Baltic Horizon: Baltic Horizon Fund consolidated unaudited interim results for Q3 2021

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

Baltic Horizon wins EPRA Gold award

Baltic Horizon Fund received a prestigious award at the European Public Real Estate Association (EPRA) virtual annual conference 2021 for the second year in a row. The Fund scored a “Gold Award” for the adoption of EPRA Best Practices Recommendations (BPR) – widely accepted industry standards for the highest level of transparency, comparability and compliance in financial reporting. EPRA assessed the financial statements of 181 European listed real estate entities as part of its annual award process.

Extension of bank loans

On 14 July 2021, the Fund extended a EUR 7.8 million bank loan to finance Headquarters. According to the agreement, the maturity date of the loan is 31 October 2022.

On 19 July 2021, the Fund extended a EUR 2.1 million bank loan to finance Sky SC. According to the agreement, the maturity date of the loan is 31 January 2022.

Property management

As of 1st September 2021, CBRE Baltics and Censeo became the partners of Baltic Horizon Fund and will be providing property management, leasing and accounting services for the entire portfolio of the Fund. Censeo will provide services to the Lithuanian business centres Duetto and North Star, as well as to the Domus Pro shopping centre and office complex. CBRE Baltics will provide services to the remaining portfolio.

Two buildings receive certification

Baltic Horizon is aiming to certify all currently operational office assets by the end of 2021 using In-Use environmental assessment method. During Q3 2021, the Fund’s North Star and Headquarters properties were awarded the In-Use “Very Good” environmental certification.

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 substantially increase at the end of Q3 2021. As a result of spiking cases, Latvian government decided to reimpose the lockdown for a period between 21 October to 15 November. At the date of this report, Galerija Centrs is operating with heavy restrictions.

BHF’s operating results of Q3 2021 were affected by the COVID-19 lockdown effects on the tenants’ financial performance and the relief measures taken to deal with the pandemic. However, broad diversification of the portfolio should allow the Fund to limit the COVID-19 impacts and maintain healthy consolidated operational performance throughout the year. The Fund’s operational performance has largely recovered once heavy restrictions were lifted in all Baltic countries.

Distributions to unitholders for Q2 2021 and Q3 2021 Fund results

On 28 July 2021, the Fund declared a cash distribution of EUR 1,316 thousand (EUR 0.011 per unit) to the Fund unitholders for Q2 2021 results. This represents a 0.98% return on the weighted average Q2 2021 net asset value to its unitholders.

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.

With reduced payouts over 2020 and 2021 in the light of prevailing market uncertainty, the Fund has opted to retain EUR 6.4 million of distributable cash flow. The Management Company of the Fund will continue to actively monitor the economic impact of the pandemic and reassess future distribution levels depending on the upcoming operating results.

Dividend capacity calculation

EUR ’000 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
(+) Net rental income 4,799 4,745 4,173 4,357 4,676
(-) Fund administrative expenses (682) (713) (745) (756) (735)
(-) External interest expenses (1,327) (1,362) (1,346) (1,311) (1,407)
(-) CAPEX expenditure1 (230) (131) (79) (92) (38)
(+) Added back listing related expenses 114 85
(+) Added back acquisition related expenses 26 31 5 9
Generated net cash flow (GNCF) 2,674 2,650 2,034 2,203 2,505
 
GNCF per weighted unit (EUR) 0.024 0.022 0.017 0.018 0.021
12-months rolling GNCF yield(%) 9.4% 8.6% 7.4% 7.0% 7.0%
 
Dividends declared for the period 3,111 1,316 1,316 1,316 2,034
Dividends declared per unit(EUR) 0.026 0.011 0.011 0.011 0.017
12-months rolling dividend yield(%) 7.5% 5.8% 5.4% 5.0% 4.5%
  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. 12-month rolling GNCF and dividend yields are based on the closing market price of the unit as at the end of the quarter (Q3 2021: closing market price of the unit as of 30 September 2021).
  3. Based on the number of units entitled to dividends.

Net profit and net rental income

In Q1-Q3 2021, the Group earned net rental income of EUR 13.2 million, a decrease of 13.1% compared to the net rental income of EUR 15.2 million for Q1-Q3 2020. Net rental income decreased due to the relief measures granted to tenants during the pandemic and a one-off rental guarantee write-off at Pirita Shopping Centre in the amount of EUR 0.2 million.

Portfolio properties in the office segment contributed 62.4% (Q1-Q3 2020: 55.1%) of net rental income in Q1-Q3 2021 followed by the retail segment with 33.0% (Q1-Q3 2020: 40.6%) and the leisure segment with 4.6% (Q1-Q3 2020: 4.3%).  Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 21.8% of total portfolio net rental income in Q1-Q3 2021. Total net rental income attributable to neighbourhood shopping centres was 11.2% in Q1-Q3 2021.

During Q1-Q3 2021, investment properties in Latvia and Lithuania contributed 36.6% (Q1-Q3 2020: 39.4%) and 37.1% (Q1-Q3 2020: 35.3%) of net rental income, respectively, while investment properties in contributed 26.3% (Q1-Q3 2020: 25.3%).

During Q1-Q3 2021, the Group recorded a net loss of EUR 6.9 million (Q1-Q3 2020: a net loss of EUR 6.9 million). The net result was significantly impacted by the one-off negative valuation result of EUR 14.3 million recognised in June 2021 (a valuation loss of EUR 15.8 million recognised in June 2020). Compared to Q1-Q3 2020, the Fund recognised smaller valuation losses on investment properties but a decrease in net rental income throughout Q1-Q3 2021 led to similar net results in Q1-Q3 2021 and 2020. Even with COVID-19 restrictions, the Fund managed to maintain positive operational performance of investment properties. Excluding the valuation impact on the net result, net profit for Q1-Q3 2021 would have amounted to EUR 7.4 million (Q1-Q3 2020: EUR 8.9 million). Earnings per unit for Q1-Q3 2021 were negative at EUR 0.06 (Q1-Q3 2020: negative at EUR 0.06). Earnings per unit excluding valuation losses on investment properties amounted to EUR 0.06 (Q1-Q3 2020: EUR 0.08).

Gross Asset Value (GAV)

At the end of September 2021, the Fund’s GAV was EUR 349.6 million (31 December 2020: EUR 355.6 million), which was a drop of 1.7% over the period. The decrease is mainly related to the negative property revaluation of EUR 14.3 million which was slightly offset by capital investments in assets and an increase in the cash balance. The Group made capital investments (EUR 4.0 million) in the Meraki office building development project during Q1-Q3 2021. The Fund aims to carry on with the construction of the Meraki office building throughout 2021. An additional EUR 0.7 million was invested in other (re)development projects. The Management Company will continue to actively monitor the economic impact of the pandemic and ensure sufficient liquidity levels during the construction period.

Net Asset Value (NAV)

At the end of September 2021, the Fund’s NAV decreased to EUR 126.1 million (31 December 2020: EUR 136.3 million) as a result of a negative portfolio revaluation. Compared to the year-end 2020 NAV, the Fund’s NAV decreased by 7.5%. The increase in operational performance and positive cash flow hedge reserve movement of EUR 0.6 million over the period was offset by a EUR 3.9 million dividend distribution to the unitholders. As at 30 September 2021, IFRS NAV per unit stood at EUR 1.0539 (31 December 2020: EUR 1.1395), while EPRA net tangible assets and EPRA net reinstatement value were EUR 1.1273 per unit (31 December 2020: EUR 1.2219). EPRA net disposal value was EUR 1.0552 per unit (31 December 2020: EUR 1.1435).

Investment properties

The Baltic Horizon Fund portfolio consists of 15 cash flow investment properties in the Baltic capitals and an investment property under construction on the Meraki land plot. At the end of Q3 2021, the fair value of the Fund’s portfolio was EUR 330.9 million (31 December 2020: EUR 340.0 million) and incorporated a total net leasable area of 153,351 sq. m. During Q3 2021, the Group invested EUR 0.1 million in the existing property portfolio, EUR 0.2 million in the reconstruction projects and an additional EUR 2.1 million in the Meraki development project.

Interest bearing loans and bonds

During Q1-Q3 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 will be used for financing the construction of the Meraki office building. The bonds are issued in tranches to match the financing and investment cash flows for the project. After the bond subscription interest-bearing loans and bonds (excluding lease liabilities) increased to EUR 209.3 million (31 December 2020: EUR 205.6 million). Outstanding bank loans decreased slightly due to regular bank loan amortisation. Annual loan amortisation accounts for 0.2% of total debt outstanding.

Cash flow

Cash inflow from core operating activities for Q1-Q3 2021 amounted to EUR 9.7 million (Q1-Q3 2020:  cash inflow of EUR 11.9 million). Cash outflow from investing activities was EUR 4.0 million (Q1-Q3 2020: cash outflow of EUR 2.5 million) due to 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 4.4 million (Q1-Q3 2020: cash outflow of EUR 10.9 million). During Q1-Q3 2021, the Fund made a cash distribution of EUR 3.9 million and paid regular interest on bank loans and bonds. At the end of Q3 2021, the Fund’s consolidated cash and cash equivalents amounted to EUR 14.6 million (31 December 2020: EUR 13.3 million) which demonstrates sufficient liquidity and financial flexibility.

Key earnings figures

EUR ‘000         Q3 2021 Q3 2020 Change (%)
Net rental income         4,676 4,799 (2.6%)
Administrative expenses (735) (682) 7.8%
Other operating income 4
Valuation losses on investment properties (5) (4) 25.0%
Operating profit         3,940 4,113 (4.2%)
Net financing costs (1,470) (1,367) 7.5%
Profit before tax         2,470 2,746 (10.1%)
Income tax (127) (153) (17.0%)
Net profit for the period       2,343 2,593 (9.6%)
Weighted average number of units outstanding (units) 119,635,429 113,387,525 5.5%
Earnings per unit (EUR)   0.02 0.02

Key financial position figures

EUR ‘000       30.09.2021 31.12.2020 Change (%)
Investment properties in use 324,788 334,518 (2.9%)
Investment property under construction 6,072 5,474 (10.9%)
Gross asset value (GAV)     349,555 355,602 (1.7%)
Interest-bearing loans and bonds 209,346 205,604 1.8%
Total liabilities       223,476 219,281 1.9%
IFRS Net asset value (IFRS NAV)     126,079 136,321 (7.5%)
EPRA Net Reinstatement Value (EPRA NRV)     134,864 146,180 (7.7%)
Number of units outstanding (units) 119,635,429 119,635,429
IFRS Net asset value (IFRS NAV) per unit (EUR) 1.0539 1.1395 (7.5%)
EPRA Net Reinstatement Value (EPRA NRV) per unit (EUR) 1.1273 1.2219 (7.7%)
Loan-to-Value ratio (%) 63.3% 60.5%
Average effective interest rate (%) 2.7% 2.6%

Property performance

During Q3 2021, the average actual occupancy of the portfolio was 93.1% (Q2 2021: 93.9%). The occupancy rate as of 30 September 2021 was 92.9% (30 June 2021: 93.7%). 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 Domus PRO Office at the end of Q3 2021. This building was once again fully occupied at the beginning of November as a new tenant moved to the vacant premises. The average direct property yield during Q3 2021 was 5.4% (Q2 2021: 5.2%). The net initial yield for the whole portfolio for Q3 2021 was 5.8% (Q2 2021: 5.5%). Property yields increased compared to Q2 2021 albeit rent vacancies and relief measures are still affecting the Fund’s performance. The average rental rate for the whole portfolio for Q3 2021 was EUR 12.2 per sq. m (Q2 2021: EUR 11.3 per sq. m).

Overview of the Fund’s investment properties as of 30 September 2021

Property name Sector Fair value1
(EUR ‘000)
NLA
(sq. m.)
Direct property yield
 Q3 20212
Net initial yield
Q3 20213
Occupancy rate for
Vilnius, Lithuania            
Duetto I Office 16,569 8,587 8.0% 7.2% 100.0%
Duetto II Office 19,455 8,674 7.4% 7.1% 100.0%
Europa SC Retail 35,284 16,856 2.7% 2.9% 82.0%
Domus Pro Retail Park Retail 16,241 11,247 8.3% 8.0% 99.5%
Domus Pro Office Office 7,620 4,831 8.9% 7.6% 91.6%
North Star Office 18,999 10,550 6.0% 6.6% 89.7%
Meraki Land 6,072
Total Vilnius   120,240 60,745 5.9% 5.9% 92.5%
Riga, Latvia        
Upmalas Biroji BC Office 21,244 10,459 7.4% 8.3% 100.0%
Vainodes I Office 18,141 8,052 6.7% 8.0% 100.0%
LNK Centre Office 16,124 7,453 6.4% 6.8% 100.0%
Sky SC Retail 4,916 3,254 7.3% 7.5% 96.9%
Galerija Centrs Retail 65,181 20,022 2.6% 3.0% 80.6%
Total Riga   125,606 49,240 4.6% 5.3% 91.9%
Tallinn,        
Postimaja & CC Plaza complex Retail 29,852 9,145 3.4% 4.1% 92.9%
Postimaja & CC Plaza complex Leisure 14,260 8,664 9.1% 7.6% 100.0%
Headquarters Office 15,401 9,179 7.7% 7.8% 100.0%
Lincona Office 15,911 10,870 7.2% 7.1% 90.3%
Pirita SC Retail 9,590 5,508 5.9% 7.7% 88.5%
Total   85,014 43,366 5.9% 6.3% 94.6%
Total portfolio   330,860 153,351 5.4% 5.8% 92.9%
  1. Based on the latest valuation as at 30 June 2021, subsequent capital expenditure 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 01.07.2021- 30.09.2021 01.07.2020- 30.09.2020 01.01.2021-
30.09.2021
01.01.2020-
30.09.2020
Rental income 5,332 5,267 14,844 16,549
Service charge income 1,271 1,245 3,697 3,749
Cost of rental activities (1,927) (1,713) (5,335) (5,109)
Net rental income 4,676 4,799 13,206 15,189
Administrative expenses (735) (682) (2,236) (2,205)
Other operating income 4 4 186
Valuation losses on investment properties (5) (4) (14,264) (15,757)
Operating profit (loss) 3,940 4,113 (3,290) (2,587)
Financial income 1 1 3
Financial expenses (1,470) (1,368) (4,222) (4,118)
Net financing costs (1,470) (1,367) (4,221) (4,115)
Profit (loss) before tax 2,470 2,746 (7,511) (6,702)
Income tax charge (127) (153) 632 (161)
Profit (loss) for the period 2,343 2,593 (6,879) (6,863)
         
Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods
Net gain (loss) on cash flow hedges 168 (3) 619 (227)
Income tax relating to net gain (loss) on cash flow hedges (3) (2) (34) 13
Other comprehensive income (expense), net of tax, that is or may be reclassified to profit or loss in subsequent periods 165 (5) 585 (214)
Total comprehensive income (expense) for the period, net of tax 2,508 2,588 (6,294) (7,077)
         
Basic and diluted earnings per unit (EUR) 0.02 0.02 (0.06) (0.06)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

EUR ‘000 30.09.2021 31.12.2020
Non-current assets    
Investment properties 324,788 334,518
Investment property under construction 6,072 5,474
Property, plant and equipment 3 2
Other non-current assets 22 22
Total non-current assets 330,885 340,016
Current assets
Trade and other receivables 3,523 1,901
Prepayments 549 352
Cash and cash equivalents 14,598 13,333
Total current assets 18,670 15,586
Total assets 349,555 355,602
Equity    
Paid in capital 145,200 145,200
Cash flow hedge reserve (1,076) (1,661)
Retained earnings (18,045) (7,218)
Total equity 126,079 136,321
Non-current liabilities
Interest-bearing loans and borrowings 140,611 195,670
Deferred tax liabilities 5,407 6,009
Derivative financial instruments 1,060 1,736
Other non-current liabilities 1,136 1,026
Total non-current liabilities 148,214 204,441
Current liabilities
Interest-bearing loans and borrowings 69,220 10,222
Trade and other payables 4,719 3,640
Income tax payable 4 1
Derivative financial instruments 84 27
Other current liabilities 1,235 950
Total current liabilities 75,262 14,840
Total liabilities 223,476 219,281
Total equity and liabilities 349,555 355,602

BHF quarterly report Q3 2021

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