It seems mall owner Nepi Rockcastle hasn’t lost any of its lustre as one of the JSE’s most popular rand hedge bets — despite the impending departure of its top management.
This week, the share price touched a one-year high of R107 following the release of a fairly solid set of interim results.
That’s nearly double the record low of R57 at end-October and comes in the wake of a surprise announcement last month that Romania-based CEO Alex Morar and CFO Mirela Covasa will make way for a new executive team at the end of December.
Morar has been with the company since it was co-founded by former SA banker Martin Slabbert and Resilient Reit CEO Des de Beer in 2007. Morar and Covasa, both in their late 30s, have said only that they are leaving to pursue other opportunities.
Nepi Rockcastle, which owns a portfolio of more than 50 shopping centres across nine Central and Eastern European (CEE) countries worth about R100bn, is the JSE’s largest property counter. At R64bn, its market cap is comfortably ahead of SA-based Growthpoint Properties’ R52bn and more than double the R30bn of the sector’s third-largest player, London-focused Capital & Counties Properties.
Analysts say there’s nothing untoward about the departure of Morar and Covasa. Stanlib property analyst Ahmed Motara says it makes sense "in light of their extensive tenure at the company". He says the board has ample opportunity to implement a succession strategy before the end of the year. "So continuity risk is being largely mitigated."
Motara describes the company’s operations as streamlined and well understood and says it is likely the new team will stick with the current strategy. "We expect investor sentiment will be little changed," he says.
Garreth Elston, chief investment officer at Reitway Global, says while losing the experience of a senior management team who have steered the company through good and bad times is a definite short-term loss, a new set of executives could arguably bring "renewed momentum and new ideas" to the company.
Ridwaan Loonat, equity analyst at Nedbank CIB, agrees that management shuffles are unlikely to dent the company’s long-term investment case: "This is a short-term headwind … but the company’s operational position and fundamentals remain sound."
Citing the latest results, Loonat says Nepi Rockcastle’s performance year to date shows that the CEE region is on a quick path to recovery, which should filter through to earnings. "This, coupled with healthy company financials, makes for a compelling investment case."
For the six months to June, Nepi Rockcastle reported a 26% year-on-year increase in sales turnover, a 4.4% rise in net operating income and a 2.2% uptick in foot count. Vacancies were contained at below 5%. Distributable earnings and dividend payouts were nevertheless down 10%, mostly due to the sale of the Romanian office portfolio and higher finance costs.
S&P Global Ratings provided further support for Nepi Rockcastle’s investment case this week by reaffirming the company’s credit rating at BBB and revising the outlook upwards from negative to stable. The ratings agency says its view is underpinned by the quality of Nepi Rockcastle’s assets and limited competition in the CEE region, which should support a further recovery in foot count and tenant sales.
But is it too late to buy Nepi Rockcastle shares if you haven’t already? The question is probably even more relevant as long-term shareholder Resilient Reit has sold down a large chunk of its shares worth about R2.37bn over the past 15 months, taking its stake in the company from 13% in May last year to less than 5% now.
Resilient has used the proceeds to reduce its debt and increase its holdings in Lighthouse Capital, a smaller, Western European-focused growth company.
However, most analysts still have an overweight recommendation on Nepi Rockcastle. Motara says it offers all the qualities SA investors should seek to protect themselves against a weak local economy and currency: 100% exposure to non-SA operations and to growing economies; good macro indicators underpinning operations; euro-denominated earnings; and significant liquidity as a constituent of the top 40 index. The company is trading at a dividend yield of just below 6% with the share price still well below pre-Covid levels of R120-R130.
Motara says: "What makes the stock more attractive than some of its CEE-focused peers is the defensive nature of its asset base and its below-market loan-to-value ratio of 32%." He says other positives include the company’s ability to maintain a 100% dividend payout ratio, a strong balance sheet, sufficient liquidity and stable asset valuations.
Speaking at last week’s results presentation, Morar said trading metrics in the company’s shopping centres picked up significantly in May and June following a "difficult first quarter and the toughest year in the company’s history". Though sales turnover for the six months to June was still 25% below that of 2019, Morar said activity for May and June were "almost" back to pre-Covid levels. Foot count at Nepi Rockcastle’s malls was up 2.2% year on year to 77.6-million visitors, 34% below 2019’s tally.
Morar ascribed the strong recovery in sales and foot count in the second quarter to the CEE region’s vaccination programme gaining momentum, the lifting of lockdowns, the reopening of cinemas and other leisure tenants and the advent of summer. He said retailers are expanding their footprints to take advantage of the region’s economic rebound.
CEE economies are expected to outperform others in the EU over the next two years. Morar referred to recent forecasts that place real GDP growth for the countries where Nepi Rockcastle operates at an average 4.7% for both 2021 and 2022 (on a weighted basis).
Morar said the company is sitting on liquidity of nearly €1bn, "which places us in a comfortable position to continue to invest in redevelopments, new projects and other growth opportunities".
For instance, construction will soon kick off on a 58,000m² extension of Promenada Mall in Bucharest, which will take the centre to close to 100,000m²; a greenfield shopping centre of 56,500m² in Craiova, west of the Romanian capital; and a number of apartment developments — the first time the company is entering the residential market.
Referring to his and Covasa’s departure later this year, Morar said a head-hunter has been appointed to assist in finding suitable replacements. "I will ensure that we appoint candidates that are the right culture-fits for our team, and I’m confident that the company’s current investment strategy and focus on CEE will be maintained."
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