Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Annual General Meeting of Baltic Horizon Fund. My name is Tarmo, I'm the Fund Manager and hereby, I would like to progress with the meeting. The idea of today is to give you our latest update on the fund, it's activities, also look back a bit into 2023 and discuss our plans going forward. So I think firstly, I'd like to propose to have a secretary for the meeting to be honor. And myself, I will be the leader of this meeting. So I'd like to start again with our strict strategic targets that we have and that what we believe that we can achieve the status of the fund, which will be in a very stable mode. So currently, we're -- #1 goal that we have and that we're working on is our portfolio occupancy. On top of several geopolitical and other kind of external events. Last year, we also had the change of certain anchor tenants. And we have been working to increase occupancy of the funds and continue to do so as we speak. We do see net operating income potential of around EUR 18-plus million when the portfolio is closely fully leased out, and that's what we are working towards. At the same time, we have to manage our debt, keep the relatively low cost of debt low, and there's been several activities around that as well. In regards to our ESG initiatives, these are something that we have been working on regularly and continue to work on. Our properties are now fully certified, and that helps us to get the best possible financing conditions and remain attractive for the tenants coming to our properties. And so I think last but not least, we have analyzed our portfolio during the past several years, decided what we believe are our strategic assets going forward, but as well have considered certain assets that are nonstrategic for us and we are looking for a disposal of 1 maximum 2 assets over the next 12 to 18-month period in order to free up equity for our other investments in the portfolio and to further strengthen our balance sheet. So let me just first have a little look back into 2023. It was a big year for us, a very, very challenging year. We had to refinance our bonds at the moment when capital markets did not work and cost of the bond increased almost 3x. We had to go through a disposal of 2 of our assets in order to strengthen our balance sheet. and renew many of our loans. And the year ended by refinancing our Europa and North Star properties since the net operating income of these properties have improved, and we were able to get a new loan from Siauliu bankas in an amount of EUR 26 million. And with that, we were able to pay back part of the expensive bond that we have. And we are restructuring -- continue to restructure our balance sheet through refinancing. It was a major event definitely for us. And I think what I've noticed -- we have noticed in the Baltics is that certain local banks are activity lending, they are hungry for new business, and that has been good for us. So we have also last year, refinanced with BlueOrange Bank, our Upmalas loan and are currently in discussions with other small banks on refinancing of Meraki. When it comes to the income side of the fund last year, when we look back then, we did have 2 of our properties, anchor tenants change in Upmalas, where SCB Global Services moved out and as well in LNK property where tenants chose new locations. And -- but at the same time, we've been upgrading our retail assets and increasing the NOI of those assets, introducing strong anchor names, such as ARKET, H&M Home, IKI grocery store. We did have recovery in our retail segment, but since the increase of vacancy in office segment, the NOI and office segment dropped by 9%. But as I mentioned, we have been working hard since second half of last year to fill index vacancies and first success was with Latvia police signed last autumn. Now they finally moved in 1st of March. So they are paying from 1st of March. And ARKET moved in December, H&M Home similarly and IKI also in March, a new grocery store in Europa. So that's shortly about 2023. Now I think we have shown this figure also the chart previously, but I cannot emphasize enough how that visualizes the work that we've done with our current leases. And here, you can see the first quarter leasing activity on top and below the leasing activity since the third quarter of last year, emphasizing that there are not only prolongations happening with current tenants, but there are also tenants that we are replacing with new tenants, and there are also tenants that are coming into empty to vacant premises. And I think the most important column here is more or less a purple color at the end there, which shows the net positive leases that we have signed over the past 3 to 6 months. Now approximately by the end of Q1, approximately 7,200 square meters of new leases have been signed. And therefore, we have increased the occupancy to 83%. And what we see is that we have completed approximately 2/3 of our plan in order to achieve 90% occupancy by year-end. Clearly, victory was also in Meraki, in Meraki's case where we've filled in Meraki with anchor tenants. And I think on the Q1 there, you can see that much of that 3,400 of new tenants or new leases goes to Meraki. The -- let me -- maybe it's right where the catch of all of this is that many of these tenants are still moving in. So we are currently going through a lower net operating income period where our monthly net operating income is approximately EUR 1 million. And gradually, when all these tenants are moving in, then our monthly income will start to increase. And with, for example, the agreement with Apollo Group that we signed on the ground floor of this building where we are today, actually construction works have already started. So they are -- cafeterias are backing themselves together. Casino has already closed and Apollo Group wants to open half of the floor to customers latest by December before the Christmas period. So that's the goal and the remainder in the first half of next year. So what we see now is that income is starting to kick in bit by bit to take us back to the operating profit zone and the same what has happened in Gallerija with Myfitness and prolongation since Lincona are definitely going to help that. I would like to focus on 3 properties that need our more -- largest attention today. So first one is the previous bank building. It was a LNK headquarters, EMERGN who is an IT company. It was their home for close to 10 years. And as it happened, both tenants moved out to other properties. So the location of this property, we believe is very good in the [indiscernible] area, which is quite well known. There is a brand-new elemental office building next door, which was just opened and they're currently in -- at today, the properties fully emptied. However, we do have a lot of visits. And with the help of Colliers team, we have weekly meetings to discuss which tenants do we want, which tenants could potentially be approached and how to get the property filled out again. These discussions have yielded us a new lead. And today, we are in negotiations with one anchor tenant for approximately 4,700 square meters, 5 floors of the total building. The discussions are still quite in an early stage, but I would like to here say that there is activity in Riga market and on top of everything, we are also considering and have been discussing what sort of branding or concept should this office building have in the future? Office market has changed due to COVID as has retail. And many tenants are reevaluating their office needs. And just also many tenants are interested in having well-located premises that are nicely fitted out for their employees in order to attract employees back to the office. And we also believe that office buildings going into the future, we need to have a specific concept, either they are public building, either they are mixed use building with financial tenants, either it's a medical property or an educational concept. So these are the discussions where we had lately, and that's where also we have targeted our tenant searches too. So I hope to give you more feedback on these discussions by the end of second quarter. The second most important property for us in terms of income generation, also going into the future is Meraki -- sorry, Europa. We have -- since COVID experienced lockdowns also increase in vacancies also due to the working habits of the people around many buildings have been built in the area, but people go to office is less, but we do still see our footfalls increasing, but not as much as we would have hoped. However, for us, in managing retail assets, especially in city centers, it's extremely important to have USP, the unique selling proposition. What do we offer to the people who are in this region. And it is -- it has taken a bit of time to convert the property to what we would ideally like to see and what our customers would ideally like to see. And first, challenge was in 2021 to upgrade the look and feel of the property, which we completed in the end of the year together with the new foothold, Dialogai on the ground floor then we have replaced our long-term grocery store there with IKI, which is, in our opinion, in a more of a high-end brand status than [ Maximos ]. And we have signed now already also a clinic medical center Perfectus on the third floor, the works are ongoing for them to move in. So the way that we see Europa going forward in the future is that third floor will have health sports and services. Gym is already there. Second floor will be a fashion cluster. We have moved Suitsupply from third floor to second floor, just recently. With other sort of modern fashion and gadget stores and ground floor, we want to convert more into restaurants. We have received also a permit to open the facade of the property to the main Konstitucijos road. And we are moving [ Fortis ] to the ground floor, and there will be several other restaurant tenants on the ground floor by the end of the year. Replacement of these low-performing tenants, yes, it has taken time, but we are in, I think, in good momentum there. But it is also true that we are changing tenants. And the tenants from the past area are not working. We do see that basically all tenants that are coming into our properties have much better turnovers and therefore, can be as well a better rent. So we believe we are on good track there. And then the third property, which has still a high vacancy rate, looking at the portfolio is our largest asset in Riga old town, again, I don't want to repeat too much, but it has been affected by everything that has happened in the region, in the geopolitical world and I think the challenge in the Riga old town in general is that how to attract people back to the old town, how to attract tourist back to the old town. And I think we have given our input into this by opening again, a foothold on the fourth floor with terraces overlooking the old town is continuously working very well. We have won the competition for ARKET flagship store last year and now just recently signed Myfitness on the fifth floor. Beauty services were just about to sign as well. So work continues on -- basically on the third and fourth floor. We have certain discussions ongoing, and we as well hope to reach higher occupancy and higher NOI in both Europa and Galerija this year. And that's definitely also in our budgets. And we are following the budget currently very well. This is the total sort of portfolio that we have. And I touched up on certain properties that we have. If you look historically, Europa and Galerija have been recovering, but not as fast as we hoped, but we still expect let's say, quite a notable increase in NOI and over the next 6 to 12 period -- 12-month period in these centers. If I go property by property, then in North Star currently, we're happy with. We have one of our largest tenants, the [ ICE ] group reduced their premises from 2,000 to 1,000 square meters. However, they have prolonged the lease with us. So they as well reviewed their office needs. At the same time, [ IBT ] Group, which was also I think, announced today in social media, has as well prolonged their lease. And we have about 1,000 square meters of vacancy in North Star but we have negotiations ongoing. And we believe in Q2, we will sign most of the 1,000 square meters. So we're quite confident with North Star. In Meraki, occupancy level of around 90%. We're moving in the smaller tenants, but also the large tenant [indiscernible] by year-end fit-up work to start now. Project management is working. And we expect as well to lease out 10% by year-end as we have, again, tangible negotiations on the table. In Upmalas, we have police moved in. We have also other smaller tenants from the previous period, but there is about 40% vacancy in Upmalas and negotiations are ongoing for approximately 10% of the vacancy today. So an active leasing is also happening in Upmalas. Vainodes, we just met the anchor tenant. They have confirmed that they would like to stay in the property for a longer period of time. So we believe that property for us is also very stable. S27, we talked about, we have an anchor discussions ongoing and hope to have a strong message now in the upcoming months in that regard. Sky Supermarket is working as expected. No surprises there. Gallerija, we talked about Postimaja and Plaza as last year was actually a year where we've prolonged all the Postimaja lease agreements, then this year has been the year when we have prolonged old cinema lease agreements. We have an anchor tenant Apollo as a cinema operator and as well, they are bringing in other brands to the ground floor opening then over the next 6 to 12 months. But actually, it's close to 100% occupied as of today. With Lincona, we have good cooperation with Riga, and they are expanding in the property. The expansion has taken a bit more time due to public tendering rules but it's all in good motion. And Swedbank -- with Swedbank, we have prolonged the lease agreement until the end of 2025. So we're as well, for the time being, quite comfortable with what's happening in Lincona. And with as well Pirita, the NOI has been increasing over the years. We expect even higher NOI this year. We have prolonged with Myfitness there until 2032, and discussions have been as well started with RIMI, the second anchor on a prolongation even though their lease expires only in 2026. So of the total portfolio, as I mentioned, our key focus today now that Meraki is leased out goes into 3 properties: Europa, S27 and Galerija and we aim to crack that puzzle during this year and get closer to the NOI potential when the property is fully occupied because the potential is definitely there. And I've tried to sort of keep this presentation rather straightforward and short and open later as well for any questions. The plan -- what is the plan going forward? And as we sort of internally discussed is that the fund was in red zone last year, when we had many, many, many things to solve many red flags coming up. Many things to sort out, then 2024, we consider ourselves in a yellow zone, where we have refinanced half of the expensive bond, hopefully, by the beginning of July, the last tranche will be repaid. And we can really planning to -- plan to get into 2025, where we are reaching a higher NOI and let's see what the European Central Bank is saying now on the 6th of June, but the market does expect as well that Euribor will start to gradually decrease. So we aim to enter again in the operating profit zone and also in the process, we want to currently strengthen our balance sheet. And so one discussion was around still disposing one nonstrategic asset and use the proceed for the portfolio's purposes. We haven't talked about it for a while, but actually, if you know our property Meraki, we do have a building rate for the same size property right next door so that we can actually have 2 towers. So the investment there, of course, is also rather sizable 8,000 square meters but underground parking has already been built for both properties. And we want to also be ready to start developing or constructing this property when we have the tenants in place, first tower is now 90% occupied, and we have some early discussions as well with other tenants in the area. I think one thing I would like to note about Meraki, which I perhaps didn't mention before is that our original business plan with Meraki was that we built the best quality property in an area where you have more amortized office buildings, but -- and then compete for tenants in the area with our new product. And it took us a bit more than we would have wanted to, but we have now actually filled in first tower with the tenants from this area, we like this area. It's a very intensely populated area and in Vilnius. And actually additional discussions we are having exactly with the tenants in this area. So -- but coming back to the second half of this year, disposal is one way forward. We still see potential in refinancing some of our loans to get additional funds of up to EUR 5 million which can also be used for refinancing the bonds or other investments and we're as well considering in order to really reach the full stability in next year a small capital increase with our current leading investors as well as the management company and management team members because now we really believe it's a time when we see potential. We see it the NOI increase potential, we see the cost of debt potentially decreasing. And what we want to do is really, as we say, bring the fund into the green zone in 2025. So as we were a dividend payer in before, we want to become a dividend payer again and that's what we are currently working on. So I'm open to any questions. At the end here, we have the financial results. However, I don't know how much it is needed to go into that as this has been presented several times. Maybe just briefly that when you compare 2022 to 2023, then our income did decrease and partially because of certain assets that we disposed, but as well due to certain increased vacancies, especially in the office segment. And -- but we are now in a totally new reality. So again, coming back to, I think, this NOI potential, and this doesn't also even include the Meraki second tower then we believe we are on good track. And we do see that if everything goes as we planned, then we can be quite satisfied in 2025. But any questions at this point from anyone.

I'm thinking about Europa shopping center, well, it's never like 100% on top of SOI solids like 80 or something because if we compare here [indiscernible] center in [ Talent ] and it's like I don't see any of the space there?

There's only one explanation to that is that as you can see maybe as well on this slide, that in retail, we do have incoming tenants, but we have also outgoing tenants. So it's for example, we are going through a replacement of or many -- more than half of tenants, I think, of the total shopping centers since 2021, meaning that we're bringing down the restaurants from the third floor and putting clinic on the third floor. And then this creates, I'd say, technical vacancy, meaning that because of the [ vital ] works ongoing. So currently, we are still in the process of where, let's say, exiting or replacing tenants are in the same amount as new tenants coming in. So -- but our target for Europa by end of '24 occupancy is 90%. So we -- probably not yet this year because we -- the remainder of the vacancy, the negotiations are still taking some time. Of course, we have, let's say, higher goals, but I think today, I can say that 90% is realistic.

How's -- for example this Upmalas office building like how long is usually like in that building companies renew the lease or how long it is particular?

So in Upmalas I can say that we have other tenants such as Bosch and Johnson & Johnson and with them, sort of re-lease cycle is 5 years. So I think the same is Postimaja in most cases, it is around 5 years, but there are a cases which are 3 years. Now we believe that police it's nonbreakable 12-year agreement and with forestry companies as well by long-term agreements. So I think maybe I can also put it in this way that our portfolio and the properties, many properties in our portfolio are currently in a conversion process for the new cycle. And for example, if we look at this property, now we have a long-term tenant with a leading entertainment group for 10 years. So yes, now we need to maintain the property. But unless, again, something extremely major happens. So we believe that this property has now entered the next cycle. I think the same has happened with Upmalas. Vainodes continues to have its tenant and -- but Europa and Galerija are in the process of still going into the next cycle. But we believe that when we have the turnout mix in place because tenants that are coming in are happy, they're making money, they're paying rent. So as we call the old era tenants just need to be replaced and it takes time. And it's still, unfortunately, takes time. When you compare it to [ Euro ] center, then I think Galerija Center has been in Riga old town been affected more because of lack of tourism, they're heavily dependent on Rusians, Belarusians and that is actually key Clientèle or has been. So for us, it's as well to managed because the location is beautiful. It's a Riga old town, but outdoors will attract more locals into the old town. And actually, the city has the same problem. But with Rail Baltica station now being finished in a couple of years' time. So we all hope that gradually, this will bring in the people and does allow us to have better offering as well for the people. But again, we're doing what we can. And I think if you've been to Galerija centers today, if you've been to Burzma then you see how visitors are enjoying the location because now I'm starting to discuss quite long, but if you look at Riga old town generally, then there's also not a lot of new things that have happened there that have attractive people there. So just -- it has to be step-by-step, something interesting again in Arket again, which is only one in Riga. So another destination, another destination. Now the Myfitness flagship on the fifth floor just another destination for people to come. We're also discussing coworking operators actually quite intensively. Haven't agreed on commercial terms yet, but several of them have been on the table for many, many months. So again, a destination for people to come. So we believe that that's what we can do, and it has to pay off.

Also go to breakout this disposal of strategic assets. Is Meraki, a building site or it has a great life or it was something else? Or is it not like a total discussion?

As one can imagine, we've -- especially last year, we had a crazy amount of ideas what to do in order to move forward. So at some point, we were considering selling Meraki. But we didn't, actually. So -- but that was more of -- not of that it's not strategic, but it is -- maybe it was more necessary. But in our case, how we define our strategy is that we have our centrally located properties that we believe in. But then we do have tenant office buildings that have the best tenant mix in certain micro regions because they are competing with the region. And that's where we believe the long-term sustainable value or sustainable attractiveness can be achieved or than public tenants who are there for a longer period of time. So that's where the backbone of the cash flow of the fund comes, whereas we do see the upside again in more in the central locations. So that's how we look at the front today. Let's say, nonstrategic assets, maybe I can just say that they are probably the smallest asset over fund and the way we believe that either more value cannot be generated or that maybe a developer can do a better job for the future in certain cases. Any questions or -- there are not that many participants either. Any other questions or thoughts or comments.

Like this Postimaja Coca-Cola Plaza renewal plans on both now even think about it now. There's lot of construction going on like...

So I would say today, it is on hold for a couple of reasons because I think the rental level of -- that we would I need to ask in the expansion is above today's market. And as we all know, the Euribor has influenced the spending disposable income, I think, as well, maybe not as much as we all feared. But we [ all ] want to see more positive progress there. And I don't think we will see that in the next year. So if we see huge momentum in local retail spending in tourism in a couple of years' time, then we may reconsider. However, today, we are looking at this complex that okay, we have put it into the new 10-year cycle. And now let's think what's happening after 10 years. And so these expansion plans sometimes take time and we may reconsider as well the expansion size and redo the project. But I would say that the changes that happened in the market have will not allow us to continue. And most likely, we will not continue in the coming years.

Basically on the contrary, interest rates kind of change.

Not until we actually can attract strong anchor tenants at higher rents because...

Apollo group kind of seems a good partner.

Apollo group is definitely a good complement to this area. We had also other plans, which were not maybe so much welcomed by the community here. But I think Apollo group with our bookstore and other brands, which they are still discussing what to bring will complement and -- but I think the expansion would need, I think, still a fashion [ center ] or somebody similar. Okay. So I think as this meeting is more of a general nature and more informative. So we are going forward with our plans as described on this slide and there are more formal decisions to be made that requires investors' attention or investors' decision, then we will approach. We will make the respective announcements. And as I said, we are firmly committed to bringing the fund to the green zone. There are still some steps, I think, needed, but our income is expected to increase and working hard as well as to reduce the leverage and cost of debt. So thank you for attendance.