Comment of the fund manager
The main economic event of 2020 was not an economic event - unexpected arrival
and spread of coronavirus. The virus wave that reached the Baltics in February
2020, closed the economy and put a significant strain on the fund's cash flows
but only in short term. The fund's management found temporary solutions with the
tenants, which usually resulted in a temporary rent discount for 3-4 months and
an equivalent extension of the lease period.
The second wave of virus, which started in the fall was significantly worse in
medical terms compared to the outbreak in spring, however, the companies had a
much calmer attitude towards the second wave compared to the first wave.
Coronavirus will definitely have an effect to fund's cash flows in the first
quarter of 2021, but the positive news related to vaccine give hope that since
the second quarter of 2021 we can hope for the permanent return of ordinary
rhythm of life. Since the fund's portfolio does not include investments in
hotels or entertainment segment the economic effect of Covid-19 to fund's cash
flows was modest.
The temporary setback was mainly reflected in decrease of the fair value of
fund's investment properties but European Commission's economic recovery plan,
national measures of Baltic states and steps taken by European Central Bank give
reason to predict that the setback in value of real estate is temporary and the
real estate values will recover. This position is assured by the developments in
residential real estate market in the Baltics where sales prices practically did
not decrease and the effect of corona crisis was reflected in temporary, few-
months long decrease in the number of transactions. Generally, the faster
dynamics of residential real estate reflects in large-scale commercial real
estate within delay of 3-4 quarters. As at the turn of the year, the average
unleveraged net yield of the fund's underlying assets is 7.8%.
Despite the turmoil caused by coronavirus, the fund made four new investments
during 2020: in February, two transactions were completed in Latvia by
purchasing Piepilsetas logistics and production centre in Kekava near Riga and
AirBaltic's headquarters in the territory of Riga airport. In August 2020, the
fund invested in the Rutkausko office building in Vilnius, where the Lithuanian
subsidiary of IT-group ATEA, that is listed in Norwegian stock market, is a
long-term anchor-tenant. In the last month of the year, the fund acquired its
first care home in Tallinn, Pirita district. The care home segment in the
Baltics has a very good outlook for growth and the fund plans to invest in the
given segment moving forward. In 2020, total investments in new commercial
buildings totalled to EUR 33.5 million.
In conclusion, the management of the fund is satisfied with the fund's
performance in 2020. As at the end of the year, 99% of commercial areas are
rented out.
Financial overview
The consolidated sales revenue of EfTEN Real Estate Fund III AS for 12 months of
2020 was EUR 10.731 million (12 months of 2019: EUR 9.512 million), which
increased by 13% in a year. The Group's net rental income in 2020 totalled EUR
10.103 million (2019: 8,754 million euros), increasing by 15.4% year-on-year.
The Group's net profit for the same period was EUR 3.317 million euros (2019 12
months: EUR 7.617 million). The lower net profit in 2020 is due to the
revaluation of investment properties, which in turn was mainly due to a more
conservative cash flow forecast.
In the fourth quarter of 2020, the fund earned a total sales revenue of EUR
3.033 million, which is 521 thousand euros (20.7%) more than in the same period
last year. The increase in sales revenue in the fourth quarter by EUR 582
thousand is related to the increase in rental income from newly acquired
investment properties, and rental income increase 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 affected the rental income of the Saules
Miestas shopping Centre the most, which is 178 thousand euros (19%) lower than
last year.
In December 2020, Colliers International performed a regular valuation of the
fund's real estate portfolio, as a result of which the value of the real estate
portfolio as a whole increased by 611 thousand euros (0.4%). In 2020 as a whole,
the value of the real estate portfolio decreased by a total of EUR 3.374 million
euros (2.3%). The Fund's consolidated net profit for the fourth quarter was EUR
2.570 million euros (Q4 2019: 2.341 million euros).
The net asset value of EfTEN Real Estate Fund III AS increased by 0.4% during
2020. In May 2020, the fund paid dividends from the profit of 2019 in the total
amount of EUR 2.745 million (spring 2019: EUR 3.061 million). Without the
payment of dividends, the fund's NAV would have increased by 4.7% during 2020.
The annual return on invested capital (ROIC) was 6.4% as a result of the 2020
financial year (2019 12 months: 17.1%).
Access to flexible financing terms helps to increase the Group's
competitiveness. During 2020, the Group received bank loans in connection with
the acquisition and development of new real estate investments in the total
amount of EUR 5.9 million. The weighted average interest rate of the Group's
loan agreements (incl. the interest rate swap agreements) at the end of December
is 2.3% (31.12.2019: 1.8%) and LTV (Loan to Value) 50% (31.12.2019: 52%).
During 2020, the Group has earned free cash flow of EUR 3.747 million (2019 12
months: EUR 3.381 million). After deducting Lithuanian corporate income tax
expense and calculating the estimated dividend income tax expense for Estonian
and Latvian companies, EfTEN Real Estate Fund III AS could 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 warehouse building in
Piepilsetas, Kekava, near Riga. The transactions were completed in March 2020
and the financial indicators of the two new subsidiaries have been consolidated
line by line in the Group's financial statements as of March 1, 2020. A total of
EUR 8.873 million was paid for the subsidiaries, including EUR 3.780 million in
loan receivables from former owners. The transaction price is adjusted according
to the agreement for changes in the working capital of subsidiaries during the
period of concluding the transaction, and it is estimated that the Group will
have to pay an additional 100 thousand euros for the acquisitions. The value of
investment properties owned by subsidiaries totalled 15.800 million euros at the
time of acquisition.
In August 2020, EfTEN Rutkausko UAB acquired an office building in Vilnius with
an acquisition cost of EUR 11.8 million. The anchor tenant of the office
building is the IT company Atea UAB. The acquisition was financed with 39% of
the equity, as a result of which the entire fund's last year emission of EUR 16
million has been invested.
In November 2020, EfTEN Real Estate Fund III AS established a 100% subsidiary
EfTEN Pirita OÜ, paying 2.5 thousand euros for the share capital of the
subsidiary. In December 2020, the fund paid an additional EUR 3.1 million euros
into the subsidiary's equity, after which the subsidiary acquired the first real
estate investment fund in the new, care home segment. The acquisition cost of
the real estate investment was EUR 6.2 million and the aged care home will be
operated by Pirita Kodu OÜ. The tenant will start paying the rent from 1 April
2021 and during the start-up period the rent will gradually increase, reaching
full capacity from 1 January 2022.
As of the end of September 2020, the Group has 15 (31.12.2019: 11) commercial
real estate investments with a fair value of EUR 144.235 million (31.12.2019:
EUR 113.011 million) and an acquisition cost of EUR 136.349 million (31.12.2019:
EUR 101.746 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
IV quarter 12 months
----------------------------
2020 2019(1) 2020 2019
-------------------------------------------------------------------------------
EUR thousands
------- --------
Revenue 3,033 2,512 10,731 9,512
------- --------
Cost of services sold -103 -100 -325 -329
----------------------------
Gross profit 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 on change in fair value of investment
property 612 1,641 -3,374 3,101
------- --------
Other operating income and expense -7 38 -3 37
------- --------------
Operating profit 3,007 3,095 5,129 10,045
------- --------
------- --------
Interest income 0 0 0 14
------- --------
Other financial income and expenses -355 -161 -1,322 -1,197
----------------------------
Profit before income tax 2,652 2,934 3,807 8,862
------- --------
------- --------
Income tax expense -82 -593 -490 -1,245
----------------------------
Total comprehensive income 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 STATEMENT OF FINANCIAL POSITION
31.12.2020 31.12.2019
--------------------------
EUR thousands
--------------
ASSETS
--------------
Cash and cash equivalents 5,128 12,986
--------------
Short-term deposits 0 6,000
--------------
Receivables and accrued income 2,018 667
--------------
Prepaid expenses 128 51
--------------------------
Total current assets 7,274 19,704
--------------
--------------
Long-term receivables 18 0
--------------
Investment property 144,235 113,011
--------------
Tangible assets 101 114
--------------
Intangible assets 4 0
--------------
Total fixed assets 144,358 113,125
--------------------------
TOTAL ASSETS 151,632 132,829
-----------------------------------------------------------
--------------
LIABILITIES AND EQUITY
--------------
Borrowings 28,781 21,147
--------------
Derivatives 246 271
--------------
Debts and advances 1,995 1,132
--------------------------
Total current liabilities 31,022 22,550
--------------
--------------
Borrowings 43,587 34,225
--------------
Other long-term debt 957 609
--------------
Deferred income tax liability 4,583 4,534
--------------------------
Total non-current liabilities 49,127 39,368
--------------------------
Total liabilities 80,149 61,918
--------------
--------------
Share capital 42,225 42,225
--------------
Share premium 9,658 9,658
--------------
Statutory reserve capital 1,323 936
--------------
Retained earnings 18,277 18,092
--------------------------
Total equity 71,483 70,911
--------------------------
TOTAL LIABILITIES AND EQUITY 151,632 132,829
-----------------------------------------------------------
Marilin Hein
CFO
Phone 655 9515
E-mail: marilin.hein@eften.ee (mailto:marilin.hein@eften.ee)
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