Via Wolf Street

Brick & Mortar melts down on mall owners. So “repurpose” malls into housing?

By Nick Corbishley, for WOLF STREET:

After a weekend of fevered speculation, struggling UK mall owner Intu Properties confirmed on Monday that it plans to raise £1 billion of fresh capital to buttress its shaky finances. The company’s shares reacted in time-honored fashion, plunging 8% to a historic low of 21 pence before ending the day down just 1%. Intu’s share price is now 80% lower than it was a year ago and 95% lower than five years ago, leaving the group valued at just £306 million.

Intu owns dozens of malls in the UK, including nine of the 20 biggest ones, and a handful in Spain. It describes itself as a commercial real estate company that is “in the business of helping customers and brands flourish, whether that’s through leasing space in our prime retail and leisure destinations, commercialisation activations or online through our multichannel platform” The problem is that many of its clients — mainly large bricks-and-mortar retail chains — are not exactly flourishing; they’re either battling for survival or going out of business.

Intu is also bleeding funds. Its net rental income in the first half of 2019 slumped by around 18% year-on-year to £205 million as a result of major clients like Topshop’s owner Arcadia, Debenhams, and House of Fraser falling into administration (a form of bankruptcy), resulting in a spike in store vacancies. Its losses surged to £856 million in the first half of 2019, up from £506 million in the same period of 2018. The combined value of its assets also fell, from around £9 billion to just over £8 billion.

The company has £4.7 billion of debt on its books that it cannot service under current conditions, which is why it is asking shareholders to stump up an extra £1 billion of capital. But just how willing will investors be to inject funds worth more than three times the market value of a company whose shares have already collapsed 80% in the last year, at a time when the UK’s retail sector is in the deepest of doldrums?

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The UK retail sector had a terrible time in 2019, in particular the second half. The three-month moving sales average between October and December fell 1.1% year-over-year, the biggest decline since September 2009. Many consumers, their psyches’ pummeled by the never-ending uncertainty over Brexit and their finances stretched to the outer limits of their borrowing capacity, have begun to tighten their belts, which is the last thing the UK’s brick-and-mortar retail sector needs.

In the last year alone, 14,500 stores were closed. This is having a direct impact on 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, leaving it little choice but to suspend redemptions. The “temporary” ban has not yet been lifted.

For Intu, the fallout of the UK’s bricks-and-mortar retail crisis has translated into lower occupancy, lower rents, lower revenues and ever-bigger losses. In the first nine months of 2019 it received £19 million in new rents, 40% less than during the same period of 2018. Its occupancy rate of 95% was also down on the 97% registered in September 2018. The company anticipates further declines in 2020 as the high-street crisis continues to bite.

With losses rising, shares falling and large amounts of debt soon coming due, the company has to somehow convince investors it still has a future worth investing in. To that end, it has drawn up a five-year survival strategy, based around two key pillars:

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1) Repurposing its business model. Just as mall owners in the US are desperately trying to come up with creative and profitable new ways to use the vast empty spaces being left behind by closing stores, Intu is intent on transforming parts of its shopping center empire into residential real estate. The company has already applied for planning permission to turn a vacant House of Fraser store and two car parks at its Lakeside shopping center in Thurrock into 1,200 homes. It also plans to build homes, hotels, leisure parks and flexible working centers at other large out-of-town malls.

Intu insists that despite the threat posed by the seemingly unstoppable rise of online retailing, its business is evolving, not dying. Even if the overall number of stores in the UK declines, “the productivity of the remaining stores will improve, and this should be weighted towards the best retail and leisure destinations,” it says.

2) “Fixing” its balance sheet, mainly by disposing of a large chunk of its non-core UK assets (estimated value: £1.6 billion) and most, if not all, of its assets in Spain. The company has already sold its 50% stake in the Puerto Venecia center in Zaragosa for £203 million, £63 billion less than the value attributed to it in its Q3 investor presentation. It is also in the final stages of offloading its 50% stake in the Parque Principado center, in Asturias, and is looking to sell its 50% stake in the Intu Xanadu center, in Madrid, when the contract comes up for renewal later this year.

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Intu should be able to raise around £600 million from the sales of its Spanish assets. It also picked up £210 million from the sale of part of its Intu Derby center in the third quarter of 2019. But time is of the essence: It has “material debt maturities” in early 2021, and it needs to “create liquidity” to deal with “upcoming refinancing activities.”

That’s where the other key plank of its balance sheet clean-up comes in: the rights issue it hopes to complete in the coming months. But for that to succeed, much will depend on its ability to win over investors that are already deeply skeptical and concerned, not only about the company’s future but the future of the entire sector in which it operates. By Nick Corbishley, for WOLF STREET.

But even red-hot online sales cooled off late in the year as consumers turned sour. Read... Brick-and-Mortar Melts Down in the UK, Worst Decline Since 2009, as Big Retailers Collapsed, 14,500 Stores Closed

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