Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Good afternoon, and a warm welcome to everyone who have joined us for Baltic Horizon Fund webinar of secondary public offering. The webinar will last approximately for 1 hour, and the recording will be available on NASDAQ Baltic YouTube channel later today. [Operator Instructions] But now I would like to give it over to the fund manager, Mr. Tarmo Karotam, please.

Thank you, and also warm welcome from my side this afternoon to hear more about Baltic Horizon Fund and our ongoing public offering. So I would prefer to make this presentation rather short and more to the point and be really ready and open for any questions that you may have. So therefore, I will start with a brief introduction of our portfolio for those who are maybe not so familiar with Baltic Horizon Funds and then discuss the public offering in more detail and the future plans and use of proceeds. So let us start. Baltic Horizon Fund is one of the largest real estate groups in the Baltic states, investing into commercial properties across the Baltic capital cities. And we have started our journey actually back in 2009 in the last crisis and now have become a listed fund in Italian Stock Exchange and the Stockholm Stock Exchange as well. Our key priorities are investing into high-quality properties in the Baltic capital cities that have a strategic allocation either in the central parts of the city or then in the main arterial roads. We have invested into office buildings and retail centers. And we hold a -- quite an efficient and investor-friendly structure with our fund being licensed here in Estonia being a contractual unit trust and alternative investment fund also. We primarily target a diversified portfolio. And therefore, what I mean by diversified is targeting several segments, then also geographies, 3 countries, but also various tenants in various segments. And we believe that to date, we have already a good diversification that we can continue expanding. When it comes to numbers, then the total gross asset value as of June this year is around EUR 350 million. There was a slight drop in valuations due to COVID lockdown and shock in the spring. 4% was the devaluation, and we are looking forward to regain that value now in the coming periods. Total investor base includes more than 5,000 investors across the Baltics and as well, Sweden and Finland and many other countries. We have more than 113 million units outstanding and being one of the most-traded securities on Baltic stock exchange. And here is also a key -- some of our key investors in the institutional side, our Swedish social pension funds, some of the local pension funds. But once again, we do have a lot of retail investors which have invested into Baltic Horizon over time. And hereby a special notation to Lithuanian investors who have found us on the stock exchange. We haven't had, for jurisdictional and legal reasons, ability to make a public offering in larger scale in Lithuania before. But this time, we have achieved to receive the right licenses from the Lithuanian bank to do so. So I will come back to that a bit later. Now this has been now widely discussed as well in previous webinars, the impact of COVID lockdown to our portfolio. And what I can say is that we have, at this point, that with the crisis, we have had devaluations, as I mentioned before. We've had S&P Global affirm the same rating that they had to review during spring. It was also a very interesting time how they analyzed and scrutinized our data very carefully, but still laugh. Now we are -- we were able to retain our rating at MM3 level. So at the same level that we've had since 2018. In terms of covenants in front of our lenders and bondholders, we have been able to keep them intact. We approached, in July, our own investors for further support, just in case, whatever would start to happen now during the end of this year. And we are thankful to receive a bit more flexibility into the covenants in the future, even though it wasn't really a major respect then either. But that being said, we're very much now ready to look into the future and see what the sort of the post-COVID world will start to look like. In terms of impact to our portfolio, then as we do have office and retail, we are happy to conclude that the office segment has not been affected at all due to some of the tenants that we have being large tenants, municipal tenants, governmental tenants and having long-term lease agreements. Of course, that doesn't say that we -- it doesn't mean that we are not discussing the future needs of these tenants and the layouts but contracts or long term, and we were happy to go through the crisis without any impacts there. When it comes to retail, then we have both neighborhood supermarkets, but also locally centralized, these CBD retail centers. And of course, the centrally located retail centers have been affected and since they were closed for 1.5 months, in spring, we have dealt with the crisis. Yes. We have also given certain reliefs and some discounts for those periods. And I'm happy to say as well that this period is over. Again, we're also discussing -- that does mean that we're not discussing the future of our retail centers with our tenants, especially the expansion plans that we have already had since last year. What has also happened then during this time is that we received some awards for our reporting. We're really happy to receive that from the European listed property fund association, and as well, we are keeping our sustainability as well as reporting standards, very high. We want to lift them to the new level here in the Baltics, and I'm happy to see some acknowledgment there. I think it's important to stress as well that at Baltic Horizon, we have committed and at Northern Horizon in general, the management company, we have committed to achieve carbon neutrality within our properties by 2030. Yes, it's an ambitious task, and the -- it's a long and meticulous road towards that. But in all things that we are already doing is green energy, solar panels. We have one Pirita roof already serve us in several years, and 3 are in planning in Domus Pro and Upmalas Biroji, but also in our new development, Meraki. So with these techniques, we're definitely trying to achieve very high standards in the -- in exhaustive gases reduction. So last but not least, during the crisis, after the lockdown, we have reviewed the best practices in our shopping centers when it comes to hygiene and safety, and therefore, have gone through quite a meticulous process with a certifier to receive a certificate saying that these standards that have been applied, the cleaning techniques have been upgraded. The cleaning company has -- is providing the different level of cleaning, plus all the tenants have been trained. Our shopping center personnel has been trained. So we want to do as much as possible to keep shopping safe and as well, we're applying these standards across our portfolio further on. Now just to finish up with the current portfolio, we have 5 assets in Riga, 5 assets in Tallinn and now 6 assets in Vilnius. The 6 assets in Vilnius being the expansion project, which I will talk about in a minute. And yes, believe that the portfolio is already quite diversified. And even certain impacts that we had in the in the centrally located shopping centers, the portfolio level returns and vacancies have remained quite strong and have as well stabilized. Breakdown of the portfolio as of today. When it comes to the net rental income is we're about 42% in retail and 54% in office. I would say that both of these segments are -- have been and are continuously in change mode. We've seen a level of online shopping increasing because of this crisis. And as -- but as well, traditional shopping recovering. Right now, in Tallinn, there's these crazy days happening, and I see a lot of people back in the shopping centers. So what is interesting, of course, to note is that traditional shopping, in that sense, is being challenged by online shopping, for sure. We believe that the future of traditional shopping or, let's say, centrally located shopping centers is definitely dependent on the environment that you would create there. And why believe -- why we believe in central locations in the long-term is as well that the tourists will return. Unfortunately, that tourism sector currently has been affected the most. But we do estimate that it will return. And when a tourist comes to a location to Tallinn city center or Riga old town, then they don't do online shopping there. They are there for experiences. They are there to shop, to eat. And that's what -- why we believe in the long-term future of these locations. Of course, when it comes to also offices, this segment is also continuously evolving. But I think in the future, more and more, what I hear from tenants is that there will be separate functions in layouts. There will be place for, of course, socializing, space for coworking, innovating, but also space for working privately. And especially that privately working part is likely to be reduced. But I think as well that the co-working spaces are likely to increase. That's what the first signs from our tenants. So anyway, I think interesting, interesting times still ahead. Now when it comes to the future plans, then we have mapped our needs. And therefore, have called upon investors to invest into Baltic Horizon Fund as we are issuing more than 17 million new units. And the units will -- the offering will start tomorrow on the 8th of October and last until the 22nd of October. So there is a public offering in Estonia for retail investors and with a minimum investment of 1,000 units. And also now in Lithuania, a public offering to its retail investors. We are also targeting Latvia. Unfortunately, in Latvia, we cannot do a public offering due to legal restrictions there. But we can, of course, offer targeted units to specific institutional accounts, not only in Latvia, but in selected other European countries, including, of course, Sweden, Finland and many others. So the price of the offering is the average price of the year-to-date results on the stock exchange in Tallinn. The weighted average trading price. So -- and that was decided in the June Annual General Meeting of Investors. So at this point, we have fixed it at the moment of prospectus registration, and it is EUR 1.1566. It is quite, I think, the same that the price is on the market right now. Now many of our current investors are -- have already said that they are considering investing on a pro rata basis, meaning that if one would hold, let's say, 1% of the fund, then they are interested in 1% of the new offering. Maybe in terms of time line, there is a few important dates still in between. On the 15th of October, we are issuing a new announcement, latest by 15th, on the September NAV. So that is something that the investors should expect. And as well according to the financial calendar, the last dividend announcement this year will be on week 43, starting with 19th of October. During this year, we have been a quarterly dividend payer since 2016. And during this year, we have already paid out 3 times. So the dividend once in January, February, then in April, May, when -- and now also in August, September. So the fourth dividend announcement will be then on week 43, and that's also going to be published through NASDAQ Stock Exchange. So more information then on the use of proceeds. So we are preparing -- we have been preparing quite a few expansion projects that we have expansion rights in our portfolio. And the most active one currently is our Meraki project in Vilnius. The ones that know Vilnius, it is an expansion project next to our Domus Pro complex, which has about 17,000 square meters of leasable space, has already a supermarket, an office building, but also several other services and also an health club. So an attractive complex on its own, and we are planning to build approximately 16,000 square meters of new office space. What's interesting to note, especially after this summer is when the office tenants in the market have actually regrouped and increased attention to these new opportunities that to provide better, let's say, ventilation standards than their -- some of their older buildings. So it's definitely what we see is a move up to the -- of the quality curve for tenants. Especially the ones that are still in office buildings that are 20-plus years old. And we see even a quicker advancement in their plans. So we also want to be ready to offer them these solutions in a timely manner. So part of the proceeds will definitely be considered to be invested here at Meraki. In regards to other expansion plans in Tallinn, Pirita is a smaller plan where we are replanning the second floor right now. The expansion there is not likely to exceed a few million euros, where also the terraces will be covered with glass. And the increase in net leasable area will happen there. But more notably, Coca-Cola Plaza and Postimaja connection, we have applied for the final construction permit for the middle part, and it's currently being processed by the city. I think it's been also quite public news here. And of course, before we are able to receive the final permits from the city and iron out all the technical details, there's not a lot we can still do, but we definitely are reserving some funds for the continuation of this expansion as well. Now, I like this slide because it shows already the diversification we have in the capital cities of the Baltic states. And the blue triangles are our office buildings, red are our retail assets and red blue are the complexes, which have both segments represented like the Domus Pro complex, which I was just discussing. Also, the future of retail, we strongly believe will be a mixed-use retail, not only a good environment there is important, but as well that it is a mix of health services, shopping, food and as well offices. Now -- and that's exactly what we want to achieve with our Postimaja expansion. So -- but when it comes to the new acquisitions that we're planning, cash flow acquisitions, since this has been the key strategic point of view from the beginning that we are not a developer, but rather buying strong locations and strong tenants, then we are continuously interested in diversifying our fund with acquisitions in office segment. But are also considering selected logistics with strong long-term lease agreements and are open to modern social infrastructure segments such as senior care homes. The ones that may know whether Northern Horizon Capital as a fund management company has been investing with investors since the 2000s into senior care homes. In the Nordic countries, we have invested in more than 120 senior care homes, which some of them we still hold with the investor base right now and more than EUR 800 million has been invested in that segment. In the Baltic States, this segment as well as residential rental houses has been emerging, but this has not been institutionalized yet. So we're definitely interested in helping to institutionalize that segment and have been discussing with developers, what sort of business models and the cooperation and the investment cases we can have in that segment. So I think that would be an interesting complement to the current portfolio that we have. Now as a last note, we still believe in the future of retail and offices in the Baltic states. Of course, there is much more competition in retail for locations, but retail spending in the Baltics has been increasing year after year since the economies are increasing. Then it is also a strong belief for Baltic Horizon Fund management team that the Baltic economies will continue to grow, meaning on a long-term basis, higher salaries and also more people, especially in the capital cities. In the office segment as well, the growth might not be that quick as it was in the past years. Because yes, office tenants are rethinking their layouts and their working principles, how much flexibility they shall allow people to work from homes. But when you compare Tallinn or Vilnius, for example, office space to Stockholm then in Stockholm, they're 6x as much as office space as we have here. So I think the organic growth is something that one could also expect as we also see some of our tenants actually wanting to expand during this time and bringing other departments from abroad to these back office locations in all of our capital cities. So hereby, I would like to open up for questions. And I see already a few of them. So let me try to read it.

So the question on COVID on footfall in shopping centers. And I think this has also been quite well described in the last quarterly report. But in retail, as I mentioned, about 11% of the rental income is coming from neighborhood supermarkets that house a food store and certain essential services. And that part, I would say, has not been affected that much. So people have been living in the suburbs, especially during the summer when the weather has been very nice. And the footfalls actually have, in many of our supermarkets, even increased as well as turnover. So that's a good thing of diversifying one's portfolio. Now in city centers, we have had the footfalls recovering, but not recovering yet to the levels that we saw pre-COVID. So we are still 20%, 30% below to what we had last year. And it is explained by the lack of tourists and lack of people traveling in the city centers. So I think one should expect as well as what we see internally is that with the help of tourism coming back in the next 12 to 18 months, hopefully, hopefully, the footfalls and the turnovers will recover then to the previous levels. So a question on cinema performance. So we've had several meetings with the cinema now during the summer. And of course, they have been struggling, I think, the most because also the cinema was allowed to open as the last of the type of tenants that we have. So we were actually quite fortunate to have a movie called Tenet in Estonia, having its opening in August. So they received a very high number of visitors. More than 20,000, if I recall. And it was considered as one of those blockbuster movies that they've had in the past, even better, so almost breaking records, historic records in the past. So that was some relief to the -- definitely for the tenant. However, what's interesting is that people are not traveling, and people are spending a lot of time in their home countries and having staycations and spending money and also looking for ways how to entertain themselves. So what I've seen is theaters, concert halls, operas are full. And also the cinemas would be full in case the blockbuster movies are actually being launched and being having the premieres, but many of the premieres have been pushed now into last year. So when it comes -- the question is on long-term effect on cinema is that I don't think cinema will disappear anywhere. The strong locations will definitely survive. They have been talking about the cinema's death since the second world war, but it still hasn't happened. People are social beings. They want to be entertained as they want to go to theaters and operas. So what can be actually somewhat expected is that when the blockbuster movies now start coming out one after the other, then it may be a bit even a rush back to the cinemas, and that's what is somewhat expected. It's interesting also when you draw a parallel with the capital markets and also in the Baltic states, but also in Sweden, that, especially in Sweden, that the capital markets, the IPOs and all of these things stopped for about a month, 1.5 months, in April, May, but then continued very strongly now after the summer. So all of what's been prepared -- what was prepared for the spring have now been pushed and crammed into autumn. So it's, yes, it -- in the cinema case, it really depends on blockbusters being premiered. When it comes to, in our case, as you know, Coca-Cola Plaza will be emerged hopefully soon with Postimaja, so we are already discussing the future. And very likely, the cinema will reduce their space somewhat and become more efficient in their operations. But yes, we have the long-term belief in the cinema segment. There's a question on ESG priorities. Yes. There was a slide on that, once again, to repeat its sustainability, not only in energy efficiencies and having good quality -- and efficient buildings, but it's also the governance point of view, for sure, having the right strategy and really acting on it. And since we have quite a large portfolio, this is quite huge work and will take some time, but definitely, we're committed to reducing our carbon footprint in the next periods of time. And as well, BREEAM is something that we are having in our -- some of our properties already, BREEAM certification, and we're considering actually certifying, if not all, then most of our properties in the portfolio. Let's see. There's a question on the dividend payout ratio and when would it return to pre-COVID levels. So I cannot right now say what is going to be the dividend decision in week 43. But if you look at the performance of our fund and the resulting dividend payout, then most of the time, we have it as -- targeted a dividend payout of, it's been minimum, 80%, but it's been actually more than 90% in the past period. Now, the last 2 quarters, and understandably so, due to an uncertainty, we did generate quite a sufficient level of cash, but we did take a cautionary measure to reduce the dividend payout for the past 2 quarters and have, therefore, increased our dividend reserve to a EUR 3.5 million level. So we do have the flexibility with our fund to payout quarterly dividends, and not just once per year. So we are able to sort of really tactically approaching the situation at hand and how confident we feel that the portfolio has been recovering and vacancy stabilizing. So I think, well, I've said that before that definitely, the payment discipline has improved considerably I -- even to the pre-COVID levels already based on with our tenants. We have, yes, stabilized our vacancies in the 3 centrally located shopping centers. There are tenants wanting to actually come to the centers now. New tenants actually coming to the Baltic markets. So we see quite a lot of activity. So I think all of this information, together with September, also NAV results will be the basis for this decision. And of course, what I can say is that our priority is to payout at least 80% of our generated returns from operations. So I -- even for the dividend reserve that we have generated, at some point, the investors have the rightful expectation that this would be paid out. There's a few more questions here. So there's a question on traditional office space versus than co-working space. I would say, based on the office tenants that we have and based on the discussions then, what we really see is that I believe that the co-working space, or let's say, flexible working space will be the new buzz word in office segment. So co-working spaces, I think, will be long-term winners here. However, how it will pan out exactly, that remains to be seen. But what we feel is that many of the tenants, when their lease agreements become renewable, might consider that the space that they will not necessarily reduce, but at least, let's say, 10%, 20%, they would want to have on flexible terms. And that remains to be seen if it will happen, but definitely, they would need some premises on a long-term basis. But I think the flexibility of either taking more space when they need and/or them giving back is going to be worked into the contracts in the next 3 to 5 years. I don't think it changes much the risk profile. I think this is just something that will take place. And it may even potentially increase the returns because now, if there is more flexibility in the lease agreement, usually, that should translate into higher rewards. So that remains to be seen. Then we have a question on the new issue of units that we are showing at least 17 million new units. And the question is that the current offering will be at a discount compared to the previous offerings. And yes, that is true. It is the mechanism that was set at the Investor General meeting in June, and now it has resulted to a price of EUR 1.15. And the question is on dilution with how much that would dilute the investors. So I think one, the recommendation that we have is, of course, for our investors to consider participating again on a pro rata basis, not to get diluted here. And if one owns 1% of the fund units, then to consider if buying 1% of the offering would be reasonable. Especially looking ahead into the future and considering the dividend history of -- the payment history of the fund. Or if, of course, investors are not -- there will be some dilution if investors are not able to participate in offering. But as far as I've -- we've calculated, that shouldn't be a very big dilution at all. I think I have answered all of the questions. If there's any more questions, I would be happy to take a few more. I think I see another question. There's a specific question now on the use of proceeds and how much would be reserved for investing into current expansions and new acquisitions. Then what I can say is that the most active project that we have is the office building expansion, the construction, where we already have signed up leases. And approximately EUR 10 million needs to be invested into that project over the next 6 to 9 months of equity in order to complete it. So of course, the other part will be the bank loan as is common. So the other expansion projects probably at this moment wouldn't need that large contribution. So I would say, currently, it could be half and half. Or if we do raise more than EUR 20 million, then -- what we believe is at least we will have funds for 1 more acquisition in the market, apart from expansion plans. And this is also evident from the pipeline that we are negotiating right now. There's a follow-on question about the acquisitions. Are we funding the expansions and the new acquisitions by issuing new units? Then the answer here is that according to fund rules, we are -- our priority is to pay out regular dividends to our investors. And we can reserve up to 20% of the net operating income of the fund for either expansions or new acquisitions. So I think overall -- and this is, I think, in the -- really the approach since our -- when we started back in 2009 and '10, that we would rather pay out the operating cash flow to our investors on a regular basis. And if we really need then additional money for good acquisitions or our expansion projects, then we go back to the investors and raise specifically for these cases. So -- but I think we still have the capacity to up to 20% to use from the operating results to invest into our current properties and new assets, and then we have also used some parts of that during the past years. There's also a question once again on the office segment. And as I've also mentioned in this presentation several times, yes, the office segment is also in -- is going to be changing. But I wouldn't -- and there are people working from home. And -- but there is still like ourselves when we look at ourselves that we have more flexibility working from places. But I wouldn't say that now because of COVID lockdown, we will not have offices, we will not have retail -- traditional retail. We will not have hotels or cinemas. I think this is definitely -- these segments are definitely going to stay. And as I mentioned before, in office, we do foresee some flexibility, definitely change in layouts to -- from office stations to more hotspots and the more social spaces, maybe larger innovation rooms where tenant -- the employees of the tenants can come together and work with each other. And people -- and there's been many surveys. People do miss bumping into each other. And so I wouldn't -- I could say that maybe some tenants, especially very small companies, a few people only. They consider we don't need office space anymore, and they can work now then from co-working arrangements. But I think that's what's happening already before. So one wouldn't invite people to come to their house regularly to have meetings. So I think there's privacy issues there. And so yes, it's interesting to monitor this, but we definitely believe in the future of, not only office, but retail segment. There's a question on -- or specifically on our pipeline objects. Unfortunately, I cannot disclose this information for confidentiality reasons. But as I mentioned, our -- we do prefer certain segments right now. And the office segment is definitely one of them, but it has to be a good case. The price has to be also good. And what's most important, the analysis of the tenant mix is crucial and the long-term location. So -- and of course, the efficiency of the building, the quality of it, for sure, is very important. And I see I have 1 more question. There's a question on the rent levels and where the rents are moving in the future. I think the -- one would have to look what are the rent levels already right now and then consider the risk of further decline or look at the contracts, how are these rents going to change during the length of the lease agreement. It's difficult to assess what will happen, let's say, if a 5-year lease agreement terminates, for example, in the office segment, in 2025. I think office cost is important for tenants, but it's definitely not the major cost line, as employee salaries is usually the largest cost line. So I think in certain locations, there definitely will be pressure on rents. There will be also pressure on rents in retail. But again, it's -- in retail, it's a combination of how well are you able to attract people to your location with the environment that you're providing and effectively the sales. And so it's really the combination of that. The ones who have declining footfalls and are not able to have certain segments added, for example, residential or office to the mix, then those will be, I think, in bigger danger. But so some, of course, rents, I mean, retail have also been a function of turnovers. I wouldn't say that we have seen that much push, but maybe somewhat to at least survive the difficult times that the requests have been to really consider the turnovers. So but again, it's as good as a job that you do as a tenant and as a landlord to attract people to your destination. Okay. We see more questions. There's a question on, do we see any insolvencies of shopping centers in the Baltics in the next 12 months? The answer to that is yes. And -- but I wouldn't say that it is only related to COVID. It's related to certain shopping centers being in a position where they are losing out to competition. And of course, a very, I guess, notorious case already is in Tallinn. We have T1 shopping center, which was launched into the market, but it really couldn't fit in and find or really sort of communicate to that -- to the right catchment. So that shopping center is definitely struggling, and we're likely to go through the bankruptcy proceedings now very soon. I think it was any way going to go into this insolvency proceeding. So when it comes to Riga, then, yes, again, there's been cases where shopping centers, which nobody wanted even pre-COVID because that was a dying center. And usually, they are in the suburbs. They don't have a right size. They are not the largest, but they're somewhere in between. Now usually, the management maybe can be not focusing on the right things. It's really now more and more about understanding the catchment. For example, Europa Shopping Center that we have in Vilnius. It has a great location. And yes, we've been maybe taking quite a bit of time to really understand what the catchment of that shopping center really needs. Europa Shopping Center, which was opened in 2004, was the #1 fashion shopping center, but it's not the case that much anymore. It's really -- really, when we've seen such big influx of new office buildings, just around the center, we know which -- what our catchment is. And we've done surveys, questionnaires. Now we have to probably review them since we had already planned beginning of the years to start. We're now working on the changes there. So it's really, again, about understanding your catchment, whether it's office buildings, which are around you or residential buildings, which are around you, what do those people need. Again, a comment on online shopping. In the Baltic states, yes, online shopping has also increased. But what we see in big metropolitan areas, such as London and New York, and you really have to travel sometimes to the shopping center to get what you need. It takes hours and hours. So you're much better off. It's all about convenience to order online. Whereas in the Baltics, everything is still within a 15-minute drive aways. So it's again about convenience and yes, understanding your client. Okay. I think that seems to be all of the questions. So thank you very much for these questions. They're very relevant and yes, we have nearly spent an hour together. So I think if there are maybe 1 -- time for a final question, if anybody has, otherwise, I thank you for participation. And okay, I welcome you to follow Baltic Horizon news either on social media or on NASDAQ over the next periods of time and really also look more into the historic performance. And I think one could find quite a lot of additional information from our reports, definitely as we did receive a gold award for the increase of the quality of the reports. So once again, thank you very much, and all the best.