Intu Properties (lon:intu)
INTU – No Share Issue!

INTU seems to be seeing a few spikes in share prices recently, albeit from a very low value to a still very low value and simply looking at the charts it seems to be interesting.

However retail seems to be one long stream of bad news, and my problem with INTU is that the management seems to have reacted to its debt too slowly.

On Friday INTU’s share price was around 13p giving it a market cap of around £170m yet the latest trading update, Nov 2019, had the company’s assets valued at a bit over £8bn and a Net Asset Value of around £3bn.

This was based on June 2019 property valuation taking into account a few sales with the debt repayment schedule being roughly

Amount  Year Due
£100m      2020 
£0.95bn    2021
£0.8bn     2022 
£1bn       2023 
£0.65bn    2024 
£1.5bn     s2025 Onwards 

Totalling roughly £5bn and about 60% of the latest property valuation, so why is the market allowing a company to trade at roughly one twentieth of it asset value?

Part of the reason is that there has been a statement that an equity issue will be announced with the year end results in early April and INTU’s management have recently been selling off some assets such as overseas centres in order to reduce debt.

Clearly a property company selling its properties to pay off debt is simply shrinking its future.

intu Asturias Oviedo, Spain, €145.0 million, Intu Puerto Venecia Zaragoza, Spain, €237.7 million and Sprucefield Retail Park Lisburn, Northern Ireland, £40 million.

These are relatively small sums considering.

So what is the future, a £1bn fund raising, a £2bn fund raising or the company going private, or disastrously a sell off of some of the larger UK shopping centres?

Another possibility is that someone with a spare £5bn might offer £1bn for the shares that would be roughly 77p per share, throw £4bn at the debt and laugh all the way to the bank in a couple of years.

Buying now would be a disaster if there is a 5 for 1 or 10 for 1 non discounted issue to raise £1bn/£2bn but a five fold return if there is a buyer looking to take the group private.

For me it is important to differentiate between large shopping centres and town centres, I live in Worcester and its high street is becoming so short of shops that the reason for visiting it is getting less and less.

This lack of shops is forcing me to buy online or visit an out of town centre as a specific journey for a specific product.

There was some news that a retail park in London, Ravenside in Edmonton has been sold and it is planned to convert it to warehouses, the reality seems to be that it will be retail fulfilment centres to service the online retail market.

If you look at the location you will see that it is not a premium retail park so is almost of no relevance to INTU’s sites.

Intu have just released a trading update with a set of numbers that are slightly down on the previous year, the main negative being the tenants who achieved rent reductions via CVAs have had slightly more effect than predicted.

Recently John Lewis made public statements about withholding service charge payments, how much of this was posturing and how much was real is unknown but I do wonder if service charges are seen to be increasing to cover some of the loss of rental income even if it is not true.

...our focus on efficiencies and cost savings relating to the centres has allowed us to deliver a benefit to our customers, with the 2020 service charge budget lower than 2019

2019 rent is predicted to be down by around 9 per cent, with more than half resulting on CVAs.

Even with this reduction it seems likely that the company will report something like a £200m underlying profit on about £400m of rental income for 2019, what the statutory profit will be will depend upon how much more the property value is adjusted downwards.

The real issue is that the company’s debt is increasing relative to the properties’s values and they haven’t been paying debt off fast enough, Interest payments are going to be something like £210m.

For me the underlying business is strong, with occupancy at Sept 2019 at 95.1% down from Sept 2018 of 97%, is still well above the high street average of 90%.

With nearly £5bn of debt and a market cap of a bit less than £0.5bn (at 34p) a share issue to make a meaning full dent in the debt could easily be a 4 for 1 issue.

It is looking to me like another business that will almost wipe out its current share holders simply because of debt.

Another quick look at INTU shows a continual fall in the share price, now down to 32p and there is very large number of retail trades mostly in the hundreds or a few thousands of pounds.

For a share that was trading at around 190p in November last year on the strength of a possible take over this is a big drop.

What surprises me though is how little has changed, rental income is down a bit, over half of which is a result of Administrations and CVAs and some big property revaluations.

The company is still profitable but it is reporting huge losses as result of property revaluations and everybody is scared by the £4.9billion in debt against property valued at £7.9billion, down from £10.7biilion in 2017.

As there are big repayments starting in 2021 of £0.9b, £1b and £0.7b over four years this isn’t surprising.

Added to this the revaluations are sending debt to asset value covenants close to being breached but how much further can the property value drop?

As buying and selling a shopping centre happens so rarely it seems to me that there is no real market value, if the oil price goes up and a sovereign wealth fund needs to spend some money then the market price is different simply because of the need to spend.

Unless there is a point at which no retailer wants shops and I don’t believe this to be the case then there will be shops, will they be in half empty high streets, small out of town centres or very large centres? I would be betting on the large shopping centres, somewhere that it is worth the effort of going to.

I never imagined when Just Eat and its competitors started out that there would be the so called “dark kitchens” or that there would be “dark supermarkets”. So it seems likely that some stores will be operating as semi dark, local enough to act as a delivery hub as well as supporting walk through the door customers.

For the remaining space changing to hotel, office space and residential doesn’t seem imaginative but that doesn’t mean that it won’t be profitable.

Although a share issue is nowhere near being certain, it seems that the market is expecting it and at 32p the market cap is only £440 million. A two for one raise at no discount would bring in about £0.8 billion which for a company that has been mostly trading in the 200p-300p range would still leave room for a big share price rise to 70p-100p.

Although there is about 5.6% of INTU shorted this percentage has decreased slightly recently, possibly because further big drop from 32p is far from certain.

INTU is definitely on my watch list as a wait for the steady consistent drop to flatten out type of share.

Last time I looked at INTU I was really worried about debt and covenants but less so about their ability to generate rents.

The latest 6 monthly report has seen another £872 million wiped of their property valuation but equally worrying a drop in rents from £233 million to £205 million.

The drop in income doesn’t seem to be related to tenants wanting slightly lower rents but chains entering administration or CVAs and asking for zero rents or vacating completely.

It is possible, but only possible that House Of Fraser, Debenhams and other chains may re-emerge as viable large multi site tenants over the next few years, remember that INTU is mostly large premium shopping centres not dying high streets.

One of the strengths of INTU is that most of their centres are large enough to offer stores that are as big or as small as wanted, so Debenhams etc could take 50% of their previous space and the remaining space would still be viable to let out. Or they could decide their problem was that they were too small and take even more space.

Click and Collect is proving popular generally and organisations such as Amazon and Ebay may decide that some retail presence is actually desirable. There is also the possibility that they have the muscle to say to businesses who sell on-line you can sell via our physical stores but it will cost you. B&M are reported as doing well and they are a "bit of everything" store.

Whilst the property valuations are a bit academic as shopping centres don’t change hands often, they are getting worryingly close to some debt covenant limits.

The management recognises this and talks about To reduce net external debt and create liquidity to deal with the upcoming refinancing activity, with the first material debt maturities in early 2021

To do this dividends are being suspended which doesn’t seem surprising but INTU is a REIT, so suspending dividends means that corporation tax will be due instead.

Selling some assetsdisposal and part-disposal of assets in the UK and Spain, reducing the capital expenditure pipeline sounds fine but INTU are in the business of letting out assets which need to be in tip top shape. This sounds a bit like Debenhams saying sales are terrible so we are going to cut back on improving our shops.

The plus would be getting rid of the overseas and the worst performing UK centres would allow management and money to be concentrated on the core portfolio.

So is a fund raising exercise likely, at current price of 43p INTU has a market cap of £587 million?

Any fundraising that does take place would go into paying of debt, INTU's debt is for the purchase of assets so if you believe that their property is now close to a trough in term of valuation then it may be attractive.

The new money would mean lower interest payments and a greater ownership of its properties rather that paying off things already bought and used up.

I could easily see 2 for 1 at around 40p raising about £1,000 million being a success, although gettting market feedback on 4 for 1 at around 40p raising about £2,000 million would be sensible.

As INTU are talking about converting some of its space into residential and hotels they could continue to be very high quality assets, mini communities with “local shops” being national chains, or they could be white elephants.

Note the numbers shown below are for a six month period.

Not too long ago INTU was involved in a serious take over at just over 200p per share, today it languishes at 84p?

Retail landlords are clearly under pressure as big chain after big chain seem to be failing British Land is at a 5 year low as is Capital & Regional.

It appears that during 2018 the service charge brought in £113million but cost £131million to provide!

This means a net rental income of £398m and finance costs of nearly £250m, if you take out the property revaluation of £1.3b then the group did make a profit of about £153m.

Current the group property is valued at £8b down from £9.2b and has £4.9b in debt, these leads to net asset value per share of 284p per share down from 378p. I am not sure if NAV is too useful at present as owning empty buildings that are not bringing in any rent means that the loans can’t be repaid!

There was a comment in the last annual report that says another 10% drop in asset value would mean that debt covenants would just be at the limits, but a 25% drop would see them exceeding them by £123m.

After all the bad retail new I was expecting that 2018 rents would be down in 2017 but they were up, not by much, but still up.

Centre                     2018           2017
Name                     Rent(£m)       Rent (£m)
intu Trafford Centre       94.7           93.7
intu Lakeside              55.8           53.2
intu Metrocentre           46.4           48.1
intu Merry Hill            41.3           42.4
intu Braehead              29             28.1
Manchester Arndale         22.2           21.3
intu Watford               18.7           15.8
intu Derby                 27.9           28.9
intu Eldon Square          16.3           16.1
intu Victoria Centre       19             19.5
intu Milton Keynes         13.6           13.7
Cribbs Causeway            12.8           12.9
Total                     397.7          393.7

The group has been looking at the use of land that is ground level parking or not in use and believes that there is the space for 5,000 residential units and 600 hotel beds.

As owned and rented out these developments show potential for ongoing income along with some strengthening of the shopping centres themselves.

For me the big worry is that the shopping centres are financed at about 53% of their current value and whilst there is only £127m worth of loans maturing in 2019/2020 there is about £3.5b over 2021/2024.

As most Intu centres are large, there is space within them for more than just shops, bowling alleys, cinemas etc and this is where that these centres have strength. Visitors can go as a family for a day out, rather than the town centres where the various types of businesses are spread over the town as a whole.

I am sure that we haven’t seen the trough yet for INTU and its like, but I am watching them closely as they do seem undervalued.

I am seeing the Arcadia CVA pushback by INTU as the end of landlords desperate to keep tenants at any cost.