RBC analyst says the 2020 first-half results from his two “best buy” choices indicate that their long-term prospects have barely changed despite the global COVID-19 pandemic.
The spectre of COVID-19 continues to reverberate around the world, dragging down the commercial real estate sector perhaps most of all. But in Europe, there is promise, argues London-based RBC Capital Markets stock analyst Julian Livingston-Booth.
Mr. Livingston-Booth started out his career in 1994 as an auditor working in the banking and capital markets division at PricewaterhouseCoopers, then joined Goldman Sachs in 2000 as an equity research analyst. From Goldman Sachs’ London office, Mr. Livingston-Booth led the European real estate equity research team. In fall 2018, he moved to RBC Capital Markets, where he continues to cover European real estate stocks.
While the analyst concedes that “significant macro uncertainty for shopping centre landlords” lingers because of the pandemic, he also asserts that the 2020 first-half results from his two “best buy” choices, multinational, Paris-based commercial real estate firms Unibail-Rodamco-Westfield SE (AMS—URW) and Klépierre SA (EPA—LI), indicate that their long-term prospects have barely changed. (Both receive an “outperform” recommendation per RBC’s rating system.)
Klépierre’s entire portfolio open for business
Klépierre holds a portfolio of roughly 100 major shopping centres boasting a combined total of 1.1 billion visits annually in more than 10 countries in Continental Europe. Its portfolio was valued at €23.7 billion as of 2019’s end. Its 10 biggest retail tenants, which together make up 11.8 per cent of its rents, include such ubiquitous brand names as Zara, H&M, Sephora and McDonald’s. The company is structured as a “SIIC” in France, equivalent to a REIT in other jurisdictions.
“Klépierre reported net current cash flow per share down only one per cent year-over-year,” observes Mr. Livingston-Booth. “Our French shopping centre survey strengthens our view that Klépierre’s portfolio will benefit from a polarization in property markets longer-term. First-half 2020 results strengthen our view that the impact on Klépierre will be manageable and that the negatives are already more than reflected in its recent share price declines.”
The analyst adds: “A dramatic deterioration in the financial performance of its continental shopping centre business is unlikely.” In a statement released on May 30, the company announced that nine of its Paris-area malls had reopened, welcoming back all retailers and visitors except for cinemas, which reopened on June 22. By June 8, when locations in Madrid and Barcelona reopened, the company’s entire portfolio of malls had resumed business.
Nevertheless, Mr. Livingston-Booth notes that Klépierre executives were cautious enough to avoid giving any specific 2020 guidance when releasing figures from the first half.
“The risks of rising COVID-19 cases leading to closures repeating appears to have influenced management’s decision,” he says. “We believe that there is limited risk of Klépierre’s management being forced to reduce gearing on unfavourable terms, reducing the risk to the very attractive 17.4 per cent yield (on forecast 2021 earnings) implied by the current share price. The company pays a dividend of €2.20 per share on an annualized basis.
Both stocks could more than double
Meanwhile, Unibail-Rodamco-Westfield’s portfolio is even larger than that of Klépierre. The former’s portfolio of properties in Europe was valued at €41.3 billion at the end of last year, while its holdings outside of Europe added a further €15.2 billion.
The company was formed from the merger of Unibail and Rodamco Europe in 2007; Unibail-Rodamco then bought Westfield Corp., a spin-off of the Australian shopping centre operator Westfield Group created in 2014, at the end of 2017. The Westfield spin-off mainly consisted of malls in the United States (more than 30), as well as three properties in the United Kingdom and a project in Italy.
Aside from shopping centres in France, where today’s URW is based, the company operates malls in Austria, Scandinavia, Poland, Czechia (or the Czech Republic), and Spain on the Continent.
Mr. Livingston-Booth remarks that when discussing 2020 first-half results, “(URW) management noted that around 83 per cent of the 5.1 per cent decline in property values was due to COVID-19 and that rent negotiations settled to date have had little impact on long-term lease terms”.
That said, the analyst says investors anticipate that the company will issue equity to shore up its financial position in light of COVID, but maintains that shares would still boast a “relatively” attractive yield if more are issued. Unibail-Rodamco-Westfield pays an annualized dividend of €8.20 per share.
Mr. Livingston-Booth predicts that both Unibail-Rodamco-Westfield and Klépierre could more than double from current levels as the market accepts that the companies are better off than previously feared and compared to other commercial landlords.
This is an edited version of an article that was originally published for subscribers in the September 18, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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