Intu properties plc (“intu”) announces that it has exchanged contracts with the Queensland Investment Corporation (“QIC”) to acquire the remaining 50 per cent of the Merry Hill estate for £410 million before expenses. This represents an income yield of 5.2 per cent, based on net rental income of £43 million.
The estate comprises the intu Merry Hill shopping centre, two retail parks, office and leisure uses along with development land.
A £500 million loan has been arranged, with a 2018 maturity, which will replace the current £191 million loan facility, maturing in 2017, secured on the 50 per cent originally held. The all-in cost of debt of this new facility is estimated to be around 3 per cent. The balance of the consideration will be met from intu’s existing resources.
The acquisition, which is scheduled to complete shortly, is expected to be earnings accretive from completion.
An external valuation of 100 per cent of the asset by Cushman & Wakefield prepared in connection with this transaction amounts to £889 million, at a nominal equivalent yield of 5.0 per cent.
Intu’s pro forma loan to value increases to 43 per cent compared with 41 per cent at 31 March 2016.
David Fischel, Chief Executive, commented:
“We are pleased to have been able to acquire the remaining 50 per cent interest in intu Merry Hill, some two years after our original 50 per cent acquisition in 2014. Our ownership and asset management to date has provided us with ample evidence of the centre’s upside potential, whatever the outcome of the EU referendum.”
In May 2014, intu acquired a 50 per cent interest in the Merry Hill estate. The acquisition price was £408 million, with intu taking on the established asset and development management rights at that point. QIC retained the 50 per cent holding which they originally acquired in 2007 but took the strategic decision in 2015 to exit this interest.
In the two years since the acquisition, and working with QIC, the market value of intu’s 50 per cent interest increased by 10 per cent to £448 million based on the valuation at 31 December 2015. The tenant mix has been enhanced with 22 new lettings, improving the headline ITZA1 around £7 million in shop fits in the centre. intu is currently working on a number of other tenancy changes.
The investment strategy remains similar to when intu acquired the initial 50 per cent interest. The centre presents a significant opportunity to re-engineer and update the tenant mix. Encouraging large flagship formats and reducing the number of smaller units will make the centre more attractive to retailers and customers, and improve the rental tone. This strategy is similar to that which has been successfully implemented at intu Trafford Centre and intu Lakeside.
On a square foot basis for super regional centres, intu Merry Hill currently has a relatively low valuation and rental levels. Headline ITZA1 PMA average for comparable super regional centres of £342 per square foot and below that for intu Trafford Centre of £425 per square foot and for intu Lakeside of £350 per square foot(2).
Initiatives underway to improve the rental tone in the centre in the short to medium term include:
– right sizing a number of existing anchor and major space users to provide retailers with the appropriate space.
– targeting key retailers not currently represented in the centre including international and aspirational retailers.
– reducing the number of smaller standard units through amalgamations and right sizing tenants.
– upgrading and modernizing the retail environment, both internally and externally.
– repositioning the food and beverage and leisure offering in the centre, in particular increasing the restaurant offer (currently at 7 per cent of rent which is low by regional shopping centre standards).
In addition, intu believes the wider estate of retail parks, offices, leisure and development land offers significant opportunities for strengthening the overall Merry Hill destination.
The acquisition is expected to be immediately earnings accretive to intu and provides considerable potential for growth in earnings and asset value.