Welcome to the presentation of Castellum Q3 report. 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. Now, I will hand the conference over to CEO Joacim Sjöberg and CFO Jens Andersson. Please go ahead.
Good morning, and welcome everybody to this Q3 presentation, and thanks for joining us this Friday morning. We jump straight into the figures, and Jens will elaborate on the numbers further on in this presentation. But in summary, Castellum's core business continues to deliver stable results. Our total income increases by 9.7%, mainly due to indexation and completed projects. Income from the property management decreases mainly due to higher interest costs, while NOI increases with 10, 10.5%. Our financial cost increases by approximately 55%. Total changes in property values in the year so far, January to September, is 5.4%, corresponding to some SEK 8.2 billion.
The average yield requirements now sums up to 5.19%, compared to 5.01% at the beginning of this year. The net leasing is positive for the second quarter in a row, +SEK 15 million. More on that later. Slightly decreased economic occupancy rate, mainly due to divestments of assets that were fully let at the time of disposal. So, to those of you who are new to us, Castellum is one of the largest listed property companies in the Nordic region. We're a fully integrated company with local hands-on presence where our assets are located. The property portfolio is concentrated in attractive growth regions in the Nordics, and we're exposed to the robust market in Norway, via our associated company, Entra. On the map, you can see the locations of our properties.
As of last of September, our property value sums up to SEK 168 billion, including our share in Entra. Of those, 168 billion, 73% is located in metropolitan areas. 73. 47% of our square meters more is sustainability certified. We have a yearly contract value of approximately SEK 9.5 billion. Jens?
Yes. Income is showing good growth, with a 9.6% increase in like-for-like holdings. When we exclude currency effects from our portfolios in Denmark and Finland, the total rise in the like-for-like portfolio sums to 8.6%. Of total growth in income, the like-for-like portfolio stands for approximately 67%, while completed projects stands for approximately 30%. The growth is weighted down by transactions. Completed projects have made a significant contribution, boosting the NOI by SEK 213 million compared to the same period last year. Notable projects include E.ON new headquarters, and the new court in Malmö, and the police building in Örebro. All green-certified, long-duration, high-quality assets, improving the overall portfolio quality. Completed projects, together with the like-for-like portfolio, are key drivers increasing the NOI, standing for 95% of the growth.
Direct property costs have risen with 10.4% and 12.4% in the like-for-like portfolio. The increase is significantly lower for the third quarter, attributed primarily to the adjustment of property taxes and lower electricity costs in the third quarter. Joacim.
Okay, so, our tenants. Our exposure to individual tenant is low. Our 10 largest tenants stands for less than 15% of our total contract value, and no tenant generates more than approximately 2%. Our strong tenant base, with many of our larger tenants being publicly funded operations, approximately 25% of our total contract value stems from public sector tenants, and the largest tenant we have is actually the Swedish Police. The average lease duration as of the last of September is 3.8 years, and ABB, our second-largest tenant, has indicated that they will leave approximately 40,000 square meters in our portfolio in Västerås. No termination has been made, but contracts expire in 2025.
However, it's expected that this will be prolonged throughout 2026, and ABB continues to be an important tenant for Castellum also in the future. When the ABB leases eventually are terminated, we see good potential, both location-wise and out of an increased rent perspective, as the area is the center for the electrification boom in Northern Europe, with a significant presence from market leaders such as ABB, Alstom, Bombardier, Westinghouse, and Hitachi. So, looking at the rental income development, it's increasing despite the volatile net quarterly figures. This stable increase is shown on the graph in the dark colors, and we have a net leasing of plus SEK 15 million for the last quarter standalone.
That's the second positive quarter in a row, after the first quarter of this year being negative SEK 52 million. We have a couple of very good leases, large square meters, leased to a couple of logistics companies in Stockholm and also some med tech companies. So our net leasing for this year so far sums up to negative SEK 16 million, and we have a rolling 12-month summary of minus SEK 8 million. We see a continued stable demand from our tenants. Contracts, however, take somewhat longer time to negotiate than conclude. We see no clear trend of tenants taking smaller spaces, rather a combination where some expand and some decrease space. Bankruptcies are higher than previous years, but from a very, very low level.
Bankruptcies in net leasing January through September sums up to minus SEK 44 million, which is less than half a percentage point of our total lease value. Bankruptcies are dominated by padel tennis courts, and that's a bit narrow, but that's the case for this year so far. That leaves us with almost no exposure to padel tennis tenants left in our portfolio. Luckily, these sites are in good locations with high ceilings, and we making them good candidates for city near storage or warehouse customers. Jens?
Looking at property values. During the period January to September, property values decreased with 5.4%, equivalent to SEK 8.2 billion. All properties have been externally valued in the first quarter, and the large sample will be tested again in the fourth quarter. Completed divestments of SEK 3.8 billion give further support to our valuations. From July to September, the values declined by approximately SEK 1.5 billion. This decline during the quarter is mainly attributed to specific properties expected to be vacated in 2026. Average yield requirements now sums to 5.19%, up from 4.75% end of the third quarter last year, where the valuations peaked out.
Since the end of the third quarter of 2022, Castellum has written down its directly owned properties with a total of SEK 15 billion, corresponding to 9.5%. Continued high interest rates and inflation will continue to put downward pressure on valuations. However, CPI indexations will mitigate most of the effect over time. Since the end of 2021, underlying interest rates have risen sharply. However, there is no absolute correlation between yield requirements and underlying interest rates, which is so far supported by sales prices continuing to be more stable than many have forecasted. On aggregate, till the end of the third quarter this year, we have sold our properties 7% below the peak valuation end of third quarter 2022. Here are some highlights from the financial side.
ICR, rolling 12 months, currently at 3 times in line with our financial policy, however, is expected to fall slightly below next quarter. Rights issue will continue to strengthen the ICR going forward, while rolling into the 12-month figures. Higher interest rates and expiring interest derivatives will, on the other hand, put continued downward pressure. An increase in the underlying interest rates by 100 basis points would increase interest costs of SEK 236 million compared to SEK 657 million, if the entire loan portfolio was unhedged. Over time, we will bear the full weight of higher market rates, though well protected the coming two years. Average debt maturity improved, thanks to new loan agreements of SEK 8.3 billion during the quarter. Share of unsecured assets have declined during the year due to an increased secured lending.
Please observe that the secured debt to total assets only amounts to 14%, and that all undrawn revolving credit facilities already are secured and drawable. Please also note that credit rating from Moody's at Baa3, with stable outlook and currently no indication of any negative action to our best of knowledge. A few words on loan-to-value. The loan-to-value has improved to 37.8% during the year. The rights issue has been the main contributing factor, followed by successful divestments and funds from operations. Changes in property values of SEK 8.2 billion have, on the other hand, put upward pressure on the loan-to-value. Average interest rates, 2.9%, up from 2.6% at end of 2022, despite increasing underlying interest rates during the year by almost 1.4%.
Excluding cross-currency swaps, average interest rate amounts to 2.5%, which is fairly good. Backed by strong Nordic banks, we have successfully increased our secured borrowing during the year at reasonable prices, well below the bond curve. Nordic banks remain strong and supportive throughout all segments in which we operate. In addition, satisfying to see is that longer duration is more available today compared to a few years ago. Looking into debt maturity and also looking into the debt capital market, that is somewhat more liquid, with one new bond issued during the quarter, SEK 1 billion at 215 basis points, two-year duration, and another one after the end of the quarter, SEK 400 million, somewhat longer, 2.6 years, at 200 basis points over STIBOR.
Bond spreads have tightened following the issue, approximately 100 basis points below the entire curve, compared with July this year. Available cash and unutilized revolving credit facilities amounts to SEK 25.5 billion, covering all the bond maturities until second half of 2026. Reduced project investments and no dividend this year will free up further funds. All outstanding bonds could potentially be repaid, given non-aggressive assumptions for future interest rates, also adding recurring earnings and reasonable divestments throughout the period. Our expectation is that the debt capital market continues to recover and hope to return to the Euro bond market early next year. Nonetheless, no one can say for sure, therefore, we still prepare for tougher times in order to safeguard a Baa3 rating, and in the long run, strive for an upgrade. Joacim.
Thank you. The seven largest ongoing projects in our portfolio are listed on this slide. We have an average occupancy rate of 83% and a total rental value of SEK 195 million and an average lease duration of approximately eight years in those projects. For projects that are ongoing after this year, the average occupancy rate is almost 100%. During this year, we have, as mentioned, completed seven projects and they contribute with a total rental value of some SEK 270 million. The occupancy rate for those are 92%, excluding the court building in Jönköping called Götaland that is sold.
The effect of all these rental values as of 2023 amounts to approximately SEK 175 million that will be shown on this year's figure so far. And during the last quarter of this year, another four projects will be completed with a rental value of an additional SEK 114 million. However, the full effect of these rental values will not be visible until full year 2024. We have approximately 560,000 square meters in our project pipeline that can be started within the next five years, given improved market conditions, good lettings, and good progress in our development plans. Most of the volume is related to development of logistics assets. And speaking of logistics assets, we continue to create value through our projects.
We have had an historic yield on cost for the last three years that varies between 5%-20%, with an average of 10% yield on cost.... compared to our valuation yield of almost 5.2%, the development projects have consistently over-delivered compared to acquisitions in the market. As mentioned, we have completed seven projects, and Jens already mentioned the court building in Malmö, but we won't see the full effect of all these new projects until next year. The pictures on this slide show our beautiful new buildings, and one is for the police in Gothenburg, and the other one is the battery manufacturer, Northvolt's plant in Finnslätten, in Västerås. And talking about the electrification, the climate change is mankind's single most important issue.
All other questions will become void if we're all dead. Sustainable, in all aspects, is something that is the main driver for us at Castellum. The investments must create value to allow us to continue investing. And that means saving money, increasing customer satisfaction, and meeting market requirements is essential for our sustainability work. 38% of our turnover is compatible with the climate change mitigation criteria of the EU Taxonomy. A major focus is on reducing energy consumption, and in the comparable portfolio, rolling twelve months, we have made savings of approximately 6%. Castellum has installed 97 solar cell systems within our 100 on solar program. The installed systems produce electricity corresponding to some 14% of our total electricity consumption.
There are several major solar cells that have been completed in the last year, and we look set to achieve our target of installing 100 installations by 2025, well ahead of that schedule. So we have a green designation from Nasdaq, and once again, we have met all the conditions for securing that condition. And we have some 58% of the revenues and 83% of the investments meet the requirements for being considered green by Nasdaq. There's another award that we're quite proud of, the GRESB Award, and for the eighth consecutive year, we've been recognized as a global sector leader, and we're scoring 100 points out of 100 in the category, sustainability in projects. So lastly, some key takeaways.
As Jens mentioned, we prepare for continued challenging times, but our core business continue to deliver stable results, which gives us a platform for continued growth when that time comes. We have a stable quarter with positive net leasing for the second quarter in a row, and we have income from completed projects during the period. We continue to create value through refurbishments, new projects, and sustainability work, but we do that at a somewhat slower pace than historically. We have a very sound balance sheet with sufficient headroom to mitigate turbulent markets. And the sustainability works remains in focus and energy efficiency in initiatives that will pay off. So that completes our run-through.
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, and good morning, Jens. I just got into the call, so bear with me if I ask something that you've already given the answer to. But first of all, regarding net letting, you had positive numbers again in the quarter. I remember in connection with the Q2 call, I think I asked you a question about what you're expecting, expectations were for the rest of the year. Are you just as confident right now as you were at that point in time, regarding being able to generate positive net letting, also during the remaining part of the year?
Yes, yes, we are, as a matter of fact, but of course, I mean, the positive is above zero. So I can't, I won't state anything more than we're aiming for something above zero. But the market's looking good.
Perfect. Thank you for that. Second question. Electricity subsidies, how much of an impact did that have in—had in the third quarter? We've seen some companies reporting net positive figures from that.
Insignificant portion.
Did you have anything of that in the second quarter? Remind me on that one.
So- sorry?
Did you have any such kind of impact in the second quarter?
No, no, no. I mean, whatever we get, we will pass on to our tenants.
Okay, so there's no net effect from that, of any material size, at least.
No.
And then jumping to a different area, transactions. We've seen you, you announced a, was it a SEK 900 million transaction a few weeks ago? Is there anything more in the, in the pipeline in terms of, that you're working with, in terms of any size, in terms of divestments?
I mean, with the size that we have and the local presence that we have, there's always divestment discussions going on. Whether they will materialize short term or not, I cannot say. But we are selling because we want to assets that are not strategic to us or where we get too good a price to say no. So we are not selling any assets because we need to, because we don't just... but we're doing it because we want to. So I think that we've established so far that we're delivering on our strategy, but whether we would sell more assets this year or not remains to be seen.
Okay, perfect. Thank you.
The next question comes from Erik Granström from Carnegie. Please go ahead.
Thank you, good morning. I would like to start off asking some questions on your development portfolio. You mentioned that you've had an average yield on cost of 10% over time. What can you say of the current portfolio running, and what do you expect going forward? Can you still maintain that kind of an average in this sort of inflationary environment?
It's very hard to say. We have our internal thresholds, and we try to uphold them. Whether all of those will be at the same level as historic, it's very hard to say, but we certainly have the ambition to stay on those levels.
But given that market yields are coming up, does that mean that you're still expecting your returns versus sort of the market valuation to come down a little bit as we've seen pressure on market yields, or can you compensate in terms of rent towards tenants for new projects?
I mean, it remains to be seen, but at the same time, we have invested some SEK 5 billion in 2022 in CapEx and projects, and we have communicated SEK 4.6 billion for the full year 2023. And we have also said that we will try to cut that in half next year. So of course, we have a big pile of potential projects, and of course, if we choose the best ones, most likely we will not choose the ones with the worst return. But at the same time, we also have to be a bit... I mean, we have a lot of larger tenants, and we want to have a good relationship with them. From time to time, we have to choose projects with lower returns in order to safeguard relationships.
Okay, fair enough. And sort of with that in mind, do you expect for next year, looking into what kind of indexation and CPI we can expect? We're not there yet, but do you think the broader tenant base will be able to absorb a CPI indexation, or is this a discussion that you've started with tenants already now?
I mean, this, this has gone from a non-issue to, to an actual issue, with, discussing with tenants. So far, we have seen no, sort of, direct actions in, in terms of, of, tenants being unable or unwilling to, to, adhere to the contracts that they've signed. But of course, as time goes by and, and when, when these constant indexations become a reality, weaker, tenants may, may have an issue. But so far, we haven't seen any of, of those questions. Whether that will change in the future is very hard to say.
... Okay, and my final question is regarding the footprint that you have right now. You mentioned that if you're divesting, you're divesting because you want to, not because you need to. And but in terms of the footprint that you have currently, do you feel that the portfolio is optimized for, let's say, the next three years in areas where you would like to be? Or do you think that there is some need for Castellum to consolidate the portfolio further?
No, there's no need for us to do so. I mean, we have a very well-functioning maintenance and asset management operation in place. We like the areas where we are, but of course, given the constraints on the financial markets, we need to make sure that we allocate our resources, both the personnel and our finances, to the areas where we'll get the best returns. And that is something that we are constantly evaluating, meaning that some areas where we are today might be weighted down, and others might be weighted up. But I wouldn't say in a three-year period that our portfolio will have changed dramatically, but rather completing the trimming that we've been talking about earlier.
Okay, good. Thank you. Those were my questions.
The next question comes from Markus Henriksson, from ABG Sundal Collier. Please go ahead.
Thank you, and good morning, both. I came in a bit late, so I apologize if some questions have already been asked. First off, one on investment. You highlighted last quarter that the main condition was the reopening of the debt capital market. You've been quite active here in Q3. Is that enough for you? Going back to what you said in Q2, or should we expect you to remain cautious for the time being?
Yes, of course. And we will remain cautious. That's the short answer. And, of course, we are glad to see that the SEK bond market has opened up and that spreads have tightened considerably. We've been able to issue bonds, and we still see interest in buying our bonds, and therefore, if the right opportunity arises, we will issue again. However, we want to see that the curve continues to tighten, and also important for us is to actually be able to raise longer money in the bond market.
Coming back to that last, you highlighted earlier in the call that you might be able to go to the Euro bond market in the beginning of next year. What is it that you're seeing in that market or hearing from the market?
I mean, we've seen transactions being carried out by real estate companies in the Euro market of late, and therefore, it's not unreasonable to believe that we will be able to issue in that market again. I think we've done everything that is necessary to separate us to the group of issuers with a strong balance sheet. And looking a few quarters back in time, people looked at the Nordic real estate market as one entity. Now, it's becoming clearer and clearer that there are different groups, and we belong to the stronger group right now.
Thank you. Very clear. Then a question here on electricity costs and hedging. Could you give us a bit of an update on where you stand today in terms of hedging, average pricing, krona per kWh , and when the hedging is expected to wear off? Thank you.
I mean, I mean, we bought a lot of expensive energy contracts in September last year. The effect, we see no effect from those acquisitions of contracts in the third quarter. I think that we are through the worst period. However, we still see higher prices. Looking into next year, the average spot price is around 70, or 7 cent, or 70 öre, roughly, per kWh . You should compare that with a price that was much, much higher last year, the same time, and therefore... I mean, these things vary a lot, but we, of course, noticed that the gas reserves in Europe are pretty much full. The weather, it has been throughout the year, relatively good, out of an energy perspective. So I think that we can continue to see that, energy prices for Castellum and most others will continue to decrease.
... the portion of energy that we actually buy in the forward market amounts to roughly 80% the coming year. But that also varies over time, depending on prices and opportunities that we see.
Thank you. Very clear. A follow-up on that, how should we expect you to hedge going forward? Is it 25% every quarter or once a year, or, or how are we going to approach that?
I mean, I don't want to make it too strict, but the general rule is 80, 60, 40. So 80% should be hedged the coming 12 months, and then 60% the coming 12-24 months, and then 40% the coming 24-36 months. That's the methodology that most listed real estate companies in the Nordics use, as far as I'm aware.
Perfect. Last question. A question on Entra. You are defending your investment grade rating in, in Castellum. Is that something you, as a main shareholder in Entra, think is the right way forward also for them? Thank you.
I'd rather pass that question on to Entra. Actually, we remain shareholder in Entra. We're happy with the management and the board's decisions on Entra's finances, but any questions relating to how Entra will operate is better directed towards Entra.
Thank you. And also, maybe a last follow-up on central admin. It continues to be quite high. We've seen quite a lot of one-offs in recent year, post merger with Kungsleden. But could you give us some update on efficiency? We touched a bit upon that last quarter, questions in the Q&A. But what could we expect from central admin going forward? Is it going to come down? Is this a sustainable level where we're right now, adjusted for the one-offs we've seen recently?
No, we're aiming to reduce the central admin. I mean, Castellum is now the result of a number of large transactions and mergers, and of course, there are long-term synergies to be taken out that has not fully been realized yet. There's also a shift in the market, as everyone is painfully aware, and that means that growth is slower, and that we need to make sure that our resources from a central admin point of view is allocated to the areas where we actually need them. So we have an ambition to reduce central admin and to be cautious in incurring costs.
Very clear. Thank you for taking my questions.
The next question comes from Alexander Totomanov from Green Street. Please go ahead.
Good morning, and thank you for taking my question. You mentioned that Castellum renegotiated SEK 170 million worth of leases during the quarter. Can you give us an indication of the rent reversion those negotiations? Was it positive, negative, about flat?
I think it's fair to say that it's flat compared to the market and the CPI indexation. The take-up, I guess, varies highly between what kind of assets we're looking at, but we don't see any downward pressure.
Yeah.
On rent levels at all.
In your view, how has that number moved since the start of the year? You're saying that, let's say for office specifically, about starting the most recent quarter, was it a positive rent reversion in Q1?
In Q1, I'm not sure.
Not specifically Q1, I mean, in general, how has the number moved over the year?
No, I mean, we are-
Mm-hmm.
The market-
Mm-hmm.
is following the CPI indexation.
Mm-hmm, mm-hmm.
except for the very small areas where we have higher vacancies and where the demand is weaker. There, of course, it's tougher to follow the high indexations. But the take-up in general is higher-
Mm-hmm.
-and we see strong demand, especially in office-
Mm-hmm
and especially in attractive locations. So we don't see any of the downward pressure or the vacancy increase as you see, for example, in North America.
Mm-hmm
or, or in some parts in the U.K.
Mm-hmm. Thank you. Thank you very much.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
We actually have a couple of questions on in the chat. One relates to our derivative portfolio. I'm not so sure that we're able to disclose all of those issues, actually. Is there anything else that sort of we're able to? We have a question on budgeted CapEx for developments the coming year. We've been quite vocal about the fact that we're reducing our investment portfolio, and we're. The plan is some SEK 2.5 billion next year, and we aim at staying on that level. That depends, of course, on whether we can utilize the projects to the yield requirements that we have internally. So I guess that's, there's no more questions.
So we thank you all for spending this morning with us and say goodbye.