Morningstar | Slowing Sales Makes it Harder for Unibail to Raise Rents. FVE Declines to EUR 165
The retail sales environment for narrow-moat-rated Unibail-Rodamco-Westfield is deteriorating faster than prior forecasts, impacting the rate Unibail can raise rents going forward. We’d previously forecast a 10-year CAGR in retail rent of 3.3%, but weakening sales figures for the European assets that make up the bulk of the portfolio means the negotiating power is now swinging more in favour of the tenant. Sales across the discretional apparel category appear to have suffered the most with U.K. based mall landlords and European online fashion retailers both flagging deteriorating trading conditions.Unibail has been slower than expected in selling weaker malls, having only divested EUR 0.5 billion of Spanish malls in August. Inflation that feeds into rent, has weakened, dropping from 2.2% in October to 1.9% in November. We’ve adjusted for the less upbeat outlook for sales and rents by cutting rental growth expectations. The 10-year rental CAGR forecast for Unibail’s retail assets now stands at 2.9% and our fair value estimate for Unibail declines 8% to EUR 165 from EUR 180. We view Unibail as undervalued, currently trading around EUR 140, with the market appearing to be pricing in a more negative outlook for rents or a material step up in the firm’s cost of capital.
News flow on retail trade in the U.K. and Europe point to deteriorating trading conditions. Importantly, the pain appears to be most severe in the fashion categories, one of the largest tenant categories of Unibail. Perhaps the biggest negative was this week’s trading update from European online clothing retailer ASOS; advising of "a significant deterioration in the important trading month of November and conditions remain challenging." ASOS management also stated "a weakening in consumer confidence has led to the weakest growth in online clothing sales in recent years." It is unlikely there is a single reason for the negative retail news, but the unwinding of ultra-stimulatory monetary policies, declines in equity markets and uncertainty around Brexit, would undoubtedly be weighing on consumer sentiment across Europe.
It is not possible to pin point Unibail’s tenants sales performance relative to peers over the past two months. But with a high weighting to fashion, the pressure being felt by ASOS is likely to be similarly impacting Unibail. Unibail’s most recent data point was September sales, where European year-on-year specialty sales growth at end September was 2.3% down on 2.6% at June.
Unibail-Rodamco is a commercial property operator, investor and developer. Co. is operationally organized in six geographical regions: France, Spain, Central Europe, Austria, the Nordics and The Netherlands. Its activities are divided into three business lines or segments: Shopping Centres, Offices and Convention & Exhibition. Co.'s Shopping Centres segment focuses primarily on the retail sector; the Offices segment takes care of office assets that are mainly located in the Parisian Central Business District; and the Convention-Exhibitions segment consists of a real estate venues and operations organization, and trade show organization.
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