Intu Properties
Update on strategy to fix the balance sheet
As previously announced, intu properties plc ('intu', the 'Company' or the 'Group') has been reviewing a range of options to fix its balance sheet and establish a more appropriate long-term capital structure.
intu has, over the past several months, engaged in extensive discussions with its shareholders and potential new investors regarding a possible equity raise of between
£1 billion and £1.5 billion. Following these discussions intu has concluded it is unable to proceed with an equity raise at this point.
While a number of intu's shareholders and potential new investors indicated their support for an equity raise, the Board believes the current uncertainty in the equity markets and retail property investment markets precluded a number of potential investors from committing capital into the business and intu was therefore unable to reach the target quantum at the current time.
However, during this process, intu received several expressions of interest to explore alternative capital structures and asset disposals.
Accordingly, intu will continue and broaden its conversations with its stakeholders with a view to discussing the range of options available to the Company to demonstrate the equity value of the business and to utilise its assets to provide further liquidity . These include alternative capital structures and solutions and further disposals. intu will also continue to keep under review the feasibility of an equity raise.
intu is today providing a trading update on its position at the end of 2019 together with guidance for 2020. It intends to publish its audited preliminary results announcement on Thursday 12 March 2020.
Trading update
Outside the challenges caused by tenant CVAs and administrations, intu delivered a robust operational performance in 2019 and income has been resilient in what has been a challenging year for retail and retail property:
- footfall in intu centres increased by 0.3 per cent and footfall in intu UK centres was flat (significantly outperforming the Springboard footfall monitor once again which was down on average by 2.5 per cent). Footfall at the Group's centres through the first eight weeks of 2020 increased by 0.9 per cent compared to the same period in 2019
- full year 2019 like-for-like net rental income in line with the guidance given in the November 2019 trading update, down by 9.1 per cent. Guidance for 2020 remains unchanged, being a further decline but at a slower rate than 2019
- in 2019, 205 leases signed representing on average a one per cent increase against the previous passing rent
- occupancy at 31 December 2019 stable at 95 per cent, in line with June 2019 and September 2019 (a reduction against December 2018 (97 per cent.) due to units closed in the first half of 2019 predominantly from tenants who went through an administration or CVA process in 2018)
- a reduction in the rent roll impact of CVAs and administrations over the second half of 2019
Rental resilience
intu's underlying rental income remains resilient and over the past five years intu has delivered underlying rental increases on new lettings and rent reviews, despite ongoing pressure from CVAs and administrations, demonstrating continued occupier demand for intu's space. Occupancy has remained high at 95 per cent as at 31 December 2019, with a strong pipeline of negotiations which continue to underpin occupancy going forwards.
Rental income is underpinned by a strong and diverse tenant customer base, with around 800 unique tenant customers and many of the best-known names in the retail and leisure market. According to Market Data, retailers trading in intu's centres typically outperform their UK chain average sales by 28 per cent and outside London and the South East, intu has the majority of the best performing malls in terms of sales productivity in each region.
With the continued evolution of the retail market, the Company has worked closely with an external consultancy firm, with particular expertise in the retail sector, to model the potential impact of current market forces on the sustainability of rent levels of its individual tenant customers. While there may be rental pressure over the short term, intu is confident in the quality of its asset base and the long-term attractiveness of its space to retailers.
Further details are set out in Appendix 4.
Valuations and covenants update
The independent valuations of intu's portfolio at 31 December 2019 delivered a valuation deficit of £2.0 billion for 2019, a like-for-like decrease in value of 22 per cent for the year and around 33 per cent from the peak valuation in December 2017. Weak sentiment rather than hard transactional evidence has been the key driver in the valuation deficit with net initial yield (topped-up) increasing by 95 basis points to 5.93 per cent.
At the end of December 2019, intu's debt to asset ratio was 68 per cent following the property revaluation deficit. Adjusted for the disposals of intu Asturias which completed in January 2020 and intu Puerto Venecia which is expected to complete in early April 2020, this will reduce to 65 per cent.
Within the next 12 months, £189.7 million of borrowings are due to be repaid or refinanced. Settlement amounts are also due on termination of the Group's unallocated swaps in the same period. These settlement amounts would have been £93.0 million as at 31 December 2019.
Since 1 January 2020, intu has utilised around £50 million from available resources to reduce the leverage levels in a small number of its facilities, including to manage the relevant LTV covenants. Over the last year, intu disposed of nearly £600 million of assets, reduced its capital expenditure pipeline by £60 million and paused the dividend to improve liquidity. The £95.4 million of net disposal proceeds after repaying asset-level debt, working capital adjustments, fees and taxation from intu Puerto Venecia are expected in early April. As at 28 February 2020, intu had £168.3 million of cash (taking into account the intu Puerto Venecia sales proceeds) and £129.2 million of available facilities.
intu is in compliance with its debt covenants and is servicing its debt with a Group interest cover ratio for 2019 of 1.67 times. However, there is a risk that, depending on the performance of intu's business and movements in valuations, it could be in breach of certain covenants at their scheduled testing date in July 2020. Sensitivities to illustrate the potential impact are:
As at 31 December 2019, a further 10 per cent fall in property valuations, equivalent to a fall of 40 per cent from the December 2017 valuation peak, would (taking into account the Spanish sales proceeds):
- create covenant cure requirements of £113 million under the group's asset-level borrowings; and
- require cures on the RCF's net worth and borrowings to net worth covenants, involving repayment of £161 million of borrowings on this facility
- a further 10 per cent decline from 2019 net rental income would create a covenant cure requirement of £34 million under the group's asset-level borrowings
intu will, accordingly, be seeking to take timely mitigating actions (which may include seeking waivers where appropriate) to deal with any covenant breaches in July 2020.
Matthew Roberts, Chief Executive of intu commented:
“We remain focused on fixing our balance sheet in the near term to ensure this business has the financial footing it needs to realise its significant potential. While it is disappointing that the extreme market conditions have prevented us from moving forward with our planned equity raise, I am pleased that a number of alternative options have presented themselves during the process which we will now explore further.
We have a concentrated and well-invested portfolio of many of the UK's best retail and leisure destinations where both shoppers and customers want to be. Operationally our business is strong, delivering a resilient rental performance despite ongoing pressure from CVAs and administrations, with stable occupancy rates and footfall that consistently outperforms the benchmark. Our centres are the best performers in the regions in which we are present and independent research shows that stores with intu outperform retailers' average sales by nearly 30 per cent. This is a compelling proposition and one that will stand the test of time.
We will face further challenges in what has been an extraordinary few months for intu and the wider sector, but I am confident that we will face these head on and emerge a leaner, fitter and more focused business”