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Nepi Rockcastle:
shopping for growth

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Richard Colburn

Equity Analyst

Nepi Rockcastle became the largest property stock on the JSE following the merger of New Europe Property Investments (Nepi) and Rockcastle Global Real Estate. The management team of the newly formed real estate investment group has consolidated and continued to implement its stated strategy of investing in dominant retail assets in high growth Central Eastern European markets. The view is that operational performance coupled with macroeconomic tailwinds will continue to drive Nepi Rockcastle’s distribution growth. We agree – we see continued value unlock and growth for the group.

Nepi Rockcastle is an internally managed investment and development group in Central Eastern Europe (CEE). After the merger of Nepi Rockcastle became effective on 11 July 2017, Nepi Rockcastle became one of the largest listed real estate companies in Continental Europe and the largest CEE real estate fund by market capitalisation.


At its half-year results for the period ending 30 June 2017, the fund announced it had €3.8 billion in income-producing properties (77% of total investment assets) with a strong retail preference. Nepi Rockcastle’s direct property portfolio focuses primarily on Romania (47%), Poland (28%) and Slovakia (9%) with a smaller presence in Croatia (6%), Bulgaria (5%), Czech Republic (4%) and Serbia (1%). More recently, the fund has made a sizeable acquisition into Hungary and increased exposure to Poland and Bulgaria.


Following the merger, Nepi Rockcastle inherited a listed security portfolio from Rockcastle worth €1.16 billion (as at 30 June 2017), which equates to 23% of total investment assets. The listed portfolio holdings are larger, more liquid property stocks in developed markets – with a focus on sustainable growth and ease of liquidation if and when necessary. This allows for flexibility if capital is required. Nepi Rockcastle’s management has commented that it wants to reduce this to at least 10% as it redeploys the capital from the listed shares into direct property and/or reduce debt levels in the fund.

As the property fund’s base grows, it becomes increasingly difficult to maintain the runway for growth of distributions. Management has to first find and secure opportunities, and then fund them in the most efficient manner.


As at 30 June 2017, Nepi Rockcastle had secured a substantial acquisition pipeline, and committed to a number of sizeable and growth-accretive development projects. At the time, the acquisition pipeline looked healthy with around €1 billion of opportunities under due diligence, and its developments and extensions pipeline was also well over €1 billion. This will provide the platform for future growth. The three earnings-enhancing transactions Nepi Rockcastle has concluded across CEE since June total around €780 million – highlighting that management not only continues to be successful at sourcing value-adding deals, but also closing them.

Of course it’s all good and well to have a secured pipeline. What’s also crucial is the funding involved in pursuing these opportunities. As at 30 June 2017, Nepi Rockcastle had managed its debt efficiently and was poised with enough balance sheet strength to execute due to the low levels of gearing in the fund (loan-to-value at 30 June 2017: 24% with 35% targeted, which allowed for flexibility to pursue accretive projects).


Beyond using ordinary debt to fund opportunities, Nepi Rockcastle has access to alternate means of funding. The group could choose to liquidate holdings in its listed securities portfolio, which would allow for rapid capital deployment as and when required. Moreover, in early October after its interim results, Nepi Rockcastle came to the market to raise capital in an oversubscribed accelerated book build.

The company raised a total of €325 million from existing and new shareholders, which was then used to fund more recent acquisitions and reduce gearing in the fund. This action once again allows it to use balance sheet flexibility for future growth.

An additional benefit of the Nepi Rockcastle tie-up is reduced funding costs, which in turn makes opportunities more attractive. We estimate funding costs to be approximately 2.5%. In summary, Nepi Rockcastle’s management has developed a strong record of efficiently deploying capital to growth-accretive acquisitions and redevelopments.

Our view has been to maintain active exposure to Nepi Rockcastle following the merger. We still see continued value unlock and growth in distributions coming out of the fund. Along with balance sheet flexibility and the pipeline of opportunities, we continue to back management to allocate capital efficiently to accretive opportunities and continue driving rentals and reducing vacancies as the group optimises its tenant mix through active asset management initiatives.

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