The former CEO of NEPI Rockcastle’s Group – Alex Morar, leaves behind a “made in house” PROFIT for 2021. Huge risk for small investors


Reporter Finweek: “Another year has passed and all they have” (e.n.: NEPI) are the doubts of the stakeholders regarding the way they have obtained and presented the financial results for the year ended as at 31.12.2021.

 With your help we will manage to find out and explain these “financial tips&tricks” of NEPI’s Group and to discover: 

  1. How a company can be a loss maker of more than EUR 200 million at Group level in 2020 and reach a profit of 261 million in the following year, 2021.
  1. How a company can have the Profit amount higher than the Turnover, although at a first glance this may be impossible.

Dr. Kristine Bago: Financially speaking, we have the following case:

 2020: Group level – CEE: (9 countries)

 SOURCE: Annual Report 2020_page 221

  1. Financial result – LOSS = EUR 202,402,000. (5)

2021: Group level – CEE: (9 countries)

SOURCE: Annual Report 2021_page 226

  1. Financial result – PROFIT = EUR 261,986,000. (5)

Anyone who wants to see the level of wealth regarding a business, and I am referring at any stakeholder – represented by any part interested on the financial information provided by the entity (e.g.: investors, creditors, banks, shareholders, suppliers, customers, employees, etc.) looks first to the financial indicator EBITDA, which shows the profit before deducting the depreciation, the interest, the income tax expense, representing the amount that comes directly from the operating level – company’s activityto which is then added the net result from financial investments, adjustments to the fair value of real estate investments, net financing costs, (for the loans acquired by the company) other adjustments related to financial instruments (derivatives, etc.), joint ventures, etc.

Also, I want to add that in some Local GAAPs (especially those of French inspiration), it is not required to compute this financial indicator – EBITDA (the Operating Profit), but as I mentioned, it is very important for any entrepreneur to know its value, having a strategic role in the financial management of any company.

In the financial reporting as per International Standards (such as IFRS), EBITDA is mandatory.

Reporter Finweek: So, if this indicator – EBITDA, has decreased by 5,7% in 2021 compared to 2020, when Nepi’s Group recorded a loss of over EUR 200 million, how is it possible that the final result reported for 2021 to be a profit of EUR 261 million? If the gross income / operating profit (EBITDA) decreased by 3%, respectively 6%?

Dr. Kristine Bago: Correct, as you can see in the printscreen above, the first line in red is the one related to the gross rental income, which in 2021 decreased by 2.74%. (1)

 Follows EBITDA (2) that decreased by 5.7% compared to the previous period.

 As mentioned above, there are several non-monetary components that can be added to EBITDA (the Operating Profit), such as those set out above, which may influence the final amount of the reported profit, although this is not the amount to be taken into account when we want to know how a business has actually performed in a certain period.

In fact, the final profit should be seen as a trash basket where everyone can “throw” several objects, but not everything that is inside is useful.

And these non-monetary elements that go into this basket after the operating profit (EBITDA) may not necessarily guide us from the financial point of view, because we are not completely sure that they will become reality, given the fact that they come from some sort of mathematical models, cash forecasts – as in this case.

First, at the base of the profit concept we have the turnover, that results from the activity of any company established.

Starting from this concept, I have compared below the net rental income, but also other related income for both reporting years ended as at 2020&2021 – for Romania, but also the gross income registered at Group level, and the related financial results. because theoretically, if there is such a big variance between the results of 2 reporting periods (loss and then profit), this difference should come from a healthy increase, such as turnover’s increase, i.e., in this case, of the rental income and / or decrease of major expenses.

Reporter Finweek: But if I look in the table, exactly as I said above, given the health and economic crisis we are going through, the Turnover per Nepi’s Group did not increase in 2021, as expected – moreover in this field, recording a decrease of 3%, (almost EUR 10.4 million) as well as EBITDA, (the Operating Profit) which decreased by 6% (almost EUR 17.2 million).

 Reporter Finweek: My question, but also the readers’ curiosity, is the following:

How did Nepi Rockcastle Group manage to end the financial year as at 31.12.2021 with profit, given the decreased levels of the financial indicators mentioned above?

Dr. Kristine Bago: What turns the financial result of the period ended as at 31.12.2021 in a profitable one, is represented by the line “Fair value adjustments of investment property” in amount of EUR 34,650,000. (vs. 2020: 345,253,000 EUR) (4)


The financial statements line represented by “Fair value loss and net result on sale of financial investments at fair value through profit or loss” null in 2021. (vs. 2020: –93,767,000 EUR)

Reporter Finweek: That is a total of -439,020,000 EUR for 2020 (which is completely missing in 2021), representing almost all the difference presented by you in the table above with the financial results of the last 2 years and the differences related.

But what do these 2 lines represent?


Dr. Kristine Bago: True.

The first line represents a trading transaction made in November 2020, when the Group sold its entire portfolio of listed securities consisting of Unibail-Rodamco-Westfield (“URW”) shares, due to high prices of URW stocks at that time. The proceeds resulted from the sale of URW shares were used to repurchase some NEPI Rockcastleshares, which were subsequently canceled.

This transaction is considered as a write-off (for Nepi’s shares) and one-off transaction, not being considered as a regular one, therefore it is stipulated in this category Net Income from Financial Investments for 2020, outside EBITDA. (the Operating Profit)

This transaction is not a part of Nepi’s Group business activity, because the main income of the Group comes from the rental of their premises, not from the sell of any shares acquired.

This is the reason why we can’t rely on existing figures in these non-monetary categories in the future, because they are not a part of the business activity, and there is a high risk for any positive amounts (representing profit) to have no continuity in the future, being too volatile – by representing only one-off transactions.

However, at the time when they occurred, according to International Reporting Standards, the amount of the final profit is influenced by them.

The second line – and the most important, in my opinion, is represented by the adjustments to the fair values ​​of the real estate investments.

The fair value of real estate investments is based on rental details that are made available to appraisers, including information on fully booked and free units, area and number of units, lease start and end dates, suspending and indexing options.

All properties are inspected by external appraisers once a year.

All real estate investments in use are valued using the income method in Nepi’s case. For the period ended as at 31 December 2021 and the year ended as at 31 December 2020, respectively, the applied method used for all real estate investments in use was the discounted cash flow (‘DCF’).

DCF uses assumptions about the benefits and liabilities over the life of the asset, including an exit or final amount.

Reporter Finweek: But the term “assumption” is not necessarily equal to something that will become 100% real, as far as I know…

Dr. Kristine Bago: True, that’s why I said that these non-monetary elements that go into the “bucket” after the Operating Profit, are not necessarily elements that can guide us to have a fair financial overview of any company’s business activity, because we are not completely sure that they will become reality, given the fact that they come from some mathematical models, cash projections – in this case or one-off transactions. (as ocurred for the first line presented above)

As accepted under the Income Valuation Method, the DCF method involves the forecasting of a series of cash flows on a real estate interest. For these series of forecasted cash flows, an appropriate market-derived discount rate is applied to determine the present value of future inflows associated with the property.

The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent review, lease renewal and lease periods, new leasing, refurbishment or restoration.

The proper period is usually determined by market behavior.

Reporter Finweek: Again, a volatile element – especially in our times, the behavior of the market can change suddenly, or it can be changed suddenly even by the authorities, by setting up new restrictions.

Dr. Kristine Bago: Exactly.

In the real estate investments case, the periodic cash flow is usually estimated as gross income less free spaces, sunk costs, collection losses, rental incentives, maintenance costs, commissions, but also other operating and management expenses.

The series of net periodic inflows, combined with the estimated exit value at the end of the projection period, is then updated. For all real estate investments in use, current use is equivalent to the largest and best use.

Reporter Finweek: As a briefing, this line of adjustments of the fair value of real estate investments – that in 2020 brought down the Nepi’s Group financial result, in 2021, it “helped” them to achieve the desired profit, although the Turnover and Operating Profit ( EBITDA) decreased in 2021 compared to 2020.

What about the question regarding the case for Romania? 

How can be the amount of the Financial Result – Profit higher than the Turnover?

Dr. Kristine Bago: The answer is similar to above – all these non-monetary aspects that make up the “bucket” with profit, as I stated above for Group level.

Reporter Finweek: Creativity, a highly developed skill for NEPI at any level…

I notice that the profit in Romania is higher than the turnover, which leads us to a question mark over the accuracy of this indicator, but also on the reality of its scenario, because according to your table it increased by 1174% in 2021 vs 2020.

Dr. Kristine Bago: Considering that the revenues amount in Romania increased by only 5%.


Reporter Finweek: And I am saying this taking in count also the fact that 2021 was the second year of the pandemic crisis, with lockdowns, the last part of the year I think it was influenced also by the impact of the ban on non-vaccinated people to enter in the malls… 

How is it possible to grow so much when the whole ecosystem around you is falling? 

Dr. Kristine Bago: If you have a “good” pen, it’s possible …


Also, another fact that reveals some issues over this company is the appeareance of some expenses with a lost litigation in amount of EUR 37,304,000. (vs. 0 in 2020) (6)

Reporter Finweek: Is there another reason maybe, besides the ones mentioned above, that made NEPI to report this financial result for 2021?

Dr. Kristine Bago: Yes, and the “reason” has recently appeared, as per a press release: (February 2022)

“ING Bank has been involved in a new € 500 million green bond issues for NEPI Rockcastle Group, the largest shopping center owner in Central and Eastern Europe – the funds will be used for portfolio’s refinancing. “

And yes, you read that right.


Reporter Finweek: But we are in NEPI’s paradise, where everything is pink and life is wonderful…

So why is there a need for refinancing? I think this fact describes the best the NEPI’s reality.

Probably this is the reason why they felt the need to add the non-monetary disclosures mentioned by you above, in order to result in such a profit amount at year end – due to serious cash needs, netted-off by the ING bank, who granted the bonds issuing based on this profit reported.

Dr. Kristine Bago: The real problem that supports this kind of practices are these small investors that I mentioned earlier, which in the absence of such an information as above can NOT figure out what is the financial reality for a company and end up investing in overvalued assets and their money will end up sustaining those ASSETS that do NOT bring benefits, but expenses.

Most importantly, they will end up sustaining these MANAGEMENT DECISIONS that have nothing in common with their interests as INVESTORS.

They will only wake up with a portfolio of shares overvalued by the MANAGEMENT, which they will not be able to sell in order to recover their initial investment, ending their shareholding with a negative result – loss.

Reporter Finweek: And this is true, considering that only in Romania, in 2020, the Nepi Group had cumulative losses, from investors’ money, of over 420 million lei. (EUR 84 million)

Dr. Kristine Bago: Yes, and also in the previous years they have not reported better results:

  • 2019: 292 milioane lei, (EUR 58,4 million)
  • 2018: 190 milioane lei, (EUR 38 million)
  • 2017: 270 milioane lei, (EUR 54 million)
  • 2016: 291 milioane lei, (EUR 58,2 million)
  • 2015: 550 milioane (EUR 110 million)

Reporter Finweek: Probably from here results also the below:

“NEPI’s offer has been oversubscribed almost 3 times, reaching over EUR 1.5 billion. The bonds have a maturity of 8 years and a fixed annual coupon of 2%. “

Dr. Kristine Bago: Given that the average is between 1.5 and 2, I think it’s clear what represents this kind of investor pattern and from where the “difference” comes…

Reporter Finweek: A significant “difference” of over 50% of NEPI’s total shares (increasing now) and amounting to USD 2,170,262,676, according to 2020’ data…

Dr. Kristine Bago: And the above facts are also confirmed if we look at the Balance Sheet (BS):

Point 1 and 2 are related to Cash.

Point 1 represents NEPI’s Group available Cash – which decreased by 22% compared to 2020, a significant percentage, which confirms the need for Cash of the Group and the ING bonds issuing in 2022.

Point 2 representing banks loans (these are related to 2021) records an increase of 28%.

Thus, although they borrowed more money from banks in 2021 compared to the previous period, the Nepi Group failed to offset its need for cash and still remained 22% less available in Cash accounts than in 2020.

Another fact that does NOT support the high growth of the financial result in 2021 (+ 229%) is represented by the receivables part, that increased ONLY with 3%. (3)

Reporter Finweek: And the remaining part, of 226% increase, was “made in house”, I guess…

Dr. Kristine Bago: Point (4) confirms the increase in debt in 2021, by 47% – a very high percentage, but which, correlated with the global pandemic situation, reflects the REALITY, which we should all present accordingly.

Another fact that reinforces the above is the following:

Many said that the former CEO of the Group – Alex Morar, would have left the company due to a decrease in salary in 2021, due to the pandemic crisis, but the note regarding management’s wages in the Financial Statements as at 31.12.2021 states the opposite:

As you can see, Alex Morar has the same salary amount in 2021 (EUR 600,000) as he had in 2020.

The only difference comes from the bonus side:

  • 2021: EUR 60,000
  • 2020: EUR 690,000.

Reporter Finweek: So, he had a lot of money and theoretically he led a very “profitable” company …

Why did he left then?

Dr. Kristine Bago: For sure he was aware that this was true only on the “paper” …


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