Earnings Call: Q1 2021

Apr 21, 2021

Thank you very much, and welcome, everyone. We will then have a short presentation and then, of course, continue with the questions. So if we take the first slide, please. I will try to shortly summarize this quarter. And it has been an active quarter for us of course as you maybe have seen. But going to results, we can conclude that we have very strong results, Actually SEK 4,000,000,000 in net income. We have shown the strength in the balance sheet, both with realized and unrealized value uplift. That together with the cash flow and in spite of the dividend, we gave a result for this quarter around SEK 4,000,000,000 in Swedish, and that's the strongest in the history of Castello. We have worked with the transformation of the portfolio. We it has been unusual quarter in that case because we have sold approximately 10% of the balance sheet With a good profit, we have already restarted the investments in some assets, but also by acquisition and mainly to new developments. And then I can conclude the resistance against the pandemic. Regarding that we are in the pandemic, we can conclude that both the market of offices and logistics in the Nordics Has been very resistant and so has Castello that it's mainly a product of how the portfolio is Consisting of the assets we are consisting of, of course, but also good work from the team that we was very Quick on doing adjustments and also in having a lot of, of course, talks with the tenants. So we can conclude now that we are in a very strong position. And It is also so that we can conclude that we continue with a strong cash flow as well as the strongest balance sheet we have ever had. And we are now one of the strongest investment platform for going forward in the Nordic sector. So if we go into the some of the figures on the next slide please. In this picture, it's easy to see the effects of the change of the portfolio. That gives a negative growth for the income from property management, but also shows The growth of 14% on the NRV and the effects on the loan to value that goes down to 41%. As said, this is the strongest balance sheet that Gattelem ever had. And then finally, of course, is the final results on the net lettings Under a pandemic, we had a surplus of SEK 40,000,000. And if anyone Have been asleep for 12 months. You then didn't know it was a pandemic in the world. You couldn't actually in the net leasing readout that it is. So I'm very pleased with the net blessing and the work done with the team. So with that short start, Ulrike, I would like to hand over to you. And then we go to the next slide, please. And we will not start with the P and L. Strange. Who thought that we should start showing how many of our assets has an Energy Performance certificate, The so called EPC ratings. And the reason we mentioned this now in this report and in this presentation is that this is the most common Question to us at the moment, and that is of course due to the EU taxonomy getting in place and becoming a reality for investors and companies. And to summarize, Castellan in this context, based on the knowledge we have at the moment, the criteria that will be used in order To classify a property as a green or not is the EPC ratings. And that is properties that has a ratings of A, B and potentially C is among top 15% in each country. Those assets will be green according to the taxonomy. And converted into Castellan's universe, That means that roughly 40% of our rental income is green and 38% of our value. And going forward in our quarterly reporting, this is numbers and information that you will have on a quarterly basis. But with that said, let us dive into 100% of our income and valuation. So please, the next slide. And I will spare you some going through all the figures on this slide, But we can at least state that for the first time in Castello, we have a fenugzegg a negative growth in income from property management, But we have the highest number on the last line in the P and L for any Q1. And the main driver behind this is Selling of our portfolio of roughly EUR 10,000,000,000 to Blackstone, which creates a realized change in value as well as an unrealized Change in value, since it confirms the yield movement on Logistic Warehouses as an asset class. But it also has a negative impact on income from property management because half of the portfolio we can We closed site and delivered in the beginning of February and the second will leave in the beginning of May. But this, however, gives also Castellan a really strong balance sheet going forward, and we will come back to that. Before going into the like for like, the Pure Property Management, I will also make you aware of our stake in EMPA, the listed Norwegian Property Company. And that stake has increased in the Q1 with roughly EUR 500,000,000 and is accounted for as an unrealized changes in value. And if you go to the next slide, please. The growth in like for like on a rental income basis and on a NOI basis is modest. And that is due to a more, you could say, soft and like for like rental growth in rental income, somewhat increased vacancies, Which is, however, suggested by lesser incentives. But the main trigger is also a much colder and snow with first quarter compared to the same period last year. And looking into different Segments, we can see that the trend from the end of last year is still here. A good like for like growth in Logistics and Public Sector and modest like for like growth in offices. A stable growth in retail and light industry is such a It's such a few assets, so that is have no big impact on the bigger picture. The Q1 has no COVID-nineteen impact or almost none on rental side, no bigger incentives. The rents for Q1 is on the bank account. The payment for Q2 looks really good. Liquidity relief has from the start of COVID-nineteen 1 year ago up until today been in total EUR 145,000,000 roughly, Of which 40 is still active? So there is not so much new channels that needs help. It's more that the first one still needs help, but the main part has shifted back towards quarterly It's quarterly payments or invoices. And at the moment, we have roughly a handful discussions Regarding renewed government, the renewed government rental aid package that has been announced. And the government has brought life in, you could say, the last year's rental aid package and has decided to apply that for the Q1 this year. There is some small changes and that is that 100% can be given in incentives from the landlord. And then the landlord applies for 50% of that 100%. There is also Maximum compensation from a tenant point of view on a route level. And that Roof for ceiling or what you could say has another tricky part and that also is that From that number, we need to or the tenant need to deduct all the Other agents that they have got due in COVID-nineteen and or based on COVID-nineteen. And additionally, the government has signaled that its report will be extended for April to June 2021. But As we know, no decision has been taken. And then Henrik, the market? Yes. The market with oil or without And then, substitution from the government. Can we take the next slide, please? Yes. So we are in the rental market, Matt Leasing. Thank you. Yes, the next coming slides will show where we think and where we are on the rental market, both on offices as well as on logistic. I will comment on that later on. On the first slide, you can see it is SEK 40,000,000 in positive net leasing. And of course, that doesn't reflect that we can't see here, as I said, that we have a pandemic in the world. If you Compared with last year, we also saw that actually that is a little bit less. But in that 99 We had last year, it was actually a very large lease we've signed in Skane in South. So I should say this 40 Consists of a normal year Q1 on the existing portfolio and then a good normal leasing out on development historically. So more or less a normal quarter. And so that's good. And You can also conclude that we'll recast. We see very little effects about pandemics. We have more or less no bankruptcies. So that's the strength. And we did very strong quarter also when it comes to this Leasing activities, and we know that we've benefited from it in the coming years. So from my view, this proves that we have a portfolio of very good composition with different tenants, And we are benefited from it in this situation simply. Take the next slide please. And then we go into the rental market and how is it now? And I can honestly still conclude that the office market in the Stellum land, if I'm allowed to say so, is strong. We can conclude that it comes to pricing. There are no changes done on market rents. It's only small adjustments done that we have increased some incentives on new leasing in some areas, And that is more or less 10% or 15% up in the softening on the incentives. And that's partly in the portfolio, not 100% of the portfolio. It's in more or less the central part of Sweden and a little bit more in South then with any interest. And we can also conclude in this picture that there's no drama when it comes to net takeout. You can see the volatility in the South, in Malmo, and it's always like that because of the market is lower, It's smaller and so it's no drama there. So the conclusion is simply that the market is very resistant against the CV19 and in good shape. So and if I move then to logistics market, We can see a strong market and huge demand for new efficient spaces. We can simply divide the market into 2 categories when we're talking logistics. One that could be placed in multiple locations and are normally very large in new developments. In this category, I don't foresee a large uplift on the rents due to the fact that the adjustments on the yields That will put pressure on rents actually going forward because it's a huge profit still in due developments. The added category is very interesting and that will be affecting be efficient to places close to large 50 is where it's simply lack of land. In this category, we'll see rents about 1,000 grams a square meter. We've already seen it. That will It's still gone and it's very interesting to be an investor in that type of category. It's Therefore, we have invested in new spaces of land, both in Stockholm and Gothenburg and also as in the Malmo area. And we'll increase the volume in new developments. So that's in the plan for the future years. And if we take the next slide, please. Then we have a smaller portion of the income, but a very important one for the research and development. And we have this quarter acquired 3 more new sites from Yuma with a good deal. So we simply have 6 facilities now in Stockholm and Uppsala and Turkline 9 facilities ongoing in Sweden. We will have another one in the year end. According to your questions, we will at least be at 10%. And I think that we see The co working and flex space solution are extremely interesting for the future, and it will be one part of the service concept that we can provide to our customers. Therefore, the plan is to continue the growth of this part of the business and make it a normal offer into all our cities and to all our clients going forward. And with that, Ulrikia, I hand over to you and balance sheet. On the next slide then. The balance sheet of Proselem is stronger than ever with an LTV of 41% and a debt charge of 39 After getting the liquidity of EUR 4,900,000,000 from selling Blackstone, and that is now accounted for all the other assets. And roughly SEK 1,000,000,000 from selling FedRIN. The LTV will be around 30 8% and the debt portfolio will be around €36,000,000,000 And that means that Castellum has Really strong financial position going forward. The NAV in a property company can be measured in many different ways. In costarum, we focus on the Equa NRV and that continued to increase and was at the end of March SEK 220 per share, an increase with 14% compared to 1 year ago Like dividend given to our shareholders. And then the market again, Henrik. And next slide please, you see the property market. And we can conclude that it was Transactions in the Q1 in Sweden of SEK 44,000,000,000 is more or less in line with last year, but The number of these increased. We see the sentiment among investors in the Swedish property and the Nordic property market Remains very strong during this quarter. And there is a great deal of interest in capital for profit and investments in the market. So strong, Sibka, it's one word. In the Q1, And we see also a lot of transactions done in the warehouse and logistics segment and we have yield adjustments there. And we So see that of course in the uplift of our valuation. And if you take the next slide please. And you have seen this before and I've described this many times. It shows the 17 largest developments And this is, as I normally say, the backbone on investments for Castello. It's not one development. It's many. And it It shows here the 17 largest ones. And therefore, we're lowering the risk in the development pipeline, and we have also a very High degree of pre let volume in here. So We can take some examples on ongoing developments on the next slide please. And here you see for the first on the top right hand side, you see the field development. This is a research and development site on the old airport in Zeeve in Gothenburg with a government sponsored So tenant with a long lease up to 15 years, it's 100% leased out. This is also the start of a permanent research and development site because So sustainability transportation systems. So we are 100% certain this will attract other interesting tenants in the future. And this is just the first and small start. The second one on the right hand side is the investment for the immigration services in Sweden. So also again, government contract, long contract for special purposes in this asset. And the third one is our next Phase of logistic asset in North Stockholm, in Grondahl. All in all, the ongoing developments all at this moment is approximately SEK 5,300,000,000 in volume and are already pre led up to 84%. And the yield, The yield is attractive. It's approximately 6%. And since it's so much government and long contracts in this portfolio, it will of course create Interesting value when they are finished and completed. So we can take the next slide please. And then you can ask yourself, okay, are it's then done? No, no, no. We have created 1 of the largest Development pipelines in the Nordics, I think, is the biggest one that actually are in a real estate company. And then when I say that, I don't mean the developments that are on the drawing board We're in the headquarter of Gothenburg. It's something we actually negotiated locally and are waiting for zoning plan and or tenants simply. This is something we think we can start Between 2022 2025. And to give you some examples of this SEK 20,000,000,000 portfolio That carries a profit at least 30%, and I think I'm cautious saying 30%. But some examples then. The first one on the left hand side is North Stockholm, where we have the capacity of building another 45,000 square meters of And our logistics. And of course, we have the more capacity in the airport in Sarve. I said it many times, But it's 800,000 square meters that are under zoning plan there. That's not on the picture. On the right hand side, you'll see Infinity That we're talking about earlier, and this is the next development of SEK 1,700,000,000 that are built in Hargasthaden in absolute lead the border of the city of Stockholm, an extremely interesting location. And then the last one Is the absolutely best positioned in Gothenburg, where we have the building right and it's under zoning For approximately 30,000 square meters, new extremely good positioned offices and with it, we'll have a subway station, Anrik, for trains. And next door to the Opera, Gothenburg. So this is just some example of the capacity for new construction that Constellum holds. And then Enrique, how will we finance this? Yes. You could say that This has not been with all the liquidity flowing into Castelmo, you could say that Lending new money at the moment has not been our biggest or most active actions. But the funding conditions in the market, you can say, are very good in every aspect, good supply, good levels of stable levels and margins. At the end of March this year, we had roughly EUR 90,000,000,000 in unused credit facilities, Of which EUR 8,000,000,000 was back up for outstanding CPs. But with further EUR 6,000,000,000 in from selling to Blackstone and Ferry In Q2, that volume will increase. So that is our situation at the moment, a very, very strong financial Professions. So very short. So finally, Henrik. Okay. If you take the next slide. Shortly, Looking forward, as we said in the beginning, the office market is, I should say, surprisingly robust and resistant. I can honestly say that it's better than I expected to say actually half a year ago. We 100% of course understand It will affect us, but I don't think you should pencil in too large effects in our cities Because the low market vacancy, the need for both rebuilding offices as well as being And taking care of simply when 80%, 90% of the staff is coming into the offices in midweek, I don't think you should pencil in 2 big effects, but that is to be seen. Going to the logistics sector, It's under development. And I've said it so many times. Its main issue is the opportunity and the problem, the actually lack of structure in the Nordics. Now when the e commerce are expanding into the Nordic cities, the society with old cities and sometimes weak balance sheet on some municipality side makes it more difficult, but also an opportunity for Castello to construct new logistics areas for distribution into the city's area simply. So Castellum going forward. As we said so many times During this presentation, we have never had a stronger balance sheet. It means that we never had more investment capacity. It's a golden opportunity for us to continue to grow in the Nordics, and I'm 100% certain that the company will show that in next coming years. I don't and don't forget, we also have the strongest pipeline of developments and that we are that we shouldn't play. This SEK 20,000,000,000 is nothing we signed up on the headquarter. It's done by hard work, Years locally and now have the possibility to build for the tenants. This is assets that Going to be attractive and would like where the tenants simply would like to stay going forward. These assets that is going to be built and rented out in the next coming years simply. So simply, the Nordic markets are strong, stronger than expected and Castellum is stronger than ever. Thank you very much. Question. Our Our first question is from Erik Braunstrom from Carnegie. Please go ahead. Thank you very much. Good morning. I would like to start by asking a few questions about the rental market. You obviously had quite good net lettings in Q1. But if we look at Stockholm, The net netting in Stockholm specifically was negative. And at the same time, you mentioned that the rental market for Stockholm is quite stable. Could you perhaps Explain the difference there a little bit and what you see in Stockholm specifically? Yes. I see the I think you have to divide Stockholm City in 2 different parts. The absolutely CBD, we know that it's volatile. We know that it's a SEK 9,000, SEK 10,000 a square meter on top brands that may be going to be adjusted. Our portfolio is just In the outskirt of the CBD and we are top brands around 6,000. It seems that we can hold it right now. And of course, we have to be cautious on saying that, But we are slowing down a little bit on the renting activity. But as said, it's more stable than I thought. And then you go in the first and second ring. I can't see effects on the market rent and offers we're going out with. So I Stay with my state that it's more stable and in line with earlier. The net lettings, I see as more a quarterly effect than anything else in the Stockholm region. Okay. Very clear. And then a similar question regarding Gothenburg. Bert, I noticed that you, to some extent, downgrade the rental marketing, Doctor. Bert, in Q1 versus Q4 and have noticed So weakening, could you perhaps explain a little bit of what you're seeing in Gothenburg? Yes. Yes. I think it's like it could be generally, but we For our in our universe, it's Gothenburg that's affected. We have some unrented developments in the market. They are affecting it very locally and would like to rent out their developments of course. It's Always a short term adjustment in markets when that's happened. But if you look at overall Vacancy rate is still very, very low in the market. So I'd see it as extremely local and I mean local local FX in some submarkets because of the developers want to lease out their new developments that are not leased out. So that will have a softening effect of that very submarket local submarkets for some time. But otherwise, extremely stable market in other words. But that is should we mention. Okay. Thank you. And perhaps it's just me that is not understanding specifically. But on Slide 6, could you just Explain the difference between the like for like development on those two tables in terms of Income, I assume rental income as well as Yes. I thought that You see the difference between 1% and 4 0.9%. Just explain that. Yes. I can explain it very easily because the table on the presentation It's wrong. That is the property valuation yield. So we will correct that and put a new presentation on our website. Okay. Now I get it. Okay. So 4.9 percent, yes, that makes sense from a yield perspective. Okay, very good. Then it's just not me going crazy. No, no, no. That's always a good thing. And then perhaps also with regards a little bit to the rental market, The divestment you're making in Copenhagen, a large proportion of that property is becoming vacant. What's the rationale for you selling a property that is that has, in my view, some sort of potential in terms of Rent a lot with store development. Yes. Agreed. We normally wouldn't do that. This is a very special case Because of the structure in the house, we I think we have been drawing on that asset since we bought it from Norborden. We conclude that we need to be clever and back off if we don't see the returns that we can find in another part of the portfolio. Technically, This is one tenant asset. It's a lot of lab areas and we don't simply see We don't simply see the returns that we can create. And therefore, Before we hand it over to the market and say, if anyone can do that, please do it. But we won't likely to reinvest something somewhere else. Definitely answer. And you should. Okay. Yes, fair enough. Then I have 2 more questions. One is regarding the balance sheet. You mentioned that it will continue to strengthen following the cash injections from the divestments. What will you do with such a strong balance sheet? I mean, you can't just adjust it simply by doing share buybacks or even having a project The portfolio of SEK 4,000,000,000 per year. Should we expect Castellum to become more aggressive in terms of the transactions market as well? We're discussing here how who should answer, but let's try to do this. I can take the transaction market. We definitely would like to see opportunities in this market. We Can, of course, conclude like everyone else, it's we are in a strong market. But we have a pipeline not only of Fantastic development. We also have an idea of what we can invest in. And I promise you that we're going to be active on the market and hope very closely, some deals that the shareholders would like. Okay. Thank you. And then my final I'm sorry. No. The cash needs to work, so to say, and that is the ambition. So I think this is an excellent opportunity for the board and the management to have a discussion about this. And we also launched the buybacks today, to be certain. Yes, absolutely. My final question is regarding your holdings In Entra, you described it as an interesting piece of the puzzle in future structural transactions. Could you explain what you mean by that? It means that we haven't simply taken any Decision how we will treat that position. Honestly, I mean, it's a fantastic company, Entra. I've said it many times and That hasn't changed in any way. But it's simply up to the Board to decide what should we do. I see it as a good piece of puzzles that could be used in the future if we would like to. So it's simple, open for discussion in the board during the before summer, and let's see where we're coming out of 2. Okay. Thank you very much. Thank you for taking all my questions. Thank you. Our next question is from Markus Henriksen from Pareto Securities. Please go ahead. Good morning, Henrik and Ulrike. I just have a follow-up here on the balance sheet. How do you view the possibility to target the Higher credit trading from Moody's to reach the AA1. You talked a lot about the ramp up in investments and transactions. How do you view that? Yes. I think that we are satisfied with the ratings we have today. I have said that earlier. And based on the portfolio combination and everything, so there is no Ambition at the moment to move towards a high rating that Castellum has today, we are rather comfortable with that one. Question. Okay, perfect. That was my question. And there are currently no more audio questions. I will hand the ball back to the speakers. Thank you very much for listening and we hope to have some This is the debate in the summer again. Thank you very much. Bye. Bye.