Castellum AB (publ) (CAST) Earnings Call Transcript & Summary

Hello, and welcome to the Castellum AB Q3 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Henrik Saxborn. Please go ahead with your meeting.

Thank you very much. Good morning, everyone. We will then present Q3 for 2020. And with me here today is Ulrika Danielsson, CFO, and myself. Okay. We are standing here now in the middle of the pandemic. And after a half year of this, we can so far conclude that the Nordic market has been resistant and that Castellum has had a good position in this so far. But of course, it doesn't mean that the effect is gone or anything. We are just in the middle of this, and it's, of course, humble on what we see around us. So we can take the next slide, please. This quarter has been calmer than the last one in the sense that we have proven our strengths and our portfolio's position that is well-positioned. The situation right now is that, of course, we are active in 3 countries, 3 countries with still different regulations, laws and other restrictions under the COVID pandemic. Denmark and Sweden so far is more or less open borders. Finland with semi-closed borders, but we have been able operating everything the last 3 months in all these 3 countries. We have also been able to continue with the construction of our developments without any interference of just the pandemic or other regulations. So the short version of this report is that almost all rents is collected in the same pattern that we have seen in the last quarter, and that means that we see strong businesses in especially Sweden where mostly of the rents are collected. We have also been able on creating 9% growth in cash flow and 8% on the NAV and kept LTV down to 43% even though we have done a dividend -- paid out a dividend. So the last 3 quarters has been strong in all lines. The cash flow has been up with still good effects on renegotiations and that we have very few losses and no bankruptcies. This, of course, with the good management of financing and all other costs. Even when the net leasing -- even then when the net leasing is better than last year, both in existing, and of course, in the development plans, we are now on record figures. And as we stated before, we have ongoing developments outstanding right now for approximately SEK 6 billion. It's also a new record for us. But Ulrika, let us go through the report, please.

And then on the next slide, please, on the P&L. Our delivery so far this year can be summarized in and increasing income from property management with 9% due to mainly renegotiations made earlier and CPI uplift and continued cost control. A small unrealized change in property values on portfolio level, mainly driven by project gains, but also on specific assets yield changes, and in some way, cash flow changes. And of course, as early quarter, there has also been adjustment downwards on specific assets. A negative change in derivatives and a tax of roughly SEK 640 million, of which SEK 140 million is paid. But finally, I would end it with saying that, so far, we have had no impact due to COVID-19 in the P&L, at least regarding earnings up until now. However, going forward, there can be somewhat up story. Since early this year when COVID-19 became a reality for everyone, renegotiations, you could say, almost up, and of course, there are some exceptions from that. But that is the general sense and that is the conclusion. And that means that growth in like-for-like and top rental growth starts to slow down and we can see that impact already a little bit in this quarter if you look into the growth in the like-for-like portfolio. On top of that, the net letting is negative in existing portfolio and that was also the case last year. And this can also indicate everything else, lesser growth in rental income in the like-for-like portfolio going forward. But on the next slide, please. Looking into the rental growth, the average increase in like-for-like is 3% and consists of the CPI uplift of 1.7% and mainly renegotiations earlier. However, high vacancies and higher incentives as part of that, of course, connected to COVID-19, mitigate the growth with 0.7%. So all in all, like-for-like holding has an increase of 2.3%. And this is, if you look into the Q2 report, a little bit lower. It's an indication of what I just mentioned. If you look into the different segments, you can see that the public sector and warehouse/logistics has really good momentum. The offices is slowing down, and the retail part had a negative development so far. And this happens at the same time when you could say the office market is going through changes from a demand perspective. And we will not be surprised if there will be an efficiency trend, you could say, or a new way to look at the use of offices from a tenant perspective. But on the cost side, we can conclude that the cost has gone in the right direction also. So in like-for-like, it is down 6.5% and that is due to continuously work with the costs, of course, but also a milder year so far compared to last year. And if we look on the next page, please, and we look into specifically COVID-19 impact. You can say that since the last quarter or the last report, there has not been so much more new liquidity help, only SEK 5 million more in going from quarterly to monthly and no more incentives given. But what we can see is that tenants that have got help earlier this year seeks further liquidity help going into Q4 and the next year, and that indicates that companies still suffer from COVID-19. And you can imagine that if this goes on for a longer period, it will increase the risk for even tougher problems for those type of tenants. And our view is that the market in general is dealt with a lot of aid packages and the COVID-19 is still here impacting us all and changed behaviors here to stay. Of course, this means that companies in general can be hurt, have tough times and that will, in the end, affect landlords such as a company -- such as Castellum. However, so far, we are very lucky in Castellum in that the tenant base so far that is tracking this way is not big for us. And then the market, please.

Yes, next slide, please. Okay. Here we have the net leasing. First of all, it's actually -- even then it was negative on the existing portfolio, like Ulrika said historically, this is actually better than last year. And what is good now is what Ulrika touched on is our tenant base. And for one example in this is that we rented out to a new port in these figures that will be building in Jönköping. And that, of course, is fantastic to having the government as a tenant. On the negative side, we have lost a tenant in Copenhagen. This is something we knew when we bought -- or put in, in the acquisition and that is helping us now, of course, in this figure. But that said is that we can conclude that we have more or less no bankruptcies and that is -- it was actually able of signing contracts for SEK 241 million during this time and SEK 142 million after March. So that is -- the market is still effective and you can lease out. It ended good actually. So let us move to the next picture, please. And if you look into this, you'll see that we -- as Ulrika touched on, I mean, the office market is just one part of it. We have the logistics. Here, we experienced a very strong market because of the expanding e-commerce. It means that we have seen rent growth in all types of locations and that is something we haven't experienced earlier because of the larger assets outside the cities. Big cities have normally not have that growth that we're now seeing in the market. We have the government buildings or the public ones. They are on stable grounds with long contracts and are benefiting from the expansion that is on lower security, especially in Sweden right now. Together, these 2 categories stand for approximately 40% of value. And then we have the multi-tenant situation, and there is no large changes in the market right now. We have the same market levels like before. There's a lot of speculations on the market will develop, and we believe that we will see changes in the behavior of that. And we shall contract in the future coming -- I will come back to that later. But as said, there is no changes at this moment in the market rents. We can also see a huge difference between the cities where we are, and there's no discussion about the future office space in the midsized towns and that comes down to, let's say, easier to communicate. It's not only about the office setup and design, it's also about communications. And we can take next slide, please. As said then -- and here is the 4 categories. We have a huge growth in the warehouse/logistics market, and there's our position is that we are strong in Stockholm and Gothenburg with a potential of building more and good yield are still around 7% achieved on total cost. And of course, we have been calculating with the existing -- that the existing portfolio will be benefiting from the lower vacancies and in some way also the adjusted rent levels. In the public sector, we are benefiting from the stability of long contracts, existing portfolio. And that in all assets are more or less 100% leased out. On top of that, the governments need more expansion and that we are benefiting from right now. Then we are one of the very few real estate companies or owners that are developing assets for the government and the courts, for the police as well. And then we have the coworking. We are right now developing new sites and that is because we want to meet the flexibility demand from the existing and new tenants. And we will meet them with more sites than we actually believed 1 year ago. And then we have the office sites -- office buildings with multi-tenant houses. Here, I must say, we are well positioned in that way that is either bought by us or built by us on locations where we see there is normally growth and this is simply a high-quality portfolio. And we will meet a new situation in this part, and I will come back to that. All in all, it is a very stable portfolio with potential of doing -- growth in the future in all our 20 towns.

Then the balance sheet on the next slide, please. The balance sheet as we heard earlier is still strong in Castellum with an LTV that has not moved much since Q2 despite dividend made in September. It's still at 43%, while the net debt-to-EBITDA is down at 10. So this, together with a very strong cash flow, makes the company strong. If we look at the valuation of the property, the valuation yield is unchanged on 5.1%. And as I mentioned earlier, we have done write-ups on portfolio level. However, we have done write-downs also mainly on retail and hotels while upwards can be found in the warehouse/logistics part and public properties due to both yield adjustments and cash flow. And on top of that, of course, we do have project gains on our development pipeline. But let us go to the next slide in the market, Henrik. The property market.

Yes. And if you look at that, as you said, we hold the yields in the market. But in the -- and we also see a strong market in Sweden. If we talk about Sweden, we have totally deals down for approximately SEK 103 billion, and the market is more and more active every day and that you can also see then the valuation in the balance sheet. So -- and the interest from the foreigners is still very, very strong and the foreigners actually stand for -- in Sweden for 1/3 of the deal start. So we can take the next slide, please. This is, as we like to show it, and we have shown it before, this is the existing portfolio on the largest developments we have. This is 15 developments. And as we've said, we're building up to approximately SEK 6 billion in investments. This is on an investment on cost on approximately 6 in average, and they are rented out approximately to 80%. This is the backbone, and I will come back to that why this is so important because we are not independent on one project. We are independent on a lot of projects. And under this, we have a long, long list of midsized and smaller ones as well. Going into the future, we have not stopped any of the developments because we have been fortunate of that tenants in the development pipeline has been caught being government and so we haven't been looking at that. Going forward, of course, we will look into the market situation before we start anything. Next slide, please. And then when we build anything, we are now targeting that we should go down to CO2 neutrality into 2030 on everything. That also means that we take in the responsibility to try to build CO2 neutral. We have started one development in Örebro, building the first what I know -- well, lease out a CO2-neutral. But we have also been the first property company in the Nordic region that is climate target approved by the Science Based Targets, SBT, and that's one of the very big steps for us going forward in the future. So we would like to have help, of course, from the market and try to make this happen in the reality in the future. And then next slide, please. And shortly, back to developments. This is 4 -- this 4 is the example that we're not only building the large office building. This is the backbone of the development side. It's actually building -- where we are building, we can take the first on left-hand side. It was named Heliumgasen in Mölndal. That's a small to midsized logistic asset of a building for one tenant that we're now moving out from an existing space they have and that space is rented out to another tenant. This means that investments like this is down between 7% or 8% yield on total cost and it's a backbone, of course. Then we can take the beautiful building on the right-hand side. It's what we are -- a refurbishment, an old retail house in absolutely CBD of Uppsala, where we are making it into a coworking space. And we actually bought it with that in the calculation and we will open it after Christmas. So that's also a fantastic investment that will be attractive. And then, of course, you have the airport, Säve, where we are looking into the next step. And hopefully, we'll come back in the short term to announce an investment, especially on the research and development side where we hope to take care of some new tenants for sustainable transportation. And on top of that, we hope to very soon be able of starting development for logistics as well. So this is just some examples what's ongoing in the pipeline so far. So then financing, Ulrika, please.

Yes. On the next slide, please. And of course, all those developments and the pipeline and the existing portfolio need to have cash or funding in place. So in Q2, I said that Castellum stands strong from a funding perspective, many tools in the toolbox, many to talk to, a good liquidity buffer and conferred credit opinion from Moody's in June, Ba2, with stable outlook. In Q2 now, we can reinforce that with an even stronger liquidity position compared to Q2. And the reason for this is mainly explained by the pricing in the bond market. As you all know, the trend for the credit market was falling during last year and in the beginning of this year. And this trend was broken abruptly when it became obvious for the market that the COVID-19 has developed to a global pandemic. And during the second half of the first quarter, the margins increased extremely steeply, and Castellum has indicated an increase 3 to 4x pre-corona crisis. And during the second quarter, the margins are back somewhat and this trend intensified in August and September. And that made profits grow for Castellum that had not addressed the market due to the high prices in the spring and early summer to actually address the local bond market now. So we have issued new bonds during Q3. Worth mentioning is also that even if the margins have come down at considerably lower levels, they are not fully back on pricing that was at the beginning of this year. Another market that has developed in a positive way, the CP market that really has recovered, you could say, since Q2. Yield is back on the same level roughly at the beginning of the year. But of course, the cost reduction -- or yield reduction, you could say, is partly driven by lower STIBOR, meaning that spreads have not fallen back on previous levels. And regarding banks, we can -- our experience is that it's good access to funding within the Nordic banks. And at the moment, relative stable margins from our perspective. So let us go to the next slide, please, and see what we have done in Castellum during those circumstances. We have renegotiated SEK 5.3 billion. We have got SEK 0.6 billion in new debt from a new supplier. We have issued SEK 3.8 billion, of which SEK 1.5 billion was refinanced, you could say, pre-COVID-19 of this year. The duration is from 2 to 7 years. And at the same period of time, SEK 1 billion has matured, so meaning a net issue of roughly SEK 2.7 billion, SEK 2.8 billion. And for the rest of this year, only SEK 200 million more is falling due. Outstanding volume in the CP market is over SEK 5 billion compared to SEK 2.7 billion in, and this is only indicating -- indicates what I said earlier that, that market is back on track. So to summarize it all, we have, at the moment, SEK 15 billion in unused credit facilities and that will cover existing debt that mature this year and next year, while at the same time can say meet the need from the businesses. And our duration, the rest part of this year is SEK 3.2 billion in CP that falls due before the year-end, and as I said earlier, SEK 200 million in bonds. So at the moment, a really good liquidity position for Castellum. And then the Q3, Henrik.

Okay. It's a very tough target to talk about the Q3 in this situation. But we can conclude that the pandemic is not gone and the effect of the pandemic is not gone. But if I should try to generalize on the Nordic situation, it's -- I should say, it's really stable. It's a little bit worried about the second wave of pandemic, but it has not been any dramatic figure so far. But that said, of course, the effect we can see in economy as well as the behavior is in front of us. This will, of course, affect the market. This will, of course, affect the real estate market. And our conclusion is then -- is that Castellum is in good position. We really don't have any hotel volume. We don't -- aren't affected by the changes in the retail sector on the negative side, actually more on the positive side. So we are winner when it looks to the e-commerce that are affecting that almost 15% of the value that we have in that part of the sector, and of course, the income from the public sector that stands for more than 20%. But that leaves us with the multi-tenant office buildings and the trends in that sector. This is globally discussed and many are looking for the Holy Grail in this question. Our view is that it's not one solution. We will see. It is going to be a lot of different solutions. It's about -- it's going to be different because of size of cities. It's going to be a huge impact for the near time frame, how do the transportation system works, and of course, how the companies will be able of having the staff using and taking the car or commuting in any way. I'm also certain that we will make the office into more meeting place. That was also a trend long before COVID and now accelerating. We will also see a huge difference between what types of work that people are doing inside office in the companies. And of course, the quality of the possibility of working at home. And the last factor is actually family situation, and we see a big difference between young and older staff in this way. So we are strong believers that the work will be done -- that we have done so far with digitalization, flexible work space and looking into the future with more services is something we're going to benefit now. And we will help, of course, our tenants in this way. Looking into the short term, we will, with this result, of course, deliver growth into Q4. But we will also have an effect, like Ulrika says, in the cooling down on the renegotiation side because it was simply not possible to continue the negotiations under the pandemic. And we will also be affected of that we're going back to a more normal CapEx situation in the assets. This, together, means that we will not be able delivering the strong 9% growth that we have done so far into Q4, but we are still very pleased with the growth that we have been able operating under the circumstances. And I am especially proud of all the work done in negotiation with tenants that have made all our losses -- all our losses more or less down to 0. So we will simply give the Board the opportunity to decide -- to take the decision to continue increasing dividend even next year. Thank you very much, and we're open for questions.

[Operator Instructions] We have a question from the line of Erik Granström from Carnegie.

I just had a few questions, if that's okay. And perhaps I could just ask you about the property value situation and the property market and what you see for Q4. How are external evaluators looking at the market now? What's your experience of having those kind of discussions in Q3? And what sort of -- what should we look for, for Q4?

Yes. I can take that. I think what we -- let's start with the market. I mean it has shown its strength in the Nordic market. And I would love to come to this meeting and say that we have been able of putting together a golden nugget in the market, and that's absolutely not possible. So it's competitive -- I see a still competitive market on all types of assets. So that's the first part. So I think it's more a question about if you are worried as a valuator of the cash flow going forward. If that's -- if any changes, that what we see on the yield side, we see actually lower yields more than we see anything else in the market, both our logistics as well as on the office stocks. And we see an open market. I would say it's possible to sell everything that Castellum holds in the balance sheet and we are having a lot of calls that investors wanted to see if we are willing to sell anything. So that's the situation. So strong still, we are starting in a strong market.

Okay. So assuming that you do not -- assuming that external evaluators don't expect market rents to come down substantially in terms of the valuations for Q4, you would actually expect to have some positive momentum in terms of valuation, driven by stable or decreasing yields.

Yes. I should say, yes.

Okay. And then perhaps you could at least, I don't know, I'm probably the only one that didn't understand this, but it was regarding the discussions that you mentioned in the CEO comments in the report that following March where you've had positive rental value development from renegotiations, that has now come to some sort of slowdown or a halt. And could you just perhaps explain that a little more because, to me, I would assume that renegotiations must have been at its toughest during Q2 rather than Q3, given the sort of the pandemic situation.

Yes. I mean it was more -- I mean we were set on hold here because of the pandemic and also because no one was knowing what's in front of us simply. So we stand still and yet standing still in that situation, lower the volume on negotiations. And -- but the result of the negotiations done is so positive with the 15%, but they are -- the volume is less. And that's perhaps more practical reasons than on market reasons, to be honest.

Okay. So basically, what you're saying is that you're just highlighting that we should know that these effects will come going forward rather than what we have seen so far?

Correct.

Correct.

And the next question comes from the line of Jonathan Kownator from Goldman Sachs.

I just wanted to go back on this comment that you have made in the statement -- in the management comments about the delayed maintenance. You said it's back to -- it needs to be back to normal level. But does that mean that we have to anticipate the sort of catch-up of what wasn't spent over the last quarters? And therefore, are you able to quantify how much maintenance you expect for the last quarter?

The quantification I can't give, but your -- the technique is right. Yes, it's some sort of catch-up volume. But it's also practical problems, of course, because we have to make them happen, order them and deploy them. So -- but of course, we're taking care of our assets and that will technically end up in the P&L as a catch-up effect.

So it's a catch-up effect that, ultimately, so you have your normal level for Q4 plus whatever should have been normal, say, for Q2 or Q3 that you have to do extra, is that a fair way of looking at it?

Yes. And you can say just to have a guidance is that if you look to early quarter this year compared to the same quarter last year, you can see that we have had a lower pace. But from what we can see now, if you make assumptions about Q4 isolated, maybe you can more have the last quarter last year as a guidance for that meaning that we are back maybe on the same pace for that quarter.

Okay. So there's no real catch-up effects on Q2 and Q3 then if you're just going to do the same level as last year?

Yes. But the last quarter was -- you could say, a high pace last year also. So it's more that we are back on track on a higher level.

Okay. That's clear. And so just to confirm from following the previous questions because you talked about volume being lower, but still 15% increase in renewals, which is obviously still quite strong even though not as strong as it's been in the past. So now you said that it's not going to be only volume, but effectively you would expect that 15% to go down as well. Is that fair?

Yes. I mean -- and the prognosis of that is after all, of course, extremely hard to make in any situation.

And the next question comes from the line of Markus Henriksson from Pareto.

I just have a question on acquisitions. I think you have a strong balance sheet right now. And could you elaborate a bit on geographical expansion or segments? Or if there's any change due to the pandemic for your cost strategy?

I see no changes. I think it's extremely important to be active in a market like this and see how we can use our balance sheet. And that means that I would like to see turnover in the portfolio, but with the volume going up. The sector is -- Nordic sector is office logistics. And yes, we would like, of course, to still expand into -- outside Sweden, in the Nordics, et cetera. That said, if the government asked us to do something else, of course, we'll look into that because we are one of the preferred owners from their side right now.

All right. And a follow-up. What's the pipeline for acquisitions for you right now?

From -- the pipeline is like always huge and the pipeline going through is less. So I mean from our standpoint, we are looking into what's in the market and what we can find off-market right now that's of interest, but we are active.

And as there are no further questions, I will hand it back to the speakers for closing remarks.

Okay. Thank you very much, and I hope you will have a nice day, working day today. Thank you very much, everyone.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.