Westfield’s owner has given investors a preview of what malls could look like in the future — part advertising platform, part residential complex. But the transformation plan is just window dressing until it can sell its US properties for financing.
Europe’s largest listed commercial real estate company by gross assets, Unibail Rodamco Westfield,
said at an investor day on Wednesday that it would make a major push into residential real estate development and promotion. Unibail’s share price is more than a third below its pre-pandemic level, weaker than its major peers in European and US malls. The stock has fallen more than 60% since Unibail bought Westfield in 2018 — a pricey deal the mall’s owner is now trying to reverse by selling its U.S. properties. Its high level of debt, which is 16 times earnings before interest, taxes, depreciation and amortization, is the main reason many investors think the stock is too risky.
Unibail wants to diversify its rental income by earning more from ads and brand launches. The company has already earned €23 million or $26 million from advertising on the 1,700 digital screens installed in its malls in 2021 and aims to double that amount by 2024.
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As regulation makes it harder to track consumers online, Unibail believes showing ads in its European malls, which have 550 million annual visitors, will appeal to brands. Although a rental company will not have the same quality of customer data as a retailer, Unibail expects revenues from advertising and brand partnerships to reach 200 million euros by the end of the decade.
Soaring home prices are the bigger opportunity. According to CBRE, institutional investors poured €102.6 billion into multi-family housing in Europe in 2021 – almost the same amount invested in offices.
Unibail owns land in major cities across Europe that can be sold to property developers. It can also sell stakes in projects to institutional investors or carry out the construction itself. Unibail has applied for planning permission to build 1,700 apartments next to its Westfield shopping center in London. Overall, it has the potential to develop almost 16,000 residential units across Europe.
But not much can happen until Unibail cuts its debt, which it hopes to do by selling US malls including Westfield’s flagship stores in New York and San Francisco. The company expects this to happen in 2023, but it’s unclear if serious talks are already underway. Chief Executive Jean-Marie Tritant mentioned that as Russia’s invasion of Ukraine sent European stocks plummeting, several potential buyers called, wondering if Unibail would be forced to sell its US malls on the cheap.
Unibail has enough capital for at least two years, so it’s not yet under pressure to sell. But borrowing costs are rising. The mall’s landlord has twice borrowed in the bond markets since the pandemic began, at a low cost of around 1%. Today he would probably have to pay 2.5%. High inflation in the US, currently at 7.9%, will make it harder to sell malls at a good price. Unlike in continental Europe, US mall leases are not linked to inflation.
Unibail could sell its assets for 30% below their 2021 valuations and still achieve its target loan-to-value ratio. Hopefully that kind of rebate won’t be needed, but just a sale of its US malls may improve prospects in Europe.
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