Earnings Call: Q1 2020

May 12, 2020

Good morning, and welcome to this presentation of Eastline's Interim Report for the 2020. The report will be presented by Eastline's CEO, Kastuti Skarsnauka and myself, Kistuszkahninmann, CFO and Deputy CEO. As usual, there will be an opportunity to ask questions in the end of the presentation either over the phone or on the website. The presentation will also be recorded and available on Eastline's website. Over to the presentation and Eastline's CEO, Kasooris Dasnauska. Thank you very much. And we move immediately to page number four describing the effects of COVID nineteen. We want to start with this right away and then move into further presentation. We stand very strong in this crisis right now with very solid tenant structure, long leases, long duration of our leases, 95% exposure to office premises, and so far, effects of the COVID nineteen on our real estate operation has been really minor. We also have very strong financial position with strong cash position, LTV at 50%, capital tie up of three point three years. There are no maturing loans during this year and only a minor part maturing next year. We do not have any capital markets financing either. In general, the we entered this crisis on a very solid base. We had a very strong development in the beginning of the year in the market. And with, you know, very falling property yields and and and strong rental market, of course, there is some stock during the crisis right now. But we also have also valid all of our our full portfolio externally in this situation. And now portfolio is just marginally affected mainly for two reasons, down adjustments of inflation forecast and expected minor rental losses. So far, losses are really minor and significantly lower than expected. Of course, the biggest implication on us is the value write down on Mellon. Mellon Fashion has been very badly affected in the crisis as its all of its stores were closed during April. Today, we operate only 26 stores after a start of relief of some of the quarantine measures and will gradually be coming back, and I will talk more about Mellon later. But it actually resulted in a €22,000,000 write down in value, and half of this write down comes from the weakened currency as ruble slighted as a result of the very low oil prices as well. And the other half is a more conservative view on the sales and effects of of the closures right now. In terms of our operation, we follow all the official recommendations. None of our staff has been ill, actually, so far. We're very happy for that. And, overall, our overall properties are operating. We've also done some community initiatives supporting hospitals and our restaurants by buying food from them and delivering to the hospital personnel. And during April and May, we're serving now 230 meals a day to to the Vilnius hospital. So if we move to our company presentation, Eastline, in brief, for those who listen to us first time. We are a Swedish real estate company listed on NASDAQ, Stockholm, Midcap, and headquartered in Stockholm. Our core tenants are Nordic tenants operating in the Baltic countries, but also servicing their main businesses and core businesses in the Nordic countries. Our property portfolio consists of prime office buildings in central location, central business districts with top quality portfolio. If we move to Page seven, you see our asset distribution, total assets of $4.00 €3,000,000 of which majority is in properties today. Non Fashion Group constitutes 11% of total assets, and we have one fund investment consisting 5% of our assets. The rest is properties and cash. And if we look on our property portfolio, majority of it, 80% is in values, both in value as well as in square meters. So why do we think Baltic capitals are so attractive? And over the last ten years, actually, Baltic markets have been growing twice as fast as or both economies have grown twice as fast as average AU economies. So there's a big convergence movement going on, and we believe it will continue. All of the countries are members of EU, Eurozone, and NATO. We are operating in euros. Countries have done a lot to improve the business environment, and Lithuania ranks, for instance, 11 in the ease of business. It's just after Sweden. So we are very similar to to to the Nordic markets. Estonia being eighteenth globally and Latvia, nineteenth. So all of them top the list of of the country's business environment business friendly country business friendliness. We have very strong demand for office space, operating in relatively low vacancy rates. Very many international tenants at Nasdaq, Danske, Amodis, Uber, and Swedbank. And maybe not all of these names are our tenants, but you see Danske, Uber, and Swedbank are actually among our tenants. We have very stable real estate markets, disciplined financing, quite attractive yield levels between 5.8 to 6.2%. And this in combination with significantly lower rental levels compared to any of the Nordic peers. You see the on the graph on the right makes a very attractive combination as the spread between the the financing cost as well is is very, very high. The financing conditions are basically very comparable to to the Nordic market. So this combination makes our case very appealing. If we move into property portfolio, you can see some pictures on page number nine and page number 10. The the far right picture on page Number 10 is property called S 73. This this property is something that we expect to complete now during the second quarter. There was a delay due to some administrative technical matter for the separation of land, and that is now in the process to being resolved. So we still expect this completion to happen at q in 2020. And if you look on our position in the market, East 9 has 80,000 square meters of A class office space. We are definitely the largest today in the owners market in the A Class segment, concentrated in the CBD area around Constitucia Street, and we intend to further build on that position and offer being having a very strong offer to our tenants in that area. If we move to Riga on page number 12, we can see our portfolio with the latest acquisition being Valdemarle Center. It is the most central low centrally located office building in in in Riga, and I see a small mistake actually that the tenants are actually moved between the Val De Mara and Aloe Esperoia. So they are just yeah. A little bit. Yeah. They they they mix a little bit, but, otherwise, it's it's it's correct. And, of course, if if we page move to page number 13, the future projects in Riga, We have two development projects. One is in building permit process now, the pine, and we expect some news of passing the first stage of that during this quarter still and having a final permit by the end of the year so we can start constructing it. And the second is the acquisition that we made in q four last year. It's a Kimmel project, which we are now developing a new concept for. But both of them will give us additional 54,000 of leasable area on top of our 20,000 square meters in the area today. On page number 14, you see where our portfolio concentrated also in relation to competition. And total premium office market stands for approximately 100,000 square meters in Riga, which implies that actually our small position of 20,000 is already a significant position in this market as well. If we move further on page 15, you can see our tenants. We have 160 rental agreements and 120 tenants. Our 10 largest tenants constitute for 64% of our contracted rent. Average lease term is five point five years, and 10 largest tenants is four point nine years. Danske Bank is the largest tenant today with 70% of annual rent, and the share of Danske will increase further due to acquisition of S7 III. However, as portfolio buildup will continue, that position will gradually decrease. And if we move to page 16, very briefly on East Hector border property fund number two, total return of 1.7 1.6% during the quarter, derives mainly from net operating surplus. The firm has five properties in office, logistics, and retail, mainly food retail of that in for the for the retail part, and we plan to exit that investment still during this year. If we move to Melbourne Fashion Group, of course, it's set to report a 32% write down of the value. However, we still believe that this company has extremely strong chance of becoming a strong winner out of this crisis. The company went into the crisis on a very strong position, very solid financial position without any debts, very strong growth. And during the quarter, we see 37% growth, but February growth was 60% almost. We have very strong growth on our ecommerce channel that I have been addressing for now many quarters. Ecommerce standard was 29% of our total sales. And today, when most of our physical stores have to be locked down due to Corona situation. Internet stands for almost 100% of our sales. And that growth is still above 50% if you look on a month to month basis. So even if it has been somewhat negatively affected during the crisis, the growth on ecommerce is still very, very strong. We see also strong growth in stores that are open. As I mentioned, 26 stores. Actually, now we see the message that we have 30 stores open today this this month. So 30 out of this in these 30 stores and the ones that have been operating for a couple of days, we see that actually very strong demand and very strong sales. So it gives us a lot of confidence that once situation will normalize, we will continue in a good way. And now I hand over to you, Guismarie. Thank you, Sotis. East Main released the best ever results for a quarter in terms of profits from property management due to larger portfolio cores, but also due to a higher occupancy and higher rental level. The coronavirus pandemic has had a large impact large negative impact on the value, of course, of m h MSG as Kasutis said. We continue with page 19. Key figures in brief divided into four categories, efficiency, rental leases, financials, and share related. The yield requirement in the valuations was 6.1%. The surplus ratio has been stable around 90%, which is a very high level. The return on equity total is negative mainly because of the effects on MFG and the real the return on equity for the real estate direct is slightly negative due to the corona pandemic's effect on the property values. Rental leases, the average rent was €15 per square meter a month at the March compared to 14.7 at the end of last year. The was approximately the same as by year end, four point nine years. Occupancy rate increased by three percentage points during the first quarter to 95.7, which is more or less fully let. Financials, LTV increased to 50% after we took a new loan on an existing property, and it's only the real estate that is leveraged. Equity assets ratio decreased to 61% due to that loan and to negative value changes, but it's still on a very high level. Average interest level, stable around 2.3%. Share related profit from property management almost doubled to 0.11. Earnings per share negative due to negative unrealized changes in value, and the equity and long term NAV per share was one hundred and twenty six and one hundred and thirty one by the end of the quarter. Page 20 highlights during the quarter. The average rent level of net letting increased to high 16.3 per square meter a month, which can be compared to fourteen point point seven by the end of last year. Net less seems slightly negative, but should be viewed in the context of the high occupancy rate. And the occupancy increase, as I said before. Page 21, the income statement. Rental income, profit expenses, and interest expenses increased in comparison with the same quarter last year due to the high due to the larger portfolio. But rental income and the increase also increased because of higher occupancy and higher rental levels, so it's a mixed effect. Other financial expenses contains mainly equipment fees for the loans related to the coming acquisition of s seven three. We had a small unrealized value chain for properties less than 1% and, of course, also a negative effect on MFE as said before. Over to Page 22, the statement of financial position. And in this page, we compare the end of quarter with the end of last year. The value on the property portfolio is almost unchanged. No acquisitions, but a small value in the change change in value of the properties. Long term securities decreased. Cash increased because of the new loan. And we can say that East Main also received an overdraft facility of €3,000,000 during the quarter, which has not yet been used. Equity affected by the unrealized changes in value and liabilities to credit institute has increased with the new loan. Over to page 23, earnings capacity. It was new during the last quarter, this page. And as you know, the earnings capacity describes theoretically the company's current earnings as of the March. Figures are based on the property portfolio by the March and should not be mistaken for a prognosis. We don't make any assessment of the rental levels, vacancies, expenses, and so on in the future. But as you can see, there is a substantial increase during the quarter due to lower vacancies and higher rents. NOI is increasing more than rental income and profits from property management even more. This is natural since design mainly have triple net agreement and that central administration is unchanged. S seven three is not included in the figures and will improve the figures even more after it has been taken session on. Over to page 24, share and dividend listed at Stockholm Nasdaq Nikka, as you know, We have slightly more than 22,000,000 shares, of which 1.2 in treasury. The board has proposed a dividend of 2.70 to be decided later today at the AGM. Page 25. The number of shareholders decreased from 5,600 to 5,400. 72% are Swedish, and around 55% of the foreign are investors from The US. What about the future? Yes. Thank you. And, of course, our focus remains on building up our portfolio. So of course, first is to complete the acquisition of S7 III during the coming quarter. We still continue looking for new opportunities and buying portfolio within our strategy. We're still looking for divesting remaining on core holdings. Of course, divestment of Mellon will be delayed due to corona, I have to say it right away. And it depends a little bit how this pandemic will evolve and and what implications it will have. We've we're proceeding with the planning stage and development of the pine and cumin. And, of course, by handling the situations from pandemic now in in in the number of discussions, we see also a lot of interesting opportunities where we can find actually value creative solutions both for our tenants, but also for us. And we are working quite actively, and we see, actually, that we could improve efficiency of some of the portfolios and even further some profits. So yeah. Yep. On that, we open for questions. Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw a question, you may do so by pressing 02 to cancel. That is 01 on your telephone keypad. And just as a reminder, that is 01 if you would like to ask a question. And our first question is from Richard Inge from Erik Pence Bank. Please go ahead. Your line is open. Morning. Could you please elaborate a bit about the transaction market in The Baltics and if you see any other actors on the market right now? Just before the crisis, we saw increase in competition from German players and even some other players, like, coming from South Korea and other places, which also indicated that, you know, there has been quite strong interest in the market. Of course, right now, there's a travel ban. So if you go to the Voltage, you will be put in quarantine for two weeks. So I guess today, it's really very calm, and we'll see how it will all evolve. But overall, just before the crisis, we saw an increased interest among internationals. Okay. And there seem to be no further questions. I will hand it back to the speakers for any final comment. So the interim report for January, June will be presented on the July 17. So thanks for listening in, ma'am. Okay. Thank you very much, and until next time.