● ANNUAL REPORT 2020
Management report | General information
2
Baltic
Horizon
Fund
(the
"Fund"
or
the
“Group”)
is
a
regulated
closed-end
contractual
investment
fund
registered
in
Estonia
on
23
May
2016.
Northern
Horizon
Capital
AS
is
the
Management
Company
(AIFM)
of
the
Fund.
Both
the
Fund
and
the
Management
Company
are
supervised
by
the
Estonian
Financial Supervision and Resolution Authority.
The
Fund
is
a
public
fund
with
no
particular
lifetime
(evergreen).
Units
of
the
Fund
are
made
available
to
the
public
in
accordance
with
the
Fund
Rules
and
applicable
laws.
The
Fund
is
currently
dual-listed
on
the
Fund
List
of
the
Nasdaq
Tallinn
Stock
Exchange
and
the
Nasdaq
Stockholm
Alternative
Investment Funds market.
Baltic
Horizon
Fund
was
merged
with
Baltic
Opportunity
Fund
(“BOF”)
on
30
June
2016.
Baltic
Horizon
was
the
remaining
entity which took over 5 assets of BOF and its investor base.
CONTENTS
Management report
3
Key figures
8
2020 at a glance
9
Letter to unitholders
13
COVID-19 update
15
Property report
35
Financial report
39
Financing
44
EPRA performance measures
49
Investor relations
55
Structure and governance
59
Risk management
60
Sustainability
62
Outlook for 2021
62
Management board’s confirmation
Consolidated financial statements
63
Independent auditor’s report
69
Consolidated statement of profit or loss and
other comprehensive income
70
Consolidated statement of financial position
71
Consolidated statement of changes in equity
72
Consolidated statement of cash flows
73
Notes to the consolidated financial
statements
115
Management approval of consolidated
financial statements
116
Definitions of key terms and abbreviations
●
ANNUAL
REPORT
2020
Management
report
|
Contents
● ANNUAL REPORT 2020
Management report | Key figures
3
KEY FIGURES
Fair value of portfolio
EUR thousand
Occupancy
%
Net rental income
EUR thousand
Dividends per unit*
EUR cent
Generated net cash flow per unit*
EUR cent
Net (loss) profit
EUR thousand
*The
Fund’s
generated
net
cash
flow
for
2020
was
EUR
0.10
per
weighted
average
number
of
units
for
the
year
(2019:
EUR
0.11).
The
payout ratio based on total generated net cash flow was 68.6% for 2020 (2019: 102.8%).
● ANNUAL REPORT 2020
Management report | Key figures
4
● ANNUAL REPORT 2020
Management report | Key figures
5
Net rental income margin
(%)
1
Valuation losses on investment properties
Generated net cash flow
3
Key financial position figures
Interest bearing loans and borrowings
Weighted average duration of debt
Key property portfolio figures
Average rent during the period
Weighted average unexpired lease term to expiry
6
● ANNUAL REPORT 2020
Management report | Key figures
6
Number of units outstanding
Weighted average number of units during the period
Generated net cash flow per unit
9
EPRA Cost ratio (including direct vacancy costs)
EPRA Cost ratio (excluding direct vacancy costs)
EPRA NRV (Net Reinstatement Value)
11
EPRA NTA (Net Tangible Assets)
11
EPRA NDV (Net Disposal Value)
11
EPRA Net initial yield (NIY)
1.
Net rental income as a % of rental income.
2.
EBIT (earnings before interest and taxes) as a % of rental income.
3.
Generated
net
cash
flow
is
calculated
based
on
net
rental
income
less
administrative
expenses,
less
external
interest
expenses,
less CAPEX expenditure. Listing related expenses and acquisition related expenses are added back in GNCF calculation.
4.
Properties includes 15 established cash flow properties and Meraki development project.
5.
Effective occupancy rate including a rental guarantee.
6.
Weighted
average
unexpired
lease
term
to
expiry
is
based
on
the
number
of
years
of
unexpired
lease
terms,
as
from
the
reporting
date, weighted by the total annual income of each contract.
7.
Based on the closing prices and split between units on the Nasdaq Tallinn and the Nasdaq Stockholm Stock Exchanges.
8.
Distributions to unitholders for 2020 Fund results.
9.
Generated net cash flow per weighted average numbers of units during the period.
10.
Gross
dividend
yield
is
based
on
the
closing
market
price
of
the
unit
as
at
the
end
of
the
year
(2020:
closing
market
price
of
the
unit as of 31 December 2020).
11.
According to new EPRA BPR, three new EPRA NAV figures should be disclosed starting from the 2020 financial year.
12.
EPRA
NAV
and
EPRA
NNNAV
figures
are
disclosed
to
provide
a
comparison
between
the
new
NAV
figures
and
the
old
NAV
figures.
● ANNUAL REPORT 2020 Management report | Significant events in 2020
7
Portfolio value (EUR million)
Investment strategy
The
Fund’s
primary
focus
is
to
invest
directly
in
commercial
real
estate
located
in
Estonia,
Latvia
and
Lithuania
with
a
particular
focus
on
the
capitals
-
Tallinn,
Riga and Vilnius.
The
Fund’s
focus
is
on
established
cash
flow
generating
properties
with
potential
to
add
value
through
active
management
within
the
retail,
office,
leisure
and
logistics
segments
in
strategic
locations
and
strong
tenants
or
a
quality
tenant
mix
and
long
leases.
Up
to
20%
of
the
Fund’s
assets
may
be
allocated
to
investments
of
a
more
opportunistic
nature
such
as
forward
funding
development projects and undeveloped land purchases.
The
Fund
aims
to
use
a
50%
long-term
leverage
strategy.
At
no
point
in
time
may
the
Fund’s
leverage
exceed
65%.
The
Fund
aims
to
grow
through
making
attractive
investments
for
its
investors
while
diversifying
its
risks
geographically,
across
real
estate
segments,
tenants
and
debt providers.
Ten largest properties
●
ANNUAL
REPORT
2020
Management
report
|
Key
figures
● ANNUAL REPORT 2020 Management report | 2020 at a glance
8
2020 AT A GLANCE
Q1 2020
On
19
February
2020,
the
Fund
distributed
EUR
3.18
million to investors (EUR 0.028 per unit).
Q2 2020
On
14
May
2020,
the
Fund
distributed
EUR
1.70
million
to
investors (EUR 0.015 per unit).
The
repeated
Annual
General
Meeting
on
9
June
2020
approved
all
proposals
of
the
Management
Company.
The
repeat
meeting
was
convened
as
no
quorum
was
reached
at
the
initial
Annual
General
Meeting
on
26
May
2020.
The
investors
resolved
to
approve
the
issue
of
new
Baltic Horizon Fund units during 2020.
Q3 2020
On
14
July
2020,
the
Fund
distributed
EUR
1.70
million
to
investors (EUR 0.015 per unit).
On
27
July
2020,
S&P
Global
Ratings
affirmed
Baltic
Horizon
Fund
“MM3”
mid-market
rating
and
removed
the
Fund
from
CreditWatch
with
negative
implications,
where
the
Fund
was
placed
on
7
May
2020.
The
indicative
corresponding
rating
for
“MM3”
on
the
global
rating
scale is “BB+/ BB”.
Q4 2020
On
24
September
2020,
Galerija
Centrs,
located
in
the
Old
Town
of
Riga,
became
the
first
shopping
centre
in
Latvia
to
obtain
the
SAFE
RetailDestination©
certificate.
It
received
the
designation
from
the
SAFE
Asset
Group,
which
offers
the
only
internationally
acknowledged
resilience certification program for shopping centres.
On
2
October
2020,
Europa
shopping
centre
(Europa
SC),
located
in
Vilnius,
also
obtained
the
SAFE
RetailDestination© certificate.
On
23
October
2020,
the
Fund
announced
the
issue
of
new
units
in
a
secondary
public
offering.
In
total,
gross
equity
of
EUR
7.2
million
was
raised
through
the
transaction.
The
new
units
were
issued
at
a
price
of
EUR 1.1566,
which
was
calculated
according
to
the
procedure
adopted
at
the
general
meeting
and
was
equal
to
the
year-to-date
weighted
average
price
of
units
on
the
Nasdaq
Tallinn
Stock
Exchange
at
a
date
7
calendar
days
prior
to
the
first
day
of
the
subscription
period.
After
the
transaction,
the
total
number
of
Fund
units
registered
in
the
Estonian
Register
of
Securities
increased to 119,635,429.
On
6
November
2020,
the
Fund
distributed
EUR 3.11
million to investors (EUR 0.026 per unit).
● ANNUAL REPORT 2020 Management report | Letter to unitholders
9
LETTER TO UNITHOLDERS
Baltic
Horizon
Fund
is
the
first
listed
real
estate
fund
in
the
Baltic
states
that
follows
traditional
REIT
principles
with
a
primary
focus
on
paying
its
unitholders
regular
quarterly
dividends
from
its
rental
operations.
We
at
Baltic
Horizon
truly
believe
that
over
the
years
we
have
built
a
portfolio
of
strong
retail
and
office
assets
with
well-known
and
long-term
tenants,
including
local
commercial
leaders,
government
agencies,
nearshoring
shared
service
centres
and
the
Baltic
headquarters
of
leading
international
companies
that
are
capable
of
surviving
different
crises
and
cycles.
The
past
12
months
has definitely put our principles to a good test.
The
year
2020
will
go
down
in
history
as
an
extraordinary
year
with
unparalleled
and
sudden
halts
of
travel
and
lockdowns
affecting
most
real
estate
sectors.
It
is
even
more
unexpected
that
this
crisis
has
affected
mostly
the
centrally
located
commercial
properties
–
hotels,
retail
centres
and
somewhat
offices
–
have
been
hit
the
hardest
as
people
have
been
forced
out
of
the
city
centres
to
commute
and
socialize
less
and
work,
shop
and
entertain
themselves
from
home.
Uncertainties
about
the
virus
-
how
it
spreads
and
which
social
groups
are
the
most
vulnerable
have
induced
governments
to
lock
down
cities,
and
to
introduce
other
restrictions
and
measures
to
limit
social
contact.
This
in
turn
has
had
a
direct
negative
impact
on
economies
and
forced
everyone
to
re-evaluate
their
business
models
to
adjust
to
the
changed environment.
Despite
the
very
ambiguous
and
stressful
environment,
I
am
proud
to
say
that
our
property
and
asset
management
teams
have
done
a
tremendous
job
and
recovered
more
than
84%
of
total
contractual
rent
from
the
retail
segment
and
more
than
98%
from
the
office
segment.
The
diversified
portfolio
with
a
strong
tenant
mix
allowed
us
to
generate
a
NOI
of
close
to
EUR
20
million
for
2020
(only
approx.
15%
less
than
budgeted).
The
decline
in
the
rental
income
of
the
office
segment
is
mainly
attributable
to
cafeterias
located
in
office
buildings
being
closed
for
almost
the
entire
period.
The
decrease
in
the
retail
segment
is
primarily
related
to
rental discounts provided to the most affected tenants.
At
the
same
time,
our
finance
team
has
been
able
to
maintain
strong
relationships
with
our
financiers
that
have
granted
us
additional
flexibility
around
debt
covenants.
With
a
debt
portfolio
where
virtually
all
loans
have
to
be
settled
in
a
lump
sum
at
the
end
of
the
loan
term
and
only
interest
payments
need
to
be
made
regularly,
we
have
not
needed
to
ask
for
grace
periods
and
it
has
improved
our
liquidity.
Additional
equity
of
EUR
7.2
million
raised
between
the
two
waves
has
further
strengthened
our
financial
standing
and
allowed
us
to
● ANNUAL REPORT 2020 Management report | Letter to unitholders
10
focus
on
new
acquisition
opportunities
and
ongoing
expansion projects.
I
am
very
pleased
to
state
that
despite
the
discounts
we
have
had
to
make
and
the
highly
uncertain
environment,
the
Fund’s
operating
cash
flow
was
clearly
positive
and
thus
we
were
able
to
continue
our
quarterly
dividend
payouts
throughout
2020,
although
with
some
reductions.
Overall
generated
net
cash
flow
(GNCF)
for
the
year
was
a
commendable
EUR
11.4
million
(EUR
11.0
million
in
2019)
and
EUR
0.10
per
unit
(EUR
0.11
per
unit
in
2019)
despite
the
shopping
centre
lockdowns.
EUR
4.4
million
of
unpaid
dividends
was
retained
at
the
end
of
2020
and
we
aim
to
gradually
restore
our
quarterly
payouts
to
the
pre-crisis
levels
as
soon
as
it
becomes
clear
that
the
virus
waves
can
be
managed,
lockdowns
of
such
magnitude
will
not
be
repeated
and
tourists
will
start to return to the Baltic capitals.
“Never
waste
a
good
crisis”
–
we
are
going
to
transform
our
central
retail
centres
into
life-style
centres
With
the
acquisition
of
Europa,
Postimaja
and
Galerija
retail
centres
in
the
hearts
of
Vilnius,
Tallinn
and
Riga,
we
had
something
very
specific
in
mind.
Firstly
to
own
properties
in
locations
with
long-term
viability
that
would
attract
the
highest
income
bracket
target
groups
including
tourists
and
secondly,
to
be
a
one-stop-shop
for
new
international
retailers
looking
to
enter
the
Baltics.
We
hope
to
announce
the
first
news
demonstrating
the
success of our strategy quite soon.
The
Baltic
states
are
still
transitioning
from
manufacturing
to
service-based
value
added
economies
and
this
trend
will
continue
in
the
2020s.
The
strong
emergence
of
the
tech
start-up
sector
is
a
good
example
of
such
transformation
with
revenues
of
more
than
EUR 1.0
billion
(yearly
increase
of
approx.
+30%)
and
attracting
investments
of
more
than
EUR
0.6
billion
across
the
Baltics
only
in
2020
(yearly
increase
of
approx.
+65%).
The
sector,
which
is
also
generating
growing
demand
for
the
office
segment,
was
virtually
inexistent
ten
years
ago
and
now
it
has
tens
of
thousands
of
employees
earning
twice
the
average
salary.
It
is
even
more
encouraging
to
note
that
already
today
Estonia
has
4.6
times
as
many
start-ups
per
capita
as
Europe
on
average.
The
average
salaries
in
the
Baltic
capital
cities
are
likely
to
continue
to
increase
as
they
have
over
the
past
decade
with
higher
disposable
incomes
to
be
spent
on
goods
and,
more
importantly,
on
restaurant
experiences,
healthy
food
and
entertainment.
A
popular
slogan
in
the
Baltic
retail
today
is
“Food
is
the
new
fashion!”.
Therefore,
healthy
fashionable
restaurants,
food
markets,
pick-up
points,
after
sales
and
convenience
services
and
upgraded
experience
driven
fashion
stores
will
be
in
the
forefront
of
the
new
concepts
and
tenant
mixes
of
all
three
of
our
centrally
located
life-style
centres.
We
have
already
started
negotiations
with
several
operators
that
share
our
vision.
The
new
concepts
will
have
to
offer
something
that
attracts
customers
from
morning
to
evening
in
order
to
maximize
the
revenue
potential
and
thus rental income.
One
of
our
most
important
achievements
in
2020
was
putting
in
place
new
centre
management
teams
for
two
of
our
largest
centres
Europa
and
Galerija.
They
are
full
of
enthusiasm
and
excited
to
take
the
properties
to
the
next
level.
Due
to
the
growth
years
and
long
leases,
it
has
been
difficult
to
interrupt
the
business,
but
during
the
crisis,
when
there
are
increased
vacancies
and
stronger
tenants
are
open
to
bright
new
ideas,
we
can
finally
carry
out
the
upgrade.
Our
management
and
retail
teams
have
been
preparing
for
the
concept
change
for
several
years.
Architects
and
designers
have
been
meticulously
working
on
the
new
concepts
and
as
building
permits
have
been
received,
2021
will
be
the
time
for
execution.
We
have
hired
the
most
innovative
interior
designers
for
Europa
and
Postimaja
and
the
plan
is
to
roll
out
the
full
concepts
with
new
tenant
mixes
during
2021-2023.
We
expect
that
with
the
new
concepts
we
can
increase
NOI
of
these
properties
by
at
least
25%
compared
to
the
pre-
crisis
levels
and
maximize
the
investment
value
for
our
investors
while
maintaining
attractive
quarterly
dividend
payouts.
● ANNUAL REPORT 2020 Management report | Letter to unitholders
11
“Cinema
will
come
back
big
time,
companies
will
continue
to
need
office space and not all sales will go online”
After
the
first
lockdown
ended
in
summer
2020,
we
monitored
closely
how
quickly
the
cinemas
filled
up
again
as
the
need
for
entertainment
and
socializing
presented
its
obvious
case.
Despite
Netflix,
Amazon
and
many
other
video
on
demand
(VOD)
providers
gaining
momentum,
it
is
hard
to
believe
that
they
can
replace
the
social
and
cultural
benefits
of
cinemas,
theatres,
museums
and
other
public
attractions.
Furthermore,
several
film
directors
have
even
refused
to
sell
their
art
to
the
big
VOD
companies,
as
they
strongly
believe
that
their
art
is
best
experienced
on
the
big
screen.
It
is
somewhat
comparable
to
gaining
a
fulfilling
experience
from
viewing
an
original
Monet
painting
in
the
art
museum
versus
having
the
same
painting
as
a
desktop
background
for
a
computer.
The
best
way
to
test
public
interest
is
to
ask
children
whether
they
want
to
go
to
the
cinema
when
the
lockdown
ends,
particularly,
as
the
number
of
blockbuster
movies,
to
be
premiered
after
the
pandemic is under control, will be sensational.
In
regards
to
the
office
segment,
working
in
the
office
from
nine
to
five,
five
days
a
week
is
a
working
model
from
the
previous
century,
which
will
become
essentially
obsolete
for
many
companies
with
this
crisis.
Does
that
mean
that
there
will
be
no
offices
in
the
future,
and
we
will
all
work
only
from
our
homes?
I
don’t
think
anyone
really
believes
that.
Companies
have
grown
to
respect
healthy
work
habits
and
better
work-life
balance.
Thus
more
flexibility
and
a
certain
amount
of
remote
working
will
be
the
way
forward
for
people
to
feel
more
satisfied,
rested and motivated.
Based
on
the
discussions
with
our
tenants
and
other
market
players,
this
in
turn
means
that
working
spaces
will
change.
More
office
space
will
be
converted
to
team
meeting
and
business
innovation
discussion
areas
while
open
plan
areas
will
decrease
as
focused
work
will
either
be
done
in
separate
rooms
or
at
home.
This
may
mean
that
in
office
layouts,
the
popularity
of
the
open
plan
concept
will
likely
decrease
significantly.
Team
based
custom-made
office
space
solutions
will
be
on
top
of
every
CEO’s
mind
in
order
to
provide
their
staff
with
the
most
attractive
environment
for
bouncing
ideas
off
each
other
and
generating
innovation
and,
at
the
same
time,
to
adjust
to
the
rapidly
changing
business
environment.
Our
newest
and
greenest
office
building
Meraki,
currently
under
construction
in
Vilnius,
aims
to
meet
exactly those needs.
This
crisis
has
accelerated
all
trends
that
had
emerged
already
before
COVID-19.
As
to
the
prospects
of
retail
real
estate,
we
believe
that
in
the
future
shopping
will
be
a
multi-level
experience
and
the
key
words
will
be
the
environment
(excitement,
comfort)
and
mixed
use
(diverse
functionality).
The
environment
should
entice
the
visitor
with
an
opportunity
to
experience
audio-visual
● ANNUAL REPORT 2020 Management report | Letter to unitholders
12
entertainment,
a
cosy
atmosphere
for
meetings,
etc.
Only
then
customers
will
start
spending
money
(otherwise
goods
can
easily
be
bought
online).
Mixed
use
including
offices/entertainment/health
will
attract
visitors
to
do
more
than
just
buy
goods.
Understanding
the
ever-
changing
mind
of
a
customer
is
of
course
a
challenge
and
the
property
should
be
able
to
adapt
to
it
without
too
many
architectural
changes,
even
though
some
investments
will
be
needed
for
the
turnarounds.
We
also
believe
that
the
tourist
flows
will
return,
which
will
positively
affect
our
centrally
located
properties,
as
people
are
impatient
to
travel
but
the
speed
of
recovery
will largely depend on the speed of vaccination.
The
retail
industry
is
very
different
in
the
largest
cities
of
the
US,
Europe
and
the
Baltic
states.
For
example,
in
the
US
the
number
of
department
stores
is
huge
compared
to
Europe
and
the
Baltics,
whereas
in
the
Baltics
fashion
high
streets
have
not
(yet)
emerged.
The
COVID
crisis
has
boosted
online
sales
for
many
companies.
Still,
in
the
Baltics
the
ratio
of
online
sales
to
total
sales
is
between
3-9%,
depending
on
the
type
of
goods
or
services.
Our
retailers
have
said
that
in
the
Baltics,
where
any
shop
is
a
15-minute
drive
away,
they
do
not
believe
that
in
the
next
5
years
more
than
15%
of
retail
sales
on
average
would
be
done
online,
which
means
that
85%
or
more
of
retail
sales
will
remain
in
physical
shops.
According
to
our
tenants,
another
major
problem
with
online
sales
is
that
allowing
customers
to
return
goods
free
of
charge
is
a
lossmaking
model
for
any
retailer.
Therefore,
attracting
customers
to
the
stores
will
be
quite
existential
for
many
retailers.
Furthermore,
one
of
the
largest
online
retailers,
Amazon,
is
planning
to
open
approx.
2000
offline
stores
and
showrooms
worldwide
with
a
primary
goal
to
maximize
customer
satisfaction.
All
in
all,
we
believe
that
in
the
future
we
will
see
omnichannel
retail,
which
combines
both
physical
and
digital
options
to
target
maximum customer convenience and satisfaction.
Across
the
cycles
with
a
sustainable
and
diversified
real estate portfolio
In
retail,
new
and
upgraded
concepts
will
appear
while
customers
will
become
more
sophisticated
about
their
needs
and
landlords
need
to
maintain
a
close
dialogue
with their tenants in order to evolve together.
In
the
long
run,
physical
retail
will
evolve
into
a
frilling
customer
service
experience,
while
being
strongly
supported
by
e-commerce
and
the
development
of
artificial
intelligence.
2021
will
be
a
year
when
retailers
seek
refreshing
solutions
while
competition
between
traditional
and
innovative
retailers
becomes
more
intense.
More
attention
will
be
paid
to
local
newcomers
with
well-developed
branding
and
a
capacity
for
story-
telling.
An
important
aim
in
our
Environmental,
Social
and
Governance
activities
is
to
achieve
the
third
star
from
GRESB
as
further
improvements
are
in
motion,
including
obtaining
BREEAM
very
good/excellent
certificates
for
all
of
our
office
buildings
and
introducing
green
lease
clauses
to
100%
of
our
approx.
300
lease
agreements
in
2021.
In
order
to
have
attractive
premises
to
rent
over
the
long-term,
we
are
planning
to
reduce
the
energy
consumption
and
improve
the
energy
efficiency
of
all
properties
by
at
least
one
energy
efficiency
class
by
2025
and
to
have
a
clear
strategy
to
achieve
carbon
neutrality
in our portfolio by 2030.
In
conclusion,
the
second
wave
is
here
with
restrictions
again
impacting
the
environment
and
our
business
throughout
the
first
quarter
of
2021
and
there
are
still
many
lessons
to
be
learned.
Hopefully,
the
ongoing
vaccination
will
render
this
period
the
low
point
of
the
crisis
and
spring
will
arrive
more
brightly
than
ever.
It
is
difficult
to
estimate
the
length
of
the
economic
shock
for
the
affected
business
segments
but
strong
performance
is
predicted
for
conveniently
located
logistics,
green
technology
and
health-care,
which
are
also
the
sectors
on
which
Baltic
Horizon
will
focus
in
the
coming
years
in
addition to the existing portfolio.
On
behalf
of
the
management
board
of
Baltic
Horizon
and
our
entire
team,
I
would
like
to
thank
all
unitholders
and
partners
for
the
continuous
trust,
and
I
can
assure
you
that
we
are
enthusiastic
about
the
future
of
our
portfolio
and
are
committed
to
deliver
strong
long-term
results.
Tarmo Karotam
Fund Manager, Baltic Horizon Fund
19 March 202
1
● ANNUAL REPORT 2020
Management report | COVID-19 update
13
COVID-19 UPDATE
COVID-19 – our response
At
the
beginning
of
2020,
a
new
coronavirus
(COVID-19)
started
spreading
all
over
the
world,
which
has
had
a
strong
impact
on
businesses
and
economies,
including
in
the
Baltics.
The
virus
outbreak
has
caused
significant
shifts
in
the
Fund’s
operating
environment,
which
has
had
a
negative
overall
impact
on
the
Fund’s
performance
in 2020.
The
operating
results
of
Q2-Q4
2020
and
property
valuations
were
affected
by
the
COVID-19
effects
on
the
tenants’
financial
performance
and
the
relief
measures
taken
to
deal
with
the
pandemic.
However,
broad
diversification
of
the
portfolio
should
allow
the
Fund
to
limit
the
COVID-19
impacts
and
maintain
healthy
consolidated operational performance.
Northern
Horizon
Capital
AS,
the
Management
Company
of
the
Fund,
has
taken
assertive
action
to
manage
the
risks
arising
from
the
pandemic
and
to
protect
the
long-term
value
for
the
investors.
The
Management
Company
is
focusing
on
optimizing
operating
costs
and
maintaining
active
communication
with the tenants to ensure long-term rent collection.
The
Fund
has
opted
to
retain
approx.
EUR 4.4
million
of
distributable
cash
flow
from
the
results
to
strengthen
the
its
financial
position.
The
Management
Company
believes
that
it
is
in
the
best
interest
of
the
investors
and
the
Fund
to
reduce
its
quarterly
cash
distributions
during
the
outbreak
of
COVID-19
in
order
to
protect
and
strengthen
the
Fund’s
financial
position.
The
management
team
will
continue
to
actively
monitor
the
economic
impact
of
the
pandemic
and
reassess
future
distribution
levels
depending
on
the
upcoming
operating results.
The
list
on
the
right
represents
measures
that
are
also
in
place
to
further
mitigate
the
risks
and
protect
the
long-
term interests of Baltic Horizon Fund and its investors.
Action taken by management
-
We
actively
communicate
with
our
tenants
and
property
managers
who
on
a
regular
basis
inform
us
of
the
measures
they
are
taking
to
ensure
their
business
continuity.
We
have
agreed
on
regular
updates
on
tenants‘
performance
and
any
issues
in relation to COVID-19.
-
We
have
approached
the
developers
and
construction
companies
to
inform
us
promptly
of
any
interruptions
in
the
supply
chain
of
materials
or
any
other
potential
delays
in
development
projects. None have been reported thus far.
-
There
is
a
sufficient
liquidity
buffer
in
the
form
of
the
cash
balance
to
meet
financial
obligations
in
case of the worst-case scenarios in 2021.
-
We
are
continuously
performing
stress
testing
of
debt
covenants
to
be
able
to
take
any
necessary
measures in due time.
-
The
Management
Company
has
initiated
additional
measures
to
protect
the
key
staff
of
the
Fund
and
ensure
continuity:
all
employees
are
working
remotely,
all
business
travel
is
suspended,
and
the
succession
plan
has
been
reviewed
and
updated.
-
We
are
fulfilling
all
safety
and
health
requirements
to
ensure
secure
shopping
experience
and
work
for office clients.
-
As
a
result
of
steps
taken
to
prevent
the
spread
of
COVID-19,
Baltic
Horizon's
Europa
shopping
centre
in
Vilnius
and
Galerija
Centrs
in
Riga
received
SAFE
RetailDestination©
certification
from
the
COVID-19
shopping
centre
certification
program.
-
We
partially
postponed
investments
in
(re)development
projects
to
ensure
a
sufficient
cash balance.
-
We
ensured
prompt
payment
of
invoices
to
aid
our suppliers and partners.
● ANNUAL REPORT 2020
Management report | COVID-19 update
14
COVID-19 - economic impact
The
spread
of
COVID
19
has
had
a
major
impact
on
the
global
economy
and
in
2020
Europe
witnessed
sharp
fluctuations
in
GDP
movements.
After
a
sharp
decline
of
-11.8%
in
Q2
2020,
GDP
in
the
euro
area
grew
by
12.7%
in
Q3
2020
(compared
to
the
quarter
before).
According
to
the
first
estimation
by
Eurostat
of
annual
change
for
2020,
based
on
seasonally
and
calendar
adjusted
quarterly
data,
GDP
fell
by
-6.8%
in
the
euro
area
and
-
6.4% in the EU.
The
quarter-on-quarter
fluctuations
in
the
Baltic
states
were
one
of
the
lowest
in
the
EU
in
2020.
Tourism,
accommodation
and
catering
were
among
the
hardest-
hit
sectors
during
the
previous
quarters.
Among
the
EU
member
states
for
which
data
are
available
for
Q4
2020,
Austria
recorded
the
highest
decrease
of
-4.3%
compared
to
the
previous
quarter,
followed
by
Italy
with
2.0%
and
France
-1.3%
while
Lithuania
and
Latvia
recorded
the
highest
increases
of
1.2%
and
1.1%,
respectively.
Latvia’s
and
Lithuania’s
GDP
contraction
compared
with
the
same
quarter
of
2019
was
also
among
the
smallest
in
the
EU:
only
by
-1.3%
and
-1.7%
respectively.
In
Estonia,
where
tourism
contribution
to
GDP is higher, the drop is expected to be -2.5%.
It
is
expected
that
the
Baltic
economies
will
continue
to
be
one
of
the
fastest
growing
economies
in
the
EU
after
the
pandemic
will
be
controlled
by
vaccination.
The
rapid
bounce
back
of
the
economy
and
retail
spending
in
Q3
of
2020
demonstrated
that
they
are
able
to
grow
rapidly
once restrictions are removed.
COVID-19 - relief measures
The
Fund
has
implemented
several
relief
initiatives
focused
on
alleviating
the
financial
hardship
of
the
most
vulnerable
group
of
tenants
whose
operations
have
been
severely
affected
by
the
outbreak
and
the
lockdowns.
The
Fund
has
agreed
to
grant
rent
payment
deferral
for
a
period
of
90
days
and
to
waive
related
penalties
and
interest for those tenants.
Baltic
Horizon
Fund
has
been
in
negotiations
mainly
with
retail
tenants
regarding
rent
reductions
and
waivers
during
the
lockdown
and
post-lockdown
periods,
which
has
had
a
negative
impact
on
the
Fund’s
performance
in
Q2-Q4
2020.
By
19
March
2021,
the
Fund
management
had
decided
on
various
pandemic-related
discounts
based
on
discussions
with
retail
and
other
tenants.
The
Fund
assessed
the
impact
of
COVID-19
on
each
tenant's
operating
performance
during
the
lockdown
and
granted
discounts
to
the
most
affected
tenants,
while
at
the
same
time
protecting
the
best
interests
of
unitholders
and
other
stakeholders.
The
Fund’s
management
team
reviewed
each
rent
discount
request
individually
in
order
to find suitable solutions for all parties.
Relief
measures
granted
to
tenants
helped
to
improve
collection
rates
and
maintain
trade
receivables
and
operating
cash
inflows
at
healthy
levels
during
Q2-Q4
2020.
13
Mar
Start
of
1
st
lockdown
13
Mar
Start
of
1
st
lockdown
16
Mar
Start
of
1
st
lockdown
17
May
End
of
1
st
lockdown
9
Jun
End
of
1
st
lockdown
16
Jun
End
of
1
st
lockdown
9
Nov
Start
of
2
nd
lockdown
7
Nov
Start
of
2
nd
lockdown
● ANNUAL REPORT 2020
Management report | COVID-19 update
15
Portfolio
value
EUR
340.0m
WAULT
(to
expiry)
3.5
years
●
ANNUAL
REPORT
2020
Management
report
|
Property
report
● ANNUAL REPORT 2020
Management report | Property report
16
PROPERTY REPORT
Portfolio and market overview
The
diversified
property
portfolio
of
Baltic
Horizon
Fund
consists
of
15
cash
flow
generating
properties,
and
one
property
under
development
in
the
search
of
an
anchor
tenant,
in
the
Baltic
capitals.
Baltic
Horizon
believes
it
has
established
a
portfolio
of
strong
retail
and
office
assets
with
well-known
and
long-term
tenants
including
local
commercial
leaders,
governmental
tenants,
nearshoring
shared
service
centres
and
the
Baltic
headquarters
of
leading international companies.
The
Fund
had
a
successful
Q1
2020
before
COVID-19
started
impacting
the
Baltic
economies.
During
2020
net
rental
income
of
the
portfolio
on
a
like-for-like
basis
decreased
by
7.4%
compared
to
2019
due
to
the
temporary
lockdowns
of
the
shopping
centres.
The
office
segment
decreased
only
by
0.1%
in
terms
of
net
rental
income
during
2020.
Occupancy
drop
on
a
year-over-
year
basis
and
rent
reliefs
led
to
like-for-like
net
rental
income
decrease
of
15.4%
and
20.8%
in
the
retail
and
leisure segments, respectively.
Food
stores
and
pharmacies
were
allowed
to
remain
operational
during
the
lockdown
from
March
to
May
or
June.
Larger
shopping
centres
were
allowed
to
be
open
from
the
beginning
of
May
or
June,
remaining
closed
for
only
about
6-10
weeks.
During
Q3,
the
sales
figures
for
neighbourhood
shopping
centres
recovered
to
pre-
COVID
levels
whereas
in
centrally
located
centres
the
sales
and
footfall
were
still
on
average
20-30%
lower
mainly
due
to
a
lower
number
of
tourists.
Q3
2020
saw
stronger
recovery
in
footfall
and
tenant
turnovers
but
due
to
the
second
wave
of
the
virus
and
the
associated
restrictions,
retail
sales
in
December
were
lower
than
a
year
earlier.
In
terms
of
segments,
the
winners
in
2020
were
home
improvements
stores,
DIY,
gardening
and
pet
stores.
The
biggest
negative
impact
was
recorded
in
high
street fashion and restaurant businesses.
The
vacancies
in
all
shopping
centres
remained
stable
in
2020
at
around
4-6%
on
average
in
Tallinn
and
Riga
and
around
3%
in
Vilnius.
Higher
vacancies
were
recorded
in
centrally located retail centres and high streets.
● ANNUAL REPORT 2020
Management report | Property report
17
“The
future
of
office
work
will
very
likely
include
an
additional
level
of
flexibility
for
tenants
as
they
are
continuously
evaluating
their
future
needs.”
The
COVID
crisis
has
had
virtually
no
impact
on
Baltic
Horizon’s
office
segment
due
to
fixed
lease
agreements.
The
CC
Plaza
cinema
building
was
closed
for
a
month
during
Q4
2020
and
reopened
on
1
February
2021,
however
with
50%
visitor
limitations.
The
number
of
blockbuster
movies
to
be
premiered
in
2021
is
estimated
to
be
at
a
record
level
as
most
films
have
been
postponed from 2020.
Although
Baltic
retail
centres
have
been
affected
by
the
COVID
lockdown
restrictions
and
the
increase
in
e-
commerce,
it
is
important
to
note
that
retail
influences
and
trends
are
different
in
the
US,
Canada,
Asia
and
the
Nordics
including
the
Baltics.
For
example,
the
Baltic
states
have
considerably
less
big
box
mid-sized
destination
shopping
centres
and
retail
parks
like
those
in
the
US
which
have
been
affected
the
most,
with
some
of
them
never
opening
again.
In
the
Baltics,
most
of
the
shopping
centres
are
major
destination
hubs
or
are
located
in
the
hearts
of
the
cities,
near
the
old
towns.
There
are
also
small
supermarkets
with
direct
residential
catchment
areas
which
have
worked
especially
well
during
the
COVID
crisis.
With
mid-sized
centres
suffering,
the
increased
focus
of
Baltic
Horizon
together
with
its
tenants
will
be
on
established
flagship
stores,
own
parcel
terminals,
pick-up
points
and
other
services
appealing
to
the
catchment
areas
of
each
retail
centre.
River
Island,
Blender,
Yamamay
closed
their
stores
and
pulled
out
in
2020,
at
the
same
time,
several
notable
international
brands
(PEPCO,
Deichmann,
Peek
&
Cloppenburg,
C&A,
Van
Graaf,
H&M
brands,
IKEA)
remain
interested
in
entering
or
further
expanding
in
2021-2023.
When
it
comes
to
e-commerce
in
the
Baltics,
the
share
of
consumer
goods
bought
online
of
3-5%
is
one
of
the
lowest
in
Europe,
the
share
of
services
bought
online
being
between
4-10%
(the
UK,
Sweden
and
Denmark
being
close
to
20%).
While
the
share
of
online
shopping
will
be
increasing,
so
will
traditional
retail
spending
as
shopping
centres
are
virtually
only
a
15-minute
drive
away.
Furthermore,
average
salaries
have
increased
30-
50%
over
the
past
5
years
and
are
likely
to
maintain
strong
growth
as
the
modern
start-up
tech
sector
continues
to
boom
and
industries
are
moving
up
the
value-added productivity curve.
During
the
past
quarters,
in
the
office
segment
across
the
Baltics,
many
tenants
adopted
remote
working
practices
where
the
nature
of
the
job
allowed
it.
Several
tenants
had
employees
work
remotely
already
before
the
pandemic
and
looking
ahead,
especially
SMEs
intend
to
allow
employees
to
work
from
home
once
the
situation
stabilizes
on
more
flexible
schedules
(e.g.
home
Fridays).
At
the
same
time,
it
is
also
apparent
from
several
interviews
that
employees
are
eager
to
return
to
the
offices
as
social
interaction
and
collaboration
in
physical
meetings
are
still
highly
valued.
The
future
of
office
work
will
very
likely
include
an
additional
level
of
flexibility
for
tenants
as
they
are
continuously
evaluating
their
future
needs.
Being
able
to
expand
or
decrease
their
leased
areas
will
become
increasingly
important
and
so
will
flexible
working
hours,
rotating
team
working
and
being
able
to
work
partly
from
remote
locations,
if
the
nature
of the job allows it.
In
summary,
the
COVID
virus
induced
lockdown
in
the
Baltics
has
impacted
mainly
Baltic
Horizon’s
centrally
located
retail
and
entertainment
centres.
Retail
assets
located
in
the
central
business
districts
(Postimaja,
Europa
and
Galerija
Centrs)
accounted
for
29.2%
of
total
portfolio NOI in 2020.
● ANNUAL REPORT 2020
Management report | Property report
18
In
2018,
the
Fund
completed
the
acquisition
0.87
hectares
of
land
next
to
the
Domus
Pro
complex.
The
plots
were
acquired
with
the
goal
to
further
expand
the
Domus
Pro
complex
in
Vilnius,
Lithuania.
The
building
permit
received
in
Q4
2019
allows
to
build
approx.
15,800
sq.
m
of
leasable
office
space
along
with
a
parking
house.
The
construction
preparations
were
started
in
Q4
2019
as
the
required
level
of
pre-
leases had been achieved.
On
6
February
2020,
the
Group
signed
a
construction
contract
for
the
Meraki
development
project.
The
total
capital
commitment
in
respect
of
construction
costs
contracted
amounts
to
EUR
4.3
million
for
the
current
construction
phase.
The
total
construction
commitment
could
increase
to
EUR 22.9
million
once
the
Fund
approves all construction phases.
At
the
end
of
2020,
22%
of
the
net
leasable
area
of
one
tower
was
pre-let
to
3
local
tenants
and
the
management
team
is
in
negotiations
to
find
additional
anchor
tenants
for
the
property.
The
building
is
expected
to
be
completed
in
Q4
2021.
Meraki
development
costs
were
EUR
6.6
million
as
of
31
December
2020,
while
the
expected
total
development
costs
amount to EUR 26.5 million.
15,800
Net leasable area (sq. m)
Very good
Target BREEAM rating
●
ANNUAL
REPORT
2020
Management
report
|
Property
report
● ANNUAL REPORT 2020
Management report | Property report
19
2021
2023
Europa SC
At
the
end
of
2020,
the
Fund’s
management
initiated
the
Europa
SC
refurbishment
project
with
the
aim
to
introduce
a
new
concept
that
would
meet
growing
central
business
district
(CBD)
and
changing
clients’
post-COVID-19
needs
(free
working
zones,
dining
and
etc.).
The
first
phase
of
the
project
is
planned
to
be
completed
in
2021,
while
other
phases
should
be
completed
by
2023.
2021
2024
Postimaja
A
final
design
and
construction
project
was
started
in
Q1
2020
for
phase I
of
the
CC
Plaza
and
Postimaja
expansion.
A
building
permit
to
connect
underground
parking
has
been
received
from
the
City
of
Tallinn.
Final
interior
design
concept
details
including
the
tenant
mix
and
a
new
name
for
the
complex
are
being
finalized.
The
final
building
permit
for
joining
the
two
buildings
was
received
in
January
2021.
The
team
is
now
involved
in
signing
on
new
anchor
tenants
in
order
to
be able to start construction in 2022.
Track record of development projects
Domus PRO 1
st
stage
Domus PRO 2
nd
stage
Domus PRO 3
rd
stage
● ANNUAL REPORT 2020
Management report | Property report
20
Property performance
Fund segment distribution as of 31 December 2020
The
Fund
maintains
a
well-diversified
mix
of
office,
leisure,
and
retail
buildings.
At
the
end
of
2020,
the
portfolio
was
comprised
of
49.0%
retail
assets,
followed
by
46.8%
office
assets
and
4.2%
leisure
assets.
Portfolio
properties
in
the
office
segment
contributed
55.8%
of
net
rental
income
in
2020
despite
accounting
for
only
46.8%
of
the
Fund’s
portfolio.
Fund country distribution as of 31 December 2020
In
terms
of
country
distribution,
in
2020
Lithuania’s
share
in
the
Fund’s
portfolio
increased
due
to
ongoing
Meraki
development
works
and
better
investment
property
valuation
results
compared
to
Latvia
and
Estonia.
At
the
end
of
2020,
the
Fund’s
assets
were
located
as
follows:
38.8% in Latvia, 36.0% in Lithuania and 25.2% in Estonia.
Fund portfolio by age as of 31 December 2020
The
graph
above
shows
the
age
of
assets
in
the
Fund’s
portfolio
since
construction
or
the
last
major
refurbishment.
The
management
team
is
working
on
new
development
projects
and
expects
to
improve
the
Fund’s
average portfolio age in the future.
Rental concentration of the Fund’s subsidiaries
The
tenant
base
of
the
Fund
is
well
diversified.
The
rental
concentration
of
the
Fund’s
subsidiaries
(rental
income
from
the
10
largest
tenants)
is
shown
in
the
chart
on
the
following
page
with
the
largest
tenant
Rimi
Baltic
accounting
for
9.5%
of
the
annualised
rental
income.
As
further
discussed
in
the
risk
management
section,
credit
risk
is
mitigated
by
the
high
quality
of
the
existing
tenant
base.
● ANNUAL REPORT 2020
Management report | Property report
21
Rental concentration of the Fund’s subsidiaries: 10 largest tenants as of 31 December 2020
The
Fund’s
teams
have
been
actively
negotiating
with
current
tenants
on
prolongation
of
lease
agreements
as
well
as
new
tenants
to
fill
vacancies.
Over
48%
of
Baltic
Horizon
Fund
tenant
leases
will
expire
after
2022,
while
the
rest
will
expire
during
the
next
two
years.
The
weighted
average
unexpired
lease
term
until
first
break
option
was
2.5
years
at
the
end
of
2020.
The
weighted
average
unexpired
lease
term
until
the
end
of
contract
term
was
3.5
years
at
the
end
of
2020.
The
graph
below
shows the expiry dates of contractual rental income.
Maturity profile of rental income expiry
Contractual rental income (to end of contract)
Contractual rental income (to first break option)
Lithuania Tax Inspectorate
Vilnius heating network company
● ANNUAL REPORT 2020
Management report | Property report
22
Overview of the Fund’s investment properties as of 31 December 2020
Postimaja & CC Plaza complex
Postimaja & CC Plaza complex
1.
Based on the latest valuation as at 31 December 2020 and recognised right-of-use assets.
2.
Direct property yield (DPY) is calculated by dividing NOI by the acquisition value and subsequent capital expenditure of the property.
3.
The net initial yield (NIY) is calculated by dividing NOI by the market value of the property.
4.
Effective occupancy rate is 100% due to a rental guarantee.
The
management
of
the
Fund
provides
two
different
yield
calculations
in
this
management
review
section.
Direct
property
yield
(DPY)
is
calculated
by
dividing
NOI
by
the
acquisition
value
and
subsequent
capital
expenditure
of
the
property.
The
net
initial
yield
(NIY)
is
calculated
by
dividing
NOI
by
the
market
value
of
the
property.
During
2020,
the
average
actual
occupancy
of
the
portfolio
was
95.8%
(2019:
97.5%).
Taking
into
account
all
rental
guarantees,
the
effective
occupancy
rate
was
95.8%
(2019:
97.5%).
Occupancy
rate
as
of
31
December
2020
was
94.3%
(31
December
2019:
98.3%).
Occupancy
rates
in
the
retail
segment
decreased
because
of
additional
vacancies
in
Europa
SC,
Pirita
SC
and
Galerija
Centrs.
Occupancy
rates
in
the
office
segment
still
remain
strong
albeit
Lithuania
Tax
Inspectorate
vacated
part
of
their
premises
in
North
Star
resulting
in
a
minor
negative
effect
on
the
occupancy
levels.
Average
direct
property
yield
during
2020
was
5.8%
(2019:
6.6%).
The
net
initial
yield
for
the
whole
portfolio
for
2020
was
5.7%
(2019:
6.3%).
The
decrease
is
mainly
related
to
the
lockdowns
and
additionally
granted
rent
concessions
to
tenants
whose
operations
were
restricted
by
government
regulations.
The
average
rent
rate
for
the
whole
portfolio
for 2020 was EUR 12.1 per sq. m.
● ANNUAL REPORT 2020
Management report | Property report
23
Breakdown of NOI development
Postimaja & CC Plaza complex
1.
The Fund completed the acquisition of Postimaja SC on 13 February 2018.
The
Fund’s
portfolio
produced
EUR
19.9
million
of
net
operating
income
(NOI)
during
2020
(2019:
EUR
19.2
million).
Please
refer
to
the
table
above
for
a
breakdown
of
NOI
development
by
each
property,
which
has
been
generating stable rental income over the years.
Like-for-like
net
rental
growth
provides
a
more
clear
view
on
the
performance
of
the
underlying
assets,
as
these
calculations
exclude
the
impact
of
net
rental
growth
or
decline
due
to
acquisitions,
developments
or
disposals
in
2019
and
2020.
The
change
in
the
Fund’s
like-for-like
net
rental
income
compares
the
growth
in
the
net
rental
income
of
the
portfolio
that
has
been
consistently
in
operation,
and
not
under
development,
during
the
two
full periods that are presented.
EPRA like-for-like net rental income by segment
Total like-for-like assets
Net
rental
income
of
the
portfolio
on
a
like-for-like
basis
decreased
by
7.4%
or
EUR
1,124
thousand
in
2020,
as
compared
to
the
same
period
last
year.
The
decrease
in
net
rental
income
from
the
retail
and
leisure
segments
● ANNUAL REPORT 2020
Management report | Property report
24
was
mainly
driven
by
an
increase
in
provisions
associated
with
overdue
receivables
from
tenants
and
temporary
discounts
granted
with
the
aim
to
provide
support
to
tenants
in
connection
with
the
lockdown
periods
of
the
COVID-19 crisis.
The
Fund’s
office
segment
properties
have
barely
been
affected
by
the
COVID-19
pandemic.
The
office
segment
showed
only
a
slightly
negative
change
with
a
decrease
of
like-for-like
net
rental
income
of
0.1%.
The
slight
decrease
in
office
performance
was
caused
by
a
temporary
vacancy
in
Upmalas
Biroji
and
increased
vacancies
in
Lincona
compared
to
last
year.
The
Fund’s
portfolio
diversification
strategy
has
proved
that
a
well-
balanced
mix
of
retail,
leisure
and
office
segments
can
help
optimize
the
risk
of
the
portfolio
and
withstand
the
challenges arising from the COVID-19 pandemic.
EPRA like-for-like net rental income by country
Total like-for-like assets
Property valuation
All
real
estate
properties
belonging
to
the
Fund
must
be
appraised
at
least
once
a
year
at
the
end
of
the
financial
year
to
determine
the
market
value
of
the
real
estate
portfolio.
During
2019
and
2020,
the
Fund’s
property
portfolio
was
appraised
twice
a
year
by
an
independent
real
estate
appraiser.
External
property
appraisals
were
carried out each year as of 30 June and 31 December.
The
Management
Company
ensures
that
only
a
licensed
independent
real
estate
appraiser
of
high
repute
and
sufficient
experience
in
appraising
similar
property
and
operating
in
the
country
where
the
relevant
real
estate
property
is
located
evaluates
real
estate
belonging
to
the
Fund.
As
at
31
December
2020
and
31
December
2019,
new
external
valuations
were
performed
by
the
independent property valuator Newsec.
Independent
appraisals
are
performed
in
accordance
with
the
Practice
Statements
and
Relevant
Guidance
Notes
of
the
RICS
Appraisal
and
Valuation
approved
by
both
the
International
Valuation
Standards
Committee
(IVSC)
and
the
European
Group
of
Valuers’
Associations
(TEGoVA).
The
appraisal
methodology
employed
by
the
external
appraiser
is
explained
in
more
detail
in
notes
and
to the financial statements.
As
of
31
December
2020,
the
fair
value
of
the
Baltic
Horizon
Fund
portfolio
decreased
to
EUR
340.0
million
as
compared
to
EUR
358.9
million
as
of
31
December
2019.
During
2020,
the
Fund
recognised
valuation
losses
on
investment
properties
of
EUR
25.2
million
(2019:
EUR 2.1
million)
in
the
consolidated
financial
statements.
The
fair
values
of
investment
properties
in
the
portfolio
decreased
mainly
due
to
downward
adjustments
to
the
main
valuation
assumptions
compared
to
previous
valuations,
resulting
from
the
uncertainty
associated
with
the
COVID-19
pandemic.
All
valuations
were
prepared
on
the basis of “material valuation uncertainty”.
Property
appraisers
have
reflected
the
increasing
investment
market
uncertainty
by
adjusting
discount
rate
assumptions
and
lowering
cash
flow
projections
compared
to
the
previous
valuations.
Discount
rates
for
the
majority
of
the
portfolio
were
raised
by
30
basis
points
to
reflect
the
expected
increase
in
the
cost
of
debt.
Operating
cash
flow
projections
of
the
portfolio
were
lowered
as
a
result
of
a
decrease
in
the
EU
and
Baltic
consumer
price
index
level
projections
and
increased
● ANNUAL REPORT 2020
Management report | Property report
25
vacancy
assumptions
during
the
years
2021-2023.
Exit
yields
remained
the
same
compared
to
2019
valuations
due
to
a
lack
of
comparable
market
deals
during
the
COVID-19 pandemic.
The
table
below
shows
the
Baltic
Horizon
Fund
investment
portfolio
fair
value
movements
during
2020.
The
values
of
the
properties
are
based
on
the
valuation
of
investment
properties
performed
by
Newsec,
which
have
been
increased
by
the
value
of
right-of-use
assets
(IFRS
16).
The
table
below
does
not
reflect
any
capital
investments during the year.
Portfolio fair value movements by segment
Proportion of
portfolio (%)
31.12.2020
Total like-for-like assets
The
like-for-like
value
of
the
property
portfolio
excluding
developments
decreased
by
EUR
22.1
million
(6.2%)
in
2020,
compared
to
year-end
2019.
The
decrease
was
mainly
due
to
a
more
conservative
valuation
approach
on
CBD
shopping
centres,
single
tenant
office
buildings
and
the
cinema
building,
out
of
which
the
Galerija
Centrs
property
fair
value
drop
amounted
to
EUR
9.0
million.
Multi-tenant
office
buildings
and
small
neighbourhood
shopping
centres
were
less
affected
by
the
downward
valuation
adjustments
related
to
COVID-19
due
to
a
strong
tenant
base
and
payment
discipline.
Appraisers
are
expecting
that
the
retail
portfolio
will
have
higher
than usual vacancies during 2021, 2022 and 2023.
Compared
to
year-end
2019,
the
property
valuation
results
in
Lithuania
decreased
by
EUR
3.8
million
(3.2%)
of
which
only
EUR
1.3
million
related
to
office
buildings.
Property
valuations
for
Duetto
I
(-0.24%)
and
Duetto
II
(-0.90%)
together
with
SKY
SC
(+2.47%)
showed
the
best
valuation
results
across
the
whole
portfolio.
Valuation
results
in
Latvia
were
mostly
affected
by
generally
worsened
key
valuation
inputs
(discount
rates,
vacancy
assumptions,
rent
indexation),
while
results
in
Estonia
were
affected
by
generally
worsened
valuation
inputs
and
additional
building-specific
adjustments
for
the
cinema
and
single
tenant
office
buildings.
For
a
summary
of property valuations, please visit the Fund’s website.
Portfolio fair value movements by country
Proportion of
portfolio (%)
31.12.2020
Total like-for-like assets
● ANNUAL REPORT 2020
Management report | Property report
26
Estonia
Economy
The
Estonian
economy
adapted
very
quickly
to
the
changed
environment
when
the
COVID-19
crisis
started
and
the
blow
was
softened
quite
effectively
by
the
local
economic
and
employment
stimulus
package.
Imports
decreased
substantially
while
exports
decreased
less
than
expected.
The
drop
in
Estonia’s
GDP
was
mainly
due
to
a
decrease
in
private
spending
and
lower
investments
but
the
recovery
in
Q3
2020
was
stronger
than
expected.
The
months
in
Q4
2020
were
more
difficult
due
to
the
second
wave
of
the
coronavirus
and
the
subsequent
new
restrictions
but
the
economy
should
be
able
to
recover quickly in 2021.
Source: European Commission Economic Forecast, Winter 2021 (Interim)
Portfolio
Portfolio
properties
based
in
Estonia
started
the
year
with
significant
growth
in
the
net
rental
income
and
improvement
in
the
key
portfolio
metrics,
although
rapid
growth
abruptly
ended
once
the
Fund
started
to
grant
COVID-19
relief
measures
to
tenants
starting
from
Q2
2020.
Relief
measures
were
granted
after
extensive
discussions
with
mostly
retail/leisure
tenants
in
order
to
support
them
during
the
hardship,
as
well
as
to
improve
tenant
rental
payment
discipline
which
was
significantly
affected
by
the
lockdown
in
Estonia.
Additional
safety
restrictions
imposed
by
the
government
during
Q4
2020
had
a
direct
impact
on
the
Estonian
portfolio’s
net
rental
income
through
lower
amounts
of
tenant turnover rents and lower footfalls.
During
2020,
the
average
direct
property
yield
decreased
to
5.6%
(2019:
5.9%),
while
the
average
net
initial
yield
was
down
to
5.6%
(2019:
5.8%).
The
decrease
in
yields
and
net
rental
income
is
mainly
related
to
temporary
occupancy
drops
in
Pirita
SC
and
Lincona
and
also
rent
reliefs
granted
to
tenants
in
the
Postimaja
and
Coca
Cola
Plaza
complex.
The
average
occupancy
level
for
2020
remained
stable
at
95.7%
(2019:
95.7%).
At
the
end
of
2020,
2
out
of
the
5
properties
in
Estonia
were
fully
leased
to
local
and
international
tenants.
The
fair
value
of
the
properties
in
Estonia
on
a
like-for-like
basis
has
decreased
from
EUR
92,620
thousand
measured
in
the
2019
valuation
to
EUR
85,790
thousand
as
of
31
December 2020.
5
Properties
43,361
Total leasable area (sq. m)
5.0m
Rental income (EUR)
95.7%
Occupancy rate
5.6%
Net direct yield
(5.5%)
Like-for-like rental income change
● ANNUAL REPORT 2020
Management report | Property report
27
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
● ANNUAL REPORT 2020
Management report | Property report
28
Net leasable area (sq. m)
● ANNUAL REPORT 2020
Management report | Property report
29
Latvia
Economy
Latvian
GDP
growth
in
Q3
2020
was
also
better
than
expected.
GDP
was
supported
by
strong
performance
in
retail
trade.
Better
than
expected
results
were
recorded
also
in
manufacturing
and
exports
of
goods,
while
exports
of
services
have
shown
little
improvement
since
spring
and
the
second
wave
is
casting
further
shadow
on
their
quick
recovery.
Still,
compared
to
Q3
of
2020,
Q4
2020
GDP
increased
by
1.1%,
according to seasonally and calendar adjusted data from Leta.
Source: European Commission Economic Forecast, Winter 2021 (Interim)
Portfolio
Latvian
properties
recognised
a
like-for-like
growth
in
net
rental
income
year
over
year
resulting
in
a
total
increase
of
0.3%
for
the
Latvian
market,
which
is
a
positive
result
under
current
market
conditions.
Like-for-like
net
rental
income
improved
in
3
out
of
4
Latvian
properties
–
Vainodes,
LNK
Centre
and
SKY
SC.
Meanwhile,
Galerija
Centrs
underperformed
during
Q3-Q4
2020
compared
to
Q3-Q4
2019
due
to
significantly
reduced
turnover
rents
during
the
lockdown
period,
rent
concessions
and
doubtful
debt
provisions
resulting
from
weakened
tenant
payment
discipline.
The
average
direct
property
yield
declined
to
5.4%
during
2020
(2019:
6.6%).
The
average
net
initial
yield
was
5.5%
(2019:
6.5%).
The
decrease
in
the
Latvian
portfolio
yields
was
entirely
caused
by
the
drop
in
Galerija
Centrs
net
rental
income
following
new
COVID-19
related
government
restrictions.
Latvian
properties
have
development
potential,
which
the
Fund’s
management
team
aims
to
execute
in
the
coming
years
in
order
to maximise the value of the properties.
At
the
end
of
2020,
3
out
of
the
5
properties
in
Latvia
were
fully
leased
to
local
and
international
tenants.
The
average
occupancy
level
for
2020
fell
to
93.9%
(2019:
99.0%),
mostly
due
to
increased
vacancies
in
Galerija
Centrs
and
a
temporary
vacancy
in
Upmalas
Biroji.
During
Q4
2020,
the
Fund
leased
vacant
premises
in
Upmalas
Biroji
to
SEB,
expanding
their
current
premises
by
approx.
1,000
sq.
m.
The
fair
value
of
the
properties
in
Latvia
has
decreased
from
EUR
143,347
thousand
measured
in
the
2019
valuation to EUR 131,920 thousand as of 31 December 2020.
5
Properties
49,239
Total leasable area (sq. m)
7.6m
Rental income (EUR)
93.9%
Occupancy rate
5.4%
Net direct yield
0.3%
Like-for-like rental income change
● ANNUAL REPORT 2020
Management report | Property report
30
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
● ANNUAL REPORT 2020
Management report | Property report
31
Net leasable area (sq. m)
● ANNUAL REPORT 2020
Management report | Property report
32
Lithuania
Economy
In
Q3
2020,
the
Lithuanian
GDP
was
supported
by
great
performance
in
exports
of
goods
of
national
origin
and
better
than
expected
results
in
retail
trade.
Once
the
lockdown
restrictions
were
lifted,
Lithuanians
were
eager
to
quickly
get
out
and
consume.
The
second
wave
of
COVID-19
with
its
restrictions
arrived
in
December
and
is
likely
to
have
an
impact
on
the
economy
again,
albeit
less
than
in
Q2
2020.
In
Q4
2020,
the
change
in
GDP
was
positively
influenced
by
the
results
of
professional,
scientific
and
technical,
industrial,
wholesale
and
retail trade enterprises.
Source:
European Commission Economic Forecast, Winter 2021 (Interim)
Portfolio
Across
all
Baltic
Horizon
Fund
markets,
the
properties
in
Lithuania
showed
the
least
promising
results
due
to
the
mandatory
closure
of
all
shopping
centres
during
March-April
and
December
2020
in
Lithuania.
Results
suffered
due
to
the
lockdown
and
post-lockdown
effects
on
the
footfalls
and
turnovers
of
retail
shops.
The
closure
of
retail
operations
resulted
in
the
financial
distress
of
several
tenants
in
Europa
SC
and
required
immediate
action
from
the
Fund.
The
management
of
the
Fund
decided
to
grant
discounts
to
tenants
most
affected
by
COVID-19
which
together
with
government
compensation
helped
the
tenants
to
save
at
least
80%
of
rental
expenses
and
overcome
financial
difficulties.
No
government
compensation
mechanisms
were
implemented
during
the
second
lockdown
period
which
started
in
November
2020.
Rent
concessions,
recognised
doubtful
debts
and
increased
vacancies
in
Europa
SC
and
Domus
PRO
complex
resulted
in
a
15.9%
combined
decline
in
the
like-for-like
rental
income
of
Lithuanian
properties
during 2020
.
During
2020,
the
average
direct
property
yield
declined
to
6.4%
(2019:
7.2%).
The
average
net
initial
yield
was
6.1%
(2019:
6.7%).
The
average
occupancy
level
for
2020
was
down
to
97.3%
(2019:
98.0%).
The
effective
vacancy
rate
of
Duetto
II
was
zero
because
net
rental
income
is
covered
by
a
rental
guarantee
provided
by
YIT
Lietuva
for
two
years
after
each
acquisition.
Duetto
II
was
fully
leased
out
at
the
end
of
2020.
The
fair
value
of
the
properties
in
Lithuania
has
dipped
from
EUR 122,975
thousand
measured
in
the
2019 valuation to EUR 122,282 thousand as of 31 December 2020.
5 / 1
Properties / Development projects
60,745
Total leasable area (sq. m)
7.3m
Rental income (EUR)
97.3%
Occupancy rate
6.4%
Net direct yield
(15.9%)
Like-for-like rental income change
● ANNUAL REPORT 2020
Management report | Property report
33
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
Net leasable area (sq. m)
● ANNUAL REPORT 2020
Management report | Property report
34
Net leasable area (sq. m)
Net leasable area (sq. m)
● ANNUAL REPORT 2020 Management report | Financial report
35
Net
rental
income
EUR
19.9m
IFRS
NAV
per
unit
EUR
1.1395
●
ANNUAL
REPORT
2020
Management
report
|
Financial
report
● ANNUAL REPORT 2020 Management report | Financial report
36
FINANCIAL REPORT
Financial position and performance of the Fund
Net (loss) profit and net rental income
The
Group
recorded
a
net
loss
of
EUR
13.5
million
for
2020
against
a
net
profit
of
EUR
8.8
million
for
2019.
The
net
result
was
significantly
impacted
by
the
negative
valuation
result
of
EUR
25.2
million
recognised
in
June
and
December
2020.
The
negative
impact
of
valuation
losses
on
investment
properties
was
partially
offset
by
an
increase
in
net
rental
income,
other
operating
income
and
a
slight
decrease
in
administrative
expenses.
Excluding
the
valuation
impact
on
the
net
result,
net
profit
for
2020
would
have
amounted
to
EUR
11.7
million
(2019:
EUR
10.9
million).
Earnings
per
unit
for
2020
were
negative
at
EUR
0.12
(2019:
positive
EUR
0.09).
Earnings
per
unit
excluding
valuation
losses
on
investment
properties
would
have
amounted
to
EUR
0.10
(2019:
EUR 0.11).
Net rental income by segment
%
In
2020,
the
Group
earned
net
rental
income
of
EUR
19.9
million
exceeding
the
previous
year’s
net
rental
income
by
EUR
0.7
million
or
3.7%
(2019:
19.2
million).
The
increase
was
achieved
through
new
acquisitions
that
were
made
following
the
capital
raisings
in
2019.
The
acquisition
of
Galerija
Centrs
and
North
Star
had
a
significant
effect
on
the
Group’s
net
rental
income
growth
in
2020
as
compared
to
2019,
albeit
rental
income
growth
in
Q2-Q4
2020
was
slower
due
to
the
relief
measures
granted
to
tenants
during
the
COVID-19
pandemic.
The
addition
of
Galerija
Centrs
added
EUR
3.0
million
to
the
net
rental
income
during
2020,
while
North
Star added EUR 1.4 million.
On
an
EPRA
like-for-like
basis,
portfolio
net
rental
income
decreased
by
7.4%
year
on
year
mainly
due
to
weaker
performance
in
retail
and
leisure
segments.
The
decrease
was
partially
offset
by
the
relatively
stable
performance
of
the
office
segment
which
remained
largely unaffected by the lockdown in the Baltic states.
Portfolio
properties
in
the
office
segment
contributed
55.8%
(2019:
50.8%)
of
net
rental
income
in
2020
followed
by
the
retail
segment
with
40.1%
(2019:
43.8%)
and the leisure segment with 4.1% (2019: 5.4%).
Retail
assets
located
in
the
central
business
districts
(Postimaja,
Europa
and
Galerija
Centrs)
accounted
for
29.2%
of
total
portfolio
net
rental
income
in
2020
.
Total
net
rental
income
attributable
to
neighbourhood
shopping centres was 10.9% in 2020.
Net rental income by country
%
During
2020,
investment
properties
in
Latvia
and
Lithuania
contributed
38.3%
(2019:
37.2%)
and
36.4%
(2019:
35.0%)
of
net
rental
income
respectively,
while
investment
properties
in
Estonia
contributed
25.3%
(2019: 27.8%).
Gross Asset Value (GAV)
By
the
end
of
December
2020,
the
GAV
decreased
to
EUR 355.6
million
(31
December
2019:
EUR
371.7
million)
which
was
a
drop
of
4.3%
over
2020.
The
decrease
is
mainly
related
to
the
negative
property
revaluation
of
EUR
25.2
million.
The
Fund
aims
to
carry
on
with
the
construction
of
the
Meraki
office
building
throughout
2021.
The
Management
Company
will
continue
to
● ANNUAL REPORT 2020 Management report | Financial report
37
actively
monitor
the
economic
impact
of
the
pandemic
and
ensure
sufficient
liquidity
levels
during
the
construction period.
Investment properties
The
Baltic
Horizon
Fund
portfolio
consists
of
15
cash
flow
investment
properties
in
the
Baltic
capitals
and
an
investment
property
under
construction
on
the
Meraki
land
plot.
At
the
end
of
2020,
the
fair
value
of
the
Fund’s
portfolio
was
EUR
340.0
million
(31
December
2019:
EUR 358.9
million)
and
incorporated
a
total
net
leasable
area of 153,345 sq. m.
The
valuation
losses
on
the
property
portfolio
came
to
EUR
25.2
million
during
2020
(2019:
EUR
2.1
million).
Valuations
were
negatively
affected
primarily
due
to
downward
adjustments
to
valuation
assumptions
resulting
from
the
uncertainty
associated
with
the
COVID-19
pandemic.
Due
to
global
market
uncertainty
caused
by
the
virus,
valuations
were
reported
on
the
basis
of
“material
valuation
uncertainty”.
During
2020,
the
Group
invested
EUR 2.1
million
in
the
existing
property
portfolio
and
an
additional
EUR
4.2
million
in
the Meraki development project.
Key earnings figures
Valuation losses on investment properties
Net (loss) profit for the period
Weighted average number of units outstanding (units)
Key financial position figures
Investment properties in use
Investment property under construction
Interest bearing loans and bonds
IFRS Net asset value (IFRS NAV)
Number of units outstanding (units)
IFRS Net asset value (IFRS NAV) per unit (EUR)
Average effective interest rate (%)
● ANNUAL REPORT 2020 Management report | Financial report
38
Net rental income
EUR ‘000
Interest bearing loans and bonds
Interest
bearing
loans
and
bonds
(excluding
lease
liabilities)
remained
at
a
similar
level
of
EUR
205.6
million
compared
to
year-end
2019
figures
(31
December
2019:
EUR
205.8
million).
Outstanding
bank
loans
decreased
slightly
due
to
regular
bank
loan
amortisation.
Annual
loan
amortisation
accounts
for
0.2%
of
total
debt
outstanding.
Cash flow
Cash
inflow
from
core
operating
activities
for
2020
amounted
to
EUR
16.1
million
(2019:
cash
inflow
of
EUR 16.4
million).
Cash
outflow
from
investing
activities
was
EUR 4.3
million
(2019:
cash
outflow
of
EUR
78.2
million)
due
to
subsequent
capital
expenditure
on
existing
portfolio
properties
and
investments
in
the
Meraki
development
project.
Cash
outflow
from
financing
activities
was
EUR 8.3
million
(2019:
cash
inflow
of
EUR
59.4
million).
During
2020,
the
Fund
made
four
cash
distributions
of
EUR
9.7
million
and
paid
regular
interest
on
bank
loans
and
bonds.
At
the
end
of
December
2020,
the
Fund’s
consolidated
cash
and
cash
equivalents
amounted
to
EUR
13.3
million
(31
December
2019:
EUR
9.8
million)
which
demonstrates
sufficient
liquidity and financial flexibility.
Net profit (loss)
EUR ‘000
Net Asset Value (NAV)
By
the
end
of
December
2020,
the
Fund’s
net
asset
value
(NAV)
decreased
to
EUR
136.3
million
(31
December
2019:
EUR
152.5
million)
as
a
result
of
the
negative
portfolio
revaluation
which
was
impacted
by
the
high
market
uncertainty
surrounding
the
COVID-19
pandemic.
Compared
to
the
year-end
2019
NAV,
the
Fund’s
NAV
decreased
by
10.6%.
Positive
operational
performance
over
the
period
was
offset
by
EUR
25.2
million
valuation
losses,
EUR
9.7
million
dividend
distributions
to
the
unitholders
and
a
negative
cash
flow
hedge
reserve
movement
of
EUR
0.1
million.
At
31
December
2020,
IFRS
NAV
per
unit
stood
at
EUR
1.1395
(31
December
2019:
EUR 1.3451),
while
EPRA
net
tangible
assets
and
EPRA
net
reinstatement
value
were
EUR 1.2219
per
unit
(31
December
2019:
EUR 1.4333).
EPRA
net
disposal
value
was
EUR
1.1435
per
unit
(31
December
2019:
EUR
1.3400).
● ANNUAL REPORT 2020 Management report | Financing
39
Average
interest
rate
2.6%
Bank
loan
amortisation
0.2%
p.a.
Weighted
average
time
to
debt
maturity
2.1
years
●
ANNUAL
REPORT
2020
Management
report
|
Financing
● ANNUAL REPORT 2020 Management report | Financing
40
FINANCING
The
Fund
currently
aims
to
use
a
55%
long-term
leverage
strategy.
At
no
point
in
time
may
the
Fund’s
leverage
exceed
65%. The
ability
to
borrow
on
attractive
terms
plays
a
major
role
in
the
investment
strategy
and
cash
distributions to unitholders.
S&P affirms credit rating
On
24
April
2018,
S&P
Global
Ratings
assigned
an
“MM3”
mid-market
evaluation
(MME
rating)
to
Baltic
Horizon
Fund.
The
indicative
corresponding
rating
for
“MM3”
on
the global rating scale is “BB+/ BB”.
On
27
July
2020,
S&P
Global
Ratings
affirmed
Baltic
Horizon
Fund
“MM3”
mid-market
rating
and
removed
the
Fund
from
CreditWatch
with
negative
implications,
where
the
Fund
was
placed
on
7
May
2020.
The
indicative
corresponding
rating
for
“MM3”
on
the
global
rating
scale is “BB+/ BB”.
Bank loans
During
2020,
regular
bank
loan
amortisation
remained
low
at
0.2%
p.a.
(EUR
388
thousand
p.a.),
while
the
average
interest
rate
as
of
31
December
2020
remained
stable
at
2.6%
(31
December
2019:
2.6%).
LTV
ratio
increased
and
reached
60.5%
after
the
revaluation
of
the
investment
portfolio.
The
management
team
is
working
on
maintaining
a
low
average
interest
rate
and
reducing
LTV in the future.
Debt financing terms of the Fund’s assets
The
table
below
provides
a
detailed
breakdown
of
the
structure
of
the
Fund’s
consolidated
financial
debt
as
of
31
December
2020.
Interest
bearing
debt
was
comprised
of
bank
loans
with
a
total
carrying
value
of
EUR
155.8
million
and
bonds
with
a
carrying
value
of
EUR
49.8
million.
100%
of
the
debt
instruments
were
denominated
in
euros.
Bank
loans
have
been
obtained
by
subsidiaries
that
hold
the
Fund’s
properties
and
the
properties
have
been
pledged
as
loan
collateral.
The
parent
entity
holds
the 5-year unsecured bonds.
Loan
arrangement
costs
are
capitalised
and
amortised
over
the
terms
of
the
respective
loans.
At
the
end
of
2020,
the
unamortised
balance
of
loan
arrangement
costs for all loans and bonds was EUR 384 thousand.
● ANNUAL REPORT 2020 Management report | Financing
41
Financial debt structure of the Fund as of 31 December 2020
Carrying amount
(
EUR ‘000)
Less capitalised loan arrangement fees
3
Total bank loans recognised in the statement
of financial position
Less capitalised bond arrangement fees
3
Total debt recognised in the statement of
financial position
1.
CC Plaza and Postimaja loan has an interest rate cap at 3.5% for the variable interest rate part.
2.
Duetto loan has an interest rate cap at 1% for the variable interest rate part.
3.
Amortised each month over the term of a loan/bond.
Weighted
debt
financing
average
time
to
maturity
was
2.1
years
and
weighted
hedge
average
time
to
maturity
was 2.2 years at the end of 2020.
As
of
31
December
2020,
83%
of
total
debt
had
fixed
interest
rates
while
the
remaining
17%
had
floating
interest
rates.
The
Fund
fixes
interest
rates
on
a
portion
of
its
debt
by
acquiring
IRS-type
hedging
instruments
or
limits
the
impact
of
rising
interest
rates
with
interest
rate
cap
instruments
(CAP).
The
unsecured
bonds
have
a
fixed
coupon rate of 4.25%.
The
graph
below
shows
that
around
86%
of
total
debt
financing
matures
in
2022-2023.
G4S
Headquarters
and
SKY
SC
bank
loans,
which
account
for
4.8%
of
total
debt,
will
be
maturing
in
August
2021.
The
Management
Company
is
looking
at
potential
options
to
refinance
or
extend these loans during 2021.
● ANNUAL REPORT 2020 Management report | Financing
42
Loan and hedge maturity terms
EUR’000
The
graph
below
shows
that
the
Fund’s
debt
financing
is
diversified
between
4
most
reputable
domestic
and
international
banks
in
the
Baltics
and
unsecured
bonds.
SEB
exposure
decreased
from
73%
in
2016
to
40%
in
2019
and
remained
stable
through 2020. 5-year unsecured bonds accounted for to 24% of total debt financing in 2020.
Financing diversification
● ANNUAL REPORT 2020 Management report | Financing
43
Covenant reporting
As
of
31
December
2020,
the
Fund
was
in
compliance
with
all
the
covenants
set
under
the
bond
issue
terms
and
conditions dated 8 May 2018.
As
of
31
December
2020,
the
Fund
was
in
compliance
with
all
special
conditions
and
covenants
set
under
the
bank
loan
agreements
except
for
the
Interest
Service
Coverage
Ratio
(ISCR)
of
the
Europa
property
(carrying
amount
–
EUR
20.9
million)
which
was
below
the
required
minimum
level
of
4.00
for
the
year
2020.
The
Fund
received
a
formal
waiver
from
the
lender
for
the
mentioned
covenant
breach.
The
waiver
is
valid
until
the
end
of
Q3
2021.
The
covenant
breach
will
not
be
construed
as
a
loan
default
until
end
of
Q4
2021.
The
Management
is
monitoring
situation
pro-actively
with
the bank to ensure timely measures.
In
July
2020,
the
Fund
applied
for
a
temporary
reduction
of
the
equity
covenant
in
the
terms
and
conditions
of
the
bonds
in
connection
with
the
Baltic
Horizon
Fund
EUR
50
million
5-year
unsecured
bonds
maturing
in
2023
by
way
of
written
procedure
announced
on
6
July
2020.
The
bondholders
decided
by
way
of
written
procedure
to
temporarily
reduce
the
equity
ratio
bond
covenant
to
25%
or
greater
(previously
35%
or
greater).
The
original
equity
ratio
covenant
of
35%
or
greater
will
be
automatically reinstated as of 1 August 2021.
Equity
Ratio
-
Equity
adjusted
for
the
cash
flow
hedge
reserve
divided
by
total
assets
excluding
financial
assets
and
cash
equivalents
as
defined
in
the
accounting
policies.
Debt
Service
Coverage
Ratio
-
EBITDA
divided
by
the
principal
payments
and
interest
expenses
of
interest-
bearing debt obligations, on a rolling 12-month basis.
Interest
Service
Coverage
Ratio
-
EBITDA
divided
by
the
interest
expenses
of
interest-bearing
debt
obligations,
on a rolling 12-month basis.
Financial covenants of bonds
Debt Service Coverage
Ratio
1.
On
28
July
2020,
the
bondholders
decided
by
way
of
written
procedure
to
temporarily
reduce
the
equity
ratio
bond
covenant
to
25%
or
greater until 31 July 2021.
● ANNUAL REPORT 2020 Management report | EPRA performance measures
44
EPRA
NRV
EUR
1.2219
per
unit
EPRA
Earnings
EUR
0.10
per
unit
EPRA
NIY
6.8%
net
initial
yield
●
ANNUAL
REPORT
2020
Management
report
|
EPRA
Performance
measures
● ANNUAL REPORT 2020 Management report | EPRA performance measures
45
EPRA PERFORMANCE MEASURES
New EPRA performance metrics
The
European
Public
Real
Estate
Association
(EPRA)
publishes
recommendations
for
disclosing
and
defining
the
main
financial
performance
indicators
applicable
to
listed
real
estate
companies.
Baltic
Horizon
supports
the
standardisation
of
reporting
designed
to
improve
the
quality and comparability of information to investors.
In
October
2019,
EPRA
published
new
best
practices
recommendations
(BPR)
for
financial
disclosures
by
listed
real
estate
companies.
New
EPRA
BPR
introduced
three
new
measures
of
net
asset
value:
EPRA
net
tangible
assets
(NTA),
EPRA
net
reinstatement
value
(NRV)
and
EPRA
net
disposal
value
(NDV).
The
three
new
measures
of
net
asset
value
replaced
the
old
net
asset
value
indicators: EPRA NAV and EPRA NNNAV.
New
best
practices
recommendations
are
effective
for
accounting
periods
starting
on
1
January
2020
and
have
been
adopted
by
the
Group
to
present
the
financial
figures for the year 2020.
The
Fund
provides
a
bridge
between
the
previous
EPRA
NAV
metrics,
as
calculated
in
line
with
the
EPRA
November
2016
BPR,
and
the
three
new
net
asset
value
indicators
in
2020
reporting
for
both
the
current
and
comparative
accounting
periods.
A
reconciliation
of
the
new
EPRA
NAV
indicators
and
old
EPRA
NAV
indicators
is presented below.
Baltic
Horizon
wins
EPRA
Gold
award
and
Most
Improved Annual Report award
Baltic
Horizon
Fund
received
two
prestigious
accolades
at
the
European
Public
Real
Estate
Association
(EPRA)
virtual
annual
conference
2020.
The
Fund
scored
a
“Gold
Award”
for
the
adoption
of
EPRA
Best
Practices
Recommendations
(BPR)
–
widely
accepted
industry
standards
for
the
highest
level
of
transparency,
comparability
and
compliance
in
financial
reporting.
Baltic
Horizon
was
also
awarded
a
“Most
Improved
Annual
Report
Award”
for
the
outstanding
improvement
in
reporting
quality
and
compliance
with
the
Association’s
BPR.
EPRA
assessed
the
financial
statements
of
168
European
listed
real
estate
as
part
of
its annual award process.
Key performance indicators – definition and use
Earnings from operational activities
A
key
measure
of
a
company’s
underlying
results
and
an
indication
of
the
extent
to
which
current
dividend
payments are supported by earnings.
Assumes
that
entities
never
sell
assets
and
aims
to
represent the value required to rebuild the entity.
Assumes
that
entities
buy
and
sell
assets,
thereby
crystallising certain levels of unavoidable deferred tax.
Represents
the
shareholders’
value
under
a
disposal
scenario,
where
deferred
tax,
financial
instruments
and
certain
other
adjustments
are
calculated
to
the
full
extent
of their liability, net of any resulting tax.
Makes
adjustments
to
IFRS
NAV
to
provide
stakeholders
with
the
most
relevant
information
on
the
fair
value
of
the
assets
and
liabilities
of
a
real
estate
investment company, under different scenarios.
Net
Asset
Value
adjusted
to
include
properties
and
other
investments
at
fair
value
and
to
exclude
certain
items
not
expected
to
crystallise
in
a
long-term
investment
property business model.
Makes
adjustments
to
IFRS
NAV
to
provide
stakeholders
with
the
most
relevant
information
on
the
fair
value
of
the
assets
and
liabilities
within
a
true
real
estate company with a long-term investment strategy.
● ANNUAL REPORT 2020 Management report | EPRA performance measures
46
EPRA
NAV
adjusted
to
include
the
fair
values
of
(i)
financial instruments, (ii) debt and (iii) deferred taxes.
Makes
adjustments
to
EPRA
NAV
to
provide
stakeholders
with
the
most
relevant
information
on
the
current
fair
value
of
all
the
assets
and
liabilities
within
a real estate company.
EPRA
Net initial
yield (NIY)
Annualised
rental
income
based
on
the
cash
rents
passing
at
the
reporting
date,
less
non-recoverable
property
operating
expenses,
divided
by
the
market
value
of
the
property,
increased
by
(estimated)
purchasers’ costs.
This
measure
incorporates
an
adjustment
to
the
EPRA
NIY
in
respect
of
the
expiration
of
rent-free
periods
(or other
unexpired
lease
incentives
such
as
discounted
rent periods and step rents).
A
comparable
measure
for
portfolio
valuations.
This
measure
should
make
it
easier
for
investors
to
judge
themselves,
how
the
valuation
of
portfolio
X
compares
with portfolio Y.
Estimated
Market
Rental
Value
(ERV)
of
vacant
space
divided by ERV of the whole portfolio.
A
'pure'
(%)
measure
of
investment
property
space
that
is vacant, based on ERV.
Administrative
&
operating
costs
(including
&
excluding
the
costs
of
direct
vacancy)
divided
by
gross
rental
income.
A
key
measure
to
enable
meaningful
measurement
of
the changes in a company’s operating costs.
Source: EPRA best practices recommendations guidelines (www.epra.com)
EPRA Net asset value
V.
Deferred
tax
liability
on
investment
properties
1
V.
Deferred
tax
on
fair
value
of
financial
instruments
VI. Fair value of financial instruments
IX.
Revaluation
at
fair
value
of
fixed-rate
loans
XII. Fair value of financial instruments
XII.
Deferred
tax
on
fair
value
of
financial
instruments
Fully diluted number of units
1.
All
deferred
taxes
attributable
to
investment
properties
have
been
excluded
from
EPRA
NTA
calculations
as
the
Fund
intends
to
hold
and
does not intend to sell its investment properties.
● ANNUAL REPORT 2020 Management report | EPRA performance measures
47
EPRA Net asset value
V.
Deferred
tax
liability
on
investment
properties
1
V.
Deferred
tax
on
fair
value
of
financial
instruments
VI. Fair value of financial instruments
IX.
Revaluation
at
fair
value
of
fixed-rate
loans
XII. Fair value of financial instruments
XII.
Deferred
tax
on
fair
value
of
financial
instruments
Fully diluted number of units
1.
All
deferred
taxes
attributable
to
investment
properties
have
been
excluded
from
EPRA
NTA
calculations
as
the
Fund
intends
to
hold
and
does not intend to sell its investment properties.
EPRA Earnings
I.
Changes
in
fair
value
of
investment
properties
VIII.
Deferred
tax
in
respect
of
EPRA
adjustments
Weighted number of units during the period
EPRA Vacancy rate
Estimated rental value of vacant space
Estimated rental value of the whole portfolio
● ANNUAL REPORT 2020 Management report | EPRA performance measures
48
EPRA Cost ratios
Property expenses not recharged to tenants
EPRA costs (including direct vacancy costs) (A)
EPRA costs (excluding direct vacancy costs) (B)
EPRA Cost ratio (including direct vacancy costs) (A/C, %)
EPRA Cost ratio (excluding direct vacancy costs) (B/C, %)
EPRA NIY and “topped-up” NIY
Completed property portfolio GAV
Annualised cash passing rental income
Property expenses not recharged to tenants
Annualised net rental income
Notional rent expiration of rent free periods or other lease incentives
Topped-up net annualised rental income
EPRA Capital expenditure
No incremental lettable space
Total capital expenditure
Conversion from accrual to cash basis
Total capital expenditure on cash basis
● ANNUAL REPORT 2020 Management report | EPRA performance measures
49
Market
capitalisation
of
Baltic
Horizon
Fund
turns
around
in
ca.
6.2
years
on
the
Nasdaq
Tallinn
and
Stockholm
Stock
Exchanges
●
ANNUAL
REPORT
2020
Management
report
|
Investor
relations
● ANNUAL REPORT 2020 Management report | Investor relations
50
INVESTOR RELATIONS
Baltic
Horizon
Fund
units
are
currently
dual-listed
on
the
Fund
List
of
the
Nasdaq
Tallinn
Stock
Exchange
and
the
Nasdaq
Stockholm
Alternative
Investment
Funds
market.
Trading
with
Baltic
Horizon
units
on
the
Nasdaq
Tallinn
Stock
Exchange
began
on
6
July
2016.
The
first
trading
day on Nasdaq Stockholm was on 23 December 2016.
As
at
31
December
2020,
the
market
capitalisation
for
Baltic
Horizon
Fund
was
approx.
EUR
138.4
million
(31
December
2019:
EUR
151.2
million)
based
on
the
closing
unit
market
prices
on
the
Nasdaq
Tallinn
Stock
Exchange
and
the
Nasdaq
Stockholm
Alternative
Investment
Funds
market.
During
Q4
2020,
Baltic
Horizon
Fund
units
on
the
Nasdaq
Tallinn
Stock
Exchange
were
trading
at
a
discount
compared
to
the
net
asset
value
per
unit.
The
COVID-19
outbreak
had
a
negative
impact
on
the
capital
and
real
estate
markets
all
around
the
world
including
the
Baltics.
Despite
the
heavy
initial
downtrend
in
the
unit
price
at
the
beginning
of
the
COVID-19
outbreak,
Baltic
Horizon
Fund
units
regained
investors’
confidence
at
the
end
of
Q2
2020
and
remained
relatively
stable
throughout
Q3
and
Q4
2020.
At
the
end
of
the
Q4
2020,
unit
price
on
the
Nasdaq
Tallinn
Stock
Exchange
(EUR
1.155
per
unit)
increased
significantly
from
the
lowest
unit
trading
price
this
year
(EUR
0.95
per
unit)
which
was
reached at the end of March 2020.
Key information
Nasdaq Tallinn
Nasdaq Stockholm
Number of units issued (units)
Highest unit price during the period (EUR)
Lowest unit price during the period (EUR)
Highest unit price during the period (SEK)
Lowest unit price during the period (SEK)
Market capitalisation
1
(EUR)
Earnings per units during the period (EUR)
Unit price premium (discount) from IFRS NAV per unit
2
(%)
Unit price premium (discount) from EPRA NAV per unit
3
(%)
Distribution per unit
4
(EUR)
1.
Based on the closing prices and split between units on the Nasdaq Tallinn and the Nasdaq Stockholm Stock Exchanges.
2.
Based on the closing price on the Nasdaq Tallinn Stock Exchange at 31.12.2020 and the IFRS NAV per unit.
3.
Based on the closing price on the Nasdaq Tallinn Stock Exchange at 31.12.2020 and the EPRA NAV per unit.
4.
Distributions to unitholders for 2020 and 2019 Fund results.
● ANNUAL REPORT 2020 Management report | Investor relations
51
Development of the Baltic Horizon Fund unit price on the Nasdaq Tallinn Stock Exchange
%
Baltic
Horizon
Fund’s
total
shareholder
return
on
unit
price
in
2020
amounted
to
-6.7%
(2019:
10.2%).
Total
shareholder
return
for
a
given
year
is
equivalent
to
the
movement
in
the
unit
price
on
the
Nasdaq
Tallinn
Stock
Exchange
over
the
year
plus
dividends
paid,
divided
by
the opening unit price.
In
2020,
Baltic
Horizon
Fund
unit
offered
good
liquidity
and
continued
positive
development.
In
total,
119,635,429
units
were
traded
on
the
Nasdaq
Tallinn
and
Nasdaq
Stockholm
stock
exchanges,
while
the
total
yearly
trading
volume
reached
19.4
million
units
(2019: 15.4
million
units).
Market
capitalisation
of
approx.
EUR
139.3
million
turns
around
in
ca.
6.2
years
on
the
Nasdaq
Tallinn
and
Stockholm
Stock
Exchanges.
Baltic
Horizon
Fund
was
the
9th
most
traded
listed
security
on
the
Nasdaq
Tallinn
Exchange
in
2020.
The
first
graph
below
shows
the
Baltic
Horizon
Fund
units’
yearly
trading
volume
on
the
Nasdaq
Tallinn
and
the
Nasdaq
Stockholm Stock Exchanges.
During
2020,
Baltic
Horizon
Fund
units
on
the
Nasdaq
Tallinn
Stock
Exchange
were
mostly
trading
at
a
discount
compared
to
the
net
asset
value
per
unit.
At
the
end
of
the
2020,
units
were
traded
at
a
1.4%
premium
compared
to
the
IFRS
NAV
and
5.5%
discount
compared
to
the
EPRA
NAV.
The
second
graph
below
shows
the
Baltic
Horizon
Fund
unit
price
in
relation
to
its
IFRS
net
asset
value since inception.
Yearly
trading
volume
on
Nasdaq
Tallinn
and
Stockholm Stock Exchanges
units
Nasdaq Tallinn unit price compared with NAV
EUR
● ANNUAL REPORT 2020 Management report | Investor relations
52
Capital raisings
On
23
October
2020,
the
Fund
announced
the
issue
of
new
units
in
a
secondary
public
offering.
In
total,
gross
equity
of
EUR
7.2
million
was
raised
through
the
transaction.
The
new
units
were
issued
at
a
price
of
EUR 1.1566,
which
was
calculated
according
to
the
procedure
adopted
at
the
general
meeting
and
was
equal
to
the
year-to-date
weighted
average
price
of
units
on
the
Nasdaq
Tallinn
Stock
Exchange
at
a
date
7
calendar
days
prior
to
the
first
day
of
the
subscription
period.
After
the
transaction,
the
total
number
of
Fund
units
registered
in
the
Estonian
Register
of
Securities
increased to 119,635,429.
Dividend capacity
According
to
the
Fund
Rules
issued
as
of
23
May
2016,
a
distribution
to
investors
will
be
made
if
all
of
the
following conditions are met:
•
The
Fund
has
retained
such
reserves
as
required
for the proper running of the Fund;
•
The
distribution
does
not
endanger
the
liquidity
of
the Fund;
•
The
Fund
has
made
the
necessary
follow-on
investments
in
existing
properties,
i.e.
investments
in
the
development
of
the
existing
properties
of
the
Fund,
and
new
investments.
The
total
of
the
Fund’s
annual
net
income
that
may
be
retained
for
making
such
investments
is
20%
of
the
Fund’s
annual net income of the previous year.
The
Fund
sets
a
target
of
dividend
distributions
to
its
unitholders
in
the
range
between
80%
of
generated
net
cash
flow
(GNCF)
and
net
profit
after
unrealized
P&L
items
are
adjusted.
The
distribution
is
based
on
the
Fund’s
short-term
and
long-term
performance
projections.
Management
has
discretion
to
distribute
lower
dividends
than
80%
of
generated
net
cash
flow
(GNCF) if the liquidity of the Fund is endangered.
Generated net cash flow (GNCF) calculation formula
(-) Fund administrative expenses
(-) External interest expenses
Interest expenses incurred for bank loan financing
The expenditure incurred in order to improve investment
properties; the calculation will include capital expenditure
based on annual capital investment plans
(+) Added back listing related expenses
(+) Added back acquisition related expenses
Include the expenses for acquisitions that
did not occur
Generated net cash flow (GNCF)
● ANNUAL REPORT 2020 Management report | Investor relations
53
Distributions to unitholders for 2020 Fund results
On
24
April
2020,
the
Fund
declared
a
cash
distribution
of
EUR
1,701
thousand
(EUR
0.015
per
unit)
to
the
Fund
unitholders
for
Q1
2020
results.
This
represents
a
1.12%
return
on
the
weighted
average
Q1
2020
net
asset
value
to its unitholders.
On
24
July
2020,
the
Fund
declared
a
cash
distribution
of
EUR
1,701
thousand
(EUR
0.015
per
unit)
to
the
Fund
unitholders
for
Q2
2020
results.
This
represents
a
1.14%
return
on
the
weighted
average
Q2
2020
net
asset
value
to its unitholders.
On
20
October
2020,
the
Fund
declared
a
higher
cash
distribution
of
EUR
3,111
thousand
(EUR
0.026
per
unit)
to
the
Fund
unitholders
for
Q3
2020
results
due
to
stabilisation
of
COVID-19
pandemic
and
low
number
of
new
cases
when
the
decision
on
distribution
was
made.
This
represents
a
2.25%
return
on
the
weighted
average
Q3 2020 net asset value to its unitholders.
On
4
February
2021,
due
to
introduced
restrictions
and
increased
market
uncertainty
the
Fund
returned
to
more
conservative
approach
and
declared
a
cash
distribution
of
EUR
1,316
thousand
(EUR
0.011
per
unit)
to
the
Fund
unitholders
for
Q4
2020
results.
This
represents
a
0.93%
return
on
the
weighted
average
Q4
2020
net
asset
value
to its unitholders.
In
total,
the
Fund
declared
a
cash
distribution
of
EUR 7,829
thousand
from
the
operating
results
of
2020
(EUR
1,701
thousand
from
Q1
2020,
EUR
1,701
thousand
from
Q2
2020,
EUR
3,111
thousand
from
Q3
2020
and
EUR
1,316
thousand
from
Q4
2020).
Dividends
for
the
operating
results
of
2020
correspond
to
a
gross
yield
of
5.8%
based
on
the
closing
price
on
the
Nasdaq
Tallinn
Stock Exchange at 31 December 2020.
With
reduced
payouts
over
2020
in
the
light
of
prevailing
market
uncertainty,
the
Fund
has
opted
to
retain
EUR
4.4
million
of
distributable
cash
flow.
The
Management
Company
of
the
Fund
will
continue
to
actively
monitor
the
economic
impact
of
the
pandemic
and
reassess
future
distribution
levels
depending
on
the
upcoming
operating results.
Cash distributions during 2020
Payments
to
unitholders
for
Q4
2019,
Q1
2020,
Q2
2020
and
Q3
2020
results
were
distributed
in
2020,
while
payments
for
Q4
2020
results
were
distributed
in
2021.
Total
cash
distributions
during
2020
amounted
to
EUR 9,687
thousand
(2019:
EUR
10,253
thousand)
or
EUR 0.084
per
unit
(2019:
EUR
0.105
per
unit).
Dividend
paid-out
in
2020
corresponds
to
a
gross
yield
of
7.3%
based
on
the
closing
price
on
the
Nasdaq
Tallinn
Stock
Exchange at 31 December 2020.
Dividend per unit (EUR)
The
management
of
the
Fund
remains
committed
to
target
a
7-9%
yield
of
annual
dividends
to
investors
on
invested
equity,
which
is
defined
as
paid-in-capital
since
listing
the
Fund
on
the
stock
exchange
on
30
June
2016.
The
table
below
provides the summary of historical calculations.
Dividends declared per unit
● ANNUAL REPORT 2020 Management report | Investor relations
54
Dividend capacity calculation
(-) Fund administrative expenses
(-) External interest expenses
(+) Added back listing related expenses
(+) Added back acquisition related expenses
Generated net cash flow (GNCF)
GNCF per weighted unit (EUR)
12-months rolling GNCF yield
2
(%)
Dividends declared for the period
Dividends declared per unit
3
(EUR)
12-months rolling dividend yield
2
(%)
1.
The
table
provides
actual
capital
expenditures
for
the
quarter.
Future
dividend
distributions
to
unitholders
are
aimed
to
be
based
on
the
annual
budgeted capital expenditure plans equalised for each quarter. This will reduce the quarterly volatility of cash distributions to unitholders.
2.
12-month
rolling
GNCF
and
dividend
yields
are
based
on
the
closing
market
price
of
the
unit
as
at
the
end
of
the
quarter
(Q4
2020:
closing
market price of the unit as of 31 December 2020).
3.
Based on the number of units entitled to dividends.
Interim Report
January 2020 – December 2020
Distribution to unitholders
Q4 2020
Interim Report
January 2021 – March 2021
Distribution to unitholders
Q1 2021
Interim Report
January 2021 – June 2021
Distribution to unitholders
Q2 2021
Interim Report
January 2021 – September 2021
Distribution to unitholders
Q3 2021
● ANNUAL REPORT 2020 Management report | Structure and governance
55
Architects
and
designers
have
been
meticulously
working
on
the
new
retail
concepts
and
as
building
permits
have
been
received,
2021
will
be
the
time
for
execution.
●
ANNUAL
REPORT
2020
Management
report
|
Structure
and
governance
● ANNUAL REPORT 2020 Management report | Structure and governance
56
STRUCTURE AND GOVERNANCE
Baltic
Horizon
Fund
is
a
closed-end contractual investment fund
registered
in
Estonia
on
23
May
2016.
The
Fund
is
defined
as
a
real
estate
fund
under
the
Estonian
Investment
Funds
Act.
The
Fund
cannot
enter
into
agreements
on
its
own.
The
unitholders
own
all
the
Fund’s assets.
The
Fund
is
a
tax
transparent
and
cost-efficient
vehicle.
The
management
fee
is
linked
to
the
market
capitalisation
of
the
tradable
units.
It
is
also
embedded
in
the
Fund
Rules
that
the
management
fee
will
decrease
from
1.5%
to
as
low
as
0.5%
of
the
market
capitalisation
as the Fund’s assets grow.
The
Fund
operates
under
the
REIT
concept
whereby
the
vast
majority
of
the
Fund’s
cash
earnings
are
paid
out
and only 20% can be reinvested.
The
Fund
is
managed
by
the
Management
Company,
which
is
Northern
Horizon
Capital
AS.
The
immediate
team
comprises
of
the
Management
Board,
which
is
headed
by
the
Fund
Manager,
and
the
Supervisory
Board
of
the
Management
Company.
The
Fund
also
has
its
own
Supervisory
Board,
which
comprises
of
4
independent
board members.
Northern
Horizon
Capital
AS
is
an
experienced
real
estate
asset
manager.
Northern
Horizon
Capital
Group
has
proven
itself
as
one
of
the
leading
real
estate
investors
in
the
Baltic countries
and
elsewhere
with
an
in-
depth
knowledge
of
the
markets
of
operation.
Over
the
course
of
the
organization’s
life,
Northern
Horizon
Capital
Group
has
been
able
to
build
a
strong
and
cohesive
team
from
diverse
backgrounds
with
a
focus
on
being
conservative
and
thorough,
yet
dynamic
in
real
estate acquisitions and management.
Commitment
to
corporate
governance
is
rooted
in
the
Management
Company’s
focus
on
long-term
business
relations
with
investors,
partners,
and
tenants.
In
all
relations,
the
Management
Company
encourages
a
professional
and
open
dialogue
based
on
mutual
trust
and
strives
to
earn
the
respect
of
its
business
partners
through
strong
commitment,
transparency
and
fair
dealings.
The
investor’s
best
interest
is
always
considered
by
the
Management
Company
to
make
sure
that
the
investor
is
treated
fairly.
The
Management
Board
ensures
that
conflicts
of
interests
between
related
parties
are
avoided or are as small as possible.
The
Management
Company
is
obliged
to
establish,
maintain
and
document
procedures
to
identify,
prevent
and
manage
conflicts
of
interest
and,
when
necessary,
issue
supplementing
instructions
to
the
policies,
instructions and guidelines.
Define
Baltic
Horizon’s
Fund
Rules
and
appoint
representatives
to
the
Supervisory
Board.
N
H
C
(
M
a
n
a
g
e
m
e
n
t
C
o
m
p
a
n
y
)
Gives
advice
to
Northern
Horizon
Capital
(NHC),
focuses
on
topics
where
conflicts
of
interest
may
arise,
has
mainly
veto
capacity.
B
a
l
t
i
c
H
o
r
i
z
o
n
F
u
n
d
Responsible
for
Fund
management
including
execution
of
the
investment
strategy
as
stated
in
the
Fund
Rules.
● ANNUAL REPORT 2020 Management report | Structure and governance
57
Management
Board
and
Supervisory
Board
of
the
Management Company
The
Management
Board
bears
overall
responsibility
for
the
daily
business
of
Baltic
Horizon
Fund.
The
Management
Company’s
Management
Board
is
composed
of
three
members.
The
Management
Board
is
supervised
and
advised
by
the
Supervisory
Board
of
the
Management Company.
Supervisory Board of the Fund
The
Fund
has
a
Supervisory
Board
which
consists
of
qualified
members
with
recognised
experience
in
the
real
estate
markets
in
Estonia
,
Latvia,
and
Lithuania,
impeccable
reputation
and
appropriate
education.
In
accordance
with
the
Fund
Rules,
members
of
the
Supervisory
Board
are
appointed
by
the
General
Meeting.
The
Supervisory
Board
consists
of
three
to
five
members.
The
Supervisory
Board
acts
solely
in
an
advisory
capacity
and
the
Management
Company
remains
responsible
for
making
the
decisions
in
connection
with
the
Fund’s
management.
The
Supervisory
Board
members
fulfil
their
consultation responsibilities collectively.
Supervisory
Board
members
are
entitled
to
remuneration
for
their
service
in
the
amount
determined
by
the
General
Meeting.
The
chairman
of
the
Supervisory
Board
is
entitled
to
an
annual
remuneration
of
EUR
15,000
and
a
regular
member
is
entitled
to
an
annual
remuneration
of
EUR
11,000.
On
the
basis
of
the
agreements
concluded
with
each
Supervisory
Board
member,
Supervisory
Board
members
are
not
entitled
to
any
benefits
from
the
Fund
or
the
Management
Company
upon
termination
of
their
term of office.
The
Fund
administration
services
are
provided
by
the
Management
Company.
Accounting
and
depository
services have been outsourced to Swedbank AS.
Valuations
The
real
estate
property
valuation
policies
of
the
Fund
are
determined
in
the
Fund
Rules
based
on
common
market
practice.
Only
a
licensed
independent
real
estate
appraiser
of
high
repute
and
sufficient
experience
in
appraising
similar
property
and
operating
in
the
country
where
the
relevant
real
estate
property
is
located
may
evaluate real estate belonging to the Fund.
Each
potential
acquisition
opportunity
is
subject
to
extensive
commercial,
legal,
technical
and
financial/tax
due
diligence
performed
by
the
Management
Company
in
cooperation
with
reputable
local
and
international
advisers.
Audit
The
auditor
of
the
Fund
is
KPMG
Baltics
OÜ
which
is
a
member
of
the
Estonian
Association
of
Auditors.
In
addition
to
statutory
audit
services,
KPMG
Baltics
OÜ
has
provided
the
Fund
with
translation
services
and
other
assurance services.
The
Fund’s
activities
are
monitored
on
a
regular
basis
by
the
Estonian
Financial
Supervision
and
Resolution
Authority and the Supervisory Board of the Fund.
Members of the Management Board
of the Management Company
Members of the Supervisory Board
of the Management Company
Members of the Supervisory
Board of the Fund
Milda Dargužaitė (Chairman)
● ANNUAL REPORT 2020 Management report | Risk management
58
Tarmo Karotam
Chairman of the Management Board/ Fund Manager
Mr.
Karotam,
born
1981,
is
a
member
of
the
Management
Board
of
the
Management
Company.
Mr.
Karotam
has
been
a
long-time
member
of
Northern
Horizon
Capital
investment
management
team
and
has
acted
as
the
Fund
Manager
for
BOF,
which
was
the
predecessor
fund
for
the
Fund,
from
the
beginning.
Mr.
Karotam
is
a
member
of
RICS
(MRICS).
He
graduated
from
Eçole
Hôtelière
de
Lausanne (B.Sc.) in 2005.
Aušra Stankevičienė
Member of the Management Board/ Fund Service Director
Mrs.
Stankevičienė,
born
1974,
is
a
member
of
the
Management
Board
of
the
Management
Company.
Prior
to
joining
Northern
Horizon
Capital
group
as
fund
treasurer
and
later
as
head
of
fund
administration
and
from
1
March
2019
as
Fund
Service
Director,
she
worked
at
Swedbank
Lithuania.
She
holds
a
Chartered
Financial
Analyst
(CFA)
credential.
She
graduated
from
Vilnius
University
(MBA)
in
1998.
Algirdas Vaitiekūnas
Member of the Management Board/ Director of Business Development
Mr.
Vaitiekunas,
born
1963,
is
a
member
of
the
Management
Board
of
the
Management
Company.
Prior
to
joining
Northern
Horizon
Capital
group,
he
held
senior
positions
at
PwC
in
Melbourne,
Hong
Kong
and
Vilnius.
He
is
Chairman
of
RICS
Baltics
being
also
a
Fellow
member
(FRICS)
and
a
member
of
the
CAANZ,
Institute
of
Chartered
Accountants
in
Australia
and
New
Zealand.
He
graduated
from
University
of
Melbourne
(B.Sc.)
in
1984
and
again
from
the
same
university
(B.Com.) in 1988.
● ANNUAL REPORT 2020 Management report | Risk management
59
RISK MANAGEMENT
The
risk
management
function
of
the
Fund
is
outsourced
to
a
sister
company
of
the
Management
Company:
Northern
Horizon
Capital
AIFM
Oy,
which
is
a
licensed
AIFM
in
Finland.
The
Risk
Manager
of
the
Fund
is
responsible
for
identifying
the
Fund’s
market
risk
portfolio,
preparing
proposals
regarding
market
risk
limits,
monitoring
the
utilization
of
the
limit
and
producing
overall
market
risk
analyses.
The
Risk
Manager
maintains
a
list
of
all
risk
management
related
instructions,
monitors
these
compared
to
internationally
recommended
best
practice,
and
initiates
changes
and
improvements
when
needed.
The
Risk
Manager
reports
to
the
Fund’s
boards
on
a
regular
basis.
The
Risk
Manager
assessed
at
the
end
of
the
reporting
period
that
the
Fund
is
currently
in
compliance
with
the
intended
risk
management framework.
Principal risks faced by the Fund
The
Fund
is
exposed
to
the
office
and
retail
markets
in
Riga,
Tallinn,
and
Vilnius
through
its
indirect
investments in investment property (through subsidiaries).
Currently,
the
yields
of
prime
office
and
retail
properties
in
the
Baltic
countries
are
decreasing
as
competition
between
real
estate
investors
is
consistently
increasing.
Investment
yields
in
the
Baltic
countries
are
on
average
around
6.5%
and
7.5%
in
the
office
and
retail
segments,
with
prime
office
yields at approx. 6%.
The
Group’s
interest
rate
risk
is
related
to
interest-bearing
borrowings.
The
Fund’s
policy
is
that
long-
term
loans
should
be
hedged
to
a
fixed
rate
for
their
whole
life.
This
converts
floating
rate
liabilities
to
fixed
rate
liabilities.
In
order
to
achieve
this,
the
Fund
either
takes
fixed
rate
loans
or
swaps
fixed
interest
rates
for
floating
ones
using
interest
rate
derivatives.
As
1)
the
Fund
seeks
to
obtain
financing
on
the
best
terms
and
conditions
and
2)
in
the
current
market,
fixed
rate
loans
are
often
more
expensive,
the
Fund
hedges
interest
rate
exposure
by
using
derivative
instruments
such
as
interest
rate
swaps,
forwards
and
options.
The
Fund
and
its
subsidiaries
acquire
swaps
only
for
cash
flow
hedging purposes and not for trading.
The
Fund
is
aiming
to
diversify
its
investments,
and
counterparties
with
low
credit
risk
are
preferred.
Major
acquisition
and
project
finance
credit
risks
are
minimized
by
sharing
these
risks
with
banks
and
insurance
companies.
Credit
risks
related
to
the
placement
of
liquid
funds
and
trading
in
financial
instruments
(counterparty
credit
risks)
are
minimized
by
making
agreements
only
with
the
most
reputable domestic and international banks and financial institutions.
Liquidity
risk
is
the
possibility
of
sustaining
significant
losses
due
to
the
inability
to
liquidate
open
positions,
to
realise
assets
by
the
due
time
at
the
prescribed
fair
price
or
to
refinance
loan
obligations.
Real
estate
investments
have
low
liquidity
and
there
can
be
no
assurance
that
the
Fund
will
be
able
to
exit
the
investments
in
a
timely
manner.
By
their
nature,
real
estate
investments
or
interests
in
other
non-public
entities
are
subject
to
industry
cyclicality,
downturns
in
demand,
market
disruptions
and
the
lack
of
available
capital
for
potential
purchasers
and
therefore
often
difficult
or
time
consuming
to liquidate.
The
Management
Company
makes
its
best
efforts
to
ensure
sufficient
liquidity
by
efficient
cash
management,
by
maintaining
a
“liquidity
buffer”
and
organizing
long-term
diversified
financing
for
real estate investments.
Operational
risk
represents
the
potential
for
loss
resulting
from
inadequate
or
failed
internal
processes
or
systems,
human
factors,
or
external
events,
including
business
disruptions
and
system
failure.
The
Fund
is
exposed
to
many
types
of
operational
risk
and
attempts
to
mitigate
them
by
maintaining
a
system
of
internal
control
procedures
and
processes
that
are
designed
to
control
risk
within
appropriate
levels.
Also,
training
and
development
of
personnel
competencies,
and
active
dialogue
with investors help the Fund to identify and reduce the risks related to its operation.
● ANNUAL REPORT 2020 Management report | Risk management
60
An
important
aim
in
our
ESG
activities
is
to
achieve
the
third
star
from
GRESB
and
obtain
BREEAM
very
good
or
excellent
certificates
for
all
of
our
office
buildings
in
2021.
●
ANNUAL
REPORT
2020
Management
report
|
Sustainability
● ANNUAL REPORT 2020 Management report | Sustainability
61
SUSTAINABILITY
Our commitment
At
Baltic
Horizon
we
acknowledge
that
our
business
activities
affect
the
society
and
the
environment
around
us,
and
that
we
have
an
opportunity
and
an
implicit
duty
to
ensure
this
impact
is
positive.
We
also
believe
that
efficient
and
sustainable
operations
are
a
necessity
for
long-term value creation.
Consequently,
we
are
committed
to
being
responsible
when
conducting
our
business
by
integrating
environmental,
social
and
governance
(“ESG”)
factors
into
our
investment
decisions
and
operational
processes.
We
strongly
feel
that
continued
commitment
to
high
ESG
standards
is
the
best
way
for
our
investors
to
achieve
their
investment
goals
and
at
the
same
time
to
ensure
that
the
environment
and
communities
can
benefit
as
well.
For
that
we
align
our
efforts
with
leading
market
standards:
the
Management
Company
of
Baltic
Horizon
Fund
and
Northern
Horizon
group
are
members
of
EPRA,
INREV,
SIPA
and
GRESB,
as
well
as
a
signatories
of
the
United
Nations-supported
Principles
for
Responsible
Investment since 2014.
Environmental impact
Baltic
Horizon
maintains
that
all
its
employees
are
committed
to
environmental
responsibility
at
all
times.
We
are
firmly
of
the
belief
that
making
the
right
environmental
decision
leads
to
better
investment
outcomes
and
increased
wellbeing
of
our
stakeholders
and
society
at
large.
As
such,
it
is
our
aim
to
ensure
that
we
can
continuously
improve
the
environmental
impacts
of our business.
We
are
taking
steps
to
integrate
ESG
factors
into
our
investment
process
in
all
steps
of
the
investment
life
cycle
by
assigning
positive
value
to
measures
that
improve
ESG.
In
Baltic
Horizon
our
responsibility
to
national
and
international
ESG
legislation
is
recognised
by
monitoring
present
compliance
and
actively
managing
the
risks
of
future proposed ESG regulation.
Stakeholder engagement
By
ensuring
that
our
investment
activities
have
a
positive
environmental
impact,
we
put
a
strong
emphasis
on
the
benefits
that
our
business
can
have
to
our
stakeholders.
We
define
4
core
groups
of
stakeholders
that
are
key
to
the success of our business:
Investors:
we
build
relationships
with
our
investors
on
transparency
by
ensuring
strong
performance
together
positive ESG impacts.
Tenants:
tenant
retention
and
commitment
to
our
assets
is
a
core
focus
of
our
asset
management
efforts.
We
aim
to
be
a
considerate
asset
owner
that
reacts
to
the
needs
and suggestions of our tenants.
Partners:
we
continuously
engage
with
our
business
partners
to
ensure
smooth
communication
that
is
built
on
mutual
values
of
trust,
transparency
and
professionalism.
Employees:
we
are
committed
to
creating
sustainable
value
to
our
shareholders
with
integrity,
and
believe
empowering
our
employees
is
the
key
to
maintaining
and creating excellent performance.
Governance
Baltic
Horizon
is
dedicated
to
good
corporate
governance
principles.
We
strive
to
have
a
transparent,
fair
and
professional
dialogue
with
our
investors,
business
partners
and
employees.
A
lot
of
emphasis
is
put
on
identifying,
monitoring,
managing
and
minimizing
potential
risks,
while
protecting
the
full
upside
potential
of
investments.
We
will
refuse
any
investment
opportunity,
which
challenges
our
integrity
or is in conflict with our mission statement and values.
We
hold
ourselves
accountable
to
the
highest
standards
of
professionalism
and
ethics.
Our
group
Code
of
Conduct
ensures
that
our
business
activities
are
undertaken
in
an
environment
of
integrity,
transparency
and
accountability.
This
approach
allows
Baltic
Horizon
to
be
a
trustworthy
and
accountable
partner
to
all
of
our
stakeholders.
Certification
Baltic
Horizon
team
is
actively
working
to
make
all
office
properties
BREEAM
certified
(BREEAM
In-Use
or
BREEAM
New
Construction)
by
the
end
of
2021.
The
Fund’s
team
has
a
target
to
obtain
the
rating
of
“Very
Good”
for
all
properties that are not yet certified.
● ANNUAL REPORT 2020 Management report | Outlook for 2021 and Management Board’s confirmation
62
OUTLOOK FOR 2021
The
spread
of
COVID-19
is
having
a
major
impact
on
global
economies
and
many
countries
are
heading
for
a
recession.
A
lockdown
of
the
Baltic
societies
during
the
period
from
March
to
May
has
led
to
an
economic
downturn
but
less
than
recorded
in
most
other
EU
countries.
The
partial
recovery
of
the
economies
is
being
hampered
by
the
second
wave
restrictions.
However,
quick
recovery
is
expected
in
2021
when
vaccination
has
been
carried
out,
which
will
then
again
allow
free
movement of people.
The
diversified
property
portfolio
of
Baltic
Horizon
Fund
consists
of
15
cash
flow
generating
properties,
and
one
property
under
development
and
in
the
search
of
an
anchor
tenant,
in
the
Baltic
capitals.
Baltic
Horizon
believes
it
has
established
a
portfolio
of
strong
retail
and
office
assets
with
well-known
and
long-term
tenants
including
local
commercial
leaders,
governmental
tenants,
nearshoring
shared
service
centres
and
the
Baltic headquarters of leading international companies.
In
summary,
it
may
be
concluded
that
the
COVID
virus
induced
lockdown
in
the
Baltics
has
impacted
mainly
Baltic
Horizon’s
centrally
located
retail
and
entertainment
centres.
Retail
assets
located
in
the
central
business
districts
(Postimaja,
Europa
and
Galerija
Centrs)
accounted for 29.2% of total portfolio NOI in 2020.
It
is
quite
certain
that
international
tourism
will
recover
slowly
over
the
next
few
years.
Therefore,
bringing
our
CBD
shopping
centres
back
to
full
performance
will
take
a
similar
amount
of
time.
The
economy
is
forecasted
to
rebound
back
to
growth
in
2021
as
domestic
and
external
demand
gradually
strengthen.
An
improving
labour
market
is
poised
to
support
incomes
and
thus
private
consumption,
while
reduced
uncertainty
will
support
investment.
It
is
expected
that
the
Baltic
economies
will
continue
to
be
one
of
the
fastest
growing
economies
in
the
EU
after
the
pandemic
will
be
controlled
by
vaccines.
The
rapid
bounce
back
of
the
economy
and
retail
spending
in
Q3
of
2020
demonstrated
that
they
are
likely
to
grow
rapidly
once restrictions are removed.
The
low
public
debt
levels
of
the
Baltic
States
allowed
the
governments
to
make
decisive
supportive
decisions
without
increasing
the
public
debt
to
critical
levels.
The
latest
economic
forecasts
from
the
Baltic
bational
banks
expect
the
Baltic
economies
to
recover
quickly
from
the
crisis
and
return
to
pre-COVID
levels
in
the
second
half
of 2021.
The
Fund
management
team
continues
to
focus
on
filling
up
the
increased
vacancies
caused
by
the
lockdowns,
mainly
in
CBD
shopping
centres,
and
on
creating
added
value
in
the
already
owned
investment
properties.
In
addition
to
the
reconstruction
of
Europa
SC
and
preparation
for
CC
Plaza
and
Postimaja
expansion,
this
also
includes
preparing
for
the
expansion
of
the
Upmalas
Biroji
complex,
Pirita
SC,
Vainodes
I,
and
G4S
properties
and further construction of Meraki.
MANAGEMENT BOARD’S CONFIRMATION
Members
of
the
Management
Board
of
the
Management
Company
Tarmo
Karotam,
Algirdas
Vaitiekūnas
and
Aušra
Stankevičienė
confirm
that
according
to
their
best
knowledge,
the
consolidated
annual
financial
statements,
prepared
in
accordance
with
IFRS
as
adopted
by
the
European
Union,
present
a
correct
and
fair
view
of
the
assets,
liabilities,
equity,
financial
position,
financial
performance
and
cash
flows
of
the
Fund
and
its
subsidiaries,
taken
as
a
whole,
and
the
management
report
gives
a
true
and
fair
view
of
the
development,
the
results
of
the
business
activities
and
the
financial
position
of
the
Fund
and
its
subsidiaries,
taken
as
a
whole,
as
well
as
of
the
principal
risks
and
significant
events
which
took
place
during
the
financial
year
and
their
effect
on
the
consolidated annual financial statements.
● ANNUAL REPORT 2020 Independent auditor’s report
63
● ANNUAL REPORT 2020 Independent auditor’s report
64
● ANNUAL REPORT 2020 Independent auditor’s report
65
● ANNUAL REPORT 2020 Independent auditor’s report
66
● ANNUAL REPORT 2020 Independent auditor’s report
67
● ANNUAL REPORT 2020 Consolidated financial statements
68
● ANNUAL REPORT 2020 Consolidated financial statements
69
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
Cost of rental activities
Valuation losses on investment properties
(Loss) profit for the period
Other
comprehensive
income
that
is
or
may
be
reclassified
to
profit
or
loss
in subsequent periods
Net loss on cash flow hedges
Income tax relating to net loss on cash flow hedges
Other
comprehensive
expense,
net
of
tax,
that
is
or
may
be
reclassified to profit or loss in subsequent periods
Total comprehensive (expense) income for the period, net of tax
Basic and diluted earnings per unit (EUR)
The accompanying notes are an integral part of these consolidated financial statements.
● ANNUAL REPORT 2020 Consolidated financial statements
70
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
Investment property under construction
Property, plant and equipment
Derivative financial instruments
Trade and other receivables
Cash and cash equivalents
Interest bearing loans and borrowings
Derivative financial instruments
Other non-current liabilities
Total non-current liabilities
Interest bearing loans and borrowings
Derivative financial instruments
Other current liabilities
Total current liabilities
Total equity and liabilities
The accompanying notes are an integral part of these consolidated financial statements.
● ANNUAL REPORT 2020 Consolidated financial statements
71
CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
Net profit for the period
Other comprehensive expense
Total comprehensive income
Transactions with unitholders
Paid in capital – units issued
Cancellation of own units
Profit distribution to unitholders
Total transactions with unitholders
Other comprehensive expense
Total comprehensive expense
Transactions with unitholders
Paid in capital – units issued
Profit distribution to unitholders
Total transactions with unitholders
● ANNUAL REPORT 2020 Consolidated financial statements
72
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from core activities
Adjustments for non-cash items:
Value adjustment of investment properties
Change in impairment losses for trade receivables
Unrealised exchange differences
Working capital adjustments:
Change in trade and other accounts receivable
Change in other current assets
Change in other non-current liabilities
Change in trade and other accounts payable
Change in other current liabilities
Total cash flows from core activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Acquisition of investment property
Proceeds from disposal of investment property
Investment property development expenditure
Capital expenditure on investment properties
Total cash flows from investing activities
Cash flows from financial activities
Proceeds from the issue of bonds
Proceeds from issue of units
Profit distribution to unitholders
Transaction costs related to loans and borrowings
Repayment of lease liabilities
Total cash flows from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the period
The accompanying notes are an integral part of these consolidated financial statements.
● ANNUAL REPORT 2020 Consolidated financial statements
73
Notes to the consolidated financial statements
1.
Corporate information
Baltic Horizon Fund
is
a
regulated closed-end
contractual
investment
fund
registered
in
Estonia
on
23
May
2016. The
Fund
is
managed
by
Northern
Horizon
Capital AS.
Both
the
Fund
and
the
Management
Company
are
supervised
by
the
Estonian
Financial
Supervision
and
Resolution
Authority.
The
Depositary
of
the
Fund
is
Swedbank
AS.
The
Fund
is
the
ultimate
parent
and
controlling
entity
of
the
group
comprising
the
Fund
and
its
subsidiaries
(the
“Group”
or
the
“Fund”).
The
Fund
is
a
public
fund
with
no
particular
lifetime
(evergreen).
Units
of
the
Fund
are
made
available
to
the
public
in
accordance
with
the
Fund
Rules
and
applicable
laws.
The
Fund
is
currently
dual-listed
on the
NASDAQ
Stockholm
and
the NASDAQ Tallinn Stock Exchanges.
The Fund’s registered office is at
Tornimäe 2, Tallinn, Estonia
.
The objective of the Fund is to combine attractive income yields with medium to long-term value appreciation by investing primarily in commercial real estate, portfolios of real estate, and/or real estate companies and making exits from these investments. The objective of the Fund is to provide its investors with consistent and above average risk-adjusted returns by acquiring and managing a portfolio of high quality cash flow-generating commercial properties, thereby creating a stable stream of high yielding current income combined with capital gains at exit.
Although
the
objective
of
the
Fund
is
to
generate
positive
returns
to
investors,
the
profitability
of
the
Fund
is
not
guaranteed
to
investors.
The
consolidated
financial
statements
of
Baltic
Horizon
Fund
were
approved
for
issue
by
the
Management
Board
of
the
Management Company on 19 March 2021.
At the reporting date, the Fund held the following 100% interests in subsidiaries:
Baltic Horizon Fund merger with Baltic Opportunity Fund
On
30
June
2016
Baltic
Horizon
Fund
was
merged
with
Baltic
Opportunity
Fund
by
issuing
100
units
in
exchange
for
each
unit
in
Baltic
Opportunity
Fund
(ratio
1:100).
During
the
public
offering
41,979,150
units
were
listed
on
the
NASDAQ
Tallinn
● ANNUAL REPORT 2020 Consolidated financial statements
74
stock
exchange,
the
offer
price
was
EUR
1.3086
per
unit,
the
total
issue
proceeds
were
EUR 29.7
million.
Share
capital
was
increased
by
EUR
21
million
and
the
remaining
amount
of
EUR
8.7
million
was
used
to
redeem
the
units
for
investors
who decided to exit the Fund (EUR 7.5 million) and to pay off subscription fees (EUR 1.2 million).
The
merger
was
treated
as
a
restructuring
of
entities
under
common
control.
During
the
merger
of
Baltic
Horizon
Fund
and
Baltic
Opportunity
Fund,
the
assets
and
liabilities
of
the
involved
parties
were
recognised
based
on
the
Baltic
Opportunity
Fund’s
book
values.
As
a
result
of
this
merger,
no
goodwill
was
recognised.
At
the
time
of
the
merger,
the
Fund
had
no
assets
and
liabilities
of
its
own.
Thus,
the
historical
financial
and
operational
performance
of
Baltic
Opportunity
Fund
prior
to
the
merger
is
directly
comparable
the
Fund’s
performance
after
the
merger.
In
these
consolidated
financial
statements,
Baltic
Opportunity
Fund’s
financial
results
prior
to
the
merger
are
presented
as
those
of the Fund.
During
four
additional
secondary
public
offerings
in
2016,
2017
and
2020
and
seven
private
placements
in
2018
and
2019
the
Fund
raised
additional
net
capital
of
EUR
99,424
thousand.
During
2018,
the
Fund
bought
back
and
cancelled
404,294
units
that
were
held
on
its
own
account.
As
a
result
of
the
offering
of
the
new
units
and
cancellation
of
own
units,
the
total
number
of
the
Fund’s
units
increased
to
119,635,429.
The
units
are
dual-listed
on
the
NASDAQ
Stockholm
and
the
NASDAQ Tallinn stock exchanges.
2.
Summary of significant accounting policies
Basis of preparation
The
Group’s
consolidated
financial
statements
for
the
year
ended
31
December
2020
have
been
prepared
in
accordance
with International Financial Reporting Standards (the “IFRS”) as adopted for use in the European Union.
Going concern assessment
The
management
of
the
Fund
has
performed
an
assessment
of
the
Fund’s
future
consolidated
financial
position,
consolidated
financial
performance
and
cash
flows
and
has
concluded
that
the
continued
application
of
the
going
concern assumption is appropriate.
New standards, amendments and interpretations adopted
The
Fund
applied
for
the
first
time
certain
standards
and
amendments,
which
are
effective
for
annual
periods
beginning
on
or
after
1
January
2020.
These
new
standards
and
amendments
did
not
have
a
material
impact
on
the
consolidated
annual financial statements of the Fund. The nature of the new standards and amendments is as follows:
Amendments
to
IAS
1
Presentation
of
Financial
Statements
and
IAS
8
Accounting
Policies,
Changes
in
Accounting
Estimates and Errors
The
amendments
clarify
and
align
the
definition
of
‘material’
and
provide
guidance
to
help
improve
consistency
in
the
application of that concept whenever it is used in IFRS Standards.
Amendments
to
IFRS
9
Financial
Instruments,
IAS
39
Financial
Instruments:
Recognition
and
Measurement
and
IFRS 7 Financial Instruments: Disclosures
The
amendments
are
mandatory
and
apply
to
all
hedging
relationships
directly
affected
by
uncertainties
related
to
the
IBOR
reform.
The
amendments
provide
temporary
relief
from
applying
specific
hedge
accounting
requirements
to
the
hedging
relationships
with
the
effect
that
the
IBOR
reform
should
not
generally
cause
hedge
accounting
to
terminate.
The key reliefs provided by the amendments relate to:
•
‘Highly probable’ requirement;
•
Risk components;
● ANNUAL REPORT 2020 Consolidated financial statements
75
•
Prospective assessments;
•
Retrospective effectiveness test (for IAS 39);
•
Recycling of the cash flow hedging reserve.
The
amendments
also
require
companies
to
provide
additional
information
to
investors
about
their
hedging
relationships
which are directly affected by these uncertainties.
Amendments to IFRS 3 Business Combinations
The
amendments
narrowed
and
clarified
the
definition
of
a
business.
They
also
permit
a
simplified
assessment
of
whether
an acquired set of activities and assets is a group of assets rather than a business.
Standards, interpretations and amendments to published standards that are not yet effective
The
following
new
standards,
interpretations
and
amendments
are
not
yet
effective
for
the
annual
reporting
period
ended
31
December
2020
and
have
not
been
applied
in
preparing
these
consolidated
financial
statements.
The
Group
plans to adopt these pronouncements when they become effective.
Amendments
to
IFRS
9
Financial
Instruments,
IAS
39
Financial
Instruments:
Recognition
and
Measurement,
IFRS
7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases
The
amendments
are
mandatory
and
apply
to
all
hedging
relationships
directly
affected
by
uncertainties
related
to
the
IBOR
reform.
The
amendments
provide
temporary
reliefs
that
allow
hedging
relationships
to
continue
if
an
existing
interest
rate
benchmark
is
replaced
with
an
RFR
(risk-free
rate)
with
the
effect
that
the
IBOR
reform
should
not
generally
cause
hedge
accounting
to
terminate.
The
amended
requirements
in
accounting
standards
provided
by
the
amendments
relate to:
•
Changes
in
the
basis
determining
contractual
cash
flows
of
financial
assets,
financial
liabilities
and
lease
liabilities;
•
Hedge accounting;
•
Disclosures.
The
Group
does
not
expect
the
amendments
to
have
a
material
impact
on
its
financial
statements
when
initially
applied.
Other changes
Other
new
standards,
amendments
to
standards
and
interpretations
that
are
not
yet
effective
are
not
expected
to
have
a significant impact on the Group’s financial statements.
Significant accounting policies
The
principal
accounting
policies
applied
in
the
preparation
of
these
consolidated
financial
statements
are
set
out
below.
These policies have been consistently applied unless otherwise stated in the following text.
The significant accounting policies applied by the Fund are as follows:
The
consolidated
financial
statements
have
been
presented
in
thousands
of
euros
(EUR),
unless
otherwise
stated.
The
euro is the Fund’s functional and presentation currency.
● ANNUAL REPORT 2020 Consolidated financial statements
76
b. Consolidated financial statements
The
consolidated
financial
statements
include
the
Fund
and
its
subsidiaries
(together
“the
Group“).The
Fund
controls
a
subsidiary
when
it
is
exposed
to,
or
has
rights
to,
variable
returns
from
its
involvement
with
the
entity
and
has
the
ability
to
affect
those
returns
through
its
power
over
the
entity
The
financial
statements
of
subsidiaries
are
included
in
the
consolidated financial statements from the date on which control commences until the date on which control ceases.
Inter-company balances and transactions, including unrealised profits and losses, are eliminated in consolidation.
Assets
are
recognised
in
the
consolidated
statement
of
financial
position
when
it
is
probable
that
future
economic
benefits will flow to the Group and the value of the assets can be measured reliably.
Liabilities
are
recognised
in
the
consolidated
statement
of
financial
position
when
it
is
probable
that
an
outflow
of
resources
will
be
required
to
settle
the
obligation
and
they
can
be
measured
reliably.
On
initial
recognition,
assets
and
liabilities
are
measured
at
cost.
Subsequently,
assets
and
liabilities
are
measured
as
described
for
each
financial
statement
item below.
c. Foreign currency translation
The
functional
currency
of
each
Group
company
is
determined
with
reference
to
the
currency
of
the
primary
economic
environment
in
which
the
entity
operates.
Transactions
in
other
currencies
than
the
functional
currency
are
transactions
in foreign currencies.
Foreign
currency
transactions
are
translated
into
the
functional
currency
using
the
official
exchange
rate
of
the
European
Central
Bank
prevailing
at
the
date
of
the
initial
transaction.
Monetary
assets
and
liabilities
denominated
in
such
currencies
are translated at the rate of exchange ruling at the reporting date.
The
cumulative
effect
of
exchange
differences
on
cash
transactions
are
considered
as
realised
gains
and
losses
in
the
consolidated statement of profit or loss and other comprehensive income in the period in which they are settled.
On
consolidation,
where
the
functional
currency
of
a
foreign
operation
is
different
from
the
functional
currency
of
the
parent,
the
assets
and
liabilities
are
translated
at
the
rate
of
exchange
ruling
at
the
reporting
date.
The
consolidated
statements
of
profit
or
loss
and
other
comprehensive
income
of
such
subsidiaries
are
translated
at
the
rate
in
effect
at
the
transaction
date.
The
exchange
differences
arising
on
the
currency
translation
are
recorded
as
a
separate
component
of
equity
reserves
under
the
heading
of
"Foreign
currency
translation
reserve".
On
the
disposal
of
a
foreign
operation,
accumulated
exchange
differences
are
recognised
in
other
comprehensive
income
as
a
component
of
the
gain
or
loss
on
disposal.
Fair
value
adjustments
and
goodwill
arising
on
the
acquisition
of
a
foreign
entity
are
treated
as
assets
and
liabilities
of
the
acquired entity and are recorded at the exchange rate at the date of the transaction.
Investment
properties
are
real
estate
properties
(land
or
a
building
–
or
part
of
a
building
–
or
both)
held
to
earn
rentals
or
for
capital
appreciation
or
both,
rather
than
for
the
use
in
the
production
or
supply
of
goods
or
services
or
for
administrative purposes; or sale in the ordinary course of business.
Investment
property
is
initially
recorded
at
cost
including
costs
directly
resulting
from
the
acquisition
such
as
transfer
taxes
and
legal
fees.
The
costs
of
adding
new
or
improved
qualities
to
an
investment
property
compared
to
the
date
of
acquisition,
and
which
thereby
improve
the
future
yield
of
the
property,
are
added
to
cost
as
an
improvement.
Costs,
which
do
not
add
new
or
improved
qualities
to
an
investment
property,
are
expensed
in
profit
or
loss
under
operating
expenses.
● ANNUAL REPORT 2020 Consolidated financial statements
77
Under
IAS
40,
investment
properties
are
subsequently
measured
at
fair
value,
as
determined
by
independent
appraisers,
being
the
price
that
would
be
received
to
sell
an
asset
in
an
orderly
transaction
between
market
participants
at
the
measurement date.
Value adjustments are recognised in profit or loss within valuation gains or losses on investment properties.
e. Dividends (distributions)
Proposed distributions are recognised as a liability at the time of declaration.
Provisions
are
recognised
when
the
Group
has
a
present
obligation
(legal
or
constructive)
as
a
result
of
past
event,
it
is
probable
that
an
outflow
of
resources
embodying
economic
benefits
will
be
required
to
settle
the
obligation
and
a
reliable estimate can be made of the amount of the obligation.
Provisions
are
reviewed
at
each
reporting
date
and
adjusted
in
order
to
present
the
most
reasonable
current
estimate.
If
the
effect
of
the
time
value
of
money
is
material,
the
amount
of
a
provision
is
equal
to
the
present
value
of
the
expenses, which are expected to be incurred to settle the liability.
g. Derivative financial instruments
The
Group
engages
in
interest
rate
swap
contracts
for
interest
rate
risk
management
purposes.
Derivative
financial
instruments
are
carried
in
the
consolidated
statement
of
financial
position
at
fair
value.
The
estimated
fair
values
of
these
contracts
are
reported
as
financial
assets
for
contracts
having
a
positive
fair
value;
and
financial
liabilities
for
contracts
with a negative fair value.
Gains
or
losses
from
changes
in
the
fair
value
of
derivative
financial
instruments,
which
are
not
classified
as
hedging
instruments, are recognised in profit or loss as they arise.
The
Group
applies
hedge
accounting
for
all
interest
rate
swap
contracts.
The
effectiveness
of
a
hedge
is
assessed
by
comparing
the
value
of
the
hedged
item
with
the
notional
value
implicit
in
the
contractual
terms
of
the
financial
instruments used in the hedge.
For
the
purposes
of
hedge
accounting,
hedges
are
classified
as
cash
flow
hedges
which
hedge
exposure
to
variability
in
cash
flows
that
is
either
attributable
to
a
particular
risk
associated
with
a
recognised
asset
or
liability
or
a
forecasted
transaction.
In
relation
to
cash
flow
hedges,
which
meet
the
conditions
for
hedge
accounting,
the
portion
of
the
gain
or
loss
on
the
hedging
instrument
that
is
determined
to
be
an
effective
hedge
is
recognised
initially
in
other
comprehensive
income
and
the
ineffective
portion
is
recognised
in
profit
or
loss.
The
gains
or
losses
on
effective
cash
flow
hedges
recognised
initially
in
other
comprehensive
income
are
either
transferred
to
profit
or
loss
in
the
period
in
which
the
hedged
transaction impacts the income statement or in which the hedge instrument or hedge relationship terminates.
i. Interest bearing loans and borrowings
Debts
to
banks
and
financial
institutions
are
initially
recognised
at
fair
value
less
transaction
costs
incurred.
Subsequently,
these debt items are measured at amortised cost using the effective interest rate method.
● ANNUAL REPORT 2020 Consolidated financial statements
78
The
effective
interest
rate
method
is
a
method
of
calculating
the
amortised
cost
of
a
financial
asset
or
a
financial
liability
and
of
allocating
the
interest
income
or
interest
expense
over
the
relevant
period.
The
effective
interest
rate
is
the
rate
that
exactly
discounts
estimated
future
cash
payments
or
receipts
through
the
expected
life
of
the
financial
instrument
or,
when
appropriate,
a
shorter
period
to
the
net
carrying
amount
of
the
financial
asset
or
financial
liability.
When
calculating
the
effective
interest
rate,
the
Group
estimates
cash
flows
considering
all
contractual
terms
of
the
financial
instruments.
The
calculation
includes
all
fees
paid
or
received
between
parties
to
the
contract
that
are
an
integral
part
of
the effective interest rate, transaction costs and all other premiums or discounts.
The
Group
classifies
its
financial
liabilities
as
current
when
they
are
due
to
be
settled
within
twelve
months
after
reporting
date, even if:
(a)
the original term was for a period longer than twelve months; and
(b)
an
agreement
to
refinance,
or
to
reschedule,
payments
on
a
long-term
basis
is
completed
after
the
reporting
date and before the consolidated financial statements are authorised for issue.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Other
liabilities,
comprising
payables
to
suppliers,
guarantee
deposits
received
from
tenants
and
other
payables,
are
measured at amortised cost using the effective interest rate method.
Deferred income is recognised under liabilities and includes payments received for future income.
The
Group
recognises
financial
assets
on
its
consolidated
statement
of
financial
position
when,
and
only
when,
the
Group
becomes a party to the contractual provisions of the instrument.
Financial
assets
in
the
scope
of
IFRS
9
are
classified
as
either
financial
assets
at
amortised
cost,
fair
value
through
profit
or
loss
or
fair
value
through
other
comprehensive
income,
as
appropriate.
The
classification
of
financial
assets
depends
on the contractual cash flow characteristics of the financial asset and the Fund’s business model for managing them.
Financial
assets
held
by
the
Group
are
comprised
of
trade
and
other
receivables,
cash
and
cash
equivalents
and
derivative
financial
instruments.
All
financial
assets
unless
otherwise
stated
are
held
to
collect
contractual
cash
flows
and
they
are
solely
payments
of
principal
and
interest.
Thus
they
are
measured
using
the
amortised
cost
method.
Derivative
financial
instruments do not meet measurement at amortised cost criteria and are measured at fair value through profit or loss.
Recognition and derecognition
When
financial
assets
are
recognised
initially,
they
are
measured
at
fair
value,
plus,
in
case
of
investments
not
at
fair
value
through
profit
or
loss,
directly
attributable
transaction
costs.
The
Group
determines
the
classification
of
its
financial
assets
after initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end.
All
“regular
way”
purchases
and
sales
of
financial
assets
that
require
delivery
within
the
time
frame
established
by
regulation
or
market
convention
are
recognised
at
the
trade
date
(the
date
that
the
Group
commits
to
purchase
or
sell
the asset), otherwise such transactions are treated as derivatives until the settlement date.
A
financial
asset
(or,
where
applicable,
a
part
of
a
financial
asset
or
part
of
a
group
of
similar
financial
assets)
is
derecognised where:
- the rights to receive cash flows from the asset have expired;
● ANNUAL REPORT 2020 Consolidated financial statements
79
-
the
Group
has
transferred
its
rights
to
receive
cash
flows
from
the
asset,
or
retained
the
right
to
receive
cash
flows
from
the
asset,
but
has
assumed
an
obligation
to
pay
them
in
full
without
material
delay
to
a
third
party
under
a “pass-through” arrangement; and
-
the
Group
either
(a)
has
transferred
substantially
all
the
risks
and
rewards
of
the
asset,
or
(b)
has
neither
transferred
nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Following
the
adoption
of
IFRS
9,
the
Group
assesses
on
a
forward-looking
basis
the
expected
credit
losses
associated
with
its
financial
assets
carried
at
amortised
cost.
The
impairment
methodology
applied
depends
on
whether
there
has
been a significant increase in credit risk.
The
Group’s
financial
assets
subject
to
the
expected
credit
loss
model
within
IFRS
9
are
only
trade
and
other
receivables
and
cash
and
cash
equivalents.
For
trade
receivables,
the
Group
applies
the
simplified
approach
permitted
by
IFRS
9,
which requires expected lifetime losses to be recognised from initial recognition of the receivables.
The
expected
loss
rates
are
based
on
the
payment
profiles
of
receivables
over
a
period
of
36
months
before
the
reporting
date
and
the
corresponding
historical
credit
losses
experienced
within
this
period.
The
historical
loss
rates
are
adjusted
to
reflect
current
and
forward-looking
information
on
macroeconomic
factors
affecting
the
ability
of
the
tenants
to
settle
the receivable. Such forward-looking information would include:
•
changes
in
economic,
regulatory,
technological
and
environmental
factors,
(such
as
industry
outlook,
GDP,
employment and politics); and
•
external market indicators; and
•
tenant base.
Trade
receivables
are
written
off
when
there
is
no
reasonable
expectation
of
recovery.
Indicators
that
there
is
no
reasonable
expectation
of
recovery
include,
among
others,
the
probability
of
insolvency
or
significant
financial
difficulties
of the debtor. Impaired debts are derecognised when they are assessed as uncollectible.
The
Group’s
cash
and
cash
equivalents
are
considered
to
have
low
credit
risk
when
they
have
a
low
risk
of
default
and
the counterparty has a strong capacity to meet its contractual cash flow obligations in the near term.
Trade
and
other
receivables
are
measured
at
amortised
cost.
Management
assesses
specific
impairment
on
a
customer
by
customer
basis
throughout
the
year.
The
Group
holds
trade
and
other
receivables
with
the
objective
to
collect
the
contractual cash flows.
m. Cash and cash equivalents
Cash
includes
cash
with
banks.
Cash
equivalents
are
short-term,
highly
liquid
investments
that
are
readily
convertible
to
known
amounts
of
cash
with
original
maturities
of
three
months
or
less
and
that
are
subject
to
an
insignificant
risk
of
change in value.
Contingent
liabilities
are
not
recognised
in
the
consolidated
financial
statements.
They
are
disclosed
unless
the
possibility
of an outflow of resources embodying economic benefits is remote.
A
contingent
asset
is
not
recognised
in
the
consolidated
financial
statements
but
disclosed
when
an
inflow
or
economic
benefits is possible.
● ANNUAL REPORT 2020 Consolidated financial statements
80
o. Subsequent events
Post-reporting
date
events
that
provide
additional
information
about
the
Group’s
position
at
the
reporting
date
(adjusting
events)
are
reflected
in
the
consolidated
financial
statements.
Post-reporting
date
events
that
are
not
adjusting
events are disclosed in the notes when material.
Rental
income
from
operating
leases
represents
rents
charged
to
customers
and
is
recognised
on
a
straight
line
basis,
net
of
any
sales
taxes,
over
the
lease
term.
Lease
incentives
granted
are
recognised
as
an
integral
part
of
the
total
rental
income, over the term of the lease.
Service
charge
income
is
recognised
on
a
gross
basis
in
profit
or
loss
when
the
Group
is
not
acting
as
an
agent
on
behalf
of
third
parties
and
charging
commissions
for
the
collections.
Revenue
is
presented
on
a
gross
basis
as
the
Group
makes
a
contract
with
third
party
service
providers
and
carries
the
risks
associated
with
such
contracts.
Service
charge
income
is
recognised
in
the
accounting
period
in
which
the
service
is
rendered.
The
transaction
prices
include
fixed
or
variable
fees
that
are
specified
in
contractual
terms
with
each
customer.
Invoices
for
service
charges
are
issued
on
a
monthly
basis
and
the
normal
credit
term
is
30
days.
When
the
Group
is
acting
as
an
agent
on
behalf
of
the
third
parties,
amounts
collected
from
the
tenants
for
the
goods
or
services
provided
by
the
third
party
are
recognised
in
accordance
with
IFRS
15 on a net basis in profit or loss and recharge revenue is recognised in the amount of commissions earned, if any.
Expenses
are
accounted
for
an
accrual
basis.
Expenses
are
charged
to
the
consolidated
statement
of
profit
or
loss
and
other
comprehensive
income,
except
for
those
incurred
in
the
acquisition
of
an
investment
property
which
are
capitalised
as
part
of
the
cost
the
investment
property
and
costs
incurred
to
acquire
borrowings
which
are
capitalised.
Operating
expenses
comprise
costs
incurred
to
earn
rental
revenue
during
the
financial
year
to
cover
operations
and
maintenance
of investment properties.
r. Administrative expenses
Administrative
expenses
include
costs
and
expenses
which
were
incurred
for
the
management
of
investment
properties
and the Group during the year.
Taxation of the Group subsidiaries
The
consolidated
subsidiaries
of
the
Group
are
subject
to
taxation
in
the
countries
in
which
they
operate.
Current
taxation
is provided for at the applicable current rates on the respective taxable profits.
Taxation of the Fund
Gains from transfer of property
Income tax is charged on gains derived from the transfer of property by a contractual investment fund if:
1)
the transferred immovable is located in Estonia; or
2)
the
transferred
real
right
or
right
of
claim
is
related
to
an
immovable
or
a
structure
as
a
movable,
which
is
located
in Estonia; or
3)
the
transferred
or
returned
holding
is
a
holding
in
a
company,
contractual
investment
fund
or
other
pool
of
assets
of
whose
property,
at
the
time
of
the
transfer
or
return
or
during
a
period
within
two
years
prior
to
that,
more
than
● ANNUAL REPORT 2020 Consolidated financial statements
81
50%
was
directly
or
indirectly
made
up
of
immovables
or
structures
as
movables
located
in
Estonia
and
in
which
the transferor had a holding of at least 10% at the time of conclusion of the specified transaction.
4)
gains
were
derived
on
the
conditions
specified
in
clause
3)
upon
the
liquidation
of
a
company,
contractual
investment fund or other pool of assets specified in the same clause.
Income
tax
is
not
charged
on
the
part
of
the
gains
derived
from
the
return
of
a
holding
specified
in
clause
3)
or
liquidation
specified
in
clause
4)
above
if
the
income
constituting
the
basis
thereof
has
been
taxed
with
income
tax
pursuant
to
the
provisions
of
the
Income
Tax
Act
or
at
the
level
of
a
company
that
has
repurchased
the
holding
or
paid
the
liquidation
proceeds.
Deferred taxes are calculated in the Fund’s Lithuanian subsidiaries as follows:
Deferred
income
tax
is
provided
using
the
liability
method
on
temporary
differences
at
the
reporting
date
between
tax
bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
i)
where
the
deferred
tax
liability
arises
from
the
initial
recognition
of
an
asset
or
liability
in
a
transaction
that
is
not
a
business
combination
and,
at
the
time
of
the
transaction,
affects
neither
the
accounting
profit
nor
taxable
profit or loss; and
ii)
in
respect
of
taxable
temporary
differences
associated
with
investments
in
subsidiaries,
associates
and
interests
in
joint
ventures,
where
the
timing
of
the
reversal
of
the
temporary
differences
can
be
controlled
and
it
is
probable that the temporary differences will not reverse in the foreseeable future.
Deferred
income
tax
assets
are
recognised
for
all
deductible
temporary
differences,
carry
forward
of
unused
tax
credits
and
unused
tax
losses,
to
the
extent
that
it
is
probable
that
taxable
profit
will
be
available
against
which
the
deductible
temporary differences, carry forward of unused tax credits and unused tax losses can be utilised except:
i)
where
the
deferred
income
tax
asset
relating
to
the
deductible
temporary
difference
arises
from
the
initial
recognition
of
an
asset
or
liability
in
a
transaction
that
is
not
a
business
combination
and,
at
the
time
of
the
transaction, affects neither the accounting profit nor the taxable profit or loss; and
ii)
in
respect
of
deductible
temporary
differences
associated
with
investments
in
subsidiaries,
associates
and
interests
in
joint
ventures,
deferred
tax
assets
are
recognised
only
to
the
extent
that
it
is
probable
that
the
temporary
differences
will
reverse
in
the
foreseeable
future
and
taxable
profit
will
be
available
against
which
the
temporary differences can be utilised.
The
carrying
amount
of
deferred
income
tax
assets
is
reviewed
at
each
reporting
date
and
reduced
to
the
extent
that
it
is
no
longer
probable
that
sufficient
taxable
profit
will
be
available
to
allow
all
or
part
of
the
deferred
income
tax
assets
to
be
utilised.
Unrecognised
deferred
income
tax
assets
are
re-assessed
at
each
reporting
date
and
are
recognised
to
the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.
Deferred
income
tax
assets
and
liabilities
are
measured
at
the
tax
rates
that
are
expected
to
apply
to
the
year
when
an
asset
is
realised
or
the
liability
settled,
based
on
tax
rates
(and tax
laws)
that
have
been
enacted
or
substantively
enacted
at the reporting date.
Deferred
tax
assets
and
deferred
tax
liabilities
are
offset,
if
a
legally
enforceable
right
exists
to
set
off
current
tax
assets
against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Deferred
income
tax
relating
to
items
recognised
directly
in
equity
is
recognised
in
equity
and
not
in
profit
or
loss.
Deferred
tax
items
are
recognised
in
correlation
to
the
underlying
transaction
either
in
profit
or
loss
or
directly
in
equity.
● ANNUAL REPORT 2020 Consolidated financial statements
82
Under
Estonian
and
Latvian
laws,
corporate
profit
for
the
year
is
not
subject
to
income
tax.
Income
tax
is
levied
on
dividends, gifts, donations, entertainment expenses, non-business expenditures and transfer price adjustments.
Income
tax
payable
on
dividends
is
recognised
as
income
tax
expense
and
a
liability
at
the
time
the
dividend
is
declared,
regardless
of
the
period
for
which
the
dividend
is
declared
or
the
period
in
which
the
dividend
is
actually
distributed.
The
obligation
to
pay
income
tax
arises
on
the
10th
day
of
the
month
following
the
distribution
of
the
dividend
in
Estonia
and on the 20th day of the month a following the distribution of the dividend in Latvia.
u. Fair value measurements
The
Group
measures
certain
financial
instruments
such
as
derivatives,
and
non-financial
assets
such
as
investment
property,
at
fair
value
at
the
end
of
each
reporting
period.
Also,
the
fair
values
of
financial
instruments
measured
at
amortised cost are disclosed in the financial statements.
Fair
value
is
the
price
that
would
be
received
to
sell
an
asset
or
paid
to
transfer
a
liability
in
an
orderly
transaction
between
market
participants
at
the
measurement
date.
The
fair
value
measurement
is
based
on
the
presumption
that
the
transaction to sell the asset or transfer the liability takes place either:
•
In the principal market for the asset or liability; or
•
In the absence of a principal market, in the most advantageous market for the asset or liability.
The Group must be able to access the principal or the most advantageous market at the measurement date.
The
fair
value
of
an
asset
or
a
liability
is
measured
using
the
assumptions
that
market
participants
would
use
when
pricing
the asset or liability, assuming that market participants act in their economic best interest.
A
fair
value
measurement
of
a
non-financial
asset
takes
into
account
a
market
participant's
ability
to
generate
economic
benefits
by
using
the
asset
in
its
highest
and
best
use
or
by
selling
it
to
another
market
participant
that
would
use
the
asset in its highest and best use.
The
Group
uses
valuation
techniques
that
are
appropriate
in
the
circumstances
and
for
which
sufficient
data
are
available
to
measure
fair
value,
maximising
the
use
of
relevant
observable
inputs
and
minimising
the
use
of
unobservable
inputs
significant to the fair value measurement as a whole:
•
Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities;
•
Level
2
—
Valuation
techniques
for
which
the
lowest
level
input
that
is
significant
to
the
fair
value
measurement
is
directly or indirectly observable;
•
Level
3
—
Valuation
techniques
for
which
the
lowest
level
input
that
is
significant
to
the
fair
value
measurement
is
unobservable.
For
assets
and
liabilities
that
are
recognised
in
the
financial
statements
on
a
recurring
basis,
the
Group
determines
whether
transfers
have
occurred
between
levels
in
the
hierarchy
by
re-assessing
categorisation
(based
on
the
lowest
level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
A
business
combination
is
accounted
for
by
applying
the
acquisition
method,
unless
it
is
a
combination
involving
entities
or businesses under common control.
Incremental
costs
directly
attributable
to
the
issue
or
redemption
of
units
are
recognised
directly
in
equity
as
a
deduction
from
proceeds
or
part
of
the
acquisition
costs.
Income
tax
relating
to
transaction
costs
of
an
equity
transaction
is
accounted for in accordance with IAS 12.
● ANNUAL REPORT 2020 Consolidated financial statements
83
Applying the acquisition method
The
acquisition
method
is
applied
in
the
acquisition
of
new
subsidiaries
which
qualify
as
a
business,
under
which
the
identifiable
assets
and
liabilities
and
contingent
liabilities
of
these
companies
are
measured
at
fair
value
at
the
acquisition
date.
The
cost
of
the
acquired
company
consists
of
the
fair
value
of
the
paid
consideration
(cash
or
own
shares).
If
the
final
determination
of
the
consideration
is
conditional
on
one
or
several
future
events,
these
are
only
recognised
in
cost
if
the
relevant
event
is
likely
and
the
effect
on
cost
can
be
calculated
reliably.
Subsequent
changes
to
the
fair
value
of
the
contingent
consideration
which
is
deemed
to
be
an
asset
or
liability,
is
recognised
in
accordance
with
IFRS
9
either
in
profit
or
loss
or
as
a
change
in
other
comprehensive
income.
If
the
contingent
consideration
is
classified
as
equity,
it
is
not
re-
measured until it is finally settled within equity.
When
a
transaction
has
not
been
identified
as
a
business
combination,
it
is
accounted
for
as
an
acquisition
of
individual
assets
and
liabilities
where
the
initial
purchase
consideration
is
allocated
to
the
separate
assets
and
liabilities
acquired,
based on the price paid for them.
Assets
are
recognised
in
the
consolidated
statement
of
financial
position
when
it
is
probable
that
future
economic
benefits will flow to the Group and the value of the assets can be measured reliably.
Liabilities
are
recognised
in
the
consolidated
statement
of
financial
position
when
it
is
probable
that
an
outflow
of
resources
will
be
required
to
settle
the
obligation
and
they
can
be
measured
reliably.
On
initial
recognition,
assets
and
liabilities
are
measured
at
cost.
Subsequently,
assets
and
liabilities
are
measured
as
described
for
each
financial
statement
item above.
Business combinations between entities under common control
A business combination is a combination between entities under common control if:
•
the
combining
entities
are
ultimately
controlled
by
the
same
party
(or
parties)
both
before
and
after
the
combination;
•
common control is not transitory (not short-lived).
If
a
business
combination
is
treated
as
a
combination
between
entities
under
common
control,
then
the
transaction
is
accounted
for
under
the
predecessor
values
method.
Under
this
method,
the
acquired
assets
and
liabilities
are
recorded
at their pre-acquisition carrying values and no goodwill is recorded.
3.
Significant accounting judgments, estimates and assumptions
The
preparation
of
the
Group's
consolidated
financial
statements
requires
management
to
make
judgments,
estimates
and
assumptions
that
affect
the
reported
amounts
of
revenues,
expenses,
assets
and
liabilities,
and
the
disclosure
of
contingent
liabilities,
at
the
reporting
date.
However,
uncertainty
about
these
assumptions
and
estimates
could
result
in
outcomes
that
could
require
a
material
adjustment
to
the
carrying
amount
of
the
asset
or
liability
affected
in
the
future.
Judgments
Management
considers
the
following
indicators
to
determine
that
a
Group
entity
is
acting
as
a
principal
in
the
agreement
with the tenants in regards to service charge income:
•
the
entity
is
primarily
responsible
for
fulfilling
the
contract
and
has
the
right
to
terminate,
freeze
or
amend
the
utilities
and
other
services
contracts,
to
enter
into
contracts
with
other
providers
or
to
switch
to
other
supply
types
at any time;
•
the
entity
is
exposed
to
credit
risk
for
the
amount
receivable
from
a
tenant
in
exchange
for
the
other
party’s
goods
or
services;
if
the
tenant
defaults,
the
entity
is
responsible
to
pay
a
supplier
regardless
of
whether
payment
is
collected from the tenant.
● ANNUAL REPORT 2020 Consolidated financial statements
84
When
the
tenants
have
the
right
to
contract
directly
with
the
utility
service
companies
from
their
suppliers
upon
the
prior
written consent of the entities, the Fund is treated as an agent.
When
the
Group
acts
as
a
principal,
service
charge
income
is
recognised
on
a
gross
basis
in
the
consolidated
statement
of
profit
or
loss
and
other
comprehensive
income.
When
the
Group
acts
as
an
agent,
both
expenses
and
income
are
netted
in
the
consolidated
statement
of
profit
or
loss
and
other
comprehensive
income
and
recharge
revenue
is
recognised in the amount of commissions earned.
The
Group
has
acquired
ownership
interests
in
subsidiaries
which
hold
real
estate
properties.
When
the
acquisition
of
a
subsidiary
does
not
represent
“an
integrated
set
of
activities
and
assets”
in
accordance
with
IFRS
3,
the
acquisition
of
the
subsidiary
is
accounted
for
as
an
asset
acquisition,
in
which
the
cost
of
the
acquisition
is
allocated
to
the
assets
and
liabilities
acquired
based
upon
their
relative
fair
values,
and
no
goodwill
and
no
deferred
tax
assets
or
liabilities
resulting
from
the
allocation
of
the
cost
of
acquisition
is
recognised.
The
Group
will
account
for
the
acquisition
as
a
business
combination
where
an
integrated
set
of
activities
is
acquired
in
addition
to
the
properties.
The
Group
has
not
accounted
any
acquisition
as
a
business
combination
during
the
current
or
prior
financial
year.
Please
refer
to
the
note
for
more
information regarding asset acquisitions.
The following recognition criteria are considered as indicators of a business combination:
•
multiple items of land and buildings;
•
existence of ancillary services to tenants (e.g. maintenance, cleaning, security, bookkeeping etc.);
•
existence
of
employees
to
have
processes
in
operation
(including
all
relevant
administration
such
as
invoicing,
cash
collection, provision of management information to the entity’s owners and tenant information);
•
management of the acquired properties is a complex process.
Operating lease contracts – the Group as lessor
Leases
in
which
substantially
all
risks
and
rewards
of
ownership
are
retained
by
the
lessor
are
classified
as
operating
leases.
The
Group
has
determined,
based
on
an
evaluation
of
the
terms
and
conditions
of
the
arrangements
that
it
retains
all
the
significant
risks
and
rewards
of
ownership
of
its
properties
and
so
accounts
for
their
leases
as
operating
leases.
One
of
the
Fund’s
assets,
Coca-Cola
Plaza,
has
only
one
tenant
with
a
long-term
tenancy
agreement
acquired
via
a
sale-
lease
back
transaction.
Based
on
the
terms
and
conditions,
the
lease
arrangement
is
treated
as
an
operating
lease
due
to the following reasons:
•
all significant risks and rewards of the ownership of this property are retained by the Group;
•
the ownership of the property will remain to the Group by the end of the lease term;
•
there
is
no
agreement
with
the
lessee
that
would
allow
the
lessee
to
purchase
the
property
at
a
discount
or
significantly lower amount than the fair value of the property;
•
the
initial
rent
period
agreed
was
for
10
years
with
a
lease
expiration
on
18
March
2023.
The
tenant
has
the
right
to
prolong
their
agreement
once
for
a
5
year-
period
with
by
giving
12
months’
notice.
Therefore,
the
lease
term
does
not comprise the major part of the economic life of the property;
•
there
is
no
agreement
with
the
lessee
that
would
allow
for
the
lessee
to
continue
the
lease
for
a
secondary
period
at a rent that is substantially lower than market rent;
•
at
the
inception
of
the
lease
the
present
value
of
the
minimum
lease
payments
does
not
amount
to
all
of
the
fair
value of the leased property.
Estimates
and assumptions
The
Group
is
subject
to
income
and
capital
gains
taxes
in
numerous
jurisdictions.
Significant
judgment
is
required
in
determining
the
total
provision
for
current
and
deferred
taxes.
There
are
many
transactions
and
calculations
for
which
the
ultimate
tax
determination
and
timing
of
payment
is
uncertain
during
the
ordinary
course
of
business.
In
particular,
the
effective
tax
rate
applicable
on
the
temporary
differences
on
investment
properties
depends
on
the
way
and
timing
the investment property will be disposed of.
● ANNUAL REPORT 2020 Consolidated financial statements
85
The
Group
recognises
liabilities
for
anticipated
tax
provisions
based
on
estimates
of
whether
additional
taxes
will
be
due.
Where
the
final
tax
outcome
of
these
matters
is
different
from
the
amounts
that
were
initially
recorded,
such
differences
will impact the net profit and deferred tax provisions in the period in which the determination is made.
In
2018,
a
new
income
tax
system
entered
into
force
in
Latvia.
The
system
resembles
the
Estonian
one
but
upon
its
application
Latvian
entities
began
to
recognise
deferred
tax
in
their
consolidated
IFRS
financial
statements
differently
from
the
Estonian
approach.
In
accordance
with
the
Latvian
treatment,
deferred
tax
for
investments
in
subsidiaries
is
to
be
recognised
even
if
the
investments
are
located
in
jurisdictions
where
corporate
income
tax
is
to
be
paid
on
the
distribution
of
profit
(Estonia
and
Latvia),
except
to
the
extent
that
the
company
is
able
to
control
the
timing
of
the
reversal
of
the
taxable
temporary
differences
and
it
is
probable
that
the
temporary
differences
will
not
reverse
in
the
foreseeable
future.
In
line
with
the
treatment
used
in
Estonia
until
that
date,
deferred
tax
liabilities
were
not
recognised
in such cases.
The
Estonian
Ministry
of
Finance
asked
the
IFRS
Interpretations
Committee
(IFRIC)
to
express
an
opinion
on
the
correct
interpretation
of
IAS
12
Income
Taxes.
In
June
2020,
IFRIC
communicated
its
opinion
on
the
correct
interpretation
of
IAS 12
Income
Taxes.
IFRIC
concluded
that
paragraph
39
of
IAS
12
requires
an
entity
to
recognise
a
deferred
tax
liability
for all taxable temporary differences associated with investments in subsidiaries, except to the extent that:
a)
the parent is able to control the timing of the reversal of the temporary difference; and
b)
it is probable that the temporary difference will not reverse in the foreseeable future.
The
Fund
have
determined
that
it
can
control
the
timing
of
the
reversal
of
taxable
temporary
differences
in
subsidiaries
due
to
100%
ownership
in
all
subsidiaries.
The
taxable
temporary
difference
in
subsidiaries
are
not
expected
to
reverse
in
the
foreseeable
future
through
a
distribution
of
profits
from
subsidiaries
due
to
the
structure
of
the
Group.
The
Fund
has
granted
sizeable
intercompany
loans
to
subsidiaries
and
expects
to
receive
repayments
of
intercompany
loans
instead
of
distributions
of
profits.
In
the
view
of
the
Group’s
management,
the
Fund
meets
the
criteria
for
deferred
tax
liability
recognition
exemption.
In
the
case
of
investments
in
subsidiaries,
the
Group’s
management
has
decided
to
continue
to
account
for
deferred
tax
liabilities
using
the
policy
applied
to
date.
In
line
with
the
latter,
in
jurisdictions
where
corporate
income
tax
is
to
be
paid
on
the
distribution
of
profit
(as
in
Estonia
and
Latvia),
a
deferred
tax
liability
is
always
zero
because
deferred
tax
liabilities
arising
on
investments
located
in
those
jurisdictions
are
measured
at
the
zero
rate applicable to undistributed profits, as provided in paragraph 52A of IAS 12.
The
maximum
income
tax
liability
which
would
arise
if
all
of
the
available
equity
were
distributed
as
dividends,
is
disclosed
in note
.
Detailed information on the deferred tax asset and liability of the Lithuanian subsidiary is disclosed in note
.
Fair value of investment properties
The
Group
carries
its
investment
properties
at
fair
value,
with
changes
in
fair
value
being
recognised
in
profit
or
loss.
The
Group
engages
independent
valuation
specialists
to
determine
fair
value.
Information
about
valuation
techniques
and
assumptions are disclosed in note
.
4.
Financial risk management
The
risk
management
function
of
the
Fund
is
the
responsibility
of
the
Management
Company
Northern
Horizon
Capital
AS.
The
manager
of
the
Fund
is
responsible
for
identifying
the
Fund’s
market
risk
portfolio,
preparing
proposals
regarding
market
risk
limits,
monitoring
the
limit
utilization
and
producing
overall
risk
analyses
of
market
risk.
The
manager
maintains
a
list
of
all
risk
management
related
instructions,
monitors
their
compliance
with
internationally
recommended
best
practice,
and
initiates
changes
and
improvements
when
needed.
The
manager
assessed
at
the
end
of
the
financial
year that the Fund is currently in compliance with the intended risk management framework.
● ANNUAL REPORT 2020 Consolidated financial statements
86
a. Credit risk
The
Group
has
procedures
in
place
to
ensure
that
rental
agreements
are
concluded
with
customers
with
an
appropriate
credit
history
and
acceptable
credit
exposure
limits
are
not
exceeded.
Credit
risk
related
to
tenants
is
also
reduced
by
collecting
rental
deposits
and
taking
rental
guarantees.
The
Group
limits
its
exposure
to
credit
risk
from
trade
and
other
receivables
by
establishing
a
credit
term
of
30
days
or
less.
An
amount
is
considered
to
be
in
default
if
it
is
more
than
90
days past due.
The
maximum
exposure
to
credit
risk
is
represented
by
the
carrying
amount
of
each
financial
asset,
including
derivative
financial instruments, if any, in the statement of financial position.
There
are
no
significant
concentrations
of
credit
risk
within
the
Group.
As
at
31
December
2020,
the
total
credit
risk
exposure was as follows:
Cash and cash equivalents (note
)
Trade and other receivables (note
)
Derivative financial instruments (note
)
Total exposure to credit risk
At the end of 2020, the Group’s provisions for bad debts amounted to EUR 589 thousand (2019: EUR 399 thousand).
The
Fund
is
aiming
to
diversify
its
investments,
and
counterparties
with
low
credit
risk
are
preferred.
Major
acquisition
and
project
finance
credit
risks
are
minimized
by
sharing
these
risks
with
banks
and
insurance
companies.
Credit
risks
related
to
the
placement
of
liquid
funds
and
to
trading
in
financial
instruments
(counterparty
credit
risks)
are
minimized
by
making
agreements
only
with
such
domestic
and
international
banks
and
financial
institutions
which
have
a
high
credit rating.
The
Group’s
interest
rate
risk
is
related
to
interest-bearing
borrowings.
Fluctuations
in
interest
rates
affect
interest
expense
(note
b
).
The
Group’s
exposure
to
interest
rate
cash
flow
risk
is
mitigated
by
the
use
of
interest
rate
swaps
and
interest
rate caps.
At
31
December
2020,
after
taking
into
account
the
effect
of
interest
rate
swaps,
83%
of
the
Group’s
borrowings
had
a
fixed
rate
of
interest
(31
December
2019:
83%).
The
Group’s
management
is
of
an
opinion
that
an
83%
hedge
ratio
is
fully
sufficient
in
the
current
interest
environment.
Development
of
interest
rates
is
closely
monitored
and
additional
hedges
can
be
concluded any time if the interest environment changes.
The
following
table
demonstrates
the
sensitivity
of
the
Group’s
profit
before
tax
and
equity
(through
the
impact
on
cash
flow hedge reserve) to a reasonably possible change in interest rates, with all other variables held constant):
Effect on
profit before tax
Effect on
profit before tax
Increase in basis points, +50
Decrease in basis points, -50
The
Group
uses
interest
rate
swaps
to
fix
the
interest
rate
of
long-term
loans
with
floating
interest
rates.
This
converts
floating
rate
liabilities
to
fixed
rate
liabilities.
In
order
to
achieve
this,
the
Fund
either
takes
fixed
rate
loans
or
swaps
● ANNUAL REPORT 2020 Consolidated financial statements
87
floating
interest
rates
for
fixed
using
interest
rate
derivatives.
As
1)
the
Fund
seeks
to
obtain
financing
on
the
best
terms
and
conditions
and
2)
in
the
current
market,
fixed
rate
loans
are
often
more
expensive,
the
Fund
hedges
interest
rate
exposure by using derivative instruments such as interest rate swaps, forwards and options.
The Group acquire swaps purely for cash flow hedge purposes and not for trading.
The
Fund’s
objectives
are
to
maintain
a
balance
between
the
continuity
of
funding
and
flexibility
through
the
use
of
bank
loans.
For
more
comprehensive
information
about
managing
liquidity
risk
please
refer
to
the
risk
management
section
in management review.
The
table
below
summarises
the
contractual
maturity
profile
of
the
Group’s
financial
liabilities
at
31
December
2020.
The
amounts are gross and undiscounted, and include contractual interest payments.
Interest bearing loans and
borrowings (note
)
Derivative financial instruments
(note
)
Trade and other payables (note
)
Total current and non-current
The
Fund’s
primary
currency
is
the
euro.
In
2020
and
2019
the
Group
held
no
significant
assets
or
liabilities
and
was
not
committed to undertake significant transactions in any currency other than the euro from this date.
5.
Capital management
The
Group
seeks
to
maintain
a
strong
capital
base
while
generating
a
solid
return
over
the
long-term
to
unitholders
through improving the capital structure.
The
capital
structure
of
the
Group
consists
of
borrowings
(as
detailed
in
note
)
and
equity.
The
capital
structure
of
the
Group is reviewed regularly based on the cost of capital and the risks associated with each class of capital.
Management
monitors
capital
using
the
loan-to-value
ratio,
which
is
borrowings
divided
by
property
value.
The
Group’s
target
loan
to
value
ratio
is
50%.
As
at
31
December
2020,
the
Group
complied
with
all
externally
imposed
capital
requirements.
Interest bearing loans and borrowings (excluding lease liabilities)
Investment property under construction
Gearing ratio (loan-to-value)
● ANNUAL REPORT 2020 Consolidated financial statements
88
6.
Operating segments
The Group’s reportable segments are as follows:
•
Retail
segment
–
includes
Europa
Shopping
Centre
(Lithuania),
Domus
Pro
Retail
Park
(Lithuania),
SKY
Shopping
Centre
(Latvia),
Pirita
Shopping
Centre
(Estonia),
Postimaja
Shopping
centre
(Estonia),
and
Galerija
Centrs
Shopping
Centre (Latvia) investment properties.
•
Office
segment
–
includes
Lincona
Office
Complex
(Estonia),
G4S
Headquarters
(Estonia),
Upmalas
Biroji
(Latvia),
Duetto
I
(Lithuania),
Duetto
II
(Lithuania),
Domus
Pro
stage
III
(Lithuania),
Vainodes
I
(Latvia),
LNK
Centre
(Latvia),
Meraki (Lithuania) and North Star (Lithuania) investment properties.
•
Leisure segment – includes Coca-Cola Plaza (Estonia) investment property.
For
management
purposes,
the
Group
is
organized
into
three
business
segments
based
on
the
type
of
investment
property.
Management
monitors
the
operating
results
of
business
segments
separately
for
the
purpose
of
making
decisions
about
resources
to
be
allocated
and
assessing
performance.
Segment
performance
is
evaluated
based
on
net
rental income and net profit/loss.
Information
related
to
each
reportable
segment
is
set
out
below.
Segment
net
rental
income
is
used
to
measure
performance
because
management
believes
that
this
information
is
the
most
relevant
in
evaluating
the
results
of
the
respective segments relative to other entities that operate in the same industries.
Operating segments – 31 December 2020
Segment net rental income
Net loss from fair value adjustment
Income tax income (expense)
Segment net (loss) profit
Investment property under construction
3
1.
External revenue includes rental income and service charge income. The segments do not have inter-segment revenue.
2.
Interest expenses include only external bank loan interest expenses.
3.
Additions
to
non-current
assets
consist
of
subsequent
expenditure
on
investment
property
(EUR
2,024
thousand),
acquisition
of
land
(EUR
90
thousand)
and
additions
to
investment
property
under
construction
(EUR 4,181
thousand).
Please
refer
to
notes
and
for
more
information.
● ANNUAL REPORT 2020 Consolidated financial statements
89
Operating segments – 31 December 2019
Segment net rental income
Net gain (loss) from fair value adjustment
Investment property under construction
3
1.
External revenue includes rental income and service charge income. The segments do not have inter-segment revenue.
2.
Interest expenses include only external bank loan interest expenses.
3.
Additions
to
non-current
assets
consist
of
acquisition
of
investment
property
(EUR
114,133
thousand),
subsequent
expenditure
on
investment
property
(EUR
651
thousand),
additions
to
right-of-use
assets
(EUR
321
thousand)
and
additions
to
investment
property
under
construction
(EUR 746 thousand). Please refer to notes
and
for more information.
● ANNUAL REPORT 2020 Consolidated financial statements
90
Investment properties as at 31 December 2020*
Segment net rental income for 2020*
Segment net profit (loss) for 2020*
*As a percentage of the total for all reportable segments
Investment properties as at 31 December 2019*
Segment net rental income for 2019*
Segment net profit for 2019*
● ANNUAL REPORT 2020 Consolidated financial statements
91
Reconciliation of information on reportable segments to IFRS measures
Operating segments – 31 December 2020
Total reportable
segments
1.
Segment
net
loss
for
2020
does
not
include
Fund
management
fee
(EUR
1,715
thousand),
bond
interest
expenses
(EUR
2,125
thousand),
bond
arrangement
fee
amortisation
(EUR
69
thousand),
Fund
custodian
fees
(EUR
71
thousand),
and
other
Fund-level
administrative
expenses
(EUR 670
thousand).
2.
Segment assets do not include cash, which is held at the Fund level (EUR 2,568 thousand).
3.
Segment
liabilities
do
not
include
liabilities
related
to
a
bond
issue
at
the
Fund
level
(EUR
49,839
thousand),
accrued
bond
coupon
expenses
(EUR 313 thousand), management fee payable (EUR 434 thousand), and other short-term payables (EUR 104 thousand) at the Fund level.
Operating segments – 31 December 2019
Total reportable
segments
1.
Segment
net
profit
for
2019
does
not
include
Fund
management
fee
(EUR
1,679
thousand),
bond
interest
expenses
(EUR
1,967
thousand),
bond
arrangement
fee
amortisation
(EUR
65
thousand),
Fund
performance
fee
accrual
(EUR
379
thousand),
Fund
custodian
fees
(EUR
65
thousand),
and other Fund-level administrative expenses (EUR 637 thousand).
2.
Segment assets do not include cash, which is held at the Fund level (EUR 1,295 thousand).
3.
Segment
liabilities
do
not
include
liabilities
related
to
a
bond
issue
at
the
Fund
level
(EUR
49,770
thousand),
accrued
bond
coupon
expenses
(EUR 313 thousand), management fee payable (EUR 474 thousand), and other short-term payables (EUR 655 thousand) at the Fund level.
Geographic information
Investment property value
1
1.
Investment property fair value including investment property under construction.
● ANNUAL REPORT 2020 Consolidated financial statements
92
Major tenant
No
single
tenant
accounted
for
more
than
10%
of
the
Group’s
total
revenue.
Rental
income
from
one
tenant
in
the
office
segment represented EUR 1,199 thousand of the Group’s total rental income for 2020 (EUR 1,200 thousand for 2019).
7.
Cost of rental activities
Property management expenses
Sales and marketing expenses
Allowance (reversal of allowance) for bad debts
Total cost of rental activities
Part
of
the
total
cost
of
rental
activities
(mainly
utilities
and
repair
and
maintenance
expenses)
was
recharged
to
tenants:
EUR 4,990 thousand during 2020 (EUR 4,525 thousand during 2019).
8.
Administrative expenses
Other administrative expenses
Total administrative expenses
The
Management
Company
is
entitled
to
receive
an
annual
management
fee
which
is
calculated
quarterly,
based
on
the
3-month average market capitalisation of the Fund.
The
Management
Company
is
entitled
to
calculate
the
performance
fee
based
on
the
annual
adjusted
funds
from
operations
(AFFO)
of
the
Fund.
If
AFFO
divided
by
paid
in
capital
during
the
year
exceeds
8%
per
annum,
the
Management
Company
is
entitled
to
a
performance
fee
in
the
amount
of
20%
of
the
amount
exceeding
8%.
The
performance
fee
based
on
this
formula
is
calculated
starting
from
1
January
2017.
The
performance
fee
first
becomes
payable in the fifth year of the Fund (i.e. 2020). Transactions with related parties are disclosed in note
.
● ANNUAL REPORT 2020 Consolidated financial statements
93
9.
Financial expenses
Interest on external loans and borrowings
Loan arrangement fee amortisation
Interest on lease liabilities
The
calculation
of
earnings
per
unit
is
based
on
the
following
profit
attributable
to
unitholders
and
weighted-average
number of units outstanding.
Profit or loss attributable to the unitholders of the Fund:
(Loss) profit for the period, attributed to the unitholders of the Fund
(Loss) profit for the period, attributed to the unitholders of the Fund
Weighted-average number of units:
Issued units at 1 January
Effect of units issued in April 2019
1
Effect of units issued in May 2019
2
Effect of units issued in July 2019
3
Effect of units issued in October 2019
4
Effect of units issued in October 2020
5
Weighted-average number of units
1.
In April 2019, the Fund issued
18,839,239 units through two private placements, which were part of the BH Galerija Centrs SIA acquisition deal.
2.
In May 2019, the Fund issued
627,974 units through a private placement, which was part of the BH Galerija Centrs SIA acquisition deal.
3.
In July 2019, the Fund issued 2,951,158 units through a private placement, which was part of the BH Galerija Centrs SIA acquisition deal.
4.
In October 2019, the Fund issued 12,472,323 units through two private placements, which were part of the North Star acquisition deal.
5.
In October 2020, the Fund issued 6,247,904 units through a secondary public offering.
6.
The number of units excludes 255,969 units acquired by the Fund and cancelled in February 2019 as part of the unit buy-back program.
Basic and diluted earnings per unit:
Basic and diluted earnings per unit*
*There are no potentially dilutive instruments issued by the Group, therefore, the basic and diluted earnings per unit are the same.
Real
estate
revenues,
or
capital
gains
derived
from
real
estate
are
subject
to
taxes
by
assessment
in
the
countries
where
the
real
estate
is
situated.
The
Fund’s
subsidiaries
in
Lithuania
depreciate
their
historical
property
cost
in
accordance
with
applicable tax regulations. Depreciation is deducted from taxable profits in determining current taxable income.
The Group’s consolidated effective tax rate in respect of continuing operations for 2020 was 0.0% (2019: 4.6%).
● ANNUAL REPORT 2020 Consolidated financial statements
94
The major components of income tax for the periods ended 31 December 2020 and 2019 were as follows:
Consolidated statement of profit or loss
Current income tax for the period
Deferred tax for the period
Income tax expense reported in profit or loss
Consolidated statement of other comprehensive income
Deferred income tax related to items charged or credited to equity:
Revaluation of derivative instruments to fair value
Income tax reported in other comprehensive income
Deferred
tax
is
only
applicable
for
the
Fund’s
subsidiaries
in
Lithuania.
Deferred
income
tax
as
at
31
December
2020
and
2019 relates to the following:
Consolidated
statement of financial
position
Recognised in profit or
loss
Tax losses brought forward
Revaluation of derivative instruments to fair value
Deferred income tax assets
Deferred income tax liabilities
Deferred income tax income/(expenses)
Deferred tax liabilities net
Reflected in the statement of financial position as follows:
Deferred tax liabilities net
The reconciliation of effective tax rate for the years ended 31 December 2020 and 2019 is as follows:
(Loss) profit before income tax
Effect of tax rates in foreign jurisdictions
Tax effect of non-deductible expenses
Change in unrecognised deferred tax
Total income tax expenses
● ANNUAL REPORT 2020 Consolidated financial statements
95
As
at
31
December
2020,
the
Group
had
tax
losses
of
EUR
2,146
thousand
that
are
available
indefinitely
for
offset
against
future taxable profits of the Lithuanian companies in which the losses arose.
Summary of taxation rates by country is presented below:
1.
20% income tax rate applies to gross distributed profits or 25% rate applies to net distributed profits.
2.
20% income tax rate applies to gross distributed profits or 25% rate applies to net distributed profits.
The
maximum
income
tax
liability
which
would
arise
if
all
of
the
available
retained
earnings
in
subsidiaries
in
Estonia
and
Latvia were distributed as dividends to the Fund, is EUR 5,435 thousand.
The
fair
value
of
the
investment
properties
is
approved
by
the
Management
Board
of
the
Management
Company,
based
on
independent
appraisals.
Independent
appraisals
are
performed
in
accordance
with
the
Practice
Statements
and
Relevant
Guidance
Notes
of
the
RICS
Appraisal
and
Valuation
approved
by
both
the
International
Valuation
Standards
Committee
(IVSC)
and
by
the
European
Group
of
Valuers’
Associations
(TEGoVA).
In
accordance
with
that
basis,
the
market
value
is
an
estimated
amount
for
which
a
property
should
exchange
on
the
date
of
valuation
between
a
willing
buyer
and
a
willing
seller
in
an
arm’s
length
transaction
after
proper
marketing
wherein
the
parties
had
each
acted
knowledgeably,
prudently
and
without
compulsion.
The
appraisers
derive
the
fair
value
by
applying
the
methodology
and
valuation
guidelines
as
set
out
by
the
Royal
Institution
of
Chartered
Surveyors
in
the
United Kingdom
and
in
accordance with IAS 40.
As at 31 December 2020, new external valuations were performed by independent property valuator Newsec.
Valuations
are
prepared
using
the
discounted
cash
flow
model.
Under
the
discounted
cash
flow
model,
the
value
of
the
property
is
estimated
by
compiling
the
net
present
values
of
future
cash
flows,
which
are
obtained
by
applying
a
discount
rate.
This
method
first
requires
an
estimate
of
potential
gross
income
to
which
deductions
for
vacancy
and
collection
losses
are
applied.
The
resulting
net
income
is
then
capitalized
or
discounted
at
a
rate
that
is
commensurate
with
the
risk inherent in the ownership of the property involved to produce a value estimate.
Fair
value
does
not
necessarily
represent
the
liquidation
value
of
the
properties
which
would
be
dependent
upon
the
price negotiated at the time net of selling costs. Fair value is largely based on estimates which are inherently subjective.
The
yield
requirement
(discount
factor)
is
determined
for
each
property.
Investment
property
comprises
buildings,
which
are rented out under lease contracts.
● ANNUAL REPORT 2020 Consolidated financial statements
96
The
following
table
shows
an
analysis
of
the
fair
values
of
investment
properties
recognised
in
the
statement
of
financial
position by their level in the fair value hierarchy as at 31 December 2020:
Total gain or (loss) for 2020
recognised in profit or loss
Latvia - Galerija Centrs (retail)
Lithuania – Europa (retail)
Estonia – Postimaja (retail)
Lithuania – Domus Pro (retail/office)
Latvia – Upmalas Biroji (office)
Latvia – Vainodes I (office)
Lithuania – North Star (office)
Lithuania – Duetto II (office)
Lithuania – Duetto I (office)
Estonia – Lincona (office)
Latvia – LNK Centre (office)
Estonia – Coca-Cola Plaza (leisure)
Estonia – Pirita (retail)
There
were
no
transfers
between
levels
during
the
years.
Gains
and
losses
recorded
in
profit
or
loss
for
fair
value
measurements
categorised
within
Level
3
of
the
fair
value
hierarchy
amounted
to
a
net
loss
of
EUR
24,171
thousand
as
at
31
December
2020
(2019:
a
net
loss
of
EUR
1,985
thousand)
and
are
presented
in
the
consolidated
statement
of
profit
or loss and other comprehensive income on the line ‘Valuation losses on investment properties’.
Valuation techniques used to derive Level 3 fair values
The
values
of
the
properties
are
based
on
the
valuation
of
investment
properties
performed
by
Newsec
as
at
31
December
2020 increased by right-of-use assets.
Development and refurbishment expenditure
Transfer to investment property under construction
Net revaluation loss on investment property
Initial recognition of right-of-use assets at 1 January (IFRS 16)
Additions to right-of-use assets (new leases)
Net revaluation loss on right-of-use assets
Closing balance excluding right-of-use assets
● ANNUAL REPORT 2020 Consolidated financial statements
97
The table below presents the following for each investment property:
-
A description of the valuation techniques applied;
-
The inputs used in the fair value measurement;
-
Quantitative
information about the significant unobservable inputs used in the fair value measurement.
As of 31 December 2020:
Europa Shopping centre, Vilnius (Lithuania)
Net leasable area (NLA) – 16,982
sq. m
Year of construction/renovation – 2004
Domus Pro, Vilnius (Lithuania)
Net leasable area (NLA) – 16,057
sq. m
Segment – Retail/Office
Year of construction/renovation – 2013
Lincona Office Complex, Tallinn (Estonia)
Net leasable area (NLA) – 10,745
sq. m
Segment – Office
Year of construction/renovation – 2002 / 2008
Coca-Cola Plaza, Tallinn (Estonia)
Net leasable area (NLA) – 8,664
sq. m
Segment – Leisure
Year of construction/renovation – 1999
G4S Headquarters, Tallinn (Estonia)*
Net leasable area (NLA) – 8,991
sq. m
Segment – Office
Year of construction/renovation – 2013
SKY Shopping Centre, Riga (Latvia)
Net leasable area (NLA) – 3,254
sq. m
Segment – Retail
Year of construction/renovation – 2000 / 2010
Upmalas Biroji, Riga (Latvia)
Net leasable area (NLA) – 10,459
sq. m
Segment – Office
Year of construction/renovation – 2008
● ANNUAL REPORT 2020 Consolidated financial statements
98
Pirita Shopping Centre, Tallinn (Estonia)
Net leasable area (NLA) – 5,460
sq. m
Year of construction/renovation – 2016
Duetto I, Vilnius (Lithuania)
Net leasable area (NLA) – 8,384 sq. m
Year of construction/renovation – 2017
Duetto II, Vilnius (Lithuania)
Net leasable area (NLA) – 8,515 sq. m
Year of construction/renovation – 2018
Vainodes I, Riga (Latvia)*
Net leasable area (NLA) – 8,052 sq. m
Year of construction/renovation – 2014
Postimaja, Tallinn (Estonia)*
Net leasable area (NLA) – 9,208 sq. m
Year of construction/renovation – 1980
LNK Centre, Riga (Latvia)
Net leasable area (NLA) – 7,452 sq. m
Segment – Office
Year of construction/renovation – 2006 / 2014
Galerija Centrs, Riga (Latvia)
Net leasable area (NLA) – 20,022 sq. m
Year of construction/renovation – 1939 / 2006
North Star, Vilnius (Lithuania)
Net leasable area (NLA) – 10,550 sq. m
Year of construction/renovation – 2009
*Postimaja,
G4S
and
Vainodes
I
property
valuations
also
include
building
expansion
rights.
The
market
value
of
the
additional
building
rights
is
EUR 4.4
million for Postimaja, EUR 0.1 million for G4S and EUR 2.7 million for Vainodes I.
● ANNUAL REPORT 2020 Consolidated financial statements
99
As of 31 December 2019:
Europa Shopping centre, Vilnius (Lithuania)
Net leasable area (NLA) – 17,426
sq. m
Year of construction/renovation – 2004
Domus Pro, Vilnius (Lithuania)
Net leasable area (NLA) – 16,057
sq. m
Segment – Retail/Office
Year of construction/renovation – 2013
Lincona Office Complex, Tallinn (Estonia)
Net leasable area (NLA) – 10,865
sq. m
Segment – Office
Year of construction/renovation – 2002 / 2008
Coca-Cola Plaza , Tallinn (Estonia)
Net leasable area (NLA) – 8,664
sq. m
Segment – Leisure
Year of construction/renovation – 1999
G4S Headquarters, Tallinn (Estonia)*
Net leasable area (NLA) – 9,179
sq. m
Segment – Office
Year of construction/renovation – 2013
SKY Shopping Centre, Riga (Latvia)
Net leasable area (NLA) – 3,254
sq. m
Segment – Retail
Year of construction/renovation – 2000 / 2010
Upmalas Biroji, Riga (Latvia)
Net leasable area (NLA) – 10,458
sq. m
Segment – Office
Year of construction/renovation – 2008
Pirita Shopping Centre, Tallinn (Estonia)
Net leasable area (NLA) – 5,460
sq. m
Year of construction/renovation – 2016
● ANNUAL REPORT 2020 Consolidated financial statements
100
Duetto I, Vilnius (Lithuania)
Net leasable area (NLA) – 8,498 sq. m
Year of construction/renovation – 2017
Duetto II, Vilnius (Lithuania)
Net leasable area (NLA) – 8,515 sq. m
Year of construction/renovation – 2018
Vainodes I, Riga (Latvia)*
Net leasable area (NLA) – 8,052 sq. m
Year of construction/renovation – 2014
Postimaja, Tallinn (Estonia)*
Net leasable area (NLA) – 9,145 sq. m
Year of construction/renovation – 1980
LNK Centre, Riga (Latvia)
Net leasable area (NLA) – 7,453 sq. m
Segment – Office
Year of construction/renovation – 2006 / 2014
Galerija Centrs, Riga (Latvia)
Net leasable area (NLA) – 19,945 sq. m
Year of construction/renovation – 1939 / 2006
North Star, Vilnius (Lithuania)
Net leasable area (NLA) – 10,562 sq. m
Year of construction/renovation – 2009
*Postimaja,
G4S
and
Vainodes
I
property
valuations
also
include
building
expansion
rights.
The
market
value
of
the
additional
building
rights
is
EUR 5.4
million for Postimaja, EUR 0.4 million for G4S and EUR 2.8 million for Vainodes I.
● ANNUAL REPORT 2020 Consolidated financial statements
101
The
table
below
sets
out
information
about
significant
unobservable
inputs
used
at
31
December
2020
in
measuring
investment properties categorised to Level 3 in the fair value hierarchy.
Significant
unobservable
input
Fair value measurement sensitivity to
unobservable inputs
2020: 6.0% - 8.0%
2019: 6.0% - 8.0%
An
increase
in
exit
yield
in
isolation
would
result
in a lower value of Investment property.
2020: 7.4% - 9.9%
2019: 7.4% - 9.3%
An
increase
in
discount
rate
in
isolation
would
result in a lower value of Investment property.
2020: 0.0% - 3.1%
2019: 0.0% - 3.0%
An
increase
in
rental
growth
in
isolation
would
result in a higher value of Investment property.
2020: 1.0% - 5.0%
2019: 1.0% - 5.0%
An
increase
in
long-term
vacancy
rate
in
isolation
would
result
in
a
lower
value
of
Investment property.
Sensitivity
analysis
of
investment
properties
portfolio
as
at
31
December
2020
based
on
possible
changes
in
exit
yield
and discount rate (WACC) are provided in the table below:
Movement in discount rate
Descriptions and definitions
The
table
above
includes
the
following
descriptions
and
definitions
relating
to
valuation
techniques
and
key
unobservable
inputs made in determining the fair values.
Discounted cash flows (DCF)
Under
the
DCF
method,
a
property’s
fair
value
is
estimated
using
explicit
assumptions
about
the
benefits
and
liabilities
of
ownership
over
the
asset’s
life
including
an
exit
or
terminal
value.
This
involves
the
projection
of
a
series
of
cash
flows
and
applying
to
this
an
appropriate,
market-derived
discount
rate
to
establish
the
present
value
of
the
income
stream.
The
duration
of
the
cash
flow
and
the
specific
timing
of
inflows
and
outflows
are
determined
by
events
such
as
rent
reviews, lease renewal and related lease up periods, re-letting, redevelopment, or refurbishment.
Rental growth
The estimated average increase in rent based on both market estimations and contractual indexations.
Long-term vacancy rate
Long-term
vacancy
rate
is
determined
based
on
the
percentage
of
estimated
vacant
space
divided
by
the
total
lettable
area.
● ANNUAL REPORT 2020 Consolidated financial statements
102
Discount rate
Rate used to discount the net cash flows generated from rental activities during the period of analysis.
Exit yield
A
rate
used
to
estimate
the
resale
value
of
a
property
at
the
end
of
the
holding
period.
The
expected
net
operating
income
per
year
is
divided
by
the
terminal
cap
rate
to
get
the
terminal
value.
The
exit
yield
is
calculated
according
to
the
growth rate of the stabilized net operating income or based on forecast.
For
all
investment
property
that
is
measured
at
fair
value,
the
current
use
of
the
property
is
considered
the
highest
and
best use.
13.
Investment property under construction
On
16
May
2018,
the
Fund
completed
the
acquisition
of
land
next
to
the
Domus
Pro
retail
park.
In
December
2019,
the
Group
started
construction
and
development
works
to
build
an
office
on
the
acquired
land
plot.
On
6
February
2020,
the
Group
signed
a
construction
contract
for
the
Meraki
development
project
in
Vilnius,
Lithuania.
The
land
plot
was
initially
recognised
as
an
investment
property,
but
was
reclassified
to
investment
property
under
construction
at
the
beginning of construction.
Transfer from investment property
As
of
31
December
2020,
the
investment
property
under
construction
was
valued
by
the
independent
external
valuator
Newsec.
The
following
table
shows
an
analysis
of
the
fair
value
of
investment
property
under
construction
recognised
in
the
statement of financial position by their level in the fair value hierarchy as at 31 December 2020:
Total gain or (loss) for 2020
recognised in profit or loss
Lithuania – Meraki (land)
There
were
no
transfers
between
levels
during
the
years.
Gains
and
losses
recorded
in
profit
or
loss
for
the
fair
value
measurement
categorised
within
Level
3
of
the
fair
value
hierarchy
amounted
to
a
net
loss
of
EUR
1,074
thousand
as
at
31
December
2020
(2019:
a
net
loss
of
EUR
79
thousand)
and
are
presented
in
the
consolidated
statement
of
profit
or
loss and other comprehensive income on the line ‘Valuation losses on investment properties’.
Valuation techniques used to derive Level 3 fair values
The
value
of
the
investment
property
under
construction
is
based
on
the
valuation
of
investment
properties
performed
by
Newsec
as
at
31
December
2020
increased
by
capitalised
costs
(EUR
54
thousand)
that
were
not
considered
during
valuation.
● ANNUAL REPORT 2020 Consolidated financial statements
103
As of 31 December 2020:
Meraki, Vilnius (Lithuania)
Net leasable area (NLA) – 15,621 sq. m
Year of construction/renovation – 2021
As of 31 December 2019:
Meraki, Vilnius (Lithuania)
Net leasable area (NLA) – 15,621 sq. m
Year of construction/renovation – 2021
Sensitivity
analysis
of
investment
property
under
construction
as
at
31
December
2020
based
on
possible
changes
in
exit
yield and discount rate (WACC) are provided in the table below:
Movement in discount rate
14.
Trade and other receivables
Less impairment allowance for doubtful receivables
Other accounts receivable
Trade receivables are non-interest bearing and are generally on 30-day terms.
As
at
31
December
2020,
trade
receivables
at
a
nominal
value
of
EUR
589
thousand
were
fully
impaired
(EUR
399
thousand as at 31 December 2019).
● ANNUAL REPORT 2020 Consolidated financial statements
104
Movements in the impairment allowance for doubtful receivables were as follows:
Acquisitions of subsidiaries
Reversal of allowances recognised in previous periods
The ageing analysis of trade receivables not impaired is as follows (at the end of the period):
Past due but not impaired
Neither past due
nor impaired
Other
current
assets
comprise
of
prepaid
expenses
related
to
future
investment
property
acquisitions
and
development
projects in Lithuania, Latvia and Estonia.
16.
Cash and cash equivalents
Cash at banks and on hand
As
at
31
December
2020,
the
Group
had
to
keep
at
least
EUR
350
thousand
(2019:
EUR
350
thousand)
of
cash
in
its
bank
accounts due to certain restrictions in bank loan agreements.
The
units
are
currently
dual-listed
on the
Fund
List
of
the
Nasdaq
Tallinn
Stock
Exchange
and
the
Nasdaq
Stockholm
Alternative
Investment
Funds
market.
As
at
31
December
2020,
the
total
number
of
the
Fund’s
units
was
119,635,429
(as
at 31 December 2019: 113,387,525). Units issued are presented in the table below:
Units issued in October 2020
Total change during the period
● ANNUAL REPORT 2020 Consolidated financial statements
105
Incremental
costs
directly
attributable
to
the
issue
of
units
in
the
amount
of
EUR
90
thousand
(2019:
EUR
1,278
thousand)
were recognised as a deduction from paid in capital.
A
unit
represents
the
investor’s
share
in
the
assets
of
the
Fund.
The
Fund
has
one
class
of
units.
The
investors
have
the
following rights deriving from their ownership of units:
-
to own a share of the Fund’s assets corresponding to the number of units owned by the investor;
-
to
receive,
when
payments
are
made
a
share
of
the
net
income
of
the
Fund
in
proportion
to
the
number
of
units
owned by the investor (pursuant to the Fund Rules);
-
to call a general meeting in the cases prescribed in the Fund Rules and the law;
-
to
participate
and
vote
in
a
general
meeting
pursuant
to
the
number
of
votes
arising
from
units
belonging
to
the
investor
and
the
number
of
votes
arising
from
units
which
have
been
issued
and
not
redeemed
as
at
ten
days before the general meeting is held.
Subsidiaries did not hold any units of the Fund as at 31 December 2020 and 31 December 2019.
The Fund did not hold its own units as at 31 December 2020 and 31 December 2019.
17b. Cash flow hedge reserve
This
reserve
represents
the
fair
value
of
the
effective
part
of
the
derivative
financial
instruments
(interest
rate
swaps),
used
by
the
Fund
to
hedge
the
cash
flows
from
interest
rate
risk
in
the
period
ended
on
31
December
2020
and
31
December 2019.
Please refer to note 23 for more information.
Balance at the beginning of the year
Movement in fair value of existing hedges
Movement in deferred income tax (note
)
Net variation during the period
Balance at the end of the period
17c. Dividends (distributions)
Declared during the period
On 13 February 2019, the Fund declared a cash distribution of EUR 2,119 thousand (EUR 0.027 per unit).
On 17 May 2019, the Fund declared a cash distribution of EUR 2,449 thousand (EUR 0.025 per unit).
On 2 August 2019, the Fund declared a cash distribution of EUR 2,624 thousand (EUR 0.026 per unit).
On 18 October 2019, the Fund declared a cash distribution of EUR 3,061 thousand (EUR 0.027 per unit).
On 31 January 2020, the Fund declared a cash distribution of EUR 3,175 thousand (EUR 0.028 per unit).
On 24 April 2020, the Fund declared a cash distribution of EUR 1,701 thousand (EUR 0.015 per unit).
On 24 July 2020, the Fund declared a cash distribution of EUR 1,701 thousand (EUR 0.015 per unit).
On 20 October 2020, the Fund declared a cash distribution of EUR 3,111 thousand (EUR 0.026 per unit).
On 4 February 2021, the Fund declared a cash distribution of EUR 1,316 thousand (EUR 0.011 per unit).
● ANNUAL REPORT 2020 Consolidated financial statements
106
18.
Interest bearing loans and borrowings
Less current portion of bank loans and bonds
Less current portion of lease liabilities
Current portion of non-current bank loans and bonds
Current portion of lease liabilities
Financial covenants for bank loans
As
of
31
December
2020,
the
Fund
was
in
compliance
with
all
special
conditions
and
covenants
set
under
the
bank
loan
agreements
except
for
ISCR
ratio
of
the
Europa
property
(carrying
amount
–
EUR
20.9
million)
which
was
below
the
required
minimum
level
of
4.00
for
the
year
2020.
The
Fund
received
a
formal
waiver
from
the
lender
for
the
mentioned
covenant
breach.
The
waiver
is
valid
until
the
end
of
Q3
2021.
The
covenant
breach
will
not
be
construed
as
a
loan
default
until end of Q4 2021. The Management is monitoring situation pro-actively with the bank to ensure timely measures.
● ANNUAL REPORT 2020 Consolidated financial statements
107
Reconciliation of movements of liabilities to cash flow arising from financing
Changes
from
financing
cash flows
Interest bearing loans and
borrowings (excluding
lease liabilities)
Derivative financial
instruments
Accrued financial expenses
Total liabilities from
financing activities
Total equity related
changes
1.
During 2020, the Fund’s interest expenses amounted to EUR 5,347 thousand. Please refer to note
for more information.
2.
In 2020, the Fund earned a net loss of EUR 13,541 thousand. Please refer to note
for more information.
1 January
2019
(restated)
1
Changes
from
financing
cash flows
Interest bearing loans and
borrowings (excluding
lease liabilities)
Derivative financial
instruments
Accrued financial expenses
Total liabilities from
financing activities
Total equity related
changes
1.
In 2019, the Group adopted IFRS 16 Leases, effective from 1 January 2019. As a result, the comparative figures were adjusted.
2.
As
part
of
BH
Galerija
Centrs
SIA
acquisition,
the
Group
acquired
a
bank
loan
of
EUR
35,813
thousand
which
was
refinanced
during
2019.
Please refer to note
for more information.
3.
During 2019, the Fund’s interest expenses amounted to EUR 4,562 thousand. Please refer to note
for more information.
4.
In 2019, the Fund earned a net profit of EUR 8,791 thousand. Please refer to note
for more information.
● ANNUAL REPORT 2020 Consolidated financial statements
108
Loan securities
Borrowings received were secured with the following pledges and securities as of 31 December 2020:
Mortgages of the
property*
Second rank
mortgages for
derivatives
Cross-mortgage
Commercial
pledge of the
entire assets
Lincona, SKY, G4S
Headquarters, Europa,
Domus Pro, LNK,
Vainodes I, North Star
and Pirita
Europa, Domus Pro,
Vainodes I
Pirita, Lincona, G4S Headquarters
for Pirita, Lincona, G4S
Headquarters bank loans;
Vainodes I and LNK for Vainodes I
and LNK bank loan
Coca-Cola Plaza and
Postimaja, Duetto I and II
*Please refer to note
for the carrying amounts of assets pledged at period end.
Suretyship
Pledges of
receivables
Pledge of land lease
rights of the land
plots
Pledges of bank
accounts
Share pledge
Europa for Domus
Pro bank loan,
Europa for North
Star bank loan,
Vainodes I for LNK
bank loan, LNK for
Vainodes I bank loan
Lincona, SKY,
Europa,
and Domus Pro
Europa, SKY, LNK and
Vainodes I
BH Domus Pro
UAB, Vainodes
Krasti SIA, BH S27
SIA
19.
Trade and other payables
EUR ’000
31.12.2020
31.12.2019
Payables related to Meraki development
Accrued financial expenses
Total trade and other payables
As
of
31
December
2020,
the
Fund
had
a
payable
in
the
amount
of
EUR
1,278
thousand
for
the
construction
costs
of
the
Meraki
development
project
as
per
the
construction
contract
signed
on
6
February
2020.
Other
costs
related
to
the
Meraki construction works amounted to EUR 13 thousand.
● ANNUAL REPORT 2020 Consolidated financial statements
109
Terms and conditions of trade and other payables:
•
Trade payables are non-interest bearing and are normally settled on 30-day terms.
•
Other payables are non-interest bearing and have an average term of 3 months.
20.
Commitments and contingencies
20a. Operating leases – the Group as a lessor
The
Group
leases
real
estate
under
operating
leases.
The
terms
of
the
leases
are
in
line
with
normal
practices
in
each
market. Leases are reviewed or subject to automatic inflationary adjustments as appropriate.
The
leasing
arrangements
entered
into
or
in
relation
with
the
Group’s
investment
properties
portfolio
which
include
a
clause
authorising
tenants
to
terminate
the
leasing
arrangements
with
up
to
six-month
notice
are
not
considered
as
non-
cancellable leases.
Lease
payments
receivable
under
non-cancellable
leases
are
shown
below.
For
the
purposes
of
this
schedule
it
is
conservatively assumed that a lease expires on the date of the first break option.
Year of expiry or first break option
20b. Litigation
As
at
31
December
2020,
there
was
no
ongoing
litigation,
which
could
materially
affect
the
consolidated
financial
position
of the Group.
20c. Contingent assets
On
18
December
2018,
the
Fund
signed
an
additional
agreement
to
the
sales
and
purchase
agreement
with
the
seller
of
the
Duetto
II
property.
The
seller
agreed
to
provide
a
rental
income
guarantee
in
the
aggregate
amount
of
EUR
1,300
thousand
per
annum
(EUR
108
thousand
per
month)
of
the
effective
net
operating
income
from
the
Building
for
the
first
24
months
starting
from
27
February
2019.
An
asset
has
not
been
recognised
in
the
financial
statements
as
the
management of the Fund expects that Duetto II will be able to earn the guaranteed amount of rent.
20d. Contingent liabilities
The Group did not have any contingent liabilities at the end of 31 December 2020.
During
the
reporting
period,
the
Group
entered
into
transactions
with
related
parties.
Those
transactions
and
related
balances
are
presented
below.
Parties
are
considered
to
be
related
if
one
party
has
the
ability
to
control
the
other
party
or
exercise
significant
influence
over
the
other
party
in
making
financial
or
operational
decisions.
All
transactions
between
related parties are priced on an arm’s length basis.
● ANNUAL REPORT 2020 Consolidated financial statements
110
Northern Horizon Capital AS
As
set
out
in
Baltic
Horizon
Fund
Rules,
Northern
Horizon
Capital
AS
(the
Management
Company)
carries
out
asset
manager functions on behalf of the Fund and the Fund pays management fees for it (note
).
The Group’s transactions with related parties during 2020 and 2019 were the following:
Northern Horizon Capital AS group
The Group’s balances with related parties as at 31 December 2020 and 31 December 2019 were the following:
Northern Horizon Capital AS group
The
Management
Company
is
entitled
to
receive
an
annual
management
fee
which
is
calculated
quarterly,
based
on
the
3-month
average
market
capitalisation
of
the
Fund.
In
case
the
market
capitalisation
is
lower
than
90%
of
the
NAV
of
the
Fund,
the
amount
equal
to
90%
of
the
NAV
of
the
Fund
shall
be
used
for
the
management
fee
calculation
instead
of
the market capitalisation.
The fee is based on the following rates and in the following tranches:
•
1.50% of the market capitalisation below EUR 50 million;
•
1.25%
of
the
part
of
the
market
capitalisation
that
is
equal
to
or
exceeds
EUR
50
million
and
is
below
EUR
100
million;
•
1.00%
of
the
part
of
the
market
capitalisation
that
is
equal
to
or
exceeds
EUR
100
million
and
is
below
EUR
200
million;
•
0.75%
of
the
part
of
the
market
capitalisation
that
is
equal
to
or
exceeds
EUR
200
and
is
below
EUR 300
million;
•
0.50% of the part of the market capitalisation that is equal to or exceeds EUR 300 million.
The
Management
Company
is
entitled
to
calculate
the
performance
fee
based
on
the
annual
adjusted
funds
from
operations
(AFFO)
of
the
Fund.
If
AFFO
divided
by
paid
in
capital
during
the
year
exceeds
8%
per
annum,
the
Management
Company
is
entitled
to
a
performance
fee
in
the
amount
of
20%
of
the
amount
exceeding
8%.
The
performance
fee
based
on
this
formula
will
be
calculated
starting
from
1
January
2017.
The
performance
fee
first
becomes
payable in the fifth year of the Fund (i.e. 2020).
Northern Horizon Capital AS Group did not own any units of the Fund as of 31 December 2020.
Supervisory Board of the Fund
As
set
out
in
Baltic
Horizon
Fund
Rules,
Supervisory
Board
members
are
entitled
to
remuneration
for
their
service
in
the
amount
determined
by
the
General
Meeting.
During
2020,
th
e
annual
remuneration
of
the
Supervisory
Board
of
the
Fund
amounted
to
EUR
48
thousand
(2019:
EUR
48
thousand).
Please
refer
to
note
for
more
information
regarding
the
total expenses related to the Supervisory Board of the Fund.
Entities having control or significant influence over the Fund
The
holders
of
units
owning
more
than
5%
of
the
units
in
total
as
of
31
December
2020
and
31
December
2019
are
presented in the tables below:
● ANNUAL REPORT 2020 Consolidated financial statements
111
As at 31 December 2020
Raiffeisen Bank International AG clients
As at 31 December 2019
Raiffeisen Bank International AG clients
Except for dividends paid, there were no transactions with the unitholders disclosed in the tables above.
22.
Financial instruments
Fair values
Set
out
below
is
a
comparison
by
category
of
the
carrying
amounts
and
fair
values
of
all
of
the
Group’s
financial
instruments carried in the consolidated financial statements:
Trade and other receivables
Cash and cash equivalents
Derivative financial instruments
Interest-bearing loans and borrowings
Derivative financial instruments
Quantitative
disclosures
of
the
Group’s
financial
instruments
in
the
fair
value
measurement
hierarchy
as
at
31
December
2020 and 31 December 2019:
Period ended 31 December 2020
Trade and other receivables
Cash and cash equivalents
Derivative financial instruments
● ANNUAL REPORT 2020 Consolidated financial statements
112
Interest-bearing loans and borrowings
Derivative financial instruments
Period ended 31 December 2019
Trade and other receivables
Cash and cash equivalents
Derivative financial instruments
Interest-bearing loans and borrowings
Derivative financial instruments
Management
assessed
that
the
carrying
amounts
of
cash
and
short-term
deposits,
rent
and
other
receivables,
trade
payables
and
other
current
liabilities
approximate
their
fair
values
largely
due
to
the
short-term
maturities
of
these
instruments.
The
fair
value
of
the
financial
assets
and
liabilities
is
the
price
that
would
be
received
to
sell
an
asset
or
paid
to
transfer
a
liability
in
an
orderly
transaction
between
market
participants
at
the
measurement
date.
The
following
methods
and
assumptions are used to estimate the fair values:
•
Trade
and
other
receivables
are
evaluated
by
the
Group
based
on
parameters
such
as
interest
rates,
specific
country
risk
factors,
individual
creditworthiness
of
the
customer,
and
the
risk
characteristics
of
the
financed
project.
Based
on
this
evaluation,
allowances
are
taken
into
account
for
the
expected
losses
on
these
receivables.
As
at
31
December
2020
the
carrying
amounts
of
such
receivables,
net
of
allowances,
were
not
materially
different from their calculated fair values.
•
The
Group
enters
into
derivative
financial
instruments
with
various
counterparties,
principally
financial
institutions
with
investment
grade
credit
ratings.
The
fair
value
of
derivatives
has
been
calculated
by
discounting
the expected future cash flows at prevailing interest rates.
•
The
fair
values
of
the
Group’s
interest-bearing
loans
and
borrowings
are
determined
by
discounting
the
expected future cash flows at prevailing interest rates. The estimated fair values of the Group’s interest-bearing
loans and borrowings were determined using discount rates in a range of +1.14% and -1.34%.
•
Cash and cash equivalents are attributed to Level 2 in the fair value hierarchy.
23.
Derivative financial instruments
The
Group
has
entered
into
a
number
of
interest
rate
swaps
(IRS)
with
SEB,
OP
and
Luminor
banks.
Also,
the
Group
has
interest rate cap (CAP) agreements with Swedbank.
● ANNUAL REPORT 2020 Consolidated financial statements
113
The
purpose
of
derivative
instruments
is
to
hedge
the
interest
rate
risk
arising
from
the
interest
rate
fluctuations
of
the
Group’s
non-current
loans
and
some
of
the
Group’s
current
loans
because
the
Group’s
policy
is
to
have
fixed
interest
expenses.
According
to
the
IRS
agreements,
the
Group
makes
fixed
interest
payments
to
the
bank
and
receives
variable
interest rate payments from the bank. An interest rate cap allows to limit the interest rate fluctuation to a certain level.
IFRS
9
allows
hedge
accounting
provided
that
the
hedge
is
effective.
In
such
cases,
any
gain
or
loss
recorded
on
the
fair
value
changes
of
the
financial
instrument
is
recognised
in
an
equity
reserve
rather
than
the
income
statement.
The
ineffective
part
of
the
change
in
the
fair
value
of
the
hedging
instrument
(if
any)
is
recognised
in
the
income
statement.
Specific
documentation
on
each
financial
instrument
is
required
to
be
maintained
to
ensure
compliance
with
hedge
accounting principles. Please refer to note
b and
b
for more information.
*Interest rate cap
Derivative
financial
instruments
were
accounted
for
at
fair
value
as
at
31
December
2020
and
31
December
2019.
The
maturity of the derivative financial instruments of the Group is as follows:
Classification according to maturity
EUR ’000
On 4 February 2021, the Fund declared a cash distribution of EUR 1,316 thousand (EUR 0.011 per unit) to unitholders.
There have been no other significant events after the end of the reporting period.
Derivative financial instruments, assets
Derivative financial instruments, liabilities
Net value of financial derivatives
● ANNUAL REPORT 2020 Consolidated financial statements
114
25.
List of consolidated companies
Date of
incorporation /
acquisition
Hobujaama str. 4, Tallinn,
Estonia
Ukmer
gės str. 308-1
,
Vilnius, Lithuania
Valdemara str. 21-20, Riga,
Latvia
Hobujaama str. 4, Tallinn,
Estonia
Konstitucijos ave. 7A-1,
Vilnius, Lithuania
Hobujaama str. 5, Tallinn,
Estonia
Mūkusalas str. 101, Rīga,
Latvia
Hobujaama str. 5, Tallinn,
Estonia
Spaudos str. 8-1, Vilnius,
Lithuania
Audeju str. 16, Riga, Latvia
Skanstes iela 27, Riga,
Latvia
Ukmergės str. 308-1,
Vilnius, Lithuania
Audeju str. 16, Riga, Latvia
Ulonų str. 2, Vilnius,
Lithuania
● ANNUAL REPORT 2020 Management approval of consolidated financial statements
115
MANAGEMENT APPROVAL OF CONSOLIDATED
FINANCIAL STATEMENTS
The
consolidated
financial
statements
of
Baltic
Horizon
Fund
were
approved
for
issue
by
the
Management
Board
of
the
Management Company on 19 March 2021.
Tarmo Karotam
Chairman of the Management Board
Aušra Stankevičienė
Member of the Management Board
Algirdas Jonas Vaitiekūnas
Member of the Management Board
● ANNUAL REPORT 2020 Definitions of key terms and abbreviations
116
DEFINITIONS OF KEY TERMS AND ABBREVIATIONS
AIFM
Alternative Investment Fund Manager.
AFFO
Adjusted
Funds
From
Operations
means
the
net
operating
income
of
properties
less
fund
administration
expenses,
less
external
interest
expenses
and
less
all
capital
expenditures
including
tenant
fit-out
expenses
invested
into
existing
properties
by
the
Fund.
New
investments
and
acquisitions
and
follow-on
investments
into
properties
are
not
considered
to
be
capital
expenditures.
Cash ratio
The
ratio
is
calculated
as
cash
and
cash
equivalents
divided by current liabilities.
Current ratio
The
ratio
is
calculated
as
current
assets
divided
by
current liabilities.
Direct Property Yield
NOI
divided
by
acquisition
value
and
subsequent
capital
expenditure of the property.
Dividend
Cash
distributions
paid
out
of
the
cash
flows
of
the
Fund
in accordance with the Fund Rules.
Equity ratio
The
ratio
is
calculated
as
total
equity
divided
by
total
assets.
Fund
Baltic Horizon Fund.
GAV
Gross Asset Value of the Fund.
IFRS
International Financial Reporting Standards.
LTV
Loan
to
value
ratio.
The
ratio
is
calculated
as
the
amount
of
the
external
bank
loan
debt
less
lease
liabilities
(IFRS
16)
divided
by
the
carrying
amount
of
investment
property
(including
investment
property
under
construction).
Management Company
Northern Horizon Capital AS, register code 11025345.
NAV
Net asset value for the Fund.
NAV per unit
NAV
divided
by
the
amount
of
units
in
the
Fund
at
the
moment of determination.
NOI
Net operating income.
Net Initial Yield
NOI divided by market value of the property.
Net LTV
Net
Loan
to
value
ratio.
The
ratio
is
calculated
as
the
amount
of
the
external
bank
loan
debt
less
lease
liabilities
(IFRS
16)
and
cash
and
cash
equivalents
divided
by
the
carrying
amount
of
investment
property
(including investment property under construction).
NOI
Net operating income.
Occupancy rate
The
ratio
is
calculated
as
rented
area
divided
by
net
leasable area.
Quick ratio
The
ratio
is
calculated
as
current
assets
less
inventory
and
prepaid expenses divided by current liabilities.
Return on assets
The
ratio
is
calculated
as
profit/loss
for
the
period
divided
by average assets.
Return on equity
The
ratio
is
calculated
as
profit/loss
for
the
period
divided
by average equity.
5299008IKT93E4SA0G492019-01-015299008IKT93E4SA0G492020-01-015299008IKT93E4SA0G492019-12-315299008IKT93E4SA0G492020-12-315299008IKT93E4SA0G492019-01-012019-12-315299008IKT93E4SA0G492020-01-012020-12-315299008IKT93E4SA0G492019-01-01ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492019-01-01ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492019-01-01ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492019-01-01ifrs-full:RetainedEarningsMember5299008IKT93E4SA0G492019-01-012019-12-31ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492019-01-012019-12-31ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492019-01-012019-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492019-01-012019-12-31ifrs-full:RetainedEarningsMember5299008IKT93E4SA0G492019-12-31ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492019-12-31ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492019-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492019-12-31ifrs-full:RetainedEarningsMember5299008IKT93E4SA0G492020-01-01ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492020-01-01ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492020-01-01ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492020-01-01ifrs-full:RetainedEarningsMember5299008IKT93E4SA0G492020-01-012020-12-31ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492020-01-012020-12-31ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492020-01-012020-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492020-01-012020-12-31ifrs-full:RetainedEarningsMember5299008IKT93E4SA0G492020-12-31ifrs-full:IssuedCapitalMember5299008IKT93E4SA0G492020-12-31ifrs-full:TreasurySharesMember5299008IKT93E4SA0G492020-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299008IKT93E4SA0G492020-12-31ifrs-full:RetainedEarningsMemberiso4217:EURiso4217:EURxbrli:shares