The enforced closure of non-essential retail stores and leisure facilities has devastated rent collections for shopping centre landlord Hammerson (HMSO). But income and asset values were under strain long before the Covid-19 outbreak. Despite the government issuing a timeline for businesses to reopen depending on how the infection rate behaves, many retail and leisure groups have been left in a precarious cash position after months of lost income. That is likely to place further pressure not only on rent collection in the coming months, but also on the ability of landlords such as Hammerson to negotiate leases anywhere near pre-Covid rents over the longer term. Those concerns are reflected in rising short interest in the shares, which has hit 11.1 per cent, making the stock the second most heavily shorted in London.
Remains within debt covenants
Lowering net debt
Falling rental values
Disposals more difficult
Rent collection at risk
Asset vales falling
The UK government has issued a moratorium on landlords forfeiting leases for rent arrears and banned landlords from issuing statutory demands and winding up orders to commercial tenants until the end of June. Meanwhile, the shortfall in rent collected by Hammerson during the three months to the end of March was more severe than that suffered by most London-listed peers. It received just 37 per cent of UK rent billed. That number could fall further at the June collection date given tenants have suffered a prolonged period of closure, and it remains unclear what proportion of rental income has been deferred or simply foregone. Hammerson has cancelled the dividend for 2020.
The impact of Covid-19 has acted as a catalyst for a trend towards online shopping and away from in-store shopping that was already putting pressure on the group’s rental income and the estimated rental values of its assets. It reported a 4.2 per cent fall in like-for-like rental income last year and a 5.9 per cent decline in estimated rental values (ERV), an acceleration of the 0.9 per cent ERV reduction recorded in 2018.
The deterioration in the financial position of many tenants and uncertainty around commercial property valuations has also placed the group’s ability to make further disposals – the prime method of lowering net debt – under greater threat. Earlier this month, Hammerson revealed that private equity group Orion had walked away from a deal to purchase seven retail parks for £400m, already a 23 per cent discount to book value at 30 June 2019.
Problems are compounded by Hammerson’s high debt levels. At the end of 2019, based on the assumption that the Orion deal would go through, the company said property values would need to drop 28 per cent for it to breach covenants on its unsecured loans and 32 per cent on its tightest “gearing” covenant. It calculated net rental income would need to drop 64 per cent to breach interest cover limits. Exceptional circumstances have made what looked an improbable scenario at least a possibility. Meanwhile, £1.9bn of Hammerson’s £2.8bn net debt is maturing over the next five years, starting with £191m due in 2021.
HAMMERSON (HMSO) | ||||
ORD PRICE: | 52p | MARKET VALUE: | £398m | |
TOUCH: | 49-52p | 12-MONTH HIGH: | 325p | LOW: 47p |
FORWARD DIVIDEND YIELD: | 19% | TRADING PROPERTIES: | £466m | |
FORWARD DISCOUNT TO NAV: | 87% | |||
INVESTMENT PROPERTIES: | £6.6bn* | NET DEBT: | 57% |
Year to 31 Dec | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2017 | 776 | 252 | 31.0 | 25.5 |
2018 | 738 | 242 | 30.6 | 25.9 |
2019 | 601 | 216 | 28.0 | 11.1 |
2020** | 432 | 83 | 10.8 | nil |
2021** | 415 | 112 | 14.5 | 10.0 |
% change | -4 | +35 | +34 | - |
Normal market size: | 5000 | |||
Beta: | 1.52 | |||
*Includes investments in joint ventures and associates | ||||
**Numis Securities forecasts, adjusted NAV, PTP and EPS figures |