Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Hello. Good afternoon. My name is Tarmo Karotam, and welcome to the Q4 Baltic Horizon webinar. So let's start. I see quite a few people have joined over the past few days, received several questions. And I hope to answer those questions also during the presentation. And if something I have missed then please don't hesitate to ask your question in the Q&A section. So let's start with the general overview and I would say that 2022, for us, was a -- generally still a good year considering the circumstances and the tough environment that we have been operating in so several new events that were not forecasted to happen had happened. And the funds having been partially from recoverable from COVID restrictions had to cope with other new challenges, but I think, overall, we achieved a good result. And definitely, the key words from 2022 were increased energy costs for us as well as uncertainty among some of our retail tenants. So -- and as well listing in stockholder that we had to restructure and, of course, refinancing of several of the fund loans, and that has been the focus of the fund already for a couple of years. So overall, if we start with the refinancing of the loans, then the banking sector is working well, and we have as a long-term client of several banks being able to successfully extend many of our loans. And if you ask me about the conditions, then the conditions are quite similar. And what we have also done now over the past several months is to increase some of our loans. And that's -- and what we did see maybe a change was that amortization, which we didn't have before. As you know, our capital structure from previous periods, since 2018, was amortization free. That was the main goal of the fund, to have net cash flow at the maximum level. Also we introduced the fund for that purpose and lowered -- lower the bank loans LTVs and we're able to generate high cash flows and pay out a high dividend. So we just calculated. And since listing, we paid out almost [ $0.58 ] per unit in terms of cash return for the investors. And so if one joined the investment into the fund in 2016, then over the years, also during the COVID years, we paid back almost 40% of the investment. So -- but times have changed, and I think everybody knows that we have a bond maturing in spring this year. And the management also for the past, I would say, a year has been working on the bonds or refinancing the bonds and I will get into more details later on. But overall, I would say that the actions that have been -- have taken place within the fund and are taking place. Now also this year, especially before spring, are mainly focused on getting the new capital structure for the funds for the next 3- to 5-year period. One notable event just to mention here as well, we have a new Board member at the management company of Northern Horizon Capital, our long-term employee, Edvinas Karbauskas. Edvinas's background is from Ernst & Young and also having been the fund controller of the funds. So he knows all the numbers and the nitty-gritty details by heart. And he's focusing also on financing projects, but also investment projects as we go along. And I note as well that Algirdas Vaitiekunas previous Board member retired. And -- but I think we will see him still around potentially the Supervisory Board of the funds for the coming period. And yes, we mentioned here as the website, which has been a part of a longer rebranding process to make communication more clearer, to make our website more lean and clean and to align also Baltic Horizon's logo to the different logos within the Northern Horizon Group. As one may know, we have several other funds in the Nordics healthcare funds. So it has been a branding exercise that has taken place for some time now, but it is completed now. And we live under the new signage. So let's get into more details. There's been quite a few specific questions about the properties. So I will try to answer them. But I think one notable event at the end of last year -- on the last days actually was selling the parking house. It was a negotiation that took almost 4 to 5 months, and we had several interested buyers and we owned 50% of the parking hub. So if you haven't been there, then the parking house is behind the Europa Center. And it was built in 2004, owned 50-50 by Europa office tower owner [indiscernible] and their prime location property fund. So when we acquired the shopping center back in 2015, we inherited 50% of the parking. So we were operating the parking together and had some space for our visitors. But of course, the structure was amortized and is getting older and older. So we had some disagreements on how to renovate the house -- the parking house and what should be the future of the parking house. And when an offer came from the other party to sell 50%, and we thought it was a good idea. We, of course, made sure that we are -- we have available parking places for our customers. And regardless that the change was now that from the first tower parking is payable because that was -- previously it was one of the few places in the city center of [indiscernible] where parking was still free. Then it is a promotion also for our tenants and that people -- if you really come park there, then you're expected as well to shop and then you get the parking for free. So I think as -- the conversion has been quite successful. We're also happy to deleverage with the sales proceeds. So that has been also the main focus of the funds for the past 6 to 9 months. And second transaction, which we prepared already end of last year, was a sale of Domus Pro in Vilnius. It's a neighborhood supermarket, which we developed together with a local developer back in 2013, '14 and '15. And there's been a few questions why Domus Pro and why -- why not in -- why Europa parking? And why [indiscernible], for example, in 2011 -- 2021? So since already the COVID times, we have been internally discussing a lot about the future of Baltic Horizon. And where we want to be, and now we've actually started to execute some of these transactions. So when we consider our disposals, we think about several things. And one thing is, of course, the tenant mix and the footfalls and attractiveness of certain property and location for the coming period. The second thing is as well the amount of investments that certain properties would need in the coming years when certain lease agreements are coming to an end. So with putting these into numbers and looking into what we should dispose and where do we see potential and where do we -- we don't see that much potential in terms of, for example, rental growth, then those decisions have been made partly because of that. So we are focused on making our portfolio more and more efficient. And believe it not, we still believe in city centers. So regardless of COVID, which was, of course, a big black swan back in the day, but what we see is that city centers continue to be very vibrant, and just wait until the tourists are back. So in that sense, we are focusing -- so focusing our investments more into city center areas. And that's why also we believe that the investments that we've made into some of our assets over the past years have been successful and will make good results in the coming years. Maybe last comment here is that we held property for close to 9 years and developed it -- eventually bought it from the developer, quite an attractive price, and it was -- it has been a good cash flow for the funds, allowing us to earn a double-digit return, doubling the money. But yes, I think the key reason for selling this, apart from preparing to refinance the bond, was that these type of properties are amortizing and there are lots of investments needed in this property in the coming years. A few words about the tenant mix. So substantially, the largest tenants haven't changed. And there was also a question on how do I see the office market today, or the governmental companies or the decreasing space becoming more efficient? So I think my answer has really hasn't really changed. What I see is that companies are operating in the premises, some office is partially already the new realities. But there's a lot of replanning of office space and for group works for the building exercises and so on. And as I've said also before, I don't think there's a major sort of push for a large expansions of certain tenants. But I also don't see that there is a major push for a large reduction of larger tenants, even though there has been some also in our case, one example, the Lithuanian tax authority in our North Star during the COVID times reduced their space by 1,000 square meters. But we've installed a sort of a small office hotel there and now it's fully let to smaller tenants. So I think it's still quite a normal scene what I see. So I don't see major expansions, but also not too many major contractions as well. And from this list, ACB, our tenant in Upmalas Biroji in Latvia is the one who was actually expanding, and that's the reason why -- and is spending heavily. So that's the reason why they have decided to move into a new development on the other side of the river in Riga. By the end of -- by the second half of this year, they will be moving out, but it's an attractive property very well -- let's say, the floors and the premises are in very good state. So we are already in negotiations with a couple of potential new tenants. We will meet on in Riga next Monday to discuss that tenant for 2,000 square meters. So we do see still quite active office market. Tenants are moving, expanding, some are reducing space, but quite normal market. Then more specifically, about properties one by one, a few comments. In Duetto, there's been some reshuffling of tenants, some expanding, some retracting. So -- but overall, the properties remain fully let. The small vacancy there is related to the kindergarten and small cafeteria downstairs in Duetto I, but otherwise well performing to office properties. In Europa, there's been also quite a few questions that the recovery of the NOI in Europa hasn't been as fast as expected, and this is true. So we have put a lot of effort into rejuvenating Europa, not only how it looks but also more early to bring a different vibe. It used to be opened as a fashion center, but it's definitely not a fashion center anymore. It's a service center. And to make that conversion has taken time and -- but the plan is set and we have visited the property. There's quite a few new tenants, the foothold we've talked about is a lot and that's a big success. And also, we have retailer who is a -- which is now more of a gadget electronic shop, [indiscernible] which is a makeup store with a bar, a very successful [indiscernible] cafeterias. And I would say that the strategy of Europa is definitely to bring more services and to bring more food and beverage, and we are in negotiations with the [ day spa ] as well. So there's quite a few new tenants that are coming, but it just takes time to implement the agreement and bring them in. But -- so if one asks why we don't have a major new fashion anchor there? Then that's not a focus anymore. Yes, we want to have some fashion and some clothes and garments for the customers, but it's definitely more services, it's definitely more F&B and that's based on the question as of -- which have been done for the surrounding offices from -- with the people in the surrounding offices. So if you would look at our three top assets in our city centers, Postimaja in Tallinn, Galerija Centrs in Riga and Europa in Vilnius. They are, yes, very centrally located, but they have quite a different catchment and audience in Europa definitely, the people working in the surroundings, but also living mainly working not so many tourists currently. And historically, that may change in the future, but it's not the most tourist location. Whereas Galerija Centrs in main audience is the people living in the old town -- working in the old town government sector, students but also the tourists. And in Tallinn Postimaja [ catchment ] is people visiting city center, working, living here but as well as tourists. So it's slightly different -- what different customers of different centers are looking for. So there will be many things happening in Europa this year, and we're working to recover the NOI and the new leases, the new lease levels have been 20%, 30% higher than we signed before. So more of the new leases that we have signed, the concepts are working. Tenants are happy. Customers are happy. So I think that's very good feedback for us that we are on right track. Then Domus Pro, as I mentioned a bit that we're selling this property, several leases -- large leases expiring there and some investment needs. And we had an offer on a table. Actually, we had three offers on the table. So it should as well that the investment market, this is quite active also during these times. And North Star doing well. And Meraki, we have fully finished the property and some tenants have moved in currently. We have just recently signed another lease agreement with Baltic Line. So occupancy now increased to close to 31%, and we have several discussions ongoing as well with tenants. So it's a matter of time when I think we will get that building filled out. So Vainodes is doing fine. Now LNK Center discussing with the tenants also how they view the future. So there may be some changes in the floor areas. But currently, these are only discussions. So we're waiting some feedback and ideas from the tenant side. In Sky, everything is working well as well. It's quite interesting to see from our numbers, the recovery now compared to beginning of last year when we still had the restrictions and certain limitations that the footfalls and turnovers across the board in our retail assets has increased 30% to 50%. So I think the numbers, they look astonishingly higher. And -- but of course, the base was also low, but it definitely shows a strong recovery. And for example, if we look at the month of January from the sales and turnover -- sales and footfalls, then everybody was afraid of what's happening -- what's going to happen in January because it's the slowest month. And when EURIBOR is increasing and all the rest. So it seems that it's really difficult to change people's habits. And at least in our retail assets, the turnovers are increasing and so are the footfalls. So -- and what we heard also in discussing with Standard & Poor's our rating agency that this is quite similar to what is happening in -- across Europe. So it seems that people are postponing large ticket item purchases or investments, such as apartments, maybe new cars, boats and motorcycles, the like, but they are still indulging themselves into shopping and restaurants, small ticket items, cafeterias, also traveling. So that's quite interesting to see as well. And maybe last but not least, the Lincona has -- we have one of the larger anchor tenants that are expanding. Again, some are retracting, some expanding to one floor now -- one additional floor in the coming few months. So we have basically agreed the terms. And Pirita also showing increases in footfall and sales. So from these numbers, maybe just to mention one more time the retail asset recovery. So it's in process, yes, it's been lower than what we hoped for. And because of -- largely because of the uncertainty last year, but I think the largest potential this year will be in Galerija Centrs as we are on next Monday, 27th, opening on the fourth floor on 1,500 square meters, a new food hall. We have 600 people invited, including the mayor. And I think with the branding of BURZMA and the excitement that we have brought, I think it's going to be a success. So I do invite everybody to visit once it's open. It has outdoor terrace as well on the fourth floor overlooking the old town and lots of lots of natural light. There was also a question about how do we measure these investments, for example, EUR 2 million invested into Galerija. For example, the IRR that we've calculated from that investment, meaning that we make an investment and get the higher rental income. So it's around 12%. And in Reval Café, when we invested roughly [ EUR 200,000 ] to redo the 170 square meters of Reval Café premises completely. The rent that we're getting from that location is considerably better than it was before. And the IRR of that project, for example, is close to 20%. So -- and that's not even -- for example, in Galerija's case, we do hope that the footfall will increase, and that will benefit also the other tenants. And also, we have signed an international anchor -- fashion anchor in this case for Galerija Centrs opening in the second half of this year. So that should bring definitely more some -- a lot of excitement. It's the first expansion of this brand into the Baltics. So we definitely -- we do see for a recovery of the NOI in our retail assets, but yes, it has just taken a bit more time than expected. But overall, I think the numbers should speak for themselves. In regards to like-for-like increase in the NOI then the change in retail was 23%. So we did have a recovery of the NOI already and this is last year. So now there was a question about, do we have -- are we planning to index our rents? And yes, we have indexed our rents, and we are planning to do so based on the contracts that we have. And what these numbers don't show is that in -- mainly in January and February this year, we have indexed our rental agreements. Our rental agreements include different types of indexation clauses. Some of them are capped, let's say, 3% or 5%, but some of them are uncapped. There is local inflation. There is European Union level EU CPI. So what we are seeing is and what we are estimating is for this year, on average, by indexation, our rents should increase by roughly 8% -- 8% to 9%, so close to the EU CPI level. And that is expected to be also visible in numbers now in -- probably also in the third -- in the first quarter already, but most likely in the second quarter. So going forward, when we are -- just a note here, maybe because of the vacancies that we had in the shopping centers, what was -- what impacted the results last year was also the surcharges and the especially energy costs that we were not able to charge the tenants. So in that sense, when the vacancies are being filled with new tenants now, we also get the coverage of some of these utilities costs. So that should have a positive -- double positive effect for the NOI. And then a few more words about the food hall in Galerija Centrs. So we did have a opening actually planned in the second quarter, but now it's -- we are in time and we are doing it in the end of February. And the question was also that we are investing around EUR 1.5 million into the ground floor to make -- to bring in this new fashion anchor. And how do we measure the profitability of such an investment? So that is a bit more complex because there -- in these cases, as seen in retail for the [ stock ] bank or tenants, it is based on turnover rents. And it is based on what we know and what we see, how this brand is doing elsewhere? What sort of sales are they doing? And based on this sort of experience, we're forecasting our returns. But then again, like the food hall, will be a destination point, so will be the new fashion anchor. So -- and that is more difficult to measure or to calculate what is the overall benefit to the whole center and to the other tenants. So we do believe there's definitely a positive benefit for that, but that is more difficult to measure, but we're still absolutely confident that this will be a game changer, these changes for Galerija Centrs in Riga Old Town. As well mentioned a bit about Postimaja Reval, maybe additionally, I would mention that we have taken back the parking and also [indiscernible] premises on the ground floor. So we're planning a new restaurant there and parking is being operated by Baltic [indiscernible] new parking operated. So that change has been made. And in Postimaja, we have had some vacancy on the second floor but we are close to actually signing also a brand for that vacancy now very shortly. So currently, it is -- one can expect an increase in occupancy in Postimaja next quarter as well. So overall, we managed to have higher rental income than in 2021, regardless that G4S was not in our portfolio in 2022 anymore. So the remainder of the properties performed well and many showed increase in rental income, especially the retail assets that have been recovering. As you can see, of course, the cost of rental activities has been much higher last year, and that's mainly because of the increase in the utilities and energy costs. So we see some stabilization in the energy costs. And that's where -- I think that's very good for the tenants and for the tenant confidence. And there was also note that we are aiming to fix our electricity cost in -- for our Lithuanian assets, 50% level, and that is expected to happen by midyear 2023 at around EUR 100 per megawatt hour. So -- and I think most importantly, it is green energy that we are using. So solar panels. And so there is an option in Lithuania to choose that. Overall, we finished the year with EUR 4 million profit. The valuations at year-end as so that was expected, the valuators reviewed the discount rates and slightly moved discount rates upwards, not a lot. But what offset this was higher indexation and higher expectations of rental income in our properties. So quite a bit of recovery on value recovery also in our top retail assets. There was also a question on the administration -- administrative expenses. And so last year, we had quite a bit of administrative activity. Firstly, rebranding of Baltic Horizon, so that increased slightly the marketing expenses and the budget that we have -- that we normally have, but mostly legal fees and as well consultation fees that were around our stock for listing. Now we have converted into a stockholder -- into Swedish entity and -- or the fund is listed as Swedish depository receipts in Stockholm. So quite a technical exercise in cooperation with Europe clearance and Nasdaq Stockholm. So that was the reason of higher expenses. Also, we have a new administrator, therefore, for the listing and audit issuing. And furthermore, of course, preparation for the refinancing of the bond legal advice, also prospectus related to that and so on. So there were, let's say, quite a few specific costs that increased the administrative expenses. The question was specifically as well, what are other administrative expenses, which is roughly EUR 460,000 a year? So those are basically Nasdaq fees, listing fees, Standard & Poor's fees for the rating, mostly those type of fees. And in regards to the balance sheet. So I think year-on-year remained relatively unchanged. But yes, I mentioned that we did refinancing as many of our loans and the majority on the current liabilities, which are short-term financial obligations, a majority of that is the bond. Then financing. And as I mentioned at the beginning, the fund -- since the war started in Ukraine and all the aftermath and all the results of that war has made us focus heavily on refinancing of our loans and also prepare for the bond financing. So that preparation for such event takes quite a bit of time. And also starting from last autumn, we could refinance the bond free of charge. Previously, we had to pay a fee of 1% if we wanted to do it earlier. So things like that to influence these decisions. The environment for the bond refinancing is not favorable. And that is the reason why we are aiming to decrease the bond as much as possible. And when -- in the previous periods and also during COVID time, actually, the bond worked very well for us because of bank loans were at a very low level. Some of the LTVs of the bank loans specifically were around 30%, 35%. So there was quite a bit of room for any covenant breaches. And we did actually sailed through that period quite smoothly because of the low level of bank loans and even when we were restricted and our shopping center revenues, NOI dropped tremendously, even then we hardly broke any covenants. So we were able to go through that period very successfully. And plus, of course, it allowed us to pay quite high dividends during the period. Now the times have changed. So we are moving back to bank financing because I mentioned we have increased some of our loans. Some of the loans are not yet withdrawn in, and they would be withdrawn in when the bond refinancing movement starts, arise. But yes, it's not attractive to have locked on financing today for our funds. So we are looking how to reduce that. And once that was selling Europa parking house and also Domus Pro and potentially, there could be one or two other disposals. But -- so we have sort of various -- we have plan A, plan B, plan C. We have discussed this also quite thoroughly with our bond investors and many are willing to participate and prolong. So we just want to arrive at the best possible capital structure for us. And there will be more news about that, of course, in the coming periods quite shortly now probably in the second half of March. So currently in regards to the bank loans, and particularly for this slide, we -- over the years, we've always hedged our interest cost side with -- so basically, this means fixed to certain levels, some 100%, some 50%. And currently, our portfolio is roughly 74% -- actually 80% fixed. So that means that we also purchased some caps before caps and hedges became very expensive in late spring, early summer last year. So some of our loans have additional caps. So that -- in case Euribor goes above 2% or goes above 3%, so there is a ceiling. So that helps us a bit from the interest cost side and that -- but of course, these caps have a term. The term is '24 and '25. So for this year, what we will see is probably be some gradual increase in our cost of financing, but not very abrupt increase. And of course, it will -- we will see at what level we want to ask, what level we will refinance the bond or partially refinance. We're doing probably a lower bond then it's difficult to say. It depends on the amount. It depends on the condition in the market at that moment. So -- but of course, it is more expensive than 4.25%, which we had as coupon since 2018. So here's a list of our financing partners and also the loans that we have to be refinanced as well in the next couple of years. So -- and after the -- after we refinanced the bond than the main focus is on refinancing our top retail assets and LTVs actually of those retail assets are quite low. And we, over the years, we paid back some of those loans and the results are recovering. So we see also positive potential in getting those loans refinanced, but that's only next year in 2024. And before I go into the outlook, let me see if I have some questions. I think some of it, I already answered, but let me just resummarize that we are aiming to have a lower bond than EUR 50 million and considerably lower. And for that, we are increasing some of our bank loans and have sold a couple of our assets. So in regards to the expected rental income for this year that we have now sold Domus Pro and will Meraki recover that loss of income then I believe so. And so I think our -- we have several scenarios, but we are targeting still at higher levels than we had for last year. But of course, it depends on the environment. And it depends on how high and will Euribor become and how long it will stay at the level where it will be. So -- and that is quite difficult to estimate and currently there's various views on that. Of course, if you would look on the next 3-year perspective, then I think this year would be where we would see the top level of the Euribor. And probably by the second half of this year, we will see more and more optimism hopefully. So that's what the markets are also expecting. So I have a few more questions. So there was a question that what if Euribor increases to extreme levels, let's say, 5% -- or, let's say, 3%, 3.5% and 4% or even 5% then, as I mentioned, we have certain sale for this year, there are quite a lot of fixed rate hedges and also caps. So that will help us a bit. But what anybody can do in a commercial real estate segment today is index rents and find efficiencies in the cost side as much as possible and make sure that the occupancies are high, so that the costs are also covered. So that's the name of the game of commercial real estate sector today. In regards to looking forward for the fund and after refinancing the bond that, will we -- what are we going to do? Are we going to expand further then. Yes, we are currently focused on getting the new capital structure in place for the fund, but -- and selling as we have sold a few assets, and -- but we definitely want to focus on commercial real estate also in the future. And as I mentioned, city centers, newer assets and possibly as well a new capital raising by the end of this year, maybe early next year. So definitely, we want to develop business further. We believe in the Baltic capital cities, and we believe in the commercial segments. Just one has to be quite smart about today what properties will have -- will be more effective and efficient and where do we see more rental growth and so forth. So that's currently what we're analyzing quite a bit. In regards to the dividends, so -- and why -- and the cost of question there was also -- why haven't we done any buybacks? So the truthful answer is that, again, we're focusing on refinancing the bond. And we want -- we see much more value in getting the more expensive bond to a lower amount than buying back our units currently in the market. Yes, they are extremely lower. And I think we have demonstrated at least on a few occasions that we don't believe that our assets are valued at 50% to the NAV, which currently the stock market suggests with G4S, with parking with Domus Pro. So I think we do have an attractive portfolio and that even in today's market, which is still quite uncertain, and we can make deals go close to the NAV level and Domus Pro, for example, was sold roughly 5% below the NAV most recent valuation. So we do see potential and value in our portfolio. So in that sense, yes, we could buy back some units, but after the bond. It really the unit price stays where it is after we refinanced the bonds, then I think it's quite a clearer thing to do, quite a reasonable thing to do. In regards to the dividend, the same answer, we are -- the focus is on deleveraging currently and getting the bond at a lower level. And then basically think about the dividend. So the announcement and the discussion on the dividend will be early June. So hopefully, and I do say that it's definitely a goal for Baltic Horizon for myself to make sure that we are able to pay also something out for these periods. So let's see there are some additional questions. I think the administrative expenses topic I covered. Many of them, I would consider still one-off expenses related to the listing and the bond prospectus and the rebranding. There's a question specifically, are we looking to dispose more assets than -- yes, we have been on the market to sell some of our assets also previously. And I think there will be -- if there will be some news, of course, that will be shared through NASDAQ as it supposed to be. So -- but definitely, we are looking to reshuffle some of our assets in our portfolio and divesting some decreasing some retail as we did with Domus Pro and then refinancing our bond and the growing, growing to fund further. So -- and one question specifically, why the unit prices where it is today? Then I think some investors have said that it could be because of the bond refinancing topic that how will that be solved, and we're solving it now. So I think after the bond is refinanced, it will be also a much clearer picture for the investors and to see how the portfolio structure and then the capital structure will look like for the coming years. So I think this concludes the presentation. So thank you for attending. And if there's any other questions, we still have -- please feel free to send an email, and we'll try to answer them as we can. So once again, thank you very much. Let's be in touch.