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Comments from Fund Manager Viljar Arakas
2023 was characterized by the fastest interest rate rise in the euro area’s 25-year history. Compared to the previous year, the consolidated interest expense of EfTEN Real Estate Fund AS almost doubled in relation to his EBITDA, directly impacting the free cash flow of the fund. However, due to the fund’s conservative funding policy, stable cash flows from investments, consistently low vacancy rates, and solid payment behavior from customers, EURIBOR’s growth will exceed the threshold of the underlying assets’ cash flows. That never happened.
Taking into account the Fund’s subsidiary liquidity buffer, the Management Committee plans to propose at the Spring 2024 General Meeting of Shareholders an amount that exceeds the amount expected by the Fund’s dividend policy for the past year. This corresponds to EUR 1.0 per share compared to EUR 1.15 per share in the previous year. Considering the market price of EfTEN Real Estate Fund AS stock, this is still 5% above the dividend yield.
The unaudited net profit of EfTEN Real Estate Fund AS in 2023 is EUR 1.0 million (2022: EUR 11.4 million). The decrease in net income was mainly due to a loss of €13.9 million due to changes in the fair value of investment properties (in 2022, the Fund had a gain of €3.1 million from revaluation). The Fund’s investment properties are independently valued by Colliers International. It is important to note that revaluations of the Fund are non-cash balance sheet valuation changes and do not affect the Fund’s actual cash flows or ability to distribute dividends. Current valuations reflect record EURIBOR interest rates at the end of 2023, and due to the expected decline in EURIBOR, the fair value of real estate investments is expected to partially recover.
Changes in commercial real estate market trends are expected in 2024. Rapid interest rate increases are a thing of the past, and interest rates are expected to gradually decline in the future. Given the fragile macroeconomic environment of the Baltic economies and the ongoing economic downturn over the past two years, the Fund’s operations will primarily focus on managing and maintaining rental income and fostering strong relationships with customers.
At the moment, real estate market participants are adapting to the new interest rate environment, which is a prerequisite for an increase in transaction activity. If this situation prevails, the board will propose issuing new shares in the second half of this year to continue the fund’s growth strategy.
Financial overview
EfTEN real estate fund AS reported unaudited consolidated rental income of €30.6 million (2022: €13.5 million) and EBITDA of €26.1 million (2022: €11.8 million) in 2023. The year-on-year increase in rental income and EBITDA is primarily due to the Fund’s merger with Eften Kinisborough Fond AS in early 2023. In real terms, rental income increased by 4% year-on-year.
In 2023, the Fund’s consolidated EBITDA exceeded interest expense 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. The debt service coverage ratio (DSCR) of the fund’s real estate investments did not fall below 1.2 in 2023. That is, the EBITDA of all properties exceeded loan principal and interest payments by at least 20%. His DSCR for the fund’s entire real estate portfolio was 1.8 in 2023 (2.2 in 2022).
EfTEN Real Estate Fund AS invested a total of €6.7 million in real estate projects in 2023, of which €3.6 million was invested in the construction of care homes in Valkla and Tartu. Significant investments (totaling €1.8 million) were also made in the logistics sector, including the expansion of warehouse space at the Betooni 6 property in Tallinn and the refurbishment of the Jurkalnes distribution center in Riga. In addition, he invested 800,000 euros in the renovation of the common areas of the Saules Miestas shopping center.
In December 2023, the EfTEN real estate fund reported consolidated rental income of EUR 2.8 million (up EUR 259,000 compared to November) and EBITDA of EUR 2.2 million (up EUR 45,000 compared to November). The increase in rental income was primarily due to rents based on shopping center sales. The main expenses in December were related to debt provisions and interim audit costs related to the replacement of tenants in one of his distribution centers in Riga.
In December, the fund’s independent real estate valuer, Colliers International, carried out its regular year-end valuation process, which resulted in a 2.1% decline in the fair value of the fund’s investment properties, resulting in a loss of €7.8 million in write-downs. . The total writedown in 2023 amounted to 13.9 million euros, which means that the fair value of the investment property decreased by 3.7%. The most significant decrease in value was in the office sector (9%). The value of the logistics portfolio decreased by 3.7% and the fair value of the care homes decreased by 5.8% due to higher market yields. The valuation of the Fund’s real estate portfolio was primarily affected by an average 0.2-0.5 percentage point increase in capitalization rates and an increase in weighted average cost of capital (WACC) due to the increase in EURIBOR. The initial yield of the Fund’s real estate portfolio as of December 31, 2023 was 8.0%. In addition to the aforementioned factors, there are also more conservative expectations for occupancy and net rental income in the office building sector.
As of December 31, 2023, the net asset value (NAV) per share of EfTEN Real Estate Fund AS was EUR 20.2128 and the EPRA NRV was EUR 20.9623. December NAV decreased by 3.7% and EPRA NRV decreased by 3.4%. Excluding non-cash fair value adjustments to investment properties and deferred tax liabilities calculated from planned dividends, the net asset value of the fund’s shares would have increased by a normal 0.6% in December.
Marilyn Hine
CFO
Phone: 6559 515
Email: marilin.hein@eften.ee
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