Hello, and welcome to the Eastnine AB Year End Report 2019. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Today, I am pleased to present Kestutis Sasnauskas , CEO, and Britt-Marie Nyman, CFO and Deputy CEO. Please go ahead with your meeting.
Thank you very much for this introduction. With this, I would like to move straight into page number four of our presentation, the vision and mission. Eastnine's vision is to create and provide prime venues where ideas can flow, people can meet, 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 capitals. For you who do not know, Eastnine is a Swedish real estate company listed on Nasdaq Stockholm Mid Cap, headquartered in Stockholm. Our main tenants are Nordic companies with international operations. We have very nice sustainable properties in the core segment of the core Baltic 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 latest 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 LEED and BREEAM Excellent certification. We aim to be the prime with the best landlord within our segment in the office segment in the CBD areas. We have conducted our employee survey, which resulted in a very high score, by a Great Place to Work, an external advisor, where 93% of our employees consider it to be a great place to work. We also are reporting under GRESB. We started already back in 2019. 2020 will be the first official score, 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 comprise now EUR 420 million, with the majority being in the property direct segment. We still have two non-core holdings, East Capital Baltic Property Fund II and MFG. 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 the Baltics so much. We see a solid GDP development in around 3%. We expect that to continue throughout the next coming three years. We see a very strong convergence trend towards European averages. All countries are members of E.U., Eurozone and NATO. All countries rank very high on ease of doing business. Lithuania ranks on 11th place, just behind Sweden, which is on the 10th. Estonia, 18th, and Latvia, 19th.
That's a global rating, which is very high for those economies. We have very strong demand for office space. We generally operate in relatively low vacancy rate environment today, and we see many internationals established in this market. Nasdaq, Danske Bank, Nordea, Uber, Swedbank, just to name some of them, and most of them actually in this list are also our tenants. We have disciplined real estate financing and transaction market with prime yields in the area of 5.8% or 6.2%, which is around 200 to 300 basis points above the Nordic peers. 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 our last presentation.
If we move to page 10, where you see the picture of stage three in Vilnius. That is about to be taken over during first quarter. There has been a minor delay in that takeover, but it is related entirely to some administrative technical issues within Vilnius Municipality. If we look on page 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. Basically in Vilnius CBD, we are already the largest player. Almost every 10 sq m of office overall in Vilnius is actually in our possession today. In the Vilnius CBD markets and the prime markets, our market share is significantly higher. We also plan to continue to strengthen our position in the central area of Vilnius. If we move to Riga, you see three properties here.
The Alojas Kvartāls , that property that was acquired together with Alojas Biroji will be redeveloped into something. If you look on page number 13, it's our new concept that we are in the process of development, will be the first wooden office constructed entirely out of wood. Our most recent acquisition is the Kimmel Quarter. You see just some of these visualizations. Today, it's a land lot with a possibility to develop up to 38,000 sq m of office and retail and more mixed-use type of property. That will be developed in the future as well. If we move to page number 14, you see our property on the map. Riga is much more spread out over the city. There is no clear CBD established today. 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 funds. We have nice returns from Baltic Property Fund II, growing almost 5% during the year, including the dividend. The fund has five properties. That fund is bound for divestment from our side. It will either be sold as it's in the exit phase, either sell it or we either develop it through the sale of other underlying properties. Baltic Property Fund II was already sold at the end. Sorry?
Three.
Yeah, sorry. Three was sold already in the last quarter. If we move to Melon Fashion Group. Melon Fashion Group has made very nice return this year. We have a total return of 42.6%, including the value changes and realized dividends. We received dividends amounting around EUR 2.8 million from that company. We had a nice value increase of around 37% during the year. Of course, it's driven by very strong performance of Melon during 2019 and very strong outlook for 2020. Achieved sales are up 30% during the year. E-commerce is growing even faster, approximately 127%. We have very strong margin growth, 37%. If we adjust for currency effect, the margin was up 43%. Current valuation constitutes approximately 5x EV and EBITDA multiples, which is, given this type of performance, still considered quite prudent, I would say.
If we move further, I would hand over to Britt-Marie.
Thanks, Kestutis. Eastnine released a property 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 is about 5.3% during 2019. Seems a bit low since we took possession of a majority of the acquired properties in the fourth quarter. Yield is measured as NOI in comparison with the average of opening and closing balance of that property value. That's why. Surplus ratio increased for the second quarter in a row to 90% by the end of 2019, mainly due to higher occupancy rate. It was 84% one year ago. Return on equity increased from 6.5% in 2018 to almost 14% in 2019, mainly due to increased profit from property management and unrealized changes in value.
Rental leases. The average rent was EUR 14.7 per sq m a month at the end of 2019, compared to EUR 14.5 at the end of last year. The WALT increased to five years to expiry, and the increase was most substantial during Q4 after taking possession of S7-2 with Telia on a 9+ year lease. The occupancy rate increased by 2.5% during Q4 and almost 4% compared to December last year. 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%. Some share-related key figures. Earnings per share more than doubled to EUR 1.66 per share compared to EUR 0.71.
The NAV was EUR 133 by year-end and the EPRA NAV was EUR 137, almost the same as the share price by the year-end. Page 19. Some highlights during Q4. We had a positive net leasing of EUR 99,000 annually. The average rent was up on the new agreement, EUR 15.2 per sq m a month compared to EUR 14.7 by the end of 2019. Some of these tenants will move in during the first quarter this year. We took possession of Valdemara Centrs in Riga and S7-2 in Vilnius. We acquired Kimmel in Riga and we sold the fund at NAV. Page 20. If we started the fourth quarter in comparison to previous quarters, rental income, property 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 S7-2. We saw positive unrealized value changes for properties, derivatives, and investments. 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 the portfolio almost doubled. 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 are almost the same level as in December last year.
We sold the Baltic Property Fund, and this is explained by the value change in MFG. Cash has decreased in pace with Eastnine taking possession of S7-1 and S7-2. Equity increased due to profit. Liabilities increased because of new loans for acquisitions and on existing properties. Page 22. earnings capacity. Since Eastnine 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 not be regarded as a prognosis. The earnings capacity describes theoretically the company's current earnings as of the end of December 2019. Figures are based on the property portfolio for the end of December. Earnings capacity doesn't contain an assessment of the development of rent levels, vacancies, property expenses, interest rates, et cetera.
As you can see, there is a substantial increase compared to the outcome of 2019, mainly because of a larger portfolio, but also due to lower vacancies and higher rents. In 2019, rental income was a little bit higher than EUR 13 million and profit from property management, EUR 5.5 million. Substantial higher than that. We also have a contract to take over the property S7-3, and that is not included in this table. To be taken over during the first quarter and at an agreed purchase price of around EUR 43 million. The property is fully let to Danske Bank. The annual rental income amounts to approximately EUR 2.5 million with an estimated surplus value as high as 90%. If we include S7-3 for 12 months, rental income is close to EUR 20 million. Page 23. The share is listed at Nasdaq Stockholm Mid Cap, as you know.
We still have 22 million shares, and we have repurchased 1.2 million shares. We haven't repurchased any shares after Q1 this year. The board proposes a dividend of SEK 2.70 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 SEK 149.
159.
159, alright. That's good. Shareholders page 24. The number of shareholders increased by 11% to more than 5,600. 71% of these are Swedish, 16 foreign, and 30% of unknown nationality. About 50% of the foreign investors are from the U.S. We have two major shareholders as before, who own more than 10% of the shares. Most of the shareholders on the top 10 shareholder list have increased their shareholding during 2019. What about the future?
Okay. Thank you. Of course, on our priority list is to take over S7- 3 , which we expect to happen during Q1. As I mentioned before, 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 within our selected areas, and we continue working on this. Hopefully there will be more news coming in the future. Of course, our focus is also to transform the company into a pure real estate play, which means that no core holdings will be there. It's also top of our agenda to work with that. Finally, but not least, to continue with our development projects that we see as very, very exciting opportunities.
That will probably, not probably, but once completed, actually will bring our position in Riga to closer to 70,000 sq m, and definitely, we will become the largest player by only executing these two projects. This is briefly for today, and we are now open for questions. Operator?
Thank you. Once again, if you would like to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Niclas Höglund from Nordea. Please go ahead. Your line is now open.
Yes, good morning. It's Niclas Höglund from Nordea. A couple of questions for me here. Let's start out with the property portfolio. The like-for-like rental growth or decline is clearly less now in the fourth quarter. You're talking about continued higher rental values. Should we expect the underlying rental values to start to increase now again already from the first quarter, or is it still some vacancies holding back performance?
Yeah, because the like-for-like portfolio is actually one property mainly, and well, it was two properties, basically. It's 3Bures-1, 2 and Alojas Kvartāls. These properties are now fully leased. Not all tenants, well, almost fully leased, to be very correct. Tenants are moving in, and we'll probably see a like-for-like growth in Q1, but definitely in Q2. Overall, the outlook is very positive.
Right. When you look at the rental value, and we were seeing a steady increase and the higher potential for rent in the portfolio if we have the vacancies. When you look at the potential for renegotiation over the next two years, do you see a potential for an uplift in the current portfolio environment, or should we expect the rental levels to be stable on these higher levels in the next one to two years?
In general, rents have developed upwards even during the last quarter. Definitely when there will be turn in tenancies, we will see an uplift, most likely, yes.
Okay. On that note, could you help us out with the underlying CPI adjustments for 2020? What do you expect?
Around 2%.
Around 2%. It's pretty above the Nordic standard. Okay. Moving over to values also in the property portfolio. Values have a decent increase here in the fourth quarter. You mentioned that it's around 80/20, or no, 60/40 higher rental income and 40% lower yields for the full year. Is it more or less the same trend also in the fourth quarter, or is it more tilted towards rents?
I'm not sure that I have that figure actually. I have to look into that.
Yeah. Maybe on that note, we are also seeing that the valuation yield is coming up in the portfolio into mix. Is it possible to get a feeling of how much of the uplift in valuation yield that is related to the mix effect in order to have more of a like-for-like comparison here?
No, it's mainly rental, in the increase in the rental income.
Right.
That's the most positive factor which is affecting.
Go looking into 2020, and more recent transactions. What are you seeing in the market with regard to yields and yield requirements? 6%+ is a pretty decent number in this kind of environment.
The yields are compressing. There hasn't been very many big transactions. The latest transaction was by Deka in Vilnius, and that was around 12.80% somewhere.
Okay.
According to our estimate. It's getting below 6%, but how far it will go, speculative.
What kind of levels would you think to be appropriate when you're looking at the market? Are you active on only above 6% or you still have a pretty decent yield yet with yields coming down to 5%?
Yeah.
How do you think?
Well, we have.
It 's hard to do.
We do as good deals as we can, but it's difficult with some of the deals.
It's dependent on the agreements on the tenants and so on.
Right.
It vary quite a lot, actually. Not all will be in the mix or not all will be maybe above or some might be below.
Okay. The focus is then on getting the vault up and have a more stable
Getting the vault up.
Tenants like you have.
Yes. The yield, of course, with okay market yields, but difficult to say.
When you look at your investment capacity, one of the beauty with an increase in earnings capacity is that it also enables further growth. Within the current structure, LTVs are now up to 47%. What's the capacity for 2020 on the investment side, like a full year?
Yeah. Niclas, we are not giving any prognosis for 2020. There are no capacities or that we give.
Yeah, just you're talking about growth, just to get a feeling of what's maybe not doable, but at least what's in your focus right now. How much would you be able to?
It still depends on how fast the divestments will go of the non-core holdings.
Right.
Of course, if we were to talk a bit longer term, if we get an all non-core holding, we would easily double our capacity from today's level.
Right. It's independent. It would be more linked to the divestments or in connection with.
It is linked to divestments. Of course, we have a capacity to do already today, and there are different ways of even further increasing it. If you look on our overall leverage, yes, it's 47% on the property portfolio, but if you look on our equity to assets, it's still very high.
Right.
It basically gives us quite a lot of opportunities. Then of course, the Baltic markets are less liquid compared to the Nordic market. Certain transactions might take more time. Given our very focused strategy, it is another complicating or delaying factor.
Maybe to follow up on the investment side, you were talking there, table, but on the project as well. Is it too early to expect the project starts already in 2020? Is it more tilted towards 2021 or 2022? How should we look at the timing?
If everything else according to plan, Pine will start late 2020, maybe early 2021.
Right.
The construction, that will take around maybe 18-24 months before the cash flow comes from it. Kimmel will probably take longer time.
Yeah. Okay.
So.
The total investment for the first project?
It would be around 40.
Okay.
Maybe more than that. Yeah.
Decent size. Yeah. Could you update us a little bit on the sort of divestments and what you foresee for 2020? Melon definitely ended the year on a very strong note. What's the interest from investors at this point? Is there a window you're starting to open up?
When it comes to Melon, unfortunately, I cannot comment anything on this.
Right.
The company is doing extremely well. It has never been as strong and has been in a good shape as ever. The year started also on a very strong note, with very strong development in sales and basically on all parameters. We're looking at what at least quite a nice start of the year. We had a bit of a weaker consumer sentiment overall, in 2019, which now seems to be changing a little bit. We made a nice acquisition, which adds on a new segment for us. Of course, it will require some rebranding and redevelopment, of course, or improvements. We are very, very optimistic about that. Overall, the business is doing very well. We're receiving nice dividends from Melon. As you see, the dividend yield is quite high. Last year it was around 6% overall.
The company valuation is still quite decent. Unfortunately, I cannot tell about this, I guess, but definitely longer term, we are looking into refocusing company 100% to real estate.
Maybe a follow-up, if I may, on Melon. We are seeing that distribution on the retail side globally might be temporarily interrupted by the coronavirus. What's the thought in Melon on sourcing? Do they have a more of a broader sourcing and are less impacted, or how should we look at it short term?
There could be disruptions. Those disruptions could come in late April, maybe May. From that perspective, there is a certain risk which we are assessing now basically on a day-by-day basis. 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. As the market or sourcing from China has been decreased towards Bangladesh and other places. Of course, there is a risk, but it's very difficult to assess right now. So far, again, we don't hear from our factories that they are shut down or there will be any major delay.
They are a decent mix then. Okay. Those were my questions. Thank you very much.
Yeah. e-commerce is developing extremely nice, yeah.
Okay.
Thank you. As another reminder, if you do wish to ask a question, please press zero one on your telephone keypad now.