Hammerson slides after revenue drop

Disappointment best describes the initial market reaction to Hammerson’s (HMSO) full-year results. Its shares fell 11 per cent on results day and the company recorded another pre-tax loss, albeit a smaller one than the year before.

The loss before tax won’t have come as a surprise to many investors. As higher interest rates drag down property values, many other FTSE 350 real estate investment trusts (Reits) have posted losses for the same reason. Statutory revenue of £131mn was marginally down on the 2021 comparator, but the shortfall was more pronounced on a proportionately consolidated basis. Gross rental income at £90.2mn was broadly flat on the prior year. 

Hammerson blamed the revenue dip on a fall in net rental income after it sold some of its assets, and stressed that like-for-like net rental income on the assets it still holds is up, and that the overall occupancy of its portfolio is up as well. “That’s the point that I really want to emphasise,” chief executive Rita-Rose Gagné told Investors’ Chronicle.

However, selling assets in order to grow your revenue in a falling market is risky. Firstly, while Gagné insists that the assets the company has sold and wants to sell are “good” and “attractive”, it is unlikely to get yesterday’s prices for them. And, although it says like-for-like rental income grew over 2022, that was then. There are big questions about whether it can increase its rental income over the course of 2023 with the threat of a recession looming overhead.

Debt also remains an issue for the business. While it has reduced its net debt figure, falling valuations and selling off assets mean that its net debt as a proportion of total equity is still high. This could make financing future development tough in a higher interest rate environment, especially when the company is behind many of its FTSE 350 Reit peers in terms of redeveloping assets so that they can hit tougher energy efficiency regulations coming down the road.

The discount to net asset value may make the price look appealing to investors, but paltry dividend payments less so. What’s more, a price/earnings ratio of 13.7 times for the next two calendar years, according to consensus forecasts from FactSet, is not cheap enough for a company where revenues are under pressure. Sell.

Last IC view: Hold, 24p, 29 Jul 2022