Enter the rationalists

Aneta Cichla, Alex Hayes, ‘Eurobuild Central & Eastern Europe’: At the beginning of the year you announced you were pulling out of Hungary and Romania

Liad Barzilai, CEO, Atrium European Real Estate: Our strategy is to focus on growing and stable economies. We decided Poland and the Czech Republic were the main markets we wanted to focus and concentrate on, further developing Atrium’s presence there. We exited Hungary because we could not create a portfolio of the quality that we wanted in Budapest. In Romania we owned one asset and concluded that we could not create the economies of scale to make it really worthwhile. This all ties into our strategy of where we as Atrium want to be. Looking at our risk return, we want to ensure Atrium has long term sustainable growing cash flows and for that we need long-term quality assets in quality locations.

You said you had difficulty building up your portfolio...

LB: Our decision was to acquire standing assets in urbanised locations instead of going into greenfield development. On the Bucharest market, there were probably a couple of assets that fit our criteria of providing long term sustainable growing cashflows. We couldn’t see how to create economies of scale with so few suitable assets. We realised that we could not implement our strategy in such countries as Romania and Hungary, so we preferred to go somewhere else where we could.

But in Poland you own a number of projects that are quite small, such as in Płock, Radom and Świętochłowice. Is it your strategy to sell these assets?

LB: In the medium term – yes.

Scott Dwyer, COO, Atrium European Real Estate: Płock Kaufland is a fantastic asset! It’s like an index bond, but it’s not that the asset is good or bad. Our strategy is to own high quality assets in good urban locations. If a regional city is growing in size and the assets that we have are in a good location with growing residential areas, we’ll invest in extending those and matching them to the size of the residential areas. If the cities are not growing, then we’ll look and see what we can do with the assets. Our strategy is to concententrate on larger format retail. We want to spend our time on creating large retail assets. These smaller assets are 10 pct of our Polish portfolio value, 25 pct of the gla and a substantial focus for our resources. This is strategically why we’re looking at separating them from our portfolio. We always look at rotating our assets. We’ve gone from 150 assets four years ago to 34 as of now.

So you want bigger and you want better?

LB: What we want is better quality and better quality is subjective. It also depends on the asset. Today’s trends are for more F&B, entertainment and more leisure. Tenants are also rationalising their portfolios and they want fewer but bigger locations and that’s what we need to provide in order to be relevant in the retail market. At Promenada there’s a complete refurbishment going on; in Targówek we’ve just added enough space for our anchor tenants to open flagship stores and for them to create an experience in their stores. In Reduta we are adding a gym and a cinema because these elements are missing from that location. It’s not necessarily that bigger is better but it’s true that in today’s market portfolios and assets are rationalising and more dominant schemes are winners in their own catchment areas.

What about Russia? You still have many assets there...

LB: Russia is a volatile market. Therefore in the long term we’re aiming to exit. In the medium term we have a good portfolio of assets there, which is only 10 pct of the company's asset value, as well as a good team on the ground and we continue to enjoy the business we have there.

How long do you expect to stay?

LB: It’s very hard to say. The geopolitical changes are out of our control, the currency is volatile and it’s a question of liquidity. It’s about finding the right time, price and buyer. We’re in no rush.

With around 80 pct of your assets now in Poland and the Czech Republic, what do you plan to do with them?

LB: In Warsaw we plan to invest EUR 300 mln in expanding and reinventing the retail that we have. We are going to add a number of elements that we believe our assets are missing. Each asset has its different needs and this is true both for Poland and the Czech Republic.

SD: In Poland we opened an extension today in Promenada, while the opening of the extension of Targówek is also to take place in October together with the extension of Reduta in November and we are also working on a number of redevelopment plans for other assets. You never get to the finish in retail – it’s a process of continual improvement. When we open the first stage of Targówek, we’ll have done our stabilisation of our large fashion range. We’ll also have done our refurbishment of the existing mall and then we’ll look at what other land is around to be able to expand in the future. It is now 60,000 sqm including the hyper-market, and that is adequate, but its format is quite large, so we may look at expanding the retail component further. There are no concrete plans. There’s strong demand and the first stage of the modernisation primarily only serves our existing retailers. When Targówek first opened, retailers took smaller shop formats and now they want larger ones, so we are matching the retailers’ needs for enlarged formats, in particular Zara and H&M. We’re 100 pct leased, we’re tight on the land and we’re doing as much as we can. We have a waiting list, so if a tenant leaves others come in. In a perfect world, if we wanted to we could probably extend the retail area, which is currently 40,000 sqm, by a further 20,000 sqm and fill it quite comfortably.

Scott Dwyer, the COO of Atrium European Real Estate

Wars Sawa Junior is a small department store per se...

LB: Is it? I don’t think so. I think it’s a super exciting asset in probably the best location in Poland. In a changing retail environment the best locations win. Since we are a retail player and we are in capital cities, there is no better place. You are right that it is a hybrid between a mall and high street, but in the medium term we have some exciting ideas to work on that asset. We believe that the entire area will develop over time and this will help us implement our strategy. We see it as a very long term hold.

So what are you going to do with it?

SD: First of all we have to buy it. Then we’ll enjoy a relatively long term cash flow. It’s fully leased and the average lease term is over five years, so we will sit back and enjoy the stable cash flow and then we will draw up our plans.

What about Atrium Reduta?

SD: I think Warsaw’s Ochota district is the most densely populated suburb in Poland…

But you have Blue City there…

SD: Blue City adds to the attraction. The consumers frequently cross over from Blue City to Reduta and vice versa. Reduta has its unique strengths complementing Blue City and these assets have lived together for the last 20 years. We have not done that much yet in Reduta, which is why we are adding the first cinema in Ochota and a fitness centre to further enhance Reduta’s range of services.

You’ve talked about the EUR 300 mln allocated for Warsaw investment, does that mean that there is more allocated for Poland as a whole?

SD: Not necessarily. The core assets in our portfolio that we want to redevelop are six or seven out of the 22 in Poland and we can’t do it all at once. We are focusing on Warsaw and Prague initially. So what we’re doing is to stabilise our core capital city assets before leveraging this expertise into other assets. Strategically, if you’re going to do things, you do them first where you’re going to get your maximum impact and then you can roll that out into the other cities. The plan for Warsaw will take us another three years or so. We want to maintain our redevelopment programme as a percentage of our assets under management, so we don’t want to overexpose ourselves in the redevelopments. We have to do it in a structured way.

I assume it’s the cash you’re generating from your disposals that you’re ploughing back into your developments?

LB: We’re doing two things, we’re taking cash from our disposals and our very healthy balance sheet which has low leverage. We’re using our financial ability to invest the EUR 300 mln back into the assets, which is a much lower risk than greenfield developments because we know the assets, we know the tenants and we know the locations. We’ve also recently announced the acquisition of Wars Sawa Junior, so we’re investing in assets that we believe are a better fit for our strategy.

Is low leverage also part of your strategy?

LB: For the last ten years the company’s had low leverage and we don’t intend to leverage up dramatically as we are highly ranked by three rating agencies. We’re investment grade. We’d like to maintain that and there are certain criteria so we will always as a strategy maintain a conservative balance sheet. ν

The two men at the Atrium helm

Liad Barzilai is the CEO of Atrium. He is also the CIO of Atrium’s parent company, Gazit Globe. He first joined Atrium in August 2008 as vice president for business development. He was later appointed head of acquisitions, before being appointed CIO of Atrium, a position he also still holds. During the time he has been employed by Atrium, the company's standing investment portfolio has increased from EUR 1.6 bln to EUR 2.5 bln. Liad holds an MBA from Tel Aviv University and a BA in business economics and management from Ben-Gurion University.

Scott Dwyer was appointed the COO of Atrium Group on October 1st 2017. He previously held the position of CEO of Atrium in Poland and under his tenure Atrium undertook the redevelopment and expansion of its three flagship shopping centres in Warsaw, which helped raise the value of the Polish portfolio to its current value of EUR 1.5 bln. He has over 20 years of experience in the CEE real estate sector. The positions he has held include the asset portfolio management director at Heitman International (2009–2012), the general manager at ING Real Estate Development, with responsibility for the CEE region, Germany, Switzerland and Italy, and the managing director for Central Europe at Rodamco Europe/Unibail-Rodamco. Scott graduated from the University of Technology in Sydney.