01 Annual Report

I believe we are greatly positioned to step up on our journey to be a trendsetter in workplace solutions in Europe. Please join us on that exciting journey!

Pavel Trenka, CEO

2016

02 Introduction

Message from Maarten J. Hulshoff

Message from Maarten J. Hulshoff

We certainly had a lot to celebrate in 2016. But we also had challenges as various geo-political developments in some countries had a negative impact on our business. We believe that negative conditions can also generate upward potential.

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From the CEO

From the CEO

The change program shall continue throughout 2017 and beyond as one of the key motives of our company culture is “The change is the only constant”.

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Ivan Chrenko

Ivan Chrenko

Chairman – Co-founder and Chairman of the Board, former Chief Executive Officer of the HB Reavis Group from 1994 to October 2013.

Maarten J. Hulshoff

Maarten J. Hulshoff

Independent non-executive director of the HB Reavis Group for 8 years. Previously, he was CEO of Rodamco Europe and Rabobank International following a 19-year career in many top international positions at Citibank.

Pavel Trenka

Pavel Trenka

CEO (since October 2013)

Pavel joined HB Reavis in late 2007. As a former investment banker at Bank Austria and Associate Partner at McKinsey & Company he was primarily responsible for Group strategy, international expansion and transformation.

Marian Herman

Marian Herman

CFO, Member of the Board

Marian joined HB Reavis in March 2010 and was promoted to Group Chief Financial Officer in November 2014. Marian has 19 years of experience in various financial, investment banking and investment management positions. In his previous role at HB Reavis, he was responsible for all the Group’s divestments and the real estate funds business. Previously, Marian worked for over 10 years in London at RREEF (Deutsche Asset & Wealth Management), Deutsche Bank and ING Group.

Marcel Sedlak

Marcel Sedlak

Member of the Board

Marcel is a long-standing executive of the Group who was promoted to the Board in 2010. Formerly the Group’s General Counsel, he currently leads our development activities in Poland, Slovakia and Turkey and oversees our expansion strategy into new markets.

Radim Rimanek

Radim Rimanek

Member of the Board

Radim joined HB Reavis in the spring of 2012. Prior to HB Reavis, he worked for Dun & Bradstreet and McKinsey & Company in New York and Prague. As an executive director, he is responsible for international office leasing and our development activities in the Czech Republic and the United Kingdom.

Robert Kantor

Robert Kantor

Member of the Board

Robert joined HB Reavis in 2000. Prior to his appointment to the Executive Board in 2013 he led our Asset Management and Retail Leasing activities. Following his promotion, he added responsibility for our Construction delivery across all countries. Before he joined HB Reavis, Robert managed a family business in the machine industry.

03 Our people

Headcount 2016 by profession

Headcount 2016 by country

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Team members

Years with the company

Building the future

At HB Reavis, we believe we are both visionary and pragmatic. That is why our ‘Building the Future’ activities are both far-sighted and focused.

The program comprises a series of events created initially and specifically for leaders, important professionals and decision-makers in the organization. The idea is to show them the potential of our envisaged culture, how it can be achieved and what it means for each person’s role and responsibilities.

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Building the future

04 Our vision & strategy

In 2014, we set ourselves a vision of where we want to be in five years, Vision 2019.

Last year, we were in the middle of our journey to achieve it and, overall, we believe we are on the right track. Our Strategy to deliver our Vision was broadened with a few strategic initiatives and we accelerated progress on others, going deeper into implementation. Despite the long delivery cycle of our projects, each of our pillars has already achieved something tangible in 2016.

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Being a trendsetter in workspace solutions

Being the most attractive employer for industry professionals

Being a leading pan-European player with global ambitions

Beyond core business strategy to be uniquely competitive and deliver on our Vision, we also include in our strategic thinking our acquisition strategy and financial framework for a completeness.

01

Core Business Strategy

We are ambitious. We aim to become the trendsetter in workspace solutions and to provide the best value proposition for existing and potential staff. To achieve both ambitions, we need to continually improve our delivery business model.

What we achieved in 2016

  1. Strategic activities to become trendsetter in workplace solutions
  2. Strategic activities to become the most attractive employer in the industry
02

Building Attractive and Sustainable Pipeline

In Central Europe, we focus on building our office project pipeline in strategically selected business districts to ensure continuity of the Group’s high quality workspace offering aiming to bring remarkable experience to people. We develop product that has the potential to differentiate our offering from the competition and secure projects earlier in the development chain so that we move up the permitting risk curve in search of greater value add

What we achieved in 2016

During 2016, we worked specifically on reinforcing pipelines in Prague and London and on our optimal entry to Germany. We also analysed every reasonable opportunity in Budapest, Warsaw and Bratislava.

03

Financial Framework

First, our long-term aim is to achieve and keep a 50:50 share of development and income producing assets and consequently to keep the right balance on the risk/return curve. Since 2010, we have increased the share of development from 33% to 51% at year-end 2016. During last year, we decided to use a positive situation on the investment market and sold our matured assets in future gross development value of almost €1 billion. That fact will allow us to be better prepared for further international expansion and construction of a robust pipeline.

05 Key projects

West Station I
Valuation€80.0m
GLA30,751 m²
Occupancy93%
Twin City B
Valuation€51.7m
GLA24,487 m²
Occupancy98%
Twin City C
Valuation€55.9m
GLA23,693 m²
Occupancy100%
Aupark Hradec Kralove
Valuation€81.1m
GLA22,739 m²
Occupancy88%
Gdanski Business Center D
Valuation€101.3m
GLA29,823 m²
Occupancy88%
Centrum Bottova
Valuation€9.9m
GLA6,161 m²
Occupancy100%
Varso Tower
Valuation at completion€366.5m
GLA70,343 m²
Planned opening6/2020
Varso 1
Valuation at completion€138.5m
GLA30,061 m²
Planned opening3/2019
Varso 2
Valuation at completion€212.7m
GLA44,800 m²
Planned opening6/2019
20 Farringdon Street
Valuation at completion€142.9m
GLA7,743 m²
Planned opening3/2018
West Station II
Valuation at completion€99.5m
GLA37,909 m²
Planned opening9/2017
Twin City Tower
Valuation at completion€97.0m
GLA34,658 m²
Planned opening8/2018
Agora Hub
Valuation at completion€98.0m
GLA35,636 m²
Planned opening3/2019
Agora Tower
Valuation at completion€104.3m
GLA35,068 m²
Planned opening4/2019
Cooper & Southwark
Valuation at completion€113.5m
GLA7,133 m²
Planned opening12/2017
33 Central
Valuation at completion€347.0m
GLA21,105 m²
Planned opening7/2017

Market value upon completion by country

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Market value upon completion by segment

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Commited development and pipeline

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06 How we performed

In 2016, our financial performance slowed down markedly. This was due specifically to foreign-exchange (FX) losses and to some delays in permitting of some of our key projects.

However, as a Group, we still generated net profit of €107.5 million (€239.4 million in 2015). This translates into a 6.9% return on shareholders’ equity (29.3% in 2015). Our balance sheet grew to €2.11 billion and Net Asset Value reached €1.22 billion at the end of 2016. At 17.4%, Group Net debt leverage remained below targeted levels mainly as a result of robust disposal of assets with gross development value of around €1 billion. In contrast, the business performed very well. We signed leasing contracts with 208 clients. This represents 141,300 m² of GLA.

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Gross development value of projects under construction (€m)

Acquisitions
  • acquisition of the plot on the Radlicka Street in Prague’s Smichov district
  • acquisition of another office project in Budapest - The Bem Palace
Leasing
  • 23,300 m² GLA leased to tenants
  • the biggest new tenants: Alza (Bratislava), Phillip Morris (Warsaw), SAP (Bratislava)
Financing
  • bond issue listed on Prague’s Stock Exchange raised CZK 700 million (app. €25.9 million).
  • new financing secured for Twin City C in the amount of €44.5 million
  • re-financed a €19.8 million loan for Aupark Piestany
Divestment
  • Vaci Corner Offices divested to Zeus Capital Management for €49.1 million
Building the future
  • at a special kick-off event in June we brought together all our managers, the idea was to tell them about our journey so far and about our vision for the future
Acquisitions
  • new acquisition in London at 61 Southwark Street
Leasing
  • 42,300 m² GLA leased to tenants
  • the biggest new tenants: AC Nielsen (Warsaw), Coface (Warsaw), Yanfeng (Bratislava)
Financing
  • second tranche of our bond issue attracted CZK 1.25 billion (€46.2 million)
Completions
  • occupancy permits for Twin City B (Bratislava) and Gdanski Business Center D (Warsaw)
Construction starts
  • construction of Twin City Tower started
Divestment
  • portfolio of logistics centres in the Czech Republic and Slovakia was sold to the Macquarie Group for €74.9 million
Leasing activity
  • 47,400 m² GLA leased to tenants
  • the largest of the new tenants is GE (Warsaw)
Financing
  • €44.6 million facility agreement signed for West Station I
Completions
  • occupancy permit for West Station I in Warsaw
  • occupancy permit for Twin City C in Bratislava
  • completion of refurbishment of Centrum Bottova in Bratislava
Construction starts
  • refurbishment of office project in London, Cooper & Southwark at 61 Southwark Street
Divestments
  • entered into forward sale agreement with Wells Fargo for a disposal of 33 Central (London)
  • sale of Konstruktorska Business Center (Warsaw) to the Golden Star Estate
  • sale of Aupark in Piestany (Slovakia) for €39.5 million to New Europe Property Investments (NEPI)
HB Reavis Major EU Developer

According to Property EU (September 2016) HB Reavis was ranked third among the leading European office real estate developers, based on size of completed office space in the period 2013-2015 (273,000 m² of GLA).

Building the future
  • special workshops were organized for all managers and people leaders so they can continue to communicate and discuss our “MVMS” (mission, vision, mindset, strategy) with our people
Acquisitions
  • acquisition of Mercuria located in Prague 7 (Czechia) for €10.7 million
  • acquisition of Ryba plot in Bratislava (Slovakia)
Leasing activity
  • 28,300 m² GLA leased to tenants
  • the biggest new tenants: Fundacja Rozwoju Systemu Edukacji (Warsaw), HubHub (Warsaw)
Financing
  • €12.0 million of new bank financing
  • launch of 2 new bond programmes: Poland (PLN 500 million = approximately €116 million), Slovakia (€100 million)
Completions
  • construction of Aupark Shopping Centre in Hradec Kralove (Czech Republic)
Construction starts
  • construction permit for Varso project in the centre of Warsaw
Valid zoning permit
  • zoning permits for Nivy Mall and Nivy Tower, our landmark project in Bratislava, have been received
Divestments
  • Gdanski Business Center I (Warsaw) was sold to a global pension fund investor advised by Savills Investment Management for €183 million
  • divestments completion of the sale of Twin City A (Bratislava) to IAD Investments at a transaction yield of 6.5%
  • the sale of River Garden II-III to Aviva Investors and LaSalle Investment Management for €83.9 million
  • the sale of Aupark Shopping Centre in Hradec Kralove to HB Reavis CE REIF a value of €88.8 million

Financial highlights

Net profit (€m)

Revaluation gain (€m)

Net Debt Leverage Ratio

Net Asset Value (adjusted, €m)

Return to shareholders

Investment in land/property and construction (€m)

07 Business review

Real estate development is a very complex business, especially if you are an integrated developer. As one of Europe’s very few fully integrated developers, this means our business is just as complex. And we make life even tougher for ourselves because our mission is to bring remarkable experiences to people through our real estate solutions. We aim to set trends in office space solutions.

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Changes in Group development property value (€m)

The European real estate market remained strong in 2016, in spite of political uncertainties. Moreover, Central European markets are now playing an everincreasing role. Investment in European commercial properties was just as strong as last year; investors sought safe and stable returns in the low-interest rate environment. High demand for good quality real estate products resulted in yield compression across European markets. Although investment activity was 8% lower compared to the record levels seen in 2015, if we exclude the UK then transaction volumes increased by 7%.

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Total office stock (thousand m² GLA)

Figures based on external expert valuations and management report.

Leasing activity by country 2016

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Leasing activity

International expansion and a primary focus on the office segment are shaping our portfolio in terms of geographical and segment structure.

Geographically, the structure of our whole development portfolio is shifting, with the UK and Poland clearly increasing in weight. At year-end 2016, the share of UK assets represented 15% of the whole portfolio; Poland 27%; Czech Republic 10%; Slovakia 35%; and Hungary 13%, all based on the expected gross development value.

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HB Reavis development total GLA (m²) ERV GDV Value change Investments
Office 1,006,407 214.0 3,562.0 339.0 169.8
Retail 157,270 35.2 592.3 58.2 33.7
Total development 2016 1,163,677 249.2 4,154.3 397.2 203.5
Additions to porfolio 2016 66,133 16.6 288.5 73.3 87.5
Completions 2016 130,495 26.9 423.0 148.2 102.6
Office 964,784 209.3 3,514.7 238.9 185.8
Retail 134,531 29.6 505.1 10.1 2.7
Total pipeline for 2017 1,099,315 238.9 4,019.8 249.0 188.5

Figures based on external expert valuations and management report.

All figures in €m, except GLA.

United Kingdom

€19.3m operating profit
€337.3m in investment property
35,981 m² GLA under preparation
42 professionals

Slovakia

€41.7m operating profit
€528.6m in investment property
602,323 m² GLA developed
486,746 m² GLA under preparation
303 professionals including HQ based

Czechia

€46.7m operating profit
€232.6m in investment property
160,942 m² GLA developed
152,280 m² GLA under preparation
53 professionals

Poland

€131.0m operating profit
€546.6m in investment property
214,946 m² GLA developed
260,046 m² GLA under preparation
129 professionals

Germany

1 professional

Hungary

€0.2m operating profit
€49.1m in investment property
21,603 m² GLA developed
164,262 m² GLA under preparation
21 professionals

Turkey

2 professionals

Luxembourg

3 professionals

08 Group at glance

1 million

m² GLA developed

1.1 million

m² GLA under preparation

235.3 million

Operating profit

554

professionals

United Kingdom

€19.3m operating profit
€337.3m in investment property
35,981 m² GLA under preparation
42 professionals

Poland

€131.0m operating profit
€546.6m in investment property
214,946 m² GLA developed
260,046 m² GLA under preparation
129 professionals

Czechia

€46.7m operating profit
€232.6m in investment property
160,942 m² GLA developed
152,280 m² GLA under preparation
53 professionals

Slovakia

€41.7m operating profit
€528.6m in investment property
602,323 m² GLA developed
486,746 m² GLA under preparation
303 professionals including HQ based

Hungary

€0.2m operating profit
€49.1m in investment property
21,603 m² GLA developed
164,262 m² GLA under preparation
21 professionals

Luxembourg

3 professionals

Germany

1 professional

Turkey

2 professionals

Market value upon completion by country

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09

There is no way round Brexit – the referendum vote in June 2016 that determined the UK would exit the European Union. Any review of economic trends in the second half of the reporting year is all about the UK’s commitment to leave. There is significant uncertainty about that process. Will the UK remain in the single market? What will the ‘divorce’ settlement look like? How will it impact the City? Will UK-based financial institutions retain ‘EU passporting rights’ allowing them to sell products throughout the Union? And what will all this mean for the prospects for real estate in the square mile?

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Changes in UK development property value (€m)

Central London

Tomas Jurdak

Only three years in the market and only three projects so far, HB Reavis seemed to be picking up an inordinate number of top, prestigious awards in 2016.

Nominations came in for Developer of the Year (Property Week) and Best Newcomer 2016 (CoStar Awards), both for our 33 Central debut project which also made the Estates Gazette’s Top 10 biggest office deals in the City during 2016. We were perhaps happiest with our shortlisting for MIPIM UK’s Visionary Developer of the Year. ‘Visionary’ is a description HB Reavis likes a lot and we are equally happy to be perceived as a disruptor in the City market. Why have we earned that particular ‘accolade’? Because our integrated business model is pretty rare in the UK.

Tomas Jurdak

33 Central, London

It was once and forever an exceptional milestone in HB Reavis’ history. The acquisition of an existing office building at 33 King William Street in the City. The views of the River Thames, St. Paul’s Cathedral and the Shard and a location only meters away from the Bank of England and right on London Bridge – this was supposed to become one of our landmark projects. And that is exactly what has happened. Demolition of the original building started in July 2014, construction itself one year later. In 2015, we decided on a ‘rebranding’ to 33 Central (21,105 m² of GLA).

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20 Farringdon Street, London

The existing office building at 20 Farringdon Street was acquired in October 2014 for GBP 29 million. The building already had valid planning consent in place for the redevelopment of 6,800 m² of new office GLA. The project has an excellent location in London’s mid-town, just a short walk from the headquarters of international companies such as Mizuho, Deloitte, Amazon and Goldman Sachs. After the acquisition, we decided to optimise the project’s concept and design in order to increase size and quality of floor space. Ultimately, we managed to achieve 7,743 m² of GLA, some 14% more than originally permitted size. We started the demolition of the original building in June 2015. The construction is progressing with some delays and we aim to complete the project in March of 2018.

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Cooper & Southwark, London

In April 2016, we acquired Cooper & Southwark, our first refurbishment project in London. The project’s location on the Southbank perfectly complements our existing Central London portfolio. The Southbank attracts tenants from various business segments such as accountancy, professional services and tenants preferring the location as a more economical alternative to the West End. With the acquisition, we secured development of 7,133 m² of office GLA. The cost of the acquisition was GBP 44 million. We aim to deliver the project to its tenants at year-end 2017.

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Poland’s economy lost some of its momentum in 2016. Estimates released by the government Central Statistical Office (GUS) at the start of this year indicate that Gross Domestic Product (GDP) grew at its slowest pace since 2013. This in spite of buoyant and even robust household spending (3.6%) on the back of an improving labour market, low inflation (although this was at its highest rate in four years) and government stimulus packages. Unemployment is down to 8.3% and indications show it is set to decline further. Consumers are taking full advantage of relatively low oil prices and strong credit growth. Exports are healthy. However, as in the rest of Europe, fixed investment has contracted due to reduced EU development funds, concerns over Brexit and uncertainties related to the heavy electoral year ahead in the region.

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Changes in Polish development property value (€m)

Warsaw

Stanislav Frnka

We love the Polish capital and Warsaw certainly seems to love us.

Once again, HB Reavis is the leading commercial developer in the city. We aim to stay on top, continually reinforcing our reputation for delivering top-notch quality projects. And then exiting them at the right time and for the right price. That is how we pursued the two largest transactions in the Polish office market by divesting Konstruktorska Business Center and the first phase of our Gdanski Business Center. We can now pump back the proceeds into even more landmark developments, such as the Foster+Partners designed Varso office project with the highest tower in Poland where we started construction in December 2016. The delivery to market of our West Station I saw the city’s office stock exceeding five million m² for the first time ever. Our sales team signed lease contracts for almost 43,000 m². If that was not enough, then the AON Hewitt survey awarded us the ‘Best Employer’ label. So you will understand why HB Reavis’ Polish team – and our clients – are feeling the love.

Stanislav Frnka

Gdanski Business Center D, Warsaw

We started construction of the last phase of our successful Gdanski Business Center – the 'D' building (29,800 m² of GLA) in June 2014 and it progressed according to our initial planning. We completed the building in May 2016. Currently, it is leased at 88% and occupied by tenants such BNP Paribas, Philip Morris and General Electric and we expect it will be fully leased at the end of 2017.

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West Station I, Warsaw

This project is a part of our joint venture with PKP and represents the first phase of the whole centre. Construction of West Station I (30,800 m² of GLA) started in the fall of 2014, and the project was completed and delivered to its clients in October 2016, exactly on the schedule. Around 93% of the project is currently leased and is already occupied by the PKP Group and Coface.

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West Station II, Warsaw

The second phase of the project, West Station II (37,900 m² of GLA), followed its older sister to completion six months ahead of the original schedule – the construction was launched in November 2015. We plan to complete the project and deliver it to the tenants in the fall of 2017. The building is currently (6 months before completion) leased at 38% and we expect it will be around 60% leased at the time of completion.

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Varso Place, Warsaw

We are finally making a start on our landmark project in Warsaw’s CBD. Varso Place (145,200 m² of GLA) received valid building permits just before the end of 2016 and we immediately launched construction. Our new flagship is a complex consisting of one office high-rise (230 metres without antenna) and two mid-rise office buildings, all rising from a common platform that will provide retail services to visitors and connections between the buildings. We are excited to work closely with Fosters+Partners, one of the world’s best architectural studios, on the optimization of the tower’s concept and design. We believe Varso will become not only our landmark project but also Warsaw’s.

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Burakowska 14, Warsaw

In July 2015, the Group acquired a 2 ha plot at Burakowska Street in Warsaw. The purchase price was €17 million and we plan to develop an office scheme with approximately 77,000 m² of GLA. The plot is located just opposite the Arkadia Shopping Center, one of the most successful in Poland. We are now in the middle of the product design stage and aim to deliver another remarkable office scheme here. It will be split into two phases and will consist of an office tower with a lively mixed-use ground floor and several low rise buildings. The scheme will be more open to the general public and carefully landscaped to provide space for several types of events. As the plot is located just few hundred meters from our very successful Gdanski Business Center, we believe this will be another success story and will contribute to evolving this part of the city into a modern district.

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Following an extraordinarily strong year in 2015, the Czech economy slowed significantly in the reporting year (2.5% against 4.7% in 2015). Similarly to other economies in the region, this is due to reduced EU investment inflows. The labour market is extremely tight with higher wages as inevitable knock-on effect. If upbeat consumer confidence, rapid industrial output growth and a strong order book are added to the mix, then expectations are that figures will rebound in 2017. Yet, it is not all good news. The stability of public finances remains uncertain. National elections for the lower chamber of the Czech parliament are scheduled for October 2017, with all 200 seats up for re-election. Also like many other countries in the EU, the Czech Republic has its own populist party that could play a significant role in any future government.

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Changes in Czech development property value (€m)

Prague

Petr Herman

It has been a busy year for our team in Prague.

In between divesting our landmark BREEAM 'Excellent' River Garden II-III project, leasing our Metronom Business Center to Abbvie, SAP and BMW, and delivering and subsequently disposing of our first Aupark Shopping Centre at Hradec Kralove, we also manage to pick up a couple of pretty prestigious CIJ awards. The jury awarded us Best Office Lease for our work with client SAP at Metronom. The Best Retail Development & Developer of the Year was thanks to our shopping centre. HB Reavis may not have been active in the Czech Republic for very long, but it seems we’ve certainly made an impression.

Petr Herman

Aupark Shopping Centre, Hradec Kralove

We completed our Aupark Shopping Centre in Hradec Kralove (22,700 m² of GLA), the first Aupark outside of Slovakia, exactly as planned. The grand opening took place at the beginning of November 2016, so the centre was ready for the Christmas season. At the opening, occupancy was over 80%, currently achieving 88%. As always with a new shopping centre, we are currently working hard to optimise the operation and to get it up to speed as quickly as possible.

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Vinohradska, Prague

The acquisition of an existing older office scheme with an excellent location at Vinohradska Street, just opposite the National Museum, was completed in August 2014. The plan was to redevelop it into a truly landmark office scheme with 22,600 m² of GLA. During 2016, we continued in work on optimising the concept and design of the scheme through the difficult and challenging permitting process. Although not always easy, in the meantime we have achieved some positive points which will allow us to progress the process. We believe construction could start around year-end 2017 or during the first quarter of 2018.

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Radlicka, Prague

During 2016 we worked on the concept and design of our fifth office project in Prague at Radlicka Street. The plot is well located in Prague’s Smichov at the one of most important arteries in the south-west of the city. We acquired it in March 2016 for €6.9 million with a plan to deliver around 28,500 m² of top class office GLA in around mid-2019.

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Aupark Shopping Centre, Brno

Our second retail scheme in the Czech Republic, the Aupark Shopping Centre in Brno, is still struggling with permitting. We are awaiting a positive change in the city’s master plan for the zone.

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Slovakia was once again among the Eurozone and CE’s strongest performers in 2016 in spite of a slowdown in GDP growth to 3.1% (2015: 4.2%). Inflation is accelerating due primarily to energy prices. The labour market is picking up and unemployment fell steadily throughout the year to around 8.8%. This has resulted in a return to higher levels of wage growth, a trend that is expected to continue. This optimistic environment has impacted the residential real estate market and there is currently a boom in mortgages. Fuelled by low interest rates and a rising labour market, residential prices rose a bearish average of 7% with the biggest demand in smaller one and two-bedroom apartments.

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Changes in Slovak development property value (€m)

Bratislava

Adrian Rac

In 2016, HB Reavis was included in Property EU’s top 10 largest office developers for the very first time.

In that time, we have become a market leader in this, our original home market. And rank high in a few others as well. But it was in Slovakia that we originally pioneered our Aupark retail concept and stunning office space solutions. Today, based on our long track record of innovation and excellence, the Slovak team is perceived as a highly creative trendsetter. Which is why in 2016, the team in Slovakia also earned Euromoney’s Best Real Estate Developer – Offices/Business; Best Real Estate Developer; and the PIE Europe Property Award for Investment of the year – Best Office Deal. Yes, we’ve definitely come a long way.

Adrian Rac

Twin City B, C, Bratislava

The construction of Twin City B (23,500 m² of GLA) was completed in March 2016. In line with the original schedule and agreements, the project was subsequently delivered to its almost exclusive tenant Swiss Re (21,800 m² of GLA, including options for future expansion).

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Twin City Tower, Bratislava

Construction of the Twin City Tower (34,700 m² of GLA) was launched in July 2016. This project, adjacent to the block of already completed A, B, and C buildings will complete one zone (A) of the Twin City area in the heart of the business district, just a few steps away from the historical city centre.

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Nivy Mall and Central Bus Station, Bratislava

Nivy Mall will clearly be a landmark project in a unique location. And that deserves unique solutions. In cooperation with London’s Benoy, the well-known architectural studio focusing on the design of top class retail schemes, we are aiming not only for a unique and large (73,000 m² of retail GLA) shopping complex but much more. We will create a concept that is sophisticated in its every detail. There will be around 3,000 m² for a market for fresh produce. There will be plenty of green areas inside and a green roof on top. We will also include a representative gateway to Bratislava with a fully integrated bus station (30,000 m²). We plan to deliver all this in 2020. Currently, we are preparing construction and plan to launch the build itself in July 2017.

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Nivy Tower, Bratislava

Nivy Tower, with around 31,200 m² of GLA, will be a remarkable office tower rising up out of the Nivy Mall. The tower will provide modern office space solutions for demanding clients and will be designed to BREEAM ‘Outstanding’ standard. The construction will be launched simultaneously with the Nivy Mall in July 2017 and its completion is planned for April 2019.

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Hungary’s macro-economic fundamentals have now been positive for the past three years. Although the GDP growth rate slowed slightly (to 1.9% against 3.2% in 2015) in the reporting year, growth in the coming year is expected to bounce back in 2017 to around 3.2%. As elsewhere in the region, the primary reason for drop in GDP is less funding from the EU. However, household consumption is up again (4.8%), driven by wage hikes following years of stagnation and growing employment which is set to reach new record levels in the coming years.

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Changes in Hungarian development property value (€m)

Budapest

Zoltan Radnoty

The competition was tough but tenants still voted our debut Hungarian development at Vaci Corner ‘Office building of the Year’ in 2015.

We had already earned a BREEAM Excellent rating for this fabulous asset. The latest accolade means we will be raising the bar when it comes to our new landmark AGORA Budapest. Our second project in the Hungarian capital was carefully chosen as we aim to continually set new standards in Budapest’s real-estate market. Permitting for two buildings out of the five was completed and the construction has started this spring on the plot.

Zoltan Radnoty

Agora, Budapest

For a full year from December 2014, we worked systematically on acquiring an interesting plot of land in Budapest. During the reporting year, we worked on fine-tuning the Agora concept and design with a leading British studio, Make architects. As this project with around 133,800 m² of GLA will significantly change this part of the city, we were cooperating closely with city representatives to create a truly iconic and remarkable design. With its five office buildings and spacious community areas, Agora Budapest will not only be a new city landmark but once completed will offer workspace for over 12,000 people.

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There were enough drivers for our decision that Berlin is our next new market.

We are looking at an overall positive macro environment in Germany. Berlin is highly attractive for young talent and new start-ups. Office vacancy is falling and demand for new space is very healthy. Initially, we planned to enter the market through the acquisition of an active local office development platform and we explored that option thoroughly. But in the end, we decided to follow our tried and tested method of market entry – setting up our own presence and building it up through organic growth, specifically based on intimate knowledge of the market. For example, Berlin’s reported total office stock is approximately 19 million m² of GLA. However, when looking at it more deeply, we believe the true modern office stock represents less than one third of that number.

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As part of our growth strategy, we began exploring the market in Turkey in 2013.

Although the Turkish economy slowed in 2014, after general elections in 2015, robust growth returned and 2016 began very positively. There was growing confidence in the business environment, supported by political stability, and there were signs of recovery in both the overall economy and in real estate. However, the series of events that began with an attempted coup in July had a severe effect on the economy and ultimately on the real estate market.

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10 Portfolio Overview

Managed GLA, of total 370,520 m²

Market value by country, owned assets of total €876m

Market value by segment, owned assets of total €876m

Country No. of projects Developed GLA (m²) Market value (€m)
Owned income-producing assets 11 305,024 692.3
Poland 4 117,758 337.5
Office 4 117,758 337.5
Czech Republic 2 77,542 108.9
Office 1 34,069 76.9
Logistics 1 43,473 32.0
Slovakia 5 109,724 245.9
Office 5 109,724 245.9
Assets managed by HB Reavis IM 3 65,494 183.7
Total 14 370,518 876.0

Note: Figures based on external expert valuations and management report.

In line with our strategy, the Group is focused on achieving and maintaining a balanced share of investment property and assets under development for the longer term.

We aim to achieve this through continual active divestment of matured assets. However, during the time we retain and manage the assets, we obviously aim to maintain them at top commercial and operational levels so that when we divest, we do so in the best achievable conditions. At the same time, and perhaps even more importantly, we also aim to focus on always providing services that exceed tenant and employee expectations, thereby maintaining long-term clients’ relationships.

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Group income
producing portfolio
GLA (m²) Valuation Rental
income
2016
ERV Equival.
yield
Capital
return
Rental
return
Total
return
2015 2016 2015 2016
AM portfolio from 2015 233,864 458.9 496.2 20.5 37.6 7.34% 6.99% 3.2% 4.5% 7.7%
Office 190,391 428.6 464.2 17.7 35.5 7.26% 6.95% 3.1% 4.1% 7.2%
Logistics 43,473 30.3 32.0 2.8 2.1 8.50% 7.50% 5.5% 9.2% 14.7%
Additions to portfolio in 2016 136,654 219.7 379.8 0.9 27.3 6.88% 6.41% 23.5% 0.4% 23.9%
Property exits in 2016 302,734 541.4 584.7 20.0 40.3 6.97% 6.71% 6.5% 3.7% 10.2%
AM portfolio for 2016 370,518 1,000.3 876.0 41.4 65.0 7.14% 6.73% 5.0% 4.2% 9.2%

Note: Figures based on external expert valuations and management report. The external valuations are not adjusted for IFRS adjustments that are taken into account in IFRS financial statements.

11 Investment Management

HB Reavis launched its Investment Management business in 2011. The goal is to create a platform for investors looking for exposure to real estate in Central Europe that leverages the Group's robust presence and proven track record in the region. The first fund has been up-and-running since 2011.

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11.57% p.a.

11.57% p.a.

Total return since inception
5.84% p.a.

5.84% p.a.

Cash dividend since inception

HB Reavis CE REIF – Fund performance

12 Financial review

Changes in real estate trends and in the way tenants perceive the way they occupy space present new challenges for our financial strategy. We are working hard to address those challenges in a proactive way.

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EBIT
€171.1m
Net profit
€107.5m
NAV
€1,220.6m
Shareholders’ return
6.9%
Net Debt Leverage Ratio
17.4%
Net rental income
€46.1m
Revaluation gain
€174.5m

At HB Reavis we are continually engaged in monitoring anticipating and analysing market trends and reviewing our financial strategy against any changes. Our aim is to ensure our financial strategy is fit for purpose and allows us to maintain a healthy capital structure while ensuring the availability of both new debt and new equity to support the Group’s growth ambitions.

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01

Balanced cash flow management matching nearterm recurring income and operating expenses as well as balancing long-term investments with sources of long-term funding

02

Careful risk management aimed primarily at mitigating foreign exchange and interest-rate risks associated with macroeconomic or property cycles

03

Target Gross Debt to Total Assets at 40% and Net Debt to Total Assets at 35% with an appropriate mix of non-recourse project debt and Group-level debt

04

Cash reserve target at 5% of the balance sheet with special reserve build-up profile to cover future debt-bullet repayments well in advance

05

Dividend pay-out in line with historical levels up to 3% of NAV

In terms of overall performance, in 2016 we delivered significantly lower financial results than in 2015. However, the fundamentals are strong as is our business result. Obviously, the main driver was a revaluation gain of €174.5 million over the year, down by 34% year-on-year (2015: €263.2 million). At €46.1 million, Net operating income was up slightly (2015: €44.6 million) while Result from disposal of subsidiaries increased somewhat to €16.9 million (2015: €13.6 million). Bottom line: we achieved a Net profit of €107.5 million (2015: €239.4 million). Our growing business also drove up growth in personnel primarily in Poland and UK, but we are also adding some head-office positions so that we are ready for further growth.

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EBIT
€171.1m
Net profit
€107.5m
NAV
€1,220.6m
Shareholders’ return
6.9%
Net Debt Leverage Ratio
17.4%
Net rental income
€46.1m
Revaluation gain
€174.5m

We delivered an operating profit of €235.3 million (2015: €302.5), which represents decline of 19% year-on-year.

Net operating income (€m)
46,1
Revaluation gains (Net of yield shift, €m)
107,7
Investment portfolio yield
6,17%

Group profit decomposition (€m)

Note: Figures based on consolidated, IFRS audited report; numbers are rounded.

In 2016, financial institutions were still very positive about real estate projects. The financing market environment offered reasonable conditions on loan-to-cost ratio, and pricing and the ability to deploy debt funding at earlier stages of the development phase were favourable. These conditions were the same across all our markets except for London, where the results of the British EU referendum prompted financial institutions to reconsider financing speculative office development.

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Cash flows (€m) 2011 2012 2013 2014 2015 2016
Cash beginning of period (BOP) 76.6 141.8 48.6 49.9 155.3 115.4
Operating cash flow 7.6 16.3 9.0 20.6 24.3 30.6
Land/property acquisitions 0.0 -143.0 -79.2 -56.7 -40.0 -76.0
Construction investments -101.7 -86.5 -112.6 -122.6 -215.5 -244.9
Land/property exits* 141.8 15.9 76.1 88.0 13.5 162.6
Other investments -16.9 -4.7 -8.2 -10.8 -8.1 -1.4
Investment cash flow 23.2 -218.3 -123.9 -102.1 -250.1 -159.7
Borrowings change 54.1 105.6 125.1 200.7 244.9 379.1
Dividends/equity contributions -19.7 3.2 -8.9 -13.8 -59.0 -49.0
Financing cash flow 34.4 108.8 116.2 186.9 185.9 330.1
Cash end of period (EOP) 141.8 48.6 49.9 155.3 115.4 316.4
Share of cash on total assets 11.3% 3.3% 3.3% 8.6% 5.5% 15.0%

Note: Figures based on management report.

*Land/property exits presented net of related investment loans repaid in relation to exit.

Financing activity is intended to support the Group’s core business lines by ensuring sufficient funding while maintaning both the long-term cost and tenor of borrowed capital at optimal levels.

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Debt maturity profile as of 31 December 2016 (€m)

*Excluding borrowings in JV.

The amount of capital raised and available for real estate is at record levels. This is driven mainly by the low interest rate environment and increased allocations to the real estate asset class. This helps investors diversify from the volatility in other asset classes and represents a source of long-term sustainable income for them. High demand and low supply of good quality real estate products has put downward pressure on yields leading to decreasing spreads between real estate returns and government bond yields.

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The Group is exposed to the risks that are part of the general commercial environment as well as to various risks that are specific to our business.

An inherent part of the Group’s business management is the emphasis on identification and monitoring of all relevant risks. Where possible, we deploy proactive mitigation tools to manage any risks that could have a material impact on our business. As a SWOT analysis of our business shows, the majority of weaknesses and threats are the focus of our comprehensive risk management.

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S

Strengths

  • Diversification across markets and locations
  • Efficient construction procurement
  • Strong office product design know-how and experienced team
  • Proven ability to deliver high quality buildings on all Group markets
  • Proven ability to divest property assets on all Group markets
  • Strong financial track record and credibility with banks and investors
W

Weaknesses

  • Robust growth in recent years has put some pressure on some operational processes
  • Less than optimal leverage of Group balance sheet
O

Opportunities

  • Strong demand in Bratislava and Budapest
  • Strong leasing activity in Warsaw and Prague
  • Increased leverage through sustainable and diversified funding sources – loans and bonds
  • Accelerated know-how transfer and implementation in markets outside CE
  • Acceleration of leasing through higher engagement with clients
  • Higher efficiency through successful implementation of new processes
  • Leadership in setting office trends
T

Threats

  • Further prolongation of oversupply in office markets in Warsaw intensifies pressure on rents
  • Not enough opportunities to redeploy Group capital that would meet our Group risk-return expectations
  • Uncertain environment on London market due to Brexit
  • Unexpected shock on financial markets
SWOT Analysis

13 Our responsibility

Corporate Social Responsibility (CSR) has been part of our business from the very beginning. We were the first to bring BREEAM to Central European commercial real estate and are pioneering the notion of buildings as areas of ‘well-being’ for users. In our own organization, we have created a corporate culture in which sustainability and responsibility have become an integral part of everything we do.

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Sustainable buildings – highest quality solutions

Sustainable buildings – highest quality solutions

At HB Reavis we try to address any environmental challenges while finding solutions that meet not only client requirements but also our sustainability goals. Our clients increasingly demand sustainable spaces with energy efficient operational and maintenance costs. We want satisfied clients.

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From brownfield to living spaces

From brownfield to living spaces

Throughout our history, HB Reavis has acquired numerous abandoned and run-down areas and has developed them gently so that once again they become vibrant and useful sites where people can live and work. And we continue to do so.

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Business wise, CSR has evolved into a natural part of our vision and strategy. We want to bring remarkable experiences to people’s lives through our real estate solutions. That is why we aim to create something unique and innovative, something our clients and the communities we serve do not expect from a real estate developer.

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BREEAM
'Very Good'
  • City Business Center III-V
  • River Garden I
  • Konstruktorska Business Center
  • Gdanski Business Center A - B
  • Aupark Hradec Kralove
  • Nivy Mall
  • Cooper & Southwark
BREEAM
'Excellent'
  • Forum Business Center I
  • Vaci Corner Offices
  • River Garden II-III
  • Metronom Business Center
  • Postepu 14
  • Gdanski Business Center C - D
  • West Station I-II
  • Twin City A, B, C
  • 33 Central
  • 20 Farringdon Street
  • Vinohradska
BREEAM
'Outstanding'
  • Twin City Tower
  • Twin City next phases
  • Nivy Tower
  • Radlicka
  • Burakowska 14
  • Varso Place
  • Agora

14 Awards

World Finance - HB Reavis Group
Best Office Developer
CoStar Agency - United Kingdom
Best Newcomer 2016
AON - Poland
Best Employer 2016 in Poland
CIJ - Poland
Leadership of the Year
CIJ - Czech Republic
Best Retail Development & Developer of the Year
CIJ - Czech Republic
Best Office Lease of the Year
Euromoney - Slovakia
Best Real Estate Developer – Offices/Business
Euromoney - Slovakia
Best Real Estate Developer
PIE Europe Property Awards - Slovakia
Investment of the year – Best Office Deal

View or download our annual reports

Find out how we performed in previous years. Have a look at our financial highlights or download whole annual reports in PDF