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

Hello, and very warm welcome to our quarterly update and results presentation for January-June 2024. My name is Kestutis Sasnauskas. I'm CEO of Eastnine. And with me, I have Britt-Marie Nyman, Deputy CEO and CFO, and together, we will guide you through the results of this first half. Before I start, I would like to ask you to post your questions during our presentation, and once we finish our presentation, we will immediately start answering questions. So let's go into the results for the first half and our highlights. We are very proud to present strong growth in our profit from property management. It's up 21% despite relatively flat top line growth of our revenue. And if you look on the quarter, our growth is actually up 26%. So very strong profit growth during this first half. It was supported, of course, by very strong cash position that we have in the company, but also very strong net letting results. Net letting for the first half is up EUR 260,000 for the first half. But actually, it's twice as high during the second quarter and most of the activity actually is taking place then because we had a negative figure for the first quarter. So if you look of -- basically, the second quarter was actually very, very active in terms of leasing out and this activity continues. Occupancy up. Surplus ratio increased, of course, helped by the new acquisition. We also completed the share split that was announced during the AGM. And it has actually had a very positive implication at least for this very short period of time in terms of liquidity. And last but not least, we actually made acquisition, our second acquisition in Poland and second acquisition in Poznan. So what is it? It's a fantastic property developed by Skanska, 28,800 square meters. We bought it almost for close to EUR 80 million. It's completed in 2023, LEED Platinum certified, and a number of other very high-rated certifications as well. Key tenants are McKinsey, Thompson Technology Wunderman Thompson and Bank Pekao. It's 100% occupied. And we will -- and come at a very nice attractive yield. So we are very happy to take this very strong position in Poznan. Today, we are a leading player in office properties in the market. And actually, those properties are the most centrally located properties today in the city between the railway station, between the old town. So it's a very, very nice micro location and very strong micro location. And we are very happy with this acquisition. So if we look on our markets, we are growing company in a very, very fast growing part of European Union. Our region is growing twice the speed of the more developed parts of Europe and -- or historically more developed parts of Europe, and we are actually building our position in this fast growing environment. It also -- if you look on the historic growth, I mean, Poland, which is the largest of our markets today, still have been growing fastest among bigger countries in Europe for the last 25 years and it continues to do though and it's actually expected to continue to do that for long time to go. And this is actually this process of convergence that has taken place and continues so far and will continue in the future. We also are in a structurally unsaturated market when it comes to office demand. Office -- number of employees in offices actually is growing but is still low compared to Western peers and at least larger cities in Germany or if you look in Sweden, the saturation is still relatively low and if you look Vilnius is kind of 19% but Poznan is at 13% of office employees working in the offices. So this is something that will -- is bound to grow, and we expect actually to benefit out of this growth. We also are in a very exciting market in terms of yields. Yields are significantly higher. So it's our properties and if you look on our portfolio, it's very, very high-yielding portfolio. It's combined with relatively low rental levels but financing costs are basically the same. We are financing European banks, we are financing at European conditions which means that our cash ROE is 200 to 300 bps above our peers. And this is actually what makes our investment case so attractive. So if you look at our operations, today, our property portfolio is around EUR 650 million, 15 properties, we surpassed 200,000 square meters, now 212,000 square meters. Occupancy rate, close to 94% and average age of the properties is 9.6 years. So very modern, very young portfolio. We are in 3 cities today. And if you look on our core market, Vilnius, standing for approximately 60% of total portfolio, followed by Poznan now around 30% and Riga at around 11%. All of this will be connected with a Rail Baltica line in the future, which is a big infrastructure project, is being constructed and is in the process, and we expect this to take place by 2030-'35, but it will actually have significant implications in terms of economic activity and integration for the region. Here are just pictures of some of our properties. You're probably recognized, but there is one more picture on the right-hand side, which is Nowy Rynek E. So key ratios in terms of rental. Net rent in the quarter, EUR 525,000. So very, very positive. And if you look on the historic figures, it's been actually one of the strongest in Europe over the past year. And WAULT increasing to 4.2. Occupancy is around this kind of 95% streak but is now just below and going up. And rent level is at EUR 199 per square meter and year. We calculate it differently in square meters per month, but this is just for making our Nordic audience easier to calculate this. So if you look on our tenants, they are exposed to most expansive, exciting sectors, ICT, finance and e-com mainly, and our top tenant list includes one new name, which is McKinsey today. So we're very happy with. It came with acquisition of Poznan property. And as you can see that our diversification among our tenants is also increasing as we add more properties, and that was bound to continue in the future. In terms of sustainability, I'm very happy to tell you that actually 100% of our property portfolio today is environmentally certified and also in the highest brackets of both LEED or -- and BREEAM certification standards. Green financing stands for 73% of our total financing. We only use bank debt. Green leases, 59%, a slight drop from previous quarter, but it depends only because of the additional acquisition. And of course, we're bound to move these figures up to 100%, the target is 100% on all three of these parameters. Our ambition is to continue our leading role in sustainability and actually making not only our properties certified environmentally friendly but also push the whole market into that direction which we believe we managed to do quite successfully. We plan to have climate neutral operations by 2030. And we target again to go into 5 -- get the 5-star in GRESB this year. So we'll see it in autumn actually how it will evolve. Now over to finances. Marie?

Thank you. Please continue to post questions. In the income statement, we compare the income and profit for the first six months and the last quarter with the same period last year. Profit from property management increased by more than 20%, mainly due to interest income as a result of the sale of MFG in August. Beside that, we also saw an increase in the property expenses, and this is due to a higher average vacancy during the first 6 months. Central administration also increased and this was due to one-off items during the first quarter. Interest expenses increased after the refinancing during the first quarter and also after the acquisition during the second quarter. The redemption of the bond in -- during the autumn last year limited the increase. We saw a negative unrealized value changes during the second quarter, and this is related to our own acquisition in Poznan. It was done on a very high yield and also then affected our existing property in Poznan. The earning capacity is a theoretical assessment based on current agreements, certain assumptions and, in some cases, also 12-month figures. It's 12-month figures, we are talking about a full year. We compare the situation at the last quarter end with the previous quarter end and, of course, during the second quarter this year, the acquisition of Nowy Rynek E has affected these figures in a very positive way. We can see that rental income increases, property expenses increases and so does the NOI. The interest income has decreased after the acquisition. And that's, of course, since we used cash for the acquisition and also due to short-term effect from the VAT related to Nowy Rynek E. This amount will be repaid during the autumn and will then affect the interest income in a positive way. It's around EUR 500,000 in interest income. The interest expenses has increased due to the acquisition and profit from property management increased by 7%. And it's really, really fantastic to see that it's possible to make new acquires in Poland and on other markets still despite high interest rates. Since August last year, Eastnine is a pure real estate company. Total assets, investment properties and interest-bearing liabilities increased after Nowy Rynek E but cash decreased, as I mentioned before. The VAT was around EUR 18 million. Cash decreased during the quarter, will increase by EUR 18 million during the autumn. ICR is slightly lower. LTV and net debt in relation to EBITDA increased, but also a little bit affected by this VAT, should be a little bit lower if you exclude that. And it's important to remember that net debt in relation to EBITDA is also affected by the fact that we already have the debt related to Nowy Rynek E, but we haven't seen that much of the income since we took possession of the property in the beginning of June. Loan maturities on the same level as previous quarter. Interest maturity is slightly higher after the new loans. We swapped the total amount, so it's 100% swapped. Interest rate level on the same level as previous quarter. Kestutis, please continue.

Okay. So this summarizes a little bit of our results. And of course, we think that Eastnine is an exciting opportunity. We are ahead of a very exciting journey, growing -- continue growing into fast-growing economies. We also focus very much on creating sustainable returns both taking relatively weighted risks, as we believe, and at the same time, focusing very much on transforming the properties or improving the property ESG performance overall. We also -- we're building very stable long-term relationships with our tenants, with our counterparties and act as a very long player in the market, which is a unique feature today in our markets. And this is also something that comes to our advantage over a longer time. And actually, if you look on our buildup of the portfolio as such, so if you look on our growth, if we move ahead. So yes, our growth potential, actually, you see the buildup of our portfolio. Over time, of course, this little drop in '23 was as a result of certain write-downs and adjustment of the yield curve. But overall, we continue growing, and we have some additional possibility to grow whilst deploying our capital. But I will not want to finish with this. I would like to finish with profit from property management and actually development of it, which with the unchanged number of shares, basically, you see a very, very strong growth in our profitability and our cash flow generation of our business. So this is what is so exciting about Eastnine and coming into the future. And now we are ready for questions.

Okay. The first question, what was the yield in Poznan acquiring Nowy Rynek E?

It was 7.5% net. So it was very -- it's basically if you look into -- it's the same 7.5% as net operating income.

You financed the Poznan acquisition at 50% LTV. Is that LTV level for future acquisitions as well? Could be different, could be lower, could be higher, but we have said that they want to be around 50% for the whole group. What was the marginal cost of debt from Berlin Hyp? If you do not feel comfortable sharing exact levels, perhaps you could relate it to your overall average interest lower or higher. I would say it's about the same level, a little bit higher, perhaps. You say that the focus is on Warsaw, but do you see any further acquisitions in Poznan in the near term? Or have you filled your appetite in that market now?

In every market which we enter, we actually want to grow and create a strong position. Today, we believe we have approximately 8% to 10% market share in Poznan and probably in the sort of premium segment higher than that. We would like to stay with this, maybe increase somewhat going forward. So as soon as there will be more opportunities, we will look into them definitely. But we also would like to go into Warsaw. So today actually, we focus mostly on Warsaw, and we know about all the potential upcoming opportunities in Poznan as well.

Can you comment on the transaction market in Lithuania?

Transaction market in Lithuania, it's been quite dry during the first half. We know that was one big of a transaction that took place at year-end that was completed during this year. And that was a big transaction of EUR 200 million approximately, but in a different segment from where we are within offices still. So -- but with a bit different focus. So in general, we believe that market is relatively dry. We see that there are -- there is an increase in sellers' interest to sell properties. And of course, we are in a very beneficial position of being able to actually acquire in these markets. So we are analyzing a lot of opportunities and actually we've never been so busy as we are now in terms of working on our pipeline.

Now you have 59% of property values in Lithuania, 11% in Latvia and 30% in Poland. Looking 12 to 24 months into the future, what is that mix going to look like?

It's very difficult to say, but I would definitely see that Polish share will increase as we really are very excited about the opportunities in Poland. And the Baltic, we will see a little bit. It depends a little bit on the -- what we succeed to do and so on.

Yes. And of course, we want to do good deals. That's the most important thing.

Yes. I think it's important to deploy money with high responsibility and, of course, so from -- and into opportunities that are long term interesting for us. So we see these openings now and definitely, we will try to allocate cash as good as possible.