intu properties 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 GBP410 million before expenses. This represents an income yield of 5.2 per cent, based on net rental income of GBP43 million.
The estate comprises the intu Merry Hill shopping centre, two retail parks, office and leisure uses along with development land.
A GBP500 million loan has been arranged, with a 2018 maturity, which will replace the current GBP191 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 GBP889 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.
In May 2014, intu acquired a 50 per cent interest in the Merry Hill estate. The acquisition price was GBP408 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 GBP448 million based on the valuation at 31 December 2015. The tenant mix has been enhanced with 22 new lettings, improving the headline ITZA(1) from GBP150 per square foot to GBP180 per square foot and tenants have invested around GBP7 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 ITZA(1) stands at GBP180 per square foot, below the PMA average for comparable super regional centres of GBP342 per square foot and below that for intu Trafford Centre of GBP425 per square foot and for intu Lakeside of GBP350 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 modernising 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.
- Headline ITZA rent relates to the annual rent per square foot after expiry of concessionary periods in terms of Zone A.
- As at 31 December 2015.
Key facts on intu Merry Hill
Located 10 miles west of Birmingham, the UK’s second largest city by population, it has a catchment of approximately three million living within a 45 minute drive time.
The asset comprises the main shopping centre, intu Merry Hill, together with a number of other assets including retail parks, offices, leisure and development land covering 229 acres.
Retail space totals 1.7 million square feet spread between the shopping centre (1.4 million square feet) and adjacent retail parks (0.3 million square feet).
intu Merry Hill is the super regional shopping centre for the West Midlands and has potential with intu’s asset management initiatives to considerably strengthen its penetration of this catchment. It is arranged over two levels featuring 214 units, including six anchor stores, retail shops and catering units.
Anchored by Marks and Spencer, Debenhams, Primark, Next, Sainsbury’s and Asda, the shopping centre is 96 per cent occupied with a weighted average unexpired lease length of 6.7 years.
The centre has around 10,000 car parking spaces and a footfall of 22 million.
INTU : Intu takes full ownership of Merry Hill