ANALYSIS: Gazit bets on CEE shopping centres with take-private offer for Atrium

Gazit chairman Chaim Katzman ‘sees value in Atrium’, as the Israeli firm takes advantage of a NAV discount following a year-long share price slide to take the firm private.

Tel Aviv-listed Gazit Globe, the majority shareholder in shopping centre owner and developer Atrium European Real Estate for the past 11 years, has announced plans to take full control of the listed, CEE-focused company and make it private.

Gazit chairman Chaim Katzman told PropertyEU that the move underlined its faith in Atrium’s retail strategy in Warsaw and Prague, whilst also taking advantage of a year-long decline in the European firm’s share price. Gazit currently owns 60.1% of Atrium, which is listed on the Vienna and Amsterdam Euronext stock exchanges.

‘There is no doubt that there is a negative sentiment towards retail stocks in Europe right now,’ said Katzman. ‘But we believe that Atrium’s assets are resilient and have potential for future growth – even if we are alone in that thinking. We hope we’re not wrong.’

CEE-focused portfolio
Atrium owns 34 shopping centres in Central and Eastern Europe (CEE) with a value of around €3 bn, 85% of which derives from assets in Poland and Czech Republic, with the rest in Slovakia and Russia. However, investor fears about the impact of e-commerce and global headwinds affecting the retail trade have seen Atrium’s share price slide by 16% over the last year. ‘Its net asset value (NAV) is slightly higher than the price we are paying,’ Katzman confirmed.

Gazit and its bidco vehicle is offering €3.75 a share for the minority shares it does not own, an 18% premium to the closing price of the share on the Monday before the deal was announced, and a 13% premium to the average price this year. The firm said it would delist Atrium and eventually sell 12% of the business to Israeli investor Menora Mivtachim, a partner with deep pockets as one of Israel’s five largest insurance and finance groups. ‘Once it becomes private, we believe that Gazit has adequate resources to expand the business,’ Katzman said.

Direct ownership
According to Katzman, the move fits with Gazit’s strategy to increase the direct ownership component of its real estate assets, focusing on dominant properties in major cities. ‘Why partly own companies that you believe in when you have the opportunity to own them outright?’ he said.

The acquisition would entail buying existing shares and yet-to-be-issued shares not already owned by Gazit and affiliates valued at €565 mln. Atrium has seven weeks to solicit other bids for the acquisition of all its share capital, with Gazit agreeing to cooperate while the firm seeks superior offers.

Gazit this year reduced its 31.3% stake in Canada’s First Capital Realty, a ‘necessity-based’ retail real estate specialist, to 9%, releasing liquidity, Katzman said. ‘We believe there is more value in Atrium,’ he added. ‘The Gazit strategy is to own irreplaceable assets in urban high-density markets. Many Atrium assets fit into that category.’

Investment bank UBS said that the offer was fair in an opinion letter to the independent committee of the board of directors. The board said it was unanimously recommending the takeover.

Positive results
Atrium Group saw its net rental income in its main markets grow by 4% in the first half of the year as it continued to rebalance its portfolio to focus on shopping centres in prime locations, particularly in Prague and Warsaw. In recent years, the firm has exited Hungary and Romania and vastly reduced its holdings in Russia.

Key recent sales include Atrium Koszalin in Koszalin and Atrium Felicity in Lublin, disposed of in July for €298 mln, around 3% above book value. Atrium also acquired a fifth Warsaw asset, King Cross shopping centre, for €43 mln in June.

‘We are pleased with the results in general. We think CEE is still strong, and our focus is paying off,’ Atrium CEO Liad Barzilai told PropertyEU.

‘The results show we’re continuing to execute our strategy. We now have a billion euros worth of assets in Warsaw, and still have plans to continue the redevelopment of the three assets there which were extended last year. The other assets will undergo full extension and refurbishment programmes next.’

According to Barzilai, Atrium’s ‘dominant city’ strategy extends to tier one cities as well, not just the Polish and Czech capitals. ‘The focus is really on growing urban areas,’ he affirmed. ‘We believe our strategy will not only maintain value, but create value. We believe quality will prevail and that is our focus.’

So why has Atrium’s share price struggled to match the value of its quality portfolio? ‘Historically, Atrium traded at a discount to NAV for a variety of reasons,’ Barzilai said. ‘In line with the market trend, we are facing the same realities as any Europe-focused retail real estate company trading today.’

The future of retail
In an interview with PropertyEU earlier this year, Barzilai said he could envisage a day when Atrium might ‘diversify into mixed-use assets’ as the company continued to monitor the outlook for retail real estate.

‘At this point our strategy is retail,’ Barzilai said. ‘I could see us diversifying further into mixed-use, with retail remaining the dominant element. It's a bigger discussion, however we do already look slightly more widely in terms of mixed-use components as part of our strategy.’

In the context of the takeover bid, Katzman confirmed that Gazit would continue with a dynamic approach to shaping Atrium’s portfolio, should the bid prove successful. ‘I don’t think we’d add residential, but there’s definitely scope to add offices, hotels, and extend the commercial uses of the assets,’ he said. ‘But we also believe that Atrium has some very unique assets which will continue to drive demand from quality retailers.’ Lazard is acting as financial advisor. If successful, the takeover could go through in early 2020.

European retail REITs mind the gap between share price and NAV
Atrium’s share price has trailed NAV for the best part of the year, reaching a 20% trading discount shortly before the Gazit bid, but the company is not the only retail REIT in Europe with such a gap, analysts suggest.

‘There has been a paradigm shift from online shopping, and investors - perhaps belatedly - are rightly questioning how to value retail assets,’ says Rob Virdee, analyst at Green Street Advisors. ‘There is undoubtedly a place for physical retail, and the bifurcation between the best retail assets and the rest will continue to play out. At the moment, however, many assets are being tarred with the same brush.’

Virdee cites the ‘eye-watering’ situation ‘in UK Retail REITland’. ‘Operational results have been terrible, and discounted asset sales are too little too late to offset rising financial leverage,’ he says. ‘Depressed share prices have gone into freefall.’ According to a recent report co-authored by Virdee, traditional property valuations across UK retail portfolios are essentially struggling to catch up with reality in a rapidly evolving market. Virdee finds risk-adjusted returns based on independent values to be ‘inadequate’, which ‘partially helps explain the dearth of UK retail property transactions in the direct market and the steep discounts in the publicly listed market’.

According to Green Street’s calculations, Intu, which has seen material valuation declines over the past year, is in particular trouble: the returns implied by its share price are ‘unlikely to be attractive enough for private market buyers to transact’. Intu’s recent H1 results revealed that capital values declined aggressively by 9.6% across the portfolio (-10.4% in UK, values ‘unchanged’ in Spain). Meanwhile, net rental income on a like-for-like basis fell by 7.7% to £205.2 mln, with vacancy and CVAs reducing rent by 7%. Intu is trading at a 70% discount to its June-end NAV, according to Goodbody.

Hammerson is in a slightly better position. Analyst Goodbody notes that while Intu is 92% exposed to UK retail by value, Hammerson’s exposure is just 42% of its portfolio, and the firm ‘is now recognising the reality of the situation facing the sector and willing to rebase valuations towards a level where transactions may occur’. Recent disposals have placed the group on track to meet sales targets, although falling rents remain an issue, and the stock is trading at a 51% discount to Green Street’s spot NAV.

Unibail-Rodamco-Westfield is another retail property behemoth facing steep challenges. Green Street Advisors warns that the company ‘shows no sign of pulling back on external growth, despite the public equity market telling it to shrink aggressively’. The business has invested €1.4 bn per annum over the past decade and management says it expects to ‘keep a similar pace of (development) deliveries over the next five years’.

‘Yet Unibail-Rodamco’s cost of capital was hugely more competitive 5-10 years ago versus today,’ Virdee says. ‘Incorporating the firm’s high cost of equity, its development pipeline is estimated to generate virtually no value for shareholders on a risk-adjusted basis.’  On latest results, Unibail is trading at a 23% discount to Green Street’s spot NAV.


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