Poland is looking good. EPP's balance sheet isn't.

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Poland is looking good. EPP's balance sheet isn't.

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Published Date: 2022-01-13 | Source: INCE|Community | Author: The Finance Ghost

Poland is looking good. EPP's balance sheet isn't.

EPP, the Poland-focused property fund listed on the JSE, has released an operational, trading and financial update.

Predictably, it starts off with an update on Covid. As was the case in South Africa, Poland managed to get through the festive season without any lockdowns on the retail industry. This is obviously great news for the properties in the region as well. Poland seems to be adequately dealing with the Omicron variant at this stage.

This is critical, as the Polish government has implemented legislation that is highly punitive on landlords in the event of further lockdowns. 80% of a tenant's rental liability falls away during a lockdown and 50% of the liability fall away for three months after each lockdown.

My view is that governments worldwide have lost most of their support for draconian lockdowns on the entire population. The tension of different rules for vaccinated and unvaccinated citizens is now the focus. Economically at least, that's far less severe than the entire economy shutting down and everyone's livelihoods being threatened.

In my personal portfolio, I've reduced some exposure to US tech and increased exposure to a local property ETF. Property had a strong year in 2021 (coming off an awful base) and I'm hoping for an ongoing recovery. It's good to see a more bullish narrative around Poland as well.

The country is expected to achieve strong GDP growth and is one of the fastest developing countries in the EU. These are some of the reasons why South African property investors spotted it as an opportunity to diversify from South Africa.

Like many other countries, Poland is currently grappling with inflation. Unlike many other countries, Poland has acted decisively by hiking rates and putting specific initiatives in place to help shield citizens from the effect of rising prices.

From July to December, Poland's shopping malls saw a trend that has also played out here: footfall hasn't returned to pre-pandemic levels, but turnover has. In other words, people are going to the malls less frequently and are spending more per trip than before. This is called the "basket size" in retail terms.

e-Commerce penetration (the percentage of total spend that is executed online) has dropped from above 10% to around 8%. This is good news for the malls.

Despite the promising news across the board, EPP believes that investment demand for malls will take another 2 - 3 years to recover to pre-pandemic levels.

EPP's portfolio is running at an occupancy rate of 95.8% and the weighted average lease term is around 5.2 years. Collection rates reached 95% in November 2021.

The fund faces headwinds from higher carbon emission taxes (added to the electricity cost and unrecoverable from tenants) and a decision by the Polish government to increase the minimum wage by 34%.

The company expects to report a loan-to-value of 56% at 31 December 2021, up slightly from June 2021. This is very high for a property fund and is part of the reason why Redefine is looking to take the company private and absorb its balance sheet.

The net asset value per share is expected to be around EUR1.02. Distributable earnings for the year ended December 2021 should be at least 7.50 euro cents per share. Due to the pressure on the balance sheet and the looming debt repayments in 2022, the board does not expect to declare a dividend for 2021.





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