Letter to the Shareholders
Dear Shareholders,
The results reported in your Company’s Annual Report for 2016 show that the year that just ended was the best in IGD’s history.
The Group’s net profit reached €68.3 million, an increase of 49.7% with respect to 2015. Core business Funds from Operations (FFO) rose 18.9% to €53.9 million: the year-end target of around 15-16% that we announced when the half-year results were published was, therefore, exceeded by a wide margin.
The timely and effective implementation of the investments called for in the 2016-2018 Business Plan fueled the strong generation of operating cash flow which was supported by an 8.4% increase in revenue from the real estate business and rents, and well reflected in a consolidated EBITDA of €94 million; the increase of 11.4% against the EBITDA reported in 2015 indicates that growth in EBITDA outpaced the increase in revenue. The core business EBITDA Margin rose noticeably from the 67.3% recorded in 2015 to 69.3% in the year that just ended driven by both the increase in revenue and tight control of operating costs.
Today IGD can count on a sizeable real estate portfolio: at year-end 2016 the appraised fair value was €2,178 million versus €2,082 million at year-end 2015, an increase of €95.8 million or +4.6%. During the year the Group’s perimeter grew due to the investment of around €47 million in the Maremà center shopping mall in Grosseto, inaugurated on 27 October. The fair value of the Group’s real estate assets was also up like-for-like against year-end 2015 as a result of the higher forecasts for revenue growth and yield compression that the independent appraisers calculated for the top performing assets. The biggest increases were reported by the shopping centers where restyling and new fit-outs, as well as extensions of the leasable space, were completed.
Today IGD’s portfolio is well balanced in terms of the average size of the assets, well distributed geographically and with a large part of the centers well positioned in the respective catchment areas: characteristics which lessen the overall risk.
Guided by the objective to maintain high occupancy rates (improved and equal to 97.3% in Italy and 96.1% in Romania), over time your Company has continued to invest in maintaining the high quality and appeal of the portfolio, even in the most profound years of the consumer crisis. We changed the merchandise mix of the tenants in our malls in order to meet the new needs of the market which is more focused on personal and restaurant services conceived as experiences linked to leisure. This resulted in the remodeling of malls spaces in order to introduce anchor brands which provide fresh appeal with respect to the traditional food anchor.
Our experience in redesigning spaces, reducing the area of the hypermarket and redirecting mall traffic flows, proved very successful in the center in Afragola, near Naples; we are replicating the same model in the Città delle Stelle center in Ascoli, where the mall is being expanded. Another example, equally as significant, was the restyling of Centro Borgo, in Bologna, where the spaces were remodeled in order to streamline use and create new traffic flows.
2016 was, therefore, a year of confirmation and consolidation of the new trends that were already discernable in the 2016 Annual Report, including in terms of “Changes in Fair Value”. If in 2015 the net change in this item, which was positive for €1.5 million, marked a turnaround with respect to the negative €23.1 million posted in 2014, the positive balance of €19.5 million reported in 2016 provides IGD with immediate and even more significant confirmation as to the validity of the investments made to maintain the high quality of its real estate portfolio.
At the same time, the rigorous financial discipline and the optimization of the debt structure, which we were able to accomplish thanks to our investment grade rating, made it possible to maintain the Loan-to-Value well below 50% (48.3% at year-end) and to further strengthen the Interest Cover Ratio which came to 2.24x.
In 2016 IGD’s debt was assigned a Baa3 rating from Moody’s which opened up a new market for the Company, namely the one comprised of institutional investors who can invest exclusively in “investment grade” debt. IGD was able, therefore, to place two bond issues with international investors – one in the spring and the other between 2016 and 2017 – for a total €400 million. Today the company’s debt is well balanced between bonds (2/3) and bank debt (1/3). Thanks to these transactions there was a significant drop in the cost of debt which will become even more apparent next year.
A further signal as to the new value that we created for our shareholders during the year is the increased Net Asset Value, calculated using the adjusted EPRA Triple Net Asset Value per share, which went from the €1.25 recorded at year-end 2015 to €1.29 at year-end 2016 (+3.2%).
In the wake of the solid results presented in the 2016 Annual Report, the Board of Directors proposes payment of a dividend of €0.045 per share, an increase of 12.5% compared to the dividend of €0.040 paid in 2015. By paying €36.6 million in dividends, IGD is also adhering to the dividend policy outlined in the Business Plan which calls for the distribution of earnings equal to around 2/3 of the FFO.
Looking at the 2016 results we can also discern elements which help us to look forward with confidence to the projects outlined in the 2016-2018 Business Plan that we are currently working on. The experience of the Maremà center opening in Grossetto, where thanks to the exciting commercial offering traffic flows in the first few weeks following the inauguration reached levels unseen at midsize centers for many years, is also guiding us in our work on the Ravenna extension which is expected to be completed by the first half of 2017. Meanwhile, we are implementing an innovative concept with areas dedicated to leisure and restaurants at Officine Storiche in Livorno which is destined to give a boost to the whole waterfront project we have undertaken there. The work is expected to be completed by 2018.
Centro ESP – Ravenna
Over the last few months we have also voluntarily made improvements to make our assets more earthquake-resistant. Even though the centers we have in Abruzzo and the Marche regions did not report any structural damage as a result of the earthquakes that took place in August and following months, IGD is committed to ensuring the safety and well-being of its visitors, as well as the retailers, in its centers through a series of targeted actions. A philosophy of carefully managing our properties which also guided us in the process that will result in UNI EN ISO 14001 environmental certification for 90% of our assets in 2018.
In the last few months IGD has received important recognition, including on an international level. At MAPIC in Cannes, the most important international trade fair for our sector, the restyling of Centro Sarca – which, moreover, recently received BREEAM certification – was recognized as one of the most excellent projects and a finalist in the “Best redeveloped shopping center” category. The quality of our corporate reporting was found to comply with the Best Practices indicated by the European Real Estate Association which, in fact, gave us the EPRA sBPR Gold Award for the 2015 Corporate Sustainability Report and the EPRA BPR Silver Award for the 2015 Annual Report, an improvement compared to the Bronze Award received in 2015. IGD was also a finalist in the Small – Medium Sized Enterprises section of the Oscar di Bilancio, a competition organized by the Italian Public Relations Federation. In September 2016 IGD received a Legality Rating of three stars from the Italian Competition Authority (“AGCM”), the maximum score awarded for this type of rating. Last but not least, Moody’s recently confirmed a “stable” outlook for IGD’s debt while, during the same review, it lowered the outlook for Italy’s sovereign debt.
While we will continue to execute our 2016-2018 Business Plan, in 2017 we will work to communicate clearly not only the results that appear in the financials, but also the ones that reflect the Company’s intangible assets, as we are convinced that both translate into concrete results for our shareholders.
The proposed dividend of €0.045 has a yield of 6.2% if calculated based on the price of IGD’s stock at the end of the year, €0.724: with this dividend, therefore, we are confirming one of the pillars of the returns we offer our shareholders. On the other hand the P/NNNAV 2016, which indicates a discount of 43.4%, tells us that the net value of our assets is decidedly higher than the value expressed in IGD’s current stock price. We know that stock prices can be impacted by factors which do not reflect a company’s fundamentals. Clearly in 2016 the performance of IGD’s stock was influenced by an increase in Italy’s perceived country risk and the sector rotation carried out by large institutional investors beginning in September 2016 which penalized defensive stocks, like real estate, in favor of cyclical stocks. Despite this we believe, as a Company, that we can reduce the noticeable discount at which our stock trades against the NAV by focusing on flawless execution of our Business Plan and clear communication of the results. A commitment that we renew with conviction.
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