If any investor has built a formidable enough reputation to strike fear into the hearts of company board members, it would be New York hedge fund Elliott Advisors.
News that Hammerson has taken the unusual step of drawing up a relationship agreement with Elliott, understood to hold around a 5-10% interest in the company through multiple derivatives, has caused surprise among analysts.
In the wake of discussions between the pair, Hammerson has agreed to create a new investment and disposal committee to oversee an extensive disposal programme, comprising four non-executive directors.
The REIT, which is looking to raise more than £500m from sales this year, is in “active” talks to sell £900m of assets. Combined with the retail park disposals it plans, this means an overall target of around £1.5bn.
But David Atkins, chief executive of Hammerson, has been quick to downplay the perception of any tension with activist investor Elliott Advisors, adding that the meetings were “constructive”.
Atkins tells EG: “We are on the same page, with the same ambitions and intentions – we are happy to work with them.”
Happy together – for now
He elaborates: “With Elliott, its belief is we were on the right track with disposals but that we should perhaps be more vocal about those disposals – and the magnitude [of them]. That was a large thrust of our discussions with them.
“Growing the board and getting some new thinking in also showed we are open-minded about the future of the business, and focused on the disposals. So we have come to a joint agreement about what that means. We both agree that we want to see share prices increase.”
If Elliott has any say in the matter, the two upcoming non-executive appointments would very likely be directors with a strong track record of capital allocation and financial skills.
Atkins maintains that Hammerson is in the driving seat when it comes to the new committee and the disposals programme that it will oversee – as well as aspects relating to succession planning for directors.
“The directors are entirely Hammerson-appointed,” he says.
Additionally, Atkins points out that some of its non-executive directors will reach the end of their nine-year terms within the next 18 months. “Frankly, this is accelerating that,” he adds.
Nonetheless, it is perhaps a burden off Hammerson’s shoulders that Elliott has agreed not to dispute any resolutions recommended by the board at its upcoming AGM – and not to increase its voting interests in the company above a 10% threshold.
If at the AGM there are resolutions to retain Atkins and chairman David Tyler in their leadership roles, this is what Elliott will vote for.
Even if the agreement spans a “maximum” of 12 months, and is subject to “certain conditions”, it seems to have bought Hammerson some time in meeting its stated objectives.
Executing its disposals
By creating a dedicated investments and disposals committee to oversee its disposals strategy, it is clear that Hammerson is eager to make more rapid progress in offloading its assets.
This is a crucial element in its overarching priority to lighten its debt burden. Net debt currently stands at £3.4bn.
Headline loan-to-value was 38% at 31 December, compared with 36% in the previous year; proportionally consolidated LTV was 43%, compared with 40% in 2017.
However, Atkins has been quick to quench any notion of a fire sale. “We are not sitting waiting for the phone to ring. We know what we want to sell,” he told analysts during the REIT’s results presentation.
One of the inherent problems with this is that most of its assets will probably sell at a substantial discount. During 2018, the REIT made £570m of disposals, at an average price of 7% below December 2017 book value.
Of the shopping centre landlord’s assets, the best performers were its premium outlets – one of the few parts of the REIT that enjoyed an uplift in portfolio value, up by 10.1% year-on-year to £2.5bn.
Its stake in Value Retail is broadly viewed as more liquid than its shopping centres. Although it would mean losing a stake in a resilient subsector, taking cash off the table quickly might be too tempting a prospect to resist.
It could also be a relatively straightforward process, since Hammerson does not manage the assets.
Atkins says: “Nothing is off the table. We are not specifying what we are or aren’t doing, but we have made it clear we are looking at all territories and all sectors.”
What next for Brent Cross and Westfield Croydon?
After deferring the start of a proposed £1.4bn expansion of its Brent Cross shopping centre last summer, it is no surprise that Hammerson has now outlined it will not commit to any major projects “until markets stabilise”.
Hammerson has also put its plans on hold regarding its major projects in the UK (including Westfield Croydon and Brent Cross), on the back of “challenges surrounding the economic and political outlook, and structural changes facing retail”. It is reviewing the “appropriate sizing” for the schemes.
Revised proposals could involve the REIT’s freshly unveiled “City Quarters” concept, with plans for up to 6,600 homes, 1,200 hotel rooms and 2.2m sq ft of workspace across mixed-use schemes.
During the analyst presentation, Atkins told attendees that Hammerson would continue with smaller projects such as individual hotels and workspace buildings within its budgeting, but funding the wider pipeline was “a decision for another day”.
“Our business is heavily joint-ventured, so we have plenty of options,” Atkins added.
A tough year
Hammerson will need to work extra hard to combat the relentlessly negative outlook for retail. Tenant failures dented Hammerson’s rent roll by £6m in 2018; it is a trend that shows no signs of letting up.
Moreover, the weakening retail investment sector continues to take its toll on valuations, with Hammerson estimating a 41% drop in market transaction volumes.
“This has been a difficult year for the business. I and the board are as frustrated as you are with the share price… but we are doing absolutely everything we can do improve that,” Atkins told analysts.
“We are not immune to the issues and hope to deliver some better numbers in due course.”
The fundamentals of the market normally win out
Alan Carter, managing director and analyst at Stifel, on Hammerson’s latest full-year results.
The numbers are in line with management indications and contain no real surprises, although the maintained final dividend puts the total figure marginally below the level indicated at the interims, a sign of the times.
I guess the UK “flagship destinations” will be the focus. There was a sharp H2 value write-down of 9.3% after a nominal H1 negative movement, but the initial yield is still a very demanding 4.8%, and still lower than intu’s [arguably superior] portfolio.
No disposals took place in H2 beyond confirmation of the Highcross sale, and all sales last year were below carrying value by 7% in aggregate.
This makes the statement about a portfolio-wide review to accelerate disposals somewhat questionable, with the original target of [more than] £500m apparently now replaced with “active discussions” on £900m of sales.
Bizarrely, the group has found it necessary to set up a special committee “to provide additional oversight and focus” given the importance of the disposal programme. Really odd – perhaps under a bit of pressure in this regard, methinks?
Other bits of the statement worth mentioning are the decline in like-for-like income attributed to tenant failures, and perhaps the most important bit as far as I’m concerned, which is that ERV’s at the UK flagship destinations fell by 2%.
It might not sound much, but the direction of travel is, I think, irreversible with “more challenging negotiations at lease expiry and rent review”.
Finally, the companies owning these “super-prime” assets are reporting not just rising valuation yields on thin evidence but also a fall in rental values on ample evidence, and the latter is why the former won’t stabilise anytime soon.
There’s a slightly odd agreement apparently reached with an activist shareholder. I will await the results meeting for clarification on that, but on face value I have never heard anything like it. It is perhaps a first public indication of a push for change, and certainly the upsized disposal programme would point to something having changed post-strategy review and the year-end.
So, good luck. But given that I don’t think capital and rental values have fallen far enough yet, I really can’t see what can be done to create any value. Rather, it’s a case of attempting to contain value destruction.
The shares may rally in the hope of corporate change, but the fundamentals of the market normally win out and I still don’t like the fundamentals. And of course in the background remains the unwillingness of the board to engage with a potential suitor at a 250p premium to where the shares trade today – and that fact isn’t going away.
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