Castellum AB (publ)

Good morning, everyone, and welcome to this presentation of Castellum's Q3 report. My name is Christoffer Stromback and I'm Head of Investor Relations.

There will be a Q&A session in the end of the webcast. [Operator Instructions].

Let's start. Please go ahead, Pal Ahlsen.

Good morning. The mission from the owners and from the Board to all at Castellum is crystal clear.

Castellum needs to become more profitable. I think that's an exciting and fun assignment, fun mission, but I don't think it will be a walk in the park.

I think everyone knows that the heydays of real estate is over for this time. So now it's back to basics for Castellum in the day-to-day business.

So instead of yield compression, it's leasing. Instead of interest rates, which are -- which were almost 0 it's turning over every stone to find ways to become more efficient and more cost efficient.

But it's also in the day-to-day business making sure that we are owning the right properties in the right locations and consequently seizing the opportunities we see in the transaction market. It means that we will become a more entrepreneurial company, I would say, a less democratic company.

Although the net leasing in the first quarter -- the third quarter, this quarter, was positive with SEK 16 million. We know that the net leasing for the previous quarters have been negative.

So in terms of vacancy rate, we know that our performance will become slightly worse going forward than it is right now due to this negative net leasing in previous quarters. So in the property management for us right now, it's mainly 1 focus, and that's leasing, leasing and leasing, means that we have to become more flexible and faster in our leasing activities.

At this stage, I've been CEO now for almost 2 months. I've seen almost all properties, not all our properties yet.

And just a personal reflection, I think what I've seen so far of the property portfolio is actually a bit better than I had expected. Of course, that statement has to do with what I thought before I started.

But at least, this is slightly better than I thought, and I'm very happy about that. The locations are good and suits the type of purposes the buildings have.

We have nice locations for office in inner cities, but also nice locations, but in B locations in the office segment. And then we have lots of industry and warehouse and logistics, also in the right locations given the purpose of those buildings.

And I also think that the property portfolio is a bit more well kept than I had thought before. So that's a nice starting point, I think, for my new assignment here in Castellum.

And the other reflection I would like to do is, I met most, but not all, of the staff, and I'm meeting quite competent staff that know their property portfolio by March. So I think we have a nice starting point for not turning the ship around, but really to get to where the owners and the Board want us to more profitability.

As I suppose most of you know, we are commercial real estate company with most of our holdings in southern part of Sweden, but we also have properties in Copenhagen and in Finland and mainly in Helsinki. Most of our assets are office properties.

We have lots of public tenants, governmental tenants and then we have a large proportion also of office -- of warehouse and light industry. And most of you also know that we have a significant share of the bid in Norway called Entra, which owns mostly AAA located office buildings in Oslo, and we own almost 40% of that company.

So all in all, we have almost, and including Entra, we have almost properties for SEK 160 billion and directly own SEK 137 billion.

Thank you, Pal. I'm jumping into the summary of the results.

The results compared with the same period last year is negatively affected by divestments and higher vacancies. In addition, income from property management is impaired by higher financial costs due to one-off profit from our bond repurchase last year.

Net leasing in the third quarter is positive SEK 16 million and minus SEK 166 million for the period, still happy to report 2 consecutive quarters with positive net leasing. Occupancy rate stands at 90%, which is somewhat lower than last quarter.

Net investments of SEK 3.5 billion compared with minus SEK 327 million in the same period last year. Going into details, looking at development of income during the period, the like-for-like portfolio income is unchanged.

Indexation contributes, but is offset by higher vacancies. The vacancies is coming quarters will continue to increase due to our weak net leasing in the first quarter.

The direct property costs for the like-for-like portfolio is increased by SEK 40 million, equivalent to 2.5%. Direct property cost decrease at the beginning of the year due to the warm winter, low increase in the second and third quarter, primarily due to the higher rental losses, which increased by SEK 25 million.

Divestments decreased income with SEK 125 million, however, partially mitigated by acquisitions in the second quarter, contributing to the income with SEK 29 million. Central administrative and property administrative cost is in line with previous years.

On an aggregate debt level, NOI decreased by SEK 226 million with divestments, increasing vacancies and one of insurance claims recorded during second quarter previous year as key drivers. Looking at renegotiations.

Corresponding to an annual rent of SEK 197 million, which translates to 9% of total lease stock up for negotiation were conducted during the period with an average positive change in rent of 1.6%. Limited investments on average to secure the renegotiated leases.

Additionally, contracts with an annual rent of SEK 1.345 billion were extended during the period with no change in terms, equivalent to 60% of total lease stock up for negotiation, which is up from 50% in the second quarter, indicating that a good portion of our tenants are comfortable continuing paying their current rent of the indexation. Net leasing for the quarter amounts to SEK 16 million for the period, the net leasing amounts to SEK 166 million minus.

The economic occupancy rate amounts to 90%, a decline of 1.2% since third quarter '24. The decline is driven by increasing vacancies corresponding to 0.8% and a general review of vacancy rents, which explains additional 0.4%.

Looking at property values. During the period, Castellum has written down property values with approximately SEK 1.4 billion, equivalent to 1%.

The value change is partly driven by the default of Norrköping, the fact that offer will leave approximately 24,000 square meters in Solna and generally lower cash flow expectations in our valuations due to a downward pressure on rental levels and/or increasing tenant investments to uphold lease levels in some of our markets. The valuation yield is in all essence, the same as the second quarter 2025 at 5.63%.

In addition, our projects continue to show positive value add. Looking into the transaction market in Sweden, the investment volume in the Swedish real estate sector ended up at approximately SEK 104 billion in the period, compared with SEK 82 billion in 2024 and SEK 83 billion in '23.

Our investment volume -- of the investment volume approximately 20% was office properties, which is higher than '24 and '23, indicating growing interest into the office segment however, on aggregate, a bit lower than historical average. Looking at financial highlights, market conditions are very favorable credit margins at historically low levels and with attractive term premium, current credit spreads in the domestic market for a 3-year bond is at around 90 bps and for a 5-year bond around 120 to 125 bps.

European market is at the lower end of this range. Nordic banks continue to offer competitive pricing and are willing to increase volumes.

S&P confirmed our BBB rating with stable outlook during the quarter, also hold a Ba2 rating with stable outlook for Moody's. Low refinancing activity during the quarter.

In total, we refinanced SEK 1 billion in secured debt on a 10-year tenor, no activity in the bond market and limited bond maturities in the coming 6 months. Average interest rate currently at 3.1%, down from 3.2% during the second quarter.

We see a potential to further reduce the average interest rate in our debt portfolio by refinancing loans and bonds on better terms. Looking at financial key ratios, very small changes in financial key ratios compared to the previous quarter.

Loan-to-value now at 36.5%, an ICR currently at 3.2x, comfortable headroom against policy levels and covenants. Average debt maturity in average fixed interest term stable at 4.6 and 3.6 years, respectively.

We would like to highlight that our interest rates hedging exclusively comprises plain vanilla interest rate swaps. Interest-bearing liabilities amounts to SEK 57.5 billion, down by SEK 1 billion since the beginning of the year.

Over to you, Pal.

Thank you, Jens. As most of you know, we have a very sustainable portfolio and a high focus on sustainability.

And here, I would like to highlight the energy efficiency, which has improved by 7%. And that's what I meant previously that we have a very good staffing in the company because it's not easy to reduce the energy consumption with 7% which is needed since the costs of energy are normally increasing quite heavily from the municipalities as we buy lot of energy from them.

So this is a very good performance, I would say, reducing energy efficiency. We're improving in energy efficiency.

We have made some acquisitions this year. We bought a couple of properties from Corem during the summer, also sold some properties, mostly single assets and we made the investments.

And I think going forward, we will have -- as I foresee it at least, we will have more transactions going on in Castellum, even if the net investments may remain the same, we will have higher figures, both on the acquisition and property sales side of things because that, I think, is one driver of profitability for a company -- for a property company in owning exactly the right properties at the right moment in time. And I think that sums up our presentation, and we are happy to answer questions.

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

Firstly, Pal, when you took the CEO position in almost 2 months ago in the end of August, I believe you stated that the management and the Board of Directors would sort of formulate a strategic update or a strategic review. Would you say that the communication today where it's back to basics, it's focused on leasing, leasing, leasing, et cetera.

Is that the strategic review all said and done? Or should we expect anything more in sort of a formal strategy update going forward?

I think that's what I've said regarding back to basics is certainly part of the day-to-day business of commercial real estate company. But we are still working and thinking a bit about how to exactly formulate the strategy.

So we will come back to that in a more formal way than this.

Okay. Perfect.

Sorry. And then on -- I think -- it's mentioned in the CEO letter that maybe Castellum will be more about entrepreneurship, decreased bureaucracy and selling and buying when good opportunities arise and so on.

Is it possible to make any more concrete comments about what this means, which type of properties are you looking to sell and buy, et cetera?

No, not at this stage. I would say.

What I can say, though, is that I'm also surprised by this of our colleagues in the industry has reached out to see if there are any swaps we could make the properties or that they are interested in buying certain parts of our portfolio or in general, making transactions. So there's definitely opportunities in the market.

Okay. Final question from me, for what's your view on share buybacks, given where your share is trading an implied deal as you see it in the direct transaction market versus buying shares?

Personally, I'm all in favor of that. We're not there yet in our discussions internally, but I'm in favor of buying back shares, at least when we have such a huge discount as we have today.

Thank you. Next one is John Vuong, Kempen.

In the media, there were talks about you considering splitting up the company or at least the shareholder is talking about that. What are your thoughts on that now?

It's too early to answer that specifically, but that's obviously, something many people are speaking about, the possibilities of splitting Castellum into smaller parts, and that would sort of show value in -- on the stock market. But that's obviously 1 option that we have, but we are looking on continuously all options we have for driving profitability.

So I can't really say more than that at this stage.

Okay. And then when you're talking about owning the right proposition in the right locations, how do you see the current pace of noncore asset sales?

And is there a change in what you designate as noncore? Also following up on that how do you assets outside of Sweden as well?

Yes. What I mean with owning the right properties in the right locations is owning those properties that will contribute to our mission to over the business cycle giving a return on equity on 10%.

That's exactly what I mean with that. That doesn't mean that we should have specific locations, only AAA locations in downtown cities or that we should only have office buildings.

I think we will have a mix of different type of properties that we believe that in the long term will support us in our mission to get 10% return on equity.

Okay. That's clear.

And you were talking about asset swaps, that's colleagues of your view in the industry are considering asset swaps with you. What's your view on nonyielding assets in your portfolio like the Säve Airport.

Could you consider swapping down into, say, a higher-yielding assets?

This was more a comment that there are transactions being made in the market and that is big interest for our portfolio in the market. All our business -- all our activities here at Castellum are aiming to reach our target of 10% return on equity.

If a swap with some other owners is supporting that, we are -- we'd obviously look into that and acquisitions as well and disposals as well.

Next one is Lars Norrby, SEB.

Just follow up on the strategy and the portfolio composition in particular. When you're looking at it, are you particularly thinking about parts that are subscale in terms of achieving efficiency, are those most likely to be on the divestment list?

I mean, efficiency that ends up in the cash flow from the property, right? But when we are looking at this, we are not looking at efficiency in that manner.

A property can be very inefficient in some sense but very profitable. So we are not saying that just because this property is a bit messy to deal with or expensive in some sense, that's reflected in the cost of the property, right?

So looking at this from a strict expected return on equity perspective.

So in that sense, just still thinking about, let's say, the portfolios in Finland and in Denmark, are they big enough or are they efficient enough to warrant the position within Castellum?

I can answer generally on that question. I think more important than size and more important than efficiency in some sense is the markets as such.

Other markets that will support rental growth are the markets where vacancy in 10 years from now or 5 years from now, will be lower or higher than today. Those questions are significantly more important than if we can reduce the cost of property management by [ SEK 10 or SEK 15 ] per square meter per year.

The rental growth and the demand are significantly more important. And I think that's something that shows up very well when you do a portfolio analysis like this.

That it's the long-term vacancy and the long-term growth possibilities in rents that are the most important factors when owning real estate. So when -- and obviously, the price of the properties.

That's the starting point, obviously.

Okay. Final question from my side, while I brought up Finland, brought up Denmark, let's talk about Norway just briefly.

I'm thinking about Entra, you're holding in Entra some 37%. And at the same time, Balder is close to 40%.

Are you -- I mean, my impression is that Balder may be interested in looking for some kind of solution to that ownership situation, what's your view on Entra going forward?

I think what I can say regarding Entra, I think they are facing somewhat of the same challenges that we are facing in Castellum. And they also have a financial target of trying to reach 10% return on equity over the business cycle.

And to reach that in an environment where needs are not compressing, you need to have significantly better growth in the net operating income to as low investments as possible. So they are facing, I would say, the same challenges as us, how can we be growing net operating income on a like-for-like basis with as low investments as possible to come close to the target.

So they are facing the same challenges as we do. Regarding our position there, we haven't discussed that much and I have no further to say rather than that we, as owners really want to see profit, obviously, in the company to increase.

And the only way forward is increasing net operating income by working by leasing, optimizing costs and not just -- and minimizing CapEx -- making smarter CapEx...

Next one is Nadir Rahman from UBS.

It's good to hear from you, Pal, on your first conference call. Looking at the like-for-like rental growth, I know that was, I think, around minus 0.3% on a total basis and minus 3.4% on a net basis.

So could you give a bit more color on the contribution from indexation versus vacancy given that the vacancy did reduce slightly -- sorry, the vacancy increased slightly during the quarter. That's my first question.

I think the -- we managed to increase sort of the rental levels in the portfolio. But the vacancy increase is sort of wiping that away.

And I think the rental levels have increased somewhat around 2% in the portfolio. But the vacancy effect is bigger plus that we have a bit more rent losses than we've had in previous periods, and that explains the sort of flat like-for-like growth in rental income.

And your indexation, what kind of percentage were you seeing during the quarter?

During the quarter, we get it once every year. And what we see right now is if the CPI, if we get 0.8%, we believe that from the first quarter, we will achieve slightly below 1%.

So we have fixed step-ups in some of our contracts. And of course, some of our public sector tenants have below 100% CPI indexation.

But on average, when CPI is low, we usually get a bit higher.

Okay. That's very clear.

And my second question is on the net lettings. So like you mentioned, it's been positive in Q3 and I know that for the year-to-date, it's been negative overall.

But how do you see this trending in Q4? And I know that Q4 generally is a more active quarter for lettings and general transaction activity in the Nordics and in Sweden in particular.

I'm reluctant to speculate. But what I can say is that this is our main focus.

It's leasing, leasing, leasing to get to turn this around, so to say. We don't want to present flat like-for-like growth rate.

We don't want to present an increasing vacancy. So this is our focus.

It's leasing, leasing, leasing to turn that ship around, so to say.

And in order to achieve all the leasing that you need to maintain vacancy and prevent that from rising any further. Do you feel like your -- wouldn't you change for rental strategy and perhaps offer more rent freeze or incentives to tenants?

Or do you think you need to compromise on rents in order to achieve a higher level of...

I think we need to use all the tools in the toolbox being faster and more flexible. It's very dependent on the specific squaring about, but we really need to use all tools in the toolbox in a market where -- in some markets, there's a slight oversupply of offices, for example.

There, you have to be faster and smarter and more flexible than your competitors. And at least in the long term, having the right locations where there actually is a long-term demand for the square meters.

But using all the tools in the toolbox being faster, more flexible than our competitors, then we can turn this around.

Okay. That's very clear.

And final question from me direct to Pal. You mentioned earlier on the call that the situation at Castellum and the portfolio and so on, where "better than you expected when you came in."

What was the expectation before you joined Castellum?

Well, that's a good question. But as I said, I think what I've seen so far, I think the locations are slightly better than I thought they were.

And I think that the upkeep of the buildings are slightly better than I thought. And as I said, it's difficult to -- it's just my feelings around this, it's difficult to put words on it.

But it is a bit like 100 meters sprinter with the targets running below 10 seconds on 100 meters. I thought we were started at 103 meters with the goal of running below 10 seconds, but it's actually starting from 100 meters.

So to give some color on that. So slightly easier than I thought, given a slightly better portfolio and a very dedicated staff in the company.

Next is Stefan Andersson, Danske Bank.

Three quick ones from me. First one on reducing costs.

You're talking about that, and we see that in your -- in the report as well. You mentioned that -- just trying to understand the magnitude of this.

I mean it's one thing to cut newspapers and be prudent of whatever you do. But is there any -- do you see any bigger opportunities here?

I mean is there still synergies from Kungsleden merger to take out? Or is it -- I mean I'm just trying to understand if we're talking about small, small things here and there or if there's any bigger ones.

I'm sorry I have to ask this, but could you repeat the question and speak a bit louder? Because I didn't hear the full question.

Okay. Sorry.

I hope this is better. So my question is really on reducing costs.

You talk a little bit about that. But just to understand the magnitude, is there any bigger things that could be done with efficiency, heritage from Kungsleden merger, I don't know.

But was it just smaller items here and there and [Foreign Language], as we say in Swedish, daily?

Okay. I got the question now.

Your question in regards if I could give any estimate how much costs we could cut when we are turning over every stone. I cannot give a forecast cost about that.

But what I can say is that we are really turning on over every stone. And that's why I mentioned the newspaper subscriptions.

I think I mentioned that in the CEO letter, and when you're turning over every stone, you will find things like that. And just to be specific when it comes to newspaper subscriptions, I think we can save SEK 0.5 million there.

And that's perhaps not money. But a large, many stones being turned over, I think we can save a lot of money, but I cannot give an estimate on that at this stage.

Okay. Good.

And then on -- we talked a little bit about the renegotiated rents that I imagine there is some investment in CapEx associated to that. Could you maybe give us a flavor of what kind of direction you have on the spot market?

I mean, is that -- do you actually see rents coming up? Or is it actually going down?

I mean looking at the renegotiations, I must admit that I was actually surprised myself when we dug into it and we do not invest that much money into the renegotiated deals, and we do not see any clear sign that it's increasing or decreasing.

Okay. And then the final 1 is Säve, which -- I mean it's -- I thought -- I've seen it as a very attractive asset that you have within a very nice segment and all.

I understand that you've had some planning issues there with other potential use of the airport and all that. Maybe could you maybe elaborate on your hopes for that now with the new situation if you could get compensation somehow?

Or if you could alter the use in some way, whatever you might have on that?

I cannot give so much details, but it's, in my mind, a very valuable asset going forward, especially given the huge investments that will be done in the defense industry. So I think that's an extremely valuable asset as it is.

It's not yielding too much right now. I think not too much, but that's more of a value play than anything else.

That is a very valuable asset.

Next one is Adam Shapton from Green Street.

Good morning. Hope you can hear me.

Okay. A couple of questions.

Pal, coming back to your comments on buying and selling of assets. I just want to be -- I just wanted to ask you to be clear.

Are you talking about 1 strategic repositioning of the portfolio and then sort of back to business as usual? Or do you mean to say that the business model will permanently shift to much higher asset trading over the cycle?

And I have another question, but maybe we can start with that one.

We can start on that one. No, what I mean is that a property has a life cycle.

You build it, you manage it and then you have a phase where it's degrading and then you have an upgrade phase. And I think Castellum is depending on market and depending on which type of asset type are good in all of these phases, but perhaps not good in all cities and all markets, and all markets are a bit different.

And Castellum has had a tendency to own properties over the full cycle. And I think we need to be a bit more smarter in owning the properties in the lifespan of a property where we are the best.

And that may vary over time, that may vary over markets and that may vary over asset types what properties that suits us. This means that we may very well own a property during 1 phase of the life cycle of a property in Stockholm but choose not to own it in another market, and that will trigger a higher asset rotation pace than we've had historically.

So that's actually what I'm meaning with this. But also perhaps ceasing a bit more opportunities than we've done historically, when prices are right, either to sell or to buy.

So it's not -- you should not read into that strategic that we are down because we are not there yet, downsizing office or increasing whatever, it's just the fact that we cannot be -- it's not perfect from a return perspective to own properties forever and ever. We need to -- we are not a perfect custodian of properties in all their faces everywhere.

Okay. So that's -- so it will be management's acumen and understanding of the cycle and each individual market that will drive better returns after transaction costs according to that.

Okay. And then second question is on CapEx.

You mentioned one of the things you'd like to do is, I mean, you said spend less on CapEx, but then I think you sort of corrected yourself to smarter CapEx. Is your assessment that Castellum has been deploying CapEx in the past in a way that doesn't meet suitable return hurdles?

Is that what you found and you think you can change that in the future?

That's a good question, and I appreciate that. I think perhaps that was true if we go back 5 or 10 years ago that we -- when money was a bit more cheap and the target actually in Castellum was to invest at least 5% of the property value each year.

So it might be some merit to that going back a bit further. I don't think that, that has been the case for the past years.

But I do think that there are potential to improve where we put in our money. In some cases, we should perhaps invest slightly more.

And in some cases, we should perhaps not invest anything right now. And there, I think, and looking forward to having discussions with management, where our capital makes the most -- where we get the most bang for the buck.

I'm sure that there are potential there for improvement. I would be very surprised if it wasn't because that's probably the case everywhere in all real estate companies.

Thank you. Back to Fredrik Stensved of ABG.

Yes. And apologies for jumping in twice.

I just have a follow-up on the leasing strategy. Listening to this presentation and what you're saying, Pal, it's pretty obvious that you're not happy about sort of the leasing this year.

You're not happy about the lower occupancy in the past couple of years. I think at the same time, you're saying asset quality or the portfolio quality is better than you were thinking and the organization is better.

They know the properties by heart and so on. So maybe in order to get sort of a feeling about upcoming changes and strategy in terms of leasing, asset quality is better, organization quality is better.

What's your view on why Castellum has underperformed peers in terms of occupancy and which are sort of the concrete actions you believe are the most important in order to improve going forward?

I'm not sure that we have been worse than peers. No idea that's the case on that.

But for a company, for a real estate company, the main mission is obviously to have as many square meters rented as possible. And we have roughly 10% at least economic vacancy.

That's a huge, huge potential. I think that amounts to roughly SEK 1 billion in rental revenue, and we must do everything we can to catch as much as possible of that potential rental revenue.

And we are discussing internally in what measures makes sense here. And here, it's different depending on what type of assets.

So I wouldn't say that we have underperformed, but I've said that we have perhaps increased the discussions around how can we reduce vacancy faster than given the measurements we've done historically.

Okay. Thank you.

Thank you. And that was actually the last question for today.

So thank you all for listening. Bye-bye.