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Edited Transcript of CAST.ST earnings conference call or presentation 18-Oct-19 7:00am GMT

Q3 2019 Castellum AB Earnings Call

Göteborg Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Castellum AB earnings conference call or presentation Friday, October 18, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Saxborn

Castellum AB - CEO

* Ulrika Danielsson

Castellum AB - CFO

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Conference Call Participants

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* Albin Sandberg

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Andres Toome

Green Street Advisors, LLC, Research Division - Research Associate

* Niclas Hoglund

Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator

* Philip Hallberg

Danske Bank Markets Equity Research - Analyst

* Robert Woerdeman

Kempen & Co. N.V., Research Division - Research Analyst

* Simen Mortensen

DNB Markets, Research Division - Analyst

* Tobias Kaj

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Castellum AB Q3 Report 2019. Today, I'm pleased to present CEO, Henrik Saxborn; and CFO, Ulrika Danielsson. (Operator Instructions) Speakers, please begin.

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Henrik Saxborn, Castellum AB - CEO [2]

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Thank you, everyone. Welcome to this Q3 report 2019. We will start looking at the first page, second page. You can change page please. So this -- the last 3 months has been a quarter where we continued to concentrate on all our core business, meaning that -- meaning simply asset management and products. It has been the quarter where we rented out in the same pace as last year. It has also been the quarter where we continued to renegotiate more contracts than ever. It has also been a quarter where we took the next step into the Eurobond market and benefited from the attractive interest rates and long duration. It has also been the quarter where we've proven that we are one of the best in sustainability, so it has been an active quarter.

And regarding the market, we can conclude that we have been in a living -- in a stable to strong and in some cases, very strong markets, both when it comes to rental as well as the real estate market. And to date, this year, the growth in the rental levels, like-for-like in the portfolio has been 5%, like last year and [October. Of course,] a top level for Castellum.

In that figure, renegotiation represents approximately half of that SEK 100 million. This means that on average, we have raised rents with approximately 18% in the renegotiations we have concluded in the end of last year and the beginning of this year. So that is a trend that we expect to continue.

This, in a combination with the program of continual efficiency, it have -- will mean that we continue to have effect going forward, which shows that we can, on firm basis, continue to have earnings growth. So in total, the income from property management over 3 quarters total to 7%, or if you want, to SEK 8.71 per share. Despite that, we still are affected on the sales within the beginning of last year -- or in the beginning of this year, sorry.

It's also a quarter that valuation increased and the property values added additional -- another SEK 0.6 billion in value. It means that we continue to decrease the LTV and are now on 43.6%. So that means that we have lowered the LTV since that we bought Norrporten in 2016.

So with this short summary in the beginning, let Ulrika go into the figures.

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Ulrika Danielsson, Castellum AB - CFO [3]

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So to the next slide, please, on the P&L. As Henrik said, the growth in income from property management is 7% for the 9-month period and 5% is for the quarter. But if you convert that to absolute amount, it's roughly SEK 160 million more that Castellum earns this year. And that is with a roughly SEK 145 million is coming from the like-for-like portfolio or pure asset management. And this was mainly driven by good rental [offering] due to CPI and renegotiations made, but also lower cost, if we do exclude the high property taxes that was put down to us. SEK 60 million from the project portfolio, SEK 40 million from debt or interest rate management, where lower interest rate has contributed despite long duration for capital, as well as interest rates. And then minus SEK 90 million from transactions due to that we still are a net seller on a 12-month rolling basis.

The property market is good, which in Castellum's universe means an uplift of 3.1%. However, we have also sold 28 assets so far, which gives an unrealized gain of minus SEK 325 million. That is, of course, mitigated by deferred tax income that we needed to account for due to selling those assets.

So after some goodwill write-down and due to selling assets in Sundsvall earlier this year, negative changes in value derivatives due to mainly lower market interest rates, and taxes at roughly SEK 640 million means that the last line income SEK 3.7 billion.

And worth mentioning this quarter is that we have accounted for the new and higher property taxes at roughly SEK 50 million on an annual basis, of which 75% is this quarter. That is, however, put onto the tenants, meaning that the rental values also have increased with the same amount.

If we then go to the next slide and look into the NOI, it increased with SEK 137 million, of which the biggest contributor was like-for-like with SEK 152 million on the NOI line, driven mainly by top line growth and good cost control if we take, as I said earlier, the property tax apart from that.

Furthermore, the developments contributed in a positive way, while the transactions [made] [loses] NOI.

The co-working part of the United Spaces delivers a positive result. Even if it's small, it's still positive, which is important. And we will come back to that later in the presentation with the steps that we're taking.

So if we go to the next slide and look into the rental income growth. The like-for-like growth was 5%. And as I've said earlier, this is a result of the CPI, renegotiations made and higher property taxes. And that is, however, taken down a bit to that. Last year, we had bigger lump sums from tenants leaving, slightly higher vacancies and incentives. And the losses of rental values due to being a net seller is compensated by increased rental values from the project in the United Spaces.

So if we then go to the rental market.

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Henrik Saxborn, Castellum AB - CEO [4]

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Yes. And if we then look at Castellum during the period, we are, of course, not satisfied with the net leasing. But if we look at -- into it, we can conclude that across leasing in the existing portfolio was in the same level as last year and consists of actually re-leased output SEK 230 million in that part of the portfolio.

But there is a moment -- this is -- in this moment is less development to rent out for us compared with last year, but that will not -- if we correct that, we could add the rent agreements for the Swedish National Courts Administration in E.ON on the headquarters in Malmö, the 2 agreements that adds up to approximately SEK 150 million in rental value that will occur in the end of this year or the beginning of next year.

The reason behind the larger number of tenants giving notice is that in some extent to us is already known as larger -- short offices that were terminated. And also our own activity where we're moving around a larger logistic tenant in Gothenburg. But of course, there is a market that is calmer than a year ago. But on some, it's also, at the same time, very lack of good spaces for office and logistics in CBD, for example.

And if we then take the next slide, it's even interesting to look at -- no, we can -- okay. I could say that from the next slide, actually but we can go back on the slide if that's possible.

On the right side on that slide, you can also see that we have divided the net leasing into different sectors. And the conclusion of this is that we can see on the right-hand side that the government contracts are expanding, that the retail and the banks is decreasing. And we can also see that we have a larger contract from the car industry that is actually one-off for us that are leaving. So this is showing us a picture that we think is -- or less like the market is, it's moving right now. And then we can change to the next slide, please.

Looking at the supply, we have shown this [mark] before. But it's very interesting to see that the construction of new developments are less than the group and are still under 1% in the most accounts. So even if we see a lot of movements in Helsinki into the market or new construction into market, it still gives us a market where there's not so much supply as we wanted to.

And if we look at the rental levels in the -- we can see that we have a rental market that is very robust. And we have today, rents in Stockholm, for example, SEK 9,500. That's higher than last year. We are in [Helsingfors, EUR 4,500] a square meter; Copenhagen, SEK 2,400 a square meter, same as last report. So in average, we can say that the market is stable to strong, still. And we, as we said, I mean, during the last period, we have renegotiated the rents we upped with 18%. So it's a strong to stable market in our universe and the limited supply simply continues.

Then we can go into the balance sheet on the next slide, Ulrika.

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Ulrika Danielsson, Castellum AB - CFO [5]

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Yes. The balance sheet of Castellum is strong and the LTV continues downward and was at the end of September for 43.6% despite leading dividend in the end of the period. The valuation yield was unchanged compared to Q2. This strong balance sheet gives an NAV as at the end of September of 886 -- SEK 186 per share, which indicates a growth of 11%, despite the dividend compared to 1 year ago and 6% compared to the end of 2018.

And if we look into the property value and the property market on the next slide, please. The valuation yield is unchanged at 5.1% on a portfolio level. The unrealized valuation at risk of 3.1% is roughly equivalent to SEK 2.8 billion, of which SEK 1.6 billion is due to yield changes for logistics, public sector in good locations with our leases and offices in good location. The rest is made up of better cash flow, project gains and acquisitions.

And if we look back, this year, to each quarter, the yield shift was really the big contributor in Q1 and Q2. It still contributed in Q3, but with much lower numbers. So the cash flow that picked up in Q2 valuation still continue to be good contributor this third quarter, despite the negative net letting that is taken into account in valuation. So regard this causes to the uplift, all in all, logistics is so far the segment with the strongest uplift this year, followed by offices and public sector.

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Henrik Saxborn, Castellum AB - CEO [6]

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And if we go to the market, then we can conclude that we are still in a very strong property market. There, we see stable to actual yield compression going on. And that's, of course, because of the strong interest compared with the strong interest and demand.

It is, of course, in the traditional CBD areas. But also, if you look at the stable cash flow portfolios, higher-yielding portfolios or correct -- or right-located logistics.

To compare with the yields you have in the portfolio, we can compare with some of the last deals done. In Stockholm CBD actually outside just the CBD area with deals done on 435 to [467]. We are in mid-sized towns on somewhere, right now, in the CBD areas on 4.5% to 4.7% in yield. And in Helsinki CBD area, we're down to actually 3%.

And looking at warehouses -- have -- that are of course, attractive, as Ulrika said and are moving. And we have seen evidence in the market right now with yields down to 4.4% to 4.7% in the best cases.

But we can move on to the next slide, please. And it's important to conclude when we're looking into our strong development pipeline that it's never been larger. The pipeline is not only large, it's also divided into so many midsized projects that we are not depending on one single project, one single zoning plan or some political decision. And the yield on total cost is very attractive compared with the market yields. Office that are completed now have an average yield on cost -- total cost on 6.5%. And the one we have under construction is calculated on -- ending up on more or less a little bit lower figures. Looking at logistics, we can still produce logistics around a 7.

And if you take next slide. As said, the pipeline is large. At the end of this slide, you can see that we are stating that we have now a pipeline of approximately SEK 10 billion that is able to start in the next coming 2 years. And of course, after that, we have more or less the delta volume that is identified, but is not, of course, concluded that we can start in 2 years or the exact start. So the pipeline is huge or at least the biggest we ever had.

And this was a very important step for us in a short-term basis. Last quarter, when the 3 largest developments of the zoning plan permission approved and where the new larger developments will start in the end of this year or in the beginning of 2020. And the approximate volume of that is SEK 3 billion.

If we go to the next slide, please. We are showing the airport Säve again, and that's because it appears to hold even more potential than was first thought and so on. From the original intent, in the beginning, it was just a pure logistic hub, but we see even more potential now. We learned that it's possible to develop Säve into high-tech center in many types of transportation solutions. The likelihood, thereby increases that logistics facilities will also be supplemented with some offices. And if we only build on 50% of the land bank in here, it will still be possible to produce somewhere around 800,000 to 850,000 square meter logistics and still keep the airport intact and have the possibility to develop further office space.

We can take some more examples on the next slide, please. Just showing some examples, what's ongoing. We have, what's called the Nyhamnen, it's -- we are in Malmö. Here, we have the 2 big projects. We're talking about SEK 2.3 billion in projects and will start this winter. It's 51,000 square meters together. What is called the Emigranten is actually where the Swedes emigrated to U.S. in the early days. And here, we're building for a smaller project, but high-quality project of 4,000 square meters for approximately SEK 230 million and that's under production.

And further on, we have the Meatpacking Districts in south of Stockholm where we are under zoning plan -- the early start of zoning plans. Here, we calculate that we have a possibility to produce for SEK 1.3 billion, approximately a little bit less than 40,000 square meters. Just to give you some examples of this fantastic development pipeline.

So if we take the next slide. And then we have United Spaces. Ulrika commented on it. And as you have seen, we have turned United Spaces into positive figures already in less than 9 months. This is a very positive and sustainable. We also succeeded in winning the contract with Geely in their new research and development facilities that we will be building in Gothenburg. Here, we will develop a new flex space arena on at least 4,000 square meters, together with Geely. And from here, we're now planning with new locations, both where we are and into other Castellum towns. So US, United Spaces, simply will be a very interesting driver in our development going forward.

And then we will, Ulrika, continue with some funding.

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Ulrika Danielsson, Castellum AB - CFO [7]

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Yes. On the next slide. The funding side of the market. At the moment, or over the last period, we have felt that the bond market is attractive, notably the international ones. Since [US] can find longer capital ratios of bigger volumes to reasonable cost compared to the Swedish bond market. We are seeking longer duration on an unsecured basis. And so far, we can find the volume out for Sweden but would be very positive if bigger volumes was accessible also at home.

We continue to see the CP market as the cost arbitrage compared to lending in banks and has a volume outstanding of roughly SEK 5 billion that has caused this [for the by] unsecured unused credit facilities.

Regarding the interest rates. We, as many others, still believe that the coming years will be characterized by lower underlying interest rates.

But regarding the credit spreads, the uncertainty is somewhat higher since they are affected by the economy as a whole, which can have increasing impact as well as quantitative market operations from ECB, as well as the Swedish Riksbank could have an impact other way around.

And if we go to the next slide, we can look what Castellum's interest and activities. So far this year, we are a net issuer in the Swedish bond market. We have issued NOK 850 million for a 10-year bond and EUR 400 million for 7 years. The last one we did the third quarter this year and all-in landed on fixed euro coupon of 75 basis points.

At the moment, we do see that even if we have issued a lot of bonds, that we still will have a considerable volume of bank debt, mainly in RCF since they offer good liquidity to permits and flexibility for us.

And regarding the CP market, we still continue that market for cost reason. And on the bond side with preferred duration, 5-year plus.

On the next slide, we can see that Castellum has not only worked with moving the property portfolio, we have also worked hard with moving the funding side the last 5 years. We have moved utilized volume in relative terms as well in absolute demand from secured bank debt to unsecured funding, which consists of bonds, CP and in some extent, even bank debt.

Our financial KPIs are developing in a good way not at least regarding LCV and the portion of unsecured assets.

The net debt-to-EBITDA has been rather stable despite increased interest in volumes in absolute amount.

The average interest rate has been reduced but that will be in the light of the last year's falling market interest rates despite that the capital as well as the great interest rate duration has been prolonged.

But looking forward now Henrik.

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Henrik Saxborn, Castellum AB - CEO [8]

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Yes. We can conclude on the next slide, please. Simply, we can conclude that we have a very strong position in some stable to a good market. We have both strengthened the balance sheet and created large share opportunities for the future. But it's also important that we are more and more productive and efficient, and we're working with that as you can see in the figures. I think that the strength of our size, our finance and our early leadership in digital solutions, we have a start over many of our competitors, and we intend to take advantage of the position we have.

If you look into the markets, we can still see the Nordics looking, just to be now in a stable position going forward. And we are, depending on what's happening around us in the world, that's standing right now on a solid ground for the future.

So with that, I thank you for listening. And if you have any questions, you can take them now. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andres Toome from Green Street Advisors.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [2]

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I was wondering, are you planning more aggressive external growth and potential non-dilutive equity issue given the favorable NAV premium of the share price?

And also, are you actively seeking acquisition opportunities in Finland? And would that be a preferred growth market as opposed to Sweden at the moment?

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Henrik Saxborn, Castellum AB - CEO [3]

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Yes. So I can -- I think I can answer your questions. We have always -- it's only one time that we have raised equity, and that's when we did the acquisition of Norrporten. And I think we succeeded in doing that. But we did that because we saw a good deal. We have the same strategy now. If we see anything that looks very attractive, we're going for equity. But as said, we only done that once.

Finland. Finland has gone more and more expensive, indeed. It's therefore more tricky to find something that's attractive. And we have history of being very cautious on what we do on an acquisition side, and that's still the question. I'm positive to Helsingfors, and that's a town, not to Finland, to be honest. I'm more positive on Helsingfors. If we find attractiveness there, we will definitely do acquisitions. But we are not in a stressed situation.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [4]

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And views on Sweden?

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Henrik Saxborn, Castellum AB - CEO [5]

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You mean on acquisition side, sorry?

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [6]

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Yes.

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Henrik Saxborn, Castellum AB - CEO [7]

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I think that's the same answer. If we can find alternatives that gives us quality and more density by building it, it's preferred to acquisitions. But in the same way, some acquisitions, I think, it's healthy, that strengthen the portfolio. And some sales also, all the time, is healthy to the market. But it's, of course, more and more tricky to find good acquisition compared with what we can build at this moment.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [8]

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All right. And additional question on Säve Airport. Could you just give a general update on the planning process? And also maybe elaborate more on the kind of the mixed-use that you outlined potential office housing component, and the economics of that versus logistics.

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Henrik Saxborn, Castellum AB - CEO [9]

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Yes. First of all, Säve is already giving us cash flow and I think that's important to say. So we are somewhere around the 5 on that one. The zoning plan is, I should say, if it's normal circumstances, I think it's possible to start the production in 2 years on that airport. If something special occurs, we will have a fast-track through the planning process. And that has always been understood in the market because of this very lack of land. And what the fast track means, I don't even know myself, but it's a faster track than 2 years.

On the new part that we are looking into right now with office part, that's an, of course, possibility that we see that we can develop it on more self-driving cars, electricified and so on. And here, the industry need more space and especially in the rest of Sweden. And combine that with an airport and logistics, that is something we'll be looking into.

On that, if we could -- that's a fast track because of the interest, of course, from the region. So the worst-case scenario is a zoning plan that takes approximately 2 years from my point of view.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [10]

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Okay. And kind of the economics of the mixed-use versus logistics. Do you have any estimate on that?

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Henrik Saxborn, Castellum AB - CEO [11]

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That is -- the simple calculation is an office building, we construct on a normal 6 and a logistic on a normal 7 to give you some guidance.

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Operator [12]

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And the next question comes from the line of Niclas Hoglund from Nordea.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [13]

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Three questions for me. Firstly, we started with the ramp to market. You were talking about 18% renegotiations, which you expect to continue. Could you elaborate a little bit more on that? Is more continued for the fourth quarter? And maybe if you can also elaborate on your thoughts on the Swedish economy given that the leading indicators [sort of] pointing down and the CPI adjustments also looks to be well below this year and for next year at least.

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Henrik Saxborn, Castellum AB - CEO [14]

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First of all, the renegotiation. I mean the renegotiation we have in the P&L right now is created last year, more or less, and that -- and we are in a situation that we'd renegotiate the same amount or more actually right now. And we have levels that have been stable to up going. It means that we should have at least that potential going forward that we present right now on the 18%. So that if everything stops now on the ramp levels we have in renegotiation power, more or less in the same figures like we present.

The economy, that's a big one. And I mean you know that Sweden is depending on everything that happens around us. From my standpoint, I mean, my own small outlook around Europe, I think, as a real estate company, we have a good position with a relatively stable to positive market compared with some of the colleagues out in Europe and that's my view.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [15]

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Okay. And maybe if we can move into the net letting and you're providing us more data on this sort of mix of the gross and net letting numbers. Could you add maybe some flavor, which we did in the first quarter. What's the reason for -- I mean the cancellation of contracts and maybe why you're not worried that the negative net letting will actually have a negative impact also on the -- sort of your renegotiation power going forward?

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Henrik Saxborn, Castellum AB - CEO [16]

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Yes. I think that's -- if you're looking into out of the 10 largest contract that was giving us notice for moving, they were down in this quarter. 67% of it was down in this quarter, of the 10 biggest ones, in value. They consist of a logistic -- they've been moving around the logistics tenant. They're, of course, and I'm not worried about leasing them out. We are losing some larger office tenants that are mid-attractive locations, but they are not in the CBD of the towns, means that where we have the renegotiations power. The most of the renegotiations power is in locations where -- yes, we have more renegotiations power in elsewhere than where they're moving. So that's the difference.

So now I see most of it, something that we simply can rent and lease out. And I can't see it's still affecting the renegotiation pushing power because this will not, in our case, affect our -- the vacancy rate in the CBD areas, for example, that's down to 2%. It's really still going to be hard for our tenants to find somewhere else to rent. So that will not be the effect right now. So we will have still very low vacancy rates in the CBD of Gothenburg and Stockholm and so on.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [17]

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And the follow-up on the CPI numbers. What -- we got 2.3% in Sweden last year. And what's in your valuator's expectations right now and what's your thoughts ahead of the October -- so October number?

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Ulrika Danielsson, Castellum AB - CFO [18]

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The CPI in -- is, at the moment, roughly 1.5-ish, if I look into the STB's statistics. We have 1 month to go in order to see what the October CPI will be. That is important for us. In our own valuation, to be honest, we have 1.5% as the inflation assumption when we do our valuation.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [19]

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Right. And then the final question, just tidying up my model here. Your paid taxes, they're coming up quite substantially in the quarter. What's your sort of -- what's your guidance on the underlying pay tax here? Should we expect 8% going forward out of the property management? Or should we see a step-up?

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Ulrika Danielsson, Castellum AB - CFO [20]

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That's a little bit tricky due to the interest rate deductibility restriction on all the changes in derivatives that is included in that calculation. And changes in derivatives can go both ways, so to say. But if we exclude that, I would say that somewhere between 8% to 10% maybe from the knowledge we have today will be your guidance.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [21]

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Okay. So the underlying will be then rather around 9%. Okay.

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Ulrika Danielsson, Castellum AB - CFO [22]

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Yes. But as I said, the value changes on derivatives can have an impact on that.

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Operator [23]

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And the next question comes from the line of Simen Mortensen from DNB Markets.

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Simen Mortensen, DNB Markets, Research Division - Analyst [24]

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Well, 2 of my questions was already on the payable tax and the net lettings. So I'm -- you can move on to the next question. They have been answered.

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Operator [25]

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The next question comes from the line of Tobias Kaj from ABG.

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Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [26]

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Yes. I would like to start with the question regarding your net leasing and your view on the rental market. I mean, you have 2 quite big projects, one in Stockholm, Öskaret with 28% occupancy ratio, which was unchanged compared to Q2; and also Masthugget in Gothenburg with 0% net leasing, and both are completed in less than 1 year. Can you give us some more flavors on why you haven't seen any activity in those projects. And yes.

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Henrik Saxborn, Castellum AB - CEO [27]

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Yes. I mean it's simple. I mean we have been -- both those projects had different reasons on it is slower because of technical reasons and [monestale] regulations reason. So actually, the real ramping out or leasing out now in this project is ongoing right now. So this figure will move in the next 6 to 9 months. I'm definitely certain of that. And it's not something that it's not a market effect or anything. We can't see that. We're holding the rent levels, and we have a lot of interest. So we are on stable on this development.

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Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [28]

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And then in Öskaret, what kind of ramp level do you expect?

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Henrik Saxborn, Castellum AB - CEO [29]

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We are at least on a 6 for average. So to calculate, if you're giving us a figure which had -- talk about SEK 6,000 a square meter in here [or less].

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Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [30]

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Okay. And another question regarding your cash earnings. Year-to-date, it's down 3% due to the increased paid tax. You have never reported a decline in cash earnings per share before. Do you think it's a risk that we will see that for the full year this year? Or do you think that Q4 will make up for the shortfall in the start of the year?

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Ulrika Danielsson, Castellum AB - CFO [31]

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The paid taxes is the reason and -- to that. And this is the first year that Castellum can't use all the tax losses carried forward because they, you could say, are a locked in, in some vehicles. So that's the reason. And from what we know now, you can say that the pace we are having so far, 9 months, is the direction we have for the whole year. But as I said earlier on another question, the change in derivatives can have an impact on the paid taxes.

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Operator [32]

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(Operator Instructions) We have the question from Simen Mortensen from DNB Markets.

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Simen Mortensen, DNB Markets, Research Division - Analyst [33]

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Yes. I'm coming back with a new question. I noticed when Henrik spoke about the net lettings, which is right, but you gave a lot of details on tenants moving and terminating leases, et cetera, but you also gave the comment that, in general, it is calmer in the rental markets when you spoke. Could you please elaborate on what you actually meant by that?

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Henrik Saxborn, Castellum AB - CEO [34]

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Yes. I think that compared with last year, it is calmer. And I think it's extremely important to make that specification because last year was fantastic. Now we're more into a normal market situation. And the trickier thing is I think is to understand where we are right now. We have an undersupplied market, but -- and a normal situation on the leasing out. So it's different from last year, and that's what I mean. But don't forget, this is still an undersupplied office market in good locations and logistics market.

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Simen Mortensen, DNB Markets, Research Division - Analyst [35]

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Yes. Just to follow-up on that. Because when you say at your net lettings, which is a focus area for everybody here today, you have on reported 12 months, minus SEK 34 million. But we see that projects actually concludes roughly SEK 64 million on plus on that. So the like-for-like adds up to minus SEK 98 million or roughly minus 1.9% of your annual rental income. How would you -- so we look at that negative like-for-like, excluding projects, when you're talking about you actually having an uplift of 18% when you relet, because your net lettings is reporting quite differently.

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Henrik Saxborn, Castellum AB - CEO [36]

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Yes. And that's -- and as I said, I mean, mostly of that. I mean, this is the last of renegotiated contracts. And so the situation is that the rent is an uplift in Sweden, in general, and especially in Gothenburg and Stockholm. And we have still benefited from, in the short-term basis, that we have rents going up of 30% to 50% from where they were in 3 to 5 years. That's the reality.

And the same time, you -- as you see, you have a negative net lift in the index in the existing portfolio. And then partly continue -- are because of that, we have larger tenants moving around, changing their position or we are moving them around, simply. So it is -- we are in a situation where, yes, it's a little bit calmer market, but we have higher rents, and we have still a lack of space in some locations, very lot of occasions, some would say. So that's just the day-to-day effects.

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Simen Mortensen, DNB Markets, Research Division - Analyst [37]

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Just a final question. In terms of your larger investments, which is listed and recorded for this year, like, those add up to below roughly SEK 672 million in terms of remaining CapEx for those developments. What do you expect to be using annually going forward in terms of developments? Because what we see here on developments now is clearly on the low side.

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Henrik Saxborn, Castellum AB - CEO [38]

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Yes. We are -- so what you're going to see is simply that with that increases. And as we stated, we will start developments approximately for SEK 10 billion the next coming 2 years. And the beginning of the period will be a strong start because then we will start SEK 3 billion -- we have started SEK 1 billion, and we have another 2, SEK 1 billion to start of the SEK 3 billion ones. That means that we will be a strong start. And from that, we'll have a continue of increases on development. And to continue that question you had earlier on leasing, the majority of these projects is well leased out before we start.

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Simen Mortensen, DNB Markets, Research Division - Analyst [39]

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And can you just give us a time frame on the Säve Airport, give us the start. But how much time you expect to be producing on that in terms of developing that?

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Henrik Saxborn, Castellum AB - CEO [40]

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It's really tough to say on the -- because it's a market situation. But we can conclude that if you look at the logistics side, this is approximately 800,000 to 850,000 square meters of logistics. In Sweden today, we produce somewhere around 500,000 to 600,000 square meters annually. It means that this is more than 1.5 to 2 years production of logistics. So I have respect for the timeline on that one. But it's hard to say if that will take another 5 or 7 years or something like that from the start of the production of that logistics side, something like that.

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Operator [41]

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And the next question comes from the line of Robert Woerdeman from Kempen & Co.

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Robert Woerdeman, Kempen & Co. N.V., Research Division - Research Analyst [42]

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This is Robert, Kempen. Actually, one question. Mr. Arnhult is obviously becoming a larger shareholder, nowadays owning 10.9% of the company, putting forward Mr. Essehorn in the Board. Do you see any changes in the Board with respect to future strategy? And let's say and more precisely, can we expect Castellum, for example, to go further on the risk curve, knowing Mr. Arnhult's, yes, view on leverage and stuff?

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Henrik Saxborn, Castellum AB - CEO [43]

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Okay. The procedure is like this: We have an Election Committee that is under meetings right now. The Election Committee is elected by the 4 biggest owners and as Mr. Essehorn is the Chairman of this committee, that was pronounced. What that will be the conclusion of then -- their meetings, I don't know. Definitely can't comment on. And from that, we will see.

So simply, it's too early to comment. And it's an owner question, not a CEO question.

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Operator [44]

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And the next question comes from the line of Albin Sandberg from Kepler Cheuvreux.

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Albin Sandberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [45]

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Yes. I have only one question, and that is on the yield requirements. And I think also you start off in the annual report with a question mark whether yields are coming down. From Castellum-specific perspective, since you kept it flat quarter-on-quarter, are you waiting for any further evidence before you're ready to put in a lower yield, or do you think that the yields you're reporting are the right ones?

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Henrik Saxborn, Castellum AB - CEO [46]

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My view on the valuation is that the valuation is correct with the knowledge we have and the market has -- where we have seen in the market right now. The feeling is, and what we want to say is that we can conclude in that we -- it's not impossible that we will see yields go down in the future come and simply -- and the feeling is that the next acquisition is a little bit more expensive than the last one, still in the market. And it's also -- definitely so that we have a large interest into the market from foreigners as well as internal Swedish investors. So -- and in the Nordics, especially Helsinki as well. So it's a huge interest for the Nordic sector. And what I can feel is that we are on stable [22%] yields going down. But the valuation we have is to our best knowledge.

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Operator [47]

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And the next question comes from the line of Philip Hallberg from Danske Bank.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [48]

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So I have 2 questions. The first one is relating to your Säve Airport acquisition. So what's your view on the competition out there? Obviously, Platzer has a large amount of land to build on also. And how do you view that one?

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Henrik Saxborn, Castellum AB - CEO [49]

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I simply think that it's a lack of efficient logistic assets close to Gothenburg harbor. And the land bank that are possible to build on right now is needed for the future goods on -- in the region and actually for the two Nordic sectors since the harbor is the only transatlantic harbor in the Nordics. And we see the volume going up and needed to go up. And if we don't want to transport everything, we're going to by -- by trucks going from south and upwards into Oslo, Stockholm and so on, the harbor's volume is going to increase. It's all about investments, and the land bank is not -- they didn't need more land bank, actually to -- in Gothenburg right now to support the harbor. That's my view.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [50]

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Okay. And is the municipality supporting you in this, like planning processes? And are they keen to you building this as well?

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Henrik Saxborn, Castellum AB - CEO [51]

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Yes. We are very supported by the municipality and also by the region, and the harbor.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [52]

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And the second question, I guess, that everyone has already tried to ask you this. But could you give any indication of the net lease in -- during the coming quarters, if you exclude this, like SEK 150 million from the already announced project leases?

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Henrik Saxborn, Castellum AB - CEO [53]

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I think it's -- no -- it's very tough to look into that figure. The only thing we know, as you indicate, is where we have already leased out in the project side. And -- so no, I can't give any more guidance, unfortunately.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [54]

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Okay. But just to follow up then. In the first period of this year, I think you mentioned that you had some leases that was terminated in the CBD of Stockholm and in Copenhagen as well. Have those been left out? Or are these -- those still vacated?

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Henrik Saxborn, Castellum AB - CEO [55]

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Part of those -- I mean, first of all, the ones that are giving notice to moving, they haven't already moved. They are giving us cash flow. So that's very important to say. But they have -- part of that volume has been leased out.

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Operator [56]

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And we have a follow-up question from the line of Niclas Hoglund from Nordea.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [57]

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I just have 2 follow-up questions. Firstly, is it fair to conclude that the negative net lease you're presenting right now will put a pressure on your vacant flows in the coming quarters? That's my first follow-up.

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Henrik Saxborn, Castellum AB - CEO [58]

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I mean, it's -- if we're looking at that, I mean, we are looking for stable to some adjustments maybe on the vacancy rate -- well, occupancy rate associated right now.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [59]

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But you're on very high level compared with the history, of course, as -- like in that portfolio.

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Henrik Saxborn, Castellum AB - CEO [60]

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Yes. We are. So don't pencil into any dramatic figures. And we have the new ones coming in later on in the portfolio.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [61]

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And then my final follow-up, maybe a little bit boring, but credit duration is coming up a little bit, but I was under the impression that you're aiming for even higher capital duration. Is that still the case? Should we expect your capital duration to move up about 3.5 years over the coming quarters?

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Ulrika Danielsson, Castellum AB - CFO [62]

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I said earlier, this year, that we aimed at roughly 3.5 years because each quarter that goes means that we lose duration, of course. But loan duration is preferable but then, it's also -- there is a question, of course, of what the market can offer us and at which price, so to say. But where we are now is roughly where we targeted for this year. And then we are still working on.

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Operator [63]

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As there are no further questions, I'll hand it back to the speakers.

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Henrik Saxborn, Castellum AB - CEO [64]

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Yes. And we thank you, everyone, for listening. And yes, thanks, everyone.

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Operator [65]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.