JSE-listed EPP, Poland’s biggest retail landlord, reported results for the six-months ended 30 June 2020 that reveal a business with increased operational resilience.
In Poland, landlords could not legally enforce rent payments by tenants during the country’s seven-week COVID-19 lockdown from 14 March until 3 May 2020, which had a material impact on EPP’s net operating income. Net property income for the year declined to EUR 52.7 million with distributable earnings per share decreasing to EUR 2.38 cents per share, in line with guidance provided in June 2020. EPP’s total investment in properties and joint ventures were reduced to EUR 2.4 billion as a result of valuations declining by 3.9%.
While EPP’s earnings were impacted by pandemic regulations, its balance sheet remained stable with a secure liquidity position, including cash on hand of EUR 177 million. Nevertheless, to prioritise sustainability, EPP continues to take prudent precautionary measures to preserve capital and maintain liquidity. This includes retaining the dividend for the second half of the 2019 financial year and drawing additional corporate facilities in the first half of this financial year. As part of this process, EPP has elected not to distribute a dividend for the first half of the year while it waits for the COVID-19 recovery to gain greater traction and more certainty to return to the market. It will assess the payment of the second half dividend when finalising its full year results, which are expected in March 2021.
The net loan-to-value (LTV) ratio increased marginally from 50% to 51.7% over the period, however it remains well within covenant levels of 68%. EPP will amplify its key deleveraging strategy over the next 12 to 18 months. To reinforce its balance sheet position, EPP will review its asset base to identify those assets that could ideally be released into joint venture partnerships, or alternately sold outright, where it remains the active asset manager. EPP will adopt a measured approach to asset recycling to support LTV reduction, and potential asset disposals would only be concluded with suitable partners at the right pricing for EPP.
Tomasz Trzósło, CEO of EPP, commented: “EPP has revised its 2020 full-year earnings per share guidance upwards from EUR 4.00 – EUR 5.00 cents per share to EUR 4.75 – EUR 5.25 cents per share, assuming no further significant changes occur in our market. We are ready for the challenges ahead and focused on resuming dividend payments to shareholders as soon as possible while being cognisant of our balance sheet strength.”
He added: “While it was necessary to sacrifice income in the short term to support our retailers, we were able to extend most leases materially in return and have gained greater operational strength and long-term sustainability as a result. Operationally EPP has fundamentally increased its resilience. Our team has managed well to assist tenants, stabilise the portfolio, extend leases, access liquidity and reinforce our balance sheet. At the moment, we are focused on concluding the few remaining negotiations in the portfolio.”
In the first two months of the period pre-lockdown, EPP’s portfolio showed strong performance with sales up by 4.2%, footfall up by 2.1% and a 98% collection rate. During the lockdown, only 21% of gross lettable area (GLA) was operational. EPP prioritised liquidity and cost optimisation with temporary payroll cuts among other measures, as well as supporting communities within the catchment areas of the EPP portfolio and ensuring staff safety. It actively engaged with tenants and the real estate industry, and leveraged available government support programmes.
Poland is expected to be one of the least impacted economies by COVID-19 in the next 18 months with +1.1% GDP growth forecast for 2020-2021. The country’s rapid economic response to the pandemic lockdown included nearly EUR 50 billion of support to protect jobs and business liquidity and promote economic activity. This was followed by another stimulus package primarily aimed at providing liquidity for companies. The total stimulus amounted to almost EUR 70 billion – equal to about 15% of Polish GDP. Poland should also be a significant beneficiary of the EUR 750 billion EU recovery fund and EUR 1.1 trillion seven-year EU budget. Mobility statistics show that a significant part of the Polish economy is coming back to usual activity, and shopping centres’ footfalls and turnover could return to pre-pandemic levels in 2021. Additionally, the country is now well prepared to cope with COVID-19 and has one of the lowest numbers of new cases in Europe.
Poland reopened its shopping centres earlier than most other European countries on 4 May, followed by food courts two weeks later, and entertainment and fitness tenants from early June 2020. Nearly 100% of EPP’s retail space was operational from July 2020, up from 93% at end-June, and the portfolio has recorded strong footfall and sales recovery since reopening. By July, turnover levels had returned to 93% of 2019’s numbers. Portfolio footfalls have recovered to 85% of those in 2019 for September so far.
EPP ended the half-year with a stable occupancy of 96% and a longer weighted average lease termination (WALT) of 4.7 years, which will increase further in the coming months as all the negotiations with tenants are concluded. These agreements are being finalised against a backdrop of positive retail fundamentals. Poland has no high-street retail and low shopping centre densities of 265 m2 per 1,000 residents, compared to 282 m2 in Western Europe which has a substantial amount of high-street retail in addition to shopping centre stock. No new shopping centre product is likely to be introduced to the Polish market in the short term. It is also worth noting that the e-commerce share of total retail sales in Poland increased from 5.6% in February 2020 to a lockdown peak of 11.9% in April, but this had already been reduced to near pre-COVID-19 levels of 6.1% in August. This indicates that Polish consumers shop online when they need to, but they prefer physical in-store contact with products.
Leasing highlights post-lockdown demonstrated high levels of confidence in EPP’s assets. In August, the international retailer Primark opened its first store in Poland, which spans 5,400 m2 of GLA in the EPP co-owned Galeria Młociny in Warsaw. Debuting in the physical retail space, successful online retailer Modivo has invested in its first brick-and-mortar store, also in Galeria Młociny, with a revolutionary new shopping concept.
Commenting on EPP’s plans for the remainder of the 2020 financial year, Tomasz Trzósło said: “EPP is well-positioned and operating in a resilient economy that is supported by favourable property fundamentals. We will continue to move forward with our asset recycling strategy, keeping a firm focus on liquidity and balance sheet strength. Maximising footfall and tenant turnover are operational priorities for EPP, and we remain dedicated to adding value through strong asset management.”
