Kęstutis Sasnauskas: Hello, and a very warm welcome to Eastnine's Q3 presentation. My name is Kęstutis Sasnauskas. I am CEO of Eastnine, and with me, Adela Colakovic, CFO. Today we will guide you through the presentation. Please, do not forget to put questions online whilst we are speaking, and we will respond to them at the end of the presentation. Acquisition of The Bridge is the main event that took place during the quarter. This is also one of our probably major strategic acquisitions during the year. An amazing property in central Warsaw, just a couple of hundred meters from our previous acquisition, Warsaw Unit. You see both of them in the picture. First, The Bridge, and then the fourth building in the row at the end of the picture is Warsaw Unit. It is a 40-story high-rise, a landmark in Warsaw, 55,000 square meters, 98% leased out.
Kęstutis Sasnauskas: It is actually 100% booked, so there is no space available in it anymore. The building is totally new and only 57% moved in. The remaining tenants will be moving in during the next year. This, of course, has some implications on our multiples. Actually, when you read our presentation, when you read our report, please make bigger note on the notes that we put because we try to explain it in very detail how different effects, implications of this acquisition. The property value at acquisition is underlying value is EUR 285 million. We paid EUR 240. There is an explanation to that. There is compensation for rent-free for the periods until the rents are commencing and some fit-out contributions to be made.
Kęstutis Sasnauskas: However, the total implication of this acquisition is very significant, and it actually will bring our earnings, or profit from property management per share up to EUR 0.36 per share, which is a significant increase in our results and profitability. If we look on the quarter, it has been a fantastic underlying development. We have 3% like-for-like growth in our portfolio, in our revenue over the quarter. 1.4% growth like-for-like during the first nine months of the year. Net operating income slightly lower compared to the previous periods. Again, affected by the gradual buildup of the organization that we have, and which is related to sort of increased property costs. Some of that biggest part of this effect actually will be reversed once we take over the management as we today run a little bit of double cost for some time.
Kęstutis Sasnauskas: Some of the most important things is that surplus ratio remains very high. Actually, our occupancy in the underlying portfolio or like-for-like portfolio, is up to 97.2%, which is a record high. This is unique for office players today in this market. Again, it shows how strong the underlying portfolio is, both the properties but also the service that we provide. NAV per share at 59.38 SEK. These are kind of main highlights. We will go into more detail during the presentation in various points of these figures. Just briefly, Eastnine today is 313,000 of prime properties in Vilnius, Warsaw, Poznań, and Riga. Property value closer to EUR 1.2 billion. Economic occupancy 88%. Again, underlying portfolio is 97%, is just because The Bridge has not moved in. It is leased, but it is not moved in. That is why we have economic occupancy of 88.3%.
Kęstutis Sasnauskas: Our annual rental revenue is at EUR 62 million. We expect a yield of 6.2% in our earnings capacity. Somewhat higher LTV, just because we financed the acquisition entirely by refinancing our portfolio, and we have paid in a VAT loan, which will be repaid at the end of this quarter, Q4, and that would reduce to 50 below or 55, 51% approximately, depending on where we are. We will go into that as well during the presentation. On the bottom, you see some names of our top tenants. If you look at Eastnine, actually, it is important to see our growth story. We have actually grown very rapidly in our portfolio. If you look over the 10 to 12-year period, basically from 2014 when we had the first property, we had EUR 62 million in property value, and now we are EUR 1.2 billion.
Kęstutis Sasnauskas: It has been a tremendous growth. If you look on our earnings, profit from property management per share is also continued growing. We had a slight dip during this quarter, and we will have it a couple of quarters before the bridge will start generating revenue. Actually, when the bridge is fully moved in, we will reach EUR 0.36 per share. That is contracted rents, very stable rents for the next coming periods. If we go a little bit to the market, the market has been growing tremendously. Actually, Poland, over the last 10 years, has grown 42% in its GDP, followed by Lithuania, 37%, Latvia, 19%, whilst EU average is around 17% growth, and Sweden is 16%, just for comparison. Not only the countries are growing, actually, the cities where we operate are growing very rapidly.
Kęstutis Sasnauskas: You see that actually Vilnius is one of the on top of our list. If you look on 170 cities almost in the whole Europe, these cities are among the top fastest-growing. They are in the top 20 list, all of them. It is, again, amazing development that is taking place in our region. If you look even further in the future, there is a big expectation that actually regions like Poznań and Warsaw will continue growing. Vilnius is also in continued growing. This is Oxford Economics prediction, so it is not our predictions. But we see it and we witness it every day, actually, that the growth is very strong in our region, which then also fuels the demand for commercial properties, especially offices in prime locations. We are also in a different universe when it comes to yields and rent levels.
Kęstutis Sasnauskas: If you look on comparable markets, our markets still enjoy the lowest rental levels. At the same time, we are in the markets enjoying highest yields. And of course, this balance will somehow, over time, will disappear. Rents probably need to be pushed up and will go up, and the prime yields will probably, over time, have to merge towards European levels or more kind of historic European levels. Both of these moves would imply quite significant value changes in our portfolio. But as a result of this, it is very important to note that actually, the per square meter values of properties are significantly lower in our region. So if you look in Warsaw, it is EUR 5.9 thousand per square meter, whilst in Helsinki, it is almost double. And if you go to Hamburg, Düsseldorf or any other German cities, it is actually more than double the price.
Kęstutis Sasnauskas: Historically, if you look in the Baltics, the values are even lower. Baltic values, our total portfolio is 3. I do not remember exactly, but we will see that figure later on. This is a huge discrepancy. There is huge opportunity for value growth. What has been keeping this and the rental levels, it is actually a very big supply of office historic in Warsaw. As demand was growing, there was huge take-up, but there was also a lot of new construction taking place. Since COVID, and since the increase of interest rates, this construction has subsided significantly. There is very little construction coming out. The demand remains very strong, and this, of course, drives square meter prices and rents upwards. That we experience in this market. You can also see it very clearly on our very high occupancy levels.
Kęstutis Sasnauskas: In Poland, we have basically zero vacancy today. Here you can see some of the pictures of our portfolio. In Vilnius, we are in the very central part of Vilnius CBD, very close to the old town, bordering in some places, the parliament, et cetera. We also have one location where all the tech companies are. This is Uptown Park property. It is a headquarters of a Lithuanian startup called Vinted. They extended with us last year and actually take possession of the full building now, continuously growing. In Poznań, we have two very central amazing properties in the main intersection between the two main communication roads in the city, next to the railway station, next to the old town, et cetera. This is the most attractive location in Poznań today, and we have almost fully let.
Kęstutis Sasnauskas: We have 1,000 square meters vacant, which was a result of some moves that we need to accommodate for one of our tenants. In Warsaw, we have two amazing properties in the very heart of Rondo Daszyńskiego area in the section of Prosta and Towarowa, and Prosta and Grzybowska. It is two amazing properties comprising now 115,000 square meters of prime office. Which again, creates a very strong market position in this area. It is actually 9% market share in this Wola district of top quality properties, but also it brings our market position in Warsaw for around 2%, making us one of the larger players in this market as well. I did not mention it, but actually in Vilnius we have 10% market share, and in Poznań we have approximately 10% market share. Very strong positions in each city.
Kęstutis Sasnauskas: If we look on the portfolio, EUR 1.2 billion in value. We have a rental value of around EUR 81 million and projected revenue for the next coming 12 months of EUR 62. Average price is EUR 3.7 thousand per square meter. This is for the average portfolio. Of course, the Polish Warsaw properties are valued higher, and the Baltic properties are valued lower. Yield requirement and valuation is 6.7%, somewhat up compared to previous periods. Average property age of 7.5 years. It is again, very modern portfolio that requires very little investment. We see that actually the cash flow generation from it is extremely strong. Occupancy, again, 88.3%, but this is mainly due to the premises that are not taken in possession by the tenants yet in the bridge. Otherwise, 97.2%, which is in like-for-like portfolio. Again, extremely strong performance.
Kęstutis Sasnauskas: Average rent of EUR 240 per square meter and year. Average WAULT is 4.1 years and share of top 10 tenants is approximately 55%. You see below some of the names of top tenants that we have in our portfolio, and you will probably be able to recognize all of them. Again, it is not only that we have this accidentally, you can see actually backwards. If you look back to 2020, our occupancy levels have stayed very high, 94% on average. You see this red little dot on your left-hand side, it is actual vacancy if you look in like-for-like portfolio, and 88% is after implications of the Warsaw Unit. Again, very strong underlying performance and the surplus ratio is at 91% right now. Again, somewhat affected by the higher costs of personnel recruited to take over the properties over time.
Kęstutis Sasnauskas: If you look back to sustainability, we have 100% of the portfolio sustainability certified. All of our properties are either BREEAM Outstanding or LEED Platinum. There is no lower level than that. 97% of our portfolio is taxonomy aligned or our revenue. We received a five-star rating again this year in GRESB annual evaluation, and green financing stands for 92% of our portfolio. Over to financials and to you, Adela.
Adela Colakovic: Thank you, Kęstutis. Looking at the Q3 results, overall, the results are stable and comparable to last year. If we start at the top from rental income, the underlying changes relate to the divestment of the Riga properties in Q2, which has led to an income loss of EUR 1 million for the period compared to the same period last year. The effect has been somewhat mitigated by higher rent and record high occupancy levels in the comparable portfolio, which is the explanation for the like-for-like rental increase of over 3% in the quarter and 1.4% for the period. Moving along to net operating income, it is a bit lower than last year, mainly due to the effects from higher energy costs in the beginning of the year for the period.
Adela Colakovic: For the third quarter, it relates mainly to the gradual buildup of our own organization in Poland. As mentioned before, when everything is handed over from external management, these costs will decrease. Net financials have decreased quite a lot, but the main reason is positive currency effects in Poland related to a volatile zloty-euro development, but also many transactions related to the acquisition of the Warsaw Unit. Excluding that effect, the expenses are in line with last year. Looking at the profit from property management, the quarter increase of 4% is mainly related to the mentioned currency effect, and for the period, the profit is slightly decreased. The acquisition of the Warsaw Unit has only had a small impact on the results this quarter since it has only been in the portfolio for six days in Q3.
Adela Colakovic: During the quarter, we have had some positive effects from property revaluations, but I will get into those a little bit further along in the presentation. Looking at our earnings capacity, there is quite a lot to talk about this time. You can see that we have added a column adjusted for the full effect of the signed rental agreements in the bridge. It is the first column to the left. I will start off with the Q3 and Q2 reported figures. Rental income has increased by 16% due to the new property, but also the increased occupancy rate in the comparable portfolio, which was 97.2% as we mentioned before. The current occupancy rate in the bridge is 57%. Moving on to property expenses, we can see that they have increased.
Adela Colakovic: One of the reasons is the already mentioned buildup of our own organization and the lower occupancy rate, which was 88% in total this quarter. Since we have almost 100% triple net tenant agreements, which means that we can recharge most of our property-related expenses to the tenant. Given that the occupancy rate is quite low right now, it means that a higher portion of those costs stay with us. It also means that as the vacancy shrinks, the property cost will follow. Central admin increased slightly due to higher personnel costs. Interest income is higher as a result of increased cash, which is also a temporary effect since we have some outstanding payments related to the acquisition.
Adela Colakovic: Interest expenses are higher due to increase of debt as a result of financing of the bridge, but also refinancings that we have done during the quarter in the comparable portfolio. We have excluded the temporary VAT loan here. Overall, compared to Q2, it is a decrease in profit from property management by 13%, and the reason is the mentioned occupancy rate in the bridge, which is low right now. We know that it is only for short term since we have signed 10-year leases for 98% of the lettable area. The building is expected to be fully occupied by Q4 next year, and this is visible in the column to the left, where we have added those contracts and decreased the property cost in relation to what will be recharged to those tenants.
Adela Colakovic: Everything else is unchanged from the Q3 column since this is not a forecast, it is just a snapshot of how it looked per the end of September. With these contracts in the portfolio, the profit from property management is expected to reach EUR 0.36 per share, an increase of almost 17% compared to Q2. A clear illustration of the value add from this investment. Speaking of values, we will look closer at the property value development. During the period, we have invested almost EUR 8 million in tenant improvements in several buildings. One of the biggest ones is for the health ministry in Vilnius, but also to our tenant, Vinted, which has a whole premise for themselves in Vilnius, where they have their headquarters.
Adela Colakovic: There has also been a positive effect of the unrealized changes in value due to increased market trends in Warsaw, but it was slightly mitigated by a yield increase, mainly in Vilnius. In Q2, we divested two Riga properties, which brought down the value by EUR 39 million, and the most significant effect and value add this year has been the acquisition of the bridge, which has increased the portfolio by 22% since last year. The average yield in the valuations is 6.7%, at the same level as in Q2, and the average growth over the past five years is 25%. Let's look a little bit more into the Eastnine financing situation.
Adela Colakovic: Starting with the development of loan-to-value, average interest rate, and interest coverage ratio in the top left corner. The loan-to-value increased this quarter to 58%, mainly due to the new acquisition, which we had to take a VAT loan, because that will be repaid during this quarter when we get reimbursed from the tax authorities. But even though we get that money back, the LTV would drop theoretically to 53%. Simultaneously, our cash will decrease by approximately EUR 50 million during the next one and a half years, which means that the LTV will go down and then up a little bit. But we're comfortable that it won't go over 60% and maybe stay between 55% and 57% in the foreseeable future. The average interest rate has increased slightly this quarter because of the swaps rate taking the wrong turn.
Adela Colakovic: On a more positive note, we have refinanced EUR 46 million of our comparable portfolio, and in that portfolio, we were able to reduce the credit margin by 34 basis points compared to Q2. We increased our debt duration, which is a sign of continued favorable financing conditions for us and a strong relationship with our banks. After the refinancings, our debt duration increased to 3.5 from 2.9 years, and the fixed interest period went up to 2.6 from two years. The interest coverage ratio is remaining at 2.4 and has been at a stable and good level for a while. Looking at the debt maturity, the next refinancings of a total of EUR 177 million are spread out during next year and are already being discussed with our banks. The interest maturity is visible in the same chart, and 79 is fixed with interest rate swaps.
Adela Colakovic: Looking at our cash position, it has actually increased since last quarter despite the acquisition, and that is explained partly by the refinancings that we did, which released EUR 46 additional millions. The other part is related to tenant fit-out contributions and deferred payments for the bridge acquisition of approximately EUR 50 million that will be released in different stages over the coming one and a half year. But EUR 20 million of those are actually an investment that will increase the value of the bridge. Overall, the financing is stable and solid, and we're comfortable with the situation. Looking at the Eastnine share, we can see that in the long term, it has had a positive development, and the annual average return is at almost 7%, which outperforms the real estate index, which is -8%. Thank you. Now we can go on to questions.
Adela Colakovic: Okay, so we will start off. Will there be any move-ins in the bridge in Q4 2026, or are they all occurring in 2027?
Kęstutis Sasnauskas: Most of it is actually Visa, and it will take place in 2027. I think the remaining smaller tenants will also be moving in the beginning of 2027. So there will be no more moves-in during 2026.
Adela Colakovic: Okay. What is your view on divesting assets in Vilnius to finance acquisitions in Warsaw? Any ongoing discussions?
Kęstutis Sasnauskas: We are looking at divesting some assets. Of course, you probably know that we have decreased our presence in Riga. We have sold two assets. We have one remaining asset, and that is also a candidate for sale. When it comes to Vilnius, we are also looking into some opportunities, and we have some ongoing discussions as well. Again, it will come to some favorite acquisitions in Poland, but we also see some acquisition opportunities in Vilnius as well. So moving a little bit of our portfolio, again, with very high focus on improving the quality of the offering that we have, and basically strengthening our positions, in every single market that we have entered.
Adela Colakovic: Central admin costs were quite low during the quarter. Are we starting to see effects of the insourcing in Poland? I can answer to that one. Central admin is only related to staff and overall. Direct property costs are visible in the property cost row. The lower central admin costs are related to vacation effects.
Kęstutis Sasnauskas: Vacation fund, basically,
Adela Colakovic: Exactly
Kęstutis Sasnauskas: has been reduced. All of our personnel that is related to property is taken under property costs, and this will be seen in the lower property costs, basically, and higher surplus ratio, et cetera.
Adela Colakovic: Starting from next year, basically.
Kęstutis Sasnauskas: Yes. The main effect will come from Q2 next year.
Kęstutis Sasnauskas: It will gradually happen already this year.
Adela Colakovic: You report other current assets of around EUR 63 million. Can you give some details on what it is? That is the VAT receivable from the Polish tax authorities.
Kęstutis Sasnauskas: In Poland, when you do transactions, you have to pay VAT on the full amount. We paid VAT on EUR 240 million, and this is expected to be returned end of the quarter next year.
Adela Colakovic: Exactly. Your restricted cash position is increasing to around EUR 15 million. Why is it increasing, and will that amount be restricted going forward as well? Is that cash position generating any financial income? Yes, the restricted cash, approximately EUR 10 million of it, is related to the acquisition of the bridge and will be paid out during this quarter, probably. Yes, we have some interest on the bank accounts, which also explains why our interest income is increasing in the current earnings capacity. Congratulations on the recent acquisition. Poland is now clearly your largest market. Are you looking into new markets on the agenda?
Kęstutis Sasnauskas: No, I am very clear about this. We still have a lot to do in Warsaw. Even within Poland, we will grow within those cities that we are in, Warsaw and in Poznań, and we will continue growing in Vilnius as well. These are the key three cities where we will continue strengthening our position. These are the fastest-growing, strongest markets today, I think, in the whole of Europe. This is where we want to be. Over time, we do not exclude other markets. For the time being, basically for the next coming three to five years, the main focus will be on strengthening our position in Warsaw, Poznań, and Vilnius.
Adela Colakovic: Do you consider the acquisition of the bridge resulting in a too high portfolio concentration risk around Warsaw Rondo Daszyńskiego? Please elaborate.
Kęstutis Sasnauskas: Yeah. There is also concentration versus diversification. Properties are always about locations and having a strong view on the locations. It took us a long time to analyze the market. We very strongly believe in this area because it is not only a pure office area, it will be a residential area as well. There is a huge development next door to us that is actually taking place, and we see a number of other projects coming up into the residential area as well. So it will be a very lively, nice part of Warsaw containing residential, hotels, restaurants, and full of life. That is why we are very strong believers and want to continue being strong in Wola. There are other places in central Warsaw that we also will be looking at.
Kęstutis Sasnauskas: In properties, locations are more important, and having a very strong position in these markets is even more important. We can actually offer our tenants to relocate, to move, but keep being in our system. We have seen that very much in Vilnius. We have seen that in every single market where we are only having these bigger properties. We can actually accommodate those needs. We see that already some companies that have recently moved in or are about to move in sometimes need more space than they had originally anticipated, et cetera. There is a very strong demand, and we want to do that. Yes, there is concentration, but that is concentration we are not really afraid of.
Adela Colakovic: Can you say anything about when in 2027 Visa will move in?
Kęstutis Sasnauskas: The first move-in is expected somewhere in Q1, Q2, half of the premises, and the second half is expected in November.
Adela Colakovic: Given LTV at 58% and focus on the bridge lease-up, should we assume the acquisition agenda is effectively paused until full occupancy is reached, or are you actively evaluating opportunities in parallel?
Kęstutis Sasnauskas: We are looking at new opportunities. All the transactions, they are taking a very long time. The acquisition of the Warsaw Unit Bridge took a shorter time. It does not happen overnight. We are working on our pipeline, we are working on our target list very clearly, and if we will see the opportunity to acquire them, we will do that. This is irrespective of the tenancy move-in into the properties. Of course, we have stretched ourselves financially a little bit. We need to accumulate cash flows, et cetera, and see how this could be financed. Of course, current conditions on the stock market are probably not the most favorable to raise capital. This will always be a balancing act. What is important is that every acquisition we do is value creative for the shareholders.
Kęstutis Sasnauskas: That means that we want to see a significant increase or positive increase in profit from property management per share. This is the most important criteria that we want to follow and we will follow. You can see historically, actually on our buildup, in the beginning of the presentation, now we have a slight dip because we take on some cost and because of the empty building, basically, or half empty building. But once the tenants move in, we will see a fantastic increase in cash flow. Again, this stage of this acquisition helps us to come in into a relatively lower pricing, and has a value potential for the shareholders as well.
Adela Colakovic: As you mentioned in the report, net lettings for the quarter amounted to -154K, which is natural given the elevated occupancy rate. Could you, anyway, please give some further comments on the current tenant market sentiment in Poland and Lithuania?
Kęstutis Sasnauskas: Market sentiment is very strong. But again, the market is very divided. We see that the prime locations, prime premises, are in very high demand. If you look on Wola region per se, on all the high rises that you see, basically there is no vacancy. Even today, at maximum, you can find smaller premises, maybe sometimes a bit spread out, et cetera. There is very little vacancy. We have zero vacancy, I would say, even The Bridge is 98% leased. Actually, these 2% are already reserved for the existing tenants, and the contracts will be signed shortly. It is no longer in the market. Warsaw Unit is 100% leased. Even ourselves actually struggle to find an office for ourselves in those premises. The market is very strong.
Kęstutis Sasnauskas: But if you move away and you find buildings that are not of the same quality or a bit worse location, you can easily find quite significant vacancy. So this flight to quality is very strong. The rents in prime locations are actually going up. Even though we see quite significantly lower rents in the worse premises, they are not really competing, because somehow people demand much more modern premises. For us, again, we focus very much on highest quality. It is also very important for us going forward in thinking about potential implications of AI, and office usage on them. We believe that actually only the best product in the market will be able to compete. That is why we are extremely selective, extremely disciplined, I would say, in the type of properties we choose. If you look on our portfolio, it is very difficult to match today.
Kęstutis Sasnauskas: We are very lucky enough to actually have this opportunity to build portfolio the way we are building gradually with some care and growing. Still, we have delivered 25% portfolio growth over the last 5 years. So we are very proud of it.
Adela Colakovic: Given the fact that you are establishing a new Polish organization, how much do you see the company to further grow in Warsaw and Poland as a whole?
Kęstutis Sasnauskas: We have not set very clear figures. Of course, there are some positive implications of growing further in Poland because today, our Polish market stands for approximately 64% of our portfolio. It stands for slightly higher portion of our EBITDA. It is very important to get included into EPRA index, for instance, is to have 75% of EBITDA generated from developed markets. Poland is considered to be developed according to LSA index makers, whilst Lithuania is considered being frontier, and it does not match in any of the other categories where you can be included into index. So for us, it is very important to reach the 75%. We are actually on the way to do it. So that is one aspect. Probably the priority will lie first into building more portfolio in Poland, before we continue growing in Vilnius again. But it depends again on the situation.
Kęstutis Sasnauskas: The properties that we want to buy, they are relatively few. We cannot really choose the timeline for each of them that we want to acquire. It depends a little bit on the opportunity, the timing, the possibilities, et cetera. This is where that will have some implications for us, how we can continue growing.
Adela Colakovic: That was the last question.
Kęstutis Sasnauskas: Okay. With this, we thank you very much for you listening to us, and see you during next quarter presentation.
Adela Colakovic: Thank you.
