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EfTEN real estate funds’ results of the first half of year 2018

As of June 30, 2018 EfTEN real estate funds’ gross asset value totalled EUR 568 million (2017: EUR 535 million), growing by 6% during the first half-year. The total equity of the funds was EUR 283 million in the first half-year (2017: EUR 267 million), growing also by 6%. In the first half of the year 2018, a record amount of net dividends, EUR 19,8 million, were paid out to investors from three funds combined. That represents a ratio of 7,0% to the first half-year end total equity. The total net profit of the three funds was EUR 15,3 million (2017: EUR 15,2 million). The weighted average annual return of the equity invested in the three funds combined stood at 19,8%.

A short overview of the unaudited 2018 first half-year financial result is provided below.

EfTEN Kinnisvarafond AS  
Fund’s year of founding: 2009
Gross asset volume: EUR 209,7 million
Number of investments: 18
Owner’s equity: EUR 108,4 million
Sales revenue: EUR 7,7 million (2017 – EUR 8,5 million)
Net profit: EUR 4,5 million (2017 – EUR 5,8 million)
   
   
ROIC (return on invested capital)1: 13,5%
Status of the fund: investment period has ended; holding phase

ROIC is the total annual rate of return on equity invested in the fund

In the first half-year of 2018 the fund made its tenth successful exit by selling the former Eesti Energia headquarters in Laki 24, Tallinn. The successful investment was in the fund´s portfolio for five years and the average annual return on equity was 18%. In the second half-year of 2018 we are concluding the expansion of UKU Centre, in Viljandi and renovation of Pärnu mnt 105 office building in Tallinn. The lower than usual return on equity is a result of the fact that the consolidated fair value of EfTEN Kinnisvarafond’s real estate investments remained essentially unchanged in the first half-year of 2018, decreased by EUR 407 thousand (in the first half of last year 2017 the value of the real estate portfolio increased by EUR 1 048 thousand).

EfTEN Kinnisvarafond II AS  
Fund’s year of founding: 2015
Gross asset volume: EUR 252,2 million
Number of investments: 6
Owner’s equity: EUR 126,9 million
Sales revenue: EUR 13,9 million (2017 – EUR 10,96 million)
Net profit: EUR 7,6 million (2017 – EUR 5,4 million)
   
   
ROIC (return on invested capital)1: 25,5%
Status of the fund: investment period has ended; holding phase

ROIC is the total annual rate of return on equity invested in the fund

In the first half of this year EfTEN Kinnisvarafond II made its sixth investment with an initial net yield of 8% by acquiring Marienthal commercial centre in Tallinn, Mustamäe. In addition, the fund has received good results from Raddisson Sky Blu hotel in Tallinn and from the full launch of the Domina shopping centre in Riga after a major upgrade. At the end of this half-year, according to EfTEN Kinnisvarafond II AS business plan, the fund has exceeded its fund planned size. In this regard, the fund manager will not make any new investments to fund and in the second half of 2018, will bring to market, for institutional investors only, EfTEN Real Estate Fund IV. The new fund will continue the investment strategy of core and core plus of EfTEN Kinnisvarafond II.

EfTEN Real Estate Fund III AS   
Fund’s year of founding: 2015
Gross asset volume: EUR 106 million
Number of investments: 10
Owner’s equity: EUR 47,3 million
Sales revenue: EUR 4,1 million (2017 – EUR 3,5 million)
Net profit: EUR 3,2 million (2017 – EUR 4,0 million)
   
   
ROIC (return on invested capital)1: 16,6%
Status of the fund: active investment phase

ROIC is the total annual rate of return on equity invested in the fund

The most important events of the first half of 2018 for EfTEN Real Estate Fund III AS was the acquisition of Evolution office building in Vilnius, the completion of the DSV Riga logistics center and the acquisition of a property in Tallinn, Tähesaju business district, for the Hortes garden center. The fund has received a building permit for the construction of a garden centre and negotiations for signing of a construction and lease contract are being held. We plan to start construction in August 2018. Laagri Selver’s development project is completed after the asphalting works completed in May. EfTEN Real Estate Fund III AS has a value added and opportunistic investment strategy. The fund is listed in NASDAQ Baltic Main List.

Conclusion
The financial results of all three funds fully meet the expectations of the management company. The fall in yield rates has slowed down in the Baltic real estate market, therefore net profit earned on real estate revaluation was modest in the first half of 2018, a total of EUR 1.9 million (a net profit of EUR 3.6 million in the same period of the previous year). It is important to point out that the net profit earned from revaluation does not in any way affect the funds actual cash flows. During the last six months, a record dividend amount of almost EUR 20 million in combined was paid out from three funds.

Funds are finding it more difficult to find new suitable investment objects in relation to the seller’s price expectations, which are high due to the high conjuncture of the market. The prices of commercial real estate are extremely sensitive to changes in the conditions for bank financing. Number of competitive lenders has significantly decreased in the Baltic banking market, which has led to an increase in risk margins. In 2019 is expected from the European Central Bank a change in current ultra-loose monetary policy, which ultimately means an increase in the terms of financing costs and stops the further decrease in the yield rates of Baltic commercial real estate. EfTEN Real Estate Fund III AS, and soon to be launched EfTEN Real Estate Fund IV, are planning to continue investing, but are conservative at the present price level. Therefore, we cannot promise that new investments will be made in rapid pace.

The past half year is an important milestone for the management company, EfTEN Capital – the total assets managed by the management company, three real estate funds, Balti Kinnisvaraportfell AS and private portfolio – has led to more than EUR 600 million in assets under management.

Viljar Arakas                                                                                                                                                                                                                                                                                                                                        EfTEN Capital CEO                                                                                                                                                                                                                                                                                                                           Fund manager of EfTEN real estate funds