WOOD Flash – NEPI Rockcastle: 3Q22 – tenants' sales 17% above pre-pandemic levels in the summer

NEPI Rockcastle’s (NRP) 3Q22 trading update confirmed that the tenants‘ sales performance during the summer was robust. The growth of turnovers accelerated in 3Q22, to +17% lfl vs. 3Q19. This is encouraging, as it should help NRP to pass the indexation in rents onto the tenants. That said, the extent of the passthrough of the utility costs will remain dictated by the sales dynamics during 2023E, and by the energy price level. Historically, service charges used to account for around one-third of NRP’s tenants’ monthly bill. During 2023E, we believe their share may increase to around 40-50%. This means the total monthly bill could grow faster than the pace of sales. The low rent to sales ratio (historically around 12%) should allow some leeway. That said, we believe it would be reasonable to expect the positive impact from the indexation to be offset partly by some compensation for energy costs, and by the transition to more expensive debt. Booked at a 6.7% yield, the valuation of the portfolio is not stretched, but we do expect to see yield expansion in the coming quarters. That said, with a LTV of 31% and c.90% of the portfolio unencumbered, NRP remains among the highest quality names in the CEE RE universe. We see NRP as well-positioned to transition into project-level debt, and capitalise on opportunities that may emerge as real estate markets reprice. Management has increased the distributable earnings per share yoy growth guidance from 33% to 38%. The reviewed guidance implies a 9% FFO yield. NRP trades at 0.8x P/NAV.