Part of the late billionaire Donald Gordon’s offshore property empire might not see out the year, if Intu fails — again — to get its hands on some desperately needed cash.
It’s a staggering decline for the once mighty Liberty International, which listed in 1999 as the offshore property arm of the powerful Liberty group. It was split, in 2010, into Capital & Counties (CapCo) and Capital Shopping Centres Group, which was later renamed Intu Properties.
Last week Intu, which owns 17 malls in the UK, had to abandon a £1bn rights issue as markets tanked on the Covid-19 coronavirus outbreak.
Intu has almost £5bn of debt, and needed to raise £1.3bn from investors to secure a four-year £440m lifeline from its bankers.
The property company’s shares had already cratered before last week’s rights issue debacle, and at about 100c on the JSE Intu is worth just R1.3bn — with debt at this week’s rand-pound exchange rate of more than R104bn.
Tiffany Jones, an investment analyst at Catalyst Fund Managers, says Intu’s best option now is for a suitor to come to its rescue.
"The biggest current issue with Intu is that leverage is far too high in an environment of weak retail fundamentals," she says.
The weakness stems from economic uncertainty in the UK following the Brexit referendum, the threat from e-commerce and failing department stores, and the high cost of occupancy for retailers in the UK.
All of that has contributed to a steep drop in property values.
"These have pushed loan-to-value levels to unhealthy levels, and management has been slow to react with asset sales," says Jones.
"Given that an equity raise to reduce leverage appears unlikely at this stage, the company is left with few options — one of which would be to sell all its assets, even when it is tough to get decent pricing, and return what is left to shareholders."
The other option, she says, is to sell the entire company to another real estate investment trust or private entity.
But, she warns, barring one of these eventualities, "we see very little chance of the company being salvaged".
So how did it get to this?
After Liberty International split in 2010, Capital Shopping Centres was left with 13 prime British shopping malls, nine of them being among the UK’s top 30 centres.
CapCo, meanwhile, became one of the largest listed investment and development property companies focused on central London, with entertainment and shopping complex Covent Garden and the residential estate Earls Court.
Capital Shopping Centres became Intu in 2013 and over the next three years it traded consistently, managing to get its tenants to pay healthy escalations.
But business soured after the Brexit referendum on June 23 2016. The effect was an instant sell-off in UK property assets.
At the same time, retail was changing: traditional brick-and-mortar stores were coming up against the transition to online shopping, which led to a fall in the perceived value of Intu’s malls.
As a result, its loan-to-value ratios — or debt divided by assets — began to climb.
By the end of December 2019, the ratio had jumped to 68%.
Evan Robins, listed property manager of Old Mutual Investment Group’s MacroSolutions boutique, says Intu’s management team became complacent.
David Fischel was CEO from 2001 until the end of April 2019, when he was replaced by Matthew Roberts, who had been CFO since May 2010.
Robins says Intu didn’t upgrade its malls often enough and its tenant mix had too many old-fashioned high-street stores.
In order to avoid tenants being liquidated, Intu was forced to sign company voluntary agreements with them.
The company was approached with takeover bids as recently in 2018 — one by a consortium led by the Peel Group, which is Intu’s biggest shareholder, and one from fellow JSE-listed outfit Hammerson. Both fell through.
Intu declined to be interviewed for this article. "Unfortunately, Intu management is not doing any more media engagements at this time," its SA public relations team said last Thursday.
One of Intu’s biggest backers, Coronation, has also declined to discuss the company.
Coronation is Intu’s second-biggest shareholder after the Peel Group, with 9.97% of the company — a position that it has built up from about 3% two years ago.
Investec owns 6.3% of the stock and the Gordon family still retains a 6% shareholding.
Keillen Ndlovu, head of listed property funds at Stanlib, says Intu is running out of time. At the current share price, it is trading at a 97% discount to its last reported NAV of 210p a share.
"This means that the market expects a massive decline in NAV when they report results," Ndlovu says.
He says a further 10% fall in asset values, or a further 10% decline in net rental income, will lead to Intu breaching debt covenants.
Ndlovu says Intu has to sell its best assets, or quickly explore the "alternative options" that the company flagged in a trading update last week.
Those options are narrowing fast.
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