Ladies and gentlemen, welcome to the Castellum AB Q2 report 2019. Today, I'm pleased to present CEO Henrik Saxborn and CFO Ulrika Danielsson. For the first part of the call, all participants are in listen-only mode, and afterwards there'll be a question and answer session. Speakers, please begin.
Thank you very much. It's Henrik here. We will first of all state that we are more positive than we were in the Q1 report. Depending on that, we see more positive signals in the market. For one example, we see that the Stockholm rents are moving again. What we mean by that is that we, of course, have a strong demand, but it's also still generally a lack of space. If we take our example at Torsgatan in the CBD of Stockholm, we can today offer the market rents from SEK 6,000 to SEK 750 a square meter a year. It should be implicating that if we are signing on top rents on SEK 7,500 a square meter a year, that will be a new top rent for that area. That was something we didn't expect to say when we were reporting in January, for example.
If you look at other towns, then we see the same trend, Gothenburg as well as other towns. In Gothenburg, we are now stabilizing on a market rent around SEK 4,000 a square meter. Looking at Castellum, we see positive net figures. We have grown up from negative to positive figures going forward. Shortly, activities that we have gone through this quarter has been that one of the most important things is that we have development plans that have been approved. What's extraordinary with this one is that the three big ones have been approved. That includes the two ones in Malmö as well as the one in Uppsala. This is investments that total to approximately SEK 3 billion, that means we expect them to be started in the next coming six months.
The two of them, the largest ones, is then leased out to 100%, one is under leasing then. On top of that, we have also brought positive news in other areas, that was in the beginning of June when Moody's announced that we have been upgraded to a Baa2 with a stable outlook. If you look short version on the results for the first six months, this just means that we increased the growth with 9% for the first half and including 8% for the quarter. We see that that's good results since we sold out of Sundsvall and have been on the sell side for some part of the portfolio. The value of the portfolio has also traded positive, the total increase was approximately for the period 2.5%. Altogether, this means that the LTV has brought down to another notch down to 44%.
We have an NAV now at SEK 184 a square meter or, if you would like to, 17% increase. It's also the first report where we give a more clear picture of the co-working, the United Spaces company that we bought. It's worthy to note that it's developing in the right direction and that United Spaces will, as we see it now, not have a negative impact on the figures for the end-year report. Should we then go into more details, Ulrika?
If we go to the next slide and dive into the P&L account. If we look at the first six months, the increase in income from property management was 9%, despite being a net seller so far this year and 8% isolated. The 9% growth means that we roughly earn SEK 120 million more in income from property management compared to one year ago.
If we split those SEK 120 million into different value-creating parts, you can roughly say that SEK 100 million come from pure management in the for life portfolio, mainly driven by good rental uplifts due to CPI and renegotiations that have been made. SEK 40 million net from the project portfolio, SEK 40 million from debt or interest rate management, then we could say loses SEK 60 million from transactions due to that we have so far have been a net seller on a 12-month rolling basis.
The property market is still good, which in Castellum's universe means an uplift of 2.5% for the first six months. However, we have also sold 27 assets with an unrealized gain of - SEK 317 million. That unrealized negative gain is, on the other hand, met by a deferred tax income further down in the P&L, so the net impact from selling is positive. After some goodwill write-down due to selling assets in Sundsvall, negative changes in derivatives, mainly due to lower market interest rates and taxes. The result on the last line ends at SEK 2.6 billion for the first six months.
If we go to the next slide and break the P&L apart and look on the NOI line, you can see it increases SEK 104 million, of which, as I've said earlier, the biggest contributor is due to a like-for-like acting or management, and it's mainly driven by top-line growth. Furthermore, the development contributed and the transaction part means we lose NOI so far. The loss of NOI is a consequence of the decision to make strategic movements with the portfolio. Selling Sundsvall, selling retail in Uppsala, and leaving a small area outside Jönköping. Of course, this can have a negative impact on the growth in the short term, but in the long run, it gives Castellum a stronger balance sheet and portfolio in order to create growth in the future.
If we turn the 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 the negotiations made. It is taken down somewhat due to that last year at this time had there been a lump sum from tenants leaving earlier and paid up for that. We add the rental contribution from developments. That means that rental growth is 6.6%. Of course we lose some from selling assets. That was Castellum, and if we go to the market maybe, Henrik.
Yeah. Looking at this market, as we indicated from the beginning, we are seeing a strong rental market, definitely. The demand is robust, and the supply is still limited, and we can't see any change in that in the near term. If you look at the growth according to the analyst, we can see that Stockholm has increased the last year with approximately an average 8%, Gothenburg with 4%, and we see CBD of Copenhagen and Helsinki have developed positive also under 2019. In general, we see an increase of the office rent in the rest of our universe. The limited supply is especially something that occurs in Gothenburg and Stockholm because of the zoning plan is going slower than expected still.
On this slide, you can see that we are on historically low vacancy rates as well we are on new top levels, especially for Gothenburg since we saw this picture the last time. We can go to the next picture, please. Into the net leasing. When we look at this, we move to positive figures. We have SEK 11 million as isolated increase on the net leasing since last year quarter. The gross leasing is the same in the existing portfolio, but we have more terminations than we had one year ago. The other difference is that we have less rental signed on new developments. That has to be said on the development side, we are of course not putting into the figures still that we have already leased out for the Swedish National Court in Malmö as well as E.ON.
That will occur in the figures in the end of the year, we think, because we are prognosing that we will have the building permission to start that. That will bring up of course SEK 150 million into this figure. On top of that, we have new products that are current developments that are into the portfolio and are not possible to lease out yet. This will change during the year. Okay, we can go to the next picture, please.
If we go to the costs again. The interest rates cost. The average interest rate the first six months has been 2.06%, and the outgoing interest rate is a little bit lower, 1.9%. That is the result from termination of bank debt and renegotiation of existing bank debt. As you all know, the market interest rates have come down during the spring, and if that stays so, it will of course be favorable for Castellum and the industry, everything else equal. We have acted in this environment by restructuring some small part of the portfolio in the end of the period. Prolonged some existing derivatives, taking up new ones, and released some ones. This has been the main contributor on landing at an outgoing interest rate of 1.9%.
If we change picture, let us talk about the balance sheet and the property market. If you 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. As at the end of June, this gives an NAV of SEK 184 per share, and that indicates a growth of roughly 16%, despite dividend, compared to one year ago. If we look on the next slide and look at the property portfolio, as I said, the valuation yield is 5.1 versus 5.3 at the year-end.
The unrealized valuation uplift of 2.5 is equivalent to SEK 2.2 billion, of which SEK 1.4 billion is due to yield changes, and that is mainly for in our portfolio, logistics, public sector in good locations with long leases, and office in good location. The rest is made up of better cash flow, project gains, and acquisitions. Regardless of 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%. If we go to the market.
Yes. Supporting what Ulrika just said, we see a strong market. 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. Office, if you look at, is huge demand, especially then for CBD areas, but also in 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. I can continue. As Ulrika says, we have seen the last half year, three large deals done on the warehouse, on logistics side that has given us evidence on the yields. All this together, of course, is into the balance sheet.
We can also looking forward, 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, it's a low downside risk from investor perspective and is a strong cash flow and secure cash flow compared with peers. It's all about the game and what could be the alternative investments that we see right now. Positive on this side as well at this moment. We can go to the next one. The logistics side, as I mentioned, we have seen the SEK 12 billion being sold in the Swedish market in three deals. It has been yields on 5% or below 5%. As you see in our figures, we are now having a yield on the logistic and combined with one is 5.8%.
This is a market where we are also positive going forward. If you take the next picture, please. We have, as we stated earlier, now growing the pipeline, and it was a very important step for us this quarter that we got the three large developments, got their zoning plan permission approved. That will start in the second half, hopefully in this year. They will give a volume about SEK 3 billion together. It's already known that we have ongoing large projects that we expect to start within next two years, that are around SEK 8 billion in volume. That means approximately 12% of the balance sheet. After them, we know also there is more to come. We have a stronger development pipeline than we ever had.
If you look into the report, we are showing the largest developments that are ongoing before this, and they are having a volume of SEK 2.7 billion, and the yield expected on their total cost is still approximately 6.5%. If we go to the next picture, please. Here we are showing the picture of the two large projects that hopefully we then will start this winter, and they are 100% leased out and has a volume of SEK 2.5 billion. The 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'll actually already started. Yes. We can go to the next picture. Here we have, during this quarter, also you know that we have a lab that we started three years ago.
This quarter we have worked a lot with continue to find new cooperations. We have found two. We have entered the European Digital Innovation Hubs together with six other European large-listed companies. We think of that will 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 Property Federation, 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. Of course, that could provide us with new smart services that may go to the market. That's the future. We jump to the next slide, I think we jump to the next market.
Okay. Castellum'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 banks show stable margins while the bond market has come down after the turbulence that was at the year-end. The CP market is ongoing, so to say, even if the yield is higher due to increased STIBOR. During the second quarter, Castellum's rating was upgraded from Moody's. This is important for Castellum in order to access longer duration. We hope that this upgrading going forward can help us in our mission to prolong the capital duration, especially if the good market situation that we experience now continues. 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 some bonds. At the end of June, that leaves us with SEK 16.8 billion in unutilized credit facilities, of which roughly SEK 5 billion is backup for outstanding CPs. We increased this frame for the Swedish EMTN program, we have issued SEK 2.3 billion in different sizes and ratios, of which roughly SEK 1.9 billion was floating and rest fixed. At the same time, we have terminated SEK 1.5 billion.
That means so far this year that we are a net issuer in the Swedish bond market. We have issued also a NOK under our EMTN program, a 10-year bond. We are active in the CP market. We have a volume outstanding around SEK 5 billion. If the market wants to and the arbitrage is still there, you could expect Castellum to have around that volume going forward. Looking into the future.
Yes. If you look at in summary, as you understand, that we have positive undertones to the market. We are living a strong rental market. The downside of it is depending on new supply. We can't see that that will change the market in the short term. The other thing is that there should be something on the macro level that changes the game, and of course, that's out of our control. 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 and the Nordic sector than we expected, and returned us more positive also on the short-term basis, of course, but it is all about what is happening around in the world and the alternative to invest. With that said, I can now conclude that Castellum is in a very good position. We have a development pipeline that we will grow. We have a lot of it that is coming in now that you can see in the future in the figures. It is going to be leased out. In that case, and with the profit of doing the development, we have a good position. We also have 5,000 tenants to talk to, and they are looking for new solutions.
We have a new solution with no more flex space solution that we will continue to develop. 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. Continue to do what we have done, grow where growth are, develop with construction, and reposition the portfolio going forward simply. That is everything for now. Thank you very much.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel. Once again, that is zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Tobias Kaj 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 is still a quite big decline for the first half. We have seen similar trends for several of your peers. In the second half, you indicate that we will have some SEK 150 million from those projects started which are already leased. 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 in the space that are left in the first 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 change movements on the logistics side. Actually that is also something that I'm positive on. It's more movements in the portfolio that's hitting us. I shouldn't calculate or pencil in the strong figures that we had last year, of course.
The pipeline of developments that you state, there we have a lot of pipeline going forward. 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. It's very hard to put out an exact figure. I expect we're going to have positive figure on existing portfolio as well. We're going to benefit from the development pipeline as we stated earlier.
Regarding the two developments in Malmö, if you look at the figure you disclose and assume 100% leased and 85% surplus ratio, the yield on cost would be 5.4%.
Yeah, 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 rates, since you said it came late in the quarter, can you indicate how big decline we should expect in interest expenses for Q3? Some SEK 10 million down compared to Q2. Is that fair?
I would say that it's volume-driven also of course. The best I could guide is that you take the outgoing interest rates of 1.9% and uses that on your assumptions regarding volume in the last six months.
Okay. Thank you. Also regarding paid tax, it increased to roughly 9% of recurring earnings in Q2, and I had in mind that you guided for roughly 4% paid tax in Q1 going forward. Should we expect higher paid tax also for the second half, or was this a temporary increase in this quarter?
No. 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 cannot be used all over the group. I have guided earlier around 7%-8% on an efficient paid tax, roughly. I think what can make it vary between different quarters is the interest deductibility restrictions and the correlation with changes in derivatives, as I said, which makes it a little hard to have a, you could say, equal tax cost each quarter. It can vary between quarters.
Okay. The 7%-8%, is that reasonable for coming years as well?
Of course, that depends on where the interest rates costs are going forward versus underlying earnings. 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 Niklas Oderud. Please go ahead. Your line is open.
Yes, good morning. Niklas Oderud of DNB 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? What have you done to sort of the revaluation of this project? Have you already taken up the values slightly? What's your input on that?
No, we haven't taken up any project gains in those projects. They are at cost in our balance sheet so far.
Right. Another project is the sort of Stockholm Vatten. I sort of forget the new name, property which you're 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 SBB recently sold their 13,000 sq m property for approximately SEK 1.3 billion it says in the media. Do you have any more thoughts on Stockholm and the neighboring area?
Yeah. First of all, it's in the CBD area.
Right.
It doesn't have to be.
Yeah.
Secondly, we are leasing it out right now. We are under a very complex development there. It's coming to a phase where you actually can show the space. We have already leased it out to 30%, and it's positive. The market is extremely interested. We have a good pipeline of tenants coming in there. 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. Are at that zoning plan connected to the assets around in the area. That looks positive. 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 go well simply from the pipeline side.
Any reflections on the most recent transaction, very close by?
No. We're benefiting from it value-wise, gets more evidence for us, but we're cautious on valuation on the development as always. Simply.
Right. A couple of follow-up questions on the financing side. You intend to 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 make it more of a like for like comparison to your peers, which is slightly lower. Are you aiming for a five-year duration or is it more three and a half year?
I would not say exactly. I think I guided that we are aiming for maybe up to three and a half years, but of course, that is also what the market allows us to do. The upgraded rating indicates so far that it's much easier for us now to, for example, reach seven years money in the bond market, both the Swedish market and the Euro bond market. If you look at the prices for that at the moment, the Euro bond market is at the moment a little bit cheaper versus the Swedish bond market.
Right. On the rating side, is it fair to assume that you, in order to keep the new rating need to have an LTV below 45%, which could act as well, a limitation to growth then?
I think you could split that into two parts because it's around 45%, and that will not stop Castellum for making really good deals if they occur in the market like we did with Norrporten. That can be followed by, you could say another restructuring of the property portfolio by selling other assets or part of that asset. That will not stop us from looking at really good deals still.
In absolute terms, it's lowered the risks, but then might take down growth, of course. Another on the financing side, in the first quarter, I think you were alone among your peers to talk about risk for higher spreads in the secured market. That is maybe less relevant to you as you've taken down that exposure. What's your thoughts now on this rising risk weights and this sort of, which was then confirmed by the Swedish FSA. 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 change the debt portfolio towards more unsecured lending. One big reason, of course, is not to be so dependent on the banks. They are really important, but we don't want to be dependent on them. One big reason is, of course, that they have regulations around them. The last one is, of course, a good example is the statement from this finance inspection .
My theory, what I said in the Q1, I still stick to 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. We have a lot of our debt in the bond market. It will have no big impact for Castellum specific, but I think it's more a general question, maybe where you should have many tools in your toolbox.
Right. The more the merrier, I guess. Okay. Thanks. Those were my questions.
Thank you. Our next question comes from the line of Albin Sandberg of Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi there. Thank you. First, Henrik, could you just clarify a little bit on your turning more positive on the rental outlook? Also reading that you say maybe signing larger substantial leases could be a bit tougher now if clients are looking at the macroeconomics uncertainty. 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 CBD area, including our assets in Malmö and generally on university towns as well. If the example is we're using Stockholm, we thought that we would stop somewhere between SEK 6,000-SEK 6,500, somewhere on Torsgatan. We seeing now that we can actually go more aggressive in the market and are offering the top rents on SEK 7,500 and the same houses that we didn't expect to be able to. We haven't signed yet, so we should always be cautious. If you take that example, it's a huge demand still. Moving to Gothenburg, we seeing that the top rents from Q4 last year are stabilizing as top rents of approximately SEK 4,000 around the area of the CBD in efficient houses. It's very, very few contracts that could be signed because there are no vacancies. Positive, simply.
Moving to university towns, if looking to them, they have a positive trend. We can see that we are discussing new top rents of developments in more or less all towns. We are preparing for signing and starting to sign on new top levels on new developments, simply. To give you a Swedish picture. Copenhagen is also positive on the rent side, and we are more cautious going forward there maybe because then is when the new development pipeline is coming in. Helsinki is also moving positive in the absolutely CBD. Simply, a 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. Then also a follow-up on me for Stockholm Water, since you showed that project to us. As you highlighted, it is extremely complex, it seems like. I can also see that your total investment cost has not changed. Have you done all the critical stuff there or any risk for potential cost overruns from here and onwards?
No. As we see it now, it is under control. The more, as you say, the most difficult parts on the old assets, including the floor, so to say, are constructed right now. We are doing the inside, and we have strong leasing activity around that development right now. Yeah.
Great. When you talk about your future development pipeline, I guess you include Hagastaden in that. Just for me to understand, the investments that you have agreed upon there, are they fixed? 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. For going forward in the procedure in Hagastaden, yes, they are in the pipeline volume. They are these two developments, different situations. The first one, we was the winner and have brought in a partner into that. That will be a solid construction that is ongoing and starts somewhere 2021 to 2022. Then you have the second one that HSB was the winner and have brought us in as partner.
Both sides is still under some sort of design. So we will come back with it, be absolutely finished and how that site will look like. Of course, completed the agreement 100% with the municipality and so on. No, it is not 100% closed what it will look like in design or what it will look like in investment volume. No, it is not 100% closed. We'll come back with that.
Yeah. Perfect. Thanks. Then I think it's been a while since you did your investment into the co-working space. I just thought now, after we had the chance to review that deal in more details, would you have done it again? What's your take out of it? Would the price have been the same if you had done it today?
Absolutely. I think 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. Now with the positive pressure on demands on co-working in Stockholm, we experience that that's extremely positive, and we're looking for new spaces. In Gothenburg and Malmö it's going quicker than we calculated from the beginning. Yes, we are positive. It will also bring us more knowledge and a new type of offer to our clients simply, so we can serve them with new types of contracts. Yes, I'm positive.
Yeah. Thank you. My very final question, maybe you touched upon that. I was a bit late in the call, unfortunately. If you look at your value changes, did you see any extraordinary or extraordinary busy, an extra positive effect on your logistics portfolio, given transactional evidence, what had happened during Q2?
You can say all in all that the logistics portfolio all in had a valuation uplift on that part for roughly 5%. That is from a percentage point of view, the biggest uplift of the different asset classes in the portfolio, you could say.
That was quarter-on-quarter, just to recap.
You could say half now and half in the third quarter.
Yeah. Okay. Yes, thank you very much.
Thank you. Once again, if there are any other questions on the line, please dial zero one on your telephone keypads now. Okay, we have one further question coming through. That's from Maya Menons of LaSalle Investment. Please go ahead. Your line is open.
Hey, good morning. I just had a quick question on your view on Finland and potential deal volume there for your portfolio.
Yeah. Our view on Finland is that we are positive and we are looking for investment opportunities. We want to create a portfolio, some with offices mainly, more CBD and first ring of Helsinki. That is something we're working with. Its market has developed very positive on value as well as competition, that makes us more cautious. 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. 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. 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. That's our view just now. That said, you have to pick them piece by piece because the yields have moved since. That's my view.
Okay. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. 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.