Baltic Horizon Fund (NHCBHFFT.TL) Q2 FY2025 Earnings Call Transcript & Summary

Hello. Good afternoon, and welcome to Baltic Horizon Fund's Q2 webinar. As usual, I would like to give some commentaries on Q2 results, also half year results and as well some information about the outlook in this coming year. So let us continue. The KPI table that we have in every webinar is also presented here, and we are making some progress with the occupancy as can be seen here. Main event that took place that affected the occupancy level in Q2 was that premises were handed over to the International School of Riga in June, and leasing activity continues across the board in properties. There are many expiries of leases, but also new tenants that have been signed up. There will be more details in the coming slides about that. We're also indexing our rents. And it's good to see that the average rent level is also slightly increasing, continues to the right direction. However, of course, the activities around leasing and welcoming new tenants, that takes time. And the effect, therefore, is slower than anticipated. Also we're making progress with net operating income, achieving EUR 3.1 million in the second quarter. And now that we have approximately EUR 3 million of NOI per quarter, we expect that to remain relatively stable throughout this year. So EUR 12 million of net operating income in 2025 should be achievable. Despite that, we have certain vacancies upcoming in the second half of the year. We're gradually also reducing our debt. Our LTV is currently at around 60.7%. When cash is added into this formula, the net LTV is approximately 56.7%, and this continues to be reduced. However, as well as -- it takes a bit longer of time to get it down to 50%, where we would want to be. And cost of debt also gradually decreasing along with Euribor level, but as we have been also partly paying back the bond, which is still the most expensive debt instrument in our balance sheet, and then the result can be seen already. The cost of debt and LTV level still remains above what we feel comfortable with, and we have been engaging in certain potential disposal activities. However, as also mentioned in the quarterly report, it is a very shallow market and especially for some of our core properties that we have tried to test in a market that what prices could be achieved in a given period of time, then those results have been nonsatisfactory. So we have decided not to sell some of our key assets, as these detrimental to that -- to the value of the fund. However, we continue some noncore, nonstrategic asset disposal processes, and hope to give you some news in the upcoming months. Let's say, the overall challenge also for the fund remains that converting the properties and bringing them up to the new standards and the new cycle, in many cases, requires capital expenditures and fit-out investments, and there's been a lot of cash flow planning in that regard. Many of tenants make the investments themselves, but still landlord's contribution in many cases is quite sizable. We've invested approximately EUR 1.3 million in the fit-out of the school's premises. The school is investing a similar amount. And also, certain fit-out investments are to be expected in the upcoming periods, so we have to very carefully plan that. When it comes to the tenant mix, then our largest tenants still to continue to be Rimi food retailer, the State Forestry with whom we prolonged the lease agreement with for another 8 years, even though at smaller premises. And we continue to have several governmental tenants such as Latvian Police and Information System Authority in Lincona in our portfolio. So overall, a lot of leasing activity is happening. We have a lot of tenants that are moving out, but also some tenants that are coming in. Key events that also happened in Europa was opening of the Fortas and Miyako concepts that we had. And we had in Galerija Centrs as well Massimo Dutti, but we are replacing them with Mango and Gant and other tenants. Good to say that we signed up Sinsay store for 500 square meters and also the entertainment area, which is trying to be opened in the summer of this year. And one note about the Latvian State Forestry release agreement is that in the second half of this year, it will impact our income from that property already due to the certain agreement that we had with the Forestry. We're entering into a fit-out phase over the next 9 to 12 months, where their premises will be slightly refitted to their new needs. And by year-end of 2026, they will give us back around 2,600 square meters for which we are already talking to potential tenants to lease out to other tenants then. And, let's say, some more vacancy is expected in the Lincona property by year-end, where Swedbank is also planned to move out, and also the search for new tenants continues. So it's still very dynamic market. It's very, very challenging to find new tenants at suitable and attractive rental terms. Long negotiations, staff negotiations also with current tenants to keep them in our properties. But slowly, we're making progress. And as of end of Q2, we had an occupancy at around 84%. And with some signed leases already then in the coming quarters, so we expect the occupancy to continue to slightly increase. This is also a table, which is quite detailed, but I'll give you some idea of the amount of negotiations ongoing with the team. And so -- and I think the major focus still is in -- on Europa. It's still on Galerija Centrs. And more news is definitely expected on the new anchor tenants in Europa in the coming weeks. The occupancy in Europa has temporarily decreased to 71%, but that's due to the changes of -- or relocation of the restaurants and as well the third floor, which has now been signed up by a sports operator. So it's definitely following sports and health strategy with Europa, and it seems to be the right path forward. In Upmalas Biroji in Latvia filling in the vacancy aside from the police, which is in the building, remains also quite challenging since the properties on the left side of the river, so it is attractive only to tenants in that part of the city. However, in S27, we're making pretty good progress, considering as well that the property was fully vacant some months ago. So in addition to school, we have found the volleyball association and some dentistry offices or -- so -- and we're in good negotiations with many tenants. There are many visits to the property. So in that sense, we're quite excited. And the tenants are smaller than they would have been several years ago. The needs have been reviewed by many office tenants, and everybody is looking for efficiency. Everybody is looking for good quality premises and not at very high prices. So -- but I think the property itself is -- has quite straightforward layout. And so we do expect further positive development in the office segment, especially in S27 building. And as well North Star remains attractive for tenants. So -- but yes, with Upmalas, we have more challenge, and Lincona is also probably a more challenging property to fill in. So the name of the game is to increase occupancy, increase rental income and decrease cost. So one of the main activities also in Q2 was that we again reviewed all of our expenses, renegotiated audit, renegotiated many of our other partners' expenses, reviewed ESG-related expenses and found some places where we can economize going forward. As well, the delisting of the fund in Stockholm is currently in process, and it will take a few more months to be completed, and we do expect some savings there as well. So I think going into 2026, we should be cutting our expenses by several hundred thousands of euros per year. Financial expenses continue to decrease. However, we -- it still remains quite high. But -- and there's various ways how to address it. One way is to sell another property and then take the proceeds from that, pay down the debt, especially the bond. We did achieve agreement with the bond investors that we can pay the bond, not in full amount, but also in EUR 3 million tranches, up basically whenever suitable for us. We achieved that in June, that agreement, so we're quite satisfied with the flexibility that we got. But also we'll talk about it a bit later, but the fund, together with its largest investors, is also discussing and contemplating on certain equity increase, focusing currently -- most likely on the current investor base to really reduce the debt level, which is too high at the moment still and continue the operations of the fund in a more stabilized and normal environment. Overall, [ like to write ] rent increased slightly. The office segment has remained more challenging due to some of these vacancies. But we're making good progress in the rents comparably in retail and leisure segment. We also decided to postpone the semiannual valuation since there's quite a bit of uncertainty around the inputs and as well in the -- in some cases, in some of our properties, in future tenancy and cash flows. So there's a lot of activity going on, as I discussed earlier, with exiting and incoming tenants. So we have saved also some costs in that regard. And -- but our planning is required by fund rules to have at least annual valuations, and we'll be preparing for that in the second half of this year when, as well, many of the vacancy issues probably will be addressed. So it will be a much clearer picture. But yes, currently, the fund has approximately EUR 7.5 million in cash. And some questions have been asked that why don't you use that money to immediately pay down the bond. Then -- the -- that money is not fully free -- freely to be used. Some of that free cash is actually either in our SPVs, I.t's either secured as a minimum sort of cash necessary for the -- according to our loan agreements and as well for operating needs. That will allow the fund and the SPVs to function properly on a daily basis. But as well some -- we are planning to have some of that money invested into new upcoming -- new incoming tenants. So -- but as I said, we are very, very focused on refinancing strategy update and looking for our best way when and how to reduce the bond further. In regards to our bank loans, so the year-to-date cost of debt is 6.3%. However, Q2 level already at 6.1%. Gradually decreasing. We have, during this past 6 months, prolonged many of our loans. And the next, let's say, negotiation that is to be expected with our financiers is at the end of this year, beginning of next year, where our 3 loans, Vainodes, S27 and Pirita come up for renewal. It's not a secret also that we have been working on potential disposals of our smaller assets like Pirita and Sky. Some process is in motion. Some processes are happening. So if there is more concrete news on that, then we will, of course, share that through a stock exchange announcement. And quite straightforwardly, this is what we are basically working on right now, and key focus areas is that, again, we're in the process of delisting. So I do, as well, reach all investors that have SDRs then to contact your banks to make the transfers. There is still quite a few units listed in Stockholm, and there is this very special process around the delisting, so that in case investors are not acting themselves to make the conversions to Estonia, then our agents there, Nordic issuing and Euroclear, will be forced to try to sell the remaining units on the market. There's also a regulated process around that. So I think I would again urge anybody who owns SDRs then either to convert or then sell to the market to control the process more themselves over a period of time. So we still have a few months left for this process to continue and to -- but yes, by beginning of October, then the deadlines start to arrive. And if -- again, if the SDRs are not converted or transferred, then they will be sold to the market later on by the agent. So we -- I touched upon the valuations. So as usual, in the portfolio, there are some assets that are improving, some assets that have more challenges. So it is difficult to say what is to be expected by year-end. It also depends on the market. The investment market is very -- still very quiet. It is dominated by local buyers. A lot of properties are for sale. And as well, what I have noticed and heard from other fund management firms that many deals are not taking place at the end because the buyers and then sellers are still not matching the expectations. So sellers don't really need to sell. In many cases, many would like to sell, but the buyers are very picky, and there are also still a limited amount of buyers locally. So the international buyers currently don't seem to be very active here, especially in the office and retail segments. But it remains to be seen. I don't expect any quick changes in the upcoming quarters. But most likely, at some point, international buyers will start again looking at the Baltics more actively, given the attractive opportunities that we have here. But still, of course, geopolitics are affecting the markets. And as well, consumer confidence, that is also quite fickle. But as I said, we are continuing to look to dispose some of our nonstrategic assets and then use those proceeds for paying down the bond. And this is the situation in the fund currently.

So let me check if I have received some questions. So the question is that how certain we are to achieve this occupancy level target of 90% that we have. So we are giving update now every quarter in this presentation on the latest negotiations. And what is certain is what is the actual occupancy and what leases we have signed. So what is the expected tenants coming in if they are not yet -- the tenant premises are not handed over. But the rest in these tables is just basically a snapshot. So these are negotiations, which are ongoing. And they are serious negotiations. But in some cases, these negotiations fail. So there's a lot of activity, but not all of these leases can be -- are to be expected. So we definitely remain, in that sense, active and basically doing the best we can and would want to achieve this 90% occupancy based on not only signed leases, but real occupancy. So -- but it is -- it remains uncertain still to some degree, and the time will tell when exactly we will achieve it. Also a question on what's the level of the fit-out expenses expected in our properties. So let's say, we have various scenarios in that regard, but it's difficult also to state how much exactly is needed to fill in the properties. It's, of course, several million euros. But in many cases, when we agree with anchor tenants, then majority of the investment is done by the tenant themselves. So -- and -- but let's say the budget for this year is still basically around EUR 3 million, EUR 4 million, and it depends on what works can be done still this year or next. But there is definitely -- and that's one of the big challenges for the fund today that how to most optimally solve this topic for the new tenants and for the fund to have sufficient cash flow for these activities, so that tenants can move in and for a longer period of time. So once again, a question on the valuations. So there's -- let's say, currently, there's a lot of activity with tenants -- with anchor tenants, especially. And the question is why did we, now, this year, change the frequency of valuations. So also talking to the valuators, they basically say that not a lot of changes can be expected until you are certain with whom you can continue what sort of rent levels you can achieve for the vacancy and so forth. So it was a discussion point. And also the fact that we are saving some costs with that, we decided to postpone it and to have the annual valuations, which are to get done together with the audited report. There was announcement on the NAV. So we had some -- it's a net positive change in the cash flows last quarter. And it was affected by slightly better income from the tenants, but also more one-off solutions agreed with departing tenants about their debts. So the debt management is an ongoing process. And sometimes, to receive the debts takes a long period of time or to agree with the tenant when the debts are basically resolved. So -- and many of these cases then positively -- were solved in the second quarter. So that's why there was a comment about that. So there is a question on fund management fee. I can only comment that this is an ongoing discussion with the new Fund Supervisory Board. As you know as well, the Fund Supervisory Board was changed a few months ago. And as well, we have a new anchor investor with whom these discussions are ongoing. So that's -- I think that's the only comment I can give at this point. When it comes to the new equity support, and as we have tested the market for certain of our properties and found very little or very, let's say, unattractive interest from the market, we have decided not to sell a larger amount of our properties in the given market. So that's why the discussions have been started or have been brought to the table on potential new equity increase. So it is nothing yet decided or the discussions are ongoing with our current main investors who are interested in seeing the future for the fund and to stabilize the fund further. So at least, the discussion has been that we should do that together with our current investor base, if at all, and limit the interest in that way, at least, for the time being. But if we have more certain plans and these discussions with main investors is ongoing, so on a regular basis now, so we will, of course, announce to the market. And we have an upcoming general meeting in September. The date is still to be specified, but I think more news will definitely be there, if the equity issue plan is to crystallize by that time. There's also a question on what sort of offer was made for Postimaja and Apollo Plaza, so -- and at what levels were those offers made. So I cannot comment exactly what levels they were. But let's say, those will be -- I think those offers most likely will be then considered, at least to some extent, in the upcoming evaluations. But again, there was no transaction, no willing buyer or no willing seller. So it's not really reflecting the market. So offers can be made at any levels of prices, but that may not really mean that it is the actual value for the property if the transaction has not taken place. So -- but I think valuators have their ways of considering these in the upcoming valuations, these processes and these indications. There's a question on getting rid of the expensive bonds. So -- well -- and how much would it really affect the result of the fund. So the effective interest rate there is about 10%, which is roughly EUR 2 million a year. And I think it has major effect on the balance sheet, this instrument. So -- and how the fund is expected to be cash flow positive and profitable again is a combination of not only cutting the cost and reducing the most expensive debt items, but also increasing the income. And there's definitely some potential there as we have set the target, long-term target of EUR 130 per square meter than where -- we still have some 16%, 17% potential for that where the team is working hard to achieve. So in that combination, the fund results are expected to improve quite notably if the bond was not in the mix. So we have the NOI targets, which we report every quarter, and it was some improvement there. We have -- we had EUR 107 per square meter NOI in Q1, and that had increased to EUR 109. So gradually moving towards the target of EUR 130. So -- but as I mentioned, there's a lot of activity in the tenant -- tenant -- with the tenants. So there are some outgoing tenants, but incoming tenants. So the -- this figure remains quite dynamic still also in the upcoming quarters. And -- but we're doing the best we can when it comes to tenants that makes sense for us. We have also rejected many tenants, which don't make sense from the return perspective that either the first investment is too large from the landlord side and also the risk around certain tenants is too high. So that has just delayed the process, but it's rather -- it's very important to make the best decisions here for a long-term -- establishing a long-term relationship because -- with the tenants because it affects the valuations, it affects the long-term income. And so the target remains EUR 130, but it's not that easy to achieve it in a short period of time. So -- but as long as we show gradually the right progress, then that, at least, we believe that at some point, it is achievable. So overall, it remains challenging. And what can I say? Of course, we would like to see quicker solutions for the vacancies and better tenants and expanding tenants, but many tenants are looking to optimize their cost base. And as well the COVID effect now, in many cases, is being sort of materializing only now when many lease agreements have come to an end. And it's not only in our properties, but across the market, of course. And office tenants definitely use the right to see what is the best fit for them in the future. And in many cases, it means less square meters. But I'm not also saying that people would like to work from home now, and this is a major trend. But let's say, the major trend is hybrid work, and that just evidently means less occupancy in the offices and more rotation of workplaces and so forth. So this affects the market overall, not only in the Baltics, but across the international markets as well. But I think not to be too pessimistic, there are tenants that are moving around and, let's say, we're happy about the activity, actually. I think in the past 2, 3 quarters, yes, I think the activity even during the -- even because it's -- even -- despite that it's summertime, it is quite notable. So hopefully, that continues into the second half of this year. Very well. So I think, as I mentioned, we have the general meeting of investors coming in September. And I think more will be discussed there when it comes to the future strategy of the fund, any updates to it and also if there are any refinancing plans. We're working on them at the moment. And I think that by that time, we will be able to present something to the investor community and to take this fund into the next stage of its life. We're happy that we have prolonged many of our anchor tenants for several years with fixed lease agreements. We're happy that in sports and health area, we have strong partners, strong tenants. I think I can name MyFitness as one of our stronger tenants in many of our properties. They are doing very well. And the ongoing discussions, what they are in Pirita with a prolonged agreement, they have amazing space in Galerija. And as well, we have now discussing the future in Postimaja. So good to see that some segments are doing well and provide also future potential cash flows for the fund. So thank you very much for attending, and let's be in touch very soon.