Earnings Call: Q2 2021

Jul 14, 2021

Hi, and very warm welcome to East 9's First Half Results. Today, myself, Jestertis Esnauskas, I'm CEO and with me, Britt Marie Niemann, will present you our first half results and go through East 9 in brief. We will talk about the highlights, our broadened business concept, about our property portfolio, sustainability, financial reports and much more. So on this, I will start. And for you who are not so familiar with us, East9 is a Swedish real estate company focusing on the properties in the Baltics. Today, we are the largest tenant in with the largest landlord in Vilnius, we are focused so far have been focused on offices, But now moving into a new segment that I will tell you about is logistics. Whilst we are focused on the Baltic in the Baltic countries on the Prime Offices and Logistics, our core tenants are actually very much Nordic and international. So we are exposed to very international businesses. And if you look on us in brief in figures, you see that our assets are around €500,000,000 Our property portfolio is around €400,000,000 130,000 square meters of lettable area of top prime offices, valued at 3,000 roughly €3,000 per square meter. Our rental income is around €23,000,000 on our rental capacity, and our market cap is SEK 3,000,000,000. If we look on the first half of the year, we deliver strong results. We continue growing. Our top line is growing at 18%. And we're also very happy to see that our profit from property management is growing even faster despite we have higher vacancies and primarily in region. If you look at our markets as such, they have been very stable during the pandemic, especially Vilnius, we see that actually our operations have been extremely stable. But we also see that the market as such has developed quite positively in general. Vilnius has a very, very strong take up figures in the first half, approximately 45,000 square meters. And if we basically today, just a couple of days after the quarter, we see already 60,000 take up in Vilnius. This has to be compared with the total market size of around 1,000,000 square meters. So we expect that 100,000 will be definitely reached this year, and it's 10% of the total market in new take up, which is very, very strong for very strong given the pandemic situation in offices. Riga is also picking up. We see stronger development in the region, we see a take up somewhere around 200000 square meters in the first half. So of course, somewhat weaker than Vilnius, but Regia's market is a bit smaller in Offices and also picking up. So all in all, we see quite positive development overall. We also completed 2 acquisitions, one in Vilnius and one in Riga that perfectly complement our existing portfolio. Unique in Vilnius complements very well our Vertas area and Zala 1 in Riga complements very well our centrally placed properties. We also added Logistics as a segment. We see a lot of exciting opportunities in Logistics. It actually is fundamentally a growing market. We see that yield levels are still significantly above those in the Nordics, but also above among the highest probably today in the market. So we see both a very exciting financial opportunity, but it also complements our offering in a nice way also brings more diversification to our business. And we're also happy to talk about Melon Fashion Group that keeps delivering on very, very strong results during this year. So from now on, our business concept is to be the leading long term provider of modern sustainable office and logistics premises in prime locations in the Baltics. And we expect the Logistics portfolio to grow quite fast from now on in our business. If we look on our properties today, 80% of the volume is, of course, in Vilnius, which is our biggest market. And as you can see on the map, it's focused very much into 3 clusters in the central business area with quite significant clusters of around 42,000 square meters. All in all, we have 130,000 in the very central heart of Vilnius and in top located offices with absolutely highest sustainability environmental certifications. If we look on Riga, it's approximately 18% of our volume today. Riga is where we build up our position. And today, of course, we have a nice around 22,000 square meters of leasable area, which makes us already one of the bigger players in the market. But at the same time, we have a fantastic development portfolio, which actually opens up for further growth. We can add additional 55,000 square meters of leasable area. And in Timel, for instance, we just finalized the competition architectural competition with White Architects and he's winning the tender. So we will move on with this development. And Pine Project is actually in the final stages of receiving a building permit. If we look further on our noncore part of the portfolio, where we have Melon Fashion Group and Property Fund, as I mentioned before, Melon Fashion continues delivering very, very strong results. We see sales growth of 100% during the 1st 5 months of the year. Online sales standing for 32%, a somewhat drop from last year, but that depends very much that during last year, actually, all of 800 stores were shut down because of the lockdown due to COVID. So this now we see a strong performance on the sort of conventional retail network. Also very strong EBITDA, 1.4% compared to negative during that period last year. So all in all, a very strong performance. Mellon OXXO also paid a very nice dividend during May, and total return in our portfolio this year in this holding is 5.2%. Property Fund is also delivering. We received a dividend, and we see positive value development. So if we look on our tenants and occupancy, we have increased occupancy rate to 92.6 percent. And we see a surplus ratio still at around 91%, and this is very, very high for the industry. And we see that this is very sustainable if you look on us quarter by quarter. Average remaining lease term is 3.8 years, with our largest tenant is around 4 and our largest tenant is Danske Bank. But if you look on the names, you recognize very strong Nordic Institutions. And this is where actually it makes us a little bit different because we are exposed to very much international businesses and international business risk, even though our properties are in the Baltics and delivering higher yield rates. And from my part, last but not least, it's about sustainability. At East 9, we worked very, very hard on pushing the sustainability agenda and work hard to carbon neutrality, 88% of our gross flow area is actually environmentally certified with either LEED Platinum or BREEAM Excellent, which are the top brackets in each of the certification systems. We also you can see on the picture, we placed some beehives now on the roofs of our properties. And we do a number of other different measures to work very actively of promoting the green, promoting the well-being of people and the environment. So if we look on overall, all leases in 6 properties out of 12 are actually green today, primarily in Vilnius, we have also increased our share of green financing with our banks. So 9% of our loans are today green. We work further of increasing that in the future. We also issued a green bond of EUR 45,000,000 just recently. That will also enable us to continue growing, and it was rated as our financial framework was rated as dark green by CECRO. We also received some rewards during this first half, especially from the Green Building Council. It's the Unity that issues the LEED certification for properties. And we score among 20 top percent globally in Gresp. So overall, we've been working very, very hard on most of the areas and actually achieving very strong results. We're also top ranked in Albright's Foundation in terms of gender equality among Swedish listed companies, we actually, I think, out of 55 in the green list and total list is around 200. And we also have a very strong and motivated team that is ready to bring this company forward. Our employee score is 9 at 100% as a great place to work, and we have a 95% trust index in the company, which makes it actually a very, very strong and motivated team to develop this company further. Now over to you, Britt Marie. Thank you, Christoph Thijs. We continue with the income statement. A larger property portfolio has, of course affected most profit items. The rental income is on a record high level. 2 new properties, Unique and Sala, were taken over in late Q2, and the full effects will be in the Q3. The increase in Central Administration fell back during the quarter to a more normal level. And as you remember, during the Q1, we had some nonrecurring costs. Interest expenses increased due to increased financial interest bearing liabilities during the Q2 since we acquired 2 properties and had some new net financing. Other financial expenses decreased during both the quarter and the period since there were hardly no commitment fees for loans, only for the overdraft facility. Profit from property management increased more than revenues due to economies of scale, and this is why it's so important for Ystad to continue to grow. There were positive unrealized changes in value for all items during the second quarter and the period sorry, during the period, but negative for investments during the quarter since both MFG and the Fund paid dividends during the Q2. Thereby, Is9 also received dividend from these two investments, totaling EUR 3,900,000. Continue with the financial position. The value of investment properties increased but also due to minor unrealized changes in value and investments. So far this year, the unrealized value change has been 0.8%. Long term securities holdings are largely unchanged. Cash decreased slightly after the acquisitions, but increased due to the new net financing. Equity increased due to the profit, but is offset by paid and reserved dividends. Interest bearing liabilities increased as a result of these acquisitions a new net financing. Other liabilities increased due to the decided but not yet paid dividend. Continue with the key figures. The occupancy rates increased in comparison to the end of March, but it's on the same level as the end of last year, and this is due to both acquisition of fully let properties, but also due to a higher occupancy in a comparable portfolio. The average rent level is on the same level as by the end of March. But if you look into the new letting during the period, we can see that the rent level is slightly higher, 15.2%. The LTV ratios increased a little bit during the period and the quarter due to new financing and the net figures is excluding the cash that we hold. If we look into the surplus rates yield, we can see that it has increased slightly, and this is due to the higher occupancy during the quarter and the period. The profit from property management is developing positively, and this is due to economies of scale, earnings per share and return on equity is positive again. They were negative during the same period last year due to negative unrealized value changes mainly in MFG during the Q1 last year. Continue with the current earning capacity. And as you know, the earning capacity is a theoretical assessment based on current agreements and certain assumptions, this is not a prognosis. It's a comparison of the situation by the end of June in relation to the end of March. The rental value and the occupancy rate in the earning capacity increased during the quarter as a result of the acquisition of the 2 fully let properties, a higher occupancy in a comparable portfolio has reduced the vacancy value, which means that rental income increases more in percentage than the rental value, and that's important. Estimated property costs are unchanged, which means that net operating income increases more than revenues. Central Administration increases slightly and the interest expenses increases due to a larger portfolio and new net financing. The surplus ratio and the forward looking yield increases slightly due to the improved vacancy situation. We continue with share and the shareholders. In the shareholder list, you can see that there are some changes during the 1st 6 months, Kiel Capital and Lazard have decreased their holdings somewhat and Patrick Broommer has invested. The market cap was SEK 3,000,000,000 in the end of June, a little bit higher than in the end of March and year end, when it was 2.8, the number of shareholders have increased during the period and quarter, up to 5,100 compared to slightly below 5,000 by the end of March end of last year. We have decided upon a dividend of SEK 3 per share split on 4 occasions. The first was in May and the next one will be in August this year. The long term NAV per share is SEK 151 Deg, the same as EUR 14.9. And the discount has decreased during the quarter. It's around 12% by the end of June. We'll continue with a little bit of information regarding the debt. The interest bearing liabilities increased during the Q2 of the acquisitions and the new net financing. By the end of June, we had only bank financing, no capital market financing, and we used 3 banks, SEB, Swedbank and OP Bank. The loan maturity increased to 3 years, it was 2.7% by the end of March and 3% by the end of last year. Interest maturity was on the same level as by the end of March, 2.1 percent. It was 2.3 percent by the end of last year. The average interest rate is stable, 2.3%, close to 75% is fixed by interest rate swaps. And in the beginning of July, we issued the 1st green bond totaling EUR 45,000,000 And it has a 3 year maturity. We have no maturities financing maturities until 2023. So, Kestoutis, please continue. Thank you very much. And let's move on why we believe IS9 is an attractive story. And if we start looking at our share development, you can see that we are constantly growing our profit from property management per share, and it's growing faster than our top line. And it's a big scale effect that we are experiencing whilst building up our portfolio. We have very high surplus ratios in the market, which means that every time we add a property, very big portion of that revenue actually trickles down to bottom line and hence we improving our profitability. Our dividend per share has been growing over the years. And if you look on the buildup of our equity, it's also been growing. And if you look even in the last quarter, we continue growing. So all in all, it's a very exciting journey that we are on, and we are early on in that journey in the Baltics. But what we've done so far is actually we created a very unique portfolio of top, top properties in the Baltics and all of them are very highly environmentally certified. They are in the best locations, and they also have the strongest tenants. And of course, those properties produced very strong and very stable cash flows. If you look on underlying businesses as well, we are very much exposed the multinational business, not only the Baltic environment, but we're also experiencing very high or relatively higher yields compared to the Nordic peers. We're also leading in sustainability in the Baltics, and we are among top 20% globally. And with this agenda, we're pushing it further in the Baltics, and we hope you join us on that journey. And last but not the least, we're actually on a very exciting growth journey. Our business plan envisages growth of almost doubling, now slightly less as we continue growing to EUR 700,000,000 in total property portfolio by 2023. But we also are exposed to the very exciting convergence going on in the Baltics already since a number of years back and Baltics have been growing faster than the Nordic peers and actually merging towards the Nordic pairs over the basically last 30 years. And if you look on the last 5 years, 15 years or any other period, Baltics have been growing 3 times the pace of the Nordics. So to be exposed into the real state market in this area is really, really exciting. And if you look on the buildup that we are creating, you can see actually quarter by quarter, we are growing our revenues. We are growing our operating income. We are growing our profit from Property Management, which actually grows much faster than our top line. So we hope you will join us on that journey. And on this, I we finish our presentation, and we are open for questions. You can both do it through a voice or you can do it through a page you can actually post it in written as well. Thank We have no questions from the audio line. I will hand it back to our speakers for any web questions. Okay. We do not have any I guess everyone is on vacation. So thank you for this presentation. If there are no further questions, we wish you all a very nice summer and speak to you in autumn. Yes. Thank you. Thank you.