Last time we analyzed Klépierre (OTCPK:KLPEF), it had just reported half year results. Since then there has been one additional update for the first nine months of 2022, and the company is expected to report full year results on February 15th, 2023. While the story has not changed that much, we believe it is worth going through the nine months results and update the valuation for the benefit of investors that are still considering the shares. What we continue to find surprising is that despite evidence piling up that the company is making a complete recovery from the Covid pandemic, shares are still not that much higher than the prices shares fetched during the worse of the Covid crisis. Shares still have ~50% upside to the historical valuation, and the dividend is currently still quite attractive at ~7.7%.
The recovery continues
Third quarter activity has confirmed the solid business recovery observed in the first half. Some of the highlights of the third quarter include retailer sales that were up 6% on a like-for-like basis compared to 2021. Occupancy is also improving and now at a quite healthy level. The financial occupancy at the end of the third quarter was 95.6%, up 150 bps year on year. The company is also experiencing positive reversions on its leases, with a 3% positive reversion on renewals and releasings, on top of annual indexation of 4.2% in 2022. Other positive signs include the fact that the company has been able to dispose of assets at valuations close to their carrying value in the balance sheet. Klépierre sold €472 million worth of assets over the first nine months, mainly in Norway and in France, in line with appraisal values. What’s more, Klépierre confirmed guidance for 2022 of net current cash flow per share of at least €2.45. This is a solid number, and it means that shares are trading at only ~9x net current cash flow per share, and that the dividend is well-covered.
We believe US Class A mall operators such as Macerich (MAC) and Simon Property Group (SPG) are still significantly undervalued, but it might be the case even more with European focused mall operators such as Klépierre and Unibail Rodamco Westfield (OTCPK:UNBLF). One reason for this is that mall density is much lower in Western European countries compared to the US. In other words, European mall operators are in a much stronger competitive position, with much less competition. It is one of the reasons Unibail Rodamco Westfield is planning to leave the US to concentrate on its top European assets. The data shown below is from an NPR article, and while it is more than a decade old, we believe the data has not changed much and it gives a good general idea of the relative mall density.
In the third quarter, Klépierre’s credit metrics further improved, with a net debt to EBITDA ratio of 8.2x and a high interest coverage ratio (ICR) of 10.0x. Consolidated net debt stood at €7,667 million, down €457 million compared to June 30, 2022. The Loan-to-Value (LTV) ratio was 37.8%. Klépierre’s gross debt has a healthy average maturity of 6.4 years, and its liquidity position stood at €2.7 billion, up €400 million compared to June. This means the company now has a very strong balance sheet and could potentially decide to further increase its dividend if it believes there isn’t much need for further deleveraging.
Klépierre updated on some of its developments, including Grand Place in Grenoble, France. Following the refurbishment completed in March 2022, the first stone was laid on the construction of the 16,200 square meter extension in May 2022. The total investment amounts to €70 million for an expected yield on cost of 7.9%. Pre-leasing stands at 82% of the projected net rental income, with 76% signed and 6% under advanced negotiations. It will be anchored by the first Primark store in the region, and the full makeover is earmarked for completion by the end of 2023.
We continue to believe that Klépierre shares offer one of the best values in the market right now. Shares are currently trading at ~9x guided net current cash flow per share for 2022, and with an attractive dividend yield of ~7.7% based on the last annual dividend payment of €1.70. The company has room to increase the dividend if it chooses to do so, or it might decide to continue deleveraging the balance sheet for a little longer.
The risks are well known for shopping malls, the biggest of which is probably the intense competition from e-commerce, including the likes of Amazon (AMZN). What the economic re-opening after the Covid crisis has shown, is that people still appreciate in-person shopping in high-quality malls, for the experience. In fact, many retailers are learning that the best strategy is an omni-channel strategy where they combine e-commerce and strategic retail location in some of the best malls. There are some additional risks worth considering with Klépierre, such as the current energy crisis in Europe, interest rate increases by the European Central bank, and the high inflationary environment that is pressuring consumers.
We continue to see more evidence that high-quality malls continue to recover from the Covid crisis, with many key statistics now pointing to full recovery. For example, financial occupancy at 95.6% for Klépierre has basically made a full-recovery now and is at a quite healthy level for the company. Many investors continue to avoid malls because of the e-commerce threat, but we believe high-quality malls can co-exist with e-commerce. Importantly, the current valuation for Klépierre remains extremely attractive. The company pays a very attractive dividend, has strengthened its balance sheet, and is trading at a single-digit multiple of its net current cash flow per share.
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