Below-market Leases To Amazon And Moderna Will Unlock Future Income Potential

Key Takeaways

• Strategic acquisition and tenant agreements create potential for increased rental income, enhancing Eastnine's revenue growth.
  
• Positioned in rapidly growing EU regions, Eastnine can capitalize on rising office demand, boosting occupancy and rental income.
  
• Concentration risk in selected markets, combined with rising interest expenses and limited rental income growth, threatens Eastnine's revenue stability and profitability.

Catalysts

A real estate investment firm.

• The acquisition of the Warsaw Unit, a transformative property for Eastnine, is fully leased to major tenants like Amazon and Moderna at below-market rates of €24 per square meter, with the market rate reaching €27-28. This creates potential for rental income growth as leases are renegotiated, directly impacting revenue.
  
• Eastnine is positioned in fast-growing regions like Poland, Latvia, and Lithuania, which are the fastest-growing parts of the EU, promising continued economic expansion and increasing demand for office spaces, likely boosting occupancy rates and rental income.
  
• The company’s high occupancy rate of 96.1% and plans to further increase it suggests that rental income and revenues may increase, especially as new tenants move in and office demand continues to grow.
  
• With low leverage in the economies where Eastnine operates and higher yields in comparison to peers in Nordics, the possibility for further leveraging and investments can enhance revenue growth and net operating income.
  
• Eastnine's commitment to sustainable property certifications and energy efficiency may attract premium tenants and potentially higher rents, improving net margins by reducing energy costs and increasing property value and desirability.

Eastnine Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eastnine's revenue will grow by 16.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 52.9% in 3 years time.
• Analysts expect earnings to reach €34.5 million (and earnings per share of €0.5) by about February 2028, up from €5.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €49.0 million in earnings, and the most bearish expecting €19.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 69.0x today. This future PE is greater than the current PE for the GB Real Estate industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Eastnine Future Earnings Per Share Growth

Risks

• The growing interest expenses due to increased borrowing and higher fixed interest rates could negatively impact net margins, thereby affecting overall profitability.
  
• Rent levels for key properties like the Warsaw Unit are below market averages, limiting immediate rental income growth, which could impact short-term revenue potential.
  
• The anticipated rental growth may not materialize quickly due to long lease agreements, potentially delaying revenue and earnings increases.
  
• Liquidity has decreased since using cash for acquisitions, which could impact the company's ability to fund further investments or manage operational risks without refinancing or additional borrowing.
  
• Heavy reliance on a few markets (Poland, Lithuania, Latvia) poses economic concentration risks; any economic downturn in these regions could significantly affect revenue and earnings stability.

Valuation

• The analysts have a consensus price target of SEK58.0 for Eastnine based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €65.2 million, earnings will come to €34.5 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of SEK46.54, the analyst price target of SEK58.0 is 19.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.