In fact, the shares have now fallen below the critical 370p support level for the first time since rising above this price last August. The significance of this market action should not be lost as this support level has held no fewer than six times in the past nine months before finally giving way last week. In other words the positive signal the company is sending out to investors and the negative one they are sending back could not be more contrasting.
On the face it the shares (HMSO: 355p) are attractively priced, trading on a 15 per cent discount to the last reported net asset value (NAV) of 421p a share at the end of December, yielding 4.3 per cent based on last year’s 15.45p a share payout and, with borrowings of £2.1bn at the end of March, gearing is comfortable at around 72 per cent. Cash and untapped facilities of £766m provide ample headroom on these lines of credit and having agreed a refinancing on a City of London joint venture scheme, there is no further debt refinancing due until March 2012.
Occupancy levels are not obviously sending out any distress signals either as the UK retail shopping centres and retail parks, which last year accounted for around half of group net rental income, were 94 per cent full at the end of March against 94.5 per cent occupancy three months earlier. The UK shopping centre portfolio generated 1.7 per cent underlying sales growth in the first quarter and there were six fewer retail units in administration than at the start of the year. In any case, these 58 units only account for 1.3 per cent of the passing rent on the UK retail developments so this is hardly material. And tenants are still paying their bills on time with 97 per cent of UK rents for the first quarter collected within seven days. The company has even reported the return of competitive bidding for space on some of its top-end UK retail units.
However, what was not reported in the trading update to shareholders, but was disclosed in a conference call, is a breakdown of the incentives Hammerson is having to offer to get UK tenants to sign up for new space. One leading London broker notes that on vacant schemes the company is having to offer rent free incentives of two years and more on leases and a number of deals are being done at the estimated rental value (ERV) on low vacancy schemes only with the benefit of 12 months plus rent free incentives. This will not be lost on investors who have been pumping up valuations in the secondary market in the past year. If they become more cautious this would not only dampen demand, but also inflate yields on future sales which can only have negative implications for valuations.
The other point to note is the ongoing headwinds the company faces from its exposure to retail property in France which accounts for a third of the £5bn investment portfolio. This segment makes up a third of group net rental income and although occupancy levels are still relatively high at 98 per cent, it is worth pointing out that property with passing rents of a combined £43.6m, or 45 per cent of total passing rents of £98m in the French portfolio, either expire or have tenant’s break clauses between now and 2012. This is important because in contrast to the UK, Hammerson’s French retail tenants appear to be struggling to generate sales growth and on an underlying basis they actually fell 0.5 per cent in the three months to end of March. Interestingly, analysts note that Hammerson is underperforming peers such as Unibail which generated growth above 1 per cent in the same period.
There is no doubt that Hammerson owns some quality assets and retains decent long-term prospects, but at this point of the cycle its low exposure to the recovery in City office space - a modest 7 per cent of the book - and heavy exposure to French retail property are two factors working against it. The fall-out from the Greek credit crisis is a further negative as this could lead to a tightening of bank lending to the property sector due to the heavy losses suffered by European banks which would restrict investment demand. In the circumstances, it is no surprise that some shareholders have been heading for the exit.
In my opinion, they are likely to remain under pressure for sometime yet and I would advise shareholders to follow the smart money and sell up, too. More aggressive traders may wish to profit by shorting the shares at 355p, a strategy which is supported both by the operational and sector specific issues outlined above and the break-down in the share price below a key support level. A price target range of 280p to 300p seems reasonable, a level from which the sharp share price rally started from in July last year. Stop losses should be placed at 385p, slightly above the recently breached support level.
