Earnings Call: Q2 2021

Jul 15, 2021

Thank you. Thank you very much. Yes, welcome everyone. So we're going to have this half year report and we can start with taking the next slide please. So this first half year in short, I would like two comments a few things before we go through it in detail. First of all, we now have created a Nordic platform with all our assets in Sweden, Finland, Denmark and also including our ownership in Entra as is now over 18%. So indirect or and indirect gives us a portfolio of approximately SEK114,000,000,000 in property and then including the transactions done after closing and the 18% of the Entra assets. We can also conclude that we have done the strongest half year report pivot with SEK 5,500,000,000 in result. We have shown the strength in the balance sheet, boat in realized and even unrealized value uplifts and that together with the cash flow and despite the dividend gave us this result SEK 5,500,000,000. And then it comes to the markets, the rental market, it is a strong rental market. We can there conclude that both the market office and logistics in the Nordics has been very resistant and I should say it's now waking up. It is proven in both rent levels negotiations and net leasing. And lastly, the 4th one, I mean, we have seen an active and very attractive real estate market. The transactions volume is high, over SEK 220,000,000,000 in transaction the first half of the year in the Nordics excluding Norway. The value creation is there through new record low yields and that we can see in several cases. So strong markets is simply the word you can use for this first half year. If we take the next slide please. On the next coming slides, I will show how we see the rental market on offices and then I will comment on the logistic market as well. I can honestly still conclude that office market in the Castellum country or land is strong. We can see that in the market generally, there are no changes in market prices or vacancies. We can see that the market is getting more and more active and that we have stable market levels in all office markets. The negotiation for us gave us an uplift of 12%. The vacancies, guess. They are stable in our accounts. And the new developments early trades 1% of new offices into the market and I will come back to that because The Swedish government, for example, has a GDE prognosis of 4.7%, the Danish mark is 5% and so on. So the conclusion for me is that the office market is waking up and that we will see growth in the office market that we will benefit from. And then talking about this discussion about changes, it will come changes in the office market. When we're done now in the next year, we know that 90% of the staff would like to be back to office and are expecting to do so from August and forward if we're talking especially about Sweden. We can see that it's not only one solution for the customers or the companies that we rent out to. It's flexible solutions. And it goes from flexible solution for office where the staff not going to be there 100% and staff simply demanding back for the companies. We are already now building more social areas And oilfield, talking about the contracts, discuss everything with 2 companies who would like more than more or less 100% service for their employees, 2 companies that don't want any changes at all. So the conclusion is that every real estate owner need to take decisions on what they should do including their offer into the market. Step. And lastly, on this subject, I mean, area reductions. It's a lot of discussion over the area reductions. We can see that more and more people are working from home. But my conclusion is anyway, there will be no more any reductions of space at least in limited volume. And that's built up with the fact that we need to see the companies to give them more social areas. We need to rebuild space for other services if they want to be an attractive employer. But the flexibility and possibility is extremely important for the office owners 2 be attractive for the clients. So my view is that the market is going to pick up and grow with the knowledge we have now with the GDP group and with the production volume of this, that is still very limited. And so we can't see any drama in changes on vacancies. And lastly, positive negotiations. As I mentioned, we have a positive uplift on the like for like portfolio of 1%. Step is partly built up with the negotiations that was 12% in our portfolio. So we have a strong even stronger market in office side than we expected. And we will take the next slide please. Here you see net easing. Another proof is, of course, the net easing on the next slide. Here we can conclude that ongoing portfolio has been very strong, the half year. We can also see that a normal year, it is a normal year if you look at the development pipeline. So to sum that up, we had a gross net leasing of 266,000,000 in the annual rental value and net leasing of the SEK 66,000,000. So it's very strong. The comparison here is done by the 3 in the last years that was including 2 larger developments that's unusual. So a strong half versus year. So we are in off grid market that are changing a little bit. The market it's waking up. We will see stable to strong rental developments in general in our town. And I think we will be a lack of good of this space shortly. If you take the next slide please. Logistic market, We can simply divide the market into 2 categories: the large distribution centers and the large migrants. If we go into Sweden, here we can see on the distribution centers, there will see a lot of new constructions, efficient ones and to a lower cost for tenant. The locations is not that critical and are built up normally in North Stockholm, Eskilstuna, Gothenburg and Skane, for some examples. The increase of land prices are not reflected because of the lower AAVs that are in this market right now. But if we focus on the last mile, the locations are drivable and driven by service and quality and time to customers. Year. The rents are still increasing and we can note rents up to the amazing SEK2,000 a square meter a year in the Stockholm area and over SEK 1,000 if we're talking about Malvern. If we look outside Sweden, the Hoeghs in Fosh area interesting and we can note that there are prime market trends up to €13,000,000 a square meter and €1,000,000,000 to €3,000,000,000 And this is the 1st drawings on the joint venture we have now together with the government cover. We will invest approximately SEK 1,000,000,000 each Indus facilities, looking really located extremely near to Gothenburg harbor or actually in the Gothenburg harbor. And with that about the markets, I leave over to you, Ulrike. Then to the next slide, one. And a short conclusion for the 3rd month year in Castello, the change in income from property management of minus 5 percent. However, the underlying business together with debt management shows black growth figures, Meaning that the negative developments from the Q1 have changed. And not surprisingly, the contribution to the negative development is, of course, Castellan selling being a net seller up until the end of June of minus €9,000,000,000 As NRV is growing due to our good result, bottom line, I will come back to that. The rental market is positive with net lettings of 66,000,000 of which 26, the second quarter. The negotiation is back and is on the positive side, an uplift of 12% on average. And COVID-nineteen It's almost not showing in our numbers. Rents are being paid and liquidity helps are being reduced. And final, the financial risks are low with MLTV of 38% and an ICR of 5.32 And worth mentioning is that we have shined the definition on OTV. Earlier, we put the net interest bearing debt in relation to property. But since we now have a big holding in EMFRA and we see it as a long term holding, we put the next interest bearing debt in relation to total assets. And if you go to the next slide please and look at A lot of figures. Let's just start with the last slide. A result of €5,500,000,000 or almost €5,600,000,000 It's, as Henrik said, the biggest figure number and it's 3rd half year in Qassela and Q3. And that is driven mainly by Changes in property values due to lower Gs in the market, both on offices and logistics, but also creative project gains. As you know, we have sold a big portfolio earlier this year, which confirmed the yield movement in logistic warehouses And created a real life change in Q1 in Q1. But of course, selling This big portfolio has a negative impact on income from property management. And it explains that development since half of the portfolio we closed, signed and delivered in the beginning of February and half of it in the beginning of May. However, this gives Castellum a really strong balance sheet, which we had used by buying more And for shares during the Q2 and in the beginning of July doing big acquisitions in Stockholm and Finland. What's new this quarter in the P and L is two lines, a dividend of €46,000,000 from our holdings in EMEA in the second quarter And the write down of goodwill of NOK 53,000,000 which is a consequence of selling Pareen in Denmark an asset that we board buying our potem. So all in, a really good bottom line, stable underlying earnings with a positive trends And accelerated trend and dividends and the big changes in value create big bottom line results. And if we go to the next slide and look into the underlying property management. Growth in like for like It's getting better versus the Q1 and that is due to high rental level, better development of vacancies and lesser incentives. And the cold Q1 compared to last year still picks up with a cost increase Looking into different segments, we can see that the trend from the end of last year and the Q3 is still here. Good like for like growth in logistics and public sector and modest like for like growth in offices, but it's better than earlier. A really good, good retail mainly due to less incentives compared to last year. And Life Industry, it's such a few assets. And this trend is the negative number is due to high vacancies. And regarding COVID-nineteen on the rent to site, no bigger incentives this year. The rent for Q2 is on the bank And the payment for Q3 looks really good. Liquidity relief has from the start of COVID-nineteen last year until today been Total, SEK 145,000,000, SEK 146,000,000. And of that SEK 20,000,000 is active at the end of June compared SEK 45,000,000 at the end of March. So the liquidity help is decreasing and it's a signal fare of a good rental market. So on to the next slide, Henrik. Yes. Shortly to just summarize the last transactions that Ulrike shortly mentioned. We have the last quarter being very active on the investment market as said and succeeding in creating actually a real Nordic platform mainly due to the acquisition in Finland and also, of course, by increasing our ownership in Entrance. But we have also been very successful in signing a joint venture with the heart of Gothenburg, which means that we will invest this SEK 1,000,000,000 in the logistic asset on fifty-fifty basis. And last lead. We bought 2 assets, approximately SEK 1,000,000,000 each in Storna and the larger area of Stockholm. With this transaction, we have changed the portfolio and created a high performing office and logistics portfolio with a very good tenant base and more footprint in the capital. This is something we strongly believe is going to create a good group and value going forward. In Finland, the yields on the transactions was 5.5% And we sold another part with a little bit higher approximately 1.7%, 1.75% yield. And when we bought in Stockholm, we did the acquisitions on 4.25 four points. So here is some figures to calculate on. All this is done and we have closed all these deals. And then back to you, Ulrike. Yes. And on the next slide, we have the balance sheet, stronger than ever NOK2V up 38%. The Entre holding was at the end of June, SEK6,600,000,000 in our Balance sheet. It's underlying financial assets. That is roughly 18.4%, 4.5%. And the ambition is to grow, So we can consolidate it into our income from property management and that demands of leased and ownership of 20%. So we are on track. And since Entra owns a property portfolio of roughly before today, SEK 58,000,000,000, maybe a little bit more now, Our exposure to Norway is almost at €11,000,000,000 and we think that is a good position to have. And if you go to the next slide, please. Short about the property market, a good transaction volume of roughly EUR 150,000,000,000 compared to EUR 81,000,000 last year and EUR 44,000,000 in the Q1. The volume and number of transaction has increased And the appetite for investing in real estate is really good. So a big interest in combination with a lot of capital quarter, support slower yields and increased property prices or values. And that is shown in our Portfolio with an increase of SEK 2,600,000,000 in unrealized property gains, of which €2,000,000,000 is from yield movements and the rest is project gains. The yield movement is both in Office and Logistics, but of course much more in the latter one. On top of that, we have sold assets, main logistics And warehouses earlier this year, which created a real change in value of up to €500,000,000 So both realized and unrealized Summarized to 3.3 percent in the first half year and the unrealized gains is 1.6 the next The Q2 isolated. So it's better momentum than the Q1. And then to the next slide, Henrik. Yes. This is a slide we all love, of course, because this is growing and getting larger and larger. This is a development. We have now created a large development pipeline. It's roughly SEK 20,000,000,000 in investments volume more to be started. We have an ongoing development portfolio approximately of SEK 7,400,000,000, in which 2.8 is already invested. This is the largest ongoing development pipeline that Castellan ever have had, nothing, the largest in Sweden in a real estate company. As you can see, It's well spread over the country and the average economic occupancy is 70% 67% in this one And if we close the large and very newly started development in Stockholm, then it's up to 84%, 85%. We calculate this project with making profit gains of approximately SEK 1,800,000,000 that are not in the books. We can look at some, if you take the next slide, please. Infinity. We can start with the one on the right hand downside first. This is a new block in Hagastarden, where we will the next coming years build a new block consisting of approximately 20,000 square meters. It's a very attractive location and the building will consist of office space with services and co working as well according to plan. It will be completed in the Q3 2025. And investment is approximately SEK1.7 billion and the yield is approximately 5.2%. The next one is Seal. The Seal is our research and development site on the airport Zwe, Gaffberg with a government sponsored tenant with a long lease of 50 years, 100% leased out. This has also started and start of a permanent research and development site for sustainable transportation. So we are 100% certain this will attract other investments and interest in tenants in the future. And it's a first and small start with a good yield of over 6%. And lastly, the new one is Badby. This is last example of the last mile distribution sensors where we are building outside Malmo and are very pleased to support Budbee in this and the yield is approximately 5.5%. And then if we take the next slide, we can see what will come. Capella holds a large volume of building rights, approximately 1,500,000 square meters of lettable area. We believe it will be possible to start approximately 900,000 square meter of LEAP for the next coming 4 years. And that will risk we call the investment volume of approximately SEK 20,000,000,000 Outside this volume Out of this, approximately 550,000 square meters are logistic and the rest primarily office. And then some examples. What we call node of Nordstorm is the one on the right hand side, upper right hand side. It's a new one. It's actually absolutely best located in Gatenberg, where we have a building right under zoning plan for approximately 30,000 square meters. This is located in extremely good position. It will have a subway station under it two trains and next go to the upper of Gothenburg. We think this production can start as soon as the infrastructure is in place and that will be 2023 or 2024. On lower right hand side, you have Berkep in Johan Sjoping. When we bought North Putten, it was a large number of government buildings and one of those was in absolutely central Johan Shopping. We have now gotten the possibility to rebuild this 20,000 square meter building during next coming years into a high quality office building and the first contract is already signed, standing for approximately 16% of the space. In addition to this, we have also more building rights in this area that we will start in next coming years and this will be more or less building a new part of the city center of Johan Sjoping. The last one on this slide is Bruna. It is North Stockholm. We have a capacity of building approximately 45,000 square meters of logistics. But of course, we have much, much more capacity of logistics assets in the portfolio. For example, the airport in Gothenburg with a capacity of approximately of another 800,000 square meters and then of course some assets around Malmo and Saab. So I'll let over to you, Ulrich. Yes. And on the next slide, a short summary of our financing of funding activities. The debt market has been Stable favorable during the 1st 6 months this year. And at the end of June, Castellum had drafted SEK 61,000,000,000 in credit facilities available, of which SEK 42,000,000,000 was used. Of the used one SEK 29,000,000,000 was outstanding bonds, SEK 7,000,000,000 CPs and SEK 6,000,000,000 Bags. During this 1st 6 months, we have We financed a smaller bank loan. We have taken up new RCS and terminated term loans. In the bond market, we have been active in the local one, issuing almost the same volume, SEK 2,500,000,000 That has been terminated. The MTN program, the Swedish domestic bond program is now at SEK 25,000,000,000 And total outstanding asset strategy is €19,000,000,000 Regarding the CP, we have a program of SEK 10,000,000,000 and has been active. It's still a good arbitrage to be in that market. And at the end of the period, SEK 7,000,000,000 was outstanding. Of course, part of this liquidity had been used in the beginning of July future buying assets with PENOLAD.com. And then over to you, Henrik. Okay. The last slide, looking a little bit to the future. The office market, I touched very much on it from the beginning. What we can see in the office market is that it will continue to grow. The GDP prognosis for Nordics is good. Sweden is around 5% and the new production volume is 1%. The export industry for one example is looking better and better And this altogether means that office market will continue to grow. The logistic market will also continue to grow and change, meaning. It will continue to create opportunities for companies like Capella with both knowledge and capacity. So from my standpoint, I see the position in the leasing market that Castellum sold as good with a solid tenant base and a lot of opportunities. Castellum then, I should say that the company is prepared for the future and have capacity to adapt. We have one of the strongest development pipelines that our 20,000,000,000 is already 7 under production that we know will create profit to the company and with good occupancy rate. The strong balance sheet. Even though we've done a lot of investment, the LTV level will be below the 45. Strong Nordic exposure. We have a growing exposure into the capitals and we have prepared the balance sheet and the capacity to grow and build also. And the company largely holds one of the strongest positions when it comes to sustainability and will continue to be an attractive partner as well as employer to our tenant. And then shortly And lastly, I would like to thank everyone because this is Mani's last report. I will be leaving the company at the latest in the beginning of October. So it's definitely my last report. The last 8 years, we created a total return of approximately 17.5% per annum average and lower the risk and maybe into one of the most sustainable real estate companies in the world. I would like therefore to take the opportunity to thank all colleagues that I worked with together all these years and made this journey interest. I would also like to thank all customers and the 88,000 shareholders and all other contributors remade this company, what it is today. Thank you very much. And then we open for questions. Thank next. Or so. Okay. We will pause for questions. And our first question comes from Stefan Bilof from Nordea. Please go ahead. Your line is now open. Thank you and good morning. I have a couple of questions. Starting off with the Finnish acquisition. You're currently kilo in Finland and you mentioned that net yield is 5.5%. And I think this appears as a high yield. And I wonder, is this a consequence of falling price levels in Finland or rather consequence of this specific portfolio with perhaps quite high vacancies. I can conclude that this is under competition. We've done this deal. The yield is, I think, combined of the that we have the capacity to work with the vacancies and maybe scare a little bit of the market off. Question. I think the main reason is that we started this negotiation when it was more uncertainty around the pandemic as well as the OpEx market in Finland. So we actually use the opportunity to do the acquisitions during a good time. And as you know, the acquisitions like this take time. So this is something we started very, very early in this year. Okay. I see. Thank you. And regarding the Solna acquisition, so I would just like to confirm that you stated it was a net yield for Of 4.25 for K11? It's correct. Yeah. And upper coast and that was 4.7, right? Correct. Yes. Okay, good. And regarding projects, do you think it will be easier year to start new office projects in the coming 12 months given the increased activity in the net lending market that we see. I can conclude that you have to divide the market into larger and smaller companies that we see on the Tenet base that are different. You can also have to divide the market into small and larger cities. And what we're seeing right now is if we talk Sweden that the vacancy rate is rather low still. I can read in reports that they are estimating higher vacancies, but we can see that the companies don't have so much opportunities, normally. So therefore, I think with just the increase of new development of 1% to the stock, it will not be enough. And that means that over time, I see actually we will in some attractive locations have a lack of office space. So yes, it will give the opportunity to start new developments again. And I see very little risk, especially in the smaller cities. And then it will take a little bit more time then you have normal vacancy rates in Gothenburg and Stockholm again, but it will go quickly simply. So one half year, something like that could see in some cases actually will be lack of office space to be honest. Okay. Thank you. That was my questions. And finally, Congratulations for delivering a strong final report from your side here. Thank you. Thank you. And our next question comes from Erik Kramstrom from Carnegie. Please go ahead. Your line is now open. Thank you very much. Good morning. Starting off by thanking you, Henrik, 4 patiently answering all our questions throughout the years. But I will take this opportunity to ask a few more before you leave. And perhaps if I could start a little bit about the vacancy rates. You mentioned that it's a very stable office market out there. But in the report, you do mention that you see some increased vacancy in CBD areas in Sweden. Could you talk a little bit about the difference here of the overall office market versus what you're seeing in CBD area specifically? Yes, I think it all has to do with new developments. We know that this we have some colleagues that are a little bit stressed about their new developments does not rent it out. But that will come down if it's very attractive locations and attractive locations. We can also see that we have tenants that are surprised they can't find good alternatives in the market and we can then also see that we have negotiation power like our colleagues and we ended up in 12%. So I think we have to divide the situation between large and smallest customers. Large ones will rebuild their offices. And they will have the most of the staff in parts of the day if you are in the early of the week GPR in Stockholm. And some companies is already demanding the staff in now in August or September because they want to have the production up simply or efficiency up. So that's the large one. The smaller companies are looking for flexibility. Here I think, things co working will have a strong position and flexible agreements and that's midsize to small companies. And the third thing that's happened right now is that some of the companies would like simply us or someone else to take over more responsibility for the employees and the services around it. All in all, I think you will have more people working from whom in larger cities, especially Stockholm, that you will have an occupancy in the office of 80%, 90% in 2 to 3 days a week. In Oribeuru, we don't share PIN, you will almost not see a difference. In healthy in QE and I don't want we don't think it's going to be so big difference not in Copenhagen either. So that's my view on the office market right now. Okay. Thank you. And do you think that CapEx will have to increase in order to sort of defend your rental incomes in renegotiations as tenants demand perhaps more social areas in the offices? Or is this something that tenants will have to pay for as with any other tenant changes or CapEx? It's a very good question. What we see is that you're going to invest more in the office space, especially for the largest companies. We haven't got any demand from their side that they want us to take the hit for, I should say. My view is that this is something that the companies are prepared to take because they see it as a responsibility 2 to 3 employees. That's more normal standpoint that we met in the market. But the CapEx will increase, but day will be also taken by the tenants. So far then, that's my view. Okay. And you invested SEK1.7 billion so far the first half of this year in your own portfolio. And you're also saying that there is some sort of acceleration. Should we expect this figure to increase for the second half of the year? Or is this pace Pretty much what you think that you can perform? I think you should calculate that more or less the same going forward. The one the largest one we just put into the notes, so to say, is SEK1.7 billion, slide that's under very special case because there we're investing over this tunnel starting the construction work. So I should say use the same investment volume approximately going forward. Thank you. And then I have 2 more questions and I'll bundle them up. One is, it seemed to me that you're quite adamant in the fact that you will increase your holdings INNTRA to above 20% in order to consolidate that position. But just to clarify, you don't expect To go over the 33, which will then trigger a mandatory bid? That I have to leave to the next COO course. But I think your estimation should be correct. Okay. And then finally, you've continued to buy back shares so far this year. And I was just wondering, your balance sheet remains very strong. You hinted at that as well. Is there a reason why you would stop the buyback program at this point? Or do you think that it's most likely that you will continue? It's Ulrike here. It's all about our view on our future NAV versus The share price, so that's a calculation the Board takes each quarter in connection with the interim report. So it's a moving target over time. And Finally, I would like to comment that 15 years of answering your questions has been a pleasure. Thank you very much. I appreciate that. Thank you. That's all I have. Thank you. Thank you. Our next question comes from Nicholas Huttling from DNB. Please go ahead. Your line is now open. Thank you. Yes, just a short question about rent discounts. I believe they were slightly up in Q2 quarter over quarter. Can you just give some flavor about that figure and The outlook ahead for our business. We can't see an increase in market kit on the discounts. And so I don't recognize what you figure there. But let's see here. In like to like, they are down. But then we make changes in the portfolio by Getting new developments into the portfolio. So the underlying incentives, as I think you asked about, It's going on the right way. It's €500,000,000 in rent this account, I believe, in node 2. Yes. And it was €60,000,000 last year. Yes. But in Q1, it was €28,000,000. Yes. Okay. So it's SEK 27,000,000 in Q2. So this amount about flat Yes. But if you look into the if you split that into 2 different buckets. 1 is like ordinary management. Then that is going down, but then we have more Some more incentives in new developments that have been completed that is coming into the portfolio. Okay. And you're taking that you are not doing you don't split it up over the lease term? We do of course, but that is like new incentives in new leases that we have never had before, if you In spaces we have never had before. Okay. Okay. So all in all, The rent discount is going in the right direction in your view? Yes. Okay, great. And slide. From a market perspective, we feel no pressure here and I think it's extremely important to say that we see a market that also picking up and FR also understanding that it's no discounts in the market and we can hold the market prices. And then this is something we worked on for more than 1 year, of course, more or less weekly, scene where we are in the offers, discounts and everything. So my view is that the market is coming back and it's coming back strong. Okay, great. Thank you very much and good luck in your future career, Henrik. Thank you very much. Thank you. Thank you. And as there appears to be no further questions, I return the questions to speakers for any closing remarks. But we can say here that we have some questions sent to us. And Henrik, the first one, can you give us a better In terms of the Finnish acquisition, the geographic distribution adjusted for the Disposal that was? Yes. From the beginning, it was approximately 40% Helsinki area and then we took out 130% of the portfolio and that was not Helsinki. So you're simply going to take away the 30% and that's all 100% in another town. And there we also are not having any staff in this transaction. So that's we benefit from. And then we have some more questions, I think, to the Yes. In which market the office leasing spread was Strongest office market and weakest office market. I think we should look at this as we hold extremely stable market levels during this 1.5 year one on all. And going forward, I'm we should be cautious with an overproduction in some submarkets and that's due to some large development. And then you have especially like I said earlier, you have some submarkets in Gothenburg when we have an overproduction in the near term, but we have hold our market levels on the rents all that. So I have no preferred and no worse. I think we are flat more or less on all the cities. And then a question To maybe to myself. Where would you expect LTV and the occupancy rate by the end of this year? That's a tricky question just at the end of the year. But the LTV, if we take that first, of course, that is Dependent on mainly if the property market is still going strong, even more stronger, so we can get More valuation uplifts and the investment phase. But to give you guidance, a comfortable So to be in is around 42%, 43%. And if we are there at the year end exactly or not, I can't tell at the moment, but we are we have started the Q3 very actively. So That is the guidance we're comfortable in. The occupancy rate is also tricky part It's quite at the end here. But as you can see from the Q2 report, the occupancy rate increased somewhat versus Q1. And based on positive net lending so far, the indication is at least that it shouldn't go down from where we are now. And that was all the questions we have got. Okay. If there's no other questions out there. Questions. Okay. Then we thank you, everyone, and wish everyone a wonderful summer. And hopefully, I will meet you in some other way in the future. Thank you very much.