EUR 850.00 For Business Accounts Only

Morningstar | Transferring Analyst Coverage of Unibail-Rodamco-Westfield

We transfer coverage of Unibail-Rodamco-Westfield, or URW. We continue to forecast slow sales growth across the portfolio reflecting ongoing evolution in consumer spending patterns. An increasing proportion of items will be purchased online, impacting tenant sales, tenant demand and hence the rate at which the landlord can increase rents.

Our fair value estimate for narrow-moat-rated URW remains at EUR 150 per share (AUD 12.00 per Australian chess depository interest, or CDI) with the stock screening as fairly valued at current levels. Our earnings projections are unchanged, and the firm recently reiterated fiscal 2019 guidance for adjusted recurring earnings per share in the range of EUR 11.80 and EUR 12.00 or AUD 0.937 to 0.952 per CDI. We forecast EPS of EUR 12.00 per share or AUD 0.952 per CDI, at the top of the guidance range.

The company is a high-quality predominantly shopping centre REIT, with assets across Europe and the U.S. The retail portfolio comprises stakes in 104 shopping centres, with around 85% of rent coming from "flagship malls," Unibail's term for its larger, more dominant malls that capture a high proportion of the retail trade in the catchment area. The retail strategy focuses on premium malls in built-up or inner-city locations, high foot traffic and an affluent demographic.

As with peers, the major challenge faced by Unibail is the growth in the proportion of sales conducted online. Brick-and-mortar retailers are at a cost disadvantage to online retailers, as online players benefit by not paying the high rents for a physical store. Additionally, they often avoid paying goods and services tax and import duties. The expectation of further strong growth in online sales from the current 10% of retail sales will make it particularly challenging for retailers selling discretionary items to generate strong sales growth. The bias towards luxury or aspirational brands has been profitable in recent years, but will be threatened if more of the high-margin sales occur online. The transition of the portfolio to focus more on premium malls is likely to weigh on earnings growth as the group sells weaker, but higher-yielding malls.

Despite the challenges the company is facing, we believe the firm warrants a narrow economic moat. Its large format malls have sustainable competitive advantage from efficient scale in their catchment area and many of the better malls also benefit from network effects. Their scale and dominance of the catchment generates high patronage and support the development of dedicated or adjacent transport routes, which drives footfall and reinforces the moat. Unibail's strategy to focus on assets in built-up areas means land is inherently expensive and it is also very rare to be able to procure land parcels of suitable size to develop a competing mall. New entrants are discouraged by long lead times and regulatory approval is inherently difficult to develop a competing asset nearby due to the disruption it causes to traffic flows.

Following the acquisition of Westfield corporation in 2018 gearing is very high relative to peers. We forecast net debt/EBITDA of 10.3 times during fiscal 2019. This will trend down as developments under way become income-generating and the firm sells noncore assets. Nonetheless, leverage is very high relative to most REITs under coverage. Fortunately, Unibail is presently able to service this level of borrowing due to an exceptionally very low average cost of debt of 1.7% that has a weighted average maturity of seven years. This means it should comfortably be able to service its debt costs for the coming few years.