Baltic Horizon Fund (NHCBHFFT) Earnings Call Transcript & Summary

Good afternoon, and welcome to this Investor Webinar. My name is Tarmo Karotam, I'm the Fund Manager and with this webinar, I plan to share more detailed information about the intended issue of new units by private placement. The webinar is structured in a way that, we will first summarize the reasons why we are doing it, what we are aiming at. And since we have received quite a few questions and remarks, then in the second half of the webinar is intended for a Q&A session where the questions have been summarized and so have been the answers to these questions. So I hope that most of the questions I can answer throughout this webinar in case there are more questions outstanding, then you're most welcome to write in the chat box, and then we'll try to find them at the end of the presentation. So some of this information has also been presented in the previous presentations, but I will just go through it once more, the reasons for what we are doing right now. So it is also clear that we've had quite a challenging year with the expensive bond and the higher vacancies last year, but we are in the process of improving our occupancies, signing new leases and now going further, the goal is to improve the capital structure of the funds. And hereby, we think we're ready for a small capital injection by our current new investors who believe in the potential of Baltic Horizon Fund. As well throughout the past periods, we have been aiming to manage the LTV, we continue to manage it since it is still much higher than we would prefer. And we maintained a continuously target LTV of 50%. We have aimed to refinance some of our expensive debt and the way to achieve lower LTVs is through amortization, maybe some repayments, and that continues to be our main goal as well. So overall, what we say is that last year, what we say internally is that last year, we were in what we call a red zone when we had a lot of different aspects to manage, a lot of uncertainty on the future. This year, we ourselves, I think that we are in a kind of a yellow zone, where many of the aspects or issues that we've had over the past 12 months have been managed. We are signing new leases. We have several other negotiations ongoing to fill up the S27 building with anchor tenants and other vacancies that we have. So we see that our portfolio, many of the properties, we have also sort of transferred into the new cycle. For example, Postimaja and the cinema building, where we have recently signed new leases, long-term leases with full occupancy and that's the name of the game to bring our properties that we believe to have long-term potential into the new cycle. And that also really means our strategic office buildings with long-term tenants and our strategically centrally located assets also Europe and Galerija. Yes, it has taken more time, but we believe that we can achieve the long-term results that we're aiming for. Currently, we're in the process of refinancing the EUR 8 million bond. It's been also quite a big effort to do that so that we have by beginning of July, we completed the redemption of the first tranche of the bond, meaning that of the EUR 42 million that was rolled over last year, we have EUR 22 million remaining. And we continue also to look for solutions for the EUR 22 million bond, which is outstanding after July. And last but not least, we know that through our negotiations with the tenants in some cases, we achieved an agreement where tenant invests in some cases, we also need to contribute to the landlord. And going forward, we need to be ready for additional CapEx investments as well. So these are all the reasons why we are currently planning these activities. So we do see that we can maintain a goal of achieving at least 90% occupancy by this year. And the goal for next year is 95%. So in more detail, we think that the FX solution to stabilize the fund further is 3-fold and is to dispose non-strategic asset that we have in the portfolio of a size of approximately EUR 10 million, then refinance some of our more expensive loans and extract a bit more financial sort of liquidity through this process of up to EUR 5 million and then get the capital injection from the current new investors of approximately up to EUR 10 million. That really depends on the market price, it can be as well a bit lower. And as we have noted, internally, we believe in the future of the funds and as well as the management team is planning to support the fund and also invest fresh equity into the fund in this process. So once again, the way we are doing this is to feel that we are in a green zone that we can welcome tenants, we can manage our debt. And through that become, again, the dividend payer during 2025. So just a bit more than the reasons why currently we are planning a private placement and the public offering. So since Baltic Horizon was listed in 2016, we have had approximately, I think, 10 issues, different kinds, both private placements, both public offerings and at different price levels. So we're following a prospectus directive following the regulations and the guidelines in order to do these things. Now the main difference between a private placement and the public offering is the efficiency. And what private placement releases is that it is targeting a more limited number of investors usually with higher tickets, they can be current investors, they can be new investors and it can also target up to 149 retail investors per EU country. So let's say, EU country, which is Estonia, but we are Lithuania, in this context. And this number doesn't include the situation investors, such as banks or pension funds. Now public offering is a much more wider offering. And it's a longer process. And what is also different is usually the amount that these offerings are targeting and giving you a very limited amount of new capital that we are aiming to raise in this process up to EUR 10 million. And then we don't see the efficiency in going through a public offering process, which, in addition, will require a much more larger undertaking with a full prospectus and usually in several languages engaging also a wide variety of investment banks and auditors with all the costs associated. So structurally, private placement is a much standardized simpler procedure that ensures much more cost-effective and then swift process. So our experience also in terms of cost and time line is also shown in this table between EUR 10,000 to EUR 20,000 for private placement, mainly legal fees. But when it comes to a public offering, the cost can be up to EUR 200,000 or even more depending on what are the fees with investment banks and the auditors. So again, this is nothing sort of that we haven't done before. And I understand there are a lot of questions from the investor base. So what to do? And I hope it is understandable why we are doing this currently or why we are asking actually to be more precise, why we are asking investors' consent to be able to do this throughout the remainder of 2024. So in regards to some of the questions and we have summarized some of these questions and offered answers that we believe or should be quite comprehensive to read and understand. So some of these answers can be a bit repetitive, but I will try to go through this in the next few slides. So there has been a question of why is the capital raise needed? And once again, we are taking several measures in order to further stabilize the funds. One is potentially selling non-strategic property. One is refinancing some of our debt, amortizing our loans and the third avenue that we have to improve the stability of the fund is a capital injection. So that will allow us to invest into our properties to welcome new tenants in case needed and lower the vacancy of the portfolio. And at the same time, it's been quite an effort to -- that we are in a process to repay the EUR 8 million bond with additional refinancing and the cash that the fund currently has. So once again, the name of the game is to increase income and reduce the cost of debt. And the process has been ongoing and will be ongoing also for the coming quarters, coming periods in the future. Why are we planning a private placement and not a public one. So private placements are cost efficient in nature. Usually prefer to be offered to institutional or larger investors with higher commitments, and we do need to follow strict rules, which are applicable to this and our legal team is monitoring and preparing. And here, I can also say that if investors are interested in the offering, we can take note of this and some investors have reached out to us. So if an investor is interested that we can consider the offering, including these investors in the offering. And last but not least, if investors are interested and believe in the future of Baltic Horizon Fund and the recovery of the unit price, and the results then investors can defend their position also by simply acquiring up to 20% of additional fund units from Nasdaq Thailand or Nasdaq Stockholm from selling investors. I've also made this note before, but there are still quite or has been quite a few Swedish investors that are selling or Swedish background investors, and we have noticed quite a few Baltic investors actually on the buy side. And furthermore, the 90-day average is a longer-term average, and it can be noted that if one is interested, then a partial increase in units can also be obtained from buying in a market at even at cheaper prices than the 90-day average unit price calculation could be in the future. So there's been a question. So why still are you planning the private placement because the unit price is low and has a high discount to the NAV. So it is true that the unit price is at the low end and much lower than what we believe the true value of the portfolio could be when the various issues regarding the occupancy and the bond will be resolved. But again, we are not able to control the market price and the 90-day average pricing mechanism has been something that we have also done before and at some of our largest investors are accustomed to. So it does even out and it does remove some of the, let's say, inefficiencies or big fluctuations. So in that sense, the average is quite a normal way how to complete these offerings. And we believe that having done what we have already been achieved or what we've already achieved over the past 12 months than taking action now is ultimately the right thing to do and in order to help to improve the operational results of the fund and work on the recovery of the unit price in the future. So the question who will be invited to participate in the private placement. So again, private placement is targeting investors known to us with larger tickets, usually professional and institutional investors, but the offering can also be extended and it can be targeted up to 149 retail investors per new member country. Another question has been, are the management board members or representatives of the management planning to acquire units. And yes, we have discussed this and several Northern Horizon team members are interested in supporting the fund with additional equity to improve the liquidity. And we think that -- we believe by estimate that approximately half of the or up to half of the commitments will come from current anchor investors and the team members. So we want this offering to be a success and hopefully, we can achieve as well to have interested investors to defend their positions in these ways, which are possible for them. The question has been that why is private placement in the interest of smaller investors. And again, we believe if we improve the capital structure of the fund, that will give more confidence to the market that the recovery will continue, and we are working on 3 avenues, disposing an asset, refinancing our debt and new equity. So again, the aim is to become a dividend payer in 2025 with these achievements also on the income side of the fund. It is also the case that investors who don't want to defend their position and they will be diluted to certain extent. But again, we have limited this offering to up to 20%. So we don't know if it's going to be between 10% or 20% of new units today offered in case we receive, of course, the mandate from the investor base in the next upcoming investor meetings. So then this is also the case. And also because the market price is so low, we are not planning to go into large capital raising and to threaten or to go through this large long-term process. And so that the dilution could be much, much larger than up to 20%, which currently could be the case for investors who are not interested in investing with us going further. As said before, smaller investors can defend their position by simply buying from the market and even possibly at cheaper levels when compared to the 90-day potential average. But as mentioned before, investors that we're targeting are usually known investors to us, and the offering itself can also be extended to up to 149 retail investors, every EU member country, and that comes from the regulations, which are related to the private placement. So there's been a question that does all of this affect the unit price. So we don't control the unit price, so we don't really know how it is affected short-term. So it could be that some investors would not like to join this new offering or buy units from the market and they would sell, but there could be as well that investors that are interested in buying at a cheaper level to maintain their percentage in the fund, in the total units pool or maybe even increase it. But as I said before, the capital injection is one of the tools, which will help us to improve the financial standing of the fund and for the team to feel much comfortable, much more comfortable that we can do what we have been planning to do in terms of increasing the NOI of the fund. When tenants are moving in and when new tenants are being signed up to move into the vacancies, so there's still quite a bit of work for that to be done, but that's the goal of the fund team and we can then plan our activities also more precisely. So we do believe that with the activities that we're doing right now should improve the operating results of the fund and hopefully, that should also then be reflected in the unit price, which is currently, as you all know, at a very low level. We had several questions, what can I do as an investor to maintain the holding that I have, then we do recommend that in case an investor believes in the fund, then there is an opportunity, very flexible opportunity to buy up to 20% of additional units from the market. And we also have the ability to target up to, yes, again, 149 retail investors. So we hope that this will accommodate all the needs of the investor base going forward. What will happen if the shareholders vote against the private placement. So in case the management team continues to work on the other 2 avenues that we have, disposing an asset still in a quite challenging market when it comes to potential transactions at good prices and then refinance the expensive debt that we currently have and mainly through cooperation with the banks and in cooperation with the bondholders. There's also been a question that why do we just not close down the fund? We've definitely considered it, and we've discussed it extensively. But again we already last year, end of last year, decided that with a lot of hard work and good cooperation with the partners with the investors we believe that there is a future for Baltic Horizon. There is a full goal to become a dividend payer again. And also having received some offers for our properties, and we do see that it is not really prudent to accept these prices at this period of time as very limited amount of value can be then extracted from this process, which can be as well costly and lengthy in nature. And what gives us much courage and much sort of confidence for the for the future? Are these tenants that we have been signing up. We've made them many times the new anchors for our properties, Police, Apollo Group now in Meraki, NARBUTAS and several others. And the current negotiations that are ongoing with the tenants in our vacant properties, yes, it will take a bit of time, but we do see as well that the markets are turning, and hopefully, so EURIBOR will continue to decrease that should improve as well our tenant situation, consumer spending numbers as well eventually the valuations and also the potential price that we could receive for any of our assets that we would like to sell. The fund is currently not in liquidation mode. It's not planning to exit in any way. So hereby, we are in the process of working on these 3 avenues, increasing the NOI through new tenants, decreasing cost of debt, amortizing the debt. And if investors believe in it, then have the mandate to increase the capital base and get also fresh equity capital, limited fresh equity capital injection into the fund. So this concludes the presentation that I have prepared. Let me see if I can take some -- if there are some other additional questions with some questions that I haven't answered already.

There's a question of the management team and how many shares the Baltic Horizon, we own in Baltic Horizon Fund. So I can say that the number is in hundreds of thousands. The number is more than 0.5 million. And also the question is that haven't checked the latest, let's say, report. What I would say today is it's definitely more than 0.5 million closer to, I would say, even to 800,000. So around -- I think shy of 1 million. So I think that's an answer I can give at this moment. So the question is that why don't we sell more of our properties instead of doing this capital increase. So I would say that once more, we believe that with some of the work that we are doing, within 12 months' time, we can improve the value of many of our properties. And this is not the time to sell. Also one needs to keep in mind of the bank that we have and some of that some of the, let's say, offers that we have received are somewhat higher than the bank did, but not a lot. So that will also not solve our problem to, let's say, increase the financial liquidity or strengthen the financial position of the fund. So we're still considering selling some smaller nonstrategic assets, but it's also a question of if you start selling larger assets then it could signal even the larger potential liquidation of the fund, which we don't believe that we want -- it's in the best interest of the investor base as a whole. So we believe in the future of Baltic Horizon and we believe that it should remain listed, which should become a dividend payer again. There's a question on the LTV that currently we are quite at the high level and our target is 50% or below. And why are we then thinking of potentially paying dividends next year, whereas we could deleverage the fund further. I think that's a very good question. The thing is, it's a balancing act, I would say. And the question is how much and in which period of time do we believe that achieving, let's say, 45% or 40% LTV is the best course of action and we do know that our investor base is expecting a dividend. It could be a small dividend, or a bit larger. So eventually, it will be a balancing act. It depends on so many factors. It depends on the valuations, it depends on the cost of debt and so forth. So as we said, that's our aim, is to become a dividend payer in 2025 if our plan works out and if we are able to achieve, if the market supports it and -- but we do see that it could be possible is. I would say that, that in terms of LTV, so our main goal is, of course, 50%, but that we want to achieve no matter what question is, would you go down to 45% or would you go down to 43% or 47%. So that's something then to be decided. And again, it depends on so many factors, and then it depends also on the time line and that needs to be balanced out. So there's been a question that in the market to potentially buy new objects. So we are a market player. So of course, we keep an eye. And in case something very attractive comes along, potentially, we could build a case for it, but it's definitely not our priority. It's something that we have to be and we keep our eye on the market, but sometimes, a few times I have said during this webinars that we do look into a longer term future than just 12 months and potentially, we need to have also a 3 or a 5-year view on where we want to be. And so let's say, in today's market where buyers and sellers are still quite far away from each other, it will take time for the new equilibrium to find itself and potentially then we will be also in a better position to consider different investments. But currently, the priority is to stabilize the fund and through these 3 avenues that I've discussed before. So there's been a question on, that we have acquired strategic assets at high prices in the past, for example, Postimaja and Galerija Centrs. So yes, high price is, let's say, a relative term. And I think around EUR 3,000 per square meter the central locations cannot be considered too much of a high price also considering the replacement costs today. One has to look into more specifics here. And for example, in Galerija Centrs is of course, our major disappointment that Riga itself has been affected by COVID and other things very directly, lack of tourists, no Russian spending money again and the property itself has been in a process of realigning it's, let's say, visitor base. And it's of course very disappointing that it has taken so long, and it will still take time. But yes, now we are really almost in 2025, almost 5 years after we acquired the property, and it has been recovering much lower than anticipated. But again, if we look in the longer-term perspective and we look at it from the point of view that when the property will be occupied by tenants such as my MyFitness, ARKET, the food hall some of the other anchors that we're planning to bring in for a period of 10-plus years, then that's where we get our sort of motivation and excitement. Yes, it will take time, yes it will take some investments. But we still don't believe that Riga will remain in this current situation or it has been already slightly improving, but not visibly, but we believe that the value will be restored, but yes, it will take a bit of time. At the same time, when we put together a portfolio of EUR 300 million, EUR 400 million in the Baltic states, you are as a fund management team buying throughout the cycle. And yes, some investments you can make cheaper, some investments a bit more expensive. But the idea is to believe in what you can own long-term. We are not a developer. We are not buying -- holding for 1, 2 years and selling. So that's something that is not part of our core strategy. So the strategy is to be a very long-term holder of certain properties and to maintain them, to uplift them at certain periods and then bring them to the next cycle. And throughout a period of economic growth and improvement of people's disposable incomes also believe in the indexation of rents and in the increase of rental prices in the coming years when EURIBOR starts to stabilize and other, let's say, major events in the region find their, let's say, new solution. So as we have said in the private placement, we are targeting mainly known investors larger and larger tickets. However, we can target as well up to 149 retail investors. So we try to accommodate their wish as well in case they really want to participate in the offering at the price which could be even larger or higher than they could acquire in the market. And we are processing the requests and are able then to contact these investors if they show interest in the due time when we actually do receive the mandate. So the question, I guess, is that has the management team been buying in the market in the previous periods? And the answer is, yes. So -- and -- but we also plan to support the fund with new fresh equity as much as we can and... So it's a question again on the 90-day average pricing, and this is something that is a market standard, you can argue, is it lower? Or is it -- can it be done higher? Or should we even give more discount to some investors that would come in with bigger tickets. So we haven't done anything specific like that. So it is up for the investors to decide really. If the investors believe that 90-day average is not the right one, then we will see what would be the right one. So this is something that has currently put on a vote. So I don't know how to comment more on this. So there's been a question that, is the NAV at the right place? So NAV, as you know, in our case, and in many cases is based on the financial results of the funds and also being quite a bit affected by the external valuators. So we've had Colliers as our valuator, we have had Newsec as our valuator. Now we have also received non-solicited offers, as I mentioned, throughout these periods for our properties. So -- but this is something where we will not sell. And we believe that's not the market price. And what the valuators are doing is trying to understand through their methodology, what could be the potential market price where buyers and sellers meet? So if we get an offer for our property, that doesn't mean that we need to book this offer and reduce our NAV. So that's not the case. So NAV is calculated by -- or affected by the valuations, and it's also not an easy job for the valuators to reflect the market price. In many cases, we have also argued with the valuators that we have actually received higher offers for the properties, and that NAV should be adjusted upwards. But there's various arguments and discussions around that selling both sides. So we believe that the NAV is trying to reflect what would be, where the market is meaning that where buyers and sellers can meet today considering the different properties that we have. So there's a question on what alternatives have we considered for this private placement? So I can answer this that private placement to this limited amount is part of the effective solution, what we call. So it also entails refinancing some of our loans. Some of our -- also the bonds and disposing nonstrategic asset. So my guess alternative could be that we just do a big public offering and -- at this current low market price and the danger of, let's say, diluting other investors who are not participating is, it's much, much higher than up to 20%. So we don't believe that this is also right. So it is something that we have been discussing for quite a bit of time. So we see that the combination is probably the best effective solution here. And as we are fully aware of the potential dilution for the investors who are not willing to participate in this, or defending their position in buying more units from the market. There's a question on S27 building. And so the answer there is that, we are in discussions with an anchor tenant. And there's been several visits throughout the past, I think, 6 months, and we aim to announce positive news shortly. Once more, maybe this is a question on the NAV. So the valuations are affecting the NAV, and due to the bond, the cost of -- I think the debt on average is higher than all of us would like it to be. So the valuators are using in their method -- WACC method, cost of debt, long-term cost of debt and long-term cost of equity that can be obtained in the market. So I believe our valuation should be all correct. So there's been a question here to improving the capital structure. And then -- so that are we able to do it organically? So yes, we have been doing it organically as much as we have been able to. But this small injection, what we believe is of new equity, will really bring us to the comfort zone, if you want to put it that way. So to really have a strong position for any -- and hopefully, there will be no negative surprises, but you never know. So that's what we really want to do with this activity and... There is a question on the net lease area of Postimaja and Coca-Cola Plaza. So this mainly relates -- and there has been a decrease in the net leasable area. So that is related to the new leases that we have signed. So they are structured a bit differently. The price is also actually higher. So let's say, it's because of the -- of certain areas are not considered net leasable area anymore. So that's the reason for it. There is a long question here about, again the pricing mechanism of the private placement. So it is the case that investors were interested in the future of Baltic Horizon and supporting the fund and see the potential, then there is a possibility to approach us with a request to participate or buy from the market to keep the ownership at even cheaper prices than the 90-day average. So this is something which is the case, and if the General Meeting of Investors approves it, then I think the overall sort of consensus is known for the management, and we're following prospectus directive and legal advice in our activities going forward. So again, this is nothing new to us. We've done it in several cases, also in the past, we've done private placements, we've done public offerings. And I think I have explained quite thoroughly the reason why we're doing a private placement right now, or planning to do. So I think there's a last question. I'm trying to see what angle is this asked from. So I think from my position, this offering is really to -- for investors to help the management and the funds to stabilize its business. So we've paid back almost half of the expensive bond. We continue also to find solutions for the remainder of the bond, of course, we continue to refinance our properties at the best possible levels and sign up new tenants, minimize the CapEx investments and bring the funds to a more stabilized position over the next period. So I don't see that we are -- in this private placement, we are selling or hypothetically even selling many of our properties. So most of the properties we definitely want to keep long-term. We see a lot of value can be still extracted. We don't believe that it is time to sell the properties and as mentioned before, so we do recommend and propose to investors if we get the mandate to consider private placement in the periods that are coming then to also consider defending the positions, so that they will not be diluted, again, we've tried to keep this process and also the potential dilution to a minimum because -- and also, we believe that the unit price potentially could increase much more than even the theoretical or practical dilution effect if we stabilize the funds and have stronger -- much stronger liquidity position to go through the next 6 to 12 months when many of our tenants are moving in, and it is a low income period currently and -- but again, the name of the game is to increase the income, sign up further new tenants and decrease the cost of debt, and have the strong liquidity position to do that. Well, I think one more question. So, it was a question about when we are refinancing our bonds which was in the period of -- beginning of 2023. And when capital markets were not working, EURIBOR was increasing. So pretty much the best time to do it. We were considering as well, refinancing it with -- through big public offering with all the press coverage, all the rest, the difficult environment. I think the only reason we didn't do it because the amount was quite large. So EUR 42 million was quite a large amount, and there was no way we could like let's say, decide that, okay, we will only do EUR 40 million or we will only do EUR 35.2 million. So it was a full amount, and we found, let's say, a solution that we could find at that moment, yes, probably today, you would be able to refinance or, let's say, get bond out that cheaper total costs. I think there's market players, who have also done that, even though at much smaller levels. So I think my comment on the bond is that final comment maybe is that, we have paid back already almost half of it. And by 8th of July, we hope to confirm it. And we continue to search the solution for the remainder of the bond and that remains on our desk as well of something that we need to resolve during the journey ahead. So thank you very much for the questions. Hopefully, this was informative and happy to answer any questions over e-mail, in case there are some. So once again, welcome you to participate in the General Meeting maybe just a small comment that regularly, we -- for these cases, according to the fund rules, we -- this needs to be discussed in 2 General Meetings. And in the first one, the quorum requirement is probably higher or historically has been higher than the investors participating in the voting. The voting process as well is quite -- preparation for it is quite technical, documents need to be presented, the power of attorneys or extracts of some registries. And so it's quite a cumbersome process. So most likely we will -- this will be discussed and decided in 2 meetings. And I think the first meeting, we will not have a quorum potentially in place. So, the question is that what can we decide there? And if we cannot decide anything there, then it will be put on the vote in the second meeting later on during this summer. Thank you once more, and all the best. Keep in touch.