Eastnine AB (publ) (EAST) Earnings Call Transcript & Summary

Hello, and welcome to the Eastnine AB Year-end Report 2019. [Operator Instructions] Today, I'm pleased to present Kestutis Sasnauskas, CEO; and Britt-Marie Nyman, CFO and Deputy CEO. Please go ahead with your meeting.

Thank you very much for this introduction. And with it, I would like to move straight into Page #4 of our presentation, vision and mission. Eastnine's vision is to create and provide prime venues where a deal can flow, people can meet and successful business can be developed. We have a mission to be the leading long-term provider of modern and sustainable office premises in prime locations in the Baltic capitals. For you who do not know, Eastnine is a Swedish real estate company listed on NASDAQ, Stockholm, Mid Cap headquartered in Stockholm. Our main tenants are Nordic companies with international operations. We have a very nice sustainable properties in the core segments of -- in the core multi-capital. If we move to Page #6, sustainability is our core focus. Our total objective is to conduct climate-neutral operations. We will reach that as soon as possible, but latest 2030. 100% of our real estate investments shall be environmentally certified. That excludes properties that are acquired for major redevelopment. Today, already, we have 71% of our area certified at the highest rank of LEED and BREEAM Excellent certification. And we aim to be the prime -- we're the best landlord within our segment, in the office segment and in the CBD areas. We have conducted our employee survey, which resulted in a very high score by Great Place to Work, an external adviser, where 93% of our employees consider it to be a great place to work. We also are reporting on the GRESB. We started already in -- back in 2019, and 2020 will be the first officials for the first-time reporting score with 64% versus 58% for the average of the first-time reported. It was also -- our portfolio, it has grown. As you can see, our total assets comprised now EUR 420 million, with the majority being in the property direct segment. We still have 2 noncore holdings, the East Capital Baltic Property Fund II and MFG. Overall, if we look on the property portfolio, the majority of the portfolio is actually in Vilnius and the rest is in the Riga today. If we move to Page #8. Just a recap, why we like Baltics so much. We see a solid GDP development in around 3%. We expect that to continue throughout the next coming 3 years. And we see a very strong convergence trend towards the European averages. All countries are members of EU, Eurozone and NATO. All countries ranked very high on ease of doing business, where Lithuania ranked on 11th place, just behind Sweden, which is on the 10th. Estonia 18th and Latvia 19th, and that's a global rating, which is very, very high for those economy. We have very strong demand for office space, a general operator in the relatively low vacancy rate environment today. And we see many internationals established in this market. NASDAQ, Danske Bank, Moody's, Uber, Swedbank, just to name some of few -- some of them. And most of them actually in this are also our tenants. We have disciplined real estate financing and transaction market with strong yields in the area of 5.8% or 6.2%, which is around 200 to 300 basis points above the Nordic period. That, in combination with low rental levels, makes our story very compelling still today. If we move to Page #9, you see our property portfolio in Vilnius. There's no changes on that slide since our last presentation. And if we move to Page 10, where you see the picture of Stage 3 in Vilnius, that is about to be tested over during first quarter. There has been a minor delaying that takeover, but it's related entirely to some administrative technical issues within Vilnius municipality. If we look on Page #11, you'll see basically a map, and we show where our properties are situated. Figures relate to the previous slide. So you can analyze this a bit further. But basically, in Vilnius CBD, we are already the largest player. Almost every 10 square meter of office overall in Vilnius is actually in our possession today. And in their CBD markets and the Hi-Fi markets, our market share is significantly higher. I will also continue -- plan to continue strengthen our position in this -- in the central area of Vilnius. If we move to Riga, you see 3 properties here. The Alojas Kvartals, that's probably -- that was quite -- together with Alojas Biroji, will be redeveloped into something. If you look on Page #13, The Pine, it's our new concept that we are in the process of development. It will be the first wooden constructed -- office constructed out of -- entirely out of wood. And our most recent acquisition is the Kimmel quarter, you see just some of the visualizations that, today, is a backlog with a possibility to develop up to 38,000 square meters of office and retail and more mixed-use type of properties. And that will be developed in the future as well. If we move to Page #14, you see our projects on the map. Riga is much more spread out over the city. There's no clear CBD established today, but you see that our portfolio is relatively concentrated around one street. And we will probably stay in that area going forward. If we move to Page #15, real estate fund. We have nice returns from Baltic Property Fund II, growing almost 5% during the year, or -- including the dividends. Property has -- or the fund has 5 properties. Tax fund is -- accounts for divestments from outside. So either be both -- as in the active space. As we have to sell it, it will be in this -- divest it through the sale of other properties -- underlying properties. Baltic Property Fund II was already sold at the end -- sorry?

Three.

Yes, sorry, three was sold already in the last quarter. If we move to Melon Fashion Group, Melon Fashion Group has made very nice return this year. We have a total return of 42.6%, including the value changes and unrealized dividends. We received dividends now being around EUR 2.8 million from that company. We have a nice value increase of around 37% during the year. And of course, it's driven by very strong performance of Melon during 2019 and very strong outlook for 2020. MFG's sales are up 30% -- or up 30% during the year. E-commerce is growing even faster, approximately 127%. And we have very strong margin growth of 36%. If we adjust for currency effects, margin was up 43%. And current valuation constitutes approximately 5x EV EBITDA multiples, which is, given this type of performance, still considered quite prudent, I would say. If we move further, I would hand over to Britt-Marie.

Thanks, Kestutis. Eastnine released a property in year-end's report this morning, with a substantial increase in the profit from profit management in combination with unrealized value changes in both properties and other investments. Page 18, some key figures. We start with some key figures regarding efficiency. The property yield was 5.3% during 2019. It seems a bit low in the possession of a majority of the acquired properties in the fourth quarter, and yield is measured as NOI in comparison with the average of opening and closing balance of that property value. So that's why surplus ratio increased for the second quarter in a row to 90% by the end of 2019, mainly due to higher occupancy rate. It was 84% 1 year ago. Return on equity increased from 6.5% in 2018 to almost 14%, 2019, mainly due to increased profits from property management and unrealized changes in value. Rental leases, the average rent was 14.0 -- EUR 14.7 per square meter a month at the end of 2019 compared to EUR 14.5 at the end of last year. The Wault increased to 5 years to expiry, and the increase was more substantial during Q4 after taking possession of S7-2 [ Vilnius ] on a plus 9-year lease. The occupancy rate increased by 2.5% during Q4 and almost 4% compared to December last year. Some financial key figures, LTV has been historically low. We have tried to increase it a bit during 2019 up to 47% by year-end. Please remember that only real estate is leveraged. Equity/asset ratio is still on a very high level. The average interest level stable around 2.3%. And some share-related key figures. Earnings per share more than doubled to EUR 1.66 per share compared to 0.71%. The NAV was SEK 133 by year-end and the EPRA NAV was SEK 137, almost the same as the share price by the year-end. Page 19, some highlights during Q4. We had a positive net leasing of the EUR 99,000 annually. The average rent was up on the new agreement, EUR 15.2 per square meter a month compared to EUR 14.7 by the end of 2019. And some of these tenants will move in during the first quarter this year. We took possession of Valdemara Centrs in Riga and S7-2 in Vilnius. We acquired Kimmel in Riga, and we sold the property at NAV. Page 20. If we start with the fourth quarter in comparison to previous quarters, rental income, property expenses and interest expenses increased due to our larger portfolio. Central administration increased due to its new installments under reservation for variable remuneration. Other financial expenses, which contains mainly of commitment fees for loans, decreased since we took over S7-2. We saw positive unrealized value changes for properties, derivatives and investments. And finally, we received dividend from MFG on the real estate funds. For the full year 2019, most of the growth in the figures is, of course, due to the fact that the trolley almost doubled. But there are some other positive changes as well. Rent levels are gradually improving. The occupancy rate is back on high levels again. The NOI and the profit from property management are increasing at a higher percentage than rental income, and the unrealized value chain for properties in 2019 was more than 6%. Around 60% from higher rental income and 40% from the lower yields. Over to Page 21. The long-term securities holdings on almost the same level as in December last year, though we sold the Baltic Property Fund. And this is explained by the value change in MFG. Cash has decreased in pace with Eastnine taking possession of S7-1 and 2. Equity increased due to profit, liabilities increased because of new loans for acquisitions and on existing properties. Page 22, earnings capacity. Since Eastnine is growing asset fast pace and historic information doesn't give much information about the future, we have from this year-end report included information about the earnings capacity in the company. It should not be regarded as a prognosis. Earnings capacity described theoretically the company's current earnings as of the end of December 2019, figures are based on that property portfolio towards the end of December. Earnings capacity doesn't contain an assessment of the development of rent levels, vacancies, property expenses, interest rates, et cetera. As you can see, there is a substantial increase compared to the outcome of 2019, mainly because of a larger portfolio, but also due to lower vacancies and higher rents. In 2019, rental income was a little bit higher than EUR 13 million and profit from profit management, EUR 5.5 million. So substantially higher than that. We also have the contract to take over the property, S7-3, and that is not included in this table to be taken over during the first quarter. And at an agreed purchase price of around EUR 43 million, the property is fully left to Danske Bank. The Annual rental income amounts to approximately EUR 2.5 million, with an estimated start-up value as high as 98%. If we include S7-3 for 12 months rental income, it's close to EUR 20 million. Page 23. The shares listed at Stockholm Nasdaq, Mid Cap, as you know, they have -- we still have 22 million shares, and we have repurchased 1.2 million shares. We haven't repurchased any shares after Q1 this year. The Board proposes a dividend of SEK 2.70 for the spring, divided into SEK 1.35 in May and SEK 1.35 in November. The share price increased by 48% last year, and the total return amounted to 51%. Today, the share has been trading at an all-time high of more than 149.

159.

159, all right. That's good. Shareholders, Page 24. The number of shareholders increased by 11% to more than 5,600, 71% of these are Swedish, 16% foreign and 13% of unknown nationality. About 50% of that foreign investors are from the U.S. We have 2 major shareholders, as before, in more than 10% of the share. And most of the shareholders on the top 10 shareholder list have increased their shareholdings during 2019. And what about the future?

Okay, thank you. So of course, in our priority list is to take over our S7-3, which we expect to happen during Q1. As I mentioned before, it's more of a technical administrative matter that is delaying it. The property is built, and the tenant has moved in. We also are very actively pursuing on our acquisition strategy and with announced selective strategy -- with respect to selective areas, and we continue working on this. So hopefully, there will be more news coming in the future. And of course, focus is also to transform the company into a pure real estate play, which means that noncore holdings will be divested, and it's also sort of our agenda to work with that. And finally, but not least, to continue with our development projects that we see as very, very exciting opportunities. And that will probably -- or probably, but once completed, actually, it will bring our position in Riga to close its 70,000 square meters. And definitely, we will become the largest player by only executing these 2 projects. So this is the play for today, and we are now open for questions. Operator?

[Operator Instructions] And our first question comes from the line of Niclas Hoglund from Nordea.

It's Niclas Hoglund from Nordea. A couple of questions for me here. Let's start out with the sort of property portfolio, the like-for-like ramping growth or decline is clearly less now in the fourth quarter. And you're talking about continued higher rental values? Should we expect the sort of underlying rental values to sort of start to increase now again from -- only from the first quarter? Or is it some -- still some vacancies holding back performance?

Yes, because the like-for-like portfolio is actually one property mainly. And what was 2 properties, basically, it's still [ Baltic ] I and II and Alojas Kvartals. These properties are now fully leased. Not all tenants -- or not -- almost fully leased, to be very correct. So tenants are moving here, and we'll probably see a like-for-like growth in Q1, but definitely in Q2. But overall, the outlook is very positive.

Right. And when you look at the sort of rental value and -- we are seeing a steady increase and the sort of higher potential for rent in the portfolio tee-up in the agencies. Now when you look at the sort of potential for renegotiations over the next 2 years, do you see a potential for an uplift in the sort of current portfolio environment? Or should we expect the rental levels to be stable on these higher levels in the next 1 to 2 years?

In general, rents have developed upwards during -- even during the last quarter. So definitely, when there will be churn in tenancies, we will see an uplift most likely, yes.

Okay. And on that note, could you help us out with the sort of the underlying CPI adjustments for 2020? What's the sort of -- or what do you expect to...

It's around 2%.

Around 2%. So it's very good, above the Nordics then.

Yes.

Okay. And then moving over to values, also in the property portfolio. And well, values have a decent increase here in the fourth quarter. And you mentioned that it's around 80%, 20% -- no, 60% and 40%, the higher rental income and 40% lower yields full year -- for the full year. Is it more or less the same trend being also in the fourth quarter? Or is it more tilted towards rents?

I'm not sure that I have that figure actually. So I have to look into that.

Okay, I understood. That's fair. And maybe on that note, we're also seeing that the valuation yield is coming up in the portfolio linked to mix. Is it possible to get a feeling of how much of the sort of uplift in valuation yield that is related to the mix effect in order to have more of a like-for-like comparison here?

No, it's mainly rental. In the increase in that rental income, that's the most positive factor, which is affecting.

And looking into 2020, and more recent transactions? What are you seeing the market with regard to yields or yield requirements? And 6-plus is a pretty decent number in this kind of environment?

The yields are compressing. They have to be in a very, very big transaction. The latest transaction was by [ DECA ] in the -- in real [indiscernible], that was around 12.8-ish percent somewhere and according to our estimate. So it's getting below 6%. And see how far will it go with respect to it.

And what kind of levels would you think to be appropriate when you're looking at the market? Or you have to do on only above 6%? Or you also -- I mean, you still have a pretty decent yield yet with yields coming down to 5%. So how do you think...

Well, we have -- so we do have the deals that we can, but it's difficult to sum it from the yield.