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

Hello, and welcome to the Annual General Meeting of Baltic Horizon Funds. My name is Tarmo Karotam. I will be hosting this meeting as the Chairman of the meeting and Jana will be assisting me with minutes and perform secretary duties. So welcome investors that are present and welcome also investors who are online. We have today an informative meeting and as nothing is put on the agenda for voting this time around. So a quorum will not be counted at this meeting. Also, thank you for attending this meeting in September. Usually, we have this meeting in June, and that's a regular time when we've had these annual meetings. However, quite a lot of things have happened during the summer. So we thought that it is probably best to have this meeting now in September, where I think more information can be shared about the current situation of the fund as well as some of the future plans. So as usual, I welcome you to ask any questions. And usually, I see them at the end of the presentation. So let's start and kick this off with a traditional KPI overview. So here on Slide 2, one can see the life of the fund in numbers, and these are what we have identified as key performance indicators. So gradually, throughout the quarters, we are making some progress with the occupancy, but it's a tough market. I will get into that a bit later and continues to be a tough market and still even 7, 8 quarters later. And we are making, I think, generally good progress with the average rent level being and trying to sustain that as much as possible. Of course, indexation helps, but as well getting in the new tenants at attractive rental levels is not easy. But gradually, we are making progress. Also, our net operating income on a quarterly basis has been around EUR 3 million on average. It has shown some positive signs in the last quarter as new tenants are moving in. However, we do have some tenants at the same time leaving the premises. So it is a dynamic environment that we are working in. Our LTV goal has been to reduce the loan levels and over the quarters, we are showing, I think, the right direction, but it is moving quite slow as we have our LTV goal set at around 50%. And the Euribor is decreasing. So that is helping our cash flows to some extent. And the average cost of debt is also gradually decreasing. However, we still have an expensive bond in our balance sheet that we are working to reduce and these are what also the plans are all about in the coming periods. I think to note that from the cash flow perspective, we do have cash outflows, which are, let's say, not part of the usual operating business, but there are investments into new tenants into the properties that need repairs. So that is one of the key elements of what has kept our cash flows under pressure as well as loan amortizations, but I will get into that a bit later. So in this slide, we have tried to highlight Slide #3 sort of the key takeaways or the key messages that we have currently for the investment public. So we have always set an ambitious goal and several years ago that when our occupancy of the portfolio was below even 80% in the middle of '23, around 76%, 77% to achieve what we call a more stable occupancy of 90%. We have signed a lot of new leases, but there are tenants that the lease agreements are terminating as well as tenants renegotiate the space that they need, especially in the office segment downwards. And in the retail segment, the retail spending and consumer confidence still remains quite challenging. So it has been more difficult to achieve the 90% target despite that we're showing some gradual progress but we continue to work on that. Then we had a decision this time around. Also it was part of the cost-cutting exercise that we continuously have gone through. And we thought that it's probably more reasonable to do the valuations at year-end when we have also a lot of tenant situations in the buildings concluded and that especially was in regards to the Latvian State Forestry lease expiry and prolongation and as well as many other tenant movements, especially in Europa center and S27 office building as well. So the investment market in the Baltics, as many know, it's quite illiquid, not many transactions happening. The buyers and the sellers are still apart from their expectations and many hold on to the properties as much as they can and wait for better times before selling them. And we made an announcement at the beginning of the year that we would be looking for a buyer for Postimaja and Coca-Cola Plaza complex, which is just behind us here. Just test the market and see if there are any attractive buyers for the core assets that we hold that potentially could solve many issues for the fund, but the results were not satisfactory to us. So we decided to focus on disposing some of our smaller properties. There are some processes ongoing. And I think we've notified before that we would be interested in selling perhaps Pirita or Sky as some of our smaller assets in this process. So if there is any more news in that case, then that will be shared through a stock exchange announcement. Now I think one key element that we constantly have to manage here is that it's basically cash management. And one thing is the profit and loss statement, but the other thing is a cash flow statement. And in order to get our properties filled with new tenants, there is investment needed and that has been also the reason why the net cash flow of the fund has been negative. But the ways to address this -- there are 3 ways how to address this and what we've done through the years is refinance some of our loans, dispose some of our assets and -- or raise additional funds from our investors. So we continue to look for these dynamic solutions for that. And we will share a bit more info the latter part of the presentation. I think something that, let's say, we are satisfied about during the summer was that we were able to extend a lease in a very difficult environment in Riga, where one of the top tenants in the market was looking for alternatives and whether to stay in our building or move somewhere else. So we were able to extend and retain that tenant in the current building that they have that they actually bid for themselves. And at similar terms, but as it is in the office segment nowadays, many of the large tenants are negotiating down their space. And that's what also happened in the case of Latvian State Forestry, intensive negotiations were concluded in the end of July, but at least we have retained them in the building, we are holding 5,300 square meters. Going forward, it's a reduction of 2,400 square meters and part of the property will be made vacant in about 1 year from now. There is also some fit-out needed for the Latvian State Forestry premises that will be then conducted over the next 12 months. And of course, we have started to look for a tenant in the upcoming vacancy. I think it would be suitable for schools. We have had some discussions already, and we'll continue to look for tenants in that vacancy -- in that upcoming vacancy. And our occupancy figures have improved, but our primary challenge remains in these upcoming potential vacancies. The other vacancy, which we expect is from the beginning of next year in Lincona, which is where Swedbank is moving out after 15 years. We have some discussions for that vacancy as well, but perhaps too early to state. So again, we're making progress at one end, but still, especially in the office segment, tenants are reducing their areas and because of hybrid work and less occupancy in the offices. But that is a trend I think we can see overall in the market. And we are, let's say, happy that we have been able to extend many leases of the top tenants that we have currently in our properties throughout these periods. So Slide 4, we are looking into the breakdown of the tenants. I think generally, a good mix. It has changed over the years, and the focus has been on governmental-related public tenants to keep them -- to have them prolong the agreements. Swedbank, as mentioned, will be moving out in the end of this year. But we do have Latvian State Forestry, the Latvian Police, Lithuanian tax agency that we were able to prolong recently as well. International School of Riga, we have moved into one of our offices in Riga and State Information Authority as one of our key tenants in the portfolio. So I think in Slide 5, one can see the dynamics of, for example, just 1 quarter of last quarter, so how many thousands of square meters are under renewals, which are -- how many square meters are being terminated and how many square meters we will -- we have welcomed new tenants into our properties. So it remains still very dynamic and I think the biggest positive development we have seen is in the sports and health sector. We've had MyFitness as one of our anchor tenants, one of the largest fitness groups here in the Baltics to open their premises in Galerija Centrs. I think it's a big thing for Galerija in Riga, the concept that they introduced there is absolutely innovative and that has attracted a lot of people, but they are also -- we have also prolonged the lease in Pirita currently in the negotiations to prolong and introduce the flagship into Postimaja. And also we have other ideas soon to introduce in other properties. So this is, I think, a positive direction for our centrally located assets and to introduce more health and fitness-related tenants into the properties instead of fashion, which used to be the traditional and services, but it's more now about dining as well and many completions were made in Europa to bring the restaurants to the ground floor. And still some fashion tenants have been signed up and introduced prolonged in our properties such as Mango, Gant and Sinsay. And Lindex will be opening their shop in Europa. So yes, many things happening and gradually to the better, but all of these plans need time to implement and capital to be invested. So on Slide 6 is sort of a traditional snapshot of the current situation or where we are with signed leases and leases under negotiations. And as of -- this is as of end of August, the most recent data also updated from the quarter report. And -- so we have the actual occupancy being at around 84.8%. And in the middle there, you can see the net result of signed leases and expiries and what are under negotiations. So we have Lincona as the major property where a tenant will be leaving the premises approximately 2,600 square meters. The rest of the lease agreements we expect to prolong. We have also a pet clinic there, which came in just recently. So otherwise, the property is doing all right, and we have also State Information Authority there as an anchor tenant who has -- who has recently expanded their premises there. But this is now the main focal point to find a solution. In Sky, we are managing the property and some prolongations, but also some terminations, but currently, we are in discussions with Sky about their future plans. And Apollo Plaza is also 100% led by Apollo Group, where they had a big opening of the ground floor a couple of weeks ago in the heart of Tallin. So welcome you to visit that property as we feel that, that property is now transferred into the next cycle and is a very attractive, I think, offering for the people visiting. In Europa, we have now over the past 6 months, taken, as I mentioned before, focus towards health and fitness. We have had the clinic open there. We are introducing some several other health-related tenants and fitness-related tenants to the third floor. So I think more news is to be expected there in the coming weeks. So, so far, we're making, I think, good progress with the tenants, incoming tenants. There has been some additional vacancy over the past quarter because we moved some of the restaurants from the third floor to the ground floor, but that we consider a temporary vacancy as we do have a tenant already for the third floor premises signed up. In Upmalas office building, which is a police office building in Riga in a big class location and the police is happy there. But for the remainder of the premises, it has remained challenging to find the tenant. So we have all brokers and many, many brainstorms how to attract them. We have some leads, but it's, I think, currently as well a challenging property to find tenants for. In Pirita, Pirita remains, I think, in that sense, quite stable with anchor tenants prolonged until 30 and 31 year and some movements of satellite tenants, but still close to 95% occupancy. And we -- actually, we do have -- we have signed a couple of more leases just now recently in the beginning of September. So operationally, I think the property remains very stable also when you look at the visitor numbers and tenant turnovers. Now some good progress, I think most in our office buildings has been happening in the school property. So the school has opened their doors and some smaller tenants also have moved to the top floors, and we continue to have a lot of visits in the property, but the tenants are small from 50 square meters to 300 square meters. We, of course, participate in tenders for larger tenants, but currently under negotiations and the serious negotiations about 1,000 square meters, which is, I think, a positive sign and promising sign. In [indiscernible], currently, no changes to report in this table, but in the next quarters and after 1 year, the occupancy of the anchor tenant will decrease, as mentioned earlier. So we'll be working on that to find a solution. In Postimaja, we have some negotiations on extensions, especially MyFitness, but we hope to find a solution there very quickly. So we expect to prolong all of the leases, which are also upcoming this year. And Galerija, we are -- we have also more tenants currently coming in than leaving. But as I said, retail remains challenging. So in some cases, the focus on debt collection is also part of everyday routine. So that the team continues to do on a regular basis. And also, I think North Star in Vilnius remains as a well-rented property with the Lithuanian tax agency, and we expect to increase the occupancy slightly also during -- throughout this year. So aiming to achieve our ambitious 90% target with all the expiries. So currently, based on the pipeline that we have, we hope to improve the portfolio's occupancy still by a few percent. But as we know, by year-end, Swedbank will be moving out vacating another 2,000, around 500 square meters. So the net result hopefully will be positive, but it is challenging to reach 90% by the end of this year. Now I think if you look at the financial results and the profit and loss, then we are keeping -- trying to keep the results stable and slightly growing. We've been able to reduce our financial expenses somewhat and continue to work also on our administrative expenses as we are being delisted in Stockholm. I will tell you more about that also in the later slides. But basically trying to make the rental income or grow the rental income despite when selling properties, and we've sold Meraki in the beginning of the year and reduced our debt burden with that transaction. And even though we didn't do the valuations now in a mid midyear, then operationally, we were somewhat showed improved results. But as I mentioned, the focus is on cash flows and that remains the biggest challenge, I think, in the coming 12 months. So we believe that we do have sufficient cash to manage our operations for the time being. And I think -- we are looking for ways to how to improve that further. And cash management remains main topic, what to prioritize, where to invest and how to make sure that we get into more sustainable grounds. So maybe a few words on also on the debt slide -- the next slide that gradually, our cost of debt is also decreasing, but the larger -- that's the most expensive is still our bonds that we need to find a solution to. Without the bonds, our average margin would be around 2.8%. Currently, it's around 3.6% most recent cost of debt around 6%, but the goal is to improve that and to decrease the debt burden through various operations. Next -- beginning of next year, we have 3 loans up for prolongations, and we have discussed -- started discussions with our banks and 2 of them are in Riga and 1 is Pirita. So this is -- for this year, we have prolonged all the debt instruments, but look for a solution with the bank now in the coming quarter. And I think there is just some of the key points as an action plan. And we -- it's been almost -- it has almost taken a year to get us delisted in NASDAQ Stockholm. It's a proper process behind that. But now it's been, I think, finalized already some time ago that 8th of October is the last trading day in Stockholm. So I still welcome all investors to look into either converting or selling their SDRs on NASDAQ Stockholm before that date because otherwise, it would be in the hands of the issuing agent, which holds these units in Stockholm Nordic Issuing to sell the units. And just to make clear that the fund is -- doesn't have the right or capacity to buy back those units themselves. So one definitely needs to talk to their bank in order to find a solution. The positive thing about delisting in NASDAQ Stockholm as we -- not a lot of investors have remained listed there is that we will be able to reduce our operating expenses from the last months of this year. And that should positively impact the results of the fund next year. Then I think one of the key things that we are focusing on apart from keeping the occupancy high is disposing one asset that we believe is nonstrategic for us over the long term. And given the current market environment, that's something that we see that is realistic to do. So we will definitely be focusing on that. Now we have also changes happening in the management company and maybe a few words on that, that it was also made public that Grinvest as an investment management company here in the Baltics, and it's an international company actually has signed a transaction to buy the Baltic activities of Northern Horizon Capital Group, namely the management company of Baltic Horizon Fund. And they are, I think, very local, very experienced property investors. I think they bring definitely new energy and new contacts and as well have brought capital into the mix. So we continue to work with them throughout this transition period very closely to brainstorm ideas, what else to do, how to further improve the economic situation of the fund and definitely look into the future how this fund can be improved and stabilized. And one of the topics that we are discussing in addition to selling a nonstrategic asset is to have a potential new offering of new units only targeting or offering to the existing unitholders. And as of this point, I can say that the parameters are still being worked out by the stakeholders, by the parties and by the management. So this is a way how to further decrease the bond, which is definitely the most expensive item in our balance sheet and we would like to have those returns directed towards equity investors. So that's definitely one reason to do it and improve the covenants that we also have agreed with the banks and as well have sufficient liquidity for the full fit-out needs that the remaining occupancy or vacancy still needs. So these are the things that we're going to be contemplating as future plans and more info will be shared in due time. But these are the tools in our toolbox and that we work with in addition to working to increase the occupancy of the fund. So let me see if there are any questions and then happy to answer them now at this point.

The one question here is that what is the future plan of S27, which is the school building. So -- in this area, there are -- it's [indiscernible] district and it is an area with many office buildings and some of them are brand new, just finished over the past 12 months. And so it has become more lively as an area. Our property there is, let's say, comparatively is somewhat older, built in actually about 20 years ago for a building for a bank. And then during last decade, it was renovated and that became the headquarters of one of the largest construction groups. So I think in this cycle, let's say, the -- I would say, the only solution to this property is to find alternative use and that has been the school. The ultimate plan actually is for this property is that it will become a school in its entirety. Currently, it's rented out to the school 50%, and we are finding smaller tenants to fill in the vacancy that is there. But we are at the same time in discussion with school to address, let's say, their further needs so that they could sign a very long lease agreement for the entire building. So the question is what is the ultimate future plan for S27. So it is actually to have a school there. It's a great location for the school. They're very happy with the premises that they have received. And I think it's a good fit. And both landlord and the school is investing. So we believe that such a tenant would be a sustainable long-term tenant in the long run. So the question was that, what were the -- from the proceeds of Meraki, what -- where did we -- what were the -- where was these proceeds used? So roughly of the EUR 16 million price that we sold it for around EUR 10 million was the bank loan and EUR 3 million was paid to the bonds -- bondholders to reduce the bond and EUR 3 million has been, let's say, partly used to amortize some debt, but also to use it as fit out in other properties and some, I think, is still in reserve. So the question is about the -- about Grinvest. And it is true that over the past 12 months, they have bought from the market a share in the fund. And right now, it is approximately 30% of all units. So I think they've invested quite heavily into the fund and also their plans to acquire the management company shows, I think, their commitment. So I think definitely are interested in the future positive development of the fund and putting all efforts they can together with the management team to make it happen. So they're definitely, I think, interested, definitely have skin in the game as well. So I would also definitely look at it as a positive development for the fund and for the properties and for the fund investors. When it comes to the additional equity issue or unit issue then is yet to be determined, first of all, discussions with potential investors, what would be the interest. And that would determine the amount to be raised. So it is -- I would not put the number at the moment out there. But as we have said that this is to reduce the bond, which is currently our bonds outstanding is around EUR 19 million. So and I think we definitely would then, in this case, if some of the bond will be repaid, then improve the balance sheet and operational results of the fund. So I think more a specific question on school again. So currently, the school is in half of the property. That is currently what they need. And -- but they do have other premises in Riga, where other classes are located. So eventually, they ideally would like to grow into the building. So -- but this is step by step. So that's a master plan that we have. And we need to solve as a landlord an issue which is the sporting facilities for them. So that's what we're working on. And hopefully, we'll find a solution soon. And -- but that's the master plan for S27 to become entirely a school building. Currently, the satellite tenants there are happy to see school as a co-tenant because either they have dentist visits there or other reasons. So some of those are associated tenants and work well with the school and the parents visiting and also the kids. So around -- if I remember correctly, around 300, 350 kids are in the building. So once again, as mentioned, from the Meraki disposal, some of the funds were used to redeem the bond also to pay the bank loan and some of it is still in reserve in our cash line. So is there any more questions? Please let us know. Otherwise, I hope this presentation has been informative and we continue to work on the occupancy as we have and the financial strategy going forward, focusing on potential disposal of smaller assets and then discussing the equity raise offering the opportunity to all existing unitholders to take the fund to the next stage. So thank you very much for attending, and let's be in touch soon.