CFA Institute Research Challenge

Transcription

1 CFA Institute Research Challenge hosted by CFA Society Romania Alexandru Ioan Cuza University of Iasi

2 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Return (%) Jan-13 Student Research This report is published for educational purposes only bystudents competing in the CFA Institute Research Challenge. New Europe Property Investments PLC Industry: Real Estate Ticker: NEP SJ ROMANIA Exchange: JSE 20 February 2013 A value stock mirroring growth Recommendation BUY Target Price: 6.20 (R73.58) Price ( ): 5.18 (R61.50) Upside: 19.64% Exchange rate EUR/ZAR: Market Profile 52 wk. Price Range (R) Avg. Daily Volume 2,298,928 Beta 0.7 Shares Outstanding 144,362,152 Market Cap. (R) 8,878,272,348 Market Cap. ( ) 748,096,203 BV/S ( ) 2.7 Source: Bloomberg Forecast and Valuation 2012A 2013F 2014F 2015F 2016F 2017F Rental Income m EBIT m Net income m DPS BVS x ROA % ROE % D/E % EV/EBIT x Source: Company data, Team s Analysis Valuation and financials are indicators of a BUY recommendation: We initiate our coverage with a target price of 6.20 (R73.58) at the end of 2013, with an upside potential of 19.64%. The Group follows a typical REIT business model, with increasing levels of leverage and high dividend payout ratio. Our valuation is based on the Dividend Discount Mode, sustained by other models in our analysis. High growth prospects: Currently, NEPI has a portfolio of investments in Romania and Germany, which includes 42 properties and 2 developments. Beside this, it has also 8 development projects, a significant tailwind for growth in an undersupplied shopping center market and favorable macroeconomic conditions. Strong competitive positioning: The Key Success Factors (KSF) analysis revealed no potential competitors that will come close to emulating NEPI s success at the moment and in the near future. The main competitive advantages of NEPI come from easy access to equity funding, practical cash management, strategic locations and lifelong experience of the management team. Highlights The Group will maintain healthy financials: NEPI has a robust forecasted balance sheet and a high rental performance related to its investment prospects. EBIT margins are expected to remain at high levels, given the Group s financial capabilities. Main risks to our target price: NEPI may encounter difficulties from expansion into new markets due to different market characteristics. Other risks that may impact NEPI s performance are political instability and regulatory changes. 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% FTSE 100 NEPI Source: Bloomberg, JSE

3 Thousand EUR 2007A 2008A 2009A 2010A 2011A 2012A 2013F 2014F 2015F 2016F 2017F Million EUR Business Description Figure 1 Rental Income Growth % Rental Revenue Source: Company data, Team s Analysis Figure 2 Tenant Profile by Gross Rentals (Q4 2011) 11% 83% Type A Type B Type C Source: Company data New Europe Property Investments PLC (NEPI) is a property investment holding company founded in August 2007 by a team of professionals. It has the structure of a group, including subsidiaries located in Romania and other countries (the Group). It is listed on 3 stock exchanges: London Stock Exchange (2007), Johannesburg Stock Exchange (2009) and Bucharest Stock Exchange (2011). The Group is internally managed by directors and staff, who own 17% of the company, and have a combined experience in development, as well as property and asset management. It owns 42 income producing properties and 2 developments, valued at EUR 478.2m; its major assets include two 53,000sqm and 46,000sqm regional malls in Braila and Ploiesti, a 43,100sqm retail park in Pitesti, a 36,000sqm A-grade office and another 25,000sqm office building in Bucharest and a 27,000sqm office in Timisoara. NEPI focuses its investments in Romania, where it has 36 properties (95% of gross rentals), and only owns 6 properties in Germany (5% of gross rentals). Its portfolio exposure is 46% in retail and 49% in offices. The remainder 5% of gross rentals is on the back of opportunistic investments in industrial spaces (Appendix 35). NEPI s investment strategy is biased towards long-term leases in EUR with strong corporate tenants, across many industries. Thus, 83% of the contracted rental income was from large global retailers and multinationals (Figure 2). The weighted average lease expiry is of 6.9 years (Figure 3).The Group s business model focuses on three types of tenants. Type A. Represented by large international and national tenants, listed tenants, government and major franchisees, this class of tenants significantly reduces NEPI s default and credit risk, as they are usually companies with assets and/or turnovers in excess of EUR 200m. Type B. This particular category of tenants is comprised of smaller international and national tenants, smaller listed tenants and medium to large professional firms. Since they usually are companies with assets and/or turnovers between EUR m, they generate a slightly higher default and credit risk to the Group, compared to the type A tenants. Type C. Regarding the size of their business, they are represented by other tenants, which have under EUR 100m of assets and/or turnovers. Of these 259 tenants, 110 of them are located in Germany. Figure 3 Lease Expiry Profile (H2 2012) Retail Office Industrial Source: Company data Contractual rental income and expense recoveries increased to EUR 40.1m in 2012, compared to EUR 32m in 2011 (+25.3% YoY) (Figure 1); the main drivers of the Group s continued strong performance were the impact of the acquisition of City Business Center in February Additional rental income was generated through various re-developments that were completed towards the end of the prior year, as well as a settlement with the vendors of Promenada Mall. Also, the consistent increase in gross margin reflects the operational efficiency of the Group. The Group s sustainability strategy is designed to return reliable, quantifiable improvements in performance over the long-term. It focuses on investments in dominant or potentially dominant retail and office assets, as well as opportunistic investments in industrial properties in Romania, but could later include other Eastern European countries, such as Serbia, Slovakia and Hungary. 20 February

4 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Units F 2014F 2015F % Industry Overview and Competitive Positioning Figure 4 Macro Indicators in Romania Source: IMF GDP growth Inflation Unemployment rate Figure 5 Urbanization Trend in Romania Romania Total population ,4 Urban population Population growth -4.3% % urbanization 51.7% 52.9% Source: WEF, National Institute of Statistics Figure 6 Economic Sentiment Index EU Romania Source: European Commission Macroeconomic dynamics: Prospects outweigh risks The uncertainties in Europe remain elevated, but 2013 is expected to bring an inflection point in terms of economic growth. The safety net offered by the European Central Bank (ECB) through its Outright Monetary Transactions program is helping to restore the economic and consumer confidence, but the fiscal policy still has to find the right combination between austerity and growth stimulus. The recovery will be a long and slow process, but if there are no major political disruptions, the European economic growth is set to accelerate in Romania has been slowly emerging from recession over the past two years, driven by the good performances in industrial production, services, export and agriculture growth. In 2011 the economy registered a GDP growth of 2.5% and the estimated economic growth during 2012 is 1.5%, according to the International Monetary Fund (IMF). For the coming years, GDP is expected to continually increase, supported by investments. Favorable perspectives for unemployment and inflation will determine an increase in the domestic demand, which will lead further to a growth in the retail sector (Figure 4). The urbanization situation of Romania is depicted in Figure 5. For the following decade, we expect an urbanization trend based on the increasing concentration of farming areas, less sustainable subsistence agriculture, more jobs in the cities due to the European recovery.moreover, the expansion of the national transport infrastructure during recent years will continue, even if at a slow pace. For 2013, planned government investments of EUR 1bn for the undergoing and scheduled projects will grant an increased growth of the economic sector of Romania. Urban sprawl, as a result of large investments in infrastructure and urbanization, will continue to enable stronger growth in retail trade. The economic sentiment indicator for Romania has recorded higher levels compared to EU27, suggesting more optimistic expectations towards GDP growth. However, for the last two year the trend is descending, due to the slow recovery of the European economy (Figure 6).Further information on the macroeconomic context of Romania can be found in Appendix 7. Retail market: Regarding the household consumption in the European countries, this indicator in the case of Romania has recorded one of the highest CAGR from 2005 to 2012 (9 th position), but it still has the lowest level per capita. Considering that the CAGR of the GDP per capita has registered an even higher growth (4 th position), this enables further opportunities for growth (Appendix 10). Mirroring consumption trends, the Romanian retail turnover recorded an important contraction during the recent global financial crisis (GFC), but has stabilized during 2011 and Retail sales (excluding the sale of motor vehicles and cycles) recorded a continued growth, as they increased by 3.0% YoY in Nov Indeed, sales have shown signs of recovery during the whole year, improving steadily by 3.9% in the first 11 months of 2012 (Appendix14). Retail rents in Romania are situated in the range of EUR/sqm/annum, and are significantly lower than in the majority of the European countries, but more in line with other CEE countries. However, Romania is ranked first considering the prime retail rent yields, at %. This enables the country to be an attractive opportunity in the coming years (Appendix19). Despite favorable consumer and retail expenditure prospects and low retail rents, Romania still remains under-supplied in regards to shopping centers. The national 20 February

5 Figure 7 Shopping Centers in CEE Capitals (Q4 2011) City Gross Lettable Area - GLA (sqm) Density (sqm/1,000 pop) Warsaw 1,065, Bucharest 736, Prague 726, Budapest 681, Bratislava 412, Source: WEF, National Institute of Statistics average of 127sqm/1,000 pop reflects an untapped potential of the shopping center market (Appendix 15). Furthermore, at the end of 2011, Bucharest had one of the lowest levels for shopping center density, as compared to other CEE capitals (Figure 7). Several property developers, such as AFI Europe, NEPI, Sonae Sierra,Real4You, Immofinanz and Argo Real Estate, have obviously identified this opportunity, having projects under development throughout the country. The 150,000sqm of new retail completion for the year 2012 represent approximately 6% of the total modern shopping center stock, and is four times lower than the volume of completions registered in Thus, the retail stock in Romania reached approximately 2.7m sqm at end 2012, out of which 30% (809,000sqm) are located in Bucharest (Appendix17). The national average of shopping center stock per 1,000 inhabitants is lower than Bucharest s, which accounts for 416sqm/1,000 inhabitants (Appendix18). Figure 8 Prime European Office Rental Index (Q3 2012) The Consumer Confidence Index shows a more pessimistic view among Romanian citizens as compared to EU27; however, the trend is positive due to improved perception regarding the future state of the economy. The Retail Trade Confidence Index illustrates a decline across Romania over the last year, although for the EU27 it has improved. This could be explained by the negative perception of consumers towards future business outlook (Appendix11 and 12). Office market: The European office market is still facing a slow recovery, and it is expected to pause on a short-term horizon. Due to modest demand conditions and slow growth and supply, the European Office Index recorded a fall of 0.6% over the third quarter of 2012 (Figure 8). Source: Jones Lang LaSalle Office rents in Bucharest ( 18.50/sqm/month, on average) are lower compared to other European countries (Appendix23), whereas rental yields are higher (Appendix24). Strong demand for high-quality space is the leading factor of the increase in occupancy costs in the office market. In the third quarter of 2012, occupancy costs in Bucharest totaled 291/sqm/annum, one of the lowest levels in Europe, with a 2% decrease from the previous year (Appendix25). Additional information about Bucharest s Office market is provided in Appendix 26. According to CBRE, compared to other EMEA cities, Bucharest is on the 9/16 office market rent cycle position, at the bottom of the cycle, alongside with Budapest, Dublin, Milan, Prague and Lisbon. Hence, the next variation will be most likely upwards, though no significant change is recognizable yet (Appendix22). Due to funding constraints, the office market in Romania is not fully exploited, resulting in an opportunity not to be missed. Industrial market: There is significant potential in the industrial spaces market, should our expectations about European recovery come true. Romania could then become one of the important production facilities for Western Europe, conditional of course upon infrastructure investments. Moreover, new developments in infrastructure (completion of A3 Bucharest-Ploiesti highway and the Cernavoda-Medgidia section of the A2 Bucharest-Constanta highway) might attract logistics and industrial developers. Looking at the industrial market across Europe in the last quarter of 2012, Bucharest has one of the lowest prime industrial rents ( 49.2/sqm/annum), but one of the highest prime industrial yields i.e. 7.5% (Appendix 27). Comparing Bucharest to other major Romanian cities, it can be seen that Bucharest accounts for 40% of the industrial take-up, followed by Cluj-Napoca (Appendix 28). 20 February

6 Figure 9 Porter s Five Forces Analysis Threat of Substitutes Threat of New Entrants Rivalry among Competitors Supplier Power Retail Office Industrial 4 = Most favorable to NEPI 1 = Least favorable to NEPI Source: Team s Analysis Buyer Power Competitive Positioning:Since it was founded, NEPI managed to become a brand in the real estate sector, through its track record of being able to fund and implement deals. During the recession, it succeeded to achieve steady annualized growth through inflation-indexing, undervalued acquisitions and strategic developments. Based on the SWOT (Appendix 30) and competition analysis, we have identified 4 key success factors in the real estate sector (see details in Appendix 31): Professionalism of Management: We have considered the years in real estate of the most experienced Director and his involvement in the property industry. Also, we have analyzed whether the companies strategy was focused or diversified (a focused approach is more attractive to investors) and have examined their management practice in terms of independence and shareholdings in the company. Access and Location: For retail, the main aspects taken into account were the ease of access to each shopping center; the land capability expansion (the potential of expansion can be decisive in order to make the asset dominant); the locations of the shopping centers relative to the cities and the number of larger shopping centers on a 15 km radius. For offices, we have evaluated the location proximity to business/city center and to public transportation points. Liquidity: The analysis was based on tenant default risk mitigants and the level of cash and cash equivalents against the companies short-term liabilities. Capitalization: This factor was evaluated considering if the company is public (easy access to equity funding), and the shareholdings of large, strategic investors. Figure 10 Competitive Positioning Professionalism of Access and Location Liquidity Capitalization OVERALL NEPI Immofinanz Iulius Group Source: Team s Analysis Our analysis highlighted: Lifelong experience: Aged over 60, Jeffrey Zidel is NEPI s director with 2/3 of his life spent developing and investing in the property industry; his past and current experiences include Resilient Property Income Fund Limited (m/cap USD 1.7bn), Fortress Income Fund Limited (m/cap USD 455m) and Property Index Tracker Managers (Proprietary) Limited (m/cap USD 103m), all listed on JSE. Aligned interests: NEPI s management interests are lined up with the interests of investors; Directors and staff own 17% of the company and internally manage the Group, in an integrated combination of property and asset management skills. Strategic locations: NEPI s development concept is to expand next to established large international hypermarkets (Carrefour, Auchan) and to build on established trading densities; they also aim to secure key locations, with expansion capabilities and on which opportunistic future projects are to be developed. Practical cash management: The Group aims at retaining high levels of access to liquidity, in order to mitigate any default risks and to have enough cash to pursue developments and investment opportunities; in order to diminish the diluting effect this has on earnings, a portion of the cash held for capital commitments has been invested in liquid dividend paying listed property shares, which at year end amounted to EUR 71.5m and traded at a premium to their initial acquisition cost. Although equity investments could be considered outside company statutory scope of activity and therefore add additional risk to shareholders, the fact that investments are within the sector of the core activity of NEPI and the strong experience of the management in evaluating such businesses, make these investments rather a factor of risk reduction through diversification. Easy access to equity funding: NEPI s major strategic shareholders own 53% of the company and are always open to contribute capital in case of new development opportunities. This provides the Group a competitive advantage over its competitors as they have the possibility to quickly fund new deals. 20 February

7 Figure 11 Peers Sharpe Indicators New Europe Property 0.3 Klepierre -0.1 Corio NV Unibail- Rodamco SE Source: Team s Analysis Figure 12 WACC Assumptions WACC Calculation Eurocommer 0.3 cial 0.0 Vastned Retail NV Median industry beta Median industry D/E Risk- free rate Credit spread Cost of debt Levered beta Market risk premium Cost of equity, levered Debt-to-capital Equity-to-capital WACC Source: Team s Analysis, Damodaran Data Porter s Five Forces Model indicates that there are opportunities that NEPI could exploit in all segments, especially in the industrial sector, in which competitiveness is the lowest (Appendix 33). Investment Summary The analysis of the business and industry, along with the estimated value of the Group through various models, led us to a strong BUY recommendation. The target price is 6.20(R73.58)at the end of 2013 and illustrates an upside of 19.64%. The Group has shown solid fundamentals during the last five-years, and rental income growth between 25-90%. Starting from its foundation, NEPI has had a robust balance sheet and an outstanding net rental performance, due to its remarkable acquisition policy. Furthermore, the Group has kepta sustainable level of leverage. During the GFC, NEPI has managed to maintain its gross margins, mainly thanks to its asset management style and strong portfolio. NEPI has a sustainable business model. It has eight developments projects expected to complete in the next two years, representing a significant support for earnings growth. Moreover, the local market shows high growth prospects as property yields are among the highest and rent the lowest. The under-supplied Romanian market regarding shopping centers and growing retail sales form a solid platform for organic growth in the coming years. We expect NEPI will maintain high EBIT margins, through its development pipeline and expansion to other countries. The highest value of % for 2012 is explained by the gains from investments and other operating income, that we consider as non-recurrent items. However, starting with 2013 we assume these margins will stabilize around 69%. The EBIT margin for 2013 mirrors the impact of the most significant transaction in the Romanian real estate market, amounted to 61.7m. Moreover, an important acquisition in CEE is expected to finalize before end 2013, which will boost the earnings for this year. Our competitive positioning analysis revealed no potential competitors that will come close to emulating NEPI s success at the moment and in the near future. The main competitive advantages of NEPI come from easy access to equity funding, practical cash management, strategic locations and lifelong experience of the management team. Analyzing the stock performance, we computed Jensen Alpha using the Least Square Method (LSM) (Appendix 46). We obtained a value of 1.41, which shows the excess return of NEPI over FTSE100. Comparing this ratio and of other industry peers, NEPI outperformed, giving higher reward per unit of volatility. The same conclusion follows from the comparison of Sharpe Ratios and Treynor Ratios (Figure 11). The sector in which NEPI operates can be cyclical and faces risks at a number of levels. First of all, the major risks faced by the Group are operational and regulatory risks, which may affect the value of the Group s operations and further the stock s performance (Appendix 43). These risks are described latter in the risk analysis section. Valuation We evaluated NEPI using five models: Discounted Dividend Model (DDM), Discounted Cash-Flow Model (DCF), Sum-of-the Parts (SOTP), Net Asset Value (NAV) and Multiples Analysis (Figure 13). However, our investment decision is based on the first two models as further argued. 20 February

8 2007A 2008A 2009A 2010A 2011A 2012A 2013F 2014F 2015F 2016F 2017F Figure 13 Price Matrix 150% 100% 50% 0% Model Price ( ) DCF 6.46 DDM 6.20 SOTP 7.58 NAV 2.82 Multiples Source: Team s Analysis Figure 14 EBIT and Gross Margins Gross Margin Source: Team s Analysis EBIT Margin DDM DDM is appropriate to value the Group given the constant dividend policy and thehigh payout ratio. The main assumptions behind the model are a 15% growth rate of dividends supported by historical data, and a perpetuity growth rate of 3%. The base price obtained is 6.20 (Appendix 37). DCF We value NEPI using DCF as it has high growth prospects and the model properly illustrates the free cash-flow value of the Group. Furthermore, the model implies for growth prospects on a long-term horizon, based on the assumption of 3% perpetuity. We assess a fair value of 6.46 (Appendix 36). SOTP This methodology is an alternative mode of assessing the value of NEPI, determined as a sum of all individual properties and developments, quantified at fair value. However, we will not base our recommendation on this model, as it is a simplified view of future cash-flows; we only consider it as a support for validating the Group s forecasted rental growth (Appendix 38). NAV We considered this approach due to high applicability to real estate valuation. Nevertheless, it did not influence our recommendation for target price. In our opinion, the NAV per share of 2.82 is understated, given the significant development pipeline considered at cost. We are confident that at completion, these developments will add value and increase the NAV. Moreover, the entire real estate market in Romania is currently behaving like a distressed asset, due to sequels of the financial crisis. In different words, the liquidity of the market is so low that the NAV valuations are not relevant, and this is why we prefer to assess the value of the company based on its future cash flows rather than based on assets value (Appendix 40). Multiples Analysis We used the multiples analysis as a cross check of previous work and to get more insights about the company s positioning in the industry. The most robust indicator was EV/EBIT multiple, as it is less susceptible to manipulation by changes in capital structure than other indicators, such as P/E range (Figure 15). With this method, we obtained a price range of (Appendix 37). Figure 15 EV/EBIT Multiples 2013 Klepierre 17.9 Unibail Rodamco SE Corio NV 19.2 Source: Team s Analysis Eurocomm ercial Properties NV Vastned Retail NV Historical Analysis The rental income CAGR for the last five years is 39.1%, sustained by a strong expansion. The gross margin shows a constant trend, fluctuating in the range of 70-80%. On the other hand, the EBIT margin went from a stable growth to a sudden increase in 2012, reaching %, mainly due to gains from investments and other operating income (Figure 14). We do not consider these gains are replicable in the following years and as such we do not include them as recurrent income in our models. During the same period, the Group maintained a high payout ratio of around 100%. Forecasted Financial Statements Starting from the historical trend, we forecast the Group s rental income for a fiveyear period as a percentage of investment property (10.2%), as it is its main source of income. Next, property expenses move in line with investment property (2.5%), whereas SG&A are a function of rental income (5%). The income statement items that are not directly related to the core operating activity of NEPI are ignored, being considered non-recurrent, and their impact is not significant for the value of free cash-flows. 20 February

9 2008A 2009A 2010A 2011A 2012A 2013F 2014F 2015F 2016F 2017F Figure 16 Capital Structure Evolution 100% 80% 60% 40% 20% 0% We project that investment property will grow more in 2013 (15%), due to significant announced development plans, and the growth will stabilize to 6% in Our hypothesis is sustained by the expected recovery of the economy, which will lead to competition enhancement and more expensive assets. Given that NEPI s business model is based on a relatively high level of leverage, we assume a target capital structure with 60% debt and 40% equity. The common capital structure of a REIT implies high leverage and NEPI will follow this model in the long run. However, we assume NEPI will only reach 52 % debt in 2017 (Figure 16), against equity issuance, far more expensive and presumably less attractive for South African (SA) investors. Debt/capital Equity/capital Source: Company data, Team s Estimates Furthermore, we foresee the Group will maintain its cash management policy and will keep its short-term investments in liquid dividend-paying listed property companies (Unibail-Rodamco, Klepierre and Eurocommercial Properties). The cash balances will remain significant, as they are a buffer for future developments and could also form a base for higher future dividend distributions. For the terminal value component, we assume a 3% perpetual growth rate, based on our belief that NEPI will be able to benefit from its diversified portfolio in Romania and in other CEE countries. Figure 17 Profitability Indicators 12% 10% 8% 6% 4% 2% 0% 16% 14% 12% 10% 8% 6% 4% 2% 0% Return on Capital (ROC) Return on Equity (ROE) Source: Company data, Team s Estimates Figure 18 Efficiency Indicators Total Asset Turnover Fixed Asset Turnover Source: Company data, Team s Estimates The cost of equity was computed based on CAPM, using as risk free rate the longest (2019) Romanian government bond yield on EUR (3.9%) and a market risk premium for Romania of 5.8% (as of January 2013).Next, we computed the WACC (Figure 12) by considering the pure play approach and using the target D/E ratio i.e Financial Analysis We analyzed the Group s profitability, efficiency, liquidity and solvency by looking at financial ratios. Next, we compared the results with the past evolution (horizontal analysis), as well as with the industry average for the most recent available data for REIT(Appendix 3). One measure of profitability is return on equity (ROE), which is well above the industry s average, suggesting strength and a good signal for stockholders wealth. It has a positive trend compared to previous years, due to the increase in net income. However, return on capital (ROC) is below the industry average (14.58%), although it has improved in the last years, due to an increase in rental income in 2012 with 25% YoY(Figure 17). An efficiency indicator is the total asset turnover, which shows a smooth decrease for the forecasted period, and balance around 8%, partly attributable to the increase in investment property and new development (Figure 18). Next, liquidity was measured through the current ratio. The forecast sustains an improvement in this ratio, suggesting that NEPI will be able to fulfill its short-term obligations. In order to have a perspective over the company s use of debt, we analyzed debt-tocapital and debt-to-equity ratios. Both have forecasted values below the industry s averages, but in line with past results. This could be a good signal to attract new creditors or for a foreseen credit rating, because the Group does not have an excessive level of leverage. We performed a vertical analysis for NEPI s financial statements, in order to crosscheck the forecast. We observe a healthy trend, in line with historical performance, based on cautious assumptions that are strongly sustainable. The Group maintained a relatively high gearing for the past five years (in the range of 40-50%) to sustain its development policy. The repayment profile of existing 20 February

10 Figure 19 Altman Z-Score Z-score T T T T Source: Team s Estimates debt is scheduled until 2016, but we are confident in the Group s ability to attract new funds through flexible revolving loans. Another source of financing from which the Group could benefit in the long run perspective would be bond issues, that offer the advantage of lowering the cost of debt. We expect that the Group will continue to issue equity at lower levels, given its advantage over peers. The high demand for its shares from SA investors represents an opportunity for the management to finance new attractive acquisitions or potentialdevelopments through equity issuance. We base our assumption on the reputation the Group built among SA investors (oversubscribed rights issuance 17 December 2010). The F-Score of 6 for NEPI indicates that the firm is likely to perform at or better than the market (Appendix 41). Another indicator that positions the Group in the safe zone regarding the default risk is Altman Z Score. This has a value of 2.75, which suggests the financial strength of NEPI (Figure 19).We analyzed the value-atrisk of NEPI in order to measure the total risk an investor is exposed to. The 1-year VaR obtained with a 95% confidence interval is R459.38, which in percentages is 8.13% from the value of the stock (Figure 20). Other Relevant Headings Figure 20 Value at risk 95% Confidence Interval (CI) Lower Upper % VaR Lower(one-tail) (Absolute) VaR Percentage VaR 8.13% Source: Team s Analysis Shareholder Analysis NEPI s issued a total of 144.3m shares, out of which 53.58% are owned by the top 10 largest shareholders. Resilient Property Income Fund, Fortress Income Fund, Hero Nominees Ltd together holds 37.18% of the issued shares (Appendix 42). Corporate Governance (CG) NEPI maintains a corporate governance structure that ensures balanced, responsible decision-making that best serves the interests of all stakeholders. It complies with the recommendations of the Quoted Companies Alliance Corporate Governance Guidelines for Smaller Quoted Companies and the King III Report on Corporate Governance in South Africa. From the detailed analysis of corporate governance statements in the annual reports and accounts, we found that the basic elements of a good governance practice are disclosed by the Group (Appendix 44). Operational risks: Investment Risks Economic Volatility: Rental income and the market value of properties are generally affected by overall conditions in the economy, such as growth in GDP, employment trends, inflation and changes in interest rates. Moreover, it is assumed that retail sales are highly sensitive to economic conditions. However, as financials suggest, there is a low correlation between the Group s sales, GDP and CPI on the other hand. We further assume that the Group s asset management style, development pipeline and the strong asset portfolio are the key value drivers of EPS. Credit risk: A downturn of the economy, leading to disappointing retail sales and a sudden turn in office take-up could cause tenants failure to meet contractual obligations, having significantly impact on the Group s earnings. However, the Group s widespread customer base, the tenant security deposit policy along with a close monitoring of tenants activity, and an impressive tenants list of global retailers and multinationals, with a relatively small exposure to any one single tenant (largest exposure to one single tenant is 4.0% of total portfolio rent), substantially reduces credit risk. Corruption in the Company s target market:unfortunately, the Group operations may be affected by corruption or any distortion of official processes within Romania, which could have an adverse impact on the Group s performance. The Corruption Perceptions Index for 2012 place Romania on the 66 th place in the world, 20 February

11 indicating a medium to high level of corruption (Figure 22). This risk is mitigated by the fact that the Group dealings with official institutions are limited to a normal business level, without special partnership and contracts with state controlled entities. Figure 21 Sensitivity Analysis DDM Growth rate Cost of equity Source: Team s Analysis Financial risks: FX risk: The Group is exposed to foreign currency risk on purchases and receivables that are denominated in currencies different from the reporting currency(eur). Moreover, foreign exchange losses and gains appear from translation of the financial statements of subsidiaries. Interest rate risk: The Group is vulnerable to adverse interest rate movements that could increase borrowing or hedging costs. However, we assess interest rate risk on loans and cash balances as relatively low, given the company s active hedging policy. In line with our thesis, the sensitivity analysis performed by management concludes that a 1% increase in interest rate leads to a limited negative impact of 0.87% on net profit. Regulatory Risks: Figure 22 Corruption Score Regulation uncertainty: Romania, as an emerging country, is subject to political instability and changes in regulation framework. As such, expected elections in Romania in autumn bring even more uncertainties. Another source of uncertainty comes from the new REIT regime to be adopted in South Africa, starting 1 st of April 2013 that could bring changes in dividend taxation. The impact could indirectly affect the Group, as investors may negatively react to news and choose to invest in other sectors. Valuation risks: The Group s value determined through DCF model is relying much on the Terminal Value, and implicitly on the perpetual growth rate and the cost of capital. In order to assess the risks, we considered a sensitivity analysis with changes is these two factors (Appendix 45). The range for the price per share obtained is Considering the same main arguments, the DDM was tested for changes in the perpetual growth rate of dividends and cost of equity. The prices were in the range (Figure 21). The rental income growth rate assumption is a milestone in our analysis of SOTP Model. Starting from the risk of changes in the rental growth rate, we performed a Monte Carlo simulation on this model to estimate the volatility of our target price. The results showed that there is only 10% chance for a recommendation of sell and hold, and a 90% probability of gain (Appendix 47). Strategic risks: Source: Transparency International Expansion into new markets: There are rumors concerning potential expansion to other markets, so additional risks are foreseen. These may include legislative and governments barriers, foreign exchange exposure, a more aggressive competition, as well as uncertainty related to individual real estate market characteristics. Unsuccessful transaction costs: The Group may incur substantial legal, financial and other advisory expenses arising from unsuccessful transactions (such as the withdrawal from the Victoria City Center development opportunity in 2012) which may include expenses incurred in dealing with transaction documentation and legal, accounting and other due diligence. Competition:There is risk that consumers will increasingly use other shopping channels, like e- & m-commerce; e-commerce share from total retail (1.3%) raised, on average, 33% in the last three years. 20 February

12 Appendix 1: Income Statement Income Statement ( m) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Rental income Property expenses (0.022) (1.398) (2.438) (5.045) (8.342) (9.744) (12.722) (14.248) (15.816) (16.923) (17.938) SG&A (0.142) (0.499) (1.544) (1.991) (2.023) (3.805) (2.829) (3.168) (3.517) (3.763) (3.989) Share-based payment expense (0.082) (0.153) (0.525) (1.042) (0.997) (0.997) (0.997) (0.997) (0.997) (0.997) Foreign exchange (loss)/gain (0.476) (2.529) Investment advisory fees (0.102) (0.571) (0.671) (0.703) Fair value adjustment on investment property and goodwill (1.671) Gains from investment+distributable income Other operating income Profit/(loss) before net finance (expense)/income Interest income Interest expense (0.074) (2.239) (3.707) (6.489) (11.179) (14.428) (12.930) (18.282) (21.756) (25.277) (27.598) Profits before taxes Reported taxes (0.058) (1.204) (2.121) (1.477) (5.249) (2.214) (1.781) (1.757) (1.575) (1.556) Net income February

13 Appendix 2: Balance Sheet Balance Sheet ( m) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Cash Trade and other receivables Investment property at fair value Investment property under development Other financial assets Goodwill Financial investments Investment property held for sale Total assets , Trade and other payables Short-term debt Tenant deposits Long-term debt Deferred tax liabilities Other financial liabilities Equity Total liabilities and equity , February

14 Appendix 3: Ratios Analysis Profitability 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Return on Assets (ROA) 1.97% 2.09% 2.62% 4.78% 6.11% 3.81% 3.37% 3.27% 3.07% 3.01% Return on Capital (ROC) 6.67% 6.95% 5.88% 6.32% 10.06% 6.15% 6.18% 6.23% 6.16% 6.16% Return on Equity (ROE) 2.81% 4.39% 6.07% 9.62% 10.53% 6.89% 6.76% 6.92% 6.73% 6.71% Return on Capital Employed (ROCE) 4.17% 5.32% 5.74% 9.07% 8.96% 7.02% 6.62% 6.77% 6.59% 6.58% Cash Return on Capital Invested (ROCI) 9.02% 11.40% 9.22% 9.86% 12.94% 10.54% 11.35% 12.11% 12.45% 12.69% Margin Analysis Gross Margin 93.67% 81.87% 77.23% 76.28% 73.99% 75.75% 77.52% 77.52% 77.52% 77.52% 77.52% SG&A Margin 41.34% 6.46% 14.42% 9.36% 6.31% 9.47% 5.00% 5.00% 5.00% 5.00% 5.00% EBIT Margin 22.80% 60.11% 77.41% 67.21% 72.34% % 70.75% 70.94% 71.10% 71.19% 71.27% Net Income Margin 80.21% 19.05% 25.42% 32.49% 58.54% 82.40% 47.08% 41.36% 39.77% 37.68% 36.97% Efficiency Total Asset Turnover 10.34% 8.21% 8.07% 8.17% 7.41% 8.10% 8.15% 8.22% 8.14% 8.15% Fixed Asset Turnover 14.44% 9.27% 9.25% 9.78% 10.59% 11.78% 10.99% 10.94% 10.75% 10.70% Liquidity Current Ratio Long Term Solvency Total Debt/Equity 0.00% 67.34% % % 70.08% 55.67% 81.61% 93.11% % % % Total Debt/Capital 0.00% 40.24% 52.36% 53.50% 41.20% 35.76% 44.94% 48.22% 50.91% 52.09% 52.76% LT Debt/Equity 0.00% 63.72% % % 66.58% 29.75% 77.72% 88.98% 99.39% % % LT Debt/Capital 0.00% 38.08% 51.08% 50.54% 39.15% 19.11% 42.79% 46.08% 48.79% 49.96% 50.64% Total Liabilities/Total Assets 4.43% 45.16% 56.49% 56.94% 44.67% 40.23% 48.64% 51.50% 53.87% 54.87% 55.42% LT Debt/ Total Assets 0.00% 34.94% 46.65% 46.80% 36.83% 17.78% 39.92% 43.16% 45.85% 47.07% 47.78% EBIT / Interest Expense % % % % % % % % % % % Total Debt/EBIT 0.00% % % % % % % % % % % ROE ROCI EBIT margin ROC Debt/capital D/E REIT Industry % 0.00% % 14.58% 73.73% % 20 February

15 Appendix 4: Income Statement (Common Size) Income Statement ( ) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Rental income % % % % % % % % % % % Property expenses 6.33% 18.13% 22.77% 23.72% 26.01% 24.25% 22.48% 22.48% 22.48% 22.48% 22.48% SG&A 41.34% 6.46% 14.42% 9.36% 6.31% 9.47% 5.00% 5.00% 5.00% 5.00% 5.00% Share-based payment expense 0.00% 1.06% 1.43% 2.47% 3.25% 2.48% 1.76% 1.57% 1.42% 1.32% 1.25% Foreign exchange (loss)/gain 0.00% 14.83% 16.91% 0.84% 1.48% 6.30% 0.00% 0.00% 0.00% 0.00% 0.00% Investment advisory fees 29.53% 7.40% 6.26% 3.31% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Fair value adjustment on investment property and goodwill 0.00% % 5.37% 5.23% 9.39% 16.06% 0.00% 0.00% 0.00% 0.00% 0.00% Profit/(loss) before net finance (expense)/income 22.80% 60.11% 77.41% 67.21% 72.34% % 70.75% 70.94% 71.10% 71.19% 71.27% Interest income 95.95% 3.58% 2.44% 2.74% 19.50% 4.61% 3.09% 2.08% 2.10% 2.17% 2.24% Interest expense 21.67% 29.03% 34.62% 30.51% 34.86% 35.91% 22.85% 28.85% 30.93% 33.58% 34.59% Profits before taxes 97.08% 34.66% 45.23% 39.44% 56.98% 95.46% 50.99% 44.17% 42.27% 39.78% 38.92% Reported taxes 16.87% 15.61% 19.81% 6.94% 1.56% 13.06% 3.91% 2.81% 2.50% 2.09% 1.95% Net income 80.21% 19.05% 25.42% 32.49% 58.54% 82.40% 47.08% 41.36% 39.77% 37.68% 36.97% 20 February

16 Appendix 5: Balance Sheet (Common Size) Balance Sheet ( ) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Cash 60.62% 4.71% 7.34% 6.62% 12.95% 13.29% 8.91% 9.05% 9.12% 9.39% 9.48% Trade and other receivables 0.26% 1.89% 2.03% 2.04% 1.82% 2.40% 2.34% 2.37% 2.40% 2.41% 2.42% Investment property at fair value 39.12% 83.89% 83.29% 83.54% 74.41% 59.83% 69.58% 70.55% 71.42% 71.77% 72.15% Investment property under development 0.00% 6.95% 4.03% 3.57% 5.98% 3.45% 4.01% 4.07% 4.12% 4.14% 4.16% Other financial assets 0.00% 0.01% 0.65% 0.38% 1.71% 2.25% 2.00% 1.81% 1.65% 1.55% 1.47% Goodwill 0.00% 2.55% 2.64% 3.85% 3.14% 2.00% 2.09% 2.12% 2.14% 2.15% 2.16% Total assets % % % % % % % % % % % Trade and other payables 4.33% 3.49% 3.61% 2.13% 1.23% 1.97% 2.29% 2.33% 2.35% 2.37% 2.38% Short-term debt 0.00% 1.99% 1.17% 2.73% 1.94% 15.50% 2.00% 2.00% 2.00% 2.00% 2.00% Tenant deposits 0.00% 0.00% 0.00% 0.61% 0.56% 0.41% 0.37% 0.33% 0.30% 0.28% 0.27% Long-term debt 0.00% 34.94% 46.65% 46.80% 36.83% 17.78% 39.92% 43.16% 45.85% 47.07% 47.78% Deferred tax liabilities 0.10% 4.13% 4.42% 4.33% 3.55% 3.39% 3.02% 2.73% 2.49% 2.34% 2.22% Other financial liabilities 0.00% 0.61% 0.65% 0.34% 0.56% 1.17% 1.05% 0.95% 0.86% 0.81% 0.77% Equity 95.57% 54.84% 43.51% 43.06% 55.33% 59.77% 51.36% 48.50% 46.13% 45.13% 44.58% Total liabilities and equity % % % % % % % % % % % 20 February

17 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Appendix 6: NEPI Stock - Event Timeline Monthly volume (shares) Share price (R) 7,000,000 6,000,000 5,000,000 4,000,000 Appointment of new nonexecutive directors Potential acquisition- Braila Acquisition: Retail Park Auchan Pitesti Acquisition: Floreasca Business Park Fitch & Moody's: Romania->investment grade Proposed development: Victoria City Centre Belrom Settlement 7000 Proposed development: Galati ,000, ,000, ,000, February

18 Appendix 7: Romania Macroeconomic Context Romania has the 8 th largest population in EU27, providing a market of reasonable size. Table 1 - Populations of European Countries Rank Country Population mid 2012 (millions) 1 Germany France United Kingdom Italy Spain Ukraine Poland Romania Netherlands Belgium Greece Portugal Czech Republic Hungary Sweden Austria Bulgaria Denmark Finland Slovakia Ireland Lithuania Slovenia Latvia 2 25 Estonia Cyprus Luxembourg 0.5 Source: Population Reference Bureau February

19 According to the IMF estimates for 2012, Romania had the 74 th largest GDP per capita in the world. Table 2 World GDP per capita Rank Country Q estimates ($) 1 Qatar 106, Luxembourg 79, United States 49, Germany 38, Spain 30, Italy 30, Bulgaria 14, Romania 12, South Africa 11, Source: International Monetary Fund Bucharest is by far the largest city in Romania, trailed by other 18 cities with population between 100, ,000. Moreover, it is amongst the largest European cities ranking 10 th by population size. Table 3 European Cities Populations Table 4 Cities in Romania of over 100,000 inhabitants (2011) City Population (thousands) City Population City Population London 8,174 Berlin 3,501 Madrid 3,284 Rome 2,799 Paris 2,234 Hamburg 1,802 Budapest 1,740 Vienna 1,730 Warsaw 1,711 Bucharest 1,677 Barcelona 1,621 Munich 1,378 Milan 1,350 Source: United Nations Bucharest 1,677,985 Braila 168,389 Cluj-Napoca 309,136 Pitesti 148,264 Timisoara 303,708 Arad 147,992 Iasi 263,410 Sibiu 137,026 Constanta 254,693 Bacau 133,460 Craiova 243,765 TarguMures 127,849 Galati 231,204 Baia Mare 114,925 Brasov 227,961 Buzau 108,384 Ploiesti 197,542 Botosani 100,899 Oradea 183,123 Source: Romanian Statistical Yearbook, end February

20 Appendix 8: Global Transparency Index Based on Jones Lang LaSalle s Global Transparency Index, in June 2012, Romania was ranked 40 th out of 97 surveyed countries, being classified as semi-transparent in regards to regulatory and legal processes, transaction process, performance measurement and listed vehicles. It is slightly less transparent than countries like Poland, Italy, South Africa, Austria and Czech Republic. Source: Jones Lang LaSalle 20 February

21 Appendix 9: Global Competitiveness Report According to WEF s Global Competitiveness Report in June 2012, Romania is at an efficiency-driven stage of development. At this point, the competitiveness is increasingly driven by pillars such as higher education and training, efficient goods markets, well-functioning labor markets, developed financial markets and other. The next logical step is for Romania to develop more efficient production processes and to increase product quality. The most problematic factors for doing business in Romania are represented by the level of corruption, tax rates and regulations, inefficient government bureaucracy and access to financing. Source: World Economic Forum 20 February

22 Appendix 10: GDP/capita and Household consumption/capita growth across Europe Country GDP per capita ( ) Household Household GDP per consumption per consumption per capita ( ) capita ( ) capita ( ) GDP CAGR Household consumption CAGR Slovakia 8,902 7,837 16,726 13, % 7.6% Latvia 6,910 6,763 13,316 11, % 7.5% Norway 65,646 39,955 99,316 63, % 6.8% Lithuania 7,644 7,682 12,873 11, % 6.3% Poland 7,963 6,820 12,302 10, % 6.2% Bulgaria 3,753 3,667 6,974 5, % 6.2% Estonia 10,319 8,011 15,987 11, % 5.8% Czech Republic 12,726 9,303 18,337 13, % 5.7% Romania 4,589 4,285 8,029 6, % 5.7% Sweden 41,369 30,912 54,879 42, % 4.7% Malta 14,831 12,854 19,740 17, % 4.5% Luxembourg 81,163 39, ,720 53, % 4.5% Finland 37,316 28,494 45,545 38, % 4.3% Slovenia 17,857 13,514 22,461 18, % 4.3% Belgium 36,187 26,893 43,175 34, % 3.8% Austria 37,143 28,137 46,330 35, % 3.3% Denmark 47,617 36,429 55,448 45, % 3.1% Spain 26,102 19,676 28,976 23, % 2.7% France 35,107 27,972 40,690 33, % 2.7% Netherlands 39,190 29,352 45,942 35, % 2.6% Germany 33,603 27,810 41,168 32, % 2.4% Italy 30,607 24,680 32,522 27, % 1.7% Hungary 10,925 9,128 12,934 9, % 1.1% Portugal 18,252 16,586 19,768 17, % 0.8% United Kingdom 38,159 33,227 38,591 34, % 0.7% Greece 21,737 19,836 22,757 20, % 0.7% Ireland 49,133 29,086 44,781 30, % 0.7% Average 27,583 20,316 34,270 25, % 3.9% Source: Eurostat, IMF, Team s Analysis 20 February

23 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Units Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Appendix 11: Consumer Confidence Index EU Romania Source: European Commission Appendix 12: Retail Trade Confidence Index EU -10 Romania Source: European Commission 20 February

24 Appendix 13: European Investments by Sector Other markets 18% Industrial market 7% Office market 50% Retail market 25% Source: CBRE Research, Q Appendix 14: Monthly Trade Turnover in Romania Source: National Institute of Statistics 20 February

25 Appendix 15: Shopping Center Densities across Europe Source: Cushman & Wakefield, Q February

26 Appendix 16: European Shopping Center Pipeline H According to Cushman & Wakefield, the shopping center pipeline in Romania for H is expected to be around 250,000sqm, being ranked 10 th across all of Europe. Source: Cushman & Wakefield 20 February

27 Sq m per 1000 inhabitants Appendix 17: Completion of Modern Shopping Centers in Romania 8% 12% 10% 1% 0% 2% 2% 1% 3% 6% 5% 24% 10% 16% Source: CBRE Research, Q Appendix 18: Shopping Center Densities across Romania Source: CBRE Research, Q February

28 Appendix 19: Shopping Center Rents and Yields across Europe Country Rent ( /sqm/year) Prime yield (%) Short term yield outlook Romania Slovakia Hungary 600-1, Italy Netherlands Spain 700-1, Poland 550-1, Austria 800-1, U.K 1,465-2, Belgium 800-1, France 1,400-2, Sweden Denmark 500-1, Germany 1,250-1, Source: Cushman & Wakefield, Q Appendix 20: Shopping Center and High Street Prime Rents in Romania According to Jones Lang LaSalle, the prime rents in Bucharest for shopping center and high street spaces has recorded a downtrend, decreasing from an average of just over 100 /sqm/month in 2008 to an average of just over 60 /sqm/month in Q Year Shopping Center Prime Rents Band ( /sqm/month) High street Prime Rent Band ( /sqm/month) 2012/Q Source: Jones Lang LaSalle, Q Looking at the rents for prime high street spaces in other large Romanian cities, it can be observed that they are situated at lower levels than in Bucharest, thus being attractive opportunities for future retail development. High street shops /sqm/month /sqm/annum Growth % 1y CAGR 5y CAGR Brasov Timisoara Constanta Cluj-Napoca Source: Cushman & Wakefield, Q February

29 Appendix 21: Retail Scene in Romania Romania has become a very attractive market for large and international retailers, which have identified the upward trend of retail sales growth in our country. Moreover, this potential has determined them to look into intensifying their presence in our market. Major Domestic Food Retailers Regional chains of supermarkets such as: Unicarm, Carmolimp, Angst, Succese Major International Food Retailers Kaufland, Carrefour, Real, Cora, Auchan, Metro Cash & Carry, Selgros Cash & Carry, Billa, Mega Image, Profi, Lidl, Penny Market Major Domestic Non-Food Retailers Dedeman, Leonardo, House of Art, Altex, Diverta, Domo, Flanco, Nissa International Retailers in Romania (selection) Inditex Group (Zara, Bershka, Pull & Bear, Stradivarius, Oysho, Zara Home, Massimo Dutti), H&M, C&A, New Yorker, Takko, LC Waikiki, Intersport, Hervis, Decathlon, Nike, Deichmann, Humanic, Sephora, Douglas, Ikea, Praktiker, OBI, BauMax, Bricostore Food & Beverage Operations McDonalds, KFC, Pizza Hut, Subway, Starbucks, Nord See, Paul Bakery, Pizza Dominium, Gloria Jeans Coffee, Spring Time Source: Cushman & Wakefield, 2012/2013 Appendix 22: EMEA Office Market Rent Cycle 20 February

30 European Cities Source: CBRE Research, Q Appendix 23: Prime Office Rents across European Cities London West End Zurich Paris CBD London City Oslo Stockholm Luxembourg St. Petersburg Rome Frankfurt Munich Amsterdam Dublin Warsaw Helsinki Madrid Hamburg Brussels Berlin Prague Copenhagen Budapest Stuttgart Lisbon Bucharest Barcelona Athens /sq.m/annum 1261 Source: Jones Lang LaSalle, Q February

31 Prime office yields % Appendix 24: Prime Office Yields across European Cities Source: CBRE Research, Q Appendix 25: Prime Office Occupancy Costs Main European Cities Total Occupancy Cost ( /sqm/annum) Change last 12 months (%) London West End 1, London City 1, Paris CBD 1, Zurich Luxembourg Stockholm Frankfurt Oslo Rome Munich Warsaw Brussels Madrid Dublin, Ireland Helsinki Amsterdam Prague Athens Hamburg Copenhagen Budapest Berlin Lisbon Bucharest Barcelona * Occupancy costs include service charges and taxes and are standardized on a net internal area basis Source: CBRE Research, Q February

32 Appendix 26: Bucharest Office Market Overview According to CBRE s research, half of Bucharest s office space is occupied by technology and telecom companies, followed by manufacturing (20%) and professional services (15%) companies. Public sector 7% Medical sector 5% Others 3% Profesional Services 15% Technology &Telecom 50% Manufacturing 20% Source: CBRE Research, Q Jones Lang LaSalle s report on the office market in Bucharest indicates a general trend towards the occupancy of office spaces, even though the average vacancy rate is 13.25%. Submarket Prime Headline Rent ( /sqm/month) Vacancy Rate Vacancy rate Q-Q North % Pipera % CBD % Center % West % South % East % Average % Source: Jones Lang LaSalle, Q February

33 /sq.m/annum % Appendix 27: Prime Industrial Rents and Yields across Europe Prime industrial rents ( /sqm/annum) Prime industrial yields(%) Source: CBRE Research, Q Appendix 28: Industrial Take-up in Romania Cluj Napoca 37% Bucharest 40% Brasov 7% Baia Mare 2% Sibiu 2% Iasi 3% Ploiesti 4% Timisoara 5% Source: Jones Lang LaSalle, H February

34 Appendix 29: NEPI s Major Assets Source: Company data, Team s analysis 20 February

35 Appendix 30: SWOT Analysis STRENGTHS WEAKNESSES Experienced internal management with large shareholdings in the company Management compensation scheme Contractual rental income with a high percentage of large international tenants Interest rate hedge policy Developments near existing multinational hypermarkets Easy access to equity funding Access to bond funding is limited Small company globally (m/cap EUR <1bn), and certain institutional investors only invest in large companies (m/cap EUR >1bn) OPPORTUNITIES Low-cost debt funding Competition for assets is low, due to tight funding markets Exploring opportunities in new markets from the CEE region Exploiting distressed acquisitions THREATS Recent GFC hinders revenue growth Romanian pension funds are restricted from investments in real estate, as of Jan 2013 Fluctuations on the foreign exchange market Equity risk for investments in short-term securities Source: Team s Analysis 20 February

36 Appendix 31: Competitive Assessment Competitive positioning is carried out with the Key Success Factors analysis using the Key Performance Indicators methodology. We identified the main drivers that lead to the company s success (KSF) and then we provided measures (KPI) for each KSF to assess the Group s competitive position, relative to its main competition. NEPI s competitors include Iulius Group, AFI Europe, S Immo, Immofinanz and Argo Real Estate, of which only Iulius Group is focused only on the Romanian market. Iulius Group and Immofinanz are NEPI s main competitors the first has 5 operational commercial centers, and the latter has 6 commercial centers and 9 office properties in Romania. KSF KPI NEPI Iulius Group Immofinanz Group Professionalism of # yrs. of experience in Management industry Strategic focus (Y/N) Yes Yes No Internal management (Y/N) Yes Yes Yes Directors are shareholders (Y/N) Yes No No Access and Location Retail* in the City Ease of access to transport (Y/N) Yes Yes Yes Expansion capability (Y/N) Yes No Yes # larger shopping centers on a 15 km radius Office Proximity to city center/business center Yes Yes Yes (Y/N) Proximity to public transportation point Yes Yes Yes (Y/N) Liquidity Tenant default risk mitigants** (Y/N) Yes Yes Yes Practical cash management (quick ratio) >1 <1 <1 Capitalization Listed on stock exchange Yes No Yes % large strategic shareholders Source: Team s Analysis ** A more in-depth analysis of the retail assets is presented in Appendix 32 ** Mitigants include monthly tenant performance review & comparisons in order to forecast tenant defaults, as well as ESCROW warranties. 20 February

37 Appendix 32: Comparative Retail Assets Access and Location In order to assess NEPI s and its main competitors retail assets, we developed a methodology based on: ease of access, location relative to the city, expansion capability and dominating position. NEPI Iulius Group Company Property Location Immofinanz Group Promenada Mall Braila Retail Park Auchan Pitesti Ploiesti Shopping City Brasov Strip Mall Palas Mall Iasi Iulius Mall Iasi Iulius Mall Timisoara Iulius Mall Cluj Iulius Mall Suceava Maritimo Shopping Center Constanta Polus CenterCluj Euromall Pitesti Gold Plaza Baia Mare Edge of city Edge of city Out of city Edge of city City center City center City center Edge of city Out of city Edge of city Out of city Edge of city Edge of city Access to shopping center by (Foot / Car / Public transport) Car Pub.tran. Car Pub.tran. Car Pub.tran. Car Pub.tran. Foot Car Pub.tran. Foot Car Pub.tran. Foot Car Pub.tran. Car Pub.tran. Car Pub.tran. Car Pub.tran. Car Pub.tran. Car Pub.tran. Car Pub.tran. Expansion capability (Y/N) Yes Yes Yes Yes No No No Yes Yes Yes Yes Yes Yes Existing larger shopping centers on a 15 km radius (Y/N) No No No Yes No Yes No No No No No Yes No Source: Team s Analysis 20 February

38 Appendix 33: Porter s Five Forces Analysis Five Forces Industry Analysis Retail Office Industrial Moderate Moderate Low to Moderate Rivalry among Competitors - Large shopping centers developers focus on different cities - Experienced management team provides competitive advantage Moderate - Main focus is on Bucharest, where there is a large number of office buildings Moderate to High - High availability of industrial spaces Low Buyer Power Supplier Power - Well positioned and dominant assets are attractive to buyers Low to Moderate - Plenty suppliers Low to Moderate - Relatively high number of office spaces available Low to Moderate - Plenty suppliers Moderate - High switching costs for buyer - Consideration only of strategic locations can provide an advantage Low - No shortage of suppliers Moderate to High Threat of New Entrants - Limited access to debt funding - High capital requirements Low - High capital requirements - High yielding industry Low - Low barriers to entry Low Threat of Substitutes Source: Team s Analysis - E-commerce convenience stores - Work from home - High switching costs for buyer - Investments in production facilities in other countries 20 February

39 Appendix 34: NEPI s Portfolio Occupancy NEPI Portfolio Occupancy (H2 2012) Retail Office Rented area Vacant area Industrial - 50, , , ,000 sqm Source: Company data, Team s Analysis NEPI Portfolio Occupancy (H2 2012) Retail 96.70% 3.30% Office 88.60% 11.40% Industrial 98.59% 1.41% 0.00% 20.00% 40.00% 60.00% 80.00% % Rented area Vacant area Source: Company data, Team s Analysis 20 February

40 Appendix 35: NEPI s Portfolio Profile NEPI s Portfolio Geographical Profile by Gross Rentals (Q4 2011) 5% Romania Germany 95% Source: Company data NEPI s Portfolio Sectorial Profile by Gross Rentals (Q4 2011) 5% 49% 46% Retail Office Industrial Source: Company data 20 February

41 Appendix 36: DCF Valuation NOPLAT statement ( m ) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F Rental income Property expenses (0.022) (1.398) (2.438) (5.045) (8.342) (9.744) (12.722) (14.248) (15.816) (16.923) (17.938) SG&A (0.142) (0.499) (1.544) (1.991) (2.023) (3.805) (2.829) (3.168) (3.517) (3.763) (3.989) Share-based payment expense (0.082) (0.153) (0.525) (1.042) (0.997) (0.997) (0.997) (0.997) (0.997) (0.997) Investment advisory fees (0.102) (0.571) (0.671) (0.703) Foreign exchange (loss)/gain (0.476) (2.529) Fair value adjustment on investment property and goodwill (1.671) Gains from investment+distributable income Other operating income ADJUSTED EBIT Operating taxes (0.046) (0.846) (1.528) (0.439) (5.093) (4.003) (4.496) (5.001) (5.358) (5.686) NOPLAT After-tax interest income After-tax interest expense (0.063) (1.881) (3.114) (5.450) (9.391) (12.120) (10.861) (15.357) (18.275) (21.233) (23.183) NET INCOME FCF statement ( ) 2007A 2008A 2009A 2010A 2011A 2012A 2013 F 2014 F 2015 F 2016 F 2017 F NOPLAT Decrease (increase) NWC (6.629) (3.781) (35.483) (20.489) (6.566) (6.192) (6.745) (4.796) FCF (9.997) February

42 Valuation DCF ( m ) 2007A 2008A 2009A 2010A 2011A 2012 A 2013 F 2014 F 2015 F 2016 F 2017 F FCF Continuing value 1, Discount factor Present value of FCF and CV Sum of present values 1, Enterprise value, gross 1, Debt ( ) Value of equity No. of shares Price per share Appendix 37: DDM Valuation 2012A 2013F 2014F 2015F 2016F 2017F Dividends ( ) Terminal value 7.90 Discount factor PV Price ( ) 6.20 Market Assumptions Risk free rate 3.90% Market Risk Premium 5.80% Levered Beta 1.02 Cost of Equity 9.82% Dividend Growth Rate 15.00% Growth Rate (perpetuity) 3.00% 20 February

43 Appendix 38: SOTP Valuation Name Ownership Rentable area (sqm) Weighted average rental ( ) Weighted average vacancy (sqm) 2012 Rental income ( m) 2013 Rental income ( m) RETAIL PORTFOLIO Promenada Mall Braila 100% 53, % Retail Park Auchan Pitesti 100% 43, % Leipzig 50% 5, % Bruckmühl 50% 5, % Mölln 50% 5, % Bucarest 100% % Brasov 100% 5, % Eilenburg 50% 3, % Frankfurt 50% 1, % Iasi 100% % Bacau 100% % Ploiesti Shopping City 50% 46, % OFFICE PORTFOLIO Floreasca Business Park 100% 36, % Munich 50% 2, % Brasov 100% 6, % Zalau 100% 3, % Craiova 100% 2, % Galati 100% 2, % Buzau 100% 2, % Baia Mare 100% 2, % Slatina 100% 2, % Alba Iulia 100% 2, % Targoviste 100% 2, % Sfantu Gheorghe 100% 2, % TarguMures 100% 2, % Timisoara A, B 100% 16, % Timisoara C 100% 10, % Deva 100% 1, % Slobozia 100% 1, % February

44 Calarasi 100% 1, % Resita 100% 1, % Sibiu 100% % Alexandria 100% % Lakeview Bucharest 100% 25, % INDUSTRIAL PORTFOLIO Rasnov industrial facility 100% 23, % Otopeni warehouse 100% 4, % DEVELOPMENTS Expected completion Victoriei office 100% 4, Timisoara 100% 20, Cluj A 100% 18, spring 2014 Cluj B, C 100% 36, Galati 100% 50, OTHER PROPOSED DEVELOPMENTS/ NEGOCIATIONS Bucarest- Vulcan 25, Brasov 65, * Land adjacent to Kaufland (Alexandria, Sf Gheorghe) 12, Land adjacent to Promenada mall Braila 1, February

45 SOTP - price calculation 2012 A 2013 F 2014 F 2015 F 2016 F 2017 F Growth rate 5% 8% 10% 10% Rental income Operating expenses (9.744) (9.031) (13.761) (16.401) (18.041) (19.845) Administrative expenses (3.805) (1.965) (2.995) (3.569) (3.926) (4.319) Net rental profit Discount factor Sum of PV Perpetuity Total Value 1, WACC No. of shares (m) Price per share February

46 Appendix 39: Multiples Valuation Company Industry Equity value ( m) Debt ( m) Enterprise value ( m) Raw beta world 5y m Debt/equity ratio Corio NV REIT Eurocommercial Properties NV REIT Vastned Retail NV REIT Unibail-Rodamco SE REIT Klepierre REIT Company EV/EBITDA-multiple EV/EBIT-multiple 2011A 2012A 2013F 2011A 2012A 2013F Corio NV Eurocommercial Properties NV Vastned Retail NV Unibail-Rodamco SE Klepierre Company Country Portfolio Corio NV Netherlands Retail 97%, Office 3% Eurocommercial Properties NV Netherlands Retail 100% Vastned Retail NV Netherlands Retail 100% Unibail-Rodamco SE France Retail 75%, Office 20%, Other 5% Klepierre France Retail 96%, Other 4% 20 February

47 Appendix 40: NAV Valuation Capitalized Income Assumed Cap Rate 12-Month Forward NOI Current Value NOI Contribution from Investment Property 9% Balance Sheet ( m) Balance Sheet Value % of BS Value Current Value Non-Operating Real Estate Assets Construction in Progress % Other Balance Sheet Assets Cash & Cash-Equivalents % Accounts Receivable, Net % Prepaid Expenses & Other Assets % Financial assets at fair value through profit or loss % 0.08 Investment property held for sale % Financial investments % Total Asset Value Liabilities Short-term Loans and borrowings % Accounts Payable % Tenant deposits % 2.70 Long-term debt % Other liabilities % Total Liabilities Value Net Asset Value Total Diluted Shares & Units Outstanding Net Asset Value Per Share 2.82 Current Stock Price 5.18 Premium / (Discount) to NAV Per Share 83% 20 February

48 Appendix 41: F-score and Z-score F-score factors* 1. Is net income positive? 1 2. Is operating cash flow positive? 1 3. Is operating cash flow > net income? 1 4. Has return on assets increased (from the prior year)? 1 5. Has gross margin improved? 1 6. Has asset turnover improved? 0 7. Has LT Debt / Total Assets decreased? 1 8. Has the current ratio improved? 0 9. Has there been no new equity issuance? 0 * Questions 6 and 8 are irrelevant for the real estate industry. Source: Team s Analysis 6 Z-score Components T1 T2 T3 T4 Explanation Working Capital/Total Assets Retained Earnings/Total Assets EBIT/Total Assets Book Value of Equity/Total Liabilities Z-score model: Z= 6.56 T T T T4 Z> 2.6 Safe zone 1.1<Z<2.6 Gtey zone Z< 1.1 Distress zone Appendix 42: NEPI s 10 Largest Shareholders Shareholder Name Beneficial Shareholdings % of issued shares Resilient Property Income Fund 21, % Fortress Income Fund 16, % Hero Nominees Ltd. 15, % Martin Slabbert 5, % Des de Beer 5, % Chataprop Holdings 4, % Stanlib Property Equity Fund 2, % RCG Trade &Finance (Pty) Ltd 2, % Investec Property Equity Fund 2, % Sakhisizwe Investment Hldgs (Pty)Ltd 1, % TOTAL 77, % Shareholding Details Authorized shares 300,000,000 Total shares in issue 144,362,152 Shares not in public hands 50% Source: Company data 20 February

49 Low Impact High Appendix 43: Risk Matrix -Credit risk - Competition - Economic volatility - Political instability - Limited expansion opportunities - Valuation risks - Unsuccessful transaction costs - Foreign exchange risk - Interest rate risk - New REIT regime in South Africa - Corruption Low Probability High Source: Team s Analysis High 20 February

50 PANEL B. Enterpreneurial management PANEL A. Flexible, efficient and effective management Appendix 44: Corporate Governance Analysis 1. Structure and process 2/2 A report by the chairman of how the QCA guidelines are applied to provide for the company s longterm 1 success. The number of meetings of the board and of the committees and individual directors attendance at 1 them 2. Responsibility and accountability 2/3 A statement of how the board operates to set, develop and execute the company s strategy A description of the chairman s and chief executive s roles and responsibilities. A list of matters reserved for the board Board balance and size 2/3 The identity of all the directors and their roles and committee memberships. The identity of those directors the board considers to be independent and the reasons why it has determined a director to be independent notwithstanding factors which may appear to impair that status. The terms and conditions of appointment of non- executive directors Board skills and capabilities 3/3 The relevant skills and experience that the executive and nonexecutive directors bring to the board 1 The audit, remuneration and nomination committees terms of reference explaining their roles and the authority delegated to them by the board. 1 A brief description of each committees work 1 5. Performance and development 1/2 A description of any board performance evaluation procedures that the board applies, focusing on its 1 objectives and outcomes An explanation of the role of any external advisors to the board or its committees and any internal 0 advisory responsibilities 6. Information and support 1/1 An explanation of the role of any external advisers to the board or its committees. A brief summary of information received by the board and by individual committees Cost-effective and value-added 1/1 A summary of risk management and internal control systems and activities, and explanation of how 1 these relate to strategy and link into key performance indicators, remuneration policies and CSR activities. 8. Vision and strategy 1/1 A Business Review detailing strategy and how this is communicated to and brought into all areas of 1 the business. 9. Risk management and internal control 1/4 An audit committee report explaining the major tasks and demonstrating how independent oversight of both management and external auditors has been exercised. A summary of risk management and internal control systems, and explanation of how these relate to strategy, KPIs, remuneration policies and CSR activities. An explanation to shareholders of how auditor objectivity and independence is safeguarded, particularly if the auditor provides significant non-audit services. A remuneration committee report explaining how the company s remuneration practices align the interests of senior management with those of shareholders February

51 PANEL C. Delivering growth for shareholders long-term wealth 10. Shareholders needs and objectives 1/1 Where votes at a general meeting are by show of hands, the votes by proxy received by the company, 1 including abstentions or votes withheld, should be reported as soon as practicable after the meeting. Where votes are conducted on a poll the actual votes, including votes withheld or abstentions, should be reported as soon as practicable after the poll. 11. Investor relations and communication: 1/1 The annual report and other governancerelated material, including notices of general meetings Stakeholder and social responsibilities 1/1 A summary of risk management and internal control systems and activities, and explanation of how these relate to strategy and link into key performance indicators, remuneration policies and CSR activities. 1 PANEL A. Flexible, efficient and effective management PANEL B. Entrepreneurial management PANEL C. Delivering growthfor shareholders long-term wealth Source: Team s Analysis, Quoted Companies Alliance Corporate Governance Guidelines for Smaller Quoted Companies 20 February