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Preliminary unaudited 2017 financial results for EfTEN real estate funds

Last year three EfTEN real estate funds achieved the best summarized financial result in its history to date. As at 31 December 2017, the gross asset value of the assets of the three real estate funds managed by EfTEN Capital totalled EUR 535 million (2016: EUR 492 million), growing by a total of 9% during the year. The total equity of the funds was EUR 267 million at the turn of the year (2016: EUR 232 million), growing by 15% during the last year. The total net profit of the three funds last year was EUR 37 million (2016: EUR 29.2 million) growing by 26% during the year. Pursuant to the dividend policy for EfTEN funds, the management board of the fund will make the proposals to the general meetings of shareholders to pay dividends in summarized amount of EUR 16.6 million for the three funds (2016: EUR 12.2 million).

A short overview of the unaudited 2017 financial results for our three real estate funds is provided below.

EfTEN Kinnisvarafond AS  
Fund’s year of founding: 2009
Gross asset volume: EUR 215.6 million
Number of investments: 19
Owner’s equity: EUR 109.4 million
Sales revenue: EUR 16 million (2016: EUR 16.9 million)
Net profit: EUR 9.5 million (2016: EUR 14.4 million)
ROIC1: 15.7%
Planned dividend payment, including income tax: EUR 6.4 million
Status of the fund: investment period has ended; holding phase

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

The fund has ended investment activity and is focused on managing the assets. In 2017, the fund carried out two successful asset sales: Narva Prisma was sold to French-based Corum Asset Management SAS (the annual invested return on equity was 24%, equity multiplier 1.9x), and the Stabu commercial building, in Riga, was sold to Colonna investors (the annual return on equity was 21% and the equity multiplier 1.8x). Thanks to the two successful exits, the fund decided to pay additional dividends in December 2017, in the total amount of EUR 4.5 million. In addition, we are concluding the expansion of the RAF Centre, in Jelgava, and in Q4 2017 we began expansion construction work on the UKU Centre, in Viljandi. 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 2017.

EfTEN Kinnisvarafond II AS  
Fund’s year of founding: 2015
Gross asset volume: EUR 221.5 million
Number of investments: 5
Owner’s equity: EUR 110.3 million
Sales revenue: EUR 24.4 million (2016: EUR 16.0 million)
Net profit: EUR 19.9 million (2016: EUR 10.5 million)
ROIC1: 24.0%
Planned dividend payment, including income tax: EUR 7.9 million
Status of the fund: active investment phase

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

In 2017, the fund made its first investment in the logistics segment, acquiring approx. 30,000 m2 of warehouse space at the Kaunas Terminal Logistics Centre, in Lithuania. In addition, the large-scale reconstruction of the Domina shopping centre, located in Riga, was completed. As a result, a total of 26 new shops were opened in the space formerly occupied by Prisma. The largest of these were a Maxima XXX hypermarket, SportsDirect and JYSK. A significant portion of the fund’s excellent results came from the Radisson Sky Hotel, Tallinn, which had a sales revenue of over EUR 10 million in 2017. The last time that the hotel exceeded EUR 10 million in turnover was exactly ten years ago, in 2007. Tallinn’s hospitality market was affected positively in 2017 by Estonia’s Presidency of the Council of the European Union in the second half of the year.

EfTEN Kinnisvarafond III AS  
Fund’s year of founding: 2015
Gross asset volume: EUR 97.5 million
Number of investments: 8
Owner’s equity: EUR 47.2 million
Sales revenue: EUR 6.6 million (2016: EUR 4.6 million)
EBITDA: EUR 5.6 million (2016: EUR 3.9 million)
ROIC1: 24.7%
Planned dividend payment, including income tax: EUR 2.3 million
Status of the fund: active investment phase

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

The most important event of the year for EfTEN Real Estate Fund III AS was the listing of the fund’s shares on the Nasdaq Baltic Main List. A total of EUR 3.5 million of new capital was raised in the IPO process, which was oversubscribed by investors by a 5.7 times. The fund made two new investments in 2017, acquiring the Hortes gardening centre property through a sale and leaseback transaction, and on 14 December 2017, the Laagri Selver grocery store, developed by the fund, was opened. Last year the fund’s largest investment thus far, the Saules Miestas shopping centre, celebrated its 10th year of operation. The fund made a significant investment in upgrading the exterior appearance of Saules Miestas, investing a total of EUR 500,000 in the replacement of the centre’s exterior facade.

Summary

While EfTEN Capital made new real estate investments totalling EUR 110 million in 2015, and EUR 140 million in 2016, in 2017 the total volume of new investments fell within the range of EUR 25 million. Over a period of three years, thanks to the zero interest rate policy of the European Central Bank, the price level of commercial real estate has increased significantly, with rates of return falling as a result. As a conservative investor, the volume of new investments by our funds has fallen due to the fact and we are increasingly focusing on the more efficient management of already existing investments, the expansion and updating of buildings, in order to be attractive in the face of growing competition by lessors.

In terms of further market trends, the monetary policy steps taken by the European Central Bank in 2018 in limiting the currently ultra-loose monetary policy will be of crucial importance. The turnaround of the current trend in the Swedish housing market will prove to be very important in terms of sentiment, which may lead to a cooling of the current growing optimism by foreign investors towards the Baltic states. We will see if Sweden becomes the first real estate market in the history of the world where prices stabilize at a high level or whether a larger price correction takes place. The eyes of the entire world’s real estate community are focused on the events unfolding on the housing market in Sweden.

Viljar Arakas                                                                                                                                                                                                                                                                                                                                            EfTEN Capital Managing Partner                                                                                                                                                                                                                                                                                                       EfTEN real estate funds fund manager