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Intu sees strong increase in footfall ... if you ignore the 'Beast from the East'

Numis Securities said the upbeat trading statement felt like management was preparing investors for the possibility of Intu going it alone should the Hammerson bid fall through
Abercrombie & Fitch store in a shopping centre
Abercrombie & Fitch chose intu Trafford Centre for its first UK store outside London

Shopping centres owner and operator Intu Properties PLC (LON:INTU) said its prime shopping centres had a strong first quarter.

The property firm saw a record level of retailer demand in the first quarter with 60 long-term leases, of which 43 were signed in the UK with the rest signed in Spain.

READ: Intu Properties records third successive year of like-for-like net rental income growth

The newly-signed leases will generate £10mln in annual rental income.

The occupancy level was unchanged from the end-year figure of 96.1%.

Year-to-date, the company's centres have seen footfall increase by 1.5% year-on-year if one excludes the period when the “Beast from the East” had much of the country in its icy grip.

Anticipated growth in like-for-like net rental income for the year continues to be in the range of 1.5% to 2.5%, with the outcome expected to be stronger in the second half than the first half.

By the end of the year, it is possible that the real estate investment trust will have merged with Hammerson, although at least one major Hammerson shareholder – APG, with 7.2% of Hammerson's share capital – has expressed concerns over the £3.4bn merger deal.

READ: Top Hammerson shareholder set to vote against Intu takeover

The group had cash and available facilities of £872mln at the end of March while the debt-to-asset ratio stood at 45.3%.

Market movements in the fair value of debt and financial instruments since the year end have positively affected net assets by around £180mln.

“Our prime centres continue to outperform as retailers and shoppers gravitate towards the best locations. We have a very concentrated portfolio. Over 80% of our UK gross asset value is comprised of 10 centres, all PMA [Property Market Analysis] ranked top-25 UK centres and some of the largest and most popular retail and leisure destinations in the country,” said David Fischel, Intu's chief executive.

“Our well-timed entry into the Spanish market continues to offer significant upside as the country's economic recovery continues, both from the three top-10 centres we currently own and from our plan to begin construction in the next 12 months of a £600mln world-class retail resort near Málaga,” Fischel added.

“As a result of this strong performance, we reiterate our guidance for like-for-like net rental income growth both for the current financial year, subject to no further material tenant failures, and over the medium term," the Intu boss declared.

Broker Numis Securities said the trading update read like management was laying the groundwork to prepare investors for life without Hammerson, should the agreed takeover be yanked.

"INTU management has issued an upbeat trading statement that highlights the strengths of its business model as it sees them," Numis said.

"However, administrations to date are expected to knock some £3.9m off NRI [net rental income] (0.8% of FY17 NRI); mgmt may have reiterated its guidance for 1.5-2.5% LfL NRI in FY18 (which assumes no further significant tenant administrations) but the market should be aware this is a same-centre not same-store LfL metric and is thus not a true indicator of underlying trading performance," Numis pointed out.

"LTV [loan-to-value] is elevated at >45% (with a high 4.2% Kd) and this is before any capital write-downs; of course, retail real estate may no longer be cyclical but this would be a brave call to make and we do not believe this to be the case. INTU has substantial capex commitments (UK capex, ex-maintenance, £560mln over the next 3 years) and we believe it will have to sell in order to finance it; mgmt has a choice, sell the family silver (and thus dilute portfolio quality) or sell weaker assets (and we see a thin market for secondary)," Numis suggested.

"INTU is not in an easy position and should HMSO walk away, we believe the shares will come under sustained pressure as the market’s focus moves onto the potential ramifications of INTU’s high peak cycle leverage. The shares may trade on -46% vs spot NAV [net asset value] and yield 6.5%, but we see limited value on a stand-alone basis," the broker concluded.

Shares in Intu were marginally higher at 208.2p in mid-morning trading, after closing at 207.9p last night.

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