Earlier this week, Europe's largest listed real estate company Unibail-Rodamco reported better-than-expected earnings growth for full-year 2016. '2016 was another year of financial and operational success for Unibail-Rodamco,' CEO Christophe Cuvillier crowed in a press release. ‘The successful 2015 deliveries, solid like-for-like rental growth and an all-time low cost of debt drove the strongest year-on-year recurring EPS growth since 2009.'

The company is active only on the European Continent and reported that rental income was particularly strong in the Nordics and Germany, which both accounted for increases of over 30% on an absolute basis due in part to new centre openings. The Mall of Scandinavia in Stockholm, which opened at end-2015 and was counted on a full-year basis for the first time in 2016, was a 'roaring success', the company's chief financial officer Jaap Tonckens told journalists in a conference call.

The retail landlord’s glowing figures helped push its share price higher this week despite a disappointing performance in one of its home markets. Retailer bankruptcies in the Netherlands dragged down net rental income by 8.1% on an absolute basis in 2016, Tonckens said during the conference call. 'The Dutch market has seen a disproportionate number of bankruptcies in 2016 and this has also had an impact on our business,' he conceded.

Darwinian struggle for survival in Dutch market 
One bankruptcy stands out in particular: Holland’s oldest department store chain V&D. Unibail-Rodamco has three former V&D stores in its Dutch portfolio in Almere, Hilversum and Leidsenhage and these large assets have been vacant since the company collapsed at end-2015. But the news is not all bad, Tonckens said. The Paris-listed company has since signed a lease with Canadian department store chain Hudson Bay Company for the former V&D store at its Almere shopping centre and is in talks with Hudson Bay as well as other parties for its former V&D stores in Hilversum and Leidsenhage. 

The Dutch market is currently undergoing a Darwinian struggle for survival and some formats like V&D and Perry Sports have simply not adjusted fast enough, Tonckens noted. He signalled that the Paris-listed company would take a tougher stance on tenants that are no longer meeting the demands of their customers and who therefore can’t afford rental hikes: 'We are not a utility company that provides space at a low, fixed rate so that retailers can make money. The overall economy is improving and if tenants are not benefitting, they need to ask themselves a fundamental question whether they need to change the model to survive.’

Unibail-Rodamco has the clout to tighten the thumbscrews – an action that shareholders will no doubt applaud. Moreover, the company’s sound financial basis means it can call the shots on other fronts as well. Asked whether he would consider teaming up with institutional investors on the company’s massive €8 bn development pipeline, Tonckens dismissed the idea out of hand, pointing out that the Paris-listed company has no need for co-financing thanks to its very low leverage and good access to capital markets.

Development pipeline generates solid growth
Indeed, Unibail-Rodamco can afford to bypass the acquisition route to further growth in a market where initial yields on large shopping centres have continued to tighten in recent years to around 4%, Tonckens said. The company’s development pipeline by contrast generates double that figure, in line with the upper range of its medium-term forecast of recurring EPS growth.

Following the latest developments in the US since Trump’s inauguration and with the UK now readying itself for Brexit, political stability remains a key issue that companies like Unibail-Rodamco are watching closely, Tonckens said.

But at the end of the day, Unibail-Rodamco is a landlord whose shopping centres appeal to a broad segment of the population and which cater to everyday needs. And there is still plenty of work to do to upgrade the portfolio, particularly in the Netherlands but also in other corners of Europe where the company is active. Tonckens put it this way: ‘We continue to conduct our day-to-day business and continue to work hard.’

All in all, no major surprises from the company’s latest full-year earnings figures this year, but that is by no means a disqualification. It will be interesting to see whether the company's UK peers Hammerson and Intu - which are due to present their full-year earnings later this month - will also be able to say it's business as usual in the face of a looming Brexit.

Judi Seebus
Editor-in-chief