Castellum AB

STO:CAST

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to Castellum Q1 Report for 2021. Today, I am pleased to present Henrik Saxborn; CEO; and Ulrika Danielsson, CFO. [Operator Instructions] I will now hand over to Henrik. Please begin your meeting.

[Henrik Saxborn, Chief Executive Officer]

Thank you very much, and welcome, everyone. We will then have a short presentation and then, of course, continue with the questions. So if we take the first slide, please.I will try to shortly summarize this quarter, and it has been an active quarter for us, of course, as you maybe have seen. But going to results, we can conclude that we have a very strong result, actually SEK 4 billion in net income. We have shown the strength in the balance sheet, both with realized and unrealized value uplift that together with a cash flow and in spite of the dividend. We gave a result for this quarter around SEK 4 billion, and that's the strongest in the history of Castellum.We have worked with the transformation of the portfolio. We -- it has been an unusual quarter in that case because we have sold approximately 10% of the balance sheet with a good profit, and we have already restarted the -- in reinvestments in some assets, but also by acquisition and by -- and mainly through new developments.And then I will conclude the resistance against the pandemic. Regarding that we are in the pandemic, we can conclude that both the market of offices and logistics in the Nordics has been very resistant and so has Castellum, that is mainly a product of how the portfolio is consisting of, the assets we are consisting of, of course, but also good work from the team that we was very quick on doing adjustments and also having a lot of, of course, talks with the tenants. So we can conclude now that we are in a very strong position. And it is also so that we can conclude that we continue with a strong cash flow as well as the strongest balance sheet we have ever had. And we are now one of the strongest investment platform for going forward in the Nordic sector. So if we go into the -- some of the figures on the next slide, please. In this picture, it's easy to see the effects of the change of the portfolio. That gives a negative growth of the income from property management, but also shows the growth of 14% on the NRV and the effects on the loan-to-value that goes down to 41%. As said, this is the strongest balance sheet that Castellum ever had. And then finally, of course, is the fine results on the net lettings under pandemic. We had a surplus of SEK 40 million. And if anyone have been asleep for 12 months, you -- and didn't know it was a pandemic in the world, you couldn't actually in the net leasing readout that it is. So I'm very pleased with the net leasing and the work done we've achieved.So with that short start, Ulrika, I would like to hand over to you.

[Ulrika Danielsson, Chief Financial Officer]

And then we go to the next slide, please, and we will not start with the P&L, strange. Who thought that we should start showing how many of our assets has energy performance certificate, so-called EPC ratings. And the reason we mentioned this now in this report and in this presentation is that this is the most common question to us at the moment. And that is, of course, due to the EU taxonomy getting in place and becoming a reality for investors and companies. And to summarize Castellum in this context, based on the knowledge we have at the moment, the criteria that will be used in order to classify a property as green or not is the EPC ratings. And that is properties that has a rating of A, B and potentially C is among top 15% in each country. Those assets will be green according to the taxonomy. And converted into Castellum's universe, that means that roughly 40% of our rental income is green and 38% of our value. And going forward in our quarterly reporting, this is numbers and information that you will have on a quarterly basis. But with that said, let us stand into 100% of our income and valuation. So please, the next slide. And I will spare you some going through all the figures on this slide. But we can at least state that for the first time in Castellum, we have a negative growth in income from property management, but we have the highest number of the last line in the P&L for any Q1. And the main driver behind this is the selling our portfolio of roughly SEK 10 billion to Blackstone, which creates a realized changes in value as well as an unrealized change in value since it confirms the yield movement on logistic warehouses as an asset class. But it also has a negative impact on income from property management because half of the portfolio we can -- we closed, signed and delivered in the beginning of February and the second will leave in the beginning of May. But this, however, gives also Castellum, a really strong balance sheet going forward, and we will come back to that. Before going into the like-for-like with your property management, I will also make you aware of our stake in Entra, the listed Norwegian property company. And that stake has increased the first quarter with roughly SEK 500 million and is accounted for as an unrealized changes in value. And if we go to the next slide, please. The growth in like-for-like on a rent-to-income basis on an NOI basis is modest. And that is due to a more, you could say, softened like-for-like rental growth in rental income; somewhat increased vacancies, which is, however, suggest by lesser incentives. But the main trigger is also a much colder and slower first quarter compared to the same period last year. And looking into different segments, we can see that the trend from the end of last year is still here, a good like-for-like growth in logistics and public sector and modest like-for-like growth in offices. A stable growth in retail and light industry is such a few assets, so that is had no big impact on the bigger picture. The first quarter has no COVID-19 impact or almost none on the rental side, no bigger incentives. The rents for Q1 is on the bank account, the payment for Q2 looks really good. Liquidity relief has from the start of COVID-19 1 year ago up until today been in total SEK 145 million roughly, of which SEK 40 million is still active. So there is not so much new tenants that needs help, it's more that the first one still needs help, but the main part has shifted back towards quarterly payments or invoices. And at the moment, we have roughly a handful of discussions regarding renewed government -- the renewed government rented aid package that has been announced. And the government has brought life in, you can say, the last year's rental aid package and has decided to apply that for the first quarter this year. There is some small changes, and that is that 100% can be given in incentives from the landlord, and then the landlord applies for 50% of that 100%. There is also maximum compensation from a tenant point of view on a root level. And that roof for ceiling or what you could say has another sticky part and that also is that from that number, we need to -- or the tenant need to deduct all the other agents that they had got you included COVID-19 or based on COVID-19. And in addition, the government has signaled that the support will be extended for April to June 2021. But as we know, no decision has been taken. And then Henrik, the market?

[Henrik Saxborn, Chief Executive Officer]

Yes. The market with or without any substitution from the government. Can we take the next slide, please? Yes. So we are in the rental market net lease. Thank you. Yes, the next coming slides will show where we think and where we are on the rental market, both on offices as well as on logistics. I will comment on that later on. On the first slide, you can see this SEK 40 million in positive net leasing. And, of course, that doesn't reflect that we -- you can't see here, as I said, that we have a pandemic in the world. If you compare it with last year, we also saw that actually that is a little bit less. But in that SEK 99 million, we had last year, it was actually a very large lease we've signed in Vasakronan in South. So I should say this SEK 40 million consists of a normal year Q1 on the existing portfolio and then a good normal leasing out on development historically. So more or less a normal quarter. And so that's good. And you can also conclude that Ulrika says, we see very little effects about pandemic. We have more or less new bankruptcies. And so that's the strength. And we did a very strong quarter also when it comes to this leasing activities, and we know that we've been benefited from it in the coming years. So from my view, this proves that we have a portfolio of very good composition with different tenants, and we have benefited from it in the situation simply. Take the next slide, please. And then we go into the rental market. And how is it now? And I can honestly still conclude that the office market in the Castellum land, if I'm allowed to say so, is strong. We can conclude that it comes to pricing, there are no changes down on market rents. It's only small adjustments done that we have increased some incentives on new leasing in some areas and that is more or less 10% or 15% up in the softening and incentives. And that's partly in the portfolio, not 100% of the portfolio. It's in more or less central part of Sweden and a little bit more in South than in the rest. And we can also conclude in this picture that is new drama when it comes to net take out. You can see the volatility in the South in Malmö and it's always like that because the market is slower -- it's smaller, and so it's no drama there. So the conclusion is simply that the market is very resisting against the CV-19 and in good shape. So -- and if I move then to logistic market, we can see a strong market and huge demand for new efficient spaces. We can simply divide the market into 2 categories, when we talk in logistics. One that could be placed in multiple locations and are normally very large in new developments. In this category, I don't foresee a large uplift on the reps due to the fact that the adjustments on the yields. And that will put pressure on rents actually going forward because it's a huge profit still is new developments. The added category is very interesting, and that will be affecting -- be efficient to places close to large cities where it's simply a lack of land. In this category, we will see rents about SEK 1,000 a square meter, we've already seen it. That will still go on and it's very interesting to be an investor in that type of category. It's -- therefore, we have invested in new spaces of land, both in Stockholm and Gothenburg and also as in the Malmö area and will increase the volume in new developments. So that's in the plan for the future years. And if we take the next slide, please. Then we have a smaller portion of the income, but a very important one for the research and development. And we have, this quarter, acquired 3 more new sites from Brunna with a good deal. So we simply have 6 facilities now in Stockholm and Uppsala and totally 9 facilities ongoing in Sweden. We will have another one in the year-end. According to Serneke we will at least be at 10. And I think that we see a co-working and flex-based solution are extremely interesting for the future, and it will be one part of the service concept that we can provide to our customers. Therefore, the plan is to continue the growth of this part of the business and make it a normal offer into all our cities and to all our clients going forward. And with that said, Ulrika, I hand over to you and the balance sheet.

[Ulrika Danielsson, Chief Financial Officer]

On the next slide then. The balance sheet of Castellum is stronger than ever with an LTV of 41% and a debt to asset of 39% after getting the liquidity of SEK 4.9 billion from selling Blackstone and that is now accounted for under other assets and roughly SEK 1 billion from selling setting, the LTV will be around 38%, and the debt portfolio will be around SEK 36 billion. And that means that Castellum has a really strong financial position going forward. The NAV in a property company can be measured in many different ways. In Castellum, we focus on the EPRA NAV, And that continued to increase and was at the end of March, SEK 220 per share, an increase with 14% compared to 1 year ago despite dividend given to our shareholders. And then the market again, Henrik.

[Henrik Saxborn, Chief Executive Officer]

Next slide, please. You see the property market. And we can conclude that it was transactions in the first quarter in Sweden of SEK 44 billion. It's more or less in line with last year, but actually, the number of these increased. We see the sentiment around -- among investors in the Swedish property and the Nordic property of the market remains very strong during this quarter. And there is a great deal of interest in capital for property investments in the market. So strong simply, 1 word. In the first quarter, we see also a lot of transactions done in the warehouse and logistics segment, and we have yield adjustments there. And yes, we actually saw the yields move faster than I've ever seen before historically, and you can also see that, of course, in the uplift of our valuation. And if we take the next slide, please. And you have seen this before, and I described this many times, it shows the 17 largest developments. And this is -- I normally say the backbone on investments for Castellum. It's not 1 development, it's many. And we chose here the 17 largest ones. And therefore, we're lowering the risk in the development pipeline, and we have also a very high degree of pre-let volume in here. And so we can take some examples on ongoing developments on the next slide, please. And here, you see for the first on the top right-hand side, you see the SEEL development. This is a research and development side on the old airport in Säve, Gothenburg, with the government-sponsor tenant with a long lease up to 15 years. It's 100% leased out. This is also the start of a permanent research and development site for sustainability transportation systems. So we are 100% certain, this will attract other interesting tenants in the future, and this is just the first and small start. The second one on the right-hand side is the investment for the immigration services in Sweden. So also, again, government contract, long contract for special purposes in this asset. And the third one is our next phase of logistics asset in North Stockholm, in Brunna. All in all, the ongoing development all at this moment is approximately SEK 5.3 billion in volume and are already pre-let up to 84%. And the yield. The yield is attractive, it's approximately 6%, and since it's so much government and long contracts in this portfolio, it will, of course, create interesting value when they are finished and completed. So we can take the next slide, please. And then you can ask yourself, okay, it's then done? No, no, no. We have created one of the largest development pipelines in the Nordics. I think this is the biggest one that actually are in real estate company. And then when I say that, I don't mean the developments that are on the drawing board or in the headquarter of Gothenburg, it's something we actually negotiated locally and are waiting for zoning plan and/or tenants, simply. This is something we think we can start between '22 and '25. And to give you some examples of this SEK 20 billion portfolio that have -- carries a profit at least at 30%, and I think I'm cautious saying 30%. But some examples then. The first one on the left-hand side is North Stockholm, where we have the capacity of building another 45,000 square meters of our logistics. And of course, we have the more capacity in the airport in Säve I've said it many times, but it 800,000 square meters that are under zoning plan there, that's not on the picture. On the right-hand side, you'll see Infinity, that we're talking about earlier, and this is the next development of SEK 1.7 billion that are built in Hagastaden in absolutely the border of the city of Stockholm, an extremely interesting location. And then the last one is the absolutely best positioned in Gothenburg, where we have the building right, and it's under zoning for approximately 30,000 square meters and new extremely good positioned offices. And it will have a subway station unrigged for trains and next door to the upper Gothenburg. So this is just some example of the capacity for new construction that can sell and host.And then Ulrika, how will be finance this?

[Ulrika Danielsson, Chief Financial Officer]

Yes. You could say that this has not been -- with all the liquidity flowing into Castellum, you could say that lending new money at the moment has not been our biggest or most active actions. But the funding condition in the market, you can say, are very good in every aspect. Good supply, good levels of stable levels of margins. At the end of March this year, we had roughly SEK 90 billion in unused credit facilities, of which SEK 8 billion was back up for outstanding CPs. But with further SEK 6 billion in from selling to Blackstone and Serneke in Q2, that volume will increase. So that is our situation at the moment, a very, very strong financial positions. So very short.So finally, Henrik?

[Henrik Saxborn, Chief Executive Officer]

Okay. If you take the next slide, shortly, looking forward, as we said in the beginning, the office market is, I should say, surprisingly robust and resistant. I can honestly say that it's better than I expected to say actually half a year ago. We 100%, of course, understand it will affect us, but I don't think you should pencil in too large effects in our cities because the low market vacancy, the need for both rebuilding offices as well as being taken care of simply when 80%, 90% of the staff is coming into the offices in midweek, I don't think you should pencil in too big effects. But that is to be seen. Going to the logistics sector. It's under development, and I've said this so many times, its main issue is the opportunity and the problem the actually lack of structure in the Nordics now when the e-commerce are expanding into the Nordic cities. The society with old cities and sometimes weak balance sheet on some municipality side makes it more difficult, but also an opportunity for Castellum to construct new logistics areas for distribution into the cities area, simply. So Castellum going forward. As we said so many times during this presentation, we have never had a stronger balance sheet. It means that we have never had more investment capacity is a golden opportunity for us to continue to grow in the Nordics, and I'm 100% certain that the company will show that in the next coming years. I don't -- and don't forget, we also have the strongest pipeline of developments and that we are -- that we showed today. This SEK 20 billion is nothing we find on the headquarter, it's done by hard work, years locally and now have a possibility to build for tenants. This is assets that's going to be attractive and would like the very antenna simply would like to stay going forward. These assets that is going to be built and rented out in the next coming years, simply. So simply, the Nordic markets are stronger than expected and Castellum is stronger than ever. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Erik Granström from Carnegie.

[Erik Granström, Financial Analyst]

I would like to start by asking a few questions about the rental market. You have obviously had quite good net lettings in Q1, but if we look at Stockholm, the net letting in Stockholm specifically was negative. And at the same time, you mentioned that the rental market for Stockholm is quite stable. Could you perhaps explain the difference there a little bit and what you see in Stockholm specifically?

[Henrik Saxborn, Chief Executive Officer]

Yes. I see -- I think you have to divide Stockholm city into different parts. The absolutely CBD, we know that it's volatile. We know that it's SEK 10,000 a square meter on top rents that may be going to be adjusted. Our portfolio is just in the outskirt of the CBD, and we are top rents around SEK 6,000. It seems that we can hold it right now. And of course, we have to be cautious on saying that, but we are slowing down a little bit on the renting activity. But as said, it's more stable than I thought. And then you go in the first and second ring, I can't see effects on the market rent and offers we're going out with. So I stay with my state that it's more stable and in line with earlier. The net lettings I see as more a quarterly effect than anything else in the Stockholm region.

[Erik Granström, Financial Analyst]

Okay. Very clear. And then a similar question regarding Gothenburg. I noticed that you, to some extent, downgrade the rental market in Gothenburg in Q1 versus Q4 and have noticed some weakening. Could you perhaps explain a little bit of what you're seeing in Gothenburg?

[Henrik Saxborn, Chief Executive Officer]

Yes. Yes. I think it's like it could be general, but we -- for our -- in our universe, it's Gothenburg that's affected. We have some unrented developments in the market. They are affecting it very locally and would like to rent out the developments, of course. It's always a short-term adjustments in markets when that happen. But if you look at overall vacancy rate, it's still very, very low in the market. So I see that it's extremely local, and I mean, local, local effects in some submarkets because of the developers want to lease out their new developments that are not leased out. So that will have a softening effect of that various submarket -- local submarkets for some time. But otherwise, extremely stable market otherwise. But that is what we mentioned.

[Erik Granström, Financial Analyst]

Okay. And perhaps it's just me that is not understanding specifically. But on Slide 6, could you just explain the difference between the like-for-like development on those 2 tables in terms of income? I assume rental income as well as profit line. You see the difference between 1% and 4.9%. Just explain that.

[Ulrika Danielsson, Chief Financial Officer]

Yes, I can explain it very easy because the table on the presentation is wrong. That is the property evaluation yield. So we will correct that and put a new presentation on our website.

[Erik Granström, Financial Analyst]

Okay. Now I get it. Okay. So 4.9%. Yes, that make sense from a yield perspective. Okay. Very good. Then it's just not me going crazy, that's always a good thing. And then perhaps also with regards a little bit to the rental market, the divestment you're making in Copenhagen, a large proportion of that properties becoming vacant. What's the rationale for you selling a property that is -- that has, in my view, some sort of potential in terms of rental uplift or development?

[Henrik Saxborn, Chief Executive Officer]

Yes. Agreed. We normally wouldn't do that. This is a very special case because of the structure in the house. We -- I think we have been drawing on that asset since we bought it from We conclude that we need to be clever and back off if we don't see the returns that we can find in other parts of the portfolio. Technically, this is a 1 tenant asset. It's a lot of lab areas, and we don't simply see the returns that we can create. And therefore, we hand it over to the market and say, if anyone can do that, please do it, but we won't likely to reinvest somewhere else. The simple answer, unusual.

[Erik Granström, Financial Analyst]

Okay. Yes. Fair enough. Then I have 2 more questions. One is regarding the balance sheet. You mentioned that you will continue to strengthen following the cash injections from the divestments. What will you do with such a strong balance sheet? I mean you can't just adjust it simply by doing share buybacks or even having a project portfolio of SEK 4 billion per year. Should we expect Castellum to become more aggressive in terms of the transactions market as well?

[Henrik Saxborn, Chief Executive Officer]

We're be discussing here how answer, but let's try to do this. I can take the transaction market. We definitely would like to see opportunities in this market. We can, of course, conclude like everyone else, that we are in a strong market. But we have a pipeline not only of fantastic development, we also have an idea of what we can invest in. And I promise you that we're going to be active on the market and hopefully close some deals that the shareholders would like.

[Erik Granström, Financial Analyst]

Okay. And then my final -- I'm sorry.

[Ulrika Danielsson, Chief Financial Officer]

No. The cash need to work, so to say, and that is the ambition. So I think this is an excellent opportunity for the Board and the management to have a discussion about this.

[Henrik Saxborn, Chief Executive Officer]

And we also launched the buybacks today to be a certain.

[Erik Granström, Financial Analyst]

Yes. Absolutely. My final question is regarding your holdings in Entra. You describe it as an interesting piece of the puzzle in future structural transactions. Could you explain what you mean by that?

[Henrik Saxborn, Chief Executive Officer]

It means that we haven't simply taken in a decision how we'll treat that position. Honestly, I mean, it's a fantastic company, Entra. I've said it many times and that hasn't changed in any way. But it's simply up to the Board to decide what should we do. I see it as a good piece of puzzles that could be used in the future if we would like to. So it's simple open for discussion in the Board during the -- before summer, and let's see where we're coming out to.

[Operator]

[Operator Instructions] Our next question is from Markus Henriksson from Pareto Securities.

[Markus Henriksson, Research Analyst]

I just have a follow-up here on the balance sheet. How do you view the possibility to target a higher credit trading from Moody's to reach the AA1? You talked a lot about the ramp-up in investments and transactions, how do you view that?

[Ulrika Danielsson, Chief Financial Officer]

Yes. I think that we are satisfied with the ratings we have today, and I have said that earlier and based on the portfolio combination and everything. So there is no ambition at the moment to move towards a higher rating that Castellum has today. We're rather comfortable with that one?

[Operator]

[Operator Instructions] And there are currently no more audio questions. I will hand it over back to the speakers.

[Henrik Saxborn, Chief Executive Officer]

Thank you very much for listening, and we hope to have some decent debates in the summer again. Thank you very much.

[Ulrika Danielsson, Chief Financial Officer]

Bye.

[Henrik Saxborn, Chief Executive Officer]

Bye.