The main keyword for 2023 was the fastest interest rate increase in the 25-year history of the Eurozone. The consolidated interest expense of EfTEN Real Estate Fund AS increased almost twice compared to a year ago in relation to EBITDA, having a direct impact on the Fund's free cash flow as well. At the same time, thanks to the conservative financing policy of the Fund, the stable cash flow of investments, the permanently low vacancy rate and the good payment behavior of customers, the growth of EURIBOR did not pressure the cash flows of any of the underlying assets above the critical limit.
Considering the liquidity buffer of the Fund's subsidiaries, the Management Board plans to propose to the shareholders at the 2024 spring general meeting to pay a net dividend for the past financial year more than the Fund's dividend policy stipulates - 1.0 euros per share, instead of 1.15 euros last year. Considering the share price of EfTEN Real Estate Fund AS on the stock exchange, this still means a dividend yield of more than 5%.
According to unaudited data, EfTEN Real Estate Fund AS earned a net profit of 1.0 million euros in 2023 (2022: 11.4 million euros). The decrease in the Fund's net profit is mainly due to the loss of the fair value revaluation of investment properties in the total amount of 13.9 million euros (in 2022, the Fund received a profit of 3.1 million euros from the revaluation of investment properties). It is important to emphasize that the write-down of the Fund's assets is a non-monetary change in the balance sheet value, which in no way affects the Fund's actual cash flows or ability to pay dividends. These evaluations have been made as of the end of 2023 and thus reflect a record high EURIBOR level. It can be assumed that the fair value of investment property will partially recover because of the expected drop in EURIBOR.
In 2024, a change in commercial real estate market trends can be expected. Rapid interest rate hikes are likely to be a thing of the past, and a gentle decline in interest rates is ahead. As the macro environment of the Baltic economies continues to be fragile and the two-year economic recession continues, the Fund's management pays attention primarily to the management and maintenance of rental income and good cooperation with clients.
Today, it can be said that the parties in the real estate market are used to the new interest environment, which in turn is a prerequisite for the activation of the transaction market. If such assumptions are implemented, the board will propose to shareholders in the second half of this year to organize a new share issue in order to continue the Fund's growth strategy.
Financial overview
In the fourth quarter of 2023, EfTEN Real Estate Fund AS earned a total of 8.103 million euros in consolidated sales revenue (2022 fourth quarter: 3.699 million euros). The consolidated sales revenue of the fund in 2023 was 31.817 million euros (2022: 14.299 million euros), including the sales revenue of real estate investments added from the merger with EfTEN Kinnisvarafond AS in the amount of 16.918 million euros. Sales revenue calculated on a like-for-like basis increased by 4.2% compared to a year ago.
The consolidated net rental income (NOI) of the Fund for the year 2023 is 29.608 million euros (2022: 13.665 million euros). This year's net rental income includes the net rental income from investment properties added by the merger with EfTEN Kinnisvarafond AS in the total amount of 15.484 million euros. Therefore, NOI calculated on the like-for-like basis has also increased by 3.4% compared to a year ago. The consolidated net rental income margin was 93% (2022: 96%) this year, so costs directly related to property management (including land tax, insurance, maintenance and improvement costs) and distribution costs constituted 7% (2022: 4%) of sales income.
The volume of the group's assets as of 31.12.2023 was 380.944 million euros (31.12.2022: 181.956 million euros), incl. the fair value of investment property made up 94% of the volume of assets (31.12.2022: 93%)
Investment portfolio
At the end of the year, the Group has 35 (31.12.2022: 18) commercial property investments with a fair value at the balance sheet date of 357.916 million euros (31.12.2022: 168.875 million euros) and an acquisition cost of 354.408 million euros (31.12.2022: 151.426 million euros). In addition, the Group's joint venture owns the Palace hotel in Tallinn, the fair value of which as of 31.12.2023 was 9.0 million euros.
After the merger, the group's investment portfolio is better spread across countries - if at the end of 2022 the share of investments in Lithuania was 60%, Estonia 25% and Latvia 15% of all investment properties, then at the end of 2023 the share of Lithuania will be 30%, the share of investments in Estonia 52% and Latvia share of 18% of all investments. The largest investments have been made in the trade sector (38%), followed by the logistics sector (30%), the office sector (25%), the nursing home sector (3%) and the National sector and hotels (both 2%).
The Group completed the construction of the Valkla care home in the summer of 2023. A total of 3.860 million euros were invested in the care home, and the investment yields a rental yield of 7.5%. In the fall of 2023, the construction of the third care home belonging to the Group - Tartu Südamekodu - began. The Tartu care home for 120 clients will be completed in 2024. In 2023, the Group invested a total of 2.674 million euros for the design and construction of the Tartu care home.
In 2023, the Group invested a total of 3.083 million euros in real estate projects generating rental income. The investments were mainly related to the expansion of the Betoon 6 logistics building in the total amount of 1.044 million euros. The subsidiary of the group receives a rental yield of 8.5% per year from the investment. Larger investments were made in 2023 also for the renovation of the general areas of the Saules Miestas shopping center (800 thousand euros) and for the improvement of the Jurkalne logistics park (561 thousand euros).
Rental income
In 2023, the Group earned a total rental income of 30.606 million euros, including rental income from the merger with EfTEN Kinnisvarafond AS in the total amount of 16.441 million euros. The rental income calculated on a comparable basis was a total 13.927 million euros in 2023, which is a 4% increase compared to 2022.
In 2023, the Group's subsidiaries did not offer significant rent discounts to tenants. The consolidated cost of discounts was a total of 36 thousand euros (0.1% of the consolidated rental income), and the discounts were mainly related to the tenants of the RAF Centrs shopping center and Terbata office building agreements.
As of 31.12.2023, the vacancy of investment property belonging to the Group per portfolio was low - 2.6%. A slightly increased vacancy can be seen in the office buildings segment (7.8%), where it takes longer than before to fill vacant rental premises. As of 31.12.2023, after the expiration of one lease in the summer of 2023, the Piepilsetas logistics center also has a larger vacancy than usual (19.1%, i.e. 2554m2), where negotiations with a new tenant are ongoing at the time of writing the report.
Fair value of investment properties
EfTEN Real Estate Fund AS regularly evaluates investment properties twice a year - in June and December. Due to the decrease in the activity of real estate transactions, more conservative net rental income (NOI) forecasts and the increased EURIBOR, the market values of investment properties carried out by Colliers International as of 31.12.2023 are lower than they were a year ago. In 2023, the value of investment properties fell by a total of 3.9% on the portfolio, including the value of investment property in the office segment (9%).
Financing
In 2023, for the second year in a row, the major central banks raised interest rates more than the markets had forecast. In the euro area, at the beginning of 2023, EURIBOR was expected to peak at 3.5% in June. In fact, interest rates rose to 4% in September-October. As a result, the asset values of most European real estate companies and funds were devalued, and many of them were forced to reduce or stop dividend payments altogether. In Scandinavia, with the highest level of financial leverage, forced sales and non-fulfillment of loan obligations occurred in the real estate sector even under unfavorable conditions.
Eurozone interest rates, which peaked in October, also had an impact on the group's cash flows in 2023, bringing the interest coverage ratio (ICR) to almost half of what it was in 2022.
Despite the higher interest expense, all real estate objects of the group maintained a positive cash flow due to low vacancy and conservative financing policy, and the special conditions of no loan were violated in 2023.
For the first time in the two years, interest costs are expected to decrease in 2024. The markets estimate that the European Central Bank (ECB) will lower interest rates by more than 100 basis points, because of which the interest cost of bank loans taken for the acquisition of investment property of the Group will decrease and the cash flow will improve.
Within the next 12 months, the loan agreements of the group's two subsidiaries - ABC Motors Autokeskus and Jurkalne logistics park, whose balance as of 31.12.2023 is 10,825 thousand euros, will expire. The LTV of the expiring loan agreements is 48% and 40%, respectively, and the investment property have a stable and strong rental cash flow, therefore, according to the Group's management, there are no obstacles in the extension of the loan agreements.
As of the end of December, the weighted average interest rate of the Group's loan agreements (including interest rate swap agreements) due to the increase in EURIBOR is 5.9% (31.12.2022: 3.7%) and the LTV (Loan to Value) is 42% (31.12.2022: 40%). All loan agreements of the fund's subsidiaries are linked to a floating interest rate.
Information on shares
On the balance sheet date of 01.01.2023, EfTEN Real Estate Fund AS (formerly EfTEN Real Estate Fund III AS) merged with EfTEN Kinnisvarafond AS. To carry out the merger, the share capital of EfTEN Real Estate Fund AS was increased by 57,472 thousand euros and 5,747,261 new shares with a nominal value of 10 euros were issued. When increasing the share capital, the shares were paid for in full with a non-monetary contribution at the expense of the entire assets of EfTEN Kinnisvarafond AS, which were transferred to EfTEN Real Estate Fund AS, the value of which was the net value of the EPRA assets of EfTEN Kinnisvarafond AS as of 31.12.2022 (125,905 thousand euros).
According to the merger agreement, the new shares were issued to the shareholders of EfTEN Kinnisvarafond AS as the merging fund, who were entered in the list of shareholders as of 31.01.2023.
The registered share capital of EfTEN Real Estate Fund AS as of 31.12.2023 is 108,198 thousand euros (31.12.2022: 50,725 thousand euros). The share capital consisted of 10,819,796 shares (31.12.2022: 5,072,535) with a nominal value of 10 euros (31.12.2022: the same).
The net value of the share of EfTEN Real Estate Fund AS as of 31.12.2023 was 20.21 euros (31.12.2022: 20.55 euros). The net value of EfTEN Real Estate Fund AS shares fell by 1.7% during 2023. The net value of the Fund's share decreased mainly as a result of the change in the fair value of investment property.
In May 2023, the Fund paid dividends from the 2022 profit in the total amount of 12.471 million euros (May 2022: 4.058 million euros). Without the payment of dividends, the net value of the Fund's shares would have increased by 4.1% during 2023.
During 2023, the Group has earned a free cash flow of 11.314 million euros (2022: 6.182 million euros), of which, according to the Fund's dividend policy, 9.051 million euros (2022: 4.946 million euros) could be considered as gross dividends. Taking into account the obligation to keep a minimum cash balance and the short-term need for liquidity arising from the special loan conditions of the Fund's subsidiaries, as well as the possibility of increasing the loan amount by 2.166 million euros due to the loan agreement of the Fund's subsidiaries EfTEN Jurkalnes SIA, EfTEN SPV15 OÜ and Saules Miestas UAB, the Management Board of the Fund proposes to the Supervisory Board to pay for the year 2023 dividends more than the dividend policy stipulates - a total of 10.820 million euros (1 euro per share).
CONSOLIDATED STATEMEMT OF COMPREHENSIVE INCOME
| 4th quarter | 12 months | |||
| 2023 | 2022 | 2023 | 2022 | |
| € thousands | ||||
| Revenue | 8,103 | 3,699 | 31,817 | 14,299 |
| Cost of services sold | -506 | -56 | -1,626 | -267 |
| Gross profit | 7,597 | 3,643 | 30,191 | 14,032 |
| Marketing costs | -190 | -113 | -583 | -367 |
| General and administrative expenses | -978 | -525 | -3,546 | -1,916 |
| Gain / loss from valuation of investment properties | -7,759 | -582 | -13,941 | 3,119 |
| Other operating income and expense | -2 | -25 | 21 | 23 |
| Operating profit/loss | -1,332 | 2,398 | 12,142 | 14,891 |
| Profit / loss from joint ventures | -474 | 0 | -499 | 0 |
| Interest income | 87 | 0 | 184 | 0 |
| Other finance income and expense | -2,277 | -582 | -7,970 | -1,680 |
| Profit/loss before income tax | -3,996 | 1,816 | 3,857 | 13,211 |
| Income tax expense | -1,884 | -617 | -2,857 | -1,803 |
| Net comprehensive profit/loss for the reporting period | -5,880 | 1,199 | 1,000 | 11,408 |
| Earnings per share | ||||
| - basic | -0.54 | 0.24 | 0.09 | 2.25 |
| - diluted | -0.54 | 0.24 | 0.09 | 2.25 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
| 31.12.2023 | 31.12.2022 | |
| € thousands | ||
| ASSETS | ||
| Cash and cash equivalents | 14,712 | 11,331 |
| Short-term deposits | 3,400 | 0 |
| Receivables and accrued income | 2,360 | 1,522 |
| Prepaid expenses | 106 | 49 |
| Total current assets | 20,578 | 12,902 |
| Long-term receivables | 214 | 61 |
| Shares in joint ventures | 2,078 | 0 |
| Investment property | 357,916 | 168,875 |
| Property. plant and equipment | 158 | 116 |
| Intangible assets | 0 | 2 |
| Total non-current assets | 360,366 | 169,054 |
| TOTAL ASSETS | 380,944 | 181,956 |
| LIABILITIES AND EQUITY | ||
| Borrowings | 16,907 | 22,058 |
| Liabilities and prepayments | 3,417 | 1,461 |
| Total current liabilities | 20,324 | 23,519 |
| Borrowings | 130,849 | 45,917 |
| Other long-term liabilities | 1,790 | 1,008 |
| Deferred income tax liability | 9,283 | 7,248 |
| Total non-current liabilities | 141,922 | 54,173 |
| Total liabilities | 162,246 | 77,692 |
| Share capital | 108,198 | 50,725 |
| Share premium | 84,721 | 16,288 |
| Statutory reserve capital | 2,749 | 2,149 |
| Retained earnings | 23,030 | 35,102 |
| Total equity | 218,698 | 104,264 |
| TOTAL LIABILITIES AND EQUITY | 380,944 | 181,956 |
Marilin Hein
CFO
Phone +372 6559 515
E-mail: marilin.hein@eften.ee
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