Simon partner looks to buy out co-owners in expansion drive

Klepierre SA plans to spend as much as $686 million a year on expansion and the shopping-mall landlord is considering using some of the money to get a bigger piece of what it already has.

The Paris-based company, whose largest shareholder is Simon Property Group Inc., may buy out some partners in jointly owned shopping centers as it focuses on the highest quality properties in regions with growing populations, CEO Laurent Morel said in an interview at his office in the French capital.

“There’s an opportunity for us to buy minority stakes from partners,” said Morel, 51. He cited the acquisition last year of a 50-percent stake in a mall in Montpellier, France, from Icade SA that gave Klepierre full ownership.

Investors acquired $20 billion of European stores and shopping malls in the fourth quarter, the most in six years, broker Cushman & Wakefield Inc. said in an April 1 report. Buyers are more positive on retail properties in southern European countries including Italy, where Klepierre operates 28 malls, as the economies there began to improve, the broker said.

Klepierre, Europe’s second-biggest publicly traded mall operator, may buy properties or stakes in malls from investors that lack shopping-center management experience, Morel said. That would give the real estate investment trust scope to increase returns by improving the rental income.

Carrefour deal

The company last month raised $2,1 billion by selling 126 shopping centers to a group led by French retailer Carrefour SA. The transaction means Klepierre will grow its funds from operations, a measure of cash flow for REITs, from next year through sales growth by its tenants, new projects and upgrading its malls, Morel said.

“We sow the seeds of future growth by constantly making sure we have the best retailers in their best formats in all of our leading shopping centers,” he said in the May 6 interview. “This is the way to provide growth to our revenue in the long run.”

Mall landlords in Europe can no longer rely on location alone for success, Morel said, and investors have to improve the way they market their malls and have strong relationships with retailers to keep customers coming back. “That’s why we say we are a natural buyer of some assets or a natural partner to some potential asset owners,” he said.

Simon’s help

Simon Property Group, which bought a 28.7-percent stake ($569 million) in Klepierre in 2012, “has been a champion of that in the U.S., so we import a lot of their technology when it comes to the marketing and improvement of the malls,” Morel said. “We just paste and copy some of the things they have gone through.”

Buying out co-owners of malls is “the best risk-return proposition in the current market,” said Peter Papadakos, a real estate analyst at Green Street Advisors Inc. “They probably won’t make an enormous amount of money doing this, but they’ll have more control of those assets where they feel they can add value. I feel pretty good about that kind of strategy.”

Klepierre plans to sell about $411 million of shopping malls a year and replace them with better-located assets, Morel said. The company’s focus is Paris, southern France, northern Italy and Scandinavia.

Retailers have not fully appreciated the “hugely rich” countries in Scandinavia and Klepierre is weighing building malls there to try to attract them into the market, he said. Klepierre owns more than 56 percent of Steen & Stroem, the largest mall operator in the region.

Tempting scents

“We convinced Sephora for example to come to Scandinavia because we could give them not just one store, but 25 in the best locations,” he said. The Sephora cosmetics chain is a unit of Paris-based LVMH Moet Hennessy Louis Vuitton SA.

Restaurants will probably become more important to Klepierre’s malls, where they currently occupy an average of 10 percent of the space, Morel said. Restaurants lease more than 25 percent of the space in St. Lazare, a two-year-old center with 80 stores in the center of Paris. The Burger King at the mall became the second-busiest in the world after opening in December, Klepierre said.

Restaurants typically pay a minimum guaranteed rent and a percentage of their sales to Klepierre.

“This is the best way to organize the relationship,” Morel said. “It works both ways.”