KléPierre: A Rundown Of This European REIT
Seeking Alpha Analyst Since 2020
Enthusiastic - non-professional - individual investor based in the Netherlands, publishing on European stocks and investments. Investing across the board from stocks, to ETFs, REITs and commodities.
Summary
- KLPEF owns a diversified European malls portfolio, offering an interesting diversification option for (US) REIT investors.
- The company is not well covered on SA, in this article I’m providing a (re)new(ed) rundown of the stock including how KLPEF has done in H1 2020.
- KLPEF was hit by the COID-19 pandemic and the subsequent lockdowns, and the stock is currently trading at an attractive 60% discount to NTA.
- H1 2020 results paint a dire picture at firstglance but there is room for KLPEF to bounce back and offer investors aninteresting upside.
Introduction
Klépierre (OTCPK:KLPEF) is a French real estate investment trust and Europe’s second-biggest publicly traded mall operator. Founded in 1990, it focuses on the ownership, management and development of shopping centers across Continental Europe.
Simon Property Group (SPG), a well-covered REIT on SA, is a major shareholder with 21% ownership. Klépierre itself has little coverage on SA, the most recent article is from July 2019 “Klépierre Hikes Guidance: Who Said E-Commerce Would Kill Malls?” and between then and now a lot has happened, validating a (re)new(ed) look at the stock.
Company overview
Portfolio across Europe
With just under a 100 leading shopping centers across 13 countries, attracting more than 1.1 billion visits each year, Klépierre is a leading player in the European shopping centers arena.
Region/Country |
# of malls |
Central Europe (Czech Republic, Poland) and Turkey |
12 |
France and Belgium |
46 |
Germany |
5 |
Iberia (Portugal and Spain) |
9 |
Italy |
23 |
The Netherlands |
4 |
Scandinavia (Denmark, Norway, Sweden) |
18 |
Source: company website
Strategy focused on targeted growth
According to the company their strategy is to focus on targeted growth:
Leveraging our strategy of focusing on assets in fast-growing metropolitan areas, we pursue a policy of targeted growth through expansions and renovations designed to cement each mall’s prominence as a regional leader.
Some good examples of this strategy in play are the recently renovated/acquired malls in France and Spain.
Créteil Soleil – Paris, France |
Nuevo Condomina – Murcia, Spain |
|
|
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Each year nearly 20 million visitors pass through its doors to visit any of 250 shops and restaurants, including 57 dining options available on the mall’s Food Avenue, along with its 18-screen UGC multiplex. Following a renovation in 2019, Créteil Soleil has enhanced its mix of retailers as well as its leisure and entertainment offerings, thanks to a glass-enclosed expansion that offers an additional 12,000 square meters of light-filled space. A €170-million investment program, set to be implemented over the next three years, will only add to the appeal of this urban beacon, soon to become a defining landmark of Greater Paris. |
Nueva Condomina sets the standard for shopping centers in Spain’s Murcia region. At 118,000 square meters, it’s not just the largest retail mall in the region but also the most appealing and comprehensive. The stylish mall originally opened in 2006 but was renovated in 2014. Its 180 tenants, including 33 restaurants, span two levels to ensure a smooth flow of customers. Featuring 10 movie theaters, the mall attracts more than 12 million visitors each year. Nueva Condomina is positioned as the premier fashion destination for the region of Murcia. In 2020 the mall is expanding to provide space for an additional retail store and two more restaurants. |
Source: Company website
The two malls mentioned above play to the vision the company is striving towards: “Shop. Meet. Connect.”:
Shopping centers are living environments, places to meet and gather, open to everyone, bringing together communities of all kinds, both physical and virtual.Jean-Marc Jestin, Chairman of the Klépierre executive board
The malls Klépierre has in its portfolio are a mix of shops, food and entertainment establishments, in key high-profile areas, making them in my opinion more robust from a visitors and footfall perspective and therefore more interesting for retailers to ‘set-up shop’.
Big name shareholders
As mentioned in the opening paragraphs, Simon Property Group (SPG) is a noticeable shareholder with roughly 21% ownership. Other big shareholders are APG, the largest pension administrator in the Netherlands holding 7%, and Blackrock (BLK) whose position is not directly stated but taken as part of the 72% free-float and mentioned as a “Shareholder(S) holding greater than or equal to 5%”.
Source: Company website
Historic performance
The following figures show how Klépierre has done over the last 3 years:
2019 |
2018 |
2017 |
|
Valuation of the property portfolio as of year-end (In millions of euros, total share, including transfer taxes) |
23,673 |
24,440 |
24,419 |
Revenues(In millions of euros, total share) |
1,326 |
1,338 |
1,322 |
Net current cash flow(In euros per share) |
2,82 |
2,65 |
2,48 |
|
Dividend per share (In euros per share) |
2,20 |
2,10 |
1,96 |
|
Loan to value (Net debt divided by the total value of the property portfolio, total share, including transfer taxes, as a %) |
37,3% |
36,3% |
36,8% |
Source: Companies’ 2019 annual report
The historical performance shows a spotty picture. Noticeable is the ~3% drop in the property portfolio valuation from 2018 to 2019 due to:
- €494 million negative impact from disposals;
- €460 million like-for-like valuation decrease (down 2.0%);
- €286 million increase related to acquisitions and developments; and
- €45 million negative impact related to foreign exchange
Revenue-wise Klépierre shows variance year-over-year, we see a growing net current cash flow and a rising dividend payout but deterioration of the loan to value ratio. It’s good mixed with not so good.
H1 2020 results
In the 2019 annual report the company stated in the risk management section of the report:
Klépierre is dependent on the key macroeconomic indicators that underpin the retail markets in the countries in which it operates: GDP growth, purchasing power, consumption, inflation, exchange rate, unemployment, urban growth and local demographic factors.
A negative macroeconomic outlook is likely to manifest itself in lower footfall and a fall in tenant sales, in Klépierre malls. This could compromise Klépierre’s rental income as some retailers may delay rent payments, fail to pay rent at all, or even decide to close their stores.
No mention of a global pandemic forcing retailers across the globe to shut their doors completely during a lockdown that would last for weeks. Obviously Klépierre didn’t see the pandemic coming, who did, but was hit significantly. Store closures happened throughout its portfolio for an average of 1,9 months, representing a 26% of gross rents for the first half of 2020.
Highlights of the first-half 2020 earnings:
- Revenue down 7,8%
- Net rental income down 8,9% (5,0% excluding disposals and forex)
- Portfolio valuation down 5,0% (3,8% on a like-for-like basis over six months)
- Increased net debt by 3,5%
- Loan to value increased from 37,3% to 40,0%
- Net current cash flow per share down 1,2%
On face value these numbers paint a dire picture, so let’s dive a bit deeper.
Is Klépierre in trouble?
Loan to value
Loan to value increased but, in my opinion, this is not a direct red flag. Let’s face it anyone with a mortgage would be more than happy to have a 40% LtV. The market doesn’t necessarily agree, it reacted very badly on the portfolio valuation downgrade of 5%, not necessarily because of the number but more that investors feel 5% is not enough. In the supplement to the H1 2020 earnings documentation it’s stated that the covenants applicable to the companies’ financing when it comes to LtV have a 60% limit. With the current LtV at 40% Klépierre would still have a long way to go before the bank comes knocking.
Cash position
In case the bank does come knocking you need a sound cash position. In first half of 2020, Klépierre raised 900 million euros through a 9-year bond with an average interest rate of 2,0%. The bond was oversubscribed 5 times and rated A- by Standard & Poor’s, showing confidence by investors and the rating agency in Klépierres’ credit-worthiness. Furthermore, Klépierre has 3,1 billion euros in liquidity, of which 679 million euros in cash, 2,0 billion euros in unused revolving loans and 400 million euros in uncommitted credit facilities. So again, when it comes to cash, I don’t see an immediate red flag.
Sound portfolio and tenants base
“Brick and mortar stores are dead, consumers are shopping online”, who hasn’t used this line to explain why you should not invest in shopping center real estate. It has merit, but in the case of Klépierre I disagree. The companies’ strategy of positioning its assets in dynamic, high-growth catchment areas is aligned with the repositioning of retailers’ physical points of sale to key locations. Furthermore, its portfolio of malls is not necessarily just focused on shopping but on food and entertainment as well creating a high attractiveness for visitors. Also, Klépierre is not overly dependent on its major clients. The top 10 retailers in terms of their contributions to rental income only represent 12% of total rental income. The company is also doing a good job in managing their malls; the vacancy rate only went up slightly by 80bsp to 3,8%, the bad debt provisions did increase by 11 million euros, but this is still a reasonable number taking into account these increases happened during a pandemic and store closures the world has never seen before.
Recovering from the COVID-19 lockdowns
Since May 2020 all of the malls in the portfolio are fully open again and rent collection is well underway. Rent payment has been deferred for a portion of the rents of the second quarter to the second half of the year, mainly related to the rents and service charges invoiced during the lockdown period. With that receivables increased by €273 million the Group invoiced rents and service charges for a total amount of €711.3 million and collected 83% of non-deferred rents and charges of the first-half (€491 million collected out of €593 million) and 62% over the second quarter. Following the reopening of its malls, Klépierre has entered discussions with tenants to find mutually acceptable solutions regarding rents relating to the lockdown period. Most negotiations are ongoing; they are conducted on a case-by-case basis and are focused around granting a partial waiver of outstanding rents in exchange for lease extensions and/or the opening of new stores. In countries where stores did not close or reopened in early May (Scandinavia, the Netherlands and Germany), rent collection has improved sharply to stand at 88% for the first half taken as a whole (and 78% for the second quarter). In countries where stores re-opened more recently (France, Iberia and Central Europe), rent collection has been lower (81% for the first half; 54% for the second quarter), but is set to improve as negotiations progress.
Conclusion
So, is the company in trouble? Investors seem to think so. Obviously, the company has gone (is going) through a rough patch due to the fall out of COVID-19.
However, I believe KLPEF has a portfolio of malls set-up for success in the long run and it will rise from the ashes of this crisis. It offers an attractive upside, 38% based on roughly the average stock price of $16 in august 2020 to the median price target given by analysts of $22.
Added bonus is that Klépierre offers (US REIT) investors exposure to the European market and a chance to diversify their investment portfolio.
Analyst's Disclosure: I am/we are long KLPEF, SPG.
I am a marketer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.
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