Like the rest of the JSE’s retail-focused property stocks, sector heavyweight Nepi Rockcastle hasn’t entirely dodged the Covid bullet.
But the Eastern European mall owner is still paying dividends, and, more importantly, is the only real estate counter to date that has forecast earnings growth for 2021..
That will no doubt further support the investment case for Central and Eastern Europe as a region, and cement Nepi Rockcastle’s prime position on property fund managers’ stock pick lists.
The company is the largest retail property owner and developer in Central and Eastern Europe. It owns a €5.8bn portfolio of more than 50 shopping centres across nine countries, including Romania, Poland, Bulgaria, Hungary, Slovakia, Croatia and the Czech Republic.
Anchor Capital portfolio manager Glen Baker says: "The fact that management has given a 10% earnings growth outlook for this year suggests Nepi Rockcastle has come through the pandemic in better shape than its SA counterparts."
Baker says that while most SA property stocks remain uncertain about their prospects, Nepi Rockcastle seems to have its ducks in a row and can grow earnings from here. "I don’t think many SA companies will be able to do that for at least one or two more reporting periods."
The concept of the modern, enclosed shopping centre was introduced to the region only after the fall of communism
Ridwaan Loonat, equity analyst at Nedbank CIB, who has an overweight recommendation on Nepi Rockcastle, shares this view. He says the property owner’s operational metrics remain sound, despite a 32% drop in distributable earnings for the 12 months to December on the back of rental concessions of €72m.
While only 85% of the company’s total gross lettable area is open for trade at present, the rent collection rate had recovered to 97% by mid-February. Loonat also refers to the vacancy rate, which has remained fairly stable at 4.3%, with little risk of significant tenant failures or distress.
But the key attraction, Loonat believes, is Nepi Rockcastle’s healthy balance sheet.
In the six months to December, its loan-to-value ratio has improved from 36% to a below-sector average of 31.5%, following the sale of its Romanian office portfolio for €307m.
The company now has €1.2bn liquidity on its balance sheet, which Loonat says places management in a position to take advantage of any acquisition opportunities that may come its way without raising too much concern of overleveraging and potentially breaching debt covenants.
Baker and Loonat believe Central and Eastern Europe continues to provide a compelling investment case for South Africans looking for geographical and currency diversification.
Over the past decade, the region has become one of the most popular offshore destinations for local property players looking to expand beyond SA.
Latest Stanlib figures show that the listed property sector has a 26.5% exposure to Central and Eastern Europe (in terms of weighted market cap).
Nepi Rockcastle, founded as New Europe Property Investments (Nepi) in Romania by former SA banker Martin Slabbert and Resilient Reit’s Des de Beer in 2007, was the first Central and Eastern Europe property company to list on the JSE. Others soon followed suit. JSE investors now have access to the region’s real estate markets through at least 10 counters, including MAS Real Estate, EPP, Redefine Properties, Growthpoint Properties and Hyprop Investments.
In last week’s fairly upbeat results presentation Alex Morar, Nepi Rockcastle’s Romania-based CEO, said Eastern Europe’s potential to outpace Western Europe in terms of wage, consumption and retail sales growth remains intact.
The region also has a lower unemployment rate — 4.2% versus 6.6%.
Morar says the general view is that economic activity — including sales turnover and foot count at malls — will bounce back quicker in Central and Eastern Europe than in Western Europe because the region’s vaccination programme is being rolled out at a faster pace.
In fact, 70% of the population in Central and Eastern Europe is expected to be inoculated against Covid-19 by mid-2021.
In addition, Morar argues there’s continued demand among local and international retailers to open new stores and expand existing ones, in something of a reverse trend to the rush online that is prevalent elsewhere.
That’s because the concept of the modern, enclosed shopping centre was introduced to the region only after the fall of communism in 1989. Morar cites the latest shopping centre density figures, which show that the nine countries that Nepi Rockcastle is exposed to have only 178.23m² of retail space per 1,000 people on average, versus the whole of the EU zone’s 322m² per 1,000 people.
E-commerce also poses a lower threat to shopping in physical centres because of the prominent role malls play as popular gathering spots for family entertainment, says Morar.
For instance, the addition of a new 6,000m² leisure area at the Ozas Shopping and Entertainment Centre in Lithuania, which houses a large indoor swimming pool and a family entertainment park, lured 70,000 visitors in the first five months of its partial opening in June.
Morar says the 10% distributable earnings and dividend growth guidance given for 2021 is based on the assumption that Nepi Rockcastle’s malls won’t be hit by any further mass lockdowns this year.
It does, however, take into account expectations that lockdown-related trading restrictions will last for "several more weeks", with restaurants and cinemas not yet allowed to operate fully in some countries in the region.
Nepi Rockcastle was trading at about R95 this week, up about 60% from its October lows. That’s below the stock’s 2017 highs of R200, and represents a discount to NAV of more than 10%.
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