EfTEN Real Estate Fund III AS unaudited consolidated interim accounts for the 4th quarter and 12 months of 2020 Tallinn Stock Exchange:EFT1T
Fund manager’s comment
The main economic event of 2020 was not an economic event – unexpected arrival and spread of the coronavirus. The virus wave that hit the Baltic States in February 2020 shut down the economy and weighed heavily on the fund’s cash flows, but only for a short time. The fund management found temporary solutions with the tenants, which usually led to a temporary rent deduction of 3-4 months and a corresponding extension of the rental period.
The second wave of the virus, which began in the fall, was significantly medically inferior to the spring outbreak, however companies had a much calmer attitude towards the second wave compared to the first. Coronavirus will definitely impact the fund’s cash flows in the first quarter of 2021, but the positive news related to vaccines gives hope that we can hope for a permanent return to normal pace of life since the second quarter of 2021. As the fund’s portfolio does not include investments in hotels or entertainment segments, the economic impact of Covid-19 on the fund’s cash flows was small.
The temporary setback was mainly reflected in a decrease in the fair value of the Fund’s investment properties. However, the European Commission’s economic recovery plan, the national measures of the Baltic states and the measures taken by the European Central Bank give grounds for predicting that property depreciation is temporary and property values will recover. This position is secured by the development of the residential real estate market in the Baltic States, where sales prices have practically not fallen and the effects of the corona crisis were reflected in a temporary drop in the number of transactions that lasted several months. In general, the faster dynamic of residential real estate is reflected in large commercial real estate with a lag of 3-4 quarters. At the turn of the year, the average non-leveraged net return on the underlying fund assets was 7.8%.
Despite the turmoil caused by the coronavirus, the fund made four new investments in 2020: two transactions were completed in Latvia in February, including the Piepilsetas logistics and production center in Kekava near Riga and the AirBaltic headquarters in the airport area Riga were bought. In August 2020, the fund invested in the Rutkausko office building in Vilnius, where the Lithuanian subsidiary of the IT group ATEA, listed on the Norwegian stock exchange, is a long-term anchor tenant. In the last month of the year the fund acquired its first nursing home in Tallinn, Pirita district. The care home segment in the Baltic states has very good growth prospects and the fund plans to invest in this segment in the future. In 2020, total investments in new commercial buildings amounted to EUR 33.5 million.
In summary, the management of the fund is satisfied with the fund’s performance in 2020. At the end of the year, 99% of the commercial space was rented.
Financial overview
The consolidated turnover of EfTEN Real Estate Fund III AS amounted to EUR 10.731 million in the twelve months of 2020 (12 months in 2019: EUR 9.512 million), which corresponds to an increase of 13% per year. The Group’s net rental income amounted to EUR 10.103 million in 2020 (2019: EUR 8.754 million), an increase of 15.4% compared to the previous year. Consolidated net income for the same period was EUR 3.317 million (12 months 2019: EUR 7.617 million). The lower net income in 2020 is due to the revaluation of investment property, which in turn was mainly due to a more conservative cash flow forecast.
In the fourth quarter of 2020, the fund achieved total sales of EUR 3.033 million, EUR 521 thousand (20.7%) more than in the same period of the previous year. The increase in sales revenue of EUR 582 thousand in the fourth quarter is due to the increase in rental income from newly acquired investment properties. The increase in rental income by EUR 96 thousand is due to a decrease in vacancies in the Evolution office building in Lithuania. In the fourth quarter, the Covid 19 crisis had the greatest impact on rental income at the Saules Miestas shopping center, which is 178,000 euros (19%) below the previous year’s figure.
In December 2020, Colliers International carried out a regular valuation of the fund’s real estate portfolio, which increased the value of the entire real estate portfolio by 611 thousand euros (0.4%). Overall, the value of the property portfolio decreased in 2020 by a total of EUR 3.374 million (2.3%). The fund’s consolidated net income in the fourth quarter was EUR 2.570 million (Q4 2019: EUR 2.341 million).
The net asset value of EfTEN Real Estate Fund III AS increased by 0.4% in 2020. In May 2020, the fund paid dividends from the 2019 profit totaling EUR 2.745 million (spring 2019: EUR 3.061 million). Without the payment of dividends, the fund’s net asset value would have increased 4.7% in 2020. The annual return on investment (ROIC) in the 2020 financial year was 6.4% (12 months 2019: 17.1%).
Access to flexible financing terms helps increase the Group’s competitiveness. In 2020, the Group received bank loans in connection with the acquisition and development of new property investments totaling EUR 5.9 million. The weighted average interest rate of the Group’s loan agreements (including the interest swap agreements) at the end of December is 2.3% (December 31, 2019: 1.8%) and the LTV (loan to value) 50% (December 31, 2019: 52)% ).
In 2020 the group achieved a free cash flow of EUR 3.747 million (2019 12 months: EUR 3.381 million). After deducting the Lithuanian corporate income tax expense and calculating the estimated dividend income tax expense for Estonian and Latvian companies, EfTEN Real Estate Fund III AS was able to pay shareholders a net dividend of EUR 2.798 million (66 cents per share) from this year’s profit in accordance with the established dividend policy.
Real estate portfolio
In January 2020, EfTEN Real Estate Fund III AS entered into debt purchase agreements for the acquisition of the owner of the Air Baltic main building at Riga Airport and the owner of the production and storage building in Piepilsetas, Kekava, near Riga. The transactions were completed in March 2020 and the financial indicators of the two new subsidiaries were consolidated line by line in the consolidated financial statements as of March 1, 2020. A total of EUR 8.873 million, including EUR 3.780 million in loan receivables from former owners, was paid for the subsidiaries. The transaction price will be adjusted in accordance with the agreement for changes in the working capital of subsidiaries during the period of closing of the transaction and it is estimated that the Group will have to pay an additional 100,000 euros for the acquisitions. The value of investment property owned by subsidiaries at the time of acquisition was EUR 15.800 million.
In August 2020, EfTEN Rutkausko UAB acquired an office building in Vilnius at a cost of EUR 11.8 million. The main tenant of the office building is the IT company Atea UAB. The acquisition was financed with 39% of the equity, whereby the issue of the entire fund was invested in the amount of EUR 16 million last year.
In November 2020, EfTEN Real Estate Fund III AS founded a 100% subsidiary EfTEN Pirita OÜ, which paid 2.5 thousand euros for the subsidiary’s share capital. In December 2020, the fund paid an additional 3.1 million euros into the subsidiary’s equity. The subsidiary then acquired the first real estate investment fund in the new nursing home segment. The acquisition costs for the property investment amounted to EUR 6.2 million and the nursing home is operated by Pirita Kodu OÜ. The tenant begins paying the rent on April 1, 2021. During the start-up phase, the rent increases gradually and reaches full capacity from January 1, 2022.
At the end of September 2020, the Group had 15 (December 31, 2019: 11) commercial real estate investments with a fair value of EUR 144.235 million (December 31, 2019: EUR 113.011 million) and acquisition costs of EUR 136.349 million (December 31). 2019: EUR 101.746 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| IV quarter | 12 months | |||
| 2020 | 20191 | 2020 | 2019 | |
| Thousands of euros | ||||
| revenue | 3.033 | 2.512 | 10,731 | 9.512 |
| Cost of services sold | -103 | -100 | -325 | -329 |
| Gross income | 2,930 | 2,412 | 10.406 | 9.183 |
| Marketing costs | -97 | -126 | -303 | -429 |
| General and administrative expenses | -431 | -870 | -1,597 | -1.847 |
| Gain / loss from changes in the fair value of investment property | 612 | 1.641 | -3,374 | 3.101 |
| Other operating income and expenses | -7 | 38 | -3 | 37 |
| Operating profit | 3,007 | 3.095 | 5.129 | 10,045 |
| Interest income | 0 | 0 | 0 | 14th |
| Other financial income and expenses | -355 | -161 | -1.322 | -1.197 |
| Profit before tax | 2,652 | 2.934 | 3.807 | 8,862 |
| Income tax expense | -82 | -593 | -490 | -1.245 |
| Overall result for the financial period | 2,570 | 2,341 | 3.317 | 7.617 |
| Earnings per share | ||||
| – Basic | 0.61 | 0.56 | 0.79 | 2.01 |
| – Diluted | 0.61 | 0.56 | 0.79 | 2.01 |
CONSOLIDATED FINANCIAL STATEMENT
| December 31, 2020 | December 31, 2019 | |
| Thousands of euros | ||
| FINANCIAL ASSETS | ||
| Cash and cash equivalents | 5.128 | 12,986 |
| Short term deposits | 0 | 6,000 |
| Receivables and provisions | 2.018 | 667 |
| Prepaid expenses | 128 | 51 |
| Total current assets | 7.274 | 19,704 |
| Long term claims | 18th | 0 |
| Investment Property | 144.235 | 113.011 |
| Property, plant and equipment | 101 | 114 |
| Intangible assets | 4th | 0 |
| Total fixed assets | 144.358 | 113.125 |
| TOTAL ASSETS | 151.632 | 132,829 |
| LIABILITIES AND EQUITY | ||
| Borrow | 28,781 | 21,147 |
| Derivatives | 246 | 271 |
| Debts and advances | 1.995 | 1,132 |
| Total short-term liabilities | 31,022 | 22,550 |
| Borrow | 43,587 | 34.225 |
| Other long-term debt | 957 | 609 |
| Deferred income tax liability | 4,583 | 4,534 |
| Sum of long-term liabilities | 49.127 | 39,368 |
| Total liabilities | 80.149 | 61,918 |
| Share capital | 42.225 | 42.225 |
| Capital reserve | 9,658 | 9,658 |
| Legal reserve capital | 1.323 | 936 |
| Retained earnings | 18.277 | 18.092 |
| Total capital | 71,483 | 70,911 |
| TOTAL LIABILITIES | 151.632 | 132,829 |
Marilin Hein
CFO
Telephone 655 9515
Email: [email protected]