Nepi Rockcastle: recovery from a rocky road
The drop in Nepi Rockcastle’s share price has created a cheap entry point for patient investors
It seems that Eastern European property play, Nepi Rockcastle, which last week declared impressive growth of 17% in its euro-based dividend payouts for 2017, has been unfairly punished by the market because of its association with the Resilient group.
A general skittishness among JSE investors following the collapse of Steinhoff’s share price has also not helped. Nepi Rockcastle’s stock has slumped around 42% in the year to date, which has wiped nearly R53bn off its market cap.
That’s a sharp turnaround from two months ago, when Nepi Rockcastle was still one of the most popular rand hedge stocks on the JSE.
Other companies in the Resilient stable — Resilient Reit, Fortress Reit and Greenbay Properties — have shed more than 50% in the year to date following what initially appeared to be an orchestrated short selling campaign by hedge funds. Market jitters were further fuelled by three reports that questioned the group’s cross-holdings, BEE structures and the large premium to net asset value (NAV) at which the stocks were previously trading.
The Resilient group co-founded Nepi 10 years ago when the company bought its first shopping centre in Braila, in southeastern Romania. It was also involved in the start-up in 2012 of Rockcastle, which initially built shopping centres in Zambia but later shifted its focus to Poland.
Resilient Reit and Fortress Reit still own 13% and 24% respectively of Nepi Rockcastle.
However, analysts say Nepi Rockcastle’s aggressive sell-down since January 10 appears somewhat irrational given that it operates as an independent offshore entity with no exposure to BEE structures or cross-holdings in other group companies.
Moreover, unlike Resilient Reit and Fortress Reit, whose portfolios consist of sizeable stakes in listed entities, 90% of Nepi Rockcastle’s portfolio consists of a direct portfolio of income-producing properties. Nepi and Rockcastle merged in July last year, becoming the largest shopping centre owner and developer in the Central and Eastern Europe (CEE) region — its portfolio of 56 properties is spread among eight countries and valued at close to €5bn.
"The sell-off has been completely overdone. The market is now fuelled by fear and the pendulum has swung too far, in our view," says Len van Niekerk, senior property analyst at Nedbank Corporate & Investment Banking.
Kundayi Munzara, director and portfolio manager at Sesfikile Capital, has a similar view: "Markets tend to overreact in both directions, and the recent correction may have been unfair to Nepi Rockcastle if based solely on its association with the Resilient group."
Munzara nevertheless believes the premium to NAV of around 80% that Nepi Rockcastle was trading at by the end of 2017 was excessive. He says that even with a big development pipeline the large premium was unsustainable, especially if one compared it to prominent Western European mall owners such as Unibail-Rodamco, Klépierre and Eurocommercial, which now trade at double-digit discounts to NAV. The upshot of Nepi Rockcastle’s substantial share price loss is that the premium to NAV has been reduced to around 5%.
Munzara says that given Nepi Rockcastle’s superior earnings growth outlook of 10%/year compared with 5%-7%/year for most of its Western European peers, Nepi Rockcastle now appears "cheap to fairly priced".
Van Niekerk says there is no doubt that Nepi Rockcastle offers value at current levels. The company’s assets are exposed to robust economies that are still achieving strong underlying retail sales growth of around 8%-10%, which he believes is exceptional given that these countries have virtually no inflation.
Van Niekerk concedes that it will become harder for Nepi Rockcastle to maintain double-digit dividend growth as it continues to grow its portfolio. "But we still expect growth of 10%-13%/year in euro over the next few years," he says. "That’s very attractive hard currency growth that most SA-listed property companies will not be able to match."
Van Niekerk adds that investors are bound to start looking at the solid underlying fundamentals again, which should support a "healthy recovery" in Nepi Rockcastle’s share price.
At Nepi Rockcastle’s annual results presentation in Sandton last week, joint CEOs Spiro Noussis and Alex Morar assured investors that despite current share price volatility "nothing had changed" in terms of the company’s operations.
"Our strategy is still to own dominant retail assets in high-growth CEE markets," Morar said at the event. He noted that over the past eight months management has focused on bedding down the merger and further growing and improving the quality of the portfolio.
Last year, almost €1bn in new deals were concluded. For the first time the company entered Bulgaria and Hungary, where it bought three malls: the 82,000m² Paradise Center and the 51,500m² Serdika Center in the Bulgarian capital of Sofia, as well as the 66,000m² Arena Plaza and adjacent land in Budapest, Hungary. Morar said management had spent three years looking for the right deals in Hungary.
In addition, the company last year bought the Serenada and neighbouring Krokus shopping centres in Poland’s Kraków, which will be turned into a mega-mall offering 100,000m².
That will cement Nepi Rockcastle’s position as the dominant retail landlord in what is Poland’s second-largest and wealthiest city after Warsaw, as it already owns the biggest mall in the south of Kraków, the 92,000m² Bonarka City Center.
Morar said it had taken Nepi Rockcastle 10 years to get to a point where it could compete for prime retail assets in the region’s major capitals such as Sofia, Budapest and Zagreb.
"Building a portfolio of Nepi Rockcastle’s size and quality doesn’t happen overnight," he said, adding that the company’s management team was probably harder to replicate than the portfolio itself.
Looking ahead, Noussis said management was likely to make acquisitions worth at least another €1bn in 2018. In addition, at least five new shopping centres were either under construction or in the pipeline.
New acquisitions and the development pipeline will be funded with cash reserves of €200m, Nepi Rockcastle’s €600m listed property portfolio and debt as the company has a relatively low gearing level of 26%.
Noussis conceded that the CEE region had become increasingly competitive, with a strong inflow of foreign capital chasing property deals.
However, he said the company had the skills and resources to execute deals quickly. "Besides, the region’s positive consumer spending outlook amid improving employment figures means there is still scope to develop new malls and expand existing ones," he said.
Referring to Nepi Rockcastle’s sell-down, Noussis said: "We have been following the company’s share price movements with surprise and shock," adding that management’s focus remained on the "assets we buy and the results we produce". Noussis said if anything good had come out of the past few weeks, it was that the company was no longer trading at a substantial premium to NAV.
"In fact, we are trading at a yield of around 250 basis points higher than our European peers," he said.
Nepi Rockastle now offers a forward dividend yield of more than 7%, up from around 4% in early January.