Letter to the Shareholders 2022 of the Chairman and the CEO
Dear Shareholders,
due to the restrictions attributable to the pandemic, 2021 also proved to be a complex year, specifically through May and, then again, in December as infection rates resurged.
By leveraging on the extraordinary work done by the entire team, IGD succeeded in embarking on a clear path toward recovery beginning May 17th, when most of the restrictions were eliminated.
The signs that this wasn’t a temporary rebound are unmistakable. In the period June – January 2021 retailers’ sales were in line with 2019, that last year before the pandemic, while at year-end occupancy was, once again, above 95%. The main income statement indicators all show improvement compared to the prior year, with a bottom line that is back in the black, while FFO rose 9.2%. The market valuations of the real estate portfolio remained stable: this, along with the net proceeds from the disposal finalized last November, allowed us to reduce the Loan-to-Value to below the target of 45% included in the Business Plan 2019-2021, set prior to the pandemic.
2021 was the year to restart
Even though we could legitimately refer to 2021 as the second year of strong setbacks caused by COVID-19, in our view it is more accurate to say that for IGD 2021 was the year of the restart; a year in which we laid the foundation needed to give continuity to our strategy, even if we didn’t use all the tools that normally would have been available to us.
Even though we couldn’t foresee the extent of the crisis that would be caused by the restrictions, we were not unprepared for the pandemic: we, in fact, had a clear path mapped out for us in the Business Plan 2019-2021 and proven experience in dealing with challenging scenarios as IGD has faced and overcome two crises in its history: in 2008-2009 and in 2011-2012. This fueled our conviction that giving priority to health and financial security was the right thing to do. We also asked our shareholders to make a sacrifice as they did not receive a dividend for 2020.
This decision guaranteed that we had the resources needed for the sustainable continuation of our operations and created the conditions needed to produce the good results reported in the Annual Report 2021, as a result of which today IGD is able to resume remunerating its shareholders with a significant dividend which should provide a yield of more than 9% based on the prices recorded at year-end.
The activities carried out in 2021 also helped to build a solid starting point from which to move forward with organic development that is completely self-financed as indicated in the Business Plan 2022-2024 launched in December by the Board of Directors appointed during the Annual General Meeting held last April.
The measures implemented to sustain tenants translated into good operating performances
In 2021 IGD’s shopping centers were closed for 44 days which, while lower than the 87 days in 2020, did have a noticeable impact.
In order to sustain the retailers when the restrictions were in place, in 2021 IGD also granted temporary discounts on rents, expensed entirely in the year, as well as monthly billing and deferred payments in the most precarious cases. Once again, we negotiated with each tenant individually in order to find the most effective solutions in each instance. As a result, we had a total of more than 900 meetings which, in 2021, also paid off if we consider the high rate of rent collection, net the rebates granted, which reached 94%.
In these two years impacted by the pandemic, IGD maintained its approach and did not change the structure of the leases which are indexed to inflation and do not include variable components with guaranteed minimums, if not for very rare exceptions. The 259 lease renewals completed in 2021 were largely stable like-for-like which demonstrates that maintaining our approach was the right thing to do and today allows us to face growing inflation with leases that will actually benefit.
Even though the long periods of closures did have an impact, producing vacancies of roughly 23 thousand square meters, the intense leasing activity in 2021 made it possible to re-market a total of 25 thousand square meters which also had a positive effect on the quality of the spaces leased.
These activities also provided an opportunity to increase the weight in the merchandising mix of the sectors that are of the most interest to our visitors. As a result, clothing was reduced and homecare and services were increased: telephony solutions, repairs, fitness, medical centers and pharmacies. As for restaurants, which beginning in June showed an immediate recovery, particularly in the historic centers, new trendy formats were introduced with more than 1,000 square meters of new openings.
At the end of 2021 IGD succeeded, therefore, in bringing the Italian portfolio’s financial occupancy to 95.2%, an increase of 124 basis points with respect to 2020 which takes into account the assets sold to Fondo Juice.
With the reopenings, sales returned to pre-pandemic levels
From 17 May on, as the restrictions were eased, footfalls began to recover and in the period June – December were 8.8% higher than in the same period of 2020, while, at the same time, retailers’ sales recorded an even bigger recovery of 23.5%.
The comparison with the period June-December 2019 shows that footfalls are still 16% lower, while retailers’ sales are in line with pre-pandemic levels. The average ticket in 2021 was also 24% higher than in 2019. The trend of less frequent, but more targeted, shopping already seen in 2020 was, therefore, confirmed.
IGD’s format continues to be appreciated
Even during the 2021 Covid-19 waves, IGD’s shopping centers were able to meet the shopping needs for essential goods thanks to its foods anchors and electronics stores that were always open. The urban locations, dominant in their catchment areas, also makes them easy to access and attractive because of the variety of merchandise offered.
Occupancy higher at Winmarkt with a satisfying rate of rent collection
The operating environment in Romania is not that different, if not for the health crisis that in December 2021 made it necessary to re-introduce the same severe measures, which had already penalized the initial part of the year, until late spring: this impacted Christmas sales which represent around one third of the annual total. IGD, which benefitted directly from government subsidies in Romania, managed this period by providing temporary discounts. With an annualized increase in GDP of 7.1%, fueled by private consumption and investments, occupancy of the Winmmarkt chain came to 94.6%, compared to 93.6% at year-end 2020. A satisfactory collection rate, net of the rebates granted, of 96% was also reported. 480 new leases were signed in 2021 – 353 renewals and 127 turnover – with an upside in the rents of around 0.4%.
Performances vary across the different categories of merchandise
While the sales of the retailers included in IGD’s Italian portfolio were overall stable in 2021 compared to 2020, there were clear differences in performances based on the size of the single retailer and category of merchandise.
The stores of less than 250 square meters recorded the largest decreases in sales, while the mid-size spaces benefitted from the new behavior of the shoppers which resulted in more targeted purchases with higher average tickets.
Restaurants and services were hit the hardest by the total lockdowns and the subsequent restrictions; they continue to be impacted by limited lunch hour traffic as in-person work has yet to resume completely. At the same time, restaurants have shown the most significant recovery when the restrictions were eased as they proposed new formats which are in tune with the shoppers’ tastes.
In 2021 the sales of shoe and clothing stores suffered a lot, especially the formal segment, even though the chains, which target young people, provided a few exceptions and reported good performances.
On the other hand, homecare products were among those that benefitted the most from the period of the pandemic. Electronics also reported strong growth, with sales in Italy that were driven by incentives to change televisions in a year of important sporting events. The need to have adequate electronic devices, to study and work at home, continued to be a factor that supported sales, as it did in 2020. The retailers of electronic goods were also rewarded for having improved service and omnichannelism during the year
Of note, lastly, is the interesting performance of jewelry stores which confirms the importance of the shopping experience.
The measures to further strengthen the financial structure
In terms of financial sustainability, in 2021 IGD was again fully aware that reducing financial exposure was a priority and delivered concrete results.
The transaction that required the most work, but that also had the biggest impact, was the sale of a stand-alone portfolio, not associated, therefore with freehold malls, comprising five hypermarkets and a supermarket, to a premier international asset management company, Intermediate Capital Group, which closed in November. The sale – which was for €140 million, in line with the book value at 30 June 2021 – was completed by transferring the six assets to an Italian alternative real estate investment fund, Juice, in which IGD maintained 40%. Net of this equity stake, IGD received proceeds of around €115 million.
The disposal of the portfolio, which was contemplated in the Plan 2019-2021, made it possible to hit the target calling for the Loan-to-Value to be below 45% that IGD had set originally.
Overall IGD made it through two years which were influenced heavily by the pandemic by being able to count on a significant amount of cash. If the cash on hand at year-end 2020 of €117 million made it possible to repay all the financial maturities for the next year, the €158 million in liquidity recorded at year-end 2021 will make it possible to repay almost all the 2022 financial maturities.
The disposal of the six assets made it possible not only to lower the LTV, but also to stabilize the ratings, as both the agencies that rate IGD’s corporate debt, Fitch Ratings and S&P Global Ratings, changed their respective Outlooks from Negative to Stable.
One of the things that IGD did immediately, already in 2020, to protect cash flow at a time when visibility of rent collection was limited due to the restrictions was limit investments to those that could not be deferred. In addition to the work carried out on the Porto a Mare project in Livorno, relative to the development of the Officine Storiche section, in 2021 IGD proceeded with extraordinary maintenance, fit-outs and also resumed work on the remodeling and restyling, suspended in 2020, of Centro Casilino in Rome and Centro Porto Grande in San Benedetto del Tronto, respectively. Investments and capex amounted to €22.9 million in 2021.
Profitability improves markedly in 2021, despite the impact of the pandemic
Even though the main indicators included in the 2021 financial statements include the direct one-off impact of COVID-19 for €7.2 million, the overall picture points to a net improvement compared to 2020, when the net direct impact of the pandemic reached €18.5 million.
In 2021 core business EBITDA, in fact, rose 7.9% to €107.3 million, while rental income fell slightly by 0.4%, and net rental income was 8.2% higher. The core business EBITDA Margin, relative to the freehold properties, came to 72.4%.
The valuations of the independent appraisers show that at year-end 2021 the fair value of Gruppo IGD’s real estate portfolio, including leaseholds and the 40% stake in Fondo Juice, was €2,198.6 million. Like-for-like fair value came to €2,140.5 million, an increase of 0.64% compared to year-end 2020, due mainly to the 1.7% increase in hypermarkets.
With a net financial position which, net the leasehold pertaining to IGD’s headquarters, fell from the €1,152.2 million recorded at year-end 2020 to €984.1 million at year-end 2021, the Loan-to-Value also dropped from 49.9% at year-end 2020 to 44.8%.
The negative balance of writedowns and fair value adjustments, which reached €146.0 million in 2020, fell to €16.3 million in 2021.
Financial expenses were also lower, falling 7.2% against 2020 to €33.4 million.
The bottom line of Gruppo IGD’s income statement is, therefore, back in the black, with a net profit of €52.8 million, compared to a loss of €74.3 million in 2020.
2021 is summarized effectively in the FFO which rose 9.2%, even higher than the guidance provided to the market which called for an increase of between 7 and 8%.
A concrete dialogue with the policy makers
In addition to EPRA, the European association of real estate companies, we make our contribution to the decisions of the Italian government through the Consiglio Nazionale dei Centri Commerciali, of which IGD’s Director of Asset Management, Development and Network Management has been Chairman since October 2020.
In the last year the dialogue with the policy makers has made it possible to help the legislature better understand the key variables impacting the sustainability of one of the sectors hit the hardest by the COVID-19 restrictions.
On the one hand, the subsidies received by the tenants as a result of the decrees passed helped us with our rent negotiations. On the other hand, a better understanding of the business facilitated the authorization to reopen the shopping centers during the weekends as of May by eliminating a heavy restriction.
IGD also made two of its assets, very accessible with ample parking, available to the Italian government so that it could set up vaccination hubs. More than 400 thousand vaccinations were then provided at the shopping centers in Ravenna and Palermo, which also increased the visibility of these two sites and promoted the vaccination campaigns in accordance with the national recovery plan. An experience which, in our view, made it clear that our structures can provide great opportunities and benefits given the deep roots and extensive regional reach that they have.
We also hope to convey the need, felt by the entire sector, for the recovery to be faster than it now seems it will be. In order to accelerate consumption a few basic reforms are needed which would help to limit inconsistencies between online and in-person shopping, and facilitate real competition between the different retailers by providing greater flexibility in promotional sales. We are convinced that only a speedier transformation and a recovery in retailers’ sales will make it possible to return to pre-pandemic levels by the end of 2022.
Important changes in aspects of the Governance
In April 2021 the new Board of Directors, appointed during the Annual General Meeting, took office. The Board comprises individuals with qualified professional experiences who immediately expressed their commitment to making a substantial contribution to guiding the Company.
After intense induction activities, the Board then began work on preparing the Plan with two in-depth meetings focused on analyzing the trends that could impact the business over the long-term and identifying the most opportune direction for the commercial policy and initiatives, as well as asset management. As a result of these discussions, the projects and numbers to be included in the Business Plan 2022-2024 were defined and presented to the financial community last December 14th: this Plan is completely self-financed and does not foresee any extraordinary capital transactions.
The continuous work on refining the Enterprise Risk Management model continued, with a risk ranking that was, however, unchanged compared to 2020. The new studies were focused on the unique features that characterize the penetration of Ecommerce in Italy and the crisis of the large retail spaces in hypermarkets which IGD had already begun to address in 2018, by starting work on remodeling.
The high standing of IGD’s Governance is confirmed by the 11 ESG ratings assigned to the Company in 2021, 10 of which unsolicited, and improvement in 4 out of the 6 ratings already assigned in 2020. The inclusion of IGD in 8 stock indices focused on ESG factors confirms the appreciation expressed in external assessments. IGD’s governance, lastly, was awarded the highest score possible in ISS ESG’s Quality Score.
At work to implement the strategic plan
While we are presenting the results for 2021, we are already focused on implementing the guidelines of the Business Plan 2022-2024 and committed to reaching an increase in the FFO of between 9 and 10%, consistent with our 2022 guidance, assuming there won’t be any new COVID-19 restrictions.
In terms of operations, great efforts will be made to change the merchandising mix and to develop co-marketing with the tenants, through targeted offers shaped by the new CRM systems that IGD is implementing.
The most innovative retailers, who have had positive feedback in terms of sales over the last few months, have shown which path to undertake: you need to make the customer relationship more personalized and stimulating, to enhance the level of service and develop real omnichannelism.
The changes in the scenario require that IGD move toward a shopping center management that is shaped even more by the specific profile of the single asset, based on the characteristics of the catchment area, by creating asset management initiatives and marketing plans developed and fine-tuned center by center.
We will, therefore, continue to work on protecting occupancy, maintaining rents at levels that provide adequate returns. At the same time, we will continue to improve environmental performances by lowering the environmental impact and increasing the energy efficiency of our shopping centers through both operational and structural changes, evaluating the initiatives that will allow us to leverage on the resources allocated in accordance with the national recovery plan (Piano Nazionale di Ripresa e Resilienza). We will pay even more attention, including with respect to the restyling program in Mantua and San Benedetto del Tronto, to the green qualifications, because this not only impacts the real estate assets that can be refinanced with the new sustainable finance instruments, but also the increases the property’s transaction value.
Refinancing of 2023 financial maturities
Now that the Business Plan and the Annual Report 2021 have been published, the future goals and the quality of IGD’s fundamentals will be clearer to the financial markets and, while monitoring interest, we intend to focus on refinancing the 2023 maturities as the 2022 maturities are already almost completely covered.
IGD’s corporate debt currently has two ratings: BBB- with a stable outlook assigned by Fitch Ratings – an investment grade rating – and BB+ with a stable outlook assigned by S&P Global Ratings.
The new bond issues will be made after having assessed all the financial instruments that will allow us to expand our investor base and refinance next year’s maturities well in advance. In the future we also intend to maintain exposures to both banks and the market in order to take advantage of all the opportunities that allow us to optimize interest rates.
IGD confirms it is a dividend company
The results achieved in 2021 allow IGD to resume remunerating its shareholders with dividends as it has done, without interruption, since 2005 with the exception of the extraordinary parenthesis in 2020 when there was a need to preserve the Company’s financial solidity in light of the severe consequences of the pandemic.
The Board of Directors is proposing that during the Annual General Meeting to be held on 14 April 2022, shareholders approve the distribution of a dividend of 35 euro cents per share. The dividend proposed is significantly higher than the guidance in the 2024 Business Plan which calls for a dividend of between 25 and 30 euro cents for 2022. The dividend of 35 euro cents comprises for 0.287588 euro cents the mandatory portion generated by the SIIQ perimeter and for 0.062412 euro cents the reserves released as a result of the disposal of the 5 hypermarkets and 1 supermarket. €10.2 million of these reserves remain as part of the mandatory portion to be distributed in 2023.
With a yield of around 9% based on the price recorded at the end of 2021, the dividend resumes its role as a cornerstone of IGD’s equity story.
At the same time, with a stock price of slightly more than €4, IGD has ample upside with respect to both the strong discount at which it trades against the year-end 2021 EPRA NRV and NAV of €10.85 euro and the average target price of the brokers covering the stock of €4.85.
Even though the retail real estate sector is currently not that appealing to investors, as it was hit particularly hard by the pandemic, we are convinced that the renewed profitability seen in 2021 attributable to the recovery recorded in the second part of the year, the LTV which has fallen below 45% and the stability of the portfolio’s fair value in the year-end appraisals will change the view of IGD’s equity story, even with respect to just a few months ago. The development path outlined in the 2024 Plan assumes much greater visibility based on the solid foundation laid in 2021.
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