Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Hello, good afternoon, and welcome to the Annual Regular General Meeting of Baltic Horizon Fund. My name is Tarmo Karotam. I'm Fund Manager and I'm here to first give you an update on the results and it's maybe a little bit repetitive to the webinar that we had a couple of weeks ago, but I think I have some small updates about the portfolio and maybe some new pictures as well about our fund's portfolio properties. Then we will, also, as a second point on the agenda, we will talk a little bit about our current listing in Stockholm and the issues that we have had there and the solutions that we have found. And as a third thing on the agenda, we will then talk about the buyback program of the fund over the next 3 years. So I will kick this off with the latest results, and we do have annual results out, which you probably have already seen, but also Q1 results and also some new information about the second quarter as well. So overall portfolio performance remains quite good. Our office buildings over the COVID period and also now during the Ukrainian crisis period, have remained fully leased out. What we see is that there's definitely some stability in the office segment as well in regards to the question that our office is going to survive and all companies reducing space. So we haven't seen that. I think companies are reorganizing their work processes, but many of the companies still prefer people in the offices. And as we have launched tenants, municipal companies and governmental organizations as our tenants, then I think there is more stability and more requirements of people coming back to the office. But it's not only about requirements. I think we have discussed this, I think, probably also in the previous discussions, but many people do prefer to go back again to the offices. And even though if there is 1 or 2 days possibility to work remotely companies have continued to keep the premises that they've had at least based on our portfolio. And it's very important to also note that due to the lockdowns, our large shopping centers were closed last year. But it is true that now this year, our properties have been recovering, especially after the 1st of April when all restrictions were lifted, including masks in our shopping centers. And we do see a continuous recovery happening also in our retail properties. More info will be also in later slides. This also is, I think, a good slide to show that many of our properties, the net operating income has been increasing. And I think the bigger change in that is that we have sold G4S property last year, but we have reinvested the money into our newest Meraki office building in Vilnius and that property is now being finished in June and first tenants moving in over the summer. We are in the process of looking for the anchor tenant in the building. So the income, I think, will also be start -- to be generated from this property later on this year. In regards to the NAV over the past years, yes, there has been some influence on the valuations because of the COVID lockdowns and uncertainty. But over the past quarters, the NAV has been quite stable. And overall, I think our portfolio has been quite resilient to the COVID crisis, which actually impacted couple of our properties quite heavily. And that's because of the diversification we have to the office segment and also to the super markets, which did well -- very well during the COVID years. What do we expect now in the midyear valuations? It's maybe a bit difficult, too early to say. They have been started. On one hand, the supply crisis and the cost of construction prices might influence the valuation. But on the other hand, inflation forecasts and indexation possibilities might also influence the valuations. So we do hope -- expect valuations overall for the portfolio to remain relatively stable. Then P&L. Very quickly, once again, there has been some increase compared to last year. And that's without G4S Headquarters. So the plan is to recover lost rental income last year, half of it this year and the remaining half next year. Overall, I think we've been also quite efficient on the administrative expenses side over the COVID years, so try to find economies -- economizations wherever we've been able to find it. And overall, for the first quarter, close to EUR 2 million profit, mainly -- basically from operations. And a quick peek on the balance sheet. We have sufficient cash currently to continue with our investments into our own properties, as we see, I would say that these are the best investments today, we can make in the market. And so that's one of the reasons why we also haven't acquired anything new. Market for new properties, it's not easy to find good quality properties at reasonable prices. But we do believe that our investments, especially in a city center, what I call community centers that we have in Tallinn, Riga, Vilnius will pay off definitely on a long-term basis. Then quick review of major events. We opened -- we have invested now, yes, in Europa in Vilnius and have opened a new food hall there. It's been widely popular. I have later some pictures as well. If you haven't seen that, I think it was very well planned with our Finnish interior designers Bolder and also well executed despite of the supply crisis and difficulty to get the right materials at the right time. So and the final investments to the new vertical escalators and a new amphitheater will be made as we speak, and the opening is planned now end of June. So we're really happy to see that these investments are already paying off with the success of the food hall. Standard & Poor's has been ratings since 2018 and despite the COVID restrictions and some impact. We have retained the same rating also this year. And last but not least, we have the next sort of major thing to do is to continue refinancing our loans. And I'll talk more about that also later. And also for this agenda, we have the buyback program in place because we do believe that the market price today on stock exchange is way below the fair valuations and our view of the portfolio value on long term. Now this is, I think, a very interesting slide and I keep showing this, and we'll keep showing this also in the coming quarters. And that shows the footfall and turnover of our shopping center portfolio since basically the COVID crisis started. And it is clearly visible here that the lockdowns have impacted the footfall drastically. And here, you can also see the waves of when the new lockdowns, again, were present. And -- but also, it's absolutely visible here that when shopping centers are open again and our centrally located community centers and the footfall and turnovers have recovered very quickly and they have continued to recover also this year. I think it is highly improbable that in the Baltics lockdowns of shopping centers will happen again. There's been already actually some court rulings at least in Estonia that these restrictions can be considered unlawful. We'll see how that sort of goes forward, but I think also the society is ready to manage these -- the COVID type of virus in a different way. So we do see a continuous recovery. And I think we will get to 100% also when tourists are back, and that is also the visitors that come to our centrally located centers, especially in Tallinn and Riga. No major changes in the tenant mix. And I think our allocation to Latvia is quite sufficient today. And if you ask where are we looking for new investment opportunities that they are definitely in Estonia and Lithuania to balance more the diversification geographically. And as well, we do see retail allocation for income probably increasing over the next months, due to recovery of the NOI. Then a few more words about our investments into the properties. And on the right, you can see the newest office building that we have BREEAM excellent certified and sort of -- this is a replacement of G4S older property that we sold. And in Vilnius, it's next to our other asset, [indiscernible] and the opening will be this year. And what we also see in Europa is today, I can say that -- now when the opening reconstructions are finished opening is in June, July, then we already have lease agreements in place to increase the occupancy of Europa to 90% by approximately September when all the tenants -- new tenants will be moving in. So very happy about that. And also, we have other investment plans in Galerija Centrs in Riga and in Postimaja, especially in Galerija Centrs, I think we will focus on that next also a new food hall and also with the replacement of some tenants and reorganization of the tenants on the fourth and third floor because the food court will be on the fourth floor. We also see that the occupancy of Galerija Centrs is going to be around 90% by the fall, given that everything -- that no major shocks again externally are happening. And Coca-Cola Postimaja project, we have started the extension of Reval Cafe that will be opened in August. And then the next topic is the refurbishment and replanning of the cinema first floor. And then the major development probably will be pushed to next year when we have new anchor tenants in place. So it all happens in sequence one project after the other. We also don't want to do too many development projects at one time. We don't have a term as a fund. So we want to do these investments at the best possible moment also considering the fund's strategy not to do too many developments in one time. So as I promised some new pictures of Europa food hall. So I think, one can see that the food court has been very well welcomed since January food hall from the local people. And if you have visited it, then hopefully, you have been also satisfied customers. There are about 10 outlets there ranging from woks to Ukrainian food to pizzas and to good burgers. And it has definitely increased the footfall. And it was also funny to see that the chess players have found this location as their new hangout place, done it for several times, but that is very good news for us that socially we have made an attractive venue and people are visiting the venue also for other reasons. Then on the other side, Huracan Coffee will be open next week or even end of this week. And on the right side, you can see also -- at the end, there are new escalators and new amphitheater being constructed. So new flooring, new shop fronts and just to make more cozy feel of the center that we have in the middle of the business district in Vilnius. And then some few pictures, again, about Galerija food hall on the fourth floor that we aim to execute. We have the interior behind us, we have even the name. It's not going to be the Dialogai, but it's going to be something else. And we have even the construction company ready to go. So we want to execute this in the second half of the year and with the terrace there overlooking the old town. Then update on the financial debt structure. So I've been asked that how does potential Euribor increase affect our portfolio? Then I can say that there is no direct impact because many of our loans have been hedged, have been fixed and almost 78% and we -- what's happening for us is that we are renewing now our loans that are due end of next year, early -- end of this year, early next year. You can see this from the list and many of those loans are office loans. I think quite happy that we were able to prolong our shopping center loans this earlier this year, and it's probably easier to prolong office loans at good conditions. And also, we are working on the bonds refinancing, which is still 8th of May next year. We want to find a solution also in the second half of this year. Currently, markets, of course, are not favorable at all for foreign prolongations. And that's why I'm happy that we don't need to prolong it today, where the war shock is still in the capital markets and lots of uncertainty. So let's see, in the second half of this year, but our alternative is also to replace the bond with cheaper bank financing and then find a solution with the amortization. But anyway, quite volatile times in the interest rate market. Some argue that interest rates could raise to 2%, 3% like they did in U.S., but there are also arguments that the interest rates may not increase as high as that Euribor, I mean, because of the upcoming recession in Europe. So it is currently quite unpredictable what will happen, but we will monitor the markets closely and our aim is to find the best possible solution with refinancing starting from August this year. So we still have some time, which is good, and we continue to monitor the markets. So -- then a few words about our dividends. We've continued to pay out dividends also during the COVID years. And yes, because of the lockdowns, we have had to give discounts of rents. And last year, we gave discounts close to EUR 5 million, and our operating income from portfolio was EUR 17 million. So we -- of the EUR 5 million, we hope to recover half this year and half next year. And so during the lockdowns and during the sort of the war shock period, we have been relatively still cautious. There's one crisis after the other. There's been many questions of when do we start paying out the reserves that we have from the pandemic period that we have covered or kept to boost the liquidity and -- of the fund. We have to be very diligent in that regard. But trust me when I say this that this is a priority for us and to pay out as much as we can after the liquidity needs are sort of addressed, and we have enough also capital for our refurbishment projects. So the strategy is to continue to pay out at least 80% of the quarterly net cash flow generated by the fund. And so that we have no plans of stopping the dividends and continue, hopefully, to increase the dividends as -- what we are also doing is, of course, trying to index our rents as much as possible. Okay. So this was a quick recap of funds results. Then there's another topic on the agenda to be discussed. And this is the topic that we had when we got listed in Tallinn in 2016 then we decided also to go for listing in Stockholm because of our large Swedish investor base. And since we were basically the only one or the first one to establish such a dual listing, then we were able to negotiate a deal with Euroclear, which is the depository -- the only depository in Sweden and Norway, Finland, to provide the link -- electronic link between Estonian depository and the Swedish depository. Now due to strategic decisions that Norway, Finland because probably also, we were the only client they have decided to strategically focus on something else. And as a result, we have to find another solution because for us, it is also strategically important to keep our activities in Stockholm and keep ourselves listed in NASDAQ Stockholm. So after some legal research and talking to market players for almost 6 months now, then we have found a solution, which is the local Swedish depository receipts. So it's a very technical thing, but still quite a regular solution for foreign companies who want to be listed in Stockholm. So we are -- what I would like to update on is that we are in discussions with potential local partners for the service, and we want to give, hopefully, some news about the solutions and if there's any changes that investors need to do by this month. So hopefully, we can arrive into an agreement. It's highly technical, the sub custody link and it has taken a bit of time for us to establish it. So I hope we have more information in the coming weeks. So we'll keep you updated, and there will be definitely an NASDAQ announcement if we have something more direct to say about the agreements. Then before we go into the resolution on the buyback, I'm just checking if there's any questions so far on the first agenda points. As well, if we have any questions here, then happy to answer them, otherwise I'm going forward to the third agenda point. I think we have something here. No questions. Okay. All right. We have a question from [indiscernible]. So do we have projections if interest rates go to 5%, I mean, Euribor? We do have such projections. And in that case, of course, what happens is that the generated cash flow, some of that will be paid as interest. And so I think we still remain cash flow positive, but it definitely impacts then the dividends, which is then the case. And hopefully, we can -- if this something like this happens, then of course, it's full crisis mode. And I think that a lot of things will happen then on the market. And -- but direct impact will be then of course, not immediate, again, because we have hedging for a close to 80%. So that means that our interest rates are fixed. But at some point, if we need to refinance or that will start to impact our portfolio then with every loan that we refinance. So that's why also, for us, it's important to refinance our loans that are upcoming as soon as possible. So then about the buyback program, as I mentioned, so we want to establish this program for the management as a tool to be able to buyback units from the market over the next 3 years, if we deem this necessary. And that if it would strengthen the capital structure, then the details of the buyback program are on the screen. And unfortunately, I have to note that for this today's meeting in order to make a decision, 2/3 of the investors need to vote, which is currently not the case and we need to have a second meeting of the investors in order to decide this, where we don't have this strict quorum of 2/3 of investors being present. So after this meeting -- so that means that for the buyback program today, we cannot adopt a decision because the quorum is not in place, and there will be a new investors meeting -- the follow-up meeting happening in a few weeks' time, most likely on the 21st of June in Stockholm, where we expect as well some Swedish investors -- larger investors present. And then hopefully, we can adopt the resolution here with simple majority. So in case, if there are any more questions because this has really concluded the agenda for the Annual General Meeting. We don't have yet the Q2 results. I think next important milestones will be 15th of July when we have -- of course, 15th of June will also be the NAV announcement and the 15th of July, which will be also the NAV announcement and with the new valuations. But yes, for the purpose of this buyback program, most likely a new follow-up investor meeting will be happening on the 21st of June. So if there are no more questions, then I would like you -- I would like to thank you for the participation and keep monitoring our NAV announcements about potential -- the recovery of our rental income. And if not sooner, then we will have another follow-up on the second general meeting on the 21st of June. So thank you very much.