Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Hello. Good afternoon and welcome to Baltic Horizon Fund's Quarterly Webinar, it's Quarter #3. And when I look back also on the whole year and the past 3 quarters, we are already also in the middle of the fourth quarter. So happy to give you the latest overview and as well answer any questions that you may have. So it's been a continuously busy year for Baltic Horizon Funds. Our team's main focus has gone into managing our liquidity, refinancing our various debt instruments including the bonds which happened in the second quarter, but also repaying back part of the bond as we have gone along as it is the most expensive financing instrument in our capital structure today. Overall in addition to managing the properties and preparing for different tenant changes, we have continued to put a lot of emphasis on our quarterly reports to make sure that they are as precise and informative as possible as well focused on the ESG matters and achieving again a 4 star rating with our GRESB report whereas also performed activities with our partners to certify our properties as it is part of the long-term goal of Baltic Horizon to have all of its properties certified. And in addition to office properties, we have now also certified our retail assets and are in the process to receive the final certifications for all of our properties. But it is true that 1 of the major events during this year has been refinancing of the bonds back in May. It was quite a challenging process and I've discussed this also in the previous webinars. And we were also exiting at the beginning of year 2 of our office properties, I would say, at quite good prices as I think the investment landscape in the Baltics has become more challenging in the second half of this year. That being said, let's look at our portfolio. There has been some slight changes in the portfolio with some tenants not in the portfolio. As you remember, ACB was 1 of our largest tenants in Latvia in Upmalas Biroji. We had already knowledge that they were moving out in August this year. So this has been the biggest change in the portfolio this year when it comes to the tenants. At the same time, we have been proactively working to find new tenants for the vacancies and I will talk a little bit about that also a bit later. Our portfolio has decreased slightly. We have 12 assets currently in the portfolio and quite a similar allocation to Latvia and Lithuania. Latvia being the largest allocation currently and Estonia the smallest allocation. We have approximately 1/2 and 1/2 when it comes to office and retail as well in the portfolio today. Now going straight into the leasing activities, which has been 1 of our priorities as it is extremely important in today's world to make sure that the properties get filled with new tenants, new concepts that do have also long-term potential. And this is interesting about real estate is that nothing happens overnight. For example, the ARKET lease agreement, which we negotiated at the beginning of last year and signed I think it was September 2022, is now finally becoming a reality more than a year later. So some of these things do take time, but finally, we are starting to see the openings. And when we have now this month ending, we will have also each of them opening in Postimaja and ARKET then early December in Galerija. At the same time, we have continued to look for new tenants for our properties. We believe our properties are well located in the capital cities of the Baltic states and they have, let's say, I would call some strategic locations in some ways. For example, Latvian State Police has discovered that our office building in Riga, Upmalas Biroji on the left side of the river bank is a good location for them to bring their different departments together. And after long negotiations and also a lot of strong support from the Latvian government up to the President and Prime Minister, they have secured a budget for it and also are investing into the premises to make them suitable for modern police building in today's world. So the lease agreement has been signed and we do expect them to move in as soon as possible, but probably it will still take a few months' time. So probably end of the first quarter, we will see Latvian State Police moving to Upmalas Biroji and the occupancy of Upmalas increasing. Same goes for IKI Lietuva who is replacing Moxyma in Europa Shopping Center and I think it was important for us to bring in a new tenant, a new brand to refresh Europa. Moxyma has been a long-term tenant of the property since 2005 when the property was opened, but we believe that IKI with its new concept is a better fit for Europa going forward. If you've been to Europa over this year, we have also signed up 13 new tenants in addition to the food hall including Pirita's optical center and [ Symetree ] flagship store and several others. And we believe that it takes a bit of time to find these tenants that fit the concept and are actually interesting to the people that do visit the properties. What we also find -- there has been a few questions that what are the average rents doing? And the answer to that is that average rents are doing very well for these new concepts to come in because as well their turnovers are immediately quite attractive. So we are going through a transition phase still not only us, but the market, to sometimes as well replace older concepts with new concepts that are attractive to people and actually can generate sales also in today's relatively challenging economic environment. There has been several smaller tenants as well in our other properties. So in that sense, the market remains quite active and companies are still thinking long term. And when you look at also Postimaja and the cinema building, then there are several discussions ongoing there and we at this point unfortunately can only remain general. But just to put it in number terms that across our portfolio today, active agreements that are being discussed across our retail properties are more than 4,000 square meters and in the office segment, more than 2,500 square meters. And I think I can also state today that the majority of the office segment discussions are happening finally in our Meraki new office building in Vilnius. So there's quite a lot of activity there. The occupancy decreased in the third quarter. It was not expected. But already with current signed lease agreements, you can add more than 4% to the occupancy as of today. Then more specifically, yes, these numbers do show that some of our properties, the vacancy has increased. In Europa, we do expect the occupancy to continue increasing over the coming quarters; in Meraki as well as I mentioned. And in Upmalas Biroji with the new signed agreement with police, in the first quarter the occupancy of the property will be probably 2/3 or not probably, but will be. And we have engaged continuously with local brokers and local connections that we have to find more similar state related tenants that work closely with police one way or the other different departments to the property. So our vision of Upmalas is for the property to become a property, which would house long-term municipal and governmental tenants in majority, but also other tenants that are currently already there and have been there since the beginning of 2008. Vainodes property remains stable. Then we've had some changes also in LNK where 1 of the tenants decreased the space. In the next door of LNK, a brand new property Elemental was just finished and it is almost fully let as we hear. So actions are going to find new anchor tenants for LNK Center. Galerija Centrs: it's been, I would say, the slowest recovery in our centrally located portfolio mainly due to the recovering of tourism being slower than anticipated. But having 2 new anchors, BURZMA food hall and ARKET, we believe and as well each of them and Remi prolongations, we do have discussions and views on the new anchors coming in after those tenants are fully opened especially ARKET. And when it comes to the Estonian portfolio, it has remained the most stable in Q3 and we do expect Lincona's occupancy to increase due to the anchor tenants expanding in the next quarters and as well we do expect the occupancy of Cinema and Postimaja to remain high over the next year as well. More specifically in numbers so I think Galerija Centrs is showing recovery and yes, the occupancy has been lower because ARKET also works. Now ARKET will be close to 1,000 square meters and that will add to the occupancy and to the NOI. Also the big recovery has been in Europa Shopping Center. Today I think I can say that the monthly net rental income is already above EUR 140,000 to close to EUR 150,000. So making stronger recovery also for the coming quarters. Then the rest of the properties have remained relatively stable except for LNK and Upmalas as mentioned earlier. But in Upmalas, a new anchor tenant is already found and in LNK, we expect to find a new tenant there also in the beginning of next year latest. Like-to-like rental income has been close to 5% and this is mainly to do with the recovery of the retail segment trends. Also the average rents being higher than the previous tenants had. In the first 9 months with also the disposals taken into account, our NOI has been around EUR 11.7 million. We do expect the NOI for this year to be roughly EUR 13.5 million. Then when it comes to our valuations, then in the middle of the year with valuators, we had to accept a loss on our portfolio due to the change in the environment mainly in the discount rates, the expectations of investors and the cost of financing being adjusted by the valuators. So we have been operating then with a loss of around EUR 50 million as of this year. We have also seen an increase in our financial expenses. The financial expenses have increased mainly due to the bond that was outstanding in August. We repaid part of the bond and also part of those financial expenses are eased. The call premium that we paid also to the bond investors to pay down that first tranche. Overall, we have today a portfolio of roughly EUR 270 million with a loan-to-value ratio of 56%. So we have been very focused on making sure that we also reduce our debt and as can be expected, our key priorities to focus on reducing the bond further as EUR 12.5 million of the first tranche is still outstanding and there are several actions being taken to make sure that we are able to reduce that tranche in full by early next year. So many actions are in motion and we hope to announce as soon as possible the repayment of the remaining tranche of the bond. So let's focus then a bit more on the refinancing. As from our perspective, the 2 most important things is occupancy, the rental income maximization and then the cost of debt and how can we get that down. So most of our bank loans do have hedges and caps. So the most, let's say, volatile today is our cost of debt for the bonds. And when we have also several bank loans now maturing beginning of next year, then I think it's quite reasonable to assume that those discussions with the banks have been ongoing since already for some time and we are making good progress with them and we expect to reach an agreement with these partners in the next coming weeks. So it's not a lot of time for Christmas and definitely I think those agreements shall be reached by the end of this year. Same goes also for LNK loan where we are in active discussions with the banks to prolong the loan and discussing what are the plans going forward. And we have engaged new leasing agents and are very much on the ground actively showing the premises and discussing what else can we do to bring additional cash flow to LNK as a property as it is currently one of the less occupied properties in our portfolio albeit quite a small property still. Then cost of debt that has increased to 5.1%. Yes, hedges have worked and have supported us in this way. And with also the bonds now reduced, the cost of debt should stabilize and jump from the previous level has been quite high. And when we are able to pay down the additional tranche, then we do expect the cost of debt to stabilize even further in the coming quarters. We have increased the weight of debt maturity and are in good process and progress to increase it even more in the coming months. We have also been able to reduce some of our debt through amortization and still keep the LTV at a relatively stable level regardless of the devaluation of the portfolio what I talked a bit earlier about. So when you look at '23 and '24, the loans outstanding and to be refinanced and I think we're in good progress to prolong these loans over the next coming weeks and months. Then before maybe I go to the outlook, I'll see if I can take some of these questions.

So the question is about the additional lease agreements being signed. And currently the year-to-date occupancy of the portfolio, as mentioned, was or is already more than 81%. So there is a recovery. If those additional square meters now are signed with new tenants, then we do expect in the coming say 1 or 2 quarters, the occupancy of the portfolio to increase to at least 85%. So that is our goal and of course we will move as quickly as possible. But what we're happy to see is that there is very active negotiations and it's not that market is sleeping or not doing anything. So I think that's quite safe to say across the Baltic states. Yes, things take more time, discussions are more lengthy and more into detail, but I think we have finally reached a very good momentum. Especially in our centrally located assets especially in Europa, I would say, over the past quarter or 2 where majority of the also retail leases have been signed, including IKI. But also have made good progress in Postimaja cinema building. And where I would say the majority of the focus will go and is going is on Galerija Centrs now. And we do have a vision, we do have a plan. We do have I think the strongest leasing partners in the market when it comes to Galerija and if you know Riga City today, it will take a bit of time. But the Valnu street is becoming the new pedestrian street. The high street in Riga, old town supported by the mayor. There are several committees for that connecting also the main Baltic station, which is currently being built at the end of that Valnu street next to the old town. So there's a lot of, let's say, positive long-term potential in this area and the city government is very much also focused on reviving the old town of Riga, which was quite severely affected by the COVID lockdowns and has been recovering since. But we do see what we can do within Galerija also in the top floors. We have several I think ideas how to make that property a mixed-use property for the future. So there's a question also on the bonds? I think I answered that. So I can once again reaffirm that we have several activities in motion to make sure that we pay down the remaining EUR 12.5 million of the first tranche to our bondholders at our earliest possibility. We have aimed to reach an LTV level of below 50%, but our valuations have been affected by the market changes and especially the discount rates. So we haven't reached the 50% yet, but we definitely have a goal to reduce the bond and therefore also the value. And we believe as well that when the occupancies of our portfolio continue to increase and more visibility is going to be seen next year about the EURIBOR rate future, then we hope to also see some positive valuation gains in the coming periods. There's I think a good question of the retail square meters that are under negotiations today, additional tenants and how is the split between the 3 properties that we have; Europa, Pagilara and I guess Postimaja as well? What I can say is that I think it's quite well distributed between the 3 properties. So maybe a slight edge as of the past couple of months has been for Europa as the momentum there is the strongest with the new anchors coming in and with new small mall concepts coming into the property. There are also discussions in the cinema building for the ground floor and some discussions also in Galerija, but probably most in Europa as of the past couple of months. Then a question is around exactly what are we doing? More specifically what are we doing for paying down the second part of the first tranche this EUR 12.5 million bond? So what I can say is that there are 3 things what we are doing for that and one is increasing occupancy in our portfolio in order to get better refinancings from the banks and use resources from those transactions. And as well we have been looking at some potential disposals in case needed and so it probably could be a combination of both going forward and this is what I can disclose at this point. There is a question about NOI guidance for this year? And as I mentioned, first 9 months we achieved 11.7 million, which already excludes the past months of the disposed property NOIs. So we hope to achieve at least EUR 13 million net operating income for this year. It depends on what is the level of turnover rents, which are in many cases accrued and put into the results in December. There is a question about our partners when it comes to leasing and when it comes to property management. Then there is also a question specifically on our Latvian properties and Galerija. So what I can say is that we work very closely with property management partners and also the project managers that are running the reconstructions for us and we do monitor their quality regularly. And I think also the corporation, we evaluate on a regular basis. So what I can say here is that in case we think that we can work with a stronger partner, then we will make those changes quite swiftly and quite quickly. So what I can maybe reveal here is that we do have as of last month’s made a decision to strengthen our property management partners in Latvia, in Riga and we hope to -- we're already engaged in more active leasing activities with them and really focused on getting our properties filled up in the coming quarters. So there is a few questions I think I already answered. There's a question or there has been, let's say, some talks what will Baltic Horizon do and how do we see ourselves going into 2024? And are we cooperating potentially with some other real estate fund or real estate investors to make some very big changes to our structure? Then I can answer that everything related to that is stipulated in fund rules and it is eventually a decision of our investor base. But currently, our work is still going towards occupying or making higher occupancy in our properties, refinancing the bond and refinancing debt. We are fully committed in that. We do see a potential in that regardless of these temporary setbacks, let's say, occupancies, which we do see are temporary. But having said that, of course we are thinking about all kinds of ideas with less whether strengthening the funds, capital base or [indiscernible] could also be a discussion later. But as I said, our primary focus is on our portfolio and making sure we expect this value from our portfolio to our investors in order to increase the cash flow situations and eventually also the unit price on the stock exchange. So we have the question on how do we see the interest rates going forward? So I think the base case for us is that we don't see any changes in EURIBOR during 2024 and that's why we're committed to reduce the bond as soon as possible because many of our other or most of our other bank loans are hedged and do have caps as far as into 2026. So what happens in 2025, it remains to be seen. So far the inflation hasn't shown signs of coming down. But as central banks in the past have always been rather slower to act and weaker to act, then we don't expect any changes during the next year. So what happens in 2025, let's see what the market is, but hopefully there would be some relief in the EURIBOR, but that will be very gradual. It depends how the economies would be in the first half of next year. I think that will be the basis for the central banks to make decisions. So whether another crisis or another geopolitical conflict will generate some abrupt and unnormal market forces, that will all be part of the picture. But I think what we've seen so far is inflation is coming down, it's quite sticky but it is coming down, but we don't see major changes in the next year. There's a question also on the generated net cash flow for the third quarter and just a few words about that. It was a quarter where majority of the investment of the CapEx was allocated during the year and we have generated results for that in order to make sure that the new tenants in our properties can start working. Of course many of our new tenants are making their own investments such as IKI, such as the police, such as many others; but also from the landlord side, we need to put down reserves for some CapEx investments this quarter and also in the next few quarters. And when it comes to the cost of financing being very high in the third quarter, that is also partly to do with the full premium that was paid to the bondholders in order to call back the first tranche of EUR 2.5 million. So in the coming quarters, the cost of debt should continue to stabilize when we reduce the bond further. That's a good question. Which of the investment properties are not available for sale, if any? How are the disposals handled? I think I can answer it quite straightforwardly. When the price is very attractive, then we can consider any offer. But of course we do have our strategic portfolio, we do have our strategic assets and we do need to think how our strategy has been evolving and will be evolving also in the future. But I think to this type of question, I'll give a very general and very straightforward answer. Our disposal processes are handled internally by the disposal investment management team. So I think that's quite a regular task for the fund management company. Few more questions. There's a question on the year-end valuations? And I think that's a difficult one to answer because the valuators have already changed some assumptions in the valuations in the midyear. But now it really depends on whether there are transactions going to happen in the market and whether there are other forces affecting the valuation inputs. So we are ourselves doing what we can with our properties and increasing the occupancy, signing leases. So it's difficult to say. But I think personally I would expect some stability in the year-end, but there could be as well some properties seeing some writedowns, but I think hopefully also some properties will regain a bit of value from new leases. So hopefully by year-end, the valuations will remain stable. But yes, I think overall you could say that there's quite a bit of pressure on valuations over the next, I would say, 6 to 12 months still going forward depending on what will happen in the macroeconomic environment and also overall in the market. There's a question on energy prices being hedged. So in that sense, we've had quite extensive discussions about that and we have signed some fixed agreements not for a long period of time. So we've tried to find some stability for our tenants and we hope that any kind of very large volatility in the coming, let's say, 6 to 12 months, we have hedged to a reasonable extent. But we also haven't gone into hedging everything fully at a very high cost or very high price level. But it is true that tenants do expect stability also in their budgetary planning. We have signed several green energy contracts over the past 3 quarters so that I can say as well. But I think that's as far as hedging energy prices goes for us. So let me then just finalize here. There's been quite a few questions so hopefully I answered all of them also during the presentation. But what is our team focusing on? Once again priority is to reduce the bond, find ways how to do it and continue executing the solutions. And in that sense giving you a bit of timeline, we do expect the redemptions of other tranches of this outstanding bond in latest by early next year. There are several things in process for that to happen and of course one of them is refinancing the expiring bank loans that we have for our properties. Some of our properties have shown increase in the NOI so that should facilitate in refinancing the properties with cheaper debt financing. As well we have made new agreements with our property management partners, which we have worked with as well. We have expanded our cooperation with new second [indiscernible] specifically and as occupancy is key and to increase occupancies is absolutely imperative for us in the coming not only quarters, but coming years. And then hopefully with more stable environment, we are able to reduce the leverage below 50% and obtain a strong platform for future dividends and future growth. So thank you very much for attending. Hopefully this was informative. And in case of anything remaining unclear, I'd be happy to try to answer your questions also over by email. Thank you very much.