Is it time to axe Hammerson?
The European mall owner’s postpandemic recovery has been rocky, which raises the question: is the share still worth owning?
Shareholders who have been waiting patiently for Hammerson to regain its former lustre may be getting restless. Despite the company’s share price almost doubling since it hit a five-year low of R3.66 in September 2022, the stock is still down 75% from early 2020 levels.
Like its retail-focused peers across the globe, Hammerson has had a torrid time battling many headwinds in recent years. First it was the rising threat of e-commerce. Then came the pandemic, which forced retailers to close several brick-and-mortar stores. Many went belly-up. That pushed vacancies higher and rentals lower. And more recently, profits have been eroded by higher-for-longer interest rates.
The unfortunate upshot is that Hammerson’s market cap has dwindled from nearly R100bn to R34bn over the past six years, placing the company’s shares at a hefty 45% discount to NAV.
Still, despite big valuation writedowns in recent years, Hammerson owns one of Europe’s most valuable retail portfolios, worth a whopping R110bn. It is listed on both the LSE and the JSE. The company’s flagship shopping centres include Brent Cross in London, Bullring & Grand Central in Birmingham, Les 3 Fontaines in Paris and Dundrum Town Centre in Dublin.
Investors are no doubt pondering whether they should wait for a further recovery or follow the lead of JSE-listed real estate investment trusts (Reits) Lighthouse Properties and Resilient Reit and head for the exit. The two have sold their Ham
merson shares down aggressively over the past year.
Lighthouse’s stake in Hammerson has shrunk from 22% (end-2022) to just more than 12%, while Resilient has cashed out its entire holding. It followed Hammerson’s decision to withhold dividends for the December 2022 reporting period. Lighthouse and Resilient slammed Hammerson’s “hostile” decision to sit on cash instead of paying out dividends. They were also unhappy about management’s seemingly slow progress to reduce administration costs and its increased focus on development activity.
Hammerson has since resumed dividend payments, but Lighthouse CEO Justin Muller said at the company’s recent results presentation there’ sa “high level of probability” that the Reit will continue to sell its remaining shares in Hammerson.
It appears, however, that most fund managers are holding out for a rebound in Hammerson’s share price. Evan Robins, head of listed property at Old Mutual Investment group, has retained a small position; he says that though there is potential upside, there are risks that could keep a lid on the share price. “We haven’t taken a large position on Hammerson, as it can go either way.”
Though Hammerson is no doubt cheap from a balance sheet perspective, with obvious upside if the discount to NAV narrows, Robins says there’s a reason Hammerson is trading at a discount. “Its seethrough gearing level, while not troubling by South African standards, is viewed as excessive by UK and European investors in the current environment.”
Nevertheless, management’s focus on selling noncore assets to strengthen the balance sheet and its ongoing efforts to reduce administration costs are encouraging, Robins says.
Investors will be keen to see what happens with Hammerson’s intention to sell its minority stake in Value Retail, which owns nine outlet villages across Europe tenanted primarily by luxury goods retailers. Though Value Retail has been an important income growth driver for Hammerson, Robins says its disposal could “profoundly” reduce its debt exposure. The stake in Value Retail is valued at £1.89bn (as at December 2023), which represents 40% of Hammerson’s current portfolio value (see graph). “The question is whether Hammerson can indeed exit Value Retail and, critically, at what price,” Robins says.
Brendon Hubbard, portfolio manager at ClucasGray, says that if Hammerson shareholders sit tight they could reap big rewards over the next six to 12 months. He says the counter offers deep value, with a “big unlock coming”. Though the 45% discount to NAV is unlikely to close completely any time soon, Hubbard expects the share price to return to its long-term average discount to NAV of about 25%.
There’s recovery potential in the valuations of Hammerson’s underlying property assets, given the excessive valuation writedowns seen in recent years. Hubbard refers to the company’s UK properties in particular, which have devalued by a colossal 65% since 2017.
He agrees that the successful sale of Hammerson’s stake in Value Retail will be a major catalyst for a rerating. “The business owns highly sought-after assets that have produced phenomenal sales growth numbers in recent years,” he says. “So hopefully it won’t be difficult to find a buyer at a decent price, especially once interest rates start to drop.”
Hubbard says the sale will enable
Hammerson to wipe out most of its debt and place it in a strong position to execute on acquisitions and development opportunities at its core portfolio of 10 directly owned shopping centres. Most of the latter are large regional and super-regional centres typically sized between 60,000m² and 120,000m².
Hubbard says it speaks to the quality of Hammerson’s assets that it has withstood the triple whammy of e-commerce, Covid and widespread store closures, unlike UKfocused peers such as now defunct Intu
Properties. “Hammerson’s malls are not little strip centres. They are top-end shopping and leisure destinations, similar to the likes of Sandton City,” Hubbard says.
He adds that the share price is likely to recover once Lighthouse sells its remaining stake in the company, pointing out that the ongoing sell-down by Lighthouse and Resilient has created an overhang of Hammerson shares in the market.
The expected easing of interest rates later this year will further support Hammerson’s value unlock.
Meanwhile, results released last month for the year to December show an improved operational performance in the company’s portfolio. Earnings growth is up 11% year on year. A full-year cash dividend of 1.50p a share was declared, which equates to a 64% payout ratio.
The company had a record year in terms of leasing, closing 306 new deals at a 12% effective rental increase. Retail trading metrics are also moving in the right direction. Foot count rose 3%, while average dwell time increased by 5%. In addition, administration costs dropped by 14%, bringing total cost reductions since 2020 to 24%.
Hammerson CEO Rita-Rose Gagné says the company’s threeyear restructuring efforts are bearing fruit, with high demand for space in its core portfolio of urban city centre malls. “City centres remain the dominant locations for commerce and lifestyle. The importance of a physical presence in a digitally integrated strategy for best-in-class operators is undeniable,” she says.
Gagné says Hammerson is keen to explore value unlock opportunities by repurposing existing space and developing vacant land adjacent to some of its existing shopping centres (for residential use, among others).
“We are confident in our ability to grow top line and earnings off a new base and therefore create value for shareholders,” she says.