Klepierre (OTCPK:KLPEF) is one of the REITs that I discussed quite regularly at European Small-Cap Ideas. This commercial REIT was obviously negatively impacted by the COVID pandemic, but was able to limit the damage in 2020 and recently reported good to excellent results for fiscal 2021 with further growth to come in 2022 as the situation unfolds. normalizes. The 2021 results and dividend exceed my expectations, and the stock price is now trading around 40% higher than when my previous article was published.
Klepierre has its main listing on Euronext Paris where it trades with LI as its ticker symbol. The average daily volume exceeds 1 million shares and since there are options available in Paris, it is a very easy choice to trade Klepierre shares on this exchange. I will be using the EUR as my base currency throughout this article.
A relatively strong direct result
As most of the COVID-related restrictions were lifted in Klepierre jurisdictions in the second half of 2021, REIT results immediately rebounded and the direct result (comparable to FFO/AFFO in North America) was twice as high only in the first half of the year. Total tenant sales results in 2021 increased by approximately 10% compared to 2020 and in the second half of 2021, retailer sales reached 95% of pre-COVID levels. This is probably the best evidence that tenants’ business is bouncing back. And maybe even better than expected as attendance improved at a slower rate to just 80% of pre-COVID levels.
The key element for commercial REITs is rent collection. Klepierre performed well, especially after a good second half. It has collected approximately 83.7% of the rent as of December 31, an additional €28 million has arrived after the end of the calendar year and Klepierre expects to receive an additional €13 million in the coming weeks, but attributable to 2021 rent. This should translate to a full-year recovery rate of just under 87%.
This may still sound disappointing, but bear in mind that the first half rent collection rate was only 74%, which essentially means that Klepierre received all the rent owed to it in the second half. . That doesn’t mean we can expect a 100% rent collection rate in 2022, but I do expect the rent collection rate to normalize further towards the mid-90s level.
Thanks to the very good occupancy rate and the levels of rent collection, Klepierre was able to post a very high direct result of EUR 622.3m, as you can see below. Spread over 285.9 million shares outstanding, the direct result was approximately EUR 2.18 per share. This represents an increase of more than 6% compared to fiscal 2020, although stores were affected by longer mandatory closing periods in 2021.
The good result allowed Klepierre to increase the dividend again and the REIT is proposing a distribution of EUR 1.70 per share. This is a 70% increase from the payout of EUR 1 per share paid in 2020, and I think we can expect further payout increases as the cash flow based payout rate of 2 .18 EUR per share is approximately 78%. An added bonus is that the distribution will likely be paid out as a return of capital which should be tax free.
There’s more to come in 2022 as the situation normalizes
Generating a direct result of EUR 2.18 is already much better than I had hoped for (I expected a direct result of EUR 1.85 per share), while the FY 2022 guidance of 2.30-2 EUR .35 per share is slightly below my expectations of EUR 2.40-2.50 per share. That said, Klepierre has sold some assets over the past two years (achieving almost €1 billion in sales in 2021 alone) and these disposals obviously have a negative impact on rental income and direct income. With interest rates also rising again, balance sheet management will remain important for Klepierre. Fortunately, the REIT has gradually reduced its net debt and at the end of December last year the LTV ratio was only 38.7%, down from nearly 41.5% at the end of 2020. And since most of the disposals took place in line with the official book values of the assets, there is currently no reason to believe that the book value of the assets is materially overstated.
If we applied a dividend payout rate of 80%, we can reasonably expect the dividend for the financial year 2022 to be approximately EUR 1.85 per share. At the current share price, this would represent a return of around 7% while Klepierre would retain over 140 million euros to fund its development pipeline.
Klepierre performed very well in 2021 and the direct result is higher than I expected while the LTV ratio is lower than I expected. That being said, the distribution of EUR 1.7 per share will have a negative impact of approximately 2.5% on the LTV ratio, but as Klepierre should obviously continue to receive rental income by the date of payment of the distribution , I expect the balance sheet after the first half to still show an LTV ratio slightly below 40%.
Klepierre is now the second largest position in the European REIT portfolio and the trend to increase exposure to commercial REITs is paying off.