Description

Underlevered & cashed up from asset sales, with a growth plan to utilize their balance sheet near term.  Eastnine is a largely unknown Swedish commercial property owner active in the Baltics and Poland, where office property is not in distress.  There, return-to-work is 90%+ (and occupancy is 93.6%).  It has 15 prime class A office properties in markets that Scandinavian companies consider ideal for ‘back office’ operations.  Since they just reported, I’m posting a prompt situation overview with bullet points and liberal screen grabs from their presentations.  

352m mkt cap                  (in EUR…  trades in SEK which is 10.48 to the USD, and 11.36 to the EUR)
  72m Cash
323m Bank Debt
603m Enterprise Value … against a current portfolio value of EUR 652m at 38% LTV, on it’s way to 50%-60% LTV.

Scandinavia’s ‘Back office’:

• EU countries in close geographic proximity to Scandinavia:

• Super low-cost travel…  Ryanair from Riga, Vilnius, or Poznan to Stockholm or Copenhagen is $15 to $18 each way.  Plentiful flights at very affordable prices, and you can get there with a ~1hr flight.
    
  
  
•  Higher real GDP growth than the rest of the EU:
  
  
  
  
• Materially lower rental costs compared to home markets in Scandinavia & Germany:

Even at lower overall rents, there are lower overall operating costs, leading to greater overall margins. So, the magic here is significantly higher cash yields.  Eastnine has Cash ROE 200 to 300 bps higher than peers, who trade two multiple tuns higher at 17x vs 15x for EAST.  This comes from financing with European Banks, at European conditions, allowing the same cost of debt to translate into higher cash returns through efficient operations with fewer vacancies.  NOI as a % of Revenues is ~93%, and they pay a reasonable 4.7% avg coupon on their bank borrowings, plus pay out a 2.6% dividend yield which should grow.

Portfolio:

Current property valuation at EUR 3,066/sq meter = $302.29/sq ft, which is below building cost per sq ft in most western countries.  Current Enterprise Value of EUR 600m is EUR 2,822/sq meter or $284.35 per sq ft… even a bit cheaper.

• So, at Q2 the situation is a growing EUR 652m property portfolio, with avg age of properties at 9.6 years, which is quite young and modern.  Their Weighted Avg Unexpired Lease Term (WAULT) is 4.2 years, with low expiries in 2024-2026.  Clearly tenants are taking a long-term leasing mindset, which compares with ~3 years at peers.  With 93.6% occupancy, and avg rent level of EUR 199/sqm/year (in USD that’s $20.03 per square foot) this appears to be strong value.  Go find class A space anywhere near that level… (You can’t find class C space for that price in midtown NYC… even the outer boroughs is ~$40/sq ft).
  
  
• Politics, Dispositions and Acquisitions:
  They are cashed up because when the Ukraine war began, and Russia became non-investible, they sold off their Russia portfolio assets in Oct 2022 at a comfortable gain… 193m EUR for assets carried at 140m EUR, thus under-levering their balance sheet to ~27% LTV.
  
  Despite NATO’s article 5 for common defense, if you think Putin’s next move is to court WWIII by marching into the Baltics, this probably isn’t the investment for you.  However, the Baltic countries’ inclusion in the EU since 2004 and Poland since 1999, is a stiff climb for Russia, especially given their exhaustion in Ukraine.  If any, I’d think the flash points are Belarus and Moldova, who are not in the EU.
  
  In June, they bought a newly built 28,000 sqm (301,389 sq ft, plus 234 garage spaces) property in Poznan, Poland known as Nowy Rynek E, adjacent to their existing property Nowy Rynek D.  This EUR 79.3m purchase brings in additional annual rental income of EUR 5.95m (a 7.5% cash yield) and was financed 50%/50% with cash and a green loan provided by Berlin Hyp, a German real estate bank.  Interestingly, the seller, Skanska, gave a revenue guarantee for the unlet area of this 2023 built property that was 89% leased at time of transaction (I believe subsequently filled up).  Consultancy McKinsey is the largest tenant in the ‘E’ property at 34%.
  
• Poland, Lithuania, and Latvia…

• Govt Help – The 870km Rail Baltica project with expected completion by 2030, is a large government infrastructure project installing a connective railway line (shown in yellow) that has “significant implications for economic activity and integration for the region”.  This better connects eastern/western Europe.
  
• The Baltics and Poland have a well-educated and highly skilled work force… particularly in math & science (including computer science).
  
  
• In eastern European areas of the EU, much of the housing stock is smaller (Soviet builds) in contrast to western areas, making newer, bright and airy prime office space an attractive place to be, compared with and in contrast to WFH in the west.  Full 5 days return-to-work, post covid, is estimated at 90%+, and commutes are generally shorter.
  
  
•  If you haven’t been and are thinking of dreary former Soviet 2^nd world cities, re-think it.  Guess where this modern skyline is:

{It’s Warsaw, Poland – Eastnine’s next acquisition target area,
 which will help grow portfolio value and move LTV toward the 50%-60% group target.}

• Top 10 tenants:

• Profit from property mgmt. was up more than 21% last quarter, with strong net letting of EUR +263k.  Central admin expenses are running higher due to new projects, and that expense level will moderate as the BS gets utilized in full, and as LTV moves to the 50%+ level.  
  
  
• Vacancy Insulation Perception – Because most of their tenants utilize these properties as a form of Offshoring at substantial cost savings relative to their home markets, there is a level of insulation from vacancies as real estate cycles unfold.  Flight to quality trends aid their class A space and helps attract and keep top local talent.  There is an attractive value proposition perceived by Scandinavian managements due to the 50% or greater discounted rental cost compared with staying in Hamburg, Stockholm, Oslo, Copenhagen, Helsinki, etc.  Combine this with lower local wages and costs, and the overall savings make these buildings a ‘last to cut’, rather than first.

The Opportunity:

Note the jump from 27% LTV to 38% this past quarter based on the Poznan acquisition.  I’m playing for an increase to 50-60% through additional acquisions, more fully utilizing their balance sheet and in-line with peers.  This will likely create a EUR ~800m+ portfolio value near term, up from EUR 573m last quarter pre-acquisition, and EUR 652m at Q2.  This would put their NOI in the EUR ~55m+ neighborhood, up from EUR 42.5m now including the recent acquisition… a 29% bump up.  Given the higher ROEs and portfolio diversity, a 6 cap at maturity isn’t unwarranted and implies EUR 916m of value, before morphing into a matured portfolio adding 6-7% per year additional from yield including expanded dividend capacity.  In time, at maturity, this implies a 65 SEK stock price vs 44.60 now (+46% before yield mode).

The 2023 dip in portfolio value relates to yield curve changes, with valuation assumptions based on cash yields after interest expenses.  And, in June the ECB cut rates for the first time since 2019… hopefully a trend.

• Peers… Not sure the small type will be legible, but this table from ABG Sundal uses 24May2024 pricing.

• Note the lower than avg multiples and higher than average yields.

Catalyst

- Utilization of their Balance Sheet to target level of 50%-60% LTV

- Expected news of Warsaw acquisition(s)

- Ongoing 6-7% yields at maturity

- Strong value proposition of 'Offshoring' in the Baltics & Poland