Management Board of Northern Horizon Capital AS has approved the unaudited financial results of Baltic Horizon Fund (the Fund) for the nine months of 2024.
Our strategic ambitions
Over the past year, our focus has been on reshaping our strategy to foster sustainable value, concentrating efforts on avenues that promise reliable and consistent growth for our investors. In light of prevailing market conditions, we firmly believe that the execution of the 'Modern City Life' strategy, introduced to investors in 2023, is paramount to their best interests.
In the coming years, we expect two thirds of the Fund's NOI to come from centrally located multi-functional assets aligned with our 'Modern City Life' strategy. These spaces are meticulously designed to ignite, elevate and enrich the lives of modern citizens and communities. The remaining results are expected to be derived primarily from government-rented premises and select suburban supermarkets and other segments. Our value proposition hinges on quality, flexibility, sustainability, and remarkable service, underpinned by strategic locations tailored to meet the evolving needs of our clientele.
The Fund's management team has made the strategic decision to implement key performance indicators (KPIs) as a means to effectively measure and track performance. This decision stems from the recognition that clear and measurable benchmarks are essential for evaluating progress towards the Fund's objectives. By defining specific KPIs, the team aims to enhance transparency, accountability, and decision-making processes.
The focus of the Fund management team is and will be on these major objectives:
- Portfolio occupancy of at least 90% by end of 2024;
- Loan-to-Value target at 50% or lower;
- To consider disposing of non-strategic assets over the next 18 months;
- Clear ESG and refurbishment strategy for the next 1-2 years with an aim to reach the portfolio's NOI potential of EUR 18 million by 2027;
- Maintaining 100% BREEAM or LEED certified portfolio;
- Achieving not less than 4 stars from GRESB assessment.
Leasing performance
In a challenging market environment characterized by increasing real estate market vacancies across all Baltic states in recent periods, the Fund also faced outflows of some tenants, however it has demonstrated its adaptability and the attractiveness of its properties by renewing a significant amount of existing leases and signing a substantial number of new leases during the first nine months of 2024. This success was primarily attributable to significant deals with prominent anchor tenants such as Narbutas in Meraki (3,200 sq. m) and Apollo Group in Coca-Cola Plaza (2,200 sq. m) and significant leases in Galerija Centrs signed with My Fitness (1,700 sq. m) and Expo GROUP (2,000 sq. m), which opened an interactive entertainment exhibition in the shopping centre.
The Fund team has been diligently negotiating with current tenants to extend lease agreements, while also actively engaging with new tenants to fill the vacancies. These efforts have resulted in lease renewals of approximately 20,000 sq. m and a net lease inflow of approximately 3,200 sq. m.
During the 9 months of 2024, the Fund signed new leases for 17,985 sq. m, securing an annual rental income of EUR 2,229 thousand for future periods. Furthermore, we are pleased to report that 41 new tenants have been attracted to our buildings, while 48 existing tenants have decided to continue their cooperation with us.
By the end of September 2024, we have already secured 80% of the targeted leases, significantly advancing towards achieving the goal of reaching 90% occupancy. Moreover, the Fund has signed letters of intent for approx. 3,700 sq. m, which will increase the occupancy rate by more than 3% when the leases are signed.
Notably, less than 25% of leases are set to expire during the next 15 months, while the vast majority expire in 2026 and later. We aim to spread our lease terms evenly so that no more than 20% of our leases expire each year. Recent successful leasing activity is reflected in the increase in the weighted average unexpired lease term until the first break option, which was 3.4 years as of 30 September 2024 (compared to 2.9 years as of 31 December 2023).
Outlook
The outlook for Q4 2024 reflects Baltic Horizon's commitment to navigating the challenging real estate market in the Baltic capitals. Our current focus is on increasing the occupancy of the portfolio and repaying the bonds thereby lowering the LTV of the Fund.
Given the influence of recent economic and geopolitical events on the operational performance of certain assets and financing costs, Baltic Horizon units are now traded at a price that is more than 55% below NAV. This deviation is not aligned with our standards and is unacceptable to both our valued investors and to Northern Horizon as the Management Company.
To address this challenge, the Fund is strategically focused on enhancing the strength of our centrally-located retail portfolio throughout 2024. This involves the introduction of new anchor tenants and the implementation of further concept changes aimed at revitalizing and maximizing the potential of our retail assets. Concurrently, the Fund is proactively working on lease extensions and addressing vacancy concerns within office buildings by pursuing new collaborative agreements with government tenants, implementing flexible workspace solutions and being in close dialogue with conventional office tenants. The Fund and its partners are working intensively to fill the vacancies and have signed LOIs for over 3,700 sq. m of office space.
The Baltic Horizon team is actively working on a strategy for Europa which would allow to increase its occupancy and to realise its NOI potential. Further steps towards our vision of creating a multipurpose centre serving the surrounding communities include Perfectus clinic, which opened its doors at the beginning of November, a new dining area planned for the first floor, which will house several different restaurants and have an open facade facing Konstitucijos avenue, and a new concept entertainment centre opening in H1 2025 on more than 1,200 sq. m, which will further enhance the attractiveness and commercial viability of the shopping centre.
Recent major leases at Galerija Centrs, including Arket, which selected our shopping centre for its first shop in Latvia, and the new anchor tenant MyFitness , which signed a 14-year lease for approx. 2,000 sq. m in April 2024, confirm that central locations are attractive to both tenants and shoppers. In Q3, the Fund successfully signed an agreement with another anchor tenant ,Expo GROUP, which has already opened interactive entertainment centre Cosmopark on approximately 2,000 sq. m in Galerija Centrs, which is expected to have a positive impact not only on NOI but also on visitor numbers.
Successfully achieving BREEAM certification for all assets in our portfolio by the end of 2023 underlines our dedication to sustainability, and the introduction of green lease clauses in our agreements highlights our ongoing commitment to environmental responsibility.
Simultaneously, the Fund remains committed to improving debt service and lowering leverage levels. These efforts are essential to fortifying our financial position and enhancing overall portfolio resilience in the face of ongoing market volatility and uncertainty. By executing these strategic initiatives, Baltic Horizon aims to mitigate the current unit price deviation from the NAV. In line with its strategic goals, the Fund successfully redeemed the short-term part of the bonds on 8 July 2024. The bonds in the amount of EUR 8 million were refinanced with a more cost-effective bank loan, raised by leveraging the Meraki asset.
Although the Fund aims for an LTV of no more than 50%, reducing the debt level will take time, particularly in the current market. The Fund intends to extend existing leases and negotiate new ones on the most favourable terms, but sometimes additional capital expenditure to fit out the premises is unavoidable. To address both goals, the Fund carried out a private placement of new units, which was successfully completed in September and during which new equity of EUR 6.29 million was raised.
As the market evolves, our strategic decisions will remain agile to ensure adaptability to changes in the operating environment. The Fund's management team remains determined in its commitment to implement revitalized strategies that enhance the concepts of our city centre assets, with the aim of restoring them beyond historic income levels. At the same time, we remain committed to maintaining stable cash flows from our other assets, ensuring a secure foundation for stable future returns for our valued investors.
Maintaining a stable financial position is a key part of our long-term strategy. Through careful financial management and a proactive approach to leasing, we strive to deliver sustainable performance and achieve success for our investors.
Baltic Horizon achieves a 100% BREEAM certified portfolio
In October Meraki received its final BREEAM new construction certificate with the grade Excellent. Our portfolio is 100% BREEAM certified.
GRESB benchmarking
In 2024 the Fund received a 3-star GRESB rating. The Fund increased its scoring in the management section from 27 points to 29 points (out of 30) but the score in the performance section decreased from 55 points to 50 points (out of 70) due to lack of data from the properties that were sold during the reporting period and the review of data by an external party. The management team has thoroughly analysed the assessment results and prepared an action plan, which is expected to bring the Fund back to a 4-star level next year.
Net result and net rental income
In Q1-Q3 2024, the Group recorded a net loss of EUR 13.4 million compared with a net loss of EUR 15.2 million for Q1-Q3 2023. The result was mainly driven by the property valuation loss. Earnings per unit for Q1-Q3 2024 were negative at EUR 0.09 (Q1-Q3 2023: negative at EUR 0.13).
The Group earned consolidated net rental income of EUR 8.9 million in Q1-Q3 2024 (Q1-Q3 2023: 11.7 million). The results for Q1-Q3 2023 include two months' net rental income of the Domus Pro Retail and Office property (EUR 0.3 million) and five months' net rental income of the Duetto properties (EUR 1.2 million), which were sold in February and May 2023, respectively.
On an EPRA like-for-like basis, the portfolio net rental income in Q1-Q3 2024 was 13.5% lower than in Q1-Q3 2023, mainly due to vacancies in office properties in Latvia due to the expiry of the agreement with the main tenant in Upmalas Biroji BC and 100% vacancy of S27, as well as lower rental income in Europa due to the new anchor tenant IKI equipping the premises and opening in March.
Portfolio properties in the retail segment contributed 53.2% (like-for-like Q1-Q3 2023: 43.6%) of net rental income in Q1-Q3 2024, followed by the office segment with 41.8% (like-for-like Q1-Q3 2023: 50.9%) and the leisure segment with 5.0% (Q1-Q3 2023: 5.5%).
Retail assets located in the central business districts (Postimaja, Europa and Galerija Centrs) accounted for 42.3% of total portfolio net rental income in Q1-Q3 2024. Total net rental income attributable to neighbourhood shopping centres was 10.9% in Q1-Q3 2024.
In Q1-Q3 2024, investment properties in Latvia and Lithuania contributed 44.8% (like-for-like Q1-Q3 2023: 48.4%) and 23.1% (like-for-like Q1-Q3 2023: 22.4%) of net rental income, respectively, while investment properties in Estonia contributed 32.1% (like-for-like Q1-Q3 2023: 29.2%).
Investment properties
At the end of Q3 2024, the Baltic Horizon Fund portfolio consisted of 12 cash flow generating investment properties in the Baltic capitals. The fair value of the Fund's portfolio was EUR 241.6 million at the end of September 2024 (31 December 2023: EUR 250.4 million) and incorporated a total net leasable area of 118.6 thousand sq. m. The change in portfolio value was mainly driven by the changes in exit yields and upward adjustments of the weighted average cost of capital (WACC) used in mid-year property valuations. During Q1-Q3 2024 the Group invested approximately EUR 3.5 million in tenant fit-outs.
Gross Asset Value (GAV)
As of 30 September 2024, the Fund's GAV was EUR 256.8 million (31 December 2023: EUR 261.1 million). The decrease compared to the prior year was mainly related to the negative revaluation of the Fund's investment properties of approx. EUR 12.5 million and was partly offset by the private placement of new units which took place in September and resulted in a cash increase of approx. EUR 6.29 million.
Net Asset Value (NAV)
As of 30 September 2024, the Fund's NAV was EUR 101.9 million (31 December 2023: EUR 109.5 million). The NAV decrease was mainly due to the revaluation of investment properties. However, the Fund's NAV increased at the end of September 2024, due to the issuance of new units resulting in approx. EUR 6.29 million of new equity. As of 30 September 2024, IFRS NAV per unit amounted to EUR 0.7099 (31 December 2023: EUR 0.9156), while EPRA net tangible assets and EPRA net reinstatement value were EUR 0.7510 per unit (31 December 2023: EUR 0.9546). EPRA net disposal value was EUR 0.7068 per unit (31 December 2023: EUR 0.8057).
Interest-bearing loans and bonds
As of 30 September 2024, interest-bearing loans and bonds (excluding lease liabilities) were EUR 146.3 million (31 December 2023: EUR 143.5 million). Annual loan amortisation accounted for 2.1% of total debt outstanding. In July 2024, the Fund successfully signed the Meraki loan with Bigbank for a total amount of EUR 10.3 million. A major part of the loan was used to repay short term bonds in the amount of EUR 8.0 million maturing in July 2024. As of 30 September 2024, the Fund's consolidated cash and cash equivalents amounted to EUR 10.0 million (31 December 2023: EUR 6.2 million).
Cash flow
Cash inflow from core operating activities in Q1-Q3 2024 amounted to EUR 6.6 million (Q1-Q3 2023: cash inflow of EUR 8.6 million). Cash inflow from core operating activities decreased mainly due to sale of Duetto and Domus Pro properties in H1 2023 and higher vacancies, mostly in S27 and Upmalas Biroji. Cash outflow from investing activities was EUR 4.3 million (Q1-Q3 2023: cash inflow of EUR 21.4 million) due to investments in existing properties and transaction costs. Cash inflow from financing activities was EUR 1.5 million (Q1-Q3 2023: cash outflow of EUR 27.5 million). In Q3 2024, the Fund received a loan for Meraki in the amount of EUR 8.7 million and paid regular amortisation and interest on bank loans and bonds. Also, the Fund redeemed a short-term part of the bonds for a total amount of EUR 8 million in Q3 2024.
Key earnings figures
| EUR '000 | Q1-Q3 2024 | Q1-Q3 2023 | Change (%) |
| Net rental income | 8,869 | 11,723 | (24.3%) |
| Administrative expenses | (1,729) | (1,986) | (12.9%) |
| Net other operating income | 15 | 15 | 0.0% |
| Losses on disposal of investment properties | (618) | (3,810) | (83.8%) |
| Valuation gains (losses) on investment properties | (12,529) | (14,626) | (14.3%) |
| Operating profit (loss) | (5,992) | (8,684) | (31.0%) |
| Net financial expenses | (7,724) | (7,241) | 6.7% |
| Profit (loss) before tax | (13,716) | (15,925) | (13.9%) |
| Income tax | 317 | 709 | (55.3%) |
| Net profit (loss) for the period | (13,399) | (15,216) | (11.9%) |
| Weighted average number of units outstanding (units) | 120,508,680 | 119,635,429 | 0.7% |
| Earnings per unit (EUR) | (0.11) | (0.13) | (15.4%) |
Key financial position figures
| EUR '000 | 30.09.2024 | 31.12.2023 | Change (%) |
| Investment properties | 241,579 | 250,385 | (3.5%) |
| Gross asset value (GAV) | 256,826 | 261,138 | (1.7%) |
| Interest-bearing loans and bonds | 146,341 | 143,487 | 2.0% |
| Total liabilities | 154,904 | 151,606 | 2.2% |
| IFRS NAV | 101,922 | 109,532 | (6.9%) |
| EPRA NRV | 107,809 | 114,205 | (5.6%) |
| Number of units outstanding (units) | 143,562,514 | 119,635,429 | 20.0% |
| IFRS NAV per unit (EUR) | 0.7099 | 0.9156 | (22.5%) |
| EPRA NRV per unit (EUR) | 0.7510 | 0.9546 | (21.3%) |
| Loan-to-Value ratio (%) | 60.9% | 57.3% | - |
| Average effective interest rate (%) | 6.3% | 5.2% | - |
During Q3 2024, the average actual occupancy of the portfolio was 80.1% (Q2 2024: 82.3%). The occupancy rate increased to 80.5% as of 30 September 2024 (30 June 2024: 79.1%).
Overview of the Fund's investment properties as of 30 September 2024
| Property name | Sector | Fair value1 | NLA | Direct property yield | Net initial yield | Occupancy rate |
| (EUR '000) | (sq. m) | 20242 | 20243 | |||
| Vilnius, Lithuania | ||||||
| Europa SC | Retail | 37,026 | 17,118 | 2.4% | 2.9% | 73.4% |
| North Star | Office | 19,210 | 10,721 | 6.7% | 7.3% | 96.2% |
| Meraki4 | Office | 16,508 | 7,870 | 1.1% | 1.4% | 85.0% |
| Total Vilnius | 72,744 | 35,709 | 3.2% | 3.8% | 82.8% | |
| Riga, Latvia | ||||||
| Upmalas Biroji BC | Office | 19,351 | 11,203 | 3.7% | 4.2% | 62.4% |
| Vainodes I | Office | 15,881 | 8,128 | 8.8% | 8.7% | 100.0% |
| S27 | Office | 11,576 | 7,450 | 0.0% | (0.1%) | - |
| Sky SC | Retail | 5,020 | 3,259 | 8.6% | 8.3% | 100.0% |
| Galerija Centrs | Retail | 60,428 | 19,330 | 3.3% | 4.2% | 87.2% |
| Total Riga | 112,256 | 49,370 | 3.8% | 4.5% | 71.4% | |
| Tallinn, Estonia | ||||||
| Postimaja & CC Plaza complex | Retail | 20,370 | 9,232 | 3.7% | 6.7% | 100.0% |
| Postimaja & CC Plaza complex | Leisure | 13,067 | 8,121 | 4.9% | 4.4% | 82.3% |
| Lincona | Office | 13,871 | 10,767 | 6.4% | 7.3% | 88.5% |
| Pirita SC | Retail | 9,271 | 5,425 | 6.7% | 9.4% | 95.5% |
| Total Tallinn | 56,579 | 33,545 | 4.9% | 6.7% | 91.3% | |
| Total active portfolio | 241,579 | 118,624 | 3.9% | 4.8% | 80.5% |
- Based on the latest valuation as of 30 June 2024, recognised right-of-use assets and subsequent capital expenditure.
- Direct property yield (DPY) is calculated by dividing annualized NOI by the acquisition value and subsequent capital expenditure of the property.
- The net initial yield (NIY) is calculated by dividing annualized NOI by the market value of the property.
- Meraki occupancy level is calculated based on the lease signing date.
| EUR '000 | 01.07.2024 | 01.07.2023 | 01.01.2024 | 01.01.2023 | ||
| - 30.09.2024 | - 30.09.2023 | - 30.09.2024 | - 30.09.2023 | |||
| Rental income | 3,690 | 3,893 | 11,357 | 13,988 | ||
| Service charge income | 1,236 | 1,334 | 3,599 | 4,521 | ||
| Cost of rental activities | (2,040) | (1,999) | (6,087) | (6,786) | ||
| Net rental income | 2,886 | 3,228 | 8,869 | 11,723 | ||
| Administrative expenses | (615) | (572) | (1,729) | (1,986) | ||
| Other operating income (expenses) | 31 | - | 15 | 15 | ||
| Losses on disposal of investment properties | (171) | (59) | (618) | (3,810) | ||
| Valuation losses on investment properties | (5) | (3) | (12,529) | (14,626) | ||
| Operating profit (loss) | 2,126 | 2,594 | (5,992) | (8,684) | ||
| Financial income | 8 | 74 | 27 | 75 | ||
| Financial expenses | (2,597) | (2,891) | (7,751) | (7,316) | ||
| Net financial expenses | (2,589) | (2,817) | (7,724) | (7,241) | ||
| Profit (loss) before tax | (463) | (223) | (13,716) | (15,925) | ||
| Income tax charge | (87) | 12 | 317 | 709 | ||
| Profit (loss) for the period | (550) | (211) | (13,399) | (15,216) | ||
| Other comprehensive income that is or may be reclassified to profit or loss in subsequent periods | ||||||
| Net gain (loss) on cash flow hedges | (238) | (341) | (557) | (514) | ||
| Income tax relating to net gain (loss) on cash flow hedges | 17 | 32 | 51 | 59 | ||
| Other comprehensive income (expense), net of tax, that is or may be reclassified to profit or loss in subsequent periods | (221) | (309) | (506) | (455) | ||
| Total comprehensive income (expense) for the period, net of tax | (771) | (520) | (13,905) | (15,671) | ||
| Basic earnings per unit (EUR) | (0.00) | (0.00) | (0.11) | (0.13) | ||
| Diluted earnings per unit (EUR) | (0.00) | - | (0.09) | - | ||
| EUR '000 | 30.09.2024 | 31.12.2023 |
| Non-current assets | ||
| Investment properties | 241,579 | 250,385 |
| Intangible assets | 10 | 11 |
| Property, plant and equipment | 6 | 4 |
| Derivative financial instruments | - | 295 |
| Other non-current assets | 1,105 | 647 |
| Total non-current assets | 242,700 | 251,342 |
| Current assets | ||
| Trade and other receivables | 3,146 | 2,591 |
| Prepayments | 881 | 402 |
| Derivative financial instruments | 92 | 621 |
| Cash and cash equivalents | 10,007 | 6,182 |
| Total current assets | 14,126 | 9,796 |
| Total assets | 256,826 | 261,138 |
| Equity | ||
| Paid in capital | 151,495 | 145,200 |
| Cash flow hedge reserve | 25 | 531 |
| Retained earnings | (49,598) | (36,199) |
| Total equity | 101,922 | 109,532 |
| Non-current liabilities |