Baltic Horizon Fund Consolidated Unaudited Results for Q4 2020

Baltic Horizon FundManagement Board of Northern Horizon Capital AS has approved the unaudited consolidated interim financial statements of Baltic Horizon Fund (the Fund) for the twelve months of 2020.

Impact of COVID-19 pandemic
At the beginning of 2020, a new coronavirus (COVID-19) started spreading all over the world, which has had an impact on businesses and economies, including in the Baltics. It is evident that the operating results of Q2-Q4 2020 and property valuations were affected by the COVID-19 effects on the tenants’ financial performance and the relief measures taken to deal with the pandemic. However, based on the currently available information, the Management Company believes that the COVID-19 pandemic should rather have a temporary effect on the Fund’s results. Broad portfolio diversification allows the Fund to limit the COVID-19 impact on the whole portfolio and maintain healthy consolidated operational performance.

The Fund has opted to retain approx. EUR 4.4 million of distributable cash flow from the results to 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, it may be concluded that 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 26.5% of total portfolio NOI in Q4 2020. Remainder of the portfolio has performed well, as expected.

Secondary public offering

On 23 October 2020, the Fund announced the issue of new units in a secondary public offering. In total, gross equity of EUR 7.2 million was raised through the transaction. After the transaction, the total number of Fund units registered in the Estonian Register of Securities increased to 119,635,429.

Distributions to unitholders for Q3 2020 and Q4 2020 Fund results

On 20 October 2020, the Fund declared a cash distribution of EUR 3,111 thousand (EUR 0.026 per unit) to the Fund unitholders for Q3 2020 results. This represents a 2.25% return on the weighted average Q3 2020 net asset value to its unitholders.

On 4 February 2021, the Fund declared a cash distribution of EUR 1,316 thousand (EUR 0.011 per unit) to the Fund unitholders for Q4 2020 results. This represents a 0.93% return on the weighted average Q4 2020 net asset value to its unitholders.

Total dividends distributed during 2020 was EUR 9,7 million (EUR 10,25 million in 2019). In addition, the fund has unpaid dividend reserve of EUR 4,4 million by the end of 2020.

Dividend capacity calculation

The Fund reduced cash distribution during some quarters in 2020 due to COVID-19 induced lockdowns. Generated net cash flow (GNCF) for the entire year of 2020 was a commendable EUR 11,4 million (EUR 11,0 million in 2019) and reached EUR 0.1 per unit (EUR 0,11 per unit in 2019) despite the shopping centre lockdowns.

EUR ’000 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020
(+) Net rental income 5,635 5,772 4,618 4,799 4,745
(-) Fund administrative expenses (846) (889) (634) (682) (713)
(-) External interest expenses (1,346) (1,331) (1,327) (1,327) (1,362)
(-) CAPEX expenditure1 (225) (95) (97) (230) (131)
(+) Added back listing related expenses 39 29 114 85
(+) Added back acquisition related expenses 26
Generated net cash flow (GNCF) 3,218 3,496 2,589 2,674 2,650
 
GNCF per weighted unit (EUR) 0.029 0.031 0.023 0.024 0.022
12-months rolling GNCF yield(%) 8.6% 11.5% 9.6% 9.4% 8.6%
 
Dividends declared for the period 3,175 1,701 1,701 3,111 1,316
Dividends declared per unit(EUR) 0.028 0.015 0.015 0.026 0.011
12-months rolling dividend yield(%) 8.0% 9.6% 7.2% 7.5% 5.8%
  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 (Q4 2020: closing market price of the unit as of 31 December 2020).
  3. Based on the number of units entitled to dividends.

Net profit and net rental income
Portfolio properties in the office segment contributed 55.8% (2019: 50.8%) of net rental income in 2020 followed by the retail segment with 40.1% (2019: 43.8%) and the leisure segment with 4.1% (2019: 5.4%).Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 29.2% of total portfolio net rental income in 2020. Total net rental income attributable to neighbourhood shopping centres accounted for 10.9% in 2020.

In 2020, the Group earned net rental income of EUR 19.9 million exceeding the previous year’s net rental income for the same period by EUR 0.7 million or 3.7% (2019: 19.2 million). The increase was achieved through new acquisitions that were made following the capital raisings in 2019. The acquisition of Galerija Centrs and North Star had a significant effect on the Group’s net rental income growth in 2020 as compared to 2019, albeit rental income growth in Q2-Q4 2020 was slower due to relief measures granted to tenants during the COVID-19 pandemic.

During 2020, the Group recorded a net loss of EUR 13.5 million against a net profit of EUR 8.8 million for 2019.  The net result was impacted by the negative valuation result of EUR 25.2 million recognized in June and December 2020. The negative impact of valuation losses on investment properties was offset by an increase in net rental income, other operating income and a slight decrease in administrative expenses. Excluding the valuation impact on the net result, the net profit for 2020 would have amounted to EUR 11.7 million (2019: EUR 10.9 million). Earnings per unit excluding valuation losses on investment properties would have amounted to EUR 0.10 (2019: EUR 0.11).

On an EPRA like-for-like basis, portfolio net rental income decreased by 7.4% year on year mainly due to weaker performance in retail and leisure segments. The decrease was offset by the relatively stable performance of the office segment which remained largely unaffected by the lockdown in the Baltic States.

During 2020, investment properties in Latvia and Lithuania contributed 38.3% (2019: 37.2%) and 36.4% (2019: 35.0%) of net rental income respectively, while investment properties in Estonia contributed 25.3% (2019: 27.8%).

Gross Asset Value (GAV)
At the end of December 2020, the GAV decreased to EUR 355.6 million (31 December 2019: EUR 371.7 million) which was a drop of 4.3% over 2020. The Group made a capital investment (EUR 1.4 million) in the Meraki office building development project during Q4 2020. The Fund aims to continue the construction of the Meraki office building throughout 2021 and welcome new office tenants looking for efficient modern work spaces. 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 December 2020, the Fund net asset value (NAV) decreased to EUR 136.3 million (31 December 2019: EUR 152.5 million) as a result of the negative portfolio revaluation which was impacted by the high market uncertainty surrounding the COVID-19 pandemic. Compared to the year-end 2019 NAV, the Fund’s NAV decreased by 10.6%. Positive net operating income of EUR 19,9 million over the period was offset by EUR 25.2 million valuation losses, EUR 9.7 million dividend distributions to the unitholders and a negative cash flow hedge reserve movement of EUR 0.1 million. At 31 December 2020, NAV per unit stood at EUR 1.1395 (31 December 2019: EUR 1.3451), while NAV per unit based on EPRA standards was EUR 1.2219 (31 December 2019: EUR 1.4333).

Investment properties
The Baltic Horizon Fund portfolio consists of 15 cash flow investment properties in the Baltic capitals and investment property under construction on the Meraki land plot. At the end of Q4 2020, the fair value of the Fund’s portfolio was EUR 340.0 million (31 December 2019: EUR 358.9 million) and incorporated a total net leasable area of 153,345 sq. m. During Q4 2020, the Group invested EUR 0.4 million in the existing property portfolio and an additional EUR 1.4 million in the Meraki development project.

Interest bearing loans and bonds
Interest bearing loans and bonds (excluding lease liabilities) remained at a similar level of EUR 205.6 million compared to year-end 2019 figures (31 December 2019: EUR 205.8 million). Outstanding bank loans decreased slightly due to regular bank loan amortization. Annual loan amortization forms 0.2% of total debt outstanding.

Financial covenants for bonds

Covenant Requirement Ratio
31.12.2019
Ratio
31.03.2020
Ratio
30.06.2020
Ratio
30.09.2020
Ratio
31.12.2020
Equity Ratio

>25%1/35.0%

42.6% 42.4% 40.0% 40.2% 40.3%
Debt Service Coverage Ratio

> 1.20

3.32 3.35 3.30 3.16 3.05
  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 2020 amounted to EUR 16.1 million (2019:  cash inflow of EUR 16.4 million). Cash outflow from investing activities was EUR 4.3 million (2019: cash outflow of EUR 78.2 million) due to subsequent capital expenditure on existing portfolio properties and investments in the Meraki development project. Cash outflow from financing activities was EUR 8.3 million (2019: cash inflow of EUR 59.4 million). During 2020, the Fund made four cash distributions of EUR 9.7 million and paid regular interest on bank loans and bonds. At the end of December 2020, the Fund’s consolidated cash and cash equivalents amounted to EUR 13.3 million (31 December 2019: EUR 9.8 million) which demonstrates sufficient liquidity and financial flexibility.

Key earnings figures

EUR ‘000         Q4 2020 Q4 2019 Change (%)
Net rental income         4,745 5,635 (15.8%)
Administrative expenses (713) (846) (15.7%)
Other operating income 18 3  500%
Valuation (losses) on investment properties (9,488) 375 (2,630.1%)
Operating (loss) profit         (5,438) 5,167 (205.2%)
Net financing costs (1,406) (1,401) 0.4%
(Loss) profit before tax         (6,844) 3,766 (281.7%)
Income tax 166 (351) (147.3%)
Net (loss) profit for the period       (6,678) 3,415 (295.5%)
Weighted average number of units outstanding (units) 118,124,947 112,686,139 4.8%
Earnings per unit (EUR)       (0.06) 0.03 (300.0%)

Key financial position figures

EUR ‘000         31.12.2020 31.12.2019 Change (%)
Investment properties in use 334,518 356,575 (6.2%)
Investment property under construction 5,474 2,367 131.3%
Gross asset value (GAV)       355,602 371,734 (4.3%)
Interest bearing loans and bonds 205,604 205,827 (0.1%)
Total liabilities         219,281 219,216 0.0%
                 
Net asset value (NAV)       136,321 152,518 (10.6%)
Number of units outstanding (units) 119,635,429 113,387,525 5.5%
IFRS Net asset value (IFRS NAV) per unit (EUR)   1.1395 1.3451 (15.3%)
EPRA Net reinvestment value (EPRA NRV) per unit (EUR)   1.2219 1.4333 (14.7%)
EPRA Net tangible assets (EPRA NTA) per unit (EUR)   1.2219 1.4333 (14.7%)
EPRA Net disposal value (EPRA NDV) per unit (EUR)   1.1435 1.3400 (14.7%)
EPRA Net asset value (EPRA NAV) per unit (EUR) 1.2219 1.4333 (14.7%)
Loan-to-Value ratio (%) 60.5% 57.3%
Average effective interest rate (%) 2.6% 2.6%

Property performance

The average direct property yield during Q4 2020 remained stable at 5.5% (Q3 2020: 5.5%). The net initial yield for the whole portfolio for Q4 2020 was 5.6% (Q3 2020: 5.6%). Property yields showed signs of improvement up until December 2020, yet December results suffered due to lockdowns and yields ultimately remained stable compared to Q3 2020. Turnover rents from retail tenants decreased during December due to lockdowns in Latvia and Lithuania. Simultaneously the Fund granted additional rent concessions to tenants whose operations were restricted by government regulations. Compared to pre-COVID-19 pandemic performance levels, the leisure and retail segments took the biggest hit mainly due to the COVID-19 forced discounts, while the office segment continued to perform well and remained largely unaffected. The average rental rate for the whole portfolio for Q4 2020 was EUR 11.7 per sq. m.

During Q4 2020, the average actual occupancy of the portfolio was 94.5% (Q3 2020: 94.6%). Taking into account Duetto II rental guarantee, the effective occupancy rate was 94.5% (Q3 2020: 94.6%). The occupancy rate as of 31 December 2020 was 94.3% (30 September 2020: 94.7%). The Fund’s tenant base remains strong despite several tenants vacating premises in Q3 and Q4 2020. The Fund signed a new rental agreement with F8 Outlet in Domus PRO Retail Park which increased the occupancy level of property to 100.0% during Q4 2020. Occupancy rates in the office segment still remain strong albeit Lithuania Tax Inspectorate vacated part of their premises in North Star resulting in a minor negative effect on the occupancy levels.

Overview of the Fund’s investment properties as of 31 December 2020

Property name Sector Fair value1
(EUR ‘000)
NLA
(sq. m.)
Direct property yield
Q4 20202
Net initial yield
Q4 20203
Occupancy rate for
Q4 2020
Vilnius, Lithuania            
Duetto I Office 16,419 8,587 8.0% 7.3% 100.0%
Duetto II Office 18,765 8,674 7.4% 7.3% 100.0%
Europa SC Retail 38,811 16,856 5.0% 4.7% 90.1%
Domus Pro Retail Park Retail 16,090 11,247 7.5% 7.2% 100.0%
Domus Pro Office Office 7,590 4,831 8.9% 7.6% 100.0%
North Star Office 19,133 10,550 6.8% 7.3% 95.4%
Meraki Development 5,474
Total Vilnius   122,282 60,745 6.7% 6.4% 96.5%
Riga, Latvia
Upmalas Biroji BC Office 23,474 10,458 6.6% 6.8% 93.5%
Vainodes I Office 19,970 8,052 6.9% 7.2% 100.0%
LNK Centre Office 16,060 7,453 6.3% 6.6% 100.0%
Sky SC Retail 4,970 3,254 7.9% 8.0% 98.6%
Galerija Centrs Retail 67,446 20,022 2.7% 2.9% 84.8%
Total Riga   131,920 49,239 4.6% 4.9% 92.3%
Tallinn, Estonia  
Postimaja & CC Plaza complex Retail 29,770 9,145 3.2% 3.7% 95.1%
Postimaja & CC Plaza complex Leisure 14,170 8,664 5.8% 4.9% 100.0%
G4S Headquarters Office 16,160 9,179 7.9% 7.4% 100.0%
Lincona Office 16,110 10,865 7.0% 6.8% 90.3%
Pirita SC Retail 9,580 5,508 5.4% 7.1% 81.1%
Total Tallinn   85,790 43,361 5.3% 5.5% 94.1%
Total portfolio   339,992 153,345 5.5% 5.6% 94.5%
  1. Based on the latest valuation as at 31 December 2020 and recognised right-of-use assets.
  2. Direct property yield (DPY) is calculated by dividing NOI by the acquisition value and subsequent capital expenditure of the property.
  3. The net initial yield (NIY) is calculated by dividing NOI by the market value of the property.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

EUR ‘000 01.10.2020-31.12.2020 01.10.2019-31.12.2019 01.01.2020-31.12.2020 01.01.2019-31.12.2019
 
Rental income 5,148 6,197 21,697 20,776
Service charge income 1,241 1,397 4,990 4,525
Cost of rental activities (1,644) (1,959) (6,753) (6,082)
Net rental income 4,745 5,635 19,934 19,219
Administrative expenses (713) (846) (2,918) (3,251)
Other operating income 18 3 204 26
Valuation (losses) gains on investment properties (9,488) 375 (25,245) (2,064)
Operating (loss) profit (5,438) 5,167 (8,025) 13,930
Financial income 1 3 5
Financial expenses (1,406) (1,402) (5,524) (4,718)
Net financing costs (1,406) (1,401) (5,521) (4,713)
(Loss) profit before tax (6,844) 3,766 (13,546) 9,217
Income tax charge 166 (351) 5 (426)
(Loss) profit for the period (6,678) 3,415 (13,541) 8,791
 
Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods
Net gains (losses) on cash flow hedges 119 802 (108) (595)
Income tax relating to net gains (losses) on cash flow hedges (10) (48) 3 44
Other comprehensive income (expense), net of tax, that is or may be reclassified to profit or loss in subsequent periods 109 754 (105) (551)
         
Total comprehensive income (expense) for the period, net of tax (6,569) 4,169 (13,646) 8,240
         
Basic and diluted earnings per unit (EUR)           (0.06) 0.03 (0.12) 0.09

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

EUR ‘000 31.12.2020 31.12.2019
     
Non-current assets    
Investment properties 334,518 356,575
Investment property under construction 5,474 2,367
Property, plant and equipment 2
Derivative financial instruments 73
Other non-current assets 22 54
Total non-current assets 340,016 359,069
Current assets
Trade and other receivables 1,901 1,794
Prepayments 352 301
Other current assets 734
Cash and cash equivalents 13,333 9,836
Total current assets 15,586 12,665
Total assets 355,602 371,734
Equity
Paid in capital 145,200 138,064
Cash flow hedge reserve (1,661) (1,556)
Retained earnings (7,218) 16,010
Total equity 136,321 152,518
Non-current liabilities
Interest bearing loans and borrowings 195,670 205,718
Deferred tax liabilities 6,009 6,199
Derivative financial instruments 1,736 1,728
Other non-current liabilities 1,026 1,298
Total non-current liabilities 204,441 214,943
Current liabilities
Interest bearing loans and borrowings 10,222 414
Trade and other payables 3,640 3,171
Income tax payable 1 8
Derivative financial instruments 27
Other current liabilities 950 680
Total current liabilities 14,840 4,273
Total liabilities 219,281 219,216
Total equity and liabilities 355,602 371,734
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