Hello, very warm welcome to our quarterly presentation. My name is Kęstutis Sasnauskas, and with me is Britt-Marie Nyman. Today, we have actually a very nice report to present you, and I'm extremely glad to do it actually on a day when Eastnine is turning actually 15. On the same very day, we were listed on Stockholm Stock Exchange back in 2007. If we look into the highlights of the quarter, we have a very strong positive net letting during the whole period, but also in the third quarter. It's actually the third quarter in a row where we deliver positive net letting results. We also enjoy the record high profit from property management.
Of course, part of it is growth of our portfolio, but not only that, it's also improved leasing and improved operations. We also received top rating in GRESB, receiving 92 points and becoming one of the industry leaders globally. Of course, we will continue working on our properties, both improving them operationally in terms of energy efficiency, but also sustainability certifications. We have a new certification for Valdemara achieving Fitwel. It's one of the first properties in the Baltics actually achieving this type of certification. Nowy Rynek and Vertas received LEED Platinum, and S7-2 and S7-3 actually received BREEAM Outstanding.
All of our properties are actually not only environmentally certified or almost all of our properties, but they're also in the absolutely highest brackets of the certifications. We also launching an innovation camp together with ROCKIT in Lithuania and the Baltic Sandbox for PropTech innovation. This is something that we will probably be coming back in the future, but it's a way to facilitate further improvements in our property industry as well as focusing very much on sustainability and growing innovation in our area. Of course, one of the most important news that happened after the quarter, we signed a sale agreement of Melon Fashion investment, and I will talk about that a little bit later in the presentation.
If we move to the main news, of course, sale of Melon Fashion Group. We sign agreement with investment company, a Russian investment company, Sistema. The purchase price is EUR 193 million. That's what the proceeds that we expect to get. Of course, this sale, especially today in today's markets is quite complicated. It entails a number of permissions to be received, governmental approvals, and so on. But still we deem the transaction to happen to be completed by the end of 2022. Underlying the company continues performing very well.
If we go into our markets and economic outlook, as such, I mean, Baltics have always been a bit of a derivative of the Nordics and a bit of derivatives of the Western world. They perform slightly stronger in the upturn, slightly historically stronger downwards in the downturns. Now we are actually very much seeing development at par. Our newly entered market, Poland, actually is performing much stronger on all parameters overall, and has been performing much stronger over a historic period of time. We had a positive development in the beginning of 2021. We had a very strong beginning of 2022.
Now we're seeing somewhat GDP growth decreasing and of course expectation that it will continue so throughout 2023. Of course, it's affected by very high inflation rates. In the Baltics, we have extremely high inflation and that is somewhat of a concern. At the same time, if you look on our property portfolio, of course, we don't experience that bigger of a risk as we see it at the moment. Overall, we see that inflation probably will start coming down in 2023. As a natural base effect today of very high energy prices today, which are going to start falling now already. We see actually still strong inflation in Poland, but more moderate compared to the Baltic states.
Unemployment rates continue very stable. Poland has very low unemployment rates and has been developing very, very strongly overall. The Baltic markets are relatively at par, and we don't see any bigger concerns. If we look on the property market, on our office prime offices, I mean, we are in the market which has significantly lower rental rates compared to the Nordic peers. Here you see a comparison with Stockholm. You also see in the lower part of the diagram is actually that rental levels in all of our markets continue to rise. This is partially driven by inflation. Also partially driven by strong demand, especially in Vilnius, as well as rising construction cost. Vacancy rates have been stable.
We have very high vacancies in Latvia, but there's also a very big divergence in terms of vacancy. We see actually lower vacancy in prime properties and higher vacancy in less attractive locations in properties that are older. There is a huge change and huge shift towards quality. We are definitely with our portfolio, we're actually benefiting out of this shift among the tenants. Prime yields have been relatively stable. When of course, everybody's discussing whether they are gonna move up or no. I mean, we've seen certain tendencies towards upward movements, but still relatively stable. Now the Baltics is less liquid. Probably more of that situation is in the capital city of Warsaw. Still in the regional cities, we see relatively stable situation.
Of course, the yield levels are significantly above the Nordic peers. If you compare to the Nordic peers or any other bigger European cities, they are significantly above. If we look on our portfolio overall, I mean, we have fantastic 14 properties. 183,000 square meters of prime office located in the central locations, and a total portfolio value of around EUR 600 million. Today, we are located in three locations, starting with the most northern capital, for us at least is Riga. Approximately 13% of our properties are located there. Vilnius is our biggest market today with almost 70% of our portfolio.
Poznań is the newly entered Polish market with a bigger acquisition that resulted in approximately 20% value in our overall portfolio. These are the sort of core markets that we intend to continue developing and growing. Especially now we see much more opportunities in Poland as yields seem to be more attractive today, at the same time as the growth opportunities are more there as well. Coming back to our sustainability and the work that we've done, it's also very important to know that actually 89% of our portfolio is environmentally certified. It's not only environmentally certified, it's actually within the absolutely highest brackets of those certifications. Today, we don't have any BREEAM Excellent anymore.
We only have BREEAM Outstanding properties. In LEED Platinum, we also have only LEED certification. We only have LEED Platinum properties. Those are very modern, all of them. The remaining 11%, there are two properties that are undergoing certification, and of course, we said that we will try to achieve at least LEED Gold or BREEAM Excellent or BREEAM Very Good, but actually, we aim for higher brackets. As I mentioned before, we received 92% score in GRESB, which places us among the absolutely top players globally in terms of our sustainability work. This is an external assessment that is done annually.
It's very popular among listed real estate companies, at least here in Nordics. We rank number three in terms of gender equality, according to AllBright, and this is an independent assessment of around 300 listed companies in Sweden. We have a fantastic team that 100% of employees actually consider Eastnine being a great place to work. We score 90% confidence index. We are a very, very strong, tight, motivated team ready to move on and make great deals. If you look on our portfolio overall, I mean, there's no news in Vilnius since the last quarter. We have fantastic nine properties. All of them are relatively big. All of them are very new. Very high occupancy rates and those have been growing.
Britt-Marie Nyman will talk more about these levels. In Vilnius, we experience 94% occupancy rate today, with the biggest relationships being Danske, Swedbank, Telia, and Vinted. We also have one amazing development project in Vilnius that is moving ahead. However, we will be a bit careful with starting all the new developments for the time being, just assessing the market. If we look in Latvia, again, we have three wonderful properties all located in the same very central area of Riga. Those are a bit smaller in size on average. But even in Latvia, where we had higher vacancy, we're actually seeing significant improvements, increasing occupancy. Now it's around 84%. With planned moves, it will probably.
We expect actually to improve it further. Overall, development is very positive. We have two development projects in Riga. The Pine was almost ready to start, but we put it on hold due to the economic situation or certain uncertainties caused by the war, of course, and very sharply increasing construction prices and supply chain disruptions. We are monitoring the situation very closely, and we'll probably be coming back to those once we see a certain stabilization in the economy. Of course, our latest acquisition in Poznań, great property. It's one big property in one location. So it gives us very, very efficient management and high efficiency gains. It's fully let. It's top brand-new, so it's basically.
It's triple-net lease. From that perspective, it's a very nice acquisition addition to our overall portfolio. We enjoy a very strong international tenant base. If you look at our tenants, you will recognize most of the names. Our biggest relationship with Polish Allegro. It's one of the largest global e-commerce sites. Danske Bank within finance, Telia, Swedbank, Vinted, Rockwool. If you look at the sort of newest relationships, it's definitely Allegro after acquisition in Poland, Rockwool, as well as Wargaming, which is within ICT sector and with its roots from Belarus. On this, I hand over to Britt-Marie.
Thanks, Kęstutis. I start with reminding you to send your questions during the presentation. It's a pleasure to present Eastnine's strong financial highlights. On this slide, we compare the third quarter to the second. The occupancy rate increased to 94.3%. Several new tenants moved in during the quarter after a fantastic leasing so far this year. The surplus ratio increased to 92%. This is an extremely high figure from a Swedish perspective. I can't think of a single real estate company with operations in Sweden that can compete with that figure. Please contact me if I'm wrong. The property yield in the earning capacity increased to 5.2%, mainly due to a higher NOI. The net LTV properties decreased to 51% after amortizations. The ICR increased to 2.6, mainly due to a higher NOI, and despite a higher average interest rate, as you can see in the square.
The income statement develops well. Most figures are higher since we have a larger property portfolio this year than last year. We start by looking into the third quarter compared to the same quarter last year. The occupancy is higher, and this has, in a positive way, affected not only rental income but also the property costs, since if the premises are occupied, we are able to transfer the property costs to the tenants in accordance with the lease agreements, which are mainly triple-net. A more efficient use of capital and a limited increase in central administration are both contributing to the fact that profit from property management increases more than rental income and also net operating income. We saw that the sale agreement regarding MFG meant a large unrealized value change during the quarter.
When it comes to the period, we can also see that the figures are increasing and the profit is increasing, but not as much in % as during the quarter. This is mainly due to a lower occupancy at the beginning of the year, and also the fact that the interest from the bond affects nine months this year and only three months last year. The earning capacity is my favorite page because it's forward-looking. It's not a prognosis. It's a theoretical assessment of how much money Eastnine can earn during the coming 12 months. It's based on current agreements and certain assumptions. The earning capacity continues to improve, and the main reason for this is a higher occupancy, which has reduced the vacancy value and increased the rental income.
We also saw that a higher interest rate increases interest expenses working in the opposite direction. In the end, and most important, profit from property management increases more than rental income and NOI. We continue with another very important slide. In times of uncertainty, it's good to have the finances in order, which we have. Eastnine has well-diversified and solid financing with five different banks and only 14% capital market financing. The share of green financing almost doubled during this year, up to 48%. The average loan maturity is 2.6 years, and the first maturity is in Q4 next year. The average interest maturity is two years, and 71% of the interest-bearing liabilities have fixed interest rates.
The EUR 45 million bond included in the chart matures in mid-2024. As you know, real estate companies share prices have been extremely volatile and negatively affected by the Russian war and the increase in the market interest rate this year. Initially, when the war started, Eastnine share price was more affected than peers, but lately, we have seen the opposite. By the end of October, the discount was 57% based on the share price at the same time, and the NAV by the end of September. We have seen minor changes in the shareholder list during 2022. The third long term investor has decreased a little bit and is now below 5%, and Gustaf Hermelin, well-known within real estate business, has bought some shares. Kęstutis, will you continue, please?
Okay, thank you. Just a reminder, use your opportunity to pose questions, because there is a certain delay in when we send to you, so we avoid a dead silence of 20 seconds or so. Why do we think Eastnine is actually an attractive case for you? We continue delivering on the profits from property management, which is our core business, and now with expected the divestment of Melon, actually our opportunities increase, especially in these turbulent times. It's very, very nice to have a very strong financial position to continue on our growth. Our profit from property management is actually expected to grow quite significantly, as you see on the graph.
We pay stable dividends, and if you look on the sort of long-term equity build-up and equity value per share growth, we have been growing constantly since basically the change of our strategy. A steady and nice build-up. It's of course thanks to a unique portfolio that we managed to create, and we continue growing it with top modern office properties in prime locations in absolutely sort of best locations in the capital cities and now in the regional cities of Poland, where we see very nice attractive opportunities coming at a very much higher yields.
We also have very strong cash flow generation capacity in those properties, coming from high yields, but at the same time in combination with relatively stable and strong tenant base, which is Nordic or global, as you could see from the list before. There's a very strong underlying performance, or strength actually in the business. If we look on the sustainability metrics, we definitely now can say that we are leaders in our region. We are among the leaders globally, but we also push for that agenda in our region overall. We actually lead the way and a lot of companies follow us. There's more certifications going on, more focus on energy efficiency, and that drive.
We hope that with this PropTech initiative, we will be able to actually even further push that agenda. Of course, an amazing growth journey ahead with the expected cash from Melon, we definitely will be able to reach the goal set for 2023 and beyond that. We have great opportunities, but we also should never forget that the Baltics and Poland have been converging to Western Europe all the time, 15 years ago, 5 years ago, and this convergence is only accelerating and is taking place faster and faster. On this, I open up for questions. Thank you very much.
Yes, we have actually received a lot of questions, and many of them regarding MFG.
Okay
as expected.
Okay.
The first one, regarding the sale of Melon, do you have any information that you can share on transactions the Russian authorities for foreign investments in Russia has approved or denied with the sellers from EU?
With the sellers from the EU. I mean, now all companies, all sellers, all owners of companies or any business in Russia that comes from EU or companies or countries that applied sanctions against Russia are now considered unfriendly countries, which means that all of those owners have to go through a special commission to receive permission to sell their assets, and especially if it comes to FX transactions, currency conversion and so on. The number of those transactions have actually increased over the year. There seems to be more established rules or practices how it works. We've seen a number of approvals have been made to other companies.
I cannot comment on our approval process, but we have seen those processes taking place with positive outcomes. This is the only comment I can make at this point of time.
Yeah. Of course, it's a bit difficult for us to comment on the process.
Yeah.
I will still mention the other questions and see what we can answer.
Yeah.
Can you explain the risks regarding the sale of MFG? What could happen for the deal not to be completed? Is the transfer of money from Russia to Sweden subject to sanctions or other problems?
Yes, there's also a number of risks associated with this. One of these governmental approvals, the processes, of course, those commissions are newly established. There are no written clear, understandable rules how the decisions are being made. Now it seems that they are being made. The other, of course, is that there is sanctions being put on Russia, basically on a monthly basis. I think there's now talk about ninth package and so on. Of course, more and more companies, more and more businesses can be sanctioned, transactions can be sanctioned. We know that, you know, things like, you know, central depository of Russia is sanctioned and stuff like that.
It's a relatively complicated how to make those transfers. Of course, it's not the easiest parties to get money out of Russia and get it into the Swedish banking system. We are working on all of this. We are very focused on doing this, and we see a clear way how it can be done. I mean, we do our best.
Yeah. Another question on MFG. Will there be any taxes to pay on the MFG sale?
There shouldn't be.
No?
No.
Another question. Do you expect all of your tenant base will be able to absorb the rent income indexation for next year? Perhaps I can answer that question. Of course, we have a very high inflation in the Baltics. Around one third of the lease agreements are linked to local index and two thirds to EU. We expect to have some discussions. For us, it's more important to have a high occupancy in the long run, so as high indexation as possible, but perhaps not all the way in relation to the inflation. If successfully.
I think it's also very important to note that, having the triple-net leases, the cost risk is not entirely on us. Of course, with you know, with this, Överskottsgrad,
surplus ratio
surplus ratio of over 92%, I mean, most of the cost is actually transferred. The most of the inflationary pressure that we would experience is actually taken by our tenants, and that's why it is quite natural to expect that probably, you know, we will not get full inflationary adjustment on the leases.
If successfully closing the MFG divestment, can you discuss around the capital allocation plan, thinking around regions, asset classes, projects, et cetera?
I mean, definitely, when that will happen, we will have lots of ideas what to do. Of course, as a management, we want to grow the business. We want to make it more efficient. We want to make it more profitable. We will focus primarily on that. For us, scale is very important. You know, you see maybe a lot of big companies being now de-merged and talks about being split up. We are on the level where we are still too small. We need to grow simply to offset all the costs of listing and so on to be efficient. For us, growth remains a focus.
You can see actually in the quarterly results, you know, in the third quarter that our profit from property management is growing, you know, twice the speed of our overall growth, so you know, growing at 60%. Adding new properties and adding these kind of modern efficient stock is extremely value creative.
Yeah. The next question is, operating expenses look somewhat low in Q3. What's pulling it down? It's the high occupancy. We are able to transfer property cost to the tenants when the premises are leased out. Roughly how much do construction costs need to come down in order for you to start your projects?
I think construction cost is a matter of. There's a number of factors affecting it. Number one is we want to see a bit more stable situation in Latvia, primarily when it comes to macro and sort of coming back to lease demand. We have a very strong lease demand for rental demand for in Vilnius, but that demand was a bit weaker in Latvia. That is number one. Number two, of course, it's not only the construction cost, it's actually what you can charge. You know, construction cost can be high. As long as you can charge higher rents, you still can make profitable developments.
We want to see a bit of a stronger market in Latvia before we feel higher confidence of start digging into the ground. These are the kind of factors more affecting than the real construction cost. Of course, the property that we wanted to develop is very specific. It also limits the number of players that can actually do it today because there's still lack of experience of constructing wooden buildings in Latvia. There's a number of puzzles that need to actually match. We were close to it, but then there was a bigger disruption and so on. Of course, there were also some disruptions on supply chains because we were not able to.
Our suppliers were not able to guarantee the supplies simply. Once we understand that, you know, there is more stable situation overall there, we will definitely come back to it.
Yeah, there was a related question. Which project will you, given the circumstances today, start first? That depends on the demand, of course.
Yeah.
Current tax came up a bit more in Q3 than in Q2 after having been zero before. They are totally related to Poland, so expect them to be on the same level in the future. How do you think about currency matching future growth in Poland? Currency matching future growth in Poland. Will you borrow in local currency even with difference in interest rate? No.
We don't expect that. I think what you have to understand that in Polish market, actually property market and especially offices, are 98% owned by foreign investors, which means that basically there's a very strong push for having euro-nominated rents, and this is a market standard. Rents are euro-nominated, and hence most of the financing is actually euro-nominated.
You expect it to have those in euro.
So far we stay with that. Of course, there is a risk, should anything happen to złoty. Złoty, if you look historically, has been more stable than some of the Nordic, Swedish currency, for instance. It's been very stable overall, over a longer period of time.
We have a question regarding financing. Please elaborate further on your upcoming loan maturities. Have you initiated any refinancing process already? Yes, we have, short answer. Any indications on the margins on new facilities? They are stable. We have contacts with more or less all our banks and we have discussions, and they are stable, so that's good. Any structural shifts on Latvian property market? Get back to the finances, it's good, also even when the market is a little bit tough out there, it's good, that we are a privileged borrower. We can see that all banks are with us. Any structural shifts on Latvian property market? Improving a little bit.
I mean, there's definitely an improvement. There's definitely a number of important factors taking place. There are a number of very exciting developments taking place, not done by us at the moment, but actually bringing up the overall quality in the market. That would benefit us because even though sort of the competition will increase, but we still think that it's very net positive to us because the tenants will understand better the quality and get used to better premises. This is one very important factor that is taking place right now. Overall, we see a more positive tendency in terms of rents in terms of demand. Actually, surprisingly, Lithuania has been very strong.
Maybe now a little bit slowing down, but the first you know three quarters were extremely strong, and despite you know all the uncertainty, the war in Ukraine, and so on and so on. We have been witnessing very strong shift towards you know stronger demand, still remaining very strong demand for the properties, and especially for the sort of higher quality, higher end properties.
We have a question. Once the sale of MFG is completed and funds transferred from the sale, will you use the proceeds to acquire new properties in Poland and Latvia or invest and develop your current product portfolio? Okay. That, I think we have answered that.
Well, I think we answered that, yeah.
Will you also use some of the proceeds to decrease your debt levels? On that question, we can just answer, we will always do what's best for our shareholders. That's our intention. We will look into all opportunities on the market, depending. Could be different ones. We got a question regarding the PropTech initiative. What kind of synergies are you expecting to get from the partnership?
Fantastic. A very good question. We really look forward to develop that partnership. Actually, we do it with ROCKIT in Vilnius and Baltic Sandbox. Actually, they have very good experience of nurturing a number of fintech companies in Lithuania. It was originally started by Barclays, now taken over by Swedbank. From that perspective, we needed somebody to help us to, you know, put it into motion. We welcome all market players to support that initiative and basically our competitors and everybody is actually welcome. The idea is actually to make Lithuania as a PropTech country known for PropTech. We have actually, you know.
It's a tighter market, it's a closer market, but we also have a lot of modern solutions in our properties. We can test a lot of ideas, and it's closer to get to the sort of market participants. Of course, there's a lot of initiatives. The more we understand our properties, the more we understand how little we understand about them actually, and how much more there is efficiency to be gained from those properties, especially when it comes to energy efficiency and so on and so on. How we use them, how we utilize these huge capital values that are invested into them. From that perspective, we see.
I see, you know, huge amount of synergies in terms of, you know, what can be done improving our properties, but also maybe, you know, supporting certain very exciting ideas and maybe, partially co-investing with them and having that angle, in our portfolio in the future.
That was actually the last question.
Okay.
So-
On this, thank you very much.
Thank you.
See you next quarter.
Thank you.