Altarea

Altarea’s dual business model results in distinct economic drivers for each segment.

Altarea operates in Europe’s most resilient property format: retail. This involves owning commercial spaces and leasing them to national or international brands. These properties are primarily “non-prime” on a worldwide scale but hold significant regional or continental importance. Notable assets include Cap 3000 in Nice, attracting over 10m visitors annually (and Qwartz, 8m), demonstrating resilience since the COVID crisis.

At the EBITDA level, cash flow is driven by managing operational factors such as vacancy ratio, effort ratios, nominal rents, management and maintenance costs, incentives, while considering environmental constraints like GDP, competing retail units in the catchment area, accessibility, and demographics. Following the recent inflationary period, we lack information on the remaining reversionary potential, which is the difference between passing rents and potential revenue at full re-lettings. Consequently, we cannot assess the potential growth of nominal rents in the coming years, especially net of inflation. We therefore consider current operating cash flow generation to be near-optimal, assuming a constant scope and net of inflation, from 2026, after the final favourable effects of indexation in 2025.

Existing landlords are currently benefiting from and will continue to benefit from a near-zero increase in competing retail space in France. This results in a relatively fixed maximum supply on both national and local scales, creating a “sclerotic” market that favours owners in areas with the highest population growth.

Altarea prioritises a high occupancy ratio for its assets, even if it requires flexibility with rents, to maintain footfall. The current occupancy ratio is frictional, but we lack detailed data for a comprehensive assessment. Based on our experience and analysis of Altarea’s peers, we consider Altarea’s retail asset management to be of high quality. The company demonstrates proactive and efficient on-site management, exemplified by responsive incentive policies. The rental base turnover is notably above average, indicating a strong commercial focus.

Information on the management fees and cost structure of the Third-Party Asset Management segment is limited. However, we believe its contribution to recurring EBITDA (Group share) is relatively small even if highly profitable (EBITDA/Capital employed). This also applies to assets co-owned with minority shareholders but managed by Altarea. Notably, third-party investors own approximately 57% of the €5bn consolidated AuM.

Residential development profitability depends on secure land prices, construction cost changes, and customer solvency. Operating margins exceeded 10% in the early 2000s but fell to 6-7% between 2018 and 2022. Altarea’s success stemmed from acquiring cheap land in the 1990s, preceding the real estate boom and low interest rates of the 2000s. Cash recycling and strategic risk-taking have shaped Altarea’s current profile. Long-term, Altarea focuses on managing size and risk profile, particularly through debt, based on economic conditions and shareholder expectations.

The Residential Development operating margin is not the sole metric; the EBIT/gross margin ratio and ROCE are crucial. While committed capital is typically low risk, significant value destruction occurred over 2022-24, highlighting cyclical risks. Crisis years can erode a third to half of accumulated value creation.

Cost and risk control are vital. In low inflation periods, market prices are set by client solvency, benefiting from subcontractor competition. Depending on macro factors, margins may be high or moderate, as seen since 2022. We expect a return to positive margins of 3-5%, applied to potentially still low revenue in 2025-27.

Altarea’s business costs are largely variable and unlikely to change significantly. Revenue control is more critical than cost control, particularly in the Retail Property segment.

In the current market phase, Altarea may accept operational under-profitability to maintain expertise, potentially enabling a rapid margin rebound if market conditions improve.

Altarea’s average debt cost is below 2% in 2024, applied to €2bn of net cash debt, resulting in €34m in recurring cash financial expenses. Aligning with a 5.2% marginal cost would increase expenses by c.€50m (group share, AV estimate), compared to €127m FFO in 2024.

With debt overhedged until 2027, short-term changes are unlikely, but medium-term debt roll impacts on FFO require careful monitoring. The net impact on FFO will depend on the Development segment’s FFO recovery at EBITDA level.

Altarea’s management is aware of this challenge. Persistent risk of higher financial expenses could hinder a rapid return to €300m FFO and affect the dimension of sustainable dividend level.