Earnings Call: Q3 2020

Oct 15, 2020

Thank you very much. Good morning, everyone. We will then present the Q3 for 2020. And with me here today is Rika Danielson, CFO and Maastricht. Okay. We are standing here now in the middle of the pandemic. And after half year of this, we can so far conclude that the Nordic market has been resistant and the Castellum has had a good position in this so far. But of course, it doesn't mean that FX is gone or anything. We are just in the middle of this and is of course humble what we see around us. So we can take the next slide please. This quarter has been calmer than the last one in the sense that we have proven our strengths and our portfolio's position that is well positioned. The situation right now is that, of course, we are active in 3 countries, 3 countries with still different regulations, laws and other restrictions under the COVID pandemic. Denmark and Sweden so far is more or less open borders. Finland with semi closed borders, but we have been able of operating everything the last 3 months in all these three countries. We have also been able of continue with the constructions of our developments without any interference of the pandemics or other regulations. So the short version of this report is that almost all rents is collected in the same pattern that we have seen the last quarter. And that means that we see a strong businesses in especially Sweden where mostly of the rents are collected. We have also been able to create 9% growth in cash flow and 8% on the NAV and kept the LTV down to 43% even though we have done a dividend, paid out dividend. So the last three quarters have been strong in all lines. The cash flow has been up with still good effects on negotiations and that we have very few losses and no bankruptcies. This, of course, with a good management of financing and all other costs. Even when the net leasing even then when the net leasing is better than last year, both in existing and of course in the development plans, we are now on record figures. And as we stated before, we have ongoing developments outstanding right now for approximately SEK 6,000,000,000. It's also a new record for us. But Ulrike, let us go through the report please. And then the next slide, please, and the P and L. Our deliveries so far this year can be summarized in an increase in income from property management with 9% due to mainly renegotiations made earlier and CPI at least and continued cost control. A small unrealized change in property values on portfolio level, mainly driven by project gains, but also on specific assets, yield changes and in some way, cash flow changes. And of course, as early quarter, there has also been adjustment downwards on specific assets. A negative change in derivatives and a tax of roughly SEK 640,000,000 of which SEK 140,000,000 is paid. But finally, I would end this with saying that so far, we have had low impact due to COVID-nineteen in the P and L, at least regarding earnings up until now. However, going forward, there can be a somewhat story. Since early this year, when COVID-nineteen became a reality for everyone, renegotiations, you could say, almost stopped. And of course, there is some exceptions from that. But that is the general sense and that is the conclusion. And that means that growth in like for like and top rental growth starts to slow down. And we can see that impact already a little bit in this quarter if you look into the growth in the Life portfolio. And this can also indicate everything else, less the growth in rental income in the like for like portfolio going forward. But on the next slide, please. Looking into the rental growth, the average increase in like for like is 3% and consists of the CPI uplift of EUR 1.7 billion and made renegotiations earlier. However, higher vacancies and fire incentives as part of that, of course, connected to COVID-nineteen mitigate the growth with 0.7%. So all in all, like for like holding has an increase of 2.3%. And this is, if you look into the Q2 report, a little bit lower. It's an indication of what I just mentioned. If you look into the different segments, you can see that the Public Sector and the Warehouse Logistics has really good momentum. The offices is slowing down and the retail part has a negative development so far. And this happens at the same time when you could say the office market is going through changes from a demand perspective. And we will not be surprised if there will be an efficiency trend, you could say, for a new way to look at users' offices from a tenant perspective. But on the cost side, we can conclude that the cost has gone in the right direction also. So in like for like, it is down 6.5%, and that is due to continuously work with the cost, of course, but also a mild year so far compared to last year. And if we look on the next page, please, and we look into specific COVID-nineteen impact, you can say that since the last quarter or the last report, there has not been so much more new liquidity help, only 5 €1,000,000 more in going from quarterly to monthly and no more incentive to give them. But what we can see is that tenants that have got help earlier this year seeks further liquidity help going into Q4 and the next year, and that indicates the company still suffer from COVID-nineteen. And you can imagine that if this goes on for a longer period, it will increase the risk for even tougher problems for those type of tenants. And our view is that the market in general is doped with a lot of aid packages and the COVID-nineteen is still here impacting us all and changed behavior is here to stay. Of course, this means that companies in general can be hurt, have tough times and that will, in the end, affect landlords such as a company, such as Castellum. However, so far, we are very lucky in Castellum in that sense that the tenant base so far that is hurt in this way is not big for us. And then the market, please. Yes. Next slide, please. Okay. Here we have the net easing. First of all, it's actually even then it was negative on the existing portfolio like Enrique said historically. This is actually better than last year. And what is good now is what Enrique touched on is our tenant base. And for one example in this is that we rented out to a new port in these figures that will be built in Johan Sjoping. And that's, of course, is fantastic to having the government as a tenant. On the negative side, we have lost the tenant in Copenhagen. This is something we knew when we bought Nordbrucken in the active positions. And that is hurting us now, of course, in this figure. But that said, is that we can conclude that we have more or less no bankruptcies. And that is it was actually able of signing contracts for SEK 241,000,000 during this time and SEK 142,000,000 after March. So that is that the market is still effective and you can lease out and it's good actually. So let us move to our next picture please. And if you look into this, you see that we as Ulrike touched on, I mean, the office market is just one part of it. We have the logistics. Here we experienced a very strong market because of the expanding e commerce. It means that we have seen rent growth in all types of location. And that is something we haven't experienced earlier because of the larger assets outside the cities. Big cities have normally not have that growth that we're now seeing in the market. We have the government buildings or the public ones. They are on stable grounds with no long contracts and are benefiting from the expansion that is on lower security, especially in Sweden right now. Together, these two categories stands for approximately 40% of value. And then we have the multi tenant situation. And there is no large changes in the market right now. We have the same market levels like before. It's a lot of speculations on the market will develop, and we believe that we will see changes in the behavior of that. And we shall contact in the future. I will come back to that later. But as said, there is no changes at this moment in the market rates. We can also see a huge difference between the cities where we are and it's no discussion about the future office space in the midsized towns. And that comes down to that's easier to communicate. It's not only about the office set out and design, it's also about communications. And we can take the next slide please. As said then and here is the 4 categories. We have a huge group then in the warehouse and logistic market. And there is our position is that we are strong in Stockholm and Gathenburg with the potential of building more and good yield are still around 7% of yield on total cost. And of course, we have been calculating with the existing that the existing portfolio will be benefiting from the lower vacancies and in some way also the adjusted rent levels. In the public sector, we are benefiting from the stability loan contracts, a fixed in portfolio and that in all assets are more or less 100% leased out. On top of that, the governments need more expansion and that we are benefiting from right now. Then we are one of the very few real estate companies or owners that are developing assets for the government and courts for the police and so on. And then we have the co working. We are right now developing new sites and that is because we want to meet the flexibility demand from the existing and new tenants. And we will meet believe 1 year ago. And then we have the office sites, office buildings with multi tenant houses. Here, I must say, we are well positioned in that way that is either bought by us or built by us on locations where we see that is normally growth. And this is simply a high quality portfolio. But we will meet a new situation in this part and I will come back to that. All in all, it gives very stable portfolio with potential growth in the future in all our 20 towns. Then the balance sheet on the next slide please. The balance sheet that we heard earlier is still strong in Castello with an LTV that has not moved much since Q2 despite dividend made in September. It's still on 43%, while the net debt to EBITDA is down on 10%. So this, together with a very strong cash flow, makes the company strong. If we look at the valuation of the property, the valuation yield is unchanged on 5.1%. And as I mentioned earlier, we have done write downs on portfolio level. However, we have done write downs also mainly on retail and hotels, while upgrades can be signed in the warehouse logistic part and public properties due to both yield adjustments and cash flow. And on top of that, of course, we do have positive gains on our development pipeline. But let us go to the next slide and the market, the property market. Yes. And if you look at that, as you said, we hold the yields in the market, but in the and we also see a strong market in Sweden. If we talk about Sweden, we have totally deals down for approximately SEK 103,000,000,000 and the market is more and more active for every day. And that you can also see then the valuation in the balance sheet. So and the interest from the foreigners is still very, very strong and the foreigner is actually standard for in Sweden for 1 third of the D star. So I can take the next slide please. This is as we like to show it and we have shown it before. This is the existing portfolio on the largest developments we have. This is 15 developments. And as we've said, we're building up to approximately SEK 6,000,000,000 in investment. This is an investment on cost on approximately SEK 6,000,000,000 in average and they are rented out approximately to 80%. This is the backbone, and I will come back to that why this is so important because we are not independent on one project. We are independent on a lot of projects. And under this, we have a long, long list of midsize and smaller ones as well. If you're going into the future, we have not stopped any of the developments because we have been fortunate that the tenants in the development pipeline has been courts been governments. And so we haven't been looking at that. Going forward, of course, we will look into the market situation before we start anything. Next slide please. And then in when we build anything, we are now targeting that we should do go down to CO2 neutral into 2,030 on everything. That also means that we're taking responsibility to try to build CO2 neutral. We have started one development in Peru, building the first what I know our police house that's CO2 Neutrops. But we have also been the 1st property company in the Nordic region that is climate target approved by the science based targets SBP. And that's one of the very big steps for us going forward in the future. So we would like to have help, of course, from the market and try developments. This is 4 this 4 is to example that we're not only building the large office building, but this is the backbone of the development sites. It's actually building where we are building, we can take it first on left hand side, what's named helium gas in Mondal. That's a small to midsize logistic asset that we're building for 1 tenant that we're now moving out from an existing space they have. And at that space is rented out to another tenant. This means that investment like this is done between 7% or 8 percent yield on total cost and it's a backbone, of course. Then you can take the beautiful building on the right hand side. It's what we are refurbishment an old absolute CBD of Uppsala, where we are making it into a co working space. And we actually bought it with that in the calculation and we will open it after Christmas. So that's also a fantastic investment that will be attractive. And then of course, you have the airport, Zeebe, where we are looking into the next step. And we hope we will come back in the short term to announce investments, especially on the research and development side, where we hope to take care of some new tenants for sustainable transportations. And on top of that, we hope to very soon be able to starting development for logistics as well. So this is just some examples what's ongoing in the pipeline so far. So then financing, Elika, please. Yes. On the next slide, please. And of course, all those developments and the pipeline and the existing portfolio need to have cash flow funding in place. So in Q2, I said that Castellon stands strong from a funding perspective, many tools in the toolbox, many to talk to, a good liquidity buffer and confirmed credit premium from Moody's in June on BA2 with stable outlook. In Q2 now, we can reinforce that with an even stronger liquidity position compared to Q2. And the reason for this is mainly explained by the pricing in the bond market. As you all know, the trend for the credit margin was falling during last year and in the beginning of this year. And this trend was broken abruptly when it became obvious for the market that the COVID-nineteen has developed to a global pandemic. And during the second half of the first quarter, the margins increased extremely steeply. And for Castellan, it indicated an increase 3 to 4 times pre kroner prices. And during the Q2, the margins fell back somewhat, and this trend intensified during August September. And that made it possible for Castellan that had not addressed the market due to the high prices in the spring and early summer to actually address the local bond market now. So we have issued new bonds during Q3. Worth mentioning is also that even if the margin have gone down on considerably lower levels, they are not fully back on pricing that was at the beginning of this year. Another market that has developed in a positive way is the city market that really has recovered, you could say, since Q2. Yield is back on the same level roughly as at the beginning of the year. But of course, the cost reduction or yield reduction, you could say, is partly driven by lower start up, meaning that spreads are not falling back on previous levels. And regarding banks, we can our experience is that it's good access to funding within the Nordic Bank and at the moment, relative stable margins from our perspective. So let us go to the next slide, please, and see what we have done in Kristalln during those circumstances. We have renegotiated SEK 5,300,000,000. We have got SEK 600,000,000 in new debt from a new supplier. We have issued €3,800,000,000 of which €1,500,000,000 was refinanced, you could say, pre COVID-nineteen this year. And the duration is from 2 to 7 years. And at the same period of time, SEK 1,000,000,000 has matured. So meaning a net issue of roughly SEK 2,700,000,000, SEK 2,800,000,000. And for the rest of this year, only €200,000,000 more is falling due. Outstanding volume in the CP market is over SEK 5,000,000,000 compared to SEK 2,700,000,000 in Q2. And this is an indicating indicates what I said earlier that, that market is back on track. So to summarize it all, we have at the moment SEK 15,000,000,000 in unused credit facilities, and that will cover existing debt that matures this year and next year, while at the same time can you say meet the need from the businesses. And our duration, the rest part of this year is SEK 3,200,000,000 in Citi that falls due before the year end. And as I said earlier, SEK 200,000,000 in bonds. So at the moment, a really good liquidity position for Castello. And then the future ending. Okay. It's a very tough target to talk about the future in this situation. But we can conclude that the pandemic is not gone and the effect of the pandemics is not gone. But if I should try to generalize on the Nordic situation, it's I should say, it's rather stable. It's a little bit worries about the 2nd wave of pandemics, but it has not been any dramatic figure so far. But that said, of course, the effect we can see in economy as well as the behavior is in front of us. This will, of course, affect the market, will, of course, affect the real estate market. And our conclusion is then is that Develem is in a good position. We really don't have any hotel volume. We don't are affected by the changes in the retail sector on the negative side, actually more on the positive side. So we are a winner when it looks to the e commerce that are affecting that almost 15% of the value that we have in that part of our sector and of course the income from the public sector, that stands for more than 20%. But that leaves us with the multi tenant office buildings and the trends in that sector. This is globally discussed and many are looking for the Holy Grail in this question. Our view is that it's not one solution we will see. It's going to be a lot of different solutions. It's going to be different because of size of cities. It's going to be due to impact for the near time frame, how the transportation system works and of course, how the companies will be able of having to start using and taking the car or commuting in any way. I'm also certain that we will make the office into more meeting place. That was also a trend long before COVID and now accelerating. We will also see a huge difference between what types of work that people are doing inside office and in the companies. And of course the quality of the possibility of working at home. And the last factor is actually family situation. And we see a big difference between young and older staff in this way. So we are strong believers that the work will be done that we have done so far with digitalization, flexible workspacing and looking into the future with more services is something we're going to benefit with now. And we will help, of course, our tenants in this way. Looking into the short term, we will with this result, of course, deliver growth in Q4. But we will also have an effect, like Ulrikas has, in the cooling down on the renegotiation side, because it was simply not possible to continue the negotiations under the pandemic. And we will also be affected of that we're going back to a more normal CapEx situation in the assets. This, too, means that we will not be able delivering the strong nine percent growth that we have done so far in the Q4. But we are still very pleased with the growth that we have been able of creating under the circumstances. And I am especially proud of all the work done negotiation with tenants that have made all our losses or our losses more or less down to 0. So we will simply give the board the opportunity to decide to take a decision to continue increasing dividend even next year. Thank you very much. And we open for questions. Thank We have a question from the line of Erik Ransom from Carnegie. Please go ahead. Thank you very much. Good morning, everyone. I just had a few questions, if that's okay. And perhaps I could just ask you about the property value situation and the property market and what you see for Q4, how are external evaluators looking at the market now? What's your experience having those kind of discussions in Q3? And what sort of what should we look for Q4? Yes, I can take that. I think what we let's start with the market. I mean, it has shown its strength in the Nordic market. And I would love to come to this meeting and say that we have been able to put together golden items in the market and that's absolutely not possible. So it's competitive. I see it's still a competitive market on all types of assets. So that's the first part. So I think it's more a question about if you are worried as a validator of the cash flow going forward, if that's it's any changes. But what we see on the yield side, we see actually lower yields more than we see anything else in the markets, both our logistics as well as our office stocks. And we see an open market. I would say it's possible to sell everything that Castellum holds in the balance sheet. And we are having a lot of calls that investors want to see if they are willing to sell anything. So that's the situation. So strongly still, we are standing in a strong market. Okay. So assuming that you do not assuming that external evaluators don't expect market rent to come down substantially in terms of the valuations for Q4, you would actually expect to have some positive momentum in terms of valuation driven by stable or decreasing yields? Yes, I should say yes. Okay. And then perhaps you could at least I don't know, I'm probably the only one that didn't understand this, but it was regarding the discussions that you mentioned in the CEO comments in the report that following March where you've had positive rental value development from renegotiations that has now come to some sort of slowdown or a halt. And could you just perhaps explain that a little more? Because to me, I would assume that renegotiations must have been at the toughest during Q2 rather than Q3 given the sort of the pandemic situation? Yes. I mean, it was more I mean, we were set on hold because of the pandemic and also because no one was knowing what's in front of us simply. So we stand still and just standing still in that situation lowered the volume of negotiations. And but the result of the negotiation done is so positive with the 15%, but they are the volume is less. And that's on more practical reasons than on market reasons, to be honest. Okay. So basically what you're saying is that you're highlighting that we should know that these effects will come going forward rather than what we have seen so far? Correct. Okay, good. Then now I understand. Thank you very much. Appreciate it. Those are my questions. And the next question comes from the line of Jonathan Kownader from Goldman Sachs. Please go ahead. Good morning. Thank you for taking my question. I just wanted to go back on this comment that you've made in your in the statement, in the management comment about the delayed maintenance. You said it's back to it needs to be back to normal level. But does that mean that you don't have to anticipate the sort of catch up of what wasn't spent over the last quarters? And therefore, are you able to quantify how much maintenance you expect for the last quarter? Thank you. The quantification, I can't do, but your the technique is right. Yes, it's some sort of catch up volume, but it's also practical problems, of course, because we have to make them happen, order them and deploy them. So but of course, we're taking care of our assets and that will technically end up in the P and L as a cash So it's a catch up effect, but ultimately, so you have your normal level for Q4 plus whatever should have been normal, say, for Q2 or Q3 that you have to do extra? Is that a fair way of looking at it? Yes. And you can say just to have a guidance. Guidance is that if you look to early quarter this year compared to the same quarter last year, you can see that we had a lower pace. But from what we can see now, if you make assumptions about Q4 isolated, maybe you can more have the last quarter last year as a guidance for that. Okay. Meaning that we are back maybe on the same pace for that quarter. Okay. So there's no real catch up FX on Q2 and Q3 then if you're just going to the same level as last year? Yes. But the last quarter was, you could say, a high pace last year also. So it's more that we are back on track on a higher level. Okay. That's clear. And so just to confirm from following the previous questions because you talked about volume being lower but still 15% increase in renewals, which is obviously still quite strong and not as strong as it's been in the past. So now you said that it's not going to be only volume, but effectively in the view, you would expect that 15% to go down as well. Is that fair? Yes. Okay. And I mean and the prognosis of that is, of course, extremely hard to make in any situation. Sure. Of course, I can understand. Okay, all right. Very helpful. Thank you very much. And the next question comes from the line of Markus Henriksen from Pareto. Please go ahead. Good morning. I just have a question on acquisitions. I think you have a strong balance sheet right now. And could you elaborate a bit on geographical expansion or segments or if there's any change due to the pandemic for your cost strategy? Thank you. I see no changes. I think it's extremely important to be active in a market like this and see how we can use our balance sheet. And that means that I would like to see a turnover in the portfolio, but with the volume going up. The sector is Nordic sector. It's office logistics. And yes, we would like, of course, to still expand into outside Sweden in the Nordic sector. That said, if the government asks us to do something else, of course, we'll look into that, because we are one of the preferred owners from their side right now. All right. And a follow-up. What's the pipeline for acquisitions for you right now? From the pipeline isn't like always huge and the pipeline going through is less. So I mean from our standpoint, we are looking into what's in the market and what we can find off market right now that's of interest, but we are active. All right. Thank you. And as there are no further questions, I'll hand it back to the speakers for closing remarks. Okay. Thank you very much. And I hope you will have a nice day working day today. Thank you very much, everyone.