In times of crisis it can be mightily tempting to indulge in some retail therapy. Yet, save for going online, shopping is all but out in the current climate. Only essential outlets such as supermarkets and pharmacies remain open as part of attempts to stem the spread of the coronavirus.
The nation’s lockdown is deepening what has already been a prolonged crisis for many commercial landlords, especially those that own shopping centres and retail parks, battling to respond to the downturn in trading at bricks and mortar stores. For those with heavy debts on top, the situation is becoming life-threatening.
Chronically indebted commercial property owners are facing a squeeze. On one side there are its tenants, baying for rent reductions and waivers while they are unable to trade. On the other, there are the lenders, demanding repayments on their loans and regularly testing them against their debt covenants.
As well as ordering banks to be flexible, and putting in place protection from eviction for commercial tenants that default on rents over the next three months, the government has said that it is considering the implications for landlords. With pressures on all sides, there is always the danger that something has to give.
The most worrisome company in the commercial sector is Intu Properties. About 80 per cent of its £2 billion portfolio is in retail, including Lakeside in Essex and the Trafford Centre in Manchester.
It has net debts of £4.5 billion, equivalent to 12.3 times its profits before adjustments such as tax and interest. Having already become loss-making due to a sharp decline in its property valuations, the company has an assessment of its portfolio’s worth coming in June, after which the following month its lenders will test its covenants, which measure debt as a multiple of profits.
Intu has already gone into talks with its lenders over possible waivers, aware that it is fighting for its survival. A £1.5 billion attempted fundraising has failed.
The impact of the virus, and arguably government measures too, on rental payments for Intu is stark. In an update yesterday, the company said that it had only received 29 per cent of due quarterly rents, against 77 per cent at the same time last year.
It has immediate and forthcoming access to just under £280 million of cash, but is likely to need to draw on the government’s emergency loans facility for larger businesses. Intu is clearly in a parlous state and the next three months will determine its fate one way or the other.
The picture at Hammerson is better, but still harsh. The company, a constituent of the FTSE 250, is almost completely invested in retail. It has stakes in retail parks, sites and shopping centres including Bicester Village, the Bullring in Birmingham and Cabot Circus in Bristol, though it has reallocated 9 per cent of its portfolio to mixed use, including residential.
Hammerson’s £2.4 billion of net debts are equivalent to a very high 8.9 times its pre-adjusted profits, but a raft of disposals last year reduced its borrowings by a third. Most of it pays a fixed interest rate, with medium-term maturities and it has 3.3 times the capital that it needs to cover payments. In its favour, Hammerson has cash and undrawn credit facilities totalling £1.64 billion, so it is by no means teetering. At the same time, it has nearly halved its planned dividend payments for this year and is continuing to offload assets. Although it has yet to report the recent effects of Covid-19, it is likely that its experience with regular rental payments will not be dissimilar to that of Intu.
The stock market’s two big beasts of commercial property, Land Securities and British Land, are more diverse with their investments, but both face considerable pressures, including over debts.
British Land became the latest group to suspend dividend payments while the threat from Covid-19 remains serious, despite releasing some reassuring figures about its capital position.
About 41 per cent of its £8.7 billion portfolio lies in the retail sector, although 55 per cent consists of more stable offices, much of it in prime London locations. Yesterday the group said that it was waiving rents for some of its smaller tenants in retail, food and drink and leisure, in a move that will cost it £3 million, and deferring quarterly payments worth a further £40 million.
While not ungenerous, it has to be said that’s small beer when set against the £243 million of net rental income that British Land collected during the first six months of its current financial year.
More eye-catching for a company that has net debt of £3.5 billion, the landlord said that it had access to £1.2 billion of easily available cash and had extended a £450 million highly flexible loan. With British Land having no need to refinance any of its debts for the next four years, the risk of it breaching any of its debt restrictions seems low, as things stand.
Land Securities, which as yet has made no public pronouncements about the financial impact of Covid-19, is in a similar position. Its £9.6 billion portfolio makes it the UK’s biggest commercial landlord but, at about 38 per cent, the company’s exposure to the retail sector is the lowest of the four discussed here.
Still, some £151 million of the gross rental income of £332 million that Land Securities collected during the six months to the end of September came from retail. Already under strain due to the rise in sector insolvencies and forced store closures, the group will almost certainly lose revenues from commercial tenants that are unable to pay over the course of the next three months, or longer if the virus persists.
Though British Land has a debt burden of just under £3.8 billion, as of the end of September it had access to £1.6 billion of cash or otherwise highly liquid funds. While inevitably potentially very painful, this company’s financial position doesn’t suggest that the Covid-19 crisis will be crippling.
The share prices of all four of these property companies are trading at wildly high discounts to the net value of their assets. Intu’s net asset value per share is 147p, for example, and its shares were trading yesterday at 3¾p, down 6.4 per cent.
With the exception of Intu, which is in serious danger of having to cede control to its lenders, the other three are still viable, but probably still best avoided unless shareholders are prepared to take a highly speculative risk.
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