Shops are closing in high streets across the country; perhaps they can be filled with chickens coming home to roost. It was only a matter time before the pain felt by store chains was passed on to retail landlords and that pain is seen in the share price at Intu Properties (INTU), which has lost more than 90% of its value in less than five years.
The greed of retail landlords, who dictated the terms of leases so that rents could be ramped up mercilessly, has been a major part of the demise of high street trading. (The legal profession is also to blame for treating this iniquity as normal practice but I doubt if any lawyers are feeling their share of pain).
Intu chief executive Matthew Roberts admits he faces challenging market conditions. Well, you can’t accuse him of exaggerating. Company voluntary arrangements (CVAs), under which tenants force through drastic rent reductions, were slightly worse than expected (or slightly better, depending on which side of the rent book you are holding).
Despite some big name deals with the likes of Harrods, letting activity slowed in the latest quarter. Roberts takes consolation from the fact that many of Intu’s top tenants are global, well capitalised businesses. That’s all very well, but if they can’t make a profit at each outlet they will still close stores. He also points to footfall holding up better than the industry average, although Intu’s performance on this measure is hardly sparkling.
On top of the problems running the business, Roberts has to sort out the balance sheet. This will certainly involve selling assets and almost certainly raising equity. Shareholders should brace themselves for a rights issue and the awful decision whether to throw good money after bad.
Intu is managing to push through a 4% increase in rentals paid by existing tenants as leases come up for renewal but, significantly, new lets are at 3% below the previous passing rent.
The occupancy rate has fallen from 97% to 95.1% over 12 months. It is some achievement that the fall has not been far worse. However, the average unexpired lease has slipped from 7.4 to 6.5 years. Serious trouble is edging nearer. Stay well clear.
Purple Patch
A bit of welcome news for Purplebricks (PURP) shareholders: the estate agency made a profit in the first half to 31 October, reversing previous heavy losses despite a decline in home sales in the South East of England.
Revenue was broadly flat as Purplebricks maintained its UK market share at 4% despite scaling back on marketing. Equally important, the Canadian business performed slightly better than expected.
I expressed concerns when the company posted full-year results in July that it was likely to need a rights issue, a view that the company challenged. That fear is somewhat assuaged by the update but I would want to see first-half results on December 12 to see if cash is still being burnt at an alarming rate.
The shares bottomed at 90p in May and have clawed their way back up to 113p. Quite far enough for now.
Sugar Finally Sweet at ABF
There is distinctly better news at Associated British Foods (ABF), the ragbag mixture of food processing and clothes retailing. The dead weight of sugar could be lifting.
The whole group has been dragged down for years by falling profits in the sugar arm as a global surplus and changes to the European Union’s sugar regime took their toll. AB Foods now says it expects a material improvement in sugar profits.
Primark, which has been carrying the grocery side, is still going great guns and the grocery side as a whole is doing much better.
The shares have picked up recently from £21.46 to £24.30 but could well recover further. The big drawback is not that there are two ill-fitting sides to the business. It is that the Weston family own more than half the shares, leaving minority shareholders with no real say in the business.
