Baltic Horizon Fund Consolidated Unaudited Interim Results for H1 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 first six months of 2021.

Oversubscribed bond issue of BH Meraki UAB

On 12 May 2021, BH Meraki UAB completed an oversubscribed 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. Investors subscribed bonds for a total of EUR 11.15 million which means that the issue volume was oversubscribed 2.78 times. 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.

Property management tender

In May 2021, the Fund has finished an international tender for property management and accounting services across the whole portfolio. Baltic Horizon Fund has selected CBRE Baltics as its main partner for property management and accounting services. CBRE Baltics will provide commercial real estate management, rental, accounting, maintenance and marketing services to the fund in Lithuania, Latvia and Estonia. In addition, 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. New property management companies will start to provide services for the entire portfolio starting from 1 September 2021.

Property valuations

From June 2021, the portfolio valuations are conducted by a new independent real estate appraiser Colliers (previously Newsec Baltics). As of 30 June 2021, the fair value of the Baltic Horizon Fund portfolio decreased to EUR 328.4 million (31 December 2020: 340.0 million). In June 2021, the portfolio revaluation resulted in a fair value loss of EUR 14.3 million (-4.1% of the portfolio value) primarily due to the uncertainty associated with rents in retail markets caused by the COVID-19 pandemic and temporary devaluation of (re)development projects.

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 centers were forced to close for a limited period except for essential retail shops (groceries, pharmacies). At the date of release of this report, the situation is slowly stabilizing in all three countries. As of 19 April 2021, Lithuania has lifted restrictions for shopping centers, while Latvia and Estonia are expected to follow during the first half of Q2 2021. Lithuania gradually eased restrictions for retail shops, restaurants and cafes starting from 19 April 2021. Estonia and Latvia eased restrictions on shopping centers in stages during May and June 2021. All BHF retail assets were fully operating at the date of this report.

BHF’s operating results of H1 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.

The Fund has opted to retain approx. EUR 6.0 million of distributable cash flow from the results to strengthen the financial position. The Management Company believes that it is in the best interest of the investors and the Fund to reduce its quarterly cash distributions during the outbreak of COVID-19 in order to protect and strengthen the Fund’s financial position. The management team will continue to actively monitor the economic impact of the pandemic and reassess future distribution levels depending on the upcoming operating results.

In summary, the COVID virus induced lockdown in the Baltics has impacted mainly Baltic Horizon’s centrally located retail and entertainment centres. Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 21.6% of total portfolio NOI in H1 2021.

Distributions to unitholders for Q1 2021 and Q2 2021 Fund results

On 29 April 2021, due to introduced restrictions and increased market uncertainty the Fund applied a more conservative approach and declared a cash distribution of EUR 1,316 thousand (EUR 0.011 per unit) to the Fund unitholders for Q1 2021 results. This represents a 0.96% return on the weighted average Q1 2021 net asset value to its unitholders.

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.

With reduced payouts over 2020 and 2021 in the light of prevailing market uncertainty, the Fund has opted to retain EUR 6.0 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 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021
(+) Net rental income 4,618 4,799 4,745 4,173 4,357
(-) Fund administrative expenses (634) (682) (713) (745) (756)
(-) External interest expenses (1,327) (1,327) (1,362) (1,346) (1,311)
(-) CAPEX expenditure1 (97) (230) (131) (79) (92)
(+) Added back listing related expenses 29 114 85
(+) Added back acquisition related expenses 26 31 5
Generated net cash flow (GNCF) 2,589 2,674 2,650 2,034 2,203
 
GNCF per weighted unit (EUR) 0.023 0.024 0.022 0.017 0.018
12-months rolling GNCF yield(%) 9.6% 9.4% 8.6% 7.4% 7.0%
 
Dividends declared for the period 1,701 3,111 1,316 1,316 1,316
Dividends declared per unit(EUR) 0.015 0.026 0.011 0.011 0.011
12-months rolling dividend yield(%) 7.2% 7.5% 5.8% 5.4% 5.0%
  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 (Q2 2021: closing market price of the unit as of 30 June 2021).
  3. Based on the number of units entitled to dividends.

Net profit and net rental income

In H1 2021, the Group earned net rental income of EUR 8.5 million, a decrease of 17.9% compared to the net rental income of EUR 10.4 million for H1 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 64.3% (H1 2020: 54.1%) of net rental income in H1 2021 followed by the retail segment with 31.8% (H1 2020: 41.9%) and the leisure segment with 3.9% (H1 2020: 4.0%). Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 21.6% of total portfolio net rental income in H1 2021. Total net rental income attributable to neighbourhood shopping centres was 10.2% in H1 2021.

During H1 2021, investment properties in Latvia and Lithuania contributed 37.3% (H1 2020: 40.0%) and 37.7% (H1 2020: 33.7%) of net rental income, respectively, while investment properties in Estonia contributed 25.0% (H1 2020: 26.3%).

The Group recorded a net loss of EUR 9.2 million for H1 2021 against a net loss of EUR 9.5 million for H1 2020. The net result was significantly impacted by the one-off negative valuation result of EUR 14.3 million during H1 2021 (valuation loss of EUR 15.8 million during H1 2020). Compared to H1 2020, the Fund recognised smaller valuation losses on investment properties and administrative expenses but a decrease in net rental income throughout H1 2021 led to similar net results in H1 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 H1 2021 would have amounted to EUR 5.0 million (H1 2020: EUR 6.3 million). Earnings per unit for H1 2021 were negative at EUR 0.08 (H1 2020: negative at EUR 0.08). Earnings per unit excluding valuation losses on investment properties amounted to EUR 0.04 (H1 2020: EUR 0.06).

Gross Asset Value (GAV)

At the end of H1 2021, the Fund’s GAV was EUR 346.9 million (31 December 2020: EUR 355.6 million), which was a drop of 2.5% over the period. The decrease is mainly related to the negative property revaluation of EUR 14.3 million or 3.4% of the portfolio value at the end of 2020. The Group made capital investments (EUR 1.9 million) in the Meraki office building development project during H1 2021. The Fund aims to carry on with the construction of the Meraki office building throughout 2021. An additional EUR 0.4 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 June 2021, the Fund’s NAV decreased to EUR 124.9 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 8.4%. Eliminating the impact of valuations, the NAV at the end of H1 2021 would have been EUR 139.1 million or EUR 1.1631 per unit. The increase in operational performance and positive cash flow hedge reserve movement of EUR 0.4 million over the period was offset by a EUR 2.6 million dividend distribution to the unitholders. As at 30 June 2021, IFRS NAV per unit stood at EUR 1.0439 (31 December 2020: EUR 1.1395), while EPRA net tangible assets and EPRA net reinstatement value were EUR 1.1176 per unit (31 December 2020: EUR 1.2219). EPRA net disposal value was EUR 1.0455 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 Q2 2021, the appraised value of the Fund’s portfolio was EUR 328.4 million (31 December 2020: EUR 340.0 million) and incorporated a total net leasable area of 153,351 sq. m. The valuation losses on the property portfolio came to EUR 14.3 million during H1 2021 (H1 2020: EUR 15.8 million). Valuations were negatively affected primarily due to the uncertainty associated with rents in retail markets caused by the COVID-19 pandemic and temporary devaluation of (re)development projects. During Q2 2021, the Group invested EUR 0.1 million in the existing property portfolio, EUR 0.3 million in the reconstruction projects and an additional EUR 0.8 million in the Meraki development project.

Interest bearing loans and bonds

During Q2 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 209.4 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.

Financial covenants for bonds

Covenant Requirement Ratio
30.06.2020
Ratio
30.09.2020
Ratio
31.12.2020
Ratio
31.03.2021
Ratio
30.06.2021
Equity Ratio >25%1/35.0% 40.0% 40.2% 40.3% 40.3% 38.1%
Debt Service Coverage Ratio > 1.20 3.30 3.16 3.05 2.71 2.65
  1. On 28 July, the bondholders adopted the decision by the way of written procedure to temporarily reduce the equity ratio bond covenant to 25% or greater, until 31 July 2021

Cash flow

Cash inflow from core operating activities for H1 2021 amounted to EUR 6.4 million (H1 2020:  cash inflow of EUR 6.7 million). Cash outflow from investing activities was EUR 2.7 million (H1 2020: cash outflow of EUR 1.7 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 1.6 million (H1 2020: cash outflow of EUR 7.8 million). During H1 2021, the Fund made a cash distribution of EUR 2.6 million and paid regular interest on bank loans and bonds. At the end of H1 2021, the Fund’s consolidated cash and cash equivalents amounted to EUR 15.5 million (31 December 2020: EUR 13.3 million) which demonstrates sufficient liquidity and financial flexibility.

Key earnings figures

EUR ‘000         Q2 2021 Q2 2020 Change (%)
Net rental income         4,357 4,618 (5.7%)
Administrative expenses (756) (634) 19.2%
Other operating income 178 (100.0%)
Valuation losses on investment properties (14,255) (15,749) (9.5%)
Operating loss         (10,654) (11,587) (8.1%)
Net financing costs (1,361) (1,372) (0.8%)
Loss before tax         (12,015) (12,959) (7.3%)
Income tax 888 149 496.0%
Net loss for the period       (11,127) (12,810) (13.1%)
Weighted average number of units outstanding (units) 119,635,429 113,387,525 5.5%
Earnings per unit (EUR)   (0.09) (0.11) (18.2%)

Key financial position figures

EUR ‘000       30.06.2021 31.12.2020 Change (%)
Investment properties in use 324,509 334,518 (3.0%)
Investment property under construction 3,940 5,474 (28.0%)
Gross asset value (GAV)     346,887 355,602 (2.5%)
Interest-bearing loans and bonds 209,403 205,604 1.8%
Total liabilities       222,000 219,281 1.2%
IFRS Net asset value (IFRS NAV)     124,887 136,321 (8.4%)
EPRA Net Reinstatement Value (EPRA NRV)     133,710 146,180 (8.5%)
Number of units outstanding (units) 119,635,429 119,635,429
IFRS Net asset value (IFRS NAV) per unit (EUR) 1.0439 1.1395 (8.4%)
EPRA Net Reinstatement Value (EPRA NRV) per unit (EUR) 1.1176 1.2219 (8.5%)
Loan-to-Value ratio (%) 63.8% 60.5%
Average effective interest rate (%) 2.7% 2.6%

Property performance

During Q2 2021, the average actual occupancy of the portfolio was 93.9% (Q1 2021: 94.1%). The occupancy rate as of 30 June 2021 was 93.7% (31 March 2021: 94.1%). Occupancy rates in the retail segment dipped due to some small new vacancies in Europa SC, Postimaja SC and Galerija Centrs. The change in occupancy rates was partially offset by take-up of approx. 2.9% of the total NLA in Pirita SC. Occupancy rates in the office segment remained strong and slightly increased during Q2 2021. The Fund signed a new rental agreement in North Star and Domus PRO Retail Park which increased the occupancy levels of these properties to 89.7% and 100%, respectively. The average direct property yield during Q2 2021 was 5.2% (Q1 2021: 4.8%). The net initial yield for the whole portfolio for Q2 2021 was 5.5% (Q1 2021: 5.0%). Property yields increased compared to Q1 2021 albeit rent relief measures are still affecting the Fund’s performance. The average rental rate for the whole portfolio for Q2 2021 was EUR 11.3 per sq. m (Q1 2021: EUR 10.6 per sq. m).

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

Property name Sector Fair value1
(EUR ‘000)
NLA
(sq. m.)
Direct property yield
Q2 20212
Net initial yield
Q2 20213
Occupancy rate for
Vilnius, Lithuania            
Duetto I Office 16,569 8,587 8.4% 7.6% 100.0%
Duetto II Office 19,455 8,674 7.0% 6.9% 100.0%
Europa SC Retail 35,071 16,856 2.9% 2.9% 85.1%
Domus Pro Retail Park Retail 16,230 11,247 7.2% 6.9% 100.0%
Domus Pro Office Office 7,620 4,831 8.2% 7.0% 100.0%
North Star Office 18,993 10,550 6.0% 6.5% 89.7%
Meraki Land 3,940
Total Vilnius   117,878 60,745 5.8% 5.6% 94.1%
Riga, Latvia        
Upmalas Biroji BC Office 21,247 10,459 7.3% 7.7% 100.0%
Vainodes I Office 18,140 8,052 6.9% 7.7% 100.0%
LNK Centre Office 16,120 7,453 6.5% 6.9% 100.0%
Sky SC Retail 4,903 3,254 7.9% 8.0% 96.7%
Galerija Centrs Retail 65,181 20,022 2.9% 3.2% 81.7%
Total Riga   125,591 49,240 4.8% 5.3% 92.4%
Tallinn, Estonia        
Postimaja & CC Plaza complex Retail 29,820 9,145 2.6% 3.1% 93.7%
Postimaja & CC Plaza complex Leisure 14,260 8,664 6.0% 5.1% 100.0%
G4S Headquarters Office 15,400 9,179 8.0% 7.9% 100.0%
Lincona Office 15,910 10,870 6.9% 6.8% 90.3%
Pirita SC Retail 9,590 5,508 5.2%4 6.8%4 89.2%
Total Tallinn   84,980 43,366 5.1% 5.4% 94.9%
Total portfolio   328,449 153,351 5.2% 5.5% 93.7%
  1. Based on the latest valuation as at 30 June 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.
  4. Excluding one-off rental guarantee write-off in an amount of EUR 0.2 million

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

EUR ‘000 01.04.2021- 30.06.2021 01.04.2020- 30.06.2020 01.01.2021-
06.30.2021
01.01.2020-
06.30.2020
Rental income 4,835 5,073 9,512 11,282
Service charge income 1,209 1,148 2,426 2,504
Cost of rental activities (1,687) (1,603) (3,408) (3,396)
Net rental income 4,357 4,618 8,530 10,390
Administrative expenses (756) (634) (1,501) (1,523)
Other operating income 178 186
Valuation losses on investment properties (14,255) (15,749) (14,259) (15,753)
Operating loss (10,654) (11,587) (7,230) (6,700)
Financial income 1 1 1 2
Financial expenses (1,362) (1,373) (2,752) (2,750)
Net financing costs (1,361) (1,372) (2,751) (2,748)
Loss before tax (12,015) (12,959) (9,981) (9,448)
Income tax charge 888 149 759 (8)
Loss for the period (11,127) (12,810) (9,222) (9,456)
Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods
Net gain (loss) on cash flow hedges 241 (46) 451 (224)
Income tax relating to net gain (loss) on cash flow hedges (16) 2 (31) 15
Other comprehensive income (expense), net of tax, that is or may be reclassified to profit or loss in subsequent periods 225 (44) 420 (209)
Total comprehensive expense for the period, net of tax (10,902) (12,854) (8,802) (9,665)
       
Basic and diluted earnings per unit (EUR) (0.09) (0.11) (0.08) (0.08)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

EUR ‘000 30.06.2021 31.12.2020
Non-current assets    
Investment properties 324,509 334,518
Investment property under construction 3,940 5,474
Property, plant and equipment 3 2
Other non-current assets 23 22
Total non-current assets 328,475 340,016
Current assets
Trade and other receivables 2,444 1,901
Prepayments 492 352
Cash and cash equivalents 15,476 13,333
Total current assets 18,412 15,586
Total assets 346,887 355,602
Equity    
Paid in capital 145,200 145,200
Cash flow hedge reserve (1,241) (1,661)
Retained earnings (19,072) (7,218)
Total equity 124,887 136,321
Non-current liabilities
Interest-bearing loans and borrowings 132,909 195,670
Deferred tax liabilities 5,280 6,009
Derivative financial instruments 1,190 1,736
Other non-current liabilities 1,024 1,026
Total non-current liabilities 140,403 204,441
Current liabilities
Interest-bearing loans and borrowings 76,983 10,222
Trade and other payables 3,554 3,640
Income tax payable 1
Derivative financial instruments 122 27
Other current liabilities 938 950
Total current liabilities 81,597 14,840
Total liabilities 222,000 219,281
Total equity and liabilities 346,887 355,602

Baltic Horizon Fund semi-annual report H1 2021

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