Key message: NEPI Rockcastle’s FY22 results were excellent, with strong core operating performance from tenants as COVID restrictions were fully lifted and a resilient balance sheet that should underpin future inorganic growth. In our view, the strong run in the share price since Oct-22 is justified by the fundamentals of the portfolio and balance sheet, but it is now fairly valued.

  • A positive picture overall: NEPI Rockcastle (NRP) grew its recurring FY22 DEPS ahead of our expectations by +41.5% y/y to EUR48.7c, although actual DEPS was even higher at EUR52.2c (+51.5% y/y) inclusive of the non-recurring positive impact from the reversal of the litigation provision related to the discontinued Serenada and Krokus shopping centre acquisitions (EUR21.3mn or EUR3.5c per share). Tenant performance was very impressive and showed a marked return of footfall and spend to the CEE region’s shopping centres in a post-COVID environment. LTV increased from 30.9% to 35.7%, due to the acquisitions of Forum Gdansk (EUR250mn) and Copernicus Shopping Centre (EUR127mn), but is within reach of the 30-35% strategic threshold. Valuations proved defensive and delivered positive growth, as the impact of rising cap rates was outweighed by underlying property performance (NOI growth).
  • Some risks remain: in our view, the high inflation environment continues to pose substantial uncertainty; base rentals are contractually linked to indexation, but the all-in cost of occupancy is a key consideration for tenants and may negatively impact prospects for rental uplift in the future. NRP has to absorb at least some of the cost pressure: we highlight that unrecovered expenses grew from EUR4.7mn in FY21 to EUR19.5mn in FY22, with overall property operating expenses growing +28% y/y. In addition, NRP will face significantly higher interest expenses over the forecast period as fixed cost debt matures and is repriced to market; although maturities are insignificant in FY23, it materially ramps up in FY24 (>EUR600mn maturing).
  • Updated forecasts: we update our FY23E DEPS forecast to EUR54.3c (+4.1% y/y), equivalent to +11.1% growth on recurring DEPS and in line with management’s guidance. We assume a 95% payout ratio but note that the updated dividend policy allows for flexibility to a minimum 90% payout.
  • Valuation and rating: our revised target price is EUR5.97 or ZAR120.49 translated at EUR/ZAR spot. This implies a one-year TSR of +26.5%, comprised of 10.2% income yield and +16.3% capital return; this return profile ranks in the middle of our rated coverage, and we accordingly maintain it on a NEUTRAL rating.
  • Key catalysts and factors to watch: rising cap and discount rates and impact on property valuations; initiatives to reduce LTV; FY24 debt maturities; rollout of capex pipeline; impact of inflation and economic environment on occupancy and rental growth.

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