Hammerson chief executive Rita-Rose Gagné has unveiled her vision of turning Hammerson into “an owner, operator, and developer of focused, prime, urban estates”, with homes, offices and hotels forming a significant part of its offer.
In the longer term, the REIT is seeking to fill empty retail space into these three uses, with residential as the biggest focus. It has identified 6m sq ft of potential residential space, 4.5m sq ft for offices and 1m sq of hotels across 14 key schemes in the UK, Ireland and France.
With input from external consultant McKinsey, the landlord has drawn up a four-pronged plan to achieve this, based on: delivering a sustainable capital structure; creating an agile platform; reinvigorating its assets; and accelerating its development pipeline.
More disposals
Underpinning these aims are a disposals programme for non-core assets, the proceeds of which would be redeployed into reinventing its locations, and a target net admin cost reduction of 15-20% by its 2023 financial year. Further details on targets for disposals were not disclosed, however.
While Gagné would not be drawn on specifics in relation to the disposals strategy, she tells EG there are ongoing “conversations” with prospective buyers that are likely to result in some sales in “the year-end and early H1 next year”. Interest has mainly come from European investors in the private equity space, says Gagné, but institutional investors are also starting to enquire about the retail environment.
“There seems to be more understanding and appetite for the sector than we’ve seen for some time,” says Gagné. “Activity is picking up at the moment.”
Valuing retail
Bicester Village owner Value Retail was found to represent a “refinancing risk” owing to a £750m secured loan maturing in December 2022, of which Hammerson owns a circa £376m interest.
While its directors are “confident” the loan will be refinanced ahead of deadline, they concluded it represented a material uncertainty that could “cast doubt over the group’s ability to continue as a going concern”.
In which case, does Hammerson intend to sell out? Gagné is seemingly non-committal. “At the core of it, it’s a very good platform, a good portfolio and a segment that is recovering well,” says Gagné. “We would like to see how it recovers when international travel comes back in, so it is resilient at this moment.
“This does not mean that in time we would not explore liquidity options, but at the moment it is a resilient performer.”
Previously Gagné has said she would hoist a “for sale” sign over almost anything, saying “You don’t fall in love with your assets… if the price is right, all assets are on the table”.
Lacklustre response
Gagné says there is a “clear path to value creation” through the landlord’s assets in the mid-to-long term, pointing to a “clear direction of travel” for the “strongholds” that it has in city centres.
But overall, the City has found the landlord’s new strategy a bit wanting. “In summary, the external consultants did not find any revolutionary new strategy options, but managed to justify the fees somehow,” say analysts from Stifel. Incidentally, some £2.3m was paid out in consultancy costs during H1 this year, part of which was paid to McKinsey.
Rob Virdee, equity research analyst at Green Street, describes the strategy update as “a bit of a damp squib”, lacking in quantitative detail.
“It had more of an evolutionary, as opposed to revolutionary, tone to it,” says Virdee. “The four pillars are grounded in sensible capital allocation, but it’s all qualitative – I would’ve liked more quantitative metrics on how they derived their conclusions. I wanted to see a data-driven approach, particularly with [regard to] unlevered return differentials between assets classified as core and the rest.”
Stabilising the business
Operationally, Hammerson seems to have gained a more stable financial footing, having raised £396m from its exit from retail parks as well as issuing a €700m (£595m) sustainability-linked bond in the six months ending 30 June. Although it posted a pre-tax loss of £354m during the period, it was nonetheless an improvement on the previous year when it recorded a £1.7bn loss. But it is not entirely out of the woods yet.
Virdee flags that UK flagship leasing activity in particular is “a bit concerning”.
“Hammerson’s explicit modelling assumptions is that rental levels will fall another 6%, [or] a 35% decline peak to trough, but they are currently signing leases 53% below passing,” he says.“Of course, a significant chunk of that is short-term, which is a pragmatic approach to keep occupancy up, nevertheless, it seems a little incongruent with their modelling assumptions.”
Analysts from Stifel add in its note that while the portfolio valuation may be close to the structural low-point, there is “still much downward risk to earnings given the over-supply of retail property and that the whip-hand in negotiations is very much still being with tenants”.
While progress has been made, Hammerson evidently still faces a long road to recovery.
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