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

Good morning, and welcome to this presentation of Eastnine's interim report for the first 9 months of 2020. The report will, as usual, be presented by Eastnine's CEO, Kestutis Sasnauskas; and me, Britt-Marie Nyman, CFO and Deputy CEO. We will be happy to answer questions in the end of that presentation, and the presentation will also be recorded and available on Eastnine's website. Over to the presentation and Eastnine's CEO, Kestutis.

Thank you very much. We are very pleased to report you a very strong third quarter. And if we look on the agenda page, we will talk about the Baltics. We view it as the new Nordics, and I would like to really draw your attention on this. We will tell you about the new business plans and our targets, highlights and the public portfolio. Of course, Britt-Marie will go through the financials, and I will round up why we think Eastnine is a very interesting start. So if we look to Baltics, the new Nordics, I think a lot of people actually missing out completely that Baltic region is quite significant. We have around 6 million people in the Baltic region that is bigger than Finland, that is bigger than Denmark and that is bigger than Norway. But if you look on the GDP, of course, and if you look on the transaction volumes and on the real estate volumes overall, this market is still lagging behind. But it's a historic matter. It's a historic matter of occupation of the Soviet Union for the 45 years, 46 years, which ended 20 -- or almost 30 years ago now. And we are catching up very, very rapidly. This market still offers you significantly higher direct yield. But also combining very low rental levels. The Baltic markets are actually growing faster, and there has been the convergence case already from the start of the independence back in 1991. But during the last 15 years, Baltics were growing 3x faster the pace of the Nordic countries. If you see in the middle graph, it's not that visible on this nominal kind of graph on the -- if you look on PPP adjusted, that gap would be closing it much faster. But if we look still as a nominal, it just gives you a perspective of how big gap there is still and how much potential there is. Again, Baltics are developing much faster and narrowing, and there is a huge convergence story going on towards the Nordic market. We also are in the market where stock of real estate of modern office is still very underdeveloped, but it's growing fast. You can see on the graph on the right-hand side that the stock is growing in all 3 capital cities. Riga is now lagging behind. But if we look on the overall stock per number of inhabitants, we're still 3.5x lower compared to the Nordic peers. So the still market is not saturated, and there is still a lot of potential for growth. And if we turn to next page, just to give you a picture of Vilnius. You can see the names of the highest -- or the biggest tenants in the market. But again, just to recap, Vilnius is 700,000 inhabitants. All Baltic capitals are actually among the top largest 10 cities in the Nordic region. And this -- it's a capital city of Lithuania, 2.8 million inhabitants in the country. 15 years ago, the Vilnius office market could actually fit in Stockholm's Hötorgsskraporna, so the ones who actually can relate to the Stockholm market. If you don't know this, it's around 100,000 square meters of office space centrally located. And the total transaction for Lithuania was around EUR 100 million a year. Today, that stock is actually at closing to EUR 1 million and transaction volume exceed EUR 500 million in the country. So we have seen an enormous shift, an enormous transformation and we are actually in the middle of it. So even in the middle of this picture, the close as biggest properties, you can see, are actually the complex S7 that belongs to us. Let's move to the next page, new business plan and targets. If we look at the business target as such, we have been growing very fast during the last couple of years, and we intend to continue that. We aim for more than doubling of our profit from property management by the end of 2023. We are also ambitious about to double our portfolio to reach EUR 700 million by end of 2023. We will continue on refinement on our portfolio. And of course, noncore holdings will be divested at a time when we feel it's commercially optimal. Our financial targets. Return on equity should be at least 10% over time. Share dividend shall correspond 50% of profit from property management. We have lowered our loan-to-value ratio, that should not exceed 60%. We were never close to formal target -- or formal limit of 65%, but we are lowering it and hence the risk. The equity asset ratio shall be at least 35%, interest coverage 2x. We also would like to speak more about sustainability. I will speak more about this during this call as well. But we are committed to have 0 carbon emissions from our property management by 2030. Entire property portfolio shall be sustainability certified, and we've reached quite far on that already. Renewable energy shall account for 100% of our property energy by 2030. And today, all electricity that we buy is already green. Green leases will be gradually introduced from the end of 2020. We are starting this process and increase over time. So we have very, very ambitious plans going forward. And now back to highlights to the quarter at properties and investments. If you look at Eastnine in brief today, our property value is around EUR 360 million. Our total assets EUR 460 million, rental income based on our earnings capacity is around EUR 21 million, LTV is 49%. We have 121,000 square meters of lettable area, top, modern, most sustainable area. And the average property value per square meter is there at EUR 2,950 per square meter. This is very, very low, given the quality of the stock and the upside percentage, it actually provides us an enormous upside potential. Market cap SEK 2.4 billion, and our surplus ratio in our operations is 90%, among the highest in the industry. If we look to highlights January-September, we, as I mentioned already, are very -- are growing very rapidly. Rental income increasing by 52%, comparable portfolio is growing at 6% despite the pandemic, despite all these challenges that we have in the market. And of course, growing portfolio gives us an enormous boost in profitability. So by growth of the portfolio, we actually -- we had grown our revenue by 52%, we managed to grow our profit by 83%. Unrealized value changes are negative. This is a history from -- back from the first quarter where we took a write-down in Melon. That write-down is now backed in rubles. So the value is increased in rubles, but we have a negative impact of the currency in Russia, which weakened during that period. So still remains somewhat negative. But overall, I will tell you more about business in Melon is also developing very, very nicely. Again, the average rent of newly signed leases still at EUR 15.9, renegotiated agreements at EUR 15.3 versus portfolio average of EUR 14.8. So it means that the market is actually very stable, and we see stable rental that was in the market overall. Overall, property portfolio increased by 76% since -- during the last 12 months. So there is more growth to come as we have just added one more property at the very last day of the quarter. If we move to next page, Vilnius. 42,000 square meters of most modern complex, S7-1, that is a home for Danske Bank and Telia. If you move to next page, our 3Bures properties, again, 42,000 square meters of very modern LEED Platinum certified properties. That house is quite a number of different tenants, international tenants. Among them, Swedbank, Visma, Unilever, Uber, Huawei. So very, very strong international mix. And the third page on Vilnius, Vertas complex, around 17,000 square meters, again, strong tenants like Invalda in Lithuania, an asset manager -- Lithuanian an asset manager; Citco; Delfi; European social security fund. The Vertas-1 was also LEED Platinum certified just recently and that was to -- is just newly acquired, and we will start certification of that building soon. Over to Riga properties. In Riga, we have approximately 20,000 square meters of prime properties in best locations. All of them are actually concentrated around one street. So again, we try to be a great efficient volume of properties around the same area. And this is the most central area of Riga. We also have fantastic projects in Riga. If you turn to next page. We have actually a project pipeline of around 54,000 square meters of new offices. With Pine being the first, and Pine will be the first office built in -- constructed in actually good as main material, and it will be the largest office ever built in wood of that site in the Nordic region overall. So if we look to next page, our tenants. We have a very strong tenant base, 120 tenants with approximately 170 lease agreements. Danske Bank is our key tenant today. And if you look on the list, you see all international or Nordic names. That brings a lot of stability and that actually brings much more of the Nordic exposure in reality, but at significantly higher yield at the lower property prices, which means lower risk in my view. The concentration is relatively high, but this is a result of the portfolio buildup. And over time, that whole situation will go down. If we move to next page. A short view of one of our holdings property fund, it stands for 5% of our total assets. This holding is unleveraged in our books. It's EUR 23 million and the fund is under divestment, and we plan to exit this fund before as soon as possible. Of course, the COVID situation might affect something, but, overall, the fund has performed very well. We also received the dividend from the fund in October in amount of EUR 640,000. Over to other investment. This is realty investment in that category is historic holding Melon Fashion Group, a Russian fashion company. Melon has actually developed amazingly well, which also resulted in a write back during this quarter. We have very, very strong bounce back after the closure of the stores. And overall, we see that during 9 months, sales are actually up and not down, which is amazing. Q3 sales are up 22%. Total e-commerce sales are growing by 120% and now stands at 35% of turnover. EBITDA somewhat lower during the 9 months. But if you look on Q3, EBITDA is up 11% and cash flow is up 22%. Comparable stores during 9 months delivered 11% growth. And if you look on Q3, comparable growth in the comparable stock is plus 16%. So really amazing bounce back despite the difficult pandemic situation. And of course, this resulted in a write-back of the value and the value today in ruble is higher than it was at the end of the year, but we still have a negative effect of weaker ruble as this asset is in Russia and is accounted in rubles. And before we move into financials, I would really like to draw your attention to sustainability and the work that we do there. We launched a green financing framework in September and that framework received Dark Green and Excellent from CICERO. Just for reference, I think in Sweden, there are only 2 real estate companies that have this type of framework is [indiscernible] and [indiscernible]. I think Melon has some, but it's not directly to real estate. So this is very, very high rating in terms of -- very high valuation of our attempt to work with sustainability in the Baltic region. It is definitely the highest of any of the Baltic companies. By the end of September, we had almost 80% of our property portfolio LEED Platinum or BREEAM Excellent certified, is also among the highest bracket within each of the categories. And already in October, we're actually 87% certified. So again, in these 2 highest brackets. Certification of Valdemara is now initiated, and it will be soon initiated for Vertas-2. We also were ranked as #3 in Allbright Foundation in terms of gender equality. This is a ranking among 2 -- more than 200 companies in Sweden listed on Stockholm Stock Exchange. We are reporting on the GRESB since 2019. 2019 was our first year and now we're waiting the first official results to be released on November 16. We expected that to be already done by November 1. Work in progress was regarding implementation of green leases, as I mentioned, we're doing this starting from Q4 in Vilnius, and we will continue working on that in all of our properties. We're also implementing a web-based supplier review system. So we are now going to be evaluating all of our suppliers in terms of sustainability. And last but not least, I'm very happy to announce that we are -- received 95% Trust Index according to Great Place to Work. And 100% of our employees consider Eastnine to be the Great Place to Work. So we are very, very pleased with those results. And over to financials. Britt-Marie?

Thank you, Kestutis. We are proud to release today's interim report. The real estate business developed positively and the result from all segments were strong during the last quarter. We'll start with some key figures in brief. The occupancy rate, the surplus ratio and the average rent level have increased compared with the turn of the year or the same period last year. LTV is slightly higher, but still low. On these properties are leveraged. So net LTV is lower. Return on equity real estate direct is lower than last year since unrealized changes in value are lower. Return on equity total is negative due to negative unrealized changes in value of MFG during the period, but was positive during the last 2 quarters. Profit from property management per share almost doubled. Earnings per share was negative during the period, but positive during the last 2 quarters. And long-term net asset value and equity per share almost back on the year-end levels. We continue with the income statement. A larger property holding and, thereby, we have rising figures, of course, S7-3 and Vertas-2 is included from the end of June and end of September, respectively. The rental income increased by 52% during the period and by 6% in that comparable portfolio. Higher occupancy rates and higher rental levels have affected rental income in comparable holdings. Profit from property management increases more than rental income and NOI, both during the quarter and period. This is a clear scalability effect. Fixed cost do not increase at the same rate as the income, very positive. Negative total value change during the period related to MFG and explained, as Kestutis said, by weaker ruble, but it was positive during the quarter. No dividends received from the real estate fund or MFG during the first 9 months. But however, as Kestutis just mentioned, that fund distributed EUR 640,000 in October and tax consists only of deferred tax. We continue with the statement of financial position. The property value has increased during the period due to the acquisition, but also due to some positive value changes during the second quarter. Value of long-term securities holding, meaning MFG and the fund has decreased, as we said, but increased during the last quarter. Cash decreased since we have acquired properties. Equity decreased during the first quarter, but has increased during the second and third quarter. Other assets and other liabilities have increased temporarily due to the VAT and the acquisition of Vertas will be eliminated during the fourth quarter. Continue with the current earning capacity. Remember, this is not a prognosis. It's a snapshot of the capacity in this state by the end of September under given circumstances. The capacity has increased during the quarter due to the acquisition of Vertas-2 in Vilnius, but the effect is partly offset by increased vacancy during the quarter since Eastnine can't transfer profit costs for vacant premises to tenants. Continue with financing. We have new financing of EUR 11 million during the quarter in relation to the acquisition of Vertas-2 in Vilnius. They have also prolonged the loan on Vertas-1 on EUR 16 million, around a little bit more than 2 years to 5 years. We have 3 banks. There are Nordic banks: SEB, Swedbank and OP and SEB is the biggest one. LTV has been stable, slightly below 50% and the interest rate level, likewise, stable around 2.3%. No loan maturity until September next year and 75% of the credit volume has fixed interest rate. We received signals from the bank that interest margins are back on the same level as before the pandemic for preferred borrowers at Eastnine. The share & shareholding. The share price has decreased during the first 9 months and the share is trading with a discount. Slightly more than 70% of the shareholders are Swedish and U.S. dominates among the foreign shareholders. NAV is almost back on the same level of year-end 2019. Kestutis, can you continue?

Thank you very much. So if we go to almost Page Why Eastnine, I would like just to summarize why we think we are such an interesting -- we see such an interesting opportunity. We have actually created a fantastic and unique portfolio of best properties in the Baltic capitals in Vilnius and gradually building up in Riga. These are all modern A class properties with the highest environmental standards and in prime locations in the Baltic capital cities. We also have -- those properties also generate extremely strong cash flow. We have also higher property yields compared to the Nordics, significantly higher property yields, as I told already in the beginning of my presentation. But it also combined with relatively low rental levels and actually Nordic financing costs. So the yield gap is probably among the highest in the industry today. We also consider ourselves now being leaders in sustainability. We have done quite a lot in this area and pursuing a very, very ambitious ESG agenda. And joining -- you are welcome to join us on this. We're really pushing the boundaries today in the Baltics when it comes to all ESG issues and driving the agenda. And we see an enormous growth journey ahead of us. We plan to double our operations by 2023. But there's also an underlying growth and convergence story that is going on -- that has been going on, and that will continue in the Baltic countries towards the Nordics. So Baltics is actually the new Nordics. And I think it's -- you have to not miss out on that. So on this, I end my presentation, and we open for questions.

[Operator Instructions] First question we have is from Mr. Rikard Engberg from Erik Penser Bank.

And great reports. So my first question is, can you please comment a bit about the development in the net lettings during the quarter?

Yes. Net netting is basically close to 0, it's around EUR 1,000. So it's relatively small. We had some changes. But as I mentioned, the changes that are coming, they are coming at higher levels. And there is basically no COVID related kind of moves. So everything that is -- those moves are being planned before.

Good. And my next question is, can you please comment a bit about the development on the transaction market in the Baltics? Who are you facing right now? Is it domestic players or are they foreign actors?

I would say that we had, of course, when the first wave hit and -- but since then, the transaction market is actually starting -- has actually started picking up. We face both local competition and still some foreign competition, mostly from the continent from Europe. So overall, I think probably volumes will not pick up to the last year's levels during this year, but we will see a number of very exciting transactions still by the end of the year.

Okay. And if we look at your financial targets, can you please elaborate with how you aim to reach on these transactions or project development or more of a mix?

Mainly transactions, so I mean, we are a cash flow generation company. And we plan to -- we have an ambitious acquisition target going forward. But we also look at projects developments, but the developments will be more like add-ons. In Riga, we have a unique situation where today's pipeline is bigger than the current portfolio. But I think gradually, that will sort of decrease in volume or kind of in weight. So we're very much cash flow focused.

Okay. And my last question is about -- can you elaborate a bit about the capital structure when you reach targets? Will it be close to the financial target when it comes to LTV?