Eastnine exits Russia

Hello again. Hope all of you had a good summer.

This year, I became the Millicom blogger. That was never my intent, it just kind of happened. The situation is still unresolved, but I think it has a great dynamic, given some patience. Many investors want to pick bottoms and tops, and that’s fine if they can do that, but that is not my approach. I look forward to some further messages about how completely wrong I am the next time the stock drops a few percent. I love you guys too.

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A case that I wrote up in December of last year, Eastnine, on the other hand did have its — belated — resolution last week. This is the way of special situations: delayed outcomes and continuous changes in dynamic. Holding your rudder is paramount. The flip-side is of course not to get obstinate as a case evolves and possibly deteriorates. Nobody said it was easy.

Eastnine moved roughly like I thought it would on closing. However, in its new de-risked form, I think it now warrants some serious consideration from the generalist investor. It trades at a super-high implied unlevered cap rate compared to all listed peers. Remember, the higher the LTV, the higher the discount if the underlying assets are deemed impaired by the market. Eastnine now should have an LTV of only about 25% and trades at roughly 35% discount to a 6.1% yield on the books (depending on what ruble exchange rate they will secure in the end). Most peers have double the LTV, significantly lower cap rates and trade in the same ballpark in terms of discount to book. When you add to it that Eastnine’s asset base is very modern and on triple net leases, this doesn’t make much sense at all.

Kestutis Sasnauskas, CEO Eastnine

Things may correct themselves as the company, in line with their stated intent, puts its cash to use buying new assets at presumably good prices in a market with few other prospective buyers. And if there is some extraordinary dividend income from this in the future, that will also help.

Now someone will think, well, what about country risk? I completely grant that the market probably won’t like the Baltics as well as Norrland, Sweden, anytime soon. But I also think that, first of all, this risk is already reflected in much higher yields on the books, so it is a component of the NAV.

But secondly — and people who live in other parts of the world or just haven’t paid close attention might have missed this — the Baltics and Poland have had increased commercial activity due to the war. Why? Ukraine was among other things a hub for cheap software developers and they relocated to nearby countries. Lithuania, Eastnine’s largest country, took 48k Ukrainians with residence permits (meaning they had employment) since the war started. They also took 78k regular refugees. This in a country of 2.7 million. Vilnius, the capital, where the overwhelming majority of these workers presumably went, has a population of roughly 500k.

What do you think the impact on central office space demand has been? Additional moves towards near-shoring IT services from the Nordics to Poland and Lithuania also support the markets. For investors used to thinking about WFH and the slow deaths by a thousand cuts in American office REITs — this is something completely different. Eastnine has warned investors throughout the last year that their occupancy ratio is so high that they can’t physically make further improvements on the metric. I’m sure WFH has some impact on the demand even here, but it’s not visible in the figures.

On the geopolitical side, we could go into a major tangent about the risk for a widened war and the Suwalki Gap and on and on. This is not my expertise, so I will refrain. But a hypothetical widened European war is not exactly low impact to Sweden, Germany or the US either. I don’t think this in itself is an adequate explanation for a higher risk premium.

Anyhow, I will keep this post short. My contention is that Eastnine is still significantly undervalued on a relative basis and that they have great opportunity — and intent — to grow the asset base and thus their cash flow. I don’t expect a fast re-rating necessarily, even though the lack of pro-forma numbers for the “new” entity and the event-driven traders wanting to move on to other pastures may keep a lid on price for the time being.