Earnings Call: Q2 2020

Jul 17, 2020

Good morning, and welcome to this presentation of the East Lions interim report for the first six months of 02/2020. As you probably have seen, we have not only launched a new report, but we have also recently launched a new visual identity as you will see in today's presentation. The reports will be presented by Usdline CEO, Kirtouk Visdas Malkas and myself, Kismar Nimam, CFO and Tessich CEO. As usual, there would be an opportunity to ask questions in the end of that presentation, and the presentation will also be recorded and available on Eastline's website. Over to the presentation and Eastnine's CEO, Kasutis. Thank you very much. Let's move directly to page number four on the presentation, Eastnine in brief. Eastnine is a Swedish real estate company listed on Nasdaq Stockholm on the Midcat list. The only difference from being a a pure Swedish company is that our our properties are all in the Baltic. But at the same time, we serve mainly Nordic large corporates and international businesses. Our property value is around €336,000,000. Total assets, 440, and our rental potential for this year amounts to €20,000,000. In total, we manage 114,000 square meters of available area. On average, our properties are valued at €2,950 per square meter, and our market cap is around 2,500,000,000.0. Eastman's vision is to create and provide prime venues where ideas can flow, people can meet, and successful business can develop. We shall be the leading long term provider of modern and sustainable office premises in prime locations in the border capital. And here, I would like to stress the word modern and sustainable because if you look on our portfolio, it is really outstanding in those parameters. If we look on page number eight sorry. Number six, the portfolio consists of a real estate direct segment, which stands now for 76% of our total assets. We still hold a property fund number two, East Capital's managed by Saxo. That investment amounts to €23,000,000 and approximately 5% of our assets. And we still hold a investment in Matron Fashion Group, which stands for approximately 11% of our total assets. If you go to our core segment properties, page number seven, you see the full complex now of s seven that was acquired during the year, and this S 73 is our last addition that was completed during the quarter. Today, we hold approximately 13% market share in all offices in Vilnius. And if you look on the A Class segment, our market share is approximately a quarter of that of the total A Class segment. So we are quite a large operator in Vilnius. Today, we are actually the largest A Class property owner in offices in Vilnius. If we turn the page, you see other properties in Buder's Complex and Valdas. And if you could see on the map, they are all actually concentrated around the CBD area of Vilnius. If we move to Riga, where we started building up our position gradually. Today, we stand for approximately 3% of the total office volume in the market and approximately eight to 10% of the APAC segment. Our properties, Valjamalat and Sussanalois De Rolle are very centrally located and of very high standards. In Viga, we also have a number of development projects, one adjacent to the Aloys, and the other is in between Valdemar and the project. Both of them will enable us to increase our office area by approximately 50,000 square meters, which would when completed, will definitely turn us into the largest player in the market. What is important to stress actually that all of our properties have very high environmental certification. If you look on the Lithuanian properties, we have BREED Excellence and lead platinum certifications for most of it. Veltas is now in the ongoing in the certification. But if we look in media, we just received lead platinum certification for a lawyer as the lawyer, and randomized centers will gradually be the certification will be initiated. I will speak speak about this a bit later in the presentation. If we move to our tenants, we have very strong tenant base in our portfolio. Danske Bank stands now for 28% after completion of s three s seven three part. And followed by Keviya, Sveta, Bismab, all of these are very strong Nordic names. But if you look here on the total list of top 10, you see a number of internationals. So all in all, we have a relatively high concentration to a number of bigger players, and that concentration will gradually go away when we continue to build our portfolio. But at the same time, having such strong tenant base also makes our revenues very stable. We have an average remaining eastern of around four point seven years and for the largest demand, the largest demand for 5.2 on average. If we look on the effects of the pandemic, those are limited, very much limited to us. We have applied some discounts during the business with tax during the quarter, which now totals to 0.6% of our total annual rent, which is not very significant. At the same time, certain discounts were significant to most vulnerable tenants where we still expect them to continue, and and they needed our support. Those are mainly related to the restaurants and services in our office centers. If we move to page number 12, property funds, It's a minor holding. Our attention is to divest this over time. A realized value change was $70,100 €700,000 approximately. No dividend was paid, paid mainly due to Solana. Total return of around 3.3%, and total value now in available power holding is around €22,000,000. If we move to Melbourne Fashion Group of investments, Melbourne actually surprised us most during the quarter, and the surprise was very positive. Despite very, very big challenges for the business, Madame developed actually quite strong given the circumstances. If you recall, most of our own stores were actually closed, physical stores. They closed beginning since April and gradually started to open during May and June. Today, approximately 80% of the network is open as of the end of the quarter. So that figure was down 75%. So all in all, the revenues dropped by 2% for the company during the first six months. Ecommerce was central here, and e ecommerce sales grew by a 140% during the six month period and amounted to 43% of the total sales. That figure is somewhat on the high side looking forward because and it was a result of basically all physical stores being closed for the most part of the second quarter. But we also managed to to to to actually surprise on the cost side, and company made a positive EBITDA figure. Second quarter EBITDA was around 9%, and in total, 0.4% EBITDA margin for the six months. So very, very strong performance given the circumstances. The value of the whole thing was adjusted to a change in the value of ruble. And, yeah, we look forward to to quite positive developments in the future. Actually, June was very, very encouraging. If we move to page number 14 and sustainability, what we do here. As I mentioned, Abu Dhabi was certified with lead platinum certification. The new left white s seven three has been excellent certification, which now means that 84% of our door space is actually either lead platinum or brief accident certified, which is on the higher end of the the certification brackets, which we are very, very proud of. Certification process ongoing for Veritas in Vilnius and will soon be initiated for Valdaba centers in Riga. Those two properties are a little bit older. And, yeah, so we'll see where we will end up with them. We also start reporting under GRESP this year. So we will have in September our official score and working quite actively actually on green leases and green financing. We're also in the process of implementation of a web based supplier review system. So, gradually, we're building up our capacity to also engage socially. And now over to you, Vipali. Thank you, Satish. If we have a short summary of the report, we can say that there were strong results from property operations during the whole period and positive value changes during the second quarter. And we start with some key figures on Page 16. The occupancy rate increased by 3.4 percentage points during the period, of which 0.4% during the last quarter. This means that the the properties are more or less fully less. First up ratio increased compared with the first six months of 02/2019. This is a very high level. The average rent increased in comparison with year end. It was 14.9 compared to 14.7 per square meter a month. By the March, it was €15. LTV is low. It's higher than year end, but lower than at the end of last quarter when it was 50%. Return on equity real estate direct was positive during the period after a negative first quarter. It includes profit from property management and a positive value change during the period for properties. Return on equity total was negative during the period due to negative unrealized changes in value for NFT, but it was positive during the second quarter. Profit from profit and management per share almost doubled compared with the same period last year. Earnings per share was negative due to MFT, but improved during the second quarter. And the long term net asset value in in SEAT, it's affected of both profits and the exchange rate, thereby decreased during both the last quarter and the period. But in euro, long term NAV increased during the last quarter. Continue with page 17, the income statement. And f seven three is included from the June from the twenty third to be exact. The rental income in a comparable portfolio increased by 7% during the period and even more during the last quarter, 8%. The rental income is affected by higher occupancy rate as well as higher rental levels. Other financial expenses mainly consist of commitment fees for s seven and will, in the future, disappear. Profit from property management increases more than rental income in percentage, and this is a clear scaling up effect. Fixed costs do not increase at the same rate as rental income, and the effect is even clearer during the second quarter than if we look at the first six months. We have negative changes in value, as mentioned before, for all items during the first quarter and positive for properties and MFT during the second quarter. We haven't received any dividend from investments during the period due to the effects from the pandemic. They usually occur in the second and fourth quarter, and tax consists of deferred tax in Lithuania on the difference between fair value of the properties and the residual value of course tax purposes. Over to page 18 and the statement of financial position. Taking possession of F7 three in the June has increased property value and debt and decreased cash. The property value was also affected by positive unrealized changes in value during the second quarter, partly related to S7 III and partly to higher rent levels. The value of other investments decreased during the first half of the year due to MFE mainly, but still the second quarter was positive. To decrease during the third quarter, but increased during the second. Other assets and other liabilities have temporarily increased due to VAT effects on INS seven three. They will be netted according to forward. Page 19 and the earning capacity. This is not a prognosis. It's a snapshot of the potential in terms of profit from property management based on the situation by the June. There have been some changes during the second quarter. The acquisition of S7 three is the most important fund, and it's it's now included in the figures. Some costs for employees directly related to property administration have been transferred from central administration to property expenses. The occupancy rate has increased during the second quarter, and we have, in the future, no more fees for external loans. And as in the income statement, we can also see economies of scale in the earning capacity. Profits from property management increases more than rental income in percentage, and this is really important. Page 20 on financing. Not much changes during the quarter, only new financing in in relation to the S7 three acquisition. The LTV increased loan maturity was a little bit lower, decreased a little bit during the quarter to three point one years, and interest maturity, two point five years. 73% of total loans has been fixed by interest rate swaps. We have no capital market financing. The first loan maturity is in September 2021, and we have received signals from the bank that interest margin is more or less back on the same level as before the pandemic. Page 21, share and shareholding. The share price has decreased during the first quarter and increased during second. The share price was 117 by the June. I think it's trading around $115.16 today. We have approximately 73% Swedish shareholders, and the list of the major shareholders is more or less unchanged during the last quarter. So over to Thank you. If we move to page number 23, we want to know is that during the quarter, there was an annual general meeting, and we have new members in the board with Christian Hermelin, former c f CEO of Faberge, and David Vasardy from Kunxsieren joining us. So today, we have a very, very strong board with very strong re real estate background. If we move further to y p nine, we have actually a unique opportunity with a combination of relatively high yields in The Baltics compared to the Nordic capitals, relatively low rent selling levels and similar type of financing opportunities as here in The Nordics, which makes actually our story much more compelling given the the spread between the financing and the deal and assuming a relatively similar type of risk. And if you look on on our performance compared to most of the Nordic peers that have already reported, they are pretty much doing very similarly, but slightly higher growth and higher yields. Our property portfolio is very modern with highest environmentally environmental rating. As I mentioned before, late platinum and premium excellent stand for 84% of the total space that we have. Very stable tenant base with relatively long contracts. Remaining contract is four point seven years. And strong and sound financial position with 49% LTV. And now today, no outstanding capital markets financing. And at the same time, we have a fantastic growth opportunity in the market, both through new acquisitions coming in the future, but also development. And the market is actually developing relatively rapidly right now. In the background, you can see a skyline actually of business, and it actually looks completely different just ten years ago. If you move to last page, our future focus, of course, looking at the future today, our growth is our core focus. We look to acquire more cash flow generating assets, and you can see the effects of those acquisitions on our profitability. And that, of course, remains our core focus today. Of course, development of remaining non core holdings will allow us to do that and looking to develop the new project as mentioned before, the pine and and the chemo project in Riga, which are in the focus. So with this, you open for questions. Thank you. We will now begin our q and a session. Ladies and gentlemen, if you wish to ask a question, you may press We have one first question from mister Richard Amber from Eric Pension Bank. Sir, please go ahead. Morning, guys. I have just one question. Can you elaborate a bit about the transaction market in The Baltic? Because there have seen some transactions in Talent, for example. Do you believe that the pace will increase now during the summer and autumn? Yes. I think, in general, it has been much warmer. Some of the transactions were put on hold, but we've seen actually three larger transactions. One bigger transaction in Tallinn, one completion taking place besides our completion in in Vilnius. So things that have been started before pandemic, I think they are going through, especially when it comes to higher quality, the top properties. But at the same time, I think overall transaction volumes will probably still be significantly lower this year compared to to to where we were last year. But we hope that with travel restrictions being lifted now, hopefully, by the end of this quarter, we will see much more of of the transactions taking place. By the way, I think I was referring only to Sweden. But if you look at other countries, the the intra travel in the Baltics is now fully free. And I think, you know, most of European countries can also access the Baltics right now. So it's getting better and better. Okay. And the yield levels of those transaction that that's been working on Telenazilius, are they on the same level as your yield? They were at the same level as they were pre pre crisis, Somewhat lower maybe even. So no no shift in yield. No significant shift in yields. Cool. That was all for me. Okay. Thank you. Thank you, sir. We have no other questions. Ladies and gentlemen, I would like to remind you that if you wish to ask a question, you may press We have no other questions. Sorry. No further questions? No. Okay. Okay. So thanks. Interim report for January and September will be released on the November 5. Thank you. Thanks for listening in. Thank you, and have a nice summer, everyone.