Globalworth (GWI) has reported strong performance for FY18, including 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 and GWI has signalled that it continues to evaluate a strong pipeline of opportunities for which it intends up to €500m of additional equity.
Globalworth Real Estate Investment |
Strong progress in 2018 |
2018 results |
Real estate |
12 March 2019 |
Share price performance
Business description
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Analysts
is a research client of Edison Investment Research Limited |
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Globalworth (GWI) has reported strong performance for FY18, including 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 and GWI has signalled that it continues to evaluate a strong pipeline of opportunities for which it intends up to €500m of additional equity.
Year end |
NOI* |
EPRA |
EPRA EPS |
EPRA NAV/ |
DPS |
P/EPRA |
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 per share) to €60.9m (€46 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. With this in mind, as well as the continuing development programme in Romania, the company is considering raising an additional €500m of equity capital 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 review 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.
GWI will make a further announcement on the potential equity capital raise in due course. A circular will be published, convening an EGM to seek the necessary shareholder approvals. 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 |
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 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 c €4.5m below our forecast, but year-end annualised contracted NOI of €159.5m is actually ahead of our estimate (€155.7m), which is a positive indicator for FY19 income. We believe the transaction will be value neutral to GWI but does mean it has received cash upfront in respect of the likely future guarantee payments, and management of the assets will become more flexible without the complication of the master lease. 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. 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 and compared with our €55.3m expectation. Although the reported EPRA earnings also benefitted from the master lease and NOI guarantee settlement, adjusting for the non-controlling interest and the tax that we would anticipate, as well as our overestimate of NOI for the year, we believe this is broadly consistent with our forecasts.
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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FY18 revenues were held back by the impact on client demand of the Q4 equity market correction and a levelling off in pension transfer activity. Nevertheless, revenue generated from affinity relationships continued to grow. Recurring revenue was up 10% and now accounts for more than 50% of customer revenue. The opportunity for the group to generate good long-term growth by meeting the need for financial advice, particularly within its affinity relationships, remains attractive.