Earnings Call: Q3 2021

Oct 19, 2021

Ladies and gentlemen, welcome to the Castellum Audiocast with Teleconference Q3 2021. All along the call, all participants will be in a listen only mode. And afterwards, there will be a Q and A session. Today, I am pleased to present Acting CEO, Jacob Mondal and CFO, Ulrika Danielson. 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 Castellium. My name is Jacob Muehndahl, and I'm the acting CEO since 2 weeks. Next to me, I have the company's long time CFO, Enrique Danielson, We will guide you through this quarter. We'll make a short presentation and then open up for questions at the end. So 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 2 steps during the Done in 2 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 Q3, Such as SEK 4,300,000,000 invested in office properties in the Helsinki area, almost SEK 2,000,000,000 invested in high quality office In Stockholm area, almost SEK 5,000,000,000 invested in the companies of Entra and SEK 2,700,000,000 and in a 9.9% stake in the company Kunziedel, for which we have also announced a public offer to the shareholders. We have also during the quarter sold 16 properties for SEK 1,700,000,000 a portfolio with an economic occupancy ratio well below The average in Castello and going forward, we are looking at selling some additional noncore assets in order to somewhat strengthening our balance sheet further. In terms of net leasing, the underlying business performed well in the Q3 with pretty strong net leasing of NOK 27,000,000. 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. And 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 Castellan with an attractive exposure To the Norwegian market, with total assets of NOK 65,000,000,000, Castellum's indirect share of the portfolio equals more than NOK 20,000,000,000 in Norwegian properties. And we're 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 7,000,000,000 equivalent. As you have seen, Castello Matr also announced on the 2nd August 2021 a recommended public offer to the shareholders of Kunstljeden to acquire all shares in Kunstljeden with the intent to combine the 2 companies. Everything is moving according to plan, And we are in the middle of the acceptance period that ends on the 29th October, adding Kunstielen with more than 200 properties valued at €43,000,000,000 with a geographical overlap of 90% would create significant value synergies for the combined company, and I will get back to that later. And Castellum's sustainability work is also an internationally winning content. 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 GRESP. We also ranked as the world's most sustainable office developer with 99 points out of 100. And GRESP is an international benchmark tool that measures and evaluates Sustainability work of real estate companies and real estate funds. And this year, a total of more than 15.40 real estate companies and funds in 64 countries were included. So 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 And 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, etcetera. And I would say that keeping our customers close is, of course, the utmost importance, and we are We are seeking those kind of discussions with our customers, but we're 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 settings, as I mentioned, net leasing for the quarter was SEK 27,000,000 bringing the total net leasing for this year to SEK 93,000,000. That's pretty good considering the pandemic in 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 Gathenburg 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 Malmo. Next slide, please. And 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. And this is also the single biggest rental contract signed this quarter, really nice premises. Next slide, please. Let's touch upon the logistic market. One can conclude that the logistics sector is almost ridiculously hot At the moment, looking at the broader European markets, yields for urban logistics have reached an inflection point, dropping below the yield level for CBD offices, down to around 4% and even below that. The yield compression has been substantial from around 6%, 6.5% back in 2017. We see a high demand for new and efficient logistic 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. And given the expectation for lower yields in the segment, it affects the price of land. We have seen prices 3 fold from around SEK 1100 per However, we don't expect rental levels to increase due to that, especially true outside the cities. Given the competition and lower yield expectations, those will probably remain. But for logistic properties closer to city centers, the situation will probably be the opposite with the 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 €60,000,000,000 when we reach year end. Up until September, the transaction volume in the Swedish markets have reached SEK 235,000,000,000. Mergers and acquisitions among listed Companies, of course, contribute to this figure, but it also shows the appetite for consolidation in the markets, 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 eurobond markets. More companies accessing capital will, of course, provide support for today's valuations. Pricing at Bisrong, with continued price increases, Of course, meaning lower yields related to low risk segments like residential, logistics and community service properties of the fields has, as you can see, remained rather unchanged. Next slide please. And then it's a lot of numbers. I will not go through everyone, but since it has been a rather hectic last quarter, I will try To focus on the last 3 months development because the first fix is history and already known to you. So 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 12th 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. Then 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 Jacob 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 Castellan. And that means that we include roughly 1 month Of Entra's earnings into our PML. And since Entra releases their futures 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 ENDRA's latest The Q2 numbers is the basis. So we have consolidated in roughly 1 month earnings that is SEK 88,000,000. 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, On market value. And when we do that, we get write down of roughly EUR 327,000,000 And that together with including Entra's earnings makes a result of company of interest of net of minus 239,000,000. Another investment made in the 3rd quarter is Kunstlera. We have bought shares in the Get we own 9.9 percent of outstanding shares and boats. And 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, reading to write down. But on the At the hand, we also include the dividend at the end of September in our P and L. And talking about Kunflarem, that Triggers some other light in the P and L. And we have acquisition cost of roughly EUR 20,000,000 and Fees for the bridge facility of roughly EUR 27,000,000 that is connected to Kungsvaderm. And To be very worth mentioning is that we have closed down the big facility due to funding in the capital market in August September. And about funding, the funding task is stable in absolute amount despite a big debt portfolio Compared to 1 year ago, we have also this quarter prolonged interest rate duration from 3.2 to 3.8 Yes. Now in Q2 versus Q2 as well as the capital ratio 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 22,000,000,000 in unused credit facilities, But I will come back to that later. And all this means that income from property management lands on SEK 888 krone's insulated Q3 this quarter. So it has turned the 3rd quarter due to being a net investor and having a good like Select rental growth versus other quarters this year. Other lines worth mentioning is the strong property market that Joakim mentioned. And in our P and L, it shows by a value at least 4.5%. And that's for the 1st 9 months, mainly driven by change yields And project days. And in the 4.5%, we have 0.5% explained by Selling assets over our own valuation. And selling assets triggers the write down of goodwill, selling Faring in Denmark And some small assets in the latest portfolio. And then of course, taxes bottom line. So Really strong results, 9 months, roughly SEK 7,100,000,000 in earnings versus SEK 2.51 years ago. And if you go to the next slide, we have some short information about The underlying performance, the like for like portfolio. And on the 9 months, the like For light rental income has increased 1.4%. It was 1% in Q2, so it's getting better and better. On 9 months numbers, you have this is due to high rental levels and lesser incentives. And as I mentioned earlier, higher rental leverage is the main driver this Q3 is related. 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 Consumption, energy consumption, but also energy prices. And that hits the like for like development. But despite that, The NOI is in black numbers. So that is really good. And 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-nineteen and it's a small part of the portfolio. So it's good numbers Based where we are coming from. And then 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 100 and SEK 27,000,000,000 roughly. The 3 main part worth mentioning is the properties of course of €104,000,000, we have the company of interest in Entra, roughly €11,400,000,000 In Q3, that was 1.5 percent ownership, and we have bought some more shares after The end of September. And our financial placement includes Leerdam that is roughly SEK 2,500,000,000. And this is funded with equity of SEK 62,000,000,000 of which SEK 10,000,000,000 is hybrid, SEK 48,000,000,000 is pure debt. And on top of that, we do have the normal items such as the deferred taxes and other short liabilities. And this means a 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%. But in reality, we like our rating with Moody's and their The view of the LTV and calculation is a little bit different and we are acting on that. So they have a Restriction or a roof or ceiling, you could say, of 45% in reality. And in that calculation, they see the hybrid as 50% debt. They see the lease agreement as interest bearing debt and goodwill has no value as an asset. And if we change slide please, if we talk look into the debt side of the activity, We have been more active this Q3. If the first half year was about taking down debt due to being a net seller, The 3rd quarter focus has been filling up our funding sources. And at the end of September, we had roughly SEK 30 €1,000,000,000 of credit facilities within the Nordic banks, of which €8,000,000 was used. We have a new credit facility in place in 3rd quarter of EUR 5,000,000,000. We raised our frame for our eM to N program up to EUR 3,000,000. We have issued EUR 650,000,000 in an 8 year bond in September and EUR 1,600,000,000 in NOK. And the Eurobond, just to give you a flavor, was really attractive levels with a coupon of 87 basis points all in for an 8 year We have a Swedish MTN program of SEK 25,000,000,000 of which SEK 18 is used. And then of course, we have the short funding source of the CP market. And outstanding volume after September was SEK 3,600,000,000, we use this debt as much as we can since it's still an arbitrage. And to give you a flavor, Today, I would say a yield all in for a length of 3 months is 25 basis points and that is A little bit lower versus the average during Q3 and it's lower versus the beginning of this year. And on top of that, in August, we issued a hybrid in August of roughly SEK 1,000,000,000, which of course has Strengthen our balance sheet and our liquidity. So based on the market, if now, it was a good timing, both the hybrid And the bond, euro bond, due to that the margin has moved or the spreads has moved as well as underlying interest. So the market is still on good levels, but we are happy with those transactions. But then Jakob, Back to you and on the next slide. Thank you, Corteva, Erika. Let's look at some ongoing projects. Castellan's ongoing project sums up to SEK 7,600,000,000 of which SEK 3,200,000,000 about 42 percent 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 a similar product would be priced at on the market. And just to show you three examples of projects that we have commenced this quarter. The 2 projects at the top Our office projects with public tenants, the left one situated in Gothenburg, where we are welcoming the recruitment office for the armed forces. And on the right picture, you see an office building in the city of Johan Sjoping, where we welcome the County Administrative Board as a tenant. And 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 square meter logistic property under construction in Helsingborg. And 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. And to give you some 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 10,600,000,000 up until summertime. The biggest divestment, of course, being SEK 9,800,000,000 in Last Mile Properties So to Blackstone. We also purchased shares of Entra for SEK 3,800,000,000. And since summer, we have made net investments instead of €12,200,000,000 about €4,600,000,000 invested in properties in Stockholm and Helsinki area. And apart from that, we have also invested €7,600,000,000 In and Franck Kunktjelden, respectively. Our latest divestment was a portfolio valued at SEK 1,700,000,000 that was sold to Oskar Properties, Which improved our key figures, given a slightly higher vacancy level in the portfolio compared to Castellum's average. Next slide, please. Castellan's view on Entre then. We received a lot of calls last week on Tuesday and Wednesday from you following information from The company Balder that they intend to submit the mandatory offer due to Balder passing the threshold of 1 third of the shares in the company. And I can say that we see absolutely no drama in this. If anything, we welcome Baldr's continued interest in the company, Strengthening our own belief that this is a great investment. Castello 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. And to conclude, we are basically in this for the long run. Next slide, please. The proposed deal with Kungsleden combining the 2 companies and creating a giant in the Nordic commercial property market is moving forward according to plan. We handle questions and inquiries from Kunstgelden 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 Kunstgeren. 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. Kaffdalen and Krogske then combined would create one of Europe's most sustainable property companies with a value creating synergies of closer to SEK 300,000,000. And even though the outcome of the recommended public offer is not yet known, we are currently planning on preparing for the deal internally in order to integrate Kungsiddehn'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 November. Next slide, please. So 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 markets, which provide support for yields. There's 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 bringing in mind It's that the Nordics in general are undersupplied logistics markets and lag behind some smaller European markets in terms of modern logistics base. So the extensive interest in the sector will most likely remain for the foreseeable future. Regarding the outlook for Castellan then, The Nordic expansion will continue. If the bid on Krumskjaerden is successful, the combined company, including the stake in Entra, will provide Exposure to assets of SEK 165,000,000,000, 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. Capsella's also have shown a strong development pipeline, both for offices and the logistic properties. We will continue to work on the logistics side, which provides the opportunity to develop logistic 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 Frederic Seijen from Carnegie. Please go ahead. Good morning, Jakob and Ulrike. A few questions from my side. Starting off with The mood is definition of loan to value. You mentioned that they want to see you maintain it below 45% of what it's Just Ireland's current LTV according to that definition. Based on the Q2 numbers, it's roughly 43%. Perfect. And you also mentioned that you might look into selling further non core assets. Considering that you're below that, their definition, why do you argue that that's wise? And what tune How divestments are you looking into doing before year end? It's I think that was basically mentioned during the presentation, the Kunstljelden Where we are looking to sell assets which aren't really core assets to us, perhaps smaller cities Or see this maybe that we aren't really focused on historically. So it's basically taking care of properties that we get on top of the deal, so to say. And of course, that is basically to keep the balance sheet in a nice, strong balance sheet going forward. So should I interpret that as the divestment you're looking to doing is more related to Kunstielen, Kunstielen Sport, they are not overlapping with the existing Castellum portfolio? Or is it also that you argue that there is Plenty of staff to divest within the existing Castellan portfolio. I think it's both. We are a pretty transaction intense company. So I think we will be looking at The assets, both in the Castellan portfolio and the Kunstel portfolio. But 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 the 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. So and that depends, of course, on the outcome. Thank you, Georgi. And then Two final questions. First one being, at what share price is Entra booked at at the end of the third quarter? In your messages. Yes. It's valued not to a share price. It's valued to The latest publication NAV, ESSER NAV. I see. So it's based on the Q2 And Eiriela? Yes. Okay. And 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. So we used the NAV instead in this quarter. That makes perfect sense. And going forward, fluctuations in the share price will not then impact your P and L Q4 and onwards. Okay. So it's just going to be the dry brochure? Yes, it will be the NAB where we are now and as long as I am here. So it will only And it will move with earnings, dividends made and of course the currency fluctuation, but no share price Volatility in the balance sheet or in the P and L. And that is what's going to happen when you're leasing at Castellan because you're not paying That's many. Exactly. Okay. Exactly. Perfect. Thank you. We have another question from Akus Andersen From ABG, please go ahead. Good morning, Ulrik and Jacob, and congratulations to both of you To your new jobs, I have a few questions as well. Looking at property costs for Q3 last year, it was exceptionally low. But 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 Castello? It depends on what the definition of normal is. But of course, what we have been impacted of, If you take the insulated quarter, it's still it's a much colder quarter versus 1 year ago And that have an impact on the heating. On 9 months numbers, we have I think it is 91%, 95% of a normal year in heating and warming And electricity. And last year, that number was 81%. So it's much colder. So that has impacted. But 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 on to the Tenants going forward because that's part of the rental agreement. So the cost that hits Castello 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 Q2 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. But so far, we are maybe a little bit surprised of how fast it has come back. And we already saw that and hinted that in the Q2 and we confirmed during Q3. And so far, we don't see any changes on the other direction. But of course, things can happen. It feels Based on what that coming from, really strong and stable. A good level here in Q3? Yes. You can say it's a tricky part. Yes, we have if you just look On the overall 9 months impact of renegotiation, we have an average Let's just round 12% to 14%. But I must say, when you're always talking about renegotiation, The volume you do negotiate is not the same volume as you did before COVID-nineteen. So before COVID-nineteen, Maybe we renegotiate over 50% of the stock that was possible to negotiate. Now that is half of it. So that is also something that we need to that you need to take into account. Then I can also add to that. You have to bear in mind that, Of course, your negotiations and updates usually comes with some kind of CapEx as well. Yes, yes. Last question for 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 2 years if we look at possible construction starts ahead? I think we are going to intensify the projects in general. So we are actually having a lot of projects in pipeline that we're looking to start. So it's More a question on getting everything ready. This is definitely a focus going forward to start more projects. That's probably the best thing I can say. And that goes for both offices and logistics. You're going to see more new builds basically. All right. Thank you. Ladies and gentlemen, if you wish to ask a question, please We have got a question here on mail or on text message. And that is if we can continue the renegotiation discussions here. And it's between the different segments What has been strongest and 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. So if you just look on the Percentage of it, 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. And then the office part is in it's not so much big differences between the different regions, to be honest, Not if we're looking to the renegotiation on Alixa portfolio level. But of course, there is differences between different leases, of course. And then there is Maybe to you, Jacob, the trends you have observed in the office market in Central Stockholm versus Gothenburg, for example. I think we have some there are a lot of projects entering the market in Stockholm, but they are, to a higher extent, already leased out, Which hasn'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 have the rental levels remain. So that's probably the biggest difference between Kon and Gassenberg, I will say. We have one more question, we are caught. So we received a question from DNB Markets. How would you evaluate being a minority to Baldur in Entra? Will this impact our view on Entra? And we are fine with our position as it is. We are Of course, we're 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 or organization. But 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 I'd like to thank you all for listening in today. And as you might have noticed, Castellum's long time CFO, Ulrike Danielsson, who many of you have met over the years, I've decided to leave the company in November. I would like to take this opportunity to, on behalf of Castellum and all investors who have been in contact with you over the years, Expect my gratitude for your work, and thank you very much for that. This was actually your 93rd quarterly report. It's truly impressive in itself, And we, of course, wish you good luck in the future. And by that, I would like to thank everyone who's listening and ask you to have a nice day. And I will say thank you also. Thank you.