Ladies and gentlemen, welcome to the Castellum Audiocast with teleconference Q3 2021. All around the call, all participants will be in the listen-only mode, and afterwards, there will be a Q&A session. Today, I am pleased to present acting CEO Jakob Mörndal and CFO Ulrika Danielsson. Dear speakers, please go ahead with your meeting.
Thank you very much. Good morning to all of you joining us for this presentation of the Q3 figures of Castellum. My name is Jakob Mörndal, and I'm the acting CEO since two weeks. Next to me, I have the company's longtime CFO, Ulrika Danielsson, and we will guide you through this quarter. We'll make a short presentation and then open up for questions at the end. Let's begin. Next slide, please. It has been a pretty intense quarter, especially on the transaction side. As you probably remember, following the large divestments of last mile properties made to Blackstone in two steps during the beginning of the year.
Castellum's strong balance sheet and the opportunities for further acquisitions have resulted in a number of new investments during the third quarter, such as SEK 4.3 billion equivalent invested in office properties in the Helsinki area, almost SEK 2 billion invested in high-quality office in Stockholm area, almost SEK 5 billion invested in the companies of Entra, and SEK 2.7 billion invested in a 9.9% stake in the company of Kungsleden, for which we have also announced a public offer to the shareholders. We have also, during the quarter, sold 16 properties for SEK 1.7 billion, a portfolio with an economic occupancy ratio well below the average in Castellum. Going forward, we are looking at selling some additional non-core assets in order to somewhat strengthening our balance sheet further.
In terms of net leasing, the underlying business performed well in the third quarter with pretty strong net leasing of SEK 27 million. We see a growing interest in new office space and the return to what can be described as a normalized work life with time spent in the office has been going fast. In Sweden, the national recommendation to work from home if possible, although not legally binding, was removed from the end of September. The general feeling, I would say, is that people want to return to the workplace. Castellum will continue to focus on its Nordic expansion, holding a 31.7% stake in the Norwegian high-quality property company of Entra, provides Castellum with an attractive exposure to the Norwegian market. With total assets of NOK 65 billion, Castellum's indirect share of the portfolio equals more than NOK 20 billion in Norwegian properties.
We are also looking eastwards, building a stronger presence in the Helsinki area. The company actually entered the Finnish market back in 2018, but it has been growing slowly until this year. By the end of this quarter, the Finnish portfolio amounted to slightly more than SEK 7 billion equivalent. As you have seen, Castellum has also announced on the 2nd of August 2021, a recommended public offer to the shareholders of Kungsleden to acquire all shares in Kungsleden with the intent to combine the two companies. Everything is moving according to plan, and we are in the middle of the acceptance period that ends on the 29th of October. Adding Kungsleden with more than 200 properties valued at SEK 43 billion with a geographical overlap of 90%, would create significant value synergies for the combined company, and I will get back to that later.
Castellum's sustainability work is also an internationally winning concept. The company was last week named world leader in the category office industry with 95 points out of 100 possible in Global Real Estate Sustainability Benchmark survey called GRESB. We also ranked as the world's most sustainable office developer with 99 points out of 100. GRESB is an international benchmark tool that measures and evaluates the sustainability work of real estate companies and real estate funds. This year, a total of more than 1,540 real estate companies and funds in 64 countries were included. We're, of course, very proud of that. Next slide, please. Let's look at the office market and rental levels. The office market shows stability, returning from a lower demand, of course, during the pandemic.
Castellum is constantly adapting to its customers' needs, the interest from customers in increased flexibility in rental agreement is growing. We also see a big interest from customers wanting to discuss what the future of office might look like in terms of layout, services, et cetera. I would say that keeping our customers close is, of course, utmost importance, and we are actively seeking those kind of discussions with our customers. We are not experiencing that customers in general are looking to reduce area rather to create a more attractive workplace in order to get employees to spend more time in the office. Renegotiations continue to be effective, strengthening the view of a stable and resilient rental market, I would say. We see a growing interest in sustainable properties in prime locations, and that's a trend that we expect will continue.
The increased demand for office space following the pandemic shows clearly in the positive net lettings. As I mentioned, net leasing for the quarter was SEK 27 million, bringing the total net leasing for this year to SEK 93 million. That's pretty good, considering the aftermath of the pandemic. In terms of rental levels, they are fairly stable across the segments. Some slight pressure on rental levels in the center of Gothenburg due to new office projects entering the markets. However, our western region, concentrated in the Gothenburg area, is overall outperforming other regions in terms of net leasing, and it shows stable rental levels in all other locations. Regarding vacancies, we see no real change in the quarter. They are fairly low levels in high-quality office space, both in Stockholm, Gothenburg, and Malmö. Next slide, please.
Just to give you an example of the daily business, this is one of our high-quality office properties at Lindholmen in Gothenburg, where we welcome Volvo as a new tenant. This is also the single biggest rental contract signed this quarter. Really nice premises. Next slide, please. Let's catch up on the logistics market. One can conclude that the logistics sector is almost ridiculously hot at the moment. Looking at the broader European market, yields for urban logistics have reached an inflection point, dropping below the yield level for C/D offices, down to around 4% and even below that. The yield compression has been substantial from around 6.5% back in 2017. We see a high demand for new and efficient logistics properties.
To meet the demand, we have a number of ongoing new builds within the logistic property segment, and we are in a number of negotiations as well with tenants demanding new builds. Of course, a major challenge is to find land for sale that have readily available zoning plans. Given the expectation for lower yields in the segment, it affects the price of land. We have seen prices threefold from around SEK 1,100 per square meter in places 30 minutes from Stockholm to reach about SEK 3,000 per square meter in short time. However, we don't expect rental levels to increase due to that. This is especially true outside the cities. Given the competition and lower yield expectations, those will probably remain. For logistic properties closer to city centers, the situation will probably be the opposite with a rental increase. Next slide, please.
What about the property market then? It is, as you know, stronger than ever. 2021 will be the strongest transaction market in the Nordics of all time. Volumes will likely exceed EUR 60 billion when we reach year-end. Up until September, the transaction volume in the Swedish markets have reached SEK 235 billion. Mergers and acquisitions among listed companies, of course, contribute to this figure, but it also shows the appetite for consolidation in the market, and we will probably see more of that going forward. Another trend is that more real estate companies are working hard to achieve investment-grade credit ratings in order to tap the Euro bond markets. More companies accessing capital will, of course, provide support for today's valuations. Pricing has been strong with continued price increases, of course, meaning lower yields related to low-risk segments like residential, logistics, and community service properties.
Office yields have, as you can see, remained rather unchanged. Next slide, please.
It's a lot of numbers. I will not go through every one, but since it has been a rather hectic last quarter, I will try to focus on the last three months development because the first six is history and already known to you. The like-for-like portfolio shows strong rental income growth due to increased rental levels, mainly this quarter, but of course also increased cost due to higher energy consumption as well as unit prices for energy. However, the income growth this quarter for the first time this year back in black numbers, looking into the NOI line. The property administration is increasing some, and that is explained by our expansion into Finland.
We have the co-working company, United Spaces, that also has net red numbers, however, small ones, and they have also expanded further this quarter by opening new arenas here, mainly in Gothenburg, in the Geely Center. As Jakob mentioned, we have increased our stake in Entra, and at the end of August, it became, you could say, from an accounting point of view, a company of interest to Castellum. That means that we include roughly one month of Entra's earnings into our P&L. Since Entra releases their Q3 numbers today, I think, it normally releases after Castellum the other quarters. Castellum sees it is now that we will base our accounting and calculation on Entra's latest published report. That means in this quarter that Entra's isolated Q2 numbers is the basis. We have consolidated in roughly one-month earnings, that is SEK 88 million.
On top of that, we need to test our acquisition value of the Entra shares in some kind of value in use you could say, or market value. When we do that, we get write-down of roughly SEK 327 million. That together with including Entra's earnings makes a result of company of interest of net of minus SEK 239 million. Another investment made the third quarter is Kungsgatan. We have bought shares in the market. We own 9.9% of outstanding shares and votes. From an accounting point of view, that holding is classified as a financial placement or asset this quarter. That means that we do a test of acquisition value versus market value. That's the share price at the end of September, leading to a write-down. On the other hand, we also include the dividend at the end of September in our P&L.
Talking about Kungsgatan, that triggers some other lines in the P&L. We have acquisition cost of roughly SEK 20 million and fee for the bridge facility of roughly SEK 27 million that is connected to Kungsleden. Worth mentioning is that we have closed down the bridge facility due to funding in the capital market in August and September. About funding, the funding trust is stable in absolute amount despite a big debt portfolio compared to one year ago. We have also this quarter prolonged interest rate duration from 3.2 to 3.8 years now in Q3 versus Q2, as well as the capital duration from 3.7 in Q2 up to 4.2 years in Q2. We have also been active on the funding side, and we have at the moment roughly SEK 22 billion in unused credit facilities, but I will come back to that later.
All this means that income from property management lands on SEK 888 isolated Q3 this quarter. It has turned the third quarter due to being a net investor and having a good like-for-like rental growth versus the other quarters this year. Other lines worth mentioning is the strong property market that Jakob mentioned, and in our P&L it shows by a value at least of 4.5%, and that's for the first nine months, mainly driven by change yields and project gains. In the 4.5%, we have 0.5% explained by selling assets over our own valuation. Selling assets triggers the write-down of goodwill, selling Ferring in Denmark and some small assets in the latest portfolio. Of course, taxes bottom line. A really strong result, nine months, roughly SEK 7.1 billion in earnings versus 2.51 years ago.
If we go to the next slide, we have some short information about the underlying performance, the like-for-like portfolio. On the nine months, the like-for-like rental income has increased 1.4%. It was 1% in Q2, so it is getting better and better. On nine months numbers you have this is due to high rental levels and lesser incentives. As I mentioned earlier, high rental levels is the main driver of the third quarter isolated. But as you know, we have also had a colder year compared to last year, a more snowy year compared to last year, and also increased energy consumption, but also energy prices. That hits the like-for-like development. But despite that, the NOI is in black numbers, so that is really good. Looking into the different categories, we can see that warehouse logistics has gone really strong.
That is the case both in Stockholm and Gothenburg, where we have our main portfolios. It's good on public sector. It's more soft on the office side. The retail part looks good here, but it's where we had some small incentives last year due to COVID-19, and it's a small part of the portfolio. It's good numbers based where we are coming from. If we turn to next slide, please. We have the balance sheet and a couple of new lines you could say. We have a total assets of SEK 127 billion, roughly. The three main part worth mentioning is the properties, of course, of SEK 104 million. We have the company of interest in Entra, roughly SEK 11.4 billion in Q3, 31.5% ownership, and we have bought some more shares after the end of September. Our financial placement in Kungsleden, that is roughly SEK 2.5 billion.
This is funded with equity of SEK 62 billion, of which SEK 10 billion is hybrid, SEK 48 billion is pure debt, and on top of that, we do have the normal items such as deferred taxes and other short liabilities. This means net asset value of SEK 230 per share, an increase of 15%. Worth mentioning is the LTV. It says 36% on the picture. It's well below our policy of 50%. In reality, we like our rating with Moody's, and their view of the LTV and calculation is a little different. We are acting on that. They have a restriction or a roof or a ceiling, you could say, of 45% in reality. In that calculation, they see the hybrid as 50% debt. They see the lease agreement as integral debt. Goodwill has no value as an asset. If we change slide, please.
If we look into the debt side of the activity. We have been more active this third quarter. If the first half year was about taking down debt due to being a net seller, the third quarter focus has been on filling up our funding sources. At the end of September, we had roughly SEK 30 billion of credit facilities within the Nordic banks, of which SEK 8 billion was used. We have a new credit facility in place this third quarter of SEK 5 billion.
Yeah.
We raised our frame for our EMTN program up to EUR 3,000 million. We have issued EUR 650 million in an eight-year bond in September and NOK 1.6 billion. The euro bond, just to give you a flavor, was really attractive levels with a coupon of 87 basis points all in for an eight-year bond. We have a Swedish MTN program of SEK 25 billion, of which SEK 18 billion is used. Of course, we have the short funding source of the CP market. Outstanding volume as of September was SEK 3.6 billion. We use that as much as we can since it's still an arbitrage. To give you a flavor, today, I would say a yield all in for a lending three months is 25 basis points, and that is a little bit lower versus the average during Q3.
It's lower versus the beginning of this year. On top of that, in August, we issued a hybrid in August of roughly EUR 1 billion, which, of course, has strengthened our balance sheet and our liquidity. Based on where the market is now, it was a good timing, both the hybrid and the eurobond, due to that the margin has moved and the spreads have moved as well as underlying interest. The market is still on good levels, but we are happy with those transactions. Jakob, back to you and on the next slide.
Thank you for that, Ulrika. Let's look at some ongoing projects. Castellum's ongoing project sums up to SEK 7.6 billion, of which SEK 3.2 billion, about 42%, are already invested. This is, of course, a snapshot, and we constantly add new projects as ongoing projects are completed. Worth noting is that the high yield on cost at 5.6%, which is clearly above what the similar product would be priced at on the market. Just to show you three examples of projects that we have commenced this quarter. The two projects at the top are office projects with public tenants. The left one situated in Gothenburg, where we are welcoming the recruitment office for the armed forces. On the right picture, you see an office building in the city of Jönköping, where we welcome the county administrative board as a tenant.
These are good examples to show that our portfolio of new projects are heavily skewed towards public tenants. The picture at the bottom shows a 22,000 sq m logistic property under construction in Helsingborg. This is a typical example of new logistics in one of the most attractive geographical locations. Next slide, please. In terms of larger transactions, this quarter has been one of the most transaction-intense quarters ever in terms of volume. To give you an understanding, looking back in order to give you a better overview of the transactions during the year, you can see that we started the year by selling properties of net SEK 10.6 billion up until summertime. The biggest divestment, of course, being SEK 9.8 billion in last-mile properties sold to Blackstone. We also purchased shares of Entra for SEK 3.8 billion.
Since summer, we have made net investments instead of SEK 12.2 billion, about SEK 4.6 billion invested in properties in Stockholm and the Helsinki area. Apart from that, we have also invested SEK 7.6 billion in Entra and Kungsleden, respectively. Our latest divestment was a portfolio valued at SEK 1.7 billion that was sold to Oscar Properties, which improved our key figures, given a slightly higher vacancy level in the portfolio compared to Castellum's average. Next slide, please. Castellum's view on Entra then. We received a lot of calls last week on Tuesday and Wednesday from you following information from the property company Balder that they intend to submit the mandatory offer due to Balder passing the threshold of one-third of the shares in the company. I can say that we see absolutely no drama in this.
If anything, we welcome Balder's continued interest in the company, strengthening our own belief that this is a great investment. Castellum will not be selling its shares due to this coming mandatory offer. We are very happy with our position in Entra. It is a highly effective way of getting Norwegian property exposure towards high-quality assets. To conclude, we are basically in this for the long run. Next slide, please. The proposed deal with Kungsleden, combining the two companies and creating a giant in the Nordic commercial property market, is moving forward according to plan. We handle questions and inquiries from Kungsleden shareholders daily related to this deal, but the vast majority of the matters are on a positive note. There are a lot of similarities between Castellum and Kungsleden.
The property portfolios are complementing each other, both in terms of assets and also geographically with an overlap of 90%. The combined company would have an attractive project development pipeline combined with a fundamentally continued strong cash flow. Castellum and Kungsleden combined would create one of Europe's most sustainable property companies with value-creating synergies of closer to SEK 300 million. Even though the outcome of the recommended public offer is not yet known, we are currently planning and preparing for the deal internally in order to integrate Kungsleden's operations in the best way. Everything in order to, as fast as possible, enable the anticipated operational and financial synergies. We will, of course, publish the final results from the acceptance period, and that will happen on the 1st of November. Next slide, please. Let's move on to the outlook.
We have a positive outlook for the office market in general, both in terms of stable rent levels and the strong transaction markets attracting more capital into the market, which provides support for yields. There is also growing demand for office space post the pandemic. Logistics has been the fastest-growing sub-segment with a significant yield compression, a compression which I believe will slow down given that we have reached such low levels. However, worth bearing in mind is that the Nordics in general are under-supplied logistic markets and lag behind some smaller European markets in terms of modern logistic space. The extensive interest in the sector will most likely remain for the foreseeable future. Regarding the outlook for Castellum then, the Nordic expansion will continue.
If the bid on Kungsleden is successful, the combined company, including the stake in Entra, will provide exposure to assets of SEK 165 billion. I think the company has a great position to benefit from a stronger office market, focusing on larger cities where most of the growth is happening. Castellum has also, as I've shown, a strong development pipeline, both for offices and logistics properties. We will continue to work on the logistics side, which provides the opportunity to develop logistics properties at 6% yields rather than acquiring them at 4%. Next slide, please. Before ending the presentation, let's open up for any questions.
We already have a question from Fredrik Stensved from Carnegie. Please go ahead.
Good morning, Jakob and Ulrika. A few questions from my side. Starting off with the Moody's definition of a loan-to-value. You mentioned that they want to see you maintain it below 45%. What is Castellum's current LTV according to that definition?
Based on the Q2 numbers, it's roughly 43%.
Perfect. You also mentioned that you might look into selling further non-core assets. Considering that you're below their definition, why do you argue that that's wise, and what tune of divestments are you looking into doing before year-end?
I think I basically mentioned during the presentation, the Kungsleden bid, where we are looking to sell assets which aren't really core assets to us. Perhaps smaller cities or cities maybe that we haven't really focused on historically. It's basically taking care of properties that we get on top of the deal, so to say. Of course, that is basically to keep the balance sheet in a nice, strong balance sheet going forward.
Should I interpret that as the divestments you're looking to doing is more related to Kungsleden's part that are not overlapping with the existing Castellum portfolio? Or is it also that you argue that there's plenty of stuff to divest within the existing Castellum portfolio?
I think it's both. We are a pretty transaction-intense company, so I think we will be looking at assets both in the Castellum portfolio and the Kungsleden portfolio. As you understand, given the situation we're in and having to await the outcome of the bid, what's going to happen next and how we're going to move forward is, of course, depending on the amount of shareholders going to participate in the bid and how much we need financing of that. That depends, of course, on the outcome.
Thank you, Jakob. Two final questions. First one being, at what share price is Entra booked at at the end of the third quarter in your balances?
It's valued not to a share price. It's valued to the latest published NAV, EPRA NRV.
I see. It's based on the Q2 NAV then?
Yeah.
Okay.
For us, it's more a reflection that this is for the long term. We don't see it as an investment in a share. We see it as an investment in properties.
Yeah.
We use the NAV instead in this quarter.
That makes perfect sense. Going forward, fluctuations in the share price will not then impact your P&L Q4 and then onwards.
Exactly.
It's just going to be the NAV that going to be the driver going forward.
Yeah, it will be the NAV where we are now, and as long as I am here. It will move with earnings, dividends made, and of course, the currency fluctuation. No share price volatility in the balance sheet or in the P&L.
That is also going to happen when you are leaving Castellum because you're not staying.
Exactly.
Okay.
Exactly.
Perfect.
Yeah.
Thank you.
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. We have another question from Akis Anderson from ABG. Please go ahead.
Good morning, Ulrika and Jakob. Congratulations to both of you to your new jobs. I have a few questions as well. Looking at the property costs for Q3 last year, it was exceptionally low. Do you feel that the property costs here in the quarter, to me, they look somewhat high? Is there anything to highlight, or is this a normal Q3 level for Castellum?
It depends on what the definition of normal is. Of course, what we have been impacted of, if you take the insulated quarter, still it's a much colder quarter versus one year ago, and that has an impact on the heating. On 9-month numbers, we have, I think it is 95% of a normal year in heating and warming and electricity. Last year, that number was 81%, so it's much colder. That has impacted. On top of that, we have a smaller impact of the energy prices that everyone knows about. What happens is that the major part of those increased costs will put onto the tenants going forward because that's part of the rental agreement. The cost that hits Castellum purely is on the vacant spaces, so to say.
All right. Thank you. Looking at the like-for-like growth, you mentioned it's ticked up a little bit here, isolated in Q3 to maybe some 2%. What's your feeling going forward? Is this a tick up that we should expect to see going forward as well?
It's a tricky question. It depends on how we are acting in the market and how the market is feeling when getting back to the offices. So far, we are maybe a little bit surprised of how fast it has come back. We already saw that and hinted that in the Q2, and it has been confirmed during Q3. So far, we don't see any changes on the other direction. Of course, things can happen. It feels based on where we are coming from, really strong and stable. The net leasing is also positive, so that's also a good sign.
Yeah. Based on we don't get the renegotiations then they've been on a good level here in Q3.
Yeah, you can say it's a tricky part. Yes. If you just look on the overall nine months impact of renegotiation, we have an average uplift of around 20%-40%. I must say, when you're always talking about renegotiation, the volume you do renegotiate is not the same volume as you did before COVID-19. Before COVID-19, maybe we renegotiate over 50% of the stock that was possible to negotiate. Now that is half of it. That is also something that you need to take into account.
I can also add to that. You have to bear in mind that, of course, renegotiations and uplifts usually comes with some kind of CapEx as well.
Yeah. Last question from me. I can see that you added some ongoing projects. If we look at the potential projects that you state in the report, can you update us on your view on investment levels for the coming two years if we look at possible construction starts ahead?
I think we are going to intensify the projects in general. We are actually having a lot of projects in pipeline that we are looking to start. It's more a question of getting everything ready. There's definitely a focus going forward to start more projects. That's probably the best thing I can say. That goes for both offices and logistics. We're going to see more new builds, basically.
All right. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad to enter the queue for the Q&A session.
We have got a question here on mail or on text message, that is if we can continue the renegotiation discussions here. It's between the different segments, what has been strongest. The like-for-like growth, I would say, is giving a reflection because it has been highest in the logistic part, followed by the public property and then the office part. If you just look on the percentage uplift, it's in the logistics sector, but the office sector is much bigger in our portfolio, of course. Logistics, it's where we have the biggest portfolio. It's in Stockholm and it's in Gothenburg. The office part, it's not so much big differences between the different regions, to be honest, not if we're looking to the renegotiation on a portfolio level.
Of course, there is differences between different leases, of course. There is maybe to you, Jakob, the trends you have observed in the office market in central Stockholm versus Gothenburg, for example.
I think there are a lot of projects entering the market in Stockholm. They are to a higher extent already leased out, which doesn't really put the same pressure on rental levels in Stockholm compared to Gothenburg. That's only CBD. Other parts geographically around Gothenburg is stronger or the rental levels remain. That's probably the biggest difference between Stockholm and Gothenburg, I would say.
We have one more question, Jakob.
We received a question from DNB Markets. How would you evaluate being a minority to Balder in Entra? Will this impact our view on Entra? We are fine with our position as it is. We are going to cooperate on the board going forward, I suppose, or cooperate with the other shareholders in Entra. It's a great company. We have nothing actually to complain about. Great project organization. Of course, we're going to have a discussion at some point with everyone involved. We're fine with our position. We're not looking to change anything at the moment. All right. No further questions. I can perhaps ask for the next slide, please. I would just like to thank you all for listening in today.
As you might have noticed, Castellum's longtime CFO, Ulrika Danielsson, who many of you have met over the years, have decided to leave the company in November. I would like to take this opportunity to, on behalf of Castellum and all investors who've been in contact with you over the years, express my gratitude for your work, and thank you very much for that. This was actually your 93rd quarterly report. It's truly impressing in itself, and we of course wish you good luck in the future. By that, I would like to thank everyone of listening and ask you to have a nice day.
I will say thank you also.
Thank you.