baltic property fund quarterly report january - march 2015 property fund/baltic property fund...

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Baltic Property Fund Quarterly Report January - March 2015

Former Portus Hotel was fully renovated in the beginning of the year and is open from March 2015 as Tallinn Seaport Hotel

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Macro overview

The Baltic economies continued to grow in 2014, despite the geopolitical tensions and still weak European growth. Annual GDP grew by 2.1% in Estonia, 2.4% in Latvia and 2.9% in Lithuania, driven mostly by strong domestic demand. The GDP growth of the Baltic countries remains among the strongest in the EU, compared to a European Union average annual GDP growth rate of 1.3% and Euro zone GDP growth of 0.9% y-o-y. Key risks to the Baltics’ growth outlook are further sanctions from Russia and weak demand from key export markets.

Unemployment remains low in Estonia, at 6.3% in 4Q 2014 (7.5% in 3Q 2014). The annual average un employment rate of 7.4% in Estonia is the lowest for the last six years. The annual average unemployment rate in 2014 was 10.8% in Latvia and 10.7% in Lithuania, with respective Q4 ratios of 10.2% and 10.1%.

Annual average inflation (HICP) in 2014 compared to 2013 was 0.5% in both Estonia and Lithuania and 0.4% in Latvia. Inflation in 4Q 2014 was 0.2% across the Baltic countries.

The Economic Sentiment Indicator (ESI) in Estonia had declined from 102.8 points in November 2014 to 96.5 points by April 2015, as a result of decreased confidence in all business sectors. The ESI in Latvia and Lithuania is 104.2 and 104.9 points respectively, and has remained broadly unchanged compared to November 2014.

Property market

In 1Q 2015, several new speculative and built-to-suit office buildings in Tallinn were completed – Lelle 22 and 24 in the Järvevana Quarter near the city centre (Eesti Energia HQ), and the Sõpruse 157 Office Building and Metalli Maja in the Kristiine city district. These projects were almost fully leased before completion, and therefore developers are planning the next development stages. The leasing market remains active, with international software company Playtech for example signing a lease agreement to occupy the top four floors (approx 3,000 sqm) in a new 13-story office building in Ülemiste City after completion of the building in September.

At the end of 1Q 2015, three office properties were under construction in Riga: Z-Towers (10,000 sqm), the second stage of Europa Business Centre (2,400 sqm), and an office property on Sporta Str. 11 (estimated GLA 14,000 sqm). Total speculative vacancy decreased to 8.9%, while rental rates remained at 4Q 2014 levels. In Q1, the most remarkable lease market deals included the relocation of IMG Services from the Jupiter office building to SWH Business Centre, and Accenture moving to Krasta Street.

On the Vilnius office market, developer SBA Group completed 2,300 sqm of office space in Sostena BC in 1Q 2015, and started the construction of the second stage of Green Hall, with GLA of 7,600

sqm. Increasing construction activity is being encouraged by the growing demand from international companies. For example, international company Adform occupied 5,000 sqm of office space in a Class B1 Premium office building in March 2015, and Danske Bank is planning to expand its shared service centre by 5,000-7,000 sqm.

After several new international brands made their debut on the Tallinn retail market in 2014, domestic retailers are expanding in 1Q 2015. DIY chain Decora, widely represented in southern Estonia, is planning to enter the Tallinn region by opening a store in the redeveloped Viimsi Market in June 2015 and constructing a new DIY shopping centre, Decora Maja, with a total area of 14,150 sqm, planned for completion in April 2016.

The retail market remained stable throughout 1Q 2015 in Riga, with vacancy and rental rates remaining at 4Q 2014 levels. The most successful shopping centres continue to enjoy operations with close to zero vacancy. The active expansion of international brands continued, with Calzedonia Group opening the clothing store Calzedonia and lingerie store Intimissimi in Riga Plaza.

Similarly, on the Vilnius retail market, interest from international trademarks continues as Zara opened its biggest store in the Baltics, at 2,300 sqm, in 1Q 2015. Development remained active, with Prekybos parkas constructing the second stage of Nordika SC in the retail zone around the IKEA shopping centre, where DIY store Senukai will occupy 17,000 sqm of the total 22,000 sqm. Additionally the construction of the second stage of Domus Pro SC (GBA 4,500 sqm) started, with a fully-formed tenant mix.

The industrial segment remains active in Tallinn, with approximately 136,000 sqm of additional area under construction in March 2015. In 1Q 2015, the first stage of the Smarten Logistics building, with 17,250 sqm of GLA, was commissioned. Preparatory work started on constructing logistics centres for ETK, Sanitex and Tallink, with 75,000 sqm of area in total. Based on the so-far-successful development of its large-scale speculative VGP Park Nehatu project, developer VGP started the construction of the fifth building, at 11,700 sqm, in the logistics park.

The development of industrial premises is similarly active in the Riga region, with close to 120,000 sqm of industrial premises currently under construction. The first buildings are due for completion already in 2Q 2015. Demand remains high and vacancy is expected to decline slightly in Q2. On the leasing market, Trialto relocated from Dominante industrial park to Avers in Q1.


Key economic figures 4Q 2014 Estonia, % Latvia, % Lithuania, %GDP growth 3.0 2.1 2.4Unemployment 6.3 10.2 10.1Inflation (HICP) 0.2 0.2 0.2

Market tendencies 1Q 2015

EstoniaRetail Office

Latvia Retail Office

Lithuania Retail Office

Construction

Supply

Demand

Rental rate

Vacancy

Yield

Total investment volume

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Vilnius’ industrial market is calm, with stable rental rates, low take-up levels and a slight increase in vacancy. The 9,000 sqm Transimeksa warehouse project, with built-to-suit and speculative premises, entered the market in 1Q 2015. The low take-up level indicates a stabilisation in demand in the industrial segment, with a possible slight downward trend.

Several large-scale deals were closed at the beginning of the year in Estonia, resulting in a total investment volume of approx. EUR 150m in 1Q 2015. EfTEN Capital acquired Radisson Blu Sky hotel for EUR 46m, the Police and Border Guard Board building was sold for above the EUR 20m threshold, and Eesti Energia’s new HQ at Lelle 22 was sold to Colonna Real Estate. Additionally, Partners Group acquired the Hobujaama 4 office building, Vesse shopping centre and Valge Maja among other assets from BPT Optima’s fund portfolio. The full deal included the acquisition of seven properties across the Baltics for EUR 163m, and is the largest investment transaction since 2008.

Total investment volume amounted to approx. EUR 45.9m in 1Q 2015 in Latvia, with the retail segment being the main target for investors. Partners Group bought Olimpia shopping centre as a part of the BPT Optima portfolio acquisition, and Hili Properties acquired a portfolio of 9 retail objects across Latvia.

In 1Q 2015, Lithuania’s investment market also remained active. The BPT Optima portfolio transaction was also one of the key deals in Lithuania, as three properties in Vilnius, Kaunas and Klaipeda were sold in the bulk deal. Also, Europa SC was sold from the BPT Secura fund to Baltic Opportunity Fund, both managed by Northern Horizon Capital, as one of the last steps to liquidate the BPT Secura fund. Outside Vilnius, Kaunas was a target for investment activity, with SBA Group buying an old administrative building with a gross area of 12,600 sqm in Kaunas city centre. The investor plans to fully renovate the building into a new modern business centre.

Portfolio activities The average rental level for the portfolio in 1Q 2015 was EUR 6.6/sqm/month, and is expected to remain stable with a slight upward trend. The average rental level of EUR 7.6/sqm in the previous quarter was higher than normal as it was influenced by year-end turnover rents paid in December.

Former City Hotel Portus, now named Tallinn Seaport Hotel, was closed for reconstruction work in January and February and reopened from March with a new name and operator. During reconstruction, all rooms, common areas and technical systems were fully renovated. The property value at the end of Q1 has increased slightly on account of the hotel boiler house, located on an adjacent plot, purchased from the previous operator.

Similarly, the second stage of investment work was carried out at GOSPA Hotel during the first months of 2015, where in addition to the pool and sauna area renovated in 2014, rooms and spa areas were renewed. The hotel continued its operations as normal, as the work was carried out in stages.

Portfolio vacancy for the quarter was 4.0%, continuing the positive trend of the last financial year. Vacancy in the office

Sector Allocation (% of fund value)

Country Allocation (% of fund value)

Office 36 Retail 35 Logistics 15 Hotel 14

Estonia 77 Lithuania 12 Latvia 11

Portfolio vacancy rate by rental value (%)

2Q 2014 3Q 2014 4Q 2014 1Q2015

4

8

12

16

20

Estonia Latvia Lithuania Fund


buildings remains low, with only the Laracija property in Klaipeda and Zemitana property in Riga operating at higher vacancy rates (11% and 22% respectively). In the Zemitana property, fourth floor open areas have been renovated into smaller offices, which are more in demand on the market, so some decrease in vacancy is expected.

The retail properties of Nurmenuku and DIY Papiniidu Bauhof continue to perform. Improvements in the tenant mix and marketing activities are continuing in the retail centres at Jõhvi, in order to remain competitive and secure rental revenues. Furniture and DIY centre Deco in Klaipeda is showing stable performance, with approx. 6% of vacant areas in the centre still to be rented out.

In the monthly review of valuations it was decided to decrease the valuation of one commercial property by EUR 0.94m as a result of an anchor tenant sending a termination notice to end their lease in the coming 12 months. The expected short-term vacancy and a drop in the average rental level for the property motivated the decrease and the adjusted valuation is included in the 31 March 2015 balance sheet.

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Result contribution (YTD, EURm)

Operatingresult

Administrationcost

Net �nancial items

Total result

6.2

2.9

-1.2

-0.9

-1.2

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Revaluation of properties

Financial overview

The net asset value of East Capital Baltic Property Investors AB (publ.) had increased to EUR 382.17 by 31 March 2015, representing a 0.22% increase for the quarter, and a 6.58% increase year-to-date, compared to 30 June 2014.

The rental revenue for the period of July 2014 to March 2015 was EUR 7.54m, a 2.6% increase compared to EUR 7.35m a year ago. Operating profit for the period was EUR 6.2m, and net profit after administration costs, financial items and property revaluations was EUR 2.9m.

Interest costs totalled EUR 1.4m for the period July 2014 to March 2015, and have decreased compared to EUR 1.5m for the same period a year ago. Net financial expenses amount to EUR 1.2m y-t-d. Approximately 32% of the loan portfolio is currently fixed with interest rate hedges.

As of 31 March 2015, the investment properties totalled to EUR 111.85m after changes in property values of Portus and Kerese. The fund had EUR 77m in bank loans, representing a loan-to-value of 69%. The fund had EUR 3.92m of cash and cash equivalents (of which approx. 25% is reserved for outstanding accounts payable and accrued current liabilities).

Properties in the portfolio

Property Type Location GLA (m2)

Estonia 88,364Nurmenuku Shopping Centre Retail Tallinn 3,467Jõhvi Tsentraal Retail & office Jõhvi 8,711Jewe Retail & Furniture Centre Retail Jõhvi 11,887Kerese Commercial Centre Retail & office Narva 5,330Papiniidu Commercial Centre Retail & office Pärnu 17,322Tammsaare Business Park Office Tallinn 8,971Go Spa Hotel Hotel Kuressaare 6,610Tallinn Seaport Hotel Hotel Tallinn 4,225Tanassilma Logistics Tallinn 13,348Favor Industrial Facility Industrial Maardu 8,493

Latvia 11,826Zemitana Centrs Office Riga 4,576Duntes Nami Office Riga 7,250Lithuania 14,924Laracija Office Office & retail Klaipeda 6,964Deco Furniture and Interior Centre Retail Klaipeda 4,355Jin Centre Office Vilnius 3,605All properties 115,114

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Net Asset Value 12m rolling (EUR) East Capital Baltic Property Fund Investors AB (31.03.2015)

NAV (EUR) % 1 month % 3 months % YTD* % 12 months % Since inception382.17 0.83 0.22 6.58 11.70 -23.57

NAVIndicative NAV is published on East Capital’s website on the 15th day of every month. For more information please refer towww.eastcapital.com

For additional information regarding the East Capital Baltic Property Fund, please contact:East Capital [email protected]: +46 8 505 88 505

Fund overview

Investment profile Value added/opportunistic

Manager East Capital Baltics AS, a company fullyowned by East Capital (Domicile: Estonia)

Auditor KPMG

Fund size EUR 55.1m. The fund is closed for furthersubscriptions

Launch date July 7, 2005

ISIN SE0001467572Management fee 2.5% on net asset valueStructure Closed-end fund structured as a Swedish limited

liability company. The fund is prolonged until 2016.Redemption NoLiquidity Limited. An investment in the fund shall be regarded

as a long-term investment. OTC trading of the shares of Investor Consortium is facilitated by Pareto Securities AB.

Jun 2014 Sep 2014Mar 2014 Dec 2014

340

360

380

400

Mar 2015* Financial Year July 1 - June 30


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Financial Statements

Statement of Comprehensive Income of East Capital Baltic Property Fund AB, unaudited for the period in EUR’000

Jul 2014 - Mar 2015 Jul 2013 - Mar 2014

Revenue 7,544 7,352Direct expenses -1,303 -1,285Gross profit 6,241 6,067

Administrative expenses -1,225 -1,268Other operating income/expenses -940 -2,722Operating profit/loss 4,076 2,077

Interest income and similar profit/loss items 278 93Interest expenses and similar profit/loss items -1,441 -1,505Profit/loss before income tax 2,913 665Income tax 0 -14NET PROFIT/LOSS FOR THE YEAR/TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,913 706

Earnings per share - Ordinary shares 528.72 128.11


Statement of Comprehensive Income of East Capital Baltic Property Investors AB (publ), unaudited for the period in EUR’000

Jul 2014 - Mar 2015 Jul 2013 - Mar 2014

Earnings per share - Ordinary shares 26.02 5.01

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Statement of Financial Position of East Capital Baltic Property Fund AB, unaudited in EUR’000

31 Mar 2015 31 Mar 2014

ASSETS

Non-current assetsInvestments properties 111,845 111,663Other receivables 20 153Equipment 11 11Total non-current assets 111,876 111,827

Current assetsAccounts receivable - trade 546 709Other receivables 873 8

Accrued income and prepaid expenses 341 83Cash and cash equivalents 3,917 5,713Total current assets 5,680 6,513TOTAL ASSETS 117,556 118,340

EQUITY AND LIABILITIES

EquityShare capital 17 17Other paid-in capital 49,915 49,915

Retained earnings -15,881 -18,702Profit/loss for the period 2,913 706

TOTAL EQUITY 36,964 31,936

LiabilitiesNon-current liabilitiesInterest-bearing liabilities 69,913 52,974Derivatives 465 742Other liabilities 523 320Deferred tax liabilities 897 1,138Total non-current liabilities 71,798 55,174

Current liabilitiesInterest-bearing liabilities 7,054 25,833Accounts payable - trade 287 1,699Derivatives 395 391Other liabilities 788 3,022Current tax liabilities 0 33Accrued expenses and deferred income 270 252Total current liabilities 8,794 31,230

TOTAL EQUITY AND LIABILITIES 117,556 118,340


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Consolidated Statement of Change in Equity of East Capital Baltic Property Fund AB, unaudited for the period in EUR’000

Share capitalOther paid in

capital

Retained earningsincl. profit/loss

for the period Total equityBalance at 30 June 2013 17 49,915 -18,702 31,230Total comprehensive income 706 706BALANCE AT 31 MARCH 2014 17 49,915 -17,996 31,936

Balance at 30 June 2014 17 49,915 -15,881 34,051Total Comprehensive Income 2,913 2,913BALANCE AT 31 MARCH 2015 17 49,915 -12,968 36,964

Reconciliation to Net Asset valueConsolidated Equity above 36,964Revaluation of property values to loan values 4,476Interest swap not in NAV balance, net of tax 860NET ASSET VALUE AT 31 MARCH 2015 42,300

Baltic Property Fund Quarterly ReportJanuary - March 2015

Disclosure for segments - July 2014 – March 2015 - geographical areas in EUR’000

Estonia Latvia Lithuania Unallocated Group

Total gross income 5,422 1,067 1,055 0 7,544Income from sales 5,422 1,067 1,055 0 7,544

Depreciation of tangible fixed assets 0 -1 0 0 -1Operating profit/loss 3,886 533 551 -894 4,076Net financial income/expenses -1,163Profit/loss before tax 2,913Income tax 0

PROFIT/LOSS FOR THE PERIOD 2,913

Assets 90,719 12,357 14,236 244 117,556- where of Investment properties 85,735 12,210 13,900 0 111,845Liabilities 50,340 17,804 11,623 825 80,592

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Consolidated Cash Flow Statement of East Capital Baltic Property Fund AB, unaudited for the period in EUR’000

Jul 2014 - Mar 2015 Jul 2013 - Mar 2014

Cash flows from operating activitiesOperating profit/loss for the period 4,076 2,077Depreciation 1 4Other non-cash items 940 -1Interest received 3 88Interest paid -1,433 -1,585Income tax paid -11 -132Cash flows from current operations before changes in working capital 3,576 451

Increase (-)/decrease (+) in accounts receivables 114 -131Increase (-)/decrease (+) in other current receivables -998 10Increase (+)/decrease (-) in accounts payable -1,759 1,427

Increase (+)/decrease (-) in other current op. liabilities 74 1,623Cash flows from operating activities 1,007 3,380

Cash flows from investing activitiesInvestments in investment properties -245 -303Cash flows from investment activities -245 -303

Cash flows from financing activitiesRepayment of borrowings -2,627 -2,649Received loans 2,121 0Cash flows from financing activities -506 -2,649

Cash flow for the year 256 428Cash and cash equivalents at beginning of the year 3,661 5,285CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 3,917 5,713


Fund Summary

31 Mar 2015 31 Mar2015 31 Dec 2014 31 Dec 2014EUR ‘000 % Committed Capital EUR ‘000 % Committed Capital

CAPITAL COMMITTED 55,094 100 55,094 100Capital contributed 55,094 100 55,094 100

Total remaining available for drawdown 0 0 0 0Potential draw downs for next reporting period - 0 - 0

Fair value of portfolio 116,321 117,116Other assets 5,708 5,664

Liabilities -79,729 -80,581TOTAL NET ASSET VALUE 42,300 42,199

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Important Notice

Full information on East Capital’s funds, such as the prospectus and financial reports can be obtained free of charge from East Capital, from our local representatives and are available on East Capital’s website. Every effort has been made to ensure the accuracy of the information in this document but it may be based on unaudited or unverified figures or sources. Availability of East Capital’s funds may be limited or restricted in some countries. Detailed information about where the funds are registered for distribution and what types of distribution are permitted can be obtained at East Capital. The information herein is only directed at those investors located where this information may be distributed, and is not intended for any use which would be contrary to local law or regulation. Investment in funds always involves some kind of risk. Fund units may go up or down in value up and may be affected by changes in exchange rates. Investors may not get back the amount invested. East Capital’s Private Equity and Real Estate Funds (Special Fund Products) are directed at institutions and other professional investors. The Special Fund Products are not UCITS-regulated funds and as a result are not adapted for retail investors in the same way as East Capital’s Public Equity Funds.

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