Greenman’s food-anchored assets performing well through coronavirus

It’s nearly ‘business as usual’ for Irish food-retail investment specialist Greenman Open which recently arranged financing of €49.5m for a portfolio of Kaufland-anchored real estate assets from German banks Mittelbrandenburgische Sparkasse (MBS), Potsdam and Landesbank Baden Württemberg (LBBW). All the assets are located in north-eastern Germany.

The two banks formed a consortium with MBS as the mandated lead arranger. The five-year credit facility is secured against a five-asset portfolio purchased in December 2019 for Greenman Open. MBS has been a long-standing financing partner of Greenman, but it’s the first deal for Greenman with LBBW

Greenman Open has €747m of assets under management, with the majority of assets being anchored by the Germany’s largest food retailers EDEKA, Rewe or Kaufland.

REFIRE talked with Greenman’s ebullient CEO Johnnie Wilkinson recently about how the company, and the market for Fachmarktzentren or retail parks, Greenman’s area of speciality, was faring in German during COVID-19.

Greenman has long been a believer in the physical bricks and mortar of grocery retailing – particularly the food-dominated retail parks, hybrid centres, neighbourhood centres and retail warehouses that have proved resilient to the encroaching e-commerce that has caused such havoc with other forms of consumer retailing, such as malls, shopping centres, and the high street.

The lockdown in Germany since mid-March closed nearly all shopping, except for food retailers, chemists, drug stores and petrol stations – the bedrock of Greenman’s business. Wilkinson said that about 81% of the company’s Greenman OPEN fund is made up of these “essential” retailers, which leaves the fund in a strong position despite the mayhem elsewhere in the retail sector.

About 38% of Greenman’s rental income comes from EDEKA, Germany’s largest grocer, with whom the company works very closely. This has included, says Wilkinson, looking for positive solutions similar to locked-down McDonalds agreement recently to ‘lend’ some of its staff to nearby Aldi stores to keep staff busy. While retailers are notoriously secretive about actual turnover figures on a per-store basis, it’s generally thought that retail outlet turnovers have been up by about 30% over the period, says Wilkinson.

As is widely known, Germany has been using its tried and trusted system of ‘Kurzarbeit’ to keep staff on employers’ payrolls in times of emergency, as it did successfully in the financial crisis of 2008/09. The COVID-19 legislation has also given leeway to tenants to negotiate deferral of rents for several months to give them breathing space between April and September of this year. A number of Greenman’s tenants have taken advantage of this, withholding rent for April and beyond.

This is a delicate balancing act, says Wilkinson. Greenman’s job is to determine which of their tenants are strong enough that they legitimately need a breather, and which will end up going to the wall, no matter what breaks are given to them.

Strong chains such as EDEKA are going to pay their rent, along with the big drugstore chains Rossmann, DM Drogerie and others. “One of our tenants, (fashion retailer) TKMaxx, initially said they weren’t going to pay their rent in April. We wrote to them, and after some consideration, they came back to us and said they’ve reviewed it and they will now pay”, said Wilkinson. “Of course, we have to be a little more aggressive with those who can pay, but won’t, than with others who might be already in big trouble. In which case we may have to look for more creative solutions. But we are assuming to collect 90% of our rent roll for April and beyond.”

This is important for Greenman’s investors. Greenman’s open-ended funds had a gross value of nearly €750m at the end of 2019, making Greenman one of the largest players in the German retail park sector. “Even if we only collected rent on the stores that are open (at this stage, all stores have now re-opened, subject to social distancing), we could still meet our bare minimum target distributions of 1% of NAV per quarter, or 4% per year.

“We target 5.5% for the year in ‘normal’ times, so even if we were only collecting 90% of our rent-roll, we’d still be delivering a 4.7% cash on cash return for our investors. This is not far short of “business as usual”. Anyone who can do that in these times is still being viewed as successful.”

“Investors may still have the challenge that valuations of the properties might be compromised. And indeed, who knows what may happen to valuations? But most of our investors are investing for the long term through their pension schemes, and they’re investing for the distributions, so a short-term decline in the asset is less important for them than it would be in a 3-year, a 5-year, or a more time-sensitive fund.”

“For example, take the decline in values in our asset class from 2007 to 2011. They went from trading at below 5% yield in 2007 to out beyond 6.5% in 2009 and came relatively quickly back to below 5% in 2011. So if you’re not obliged to sell during that period of time, and EDEKA continues to pay the rent, that’s not such a bad place to be.”

Greenman currently has an LTV of 36%, which Wilkinson says is comfortable, particularly with interest rates as low as they are. This improves the returns with the judicious use of gearing, and Wilkinson suggests he could even go as high as 45%. News should soon be imminent about a new deal to buy 23 supermarkets in northern Germany, and Wilkinson said he’d certainly be interested in doing further project development deals with existing partners, particularly if the food element was very high.

Greenman stays very close to technological developments in the grocery trade in Germany and France, where new acquisitions are planned. These range from tracking customer preferences via mobile phone apps to white goods discounting to diverting heat from the servers in in-store data centres to heat the rest of the store.

As to ecommerce, the slow take-up of online grocery shopping in Germany, whether for home delivery or click-and-collect, may remain just that, says Wilkinson. The cracks appearing in the business model of home delivery in the UK and partly also in France, where the technology could not keep up with the recent surge in demand, will give German retailers much food for thought, he believes. Getting it right might demand a non-commensurate investment in technology for a non-proven business model, as against focusing on a form of in-store gathering of customer intelligence which is cheaper and delivers more immediate results, he thinks.