Welcome to Castellum Q4 Report 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to Joacim Sjöberg, Acting CEO, and Jens Andersson, Head of Treasury.
Hi. Welcome, everyone. Welcome to this year-end report. As you can see from the slides, there has been a tremendous year behind us. Income from property management is up by 28%. Our EPRA NRV per share are up. Down slightly. The like-for-like figure is up 7.2% year-end. The main drivers behind this increase is the successful renegotiation and indexation of our leases. In the total portfolio, we are up by 5.2% compared to last year. The net leasing as you can see, is up by SEK 161 million, and we have an ICR of almost 4 times, down slightly from five l ast year.
The driver behind the decreased ICR is mainly the interest rate hike that we see in 2022. If we look at the important events during and after this quarter, of course, one of the main news today is the announcement of a rights issue. We have also decided not to propose dividend as has been communicated before. In terms of new financial policy, we have increased the ICR to be at least three times and decided also not to increase 40% in LTV. In terms of investments going forward, we foresee that we will focus on the most profitable investments, and our CapEx will be gradually reduced this year and next year.
We believe that prioritizing a stronger balance sheet and maintaining our credit rating is favorable for both shareholders and the bondholders. As you can see from this slide showing our geographies, we are now at SEK 181 billion in property values, and our share of Entra is SEK 27 billion thereof. We have a very good mix, mainly in metropolitan areas where the Nordics are rated very high in terms of their economies. The capitals of the Nordic countries, Stockholm, Helsinki, Oslo, and Copenhagen, make up about 43% of our book value. We have a focus on growing municipalities, both regarding GDP in those regions and in increasing population. Jens, I hand over to you.
Thank you, Joacim. This is a slide put together by Newsec that is meant to show the development in our most important markets. We see here yield level slightly up in 2022 compared with 2021. Transaction volume is still stable on high levels. Record volume in 2021 largely explained by Kungsleden and Klövern takeovers. CBD rents levels continues to be stable, however, deemed to be a bit volatile. Gothenburg and Helsinki show increasing vacancies, while Copenhagen, Malmö, and Oslo have fallen vacancies. Continues to be very stable in Stockholm. Valuation yields for the entire Castellum property portfolio, excluding Entra, increasing to 5% from 4.75% last quarter.
If we look at the tenant base that we have, it's very well-diversified. The five largest tenants represent less than 10% of our total income, and no individual tenant represent more than 2.2% of our total income. Out of the 10 largest tenants, five are public sector tenants with, of course, the public triple A rating. In total, it's a 24% public tenant ratio. As you can see also from the balloon up to the in the right-hand corner, a 99% of our leases are index-linked, which has given us quite an increase due to the high CPI of last year. Property values per category is somewhat of a summary, of course. It depends on how you define on a granular level.
You can see that we are very heavy on office, which we believe is a strength in this, in this environment. The hampered retail sector, in general, comprises in our world, mainly from the grocery sector, where ICA, Dagab, City Gross, and others are the main tenants. Jens.
We are also happy again to report positive net leasing. We've had positive net leasing over the last 12 quarters throughout the COVID, and now it continues. We see a continued stable demand from our tenants. Contracts, however, take somewhat longer to negotiate. We see no clear trend on tenants taking smaller space, rather a combination where some expand and other decrease space. We still see few bankruptcies. However, it cannot be ruled out that they will increase in the current market. Negative effects from the ongoing war and high interest rates can be expected, but do not show yet in the full year net leasing. Net leasing 2022 was SEK 161 million, as previously mentioned, and it should be compared to the SEK 162 million 2021, so not much of a difference.
Q4 was somewhat weaker than previous quarters, partially explained by a few larger contracts being terminated that could be expected sometime in the near future, however, coincide the same quarter. Among our largest projects, that are above SEK 100 million, we have 14 of them, with an occupancy rate of 83%. The five largest are E.ON, Swedish Court and Administration Office, Swedish Police, an animal hospital, and Northvolt in Västerås, close to 100% pre-leased. We have a total volume of ongoing projects, major ongoing projects of approximately SEK 6.3 billion, of which only SEK 2 billion remains to be invested. We have completed 10 major projects during the year with a total annual rental value of approximately SEK 220 million.
Many of the larger ongoing projects in the list here will be completed in 2023 and will generate approximately SEK 280 million in annual rental value. During Q1 2023, E.ON new head office and new construction for the court office will be completed with an annual rental value of approximately SEK 170 million. Total investment budget 2023 is SEK 4.6 billion, including CapEx.
Yeah. Okay. If we look at some of these beautiful buildings that we have completed in 2022, one of them is Greenhouse in Helsingborg, with the tenants as Helsingborg's municipality, AFRY, and Grant Thornton. The annual rental value is SEK 22 million. We see another example here. It's the climate-neutral police house in Örebro, with an annual rental value of SEK 15 million. We have another police building. During the quarter we also started a fully leased police house in Gothenburg, in Hisingen, with a rental value of approximately SEK 40 million.
Finally, another example of our projects is this logistics building in Malmö, of 12,000 square meters, 97% let to a tenant that we cannot announce as of yet, but it started in the last quarter and will be completed within a year. We continue to have a high focus on energy efficiency. Energy consumption decreased with 4.5% like for like 2022 compared with 2021. The energy used per square meter was 41% better compared to the industry average.
During the year, 21 solar power plants were built and in total, Castellum now has 76 plants producing over 7,000 MWh . Due to high energy prices, the investment in renewable energy have proven to be far more profitable than calculated. Another focus during the year has been to environmentally certify more properties in the portfolio, where at the end of the year, the company reached 249 certified properties. 45% of the portfolio is thus one step closer to the goal of 50% of the property area to be certified by 2025 at the latest. We are very happy to be the only Nordic large cap with green designation by Nasdaq. We are also the only Nordic real estate company to be on Dow Jones Sustainability Indices.
Property values year-over-year slightly up due to project investments. Isolated, the properties decreased in value by SEK 3.5 billion on the full year and SEK 6.4 billion the last quarter. Over 50% of our properties were externally valued by Cushman & Wakefield and or Newsec. Rental income up 7.2% and cost up 20.1% like for like. The latter we deem to be of a more transitory nature, largely explained by increasing electricity and heating costs. We have also secured the energy prices rather late last year, which has affected the costs possibly more than other companies that had the hedging in place earlier. NOI up with 34% compared to 2022. However, Kungsleden was only consolidated November and December 2021, therefore the large increase.
Income from property management per share, down from 3.52 SEK to 2.78 SEK year-on-year. Key drivers are increasing interest rates and higher prices on electricity and heating. Long-term effects on the cost side is difficult to assess, but is expected to normalize on a lower level than today. Currently, loan to value is above our new financial policy, although well below our creditors' requirements. The suggested rights issue would strengthen the loan to value and ICR. Higher interest rates, falling values, and expiring interest derivatives will, on the other hand, put continued downward pressure. Debt capital market still relatively illiquid. Positive signs can be noted with our bonds trading 200 bits below all-time high last autumn.
Good appetite from the banks, we need to preserve our unencumbered assets, currently at 52% according to Moody's definition, where we have to keep it above 45%. Loan margins are up somewhat during the second half of 2022, although still roughly half of the spread required by the debt capital market. Average interest 2.6%, up from 1.9% end of 2021. Net debt to EBITDA 13.6 compared to 16.7 end of 2021. 57% of our loan portfolio is secured with swap derivatives or fixed contracts with a duration of at least one year. Debt maturity structure. We have SEK 25 billion of bonds expiring in the coming three years. Available cash and unutilized revolving credit facilities amount to SEK 16.2 billion.
Reduced project investment and proposed no dividend will free up further funds, and in combination with the suggested rights issue, all bonds could potentially be repaid the coming three years. Our expectation is although that the debt capital market recovers within a reasonable time period. Nonetheless, no one can say for sure. Therefore, we need to prepare for worse times in order to safeguard a Baa3 rating, and in the long run strive for an upgrade. Our commercial paper program is quickly being repaid. Only SEK 200 million remains. Investors prefer short-term bonds at higher spreads rather than the commercial paper program. The key takeaways so far is that the profit from property management is up by 9.5% per share. We have a positive net leasing for the 12th consecutive quarter.
The rental income like for like is up 7.2%. We have an occupancy rate of 93.4%. In summary, that means that we have a very strong increase in property management, the positive net leasing is due to both new projects and existing assets. The economic vacancy rate is marginally up compared to 2021, vacancies are a fundamental factor for us creating value. We become relevant for tenants, we can refurbish and increase rent when we have vacancies. However, as stated in the year-end report, the prospects for 2023 are divided. Operations are moving along at a good pace within Castellum while financial markets remain uncertain. We must be able to adapt to current environment with focus on our performance. Yes.
Then some information on the rights issue, and this is just an overview, and we are not able to give you any more exact information. That is something we will come back on later. However, the board of directors have resolved to propose that the annual general meeting 2023 authorizes the board of directors to resolve upon a new share issue with preferential right for existing shareholders. The size of the deal is approximately SEK 10 billion. The reasons behind this have already been mentioned, and important for everyone to know is that the transaction will be fully underwritten by Akelius Residential, Citibank, and Nordea.
We are helped by the syndicate that is Citi, Handelsbanken, and Nordea, and we also have a good lineup of Swedish Nordic banks that will assist us as joint bookrunners: Danske Bank, DNB, Nordcredit, SEB, and Swedbank. The annual general meeting will be held on the 23rd of March. Therefore we cannot say much more right now. Thank you. That completes the presentation that we have prepared, and we do open up for questions, and you know how to do that.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Thank you and good morning. Few questions from me. First off, the like-for-like costs, they were up around 13% in Q3. Now it increased to 20% year-over-year now in Q4. You mentioned the electricity prices and the securing them rather late, could you give us a bit more details surrounding any potential non-recurring items?
Yeah. I would say that is the main driver here that we secured our electricity contracts late Q3 and we will see the full negative effect of it during Q4 and Q1. The contracts were not that long. They were only for two quarters. Therefore starting from Q2, things will normalize. However, we do not know how high the energy prices will be at that time.
Perfect. Me neither. Let's see. How much of the like-for-like rental income growth here of 7% is due to higher recharge costs to tenants? What is the like-for-like on rental income alone?
Very good question. I think we will revert on that later with a written answer.
Thank you. A question, have you had any dialogue here with Moody's in conjunction with the news surrounding the rights issue?
Yes. Yes, we have. They do not give any direct advice on how they will see this. However, they will go to committee later on today and release a report late this evening.
Perfect. Last question. You mentioned previously that you have some signed LOIs for further divestments. Are you looking into divesting even more, or are you more or less done now with the announced rights issue?
Well, I mean, we're a property company, we buy and sell properties all the time. Some of them are on our sales list and some we get offers for. I'd say that out of these SEK 181 billion of assets that we have, for sure there will be more transactions, I cannot neither guarantee or state anything about that. It's of course a moving target. Yes, we will continue to sell and invest in new properties.
If I just change it up a little bit, you have been very clear that you aim to be a net seller previously. Do you aim to be a net seller in 23 as well?
That's a very tough question. I mean, 2023 is far from completed, so we'll have to come back on that at a later call, just to be sure.
All right. Thank you. Those were my questions.
Thank you.
The next question comes from Niklas Wetterling from DNB Markets. Please go ahead.
Thank you. Yeah, I have two questions, and the first one is regarding the CEO recruitment process, if you can share any info about that one and when you expect to be able to announce a new CEO.
Yeah. Well, I can say as much as that the process is ongoing and has been ongoing for quite a while. As we've stated before, this will take some time likely because most of the potential candidates are in a position at the moment, meaning that they have a notice period of 3-6 months. We aim at being able to announce something as soon as we can, but the timing is also dependent upon the candidate's current situation.
Okay. Thanks. My second question is, regarding the stocks that Castellum has repurchased, before, what's the strategy with that holding?
We cannot comment on that question right now.
Okay. That's all for me. Thank you.
The next question comes from Bart Gysens from Morgan Stanley. Please go ahead.
Yeah. Hi, good morning. It's Bart Gysens from Morgan Stanley. I just had a question on the rights issue. I appreciate you can't provide much detail. Can you help us understand a little bit the thought process about the amount that you're planning to raise? You're taking your LTV down from, on your reported base, from 42 to 37. There are of course different ways to define a loan to value ratio. EPRA has come up with an EPRA LTV where you proportionally consolidate, where you treat hybrids as debt. On that basis, the LTV is meaningfully higher. The reduction is not meaningfully bigger, of course. What gives you the confidence that SEK 10 billion is sufficient to protect your balance sheet from the potential further correction in capital values? Thank you.
I mean, SEK 10 billion is a big amount. Comparing it with other rights issues over the last few years in the Nordic, it comes out as one of the larger ones. Therefore, I think size-wise, it's difficult to see a larger amount than SEK 10 billion. Looking at our balance sheet, we think that it will fulfill the needs that we see for a foreseeable future. Of course, we cannot say for sure that the debt capital market will recover and present the possibilities to issue new bonds at reasonable levels. Therefore, it gives us a lot of time to maneuver. We can continue to sell, but we could also wait a while and see how the market develops. It's definitely not an exact science.
We understand when we run the numbers that it will most likely not immediately lead to an upgrade by Moody's. That would have meant that we had to take in a larger amount. SEK 10 billion is good enough, and that is a number that we've agreed upon, together with our advisors.
Okay. Thank you very much.
The next question comes from Fredric Cyon from Carnegie. Please go ahead.
Morning, gentlemen. Two questions. Starting off with the rental value reported, on page 11. That does not include any indexation, right?
On page 11. Hold on. Okay. No. There's a slight increase, but not to the full extent. Yeah. It actually includes in Stockholm for the Castellum portfolio, we have quarterly indexation connected to consumer price index. It's a small portion of it. I think it's around 5% of the increase.
I'm looking at the outlook for 2023. We knew CPI in October was about 10.9%. What do you expect in terms of CPI effect to top line in 2023?
I mean, we do not do these forecasts. However, we can clearly state that we have 83% of our lease contracts that are 100% connected to CPI. If that gives any flavor.
Yeah. Okay. Then moving over to large projects in Malmö that will be completed here in the first quarter. Was there any contribution from those two projects in terms of rental income during the fourth quarter? Do you expect the full benefit of it in the first quarter, if not?
Nothing was added into the fourth quarter, and the full effect will not occur until 2024.
Okay. How does that part look like?
Yeah. The first quarter, it will not be. I'm not sure if they will start paying the second quarter or if they will pay part of the first quarter, but we will not achieve the full effect of those contracts in 2023.
Moving over to the bond market. Considering the move now with a rights issue, do you expect to be back issuing new bonds during, let's say the first or second quarter? Or do you anticipate that the bond market is currently too weak for you to issue?
Yeah. I mean, it's difficult to say. The spreads tightened 50 basis points this morning, after we communicated our ambition to do a rights issue. If this continues, we will be back on reasonable levels. To which extent there will be liquidity enough for larger bond issues, we cannot be sure on. I mean, most likely we will not be out in the market the coming two quarters, but who knows?
My final question relates to the advisors. There's a bunch of banks involved here. Have they provided you with any additional unutilized credit facilities in connection with this rights issue?
All banks save for Citi have a major exposure to us, lending us a lot of money, and we have a very good relationship with all of them. Therefore, the problem is not really borrowing money from them, it's keeping the portion of unencumbered assets that we need to safeguard to keep our rating with Moody's.
Do I interpret you correctly that there is no additional benefit in terms of getting more unutilized credit facilities post this rights issue?
Yeah, yeah. There's always a benefit in having a good dialogue with your banks and working together with them. They're important providers of one of our key sources of capital. There's ongoing discussions all the time, both financing projects that are very profitable and other credit facilities as well. I wouldn't say that there are no other benefits, but there's nothing that we'd like to communicate at this moment.
That's clear. Thank you, Jens, Joacim.
Please state your name and company. Please go ahead.
Hi, it's Paul May from Barclays. Can you hear me okay?
Yes.
Yes.
Yeah. Great stuff. Sorry. Just a couple questions from me. Appreciate, obviously, you've moved yields out about 30 basis points, I think, over the year, but that does compare to a 300 basis point move in underlying financing costs in terms of market financing costs. Just wondering why you feel that that level of values is now appropriate. I think the last time your weighted average cost of debt was around 2.6%, your property yield was sort of 5.8%. I think the last time the market financing costs were around 5% or 4%-5%, which they are now, your property was about 8%, I think. Just wondering why the 5% is seen as being the right number, which obviously feeds into the rights issue being sufficiently sized and giving you time. Just wondering what your thoughts there were on that valuation?
I mean, first of all, half of our properties were externally valued by Cushman & Wakefield and Newsec, and therefore, we feel that. I mean, it's not really our call. It's something that the company together with our operators and auditors agree upon. This is the number that our own valuation model came up with. It's very close to the external valuations that we have received. We have great comfort in it. Should it be 2% or 5%? I mean, this is the number that we feel is reasonable. Will the values continue down? It's possible. Should we take into account the high spreads.
Yes, that is done in the valuations. We cannot really, I mean, we cannot see it as a long-term unchangeable effect. We still believe that inflation will come down, and when it comes down, underlying interest rates will most likely follow down. The full effect cannot transition into the valuations immediately, and therefore you see a lag in the system, which I think is sound. We've seen the same in connection with the Lehman crisis, where values came down with around 8% looking at the all listed Swedish real estate companies as an aggregate.
Okay. It's sort of an expectation on further rates coming down. Is that fair to say?
Yeah.
If rates don't come down, then value is likely to move out further. Is that sort of what you're saying?
Yes. That is correct.
Okay.
You should also then take into account the self-healing capacity of a real estate company, pretty much the same that you would see with a bank. If this continues, we have the CPI indexation. As long as our tenants can pay the higher rent levels, we will see increasing rental income that will work in a favorable direction, while high rent levels will work in the opposite direction. Who knows which side will win.
Indeed, indeed. Crystal ball time. Second question is around CapEx, sort of annual CapEx requirement. I appreciate you're bringing down investment on the development side, as in sort of the CapEx you have control over, I suppose. What's the total CapEx spend or the maintenance required CapEx spend, if you wanted to split it, that you kind of have to spend on an annual basis in order to, you know, keep buildings occupied and so on and so forth?
I mean, it's a very tricky question. short-term, you can reduce the CapEx quite a lot. Can we go well below SEK one and a half billion? I don't think it's advisable. Roughly 1% of our property portfolio excluding Entra. I think 1%, that's a reasonable number. Sometimes we want to go higher, especially if we can find new tenants that want to pay good rent for new premises. In this cycle, with high underlying interest rates and then a very large portion of uncertainty, we need to be very careful. Let's assume 1% as a low.
Just to be clear, that's 1% on top of any of the development investment CapEx that you're doing. That 1% is kind of a, not fully maintenance, but sort of a recurring CapEx spend. Is that correct?
Yeah. When we say SEK 4.6 billion in 2023, the simplest way to put it would to be, all of it is CapEx, but a good portion of it refers to larger projects. When I say 1%, that is just the CapEx, not projects.
Right. That SEK 1.5 is on top of the SEK 4.6, or does the SEK 4.6 include the SEK 1.5?
No, it's included. It's included.
It's included. Yeah. Okay. Brilliant. Thank you.
Please state your name and company. Please go ahead.
Hi, this is Vanessa Guy from JP Morgan. Can you hear me okay?
Yes.
I had just a couple of questions, and apologies if someone's asked them before. When you mentioned that you're considering divestments of the SEK 180 billion of your portfolio, I assume Entra is also being considered for that.
I must correct you. We have a total asset base of SEK 181 billion. We do not propose to sell all of our assets, we have to find something else to do.
No, but... Yeah.
The question was whether we will be net sellers or not in 2023.
Yeah.
We cannot say anything about that because we do constantly consider both selling and buying assets a sell list that we're working on. We also, given the volatile market, we need to make sure that we are careful with our investors' money.
Mm-hmm.
Whether we will actually buy or sell, more or less during the year, we cannot say at this very moment.
You can't comment on whether you still see the Entra stake as core and something that you want to maintain for the foreseeable future?
We have already communicated that we have a Nordic strategy. For us, the Entra holding is our Norwegian foothold. Entra is a listed company and I'm on the board of it, so I'm unable to comment on it other than that the strategy for Castellum to be present in all the Nordic markets remain, and our exposure to Norway is through Entra. More... I cannot say more than that.
Thank you for that. One last question. In terms of, you've mentioned that you've secured, Well, you've refinanced SEK 3.8 billion of secured debt, and you've also signed SEK 4.3 billion of new secured financing. Is there any more color that you can provide on what yields probably they were done? What the differences that you're seeing between the secured and the unsecured market?
Sure. I mean, the secured financing from the Nordic banking system is still very favorable. However, the spreads have come up somewhat, somewhere between 30 and 50 basis points. We still think that it's a very good thing for us to increase the portion of secured financing as long as the debt capital market is illiquid and highly priced. I mean, we have an ongoing discussion with many different banks, and we know that there is more money to get from the Nordic banks. As I said before, we need to safeguard the ratio of unencumbered assets that Moody's demand from us.
Great. Thank you very much.
Please state your name and company. Please go ahead.
Paul from Barclays again. Just one follow-up question given the comments on thoughts on interest rates. What is your base case for where inflation is to come? Which obviously feeds into your expectation around where the property yield should be. Just, just to get a feeling as to what is baked into the valuations moving forward.
I mean, it's really tricky. first of all, the Swedish government release quarterly reports on where they see the CPI the coming year. I believe in the last report they sent out, it was 8%. in the valuations, we see a number of 4%. I think that most of the operators apply a very cautious model for next year.
Okay. How does that feed into your thoughts around interest rates if inflation's at sort of 4%? Just to get a sense, because you mentioned the values are kind of dependent on rates coming down.
I mean, we are not the central bank, and we are no experts on these subjects. I think we will just have to live with the outcome. Of course, that's one of the reasons why we secure a good part of our loan portfolio with derivatives or fixed contracts.
Okay. Cool. Thank you very much.
There are no more questions at this time. I hand the conference back to Joacim and Jens.
Okay. We have some written questions as well. I think some of them are answered already. There is some that we haven't comment on. The first one is from Peter Wild: What was the impact on rent from indexation for 2023?
We don't know that yet.
We haven't communicated this number, but as I said before, a good portion of our contracts do have CPI indexation, and therefore you should assume that not all of the CPI indexation, but a good portion of it will be seen in the Q1 figures.
All right. There is another question here from Jonathan Conator. Assuming you would use proceeds from a potential right issue to rep any debt, what would be the interest rate on the debt you could repay?
I mean, first of all, initially in connection with the right issue, when we get the funds, we will most likely repay on our revolving credit facilities. They are sadly the cheapest usually. Therefore the effect will not be the same as if we actually were to repay more expensive bonds with perhaps longer duration. Assuming an underlying interest rate of 3% and the revolving credit facility spread, so one and a half, that would mean SEK 450 million on an annual basis in reduced interest costs.
Okay. Thank you, Jens. The last question from Phil. Hello. On your outstanding euro bonds, did you hedge the currency of the proceeds of the euro bonds when issued to SEK? Would you prefer issuing new bonds in SEK or in euro?
I mean, first of all of our EMTN bonds, save for the last one, have been hedged 100%. There is no risk on the SEK EUR side. On the last one, it was hedged with a currency swap over 50% of the face value. In the future, I mean, if liquidity and price is the same, I guess it would be better not to have a currency risk at all, therefore it would be better just to issue everything in SEK or most of it at least, as long as the amount of properties we have in the Eurozone is rather limited.
I guess that a lot of investors prefer investing in euro bonds, and therefore we will most likely be in that market as well.
Okay. That was the last question for this call. Thank you.
Thank you all for listening in, thank you for your questions and your interaction. I hope you will be able to dig into the details once you go through the year-end report in full. We're happy to answer questions sent to our IR department. Thank you.
Thank you.