Hello, and very warm welcome to Eastnine's second quarter results. Today, we will. Myself, Kęstutis Sasnauskas and Britt-Marie Nyman will present you our quarterly results, which we are very happy to present, because they are truly very, very strong. Before I start, I would like to inform you that there is a certain delay in our sending, so please make sure that you post your questions while we're speaking so we see them actually right after we finish our presentation. With this, let's move on. We have truly very, very strong quarter. Record high revenues, record high profits. Of course, the key happenings that led to it are basically two.
First of all, our acquisition in Poland, which have a very significant contribution. We'll go into a bit later. We also have very strong net letting. Actually, our market performed extremely strong. Our core market, Vilnius, has been very, very strong during the first half of the year. This resulted in rental income growth of 29%, operating income growth of 26%, and we also have a record high profit from property management. Despite that, actually, most of the effect in profitability will be seen during the second quarter as the premises will be inhabited and rents will start being paid.
With this, you know, very strong start of the first half of the year, we also see a very strong continuation during the second half of the year. There's also a significant value change in Melon Fashion Group. We have a very special situation in Russia. Of course, there is high uncertainty and the war. What has happened mainly during the quarter is that ruble has strengthened very, very significantly. Ruble is very volatile. You can see it in a graph in our report. These values might change over time. They will be volatile maybe for some future. The only thing that is kind of we can report is that Melon is actually performing very strongly despite all the turbulences.
The underlying performance is very, very good. If we move into macroeconomic outlook, what we see is actually a slowdown in GDP expectations. We don't see it yet, at least on our tenancy base. We see actually growing demand. We can witness this during the quarter with a record high lease out and mainly in IT sectors. Of course, the slowdown probably will not have as big effect on us because most of the businesses that is concentrated in our premises is actually the business that improves profitability and saves cost to the tenants. It's a lot of shared services that are produced cheaper where rents are cheaper salaries are cheaper, and so on.
We probably see a higher influx, even in a weakening environment in general. We see inflation very high in our region in general. This, of course, has an impact on our tenants. It has an impact, in general, in the market. Again, most of our tenants are actually exporting their services. Those services are consumed globally and internationally. At the same time, if you look on the cost level with triple net rents, basically, we are not as affected by the inflationary pressure. Of course, over time, inflation pushes the rents up as construction cost is growing and in general, as a normal effect of the inflation, adjustment of the rents.
We also are in relatively stable unemployment environment. I mean, the Baltics have a similar average as EU, and Poland is actually very, very strong with relatively low unemployment levels. We also are in a low rental level environment. You can see on the staples here, the sort of from yellow to blue to darker ones are actually the three first staples are our markets, with Poznań being the lowest rents and Vilnius having the highest rents. If you look overall, we're still way, way away from capital cities in the Nordics. Stockholm is an example.
Even if we compare to secondary cities like Gothenburg or Malmö, we're still below in terms of rental levels. This of course opens for future positive development in rents. Vacancies have been higher in certain of our markets, but they are coming down. Especially if we look on the prime segment. Prime segment has been very strong, especially in Vilnius. Vacancies are actually very low. Take-up remains to be very strong. If you look on the office yields in general, all office yields are actually 200-300 basis points above the Nordic markets, including secondary cities. If we look in Poznań and in Poland, this yields is even higher.
Basically the acquisition that we made is improving our yield level. Basically creating a bigger cushion for the future. If you look on our portfolio overall, we made this great acquisition in Poland. Nowy Rynek, we bought it from Skanska. It is the largest regional deal ever done in Poland. We still acquired it at attractive terms. It increases our rental income by EUR 7.5 million, which is very, very significant to us. It also has a significantly lot longer WALT. We improve basically on both sides. Property is 100% occupied. It's LEED Platinum and WELL Silver to be certified. This process is ongoing.
You will see that maybe there is a certain decrease in our certification level in terms of how many square meters are certified. It depends that Poznań is not certified yet, but it will be certified, and we aim for the highest points then. Allegro is the largest tenant. If you look overall on our property portfolio, we are in three cities on the eastern flank of the Baltic Sea. We own 14 properties, 183,000 square meters of top located top leasable space. Our property portfolio is valued at around EUR 605 million. It has been growing over time. We are a fast-growing company and fast-developing company, and we continue to grow.
We target to reach EUR 700 million in Q4 2023. You can see sort of the path that we are moving. We stay firm that to deliver on that goal. If you look distribution across the markets, Vilnius is our largest market with 67% market share, followed by Poznań and Riga. Overall, we added on diversification in terms of countries and the markets, and regional markets. In Vilnius, we own nine beautiful properties, 121,000 sq m. They are quite big in size, which gives us very efficient management possibility around 13,000 on average, and we have high occupancy of 91%.
That occupancy is bound to grow, as Uniq, which was vacated in May, actually is now fully leased and tenants will be moving in. We had approximately 40% leased out of that property, in at the end of the quarter. Already today, it's closer to 80% and basically we will see going forward. We will see the full effect actually of all moving in during Q3 and basically Q4 will have a full-scale effect. Properties in Riga, not too much change here. Around 22,000 square meters. Top-located three properties, two development projects. We have increasing occupancy as well. We had big vacancies in Riga, primarily in Alojas Biroji.
Now the situation is changing and we also sign new leases there as well. If you look on our overall tenancy, I mean, we have 100 top tenants, 220 leases. 62% of them are already green. We're working constantly on aiming basically 100% green. 4.7 years WALT. Net letting during the first half of the year was EUR 2.1 million, and basically with the majority of it being done during the second quarter. Our biggest tenants remain the same. We have very strong international players. Allegro became our largest tenant since the acquisition. It's a Pan-European company coming actually from Poznań originally.
Danske Bank, Telia, Swedbank, Vinted, Rockwool and so on. Basically, these are international, all multinational businesses, with a very strong base. We also, you can see that our rental income is rapidly growing. As a business, we evolve in a very rapid pace. Over to financials. Britt-Marie, over to you.
Thank you, Kęstutis, and please post your questions. We haven't received any yet, so we can answer them in the end. We continue with some key figures. The average annual rent increased to EUR 183 compared to EUR 178 by year-end, mainly due to rent indexation. The occupancy rate increased to 91.5%, mainly due to the acquisition of Nowy Rynek. Property yield in the earning capacity, excluding development projects, increased to 5.0%, mainly due to increased NOI. The net LTV properties increased to 52%, mainly due to loans related to the acquisitions. The surplus ratio here decreased a little bit during the period compared to the same period last year, 89%, and this is mainly due to a lower average occupancy during the period.
The cash flow per share increased from operations to SEK 0.52, and the profit from property management per share increased to SEK 0.26. Earnings per share up to SEK 1.95 per share, and that's mainly due to unrealized value changes, of course. We continue with the income statement, and some changes during the last year affected several of the items in the income statement. The most important one is, of course, the larger portfolio. We acquired four properties during the last fourteen months, and they are only included to a small part in last year's figures. We also had a higher average vacancy during the first 6 months this year than last year, and that affects both rental income and property costs. We also have some specific differences.
The increase in the rental income, this is also an effect of the rent indexation from January, and the increase in the property costs is also an effect of the higher electricity and heating costs. We can also see non-recurring items during the second quarter, and these are related to Poland, but we also had non-recurring items during the first quarter last year. The increase in the interest expenses and financial expenses are related to the bond issue in July last year, and the increase in the profit from property management is 10%, which is very good. Good to remember that Nowy Rynek is only included for up to two months this period, and we haven't seen the full effect from the new leases, only partially, a small part so far. As Kęstutis said, they will come during the third and fourth quarters.
We had positive unrealized value changes regarding the properties in the second quarter. This was due to increased market rent levels and new letting. When it comes to MFG, also during the second quarter, it was due to strengthened ruble and improved earnings in MFG, and derivatives both during the first quarter and the second quarter. It was due to increased market interest rates, of course. Received a large dividend during the first quarter from MFG and also a small one during the second quarter in June. The current tax refers to Poland. We continue a little bit with MFG. As you know, we have had these investments for many years, and we have also been clear that we want to divest it for many years. The intention was to list the company during the second quarter this year.
It has been postponed, obviously we are evaluating alternative divestment possibilities. The company performs very well. According to preliminary figures, sales grew by 13%, and the EBITDA increased by 36%, and the EBITDA margin reached 29%. MFG's net profit increased to RUB 2.5 billion. E-commerce sales still around a third of total sales. As Kęstutis mentioned before, we have seen a volatile ruble affecting the value of the holding in Eastnine's books. Now we come to my favorite page, the earning capacity, and it's perhaps more relevant than ever since it's been positively affected by the new acquisition of Nowy Rynek during the quarter. Improved rental value and rental income up 28%, very good. We saw some increased vacancies during the period in other properties affecting the vacancy value, which also increased, still small amounts.
Despite this larger portfolio, including Nowy Rynek, property expenses is almost unchanged, up 3% only, and this is due to the very, very high surplus ratio in Nowy Rynek. Net operating income increases more than rental value and rental income, and central administration almost unchanged. Interest expenses increases due to the acquisition. Profit from property management increases by as much as 41%, and this is a true effect of economies of scale. Very good level. We continue with the stable financing structure. The interest-bearing liabilities increased during the period. We had two new loans related to Uptown Park with Luminor, and related to Nowy Rynek from Berlin Hyp, meaning that we have also two new banks, which is very good for us and decreases the financing risk. We have a total of bank loans, EUR 286 million, and the bond is EUR 45 million.
If you look at the split, SEB is still the largest bank, followed by the bond is only 14% of total interest-bearing liabilities. The share of green financing has increased up to 48%, we intend to increase it even more in the future if possible. We saw a higher average interest rate during the period, and of course, you know that the interest market rates has increased during the spring and the new loans affected. We also had an increased capital tie-up, up to 2.8 years, and the fixed interest term increased to 2.2 years. If we have a closer look at the maturity structure and start with the dark blue columns, you can see that we have nearly EUR 100 million with floating interest rate and a little bit more than EUR 50 million with fixed interest rate until next year.
Same amount 2024, small amounts 2025 and 2026, and little bit above EUR 90 million with fixed interest rate until 2027. If we look at the green blue-green bars, you see that we don't have any maturities when it comes to the loans this year. It's not until autumn 2023. We have EUR 135 in 2024, including the bond which matures in July 2024, so still two more years to go. Small amounts 2025 and 2026, and EUR 90 in 2027. If you look at the LTV properties, net LTV properties and the equity asset ratio, it's normal among most real estate companies to have an equity asset ratio which is lower than the net LTV properties. Since we have had a lot of other investments and still one remaining, and those were non-leveraged, pure equity, we have had the opposite.
They are coming closer to each other, since we are only having one left. We had an equity asset ratio at 53% by the end of the period, and the net LTV properties was 52%. The NAV increased during the period, 13% up to 206 SEK. The share price decreased by 46%, which is slightly lower than real estate sector in total, which decreased by 48%. The discount now by the end of the period was 58%, and we had only small changes in the shareholder list. Three shareholders with 10% or more. Christoph this.
Yes. Why we think Eastnine is an exciting opportunity actually going forward, and it's actually because we are a very rapidly growing business. Not only that we grow the business, we see a very significant improvements in profitability while we grow our portfolio. If you look on our basically historics, and if you look on our earnings capacity post all the acquisitions and basically the lease out that we made, you see a significant improvement going forward. Rental income is expected to grow 52% and profit from property management by 64%, as of Q2 of this year. We also grow in profit per property management per share, which is probably the key metrics that we want to focus on.
Deliver strong cash flows to our shareholders. Long-term equity is growing, and if we see on the sort of dividends per share, they have been stable and growing over time. Of course, the share price development, as most of real estate companies, have been negatively affected during the first half of the year. Well, it's probably nothing I can comment on at this stage. Why we think Eastnine is actually interesting is we have a very, very unique top property portfolio in very top locations in each market we are in. Those properties are inhabited by very strong tenants which generate very strong cash flows and stable cash flows to us.
This also gives not only exposure to sort of the Baltic market, it gives or Polish market, it gives exposure to the sort of more international markets. We are leading in sustainability in the market today. We have very ambitious goals to further improve our operations going forward. There is a very exciting growth journey ahead of us, both in terms of our ambition, but also I always want to remind you that there is the ongoing convergence in the eastern flank of the Baltic Sea towards the more developed markets of the Nordics and Western Europe. This convergence is taking place every day and developing very fast. On this, I wish you a very nice summer.
Before we say goodbye, we will answer some questions.
Yeah. We have a lot of questions, so that's really good. The first one is do you hedge interest with new loans? We have hedged the last two loans with interest rate swaps. We are not obliged to hedge all the new loans. We have approximately slightly above 70% of the total interest-bearing liability hedged right now. It might differ over time. Let's see. I can start at the bottom. This is a long one. I think it's the different questions. What explains the downward revision of the average rent per square meter for Q1 in the Q2 report? Yeah, that's. We have some new information regarding a rental contracts in Uptown Park, so that's why we have to revise it. EUR 185 reported in Q1.
Okay, that was related to that question. Your occupancy is up 0.4 percentage points sequentially and now at 91.5%. Please remind us of what level you see as a sustainable here. What should we like when it comes to the occupancy?
I think in general, occupancy in Vilnius now will increase. In general, we had a relatively high occupancy, so it probably should go up, you know, above 90. Maybe Vilnius could reach even 95%. In Riga it's been lagging a little bit, but you know, longer term we'll strive to have our properties leased out. I think we should always calculate with 5% vacancy, probably.
Yeah. As far as we see right now, it will increase-
Yeah
Since we have a lot of new lease agreements, and the tenant haven't moved in yet. In the long run, perhaps it's hard to answer actually, but since it might be different over time, but an occupancy above 90% at least.
Yeah.
92, perhaps 93.
Yeah. Yeah
In the long run. How do you think that one should view central admin going forward? Do you currently foresee any material changes within the next 2-3 years, or is it reasonable to believe in a similar ratio central admin related to property value as today? Yeah. I think that the best answer is their own capacity, and we don't expect it to increase in the same time as the property.
Yeah.
Of course.
The properties, since the portfolio is growing, actually the central admin will not grow as much. This is the whole point of our basically growth that we have already a sufficient size of the organization to be able to scale it significantly up before our CA has to grow. From that perspective, that ratio should go down and we are fighting to push it down as fast as we can.
We also had a question. Please explain the value revision of MFG in further detail. It was 20% in Q1 and Q2.
The biggest value revision actually is the FX rate. Russian ruble was weakened very significantly since the start of the war. It peaked at 120 to euro, went down almost approximately it was 95 or something, or 90 around 90, at the end of first quarter. At the end of second quarter it was around 57. This is the biggest explanation of the value change. The ruble value has improved somewhat, but that's when you discount things with very high discount rate, just a some certain period of time implies a certain value change. At the same time, the company's performing very strongly, so there is a slight adjustment to the actuals, basically.
No major changes in its value assessment in rubles. The biggest effect is actually the FX rate. Ruble also weakened since then, approximately 8%, by now. It's a very volatile situation right now.
It could also be a recommendation to have a close look at the ruble.
Yeah
If you want to follow.
The values-
Yeah.
potential values, yeah.
Are you planning to sell the investment in MFG, Kęstutis?
Yes, we are. I mean, we expressed that, and we are looking for all alternatives at the moment. Our ambition is, as we told you before, to be 100% real estate company, and this is the only asset that remains that is not in that segment.
Is it correct to assume that, due to take up in Vilnius properties at the end of Q2, you are able to reach 93%-94% occupancy curve in Vilnius again in the second half of 2022? Yes, I expect so. Or how should we look at the occupancy levels? Yeah, they should definitely increase. What's your realistic assessment of Melon Fashion investment? Is it worth EUR 0 or is it realistically any value left? Yes, of course it's, we think that there is a value, of course. Otherwise, we should have changed it in the report. We are obliged to have the fair value.
The fair value to the best of our knowhow. Of course, we are in a very uncertain situation. Having said that, we are in an uncertain situation in Russia, and of course, regulation is changing and the rules of the game are changing. There is an uncertainty primarily sort of in what if you sell it, how can you actually get paid? There is currency controls currently in the market. At the same time, we see a number of foreigners selling their assets. We see a number of foreigners getting paid in euros. We monitor the situation very, very closely.
Of course, our ambition is to divest this holding and receive proceeds in euros.
What dividend did you receive from Melon in the second quarter? It was EUR 92,000. How large share of your rents are indexed? Almost 100% are indexed, but some of the rental agreements have caps. Can you talk about your ability to compensate higher yield requirements with higher rents? Would you like to answer that one, Kęstutis?
Yeah. What we see is that rents are actually growing today in our core markets basically all across the region. Vilnius probably performing strongest. At the same time, we see Poznan as well quite strong and even improving situation in Latvia. Overall, I think since we have quite big premises, quite big contracts, sometimes there could be variations depending on the exact location of the premises when we lease out because in general, we see a positive upwards trend. What is important to note in this, that we are in the triple net rent environment for most of our contracts basically over 90%, I would say.
That means that basically the cost inflation that is taking place is directly moved to the tenants and is paid by the tenants. We do not risk that. Of course, we risk it with vacancies. When we have vacancies, higher vacancies, this affects us. In general, you see that this situation is actually improving right now. Overall, we have a very positive outlook for the second half of the year.
Yeah. We have a question here regarding the inflation. Could you please clarify underlying assumptions on CPI, which is relevant for your properties for 2023? What is included in the valuations, and general comment on the market. I know that we increased the inflation level in the valuations, but sorry, I can't remember the figure right now, so I will have to come back to that to the person who actually asked the question. Do you have any caps in your rental agreement? Yes, we have. Some of the larger tenants have caps that might limit the support in rents. Yeah, it might be a limitation there. Will market rent increase follow the CPI, or should we expect markdown in rents toward the end of lease expiry?
We don't see that at this point of time. In general, I mean, it depends on how long leases are we talking about. Our average hold was 4.6 years. It's very difficult to predict how the market will look, then. In general, on the most recent situation on the lease interest that we did in the Q2, a very significant lease out, the average rent was significantly above the previous rent. It's coming closer to the market. In general, we see a positive trend in rents.
Yeah.
For now.
We have a question regarding dividends. Plan with dividends and buybacks, how to restore the share price. The discount to NAV seems to be too deep. Yeah. We agree. If we start with the dividends, we have a policy to pay at least 50% of the profit from property management after current tax to the shareholders, and that's the same as ever. It will be like that. We have decided upon that. No plans to change it, the policy. Regarding buybacks, no. We think it's better to invest in properties and to grow the company. The large discount is mainly an effect of how the market looks at MFG.
Concerns with MFG, which is, you know, up to the market to decide. At the same time, I think what is important for this company is actually growing our business and growing our size, because we need higher liquidity in the market. We have to do everything to increase our asset base, and this will probably be more helpful to sustain our value long-term and share price long-term.
What is your plan with development of current land bank? Do you plan to start any of the development in 1-2 years?
We're monitoring the situation very closely. Some of our developments, as you all know, are delayed. They're delayed because of soaring construction prices and as everywhere else, and as well of almost impossible, you know, timelines for deliveries and so on. This is a concern for all of the market. We see that basically the rental levels are not on the level where that would motivate the developers to develop at this point of time. We either see an increased rental level which will benefit our existing portfolio or the construction costs have to come down to a level which is more sustainable.
We monitor it and we look at it on a quarterly basis. We can come back on a quarterly basis on our plans. For now, we pause it.
Where do you see portfolio LTV in the near future? We see it coming down since we amortize around 2.5% per year. It's coming down. Are there currently any issues or sanctions intact regarding FX transactions relating to the ruble? For example, transferring dividends from MFG to Eastnine accounts.
Yes, there is. There is a limitation today to pay up to RUB 10 million to foreigners from non-friendly countries as Russia calls it. Basically, countries that impose sanctions on Russia. It implies basically all E.U., U.S. and other 40 countries. Today there is a limitation. We follow the rules and basically we receive dividends now on a monthly basis. We received one tranche in June. We received one tranche in July already. We will continue receiving those on a monthly basis. It's RUB 10 million for a collective foreign ownership in a company today. These are the limitations that we follow.
Approximately how large can the rental increase be before those rental caps kick in? And approximately how large share of your rental value do these affect? Thanks. It's 40% of the total annual rent has a cap today, and I would say that the caps are around 3% and related mainly to the euro.
To larger contracts and that are based on European inflation, because certain of our contracts are based on European inflation and certain are based on local inflation.
Once again, it's important to remember that since most of the property costs are transferred to the tenants, when we have a high vacancy, our own property costs are very, very low. I think that was all. Very, very good questions.
Thank you very much. On this, we finish our quarterly presentation. Again, thanks everyone, especially Eastnine's team, for delivering fantastic result. We wish you all a very nice summer and speak to you when the weather is a bit colder.
Yeah.
Thank you. Goodbye.
Thank you very much. Bye.