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Continental retail holds up for Unibail-Rodamco-Westfield, UK assets drag

Unibail-Rodamco-Westfield's continental European retail assets proved resilient in the first half of 2019, but the landlord's two U.K. assets experienced a sharp dip in value as the country's retail sector continues to suffer.

The landlord's continental retail assets recorded just a 0.4% year-over-year decline in values despite growing concern about the region's retail prospects. By contrast, URW's two Westfield-branded shopping centers in London saw their combined values sink 6.3% year over year, while also recording a 3.1% fall in net rental income, CEO Christophe Cuvillier said during a first-half earnings call.

The U.K. retail sector is gripped by turmoil, with retailer insolvencies and store closures widespread. The U.K. has the highest penetration of e-commerce in Europe, which has severely hit sales at brick-and-mortar retailers who are also battling low consumer spending growth and economic uncertainty surrounding Brexit.

"The industry backdrop remains challenging," said CFO Jaap Tonckens. "And we expect that to remain the case for another two years. It's going to be tough, especially in the U.K." About 87% of URW's portfolio, which has a gross market value of €65.2 billion, consists of shopping centers across Europe and the U.S.

URW's continental shopping centers enjoyed a 5.3% year-over-year increase in tenant sales in the first half of the year, while footfall was up 3.2% compared to the same period last year, Cuvillier said. Net rental income at the company's continental shopping centers rose 2.1% year over year during the period.

Meanwhile, the fall in URW's U.K. asset valuations was offset by better performance in some other metrics. Footfall at Westfield Stratford City increased 6.5% year over year, while footfall at Westfield London was up 6.3% year over year, Cuvillier said. This compared with a drop of 1.1% in the global footfall index for the period, he added.

Tenant sales at URW's two U.K. assets were also up by 7.1% in total compared to the same period in 2018 — a 12.5% increase at Westfield London and a 2.3% rise at Westfield Stratford City, Cuvillier said.

Still, Cuvillier acknowledged that "vacancy is still too high" at both shopping centers. The 3.1% fall in net rental income across the two assets was due to the impact of company voluntary arrangements — an insolvency procedure that often requires landlords to slash rents — and some nonrenewals at Westfield London, Cuvillier said.

Difficulties in the retail sector across URW's assets in continental Europe, the U.K. and the U.S. saw 250 stores impacted out of a total of 15,000 stores, the company said. Of these stores, 85 were in continental Europe, 20 were in the U.K. and 145 were in the U.S. Still, the impact of these problems accounted for only 0.7% of the company's retail minimum guaranteed rent on an annual basis, it said.

URW's U.S. assets saw occupancy fall in the first half to 93.4% from 94.3% in the year-earlier period due to bankruptcies and departing tenants, Cuvillier said. Tenant sales rose 3% overall in the first half of 2019, with a 4.9% year over year increase at flagship assets, he added.

"The main challenges in today's environment are leasing and tenant monitoring," said Cuvillier. "[The first half of 2019] has been very busy in this respect, especially of course, in the U.K. and the U.S., but also in continental Europe."

URW's net rental income for the period was €1.25 billion, an increase of 35.9% from €923.0 million in the year-ago period. The company's first-half recurring EPS amounted to €6.63, compared with €6.61 in the prior-year period.

URW increased its guidance for 2019 adjusted recurring EPS to a range of €12.10 to €12.30 from a previous guidance range of €11.80 to €12.00.