Letter to the Shareholders 2024 of the Chairman and the CEO
IGD recorded Funds from Operations or FFO, of €55.4 million in 2023, a decrease of €11.86 million compared to 2022: this performance reflects higher debt servicing costs, which were not offset by the improved operating results.
This result was deeply affected by the external context that we found ourselves in. In fact, after having overcome the difficulties caused by the pandemic, we had to face a scenario characterized by significant geopolitical tensions and high inflation. Monetary policy, aimed at bringing galloping price growth back under control, took the form of a sequence of no less than ten consecutive interest rate hikes by the ECB between July 2022 and October 2023, which brought the rates from zero to 4.5 %.
IGD was not passive in this environment, we followed our solid, long-term directed, strategy. A strategy which has already allowed the Company to navigate moments of profound financial and macroeconomic crises, from 2005 through the present.
Looking at the 2023 results, we can safely say that the careful commercial and property management policy made it possible to achieve a series of gradual improvements in our operational metrics by leveraging on an effective business model.
On the financial management front, we also achieved concrete results. In 2023 we refinanced a significant portion, around €650 million, of the total debt stock before the maturity date, while also extending the average maturity. The period in which we carried out these liability management transactions, however, forced us to accept conditions which increased IGD’s cost of debt considerably.
The higher cost of funding also had a negative impact on Gruppo IGD’s 2023 financial statements as it contributed to a 5.4% reduction in the independent appraisals of our real estate assets as a result of the higher discount rates used in the appraisers’ valuation models. This was reflected in both the income statement, which showed a lower fair value, and the higher Loan-to-Value reported in the balance sheet.
Many of the results we achieved in 2023 and the projects we implemented are not reflected in the numbers, but they comprise assets, tangible and intangible, that IGD will be able to count on in future years. In an environment that we hope will normalize as soon as possible, the positive impact of the achievements made in 2023 will find a way to be expressed over time, while also making an appreciable contribution in terms of numbers.
With this in mind, the policies we implemented during the year are examined below, along with the factors that determined the 2023 results.
Operational metrics reflect the positive impact of policies adopted in recent years
2023 reaped the benefits of the sound policies implemented in recent years to manage vacancies and the negative effects of inflation, which impacted not only the margins of the retailers in shopping centers, but also household spending.
The temporary discounting policy made it possible to manage the most difficult situations without having to renegotiate pre-existing leases, which protects IGD’s business profitability to the extent that the leases are linked to inflation. The effectiveness of this choice is clearly reflected in IGD’s rent collection which is now at around 97%, an improvement over the 96% recorded a year ago. At the same time, the financial occupancy of the Italian portfolio remained at a high level, coming in at 95.3% at the end of the year.
In 2023, IGD’s team in Italy signed 188 new leases, 135 renewals and 53 attributable to retailer rotation. Overall, 13.5% of the total Italian portfolio was re-let, with rents largely stable (-0.45%): a result we view as positive, as the base rents in the renegotiated leases had already been adjusted for inflation.
Sales for malls and hypermarkets grow
In 2023 tenants’ sales in IGD’s Italian malls were 4.3% higher than in the previous year, while footfalls were also up by 4.5% percent. Sales in 2023 were also 6.2% higher than in 2019, the last year not impacted by the pandemic, despite footfalls which were 13.2% lower than in 2019.
Not to be overlooked, lastly, are the positive performances posted by the food anchors present in all IGD malls, which recorded an increase in sales of 3.9% against 2022 and 1.6% against 2019.
The trend of less frequent shopping during the week, but with an increase in the average ticket (which was increased by about +1.4%) also stabilized.
Sales for the different merchandise categories improved across the board
In 2023 a phenomenon already observed in 2022 was confirmed: year-on-year sales improved across the board for all the categories of merchandise offered at IGD’s shopping centers with one exception, electronics, which was down 2.4% after sales peaked in 2020-2021
In a panorama of generalized improvement, stand-outs include restaurants which recorded a 15.5% increase in revenues year-on-year. This decided recovery is explained by the reduction in remote working which supported lunchtime demand and the expanded offerings attributable to the work done by the IGD team to include new formats, from fast food to steakhouses. Not to be underestimated is the 51.3% rebound in cinema revenues, which had a positive impact not only on footfalls, but also on restaurants’ evening business. The outstanding performances of these sectors confirm that IGD has definitely recovered its authentic “spaces to be lived in” dimension, which was inevitably penalized in 2020-2021.
The homecare sector was also very dynamic, growing by 15.4% in 2023, especially in large stores. Personal care and healthcare also continued to post double-digit growth, with revenues up 11.1%, driven mainly by cosmetics and optical stores. After growing by 13.5% in 2022, in 2023 clothing also posted further improvement of 3.5%: an important piece of the overall picture, as this category accounts for 49.3% of the total sales at IGD’s Italian malls.
IGD provided a convincing response to a challenging environment, tapping into visitor preferences
Overall, the sales performance confirms the shopping center’s ability to meet the needs of visitors and respond to new consumer trends: an ability we have tested even in the face of weakened household spending amid high inflation.
With regard to the challenges posed by inflation, we worked to provide an effective response through more intense and frequent revision of the tenant and merchandising mix. Through continuous rethinking of our retail proposition, we managed to understand consumers’ new preferences and stimulate purchases.
The 22 new brands that we have included in the Italian portfolio in 2023, for example, were focused particularly on activities that have proven to be the most dynamic: restaurants, culture, leisure and gifts.
A new way of working on commercial aspects and asset management, which was unimaginable until recently
The satisfactory results achieved in terms of operational metrics are the result of the systematic work done to reposition centers and minimize vacancy. To bring about these changes, within timeframes that we would have thought impossible in the past, we organized working groups based on which the commercial team worked together with the asset management team.
We are convinced that the mall, because of the way IGD’s business model interprets it, remains a very viable format but we are equally convinced that today’s mall must first and foremost be “flexible,” in order to respond quickly to the changing needs of the retailers present and the need to redirect the merchandise mix by continuously introducing new brands and merchandise categories.
Behind the good operational results, we delivered in 2023 lies this work, which means understanding when re-marketing was needed and quickly carrying out the works needed to accommodate the new brands.
Targeted pipeline investments continued
In 2023, IGD made investments totaling about €25 million, compared with €35 million in the previous year.
Today’s investments respond to the need to facilitate continuous rethinking of the commercial mix through work on fit-outs; as well as restyling and refurbishment projects, ESG-oriented activities – installation of solar energy systems and electric vehicle charging stations, etc. – and maintenance, in order to improve their energy efficiency and resilience in the face of severe weather conditions.
We followed a well-calibrated approach to the allocation of investment resources, which we also plan to use going forward.
In 2023, the capex was mainly focused on three macro-projects: the completion of the restyling of the PortoGrande center in the province of Ascoli, which was inaugurated last November; the transformation of the Officine Storiche in Livorno through the creation of the innovative 16,000-square-meter space housing retail and entertainment activities, which was inaugurated last September, and the start of a deep restyling of the Leonardo Center in Imola – one of the key assets in IGD’s portfolio – which will be completed in 2025.
Significant work was also done to return the LungoSavio center in Cesena, where the overflowing of the river in May following violent storms had produced flooding in the center, to normal operation very quickly.
In the two Sicilian centers, the La Torre center in Palermo and the Katanè in Catania, 2023 also saw the completion of the remodeling of the areas previously occupied by the supermarkets. The outcome was very positive as demonstrated by the fact that the new spaces created in the mall were fully let.
Officine Storiche: a major implementation effort which had a positive impact on footfalls immediately
Officine Storiche‘s retail segment, part of the Porta a Mare project in Livorno, provides us with a good example as to how operational metrics can reward the significant work done to achieve the ideal merchandise mix immediately.
On September 14, in fact, we not only completed the most important project in our development pipeline, but we also gave the public the end result of a commercialization effort which reflects years of work, aimed at breathing new life into a large and complex space that formerly housed the city’s old shipyards, with a stimulating and innovative commercial proposal. We have redesigned this area of more than 16,000 square meters by dividing it into 16 stores, 11 restaurants, a fitness center of nearly 5,000 square meters and an entertainment area with the idea of offering not only shopping, but also entertainment, dining and leisure.
Pre-letting activities intensified significantly over the past year. All of this made it possible for us to inaugurate Officine Storiche with the malls’ occupancy at more than 95%, taking into account the stores which were already operational and leased.
In the first four days of operation more than 110,000 footfalls were recorded, while in the first four months there were more than 910,000 visitors: a success that is ongoing and will only increase, considering that in the second part of 2024 we will be able to count on the presence of Primark, a leading Irish fashion, home and beauty brand.
In the Winmarkt malls, a satisfactory level of quality occupancy is confirmed
In Romania, the high levels of inflation affected household spending, leading to a deceleration of the GDP. In this macroeconomic backdrop, a high level of occupancy (96.2%) was still maintained in the Winmarkt malls. The slight decrease against the level recorded in the first half of the year, of about 60 basis points, is not significant, as it reflects the exit of a retailer from a medium-sized store which is close to being relet. In 2023, 515 renewals were signed in Romania, along with 147 turnover leases at an average upside of 1.94%, with a view to maintaining an attractive retail proposition, rich in services and appealing brands. Rent collection, which stood at about 98% in February, testifies to the effectiveness of the work done by the IGD team.
With the new resources gathered in 2023, IGD strengthened its financial position
Given the ECB’s highly restrictive policy and with credit markets remaining tight throughout the year, we found ourselves in an unfavorable situation at a time when we needed to refinance IGD’s maturing debt.
In May 2023, however, we managed to raise €250 million through a five-year green secured facility, which enabled us to repay the €100 million private placement maturing in January 2024 in advance. The quality of our real estate assets and our continuous investments to make them increasingly more environmentally friendly allowed us to leverage on the highest level of ESG certification achieved by our assets which is essential to obtaining financial resources of this sort.
Even more challenging was the subsequent liability management transaction, which we launched on 5 October 2023 and concluded in the following month, in order to refinance the €400 million bond maturing in November 2024 in advance.
The transaction, which comprised an exchange and repurchase offer for the existing bonds and a consent solicitation, produced positive results on both fronts. Once almost 86% of the bondholders had accepted the terms of the offer, on 17 November 2023 we were able to issue a new senior bond of approximately €310 million, paying approximately €30 million in cash to the bondholders who had accepted the exchange by the early deadline (13 October 2023). The approval of the consent solicitation by the Bondholders’ Meeting then made it possible to align the maturity and economic terms of the existing non-exchanged bonds with the new issue which matures on 17 May 2027.
The transaction includes a clause limiting the distribution of earnings to what is necessary to comply with SIIQ regulations, and a redemption clause, in the event of asset divestment, with the obligation to use the proceeds from the divestment to reimburse bondholders on a priority basis.
IGD was once again able to gain the consensus of the capital market investors, by proposing a market-friendly transaction, capable of meeting expectations at that particular moment. The high take-up rate of the Offer is the most eloquent demonstration that the transaction and its intent were thoroughly understood. The achievement of this result at such a delicate moment, with rates at record highs, also confirms that the bondholders appreciate IGD’s strategy and view it as viable, which increases the visibility of an FFO capable of sustaining the path that lies ahead.
As a result of the two transactions carried out in 2023, IGD ended the year with its refinancing needs for 2024 already covered and without any major new maturities before 2027.
Thanks to the lengthening of debt duration achieved with the most recent issue, which removed short-term liquidity risk, IGD succeeded in maintaining the investment grade rating of its debt – essential to accessing the market when a window to place new instruments at more affordable rates opens. On 17 November 2023, Fitch Ratings Ltd. confirmed the investment grade BBB- rating with a “Stable” outlook. S&P Global Ratings confirmed its previous BB rating with a “Stable” outlook through February 2024.
EBITDA improves due to effective marketing and rent indexing
The commercial and asset management policies that we have continued to implement during this challenging environment have produced positive results, as demonstrated by the operating performance.
Core business EBITDA was up 4.6% in 2023 with respect to 2022, coming in at €108.2 million. This progress was driven by both net rental income, which rose 4.9% year-on-year to €119.6 million, and net services income which grew 15.1% to €2.0 million.
The performance of rental income reflects the positive effects of the marketing and remarketing activities carried out, as well as inflation indexing. This made it possible to offset the negative impacts of the vacancies created as a result of remodeling.
Despite a 10.3% increase year-on-year in general expenses, due mainly to the ongoing IT systems and infrastructure internalization project, ESG certification and consulting, the core business EBITDA margin, calculated as a percentage of gross rental income (which reached €142.4 million), improved by 50 basis points rising 71.6% in 2022 to 72.1%.
The 5.42% contraction in property valuations hurt the income statement
Based on the independent appraisals, the fair value of the Gruppo IGD’s real estate assets came to €1,968.10 million at the end of 2023, a decrease of €112.79 million compared to the end of 2022.
The reduction in fair value affected all the Italian perimeter’s asset classes, although malls were impacted the most with valuations down by 6.32% year-on-year. The resiliency of hypermarkets and supermarkets was confirmed with fair Value at 31 December 2023 down by a modest 0.35% compared to the end of 2022 and slightly higher, by 0.28%, against 30 June 2023.
Portfolio valuations were affected across the board by a decompression in net exit yields, while discount rates rose as the ECB continued to increase the cost of funding.
The Group’s Fair Value was also negatively impacted by the drop in the fair value of Winmarkt‘s Romanian portfolio, which fell 4.91% against year-end 2022, as well as of the trading and development assets which both posted double-digit decreases.
The trend in consolidated EBIT, which went from €7.7 million in 2022 to -€33.1 million in 2023, was profoundly affected by the change in fair value that emerged in the independent year-end appraisals which, together with the capex made in 2023, had a negative impact of €138.8 million.
Higher interest rates are reflected in the cost of debt
Financial expenses, which amounted to €48.7 million, were 59.7% higher than in 2022: this reflects the higher level of interest rates and the higher cost of new financing. In 2023 IGD’s overall average cost of debt was 3.86%, compared to 2.3% in 2022, while the net financial position went from €976.9 million at the end of 2022 to €968.3 million at the end of 2023.
As a result of the decline in fair value, the loan-to-value increased from 45.7% at the end of 2022 to 48.1% at the end of 2023.
The consolidated income statement for 2023, therefore, closes with a net loss of €81.7 million, compared to a loss of €22.3 million in 2022.
Improvement in FFO exceeds guidance
FFO reached €55.4 million, compared to €67.2 million in 2022. Given the improvement achieved in core business EBITDA, the decrease of €11.8 million is attributable mainly to higher financial management expenses.
In November, when we published our results for the first nine months of 2023 and in light of the liability management transaction we had just completed, we provided full-year FFO guidance of €53 million.
The FFO reported, although lower than in 2022, does provide an encouraging signal as it is above our own expectations of a few months ago.
IGD always adopts new Governance tools and is rigorous in their application
Regarding Enterprise Risk Management, as of 1 January 2023, a premier advisory company was charged with IGD’s risk management. Through direct interaction with the Risk Control Committee and the Board of Directors, the new risk manager reviewed the map of major risks – from financial to climate change risk – making not only a qualitative, but also a quantitative assessment, of the factors most relevant to IGD’s business, within different scenarios. This new approach made it possible to define a set of indicators to be used when assessing risk, as part of a process that is not limited to an internal review, but includes continuous benchmarking against best practices.
We also set up internal regulations for selective disclosure which began with a detailed mapping of the information that is subject to disclosure outside IGD.
Following the results from the climate survey conducted in 2022, job descriptions for all company employees were drafted in 2023 and new career paths were activated, structuring a performance review system that is as objective as possible, thanks to the participation of all IGD’s people. Starting in 2024, a new internally developed IT project will also enable a complete digitization of the performance management system.
IGD’s commitment to Governance aspects is continuously reviewed and recognized by the numerous ESG ratings IGD can boast: 13 independent and unsolicited, as well as two solicited ratings, from CDP and GRESB.
A significant part of the path to reach the targets of the Sustainability Plan 2022-2024 has already been covered
During the two-year period 2022-2023, IGD achieved 68.8% percent of the more than 40 sustainability targets defined in the 2024 Plan.
The BREEAM certifications obtained in 10 shopping centers in Italy, as well as the numerous solar energy systems installed, which produce about 2,900 MW of green energy in one year, or the 122 electric vehicle charging stations, present in 85% percent of IGD’s shopping centers, are eloquent evidence of this achievement.
The progress made in terms of increasingly virtuous behavior brings concrete benefits to the local communities as a result of lower greenhouse gas emissions, as well as to tenants, who see a decrease in their expenses.
IGD can also count on a high-level management team in all areas. A team built over time, including by enhancing the professional expertise of some internal figures to replace directors who had reached retirement.
This cultural and managerial continuity has been an essential element in successfully navigating the challenging backdrop encountered in recent years.
Consistent implementation of the strategic guidelines is rewarding even in scenarios that differ from those in the 2022-2024 Plan
Our efforts to remain consistent with the guidelines of the 2022-2024 Business Plan have proven rewarding.
In 2022 and 2023 we, in fact, continued to operate in accordance with the Plan, in terms of both operational choices, pursuing the important investment pipeline projects, and liability management.
We were aware, after all, that over the three-year period 2022-2024 we would have to refinance 90 percent of our debt. What we could not have foreseen was that market access would suddenly disappear, with banks experiencing serious difficulties in providing credit, in an environment of high rates.
We, therefore, feel confident when we say that in 2024, the last year of the Plan, IGD can aspire to achieve the other operational goals.
In terms of financial management, our efforts will be focused on achieving a sustainable balance.
With rates falling, it will make sense to refinance debt again
Now that the 400-million-euro hurdle of the bond maturing in November 2024 has been removed, in theory the next financial maturities will not be until 2027. In reality, IGD now has the opportunity to work over the next 3 years to re-schedule debt and minimize cost as much as possible.
When market access is renewed and while rates fall, we will be committed to carrying out a second re-financing which lengthens debt maturity and reduces its cost.
Disposals continue to be essential to reducing LTV and improving FFO
In this regard, on February 23, 2024, we signed an agreement with Sixth Street and Starwood Capital for the disposal of a portfolio comprising 13 assets valued at €258 million, largely in line with the book value at 31 December 2023. The portfolio consists of 8 hypermarkets, 3 supermarkets and 2 shopping malls.
The closing of the transaction is expected to take place by April 2024.
The sale will be accomplished by transferring the assets to an Italian alternative real estate investment fund in which IGD will retain a 40% stake. Net of this interest, IGD will cash in about €155 million.
The divestment of a part of the owned real estate portfolio was one of the target of the 2022-2024 Business Plan and is aimed entirely at reducing the Group’s financial leverage, with the Loan to Value estimated to drop by approximately 3.7 percentage points as of today.
The transaction proceeds will, in fact, be used to make partial early repayment of the mortgaged-backed loans on the properties sold, as well as a few other loans, in accordance with the relevant contractual agreements.
Resources generated in 2023 will help strengthen self-financing
Given that the SIIQ perimeter did not generate a profit, due to the negative impact of real estate valuations and higher financial expenses, no dividends will be distributed for 2023.
The global market conditions and the strategy we are adhering to make us believe that it is reasonable to assume that IGD will soon be able to return to being a dividend company for its shareholders.
The new Board of Directors, which will be appointed during the next Annual General Meeting of Shareholders, will determine the best path for IGD to follow over the next few years in order to make the most its strengths in a scenario which, we hope, will be more favorable.
Meanwhile, with the unwavering commitment of all its people, IGD remains focused on a very clear agenda for the current year.
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