Via Wolf Street

Local governments end up buying dying malls to keep them from becoming dead zones.

By Nick Corbishley, for WOLF STREET:

Intu Properties which owns dozens of malls in the UK, including nine of the 20 biggest, as well as a handful in Spain, warned this week that it is on the brink of bankruptcy after declaring losses of £2 billion for 2019 and a debt of £4.5 billion. Its portfolio of properties is still valued on its books at £6.6 billion, down 33% from December 2017. Its shares are now worth just four pennies a piece. Two and a half years ago, before many of its high-profile tenants began dropping like flies, the company was worth more than £2 billion; today it’s worth just £55 million.

Like-for-like net rental income was also down by 9% in 2019, to £401 million, due in large part to some of its once-thriving tenants entering administration or company voluntary arrangements (a form of bankruptcy), as well as an increased vacancy rate.

Now, to stave off its own bankruptcy, Intu desperately needs to raise new funds. Intu’s original plan to raise fresh equity capital, unveiled less than two months ago, already failed. It wanted to raise at least £1.3 billion to fortify its shaky finances, keep its creditors at bay, and avoid defaulting on its huge debt pile. But trying to convince already skeptical investors to inject fresh funds, after its shares have already collapsed to almost zero, at a time when the UK’s retail sector is in the deepest of doldrums, was always going to be a tough sale.

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The first major investor to pull out of the equity raise was Hong Kong-based Link Real Estate Investment Trust. Others quickly followed and by last week Intu conceded that its plan had been a complete flop, which it nonetheless blamed on “extreme market conditions,” meaning the coronavirus, which is expected to further decimate store traffic in the coming weeks.

Unless another solution is found, Intu will soon breach multiple debt covenants. This could cause lenders, including HSBC and Royal Bank of Scotland, to take control of its assets — assets they would rather not have and will probably quickly sell.

The company has £190 million of debt maturing and £93 million of swaps payable within the next 12 months, compared to £168 million of cash and £129 million of other available funding facilities. Things get particularly hairy thereafter, with £920 million of debt coming due in 2021, followed by £780 million in 2022, £1.03 billion in 2023 and £670 million in 2024.

Intu’s CEO Matthew Roberts insists that while “a material uncertainty exists that may cast significant doubt on the group and company’s ability to continue as a going concern,” the company still has “options.” Those apparently include “negotiat[ing] covenant waivers” and “alternative capital structures and further disposals to provide liquidity.”

It has already sold a number of properties, including two of its three Spanish properties, in a bid to raise cash and bring down its debt, but now pressure is rising on it to offload some of its most valuable UK properties. But once Intu sells those, it will have precious little left of real value with which to generate income.

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Matters are hardly helped by the anemic demand for brick-and-mortar malls in the UK: 2019 saw the lowest level of shopping center transactions since 1993. Many of those belonged to Intu’s rival, Hammerson plc, which offloaded all of its out-of-town retail parks for the knockdown price of £455 million.

In the absence of private-sector buyers, some of those retail parks were bought, at discount, by local and city councils, which last year spent £232 million purchasing shopping centers, accounting for 36% of all shopping center deals according to data from Knight Frank.

Yet even as local governments step in to bail out commercial real estate owners or their creditors and keep local shopping centers alive a little longer or try to transform them into something more socially useful or appealing, the decline-and-fall of bricks-and-mortar retail in the UK continues a pace. Footfall fell in every single month of last year, according to Springboard figures. More and more of the retail spending that does occur is migrating online, where sales now account for 19% of retail sales.

Last year alone, 14,500 stores ending up closing. And that is having a direct impact on both city centers and retail malls, as well as the investors that own them. Open-ended property funds sustained the largest withdrawals on record in 2019, with total outflows of £2.2 billion. In December, the giant UK fund manager M&G suffered a run on its £2.5 billion M&G Property Portfolio and forced it to suspend redemptions. Four months later, the “temporary” ban remains in place.

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For Intu, the fallout of the UK’s bricks-and-mortar retail crisis has so far translated into lower occupancy, lower rents, lower revenues, lower valuations, ever-bigger losses and an unpayable debt stack. And that was before the arrival of Covid-19, which threatens to decimate retailers’ supply chains as well as deter or prevent people from going to the mall. By Nick Corbishley, for WOLF STREET.

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