Good times aren't over for Unibail

By WILLIAM BOSTON

Judging by the pounding that Unibail-Rodamco SE's shares have taken over the past few days, it might seem that the good times are over for Europe's largest operator of shopping malls.

Shares in the Paris-based company fell 6% Tuesday to close at €144.80 ($197.79). The stock is down 7.7% since Feb. 4, when Unibail announced it was acquiring Simon Ivanhoe, a joint venture between Simon Property Group Inc. and Ivanhoe Cambridge Inc. that holds seven European shopping centers, for €715 million ($976.6 million).

What spooked investors is Chief Executive Officer Guillaume Poitrinal's warning that profits, which grew 7.1% last year, will be flat or grow 2% at best in 2010.

This year "will be a transition year," he told reporters.

Profit will be hit by low or negative inflation indexes that affect rent linked to inflation, the loss of rental income from properties sold in 2009, lingering uncertainties about the economic recovery, and sluggish consumer spending. Profit growth also will be affected by the limited amount of new completed developments in 2010 and the high level of dividends. Unibail management is proposing a dividend on 2009 earnings of €8 a share, an increase of 6.7% from 2008.

Unibail's profit warning came as a surprise because the company is one of the few European property companies to emerge from the financial crisis in robust health. Unibail has cash and available credit of more than €2 billion and little debt.

Its shares rose 23% over the past six months, outpacing the FTSE EPRA Nareit Real Estate Index, which rose 10% during the same period. The stock was added to the Dow Jones Euro Stoxx 50 index of blue-chip companies, bumping German car maker Volkswagen AG.

"Unibail has become a proxy for people wanting to buy into European retail property," says John Lutzius, managing director of Green Street Advisors in Europe.

Unibail did more than just weather the economic storm. While the company reported a net loss of €1.5 billion in 2009, the loss was caused by the technical effect of writing down the value of its property. The value of its property portfolio was €128.20 a share at the end of December, down 15% compared with the same period a year earlier. But excluding asset write-downs, earnings rose 7.1% to €9.20 a share on a like-for-like basis. Net rental income from its shopping centers rose 3.9% to €942 million.

Unibail operates more than 100 shopping centers in 12 countries. Its strategy is to own huge supercenters with a broad offering of shopping at international retail stores, restaurants, bars and cinemas. Because of their sheer size and the scope of stores they offer, the centers tend to attract more shoppers than smaller malls.

Created from the 2007 merger of French and Dutch property companies Unibail and Rodamco Europe, the company still sees strategic acquisitions as a key source of growth. Its favored targets are big shopping centers in need of improvement in major European cities.

"If we can find opportunities of that kind we will not hesitate," Mr. Poitrinal says. "We are interested not only in the quality of the acquisition but also in the potential upside."

The latest example of this strategy is Unibail's agreement last week to acquire Simon Ivanhoe, a jointly owned European subsidiary of Simon Property Group and Ivanhoe Cambridge. Unibail will pay €715 million for a portfolio of seven shopping centers in France and Poland. Unibail also agreed to a joint venture with Siimon Property and Ivanhoe covering five retail development projects in France.

The deal follows the purchase last year of shopping centers in Spain that were sold by struggling property company Metrovacesa SA.

"Unibail has a strong balance sheet and is perfectly positioned to look for attractive acquisitions," says Gerios Rovers, chief investment officer for Cohen & Steers in Europe.

There are signs that real-estate developers are beginning to put retail property on the market. Dutch developer Multi Corp. is in talks to sell some of its Western European shopping centers to Corio NV, another Dutch property firm. It is also likely that as European property markets continue to recover, more landlords who have been kept afloat by their creditors will sell property.

"Local developers in Spain have been kept alive by their banks and you can expect to see some of them selling shopping centers," says Robert Stassen, property analyst for Credit Suisse in London.

Over the longer term, Unibail's strategy is to develop shopping centers itself or acquire centers and improve them by replacing low-paying local retailers with international brands for which Unibail can command a higher rent. Mr. Poitrinal says the financial crisis and recession have helped the company speed up the restructuring of its roster of retail tenants. Many local retailers have gone bust in the recession.

The search for underperforming shopping centers that Unibail can improve is likely to keep the company focused on continental European cities, where rents aren't as high as in the U.K. As long as Unibail keeps focused on ensuring there is strong upside potential from its acquisitions, the slowdown in profit growth this year isn't likely to be the end of the story.

"Compared to other companies like Simon or Westfield, Unibail is much newer to the shopping-center game," says Mr. Lutzius of Green Street Advisors. "The growth story is not over."