Earnings Call: Q1 2021

May 5, 2021

Hey, Oks here. Sorry, it's English. Hello and very warm welcome to our quarterly report. Today, we have myself and Britt Marie presenting. Since this live sending is a little bit delayed or coming with a little bit delay between what we speak and what you see. We would like to ask you to pose your questions when while we speak and we will connect them and answer at the end of the presentation. So with this, I would like to start our quarterly brief, where we will talk about the highlights. We will talk about the new acquisitions, tenants and sustainability. And with Maria will go deeper into our financial performance. East 9 in brief. East 9 actually is a listed Swedish real estate company, listed on Nasdaq Mid Cap. Our but our core properties are actually all in the Baltics. And what is also that maybe difference as is that most of our tenant relationships are Nordic or international. Our vision is to create and drive prime venues where ideas can flow, people can meet and successful business can be developed. And we worked actually very, very hard to make competitive advantage to all of our tenants once we're providing actually the best properties and the best service. Our property value is around EUR 374,000,000 120,000 square meters of lettable area to be increased relatively soon once we take over the new acquisitions that were announced recently. Our total assets are around EUR 500,000,000 rental income around 20%, LTV relatively low 36% in total and 46% on the properties. We also generate a 90% surplus ratio, which is among the highest in the industry. Market cap SEK 2,800,000,000 and our properties are actually valued at a mere 3,000 euros per square meter. If we go to the highlights of the quarter. We had a relatively stable quarter, a little bit of a hesitancy in the market, of course, due to corona pandemic. It takes longer time to lease out the maintenance premises. But in general, We have seen a relatively stable situation. No major discounts, no major changes. The vacancies that increased in Wieder, have been planned since before and they are very much connected to the development of the pipe in the future that I will address a bit later. What is also very, very ensuring and we are happy about this that performance of energy is very strong. And we also I've been working for some time on the acquisitions, which are materialized just after the quarter. And those are the new acquisitions, 2 fantastic properties, 1 in Vilnius and 1 in Riga. If we start with Unique, Unique is in the area that actually complements our Veltas proposition. These are modern properties completed in 2016, almost 7,000 square meters, nice parking and it's leased to Danske Bank IT Services 100%. Zaven Media confidence, our offering in Baldemara and in the central part of Borrida. It's a smaller property, but has a very big parking, which is also very supportive to our Guatemala property as such. Our tenants. We have Microsoft and CBRE and we welcome those new relationships here. If you look on the map in videos, you see very clearly 3 clusters, S7 as marked as number 1 with 3 properties leased to Danske Bank and Telia. We have 3 Bureaus as number 2, where we have 3 towers and we are actually combination of high towers, high rises and a relatively flat surfaces in other properties. So actually, we can combined various types of demands for different customers. And you see the Vapas and the unique number 3. They are just across the street and actually it could no complements the offering from our side. Weltas location is very strong and historically has been very, very attractive. It's also located next to the parliament in Vilnius. If we look on media, Vandemaler Centrus is our most central property. Number 4, Zala. The new addition is just a couple of 100 meters away and complements our offering. And our offering is now concentrated round Valdemara Street. We'll talk maybe more about the Aloyas Perroya, Aloyas and the Pine market number 3. Annuities have now bigger vacancy this at the end of since the end of last year. And it was actually planned that some of the tenants would move out and we will have higher flexibility when it comes to lease out of the Pine project because the Pine is adding on to Aloyas and it will be actually connected to Aloyis itself, so making this whole complex of around 28,000 square meters in total. And we work quite actively actually in Kimel project. Kimel is now undergoing architectural competition. We have received 12 very exciting proposals and the jury now is evaluating them. And once the winners will be selected, we will inform you more about the process of that development. It's a full quarter development. So but you can see that all of them are very concentrated in one single area. Earnings. Now to our other investments, we start with MFG that actually performed extremely well during the quarter. You see a 35% growth in rubles, very, very strong performance despite the pandemic situation and despite that some of the stores are actually unlimited in amount of visitors and so on. So despite this very, very tough situation, the company is streaming well. And we are comparing to pre quarter on a quarter, so to speak, so last year. Online sales are up, comprised now to 32% of total. Online is continues growing faster than the total and faster than the underlying network. But if you look on the sort of the store network has grown by approximately 30%, online sales through partners growing at 46% and own online is growing 100%. So this share of online is bound to increase even further. We'll also have a positive EBITDA for the Q1, which is also a very strong performance given sort of historics of the company. And during the quarter, The company was not revalued. The only implication is actually that ruble has strengthened. So the company is following plan that has been set overall. Also good news is we plan for dividend to receive dividend from MEDON, which will be approved at the AGM next week hopefully. If we look on our property fund, has also performed quite well with total return of 1.7% and the total value of that holding is approximately €23,000,000 in our books comprising approximately 4.6 total. So now to Tenants and sustainability. Our tenant picture didn't change very much. I mean we have 110 tenants, 150 lease agreements with average remaining term of around 4.2 years. Danske remains our biggest relationship and it will increase somewhat through the acquisition of Unique. But at the same time, we have a plan that Danske will move out of some of our profit premises in Tris Boreas. So that total increase will not be that significant. And of course, we still have high concentration among the biggest tenants, but it also gives us quite a significant stability whilst we're building up our portfolio further and car growing. So this is also very important. On sustainability side, I mean, we've done quite a lot last year. This is mainly repetition of what has been achieved already last year. We are among top 20% of among real estate companies globally in terms of our sustainability work, if added by GRES. We have done a we received double green evaluation by CECO for our financing framework. 87% of our properties are either lead platinum or Green Excellence certified. We are adding 2 more lead platinum properties in our portfolio. So this figure will grow. We also were ranked in top in terms of gender equality on Swedish listed campaign by Albright Foundation. We implemented green leases in billions now. And last but not the least, We have 95% trust in this among our employees and 100% of our employees are actually motivated and feel that East Main is a great place to work. And of course, on this ground, we stay committed to deliver further growth and further results. Now over to you, Birman. Thank you, Christophus. Then we continue with some financials. As you can see in the income statement, most figures have increased due to a larger property portfolio, but we have also seen higher vacancies in Riga, which has affected both rental income and the property expenses. In a comparable portfolio, rental income decreased by 7%. It has been difficult to show vacant premises during this period, But thereby taking longer time than normal to lease out vacancies. But we have also vacated building in Riga in order to prepare for the future construction of the pine. Central administration increased mainly due to nonrecurring costs. Islaisen reported only minor unrealized value changes during the quarter. We haven't received any dividend so far this year. But as Stutus mentioned, we have reason to expect dividend from MFG during the Q2. No current tax, only deferred tax in Lithuania. Continue with the balance sheet. No acquisitions during the Q1. Increased property value refers to investments and small unrealized value changes. Long term securities holdings were mainly affected by unrealized value changes in MFG due to the strength in ruble. Equity increased, thanks to the profit and amortizations during the period. Amortizations also decreased liabilities to credit institutions. Small increase in deferred tax liabilities due to unrealized changes in values of the properties mainly. Continuing with the key figures. The occupancy is lower than at year end since the vacancies has increased. The occupancy was still 97%, which is really high in venues, bit lower in the year. Surplus ratio is on the same high level as by the end of the compared to Q1 last year. The average rent level is slightly higher than at year end. LTV total and LTV properties is on the same level as at year end. Return on equity is positive compared to the same quarter last year, but it was negative due to negative unrealized value changes of properties. Profit from property management per share was at the same level as last year. Earnings per share also positive this quarter compared to the same quarter last year. Equity per share and long term equity per share increased by 2% to 4% during the quarter, slightly more in CFM in Europe. The current earning capacity, As you know, the earning capacity is a theoretical assessment based on current agreements and certain assumptions. This is not a prognosis. There were only minor changes in the earning capacity during the quarter since we haven't bought any new properties during the quarter. And recently announced acquisitions in the Egan Villeneus are not included in this one. Rental income from those is around €2,200,000 and we expect to take possession of them during this Q2. The level of the rental value decreased slightly despite rent indexation affecting the rental income in a positive way. We have vacated a building within Aloyasporoye related to this planned construction on the Paine. The rental income decreased during last quarter due to increased vacancies, Active yield has decreased mainly as an effect of lower NOI in comparison to a higher property value. We continue with the share. There are some changes on the top 15 list of shareholders. Potiklum has bought some shares during the Q1 and ICA has increased their shareholding. The Eastline share price was relatively stable during the quarter, closing slightly higher than in the beginning. The share was trading with a discount of 17% at the end of March. And hopefully, the AGM will today decide upon the proposed dividend of SEK3 per share split on 4 occasions, 3 of them this year and 1 in February next year. Continue with the debt. Liabilities to credit institutions were almost unchanged. The loans are split among SEB, Swedbank and OP. The equity ratio is on a high level, LCV on a low level. The average loan maturity was 2.7 years And the major part of the loans mature in 2023 2024. The average interest maturity was 2.1 years. After the end of the quarter, we have raised a new credit of €10,000,000 from Swedbank Lithuania secured in an existing property. And the new acquisitions We'll be financed by SEB in Lithuania and OP Bank in Latvia and they will mature in 2025 and 2026. Stutis, can you continue please? Okay. Thank you very much. So let's continue to with our summary. And I really would like to reiterate that East Line today provides a fantastic assembly of probably the best Baltic office properties in the best locations. And those properties are leased to very stable multinational but also local tenants and generating very strong cash flow. So we have a very stable business underlying business. At East Main, we work very hard with sustainability and try to lead that way towards more sustainable future for the whole Baltic. And we hope that you can join us on that journey. And we actually have a fantastic growth ahead. Partially, we plan to double our portfolio within the next 2 years, 3 years remaining. And not only that, but it's also the underlying growth in the Baltics, this convergence process that has started with the independents back in early '90s. That continues and we see a very sort of favorable benign conditions actually for that to develop further. Cylinders. I would like to finish and we will move towards the questions. No, sorry, there's one more graph that was remaining and that's our quarterly performance. And I would like to show you just to reiterate that sort of see this long term path of growth. Well, we have a slight dip in this quarter, but it's mainly related to planned vacancies in Aloyas quartiles in Riga, but we will continue with the new acquisitions and growth. So on this, we will start with the question section. And I think we have received a question Regarding the central administration costs up from the last from during this quarter. And it was mainly nonrecurring costs and it's related to an invoice That we should have received during mainly 2020, but also 2019, but we received it this year. So that's why. So maybe we'll be back on the same level as before and it's better to look at the capacity instead. Update. We have one more question about please tell more about Truss Bore's 4 timeline and size of project in square meters. Yes, indeed, I haven't mentioned during my presentation, but actually we are looking at developing further the 3 spurs complex and to add on another tower next to the 3 walls. We have a space behind the building and there's a parking lot that utilized in a better way. So now we are in the process of planning, in the process of taking the architectural concept to that. And in total, we plan that it would actually be around 11000 to 12000 square meters up to 11000, 12000 square meters of new space that can be developed. However, it's a bit early to say. That's why it's not in our presentation yet. And we will come back and we will come back to it a bit later once we are ready with that. But today we are in the process of again taking the architectural concepts to it. There's one more question about can you elaborate on the future lease out in the region? Region in general has been a bit more hesitant than Venous. It's but we also have smaller properties with smaller tenants as well compared to what we have in venues. The biggest vacancy or increase decrease in revenue is actually related to Aloyas Biroje, which was planned to be developed in the coming years. And we wanted to have higher flexibility. That's why we plan for certain contracts to end at 7 of this at last year. And one big tenant no doubt was Lindo, who also managed to complete their own headquarters in Riga. And some of the tenants probably will move in on a shorter contract because we will still need some flexibility whilst we lease out. The total time. We also might need to work with the tenants that might need to move in a bit earlier than the planned construction finished and so on. We want to have a higher flexibility in that property. So we'll probably see more volatility on that, but it's nothing to be afraid of. And longer term, we believe that the PYNE project will improve the quality and the offering in total and hence potentially the pricing. We have received some new questions. What is the near term plan for MFG, potential disposals, been off To existing shareholders or sale to related East Capital Entities. I don't think there is any ideas of doing any related product transactions. There is when it comes to Mellon, of course, we have been looking for different exit opportunities. We haven't communicated any clear timeline now due to very understandable reasons. But when you look at this company, the company has actually grown and is growing very, very fast. It has increased the online offering very significantly, which is today the highest among the Russian fashion peers. And longer term, I see possibilities to have multiple exit routes, one being IPO, but that is a bit too early to speculate on. Yes. And we have received one question regarding the recent acquisition. I guess it's the coming acquisitions. The size of the Vigna's property is the double of the Vannergia. Is that indicative of the property value? Are the leasing terms similar to other properties you manage in each area NOI similar. They are financed With cash and bank financing, as I mentioned, in 2 different banks. And the size, Jan, that's indicative of the property value? Yes, it's a negative of the property value. And I think in terms of rental, they are not over rented in any sense. The rentals are just slightly below maybe the current market levels. Please remind us about rent difference in Baltics versus Nordic per square meter, what is time lag for this? Do you think to narrow in 10 years? Well, the price gap is very, very big. If you look at nominal terms in everything basically what you look at both there's a big gap between the Baltics and the Nordics. If you look on the rental levels itself, we compare to if we compare the stock on the price differences, maybe 5 to 6 fold. If we're talking about the smaller cities in the Nordics and you have to actually remember that the 3 Baltic capitals, pharma top 10 largest cities in the Nordic area, including Stockholm, including Oslo, including Copenhagen Helsinki, Gaap and Barrick orders and Malmo. So in this area, of course, the price gap against the Gothenburg and Malmo is lower, probably lower to Copenhagen as well. But overall, this is the out of this region. So the Baltics is actually among the lowest in terms of rental levels. We also it also comes in combination with relatively low salary levels and salaries are still in nominal terms are significantly higher compared to the Nordics. And in general, I think we see a very favorable conditions for future development of shared services. We have seen actually that during pandemic, some of the shared services from very far away actually continue to establish and with the aim that we have approximately 30,000 square meters of new take up, of which some big chunk has been taken by newcomers, both the shared service centers, but also some Belarusian companies actually entering the Baltic market. But if you can do services, if you can work from remote distances, which is actually this process being accelerated by the pandemic. We'll probably see much more of that type of establishments in the Baltics, which has a very, very significant cost advantage both in terms of rental levels, the total cost for the company and salaries whilst producing very high quality of service and very high quality of buildings. So that was and all the questions. So I hope you say thank you for today. Thank you very much for today and see you next quarter.