Castellum, Inc.

Welcome to Castellum Q1 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star 5 on their telephone keypad. Now I will hand the conference over to CEO Hossein Shouberg and CFO Jens Andersen. Please go ahead.

Good morning everyone. This is Joakim Sjöberg, CEO of Castellum. I'm glad to have so many of you participating here in this Q1 report. This has been somewhat of a slow quarter and we see increased income thanks to our indexed agreements. Our tenants show good ability to pay and we have small losses during the quarter. We have increased cost of approximately 140 million SEK, of which 70% are directly linked to secured electricity prices this quarter. And those secured prices will decrease in Q2. We have also some slight increases in property taxes during the quarter. The net operating income, and we are writing down the values by approximately 3.9% due to the increased yield requirements. So Castellum in brief, you all know pretty much everything there is to know about Castellum. But we are one of the largest listed commercial property companies in the Nordics. We are present in growth cities in Sweden and in the very dynamic regions of Copenhagen and Helsinki. And through our Nordic strategy, we are also represented in Norway by Entra, mainly in the Oslo region. And as you can see, as of this quarter, we have a property value of approximately 174 billion, including Entra. That comprises 741 properties. And we have a yearly contract value of approximately 10 billion SEK. That's the amount of rent that we can invoice as per now. So Castellan's tenants, it represents a fairly good cross-section of Swedish business life and the public sector. We have an average lease duration of 3.9 years compared to 3.6 years for the same quarter last year. We have, as you can see, a good mix of customers and the property categories give all an extra stability in these uncertain times. So I think I hand over to Jens.

Good morning, everyone. As you see on the slide, we've had a long positive trend of net leasing however in q1 negative with minus 52 million and should be compared with the net leasing in q1 22 that was positive 25 million however continued stable demand from our tenants contracts take somewhat longer to to negotiate Continued negative effects from the ongoing war. Higher interest rates can be expected, but do not show clearly in the rolling 12-month figures. Too early to draw long-term conclusions. And important to mention is that the 12-month rolling figure is positive and 84 million. No clear trend, but tenants take smaller space, broader combination where some expand and other decrease space. Bankruptcies are up 19 million for the first quarter compared with 8 million the full year 2022. Higher numbers cannot be ruled out in the future, but all natural in a weaker economy. Numbers are partially explained by a few larger contracts being terminated, mostly in Stockholm, and the increasing bankruptcies. Also, our communicated strategy to reduce projects will have a negative effect over time. Looking at the key figures, Currently loan-to-value is above our new financial policy of 40%, although well below our creditors requirements. The suggested rights issue will strengthen the loan-to-value and ICR. Higher interest rates and expiring interest derivatives will, on the other hand, put continued downward pressure. Good appetite from the banks, but we need to preserve our unencumbered asset base currently at 51%. we will need to keep it about 45% long-term in order to keep a specially mooded happy. Loan modules from the banks continue to be relatively stable during the first quarter of 2023. 56% of our loan portfolio is secured with swap derivatives or fixed contracts with a duration of at least one year. Debt capital markets still relatively liquid with high spread. even though some real estate names have been able to issue below average spreads. However, we still favor bank financing for the time being. Looking at our largest ongoing projects, they will add a lot of rental income during the year, and they will also add a lot of duration to our work. The 12 largest projects, all above 100 million, have an occupancy rate of 75%. Key tenants in the four largest projects, Swedish Police, an animal hospital, North Vault and National Court Administration in Jönköping, all four are 100% pre-leased. Castellan's total investment volume for ongoing major projects amounts to approximately 3.6 billion, of which approximately 1.6 billion remains to be invested. We have completed two of our largest projects, Sju Skärman, Eons Headquarter, and God Svinkan National Courts Administration in Malmö during the first quarter with an annual rental value of approximately 170 million SEK. Another five larger ongoing projects will be completed during 2023 and will generate another approximately 110 million, excluding Jötland 9, which have been sold but not yet transferred to the new owner. Total investment budget 2023 is 4.6 billion, including capex, and the average lease term is above 11 years in these ongoing projects.

All right. So as Jens mentioned, we have a couple of fantastic projects that we have sort of handed over to tenants. And two of the largest that were completed in Q1 were the E.ON, the energy company's headquarter in Malmö. And then we have a huge new court administration building also in Malmö. Both are almost fully let and they will add, as Jens mentioned, almost 170 million of rental value. In total, there will be 280 million in total rental value for the larger projects this year. We take great pride in our projects, of course, and one that was also noticed by others was the winner in the Swedish competition New Building Awards. which made us very proud, and that was Greenhouse in Helsingborg. It's a beautiful building. If you're ever in Helsingborg, you must go see it. It's voted to be the best building by the industry. It was completed in, sorry, I was just saying that it was completed in the last part of 2022 and total investments were 330 million. It added a rental value of 22 million and the tenants are AFRI, which is a large consultancy firm. So another project is in Kista, that's a place where we have made investments of 180 million about. We have a micro office co-working and we have Infor in that building. We also have an ongoing project to be completed during this year, and that is in Gateway Säve in Gothenburg, where SEAL will take over a building that we've invested almost 300 million second, and it will generate the rental value of 21 million. And finally we have an ongoing project in Västerås in Finnslätten where the tenant Northvolt will take over a building and move in during this year. Total investments 445 million and the rental value is 31 million on that one. Jens.

And then looking at property values that came down this quarter as well with some 3.9 percent. All properties are valued internally each quarter in a discounted cash flow model agreed with our auditors. Property values as I just said came down and the external valuation were also done in Q1 on all properties and were in line with the expectations and followed the same development. Difference between internal and external valuations were from 1.7%, which historically is a low figure, mostly explained by somewhat lower internal cost assumptions. Valuations yield up with 15 bps, mainly due to higher interest rates, and are now at 5.16%. And as you know, interest rates and yields correlate strongly with one another, however, have a very obvious lag effect. And with the interest rates coming up, yields will follow. However, these high interest rates, I can just speculate now, but looking at the development, we've seen it's likely to see that the interest rates will come down eventually when inflation comes under control and if we look at the latest forecast from the national institute of economic research in sweden three months fiber is expected to go down to 1.75 percent already in 2024 um but of course it's not the prediction from our side it's just um the way it usually goes when things go up they come down at some stage.

All right, so as you all know, the sustainability work that we do at Castellum is at the core of our business and has been so for quite a while. We have continued the installation of solar panels and we are now at 12% of the electricity used by us are produced by our own solar installations. We have lowered the energy consumption by 5% on the like for like assets. And we have in total installed 80 solar panels, which brings us closer to the 100 goal that we have set out for ourselves. 46% of the properties in terms of square meters are sustainability certified. which gives us a very solid base if ever the EU initiatives on energy classification would come into effect.

Back to financing. Average cost of debt 2.8% compared to 2.6% end of 2022. mainly driven by increasing underlying interest rates but still on a reasonably low level thanks to especially good bank relationships but also a good portion of swap contracts looking at the death maturity structure um we have some 25 billion of bonds expiring the coming three years um available cash and unutilized revolving credit facilities amount to 14.2 billion um bank loans are uh prolonged on good terms and we are able to increase them, which will be part of the solution should the debt capital market continue to be liquid. Including rights issue and property divestment, all bonds could potentially be repaid the coming three years. Reducing project investments and no dividend this year will free up further funds. 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 worse times in order to safeguard the AA3 rating and in the long run, strive for an upgrade. and then looking at the rights issue sadly not much report so no new information however the right issue is expected to be concluded during this quarter as previously stated purpose of the right issue is to maintain our credit rating repay debt then free up liquidity to complete ongoing projects Q2 will be published on the 14th of July and is therefore expected to include the rights issue in the numbers.

When we look at what we foresee in the future, we have an outlook that brings us to focus on the core business, especially leasing and customer relations. We are, of course, working hard on the rights issue to be completed, as Jens mentioned, in the current quarter. We will improve our financial positions through the rights issue and continue the leverage. And we are also adapting to the new macro environment. And that means that we will be net sellers of assets in 2023. So that more or less concludes the presentation that we were intended to give.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Lars Norby from SEB. Please go ahead. The next question comes from Lars Norby from SEB. Please go ahead.

Good morning, Joachim. Good morning, Jens. Can you hear me? Yes. Okay, very good. I have a question first of all about CPI indexation and current market rents. Obviously, you had a big boost from CPI indexation starting from this quarter, the first quarter, and It's fair to assume that we will have some kind of help from CPI indexation also in the first quarter of next year. If you look at market rents, are market rents following CPI indexation or is there a discrepancy between those two?

I can give a general question and then Jens can fill in the details if any. No, we don't see a super strong link. It's more a link between the assets location and quality, as always, rather than ongoing discussions necessarily being increased by 10% or so. But we, on the other hand, don't see uh any any diminishing demand uh especially on the uh better quality uh products so there's no immediate uh or direct link uh it's it's still more linked to the assets locations but we are of course getting help from from uh from the indexations

But let's say you have a contract that is due to be negotiated during this year. Would you manage to get anything above indexation or will it be in line with indexation or will it have somewhat of a negative effect on a renegotiation?

I would be, I can't really tell because it's really up to the hard work that's being done by our leasing colleagues and the managers of each asset. So it really depends on the asset whether it has a strong demand etc but but of course we will get help from the from the fact that that the the underlying CPI is growing okay thank you I'll leave the floor to someone else

The next question comes from Marcus Henriksen from ABG Sundal Collier. Please go ahead.

Thank you and good morning. A few questions from me. First on property values, they decline around 3.9% here in Q1. Could you give us a bit more insight into property segments and geographies that are down the most and the least?

Okay. I think we can see no really clear trend between the segments. What could possibly be mentioned is that the Kungsleden portfolio was externally valued, possibly at the peak of a business cycle, and we do not externally value all properties each quarter. So if we look at which properties were affected the most, one could say that Kungsleden is possibly a part of the explanation of this.

Thank you for that, very clear. Dan, your project investment declined from 1.9 billion in Q4 to around 700 million. Now in Q1, you have earlier stated that we will see a much lower project tempo, but what's your view here for the full year 2023?

It will follow pretty much what we have presented earlier. So you cannot draw a conclusion based upon the 700 million, Q1 is, I mean, it really depends on what type of projects you have ongoing. And so I think we stick to our prediction and the budget of 4.6, it can be slightly below and it can be slightly above.

Thank you. Dan, I see that you divested for around 300 million here in Q1, and we have a previous LOI of a total of 1.8 billion. You mentioned here that you will be a net seller, but could you give us anything more here on potential divestments in 2023 based on the communicated LOIs?

We cannot communicate on the LOI. However, as Joachim said previously, we aim to be a nut seller this year, and we will revert as soon as we have additional information to present to the market.

Fair enough. Thank you. Those were my questions.

Please state your name and company. Please go ahead.

Hello, Stefan Andersson, Danske Bank. A couple of questions for me, starting with the Kungsleden deal. We tend to forget a little bit. A couple of quarters ago, we talked quite a lot about the synergies that were going to be retrieved from integrating that. Could you maybe update us a little bit about where you are there, what was the outcome, and what is left to retrieve when it comes to that work?

It's a very tricky question to answer in the prevailing business climate. Some of the things that were supposed to happen earlier might take longer, especially on the financial side. When we look at 2022, we are in line with our expectations on saving costs. But how this will develop over time, it's a bit tricky to say what is what. And I think we will have to revert on that question as well when we have more detailed information to give.

Okay. But it's not like we should expect a lot of improvements or cost cuttings ahead. That's really what you're saying.

I mean, we have communicated a plan to cut costs. However, in the prevailing market where we see that costs have been going up to a large extent explained by the energy contracts bought in September last year, that will not affect the coming quarters. But looking at the organization, I think that this is something that will Take some time to realize, and we don't have a clear number to present. So, therefore, maybe you shouldn't expect to to major any major changes in the short run at least. And we will come back on that 1 if we have more information to give.

Okay, good. Thank you. Then. Just a question on the projects that came on during the Q1 there. How much rent did you have from that, the 168 you presented? How much were affecting the quarter and what month did you go on stream with that one?

To a very minor extent.

Perfect. And then another small thing, but you talked about external valuations. Did I interpret correctly if I understood that the 1.7... valuation difference was that the external values had a lower value than yours or did I misunderstand that?

Yeah, that is correct.

Thank you. And then the final question, you talked a little bit about preparing for the future and net divestment of properties. Thinking a little bit about the interest shares, could you maybe elaborate a little bit on your view on that position? Could that be something that you would be willing to sell?

I think maybe that is something for Joaquin to answer. Joaquin is out traveling and has been calling in, so therefore I will answer this question as well. I mean, it's a tricky one. I mean, in our strategy, Norway is a very important part of it. And it's not up for sale. The book value is high compared to what we could actually sell it for. on our key figures will not be significant if we solve them but it's not on the table and not something we are discussing perfect that that's all my question thank you so very much the next question comes from Frederick CYO n from Carnegie please go ahead

Good morning. Yeah, a bunch of questions from my side. So starting off with the value changes in the quarter, there were 4%, which is similar to what you had in the fourth quarter. What were the new findings during Q1 versus what you did at the end of Q4?

I mean, you're referring to the continued downward shift in values. I mean, it's mainly driven by the valuation yield increase. And I think it's healthy to see that our internal valuations, to a very, very large extent, have been confirmed by Cushman and Wakefield and Fodenfaste's economy. So I think 80% has been valued by Cushman and Wakefield. And I mean, it is what it is. If you look at the value development over the last 10 years, as we show in the graph, I mean, we've had considerable value growth. And now when interest rates goes up, valuation yields follow. And as I was trying to state, when interest rates come down again, which is expected by at least some large players in the market, the trend will most likely shift upwards again.

I'm comparing your changes to values now in the fourth and first quarter. It looks very, very different from what peers are doing and you're using the same external valuation of firms. How is it possible that there's such a large difference between your assessment and others?

I think we are using a very prudent methodology, and it has been confirmed by external appraisers, and I cannot really comment on how others are doing.

And looking at the confidence of the unrealized value changes in the quarter, it's not purely driven by increasing yield time. It's also low cash flow expectations, but also reversal of partial gains.

What happened? Mainly a yield shift.

Yeah, but the other components, when it comes to cash flow, what's new? What can take you in the valuation on those two lines?

Insignificant, I would say. It's the valuation yield shift that is the key driver here.

And then moving over to the NOI margin, you guided towards that Q1 would be weak, just like Q4 was. If we go back a couple of years, Kungsleden and Kastellan both had NOI margins of plus 70%, and you're now rolling a 12-month NOI margin of about 64%. That's a very large drop. Is the worst behind you? see the trajectory towards 70 in, let's say, 2024, or are you going to get used to a much, much lower efficiency in your property cost in relation to rent?

No, I don't think you... I mean, it is largely explained by increasing costs that we expect to come down. Look at what we have communicated regarding energy costs We see that they have come down quite a lot since we bought these energy contracts in September last year. And we also see other costs are coming down. But we really don't do forecasts here. And therefore, let's see how things develop. But there are one-off effects that should be taken into account when predicting how we will perform in the future?

I fully understand that you don't want to do forecasts, but if you have a significant deterioration, it might be worth mentioning what has gone wrong, what do you think will be the drivers of getting back to where you used to be. Are you seeing that the energy hedges that hit you during Q4 and now Q1, that kind of negative impact from that line is behind us and we're getting back to kind of normal pattern in terms of profitability?

Yes.

Perfect. And then regarding Stefan's questions on the contribution from the two major model projects, you said they were minor in the first quarter. Will there be a full contribution from those or are there step ups in the rental income during 2023?

I mean, usually when you sign a contract, you give out discounts the first year, but the P&L effect will be seen to the full effect in next year. because they moved in during the quarter. So the full effect will not be seen this year.

Okay, very clear. And two final questions. On EMFRA, the auditor's view on the book value, have there been any discussions on write-downs due to the fairly large difference between the book value and the share price of EMFRA?

I mean, they are very comfortable with our model, and we do impairment tests every quarter, and we have nothing negative to report.

Okay, and then final question on the netlifting. It was weak in the quarter, but very much driven by Stockholm. Is there a trend that you're witnessing Stockholm being under more pressure than your other regions, or is this more related to individual contractors?

I mean, it's difficult to say we cannot see a long term clear trend. However, Stockholm was a bit more negatively affected by COVID and this might be some sort of a continued development thereafter. First COVID and then the war in Ukraine. This combination might have some effect, but it's still very early to say.

It should also be noted that we see fluctuations on the net leasing, and to some extent those that have affected Stockholm are now somewhat expected, and it's more or less of a coincidence that they be terminated in the same quarter. So, as Jens said, it's too early to draw any major conclusions. But we are keeping a close eye on the net leasing and that's what we are steering the entire organization towards.

Thank you for your insight and those were all my questions.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

There is also some questions coming in by our webcast in the chat. I will read them out loud and answer some of them. There's one question from Andreas Litander. Seeing as you will be the net seller during 2023, how much do you see yourself selling during the year? And how much are you willing to divest? Is there any of your assets that you will not consider selling? Joakim.

Yes. Well, we can't communicate a target on this. We are working constantly within Kristina Saviani's transaction team to optimize our portfolio. So there's important optimization work going on. And in addition to that, we have the sort of ambition to deleverage. That means that we are considering offers and we are actively disposing assets. But it's a tricky market and takes tend to take longer time. There's nothing that is not for sale, but we will only sell assets that we consider to be either peaking in their valuations or deemed to be not strategic to us. And that, of course, includes whether we believe that the value or the price we are offered is reasonable or not.

Thank you. Next question. Robert is asking, hi, thank you for taking my questions. In relation to debt maturities, do you consider a new issue of bond in euro?

Jens? Of course, we consider issuing Euro and SEC bonds all the time, but in the current market, with spreads way above what we can finance ourselves with Nordic banks, it's not really reasonable for us to go out in the debt cap market. In addition, the liquidity is rather weak and therefore not in the short run at least. You shouldn't expect us to enter the market. But we follow the situation closely and if our spreads come down considerably after the rights issue, I think it's fair to say that we are definitely interested in the depth capital markets.

Okay, another question. It's about the emission. Simon Mortensen, you stated during the bond maturity chart, it may be aided with no dividend this year. Does this mean no dividend is planned for 2023? No DPS is planned for 2023.

No such decisions have been taken.

Can you please clarify when the right issue will be concluded? Will it be the prior to Q2 reporting in July with final details in Q2 reporting or will the terms be announced during Q2?

Yeah, the latter. I mean, we've said that the rights issue is expected to be concluded in Q2.

Okay, that was all the questions that we had. Thank you everyone for listening. That was all for today.

Thank you everyone. Thank you. Thanks.