Castellum AB
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Castellum AB
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Ladies and gentlemen, welcome to the Castellum AB Q2 report for 2019. Today, I'm pleased to present CEO Henrik Saxborn and CFO Ulrika Danielsson.[Operator Instructions] Speakers, please begin.
Thank you very much. It's Henrik here.And okay. We will, first of all, state that we are more positive than we was in the Q1 report, and we -- it's depending on that we see more positive signals in the market. For one example, we see that Stockholm rents are moving again. And what we mean with that is that we, of course, have a strong demand, but it's also still generally a lack of space. And if we take our example at Torsgatan in the CBD of Stockholm, we can today offer the market rents from SEK 6,000 to SEK 750 (sic) [ SEK 6,000 to SEK 7,500 ] a square meter an year. It should be implicating that we can -- when we -- if we are signing on top rents of SEK 7,500 a square meter a year, that will be a new top rents for that area. And that was something we did not expect to say, when we was reporting in January, for example. And if you look at other towns, then we see the same trends, Gothenburg as well as other towns. And in Gothenburg we are now stabilizing on a market trend of around SEK 4,000 a square meter. And looking at Castellum, we see positive net figures. We have grown up from negative to positive figures going forward.And shortly. Activities that we've gone through this quarter has been that -- one of the most important thing is that we have developments plans that have been approved. And what's extraordinary with these ones is that the 3 big ones have been approved. That includes the 2 ones in Malmö as well as 1 in Uppsala. This is investments that's total to approximately SEK 3 billion, and that means they will -- we expect them to be started in the next coming 6 months. The 2 of them, the largest ones, is then leased out 100%. And one is under leasing then. On top of that, we have also brought positive news in other areas. And that was in the beginning of June when Moody's announced that we have been upgraded to a Baa2 with a stable outlook.If we look short version on the results, for the first 6 months, this just means that we increased the growth with 9% the first half and -- for the first half and including 8% for the quarter. We see that's good result since we sold out of Sundsvall and has been on in the sales side for some part of the portfolio. And the value of the portfolio has also trended positive, and the total increase was approximately for the period 2.5%. Altogether, this means that the LTV has brought down to -- another notch down to 44%. And we have an NAV now at SEK 184 per square meter or, as -- if you would like, to 17% increase.And it's also the first report where we give a more clear picture of the coworking, the United Spaces company that we bought. And it's worthy to note that it's a development in the right direction; and that United Spaces will, as we see it now, not have a negative impact on the figures for the end-year report.And should we then go into more details, Ulrika?
And then if we go to the next slide, and that include the P&L account.If we look at the first 6 months. The increase in income from property management was 9% despite being a net seller so far this year, and 8% [ is slated ]. And the 9% growth means that we roughly earned SEK 120 million more in income from property management compared to 1 year ago. So if you split those SEK 120 million into different value-creating parts, you can roughly says that SEK 100 million come from pure management in the like-for-like portfolio mainly driven by good rental uplifts due to CPI and renegotiations that have been made, SEK 40 million net from the project portfolio, SEK 40 million from debt or interest rate management. And then we could say losses SEK 60 million from transactions. Due to that, we have -- so far have been a net seller on a 12-month rolling basis.The property market is still good, which in Castellum's universe means an uplift of 2.5% on the first 6 months. However, we have also sold 27 assets with an unrealized gain of minus SEK 317 million. And that unrealized negative gain is, on the other hand, met by a deferred tax income further down in the P&L, so the net impact from selling is positive, after some goodwill write-down due to selling assets in Sundsvall, negative sales in derivatives mainly due to lower market interest rates. And tax is the result on the last line. And so SEK 2.6 billion for the first 6 months.And we -- if you then go to the next slide and it -- and break the P&L apart and look on the NOI line, you can see it increases with SEK 104 million, of which as I said earlier the biggest contributor is due to a like-for-like [ acting or ] management. And it's mainly driven by top line growth. Furthermore, the development contributed. And the transaction part was -- means we loses NOI so far. And the loss of NOI is a consequence of the decision to make strategic movements with the portfolio, selling Sundsvall, selling retail in Uppsala and leaving a small area of Vaggeryd, Jönköping. And of course, this can have a negative impact on the growth in the [ share of products ], but in the long run it gives Castellum a stronger balance sheet and portfolio in order to create growth in the future.If we then turn page, so to say, and go to the next slide again and talk about rental income. As you can see, the rental market is still good. The like-for-like growth top line was 5%, which is result of CPI and renegotiations made. Then it is taken down somewhat due to that last year, at this time, had a big lump sum from tenants leaving earlier and paid up for that. Then we add the rental contribution from developments. That means that rental growth is 6.6%. And of course then, we lose some from selling assets.So that was Castellum. And then if we go to the market maybe, Henrik.
Yes. And looking at this market, as we indicated from the beginning, we are seeing a strong rental market definitely. And it's the demand is robust and the supply is still limited. And we will not -- we can't any change in that in the near term.And if we look at the growth according to the analysts we see, we can see that Stockholm has increased the last year with approximately in average 8%, Gothenburg with 4%. And we see CBD of Copenhagen and Helsinki, first, have developed positive also under 2019. So in generally we see an increase of the office rent in the rest of our universe. And the limited supply is [ possibly ] something that occurs in Gothenburg and Stockholm because of [ this development plan ] is going slower than expected still.And so on this slide you can see that we are in historically low vacancy rates. As well, we are on new top levels, especially for Gothenburg, since we saw this picture the last time. And we can go to the next picture, please, and then into the net leasing.When we look at this, we move then to positive figures. We have SEK 11 million [ as isolated ] increase on the net leasing since last year quarter. And the gross leasing is the same in the existing portfolio, but we have more terminations than we had 1 year ago. And the other differences is that we have less rental signed on new developments, but that has to be said on the development side we are, of course, not putting into the figures still that we have already leased out for the national -- Swedish national court in Malmö as well as E.ON. That will occur in the figures in the end of the year, would be, we think, because then we are prognosing that we will have the building permission to start that. But that's -- that will bring, of course, SEK 150 million into this figure then. On top of that, we have new products that are current developments [indiscernible] to the portfolio and are not possible to lease out yet. So this will change during the year.Okay. We can go to next picture, please.
And then if we go to the costs again, the interest rates cost.The average interest rate the first 6 months have been 2.06%. And the outgoing interest rate is a little bit lower, 1.9%. And that is the result from termination of bank debt and renegotiation of existing bank debt. And as you all know, the market interest rates have come down during the spring. And if that stays so, it will of course be favorable for Castellum and the industry, everything else equal. And we have acted in this environment by restructuring some small part of the portfolio in the end of the period. So prolonged some existing derivatives, taking up new ones and releasing some ones. And these have been the main contributor on landing at an outgoing interest rates of 1.9%.And then if we change picture. Let us talk about the balance sheet and the property market.So if we go to the next slide, the balance sheet. It is strong. We have an LTV of 44% or, more specific, 43.8%; and a valuation yield of 5.1%. And as at the end of June, this gives an NAV of SEK 884 (sic) [ SEK 184 ] per share. And that indicates a growth of approximately 16%, despite dividend, compared to 1 year ago.If we look on the next slide and look at the portfolio or the property portfolio. As I've said, the valuation yield is 5.1% versus 5.3% at the year-end. The unrealized valuation uplift of [ 2.5 ] is equivalent to SEK 2.2 billion, of which SEK 1.4 billion is due to yield changes. And that is mainly for, in our portfolio, logistics, public sector in good locations with long leases and office in good location. And the rest is made up of better cash flow from the gains and acquisitions, but -- and regardless causes to the uplift, you could say all in all logistics is so far the segment with the strongest uplift this year at 5%, followed by public sector properties with 3.5%.And then if we go to the market.
Yes, yes, supporting what Ulrika just said. I mean we see a strong market. We -- I can't say it's the strongest I experienced, but it's a strong market. And it's interesting to the market in all types of sector, especially the ones that we have, we can say, there.And office, if we look at, it's in huge demand, especially then for CBD areas, but also long leases. Deals are in stable to decreasing yield, as we can see there. You can also see portfolios with secured cash flow, public sector, and so on. So I can continue. As for retail assets, we have seen in the last half year 3 large deals done on the warehouse, on logistics side. That has given us evidence on the yields. And all this together, of course, is into the balance sheet, but we can also looking forward. And we can't see right now any change in the demand for investments in the Nordic sector. And it's especially then as we think of that, of course, the low interest rate, it's a low downside risk from investor perspective. And it's a strong cash flow and secure cash flow compared with peers. So it's all about again [indiscernible] what could be the alternative investments that we see right now.So positive on this side as well at this moment. We can go to the next.And then on logistics side, as I mentioned, we have seen the SEK 12 billion been sold in the Swedish market in 3 deals. It has been yields of on 5% or below 5%. And as you see in our figures, we are now having a yield on the logistic. And the comparative one is 5.8%. And so this is a market where we are also a positive going forward.And if we'll take the next picture, please. We have, as we stated earlier, now growing the pipeline. And it was a very important step for us that -- this quarter that we got the 3 large developments. We got the zoning plan permission approved. And that will start in the second half, hopefully, in this year. And they will give a volume about SEK 3 billion together. And it's already known that we have ongoing large projects that we expect to start with the next 2 years that are around SEK 8 billion in volume. That means approximately 12% of the balance sheet. And after them, we know also there is more to come. And so we have a stronger balance -- development pipeline that we ever had.And if you look into the report, we are showing the largest developments that are ongoing before this, and they are having a volume of SEK 2.7 billion. And the yield expected on -- then on total cost is still approximately 6.5%. So it's a good thing.Next picture, please. Here we are showing the picture of the 2 large projects that we -- hopefully, we then will start in this winter. And they are 100% leased out and has a volume of SEK 2.5 billion. And the tenant is E.ON and the Swedish courts. On top of that, we have another one in the absolutely CBD of Uppsala that we'll -- have already started, yes.And then we can go to the next picture. And here we have during this quarter -- also, you know that we have labs that we started 3 years ago, this quarter, where we have worked a lot with -- continue to find new cooperations. We have found 2. We have entered the pan-European innovation hub together with 6 other European large listed companies. And we think that we will see more knowledge, of course, but doing the developments on the tech side and the digital side and the sustainable side more efficient than we could do without them. On top of that, we also started a cooperation with the Swedish cooperative federation and other listed companies in Sweden to focus on creating a new digital key that will make life easier for both the customer as ourselves as owners. And then of course, that could provide us new, smart services that we can probably go to the market with.And so that's the future. And then we'll jump to the next slide and then, I think, be on to the next market.
[ Yes, sure ], and Castellum's credit funding conditions Q2.And credit market where we are active in are good, with good liquidity and access to capital. At the moment, the bank shows stable margins, while the bond market has come down after the turbulence that was at the year-end. The SEK market is ongoing, so to say, even if the yield is higher due to increased Stibor.During the second quarter, Castellum's rating was upgraded from Moody's, and this is important for Castellum in order to access longer duration. We hope that this upgrading going forward can help us in our mission to prolong the capital duration, especially if the good market situation that we experience now continues. And the aim to prolong the capital duration indicates maybe that you should not expect too much low interest rates from us even in the -- even if the market interest rates stays low.But if you go to the next slide. We have had some activity within the debt portfolio. We have renegotiated some bank debt, and we have terminated some one. And at the end of June, that leaves us with an SEK 16.8 billion in unutilized credit facilities, of which roughly SEK 5 billion is bank debt for outstanding CPs. We increased this frame for the Swedish MTN program. And we have issued SEK 2.3 billion in different sizes and ratios, of which roughly SEK 1.9 billion was floating and rest fixed. And at the same time, we have terminated SEK 1.5 billion. So that means, so far this year, that we are a net issuer in the Swedish bond market. We have issued also a note under our EMTN program, a 10-year bond. And we are active in the CP market. We have a volume outstanding around SEK 5 billion. And if the market [ wants you ] and arbitrage is still there, you could expect Castellum to have around that volume going forwards.And then looking into the future.
Yes. And if you look at in summary, as we understand, that we have positive undertones to the market. And I mean we are living in strong rental market, and the downside of it is depending on new supply. We can't see that, that will change the market in the short term. The other thing is that there should be something on the macro level that changes the game. And of course, that's out of our control, but so far what we see right now is a stable to positive rental market in front of us. And we have a negotiation power, of course, in a short-term basis.Looking at real estate balance sheet. We have experienced stronger demand into the Swedish sector than we -- and the Nordic sector than we expected. And it turned us more positive also on the short-term basis, of course, but it's all about what's happening around in the world and the alternatives to invest.And so with that said, I can now conclude that Castellum is in a very good position. We have a development pipeline that we will grow. We have a lot of it that's coming in now, that you can see in the future in the figures is going to be leased out. And so in that case and with the profit of doing the developments, we have a good position. We also have [ 5,000 ] tenants to talk to, and they are looking for new solutions. And we have a new solution with more flex-based solution that we will continue to develop. So from that standpoint, positive. And we think we can achieve more or less a -- very close to the long-term goal. Of course, it will be affected of what we do with the portfolio going forwards, so to say.So continue to do what we have done, grow where growth are, develop with construction and reposition the portfolio going forwards.So that's everything for now. Thank you very much.
[Operator Instructions] Our first question comes from the line of Tobias Kaj and ABG.
I would like to start to ask regarding the net lease. Even if it turned positive in Q2, it's still a quite big decline for the first half. And we have seen similar trends for several of your peers. And in the second half, you indicated we will have some SEK 150 million from those projects started which is -- which are already leased, but excluding that, can you give any indication of what to expect in terms of net lease for the second half?
I think we are seeing that -- here in the space that are let in the first period of this year we had some leases that was giving to termination in absolutely CBD of Stockholm as well as Copenhagen. They will be leased out. It's very hard to indicate exactly when that will be done, but I'm positive of that one. In this last quarter, we have seen some movements in -- on the logistics side. So actually that is also something that I'm positive on. So it's more movements in the portfolio that's hitting us, but I shouldn't calculate or pencil in the strong figures that we had last year, of course. And then the pipeline on developments that you state: The -- we have a lot of pipeline going forward, but since they are larger, it takes longer time to actually get signed contracts 100% secured on all lines, so to say; and means that they will take not -- a little bit longer before they're coming into the figures as well. So it's very hard to put out an exact figure, but I expect we're going to have positive figure on existing portfolio as well take on a benefit from the development pipeline, as we stated earlier.
And regarding the 2 developments in Malmö. If you look at the figure, you disclosed the assumed 100% leased and 85% surplus ratio. The yield on cost would be 5.4%. Is that a fair assumption?
Yes, more or less, yes.
I also have a couple of detailed questions. First of all, regarding the interest net and the decline in average interest rate since you said it came late in the quarter. Can you indicate how big decline we should expect in interest expenses for Q3? Some SEK 10 million down compared to Q2, is that fair?
I would say that it's volume-driven also, of course, so the best I could guide is that you take the outgoing interest rates of 1.9% and uses that on your assumptions regarding volume in the last 6 months.
Okay. And also, regarding paid tax. It increased to roughly 9% of recurring earnings in Q2, and I had in mind that you guided for roughly 4% paid tax in Q1 going forward. Should we expect higher paid tax also for the second half? Or was this a temporary increase in this quarter?
Well, I have guided that I think that you could -- should expect for this year maybe due to new legislation but also that tax losses that we do have are, you could say, locked in and cannot be used all over the group. So I have guided earlier around 7% to 8% on an efficient paid tax, roughly. And so I think what can make it vary between different quarters is interest rate deductibility restrictions and the correlation with changes in derivatives, as I said, which makes it a little hard to have, you could say, an equal tax cost each quarter. It can varies between quarters.
Okay, but the 7% to 8%, is that reasonable for coming years as well?
Of course, that depends on where the interest rates costs are going forward versus underlying earnings. So we will, I will need to come back to that one.
And our next question comes from the line of Niclas Hoglund of [ Nordea ].
Niclas Hoglund, Nordea here. Well, firstly, on the development side you've sort of talked about the net costs. And could you maybe elaborate a little bit? Since you now have the planning permits in place, have you -- what have you done to sort of the revaluation of these projects? Have you already taken up the values slightly? What's your sort of input on that?
No, we haven't taken up any project gains in those projects, but they are at cost in our balance sheet so far.
Right. And another projects is the sort of Stockholm Vatten. I sort of forget the new name, that property where which you are developing in Stockholm, in the CBD area, or very close to. Do you have any updates on that project and maybe a reflection on the sort of very recent transaction close by where [indiscernible] sold a 13,000-square-meter property for approximately SEK 1.3 billion? So it's on the -- in the media. And do you have any sort of more thoughts on Stockholm Vatten and the sort of neighboring area?
Yes. First of all, it's in the CBD area. I mean we...
Right. [indiscernible] yes.
Yes. And secondly, we are leasing it up right now. I mean we are under a very complex development there, and it's coming to a phase where you actually can show the space. And we have already leased it out to 30%, and we -- it's positive. So the market is extremely interested, and we have a good pipeline of tenants coming in there. So it looks good, for this first phase, I should say, because that's the old part of the building. At the same time, we're working with a possibility to change the zoning plan and are -- at best, a zoning plan connected to the assets surrounding the area. And so that looks positive. And combined it with some space we have possible to rent out during this year as well, on the [ outside ], in the more modern houses. It seems to go well, simply, on the pipeline.
And any reflections on the most recent transaction, well, very close by?
No. We are -- I mean we're benefiting from it value-wise. That's more evidence for us but be cautious on valuation on the development, as always, simply.
Right. And then a couple of follow-up questions on the financing side: You intend to sort of prolong the capital duration from currently 3.2 years. Could we -- could you share some thoughts on how far you want to go and in order to sort of, well, make it more of a like-for-like comparison to your peers which is slightly lower? Or are you aiming for a 5-year duration, or is it more 3.5 year?
I would not say exactly. I think I guided that we are aiming for maybe up to 3.5 years, but of course, that is also what the market allows us to do, of course. The upgraded rating indicates, so far, that it's much easier for us now to, for example, reach 7 years money, yes, in the bond market, both the Swedish market and the eurobond market. And if you look at the prices for that, at the moment, the eurobond market is at the moment a little bit cheaper versus the Swedish bond market.
Right, right. And on the rating side, is it fair to assume that, in order to keep the new rating, you need to be -- have an LTV below 45%, which could act as, well, a limitation to growth then?
I think you could split that into 2 parts because it's around 45%. And that will not stop Castellum for making really good deals if they occur in the market, like we did with Norrporten, but that can be followed by, you could say, another restructuring of the property portfolio by selling other assets or part that assets. So that will not stop us from looking at really good deals, still.
Right, but in absolute terms it's, well -- and it lowered the risks but then might take down growth, of course. And another on the financial side: In the first quarter, you were -- I think you were alone among your peers to sort of talk about highest -- risks for higher spreads in the secured market. Now that is maybe less relevant to you, as you've taken down that exposure. What's your thoughts now on these sort of rising risk weights and these sort of -- and well, which the bank confirmed that it's [indiscernible] [ per se ]? Do you see any, do you expect that to have a negative impact in general?
I will say that, since the last year, you could say Castellum has worked with -- change the debt portfolio towards more unsecured lending. And one big reason, its cause is not to be so dependent on the banks. They are really important, but we don't want to depend it on them. And one big reason is, of course, that they have regulations around them. And the last one is, of course, a good example is the statement from the finance inspection. And my theory, what I said in the Q1, I still stick to that, that, that acting from the finance inspection should means that the margins in the banks will increase if the owner from the banks wants to have the same return on equity. So we have a lot of our debt in the bond market but which will have no big impact for Castellum specific, but I think it's more a general question in the way you should -- where you should have [ magnitude, in 2 box ].
Right. The more, the merrier, I guess. Okay. That's all my questions.
And our next question comes from the line of Albin Sandberg of Kepler Cheuvreux.
First, Henrik, could you just clarify a little bit on your kind of turning more positive on the rental outlook? Because also [ reading ] that you say maybe signing larger, substantial leases could be a bit tougher now if clients are looking at the macroeconomics uncertainty, but what is it that you are seeing that makes your tenants more confident to sign up leases in the near term at least?
I say the development continue to positive in the absolute CBD area, including our assets in the Malmö and generally on university towns as well. If -- an example is using Stockholm. We thought that we would stop somewhere between SEK 6,000 to SEK 6,500, somewhere, on Torsgatan. We're seeing now that we can actually go more aggressive in the market and are offering the top rents on SEK 7,500 and the same houses that we didn't expected to be able to. We haven't signed yet, so you should all must be cautious, but it's -- if you take that example, it's a huge demand still. Moving to Gothenburg: We're seeing that the top rents from Q4 last year are stabilizing as top rents are approximately SEK 4,000 around the area of CBD and in efficient houses. But it's very, very few contracts that's -- could be signed because there are no vacancies. Positive, simply. And then moving to university towns, if looking through them, they have a positive trend. We can say that we are discussing new top rents on developments on -- in more or less old towns. We are preparing for signing and starting to sign on new top levels on, new developments, simply, to give you a Swedish picture. And Copenhagen is also positive on the rent side, and we are more cautious going forward there maybe because -- but then is when the new development pipeline is coming in. And Helsinki is also moving positive on the scene. It is absolutely CBD. So simply stronger market then I would expect to see now, if you have asked me in January, and that's the difference.
Very clear. And then also a follow-up from me for Stockholm water since you showed that project to us. And then as you highlighted, it's extremely complex, it seems like, but I can also see that your total investment cost has not changed. Have you done all the kind of critical stuff there? Or any risk for potential cost of rents from here and onwards?
No. As we see it now, it's under control. And the more -- as you say, the more -- most difficult parts on the old assets, including the floors, so to say, are constructed right now. So we're doing the inside and with strong leasing activity around that development right now. So yes.
Great. And when you talk about the future development pipeline, I guess you include Hagastaden in that. And just for me to understand: Do you -- the investments that you have agreed upon there, are they fixed? Or would you carry any market risk from here until those projects start and whether market is going up or down or...
It depends on what you describe as fixed. I mean, for going forward in the procedure in Hagastaden, yes, they are in the pipeline volume. They are these 2 developments, different situations. The first one, we was the winner and have brought in a partner into that. And that will be a solid construction that's ongoing and start somewhere '21 to '22. And then you have the second one that HSB was the winner and brought is -- us in as partner. Both sides is still under some sort of design. And so we will come back with the absolutely finished and how that site will look like but that we are -- and of course, completed agreement, 100%, with the municipality and so on and so on. So no, no. It's not 100% closed what it will look like in design or what it will look like in investment volume. So no. It's not 100% closed, simply. We will come back on that.
Yes, perfect. And then I think it's been a while since you did your reinvestment into the coworking space. And I just thought now, after we had the chance to review that deal in more details, would you have done it again? And what's your take out of it? Would the price have been the same if you had done it today?
Absolutely. I think we are -- we had to choose at that point by developing something ourselves, going slower or paying a little bit more to gain all the knowledge from 20 years backwards on the management team and having something that's already rolling, so to say. And now with the pressure and positive pressure in -- on demands on coworking in Stockholm, we experienced that, that is extremely positive. And we're looking for new spaces, simply. And in Gothenburg and Malmö it's going quickly than we calculated from the beginning, so yes, we are positive. It will also bring us more knowledge and a new type of offer to our clients, simply, so we can serve them with new types of contracts. So yes, I'm positive.
And my very final question. And maybe you touched upon that. I was a bit late in the call, unfortunately, but if you look at the value chains, did you see any extraordinary -- or I just wondered, do you see an extra positive effect on your logistics portfolio given transactional evidence, what has happened during Q2 in the...
Yes, you can say all in all that the logistic portfolio all in had a valuation uplift on that part for roughly 5%. So that is from a percentage point of view the biggest uplift of the different asset classes in the portfolio, you can say.
Yes, yes. And that was quarter-on-quarter, just -- Ulrika.
You could say half now and half first quarter.
[Operator Instructions] Okay. We have one further question coming through. That's from [ Maya Menenz of Luso Investment ].
I just had a quick question on your view of Finland and potential deal volume there for your portfolio.
Yes. We -- our view on Finland is that we are positive and we are looking for investments opportunities. We want to create portfolio, some with offices mainly, more CBD and [ fostering ] of Helsinki. And that is something we're working. Its market has developed very positive on value as well as competition. That's makes its -- us more cautious. And so if it takes a little bit longer time, I'm not worried for the long-term basis. We are interested in the Helsinki market. And that is based on that we see opportunities on rent. We see also a market that has not been so much invested in and especially not the CBD area. And we see possibilities to invest and catch up with rent increase going forward even though that yields has gone down in the last year in the market. So that's our view just now, but that said, you have to take them piece by piece because the yields have moved since as much.
[Operator Instructions] Okay. So there are no further questions coming through. I will hand back to our speakers for their closing comments.
Thank you very much. Thanks, everyone.