Good afternoon. This is Tarmo Karotam. I'm presenting the First Half of 2022 of Baltic Horizon Fund's results. Let us kick this off as usual with a 45-minute presentation, and then some Q&A later if there are any questions. I received quite a few questions over email, so thank you for that. I will try to respond to those or during the course of this presentation. Hopefully I will get them all covered. Let's start with what we consider the notable events for our fund during the first half of 2022.
Of course, we were happy to see the restrictions dropped in the end of March, in early April, across the board in the Baltic States. As we had continued already last year with our shopping center concept renewals, then we continued as well during the first half of 2022, finished [Postimaja] and now we have also finished by summer most of the major construction works in Europa. There are still some facade upgrades to be done in August, September, but we're happy that now the major demolishing and reconstruction works of new amphitheater and new escalators have been finished.
Of course, that gives us a good potential to see better results in Europa during the second half of this year. I will talk about that a bit later in more detail. Also, we have by today fully commissioned and completed Meraki first tower, and it's ready for the first tenants to move in. We have a clinic there, and then, you know, Luminor Bank with its retail unit and as well a couple of more smaller tenants. We're still in search for the large anchor, but again, I will then come back to it later on during this presentation.
For us, you know, throughout the COVID period, lockdowns have been affecting the funds retail assets mainly in the city center, which is clear. Regardless of these difficulties, we've maintained great relationships with our banks and we have, over the course of the two years, only breached I think one or two soft covenants regarding the net rental income clauses. But other clauses have not been affected at all. As a result, Standard & Poor's as well has given us a stable rating despite of the challenges that we've had during the lockdowns.
There's been quite a few questions over the years that you know when we did the bond in 2018 at a 4.25% coupon, then was that a good idea? You know, if you could finance from the bank at, let's say, 2%. We still believe it was a very important move for us. First of all, we were able to with a slight increase in cost of debt due to the higher coupon to remove all the amortization that we would have to otherwise pay back to the banks. Second most important aspect was that we lowered the LTVs that we had with the banks to the level of around 35%, 40%, 45%.
Also during the lockdown period, especially for shopping centers, we had that LTV buffer or in covenants, which otherwise potentially could have been breached, due to the decrease in values and the decrease in the NOI. That has given us, you know, sort of fixed cost of debt and quite good foreseeable cash flows over these years. Now in the second half of this year, we are continuing to refinance our loans and the bond. Again, I will come back to it later during this presentation.
Just touching upon the buyback program, and I will explain a bit more there as I've also done before, but the reason for this buyback program was to first and foremost have a tool in the management toolbox to use when the time is right and when the combination of aspects in the fund sort of demand it. It was put in place so that we can act quickly and over the next three years. To expect that you know all of our free cash will now be poured into you know buybacks, it's, I think, unfounded because cash needs to be also used for other things.
Again, you know, we will have the opportunity to buy back units on the regulated Nasdaq. I think we will do that when the time is right. We haven't done it yet, now during the summer, as we believe that the cash that we have at hand can be used for other purposes to create the long-term shareholder value, even at the current market price that is there. I think the largest, of course, exercise that we have undertaken is to refinance our loans over the past couple of years, and we have successfully refinanced already our shopping center loans.
For the remainder of this year, we will continue to renew some of our office building loans, but as well, find a solution for the bond. These are the main topics that I would like to talk about today. Going into more detail, I think overall the fund has been stable. I think the Europa construction works and maybe taken a bit more time than we expected, so it will receive its finishing touches now over the coming months. The major reconstruction has been finished.
The reason why June we had slight drop in occupancy and in net rental income was mainly because of the Europa Shopping Center, as we had recorded one of the bad debts written off those, but also given discounts to our tenants. Also to note that the food hall, which has been open since January, many of the tenants have received large rent discounts for the first month, so only now their rent is kicking in there. We know that by September official occupancy of Europa will be more than 90%. This is already contractually also covered.
New tenants are moving into the premises and also the other premises are opening up again and the rent discounts because of the reconstruction works will decrease. That should show an increase over the next third quarter and we do expect that. There's been some questions around our stock price, and as well as this, we made a table here which compares us to some of the local other listed funds, but as well to the European property or ETF index. Generally, because of what's happening in the market and in the geopolitical world, all of the real estate funds have been affected one way or the other.
As you all know, there are risks of increasing construction prices, risks in increasing Euribor, inflation being very volatile, increasing risks in geopolitical tensions and availability of materials. It's. There's a lot of volatility in the market. The way we look at it at Baltic Horizon today overall is, you know, plan for the best, plan for the good times, but be prepared for the worst. In that sense, the volatility, I haven't seen such volatility probably since, you know, last financial crisis. Yes, everything may turn out to be better, but we'd rather be more cautious and plan for the worst.
Now, I think overall, there was a question about fund strategy. Let me just reaffirm this. Baltic Horizon, it's a commercial real estate fund focusing on the capital cities, as we still believe that over long term, the capital cities will hold the highest value. Yes, there's been COVID impact. Yes, there's flexible working now, that's for sure. Yes, there's some let's say de-urbanization, as one may say. Yes, there's not that many tourists as they were in 2018-2019 due to all of these tensions and still COVID aftermath. Again, over long term, we at Baltic Horizon believe in the value of our shopping centers in the city center.
We really believe as well in the Office segment. What we see when we talk to our tenants that yes, you know, flexible working is here to stay, but very few tenants are thinking about decreasing their premises. There are some yes in our portfolio. One tenant which was at least [Lithuanian tax] gave back some space after COVID started. Many companies are still preparing for growth, and they're holding on to the square meters that they have. You know, flexible working is here to stay. Now, when you look at the valuations of Baltic Horizon, then we had a boost in values in most of our properties, especially in the Office segment.
That is mainly to do with the higher forecasted inflation for this year and next year. There's been quite a lot of questions about how much can we index, so the answer there is that we can index as much as the contract allows, yes, it's not 20% and in many cases it is capped at, you know, 5%, in some cases it's not capped at all, so then we have special negotiations with tenants. For us, it's again to have rather than maximize short-term, you know, income by squeezing the most out of our tenants, you know, we still talk to them, we find, you know, the best way forward. Sometimes instead of applying full indexation, we have prolonged the lease agreement.
We want good relations with our tenants and our tenants being happy. Again, it's not as straightforward as one would maybe expect. Still, you know, in the first half of the year, we were able to index like-to-like in Office segment more than 2% and in the second half of the year, the indexations are continuing. We're doing what we can according to agreement and I think that's been quite effective. Now, you can also notice that Meraki value was restored here, because the development is ready and some additional improvements in value are expected in the coming quarters, as not all of the construction value has been accounted for.
We did have quite a solid increase in Sky Shopping Center in value, and also in the tenant mix. We had some new tenants coming in. Sky Supermarket has been performing well. We've owned it for almost 10 years. We expect actually Domino's Pizza to open there in the coming weeks. Yes, it's also true that Sky Shopping Center is for sale, and since we are looking what sort of portfolio we would like to hold on a long-term basis, and that process is in its final stages.
Now, it is important to note that the biggest decrease came from Postimaja's valuation, and that was a long discussion with evaluators. It is mainly due to the fact that for evaluators, this time around it was almost impossible to estimate what sort of construction cost would there be for the expansion and what sort of level of rental income they should assume. They, you know, decided to actually remove the development value from the valuation this time altogether.
I'm not saying that this will not come back, but I think definitely we need more stability in the market to better estimate the overall price of the expansion and the value of it. In addition, we have actually planned to start very shortly the new detailed plan. Actually, Postimaja and Coca-Cola Plaza have the construction permit based on the design criteria, but no detailed plan yet. With that, I think it is also very important for us to pursue the maximum value that we can get from the construction rights and the new detailed plan. Yes, it may take time. Yes, it could actually include residential to some extent.
Again, we have this location on a long-term perspective and we aim to, you know, extract the maximum value out of that. This is about valuations for half the year. Overall, from the portfolio perspective, they were quite stable. There's not a lot to update on the tenant mix. I think, you know, retail in terms of the share of rental income is expected to increase over the second half of the year, when Europa's discounts are finished and we do expect some improvements also in Pirita a nd Sky. In regards to the occupancies, they have remained stable over the past quarters.
Again, two properties affect currently the returns or the recovery of the funds. It is clear that this is Europa and this is Galerija Centrs. I think, as I mentioned before, the occupancy of Europa contractually is already above 90% today, with the new lease agreement signed, so the tenants will open up the stores now in the coming months. That should also recover the NOI. The same is expected with Galerija. However, for the second half of this year and reconstruction of the food hall on the second floor will happen. That's now the main focus of the Europa and Meraki from the fund perspective.
After that, the major sort of reconstruction works within the fund have been finished. Now, if you look at the NOI development and compares to last year, then most of our properties have shown improvement. Like for like, you know, even without G4S headquarters, the result is better than last year's first half. There's been this question again, why Europa's first half was lower, and it was precisely to do with the reconstruction period discounts, but as well the larger vacancy due to the reconstruction, which, as I mentioned before, will be turned around and expectations on second half is considerably stronger.
Galerija Centrs did much better, and as well, the Postimaja complex, than last year. We do expect as well Meraki to start contributing to the rental income flow. I think that would mean that expected results for the second half will be better than the first half of this year. Now more details and some more illustrations. There was also a request for that, on what we have actually been doing over the past year and a half. Our aim, you know, during the lockdowns, the difficult times, has been to reinvest, you know, and revitalize our city center locations.
When tenants are opening their stores again and people are coming back to the city centers, then we are ready with the new attractions. Europa has definitely been a major success. If anybody has been in Europa in Vilnius lately, then we have now also the outdoor terrace ready and finished, and there's some chess games happening. It's really becoming a social hub in the city center. We're really excited about that, and we want to copy-paste that for similarly, you know, in Galerija. I think I've mentioned this as well several times.
Now, if you ask me about the market in general and, you know, where are we with our city center properties, then, actually in Tallinn, in Postimaja and the cinema, the footfalls and the turnovers are quite close to the levels of pre-COVID. However, in Galerija and Europa, we're still about 20%, 25% below the levels of 2019 overall. Of course, this is due to the fact as well that we have larger vacancies currently. Not all premises currently are delivering turnovers, but that we expect to improve now in the second half of the year when people are returning again more to the offices.
You know, flexible working is here to stay. However, it is also clear that people visit shopping centers less but buy more. Average checks have been increasing and considerably also during the COVID years and post-COVID as well. The tourists are not back to the level of 2019, especially in Riga. Again, we believe in these locations' long-term perspective and I guess the war has definitely affected tourism into the Baltics. That's clear. We also know that people, you know, want to travel. We see that and I think, you know, when more stability is expected from the geopolitical zone, you know.
I think positive news to the region is that Finland and Sweden are joining NATO, hopefully now very soon. I think that should definitely bring more focus to this area. Unfortunately, uncertainties currently still prevail. That's when you know we as a fund management team have to be ready for anything. This is one of the latest pictures of Meraki on the right as well. Today in August actually the occupancy rate is 23%. Maybe I can comment more about why the tenanting of the building hasn't been as quick as we all are hoping for.
I think first of all now we have a real building so it makes it still easier to find a tenant who however many times need to move very quickly. I can also share that over the past six months we have participated in a tender to get the anchor tenant, a local tenant, looking for 3,000, 4,000 sq m. Unfortunately in both of these cases we have finished second. One reason, I think what I can say is that one tender we lost because of location. There was another location that the tenant eventually preferred.
I think the tender was most likely lost because of heavy dumping on rental level by this other office building, which is much older than ours. We expect EUR 12.5 per square meter here. Yes, there's potential to negotiate some of that level. We also know that in the market currently, we are the cheapest brand new, premium, excellent building which is looking for tenants. On a long-term basis, again, we rather wait for the right tenant and really fight for it, and try to fill the building now as soon as possible. The building is fully commissioned. It's ready. It's a beautiful building, being inside there.
I think the grand opening will also now happen in September when all the grass is green and we do expect higher buzz in the market of our property and some new tenants. A few more words about the Tallinn City Center, and there's a couple of things I think are important to mention. First thing is that the cinema property and operations have been taken over by Apollo Group. I'm sure it's a well-known name across the Baltics. It's a very strong name, if not the strongest. We've had several discussions with them about the takeover and their plans for the future. They believe in this location again, to become their flagship property.
We're actually quite happy that we have such a strong partner. Currently, they are operating under the old lease agreement that they took over, which is up until 2028. We are in cooperation discussing what to do with the property and, you know, how to break the development into stages. I think the first stage would be looking at cinema operations from the second floor up, and then we would renovate the first floor. These discussions are actively ongoing now with Apollo and a new entrance to the Rotermann Square. This is something definitely actively under discussion. We have started as well to upgrade Postimaja Reval cafes.
New premises are being built as we speak. We expect it to also be a very attractive cafe with a big terrace facade and the opening date is end of September. Now, there's been questions again asked about the middle part and are we constructing that. I would say this is stage three. The market is very volatile today, so we rather do what we can, which is, you know, upgrading the cinema and Postimaja. Also, we are in discussions in Postimaja with a new international brand. Stage three is kind of currently postponed. As I mentioned earlier, we have in parallel plan to start the new detailed plan to have the building rights also on top.
A few words about Galerija, more details. The place for the food hall is the fourth floor of the new floor, and it's currently closed down. It's fully vacant, so we have secured the contractor. We have 90% of the area leased out. Let me see. There's some pictures here on Europa of the logo and the sort of the new social spaces in Europa. Some of the investors did ask for some illustrations. As well, this is quite a large space now in Galerija food hall. These are the visualizations of our interior architect, a brilliant local company. You know, this is. Again, we have the construction company offer.
We are basically ready to go. If you ask me, you know, did the budget increase here due to the given this, you know, the uncertainties, and I would say no, because this is mainly interior fit out, interior sort of development. No major sort of reconstruction and materials related to that is needed. It's mainly furniture and interior fit out with the new kitchens and new stores. Now, coming back to the figures. As one can see, we did have a slight increase in the values of the properties, but not as high as we hoped, because of Postimaja's valuation and the uncertainty around the expansion there.
Construction prices, as you all know, are through the roof, 30%-50% more expensive. Question is that, is that sustainable? Is that the new level for the future? As well, there's been several arguments against that this is also because of the temporary restrictions or let's say what's happening in geopolitical world. But then again, how temporary they are. It's difficult to estimate what would be the new level. But of course, as we all know, it will never be as low as it was before. Now, I would also maybe comment on the rental income of commercial real estate in this environment.
You know, many people see what's happening in the residential sector, so that if construction prices increase, then automatically the sales prices increase the same amount, you know, for the developers to sustain their profit margins. Yes, it is quicker in residential segment to push the cost of increasing construction prices to the end buyer, but it is also due to the fact that end buyers are willing to buy. It could be as well a bit of air in these prices.
What I'm saying is that commercial real estate, due to long-term lease agreements, it is more difficult to push the increase in construction prices right away to the level of tenants. However, I do believe that it will happen over a period of time in case the construction prices remain at the level where they are or even increase further, and that's for a couple of reasons. One is that new development, new competition will be smaller, especially in Office segment. And in case new developments are happening, they are happening at a totally different price levels. And, there's definitely I believe there is a different long-term push for the rental levels in case such inflationary environment stays.
Yes, there are also several discussions that potentially the economic downturn, due to all what's happening and also increase in Euribor, may actually happen. That again, with fewer constructions happening, should also bring down, you know, the demands, and then that means also lower construction prices. It remains to be seen. However, as in commercial real estate, to push the sort of quick increase or sharp increase in construction prices to the tenant level, it's not that easy. However, as I mentioned before, indexation is happening and to the level which we have, you know, contractually are possible to do.
It may be so that only bigger hikes in rental levels could happen when the lease agreements become due for renewal. Of course we are monitoring the situation on a regular basis. When it comes to the estimate of the rental income for this year and compared to last year, as I mentioned before, our estimate at the beginning of the year was that, well, we should recover the NOI in our portfolio within a couple of years. I still believe that this year will be better, like for like, than last year.
It remains to be seen, but perhaps just not as good as we estimate at the beginning of the year. Of course, there's a lot of volatility. We don't know what energy prices will do. Let's say, we see, you know, turnover is coming back, but then again, the cost base of tenants, especially in our retail segment, is also expected to increase. We are a bit, let's say less optimistic about recovering half of the NOI that we lost this year. I think 25%, 30% would be a good estimate. Again, it depends on what's happening, you know, with all the risk factors.
I think, you know, we do as much as we can, you know, to restore the values in our shopping centers as soon as we can. If Europa is fully open and fully completed in Q3, and then Galerija renewed, as we already moved to [P ortland ] from the fourth floor to the third floor. And the new food hall will be an attraction on the third, fourth floor end of this year. Next year should actually, I think, be quite exciting for these properties. One thing I haven't mentioned is that we have serious discussions with an absolutely new international retail brand to come to the first floor of Galerija Centrs.
There will be news definitely announced when we have signed that long-term agreement with them. If everything goes well, they will probably as well move into Galerija Centrs end of next year. I think, you know, lots of work. I personally feel, considering all the risks and volatility that our portfolio has potential and we continue to execute our plans. Yeah, these tables on the results also in front of you. I think most of what we already discussed, the cash position for us, yes, has been decreasing due to the investments into Meraki and Europa.
We do believe we have sufficient liquidity. Let me then move on to a couple of things which I think are still very important in the commercial real estate world for all of us. One thing is cost of financing and Euribor. The other thing is definitely cash flow production potential in our fund going forward and dividends. These two things I would like to focus on in the remaining part of our presentation. We have you know since the beginning considered that hedging should be part of our strategy. We don't want to take financial market risks.
Yes, over the past, I would say six to eight years, Euribor has been quite favorable and even negative. When we had bought some of our properties in 2016 and 2017, and also 2018, then we hedged for five years the interest rates, basically effectively fixing them, without almost any cost. There was actually one hedge that even the cost was basically zero. The market expectations back then were that Euribor will be negative for a very long time. However, you know, some of the hedges and caps that we've had in our later acquisitions, yes, they have cost some tens of thousands of euros, but I think it's definitely been worth it.
We still have hedging in our portfolio for more than 1.3 years. I think we have taken some steps and plan to take in Q3 to prolong that. One of the things that we are planning to secure for us is that we are not affected by Euribor if it decreases by more than 3%. Again, you know, planning for the worst. Now if you look at this chart, then you can easily see what Euribor used to be during even the financial crisis years. It is always so that the central banks seem to be either, you know, ahead of the curve or behind the curve.
This time it's certain they seem to be behind the curve. You know, when about six to nine months back, I thought that increasing Euribor is not going to happen because of the government debts of southern European countries, and I think that was a prevailing thought. Today, already for about three to six months, I've been much more pessimistic about that. Irregardless of inflation, you know, not being really sort of influenced by this. That's the paradox today that, you know, will actually the increase in Euribor influence the inflation. There's many reasons to say that not so we may be in the environment where inflation remains high and Euribor is being checked up.
As we all saw, the increase in the ECB rate during July was higher than expected. We believe in-house that within the next 12 months, Euribor will be 3%. It may trigger the issues in the economies, and you know, the Euribor may also even be higher than that, and it may come down, you know, two, three years from now, but during these volatile times, we want to make sure that we always remain cash flow positive. That's why our plan is to have majority of our portfolio continue to be safeguarded if in case Euribor increases to a higher level than 3%.
Now, major action, which is currently in the making is prolonging some of the loans and the bonds. In this year, you know, we have Meraki bonds, but also Lincona and beginning of next year, the Duetto office buildings and Postimaja to be prolonged. We plan to execute this together with the bond and the large bond, which is also due May next year, but we aim to execute this already during the fourth quarter of this year. Now that we have new valuations in place, we are approaching the banks, and we are asking for final proposals for our office buildings.
We are looking at our bond and seeing what the market thinks about that. It is clear that 4.25% today is not the right valuation for the bond, and the market, especially before the summer, estimated that it could be as high as 7%. However, I think the market has come down a bit, and with our top investors, we have already started discussions in the early spring. Now we'll see what we can agree with them in terms of the cost of the coupon or for the next couple of years to roll it over.
For us to also optimize the cost of financing, we are thinking to decrease the bond from EUR 50 million probably to around EUR 30 million level and then increase some of the LTVs of our office buildings, you know, from 40% - 45%, 50%, and get cheaper financing from the banks to balance out the cost of debt for our fund. Currently, regardless of the quite difficult situation in the capital markets, we don't see our cost of debt increasing considerably over the next couple of years. It will probably increase some basis points. Remains to be seen what offers we get now from the banks and the bond.
Regardless, you know, even if despite that, the debt capital markets are very volatile, then the banking sector in the Baltics is very competitive, and the initial offers that we have received are very competitive, so we're happy about that. That's definitely the major activity, apart from the operations, apart from opening up the Europa and finalizing the works in Galerija, this second half of the year. Then finishing off with some words about the dividends. As you can see, during the volatile times and, unfortunately, after COVID, we got this geopolitical crisis right away. Even though that we wanted to be more optimistic and forthcoming as we know that high dividends are highly valued by our investors, and
I think to be cautious during these times is probably more important than when times get better. There's been a lot of questions, okay, when are we increasing dividends back to the maximum levels or close to 100% of the generated cash flow? The answer is, I don't know. It depends on the environment becoming definitely more predictable. You can yourself think in those lines. Unfortunately, this is the case. I think it's important to note that the fund is continuing to generate positive cash flow and we have not stopped dividend payments even the most unpredictable times, and we are not planning to stop them now. We are...
Actually, I can say that we are planning to keep stable dividends at these levels, not lower them, currently. We have changed the frequency from quarterly to semi-annual also because of the uncertainty in the markets, also to have better cash flow planning for the fund. That doesn't mean that again, you know, it's not to sort of cut the dividends in half. It just means that two quarters will be paid out in one go. Now the question is that written in stone now for forever and ever? The answer is that no, it's just a temporary measure.
We may go back to the quarterly, but if things worsen even more, let's say if we see Euribor at 5%, then I think you can only imagine what sort of chaos would be in the markets. We may become even more defensive and pay annual dividends. We know what investors expect, and investors expect a return cash flows. I think as well that compared to some other dividend payers in the market, even semiannual dividends are attractive and especially at the current market price level, which we have in the stock exchange today.
You know, I'm still cautiously optimistic about the results of the fund over the next six to 12 months, not worsening, but rather improving. That's definitely sort of what we are working towards. I do hope that the investor base also appreciates the dividends that were paid out even during the more difficult periods. To summarize, again, the priorities for the coming periods is refinancing of the loans and the bond, definitely by November, December this year. To have also good predictability in terms of cost of debt and safeguards from potentially very volatile Euribor over the next two and a half years.
That's something that we want to control. Hopefully after two and a half years, come back to the markets when they're more stabilized and then refinance again at hopefully better levels. Again, Euribor may stay high for quite a long time, so we need to be prepared for that. Meraki first tower anchor tenant a priority, which we are working on, again participating in any tenders that are there and negotiating best possible terms for us to get the property filled and get additional NOI to the portfolio. Finalizing of the Rotermann reconstruction, Galerija Centrs food hall in this year.
That should increase both the occupancy but also improve the footfall and NOI for the year 2023. Europa, we talked about rental and the Apollo, you know, to understand what Apollo is planning there. I think they are planning investments and long-term stay in the location, as they do believe it could become their flagship cinema, and that's been very exciting to hear. Last but not least, focusing on keeping our office buildings full, prolonging the lease contracts. We have, as I noted before, we are selling Lincona, and we are thinking maybe one other property to sell.
I think I can reveal that today, that property would be Lincona. Some investors have also mentioned that, why don't we sell Pirita? I think we could sell that as well, but maybe not right now. I think for Pirita's value to be there where we want, we need additional six months. Last note that I have is that we have worked on a brand new website, which I think will be a good complement to the Nasdaq announcements and where we can share as well in a much more detailed way and more sort of everyday news about the fund.
It will be quite interactive, and hopefully we can already launch that in September. Much more, I think news will be available to the investors which are maybe, you know, not that critical that we, you know, only need to announce through to Nasdaq. Yes, there will be definitely more information about that in a coming four to six weeks. That concludes my presentation. I hope I answered the questions that I received and gave some perspective, some view on where we are and where we want to be, and how we foresee our portfolio and how we are ready for the risks and volatility ahead.
Unfortunately not the best of times, but again, we believe in our citizens and locations. We believe in Office segment, and that's where we will mainly remain also in the coming years. Thank you once again, and have a good remainder of the summer.