Earnings Call: Q3 2020

Nov 5, 2020

Good morning and welcome to this presentation of East9's interim report for the 1st 9 months of 2020. The report will, as usual, be presented by East9's CEO, Kjututis Das Malsgaard and Niedrichs Varinirman, CFO and Deputy CEO. We will be happy to answer questions in the end of the presentation, and the presentation will also be recorded and available on Eastline's website. Over to the presentation and Eastline's CEO, Chris Otis. Thank you very much. We are very pleased to report you a very strong Q3. And if we look on the agenda page, we'll talk about the Baltic. We view it as the new Nordics, and I would like to really put full attention on this. We will tell you about the new business plans and our targets, highlights and the property portfolio. Of course, we will go to financials and I will round up while we think Eastman is a very interesting start. So if we look to Baltics, the new Nordics, I think a lot of people actually missing out completely that Baltic region is quite significant. We have around 6,000,000 people in the Baltic region. That is bigger than Finland, that is bigger than Denmark and that is bigger than Norway. But if you look on the GDP, of course, and if you look on the transaction volumes and on the reader space volumes overall, This market is still lagging behind. But it's a historic matter. It's a historic matter of occupation of the Soviet Union for the 45 years, for the 6 years, which ended 20 or almost 30 years ago now. And we are catching up very, very rapidly. This market still offers you significantly higher direct yield, but also combining very low rental levels. The Baltic markets are actually growing faster and there has been the convergence case already from the start of the independence back in 1991. But during the last 16 years, Baltics were growing 3x faster the pace of the Nordic countries. As you can see it in the middle graph, it's not that visible on this nominal kind of graph. If you look on PPP adjusted, that gap would be closing it much faster. But if we look still at the nominal, it just gives you a perspective of how big gap there is still and how much potential there is. Again, Baltics are developing much faster and narrowing and there is a huge convergence story going on towards the Nordic market. We also are in the market where stock of real estate, of modern office is still very underdeveloped, but it's growing fast. You can see on the graph on the right hand side that the stock is growing in all three capital cities. Riga is now lagging behind. But if we look on the overall stock per number of inhabitants, we're still 3.5x lower compared to the Nordic period. So the steel market is not saturated and there is still a lot of potential for growth. And if we turn to next page, just to give you a picture of business, you can see the names of the highest or the biggest tenants in the market. But again, just to recap, the business is 700,000 inhabitants, all Baltic capitals are actually among the top largest ten cities in the Nordic region. And this is it's a capital city of Lithuania, 2,800,000 inhabitants in the country. 15 years ago, the business office market could actually fit in Stockholm's Hertorist Grafenas, so the ones who actually can relate to the Stockholm market. If you don't know this, where Hertel is Grokonen is, it's around 100,000 square meters of office space centrally located. And the total transaction volume in Lithuania was around €100,000,000 a year. Today, that stock is actually at closing to €1,000,000 euros and transaction volume exceed €500,000,000 in the country. So we have seen an enormous shift and an enormous transformation and we are actually in the middle of it. So even in the middle of this picture, the closest biggest properties you can see are actually the complex S7 that belongs to us. Let's move to the next page. New business plan and targets. If we look the business target as such, we have been growing very fast during the last couple of years, and we intend to continue that. We aim for more than doubling of our profit from property management by the end of 2023. We are also ambitious though to double our portfolio to reach €700,000,000 by end of 2023. We will continue on refinement in our portfolio and of course non core holdings will be divested at the time when we feel it's commercially optimal. Our financial targets, return on equity should be at least 10% over time. Share dividend shall correspond 50% of profit from property management. We have lowered our loan to value ratio That should not exceed 60%. We were never close to former target or former limit of 65%, but we are lowering it and hence the risk. The equity asset ratio shall meet this 35% interest coverage 2x. We also would like to speak more about sustainability. I will speak more about this during this call as well. But we are committed to have 0 carbon emissions from our property management by 2,030. Entire property portfolio shall be sustainability certified and we've reached quite far on that already. Renewable energy, so count for 100 percent of our property energy by 2,030. And today, all electricity that we buy is already green. Green leases will be gradually introduced from the end of 2020. We are starting this process and increase over time. So we have very, very ambitious plans going forward. And now back to highlights to the quarter at Porky's and Investments. If you look at Eastman in brief today, our property value is around €360,000,000 Our total asset is €460,000,000 Rental income based on our earnings capacity is around 21,000,000 LTV 49. We have 121,000 square meters of lettable area, top model, most sustainable area. And the average property value per square meter is there €2,950 per square meter. This is very, very low given the quality of the stock and upside potential. It actually provides us an enormous upside potential. Market cash SEK2.4 million and our surplus ratio in operations is 90%, among the highest in the industry. If we move to highlights, January, September, we, as I mentioned already, are growing very rapidly. Rental income increasing by 52%, comparable portfolio is growing at 6% despite the pandemic, despite all the challenges that we have in the market. And of course, growing portfolio gives us an enormous boost in profitability. So by growing the portfolio, we actually even if we grow our revenue by 52%, we managed to grow our profit by 83%. And if you highlight changes on negative, this is history from back from Q1 where we took write down in melon. That write down is now back in rubles. So the value is increased in rubles, but we have a negative impact of the currency in Russia, which weakened during that period. So still remains somewhat negative. But overall, I will tell you more about business in Melbourne. It's also developing very, very nicely. Again, the average rent of newly signed leases still at €15,900, renegotiated premiums at €15,300,000 versus portfolio average of 14.8. So it means that the market is actually very stable and we see stable rental levels in the market. Overall, property portfolio increased by 76% since during the last 12 months. So there is more growth to CarMax. We have just added 1 more property at the very last day of the quarter. If we move to next page, business. 42,000 square meters of most modern complex S71 that is home for Danske Bank and Telia. If you move to next page, our 3 Sborres properties, again, 42,000 square meters of very modern, late platinum certified properties that houses quite a number of different tenants, international tenants. Among them, Swedbank, Visma, Unilever, Uber, Huawei. So very, very strong international mix. And the 3rd page on Vilnius, Vaca complex, around 70,000 square meters, again strong tenants like Invalga in Lithuania, an asset manager, Cinco Delfin, European Social Security Fund. The Veritas 1 was also LEED platinum certified just recently and Veritas 2 is just newly acquired, and we will start certification of that building soon. Over to Riga Properties. In Riga, we have approximately 20,000 square meters of prime properties in best locations. All of them are actually concentrated around one street. So again, we try to be create efficient volume of properties around same area, and this is the most central area of Riga. We also have fantastic projects in Riga. If you turn to the next page, we have actually a project pipeline of around 54000 square meters of new offices with Pine being the 1st and Pine will be the 1st office built in constructed in actually wood as main material and it will be the largest office ever built in wood of that site in the Nordic region overall. So if we look to next page, our tenants. We have a very strong tenant base, 1 120 tenants with approximately 170 lease agreements. Danske Bank is our key tenant today. And if you look on the list, you see all international or Nordic names. That brings a lot of stability and that actually brings much more of the Nordic exposure in reality but at significantly higher yield at the lower property prices, which means lower risk in my view. The concentration is relatively high, but this is a result of the portfolio buildup. And over time, that concentration will go down. If we move to next page, short view of one of our holdings, property fund. It stands for 5% of our total assets. This holding is unleveraged in our books. It's €23,000,000 and the fund is under divestment, and we plan to exit this fund before as soon as possible. Of course, the COVID situation might affect something, but overall, the fund has performed very well. We also received a dividend from the fund in October in the amount of €640,000 Over to other investment. This is the old investment in that category is historic holding Melon Fashion Group, a Russian fashion company. Melon has actually developed amazingly well, which also resulted in the write up during this quarter. We have very, very strong bounce back after the closure of the stores. And overall, we see that during 9 months, sales are actually up and not down, which is amazing. Q3 sales are up 22%. Total e commerce sales are growing by 120% and now stands for 35% of turnover. EBITDA somewhat lower during the 9 months, but if you look on Q3, EBITDA is at 11% and cash flow is at 22%. Comparable stores during 9 months delivered 11% growth. And if you look on Q3, comparable growth in the comparable stock is plus 16%. So really an amazing balance back despite the difficult pandemic situation. And of course, this resulted in a write up of the value and the value today in ruble is higher than it was at the end of the year, but we still have a negative effect of weaker ruble as this asset is in Russia and is accounted in rubles. And before we move into financials, I would really like to draw your attention to sustainability and the work that we do there. We launched a green financing framework in September, and that framework received dark, green and excellent from Cicero. Just for reference, I think in Sweden, there are only 2 real estate companies that have this type of framework. It is Voss Akrona and Akerbeniska Hus. I think Valensdam has some, but it's not directed to real estate. So this is very, very high rating in terms of very high valuation of our attempt to work with sustainability in the Baltic region. It is definitely the highest of any of the Baltic companies. By the end of September, we had almost 80% of our property portfolio LEED Platinum OR Green Excellence certified. It's also among the highest bracket within each of the categories. And already in October, we actually 87% certified. So again, in these two highest brackets. Certification of Waldemarra is now initiated and it will be soon initiated for purpose too. We also were ranked as number 3 in All Rights by All Rights Foundation in terms of gender equality. This is a ranking among more than 200 companies in Sweden listed on Stockholm Stock Exchange. We are reporting undigressed since 2019. 2019 was our first year, and now we're awaiting the 1st official results to be released on November 16. We expected that to be already done by November 1. Work in progress, but we want to explanation of green leases. As I mentioned, we're doing this starting from Q4 in Vilnius, and we will continue working on that in all of our properties. We also implemented web based supplier review system. So we are now will be evaluating all of our suppliers in terms of sustainability. And last but not least, I'm very happy to announce that we are received 95% trust index according to Great Place TO Work and 100% of our employees consider Islaan to be the great place to work. So we are very, very pleased with those results. And over to financials, Brittani. Thank you, Kestutis. And we are proud to release today's Infurim report. The real estate business developed positively and the results from all segments were strong during the last quarter. We start with some key figures in brief. The occupancy rate, the surplus ratio and the average rent level have increased compared with the turn of the year or the same period last year. LTV is slightly higher, but still low. Only properties are leveraged, so net LTV is lower. Return on equity real estate direct is lower than last year since unrealized changes in value are lower. Return on equity total is negative due to negative unrealized changes in value of MSP during the period, but was positive during the last two quarters. Profit from property management per share almost doubled. Earnings per share was negative during the period, but positive during the last two quarters. And long term net asset value and equity per share almost back on the year end level. We continue with the income statement. A larger property holding and thereby we have rising figures, of course, S73 and SIGHT. II is included from the end of June and end of September, respectively. The rental income increased by 52% during the period by 6% in a comparable portfolio. Higher occupancy rates and higher rental levels have affected rental income in comparable holdings. Profit from property management increases more than rental income and NOI, both during the quarter and period. This is a clear scalability effect. Fixed costs do not increase at the same rate as the income, very positive. Negative total value change during the period related to MSP and explained as to 30 days by weaker ruble, but it was positive during the quarter. No dividends received from the Real Estate Fund or NFT during the 1st 9 months. But however, as Judith mentioned, the fund distributed €640,000 in October and tax consists only of deferred tax. We continue with the statement of financial position. The property value has increased during the period due to the acquisition, but also due to some positive value changes during the Q2. Value of long term securities holding, meaning MSE and the fund, has decreased, as we said, but increased during the last quarter. Cash decreased since we have acquired properties. Equity decreased during the Q1, but has increased during the 2nd and third quarter. Other assets and other liabilities have increased temporarily due to the VAT in the acquisition of assets will be eliminated during the Q4. Continue with the current earning capacity. Remember, this is not a prognosis. It's a snapshot of the capacity in this case by the end of September under given circumstances. The capacity has increased during the quarter due to the acquisition of Elbatou in Williams, but the effect is partly offset by increased vacancy during the quarter since East Line can't transfer profit costs for vacant premises to Canada. Continuing financing. We have new financing of EUR 11,000,000 during the quarter in relation to the acquisition of Vergas 2 in 1,000,000. We have also prolonged a loan on Vergas 1 on EUR 16,000,000 around a little bit more than 2 years to 5 years. We have 3 banks. There are Nordic Bank, SEB, Swedbank and OP and SEB is the biggest one. SEB has been stable, slightly below 50% and the interest rate level likewise stable around 2.3%. No loan maturity until September next year and 75% of the credit volume has fixed interest rate. We see signals from the banks that interest margins are back on the same level as before the pandemic for preferred borrowers at decreased during the 1st 9 months and the share is trading with a discount. Slightly more than 70% of the shareholders are Swedish and U. S. Dominates among the foreign shareholders. NAB is almost back on the same level as of year end 20 19. Stoltis, can you continue? Thank you very much. So if we go to almost Page YEIX 9, I would like to just summarize why we think we are such an interesting we see such an interesting opportunity. We have actually created a fantastic and unique portfolio of best properties in the multi capitals in Vilnius and gradually building up in Riga. These are all modern A class properties with the highest environmental standards in prime locations in the Baltic Capital cities. We also have those properties also generate extremely strong cash flow. We have also higher property yields compared to the Nordics, significantly higher property yields, as I told already in the beginning of my presentation. But it also combined with relatively low rental levels and actually Nordic financing costs. So the yield gap is probably among the highest in the industry today. We also consider ourselves now being leaders in sustainability. We have done quite a lot in this area and pursuing a very, very ambitious ESG agenda. And joining you're welcome to join us on this. We're really pushing the boundaries today in the board when it comes to all ESG issues and driving the agenda. And we see an enormous growth journey ahead of us. We plan to double our operations by 2023, but there's also an underlying growth and convergence story that is going on that has been going on and that will continue in the Baltic countries towards the Nordics. So Baltic is actually the new Nordics and I think it's you have to not miss out on that. So on this, I end my presentation and we open for questions. Thank you. Thank you very much. First question we have is from Mr. Richard Lambert from Eric Cantor Bank. The floor is yours. Good morning, guys. Great reports. So my last question is, can you please comment a bit about the development in the net lettings during the quarter? Yes. Netting is basically close to 0. It's around €1,000 So it's relatively small. We have some changes. But as I mentioned, the changes that are coming, they are coming at higher level. And there is basically no COVID related kind of moves. So everything that is those moves are being planned before. Good. And my next question is, can you please comment a bit about the development on the transaction market in the Baltics? Who are you facing right now? Is it domestic players or are they foreign actors? I would say that we had a pause when the first wave hit. And but since then, the transaction market is actually started has actually started picking up. We face both local competition and still some foreign competition, mostly from the front end from Europe. So overall, I think probably volumes will not pick up to the last year's levels during this year, but we will see a number of very exciting transactions still by the end of the year. Okay. And if we look to financial targets, can you please elaborate how you aim to reach them? Is that transactions or project development or more of a mix? Mainly transactions. So I mean, we are a cash flow generation company and we plan to we have an ambitious acquisition target going forward. But we also look at certain developments, but the developments will be more like add ons. In region, we have a unique situation where today pipeline is bigger than the current portfolio. But I think gradually that will sort of decrease in volume or in volume kind of in weight. So we're very much cash flow focused. Okay. And my last question is about can you elaborate about the capital structure when you reach targets? Will it be close to the financial target when it comes to LTV? Our LTV will probably stay at around 50%. We do not expect significant hikes. Temporarily might change, might be over that. But over time, we probably see ourselves at around 50% LTV. You also have to note that 49% LTV today is only on the equity portfolio or only on realty sorry, on property portfolio. We still have a significant holdings that will be divested cash. So net LTV is significantly lower, it's closer to 40%. Okay, thanks. And that was all for me. Thank you. Thank you very much. Next we have Mr. Victor Kruger from PBG. The floor is yours, Mr. Victor. Thank you. ABG here. Would you like to comment a bit more on the development from COVID-nineteen in respect to your different business units or rather different types of real estate that you're investing in? Okay. So if you look on our portfolio, 95% of the sort of square footage is leased as offices. And the remaining 5 is around 3 is retail and 2 is other, let's say, type of operations. If you look on the office side, the impact is very, very small. And the biggest impact we have seen on the by the COVID was restaurants and services that were actually obligatory closed during the 1st quarantine measures taken by the Lithuanian government. And so those operations were forced to close. And during the pandemic, we were supporting them by rent reliefs, but also buying their food and delivering that food to the hospital. So from that perspective, this was the biggest impact. Overall, that impact stands with 0.8% of our annual turnover. So this is really relatively negligible kind of impact. Otherwise, we have a very strong tenant base that, of course, somewhat was affected, but not that significantly. That did not result into any kind of meaningful discounts during the whole period. That's great. Thank you. And in terms of geography, it seems that Lithuania is your top market at the moment. And the continuous focus is still on the 3 capitals in the Baltics, is that correct? Our ambition is to be present in all those markets, but that ambition of course that will take time and both the You said all Baltic markets? All three Baltic markets. Okay. So including Estonia. Today, we're not present in Estonia, but that will take some time. So today, we are we started with Lithuania. We established a strong position. That position will try to strengthen even further. So we would like to still grow in Lithuania. We would like to grow in Latvia and we would like to enter Estonia. But it depends a little bit on opportunities that we see and today for best opportunities in both Vilnius and Riga. And once those opportunities appear in Tallinn, we will take them. Great. Thank you for taking my questions. Thank you. Thank you very much. Okay. At this time, there's no more question. I would like to hand over the floor to our speaker. Sir, you may proceed. So, let me say thank you very much for participating. And remember that we released the year end report on the 70th February next year. Thanks for listening in. Thank you very much. Goodbye.