Brick & Mortar melts down on mall owners. So “repurpose” malls into housing?
By Nick Corbishley, for WOLF STREET:
After a weekend of fevered speculation, struggling UK mall owner Intu Properties confirmed on Monday that it plans to raise £1 billion of fresh capital to buttress its shaky finances. The company’s shares reacted in time-honored fashion, plunging 8% to a historic low of 21 pence before ending the day down just 1%. Intu’s share price is now 80% lower than it was a year ago and 95% lower than five years ago, leaving the group valued at just £306 million.
Intu owns dozens of malls in the UK, including nine of the 20 biggest ones, and a handful in Spain. It describes itself as a commercial real estate company that is “in the business of helping customers and brands flourish, whether that’s through leasing space in our prime retail and leisure destinations, commercialisation activations or online through our multichannel platform intu.co.uk.” The problem is that many of its clients — mainly large bricks-and-mortar retail chains — are not exactly flourishing; they’re either battling for survival or going out of business.
Intu is also bleeding funds. Its net rental income in the first half of 2019 slumped by around 18% year-on-year to £205 million as a result of major clients like Topshop’s owner Arcadia, Debenhams, and House of Fraser falling into administration (a form of bankruptcy), resulting in a spike in store vacancies. Its losses surged to £856 million in the first half of 2019, up from £506 million in the same period of 2018. The combined value of its assets also fell, from around £9 billion to just over £8 billion.
The company has £4.7 billion of debt on its books that it cannot service under current conditions, which is why it is asking shareholders to stump up an extra £1 billion of capital. But just how willing will investors be to inject funds worth more than three times the market value of a company whose shares have already collapsed 80% in the last year, at a time when the UK’s retail sector is in the deepest of doldrums?
The UK retail sector had a terrible time in 2019, in particular the second half. The three-month moving sales average between October and December fell 1.1% year-over-year, the biggest decline since September 2009. Many consumers, their psyches’ pummeled by the never-ending uncertainty over Brexit and their finances stretched to the outer limits of their borrowing capacity, have begun to tighten their belts, which is the last thing the UK’s brick-and-mortar retail sector needs.
In the last year alone, 14,500 stores were closed. This is having a direct impact on retail malls, as well as the investors that own them. Open-ended property funds sustained the largest withdrawals on record in 2019, with total outflows of £2.2 billion. In December, the giant UK fund manager M&G suffered a run on its £2.5 billion M&G Property Portfolio, leaving it little choice but to suspend redemptions. The “temporary” ban has not yet been lifted.
For Intu, the fallout of the UK’s bricks-and-mortar retail crisis has translated into lower occupancy, lower rents, lower revenues and ever-bigger losses. In the first nine months of 2019 it received £19 million in new rents, 40% less than during the same period of 2018. Its occupancy rate of 95% was also down on the 97% registered in September 2018. The company anticipates further declines in 2020 as the high-street crisis continues to bite.
With losses rising, shares falling and large amounts of debt soon coming due, the company has to somehow convince investors it still has a future worth investing in. To that end, it has drawn up a five-year survival strategy, based around two key pillars:
1) Repurposing its business model. Just as mall owners in the US are desperately trying to come up with creative and profitable new ways to use the vast empty spaces being left behind by closing stores, Intu is intent on transforming parts of its shopping center empire into residential real estate. The company has already applied for planning permission to turn a vacant House of Fraser store and two car parks at its Lakeside shopping center in Thurrock into 1,200 homes. It also plans to build homes, hotels, leisure parks and flexible working centers at other large out-of-town malls.
Intu insists that despite the threat posed by the seemingly unstoppable rise of online retailing, its business is evolving, not dying. Even if the overall number of stores in the UK declines, “the productivity of the remaining stores will improve, and this should be weighted towards the best retail and leisure destinations,” it says.
2) “Fixing” its balance sheet, mainly by disposing of a large chunk of its non-core UK assets (estimated value: £1.6 billion) and most, if not all, of its assets in Spain. The company has already sold its 50% stake in the Puerto Venecia center in Zaragosa for £203 million, £63 million less than the value attributed to it in its Q3 investor presentation. It is also in the final stages of offloading its 50% stake in the Parque Principado center, in Asturias, and is looking to sell its 50% stake in the Intu Xanadu center, in Madrid, when the contract comes up for renewal later this year.
Intu should be able to raise around £600 million from the sales of its Spanish assets. It also picked up £210 million from the sale of part of its Intu Derby center in the third quarter of 2019. But time is of the essence: It has “material debt maturities” in early 2021, and it needs to “create liquidity” to deal with “upcoming refinancing activities.”
That’s where the other key plank of its balance sheet clean-up comes in: the rights issue it hopes to complete in the coming months. But for that to succeed, much will depend on its ability to win over investors that are already deeply skeptical and concerned, not only about the company’s future but the future of the entire sector in which it operates. By Nick Corbishley, for WOLF STREET.
But even red-hot online sales cooled off late in the year as consumers turned sour. Read... Brick-and-Mortar Melts Down in the UK, Worst Decline Since 2009, as Big Retailers Collapsed, 14,500 Stores Closed
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“the company has to somehow convince investors it still has a future worth investing in.”
In the times before “Hope and Change destroyed contract law in the States” and crushed GM bondholders in favor of a political ally of the UAW – it is ALL how the bonds are structured and who is first in line.
Risk, the basis of what investors charge in interest to compensate for taking that risk with their money, is based on
1. being paid back over an agreed time period with interest
2. being able to get their money back in the event of a bankruptcy.
Stocks, of course, are wiped out in a bankruptcy.
“The combined value of its assets also fell, from around £9 billion to just over £8 billion.”
“The company has £4.7 billion of debt on its books that it cannot service under current conditions, which is why it is asking shareholders to stump up an extra £1 billion of capital.”
Intu’s five-year survival strategy talks about the first part – paying back the bonds over an agreed amount time period.
What what about the second part? Who is first in line? Will assets cover bonds in the event of a bankruptcy? How are they structured?
Since the idea of “risk” has been erased by the central banks, everything after your use of that word can be safely ignored. If they issue NIR bonds, they will be on to a winner and will be oversubscribed. Even if there is “risk” that it is too expensive to repurpose malls into a glut of “luxury apartments” (which most can’t afford anyway), we are now living in cloud cuckoo land where delusional spin fixes everything. Just ask the central banksters and their voodoo “economists.”
These guys missed the boat – the time to attempt to raise a billion pounds was a couple years ago.
IIRC there was a take-over bit on Intu last year, or the year before, for billions.
Dec 2017 If i understand correctly more than 3Bn in cash and mid 2018 another for almost 3Bn
All failing malls should be repurposed to housing to relieve the housing shortage.
Makes sense – most malls have mass transit lines, and parking. Perhaps throw in some rent-by-the-hour office space as well, a few small grocery stores, small service businesses – keep the food court…
Our Oglethorpe Mall, in 1973, had a clean Piggly Wiggly grocery, a movie theater, a drug store, a 5&10 store called McCrory’s. with sandwiches and coffee, a Fabric store, 3 toy stores, Belks, Penney’s & Sears anchor stores, a cafeteria with fresh made food, etc. All were full of USA made products.
It morphed into slave made fast fashion .
Besides the Walmart Chinese tsunami of crud and higher rents, there was another cause of it’s sad, sad demise.
Computer inventories made check out way too long…Sears was worst. Computers are only about the past…ONLY. They spit out the past and have no intuition or imagination or vision. No algo can be devised with those.
Even if they devise an algo that imitates a pilot with self preservation, they can’t devise one that loves it’s grandchildren enough to make the self preservation meaningful on terra firma. Guess I’m a philosopher!!!
Leicester UK did it years ago.
Put flats and office space at opposite ends as anchor tenants.
Everyone is going to be walking home anyway. Hello captive audience.
Add in some parks,schools and playground.
Hello new eco village.
Now if we can just get ecovillage adjusted ebitda we can use the loss making nature of these malls in our favour!
What “ housing shortage” it’s an affordability shortage from my perspective Lots of empty luxury housing here
There is a lot of money tied up in luxury housing but the units are not that many
A lot of them do re-purpose to housing, as economics determines highest and best use. They build condos in the huge parking lots, or actually tear down the mall and build more condos.
However, making apartments from slots in the mall doesn’t sound initially like an attractive offer, though it is tempting to consider senior housing, appropriately redesigned, and already having indoor walking space, elevators, and escalators, with appropriate security at the entrances monitoring for residents and their guests.
Just look at the number of seniors ‘hanging around the mall’ anyway, never buying anything and just talking to their friends, sitting on the benches. And the mall owners/developers could still use the excess huge parking lots to build new condo buildings.
As far as the obsolescence of malls is concerned it’s just a paradigm shift, which occasionally takes place in every venue of business or technology. Some will survive.
2banana,
You are simply asking logical investor return questions which are verboten. You are to trust the management team who apparently are shedding assets in favor of focusing on their core business, which, if it is mostly malls, is in a nose dive and approaching ground zero at the speed of sound. They are asking you to hop aboard with your parachute, and give the parachute to them. Don’t ask them what they plan to do with your parachute.
This is a fantastic opportunity for investors in Tesla, Uber, BitCoins, etc., to heighten the quality of their portfolios.
Disclaimer: Pay NO ATTENTION. This entire post is intended to be sarcastic in nature.
I have been watching Tanger outlet mall like a hawk. Up 3% today in down market. It tends to do well on risk off days when treasury yields drop. I think it might do ok if stock market rolls over because price to cash flow is so low.
I put a sizeable chunk in it believing if a company is making money and is going to survive you can do a discounted cash flow analysis and come up with a price. Markets go through periods when they want fantasy and not cash flow.
Old-school,
This is the 6th comment in which you have promoted your stock (Tanger). Your future comments promoting this stock will be auto-deleted.
I have nothing to gain other than to share a lot of work with your readers to check out on their own to see if it makes sense for them when you mention the mall story. No more comments from me about anything.
Wolf, how is that for timing on your comment? Funny. Check after hours price. I will be good from here on out. All in good fun. Keep up the quality work.
Wolf,
This thread is about malls. Promoting a thread related stock seems to be a service, IF it’s backed up with reasoning and disclosure. Can’t say that was done here. Not even a ticker symbol.
cb,
If you discuss a company once under a related article, no problem. Many people do that.
But this company is the only stock Old-school has been promoting on this site repeatedly (at least 6 times), even on articles unrelated to US retail. If everyone does this, the comment section will go haywire.
Then there is commenting guidelines #4 – “broken record” – where a comment is being repeated over and over again.
https://wolfstreet.com/2017/10/07/finally-my-guidelines-for-commenting/
I knew I wad pushing it. In general I take that Wolf, I and most readers have thought the market has been over valued for a long time and to the extreme. Wolf finally took a shotgun approach with some of his funds and shorted the whole market. I don’t short only because that is the advice Buffet gives.
I decided to take the rifle approach and continually look on the most shorted top 20 list and find one stock that is shorted too much based on value investing. That’s why I only talk about one stock at a time. If you do a lot of work and think you are right it’s hard not to share. But it is diverging from Wolf’s intent of the wonderful thing he has created. I can always run my mouth on a single stock forum.
If Intu is lucky enough to own a lot of well located properties that can convert into residential, they will do well out of this.
They just have to convince the relevant planning authorities that they have tried everything possible to retain the commercial use of their properties but sadly and heartbreakingly they simply have no option but to convert everything into residential. Smallest possible boxes preferably so to “maximise the investment “.
I won’t be crying over their fate, no.
In July 2016 I couldn’t believe that Simon property group was $247…at $149 it’s still a sale…in 2016 it had risen relentlessly to $247 in the teeth of all the “death of retail/malls” articles…speaking of which it looks like TSLA is on a relentless rise to its newly granted–today–target of $800
In the UK, I see old factories and industrial areas demolished and made way for apartment blocks.
The UK government tells the UK people that there is more employment in the UK than ever before. This is probably the massive increase in immigration over the last 12 years.
The UK government just announced that unemployment is the lowest since 1974.
So I would like to know what all these employed people are actually doing.
Yet with all this great news, how come the UK government continues to have a massive defficit for the last 25 years?
I suspect it is as follows:
A massive population of the UK is on “zero hour contracts”. That means that they are employed by a company when and if needed. The result is that they are considered in employment but are actually still living on state benefits.
Then the UK has what I call “The Self-Unemployed”. These are people that have been signing on unemployed for 6 months. They then have an interview with the government unemployment office, where they are told that if they start their own business will continue to receive full state benefits for the next 6 months but do not have the inconvienience of coming to the unemployment office every two weeks to sign on unemployed and explain how they have been doing to find a job.
after 6 months these “Self Unemployed” will be signing back on unemployed on the basis that the business was not viable.
State accounting is wrong and only looks at cashflow. That is why they have deficits. I bet the if you look at companies like Wallmart for the last 25 years that their total debt has increased every year.
The figures you seek are on the ,office of national statistics website.
They are going down. Large out of town shopping malls don’t work anymore.Out of town shopping malls footfall is pure destination shoppers and as such can’t compete with shopping areas were footfall is more due to other reasons. City core shopping malls also have the advantage that their land-value s much higher and can be used for something else.
Yes…I like that…but aren’t those city shopping areas now gentrified beyond the price of most of us? Our main street here in Savannah has become a high end waste of time for the locals.
The US and urbanization is plain weird. How can boom regions like SF loose population? But Britain is normal with respect to urbanization and population growth etc. They have also a lot more main street or semi main street areas being old cities. So main street has been gentrified less into where Prada is a cheap brand. The kind of malls Intu specializes in , namely the best and especially biggest in the region, can’t live off only the luxury brands. If a Intu mall would be in the city center than by its mass it would be in the center of the city center so land value wish it is always high and they could use that value to lend money
Hi Nick,
Just to add to the news, Beales department stores chain has just appointed the administrator.
Joules profits down the pan too.
Lots of residential conversions to come from these poor B&M retailers.
They must be gutted not to have any properties in our LibDem led SW London council, here if you know right people, you knock down a 5 storey building and replace it with 15 storeys one.
Little boxes, little boxes, gimme lots of tiny boxes.
I remember in the 70’s people used to drive into gas stations and a service attendant would fill their gas tanks and take their payments. Some stations started making people fill their own tanks, but offered lower priced gasoline. Eventually everyone wanted to use the cheaper self serve gas stations.
There is a restructuring going on in retail. Retail sales are up and stores are going out of business, except online stores.
Move to New Jersey, its like the 1970’s never ended and you’ll never sully your hands by touching a fuel pump.
Wow. Can you explain why it’s different in NJ?
State law doesn’t allow self service gas stations.
Petunia It’s not a bad law I’ve seen people pumping their own gas while smoking Darwin’s theory at work
The law was created to suppress competition, and other states imposed the law too.
Somebody in the 1940s offered the innovation of pumping your own gas at a discount, it caught on quickly, and rival stations/lessors petitioned to outlaw it, using the rationale of safety, e.g. people are too dumb to pump their own gas and will end up setting themselves on fire by not shutting off their engines, or smoking. Of course in Olden Tymes, a lot of operators used to smoke and fill gas, unless it was a major lessor’s policy not to. Nothing bad used to happen, at least with no greater frequency than occurs due to static electricity.
Good for the Garden state….may her tribe increase!
So are all of the other states are having problems with self serve pumps?
I’ve pumped my own since the early 1970s, quick, efficient, and no problems.
Maybe I missed the reports of wide spread self serve gas station problems.
“the company has to somehow convince investors it still has a future worth investing in.”
Au contraire!
They need to incorporate in the U.S, list themselves on the NASDAQ, NY Stock Exchange, or whatever…maybe get themselves assess to the Fed’s Repo Window or fundraise and issue some junk bonds, do some stock buy backs….what am I missing, anything?
Problem solved.
Next emergency? I still available for advice…
Intu is a complete trainwreck. Piling into retailer stores in the 2000s, just as e-tailer warehouses took off in the 2010s. Now, Intu is hoping to whip up thousands of cheap apartments on top of their old malls in the 2020s, blighting city centres with yet more cr*p housing. Intu is a case study of some of the worst mismanagement the world of retail has ever seen.
Looks like the easy money era in retail Reits is oovaa.
Ya gotta go where the demand is and that is housing.
Of course that will be overplayed and investors will have
to move on again, and so forth and so on.
Simple. The global downturn has begun. And like a spring, it will unwind. How to survive it unharmed is the better discussion rather than what to do with junk like malls.
This has nothing to do with the economy. B&M retail is going to a phase were everybody is loosing money because of a channel shift and Brexit makes the lenders skittish so they are calling in the loans now
I think it’s a combination of online and the economy to be honest Demographics as we Boomers have all the crap we need and the younger people aren’t as insanely obsessed with “stuff” other than tech of course
2014 was the year a lot of Dutch retail died. Every week there was a retail group that went bankrupt. But outside retail there was no spike in bankruptcies. It was not the economy but a bank that saw no future in retail and called in their loans. In my opinion they were right. Demographics and Amazon are the underlying reason but why now is because Brexit creates a reason
You have to admire the Brits for their stiff upper lip and their pluck. “Give me $3 or you are gonna lose your $1.”
The funny thing is if that actually happened, it could indicate just how nutty some of these investors actually are.
In most of Asia, malls are doing very well, but malls there provide a user experience that cannot be matched online. This means competent sales people, and beautiful public spaces with attractive design.
These malls co-exist with the online space very well.
In contrast, a few months ago I visited Canada, went to some malls I used to use as a young adult, and found a depressing experience with stores stripped of sales staff, and clearly no thought to design of the spaces themselves. This is probably the result of too many 23-year-old MBAs with spreadsheets, and not easy to reverse.
They can learn from Japan. They have 3 basement levels for fantastic take away food. The top floor may have great restaurants.
How much user experience is due to a difference in type of mall you visite. The large regional malls, the type Intu owns, are still doing great from a user experience. The local suburban malls, the kind you probably visited as a youth are dying. As traveler you are more likely to experience the first kind
I think that malls still have a place in the future, just on a smaller scale. I live in a city that’s about 600,000 people with three malls. Two are dead and full of crime, while the third is always bustling with people actually buying products. It’s time that brick and mortar stores downsize to actual demand.
Dont get it 95 percentil occupancy and Then cant service the debt with this low interest rates. Have they discounted the rent that much to keep tenants?
95% occupancy doesn’t mean tenants are paying rent. They may be in default or “administration” (form of bankruptcy), and no payments are made. These occupancy numbers can be very misleading. When a big department store chain defaults and goes into administration, rent payments halt, and the landlord becomes a creditor waiting in line, though the space is still listed in the occupancy number. In that case, either the stores will eventually get shut down and vacate the premise, but this can take a long time, or the lease payments will be changed, with a haircut for the landlord.
Mall often get a part of the take. 95% can mean a lot less footfall and half empty parking. Another source of income. Also a lot of retail chains went into company voluntary agreements, a British kind of insolvency to lower their rent payments
Take the skinheads bowling, take them bowling.
No one wants a mall. Hunting and pecking for goods in a mall is for terminally consumerist grandmas.
What an ugly comment…have your never enjoyed browsing and girl watching in the springtime, buying your Mother some cologne, and getting out ?
Aren’t you forgetting the little pleasures that make most people, including grandmas happy for a few hours?
When malls became mind numbingly choked with the same stores, row after row, level after level, I quit going even with my wife.
How many jeans, shoes, jewelry, and T shirt stores can there be? All staffed by clueless children who desperately want to be elsewhere else, and in fact ARE elsewhere else via their smartphones. Those that are not on smart phones are bitching to each other about work, friends, family, and customers.
Just ask one of them …”so how is your day going so far?”….. I’d be surprised if you got even a blank stare let alone some conversation.
Hey, sorry. No shame, if that’s what you are into.
What goes up must come down. British mall owners have benefited from ‘upwards-only’ rent reviews for years. Surprise, surprise, when this finally becomes unaffordable for retailers, the owners can’t cope.
This is hubris rather than purely because of the shift to online.
I am a layman and even I know malls are relics of the past. The few I have seen still surviving due it to a mix of having a very good location, center of the city thanks to predating laws that moved malls away, having food courts, ATMs, and making deals with credit cards to have discounts of some things in some days.
But the key is still location, if most people can go to the mall just by walking instead of a car, they end going as n outing, even if the prices are normally high. They hunt for discounts and later end eating there, without being one or two hours away from the city by car.
Those malls that need people to actually drive there? They are doomed.
WOLF, To help solve the worldwide problem of empty malls is simple. The existing empty structures could be converted to indoor farming. The large central area at ground level the farmers market. The existing empty stores to become production and living quarters for entrepreneurs. A variety of products would be possible in this unique and novel environment.
January 22, 2020
I have been wondering for a while now:
Seems like some of the dying malls might well be repurposed into EV charging stations. That is if we are inexorably moving towards a world in which EVs are the common man’s vehicle. That IS widely believed, you know.
I have recent good-quality info that it takes about half an hour to recharge an EV. If so, something like an Oasis store, only more so, makes perfect sense as an adjunct.
Is this what Eddie Lampert has in mind for his Sears holdings ? Makes sense to me….In the Inland Northwest, a Barnes and Noble at a Sears-anchored mall is a common association. I can imagine some of us browsing books while we charge our EVs. There is still a lot of bricks and mortar shopping in my neck of the woods, so this is an easy transition for me to imagine.
What are the reasons why many existing malls could not be repurposed into EV charging stations ? Amazon may help this transmogrification with their increasing distancing of human response to their customers (“Do you have a problem ? Talk to the BOT !! ” )
Changing subjects here, I hope from interchanges above, that Old-school and Wolf, have reached an understanding on what leads to “broken-record” auto-deletes. I find Old-school’s comments informative; hadn’t realized some of them have been redundant.
As always, thx Wolf, Nick, et al..
I messed up. More reading, less posting.
What to do with the malls? Who cares?!? When the property becomes cheap enough someone will buy. As for the seller? Not my circus, not my monkeys . . . or put another way, who cares squared?!?
Malls and the stores within them are big employers. That makes them important
Convert them to condos and apartments with restaurants movie theaters and convenience stores like a mini walmart. Millenials would live there, close to entertainment and shopping.
Upward only rent reviews, and the cessation of same, is contributing to these problems.
Sure investors want certainty and returns, but when tenants income falls, rent repayments have to fall too
You may know this but ‘upward only rent review’ doesn’t mean the rent has to go up. Simply that the rent payable after the review to market rent is agreed or ascertained cannot be less than the rent payable before the review.
Intu in common with other quoted propcos is in trouble because of how the stock market values propcos: a combination of net asset value (NAV) and net rental income. NAV lags behind because valuers are prone to thinking ‘in a normal market’ and protecting their clients so do not substantially down-value unless there is tangible evidence. Investor demand for shopping centres has slowed so valuers have nothing to go on. The stock market on the other hand is quick to respond.
I assess shopping centre propcos by reference to the capital value of the rental stream and ignore the asset capital value. On that measure, shares have been overpriced for years. Trouble is banks and others have based their thinking primarily on NAV which is how Intu have managed to borrow more than they could afford.