Physical Retail And France Exposure Will Pressure LifeCentral Returns Over Time

Catalysts

About Wereldhave

Wereldhave owns and operates retail and mixed use centers in the Benelux and France, with a focus on Full Service Centers under its LifeCentral concept.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on physical shopping centers leaves Wereldhave exposed if retailer expansion in fashion and discretionary categories slows after the current phase of store network growth. This could cap like for like rental growth and pressure revenue and earnings if leasing spreads weaken.
• The push to grow the portfolio toward about €3b in Belgium and Luxembourg at net initial yields around 8% depends on a steady flow of large assets at attractive terms. If competition for these assets intensifies or yields compress, acquisition driven growth could come with thinner margins and lower incremental earnings.
• France remains described as a more difficult occupier market with quiet investment activity and potential book losses on eventual disposals. Prolonged delays in exiting these assets could tie up capital in lower return properties and weigh on net margins and earnings.
• The LifeCentral model increases exposure to food and beverage and other experience led categories. If consumer spending in these segments softens after the current reported sales growth, occupancy cost ratios could climb again and limit future rent uplift, affecting net rents and EBITDA.
• Growth in other rental income from solar panels, EV chargers and parking turns previously loss making areas into profit contributors. This also raises execution and capital allocation risk in a fast developing energy and mobility market, where weaker than expected utilization or pricing could restrict the contribution to revenue and net margins.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Wereldhave compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Wereldhave's revenue will decrease by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 33.8% today to 52.7% in 3 years time.
• The bearish analysts expect earnings to reach €102.0 million (and earnings per share of €1.97) by about July 2029, up from €73.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €137.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.7x on those 2029 earnings, down from 12.1x today. This future PE is lower than the current PE for the GB Retail REITs industry at 11.9x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Wereldhave has raised guidance for direct result per share to a range of €1.75 to €1.85 and reported an 8% increase in direct result per share. If this is maintained or improved over several years, it could support higher earnings and potentially a stronger share price than a bearish view assumes, directly affecting earnings and cash flows available for dividends.
• Like for like net rent growth of about 6% and leasing spreads in Belgium and the Netherlands that are positive or in line with old rents, combined with high occupancy levels around the mid to high 90% range, suggest a resilient tenant base. This could underpin stable or rising rental revenue over the long term rather than a deterioration.
• The shift of parking, solar panels and EV charging from loss making to profit contributing activities, along with plans to install hundreds of additional charging points and more solar capacity, creates a growing stream of other rental income. This could support revenue and help protect net margins if traditional retail rents come under pressure.
• The LifeCentral program, including transformations at Kronenburg and Nivelles and the first Dutch joint venture in Zoetermeer, targets unlevered IRRs above 8% and adds food and beverage and mixed use components that are currently seeing positive tenant sales trends. This could sustain or improve rental levels and portfolio valuations, supporting earnings over time.
• Capital recycling out of the Netherlands into Belgium and Luxembourg, where management reports access to assets at net initial yields around or above 8% and has already seen valuation gains on recent Luxembourg acquisitions, could, if replicated, support portfolio growth and improve asset yields. It could also provide upside to revenue and net income compared with a thesis that assumes weaker long term performance.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Wereldhave is €19.0, which represents up to two standard deviations below the consensus price target of €22.5. This valuation is based on what can be assumed as the expectations of Wereldhave's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €26.0, and the most bearish reporting a price target of just €19.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €193.6 million, earnings will come to €102.0 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of €19.08, the analyst price target of €19.0 is 0.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.