What is Baltic Horizon Fund?
Baltic Horizon Fund is the first REIT (Real Estate Investment Trust) fund in Baltic Equity Market. Fund manages commercial real estate in Baltic capital cities: Tallinn, Riga, Vilnius and entered Baltic Stock Exchange via successful IPO on 2016.07.06. Fund is controlled by parent company Northern Horizon and is supervised by Estonian Financial Supervisory Authority. You can read more about the Horizon Fund in official website.
Fund Objectives and Key Facts
Upon entering the market fund managers declared their objectives, that to my memory haven’t been changed:
- 12-15% return on equity;
- 7-9% annual dividend yield;
- 50% leverage (target Debt/Equity=0.5)
Other key notes on the fund:
- Listed on both Nasdaq OMX Tallinn and Stockholm Exchanges (tickers: NHCBHFFT / NHCBHFFS);
- Term – evergreen;
- Portfolio consists of 11 properties in Tallinn, Riga and Vilnius. All of which have a high occupancy rates (above 92%);
- Management fee is tied to market capitalization of the fund units:
- Fund size in Euros: 224 Million;
- Baltic Horizon Fund aims to pay out at least 80% of its free cash flow as distributions;
- Fund’s properties portfolio:
Baltic Horizon dividends
One of the fine reasons to be the unit holder of Baltic Horizon Fund is quarterly dividends. Yes, kind of an exception in Baltic Equities Market. While most companies share their profits once or a few – twice a year Baltic Horizon Fund pays out dividends on quarterly basis. Let’s take a look at historic dividend distributions.
Below you can see nominal gross quarterly dividends of Horizon Fund as well as annualized gross yield for period’s closing price.
While in developed markets, yields are significantly lower.
This kinda requires a look at price development, but I would like to plot that in line with Net Asset Value (NAV).
Unit Price development in relation to Net Asset Value (NAV)
Recently in Baltic Stock Exchage Fund’s units were trading at record discounts (up to 8,34% as of 2018 July).
At this point we could argue about the asset valuation models, but I got be honest, I am not an expert on those. If auditors see no problems, I am inclined to trust them. Now it’s important to note, that recently price was being pushed mainly by one main seller, namely – Nordea clients.
Baltic Equity market is perfect for retail investors in that once in a while it provides windows of opportunities due to low liquidity. That is exactly the case here and this has happened in other Baltic equities in the past. If you look at broker trading activity – it is evident, that from 2018 Q1 till now (2018.08.18) Nordea (NRD) has been the dominant selling pressure, reducing its holdings in Baltic Horizon Fund. While other brokers have been actively accumulating.
However buyers are seeking for maximum discount and highest yield, so we have this double-sided dynamic.
According to 2018 Q1 Fund’s report, Nordea Bank AB clients hold majority (44.34% or 35 096 111) of funds units. From 2018 Q1 till today (mid August) Nordea had net change of -548 815. This represents only 1,56% of their 2018 Q1 holdings, which is minuscule and could mean we are stuck at discount zone for a long time and only the appetite from buyers could change things significantly.
Personally I don’t think Nordea is exiting BHF completely. We don’t even know who exactly is making a price pressure – individual, institutional entity, fund..? What is for certain is current situation.
From Initial public offering (IPO) (2016 July) Fund assets grew from EUR 100 Million to EUR 224 Million as of 2018 May. In recent announcement Fund manager Tarmo Karotam said:
Baltic Horizon Fund is mainly focusing on value adding expansion activities within its portfolio, however, we also remain on the lookout for well- priced attractive cash flow objects, which form the backbone of the fund. In today’s real estate market with increased rents and record high square meter prices we are very comfortable to acquire LNK Centre in well-known Skanste business district with its strong tenants and competitive rental levels.
Which is somewhat inline what I had encountered in Latvian media a while back, with key idea of focusing on asset optimization rather than new acquisitions as the prices are now pretty high.
I strongly await 2018 Q2 webinar, in 2017 webinar Tarmo promised exciting news and it sure proved to be right:
- Increased NAV;
- Higher dividends;
- Increased discount (not mentioned, but on the topic);
- New acquisition;
- Announced Fund units buy-back program.
Icing on the cake – buyback program
On 2018.06.19 Fund announced that general meeting of unitholders approved unit buy-back program. Conditions:
- The re-purchases of units are executed either on Nasdaq Tallinn and/or Nasdaq Stockholm in accordance with the rules of Nasdaq Tallinn and/or Nasdaq Stockholm applicable and strictly in line with applicable legislation;
- The purpose of the re-purchase program is to strengthen the capital structure of the Fund by purchasing units at the price lower than the NAV of the Fund unit at the time;
- Re-purchases are made at the price level lower than NAV of the Fund unit at the time;
- Maximum of 5,000,000 units may be repurchased during the period of 12 months starting from 19th June 2018 for the maximum amount of EUR 5,000,000;
- The aggregate number of units purchased and held by the Fund shall not exceed 10% of the total number of Fund units at any time;
- Payment for the units shall be made in cash;
- The Units held by the Fund shall not grant any unitholder rights to the Fund or to the Management Company;
- the Management Company shall cancel the Units within 3 months after the re-purchase;
- The Management Company has received confirmation from the Estonian Financial Supervision Authority and the Swedish Financial Supervisory Authority that the buy-back program of the Fund on the above terms falls under the safe harbours of the Market Abuse Regulation No 596/2014/EU.
What 5 Million/Units means for Baltic Horizon Fund trading activity? Funds trading statistic for 2018 YTD (year to date) as of mid August in Nasdaq Baltic is this:
Volume: 4 392 853 units
Turnover: EUR 5 639 678
So… Even without anyone else’s buying fund could hold same price while unitholders collect dividends besides slow growth of NAV. Unless something worrying of macro scale would start evolving.
So that’s about it. In low yield environment and diminishing returns stocks, Baltic Horizon Fund seems like a good lee. The way I see – real estate is more inert and would provide more time to react if equities showed signs of turning down.
Other Wonders in Baltic Equities market are here.