Long-suffering shareholders of Intu Properties have nursed big losses in the past few years. And they may not get a penny back, with Covid-19 dealing a possible death blow to what was once one of the JSE’s most valuable and popular rand-hedge stocks.
The UK mall owner, founded four decades ago by SA insurance mogul Donald Gordon as Liberty International, was suspended on the JSE and London Stock Exchange (LSE) last week after it was placed under administration. Nearly R100bn has been wiped off the company’s market cap over the past five years.
Despite various last-ditch efforts to save the debt-ridden company, Intu’s demise now seems to be a foregone conclusion. Administration, the legal route that insolvent companies in the UK are required to follow, typically leads to liquidation.
Gordon’s legacy
Though all Intu’s assets are based in the UK and Spain, the company, as Gordon’s brainchild, holds particular historical relevance to SA’s investment community.
Back in 1980, when Gordon founded the company — initially as Transatlantic Insurance Holdings, which later became Liberty International — he was one of the first South Africans to successfully expand his empire of insurance and property interests offshore.
Raised by a working-class Jewish family in Joburg, Gordon came from humble beginnings, but was a trailblazer on many fronts. At the age of just 27, he started SA financial services firm Liberty Life after studying accounting at Wits University.
In 1965, Liberty became the first SA company to sell unit trusts.
Gordon was also behind Sandton City, which opened its doors in 1973 and is still one of the largest and most-visited shopping centres in SA. A few years later he added Eastgate to Liberty Life’s mall portfolio.
His success on the SA retail property front prompted Gordon to expand his shopping centre interests to the UK, where he also held citizenship.
When he listed Liberty International on the JSE in the late 1990s, it was the first — and for many years only — direct route for SA investors to share in the rich pickings of offshore real estate markets. The stock was widely held by local portfolio managers and large SA pension funds.
Gordon’s pioneering move paved the way for other SA entrepreneurs to bring more offshore property plays to the JSE. They included Resilient’s Des de Beer and the late Marc Wainer, who were instrumental in listing New Europe Property Investments (now Nepi Rockcastle) and Redefine International (now RDI Reit) in 2009/2010.
Over the years, Gordon’s bet on UK shopping centres paid off handsomely for shareholders. In May 2010, Liberty International was de-merged and split into a separate retail arm, Capital Shopping Centres (which would later take the name Intu), and London-based Capital & Counties, which owns the iconic play, shop and live precinct Covent Garden. By then, Liberty International was one of the UK’s largest mall owners.
In 2011, the mall owner acquired the Trafford Centre in Manchester, the UK’s third-largest shopping and leisure complex, from the UK’s Peel Group as part of a share-swap deal believed to be worth more than £1.6bn.
By 2013 the company had entered Spain. It acquired stakes in three retail developments, including megamall Xanadu on the outskirts of Madrid and a huge development site in the south of Spain.
By late 2015, Intu’s portfolio included more than 20 shopping centres, worth £10bn. At the time, it was trading at record highs of R74 a share, making it the JSE’s most valuable property company, with a market cap touching R100bn.
Five years on, the picture has changed dramatically. By the time Intu was suspended last Friday, the share price had crumbled to 29c, and the company’s market cap had withered to R393m.
Intu’s collapse marks an unfortunate end to an important part of Gordon’s legacy. He was chair of Liberty International until 2005, when he retired on his 75th birthday. At the time, a large chunk of his wealth was tied up in the company through a 21% stake.
Back then, Forbes magazine placed Gordon among the world’s 500 wealthiest people, with a net worth of $1.6bn.
In May last year, six months before the billionaire passed away at 89, the Gordon family still ranked 230th on the UK’s Sunday Times 2019 Rich List. Between 2018 and 2019, however, his property wealth had shrunk by £100m to about £600m, no doubt due to the fall in Intu’s fortunes.
According to Bloomberg, the Gordon family still owns a 6% stake in Intu. Coronation Holdings, which until recently was one of Intu’s largest supporters, sold its entire stake (19% in mid-2019) in March. But SA investors as a whole, including large asset managers such as Ninety One and the Public Investment Corp, are still believed to hold just more than 20% of Intu. That’s down from about 40% in May 2010, when Liberty International was de-merged.
Perfect storm
It is difficult to comprehend the extent of the value destruction in such a relatively short time. But it seems the company was caught in a perfect storm.
Stanlib property analyst Ahmed Motara says the downward spiral of Intu’s share price was triggered in mid-2016, when the UK announced its intention to exit the EU.
Since then investor sentiment has been steadily eroded by a combination of factors. Motara refers to Brexit uncertainty that led to pressure on UK property valuations and the shift from traditional bricks-and-mortar retail to e-commerce, which made it difficult to grow shopping centre rentals.
More importantly, the company increased its debt to unsustainably high levels.
Uncertainty was also created by management changes. Long-standing CEO David Fischel announced his departure in mid-2018 after an abortive take-over attempt by UK rival Hammerson.
Fischel was replaced in April last year by former CFO Matthew Roberts, who has since tried to fix the balance sheet and resuscitate the company through various rights issues and debt restructuring deals with the company’s bankers. But most of these efforts came to naught and Roberts stepped down shortly after Intu was placed under administration.
In March this year, the company declared a loss of £2bn for the year to December, predominantly due to a property value deficit of 23% and a 9% fall in like-for-like net rental income. That brought Intu’s total property valuation losses to 33% from December 2017 peaks.
Meanwhile, debt levels had reached £4.5bn, which placed the company’s loan-to-value (LTV) ratio at 68%, prompting fears that lenders will start calling in loans.
An LTV of 68% is considered sky-high, even in UK terms, and compares with average LTVs of 30%-40% for most SA real estate investment trusts (Reits).
Following the release of dismal results, Roberts had to abandon a £1.3bn emergency capital raise, as not enough investors were willing to support the call.
Shortly after, Intu appointed chartered accountant and turnaround specialist David Hargrave to help restructure the business and sell some of its malls to pay off its debt.
Though the company has managed to sell its stakes in two of its three Spanish malls, it is a case of "too little, too late".
And then Covid-19 hit. Motara says the UK’s subsequent 12-week lockdown of nonessential retailers was probably the tipping point that pushed the company into administration. The lockdown led to minimal rental being collected from shopping centre tenants, he says, which further affected Intu’s ability to service its debt obligations.
‘A tale of hubris’
While Intu may appear to be a victim of Brexit, the rise in e-commerce and Covid-19, analysts believe management should shoulder a large part of the blame. Many of Intu’s problems, they say, seem to have been of its own making.
"Sadly, Intu is a tale of management hubris, incredibly bad corporate structuring and a dash of bad luck," says Garreth Elston, chief investment officer of Reitway Global, a Cape Town-based asset manager that invests in offshore Reits.
Blaming Brexit and e-commerce for Intu’s collapse is a cop-out, he says. "Intu’s UK peers have also been exposed to pressure from online retail and the post-Brexit referendum malaise. Yet they have proven far more resilient."
Besides, Intu’s problems are not new. "We have viewed Intu as a fundamentally damaged company for several years," Elston notes. He cites management’s excessive use of debt as key to the company’s downfall, along with the "house of cards" that was its capital structure. A lack of investment to maintain and improve the company’s shopping centres and the inability to complete various potential takeovers and mergers added to its woes, he says.
Elston refers to a proposed merger with US shopping centre giant Simon Property Group in late 2010, and with UK-listed Hammerson, which owns a portfolio of more than 50 shopping centres, retail parks and outlet villages across the UK and Europe.
In 2017, Hammerson announced plans to merge with Intu, but the deal never materialised.
A potential buyout in 2018 by the Peel Group, which owns a 27% stake in Intu, also fizzled out.
Elston argues that Intu’s management was never properly aligned with shareholders. "Even though the company’s strategy failed, executives faced little personal risk and were handsomely rewarded. In stark contrast, investors are probably going to be left with an empty bag," he says.
Evan Robins, portfolio manager at Old Mutual Investment Group, shares the sentiment. He refers to Intu’s ultimate implosion as a "slow-motion train wreck".
Like Elston, Robins believes the company’s problems aren’t linked only to Brexit and a weak and changing UK retail landscape. "Management failure is also to blame," he says.
By way of example, Robins points to management’s stubborn refusal to take note of market signals. "They never believed things could get as bad as the market was pricing in," he explains. "Management also didn’t reduce gearing when they had the chance years ago through rights offers, disposing of properties or cutting dividends."
He says that if management had taken some pain earlier, the dire situation that Intu now finds itself in could have been averted.
In addition to this inaction, Robins says Intu management served shareholders badly over the years by turning down attractive takeover and merger offers.
Analysts believe the Intu saga should be seen as a cautionary tale for SA property companies, especially those with high gearing levels.
Motara says lessons to be learnt from Intu include the importance of managing debt levels, keeping a simple capital structure and selling underperforming assets.
Transparency is also crucial. He believes that if management doesn’t engage proactively with stakeholders, companies can forget about shareholders supporting rights issues and recapitalisation efforts during tough times.
Robins agrees that the main takeaway for SA Reits is to avoid taking on more debt — particularly when the market outlook is deteriorating. He reckons it was the high level of gearing that ultimately killed Intu.
Trying to maximise dividend payouts can also sink a company, he adds.
At this stage, it’s unsure what the final outcome of Intu’s administration will be, and how long the process will take under auditing firm KPMG’s London-based restructuring practice.
KPMG partner David Pike hasn’t provided the FM with any clear answers on a timeline, except to say the administrators are in the process of assessing various options.
He says all of Intu’s 17 UK shopping centres, which attract about 400-million visitors a year, as well as its Madrid mall, are continuing to trade as normal since the UK eased trading restrictions from June 8.
"With all centres remaining open, we look forward to working with staff, suppliers and other key stakeholders to preserve value and jobs in these important retail destinations," he says.
The fact that none of Intu’s malls have closed their doors and the company’s portfolio still maintains a healthy vacancy rate of less than 5% will no doubt provide a glimmer of hope that the company may be salvaged. But analysts say it depends on what course of action Intu’s administrators take to restructure it and to repay creditors.
The company can either be rehabilitated as a going concern, broken up and sold, or liquidated. Analysts say if it’s rehabilitated and its JSE and LSE suspensions are lifted, investors may still be able to sell their shares. However, shareholders should probably not hold their breath; such an outcome is likely to be a long shot.
As Reitway Global’s Elston notes: "Given the amount of debt outstanding and the crash in UK retail property values amid an ongoing pandemic-induced economic disaster, shareholders will be lucky to get anything back on their investment."
Fingers are being pointed at Intu management for turning down attractive takeover and merger offers over the years
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