I’ve always thought of Intu Properties (LSE: INTU) as a good way to invest in the property market without taking on the huge individual risk of entering the buy-to-let market.
As an operator of shopping centres, with its flagship being Manchester’s Trafford Centre, it invests in commercial rather than residential property, and I’ve always thought prices and rentals in that sub-sector should be more stable over the long term. With that in mind, seeing a 20% share price crash Wednesday morning came as a bit of a shock.
The company warned that like-for-like net rental income is set to fall by about 9% this year, and told us a new equity issue is a likely part of its strategy to deal with its troubling debt mountain. Some asset disposals are also possible, as the firm approaches its next material debt maturity in early 2021.
Big debt
Net external debt stood at £4.71bn at the interim stage at 30 June, and while that was a little down on the £4.87bn figure of a year previously, chief executive Matthew Roberts’ latest statement that Intu’s “number one priority is to fix the balance sheet” hardly comes as an earth-shattering revelation.
Intu shares are now down 90% over the past five years, and looking back on the firm’s earlier generous dividend policy has me shaking my head. Before the dividend was severely slashed in 2018, Intu had been paying out almost all of its earnings as dividends and providing yields of around 5%.
With the UK’s retail troubles being nothing new, with the company carrying such huge debt, and with the rapidly approaching debt maturity, could nobody at the top really see to question that strategy a bit earlier?
Contagion
The weakness spread, a little, to NewRiver REIT (LSE: NRR), whose shares dipped by 3% in early trading, though that real estate investment trust does not suffer from the same balance sheet problems.
In May, accompanying full-year results for the year to March 2019, chairman Margaret Ford said that the company’s “balance sheet is very strong following last year’s successful debt refinancing,” adding that the firm is well positioned “to take advantage of the attractive opportunities that we believe will present themselves in the coming period.”
The result is that NewRiver is still making new investments rather than looking at disposals, having announced the completion last month of the acquisition of Poole Retail Park as part of a joint venture with Bravo Strategies.
Dividend
NewRiver’s dividend is still going strong, with a massive 10%+ on the cards for the current year. That wouldn’t be covered by forecast earnings and needs to be watched on that score, but what it really suggests to me is that the shares are oversold and undervalued, having fallen 40% over the past two years.
My conclusion? On a forward P/E of under 10, I think the NewRiver share price more than compensates for the commercial property risk, and I see a buy. As for Intu, that company really does need to get a grip on its balance sheet, but on a forward P/E of only around 3.5, I can’t help seeing a tempting recovery prospect — but I’d wait and see how its strategy shapes up.
