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

Good morning, everyone, and welcome to this presentation of Castellum's Q3 report. There will be a Q&A session in the end of the webcast. [Operator Instructions] Let's start. Please go ahead, Pal.

Good morning, and let's jump right into it. Let's start with the share buybacks. This morning, we announced that we intend to buy up to additionally SEK 8 billion of shares, obviously, dependent on the share price and the value of net asset value, of course, and the difference between the share price and the net asset value, but up to SEK 8 billion share buybacks. And we have already bought back for SEK 7.66 billion, amounting to roughly 62 million shares during the period January to September. So that will continue during this year and in the beginning of next year as well. During the quarter, we have also -- and due to our pretty big divestments, decided to reorganize Castellum from 4 to 2 regions. So 2 regions will disappear and be merged by 2 other regions. And the idea is that this will increase efficiency and reduce costs. And our aim is to reduce administration costs by 15%, which almost amounts to SEK 100 million. And during the quarter, we closed the Alecta transaction with two properties here in Stockholm. And after the reporting day, we also closed the Wihlborgss transaction where we sold all our properties in Skåne. So those properties are still in our balance sheet and income statement. But from 1st of October, they are no more with us, but rather with Wihlborgss. And we are continuing with our strategy Back to Basics, which means less bureaucracy, greater efficiency and focus on leasing and not the least, disciplined capital allocation. For those of you who are not too familiar with Castellum, we have a property fair valuation of almost SEK 130 billion. We own 37% of a Norwegian office company listed on the Norwegian Stock Exchange called Entra. That amounts to roughly SEK 11 billion. We have slightly more than 5 million square meters. Most of it is office. And at the reporting day, we had 644 properties. Today, as we have handed over the properties in Skåne, we have around 545 properties and around 440, 430 employees. Net leasing is obviously a very important key figure for us. During the year, so far, we have positive net leasing of SEK 105 million. This includes the total portfolio. And if we look at the like-for-like or excluding projects, the actual net leasing is negative SEK 63 million. And it has been a long period of time now where the sort of like-for-like or the excluding project portfolio has been negative. And our view -- and my view is as long as we see negative net leasing, excluding projects, we will have issues with the growth of income in the like-for-like portfolio. We will struggle with not increasing the occupancy rate. So this is our main focus in the day-to-day business to increase leasing and reducing vacancy. And here, we can see the occupancy, how that has been affected by the negative net leasing for the past year, where we had the best performance in 2022, where we were at almost 94% occupancy, and now we're down to 87%. And this is obviously the negative net leasing trickling down in these figures. This is the action within the portfolio. Around 30% of the portfolio, we've seen action in the portfolio during the year. Half of that, 40% of the total stock have just prolonged. 3% has renegotiated and 10% has terminated their leases. In the prolonged leases, there's obviously no change in the lease levels. And in the renegotiated leases, we have had to reduce the rent level by 2.5%. So the changes due to prolonged lease term and renegotiation, the total of that is minus 0.4%. And here, we can see what affects the lease levels we are or the in-place rents we have in the portfolio. Obviously, we have disposed lots of properties, and we have made some development and some acquisition. But looking at the like-for-like portfolio, we can see that even if we are able to increase the average rent level a bit, the vacancy has a stronger effect on our in-place rent levels. So like-for-like, we're down minus 1.4% during the past 12 months. And increased vacancy and negative net leasing obviously also trickles down in the like-for-like figures, both for income, rental income, which is down minus 1.7%. And on the net operating income, if you look at the next slide, it's down even more 3.6% due to slightly increased cost compared with last year and mainly due to a bit colder winter this year than last year. Now over to transactions, Christoffer.

Yes. As most of you know, and as Pal mentioned briefly in the beginning, we have been quite active on the transaction market. We have signed deals totaling SEK 25 billion of value so far this year. And with the large one being the divestment to AP7 signed in February, SEK 5.6 billion of public properties, the divestment to Alecta signed in June, SEK 5 billion of office properties in Stockholm and the divestment of our assets and our organization in Skåne to Wihlborgs, SEK 13.3 billion of mixed assets also signed in June. The Alecta transaction closed 1st of September and the Wihlborgs transaction closed 1st of October. In addition to these larger transactions, we have also signed a couple of the smaller ones in total, close to SEK 650 million in property value, mixed both in terms of geography and category. And these figures on this page includes the divestments in Linköping and Umeå that was announced earlier this week. The total value, SEK 24.6 billion, was just above SEK 500 million or 2% above fair value, the quarter before the transaction was signed. We are more focused on the total return we expect long term in relation to the price we get or return on equity perspective rather than price versus book value. In this table, we also highlight the total profit, and that is including all effects in the income statement. So that is value changes, of course, but also goodwill and tax effects, which are quite big ones in the income statement. The value of our properties as of the report date is SEK 129 billion. And as Pal mentioned, this includes the properties divested to Wihlborgs. Excluding that figure of that transaction, it's SEK 116 billion. And please notice that we, in the balance sheet in this report, still have these Wihlborgs assets as assets held for sale. During the 9 months period -- could you actually go back a bit? So during the 9 months period, we invested SEK 3 billion in our existing properties. Half of it, SEK 1.5 billion, is new construction, and that also includes extensions and reconstructions, SEK 0.8 billion in TIs and SEK 0.5 billion in maintenance investments. So it is quite a large volume of investments in existing properties and projects. The value changes in the period, minus SEK 0.7 billion. And of that, actually SEK 1 billion was in Q3 -- and of that SEK 1 billion in Q3, roughly SEK 300 million was realized, and that is actually deduction for deferred tax for the Alecta transaction that was closed during that quarter. And the remaining is more underlying unrealized value changes. A mix of categories, mix of geographies. Actually, all of our regions have a minus in front of it, a bit more in Gothenburg than in the rest of the regions, but minus in all of them. Cap rate in our valuations has been very stable over the last couple of years. So the value declines that we have seen has been more of -- due to lower cash flow expectations. In this quarter, if we compare with the last quarter, it's -- the average exit yield is actually 9 basis points higher, and that is mainly explained by the 2 large properties we sold to Alecta, which, of course, had quite much lower yield requirements than the average of the group. Loan-to-value, 37.4%, very stable. It was 37.3% last quarter. So stability and has been over quite some time. Also healthy headroom against policy, which is maximum 40%. And this is also the larger divestments we have done during this year, we have used the proceeds for debt reduction, 40% and equity reduction through share buybacks of 60%. So we are keeping the loan-to-value in all of those divestments and what we use with the proceeds. Debt maturities, 4.0 years, that is down from 4.5 years in the last quarter. That is due to that we have, during the quarter, closed some longer-term loans linked to the divestments to Wihlborgs and Alecta. So also the Wihlborgs transaction, we have closed the financing in this quarter, i.e., before the transaction was closed. And we also have one-off costs related to this of SEK 21 billion (SIC) [ SEK 21 million ] that is recorded in the Q3 report. So that is break costs for loans attributed to those properties. During the quarter, we issued a EUR 300 million bond on the European bond market, 3-year 78 bps of credit margin, and that was done in the end of August. At that point in time, the market was very good. Since then, we see some 10 to 15 basis points higher margins in the bond market. Still stable margins in the banking system. And if you zoom out, then, of course, the bond markets margins are also still attractive, although they have, as I said, increased a bit over the last couple of weeks and months. Interest-bearing liabilities, SEK 56 billion, close to 50-50 split between banks and bonds. And we have an average fixed interest term of 2.7 years, and we are currently hedged -- or at the reported date, we are hedged at 61%. Also these hedges will, all else equal, improve quite a lot in Q4 as the Wihlborgs proceeds came in on the 1st of October. We haven't entered any new interest rate swaps during Q3, and we only use plain vanilla interest rate swaps in the hedging portfolio. So as the headline here is unutilized credit facilities, SEK 14 billion. As I said, we used quite a lot of our RCFs during Q3 when we paid back debt to the Alecta and also for the Wihlborgs transaction. And then in the beginning of, of October, we have actually restored that. So as of today, the unutilized credit facilities are much higher again. Average interest rate currently at 3.5%. That is same as last quarter. We moved up quite a bit in Q2. That was when we redeemed the cheap Eurobonds of some SEK 9 billion, which we had to do, to be able to execute on our strategy of asset rotation, but been stable since then. And we actually think that it will be stable also going forward the next couple of quarters, given both the current pricing of the forward STIBOR, but also, as I said, with quite high hedging -- and as of today, as I said, 61% hedging as in the report. And if we would calculate it as of today, it will be something like 75%. ICR 3.1x. Financial policy is that we should be above 3x. Also ICR expected to be stable despite market pricing of higher short-term interest rates. As Pal also mentioned, share buybacks so far during 2026, SEK 7.6 billion, average price just south of SEK 123 per share. And with that, we have concluded both the 60% part of the proceeds from the Alecta and the AP7 transactions as well as the part of the results for 2025. And then today announced the SEK 8 billion, which is the same proportion of the Wihlborgs transaction. And last week, we held an EGM. And at that point in time, we have 9.9% of the shares. And then, of course, the EGM decided to cancel those shares. Income from property management per share is on this slide, increased 4.7% when comparing with the first 9 months the same period last year. But then we have, of course, bought back shares from these transactions, which should be mentioned that they are -- the AP7 transaction was closed on 15th of June and the Alecta transaction 1st of September. So definitely generating some income for quite a large portion of that period. And looking at the 12 months instead, it's 3.4% up. Our net asset value per share is currently at SEK 169. It has increased with 5.9% since year-end and just below half of it is due to profits and then consequently, a bit higher than half of it depends on share buybacks bought back substantially below net asset value. And as most of you know, our overall financial target is return on equity over a business cycle should be above 10%. Taking the first 9 months of 2026 and annualizing the figure, we are at 5.2%, far from the goal, but at least a small step in the right direction after 4 quite bad years. And with that, it's time for questions.

[Operator Instructions] And the first question comes from Fredrik Stensved, ABG.

My first question is on the share buybacks and what you started off this call with saying, Pal, you said the share buyback program is for up to SEK 8 billion, but dependent on the share price and the difference between NAV and the share price. My question is how we should think about sort of other metrics that I assume also goes into this consideration, not just the difference between the share price and then rates are up, ICR should be coming down for most companies. So I guess at what projected ICR do you believe that Castellum has to deleverage versus buybacks? And what else goes into this consideration as well?

If I may start, I would say that our main consideration is to make return on the capital we have in the company. So -- and as long as we see what we see right now, we see it's better to return the -- so if we can earn it, we have to return it, like we said in the previous quarter. So that's our main -- so we are constantly looking at prices in the property market to see whether we can invest in the property market. And it does not look like that right now. And then we have the consideration between the NAV and the share price. Today, there's a distance there. That could change either through that the share price increases or that the property prices go down. And if the property prices goes down, we will probably start investing in properties again. So we need -- so that's on the sort of the active side on the balance sheet. And then we have the passive side, which you mentioned on interest rate coverage and so on. I will hand over that to Christoffer. But I think with our hedging and pretty stable -- even if the sort of the net leasing is a bit negative, it's pretty stable income anyway. So if we would make a projection of our interest coverage ratio going forward, it will remain around our target of 3 and around what the rating agencies look at or what Moody's look at for several quarters ahead, actually years, I would say. So that's not the key consideration right now. Do you agree, Christoffer?

I totally agree. So as I said, quite stability on that with the pricing that we see in the market as of today, the forward pricing. Then of course, if something changes, then we, as always, have to reiterate that thinking. But what we see right now and what we can plan for with the hedging we have, we feel comfortable with that.

All right. Yes, that's clear. Second question is on the hybrid bond, which is callable this winter. Can you talk a bit about how you think about refinancing that one, new hybrid, other equity instruments, normal debt or just keeping it where it is?

We actually haven't made any decisions on that one. And we intend to come back to the market in a sort of more formal way when we do so. So we stay away from speculating about that future decision, so to say.

All right. Yes. No, that's fair. Maybe if I sort of reframe the question more from a shareholder and share buyback point of view without, I guess, going into details or talking about the hybrid specifically before you made up your mind. But hybrid spreads have widened quite a lot. Can you sort of talk about why it makes sense from a shareholder point of view that proceed with the SEK 8 billion share buyback program compared to deleveraging? Does that sort of only goes back to the fact that you think ICR will stay above 3 or -- or can you elaborate a bit on buybacks versus deleveraging?

I think as we have stated before, we are quite happy with our current leverage. And that's why we have chosen that split between debt reduction and buybacks or distribution to the shareholders. And so far, it has been through share buybacks.

Okay. I guess we'll wait for the formal announcement.

Next one is Lars Norrby, SEB.

Obviously, you managed to make three really major portfolio divestments during the year. Looking ahead now, are you continuing to work on additional significant divestments? And do you feel that in any way, the recent increase in long-term interest rates have been anything affected that transaction?

I can start answering. We are continuously speaking with a lot of investors, both institutional capital and property companies. And there is continued interest in making transactions, even though I would say, and you can give some more color on that later on, Christoffer, that I think the recent rent rate hike has probably made some people a bit more reluctant. That would be my sort of gut feeling. But still, there is a big interest in making transactions. Interest rates are still not very high. There's still access to a lot of capital. And there's sort of a longing for making transactions during a couple of pretty thin years on the transaction market. So many are making sort of strategic investments when there is possibilities to do so.

Yes, I totally agree. We -- as Pal mentioned also, we have a couple of ongoing transactions that we work on, and they are going as planned, I would say. But then of course, it's always -- the deal is not closed until it's closed. So let's see. Of course, we should be prepared for that in some way or the other, the transaction market is affected by the higher long-term interest rates, but we haven't really seen it in the transactions so far to be honest.

My second and final question is regarding your holding in Entra, obviously, a potential source of cash that can be used for buybacks if something happens to the ownership. Pal, you're on the Board of Directors. What's the thinking from your side in terms of Entra? Do you want to do the same thing as you're doing in Castellum, that is divesting properties and using that for buybacks?

I think the discussions we have in the boardroom in Entra needs to stay there. But obviously, I'm a bit inspired of what we are doing in Castellum.

In terms of ownership, -- are you more likely to go down in ownership than to go up in ownership in Entra?

Tricky question. I don't think we will -- I don't think -- we are not discussing -- adding any shares as it is right now. Our main concern is all the shareholders that have had pretty weak development for the past 10 years owning Entra shares to improving that. So that's what we are discussing rather than changing our -- going up 1% or 2% or going down 1% or 3%. But in the long term, I've said this before, obviously, I think we should -- Castellum should focus its operations in Sweden predominantly.

Next one is Staffan Bülow, SB1 Markets.

A couple of questions, starting with buybacks. So the mandate is limited to 10% of the shares, but at the current share price, SEK 8 billion would correspond to more than 10% of the share count. If the NAV discount remains quite wide, would you consider canceling the initial 10% and launching a buyback program to reach the SEK 8 billion?

Yes, a simple answer.

All right. Very clear. You announced in Q3 that you will reduce admin costs by SEK 100 million. How much is central and property? And how long time will it take to reduce the admin cost by SEK 100 million?