TRADE ALERT - International Portfolio May 2025 (Capital Recycling)

In late 2020, we posted an article entitled:

"The European Mall Opportunity: 8% Yield And 100-200% Upside Potential"

Back then, it seems improbable to most investors that KlePierre (LI.PA / KLPEF) would ever earn such large returns to its shareholders.

Malls were oversupplied...

Retailers were closing stores or even going bankrupt...

E-commerce companies were stealing market share...

And the pandemic only accelerated this trend...

It was bad news after bad news, and you had to be a true contrarian to invest in the company at the time.

But we saw an opportunity because the REIT was trading at an incredibly low valuation, and we understand that after the storm would come better days.

The growth of e-commerce would likely lead to the death of many lower-quality malls, but this would actually help to resolve the oversupply since it would lead to traffic consolidation towards the best remaining malls, often owned by KlePierre. At the same time, KlePierre was busy improving its properties by diversifying their uses to include more experiential, service, and non-retail tenants.

Ultimately, we were acquiring prime real estate at a fraction of its true value, confident that patience would pay off when the market cycle inevitably turned in our favor.

It took nearly 5 years for our thesis to play out, but it did. It has earned a 213% total return since we posted that article, and this is despite the historic surge in interest rates. If rates had been kept at low levels, the upside could have been even greater:

Data by YCharts

Quick side note: I think that there are many REITs in our Portfolio that are today offering similar opportunities. Alexandria Real Estate (ARE) is the first one that comes to my mind. It has faced a series of bad news, and it now trades at an extremely low valuation. But eventually, we think that conditions will improve, the cycle will turn again, and its now ultra-low valuation will recover. It is hard to be contrarian, and it requires a lot of patience, but it can be very rewarding.

But what about now? Is it time to sell KlePierre and move on to something else?

It now trades at a slight premium to its net asset value even as most other REITs are selling at large discounts, especially in Europe.

Who would have predicted this five years ago? Malls went from being the most hated asset class of commercial real estate to being one of the favorites.

The reasons why malls are so popular these days are the lack of new supply, the consistent rent growth, and the potential for cap rate compression.

The flip side of things is that KlePierre has quite a bit of leverage, and as a result, its cash flow is expected to stagnate in 2025 even despite hiking its rents.

Therefore, we have decided to sell our position. We still think that KlePierre is likely to perform reasonably well going forward, but there are better opportunities out there, and our capital is limited:

Our position represented 5% of the International Portfolio, and the sale unlocked about €20,000 of capital.

What are we buying with it?