Earnings Call: Q1 2020

Apr 24, 2020

Hello, and welcome to the Castellum AB Q1 Report for 2020. Throughout the call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present the CEO, Henrik Saxbourne and the CFO, Ulrike Danielsen. Please go ahead with your meeting. Good morning, everyone. This is Henrik speaking. And you can start with changing the slide, please. During this session, we will comment on the Q1, of course, at the same time, looking to the future under this extremely special circumstances that are we are living now for Castello and for the real estate sector and actually the whole world. We will, during this web conference, give you a view of the results, of course, but also status on the market as well as we will see try to see in front of us, even though it's very hard to do any types of prediction under the circumstances that we are living in right now. But we will try. We will try to guide you and give you the knowledge we have. So the situation's circumstances right now. We are active in 3 countries. The 3 countries have different laws, support from government and so on. And if we start with Denmark, Denmark closed down very fast and are actually right now opening again for people running to work or the kids going to school. So for us, 50% of our working force is back in office, and that is the normal now in Denmark. In Finland, we are they are planning to opening again. And so that was ongoing for the last days. Looking at Sweden, where we have more than 90% of value, it's like semi opened. Everything is allowed to stay open, but the streets are more or less empty. And but and the most people work from hook. So the turnover in all types of services decreased dramatically, of course, like in the rest of the world and for other businesses as well, like traveling business and so So we live under different circumstances right now. And if you look into the Castellium condition in brief, I would, with humbleness, say that we are in a strong position. We have 5,700 customers spread over the last and the large single ones is only 2% of the contract volume. We have 650 assets located in 17 towns. We have a strong cash flow. We have a very strong finance situation. And we have more upcoming investments for the Swedish government that we will come back to that are leased out and will be leased out more than 100%. And 23% of the portfolio is government. And on top of that, the organization has capacity and competence to go through this difficult time. Looking into the clients a little bit more, we can see today that 96% of the rents from the Q2 has been paid. And that's more or less a normal payment pattern and that we have also given 140 customers some sort of going actually from annual quarterly rent down to monthly rent. And just a very few, very little part is some sort of other supporting for these tenants. So it's actually everything is quarterly to go into monthly rents. And that equals up to approximately 4% of the total amount. And even though the activity is very low in the market on the net leasing, it was like in the end of the quarter, like a normal quarter. The March was actually in the same figure, like a normal quarter. Looking at costs and staff. On the cost side, we have prepared us and are working even harder now with efficiency and cost cutting programs, and that has already given the results. We are all working from home. Everyone that can do it is doing that since 6 weeks back. And we have no let's go ahead, no seriously seek at the moment for the stainless steel. And the investment side. If you look at the development, the development side, it's still under production, and we have no larger impact because of the epidemic jet to end on the delivery or on staff. So everything is rolling like normal. And from a funding perspective, TelstraLM stands strong, a well diversified funding situation with many suppliers, good relations as well as well spread capital maturity. And that, together with the liquidity reserve of 14 volume, gives Castellum the possibility to meet the need from the operation and, at the same time, handle mature debt the coming year with all of the existing credit facilities. Yes. And then we can change slide, please. Then looking into the Q1 result. We can conclude that we had a strong result with 9% growth on Property Management. We had a net leasing that approximately was SEK 100,000,000 mostly because of the leasing out to the E. ON headquarter while coming into the figures. So I so we had what I should call a normal quarter and also March was in the figures with the net leasing in line with last year and note, no bankruptcies. But also the negotiation was in average increased by 15%. That's already in the P and L. And NAV increased with 8% compared with last year. And we didn't increase it with the value in Q1. But let us come back to what we see in the market a little bit later. Now more details, please, Riksha. Yes. On the next slide, please. The P and L. The Q1 this year shows an increase in income from property management with 9%, and that is mainly due to renegotiating made earlier, the CPI list, and those 2 have increased the rental income. A continued cost efficiency control program and, of course, a mild Q1 That has led to lower property and administration costs. We have also an unchanged view of property values even if there have been some adjustments on single assets. We have a negative change in derivatives and of course, on the bottom line, a tax of roughly €150,000,000 where €40,000,000 is actual tax. So if you go to the next slide, please. The Light portfolio stands roughly 8% of the total growth in income from property management of 9%. And that is due to, as I said earlier, an increase in rental levels of 3.7% on average due to CPI and already made renegotiation. And then you have some mitigation of that uplift due to higher vacancies, which means that rental income increased 3%. But the expenses have moved even more. In like for like, it's down 5.5% due to the cost efficiency program as well as in my 3rd quarter. And to give you a reflection of it, the expenses, if we exclude the co working company, is €53,000,000 down in like for like, including administration. And of that, roughly $20,000,000 is from cost savings, dollars 20,000,000 from a mild Q3, and the rest is changed in the portfolio. So this is a very good job done by the organization. I must say it's something that we are very proud of. So the cost savings last year, dollars 60,000,000 together with this Q1's 'twenty means that we're now at $80,000,000 dollars If you go to the next slide, please. As you're surely now, our industry is favorable in that way that our channels, our customers, pays in advance. So for QS, payment was done at the year end. And that means that the impact that corona brings onto the world from a financial point of view will not be seen in this report for Castello for this Q3. And as you can see from our industry split, our biggest sector is the public sector. On that, a stable tenant and not so sensitive for up and down turns. We, however, have some exposure, if it's small, to a hotel, rough, strong service industry. That has, it's like the 3rd way industries that got liquidity problem and that needs some sort of help. And the help we can ask for them in order to support the liquidity is to go from quarterly payment to monthly and in some cases postpone the payment. We do make individual assessments for each tenant. And so far, we have made such a pretty Q2 court order rent with an amount of $58,000,000 equal to roughly 4% of the rental income, and the absolute main part is monthly payment. Another sign is the pattern in payment for Q2 rent that was supposed to be paid in the end of March, but with some delays in the beginning of April, the sales date. For Q2 payments, roughly 4% has not paid at all or only paid part of the rent. A big part of that is part of the 4% that I just mentioned before that has got liquidity help. So that means in the end that the payment pattern is roughly the same as 1 year ago. So all in, it feels stable. But however, we do assume that corona will have an impact, but we are not immune to Cellim. But so far, the exposure on the rent to site is very limited. How this will continue remains to be seen. And for those companies that are exposed, the future will even be tougher, we do assume and are humble before that. Okay. We can take the next slide, please. This is the net leasing that you see in front of you right now. And as we I said earlier, this was a strong net leasing in the Q1, And it was, of course, benefiting from that we could, after some months now or years of work, include E. ON contract on the headquarter. But it also has seen the pattern of a normal Q1. And the most important number is, of course, for the March figures, and that was also normal and new bankruptcies. And the best part is that it's more government contracts to come during this year and look for the large one very in this very short term. So we can move to the next slide, please. Looking then into the market. What we can see in the market is that the activity is low, not closed. So we have offers in the market and have closed new deals with normal companies as well as government contracts the last month. The logistic market, the activity there is normal. It's a lot of question of different kinds that mainly are driven by expansions in the market towards e commerce and a change of the sector, of course, that's still ongoing. That brings me to rent levels. The short answer is stable. We don't have so much evidence, but we are not in, at the moment, changing any market trends in our office. But it's important to notice that the rent levels are was increasing in our universe before the pandemic and are now standing still. So the and that includes all types of premises. Then we can change picture, please. And a little bit, very small part of the business, it also gives us a hint. The first to be hit in a crisis like this is short term contracts. And therefore, it's extremely important for us to see the development in our co working company, United Spaces. So far, we can conclude that approximately 13% of the member are using this basis ever again. And that we have been giving notice for the contracts approximately for 10% of the total income. On top of that, of course, all meeting was canceled. And that is 15% of the income that disappears overnight because of this pandemic. Since we are certain that this type of business will be the 1st to benefit from a recovery in the market, we continue to invest in new sites in Uppsala, Helsingborg, expansion in Stockholm and a new site in Gothenburg, where we would be part of the Geely's research and development headquarter. And then next slide, please. The next slide, yes. And the balance sheet, a short story. The balance sheet of Capstone is strong. The LTV is 44%, and we do have to keep in mind that was part of the dividend at the end of March, and earnings are still to continue the rest of the year. The valuation yield was unchanged, on 5.1%. In the NAV, the value of that depends on how you do your calculation. And we tend to look at the EBITDA NAV, the long term net asset value that earlier was IFRS NAV, and that was SEK 193 per share. Next slide, please. The valuation on portfolio level is roughly unchanged, even if we do have made some adjustments of single assets, both positive as well as negative. We feel that even if the market was very positive with low yields in the beginning of the period, it ended in a more modest view at the end of the period. And at the moment, we experience a more cautious view in the market in order to try to understand the long term impact on society, the industry, the interest rates and the property prices. As you can see, the public sector is not only the biggest from an income view, it is also the biggest from a valuation point of view. Retail exposure here is 7% from a valuation point of view and consists of some but retail, but much car retail and grocery stores. And worth mentioning and regarding logistics, it's very positive. If retail has hurt during those corona times, the e commerce is doing well in our portfolio. Next slide, please. And maybe the market. Yes, the market. Looking into transaction volume in Sweden, in total, the Q1 was SEK 43,000,000,000, maybe not so important. But what's important now is that a number of transactions has been postponed or canceled. But we can see more activity for every day. And I don't think it will be taking long before the market starts to pick up again or tries to pick up again. The office assets with a long with a strong cash flow and attractive tenants are still very attractive. So I think government, not very much municipality, but some municipalities. Logistics are growing, and we'll continue doing so. The new sites and efficient locations and assets are very attractive still. So I'm very pleased that we have been innovative and because that means that we are more prepared now than we will when we will see changes in the demand from the clients. We are convinced that more flexible solutions will be asked for and that innovative companies in our sector be more attractive than others. And we can look at the next slide, please. Here we have all the developments. As you can see in this picture, we have a lot of midsized and large developments ongoing. As said before, we have no delays in the production. We are now enlarging the investment pipeline with developments that are leased out to 100%, and the government tenants are the main tenants in that pipeline right now. And under 2020, we will start developments for approximately SEK 2,500,000,000 just for the government tenants. And we can go into some of them. Next slide, please. As far as looking at what we started this quarter, on the left side, infill development in Vasteras, where we have a stronghold with assets and new developments on this side. This asset is more or less 100% leased out by the government, the insurance company that occupies 88% of the assets. On the right hand side is the development that Jasna started in Malmo, the headquarter for E. ON. That investment of approximately 1,300,000,000 and has a yield on cost under 6 just under 6% and will be completed in little bit less than 1.5 years' time. We can take the next slide, please. Here, we have 4 different investments. You have the on the right top, the left top hand side, you have the Kortemalme that we hope to be finally start the start approval in a very soon time, and that we would mean that we immediately started production of 27,000 square meters, almost fully less than invest $1,300,000 And of course, this is a government contract. Then on then we have on the right top side, you have a Revolut. There, we're also planning to building a new construction in direct connection to the railway station for the government tenant, and we're talking about an investment approximately on SEK 220,000,000. And then you have on the right hand bottom, where we are planning to start also this production in the summer, hopefully, a new court and invest approximately SEK 300,000,000 also, of course, which is 9,000 square meter for the government. And the last one is funny that you have seen before, is the airport, Schwerwer, in Gothenburg, where we right now are doing a lot of smaller midsized investment on for the tenants, that's our government or other tenants. Activity extremely high. And on top of that, the planning process is undergoing speed for the research and development part of the site. So that looks extremely good at this moment. Next slide, please. Then the funding conditions. I have always liked 2 words, and that is flexibility and diversity when it comes to funding. That has been our strategy to get many tools in the toolbox and have many supplies to talk to. And finally, on top of that, a good liquidity buffer. So all that together, as I said earlier, makes us strong in this crisis where we are in. And if we do look into the 3 different buckets, Capstone experienced relatively good access to funding within the Nordic banks and, at the moment, stable margins. All our relation banks have announced that they will support us and offer liquidity if necessary and that we are very grateful for. Someone has said that the bond market is dead, and that depends on how you define that. I would say it has it's aligned in that sense that there has been some activity in the European bond market, more than in the domestic market, I must say. But the prices are much higher, roughly 2 to 4x pre corona and sometimes even higher. And that means that if you don't need to accept that market at the moment, you don't do it. So the market is there, but the price is much higher. And then the short part of the capital market, the so called city market is very limited. Here, the Swedish Riksbank was out supporting it, but only in the secondary market, which will not help. It's the primary market that needs support, and that part of the market don't give support. There will be no any secondary market in a couple of months. However, from time to time, you can do deals depending on how generous you are. And Castellum has made deals in April equal roughly to RixBank's twice in that market. In this market, the yields are much higher, but that includes also, of course, an impact from high STI dollars at year end. So if you go to the next slide, please. What have we done in Castellam? We have renegotiated some bank debts and terminated some, the main part pre corona. We have issued 1 point $5,000,000,000 in the domestic bond market of this pre corona. And at the same time, 1.6 was matured. So almost all that matured during Q1, we did refinance before the corona impact. The Citi market, as I said, is very sluggish, and we used that as an arbitrage. At the end of Q1, we had roughly €4,000,000,000 outstanding compared to €5,000,000,000 at the year end. And those $4,000,000,000 all points due during Q2. And we, as I said earlier, have some done some deals, both in March, but even in April. For example, in April, we issued SEK 650,000,000, maturity 1 to 4 months, yields all in from 51 basis points up to 85 basis points. And that equals roughly spread from 40 up to 50 basis points. That means that at the end of the period, we do have EUR 14,000,000,000 including EUR 1,000,000,000 in cash that are not not used and that can be used to refinance not only daily operations, but also debt that do mature in the CERD bond market. And that leads us to the next slide, please. On the right upper corner, we have the debt maturity. Apart from CP, it is only bonds in the domestic market that for you will spread out during quarters. Regarding 2021, we do have 1 bank of 2QM with the bank that we do have very good relations with. And the rest that mature during 2021 is bonds. It is 10 bonds equally spread out during the quarters. So with the cash flow from the operation, dollars 40,000,000,000 in reserves, Castellum will cash finance, all that matures and at the same time meet the needs from operations on a daily basis, rest of 2020 and a good way in, in 2021. But we have not only worked with moving the property portfolio the last year, we have also worked hard with moving the funding side in order to get well in absolute amount. Our financial KPIs are developing in a good way, not at least regarding the LTV and the portion of unsecured assets. The net debt to EBITDA has been rather stable despite increased interest bearing volume in float amount. And that key metric is a key metric that is very relevant in those more turbulent times, maybe in some cases, more valuable than the valuation driven financial metric. So let us go to the next slide. Yes. And then come the hard part, the outlook. But let us conclude where we started. Castello remains on stable grounds with our tailwind base, our strong cash flow and balance sheet. And on top of that, we have a very strong finance situation, and we have the capacity to, as Enrique said, not enter the banks more over the last more than in spite of. So let us not forget, when we went into this crisis, the rental market started from a situation with very low vacancy and low production volume in the market. So we have still seen the same market vacancy in the office and logistics markets that we are standing still. The high risk is at the moment in the retail, hotel industry and so on, as you all know. So some difference for some in my prediction, it's our it's a little bit different between tons. And it's still the market level has not softened yet. On the retail real estate market, it's all about the required yields on going forward. What we see so far on the office and logistics portfolio is not a big change in cash flow. It will be about risk, cash flow assumptions, alternative investments and, of course, financing. So as long as the financing, as Ulrika said, is there, I don't see we will see a huge drop. So our view is it's all about time. How fast can this market come back? CapTelo will be active. The strength will give us opportunities on the rental as well as the investment market, but it's too early to see exactly what that is. During the time, we will invest in our tenants. There's a lot of planning. It's all about supporting the government in different developments. And there's the next phase is around SEK 2,500,000,000 that we will invest for them. And hopefully, all of that will start 2020. In our our objective is still to create growth even though the 10% is hard to reach a year like this. And with that, we'll thank you all and leave for questions. Thank you very much. Thank And our first question comes from the line of Tobias Kai of ABG. I would like to start to ask regarding your the 90% 96% of income that you write to have received in Q4. I assume that's of contracted income, but have you if you compare the income to Q1, are there any discounts that you have given that are not included in the 96%? No, it's not. So simply, we have just giving extremely few contracts. It's actually about hotels. Some they will simply pay their rent a little bit later. That's the only thing we've given. But it's all about doing from quarterly to monthly payment instead. That is what's happened in volume, and that's the 4%, nothing else. And since you're right that I think it was €58,000,000 or 4% of the income, which have converted to monthly payments, does that mean that you are at like 99% received for the remaining part of the portfolio? Yes. More or less, I should say. So we have very close to a normal pattern, and you are correct. Okay. And you talked a bit about development. And obviously, when you have, for example, the big project in Malmoet, Domsalzverket already leased and with a government tenant, it's a no brainer to start it. But if you exclude the ones which you have worked with for a long period, do you still aim to start new projects in the same way as you planned for, say, 3 or 6 months ago? Or have you become more cautious? I mean, you already have an all time high in terms of remaining investments in your ongoing project portfolio? Right now, we're evaluating all developments, of course, and we've gone through everything that had to have a decision to start process, even if it was €1,000,000 or more. And the ones that we're really waiting right now how we will look at the risks, and that will be just from project to project in the future because of the market situations and, of course, contract volume. So no decisions that was made pre corona is active right now. So we have to go through decision proceeds on all developments that are not under production. So let us come back on volume, but we are, of course, as you understand, focusing what's ongoing as well as supporting the government when they want to grow in a time like this. So that's the situation. Can you give some more detail regarding your co working portfolio? You came from a small gain to a small loss in the Q1. You mentioned that 10%, you have had termination of 10% of the contract. Is that the kind of decline we should expect in income for Q2 compared to Q1? And also, how flexible are you on the cost side regarding co working? Yes. The co working, they have been reacting let me start on costs. We have worked very quick on the co working side, and I'm very pleased with the start and what's happened there. So we're down to the working hours only 60%. But as you know, we have also costs for and the biggest one is rents. That is really hard to like every business is to adjust. And on the rent side, that's the biggest cost that we have. On all other costs, we are cutting so much as possible, but supporting that the arenas is open simply. On yes, if you're looking on a 12 year month basis, if it should stop now, that means a decrease on income of 10%. So that's the situation. Did that answer your question? Yes, more or less. And I actually have one final question, maybe more to Enrique, and that's regarding your average interest rates, a very minor change here in the Q1. Should we expect a bigger increase in the Q2 given that the STIBOR increased quite a lot towards the end of this quarter and also related to increased credit spreads? Yes. If you do assume that SkyBell will be here to stay on or up these 30 basis points? Then you see how much floating we do have. The other thing that you have to make assumptions about is will the CT map be there or not because if it will not be there, then we have to swap that to bank debt that in relation to the CECL prices are a little bit more pricing. And are we talking about potentially 10 to 20 basis points higher average interest rates? Or can it be more? No, not more, not 20 basis points. I would it's hard because it's assumptions you need to make on the CP market, and I think that will have the impact in that case. So maximum ten basis points, I would say, from what but that is assumptions in it. Our next question comes from the line of Frederic Sillem of Carnegie. A few questions from my side. Starting off with the 96%, that is obviously reassuring. But could you put that into context? What is a normal level for Castellan? Yes. I should say we are in a normal pattern. And we're charging normally this quarter, €1,400,000,000 and this is €58,000,000 that we're talking about. And this is the 4%. So a normal pattern. And obviously, the corona situation worsened and was only a minor impact in late March perhaps. Shall we expect that, that 96% will be a lot lower when we conclude the Q2? It's very tough to say that to I mean, the effect and the worries when everything was due to pay. And also, you know that the liquidity situation for all our clients was tough at that moment. I'm very impressed. I'm impressed of the work done for another normal company. And I said that and what they're doing. So we have a good contact, and we I know that we have had discussions with a lot of tenants during this time. So and what we will have in front of us, it's really, really tough to say. But this, I think, I believe, is proving that we have a very strong customer base. That is actually what we usually see in that. So I'm impressed by what the clients are doing here. And then my final question related to valuation changes. The net effect is very limited. Are there any variances within different types of premises? For instance, I noticed that logistics was the reported value was up 10 bps, which could be, of course, could have been less than 10 bps, a rounding error, but it seems all that logistics will be more affected than the other segment. Yes. I mean, we was before the epidemic, we was in a pattern of good growth on cash actually because of renegotiation as we see. So that is one value going up. And then you have in different sectors, of course, you have hotels, for example, we have very few hotels, but they are, of course, affected in these valuations. We have variations in it. And then we have stated that it's very tough for, say, where we was in the first of the last of March when these valuations reflect us because of this no evidence in the market on the office portfolios. So that's our view on it. Okay. So basically, it's not new changes to the yield assumption. It's more about renegotiations than I would imagine that also the stock from Luxembourg has been decent in the Q1 than compared to Q2? So it's a prudent valuation also depending on that we don't know, as we said earlier, the long term impact. So it's a more cautious way to look at it at the moment. Thank you. Those were my questions. And there are no further questions at this time. Please go ahead, speakers. Okay. Then we thank everyone for listening, and we hope to see you soon, but at least hear from you in December when we come in with the next report. Thank you very much. Thank you. This now concludes our call. Thank you for attending. Participants, you may disconnect your line.