Strong progress in 2018

Globalworth Real Estate Investments 13 March 2019 Update
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Globalworth Real Estate Investments

Strong progress in 2018

2018 results

Real estate

13 March 2019

Price

€8.23

Market cap

€1,116m

Net debt (€m) at 31 December 2018

1,259

Net LTV at 31 December 2018

43.9%

Shares in issue

135.6m

Free float

26.3%

Code

GWI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.8

(4.1)

(10.0)

Rel (local)

2.3

(8.0)

(8.4)

52-week high/low

€9.60

€7.90

Business description

Globalworth is a real estate investment company, incorporated in Guernsey and listed on AIM. It is the leading office investor in the CEE region with a portfolio approaching €2.5bn in Romania and Poland. It targets a sustainable and growing dividend with capital growth.

Next events

EGM

29 March 2109

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Globalworth Real Estate Investments is a research client of Edison Investment Research Limited

A strong FY18 performance for FY18 included a full-year earnings contribution from Globalworth Poland and good underlying progress from the existing portfolio. The results appear consistent with our recently published multi-year forecasts, which we will review in detail in the coming days. These look for strong future growth from adding value to existing assets and further developments, against a positive operating environment in Romania and Poland. Not included in those forecasts were potential further accretive acquisitions although Globalworth Real Estate (GWI) continues to evaluate a strong pipeline of opportunities. To fund investments, including acquisitions and the planned elimination of the Globalworth Poland minority interest, GWI intends to issue up to €500m of additional equity capital.

Year end

NOI*
(€m)

EPRA
earnings** (€m)

EPRA EPS
(c)

EPRA NAV/
share*** (€)

DPS
(c)

P/EPRA
NAV (x)

Yield
(%)

12/16

43.6

8.6

13.3

8.57

0

0.96

N/A

12/17

51.1

16.8

17.9

8.84

44

0.93

5.4

12/18

133.4

60.9

46.0

9.04

54

0.91

6.6

Estimates under review

Note: *NOI is net operating income. **EPRA earnings is adjusted for revaluation movements and other non-recurring items. *** EPRA NAV is adjusted for deferred tax liabilities, fair value of interest rate derivatives and other items.

Acquisitions and underlying gains

Globalworth Poland was fully reflected in the FY17 balance sheet but contributing to the FY17 income statement for less than one month and was a significant driver of FY18 growth. Underlying progress also reflected strong leasing activity and an increasing contribution from recently completed developments, rental growth, ongoing acquisitions and operational efficiency. Net operating income increased from €51.1m to €133.4m but is yet to fully reflect the increase, to €159.5m, in year-end annualised contracted income for the commercial standing portfolio. EPRA earnings grew from €16.8m (17.9 cents per share) to €60.9m (46.0 cents per share). Including increased DPS and growth in EPRA NAV per share to €9.04, the NAV total return for the year was 7.8%.

Targeting further accretive acquisitions

The commercial property markets in Romania and Poland are supported by strong economic growth, above the EU average, and an increasing number of multinational companies operating in the region. Against this positive backdrop, GWI has potential acquisitions with a value of €280m under exclusive negotiation in Poland, with a blended yield of 7.5%, and is evaluating other accretive acquisitions. To fund this investment as well as the acquisition of a further 21.58% interest in Globalworth Poland (taking its stake to more than 99%) GWI proposes to issue up to 55m new shares at around the prevailing EPRA NAV per share.

Valuation: Growth should drive shareholder returns

GWI is trading with an FY18 yield of almost 7% and a discount to forecast EPRA NAV per share of c 10%. Management of existing investments, further developments and continuing accretive acquisitions all point to strong growth.

The FY18 results appear consistent with our growth outlook

In our recently published detailed note on Globalworth, we laid out our multi-year financial forecasts up to and including FY22. We did this to demonstrate GWI’s potential to grow rental income and capital values, including a significant potential contribution from the active development programme as well as an increased contribution from recently completed acquisitions and developments, rental growth and operating efficiency. Not specifically included in our forecasts, but highlighted as areas of potential additional uplift, were accretive acquisitions and capital growth as a result of Bucharest yield convergence towards the lower levels seen in markets elsewhere around the CEE region.

We will review the FY18 financial results, summarised in Exhibit 1 alongside our FY18 forecasts, in detail in the coming days and update our multi-year forecasts. We do not expect material changes in the current portfolio and developments; however, the potential accretive acquisitions flagged by management are a source of medium-term upside.

The up to 55m new shares that GWI proposes to issue is split between a placing for cash issue (up to 38m new shares) and proposed issue of up to 17m new shares to Growthpoint properties International in exchange for the Gowthpoint’s 21.58% interest in Globalworth Poland, increasing the GWI to more than 99%. Growthpoint, South Africa’s largest REIT, became the cornerstone investor in GWI in 2016 and owns 28.3% of GWI. It acquired its stake in Globalworth Poland in June 2018 when it subscribed to its €450m equity raise. If the transaction completes, GWI will consider exercising its statutory squeeze-out rights to acquire the remainder of the GPRE shares (less than 1%), which it says would allow it to rationalise the group structure, reduce administration costs, achieve operational synergies and present a simpler equity story to its investors.

Management also indicates that the identified €280m of acquisitions in Poland being negotiated under exclusivity, and other pipeline assets, have a clear strategic fit with the existing portfolio, are in prime locations, have an attractive income profile, bring further asset management opportunities, and offer potential scale benefits. The additional acquisition growth in Poland complements an existing active development programme in Romania. The share placing is targeted at assisting the company in managing its gearing strategy to a long term target LTV of below 40%. At an EGM called for 29 March the board is seeking shareholder approval to issue the up to 38m placing shares for cash. GWI intends to issue all of the new shares at around the prevailing EPRA net asset value

The board has also provided an update on the potential move to a premium listing on the London Stock Exchange, noting that it will await greater clarity in terms of the impact of Brexit before making a decision to proceed.

Exhibit 1: 2018 financial summary and versus Edison forecasts

€m unless otherwise stated

2018

2017

Change

Edison forecast

Net operating income

133.4

51.1

161%

116.4

Administrative expenses

(15.3)

(10.2)

49%

(14.3)

Fair value gain on investment property

34.1

6.7

407%

60.5

Net other income & expense items

(1.6)

13.4

(3.3)

Operating profit

150.7

61.0

147%

159.3

Net finance expense

(38.4)

(37.0)

4%

(38.3)

JV profit

3.1

2.2

41%

3.5

Profit before tax

115.3

26.2

341%

124.5

Current & deferred tax

(15.4)

(2.4)

(15.2)

Net profit

99.9

23.7

321%

109.4

Non-controlling interests

(19.7)

0.7

(15.7)

IFRS attributable net profit for year

80.3

24.4

229%

93.7

Adjust for:

Fair value gain on investment property

(34.1)

(6.7)

(60.5)

Other EPRA adjustments including tax and non-controlling interest effects

14.7

(0.9)

22.2

EPRA earnings

60.9

16.8

262%

55.4

Basic IFRS EPS (€)

60.7

26.4

70.8

Diluted EPRA EPS (€)

46.0

17.9

156%

41.8

DPS declared (€)

54.0

44.0

23%

54.0

Diluted EPRA NAV per share

9.04

8.84

9.11

Investment properties inc JV(€bn)

2.46

1.82

36%

2.48

Net LTV

43.9%

34.0%

43.0%

Source: GWI, Edison Investment Research

Compared with our forecasts we briefly note that:

The net operating income growth from €51.1m to €133.4m substantially reflects a full year contribution from Globalworth Poland and development completions in Romania, further acquisitions of income generating assets in Poland through the year, and strong letting activity. The Globalworth Poland contribution includes a €21.5m one-off cash settlement in respect of master lease and NOI guarantees that had been granted to the company prior to its IPO and before GWI made its investment. This was not included in our NOI forecasts, pending confirmation of the accounting treatment for the settlement, announced in December 2019. On an underlying basis, NOI earned during the year was slightly below the level that we had forecast, but year-end annualised contracted NOI of €159.5m is actually ahead of our expectations (€155.7m), which is a positive indicator for FY19 income. We believe the transaction will be largely valuation neutral to GWI but it has the benefits of delivering an upfront cash payment in respect of the likely future guarantee payments, and brings greater operational flexibility to the management of the assets. The master lease settled accounted for 0.5% of group standing commercial GLA at the time of settlement and GWI expects to lease the corresponding space in the short to medium term.

With Globalworth Poland already reflected in the FY17 balance sheet, the 36% growth in the investment portfolio in 2018 to €2.5bn (FY17: €1.8bn), includes €538.3m invested in five standing asset acquisitions in Poland, €17.5m in three land plots in Bucharest, Romania on which GWI plans to new office projects, continuing development spend and valuation uplift.

Occupancy of the commercial standing portfolio, already at a good level, continued to increase, reaching 95.1% at end-FY18 (H118: 94.6% and FY17: 93.3%). Including tenant expansion options, end-FY18 occupancy was 96.3%. During the year the group negotiated the take-up or extension of 121.8k sqm of commercial space in Romania and Poland, with a similar pace maintained in H2 as in H1.

2018 saw two development projects completed, both in Bucharest; the second (of three) towers at Globalworth Campus (H118) and the new pre-let HQ for Groupe Renault Romania, the Renault Bucharest Connect. Construction of the third tower at Globalworth Campus is underway (due for completion Q419) and since year end, 60% of the project has been pre-let or is subject to a letter of intent. Two of GWI’s further pipeline of development projects have also commenced; the 26.4k sqm Globalworth Square project in Bucharest and a 17.7k sqm unit at the TAP logistics centre in Timisoara.

Net finance expense was little changed despite increased borrowing during the year, reflecting the benefits of refinancing secured bank debt with lower cost, unsecured, fixed rate debt, and the non-recurrence of prior year refinancing costs. In June 2017 GWI issued a €550m Eurobond at a fixed 2.875% due 2022, and in March 2018 €550m of senior unsecured notes due 2025 at a fixed 3.0%.

EPRA earnings increased from €16.8m to €60.9m, ahead of our €55.4m expectation. EPRA earnings benefited from the net effects of the master lease and NOI guarantee settlement, including non-controlling interests.


Exhibit 2: Financial summary

Year ending 31 December, €000's

2016

2017

2018

INCOME STATEMENT

Rental income

46.2

53.9

137.6

Net property operating expenses

(2.6)

(2.8)

(4.2)

Net operating income (NOI)

43.6

51.1

133.4

Administrative expenses

(7.7)

(10.2)

(15.3)

Depreciation of long-term assets

(0.2)

(0.2)

(0.4)

Acquisition costs

(0.1)

(10.8)

(1.2)

Fair value gain on investment property

6.7

6.7

34.1

Bargain purchase gain on acquisition of subsidiaries

0.0

28.9

0.3

Gain on sale of subsidiary

0.3

0.0

0.0

Share based payments

(0.0)

(0.1)

(0.5)

FX gain/(loss)

(0.1)

(0.3)

(1.2)

Other net operating income/(expense)

1.3

(4.1)

(4.0)

0.0

0.0

5.5

EBIT

43.7

61.0

150.7

Net finance expense

(31.5)

(37.0)

(38.4)

JV

0.0

2.2

3.1

Profit before tax (PBT)

12.2

26.2

115.3

Tax charge

(0.9)

(2.4)

(15.4)

Profit after tax

11.3

23.7

99.9

Minorities

0.0

0.7

(19.7)

Attributable profit after tax (PAT)

11.3

24.4

80.3

EPRA earnings adjustments:

Fair value gain on investment property

(6.7)

(6.7)

(34.1)

Bargain purchase gain on acquisition of subsidiaries

0.0

(28.9)

(0.3)

Other EPRA adjustments

4.0

28.0

15.0

EPRA earnings

8.6

16.8

60.9

Basic average number of shares (m)

64.4

92.5

132.3

Fully diluted average number of shares (m)

64.4

93.8

132.5

IFRS EPS - basic (€c)

17.6

26.4

60.7

Diluted EPRA EPS (€c)

13.3

17.9

46.0

DPS (€c)

0.0

44.0

54.0

Dividend cover

0.4

0.9

BALANCE SHEET

Investment property

980.9

1,792.4

2,391.0

Other non-current assets

17.7

49.2

69.0

Total non-current assets

998.6

1,841.6

2,460.0

Cash & equivalents

221.3

273.3

229.5

Other current assets

11.8

46.1

47.4

Total current assets

233.2

319.4

277.0

Interest bearing loans & borrowings

(375.6)

(834.0)

(1,235.1)

Deferred tax liabilities

(70.6)

(99.6)

(107.0)

Other non-current liabilities

(4.5)

(13.1)

(15.9)

Total non-current liabilities

(450.6)

(946.7)

(1,358.0)

Interest bearing loans & borrowing

(38.7)

(36.4)

(24.0)

Other current liabilities

(27.1)

(41.5)

(57.7)

Total current liabilities

(65.8)

(77.8)

(81.7)

Net assets

715.4

1,136.5

1,297.3

Non-controlling interests

0.0

(67.6)

(212.4)

Shareholders' equity

715.4

1,068.9

1,084.9

Adjustments to EPRA:

Add deferred tax liability

70.6

112.1

128.6

Deduct goodwill as a result of deferred tax

(5.7)

(5.7)

(5.7)

Add negative fair value of interest rate swap

3.6

2.6

2.1

Other

0.0

(6.5)

(9.8)

EPRA NAV

783.8

1,171.5

1,200.2

Period end number of shares, fully diluted (m)

91.5

132.5

132.7

Basic NAV per share (€)

7.91

8.09

8.19

EPRA NAV per share (€)

8.57

8.84

9.04

CASH FLOW

Net cash flows from operating activities

19.9

10.1

80.1

Cash flows from investing activities

(39.5)

(388.0)

(426.9)

Cash flows from financing

206.9

430.6

303.1

Change in cash

187.3

52.7

(43.7)

Opening cash

31.0

218.4

271.0

Closing cash

218.4

271.0

227.3

Adjustments to balance sheet cash

3.0

2.3

2.3

Balance sheet cash

221.3

273.3

229.5

Debt

(414.2)

(870.4)

(1,259.1)

Net (debt)/cash

(192.9)

(597.1)

(1,029.5)

Net LTV

19.7%

34.0%

43.9%

Source: Company data. Edison Investment Research

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This report has been commissioned by Globalworth Real Estate Investments and prepared and issued by Edison, in consideration of a fee payable by Globalworth Real Estate Investments. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

This report has been commissioned by Globalworth Real Estate Investments and prepared and issued by Edison, in consideration of a fee payable by Globalworth Real Estate Investments. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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