Hello, welcome to the Castellum AB Q1 report for 2020. Throughout the call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. Today, I'm pleased to present the CEO, Henrik Saxborn, and the CFO, Ulrika Danielsson. Please go ahead with your meeting.
Good morning, everyone. This is Henrik speaking. You can start with changing the slide, please. During this session, we will comment on the first quarter, of course, at the same time looking to the future under these extremely special circumstances that we are living now for Castellum 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 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. We will try. We will try to guide you and give you the knowledge we have. The circumstances right now. We are active in three countries.
The three countries have different laws, support from government, and so on. If we start with Denmark closed down very fast and are actually right now opening again for people running to work or the kids going to school. For us, 50% of our working force is back in office, and that is the normal now in Denmark. In Finland, they are planning to opening again. That was ongoing for the last days. Looking at Sweden, where we have more than 90% of the value, it's like a semi-opened. Everything is allowed to stay opened. The streets are more or less empty, and most people work from home. 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 on.
We live under different circumstances right now. If you look into the Castellum condition in brief, I would with humbleness say that we are in a strong position. We have 5,700 customers spread over the large, 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 financial situation. We have more upcoming investments for the Swedish government that we'll come back to that are leased out and will be leased out more than 100%. 23% of the portfolio is government. On top of that, the organization has capacity and competence to go through this difficult time. Looking into the clients a little bit more then, we can see today that 96% of the rent from the second quarter has been paid.
That's more or less a normal payment pattern, that we have also given 140 customers. They're going actually from quarterly rent down to monthly rent. Just a very few, very little part is some sort of other supporting for these tenants. It's actually everything is quarterly to go into monthly rent. That equals up to approximately 4% of the total amount. 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 the same figures 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 results. We are all working from home.
Everyone that can do it is doing that since six weeks back. We have, thank God, no seriously sick at the moment from the staff. The investment side. If you look at the development side, it's still under production, and we have no larger impact because of the epidemic yet on the delivery or on staff. Everything is running like normal.
From a funding perspective, Castellum stands strong. A well-diversified funding situation with many suppliers, good relations, as well as a well-spread capture and maturity. That, together with our liquidity reserve of SEK 14 billion, gives Castellum the possibility to meet the need from the operation and at the same time handle mature debt the coming year with already existing credit facilities.
Yes. We can change slide, please. 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 million, mostly because of the leasing out to the E.ON headquarter was coming into the figures. 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. Also renegotiation was in average increased by 15%. That's already in the P&L. NAV increased with 8% compared with last year. We didn't increase it with the value in the Q1. Let us come back to what we see in the market a little bit later. Now more details, please, Ulrika.
Yes. On the next slide, please. The P&L, the first quarter this year shows an increase in income from property management with 9%. That is mainly due to renegotiation made earlier, the CPI uplift. Those two have increased the rental income. A continued cost efficiency control program and of course, a mild first quarter that has led to lower property and administration costs. We have also an unchanged view on property values, even if there have been some adjustments on certain assets. We have a negative change in derivatives and of course on the bottom line, a tax of roughly SEK 150 million where SEK 40 is actual tax. If you go to the next slide, please. The like-for-like portfolio stands roughly 8% of the total growth in income from property management of 9%.
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. You have some mitigation of that uplift due to high vacancies, which means that rental income increases 3%. The expenses have moved even more. In like-for-like, it's down 5.5% due to the cost efficiency program as well as a mild first quarter. To give you a reflection of it, the expenses, if we exclude the co-working company is SEK 53 million down in like-for-like, including administration. Of that, roughly SEK 20 million is from cost saving, SEK 20 million from a mild first quarter, and the rest is changed in the portfolio. This is a very good job done by the organization, I must say, and something that we're very proud of.
The cost savings last year of SEK 60 million together with this first quarter SEK 20 million means that we're now at SEK 80 million. If you go to the next slide, please. As you surely know, our industry is favorable in that way that our tenants or customers pays in advance. For [Q4], 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 Castellum for this first quarter. As you can see from our industry split, our biggest sector is the public sector. On that are stable tenant and not so sensitive for up and downturn.
We, however, have some exposure, if it's small, to hotels, restaurants, and the service industry that is the first wave of industries that got liquidity problems and that need some sort of help. The help we can offer 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 deal for the Q2 rent with an amount of SEK 58 million equal to roughly 4% of the rental income, and the absolute main part is marked payment. Another side is the pattern in payment for Q2 rent that was supposed to be paid in the end of March, but which some delayed in the beginning of April, the first.
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. That means in the end that the payment pattern is roughly the same as one year ago. All in, it's still stable. However, we do assume that corona will have an impact, but we are not immune in Castellum. So far, the exposure on the rental side is very limited. How this will continue remains to be seen, and for those companies that are exposed, the Q2 rent will even be tougher, we do assume and are humbled before that.
Okay. We can take the next slide, please. This is the net leasing that is in front of you right now. As I said earlier, this was a strong net leasing in the Q1. It was, of course, benefiting from that we could, after some months now or years of work, include E.ON contract on the headquarter. It also seen the pattern of a normal Q1, and the most important numbers is, of course, for the March figures, and that was also normal and new bankruptcies. The best part is that it's more government contracts to come during this year and hopefully a large one in the very short-term. We can move to the next slide, please. Looking into the market. What we can see in the market is that the activity is low, but not closed.
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, we are not in, at the moment, changing any market trends in our offers. It's important to notice that the rent levels are what's increasing in our universe before the pandemic and are now standing still. That includes all types of premises. We can change picture, please. 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. Far, we can conclude that approximately 13% of the members are using the spaces every day. That we have been giving notice for the contracts approximately for 10% of the total income. On top of that, of course, all meetings are canceled, and that is 15% of income that disappears overnight because of this pandemic. Since we are certain that this type of business will be the first 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 will be part of the [tedious] research and development headquarter. Next slide, please.
The next slide, yes. The balance sheet. A short story. The balance sheet of Castellum is strong. We have released our 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 was unchanged on 5.1%. The NAV, the value of that depends on how you do your calculation. We tend to look at the EPRA NAV, the long-term asset value that earlier was EPRA NAV, and that was 193 SEK 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. 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 box retail, but much car retail and grocery stores. Worth mentioning regarding logistics, it's very positive. If retail is hurt during those Corona times, the e-commerce is doing well in our portfolio. Next slide please, maybe the market.
Yes, the market. Looking in the transaction volume in Sweden, in total, the Q1 was SEK 43 billion, maybe not so important. What's important now is that the number of transactions has been postponed or canceled. We can see more activity for every day. I don't think it will take long before the market starts to pick up again or tries to pick up again. The office assets with a strong cash flow and attractive tenants are still very attractive. Think government, not very much municipality, but some municipalities. Logistics are growing and will continue doing so. The new sites and efficient locations and assets are very attractive there. I'm very pleased that we have been innovative and because that means that we are more prepared now than 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 will be more attractive than the others. 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 mid-size 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. Under 2020, we will start developments for approximately SEK 2.5 billion just for the government tenants. We can go into some of them. Next slide, please. First, looking at what we started this quarter, on the left side, in-filled development in Västerås, where we have a stronghold with assets, a new development on this side.
This asset is more or less 100% leased out by the government. The insurance company that occupies 88% of the asset. On the right-hand side is the development that just now started in Malmö, the headquarter for E.ON. That investment of approximately SEK 1.3 billion and has a yield on cost just under 6% and will be completed in little bit than one and a half years' time. We can take the next slide, please. Here we have four different investments. On the left top-hand side, you have the court in Malmö that we hope to be finally start the start approval in a very soon time. That we would mean that we immediately start a production of 27,000 sq m, almost fully let and invest SEK 1.3 million. Of course, this is a government contract. We have on the right top side, you have Örebro.
There we 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 million. 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 million, also, of course, with its 9,000 sq m for the government. The last one is one that we have seen before with the airport, Säve in Gothenburg , where we right now are doing a lot of smaller mid-size investment for the tenants that are government or other tenants. The activity extremely high, and on top of that, the planning process is undergoing in speed for the research and development part of the site. That looks extremely good at this moment. Next slide, please.
The funding conditions. I have always liked two 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 suppliers to talk to. Finally, on top of that, a good liquidity buffer. All that together, as I said earlier, makes us strong in this crisis where we are in. If we do look into the three different buckets, Castellum 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 dead.
I would say it's alive in that sense that there has been some activity in the European bond market, more than in the domestic market, I must say. The prices are much higher. Roughly two to four times pre-corona and sometimes even higher. That means that if you don't need to accept that market at the moment, you don't do it. The market is there, but the price is much higher. The short part of the capital market, the so-called CP 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, if that part of the market don't get 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. Castellum has made deals in April equal roughly to Riksbank's price setting in that market. In this market, the yields are much higher, but that includes also, of course, an impact from high STIB over the year-end. If you go to the next slide, please. What have we done in Castellum?
We have renegotiated some bank debts and terminated some, the main part pre-corona. We have issued SEK 1.5 billion in the domestic bond market, also this pre-corona. At the same time, SEK 1.6 was matured. Almost all that matured during Q1, we did refinance before the corona impact. The CP market, as I said, is very sluggish, and we use that as an arbitrage. At the end of Q1, we had roughly SEK 4 billion outstanding compared to SEK 5 billion at the year-end.
Those SEK 4 billion all falls due during Q2. We, as I said earlier, have done some deals both in March but even in April. For example, in April, we issued SEK 650 million, maturity one to four months, yields all in from 51 basis points up to 83 basis points. That equals roughly spread from 40 basis points up to 50 basis points. That means that at the end of the period, we do have SEK 14 billion, including SEK 1 billion in cash that are not used and that can be used to finance not only daily operation, but also debt that do mature in the CP and the bond market. 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 falls due, well spread out during quarters.
Regarding 2021, we do have one bank in Q1 with the banks that we do have a very good relations with. The rest that mature during 2021 is bonds. It is 10 bonds equally spread out during the quarters. With the cash flow from the operations, the [SEK 14 billion[ in reserve, Castellum can finance all that matures, and at the same time meet the need from operations on a daily basis. The rest for 2020 and a good way in 2021. 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 a diversified funding situation. This slide is showing it. We have moved utilized volume in relative terms as well as 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 EBIT has been rather stable despite increased interest-paying volume in absolute amount. That 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. Let us go to the next slide.
Yes. come the hard part, the outlook. let us conclude where we started. Castellum is on stable grounds with our tenant base, our strong cash flow, and balance sheet. on top of that, we have a very strong finance situation, and we have the capacity to, as Ulrika said, not enter the banks more over the last more than in 2020. 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. we have still seen the same market vacancy in the office and logistics markets they are standing still. The high risk is at the moment in the retail, hotel industry, and so on, as you all know. some difference.
In my prediction, it's a little bit different between towns, and it's still the market rentals 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 logistic portfolio is not a big change in cash flow. It will be about risk, cash flow assumptions, alternative investments, and of course, financing. As long as the financing, as Ulrika said, is there, I don't see we will see a huge drop. Our view, it is all about time. How fast can this market come back? Castellum 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. There's the next phase is around SEK 2.5 billion that we will invest for them. Hopefully, all of that will start 2020. Our objective is still to create growth, even though the 10% is hard to reach a year like this. With that, we'll thank you all and leave for questions. Thank you very much.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypads. If you wish to withdraw your question, you may do so by pressing zero two to cancel.
Our first question comes on the line of Tobias Kaj of ABG. Please go ahead. Your line is open.
Yes. Thank you and good morning. I would like to start to ask regarding the 96% of income that you write you have received in Q4. I assume that's of contracted income. If you compare the income to Q1, are there any discounts that you have given that are not included in the 96%?
It's not. Simply we have just given extremely few contracts. It's actually about hotels. Some they will simply pay the rent a little bit later. That's the only thing we have given. It's all about going from quarterly to monthly payment instead. That is what's happened in volume, and that's the 4%. Nothing else.
Since you wrote that, I think it was SEK 58 million or 4% of the income which have converted to monthly payments, does that mean that you are at 99% received for the remaining part of the portfolio?
Yes, m ore or less, I should say. We have very close to a normal pattern, and you are correct.
Okay. Thank you. You talked a bit about development and obviously when you have for example, the big project in Malmö Domstolsverket already leased and with a government tenant, it's a no-brainer to start it. 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, three or six months ago, or have you become more cautious? I mean, you already have an all-time high in terms of remaining investment 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 decisional start process, or even if it was SEK 1 million or more. The ones that we're evaluating 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. No decisions that was made pre-corona is active right now. We have to go through decision proceeds on all developments that are not under production. 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. That's the situation.
Yeah. Can you give some more detail regarding your co-working portfolio? You came from a small gain to a small loss in the first quarter. You mentioned that 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? How flexible are you on the cost side regarding co-working?
Yeah. Let me start on costs. We have worked very quick on the co-working side, and I'm very pleased with the staff and what's happened there. We're down to the working hours only 60%. 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. 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. Yes, if you're looking on the 12-year month basis, if it should stop now, that means a decrease on income of 10%. That's the situation. Did that answer your question?
Yes, more or less. I actually have one final question, maybe more to Ulrika. That's regarding your average interest rates, a very minor change here in the first quarter. Should we expect a bigger increase in the second quarter given that the STIBOR increased quite a lot towards the end of this quarter and also related to increased credit spreads?
If you do assume that the STIBOR will be here to stay on roughly 30 basis points, you see how much floating we do have. The other thing that you have to make assumptions about is, will the CP market be there or not? If it will not be there, we have to swap that to bank debt. That relation to CP prices are a little bit more pricey.
Are we talking about potentially 10 basis points-20 basis points higher average interest rates, or can it be more?
No, not more, not 20 basis points there. 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. Maximum 10 basis points, I would say. That is assumptions in it.
Okay. Thank you very much for taking my questions.
Thank you. Our next question comes from the line of Fredric Cyon of Carnegie. Please go ahead. Your line is now open.
Good morning, Henrik and Ulrika. A few questions from my side. Starting off with the 96%, that is obviously reassuring. Could you put that into context? What is a normal level for Castellum?
Yeah. I should say we are in a normal pattern. We're charging normally this quarter SEK 1.4 billion. This is SEK 58 million that we're talking about. This is the 4%. A normal pattern.
Obviously the corona situation worsened, and there was only a minor impact in late March, perhaps. Shall we expect that 96% will be a lot lower when we conclude the second quarter?
It's very tough to say that. 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 from our normal company, and I said that, and what they're doing. We have a good contact, and I know that we have had discussions with a lot of tenants during this time. What we will have in front of us, it's really tough to say. This I believe is proving that we have a very strong customer base, and that is actually what we usually see in that. I'm impressed by what the clients are doing here.
My final question relating to valuation changes. The net effect is very limited. Are there any big variances within different type of premises? For instance, I noticed that logistics was the reported value yield was up 10 basis points which could be, of course, could have been less than 10 basis points, a rounding error, but it's been told that logistics will be more affected than the other segments.
Before the epidemic, we was in a pattern of good growth on cash, actually because of renegotiation, as you see. That is one value going up. You have in different sectors, of course you have hotels, for example. We have very few hotels, they are of course affected in these valuations. We have variations in it. We have stated that it's very tough to say where we was in the last of March when these valuations were affected because of no evidence in the market on the office portfolios. That's our view on it.
Basically, it's not huge changes to the yield assumption, its more about renegotiation.
Absolutely
So then I would imagine that offices on Gothenburg has been decent in the first quarter than compared to [other segment].
Absolutely
It's a prudent valuation also, depending on that we don't know, as we said earlier, the long-term impact. It's a more cautious way to look at it at the moment.
Thank you. Those were my questions.
Just to remind everyone, if you would like to ask a question, please press zero one on your telephone keypad. You may withdraw your question by pressing zero two to cancel. There will now be a further pause while any questions are being registered. There are no further questions at this time. Please go ahead, speakers.
Okay. We thank everyone for listening, and we hope to see you soon. At least hear from you in December when we're coming with the next report. Thank you very much.
Thank you.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.