Earnings Call: Q4 2019

Feb 21, 2020

Hello, and welcome to the Eastline AV Year End Report twenty nineteen. Throughout the call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present Kastutius Sasmauskas, CEO, and Brit Marie Neyman, CFO and deputy CEO. Please go ahead with your meeting. Thank you very much for this introduction. And with it, I would like to move straight into page number four of our presentation, vision and mission. Eastline's vision is to create and provide prime values where ideas can flow people can make and successful business can be developed. We have a mission to be the leading long term provider of modern and sustainable office premises in prime locations in the Baltic capital. For you who do not know, Eastline is a Swedish real estate company. This is a Nasdaq Stockholm MidCap headquarter in Stockholm. Our main tenants are Nordic companies with international operation. We have very nice sustainable properties in in in the in the core segment, so to speak, in in in the core working capital. If we move to page number six, sustainability is our core focus. Our total objective is to conduct climate neutral operations. We will reach that as soon as possible, but later 2030. 100% of our real estate investments shall be environmentally certified. That excludes properties that are acquired for major redevelopment. Today, already, we have 71% of our area certified at the highest rank of lead and pre maximum certificate certification. And we aim to be the prime with the best landlord within our segment in the office segment in the in the CBD area. We have conducted our employee survey, which resulted in a very high score by Great Place to Work and external adviser, where 93% of our employees considered to be a great place to work. We also are reporting. We started already in back in 02/2019, and 2020 will be the first officials for the first time reporting score was 64 versus 58 for the average of the first time reporters. If we go to our portfolio, it has grown. As you can see, our total assets comprised now €420,000,000, with the majority being in the property direct segment. We still have two non core holdings, East Capital, both in property fund number two, and MSG. Overall, if we look on the property portfolio, the majority of the portfolio is actually in Vilnius, and the rest is in Riga today. If we move to page number eight, just to recap why we like Voltig so much. We see a solid GDP development in around 3%. We expect that to continue throughout the next coming three years, and we see a very strong convergence trend towards European averages. All countries are members of EU, Eurozone, and NATO. All countries ranked very high on ease of doing business, while Lithuania ranked on eleventh place just behind Sweden, which is on the tenth, Estonia eighteenth, and Latvia nineteenth. And that's a global rating, which is very, very high for for the for those economy. We have very strong demand for office space. Generally operate in in relatively low vacancy rate environment today, and we see many internationals established in the in this market. NASDAQ, Tanske Bank, Moody's, Uber, Swedbank, just to name some of you some of them, and most of them actually in The States are also out of China. We have disciplined real estate financing and protection market with prime yields in the area of 5.8 or 6.2, which is around 200 to 300 basis points above the notice period. That, in combination with low rental levels, makes our story very compelling still today. If we move to page number nine, you see our property portfolio in Vilnius. There's no changes on that slide since since our last presentation. And if we move to page 10, where you see the picture of page three in Lyonos that is about to be taken over during first quarter. There has been a minor delay in that takeover, but it's related entirely to some administrative technical issues within Vilnius municipality. If we look on page number 11, you see basically a map, and we show where our properties are situated. Figures relate to the previous slide, so you can analyze it a bit further. But, basically, in low density, we are already the largest player. Almost every tenth square meter of office overall in Vilnius is is actually in our possession today. And in the Vilnius CBD market and the high high market, our market share is significantly higher. And we also continue plan to to to continue to strengthen our position in this in the central area of Vilnius. If we move to Riga, you see three properties here. The Aloe and Quartet that's probably that was acquired together with Aloe. The way it will be redeveloped into something, if you look on page number 13, the time, it's our new concept that we are in the process of development. It will be the first wooden constructed office constructed out of entirely out of wood. And our most recent acquisition is the Kimmel Quarter. You see just some of the visualization. Today, it's a landlock with a possibility to develop up to 38,000 square meters of office and the retail and more mixed use type of property, and that will be developed in the future as well. If we move to page number 14, you see our project on the map. Regates much more spread out over the the city. There is no clear CPD established today, but you see that our portfolio is relatively concentrated around one street, and we will probably stay in that area going forward. If we move to page number 15, real estate fund, we have nice returns from Baltic Property Fund number two, growing almost 5% during the year, all returning including the dividend. Property has or the fund has five properties. That fund is found for divestments from our side. It will either be sold as it as it's in the in the active phase. We either sell it or or we either sell it through for the sale of all the properties underlying properties. Mortgage property fund number two was already sold at the end. 3? 3. Yes. Sorry. 3 was sold already in the last quarter. If we move to Melbourne Fashion Group, Melbourne Fashion Group has made very nice return this year. We have a total return of 42.6, including the value changes and and and realized dividend. We received dividends in about being around €2,800,000 from that company. We had a nice value increase of around 37% during the year. And, of course, it's driven by very strong performance of Mellon during 2019 and and very strong outlook for 02/2020. MMG's sales are up 30% or 30% during the year. Ecommerce is growing even faster, approximately 127%. And we have very strong margin growth of 36%. If we adjust for currency effect, margin was up 43%. And current valuation constitutes approximately five times EVEBITDA multiple, which is, given this type of performance, still considered what, prudent, I would say. If we move further, I would hand over to this Marie. Thanks. Is nine released a positive year end report this morning with a substantial increase in the profit from property management in combination with unrealized value changes in both properties and other investments. Page 18. Some key figures. We start with some key figures regarding efficiency. The property deal was 5.3 during 02/2019. Seems a bit low since we took possession of a majority of the acquired properties in the fourth quarter, and yield is measured as NOI in comparison with the average of opening and closing balance of that property value, so that's why. Third party ratio increased for the second quarter in a row to 90% by the 2019, mainly due to higher occupancy rate. It was eighty four percent one year ago. Return on equity increased from six point five percent 2018 to almost fourteen percent 2019, mainly due to increased profit from property management and unrealized changes in value. Rental leases, the average rent was $14.07 euro per square meter a month at the 2019 compared to 14.5 at the end of last year. The warts increased to five years to expiry, and the increase was more substantial during q four after taking possession of S72 with Telia on a plus nine year lease. The occupancy rate increased by 2.5% during Q4 and almost 4% compared to December. Some financial key figures, LTV has been historically low. We have tried to increase it a bit during 2019, up to 47 by year end. Please remember that only real estate is leveraged. Equity asset ratio is still on a very high level. The average interest level is stable around 2.3%. And some share related key figures. Earnings per share more than doubled to €166 per share compared to 0.71. The NAV was 133 by year end, and the EFRA NAV was 137, almost the same as the share price by the year end. Page 19, some highlights during q four. We had a positive net leasing of €99,000 annually. The average rent was up on the new agreement, 15.2 per euro per square meter and month compared to 14.7 by the February '19, and some of these tenants will move in during the first quarter this year. We took possession of Valemara Centes in Riga and S-seven-two in Bilnius. We acquired KymaD in Riga, and we sold the fund as NAV. Page 20. If we start with the fourth quarter in comparison to previous quarters, rental income, profit expenses, and interest expenses increased due to a larger portfolio. Central administration increased due to new employment and the reservation for variable remuneration. Other financial expenses, which contains mainly of commitment fees for loans, decreased since we took over S72. We saw positive unrealized value changes for properties, derivatives and investments. And finally, we received dividend from MFG and the real estate fund. For the full year 2019, most of the growth in the figures is, of course, due to the fact that project almost doubled, but there are some other positive changes as well. Rent levels are gradually improving. The occupancy rate is back on high levels again. The NOI and the profit from property management are increasing at a higher percentage than rental income, and the unrealized value change for properties in 2019 was more than 6%, around 60% from higher rental income and 40% from lower fees. Over to page 21. The long term securities holdings on almost the same level as in December, though we sold the Baltic Property Fund, and this is explained by the value change in MSG. Cash has decreased in pace with East nine taking possession of S7, one and two. Equity increased due to profit. Liabilities increased because of new loans for acquisitions and on existing properties. Page 22, earnings capacity. Since East nine is growing at a fast pace and historic information doesn't give much information about the future, we have, from this year end report, included information about the earnings capacity in the company. It should it should not be regarded as a prognosis. Earnings capacity describes theoretically the company's current earnings as of the December 2019. Figures are based on the property portfolio by the December. Earnings capacity doesn't contain an assessment of the development of rent levels, vacancies, property expenses, interest rates, etcetera. As you can see, there is a substantial increase compared to the outcome of 02/2019, mainly because of a larger portfolio, but also due to lower vacancies and higher rents. In 02/2019, rental income was a little bit higher than €13,000,000 and profit from property management, 5 and a half million euros. So substantially higher than that. And we also have the contract to take over that property s seven three, and that is not included in this table to be taken over during the first quarter and at an agreed purchase price of around €43,000,000. The property is fully left to Danske Bank. The annual rental income amounts to approximately 2 and a half million euros with with an estimated surplus value as high as 98 percent. If we include s seven three for twelve months rental income is close to €20,000,000. Page 23. The shares listed as stock on Nasdaq, MidCap, as you know. We have we still have 22,000,000 shares, and we have repurchased 1,200,000.0 shares. We haven't repurchased any shares after Q1 this year. The Board proposes a dividend of SEK 2.7 for this spring, divided into SEK 1.35 in May and SEK 1.35 in November. The share price increased by 48% last year, and the total return amounted to 51%. Today, the share has been trading at an all time high of more than 149. One fifty now. One fifty now. Okay. That's good. Shareholders page page 24. The number of shareholders increased by 11% to more than 5,600. 71% of these are Swedish, 16 foreign, and 13% of unknown nationality. About 50% of the foreign investors are from The US. We have two major shareholders as before in more than 10% of the shares. And most of the shareholders on the top 10 shareholder list have increased their shareholding during 02/2019. And what about the future? Okay. Thank you. So, of course, on our priority list is to take over at seven number three, which we expect to happen during q one. As I mentioned before, it's it's more of a technical administrative matter that is delaying it. The property is built, and the tenant has moved in. We also are very actively pursuing on our acquisition strategy and within our selected strategy within selected areas, and we continue working on this. So, hopefully, there will be more news coming in the future. And, of course, our focus is also to transform the company into pure real estate play, which means that no core holdings will be divested, and it's also on top of our agenda. So we work with that. And finally, but not least, to continue with our development projects that we see as very, very exciting opportunity, And that will probably or not probably, but once completed, actually, we'll bring our position in Riga to closer to 70,000 square meters, and definitely, we will become the largest player by only executing these two projects. So this is briefly for today, and we are now open for questions. Operator? Thank you. And our first question comes from the line of Nicolas Hoglund from Nordea. Please go ahead. Your line is now open. Good morning. It's Helgenen from Nordea. A couple of questions for me here. Let's start out with the sort of property portfolio. The like for like rental growth or decline is clearly less now in the fourth quarter. And you're talking about continued higher rental values. Should we expect sort of underlying rental values to sort of start to increase now again from already from the first quarter? Is it some still some vacancies holding back performance? Yeah. Because the like for like portfolios is actually one property mainly and well, it's two properties, basically. Three to four s one and two and a lot of squash out. These properties are now fully leased. Not all tenants are not almost fully leased, to be very correct. So cannot start moving in, and we'll probably see a like for like growth in q one, but definitely in q two. But overall, the the outlook is very positive. Right. And when you look at the sort of rental value and and we're seeing a steady increase and the sort of higher potential for for for rent in the portfolio, picking up the vacancies. When you look at the sort of potential for renegotiations over the next two years, do you see a potential for an uplift in the sort of current portfolio environment? Or should we expect rental levels to be stable on these higher levels in the next one to two years? In general, rents have developed upwards during even during the last quarter. So definitely, when there will be churn in the in the tenancy, we will see an uplift most likely. Yes. Okay. And and on on that note, could you help us out with the sort of the underlying CPI adjustments for for 2020? What's the sort of what do you expect? Around 2%. So it's it's pretty Yeah. Above the Nordic extent. Okay. And then moving over to values, also in the property portfolio. While values have a decent increase here in the fourth quarter, and you mentioned that it's around $8.20 or no, $60.40 higher rental income and 40% lower yield for the for the full year. Is it more or less the same trend in also in the fourth quarter, or is it more tilted towards rents? I'm not sure that I have that figure, actually, so I have to look into that. Yeah. It's the that's the and maybe on that note, we're also seeing that evaluation yield is coming up in the portfolio linked to mix. Is it is it possible to get a a feeling of how much of the sort of uplift in in valuation yield that is related to the mix effect in order to have a more of a like for like comparison here? No. It it's mainly rental in the increase in the rental income. That's the the most positive factor which is affecting. And and go looking into 2020 and more more recent transactions, what are you seeing in the market with regard to to yield yield requirements? Six plus is is a pretty decent number in this kind of environment. The yields are compressing. If it there hasn't been very many big transaction. The latest transaction was by in and that was around 12.80% somewhere. Okay. According our estimate. So it's it's it's getting below six and and how far it will go respectively. And and what kind of levels would you think to be appropriate when you when you're looking at the market? Are you are you actually on only above 6% or or you also I mean, you still have a pretty decent deal yet with yields coming down to five. Yeah. So how do think? Well, we have five do. We we do as good deals as we can, but the the deal we come up on the deal. It's dependent on the agreements on the tenants and so on. Right. Yeah. It's very important. It's a so not all not all will be in the text or not all will be maybe, you know, above or or something. It might be below. Okay. So so the focus is done on on getting the vault up and and having a more stable Yes. And the and the yield, of course, with the pay market yield, but it's difficult to predict. And when you look at your your investment capacity, I mean, one of the beauty with the with an increasing earnings capacity is that it's also enabled further growth. But within the current structure, I deal, LTVs are now up to 47%. Where what's what's the capacity for 2020 on on the investment side, like, the full year? Yeah. But beyond the next because we are not getting any prognosis for 2020. The only capacity is all that we give. So Yeah. But just you're talking about growth and just to to get a feeling of what's what's maybe not doable, but at least what what's what's in your focus right now? How much would you be able to depends on sort of the it still it depends on how fast the divestments will go of the non core holdings. And, of course, if if we would talk a bit longer term, if we got an old non core holdings, we would easily double our capacity from from today's level. So Right. So it's still dependent. So you would be more linked to the divestments or in in connection. If it's at least the divestments, of course, we have a we have a capacity to do already today, and and there are different ways of, you know, even further increasing it. If you look from our overall leverage, yes, it's 47% on the on the property portfolio. But if you look from our equity to assets, it's still very, very high. And Right. So it it basically gives us quite a lot of opportunity. Then, of course, the corporate markets are less liquid compared to to the Nordic market. So, you know, certain transactions, you know, might take take might take more time. And giving our very focused strategy is is is is another, you know, complicating and delaying factor. So Maybe a follow-up on the investment side. You were talking about a table, but on the project as well. Yeah. Is but is it too early to expect the project starts already in 2020? Is it more tilted towards '21 or '22? How should we look at the time? If everything goes according to plan, time will start with late twenty twenty, maybe early twenty one. Right. The construction, and that will take around maybe eighteen to twenty four months before the the cash flow comes from it. Kimmel will probably take longer time. Yeah. Okay. So And and the the the total investment for that the first project? It would be around 40. Okay. On that. Yeah. That's yeah. It is an exciting. Yep. Those were my well, if you don't, could could you update us a little bit on this sort of divestments and and what what you foresee for 2020? I mean, that loan definitely ended the year on a on a very strong note. And what's the sort of interest from from investors at this point? Is there a window Yeah. I I open up. When it comes to my nonmaportia, I cannot comment anything on on this. Right. The results are doing the company is doing extremely well. It has now been as strong and and as it did make good shape as it's ever. And, basically, the year started also on a very strong note with very strong development in sales and basically on all parameters. So we're looking at quite nice quite nice what leaves quite nice start of the year. We had a bit of a weaker consumer sentiment overall in 02/2019, which is now seems to be changing a little bit. And we made a nice acquisition, which adds on a new segment for us. And, of course, it it will require some rebranding and and redevelopment, of course, or improvements, but we we are very, very optimistic about that. So overall, the business is doing very well, and we're receiving nice dividends from our end. As you see. So the dividend yield is quite high. Last year is around 6% overall, and the company's valuation is still quite decent. So, I mean, unfortunately, I cannot tell about this, know, exit steps, but that's just the longer term to everything into refocusing company 100% to real estate. Maybe a follow-up from me on that one. I mean, we are seeing that distribution on the retail side in in well, globally, it might be temporarily interrupted by the corona coronavirus? What's the sort of what's the thought in in Melbourne on sourcing? Do they have have a more of a broader sourcing and and are less impacted, or how should we look at it short term? There could be there could be disruptions. Those disruptions could come in late in April, maybe May. And so from that perspective, there is a certain risk which are testing now basically on a day by day basis. But so far, we haven't received any kind of major warnings. Of course, most of the production is done actually in China, but there are also alternative sources we are also looking at. But this is the a risk that China has been sort of gradually at the market or the shortage from China has been decreased towards Bangladesh and other places. But, of course, there there is there is a risk, but it's very very very difficult process right now. So far, again, we we don't hear from our factories that they are shut down or they will be any major Okay. I mean, they are I mean, this is a mixed up. Okay. Those were my questions. Thank you very much. Yeah. And ecommerce is developing extremely nice. So Yeah. Thank you. And as another reminder, if you do wish to ask a question, please press 01 on your telephone keypad now.