KLPEF - Unibail-Rodamco-Westfield Is Too Cheap To Ignore

2023-05-05 16:31:06 ET

Summary

• Unibail is the largest European real estate company measured by property value, focused on mainly on  large shopping centres in Continental Europe, the U.K., and U.S.
• While its financial performance was markedly impacted by the pandemic, its recovery has been quite fast and has delivered a positive operating performance recently.
• Unibail is currently trading at only 5x forward earnings, which seems to be too low.

Unibail-Rodamco-Westfield ( OTCPK:UNBLF ) has delivered an improved operating performance recently, but its valuation remains quite depressed and the discount to peers is unwarranted.

Company Description

Unibail is one of Europe’s largest real estate companies measured by market value, being also the leading company specialized in shopping centres. Its current market value is about $7 billion and its shares are traded in the U.S. on the over-the-counter market.

It has a long history in the property investment sector, with a mixed growth strategy focused both on organic initiatives and acquisitions. It made two large mergers in the past, namely Rodamco in 2007 and Westfield in 2018, being nowadays present both in Europe and the U.S.

The company’s strategy is to focus on large shopping centres in major cities across Continental Europe, the U.K., and the U.S., which account for the majority of its revenues. Beyond shopping centres, Unibail also owns some offices and exhibition assets, which together accounted for less than 10% of Unibail’s net rental income in 2022.

Despite its somewhat unique profile within the global real estate sector, Unibail’s closest peers are Klepierre ( OTCPK:KLPEF ) in Europe, and Simon Property Group ( SPG ) in the U.S.

At the end of 2022, Unibail’s property portfolio was valued at more than €52 billion, a decrease of 4% YoY mainly due to divestments and lower property valuations, with about 70% of its portfolio being located in Continental Europe, 25% in the U.S., and 5% in the U.K. Its portfolio is mainly focused on large shopping centres with high quality and good location, being a key competitive advantage compared to its peers.

Due to its exposure to large shopping centres, Unibail is more resilient than smaller competitors to some structural headwinds in the retail segment, namely e-commerce, plus in Europe online retail has much lower penetration than in the U.S. and shopping centres have much less exposure to department stores than U.S. malls, being key reasons why European shopping centres have better operating trends than in other regions.

Financial Overview

Regarding its financial performance, Unibail had a good growth history until 2019, but not surprisingly its business was severely hurt by the pandemic and lockdowns across its geographies. This negatively impacted its revenues and earnings during 2020-21, leading also to a dividend suspension, while during the past year its business started to return to ‘normal’ levels.

In 2022 , Unibail’s operating performance recovered markedly from the previous years, and is now closer to 2019 levels, supported by recovering sales from its tenants. Indeed, during the past year, its tenant sales were above 2019 levels, showing that the recovery from the pandemic hit was quite rapid, as shown in the next graph.

Higher sales also led to a decreasing vacancy rate, which was 6.5% at the end of 2022, compared to close to 9% at June 2021, and higher rent collection. This was a big issue during the pandemic, as some tenants stopped paying rents due to lower sales, but during 2022 the collection rate was close to 97% and further improvements are likely in the short term as Covid restrictions are totally lifted across its geographies.

Given this improved backdrop of higher tenant sales, lower vacancy, and better rent collection, Unibail’s rental income was up 29.1% YoY to €2.2 billion. Shopping centres reported an annual increase of 24% in rental income to more than €2 billion, while offices reported rental growth of 16% YoY (to only €70 million), while convention & exhibitions rental income surged from €32 million in 2021, to €132 million during the past year.

By geography, like-for-like rental income was stronger in Continental Europe (+25% YoY) and in the U.K. (+21% YoY), while in the U.S. gains were more moderate (+12% YoY). This strong increase in rental income was largely justified by the end of Covid-related rent relief, but also by inflation and higher renewals, which the company was able to pass to its tenants.

Due to good cost control and gains from the disposal of assets, Unibail’s EBITDA increased by 30% YoY to €2.2 billion, and its net income was €1.33 billion (+33% YoY). Its EPS amounted to €9.66, also up by 33% YoY.

Related to the first three months of 2023, Unibail only provided a trading update , but its key financial figures released showed a positive operating momentum, which means that its revenue and earnings recovery is well underway.

Its like-for-like gross rental income was up 7.8% YoY, boosted by indexation and strong operating performance, being also supported by higher tenant sales (+12% YoY). Continental Europe continues to be the region with better performance (sales up 17% YoY), while U.S. continues to be a laggard (sales up by only 4% YoY).

Its rent collection rate was 95%, a level that is above Q1 2022 (93%), but lower than compared to the second half of 2022. Its vacancy rate increased to 7.2% at the end of March, up by 70 basis points compared to the end of 2022, but Unibail expects the vacancy rate in 2023 to be below 2022 levels due to re-letting and due to the company’s increased focus on long-term rentals rather than short-term deals.

Its guidance is to achieve adjusted recurring EPS in the €9.30-9.50 for the full year, which is a small increase compared to the previous year.

Regarding its balance sheet, like many other companies in the real estate sector, this has been one of its most important factors of its investment case over the past couple of years. As Unibail was greatly impacted by the pandemic, one of its management priorities was to preserve cash and maintain an acceptable leverage position, leading to a dividend suspension in 2020 that remains until today.

At the end of 2022, Unibail net debt was above €20 billion and its loan-to-value (LTV) ratio (including hybrid debt) was 45.2%. This is an acceptable leverage position, but given that Unibail wants to maintain an investment credit rating in the medium term, it should improve its leverage ratio.

To reduce its debt levels, improve its liquidity, and reduce its financial exposure to the U.S., Unibail has set a sizable disposal program last year. This resulted in €1.8 billion in disposals during 2022, of which a large part was in the U.S. During Q1 2023, Unibail closed the sale of a shopping centre in California for a value of $57 million and is in active discussions in relation to several of its U.S. regional assets. In Europe, it also expects to sell assets valued at about €800 million in 2023.

Regarding its liquidity, it had €4.2 billions of cash at the end of March, plus €9.4 billion of credit facilities, representing total liquidity of more than €13 billion. This covers its debt maturities in the coming three years, plus Unibail continues to have access to secured financing and raised more than €600 million since the beginning of this year. Therefore, I don’t expect any liquidity issues over the coming years, which is supported of its disposal program at favorable terms, as the company is in no rush to raise cash.

Conclusion

While Unbail’s operating performance was significantly impacted by the pandemic, its recovery has been quite fast and the company is now reporting much improved metrics and is taking the right steps to improve its balance sheet. If Unibail executes well on its disposal program and reduces leverage to a strong position, it may resume a dividend payment in the next year (related to 2023 earnings).

Despite this improved backdrop, Unibail’s valuation is still at very depressed levels, considering that it’s currently trading at only 5x its expected EPS this year, compared to about 8.5x for its closest peers. This discount seems unwarranted and its depressed valuation seems to be based on Unibail’s recent historical performance rather than its future earnings power, making it an interesting value play in the European real estate sector.

For further details see: