Good afternoon, and welcome to Baltic Horizon Fund's Semi-Annual Webinar, where the latest update of the fund will be given, based on mostly of the Q2 results and, and the main events of Q2. Also looking back, you know, on for the past six months and, and also past 12 months, I would say, in some instances. As usual, I plan to give a roughly 40 -minute presentation, and then during the presentation, try to answer as many questions as possible that were received already previously, before the webinar. In case I miss something, then I will respond specifically to those emails. Let's get started.
Yes, of course, questions can be asked also here in this webinar. It's been a very eventful past six months, and many of the important events have materialized only in second quarter. Most importantly, I think, what's been on investors' mind and also our primary goal is to refinance the bond of EUR 50 million. That bond was maturing on the eighth of May this year, not the best time, but negotiations for this bond already started last summer, after the war had started, and there was still quite a lot of uncertainty in the market.
T here was a question on, on, you know, what sort of bond solutions did we consider? And there were various solutions. O f course, it was necessary for us to make sure that we can do the bond at the lowest possible level. T hat's why we tried to refinance many of our loans with the banks during the second half of 2022 . O f course, that wasn't easy either because of the situation, uncertainty, and the discussions with the banks, so led to us, to understand that we needed to also sell a few properties.
Being conservative, you know, we weren't allowed to use, you know, the whole proceeds from the disposals for the bonds and had to pay back some bank loans in addition. We were considering for some time, you know, whether to do a public offering of the bond, targeting all investors across the Baltics and the Nordics to reach a level of EUR 35-EUR40 million.
And alternatively, we discussed with our top bond investors, local pension funds, whether, you know, a private debt or private bond could be a better alternative. Then we reached a conclusion beginning of this year, where we decided not to go through with the public offering of the bond. Potentially, you know, we could have achieved very similar, I think terms, maybe slightly, slightly better, but the execution risk, we considered it very high, especially since the amount was quite sizable. Then we were able to agree on certain terms with two local Estonian bond investors, one of whom was a previous investor, the second one is a new investor.
A structured new bond, where we could reduce the bond amount within the next 12 months, so until May of 2024, and then have the bond for five-year term, but be able to repay back the remainder of the bond after 2.5 years with certain prepayment fees. That was what we believe the best possible result we could achieve in the market. I think comparably, you know, looking at similar bonds, we were priced quite similarly, considering the size of the bond and the situation in the market.
What happened in the second quarter, we did sell a few Domus Pro to a local real estate fund and Upmalas Biroji to East Capital. I think overall, we could say today, we're quite happy with the results of these transactions, being able to free up free up money. I think that probably in the second half of the year, we would not be able to achieve so, these terms that we were able to achieve beginning of the year with these transactions. We have paid back now first tranche of the EUR 20 million bonds, I will get back to that a bit later.
You know, there's been several questions about that. Just maybe to note here that we also have this new Chairman of the Supervisory Board here in Estonia, Estonian management company, Lars, and the previous Supervisory Board member is currently on a medical leave. Yes, Lars has stepped in as the founder and also a considerably considerable unit holder in the Baltic Horizon Fund as the Supervisory Board Chairman since the summer. Europa, yes, shopping center has shown now the first results of the turnaround, and we did receive a little award for that as well.
Just quickly, remind about the properties that we had and we were able to successfully exit and, you know, free up as much equity as possible, Domus Pro. going forward, you know, we have now a slightly reduced portfolio and still our top tenants are, you know, the Latvian State Forestry, Rimi, the cinema, and some of the others. Net rental income, you know, is still, let's say, rather, rather equally sort of divided between retail, leisure, and office segments. Probably the office segment part will will decrease a bit now in the second half of the year because of the disposals.
Also there is SEB, which is one of the largest tenants in our portfolio, is moving out now shortly. The new tenant hopefully will move in right away to start the preparation works and be able then to move in to some of the vacancy created by SEB in first of January. Perhaps a side note, there was a question on on how how our organization works and and that so we have the management company in in Estonia, where some people are employed.
Then we have also a sister company in Lithuania, where other people are employed, including, you know, the financial, the controlling, the treasury, the fund administration team. That is our Baltic Horizon, I would say, management team. The management fee that, you know, is paid by the fund is, is for those services and as well, of course, investments and disposals. But we do work with outsourcing partners, CBRE, Newsec, that help us to manage the properties on a daily basis, find new tenants, and we, we call them sort of as an extended team because we work so closely together with them.
There's quite a lot of people across the Baltics on the ground and also in several offices that we consider are our close colleagues with this. We do have separate teams for Europa. We do have separate team for Galerija Centrs with the property manager and also the marketing and these managers. I think all in all, we have about, you know, 30, 40 people working on the fund and asset management side of Baltic Horizon. Currently our main focus is going on on the occupancies, increasing of the occupancies and maintaining the occupancies of the portfolio. There is some progress made in Europa.
There's also some progress made in Galerija. I think this is also a good slide depicting that the past quarters were probably the lowest quarters of our centrally located properties. Because many of the premises were vacated for the food halls to be reconstructed and for many other tenants to move in. We have seen now, especially due to a considerable recovery in those centers. Also we can see that from the like-for-like assets comparison when we look at this summary here. It is true that Duetto, Domus Pros will not contribute to the rental income in the second half of the year.
Which it still looks like, you know, that we are, you know, aiming, aiming to achieve an NOI for the year between EUR 13 million and EUR 13.5 million. I think, yeah, if to disregard the properties that were disposed, then our portfolio remained quite stable in the second quarter, and did show recovery in the NOI, specifically in Galerija Centrs and Europa, and based on the contracts and what we see, the new tenants moving in, we see a continuous recovery happening in the second half of the year.
However, at the same time, we've had some increase in vacancy, or will have now in the third quarter in Upmalas and LNK Centre. In LNK Centre, we had, we have two tenants, and one of them took quite a bit of time to understand what exactly are their office needs. Going forward, it's an IT technology company, and they finally decided that they would like to reduce, well, almost half of their space that they had.
Yeah, new tenant searches are ongoing, and as I mentioned, in Upmalas, we already have one large tenant that will take a little bit less than half of the created vacancy from, hopefully from January next year. There was also a question on, you know, how efficiently is our, our fund, our fund managed, and that, you know, roughly around 30% of the of the rental income is for administrative and property management charges. And this, I would say, has been influenced. It's a bit high, you know if you ask me, and compared to the market, you know, I think the good level would be anywhere between 15% and 25%.
I think one of the largest REITs today has has around 24%. I think Citycon, as a comparison, around 17%. We've had some additional costs related to the bond refinancing as well as the vacancies have created additional expenses for the for the fund for the for the landlord to to to cover. Historically, we've had a a cost recovery percentage of in the portfolio or in the properties around 90% of all service charges being recovered. That's where our goal is right now, is to achieve that when we have the vacancies reduced and and new tenants signed in. The new agreements are to to the vast, vast majority, signed as triple net.
That definitely, what, what we see also in Galerija and Europa now with the vacancies being filled out, that it's a double positive effect, as previously it was a double negative effect on the NOI. A positive effect that not only we receive rent, but also recovery of the charges. We do expect that ratio to improve, and, as I mentioned, I think our, you know, our target is to bring it down to, you know, anywhere between 15%-25%. I think realistically, it's, it's around 20%-21% when the buildings are all filled out. Overall, yeah, we did have some increase in, in, in financial expenses, as I will, I will also talk about that a bit later.
Our balance sheet at this moment is the following. We did have to accept some of the devaluation of our properties that influenced our balance sheet. We have also paid now partially back the bond, EUR 7.5 million. There's been some questions, why EUR 7.5 million? Why not, you know, why, why not more? Why, why not less? From our side, this is, you know, very, very specific cash management discussion. I think it's quite clear that we do have several also bank loans still to be renegotiated and prolonged. They are all in progress.
Successfully prolonged with the new bank, or let's say, signed a new bank loan for Upmalas Biroji. For LNK Centre, the loan can be extended at similar terms, but also the Galerija Centrs loan is coming up beginning of next year. We try to be very prudent and to understand how these different aspects of our daily life will find a solution. In addition, of course, we have been also offered some proposals to dispose some other properties, so we are also considering that.
tags. Let's break down the original transcript: but I think from the bond repayment point of view that, you know, we will do it as prudently as possible in tranches, and probably not more than three tranches, before the year end. Y es, it will cost slightly, slightly more to keep the expensive bond, but we do have to consider other things as well, and not just pay back the bond. Y ou know, and so it give us challenges for further cash management topics. The l everage of the disposals and after evaluations is around 57% .
A s we've said openly, we continue to f ind ways how to, you know, use new bank debt to pay back the more, most expensive bond. It's priority for us to reduce the bond, so I think that's clear, and we've announced it several times, and there's various ways how we can do that. Again, it's either either new, cheaper bank loans upon improvement of our NOI in certain properties, or through the disposals, which are also not out of the question. We rather would keep more cash in in our balance sheet than than less. If we find proposals reasonable for certain properties that we have, we will consider disposing them as well.
Our goal, of course, is to continue and, and prolong the debt maturity as much as possible. Yes, around two years is is quite a low figure, but we work with the banks as much as we can. With the new long-term leases, we do hope to have also more long-term bank loans. We're quite happy with Upmalas Biroji refinancing with a relatively new, but small bank in Latvia, Riga, called BluOr Bank. They are our new partner now. I think, you know, we work with all the banks that are today in the market and, and discuss various proposals.
Happy to see that these new up-and-coming banks are eager to also gain market share, and, therefore, offer quite competitive terms, and, and actually, in this case, best, best terms, offered, by BluOr Bank . In regards to our hedging policy, we still have quite a few hedges with different maturity dates. Yes, these hedges are, you know, loan by loan, maturity by maturity, being, being, removed. You know, our answer there is, is that we, during this time, you know, aim to pay back the bond as much as possible, because again, this is the most expensive, bond that... or the loan that we have, that instrument.
If one would ask, you know, would we want to pay back the whole bond, the whole EUR 42 million as soon as possible? The answer is yes. Of course, that also needs a specific agreement with the bondholders who have said that they, you know, theoretically, they could be open for that. Of course, it's a commercial agreement, and we're looking for ways how to do that. Of course, primary goal is to pay back the first EUR 20 million before this year ends. At the moment, the hedges still help us, regardless of the very expensive bond. Our average cost of debt in Q2 was 4.2%. I think it's reasonable to expect that this will be increasing over the next few quarters.
I don't think the increase will be too astronomical. No, so yes, the hedges still help us today. It's today, difficult to say, you know, have the hedges paid off, but I would, you know, from because it's too early, depends on, this depends on how long the high interest rate environment will, will stay. Probably today it looks like it's gonna stay here longer than, than, you know, was expected beginning of the year. Also understanding what the, you know, more or less, if I recall correctly, what we paid for those hedges, back in the day, then, I think, I think they should be paying off, definitely.
But I think a more specific calculation needs to be done for that, and we will, we will do that for, for, for this year when the, when the full year is over. Hopefully also have a paragraph there about that in the, in the annual report. Going forward, we've analyzed our profit this thoroughly, and, you know, we... Yes, we on one hand, you know, we are in the process of deleveraging, selling our, you know, secondary assets in secondary locations where we feel that we can get the best price today and, and, and on a long-term perspective, where we can only add limited value.
Then clearly, you know, we've been, you know, hit by, by several, by, by several different crises over the past three years, starting from, from COVID. The COVID did have a strong effect on our centrally located properties. Today, we have already made some progress, and we're confident that we can make even better progress with our centrally located asset leasing. The work is cut out for us, but, you know, there are several scenarios, but we do see that there's definitely interest in our vacancies. There are several negotiations still ongoing. We have signed several leases already, but the levels of rents that we could get from these new concepts are very attractive.
They're long-term leases, so it's definitely where our main focus is going today. We see an upside potential in our portfolio, you know, with indexations and reductions of around EUR 4.5 million that we have calculated today. Yes, it would need some investments, and that's what we are also preparing for over the next 12 to 18 months in order to achieve the full potential. We definitely see that investing EUR 1 million into these lease agreements, into these tenants and reducing the vacancy and getting better cost coverage is absolutely worth it.
It's what we see also from the food hall investment calculation that, you know, investing, investing around EUR 2 million, you know, we have, you know, at least the beginning, we have a return of around 20% of that investment. Achieved even higher rent, more than 20%, 20 EUR per square meter for the fourth floor in Galerija Centrs. We see that it is possible, and when you get the concept right, when you get the tenants right. That's what we see today also for the portfolio. Here, in more detail, these are the four assets that have the highest vacancy today.
Yes, we haven't found the anchor anchor tenant in Meraki yet, but there are several tenants again looking at it, and maybe we're making test fits for them. We're trying to agree on commercial terms. It's just again a matter of time when we will be able to lease it out, because in that area, again, it is the best and the newest office building in the area. Office tenants need to make certain upgrades for their fit outs in order to attract people back to the offices, so that is all working in our favor. Of course, at the same time, competition for new tenants in Vilnius is strong.
Quite a few older properties that have increased vacancies, but the work continues. In regards to Postimaja and the cinema, there is quite simple, the Postimaja agreements have all been prolonged. The last vacancy, we have a tenant in place. It's not signed yet, but we need to sign it shortly. The tenants as well as we are, you know, expecting the timeline to be completed. Then with the cinema, you know, we need to sign two lease agreements, one for the ground floor where negotiations are ongoing as well, with several anchors, and then finalized talks with Apollo, who would take the remainder of the property, second floor until the sixth floor.
Cinema business is doing well, recovered very quickly, as has, you know, the fitness segment. So, in that sense, we're comfortable and actually quite happy to have such a segment in our portfolio as a cinema. People need entertainment and relatively cheap entertainment. So, that's definitely that shows also in the results. With Europa Shopping Center, we are working on the third floor, which is a prime pri-primary topic, how to lease out that half of the third floor to, well, to tenants that are not in retail segment. So, in other segments, to improve the tenant mix, improve the property and make it more mixed use.
We see it a game changer and several negotiations ongoing, and again, I hope to make further announcements in upcoming periods. Galerija Centrs mentioned already about the food hall market, which is coming in November, improvements in H&M store, but also search for new anchors on the fourth and fifth floor continues. Also, adding mixed use to the properties will most likely be related to either offices or clinics or also gym. We know what we have to do, and you know, hard work is being put on by the teams in order to achieve those new leases.
To make maybe a recap here, you know, this is where we're we are focused on. You know, if we believe that we can still get the best price today, at an acceptable level, for some of our assets that we don't see long-term potential, we will consider selling them. We continue to deleverage, continue to cash up for the coming 12-18 months period. We want to pay back the bonds. We want to have some funds for the for the CapEx fit-out investments that that would be needed to achieve improved NOI.
If we achieve improved NOI, we are able to get better financing terms with the banks. That's definitely what we want to achieve as well, because compared to the bond, bank financing is still very, very competitive and much cheaper. Some of our LTVs in some of our properties are, are, are very low at the moment, because of the recovery happening. That's one side of the coin as well, of what needs to be solved for the upcoming six to 12 months.
ou know, several lease agreements have already been signed, and a lot of them under negotiations, and bit by bit, you know, we are confident that we can increase the occupancy of our top assets already now over the next six to 12 months. But there are many more things that I cannot maybe announce today that are in motion. This, I think this slide definitely summarizes the action plan that currently is in motion. Let me see if I have some questions here.
There was a question also on the NOI drop of from 1.4 to 1.2 last month, and that is directly to do with the disposal of Duetto. Yes, there was some indexation, but the new level of the NOI is 1.2, and I think it is reasonable to assume that the annual NOI will be roughly EUR 13 million-EUR 13.5 million. Let me see. There are more questions. The question on the office market. How do I see the office market today?
I would say that office market generally works fine, and there are tenants that are looking to find more efficiencies, especially in certain segments, such as IT and probably financial services to some extent. Then again, you know, real estate, real estate development, we definitely don't see that, rather the opposite. In that sense, and also, you know, back offices, I think due to security reasons, people are required to work more from office and cannot provide too much flexibility there. So, for example, SEB that is moving out from Upmalas, they are actually expanding their back office service center, and that's why Upmalas was too small for them.
Upmalas is a, is a good quality, actually a very good quality property, on the left side, bank of River Daugava. It is has 2,000 square meter floor plates, and that's why the new tenant that has also, we have been able to attract to Upmalas likes the property. There are, you know, and this new tenant is actually gathering their different small, let's say, small premises, people from the smaller premises into one. They are consolidating the premises, so we see that as well. In Lincona, we see one of our anchor tenants also increasing their premises, but yes, in LNK's case, we saw a decrease.
I would say overall in the market, there is definitely increased competition for tenants, and that's what we see also in business today with Meraki. The new reality in the office segment is beginning to show, you know, the new face. I'd say the office market growth is definitely expected to be smaller than, let's say in a pre-COVID periods when it was, you know, the growth of 20%-30% annually. You know, as Baltics are still moving towards, you know, service-based economies and, and, you know, we have not near, not even comparable amount of office space compared to the Nordics. There's definitely going to be some growth overall.
I think from the short term period, yes, there will be some reductions, there will be more competition. So in that sense, probably the new stability will be found within the next two or three years. What is the, what is the new fit out for the, for the, for the offices needed and, and the new standards going forward with this life after COVID? A question on what proposals have we received for our properties and, and which, which ones? I can probably generalize a bit. I don't think we have received pro offers for all of our properties, but we received quite a few offers. Most of them actually unsolicited offers.
I think what, you know, looking back to the, to the six months that we had, you know, there's definitely still buyers out there, and I think the market can be satisfied with that. Of course, it's a cat and mouse game, what price, you know, what property, and, you know, I wouldn't say that the market is completely dead. I think there are, you know, transactions happening, quite close to the valuation, at least, in our case. Let's say, certain offers that we have received, we consider them also based on the calculations, again, based on the potential that we see in our properties, not, not acceptable, as a lot of value would be, would be lost.
We do see, you know, with signing some of these additional leases that a lot of value can be recovered, and, and that's again, what we are working on, as we speak. There is a question on Galerija Centrs, and I guess that also goes to the yield of Galerija Centrs and Europa, and to some extent, you know, Postimaja, which has been lower. The net yield, you know, running yield, you know, between 3%-4%. It has been improving gradually and, and will improve, I think, also in the coming quarters. Yes, it is still below, you know, our target, the yield, you know, which is close to, you know, 6%-6.5% on average.
In the next, I think, quarter, Galerija Centrs, for ground floor for Arket will be still under construction and fit out works, so no rent is actually received from those premises. That's why the recovery of the yield is probably not happening too much in the next quarter. In Q4, definitely there would be improvement there as well as in first quarter, when the Arket effect should be very visible. Since it would be the only Arket in Riga, I think again, like, it's a novelty like we see with the food hall perspective, you know, we're absolutely amazed what's happening there. People, you know, come there.
You know, it's not cheap, you know, to have a dining experience there, but just the views and the atmosphere and, and the vibe, you know, that's what people want, and that's what people, you know, in, in today's retail world, search for. It's not, you know, again, only food stores or fashion, it's about experience and, and we do the best we can, you know, with, with the concepts that we can come up with. And we believe that Arket will be similar with their, with their, you know, little cafe there as well, in the courtyard. I'm looking forward to, you know, further enhancing them with, with anchor tenants that we're targeting.
Again, that will take, take probably another 12 to 18 months to fully realize. Let me see if there were any other questions. Yeah, coming back maybe to the administration of the fund and, and, you know, we've been searching for, you know, ways how to, you know, cut costs, you know, reduce the marketing expenses. Also negotiated as much as possible with, with lawyers and, and, auditors for better terms. Decided to, you know, postpone certain expenses for the future. We've really gone through, you know, as well, the cost cutting as, as much as possible.
Of course, you know, especially for our new concepts, we need to have some marketing, you know, to promote it and, and to get the NOIs improving. But, but we, we aim to be as, as efficient as possible in that in that regard. Let me see if there's more, more questions. Maybe, yeah, just to, just to summarize once again. It's, it's been turbulent times and, you know, we're preparing for for for the upcoming period, which will be as well challenging. From, you know, one end, you know, we're, we're in economic recession already.
The positive thing is that all the new, new concepts opening in our shopping centers, in our centrally located assets, show very positive results. Again, new concepts work. They are you know, fresh news and we see it from the results. We see that, you know, we're working towards the right direction. As well, the turnover of the tenants hasn't really dropped much. It has remained stable, maybe hasn't shown major increases now over the past quarter, as it did, you know, end of last year, due to inflation and price adjustments. We're cautiously optimistic there, especially the new concepts work. Working on decreasing the vacancies, that's our primary goal.
That will allow us to to improve the the occupancies, the yields, get better bank loans, then we have more resources to pay back the the expensive loan. Up until that, you know, we we have disposed some assets, may continue to dispose even more, if that's necessary, to have sufficient cash to go through this period of re rejuvenation of the centrally located assets. As I mentioned, you know, the potential of roughly, you know, EUR 4 million-EUR 5 million of additional NOI.
You know, we see that as very tangible, dependent on these new concepts and new leases, and from that, a lot of value can be restored, regained, instead of, you know, looking for ways how to, how to dispose assets in today's environment, at very unfavorable conditions. So, yes, we have started discussions on refinancing of the loans also happening next year. They are well in motion. We have good relationship with the banks, who have made quite large profits in the past periods. So, we hope to achieve attractive terms with the banks.
It's yet early to see what terms, but, maybe one note I can give here is, is that we had, I think, the most difficult time, end of last year, beginning of this year, where disposals were not certain, nothing was certain. Banks, were very conservative towards, you know, us being able to refinance the bond at all. As you know, they saw what was happening in, in the Nordic market, in Sweden and Finland, especially and, and but after now, after the past six months events, we've been, you know, executing, we've been able to execute these plans successfully.
I think going forward, we are in a, let's say, more predictable or more certain situation as we were compared to end of last year, beginning of this year. I think thank you from my side. Hopefully, this was informative. The work continues, and if we have any additional news, of course, we will announce it separately through a stock exchange. I think one should expect some news definitely in the upcoming month or two. We're, you know, looking for various ways how to you know, keep our cash buffers, how to, you know, get the best possible terms with our loan partners, and how to be also ready to to attack the market and the opportunities in the upcoming periods.
That's also something that we are, we are discussing with some of our anchor investors and that have a long-term view, you know, on the Baltics. All the best, and let's be in touch.