CWQXF - Castellum AB (publ) (CWQXF) Q2 2023 Earnings Call Transcript
2023-07-14 08:29:03 ET
Castellum AB (publ) (CWQXF)
Q2 2023 Earnings Conference Call
July 14, 2023 03:00 ET
Company Participants
Joacim Sjoberg - Chief Executive Officer
Jens Andersson - Chief Financial Officer
Conference Call Participants
Markus Henriksson - ABG Sundal Collier
Lars Norrby - SEB
John Vuong - Kempen
Presentation
Operator
Welcome to Castellum Q2 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. [Operator Instructions] Now I will hand the conference over to CEO, Joacim Sjoberg; and CFO, Jens Andersson. Please go ahead.
Joacim Sjoberg
Good morning, everyone. This is Joacim Sjoberg. I am here together with the CFO of Castellum, Jens Andersson. Happy to have you all here to listen to our Q2 report. And starting off with the first interesting figure is that we increased the rental income by a total of 12.6%, mainly due to indexations in the rental agreements, but also due to the long and positive trend of net leasing and successful renegotiations and also some completed projects that have been worked on for several years. We will come back to that letter.
The net operating income increased by 10.5% mainly due to indexations and the income from property management decreases mainly due to higher interest rates and property costs. Of the total increase in costs, financial cost stands for some 60% and property costs about for the rest. Changes in property values, is during the first half of this year, around SEK6.5 billion. But please let me remind you that Castellum started to adjust the yields already after the third quarter last year. We have already learned the value of our portfolio with some SEK13 billion and that is 8.5% since the top values last year. The bulk of the changes during this period was done in Q1 and continues during the second quarter.
Castellum has a positive net leasing during this quarter isolated, but since January decreasing mostly due to some previously known vacancies in the first quarter, but more on that later. Overall, demand remains strong with the same high level of newly signed contract as in the previous period. We can see a slight decrease in occupancy rate largely explained by sold properties in Stockholm and also the big sale that we completed with to access in learned properties that were almost fully left and therefore when they disappear from our occupancy rate calculation will lower the rate. And we have sold properties of about SEK3.4 billion during the first half of this year, which we are very pleased with. No need for the sales right now. But by definition, all assets are for sale if the price is right and the continued divestments of non-strategic assets will happen as we did earlier.
Most of you know this already, but please let me just reiterate our business and geographic presence. The largest portfolios are in the Stockholm area. And then we have the West and the assumed area that together represents slightly around 30% each stock from its 50% roughly. And then we have of course our holdings in Copenhagen, Helsinki and indirectly through Entra in Oslo. This strategy is to be a leading sustainable and Nordic property company and that remains.
We have completed the rights issue during this quarter. And with the observance of the equal rights of all shareholders and taking into account the Swedish stock market rules, this process did take a while. This year was fully subscribed, without using any of the guarantees and underwriting that we had. And you have added just over SEK10 billion to the company. In the short-term, the money has been used to repay maturing bonds and revolving credit facilities in banks. Through the rights issue, Castellum’s financial position has strengthened, which clearly shows in the improved financial key figures, such as the loan to value ratio of 36.9%, which was a significant decrease since last quarter and it’s also strengthened our liquidity position and covers all bonds that matures over the next 3 years. This gives us a stability in troubled times and also creates opportunities to create value out of our product portfolio.
I now hand over to Jens.
Jens Andersson
Hi, everyone. We report strong growth in income during the period, 9.8% for the like-for-like portfolio, largely due to indexation and a long trend of positive net leasing and successful renegotiation on contract. Development properties are also a key driver, thanks to completed projects such as the Swedish Police in Orebro, GreenHaus in Helsingborg, E.ON, in Malmo among others, which gives a similar effect on the cost side however to a smaller degree due to high surplus ratio in new-built effective green buildings.
Total increase in costs is still high, 21.9% for the like-for-like portfolio, although lower than during the first quarter that summed up to 25% in the like-for-like portfolio. Cost control will be our key focus throughout the remainder of the year and during the coming budget process for 2024.
Total increase in costs for like-for-like portfolio for the first half of the year was SEK192 million, of which SEK103 million relates to electricity, SEK30 million relates to property tax and an additional SEK30 million comes from increased heating expenses. Please note, one-off administrative cost of SEK63 million that is attributable to system development that has now been reclassified.
Next Slide. As you all know, we have a very strong tenant base with many of our larger customers being publicly-funded operations or listed companies. A good portion, 25% of our rental income is derived from publicly-funded operations, Swedish Police is now also our largest tenant, followed by AFRY and ABB. Our 10 largest tenants stands for less than 50% of our total rental income and we know tenant rent generating more than 2.1%.
Our customers demonstrate a strong ability to pay rent even after factoring in indexation. First, let me comment on the fact that so much attention is paid to the short-term valuations in net leasing as can be shown in this slide, where the net leasing is the light green graph jumping up and down over the quarters. In our opinion, the quarterly net leasing figures are very poor indicators of our performance. As can be seen, we keep increasing the total rental income despite the quarterly net leasing figures going up and down.
It is however not unlikely that the rental income will level out in the future, if we don’t invest heavily as we have done historically. Net leasing plus SEK21 million for second quarter standalone, a good bounce-back from minus SEK52 million for the first quarter. Rolling 12 months net leasing sums up to plus SEK21 million, not the high number, but still a positive one.
Continued stable demand from our tenants, contracts however take somewhat longer to negotiate, no clear trend of tenants taking smaller space rather combination with some expand and other decreased space. Bankruptcies SEK26 million first half of ‘23, which is largely attributable to bankruptcies, in Q1 that amounted to SEK19 million. High numbers cannot be ruled out in the current market, all natural in a weaker economy bankruptcy is related to paddle tennis both during Q1 and Q2 explained a large portion of this.
Then we have some events after the reporting date, that is worth-mentioning, that is that Castellum has signed a 10-year lease contract with Exeter Logistic in Stockholm, 5,500 square meters. We have also signed a five-year extension and a contract with life science company, BioArctic in Stockholm of 3,300 square meter and then we sadly have bankruptcy after the end-of-the quarter in Denmark with auction house low rate most likely, we will be able to re-let that space within a short period of time.
Then looking at value chain, yes, that Joacim already have mentioned, so I will be very brief here. Key drivers are divestments and changes due to yield expansion followed by cash-flow related changes, mainly due to future project with larger portion of uncertain to account for. Since the end of the third quarter of 2022 devaluations, when valuations reached its latest peak, Castellum has written-down its properties with a total of circa SEK13 billion, which was already mentioned before, corresponding to 8.5%. The aggregated adjustment of the yield requirements during the same period amounted to 41 points.
Property values, this slide is just to show that, we had a very, very obvious peak after COVID and now we have taken down values to a more reasonable level considering the high underlying interest rate. Continued high-interest rates and inflation will continue to put upward pressure on valuations. However, CPI indexation will mitigate most of the effect over-time.
Looking at the financials, liquidity from the share issue has been used to repay floating-rate loans and maturing bonds. As a consequence, the hedge ratio has increased to 71% and the loan-to-value has improved to 36.9%. An increase in the underlying interest rate by 100 basis-points would increase interest rate of SEK190 million compared to SEK655 million if the entire loan portfolio was unhedged.
ICR rolling 12 months currently up 3.1 close to policy level at 3.0, rights issue will strengthen the ICR going-forward, while rolling into the 12-month figures. Higher interest rates and expiring interest derivatives will on the other hand put continued downward pressure on ICR. Average debt maturity and share of unsecured assets stable of the year and then credit rating from Moody at Baa3 with stable outlook. And no indication of any negative action to our best of knowledge.
A quick glance at the loan-to-value. The loan-to-value has improved as we already have mentioned several times to 36.9% during the year. The share issue has been the main factor behind the improvement, followed by divestments and funds from operations. Unrealized value changes from minus SEK6.6 billion have on the other hand put upward pressure on the loan-to-value.
Continue with financials, average interest rate 2.7% up from 2.6% at the end of ‘22, despite increasing underlying interest rates during the year by approximately 120 bps. Excluding cross currency swaps, average interest rates amounts to 2.4%, backed by strong Nordic banks we have successfully increased our secured borrowing during the year. Loan margins from the banks continue to be relatively stable during the second quarter of ‘23. New and existing loans amounting to circa SEK7.4 billion, of which SEK1.5 billion new loans will most likely be signed today.
Debt capital market still relatively liquid, SEK22.9 billion of bonds expiring the upcoming 36 months, available cash and unutilized revolving credit facilities amounts to SEK24.4 billion. Reduced project investments and no dividend this year will free-up further funds, all outstanding bonds could potentially be repaid given non-aggressive assumptions about recurring earnings and divestment.
Our expectation is although that the debt capital market recovers within a reasonable time period. Nonetheless, no one can say for sure, therefore, we need to prepare for worst times in order to safeguard a Baa3 rating and in the long-run strive for an upgrade.
Over to you, Joacim.
Joacim Sjoberg
Looking at our project portfolio, the nine largest projects are all above SEK100 million and with an occupancy rate of 81%. The key tenants in our three largest ongoing projects are the Swedish Police, a large veterinary clinic in Gothenburg and then the Swedish battery company in Northvolt, all three are 100% pre-leased. Castellum’s total investment volume for the ongoing major projects amounts to approximately SEK2.8 billion of which only SEK1.2 million remains to be invested. The total investment budget for 2023 is SEK4.6 billion including CapEx. And the average lease term for the ongoing project is more than 10 years.
In addition, we invest in existing assets. Energy efficiency improvements for tenants upgrading systems for access such as and security, etcetera, are our main focuses, but also the daily hard work that rarely is noticed but it provide the basis for our stable income.
During the quarter amongst other thing, we have completed the first facility for steel, the Swedish Electric Transport Laboratory at Gothenburg, with an annual rental value of just over SEK20 million. Earlier this year, two larger office properties were completed in Malmo to E.ON and to the Swedish Court Administration with a total rental value of SEK168 million. During 2023, Effekten will be completed to Northvolt in Vasteras and also to Martin & Servera’s new headquarters in Stockholm. In total, during the year, completed projects will contribute some SEK280 million in annual rent value and the average contract length of these are – is almost 11 years.
In the current market situation, we only start a very limited number of new projects, but we are ready to invest again when conditions improve. Our project portfolio is extensive with a land bank of some 660,000 square meters with approved plans of about 60,000 BTA square meters. Some existing investment opportunities can be found in Hagastaden, in Stockholm, in Save, in Gothenburg and in Framre Bolanderna in Central Uppsala.
During the quarter, we brought forward Axis by up to 2 years on one of the planned new building project in Hagastaden called Infinity after very constructive talks with the city of Stockholm. In this way, flexibility needed to optimize the project in relation to the market situation is created.
One of our key areas of attention within Castellum is our persistent work to reduce energy use in the property portfolio and that has resulted that we now have one of the lowest energy users in the energies – in the real estate sector. The energy use is on 45% lower than the average in Sweden. In the last 12 months, the – our energy use has decreased by 4%, which exceeds our ongoing goal of a 2.5% annual energy saving.
In 2020, we decided to invest on a large scale in expansion of solar cells and solar panels, at least 100 installation should be made before the end of 2025. During this quarter, the 87 solar cell facility has been installed. And today, these facilities contribute roughly 12% of our own energy use, corresponding to some 13,000 megawatt hours on an annual basis. The overall sustainability goal is to be climate neutral by 2030, an important step on this way is to have 100% fossil-free energy use, which we are now very close to reach with some 97% fossil-free use in our business. So, key takeaways from this first half year is that we are still experiencing a very strong rental market. The right issue has strengthened our financial position and we have a very large project pipeline for value creation going forward. In addition, I would like to underline that our strategy, growth ambitions and geographic position as a Nordic company remains the same.
I understand, however, that everyone wants to know when the dividend will return, that’s a decision for the shareholders to make, but I’d say it depends on the financing situation and when we see it favorable for Castellum shareholders to pay dividend without jeopardizing financial stability.
And that leaves room for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Markus Henriksson
Thank you very much. Good morning, Joacim and Jens. Three questions from me. First, you highlighted that you have some non-strategic properties for sale. Roughly how much of the Castellum portfolio is non-strategic? And could you also outline what type of property segments or and geography?
Joacim Sjoberg
We will not disclose what is on our sales lift that would sort of defy its own purpose. But what we can say is that we are striving for having efficient management portfolio and that means that it relate to geography, it relate to the type of building, but it also relate to whether we can actually create value from these properties going forward. So – and in terms of volume, we have already communicated that we are happy with the sales that we’ve conducted so far. We will continue to divest during the year, but we have not communicated any goal or ambition in terms of volume, but we will continue to be net sellers this year.
Markus Henriksson
Thank you for that. Then you amortized quite a lot, almost SEK14 billion in Q2. You got cash from divestments and then the rights issue, of course. Could you help us out a little bit when in the quarter you amortized the bulk of the sum and by how much was Q2 positively affected by this action, so when in the quarter is the key part of the question.
Jens Andersson
I mean looking at ICR, the ICR effect was very limited. So, it affects roughly one month of six months. So, it was conducted early in – it was conducted in the beginning of June, sorry.
Markus Henriksson
So around one month positively affected the bulk of the amortization?
Jens Andersson
Yes.
Markus Henriksson
Perfect. Thank you. Last question, you mentioned that you are ready to invest when conditions improve. Could we get any information regarding construction costs? What do you hear there? And what else do you feel need to improve before you are ready to invest?
Joacim Sjoberg
I mean the main condition is the reopening of the debt capital market. That is sort of the main driver for us using our cash flow not to amortize, but to invest in the business. So, if the debt capital market remains as sort of semi-closed as it is, then it will be just the limited cash flow that we have already communicated of SEK2.5 billion annually that will go into investment. As far as the construction costs, we definitely see a drop in those, but the drop is not nearly enough to compensate for the fact that we need to apply a very disciplined capital expenditure during the next few years. So, costs are decreasing, but it won’t compensate for the fact that we need to be very cautious.
Markus Henriksson
Very clear. Thank you for taking my questions.
Operator
The next question comes from Lars Norrby from SEB. Please go ahead.
Lars Norrby
Good morning guys. Net letting back in positive territory again in Q2, you mentioned a continued strong rental market, demand remaining strong, even though I think you mentioned that contract discussions take some time. Now, looking into the third quarter and for that matter, the fourth quarter, are you expecting for the year in total to be positive? That is meaning positive numbers in the second half of the year?
Joacim Sjoberg
Yes, in general, I would say, so we are as mentioned earlier always reviewing divestment opportunities and that could, of course, affect the total and – but we have a very attractive pipeline. We have good discussions and we also have project that will be completed. So, I would say maybe I am sticking my neck out here, but I would say that we will – we anticipate a continued positive net leasing. And the size of the pipeline of the contracts is similar to the one that we saw 1 year ago, so there is no real difference. However, the market is a bit more cautious and it’s difficult to say if we will be able to actually sign all of the contracts that we hope to sign, they take longer, but I think we have shown the last few days that we have been able to actually come through with a lot of contracts on good levels…
Lars Norrby
Very good. So, that’s on net leasing. My second question is regarding CapEx. I know you are finalizing lot of big projects this year. I think you mentioned the CapEx figures for 2023 of some SEK4.6 billion. Now, isn’t that expected to come down quite sharply in ‘24 and ‘25, so what are you looking for in terms of round figures for those 2 years?
Joacim Sjoberg
Yes. But it’s SEK2.5 billion starting from ‘24. Most of our projects, the larger ones have already been completed and a lot of them are being completed this year and next. Will SEK2.5 billion be enough to continue to grow in an orderly way, I mean it’s – we have a very cautious plan right now. And I think we need to see some positive signs before we can say that it’s time to invest more money. But it’s good enough for the time being.
Jens Andersson
And those positive signs, as mentioned, mainly relate to the debt capital market.
Lars Norrby
Okay. Well, thank you. That’s my questions.
Joacim Sjoberg
Thank you, Lars.
Operator
The next question comes from the line of Paul May from Barclays. Please go ahead. Your line is open. Paul, your line is open. I think we lost Paul. So, I hand the word back to the speakers for maybe written questions and we take Paul after them.
Jens Andersson
Yes, we have got one question about when we believe that the debt capital market will open for us? And if we knew that we would be acting maybe in a very different way from what we are acting today. So, we don’t really know. What is interesting though is that the volume of money that has been allocated to the sector and the money that is piling up, brings at the moment is clearly shows that there is an interest to get into this market, but people are hesitant because, I guess investors don’t really know what to expect in terms of interest rate. So, I guess it’s all related to whether the Central Bank’s interest rate increases will stop or not. And our MGM [ph] program will soon be updated and we have our green bond framework and we are happy to issue if there is interest on reasonable levels, right. I mean we are hopeful, but we will not rely on the debt capital market reopening. We will use our cash flow to amortize and we can do so for a very long time actually with very quick assumptions, we can actually repay all our outstanding bonds up and until 2027. And then we will only have bank debt. That’s of course, not our main strategy or main scenario, but it is a fallback and a plan B or C.
Operator
The next question comes from John Vuong from Kempen. Please go ahead.
John Vuong
Hi. Good morning. Thank you for taking my questions. You mentioned already several times that investments depend on positive signs in the debt capital markets. So, if the signs were to come, does that imply that you would cut your sales let short from here then?
Joacim Sjoberg
Not necessarily because we are – as mentioned earlier, we have a list – an internal list of non-strategic asset. And we have been working on that list for quite some time and we are doing constantly divestment. Those will continue more for the fact that they are non-strategic to us and we don’t see they – them creating value over time rather than that we need that cash specifically. So, I think on the divestment side in terms of non-strategic assets, that will go on irrespective of whether the debt capital market improves or not.
John Vuong
Does that also mean that on your current sales list, there is also non – sort of bit more strategic assets, or is that not the case at all?
Joacim Sjoberg
No, not on our sales list today, but of course, we get questions as we got on the property called Gotaland [ph] in Jonkoping for the Court Administration Authority, which we sold to [indiscernible] and we will hand that over once the project is closed in – after the summer. And that was a strategic asset, but we got a very good price and we realized that it will not continue to create value within our portfolio in the way that we wanted. So, we sold it despite the fact that it’s sort of a strategic asset to us, a more opportunistic sale, definitely an opportunistic sale.
John Vuong
Okay. Perfect. Thank you.
Operator
There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.
Joacim Sjoberg
Well, those are mainly the things that we would like to highlight with you. Thank you for your attention. And if there is any follow-up questions, you can e-mail them to us and we will try to answer them as soon as possible. Thank you for your attention. Thank you.
For further details see:
Castellum AB (publ) (CWQXF) Q2 2023 Earnings Call Transcript