Eastnine AB (publ) (EAST) Earnings Call Transcript

Hello, and a very warm welcome to our first half results presentation for 2023. 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 go through today's presentation. Before I start, I would like to remind you that there is a certain little delay in what we send and actually when you hear us. So please post all your questions during the presentation, so we can actually start answering them directly after we finish, without any delays. With this, I go into highlights of the quarter, and we had actually a very strong continuous growth, growing our net operating profit by 41%. Profit from property management continues, up 49% during the first half compared to the first half of last year. There is a weakening in result in terms of profit from property management versus Q1, but this is mainly explained by increased interest expenses. If you look on net operating income, we continue performing very strongly. And this is mainly driven by increased occupancy, increased average rents, et cetera. We have negative unrealized value changes, maybe not a surprise given the increasing yield requirement in the market. And there is a weakening ruble effect affecting value of MFG in our exit discussions. If you look overall, we have refinanced all the maturities going that were about to expire during this year in autumn. And actually, we are very proud to mention that we came out #1 in terms of Allbright Foundation's comparison of gender equality among listed Swedish companies. Around 361 companies participated in the survey this year. If we go to our region and look at basically economic development, of course, we clearly see a slowdown in economic activity. This is, of course, effect of increased interest rates all across the border. And there is a downturn in GDP growth as a result of that. We also see inflation coming down from very, very high levels, especially in our part of the universe, reaching topping basically at 20% in Lithuania last year and actually now coming down. But of course, it remains to be seen, and it's very much an effect of the interest policy by the central banks. We see somewhat weakened employment figures in our markets, but it is also a natural effect out of the slowdown in economic activity. Still Poland performing extremely well in terms of extremely low unemployment figures per se. If we look on the prime offices, we see, again, still very, very strong performance in prime office locations in terms of rents, wherein actually we see now an increase closer to actually EUR 20 per square meter for prime office rents. We see a positive trend in Poznan and basically stable situation in Latvia. In terms of vacancies, we have statistics that we show here for the whole market. But if you look on the premium segment, we see clearly that there is a very strong demand remaining, somewhat maybe slower in terms of lease-outs. But overall, vacancies remain actually quite low and rents still continue performing very strongly. At the same time, we see higher vacancies going into a bit of sort of B class locations, worse locations, and worse properties. So there's a very, very clear divergence right now that started already some time ago, but it continues very, very clearly. Yields are going up, and we see that effect in our valuations. I think an average yield is up around...

0.5.

0.5. So 50 bps actually compared to year-end last year. So if you look on our properties, we have 14 properties with -- sort of across this planned Rail Baltica line. Approximately 67% of our properties are actually in Vilnius, followed by Poznan in Poland and Riga. Overall, 183,000 square meters and valued at around EUR 580 million in total. Out of all of our space, actually, 96% is office and approximately 4% is other dominated by retail, that's a small portion. So very, very much focused on offices. And if you look on the sectors that are actually represented in those offices, it's ICT, finance, e-com, manufacturing maybe sounds a bit odd in the office, but it's not manufacturing per se, it's actually services provided to the manufacturers that have their shared service businesses, law and audit, cowork, public sector, and medical and health. So if you look on maturities, we have basically 22% maturing during this and next year. And the biggest maturity is coming actually much further into '27 and '29. In terms of sustainability work, 94% of our floor space is now environmentally certified, again, in the highest brackets of each LEED or BREEAM certification systems. Green lease agreements stand for approximately almost 70% of our total leases. We also have 91% of our turnover from properties as EU Taxonomy aligned today. These are internal measures based on different metrics that are available today. In GRESB, we scored 92 points. We're now, as I mentioned before, #1 in Allbright's ranking in terms of gender equality. And Great Place to Work index is at 95%. So very motivated team that is bringing this company forward. On the financial overview, over to you, Britt-Marie.

Thanks. My pleasure. Please remember to post questions right away, so we can answer them afterwards. The profit from property management during the period increased by 49% and 31% during the quarter. So why is it that the increase was higher during the period than during the quarter? It's because we acquired Nowy Rynek in May 2022, meaning that the profit was included for 2/3 of the quarter already last year and only for 1/3 during the period last year. The larger property portfolio affected mainly the rental income and the interest expenses. But besides that, we also saw that higher rent levels and lower costs for energy had a positive effect on the profit. And we saw that higher interest rate level had a negative effect on the profit. The rent level increased from slightly above EUR 15 per square meter a month during the period last year to above or around EUR 16 the same period this year. And the interest rate level increased from around 3% during the first 6 months last year to around 4% during the period this year. Finally, we saw negative unrealized value changes, both for the properties and MFG during the quarter and period. We had negative unrealized value changes of around EUR 25 million during the period. This corresponds to 4.1%. It was slightly higher during the first quarter than during the second quarter. The reason was, as Kestutis mentioned, mainly because of an increase in the weighted yield requirement, up 0.5% to above 6%, but we also saw a positive effect from an increase in the average market rent, up 0.4% to around 16%. If you look at unrealized value changes for the properties in the long run, we can see that the decrease during the first 6 months this year is about the same amount as the increase during the last 2 years. So quite a substantial decrease or quite a low increase, depends on how you see it. The earning capacity. As you know, the earning capacity is not a prognosis, it's a theoretical assessment based on current agreements, some assumptions, but also from this quarter, rolling 12-month figures for property expenses and central administration. It shows how much money we can earn during the coming 12 months, and we compare the situation by the end of the quarter with the end of the previous quarter. We saw that the rental value and the rental income are basically unchanged compared to the first quarter. The vacancy value increased a little bit due to lower occupancy, slightly lower occupancy. And we had a decrease in the property expenses mainly due to lower costs for energy, but also due to low costs for repair and maintenance. The central administration is lower due to the new calculation method. The interest expenses increased due to new loans, the refinancing, and higher interest rates, and the profit from property management decreased mainly due to the increased interest expenses. Some key figures on the financial side. The interest rate level increased up to 4% compared to 3.4% by the end of the last year. Net LTV properties increased. This is because of the new loans because of lower values for the properties, but also after some amortizations, of course. The equity/asset ratio decreased a little bit due to lower value for assets. The ICR slightly lower because of increased interest expenses. The average loan maturity is slightly longer after the refinancing and the average interest maturity slightly lower. If you look into the chart to the right, you can see the dark blue bars showing the loan maturity. And since we refinanced all loans maturing 2023, loans with Swedbank, until 2026, we only have 1% left and that's amortizations, no loans. You can see that we have maturities next year. That's including bank loans in February, the bond in July, and also some bank loans in December, and we have already had some discussions with the banks in February, and we have had positive reaction from their side and interest, so we would start directly after summer. If we look into the green bars, you can see that we have around 1/3 of the loans with floating interest rate, meaning the others are, of course, fixed. Shareholders. This table shows the shareholding by the end of May since the June figures are not official yet. The shareholding by the end of May, we had around 5,500 shareholders. Approximately 80% of the shares are owned by Swedish, and we had 3 major shareholders, which owned around 50%. In the end of June, we also got a notice about Bonnier Fastigheter Invest, one of the largest shareholders. They acquired another 3.5%, meaning that their new ownership will be above 17%. So Kestutis, over to you.

So thank you very much. So basically, if you look at our portfolio, you see that over time, we gradually continue growing our portfolio. Of course, there's now a negative implication of around 4% of decrease of value changes, so basically unrealized value changes affecting the portfolio value. Of that we, of course, have ambitions to grow. But if you look on our revenue stream that is generated from our business, we actually continue growing very, very strongly. And we see it growing basically by 15%. If you look up until Q2, equity somewhat affected, of course, by the unrealized value changes that is down, but the overall trend is very, very clear. Profit from property management, which is probably our major metrics, is growing very rapidly, up 22% on a sort of annualized rolling 12-month basis. And long-term equity per share has negative implications of the value changes, but we see a certain weakening of SEK that is actually compensated by underlying assets being in Europe. Dividend per share growing by 13%. So overall, it's -- a long-term growth story continues. And why we think Eastnine is a compelling investment opportunity is that we have actually today a very unique portfolio of prime properties in a very rapidly developing and growing region. We have very strong and stable underlying tenants. These properties also generate very strong cash flows at higher yield that are significantly higher yield levels today compared to the Western peers. And we have been leading from the very beginning, working very, very thoroughly with our sustainability work. We lead the work in terms of sustainability in our region. And we also hope that you can join that journey. And we also -- not only that we have an exciting region, we also have a very clear ambition to grow and continue growing. And of course, the planned exit of Melon, which is kind of the last thing that will boost our growth possibilities going forward. So on this, let's turn over to questions.

Yes. And please continue to send questions. We have a couple of questions already. The first one, is there an alternative plan for MFG, for the divestment, if it doesn't succeed? And what is it in that case?