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Unibail-Rodamco: Europe's top Reit

A superb track record sets Europe's biggest property company apart from the rest
June 28, 2012

London is Europe's most exciting property market, if you believe Mayfair's estate agents. But by far the top-performing real estate investment trust (Reit) in Europe is Unibail-Rodamco, a $13bn (£10.4bn) French company with no assets in Britain. With dividends reinvested, the return on its shares has beaten Land Securities - Britain's largest Reit - by about eight times since the turn of the millennium.

IC TIP: Buy at 139.6€
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong track record
  • Ability to grow dividends
  • Well-diversified portfolio
  • Substantial development pipeline
Bear points
  • Exposure to Spain
  • Proxy for eurozone risk

The reasons for this include one big structural advantage that should ensure ongoing outperformance: Unibail is more profitable than any of the big UK Reits, and therefore pays bigger dividends. That's largely because it can borrow more cheaply - with direct access to the bond markets, the group paid just 3.6 per cent on its €9.7bn debt pile last year. Lower administration costs - the topical one being executive pay - have also helped ensure that as much rental income as possible flows through to shareholders.

Another reason Unibail has outperformed its UK peers is superior market timing. True, this may be the result of luck as much as of skill, but analysts agree that Unibail's bosses, who are all graduates of the same elite business school, are unusually clever and competent.

UNIBAIL-RODAMCO (UL)

ORD PRICE:€139.6MARKET VALUE:€12.8bn
TOUCH:€139.5-€139.612-MONTH:€163LOW: €123
DIVIDEND YIELD:5.9%INVESTMENT PROPERTIES:€24.1bn
PREMIUM TO NAV2%NET DEBT:74%

Year to 31 DecNet asset value (€)Pre-tax profit (€bn)Earnings per share (€)Dividend per share (€)
20081511.1613.67.5
20091281.6817.18.0
20101252.6123.98.0
20111311.6414.58.0
2012*1371.4814.48.3
% change-5-10nil+4

Beta: 0.9

*Jefferies estimates

The group was formed when Paris-based Unibail took over Dutch retail landlord Rodamco in 2007. Crucially, this so-called 'merger of equals' involved raising no new debt, setting it apart from most big deals of the same vintage. Moreover, the combined group immediately embarked on a plan to sell smaller shopping centres and reduce a debt load that was already low by UK standards. That put the group in a strong position when the European correction came in 2008. Even at the trough of the cycle, at the end of 2009, Unibail's loan-to-value ratio was only about 30 per cent. The UK reits destroyed their track records by tapping shareholders for cash in 2009; Unibail paid out €1.8bn in special dividends in 2010.

The group's debt load is now increasing again. The loan-to-value - 37 per cent at the end of 2011 - will soon be higher because Unibail announced a major acquisition in Germany this month. Moreover, it has substantial development plans, with €1.7bn of capital expenditure alone pledged to projects already under construction.

Unibail's bosses are betting the group can retain its investment-grade credit rating while expanding in a downturn, when acquisitions and contractors are cheaper. Given its track record of market timing, that looks feasible. It also helps that Unibail has an excellent record of pre-letting its developments. It serves as a kind of one-stop shop for US (and occasionally UK) brands that want to launch a retail platform on the European continent. Marks & Spencer has chosen two Unibail developments for its push into France, for example.

The substantial risk of investing in Unibail - aside from practical considerations such as exchange rates and witholding tax on dividends - is the effect of the eurozone crisis. Most obviously, this undermines retail sales, which drive Unibail's business. Shopping centres in fragile Spain pay about 10 per cent of the group's net rental income. As a highly-liquid play on the eurozone economy, Unibail is also an obvious target for traders who want to short 'Europe'.

Yet there are good reasons to be sanguine. Unibail's exposure is very broad and, with the exception of Spain, is focused on the better-performing countries of northern and eastern Europe. It also seems to be able to extract growth from the most unpromising situations by constantly changing tenants and upgrading its centres. Growth in like-for-like net rental income has risen throughout the downturn - it fell to 0.8 per cent in 2010 but bounced back to 4.6 per cent last year. Unibail may even benefit from turbulence because the value of economically-resilient assets such as it owns could go up.