Good morning, and welcome to this conference call on Castellum's first quarter report, hosted by Henrik Saxborn, CEO of Castellum, and Ulrika Danielsson, CFO. My name is Ingalill Östman, and I'm the Corporate Communications Director at Castellum. We will start this morning with a presentation of the results, followed by a question and answer session. So by that, over to you, Henrik.
Thank you very much, Ingalill. I think we will start with the first slide. And, as you know, I think, we have had a very active start of this year. We have in Castellum both been very active in changing the portfolio, closing deals, simply leaving four of the portfolios we sold out of Norrporten. And at the same time, closing the deal in Stockholm on Torsplan. Despite this, we have been able to have growth, good growth in the cash flow. And, the strongest so far is maybe the net leasing that we had a total of, or a net total of SEK 103 million, is actually a record for Castellum. And, we have also benefited from projects as well as a strong real estate market, and achieved upward valuation of approximately 1%.
All this done, we ended up this quarter with a low LTV level of 48%.
And then if we look into the next page, the P&L account, we could say that the first quarter, Castellum achieved a growth of 9% in income from property management. And this was, of course, driven by many things. One thing is the acquisition on Norrporten, that we got the key to in the middle of June last year. But also that the like-for-like Castellum portfolio is going well, and that is driven by a good rental growth, like-for-like, 2.6%. That is due to a good rental market in Sweden, and a good job done by the organization. We have lower property costs in like-for-like, and stable administration costs.
If you look into the administration cost, of course, it's high compared to one year ago, but that is mainly driven by the acquisition of Ståhls and the Norrporten that we did last year. This line will be a little bit lower going forward into 2018, since staff now is leaving during this year. And then finally, the average interest rate is lower compared with one year ago, but at the same line as in the beginning of this year, despite big changes in the interest rate portfolio. What is a little bit lower or higher, depending on how you want to see it, is the economic occupancy rate. And how is that possible when we do have a strong net leasing and a good rental market? But it can be explained.
If we go back to our reports in 2014 and 2015, we did have roughly SEK 50 million in notices for termination, where tenant was leaving up to eight months, 18 months later, and that is in the beginning of this year. The main part of those notices have been let out again, but we do have some time lag, you could say, between when the last krona from the last tenant is leaving and the first krona from the new tenant is moving in. And a lot of our net leasing has been in investment, and it takes some time before it hits the P&L, up to, from 12 up to 24 months, you could say.
So going forward, that means that everything else equal, the occupancy rate will get better during this year and the end of this year. So if you look into the lines below the income from property management, we also have value uplift in the property portfolio of up to 1%, and that was driven by many factors. The stronger cash flow, yield shifts of specific assets, you could say, project gains, and then transactions, both acquisitions made, mainly the Torsplan in Stockholm, which had a value uplift of 13% the third quarter, and as well as we have sold above, above our last valuation. So a strong P&L for the first quarter. If we go to the next page and look into the balance sheet, we can say that that is strong.
Despite net investment of roughly SEK 2.5 billion this first quarter and a dividend, the LTV is at 48%. What has changed, that I could say, is more the calculation of the Triple NAV, where we have, a little bit another view on the market value of deferred taxes, and we will come back to why later in the presentation.
If we go then to the rental market and take the next page, we are still living in a very strong market. And we directly go to the next page, we can see how that affected Castellum. We have, as I started with saying, a record in new levels, simply. We have signed 240 new contracts just the first three months, and had a gross leasing out activity of SEK 170 million. And of course, that is amazing, strong figures. And if you look into the existing portfolio, excluding the project, this also was a plus of SEK 19 million. Compared with last year, that's a difference of approximately SEK 50 million. And then the project was giving us uplift of SEK 84 million.
If you look at the differences on next page, you can see the differences between the different regions. You can see that we are benefiting from all regions. All regions have strong net leasing. And this year started out with a strong start, actually, in the Danish side, where we benefited from good premises that we can rent out from the older Norrporten portfolio. And then we have continued like that all over the country. And the smaller two towns that's left on the northern part of the portfolio is also around zero at the start of the year. And if you go to the next page, you can see how the market looks like. You can see that we have still vacancies that's getting lower.
This is, of course, low supply on new office space, as well as logistics. On the right-hand side, you can see the last numbers on top levels of rents in the towns. We are actually right now experience maybe that this rents will continue upwards during the year. I can't see anything right now that could hit this market, and that's simply because Sweden is on the top of growth in Sweden as well as in the towns. So this is extremely strong market we have in front of us right now, and are actually suffering from it when we can't supply our tenants with good spaces. That said, we can move into the property market. You see a property market that had started out with higher activity.
It was actually SEK 35 billion sold last year. As you take the next slide, you can see how that was compared with last year. The right ones, the left ones with the red ones is 2017. And you see that March was stronger than last year. And now we will discuss, of course, the effects of the tax proposal that the government came out with. But these deals done is done mostly before the tax proposal came out, and that is why I think this figure is so strong. But if we don't look at the tax proposal, we look at the market, you can see that we are seeing its huge demand for all types of assets. We see new yields.
We have experienced yields under 4% in some assets in Gothenburg. We are definitely under 4% in Stockholm. We see that, for example, social housing and all assets like that, extremely high interest for that in the market. I conclude that this market should be very strong, and the only discussion we have right now is the tax proposal, proposal action. If we continue to the next slide, you see some examples then. Here you can see assets in Gothenburg on top. That was in our way of looking at it, under 4%. We can also see the ones that it called the Tobaksmonopolet in Stockholm. That's around 4% yield in that asset sold.
You can also see examples of portfolios that we was part of, where we moved the portfolio in the western part of Sweden to actually make it stronger position for us, as well as creating new building rights. If you look at the next slide, we have some example of projects. The first one is a logistic asset. We are right now under construction. It's 26,000 square meters. It's an investment of SEK 220 million. We are expecting to achieve around about SEK 70 a square meter in a year, and complete this under Q2 2018. We have started without any tenant. We have done that because we have no vacancy at all on the logistic side in Gothenburg.
We also see that the market vacancy rate is extremely low, and want to benefit from the good location of this asset. If you take the next one, to give you some more examples, then we are in the middle part, or the center part of Norrköping. This was an asset that was included in the deal with Ståhl. It's an old asset from 1972, where we're now investing approximately SEK 110 million and it's almost 8,000 square meters, and we are looking at the calculated top rent for Norrköping at SEK 2,300 a square meter in a year. This is already rented out for almost 40%, and we expect it to be completed in the first quarter in one year's time, simply 2018.
If we look at the next one, this is the new construction we're doing in Örebro. It's absolutely the closest office building to the railway station. Here we are building 14,500 square meters, investing SEK 420 million. The rents expected here is SEK 2,400 a square meter in a year, and we are calculating with completing this in the half year of 2019. But we already rented out almost 50% of it to a municipality in town. And to conclude this with all the fantastical projects we have, we have a next – if you look at next page. We have in the portfolio today approximately SEK 4.5 billion on ongoing projects. If you look into the report, you will have 60 of the biggest projects listed.
That is approximately SEK 2.2 billion. If you look at the normalized yield on them, they will, in all costs, achieve approximately 7.5% yield. So looking forward on this, we have in the pipeline, the same volume, approximately SEK 4.5 billion for the next coming 18 months, to- could be started, and it's only waiting for either clients or planning processes. I think this is a very important part of the future portfolio for Castellum, and it makes us also one of the biggest producer or developer of office space today in Sweden.
Then if we look into the funding on the next page, and we can turn one more page. You could say that we have a strong funding situation with an LTV, as I said before, of 48% and an ICR of 361%. The average interest rate is the same as at the year-end, despite a lower interest bearing volume, a longer duration in both interest rate and credit agreements and margins. So the last two months is due to that we have the first quarter, we negotiated SEK 12.5 billion of credit agreements, and ended SEK 1.2 billion. Further, we have had activity in the bond market, has issued SEK 3.5 billion, with a duration of 2-6 years, and SEK 1 billion has fallen due.
So in the end, the same funding cost all in, but longer duration in all aspects, and a good spread between different funding sources that we can see on the next page. While we have a good mix between bank loans, bonds, Swedish bonds, I must say, and CP program. After we have deducted that gap facility for the CP program, we still have SEK 11 billion in unutilized credit agreements that could be used for investments. On the next page, we can see the temperature on the three different markets, you could say, and the tools that Castellum are using in the interest-bearing portfolio. It's good and fair access within the bank system. It's very good on the Swedish bond market, and it's excellent on the CP market, just as it was at the year-end.
What we can see is that we like long duration in Castellum due to that refunding with this big portfolio is one of the biggest risk. So we would gladly reduce that by having longer duration in the credit agreements or in the bonds. But as you can see, the normal longest maturity is five years in both the markets. However, we can see and had access to go up to six years on the bond market, and we think that is positive. Price-wise, you could say the bank has stable credit margins, the bond market has showed some downward trends for the market in general and Castellum specific, that has been positive for us in the first quarter.
The CP market is stable, but as it has been now for a while, you talk about fixed rates instead of margin, margin on that market. So all in, a good current funding conditions.
Going forward in the presentation, we're looking to the future, simply, and if you take the next slide.
First, I will talk about what Henrik said before. The tax regulation that has been a lot of discussion here in Sweden that was proposed just in the end of March this year. And it's a proposed change to have, you could say, tax neutrality between selling directly or indirectly when selling properties. And that means that to simplify, two new taxes will arise even if you sell indirectly. Tax on capital gains and a stamp duty or a transaction cost, and this will be borne by the property-owning company that is sold. And you could say, one impact that this proposed changes will have is also that it has some retroactivity.
That means that, that all the old taxes will be paid, the day the actual seller sells, or the future seller, seller sells that asset. It's on referral now around here in Sweden. So in our report, you could say that calculating the Triple NAV as at the end of March, we changed our view on the tax deduction, and said that maybe the seller and the buyer would share that risk. That means that we have, a higher view on the market value of the deferred taxes of 6% instead of roughly below 5%, as it was earlier. And if you want to, you could also look into that.
We have two, you could say, examples of what will happen, everything else equal, if all of the portfolio was supposed to sell directly instead of as we have in our calculation, two-thirds. It will have an impact on the triple NAV of 4%. On top of that, if you also buy or suppose that you will have a lower property value roughly corresponding to the transaction cost or the stamp cost of 2%, you will have all in 8% lower triple NAV. So this is just a reflection to show how the NAV could, the triple NAV could be affected if this such proposal will go through.
If we then look ahead, not looking at tax regulations and other stuff, we look at the big picture and take the next slide. You can say that we are definitely living in a healthy world with Sweden and Denmark, with both fantastic growth and strong balance sheets. You can see at the Swedish figures that the population growth is calculated to be 1.4% compared with EU of 0.3. It will consist of actually internal growth and not imported growth, simply. Then they have a strong GDP prognosis. So everything looks extremely good, but we have bottlenecks that actually we are benefiting from in the strong rental market. But we have bottlenecks in legislation, not so much about planning processes, right now, that we makes it actually benefit on the rent levels.
So we live in a strong rental market, where we are the production of new office space is approximately 1% in most of the towns, but the growth is somewhere between 2% and 3%. And if this continues, we will continue to see rising higher rent levels, simply, but also creating new problems for our tenants. So it works both ways, simply. On the transaction market, we are looking ahead on good transaction market if we don't look at the discussions about the taxes, and that is all about also the growth theory. So we are waiting for the tax discussions to end, and then hopefully, we can continue where we started.
And as I said before, the funding financial market is good and continue to show strength. So what is a little bit uncertainty on top of all everything is the political environment in Europe and in the world, with all the elections that have been done and the Brexit and et cetera. And here in Sweden, more specific, the legislation around taxes for our industry and for all capital-intensive businesses going forward due to interest rate deductibility discussions. So it's more about things around us that create a certain uncertainty, so to say.
Whatever happens now, Castellum will continue going forward. If we take the next slide, please. We are right now absolutely creating the one Castellum group. We are benefiting from this. We are working with the synergies and merger with the Norrporten, as you know, and that we will continue doing in 2017, and it will be done this year. We will continue to strengthen our locations. We are moving the portfolio, as you have seen this first quarter. You will see us continue to focus on the product portfolio. I could say that I wouldn't be surprised if we are succeeding in making that even bigger going forward than it is right now. On top of that, we work very much with the sustainability questions, and we are convinced-...
businesses for us, so being in the forefront of the sustainability questions. And we will, from this position, have a strong portfolio of projects. We will have a strong portfolio of existing assets, and we will have a strong balance sheet. So whatever is in front of us, we will be prepared, and we have the possibility to continue the growth story of Castellum. So I will end there and open for questions, Ingalill.
Mm-hmm. Then we move to the Q&A slide of the presentation. And, when you ask questions, please state your name and number, and if possible, ask only one question at a time. If you're listening to this over the web, you can also send your questions, and I will pick that up in my computer here and put forward the question so that everyone can hear. But please go ahead.
Thank you very much. Ladies and gentlemen, if you do have a question for the speakers, please press zero-one on your telephone keypad. We have a question from Niclas Höglund of Nordea. Please go ahead. Your line is now open.
Yes, good morning. Niclas Höglund from Nordea. Well, firstly, if we start out with the, with the sort of, the boring tax issue, could you elaborate a little bit more on what you're actually seeing in the transaction market? And, you're also alluding to in your, in your, in your comments, at least in the report, that you, that you, you see a lot of flaws in, in this proposal, and, that it might be delayed or, or even, not go through. So, what are we really seeing right now, and what's your expectations of, timing on, the implementation? Thank you.
If I can start with what we're seeing in the market right now, our view is that it has put a wet blanket over the market. It also give questions mark to deals that is on the table because it's extremely difficult, of course, to sign a contract today and if you don't know what you have in front of you. So that technically gives a wet blanket over deals that maybe would have been done right now. And then the market is always fantastic, of course, so everyone has the problem now giving their view of what should be the right calculation for a transaction in this environment. So that is also, of course, a discussion in the market, where you can see consultants as well as colleague to us try to do the deals.
Simply, from my standpoint, it's a wet blanket right now, and it will lower the transaction volume going forward.
Just to follow up then, so you are seeing a more of 11% adjustment rather than the historical 5.5%. Is that what you're saying, or is it still... Well, have we seen any transaction going through on that level, or is it more of your expectations of the sort of general level?
I would say that the figure is now more a question mark than a figure in the market, and a lot of views on what would be the right figure. From my standpoint, personally, I won't put down a figure before I seeing where the proposal are going, simply. But of course, technically, we can do what we have done in the report.
If I take the legislation process, you could say, I don't know more than you, but I know that it's out now for the normal process here in Sweden to have institutional companies to have their view on it. And it has been some mismatch because the press secretary has said that they will slow this down. And then it went, I think, three days, and then it went out anyhow. So the timetable, we don't really know, to be honest, but we know that the government want to have more taxes into the system. So that is all that we know. So now it's out in the legislation process, so to say.
Thank you. May I then just come back to the Castellum again? You have a very solid like-for-like growth on the rental side, and the net letting, well, and the record number here is also encouraging for the underlying earnings, of course. Could you give help us a little bit on timing on the like-for-like growth, for example, how much is renegotiated rents, and the sort of timing of the net letting? Is it very much linked to the projects ongoing and hence more tilted towards the end of the year or into next year? Thank you.
You can say a lot of the like-for-like growth is renegotiation, and some is all reconstructions. But yeah, I can say that is, it's an impact, and of course, you have some indices on top of that. So but the next leasing, when it will hit the P&L account, since a lot of it's in project and you have a time of production, it will take time until it hits the P&L account. And one guiding you can have is the date of each bigger projects in the report to see when will that then sell.
... hit the P&L account.
Okay, and then, yeah...
Niclas?
Yes.
I don't know if we have a queue. Do you have a short, let's say, comment on this? Otherwise, I'd like to let someone else-
No, let someone in. Yeah.
Yeah, and then you can come back. No problem. So, let's take next question, please.
Thank you. Our next question comes from the line of Robert Woerdman of Kempen & Co. Please go ahead, your line is open.
Good morning. This is Robert, Kempen . Hi. Actually, once more zooming in on the tax proposal, I know it must be frustrating, but just, just two things that strike me. You indicated that you wanted to make the portfolio even bigger, perhaps also aside from just development completions. So, just, just give us an understanding on what has changed in your underwriting for deals, if you want a deal... if you want to do a deal right now, given the fact that there is more uncertainties.
I should say that even doing a small deal today, looking at just buying land, is. It's complicated right now in underwriting it. So we will, as I said, have a wet blanket on that. I mean, from our standpoint, we will have guarantees what happens on the tax issue going forward, that we're not ending up with a less good deal simply where we had where we were before. So it's actually have to be more flexible agreements than we had earlier. We will not sit down on a number. On it's not a high number on the tax part of the balance sheet, to be honest. And we will...
But right now, the portfolio volume, it's mostly coming from products going forward until we know where we are on the tax issue.
Okay. That's, that's clear. That was it, actually. Thank you very much.
Thank you, Robert. Next question, please.
Thank you. Our next question comes from the line of Erik Granström of Carnegie. Please go ahead, your line is open.
Good morning, Erik Granström here with Carnegie. I'll fire off my one question, then. It's regarding the recent restructuring cost that you had in Q1, and I was just wondering, do you expect to have any further costs associated with, with this going in, in, into the next quarters, or have we sort of seen the bulk of it already?
No, we are, if it should be an adjustment, it should be a very small adjustment, so it's SEK 0 to some million upwards, but not more going forward.
Okay, thank you.
Thank you, Erik. Next question, please.
May I remind everyone that if you wish to ask a question via the telephone lines, please press zero-one on your telephone keypads.
Meanwhile, we have one question from the web, but I think we already covered that, actually. It's about your take on the probability for the tax law. What does it mean that it was not included in the budget of 2018? But Ulrika, I think you already covered that, right?
Yes.
Yeah. And we have one more from the web, which is also concerned about the impact of the tax proposals. I think that it's covered as well. I let Ulrika read the long question there.
Yes, you can conclude it's the same discussion that, you could say Kempen asked about how, how do we see in this, both on our valuation or, and in our, transactions.
That's great. Lots of concerns about the tax proposal. Any more questions on the line?
Yes. Our next question comes from the line of Niclas Höglund of Nordea. Please go ahead, your line is open.
Yeah. Yeah, my final question then.
You're welcome, Niclas.
Yeah, I'll, I'll make sure to, to keep it simple. Average financing cost. You're sort of prolonging the, the duration and moving out of the, out to the curve and reducing your, your risk, as you clearly points out. At the same time, we are seeing a very, very strong development in the bond market, and with the LTV clearly below 50%, we thought, we talked about the opportunity for, for maybe a rating. Could you elaborate a little bit on, on the, the potential to, to get the, the average funding costs down, more in line with the market, for the remainder of the year, or, if you're quite happy with the, with, with these levels? Thank you.
I think that if you first look into the average interest rate that we have now from where we come from, from the derivative portfolio and from what we got when we bought Norrporten also, that we have to have in the back of our head, I think it's a good position. And you also have to have in mind that we have a negative interest rate in Sweden, and if this negative interest rate goes up to zero, that will mean that we will have a lower funding cost to be honest, since we have a stable floor in the bank agreement, and then you have derivatives to swap the duration. So it's a little bit up, but that's the real fact. Then if we look into the rating question...
You could say, as I said before, that it's our responsibility to look into that question. So where we are now, I think we do have a good access to all the funding sources that we need. But of course, the rating question is a more strategic issue, I think, for a company like Castellum. So we are looking into that. Yeah? Thank you. Any more questions?
Thank you. We have a question now from the line of Eric Granström of Carnegie. Please go ahead. Your line is open.
All right, I'll fire off my second and final question then. It's regarding synergies, and I guess it's for you, Henrik. Could you just tell us are the synergies running through as you had expected going into this year? And could you give us some guidance on what you expect for 2017 now as Q1 is completed? Thank you.
Yes, we're simply going through as we expected. And it's all about, mostly about personnel costs. We have them, actually in three parts. First group left the company in the last day of December. Next group was, the headquarters was, down in Sundsvall the last day of March. We are moving ahead to some of the personnel into the half year of this year. But of course, the cost for this personnel is still on the P&L for 2017. That means that you will see the most lovely effect coming in 2018. Then on top of that, you have the efficiency program that we had, that we amounted to SEK 30 million, of course, that will prolong for another two and a half years.
So yes, there's a long answer for your short question, but, short, one is, short answer is simply yes.
Thank you.
Thank you, Erik. Any final questions, please?
We have no further questions on the telephone line at this time.
I can see no further questions over the web either. So by that, I think we can close this conference call. The presentation is, of course, uploaded on our website, both in Swedish and English. By that, thank you and goodbye.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.