EPP N.V. - Unaudited condensed consolidated financial statements for the six months ended 30 June 2018

Release Date: 07/09/2018 07:05
Code(s): EPP
 
Wrap Text
Unaudited condensed consolidated financial statements for the six months ended 30 June 2018

EPP N.V. 
(previously Echo Polska Properties N.V.)
(Incorporated in The Netherlands)
(Company number 64965945)
JSE share code: EPP
ISIN: NL0011983374
LEI code: 7245003P7O9N5BN8C098
("EPP" or "the company" or "the group")

Unaudited condensed consolidated financial statements
for the six months ended 30 June 2018

Highlights
Net property income up 45% to EUR66.2 million (H1 2017: EUR45.5 million)
Distributable earnings up 32% to EUR48.3 million (H1 2017: EUR36.6 million)
Distribution per share up 12% to EUR5.82 cents (H1 2017: EUR5.19 cents)
Total investment properties value exceeded EUR2 billion
Net asset value ("NAV") per share increased by 4% to EUR1.37 (December 2017: EUR1.32)
Successful acquisition of tranche 1 of M1 portfolio over 194 000 m2

Consolidated statement of profit or loss
                                                              Period from    Period from
                                                                1 January      1 January
                                                               2018 until     2017 until
                                                             30 June 2018   30 June 2017
                                                                  EUR'000        EUR'000
Rental income                                                      67 145         46 364
Service charge income                                              25 304         19 983
Property operating expenses                                       (26 235)       (20 816)
Net property income                                                66 214         45 531
Other income                                                          735          1 029
Other expenses                                                       (972)          (611)
Administrative expenses                                            (6 728)        (4 161)
Net operating profit                                               59 249         41 788
Profit on investment properties                                    28 802         15 582
Profit from operations                                             88 051         57 370
Finance income                                                      1 236          1 600
Finance costs                                                     (16 689)        (9 596)
Foreign exchange (losses)/gains                                     5 853         (2 680)
Participation in profits of joint ventures                         25 321          2 682
Profit before taxation                                            103 772         49 376
Taxation                                                   
Current income tax                                                 (4 883)        (1 466)
Deferred tax                                                      (19 490)        (8 355)
Profit for the period                                              79 399         39 555
Profit for the period attributable to EPP shareholders             79 399         39 555
Basic and diluted earnings per share (EUR cents)                     10.0            6.2
Headline earnings and diluted headline earnings            
per share (EUR cents)                                                 6.4            3.8

Consolidated statement of other comprehensive income
                                                              Period from    Period from
                                                                1 January      1 January
                                                               2018 until     2017 until
                                                             30 June 2018   30 June 2017
                                                                  EUR'000        EUR'000
Profit for the period                                              79 399         39 555
Other comprehensive income to be reclassified to profit    
or loss in subsequent periods                              
Foreign currency translation reserve                               (8 563)        (3 019)
Total comprehensive income for the period, net of tax              70 836         36 536
Total comprehensive income attributable to the parent      
for the period, net of tax                                         70 836         36 536

Consolidated statement of financial position
                                                                    As at          As at
                                                                  30 June    31 December
                                                                     2018           2017
                                                                  EUR'000        EUR'000
ASSETS
Non-current assets                                              2 224 382      1 797 545
Investment in joint ventures                                      138 485        116 009
Tangible assets                                                        89             47
Investment property                                             2 066 718      1 655 572
Financial assets                                                   18 071         25 917
Deferred tax asset                                                  1 019              -
Current assets                                                     95 294        154 569
Inventory                                                             679            525
Tax receivable                                                      3 738            209
Trade and other receivables                                        16 827         26 723
Financial assets                                                    3 995          3 955
Restricted cash                                                    13 092         23 613
Cash and cash equivalents                                          56 963         99 544
Total assets                                                    2 319 676      1 952 114
EQUITY AND LIABILITIES                                       
Equity                                                            975 988        833 821
Share capital                                                     642 778        571 026
Share premium                                                     187 668        147 534
Treasury shares                                                    (3 095)          (783)
Accumulated profit                                                150 789        111 419
Share-based payment reserve                                         6 694          4 909
Foreign currency translation reserve                               (8 846)          (284)
Non-current liabilities                                         1 191 623        941 710
Bank borrowings                                                 1 067 031        831 183
Related party liabilities                                           1 762          1 741
Other liabilities                                                  13 075         15 033
Deferred tax liability                                            109 755         93 753
Current liabilities                                               152 065        176 583
Bank borrowings                                                   123 338        117 155
Related party liabilities                                           3 003         18 019
Tax payables                                                        5 683            879
Trade and other payables                                           18 555         40 353
Provisions                                                          1 486            177
Total equity and liabilities                                    2 319 676      1 952 114

Statement of changes in equity
                                                       Share                     Accumu-
                                                    premium/                       lated
                                         Share       capital     Treasury        profit/
                                       capital      reserves       shares          (loss)
                                       EUR'000       EUR'000      EUR'000        EUR'000
Balance as at                                                                  
31 December 2017                       571 026       147 534         (783)       111 419
Profit for the year                          -             -            -         79 399
Other comprehensive income                   -             -            -              -
Other comprehensive                                                                   
income from joint ventures                   -             -            -              -
Total comprehensive income                   -             -            -              -
Issue of ordinary shares                71 752        40 748            -              -
Transaction cost related                                                              
to issuance of shares                        -          (614)           -              -
Acquisition of own shares                    -             -       (2 312)             -
Recognition of share-                                                                 
based payments                               -             -            -              -
Dividend paid                                -             -            -        (40 029)
Balance as at 30 June 2018             642 778       187 668       (3 095)       150 789

                                                     Foreign       Share-
                                                    currency        based
                                                 translation      payment          Total
                                                     reserve      reserve         equity
                                                     EUR'000      EUR'000        EUR'000
Balance as at 31 December 2017                          (284)       4 909        833 821
Profit for the year                                        -            -         79 399
Other comprehensive income                            (5 565)           -         (5 565)
Other comprehensive income from joint ventures        (2 997)           -         (2 997)
Total comprehensive income                            (8 562)           -         (8 562)
Issue of ordinary shares                                   -            -        112 500
Transaction cost related to issuance of shares             -            -           (614)
Acquisition of own shares                                  -            -         (2 312)
Recognition of share-based payments                        -        1 785          1 785
Dividend paid                                              -            -        (40 029)
Balance as at 30 June 2018                            (8 846)       6 694        975 988

Statement of changes in equity (restated)
                                                                    Share        Accumu-
                                                                 premium/          lated
                                                       Share      capital        profit/
                                                     capital     reserves         (loss)
                                                     EUR'000      EUR'000        EUR'000
Balance as at 31 December 2016                    
after restatement                                    474 702       95 095         38 075
Profit for the year                                        -            -         39 555
Other comprehensive income                                 -            -              -
Other comprehensive income from                                        
joint ventures                                             -            -              -
Total comprehensive income                                 -            -         39 555
Issue of ordinary shares                              97 287       55 687              -
Transaction cost related to                       
issuance of shares                                         -       (4 190)             -
Special dividend due                                       -            -        (16 849)
Dividend paid                                              -            -        (18 402)
Balance as at 30 June 2017                           571 989      146 592         42 379

                                                                  Foreign
                                                                 currency
                                                              translation          Total
                                                                  reserve         equity
                                                                  EUR'000        EUR'000
Balance as at 31 December 2016 after restatement                     (434)       607 438
Profit for the year                                                     -         39 555
Other comprehensive income                                         (5 523)        (5 523)
Other comprehensive income from joint ventures                      2 504          2 504
Total comprehensive income                                         (3 019)        36 536
Issue of ordinary shares                                                -        152 974
Transaction cost related to                                            
issuance of shares                                                      -         (4 190)
Special dividend due                                                    -        (16 849)
Dividend paid                                                           -        (18 402)
Balance as at 30 June 2017                                         (3 453)       757 507

Condensed consolidated statement of cash flow
                                                              Period from    Period from
                                                                1 January      1 January
                                                               2018 until     2017 until
                                                             30 June 2018   30 June 2017
                                                                  EUR'000        EUR'000
Cash generated from operations                                     64 472         78 279
Tax paid                                                           (3 910)        (1 328)
Net cash generated from operating activities                       60 562         76 951
Investing activities
Purchase of investment property                                  (375 874)      (223 953)
Acquisition of business net of cash acquired                            -          5 196
Investments in joint ventures                                           -        (29 554)
Capital expenditure on completed investment property              (14 997)       (19 117)
Loans granted                                                           -        (39 104)
Loans repaid                                                        9 950              -
Interest received/(paid)                                                -         (1 431)
Net cash utilised in/generated from investing activities         (380 921)      (307 963)
Financing activities
Proceeds from borrowings                                          249 526        194 505
Repayment of borrowings                                           (10 195)       (36 076)
Proceeds from issue of share capital                              112 500        148 785
Transaction costs on issue of shares                                 (614)             -
Treasury shares                                                    (2 313)             -
Dividends paid                                                    (40 029)       (19 930)
Loans repaid                                                      (17 892)             -
Interest paid                                                     (12 250)        (8 471)
Interest received                                                     800              -
Net cash generated from/(utilised in) financing activities        279 533        278 813
Net increase in cash and cash equivalents                         (40 826)        47 801
Cash and cash equivalents at the beginning of the period           99 544         21 921
Effect of foreign exchange fluctuations                            (1 621)           299
Cash and cash equivalents at the end of the period                 57 097         70 021

Headline earnings reconciliation
                                                              Period from    Period from
                                                                1 January      1 January
                                                               2018 until     2017 until
                                                             30 June 2018   30 June 2017
                                                                  EUR'000        EUR'000
Profit for the period attributable to EPP shareholders             79 399         39 555
Change in fair value of investment properties                     (28 802)       (15 582)
Headline and diluted earnings attributable to                
EPP shareholders                                                   50 597         23 973
Actual number of shares in issue                              793 552 888    704 970 211
Weighted number of shares in issue                            793 552 888    637 298 120
Basic and diluted earnings per share (EUR cents)*                    10.0            6.2
Headline earnings and diluted headline earnings per          
share (EUR cents)**                                                   6.4            3.8
*  There are no dilutionary instruments in issue and therefore basic and diluted earnings
   per share are the same.
** There are no dilutionary instruments in issue and therefore headline earnings and
   diluted headline earnings per share are the same.

Commentary
1. Reporting entity
EPP is a Dutch-based real estate company that follows the REIT formula and is one of the
leading owners of retail space in Poland. The company's portfolio is complemented by
high quality offices located in regional cities across Poland. As of 30 June 2018 the
company manages a portfolio of 18 retail centres and six offices located in the majority
of regional cities in Poland. In addition to these income generating properties, EPP also
has two developments in the capital - Warsaw, namely Towarowa 22 and Mlociny (set to
open in April 2019). By the end of 2020, EPP expects to own 28 shopping centres post the
conclusion of the M1 transaction.

As of 30 June 2018, EPP owns and operates over 630 000 m2 of retail and over
130 000 m2 office GLA, excluding joint ventures. The investment portfolio has a diversified
tenant base of leading retailers with international brands in the retail properties, and
primarily blue-chip companies in the office properties.

The company's operations are fully internalised and all asset management and property
management is done in-house.

EPP's shares are listed on the official list and admitted to trading on the Euro MTF market
of the Luxembourg Stock Exchange ("LuxSE") and on the Main Board of the JSE Limited
("JSE") in the Real Estate Holdings and Development Sector. The company has primary
listings on both the LuxSE and the JSE.

The company's strategy is to own large dominant shopping centres, located in strong
catchment areas and which have asset management opportunities in terms of extensions
across Poland. EPP intends continuing to divest from offices and recycle the proceeds to
fund purchases of retail assets.

2. Basis of preparation
These unaudited condensed consolidated interim financial statements have been prepared
in accordance with IAS 34: Interim Financial Reporting, the Dutch Civil Code, the JSE
Listings Requirements and the Rules and Regulations of the LuxSE.

These unaudited condensed consolidated interim financial statements do not include all of
the information required for full annual consolidated financial statements and should be
read in conjunction with the consolidated annual financial statements of the group as at
and for the year ended 31 December 2017.

The accounting policies applied in the preparation of these unaudited condensed
consolidated financial statements are consistent with those applied in the previous IFRS
financial statements as of and for the year ended 31 December 2017, with the exception of
implementation of IFRS 15 and IFRS 9.

3. Significant accounting policies - impact of new standards
IFRS 9 Financial Instruments
The group performed an assessment of the impact of IFRS 9 on its consolidated financial
statements. Two separate classes of financial assets, currently accounted for under
amortised cost in line with IAS 39, did not pass the SPPI ("Solely Payments of Principal
and Interest") test and are classified as FVTHPL ("Fair Value Through P&L") under IFRS 9.
The financial assets considered are:
- Other financial assets representing loans granted to Kalisz Retail sp. z o.o. and to Aradiana
  Ltd, a shareholder and a controlling party of Kalisz Retail sp. z o.o. ("Kalisz loans").
- Other financial assets in related entities representing advances to each of the Right Of
  First Offer ("ROFO") entities in connection with the ROFO projects ("ROFO loans").

In relation to Kalisz loans granted by the EPP Group, in the first half-year of 2018 the
borrowers repaid in total EUR10.75 million of the initial aggregated amount of EUR23.30
million. There are various repayment scenarios possible that include a prepayment of the
loan, repayment of the loan after a five-year period, refinancing of the loan after a five-year
period, sale of the underlying asset and repayment of the loan. Options available are
outside of EPP control, as such the group management decided to assume that the loan
will be repaid after a five-year period. Under that assumption amortised cost valuation as
of 30 June 2018 approximates the fair value of the loan granted.

In relation to ROFO loans the fair value is calculated using a present value technique, where
the present value of expected net cash flows from the asset is discounted at a current
market-based rate. The cash flows related to the selling price of the building and the final
outcome of the ROFO transaction are impacted by a number of factors, which are very
difficult to estimate. We concluded that the carrying amount of the ROFO loans
approximates its fair value.

IFRS 15: Revenue from Contracts with Customers
IFRS 15 does not have a significant impact on the group's consolidated financial statements.
Note that IFRS 15 does not affect the recognition of lease income as this is still dealt with
under IAS 17: Leases.

IFRS 16: Leases - not yet effective
The standard is effective for periods beginning on or after 1 January 2019 and has not been
adopted by the group yet. The management is currently assessing the impact of the new
standard.

4. Financial results
The net profit for the six months ended 30 June 2018 amounted to EUR79.4 million and
distributable income totalled EUR48.3 million. Total NAV amounted to EUR975.99 million
equating to a NAV per share of EUR1.37. The net loan-to-value ratio as of 30 June 2018
was 50.9% with an average cost of debt of 2.38%.

Acquisition of M1 portfolio
In October 2017 EPP has reached an agreement to acquire a portfolio of retail properties
for a combined consideration that values the portfolio at EUR692.1 million. During the first
half of 2018, the group successfully purchased the first tranche of the M1 portfolio
consisting of four properties for a consideration of EUR359 million.

Acquisition of remaining properties is conditional upon fulfilment of outstanding conditions
precedent and is scheduled as follows:
- the Second Tranche Portfolio comprising a further six properties with an aggregate GLA
  of 184 000 m2, an aggregate value of EUR222.5 million and an aggregate purchase
  consideration of EUR75.2 million with the expected completion date by either 27 June
  2019 or 10 July 2019; and
- the Third Tranche Portfolio comprising a further two properties with an aggregate GLA of
  68 100 m2, an aggregate value of EUR110.9 million and an aggregate purchase
  consideration of EUR44.1 million with the expected completion date by either 29 June
  2020 or 9 July 2020.

The delay in completing the second and third tranche acquisitions is to enable the seller to
implement various contracted asset management initiatives (including certain lease
renewals or renegotiations) to align those acquisitions with EPP's investment requirements
and strategy.

5. Related-party transactions
In January 2018 EPP repaid EUR18.03 million loans received from Echo Investment. In
May 2018 there was a partial repayment of loans granted to Kalisz Retail sp. z o.o. and to
Aradiana Ltd, a shareholder and a controlling party of Kalisz Retail sp. z o.o. as described
in section 3 above.

6. Segment information
                                        Retail      Office    Unallocated          Total
                                       EUR'000     EUR'000        EUR'000        EUR'000
Six months ended 30 June 2018                                                 
Segment profit                                                                
Rent and recoveries income              77 342      14 127            980         92 449
Property operating expenses            (21 188)     (4 367)          (680)       (26 235)
Net property income                     56 154       9 760            300         66 214
                                                                              
                                        Retail      Office    Unallocated          Total
                                       EUR'000     EUR'000        EUR'000        EUR'000
As at 30 June 2018                                                            
Segment assets                                                                
Investment in joint ventures           136 911           -              -        136 911
Investment property                  1 758 318     308 400              -      2 066 718
Total segment assets                 1 895 229     308 400              -      2 203 629
Bank borrowings                        929 178     160 725        100 466      1 190 369
Total segment liabilities              929 178     160 725        100 466      1 190 369

Headline earnings to distributable income reconciliation
                                                              Period from    Period from
                                                                1 January      1 January
                                                               2018 until     2017 until
                                                             30 June 2018   30 June 2017
                                                                  EUR'000        EUR'000
Headline and diluted earnings attributable to               
EPP shareholders                                                   50 597         23 973
Amortised cost valuation of long-term financial              
liabilities                                                         2 469            901
Foreign exchange and other items                                   (3 061)         1 800
Fair value losses/(gains) in joint ventures                       (25 096)        (2 105)
Change in deferred tax                                             19 490          8 355
Provision for long-term incentive plan                              1 785              -
Antecedent dividend*                                                2 121          3 678
Distributable income                                               48 306         36 602
Actual number of shares in issue                              793 552 888    704 970 211
Shares issued on 31 July 2018                                  36 436 916              -
Shares in issue for distributable earnings                    829 989 804    704 970 211
Distributable income per share (EUR cents)                           5.82           5.19
* Antecedent dividend relates to issuance of shares on 31 July 2018 in connection with
  acquisition of Marcelin Shopping Centre.

7. Subsequent events
Acquisition of Symetris Business Park phase II
On 27 July 2018 EPP concluded the acquisition of the second phase of Symetris Business
Park as part of the ROFO agreement.

Acquisition of Marcelin and new equity raise
EPP successfully placed 36 436 916 new shares with Redefine Properties Limited at a price
of R19.26 per share to partially fund the acquisition of the King's Cross Marcelin Shopping
Centre. The acquisition of King's Cross Marcelin was concluded on 31 July 2018 for a net
purchase consideration of EUR91.1 million subject to working capital and other potential
price adjustments.

8. Dividend declaration
EPP's dividend policy states that the company intends to declare 100% of its distributable
income to shareholders. The company intends declaring half-yearly dividends, which are
expected to be declared for the periods ended 30 June and 31 December of the relevant
year. No assurance can be made that dividends will be proposed or declared in any given
year.

The board has declared an interim dividend of EUR5.82000 cents per ordinary share for the
six months ended 30 June 2018.

A further announcement informing shareholders of the salient dates and tax treatment of
the dividend will be released in due course.

Group management report
Portfolio performance
During the first half of the year, we successfully purchased the first tranche of the M1
portfolio consisting of four properties for a consideration of EUR359 million. The total retail
gross lettable area ("GLA") added was over 194 000 m2 with an average property size of
over 48 000 m2. The majority of assets are located in the much desired Silesia region in
Poland. Post interim period end the company acquired the King Cross Marcelin, a
45 353 m2 shopping centre located in the affluent western part of Poznan. Following this
acquisition EPP's total GLA space amounts to almost 700 000 m2.

The portfolio continues to perform well. The Sunday trading ban introduced in March 2018,
had a limited impact on sales and footfall.

Construction at EPP's flagship Warsaw-based shopping centre Mlociny remains on track
and on schedule to open in April 2019. Mlociny is more than 75% pre-leased, with many
first time entrants to Poland looking to open in the shopping centre. Towarowa 22 is in the
process of zoning approval which is expected in 2019.

Vacancy profile
The vacancy profile indicated below reflects the vacancy percentage in terms of current
GLA by sector.

                                                                                 30 June
                                                                                    2018
Vacancy based on total GLA (%)
Office                                                                               6.0
Retail                                                                               0.6
Total                                                                               1.57

Tenants
As of the end of the quarter retail tenants totalled 1 828 with 91 office tenants.

Geographic profile
                                                                                By fully
                                                                   By GLA        let NOI
City             Project                                                %              %
Wroclaw          Pasaz Grunwaldzki                                   6.23          10.42
Szczecin         Galaxy, Outlet, Oxygen                             12.73          17.87
Kielce           Galeria Echo, Astra Park                           11.09          11.28
Kalisz           Galeria Amber                                       4.32           4.15
Lomza            Galeria Veneda                                      1.94           1.87
Jelenia Gora     Galeria Sudecka                                     3.90           2.84
Belchatow        Galeria Olimpia, CH Belchatow                       4.21           2.70
Przemysl         Centrum Handlowe Przemysl                           0.74           0.31
Krakow           Zakopianka, Opolska Business Park, M1              14.64          14.81
Zamosc           Twierdza Zamosc                                     3.07           2.89
Klodzko          Twierdza Klodzko                                    2.97           2.38
Wloclawek        Wzorcownia Wloclawek                                3.27           2.87
Inowroclaw       Galeria Solna                                       3.03           2.96
Poznan           Malta Office Park                                   3.64           3.56
Warszawa         Park Rozwoju                                        4.32           4.25
Lodz             Symetris, M1                                        6.18           3.90
Czeladz          M1                                                  6.91           6.29
Zabrze           M1                                                  6.80           4.68

Sectoral profile
                                                                                By fully
                                                                   By GLA        let NOI
                                                                        %              %
Retail                                                              82.29          82.70
Office                                                              17.71          17.30
Total                                                              100.00         100.00
                                                                              
WAULT*                                                                        
                                                                               By rental
Sector                                                             By GLA         income
Retail                                                               5.36           4.59
Office                                                               4.16           4.16
* Weighted average unexpired lease term in years.

Prospects
EPP has a quality portfolio of dominant retail properties complemented by high quality
office properties. The company continues to focus on integrating its recent acquisitions into
the portfolio, exploring asset management opportunities and continuing on its asset
recycling strategy. The Polish economy continues to perform well and the current property
fundamentals remain favourable.

The board remains confident that EPP will deliver on its stated full year distribution per
share guidance of between EUR11.6 cents to EUR11.8 cents.

There have been no changes to the board during the period under review.

By order of the board

EPP N.V.

7 September 2018

Company information
Directors
Hadley Dean (chief executive officer)
Jacek Baginski (chief financial officer)
Robert Weisz* (chairman)
Marek Belka*
Peter Driessen*
Maciej Dyjas**
Dionne Ellerine*
Andrew Konig**
Nebil Senman**
Andrea Steer*
Marc Wainer**
* Independent non-executive
** Non-executive

Registered office
Gustav Mahlerplein
28, 1082 Amsterdam
The Netherlands

Company secretary
Rafal Kwiatkowski (Master of Laws)
al. Solidarnosci 36
25-323 Kielce
Poland

Transfer secretaries
Computershare Investor Services (Pty) Ltd
Rosebank Towers
15 Biermann Avenue
Rosebank
2195

PO Box 61051
Marshalltown
2107

LUXSE listing agent
M Partners
56, rue Charles Martel L-2134
Luxembourg

JSE sponsor
Java Capital
6A Sandown Valley Crescent
Sandton
2196
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