Letter to the Shareholders 2021 from the Chairman and the CEO
Dear Shareholders,
2020 was the most difficult year in IGD’s history.
Even though we carefully analyzed all possible scenarios when structuring the Business Plan 2019-2021, we could not have imagined finding ourselves in such a challenging environment, with heavy restrictions on shopping center operations caused by the need to limit the spread of the Covid-19 pandemic.
After having begun the first two months of the year with results that indicated we were on the right path to achieving the Plan’s targets, beginning in March 2020, in the face of severe lockdown measures, we found ourselves in an unprecedented situation. We, however, demonstrated that we knew how to react quickly, with clear priorities: protect the health of the people present on our properties and safeguard the economic-financial sustainability of our business.
During the period between June and October, when the restrictions were eased partially, the valid positioning of our assets and the effectiveness of the measures we were implementing to manage the Covid outbreak were confirmed as demonstrated by the speedy recovery of the operating performance in terms of footfalls and retailers’ sales. In the last few months of the year, however, we once again found ourselves in front of limitations which impacted a season that is crucial to retailers’ sales.
Overall, however, we closed 2020 with a 28.8% drop in Funds from Operations, which came to €59.3 million. This change was largely in line with the decrease of 25-28% indicated in the guidance provided last August.
In order to better understand the performances recorded in this difficult year and the impact that the pandemic had on the numbers, we need to look at the measures we adopted in terms of operational and financial management.
The measures taken to support tenants in 2020 will not have any carry over impact in 2021
Informed by the sense of partnership and mutual sustainability that IGD has always cultivated with its retailers, we managed this delicate phase with our Italian tenants by offering deferred payments and temporary rent discounts on rent, amounting to 1.7 month’s rent on average, expensed entirely in the year.
Our centers were always open, even during the lockdown
During the months when the restrictions were the most severe, we were able to verify the important role of our shopping centers, which were always open, as a place where you can purchase essential items, like food products, electronics, as well as health, personal and home care products. Located typically just on the outskirts of urban areas, our locations were always accessible, within the limits on movement allowed outside the place of residence.
The reassuring sales and footfalls recorded in the period May-October
Beginning in May, as the restrictive measures were gradually eased, we were able to regain partial possession of our business. Even though organized events were still not allowed and despite the limitations on the hours of operation and mandatory distancing for food courts, we witnessed a rapid recovery in footfalls and retailers’ sales. At the end of September IGD had recovered about 87% of the footfalls and around 97% of the retailers’ sales recorded in the same month 2019.
Another encouraging sign emerged during the three-month period (August, September and October), during which retailers’ sales rose 0.3% against the same period 2019, though footfalls were down by 12.6%.
During the months subsequent to the reopening, IGD’s visitors confirmed their appreciation for IGD’s format
If the March-April lockdown period confirmed the vitality of the shopping center as a regional point of reference for the purchase of essential goods, the months of the reopening (between May and October) demonstrated that the format of our shopping centers is entirely valid: medium sized assets, dominant in their catchment areas, experienced as the ideal place for safe, practical and convenient shopping; IGD was able to differentiate itself from the competitors because it has a portfolio of urban centers, capable of offering a complete range of goods and services under one roof which allows for ample choice while optimizing time.
With the second wave of the pandemic, which became stronger beginning in October, came new restrictions which penalized retailers’ sales severely in the last few months of the year when Black Friday and Christmas promotions take place. We, therefore, had to begin a new phase of negotiations with tenants similar to those carried out during the first and more severe lockdown.
A controlled risk profile was maintained
The individual negotiations that we carried out with an impressive 707 retailers allowed us to close 2020 with financial occupancy at 94.3%, and we succeeded in collecting more than 91% of the net turnover. We count on receiving the remainder in the first half of l 2021.
Leveraging on the fact that the rents per square meter of our shopping centers have always been fair, we were able to end the negotiations without modifying the terms and conditions of the existing leases, except for a couple or rare exceptions of retailers who were already experiencing difficulties even before the pandemic.
Even though most retailers expressed interest in variable rents, we maintained the minimum guaranteed clauses in all our leases, including in light of the fact that IGD needs to provide its investors with visibility on future cash flows as the company has both bonds and shares that are traded on financial markets.
The rents in the 110 leases renewed in 2020 were largely unchanged (-0.38%).
The operating metrics testify to the superior resilience of IGD’s portfolio
If we consider the long period of mandatory closures for many stores, the performance of the operating metrics of IGD’s Italian portfolio was substantial. More in detail, we verified that our performance was better than the sector average based on the statistics of CNCC, the Consiglio Nazionale dei Centri Commerciali. An analysis of these figures shows insolvencies particularly for large shopping centers, located outside urban areas and, therefore, impossible to reach during the lockdown.
In 2020 the footfalls at IGD’s centers were down 29.5% compared to 2019, versus a sector average of 34.2% in Italy. The sales of retailers in IGD’s malls were also better than average, falling 27.6%, while the benchmark was down 29.9%.
We also shouldn’t overlook the fact that for supermarkets and hypermarkets, which account for about one fourth of the value of IGD’s real estate assets, the drop in sales was limited, coming in at –2.8%.
In 2020 the shopping habits of visitors changed, also because they entered the shopping centers to make more targeted purchases, as demonstrated by the increase of 21.9% in the average ticket recorded in December 2020 compared to the same month in 2019.
Winmarkt reports a good collection rate
In Romania, where there were also long lockdown periods due to the pandemic, IGD benefitted from the presence of a food anchor in its centers and, indirectly, the measures that called for the closure of centers of more than 15 thousand square meters. As a result of these measures a significant part of the competition was eliminated which bode well for the collection rate that reached an average of more than 94% for the portfolio of 14 Winmarkt centers. Based on a more standardized approach than the one adopted for negotiations in Italy, a single policy was adhered to which consisted in granting a one-off discount of two months’ rent to all tenants impacted by the restrictions. The rents in the leases renewed in 2020 were largely unchanged (-0.47%), while the occupancy rate went from 97.6% at year-end 2019 to 93.6% at year-end 2020.
An extremely varied performance based on the type of activity
IGD’s portfolio, with a couple of exceptions, was not subject to large retailer bankruptcies. Overall, only 5 tenants began bankruptcy proceedings.
There was, however, a considerable difference in the performances depending on the category of merchandise. The demand for home comfort improvement solutions was high, as well as for consumer electronics and personal care products. At the moment restaurants, however, continue to be penalized due to the continued restrictions and, in a few large urban centers, the lack of traffic between 12 non and 2:00 p.m. because many companies, above all in the service sector, continue to promote remote working.
Our four cinemas were also impacted negatively by the pandemic as, even after the restrictions were eased last spring, they remained closed due to the lack of new movies. While we entered into a framework agreement with Coop in 2018 which called for a new merchandise mix, that would have resulted in a gradual increase in the number of services by decreasing the size of the hypermarkets, the process has yet to be completed. At this point restaurants represent only 7% of total rents, and entertainment not more than 4%.
Conversely, the development of personal services contributed to the resiliency of our revenues at a time when non-essential businesses had to close.
The situation created by the pandemic did not, however, stop IGD’s commercial activities which resulted in the introduction of new brands that better reflect current consumer trends.
Measures for safeguarding financial sustainability
In the face of a foreseeable drop in rental income and the limited visibility of rent collection, IGD immediately took steps to protect its cash flow.
Even though the Covid-19 crisis was not foreseeable, it came at a time when we had significant liquidity, due to the liability management carried out in November 2019, which meant we didn’t need to resort to bond issues at a time when the market would have been unfavorable.
A first measure was implemented already in March 2020 based on which all non-essential investments were suspended. For a large part of the year, construction sites remained closed due to Covid-19. A total of €8.0 million in investments were made on essential capex for maintenance and marketing/pre-letting. Another €10.3 million was spent on development in Livorno, where we revised the timetable for the Porta a Mare project, extending the completion date We are convinced that once the restrictions of the pandemic are overcome, our extensive requalification plan for the Tuscan city’s waterfront will continue to be of great value, as shown also by the interest expressed by a large chain in managing the future hotel. A lot of appreciation has also been shown for the residences given the new lifestyles that are emerging which aspire to more comfortable living. We will revise the original design for the Officine Storiche section to some degree, as it is very focused on entertainment and restaurants.
Restyling and remodeling projects originally in the pipeline for 2019-2021 were suspended. Work is expected to resume in 2021.
With a view, once again, to preserving cash flow, as well as meeting the requirements for the government guaranteed loans, we reduced the dividend distribution for 2019 to €25.2 million which is the minimum amount required to maintain SIIQ status.
We also renewed €60 million in committed credit lines through 2023 which were added to €151 million in available uncommitted lines.
In October 2020 IGD also received a €36.3 million loan granted by MPS and guaranteed by SACE and, at this point, all our financial needs for 2021 were already covered.
In January 2021 IGD also exercised the option for early redemption of the €70.8 million outstanding on the bond maturing at the end of May.
Today IGD’s corporate debt is rated by two agencies: Fitch Ratings, which has issued a rating of BBB- with a negative outlook, and S&P Global Ratings, with a rating of BB+ with a negative outlook. Maintaining an investment grade rating is a priority so that the step-up clause of 1.25% on the outstanding bonds is not triggered which would impact us beginning in 2022, above all, when we will need to carry out our first refinancing.
The pandemic severely impacted the economic-financial performance in 2020
When looking at the 2020 results, the fact that the Italian government has not provided any sort of relief for real estate companies, not even by lowering property taxes (IMU) must be taken into account. The only form of government aid IGD received came under the form of the unemployment subsidies received for headquarter personnel during the weeks of total lockdown and the SACE loan.
The main indicators in the 2020 financial statements reflect the net direct impact of Covid-19 for a total amount of around €18.5 million attributable to lower revenues, due to the one-off discounts granted on rent, higher direct costs, which include credit losses, as well as rents payable on leasehold properties that were lower than in 2019.
Core business EBITDA fell 20.6% to €99.4 million in 2020 as a result of the €27.1 million drop in net rental income, partially offset by savings in general expenses of €1.1 million The core business EBITDA Margin came to 65.4%.
Based on the appraisals of the independent experts, the fair value of IGD SIIQ’s real estate portfolio, including the leasehold properties, reached €2,309.01 million at year-end 2020, 5.22% lower than at year-end 2019. Net financial debt, including the impact of IFRS16, was €1,155.5 million while the Loan-to-Value came to 49.9%, higher than the 47.6% posted year-end 2019.
Fair value adjustments and writedowns were negative for €146.0 million at year-end 2020 which had a noticeable impact on the bottom line of the income statement and resulted in a net loss of €74.3 million, compared to a net profit of €12.6 million in 2019.
As a result of the loss recorded by the parent company, attributable to the property writedowns, the mandatory SIIQ distribution of a dividend was waived. In light of the unforeseeable circumstances and with a view to safeguarding the Company’s future financial sustainability, the Company will not pay a dividend for FY 2020.
We confirm our strategy for the future, because the format holds
The changes in consumer habits, which were accelerated, due, to a certain degree, to Covid, push us to innovate, using, on the one hand, the opportunities provided by digital technology, and, on the other hand, by including new brands in our malls which reflect current lifestyles. While we need to have a defensive approach for the duration of the pandemic, once the restrictions are eliminated, above all those relating to weekend openings, we will be able to be more proactive in our approach to co-existing with e-commerce: a channel that grew rapidly when mobility was limited, but which will likely stabilize once things are back to normal.
True omnichannelism leads to the shopping center
During the months between June and October 2020, the rapid recovery in shopping center footfalls undermined the likelihood of a future “de-malling” which would be the demise of the format. We have to, therefore, be ready and able to provide customers with a truly real omnichannel experience. On the one hand in a few months we will begin to use new interactive Customer Relationship Management applications, which will make it possible for tenants to establish a dialogue with customers and develop personalized offers based on careful customer profiling. On the other hand, it will make it possible for retailers to use the shopping center spaces also as flagship stores for traditional and/or online sales and to organize practical ways to pick up the purchases made online: our centers will also be able to act as logistic hubs, undoubtedly practical given the accessibility and parking available.
Many of our retailers, above all the Italian ones, need support from the shopping center in order to have effective CRM systems, if they want to develop offers and promotions of goods and services which are designed based on the catchment area. In addition to providing data about footfalls, the new technologies will make it possible for us also to generate contacts and profile customer segments based on gender and age bracket. A shopping center with wi-fi, website and on social media is, after all, an ideal gatherer of profiles: it will, therefore, be much more efficient to develop these CRM systems for the shopping center rather than for the single retailer.
While we do not expect to make significant changes to our merchandising mix, we are already aware that will have to make a few adjustments on a local level and get ready to include more services in the merchandising mix which will fuel traffic and extend the life cycle of the centers without putting pressure on rents, if – as is our case – the historic ones were not high.
A proactive dialogue with policy makers
During this time of crisis, we also strengthened our work with trade associations, particularly with the Consiglio Nazionale dei Centri Commerciali, of which our Director of Asset Management, Development and Network Management is Chairman.
We will intensify our dialogue with the Italian government in the coming months because the funds called for in the “Next Generation EU” package could be used in concrete programs which fuel change and innovation in shopping centers thanks to the tools that will be included in the Italian Recovery Plan. The investments we could make in reducing the environmental impact and improving the energy efficiency of our buildings are fully consistent with the “Green Deal”, guidelines and the digitalization process will help us to equip our shopping centers with the new CRM tools called for in the document “A Europe fit for the Digital Age”.
Over the next few weeks, we will also solicit the finalization of the “Ristori 5” program, in order to include the tenant agreements in a clearer framework.
We will also be tireless promotors of the fact that traditional commerce needs the correct means to make it through the crisis and a tax treatment that makes it possible to compete with e-commerce on equal ground.
Progress in Governance made in 2020
In 2020 we made substantial progress in terms of Corporate Governance. In March the anti bribery management system obtained UNI ISO 37001 certification and the Organizational Model was, consequently, updated.
While not mandatory for IGD, based also on the last Board review it was strongly recommended to adopt a Succession Plan. In 2020, therefore, a project dedicated to the definition of a Plan was begun which addresses the succession of five strategic executives, in addition to the Chief Executive Officer.
When the new board is appointed on 15 April 2021, the criteria used to select independent Directors and Statutory Auditors will be even more rigorous and compliant with the best practices suggested by Borsa Italiana’s Corporate Governance Committee.
A lot of work was, lastly, done on risk management, with an update of the Enterprise Risk Management model which, this year, was focused on the impact of the pandemic and, more specifically, on credit collection risk based on peer benchmarking.
Financial sustainability will continue to be the priority in 2021
In light of an uncertain scenario for 2021, above all with respect to the amount of time needed to complete the Covid-19 vaccination program, IGD will have to act on all possible fronts to maintain a solid financial profile, which makes it possible to maintain an investment grade debt rating: a target which makes it necessary to bring the Loan-to-Value to 45% or lower as quickly as possible.
Lowering the LTV, the top short-term priority, is also key to being ready to begin again with the new investments which will make the centers even more appealing and will attract a growing number of customers into retailers’ stores who are interested, specifically, in what they offer.
The tools for maintaining a correct balance
Consistent with the Business Plan 2019-2021, between the first and second halves of 2021 we intend to sell a portfolio of hypermarkets and supermarkets which will bring in between €170 and €190 million. The sale of these stand-alone assets, which are not part of our freehold malls, at book value is credible in light of the transactions completed on the European market in the last few months.
While, at the moment, the demand for malls is stuck due to the uncertain future of the retail market, the pandemic highlighted just how important it is to have points of sale for food shopping nearby, including in light of high delivery costs and inefficient logistics.
We, therefore, granted a mandate to a premiere international advisor to explore investors’ interest. We are sure that the net initial yield offered by the long-term leases pertaining to this portfolio could be very attractive in an environment in which interest rates are destined to remain very low.
We also have a wide variety of options from among the liability management tools available to us which allow us to look forward to the next debt maturities, which would be after May 2020, with serenity; this could include a direct market issue.
When there is greater visibility about the future, it will be possible to build a new Business Plan
While, on the one hand, we are convinced that our shopping centers will return to being “spaces to be lived in” as per our payoff, on the other hand we have less visibility as to how long the economic crisis triggered by the pandemic will last. We, in fact, work in a sector that is noticeably influenced by household spending. Toward this end, we will carefully monitor the measures that the new Italian government might implement to sustain private consumption and provide retailers with aid in the even of the loss in revenues during the periods of closure.
As we have seen, the severe crisis triggered by Covid-19 made it impossible for IGD to reach the targets of the Business Plan 2019-2021, even though the results for the first of the three years were largely as forecast. In 2021, while we expect to report improvement, particularly in the second half, we are aware that it won’t be possible to fill the gap with respect to the Plan created in 2020. The previous targets are, therefore, to be considered obsolete in the new context.
Following adequate induction of the new directors, the Board of Directors that will be appointed on 15 April 2021 will undoubtedly work on a new Business Plan which will guide IGD through 2024.
IGD’s stock continues to be a dividend play
What we can already say, right now, to our shareholders is that the lack of a dividend for 2020 will remain an isolated incident, connected to the unprecedented situation caused by the pandemic.
Once the shopping centers return to normal operations, IGD will once again be a Company for which shareholder remuneration through the distribution of a dividend is a strategic goal.
We, in fact, have a track record of paying dividends, each year, without interruption since our IPO in 2005.
Not only: IGD has always paid a very generous dividend, with an average yield of 7.0% between 2010 and 2019. Even though the SIIQ regime requires that 70% of the net profit generated by the rental business be distributed as a dividend, whenever it was possible IGD’s Board of Directors proposed the payment of a dividend that was higher than this minimum threshold.
IGD has recently been trading at around €4 euro: a level which is well below EPRA NAV/NRV 2020 of €10.38, as well as the consensus target price of the analysts covering the stock of €4.6 euro. The room for potential upside is, therefore, clear, as well as, ample.
At a time characterized by great uncertainties, we would like to share two certainties with our shareholders: the validity of the positioning of our real estate portfolio, including ln light of pandemic related stress-testing, and the philosophy with which we manage it; on the other, our equity story, of which attractive and sustainable shareholder remuneration will continue to be a pillar.
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