Eastnine - Baltic growth with Nordic risk
High operational leverage and cheap financing Baltic prime office market outlook is bright We expect acquisitions to add to estimates 3. 2pp yield gap is 42% above core peers We initiate coverage of Eastnine, a Sweden-based owner and manager of prime offices in the Baltic capitals. Nordic and international companies comprise the main share of its tenant base. Its operations are conducted with a =90% NOI margin vs.
Swedish core peers at ~70%, thanks to Baltic leasing structures. The company offers a considerable risk-adjusted return, as it yields ~5. 5% while borrowing at ~2%.
Acquisitions have been the company’s main growth strategy in the past, and with a net LTV of 40%, we expect more to come. We do not include acquisitions in our forecasts, which implies significant potential for forecast revisions. Prime owner in a fast-growing market Baltic GDP grew 3x faster p.
a. than Nordic GDP in ’11-’20, and the region has ~35% lower government debt. The Baltic prime office market picked up speed in 2015 following the inflow of business to the region.
The expansion rate hit an all-time high in ’19, driven by Lithuania. For Eastnine, we estimate 3. 5% LFL rental growth from renegotiations and inflation in ’21, and 4% in ‘22-‘23.
We estimate 4% value revisions in ‘21-‘23, higher than for Eastnine’s Nordic commercial peers, due to stronger macro trends. The company has a strong ESG agenda – 87% of its properties are currently certified to the highest international standard. It also plans to build the first entirely wooden office building in the Baltics in ’23.
P/EPRA NAVPS in line with the historical average As of the last reported P/EPRA NAVPS, Eastnine is trading in line with its historical average and ~12% below core peers. We assign a low point of 65% and high point of 110% of ‘21e P/EPRA NAVPS and arrive at a share price range of SEK 105-178. Historically, growth has mainly come from acquisitions, and the company has communicated that this will continue in ‘21-‘23.