The Chief Executive Officer’s point of view on the first half of 2019

Dear Shareholders,

the results in the half-year report show that our commitment to operational and financial management is moving in the direction forecast in the Business Plan.

In the independent appraisers’ snapshot at 30 June 2019 IGD is presented as a company with solid positioning. Our real estate portfolio, which is worth €2,388.3 million, is well distributed across the different asset classes, as it is comprised for 65% of shopping malls, for 24% of hypermarkets and for 6% of the Winmark chain that we own in Romania. In Italy, which accounts for 94% of the portfolio’s total value, we can claim full ownership of 16 shopping centers, with an impressive 8 malls, that have a market value of more than €70 million.

Our assets also provide compelling returns, effectively summarized in the gross initial yield, which comes to 6.43% for malls, 6.07% for hypermarkets and 6.94% for the properties in Romania. These performances are even more remarkable if we consider that occupancy in Italy, albeit still high, fell temporarily to 96.3%, compared to 97.2% in 2018, due to strategic vacancies in a few midsize retail areas for which re-marketing is currently underway (to date 1,300 m² have already been rented which bring the current occupancy to 96.6%).

It should be emphasized that the market value of €2,388.3 million at 30 June 2019 takes into account the remodeling of hypermarkets and malls called for in the strategic agreement signed with Coop Alleanza 3.0 at the end of 2018. In absolute terms this market value is down by just under 1% compared to €2,412.1 million at 31 December 2018, explained mainly by the change in market rates used in the appraisals and other changes in cash flow (linked, in particular, to the forecast drop in variable rent).

In a complex operating environment, in which weather conditions had an adverse impact – with an extremely mild February and, conversely, a cold and rainy May which penalized the clothing segment – retailers sales were basically unchanged against the first half of 2018, with a noticeable recovery in the second quarter.

The continuous commitment to making our real estate portfolio more functional, appealing and in step with the new consumer trends, proved to be effective as shown by the FFO or Funds from Operations, which reached €41.8 million in the first half of 2019, an increase of €3 million, driven mainly by the contribution of core business adjusted EBITDA which grew by €2.2 million and the €0.3 million improvement in financial management.

A closer look at these results reveals a good operating performance with a 4.4% increase in rental income and an adjusted core business EBITDA margin that came to 71.5%.

On the other hand, proactive financial management made it possible to reduce net financial expense by 3.7% despite the €77 million increase in net financial debt which at 30 June 2019 came to €1.185 million. The average cost of debt in the first half was 30 basis points lower than the 2.7% recorded in 2018.

The income statement for the first half of 2019 shows a negative balance in “Writedowns and fair valued adjustments” of €38.8 million, versus a negative €2.6 million in the first half of 2018. Even though this amount is marginal compared to the total value of the portfolio, it prevented the net profit from fully expressing the progress made in terms of operational and financial management. The bottom line of the income statement, however, shows an adjusted net profit of €7.2 million.

The half-year report also shows an EPRA Triple Net Asset Value per share, updated at the end of June, of €10.78 euro. A level that indicates that, at below €6, the stock has been recently trading at a heavy discount. At current levels, ample upside also emerges with respect to the average target price of the analysts covering IGD (€8.08).

We changed our guidance for FY 2019 FFO from 6-7% to the current 4-5%, in order to be more prudent in a context of weak consumption, while we are proceeding with asset management and remodeling projects which penalize occupancy. This notwithstanding, we are convinced that we will be able to provide good visibility for continuous growth and reach, therefore, the targets for 2021 included in the Business Plan.

The stock market sentiment is very negative for the retail real estate segment in this period, as shown by the low multiples at which the European best practice equities are currently trading. We, managers of portfolios comprised of important shopping centers, cannot be held back by concerns about how eCommerce might impact global consumer trends.

We will strive, rather, seek to look ahead, to intercept new trends, to enhance our retail offering and redesign the spaces where it is presented.  If we will have met the challenge in three, five or ten years will depend on the choices that we make today. That is why we will continue with our projects and with an operational and financial management that is more careful than ever.

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