Castellum AB

STO:CAST

Earnings Call Analysis

Positive Earnings Amid Strategic Adjustments

Castellum's first-quarter earnings show a 13% increase in property management income, despite divestments and a sluggish rental market. The company's new strategy focuses on divesting non-core assets worth SEK 1 billion to fund new investments and streamline operations, resulting in cost efficiencies and lower interest expenses. Revised financial targets aim for a 10% return on equity and a 25% dividend from property management income while maintaining a loan-to-value ratio below 40%. With a strong project pipeline worth up to SEK 40 billion and 52% of properties sustainability certified, Castellum is poised for long-term growth.

Introduction

Castellum, one of the largest listed property companies in the Nordic region, held its Q1 2024 earnings call to discuss recent performance and future strategies. The company has been active in property management and divestments to streamline operations and ensure financial stability in a changing market environment.

Financial Performance

Castellum reported a 13% increase in income from property management, despite divestments reducing rental income. The like-for-like portfolio income rose by SEK 63 million, equivalent to 2.9%, with Sweden alone seeing a 3.9% increase. Lower interest expenses due to debt repayments and cost efficiencies helped bolster income. However, electricity costs were significantly down from the previous year's high costs.

Property Values and Sales

The company's property values stood at SEK 159 billion, with a focus on metropolitan areas. During Q1, Castellum wrote down property values by approximately SEK 1 billion, reflecting a cautious view on vacancies. They also made significant sales, including non-strategic properties and a portfolio worth SEK 1 billion after the quarter's end. These proceeds will be reinvested in strategic projects.

Strategic Divestments and Investments

Castellum has revised its financial targets to deliver a return on equity of at least 10% over a business cycle, with a new dividend policy aiming for at least 25% of income from property management. The focus remains on profitability and long-term growth, allowing for larger yearly investment volumes. The company continues to divest non-prioritized assets to reinvest in more profitable ventures, ensuring a streamlined and efficient portfolio.

Future Investment Strategies

Castellum aims to invest SEK 2.5 billion this year, with potential room for additional investments. The company is cautious about new projects, particularly in areas like Stockholm, where demand has softened. They plan to focus on refurbishing existing assets and new logistics opportunities, aiming for high-yield projects that enhance portfolio quality over time.

Operational Focus

Tenant quality remains stable, with low and decreasing outstanding receivables. Castellum's operational strategy includes retaining existing tenants, leasing vacant spaces, and managing energy costs effectively. They are also implementing a complete procurement organization to reduce expenses further and streamline central administration.

Market Outlook

Despite economic challenges and increased vacancies in certain areas, Castellum is optimistic about its ability to navigate the current market. The company is prepared for downward pressure on rents but sees opportunities for value-creating investments. They highlighted the stability of their tenant base, with significant public sector representation, which provides a buffer against market volatility.

Conclusion

Castellum remains focused on long-term profitability and growth through strategic divestments and prudent investments. With a strong tenant base, improved cost efficiencies, and a clear investment strategy, the company is well-positioned to manage market challenges and capitalize on new opportunities.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Castellum Q1 Report 2024. [Operator Instructions]Now I will hand the conference over to CEO, Joacim Sjoberg; and CFO, Jens Andersson. Please go ahead.

[Joacim Sjoberg, executive]

Good morning, everyone, and thanks for joining us. I'd like to start by drawing your attention to the picture on the first page of our presentation. It shows one of our recently started projects, the complete renovation of 3 buildings in Stockholm, of which one -- the one with a reddish facade is designed by the renowned architect, Ralph Erskine. Thus, the project is named Erskine & Friends in his honor. That was just a glimpse of what we're going to hear more about later.So our main strategic position last year, the rights issue of SEK 10 billion and the divestment of properties worth SEK 5.2 billion can be seen in the P&L when comparing this quarter with the same period last year. The rental income is not increasing as much as could be predicted, but that is due to divestments. And the cost base is also favorably affected by the lower interest rates. This combined with a good cost control and the income from property management is up 13%.Looking at our rental income, we also see that the negative net leasing from last year translated into the like-for-like figures. But as mentioned in the Q4 report, it was expected and that the interest rate hike has left a mark on the economy with somewhat poor demand. However, our net leasing for this period is positive, not much, but at least positive. We have during Q1 sold nonstrategic properties for a significant amount and 347 of those are in the Retail segment. After the quarter we have sold a portfolio of nearly SEK 1 billion, again, nonstrategic properties, and we are selling because we want to, not because we have to. These proceeds will be used to talk about our new investments in addition to those volumes communicated earlier.For those of you who are new to Castellum, just a brief overview. Castellum is one of the largest listed property companies in the Nordic Region. We're a fully integrated company with local hands-on presence where our assets are located. The property portfolio is located in attractive growth regions in the Nordics and we're exposed to the robust Norwegian market by via our associated company, Entra. On this map, you can see the location of our property portfolio.Property values as of last March sums up to SEK 159 billion, including our share of Entra. Of these SEK 159 billion, 76% is located in metropolitan areas, meaning urban areas with at least 1 million people in them. 52% of our 5.5 million square meters are sustainability certified and we have a yearly contract value of approximately SEK 9.7 billion.So as you probably all have seen yesterday evening, we announced revised financial targets and the revised dividend policy. The overall financial target is to deliver a return on equity of at least 10% over a business cycle. The new dividend policy is at least 25% of the income from property managers -- from property management, but safeguarding the financial position of the company.The targets shall be seen in the context of how we work with capital allocation and capital efficiency. Our focus on profitability and our long-term perspective, still being -- but still being able to return to attractive total returns, including through dividends. It also allows for a larger yearly investment volume than the old dividend policy. The strategy remains unchanged and also our financial policy, including the targets of an ICR [ above ] 3x and then LTV below 40%.The operational focus of the company is to retain existing tenants and lease vacant spaces to recycle capital through divestments and to reinvest proceeds in our existing product portfolio. And we're streamlining our business to realize synergies. These investments are made to manage both vacancies and to fight higher energy costs.We are still selling assets, and not because we need to as mentioned, but because we want to. We are not focused on retaining every single revenue krona by clinging on to every single asset we own, but to improve our profitability and to create value over time. We have a very attractive product portfolio of more than SEK 40 billion that includes opportunities for new logistics, but also refurbishment of existing buildings.We will have a continued focus on reducing our costs where possible. Examples of that is a newly implemented complete procurement organization. We are reviewing our business processes and we are streamlining central administration. More on that at the later stage.Our tenants represent a cross section of Nordic business and authorities and our exposure to individual tenants is low. Our 10 largest tenants stands for less than 14% of our total contract value and with no tenant generating more than approximately 2.3%. We have a very strong tenant base, with a number of our largest tenants being publicly funded. Approximately 25% of our total contract value stems from public sector tenants. Our largest tenant is The Swedish Police. As of last of March, the remaining average length of our contracts was 3.7 years.I'd like to give you just a brief overview of what we are staring at and how we do manage the company. As you see from this P&L in brief, our total income is in line with prior year. Divestment has reduced the top line income by some SEK 100 million, while completed projects contributed positively with SEK 44 million. Our direct property costs decreased by SEK 77 million, that equals about 10.6%, mainly driven by lower electricity costs.Leasing and property administration together with central administration expenses decreased by SEK 9 million, equivalent to 3.5%. The decrease is primarily explained by cost efficiencies through reduced number of FTEs and a strategic decision to discontinue our innovation company. The loan volume is significantly lower after we have repaid some SEK 16 billion of debt last year, and as a result, our interest expenses are lower compared to last year.Summing up, we report the income from property management up 13% from last year.Jens will walk you through all these numbers in greater detail, but this was just to give you a brief overview. Jens?

[Jens Andersson, executive]

Good morning, everyone, and thank you, Joacim, and I think that you covered most of it yourself really good. But for the like-for-like, portfolio income increase by SEK 63 million equivalent to 2.9%, 3.9% looking at Sweden isolated. Castellum, as you might know, in some cases have limitations in the lease agreement, which means that full indexation is not achieved, while indexing in Denmark and Finland was lower than Sweden.And as Joacim already mentioned, electricity costs was down significantly due to unusually high costs in the first quarter previous year. Excluding one off effects of electricity costs like-for-like increased by 9.4%, equivalent to SEK 42 million. And this is primarily explained by higher cost for snow removal and heating due to the cold and snowy winter compared to previous year.Next slide. The rolling 12-month rental income is in line with previous quarter despite divestment, net leasing SEK plus 3 million for the first quarter and SEK 12 million minus rolling [ 12 ], and continue to be rather volatile while income is more stable over time. Bankruptcy is significantly lower, SEK 3 million compared to the same period last year.Tenant quality seemed very stable and outstanding receivables are low and decreasing. In addition, we've done an assessment of tenant quality together with Dun & Bradstreet this quarter. That clearly confirm the stability of the tenant base. Only SEK 25 million of the outstanding receivables are older than 30 days.Next slide. Looking at property values. During the quarter Castellum has written down property values with approximately SEK 1 billion equivalent to minus 0.7% since the peak in '22, down with close to SEK 22 billion. The value changes this quarter is mainly driven by negative cash flow as a result of more cautious view on vacancies. Valuation yield is in line with last quarter, have an ever almost 1% upward shift since the peak in '22. Approximately 10% of the property value has been externally valued during the first quarter by Cushman & Wakefield, confirming internal values and our valuation process. Property sales communicated in the second quarter of circa SEK 1.3 billion further confirm our book values.Next slide, please. Nominal valuations are down to 2019 levels. However, looking at the yield shift isolated, we are back at the 2017 level. The difference is explained by higher cash flow mitigating some of the negative effects from the yield expansion. With falling inflation, we saw a sharp decline on the line interest rates end of '23. However, during first quarter, interest rates have gone up again. Though with the completed rights issue and successful sales we are prepared for higher for longer.Stable evaluation yields compared with year end, however, too early to see a trend, highly dependent on the development of Swedish and global economy. Also important to mention is Castellum's ongoing journey to improve asset quality and location through divestments in metropolitan cities in the Nordics and through divestments of properties in non-prioritized areas and segments, which over time is expected to generate higher total return, though it's harder to see when only looking at the spread between government bonds and our valuation yields. That give little guidance on the quality shift of our portfolio.Next slide. Yes. Highlights from the quarter. Loan-to-value is still on a historically low level of 38%, somewhat increasing during the quarter due to lower property values. ICR currently at 3.2% and will most likely continue to improve in the second quarter when rights issue will have full one-off effect on our numbers. On the other hand, expiring interest rate derivatives will put some downward pressure on the ICR, however, still expected to remain on comfortable levels at around 3%.Average interest rates currently at 3.1%, up from 3.0% at year end. Please note that the average interest refers to a point in time at the end of the quarter and not an average interest cost for the first quarter. Hedging ratio has decreased, however, will be held on a comfortable level going forward. Rating is stable and we feel that we have reasonable headroom to move as requirements.Yes. Next slide. During the quarter we have issued SEK 3 billion in SEK bonds and SEK 5.65 billion since market opened in the third quarter last year. Bond [ spends ] have tightened gradually during the quarter and continue to improve in the beginning of the second quarter. Glad to see demand for our bonds with both short and long-term ratio. European market is still wider than the SEK market, however, we'd continued repayments of Eurobonds by Nordic names. We expect the gap to gradually close. It however remains to be seen if we reenter the European bond market this year or next.We also see continued good interest from Nordic banks and a downward shift in pricing from the peak in '23. Our spreads down with 25 to 50 bps on longer [ tenors ]. In addition, we see interest firms and institutions slowly increasing their presence in the Swedish real estate debt space, which is also a good sign. Also, SEK 25 billion in cash and unutilized credit facilities are available at the end of the quarter and still important to keep a healthy volume till the Eurobond market opens up for Nordic names on good terms.Over to you, Joacim.

[Joacim Sjoberg, executive]

Yes. Thank you, Jens. And we are trying to look also and describe to you all our view on the future. And therefore, we've decided to make a somewhat more elaborate overview of our projects. 2 larger projects have been completed during the quarter. One is the logistic project fully let in Malmo called Tistlarna, and an office project in Jonkoping, Werket. These 2 projects gave us a rental value of SEK 69 million with a good occupancy rate.We have 7 larger ongoing projects at the moment. The average occupancy rate is 87% and rental value of SEK 180 million with the average lease duration of approximately 6 years. The total rental value from completed projects during 2024 sums up to SEK 104 million, of which SEK 49 million will be recorded as income during 2024.Just a few words on 2 recently started projects, and they are in the picture here. And pattern one in Vasteras is a logistic property, a new construction. 37,000 square meters, efficient. New premises with AA logistic as a 100% tenant. This is an example of us densifying our existing land for an existing client who's expanding its business. That is about as good as it gets. Bagaren 5 in Norrkoping is a office building that's been vacant for quite a while and it's now being refurbished and completely renovated with the Swedish government authority as a 100% tenant.One of our ongoing projects that is entering into the final phase is Tusenskonan in Molndal in Gothenburg. It's a new construction fully let to a veterinary hospital. It's an investment of approximately SEK 400 million, of which SEK 100 million remains to be paid. We are doing very good progress, sorry, in that project and we have a good cost control.Another of our ongoing projects that I'd like to highlight is Backa in Gothenburg. It's a 9,000 square meter, completely new construction with The Swedish Police Authority as tenant. It's a 15-year lease, 100% let, and the total investment is about SEK 500 million. These are examples of projects that we do prioritize existing clients fully let and good size and a stable return. We like that.I already mentioned our project pipeline, which we take great pride in, and our project pipeline includes projects in all of our core markets with a focus on our metropolitan areas. It's a total of 700,000 square meters and an investment volume of up to SEK 40 billion. However, these will be executed gradually over a number of years and in line, of course, with demand from tenants.A few of our projects can be seen in these pictures. And the first one is, of course, Gateway Save in Gothenburg, a very large logistics opportunity, which has probably one of the best logistics location in the Nordics. We also have Infinity, an office project in Hagastaden in Stockholm of approximately 20,000 square meters. And then we have Noon, an office in Central Gothenburg projected to be around 25,000 square meters.So over to the prioritized area of our sustainability. And so far we've been steering very clear towards our sustainability targets, both in the short and the long-term, and we will continue to do that. We are actively engaged in our -- in the reduction of our climate impact through enhancing energy efficiency. And the energy efficiency is -- was down some 3% in the like-for-like on the rolling 12 months.We have a target of 50% of our square meters to be sustainability certified by 2025, and we already achieved that goal last year. The outcome for this first quarter is, as mentioned, 52%. We also had a target of 100 solar systems installed by 2025. That was also achieved last year. The outcome of the -- from the first quarter is a total of 110 solar systems installed, and we are considering new targets to be updated.We advanced our commitment to climate cautious construction by installing some pioneer ventilation ducts made from fossil-free steel made by SSAB. These innovative ducts were incorporated into a property in Stockholm as a part of a pilot initiative involving Linda, who's produced them. We're making significant progress towards Castellum's ambitions to be climate neutral.So the key takeaways from this session is that we are focusing on our core business. We are letting properties. We are reducing costs. We are being more efficient, thus improving our net operating income. This is a never-ending process. Through capital discipline supported by our shareholders chipping in, we have been able to amortize and to invest at the same time. The LTV of 38% is now very stable, and we have a very resilient business.Measures have been taken to withstand the negative effects from a weaker market, but we will continue to improve our profitability and our returns. Despite the investment volume being lower than in previous years, we still have a very good and exciting project portfolio of SEK 40 million -- SEK 40 billion, sorry.The new financial targets and dividend policy is a reflection of how we work with capital allocation and capital efficiency. Our focus is on profitability and the long-term perspective is to be able to provide the market with attractive total returns, including through dividends. The new and revised targets also allow for a larger yearly investment volume. The strategy remains unchanged and also our finance policy, including the targets of an ICR of 3x and an LTV below 40%.That is what we have to say today. So we leave it to you guys for any questions.

[Operator]

[Operator Instructions] The next question comes from Erik Granstrom from Carnegie.

[Erik Granström, analyst]

I had a few questions, and I think, perhaps start with where you ended, Joacim, with the changes to your financial targets. Could I just ask what was the rationale for scrapping the previous targets of a yearly growth rate of at least 10% as well as your percentage in terms of property value in yearly investments?

[Joacim Sjoberg, executive]

Well, the old targets have served us well, and I think that the market has appreciated them. They are, however, designed for a low interest market, and we don't foresee that going forward. The other reason is that it became quite clear when the market turned that the investment volume and the dividend simply didn't match. I think that being more cautious and making sure that we can deliver without any negative surprises is critical to the Board and to us in management. So that's the reason for the change.

[Erik Granström, analyst]

And if I could come back to that, and you also stated towards the end here that the overall target or goal is to allow for larger yearly investment volumes overall. And you mentioned the SEK 40 billion over time. But what do you expect for this year? And when you mean by larger volume, what should we compare that to in terms of your project pipeline? Because currently, I think it's just SEK 1 billion left to invest at least for large projects. So could you help us out there a little bit?

[Joacim Sjoberg, executive]

Of course. Yes. Well, compared to the investment volumes that were in place 2018, '19 and '20, I'd say it's a lower volume, of course. But compared to the investment volumes that would have been applicable should we have stayed with the 50% dividend policy. This new policy allows us to invest more. We have communicated some investment volume of SEK 2.5 billion. So far this year we have freed up investment space by being more cost cautious and selling assets that has allowed us to invest some SEK 800 million more. And so, we're -- it's the [ SEK 2.5 billion ] that is the base, and we will try to make room for further investments over and above that.

[Erik Granström, analyst]

And then in terms of what you see in the rental market, you've mentioned for quite some time that obviously, there is an economic downturn. And if you will look at your vacancy, it increased slightly Q-on-Q. What do you expect for vacancy going forward for this year? Do you think you can recapture some of that? Or should we expect vacancy to creep upwards for the remainder of this year?

[Joacim Sjoberg, executive]

Well, we -- normally, we don't give prognosis and I won't do this in this instance either. But I mean, it is quite clear that the ongoing trend where companies review their cost base and are moving to more efficient modern buildings will put downward pressure on demand, especially in the Stockholm area. We don't see the same kind of pressure in other areas, except maybe for Gothenburg. But the rest of our markets performed very well. So it's very hard to say whether the vacancies will be on this level or if they will increase slightly.However, it is important to note that, as you mentioned, we've been seeing this coming for quite some time. That's one of the reasons for us being so cautious on our balance sheet, making sure that we are able to meet these challenges without jeopardizing our investment possibilities or taking advantage of business opportunities.

[Erik Granström, analyst]

And then my final question regarding overall investments. You've been selling assets that are noncore, and you mentioned, obviously, your project pipeline. Do you see any opportunities to make bolt-on acquisitions at all? Or is that sort of something you're not looking at?

[Joacim Sjoberg, executive]

Yes, we are looking at that. We are comparing investments and making sure that we allocate the capital that we have to the most sort of long-term profitable cases. We are reviewing, of course, investments in standing assets. But so far, our investments in our own existing portfolio, especially refurbishments and renovating, is outperforming all standing assets that we have reviewed. But that may change over time. And there's, of course, strategic locations where we'd like to grow, both in Sweden and in Helsinki and in Copenhagen, where it's not only the today's yields or returns that are decisive.

[Operator]

The next question comes from Lars Norrby from SEB.

[Lars Norrby, analyst]

I came in a bit late into the call, sorry about that. So anyway, I'll try to ask you a similar question that I asked on the [ Balder ] call, and that is concerning holding back on growth versus you can say, pushing the accelerator. You mentioned here about some indicated base level for CapEx. I think you said some SEK 2.5 billion. It's still down in the first quarter. When do you expect to sort of push the accelerator again? When can we see an increase in CapEx [ quarterly ] versus the same quarter last year?

[Joacim Sjoberg, executive]

Yes. Thanks for that question, Lars. I mean we are effectively taking our foot off the brake. And the question is whether to push the accelerator. I think it's way too early to say that we are pushing full throttle, but we are certainly investing more now than we predicted 1 year ago when we hit the brake completely.As mentioned, we have communicated an investment volume of SEK 2.5 billion. We have freed up some more space through earnings and through [ divestments ] that has allowed us to invest --[indiscernible] investment decisions on [ SEK 8 million ] more. So -- and -- I mean, to us that is actually [ leading ] slightly [ forward ]. I'd say it's too early to say that we will push heavily for growth, but we are definitely considering [indiscernible] [ right time ] [ is ] going to [indiscernible][ come ].

[Lars Norrby, analyst]

And then one more question, which is somewhat linked to the first one, but it also takes into account what's happening in the capital markets. I'm thinking about your unutilized credit facilities, I think it's some SEK 24 billion. And I think you had some SEK 25 billion in connection with the previous quarterly report. And seen in the context of that you've also announced some divestments in the past couple of weeks. So what's your view on the size of your unutilized credit facilities? And are you planning additional divestments of any size going forward?

[Jens Andersson, executive]

Thank you, Lars. I will begin, and then I think I will hand it over to Joacim. I mean, the size of the revolving credit facilities, I mean, it's a very cheap life insurance. And as we all know, we have a rather impressive volume [ of ] European bonds out in place and we need to take that into consideration. So when the Eurobond market opens up on reasonable levels and especially on longer duration, I think it definitely is time to decrease the amount of the undrawn revolving credit facilities, but not today.And then I think I hand it over to Joacim regards how we will handle it in relation to possible divestments.

[Joacim Sjoberg, executive]

We will keep on divesting assets that are not prioritized to us, and that goes both for assets that within a prioritized area are somewhat odd. It could be that they are too heavy to manage. They could be located as a single asset somewhere or they could be within a segment that we feel is less prioritized. So we will continue to trim our portfolio and to sell off. Whether that will happen at the same pace as now or if it will be a slower pace, that really depends on both the market and our ability to reinvest those money into new projects. But I think it should be clear to everyone that since we have the combined portfolio of Castellum and Kungsleden, there are a number of assets that we like to recycle and use the proceeds for new investments, and that will continue.

[Operator]

The next question comes from John Vuong from Van Lanschot Kempen.

[John Vuong, analyst]

With the new financial targets, I suppose you want to focus a bit more on developing the portfolio quality as you stated, which I suppose also implies as you'll be looking at restarting the pipeline, also in line with your comments. At the same time you have a new dividend policy that depends on the financial conditions. Looking at your LTV, that is within target of 40% on your metrics. Does this imply that you're comfortable with the balance sheet as it is to restore the pipeline as well as reinstate the dividend for this year?

[Joacim Sjoberg, executive]

The dividend question is way too early to answer. I mean that is something for the AGM in 12 months. So a lot of things can and will happen between now and then. So that question is too early.But yes, the revised policies are meant to free up space in our balance sheet for further investments. Are we happy with the 38%? Well, I think that we are in a much more comfortable zone today than we were 1 year ago. We need to make sure that we safeguard these 38%. That means that, as we've answered Lars Norrby's questions, we will be cautious about how much pressure we will apply on the accelerator. But for sure, we have sort of left the austerity and the complete holding back. But how much we will accelerate and at what pace, that is something for us to manage over time.

[John Vuong, analyst]

Okay. Just to understand it correctly, to talk about the dividend, I suppose you need a bit more visibility on also [ shaving ] [ off ] the tail end of your portfolio in terms of [ non-core ] disposals as well as the overall macroenvironment?

[Joacim Sjoberg, executive]

Correct.

[John Vuong, analyst]

Maybe moving on to like-for-like rental growth. My apologies if I missed this given that I joined the call a bit later. It came in a bit weak at plus 2.9%. Could you provide a bit more color on that? Is there also a bit of an impact from service cost that you charge back to tenants?

[Joacim Sjoberg, executive]

I mean, it relates to the fact that we couldn't achieve full CPI indexation due to limitations in the indexation clauses that we have. We were able to get 2.9%. However, looking at Sweden isolated, it was somewhat higher. And then the indexation was mitigated largely by increasing vacancies.

[Jens Andersson, executive]

And divestments.

[Joacim Sjoberg, executive]

And divestments. Yes, but not like-for-like.

[Jens Andersson, executive]

Not like-for-like. Sorry.

[John Vuong, analyst]

Okay. So there's no impact from the electricity cost that you charge back to tenants given that, that came in quite much lower than last year?

[Joacim Sjoberg, executive]

Yes. That's a one-off effect. A small, small portion of it will come later during the year, but the absolute bulk of it giving a positive effect came during the first quarter.

[Operator]

The next question comes from Albin Sandberg from Kepler.

[Albin Sandberg, analyst]

Yes. Three questions from me as well. On the occupancy, one, whether there were any impact from that given the divestments? I mean, was there a mix effect, and also how you view the, let's say, the vacancy now? Is there any part of that, that is, let's say, structural, that you will find very hard to fill? Or is it a matter of just finding the right tenants? And if so, any potential timing of when that can be seen?

[Joacim Sjoberg, executive]

So our divestments, at least from the reporting figures, are probably sort of reflecting our average occupancy rate. So we are not sell -- have not sold off, at least that is shown in these figures, any vacancies or anything like that. I'd say that the sale that we communicated just last week had a higher average occupancy rate than the remaining volume. And that means that just comparing numbers, we will probably see a slight increase in our vacancy numbers based on these divestments.From a general portfolio point of view, there are, of course, some structural vacancies in areas where there's a weaker demand or where our assets are in need of refurbishments or upgrading. So there are definitely -- and especially in a portfolio of our size, some [ hairy ] assets that are deemed to be more or less in demand of overhaul. But we are working at a steady pace to increase the quality of our portfolio and thus taking care of vacancies. That is a long-term tedious job, that is creating value over time. So we are working on that.

[Albin Sandberg, analyst]

And would you like to say a number where you would be happy with the occupancy given your current portfolio?

[Joacim Sjoberg, executive]

Yes. It's certainly higher than we have now. Any real estate company would always like to have as little vacancy as possible. But we have a clear plan. We are addressing the largest vacancies on a monthly basis within the management team. It needs to be a combination of tenant demand and our ability to allocate money properly. So we're on the case.

[Albin Sandberg, analyst]

And then, Jens, I think you alluded to, I guess, terms on the Eurobond market not attractive enough versus the SEK market. Based on what you saw in Q1, what were the differences you feel? And at what level is the Eurobond market interesting for you?

[Jens Andersson, executive]

I mean, I think that the Eurobond market is very important for us over time, even if we can survive without it, considering the interest from Nordic banks and also the very high liquidity in the SEK bond market. Though -- to have an alternative and if we want to keep the amount of unencumbered assets at a reasonable level, I think it's a very good thing for us to actually be able to have the euro money competing with the SEK investors pushing down prices over time. However, right now, the spreads are around 60, possibly a bit lower, let's say, 50 bps for the same duration, and the Eurobond market has over time been very well known for offering longer duration, and that is, of course, something that we are eager to actually be able to acquire.But for the time being, with the liquidity in the SEK market, we have the possibility to hold back. And I think also both the rights issue, but also the fact that we have sold for a lot more than we actually perceived at the beginning of last year, we actually have a much better position to choose when [indiscernible]...

[Albin Sandberg, analyst]

And my final question is now, one, you have the opportunity to revise financial targets and so on. Did you have any specific strategic discussion about the Entra stake and the situation around that? It's been a bit standstill now for a few years. Maybe this is a steady-state option for Castellum's investment in Entra. Or are there any changes in how you view that?

[Joacim Sjoberg, executive]

No, there are no changes in our view. We're quite happy with the performance of the portfolio that Entra has and the management team. And of course, we are constantly reviewing our alternatives, and the entire balance sheet that we have has been focused on reviewing our financial targets. So Entra is a part of that, but not a decisive part. We're quite happy with how the [Audio Gap]

[Albin Sandberg, analyst]

I might have lost you there or you lost me.

[Jens Andersson, executive]

We hear you.

[Albin Sandberg, analyst]

Okay. Okay. All right.

[Operator]

The next question comes from Markus Henriksson from ABG Sundal Collier.

[Markus Henriksson, analyst]

First, a question on property value changes. I apologize if it's already been asked. You continue to write down your assets. You're one of the companies that have written down your assets the most in the sector. Any general thoughts on your property valuations? And anything to highlight from appraisers, what are they saying and thinking?

[Joacim Sjoberg, executive]

I mean, not much to say actually. I mean, as I mentioned before, 10% of the total valuations have been vetted by Cushman & Wakefield confirming our valuations. We see a difference at around 1.5%, but that varies over time. So we are very comfortable with the situation. And of course, focus on our own properties. And due to the model that we are using, we [indiscernible] what we see in the market and what we hear from the appraisers when assessing the value. And right now, it is cash flow that is driving down values somewhat, but still with a stable valuation yield. And I think that by looking at overall trend, things seem to be stabilizing. But of course, that -- then we need to see interest rates starting to actually come down sometime during this year in order to safeguard that stability. And how things will develop going forward is very much a factor of how we are actually -- how we're able to actually lease out buildings and at what rent levels.

[Markus Henriksson, analyst]

Then you highlight that you have an ambition or a target to lower costs where that is possible. Could you elaborate a bit on that statement? You mentioned electricity costs. But where could you cut costs?

[Joacim Sjoberg, executive]

I mean there are always costs to cut in a big operation. We are looking at everything ranging from central administrative costs to accounting procedures, automation, applying artificial intelligence where possible to actually energy efficiency investments in our properties, allowing remote control [ presence ], [ tech ] lighting and heating and so on. So this is a constant work that we are doing all across the company. There will be areas where we can be much sort of more transparent in -- when we are taking certain steps, and others are simply small steps that we are taking on a monthly basis to try to improve our performance.Cost reduction in themselves are, of course, just a step on the way of improving our total return. But it is important -- I mean, it's important to keep an eye on our costs constantly. So that is a focus area. But I cannot give you any guidance or any defined number that we are targeting because there isn't.

[Markus Henriksson, analyst]

Then I apologize if this question is already asked, but I know that Stockholm net leasing is quite weak. And I think your exposure in Stockholm is quite interesting relative to peers. So is it very isolated to, say (inaudible)? Or is it -- do you see it in [ a city ]? And then, what do you see in those different type of markets that you are in?

[Joacim Sjoberg, executive]

Of course, [indiscernible] is probably the area that long-term it can be affected, but we see the increase in vacancies in the Stockholm area throughout our portfolio, to be honest. And that is, I think, more due to the composition of the Stockholm business life in general, where quite a few of the typical office -- the tenants are businesses where a lot of people work from home. They're early in the cycle. That means that the downturn has affected Stockholm more than other parts of the country. We are quite confident that the downward shift in the Stockholm market will be reversed in the near future. But for now, Malmo and other regional areas such as Uppsala, Vasteras, Orebro, [ Bla Stjarnan ] are performing somewhat better than Stockholm. But we see a broader sort of decline in demand in the Stockholm area as mentioned.

[Markus Henriksson, analyst]

A follow up. You have quite interesting project possibilities in Stockholm going forward. You have the Infinity that you started and [ then stopped ], and then you have in Hagastaden overall in Stockholm. Is this kind of altering your view on how you should look at projects going forward? Should we expect the logistics or offices in more regional cities? Or you haven't drawn that [indiscernible] from the current development in the Stockholm market?

[Joacim Sjoberg, executive]

I mean the demand is, of course, critical when it comes to initiating especially large, very costly projects. We have a minimum level that must be met before we push the button. And since we haven't communicated that we have pushed the button, we have not met those requirements yet. But we are actually working quite actively with both Hagastaden in general, with [indiscernible] and also refurbishing the other assets that we have in the Stockholm area. So by no means have we stopped or put the entire business region on hold on the contrary, but we are cautious in terms of us having minimum requirements as to pre-let areas or volumes before we initiate any new projects. But I mean, there is a considerable volume allocated in our development portfolio. It's now up to SEK 3.3 billion for this year, which is a handsome amount at least in our world.

[Markus Henriksson, analyst]

Last question from me. Co-working, what do you see in your co-working business? Any update on how tenants are acting? I know that the flat sales year-over-year, Q-o-Q it's down somewhat. How should we think about growth going forward? When are you going to make money on this business?

[Joacim Sjoberg, executive]

I mean, to us, it's -- the business is supporting our general business. And co-working is an integral part of Castellum's offer to our clients. That means that we will keep on investing in areas where we deem that co-working has great value. There are areas where we see a weaker demand, but there are also areas where we see a stronger demand as a consequence of tenants reviewing their office space. So it's not only that we look at the exact number of United Spaces' revenues because United Spaces [Audio Gap] we are adjusting our rents for them.[ Oh ], connection error. Can you hear us?

[Markus Henriksson, analyst]

I lost you a little bit, but then you came back. So I didn't get the last 20 seconds maybe. If you could add on the -- that you adjusted rents or something?

[Joacim Sjoberg, executive]

Yes. We -- I mean, United Spaces is a tenant of Castellum and it's a part of our business. So we are, of course, adjusting the rents that United Spaces are paying to make sure that we offer clients in the area best possible service. Co-working, as mentioned, is an integral part of quite a few of the buildings where we operate. So you shouldn't look too much on the exact numbers of United Spaces sales.

[Markus Henriksson, analyst]

You highlighted lower demand and higher demand in different areas. Could you be a bit more explicit there?

[Joacim Sjoberg, executive]

On co-working, in particular, you mean?

[Markus Henriksson, analyst]

Exactly.

[Joacim Sjoberg, executive]

Yes. I think that, in general, you can say that the more urban area, the more densely populated, the larger the market, the higher demand. That is probably as granule as we'd like to be.

[Markus Henriksson, analyst]

Okay. Last question -- many last questions here. Do you have any one-offs to highlight in the quarter? I didn't see any, but there's been quite a few in recent quarters. Anything to note?

[Joacim Sjoberg, executive]

Yes. We mentioned the electricity, if you -- I mean, that is kind of a one-off. But yes, nothing else.

[Operator]

The next question comes from Jonathan Kownator from GS.The next question comes from Paul May from Barclays.

[Paul May, analyst]

Just one question because I feel a bit like I'm in the twilight zone at the moment with all this talk of increasing investment. [ And ] if anything, the situation is worse than it was 3 months ago when you were more cautious, and the leverage from an [ equity ] perspectives, because since your valuation impact from cash flows is now materially negative, which is obviously very, very poor, [ You've got ] [indiscernible] like-for-like rental growth in the high vacancies. So I just -- I am really struggling to understand, one, where is this [ funding ] from to invest? Why you are more positive about investments and talking about a dividend reinstatement relative to 3 months ago when [ you were ] more cautious? And maybe you can help me understand, but it just seems a bit strange sort of approach. So maybe I'm just not on the same page.

[Joacim Sjoberg, executive]

No. We are actually not feeling that we are in the worst place now than 3 months ago. I think we have predicted the downturn in demand quite well. We are prepared for pressure -- downward pressure on rent levels. And that means that we have our [ ships ] in shape and are able to leverage the position that we have, increasing investments to create value going forward. So I don't really share your view that we are in a darker place now than 3 months ago.

[Paul May, analyst]

If you look at the operational performance, you see your cash flow is negative. You say rents are coming down. You may be positioned to manage it, but rents are coming down. Longer rates are now higher than they were -- I think you probably talked about hoping for rate cuts to [ come through ] or rates to be lower. They're actually higher now than they were [ in the ] 10-year swaps [ or ] the 5-year swaps than they were 3 months ago. So hence my question that it's a more difficult position now than 3 months ago. So I'm just -- I'm surprised that there is talk of investment rather than talk of managing the share for potentially -- and maybe the question is where does the money come from? It could be raising equity to invest and that would be understandable. But I think looking at leverage to a debt to invest seems a relatively [ punchy ] approach given the broader situation, but thinking [ what are ] your thoughts about this?

[Jens Andersson, executive]

I think that, for instance, looking at the bank market in the Nordics, it has greatly improved and is now offering longer duration at lower prices, giving us a sense that things are gradually improving. We also see that spreads on our bonds have come down considerably. We have to remember that less than 1 year ago, a 2-year bond in the SEK market was traded at a spread of 300 bps. Now we recently issued a 3-year SEK bond at 155 bps. So that means a lot of things are actually leaning in the positive direction rather than the opposite.And then as Joacim mentioned, we have signaled quite clearly that higher underlying interest rates will have a dampening effect on demand already last year. And I think that is what we're seeing now. But at the same time, we have to prepare and be willing to do these usually very profitable projects at high yield on cost that will, over time, improve the quality of our portfolio. So I think we keep one foot on the brake, and we are prepared to actually [ push ] the throttle when time comes. But of course, it's a very delicate balance, as you mentioned, and we are absolutely not taking unnecessary risk right now.

[Paul May, analyst]

Is there any thought about using equity given that return on investment you're targeting?

[Joacim Sjoberg, executive]

No.

[Jens Andersson, executive]

I mean we see the liquidity in the Swedish transaction market has been -- I mean, it has been much weaker than previous year, but still, Castellum has been able to sell off assets and not the best assets that we have, but rather reasonable assets to sell and the deals that we have communicated of late has definitely been the type of properties that we want to divest, and therefore, improving the overall quality and increasing our possibilities to amortize or invest without doing any type of equity-related products.

[Paul May, analyst]

But effectively selling assets is a – [indiscernible] using some cash flow you have [indiscernible] to invest elsewhere. So is it really right in saying that you'd look to rotate capital rather than increase leverage [ in these ] investments?

[Joacim Sjoberg, executive]

Paul, you're slightly breaking up, but I think I am --

[Paul May, analyst]

Sorry.

[Joacim Sjoberg, executive]

You're breaking up, but I think I understand your question. Rotating our assets and selling to make space for investments is part of our strategy. And it has a lot of benefits to it, and short-term it will make us a better company by improving our quality and by adding return. So divesting non-prioritized assets is a part of Castellum's strategy, and that will continue to happen.

[Paul May, analyst]

Just to say you won't be leveraging [indiscernible] to make future investments. Is that right?

[Joacim Sjoberg, executive]

No.

[Operator]

The next question comes from Jonathan Kownator from GS.

[Jonathan Kownator, analyst]

Just one question on reversion, please. I mean obviously you've had some fair amount of inflation. I think, [ last ], you said that you were able essentially to maintain the level of rent at timing. Is there any evolution on the positive side or on the negative side in terms of reversion [ at this stage ] in the portfolio?

[Joacim Sjoberg, executive]

Sorry, we didn't catch that, any of us, actually. Could you repeat the question? Sorry.

[Jonathan Kownator, analyst]

I was saying -- it was a question on reversion and whether there had been any positive or negative development in terms of your ability to sign contracts above or below passing rent or whether it was still around the same levels as previously given the inflation?

[Jens Andersson, executive]

I mean, looking at the SEK 67 million of renegotiations that we conducted during the quarter, the rent levels were down only with 1%, so a very small change actually. However, it actually differs between where you look in the different submarkets where we operate. Of course, we see a more cumbersome situation in some metropolitan areas. And as Joacim mentioned before, in the more regional cities we've had a somewhat different development, especially in Vasteras and in Uppsala with actually increasing rent levels. But most of the contracts of around SEK 550 million were just rolled over with unchanged terms.

[Joacim Sjoberg, executive]

All right. I think that sort of concludes the session now after 1 hour and 15 minutes. Thank you all for listening in, and see you on the next occasion.