Baltic Horizon: Baltic Horizon Fund Consolidated Unaudited Interim Results for Q4 2021

Baltic Horizon FundManagement Board of Northern Horizon Capital AS (the Management Company) has approved the unaudited consolidated interim financial statements of Baltic Horizon Fund (the Fund) for the twelve months of 2021.

G4S office building disposal

On 8 November 2021, Baltic Horizon Fund signed a real right agreement with HITS Investments OÜ to sell the land plot located at Paldiski mnt 80, Tallinn together with the G4S Headquarters office building. The sales price was EUR 15.35 million (excluding value added tax) matching approximately the latest valuation. The IRR for the holding period of more than 5 years was around 11.2%, while equity multiple was 1.7. The decision to dispose of the asset was made to avoid high re-leasing risk and potential capital expenditure of bringing the asset to a high energy efficiency standard.  The proceeds of the transaction will be used for new and more energy efficient investments for the Fund’s portfolio in the Baltics.

Baltic Horizon Fund Meraki SPV bonds

On 15 November 2021, bonds issued by BH Meraki UAB were admitted to the Nasdaq Baltic First North Market by Nasdaq Vilnius. The size of the bond issue is EUR 4 million. The bonds have a nominal value of EUR 100 and an annual interest rate of 5% with interest paid semi-annually.

Six buildings received BREEAM certification

Baltic Horizon aimed to certify all currently operational office assets by the end of 2021 using the BREEAM In-Use environmental assessment method. During 2021, the Fund’s North Star, Domus Pro Office, Upmalas Biroji BC, LNK Centre and Vainodes I properties were awarded the BREEAM In-Use “Very Good” and Lincona was awarded the BREEAM In-Use “Good” environmental certification. All office properties are now BREEAM certified.

Impact of COVID-19 pandemic

At the beginning of 2020, a new coronavirus (COVID-19) started spreading all over the world, which has had a strong impact on businesses and economies, including in the Baltics. The virus outbreak has caused significant shifts in the Fund’s operating environment, which has had a negative overall impact on the Fund’s performance in 2020 and 2021.

At the end of 2020, the Baltic countries entered the second round of lockdowns and heavy government restrictions for residents and businesses to fight the spread of the COVID-19 virus. Shopping centres were forced to close for a limited period except for essential retail shops (groceries, pharmacies). In summer 2021, all three Baltics countries eased COVID-19 restrictions as new virus cases dropped and the situation stabilised. However, COVID-19 cases in all three countries started to spike in late 2021 and early 2022 once the omicron variant became the dominant COVID variant. As a result of spiking cases, Latvian government decided to reimpose the lockdown for a period from 21 October to 15 November. Other Baltic countries also took restrictive actions, but without full lockdowns. While the omicron variant led to a drastically increased number of COVID-19 cases, hospitalization and death rates did not follow the same drastic trend due to the lower disease severity of the omicron variant. At the date of this report, Lithuania has already started lifting restrictions related to COVID-19 with other countries expected to follow.

BHF’s operating results of Q4 2021 continued to be affected by the pandemic through the support measures for weakened retail tenants, especially during the latest Latvian lockdown in November. It is expected that broad diversification of the portfolio should allow the Fund to limit the COVID-19 impacts and maintain healthy consolidated operational performance throughout the next year as the central retail sector is set to recover. The Fund’s operational performance has largely recovered every time heavy restrictions were lifted in all Baltic countries.

Distributions to unitholders for Q3 and Q4 2021 Fund results

On 28 October 2021, the Fund declared a cash distribution of EUR 2,034 thousand (EUR 0.017 per unit) to the Fund unitholders for Q3 2021 results. This represents a 1.63% return on the weighted average Q3 2021 net asset value to its unitholders.

On 3 February 2022, the Fund declared a cash distribution of EUR 2,273 thousand (EUR 0.019 per unit) to the Fund unitholders for Q4 2021 results. This represents a 1.79% return on the weighted average Q4 2021 net asset value to its unitholders.
With reduced payouts over 2020 and 2021 in the light of prevailing market uncertainty, the Fund has opted to retain EUR 6.1 million of distributable cash flow. During 2021, the Fund declared for distribution EUR 6.9 million out of total generated distributable cash flow of EUR 8.7 million.

Dividend capacity calculation

EUR ’000 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
(+) Net rental income 4,745 4,173 4,357 4,676 3,798
(-) Fund administrative expenses (713) (745) (756) (735) (633)
(-) External interest expenses (1,362) (1,346) (1,311) (1,407) (1,408)
(-) CAPEX expenditure1 (131) (79) (92) (38) (222)
(+) Extraordinary income related to investment properties2 440
(+) Added back listing related expenses 85
(+) Added back acquisition related expenses 26 31 5 9 32
Generated net cash flow (GNCF) 2,650 2,034 2,203 2,505  2,007
 
GNCF per weighted unit (EUR) 0.022 0.017 0.018 0.021 0.017
12-months rolling GNCF yield(%) 8.6% 7.4% 7.0% 7.0% 6.8%
 
Dividends declared for the period 1,316  1,316  1,316 2,034  2,273
Dividends declared per unit(EUR) 0.011  0.011  0.011 0.017  0.019
12-months rolling dividend yield(%) 5.8% 5.4% 5.0% 4.5% 5.4%
  1. The table provides actual capital expenditures for the quarter. Future dividend distributions to unitholders are aimed to be based on the annual budgeted capital expenditure plans equalised for each quarter. This will reduce the quarterly volatility of cash distributions to unitholders.
  2. Latvian government COVID-19 grant related to decrease of net rental income in Galerija Centrs due to discounts to tenants. The grant is used to off-set property operating expenses.
  3. 12-month rolling GNCF and dividend yields are based on the closing market price of the unit as at the end of the quarter (Q4 2021: closing market price of the unit as of 31 December 2021).
  4. Based on the number of units entitled to dividends.

Net profit and net rental incom

In 2021, the Group earned net rental income of EUR 17.0 million, a decrease of 14.7% compared to the net rental income of EUR 19.9 million for 2020. Net rental income decreased due to increased vacancies across portfolio, relief measures granted to tenants during the pandemic and disposal of G4S Headquarters in November 2021.

Portfolio properties in the office segment contributed 63.0% (2020: 55.8%) of net rental income in 2021 followed by the retail segment with 32.4% (2020: 40.1%) and the leisure segment with 4.6% (2020: 4.1%).  Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 20.5% of total portfolio net rental income in 2021. Total net rental income attributable to neighbourhood shopping centres was 11.9% in 2021.

During 2021, investment properties in Lithuania and Latvia contributed 38.1% (2020: 36.4%) and 36.0% (2020: 38.3%) of net rental income, respectively, while investment properties in Estonia contributed 25.9% (2020: 25.3%).

In 2021, the Group recorded a net profit of EUR 1.4 million as compared to a net loss of EUR 13.5 million in 2020. Even with hard COVID-19 restrictions in 2021, the Fund managed to maintain the positive operational performance of its investment properties. Year-end valuations showed recovery as the Fund brought down overall yearly valuation losses by recognizing a valuation gain of EUR 7.1 million in Q4 2021. Excluding the valuation impact on the net result, net profit for 2021 would have amounted to EUR 8.6 million (2020: EUR 11.7 million). Earnings per unit for 2021 were positive at EUR 0.01 (2020: negative at EUR 0.12). Earnings per unit excluding valuation losses on investment properties amounted to EUR 0.07 (2020: EUR 0.10).

Gross Asset Value (GAV)

At the end of December 2021, the Fund’s GAV was EUR 346.3 million (31 December 2020: EUR 355.6 million), which was a drop of 2.6% over the period. The decrease is mainly related to the negative property revaluation of EUR 7.2 million and the disposal of G4S Headquarters. The Group made capital investments (EUR 7.0 million) in the Meraki office building development project during 2021. The Fund aims to carry on with the construction of the Meraki office building throughout 2022/2023. An additional EUR 2.1 million was invested in other (re)development projects.

Net Asset Value (NAV)

At the end of December 2021, the Fund’s NAV slightly decreased to EUR 132.6 million (31 December 2020: EUR 136.3 million) due to the results of overall investment property revaluation for the financial year. As at 31 December 2021, IFRS NAV per unit stood at EUR 1.1082 (31 December 2020: EUR 1.1395), while EPRA net tangible assets and EPRA net reinstatement value were EUR 1.1884 per unit (31 December 2020: EUR 1.2219). EPRA net disposal value was EUR 1.1086 per unit (31 December 2020: EUR 1.1435).

Investment properties

The Baltic Horizon Fund portfolio consists of 14 cash flow generating investment properties in the Baltic capitals and an investment property under construction on the Meraki land plot. At the end of Q4 2021, the fair value of the Fund’s portfolio was EUR 327.4 million (31 December 2020: EUR 340.0 million) and incorporated a total net leasable area of 144,081 sq. m. During Q4 2021, the Group sold G4S Headquarters for EUR 15.4 million, invested EUR 0.2 million in the existing property portfolio, EUR 1.5 million in the reconstruction projects and an additional EUR 3.0 million in the Meraki development project.

Interest bearing loans and bond

During 2021, the Fund completed a private placement of 18 months secured bonds of EUR 4.0 million. The bonds bear a fixed-rate coupon of 5.0% payable semi-annually. The net proceeds from the issuance of the bonds were used for financing the construction of the Meraki office building. Outstanding bank loans also decreased slightly due to regular bank loan amortisation. Annual loan amortisation accounts for 0.2% of total debt outstanding. After the bond subscription and loan repayments interest-bearing loans and bonds decreased to EUR 198.6 million (31 December 2020: EUR 205.6 million).

Cash flow

Cash inflow from core operating activities for 2021 amounted to EUR 14.7 million (2020: cash inflow of EUR 16.1 million). Cash inflow from investing activities was EUR 6.9 million (2020: cash outflow of EUR 4.3 million) due to disposal of G4S Headquarters building in Q4 2021. Net proceeds from the sale were partially used to finance subsequent capital expenditure on existing portfolio properties and investments in the Meraki, Postimaja and CC Plaza complex and Europa development projects. Cash outflow from financing activities was EUR 18.7 million (2020: cash outflow of EUR 8.3 million). During 2021, the Fund made a cash distribution of EUR 6.0 million, paid regular interest on debt and fully repaid G4S Headquarters bank loan. In December 2021, the Fund also repaid early EUR 3.0 million of Europa SC bank loan. At the end of 2021, the Fund’s consolidated cash and cash equivalents amounted to EUR 16.1 million (31 December 2020: EUR 13.3 million) which demonstrates sufficient liquidity and financial flexibility. Available cash will be used to finance new acquisitions and continue with development projects.

Key earnings figures

EUR ‘000         Q4 2021 Q4 2020 Change (%)
Net rental income         3,798 4,745 (20.0%)
Administrative expenses (633) (713) (11.2%)
Other operating income 440 18 2,344.4%
Losses on disposal of investment properties (71)
Valuation gains (losses) on investment properties 7,103 (9,488) 174.9%
Operating profit (loss)         10,637 (5,438) 295.6%
Net financing costs (1,484) (1,406) 5.5%
Profit (loss) before tax         9,153 (6,844) 233.7%
Income tax (861) 166 (618.7%)
Net profit (loss) for the period       8,292 (6,678)                                                 224.2%
Weighted average number of units outstanding (units) 119,635,429 118,124,947 1.3%
Earnings per unit (EUR)   0.07 (0.06) 216.7%

Key financial position figures

EUR ‘000       31.12.2021 31.12.2020 Change (%)
Investment properties in use 315,959 334,518 (5.5%)
Investment property under construction 11,400 5,474 108.3%
Gross asset value (GAV)     346,338 355,602 (2.6%)
Interest-bearing loans and bonds 198,571 205,604 (3.4%)
Total liabilities       213,754 219,281 (2.5%)
IFRS Net asset value (IFRS NAV)     132,584 136,321 (2.7%)
EPRA Net Reinstatement Value (EPRA NRV)     142,176 146,180 (2.7%)
Number of units outstanding (units) 119,635,429 119,635,429
IFRS Net asset value (IFRS NAV) per unit (EUR) 1.1082 1.1395 (2.7%)
EPRA Net Reinstatement Value (EPRA NRV) per unit (EUR) 1.1884 1.2219 (2.7%)
Loan-to-Value ratio (%) 60.7% 60.5%
Average effective interest rate (%) 2.7% 2.6%

Property performance

During Q4 2021, the average actual occupancy of the portfolio was 92.4% (Q3 2021: 93.1%). The occupancy rate as of 31 December 2021 was 92.1% (30 September 2021: 92.9%). Occupancy rates in the retail segment dipped, mostly due to the Europa SC reconstruction as part of the premises were temporarily vacated to be reconstructed in upcoming months. Occupancy rates in the office segment remained strong, but slightly decreased resulting from a temporary vacancy in Lincona Office. Domus PRO Office building occupancy increased compared with the previous quarter, and the building was once again fully occupied starting from November as a new tenant moved to the vacant premises. The average direct property yield during Q4 2021 was 4.5% (Q3 2021: 5.4%). The net initial yield for the whole portfolio for Q4 2021 was 4.8% (Q3 2021: 5.8%). Property yields decreased compared to Q3 2021 due to vacancies and relief measures for mostly leisure/retail tenants with restricted activities. The average rental rate for the whole portfolio for Q4 2021 was EUR 11.1 per sq. m (Q3 2021: EUR 12.2 per sq. m).

Overview of the Fund’s investment properties as of 31 December 2021

Property name Sector Fair value1
(EUR ‘000)
NLA
(sq. m.)
Direct property yield
 Q4 20212
Net initial yield
Q4 20213
Occupancy rate
Vilnius, Lithuania            
Duetto I Office 17,345 8,587 8.3% 7.4% 100.0%
Duetto II Office 19,683 8,674 7.5% 7.1% 100.0%
Europa SC Retail 36,737 16,856 2.0% 2.1% 78.8%
Domus Pro Retail Park Retail 16,255 11,226 7.6% 7.4% 99.4%
Domus Pro Office Office 7,820 4,831 8.5% 7.1% 100.0%
North Star Office 19,869 10,550 5.5% 6.0% 89.7%
Meraki Development 11,400
Total Vilnius   129,109 60,724 5.5% 5.4% 92.2%
Riga, Latvia        
Upmalas Biroji BC Office 21,944 10,459 7.2% 8.0% 100.0%
Vainodes I Office 18,150 8,052 6.5% 7.7% 100.0%
LNK Centre Office 16,840 7,452 6.2% 6.5% 100.0%
Sky SC Retail 5,096 3,249 7.6% 7.7% 97.6%
Galerija Centrs Retail 65,544 20,022 0.8% 0.9% 79.2%
Total Riga   127,574 49,234 3.6% 4.1% 91.4%
Tallinn, Estonia        
Postimaja & CC Plaza complex Retail 29,772 9,145 3.0% 3.5% 93.9%
Postimaja & CC Plaza complex Leisure 14,442 8,664 5.8% 4.8% 100.0%
Lincona Office 16,990 10,870 6.8% 6.6% 89.1%
Pirita SC Retail 9,472 5,444 4.8% 6.2% 89.2%
Total Tallinn   70,676 34,123 4.6% 4.9% 93.2%
Total portfolio   327,359 144,081 4.5% 4.8% 92.1%
  1. Based on the latest valuation as at 31 December 2021 and recognised right-of-use assets.
  2. Direct property yield (DPY) is calculated by dividing annualized NOI by the acquisition value and subsequent capital expenditure of the property.
  3. The net initial yield (NIY) is calculated by dividing annualized NOI by the market value of the property.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

EUR ‘000 01.10.2021- 31.12.2021 01.10.2020- 31.12.2020 01.01.2021-
31.12.2021
01.01.2020-
31.12.2020
Rental income 4,651 5,148 19,495 21,697
Service charge income 1,204 1,241 4,901 4,990
Cost of rental activities (2,057) (1,644) (7,392) (6,753)
Net rental income 3,798 4,745 17,004 19,934
Administrative expenses (633) (713) (2,869) (2,918)
Other operating income 440 18 444 204
Losses on disposal of investment properties (71) (71)
Valuation gains (losses) on investment properties 7,103 (9,488) (7,161) (25,245)
Operating profit (loss) 10,637 (5,438) 7,347 (8,025)
Financial income 1 3
Financial expenses (1,484) (1,406) (5,706) (5,524)
Net financing costs (1,484) (1,406) (5,705) (5,521)
Profit (loss) before tax 9,153 (6,844) 1,642 (13,546)
Income tax charge (861) 166 (229) 5
Profit (loss) for the period 8,292 (6,678) 1,413 (13,541)
         
Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods
Net gain (loss) on cash flow hedges 279 119 898 (108)
Income tax relating to net (loss) gain on cash flow hedges (32) (10) (66) 3
Other comprehensive income (expense), net of tax, that is or may be reclassified to profit or loss in subsequent periods 247 109 832 (105)
Total comprehensive income (expense) for the period, net of tax 8,539 (6,569) 2,245 (13,646)
         
Basic and diluted earnings per unit (EUR) 0.07 (0.06) 0.01 (0.12)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

EUR ‘000 31.12.2021 31.12.2020
Non-current assets    
Investment properties 315,959 334,518
Investment property under construction 11,400 5,474
Intangible assets 9
Property, plant and equipment 2 2
Other non-current assets 23 22
Total non-current assets 327,393 340,016
Current assets
Trade and other receivables 2,708 1,901
Prepayments 137 352
Cash and cash equivalents 16,100 13,333
Total current assets 18,945 15,586
Total assets 346,338 355,602
Equity    
Paid in capital 145,200 145,200
Cash flow hedge reserve (829) (1,661)
Retained earnings (11,787) (7,218)
Total equity 132,584 136,321
Non-current liabilities
Interest-bearing loans and borrowings 157,471 195,670
Deferred tax liabilities 6,297 6,009
Derivative financial instruments 756 1,736
Other non-current liabilities 1,103 1,026
Total non-current liabilities 165,627 204,441
Current liabilities
Interest-bearing loans and borrowings 41,676 10,222
Trade and other payables 5,223 3,640
Income tax payable 5 1
Derivative financial instruments 109 27
Other current liabilities 1,114 950
Total current liabilities 48,127 14,840
Total liabilities 213,754 219,281
Total equity and liabilities 346,338 355,602

BHF quarterly report Q4 2021

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