In 2013, Rachel (Rocha) Lavine, who was then the CEO of Atrium European Real Estate, conducted tough negotiations for almost a year for the acquisition of Galeria Dominikanska in Wroclaw, Poland. Across the table from her sat the seller, Josip Kardun, who was then the chief investment officer of ECE Projektmanagement GmbH, a large private German company with nearly 200 commercial real estate properties.
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The deal, which was finally completed at a value of €150 million, also yielded a dinner at which Lavine asked Kardun if he would be willing to leave ECE to join Atrium. Lavine, the incoming president of Gazit-Globe, Israel’s largest real estate investment firm, sought to recruit Kardun as Atrium’s chief operating officer and deputy CEO in order to groom him as her replacement, so that she could come back to Israel after six years of living in Amsterdam. Gazit-Globe became the controlling shareholder of Atrium earlier this year.
Kardun did not dither long before accepting her offer, despite the fact that he was well compensated at ECE. The possibility of being appointed Atrium’s CEO sometime in the future was attractive enough for him.
Kardun, 41, lives in Hamburg, Germany, and speaks fluent German, although he was born and raised in Croatia. He works in Amsterdam but manages a shopping center company whose assets are located in Eastern Europe. During an interview at Gazit-Globe’s Tel Aviv office, in which he was asked about his complex identity, he insisted that his DNA is Mediterranean, and that he feels very much at home in Tel Aviv.
Kardun came to Israel to meet with institutional investors to discuss Atrium’s latest moves and its plans for Europe. Atrium’s shares are traded on the Vienna and Euronext Amsterdam stock exchanges at a market cap of €1.5 billion. Operating mainly in Poland, the Czech Republic, Russia and Slovakia, the company owns 82 yield-producing commercial properties with a total built area of 1.2 million square meters, as well as land for future development.
During Lavine’s six-year tenure as Atrium’s CEO, she cleared its debts related to property under development and left it with a cash stash of €350 million, earmarked for new investments. Lavine also increased Atrium’s asset value from €1.6 billion to €2.5 billion, boosted the occupancy rate at its shopping centers to 97.4%, improved its operating profit margin from 70.1% to 95.1%, and raised its shareholders’ dividend from €0.03 to €0.27 per share. Since 2008, Gazit-Globe has invested €800 million to acquire 55% of Atrium. The market value of these shares is about €830 million, and if you add in Gazit-Globe’s share of the dividends that were distributed (more than €200 million), it emerges that Gazit-Globe has made about €250 million on its investment in Atrium – in other words, about 30% over the course of seven years.
However, Atrium is traded today at a price-to-book ratio (which compares a stock’s market value to its book value) of only 0.72. The primary problem still clouding the shares’ performance are Atrium’s investments in Russia. The ruble’s devaluation against the dollar (due to the sharp drop in oil prices) combined with rising interest rates, has lowered the value of Atrium’s seven properties in Russia.
During the first half of 2015, the company was forced to extend discounts to its Russian tenants in order to maintain occupancy rates (which stood at 96.3% as of the end of June 2015). As a result, Atrium’s net income from property rentals in Russia dropped by €19.7 million – about 32% – during the first half of 2015 compared to the parallel period last year. This, in turn, dragged down the company’s first-half total net rental income by 5%, to €98 million.
Kardun became Atrium’s CEO in November 2014 Following the publication of the company’s second-quarter 2015 financial reports about two weeks ago, he said: “In Russia, the situation remains fundamentally challenging and it is still too early to predict any notable positive momentum.” He noted, however, that the relative weight of the company’s investment in Russia has declined from 18.8% in 2013 to 12.5% at the end of the second quarter 2015, due to investment in other countries. At the same time, the company has carried out structural improvements in the shopping centers it owns in Russia and taken in some international retailers that can enhance competitiveness, he adds.
“Another thing that works to our benefit is that we never took out loans on our properties in Russia. So it’s not just that Atrium as a whole enjoys a low level of leveraging, but that our Russian operation does not owe even a single euro to anyone anywhere in the world. While it’s true that our operating revenue in Russia – that is, NOI (net operating income) – is lower than in the past, if you look at Russia’s impact on Atrium as a whole, taking into consideration the conservative approach we’ve applied there over the years, it turns out that there’s been no fundamental impact on Atrium’s overall business results.”
What makes Atrium distinct compared to other companies?
“We are a very special company indeed in the Central and Eastern European environment, because we maintain transparency, financial stability and proper corporate governance. Compared to our competitors, we are among the only ones that own the shopping centers and operate them ourselves, eliminating the need for external management companies and thus preserving a high level of management as well as high operating profit. From the financing standpoint, since we have attained an Investment Grade rating, our financing sources are much wider and, as opposed to our rivals, are not dependent solely on local sources of funding.”
And what are the challenges you face in the future?
“We want to enlarge our presence in our current main markets – Poland, the Czech Republic and Slovakia – with the emphasis firmly on urban areas.”
Would you want to expand also in countries where you have a small presence, such as Romania?
“Romania is a country we’re keeping in our sights, since we see a growth trend there. If we look at Bucharest, the revenue cycles in shopping centers resemble those in our other markets but in the smaller towns and cities, the gaps between Poland and Romania is large and we don’t think they’ll be shrinking, which leaves a relatively small potential for investment in Romania.”
What lessons did you learn from the economic crisis of 2008?
“Atrium experienced the crisis in Russia twice. In 2009, when the worldwide crisis also swept over Russia, Atrium realized that it must strengthen itself in terms of its assets and prepare them for competition. At the time, we did extend discounts, sometimes significant ones, but we maintained a high occupancy rate and the shopping centers continued to operate as usual. When that crisis ended, there was a tremendous difference between Atrium and its competitors in terms of confidence, on the part of both customers and retailers. This enabled the company to take in all of the international retailers that gave preference to Atrium, because of the improvements we made at the shopping centers and also because of our business conduct.”
Are you considering expanding into new countries?
“For now, our mandate is to concentrate on Central and Eastern Europe, where we still have more than a few opportunities and goals. I think that broadening our assets and preserving our position in the countries in which we’re already active would be the most correct and meaningful course to follow on the strategic level. This is because focusing on size in specific markets also gives us depth in terms of our relationships with retailers, leads to betterment of operating relations and improves our ability to recruit talented senior employees.
How do you deal with the e-commerce threat?
“In the markets where we’re active, Internet use is still in the diaper stage but it’s growing fast. It’s definitely something we take into consideration. The shopping center culture is still stable and strong where we operate. In general, consumption patterns in Eastern Europe differ from those in Western Europe. So, for example, while the Germans consume more video material at home via streaming, the Eastern Europeans still go out to cinemas despite being able to watch movies at home.”
But the forecasts show that it’s just a matter of time before the entire continent will go over to shopping from home.
“These forecasts speak of Internet shopping getting to Eastern Europe within four or five years, and we are definitely getting ready for that by, among other things, finding alternative and more suitable locations for the establishment of commercial centers. In any case, what’s happening right now on the ground reflects a more complex reality in which many Western European retailers are continuing to invest resources in shops, which they subsidize through their Internet sales. And here’s the reason: A store in a shopping center is just as important as ever to building a brand and no less important than maintaining a website, especially in Eastern Europe. From the moment customers decide to buy something, they have a need to physically feel the brand.
“Furthermore, we’ve seen the original method used by retailers to cope with the ‘cash back’ trend on the Internet – they offer incentives to customers who shopped online to return the merchandise directly to the store and then award them cash for purchases, rather than having the customers go to the various cash back sites that are causing great harm to brands. Retailers tell us that almost everyone who comes in to return merchandise spends the money they receive to buy other products from the brand during the same visit to the store – and they come back for return visits.”