JSE-listed EPP, Poland’s biggest retail landlord, has reported distributable earnings reaching €5.56 cents per share, exceeding its guidance of between €4.75 – €5.25 cents for the year ended on the 31st of December 2020.
This combined with a strong retail rebound in Poland and economic prospects, bodes well for EPP’s future performance. However, the board prudently resolved not to distribute a dividend for the second half of its financial year to reinforce its capital structure given Covid-19 challenges.
Poland’s ongoing Covid-19 vaccination programme and eased lockdown limitations that currently allow 96% of EPP’s gross lettable area (GLA) to operate provide the landlord with a solid basis for performance recovery with its portfolio occupancy stable at 96% and continuing to attract new store openings by leading brands including Primark, Pepco, Dealz, Sephora, Levi’s, and Carrefour.
EPP saw a strong retail rebound post each of the three Polish lockdowns to date, with tenant turnover growth outpacing footfall increases. The company also relies on its shoppers, who prefer physical shopping experiences to e-commerce. While online sales increased during lockdown periods, they have declined sharply when restrictions are lifted. Visiting brick-and-mortar retail remains the most favoured form of shopping for Poles due to unique shopping experiences and social aspects.
EPP is operating in a resilient economy with Poland reporting a relatively small drop in GDP of 2.8% in 2020 and it remains one of the most attractive investment markets in Europe. It is expected to achieve rapid GDP growth of 8% combined in the next two years with retail spending driven by stable low unemployment rates and consistently rising wages.
Additionally, Poland has achieved one of the highest rates of Covid-19 vaccine doses administered per one hundred people in Europe, with 3.3 million doses given to 5.7% of its population (4.8% EU average) by the 27th of February 2021. Poland’s Covid-19 infections are expected to steadily decline in the months ahead, supporting the economy’s dynamic recovery.
EPP safely managed its financial liquidity during the pandemic with a disciplined approach. The company can meet all its financing commitments and it has adequate debt headroom in terms of financial covenants. However, EPP was not unscathed by the pandemic.
Polish retail faced two closure periods in 2020 lasting more than ten weeks in total during which landlords could not legally enforce rent payments. Current legislation in Poland allows tenants not to pay rent during lockdowns in exchange for extending their leases by six months, plus the amount of time the tenants’ store is closed. This had a material €40 million impact on EPP’s net operating income. Net property income declined to €114.2 million with distributable earnings decreasing to €50.5 million. This regulation, however, resulted in an extension of current lease agreements and EPP’s lease expiry profile increased to 5.3 years.
Tomasz Trzósło, CEO of EPP says the company closed 2020 with better results than anticipated: “We maintained our financial liquidity during the pandemic thanks to thoughtful and well-balanced decisions, taking a long-term approach to support our tenants and achieving higher-than-expected distributable earnings per share despite the extensive tenant relief granted. Stringent cost savings, conservative assumptions about the impact of COVID-19 and fewer tenant failures than initially anticipated contributed positively to performance”.
The value of total investment properties reduced to €2.13 billion due to valuations declining 8.4% on a like-for-like basis. On the back of the property devaluation, EPP’s net asset value per share decreased to €1.09.
“We believe that not only is most of the short-term cashflow impact caused by COVID-19 reflected in these values but also the long-term fundamental retail market changes, and further devaluations are unlikely,” continues Trzósło.
The Polish landlord aims to reduce its loan-to-value (LTV) ratio materially as the investment market improves. Currently, EPP’s 54.8% net LTV is well within EPP’s average covenant levels of 67% and below the average LTV levels for Polish real estate, which is dominated by private market investors who strategically seek to maximise LTV. While it remains at appropriate financial and operational levels, EPP is acutely aware that the South African market prefers lower LTV levels for listed property and plans to reduce it materially over the next two years as the investment market improves.
In September 2020, EPP announced its strategy to dispose selected properties and sell stakes in certain assets, with EPP remaining as the active asset manager and leveraging its platform and expertise. This disposal programme will play a key role in reducing LTV. EPP has commenced work on this strategy, which is expected to gain momentum from mid-2021 under the direction of a senior professional appointed to lead sales and acquisitions.
“We are working off a carefully compiled strategy and are confident we can deliver. The Polish real estate market is the largest and most liquid in the CEE and continues to see rising interest from investors, supporting our success. Given the prospects for future economic recovery, we foresee this strategy taking around two-years to finalise, which will help to avoid deep discounts in the current market and take advantage of the best possible market fundamentals,” adds Trzósło.
“We are focused on resuming dividend payments to shareholders as soon as possible while being cognisant of our balance sheet strength. EPP will focus on the disposal programme, refinancing upcoming debt expiries and reinforcing the overall capital structure to support this. We are committed to the Polish market for the long term, and this is clear in our preference to retain assets in joint ventures with suitable partners. EPP owns top shopping centres in affluent retail destinations with excellent shopping and leisure experiences backed by high quality international and Polish tenants. They have a track record of outperforming the market, and their exciting futures will benefit significantly from the broader reopening of the economy” concluded Trzósło.
EPP provided guidance of between €7.00 and €7.25 cents distributable earnings per share for its 2021 financial year, assuming no further significant market disruptions.
