“A management team that remains prisoner of its failed strategy that started with the acquisition of Westfield.”
By Nick Corbishley, for WOLF STREET:
Unibail-Rodamco-Westfield (URW), which, in addition to many properties in Europe, owns 27 malls in the the US, including the upscale Westfield San Francisco Center, reported a loss of €7.6 billion for 2020, after large write-downs. Its net rental income dropped by 28%.
The company, Europe’s biggest property REIT, is heavily leveraged and is in all the wrong markets at the wrong time. Besides its exposure to the ravaged brick-and-mortar retail sector, URW has a portfolio of airport shopping centers, office towers, hotels and conference halls, all of which were hammered by lockdowns, closures, travel restrictions, and cancellations.
The company’s shares responded to the news by sliding 12% on Thursday, to €57 a piece. They are now down 55% year over year and 78% from a peak of €257 in February 2015.
Now URW faces the challenge of reducing its debt in the midst of a global economic crisis. It has axed stock dividends for the next three years. It also tried to pull off a €3.5 billion rights issue last October. But that plan was shelved after a large bloc of shareholders led by French billionaire Xavier Niel and Unibail’s former CEO Leon Bressler voted down the proposal. Bressler blasted the rights issue as “a misguided act by a management team that remains prisoner of its failed strategy that started with the acquisition of Westfield.”
Unable to raise fresh capital, the company is trying to sell off a chunk of its assets before 2022, as values in the market are tumbling. On Wednesday, it announced that it will try to dump its U.S. properties that it had acquired in 2018 from Australian mall operator Westfield. In effect, it placed a €16 billion bet on a sector that was already grappling with the threat posed by e-commerce.
This left it with 27 malls in the US — 16 in California, three in Maryland and two a piece in Illinois, Florida and New York City, where it owns the Westfield World Trade Center. It also has 10 shopping centers in some of America’s biggest airport terminals, including JFK, LAX, Miami International Airport and Chicago O’Hare. It also aims to dispose of €3.2 billion in European assets by 2022.
The company’s financial report makes for painful reading, even by current standards: in 2020, URW’s malls were shut for 93 days. There were only 70 days in the entire year when they were not subject to some form of restriction. Even today, the company says that roughly half of its centers remain closed.
Headquartered in Paris, URW owns 40 assets in France, including malls, airport retail centers, conference centers, office complexes and even the odd hotel or two, such as the Salomon de Rothschild in Paris. Its portfolio also includes 9 malls and one office complex in Germany; 8 malls in Spain; 6 in Poland; 4 a piece in the Netherlands and Sweden; 3 in the Czech Republic; 2 in Austria; and one a piece in Italy, Belgium and Denmark. In the UK it owns four London malls.
In 2019, the total value of all of URW’s assets was €65 billion; by the end of 2020, it had fallen 11.6% to €56 billion. Revenues crumbled as its tenants’ sales plunged 37%. In Continental Europe, the group’s revenues fell 19%. In the US they tumbled 28%. In the UK, which went through two full-blown national lockdowns last year (and is now on its third), they plunged by 49.3%.
The UK’s brick-and-mortar retail sector was already deep in crisis before Covid. The lockdowns have merely intensified a shift from brick-and-mortar retail to e-commerce that was already well under way while also leaving a trail of bankruptcies in their wake. Long-struggling retail groups such as Arcadia and Debenhams were tipped over the edge. They behind left an even larger hole in the UK’s already decimated retail property landscape.
With many of its tenants unable to open their shops and eviction moratoriums in force across its international markets, URW suspended rent collection for some of 2020. By the end of the year, it had collected around 80% of rents and had extended just over €400 million of rent relief to its tenants.
“These negotiations are typically not about permanently changing lease structures or changing the basis for rent calculations (e.g., replacing Minimum Guaranteed Rent with Sales Based Rent only leases), but rather focus on providing appropriate rent relief to achieve a fair burden sharing,” it said.
URW is one of a number of large retail property landlords that refuses to give in to pressure from tenants to move to sales-based leasing. That would further erode the value of its properties, which in turn would make it even more difficult to continue servicing its debt, said Colm Lauder, a real estate equity analyst at Goodbody.
“If you are servicing debt, you need a clear income profile. If your rental income has a much smaller fixed component, far more significant variable component, naturally, your debt will be more expensive, more complex or not available at all,” Lauder said.
That would be a major problem for URW, given the size of its debt load, which reached €26.4 billion ($32 billion) last year. This is in large part a legacy of its purchase of Westfield’s US and UK assets, for $16 billion. The acquisition significantly expanded the company’s global reach but it also increased its exposure to brick-and-mortar retail at the worst possible time, when the sector was on the cusp of a deep structural downturn — particularly in the U.S. and the UK, the two markets it had just expanded into. By Nick Corbishley, for WOLF STREET.
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