Castellum AB (publ) (OTCPK:CWQXF) Q2 2022 Earnings Conference Call July 15, 2022 3:00 AM ET
Company Participants
Anna-Karin Nyman – Director of Communications
Rutger Arnhult – CEO
Maria Strandberg – CFO
Jens Andersson – Treasury
Conference Call Participants
Helen Rodriguez – Mizuho
Erik Granström – Carnegie
Paul May – Barclays
Operator
Ladies and gentlemen, welcome to the Castellum Half Year Report January-June 2022 Conference Call. I am Aly, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.
At this time, it’s my pleasure to hand over to Anna-Karin Nyman, Director of Communications. Please go ahead, madam.
Anna-Karin Nyman
Thank you, and welcome to this call. Castello’s CEO, Rutger Arnhult; CFO, Maria Strandberg; and Treasury, Jens Andersson will present the results of this first half year. After the presentation, there will be time to ask questions, as you heard.
So now I would just say, please, Rutger Arnhult, go ahead.
Rutger Arnhult
Thank you, and thank you for calling in.
Yes, we are reporting our second quarter this morning, and we are happy to announce a strong result all through the quarter. We have income from property management, plus 47%, which is 21% up per share. We have a positive leasing of SEK 109 million, which we’re very happy about. We really reckon rebouncing Stockholm rental market, coming back from being depressed by COVID for a number of quarters. We are reporting a like-for-like rental income increase of 4.4%, which I believe is maybe the strongest we have ever reported in the history of the company.
We have a strong underlying business, and we also see that in the occupancy rate, which is now 93.7%, which is down by 0.5% since the beginning of the year when it was 93.2%. I believe this is the strongest figure ever in the history of Castellum. So we are very pleased with that.
We do have a very solid and stable financial position with an LTV today of 38.2%. This is also down since the beginning of the year when it was 38.5%. We’re stable and even stronger. And we also show a strong growth in the net asset value, which is now SEK 263 per share, and that’s up by 16%.
I would say that Castellum is a leading commercial property company in the Nordics. We do have a strong — super strong platform in Sweden and Norway, but we also in the markets in Finland and Denmark and mainly Helsinki and Copenhagen. 80% of the volume is in Sweden, as you know, and then 14% is in Norway through our company of interest, Entra.
We are mainly focused on office. 72% of the portfolio is office. Out of that portion, there is a large portion of the public tenants in the office segment. And the public sector stands for 24% of our total leases, total income. And when looking at the 10 largest tenants, you can notice that every second of them are actually a public tenant as the Domstolsverket, like the Police and Forsakringskassan and so on.
We have a very, very diversified geographic and strong portfolio. We are in the major larger towns in Sweden and also in Helsinki, Oslo and Copenhagen. The largest portion is in Stockholm, 26%, and then Oslo is 11%, which gives us a very, very strong situation on the rental market.
And also, transaction wise, we are experiencing a strong market. We see lower vacancy rates in both Stockholm and Oslo generally. We see stable rental levels this year, mainly raised by the CPI, in Sweden, 2.8% and in Norway, 5.1%. But still slightly lower vacancy levels in both Stockholm and Oslo.
Positive net leasing in the sector, generally, and we report a very strong figure of SEK 109 million. We’re very, very happy with this occupancy ratio of 93.7%. When we reach 0.5%, 0.6%, if we do, then I would say we are in a situation where we rather increase rental levels than really pushing out the square meters. So hopefully, we reach that level in a year from now. It takes time, though, as you know. And 0.5% better is really, really a strong figure.
The net leasing the last half year here has been the strongest figure in the Western region with Gothenburg and also Molndal and with the region of Vasteras has been the strongest this period. This also shows that it’s very good to have this geographical diversification in the portfolio. Sometimes Stockholm is best, sometimes Gothenburg or Vasteras is the best market.
The best recovery is actually in Stockholm, but we don’t — feeling wise, but we don’t really see that in the figures yet. But I think Stockholm was the market that was mostly hit by COVID since lots of people are relying on public transportation in Stockholm, and the situation is not really the same in the other large cities.
We see modest value changes. Half of them are driven by projects. And we now have — we have a large portion of ongoing projects that are about to be finished. So now we know what the final cost of them is going to be. And as you know, the cost side in projects are today hard to lock in. But since these are old projects brought up in a different kind of market, we can now start to calculate how we will end up in them.
We are very cautious with new products. Some we have announced. But we also are pushing some forward and looking for more fixed prices on the project side. And also, we require a higher pre-let percentage normally in new projects. We are more cautious with projects since the capital markets and financing conditions are tougher. And therefore, we hold harder in our liquidity.
Transaction yields and volumes are still good. We see a downturn, but still there’s a lot of transaction going on. But of course, a more troublesome finance market is having an impact on the transaction market.
But we don’t see any shift in yields yet. And I do believe that we also will see quite a lot of transaction in the third quarter, which we report–will be reported in a few months. There is a lot going on.
We have a value change, total of 1.8% in this half year, giving a like-for-like increase of rental income of 4.4%. And that might sound modest. But also bearing in mind that half of that is from product, it makes it even more modest. So we see a slowdown. We don’t experience the same kind of value increases as previously years, but still it’s a positive figure. So we’re happy with that, SEK 2.8 billion in total.
We have stable – I turn over to Jens, who is our Head of Treasury. And you have – you can explain the financial situation for us, Jens.
Jens Andersson
Absolutely.
The quarter has been very volatile in the debt capital market. However, Castellum has experienced a relatively stable quarter in many perspectives. We continue to have a large portion of our debt in the bond market, followed by bank loans. We see a slowdown in the commercial paper segment, and that has been transitioned into bank loans over the quarter. But we still see interest in our commercial papers and think that we can continue to issue them over time.
Important to understand is that we have unutilized credit facilities of around SEK 20 billion, and that includes SEK 1.3 billion of cash. We also have been able to preserve the average capital term. That is pretty much the same as last quarter.
The same goes for average interest term. That is just slightly below what we saw in the last quarter, but I think that we can expect over the next quarters that we can keep it stable or even slightly increase the capital term even if the debt capital market is very weak at the moment. But at the same time, it’s summer, and it’s always very slow during summer time. But of course, this time, it feels a bit different.
We’ve also been able to actually increase the amount of interest-bearing liabilities that are hedged over the quarter. So we feel that we have a relatively strong protection against the interest increases over the coming years.
We also have a very diversified debt structure. And over the next coming two years, we have around SEK 15 billion of bonds in the debt capital market expiring. And as I mentioned before, we have roughly SEK 20 billion in unutilized credits and cash that we can exchange those bonds with. But at the same time, it is unlikely that we will not be able to actually reissue those bonds, especially when the bulk of them — so out of the SEK 15 billion, the first SEK 10 billion expiring, that we can discuss with over time. And we feel very confident that this will not be a problem.
Jumping into financing activities. During the quarter, even with a very obvious slowdown in the debt capital market, we’ve still been able to continue to issue bonds now in the Swedish capital market. The spreads were higher than the previous quarters, but still on relatively good terms. We’ve also been able to refinance SEK 13 billion of short-term bank loans, prolong them on very good terms.
We’ve also been able to secure an increase of credit limits of SEK 4 billion from Nordic banks. And most likely, we will continue to grow that number with several other banks over the coming quarters. So if the debt capital market continues to be slow, we will be in a position to transition into a larger portion of bank loans.
Also, a thing that Castellum is very proud of is all our green initiatives, and we try to do the same on the financing side. And therefore, we think that it’s time to update our green bond framework and that will come during the autumn. We also are looking into a green equity assessment as one of the first real estate companies in the Nordics and hope to be able to labeling our ordinary shares as green in the coming autumn.
Rutger Arnhult
Thank you. Okay. Going back to me.
I’ll start presenting the ongoing projects, with high activity in ongoing projects. As you know, we have a lot — a portfolio of ongoing projects. It’s SEK 6.3 billion today with a high occupancy rate, it’s 80%, good yield on cost of 5.8%.
A lot of these projects will be completed within the next nine months. So going into the next year, we will add not only managed properties into the property management portfolio from the project portfolio. We will also see that we increase our rental income from these projects. And about SEK 337 million will be added to the income side and a large value of about SEK 6 billion will also be transformed from products into the management portfolio.
Going forward, the project part will be a bit lower. And that’s also — that’s due to the previous years of COVID affecting the office market and also today — that we are more cautious today on starting new projects. But it doesn’t mean that we haven’t started anything at all. We do get new projects in the company. We just signed a paper regarding a 25,000 square meter storage in Gothenburg and we signed a new lease on an animal hospital in Gothenburg, also that we will be start — we will start to build. So we do some.
But we are very, very cautious, and that’s because the financials are tougher and the cost side is harder to get fixed. So we like when we can build on cost with a fixed yield instead of the opposite.
Going through the slide here shows some examples. We have a property called Gotaland and that’s a really nice public property in Jonkoping, and that will be completed by the end of the year. It will move in beginning next year into this new courthouse.
We also see Sesamfroet, the next building here, a 25-year long lease, a very nice building for Migrationsverket. Another example is Drevet in Helsingborg, a slightly smaller investment, almost SEK 300 million. It’s 22,000 square meters, fully occupied with three different tenants.
And then Godsfinkan in Malmo. This is the new courthouse in Malmo, a big project, 26,500 square meters, occupancy rate of 94%, more or less fully let. We do still have some smaller places we try to rent out to some law firms. The next one, Sjustjarnan also in Malmo, also a large project, 31,500 square meters, occupancy rate of 96%. That’s a new head office for E.ON, and it’s also going to be a small new head office for Castellum in the southern part of Sweden, the new — our new Malmo office.
Then we have Hornsberg. It’s a Stockholm asset, which we will refurbish and let out to primarily Martin & Servera. But there are also other tenants in it. And it’s a 10-year long lease in Stockholm. Tusenskonan, this is the animal hospital in Gothenburg, 18-year long lease, fully occupied, will start to be built now.
So that was a few examples of projects going on and projects about to be completed. And now I have a slide of — regarding our sustainability activities. And what we’ve done during the first half of the year is that we have increased our targets to — the new aim is to reduce energy by 2.5% a year. We have big ambitions regarding solar energy. We have now built 68 solar cell plants. The ambition is to build 100. And we now produce 5% of our total electricity needs.
Given today’s energy prices, these investments even look better than they did from day one and we’ll continue to focus on this. And we’ll be happy to come back with an increased — even an increased target on this side going forward.
We now have 61% of the total property value classified and certified as — how do you say it? — yes, different classifications of [indiscernible] requirements. How do you say it, Jens? I don’t find the right word there. But they’re classified as sustainable buildings.
Next picture, lettable — the picture shows one of the building we’ve just finalized. It’s a greenhouse in Helsingborg, a beautiful building. And you also see an interior building for the animal hospital being built. But what we will see is, we’ll see that lots of projects will be finalized. Rental income from them will increase. And the CapEx going forward, next year, primarily, will slowly get lower and lower.
The largest projects, 10 largest, really shows which one it is. So you can see that when they are completed Q1 2023, Q2 2023 or during this year, they will move from projects into the management portfolio.
Financial performance, Maria, I’ll leave that over to you.
Maria Strandberg
Well, thank you, Rutger.
As you have heard, we delivered strong results from several parts of the business. Castellum’s ownership in Norwegian-listed Entra is 33.3%, and we report our holdings in Entra as an associated company and the figures are based on Entra’s report for the second quarter.
The value of the property portfolio sums up to SEK 185 billion, including our holdings in Entra. This is an uplift of SEK 3 million in the second quarter. Income from property management increased by 47% to almost SEK 2.4 billion, which is a result of our successful acquisition last year and strong rental market.
The rental income in the like-for-like portfolio increased by 4.4% due to new leasing, successful renegotiation and indexation. About all of our leases are indexed linked, which Rutger mentioned. And that means that we will be fully compensated for inflation.
We have also had decreasing vacancies and average economic occupancy rate for the period is almost 94%, which is all-time high for Castellum. On the other hand, we also have increased our cost during the period. Property costs in the like-for-like portfolio increased with 7.5%, and this is mostly a result of higher energy prices, but about half of the cost of electricity and heating are passed on to tenants.
Increased administration costs are mainly due to the merger with Kungsleden, and some of the increase is temporary and will in the long term decrease as a result of synergies. And as we previously communicated, there are both financial and operational synergies that will be achieved on an ongoing basis within two to three years.
And because of the FX explained, net operating income in the like-for-like portfolio increased by 3.5% in the period and for the entire profit portfolio, net operating income increased by 43%.
On the next slide, our successful acquisitions last year of Kungsleden in Sweden, increased holdings in Entra Norway and Kielo in Finland enabled a 21% increase in income from property management per share. And this is well over our target of 10% annual growth.
And then we move on to the key figures. Due to growing profit from property management and positive value changes, we have a great increase in the figures, as you see. The EPRA EPS increased with 29% and our long-term asset value, EPRA NRV, increased by 16% to SEK 263. So strong results from several parts of the business.
And I hand over back to you, Rutger, to sum up and present our takeaways.
Rutger Arnhult
Yes. Thank you, Maria.
Strong figures. Well, the takeaways is that we see a strong rental market. We see rental increases, and we do have a like-for-like increase of 4.4%. As you know, the CPI last year was in Sweden 2.8% and we managed to increase it even more, so 4.4% like-for-like, a very strong figure.
And we also see the net leasing is very strong with SEK 109 million. And we see the best ever in Castellum — in the history of Castellum occupancy rate of 93.7%, which is a really, really strong figure, and a 0.5% increase in next months.
One thing to stress is also that we have — 99% of our leases are index-linked. And this is really important since we have this strong inflation. Yesterday’s figure of 8.5% would give — given the structure of our lease, it would give us SEK 740 million in rental increase next year.
If it will be — if CPI will be — end up on 6%, that would mean about SEK 525 million in rental increases next year. So that really helps us to pay — if we need to pay higher interest rates, that will helps us get these rental increases. Higher cost, which we partly pass on to the tenant but still we have to take a part of it ourselves, this increases helps us to cover that and more than that.
We also have, as I mentioned before, large projects coming in, under completion today. They need CapEx. That will end up in a few quarters and instead will be rental income. And we will add on like SEK 300 million, SEK 340 million next year from new projects, which we already — we know with — they’re leased out and so on.
Strong yields on those. Also, average yield of 5.8% from those, and very, very long leases. We do have a stable position. We have an average yield in our existing portfolio of 4.7%. So we have margin in regards of today’s interest rate. Also, financial stability, loan-to-value of 38.2%. That’s also low, and it’s lower than the year-end of — when it was 38.5%.
And as Jens mentioned here before, a strong forward-focused financial best year with the treasury change, that we have taken care of our credit facilities, worked really hard with those during this first half of the year.
We do have unutilized credit facilities and cash of a total of SEK 19.9 billion, which is — compared with bonds coming out in the next two years of 14.9%. So bonds that are about to be — to expire are more than well fully covered by existing credit facilities, which gives us a good situation compared with others. And we still believe that we will come back on the capital market. But given today’s levels, this is a really important backup to have.
And then strong growth in EPS. The EPRA EPS up 29% and the net asset value up 16% and the net asset value is today SEK 263. And still a few weeks into the third quarter. We don’t see any different market than we’ve experienced during the first half of the year. Still a good market. We’re still on work on new leases and there are still projects coming in. We are careful with new investments. We are careful with new projects. We take care of what we have. Cautious with the cost side and just focus on — continue to deliver strong, stable results from Castellum going forward.
So that’s where we are. And we open up for questions. Anna-Karin, we do have maybe questions coming in. Or if — and if we get questions, we will make sure to answer them afterwards or some maybe now.
We still have some time here. Anna-Karin, do you have any?
Anna-Karin Nyman
I think the operator will have some on the line. So you are welcome to ask questions now.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Helen Rodriguez with Mizuho. Please go ahead.
Helen Rodriguez
Thanks very much for the questions. Can I please ask? So if I look at your cash flow statement, Page 17 of the release, you have actually not spent very much money. You’ve got CFO of SEK 2.5 billion this first half and your investment spending is around SEK 1 billion, which is obviously quite good. Whereas if I go back a year, you have a similar quantum of cash flow, but you’re spending about SEK 14 billion. Now you’ve said a couple of times on the call that you are going to cut your cost a little bit more. Can you just give us a sense of how much investment you’re planning over the next year or two in these times of sort of constrained capital markets?
Rutger Arnhult
Yes. I think we will invest about SEK 1 billion a quarter going forward for the — during the next two, three quarters. But then you will see a slowdown in investments. We will be — you will see that we are and have been a little bit more cautious with new projects. And that’s mainly because of the problem of getting fixed costs on new projects and then partly also the fact that it’s harder to take up debt, cheap debt.
So we have risen our requirements on new projects, and that will show off in three, four months — three, four quarters from now. The — all terms will be similar to the first quarter and the first half of the year. And the third and fourth quarter will be similar volumes as we’ve seen in the first and second quarter.
Helen Rodriguez
Got it. And in terms of your development portfolio, which I think maybe I misread, SEK 16 billion or something, that’s — but anyway.
Rutger Arnhult
It’s — in total it’s SEK 12 billion. It’s on SEK 12 billion with that.
Helen Rodriguez
So of that SEK 12 billion, how much is presold as it were? So when you’re doing these development projects, do you have your customer already? And in terms of inflation and the cost of construction, how much is — the contract fully passed through before you break ground as it were?
Rutger Arnhult
I could take an example. The largest project there is SEK 1.7 billion, SEK 1.9 billion. And that’s the project that we’ve spent SEK 100 million on it. But now it’s put on hold. So when I say SEK 12 billion, that’s partly true. You can also say more or less SEK 10 billion, because that’s not even — we have not even started to let that product out.
And will not be started before — we will not continue to build on that project before we have a certain part — a certain portion pre-let, if we’re not super confident that we will rent it out during the process of building it.
But that’s really, really going to be the situation. Even though the project is very, very good, it has a very, very good location in Stockholm, we wouldn’t dare to build it on speculation. We require a certain amount of pre-letting.
Normally, it’s between 60% and 80% pre-let. We have only done a very few examples of speculative non-pre-let projects, and that has been logistic properties because we have had so many requests of new space in some of the areas that we have felt super confident of getting the amount during construction.
And that’s actually the case. And then very – with a few existing cases where we only have like 35% pre-let. And so – but we are super confident that the strong market may help us to fill them during construction.
But we are more cautious today. We are in January more cautious today given the problems with getting fixed costs on them. So you will see a downturn in the total volumes of projects going forward for sure.
Helen Rodriguez
Okay. Thank you very much.
Rutger Arnhult
You’re welcome. Thank you for questions.
Operator
The next question comes from the line of Erik Granström with Carnegie. Please go ahead.
Erik Granström
Thank you very much. Good morning. I had a few questions. First off, regarding your property value changes. You mentioned that projects was the main driver as well as some improved NOI. First off, could you say if you have changed your internal inflation assumptions this quarter?
Rutger Arnhult
Of course, we see what’s — we see what’s going on and we can — but we haven’t changed — we can’t really change our inflation assumptions until we get — we change it when we get the October CPI. Then we change it for sure. And of course, it’s not in our model. I don’t know — Erik, I don’t know exactly what it is, what our assumption is today. It’s not 2% since we have this — the level we do have in inflation today. But we are — it’s not 8.5%. So there is an assumption. Actually, I don’t really know what it is, Erik. But it’s something between 2% and I would say 5%.
During the next year, we expect to get something — I would guess like 5% for next year. And then I assume it’s going back to like 2% again the year after. But of course, we are not expecting 2% in the model. That would be — that will be strange. So it’s something like 5%, I guess. I can get a — I can dig out the exact figure from the team that’s working with that model.
But I think what you’re aiming for — I understand what you’re aiming for. Because it’s when we put in — if we put in like 8.5%, which was yesterday’s figure, then things will happen, of course.
Erik Granström
Right. But at the same time, you haven’t changed the yield requirements either. So I was wondering what —
Rutger Arnhult
No. Yes.
Erik Granström
Right. And I would assume that —
Rutger Arnhult
There is — yes. Sorry.
Erik Granström
No. Go ahead, please.
Rutger Arnhult
There is one big thing with a company — or our segment, the office segment. You haven’t seen so much downward yield shift in — particularly, in the office segment during the last years. And that’s due to the COVID situation. There has been so much worries about whether people are going back to the office or not, and that has created some cautious regarding office buildings.
And you can see that — so the difference between lower yields on office compared with lower yields on public [indiscernible] public rental buildings or logistics or residential, there is a huge difference. We haven’t seen the — we have not seen that downward shift as they have experienced in their segment.
And maybe that’s good for us now, because — and that means that we have in average in the segment higher yields and we really have in our portfolio, as you know, 4.7% average yield. And it’s still, of course, very difficult to buy in buildings on that kind of high yield. You can’t even buy an old rubbish building in Stockholm at that yield. But maybe you can by the end of the year. But not today.
So we don’t — and we haven’t experienced any yield shifts in our segments. I have heard of some yield shifts on the logistics segment, newly built long leases, where the most extreme levels are gone. As you know, we sold off quite a lot of our own logistics in about a year from now, and that’s well paid. I guess we could have gotten more or less the same level today because that was not a portfolio of newly built and long leases. It was a mixture. But the most extreme yields are not there anymore in logistics I’ve heard. But you haven’t read about it really yet, but that’s what I hear when I speak with the transaction teams around the market.
Erik Granström
Okay. And then my last question regards cost development. First off, the central admin cost increased quite substantially quarter-on-quarter. You mentioned that long term you expect it to come down with synergies from the Kungsleden acquisition. But could you give us a sense of what sort of your running situation is for this year and next year? Because — and how much was extraordinary, because the step-up is SEK 18 million I think or SEK 17 million or something like that Q-on-Q?
Rutger Arnhult
Yes. There is a lot of one-offs, of course. And that has to do with the transaction and also — transaction of Kungsleden and also transformation into new systems and so on and investments in regard of that. So there is a lot of one-offs. We haven’t given a specific figure. But of course, the ambition is to lower the average cost of managing every square meter.
So we are not getting bigger and more costly per square meter. The ambition is to lower the cost per square meter. And we are spending a lot of time and effort in doing this more efficient with new systems. And you will see that.
But this year is going to be hit by double cost on many things: double salaries, double cost for systems and so on. And we — for example, we pay for getting our buildings — our economics administrated by external parties in the Kungsleden portfolio. Even though we do have now the capacity to do everything by ourself, we have to pay for that the whole year out, for example. And we pay for CFO and CEO and sort of on double. So there is a lot of cost this year, and that’s one-offs.
Erik Granström
Okay. Thank you. And then my final question then is on sort of your NOI margin. I think it’s 66% in the first half of the year, which is down maybe three percentage points or something like that. What kind of level do you think that you will be able to reach for this year and going forward for this? Should we expect just aiming to run at clearly lower NOI margin going forward? Or are you aiming to reach sort of the 69%, 70% that you have had historically?
Rutger Arnhult
Exactly. Exactly. Our aim is to come back to 69%, 70%. And I think the first quarter has been — it’s been a — the energy cost is above average, above an average here. When we compare with a normal year, this first half was a tougher one. But then also given the energy prices and so on we’ve had, that has also had an effect.
But of course, the 70% is something we should be able to reach. And then long term, even better. We spend a lot on becoming more efficient and more sustainable. So we work — as you know, we work hard on reducing costs in our buildings.
One other thing with yields I would say — would differ maybe from some others. Our main competitors are super strong. Our neighbors are super strong companies. So our next door buildings are most often owned by very stable, long-term owners. And they just buy and hold and buy and hold and merely sell them.
So I don’t believe that we will be — we’ll see any major yield shift down in our segments because it’s not speculative areas. The neighbors are long-term holders, strong holders. And as you know, it’s like Vasakronan and Fabege and that kind of neighbors we do have. Different in different towns, but they are all very stable and long-term, institutionally owned most often or the larger listed bonds with stable financials. And they will not start selling. So there will be very few things coming out.
And when something — if something comes out for sale, there will be so many that will be interested in buying it. So I don’t expect any big changes in yield actually, even though everybody are calculating, of course, with the increasing interest rates. But the increasing interest rate is something we have assumed for many, many years. Of course, we haven’t expected to have negative interest rates. We have all expected the interest rates to come back to something more normal.
What’s different at this point is the turmoil on the capital market. But bear in mind, everybody is not out there. There is a lot of companies without bonds. There is a lot of investors without debt. And there is also a lot of the companies who has bonds also have owners that are more or less government or institutions that can replace some of the bond debt with actual — with equity or lending out the money themselves to the real estate company.
So — but it will be turmoil on the capital market for a while until it stabilizes, and some of the money that has been on that capital markets will disappear. And we just have to wait that out and see where it lands. And meanwhile, we do have credit facilities to cover this, as Jens commented before.
Erik Granström
Okay. Thank you.
Operator
The next —
Rutger Arnhult
I can add on — before the next question, I could add on, given Erik’s question regarding what we assume — what we have, kind of yield requirements we have in our model or CPI expectations. Bear in mind that 99% of the portfolio is indexed. And if we get 8.5% index, as we did see yesterday, that would mean an increase of our rents with SEK 740 million next year. If we get 6% CPI, that will give us SEK 525 million in rental increase next year. And that covers a lot of higher — we also expect higher interest rate cost, but that covers a lot.
So once again, real estate with index-linked contract, it’s a good hedge when you meet inflation. And that’s something to bear in mind and not forget. Sorry. Next question?
Operator
The next question comes from the line of Paul May with Barclays. Please go ahead.
Paul May
Good morning. I just got a few questions. Obviously, the debt side of the business is where most of the focus is and I think there’s much question around the structural side on the gross rents and how that’s progressing investors’ concern is very much around the debt and the progression there. Just wondered, do you mentioned about the new financing facilities that have been arranged through the first half and the money to — SEK 0.9 billion is available facilities. And what is the all-in cost of those? And since you arranged, particularly any more recent ones? And how is that compared to sort of in place — or what that would have been six months ago? And also on the noncash available facilities, what is the all-in cost of those if they’re withdrawn?
Rutger Arnhult
I can turn that — I’ll turn that over to Treasury, Jens.
Operator
Sorry. This is the operator, Mr. Andersson. I think your line is muted.
Jens Andersson
Okay. Sorry. Sorry. Let me take that again. Apparently, my line was muted. If we look at the facilities that was refinanced over the quarter, the SEK 13 billion, the increase was around 2.5 basis points on average. So we — so I mean pretty much no change at all at present. But with that said, it doesn’t give us any guarantees that it will not be increased in the future. But we feel that the bank market is extremely stable for us at the moment.
Paul May
Sorry, just on that. Is that — sorry. Is that on the — sorry to jump in — is that just on the margin that you’ve seen that change? I’m talking about the all-in cost, so including the spread and — so the all-in cost is only up 2.5 basis points?
Jens Andersson
Yes, the spread is 2.5. I mean the underlying interest is known for everyone, but — on the SEK 74 billion total of debt, we — if you look at the 1% increase, that would mean SEK 740 million. But with the hedge that we have in place, the increase will come in at around SEK 350 million. So we have a relatively good protection against underlying interest increases. But it’s not perfect by any means. But it gives us good stability. And at the current situation, we can actually handle underlying interest rates of 7% and still be in line with all our covenants.
Paul May
Yes. And just on the — so the rate average cost out here is 1.9 as of the year end?
Jens Andersson
Yes.
Paul May
If you refinanced everything today — and I’m sure you would not, but if you were to refinance everything today with a mix of bank, bonds and commercial papers, what is your — what are you looking at as all-in cost of financing Castellum over the medium term?
Jens Andersson
I mean, I cannot really say how it will look like in the future. And of course, we will take loan by loan. And — but as we see it, the first SEK 15 billion of bond debt that we already have covered with revolving credit facilities. But if we were to go into the market and refinance them as bank loans, we do not expect any change in our spreads.
Paul May
But the all-in cost would be 178.5. Is that —
Jens Andersson
Yes. It will remain unchanged for the first SEK 15 billion. That’s our assumption at least. We believe that the first SEK 4 billion that we already have in place will cost us around 125 bps. And then we have assumed that the remaining SEK 11 billion will cost around 175 bps. And that — the average on that will pretty much give us the same cost that we have today in the bond market.
Paul May
Yes. Okay. And at least to that is probably more a question for — on — most investors that we speak to — so your leverage has been much higher given the hybrids and towards the high 40s. And obviously, that’s a concern if yields were to expand. And I appreciate your commentary to Erik on office yields have not compressed as much as logistic yields, but they have compressed as interest rates have come down.
So in theory, they should expand as interest rates have increased, would be the sort of logical mathematical approach. I appreciate it doesn’t always work that way. I just wondered, what is your thought process around leverage more generally in the high 40s as most people would view it — from an equity investor point of view, it appears high, not as high as some of your peers, I appreciate. But I just wondered what your sort of thought process is around leverage? Is it to maintain a higher leverage? Is it to eventually reduce leverage? What is the thought process there?
Rutger Arnhult
We have — since we are — we are keen to keep our existing rating with Moody’s. We are actually working on lower LTV to get some headroom. So that we announced on the border line of their — they don’t downgrade us. So that gives us a limitation of maximum 45% LTV. And as you know, they regard — they look different on hybrids. They look different on bought back — shares we have bought back, which we hold in our own possession.
So they do a lot of haircuts. And we are at 45% today. So we can’t increase our leverage if we would like to keep our rating. So that limits us, and that’s what we work for. Going forward, you will rather see a lower LTV in Castellum than we have today.
Paul May
And then one final one —
Rutger Arnhult
Just to make sure that we can come back or we can come out on the capital markets on attractive levels. Even though the levels are not so attractive as we speak, but we, of course, look forward to see some better levels going forward. We just need to — the market just needs to calm down a little bit. And as I mentioned before, I think there is some capital leaving the capital market and that — you need to stabilize and find a new balance on that market. But if you look at our average yield, it was 4.8% a year ago and now it’s 4.7%. But we have also changed the quality in the portfolio. That could explain a slightly lower yield. So 10 points lower could be explained by the fact that we have better houses now, better average quality with a higher average rental income per square meter.
So you can also compare with average square meter income in Castellum today than a year ago, then you can see that it’s above the CPI level. I think it’s 4.2% up a year ago from now. And like-for-like is 4.4%. So higher rental levels explained by higher quality, which normally means that we have a slightly lower yield. But still 4.7%. It’s a good yield spread towards the interest rate today.
But we don’t expect yields to come down. Rather — we expect actually — I expect, as many others, yield to come up a little bit. And we are prepared for that, of course, given the strong CPI in October, a strong increase of our rental next year. If we don’t adjust the values, then you will automatically see a lift in average yield.
So if we just keep the values and get like 6% or 7% increase in income — then also bear in mind that we pass on a lot of cost to the tenants because we are not willing to take the risk on energy and so on fully. We pass that on, half of it. If we don’t adjust the value, then the average yield will come up in total.
Paul May
I mean — sorry. Just given your interest is the largest investor, M2. Just a question there on — we were running some numbers and if the mark-to-markets or the investments that M2 has — it would appear that it’s almost touching, I think, it’s common equity ratios. I appreciate the value of calling I think — I mean, Castellum is held at NAV, I think, within the M2 accounts. I just wondered, are there any risks or issues in regard to any like margin calls or pressure — selling pressure potentially from M2 given the material reduction in share prices that we’ve seen in this —
Rutger Arnhult
There was — they did in the paper a stress test just saying that we do have a lot of headroom. But — and that was based on that. They thought that we value everything daily. Bear in mind that the M2 group are having the largest holdings as companies of interest. And of course, they do frequently impairment test. But since all the companies — the main companies they hold are performing better than ever, long-term leases, long-term credit facilities and so on long-term. Stable values that will — there will not be any changes in view on the long-term value of the companies.
And since it’s companies of interest, you will — since they are following the IFRS accounting regulations, you will not adjust for temporary shift in the values. So they will report their part of the result as the same way Castellum report our part of the result from Entra. And the daily share price doesn’t — if it goes up or down, doesn’t impact the covenants in the company.
So the answer is, no, the daily share price doesn’t impact the covenants in the company.
Paul May
Thank you very much.
Anna-Karin Nyman
Thank you very much. And I think that has to be the last question for today, but we will be very happy to ask any other questions by e-mail during this day. Please e-mail to Maria Strandberg or to me, myself, Anna-Karin Nyman. And with that, I will say — I’d like to say thank you for everyone who has been listening today.
Rutger Arnhult
Thank you. Thank you from Jens and me also here. And please send us questions, and we will make sure to answer them in written or call you up. If you want us to call, we call you up also. Thank you.
Anna-Karin Nyman
Thank you.
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