Castellum AB (publ)

Welcome to Castellum Q1 Report 2024. 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 pound key 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, and thanks for joining us. I'd like to start by drawing your attention to the picture on the first page of our presentation. It shows one of our recently started projects, the complete renovation of three buildings in Stockholm, of which one the one with the reddish facade is designed by the renowned architect Ralph Erskine. Thus, the project is named Erskine and Friends in its honor. That was just a glimpse of what we are going to hear more about later. So our main strategic decision last year, the rights issue of 10 billion and the divestment of properties worth 5.2 billion can be seen in the P&L when comparing this quarter with the same period last year. The rental income is not increasing as much as could be predicted, but that is due to divestments. And the cost base is also favorably affected by the lower interest rates. This combined with a good cost control, the income from property management is up 13%. Looking at our rental income, we also see that the negative net leasing from last year translated into the like for like figures. But as mentioned in the Q4 report, it was expected and that the interest rate hike has left a mark on the economy with somewhat poorer demand. However, our net leasing for this period is positive, not much, but at least positive. We have during Q1 sold non-strategic properties for a significant amount, and 347 of those are in the retail segment. After the quarter, we have sold a portfolio of nearly a billion SEC, Again, non-strategic properties, and we are selling because we want to, not because we have to. These proceeds will be used to top up our new investments in addition to those volumes communicated earlier. For those of you who are new to Castellum, Just a brief overview. Castellum is one of the largest listed property companies in the Nordic region. We're a fully integrated company with local hands-on presence where our assets are located. The property portfolio is located in attractive growth regions in the Nordics, and we're exposed to the robust Norwegian market via our associated company Entra. On this map you can see the location of our property portfolio. Property values as of last March sums up to 159 billion SEK, including our share of Entra. Of these 159 billion, 76% is located in metropolitan areas, meaning urban areas with at least 1 million people in them. 52 of our five and a half million square meters are sustainability certified and we have a yearly contract value of approximately 9.7 billion sec so uh as you probably all have seen yesterday evening we announced revised financial targets and the revised dividend policy the overall financial target is to deliver a return on equity of at least 10 percent over a business cycle the new dividend policy is at least 25 percent of the income from property managers from property management but safeguarding the financial position of the company The targets shall be seen in the context of how we work with capital allocation and capital efficiency. Our focus on profitability and our long-term perspective, but still being able to return to attractive total returns, including through dividends. It also allows for a larger yearly investment volume than the old dividend policy. The strategy remains unchanged and also our financial policy, including the targets of an ICR above three times and an LTV below 40%. The operational focus of the company is to retain existing tenants and lease vacant spaces, to recycle capital through divestments, and to reinvest proceeds in our existing project portfolio. And we are streamlining our business to realize synergies. These investments are made to manage both vacancies and to fight higher energy costs. We are still selling assets and not because we need to, as mentioned, but because we want to. We are not focused on retaining every single revenue of Krona by clinging on to every single asset we own, but to improve our profitability and to create value over time. We have a very attractive product portfolio of more than 40 billion SEK. That includes opportunities for new logistics, but also refurbishments of existing buildings. We will have a continued focus on reducing our costs where possible. Examples of that is a newly implemented complete procurement organization. We are reviewing our business processes and we are streamlining central administration. More on that at the later stage. Our tenants represent a cross section of Nordic business and authorities and our exposure to individual tenants is low. Our 10 largest tenants stands for less than 14% of our total contract value and with no tenant generating more than approximately 2.3%. We have a very strong tenant base with a number of our largest tenants being publicly funded. Approximately 25% of our total contract value stems from public sector tenants. Our largest tenant is the Swedish police. As of last March, the remaining average length of our contracts was 3.7 years. I'd like to give you just a brief overview of what we are steering at and how we do manage the company. As you see from this P&L in brief, our total income is in line with prior year. Divestment has reduced the top line income by some 100 million, while completed projects contributed positively with 44 million. Our direct property costs decreased by 77 million, that equals about 10.6%, mainly driven by lower electricity costs. Leasing and property administration together with central administration expenses decreased by 9 million, equivalent to 3.5%. The decrease is primarily explained by cost efficiencies, through reduced number of FTEs and the strategic decision to discontinue our innovation company. The loan volume is significantly lower after we have repaid some 16 billion of debt last year. And as a result, our interest expenses are lower compared to last year. Summing up, We report income from property management up 13% from last year. Jens will walk you through all these numbers in greater detail, but this was just to give you a brief overview.

Yes. Good morning, everyone. And thanks Joakim. And I think that you covered most of it yourself. Really good. But for the Life Flight portfolio, income increased by 63 million, equivalent to 2.9%. 3.9% looking at Sweden isolated. Castellum, as you might know, in some cases has limitations in the lease agreements, which means that full indexation is not achieved. while indexing in Denmark and Finland was lower than in Sweden. And as Joakim already mentioned, electricity costs was down significantly due to unusually high costs in the first quarter of previous year, excluding one of effects of electricity costs like increased by 9.4%, equivalent to 42 million. And this is primarily explained by higher costs for snow removal and heating due to the cold and snowy winter compared to previous year. Next slide. The rolling 12 month rental income is in line with previous quarter despite divestments, net leasing plus 3 million for the first quarter and 12 million minus rolling 12 and continue to be rather volatile while income is more stable over time. Bankruptcy is significantly lower, 3 million compared to the same period last year. Tenant quality is being very stable and outstanding receivables are low and decreasing. In addition, we've done an assessment of tenant quality together with Don and Bradstreet this quarter that clearly confirm the stability of the tenant base. Only 25 million of the outstanding receivables are older than 30 days. Next slide. Looking at property values, during the quarter, Castellum has written down property values with approximately 1 billion, equivalent to minus 0.7%. Since the peak in 22, down with close to 22 billion. The value changes this quarter is mainly driven by negative cash flow as a result of more cautious view on vacancies. Valuation yield is in line with last quarter. However, almost 1% upward shift since the peak in 22. Approximately 10% of the property value has been externally valued during the first quarter by Cushman Wakefield confirming internal values and our valuation process. Property sales communicated in the second quarter of circa 1.3 billion SEK further confirm our book values. Next slide. Nominal valuations are down to 2019 levels. However, looking at the yield shift isolated, we're back at the 2017 level. The difference is explained by higher cash flow mitigating some of the negative effects from the yield expansion. With falling inflation, we saw a sharp decline in underlying interest rates end of 2023. However, during first quarter, interest rates have gone up again. Though with the completed rights issue and successful sales, we are prepared for higher for longer. Stable valuation yields compared with year end, however, too early to see a trend, highly dependent on the development of Swedish and global economy. Also important to mention is Castellan's ongoing journey to improve asset quality and location through divestments in metropolitan cities in the Nordics and through divestments of properties in non-prioritized areas and segments, which over time is expected to generate higher total return. though it's harder to see when only looking at the spread between government bonds and our valuation yields that give little guidance on the quality shift of our portfolio next slide yes highlights from the quarter loan to value still on a historically low level of 38 percent somewhat increasing during the quarter due to lower property values ICR currently at 3.2 and will most likely continue to improve in the second quarter when rights issue will have full one-off effect on our numbers. On the other hand, expiring interest rate derivatives will put some downward pressure on the ICR, however still expected to remain on comfortable levels at around 3. Average interest rate currently at 3.1%, up from 3.0 at year end. Please note that the average interest refers to a point in time at the end of the quarter and not an average interest cost for the first quarter. Headroom ratio has decreased, however, will be held on a comfortable level going forward. Rating is stable and we feel that we have reasonable headroom to move this requirements. Yeah.