Castellum AB (publ) (OTCPK:CWQXF) Q3 2022 Results Conference Call October 20, 2022 4:00 AM ET
Company Participants
Anna-Karin Nyman – Director of Communications
Rutger Arnhult – CEO
Jens Andersson – Treasury
Conference Call Participants
Fredric Cyon – Carnegie
Niklas Wetterling – DNB
Arnaud Fournier – Lombard Odier
Anna-Karin Nyman
Welcome to Castellum’s webcast where CEO, Rutger Arnhult and Head of Treasury, Jens Andersson, will present the interim report for the third quarter. In the end of this webcast, there will be a Q&A session. So please Rutger, go ahead.
Rutger Arnhult
Yes. Thank you for listening and calling in here. My name is Rutger Arnhult, I’m the CEO of Castellum. To sum up the first 9 months, we are reporting income from property management that increased by 39%. This is mainly due to the acquisition of Kungsleden. It’s also 15% per share. So that’s a more important figure. So income from property management, plus 395% per share. The EPRA NRV is increasing by 13%, and that’s, of course, per share. The like-for-like rental income is plus 5.2%.
And as you might remember, we got an indexation of 2.8% from October last year, and that was affected on our rental income from the 1st of January. So on top of that, we have managed to renegotiate contracts way above current levels, which is important when we get back to the discussion whether or not we will be able to achieve the CPI indexation going forward from the 1st of January. We’ll get back to that.
Net leasing is for the 11th quarter in a row, positive, sums up to SEK 153 million in the quarter. It’s about 1/3, it’s SEK 44 million. And the ICR is still strong rolling 12 months, 4.1%, but of course, slowing down here, getting lower since interest rates are coming up. So in the quarter, it’s 3.1%.
Next page, our focus for the moment. The rental market is still stable. Companies are getting their employees back to the office. There’s a large focus on refurbished office spaces to more attractive standards, more welcoming and more space for meetings and more meeting rooms and — but also higher requirements of quiet rooms. So maybe what you enjoyed by working from home was to be able to focus and sit quietly for some of the work and that’s something we need to be able to offer in the office area. So a little bit going back from the open space to more meeting rooms and small office room, which you also share, of course. Occupancy ratio, top levels, 93.4%. So that’s a very strong figure.
Transaction markets, good in the first half of the year, slowing down now after summer, October, September, a lot lower due to worries regarding financing and the capital market. We can elaborate on that later on if you have questions, but quite obvious, slowing down in the third quarter.
Downscaling projects. We — as you know, we used to build a lot and do a lot of new things. We still do. We produce for about SEK 1 billion a quarter, and that’s the same in the third quarter and will more or less be the same in the fourth quarter, and then it slows down in the first quarter next year and going forward. Remaining investments in our project portfolio is becoming a lower and lower figure.
So less and less CapEx due to the cost side on new projects and also due to the turmoil on the capital markets and uncertainty regarding financing, but not due to a lack of demand. So that’s something we struggle with. A strong continuous demand for new things from some tenants, then we just need to figure out how to finance it going forward. So it’s both positive and negative issues regarding that thing. But we keep — we hold hard in the cash. So that’s why we’re downscaling. So we put a lot of more requirements on new products if we should start higher requirements.
Financing activities, of course, top issue. High activity there, refinancing, make sure that we get new credit frames from banks and also testing all kinds of new ways to finance our business. Our Head of Treasury, Jens Andersson, is sitting here beside me, he will elaborate on those issues later on.
Next page, for you who doesn’t know Castellum in and out, we are — we do have a very diversified geographic — geographically spread-out property portfolio. It’s focused to more or less 14 cities. In Sweden, it’s like 12, and then we have Copenhagen and Helsinki. And then through our holding in Entra, we do have a standing — a good position in mainly Oslo in Norway. And you can see here how it’s spread out in the graph as 78% in Sweden of the book value.
15% is done in Norway, 4% is in Finland and 3% in Denmark. The Denmark and Finland businesses focus to Copenhagen and Helsinki. So the capitals in those 2 countries. Stockholm is by far the largest market — the largest market for us in regards of value. If you look on square meters, Gothenburg and Stockholm are about the same size. So actually, Gothenburg has a few square meters more. But in value and rental value, Stockholm is the largest. The next page shows in more detail where we are located, 28% is in Stockholm. And as you know office and warehouse, mainly office and then West is the same — and that’s the same all over, mainly office. West is of course Gothenburg then. Central is Jonkoping, Linkoping cities. Oresund, it’s mainly Malmo, Helsingborg, Lund. So it’s mainly [Skona], the southern part.
Region Malardalen is Vasteras, also large 9% of our total value. Vasteras is one of these plants where the electrification business goes very strongly. So strong demand from more like industrial tenants there like ABB, Hitachi, Northvolt, Alstrom and those companies. Helsinki, Finland, 20 properties, a little footprint there, same as in Denmark, 16 properties, small footprint there, more or less 200,000 square meters in each of these plants. And then our position of our share of Entra, which equals to about 500,000 square meters, and that’s mainly in Oslo.
Looking at where we are located in regards of larger metropolitan cities, we do have 6% of our portfolio in Copenhagen, Helsinki, Oslo, Gothenburg and Stockholm. The rest is in regional centers. Stable transaction volumes and market rents in the property market, that’s the statistics from external firms from — actually from Newsec, is that something you can elaborate on, Jens?
Jens Andersson
Yes. Of course. I mean it’s interesting to see that the volume, the transaction volume in Sweden is still relatively strong compared to if you look at 2019, that was the second most liquid market or year we had in Sweden. We believe that the full year 2022 will actually exceed those numbers. And if you also look at the yield levels, Newsec report slightly increasing yield levels.
But if you look on the right-hand side on the slide, you also see that vacancy rates are stable or coming down and you also see that rent levels actually are coming up still in CBD. So the overall effect should be close to neutral. Yes.
Rutger Arnhult
Yes. Yes. And also that Oslo is doing really well. That’s notable and we’re discussing what happened in interest and value changes. We don’t understand it from an external thought.
But that’s something to discuss with Entra. We do have next page, a very well-diversified, not only geographically diversified portfolio. So customer base is very diversified with companies and authorities of all kinds. This is a pick of our — some of our largest tenants, ABB, AFRY, The Police Authority, Handlesbanken, the law authorities or what you call the Domstolsverket, the courts, national courts administration. Insurance company, Northvolt, immigration, Region Stockholm is also governmental, Axis, the defense industry — the defense, not the industry and Hitachi and so on. Huge variety. The top 10 only stands for like 13% of the total income, which is a very — shows a very, very, very diversified portfolio.
The largest tenants stands for like 2% of the total. So we’re not depending on any large single one. 24% of our leases are with the public sector. Very, very little proportion of retail, it’s office, it’s government, it’s multinational companies. So — and also a very, very little portion of hotels, restaurants, very limited.
So office focus, warehouse focus. Next page shows on net leasing. Over the last 10 years, we do have 40 out of 43 quarters with positive net leasing. And the last 11 consecutive quarters in a row, even though — even though we had this COVID period, was — has been positive. So this is really something we are proud of and it also shows the strength in the Swedish industry and the country as a whole. And it also shows the benefit of being focused to the larger metropolitan areas. Next page.
This goes into financial. Jens, back to you.
Jens Andersson
Yes. As Rutger mentioned before, we have solid and stable financial position with a loan-to-value well below 40%, including the repurchased shares. And ICR rolling 12 with 4.1% also previously mentioned. Total outstanding loan volume has increased somewhat over the quarter, mainly due to projects. We have bonds that have expired, and we have repaid those and exchanged them with the bank loans.
We have an average margin of around 130 bps on our bank loans. So it feels very, very comforting to have the bank supporting us in this somewhat illiquid capital market. Commercial papers are also reducing over time. So we only have SEK 2.1 billion left. I’m not sure if we will continue to have commercial papers in the future, but time will tell. We have unutilized credit facilities of SEK 15.3 billion of which SEK 2.1 billion cash has been included in those numbers.
We also have an average capital term of 3.2 years. But if we include non-signed but credit approved financings that we have ready, that number actually increased as compared to last quarter and that is really good in this market. So we have strong commitments to prolong and increase facilities from banks. And I believe that that will continue even if the supply of financing from the Nordics banks can — is not unlimited, but I think that they will choose us before many others. Average interest rate, 2.3%, up mostly due to underlying interest rates. Average fixed interest term 2.6 decreasing, of course, if we could redo things, we should have gone longer in our fixing strategy, but now this is what we have and we have a fairly strong protection against interest going up for the coming years and we have been able to repackage our derivative portfolio and increase the hedging ratio from 52% to 60%.
And right now an increase in underlying market rates by 1% would increase financial net of less than SEK 300 million on an annual basis given our current hedging levels. And then an outlook, we have, as I mentioned, SEK 15.3 billion in cash and in — and unutilized credit facilities. And that will cover all bond maturities during this and next year. We believe that we will be able to find a lot more secured financing that will grow that number over time. We have written credit approvals above SEK 6 billion from Nordic banks and we expect a lot more in the coming quarters. Bond market remains challenging.
That’s very true. From time to time, we noticed that things improved slightly, but then the things go back to the more illiquid market that we’ve seen over the last 6 months. And we do a lot to find new ways of finding liquidity from the U.S. market using U.S. private placements and there are, of course, private placements elsewhere to be found as well. We also have a diversified debt structure, a combination of bonds, bank loans, commercial papers, even though commercial papers have been shrinking over time and we’ve been exchanging or repaying bonds and drawing on revolving credit facilities.
If you look on the left-hand side of this, most important is, of course, the bonds and we have quite a lot of bonds expiring over the coming 3 years, but also then bear in mind that we have free cash flow before projects and dividend of around SEK 25 billion over the coming 5 years. So there is still a lot of room to be taken from our operations to actually repay bonds. And we are certain that we can move away from the debt capital market and exchange it with bank debt up to a certain point. But of course, all of it cannot be handled by Nordic banks.
Rutger Arnhult
Okay. Thank you, Jens. Next page. We also will also be helped by getting new cash into the systems — system. Since we are completing a lot of projects, it’s kind of a peak at the moment.
So a lot of projects will be completed during the third and fourth quarter this year. They will actually add more or less fully-let buildings with long leases, like SEK 183 million in rental value. And then during 2023, the next year, we will complete projects with a rental value of another SEK 280 million. So of course, that’s a lot of money coming in from next year in different periods, of course, but mainly in the beginning of the year when we complete the 2 largest projects in Malmo, it’s the new courthouse, almost a SEK 2 billion project in market value and the new head office for E.ON as well, also nearly SEK 2 billion worth property. Only those 2 will add something like SEK 170 million in rental value and that’s — they are completed, and will — tenants will start moving in during the first quarter. It’s about 60,000 square meters in terms of brand new office next door to each other. And the 13 largest — out of our 13 largest projects, in fact 9, 10 will be completed from now and until the end of next year, more or less complete than there were some that will last on for a longer time, but with only small amounts still to be invested in.
Remaining investments in all this is it’s about SEK 2 billion. And we are used to invest like SEK 1.1 billion, SEK 1.2 billion a quarter. So of course, this slows down a lot. And this also creates a lot of free cash flow that we can use to pay back debt. Going forward, without a large portion of new developed buildings, we will more likely invest something like SEK 300 million, SEK 400 million a quarter, and that’s to take care of existing tenants and then a few projects going on. But as long as the market is as it is now, the capital market, this is the way we’ll go forward. So we will focus on generating cash flows to strengthen our balance going forward.
If you can see the next page here, it shows the completion and there is a lot being completed this year, third quarter, fourth quarter next year, first quarter, Malmo, Jonkoping. So it’s the courthouse Godsfinkan, [indiscernible] and it’s E.ON first quarter, the two mentioned, Sjustjarnan, Gotaland in Jonkoping. That’s an area, the whole grid, it’s also courthouse. That’s an interesting story about that. It’s a little bit delayed. It’s like a 1 quarter delay in that project.
That’s supposed to move in the 1st of January. They will move in by the end of March. So they will have to spend another year in their existing building. They have already spent 389 years in their old building. So we will actually spend 390 years in the old courthouse, quite amazing.
If I would have asked, you would probably guessed a 100 year or something, but you will miss out with 290 years. So a fantastic story. Then second quarter next year, we complete some logistic properties in Stockholm. In our official list it says like 37%, 36% occupancy ratio. That’s partly wrong because it’s different buildings, we haven’t — the vacancy ratio is regarding the total project. It’s more like — it’s not truly a figure.
It’s more than 60% today. And we have — we show new tenants, the existing build vacant space daily. So that’s most likely to be fully let as well, like most of these projects are fully let more or less for the let.
Next page, I think we’ll leave projects for a while and go into sustainability. As you know we focus a lot on sustainability. We win all different kind of prices within our category.
We just became listed as a green stock at Nasdaq. So now we’re the only in the first larger real estate company in the Nordics listed on Europe, listed as a green start on Nasdaq, which we are very proud of. We — seventh year in a row we achieved the first price in the GGRESB rating that was also recently achieved. That’s the prices we get, but we also get paid by better figures. We estimate that we are 42% better than the average of the industry, which is amazing. It can still be improved and that’s what we try to do all the time.
Our goal is to become entirely climate neutral by 2030. To become that, we build Smart, our last building in Orebro, a courthouse — a police house. It’s actually the first zero emission building. It’s a zero emission over its lifetime, built in with a lot of wood, for example, is kind of all for being a police house built in wood. We also invest a lot in solar cells. So we have a solar cell program which aim to build 100 solar cell facilities.
We just built the 71st out of this. And today, they produce 7% of our needs, which is 7.8 gigawatts of energy on an annual basis. At the moment, these investments gives a really, really strong return. We do have some projects, for example, what was expected to give a return of SEK 1.6 million yearly only in August, this facility gave SEK 1.2 million, I think SEK 1.2 million in 1 month and expect it to give SEK 1.6 million in a year. But with today’s energy prices, the return becomes a lot better some months, then the month after you don’t know whether it’s windy or not, whether the cable to Germany works or not. So it differs.
But it’s a strong focus to continue on this trial. We have fixed 80% of our electricity volume at fixed price. And then also to bear in mind that we are billing the tenant for a lot of the electricity to like more than 50%, so we don’t carry the whole cost of increasing energy costs.
Next page is just a glorious picture of 3 happy guys on Times Square. It’s the Nasdaq building in the background. That’s when we became — we got this green designation, we’re invited to ring the bell at Nasdaq.
That was like a month ago. Nice to get this designation, I think it will matter for us in the future going forward. It’s just another step on the road here to become more and more sustainable. And as you know we are also the only real estate company included in the Dow Jones — in the Nordics in the Dow Jones in Sustainability Index.
Financial performance. Next page. I can take, our CFO, she is not here today. We do have another girl working with her here, but I can comment this one. So the property portfolio has increased by 2%. The income from property management is like SEK 3.5 billion, increase with 39%, 15% per share as we mentioned before. The total increase, of course, due to the acquisition of Kungsleden and the dilution of new shares and everything gives us an increase of 15%.
Rental income, more important, like-for-like 5.2%. And as I mentioned, the indexation was 2.8% in Sweden from last — October last year, beginning from 1st of January this year. Operating income, 44% higher also mainly due to the acquisition of Kungsleden.
Next page, it actually just shows the increase of income from property management per share over the years, increasing over time, which we are proud of, of course. The EPRA and EPS NAV increased. The EPRA EPS is plus 53% during — over the last 5 years.
The EPRA NRV this year is up 13%. And the EPRA NRV over a 5-year period is up 82%. So the NRV is today SEK 259 and the EPS SEK 9.6.Takeaways. Rental income like-for-like 5.2%; net leasing, positive for the 11th consecutive quarter in a row, occupancy ratio impressively, 93.4%. Bear in mind, 99% of our leases are index-linked.
We haven’t mentioned that in the presentation, but 99% is index-linked. 84% is 100% index-linked and then we have a variety. So assume that we get 90% from CPI from 1st of January next year. We are very confident that we will have no problem achieving this from the tenants. The rent goes up as everything else goes up. On top of this, we also have to bill the tenants for 60% of our energy costs that’s going to be paid by the tenants.
And of course, that also increases a lot. That’s how it is today and we can’t do so much about it. And we can’t help out reducing that. So it’s just going to be fully billed to the tenants. Financial stability. We do have an LTV of healthy 38.8%.
With the things we are — the measures we take that figure will probably stay still, if something — when projects starts to diminish, it will start to go down a little bit, but that will take a few quarters before you see that actually. We do have SEK 15.3 billion in cash and unutilized credit facilities. And that’s covering all the bond maturities during the next 2 years. Projects near completion had strong cash flows and also new projects are being scaled down and pushed for the future. So we will have a land bank. We work with the land bank.
We work with projects, but we don’t spend and start spend money on them. But we continue to work with some of them slowly in the office on our own, not spending cash on new construction. Strong and stable underlying results and that will continue. We do have a very, very strong tenant base. We do have a strong and stable and healthy distribution of our assets in different strong local markets. And that’s really something we can see over the years, giving us stable returns.
EPRA NRV SEK 259, huge discounts on the stock market compared with that. So of course, lot cheaper to buy real estate through acquisition of shares today and EPRA NRV increased by 13%.Okay. Next page is Q&A.
Anna-Karin Nyman
Thank you, Rutger. Now there’s time for asking questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Fredric Cyon of Carnegie.
Fredric Cyon
A couple of questions from my side. Starting off with financial costs, they were quite high compared to my forecast. Are there any one-off costs on the financial cost line? And if so how much?
Jens Andersson
Yes. Good question. Apologies. It’s around SEK 120 million that comes from currency effects due to that we follow ESMA policies. When we issued the Eurobond earlier this year, part of that bond wasn’t secured with a swap derivative.
And therefore, that effect, which we thought was going to come further down in the P&L, actually have to come under interest costs. So SEK 120 million could be deducted to get a more fair interest cost.
Rutger Arnhult
Fredric, in my view — it’s Rutger. That way to report it is kind of strange because that one will, of course, vary in accordance to how our currency varies, which has nothing to do with our underlying business. So we’ll see, going forward, we will — even though we will probably most likely report it on the same line, we can separate it out so it’s easier to see what’s what and what. Yes, we’ll do that. And thanks for the question, it’s a good one.
Fredric Cyon
Perfect. And then related to projects and CapEx in general, you touched upon this previous year, it’s given. But during the first 9 months, you invested about SEK 3.7 billion. We can see that what remains to invest in major projects are moving south. Can you give some guidance or an expectation for 2023?
And then I mean both projects and general CapEx for existing properties?
Rutger Arnhult
Yes. You can expect us to invest about 1% of the property value yearly. That’s — doing that, that’s SEK 1.5 billion. Then we really take care of our tenants. So — but we will be strict, but I expect up to SEK 1.5 billion.
Maybe we can reduce it to SEK 1.2 billion, but somewhere 0.8% to 1% of our property value. So SEK 1.2 billion to SEK 1.5 billion underlying CapEx projects in existing portfolio. And then everything else above that is new construction. So — and we do have a few — we do have a police house in Gothenburg. We do have a animal hospital in Gothenburg that are running built on yield.
So we don’t take any risk in those in regards of costs. Of course, we try to keep the costs low anyway to get the rent level that’s healthy. Except for that, not much will be started. It will be postponed. And then, of course, we finalize all this on all the projects were mentioned. Most of that in largest will be completed now in this year or in the first and second quarter next year.
So we will probably have CapEx on the project of about SEK 1 billion next quarter and the first quarter, not really the first quarter next year lower. And then it really slows down from the [Technical Difficulty] March next year, March, but you will see it in the second quarter, it really slows down.
Fredric Cyon
So call it all in somewhere around SEK 2.5 billion, SEK 3 billion for next year, is that a good proxy?
Rutger Arnhult
Yes. Yes. Yes. Somewhere there. I would say, yes, SEK 2.5 billion. SEK 2.5 billion.
Fredric Cyon
Perfect. And then moving over to disposals. Obviously, the capital markets is extremely tricky, another way to get liquidities to disposals. Do you have an active plan of doing major developments —
Rutger Arnhult
We always —
Fredric Cyon
Yes, go ahead.
Rutger Arnhult
Yes, we always try to divest 1% or 2% of our portfolio in a normal market. We normally — we like that turnover just to force ourselves to test the market, test the values. We usually sell off what we call a tail. The properties we have on a — you always have a sell list if you buy some — when we bought Kungsleden, 10% of the portfolio didn’t really overlapped our portfolios, and that’s our sell list. Still some assets on that list.
But now we have shifted. So now we’re also looking at selling some trough assets, the lowest-yielding assets, which might attract the more — the institutions that doesn’t use debt when they buy, they buy, sell them, but they buy — they pick the best nicest assets with the longest leases and then they hold them for 20 years or longer. We are open to discuss transactions like that also today, which we normally do. And the reason for that is because we see the benefit of strengthen our balance sheet in this term of capital market to come out stronger, lower it, we don’t need to, but we believe it would be good to do it. So it’s a way to free cash — get free cash and strengthen the balance sheet going through this period as a winner as a strong — one of the strongest companies. So we benefit from having a long list of trough assets that strong investors would long to buy.
So that’s something that has shifted over the last quarter that we are — we now look at that possibility to divest, just to strengthen the balance sheet and become free cash flow.
Fredric Cyon
Do you expect we’ll say in the press releases during the fourth quarter in relationship to that?
Rutger Arnhult
No. I can’t give any — that would be like guessing. And we are not going to — we are not going to sell at discounts. We want fair market value. So if there is a buyer on the right level, then we’ll sell.
If not, we don’t need to sell and we will not sell. So then we hang on to these troughs and continue to develop them if there is anything to develop. But for example, if we have a building with a new building, fully completed, you can’t do much about it for the next 10 years, maybe even longer lease. It’s a marvelous building for an institutional owner to own. Back in the days, we would never have sold it.
Now we will consider selling it, but we don’t need to. So we don’t feel forced to do it, but we will test the market with a few of those assets.
Fredric Cyon
Perfect. I have 2 more questions, if you bear with me. First of all, relating to secured funding as a total of assets, it increased to 15%. I can you have a constraint of 45%, but in relationship to your rating — the rating you have and how high can it go without them having an issue with it?
Jens Andersson
I mean, we should keep at least 45% unencumbered. However, Moody’s have opened up for smaller deviations and they also have other less strict rules for other competitors. And therefore, we do not see it as an absolute level that we cannot pass if the debt capital market continues to be very illiquid. But over time, with the type of rating that we have, we need to keep the 45%. And I think we will do that without any problems taking up additional debt of around SEK 10 billion from the Nordic banking community.
Rutger Arnhult
And bear in mind that we take up more debt on the same assets that we have already pledged. So that’s — so it might be — we might have a LTV of 30% in an asset we might be to increase to 50%. It’s still the same assets pledged. That doesn’t increase the amount of pledged assets.
Fredric Cyon
Fair point. And the final question I have is related to the dividends. Obviously, you have a proud history of raising it now I think for 24 years. At the same time, the capital market is extremely tight and your bonds are trading at quite big discount to fair value. How do you look at raising dividends considering the financial circumstances?
Rutger Arnhult
That has to be something for the Board to decide when it’s time to decide it. Of course, the ambition is to continue on that tradition. But if things are not — if there is room for it, then of course, if not, then it needs to be discussed. We have a lot of shareholders that like to see the dividend. But what’s best for the company is to do what’s best for the company.
So we’ll see. That’s something for — to decide further on. Also, of course, maybe also it depends on how we manage to divest some assets and also depends on how we manage to refinance ourselves with new facilities. Some of these things, we work with daily, refinancing, new possibilities and then also transactions goes on. So that’s — those things — the shift over time is how the situation is when we get closer to those decisions. But our aim to distribute a dividend in the same way as we used to do, that’s something we haven’t changed.
Operator
And our next question comes from the line of Niklas Wetterling of DNB.
Niklas Wetterling
Jens mentioned that there was a certain point where Castellum no longer can grow its amount of debt in the Nordic banks. I wonder where this certain point is. And in a worst-case scenario, when could Castellum hit that point?
Jens Andersson
Tricky question. I mean I think that Castellum is one of the most favored borrowers in the market. And therefore, we cannot rule out that we can move away entirely from the debt capital market. But at the same time, we want to continue to be an investment-grade company. So the limit is more in the hands of Moody’s rather in the hands of the Nordic banking community.
I think that the first SEK 10 billion will be relatively easy to achieve, to get SEK 20 more billion from the Nordic banking community will be a bit challenging and might come at a higher price. But then we haven’t really moved into the German banks. We haven’t borrowed any money in Finland from Finnish banks. So I still think there’s a lot of room, but it’s always a balance. We like being in the debt capital market. It has served us very well over many, many years.
And I think it will continue to serve us well when it opens up again on reasonable levels.
Niklas Wetterling
Okay. So time-wise, you believe it’s — there will not be any problem for the next — for several years or —
Jens Andersson
At least next year. I mean, it takes some time to achieve new revolving credit facilities to achieve new loans. It’s not a process that takes 1 or 2 weeks’ time. It’s a process that takes between 3 and 6 months. So now we have SEK 10 billion, SEK 11 billion that we see as very reasonable achieving.
And whatever comes thereafter, it’s still something that we need to discuss with our banks. I cannot promise those things to you.
Rutger Arnhult
No. And for the moment, growth is not on the top priority. The topic at the moment, as you can understand. So it’s not an issue for the moment whether we can become larger. We can, of course, become larger among the banks over a few years.
But then we reached a point where when Moody’s say, hey, you need to have this and this amount of percentage on income growth, we’re not there yet. But if we reach that point, then we just need to suspend for a while, accumulate cash, maybe distribute even more to the owners and lower our LTV, just grow — create value, create cash flow, dividends, become a more dividend — even more of a dividend-distributing company. So it’s not too bad to reach that point is. So there is — but I’m sure there will be other solutions when we get there. That’s a few years ahead of us.
And we hope that the capital market rebounds back to normal level.
Niklas Wetterling
Yes. That’s helpful. And I also wanted to ask about the average credit and interest rate period that has come down, both of them has come down about a year in 1 year of time. And so what’s your strategy on extending those? Can we expect that near-term?
Jens Andersson
I mean, the loan duration, that is something that we can solve and that we see right now that the banks are willing to give us longer loan commitments. The longest we see right now is around 15 years at very reasonable terms. And however, I mean, as I said during the presentation, a lot of things could have been done better, securing longer interest derivatives. Now we have what we have. And we still have a lot of longer derivatives that we could repackage so we could go wider and shorter, but that will not really solve what you are addressing. So we have a very reasonable coverage over the coming 2 years.
And thereafter, we will feel a much stronger wind from the higher interest rates. So we will need to sort that out over time. If there’s an opportunity, interest rates comes down, we will definitely take that opportunity to secure more. But it’s not really the perfect time to do it right now with a 3-month LIBOR at 176 and you have swap rates well above 3%.
Niklas Wetterling
Okay. And then a question on the service income that grew 50% quarter-over-quarter. Have we now reached some kind of normalized level? Or will this income continue to be volatile? And are you making surplus on this income or is it offset by higher property costs?
Rutger Arnhult
I think we will most likely level out at this level. Things get — we guess increasing — we’ll get increased income over time over the next year, but we’ll also get increased costs, both on the cost side and property management and then interest rates that we will be have in this way, we helped a lot by the new projects coming in. So that really helps us to keep the level. One thing I think about regarding the capital market that if it comes back and sooner or later will, then we will focus on being one of the strongest private companies. The market still works for the more fund-owned government-owned companies.
Then everything else is like not working. When it starts to bounce back, it might start for a few of us, maybe not all of us at the same time. So hopefully, we look strong at that point, good rating, good figures, good LTV and so on, so that we will be one of the first possible to come out on good levels. Maybe that’s — maybe those levels are not for all, but I hope that — and I foresee that there will be a difference between strong and less strong companies when the market comes back. A year ago, it was more like everything was at the same level. The market didn’t do any large difference between strong and less strong companies. But I believe with our indexation, our strong occupancy ratio, our strong tenant base, our geographics and lower LTV than average, I think we will come out well in comparison.
And that’s what we believe will happen in — when the market comes back. And whether that’s in a year from now or 1.5 years or 2 years from now, it will come back sooner later. We don’t know. That’s — nobody knows at the moment. But we will look strong when that market bounce back and comes back, opens up again.
Operator
Our next question comes from the line of Arnaud Fournier of Lombard Odier.
Arnaud Fournier
First question, I would like to know if you have some color on the energy side credit facility you present. Is there any limit to draw on these energies at credit facilities? First question for me, please.
Rutger Arnhult
I didn’t get the question. Is there a limit on the facilities?
Arnaud Fournier
Yes. Is there any covenant —
Rutger Arnhult
Covenant on the credit facilities. Jens, you can get into —
Jens Andersson
Yes, yes, yes. Of course, there are covenants for sure, but they are very wide. So we are not anywhere close any of the covenants. So the Swedish or Nordic banks, they use more German or whatever you call it, flexible covenants while in the U.K. market, usually the banks put them really tight in order to be able to increase margins.
But that is not the way that the banks handle things. So usually, we have an ICR of around 150 and the loan-to-value that varies between 60% and more commonly 70% and even higher. So there’s a lot of room still before we are anywhere near any covenant breaches.
Arnaud Fournier
Okay. Second question is regarding M2 Asset Management. So M2 Asset management sold some share of Castellum. Could you please give us who is the buyer because there is no pressure on the — it doesn’t seem to have some pressure on the equity of Castellum. Who is the buyer of this package?
Rutger Arnhult
It’s in the report, which says and other shareholders in the text above the shareholders’ list. You can see that the buyer is Akelius Residential, and they bought 12% from me. And so now they are the largest owner, Akelius Residential and Akelius one of the richest people in the Nordics, is one of the most famous in real estate. He was the one that did a SEK 93 billion sell, I think it was to Heimstaden in the beginning of this year. He sold a European residential portfolio to Heimstaden worth SEK 93 billion.
And he is a large owner of real estate in North America. I don’t know exactly what he owns still in Europe, but it’s a well-known investor in real estate with a European and North American focus, very skilled, used to have a very — it looks like he’s often had a good feeling of selling and buying at the right points.
Arnaud Fournier
Okay. And do you have any exposure on margin loans? So you said previously that the LTV is not concerned if you increase your —
Rutger Arnhult
Are you talking — is that a question to me now?
Arnaud Fournier
Just for your — yes, just margin loan.
Rutger Arnhult
I’m not commenting on that, but that was not a margin loan. But I will not dig into that, but it was not a margin loan. This is just to be — make sure that our private companies continues to be stable and can fulfill their financial requirements.
Arnaud Fournier
Okay. And I think at Castellum level, do you have any margin loan exposure in terms of collateral or thing like that from banks?
Rutger Arnhult
In Castellum?
Arnaud Fournier
For Castellum more so, yes.
Rutger Arnhult
No, no, no. No.
Arnaud Fournier
Okay. Okay. Okay, clear. And the last one. Balder is — we are not here to speak about them, but I know it’s definitely concerned by — on its rating, investment-grade rating. We saw also that the currency has increasing — sort of the Swedish kroner has increasing massively with the recent rate hike from Europe. Definitely, there is a risk of contention for you guys even if you are stronger than this one. There is a contingent risk. Could you please comment on this headwind possible if we have some more pressure from new competitors, how you guys are able to manage the situation if it doesn’t coming from you? So what is — what did you heard from politician from — to manage this contention risk if it’s happened?
Jens Andersson
I mean there is always a risk doing business. However, you should bear in mind that the Swedish state is triply rated by all 3 major rating agencies. And then if you look at the Sweden banking community, most of the banks are AA rated. So we have pretty good support from state and banks to handle a lot of these problems. And both when it comes to Balder and when it comes to us, we have a very sound underlying business, strong cash flow.
So therefore — and looking at us, as I only represent Castellum, we have a low loan-to-value and I expect us to over-perform most expectations over time.
Rutger Arnhult
And we do have a 99% index-linked leases and that will be paid with same thing as during COVID, we didn’t lose anything during COVID either, 99% and that single 1% that’s not leased, that has a fixed increase. So 100% of our income will be increased, which covers increasing interest rates. And then we also have increasing energy costs for the moment. That’s the cost side. But that’s more than 60% billed out to the tenants.
So we do have a hedge there. And then we have hedged the cost of 80% on that side. And then the energy cost will gradually come down again. So that’s just a temporary high level. But the income when it’s increased, it will stay up, it’s upwards only and it stays. The cost side will come down again over the next coming years.
We are 100% sure about that. Since governments all over Europe and in Sweden and in Nordic are focusing a lot on increasing the production of energy at the moment, we have also agreed of starting up new nuclear facilities in Sweden. They are focused on wind, water, nuclear, sun. So there is a lot going on. So the cost side will come down. The same with the interest rate, they will also eventually come down.
We just need to be able to take these pickups over a shorter period, but it will come down or the inflation will continue to be high and then we will get continuous increased rental income.
Anna-Karin Nyman
Okay. Thank you so much. Do you have any last question before we close the record out?
Arnaud Fournier
Excuse me, if I can, just last one. And could you just comment regarding pension fund local purchases from — a reaction? What is the feeling on that, please?
Rutger Arnhult
A feeling regarding how the pension funds will act?
Arnaud Fournier
Will react, yes, as an investor in the real estate Nordic real estate for us?
Rutger Arnhult
You normally — normally, they always invest a certain percentage of their portfolio into bonds, most part, then a stock and then a certain portion and directly on real estate. I don’t see that they will change this. This is long-term decisions, and they will keep — a long-term strategy and they will not change that due to this. I expect to see transactions made by the pension funds. We saw one just recently at record levels in Stockholm, just 2 weeks ago, an office building sold to one of these institutions. I’m sure we will see more of those in a less competitive market.
There is still competition as long as there is more than 1 or 2 investors interested. I think we will see more acquisitions done by these types of — we normally see that in these types of markets from these type of institutions. So the pension funds are stable, they will continue to own and buy real estate assets.
Anna-Karin Nyman
Okay. I think — that would be the last question for today. We are running out of time, but I will also ask you to please ask your questions by mail to me, Anna-Karin Nyman, and we will have them answered during this day. So don’t hesitate to ask any more questions on e-mail and we will get back to you. Thank you so much for listening.
Rutger Arnhult
Thanks a lot.
Jens Andersson
Thanks a lot.
Be the first to comment