This summer, Argo Real Estate Opportunities Fund (AREOF) doubled in size with its acquisition of two Romanian shopping centres.
The deals were executed through the purchase of holding companies Huincas Properties and Omelit and subsidiaries from vehicles managed by Argo Capital Management Cyprus in a deal valued at €40.5m.
The deal, which involved the ERA Shopping Park Iasi plus adjacent land and ERA Shopping Park Oradea, took AREOF’s net assets from €42.2m to €82.7m.
AREOF is a Guernsey-incorporated closed-ended investment company, originally incorporated under the name of North Real Estate Opportunities Fund Limited in 2006.
The fund’s name was changed in February 2008. It was planned to be dissolved in July 2013 but shareholders approved a proposal last month to extend its life by five years to July 2018.
Focus on CEE
The vehicle was formed to invest in central and eastern European commercial property markets, mainly Romania, Ukraine and Moldova. Specifically, AREOF is looking for returns from rental income and capital appreciation from the acquisition, development and active management of retail and mixed-use assets.
The focus is on retail, a sector which is set to benefit from anticipated growth in disposable income and spending power as eastern European economies catch up with western ones.
The fund owns four shopping centres in Romania and one in Ukraine, and commands a 30-strong management team in its countries of operation.
AREOF raised €96m through its AIM listing in August 2006. By the close of its first financial year to September 2007 it had acquired its main assets of Sibiu Shopping City and Suceava Shopping City in Romania; Riviera Shopping City in Ukraine, plus three commercial development sites in Moldova and a development site in Ukraine.
Present annual gross rental income after rental discounts to tenants amounts to €24m but the company forecasts that by 2013 annual income will be €41m.
The company raised another €10.5m in October 2009 through a placing and open share offer to complete the Riviera Shopping City. The raising also provided working capital, some of it needed to grant rental concessions to tenants during the crisis, notably in Romania.
Additionally, since its IPO, AREOF, along with a local partner, has been securing a land bank in and around the Moldovan capital of Chisinau, and is exploring options for its development sites.
Gross property asset value is €440m and debt totals €357m. Typical loan-to values across the portfolio are between 70% and 80%, while gearing is just over 80%. The company trades at around a 71% discount to net asset value.
The main shareholders are Argo Capital Management (72%), an emerging markets hedge fund which bought the management contract of AREOF in 2007; Aberdeen Asset Management (3%); and Greek bank Proton (8%).
Michael Jivkov, investor relations director at Argo Capital, is enthusiastic about growth prospects for Romania and Ukraine. “[In the] short term, the International Monetary Fund expects growth of 1.5% this year and up to 4% in 2012. Over the past ten years the Romanian economy has outperformed strongly compared to the EU average, posting average growth of 4% compared to 1.6% for the EU,” says Jivkov.
“The Ukrainian economy is forecast to grow by 4.5% this year and by 4.9% over 2012. Ten-year average growth has been 6.5% up to 2010.”
Discount to NAV
He is also excited about the company shares trading at just €0.4 a piece. “We think that 71% discount to NAV is very big. It’s the wrong price for us, the biggest listed real estate operator in Romania. Actually we have a much higher NAV than this. NAVs have bottomed and they are going to be going up a lot higher and the shares will, of course, increase in value,” says Jivkov.
Last month analysts at Growth Equities & Co Research recommended the shares as a “strong buy” and said the company “offers considerable long-term upside potential because the Romanian and Ukrainian economies are recovering strongly and this upside has yet to be fully reflected in asset values.”
Argo Capital finance director Graeme Daniel points to a revaluation in its interim results this year of the Riviera shopping centre in Ukraine from €79m a year ago to €88m. Daniel says that “Romania is a bit behind in terms of capital appreciation but we’ve reached the upside, albeit on a gentle slope.” He says the property vehicle aimed around the time of the IPO in August 2006 to offer risk-adjusted returns of 15% and 20%. “But obviously market conditions have changed quite substantially since then,” he says.
Although its core assets are the first priority, the company may buy more assets. Jivkov says: “There is a lot of distress out there and we may get some good bargains over the next year and a half.”
