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

Good morning, everyone, and welcome to this presentation of Castellum's Q2 report. There will be a Q&A session in the end of the webcast. [Operator Instructions] Let's start. Go ahead, Pal.

Thank you, Christoffer. And let's start with some highlights from the second quarter. Divestment to Wihlborgs, we sold all our properties in the Öresund region minus Copenhagen to Wihlborgs. Sales price was SEK 13.3 billion. We also sold the portfolio here in Stockholm with 2 buildings, and we sold it to Alecta, and the sales price was SEK 5 billion. And the sort of common denominator for both of those transactions were that we received a good price, and we think that we will not be able to meet our return targets given the price we achieved in those 2 transactions. We have conducted -- continued to conduct share buybacks. So for the first 6 months of 2026, we have purchased 39 million shares for SEK 4.6 billion. And on the leasing side, we -- Ericsson did not use its option to not lease the full Infinity, but they would rather -- lease the full Infinity, and we also made a leasing contract with Ericsson for 2 additional buildings in Hagastaden, Emerald House and Jubileumshuset. There are some conditions to those 2 agreements, so these 2 lease agreements are not a part of our net leasing this year and probably not until the end of next year in 2027. Short introduction of Castellum, we have a property portfolio of SEK 134 billion. We also own 37% of the listed Norwegian company Entra. Currently, we have 5.2 million square meters and 650 (sic) [ 655 ] properties and around 500 employees. But that will reduce as we have the closing on the announced transactions. We are working quite diligently with sustainability and not the least with reducing our energy consumption. And this first half year, we have reduced our energy consumption with 2 percentage points. Net leasing, obviously, very important for commercial real estate company. And it's very nice to see a positive net leasing for the first 6 months of 2026, despite quite big terminations in the last quarter. But net leasing is SEK 110 million, and a lot of that is obviously driven by the Ericsson leasing of Infinity, which is around SEK 140 million. If we move on to the next slide, you can see the net leasing excluding projects. And what you can see here is that it's still negative when you -- we remove the projects we are doing, but perhaps a bit better than it has been for the past 3 years. And this picture also gives us a nice bridge to the next slide, where we can see our vacancy, which is today is 87.5%. So it has increased a bit also in this quarter. But what we can see is that the vacancy rate or the occupancy rate has gone down, and this is all due to the net leasing that has been negative for quite a long time, actually. And here some key figures regarding the contracts, roughly 1/3 in annualized terms there has been action in the contracts, 9% annualized figures has just been prolonged with no change in rent level and roughly only 3% has been renegotiated, and those terms have then been 4% lower rent level than before the renegotiation. And quite a big chunk has been terminated, 11%, in annualized terms. And that's -- a lot of that is actually driven by AFRY. It was a pretty big contract that was terminated during the quarter. But if you weigh in on prolonged and renegotiated leases, the change in rent level is minus 1%. And here, on the next slide, you can see the in-place rent, the contractual value of our rent levels, how that has changed during the past year. We have disposed assets, and we have removed assets from the like-for-like, where we are making projects. And the like-for-like in-place rents have declined with minus -- declined with 1.3%. And that's mainly driven by an increased vacancy. And, of course, with increasing vacancy, you get a negative income growth in the like-for-like portfolio and has been minus 2%, basically the same as we reported in the first quarter. NOI is also negative for the quarter -- for the period, full period, minus 4.8% negative income growth, but also a bit higher costs, mainly driven by a pretty cold winter, so more costs for snow removal and heating and so on. Okay. Over to you, Christoffer.

Thank you. As Pal mentioned, we have been quite active on the transaction market in the first 6 months of this year. We have signed the deals totaling SEK 24 billion of value, which the large one being the divestment to AP7 signed in February, SEK 5.6 billion of public properties, the divestment to Alecta, signed a couple of weeks ago, SEK 5 billion of office properties in Stockholm and the divestment of our assets and our organization in Skåne, south of Sweden, to Wihlborgs, SEK 13.3 billion, also signed a couple of weeks ago. In addition to that, we have signed a couple of smaller transactions totaling close to SEK 400 million in property value. Also, this is a mix, but mostly offices, one small one in Copenhagen, one small one in Malmö, one small one in Stockholm, a couple of ones in Linköping, different categories and different geographies. The total signed divestment has been done at a value just below SEK 400 million -- SEK 500 million or 2% above fair value the quarter before the transaction was signed. We are, of course, more interested in the return we expect from the properties to give us in relation to the price we get rather than price versus fair value, but still worth mentioning, especially given the size totaling SEK 24 billion. And as I said, also a mix of property categories and a mix of geographies, so interesting, I would say. In this table, we have also highlighted both the total profit, and that is including sort of all effects, including in the income statement. So also value changes in goodwill, tax effects, et cetera. So bottom line results. And we have also one line here, profit included in the report, which is what we have recorded in the income statement up until this report. And the difference, of course, will come in later reports. Looking at our property value, it's SEK 134 billion as of this report. But in this figure, the Alecta and the Wihlborgs transactions are included, as they have not been closed yet. And if we exclude them, we have approximately SEK 116 billion of asset value. Please also notice that we, in the balance sheet in this report, have reported properties sold to Wihlborgs as assets held for sale. So they are not included in the line investment properties. During the period, we have invested SEK 2 billion in our existing properties. Of this, SEK 1 billion is new construction, roughly SEK 600 million is tenant adoptions. Approximately, SEK 300 million is maintenance, and there are some smaller amounts, energy investments and other investments. And this is something new that we have added to the report. A couple of you guys have asked for it, and here you go. Value changes in the period, plus SEK 236 million. And if you divide that, it was plus SEK 401 million in the first quarter and minus SEK 165 million in this quarter. It's roughly the value change in this quarter from the signed transactions. But then the rest, there is some big positive ones and a couple of minuses. And Infinity property is up quite a lot after the signing of the lease agreement with Ericsson. The cap rate in our valuations is 5.7%. It has been quite stable over the last couple of years, and the value decline over those years has rather been lower cash flow expectations. Loan-to-value, 37.3%, healthy headroom, I would say, against our financial policy, which is not to exceed 40%. We have, during the quarter, terminated our S&P Ratings. And the reason for that is that we believe that one credit rating is sufficient to support our new strategy. Debt maturities on average 4.5 years, unchanged during the quarter. We have, during the quarter, refinanced SEK 2.3 billion of secured RCFs. We have issued SEK 3.9 billion of unsecured SEK bonds, a mix of 2, 3 and 5 years, average credit margin 99 bps. And we have also repurchased a number of shorter SEK bonds, SEK 1.7 billion in total value. Stable to decreasing margins, I would say, in both the bond and the banking system during the quarter. So still good financial markets. Interest-bearing liabilities, SEK 57.3 billion, down from SEK 59.5 billion in Q1, and we expect this to come down even further, of course, when we close the transactions later in the year, and that we will reach somewhere SEK 49 billion to SEK 51 billion given that we will amortize approximately 40% of the Wihlborgs and Alecta transactions. Average interest rate currently at 3.5%. That one is up from 3.1% in Q1, and that is driven by the redemption of 2 Eurobonds with low fixed coupons. And this was something that we had to do to be able to fully execute on our strategy and including the divestments of properties to Wihlborgs and Alecta. Those ones would not have been able -- we would not have been able to do those with the previous bond documentation. And the total increase in running financial net will be approximately SEK 200 million on an annual basis. That's approximately SEK 50 million in the shorter bond and approximately SEK 150 million in the longer bond. ICR, 3.2x. It's unchanged. Our policy is to have at least 3x. So headroom there as well. The ICR is stable to slightly decreasing due to the higher interest rates following this redemption of Eurobonds that I just mentioned. In the financial net, we can also highlight that we in Q2 had one-offs of SEK 48 million, SEK 31 million of those relates to this redemption of Eurobonds. And most of that is actually not a cash flow effect, but rather only income statement effect. We have, during the first 6 months, bought back shares, as Pal mentioned, for SEK 4.6 billion. And with that, we concluded the share buybacks relating to both the AP7 transaction and results for 2025. Average price has been roughly SEK 117. And as you might have seen, this morning, the Board decided upon a new share buyback program of up to SEK 3 billion, and that equals 40% of the proceeds from the Alecta transaction, and that is -- actually, 60% of the proceeds from the Alecta transaction, and that is roughly equal to the remaining part of the authorization that the Board has from the AGM because as of today, we hold approximately 5% of our own shares. Income from property management per share increased 7.3% when comparing the first 6 months of this year with the same period last year. Then, we have, of course, bought back shares during this period for proceeds from the AP7 transaction, but that transaction was closed on 15th of June, so almost fully in the income from property management during the period. And looking at the last 12 months comparing with 2025, it's instead 3.5%. Net asset value per share, here measured as EPRA NRV, has increased 4.6% since year-end. Roughly half of it is due to profit and roughly half of it is due to the share buybacks that we have executed below net asset value. As most of you know, our overall financial target is a return on equity over a business cycle, above 10%. Taking the first half of 2026 and annualizing that figure, we are at 5.2%, far from the goal, but at least a step in the right direction, and we will continue to fully focus on this in everything we do. And with that, it's time for questions.

[Operator Instructions] And the first question comes from [ Stefan Block ], SBAB Markets.

I have a couple of questions, starting off with the AP7 divestments. How much did that impact rental income in Q2?

Do I have actually that figure somewhere here? But as I said, with almost the full year -- or the full quarter, as we close it on 15th of June. I think in the press release, it was a preliminary closing date of 29th of April. But then, as I said in the end, it was 15th of June, so almost a full quarter. And if you give me 1 minute, I can perhaps -- I have to come back on that one.

Yes. No worries. I can move on to the next question, a bit more on the capital allocation. And at what share price level would share buybacks no longer be an attractive use of capital in your view?

We haven't really discussed that in the Board. It's quite a big difference still between the share price and the NAV. I think it's around SEK 40. So it has not been a topic. But of course, when approaching the net asset value, share buybacks won't be as attractive as it is right now. But I think we have some headroom still.

Yes. Okay. And following the Wihlborgs divestments, what distribution alternatives are you considering for the excess capital? Could you consider a mix of the dividend, buybacks or -- like, yes, what options are you considering?

I think we are considering all options. And -- but also as we have said, I think we wrote it in the press release today as well that today, we have decided upon the proceeds from the Alecta transaction and the proceeds from the Wihlborgs transaction will be at a later stage. But then, of course, we will sort of take all options into the equation and decide what's best at that point in time.

Yes. And since the closing is a couple of months ahead, we don't know where share price is moving and so on. So we -- it would be a bit stupid to make that decision right now. So we have to come back when we actually know where the markets are, when we are receiving the proceeds.

Understood. Makes sense. And next question after the announced divestments that you have made here, what share of the remaining portfolio still fails to meet your return requirements?

It's extremely difficult to answer that. It's much dependent on what prices we may achieve on the transaction market. But if we would look at the fair values we have today, it's -- I wouldn't say it's a big proportion, but it's a significant proportion of the portfolio where we probably would be better off if we could sell them at fair value. But as I think I write in the letter or in the CEO comment, it's tricky with fair values because there are very few comparables in the market. So they are guesstimates, but that's why we are discussing a lot with other property companies and other interested investors in what prices may be achievable actually in the transaction market. So -- but we do absolutely have a big chunk of our portfolio where if we would receive the fair value, we would probably be better off selling them. But that remains to be seen how much we will get for different type of properties.

Okay. And one final question for me. Do you see a broader base of buyers of your assets versus the beginning of the year? Or is it the same conditions?

I think already in the beginning of the year actually was a very large and broad interest in transaction markets. Perhaps, it's increased a little bit since then. But as I said, I think it was a very large interest already at that point in time. Next one, Lars Norrby, SEB.

Question regarding net leasing, obviously, positive in the quarter, but negative excluding previously announced leases with Ericsson. And you're also, I think, saying something like conditions in the rental market remains sluggish. So looking ahead at the remaining 2 quarters of the year, what's your aim in terms of net leasing?

The aim can only be to work as hard as we can to get as many signed contracts as possible. Forecast for the demand is something that we can't do. We don't have that glass ball, so to say. So we don't know, but we can only do our best to sign as many lease contracts as possible.

Are conditions pretty much unchanged from a quarter ago in the market?

I think when I speak with people within the organization working with leasing every day. I think, in Stockholm, they say that there is more activity. We have signed more lease agreements than we did a year ago. And in other markets, in Gothenburg, it's still pretty weak, but it's not declining. It's perhaps has bottomed out. And in our regional cities, it seems like it's a bit sluggish still, but it's not declining at least. That's sort of the message I get when I speak with people.

And then regarding -- you have AFRY affecting the Q2 net leasing figure by negative SEK 95 million. Is that correct?

Yes.

And as that was -- I understand previously, it was known that, that was upcoming. Is there anything else remind us that you're waiting to come in terms of termination from any other tenant of size?

No, not in that size. No.