Earnings Call: Q2 2020

Jul 15, 2020

Good morning, everyone, and this is Henrik. This has been a quarter that no one of us has experienced before. Has meant a lot of work for us in the group, but I can proudly today say that we have shown that Castellum stands strong under these tough circumstances and have delivered. So I'm today sure that we will also deliver growth in 2020. But we will start this presentation by giving you a view on the report as well as the market. So next slide, please. The situation right now is that you know that we are active in 3 countries, 3 countries that has different regulations, laws and support from governments. Denmark and Finland that are more or less domestic open now, but hasn't opened the borders to 100% yet. Sweden that has taken another path and have all the time been more opened than the most of the countries. We can see that our customers are paying and so far not in the need so much of aid that we was expecting from the beginning. So this, together with a fantastic job done by the team in Castellium and the shape of the portfolio, meant that we could perform well even under these special circumstances. And the short version of this report is simply this, that all rents are more or less collected. We have achieved 9% growth in cash flow, and the cash flow has been built up with a lot of work from income side, but also through decreases in the cost side. We have today reached the goal of our cost savings programs to simply decrease cost by SEK 100,000,000 during 3 years. And the last year has stand for 40% of that. We have also achieved 8% on the NAV Group, and the net lettings have been strong with effect from the last big contract with the government. But even out of that, without that, the net leasing is better than last year in all lines. And even if there if the investment volume is not that impressive for the quarter, we have started new developments for approximately SEK 3,000,000,000, and that's extremely important for the in the future. And all this together resulted in a decrease of the LTV down to 43%. And on top of this, we have been active, started new construction, as was mentioned, for SEK 3,000,000,000 We are starting the buyback program and the climate neutral program to reach neutrality in 2,030 as well as then started construction of 1 of the largest solar cell projects in Europe. But with that said, I think I will go back to the report, please. So next slide, please. And then the PML, I will not go through every detail in this slide. But to summarize, the 1st 6 months can be summarized in an increase in income from property management with 9%, 10% is late quarter. And that is mainly due to renegotiations made earlier and CPIF, which has increased rental values, continued cost, efficient control and lower funding cost. The small unrealized change in property values on a portfolio level, mainly driven by project gains and better cash flow and on top of that, a realized change in value due to transactions made earlier. A negative change in derivatives, mainly due to lower market interest rates and finally, a tax of roughly SEK 364,000,000 of which SEK 80 is paid. And to finish, finally low impact so far due to COVID-nineteen. But let us dive into the rental income and costs on the next Slide, please. The like for like portfolio stands roughly 8% of the growth of the 9%. And the big contributor is, as I just mentioned, rental growth, cost control and our funding cost. But looking into the rental growth, the average increase in like for like is 3.8% and consists of CPI of roughly 1 point 7% and made renegotiations with an average increase of 15%. However, high vacancies and incentives mitigate that growth with 0.8%, meaning a rental income growth of 3% net. And worth mentioning, looking into this number, is that Cassella must give in roughly SEK 14,000,000 in incentives under their governmental rental support aid program. And of that, the government will compensate the landlords and Castello with 50%, meaning that we have accounted SEK 7,000,000 in incentive costs this 2nd quarter. So if we adjust for that, the like for like growth is 3.2 In like for like, it's down 2.8%. But we have to have in mind that the first half year, we had really higher property taxes due to taxation last year. So if we adjust for that real cost development in like for like is lower cost with 7.5%. And finally, the funding cost. It is 10 basis points lower in average, and that has contributed with SEK 70,000,000. A part of that is, however, mitigated by increased debt volume. Let us go to the next slide, please, and mention something about COVID-nineteen on Castellum. When we released the Q1 report, we had a knowledge of the payment part and its part in Q2 rents. At that point in time, 96% of the rents was paid as normal, 4% were outstanding that we had to pay discussions with regarding need of liquidity help. And the 4% had one thing in common, if I should simplify the picture. Apart from needing help, of course, it is that they almost all can be found in the service sectors, such as hotels, restaurants, traveling, leisure, retail, etcetera. And the reason the numbers was not big is that our exposure is so little. So looking into the 4%, it is now down to 1%, meaning that we have got roughly 99% of the Q2 rents paid. And as we see now, the rents for Q3 will follow the same pattern in share payments. But with that said, we are humble and would not be surprised if it gets worse in Sweden and the world for some time of businesses before it gets better. The liquidity held revenue so far is mainly going from quarter to monthly payments. And today, we have helped roughly 2 30 tenants with a total rental value of SEK 110,000,000. And to give you a reflection, Castellum has a tenant base of 6,000 clients. Of that, onethree, you could say, is already back on a normal invoicing growth. And twothree, we have said that we will help them going into 3 and in some cases, Q4. And on top of that, we had given the government a rental aid program, euros 40,000,000 EUR 7,000,000 net cost for Castellan. As you all know, COVID-nineteen hits everyone. It's more a question of how and the magnitude. The logistic warehouse is doing really, really well in the tenant base, among other things, due to increased e commerce shopping. And public tenant had increased demand for new premises before COVID-nineteen, and we experienced that, that is the same. Regarding offices, there are, at the moment, no big discussions, but we experienced that companies, CEOs or Boards. So what you would say are trying to understand what will be the new normal regarding offices. Less offices due to working from home more, more offices but smaller ones and on different locations, more office space, its own desk and spaces between desks, if needed. Therefore, we can say that offices at the moment are on, we could say, hold. Retail and hotels have had positive times, as everyone knows and fully understands. So our view is that the COVID-nineteen hits very differently. And depending on how long this will go on, of course, the impact can be broadened. And we will get back to that when we talk to our top tier valuation. But now to the market. Next slide, please. Thank you. Then going into the rental market. And first of all, from a CapEx spend perspective, this net leasing we have on the half year and the quarter was very strong. I said very, very strong with SEK 200,000,000. That was, of course, a result of the leasing out to E. ON's headquarter in the Q1 and the government in the Q2 that stands for approximately SEK 150,000,000. But even excluding that, we can conclude that this quarter has been better than the last years. So we have had a good activity and good result of that activity. So the net leasing from the existing portfolio, excluding all projects, was surplus and we signed more contracts than the last Q2. We have no bankruptcies at all the last quarter, so simply strong. We expect to include even more government contracts in the short term basis, but we'll come back to that in the next reports. The next slide, please. And then if we look at the rental market, we can now see in the market that the expected activity increases in the office market, the market levels are still in the same levels that before the pandemic. And you as you've seen, the gross volume in the leasing are intact for us. In the office market, we're also benefiting now from the increasing of investments volume from the government side. The logistic market, as Enrique mentioned, the activity is strong and stronger than historical, driven now by expansion into the market towards e commerce. So the shopping is now moving into our logistics sector for real. So the rents are stable to growing and on the most attractive locations for e locations. But then you can ask yourselves, are the markets the same? Of course not. In the short term, looking back for the last crisis, Stockholm, CBD and Shasta has been the only real volatile markets and tons. And tons like or raw, it's the opposite, where it's actually hard in the aftermath to see the difference of the pricing in at the crisis. So my point is that our portfolio is a very good have a very good resistance in a market like this. And the next slide, please. And then going into something else. The first to be hit in a crisis like this is a short term contract, and therefore, it's extremely important for us to see the development in our co working company, United Spaces. This is also our test arena for new technical solutions. So far, we can conclude that approximately 12% 12% of all members are using the spaces on a daily basis and that we canceled and then 15% is the peers of in the income overnight. Since we are certain that this types of business will be the 1st to benefit from the recovery in the market, we continue to invest. We invest right now in 4 new sites in Uppsala, Helsingborg and expand in Stockholm and Gothenburg. And then back to the balance sheet, please, Ulrike. On the next slide. The balance sheet of Castellan is strong. The LTV is 42 0.9%, while the net debt to EBITDA is down on 9.9%. So this, together with a strong cash flow, makes the company very good positioned. The valuation yield on portfolio level was unchanged on 5.1%. And the NAV depends on how you do your calculation when we tend to look at the EBITDA NRE, the long term net asset value, and that was landed in SEK 199 per share. But the balance sheet leads us into thoughts about the valuation, the property valuation that we can see in the next slide, please. The valuation on portfolio level means that we moved the value in a positive way with SEK299. The main part is project gains and better cash flow. But in our valuation, you do have a reflection of what was mentioned earlier, talking about our tenant base and how the COVID-nineteen has hit it in different way, meaning a very good situation for the logistic warehouse side and for offices if the tenant is a public tenant. A more traditional office is on hold in order to try to understand changed demand for premises and office location going forward. And finally, retail and hotel has been taken down in order to reflect its much tougher market. So that means that the asset class has been more polarized. And to give you a reflection on the retail part, on portfolio level, we have written that down 4%, but we have half of the retail that is doing very well also, of course, roughly, etcetera. So on single assets, you can see write downs up between 10% to 20%. But on the other hand, warehouse logistics is really doing really, really well. But let us go into the property market outlook on the next slide. Thank you. And the volume of transactions in Sweden totaled to approximately SEK 78,000,000,000 last the half year. That means a sign of 9%. We feel like the market is waking up and could bring good investment opportunities for us. The yields have been stable in our markets, office and logistics, examples that logistics deals done on 4.5% and some transaction not closed, but seems to end up in deals in line with before the crisis on the office side. And the interest from the foreign investors increased, and they stood for all the 35% of the deals in the Swedish market the last half year. If you look at our developments, we can take the next slide, please. As you see in this picture, we have a lot of midsized and our large developments. These 15 developments represent SEK 5,800,000,000 in investment volume. The average and mean is approximately almost SEK 400,000,000 euros per project. And you can say in average yield on all this portfolio is normalized to 6.2%. And the pre let volume of this is approximately, at this moment, 79%. So it's a low risk and good return on equity. I'm not sure that we will find more interesting developments, but we will only invest if it's in a low risk at this moment. And then looking at some pictures and some developments, we can take the next slide, please. These 3 are the 3 latest ones. Malme, the court that we have described before, that's all under construction and under construction, and it's more or less fully left with the government on a 20 year lease. And that will start will be ended in the 2022. And the next one is Johan Sjoping. In Johan Sjoping, that's the new court that we will build and lease out to the government for 15 years. This is a lease agreement is now signed and the construction will be signed in the latest in the orders and we'll start up with that. This construction will also be finished 2022. Then on the last one is in Orebro. This is the police department will rent this for 12 years. And this building that will be the 1st carbon neutral police house that we ever heard of, 100% leased out and will be finished in 2022. All the three projects stand for investment volume of SEK 2,900,000,000 and a rent volume of SEK 182,000,000. So then financing, please, Ulrika. Yes. And of course, on the next slide, all those developments need to be funded. And Castellum stands strong, as Florent said earlier, from many aspects, so also the funding situation. With many tools in the toolbox, many to talk to, a good liquidity buffer and confirmed credit opinion promoted this June on the AA2 with stable outlook. Castellum has a good situation in these more turbulent times. We experienced relative good excess to funding within the Nordic banks and at the moment, relatively stable margins. The bond market experienced falling margins or spreads during the most part of last year and in the beginning of this year. This trend was broken at the same time that the market realized the progress of COVID-nineteen. During the second half of the third quarter, the credit spreads increased dramatically steep. And for Castellamet indicated an increase of 2 to 4 times pre corona prices for duration 2 to 7 years. But during the Q2, the spreads have, however, fallen down even if they are far from precorona prices. And worth mentioning is that the real estate sector is lagging a little bit compared to other industries regarding spreads falling down. And to give you a price reflection, Castello would have paid roughly 100 basis points for 5 year money at the year end. And today, maybe price on screen is around 200 basis points or just below. The city market has also been hit by COVID-nineteen with increased spreads, all in use. During a period of calmness in March, we have issued some volumes during the Q2 and has now SEK 2,700,000 outstanding in volume compared to Q1 SEK 4.4 percent. Also here, the spreads have increased. And at the moment, to give you a reflection, maybe we would pay 65 basis points, which can be compared to year end prices at 35 basis points, but however, lower price than what the Riksbank is by now. And let us go to next slide, please. What have we done? We have done a lot. A lot of it was pre corona, meaning earlier this year, we renegotiated some bank debts, terminated some and at the same time, issued new Swedish bond for roughly SEK 1,500,000,000 in the domestic market. And during this first half year, SEK 2,000,000,000 inbound has matured of, as I said, SEK 1,500,000,000 was refinanced and SEK 0.5 billion is refinanced with existing bank facilities. To summarize it all, Castellum has, at the moment, roughly SEK 12,000,000,000 in unused credit facilities, and that will cover existing debt that mature this year and a good way into 2021, while we, at the same time, can meet the need from the business. And our duration for the rest of the year consists of SEK 2 700,000,000 of what was mature, SEK 2,700,000,000 in CP and SEK 1,200,000 in bonds in the autumn. And our vision as we see it now is to refinance that in the capital market, if it so allows us to do. But of course, we can always use our credit facilities within the bank system if needed. Go on to the next page, please. And then to something totally different and extremely important, sustainability. Our objective is that we shall be one of the most sustainable property companies in Europe and a major player in the construction of sustainable societies. Castellum is Castellum is targeted to achieve now 100% climate neutrality in their operations to 2,030. Therefore, the Board has approved to implement 2 roadmaps, one for property management and one for the development to achieve this. And since the big polluter is the new developments, we decided to try to build the 1st carbon free police house, as I told you earlier. And the objective is that this building shall have net zero carbon emission during its lifetime. And there will be more projects like this to come. Another example is our program to build 100 new solar cells panels on our roofs. We have started approximately we have started 14 new ones and the largest one is 30,000 square meters with 8,500 panels that will produce approximately 3.3 Gigabatthourpergear. So this is one of the biggest figures. So we will come back to this, and you will follow us on this objective we have during the years simply going forward. The next slide, please. As we have stated, the pandemic has not gone, and the economic effect of the pandemic is not gone. It will continue and will affect us. But in our market, we have a strong position. The markets are in also in a good and stable at the moment, but it's divided. It's a divided market. You need, for example, to have capacity to invest. Our belief is that we will create opportunities for us. So we will I think we will see very interest in next coming months. We have already active office market that will develop, and we are rightly positioned for that. We will see a logistic market develop strongly and we are also there. We have created a strong cash flow inside Castellum and a strong balance sheet that will give us opportunities. So simply to summarize this, this strong first half year will give us the opportunity to report in the Q4 for 2020 despite the pandemic that we will have an increase in income from property management. And with this, we will leave for some questions. Thank you very much. Next you. Our first question comes from the line of Tobias Kai of ABG. ABG. I would like to start to ask some questions regarding your rental income. And you wrote that you gave €14,000,000 in discounts and expect to get €7,000,000 back from government support package. Have you included those SEK 7,000,000 in your income for Q2? Yes. They are taken as an incentive cost in Q2 totally. Okay. And have you received all other income for Q2? Or do you have other outstanding receivables? No. We have of what was invoiced for Q2. When we finally closed that one, 99% of all that was in the most cost, being cash on the banks. Okay. And regarding your occupancy rate, it's improved by 1.7% in the quarter, and it seems to improve in most segments. However, the like for like growth for rental value is stronger than the like for like growth for rental income. Why is that? We have changed I think we write that in the report, we have changed the definition on the occupants, how you calculate the occupancy rate. So in Q1, we and the earlier reports, we have had incentives treated as vacancy. So what you see now is it's just the vacancy part that deduct rental value. So the number for Q1 with the new destination mission would have been 93.8% on portfolio level. Okay. And your reported rental income increased by 3.2% quarter over quarter. And that's despite I mean, you don't have any really significant acquisitions in the first half of the year. So can you give some more information of the sequential increase in rental income? How much is related to developments? And what's the rest related to Yes. As you see, the like for like growth is in this market good and is also adjusted for, could say, the incentives, the government incentives that we have given. We have also, this second quarter, and I think that is mentioned in the report, on the total portfolio, extra, you could say, 1 single income that we don't have going forward, and that is all summarized to SEK 20,000,000 this Q2, isolated. And it's a lot of small, because the insurance cases that you've announced in Q2 suddenly were closed from the insurance company, everyone, and money was received. So that one is extraordinary, you could say, 2nd quarter. Okay. And regarding you talked about your start to developments in Q2. And I just want to ask if the rent contracts in the development in Johan Sjoping and Aerebro, are they included in the net lifting for Q2? Yes. Yes. Yes. And in total, I think the total investments and remaining investments in ongoing developments are, to my knowledge, at an all time high level. Do you think you need to divest something to fund all the investments? Or are you able to fund this internally? No. We don't have any pressure of selling anything. So we will we've carried on like this. We like to have turnover in the portfolio, but we don't press to sell anything at all. And are you also looking for acquisitions or all your focus on investments in the developments? No, I think this as I said, I think this will give us opportunities for investments and also to have a turnover in the portfolio. So I'd like to see an active market in front of me in the after summer. Okay. Thank you. And one final question, if I may. Regarding the valuation, I was a bit surprised that the valuation yield is actually up year over year for warehouse and logistics. What's the reason for that? You can say that there is still a little bit cautiousness. But what we experienced maybe cautiousness in that sense that the cash flow is really, really strong. And maybe we haven't showed everything in the valuation in that sense. And that's why you have that movement. Okay. Thank you very much for taking my questions. Thank you. Now our next question comes from the line of Erik Gromstrom of Carnegie. Please go ahead. Your line is open. Thank you very much. Good morning. I had a few questions as well. I'd like to start off with the like for like development. Ulika, I believe you mentioned it was 3.2% or something like that in Q2. Could you say something about the sort of breakdown of that within the different segments? How, where and how have you seen the biggest movement in terms of like for like over in Q2 over last year? You could say it's a reflection a little bit of, you could say, how the market is hit. So we have a good like for like growth or if could say what support the like for like growth from a segment point of view is the logistic side. Of course, it's part of the office side also because that is when negotiations made earlier, the retail part is not a contributor, you could say, to this part. And in small cases, also public tenant. So logistic, offices, public tenant, positive with different magnitude and then more cautiousness or not so big support from the retail part. Okay. Thank you. And then also perhaps on Henrik's statement regarding the opportunities going forward, you expect the property market or the transaction market to continue to improve after the summer as well, it seems like. Is this is there a difference in where you see things opening up in terms of transactions geographically? Or is this something that is happening at every place in the Nordics where you guys are looking? I should say it's not geographic divided. It's divided between markets and owners, so to say, to give us opportunities in the future, I think, and also developments that are not 100% finished or anything. So to summarize it with one word, I think you can use the word financing. Okay. And you previously stated that your focus is to become Pan Nordic over time. And in terms of these opportunities showing up now, do they play into those sort of into that strategy that you have going forward? Or is this more of a situation where you're going to be opportunistic and see that there might be situations that come up, scenarios where you sort of haven't communicated before that you're looking, but now there might be opportunities there? Or should we expect you to stick to the comments or statements you've had before where you would like to grow? No. We would like I think you should not you should pencil in that we geographically be looking at the Nordics. We monitor the total market, and we will see what simply occurs on the screen, so to say, to make it happen. And my prediction is simply out of what I'm seeing on the high activity and also that I expect that some interesting opportunities could occur simply after summer. Okay. And then my final question is regarding the statements that you made that you do expect that there might be a situation where tenants will have a tougher time in the second half of the year, seems to be mainly due to the slowdown of the economy. Has this been something that you've noticed at this point and sort of in what sectors, if that's the case? Because I believe that sort of pertains to sectors outside the service sector then. Yes. No, we don't see that. It's more just a reflection from outside, and it's more a reflection what can happen maybe in the economy general. And I think that Castello will not be unsensitive to it in that case, but we don't see any signs of it. But what we can say is that with all the aid packages that's flowing out into the system in the economy. Together with that liquidity reserves doesn't exist forever, that means that the economy need to be better, and we need to do more if certain companies will have, you could say, a sustainable way going forward. So it's not Castello specific. Okay. Thank you very much. Those were my questions. Thank you. Yes. We thank you very much for listening, and we wish you, for the ones in the Nordics, we wish you a happy summer. And for the ones that we have it in August, we wish you also a happy summer. And we will be back in October simply. Take care.