Damning Viceroy report drags NEPI, property sector down

By Roy Cokayne Time of article published Nov 29, 2018

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PRETORIA – Shares in NEPI Rockcastle slumped by 14.07 percent on the JSE yesterday to close at R9914, dragging down the share prices of most other companies in the listed property sector, after the release of a damning report by Viceroy Research, which was behind exposing the Steinhoff debacle.

The Viceroy report claimed its investigations had “uncovered numerous inconsistencies within NEPI Rockcastle’s financial reporting and major links to an established financial fraud”.

NEPI Rockcastle hit back, claiming Viceroy’s report was based on many factual errors, misleading information and false claims.

It said it was considering taking measure to hold any parties accountable for presenting misleading information.

“Viceroy has not approached the company for comment and the company has not had an opportunity to respond to the allegations prior to the release of the Viceroy report.

“The company considers that it has consistently proven transparency towards stakeholders and its disclosures are prepared in accordance with the legal requirements and best practices.”

There has been a sell-off since the beginning of this year of shares in companies in the Resilient stable, including Resilient real estate investment trust (Reit), NEPI Rockcastle, Fortress Income Fund and Greenbay Properties, following rumours about a Viceroy report, with the share price of other companies in the sector also dented by this sell-off.

Viceroy said local filings for NEPI’s Romanian subsidiaries suggested the company’s figures were “massively overstated for at least the past three years”.

It said Romania was NEPI’s largest geographical income segment and showed a net profit before tax of 284.87million (R4.74billion) in its consolidated 2017 group accounts, but Romanian income statements showed these companies operated at losses of more than 40m for the same period.

Viceroy did not believe a corporate or tax effective structure or transfer pricing adequately explained the substantial differences in Romanian earnings generation because NEPI’s reported income tax expenses in Romania also did not match local filings.

“Given the criminal implications of misrepresenting tax numbers to the Romanian tax office, we assume NEPI chose instead to mislead its shareholders,” it said.

Viceroy’s report was also highly critical of NEPI’s December 2016 acquisition of Rockcastle for 2.3bn, because the goodwill on the transaction amounted to a massive 886m, a 62 percent premium to book value for a Reit.

It said this 886m premium was written off in its entirety within six months of the acquisition.

Viceroy claimed many insiders benefited from this excessively priced transaction, including Resilient Properties, Fortress and the chief executive and chief financial officer of Rockcastle.

“The goodwill associated with this extremely overpriced transaction allowed insiders to gain an excessively large portion of NEPI to the detriment of NEPI holders, who had to bear Rockcastle-related losses manifested in the write-offs in an extremely dilutive transaction.

“We believe it is prudent for NEPI investors to investigate this transaction further. Viceroy believes they have been hoodwinked,” it said.

Viceroy said NEPI was fundamentally overpriced compared with its peers.


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