Castellum AB (publ)

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00:31 Thank you very much. Good morning to all of you joining us for this presentation of the Q3 figures of Castellum.

My name is Jakob Mörndal and I'm the acting CEO since two weeks. Next to me, I have the company's long time CFO, Ulrika Danielsson and we will guide you through this quarter.

We'll make a short presentation and then open up for questions at the end. So let's begin, next slide, please.

0:55 It has been a pretty intense quarter, especially on the transaction side. As you probably remember following the large divestments of last-mile properties made to Blackstone in two steps during the beginning of the year.

Castellum’s strong balance sheet and the opportunities for further acquisitions have resulted in a number of new investments during the third quarter such as four point three billion Swedish Krona equivalents, invested in of this properties in the Helsinki area, almost two billion Krona invested in high quality office in Stockholm area, almost five billion Krona invested in the companies in Entra and the two point seven billion Krona invested and nine point nine percent stake in the Kungsleden for which they have also announced a public offer to the shareholders. 01:41 We have also during the quarter sold sixteen properties for one point seven billion Swedish Krona a portfolio with an economic occupancy ratio well-below the average on Castellum and going forward we're looking at selling some additional non-core assets in order to somewhat strengthening our balance sheet further.

01:59 In terms of net leasing, the underlying business performed well in the third quarter with the strong net leasing of twenty-seven million Krona. We see a growing interest in new office space and the return to what can be described as a normalized to work life with time spent in the office, has been doing past.

In Sweden, the national recommendation to work from home is possible, although not legally binding, was removed from the end of September and the general feeling, I would say if the people want to return to the workplace. 02:32 Castellum will continue, it will goes and it’s Nordic expansion holding a thirty one point seven percent is taken in our Norwegian high quality, property company of Entra provides Castellum with an attractive exposure to the Norwegian markets.

With total assets of sixty-five billion Norwegian Krona. Castellum’s indirect share for the portfolio equals more than twenty billion Krona in Norwegian properties and we are also looking these words building a stronger presence in the Helsinki area.

The company actually entered the finish market back in twenty eighteen but it has been growing slowly until this year. By the end of this quarter, the finished portfolio amounted to slightly more than seven billion Swedish Krona equivalents.

3:13 As you've seen, Castellum was also announced on the second of August twenty twenty one, a recommended public offering to the shareholders of Kungsleden to acquire all share Kungsleden with the intent to combine the two companies. Everything is moving according to plan and we are in the middle of the acceptance period that ends on the twenty nineth of October.

I think Kungsleden we have more than two hundred properties valued at four three billion Krona with a geographical overlap of ninety percent would trade significant value synergies for the combined company and I will get back to that later. 03:46 And Castellum’s sustainability work is also internationally leaning concept.

The company was last week named were leader in the categories office industry with ninety five points out of one hundred possible in Global Real Estate Sustainability Benchmark survey called GRESB. We also ranked at towards most sustainable office developer with ninety-nine-point sort of one hundred.

And GRESB is an international benchmark too that measures and evaluate the sustainability work or real estate companies and real estate funds and this year, a total more than one thousand five hundred and forty real estate companies found in sixty four countries were included, so we're caused very proud of that. Next side, please.

04:26 Let's look at the office markets and rental levels. The office market shows stability returning from a lower demand of course during the pandemic.

Castellum is constantly adapting to its customer’s need and the interest from customers in increased flexibility in rental agreement is growing. We also see a big interest from customers wanting to discuss what the future of this might look like in terms of layout services, etcetera.

And I would say that keeping our customers close is of course outmost importance and we are actively seeking those kind of discussions with our customers, but we're not experiencing that customers in general, are looking to reduce area in order to create them or attractive workplace in order to get them please spend more time in the office. 05:09 Renegotiations continues to be affected strength can give you over a stable and resilient strengthen market, I would say.

We see a growing interest in sustainable properties in prime locations and that’s the trend that we expect will continue. The increase demand for office space, following the pandemic shows clearly in the positive net lettings.

As I mentioned that we talked in the quarter was twenty-seven million Swedish Krona bringing the total net lettings and for this year to ninety-three million Swedish Krona. That's pretty good considering the pandemic – the aftermath of the pandemic.

05:41 In terms of relative levels, they are fairly stable across the segments, some slight pressure on rental levels in the center of Gothenburg due to new office projects and premium markets. However, our western region concentrated in the Gothenburg area is overall outperforming other regions in terms net leasing and it shows stable rental levels in all other locations.

Regarding vacancies, we see no real change in the quarter, we are final to low levels and high quality office space both in Stockholm, Gothenburg and Malmö. Next slide, please.

06:13 We just to give you an example of the daily business, this is on our high-quality office properties at Lindholmen and Gothenburg, where we welcome Malmö as a new talent. And it is also the single biggest rental contract sign this quarter, with nice premises next slide, please.

06:31 Let's catch up on the logistic market. What can conclude that the logistics sector is almost ridiculously helps at the moment.

Looking at the broader European markets, yields for urban logistics average new inflection points dropping below the yield level proceed the offices down to around four percent and even below that. The yield compression has been substantial from around six percent to six-point five percent back in twenty seventeen.

We see a high demand from new and efficient logistic properties. To meet the demand, we have a number of ongoing new deals within the logistic property segment and we're in a number of negotiations as well dependent demanding new builds.

07:08 Of course, the major challenge is to find land for sale that have readily available solar plants. And given the expectation for lower yields in the segments, it affects the price of land, we have seen prices [Indiscernible] from around eleven hundred Swedish Krona per square meter in places thirty minutes from Stockholm to reach about three thousand Swedish Krona per square meter in the short time.

07:31 However, we don't expect to rental level to increase due to that especially true outside of Swedish, given the competition and lower unit utilization, those will probably remain but for logistic property is closer to see the centers the situation will probably be the opposite with the rental increase. Next slide, please.

07:52 What about the property market then. It is, as you know stronger than ever, twenty twenty one will be the strongest transaction market in the Nordics of all time.

Volumes will likely exceed sixty billion euros when we reach year end, up until September, the transaction volume in the Swedish markets have reached two thirty five billion Swedish Krona. Mergers and acquisitions some among listed companies, of course, contribute to this figure, but it also shows the appetite for consolidation in the markets and we will probably see more of that going forward.

08:24 Another trend is the Global Real Estate companies are working hard to achieve investments grade credit ratings in order to tap the year bond markets. More companies, access in capital will of course, provide support for today's valuations.

Pricing a bit strong, we will continue price increases of course, meaning lower yields related to low-risk segments like residential, logistics and community service properties. Office sales has as you can see remain rather unchanged.

Next slide, please.

08:57 And then it's a lot of numbers, I will not go to everyone, but since it has been a rather hectic last quarter, I will try to focus on the last three months development because the guest already known to you. 09:15 So the like-for-like portfolio shows strong rental income growth due to increased rental levels mainly this quarter, but of course, also increased costs due to higher energy consumption as well as unit prices for energy.

However, the income growth this quarter for the first time this year and back in less numbers looking to the – in wireline. 09:43 The profit administration is increasing some and that is explained by our expansion into Finland.

Then we have the coworking company in united spaces that also have net red numbers however, small ones and then has also expanded third of this quarter by opening new [Indiscernible] mainly in Gothenburg in the GD center. 10:10 As you also mentioned, we have increased our stake in Entra and at the end of August, it became, you could say from an accounting point of view, a company of interest Castellum and that means that we include roughly one month of Entra’s earnings into our TMO and since Entra releases their Q3, I remember today I think and normally releases after Castellum, the other quarters.

Castellum pieces it is now that we will base our accounting and calculation on Entra’s latest complicated report and that means in this quarter that Entra’s is related Q2 numbers is the basis. So we have consolidated in roughly one month earnings that is eighty eight million SEK.

11:03 On top of that, we need to test our acquisition of the Entra shares and some kind of value in use, you could say our market value. And when we do that, we get a write down of roughly three twenty-seven million Krona and that together with including Entra’s earnings makes a result of company being just a net of minus two thirty-nine million Swedish Krona.

11:31 Another investment made the third quarter comes clear. We have that both shares in the market, we are nine-point nine percent of outstanding shares in both.

And from an accounting point of view, that holding is classified as a financial statement or asset this quarter, that means that we do a test of acquisition value versus market value, that's the shared price at the end of September, leading to write down, but on the other hand, we also include the dividend at the end of September in our P&L. 12:07 And talking about Kungsleden that triggers some other lines in the P&L and we have acquisition cost of roughly twenty million Krona and since with the bridge facility of roughly twenty-seven million Krona that is connected to Kungsleden and to be very worth mentioning is that we're closed down which facility due to funding in the capital market in August and September.

And about funding, the funding task is stable in absolute amount despite a big depth portfolio compared to one year ago. 12:47 And we have also this quarter prolonged interest rate duration from three point two to three point eight, yes, now in Q3 versus Q2 as well as the capital duration from three point seven in Q2, up to four point two, yes in Q2.

We have also been active on the funding side and we have at the moment roughly twenty two billion Krona is unused credit facilities, but I will come back to that later. 13:14 And all this means that income from property management lands on eight hundred eighty eight Swedish Krona is selected Q3 this quarter.

So you just turned the third quarter due to being an estimator and having a good like-for-like rental growth versus the quarter of this year. The lines worth mentioning is the strong aftermarket, but Jakob mentioned and in our P&L, it shows by a value uplift of four point five percent and that's for the first nine months mainly driven by [Indiscernible] and in the four point five percent we have zero point five percent explained by selling assets over our own valuation.

14:00 And selling assets figures write down the goodwill as selling firing in Denmark and some small access in the latest portfolio. And then of course, taxes bottom line.

So really strongly results nine months roughly seven point one billion Krona in earnings versus two point five one years ago. And if you go to the next slide.

14:27 We have some short information about the underlying performance they're like-for-like portfolio and on the nine-month, the, like-for-like rental income has increased one point four percent, it was one percent in Q2, so it's getting better and better. On nine months numbers, you have this is due to high rental levels and less incentives and as I mentioned the earlier, high rental levels is demand drivers the third quarter is related.

15:02 Last, as you know, we have also had it cold year and compared to last year and a more snow year compared to last year and also increased consumption – energy consumption, but also energy prices and that keeps the like-for-like development, but despite that anyway is in black numbers so that it's really good. 15:26 And looking into the different categories, we can see that warehouse logistics and has come really strong, that is the case both in Stockholm and Gothenburg have our main portfolios.

It's good and public sector, it's more soft on the opposite side. The retail part looks good here, but it's where we had some small incentives last year due to COVID-19 and it's the small part of the portfolio.

So it's good numbers based where we are coming from and then if we turn to next slide please. 16:04 We have the balance sheet and a couple of new lines you could say, we have a total assets of hundred twenty seven billion Swedish Krona roughly, the three main part was mentioning in east – the properties of course of one hundred four million Krona.

We have the company of interest in Entra roughly eleven point four billion Krona and in Q3 thirty one point five percent ownership and we have bought some more shares after the end of September. 16:40 And our financial placement in Kungsleden that interest rate two point five billion Krona and this is started with equity of sixty two billion Krona of which ten billions Krona is hybrid forty eight billion Krona is pure debt and I'm top of that we do have normal items such as deferred taxes and other short liabilities and this means net asset value two thirty three Swedish Krona per share, an increase of fifteen percent, it was mentioning [Indiscernible] it says thirty six percent on this picture.

It's well below our policy for fifty percent. But in reality, we like our rating with Moody's and their view of the LTV and calculation is a little bit decent.

And we are acting on that. So they have a restriction [Indiscernible], you could pay forty five percent in reality and in that calculation, they see the high rate is fifty percent depth they see the lease agreement as interest rate that goodwill has no value asset.

17:52 And if we change slide please, it would talk and look to the debt side on the activity. We have been more active this third quarter.

If the first half year was about taking down debt due to being a seller. And the third quarter focus has been filling up our funding sources and at the end of September, we had dropped thirty billion of credit facilities within the Nordic bags of which eight was used.

We had a new credit facility in place, it's third quarter of five billion Krona. We raised our frame for our EMTN program up to two thousand million MEUR.

We have issued six fifty million MEUR in eight-year bond in September and one point six billion in MNOK. And we used the bond just to give the flavor was really attractive members with a coupon of eighty-seven basis points all in for an eight year bond too.

18:58 We have a Swedish MTN Program of twenty five billion Krona of which eighty is used and then, of course, we have the short funding sources the CP market and outstanding volume as September was three point six billion Krona we uses that as much as we can, since there's still an arbitrage and to give you a slight flavor, today, I would say read all in for lending three months is twenty five basis points and that is a little bit lower I received average given Q3 and it's lower versus at the beginning of this year. 19:35 And on top of that, in August, we issued a hybrid in August of roughly one billion Krona MEUR, which of course has strengthened our balance sheet and our liquidity.

So based on the black market is now, it was a good timing both the hybrid and the bond, MEUR bond due to that the margin has moved and a little bit spread has moved as well as underlying interest. So the market is still on good level, but we are happy with those transactions.

But then Jakob back to you and on the next slide.

20:15 Thank you for that Ulrika. Let's look at some ongoing projects, Castellum’s ongoing projects sums up to seven point six billion Swedish Krona, of which three point two billion Krona about forty two percent are already invested.

This is of course snapshot and we constantly add new projects as ongoing projects are completed. Worth noting is that the high yield low cost at five point six percent which is clearly about with a similar product with the priced that on the market and just to show you three examples of projects that we have commenced this quarter, the two projects at top, our office projects with public tenants, the left one, situated in Gothenburg where we are welcoming the recruitment office for the armed forces and on the right picture, you see an office building in the picture of young [Indiscernible], where we welcome the administered board as attendant and this are good example to show that our portfolio of new projects are heavily skewed towards public talents.

21:10 The picture of the bottom shows a twenty two thousand square meter logistic property on the construction hints some volume. And this is a typical example of new logistics in one of the most attractive geographical locations.

Next slide, please. 21:27 In terms of larger transactions, this quarter been one of the most transaction income quarters ever in terms of volume, to give you some understanding looking back in order to give you a better overview of the transactions during year, you can see that we started year by selling properties of net ten point six billion Swedish Krona up until summertime.

The biggest divestment of course being nine point eight billion Swedish Krona in last-mile properties sold to Blackstone. We will purchase shares of Entra for three point eight billion Krona and since summer, we have made net investment as over twelve point two billion Krona about four point six billion Krona invested in properties and Stockholm and the Helsinki area.

And apart from that have also invested seven-point billion Krona in Entra and Kungsleden respectively. 22:15 Our latest divestment, mixed portfolio valued at one point seven billion Swedish Krona that's sold also properties, which improved our key figures even a slightly higher vacant level in the portfolio compared to Castellum’s average.

Next slide, please. 22:32 Castellum’s view on Entra then, we received a lot of calls last week on Tuesday and Wednesday from you following information from the property company [Indiscernible] that they intend to submit the mandatory efforts due to [Indiscernible] processing the threshold or one third of the shares in the company and I can say that we see absolutely no drama in this.

If anything, we welcome about this continued interest in the company. Strengthening our own belief that this is a great investment.

Castellum will not be selling its shares due to this coming mandatory effort. We are very happy with our position in Entra.

It is a highly effective way of getting Norwegian profit exposure towards high quality assets. And to conclude, we are basically in this for the long run.

Next slide, please. 23:21 The proposed deal with Kungsleden combined the two companies and tracing giant in Nordic commercial property market is moving forward according to plan.

We handle questions and inquiries from Kungsleden shareholders daily related to this deal, but the vast majority of the matters are in a positive notes. There are lot of similarities between Castellum and Kungsleden, the property controls are complementing each other both in terms of assets and also geographically with an overlap of ninety percent.

23:48 The combined company would have an attractive project development pipeline combined with a fundamentally continued strong cash flow. Castellum and Kungsleden combined would create one of Europe's most sustainable property companies with a value creating synergies of closer to three hundred millions Swedish Krona.

And even though the outcome of the recommended public offer is not yet known. We are currently planning and preparing for the deal internally in order to integrate considers operations in the best way, everything in order to as fast as possible and able the anticipated operationally and financial synergies and we will of course, published define results from the acceptance period and that will happen on the first of November.

Next slide, please. 24:31 So let's move on to the outlook.

We have a positive outlook for the office market in general. Both in terms of stable rent levels and the strong transaction markets, attracting more capital into the markets, which provide support for use.

There's is also growing demand for office space post pandemic. Logistics has been the fastest growing sub segment with a significant deal compression, a compression which I believe will slow down given that we have reached such low levels.

However, we're playing in mind such Nordics in general are under slide logistic markets and lag behind some smaller European markets in terms of modern logistics space, so the extensive interest in the sector will most likely remain for the foreseeable future. 25:12 Regarding the outlook for Castellum then, the Nordic expansion will continue if they didn't close, we have an successful, the combined company including just taking Entra will provide exposure to assets of one hundred and sixty five billion Swedish Krona.

I think the company has a great position to benefit from a stronger office market focusing a larger cities where most of the growth is happening. Castellum also set have shown a strong development pipeline, both for offices and new logistic properties, but we will continue to work on the logistics side, which provides opportunity to develop logistic properties at six percent yields rather than acquiring them at four percent.

Next slide please. 25:52 Before earnings presentation, let's open up for any questions.

26:29 Good morning Jakob and Ulrika. A few questions from my side.

Starting with the mood is the finish now the loan-to-value, you mentioned that they want to see you've maintained it below forty five percent awarded Castellum’s current LTD according to that definition?

26:46 Based on the Q2 numbers, it's roughly forty three percent.

26:52 Perfect. And you also mentioned that you might look into selling quarter non-core assets and considering that below that their definition ma’am.

Why do you argue that twice and what do you know of divestments are you looking into doing before year end?

27:15 It's – I think, I was basically mentioned during the presentation Kungsleden then – they—where we are looking to sell assets, which aren't relay core assets to us, perhaps smaller sales, we'll see this maybe that we actually focused on historically. So it's basically taking care of properties that we get on top of the deals have to say.

And of course, that is basically to keep the balance sheet in a nice and strong balance sheet going forward.

27:46 So should I interpret that, that since you're looking and doing, it is more related to Kungsleden’s part that are not overlapping with the existing Castellum portfolio or if it also that you argue that there's plenty of stuff to divest within existing Castellum portfolio?

28:07 I think it those, we are pretty transaction in terms companies. So I think we will be looking at assets both in Castellum portfolio and Kungsleden portfolio, but as you understand given the situation, we're in and having to await the outcome of the bid, what's going to happen next and how we are going to move forward is of course, depending on the amount of shareholders going to participate in the bid.

And how much we need a financing of that so and that depends, of course on the outcome.

28:39 Thank you, Jakob and then two final questions. First one being at what share price is Entra booked that and at the end of the third quarter?

And your…

28:52 Yeah. It's that not to share price.

It's – that’s your -- to the latest [Indiscernible] NAV.

29:05 I see, so it's based on the Q2 NAV then?

29:09 Yeah. And yeah.

29:13 Okay.

29:13 And for our six more reflection that this is pretty long term, we don't see that some investment in a share. We see at, it is an investment in – in properties, so we used the NAV instead in this quarter.

29:36 That makes perfect sense and going forward, fluctuations in the share will not then impact your P&L Q4.

29:45 Exactly.

29:47 So if you just going to do then. It is going to be the driver process.

29:50 Yeah. It will be the NAV where we are now.

And as long as I am here, If so it will own and it will move with earnings dividends made and of course, the currency fluctuation, but no share price volatility in balance of the sheet or the P&L?

30:10 And that is all going to happen and when you leasing Castellum because you are not paying that as many…

30:15 Exactly.

30:16 Okay.

30:17 Exactly.

30:18 Perfect. Thank you.

30:37 Good morning, Ulrika and Jakob and congratulations to both of you to your new jobs. I have a few questions as well.

Looking at property costs for Q3 last year, it was exceptionally low, but do you feel that the property costs here in the quarter, to me its look somewhat high. Is there anything to highlight or is this a normal Q3 level for Castellum?

31:03 It depends on what the disposition of normally, but of course, what we have been impacted of, if you take the insulated quarter is still, it's much cold quarter versus one year ago and that have an impact on the heating on nine months numbers we have, I think it is ninety-one – ninety five percent of a normal year in heating and the warming and electricity. And last year, that number was eighty one percent.

So it's a much cooler so that has impacted. But on top of that, we have a smaller impact of the energy prices.

That to everyone knows about. What happens is that the major part of those increased costs will put onto the tenants going forward because that's part of the rental agreement.

So the cost that it's Castellum purely it's on the vacant spaces so to say.

32:15 All right. Thank you.

Looking at the like-for-like growth here, you mentioned ticked up a little bit here isolated in Q2 so maybe some two percent, what you're feeling going forward is this a tick gap that's we should expect to see if going forward as well?

32:33 It's a tricky question. It depends on how we are asking in the market and how the market is feeling when getting back to the offices.

But so far, we are made, there a little bit surprised of how fast it has come back and we already saw that hinted that in the Q2 and Castellum do confirm you to Q3 and so far, we don't see any changes on the other direction, but of course, things can happen. It feels based on that coming from really strong and stable.

And it also positive so that's also a good side.

33:22 Yes. So based on we don't get the renegotiations that they've been on normal and good level here in Q3?

33:29 Yeah. You can say it's a tricky part.

Yes. We have – if you just look on the overall nine months impact of renegotiation, we have an average let’s that around twelve percent to fourteen percent but I must say when you're always talking about renegotiation, the volume you do renegotiate.

It's not the same volume as you do before COVID-19. So before COVID-19, maybe we renegotiate over fifty percent of this stock that was possible to negotiate.

Now that is half of it. So that it's also something that we need to – that you need to take into account.

34:17 And, I can answer that. You have to bear in mind that of course, your negotiations and up this usually comes with some kind of CapEx as well so.

34:27 Last question from me. I can see that you added some ongoing project.

If we look at the potential projects that you stayed in a report, can you update on your view on investment levels for the coming two years. If we look at possible construction starts ahead?

34:46 I think we are going to intensify the projects in general. So we are actually having a lot of projects and pipeline that we are looking to start.

So it's more across on getting everything ready. This definitely a focus quarter forward to start more projects.

That's probably the best thing. I can say it that for both offices and logistics.

You're going to see more of new builds basically.

35:10 All right. Thank you.

35:34 We have got a question here on mail or on text message. And that we can continue the renegotiation discussions.

And it's between the different segments, what has been strongest and the like-for-like growth, I would say is giving a reflection because it has been highest and the logistic past followed by the public property and then the office part. And so if you just look on the percent adjusted it’s in the logistic sector, but the office sector, it must be during our portfolios, of course.

And logistics, it's where we have the biggest portfolio, it seems Stockholm and it's in Gothenburg and then the office part is in – it's not so much big differences between the different regions to be honest and not if we're looking to the renegotiation on this portfolio level. But of course, there is differences between different leases of course.

36:48 And then there is made it you, the trends you have set in the office market in Entra Stockholm versus Gothenburg for example.

36:58 I think we have some, there are a lot of projects in market in Stockholm, but they are to a higher extent already leased out which hasn't really put the same pressure on rental levels in Stockholm compared to Gothenburg, and that's only CBD other parts geographically around Gothenburg is stronger already have the rental levels remain. So that's probably the biggest between Stockholm and Gothenburg, I would say.

37:25 We have one more question Jakob.

37:29 So we received the question from DNB markets. How would you evaluate being a minority to valuing Entra.

Will this impact are you in Entra and then we are fine with our position as it is. We are, of course – we're going to cooperate on the board going forward.

I suppose to incorporate to us with the other shareholders in Entra and it’s a great company. We have nothing actually to complain about great project organization.

And but of course, we're going to have a discussion at some point with everyone involved, we are fine with our position. We're not looking to change anything at the moment.

38:25 Alright. No further the questions, I can perhaps ask for the next side please.

I would just like to thank you all for listening in today. And as I can noticed, Castellum’s long time CFO, Ulrika Danielsson, many of you have met over the years, have decided to leave the company in November.

I would like to take this opportunity to on behalf of Castellum and all Investors who have been in contact with you over the years. Expect my gratitude for your work.

Well, thank you very much for that. This was actually your ninety third quarterly report.

It's truly impressive in the sales. And we, of course, wish you good luck in the future.

39:04 And by that, I'd like to thank everyone of listening and ask you to have a nice day.

39:09 And I also thank you.

39:12 Thank you.