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

Hello, and a very warm welcome to Eastnine's Second Quarter Results Presentation. My name is Kestutis Sasnauskas. And with me Adela Colakovic; and our new CFO, we will together to guide you through this quarterly result and the latest news in the company. Before I start, I kind of ask you to post questions during our presentation and when the presentation is over, we will respond to your questions. So if we move to the first -- our second quarter, we delivered stable results. Our rental income is up slightly. We are coming from very high occupancy levels. So it's very difficult to increase our earnings significantly from 96.5% occupancy, which also increased during the quarter. Our net operating income, again, stable, somewhat lower over the first half year. But it's also the same for the profit and property management -- it's a result of us actually building up organization to take our next step. And this is probably the main explanatory reason why the net results are somewhat lower. Otherwise, the business is doing extremely well. Our surplus ratio back again at 92.5%. We have achieved now 8x debt-to-EBITDA ratio and 45% loan-to-value, which actually enables us to do the acquisitions that we just announced this morning. And of course, during the quarter, we divested 2 properties in Latvia. And today, we announced the acquisition of the bridge. And I will go into that acquisition in more detail further on in our presentation. So just briefly, we have approximately 25,000 square meters of leasable area around EUR 1 billion in total assets. The new transaction will add additional EUR 300 million approximately in asset value and another 55,000 square meters. So we will be around 300,000 square meters of prime, prime office in our markets. You can see the gradual buildup of our portfolio. We actually went through first acquisition back in 2014. And now in this quarter, we have of course, first effect of first divestment that we had in Riga. But actually, if you look on the profit from property management per share it actually continues performing very strongly. Of course, there's a slight dip during this quarter, again, buildup of the organization, sale of Riga assets. But when we look into the new acquisition, you will see the enormous positive effect coming from it in the future. So what are the long-term trends -- and it's all about the very strong economic development in our markets. Baltic states, Lithuania, and of course, Poland, we're the leaders in economic growth over the last 25 years, 10 years, 5 years and continue actually performing. When you put the graph like this, it doesn't look that actually there is some very big difference between the growth. But if you look on the accumulated basis, this additional 1% to 2% of extra growth gives an enormous actually scale buildup. And if you look on the index, actually, you can compare over the last 10 years, you see how much faster and how much more wealth is being created in that region. And that's what we believe is extremely compelling when you look into the future and when you invest in real estate. We also see that the regions where we are, are among the fastest-growing regions and expect it to be the fastest-growing region. So even the submarkets where we are in, in Warsaw and Poznan in Poland, in Vilnius and in Riga. Those are actually developing quite nicely and expected to develop quite nicely. Even if you measure on the top 20 European cities over the last 10 years, 15 years or even 5 years. Actually, the among the top 20 European cities, 10 of them, half of them are Polish, and we are very happy that all of the cities where we are in, they are among those top growing cities. So again, the very strong underlying macro picture in our universe. And this is, of course, our favorite graph. It's the average rent in each market and average yield that you get when you buy properties. And this enormous divergence of being in the market with lower rents and higher yields in our view, is somewhat mispriced. And of course, over time, this gap should close. We don't know when -- how long it will pay, but it actually -- this movement should definitely be there, looking at the economic development, again, GDP per capita, et cetera, et cetera, et cetera, how fast this region is actually catching up. And what does it mean? If you look on practical terms, you can see that this very low yielding combined with very high rent results in a very high capital values of properties. So Stockholm peaks at EUR 22 approximately, whilst Warsaw is at 5.9%. Our latest acquisition announced today came at 5.4%, so slightly below the top level, even though this is a top, top prime asset and brand new one. What is also important to note that in our now main market, which Warsaw actually just will become after the completion of this transaction, we see a record low offering of new supply of office. This decreased post pandemic. There's been a lot of concerns about the offices. We see actually the opposite. We see that the prime office demand is very, very strong, whilst secondary locations are struggling. And this is a global trend where we see basically everywhere. It doesn't need to be entirely our markets. But what is actually a result of this concern and also very, very high competition from demand from residential pricing or residential properties is that land prices went up, developers see much bigger opportunity to develop resi, and we see the drop in supply for office. And this is a very important factor, actually driving the rental growth in Warsaw. We are seeing record low vacancies, especially in the region where we are. and we see very strong demand for premises. So if you look on our very fast, but I would like you to show where we are in each of the city, but also the quality of the buildings that we own. This is top prime, very modern offices with very modern technology in them, all of them highly environmentally certified. Here, we see headquarters of Vinted Lithuanian start-up for secondary cloth -- is a platform for trading secondary clothes in Europe and globally. Here, we see our properties in Poznan, top properties in the very heart of Poznan actually located in the best place with amazing tenants like Allegro, McKinsey, ROCKWOOL, et cetera, et cetera. So we have topped up locations even in Poznan. And of course, our Warsaw unit, which is the largest property, single property in our portfolio, it's our jewel. And it's also still 100% occupied in very high demand. We see actually a lot of people willing to come to our office, even though we -- today, we don't have anything to offer. [indiscernible] As a contracted rent looking forward is around EUR 63 million. The average value of the portfolio is EUR 36,000 per square meter. Current yield requirements around 6.7% and average property age of 8.5%, which is actually 1 of the youngest portfolios I would say, if you look in general. Warsaw and stands for 33%, Poland today at 51% in total now 55% in total billions at 42%. And we actually post sell in Riga, we only have 1 property, 1 smaller property in the heart of Riga and on development land plot. So it stands only for 3% of our portfolio. What is also very important to look back is actually how consistent and strong the underlying businesses. This is our occupancy on the -- now I would say, I see it on my left-hand side, it's probably on your right-hand side. is the occupancy rate, which is at 94% on average. And today, we have 96.5% as of the last quarter. And you see that it's always moving like a little bit like a wave, and it will be moving like a wave because at this kind of lease-out ratio, it's almost impossible to offer anything else. Today, we have vacancy in Riga in 1 property, which is now being totally refurbished. And we now -- we start offering parts of it to the market. At the same time, in Vilnius, we only have around 2,500 square meters of free office in the portfolio of 100 -- close to 130,000 square meters. So it's basically almost nothing to offer. And of course, occupancy remains very high and demand is very strong. On the other hand, if you look on the surplus ratio, we are higher than our average over the last, again, now almost 6 years. at over 92%. It's 92.5% at this quarter. And of course, we see quite strong -- again, strong development and after -- some other movements will come during -- expected to come during Q3, we will even expect somewhat higher occupancy in our portfolio. If we look on the environmental part, -- we have 100% sustainable and certified portfolio. We only own bream outstanding and lead platinum buildings. So even while the Maratha was gold is now actually recertified to platinum. 97% of our turnover is considered to be a taxonomy aligned. We have 5 stars in res and green financing stands for 88% of our total financing. And of course, this figure will grow as we refinance our debt. We also aim for a net 0 target by 2040, which is now SBT aligned, and we follow this science-based target initiative. So over to you Adela.

Thank you. So let's go over the first half year financials. And as Kestutis mentioned earlier, the results are stable and rental income are in line with the period both for the quarter and first half year. But there are some underlying changes and those relate to a couple of things. One is the divestment of the 2 properties in Riga, which led to an income loss in Q2 of approximately EUR 300,000. Lower average occupancy rate in the beginning of the period had a negative effect on the year-to-date income, but both of these effects were mitigated by rent indexations both in the beginning of the year and some in Q2. Looking at net operating income, it's basically flat in Q2. Compared to last year and for the period, it's a small negative effect, mainly related to the cold weather in the beginning of the year. Overall, there are small movements in the operating income. But as we mentioned before, and as Kestutis highlighted before, we're growing our company and especially the team in Poland, which above cost during a limited period of time, building our own organization and moving from external administration to internal, which we do believe will be both more cost efficient and also add more value to our tenants in the future. And also the organization that we have built and are still building in Poland will also be able to take on the new property, The Bridge. Net financials have decreased by 2.2% and both for quarter and the period. And it's related to lower average interest rate. The average interest rate is, however, the same as a year ago, approximately 4.4%. But last year, we came from a higher interest rate level in the beginning of the year, which we don't have this year. Profit from property management decreased by 9% and 5%, respectively, for the quarter end period. The main reason for that is higher cost due to additional employees. And let's go ahead and look a bit at our earnings capacity, where we can see that rental income has decreased due to the earlier mentioned divestments in Riga while lower occupancy ratio and indexation had an opposite effect. Property expenses have decreased due to the divestment; however, the unusual cold winter in the beginning of the year and higher personnel costs related to new employees in Poland has offset that effect. However, the property cost will be lower going forward since we have closed our office in Riga and will replace the internal management there with external, which will be a bit more cost efficient since we don't have the same property stock in Riga. Central administration increases due to higher personnel costs, interest income has increased as a result of increased cash. Interest expenses have decreased due to the divestment of the properties in Riga. So overall, the profit from property management is a bit lower now in Q2 compared to Q1 based on the explanations that were given. But going forward from -- expected from Q3, we see it will be a bit higher again. Looking at the property value development. From beginning of the year, it has changed minus 4%. During the period, we have invested EUR 4.3 million in tenant improvements in several buildings. There has also been a small positive effect in the unrealized changes in the value due to increased market rent, but that was mitigated by a slight yield decrease during the period. The biggest change in the portfolio is, of course, the 2 divestments that decreased the value by EUR 39 million, leading us to a property value of EUR 926 million by the end of Q2. And like-for-like, the development is flat. The yield in the valuations is 6.7%, up from 6.6% in Q1 and the average growth for the past years in the property portfolio has been 19%, and the bridge will grow the portfolio by approximately 30%. Let's look a bit closer at the East financing situation, and we can start at the top left corner that shows loan-to-value, average interest rate and interest coverage ratio. The loan-to-value decreased this quarter to EUR 45 million due to the divestments in Riga, which both increased the liquidity and decreased the debt since we amortized the debt related to those properties, leading us to the average interest rate, which has this quarter because we realized some interest rate swaps that were connected to those loaned to the divestment -- divested properties and we're at some good levels. We do, however, see potential for the interest rate going down since we do have a few refinancings to do, and we can see that they're coming in at a competitive level. Looking at the debt maturity, the next refinancings of approximately EUR 80 million is due in February and May next year, and we have already began the discussions with our banks. -- the interest maturity is visible in the same chart and 80% of the interest is fixed with interest rate swaps. Overall, the financing is very stable and solid. LTV and average interest has been trending down over the past 4 years. And as I said, overall, all prepared for future growth. Eastnine has a long-term investment, looking at the Eastnine stock. The total return in the Eastnine share for the past 12 months was a bit negative, 7%. But during the same period, the Omex Stockholm Real Estate Index declined by minus 16%. And over the past recent 5-year period, Eastnine's total return averaged 11% per year compared with a decline of 7% for the real estate index. And let's go over to the acquisition of the day.

Wonderful. Thank you. I hope this is more sharing to discuss then the stock prices over the last half year on the market. So The Bridge. We actually -- we're working on this transaction for quite a while. It's an amazing asset. It adds to our portfolio in Warsaw, both in terms of market share, but also in volume and in quality. This is a top asset with all the certifications you can mention, very high tech, again, as all of our properties in Poland. The property was completed 2025. It's a 40-story building with a lettable area of 55,300 square meters let to 92%, but we expect that occupancy level to actually increase before we complete the transaction. Today, the building, which used to be Santander Polska and they acquired the Santander Bank, which was Polish largest private bank. And Visa, which is a Visa Technology Center, the Visa Card Technology Center. Rental value is expected to be at around EUR 18.2 million, an average lease term in excess of 10 years. We acquired this property for EUR 300 million valuation. Preliminary purchase prices like that. The reason for that is actually that the building is not fully moved in and commenced, but it's -- the leases are signed, and we have a price reduction related to certain periods of vacancy during the time as well as some rent frees and some fit-out contributions that will be necessary to complete the building. But when it's completed, and it's fully operational. We expect the profit from property management to reach EUR 0.37, which is 20% up from today's level. and this buildup will happen gradually, depending on the schedules for tenants moving in and of course, starting occupying the building and starting paying the rent. So as of -- and this 20% increase is related to the last quarter reported for this quarter report. And now I just want to share with you some nice pictures just to get you a little bit of a feeling of the high quality of this building. You can see there some elements from the lobby, which is truly amazing and very inspiring. It's a true wow feeling when you enter the building and also architecturally, it's a very, very attractive building. Again, something that we always work with that we want to create feelings when people look at our buildings. And this acquisition fits our values very, very well. And last but not the least, I would like to show you where it's situated on the map. And actually in the background with the top with a light of text on the top, you see Warta. It's actually Worth unit. -- and this building is just around approximately 500 meters from our current building. And in between, we have also Spire, which is 1 of the landmarks of Warsaw and headquarters of PCU. So -- we are extremely well located, extremely high quality, and it will be another jewel in our portfolio. So with this, I open up for questions. Thank you.

Yes. And we have received a couple of those. What market position will Eastnine have in Warsaw's office market following the acquisition of the bridge with the AAA class office segment?

So if we look in the total market position once we acquired Warsaw Unit was about 1%. And with addition of The Bridge, we would be around 2% in the total Warsaw market. But if we look in the prime segment, we would be at around 5% in this very central in Warsaw CBD. So in Vilnius, we have approximately 10% market share of the whole market. In Boston, we have 10% market share. And we also would like to continue building, of course, strong position in the CBD area going forward as well.

We have a couple of more. Even though the market sentiment for offices has been weaker in recent years, Eastnine's portfolio has consistently performed strongly. What is the secret? And what is the feedback you received from your top tenants?

We have -- you saw on the figures that actually our occupancy is consistently very high. It is tough, to be honest, to keep tenants because of a different reason than -- and the reason is that most of those companies are actually growing. So we have managed to do some expansions for Rockwell, for instance, in 100% leased out building, but that implies that we need to create some vacancy to be able to play the chest game of moving around. And we see remaining very strong demand. So in general, what we see is that century located, high-quality buildings are in very high demand. We see that rents are actually growing in this and companies are paying maybe for less square meters, but they are paying for much higher quality of square meters. And we truly believe that this trend will continue, which will continue even with the EI expansion, because the most profitable companies, the winners of the ARAs will want to have the best product. That's why we also continue moving up the quality latter when we buy new properties. So actually, everything that we buy has to be of absolutely top quality.

Let's mix it up with the Riga question. Congratulations on the deal in Warsaw. My question concerns the sale of Riga asset and the decision to close the rig office. What was the decision -- decisive factor behind that decision, market fundamentals, asset-specific limitations under performance of local management or better expected risk adjustment returns in Warsaw?

It's a combination of us willing to relocate capital towards Warsaw, but we also cannot hide and say that actually, the Riga market was weaker over the years. We have been talking about it. It's actually the biggest vacancy we had in our portfolio has always been in Riga. And -- it's very difficult to say because vacancy overall in Riga was quite high and the market was relatively weak. So by making a decision not to develop because we didn't feel very confident about the market fundamentals, we also came to a conclusion that it's probably better to allocate the capital towards Warsaw, where we see higher rental potential simply -- and we see that this is a much more dynamic market, much more liquid market. And -- so this is -- and closing of the Riga office is purely related that we have actually too little volume of the business. It is cheaper to run it externally today. It's only 1 building. It's not -- we cannot have a full team working only on 1 building.

Are you surprised that not more Swedish companies invest in the Polish office market?