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

Good morning, and welcome to this presentation of Eastnine's interim report for the first quarter of 2020. The report will be presented by Eastnine's CEO, Kestutis Sasnauskas; and myself, Britt-Marie Nyman, CFO and Deputy CEO. As usual, there will be an opportunity to ask questions in the end of the presentation either over the phone or on the website. The presentation will also be recorded and available on Eastnine's website. Over to the presentation and Eastnine's CEO, Kestutis Sasnauskas.

Thank you very much, and we move immediately to Page #4, describing effects of COVID-19. We want to start with this right away, and then move into further presentation. We stand very strong in this crisis right now with very solid tenant structure, long leases, long duration of our leases, 95% exposure to office premises, and so far, effects of the COVID-19 on our real estate operation has been really minor. We also have very strong financial position with strong cash position, LTV of 50% and capital tie-up of 3.3 years. There are no maturing loans during this year and only a minor part maturing next year. We do not have any capital markets financing either. In general, the -- we entered this crisis on a very solid base. We had a very strong development in the beginning of the year in the market and with very -- falling property yields and strong rental market. Of course, there is some stock during the crisis right now but we also had also valued all of our full portfolio externally in this situation. And now portfolio is just marginally affected, mainly for 2 reasons: downward adjustments of inflation forecast and expected minor rental losses. So far, losses are really minor and significantly lower than expected. Of course, the biggest implication on us is the value write-down on Melon. Melon Fashion has been very badly affected in the crisis, as its -- all of its stores were closed during April. Today, we operate only 26 stores after a start of relief of stagnant -- of the quarantine measures. And we'll gradually be coming back. And I will talk more about Melon later. But it actually resulted in a EUR 22 million write-down in value. And half of this write-down comes from the weakened currency as ruble slided as a result of the very low oil prices as well. And the other half is a more conservative view on the sales and of effects of the closures right now. In terms of our operation, we follow all the official recommendations. None of our staff has been ill actually so far. We're very happy for that. And overall, our properties are operating. We've also done some community initiatives supporting hospitals and our restaurants by buying food from them and delivering to the hospital personnel. And during April and May, we are serving now 230 meals a day to the business hospital. So if we move to our company presentation. Eastnine, in brief, for those who listened to us first time. We are Swedish real estate company, listed to Nasdaq Stockholm Mid Cap and headquartered in Stockholm. Our core tenets are Nordic tenants operating in the Baltic countries, but also servicing their main businesses and core businesses in the Nordic countries. Our property portfolio, it consists of prime office buildings in central locations, central business districts with top-quality portfolio. If we move to Page #7, you see our asset distribution and total assets of EUR 403 million of which majority is in properties today. Manufacturing group constitutes 11% of total assets, and we have 1 fund investment consisting 5% of our assets, the rest is properties and cash. And if we look on our property portfolio, majority of it, 80%, is in Vilnius, both in value as well as in square meters. So why do we at think Baltic capitals are still attractive? And over the last 10 years, actually, Baltic markets have been growing twice as fast as almost -- some of these growing twice as fast as average EU economies. So there's a big convergence movement going on and we believe it will continue. All of the countries are members of EU, Eurozone and NATO. We are operating in euros. Countries have done a lot to improve the business environment. And Lithuania ranks, for instance, 11th in the ease of business, just after Sweden. So we are very similar to the Nordic markets, Estonia being 18th globally and last year, 19th. So all of them top the list of the countries -- business environment -- business-friendly countries -- in business friendliness. We have very strong demand for office space, operating a relatively low vacancy rates, very many international tenants. It's Nasdaq, Danske, Moody's, Uber and Swedbank. And maybe not all of these names are our tenants, but you see Danske, Uber and Swedbank are actually among our tenants. We have very stable real estate market, disciplined financing, quite attractive yield levels between 5.80% to 6.20%. And this, in combination with significantly lower rental levels compared to any of the Nordic peers. You see this on the graph on the right. Makes a very attractive combination as the spread between the financing cost as well is very, very high as financing conditions are basically very comparable to the Nordic markets. So this combination makes our case very appealing. If we move into the property portfolio, you can see some pictures on Page #9 and Page #10. The far right picture on Page #10 is property called S7-3. This property is something that we expect to complete now during the second quarter. There was a delay due to some administrative technical matter for the separation of land. And that is now in the process to being resolved. So we still expect this completion to happen in Q2 of 2020. And if you look on our position in the market, Eastnine has 80,000 square meters for A-class office space. We are definitely the largest today in the Vilnius market in the A-class segment, concentrated in the CBD area around Konstitucijos street. And we intend to further build on that position and offer being -- having a very strong offer to offer in that area. If we move to Riga. On Page #12, you can see our portfolio with the latest acquisition being Valdemara Centrs. It is the most centrally-located office building in Riga, and I see a small mistake actually that the tenants are actually move between the Valdemara and Alojas Biroji. So they had just -- we have to get -- yes, they mixed it a little bit, but otherwise, it's correct. And of course, if we move to Page #13, the future projects in Riga. We have 2 development projects. One is in building permit process now, The Pine, and we expect some news or passing the first stage of that during this quarter still and having a final permit by the end of the year, so we can start constructing it. And the second is the acquisition that we made in Q4 last year. It's a Kimmel project, which we are now developing a new concept for. But both of them will give us additional 54,000 of leasable area on top of our 20,000 square meters in Riga today. On Page #14, you see where our portfolio is concentrated also in relation to competition. So premium office markets stands for approximately 100,000 square meters in Riga, which implies that actually our small position of 20,000 is already a significant position in this market as well. If we move further on Page 15, you can see our tenants. We have 160 rental agreements and 120 tenants. Our 10 largest tenants constitute for 64% of our contracted rent. Average lease term is 5.5 (sic) [ 4.9 ] years. And 10 largest tenants is 4.9 (sic) [ 5.5 ] years. And Danske Bank is the largest tenant today with 17% of annual rent, and the share of Danske will increase further due to acquisition of S7-3. However, as the portfolio build-up will continue, that position will gradually decrease. And if we move to Page 16, very briefly on East Capital Baltic Property Fund II. Total return of 1.6% during the quarter, derived mainly from net operating surplus. The fund has 5 properties in office, logistics and retail, mainly food retail of that in -- for the retail part. And we plan to exit that investment still during this year. If we move to Melon Fashion Group, of course, it's sad to report a 32% write-down of the value. However, we still believe that this company has an extremely strong chance of becoming a strong winner out of this crisis. The company went into the crisis on a very strong position, very solid financial position without any debts, very strong growth. And during the quarter, we see 37% growth. But February growth was 60% almost. We have very strong growth on our e-commerce channel that I have been addressing for now many quarters. E-commerce standard was 29% of our total sales. And today, when most of our physical stores have to be locked down due to corona situation, Internet stands for almost 100% of our sales. And that growth is still above 50% if you look on that month-to-month basis. So even if it has been somewhat negatively affected during the crisis, the growth on e-commerce is still very, very strong. We see also a strong growth in stores that are open. As I mentioned, 26 stores -- actually, now we see the message that we have 30 stores opened today -- this month. So 30 -- out of these -- in these 30 stores, and the ones that have been operating for a couple of days, we see that actually very strong demand and very strong sales. So it gives us a lot of confidence that once situation will normalize, we will continue in a good way. I now hand over to you, Britt-Marie.

Thank you, Kestutis. We've now released the best-ever result for a quarter in terms of profit from property management due to last year's portfolio, of course, but also due to our higher occupancy and higher rental level. Coronavirus pandemic has had a large impact, a large negative impact on the value, of course, of MFG as Kestutis said. We continue with Page 19, key figures in brief, divided into 4 categories: efficiency, rental leases, financials and share-related. And yield requirement in the valuation was 6.1%. The surplus ratio has been stable around 90%, which is a very high level. The return on equity total is negative mainly because of the effects on MFG and the return on equity for the real estate direct is slightly negative due to the corona pandemic's effect on the property value. Rental leases. The average rent was EUR 15 per square meter a month at the end of March compared to EUR 14.7 at the end of last year. It WAULT across the leases, the same as by year-end, 4.9 years. Occupancy rate increased by 3 percentage points during the first quarter to 95.7 %, which is more or less fully let. Financials. LTV increased to 50% after we took a new loan on an existing property. And it's only in the real estate that it's leveraged. Equity/assets ratio decreased to 61% due to that loan and to negative value changes, but it's still on a very high level. Average interest level stable around 2.3%. Share-related. Profit from property management almost doubled to EUR 0.11. Earnings per share negative due to negative unrealized changes in value and the equity and long-term NAV per share was SEK 126 and SEK 131 by the end of the quarter. Page 20, highlights during the quarter. The average rent level of net letting increased to high EUR 16.3 per square meter in a month, which can be compared to EUR 14.7 by the end of last year. Net letting slightly negative, but should be viewed in the context of the high occupancy rates. And the occupancy increased, as I said before. Page 21, the income statement. Rental income, property expenses and interest expenses increased in comparison with the same quarter last year due to the larger portfolio, but rental income and the -- increased -- also increased because of higher occupancy and higher rental level. So a mixed effect. Other financial expenses contains mainly equipment fees for the loans related to the coming acquisition of S7-3. We had a small unrealized value chain for properties, less than 1%. And of course, also a negative effect on MFG, as said before. Over to Page 22, the statement of financial position. And in this stage, we compare the end of quarter with the end of last year. The value on the property portfolio is almost unchanged. No acquisitions, but a small value in the change -- change in value of the properties. Long-term securities decreased. Cash increased because of the new loan. And we can say that Eastnine also received an overdraft facility of EUR 3 million during the quarter, which have not yet been used. Equity affected by the unrealized changes in value and variabilities to credit institute shall increase with the new loan. Over to Page 23 on capacity. What's new during the last quarter, this page. And as you know, the only capacity described theoretically in the company's current earnings as of the end of March. Figures are based on the property portfolio per the end of March and should not be mistaken for a prognosis. We don't make any assessment of the rental levels, vacancies, expenses and so on in the future. But as you can see, there is a substantial increase during the quarter due to lower vacancies and higher rent. NOI is increasing more than rental income and profit from property management even more. But this is natural since this line mainly have triple-net agreement and the central administration is unchanged. S7-3 is not included in the figures, and we will improve the figures even more after it has been taken on. Over to Page 24, share and dividends listed at Stockholm Nasdaq Mid Cap. As you know, we have slightly more than 22 million shares of which 1.2 million in treasury. The Board has proposed a dividend of SEK 2.70 to decide it later today at the AGM. Page 25. The number of shareholders decreased from 5,600 to 5,400, 72% are Swedish and around 55% of the foreign are investors from the U.S. What about the future?

Yes. Thank you. And of course, our focus remains on building up our portfolio. So of course, first is to complete the acquisition of S7-3 during the second quarter. We still continue looking for new opportunities and buying the portfolio within our core strategy. We're still looking for divesting remaining noncore holdings. Of course, divestment of Melon will be delayed with the corona, I have to say it right away. And it depended on how this pandemic will evolve and what implications it will have. We're proceeding with the planning stage and development of The Pine and Kimmel. And of course, by handling the situations from pandemic, now in the number of discussions, we see also a funnel of interesting opportunities where can find actually value-creative solutions, both for our tenants, but also for us. And we're working quite actively. And we see actually that we could improve efficiency of some of the portfolios, even products and profits. So yes.

Yes.

On that, we open for questions.

[Operator Instructions] And our first question is from Rikard Engberg from Erik Penser Bank.

Could you please elaborate a bit about the transaction markets in Baltics and if you see any other actors on the market right now?

Just before the crisis, we saw increase in competition from German players and even some other players like coming from South Korea and other places, which also indicated that there's been quite strong interest in the market. Of course, right now, there's a travel ban so if you go to the Baltics, you will be put in quarantine for 2 weeks. So I guess, to date, it's really very calm. And we'll see how it moves overall. But overall, just before the crisis, we saw an increased interest among internationals.

[Operator Instructions] And there seem to be no further questions. I will hand it right back to the speakers for any final comments.

So the interim report for January-June will be presented on the 17th of July. So thanks for listening in then.

Okay. Thank you very much, and until next time.

Yes.