EfTEN Real Estate Fund III AS unaudited results for 3rd quarter and 9 months 2022
Comments from Fund Manager Viljar Arakas
The three quarters of this year has been financially the best period in the fund's history. Rental income increased by 13%. Both, acquisition of new objects but equally importantly increasing rental income from existing objects by 8%, contributed to this. It indicates that despite increasing energy prices, we have been able to pass on rent increase to our tenants as well as to reduce vacancies.
The vacancy level was 0.5% at the end of the 3rd quarter, i.e. essentially all commercial premises of the fund are covered by lease agreements.
High energy prices present challenges, but so far we have not encountered impossible problems. The fund manager, in cooperation with the tenants, does everything possible to reduce energy consumption in the buildings.
From the fund’s investors perspective it is important that free cash flow for dividend has increased by 22% to 4,623 mio EUR (73 euro cents per share) during the first three quarters of the year. The fund has a low financial leverage - 41% LTV (the total value of loans to the total value of assets). As a result, we plan to increase the leverage level of each property to 50% during the regular refinancing operations and pay out the additional cash flow to shareholders as dividends.
The rapidly growing euribor leads to higher financial costs, but since we have always amortised on our loans (as a rule, 27% of the monthly rental income), higher interest rates do not pose any threat to the fund's business activities. In addition, the ability to pass on increase in rental prices in recent quarters gives us additional assurance that the rising interest costs can be (at least partially) compensated by higher rental income.
Financial overview
The first 9 months of 2022 turned out to be succesful for EfTEN Real Estate Fund III AS. The fund’s revenue increased to EUR 10,600 million, i.e 12.6%, compared to the last year’s first nine months.
In the first nine months of the year the fund purchased two new investment properties – immovables for Valkla and Ermi care homes which are planned to accommodate up to 370 customers when finished. As of September 30, 2022 a total of EUR 2,389 million has been spent to purchase the care homes and to make initial investments.
In June 2022, the fund’s subsidiaries EfTEN Laagri OÜ (Laagri Selver) and EfTEN Seljaku OÜ (Laagri Hortes) extended their bank loans for the next five years. When EfTEN Laagri OÜ intrest margin stayed the same when extending the contract (1,4%), then EfTEN Seljaku OÜ interest margin increased from 1.55% to 2.0%. In the following 12 months, the fund’s three loans that have mortgage on Saules Miestas shopping centre, Evolution office building and Piepilsetas logistics centre will meet their maturity dates. All investment properties that are set as collateral have strong rental cash flow and LTV is between 30% and 40%, due to which the management does not see risk related to extending the loan contracts when the maturity date arrives.
As of September 30, 2022, the fund has EUR 3,5 million uninvested capital that is planned to use for development of purchased care home land plots.
The consolidated revenue of EfTEN Real Estate Fund III AS for the third quarter of 2022 was EUR 3,612 million (2021 third quarter: EUR 3,458 million), increasing by 4.5% during the year.
The consolidated revenue of EfTEN Real Estate Fund III AS for the first nine months of 2022 was EUR 10,600 million (2021 first nine months: EUR 9,413 million), increasing by 12.6% compared to last year (EUR 1,187 million). In the first nine months of 2022, the Group earned rental revenue of EUR 9,995 million. Rental income calculated in comparative terms was EUR 9,331 million in the first nine months of 2022, which is 9% (EUR 752 thousand) more than in 2021 at the same time.
The Group’s net rental income of the first nine months of 2022 was EUR 10,135 million (2021: EUR 9,076 million), increasing by 11.7%. The Group’s net profit for the same period was EUR 10,209 million (2021: EUR 7,744 million).
In the first nine months of 2022, the consolidated net rental income margin was 96% (2021: same), thus, the expenses directly related to the management of real estate (incl. land tax, insurance, maintenance, and improvement costs) and marketing expenses accounted for 4% (2021: same) of revenue.
As of September 30, 2022, the volume of the Group’s total assets was EUR 180,125 million (31.12.2021: EUR 176,401
As of September, 2022, the Group had 18 (31.12.2021: 16) commercial real estate investments with a fair value as of balance sheet date in the amount of EUR 168,830 million (31.12.2021: EUR 161,961 million) and acquisiton cost of EUR 150,800 million (31.12.2021: EUR 147,633 million).
In April, the fund’s subsidiary EfTEN Valkla OÜ acquired real estate located in Valklaranna tee 36, Valkla. The fund plans to remodel the building from care home to general care home that could accommodate up to 250 customers in the future. Renovation work is performed in stages. The purchase price of the real estate plot was EUR 2,005 thousand and in addition, the fund’s subsidiary is required to carry out investments on the amount of EUR 2,000 thousand. Purchase of the real estate plot and investments are financed by the fund’s own assets.
In April, the fund’s subsidiary EfTEN Ermi OÜ acquired building rights located in Ermi tn 13, Tila village, Tartu parish in Tartu county. The fund plans to develop a care home for minimum of 120 customers on the land plot used based on the building rights. The building rights’ maturity date is 50 years, which is possible to extend up to 99 years in agreement with the landowner. After developing a care home in the land plot, it will be leased to Südamekodud AS based on a longterm lease contract. The purchase price of the building rights was EUR 233 thousand- Purchase of the building rights and investments are financed by the fund’s own assets.
In the following 12 months, the Group’s three subsidiaries’ – Evolution office building, Saules Miestas shopping centre and Piepilsetas logistics centre – loan contracts will end, the balance of the loans as of 30 September, 2022 is EUR 20,160 thousand. The LTV of maturing loan contracts is 30%-40% and investment properties have stabile strong rental cash flow, due to which the Group’s management does not see risk related to extending the contracts.
The weighted average interest rate of the Group's loan agreements (incl. taking into account interest rate swap agreements) as of at the end of September is
2.9% (31.12.2021: same) and LTV (Loan to Value) is 41% (31.12.2021: 44%). All of the loan agreements of the fund's subsidiaries are linked to a floating interest rate. In order to hedge the risk of an increase in the interest rate of one loan agreement, where Euribor is fixed at 0.35% rate. The interest rate swap agreement expires in 2023 and it’s fair value as of September 30, 2022 is EUR 79 thousand.
As of September 30, 2022, the net asset value per share (EPRA NDV) of EfTEN Real Estate Fund III AS was EUR 20.32 (31.12.2021: EUR 19.11). The net asset value per share of EfTEN Real Estate Fund III AS increased by 6.3% in nine months of 2022.
CONSOLIDATED STATEMEMT OF COMPREHENSIVE INCOME
| 3rd quarter | 9 months | |||||
| € thousands | 2022 | 2021 | 2022 | 2021 | ||
| Revenue | 3,612 | 3,458 | 10,600 | 9,413 | ||
| Cost of sales | -80 | -54 | -211 | -193 | ||
| Gross profit | 3,532 | 3,404 | 10,389 | 9,220 | ||
| Marketing costs | -63 | -54 | -254 | -144 | ||
| General and administrative expenses | -488 | -426 | -1,391 | -1,302 | ||
| Gain / loss from revaluation of investment properties | -1 | 0 | 3,701 | 2,020 | ||
| Other operating income and expense | 5 | 12 | 48 | 18 | ||
| Operating profit | 2,985 | 2,936 | 12,493 | 9,812 | ||
| Other finance income and expense | -376 | -419 | -1,098 | -1,258 | ||
| Profit before income tax | 2,609 | 2,517 | 11,395 | 8,554 | ||
| Income tax expense | -282 | -243 | -1,186 | -810 | ||
| Net profit for the financial year | 2,327 | 2,274 | 10,209 | 7,744 | ||
| Earnings per share | ||||||
| - basic | 1.17 | 0.45 | 2.01 | 1.69 | ||
| - diluted | 1.17 | 0.45 | 2.01 | 1.69 | ||
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
| 30.09.2022 | 31.12.2021 | |
| € thousands | ||
| ASSETS | ||
| Cash and cash equivalents | 9,623 | 13,074 |
| Receivables and accrued income | 1,496 | 876 |
| Prepaid expenses | 44 | 314 |
| Inventory | 0 | 29 |
| Total current assets | 11,163 | 14,293 |
| Long-term receivables | 2 | 4 |
| Investment property | 168,830 | 161,961 |
| Property. plant and equipment | 128 | 140 |
| Intangible assets | 2 | 3 |
| Total non-current assets | 168,962 | 162,108 |
| TOTAL ASSETS | 180,125 | 176,401 |
| LIABILITIES AND EQUITY | ||
| Borrowings | 22,280 | 7,645 |
| Derivative instruments | 0 | 121 |
| Payables and prepayments | 949 | 1,349 |
| Total current liabilities | 23,229 | 9,115 |
| Borrowings | 46,117 | 63,440 |
| Other long-term debt | 1,007 | 987 |
| Deferred income tax liability | 6,707 | 5,945 |
| Total non-current liabilities | 53,831 | 70,372 |
| Total liabilities | 77,060 | 79,487 |
| Share capital | 50,725 | 50,725 |
| Share premium | 16,288 | 16,288 |
| Statutory reserve capital | 2,149 | 1,489 |
| Retained earnings | 33,903 | 28,412 |
| Total equity | 103,065 | 96,914 |
| TOTAL LIABILITIES AND EQUITY | 180,125 | 176,401 |
Marilin Hein
CFO
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