Fleeing the Eastern Reits

Investors spooked by events in Eastern Europe should take a fresh look at Lighthouse Properties, which has made impressive headway to bulk up its Western European assets.

This month the company announced its entry into Spain where it has splurged €162.5m to buy the 62,000m² Centro Comercial Torrecárdenas mall in the coastal city of Almeria.

It follows the acquisition of four French shopping centres in September last year. The value of Lighthouse’s directly held retail portfolio, which a year ago included only two European malls — one in Portugal and one in Slovenia — has increased from less than €200m in December 2020 to €677m currently.

The French acquisitions have already helped to boost revenues, which enabled Lighthouse to increase dividend payouts by 2.2% (in euros) for the 12 months to December. That’s despite most entertainment and leisure tenants in its mall portfolio being unable to trade for part of the year due to pandemic-related lockdowns.

Like-for-like dividend growth was much higher, given that the company’s year-end was moved from September to December. The previous annual dividend covered the 15 months to December 2020.

Results were further underpinned by a hefty 122% recovery in the adjusted earnings in 2021 of Hammerson, in which it owns a 22% stake worth about €400m. Hammerson is one of Europe’s largest mall owners and has centres across the UK, Ireland, France and Spain.

Lighthouse (formerly known as Greenbay Properties) was created by SA’s Resilient stable in 2014 and owned a mixed bag of assets — mostly stakes in various global listed infrastructure stocks and a few random shopping centres.

However, last year the company’s investment strategy was refined to focus increasingly on owning directly held shopping centres in Western Europe. Resilient Reit has, over the past 12 months, steadily switched its investment out of Eastern European-focused Nepi Rockcastle into Lighthouse. It is now the single largest shareholder in the company, with a 41.4% stake worth about R6bn. Resilient also owns 25% of the French portfolio of four malls alongside Lighthouse’s 75% stake.

Though it still has a R1.6bn exposure to Nepi Rockcastle, Resilient CEO Des de Beer says for now the company’s offshore investment strategy is focused on its Western European interests. He calls the timing of the French malls deal "immaculate" and says gaining a foothold in the French retail property market is not easy, as quality assets are usually tightly held.

For Resilient and Lighthouse, the big opportunity is that all four malls lend themselves to fairly extensive redevelopment and new leasing activity. De Beer expects a significant uplift in value once these opportunities are unlocked.

For instance, at Docks 76, one of two centres bought in the port city of Rouen, food hall operator Biltoki plans to bring more than 20 food artisans and gastronomy offerings to the centre this year. At Saint-Sever, Lighthouse’s other mall in Rouen, fast-fashion retailer Primark will open a new 6,000m²-plus store next year.

At the recent results presentation, Lighthouse CEO Justin Muller said the Primark lease was a game changer and should consolidate Saint-Sever’s position as Rouen’s main clothing shopping destination. He noted that the opening of a Primark in any mall across Europe typically lures an extra million shoppers annually.

Lighthouse is also in the final stages of buying more land next to its Rivetoile centre in Strasbourg, one of France’s wealthiest cities, which will allow the addition of 12 new stores spanning 1,136m². There are also plans to refurbish and improve the layout of the centre, which should further boost revenue streams.

Muller said he hoped to buy more shopping centres in Western Europe, as the sector offers attractive risk-adjusted recovery potential in a post-Covid world. He said retail trading metrics in Western Europe have generally returned to close to pre-Covid levels — yet there’s still an opportunity to buy properties at attractive prices with cash-on-cash yields of 8%-10%.

Muller reckons Lighthouse is now in a better position to compete with other major retail property buyers in Western Europe. It has established a reputation as a reputable investor among financiers and big real estate players.

"Building a stake in Hammerson and concluding the deals in France and Spain have … helped push us to the frontline to conclude further acquisitions in Western Europe."

Analysts say Lighthouse could be one of the Western European-and UK-focused beneficiaries if risk-averse property investors look to sell out of Eastern European-focused counters, into which many rushed over the past decade.

Companies heavily invested in the region include mall owner Nepi Rockcastle, the JSE’s largest property stock, whose 56 malls are mostly located in Ukraine neighbours Romania, Poland, Slovakia and Hungary. MAS Real Estate also has sizeable exposure to Romania while large SA-based players including Growthpoint Properties, Redefine Properties, Hyprop Investments and Fortress Reit have in recent years expanded their footprints to Poland, Romania and Bulgaria, among others.

Howard Penny, equity research analyst at Anchor Stockbrokers, says: "On the one hand, the depressed share prices of companies exposed to regions close to Russia’s war in Ukraine could present an opportunity to buy at lower prices. But on the other hand, the conflict may have an enduring impact on valuations in the short to medium term. And this may be pushing some investors further west into lower-risk regions."

Penny believes Lighthouse offers further potential upside from a post-Covid rebound in Western European retail, leisure and entertainment spending.

Garreth Elston, chief investment officer at Reitway Global, welcomes Lighthouse’s steady progress towards becoming a focused pan-European retail property investor. But questions remain around how the Hammerson holding will play out and whether Lighthouse will retain its hybrid model in the longer term.

The Hammerson investment has been opportune, but management needs to provide clarity on what form the company will take.

"In my opinion, it remains an option for Lighthouse to consider purchasing part or all of Hammerson’s French assets, and working towards becoming a specialist continental European retail operator with sustainable scale and a portfolio leaning towards French assets."

Lighthouse’s share price was under pressure in recent weeks, but it is still up 11% over the past year and trades at a 15% premium to NAV.