French REITs keep ratcheting up dividends

[Pages:8]French REITs keep ratcheting up dividends

Tuesday, January 30th 2018 Real Estate Investment Trusts (REITs) combine high dividend payouts, above-average yield and protection against inflation

French REITs exhibit strong and reliable dividends that have increased over time We forecast dividends from French REITs to grow 5.3% CAGR over next four years REITs forecast to have the highest yield amongst the sectors in the SBF 120 Unibail-Rodamco is a top prospect with compelling dividend growth and value We are forecasting aggregate dividend from the six French REITs listed in the SBF 120 to reach 3.2bn by 2020. This reflects a 5.3% CAGR growth over the next four years, above the 4.7% we forecast for France SBF 120 overall. French REITs own assets mainly located in Europe and should benefit from a continued economic expansion associated with potential higher inflation in the region. French REITs are also expected to return the highest dividend yield among SBF 120 sectors. Whilst a high dividend yield can sometimes signal a dividend at risk, French REITs have a proven track record of combining above average yields with high payout ratios and reliable growth. They have remained much more stable than other high yielding sectors such as banks, where dividend evolution has been volatile. While REITs could be vulnerable to adjustments in the ECB monetary policy which could increase borrowing costs and impact property values, they provide some protection against inflation. The impact of interest rise when associated with economic growth and rising inflation should be limited as both factors can positively affect REIT fundamentals.

Constant aggregate dividend growth from French REITs since 2008 4.0

3.0

2.0

1.0

0.0

Confidential | Copyright ? 2018 IHS Markit Ltd

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Dividend Forecasting

1. French REITs are well suited to income-seeking investors

REITs have a high dividend payout requirement due to their tax regime. Thus a large share of total return comes from dividends compared to other sectors, and REITs usually exhibit a higher dividend yield compared with other sectors.

Above-average payout ratio from French REITs

The SIIC tax regime allows listed property companies, under certain conditions, to elect for corporate tax exemptions: on earnings from the rental of properties, capital gains realized on the disposal of buildings, equity in partnerships or in SIIC subsidiaries, and finally on dividends received from SIIC subsidiaries. In return for these tax exemptions, REITs must distribute to shareholders 95% of rental income, 60% of any capital gains realized, and 100% of dividends received from SIIC subsidiaries.

As shown in the table below, French REITs exhibit high dividend payout ratio.

2011 2012

French REITs 82% 82%

CAC 40

53% 52%

SBF 120

50% 53%

Source: IHS Markit, FactSet.

2013 89% 52% 52%

2014 90% 63% 59%

2015 92% 59% 55%

2016 87% 58% 54%

2017e 90% 49% 52%

2018e 87% 47% 49%

Price change compared with income return and above-average yield

As depicted in the table below, a large part of the total return from French REITs are from income returns. The typically high income payout ratios of REITs make them among the highest yielding of publicly traded equities. French REITs are expected to return the highest dividend yield sector among France SBF 120, with a forward dividend yield of 4.9% (FY17 dividend estimates).

Above-average dividend yield

6.0 5.0 4.0 3.0 2.0

01/01/2013 01/07/2013 01/01/2014 01/07/2014 01/01/2015 01/07/2015 01/01/2016 01/07/2016 01/01/2017 01/07/2017

CAC 40

SBF 120

Source: IHS Markit, FactSet.

French REITs

% of income return in total return

1-Year 3-Year 5-Year 10-Year 15-Year 20-Year

CAC 40 21% 40% 37% 82% 60% 67%

SBF 120 19% 37% 34% 70% 55% 62%

French REITs 31% 97% 52% 73% 58% 62%

Source: FactSet

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Dividend Forecasting

2. French REITs look well positioned to benefit from Eurozone and French recovery

As macro conditions strengthen with increase in businesses and consumer spending, so often does the demand for real estate, leading to increases in occupancy and rents.

French REIT's strong exposure to France and Europe

Assets geographic

breakdown

France Europe

NRI* geographic breakdown

France Europe

Unibail Rodamco**

54%

46%

Unibail Rodamco

46%

54%

Klepierre

39%

61%

Klepierre

37%

63%

Gecina

100%

0%

Gecina

100%

0%

Icade

100%

0%

Icade

100%

0%

Fonciere des Regions 52%

48%

Fonciere des Regions

46%

54%

Mercialys

100%

0%

Mercialys

100%

0%

* NRI = Net Rental Income

**Pro forma of Westfield acquisition: France 37%, USA 22%, Europe including UK 41%. Shopping center 87%, Offices 7%.

Source: Company.

France and Eurozone PMI continues to point to buoyant activity at start of 2018

Eurozone and France GDP have increased 2.5% and 1.9% in 2017, at respectively a ten year and six year high. And the strong January Flash PMI Composite, which includes the manufacturing and service sectors (Eurozone: 58.6; France: 59.7) continued to point to strong activity in the private sector at start of 2018. IHS Markit expects 2018 GDP to grow 2.2% in the Eurozone and 1.9% in France.

France private consumption to accelerate in 2018

France consumer confidence remains high for historical levels despite January's contraction and IHS Markit expects private consumption growth to accelerate in 2018. The improvement in the labour market, low inflation and a gradual increase in nominal wages will help sustain households' purchasing power.

Retail sales growth is reflected in shopping centre tenants' sales which affect rents

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Eurozone Total retail trade (ex. motor vehicles & motorcycles) France Total retail trade (ex. motor vehicles & motorcycles) Unibail tenant sales growth

Unibail Shopping center NRI lfl

Source: Company, FactSet.

France labour market to gradually improve over coming years

Job creation has an immediate impact on the office sector as the demand for office spaces is tied to job growth. France business confidence remained high in January and IHS Markit expects labour market conditions to continue their gradual improvement in 2018 with the unemployment rate to move towards its pre-crisis levels over coming years.

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Dividend Forecasting

3. French REITs: a protection against inflation

In the scenario of a stronger economic recovery in France over coming years triggering an acceleration of the inflation, what will be the impact on French REIT investments?

Inflation-indexed rent for French REITs

Rent levels are adjusted annually based on changes in particular indices. Indices used vary by property types (retail, office, residential) and are partially composed by the French Consumer Price Index. Thus, higher inflation should increase expectations for rental growth and positively impact dividend distribution.

French REIT Income return has outpaced Inflation in France

The ability to increase rents with inflation can provide protection against inflation. As depicted in chart below, the income component of French REITs returns has exceeded inflation (as measured by the French Consumer Price Index) in the past 9 years. Our forwards dividend yield also exceeds inflation expected by IHS Markit in France in 2017 and 2018.

8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

French REITs Income return Consumer Price France

Source: IHS Markit, FactSet, INSEE

IHS Markit expects French inflation to trend upwards in 2018 but remain muted

France inflation remains low despite the economy going through a strong cyclical recovery. IHS Markit expects headline inflation to increase gradually in 2018 as a result of higher international commodity prices. IHS Markit also projects the economy to remain strong this year, putting some upward pressure on core inflation. Nevertheless, underlying inflationary pressures are seen remaining muted in 2018. IHS Markit target a consumer price inflation of 1.4% in 2018 vs. 1.0% in 2017 and 0.2% in 2016.

Key macroeconomics indicators

France Real GDP, Growth Rate, Year-on-year CPI, Year-on-year percent change

Source: IHS Markit

2015 1.0 0.0

2016 1.1 0.2

2017 1.9 1.0

2018 1.9 1.4

2019 1.7 1.7

2020 1.6 1.7

2021 1.6 2.0

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Dividend Forecasting

4. French REITs are well positioned for higher interest rates

In a scenario seeing Eurozone recovery to maintain its momentum and inflation to accelerate and coming closer to the 2% ECB objective, the ECB might begin to taper faster than anticipated its quantitative easing program (currently scheduled in September 2018) and starts to set a raise in interest rate.

If the ECB signal further increases in interest rates, what will be the impact on REITs?

The transition to a more neutral monetary policy may lead to volatile REITs share prices in the short term. Interest rates increase could affect REITs' fundamentals via higher interest expenses or lower property valuations as higher discount rate reduce present value of future cash flows if they are not expected to rise.

However, changes in interest rates often reflect changes in the economic activity which could support demand for commercial real estate translating into higher REITs earnings and dividends in the future.

Are French REITs well-prepared for rising rates?

The charts below show how positions at REITs have changed since the financial crisis, and help to gauge how well REITs are positioned for a period of higher interest rates.

Leverage ratios is down (Loan to value) 60.0% 50.0% 40.0% 30.0%

Low interest rates reduce financing costs 5.0% 4.0% 3.0% 2.0% 1.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2Q17 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2Q17

French REITs LTV

EBITDA relative to interest charges

6.0 5.0 4.0 3.0 2.0

Weighted Average interest rate Longer maturities lock in low rates

7.0 6.0 5.0 4.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2Q17

French REITs ICR

Weighted Average maturity

Source: FactSet, company

French REITs have protected themselves from an increase in borrowing costs by locking in their existing debt at fixed interest rates. Based on Q217, the median share of total debt that was at a fixed interest rate or hedged by rate hedging instruments was 85%. Low leverage, low interest costs, long maturities and high coverage ratios--French REITs are well prepared for an increase in interest rate.

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Dividend Forecasting

5. Unibail-Rodamco: compelling dividend growth and value

Unibail-Rodamco (UR) owns a 42bn portfolio, consisting of 80% of shopping centres in Europe (37% in France), offices (10%) and convention centres (7%) in France. In December 2017, UR announced the acquisition of Westfield. Pro forma, shopping centres will account for 87% of the portfolio with exposure to US and UK.

UR faces risks, such as weaker economic recovery and retail sales in Europe, a challenging US retail landscape post Westfield takeover and online shopping. However UR's portfolio of prime shopping centres, a large development pipeline and a strong balance sheet should sustain its future growth.

Better Earnings growth outlook vs peers

Consensus estimates Unibail Rodamco Klepierre Average European peers

Source: FactSet

2017e 11% 5% 9%

2018e 10% 4% 5%

2019e 10% 4% 3%

3yrs CAGR 10% 4% 5%

UR expects recurring EPS for FY17 at the high end of the 11.80-12.00 range. Recurring EPS growth in the mid-term is currently guided by UR at between +6% and +8% CAGR. The management will give an update at Q417 release on January 31st. UR expects the Westfield transaction to be recurring EPS accretive from the first full year, and anticipates run-rate synergies of 100m per annum.

The consensus forecasts a CAGR 10% over next three years exceeding expected growth for Klepierre and European peers' average. The consensus is yet to fully account for the Westfield acquisition and thus estimates could be revised upwards if the transaction is completed.

Dividend estimates growth

14.0 12.0 10.0

8.0 6.0 4.0

10.20

10.70

11.40

12.30

13.20 7.0% 6.5%6.5%

6.0%

6.0%

5.3%

5.6%

5.5% 5.0%

4.5%

4.5%

4.0%

2.0

3.5%

-

3.0%

2016

2017

2018

2019

2020

Dividend per share

Dividend yield

Dividend growth Unibail Rodamco Klepierre

Average European peers

Source: IHS Markit, FactSet

2017e 5% 2% 6%

2018e 7% 5% 4%

2019e 8% 5% 3%

2020e 7% 5% 4%

4yrs CAGR 7% 4% 5%

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Dividend Forecasting

As the Westfield transaction is still conditional, our dividend forecast for UR is based on a standalone basis. The closing is expected in Q218. UR aims to pay semi-annual dividend between 85% and 95% of recurring EPS and expects to increase its annual dividend broadly in line with recurring EPS growth. Our forecast reflects a payout ratio in line with FY16 level (~90%) and within the range observed over last 6 years.

UR intends to maintain its current dividend policy post Westfield transaction. Thus, we could revise our dividend forecast for FY18 and beyond upwards if the transaction is completed depending on recurring EPS accretion.

Attractive discount to Net Asset Value

Discount - /premium NAV + 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Unibail-Rodamco

Source: FactSet, company

1% 22% 20% 27% 31% 16%

-3%

-9% -14%

Unibail trades close to its last reported Net Asset Value per share (206.2 at 1H17) and at a 3% discount to 2017 NAVPS consensus estimates of around 210. Over 20112016, Unibail has traded at an average 20% premium to NAV reported.

Month-end dividend yield at 4 years high

6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0%

2020e -13%

01/01/2011 01/06/2011 01/11/2011 01/04/2012 01/09/2012 01/02/2013 01/07/2013 01/12/2013 01/05/2014 01/10/2014 01/03/2015 01/08/2015 01/01/2016 01/06/2016 01/11/2016 01/04/2017 01/09/2017

Source: IHS Markit, FactSet

Unibail trades with a 5.3% dividend yield based on a FY17 dividend estimates of 10.7 per share. The last time UR return this level of dividend yield was January 2014. In addition, Unibail trades at 16.9x 2017 recurring EPS estimates of 12.0 which is below average of last 6 years of 19.1x recurring EPS.

Unibail offers a 22% potential total return

Total return Share price dividend yield Consensus Price target Upside to PT Estimated total return

Unibail

203.6

Source: IHS Markit, FactSet

5.3%

238.5

17.2%

22%

The consensus targets a share price of 238.5 for UR suggesting a 17% potential upside vs. current UR share price. Consensus target price combined with a dividend yield of 5.3% reflect a total return of 22%, the highest after Deutsche Euroshop (+27%) and above Klepierre (+16%).

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Dividend Forecasting

Contacts: Jonathan Chatelain Dividend Forecasting +44 20 7064 6021 dividendsupport@ For further information, please visit

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