Welcome to Castellum Q1 Report 2023. 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. I will hand the conference over to CEO Joacim Sjöberg and CFO Jens Andersson. Please go ahead.
Good morning, everyone. This is Joacim Sjöberg, CEO of Castellum. I'm glad to have so many of you participating here in this Q1 report. This has been somewhat of a slow quarter, and we see increased income thanks to our indexed agreements. Our tenants show good ability to pay, and we have small losses during the quarter. We have increased cost of approximately SEK 140 million, of which 70% are directly linked to secured electricity prices this quarter, and those secured prices will decrease in Q2. We have also some slight increases in property taxes during the quarter. The net operating income... We are writing down the values by approximately 3.9% due to the increased yield requirements. Castellum in brief.
You all know pretty much everything there is to know about Castellum, but we are one of the largest listed commercial property companies in the Nordics. We are present in growth cities in Sweden and in the very dynamic regions of Copenhagen and Helsinki. Through our Nordic strategy, we are also represented in Norway by Entra, mainly in the Oslo region. As you can see as of this quarter, we have a property value of approximately 174 billion, including Entra. That comprises 741 properties. We have a yearly contract volume value of approximately SEK 10 billion. That's the amount of rent that we can invoice as per now. Castellum's tenants, it represents a fairly good cross-section of Swedish business life and the public sector.
We have an average lease duration of 3.9 years compared to 3.6 years for the same quarter last year. We have, as you can see, a good mix of customers, and the property categories give all an extra stability in these uncertain times. I think I hand over to Jens.
Good morning, everyone. As you see on the slide, we've had a long positive trend of net leasing. However, in Q1, negative with minus SEK 62 million and should be compared with the net leasing in Q1 2022 that was positive SEK 25 million. However, continued stable demand from our tenants contracts takes somewhat longer to negotiate. Continued negative effects from the ongoing war, higher interest rates can be expected, but do not show clearly in the rolling 12-month figures. Too early to draw long-term conclusions. Important to mention is that the 12-month rolling figure is positive SEK 84 million. No clear trend that tenants take smaller space. Broad recommendation where some expand and other decrease space.
Bankruptcies are up SEK 19 million for the first quarter, compared with SEK 8 million the full year 2022. Higher numbers cannot be ruled out in the future, but all natural in a weaker economy. Numbers are partially explained by a few larger contracts being terminated, mostly in Stockholm, and the increase in bankruptcies. Also our communicated strategy to reduce projects will have a negative effect over time. Looking at the key figures. Currently loan to value is above our new financial policy of 40%, although well below our creditors' requirements. The suggested rights issue will strengthen the loans value and ICR. Higher interest rates and expiring interest derivatives will, on the other hand, put continued downward pressure. Good appetite from the banks, but we need to preserve our unencumbered asset base currently at 51%.
We will need to keep it above 45% long- term in order to keep especially Moody's happy. Loan margins from the banks continue to be relatively stable during the first quarter of 2023. 56% of our loan portfolio is secured with swap derivatives or fixed contracts with a duration of at least one year. Debt capital markets still relatively liquid with high spreads, even though some real estate names have been able to issue below average spreads. We still favor bank financing for the time being. Looking at our largest ongoing projects, they will add a lot of rental income during the year, and they will also add a lot of duration to our vault. The 12 largest projects, all above SEK 100 million, have an occupancy rate of 75%.
Key tenants in the four largest projects, Swedish Police, an animal hospital, Northvolt, and National Courts Administration in Jönköping. All four are 100% pre-leased. Castellum's total investment volume for ongoing major projects amounts to approximately SEK 3.6 billion, of which approximately SEK 1.6 billion remains to be invested. We have completed two of our largest projects, Sjustjärnan, E.ON's headquarter, and Godsfinkan 1, National Courts Administration in Malmö, during the 1st quarter, with an annual rental value of approximately SEK 170 million. Another five l arger ongoing projects will be completed during 2023 and will generate another approximately SEK 110 million, excluding Götaland 9, which have been sold but not yet transferred to the new owner. Total investment budget 2023 is SEK 4.6 billion, including CapEx, and average lease term is above 11 years in these ongoing projects.
All right, as Jens mentioned, we have a couple of fantastic projects that we have, sort of handed over to tenants. Two of the largest that were completed in Q1 were the E.ON, the energy company's headquarter in Malmö. We have a huge new court administration building also in Malmö. Both are almost full, fully let, and they will add, as Jens mentioned, almost SEK 170 million of rental value. In total, there will be SEK 280 million in total rental value for the larger projects this year.
We take great pride in our projects, of course, and one that was also noticed by others was the winner in the Swedish competition New Building Awards, which made us very proud, and that was Greenhouse in Helsingborg. It's a beautiful building. If you're ever in Helsingborg, you must go see it. It's voted to be the best building by the industry. It was completed in last part of 2022. Total investments were SEK 330 million. It added a rental value of SEK 22 million, the tenants are AFRY, which is a large consultancy firm. Another project is in Kista.
That's a place where we have made investments of SEK 180 million about. We have a micro office, co-working, and we have Infor in that building. We also have an ongoing project to be completed during this year, and that is in Gateway Säve in Gothenburg, where SEEL will take over a building that we've invested almost SEK 300 million in, it will generate the rental value of SEK 21 million. Finally, we have an ongoing project in Västerås, in Finnslätten, where the tenant Northvolt will take over a building and move in during this year. Total investments, SEK 445 million, and the rental value is SEK 31 million on that one. Jens.
Looking at property values, that came down this quarter as well with some 3.9%. All properties are valued internally each quarter in a discounted cash flow model agreed with our auditors. Property values, as I just said, came down and the external valuation were also down in Q1 on all properties and were in line with the expectations and followed the same development. Difference between internal and external valuations were some 1.7%, which historically is a low figure, mostly explained by somewhat lower internal cost assumptions. Valuations yields up with 15 basis points, mainly due to higher interest rates and are now at 5.16%. As you know, interest rates and yields correlate strongly with one another, however, have a very obvious lag effect. With interest rates coming up, yields will follow.
However, these high interest rates, I can just speculate now, but looking at the development, we've seen it's likely to see that interest rates will come down eventually when inflation comes under control. If we look at the latest forecast from the National Institute of Economic Research in Sweden, three-month STIBOR is expected to go down to 1.75% already in 2024. Of course it's not a prediction from our side. It's just the way it usually goes. When things go up, they come down at some stage.
All right. As you all know, the sustainability work that we do at Castellum is at the core of our business and has been so for quite a while. We have continued the installation of solar panels, and we are now at 12% of the electricity used by us are produced by our own solar installations. We have lowered the energy consumption by 5% on the like for like assets. We have in total installed 80 solar panels, which brings us closer to the 100 goal that we have set out for ourselves.
46% of the properties in terms of square meters are sustainability certified, which gives us a very solid base, if ever the EU initiatives on energy classification would come into effect. Right.
Now back to financing. Average cost of debt, 2.8%, compared to 2.6% end of 2022, mainly driven by increasing underlying interest rates, but still on a reasonably low level thanks to especially good bank relationships, but also a good portion of swap contracts. Looking at the debt maturity structure, we have some SEK 25 billion of bonds expiring the coming three years. Available cash and unutilized revolving credit facilities amount to SEK 14.2 billion. Bank loans are prolonged on good terms, and we are able to increase them, which will be part of the solution should the debt capital market continue to be illiquid. Including rights issue and property divestment, all bonds could potentially be paid the coming three years.
Reducing project investments and no dividend this year will free up further funds. Our expectation is although that the debt capital market recovers within a reasonable time period. No one can say for sure. We need to prepare for worse times in order to safeguard a Baa3 rating and in the long run strive for an upgrade. Looking at the rights issue, sadly not much to report, no new information. However, the rights issue is expected to be concluded during this quarter as previously stated. Purpose of the rights issue is to maintain our credit rating, repay debt, and free up liquidity to complete ongoing projects. Q2 will be published on the fourteenth of July and is therefore expected to include the rights issue in the numbers.
When we look at what we foresee in the future, we have an outlook that brings us to focus on the core business. Especially leasing and customer relations. We are now, of course, working hard on the rights issue to be completed, as Jens mentioned in the current quarter. We will improve our financial positions through the rights issue and continue deleverage. We are also adapting to the new macro environment. That means that we will be net sellers of assets in 2023. That more or less concludes the presentation that we were intended to give.
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 Lars Norrby from SEB. Please go ahead.
Good morning, Joacim. Good morning, Jens. Can you hear me?
Yes.
Okay, very good. I have a question first of all about CPI indexation and current market rents. Obviously, you had a big boost from CPI indexation starting from this quarter, the first quarter. It's fair to assume that we will have some kind of help from CPI indexation also in the first quarter of next year. If you look at market rents, are market rents following CPI indexation, or if there's a discrepancy between those two?
I can give a general question, and then Jens can fill in the details if any. No, we don't see a super strong link. It's more a link between the assets, location and quality as always, rather than ongoing discussions necessarily being increased by 10% or so. We on the other hand, don't see any diminishing demand, especially on the better quality products. There's no immediate or direct link. It's still more linked to the assets locations, but we are of course, getting help from the indexations.
Let's say you have a contract that is due to be negotiated during this year. Will you manage to get anything above indexation or will it be in line with indexation or is it will have somewhat of a negative effect on a renegotiation?
I would be. I can't really tell because it's really up to the hard work that's being done by our leasing colleagues and the managers of each asset. It really depends on the asset, whether it has a strong demand, et cetera. Of course we will get help from the fact that the underlying CPI is growing.
Okay, thank you. I'll leave the floor to someone else.
The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Thank you. Good morning. Few questions from me. First, on property values, they decline around 3.9% here in Q1. Could you give us a bit more insight into property segments and geographies that are down the most and the least?
Okay. I think we can see no really clear trend between the segments. What could possibly be mentioned is that the Kungsleden portfolio was externally valued possibly at the peak of a business cycle, and we do not externally value all properties each quarter. If we look at which properties were affected the most, one could say that the Kungsleden is possibly a part of explanation, at least.
Thank you for that. Very clear. Your project investment declined from SEK 1.9 billion in Q4 to around SEK 700 million. Now in Q1, you have earlier stated that we will see a much lower project tempo, but what's your view here for the full year 2023?
I mean, it will follow pretty much what we have presented earlier. You cannot do a conclusion based upon the SEK 700 million. Q1 is, I mean, it really depends on what type of projects you have ongoing. I think we stick to our prediction and the budget of 4.6, it can be slightly below, and it can be slightly above.
Thank you. I see that you divested for around SEK 300 million here in Q1, and we have a previous LOI of a total of SEK 1.8 billion. You mentioned here that you will be a net seller, but could you give us anything more here on potential divestments in 2023 based on the communicated LOIs?
We cannot communicate on the LOI. However, as Joacim said previously, we aim to be a net seller this year, and we will revert as soon as we have additional information to present to the market.
Fair enough. Thank you. Those were my questions.
Please state your name and company. Please go ahead.
Hello, Stefan Andersson, Danske Bank. A couple of questions for me, starting with the Kungsleden deal. We tend to forget a little bit. A couple of quarters ago, we talked quite a lot about the synergies that were going to be retrieved from integrating that. Could you maybe update us a little bit about where you are there, if there, you know, what was the outcome and what is left to retrieve when it comes to that work?
It's a very tricky question to answer in the prevailing business climate. Some of the things that was supposed to happen earlier might take longer, especially on the financial side. When we look at 2022, we are in line with our expectations on saving costs. But how this will develop over time, it's a bit tricky to say what is what. I think we will have to revert on that question as well when we have more detailed information to give.
Okay. It's not like we should expect a lot of improvements or cost cuttings ahead. That's really what you're saying.
I mean, we have communicated the plans to cut costs. However, in the prevailing market where we see that costs have been going up, to a large extent explained by the energy contracts bought in September last year, that will not affect the coming quarters. Looking at the organization, I think that this is something that will take some time to realize, and we don't have a clear number to present. Therefore, maybe you shouldn't expect any major changes in the short run at least. We will come back on that one, if we have more information to give.
Okay. Good. Thank you. Just a question on the projects that came on during the Q1 there. How much rent did you have from that, the 168 you presented? How much were affecting the quarter and, or what month did you go on stream with that one?
To a very minor extent.
Perfect. Another small thing, but you talked about external valuations. Did I interpret correctly if I understood that the 1.7 valuation difference was that the external values had a lower value than yours? Did I misunderstand that?
Yeah, that is correct.
Thank you. The final question, you talked a little bit about, preparing for the future and, net divesting of properties. Thinking a little bit about the Entra shares, what could you, maybe elaborate a little bit on your view on that position? Could that be something that you would be willing to sell?
I think maybe that is something for Joacim to answer if he's... Joacim is out traveling and has been calling in. Therefore, I will answer this question as well. I mean, it's a tricky one. I mean, it's in our strategy, Norway is a very important part of it, and it's not up for sale. The book value is high compared to what we could actually sell it for, and the effect on our key figures will not be significant if we sold them, but it's not on the table and not something we are discussing.
Perfect. That's all my questions. Thank you so very much.
The next question comes from Fredric Cyon from Carnegie. Please go ahead.
Good morning. Yeah, a bunch of questions from my side. Starting off with the value changes in the quarter, there were 4%, which is similar to what you had in the fourth quarter. What were the new findings during Q1 versus what you did on the at the end of Q4?
I mean, you're referring to the continued downward shift in values. I mean, it's, I mean, it's mainly driven by the valuation yield increase. I think it's healthy to see that our internal valuations to a very large extent have been confirmed by Cushman & Wakefield and Forum Fastighetsekonomi. I think 80% has been valued by Cushman & Wakefield. I mean, it's, it is what it is. It's if you look at the value development over the last 10 years, as we show in the graph, I mean, we've had considerable value growth. Now when interest rates goes up, valuation yields follow.
As I was trying to state, when interest rates come down again, which is expected by at least some large players in the market, the trend will most likely shift upwards again.
I mean, comparing your changes to values now in the fourth and first quarter, it looks very, very different from what peers are doing, and you're using the same external valuation firms. How is it possible that there is such a large discrepancy between your assessment and others?
I think we are using a very prudent methodology, and it has been confirmed by external appraisers, and I cannot really comment on how others are doing.
Looking at the components of the realized, unrealized value changes in the quarter, it's not purely driven by increasing yield returns. It's also lower cash flow expectations, but also reversal of project gains. What has happened?
Yeah, mainly a yield shift.
The other components when it comes to cash flow and COGS, what's new, what affects you in the valuation on those two lines?
Insignificant, I would say. It's the valuation yield shift that is the key driver here.
Then moving over to the NOI margin, you guided towards that Q1 will be weak just like Q4 was. If we go back a couple of years, Kungsleden and I think we are using a very prudent methodology, and it has been confirmed by external appraisers, and we have nothing negative to report.
Okay. Then final question on the net letting. It was weak in the quarter, but very much driven by Stockholm. Is there a trend that you're witnessing Stockholm being under more pressure than your other regions, or is this more related to individual contracts? I mean, it's difficult to say, we cannot see a long-term clear trend. However, Stockholm was a bit more negatively affected by COVID, and this might be some sort of a continued development thereafter. First COVID and then the war in Ukraine. This combination might have some effect, but it's still very, very early to say.
Okay. Thank you.
It should also be noted that we see fluctuations on the net leasing and to some extent those that have affected Stockholm are now somewhat expected. It's more or less of a coincidence that they be terminated in the same quarter. As Jens said, it's too early to draw any major conclusions. We are keeping a close eye on the net leasing and that's what we are steering the entire organization towards.
Thanks for your insights, and those were all my questions.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, I hand the conference back to the speakers for any closing comments.
There is also some questions coming in by our webcast in the chat. I will read them out loud and answer some of them. There is one question from Andreas Ritander. Seeing as you will be the net seller during 2023, how much do you see yourself selling during the year, and how much are you willing to divest? Is there any of your assets that you will not consider selling, Joacim?
Yes. Well, we can't communicate a target on this. We are working constantly within Kristina Sawjani's transaction team to optimize our portfolio. There's important optimization work going on. In addition to that, we have the sort of ambition to deleverage. That means that we are considering offers, and we are actively disposing assets. It's a tricky market, and things tend to take longer time. There's nothing that is not for sale, but we will only sell assets that we consider to be either peaking in their valuations or deemed to be not strategic to us.
That of course, includes, whether we believe that the value, we, or the price that we are offered, is reasonable or not.
Thank you. Next question, Robert is asking. Hi. Thank you for taking my questions. In relation to debt maturities, do you consider a new issue of bond in euro? Jens.
Yeah. Of course, we consider issuing euro and safe bonds all the time, but in the current market with spreads way above what we can finance ourselves with Nordic banks, it's not really reasonable for us to go out in the debt capital market. In addition, the liquidity is rather weak and therefore, not in the short run at least, you shouldn't expect us to enter the market. We follow the situation closely, and if our spreads come down considerably after the rights issue, I think it's fair to say that we are definitely interested in the debt capital market.
Okay. Another question, it's about the emission. Simon Mortensen, you stated during the bond maturity chart it may be aided with no dividend this year. Does this mean no dividend is planned for 2023? No DPS is planned for 2023.
No such decisions have been taken.
Can you please clarify when the rights issue will be concluded? Will it be the prior to Q2 reporting in July with final details in Q2 reporting, or will the terms be announced during Q2?
Yeah, the latter. I mean, we've said that the rights issue is expected to be concluded in Q2.
Okay. That was all the questions that we had. Thank you everyone for listening. That was all for today.
Thank you everyone.
Thank you.
Thanks.