Earnings Call: Q2 2019

Jul 12, 2019

Ladies and gentlemen, welcome to the Castellum AB Q2 Reports 2019. Today, I'm pleased to present CEO, Henrik Saxon and CFO, Orike Danielson. For the first part of the call, all participants are in listen only mode and afterwards, there will be a question and answer session. Speakers, please begin. Thank you very much. It's Henrik here. Okay. We will, first of all, state that we are more positive than it was in the Q1 report. And we depending on that, we see more positive signals in the market. For one example, we see that the 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 you take our example at Tushka, I mean, the CBD of Stockholm, we can today offer the market rents from SEK 6,000 to SEK 7.50 a square meter a year. It should be implicating that we can when we if we are signing on top brands on SEK 7,500 per square meter in year, That will be a new top brands for that area. And that was something we didn't expect to say when we was reporting in general, for example. If you look at other towns, then we see the same trend, Gothenburg as well as other towns. And in Gothenburg, we are now stabilizing on a market trend around 4,000 tonnes a square meter. Looking at Castello, we see positive net figures. We have grown up from negative to positive figures going forward. And shortly, activities that we have gone through this quarter has been that one of the most important thing is that we have development plans that have been approved. And what's extraordinary with this one is that 3 big ones have been approved. That includes the 2 ones in Malmo as well as the one in Uppsala. This is investments that's total to approximately SEK 3,000,000,000 and that means they will we expect them to be started in the next coming 6 months. The 2 of them, the big largest ones is then leased up to 100%, and the 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 MODIS announced that we have been upgraded to a Baa2 with a stable outlook. If we look short version on the results, for the 1st 6 months, this just means that we increased the growth with 9% for the first half and including 8% for the quarter. We see that as good results since we sold out of Sonsoam and has been on the sales side for some part of the portfolio. The value of the portfolio has also approximately for the period 2.5%. Altogether, this means that LTV has brought down to another notch to 44%. And we have an NAV now at 184 grams per square meter or as if you won't like to 17% increase. It's also the first report where we gave a more clear of the co working, the United Spaces company that we bought. And it's worth it to note that it's developing in the right direction and that United States will, as we see it now, not have a negative impact on the figures for the end year report. Should we then go into more details, Ulrik? And then if we go to the next slide and dive into the P and L account. If we look at the 1st 6 months, the increase in income from property management was 9% despite being a net seller so far this year and 8% is slighted. And the 9% growth means that we roughly earn EUR 120,000,000 more in income from Property Management compared to 1 year ago. So if we split those EUR 120,000,000 into different value creating parts, you can roughly say that EUR 100,000,000 come from pure management in the like for like portfolio, mainly driven by good rental up due to CPI and renegotiations that has been made. SEK 40,000,000 net from the project portfolio, euros 40,000,000 from debt or interest rate management. And then we could say it loses €60,000,000 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% for the 1st 6 months. However, we have also sold 27 assets with an unrealized gain of minus 3.17 and that unrealized negative gain is, on the other hand, met by a deferred tax income further down in the P and L. So the net impact from selling is positive. After some goodwill write down due to selling assets in Zumfgaard, negative changes in derivatives, mainly due to lower market interest rates and taxes. The result on the last line ends at SEK 2,600,000,000 for the 1st 6 months. And we if you then go to the next slide and look and break the P and L apart and look on the NOI line, you can see it increases EUR 104,000,000 of which, as I said earlier, the biggest contributor is the true 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 lose this NOI so far. And the loss of NOI is a consequence of the decision to make strategic movements with the portfolio. Selling Sunsal, selling retail in Uppsala and leaving a small area outside Jansskepping. And of course, this can have a negative impact on the growth in the shaft tons, but in the long run, it gives Castellan 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 a 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 percent. And of course, then we lose some from selling assets. So that's what Castello. 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 see any change in that in the near term. And if you look at the growth, according to the analysts, we see we can see that Stockholm has increased the last year with approximately an average 8%, Katzenberg with 4%. And we see CBD of Copenhagen and Helsingforsch 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 especially something that occurs in Gothenburg and Stockholm because of the Zummin plan is going slower than expected still. So on this slide, you can see that we are 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 11,000,000 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 that we had 1 year ago. And the other difference is that we have less rental signed on new developments. But that has to be said then on the development side, we are, of course, not putting into the figure still that we have already leased out for the national Swiss National Court in Malmo as well as E. ON. That will occur in the figures in the end of the year, we think, because then we are diagnosing that we will have the building permission to start that. But that will bring, of course, dollars 150,000,000 into this figure then. On top of that, we have new products that are account development that are into 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 rate cost. The average interest rate, the 1st 6 months has been 2.06 percent. And the outgoing interest rate is a little bit lower, 1.9 percent. 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 forecast on them 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 prolong some existing derivatives, taking up new ones and releases some ones. And this has been the main contributor on landing at an outgoing interest rate 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 per share, and that indicates a growth of roughly 16% despite dividend compared to 1 year ago. If we look on the next slide and look at the portfolio, the property portfolio, as I said, the valuation yield is 5.1% versus 5.3% at the year end. The unrealized valuation at least at 2.5 is equivalent to 2,200,000,000 of which €1,400,000,000 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, project gains and acquisitions. But 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 Enrique 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 that. And office, if you look at is huge demand, especially then for CBD areas, but also long leases. Yields are stable to decreasing yields, you can see there. You can also see portfolios with secure cash flow, public sector and so on. So I can continue. As Enrique says, we even have seen in the last half year 3 large deals done on the warehouse or on the 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. It's especially done as we think of that, of course, the low interest rate is low downside risk from investor perspective and is strong cash flow and secure cash flow compared with peers. So it's all about the game and what could be the alternative investments that we see right now. So positive on this side as well at this moment. So we can go to the next one. And then the logistics side, as I mentioned, we have seen the SEK 12,000,000,000 being sold in the Swedish market in 3 deals. It has been yields on 5% or below 5%. And as you see in our figures, we are now having a yield on the logistic and combined to 1 is 5.8%. So this is a market where we are also positive going forward. And if you'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, got the zoning plan permission and approved. And that will start in the second half hopefully in this year. And they will give a volume about SEK 3,000,000,000 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 8,000,000,000 in volume. That means approximately 12% of the balance sheet. And after them, we know also there is more to come. So we have a stronger balance sheet development pipeline than 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 2,700,000,000 and yield expected on the annual total cost is still approximately 6.5%. So if we go to the next picture, please. Here, we're just 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 2,500,000,000 and their tenant is E. ON then and the Swedish courts. On top of that, we have another one in the absolute CBD of Uppsala that we've actually already started. Yes. And then we can go to the next picture. And here, we have during this quarter also that we have a lab that we started 3 years ago. This quarter, we have worked a lot with continue to find new corporations. We have found 2. We have entered the 10 European Innovation Hub together with 6 other European large listed companies. And we think of that, that will we achieve 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 Federation and other listed companies in Sweden to focus on creating a new digital key that will make life easier for both the customers as ourselves as owners. And then, of course, that could provide us the new smart services that make go to the market with. So that's the future. And then we jump to the next slide, and then I think we jump to the next market. Okay. And Kerstellem's credit funding conditions, Q2. The 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 city market is ongoing, so to say, even if the yield is higher due to increased cyber. During the Q2, Castellum's rating was upgraded from Moody's. 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 cap generation, especially if the good market situation that we experienced now continues. And the aim to prolong the capital duration indicates maybe that you should not expect too much lower interest rates from us even if the market interest rates stay slow. 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 someone. And at the end of June, that leaves us with EUR 16,880,000,000 in unutilized credit facilities, of which roughly €5,000,000 is backup for outstanding CPs. We increased this frame for the Swedish MTN program. We have issued SEK 2,300,000,000 in different sizes and ratios, of which roughly SEK 1,900,000,000 was floating and rest fixed. And at the same time, we have terminated €1,500,000,000 So that means so far this year that we are a net issue in the Swedish bond market. We have issued also a NUK under our EMTM program, a 10 year bond. And we are active in the CP market. We have a volume outstanding around €5,000,000,000 and if the market wants you and the arbitrage is still there, you could expect Castellum to have around that volume going forward. And then looking into the future. Yes. And if you look at in summary, as we understand that we have positive undertools to the market, I mean, we are living a 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 it 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 upwards in the short term basis. Looking at the real estate balance sheet. We have experienced stronger demand into the Swedish sector than we and the Nordic sector than we expected and returned 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 alternative to invest. So with that said, I can now conclude that Castello Mist 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. It's 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 no more flex based solution that we will continue to develop. So from that standpoint, positive. And we think we can achieve more or less fairly close to the long term goal. Of course, it will be affected of what we do with the portfolio going forward, so to say. So continue to do what we have done, grew where growth are, developed with the construction and reposition the portfolio going forward. So that's everything for now. Thank you very much. Thank Our first question comes from the line of Tobias Kai of ABG. Go ahead. Your line is open. Thank you and good morning. 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. In the second half, you indicate that we will have some EUR 150,000,000 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 the space that are left in the 1st period of this year, we had some leases that was given to termination, 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 on that one. In this last quarter, we have seen some chain 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 of developments that you state, there we have a lot of pipeline going forward. But since they are larger, it takes longer time to actually get design contracts 100% secured on all lines, so to say, it means that they will take 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 you're going to have positive figure on existing portfolio as well as we're going to benefit from the development pipeline as we stated earlier. Regarding the 2 developments in Malmo, if you look at the figure you disclosed and assume 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 EUR 10,000,000 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 outcome interest rates of 1.9% and uses that on your assumptions regarding volume in the last 6 months. Okay. Thank you. 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 pay tax also for the second half? Or was this a temporary increase in this quarter? I have guided that I think that you should expect for this year maybe due to new legislation, but also that the tax losses that we do have are, you could say, locked in and kind of used all over the group. So I have guided earlier around 7 percent to 8% on an efficient paychecks, roughly. So I think what can make it there 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, equal tax cost each quarter. It can vary between quarters. Okay. But the 7% to 8%, is that reasonable for coming years as well? Of course, that depends on where the interest rate costs are going forward versus underlying earnings. So we will I will need to come back to that one. Okay. Thank you very much for taking my questions. Thank you. Our next question comes from the line of Nicholas Hedlund of Nordea. Niklas Hedlund, Nordea here. Well, firstly, on the development side, you sort of talked about the yield at cost. 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 this project? 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. So they are at cost in our balance sheet so far. Right. And another project is the sort of Stockholm Vatten. I sort of forget the new name, property 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 S and P Triggly sold their 13,000 square meter property for approximately SEK 1,300,000,000 it says on the in the media. And do you have any sort of more thoughts on Stockholm, but then on the sort of the neighboring area? Yes. First of all, it's in the CBD area. Right, right. It doesn't have to be. Yes. Yes. And secondly, we are leasing it out right now. I mean, we are under a very complex development there, and it's coming to a phase where you actually can shoe the space. And we have already leased it out to 30%, and we it's positive. So the market is extremely interesting, 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 the possibility to change the zoning plan and our that zoning plan connected to the assets around in the area. So that looks positive. And combined it with some space we have possible to rent out during this year as well on the other side in the more modern houses, it seems to do well simply on the pipeline side. And any reflections on the most recent transaction very close by? No. We are I mean, we're benefiting from it value wise. It gets more evidence for us, but we cautious on valuation on under development as always. 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 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 years? 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 in the bond market, both the Swedish market and the euro bond 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 fund market. Right. Right. And on the rating side, is it fair to assume that you in order to keep the new rating need to be having 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 Norporten. But that can be followed by, you could say, another restructuring of the property portfolio by selling other assets or part of that asset. So that will not stop us from looking at really good deals still. Right. But in absolute terms, it's lower the risks, but then might take down growth, of course. And another on the financial side, in the Q1, you were I think you were alone among your peers to sort of talk about highest risk for higher spreads in the secured market. Now that is maybe less relevant to you as you've taken down that exposure. But what's your thoughts now on this sort of rising risk weights and this sort of which was then confirmed by the Swedish FSA? Do you see any do you expect that to have a negative impact in general? I would say that since the last year, you could say Castellum has worked with changed the debt portfolio towards more unsecured lending. And one big reason, of course, is not to be so dependent on the banks. They are really important, but we don't want to dependent 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 this finance inspection. And my theory, what I said in the Q1, I still stick to that, that acting from the finance inspection should mean 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, so which will have no big impact for Castello specific. But I think it's more a general question maybe where you should have any tools in your toolbox. Right. The more the merrier, I guess. Okay. Thanks. Those are my questions. Thank you. Our next question comes from the line of Albin Sambi of Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Hi, there. Thank you. 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 as a time it evolved. What is it that you're seeing that makes your tenants more confident to sign up leases in the near term at least? I see the development continue to positive in the absolute CPD area, including our assets in Malmo and generally on university towns as well. If an example is we're using Stockholm, we thought that we would stop somewhere between 6000 to 6,500 somewhere on Tushkartan. We're seeing now that we can actually go more aggressive in the market and are offering the top rents on 7,500 and the same houses that we didn't expect to be able to. We haven't signed yet, so you should always 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 brands from Q4 last year are stabilizing as top rents of approximately 4,000 around the area of the CBD and efficient houses. But it's very, very few contracts that could be signed because there are no vacancies, positive simply. And then moving to university towns, if looking to them, they have a positive trend. We can see that we are discussing new top brands of developments in more or less old towns. We are preparing for signing and starting to sign on new top levels on new developments in Pia to give me a Swedish picture. The 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 in this absolutely CBD. So simply, stronger market than I would expect to see now if you have asked me in January, and that's the difference. Okay. Very clear. Thank you. And then also a follow-up on me for Stockholm Water since you showed that project to us. And 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 overruns 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, some to say, are constructed right now. So we're doing the inside, and we have strong leasing activity around that development right now. Now. So yes. Great. And when you talk about your future development pipeline, I guess you include Hagastarden in that. And just for me to understand, do you the investments that you have agreed upon there, are they fixed? So would you carry any market risk from here until those projects start, whether the market is going up or down? It depends on what you describe as fixed. I mean, going forward in the procedure in Hardcastle, 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 starts somewhere 2021 to 2022. And then you have the second one that HSB HSB was the winner and have brought is ASEAN as partner. Here, both sides is still under some sort of design. And so we will come back with it absolutely finished and how that site will look like. But that we are and of course, completed the 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% close to it if we'll come back with that. Yes. Perfect. And then I think it's been a while since you did your reinvestment in the co working 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 prices been the same if you have 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 pressure on demands on co working in Stockholm, we experienced that, that's extremely positive, and we're looking for new spaces simply. And in Gothenburg and Malmoet is going quicker than we calculated from the beginning. So yes, we are positive. It will also bring us more knowledge and new type of offer to our clients simply so we can serve them with new types of contracts. So yes, I'm positive. Thank you. And my very final question, maybe you touched upon that. I was a bit late in the call, unfortunately. But if you look at your value changes, did you see any extraordinary or extraordinary do you see an extra positive effect on your logistics portfolio given transactional evidence what had happened during Q2? Yes, you can say all in all that the logistic portfolio all in had evaluation 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 could say. And that was quarter on quarter, yes, Alekha? You could say half first quarter. Yes. Okay. Yes. Thank you very much. Thank you. Okay. We have one further question coming through. That's from Maja Menas of LaSalle Investments. Please go ahead. Your line is open. Hey, good morning. I just had a quick question on your view on Finland and potential build 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 first ring of Helsinki. And that is something we're working with. Its market has developed very positive on value as well as competition. That makes it us more cautious. So if it takes a little bit more 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 rents. We see also a market that has not been so much invested in, especially not the CBD area. And we see possibilities to invest and catch up with rent increase going forward, even though that the yields has gone down in the last year in the market. So that's our view right now. But that said, you have to pick them piece by piece because the yields has moved that much. Okay. Thank you. Thank you. Okay. As there are no further questions coming through, I'll hand back to our speakers for the closing comments. Thank you very much. Thanks everyone.