MAGAZINE: Covid-19 reminds listed sector of financial fundamentals

Economic turmoil is putting a premium on LTVs and solvency, while making the case for Europe’s shareholders to get active, like in the US.

Overall returns in the European listed property sector plunged by an eye-popping 21.7% during the first six months of year.

What a difference a deadly viral pandemic makes.

Only a few months ago the sector looked forward to extending the top of the longest cycle ever seen in the property market, before dipping gently at the end of Q4. Then along came Covid-19 and continent-wide lockdowns, plunging the sector into a coronavirus-induced coma.

Now 2020 will forever be known as the year of the virus.

Listed sector specialists PropertyEU consulted predict the months ahead are going to see the deepest recession recorded in living memory, eclipsing even the global financial crisis (GFC) of 2008. Many major European cities are predicting a decline in their GDP of between 6-12%.

Hopes of a speedy ‘V’ shaped recovery have given way to betting that the upturn is further ahead in the future, with the line tracking a return to health looking more like a ‘U’.

Across Europe’s listed sector, hardest hit has been the Netherlands, where overall listed returns contracted by a painful 62.7% over the year so far, followed by Spain (-41%) and France (-37.4%), according to Global Property Research data. Only Belgium (+5.3%) and Germany (+1.3%) managed to stay in the black.

The European listed sector is trading at a discount of around 20% to NAV, according to data by Green Street Advisors, against a 10% discount to NAV for the UK. ‘This not a massive discount,’ says Peter Papadakos, head of European research at Green Street Advisors. ‘It is to do with the UK having better balance sheets, less leverage, and consequently more resilience. The leverage ratio is around 30% in the UK and more like 50% in the EU.’

Year-to-date returns (YTD) by asset class make for grim reading. Retail suffered the biggest decline at -52%, followed by hotels (-50%) and offices (-30%). But amid the gloom some bright spots do exist, mainly in the alternatives segment. YTD returns for data centres stand at +17.5%; laboratory space at +1.75%, while logistics declined a mere 1.8%.

Rent collection
Across Europe since March, the primary focus has been upon liquidity and making sure the balance sheet is solvent. PropertyEU’s mailbox has been bombarded by firms announcing how well they have done in collecting rent from tenants. Covid-19 has made this metric a key indicator of health.

But collection rates vary greatly across sectors. For retail they have been 40%-60%, whereas in logistics they have been much higher, thanks to the sector’s exposure to online retail among other things.

In its latest results, UK-based industrial developer Segro revealed its H1 rental collection levels this year were in line with 2019. The UK REIT was able to raise its dividend to shareholders by 9.5% on the back of strong H1 results, including growing profits 6.5% compared to 2019 and a growing pipeline comprising 1.3 million m2.

Retail doldrums
Elsewhere, lockdowns across the continent deepened the woes of listed retail companies, already suffering due to the changing ways people shop in the 21st century.

The highest-profile casualty has been Intu, which announced at the beginning of August that it is to delist from the London and Johannesburg stock exchanges. It was a spectacular fall for the owner of 17 shopping centres in the UK, which proved unable to suspend repayments on its €5.2 bn debt pile.

Meanwhile, international giant Unibail-Rodamco-Westfield (URW) has been able to stave off trouble by raising debt at highly competitive rates. In May, it disposed of five shopping centres in France valued at more than €1 bn, to a joint vehicle of URW, Crédit Agricole Assurances and La Française. A consortium of mainly French banks lent Unibail-Rodamco-Westfield €1bn for this new strategic partnership, including ING, Natixis and Société Générale.

Leaning on the credit markets has been a real boon for listed firms, according to market watchers consulted by PropertyEU. URW was forced to slash its July dividend after seeing its net result for H1 tumble 27.2% and writing down 5.1% of the value of its portfolio.

Elsewhere, troubled retail REIT Hammerson definitely has pressure on its fundamentals, collecting 46% of its second-quarter rents, with only 34% paid at its UK, France and Ireland centres at the start of Q3.

But Hammerson is not alone. Indeed the company says its rental collection figure is in line with peers such as CapCo, which reported 30% of rent collection for Q3.
In early August Hammerson announced that it was proposing a rights issue to raise around €613 mln, as well as plans to dispose of substantially all of its 50% interest in VIA Outlets to its joint venture partner APG, the Dutch pension fund, for around €301 mln.

Hammerson’s two largest shareholders, APG and Lighthouse, who make up around 20% and 15% of current shareholding respectively, have committed to vote in favour of the rights issue and take up their rights. The company also announced the introduction of a new UK leasing approach, which will see the business move towards more flexible leases, rebased rents at more affordable levels, and indexation to replace the existing rent-review system, with an omnichannel top-up element.

According to one expert PropertyEU spoke with, Hammerson’s survival could depend on the success of its next move. Egbert Nijmeijer, co-head of real assets at Kempen Capital Management, says: ‘Hammerson went into this crisis overleveraged. It now needs an equity raise to save the firm. But doing it at the current share price is bad for shareholders. It depends if they can liquidate their assets, which is what they are trying to do.

‘At the end of 10 years of growth, some investors said, “why not increase the LTV?” Yet at the end of the cycle you need to sell assets. But selling shopping centres is very difficult for obvious reasons. If you’re dependent upon selling assets, there’s no liquidity and then valuations are written down.

‘Many listed firms have created extra credit lines for the next 12 to18 months and now have much better liquidity positions than in 2008. The LTV of the listed market was nearly 45-50% in 2008. Now it is around 36%.’

Dearth of listings
One feature 2020 shares with the 2008 crisis is the lack of IPOs. They have dried up in the property sector, as during the GFC. A rare exception was Olimpo Real Estate Portugal REIT – or SIGI - which floated on the Lisbon stock exchange in June. Launched by Sonae Sierra and Bankinter, it focuses on assets with long-term leases in Iberian cities.
Given managers’ reluctance to sign off on large capital allocation decisions in the current uncertain climate, mergers have also been few and far between. Bucking this trend was Apollo, the private equity investment manager, which acquired Atlantic Leaf for €168 mln in May.

This year has sparked a debate in the listed sector about how much office space companies will need in future, after lockdown measures forced employers to adopt home working for staff. Office is presently trading in line with retail in terms of discounts at -15% to gross asset value, according to data from Green Street Advisors.
‘The public market is much more spooked than the private market and asking, “What is the long-term rental growth potential and how much capex do you need to spend,”’ says Papadakos.

‘In contrast, the private market is mostly made up of investors who are already in the sector. There’s so much uncertainty in terms of what occupiers will do and private investors wait to see this. In real estate the cycles are long, and it takes time for consensus to take hold, whereas the public market gets there a lot quicker.’

Unlike others, the European Public Real Estate Association (EPRA) is predicting that the listed sector’s economic recovery from this historic pandemic will be speedy and ‘V’ shaped. It identifi es the sector’s resilience and record low interest rates, as well as a shortage of residential supply across Europe, as key ingredients fuelling the comeback – depending upon the pace of easing of lockdown restrictions and the impact upon jobs and incomes.

Dominique Moerenhout, CEO of EPRA, believes the impact of the pandemic shall not cause as much pain as the GFC of 2008 and Eurozone crisis of 2010 did. ‘The listed sector is much better prepared now [than for the GFC], in terms of balance sheet and debt structure,’ he says. ‘Today we have lower loan-to-value, much longer debt maturity, lower cost of debt and a higher proportion of fixed-rate debt. The structure is much better, and this has made a huge difference this time.’

Changing of the guard at UK REITs
This year has seen change in the boardrooms of some of the leading listed players.

UK-based REIT British Land put on hold its search for a new chief executive officer to replace Chris Grigg, who announced his intention to stand down at the start of the year. Meanwhile, Robert Noel stepped down from Landsec to be replaced by Mark Allen. Both changes were already in motion before the coronavirus pandemic took hold.

‘I don’t see these changes as being due to Covid disruption, with the possible exception of Hammerson,’ says Green Street’s Peter Papadakos.

After 11 years in the role, David Atkins has resigned as CEO from Hammerson amid deepening woes for the retail REIT, remaining in the post until early 2021. Ex-Landsec CEO Noel will be joining as chair of the board from October and will help lead the search for his replacement.

‘Most investors understand it’s not completely CEOs’ fault that listed fi rms are trading at discounts at this time. Relative to the US, it feels like the EU has a lot less shareholder activism, so CEOs generally don’t get pushed out by boards. But the question is, are CEOs pursuing a strategy that closes the NAV gap, or are they not changing their view despite events?’

Shareholder activism is called for, says Kempen’s Nijmeijer. ‘Engagement voting and active holdership are crucial because security is the number one priority. We call it being the “Real Active” shareholder, playing a proactive role in making companies better in terms of the board, liquidity, environmental and social matters. There is a definitely a need for active shareholdership.’


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