Management Board of Northern Horizon Capital AS has approved the unaudited consolidated interim financial statements of Baltic Horizon Fund (the Fund) for the first nine 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. The virus outbreak has caused significant shifts in the Fund’s operating environment, which will have a negative overall impact on the Fund’s expected 2020 performance. 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 and less than was previously expected. Broad portfolio diversification should allow 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 2.2 million of distributable cash flow from the results for the first three quarters of 2020 to strengthen the Fund’s financial position. Over the past three quarters, the Fund has increased its cash distribution reserve to EUR 3.0 million. The Management Company believes that it was in the best interest of the investors and the Fund to reduce its quarterly cash distribution during the initial 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, 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 27.9% of total portfolio NOI in Q3 2020. Overall, the portfolio has remained resilient to the crisis and the total negative effect on the portfolio NOI for the year 2020 is expected to remain around 10%.
Distributions to unitholders for Q2 2020 and Q3 2020 Fund results
On 24 July 2020, the Fund declared a cash distribution of EUR 1,701 thousand (EUR 0.015 per unit) to the Fund unitholders for Q2 2020 results. This represents a 1.14% return on the weighted average Q2 2020 net asset value to its unitholders.
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.
Dividend capacity calculation
The Fund reduced cash distribution for Q1-Q2 2020 due to COVID-19 outbreak. Generated net cash flow (GNCF) for Q1-Q2 2020 reached EUR 0.054 per unit.
| EUR ’000 | Q3 2019 | Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 |
| (+) Net rental income | 5,412 | 5,635 | 5,772 | 4,618 | 4,799 |
| (-) Fund administrative expenses | (879) | (846) | (889) | (634) | (682) |
| (-) External interest expenses | (1,295) | (1,346) | (1,331) | (1,327) | (1,327) |
| (-) CAPEX expenditure1 | (178) | (225) | (95) | (97) | (230) |
| (+) Added back listing related expenses | 60 | - | 39 | 29 | 114 |
| (+) Added back acquisition related expenses | 16 | - | - | - | - |
| Generated net cash flow (GNCF) | 3,136 | 3,218 | 3,496 | 2,589 | 2,674 |
| GNCF per weighted unit (EUR) | 0.031 | 0.029 | 0.031 | 0.023 | 0.024 |
| 12-months rolling GNCF yield2 (%) | 8.4% | 8.6% | 11.5% | 9.6% | 9.4% |
| Dividends declared for the period | 3,061 | 3,175 | 1,701 | 1,701 | 3,111 |
| Dividends declared per unit3 (EUR) | 0.027 | 0.028 | 0.015 | 0.015 | 0.026 |
| 12-months rolling dividend yield2 (%) | 7.8% | 8.0% | 9.6% | 7.2% | 7.5% |
- 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.
- 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 2020: closing market price of the unit as of 30 September 2020).
- Based on the number of units entitled to dividends.
Net profit and net rental income
During the first three quarters of 2020, the Group recorded a net loss of EUR 6.9 million against a net profit of EUR 5.4 million for Q1-Q3 2019. The net result was significantly impacted by the one-off negative valuation result of EUR 15.8 million recognized in June 2020. The negative impact of valuation losses on investment properties was partially 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 Q1-Q3 2020 would have amounted to EUR 8.9 million (Q1-Q3 2019: EUR 7.8 million). In Q3 2020, the Fund earned a net profit of EUR 2.6 million, although negative COVID-19 related rent concessions impact on net rental income led to a lower net profit compared to previous year (Q3 2019: EUR 3.1 million). Earnings per unit for Q1-Q3 2020 were negative at EUR 0.06 (Q1-Q3 2019: positive EUR 0.06). Earnings per unit excluding valuation losses on the investment properties amounted to EUR 0.08 (Q1-Q3 2019: EUR 0.09).
In Q1-Q3 2020, the Group earned net rental income of EUR 15.2 million exceeding the previous year’s net rental income for the same period by EUR 1.6 million or 11.8% (Q1-Q3 2019: 13.6 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 Q1-Q3 2020 as compared to Q1-Q3 2019, albeit rental income growth in Q2-Q3 2020 was slower due to relief measures granted to tenants during the COVID-19 pandemic. The addition of Galerija Centrs added EUR 2.5 million to the net rental income during the first quarters of 2020, while North Star added EUR 1.1 million.
On an EPRA like-for-like basis, portfolio net rental income decreased by 7.2% year on year mainly due to weaker performance in retail and leisure segments. The decrease was partially offset by the strong performance of the office segment which remained largely unaffected by the lockdown in the Baltic States.
Portfolio properties in the office segment contributed 55.1% (Q1-Q3 2019: 51.5%) of net rental income in Q1-Q3 2020 followed by the retail segment with 40.6% (Q1-Q3 2019: 42.8%) and the leisure segment with 4.3% (Q1-Q3 2019: 5.7%).
Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 30.0% of total portfolio net rental income in the first three quarters of 2020. Total net rental income attributable to neighbourhood shopping centres accounted for 10.6% in Q1-Q3 2020.
During the first three quarters of 2020, investment properties in Latvia and Lithuania contributed 39.4% (Q1-Q3 2019: 35.4%) and 35.3% (Q1-Q3 2019: 35.4%) of net rental income respectively, while investment properties in Estonia contributed 25.3% (Q1-Q3 2019: 29.2%).
Gross Asset Value (GAV)
At the end of September 2020, the GAV decreased to EUR 358.4 million (31 December 2019: EUR 371.7 million) which was a drop of 3.6% over the first three quarters of 2020. The decrease is mainly related to the negative property revaluation of EUR 15.8 million or 3.7% of the portfolio value at the end of 2019. Compared to the previous quarter, the Fund’s GAV rose by EUR 1.7 million during Q3 2020. The Group made a capital investment (EUR 1.2 million) in the Meraki office building development project during Q3 2020. The Fund aims to continue the construction of the Meraki office building throughout 2020 and 2021. 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 2020, the Fund net asset value (NAV) decreased to EUR 138.9 million (31 December 2019: EUR 152.5 million) as a result of 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 9.0%. Positive operational performance over the period was offset by EUR 6.6 million dividend distributions to the unitholders and a negative cash flow hedge reserve movement of EUR 0.2 million. Compared to the previous quarter, the Fund’s NAV rose by EUR 0.9 million during Q3 2020 mostly due to positive operational performance of the portfolio. At 30 September 2020, NAV per unit stood at EUR 1.2247 (31 December 2019: EUR 1.3451), while NAV per unit based on EPRA standards was EUR 1.3137 (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 Q3 2020, the fair value of the Fund’s portfolio was EUR 347.2 million (31 December 2019: EUR 358.9 million) and incorporated a total net leasable area of 153,351 sq. m. During Q3 2020, the Group invested EUR 0.5 million in the existing property portfolio and an additional EUR 1.2 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 205.7 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 |
| Equity Ratio | >25%1/35.0% | 42.6% | 42.4% | 40.0% | 40.2% |
| Debt Service Coverage Ratio | > 1.20 | 3.32 | 3.35 | 3.30 | 3.16 |
- 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 the first three quarters of 2020 amounted to EUR 11.9 million (Q1-Q3 2019: cash inflow of EUR 11.0 million). Cash outflow from investing activities was EUR 2.5 million (Q1-Q3 2019: cash outflow of EUR 56.4 million) due to subsequent capital expenditure on existing portfolio properties and investments in the Meraki development project. Cash outflow from financing activities was EUR 10.9 million (Q1-Q3 2019: cash inflow of EUR 38.8 million). During the first nine months of 2020, the Fund made three cash distributions of EUR 6.6 million and paid regular interest on bank loans and bonds. At the end of Q3 2020, the Fund had a sufficient amount of cash (EUR 8.4 million) to cover its liquidity needs amid the COVID-19 pandemic.
Key earnings figures
| EUR ‘000 | Q3 2020 | Q3 2019 | Change (%) | |||||
| Net rental income | 4,799 | 5,412 | (11.3) | |||||
| Administrative expenses | (682) | (879) | (22.4%) | |||||
| Other operating income | - | 17 | (100.0%) | |||||
| Valuation losses on investment properties | (4) | - | - | |||||
| Operating (loss) profit | 4,113 | 4,550 | (9.6%) | |||||
| Net financing costs | (1,367) | (1,339) | 2.1% | |||||
| Loss before tax | 2,746 | 3,211 | (14.5%) | |||||
| Income tax | (153) | (152) | 0.7% | |||||
| Net (loss) profit for the period | 2,593 | 3,059 | (15.2%) | |||||
| Weighted average number of units outstanding (units) | 113,387,525 | 100,461,178 | 12.9% | |||||
| Earnings per unit (EUR) | 0.02 | 0.03 | (33.3%) | |||||
Key financial position figures
| EUR ‘000 | 30.09.2020 | 31.12.2019 | Change (%) | |||||
| Investment properties in use | 342,775 | 356,575 | (3.9%) | |||||
| Investment property under construction | 4,437 | 2,367 | 87.5% | |||||
| Gross asset value (GAV) | 358,409 | 371,734 | (3.6%) | |||||
| Interest bearing loans and bonds | 205,660 | 205,827 | (0.1%) | |||||
| Total liabilities | 219,544 | 219,216 | 0.1% | |||||
| Net asset value (NAV) | 128,865 | 152,518 | (9.0%) | |||||
| Number of units outstanding (units) | 113,387,525 | 113,387,525 | - | |||||
| IFRS Net asset value (IFRS NAV) per unit (EUR) | 1.2247 | 1.3451 | (9.0%) | |||||
| EPRA Net reinvestment value (EPRA NRV) per unit (EUR) | 1.3137 | 1.4333 | (8.3%) | |||||
| EPRA Net tangible assets (EPRA NTA) per unit (EUR) | 1.3137 | 1.4333 | (8.3%) | |||||
| EPRA Net disposal value (EPRA NDV) per unit (EUR) | 1.2292 | 1.3400 | (8.3%) | |||||
| EPRA Net asset value (EPRA NAV) per unit (EUR) | 1.3137 | 1.4333 | (8.3%) | |||||
| Loan-to-Value ratio (%) | 59.2% | 57.3% | - | |||||
| Average effective interest rate (%) | 2.6% | 2.6% | - | |||||
Property performance
During Q3 2020, the average actual occupancy of the portfolio was 94.6% (Q2 2020: 96.4%). Taking into account Duetto I and Duetto II rental guarantees, the effective occupancy rate was 94.6% (Q2 2020: 96.4%). The occupancy rate as of 30 September 2020 was 94.7% (30 June 2020: 96.0%). The Fund’s tenant base remains strong despite several tenants vacating premises in Q3 2020. Occupancy rates in the retail segment decreased further because of additional vacancies in Europa SC, Pirita SC and Galerija Centrs. 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% at the end of Q3 2020. Occupancy rates in the office segment still remain strong albeit two tenants vacating premises in Upmalas Biroji and Lincona had a minor negative effect on the occupancy levels.
The average direct property yield during Q3 2020 was 5.5% (Q2 2020: 5.3%). The net initial yield for the whole portfolio for Q3 2020 was 5.6% (Q2 2020: 5.2%). Property yields increased compared to Q2 2020 albeit rent relief measures are still affecting the Fund’s performance. Compared to pre-COVID-19 pandemic performance levels, the leisure and retail segments took the biggest hit mainly due to the COVID-19 incentives, while the office segment continued to perform well and remained largely unaffected. The average rental rate for the whole portfolio for Q3 2020 was EUR 11.8 per sq. m.
| Property name | Sector | Fair value1 (EUR ‘000) | NLA (sq. m.) | Direct property yield Q3 20202 | Net initial yield Q3 20203 | Occupancy rate for Q3 2020 |
| Vilnius, Lithuania | ||||||
| Duetto I | Office | 16,250 | 8,587 | 7.7% | 7.1% | 100.0% |
| Duetto II | Office | 18,665 | 8,674 | 7.3% | 7.2% | 100.0% |
| Europa SC | Retail | 39,725 | 16,856 | 5.0% | 4.7% | 91.6% |
| Domus Pro Retail Park | Retail | 16,170 | 11,247 | 7.0% | 6.7% | 96.6% |
| Domus Pro Office | Office | 7,590 | 4,831 | 8.4% | 7.1% | 100.0% |
| North Star | Office | 19,743 | 10,550 | 6.9% | 7.2% | 100.0% |
| Meraki Development | 4,437 | - | - | - | - | |
| Total Vilnius | 122,580 | 60,745 | 6.5% | 6.3% | 97.0% | |
| Riga, Latvia | ||||||
| Upmalas Biroji BC | Office | 23,033 | 10,458 | 6.4% | 6.7% | 90.2% |
| Vainodes I | Office | 20,843 | 8,052 | 6.9% | 7.0% | 100.0% |
| LNK Centre | Office | 16,505 | 7,453 | 6.4% | 6.6% | 100.0% |
| Sky SC | Retail | 4,962 | 3,254 | 8.5% | 8.6% | 98.6% |
| Galerija Centrs | Retail | 71,370 | 20,022 | 3.8% | 4.0% | 84.9% |
| Total Riga | 136,713 | 49,239 | 5.2% | 5.4% | 91.7% | |
| Tallinn, Estonia | ||||||
| Postimaja & CC Plaza complex | Retail | 30,832 | 9,145 | 1.4% | 1.6% | 95.1% |
| Postimaja & CC Plaza complex | Leisure | 14,250 | 8,664 | 8.0% | 6.7% | 100.0% |
| G4S Headquarters | Office | 16,790 | 9,179 | 7.9% | 7.3% | 100.0% |
| Lincona | Office | 16,470 | 10,871 | 7.5% | 7.2% | 91.6% |
| Pirita SC | Retail | 9,577 | 5,508 | 4.7% | 6.1% | 81.5% |
| Total Tallinn | 87,919 | 43,367 | 4.9% | 5.0% | 94.5% | |
| Total portfolio | 347,212 | 153,351 | 5.5% | 5.6% | 94.6% |
- Based on the latest valuation as at 30 June 2020m subsequent capital expenditure and recognised right-of-use assets.
- Direct property yield (DPY) is calculated by dividing NOI by the acquisition value and subsequent capital expenditure of the property.
- 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 | 01.07.2020-30.09.2020 | 01.07.2019-30.09.2019 | 01.01.2020-30.09.2020 | 01.01.2019-30.09.2019 |
| Rental income | 5,267 | 5,782 | 16,549 | 14,579 |
| Service charge income | 1,245 | 1,476 | 3,749 | 3,128 |
| Cost of rental activities | (1,713) | (1,846) | (5,109) | (4,123) |
| Net rental income | 4,799 | 5,412 | 15,189 | 13,584 |
| Administrative expenses | (682) | (879) | (2,205) | (2,405) |
| Other operating income | - | 17 | 186 | 23 |
| Valuation losses on investment properties | (4) | - | (15,757) | (2,439) |
| Operating (loss) profit | 4,113 | 4,550 | (2,587) | 8,763 |
| Financial income | 1 | 1 | 3 | 4 |
| Financial expenses | (1,368) | (1,340) | (4,118) | (3,316) |
| Net financing costs | (1,367) | (1,339) | (4,115) | (3,312) |
| (Loss) profit before tax | 2,746 | 3,211 | (6,702) | 5,451 |
| Income tax charge | (153) | (152) | (161) | (75) |
| (Loss) profit for the period | 2,593 | 3,059 | (6,863) | 5,376 |
| Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods | ||||
| Net losses on cash flow hedges | (3) | (305) | (227) | (1,397) |
| Income tax relating to net gains on cash flow hedges | (2) | 17 | 13 | 92 |
| Other comprehensive expense, net of tax, that is or may be reclassified to profit or loss in subsequent periods | (5) | (288) | (214) | (1,305) |
| Total comprehensive (expense) income for the period, net of tax | 2,588 | 2,771 | (7,077) | 4,071 |
| Basic and diluted earnings per unit (EUR) | 0.02 | 0.03 | (0.06) | 0.06 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
| EUR ‘000 | 30.09.2020 | 31.12.2019 |
| Non-current assets | ||
| Investment properties | 342,775 | 356,575 |
| Investment property under construction | 4,437 | 2,367 |
| Derivative financial instruments | - | 73 |
| Other non-current assets | 54 | 54 |
| Total non-current assets | 347,266 | 359,069 |
| Current assets | ||
| Trade and other receivables | 1,849 | 1,794 |
| Prepayments | 496 | 301 |
| Other current assets | 411 | 734 |
| Cash and cash equivalents | 8,387 | 9,836 |
| Total current assets | 11,143 | 12,665 |
| Total assets | 358,409 | 371,734 |
| Equity | ||
| Paid in capital | 138,064 | 138,064 |
| Cash flow hedge reserve | (1,770) | (1,556) |
| Retained earnings | 2,571 | 16,010 |
| Total equity | 138,865 | 152,518 |
| Non-current liabilities | ||
| Interest bearing loans and borrowings | 195,705 | 205,718 |
| Deferred tax liabilities | 6,166 | 6,199 |
| Derivative financial instruments | 1,847 | 1,728 |
| Other non-current liabilities | 1,162 | 1,298 |
| Total non-current liabilities | 204,880 | 214,943 |
| Current liabilities | ||
| Interest bearing loans and borrowings | 10,247 | 414 |
| Trade and other payables | 3,729 | 3,171 |
| Income tax payable | - | 8 |
| Derivative financial instruments | 35 | - |
| Other current liabilities | 653 | 680 |
| Total current liabilities | 14,664 | 4,273 |
| Total liabilities | 219,544 | 219,216 |
| Total equity and liabilities | 358,409 | 371,734 |
For more information, please contact:
Tarmo Karotam
Baltic Horizon Fund manager
E-mail tarmo.karotam@nh-cap.com
www.baltichorizon.com
The Fund is a registered contractual public closed-end real estate fund that is managed by Alternative Investment Fund Manager license holder Northern Horizon Capital AS. Both the Fund and the Management Company are supervised by the Estonian Financial Supervision Authority. This announcement contains information that the Management Company is obliged to disclose pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the above distributors, at 23:32 on 30 November 2020.
Attachment
