We have increased our position in Klépierre (OTCPK:KLPEF). The company is one of the largest and highest-quality REITs in Europe. Morgan Stanley recently issued a report highlighting the downside risks for European retail property, noting the possibility of online channels gaining more share of total retail sales. Klépierre’s stock price slumped following the report, adding to pressure on the company’s market valuation which has dropped by over one-third since its 2015 peak. Dividend investors may do well to view the depressed stock price as an attractive opportunity to pick up a high-quality REIT that is yielding near 7% and which has grown its dividend at a 5.9% compound annual growth rate (CAGR) over the last decade.
Company background and description
Founded in 1990, Klépierre SA is Europe’s second-largest real estate investment trust (REIT) after Unibail-Rodamco-Westfield (OTCPK:UNBLF) and followed by Hammerson (OTCPK:HMSNF). The Group has a property portfolio of more than 100 leading shopping centers, attracting 1.1 billion visitors each year and valued at €24.4 billion as of December 31, 2018.
Source: Klépierre Annual Report 2018
As shown below, Klépierre’s properties are predominantly located in France and the Benelux region, other Western European countries, Scandinavia, as well as Central & Eastern Europe and Turkey. Despite being focused on shopping centers and other retail assets, Klépierre displays a fair amount of diversification in terms of end-market exposures. Unlike many US REITs focused on shopping centers, Klépierre derives over 50% of its rental income from non-fashion tenants, including cultural & leisure activities, food & restaurants, health & beauty, household goods, and services & entertainment.
Source: Klépierre Annual Report 2018
Concerns expressed in the Morgan Stanley report
Morgan Stanley recently produced a report on European retail property. The day the report was released, Klèpierre’s stock dropped below 30 EUR a share. Morgan Stanley expressed some broad concerns for the European retail space and claimed that capital values for continental European shopping centers are due for a substantial correction. Morgan Stanley dropped their price target for Klèpierre by 20% to 23 EUR a share. The price target for Unibail was dropped by 17%, Carmila’s by 22% and Hammerson’s a whopping 33%.
Morgan Stanley highlighted the risk of online channels gaining more share within retail sales which could potentially create pressure on rental growth for physical retail and prompt property re-pricing. It is clear that online shopping is changing the retail landscape, but that change isn’t necessarily negative for all physical retail participants, and companies like Klèpierre are also able to respond effectively to the transformation. First, it’s perhaps worth pointing out that Europe does not have the same physical retail glut that the US has and therefore is unlikely to need the same kind of brick and mortar cleanup that we see going on in North America. The chart below from a Cowen and Company report makes it clear that the US has far more retail space per capita than any other country, with Klépierre’s European markets looking relatively reasonable on this metric.
Source: Cowen and Company; ICSC; Cushman & Wakefield
It’s also important to note that Klèpierre is not sitting idle in this regard. The company is actively seeking tenants benefiting from the move to online that have strong omnichannel offerings. Initiatives such as “Retail First” offer programs to help tenants right-size or appropriately locate their physical stores considering the trends in online shopping. Klèpierre also has a set of initiatives focused on making the shopping center experience more attractive to draw consumers to their locations and get them to stay longer. These initiatives include entertainment concepts and events as well as enhancing the food offering.
And, despite some dreary predictions for physical retail, it’s also clear that many online retailers are adding brick and mortar locations as omnichannel looks to be the way forward. It’s no secret that companies like Amazon (AMZN) and Wayfair (W) are looking into expanding in physical retail, but there are numerous successful online businesses now moving into shopping centers, bucking the idea that physical retail needs to fade indefinitely.
Pressures lead to a buying opportunity in Klèpierre and a 7% yield
Morgan Stanley’s report may have pressured the Klèpierre stock recently, but it has been in steady decline since its 2015 peak, having lost around a third of its value. Concerns around technological disruption and European Central Bank strategy have certainly been contributing factors, but Klèpeirre remains a fundamentally strong and diversified REIT. And, perhaps due to recent concerns, the company can now be bought at what we view as attractive levels. We recently posted a more comprehensive article on the fundamental profile of the company, but one chart that should catch dividend investors’ attention is below.
Source: Thomson Reuters
The dividend yield is now near 7%, which is an attractive absolute level, but also interesting when viewed against the company’s average historical yield. Don’t forget that this is a REIT that has been growing its dividend at a 10-year CAGR of 5.9% and looks undervalued compared to our estimated valuation around 35 EUR per share. We purchased some Klèpierre in October of last year below 30 EUR per share, and following solid results and the recent share price weakness, we picked up more shares at a similar price.
Klèpierre’s quality and yield make it hard to ignore
Klépierre is one of the largest and arguably highest-quality REITs in Europe. Concerns about a shift to online shopping, weak consumer spending, and interest rate policy have pressured the company’s stock and pushed its yield to near 7%. Klèpierre is actively addressing changes in its industry and can fall back on a high-quality property portfolio and strong relationships with some of Europe’s top and growing retail companies. The yield and potential for continued dividend growth, combined with the current valuation, offer an investment opportunity that dividend and non-dividend focused investors alike should consider for their portfolios.
Disclosure: I am/we are long KLPEF, O, UNBLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed to or by the author. This article does not constitute investment advice.