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Charles Stodart

Refocus: A global strategy to lift bricks-and-mortar shopping malls delivers strong investor value

By Charlie Stodart
4 minute read

History has shown that the listed AREITs markets can overreact in times of market uncertainty. And even within this asset class, large valuation dispersions can emerge. A strong case can be made that this is exactly what is happening to AREIT mall landlords today.

This presents a potential opportunity for active long-term investors who can position their AREITs exposure to take advantage of these dispersions.

Lockdowns, travel restrictions and social distancing are clearly not the friend of “bricks and mortar” shopping and the take-up of online shopping in the immediate term has been nothing short of staggering. In the depths of the lockdown, for example, weekly online sales for Rebel reached almost 40 per cent of total sales, from approximately 10 per cent prior. 

Markets hate uncertainty

In the case of Rebel, online sales take-up has since retreated below 15 per cent of total sales as COVID measures were eased, but investor concerns continue to weigh on mall AREITs. This is particularly the case for Unibail, which owns premier malls in the northern hemisphere, mainly Europe. 

Part of that concern may be driven by Unibail’s level of gearing, which is higher than peers, though still well below covenant levels. Management is now looking to address those concerns with a €9 billion RESET plan that was announced in mid-September.

A challenge to this Unibail RESET plan has since emerged, led by an activist consortium of Unibail shareholders and dubbed REFOCUS, which rejected RESET’s proposed €3.5 billion rights issue (since voted down by shareholders), advocating instead to dispose of the US portfolio to refocus Unibail as the leading pan-European player. 


The recent sale of the SHiFT building in Paris (Nestle’s new French HQ) at a premium to the book value of 30 June 2020 supports the REFOCUS proposal. While it would be wrong to assume that all of Unibail’s assets can be sold at a premium to book value, this sale does suggest a more positive view for long-term investors than currently priced in by the market. Investors appear to agree and have warmed to REFOCUS developments. And while the discount to net tangible assets (NTA) has narrowed abruptly since the rights issue was rejected, that discount remains significant.

The market may also be troubled by the resurgence of COVID in the UK and certain European countries, key markets for Unibail’s flagship stores. And while we don’t know when COVID will be sufficiently under control – with lockdowns known to damage occupancy, rents and asset values – experience from elsewhere suggests that once conditions improve, footfall and consumers do return. Clearly, positive vaccine developments potentially accelerate that return.

But even if the return of the consumer takes a little longer, maybe this is already sufficiently discounted as the stock is trading on a “single digits” price-to-earnings multiple.

Uncertainty can also bring opportunity

What has been the experience of other stocks in the AREITs universe that have opted to reduce gearing uncertainty? Overall gearing levels across the universe have been in far better shape than during the GFC, though investors remain concerned that asset values could be marked down if the COVID environment extends.

Scentre Group has recently issued a 60-year US$3.0 billion subordinated hybrid at a blended coupon of 4.93 per cent to head off these concerns. To be treated as equity for covenant purposes, this issue largely removes the uncertainty regarding the level of gearing. Despite recent positive moves, Scentre Group still trades at a significant discount to NTA. 

This decision has enabled investors to focus on the underlying business operation which has clearly been under pressure through the worst of the lockdown. 

During the most recent earnings season, we learnt that rent collection for malls in Q2 was a paltry 35 per cent, primarily hit by hugely constrained activity in NSW and Victoria. But what has been the experience elsewhere?

Focus on the foot traffic

Carindale, which is solely exposed to the Queensland market via its stake in Westfield Carindale, is perhaps a reasonable example, although not representative of the wider mall industry. In the first half of the year, gross rental billings collected was only 71 per cent (including “COVID-free” January and February). However, by early September that rental collection had jumped back to 98 per cent prompting a sharp improvement in the stock price in the ensuing weeks. 

Keeping this in mind, does it then mean that maybe investors are again being too pessimistic in their long-term outlook for the mall AREITs?

A key factor supporting rent collection – and rent levels post-COVID – will be how quickly foot traffic returns to malls as economies reopen. The recent reporting season showed that foot traffic in malls rebounded to between 75 per cent and 90 per cent of pre-COVID levels as malls reopened. The evidence points to shoppers going back to the malls as and when conditions allow. 

The significant discount being applied across these three malls and the subsector in general warrants a closer look. Of course, malls do differ, and the stronger centres will thrive in the long-term. Perhaps the real story here, though, is the opportunity for active long-term investors that are willing to take the view that, ultimately, value gets recognised.

Charles Stodart, investment specialist at Zurich Investments