Mall Rats Keener to Hang Out in URW

With the deleveraging plans out in the marketplace, analysts think there is more value in the European/North American angle when it comes to the Westfield story, with consensus target prices for Unibail-Rodamco-Westfield on the ASX showing far greater expected upside than for the Scentre Group’s Australian-New Zealand exposure.  

So much so that there have reportedly been calls from property fund managers for Scentre to consider privatising the under-performing local Westfield shopping empire, with the shares trading at a 40% discount to what the centres are worth.

Concerns over the balance sheets of both Scentre Group (SCG) and Unibail-Rodamco-Westfield (URW) in the wake of COVID-driven traffic slumps had both companies considered candidates for equity raisings to reduce leverage, and both duly addressed that this month, Scentre with its highly successful US$3 billion ($4.1 billion) hybrid issue, and URW with the unveiling of its comprehensive €9 billion ($14.8 billion) ‘RESET” plan.

The URW RESET involves, among other things, a fully underwritten €3.5 billion ($5.7 billion) capital raising (a fully underwritten rights issue) to be used to immediately reduce leverage; limiting cash dividends through scrip and/or a lower payout ratio, resulting in €1 billion ($1.6 billion) in cash savings over the next two years; and a €4 billion ($6.6 billion) asset disposal program to be concluded by year-end 2021.

URW says the full RESET plan would reduce its loan-to-value (LTV) ratio from 41.5% as at June 2020 to 30.9%.

SCG’s hybrid issue – which surprised a market expecting either a dilutive equity raising or asset sales – will buttress its existing credit ratings and increase the buffer to debt covenants. While leverage to SCG equity investors is unchanged, at about 40%, any “forced near-term de-leveraging scenarios have been removed,” says UBS, which worked on the deal.  

UBS describe the transaction as “a good example of innovative thinking when it comes to capital management strategy,” and says it would expect this form of capital to be considered by other companies in the future – especially noting the ongoing investor demand for higher yielding securities in the current environment.

The Scentre notes were issued in two equal-sized tranches, with the six-year subordinated notes at a rate of 4.75% and the ten-year notes offering a 5.125% rate.

SCG says the proceeds will be used to shore up its balance sheet, repay shorter-term debt facilities and provide funding for longer-term security as it battles the COVID impact on its business. Last month the REIT reported a $3.6 billion interim loss, on the back of a $4 billion hit to the value of its Westfield malls.

Investors applauded the fact that Scentre will now have sufficient long-term liquidity to cover all debt maturities to early 2024 – they can now be confident that Scentre can ride out the pandemic without undue harm to the balance sheet. It can now get on with trying to address the disruption to its foot-traffic and rent collection, and coming to agreements with angry tenants.

While UBS says Scentre’s earnings are downgraded by about 10%, on FY21 earnings SCG is trading on 11.6 times funds from operations (FFO) multiple. UBS has lifted its price target to $2.40, reflecting reduced financial risk, which is above-consensus: Thomson Reuters’ collation of analysts’ valuations has SCG at $2.30, while FN Arena has $2.38 – versus the current SCG unit price of $2.15. The FY21 (December) estimated yield is 6.6%, unfranked.

However, analysts have a slightly brighter view of URW’s ASX-listed rump, at $2.66 – although Macquarie, which was first out of the blocks with an assessment of the RESET deal, slashed 28% from its target price, to $2.96. Macquarie said that although the plan would reduce gearing below 30%, it could be 50% dilutive to earnings per share (EPS) and 66% dilutive to net tangible asset (NTA) value – assuming that the raising would be conducted at €25 a share for the headstock. Macquarie also thinks that successful execution of the €4 billion of asset sales is crucial to the plan, stating that if asset values fall by 20%, gearing could increase to 36%.

(FN Arena has a consensus analysts’ target price of $3.88 on URW, while Thomson Reuters has $3.89, but the more bullish targets will be wound back as analysts digest the RESET plan, as Macquarie’s has been.)

Currently, Thomson Reuters’ collation shows an estimated FY21 (December) A$ yield of 16.7%, unfranked; FN Arena has the yield, at present exchange rates (UWR reports in euro) at 16.4%, on a 59.8% payout ratio. These expectations will be revised down, particularly with the United Kingdom going back into lockdown restrictions: more of the dividend over the next two years is likely to be paid in scrip.

When announcing its RESET plan on 16 September, URW said the footfall recovery across its portfolio was “encouraging,” with most Continental European regions trending in the range of 80%-90% of last year’s footfall, which it said demonstrated the appeal of URW’s Flagship destinations.

While the UK is in the 60 – 70% range, URW said it was showing good week-on-week development as people are returning to offices following the lockdown and summer holidays – clearly, this outlook is no longer as strong.

Footfall in the US centres lags behind that in Europe, said URW, as, for a number of shopping centres in Los Angeles, indoor operations remain restricted. In addition, “mobility in the major US cities in which the Group’s shopping centres operate is well below that of most Continental European cities.”

Also, URW’s rent indicators are improving, with 70% of rent being collected in August.

The bottom line is that even with scope for some optimism to come out of analysts’ expectations for URW’s earnings and distributions, it still looks to be reasonable value on a total-return basis.

James Dunn

James is an experienced senior journalist and host of The Inside Network's industry events.