Good morning, everyone, and welcome to the earnings call for Castellum's half-year report, January-June 2018. This will be presented to you by Castellum CEO Henrik Saxborn and CFO Ulrika Danielsson. After the presentation, we will follow up with a Q&A session. By that, I think it's time to hand over to you, Henrik.
Thank you. Good morning, everyone. So this midsummer, almost, we will report then. I would like to start off with the three news that we came out with in this report. The first one is that we enter into a new geography, and we can take the next slide, please, to start with. So Castellum would like to be seen now as a company with a Nordic platform. We want simply to be present where the growth is the strongest. And we have, the last years, made major changes in our portfolio to make that move. And we have, for example, moved into the Stockholm CBD with properties valued now around SEK 9 billion-SEK 10 billion, and with favorable prospects and also, of course, have significant growth in these areas. And we also left some outlying areas around Stockholm.
The growth has been focused, and Sweden alone can't meet all that growth in the future. So you will see us simply focus on moving the portfolio and not looking at countries but cities. So going forward, you can see us possibly moving to one or maybe two more towns outside Sweden. The second news is that we will focus even more on the logistics part of the portfolio. Even here, we have made significant changes and are made in this area, and that's, of course, because of the growth in the commercial side and the impact on the retail and logistics segment. And we have been proactive there for many years. We have reduced, for example, the part of the portfolio in the retail space. We have invested in expansion of the logistics portfolio and are now one of the largest portfolios on the logistics side.
The total of that is now SEK 12 billion in value for the logistics side. So I would like to see Castellum as perfectly positioned to capture the leading role of the e-commerce logistics chain. Due to that, we have well-located buildings and land, including major hubs along the key logistics routes down to the last mile actually, down to the consumer now with handling. So you will simply see us working more actively on the logistics market, and you will also see us coming back to that in this year. And the third part is, of course, that we announced just some weeks ago that we will start e-commerce no, a coworking company in the Nordic region based on the also on developing a digital platform for it.
We have intended to take a firm grip on this new market and for us, a new market. It's for us driven by that we think it's extremely important to have close contact with our tenants. We are today in close contact, of course, with our 6,000 tenants, but we would like to get more in contact and be driven by the demands from 250,000 people going to work in our space every day. So therefore, during this autumn, we will launch our coworking concept, and we will use our own premises and test it during the autumn or in the end of the year. Geographically, we will start in Gothenburg and Stockholm. This will, of course, be offered to existing customers, as well as we will love to welcome new ones. So that's what the three news and we take the next slide, please.
Looking at this quarter then, we can conclude that we have performed very well. We have a net leasing that was strong. We have had more than we have a net leasing of SEK 120 million this year, and it's in line, actually, with last year's report if we also include the E.ON leasing that is not in these figures. We continue with a high pace of investments, a net investment volume of SEK 2 billion. We're coming back to that. All this, of course, activity has the last half-year then created growth on 14% compared with last year in cash flow and also 14% growth on the NAV. That lowered the LTV level together with down to 47% in this report. Of course, I will not forget to mention again that we entered the Helsinki market and the rating, actually. With that, I leave this to Ulrika.
Okay. Then on the next slide, please, we do have the P&L. Castellum's delivery the first six months is increasing income from property management with 14%, and the second quarter isolated 15% growth. That increase is due to a good rental market, a really good net leasing, completed projects, and cost control together with lower funding costs. Value in shares and properties was SEK 827 million, of which roughly 40% was due to lower yields, and the rest is divided or split between development gains and cash flow. We do have some smaller changes in derivatives before we reach the tax line in the P&L. Castellum has tax losses carried forward that we still can use, and that means that almost all taxes is deferred taxes.
Deferred taxes has, in a positive way, been impacted by the new income tax legislation that was decided in June this year, which means a future lower income tax rate and interest rate deduction restrictions. And I will come back to that later. So what is the drivers behind this delivery? So if we start with the NOI on the next slide, please, we can see that the NOI increased with SEK 163 million or 9%, of which the income side contributed with an increase of SEK 177 million. And that increase was somewhat mitigated by a small increase in cost. What is so strong is the like-for-like portfolio, and that is the portfolio that has been in our management for the period of, truthfully, two years. So we use this EPRA definition, and that contributed with roughly SEK 100 million and stands for 6% of the 9% growth.
The rest of it is almost contribution from the project volume, while the transactions part had a smaller negative impact on the growth. So on the next slide, we will guide you through our three markets where we are acting in: the rental market, the property market, and the credit market. And we will also have some guidance or talk about the development in the income side and in the balance sheet. So on the next slide, let us start with the income or the top line. The rental market has been strong for a while, and it is still so, which is one big reason for the life-for-life growth of 5.4%. If you split that in different parts, you can say that roughly 3% is from increased rental levels for the group, 2% is from lower vacancies, and the rest, 0.4%, is due to early termination of leases.
Another value-creating part of the company is the development. If we add that to the like-for-like growth, the total growth in the same portfolio during this period is 8.3%. What takes down the growth a little bit is the transaction part since we have sold more than we have acquired from a cash flow point of view. Let us talk about the market on the next slide.
Yes. And we're looking through the market. I think it's on the office side. It's still the same situation that we had three months ago. We have lower market vacancies, especially in Gothenburg and Stockholm, as you can see here. And of course, I can give you some examples on the rent side. I mean, for three months ago, we said that we would try to reach SEK 6,000 per square meter a year on our project in Stockholm on Torsgatan. We have done that. We have leased, and we have signed that. That means, actually, that we have an increase on the rents in Stockholm on that location of 10% the last half-year. If you look at Gothenburg, we hold the top rents there of SEK 3,400 approximately, like it was three months ago, but it's still extremely low vacancy.
You can see it as none, actually, in the CBD area. In Copenhagen, we are, for the first time in our portfolio, in our areas, seem to or we are renting our smaller office out to the top levels that we have in this chart to actually DKK 2,400 with everything included in Danish crowns, as you say, so you don't mix it up with Swedish crowns. So that market is also stronger, and we are benefiting from that, and we can see it on all types of offices. If I'm going to the next slide, please, then I'm back on this picture I have shown earlier on the logistics market. And what we're trying to show here is the effects on the last mile. You can see here on these pictures the Stockholm market, and you can see where Colliers is thinking the market should be for larger terminals.
On top of that, you have four contracts that we signed. The last one is number one, and that's in Boländerna, and that is actually up close in Uppsala in this region. We are actually signing something now for SEK 1,400. It approximately means that we have increased the rents with 100% for this location and the same asset during the last year. So this is extremely interesting, of course, for this part of the portfolio. If we do the same trick and look at Gothenburg on the next slide, please, you will see that we have the same tendency here. We can see that we have now signed contracts for SEK 835 per square meter a year, and that we have so we have an increase as well here.
So this is just to show you the effect on the last mile that we can now see in signed contracts. I think this will continue because of the lack of good space, actually, and good areas. If you look at the next slide, we can see the total groups leasing. At the first look, you can think it's weaker than a year ago, but that's not true. The true story is that we are in line with last year if we're taking the existing portfolio and looking at the project or the development. We're also in line if I then include the EON contract that's not in these figures. So we are actually in line. So I'm very pleased that we have signed contracts for SEK 232 million for the first year and have a net leasing of SEK 128 million.
Then you can also look into the next slide and see how that is divided into the different regions. Every region has positive results, of course, that we're getting used to now, but it's also extremely strong. But you can also see so far that it's what we call the central region, existing as six towns, is the strongest with SEK 47 million in net leasing. That was the same position they hold for the first quarter this year, but it's also very close game now or play with Stockholm coming up with 31, respectively, 34 million crowns as net leasing for the past half-year. So this looks good. We have a good spread out geographically and a good net leasing all over Sweden. So we can go to the next slide, Ulrika.
Yes. Then we will focus on some cost line P&L, and we'll start with the property cost. They increased with SEK 14 million, of which 11 is in OPEX, and that is due to a little bit colder climate. The life-for-life portfolio had an increase of SEK 24 million, of which 20 is in OPEX, and the rest is maintenance. Regarding maintenance, that can vary between different quarters, as I had said earlier. So my guidance is to look at it on a more yearly basis. Then if we go to the next slide, we have our interest cost. This year, we went in with an average funding of 2.4. Six months later, it is 30 basis points lower, 2.1. And that is mainly driven by a lot of different activities that have happened. We have, in Castellum ending, credit volumes of roughly SEK 6.5 billion.
We have renegotiated roughly SEK 7.1 billion to more attractive terms, including exit of the costly Stibor floor. We have used the EIB loan on attractive terms and a duration of five years. We have also increased the CP program with SEK 32 billion, of which at the end of this quarter, roughly 90% was used. And of course, we had a positive impact on what you could say a higher Stibor or a less negative Stibor. So if we go to the next slide, we have the last cost line, so to say, and that is taxes. And what has happened is that you can see that we don't pay so much taxes. We have SEK 1.8 billion still to go in tax losses carried forward.
The new legislation that I mentioned earlier had a positive impact in Castellum's P&L because the lowered corporate income tax has now been calculated when revaluation of the deferred tax debt in the balance sheet, and that gave us roughly SEK 500 million in deferred tax income. Regarding the next decision or the consequence of the legislation, is that in Sweden, we will have an interest rate deductibility restriction with start the 1st of January 2019. From what we can see now, it will not have any big impact on Castellum due to good cash flows and rather low interest rate cost. We have some guidance to look at. You can see that the good ICR gives us a rather good headroom in this new environment.
So if we go to the next slide, and let us start to have comments on the next market, the property market, and the balance sheet. So if we change pictures, we start with the balance sheet. The balance sheet of Castellum is strong with a cautious valuation on the portfolio level and an LTV that was further lowered this quarter down to 47%. So this balance sheet gives an NAV of SEK 157 per share, which has grown with 14% despite the dividends that we give away or the AGM decided in March. If we on the next slide look on our portfolio, the property portfolio consists not only of different geographical areas but also different asset classes. And our main focus is offices, public sector properties, and logistics.
So the last one, the logistics part, stands from a value point of view of 14% of the portfolio, but from a square meter point of view, it is almost 30% of our portfolio. So with 1.2 million square meters of logistics, we are one of the biggest owners in Sweden. We like the asset class that has a positive flow, you could say, now due to changes in our way to chart. So if we then go to the property market on the next slide.
Yep. And if you look at the start with the transaction volume, it was approximately SEK 57 billion transaction tonne. The changes in the market is that it's a larger share of international investors than it has been historically. 32% is international investors, and that's a high figure in the market. What you can see also is that modern office buildings in the CBD of Stockholm, Gothenburg, and Malmö continue to be extremely attractive. And greater office transactions in Stockholm have now a new top levels on square meter prices. So they are now between SEK 110,000 per square meter up to SEK 130,000 per square meter. And the changes we have done in this picture since last time is that we have lowered the Stockholm yield with 15 basis points or about to give a view on the mid-sized university towns with 25 basis points. So it's not all about Stockholm.
We have still seen value changes or yield changes in some of the markets, but especially on the high quality because of the interest there. If we take the same picture for logistics on the next slide, please. Here, you can now conclude that we have yields between 5.4-6.2 in our universe. If you compare that with the rest of Europe, it seems still high. So my belief is there is still room for decreasing yields in this market, and that will, I think, come back to the rest of the year and the discussion on what's the right yield. I think we have a slower valuation curve than we have a market at this moment. So this is an extremely interesting part of the portfolio, like Ulrika said.
I think, as I said earlier, that we are good positioned, have a good local knowledge, and a strong position for terminals as well as last-mile distributions networks. If you look at what we have done then, we can take the next slide. I have a beautiful picture on the Helsinki asset that we bought. This is around 14,000 sq m. It's located extremely well, just outside the CBD area of Helsinki, and it's 100% leased out. And we have a remaining contract duration of a little bit over three years. So in total, this is a step into the Finnish market or especially the Helsinki market. So see it more as the first step and a ticket into that market. If you look at the next slide, you see all the developments that we have ongoing and some that we are planning.
Today, Castellum has an interesting development portfolio with low risk. Because of the geographic deviation and occupancy levels, it's very low risk, as I say. One example is the Torsgatan in Stockholm that now already has occupancy of 28%. The total occupancy in this portfolio has increased. If you look at the largest part of the largest developments we are doing right now, over SEK 100 million, it stands for SEK 2.8 billion. We have still the same high but increasing volume on investments, primarily offices. The last year, we invested SEK 3 billion in developments. This first half-year, we have the same pace of SEK 1.4 billion. The pipeline is gradually increasing, and we are now also gradually using pipeline opportunities for the next coming years that we are guaranteed.
The yields on cost on this is approximately 6% for an office building, and it's approximately 7%+ for a district asset. In general, the total amount that's ongoing right now, we have around 7% yield on the bigger assets in total then. So it's a good opportunity for the future, simply. And if you go to the next slide, please, then we're coming into the next market.
Yes. Then we have the last market to comment, and that is the credit market. If we take the next slide, this second quarter, I would like to say two important things happen regarding the financial risk. The first one is that in Castellum's ambition to further strengthen its profile as a commercial real estate company featuring low financial risk, the board decided to change current financial policies and decrease the LTV level from 55% to 50% on a sustainable basis. Number two was that Castellum obtained and published an investment-grade rating with positive outlook from Moody's. This rating provides Castellum with an important tool in our objective to achieve a broader investor base, including international capital markets, as well as enhanced financing conditions and the possibility of accessing longer debt maturities. The latter is especially important when handling the financial risk.
This also gives us a tool to match the euro flows in Helsinki. So if we turn page and go to the next slide, Castellum today has historically experienced good access to funding from banks as well as the capital market, both the Swedish bond market and the CP market. The banks are more protective, as I have said earlier, if you say so to different demands, for example, the euro Stibor floor and price versus bond market, and that is much positive. The margins in the Swedish bond market is roughly relatively stable after the decrease in conjunction with the publication of our rating in April that lowered the curve for us. For example, for a five-year bond, the margin fell 20-25 basis points.
So if you prolong, you could say, your time horizon, Castellum today pays 40-50 basis points lower for a 5-year bond compared to the beginning of 2017, of which half can be explained by the rating. The CP market is still stable and in excellent demand as it has been now for a longer period of time. And at the moment, for one month, Castellum pays 0% in yield. So all in all, we do have good access to funding and different funding sources on competitive levels. So if we change and go to the next slide, here, you could see a summary of our activity the first half year. And that is the explanation why we have a lower outgoing interest rate as at the end of June. But apart from that, I would like to address the question about the euro bond market.
I want to take the chance to say that you can expect Castellum to act in that market in 6-12 months if the market so allows and wants us to be. Three big drivers in that is to get a natural flow in euro towards our investments in Helsingfors, to broaden our investor base, and to prolong the capital duration. Now Castellum is working with getting all the right tools in the toolbox to be able to act if the market is there and wants Castellum to be there. On the next slide then.
Yes. Then we have, as I mentioned, the coworking concept. And what this is all about is actually that we are, as I said, very cautious on getting contact and continue the contact with our tenants and actually the people getting into their offices. This is something that we can offer now to 6,000 clients. And we have tested the interest, and it's huge because of the growth in these companies and the problem of finding people as well as premises to use. So in a cooperation with some of the largest tenants, I think we can develop this in the end of the year and launch it 100% in the end of the SMG. So this will be starting in Gothenburg and Stockholm. And we will simply coming back to how we'll do it.
And we're looking forward to be part of this market and compete in that as well. So if you take the next slide, please, I think we can sum up on the outlook going forward. So we said now that we are looking for growth. That means that we're moving more out of Sweden and want to be a Nordic platform going forward. We have even more focus than earlier on logistics. You will see us coming back on that. I think we also can conclude that we have an excellent portfolio of developments going forward, and that will be enough for the next coming years. And this is not only land or plots. It's ongoing developments that's on the drawing board and has been partly contracted from some tenants. So that's live and real. And we will also, then as Ulrika says, try to enter the Eurobond market.
Together, all this will mean that I can conclude that we are looking forward to delivering our objective for 2018. With that, I think it's enough, and we can open for questions.
Great. Thank you. Yep. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad now. The first question is from the line of Tobias Kaj from ABG. Please go ahead. Your line is open.
Yes. Thank you. Congratulations to very strong earnings growth also in the second quarter. I would like to start to ask a little bit regarding your expansion to other Nordic countries. Both, I mean, some details if you can mention what kind of yield you are acquiring at in Helsinki, but also what kind of exposure you expect to have outside Sweden if you look maybe two, three years ahead.
Yep. I can take that. To start with, I mean, we are around 5% yield on the Helsinki asset. And going forward on if you're talking the Helsinki market, that is the close one now. Like every other town, we want to be one of the major players in that. But we also have respect for the volumes in the market, and that will take time. We will act as we've done in all other towns. And you can compare that with Stockholm, for example. We want to be a core-plus investor. So we don't only want to go for rare assets. It means that we're open for looking at existing assets as well as the existing portfolios.
I think, spend some time in Helsinki now and 15 years ago a lot, that we also can have a role to play in this market because we don't have so many competitors that are exactly like that Castellum. So I think it's an extremely interesting market for us in this position. So volume-wise, you can say that we expect to be one of the largest players simply for the next coming year. And we have also stated that in a 18-24-month period, we will hope to be somewhere between SEK 3-5 billion in volume.
In Helsinki, is that or?
In Helsinki, yes.
Yeah. And.
Yes.
I'm sorry.
Continue.
You mentioned that you're potentially looking for one or two more cities outside Sweden. Can you be more concrete which cities that would be? Is that also in Finland, or is it Oslo, for example, or?
Look at it from our state, we don't care so much about borders anymore. So we look at towns. And it could be both other capitals, but it could also be some other towns around our geographic area then.
Okay. And this acquisition in Helsinki, is that included in the figure of more than SEK 1 billion in acquisitions in the first half, or will that be consolidated in Q3?
No. That is the big part. So we'll have it in the balance sheet, but we don't have any earnings, so to say, because we got the key in the last June.
Regarding activities outside Sweden, do you expect to be a relatively large player in terms of developments as well, or will it take longer time to build up that potential, so to say?
No. To our knowledge, we will go where the tenants want to be. That means that we would like to, first of all, set up a portfolio before development. So normally, see us as a buyer before developer.
Okay. If I can move on with a couple of other questions as well regarding your coworking concept, is it mainly for Stockholm and Gothenburg that you have plans for this, or should we also expect that you can be active in kind of regional cities in Sweden?
Yeah. I think one of the strongest positions we have is actually that we can offer this in other towns as well. Of course, the volume is less there, but it's so interesting that we, of course, have the capacity of launching this in approximately 20 towns in only Sweden.
Okay. Thank you. And then I have one final, maybe a little bit more detailed question. But if we look at your admin expenses, both in terms of property admin and central admin, they were down or they were up, sorry, in terms of property admin, they were up quite a lot in Q2 compared to Q1. And in central, it was the other direction. Is one of the quarters more kind of indicating for the future, or should we look at the level in the first half and expect that as kind of the run rate?
I think you could look at the first half year as a run rate.
Okay. Thank you for taking my questions.
Next question is from the line of Erik Granström from Carnegie. Please go ahead. Your line is open.
Thank you very much. I have a few questions as well. If we could start off with sort of your logistics focus, you mentioned that rental income from logistics properties now stands at about SEK 950 million. What kind of target are you looking for there? Obviously, you're talking about expanding, but it's about 17% now, somewhere around there, of total rental income. What is your sort of goal in the next two to three years?
I lost the first part of the question piece. You talked about logistics, didn't you? Yeah.
Exactly. I was just wondering, logistics is about 17% of rental income, now give or take. What do you aim for in, let's say, three years?
Yeah. I think it's I love logistics. And the question is actually, can we hold the 17%? If you do the calculation, it's much easier to expand on the office side. So I would love to say to you that it's going to be a larger part of the portfolio. That's going to be a strength to do that, just keeping it with the growth potential or the objectives we have in the portfolio. So I should calculate in that we are somewhere around where we are now going forward. If I'm going to be positive, I'm going up to 20%, but somewhere between, to be honest.
Okay. And then I would just like to ask a question regarding your sort of project development and investments versus acquisitions. You were mentioning about SEK 3 billion in terms of investments overall, which has been sort of a little bit of the run rate, and you seem to be running that as well. But in the next 2-3 years, do you think that net acquisitions will sort of outpace the rest of investments, or do you expect that to be sort of on a similar level, or what should we look for?
No. I think since 2009, we built up a stronger pipeline of projects. We are now on a run rate of that that we are about SEK 3 billion, actually, even if you see a lower figure in the reporting data. If you look at the annual start of projects, we are still increasing that. That could be that we are coming up to another SEK 500 million in start on an annual basis. That's on a positive outlook. We're also negotiating rather large projects now and larger volumes that we've done historically. That can definitely change that figures. I'm positive on the pipeline of developments. That's going to be the first pick. Then the acquisition is going to be the second. On top of that, to give you some guidance, you will also hopefully see some portfolio changes.
The net investment volume is going to be still around this 5%, so both buy, sell, and develop. But if I have to choose, I'd always choose the developments right now because of yield and quality and position, of course.
Okay. A question on your expansion when you're talking about being a Nordic platform. You're moving to Helsinki, and the fact that you're talking about 1-2 other cities in the Nordics, does that mean that you don't see as much opportunity in Copenhagen now that you've obviously been there for a little while, but it's also a city that's drawn increased interest from Swedish commercial players? Should we expect sort of the expansion into Copenhagen to take a backseat as you move into other cities in the Nordics?
I think if we go to Copenhagen, it's a fantastic town. I love it, drinking beer, and in Vesterbro as well. And honestly, the market there is a little bit difficult, and I think the growth is going to come from developments or acquisitions. And we have a fantastic portfolio, and we can hold the growth of that with a 10% objective. But that said, it's more normal investment pace of Copenhagen. So I should place it with all the other towns. And so potentially normal growth in Copenhagen, simply.
Okay. And then my final question might be a little bit detailed as well is regarding your statement in the report about your cost reduction program and the fact that that will be sort of counteracted by your new investments. And I assume the coworking part of Castellum is part of what you mean there. Does that mean that we should expect sort of the NOI margin to expand with the improvement of the portfolio rather than the sort of cost-effectiveness program?
I think you should expect, I mean, like we are writing, I mean, it goes both ways. You have the efficiency program, and you have the new businesses, as you used to call it. So it's two different lines for me, totally. And the most part of the new business is investments that will not affect the P&L so much going forward, simply.
Okay. Thank you very much. Those were all my questions.
Next question is from the line of Marie Scheer from Nordea. Please go ahead. Your line is open.
Thank you so much. I have a question regarding the Investment Grade rating. We can already now see a positive effect of it, but for how long do you think we will continue to see it?
The positive effect, I think that maybe I should not comment Castellum as specific, but more the market. I think that what has happened in the Eurobond market with a little bit more volatile or increased margins has not hit the Swedish bond market in general yet. Maybe I would not be surprised if the tendency outside Sweden also will be imported into Sweden. It's not so much Castellum specific than the market in general, so to say, I must say.
Okay. Thank you. Also regarding the asset revaluation, it was rather subdued this quarter as well. Could you give us a comment on why is that?
If you compare the market yields and our yields, you can see we have, like I said, a little bit cautious valuation, and we have still six months to go. So I think that is maybe Castellum's normal behavior.
Okay. Thanks.
Just as a reminder, if you do have any further questions for the speakers, please press 01 on your telephone keypad now. There are currently no further questions registered on the phone line, so I'll hand the call back to the speakers. Please go ahead.
Okay. Thank you. I think that's all for today. So thank you, everyone, for participating and wishing you all a great Friday. Thank you. Bye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.