Intu predicts rental growth in 2019 

Intu is anticipating rental growth in its portfolio next year, despite the ongoing tidal wave of CVAs and insolvencies among retailers.  The company set out guidance of around 1% rental growth in its latest trading update released this morning. Intu is considering a £2.9bn indicative bid for the company from John Whittaker’s Peel Group, Brookfield and Olayan Group.   The expected full-year growth for 2018 ranges between 0% and 1%.  Matthew Roberts, chief financial officer of intu, told analysts: “We will benefit from the ongoing rent review process next year as leases come to an end.  “Going the other way, we will have the negative impact of the stores that have closed through the CVA process and we’re assuming a ‘normal’ level of insolvency – a number of the smaller chains reducing or disappearing completely. “If we [experience] a material change, it will lead to further erosion of that number. But 1% is our best guess for the time being.” The company’s value declined by 3% during the period, as did its full-year rental income forecast, but David Fischel, chief executive was defiant about the REIT’s fortunes. However, he refused to answer any questions relating to the ongoing bid. “We can talk about the trading update, but we can’t talk about the offer,” he said. “There is nothing more we can add to the announcement we made on 19 October.” In limbo While negotiations proceed, Fischel’s chief executive role at the REIT remains unclear, following the announcement in July that he was to step down from the job after the company’s aborted merger with rival Hammerson.  “We will have to see how it progresses, to be honest,” Fischel told EG, after a beat. He added that his replacement could feasibly be found during any stage of the ongoing process. “I am not conducting the search for our successor, so I am the wrong person to ask,” he said. “Our position at the moment is that I will go as and when a successor is found.” Toughing it out During the period from 1 July to 23 October, Fischel said intu achieved “good, strong underlying performance” despite “a tough retail environment” overall. “There is plenty of good evidence of lettings ahead of previous rents. Our operational metrics continue to be strong. Occupancy is at 97%,” said Fischel. On top of these, he highlighted the “substantial” mixed-use development opportunities identified within the portfolio, which includes scope for 5,000 PRS residential units and around 600 hotel rooms. Exposure to Debenhams Intu also downplayed the potential impact of expected store closures at key tenant Debenhams, which is issuing a trading update later this week. The REIT has let 10 stores to Debenhams, which accounts for just under 3% of its rent roll. Referencing Debenhams boss Sergio Bucher’s exclusive column for EG published last week, Roberts noted that Bucher was “very complimentary” of intu’s work with the retailer at Watford and Uxbridge.  As such, he outlined he is “pretty confident that very few” of its stores would be affected by potential closures. Exploring disposals Overall like-for-like property values reduced by 3% in the three months. Fischel declined to elaborate on the impact of valuation on any specific assets, but said there was a “tendency for the larger, stronger assets to do better” than “one or two assets that the valuers marked down” to sub-3%. Since LTV rose to 50.6%, from 48.7% in June, it stands to reason that intu could reduce this by increasing its push to sell assets before the full-year period ends. This include advancing the possible sale of its Derby shopping centre, among others. Any proposed disposal would likely need approval from a potential buyer since it could frustrate an offer. But intu reiterated that it would continue to “look to finance capital investment by recycling capital through the disposal of non-core assets and introducing partners to assets”. “We have not commented on Derby but it is our plan to continue to recycle assets to finance our capex,” said Fischel. Tenant incentives The REIT also fielded questions on its tenant incentives, which have been rising according to analysts. During the six months to 30 June, these amounted to £115.8m. Fischel asserted that the incentives, which include a large part of capex to fit out Debenhams’ new store at its Watford extension, will be “amortised through the income statement”, adding that it is “not unusual for landlords to contribute to first lettings of department stores for extensions”. “[The £115.8m amount] is around a quarter of our annual rent roll, [which] is £450m, so that puts it in context,” he said.  “When we come to do property valuations and restate those for the accounts, that amount gets deducted from the valuations, so there is no double counting there.” Roberts said: “Net effective [rent] growth of 7% is in line with total rental growth of 7% on new leases. If we were discounting rents significantly more than we were to secure those lettings, we would see a disparity between the absolute level of rental growth and net effective, [but] they are both bang in line.” The countdown continues The latest results, which have included a fall in values and predictions for reduced rental growth, may go some way in silencing any potential resistance to the consortium’s bid. Whittaker’s Peel Group already owns roughly 26% of intu, while Olayan Group has around 3%. The consortium has until 1 November to make a firm offer. To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette