Commentary by the Fund Manager, Viljar Arakas
The defining feature of 2023 was the fastest interest rate increase in the Eurozone’s 25-year history. Compared to the previous year, EfTEN Real Estate Fund AS’s consolidated interest expense nearly doubled in relation to EBITDA, directly impacting the fund’s free cash flow. However, due to the fund’s conservative financing policy, stable cash flow from investments, consistently low vacancy rates, and solid payment behavior from clients, the growth in EURIBOR did not result in cash flows of any underlying asset’s falling beyond critical limits.
Considering the liquidity buffer of the fund’s subsidiaries, the management board plans to propose at the spring 2024 general meeting a dividend payment for the past year more than fund’s dividend policy foresees. This would amount to 1.0 euro per share, compared to the previous year’s 1.15 euros per share. Given the market price of EfTEN Real Estate Fund AS shares, this still represents a 5% exceeding dividend yield.
EfTEN Real Estate Fund AS unaudited net profit for year 2023 is 1.0 million euros (2022: 11.4 million euros). The decrease in net profit is primarily due to the loss from changes in investment property fair value in the amount of 13.9 million euros (in 2022, the fund had a profit of 3.1 million euros from revaluation). The fund’s investment properties are independently appraised by Colliers International. It is important to note that the fund’s revaluation is a non-cash balance sheet valuation change, which does not affect the fund’s actual cash flows or dividend-distribution capacity. The current valuations reflect the record-high EURIBOR rates at the end of year 2023 and a partial recovery in the fair value of real estate investments is expected with the anticipated decrease in EURIBOR.
In 2024, changes in commercial real estate market trends are expected. The rapid interest rate increase is likely a history, with an expected gradual decrease in rates ahead. Given the fragile macroeconomic environment in the Baltic economies and the ongoing economic downturn over the last two years, the fund’s management will focus primarily on managing and maintaining rental income and fostering strong relationships with clients.
As of now, real estate market participants have adjusted to the new interest rate environment, which is a prerequisite for increased transactional activity. If such conditions prevail, the board will propose a new share issuance in the second half of this year to continue the fund’s growth strategy.
Financial Summary
EfTEN Real Estate Fund AS reported unaudited consolidated rental income of 30.6 million euros for 2023 (2022: 13.5 million euros) and an EBITDA of 26.1 million euros (2022: 11.8 million euros). The year-over-year growth in rental income and EBITDA is mainly attributed to the fund’s merger with EfTEN Kinnisvarafond AS at the beginning of 2023. On a like-for-like basis, rental income increased by 4% compared to the previous year.
In 2023, the fund’s consolidated EBITDA exceeded interest expenses by 3.3 times (2022: 6.4 times). The weighted average interest rate on the fund’s bank loans was 5.91% at year-end. None of the fund’s real estate investments’ debt service coverage ratios (DSCR) fell below 1.2 in 2023, i.e. EBITDA of all properties’ exceeded loan principal and interest payments by at least 20%. The overall DSCR for the fund’s property portfolio was 1.8 in 2023 (2022: 2.2).
EfTEN Real Estate Fund AS invested a total of 6.7 million euros in real estate projects in 2023, including 3.6 million euros in the construction of Valkla and Tartu care homes. Significant investments were also made in the logistics sector (totalling 1.8 million euros), including the expansion of warehouse space at the Betooni 6 property in Tallinn and refurbishment works at the Jurkalnes logistics center in Riga. Additionally, 0.8 million euros were invested in upgrading the common areas of the Saules Miestas shopping center.
In December 2023, EfTEN Real Estate Fund reported consolidated rental income of 2.8 million euros (259 thousand euros more than in November) and an EBITDA of 2.2 million euros (45 thousand euros more than in November). The increase in rental income was primarily due to turnover-based rents in shopping centers. Major expenses in December were related to debt receivables provisions due to the tenant replacement at one of the Riga logistics centers and interim audit costs.
In December, the fund’s independent real estate appraiser, Colliers International, conducted its regular year-end valuation process, resulting in a 2.1% decrease in the fair value of the fund’s investment properties and a loss of 7.8 million euros from the write-down. The total write-down for 2023 amounted to 13.9 million euros, i.e a 3.7% decrease in the fair value of investment properties. The most significant value decrease was in the office segment (9%). The value of the logistics portfolio decreased by 3.7%, and due to increased market yield rates, the fair value of care homes decreased by 5.8%. The fund’s property portfolio valuations were primarily influenced by an increase in capitalization rates by an average of 0.2-0.5 percentage points and an increase in the weighted average cost of capital (WACC) due to the rise in EURIBOR. The fund’s property portfolio initial yield as of December 31, 2023, was 8.0%. In addition to the aforementioned factors, there is also a more conservative expectation for occupancy and net rental income in the office building segment.
As of December 31, 2023, the net asset value per share (NAV) of EfTEN Real Estate Fund AS was 20.2128 euros, and the EPRA NRV was 20.9623 euros. NAV decreased by 3.7% in December, and the EPRA NRV decreased by 3.4%. Excluding the non-cash fair value adjustment of investment properties and the deferred tax liability calculated from planned dividends, the fund’s share net asset value would have increased by the usual 0.6% in December.
