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

Hello, and a very warm welcome to our Q3 report. My name is Kestutis Sasnauskas. And together with me, Britt-Marie Nyman, Deputy CEO and CFO. And today, we will go through our results for these 9 months, and we have some really great news. First of all, this was actually a truly historic quarter for us. We managed to exit our last noncore holding, which was also very, very substantial and happened to be in Russia. So this combination was very challenging for many shareholders and ourselves as a management. But now we've done it and now we are in a completely different situation with very strong cash position and actually fantastic opportunity to continue on our growth journey. We also obtained bondholders' approval to buy back the bond. And actually, the bond was repurchased after the quarter. which, again, strengthens our financial situation. Today, we only have bank financing remaining in our portfolio. And we have, together with the cash from the proceeds of the sale, very, very strong financial position at probably one of the market's lowest net loan to value ratios. If we go into our operations, they also continue to thrive and perform very, very strongly. We are growing rental income, up 25% for the first 9 months. Net operating income continues growing faster than our top line. And the most important, profit from property management, all-time high, again 35% plus. So it's a very, very strong and very solid results from our operations. And this actually, again, gives comfort to or confirmation of what we have been talking about, we grow and we have significant competitive gains actually out of bigger portfolio and higher growth. Of course, the market is as it is, we have a negative value changes in now properties. Everybody has it, and the yields are moving up. So there's nothing to do about it. And we have a realized value change in Melon Fashion, mainly driven because of the sort of weakening ruble during the sales process. And as you all know, the first attempt did fail, so we had to continue with another buyer. If we look on the quarter alone, performance, again, very solid. This is more like-for-like growth in the portfolio. Rental income, up 10%. But again, you see that our underlying performance and the higher -- the bigger portfolio brings significant scale effects. So net operating income growing at 12% and profit from property management, again, at all-time high, up 14%. So if we look on our markets and now we are pure real estate play with a very strong cash position. And actually, we are investing and growing in the fastest-growing part of the European Union, namely Baltics and Poland. And if you look on Poland, there is no other country in Europe that actually could match the historic growth of Poland. But also looking even today at the country's development and even boosted by the very good outcome in the election for -- at least for the foreign investment and potential release of the EU funds, Poland will continue thriving forward. So we are actually in a very, very exciting market that has been growing historically and continue growing faster. And of course, owning real estate in this economy is very attractive. What we also -- mainly probably most of you forgot is actually the rental levels have been stable over the years, and they now start growing. They started growing very slowly. But there is a huge potential actually there, because if you compare with Stockholm market and other capital cities, the rents have been going up very, very sharply, and this hasn't happened in our region. Which means that capital values, combined with -- are lower and is combined with higher yield rates actually makes investment in this region very, very compelling. We have a higher vacancy rate. And part of the market research doesn't cover sort of certain segments. But if you look overall, the vacancy rates are higher. But it has been also historically high, and the market has been growing all the time and actually keeping up with a gradual growth in rents. And especially now, there is a significant push. What is also very, very important to -- not to forget is actually there's a huge tendency of flight to quality. We see and -- more and more that actually in all capital cities in best locations offices are demanded, the rents are going up, and we see the opposite development into worst locations and so on. So our portfolio being located in those absolutely best locations is actually thriving today, and we -- you can see in our figures that our -- basically, all multiples are improving very significantly. Prime yields are going up. Of course, it's a result of a high interest rate environment. We don't know where sort of -- where it will end, but we feel that now we see more stabilization, at least we -- the right expectations inside that we are reaching the top in terms of central bank rates. And of course, that probably will allow for some kind of stabilization, increase in transaction volumes and probably we'll see better pricing going forward. But nevertheless, we are actually in the environment where still financing costs are significantly below the yield levels that can be achieved through new investments. So if you look on our portfolio overall, and there is now a very clear pattern that you can see, is actually we are situated across this rail Baltic line and actually a new big infrastructure project that will reconnect the Baltics to the total of Western Europe, and actually it becomes a bigger integrated part of Europe. So we believe that this infrastructure project actually will drive more investment, more near-shoring and more integration within this whole region. We are, today, the largest property owner in office segment in Vilnius, we are quite significant in Riga and we are a significant player already in Poznan. Going forward, we'll probably look in Warsaw as well. So if you look along this line, this is where our core investments should be expected. We also have 14 properties, but they are relatively big properties. So it's relatively few, but they are relatively big, with a total lettable area of around 180,000 square meters. It's all very modern. It's all sustainability certified. 94% of floor space is actually sustainability certified at the highest brackets. We have -- the lowest lead gold, but that's only one property, the rest is lead platinum or BREEAM Excellent certified. And we have 91% of our turnover from our operations in properties derived. 91% is actually already EU taxonomy aligned. So if we look on our tenants. And being a pure office play, having this focus, we actually can work and be a better landlord, a better partner for our tenants. Work with them, helping them develop their businesses. Make sure that they thrive, they can attract people and sustain that. From the risk perspective, we are exposed to the most exciting part of the economy. ICT sector, finance, e-comm are our key sectors that inhabit our properties. Other sectors include some manufacturing, some -- but also services, office jobs that are sort of related to certain manufacturing, and other sectors like law firms and so on. So it's a very, very modern, very stable part of the economy that is bound to grow in the future. If you look on maturities, we have approximately 30% of our rental stock maturing this year and next year, mainly next year. But we have -- we are in a very good dialogue with our tenants, and we expect significant prolongations going forward. We run a 93% surplus ratio in our portfolio. This is probably, in office segment, one of the highest. Rent level, still relatively low compared to all other capital cities around or significant cities around on the western bank of the sort of Baltic Sea. Wault is 3.9 years, and green leases constitute 68% of our total lease portfolio. So -- no, sorry. That's a bit fast.

Very good, Kestutis. Thank you, Kestutis. It's a pleasure to present Eastnine's result for the third quarter and the period. Profit from property management increased by 14% during the quarter and 35% during the period. Of course, this is due to a lot of different things. We saw an increase in the NOI and this was due to a larger property portfolio, but also a higher average rent level and occupancy. We saw lower energy prices affecting the property expenses in a positive direction. The central administration was slightly lower, partially due to less employees. But the most important change during the quarter was, of course, the interest income from the sale of MFG. We were able to put it in bank accounts on a fairly high level. We saw increased interest market rate during the period and the quarter, meaning higher interest level. But we also had a larger debt during the period. We saw negative unrealized value changes for both properties and derivatives during the quarter and period, and we saw negative realized value changes for MFG during the quarter and period. The unrealized value changes amounted to around EUR 35 million during the period, corresponding to 5.7%. The main reasons were an increase in the weighted yield requirements, up 0.6 percentage points, up to 6.2% by the end of the period. But we also saw a positive effect from an increase in the average market rent, up EUR 0.8 per square meter a month to EUR 16.3. If you look at the chart to the right, you can see that the negative unrealized value changes this year is even higher than positive effect from the last 2 years measured in euros. The figures in the earning capacity has improved quite a lot during the quarter after the sale of MFG. We compare the situation by the end of September with the situation by the end of June. And as you know, this is not a prognosis, it's a forward-looking figures for the coming 12 months based on current agreements, both lease agreements and financial agreements, but also some theoretical assessments. We had slightly lower occupancy by the end of September compared to the end of June, meaning that the vacancy values increased. The most important impact is, of course, from the interest income after the sale of MFG, close to EUR 6 million. We saw an increase in the interest expenses, meaning that we had higher costs during the coming 12 months compared to the end of June. We also saw an effect from the redemption of the bond. It was already affecting Q3. We had some costs when we issued the bond and they were spread out all over the maturity. But now they are included in the Q3 figures, meaning that other financial income and expenses will be lower going forward. And on the bottom line, profit from property management in the earning capacity, up 33%, a huge difference during the quarter. If we look at what is happening after the redemption of the bond, we see that both interest income and interest expenses will decrease since we use cash to pay back the interest -- to pay back the bond. We have a very strong financial position after the sale of MFG. During the quarter, the interest rate level increased due to increase in the interest market rates. But after the redemption of bond, we will see a lower -- we will see an effect from that, meaning around 0.6%. If we look at the cash position, it improved to EUR 173 million by the end of September. But you remember that we redeemed the bond, meaning that we used EUR 46 million in the beginning of October. If you look at the ICR, it improved during the quarter due to the interest income, up to EUR 2.3 billion. Net LTV properties, huge improvement, only 28% at the end of the quarter. Net debt in comparison to EBITDA, 5.6, also due to the large cash position and the maturities. Both loan maturity and interest maturity decreased during the quarter. And we have some loans maturing next year, both in February and December, mainly in February. There were no substantial changes during the third quarter, except the increase in the share price, of course, due to the sale of MFG. We had around 5,000 shareholders. Slightly higher, a couple of hundreds higher than a couple of months ago. 85% of the shareholders are Swedish. It used to be 70% to 75%, 1 or 2 years ago. Three major shareholders own close to 54%. All of them have increased their shareholding this year, especially Bonnier Fastigheter Invest. The long-term NAV per share was SEK 211 by the end of the quarter. So over to you, Kestutis.

So thank you very much, Britt-Marie. And before I continue my concluding remarks, I just want to remind you that please post your questions now because there is a certain delay in what you see and what we speak, so that there is no delay further. But I see that we received a lot of questions already. So don't forget to post your questions, not to be missed out. So basically, our journey continues. And our rental income is significantly up during this 9 months. This is an annualized figure. Property portfolio decreasing somewhat. But if you look, it's of course an effect of the revaluations in the portfolio, mainly driven by the yield. Equity affected as well negatively by this. But if -- the most important parameter for us is actually profit from property management and actually our cash flow generation capacity. And you can see that actually a very clear growth trend and that is even faster than our top line growth. And this is something that we've been talking about for now many quarters, that our growth journey brings with it very, very significant scale effects. And we become more profitable, the bigger portfolio we add -- we have. So of course, we don't need to be the biggest company in the world, but actually growing still -- growth still remains one of our key areas of focus and actually improving our profitability going forward. Long-term equity affected. NAV is down, again, mainly driven by the revaluations and certain value changes in connection with the sale of Melon. We expect it to be much more stable now once we don't have ruble exposure, a significant ruble exposure in our books. And dividend per share growing steadily as well. And you can -- looking on our expected profitability, the trend should probably continue. So an investment in Eastnine, actually, what it offers you in basically 3 key points is that we have a unique portfolio. There is a very strong flight to quality trend, and we -- our strategy is benefiting out of it. We lead the way in the Baltic in our region in terms of sustainability. And we continue working with that, and we will continue leading and we continue improving our properties from all aspects, including energy intensity, customer service and so on. And we have a fantastic growth opportunity ahead, having a very strong cash position, but also we are in the markets that converge towards Western Europe and they are bound to grow faster for many, many years ahead. So on this, we finish our presentation. And now over to questions.

Yes, and we have a lot of questions. The first one, at the price the share is trading, the properties in your portfolio is valued at a considerable discount compared to the value in your books. It is hardly possible to buy corresponding properties in the direct market at these prices. Is the Board considering share buybacks as an alternative for capital allocation given your solid financial position?

We're looking at different alternatives how to balance this interest. But of course, for us, today, we see actually opportunities to buy properties very close to the levels that implied yield today is on the market. And actually, it is very, very important for us at this stage to continue growing, and to continue growing as business to earn more money and actually increase share value that way, that would allow actually us to become a bigger company, not to be disregarded by other shareholders. If you look on our shareholder list, we still lack major investors in real estate from the financial point of view, and the biggest challenge for them is actually is liquidity of the stock. So we are looking very much on how we can actually improve the liquidity of the stock. And probably, there is a bit of a conflict of reducing number of shares rather than sort of...

Yes. Next question. Please speak about your acquisition plans in the next 1 to 2 quarters. Will you rush to allocate? How do you see prime yields? Where do you see most of acquisition opportunities?

If we look on the general pipeline, we have never had such a big pipeline ever in our life of potential projects to buy. The yields are moving up in the market, you can see on our books, unfortunately. But fortunately, for us, also that actually, today, we are in the buying position, we have significant cash and we want to deploy it in a smart way where we can bring significant returns. And actually, we see yields in certain markets closer to 7%, like markets -- regional markets like Poland. But we also see increase in yields or at least expectations are shifting even on the sell side in the Baltic market. So we rush, but we want to make sure that we do smart investments today. And as I mentioned again, I will not comment on different transactions that we pursue, but actually, we are very, very busy looking at very, very many cases today.

You mentioned that the prime office yields are expanding, 6.5% for Baltic and close to 7% for Poznan. How do you view your own valuation yield of 6 2%?

Yes. I think we -- the values are assessed by external evaluators. We use the model, so it's very difficult to comment actually on our own valuation. We have a very high potential for growth in our portfolio overall continuously. We have very nice portfolio with increasing interest rates. And I think what happens when you have a yield expansion, you should also do not forget that actually, we are now in a growing rental rate for our portfolio, and this actually dampens the capital losses, potential capital losses of the increase in rental levels. So from that perspective, we feel very confident about our portfolio. Given the fact that we've been very, very selective in acquiring our portfolio, we are -- we are in no need to sell any of our properties, and we are in the buying mode rather than sort of refinancing or restructuring of our portfolio. So today, we are not very concerned about the valuations.

Yes. And it's important to remember that we externally evaluate 25% each quarter. So we use the same yield as actually the valuators do. What will you do close -- what will you do to close the gap between your NAV and the share price, especially when a big amount of your NAV is cash?

Well, I mean we continue working on -- sorry what...

What will you do to close the gap between your NAV and the share price, especially when a big amount of your NAV is cash?

Well, I've been -- we will gradually deploy it. I think having cash is not a bad thing in this market. I think people start forgetting, they say that cash is trash, I think cash is king today in today's market. And we will gradually deploy that cash in new acquisitions. And as I mentioned again, we need to grow as a business. This is very, very important. And it also not comes with the top line growth, as we showed now on a number of quarters, actually, we get so much more in profitability out of this growth, that it will drive the value up. But I think in today's market, we see so much volatility in the share prices of real estate and it is really difficult to comment on -- it could move very quickly in different directions and -- yes.

And we got a question regarding the portfolio yield for the coming year. And you can find all these figures in the earning capacity. What is your outlook for interest rates? Yes, if we're talking to the market interest rates, we have been looking into prognosis and forecasts as well as anyone else, and they are obviously changing all the time. So let's see what ECB is about to do and the Fed next week. So that will be interesting. But if we're talking about our interest rates, we will have a positive impact, of course, from the redemption of the bond. But we also see that we have some loans to renegotiate and we have some swaps running out, so that will have a negative effect. It seems like the transaction activity in your markets is very low. Are there likely to be any especially eager or forced sellers in your markets?

We will see. I think there's a lot of refinancings maturing. I think people are rethinking there may be strategies and so on. So definitely, we expect more transactions coming up. Even today, we could do -- we could deploy very easily all of our money at significantly higher yields than we have seen before. So we are trying to do the best out of the money we have, and it's also very, very important to continue, again, doing profitable investments with -- aligned with our strategy and be very, very selective in our portfolio.

Are there any players out there that could be combined, merged into Eastnine, making use of your financial strength and more quickly deliver scale effects?

Yes, probably. Yes.

Might be.