Q: What is the inter-company financing mechanism?

A: NEPI Rockcastle’s financing strategy combines equity and debt, with a preference for unsecured debt (such as bonds or revolving facilities). The Group’s strategy is to minimise secured debt in order to maintain the majority of assets unencumbered (73% as at 30 June 2018) and  further improve its credit ratings. Secured debt is contracted when its cost of funding is lower than the Group’s average cost of funding, or when joint venture contracts require contracted debt at the level of the subsidiary (as agreed with joint venture partners).
Equity is raised by NEPI Rockcastle plc and unsecured debt (bonds or revolving facilities) is raised by NE Property Cooperatief UA, a wholly-owned subsidiary of NEPI Rockcastle plc in the Netherlands. The local companies (SPVs) are financed by the Dutch financing entity through a combination of equity and unsecured intra-group debt. Third party secured debt is contracted at the level of the SPVs.

Q: How is the intra-group interest rate determined?

A: When pricing intra-group loans, NEPI Rockcastle follows the recommendation of OECD Transfer Pricing Guidelines and best international transfer pricing practices. The interest rate is based on transfer pricing studies that factor in the various characteristics of the intra-group loan, such as the amount of the loan, its maturity, the unsecured nature of the loan, level of subordination to other debt, geographical location of the borrower and the related risk, the currency, any collateral or guarantee provided, whether the interest rate is fixed or floating, etc.
NEPI Rockcastle’s intra-group loans are EUR denominated, fixed rated, subordinated to third party debt, unsecured, with no additional costs such as administrative fees or penalties for early or late repayment. The intra-group interest rate is not comparable to the mortgage rate, as the characteristics of the intra-group loans are significantly different from the characteristics of mortgage loans.
NEPI Rockcastle is comfortable that the interest rates used for intra-group funding purposes are in compliance with local tax legislation and transfer pricing regulations, and withstand the scrutiny of tax authorities.

Q: What portion of the interest expense is tax deductible in Romania?

A: Interest expenses are deducted for tax purposes in accordance with local tax legislation. All Romanian SPVs applied the following tax deductibility rules for financing costs, in accordance with the Romanian Fiscal Code:
  • in 2016 and 2017: interest expenses related to the intra-group loans denominated in EUR were deducted for tax purposes at 4%, provided that debt-to-equity ratio was lower than or equal to 3:1. If the debt-to-equity ratio condition was not met, the entire interest and related net foreign exchange losses were non-deductible, and carried forward indefinitely with a possibility to deduct for tax purposes when thin cap rules are met. Interest expenses and the related net foreign exchange losses related to bank loans were fully deductible.
  • in 2018: the deductibility of interest expense was limited to EUR 200,000 plus 10% of adjusted EBITDA for both intra-group and bank loans, including the related net foreign exchange losses.

Q: What documentation is in place for intra-group transactions?

A: All intra-group transactions are based on contracts outlining the terms and conditions and the legal framework.

Transfer pricing files, documenting the observance of the arm’s length principle with respect to intra-group transactions (including loans), are prepared annually in accordance with the transfer pricing regulations applicable in each jurisdiction where the Group operates. These files are prepared with the assistance of transfer pricing specialists, including Big4 firms and other experienced and reputable tax advisors.

Q: Were there any tax audits during the last two years and if yes, what was the outcome?

A: The tax authorities in various jurisdictions where the Group has a presence have reviewed various intra-group loans as part of tax audits, including inspecting contracts and any other supporting documentation such as transfer pricing files. In the last two years, some of the Group’s Romanian subsidiaries have been subject to various VAT tax audits and no issues were raised. In 2017, two Romanian subsidiaries were subject to tax audits covering corporate income tax, including deductibility of interest expenses, with no adverse findings.

Q: Can you provide details on the quantum of net rental income versus finance income recorded at consolidated level?

A: The net rental income generated by the properties in each country for the year ended 31 December 2017 is set out on page 179 of the 2017 Annual Report (https://www.nepirockcastle.com/wp-content/uploads/2018/03/NEPI-Rockcastle_Annual-Report_2017_online.pdf).

The consolidated finance income is shown in the consolidated Statement of Comprehensive Income and in Note 29 included in the 2017 Annual Report, and amounts to €2.5 million. This amount excludes the impact of intra-group balances and transactions, which are eliminated in the consolidation process.

Q: How does the Group consolidate cash and cash equivalents from subsidiaries? Are the subsidiary balances equivalent to the consolidated cash amounts or are there any accounting differences?

A: The consolidated cash and cash equivalents represent the aggregated cash balances of all the Group’s subsidiaries. There are no accounting adjustments in relation to cash and cash equivalent balances.

Most of the cash balances are held by holding companies, in euro.

Cash held by subsidiaries is mainly used to settle operational costs, development costs and taxes.

Q: Is any of the cash restricted? 

A: For cash management purposes, the Group considers the following to be restricted:

  • the cash held by those subsidiaries that have limitations regarding free cash flow distributions to the holding company (NEPI Rockcastle plc). These limitations typically arise from obligations assumed in secured loan agreements, such as the obligation to present information to the lenders for approval of distributions of excess cash to the holding company;
  • the cash held by joint ventures, as the distribution of cash to the holding company requires the joint venture partner’s approval (Nota Bene: this is already excluded from IFRS consolidated financial statements, as joint ventures are accounted for using the equity method); and
  • cash held in escrow accounts.

As at 31 December 2017, restricted cash amounted to €10 million, out of the total cash balance of €196 million.

Q: What is the amount of cash at the holding companies level compared to the operating subsidiaries?

A: The holding companies retain most of the cash balances of the Group, due to their direct sourcing of unsecured revolving facilities and access to capital markets. As per Note 34 of the 2017 Annual Report, out of the total cash balance at 31 December 2017 of €196 million, the cash balance in holding companies was €111 million, while cash held in operating subsidiaries was €85 million.

Q: Why was the goodwill from the merger of NEPI and Rockcastle fully written off within six months from the transaction?

A:  As disclosed in the 2017 consolidated financial statements of NEPI Rockcastle, from an IFRS 3 perspective, the merger between NEPI and Rockcastle was treated as an acquisition by NEPI of Rockcastle, with the goodwill generated as the difference between the actual value of the Rockcastle group (total equity at June 2017 – € 1.44 billion) and the consideration paid to acquire the business, which was based on NEPI’s trading share price at the date of the merger (€ 2.32 billion). At the time of the merger, NEPI and Rockcastle shares were trading on the JSE at a premium to net asset value, therefore generating a gap of € 0.88 billion between the value of NEPI Rockcastle shares issued and Rockcastle’s net asset value. The accounting of this transaction would have normally increased the balance sheet by the generated goodwill of € 0.88 billion, and the NEPI Rockcastle Group would have had a significant difference between its net asset value and adjusted net asset value. In accordance with IFRS 3 – Business Combinations, the acquirer (NEPI) has the ability to fair value its acquisition and adjust the goodwill recorded for a period of one year from the date of combination.

This fair valuation took place at 31 December 2017. At the same time the Company fair valued all assets and liabilities in the Group’s balance sheet. The goodwill on the acquisition of the Rockcastle group has been reconsidered and impaired through the year’s profit and loss, since all elements in the balance sheet are fair valued.

It should be noted that the write-off of goodwill in NEPI Rockcastle’s financial statements subsequent to the merger is consistent with the accounting treatment adopted and disclosed in NEPI Rockcastle’s prospectus issued on 9 June 2017. The consolidated pro forma financial information is set out in Annexure 18 of the prospectus. Note 9 to the pro forma consolidated statement of financial position states: “According to NEPI Rockcastle’s accounting policy, goodwill is measured at cost less any accumulated impairment losses and goodwill is tested annually for impairment. Goodwill arising from the transaction is expected to be impaired and an impairment of EUR739.38 million is recognised. The additional goodwill arising from the merger transaction of EUR739.38 million is assumed to represent the future potential increase in fair value of the acquired portfolio of properties but is not expected to be recoverable through the sale of the assets and liabilities as the assets and liabilities are measured at fair value in the financial statements of NEPI Rockcastle. NEPI Rockcastle expects, subsequent to the goodwill impairment through profit and loss, to transfer the loss arising from the goodwill impairment to share premium, off-setting the effect of the impairment charge within accumulated profit.” The Group notes that such an accounting treatment is not unique, as presented by the Report, as such a treatment has also been applied in the Unibail – Rodamco merger (€1,335 million) as well as Klepierre – Corio merger (€704.5 million).

Q: What do the impairment of investments of €300 million and impairment of loans to subsidiaries of €586 million, following the NEPI Rockcastle merger, disclosed in the Annual Report 2017, refer to?

A: These impairment adjustments are included only in the stand-alone financial statements of NEPI Rockcastle plc, and not in NEPI Rockcastle’s consolidated financial statements.

NEPI Rockcastle complies with the JSE Listings Requirements, and therefore includes in its Annual Report the stand-alone financial statements of NEPI Rockcastle plc, prepared in accordance with IFRS. These financial statements present the financial position and transactions of the Group holding company, NEPI Rockcastle plc, and therefore include intra-group transactions and balances. As per IFRS, intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated when preparing consolidated financial statements.

Pursuant to the merger in July 2017, the assets and liabilities of Rockcastle Global Real Estate Company Limited (“Rockcastle”) were transferred to the new parent company, NEPI Rockcastle plc, in exchange for newly issued NEPI Rockcastle shares. The key assets of Rockcastle were investments in subsidiaries and intra-group loans. It is not a customary practice to recognize goodwill at a stand-alone level, as goodwill is a common adjustment for a business combination.  As NEPI Rockcastle paid the consideration for the assets and liabilities acquired from Rockcastle, the impairment of goodwill at the consolidated group level, of €0.88 billion, is reflected in the stand-alone accounts by impairment of investments in subsidiaries and loans to subsidiaries..

Q: What is the rationale for the differences between the IFRS consolidated financial statements of NEPI Rockcastle and the aggregation of the Romanian statutory financial statements of each subsidiary?

A: NEPI Rockcastle prepares its consolidated financial statements in accordance with IFRS, showing the position and the transactions of the Group with third parties, and excluding any intra-group balances and transactions.

The information included in the stand-alone statutory financial statements submitted to local authorities are prepared based on the local GAAP requirements and present the position and transaction of the entity with all partners, irrespective of whether they are part of the NEPI Rockcastle group or not. Thus, the stand-alone statutory financial statements include intra-group balances and transactions. The main differences between IFRS and local GAAP applicable to NEPI Rockcastle are:


Accounting item Romanian GAAP standalone financial statements, prepared in local currency (RON) IFRS consolidated financial statements, prepared in reporting currency (EUR)
Valuation of investment property Valuation gains are recorded directly in the equity reserves.
Valuation losses are accounted for as part of the equity up to the cost price of the property. Once fair value decreases below cost, further impairment is recognised in the Income Statement. Any subsequent recoveries of the loss are recognised in the Income Statement up to cost price, with further surpluses recorded directly in equity.Valuations are not mandatory unless there are significant change in market value and should be performed at least every 3 years. However, adhering to best practices, the Group policy is to perform more regular valuations of its Romanian properties.
Valuation gains and losses are recorded exclusively in the Income Statement.

Valuations are done semi-annually, for all income-producing properties and land.

Depreciation of properties Investment property is depreciated over its useful life, set in accordance with statutory rules. The fair value model (IAS 40) is used, which prohibits the depreciation of assets. There is therefore no impact from depreciation on the Income Statement.
Investment property capitalised interest Interest related to funding development costs is capitalised at the rate that the relevant SPV obtains funding, subject to compliance with specific legal conditions. Interest related to funding development costs is capitalised at the average Group cost of debt.


Intra-Group transactions Intra-Group transactions are included in standalone financial statements. Intra-Group transactions are excluded on consolidation.
Foreign exchange differences All loans payable by the SPVs are denominated in EUR, which can generate significant unrealised foreign exchange differences versus RON. These are recognised in the Income Statement (as revenue or an expense, depending on the nature of the fluctuation in exchange rates) The functional and reporting currency of the group is EUR, therefore no foreign exchange differences arise from revaluation of EUR loans to local currencies.
Business combinations Not applicable for standalone reporting purposes, as from the SPVs perspective there is no change in accounting if its shareholders change. Newly acquired SPVs are accounted for only starting from the date the Group acquired the respective entity. Also, the SPVs’ equity is netted off in the consolidation process against the participation held by the holding entity, irrespective of the jurisdiction where the parent is located.
Deferred tax Deferred tax expense is not recognised. Deferred tax must be recognised and disclosed.
Accounting for joint ventures Statutory accounting takes into consideration 100% of the balances and transactions of all entities, irrespective of the percentage held by each of its shareholders. Joint ventures are accounted for using the equity method, by cumulating the percentage of the balances and transactions corresponding to the percentage of the venture held by the Company in ‘Investment in joint ventures’, ‘Long-term loans granted to joint ventures’ and ‘Profit from joint ventures’.
Interest rate derivatives (hedging) Premiums paid for cap derivatives are amortised over the period of the contract. Cap instruments are recognised at fair value through Income Statement, without amortising the premium paid.

Q: How does the IFRS Profit before tax in the IFRS consolidated annual report reconcile with the aggregated Profit before tax from the statutory filings in Romania?

A: The reconciliation of profit before tax for the Group’s Romanian portfolio, from the aggregated stand-alone financials to IFRS consolidated financial statements for the year ended 31 December 2017, is presented below:

Statutory loss before tax in Romanian subsidiaries, excluding joint ventures (54.6)
Add fair value gains from valuation of investment property (recognised in the Statement of Comprehensinve Income for IFRS; recognised as equity reserves in Romanian GAAP) 133.0
Exclude effect of intra-Group transactions (mainly finance expenses) 120.8
Exclude effect of depreciation expense (only recognised in Romanian GAAP) 40.9
Exclude exchange rate differences (recognised for Romanian GAAP purposes; irrelevant for IFRS as EUR is the functional currency) 37.5
Other accounting treatment differences 7.3
IFRS consolidated profit before tax 284.9

Q: Please provide more information on the property valuation process

A: NEPI Rockcastle updates the valuation of its property portfolio twice a year, with fair value being determined by external, independent professional valuers with appropriate and recognised qualifications, and experience in the locations of properties being valued. All valuers are members of the Royal Institute of Chartered Surveyors and apply global valuation standards required by the profession. Valuations for each property in all categories (Investment property in use, Investment property held for sale and Land held for developments), as at 30 June 2018 were performed by Cushman&Wakefield and Jones Lang LaSalle. All properties are inspected annually, in accordance with RICS requirements. Valuation experts confirm their independence every year by assessing, among other criteria, that the proportion of annual fees received from the Company is less than 5% of their group turnover.

All investment properties in use are valued using the Income Method, mostly utilising the discounted cash flow (DCF) method. The DCF method involves the projection of a series of cash flows generated by a real estate property, discounted at an appropriate, market-derived discount rate.

Detailed tenancy schedules are made available to the valuers, including information on occupied and vacant units, unit areas and numbers, lease commencement and expiry dates, break options, and indexation clauses. Periodic cash flow is typically estimated by experts as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance costs, agent and commission fees, and other operating and management expenses. Explicit adjustments are made for letting voids, empty service charge, letting fees, fit-out contributions and irrecoverable operating costs. The series of periodic net cash inflows, combined with the estimated terminal value anticipated at the end of the projection period, is then discounted.

Land used for developments is valued using the sales comparison or residual approach, and additions from construction works are held at cost. When the development is completed, the entire project is valued using the Income Method/DCF.

The valuations are made under the assumption of best use of the properties, in the context of the market. In this respect, the valuers used assumptions based on factors such as market context, age of the asset and location. They may require a management assessment of specific variables, but in most cases the valuers rely on self-assessments. The individual valuation reports are reviewed by PwC, the Group’s auditors, as part of the annual audit.

The Group’s finance department includes a team that reviews the valuations performed by the independent valuers for financial reporting purposes. This team reports directly to the Chief Financial Officer (CFO) and the Audit Committee (AC). Discussions of valuation processes and results are held between the CFO, AC, the valuation team and the independent valuers twice a year.

At each financial year-end the finance department:

— verifies all major inputs to the independent valuation report;

— assesses property valuation movements when compared to the prior year valuation report;

— holds discussions with the independent valuer; and

— reports to the Audit Committee on the results of the valuations.

Q: What is the Group’s days sales outstanding ratio? How does the group compute the 99.9% collection rate as at 31 Dec 2017 and 30 June 2018?

A: The 2017 Annual Report includes a comprehensive analysis of the Group’s receivable balances in note 6.1 to the financial statements (Credit Risk). The analysis shows that the majority of receivables balances as at 31 December 2017 were not due (€26.6 million of the total tenant receivables of €34.0 million).

Based on the 2017 financial statements, the Group collects its tenant receivables in approximately 29 days on average; this ratio is computed by dividing average tenant receivable balances to revenues from rent and expense recoveries, and excludes VAT receivables (as they are related to development costs, not to tenant income, and are recovered from the state in accordance with local laws). For Romania, days sales outstanding ratio was 33 days for the year ended 31 December 2017.

The exposure to credit risk is mainly influenced by the tenant’s individual characteristics. The Group’s widespread customer base reduces credit risk. The majority of rental income is derived from type A tenants (large international and national tenants; large listed tenants; government and major franchisees and companies with assets and/or turnovers exceeding €200 million), but there is no concentration of credit risk with respect to trade debtors. Management has established a credit policy where new customers are analysed individually for creditworthiness before standard payment terms and conditions are offered. When available the evaluation includes external ratings.

The Group assessed its receivables for impairment and concluded that a net amount of €103 thousand was considered unlikely to be recovered in respect of revenues for 2017, therefore an allowance for doubtful debts was charged to the Statement of comprehensive income. The 99.9% collection rate is computed by comparing this allowance for doubtful debts for the year to revenues from rent and expense recoveries for the same period (€337 million).

The Group has strict collection procedures and this process is proactively managed. The Company’s asset management team closely monitors tenants and their effort rates, so as to prevent tenants’ defaulting. All provisions are assessed individually and are regularly followed up.

Q: How does PricewaterhouseCoopers conduct their audit?

A: PricewaterhouseCoopers (“PwC”) is the Group’s auditor and reports directly to the  Audit Committee. As detailed in the audit opinion included in the 2017 Annual Report, PwC has confirmed their independence, has continuous unrestricted access to communication within the Group, and conducted their audit in accordance with International Standard on Auditing (ISAs) and relevant ethical requirements.

The audit report on the Group’s consolidated financial statements is issued by PwC Isle of Man, after having reviewed the work of the PwC offices in the jurisdictions where the Group operates. Local audit work is required as the various jurisdictions where the Group operates have differing laws and regulations, including accounting and tax rules.

PwC performs over 15,000 hours of review and audit work annually on NEPI Rockcastle. The local PwC offices audit the standalone IFRS financial information of the subsidiaries, for the purpose of issuing an audit report on the consolidated financial statements of the Group, prepared in accordance with IFRS. They also perform audit of statutory financial statements (prepared in accordance with local accounting standards) for some subsidiaries where this is required by local legislation; the criteria is usually based on size of the subsidiary’s activity, in terms of assets, revenues and number of employees, but can be also driven by specific requirements (e.g. for Hungarian subsidiaries, if they are consolidated for group purposes, then they are required to be audited for statutory purposes).

Q: What were the fees received by PwC from NEPI Rockcastle in 2017?

A: Fees incurred in 2017 with PwC were as follows:

Audit services 759,785
Other assurance procedures, including work related to issuing comfort letters for the EMTN program and independent reporting accountants work in respect of the merger between NEPI and Rockcastle 247,286
Advisory and consultancy services 74,140
Total 1,081,211

Q: Are there any other firms involved in the Group’s audit?

A: For group reporting purposes, all subsidiaries were audited by PwC in 2017, except for:

  • Rockcastle Global Securities, which was audited by BDO, Rockcastle’s former auditor, due to their knowledge in relation to thelisted securities portfolio; this subsidiary will be audited by PwC in 2018;
  • Ploiesti Shopping City, a joint venture with Carrefour Property, which was audited by KPMG (Carrefour’s group auditor).

For statutory reporting purposes, audit requirements are driven by local regulations. For the entities which required statutory audits, all but the two subsidiaries mentioned above and four other non-property-owning subsidiaries (service companies) were audited by PwC. For 2018, all property-owning subsidiaries except for Ploiesti Shopping City will be audited by PwC.

Q: How is the listed securities portfolio accounted for and presented in the financial statements?

A: The listed securities portfolio is measured at fair value being the quoted closing price at the reporting date and is categorized as a Level 1 investment, according to IFRS 13 – Fair value measurement. Realised and unrealised gains and losses arising from changes in the fair value of these investments are recognised in profit or loss in the period in which they arise. Attributable transaction costs are recognised in the statement of comprehensive income as incurred.

At 30 June 2018, the listed securities portfolio included physical shares with a fair value of €300.1 million presented as Financial investments at fair value through profit or loss within the Consolidated Statement of Financial Position.

The equity derivative collateral of €76.8 million represents the cash held at Prime Brokers and provides the Group with gross exposure to equity derivative swaps.

The Group’s equity derivatives swaps had a net fair value of €4.9 million from Financial assets at fair value through profit or loss of €6.1 million and Financial liabilities at fair value through profit or loss of €1.2 million.

Within the Consolidated Statement of Comprehensive Income, the Income from financial investments at fair value through profit or loss of €29.6 million included the gross income from dividends that the Group earns on the gross exposure netted off with the interest expense on the gross liability. The Fair value and net result on sale of financial investments shows the change in fair value of the financial instruments as well as the net result on sales of such instruments.