Interview: Intu weighs equity issue as debt deadline looms

Pressure is mounting on shopping centre landlord intu to reduce its debt burden – and the company has warned that more pain on the high street will only exacerbate the situation.  Shares in the REIT had dropped by around 18% by mid-afternoon to around 33p, following the company’s trading update for the period from July to early November. Nonetheless, chief executive Matthew Roberts is upbeat when he speaks to EG, pointing to new lettings from Harrods and Zara. “Having visited 17 centres in recent weeks, there is a lot of contrast between the feeling on the ground to the one we read about,” he says, adding that footfall has exceeded expectations. “Operationally, we are doing okay.” But the clock is ticking: £926m of the company’s £4.7bn debt pile will mature in 2021. The company’s loan-to-value ratio stands at 57.7% – still some way off from its sub-50% target.  At the same time, retail property valuations continue their steep decline, which shows no signs of slowing down.  Like-for-like rental income is expected to drop by 9% this year, the company said, largely driven by CVA processes initiated by retailers such as Arcadia and Monsoon. Another decline is predicted for 2020, although at a slower pace. Intu’s hunt for £750m of debt to secure against its prize asset, the Trafford Centre in Manchester, forms a key part of its strategy to fix the balance sheet.  However, the company is still in talks with its lenders, and does not expect to reach any definitive agreements on refinancing activities before the end of 2019. It expects to update the market in February. Prospective equity raise An equity raise therefore seems to be on the cards. The prospect of such a deal has moved from a mere possibility to now being “likely”, the company said in its update to the market.  While timings around this seem tight, Roberts says that there is still scope to arrange such a transaction in the coming months. “There is no immediate need to raise equity,” he said. “We don’t have any debt refinancings until 2021, and we are making good progress on our disposals in Spain. It continues to be under review, but we have not committed to any timings.” Intu’s chances of gaining backing for an equity raise would be substantially improved if it can get the sales of intu Asturias, intu Puerto Venecia and intu Xanadú over the line – the former two of which the company says have reached “advanced” stages – and if it can defy the UK’s tepid retail property investment market.  During its third quarter, intu sold £21m of assets at prices that it said were 13% ahead of December 2018 book values. Proceeds from disposals amounted to £33m in the year to date. James Carswell, an analyst at Peel Hunt, says: “I wouldn’t be surprised if they are trying to line up disposals alongside or ahead of an equity issue, and prove the market is there and that [pricing] is right, but so few shopping centres have transacted – it will be very hard. If they can, it will be much easier for investors to back a rights or equity issue.” What does intu’s future hold? Robbie Duncan, analyst at Numis, says: “Intu’s [balance sheet] remains fraught with problems and its assets remain in structural decline, exacerbated by the lack of historic investment [management] in its centres and its inability to finance future investment.” Duncan adds that while he believes intu will “pull through this”, the REIT is playing a “game of 3D chess, but with the odds stacked against them and in favour of the lenders”.  “Even if they can [or] do raise equity, does it mean there is a medium-term investment case? After all, where does the total return come from?” he says. At Green Street Advisors, managing director Hemant Kotak said intu’s “self-help measures” were welcome, “but it’s a long road back and navigating the multiple landmines will be difficult”. Away from the measures outlined, analysts have also long suggested that a take-private could solve many issues – if key shareholders such as John Whittaker could drum up enough investment. “[Speculatively,] there could be a real prospect the company will be taken private in some form,” says Carswell. “We think that would be the best route, if the likes of John Whittaker could raise enough capital do that.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette