Castellum AB (publ) ($CAST)

Good morning, everyone, and welcome to this presentation of Castellum's Q1 report. There will be a Q&A session in the end of the webcast [Operator Instructions]. So let's start. Please go ahead, Pal.

Good morning. As you probably all know by now, we are -- the main target in Castellum is to achieve a return on equity of 10% over the business cycle. And during the autumn, we launched a new strategy, one could say, which we call Back to Basics. And one of the main principles in Back to Basics is to increase the transaction pace. And during the quarter, we conducted 2 transactions, 1 smaller in Linköping and 1 bigger with the disposal of 9 properties to AP7 with a profit of SEK 750 million. Another principle in Back to Basics is to be very prudent with the capital that the shareholders have given us. And if we can't return it, we will -- if we can't earn it, we will return it. And during the quarter, we have repurchased almost 24 million shares. Another principle of Back to Basics is to have a tight grip on costs. And during the autumn, we sold our co-working operation called United Spaces, we've made a reorganization and cost cuts at the headquarters. And the administrative costs, both in property management and in central administration is lower this quarter compared to the first quarter 1 year ago, and it's almost SEK 100 million lower -- Swedish crowns lower. And of course, leasing, leasing, leasing is also one of the main principles in Back to Basics. It's still slow, but we had positive net leasing during the quarter, SEK 82 million, whereof SEK 72 million was the leasing to Ericsson in Hagastaden. So still slow but positive. Castellum, our property portfolio valued to SEK 138 billion, but we also have 2 joint ventures. One joint venture in Gothenburg, Halvorsäng logistics together with the harbor in Gothenburg. And then we own 37% of the shares of the listed Norwegian office company, Entra. We have a mixed-use portfolio, mainly with office, but also a large proportion of warehouse and light industry and public sector properties, 5.3 million square meters lettable area and high sustainability focus. Now down to the details. So I hand over to you, Christoffer.

Thank you. So looking at income and net operating income, both are down by some 3% compared with last year -- Q1 last year. This is mainly due to higher vacancies, but also higher direct property costs. However, with lower central administration, SEK 24 million this quarter, SEK 66 million last quarter, and in addition to that, somewhat lower interest costs, some SEK 10 million and a better contribution from Entra of SEK 17 million. This at least leaves us at positive territory in terms of income from property management. Property values were positive, SEK 416 million or 0.3% and as Paul mentioned, the net leasing for the period is SEK 82 million, whereof the large leasing in Hagastaden to Ericsson is most of that. Occupancy now at 88.0%, somewhat lower than the last quarter. And on the investment side, we have net investments in the quarter of SEK 679 million. Of this is SEK 886 million investments in existing properties and then we sold properties for SEK 214 million. So not including the large AP7 transaction, but this was transactions we made and communicated in the end of last year. The biggest one is in group. Into more details, income in the like-for-like portfolio decreased by SEK 47 million, and that corresponds to 2%. And that is mainly due to higher vacancies of SEK 60 million compared to last -- the quarter last year. Both income and costs are affected by this divestment of our co-working business. So this is the first full quarter without that business. So income decreased by some SEK 45 million and cost decreased by some SEK 53 million. So that is a quarterly net positive effect of SEK 8 million, in line with what we announced in October when we sold the company that we indicated a positive yearly effect of SEK 30 million, that's quite spot on. On the cost side, the like-for-like property costs increased with SEK 45 million. And of this SEK 38 million was due to higher cost for heating and snow due to the colder winter than the year before. And as Paul mentioned also looking at administration costs, and if we add both property administration and central administration, costs are down SEK 99 million. However, half of that SEK 53 million is related to this sold co-working business. And then please also note that we have SEK 22 million of costs that we have moved from central administration to property administration. And this is part of that changes we did in the autumn where we both reduced costs on the headquarters, but we also moved some staff to the regions. I would also say that we, in this quarter, has had no material one-off, which we, of course, had quite a lot of in Q4. Looking at the leasing side, 14% of the total lease that were up for renegotiation were renegotiated during the period with an average negative change in rent of 7.1%. It's quite small volume, and it's no specific or individual rental agreement behind it. It's actually a couple of them. As usual, the largest proportion are extended but no changes in terms. This quarter, about half of the volume, 49% or SEK 249 million is rolled over with no changes in terms. And net leasing, as mentioned, SEK 82 million in addition to the Ericsson deal that we have talked about, we can also mention that we have some positive net leasing in Denmark of some SEK 20 million, and we have some positive net leasing in the Mälardalen region of SEK 18 million, and that is roughly the amount of new leasing to light industry. Looking at property values, as mentioned, they are up with some SEK 400 million, mainly due to the Infinity project in Hagastaden, some SEK 300 million plus and also the divestment of 9 properties to AP7, approximately SEK 250 million up. That was also communicated in the press release in that transaction. So if we take those two away, the remaining part is actually a little bit lower than the last quarter. SEK 138 billion of fair value. And this then, of course, includes the SEK 5.6 billion transaction with AP7 as that one is closing in Q2 or a smaller part of it is actually in Q3, but the big part in Q2. Also in this quarter, we have actually lower cash flow expectations in our valuations, and that's the downward pressure on rental levels. That's the explanation to this smaller negative value changes if we exclude Infinity and AP7 transactions. Looking at the financing side, market conditions remain favorable despite increased volatility. We saw some credit spreads widening during the quarter as the conflict in the Middle East escalated, but we have recovered continuously during the quarter and now in the beginning of Q2 and spreads in the bond market are some 10, 15 bps wider than the lows before the conflict started. Nordic banks continue to offer very competitive pricing and are willing to increase volumes. And it's also on this side that we have been active in the quarter. So on the secured side with the refinancing of in total SEK 6.8 billion in bank loans. The average duration of those loans has been just over 8 years, so quite long credit duration in the bank loans that were offered currently. And that is also contributing to the increase in our average debt maturity. We still have some SEK 18 billion in cash and unutilized credit facilities and providing us with sort of comfortable backup to the upcoming maturities, which are, I mean, not very big. Financial key ratios, broadly stable compared to previous quarter. However, a slight increase in the loan-to-value now at 37.5%, mainly explained by the fact that we have bought shares in the quarter of some SEK 2 billion, while the proceeds from the transactions comes in Q2. ICR stable at 3.2x and comfortable headroom against policies of 40% LTV and 3.0x ICR. As mentioned on the previous slide, average debt maturity is slightly higher, 4.5 years, and the average fixed interest term is 3 years. Interest-bearing liabilities slightly up, same explanation, a bit higher due to the mismatch in acquiring shares in the quarter and proceeds from the transactions in the next quarter. Looking at divestments, we have done, as mentioned, two larger transaction -- one large transaction and one with a small transaction. And the last one we have talked about quite a lot already, SEK 5.6 billion public assets 100% leased out, sold to AP7. Fair value as of Q4 was SEK 5.15 billion. So the earnings -- total earnings effect was SEK 715 million, and that one is closing in Q2 and Q3. The smaller one, maybe not small for the Linköping market, SEK 256 million sold to the Åman family, a big different, 25% vacancies from our perspective, quite a lot of investment needs in the portfolio going forward and a good transaction from our perspective. An update on the share buybacks that we are conducting. After the divestment of the portfolio AP7, the Board announced that we are initiating a share buyback program in total of SEK 3.4 billion and of that, we have so far acquired for SEK 2.7 billion. That is up until today or yesterday evening at least. And out of that, some SEK 2 billion was acquired during the quarter and then the remaining one now in April. Average price, SEK 113 per share. The large lease during the quarter, 24,000 square meters in Hagastaden, the entire building and we have 15-year duration. Then it includes an option for the tenant up until 1st of June this year. So roughly in a month, we will know that they have the optionality to decrease it to a 5-year tenant with approximately half of the volume.

And to wrap things up, some words on our sustainability performance. The day-to-day work to decrease our energy consumptions goes on as previously. And during the quarter, we have reduced the energy consumptions in the like-for-like portfolio with 4% and roughly 1/4 of our electricity is self-generated mostly by solar panels. And before we let all the questions in, let me summarize a bit. We have positive net leasing, SEK 82 million, whereof SEK 72 million from Ericsson. So it's the fourth quarter in a row with positive net leasing, but very low figures, one could say. So it's still -- it remains slow in the leasing market. We made transaction -- 2 transactions very successfully, I would say, and that's part of the Back to Basic principle to remove everything that we don't believe will give a 10% return on equity. And the cost savings program we conducted during the autumn now comes into the figures. So with that, I think we can hand over to questions.

[Operator Instructions] The first question comes from [indiscernible].

First, I have a couple of general questions. Regarding your portfolio, is it possible to, in some way, quantify how large proportion that you think that doesn't meet your return requirements?

Not really. I think we are looking at that continuously. And one thing that's very important in that equation is actually what prices you can achieve. So it's difficult to answer that question. But I would say there's a big proportion that actually can achieve 10%. And there's a proportion also that, I would say, is borderline. And then there's a proportion that probably not depending on prices that not will meet our 10% return requirement. But I cannot give you a figure on that right now.

That's fair. But kind of a follow-up, how does that view impact your view on projects? I mean, if you complete the project with a long lease to a stable tenant and it's fully let, is it possible to keep -- to continue to own those kind of properties? Or should that properties be sold as they are completed? Or do you kind of give promises to the tenant that you will remain as a long-term owner, so you can't sell it?

The last question that's very uncommon that you have to promise tenants that you keep something forever and ever. So I wouldn't say that, that's a question. If we complete something and obviously, then the property is in its prime. So the demand for those type of properties may very well in different markets, depending on the market and interest rate may be very high. But it's from case to case, I would say.

Okay. And regarding your renegotiations, even though it's a small number, is it related to some specific region or some specific category?

No, actually not. It's quite a lot of the different underlying rental agreements, actually it different categories and different geographies. So that's unfortunately not...

Okay. And regarding your admin expenses, both the level of expenses for central admin in Q1 and the movement from central admin to property admin in Q1. Is that like a reasonable level also for coming quarters? Or are there some seasonal variations in those numbers?

No seasonal variation. So that's roughly in line with the expectations, although we, of course, not guide on it, but it's quite clean, so to say, no one-offs in...

And the next question Lars Norrby, SEB.

A question about buybacks. By the way, I love your comment there. If we can't earn it, we will return it. You still have some way to go on the SEK 3.4 billion buyback program that you have. And on top of that, I guess you have the capital distribution for '25, a few hundred million on that one to do even more than that, but does that necessitate more divestments of properties?

At least, we do not have any plans for more that should we not do any more divestments...

And you've done some quite sizable divestments, the SEK 5.9 billion and close to SEK 300 million or so, but still your total portfolio is something like SEK 138 billion. Why haven't you been able to do more? I guess you want to do much more than that. Isn't that true?

I can -- what we see right now, I would say that we see quite a big interest in general on the property transaction market to make transactions. That's quite clear. More in detail than that. I don't think we can answer more in detail than that. But we have discussions with interested parties. And as soon as we have something to tell, we will definitely tell.

Next question, Nadir Rahman, UBS.

Yes. So I have 2 questions from me. The first one is in your report, if we look at the value decline in the markets that you mentioned have lower expected cash flows, I'm assuming this is firstly not Sjisjka [indiscernible], which you said you took value declines on in Q4. So can you give some more color as to where this decline was concentrated? Then I can ask my second question after this.

Not really any concentration to that. You are correct that Sjisjka and Finland was more Q4. So this is more broadly across the portfolio.

Okay. And the second question is on the slight decline in rental income and of course, and occupancy as well, and you're mentioning that this is largely due to the effect of the legacy like negative net lettings from last year. When do we expect this to start to inflect and we start to see a more positive effect from any positive lettings from the last 4 quarters? Do you have perhaps an indication of when we see that inflection?

We don't really have that indication or maybe we have that indication, but we don't guide on it. What we could mention is, of course, that Q1 last year was very negative net leasing wise and then at least positive, very small figures, but positive Q2, Q3, Q3 and Q4 and now positive again in Q1 this year. But we can't give more details than that.

Okay. Very clear. And sorry, just to come back to my initial question on the value decline. Instead of any regional concentration, is there any asset class, for example, offices or any other sector that you see this value decline in occurring in more?

Not really there either. It's actually in different asset classes. I mean, quite small volume in the big perspective, I would say.

Next question from John Vuong, Kempen.

In the previous energy crisis, Castellum wasn't really fully hedged against electricity costs. With the war ongoing, could you provide a bit more color on how well you're now protected against a surge in electricity prices?

Yes. We changed that a couple of years ago to a more -- maybe more normal, I don't know, but at least a different hedging strategy, more classic 80%, 60%, 40%, 20% strategy. So I would say better hedged, not fully hedged, but better hedged and quite sort of evenly over a couple of years.

Okay. That's clear. And just on the share buyback, I think in your latest press release from this week, I noticed that there were no repurchases done on Friday and Monday. I suppose that also coincides with the share price above SEK 125. Could you provide a bit more color on this?

That's correct. That was -- I mean, as of lately, we have bought back shares through this safe harbor procedure as we have been in close period and then we instructed the bank of that share price maximum.

Okay. And then just lastly on the occupancy. I noticed you restated several numbers. Could you highlight what has changed and why it has changed?

Could you repeat the question?

On your occupancy definition, I noticed you restated some historical numbers in the quarterly reporting. So what has changed in the definition of occupancy? And why did you change it?

What we have changed is that previously, we -- our occupancy was for the full period, now we have changed it into end of period. And the reason for that is that we think that's more accurate, especially when you come to the end of the year when you are very much affected by the vacancy level in the sort of first quarters of the year. I think that's more common that the vacancy figure or occupancy figures are end of period figures.

Next question, Paul May, Barclays.

Just a couple of quick ones from me. You mentioned obviously looking at disposals and selling assets where you don't hit your return requirements. Just wondering who would be the buyers of those assets because there's not many buyers or much capital out there that's looking for the low returns that you would anticipate on those assets and hence, you're trying to sell them. Just wondering if you could give some color on that would be great. And then secondly, on the operating environment, I appreciate it's not particularly easy out there. And as you've highlighted, it's quite tough. I think you've talked about improving the leasing environment, improving the operating metrics. So when should we expect those to actually flow through into real numbers in terms of occupancy and NRI growth, which seems to be getting worse rather than better. Is it to do with your weaker assets or weaker locations? Or do you just think it's a market-wide soft leasing market that just requires time before that starts to improve?

I can start with the first question. We actually disagree a bit. We think it's plenty of interest out there, plenty of capital out there interested in a very large proportion of our assets. And I would say that's from different kinds of capital or investors as well, local and foreign institutional and private listed real estate companies and private equity funds and not at least Swedish institutions. So -- we think it's very much interest in the transaction market.

And regarding the operational figures, vacancy and like-for-like growth, I would imagine we are not guiding, but I would imagine that we will continue to see a pretty slow market for a while. We haven't seen any turnaround as of yet anyways. So until we reach sort of a new equilibrium where we are, we probably will see figures that are a bit on the down slope before it turns. And this was also, I think we indicated that during the autumn that it will get a bit worse before it can improve. But now we still have -- we at least have positive net letting even if it's dancing around 0, but it's still positive. But we are not seeing a rapid increase in demand for our properties in the rental market as it is.

Next question, Pranava Boyidapu, sorry if I'm pronouncing it wrong, also Barclays.

I'm Paul May's credit analyst. On that note, I would like to get a little bit more clarity on what your -- if you can't earn it, we'll return it policy means for the bondholders because again, at the cost of sounding repetitive, there are some loose ends with the consent solicitation that didn't go through specifically for the Castellum 29 Eurobonds. So I was just wondering what does it -- at what point in your business plan, does it seem like you have -- you could potentially consider the bondholders on the side of the cessation of business event?

Same answer that we have said before that we -- if and when we come to that point in time that we are having such transactions sort of on the table, then we will handle it at that point in time.

And then I have a second question regarding your hybrid debt, which is, I believe, SEK 1 billion with the first call next year. I was wondering if you had any plans in terms of how you expect to refinance it considering the size of it. And I assume that the hybrids will remain a part of your capital structure, if there are potentially different currencies you might consider? Or is it going to be euros?

Also on that one, we will announce our plans sort of when we have decided on our plans. Thank you. And that seems to be the last question of today. So thank you all for listening, and thanks for the questions.

Yes. Thank you and until next time.