Intu ‘May Soon Be A Have-Nothing,’ Analyst Warns As Retail REITs Play With Fire
In a note dated 14 January on the UK’s largest listed property companies, Green Street said Intu and fellow retail REIT Hammerson were “playing with fire" due to higher than optimum levels of debt, with Intu’s leverage of particular concern.
“Retail REITs leverage remains too high (at or above pre-Great Financial Crisis levels), which once again leaves them very exposed to declines in property valuations,” analysts Hemant Kotak and Rob Virdee wrote. “Notably, as capital values have been pressured, leverage for all UK majors has crept upwards since the last update. Intu's leverage is alarming and needs to be addressed sooner rather than later.”
Intu’s reported loan-to-value ratio is 51%, but Green Street said that if its portfolio was revalued to match current retail values, that would rise to 74%. Hammerson’s LTV would rise to 54% from a current reported level of 42%.
“Balance sheet ‘haves’ are British Land and Landsec, Hammerson is a ‘have not’, and Intu may soon be a ‘have nothing’ — especially with proper mark-to-market,” Kotak and Virdee wrote.
Last year both Hammerson and Brookfield walked away from potential takeovers of Intu. The latter indicated it might offer £2.8B for the company before deciding against pursuing a formal bid, and since then the company’s market capitalisation has almost halved to £1.5B.
“Intu's pains are largely self-inflicted; management appear to hope for the best, rather than preparing for the worst,” Kotak and Virdee said.
Green Street warned of a difficult 2019 for retail property owners.
“[The] retail market is undergoing both cyclical and structural changes — a GFC type correction is not out of the question,” the note said.
“Physical sales and margins are falling fast, and tenants cannot afford high rents. Retail capital values are poised for a roller coaster ride, yet some management teams are refusing to buckle up properly. High quality retail has yet to see rents/yields rebase lower; don't be surprised if ‘quality’ fails to provide a refuge.”