JSE-listed Polish retail landlord EPP reported earnings of €5.56 a share for the year ended December 31, 2020, exceeding the company’s guidance of between €4.75 and €5.25 a share.

This, combined with a strong retail rebound in Poland and “promising” economic prospects, bodes well for EPP’s future performance, the company said on March 10. The company did not, however, distribute a dividend for the second half of its financial year as a means to reinforce its capital structure, given ongoing Covid-19-related challenges.

In conversation with Engineering News, EPP CEO Tomasz Trzósło said that while the company was hopeful of a promising year ahead, EPP continued to consider the measures that have been, and are being, implemented to help curb the spread of the virus, as well as macroeconomic trends and how quickly citizens are being vaccinated.

Poland’s ongoing Covid-19 vaccination programme and eased lockdown limitations – which currently allow for 96% of EPP’s gross lettable area (GLA) to operate – provide the company with a solid basis for recovery.

“We believe that from late summer, things should be coming back to normality because there will be enough people vaccinated,” he added, noting that this should equate to about half of the Polish population being vaccinated by July this year.

The EPP portfolio occupancy is a stable 96% and continues to attract new store openings by leading brands including Primark, Pepco, Dealz, Sephora, Levi’s and Carrefour.

Further, EPP operates in a resilient and strong economy, as Poland reported a relatively small contraction in gross domestic product (GDP) of 2.8% in 2020 and is expected to achieve rapid GDP growth of 8% combined in the next two years.

Retail spending is driven by stable, low unemployment rates and consistently rising wages, EPP commented.

In terms of liquidity, EPP safely managed its financial liquidity during the pandemic with a disciplined approach and can, as a result, meet all its financing commitments and has adequate debt headroom in terms of financial covenants.

However, EPP was not left unscathed by the pandemic, as 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, including the amount of time the tenant’s store is closed.

This had a material €40-million impact on EPP’s net operating income and net property income declined to €114.2-million. Distributable earnings fell 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.

Meanwhile, Trzósło indicated that the value of total investment properties reduced to €2.13-billion owing 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 cash flow impact caused by Covid-19 reflected in these values but also the long-term fundamental retail market changes, and further devaluations are unlikely,” he continued.

OUTLOOK

EPP 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 said it “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 of 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 started 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, and should be concluded in 2022, Trzósło confirmed to Engineering News.

Given the prospects for future economic recovery, EPP foresees this strategy taking about two years to finalise, which will help to avoid deep discounts in the current market and take advantage of the best possible market fundamentals,” Trzósło said.

“We believe there should be appetite from investors to partner with EPP, but before we can achieve that, we need some post-Covid stabilisation of operations to be able to prove to potential investors what the post-Covid stable level of income, occupancy and tenant turnovers will look like,” he elaborated.

Commenting on EPP’s plans for the remainder of the 2021 financial year, Trzósło said the company was “focused on resuming dividend payments to shareholders as soon as possible, while being cognisant of our balance sheet strength”.

EPP intends to focus on the disposal programme, refinancing upcoming debt expiries and reinforcing the overall capital structure to support this.

EPP provided guidance of between €7 and €7.25 in distributable earnings a share for its 2021 financial year, assuming there is no further significant market disruption.