INTERVIEW: Atrium moves into a new phase

Atrium European Real Estate has turned a corner and is gearing up to expand in its core CEE countries, its new CEO Josip Kardun told PropertyEU.

‘Eight years ago Atrium still had a start-up flavour, but it is now more mature and has more depth. Atrium is moving closer to its western European peers and is becoming a corporate at a European level. We are currently involved in a major extension of our Promenada shopping centre in Warsaw, Poland. You can only do that if the company has reached a certain financial level and degree of consolidation.’

At end-2014, Kardun took over the helm from Rachel Lavine who was promoted to executive vice-chairman from the same date. After joining the company in August 2008, Lavine spent the past six years running a very tight ship, winding down the company’s enormous land bank and injecting a healthy dose of financial discipline to bring it back on track after a period of unbridled expansion under its former management and owner.

Thanks to Lavine’s steady hand, Atrium is now back into calmer waters. The balance sheet has been restructured, EBITDA (earnings before interest, tax, depreciation and amortisation) has increased more than fourfold, the LTV has been almost halved to 35% while the cost of debt has been slashed to 3.9%. Core CEE countries The only listed property player focused 100% on Central and Eastern European retail markets, Atrium was granted an investment grade credit rating by Fitch and S&P in autumn 2012.

Food-anchored shopping centres
The group’s aim is to remain the leading owner, operator and developer of food-anchored shopping centres in Central and Eastern Europe, Lavine said. ‘The portfolio remains predominantly focused on income-generating shopping centres in the more mature and stable CEE countries producing solid cash flow in the long term.’

Hypermarkets and supermarkets account for almost a third – or 30% – of the portfolio, she added. ‘The tenant mix with large exposure to food retailing and everyday necessities has proven its economic resilience.’

When Lavine joined the company in 2008, Atrium had a significant land bank in Turkey and Russia, but it is now sticking to the more mature markets in CEE, she noted. ‘Poland, the Czech Republic and Slovakia now account for almost 70% of our income-producing portfolio. We are not expanding in Russia. Anything we invest in, is within the properties themselves.’

Aside from the three core CEE markets, Atrium is also active in what Lavine describes as secondary CEE markets like Romania and Hungary. ‘They come first, then Russia.’

Together with Latvia, Russia accounts for 28% of the net rental income of the portfolio with seven properties valued at €369 mln at end-2014. This valuation marks a decline of almost 20% on the figure for end-September 2014, indicating the worsening volatility of the Russian market following the outbreak of the Ukraine crisis a year ago.

Russian operations remain challenging
While the Russian centres generated 4.5% net rental growth across the portfolio last year, the effect of geo-political tensions, lower oil prices and rouble devaluation began to impact towards the end of November, Kardun conceded. The company will continue to monitor the situation closely while
evaluating the potential impact on the group’s cash flow and portfolio valuation, he added. ‘We are working closely with our tenants in Russia at this challenging time and our focus is firmly on helping them trade through this period while maintaining our own occupancy.’

Meanwhile Poland’s weighting in the total standing investments portfolio is now in excess of 50% of the group’s income-producing portfolio and the top 10 assets represent 58% of Atrium’s portfolio value. Eight of the top 10 standing investments are located in Poland, two in Russia, one in the Czech Republic and one in Slovakia.

The increased focus on core CEE countries has already reaped positive results. The company’s occupancy rate has steadily improved throughout the global financial crisis, reaching 97.4% in December 2014 compared to 93.6% at end-2008. The operating margin has increased from 71.0%
in 2008 to 95.1% in December 2014 while earnings per share have risen from €0.24 in 2009 to €0.36 in 2014. Following continued operational improvements, the dividend rose from €0.12 in 2010 to €0.24 per share per annum in 2014 and for 2015, the board has approved a dividend of at least €0.27 per share, implying a compound annual growth rate of 15% from its first introduction five years ago.

While Lavine drew on a long corporate career to help steer Atrium into a safer haven in the past six years, Kardun brings a strong operational track record to his new position as CEO. Prior to joining Atrium, he served European retail property specialist ECE Projektmanagement for seven years in a number of senior positions, including chief investment officer and head of mergers & acquisitions and the transaction management group, deputy managing director of development of ECE Group and managing director of ECE International.

Kardun brings an ‘industrial depth’ to the business, Lavine said. ‘You cannot steer a company just by numbers,’ she added. ‘Asset management is very important.’

Atrium already has a good reputation in this area, noted Kardun. ‘Atrium has been very successful in getting retailers like Inditex, Decathlon and Haussman into our shopping centres in Poland. We are able to offer tailor-made solutions and are making this footprint work.’

Improvements to the capital structure
Further improvements to the company’s capital structure and balance sheet remain key goals, but expansion through acquisitions in core countries is now on the cards, Kardun said. In recent months, the company has agreed a number of acquisitions including the 41,200 m2 Focus Mall in Bydgoszcz, Poland for €122 mln and the 20,900 m2 AFI Palace in Pardubice, Czech Republic for €83 mln. At end-2014, the company’s portfolio of 151 income producing properties with a total GLA of 1.3 million m2 was valued at €2.6 bn compared to €1.6 bn at end-2008.

At the same time, the number of staff has shrunk from 550 to 370 now, Lavine said. ‘The company has become more hands-on and individual staff have a much wider skill set.’

Further progress was made in January 2015, when the company completed the sale of 72 non-core smaller retail properties in the Czech Republic with an aggregate volume of around €70 mln and agreed to acquire a 75% stake in the prime shopping mall Arkady Pancrac in Prague.

Reducing the land bank
Six years ago when Lavine took over the helm at Atrium, the Vienna and Amsterdam-listed company still had €5 bn of exposure to land. The bulk of the land bank has since been sold off and wound down without any additional costs being incurred, Lavine said. During 2014, the company completed the sale of several more land plots, including two in Turkey, one in Bulgaria and one in Georgia, for a total sum of €71 mln. At present, Atrium has a total of €365 mln in development and land, of which €215 mln is spread more or less equally between Russia and Turkey.

There is still a bit of work to be done on this front, Lavine said. ‘We have to reduce our land bank a bit more. We need to find the right partners. Buying land is different to buying a shopping centre.’

In the coming years, Atrium will seek to further raise the quality of its portfolio by disposing of non-core assets and boosting the number of large shopping centres to around 40 compared to 33 now, Lavine predicted. ‘We are not under huge delivery pressure, that’s part of our DNA. But the number of assets will decrease.’ The standalone supermarkets are key candidates, she added. ‘We will not create a
blueprint upfront, we will just do it and announce it later.’

The company has a three-year trajectory ahead during which it will focus on A markets, Kardun added. ‘We would like to buy one to two assets a year. It should be possible if we continue to dispose of our non-core assets.’

The development engine is now also cautiously being revved up. Atrium is now targeting a share of no more than 10-15% for its development portfolio in line with the demands of the capital markets, Kardun said. ‘We need to carefully manage our resources and our risk profile. For example, we couldn’t announce that we were extending Promenada until our Lublin extension was finished.’

After buying Promenada in 2011, Atrium is now expanding the Warsaw centre from 52,000 m2 to 86,000 m2. Meanwhile in the Polish city of Torun, Atrium has just completed the expansion of its Copernicus centre by a further 17,300 m2 to bring the total to over 47,000 m2. ‘We aim to capitalise on the strong performance of our existing standing investments,’ Kardun said. ‘We are very excited about these
new developments, we are managing everything ourselves.’

In the past, development was considered a way to grow, added Lavine. ‘The world has changed. We have significantly brought back our commitment and adapted our risk profile. We are not doing greenfield developments and do not want to own land unless it is connected to a shopping
centre. We will not expand our development exposure.’

New extensions will focus on dominant shopping centres, Kardun added. ‘We will focus on the national capitals and big regional cities with strong catchment areas. We are slowing down any opportunistic development, we only have a couple and the chances of any new ones is very low.’

Russia and Turkey may rate as the most promising markets for shopping centre development in the coming years, but Lavine is not tempted to pursue further opportunities in either of those markets. More activities in both countries would significantly extend the company’s geographic spread, she pointed out. ‘We are already active in a lot of countries. When I travel to Russia, I am away for a whole
week. And then you also have the different currencies.’

Under Lavine’s leadership, Atrium has realised a higher investment grade but there is little or no scope for further improvement unless the political and economic outlook for Russia itself changes. Lavine: ‘I said from day one that our corporate risk profile cannot include too big a stake in high-risk countries. We can’t accommodate too much in both Russia and Turkey.’

Growing role for gastronomy
Russia may add some spice in terms of high yields, but the country remains riskier than the other countries in the portfolio. In the depths of the crisis, Russian tenants were commanding discounts of up to 40%, Lavine noted. But the operations in the country have been turned and are now income-producing. And the good news about Russia is that global retailers like Ikea are still expanding in the country, she added. ‘International retailers continue to expand heavily and consumers are still spending. But it’s a diverse picture. From an institutional perspective, Russia is a black box.’

One of the trends Kardun has witnessed in the last few years is the growing role of gastronomy in shopping centres. ‘We’re seeing more and more restaurant offers. That’s a strong trend; gastronomy used to account for 5 to 7%, but it can now go up to 10%.’ Other services like dedicated apps, free wifi, meeting places and facilities like a gym are also growing in importance: ‘These services are starting to
become a must. Everything relates to lifestyle. Consumers have more income, especially the 55+ generation, and more time to spend time. YouTube and the internet are powerful tools and give consumers access to different lifestyles.’

At the same time, some retailers are being forced to scale back their operations due to the impact of ecommerce, he conceded. ‘Electronics stores are decreasing in size. In a number of our standing assets, the anchor tenants are shrinking. Primark is a notable exception. But not everything
is being replaced by ecommerce. The online battle is being won by omnichannel operators. For example, Fossil – a specialist in leather jackets, jeans and bags – is growing. And online retailers are also entering the physical space. Samsung, for example, is starting to open stores.’

Internet is definitely a game changer, Kardun continued. ‘It is changing our business. But every time people have said that this is the end of the shopping centre, every time the sector has adapted. The sector is becoming more unpredictable, but if you are focused, it is still possible to remain in control. The key is to have deeper and closer relations with the retailers and to understand their business model.
Having a feel for that is part of our business helps you stay ahead of the game.’

Judi Seebus
Editor in chief