Troubled UK shopping centre operator Intu has warned it is expecting a significant drop in rental income, due to the knock-on effect of brands failing in the high street.
In a trading update for the period from January 1 2019 to May 2 2019, Matthew Roberts, the newly appointed Intu chief executive, admitted that previous company forecasts hadn't factored in store closures by Debenhams and Arcadia.
Both retail groups have been shutting shops via the company voluntary agreement (CVA) mechanism, which allows them to break tenancy agreements.
'We expect the remainder of 2019 to be challenging due to a higher than expected level of CVAs and a slowdown in new lettings as tenants delay their decisions due the uncertainties in the current political and retail environments,' Roberts said in a statement.
'As such, we have revised our approach to how we guide towards our year-end like-for-like net rental income to factor in expected CVAs and have adjusted our 2019 guidance accordingly to minus four to six per cent.'
Analyst Goodbody noted that the recent raft of closures announced by Debenhams - with 22 set to draw down shutters under the new CVA - would not affect stores in Intu centres. Debenhams currently makes up 3% of Intu's rental income.
Intu upside
Roberts, who took up the chief executive role at the end of April, stressed that the outlook wasn't all bad. 'Our operational performance in the quarter has been stable. We have continued to see good letting activity with 53 long-term leases signed amounting to £6 mln (€7 mln) of annual rent at an average of 1% above previous passing rent.'
He also flagged that the group had attracted 'new types of tenants such as Metro Bank at Manchester Arndale, exciting new catering concepts with Market Halls at Intu Lakeside and an expanding leisure attraction at Intu Metrocentre with Namco’s mini golf and a climbing attraction'.
Roberts said: 'Despite the current operating environment, I believe we have a very good business and am confident we can meet the challenges we are facing head on. I look forward to updating the market on strategy alongside our interim results in July.'
Goodbody observed: 'The slowdown in completion of new lettings is said to be driven by Brexit uncertainty and waiting for the outcome of a number of CVAs. Despite the slowdown, 53 new leases were signed at an average of 1% above previous passing rent, a welcoming signal.'
Loan to value focus
The new chief executive's stated priority is to reduce the company's loan to value to below 50%, Roberts added, saying that 'our plans to achieve this are underway'.
The firm's recent sale of a '50% interest in intu Derby at book value is a positive first step in this regard', Roberts noted.
Goodbody concluded: 'Overall, it looks like CVAs are set to become a more ingrained part of Intu’s operating model, despite previous commentary as recently as FY18 results that the company has been relatively unaffected by the challenges CVAs pose.'
