On Thursday evening, we made an adhoc-announcement dealing with a very high foreign exchange-adjusted write-down to our Russian portfolio. On Friday, CEO Schumy talked to Austrian Börse Express about the reasons and the current environment.In your ad-hoc press release on the expected write-down of approx. EUR 400 million to the Russian portfolio, you indicate that this is the result of a special valuation. What exactly does that mean?
Our real estate portfolio is normally appraised by external experts twice during each financial year, after six months and at the end of the 12-month period. At the end of the first and third quarters, we carry out an internal appraisal. Since we have a new appraiser for our East European portfolio and are faced with a further deterioration in the operating environment in Russia, we decided to also commission an external appraisal of the Russian portfolio as of 31 January. That is important, above all for our investors, because we are repeatedly asked to comment this ongoing difficult situation at road shows and other meetings – and indicate whether this could possibly require further high write-downs in Russia. This is now no longer an issue.
The EUR 400 million represent a write-down of roughly 25%. However, the decline in rental income from Russia has been more substantial – nearly one-half in six-month comparison. Is this really no longer an issue?
You can’t overlook the fact that we recorded a EUR 200 million write-down in Russia during the 2014/15 financial year. Real estate valuation also works with long-term calculation models that reflect the current status as well as the appraisers‘ expectations and assumptions and don’t carry a current crisis situation forward for the next 10 or 20 years. Therefore, this issue should be settled unless there is a further substantial deterioration in operating conditions.
Who is the new appraiser and why did you change at this time?
The experts at CBRE, one of the largest and best-known service providers in this business, will now be valuing our East European portfolio – and thereby also our five Moscow shopping centers – for a period of three years. We hold competitive tender proceedings for these appraisal services every three years, and were recently at the start of a new cycle.
The new appraiser apparently sees the situation in Russia much more sceptically than JLL. What are the reasons for this?
There has been a recent notable deterioration in the framework conditions. The EU extended the sanctions against Russia into the summer, even though it is becoming more and more obvious that European companies have been negatively affected by these measures and resistance is growing, for example in Germany’s industrial sector. Then we have the oil price, which plays an important role in the Russian economy and has been on an even faster downward spiral since the beginning of 2016. The recession in Russia is therefore expected to continue during 2016, and that is reflected in the development of the Ruble – which weakened further from approx. 70 to 90 for EUR 1 from early December to mid-January.
The signs contradicting a rapid recovery to the former level have recently increased. And CBRE agrees with this viewpoint. However, that means we must expect to remain at the current level – unless there is a further substantial deterioration in the relevant valuation parameters – until the economic environment begins to recover. And, without a doubt, Russia still has great potential.
How do the appraisers work, and can you explain a few of their assumptions on Russia?
Many different parameters flow into a valuation model. They include property-specific factors like rental lists, rental contracts, investment budgets etc. The experts also prepare forecasts for the development of the market, future rental income, occupancy rates and expected returns. In combination, all these factors produce an overall view.
We received the first indications from CBRE on Thursday evening, which is why I don’t have the details right now. The valuation-relevant parameters will definitely be discussed in our third quarter report. In general, this appraiser’s long-term projections for market rents are more conservative.
In other words, there won’t be a quick return to the rent levels seen during the boom years in 2012 and 2013?
Will the rental reductions in IMMOFINANZ’s shopping centers remain in effect?
We normally grant rental reductions for a period of three to six months. These reductions are monitored regularly and then renegotiated. The original rental contracts, which are generally based on US Dollars, remain in effect. Most of them have a term that runs at least to 2019.
What is your forecast for rental income from Russia in 2015/16?
At the end of six months, we had recorded approx. EUR 43 million from Russia. For the full year, we are expecting about EUR 80 million or slightly more.
And how is the occupancy rate?
It has been stable at 85/86% since April 2015. For our Golden Babylon Rostokino shopping center, we recently entered into a cooperation with ECE, the market leader in European shopping center management. I’m optimistic that we will see the first positive effects on the occupancy level in the Rostokino by the end of 2016.
How is the financing situation in Russia?
Our Russian portfolio has approx. EUR 725 million of external financing, which consists of US Dollar loans, among others from Sberbank. Most of these loans have a term of over five years and, consequently, there is no need for refinancing at the present time.
What does the write-down of up to EUR 400 million mean for IMMOFINANZ’s 2015/16 results?
It will have a significant negative effect on earnings for the full year. The exact development of Group earnings will be dependent, above all, on the volatility of exchange rates in the fourth quarter.
If IMMOFINANZ reports a loss for 2015/16, similar to the situation in the previous year, is a dividend possible and planned?
Yes, the capital measures approved by the last annual general meeting give us sufficient free reserves to cover any possible loss for the year and also pay a dividend. Our outlook – which calls for the payment of a six Euro cents dividend for 2015/16 and for the eight-month abbreviated financial year in 2016 – remains unchanged.