INTU SGS - Firm foundations platform for growth?

All,

Please find our unchanged model here.

Of course the mixed bag of performance figures was not unexpected, but looking beyond the reported figures, we find that adjusted occupancy rates are stabilising and coupled with increased rent (and rent arrear) collection, providing the base to drive valuations. High-quality shopping centres will revert to near capacity in the medium term, as seen in Braehead. Occupancy above 90% will ultimately compress valuation yields and drive asset valuations.

Rental Collections:

INTU SGS are consistently seeing improvement in rental collection, with Q2 figures (March-June) at c.70% for Net Rent and Service Charge. Q3 figures (July-Sept), which fell due in June, are at 66% for Net Rental and 60% for Service Charge, Note, some of the rental is now charged monthly, and in line with previous collections and discussions with tenants, we would expect the collection to exceed that of Q2. Furthermore, at a headline rate, we would expect Q4 collections to be higher again, given the importance of the Christmas trading to all retailers.

However, notwithstanding the progress, there are some issues to emerge. The UK government’s Covid support measures, including moratorium of forfeiture, VAT reduction for hospitality, business rates relief, and furloughing schemes, are all expected to be removed in the coming months, which will put more pressure on retailers and their ability to pay rents.

Rental Arrears:

More encouraging, INTU SGS have managed to collect £18m of rental arrears for FY20 and given its current knowledge, expecting further arrears collection in the coming months. The £18m plus c.£6m expected in the coming months exceeds the original £15m expected for rental arrears collections. Moreover, this is demonstrating that some tenants are not hiding behind Covid protections and see their future including a presence in retail shopping centres.

Occupancy:

The headline number of 82% Group Occupancy rate is alarming. The rate is exceptionally low, in part due to the closure of the John Lewis Partnership store at the Watford centre in Q1 2021, reducing occupancy to 69% at Watford. However, included in the vacancy numbers are the ice rink and curling rink at Braehead. These are low-yielding spaces and when omitted, occupancy at Braehead and the group rises to 95% and 85% respectively.

Valuation:

Total Valuation has reduced a further 5% across the SGS portfolio, which isn’t a major surprise given the exit of a large anchor tenant (John Lewis) at Watford and the exit of Debenhams and Arcadia Group brands since the December valuations. However, recently the Company has seen rental negotiations conclude (or near conclusion) with the Fraser Group, H&M, and Inditex brands across the whole portfolio, all of which would be viewed as anchor tenants, stabilising the tenant base. We are a little surprised the valuation of Braehead, with near 95% adjusted occupancy rates, hasn’t seen an uplift (increased by only £2m since December) with yields still double digits (11.8%).

Positioning:

There is a call later this month to discuss the presentation, but we are maintaining our 5% long position at current levels. We reiterate our view that the timeframe of this trade is 18-24months, and recent information does nothing to alter it. Progress is slow, but we are seeing some improvement in underlying performance. The structure has now completed the restructuring, with maturities extended to March 2024.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk