Trading Update

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this information is considered to be in the public domain.

20 July 2020

Globalworth Real Estate Investments Limited

("Globalworth" or the "Company")

Trading Update

Introduction

Following the "Update on Covid-19" announcement released on 23 April 2020, Globalworth is pleased to release the following Trading Update summarising the key highlights of its operating performance during the first six months of the year to 30 June 2020 ("H1-2020"), including some further updates as to the impact of the pandemic crisis on our operations.

Dimitris Raptis, Co-CEO and Chief Investment Officer of Globalworth, commented: "The quality of our portfolio, our small exposure to the retail segment of the market, the significant cost savings achieved during this period and the strength and depth of our platform have contributed to achieving solid operating performance, demonstrating the strong resilience of our business amidst this unprecedented crisis. The safety and wellbeing of our people, partners, communities, and other stakeholders, is and will continue to be our top priority, as we focus on safeguarding our business, protecting our assets and minimising our exposure to the impact of Covid-19."

Highlights

·       Healthy leasing activity in H1-2020, with 115.5k sqm of commercial space taken-up or extended at an average WALL of 3.2 years.

·      Leases renewed accounted for 74% of our leasing activity, resulting in our WALL remaining substantially the same over the period (4.5 years as at 30 June 2020 vs 4.6 years as at 31 December 2019).

·       Standing portfolio footprint increased by 34.8k sqm mainly attributed to the addition of Globalworth Campus T3 in Bucharest, to 1,248.5k sqm of GLA.

·    Average standing occupancy of our commercial portfolio of 93.3% (94.2% including tenant options), decreasing from 94.7% (95.9% including tenant options) at year end 2019. Like-for-like occupancy decreased by 0.8%.

·     Most of our contracted rent is from office and industrial properties (89.9% of annualised contracted rent) which have remained largely unaffected by measures taken by the authorities against Covid-19.

·      Claims received principally by occupiers of space who have been impacted by the Covid-19 pandemic, with claims accounting for 2.4% of annualised contracted rent received and settled with tenants, and further claims accounting for 2.3% of annualised contracted rent rejected or under negotiations.

o  The modest economic impact of claims is expected to be substantially mitigated by the cost cutting initiatives already implemented by the Group and through the extensions of leases in place negotiated as part of the Covid-related agreements reached with our tenants.  

·      Rate of collections for rents invoiced and due remained high at 92.7% during the first half of 2020.

·      Group liquidity position remains very strong with c.€565 million of cash available as of 30 June 2020.

Leasing Review

The strong leasing momentum of the previous years in our markets of focus in Poland and Romania, came to a sudden slowdown in the last three months due to the Covid-19 pandemic, with several companies forced to re-assess their occupational plans (extensions, expansions, relocations, release of spaces etc), as well as the duration of the leases signed.

New Leases

Within the last three months that the pandemic crisis is ongoing, the Group negotiated the take-up (including expansions) or extensions of 76.2k sqm of commercial spaces in Poland (33.9% of transacted GLA) and Romania (66.1% of transacted GLA), with an average WALL of 2.1 years.

Overall, in the first six months of 2020, the Group successfully negotiated the take-up (including expansions) or extension of 115.5k sqm of commercial spaces in Poland (40.3% of transacted GLA) and Romania (59.7% of transacted GLA), with an average WALL of 3.2 years. 

A significant part of our efforts over the period has been focused on lease extensions due to:

·       the high occupancy of our portfolio;

·      the expiration profile of our leases, with 80.0k sqm of GLA initially expiring in 2020 (5.0% of contracted rent), and a further 113.5k sqm (11.0% of contracted rent) in 2021; and

·      the prevailing market environment, and in particular the fact that a significant part of the tenant claims has been settled by offering rent concessions in exchange for extensions in lease duration.

Leases renewed were signed with 92 of our tenants, for a total of 85.5k sqm of GLA, at a WALL of 2.2 years, with the most notable extensions involving Unicredit, DXC, InOffice, Patria Bank, Cegedim and Mazars. We are pleased that c.80% of the renewals by GLA signed in the first half of 2020 were for leases that were expiring in 2021 or onwards. The shorter WALL of these extensions is a reflection of the cautious approach taken by many corporates in this period of higher volatility in the global economy.

New leases for 17.1k sqm of GLA were signed at a WALL of 8.3 years, accounting for 56.9% of total new take-up, and included tenants such as BRD (part of Societe Generale Group), Green Net and Adecco as well as 20 other corporates. The remaining 12.9k sqm of space signed in the period related to expansions by 16 tenants, with an average WALL of 4.5 years.

Signing of new leases, typically for large multinational and national corporates, takes longer in the current environment as potential tenants are re-assessing their future occupational plans.

Overall occupancy of our combined standing commercial portfolio as at 30 June 2020 was 93.3% (94.2% including tenant options), representing a 1.4% decrease over the past six months (94.7% as at 31 December 2019 / 95.0% including tenant options). The addition (through delivery) of Globalworth Campus Tower 3 to the standing portfolio during the period, with occupancy lower than the Group average, and the negative net uptake of space despite the signing of new contracts, resulted in a lower average occupancy rate of our portfolio.

On a like-for-like basis, occupancy decreased by 0.8% to 94.0% over H1-20, negatively impacted by the expiration of certain leases mainly in our Polish portfolio, however considering our active discussions with potential new tenants, we remain confident that we will be able to lease the available spaces in our portfolio in the near term.

Across the portfolio, as at 30 June 2020, we had 1,157.0k sqm of commercial GLA (98.1% of the standing GLA) leased to approximately 690 tenants, at an average WALL of 4.5 years (4.4 years on standing GLA) , the majority of which is let to national and multinational corporates that are well-known within their respective markets.

Contracted Rents (on annualised basis)

Total annualised contracted rents in our standing commercial portfolio were €186.1 million at 30 June 2020, +1.5% compared to 31 December 2019, further increasing to €189.3 million when including pre-lets in place in our development projects. In addition, €0.9 million of annualised rental income is generated by renting 150 residential units and other auxiliary spaces in Upground, the residential complex in Bucharest which we partially own.

Like-for-like annualised contracted rents in our standing commercial portfolio decreased by 0.7% to €182.1 million at 30 June 2020 compared to year end 2019, as the increase in rents (1.0% on average) due to indexation was outweighed primarily by lower occupancy.

The Group's rent roll across its combined portfolio is well diversified, with the largest tenant accounting for 5.3% of contracted rents, while the top three tenants account for 10.7% and the top 10 account for 26.2%. We expect this diversity to grow further as the portfolio continues to expand.

Cost of Renting Spaces

Renting spaces typically involves certain costs which are incurred by the landlord. The base rent is the figure generally used as reference point in the real estate market, but in assessing the profitability of a rental agreement, the effective rent can be a more useful indicator.

The difference between the base rent and the effective rent is determined by the level of incentives awarded to tenants as part of the lease agreement, including rent-free periods, fit-out costs for the space leased, and brokerage fees. These incentives can vary significantly between leases, and range depending type of lease (new take-up or lease extension), space leased (office, commercial, etc), duration of the contract and other factors considered.

For leases typically signed by Globalworth the difference between base and effective rents ranges from 10% to 30%, however due to the high-level of renewals with a shorter term duration than what we normally sign, the average for H1-2020 was c.15%.

Tenant Demands / Claims Review

As previously reported, over the last 2-3 months authorities in Poland and Romania adopted very restrictive measures in terms of movement of people and travelling, as well as enforcing the closure of all but essential retail premises. They also imposed emergency measures to protect affected businesses, including rent reductions and / or deferrals for non-essential retail businesses for as long as the state of emergency applies. There has been no government measure in either country forcing the closure of office premises, logistics / light industrial assets or essential retail businesses (supermarkets, pharmacies, convenience stores etc.).

Our portfolio comprises mainly of office and industrial spaces, with our exposure to retail / commercial spaces limited to our three mixed-use properties in Poland and (typically) on the ground floors of our offices across our portfolio.

Of our €190.2million of total contracted rent, at the end of June 2020, office rent accounted for 85.1% (parking rent assimilated to office rent), with retail / commercial, industrial and other for 7.9%, 4.8% and 2.2% respectively.

As a result of the restrictive and protective measures imposed in both countries as well as the severe impact that the crisis has had on certain business and industries, between April and June we received a growing number of tenant demands and claims. We have been very proactive in managing this evolving situation by being in constant communication with all our tenants and adopting an open and collaborative approach, which on one hand, targets to assist them to weather this crisis and on the other hand, protects the sustainability and longevity of our income. 

Rather than applying a horizontal or vertical approach on dealing with tenant claims, we have considered each case separately.  Some of the solutions implemented have been bringing forward to this year rent frees that were applicable in later years, rent frees/reductions this year in exchange for lease extensions or delayed payment dates on rent invoices. 

Overall, we have estimated the value of the claims received at c.€8.9m¹, reflecting a c.4.7% of our contracted annual rent, of which most of them are attributed to office tenants (€5.2 million or 58.4%) and retail tenants (€3.3 million or 37.1%).  We expect that the modest economic impact of these claims will be substantially mitigated by the cost cutting initiatives already implemented of by the Group and through the extension of leases in place negotiated as part of the Covid-related agreements reached with our tenants.

Approximately 9.0% of the claims by value were settled without a cash impact on the rental income, 42.7% of the claims (by value) have already been agreed with tenants (40% of the claims settled resulted to a lease maturity extension) and the remainder of the claims have been either rejected (20.2% of claims by value) or are still under negotiation (29.2% of claims value).

On the retail side, as over the last three months the operations of the majority of occupiers of such spaces in our portfolio were closed down by the authorities or have been materially impacted (eg like restaurants/canteens etc.), we have received notifications from most of them.

On the office side, notifications have been received both from tenants operating in industries who have seen an immediate impact in their businesses (eg co-working accounting for c.2.9% of our annual contracted rent as at 30 June 2020) as well as from a number of multinationals seeking to reduce costs. 

In the last few weeks, and in line with many other countries, most of the restrictive measures in Poland and Romania have been lifted.  As a result, we have also witnessed a material decrease in the number of new tenant claims or demands.

¹ The estimate results from the fact that a number of tenant claims received had no value attached to them or are still under negotiation.  The estimated claims value also excludes certain ones related to lease agreements which were already under extension negotiations before the start of the crisis.

Collections Review

The ability to collect - cash in - of contracted rents is a key determinant for the success of a real estate company.

Our strategy at Globalworth, since inception of the Group has been to establish long-term partnerships with high-quality national and multinational tenants to ensure sustainable cash-flow generation. As such, in the first half of 2020, we were able to minimise the impact on rent collections of the Covid-19 pandemic in our portfolio.  The collection rate of rents invoiced and due during the period remained high at 92.7% (95.8% for H1-2019).

More specifically, considering the current market environment, rent to be collected in the period was classified as:

·      Rent eligible for invoicing; Includes rents to be invoiced to tenants in accordance with the terms of their lease agreements. Such rents were either collected or subject to collection; and

·      Rent impacted by measures imposed by the authorities; Such rent was to be collected based on the contractual agreements in place, however due to measures taken by the authorities in Poland and Romania, tenants were excluded from paying, and as such no invoices were issued by the Group.

From the €78.2 million of rent to be invoiced and due under normal conditions during the first half of the year, €1.4 million was not invoiced due to measures taken by the authorities.

For further information visit www.globalworth.com or contact: 

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About Globalworth / Note to Editors:

Globalworth is a listed real estate company active in Central and Eastern Europe, quoted on the AIM-segment of the London Stock Exchange. It has become the pre-eminent office investor in the CEE real estate market through its market-leading positions both in Romania and in Poland. Globalworth acquires, develops and directly manages high-quality office and logistics/light-industrial real estate assets in prime locations, generating rental income from high quality tenants from around the globe. Managed by over 200 professionals across Cyprus, Guernsey, Romania and Poland, a combined value of its portfolio is €3.0 billion, as at 31 December 2019. Approximately 93.4% of the portfolio is in income-producing assets, predominately in the office sector, and leased to a diversified array of c.700 national and multinational corporates. In Poland Globalworth is present in Warsaw, Wroclaw, Lodz, Krakow, Gdansk and Katowice, while in Romania its assets span in Bucharest, Timisoara, Constanta and Pitesti. For more information, please visit www.globalworth.com and follow us on Facebook, Instagram and LinkedIn.

IMPORTANT NOTICE: This announcement has been prepared for the purposes of complying with the applicable laws and regulations of the United Kingdom and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of the United Kingdom. This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "targets", "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts and involve predictions. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect the Company's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's business, results of operations, financial position, liquidity, prospects, growth or strategies and the industry in which it operates. Forward-looking statements speak only as of the date they are made and cannot be relied upon as a guide to future performance. Save as required by law or regulation, the Company disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements in this announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement.