Good afternoon, everybody, and welcome to the annual general meeting of Baltic Horizon Fund. My name is Tarmo Karotam. I'm the Fund Manager, and hereby I would like to progress with the meeting. The idea of today is to give you the latest update on the fund, its activities, also look back a bit into 2023, and discuss our plans going forward. So, I think firstly, I'd like to propose to have a Secretary for the meeting to be Jana , and myself, I will be the leader of this meeting.
So, I'd like to start again with our six strategic targets that we have and with what we believe that we can achieve, a status of the fund, which will be in a very stable mode. So currently, we're number one goal that we have and that we're working on is our portfolio occupancy. On top of several geopolitical and other kind of external events, we last year also had the change of certain anchor tenants, and we have been working to increase occupancy of the funds and continue to do so as we speak.
We do see a net operating income potential of around EUR 18+ million when the portfolio is fully leased out, and that's what we're working towards. At the same time, we have to manage our debt, keep the LTV low, cost of debt low, and there's been several activities around that as well. In regards to our ESG initiatives, these are something that we have been working on regularly and continue to work on. Our properties are now fully certified, and that helps us to get the best possible financing conditions and remain attractive for the tenants coming to our properties.
I think last but not least, we have analyzed our portfolio during the past several years, decided what we believe are our strategic assets going forward. But as well, have considered certain assets that are non-strategic for us, and we are looking for a disposal of one, maximum two assets over the next 12- 18-month periods in order to free up equity for our other investments in the portfolio, and to strengthen, further strengthen our balance sheet. So let me just first have a little look back into 2023. It was a big year for us, a very, very challenging year.
We had to refinance our bonds at the moment when capital markets did not work, and the cost of the bond increased almost three times. We had to go through a disposal of 2 of our assets in order to strengthen our balance sheet and renew many of our loans. The year ended by refinancing our Europa and North Star properties since the net operating income of these properties had improved, and we were able to get a new loan from Swedbank in an amount of EUR 26 million.
And with that, we were able to pay back part of the expensive bond that we have, and we are restructuring, continue to restructure our balance sheet through refinancing. It was a major event, definitely for us, and I think what I've noticed, we have noticed in the Baltics, is that certain local banks are actively lending. They are hungry for new business, and that has been good for us. So we have also last year refinanced with Blue Orange Bank our Upmalas loan, and are currently in discussions with other small banks on refinancing of Meraki.
When it comes to the income side of the fund last year, when we look back then, we did have two of our properties' anchor tenants change in Upmalas Biroji, where SEB Global Services moved out, and as well in LNK Centrs where tenants chose new locations. But at the same time, we've been upgrading our retail assets and increasing the NOI of those assets, introducing strong anchor names such as ARKET, H&M Home, and IKI Grocery Store. We did have recovery also in our retail segment, but since the increase of the vacancy in office segment, the NOI in office segment dropped by 9%.
But as I mentioned, we have been working hard since second half of last year to fill in those vacancies and first success was with Latvian police, signed last autumn. Now they finally moved in first of March, so they are paying from first of March. And ARKET moved in in December, H&M Home, similarly, and IKI also in March, new grocery store in Europa. So that's shortly about 2023. Now, I think, we have showed this figure also, this chart previously, but I cannot emphasize enough how that visualizes the work that we've done with our current leases.
And here you can see the first quarter leasing activity on top and below the leasing activity since the third quarter of last year, emphasizing that there are not only, you know, prolongations happening with current tenants, but there are also tenants that we are replacing with new tenants. And there are also tenants that are coming into empty to vacant premises. And I think the most important column here is the more or less a purple color at the end there, which shows the net positive leases that we have signed over the past 3-6 months.
Now, approximately by the end of Q1, approximately 7,200 square meters of new leases have been signed. Therefore, we've increased the occupancy to 83%. What we see is that we have completed approximately two-thirds of our plan in order to achieve 90% occupancy by year-end. A clear victory was also in Meraki. In Meraki's case, where we filled in Meraki with anchor tenants, and I think on the Q1 there, you can see that much of that 3,400 of new tenants or new leases goes to, goes to Meraki. Let me, maybe, maybe it's a right word, the catch of all of this is that many of these tenants are still moving in.
So we are currently going through a low net operating income period, where our monthly net operating income is approximately EUR 1 million. And gradually, when all these tenants are moving in, then our monthly income will start to increase. And with, for example, the agreement with Apollo Group that we signed on the ground floor of this building where we are today, actually, construction works have already started, so their cafeterias are packing themselves together. Casino is already closed, and Apollo Group wants to open half of the floor to customers latest by December, before the Christmas period. So that's the goal, and remainder in the first half of next year.
So what we see now is that income is starting to kick in bit by bit to take us back to the operating profit zone. And the same you know what has happened in Galerija with MyFitness and prolongation since in Lincona are definitely going to help that. I would like to focus on three properties that need our more of the largest attention today. So first one is the previous bank building. It was a LNK headquarters and Emergn who is an IT company. It was their home for close to 10 years. And as it happened both tenants moved out to other properties.
So, the location of this property, we believe, is very good in the Skanste area. It's quite well known. There is a brand-new Elemental office building next door, which was just opened. It's currently fully empty as of today. However, we do have a lot of visits, and with the help of the Colliers team, we have weekly meetings to discuss which tenants do we want, which tenants could potentially be approached, and how to get the property filled out again. These discussions have yielded us a new lead, and today we are in negotiations with one anchor tenant for approximately 4,700 sq m, 5 floors of the total building.
The discussions are still quite in an early stage, but I would like to say here that there is activity in the Riga market, and on top of everything, we are also considering and have been discussing what sort of branding or concept should this office building have in the future. The office market has changed due to COVID, as has retail, and many tenants are reevaluating their office needs. And just also, many tenants are interested in having well-located premises that are nicely fitted out for their employees in order to attract employees back to the office. And we also believe that office buildings going into the future need to have a specific concept.
Either they are public building, or either they are, you know, mixed-use building with, with financial tenants, either they, it's, it's a medical property or, or an educational, concept. So these are the discussions we were had, lately, and, and that's where also we have, targeted our tenant, searches, too. So I hope to give you more feedback, on, on these discussions, by the end of second quarter. The second, most important property for us in terms of income generation, also going into the future, is Meraki. S orry, Europa. We have, since COVID, you know, experienced the lockdowns, also increase in, in, in vacancies, also due to the, working habits of the, of the people around.
Many buildings have been built in the area, but the people go to offices less. But we do still see our footfalls increasing, but not as much as we would have hoped. However, for us, in managing retail assets, especially in city centers, it's extremely important to have a USP, the unique selling proposition. What do we offer to the people who are in this region? And it has taken a bit time to convert the property to what we would ideally like to see and what our customers would ideally like to see.
First challenge was in 2021 to upgrade the look and feel of the property, which we completed in the end of the year, together with the new food hall, Dialogai, on the ground floor. Then we have replaced our long-term grocery store there with IKI, which is in our opinion in a more of a high-end brand status than Maxima was. And we have signed now already also a clinic, medical center, Perfectus, just on the third floor. The works are ongoing for them to move in. So the way that we see Europa going forward in the future is that third floor will have health sports and services. Gym is already there. Second floor will be a fashion cluster.
We have moved Suitsupply from third floor to second floor just recently with other sort of modern fashion and gadget stores. And ground floor we want to convert more into restaurants. We have received also a permit to open the facade of the property to the main Konstitucijos Avenue, and we are moving Fortas to the ground floor, and there will be several other restaurant tenants on the ground floor by the end of the year. Replacement of these low-performing tenants, yes, it has taken time, but we are in, I think, in good momentum there.
But it is also true that we are changing tenants and the tenants from the past era are not working. We do see that basically all tenants that are coming into our properties have much better turnovers and therefore can pay as well better rent. So we believe we are on one good track there. Then the third property, which has still a high vacancy rate, looking at the portfolio, is our largest asset in Riga Old Town. Again, don't want to repeat too much, but it has been affected by everything that has happened in the region in the geopolitical world, and...
I think the challenge in the Riga Old Town in general is that how to attract people back to the Old Town, how to attract tourists back to the Old Town. I think we have you know given our input into this by opening a food hall again on the fourth floor with terraces overlooking the Old Town is continuously working very well. We have won the competition for our flagship store last year and now just recently signed MyFitness on the fifth floor. Beauty services we are just about to sign as well. So work continues on basically on the third and fourth floor.
We have certain discussions ongoing and we as well hope to reach higher occupancy and higher NOI in both Europa and Galerija this year. That's definitely also in our budgets. We are following the budgets currently very well. This is the total sort of portfolio that we have, and I touched upon certain properties that we have. If you look historically, Europa and Galerija have been recovering, but not as fast, yeah, as we hope. But we still expect, let's say, quite a notable increase in NOI over the next 6-12-month period in these centers. If I go property by property, then in North Star, currently, we are happy with.
We have one of our largest tenants there, ICE group, reduce their premises from 2,000 to 1,000 square meters. However, they have prolonged the lease with us. So they as well reviewed their office needs. At the same time, IDT Group, which was as well, I think, announced today in social media, has as well prolonged their lease. And we have about 1,000 square meters of vacancy in North Star, but we have negotiations ongoing, and we believe in Q2, we will sign most of the 1,000 square meters. So we're quite confident with North Star.
In Meraki, occupancy level of around 90%, we're moving in the smaller tenants, but also the large tenant, Narbutas, by year-end. Fit-out works are to start now. Project management is working, and we expect as well to lease out 10% by year-end, as we have, again, tangible negotiations on the table. In Upmalas Biroji, we have police moved in. We have also other smaller tenants from the previous period, but there is about 40% vacancy in Upmalas , and negotiations are ongoing for approximately 10% of the vacancy today. So, an active leasing is also happening in Upmalas . Vainodes , we've just met the anchor tenant.
They have confirmed that they would like to stay in the property for a longer period of time. So, we believe that property for us is also very stable. S27, we talked about, we have an anchor, discussions ongoing, and hope to have a strong message now in the upcoming months, in that regard. SKY Supermarket is working as expected, no surprises there. Galleria, we talked about, Postimaja and Plaza, as last year was actually a year where we prolonged all the Postimaja lease agreements, then this year has been the year when we have prolonged all the cinema lease agreements.
We have an anchor tenant, Apollo, as a cinema operator, and as well, they are bringing in other brands to the ground floor, opening then over the next 6-12 months. But factually, it's close to 100% occupied as of today. Within Lincona, we have good cooperation with RIA, and they are expanding in the property. The expansion has taken a bit more time due to public tendering rules, but it's all in good motion. And Swedbank—with Swedbank, we have prolonged their lease agreement until end of 2025. So we're as well, for the time being, quite comfortable with what's happening in Lincona. And with as well Pirita, the NOI has been increasing over the years. We expect even higher NOI this year.
We have prolonged with MyFitness there until 2032, and discussions have been as well started with Rimi, the second anchor, on a prolongation, even though their lease expires only in 2026. So of the total portfolio, as I mentioned, our key focus today, now that Meraki is leased out, goes into three properties, Europa, S27, and Galerija. And we aim to crack that puzzle during this year and get closer to the NOI potential when the property is fully occupied, because the budget potential is definitely there. And I've tried to sort of keep this presentation rather, you know, straightforward and short, and open later on as well for any questions. The plan, what is the plan going forward?
As we sort of internally discussed is that, the fund was in a red zone last year, when we had many, many, many things to solve, many red flags coming up, many things to sort out. Then, 2024, we consider ourselves in a yellow zone, where we have refinanced half of the expensive bond, hopefully, by beginning of July, the last tranche will be repaid.
We plan to get into 2025, where we are reaching a higher NOI and let's see what the European Central Bank is saying now on the sixth of June, but the market does expect as well that the Euribor will start to gradually decrease. So we aim to enter again in the operating profit zone, and also in the process, we want to currently strengthen our balance sheet. And so one discussion was around still disposing one non-strategic asset and use the proceeds for the portfolio's purposes.
We haven't talked about it for a while, but actually, if you know our property, Meraki, we do have a building right for the same size property right next door. So, that we can actually have two towers. So, the investment there, of course, is also rather sizable, 8,000 square meters, but underground parking has already been built for both properties, and we want to also be ready to start developing the constructing this property when we have the tenants in place. First tower is now 90% occupied, and we have some early discussions as well with other tenants in the area.
I think one thing I would like to note about Meraki, which I perhaps didn't mention before, is that our original business plan with Meraki was that we build the best quality property in an area where you have more amortized office buildings, but and then compete for tenants in the area with our new product. It took us a bit more than we would have wanted to, but we have now actually filled the first tower with the tenants from this area, who like this area. It's a very densely populated area, and in Vilnius, and actually, additional discussions we are having exactly with the tenants in this area.
So but coming back to the second half of this year, disposal is one way forward. We still see potential in refinancing some of our loans to get additional funds of up to EUR 5 million, which can also be used for refinancing the bonds or other investments. And, we're as well considering, in order to really reach the full stability in next year, a small capital increase with our current leading investors, as well as the management company and management team members. Because now we really believe it's a time when we see potential, we see the NOI increase potential, we see the cost of debt potentially decreasing.
What we, what we want to do is really, as we say, bring the fund into the green zone, in 2025. So, as we were, a dividend payer in before, we want to become a dividend payer again, and, and that's what we are, currently working on. So I'm open to any questions. At the end here, we have, the, the financial results. However, I don't know how, how much, you know, it is needed to, to go into that, as this has been presented several times.
Maybe just briefly, that when you compare 2022 - 2023, then our income did, did decrease, and partially because of, of certain assets that we disposed, but as well, due to certain increase, increased vacancies, especially in the office segment. But we are now in a, in a totally new reality. So again, coming back to the, I think this, this NOI potential, and this doesn't also even include the Meraki second tower, then we believe we are on good track. And we do, we do see, we do see that if everything goes as we planned, then we can be, we can be quite, quite satisfied in 2025. But any questions at this point from anyone?
I'm thinking about Europa Shopping Centre. Why it's never like 100% occupancy, why it's always like 80% or something? Because if we compare here, Pirita Shopping Centre in Tallinn, and it's like, I don't see any empty spaces there if I go there.
There's only one explanation to that, is that, as you can see, maybe as well on this slide, that, in retail, we do have incoming tenants, but we have also outgoing tenants. So it's, for example, we are going through a replacement of many more than half of tenants, I think, of the total shopping center since 2021. Meaning that, we're bringing down the restaurants from the third floor and putting clinic on the third floor. And then this creates a, let's say, technical vacancy, meaning that because of the fit-out works ongoing, so currently we are still in a process of where, let's say, exiting or replacing tenants are in the same amount as new tenants coming in. So...
But our target for Europa by end of 2024 occupancy is 90%. So we-
Not like 100, can't reach that?
Probably not yet this year, because, you know, the remainder of the vacancy, the negotiations are still taking some time. Of course, we have, let's say, higher goals, but I think today I can say that 90% is realistic.
Also, just confirmation, for example, this office building, like, how long is usual, like, in that buildings, the companies, renew the lease, or how, how long are these are in it? What the price?
So in Upmalas , I can say that we have other tenants such as Bosch and Johnson & Johnson, and with them, the sort of lease cycle is five years. So I think the same is in Postimaja. In most cases, it is around five years, but there are cases which are three years. Now, we believe that, you know, police, it's a non-breakable 12-year agreement and with the forestry companies as well, a long-term agreement. So I think maybe I can also put it in this way, that our portfolio and the properties, many properties in our portfolio are currently in a conversion process for the new cycle.
And for example, if we look at this property, now we have a long-term tenant with a leading entertainment group for 10 years. So yes, now we need to maintain the property, but unless, again, something extremely major happens, so we believe that, you know, this property has now entered the next cycle. I think the same has happened with Upmalas . Vainodes 1 continues to have, you know, its tenant and but Europa and yes, and Galerija are in the process of still going into the next cycle. But we believe that when we have the tenant mix in place, because the tenants that are coming in are happy, they're making money, they're paying rent. So as we call, you know, the old era, tenants just need to be replaced, and it takes time, and it still unfortunately takes time.
When you compare it to Viru Center, then I think, Galerija Centrs has been in Riga Old Town being affected more because of lack of tourism. They're heavily dependent on Russians, Belarusians, and that is actually key clientele, or has been. So for us, it's as well to manage, because the location is beautiful, you know, it's Riga Old Town, but how to as well attract more locals into the Old Town. And actually, the city has the same problem, you know, but with Rail Baltica, this station now being finished in a couple of years' time. So we all hope that gradually this will bring in the people and thus allow us to have a better offering as well for the people.
But again, we're doing what we can, and I think, you know, if you've been to Galerija Centrs today, if you've been to BURZMA, then you see how, you know, visitors are enjoying the location. Because now I'm starting to discuss quite long, but, but, you know, if you look at, look at Riga Old Town in general, then there's also not a lot of new things that have happened there, that have attracted people there. So, you know, it has to be step-by-step, something interesting. Again, you know, ARKET again, which is an only one in Riga, so another destination, another destination. Now the, MyFitness, you know, flagship, on the fifth floor, just another destination for people to come. We're also discussing coworking operators, actually, quite, quite intensively.
Haven't agreed on the commercial terms yet, but, but, several of them have been on the table for, for many, many months. So again, a destination, you know, for people to come. So we believe that, you know, that's, that's what we can do, and then, it has to pay off.
Also, put the break, you touched this disposal of non-strategic assets, like was the, this Meraki, building site or it was something else?
Um-
Or is it not, like, to open discussion?
As one can imagine, you know, with especially last year, we had a crazy amount of ideas what to do in order to move forward. So, at some point, we were considering selling Meraki, but we didn't actually. But that was more of, not that it's not strategic, but it is, maybe it was more necessary. But in our case, so how we define our strategy is that, you know, we have our centrally located properties that we believe in. But then we do have tenant office buildings that have, you know, the best tenant mix in certain micro regions, because they are competing with the region.
And that's where we believe the long-term sustainable value or sustainable attractiveness can be achieved, or then public tenants who are there for a longer period of time. So that's where the backbone or the cash flow of the fund comes. Whereas we do see the upside again in the central locations. So that's how we look at the fund today. Let's say, non-strategic assets, maybe I can just say that, they are probably the smallest assets of the fund. And the way we believe that, either more value cannot be generated or that maybe a developer can do a better job for the future in certain cases. So I see any questions or there are not that many participants either, I think so.
Any other questions or, or thoughts or comments?
Like this, postponing my Coca-Cola Plaza renewal plans on hold now, so we think about it now. There's a lot of construction around, like-
So, I would say today it is on hold for a couple of reasons. Because I think the rental level of that we would need to ask in the expansion is above today's market. And as we all know, the high Euribor has influenced the spending disposable income I think as well. Maybe not as much as we all feared, but we want to see more positive progress there, and I don't think we will see that in the next year. So if we see a huge momentum in locals retail spending, in tourism in a couple of years' time, then we may reconsider.
However, today, we are looking at this complex that we have put it into the new 10-year cycle, and now let's think what's happening after 10 years. These expansion plans sometimes take time, and we may reconsider as well the expansion size and redo the project. But I would say, yeah, that the changes that happened in the market have do not allow us to continue, and most likely we will not continue in the coming years.
Basically, not until the interest rates kind of change.
Not until we actually can attract strong anchor tenants at high rates, because-
Apollo Group kind of seems a good partner there.
Apollo Group is definitely a good complement to this area. We had also other plans, which were not maybe so much welcomed by the community here. But I think Apollo Group, with their bookstore and other brands which they are still discussing what to bring, will complement, and. But I think the expansion would need, I think still a fashion anchor or somebody similar. Okay, so I think as this meeting is more of a general nature and more informative, so we are going forward with our plans, as described, on this slide.
And if there are more formal decisions to be made that requires investors' attention or investors' decision, then we will approach and make the respective announcements. And as I said, we are firmly committed to bringing the fund to the green zone. There are still some steps, I think, needed, but our income is expected to increase, and working hard as well as to reduce the leverage and cost of debt. So thank you for attending.