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

Good morning, and welcome to this Castellum webcast and Q&A session. From our side, it's myself, Christoffer Stromback, acting CFO; and Pal Ahlsen, CEO. The topic for today is our new strategy that we announced 2 days ago. And we will start with a short introduction, and then we will open up for the Q&A. [Operator Instructions]. Over to you, Pal.

Good morning. As Christoffer said, the short introduction to the new strategy, which we have called Back to Basics, and then we'll open up for questions. Back to Basics, I would say, refers to going back to the core of how to manage real estate. And as most of you know, we are a commercial real estate company, and we are predominantly owning properties in Sweden. Roughly 92% of our assets are located in Sweden. And it's in Sweden, we have our sort of the DNA arises from owning commercial real estate in Sweden. I think that will remain that way going forward. This does not exclude that we could both increase and decrease in other geographics that we already have, Finland and Denmark and through Entra in Norway. But in the foreseeable future, one should probably think that we will continue to be predominantly in Sweden, owning commercial real estate. What's really new and what I think will be the biggest transformation within Castellum is this crystal clear focus on profitability. Previous strategies, probably from the beginning of the Castellum history, focus was more on growth rather than profitability, and this is something we would like to switch, taking away all actions that are not meeting our return target on 10% return on equity. And another key thing we think is important for reaching our return target in the long run is increasing transaction pace. We think that we need to rotate the portfolio a bit at a higher pace than we've done historically. Buying properties, we believe will meet our return targets and handing over properties that where we are not the best owner going forward to others, which have other return targets, other expectations for the future or other views on risk. So increasing transaction pace will be an integrated part of our new strategy going Back to Basics. The centralized property and asset management, that's something which were really from the beginning of Castellum's history, then everything was basically decentralized. And in the regions of the company -- and since then, a bit more has been focused on headquarters, but we are turning that back a bit, putting more responsibility and accountability in the regions. We believe that's where the business is done when you own commercial real estate. And something which most companies really say that they are doing, continuously strive for improvements. This is something we also will do, but we will also take actions to actually do that. And one of those actions is that we will increase our efforts in education by Castellum Business School, and that's something that will be rolled out during next year. And before I hand over to Christoffer, the final point I would like to mention is an increased level of cost awareness. Most companies are obviously aware of costs, but we would like to increase that. And I've mentioned the usage of consultants, for example, and other issues or other topics where we actually can reduce costs. And one of the things we've announced and are in the midst of effectuating is reducing staff on headquarters. I'll hand over to you, Christoffer, and he will talk a bit more about the passive side of the balance sheet.

Yes. Thank you. So we have also decided to introduce a more strict capital allocation focus with sort of our shareholder value as top priority. And as part of that, all investments should meet our return target of ROE of above 10%. And all investments should also be evaluated against each other and against other investment opportunities, and that include investing in ourselves through share buybacks. Excess capital, if and when we have such, shall be distributed to the shareholders, and that will be done in the most value-enhancing way possible. And all of that also comes to that we have changed our dividend policy. We now call it a capital distribution policy. So instead of the dividend of at least 25% of the income from property management, the new policy states that it's still the 25%, but it will be distributed to shareholders either as dividend or through share buybacks. We do not have a specific sort of formula for when it will be dividend and when it will be share buybacks. So that is something the Board will decide from time to time and when relevant, of course, propose to the AGM for a decision. When it comes to financial targets, we keep all of them. So still, as we have already said a few times, the overall financial target for us is a return on equity of at least 10% over a business cycle. So that is the overall target, same as we have had for the last year or so. We also keep our financial targets or risk limitations with an LTV of below 40% and ICR above 3x. So those ones are also kept. One change we are doing is that we are adding our ambition to maintain an investment-grade rating at all times to our financial policy. So the ambition itself is not new, but that we are adding it to the financial policy is new. Yesterday, we also announced a process for amending the terms for our EMTN bonds. And more specifically, it's the so-called cessation of business provision that we would like to change. And the reason is that we think it would better allow us to execute on this new strategy when it comes to asset rotation. So we are offering the bondholders a fee to vote in favor of the amendment. And in addition, we are adding a step-up to the coupon of the bonds, should a divestment lead to a downgrade to sub-investment grade.

And with that, it's time for a question. [Operator Instructions]. And the first question comes from Lars Norrby, SEB.

Lars Norrby from SEB. The composition of the property portfolio, I guess, in any company is maybe the most important component regarding future development of the business. Now you're using the expression focus on commercial properties predominantly in Sweden. That would, I guess, theoretically give room for you to have a higher share of your business outside of Sweden. But aren't you primarily looking at it to change it in the other direction? And specifically, what is your view on your portfolios in Finland and Denmark in terms of -- are they subscale? Are they big enough to generate efficiency in property management?

Thank you, Lars. I think the -- when we say commercial real estate predominantly or commercial properties predominantly in Sweden, we are referring to a couple of things actually. One thing is that Castellum owns a pretty broad palette of different asset types within the commercial real estate. We own office, obviously, some public properties. We own light industry, warehouse, logistics, but also some hotel and also some retail. And we are pretty good on managing all those type of assets or types of properties. But the overall key here is the return rate on equity. And there will be differences over time, what type of composition we have in our portfolio, depending on the -- what we believe about future profit potential in different asset classes. And that overall view on that is the expected return going forward will sort of dictate our -- where we are, how much is allocated, so to say, to Denmark or Finland or to Vaggeryd or to Stockholm. We have not set up any target that we should be only in Sweden within 5 years. I could foresee that we actually grow in Denmark if we see profit potential there. Or if we don't, we have to reduce, obviously, if there are better opportunities in other areas within our portfolio.

Okay. Just one more follow-up question. You also have an indirect holding of properties, one could say, through Entra. You've been buying shares during the spring, and then that's been put on hold, if I use that expression, for quite a while. What's your view on Entra going forward? My impression is that the other major shareholder, Balder, may very well be open to selling the stake if the price is right.

No. I think Entra is a great company, and we hope that company will continue to develop. And as soon as we know anything of our future plans, other than holding what we have right now, we will obviously tell you about those plans.

So next question from Fredrik Stensved, ABG.

Can you hear me fine?

Yes.

Perfect. So first question is on almost the same theme as Lars' question. I mean I read your bond document press release yesterday, and I assume that you don't sort of propose a cost increase of 25 basis points unless you actually have a thinking that you might divest Denmark and/or Finland in sort of the near future. So can you add any color or elaborate on your thinking? Are there already ongoing dialogues, which market outside of Sweden do you think is the most likely to be divested and so on?

I should not interpret it like that. As we deem the cessation of business clause in our bond agreement is that we are not allowed basically to do anything at all with the property portfolio. It's put strains on us what we can do. So this has nothing to do with either Finland or Denmark. This is -- we would like to have a bit more freedom to rotate the assets within our portfolio.

Okay. Yes. I think the way I read it was predominantly in Sweden and this together sort of adds up to that conclusion. But I hear your point. Second question on your capital distribution policy change. That's still sort of a portion of income from property management. How do you currently think about share buybacks and/or dividends versus other sort of capital allocation options in the case of divestments and your balance sheet being below 40% LTV and above 3x in terms of ICR?

Well, in terms of divestments, it's sort of definitely an option to go down the route of share buybacks, definitely. Probably there are room in the current shape of the balance sheet as well. But as you know, no such decision has been made. But I mean, we have a strong financial position and definitely room for both dividends and share buybacks should we decide to go that way.

Would you be open to selling assets for the sake of buying back shares?

I think no. If we decide to sell assets, it's due to the fact that we see better opportunities elsewhere, not for the purpose of just buying back shares.

Next question from Nadir, UBS.

Can you hear me clearly?

Yes.

My question is -- well, I have a few questions, but I'll ask them one by one, if that is okay. The first one, you mentioned maintaining the investment-grade rating. Is there a bit of pressure from the rating agencies? Or are you comfortable where you are now and therefore, there isn't any need to dispose or restructure the capital? So in other words, what you're doing now, is that because you have been in discussions with the rating agencies and there is a risk of a downgrade at the present?

No, this is purely from sort of ourselves also in connection with that we're adding that language in the proposed new bond terms than we thought it would makes sense to also sort of add it to the financial policy. I mean, as I said, the ambition has been there for quite some time. So it's more sort of highlighting that ambition.

Okay. That's very clear. Staying on the topic of debt, my second question is, how do you define the 40% LTV? Does that include hybrids as per the EPRA definition? Or are you using your own company-defined LTV there? So how do we calculate that in your case?

That's including the hybrid as we are having the definition in our reports, i.e., the hybrid is recorded as equity, as you know.

Okay. So we're using your company to find its LTV?

Our definition of LTV.

Okay. Okay. That's very clear. My third question is, your ROE on a net income basis versus the book value of equity was around, I believe, 3% to 4% for full year '24. And we, of course, don't have the figure yet for full year '25. But how do you go about reaching your 10%? Is that going to be via net income growth? Or will it be more through shrinking the equity book value on the balance sheet?

Predominantly, it will be driven by returns from our assets, and that comes in both form of yield from the properties or income return. And then if we manage to increase income, obviously, there will be some growth in values. So it's a mix of those 2. And I think the increasing of asset rotation or transaction pace will also help us in always having the right properties with the best return probabilities in the portfolio. So it's not the case of increasing debt to increase return on equity.

Okay. That's very clear. And the timing on when you reach this return on equity of 10% from your current standing and also when you plan to reach the 40% LTV threshold and the ICR limits you have, like what time line do you have for reaching those metrics for the purpose of our forecasts?

Our return target must be seen over a business cycle, obviously, since return on equity is influenced by the volatility of asset prices or property prices. But over a business cycle, if that may be 7 or 10 years, we would like to see an average of 10% return on equity. The past couple of years has obviously been quite challenging on that note, with increasing interest rates and decreasing property prices. In that environment, it will be impossible, obviously, to meet return on equity 10%. But we are looking on this over a business cycle. So it's a long-term target. And I think when it comes to commercial real estate or real estate overall, that you have to have a long-term perspective to reach good returns.

And that's very clear. And on the LTV and ICR, do you have like a time line for how you want to go out reaching this and by when you expect to?

Well, those 2, we are already reaching. So we are within those targets as of today. And those are more risk limitations, and we should keep being within those limitations.

Okay. That's very clear. And my final question is, as of today, given the discount you're trading at and the current transaction markets and the capital opportunities you have, like if you were to decide today as a Board, what your capital allocation would be, would you prefer share buybacks or dividends?

That's a good question. Probably we should come back to that after sort of -- as it is a Board decision, no such decision has been made, obviously, as we haven't announced it, then it would probably not be the right way for us to comment on. Next question is from Jonathan at Goldman Sachs.

I have 2, if I may. The first one, you're talking about potential cost reduction. Are you able to give us any quantification of that, that would be super helpful, please. And just also to come back to your asset rotation policy, so you want to accelerate that. Should we then understand that you're looking, given your ROE targets, to sell lower-yielding properties or higher-yielding properties or noncore properties? Or like, it's a bit unclear how you want to look at the properties that you want to dispose. Any specific you've talked about hotels or retail or any specific more subsectors? Like how are you going to look at that rotation, please?

I think actually, in our portfolio today, even though the weights on some of the asset classes are quite low, but we have, as I said, a broad palette of different type of properties. And so that will probably change over time, but we have no targets for how big a proportion we should have of logistics or light industry or office. That will be more driven by the rates of return we believe we could have in those different types of properties. When it comes to your question regarding high-yielding, low yielding, we are looking on this on more of a total return thinking. This means that we could very well have low-yielding properties in our portfolio if we feel that the growth potentials in those type of assets are good. But it can also mean that we have high-yielding properties as well. We are not excluding anything here. We are looking on the long term to meet our return target of 10% on equity over the business cycle.

Okay. And it's my understanding, I think that your documentation on the bonds like would allow you some flexibility. So does that mean that you're looking to move quite big, like some seem to see some sort of case law about 15% threshold. So other than -- below that, you wouldn't need that consent. So was that a limitation to you, that 15% factor? And sorry, there's a cost question as well.

I can answer the cost question, and then I'll hand over to Christoffer. What we've said is that the reduction in the head office will save us probably around SEK 50 million next year. But as we also mentioned in the Back to Basics, new strategy of Castellum is continuous improvements, and that would lead to continuous cost reduction as compared to not doing that. And I also think that we could be slightly more cost aware within the company, and that will also continuously lead to lower costs compared to -- as if we wouldn't have had that focus. But SEK 50 million for next year is what we've communicated regarding staff reduction on the headquarters for next year.

And then from the flexibility side, I mean, of course, there are rooms for some asset rotation within the current terms, of course. However, we think that more specifically, the material subsidiary definition that puts some constraints that -- I mean, it's not that big figures in some of those subsidiaries. So there, we would like to amend -- therefore, we would like to amend those.

Okay. Understood. And in terms of your corporate structure then, do you have many subsidiaries?

We have something like 8 to 10, I think. I can check it up later, but something like that. Next question comes from [ Florent ] from Citi.

I have 2. The first one is, do you have a plan B if you don't get the consent as expected? And the second one is regarding hybrids. In your new financial policy, you don't make any reference to that. How do you look at hybrids in general? And how should we think about the call in a year's time?

So if -- I think I got the first question and then sort of the answer to that one. I mean now we have this process in the market and we would like -- we don't want to speculate in the outcome of that, of course. So we'll wait for that. We think that's the most prudent way to do it and sort of not speculating about the outcome. And then -- what was the second question?

And hybrid.

The hybrid. No news about the hybrid. As I mentioned before, it's recorded as equity. So no difference made to our financial targets, no difference how we are seeing on the hybrid and sort of no new message on that as well. So as with most things, we have to come back to that when we have something to say about it, so to say. Then next question from Neeraj at the Barclays.

Actually, my two questions were just being asked, but I would still go ahead and ask in a slightly different format. I mean it's fine you don't want to speculate about the outcome of the consent solicitation process. But when you briefly spoke about it, you said the current documents are kind of restrictive. So adding this 200 basis points of step-up in the event of higher downgrade, do you think it makes it restrictive for future actions of the company?

Can I take that once more?

Sorry. I was just asking, do you think the bond documents become restrictive again for any future events company may want to do?

No, no. Okay. That one we -- no.

Okay. Good. And coming to hybrids, again, like do you want to increase or decrease the size of your hybrid in the cap stack? Do you see it as like an expensive debt instrument as you think about the cost savings and all those things? Any more thoughts about this, if you can provide color?

At this point in time, we actually don't have any more -- maybe we have thoughts about it, but we think it's more prudent to come back to that one when it's time for that and communicate properly sort of more formal communication to the market at the right point in time, so to say. So next is Michael from BNP.

I have 3 questions. If you don't get the consent to amend the EOD clause, say, for like the 29th or the others, would you still look to go ahead with the restructuring of the companies -- of the company? And then if the 29th didn't give you consent, would you -- would it still make sense to give the early consent fee to the other bond maturities? And then last, my third question is, if you do the split, sell some assets, you are going to have a smaller company. We know the agencies tend to look unfavorably on scale. Would you -- if the agencies did that, would you look to have a tighter financial policy? Or would you say, I accept that we are going to have the same -- we're going to have a similar leverage, but just be one notch lower, and we're not going to try and keep the mid-BBB rating?

Plenty of questions. I mean I think we have to answer the same answer as before that we do not like to speculate on the outcome of the process that we are in the middle of right now. So we are in the market with that one, and we -- I think we'll leave it as...

Okay. Maybe I can rephrase that then. Because in the document, you talk a lot about interconditionality. Maybe can you give some thoughts on why you guys wanted to include that language in the document? And I would imagine that most of this is for the 29th. Is it linked -- is that language there linked to basically the -- for those 29th? Maybe anything you can share to give more color on that?

We think it's good to have that flexibility in this ongoing process, given that, of course, we don't know the outcome. So for us, it's natural to have that flexibility. And as I said, we don't want to speculate about the outcome.

I mean I appreciate that it's hard to comment on a like-for-like thing, but thank you for that. And anything on the S&P -- sorry, the Moody's, if you had a smaller company, would you look -- and they look down favorably, would you want to tighten your financial policy to shore up your BBB rating? Or it's more about protecting your financial policy regardless of how the agencies view on scale?

I think also that one is it's sort of too many steps ahead. So let's see what actions are taken from our side, what transactions we are able to do and I mean, how we are looking at that in time. So at this point, we are adding the language that we have done, communicating that we are having a strong ambition to maintain our investment-grade rating, and that is what we have communicated 2 days ago, and that's where we stay at for a moment. Thank you. Next one is Viktor at Pareto.

Just one question left from my side. You mentioned increasing the M&A pace, but how do you view speculative projects like Sunnanå, Malmö or Infinite in Stockholm in order to help you achieve your return on equity target over the next 2 years?

Our view on the projects is that they should have the same or even higher return rate -- expected return rate than existing portfolios since at least, what you said, speculative projects, commonly have slightly higher risk.

Yes. How do you, like, starting those? Are you looking to actually start...

If we believe -- and that's obviously case by case, what we believe, in that particular market and that particular type of assets that are under discussion, what -- we believe that the expected rates of return will be -- if I should speculate, I think that we might have slightly less speculative projects going forward. But that's difficult to say since we don't have anything -- since -- before we have actually made any decision upon that, we are looking on many things we could do, divestments, acquisitions and upgrades of our portfolio and everything should meet 10% return on equity. But on projects, you should probably expect a bit more since they are a bit more risky than what's already up and running.

Thank you, Victor. Next one is Stéphanie at Jefferies.

Well, I appreciate it's a bit tricky for you to answer our questions as you are in the middle of the process of reviewing the activities and so on. But maybe a follow-up on the close of solicitation to bondholders, to modify "the cessation of business provision." Earlier this year, your main shareholders have been suggesting in press articles about splitting the company in several companies. So could you give us your view on this option? And maybe as you quoted also or you mentioned commercial properties to be the focus. I was wondering if there is -- if there are noncommercial properties you are considering to divest? What would be the noncommercial properties in your portfolio in your view? And yes, that's pretty it.

I mean -- when we refer to commercial real estate, it's basically most of real estate besides residential real estate. So we are not thinking about entering into the housing market, so to say.

In the current portfolio, it's more or less only commercial properties. I think it's SEK 49 million rental income from resi, but those -- most of that is included in sort of 1 or 2 floors on a commercial building with apartments. And in the report, it's 0%, SEK 49 million out of roughly SEK 10 billion total rental income.

Sorry, but -- so you are not considering public properties as noncommercial. That's what I wanted to know.

No. Our public properties is, in our definition, commercial properties. So you should not read it as anything large in our portfolio that sort of does not fit into our strategy anymore. Rather the opposite, almost 100% of the portfolio is commercial properties.

And then on your question on splitting the company into pieces, so to say, that's not at all on the table right now.

Thank you. And that was actually the last question for today. So thank you all for participating and asking questions. And also, of course, thank you all of those who are listening today. Bye-bye.

Bye-bye.