Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Good afternoon, and a warm welcome to everyone who have joined today's webinar of Baltic Horizon Fund. The fund manager and member of the management Board of Baltic Horizon Fund, Mr. Tarmo Karotam, will introduce the results of the second quarter and half year of 2020 shortly. [Operator Instructions] I would like to now give the microphone over to Mr. Tarmo Karotam, please.

Hello, good afternoon. This is Tarmo joining from Tallinn office. And for today's purpose, I would like to go over the first half of this year for Baltic Horizon Fund, talk about -- a little bit generally about the virus impact and compare the Baltic states to European numbers, but also then focus on the portfolio itself, the period of second quarter, which was the highest -- which showed the highest impact understandably. And then talk about the future plans that we have ahead. So I will aim to conclude this presentation in some 45 minutes. And then, yes, I will be willing to answer any more specific questions, which I will most likely see in this question box. But let's get right into it. So I would like to say that Baltic Horizon being one of the largest real estate groups in the Baltic states, and having had a investment period, actually we've been growing our portfolio since 2010, acquiring projects that have been attractive for us on a long-term basis. And we do really see our investments with a very long horizon. And we have gathered quite a large real estate portfolio across the Baltics and focusing on the capital cities. And our investment strategy has always been on acquiring quality buildings with very good quality tenants. And that investment strategy as of this moment has not changed. So we still have and will be focusing on high-quality properties across the Baltic capitals that do have high dividend capacity that are very bankable. And that's a big question, has been, or a topic of discussion at least, in real estate scene here in the Baltics, that what sort of properties are bankable and can actually achieve good terms. So it's also a good test of any real estate strategy that how banks are actually also seeing the real estate market. Also that we are looking for certain added value opportunities, always have been and will be looking. So whether we can add value over the long term through expansions or through re-tenanting. And I think having had the opportunity to invest into not only supermarkets or neighborhood retail centers, but also centrally located assets and office buildings. And I think we do have a good portfolio that has, I would say, also gone through the second quarter quite well. And I will get into this just a bit later. Just a reminder of important things about Baltic Horizon Fund, we do have a large investor base here in the Baltics and Sweden, we have a wide variety of investors from retail investors to pension funds and insurance companies. Our market cap today is around EUR 120 million, EUR 130 million, that has had an impact since the end of last year, and we are working hard to recover that. And we still have more than 150,000 square meters of lettable area. Our loan-to-value from last year has increased a few percentage points, it's now 59.5%, and that's mainly due to the revaluation of our portfolio now at the end of June. But I think we're still quite at an acceptable level. And of course, working hard to make sure that we will stay around those numbers. We have not stopped our dividend payouts. That's been a big topic among investors and also internally. That having entered the second quarter with a lot of uncertainty, I think, for all of us, we still decided to have a partial payout in May. And because the first quarter of this year was the most successful quarter of the -- in the fund's history and generating net distributable cash flow of EUR 3.5 million. So we decided still to pay out EUR 1.7 million. In total, so we have paid out even a bit more compared to last year's first half because the payout in January was also considerably higher than last year. And this is also to do with the fact that we did acquire 2 new properties last year, adding EUR 100 million worth of investments. And we have -- we're happy to say that we have retained the ratings that we were assigned by Standard & Poor's last year. And even though that our fund was put under negative credit watch after the corona pandemic started in July, and there was a verification that our rating has remained unchanged. Now just some highlights, which I will go into more details a bit later. This is also the summary of our numbers. Yes, we had a reduction in the in the NAV due to the fact that our valuation dropped -- valuations dropped. We were maybe positively surprised that our valuations were corrected to an extent of only 4%. Most of the -- most of the valuations dropped in the retail segment considerably more maybe than in the office part, but still I think the valuators looked at our portfolio and considered it more resilient over the next 10-year period as they do their cash flow estimations for that time themselves. What was also happening was that the rental income. Yes, we did have, again, an increase compared to last year, half of which was in H1 compared to H2 '19 to '20. Yes, we had an increase, but that can be also explained that we had new investments in last year. But actually, overall, our net rental income, which was EUR 10.39 million for this half of the year, our budget or estimation was that it would be EUR 900,000 higher, so approximately 11.3%. And as you can understand, that number, EUR 900,000 approximately, was the amount of discounts we were, I would say, maybe use the word, really forced to assign to some of the key tenants that we have that were directly impacted by the lockdown. But then again, I think the recovery has started since June, and we're looking at a good stabilization of especially some of our retail centers. Some key numbers here again that we had a strong first quarter, as I mentioned, and we generated about EUR 0.032 per unit, if I recall correctly, of net generated cash flow, of which then we kept EUR 1.8 million in reserves and distributed EUR 1.7 million in May. And also the -- now the second quarter result was the net cash flow from operations was EUR 2.6 million, of which we also paid out EUR 1.7 million now just recently in August. So yes, we have kept on paying the dividend and generated quite a large reserve. And of course, that's been for us important to make sure that our cash position has remained strong. In July as well, we approached our bond investor base. And since valuations are something that we couldn't really -- can't really control and they're largely affected as well by inflation forecasts and as well weighted average cost of capital that the valuators are calculating, so that we asked whether we could have more flexibility in terms of the equity ratio covenant for our bond investors. And on a majority vote, they decided to give us more flexibility for the next 12 months. Even though, yes, our equity ratio worsened a little bit, but it's -- from 42%, it decreased to roughly 40%, but I think it has still remained very very healthy compared to what was actually expected. Now moving more into the impact on the environment and really comparing the Baltic states a little bit to a wider geographical area. Then, I would say, generally, we have done pretty well. I think from the health crisis point of view, the hospitals were, yes, a bit unprepared for all of this, but they -- the hospital sector got themselves together relatively fast, and there was no real, I would say, threat of not being able to cure the ill people that were coming in. But of course, it was very, very shocking at the beginning that where -- to how far this health crisis can grow into. And yes, the Baltic states decided to have also a lockdown. But I think compared to some of the other countries in -- also in Europe, in Southern Europe specifically, and if you now look also globally, then the first lockdown, I would say, or the first impact of the COVID or the first wave was comparably, let's say, better. And about after 6 or 8 weeks, the restrictions started to loosen up. And if you look at, as well, the cases per 100,000 people then generally, they have been comparably still quite low with the total number of cases in a few thousands rather than tens and hundreds of thousands. But of course, just the populations comparably are also lower in the Baltic states. I would say that when we now -- these numbers have, of course, changed a bit because this is a snapshot of mid-August. And yes, we've seen a trend where the cases are again increasing. And the questions are that how much this will affect the restrictions, the new restrictions again. So yes, there's a lot of discussions, but there will be probably restrictions. But in our base case scenario, they will not be as harsh as they were in the second quarter when the pandemic really hit to everybody's surprise. I think there's a lot more information out there about the virus. The focus is more on the locations, on the places where -- the spots where the virus starts to spread and as well on the risk group. So hopefully as well, the hygiene of these people have improved, but remains to be seen. At the moment, we remain cautiously optimistic still. What we did as a fund management team at Baltic Horizon, we as well, were able to have as quick and as clear communication through stock exchange over the second quarter, that we're willing to be open and hear our partners, hear our tenants, how they are doing. Of course, it was for the first weeks quite uncertain and unclear how this and for how long this will be affected. But we thought that at the beginning, it was also a time for us to just -- for all of us to gather information. And then in April and May, we started to discuss more about what we can do to the to the tenants that were mostly affected. They were also forced to shut down by the government decree. And by June or let's say early July, we had gone through a vast majority of the discussions, and of course mainly or, I would say, really, really only with our retail tenants, the office segment stood quite strong and has still remained like that. But it was a very analytical time for us. We did a lot of stress testing. We did a lot of scenarios where -- what would be the worst impact, what would be the base case and then try to really forecast the future for us. So going into depth -- into really case-by-case analysis, tenant by tenant, so big, I would say, thanks and applause for our analytical team here. And of course, it was very important for us to really go through the second quarter without basically -- like honoring all the commitments and all the obligations that we had in front of the banks and in front of our bond investors. And we were able, I think, to really keep a normal or even good cash buffer throughout the second quarter. So maybe -- maybe just to present this slide, I think it's an important slide to present. I think I will need to explain this in more detail, but this shows actually the rent collection of the issued invoices. And on the regular months, it's normally close to 100%. January, February, 97% 99%. In March, also quite strong. Even though this is an international standard, how it is presented, but I have to note here that in April and May, and somewhat in June, the invoices reflected also certain discounts that we were giving to our retail tenants, not all of them but to some. But happy to say that even though some of the invoices issued in July have yet to be paid because the -- some of the payment deadlines are longer than 30 days. But the -- let's say, the agreements that we have achieved with our tenants during the second quarter shows also in this chart that they were honored. And we're happy that the agreements that we found in regards to the invoices issued, they were then paid. And on average, we gave discounts to our most affected retail tenants not more than 50% per month during this period. So, yes. And partly also the government support has helped the tenants to honor their commitments. In Estonia, the government support was lower than in Lithuania. And I think in Lithuania, the government support measures are still open for some. But yes, I think it helped us as well our tenants. Now if you look at the recoveries, then generally the recoveries have been also quite successful. And the rent collected in Q1 was for the -- if you take it on average, then these Q numbers are Q -- quarterly numbers are here on the right side. And then the footfalls. This is in -- this is basically our retail centers. We have neighborhood retail centers and we have city center retail centers, and I guess it was also clearly written in the quarterly report that our neighborhood centers are doing fine. But mostly, the only properties really impacted by the lockdown are the centrally located retail centers that we have, Galerija, Europa and Postimaja. But the -- as of July, the footfall and turnovers have recovered, especially well in Lithuania and in Europa shopping center. As compared to last year's July, the turnovers that we have that have been reported to us were almost 86% of the level that we saw in July 2019. And in Latvia, it's not yet as good. The Galerija Centrs turnovers have recovered as of July a little bit more than 2/3. So we'll have to work on that more. It is also true that Galerija Centrs' visitors were -- quite a large number were tourists, maybe less so in Europa. And Postimaja, it's the same story, less tourists and a bit less turnover if we compare the July figures. But overall, yes, I think quarter -- second quarter has recovered quite as expected. Then just another -- just another presentation of the financial results. Here, you can also see that the first half, we recorded a loss of EUR 9.4 million, and that was largely to do with the revaluation of our properties. And of course, this number as -- or the, let's say, the valuation and revaluation is important. But I think more important has always been for us the cash flow generated from the operations, how the tenants have been paying, because valuations do change and do change because of external factors. We have a portfolio at the moment, which we have no plans to -- at this point, to sell off or in any way restructure. We are -- I think we're -- we have made our investments long term, so now we're just working on upgrading our concepts and really the tenant mix for the next periods ahead. And again, happy to keep the cost of debt as it was, 2.6%. Compared to 2019, it remained the same. There was no covenants breached with the banks nor towards the bond. So -- but the overall LTV increased 2 percentage points to 59.5% as of the end of the first half. And when, again, you talk about our loans, then you can see from this slide that they've been well diversified. No loans are coming for renewal before the end of next year. So we haven't really had a too much issues with the banks. Just we've been in talks with them. Of course, at the beginning, I spoke to them all, they were accommodating, saying that even if there are some breaches of the covenants. I guess that was -- for the whole market, they declared that we are willing to waive them. But as we also didn't have any amortization -- well, we have a very small part of the amortization in our loans, which is shown here, 0.2%, and this was the -- this is the result of the restructuring of our financing [ siding ] from 2018. So we didn't really have to ask anything from the banks as also we had quite good levels in the covenants that it was not probable that those will be breached. So I think you can see as well our financing breakdown once again here, we have 4 banks, and then bonds is about 24% of our total portfolio of obligations. This hasn't changed also. I think this is just to show in more detail once again where we are and how our interest has been fixed. So the 83% of our interest is fixed. And it's interesting also to note what is happening in regards to Euribor. It doesn't affect us too much because, again, we have our interest rate fixed. But yes, it's still very much in the negative territory. So we did have a portfolio loss of 4% in valuations, which amounted to EUR 15.8 million. And but we also had a strong -- still a strong operating profit from our operations. But yes -- well, yes. Well I guess overall, let's say, the income from the operations was not sufficient to cover the losses of the valuations. But I think we're working very hard, and we hope that the markets will also start to recover. And I think, currently, we are we are aiming that within the 12- and 18-month perspective, we would we would recover at least a large part of the devaluations that we saw now in June. But of course, still, there is some uncertainty in the markets. And for the upcoming autumn, travel restrictions are being put into place now, again, across Europe. And in the Baltic states, I think the -- not so many people traveled, of course, abroad. So there was a lot of staycations, which actually was good for the economies and good for the resort towns. And many people decided to spend their money either in their own country or then traveling across the Baltic states. So it was quite interesting. I'm sure many of our Baltic colleagues here could verify that during the summer, in Estonia, we saw quite a lot of Finns and quite a lot of Latvians more than before. And in Latvia, in the coast, it was seen a lot of Latvians. And also in Lithuania, quite a lot of Latvians and Germans that were traveling mostly by car. So it was more of a regional sort of exchange of value. And I think that's also helped the Baltic economies, maybe also in Q2, not to show that large of a decrease in the GDP as well. Now moving on to the most important slide, I would say, where I think every investor who is focusing on dividends should look at is what was the impact of our net cash generation in Q2. And here you can see that that the combination of, I would say, discounts that were given in Q2 and, let's say, added maybe operational costs for the fund, because we still had to keep the shopping centers running even though we reduced quite a lot the heating and all the systems that that were needed, the negative result to what was expected was about EUR 0.9 million. So in regards to in regards to actually the occupancy, then the occupancy of the portfolio at the end of Q2 was around 96%. So the portfolio, let's say, from the vacancy point of view, yes, we've had some more vacancy now in our larger centers, but it hasn't really been that, I would say, notable if you look at it from the portfolio point of view because, again, our office buildings there's been almost pretty much no impact. And our neighborhood supermarkets and retail centers are also doing quite well. So yes, we will probably see a little bit more vacancy in Q3, but nothing detrimental for sure. And I guess that's the -- at least has been so far, the benefit of having a diversified portfolio. Now if you look at the -- I think very interesting is to look at the 12 months rolling generated net cash flow yield. And this is the -- it's quite a simple calculation. It takes generated net cash flow from operations in each quarter, which is actually the distributable cash flow. This is the cash flow that we can essentially distribute to our investors on a quarterly basis. Yes, we have had in the past a payout ratio, not 100% but around, let's say, 90%, 95%. But if you also take then the market price of that quarter and divide the generated net cash flow with the market price, then that's how you get the generated net cash flow yield. And as you can see, when -- in Q1, we generated almost EUR 3.5 million, and you roll that against the market price, which in the end of the March was lowest in our fund's history, then the cash flow yield is -- it becomes very, very attractive. Of course, there was a lot of uncertainty and a lot of investors that did buy at those levels, took a risk as well and took a long-term view that, okay, but this cash flow has to recover at some point. And yes, in Q2, the result was due to reasons explained earlier, it was lower, and the market price actually improved a bit at the end of Q2. So the calculation there is 9.6%. Now I think everybody can do a calculation like that on their own and then see whether this is an attractive dividend yield for them. So if you saw in Q2 '19, Q3, '19, Q4 '19, then the actual dividend yield against or the -- let's say, the generated net cash flow against the market price was always improving. So this is definitely something to monitor for the future. I think it's very, very important. And if you look now, the dividends declared lying then, you see that not all of the generated net cash flow that we made this year was paid out. And today, we have EUR 3.5 million in distribution reserve, and that comes from not having always the 100% payout ratio also from the past. So well, I think one could expect that this amount will be paid out. So I welcome you to really see whether how attractively or non-attractively currently the Baltic Horizon Fund's unit is priced on the stock exchange. But these are, yes, very important numbers, I think, if one would consider Baltic Horizon, a long-term dividend investment. And the value-added will be part of it later on over the course of time, but I think as well as it has been a priority for us to pay out dividends. And last bit, I would like to focus again on our portfolio, but from a different angle. As a matter of fact, based on net rental income at the end of second quarter, we get 54% of NOI from offices, actually; 4% from leisure, which is actually the cinema building. And we have made agreements there. They are also regaining visitors now as we have quite a big few blockbuster movies in the cinema at the moment. But one may maybe expect that our retail -- rental income from retail premises is large, but actually, it's much less than in the office. And it's 41% -- 41.9% as of the second quarter. As yes, we do have quite a lot of large office tenants in our portfolio. And the country breakdown, as you can see, is also below. And on the right, the -- our largest tenants. I guess, this is a slide just to demonstrate that many of our larger retail centers were impacted in the second quarter and have reduced yields due to the temporary discounts that we had to give. But I think if you would look at Domus Pro Retail and as well Sky retail center then, and as well Pirita neighborhood center, then the impact of course was much lower in the second quarter. And yes, a lot of people are still in the suburbs, and that's why our -- yes, those neighborhood centers have recovered, I would say, more quickly than our centrally located centers. I think we cover this that our total like-for-like assets fair value change was 4%, which we thought was lower than we expected. And today, we have EUR 342 million in value under our fund. Now looking into the future. We have been screening the market, of course, for new opportunities. And we have some cash buffer to consider something, but we want to be as well focusing on our expansion projects. And Meraki, it's an office complex under construction today in Vilnius, next to our Domus Pro complex. I'm sure if you have joined this webinar before, you are aware of this. It definitely has been going also during the COVID pandemic, the construction sector in the Baltics was not halted. The constructions, yes, they had a lot of hygiene and self-health protection requirements, but it was -- the construction was slowly able to continue. As well, we discussed with our construction company that it's important that you will take it slower than we originally expected because there was still a lot of uncertainty. And we had quite -- we had very good cooperation with our construction company Conresta there, during the second quarter. Interesting is that from beginning of August, the office tenant pipeline has really warmed up. And the discussions that we held with potential new tenants in the end of first quarter, in the second quarter, it was taken time out. But right after the vacations, the interest, I think, has definitely come back. And let me explain you why I think so and why we, as a team, think so and have gathered from the tenants. First of all, in the future, in the office segment, a lot of importance will be put on the personal hygiene of -- and also health and safety measures of the employees. So tenants in the older buildings and buildings with old layouts or worst ventilation systems are -- they're thinking that we should actually consider moving. If we can get also a good price and really -- if we feel secure that the continuation of our business will at least be stable. So we have actually signed up one new tenant in August. And currently, the net leasable area that we have in Meraki I tower, we have 25% already pre. So we have still not started the larger part of the construction. We're still in the first part where we are preparing the underground parking and the beams for the construction of the buildings. So we hope to achieve 40%, 50% net lease commitments by end of this month, where we can really push the button and start the construction of both of the towers. In addition, in Estonia in Tallinn, we have finally been able to work through quite a complex assignment, which is having a design and architectural full solution for the expansion and joining of the 2 buildings. And we have, therefore, with the full package issued also for the final -- issued an application for the final building permit. So -- and that was also announced publicly here in Estonia that we have done. So the -- we hope to keep a good cooperation with the city and really find an amicable solution for both of us. And in PIrita, the second floor, we have replanned that since also end of last year. We have changed a few tenants. We are now in negotiations with MyFitness to renew their concept. And as well, in negotiation with one other large tenant now again in August, that potentially could take the rest of the floor. So we're really determined. If you live in Estonia, in Tallinn, and you know Pirita, then, yes, it is a nice neighborhood center, but still is lacking the right tenant mix. So we are determined to really make it work. Estonian Post now is there. We have pharmacy. We have flowers. We have a pizza joint. We have the wine store. And so let's see. I think we are in good track there. So it's somewhere there where we're also now focusing more than in terms of expansion wise because that needs some investment as well, especially the second floor. And I'm sure that some of you have noted that we have announced that we're planning a public offering of new units. And not sure if that was also noticed, but we're now planning a public offering in Lithuania, which we haven't done before. Public offering is that the way where all investors, even with EUR 10 can participate. And we've only received a license, it was quite a long period from Lithuanian central bank this June. And in addition, we're targeting a wider investor base in the Nordics, but also in the Baltics. And we are really targeting a new equity to continue with our expansion projects because we also feel that the time of construction is now if we do have the right tenant commitments, as the construction sector is quite hungry. And in addition to our expansions, we are definitely in the market to take advantage of some of the opportunities. If somebody would ask do we consider hotels, then the answer is no. We were not into investing to hotels. We're still continuing with our strategy, currently preferring of office -- new office projects. But I would say that, potentially, if there is a very good opportunity also in the logistics segment, that this is something we may consider as well. But definitely priority is in office. Then again, we're definitely as well open for any fire sales that could be happening apart from hotels. So very much want to be ready for the recovery phase now, which I think has started and still will continue for the next 12 to 24 months. So I think this concludes my presentation. If there's any questions, I would be happy to answer them.

A [indiscernible] here is asking, what is the estimated issue price? As was decided by the investors in the general meeting that took place on 9th of June, the issue price will be the year-to-date issue price in euro. So it will be the average of the market prices up until the moment of -- or actually 7 days before the issue period will be happening. And as far as -- I know we've done some calculations, but it should be approximately at the level where the market price is currently. So that's about 5%, 6%, 7% discount to the current NAV, which was the result of the valuation of end of June. But that's our estimate. It may fluctuate. But the idea was to have a year-to-date average as the base. Is there are perhaps any more questions? Okay. Well, happy to have had such an attendance. And hopefully, this webinar was useful and gave some additional remarks and explanations from the quarterly report and about the results. So I would conclude here that we are definitely hands on with our portfolio with our tenants. And of course, the main focus is on our retail centers and trying to make sure that the recovery of the footfalls and turnovers will continue. And -- but having said that, the retail centers do form only a part of our portfolio, and one would really have to evaluate the full portfolio and the potential of it when looking forward and when considering an investment to our fund. So once again, thanks again. And so let's be in touch. And hopefully, see you next week in Vilnius in the real estate conference.