Dismal rent collection rates since the coronavirus outbreak and mounting fears of covenant breaches have caused short sellers to circle Hammerson (HMSO). Investors are more sceptical about the retail landlord’s prospects than any other group listed in London, with outstanding short positions totalling 13.6 per cent of the shares. The failure of Intu at the end of June has worsened sentiment towards the sector. Will first-half results provide vindication for investors when the group reports on 6 August?
We already know that Hammerson will be facing a shortfall in rental receipts over the first-half, after it announced that by 29 June it had collected almost three-quarters of the amount due in both the UK and Ireland and just 53 per cent in France.
Retail landlords have been the worst affected by tenants not paying rent in the wake of the pandemic, collecting an average of just under half of the roll both for the first six months of the year and for the third quarter, according to data from property management platform Re-Leased.
It is likely that commercial landlords, including Hammerson, will have to write off some of the rent due this year, said Goodbody analyst, Colm Lauder. “I can’t see a scenario where the economy recovers sufficiently enough for these guys to recover their rent,” he said. A best case scenario would be a write-off of between 20 and 25 per cent of annual rental income, a worst case would be 40 per cent, he estimated.
Colliers International’s latest forecasts suggest that retail rental values will fall by 8.3 per cent in 2020, with particularly sharp declines recorded for shopping centres. But coronavirus has merely exacerbated existing falls in rental income and asset valuations; last year Hammerson reported a 5.9 per cent decline in estimated rental values and a 16 per cent fall in the value of its portfolio.
With that in mind, attention has naturally intensified on the group’s ability to stay within covenants attached to its debt, which stood at a net £2.8bn at the end of 2019. At that date, it calculated that net rental income would need to drop 64 per cent to breach interest cover limits. Meanwhile valuations would have to fall by 32 per cent to breach its tightest gearing covenant, or by 28 per cent to breach the unencumbered asset covenant in the private placement senior notes, after taking into account proceeds from the sale of seven retail parks. However, in May, private equity firm Orion walked away from a £400m deal to buy the retail parks, which was already a 23 per cent discount to book value at 30 June 2019.
The group has bought itself some breathing room until the end of next year, negotiating a waiver on the covenant attached to its £689m private placement notes, which is most sensitive to asset valuation falls. This covenant has been relaxed so that the value of assets without secured debt should not be less than 125 per cent of unsecured net debt, compared with a previous floor of 150 per cent.
Nevertheless, exceptional circumstances surrounding commercial landlords have made what looked an improbable scenario at least a possibility.
“The key challenge for them is that they want to be able to dispose of more assets, or create more value somehow, ahead of the declines in the portfolio,” said Mr Lauder.
Management had already been making disposals to pay down debt, generating £542m from sales in 2019, ahead of a £500m target. But that has become a tougher ask in an investment market where activity has tumbled. Deals worth £1.5bn were transacted in the retail sector during the first half, according to Colliers International, down half on the same time last year, and just over two-thirds below the five-year average. Shopping centre deal volumes across the UK were lower still.
A lack of transactional evidence upon which to derive asset values also means that, despite the substantial drop in Hammerson’s market value, it is unlikely to become a takeover target at present, argued Mr Lauder. “That may come because of Intu, Intu’s assets will need to be sold pretty soon,” he said.
