Intu Properties : Half-year Report 30 June 2019

Half-year Report 30 June 2019

Released : 31/07/19 07:00:00

RNS Number : 2731H

Intu Properties PLC

31 July 2019

31 JULY 2019

INTU PROPERTIES PLC

HALF YEAR REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2019

A TRANSFORMATIONAL FIVE YEAR STRATEGY

Matthew Roberts, intu Chief Executive, commented:

"The first half of 2019 has been challenging for intu. We have experienced further downward pressure on like-for-like net rental income and property values resulting from a higher level of administrations and CVAs as some retailers struggle to remain relevant in a multichannel world.

These challenges, facing intu and the whole sector, have been well-documented and, while there are no quick fixes, I am confident that we can address them head on. Over the past nine months we have carried out the most comprehensive review of the business that intu has ever undertaken.

We know radical transformation is required and have developed a new, ambitious five year strategy to reshape our business and address the challenges we face, with a priority to fix our balance sheet. With the people changes we have made, we now have the right leadership team in place with the appropriate skill sets to deliver this plan and drive the business forward.

Regardless of current sentiment, one thing is clear: the physical store is not dying, it is evolving. The right store in the right location still plays a vital role in retailers' multichannel strategies and we are starting to work with them as partners sharing the risks and rewards.

Our centres will also transform as we turn them into thriving communities - places where people want to live, work and have fun, as well as shop. Change will not happen overnight, but I am confident we have the right plan in place and an energised, dynamic team to deliver it."

Investor presentation

A presentation to analysts and investors will take place at UBS, 5 Broadgate, London EC2 at 09.30BST on 31 July 2019. The presentation will also be available to international analysts and investors through a live audio call and webcast. The presentation and a copy of this announcement will be available on the Group's website intugroup.co.uk.

Enquiries

intu properties plc
Matthew Roberts	Chief Executive	[phone]
Robert Allen	Chief Financial Officer	[phone]
Adrian Croft	Head of Investor Relations	[phone]
Public relations
UK:	Justin Griffiths, Powerscourt	[phone]
SA:	Frédéric Cornet, Instinctif Partners	[phone]

This announcement contains "forward-looking statements" regarding the belief or current expectations of intu properties plc, its Directors and other members of its senior management about intu properties plc's businesses, financial performance and results of operations.

These forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of intu properties plc and are difficult to predict, that may cause actual results, performance or developments to differ materially from any future results, performance or developments expressed or implied by the forward-looking statements. These forward-looking statements speak only as at the date of this announcement. Except as required by applicable law, intu properties plc makes no representation or warranty in relation to them and expressly disclaims any obligation to update or revise any forward-looking statements contained herein to reflect any change in intu properties plc's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Any information contained in this announcement on the price at which shares or other securities in intu properties plc have been bought or sold in the past, or on the yield on such shares or other securities, should not be relied upon as a guide to future performance.

Results summary for the first six months of 2019

	Six months	Six months ended
	ended
ment (£m)	30 June 2019	30 June 2018	Change	Key comments
Net rental income 1/2	205.2	223.1	(17.9)	-	like-for-like reduction of 7.7% (£16.8m)
				- driven by impact of administrations and CVAs
Underlying earnings 1/2/3	66.4	98.5	(32.1)	-	net rental income reduction of £17.9m, see above
				-	finance costs increased by £6.2m mainly due to reduced capitalised
					interest (£4.5m)
				-	increased tax expense of £8.3m from current period estimated
					underpayment of minimum PID
Underlying EPS (pence) 1/3	4.9	7.3	(2.4)	- reduction in line with underlying earnings
Property revaluation deficit 1/2	(872.1)	(650.4)	(221.7)	-	like-for-like reduction of 9.6%
				-	23bps outward yield shift from weakening investor sentiment
				- ERVs marked down by 4.1%, in particular for larger units following
					higher level of administrations and CVAs
IFRS revenue	279.9	286.1	(6.2)	-	reduction in rents received
IFRS loss for the period attributable	(829.6)	(486.2)	(343.4)	-	adversely impacted by revaluation deficit (see above) as well as change
to owners of intu properties plc					in fair value of financial instruments
IFRS basic loss per share (pence)	(61.7)	(36.2)	(25.5)	-	reduction in line with IFRS loss for the period
	At 30 June At 31 December
Balance sheet (£m)	2019	2018	Change	Key comments
Market value of investment and	8,357.5	9,167.4	(809.9)	-	revaluation deficit of £872.1m
development property 1/2/4				- capital investment of £71.7m, mainly on developments such as intu
					Lakeside and intu Trafford Centre
Pro forma net external debt 1/2/5	4,714.2	4,867.2	(153.0)	-	part-disposal of intu Derby for initial consideration of £108.7m,
					calculated by reference to the December 2018 valuation
IFRS net assets attributable to	2,999.2	3,811.7	(812.5)	-	predominantly as a result of revaluation deficit
owners of intu properties plc
Dividends paid (pence)	-	4.6	(4.6)	-	no 2019 interim dividend recommended for payment
NAV per share (diluted, adjusted)	252	312	(60)	-	impact of revaluation deficit of 62p
(pence) 1/3				-	partially offset by underlying earnings in period of 5p
EPRA NNNAV per share (pence)	210	271	(61)	- as above for NAV per share (diluted, adjusted)
1/3
Pro forma debt to assets ratio	57.6	53.1	4.5	-	increase due to reduced property values
(per cent) 1/2/5
	Six months		Year ended
	ended	Six months ended	31 December
Operational performance	30 June 2019	30 June 2018	2018	Key comments
Leasing activity
- number	109	116	248	-	level of lettings similar to prior year
- new rent	£14m	£16m	£39m	- in line with valuers assumptions
- rental uplift (v previous passing)	+1%	+6%	+6%	-	+2% on net effective basis (net of rent frees and incentives)
Uplift on rent reviews settled	+7%	+10%	+7%	-	101 settled in period
Footfall	+0.8%	-1.3%	-1.6%	- UK +0.4%; Spain +3.5%
				- UK outperformed Springboard benchmark which was down by 2.2%
Occupancy (EPRA basis)	95.1%	96.6%	96.7%	- lower occupancy due to increased level of administrations and CVAs, in
					particular the impact from prior year processes
Net promoter score	7 8	7 3	7 5	-	continued improvement in visitor satisfaction

1. Figure presented is an APM. See presentation of information section for further details including rationale for significant APMs used.
2. See financial information including share of joint ventures section for reconciliations between presented figures and IFRS figures.
3. See notes 10 and 11 for reconciliations between presented figures and IFRS figures.
4. 30 June 2019 including intu Derby which is classified as an asset held for sale. See investment and development property section for reconciliation between presented figure and IFRS figure.
5. 30 June 2019 figures pro forma for the part disposal of intu Derby which completed on 8 July 2019.

- leading the way in modernising the lease structure, to include store generated online sales

Within the existing centre footprint:

- improving the visitor experience and dwell time: street food, experiential markets and paid for experiences

- seamless customer offering: direct retail and curated space for pure-playonline brands and intu Pocket, a cashback loyalty wallet

Intensification of our landbanks, using a capital light model. Initial focus is on:

- residential - hotel

- flexible working

- reducing the capital expenditure pipeline

Chief Executive's statement

Our five year strategy

Over the last nine months we have carried out the most comprehensive review that intu has ever undertaken. With the pace of change accelerating in our sector, radical transformation is required, and we have tested our beliefs to develop a clear five year strategy to reshape the business by way of four strategic objectives.

From our half year results you can see that there are currently many changes and challenges in our market, but we have centres where both substantial visitor numbers and their satisfaction ratings are increasing.

We understand the issues we face, including how the market is changing, but recognise that we have some fundamental strengths that mean we are best-placed to take advantage of the flight to prime.

Challenges

The retail property market is impacted by the structural changes ongoing in the retail sector, with some weaker retailers struggling to remain relevant in a multichannel environment. This has led to a higher level of administrations and CVAs which has been exacerbated by the current political uncertainty in the UK and weak consumer confidence.

The result of all this on the retail property sector is pessimistic investor sentiment and decreasing property values.

On top of this, intu itself faces challenges. We are seen as having too much debt, with a tail of underperforming assets. Our relationships with tenants are seen as old-fashioned and our management structure has stopped us being as agile as we would like to be.

We believe our new strategy addresses these challenges and will position us to take advantage of opportunities that arise.

Strategic objective

Key actions

What have we done

Fix the balance sheet

To reduce net external debt and create liquidity to deal with the upcoming refinancing activity, with the first material debt maturities in early 2021

- not paying a dividend for the time being

- no 2018 final or 2019 interim dividend

- disposal and part-disposal of assets in the UK and Spain - part disposed of intu Derby for initial consideration of £109m

- entered second round of sales process for intu Asturias and intu Puerto Venecia

- disposed of £12m of sundry assets with a further £24m exchanged at above book value

- reduced capital expenditure pipeline by £60m, with total to 2023 now £146m

Simplify, enhance and drive	-	update management structure for our forward-looking	-	restructured Executive Committee
efficiency		strategy	-	new Non-Executive Directors
To deliver our strategy and reshape intu,	-	deliver a thriving culture of happy and high performing -	delivered £5m of annualised cost savings
we need to ensure we have the correct		colleagues	-	signed Mind 'Time for Change' pledge
leadership team in place, with the right	-	new approach to incentive plans
skill sets and teams to deliver this vision	- focus on wellbeing and ESG
Sharpen customer focus	- identifying, nurturing and supporting leading brands	-	commenced CEO meetings with top 30 customers
To improve our relationships with those	-	investing further in data and sharing the insight	-	appointed Customer Performance Director
who pay us to take space, working	-	developing new product and service propositions for	-	recruited Head of Insight
closer with them and taking a		our customers to reduce their costs, remove hassle and -	identified new product and service propositions
partnership approach to maximise		improve sales

returns for both parties

Transform our centres

To deliver what future visitors and customers want with a project pipeline for new uses

• successful intu Lakeside trial of 'instagrammable' upside down house, with further roll-out planned
• opened test site for direct retailing with Birdhouse Café in Nottingham
• launched first shopping centre branded cashback loyalty wallet, intu Pocket
• around 6,000 potential residential units identified across eight sites with public consultation launched at intu Lakeside
• seven potential hotel sites identified for around 800 rooms
• six viable flexible working sites identified

Our review of the business looked at how we see the market evolving, and this along with our underlying strengths helped formulate our strategy for the next five years.

The store is not dying, it is evolving

With all the recent media articles around the death of the store, you could believe that no one will go shopping again. However, the right stores in the right locations still play a vital role for retailers. Two statistics tell this story well. First, 85 per cent of all retail transactions still touch a physical store. Second, recent research by CACI has shown that the presence of a physical store can double a retailer's online sales in that local catchment.

If we look ahead to 2026 and research carried out by CACI and Revo, their research suggests that 78 per cent of transactions will still touch a store in 2026, even with the overall percentage of online sales increasing from 20 per cent to 30 per cent. Although direct in-store spend on comparison goods will grow at a lower rate than other channels (2017 to 2026: +2.5 per cent compound annual growth rate), the growth in click and collect and online sales researched in-store gives an overall compound annual growth rate in sales that touch a store of 3.0 per cent.

This highlights the importance of the store, added to which, if the overall number of stores in the UK declines over this period then the productivity of the remaining stores will improve, and this should be weighted towards the best retail and leisure destinations.

As the role of the store changes, then the relationship with our customers will have to change too. As data becomes increasingly important, it is key that we and our customers can join forces and share data to ensure we both benefit and potentially share the risk and reward.

Centres are transforming

The transformation of centres is nothing new, it is a continuous process but the speed of change is increasing. Our view is that the best locations will deliver theatre and world class service, maximising the footfall and dwell time for our customers. These will be the locations that our customers focus on as they rationalise their store portfolios.

In addition to the retail and leisure mix, we also see further intensification of sites introducing residential, office and hotels which will increase our centres' importance at the heart of their communities.

intu's fundamental strengths

There are many challenges, but there are also many strengths we have to take advantage of.

We own nine of the UK's top-20 centres (source: GlobalData) and on average over one million people a day visit one of our centres where our visitor satisfaction continues to grow. Our centres continue to have high occupancy at 95 per cent. We are seen as innovators - we introduced the first nationwide online shopping mall in the UK, intu.co.uk.

All this means that we are a first stop and major provider of space in the UK for many global brands, such as Apple, Inditex, Victoria's Secret and Abercrombie & Fitch.

Outlook

In the period we have seen a reduction in like-for-like net rental income of 7.7 per cent. We expect this to run at a similar level through the remainder of 2019 as the impact of recent administrations and CVAs are resolved. Looking into 2020, we would expect like-for-like net rental income to be moderately down due to the full year impact of the 2019 CVAs, with the overall run rate improving against 2019.

Similarly, with valuations, we have seen reductions in the first half of the year by around 10 per cent. In the UK, we would expect continued downward pressure in the second half of the year, until we have more certainty on income as the level of administrations and CVAs reduces and we have clarity on the outcome of Brexit. Our share price has traded at around a 35 per cent discount to gross asset value (based on 31 December 2018 valuation) reflecting the more pessimistic view of external markets on Brexit and retailer strength. This discount is amplified at a net asset value level due to intu's debt levels.

In the short term, fixing the balance sheet is our top priority. We are making good progress on the disposal of our Spanish assets, the proceeds of which we will use to reduce our debt. Additionally, we are not paying a dividend for the time being to retain cash within the business. We are looking to make material progress over the next six to 12 months and we will keep all options under review, from the self-help measures described through to raising equity.

There are challenges in the market at the moment and we understand what they are, but we have a clear plan to address them and move the business forward.

Financial review

Presentation of information

Figures and commentary within the financial review, unless otherwise stated, are presented including the Group's share of joint ventures on a proportionately consolidated basis. See presentation of information section for further details including rationale for significant APMs used.

Income statement

		Six months	Six months
		ended 30 June	ended 30 June
£m	Notes	2019	2018	Change
Net rental income	A	205.2	223.1	(17.9)
Administration expenses	B	(20.8)	(21.7)	0.9
Net finance costs	C	(113.5)	(107.3)	(6.2)
Tax on underlying profit	D	(8.7)	(0.4)	(8.3)
Other underlying amounts2		4.2	4.8	(0.6)
Underlying earnings1		66.4	98.5	(32.1)
Revaluation of investment and development property	E	(872.1)	(650.4)	(221.7)
Change in fair value of financial instruments	F	(32.2)	75.1	(107.3)
Other non-underlying amounts3		8.3	(9.4)	17.7
IFRS loss for the period attributable to owners of intu properties plc1		(829.6)	(486.2)	(343.4)
IFRS basic loss per share (pence)		(61.7)p	(36.2)p	(25.5)p
Underlying EPS (pence)		4.9p	7.3p	(2.4)p

1. A reconciliation from the IFRS consolidated income statement to the underlying earnings amounts presented above is provided in the financial information including share of joint ventures section. A further reconciliation of underlying earnings to the IFRS loss attributable to owners of intu properties plc is provided within note 10.
2. Other underlying amounts includes net other income, share of underlying profit in associates and any underlying amounts attributable to non-controlling interests.
3. Other non-underlying amounts includes losses on disposal of subsidiaries, gains on sale of investment and development property, exceptional administration and finance expenses, exceptional tax, share of joint ventures and associates adjusted items and any non-underlying amounts attributable to non-controlling interests.

The key drivers in the decrease in underlying earnings of £32.1 million and underlying EPS of 2.4 pence in the period as well as the decrease in IFRS loss for the period attributable to owners of intu properties plc of £343.4 million and IFRS basic loss per share of 25.5 pence are discussed below.

A Net rental income

Net rental income decreased £17.9 million in the period to £205.2 million. This is largely due to the 7.7 per cent reduction in like-for-like net rental income of £16.8 million, compared to an increase of 1.3 per cent in the same period in 2018. The key components of the movement are:

	Six months ended	Six months ended
%	30 June 2019	30 June 2018
Rent reviews and improved lettings	+0.9	+1.4
Capital investment	+1.7	+0.3
Vacancy impact	-2.7	-0.3
Administrations and CVAs	-4.3	-0.9
Turnover rent	-0.8	-
Other (e.g.: bad debt; surrender premiums; headlease adjustments)	-2.5	+0.8
Change in like-for-like net rental income	-7.7	+1.3

• rent increases from rent reviews and new lettings delivered 0.9 per cent rental growth. Rent reviews were settled 7 per cent ahead of previous rents and lettings were on average up 1 per cent (see operational performance section for more details)
• capital investment in intu Lakeside and intu Watford delivered growth of 1.7 per cent
• vacancy increased in the period by 1.6 per cent, resulting in a 2.7 per cent impact on net rental income from both rent foregone and increased void costs
• the effect of administrations and CVAs was 4.3 per cent, mainly driven by the 2018 administrations and CVAs, including House of Fraser, HMV and New Look Men
• other is adverse by 2.5 per cent primarily due to the level of premiums received, with around £4 million received in the first half of 2018 against around £1 million for the same period this year

In the first half of 2019, administrations and CVAs relate to 71 stores and around 7 per cent of our passing rent. By rent, 45 per cent have had no impact, with the tenant keeping their stores in our portfolio open on the existing rent. Of the remainder, 52 per cent are trading on discounted rents and 3 per cent have closed.

We anticipate full year like-for-like net rental income to be down by a similar amount to that seen in the first half of 2019.

B Administration expenses

Administration expenses reduced marginally in the period:

• our EPRA cost ratio (excluding direct vacancy costs) remains low at 16.0 per cent (see EPRA section for detailed calculation)
• since the end of June, we have been through a restructuring of headcount removing around 10 per cent of management roles. This gives £5 million of annualised saving, of which around £2 million will benefit the service charge. We estimate that the changes will have minimal impact in 2019

C Finance costs

Net finance costs have increased by £6.2 million in the period to £113.5 million, largely due to lower interest being capitalised on developments as they come online.

D Tax on underlying profit

Tax on underlying profit includes £8.3 million in respect of corporation tax on the estimated current period underpayment of the minimum PID.

Current tax relating to the estimated prior year underpayment of the minimum PID of £7.9 million has been treated as an exceptional expense due to changes in the interpretation of REIT legislation. See note 8 for further details.

E Valuation

The revaluation deficit of £872.1 million relates to increasing yields and reduced rental values in the period:

• UK centres are down by 10.4 per cent on a like-for-like basis with all centres impacted by broadly similar amounts of 9 per cent to 11 per cent (see investment and development property section for centre by centre analysis)
• Spanish centres are unchanged given the continued demand for top quality Spanish centres and strong income performance

Yields have been impacted by weak sentiment in the investment market, with investors focusing on net initial yields. The main factors impacting yields are:

• uncertainty around Brexit, the structural change in retail and higher than normal levels of administrations and CVAs has significantly reduced demand for prime shopping centres in the UK
• according to Cushman & Wakefield, the first quarter of 2019 has had the lowest level of shopping centre transactions since the third quarter of 2008
• intu's weighted average net initial yield (topped-up) increased by 23 basis points to 5.21 per cent at 30 June 2019. This yield shift equates to an approximate 4 per cent reduction in capital values

Rental values have also been impacted by the higher than normal levels of administrations and CVAs

• valuers have reappraised ERVs, in particular on some of the larger spaces
• intu's ERVs decreased by 4.1 per cent in the period on a like-for-like basis

For the investment market to improve, more certainty over the terms of Brexit and stabilisation of income is required. This will enable investors to make more informed decisions on pricing.

F Change in fair value of financial instruments

The change in fair value of financial instruments relates largely to fair value movements on our interest rate swaps. Further detail on our interest rate swaps (including detail on allocated and unallocated interest rate swaps) is provided under E below within the balance sheet section.

Balance sheet1

		30 June	31 December
£m	Notes	2019	2018	Change
Investment and development property	A	7,964.6	9,130.1	(1,165.5)
Investment and development property classified as held for sale	B	349.9	-	349.9