Unibail stock: countdown to dividend reinstatement (OTCMKTS: UNBLF)

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introduction

2020 and the first half of 2021 have not been easy for commercial REITs. But at Unibail-Rodamco-Westfield (OTC:URMCY) (OTCPK:UNBLF) (hereafter “Unibail” for simplicity), the problems started about five years ago when it acquired Westfield in a multi-billion dollar transaction. This happened just before the COVID crisis, and Unibail was never able to fully integrate newly acquired shopping centers and generate the benefits of synergy before COVID hit. Now, in 2022, the REIT plans to sell its US assets within two years and fall back on the European market. Back to square one, but that doesn’t mean Unibail’s “clean version” couldn’t be an attractive investment option.

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Unibail has its main listing on Euronext Amsterdam where it trades with URW as a stock symbol. The average daily volume in Amsterdam exceeds 750,000 shares, making it the most liquid trading platform. In addition to this, the Amsterdam list offers options that could help in a scenario where one writes put options out of the money.

The FPI limited the damage in 2021

I was looking forward to seeing how the REIT would fare in 2021. The first half was rather weak as shopping centers owned and operated by Unibail were still facing mandatory closures. As the vaccination rate increased throughout the second quarter of 2021, shopping malls were allowed to reopen and the REIT’s financial performance improved.

At the end of Q2 2021, adjusted recurring EPS (comparable to FFO) was €3.24 per share, down from EUR 4.65 per share in the first half of 2020, as the first quarter of 2020 was still quite normal and Unibail had more income-generating assets. The majority of the COVID-related impact in 2020 was recorded in the second half of the year, with Unibail’s adjusted recurring EPS being only EUR 2.63 per share. So, looking at this weak result in H2 2020, recurring EPS of EUR 3.24 in H1 was not too bad as it represented a 20% increase compared to the previous half.

Unibail’s recurring EPS in 2021 was EUR 6.91 per share. Deducting the EUR3.24 per share generated in the first half of 2021, H2 EPS was around EUR3.67 or above EUR7.25 on an annualized basis, and that’s quite encouraging.

2021 results

Unibail Investor Relations

It is still lower than that of the 2020 financial year, but it should be remembered throughout 2020 and 2021 that Unibail continued to sell assets in the amount of 3.3 billion euros (with, for example, the sale of office buildings for more than 200M euros and 620 million euros) and this obviously had a negative impact on recurring EPS as Unibail repositions itself.

For 2022, Unibail now aims to generate 8.2-8.4 EUR of adjusted recurring revenue per share, which would be another major step forward. Of course, the actual realization of this outcome will depend on the timing of the sale of the US-based assets.

Although Unibail has posted good results in 2020, good results in 2021 and very positive forecasts for 2022, the REIT is still giving up on paying a dividend because it wants to put its balance sheet in a much stronger position first.

Its plans for 2024 are encouraging, but Unibail will have lost a decade

It was no secret that Unibail wanted to sell its US assets and although it will take a little longer than expected, Unibail now wants to finalize the sale of its US portfolio by the end of 2023. This will make unibail one Pure European Commercial REIT with a stronger balance sheet than at present since Unibail aims to achieve an LTV ratio of 40% by the time the US portfolio is sold.

European orientation

Unibail Investor Relations

It seems that Unibail is already preparing the market for a disappointing sale price for the US assets, as the REIT has provided sensitivity analysis on the evolution of the LTV ratio depending on the discount it must apply to the book value. American assets to get rid of them. As you can see below, the REIT’s most optimistic scenario appears to be a “sell at book value” as there is no data on what would happen if the assets were sold above the book value.

LTV Sensitivity

Unibail Investor Relations

As you can see above, if the US assets were sold at a 30% discount to book value, the total LTV ratio would fall to just 37.6% (including super subordinated hybrids). Unibail’s financial health depends on selling US assets at as high a valuation as possible. The drop in the LTV ratio will also help Unibail to self-finance its own development pipeline where it has identified more than 3 billion euros worth of projects.

Unibail also provided guidance for 2024 on a European basis only. The REIT expects its net rental income to return to pre-COVID-19 levels.

NRI Guidelines 2024

Unibail Investor Relations

This allows us to calculate recurring EPS for 2024 because we can apply certain assumptions for general and administrative expenses (€175 million, compared to €212 million in 2021, because general expenses will decrease when the sale of the US assets) and interest charges (€250 million). We should also deduct payments on hybrid securities and non-controlling interests, which makes it realistic to see a direct result of around 1 billion euros per share. Note: Much will depend on the sale of US assets that have a book value of around 12 billion euros. And the actual selling price will determine how much debt Unibail can repay and how much interest charges will go down.

US assets

Unibail Investor Relations

The bottom line, however, is that Unibail will have passed the 2018-2024 period only to start from scratch. He spread himself too thin when he acquired Westfield and I hope the REIT will have learned his lesson.

Investment thesis

The cancellation of the dividend due to the COVID pandemic was likely a blessing in disguise. As COVID hit all commercial REITs pretty hard, Unibail’s dividend cancellation got lost in a myriad of other REITs doing the same. I also think the decision to forego dividend payments in 2021 and 2022 was also the smartest thing to do. This has allowed Unibail to keep around EUR 22 per share in earnings and with just under 139 million shares outstanding. This essentially means that Unibail will have hoarded around €3 billion in cash to reduce balance sheet risk.

It’s tough for income investors, but I like the drastic approach. Save $3 billion, dispose of the assets you no longer want, and start rebuilding from there. The unknown in Unibail’s story is the sale of the US assets because the higher the discount to book value, the lower the impact on the REIT’s LTV ratio.

2022 will be a good year with recurring EPS above EUR 8 per share, but I think the sale of the US portfolio may have a negative impact on the anticipated EPS but the positive consequence will be a more secure balance sheet.

The dividend will return from fiscal year 2023 (payable in CY 2024), so there is no rush for dividend investors to pick up the stock. But the next 12-18 months will likely provide some good opportunities to recoup the stock before the dividend is reinstated (a payout ratio of 75% on recurring EPS of EUR7.5 would indicate a dividend of just over EUR5 per share, subject to the withholding tax of 12.8% in France). I currently have no position at Unibail but I have written put options. These puts are currently all out of the money, and I will likely continue to sell puts to take advantage of high volatility levels. An investment in Unibail is a waiting game.

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