Unibail-Rodamco-Westfield Is An Income Investment Again (UNBLF)

Manuel Milan

Unibail-Rodamco-Westfield (OTCPK:UNBLF) has announced the distribution of a dividend related to 2023 earnings, making it attractive again for income investors, plus its valuation is quite low making it an interesting play within the European REIT sector.

As I’ve analyzed in a previous article, Unibail’s restructuring phase was almost completely done and the company is now in a much better position to return again capital to shareholders.

Indeed, Unibail has recently released its financial figures related to 2023 and has announced the resumption of its dividend, as I was expecting, after several years of hiatus. Since my last article on Unibail its shares are up by more than 25%, clearly outperforming the market during the same timeframe, as shown in the next graph.

Article performance (Seeking Alpha)

In this article, I update Unibail’s most recent financial performance and investment case, to see if it’s now an attractive income option following its decision to pay dividends again.

Earnings Analysis

Unibail is a large European real estate company, having an investment portfolio of €49.5 billion at the end of 2023. Its portfolio is mainly invested in shopping centres, being its largest business segment by far, even though it also has some office and convention & exhibition assets.

Due to the rising interest rate environment, its property portfolio has been revalued lower in recent quarters, but its decline in 2023 was only 4.3% YoY on a like-for-like basis during a tough period for the real estate industry, showing that it has a quality portfolio. During the year, Unibail has maintained its strategy of asset disposals to reduce debt, making 11 transactions that led to cash proceeds of about €1 billion.

Since 2021, when Unibail started its develeraging program, it has reduced net debt by €5.1 billion, which has been a very important factor in maintaining a strong balance sheet and an investment credit rating during this period.

Its loan-to-value ratio was 41.8% at the end of 2023, versus close to 45% at its peak back in 2020, and its interest coverage ratio has returned to a more acceptable ratio at 4.2x, compared to less than 3x at its bottom in 2021.

Debt ratios (Unibail)

Regarding its liquidity, Unibail has some €13.6 billion of available resources, including cash and revolving credit facilities, which is enough to cover its refinancing needs for some three years, thus Unbail’s liquidity position is quite good and there isn’t much need to retain cash going forward.

On the other hand, while Unibail has been able to protect its balance sheet and maintain sound credit metrics, its net debt-to-EBITDA ratio was 9.3x at the end of 2023, still a relatively high level compared to U.S. REITs, but acceptable compared to other European peers. Nevertheless, this ratio is much lower than 14.6x reported in 2020 and is already lower than the ratio reported in 2019 (9.9x), thus most likely Unibail’s management is comfortable with this leverage ratio and further reductions should come from higher earnings rather than lower debt levels.

Net debt (Unibail)

From an operating perspective, Unibail has reported a much-improved performance over the past couple of years, following a tough period in 2020/21 when its business was quite impacted by the pandemic.

While Continental Europe recovered faster than the U.K. and U.S. in 2022, during the past year Unibail was able to report improved operating trends across its portfolio, boding well for growth in the near future.

Indeed, net rental income increased in all geographies, even though growth was stronger in Europe than in the U.S. In the U.K., net rental income increased at 10.1% YoY on a like-for-like (LfL) basis, while Continental Europe increased by 9.7% YoY LfL, and the U.S. reported net rental income up by 6.2% YoY LfL.

Overall, Unibail’s net rental income increased by 6.1% YoY LfL, to €2.21 billion. However, on a reported basis, its net rental income declined by 0.7% YoY, due to asset disposals made during the year.

By segment, shopping centres reported annual net rental income growth of 8% LfL, and represented some 92% of total net rental income. Offices also reported strong growth (+22% YoY LfL), while conventions & exhibitions were the weakest point in its property portfolio (rental income -28% YoY).

In shopping centres, its strong growth on a like-for-like basis is explained both by indexation to inflation, a recovery in tenant sales which led to higher rental income in lease renewals, and lower vacancy.

Its vacancy rate declined by 110 basis points in 2023, to 5.4% at the end of 2023, a similar level to 2019. This clearly shows that retail stores have now largely recovered from the drop in sales due to the pandemic, plus also shows that concerns about changing consumer habits following the pandemic, namely toward digital channels, were largely overblown.

Vacancy (Unibail)

Rent collection was also good at 98%, a level that is similar to pre-Covid. Due to positive top-line growth and good cost control, Unibail reported higher EBITDA on a LfL basis (+6.7% YoY to €2.2 billion). Its recurring net income amounted to €1.4 billion (+5.2% YoY) and its adjusted earnings per share were €9.62, slightly ahead of its guidance. Its net asset value per share was €146.7 at the end of 2023, a decline of 5.8% YoY, due to lower property valuations and asset disposals.

Going forward, Unibail is expected to maintain strong growth in the near term, supported by long-term leases signed in recent months with substantial Minimum Guaranteed Rent increases of about 10%, which will support rental income growth ahead. Moreover, despite its efforts to deleverage the balance sheet, Unibail maintained a sizable development pipeline and has several assets expected to be completed during 2024, accounting for about 90% of its €2.5 billion development pipeline at the end of 2023.

For instance, Unibail is expected to open a large shopping centre in Hamburg (Germany) next April, which represented an investment of €1.64 billion, and is already 80% pre-let, being a strong support for organic rental income growth in Europe over the coming quarters. Reflecting this supportive background, Unibail expects to report growing revenues in 2024, and reach an EPS of €9.65-9.80, or 1.1% YoY at the mid-point, which seems to be quite conservative.

Taking into account its positive operating momentum and efforts to maintain a strong balance sheet, Unibail’s management decided to resume its dividend, which was suspended in 2020. I think this is a strong signal that Unibail has again a strong financial profile and its restructuring phase is now completed, allowing its business strategy to finally switch from balance sheet protection to capital returns.

Its dividend related to 2023 earnings will be €2.50 per share, distributed to shareholders next May if it’s approved at the company’s annual general meeting in the coming months.

At its current share price, Unibail offers a forward dividend yield of about 3.6%, which is interesting even though it’s not a high-dividend yield. It’s also much lower than compared to its closest peer Klepierre (OTCPK:KLPEF), which currently yields above 7%, but it’s a positive signal that Unibail wants to provide again an attractive shareholder remuneration policy. Given that its dividend payout ratio is only 26%, which is quite low, I think its dividend is quite likely to grow over the coming years supported both by earnings growth and a higher payout ratio.

Conclusion

Unibail has reported an improved operating performance and its strategy to protect its balance sheet has borne fruits and is largely completed. As I expected, the company resumed its dividend payments, an important factor for investors in the REIT space.

In addition, Unibail’s valuation continues to be quite low, given that it’s currently trading at only 0.48x NAV and 7x earnings, which is quite undemanding and makes Unibail an undervalued income investment in the European REIT sector right now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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