The £1.5bn sale of Hammerson’s stake in a portfolio of nine luxury retail villages in major European capitals last week signals the start of what is likely to be a more profitable chapter for the beleaguered UK- and Europe-focused property stock.
The sale of its interests in the company, known as Value Retail, will leave Hammerson, listed on both the JSE and the London Stock Exchange, with a more streamlined portfolio of 10 prime shopping destinations — and a significantly stronger balance sheet.
The announcement of the deal coincided with the release of a solid set of results for the six months to June, which saw patient investors rewarded with a generous 5% uplift in dividends.
Management also announced its intention to increase the dividend payout ratio to 80%-85% of adjusted earnings. In recent years, shareholders had to be satisfied with a 60%-70% payout ratio.
Hammerson’s more favourable dividend policy has been supported by a three-year restructuring and disposal programme, of which the proceeds have been used to repay debt and reposition its existing retail portfolio.
The latter includes Brent Cross in London, Bullring & Grand Central in Birmingham, Les 3 Fontaines in Cergy, northwest of Paris, Cabot Circus in Bristol and Dundrum Town Centre in Dublin.
CEO Rita-Rose Gagné, who embarked on a turnaround strategy when she joined the company in 2021, tells the FM it’s been a big week for Hammerson. “After three years of an intensive turnaround, we have turned a page and are now entering a new growth phase,” she says.
The company is back on track to deliver sustainable returns to shareholders, with earnings and dividend growth expectations of 6%-8% a year in the medium term, she says.
The latest retail performance metrics suggest that asset management initiatives at Hammerson’s retail destinations are already paying off.
For the six months to June, like-for-like gross and net rental income increased by 4% and 5% respectively (year on year). Leasing values rose 24%, while rentals achieved for new leases were effectively up 10%, which is no easy feat in the constrained UK and European economies.
In fact, Gagné notes it’s the first time since 2018 that rental reversions in all Hammerson’s retail destinations are back in positive territory. She says new tenants’ sales were a hefty 20% ahead of those of previous occupiers.
Importantly, administration expenses were further reduced by 16% year on year, bringing total cost reductions since 2020 to more than 30%.
Gagné says the robust trading metrics delivered by the core portfolio speak to the quality of Hammerson’s assets and prime locations within the city centres of leading UK, Irish and French capitals, where retail space is in high demand. “Our shopping destinations are in the fastest-growing cities in Europe, which attract a young and affluent population.”
She says the best retail brands in the UK and Europe are competing aggressively to capture a slice of this lucrative market, which means tenants continue to invest in innovative store concepts and new product offerings.
Though Value Retail’s assets are regarded as highly sought after, Gagné says Hammerson’s interest in the company was “yield dilutive and noncontrolling”.
The sale ensures what she calls a “clean exit from a complex structure”. The deal will generate about £600m of cash proceeds that will be used to reduce debt, reinvest in upgrading existing assets and get rid of the overhang of Hammerson shares via a £140m share buyback.
Hammerson is not a big, steady ship that hardly moves. It’s an attractive value play with lots of uplift potential
— Rita-Rose Gagné
Hammerson’s improved fortunes come after a torrid few years, during which the company, like most of its retail-focused peers, battled several headwinds.
First it was the rising threat of e-commerce. Then came the pandemic, which forced retailers to close several bricks-and-mortar stores, pushing vacancies higher and rentals lower.
That was followed by huge property valuation writedowns, particularly in the UK. More recently, profits have been eroded by higher-for-longer interest rates.
Investors have bailed over the past five years, sending the share price crashing.
Its market cap, which touched a colossal R100bn and placed it as the JSE’s largest real estate counter when it listed in late 2016, has since dwindled to about R33.5bn.
The question that arises is: how much potential upside does a rebound offer? The share price touched a two-year high of R7.23 last week, but it still trades more than 90% below its 2019 highs of R300.
Gagné argues that investors now have a “rare” opportunity to buy into a prime portfolio of retail assets at a big discount.
“Hammerson is not a big, steady ship that hardly moves. It’s an attractive value play with lots of uplift potential,’’ she says.
She adds that the company is at an inflection point, with several positive factors converging. “Our portfolio is realigned and well positioned to capture robust consumption and occupancy growth, which will gain further momentum once interest rates drop.’’
That’s a sentiment echoed by Brendon Hubbard, portfolio manager at ClucasGray, who believes Hammerson is poised for a strong recovery.
He says the company owns some of the best retail destinations in Europe, similar in quality to the likes of Sandton City.
“We’re still going to see lots of benefits flow through from the sale of Value Retail, which has placed the business on the front foot to execute on initiatives that will further drive up rentals and values,’’ he says.
Nicolas Lyle, property analyst and portfolio manager at Stanlib, says Hammerson’s management team deserves plaudits for successfully turning the company around.
“It’s undeniable that the new management team has transformed Hammerson since 2021, selling noncore assets and materially reducing debt and complexity, thereby positioning the company for growth while improving the transparency of returns.’’
Still, he notes that the restructuring has come at a cost: the company has shrunk in size, which has reduced both equity and earnings.
But Lyle says it was a worthwhile sacrifice given that Hammerson has emerged as a far simpler and transparent investment, comprising a portfolio of modern destination shopping centres in key cities, roughly evenly weighted between the UK, Ireland and France.
Lyle believes the share is attractively priced for those with an investment horizon of 12 months or longer. He says upside potential will be unlocked by rental and earnings growth.
The latter will be driven largely by a £300m reinvestment allocation to upgrade Hammerson’s existing portfolio and by the start of the next rate cutting cycle.
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