Globalworth Real Estate Investment (GWI)

Globalworth has continued to increase the proportion of environment-friendly properties in its portfolio and 85.3% by value now consists of green-certified assets.

Globalworth is a listed real estate company active in Central and Eastern Europe (CEE) and 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 in both Romania and Poland. Globalworth acquires, develops and directly manages high-quality office and industrial real estate assets in prime locations, generating rental income from high-quality tenants from around the world. Managed by over 200 professionals across Cyprus, Guernsey, Poland and Romania, it has a portfolio with a combined value of EUR3.0bn, as at 30 June 2020.

Approximately 94.4% of the portfolio is in income-producing assets, predominantly in the office sector, which are leased to a diversified array of about 700 national and multinational corporates. In Poland, Globalworth is present in Warsaw, Wroclaw, Lodz, Krakow, Gdansk and Katowice, while in Romania it has assets in Bucharest, Timisoara, Constanta and Pitesti.

The Polish and Romanian economies expanded again in 2019 and these positive conditions gave rise to firm demand for office and industrial space, with healthy occupancies and vacancies below 10% at the end of the year. Investment volumes in Globalworth's investment sectors, particularly the Polish office market, reached record levels in 2019. The first part of 2020 also started at a great pace in the CEE, carrying over the momentum of 2019, but came to an abrupt halt in March with the onset of the Covid-19 pandemic, which has created serious uncertainty regarding the future in the CEE and the world in general.

For its financial year to 31 December 2019, Globalworth reported a strong uplift in its earnings and delivered a total dividend of 60c per share (54c in 2018), which Growthpoint received in two instalments in August 2019 and February 2020. Globalworth also placed new equity of EUR264.3m in October 2019 with new as well as existing shareholders. Two of the biggest property companies in Western Europe and CEE became significant Globalworth shareholders; Aroundtown SA, which acquired a 21.9% shareholding, and CPI Property Group, which acquired a 29.4% shareholding and is now one of Globalworth's two biggest shareholders along with Growthpoint, which also has 29,4%. Globalworth also accessed the debt capital markets at the end of July 2020, successfully initiating a parallel process by issuing its inaugural green bond and raising EUR400m with a 2.95% coupon, while repurchasing approximately 40% of its 2022 Eurobond notes and effectively extending the maturity of a significant part of the 2022 Eurobond from June 2022 to July 2026. Following these liability management transactions, Globalworth improved its overall debt maturity profile by extending debt maturity further into the future.

Performance

Globalworth expanded its platforms in Poland and Romania and took advantage of favourable market trends and value-added opportunities during 2019 and early 2020. It also achieved a solid operating performance and demonstrated strength amid the Covid-19 pandemic, thanks to the quality of its portfolio, significant multinational and large national tenant base, limited exposure to the retail sector and proactive approach following the outbreak of the pandemic, with several measures being implemented that resulted in significant cost savings. Unfortunately, the rapid spread of Covid-19 has left no sector or business unaffected.

In a milestone for the company, its combined portfolio value exceeded EUR3bn. It expanded its platform in Poland and Romania and took advantage of favourable market trends and value- added opportunities. Its Polish properties accounting for 54% of the portfolio by value. Slightly more than 87% (89% including Rondo as of July 2020) by value of its standing office and mixed-use properties are managed in-house.

Also as at 30 June 2020, the liquidity position of Globalworth remained very strong, with EUR567m of cash and cash equivalents.

Healthy leasing activity during the previous 12 months saw 115 500m2 of space taken up or extended, resulting in an average total WALL of 3.2 years.

Lease renewals have meanwhile become a bigger focus since the onset of the pandemic, given the high portfolio occupancy and leases relating to 5% of contracted rental due to expire before the end of 2020 and another 11% due to expire during 2021. In addition, several Covid-19 rent concessions were offered in exchange for lease extensions. About 80% of the renewals by GLA signed in the first half of 2020 were for leases that were due to expire in 2021 or later. These lease extensions, however, were for shorter periods than usual, reflecting tenant caution amid global economic volatility.

Globalworth's standing commercial portfolio occupancy at 30 June 2020 was 94.2%, including tenant options, with vacancies increasing a little, primarily because of new vacancies introduced with the completion of the Globalworth Campus Tower 3 development in Bucharest, Romania. Like-for-like annualised contracted rents of the standing commercial portfolio decreased to EUR182.1m at 30 June 2020, or by just 0.7% compared to end-December 2019, as the increase in rents (1.0% on average) due to indexation was outweighed primarily by lower occupancy. As at 30 June 2020, Globalworth had total annualised contracted rent of EUR187m for its standing portfolio with an additional EUR3.2m of annualised contracted rent pre-let in properties under development.

Portfolio highlights

Construction of the third and final tower of the Globalworth Campus complex, the largest office park in Romania, was completed in January after a 19-month programme. The 14-storey, 34 800m2 tower will include an impressive 1 800m2 conference room to serve the campus, which is due for completion by the end of 2020. The Globalworth Campus complex is a significant office project in the portfolio. It includes three A-class buildings housing extensive office spaces, retail outlets and various other facilities, and spanning a rentable area of over 92 000m2. The park was built to offer a complete work experience and has been chosen as an office solution by companies such as Amazon, Mindspace, Garret Motion, Dell, Stefanini, and most recently UniCredit and Allianz. It complies with the highest energy efficiency standards, with all three towers now having BREEAM Excellent accreditation. The third tower received its BREEAM certification in the third quarter of 2020.

Globalworth has four projects under construction, three in Romania and one in Poland, with an average estimated development yield of 8.9%, and several other developments planned for the future subject to market conditions. In June, the business had completed the structural framework, the facade and other installations at its high-tech Globalworth Square project in Romania. Dubbed "the new office of the future", it will be the first energy-producing building in the portfolio and offer one of the most technologically advanced office spaces in the country. Located in the northern part of Bucharest, in the biggest business community in Romania, the building is designed to achieve the BREEAM Outstanding green accreditation. The 15-storey structure is set for completion in 2021.

ESG

Globalworth has continued to increase the proportion of environment-friendly properties in its portfolio, and 85.3% by value now consists of green-certified assets. Globalworth issued its second standalone sustainability report for its financial year to 31 December 2019 to support Growthpoint's overall sustainable development initiatives, as well as frameworks that many of its investors have applied. The Globalworth Foundation aims to make a contribution to the welfare of society and better shape conditions for future generations, consistent with the business's overriding focus on "People, Places and Technology". It supported a number of social causes in Poland and Romania in 2019 and 2020, and following the Covid-19 outbreak, it principally focused its efforts on the fight against the virus.

Globalworth recognises that technology is a major disruptor for the real estate industry globally and aspires to be the most technologically advanced landlord in the CEE office market. It takes a holistic approach to the use of technology to add value to its portfolio and to create a strong community with the users of its buildings.

Covid-19 response

When Covid-19 became a reality in Poland and Romania in March, the safety and wellbeing of Globalworth's people, partners, communities and other stakeholders became its priority, and the company focused on safeguarding its business, protecting its assets and minimising its exposure to the impact of the pandemic.

The authorities imposed very restrictive measures in terms of the movement of people and travel, as well as enforcing the closure of all but essential retail premises. They also introduced measures to protect affected businesses, including rent reductions and/or deferrals for non-essential retail businesses, effective for the extent of the state of emergency.

However, there was no forced closure of office premises, logistics and light industrial or essential retail businesses. Most of Globalworth's contracted rent is from office and industrial properties (89.9% of annualised contracted rent) which remained largely unaffected by measures taken by the authorities to combat Covid-19.

The Globalworth portfolio comprises little exposure to retail, other than three mixed-use properties in Poland and some small spaces serving office buildings. Of its EUR190.2m of total contracted rental at the end of June 2020, office rental, including parking rental, accounted for 85.1%, followed by retail (7.9%), industrial (4.8%) and other (2.2%).

During the quarter from April to June, Globalworth received a growing number of tenant demands and claims as a result of the restrictive and protective measures imposed in both countries and the resulting severe impact on most businesses and industries. The company adopted a collaborative approach to manage this evolving situation and assist tenants to weather the crisis while also protecting the sustainability and longevity of its income. Each case was considered separately.

The total value of claims was approximately EUR8.9m or around 4.7% of contracted annual rent. At the time of writing this report, half of the claims received had been settled, accounting for 2.4% of annualised rent, while claims equal to 2.3% of annualised contracted rental had either been rejected or were still under negotiation. Most applied to office (58.4%) and retail tenants (37.1%). The modest impact of these claims will be substantially mitigated by cost-cutting initiatives already implemented and the extension of leases negotiated as part of Covid-19 relief agreements with tenants. About 9% of claims had no impact on rental income and 40% led to lease extensions.

Globalworth enjoys long-term partnerships with high-quality national and multinational tenants to ensure sustainable cash flow generation. This minimised the impact of Covid-19 on rent collections in the portfolio, which remained at a high 92.7% for January to June 2020, versus 95.8% for the corresponding six months of 2019. However, of the EUR78.2m of rent that would have been invoiced under normal conditions during this period, EUR1.4m was not invoiced due to measures taken by the authorities.

In the final weeks of June, most of the restrictive measures in Poland and Romania were lifted and, accordingly, tenant claims and demands reduced substantially.

Prospects

Globalworth continues to approach the future with caution as the Covid-19 pandemic continues to evolve, focusing on actively managing its portfolio of standing properties and developments while respecting the regulations and recommendations issued by the World Health Organisation as well as national, regional and local governments, and adapting its operations accordingly. At the same time, Globalworth has a strong balance sheet which will allow it to take advantage of attractive opportunities should they become available in the future.