Remote Work Shifts And High Debt Will Weaken Nordic Offices

Key Takeaways

• Persistent weakness in Nordic office demand, portfolio revaluations, and tenant instability pressure Castellum's revenue growth, net asset value, and cash flow prospects.
  
• Heavy leverage and reliance on debt amplifies exposure to refinancing and interest rate risks, limiting flexibility amid tightening credit markets and shifting tenant profiles.
  
• Urban-focused asset growth, stable public sector leasing, strong refinancing moves, sustainability initiatives, and diversified investments collectively support Castellum's income stability and future value appreciation.

Catalysts

Castellum is one of the Nordic region’s largest commercial property companies, with a focus on office and logistics properties in Nordic growth cities.

• The persistent shift toward remote and hybrid work continues to erode demand for traditional office space in key Nordic metropolitan areas, with Castellum reporting higher vacancies and a deteriorating occupancy rate now at 90.3 percent. This trend is likely to depress top-line revenue growth as the core office portfolio faces structural headwinds and increasing risk of oversupply.
  
• Geographic concentration in Swedish and Nordic secondary cities leaves Castellum particularly exposed to local economic downturns and evolving demographic patterns, such as an aging population and shifting tenant demand profiles. This undermines rental income stability and increases the risk of sustained declines in occupancy and rental yields.
  
• Recent negative property revaluations, including SEK 1.15 billion in write-downs-driven mainly by weaker cash flow forecasts, tenant bankruptcies, and falling rental levels in Stockholm-suggest the property portfolio remains vulnerable to further corrections. This puts pressure on net asset value and could further reduce reported earnings if market conditions worsen.
  
• High leverage from acquisitions and continued debt-funded investments, with loan-to-value now at 36.7 percent and increased reliance on short-term commercial paper, raises refinancing risk. Rising long-term interest rates or credit markets tightening could significantly increase interest expenses, impacting net margins and limiting Castellum's financial flexibility.
  
• Heightened dependence on commercial office and public sector tenants-in a context of government budget constraints and ongoing public sector consolidation-amplifies the risk of rental revenue loss due to contract terminations or tighter public budgets. This threatens medium-term cash flow generation and puts additional downward pressure on future earnings.

Castellum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Castellum compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Castellum's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 27.1% today to 48.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 4.7 billion (and earnings per share of SEK 9.26) by about July 2028, up from SEK 2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the GB Real Estate industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.96%, as per the Simply Wall St company report.

Castellum Future Earnings Per Share Growth

Risks

• Strategic asset acquisitions in high-quality Nordic growth regions, particularly in urban centers with resilient rental growth, position Castellum to benefit from long-term urbanization and demographic tailwinds, supporting stable rental revenues and occupancy rates.
  
• Continued focus on public sector and logistics tenants-segments that offer high occupancy, inflation-protected rental contracts, and reduced volatility-could sustain steady core income and limit downside in net margins.
  
• Proactive refinancing of SEK 10 billion in debt at lower credit margins, combined with a strong investment grade credit rating and a stable loan-to-value ratio under 37 percent, strengthens Castellum's balance sheet and could lead to lower interest expenses and improved earnings over time.
  
• Portfolio sustainability initiatives, demonstrated by high rates of certified properties and significant energy efficiency gains, enable Castellum to secure premium leases, lower operating costs, and enhance access to green financing, all of which are set to support higher net operating income and property values.
  
• Growing contributions from associated companies and recent investments in Entra at attractive valuations provide additional earnings diversity and potential for value appreciation, which can boost long-term earnings and net asset value.

Valuation

• The assumed bearish price target for Castellum is SEK100.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Castellum's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK150.0, and the most bearish reporting a price target of just SEK100.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK9.7 billion, earnings will come to SEK4.7 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 9.0%.
• Given the current share price of SEK115.45, the bearish analyst price target of SEK100.0 is 15.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.