Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Good afternoon, and welcome to Baltic Horizon's Q4 2023 webinar. My name is Tarmo Karotam, I'm the fund manager, and I aim to give an update of Baltic Horizon's funds, general words about last year Q4, we are in February already, so also some comments of the latest developments and outlook for this year will also be included. So let's start. We have devised a letter to the investors beginning of this year and also announced it through NASDAQ, and that's where we have aim to be very precise about our goals and where we are today. Last year was a very challenging year for us, a lot of major events happening. And if -- just to talk about last year, then the year started with the disposal of 2 of our assets in the secondary locations in Vilnius. This actually -- the process had already started in the autumn of 2022. So the aim of those transactions was to find suitable buyers at attractive prices and increase the liquidity of the fund for the upcoming period. And generally, I think we were successful with the achievement of disposing these assets at the prices that we were able to get back then. I think today, we would not get those prices and the market has really moved down after that. But anyway, then last year, we had also a bond to refinance, and it was a difficult moment for -- in terms of market conditions, not the volatility. However, we were able to secure the refinancing of the old bond, which were maturing in 2023 and managed to restructure it into 2 tranches, one short-term tranche and one long-term tranche together with 2 bond investors, local bond investors. And since then, we have been focusing on deleveraging and paying down the first tranche. It was -- total bond is EUR 42 million, and the first tranche is EUR 20 million. So in the summer of last year, we refinanced EUR 7.5 million of the EUR 20 million, so EUR 12.5 million is still outstanding. But overall, I think we had also change of some of our anchor tenants in our office buildings last year in Upmalas SEB and EMERGN in LNK. So there was a lot of work to get new tenants in and that's where actually most of our efforts went at the end of last year. So when we look at this year, then we have I think quite realistic goals and that end of last year, our occupancy of the portfolio was probably the lowest. We have worked to sign several new anchor leases in Europa and in Upmalas. I think that's all been published as well, but for this year, we have a goal of 90% of total occupancy across the portfolio. And I think this has been also LTV target has been a long-term target for us, and we used to work with 50% to 55%, but we have reduced it to 50% or lower. Of course, today's real estate market, the transactions being made at lower levels hasn't helped us too much because the valuations were affected by other market transactions because of discount rate differences and exit yields going up in the valuation estimations, but we still have a target of 50%. We ended up with 57% in the last year. So we have been amortizing our loans as well and continue to do that also this year. It's all about having more sort of confidence in today's volatile world about the income side, but also the debt side being managed and reduced as we are today. Then I think overall, maybe a comment on the investor letter, it was devised. We are restricted, of course. What we can say? And it was devised together with quite a large team that we have as well as lawyers just to help us understand what we can say and what we cannot say. But I think these are the 3 -- 4 key principles that we are currently working with overall when it comes to one management going to the future, and one of them is also that we have to review the strategy, and I will come to that in the future slides. And we are still considering disposing 1 or 2 of our assets in the coming periods. But overall, we do see potential in our portfolio as of today. And there's still quite a bit of vacancy to be filled. We have signed several anchor leases, so the occupancy is already increasing or has increased, and we expect to increase it also during this year. And next, and here, we have also sort of viewed our potential of the portfolio of the NOI being close to sort of EUR 18 million and the target to achieve that is in the next few years. Then more precisely, we wanted to explain what is our strategy all about. And I think we have explained it or try to explain it in our annual approach and other communication. But with this investor letter, that has probably summarized it in a more precise manner. And thank you for the good feedback on the investor letter. We see that it has been appreciated by the investor base and many other market participants taking notice of this letter. So when it comes to our strategy, then we still believe in city centers. And despite of COVID restrictions, influencing the life in the city center and the tourism, then we see it strongly returning. I'm not saying that there are not hubs in places, in the outskirts, but I think city center still remain in demand from both tenant and investor perspective, and we do see that also with -- in the negotiations that we're having in our properties. Glad to say that Postimaja is fully leased as of today. We are working on a new anchor in the cinema building, active negotiations there. And in regards to Galerija and Europa, the top floors have taken more time to fill in. But it also comes from our view that let's not fix the problem for 1 year, but let's really find a solution for a longer period of time and also at the right commercial terms. You can fill in premises today. And I think many of the retail centers today, not only in the Baltics, but across the region are renting or giving out premises to tenants that virtually just cover the utilities costs. So that's not our aim. Our aim is to sign tenants that fit our concept that are actually in demand by the visitors so that the visitors win, the tenant wins and then eventually the landlord wins and is able to -- everybody is able to make business and get the services and products that they actually need. So it has taken a bit more time. But I can confirm that the negotiations with the anchor tenants are ongoing, also in Galerija and Europa. In Europa, last year was good progress. We increased the NOI by 50% from EUR 1 million to EUR 1.5 million and expect a similar pace this year. With Galerija, the increase wasn't that visible, but it's because many tenants such as Arket moved into the property at the end of the year. So we did have sort of forced vacancy for about a year at that location just to wait for them to move in and start paying rent. Food hall has been a great success for us also financially and so we aim to continue with that. And we have a plan, and we have a clear approach to execute that plan also this year and sign at least 2 anchors in Galerija and on the top floors actually to fit the concept of Galerija. The same goes for Europa. And so what also we believe in what happens in the city centers is the development. So people more -- city centers are becoming more congested, more concentrated. So in Tallinn and the Europa the city center is more sort of understandable, we have both commercial, residential and public infrastructure projects happening. So we believe that will support the locations on a long-term basis when it comes to the impact of, let's say, interest rates and also economic downturn in this region and we somewhat see it. And I also understand that somewhat our tenants also feel it, especially I think the first quarter of this year will be tough for some retail tenants, but it doesn't seem to be a big issue actually for many. And in some cases, we are happy to see that actually the turnovers have remained relatively stable. Yes, they haven't increased, but they also haven't decreased that much. So that gives us also sort of let's say, positive sort of understanding of the future. For example, in Tallinn, the term line is finally finished and interest rates hopefully will start to stabilize and many of the developments are completed. Then there's quite a bit of upside potential, I think, for our tenants and also for our properties when it comes to rental income and occupancy. So yes, it's been tough, I think, for Europa, Galerija, especially. But then again, we believe in the medium- to long-term future of the city centers and that gives us also confidence to move forward with these properties. And we also see that the anchor tenants believe in it. Yes, it has taken longer time than we anticipated because of many reasons that are external, but our team and we do what we can and as fast as we can to increase the occupancy in these properties. So when it comes to the office segment, then we -- since COVID, we've been also like everybody else have been contemplating on what's the new future in the office segment. So it's definitely sold that some particular tenants will definitely need the office space. They will need cabinet structures, they will need also flexible spaces. But it is true that flexible working is here, and there are tenants that and companies that basically don't have an office at all anymore. So that has definitely influenced the office segment also in the Baltics and especially in some areas like IT, so specifically. So the market is really adapting to it. And also when you look at the development projects coming to the market, yes, there are some. But for the coming years, the pipeline is definitely decreasing. And we also see it -- and we're talking with the banks, then banks are also extremely skeptical of financing other projects like that unless one has quite a high level of 70% or 80% pre-leases, which is very difficult to achieve in today's market. So the market has rather stabilized and is looking at its new equilibrium. And where we see our properties, office properties falling into this is that, yes, we have certain anchor tenants move for various reasons. But the tenant market remains active and not only in Vilnius, less so maybe in Tallinn, but also in Riga. And that's the reason why we were able to also attract police headquarters. I think it's a good precedent overall for the market. And since -- yes, many times, these municipal governmental tenants also look for solutions with national real estate companies, but national real estate companies also have certain rules and certain capacity. So with police, I think it was absolutely critical for them to get modern up-to-date premises for the entire force. In the meeting with the police chief and the executives there, they did actually show us a presentation of where the police was situated and is situated and which premises they are actually, at what level or what quality they are, and they were extremely poor. So they were very content that they could find solution with us. And that has really increased also a level of public tenants in our portfolio. So we believe that despite certain risks related to sort of public procurement, we do see that they are long-term tenants. And so if we keep them happy, they are quite -- I guess, the professional word is to use here sticky internet. So we continue to look into that also in the future. When it comes to the vacancies of our properties, then that's where also the concepts are developing based on the anchor tenants. So we will be looking for more public tenants or tenants that work together with police in Upmalas. We have also a concept developed, and in process, let's say, for LNK. So we believe that when you have an office building today and just randomly open to the market, then it doesn't work as well as if you have a tenant or an office building focusing on a specific concept on a specific segment. So that's what we're trying to do in Riga today. When it comes to our modern City life concept, and that's something that as well many stakeholders have also come to specify, what does it exactly mean? And what I can say is it's a summary of, I think, how we see the life continuing in the Baltics. And it's that, first of all, we still believe it's -- it will be in the cities and especially also in the city centers. What we mean by modern is really the post-COVID that the retail segment has moved into definitely more convenience, but also more entertainment, more services, more destination tenants. So window shopping is something that we really don't believe in. And the office segment, as I mentioned previously, that hybrid work, but also the right layout, the attractiveness of the offices, especially where the occupant -- sorry, the employment of the Baltic states remains quite high, then it's really, really important for companies to have attractive premises. Where to work, where to get inspired, where there is me space, where is we space. So that's what we see. And life, I think, also definitely signals the experiences and potentially as well other segments such as social assets that we look into potentially considering for our portfolio in the coming periods. Then there are -- I'm focusing now on the investor letter a bit more as it was a plan to explain it or elaborate on this a bit more during this webinar as well. So we have brought out the table of our properties in the Retail segment, Retail Entertainment segment and show the occupancy. So of course, these numbers are relatively dynamic and sort of changing. But this gives you a bit of a picture of that. And what I mean by active negotiations on the last column there is that we do actually have active negotiations on commercial terms on the layouts and the fit-outs on other specifics. And contracts actually being shared and real serious discussions with real series anchor tenants. What we're happy to see is that we do have tenants that move across the portfolio, both in office and retail side that especially, I would say, in retail side where if they're already in one of our properties across the Baltics, then they are also considering other properties that we have in the other capital cities. So what I can say is that Pirita and Sky have been stable and are expected to be stable supermarkets. And so the focus has really been on Europa and Galerija. And yes, we still have one anchor negotiation in the cinema building as well. But overall, yes, the NOI last year increased in this segment, I think largely to do with Europa. We expect further increases this year. And yes, there will be some fit-out investments also needed from our side, but also from the tenant side. And I think we have the best team currently in place to not only to search for tenants and to negotiate with them, but together with our asset management team to really form long-term relationships and continue to bolster them more so into the future. So some of the best comments that we receive is that we are a listed fund and they are looking for a stable long-term partner. So this is music to our ears from the fund perspective as well. So when it comes to the office segment, there is also a lot of activity. So I think what I can say about the office segment is by the end of last year, it was a good achievement that we also prolonged all of the leases, or most, I would say, most of the leases -- actually, I can say all that we wanted to prolong. SEB moving out, that we knew already a year, something like that in advance. So there were no big surprises to us, I think, in the end of last year. So then the focus has really been on filling in the vacancies. And yes, there is some vacancy, mainly in Meraki, in Upmalas, we talked about the police and the S27, which is the LNK property. So lots of our focus has done there. For Meraki, I can say that end of last year, when we had I think the occupancy rate of 32% in the early autumn, so we made progress there the second half of the year. We really felt that Meraki has gained momentum. So we did achieve an occupancy level of 47%. And there are different negotiations with different tenants also still ongoing with different stakeholders and partners involved. And then, S27, it's probably the biggest challenge that we have in terms of occupancy. The level of occupancy has decreased, and we need to find a new life for that property. The good thing is that as we were in Riga just a couple of days ago and talking to the local community, getting the fresh news is that Skansta is definitely in demand as an area. Elemental developed by -- Capital, the Estonian family office has been finished right next door, basically, 20,000 square meters of new office space rented out to strong tenants. So it has definitely brought more life to the area. And we do have visits and discussions with certain tenants there already. So we aim to give -- show some results also this year in LNK property. And North Star, we have prolonged all the leases, we're happy. I think there will be one or 2 prolongations also this year. So we expect a stable income from both North Star and LNK where we have prolonged the anchor leases for 2024. Then the tenant mix of the portfolio has changed a bit. So there has been a few names that are not here anymore due to disposals and due to one or 2 tenants relocating, but we also have new names, and as I mentioned from the public sector as well when it comes to large tenants. So when it comes to the breakdown, then the exposure to Latvia is close to 50%. So definitely needs a lot of focus to get the properties filled there. And we know what we're doing. So work is cut out for us. So it's all about filling the occupancy. And so I think this year will be definitely a year where Latvian properties have to deliver. And that's where our main focus will be. The yield numbers, I think, overall, are not attractive at all. And we clearly -- I think I can clearly state that also on behalf of the fund management team and the company that we're not satisfied with these yield figures. But we do see potential, and that's I think that is much more important than looking at the snapshot of the moment. So -- and the negotiations are happening. So we do expect the portfolio yield to improve throughout this year. And as we have said as well, the portfolio yield target of 90% for the end of 2024. So this is also a slide comparing each property. I think I have commented on most of these properties already. So we do expect further increases in the NOI in Galerija and Europa specifically and in some of our office buildings as well this year. So last year, there was an improvement in retail of close to 12%, whereas in the office segment due to the vacancies mainly related to the SEB and Upmalas and the S27 LNK property maintaining a vacancy in the second half of the year. And when it comes to leisure, which is the [ cinema ] property than the -- we are working to fill in the ground floor vacancy. So that should also improve the results for the coming period. So when we talk about the rental income, then clearly, we had a decrease due to disposals and due to some vacancies. But overall, we obtained a net rental income of EUR 14.6 million, which was actually close to our budget. So I'm happy that we're able to budget the results quite well. I think what was a bit unexpected was the valuation losses not only in midyear, but also at the year-end. And I think the whole market had quite a lot of discussions with the evaluators and it's not an easy job for the evaluators to evaluate the market based on a few transactions. But I think the result is here. We consider this result technically on paper. So if one would actually be selling the properties today, then it could be very different for different properties. So yes, the evaluators didn't have an easy task this time around. But I think what we believe is that the market has bottomed out and also for Baltic Horizon when it comes to the occupancy than last quarter. It was hopefully the lowest ever, and it will continue to increase further. And the same goes for cost of debt so that we had a good start of cooperation with Siauliu bankas, and we were able to refinance 2 of our loans at attractive terms, but the discussions and negotiations took almost 6 months. So now we're ready to reduce the bond, and that will be happening shortly. So that will definitely impact as well the financial expenses, cost of debt. And so our job is quite simple actually this year is to increase income and increase cost of financing. We have a portfolio of EUR 250 million today. It is about EUR 80 million less than last year, mainly due to disposals, but also some devaluations. So we need to work with the portfolio and continue to decrease our income. And hopefully, there will be also some transactions in the market, maybe not in a short while, but that would stabilize the valuations and as well give further potential for it. Then what I have to say about our loans is that we have had good cooperation with our partner banks, and we have been able to prolong all of our loans. I think there was a question on the Galerija loan as well on LNK loan prolongation. So I think we are confident to say that in a short while, we are able to prolong them further. So it's been a discussion with our partner banks. And they have wanted to see certain either valuations or certain results happening. So I think we have also the information that is key for them. So we have provided that to them and are looking for prolonging those 2 loans further, I think, which are most imminent. Europa and North Star has been refinanced. So I think the job on the loan side has been -- or will be done for this year relatively quickly. And the one I mentioned, it is key for us to pay down the full EUR 20 million by latest by May this year. So we will be working on that. So before I go to the questions, in a way just to summarize, so I think some key events for us definitely has been the cooperation with Siauliu bankas and the new loan for 5 years for the 2 properties, which are doing well. And with that, we are able to refinance the bonds. We are still working with certain refinancing cases and potential disposals to be able to increase the liquidity further for us in order to continue welcoming long-term tenants for us, but as well keep liquidity buffers for certain unexpected events. I think this year, economically, will be relatively challenging. So hopefully, we're looking at a stable year, and it will not worsen considerably. I think there is some optimism in the year on the reduction of EURIBOR, but we're not making any sort of fantasies around it. So we will -- it's a bonus. So for us, it's a bonus. And we still have hedges, many of them until mid-2024, but also certain caps until even '25, '26. That will help us, especially on the bank loan side. So in that sense, we are relatively content. Then when it comes to the leverage target of 50% or LTV target, so, as I mentioned, 55% is not anymore I think a short-term reality. So I think we feel comfortable when it's below 50%, so we will be working on that. And yes, so I think the last comment is about the bad debt that we have.

So there was a question also on Meraki rent level. And I think what I can say is that we have a premium product in that area. And so we haven't lowered our expectations when it comes to rent. So overall, we are targeting EUR 12 on average for the whole building. And I think that's a good achievement in the area. So there's a question on Galerija and the yield. So Galerija's, I think, yield is influenced mostly because there is a larger vacancy and that the -- let's say, how we bridge -- how we aim to bridge the gap is actually that we believe that we can achieve quite high -- relatively higher rent levels in the top floors as opposed to Europa. So we will be working definitely on increasing the yield both of Galerija and Europa continuously. So there's a question on what sort of nonstrategic assets do we have for sale. And I think we have had several discussions. I think over the past couple of years, many potential buyers have approached us for certain properties. Sometimes we have approached as well potential buyers if we felt that we would like to dispose something. So it's been ongoing dialogue. But I think when I mentioned previously, strategic assets being in central locations and having public tenants and perhaps one can derive conclusions from that. So there is a question on the refinancing of the bond in the next few months. So yes, a major part is coming from refinancing of Europa and North Star loans. The remainder will be a combination of either refinancings, cash available or some disposals. So I cannot say more, but this is something that I think we have communicated to the market as well, and we're working on various angles. We're discussing things with bondholders. And I think there will be announcements about that also very soon. So there's a question on the CapEx. And so when it comes to CapEx, I think maybe I could elaborate on that a bit more because it is definitely a topic across the real estate market today that when you have tenants changing and when you have the concept changing that the fit-outs, sometimes the tenants actually bring their own budget like we have had with police and IKI, but in many cases, a landlord has its contribution. So it's really a question of planning. And so CapEx has to be optimized and has to be -- yes, first of all, optimized, that you find the best solution, not paying for something that is not needed and not overdoing if that works, and also that how to schedule it properly against incoming cash flows, against refinancing and all the rest. So for us, what I can say is that over the past 3 years, we have invested close to EUR 13 million in our properties, in the turnaround and refurbishment and in full renovation. And for this year, our CapEx budget is again -- some discussions with the tenants are prolonged. So that may be prolonged into the coming years, but it's definitely at least EUR 3 million. So with also the commitments that we've had to tenants in the past, probably realistically also a bit more. So it's difficult to give a very exact number here. There is a question on direct property yield. When could direct property be 8%? I think the answer to that is that, first of all, win -- yes, so first of all, we need 100% occupancies in our properties or close to that. So I think that would take 12 to, I would say, more than 12 months. So probably realistically, hopefully, 24 months. Some indexation definitely needs to happen. And we -- let's say, we have other plans, which maybe I cannot disclose at the moment. So let's see -- let's leave it like that. So there's a question on why don't we announce more all the stock exchange channels like loans being refinanced and these agreements being signed. So I think, first of all, we have to abide by the [ agnostic rules ], which are very, very strict. And we also have to think what is according to rules, what is material, what is precise and what is concrete enough, so that type of news. So we have to find a balance. It's true that we have to find a balance of what we consider important information and material information. So disclosing all the small things that we do in our properties is definitely not the way to go, but it's been on our I think, constantly on our discussions that how much should we disclose and what can we disclose. And so we have, I think, definitely engage more of our social media channels and other marketing activities, apart from NASDAQ. And with NASDAQ it's also -- I think that maybe the restriction with NASDAQ is that you have to be very precise and very concrete and very short. So to elaborate on things, give comments, I think that's quite restricted. So what we try to do is a combination of NASDAQ announcements and press releases, something that we also share with the newspapers and social media. But it's a good comment that we -- it's a constant reminder for us because we know that investors expect more information rather than less. And we want to give as much as we are allowed to, and hopefully, we will make further progress also in that area as we did with the investor letter, which was well received. And a more specific question on the positive -- on the picture that could we have a roof terrace there. So yes, there is like a little garden on the third floor inside -- well, I think to call it a garden, maybe it's too much, but a little patio. It is being used by MyFitness and so a lot of people going the -- so I remember that there are some issues there with the load bearing of the middle part. So it's difficult to have larger gatherings. But I think MyFitness is definitely appreciated. So in fact, it is almost a cafe type of patio already being used by MyFitness clients. So for all the locals, I do recommend you to visit it. I think there was one comment about our ESG and about green energy. So overall, I think over the years, we put a lot of effort into it and especially on the low-hanging fruits. So what can we really do that makes sense and really brings us the best utility or best advantage, and I think we've done that. Mostly, we continue to do that. Green leases for our tenants, and we're close to achieving the full majority. It's been actually quite a process. Then, of course, certifying all of our properties. So we have BREEAM-certified all of our properties. So a lot of work has come in to that. When it comes to green energy, then -- and how do you look at the energy prices today from the landlord perspective because it's been quite volatile, quite expensive. What tenant expects are stability. And so we've had various solutions that. In some of our properties where we have been able to put, we have put solar panels such as Pirita, such as we have on top of Meraki, the new development. We have been looking into Upmalas. In many of our properties, technically, it's not possible to put solar panels such as our old-town property Galerija and Postimaja, for example. So there's not enough space. So unless there are some modern solutions coming, more effective solutions then we will consider it. But I think the way we have approached it is that many of our energy suppliers do offer green energy packages, and especially in Lithuania and Latvia, we've been working with that, and we've signed agreements, I think at quite competitive prices. And we have also fixed for certain periods in some properties, our energy costs, but not to 100% level, but right to a 50% level of the consumption. So still trying to hedge the risk of the energy cost not being that volatile in the future. All right. So I hope this was an informative webinar. So please continue to ask questions and hopefully we can answer them. So we will be focusing on our communication. I think that's key. And in case there is any news -- I think there will be some news in the coming weeks. So we will definitely announce them as soon as we have them. And I think what I can say is that maybe an end comment that last year was a very challenging year, a lot of large events happening at the same time, quite a lot of volatility and uncertainty. So I think starting with this year, we have many of those challenges. We have faced them, we have solved them. And I think the work is cut out for us. We need to increase our occupancy. We need to decrease our cost of debt. And together with our partners, our banks and the investors, also the bondholders, we aim to achieve it, and we aim to deliver strong results or stronger results this year and then we can already take it from that. Thank you, and have a nice day.