AS Pro Kapital Grupp (PKG1T) Earnings Call Transcript & Summary

Good afternoon, everyone. I see it's already 3:00 local time in Estonia. My name is Silver Kalmus, I'm the Head of [ Debt Securities Area Manager at LHB]. Also welcome to Pro Kapital bond issue webinar. Personally super excited that we have a true [ pan-Baltic ] company, tapping the [ 10 Baltic ] capital markets. We have prepared slides for you. Pro Kapital is developing high-quality, mostly premium residential real estate in capital cities in the Baltics. With me, we have the Managing Director at Pro Kapital Group, Mr. Andrus Laurits; and CFO, Ann-Kristin Kuusik who will walk you through the slides. And it's a live webinar. We are going to record it and also uploaded to Pro Kapital's website later on. [Operator Instructions] We will try to answer all the questions after the presentations. I think that's the most efficient. But for now, I will give a handover and the word over to Andrus to begin with the presentation. Andrus, the floor is yours.

All right. Thank you, Silver. First off, I apologize for my voice. Just as it happens, it happens to be gone today, but good afternoon to all the listeners. My name as Silver said Andrus Laurits, and I'm the General Manager of Pro Kapital Grupp. And I've been involved with the company since '97 already. We are very happy to have the opportunity to introduce to all the listeners, our activities, our history in the context of the ongoing bond issue. I will tell you more about Pro Kapital in a more general sense, our history, our activities. I will share our assessment or my opinion, observations on today's market sentiment. And after this, I will give the floor to our CFO, who will elaborate a little further on the financials. And lastly, then Silver Kalmus from [ LHi ] will walk you through the terms of the bonds and the subscription matters. But before we get into the details, let's -- we need to get the legalities in order an important, let's say, disclaimer notice that this event here is not a solicitation to buy. It's an informative introduction in nature. So I kindly invite and encourage everybody to read this notice very carefully before making any decisions. So let's begin with the most important question then as to why we are here. And as you all know, Pro Kapital has launched its bond issue that started officially yesterday. And the purpose of this bond issue is to use the capital to fully redeem our existing bonds, which are currently listed in Nasdaq Stockholm Exchange. Pro Kapital has by now developed a very clear Baltic identity. All our activities, our customer base, our entire portfolio is predominantly in the Baltics. So it is only natural that also our investor base be here with us in the home market. And at least is the important is also the fact that with this move we would save on our operating and the financing costs. And before going to our history and portfolio, a brief overview of our group structure, in other words, how we manage our operations. Program in the group is a publicly listed holding company, coordinating real estate development through dedicated country platforms and project-level subsidiaries. Quite typical quite a typical structure for a real estate developer. And then local development platforms such as Pro Kapital Estonia, [indiscernible] Lithuania, are then, in turn, supported by separate special purpose vehicles for individual projects. It helps us to manage each development separately, keep the finances apart and just enables us to have a much better control of each individual project. As I mentioned, Pro Kapital Grupp is a publicly listed company since 2012 already, and since 2018 on the main list of Nasdaq [indiscernible]. As of date, our shareholder base is well over 900 shareholders. And many of them are, let's say, nonresidents that hold that hold their accounts through nominee companies. And currently, the largest shareholder of the group is its original founder, Mr. [ Mesto Petone ] directly or through his affiliates. So for the past 32 years, Pro Kapital has been developing homes, offices, shopping centers in all 3 Baltic capitals. At different times, the weight of these functions has varied in our strategies. But today, we have very clearly become a homebuilder. And if I were to describe our developments, I would tell you such keywords as prime locations and massive locations, large locations, very thoughtful architecture and high construction quality. And especially as it concerns the latter, we have always been very demanding of our contractors, which has not made our life any easier, believe me. And today, when we are organizing our contracting by ourselves, we are especially demanding of ourselves. And just to grasp the scale, some numbers. As of date, we have built and delivered over 1,200 homes apart from all the offices and the shopping centers. And we still have over 1,800 homes to be built in our portfolio. So in construction terms, this means well over 0.5 million square meters of already developed areas and again, well over 300,000 square meters that is waiting to be developed. So the total portfolio size that you see on this slide is something that we are quite proud of. As to the time line to try to illustrate our 32 years of history on a time line, it gets a little cramped, but we have we have tried our test, and we have made some selection of perhaps more important developments. 1994 is when Pro Kapital was established and that back in the day, I believe we were one of the first so-called professional developers in the Baltics. And our earlier years were predominantly marked by various large-scale acquisitions and purchases and it was exactly these purchases back in the day that paid the way for our today's portfolio. And just to give you a few examples where we have color on a quarter today, this used to be huge [indiscernible] fish plant production plant, which we acquired in [ Marina ] Industrial Complex, [ Tony military area], where we have our [ Kristina City ] developments today. In Riga, massive Kliversala area and a huge [indiscernible] metal production factory in [indiscernible] Street. So until the mid-2000s, our focus was mostly on commercial development when we completed our very first development pro capital business center in 1999, the first of its kind in the Baltics, [ Kristina Shopping ] Center and in 2003, [ Domino's ] shopping and when it comes to developing shopping centers, we consider ourselves the pioneers in the market because. As I mentioned, [ Kristina ] was the first of its kind at that time. And from then onwards, our focus shifted more and more towards residential and real estate. By that time, we had already completed. [indiscernible] is a quarter we had done many residential developments in all the old towns of [indiscernible]. In 2011, we completed the first a massive development in [indiscernible] Street. In 2018, many award-winning architectural masterpiece of residential building in [ Riga ] of [ River ] Price residence. And moving closer to present day 2022 was a big year for us in [indiscernible] when we completed 40 apartments into different projects in [ Kristina ] City and the [indiscernible]. And in 2026, we completed a very important project for us in Vilnius old [ Mesto ] Vilas or city villas in translation. And the project is very significant to us in the sense that the record sales there have achieved EUR 14,000 per square meter price and the record transactions have fetched over EUR 4.5 million. But even more important than the record deals, it is important that the median price or the average price of all the unsold units of -- I'm sorry, of all the sold units in that project is EUR 10,000. So in the luxury segment in billions, we are using boxing terms an undisputed leader. And this is not just in my head, but also according to the officially published statistics. So the Vilnius market is booming today and it's posting very strong results for us. Our portfolio overview. Today, I would say our most active life is happening in [ Tallinn], where we have 4 projects in active development and 6 projects are upcoming. So in the short and midterm perspective, Tallinn definitely provides the largest volume and also the cash flows. In Latvia, we have one project ongoing and 9 projects are upcoming. I would like to say that in Riga, we have by far the largest development portfolio today. And in Vega, where we are very active in the luxury segment, we have 1 project ongoing and 1 is actually about to start. Now going further into the Estonian projects in more details. Out of the 4 active projects in 2 of them, the construction is completely done. The construction loans have been repaid. So the construction risk is fully mitigated. We are only marketing the unsold units in 2 projects and actually also in the third one, the construction is ending next month. So we are planning to start delivering the units, the sold units to our clients last quarter of this year. And the only active construction site today is in the [indiscernible] first phase with 145 units which is being financed. The construction is being financed by the traditional construction loan and the units are on presale. And out of the projects in waiting, so to speak, out of the 6 of them for 2. We already have the building permits in place and for 3, the building permits that are in process. So what I deem important from -- especially from the perspective of investors is that we do not have any lens in our portfolio. It didn't start, but also across the board that bear the risk of detailed planning, which, as you may know, is a big headache and a completely unpredictable process and adds a lot of unknown factors to one business plan. So I believe we are at a very good place in Estonia with our projects and some visuals of our active developments in Tallinn Kalaranna, the [indiscernible] military area where we have all our [ Kristina ] city developments over 18 hectares and the [indiscernible] buildings and [indiscernible], that is an active construction site today. Moving on to Riga. The active development that is happening now is called [ Flumarin ] residents. It's under construction now slated for completion end of next year and we are actively in the marketing stage. We also have another project with building permit in place, so to speak, development ready called CDOs, and this will add another 330 units and over 40,000 square meters to our portfolio. But most importantly, Kliversala be, this is our group's flagship project by far, the largest if any of the listeners are familiar with Riga, you can picture [indiscernible] Hotel on the 1 side and [ SmitBank ] [indiscernible] on the other side, in between those 2 landmarks there is a peninsula. And that project alone adds to our portfolio, over 100,000 square meters of development area and almost 700 units. And the preliminary project for that development has been -- has received all the approvals from the city and also UNESCO Commission. But I will return to the topic of Riga towards the end of my presentation. And some visuals, we -- this is our River Breeze Residence in the forefront, many architectural awards and the green area, and if you can go back 1 slide -- or the green area behind the round River Breeze building is where the Kliversala day development will take place. Beautiful water views to the whole town of Riga and the river in itself. And in Vilnius, we completed this year the project that I already mentioned to [ Minister Villas], where we have very exclusive homes. Construction is completed as of today, we are only marketing the unsold units and we are about to start another project called [ Borgo], which is also a luxury segment product. And as I would like to say again that -- and stress that Lithuania really today's economy is booming and they are a very clear leader in our portfolio and some visuals of our developments in Vilnius. Now perhaps one more surprising detour to Germany. You may have noticed when I was showing you our structure that we had country platform, Pro Kapital Germany. And it is specifically for this purpose, we happen to own a very unique and historic hotel property with 116 keys and 11 conference calls that is located in the beautiful spot town of [indiscernible], about 1 hour's car drive from Frankfurt. And the building is very important in the context of European history because it was here that [indiscernible] met back in the day to try to amend the German and French relationships post World War II. Given that we have limited time, we're not going to be able to go through a long and a comprehensive market study. And instead, I would like to offer my personal observations on today's market sentiment. The recently published GDP and wage growth forecast combined with the slowing of inflation will definitely provide a very solid basis for steady progress. Unfortunately, the numbers are quite good for all the Baltic states and hopefully also beyond the margin of error, so that there is real growth taking place. And for example, from our experience, when things are in good shape in billings, I would even say more than in good shape, then we feel that the improvement in consumer confidence and affordability, would greatly help especially Taillinn activities. And not that anything is particularly or dramatically wrong with the situation and it is exactly here that I would actually like to make one example from our own experience. In the post-COVID period when the GDP was in the red for Estonia, for the 9 or 10 consecutive quarters, and with pessimism looming everywhere, Pro Kapital actually achieved a EUR 12 million net profit with over EUR 53 million of revenue at its 2025 result. However, it is very important to note that all of this -- the good result was, to a very large extent, based on the activities that we were doing during '23 and '24. In other words, pray sales. So in the era of so-called pessimism, the market was actually very functional and people really did make vitally important decisions. And I believe that our numbers are a very solid proof of this. And moving up from the more general picture in doing perhaps more specific numbers. In those graphs on the left side, where the sales in new developments are measured for all 3 Baltic capitals. We see and quite logically that vision stands out the most with almost 86% growth that is '25 measured against '24. But also Riga and Taillinn grew by double digits, which is not at all bad, in my opinion. It is also true that when you start the measurements from a low plateau, it is so much easier to achieve a solid growth. But nonetheless, I believe that Lithuania numbers show that an even more growth is possible in Taillinn and also Riga. Obviously, on the assumption that the big macroeconomic picture supports it. And today, we definitely see that the macro numbers are improving. So we as Pro Kapital to capital, we are definitely looking onwards with a good level of optimism. All the 3 countries have developed at different speeds, post-COVID period and the fact that Pro Kapital as one of the few, if not the only one, besides medical construction that is active in all 3 Baltic states. It has given us the flexibility and the opportunity to force our activities in the countries, which provide the best market conditions. And again, business series is an excellent example where they have made a proportionally stronger contribution to our figure with their good results. And lastly, when I earlier I mentioned that in [indiscernible], we have our group's largest development portfolio, yet we only have 1 development in active stage. And why is this? If we are comparing now on the right-hand side, the median pricing in the new developments in the Baltics cities, we see that the Vilnius and Taillinn, they are more or less on the same level, absolutely comparable. However, Riga stands out with a price that is substantially lower. And this is exactly the reason why we have remained a touch conservative on this and have not jumped on the bandwagon as many other developers have done. There is still an anomaly in Riga market and then continues to favor, let's say, the lower price point developments. And again, very respectfully, we simply feel that our portfolio is worth more. And we do not want to spend our so-called premium quality land for an economy class development. But once again, Riga is picking up to Vilnius and Taillinn very fast and sooner or later, there will be time for us, and we will definitely be ready with our projects in Riga. With this, I thank you, and I give my time to Ann now.

Thank you, Andrus, and hello, everyone, from my side as well. I will now take you through the financial side of Pro Kapital. 2025 was actually a very successful year for Pro Kapital when revenue reached EUR 53 million. Operating profit was almost EUR 15 million and net profit was EUR 12 million. The first half of 2026 has also been profitable for us when the revenue for first 6 months was EUR 26 million and operating profit was close to EUR 6 million. One important metric along us these numbers is our gross margin, which is in simple terms shows how much we get to keep after covering the direct costs. In 2025, our residential development gross margin was around 35%, while comparable residential developers were at 16% to 24% In real estate, revenue can move quite a lot from year to year because it depends on when projects are completed and the apartments are handed over to the customers, but our gross margin has remained relatively stable at around 30%. And the increase to 37% over the best year has been mainly driven by the completion of our exclusive [ Minister Wheeler's], project and, of course, its strong sales performance. The lower revenue in 2023 and 2024 mainly reflects the cyclical nature of the real estate business as most of our earlier projects had already been sold and next projects were actually still under construction. So the sales were happening and the presale agreements were being signed, but the revenue wouldn't not yet be recognized. Besides revenue and profit, one of the most important areas for the bond investors is always the balance sheet. And as at the end of June, our equity was almost EUR 67 million. So in other words, around 54% of our assets were financed with shareholders' own capital. And while other issuers in our sector are in the range of 23% to 41%, this actually should give investors additional confidence that every new investment and development project is actually carefully assessed by us. As investment decision somehow become a little more real when our money is at stake, not just the numbers in Excel spreadsheet. In addition to stronger equity, we also have a solid asset base. This includes cash and receivables completed and under construction real estate as well as in investment property. And in investment property, it includes mainly the land plots where the development is still ahead of us. On dated inventory at the end of June included 85 apartments and 10 commercial permits together with parking spaces and storage units. And additionally, we have [indiscernible] around 375 apartments in active development and construction across all 3 countries. What is also important is that our completed properties are carried on the balance sheet at cost. So the additional profit margin is recognized when the property is sold. And development in progress, of course, it is not net as the cash or a completed apartment, but these are the projects that are expected to generate a significant part of our revenue and cash flow in the coming years. And the final key topic is our debt level, which has come down significantly over the past few years. Our LTV, which shows how much debt we have compared to the value of our real estate assets has come to down 40% over the past 3 years. At the same time, 83% of our total debt is already today covered with existing cash and completed real estate held for sale. And I would also like to point out that the current bond issue will not increase from capital's overall debt level but its main purpose is to repay our existing bonds in the Swedish market in full and bring this financing back to our home market in the Baltics. So at the same time, of course, it will help us to reduce the administrative and financing costs related to the servicing this debt. So to sum it up, I would like to highlight once again the key strengths of Pro Kapital Group, which are our own track record and presence across all 3 Baltic countries, our strong equity and solid asset base and our prudent debt level together with profitable development projects. So if you decide to invest in Pro Kapital, you are investing in a long-established Baltic real estate developer with a broad development portfolio. So this is over from me, and I will now hand over to Silver.

Thank you, Ann. I see we have already quite many questions also to you, Ann. But maybe before I will read out the questions, let me walk you through the terms as well. Before I do that, I encourage everyone to go to Pro Kapital's website and download or read at least prospectus, which is available in English. Also, the terms and conditions are available at Pro Kapital's website. So if you have any questions while you're reading it, let us know, you can write to me directly or the Pro Kapital. We are happy to answer all the questions after the call as well. To summarize the terms of the issue. So the issuer is Pro Kapital Group. So it's an unsecured bond the type of placement is a public offering in all 3 body countries, also -- the bond issue is also available for professional investors in European economic area. So the professional investors can also subscribe. The issue size is EUR 6 million with the possibility to increase it up to EUR 10 million. The interest rate is 8.3% and it's paid out quarterly. The issue date is 25th of September and the tenure of the bond is 2 years, but it's important to highlight that issuer can also be in the bonds early 6 months prior to maturity. The use of proceeds, as Ann mentioned, is for the redemption of the existing Swedish bonds fully. It's very important that we have the financial covenant written in the terms and conditions. This -- we are testing on a quarterly basis, and it has to be above 35% at all times. These bonds will be also listed on Baltic bond list on the settlement date. The [indiscernible] bank and the legal advisory tags. If we are now going to the next slide, then here is a short reminder for some of the investors that maybe are doing. The first bond investment to invest into a bond investor has to have a Baltic securities account. If you are a legal investor, you also have to have a legal entity identifier. And regarding the subscription period. So yesterday was the first subscription day and the subscription period will end next Friday, that is September 18. The allocations and results will be published on Tuesday, that is September 22. And as I mentioned, the issue date will be 25th of September and expect that lifting of the notes is the same date. Now I see we have quite many questions. So let's try to cover all of them. So Ann, maybe the first question to you about the financials. Regarding your gross profit margin, so it's quite high. The investor is mentioning what are the main drivers behind it and is it sustainable?

Thank you. Of course, we don't know the exact cost structure of other developers. But we can say that pro capital benefits from strong cost control. And of course, from long experience in pricing the projects. Also, our in-house general contractor helps construction, sorry, helps us to manage our construction costs. And I would say that at the same time, also definitely a good location and projects quality support our strong selling prices. I would also point out that our direct costs, they include capitalized construction loan costs and the earlier land evaluations have already also been recognized in previous periods. So this one will also not improve actually our gross margin. About future. Of course, margin will always depend on the project. and most definitely from the market conditions. But our current development portfolio and strong locations definitely support the healthy margin also going forward.

Okay. And a follow-up question I see is about revenue for '27 and '28. So do you have any predictions for the revenue for '27, '28 based on the current inventory and development pipeline and would EUR 25 million per year be a fair assumption. That's the investor question.

I'm sorry, how [indiscernible]?

So whether the EUR 25 million per year would be a fair assumption for the turnover or revenue?

Okay. First of all, I'm not definitely trying now to step away from this question, but as we are a stock exchange company, and we haven't actually published our forecast for the next years. Then I try to answer as good as I can from the actually existing financials. So as you saw, we have actually really solid completed inventory balance, which is EUR 27 million, and which we added up the gross margin. So based on that, we expect to generate enough revenue also in the future. And of course, our completed projects, not completed the projects that are still under construction will be completed next year, and we'll have extra revenue and cash flows from that -- and as I said, unfortunately, I can say that is it EUR 25 million or is it EUR 50 million, but we do our best. And we can also say that actually the demand on the market is still existing and our first 6 months result also supported.

Silver, if I may add, true, we are unfortunately, we are not at liberty to say predictions or prognosis here due to the regulations. But anyway, if the listeners who have posted the question, if they read the prospectus our current activities, there are also tables with unit counts, which are in active development. It's fairly easy to, let's say, to deduct, to deduce what would be the assumed revenue or at least the size of it. So I invite everybody to read the prospectus and especially where it describes our business activities.

Okay. That's a good recommendation. Two more financial questions before the project-specific questions. So firstly, about the equity ratio. So the listener is asking, why such a high equity ratio compared to other developers.

Ann, if you want, I can take this.

Yes. Yes.

So the high equity ratio, it's actually a conscious decision that given our age that we started practically from mid-90s, we have seen all the different cycles and it is also the owners, let's say, philosophy in my opinion, that they would rather carry a bit more buffer under our belly so that we are -- we can weather the crisis much better and it has proven to be the correct decision. When times are tougher, we are not forced to sell at fire sale prices it gives us the delivery to really elaborate the projects carefully before starting. So it just gives us some financial freedom and flexibility to make very conscientious and well thought out decisions. So why -- yes, so that's the answer. It is intentionally like this. And I don't see this philosophy changing in the next period where we have a lot of developments coming up.

I think it's a good philosophy. Now the second question or last question, sorry, is about project financing. So is the bank debt secured solely by the respective project or SPV that the collateral package also include share pledges or guarantees or claims and other development assets within the group?