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Intu Properties dividend cut casts shadow over retail Reits

29 November 2018

Shares in shopping centre owner slump 39% after a consortium led by its deputy chairman John Whittaker drop acquisition plans prompting group to warn it would cut its dividend.

Intu Properties (INTUP) cast a shadow over the property and real estate investment trust sector today when its shares slumped 39% after a consortium led by its deputy chairman John Whittaker dropped plans to buy the shopping centre owner, prompting the group to warn it would cut its dividend.

Shares in the owner of Manchester’s Trafford Centre tumbled 77p to a record low of 116p after the consortium, which included Peel Group and Saudi Arabia’s Olayan Group and Brookfield Property Group of Canada, withdrew their indicative cash offer of 215p per share citing Brexit and global uncertainties.

‘Given the uncertainty around current macroeconomic conditions and the potential near-term volatility across markets, the consortium is not able to proceed with an offer within a timeframe which is manageable,’ Brookfield stated on behalf of the group that had conducted due diligence on Intu.

‘We suspected the process wasn’t running smoothly and we always thought it would be a tough sell to Brookfield shareholders,’ Jefferies analysts said.

This is a further blow to Intu shareholders after its larger rival Hammerson (HMSO) - marked nearly 7% or 29p lower at 392p today - abandoned a 253.9p per share merger earlier this year.

Liberum analysts recalled that Intu had rejected a 425p per share cash bid from Simon Group eight years ago, calling it ‘a disappointing out-turn for long-term shareholders’ in the company.

Peel Hunt analysts said Intu was in a ’tricky’ situation with the pressures on high street retailers depressing valuations and raising the proportion of its debts in its property portfolio.

It warned Intu’s loan-to-value (LTV) ratio currently at 50% could rise up to the 60% limit of its bank borrowing agreements. This would require it to sell around 40% of its assets to raise £2 billion and reduce LTV to 35%, analysts said.

Russ Mould, investment director at AJ Bell said Intu provided three lessons for investors:

  • never buy a stock for a bid alone
  • take care with dividend yields that look too good to be true (Intu was yielding 7% before today’s news)
  • value with no catalyst is no value – Intu’s 57% discount to its last net asset value per share of 297p could be closed by a fall in asset values rather than a rise in the share price.

Coming in the wake of the Bank of England warning on the negative impact of a hard Brexit on the UK economy, investors in other retail heavy developers dumped their shares. British Land (BLND) slid 5.5% or 34p to 571p and Land Securities (LAND) shed 4.4% or 38p to 837p.

“Those Reits with the greatest exposure to retail are bearing the brunt of investors’ disappointment, with Hammerson and Land Securities down the most, as shareholders begin to despair of whether there will ever be a catalyst that closes up the substantial discounts to net asset value at which these property plays trade,’ said Mould.

Among real estate investment trusts F&C Commercial Property Trust (FCPT) was the biggest faller, its shares sliding 1.8% or 2.6p at 138.4p to yield 4.2% after a downgrade by analysts at Canaccord Genuity.

FCPT trades close to par, or NAV, but Canaccord's Alan Brierley said shares in the monthly dividend payer looked vulnerable given the comparatively low 4.3% yield and the low level (79%) of dividend cover from profits. 'Improving this dividend cover in the current environment is not without challenges,' he told investors, reducing his recommendation to 'sell' from 'hold'.

Picton Property Income (PCTN) on a 6% discount and 4.1% yield, Ediston Property Investment Company (EPIC) on an 8% discount and 5.5% yield, UK Commercial Property (UKCM) on a 10% discount and 4.4% yield and Tritax Big Box (BBOX) on a 2% discount and 4.7% yield, softened between 0.5% and 1.4%.

Intu said that while it was confident of its commercial prospects based on its ownership of eight top-20 UK shopping centres and with 97% tenant occupancy, ‘negative’ market sentiment and the need to invest in its portfolio and reduce debts meant it would ‘substantially reduce’ dividends in the short term starting with the final 2018 payment due early next year. Last year it paid total dividends of 14p per share at a cost of £188 million.

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