Fund manager's comment on the 2022 financial results

In 2022, major changes took place in the European and Baltic commercial real estate market. The rapid acceleration of the inflation rate prompted the central banks to end the so-called zero interest policy that had lasted for almost ten years. While at the beginning of 2022, the EURIBOR rate used as the basis for most loans issued in euro was negative, by the end of the year the 6-month EURIBOR rose to 2.7 % and the 1-month EURIBOR to 1.9 %. In the real estate sector, where investments are usually made with financial leverage, this meant a significant increase in borrowing costs and a decrease in transaction activity.

In the real estate market of the Baltic countries, the use of leverage has generally been lower compared to the so-called developed European countries. Mainly because of this, the rise in interest rates here did not immediately lead to a fall in real estate prices. In particular, the increase in interest rates was accompanied by a significant decrease in the number of real estate transactions in this region. The uncertainty and low transaction activity of the commercial real estate market in the Baltic countries will probably remain in the first half of 2023.

In December 2022, the shareholders of EfTEN Real Estate Fund III AS approved the fund's merger with EfTEN Kinnisvarafond AS (the fund being acquired), resulting in the largest commercial real estate fund in the Baltic States. The balance sheet date of the merger was 01.01.2023, and after the merger, the consolidated assets of EfTEN Real Estate Fund III AS will increase more than twice. After the merger, the business name of EfTEN Real Estate Fund III AS will be EfTEN Real Estate Fund AS. At the beginning of this year, one of the important priorities of the management company is to correctly close the legal merger of the funds.

Financial overview

The consolidated sales revenue of EfTEN Real Estate Fund III AS for the 12 months of 2022 was 14.299 million euros (2021 12 months: 12.921 million euros), increasing by 10.7 % during the year. The Group's net rental income in 2022 totalled to 13.665 million euros in 2022 (2021: 12.412 million euros), increasing by 10.1 %. The Group's net profit for the same period was 11.408 million euros (2021 12 months: 13.099 million euros). The decreased net profit is related to the smaller revaluation of real estate investments, which was 3.119 million euros this year and 6.442 million euros in 2021. The Fund earned a total revenue of 3.699 million euros in the fourth quarter of 2022, up 191 thousand euros compared to the same period last year. The Fund's net rental income for the fourth quarter of 2022 amounted to 2.948 million euros, an increase of 1.1 % compared to the same period last year. The Fund's consolidated net profit for Q4 was 1.199 million euros (2021 Q4: 5.355 million euros).

The Group’s total assets as at 31.12.2022 was 181.956 million euros (31.12.2021: 176,401 million euros), incl. the fair value of the investment properties that accounted for 93 % of the total assets (31.12.2021: 92 %).  

At the end of December 2022, the Group has 18 (31.12.2021: 16) commercial property investments with a fair value at the balance sheet date of 168.875 million euros (31.12.2021: 161.961 million euros) and an acquisition cost of 151.426 million euros (31.12.2021: 147.633 million euros).

In April, the Fund’s subsidiary EfTEN Valkla OÜ acquired real estate located in Valklaranna tee 36, Valkla in Harju county. The Fund reconstructs the building from nursery home to general nursery 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 million and in addition, the Fund’s subsidiary is required to carry out investments on the amount of EUR 2.000 million. Purchase of the real estate plot and investments are financed by the Fund’s equity.

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 nursery 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 nursery home on the land plot, it will be leased to Südamekodud AS based on a long-term 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 equity.

In 2022, the Group earned a total rental income of 13.489 million euros. The rental income calculated on a comparable basis was a total of 12.588 million euros in 2022, which is a 7% increase compared to 2021.

EfTEN Real Estate Fund III AS revalued it’s investment properties twice this year - in June and December. In connection with the merger with EfTEN Kinnisvarafond AS, the Fund also evaluated extraordinary investment property as of 30.11.2022. As of 31.12.2022, the fair value of the Fund's real estate portfolio is 168.875 million euros. In 2022, the value of the Fund's investments increased by 1.9% as a result of revaluations, and the fund received a total profit of 3.119 million euros from fair value changes. The value of investment property increased mainly as a result of higher expected rental cash flow driven by increased inflation. Due to the increase in EURIBOR and investors' return expectations, the discount rates used to calculate the present value of cash flows in appraisal increased in almost all investment objects in 2022.

Financing

In the following 12 months, the loan agreements of the Group's three subsidiaries – EfTEN Evolution UAB, Saules Miestas UABand EfTEN Piepilsetas SIA - will expire, the balance of the loans as at 31.12.2022 is 19.841 million euros. The LTV of the expiring loan agreements is 30%-40%, and investment properties have a stable and strong rental cash flow, therefore, according to the Group's management, no complications is expected in extending the loan agreements.

The weighted average interest rate of the Group's loan agreements (including taking into account interest rate swap agreements) due to the increase in EURIBOR is 3.7 % (31.12.2021: 2.3 %) and LTV (Loan to Value) 40 % (31.12.2021: 44 %) as of the end of December). All loan agreements of the Fund's subsidiaries are linked to a floating interest rate. In order to mitigate the risk of an increase in the interest rate of one loan agreement, an interest rate swap agreement has been concluded, where the Euribor is fixed at 0.35 %. The swap agreement expires in 2023, and its fair value is 53 thousand euros as of 31.12.2022.

Information on shares

The net value of the share of EfTEN Real Estate Fund III AS as of 31.12.2022 was 20.55 euros (31.12.2021: 19.11 euros). The net value of EfTEN Real Estate Fund III AS shares increased by 7.5% during 2022. In May 2022, the Fund paid dividends from the profit of 2021 in the total amount of 4.058 million euros (in June 2021: 2.798 million euros). Without the payment of dividends, the net value of the Fund's shares would have increased by 12.0 % during 2022.

During 2022, the Group has earned a free cash flow of 6.182 million euros (12 months 2021: 4.550 million euros), of which, according to the Fund's dividend policy, the total amount of net dividends would be 4.638 million euros (2021: 3.401 million euros). Taking into account the obligation to keep a minimum cash balance resulting from the special conditions of the loan of the fund's subsidiaries and the short-term need for liquidity, as well as the possibility of increasing the loan amount by 1 million euros due to the current loan agreement of the Fund's subsidiary EfTEN Laagri OÜ, the Fund's board proposes to the council to pay dividends for 2022 more than the dividend policy stipulates - in total 5.438 million euros.

In connection with the merger of EfTEN Real Estate Fund III AS (the acquiring fund) and EfTEN Kinnisvarafond AS (the fund being acquired), in addition to the dividends of EfTEN Real Estate Fund III AS, the free cash flow of EfTEN Kinnisvarafond AS will also be paid out of the Fund in the spring of 2023. Insofar as EfTEN Real Estate Fund III AS makes a share issue for the shareholders of EfTEN Kinnisvarafond AS in accordance with the share exchange ratio and the number of EfTEN Real Estate Fund III AS shares increases as a result of the issue, the exact net dividend per share will be announced through the stock exchange system in March 2023.

CONSOLIDATED STATEMEMT OF COMPREHENSIVE INCOME

		4th quarter	12 months
€ thousands		2022	2021	2022	2021
Revenue		3,699	3,508	14,299	12,921
Cost of services sold		-56	-48	-267	-241
Gross profit		3,643	3,460	14,032	12,680
Marketing costs		-113	-124	-367	-268
General and administrative expenses		-525	-1,024	-1,916	-2,326
Gain / loss from valuation of investment properties		-582	4,422	3,119	6,442
Other operating income and expense		-25	-17	23	1
Operating profit		2,398	6,717	14,891	16,529
Other finance income and expense		-582	-420	-1,680	-1,678
Profit before income tax		1,816	6,297	13,211	14,851
Income tax expense		-617	-942	-1,803	-1,752
Net profit for the financial year		1,199	5,355	11,408	13,099
Earnings per share
- basic		0.24	1.06	2.25	2.79
- diluted		0.24	1.06	2.25	2.79

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                 

		31.12.2022	31.12.2021
€ thousands
ASSETS
Cash and cash equivalents		11,331	13,074
Receivables and accrued income		1,522	876
Prepaid expenses		49	314
Inventory		0	29
Total current assets		12,902	14,293
Long-term receivables		61	4
Investment property		168,875	161,961
Property. plant and equipment		116	140
Intangible assets		2	3
Total non-current assets		169,054	162,108
TOTAL ASSETS		181,956	176,401
LIABILITIES AND EQUITY
Borrowings		22,058	7,645
Derivative instruments		0	121
Payables and prepayments		1,461	1,349
Total current liabilities		23,519	9,115
Borrowings		45,917	63,440
Other long-term debt		1,008	987
Deferred income tax liability		7,248	5,945
Total non-current liabilities		54,173	70,372
Total liabilities		77,692	79,487
Share capital		50,725	50,725
Share premium		16,288	16,288
Statutory reserve capital		2,149	1,489
Retained earnings		35,102	28,412
Total equity		104,264	96,914
TOTAL LIABILITIES AND EQUITY		181,956	176,401

Marilin Hein
CFO
Phone +372 6559 515
E-mail: marilin.hein@eften.ee

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• EREFIII_Interim_12_months_2022_ENG