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

Hello, and a very warm welcome to our quarterly presentation for Q1. My name is Kestutis Sasnauskas. I'm CEO of Eastnine. And with me, Britt-Marie Nyman, Deputy CEO and CFO. Before I start the presentation, I would like to note to you that please ask questions, put your questions during our presentation. There is a certain delay in the sending that you see. So whilst we finish, we can see the questions coming. So if we go into our first quarter results. This is truly a fantastic quarter for us. We make record profits, record turnover. And of course, it is due to growing portfolio. But not only that, we see basically strengthening on our real estate operations on basically every single aspect. Our revenues grew by 45% like-for-like, 12%, but what's most importantly actually is that profit from property management is growing 70% versus Q1 last year. And not only that, actually versus Q4 2024, we are growing 26%. So truly amazing quarter and very, very strong results. As I mentioned, larger portfolio, increase in occupancy and increase in rental levels. So we strengthened basically on all levels. We have a negative unrealized value changes, and this is mainly driven by increased yield requirement in our region. And we also continue our discussions on exit from Melon Fashion Group. If we look on the region as such, of course, the higher interest rates start biting into economies, and we see a certain slowdown, at least we expect a stronger slowdown during this year. However, I cannot say that we noticed this on our lease out, and we noticed in our particular segment. In ICT, in telecom and financial services, they're all performing very, very strongly. And we see it actually on demand for the properties. Inflation, that has been a big issue and of course, a major issue for us, not only -- or mainly due to increased interest rates, but we see that inflation starts cooling off, at least in the Baltic region and Poland somewhat. Baltics were -- had very, very high inflation over the last year, but definitely, there will be base effects that will bring that figure down. If we look on the unemployment, we see also the weakened economy increase -- we see a clear trend that probably unemployment will rise, but we're still in a very strong economic development overall, I mean, the Baltics are at the EU level. Poland is actually extremely strong when it comes to employment figures as such. What is actually very interesting to see is actually is the first spike is the last part of this graph, where you see the interest or rental rate development in the region. You see a very gradual increase. But actually, this quarter, we clearly see a spike in Vilnius. And this is actually effect of a relatively strong market but also inflation-driven cost base for construction that actually drives the prime rents up. So even in this kind of weakening market, we see a relatively strong performance. No clear trend actually when it comes to vacancies, but those statistics include basically the whole market. We see significantly lower vacancies in prime properties and significantly higher vacancies in B locations or C locations. So basically, the divergence right now between the prime and non-prime is even bigger. And demand remains very strong for prime. As companies transform, they may be focused on less space, but actually a higher quality space. And in that respect, our portfolio is very, very well positioned. Yields are rising, of course, driven by higher interest rates. We see during this quarter actually an increase of somewhere 25 bps to 30 bps overall of our portfolio. And of course -- but we are actually in a market which is significantly above the Nordic capitals still. So there is much less of downturn risk in this market. So if you look on our properties and tenants, and this is actually the best graph to describe a lot of our strategy, the yellow line that you see is actually the planned via Baltic route that is a railway route that is being planned, and it's actually -- there is already a physical road, but we see very strongly the potential of the eastern flank of the Baltic Sea actually developing and integrating to the Nordic region and converging with the Nordic region. And of course, the buildable infrastructure is extremely important for this development to happen, which will now happen in the near future. And of course, being in these hotspots of Riga, Vilnius, Poznan, maybe in the future in Warsaw, is actually on this, so to speak, the Baltic Silk Road or the Eastern Flank Silk Road. So this will definitely benefit us. And of course, with this growing trend of working in a distance, at the same time with a growing trend of near-shoring certain services and -- we see a huge potential in Poland and the Baltic region as such. Overall, we own 14 properties in this region. We've been very, very selective on choosing the properties. And today, we manage 183,000 square meters of prime office valued at around EUR 600 million. So if you look on our tenancy base and basically which sectors we are exposed to, we are very much in ICT, we are very much in finance and e-comm. So all the modern parts of the economy. We have a lot of different services, law and audit firms are in our premises and so on. So overall, these are the key sort of -- key sectors, but very much modern services that are provided. If you look on the contract length, most of the contracts are relatively long. The average WAULT is 4.2 years. Sustainability has always been a very, very big focus, and I'm extremely happy to actually show these figures that 94% of our floor space is environmentally certified. And not only environmentally certified, it's also in the highest brackets of both LEED and BREEM certification levels. 68% of our lease agreements are actually today green. And what is also very, very interesting to note is actually we started looking at our EU taxonomy compliance already last year. And now we can actually -- our assessment is that 91% of our properties and our revenue is actually generated from EU taxonomy or EU-aligned properties. So this is extremely -- we are extremely proud of this. We also scored very high in GRESB, 86 points during last year. We also are on the top in terms of gender and diversity equality by Allbright, #6 out of 355 listed companies, and we score very high on Great Place to Work within our company. So we have a very strong corporate culture, very strong motivated people working to develop this company further. And on this, I turn over to Britt-Marie.

Thank you, Kestutis. And we're going to dig a little bit deeper into the key figures from the property operations and start with the occupancy rate, which increased to 96.6%. This is up 6 percentage points compared to Q1 last year and 0.3% compared to Q4 last year, mainly due to a fantastic net letting during the year. The average rent level increased to slightly above EUR 60 per square meter a month. This is up 6% compared to Q1 and 5% compared to Q4. And of course, this is mainly due to the rent indexation in the beginning of this year. The surplus ratio increased to 93%. This is up 5 percentage points compared to Q1 last year and 1 percentage point compared to Q4. This is due to a higher NOI. And those of you who actually looked at our presentation last quarter, remember that -- might remember at least, that I said that this is a figure anyone could die for. And I guess I have to repeat it now since it's even higher. The value for the property portfolio decreased to EUR 590 million. This is up 25% compared to the first quarter last year, mainly due to the acquisition of Nowy Rynek in Poland, and it's down 3% versus Q4 last year, mainly due to unrealized value changes. I would like to start in the middle of the income statement with the profit from property management since this is an extremely high figure, up 70%. This is fantastic. And if we compare to the last quarter, it's up 26%. So it's not only that we have a bigger portfolio, but of course, a larger portfolio has affected most of the figures in the income statement and mainly the rental income, the property expenses and the interest expenses. There were also other factors that have influenced. The rental income also increased due to a higher occupancy and an increased rent level. The property expenses decreased due to higher occupancy since we are able to transfer the property costs to the tenants when the premises are leased out. The central administration expenses decreased, and this is due to lower personnel costs. The interest expenses, as you know, increased due to a higher average interest rates, and we have -- we had negative unrealized value changes for properties and the value of MFG was unchanged. Continue with the earning capacity and it's forward looking, as you know, how much money can we earn the coming 12 months based on the agreements by the end of March. And compared to the previous quarter, by the end of the previous quarter, this is not a prognosis. It's a theoretical assessment based on the current agreements and certain assumptions. Normally, we can't see that much of a change during a quarter if we don't take possession of any new properties. But still, this quarter, we see quite a substantial change in the earning capacity and this is due to the rent indexation during the first quarter. The rental value and the rental income increased by 6%. The vacancy value decrease is due to a higher occupancy. The personnel costs are lower. This means that the central administration expenses decreased. The interest expenses continue to increase. And we see on the bottom line that profit from property management increased in the earning capacity by as much as 8%. The value of the property portfolio decreased to EUR 590 million. This is mainly an effect of the negative unrealized value changes during the quarter close to EUR 17 million, corresponding to 2.8%. We also saw some investments in existing properties, which had a positive effect. If we look a little bit closer into the unrealized value chain, Kestutis mentioned it that we saw an increase in the weighted yield requirements, plus 0.3 percentage points to 5.9%, a little bit higher, but we also saw a positive effect from an increase in the average market rent up EUR 0.4 per square meter a month. Sorry, we can look at the chart as well. You see that the unrealized negative value changes during the quarter was EUR 17 million, and this is sort of eating up the value increase during the last year. So it's even bigger than the value increase during the past 12 months. Continuing with the financing structure and some key figures regarding the financials. We have seen both positive and negative effects during the quarter. The interest rate level increased up to 3.8% and the net LTV properties increased a little bit due to the lower property value, even though we had some amortizations during the quarter, of course. The ICR a little bit higher, and that's good. The average loan maturity and the average interest maturity, they are a little bit lower than previous quarter. And you can see to -- on the chart to the right that if you start with the dark blue bars, that the loan maturity, we have a loan ending in Q4 this year, and we have already ongoing discussions, and we have received offers from 3 different banks. If you look at the green blue bars, you see that 1/3 of our interest-bearing liability has floating interest rates and the others are spread out all over the years, the coming 5 years. So Kestutis, over to you again.

Thank you. So why we think Eastnine is a very compelling story. And it's, of course, about -- it's all about our growth and the potential in the region. You see actually the gradual buildup on this graph of our property portfolio. Of course, now we have a slight negative effect in terms of increasing yields on property values that decreased a little bit the bar, but the overall trend is, I think, very, very clear. If you look on our rental income and actually our -- the cash flow generation capacity, it's actually growing very, very nicely and very steadily. And in last year, we have a 21% increase. And if you look on our equity, of course, it's again affected by the decrease in property values, but it's also been a very nice buildup over the years. But the most important actually is our ability to generate cash from profit from property management. And here you see, again, a very nice growing curve and Q1 figure is based on the earnings capacity versus actuals of the previous year. So we still have a very nice continuous churning. Long-term equity per share has been growing again, and we continue paying a nice dividend and receive a certain growth. So with all of that combined, we believe and we see a very, very positive outlook in general in our markets. Of course, there are clouds in the sky, increased interest rates, there is a big transformation in different sectors overall. So it's not only sky -- in the sky, but we see -- or it's not only sun in the sky, but there are -- but we believe we are very well positioned to meet the future challenges as well. So on this, we turn over to questions.

Yes. We have already received some questions. Are you impacted by the 50% haircut to the so-called independent valuations imposed on Russian asset sales? Does the additional 10% tax also impact you? So that's the question, Kestutis.

I think there is no change in the rules from the sort of previously announced transaction how the values are done. So, so to speak, quarter-to-quarter, no. But of course, the values are lower compared to sort of -- to the potential market value that we can actually sell. So in terms of our valuation, no, just to be very clear.

We have some questions here. Any update regarding when you start your 3 future development projects? That's the first one.

Not yet. We continuously monitor the market. On the positive side, what we can see is actually more positive news coming out of lease market in Latvia. We see more positive developments there. So that is a positive. At the same time, I think we just -- right now, we're a little bit in a wait mode.

What is your view on M&A at the moment in order to potentially reach EUR 700 million in investment properties by the end of this year?

Of course, it depends very much on our ability to exit Melon. We didn't revise this goal yet, and that maybe indicates where we stand today. Should that transaction happen, I think that goal is very easily achievable.

Property value is down 2.8%. Any relevant property transactions during Q1 in your markets? Of course, there is a lack of transactions.

Yes. Today, there's very few transactions actually and very few relevant transactions that have actually occurred. We know that there are some transactions ongoing, and we will probably see new levels established. So right now, it's difficult to actually base on any transactions.

What is your view on rent potential in renegotiations, excluding or in addition to indexation?

In certain cases, we have very high potential because we have some contracts -- older contracts that actually expire that were at a significantly lower rental levels that were before. But overall, we don't see very much of the movement in the closest year. So unless something dramatic happens, we'll probably not see very -- I mean, today, we have a 97% occupancy rate. So it's very difficult to make any impact.

Any update on MFG and potential buyers, et cetera?

Not at the moment.

EUR 45 million in bond financing due next summer can almost be covered with available cash on hand -- at hand and your cash flow from property management, but not quite. In the case that MFG transaction have not materialized, what is your plan for refinancing of the bond next summer? Do you have available remaining borrowing capacity with your real state as collateral? Probably not. I guess we will have the same opportunities as every real estate companies, meaning that if MFG, which we -- still will happen. If it will not, we probably will need to sell something or make some sort of new issue. Could you please provide more clarity on the way forward if there is no deal for divesting MFG? Is writing off MFG an option in order to continue as a pure real estate company?

I think we will come back to that once we know a bit clear what will happen and so on. But right now, we firmly believe that this will happen.

Of the 2023 and '24 loan maturity, have so far been refinanced with new agreements and what's the average increase in interest costs? Okay. We don't expect any increase in the margins. But of course, the interest rates on the market is higher. So probably or most probably, there will be an increase. The newer loans will be more on a higher level than existing ones, but we will see how it ends.

It depends on the Euribor rate, basically.