Eastern European property still a draw
Nepi Rockcastle is shrugging off the Resilient contagion, and recent results have put it back on punters’ watchlists
SA companies’ offshore track record may well be questionable, but Eastern Europe is one destination where a number of South Africans have been able to successfully replicate their business models. Mall owner Nepi Rockcastle is a case in point.
The company, co-founded by former Nedcor investment banker Martin Slabbert and the Resilient property group more than a decade ago, entered Central and Eastern Europe (CEE) well before other SA property players flocked to the region.
Romania was chosen as the company’s initial port of call because there was a shortage of formal Western European-style shopping centres. Following the demise of communism in 1989, the country’s consumer market had become highly aspirational and fashion-conscious, keen to spend new-found wealth. It was not unlike the situation in post-apartheid townships and rural areas, where Resilient started building malls in the late 1990s.
When it first listed on the JSE in 2009 as New Europe Property Investments (Nepi), it owned fewer than 20 properties in Romania. They were worth about €300m. Today, it is the largest mall owner in the CEE region, with a portfolio of 59 properties worth €6.1bn across nine countries. The company’s track record of rewarding investors with above-market capital growth was interrupted last year, when the share price plunged 48% following allegations of insider trading and share manipulation against various companies associated with the Resilient group.
But earlier this year, Nepi Rockcastle was cleared of any wrongdoing by the Financial Services Conduct Authority. While the share price is still some way off its late 2017 highs of R217, it touched R133 this week, up 35% from its R99 November 2018 low.
More importantly, there has been no negative impact on its earnings performance. Last week management declared dividend growth of 9.55% (in euro) for the six months to the end of June. That compares to the average 2% (in rand) dividend growth that SA-focused property stocks are expected to deliver this year. Though growth for the year to December is expected to be in line with management’s previous forecast of 6% and therefore lower than previous years, it is off an already high base.
The counter has also reappeared on most fund managers’ stock-pick lists. Stanlib’s Keillen Ndlovu believes Nepi Rockcastle offers value at a current dividend yield of 7.8%. He says: "The balance sheet is well-managed, occupancies remain high, there are virtually no arrears in the portfolio and sales in its malls continue to grow strongly. This is driving rental growth as well as NAV."
Kelly Ward, investment analyst at Metope Investment Managers, believes Nepi Rockcastle offers a good buying opportunity for long-term investors looking for a high yield and a growing hard currency income stream. "We like the CEE regions of Poland and Romania in particular, given wage growth that is still ahead of inflation and relatively strong GDP growth forecasts."
At last week’s results presentation, Nepi Rockcastle’s Romanian-born CEO, Alex Morar, a finance graduate from New York University, said despite the allegations against the company last year, nothing material had changed in terms of its strategy or performance. "We have done exactly what we promised to do."
In the six months to June 30, Nepi Rockcastle’s shopping centres achieved retail sales growth of an average 8.2% and rental renewals of 9.5%. In SA most mall owners are reporting flat or falling rentals and retail sales are growing at low single digits.
Morar said international retailers are keen to expand existing stores and roll out new ones as the CEE economy continues to grow at a faster pace than its EU counterparts. He noted that average wage and consumption per capita in the region is still way below that of its Western European neighbours.
"In my view the CEE will, for at least the next decade, still play a game of convergence with the West," he said.
He plans to continue growing the company’s CEE footprint via new developments and more acquisitions. "We are sticking to our long-term strategy of owning the most dominant assets in the most attractive cities," he said.