It has been a turbulent six months for shopping centre owner Hammerson, which was rocked by its failed £3.4bn takeover of intu Properties after rejecting a bid from French rival Klépierre.
With both aborted takeover bids racking up £6.4m in fees during 2018 as well as £6.5m in the latter half of 2017, alongside advisor McKinsey, the retail REIT has been keeping its head down and drawing up a comprehensive strategy to appease its investors.
The landlord will be hoping the slew of new measures unveiled earlier today will be enough to get the business back on track.
Among a host of initiatives, it plans to focus solely on its two most lucrative retail segments, comprising flagship retail destinations and premium outlets; shrink its board; delay its Brent Cross development; and reduce its exposure to the high street.
On the whole, the REIT said it has identified opportunities for cost savings of at least £7m per annum from the end of 2019.
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It is targeting £1.1bn in proceeds from its disposals programme by the end of 2019 and it aims to return £300m to investors.
The remainder would then be invested in two areas; its flagship destination centres, with surrounding land being targeted for additional returns; and its premium outlets business.
Will the strategy pay off in the current retail market climate? EG puts its key points under the magnifying glass.
Halving its board size
Hammerson has rejigged its board by axing two executive roles from its four-strong line-up, leaving chief executive David Atkins and chief financial officer Timon Drakesmith as its sole executive directors. Chief investment officer Peter Cole is retiring after almost 30 years at the firm and Jean-Philippe Mouton is stepping down but remaining head of the French business.
This clearly goes some way in cutting costs; the REIT hopes the reshuffle will result in £3m in cost savings, combined with other management changes. However, the prospect of a two-member executive board of directors – an extremely concentrated pool of decision-makers – will no doubt change processes.
A £300m share buyback programme
Like many large listed property companies over the past two years that have traded at a substantial discount to NAV, the company has created a share buyback programme to purchase up to £300m of shares.
Given it is trading at a discount of around 31.6% to NAV, it is essentially able to invest in assets on its own balance sheet at this level of reduction. It also gives a signal to the market of confidence in its future position and as the shares will be cancelled it boosts the earnings of the remaining outstanding shares.
Paying a dividend
The board has declared an interim dividend of 11.1p per share for the six months to 30 June. It marks an increase of 3.7% compared with its 2017 interim dividend of 10.7p, which will go some way in mollifying shareholders. However, tough retail conditions in the UK look set to stay. Guidance for dividend growth has been reduced to 3-5% per year as rental values look set to stagnate.
Paying back €500m of bonds early
Hammerson opted to buy back €500m of bonds that were due next year and exercise an early redemption option next month.
With the proceeds it expects to raise from sales, it will be able to pay back these bonds and other debt. Its current LTV rose marginally to 37% during the first half of the year and it is targeting a reduction “to mid-30s% level over the medium term”.
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A steady hand on gearing is particularly important if Hammerson ends up selling assets below book value, as it did two retail parks earlier this week, as the assets that remain will likely eventually be revalued lower in line with these sales and its LTV will nudge up.
A reduction in its gearing will help protect it against any breaching of banking covenants in the result of any dramatic reduction in values.
Halting the Brent Cross extension
Works on the long-awaited £1.4bn Brent Cross redevelopment, initially expected to begin this month, has been put on ice for the foreseeable future, with Hammerson citing “increased risks in the current market environment”.
Given that capital expenditure would be affected on the back of its share buyback programme – and ongoing turmoil in the retail sector – it looks to be a logical move. Analysts at JP Morgan Cazenove estimate that Hammerson’s decision to delay the 970,000 sq ft extension scheme will reduce the REIT’s UK exposure by circa £500m.
Selling off its retail parks
Hammerson plans to shed £1.1bn in assets, including its retail park portfolio in the medium term – which analysts estimate yield around 6.5%.
Since Hammerson’s traditional stronghold has been in shopping centres, plans to ditch the retail park portfolio makes sense. However, an ongoing slowdown in retail park investment activity could be a hurdle: Radius Data Exchange estimated last month that £600m was spent on retail parks in the UK during H1 2018, down 50% from £1.2bn for the same period last year.
Notably, any deal could involve a degree of discounting to book value. Its two retail parks in Bristol and Kirkcaldy were recently sold at £164m, around 10% below December 2017 book values.
New City Quarters land development drive
Hammerson has created a development concept called City Quarters, which is designed to extract more value from a its land bank of at least 65 acres in prime city locations, with sites mostly adjoined to its existing retail hubs.
The REIT plans to apply it to alternative uses such as residential, leisure, cultural and flexible workspaces. As urbanisation speeds up and consumer demand shifts, reinvention has always been essential to long-term survival; the fact that Hammerson recognises the potential in alternative uses to drive footfall and retail spend points to a positive, and much-needed, shift in mindset.
Focusing on non-UK assets
In order to reduce its exposure to the troubles of the British retail sector, Hammerson plans to ramp up its non-UK retail exposure by around 10% – in a marked departure from what its proposed merger with intu would have done.
It is not hard to see why geographical diversification is an attraction. It reported a £19m revaluation surplus for its portfolio in Ireland, of which £16m was achieved through income growth at its Dundrum Town Centre and its Pavilions complex in Swords.
On the other hand, predictions that the UK’s problems in retail will likely extend to Europe could diminish the long-term impact of this particular strategy.
Increasing “experiential” focus
The REIT plans to funnel more of its capital resources into meeting consumer demand for experience-enhancing events and a more elevated digital offering.
It aims include initiatives such as repurposing department store space, the introduction of flagship retail showrooms, marketplace food offers and enhancing its event spaces.
While these would clearly be solid footfall drivers, Hammerson will need to ensure that each experience-led offering caters to each specific catchment area in question in order to maximise customer visits and opportunities for spending.
Reducing department store and high street exposure
Hammerson aims to cut department store space by 25% and trim back its high street exposure by 20%; two segments that are struggling to revive sales in a saturated and competitive market.
Replacing these with a more differentiated brand offering as well as leisure, events and lifestyle spaces was an obvious choice to make, if it is perhaps easier said than done when it comes to securing such tenants for each space – especially seeing as a finite number of these are prospering.
At its shopping centres, consumer confidence was subdued during the six months to 30 June, with retail sales dropping by 2.5%. However, it noted sales performance by centre and retail category were mixed with stronger performances from sports and leisure, and health and beauty, which offset a weak performance from high-street fashion.
What the analysts say
Although Hammerson’s new strategy was largely regarded as pragmatic, the jury was out among analysts on whether it will make a meaningful long-term impact.
Analysts at Goodbody say the measures are a “step in the right direction” and will help it shrink its exposure to the weaker parts of the UK retail sector.
James Child, retail analyst at EG, observes the strategy is “a story of specialisation against diversification”.
He says: “[Fundamentally] it is moving towards prime asset specialism and indicates an exit from the out-of-town market.
“With 15 retail parks on its books at present, the revenue generated could be reinvested into the New City Quarter concept to establish and maximise value around its existing premium shopping centre assets.”
Analysts at JP Morgan Cazenove said: “In our view, those investors looking for drastic short-term action involving disposing of prime assets could be disappointed, but the announced plans protect value for longer-term holders by focusing on prime destinations and premium outlets. The announcement walks the line between the two.”
Alan Carter, analyst at Stifel, notes the new strategy is “pretty underwhelming”. He said: “The shares will probably have a bounce today but I remain unconvinced that there is much growth in the business going forward, and certainly not in the short-term.
“With management under pressure to deliver and the share price nearly 100p below the indicative bid that was turned down, there’s not a lot that can be done in my view to get the shares anywhere near that level for the foreseeable future.”
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