When I was a kid, my father was a salesperson for World Book. Every other year, he would give me and my brother a set of new World Book Encyclopedias that served as many gateways to travel to new places across the globe.
Back then, I decided to create a game where I would spin the globe in my room. When my finger landed on a country, I’d proceed to my World Books to investigate the pick of the week.
Now, as I’m sure you know, it’s virtually impossible for me to spin the globe and land on a REIT. But I can point out specific companies with specific territorial or global reaches, which is just as informative, not to mention more profitable.
Today I decided to focus on Unibail-Rodamco-Westfield (URW), a “developer and operator of flagship shopping destinations.”
On June 7, 2018, Unibail-Rodamco announced it had completed the acquisition of Westfield Corp. to create Unibail-Rodamco-Westfield. By the end of the year, URW both owned and operated 93 shopping centers in 13 countries, with 56 of those properties being flagship centers in the most dynamic European and U.S. cities.
Shopping centers represent 87% of the gross market value of its assets, which amounts to €65.2 billion. That makes sense considering how its total assets attracted some 1.2 billion visits in 2018 alone.
As for this year, the rollout of the Westfield brand in continental European flagship assets will soon begin, with the first 10 centers – located in France, the Czech Republic, Poland and the Nordic countries – to be simultaneously rebranded in September.
Another eight centers will follow that path in 2020, with each rebranding accompanied by a specific event and communication plan.
In a Bloomberg article last year titled, “These Malls Didn’t Get the Memo They’re Dying,” the author lists off “Class-A malls” that are able to attract premier tenants and have performed well from both a fundamentals and valuation perspective as a result.
According to Green Street Advisors, “This disparity is captured by the analysis below, which calculates that the roughly 270 malls rated Class A (by Green Street Advisors) represent 72% of total mall value. By contrast, the balance of more than 700 Class B/C malls represents only 28% of total mall value.”
The most commonly utilized method for determining a mall’s classification as A, B, C or D is the sales-per-square-foot of its inline tenants. The chart below, prepared by Korpacz, illustrates that sales per square foot greater than $500 generally falls into the A category.
That’s a high bar, and out of all the companies trying to reach it, only Unibail-Rodamco-Westfield, Simon Property Group (SPG) and Taubman Centers (TCO) can claim those bragging rights.
(Note: URW is not legally qualified as a REIT. It’s listed as an ordinary corporation.)
The Balance Sheet
URW disposed of €2.0 billion worth of offices and shopping centers in 2018 at a pace well ahead of its original expectations. The company had decided to set a new loan-to-value (LTV) ratio objective of between 30% and 40%, down from between 35% and 45%, and it went about achieving that goal with a will and a way.
Now, as part of its annual business plan exercise, URW has identified almost €4 billion of non-core continental European assets it’s better off without – essentially doubling the original disposal target it set in 2018.
Thanks in part to those ongoing efforts, the corporation had €370 million of cash on hand at year’s end, €463 million on a proportion basis and €8.4 billion of undrawn lines.
Unibail-Rodamco’s 2017 year-end LTV ratio, meanwhile, amounted to 37%: 39.8% on a pro forma basis and 33.2% on a standalone basis. And its interest coverage ratio stood at 6.1x for 2018 (>5x in 2017 on a pro forma basis and 6.7x on a standalone basis) as a result of strong rental growth, a controlled cost of debt and, of course, the Westfield acquisition.
All put together, including seven months of Westfield-specific expenses, URW’s average cost of debt for 2018 was 1.6%… a slight increase from 1.4% in 2017. This resulted from a number of factors, including:
- Low coupon levels the company achieved during the last years on its fixed-rate debt
- The level of margins on existing borrowings
- Its active balance sheet management through tender offer transactions
- Hedging instruments put in place
- The cost of carry for undrawn credit lines.
Taking into account those unused credit lines, URW’s average debt maturity increased from 7.2 years in 2017 to 7.5 years in 2018 as a result of including in Westfield’s debt and issuances completed that same year.
A Look at the Financials
In 2018, URW slightly exceeded guidance, with adjusted recurring earnings per share (AREPS) reaching €12.92. That was growth of 7.2% over 2017.
At the same time, it achieved very solid like-for-like growth on its operating business, 4% in its shopping centers, 4.5% in offices, and 4% in the convention and exhibition business.
URW has a strong and flexible pipeline to fuel future expansion as well. Its total expected cost for its new development portfolio amounted to €11.9 billion at the end of 2018 (compared to €13 billion in 2017), out of which €2.9 billion are committed. Among deliveries to come in 2019 are two major office projects: (1) Shift, leased to Nestlé in the south of Paris and (2) Trinity.
Over in the retail segment of its business, the major extension of the Westfield Valley Fair is due in late 2019 after it finishes renovating the existing part of the shopping center. Its ShowPlace ICON movie theater, however, should already be open.
After calculating its planned disposals, URW expects its compound annual growth rates on AREPS to be between 5% and 7%. And it announced on its recent earnings call that it intends to maintain its dividend in spite of the diluted effects on dispositions.
In addition, URW proposed a dividend of €10.80 to the annual meetings this spring. And, going forward, it expects to maintain that dividend at no less than €10.80, growing it broadly in line with AREPS growth.
How To Play It
URW is based in Paris, France, so there are several exchanges to consider here. The group’s stapled shares are listed on both the Amsterdam Stock Exchange (URW.AS) and the Paris Stock Exchange (1BR1.F), as well as in the form of CDIs on the Australian Securities Exchange (URW.AX). Unibail-Rodamco-Westfield is also included in the CAC 40, AEX 25 and Euro Stoxx 50 indexes.