Letter to the Shareholders
2018 was a very intense and fruitful year, which marks an important milestone in the growth path that IGD has been pursuing since the IPO in 2005 through today as shown by the value of the real estate portfolio which has quadrupled in the 13 years rising from €590 million to €2,412 million.
2018 was also a year of growth: we expanded our portfolio with the 4 malls and the retail park purchased in April from ECP for €195.5 million and successfully completed a €150 million capital increase which was used to finance a significant part of this transaction.
2018 marks an end as it is the last year of the Business Plan 2016-2018 and, at the same time, a starting point as in November the new Board of Directors approved the new Strategic Plan which will carry your company through 2021.
The results shown in the Annual Report 2018 enabled execution of the Business Plan 2016-2018 which had challenging targets.
In the last four years we have doubled our cash flow generation, going from the €35.1 million recorded in 2014 to €79.7 million in 2018, with a weighted average annual growth rate of more than 20%. With the 21.4% increase in FFO achieved in the last year of the Plan 2016-2018 we have reached a record level and exceeded the most recent guidance: in August, in light of the acquisition, we forecast a rise in FFO of at least 20%.
In 2018, the robust performance of rental income and revenue from the real estate business, which rose 9.2%, drove EBITDA and fueled a 12.4% increase in the core business EBITDA which benefitted from the traditional policy of keeping operating costs under strict control. The core business EBITDA Margin amounted to 71.9%, an increase of an impressive 220 basis points compared to 69.7% in 2017: clear testimony to the ability of the assets that just joined our portfolio to make an incremental contribution to the Group’s margins already in the short term.
The intense growth phase which characterized the last few years was carried out while maintaining a disciplined approach to finance: the drop in the Loan-to-Value to 45.8%, and the Interest Cover Ratio of 3.5x, as well as the drop in the cost of debt to 2.7%, therefore below the threshold of 3.0%, are in line with the path outlined in the Plan for 2018.
Net profit was impacted by the property valuations: the decrease from €86.5 million in 2017 to €46.4 million in 2018 is attributable to the negative impact of fair value measurements and the investments made offset by the impact of the acquisition of 4 business units. If compared to the size of IGD’s real estate portfolio, which at year-end exceeded €2.41 billion, the change in fair value is limited. This figure indicates the ability of our portfolio to maintain its value even in less market conditions that were less favorable than in 2017, thanks to the solid and sustainable positioning of our shopping centers in their respective catchment areas and the investments made to maintain the quality high.
The fair value of IGD’s real estate portfolio increased by €183.9 million in 2018 compared to year-end 2017, based on the independent appraisals at 31 December 2018, coming in at €2,412.2 million. The updated appraisals reflect the inclusion in IGD’s perimeter of the properties purchased in April and the impact of the framework agreement finalized in November 2018 which extended the expiration date of the rental agreements of 18 Coop Alleanza 3.0 hypermarkets to 2037 and rendered the rents more stable and sustainable.
As part of the same agreement, in light of the positive effects of the experiment involving the remodeling of Le Porte di Napoli and Città delle Stelle hypermarkets, 5 assets were found which could benefit from increasing the number of stores/services in the malls by downsizing the hypermarkets. As much as we continue to believe that a food anchor is still a key attractor for our shopping centers, we are aware that the new consumption models call for an ever increasing number of personal services and denote the visitors’ search for a shopping center experience that is increasingly complete; these transformations are accompanied by the expansion of e-commerce which makes it necessary to rethink the offer and size of the hypermarket.
We gained more knowledge about how to handle the new e-commerce paradigm more appropriately. On the one hand we act as champions and keepers of the merchandising mix, making decisions to expand the space dedicated to restaurants, entertainment and personal services, for example. On the other hand we also make our spaces available to those who want to integrate the digital and physical world by opening the doors to kiosks for demonstrations or creating spaces for the pick-up of merchandise purchased online.
At the end of 2018 food courts represented around 8.2% of tenants’ sales, while services reached 4.1%. We are increasingly more convinced that food courts should be offered together with entertainment in order to keep them alive at night as well: for this reason we have introduced areas where you can experiment with virtual reality through different games, beginning with surf simulators, as well as provide a carefully selected and innovative offering in terms of cinema. The first Notorius Pictures multiplex opening on 1 March at Centro Sarca in Milan is an example. The multiplex will meet the highest technical standards for audio and video available today, in addition to providing singular comfort.
On the other hand, we placed topics like socialization, aggregation and interaction at the center of our Marketing Plan, favoring the customer experience in order to give further credence to our pay-off “IGD Spaces to be lived in”.
If we look at the operating metrics it seems that in 2018 our efforts relating to commercial policies and asset management were effective: the financial occupancy improved in the year across all asset classes, reaching 97.2% at year-end for the Italian portfolio and 97.1% for the Romanian assets.
In 2018 rental income rose 1.3% like-for-like in Italy, with mall rents up 1.5%, while hypermarkets rose 0.9%. In 2018 in Italy new leases were signed at conditions which were on average stable. Excluding the lease for a mid-size store in Conegliano, overall upside reaches 1.2%.
In Romania where, following the peak in investments reached in 2012-2014 and the commercial initiatives designed to refresh the appeal of our centers, occupancy has improved considerably over time. In 2018 IGD worked very carefully on assessing the reliability of the tenants in a consumer environment driven by expansionary fiscal policy. As a result of the renewals and rotations, we recorded an average increase in rents of 3.9% per square meter, while the average increase in rental income reached 2.9%.
Sustainability is also strategic to our success. For this reason we continued with the environmental certification of our centers in 2018, expanding the ISO14001 perimeter to 20 properties. After Centro Sarca in Milan, in 2018 the Tiburtino center and Katané obtained BREEAM certification with a rating of very good for asset performance, in line with our targets and the desire to satisfy not just environmental criteria, but also to enhance the well-being that our centers provide. In 2018 investments in solar energy continued at two shopping centers, ESP and La Torre, which has already resulted in appreciable benefits in terms of lowering energy consumption. Investments in making the centers easier to reach, with several modes of transportation, also continued; toward this end charging stations for electric cars were introduced and new bicycle paths were created in Italy where today 80% of the properties can be reached using public means of transportation.
While the operating metrics point to the efficacy of the different commercial and asset management initiatives undertaken, we also paid attention to financial management, following the path outlined in the Plan to maintain a balanced level of debt and ensure the Company’s access to the capital markets at competitive rates.
In the second part of 2018 we succeeded in further reducing the cost of debt which, in fact, dropped to below 2.7%. This puts the company in the position of not needing new financing until 2021, when the bond issued in 2016 with Morgan Stanley matures. We were also granted a 3-year €200 million senior unsecured loan, which can be extended to 5 years, comprised of 2 separate tranches: the first, of €125 million, for the repayment of the bond that expired on 7 January 2019; the second, comprised of the remaining €75 million was used to extinguish short-term lines of credit and cover liquidity needs.
Once this transaction was closed, at year-end we had hedged almost 93% of our debt from interest rate risk, maintaining large margins with respect to the covenants.
On 24 October 2018 Moody’s confirmed the Baa3 rating of our debt, with a negative outlook.
If the results presented in our 2018 financial statements rewarded us for the work done, confirming the validity of the choices made, we cannot say the same thing about the multiples at which IGD’s stock is trading even though the Strategic Plan we presented in Milan and London was well received by investors. Even though the recovery in January steered us away from the lows, IGD’s stock continues to trade at very low multiples with respect to both FFO and the EPRA NNNAV.
During 2018 IGD’s market capitalization shrunk by 18.5%, also as a result of the capital increase completed in April; in the same period the Italian index fell by 16.7%, while the European real estate sector index lost 11.7%.
In addition to the growing tensions in world trade, uncertainty about Brexit, concerns about the excessive deficit/GDP ratio in the Italian Budget Law, retail real estate stocks – and, therefore, IGD – were impacted by a slowdown in consumption, combined with the new challenges presented by omnichannel sales: these are all elements that increase the risk premium for stock markets, in general and the retail real estate sector, in particular.
By distributing our earnings, we continue, however, to provide our shareholders with interesting returns. IGD’s Board of Directors proposed to leave the dividend unchanged at 50 euro cents per share: at the year-end 2018 price, the yield of the proposed dividend is 9.3% and reaches around 8% if we consider the most recent prices, at about 6 euro: both very significant levels and markedly higher compared to 2017.
We, therefore, remain confident that IGD, particularly at current levels, still represents an investment with great medium-term visibility. Because of this our commitment to explaining the steps we plan to take to maintain the great resilience of our FFO and the staying power of our portfolio’s valuations, will continue in 2019.
IGD can count on a management team that has worked together closely over the last 10 years, guiding the Company to profitable growth during the aftermath of the 2008 crisis through today. A lean and determined group, in which ideas are easily shared and the operating decisions are made very quickly; this allows the Company to take advantage of opportunities and quickly change direction when necessary. Overall the company is more prepared to face the future now than ten years ago: from an operational, financial and managerial standpoint we are more prepared and qualified. Having presented multi-year plans with targets that we have always achieved testifies to the fact that we have developed an ability to plan and execute that makes us credible, including as we move forward.
Furthermore, with respect to the difficult economic times experienced in the past, today we are bigger and more experienced which makes us stronger and better equipped to respond to the challenges of the near future. The new size that we reached after the most recent acquisition allowed us to achieve a higher EBITDA margin as we can now spread costs over a larger sales base. All of the acquisitions we have made over time were quickly and effectively integrated by applying our operating policies to the new assets in our portfolio. We followed the same approach with this last transaction: that’s why there was an immediate benefit in terms of cash flow generation.
In the meantime out shopping centers have also become stronger: the liveability of our “spaces to be lived in” has improved thanks to continuous investment. We have become more agile in our ability to redesign the layout and merchandising mix based on trends that seem to change much quicker than in the past. We have also become very careful and quick in understanding and interpreting emerging trends, we cannot think that we will benefit from the latest work done on repositioning for too long. We have, therefore, prepared ourselves to work in a phase during which the commercial offering is constantly being rethought by making the changes to our space that this entails.
In 2018 a new Board of Directors took office, with a number of directors that over time has gone from 15 to 13, then lastly to 11, of which 7 are independent with a mix of expertise that is well balanced between experts in real estate, managers, entrepreneurs, and professionals active in legal and academic fields.
Today our goal is to execute an ambitious 2019-2021 Strategic Plan not focused on growth, but on the consolidation of our leadership in a challenging environment.
The Plan calls for investments of €90 million in three years, beginning with moving forward on the Officine Storiche section of the Porta a Mare project in Livorno: beginning on 21 December 2018, after having reached an agreement with the local authorities over changes to the original project, we will proceed at full capacity on the work which in 2020 will result in the inauguration of a new retail concept, with personal services dedicated to fitness, leisure time and restaurants. As for restyling, work will continue on the interior and exterior of the Casilino center in Rome, which should be completed in 2019. In the second half of the year we expect to finish the remodeling of the spaces in the Fonti del Corallo center in Livorno by downsizing the UniCoop Tirreno hypermarket and, at the same time, creating new spaces for services and retailers. We believe, therefore, that the premises exist for IGD to continue to be a strong generator of cash, with a portfolio capable of maintaining its value throughout the economic cycles. Going forward we will also focus on maintaining a balanced LTV in an environment of rising interest rates. We feel ready, therefore, to manage our business and face the new challenges that the market might impose upon us in order to provide our shareholders with the best returns possible.Share