Despite no signs of the Russia-Ukraine war abating, and a fully fledged energy crisis, it appears the investment case for Eastern Europe real estate remains intact.
Nepi Rockcastle (NRP) and MAS Real Estate, two of the JSE’s prominent players in the region, have released impressive results for their respective June reporting periods in the past week. Both are cash-flush and have resumed double-digit growth in dividend payouts.
NRP, the JSE’s largest property stock with a market cap of R57bn, as well as MAS, a much smaller but rapidly growing company with a value touching R15bn, reported an uplift in distributable earnings for the six months to June of about 30% year on year.
While NRP and MAS are both retail-focused, MAS is also making rapid inroads as a residential developer in Romania where housing stock still comprises mostly drab blocks of poky flats built in the communist era pre-1989.
MAS declared a total dividend payout for the year to June of 6.78c, a 14% increase year on year, while NRP should announce its dividend for the six months in the next few weeks once the parent company’s relocation from the Man of Isle to the Netherlands has been completed.
However, CEO Rudiger Dany assured shareholders at the release of NRP’s results last week that the company’s “exceptionally strong’’ balance sheet with more than €1-billion in liquidity supports a payout ratio of 100% of distributable earnings.
NRP’s income recovery has been aided by East European shoppers reverting back to pre-pandemic habits
He said NRP’s income recovery has been aided by East European shoppers reverting back to pre-pandemic habits. In the six months to June, sales turnover a square metre in NRP’s portfolio, which spans more than 50 shopping centres, was 38.5% up year on year and 3.2% higher than the same pre-Covid period in 2019.
Foot count is up 28.2% year on year, albeit still 12.2% below 2019 levels. Despite the ongoing war, higher interest rates, inflation at multi-decade highs and winter approaching, Dany said NRP is well positioned for further earnings growth. In fact, he revised the company’s guidance upwards, with earnings for the full-year to December forecast at 33% higher year on year.
Dany expects a continued catch-up by CEE consumers to their West European counterparts, given rising wealth and the relatively recent advent of formal, Western-style shopping centres. Consumption in most CEE countries is likely to achieve 10-year cumulative growth rates of between 80% and 120%, against 40%-60% for most of their West European peers.
NRP’s growth will be underpinned by a €665m development pipeline, including three new retail developments and one residential project in Romania spanning 252 apartments.
At MAS, meanwhile, sales turnover a square metre from January to June grew a hefty 15% on the same period in 2019.
CEO Irina Grigore says the company’s 21 retail centres all enjoyed a significant recovery in trading once all Covid restrictions were removed by authorities in March. Foot count at the company’s open-air malls has now recovered to pre-pandemic levels while in enclosed malls it is only 13% below 2019 levels.
Grigore expects dividend growth for the year to June 2023 of between 38% and 48%. For the three years to June 2026, management aims to grow earnings by at least 14% a year.
Much of MAS’s growth will come from its ambitious residential development pipeline. The company has 10 housing projects either under construction or in various planning phases, which will bring about 11,000 apartments to the Romanian market over the next four years.
Grigore expects residential sales worth €200m a year to June 2026 with a 20% net after-tax margin. In the 12 months to June, MAS already pocketed a €3m profit from apartment sales. The company also plans to complete a €600m pipeline of retail developments (new centres, extensions and refurbishments) by June 2026.
Though the growth outlook for both NRP and MAS appears attractive, most property analysts have placed MAS ahead of NRP on their top pick lists.
Anchor Stockbrokers last week maintained its ‘buy’ recommendation on MAS while downgrading NRP to ‘hold’
Anchor Stockbrokers last week maintained its “buy” recommendation on MAS while downgrading NRP to “hold”. Brendon Hubbard, portfolio manager at ClucasGray Investment Management, also prefers MAS to NRP given the former’s “far higher growth potential and a better aligned management team’’.
He refers to the company’s entrepreneurial approach and track record of ex-South African Martin Slabbert, founder of MAS’s development joint venture partner Prime Kapital.
Slabbert, CEO of MAS until April this year, was also the co-founder and former CEO of NRP and was instrumental in its rapid growth trajectory until his departure in 2015. Most of the MAS executives, including current CEO Grigore, also come from the NRP stable.
Hubbard likes the fact that Slabbert and most board members have exposure to MAS via a sizeable stake in the company, which he believes typically drives outperformance over longer periods.
Independent property analyst Garreth Elston says both companies offer SA investors better long-term growth opportunities than purely SA-focused Reits. That’s despite NRP and MAS trading at a lower relative discount to book value than their SA counterparts.
Elston says though a further recovery for both NRP and MAS most likely won’t be rapid, both still offer value on a three-year horizon. But, he says, the two stocks offer different investment merits.
NRP offers better diversification given that it has a much bigger portfolio that is spread among nine CEE countries, while MAS is predominantly Romania-focused with a small exposure to Bulgaria and Poland. “So MAS is not as geographically diverse,’’ he says.
Though both companies offer interesting development pipelines, Elston says MAS arguably holds the better record of delivery of completed projects.
Share price movements support the view that MAS is now the preferred route into Central and Eastern Europe. Over the past 12 months, MAS is up about 15% while NRP has lost about 10% in value.
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