On Tuesday, Simon Property Group announced a €750 mln 3-year unsecured bond issuance exchangeable into existing ordinary shares in Klépierre, the second largest shopping centre owner in Europe with around €17 bn of assets.
The move has caused some speculation among European property experts about Simon’s longer-term plan for its shareholding in the French group, and also for Simon’s interest in Value Retail, a private factory outlet group with 12 flagship destinations.
Simon owns a 22.4% stake in Klépierre having bought a 28.8% chunk in March 2012 from BNP Paribas, which retained a 22% holding.
Overtly, this week's €750 mln issuance of bonds exchangeable for existing ordinary shares in Klépierre is primarily being done because this is the best way it could find to provide savings on interest rates. The proceeds are destined to paydown the company’s European line of credit.
Under the terms of the issuance, Simon will be paid a 3.5% coupon while the rate on the note would be about 100 bps higher. Over the course of three years, Simon could save €7.5 mln a year, although probably less due to fees.
Analysts at real estate analytics firm Green Street say Klépierre has been the best performing Pan-European retail REIT, delivering annualized total returns of 5%, which is better than Simon’s 3.2%.
In October, Klépierre said it had enjoyed strong performance over the first nine months of the year with like-for-like net rental income up 8.6%. It has centres in France, Italy, Scandinavia, Iberia, the Netherlands, Germany, and Central Europe.
Using this moment to leverage Klépierre's position is interesting because aside from the savings angle for Simon, it is possible that this bond structure could see Simon’s stake in Klépierre reduced. If it elects to pay bondholders completely in shares rather than cash, this would equal to 9.6% of equiity in Klépierre. So, Simon’s stake could go from 22.4% to 12.8%. Simon could of course elect to repay in a combination of cash and shares, so this is speculation.
Those that follow European real estate will remember that Simon also owns a stake of around 20% in Value Retail. Three years ago, it was reported that Hammerson, the UK property company, was exploring a sale of its 25% stake in the very same company.
A detailed report out just this week underlined the strength of the sector.
Could Simon ultimately sell down its stake in shopping centre company Klépierre while upping its stake in factory outlet business, Value Retail? That is a question being mooted, and only time will tell.
