'Why Not Before?' A Deep Dive Into Hammerson’s Strategic Overhaul

Hammerson this week unveiled the results of a review of its strategy undertaken in the wake of a turbulent six months.

A narrowing of strategy, the need to sell assets at a difficult time and cancelled developments are all on the agenda. But will it be enough to get the share price to the level of the takeover bid it rejected?

Here is everything you need to know about why it has done this, what it is planning and whether it is likely to work.

Why did Hammerson need to look at its strategy?

The retail specialist has had a pretty torrid six months when it comes to merger and acquisition deals. It proposed a deal to buy shopping centre rival Intu for £3.4B, but ended up dropping it due to opposition from shareholders. While that deal was in progress, it rejected a 635p a share offer from French-listed rival Klépierre, saying the bid undervalued it.

How did that go down?

The market did not react well to this. Activist investor Elliott has taken a 5% stake in the company in a bid to shake it up. Elliott is not afraid of a fight — it undertook a 15-year legal battle with the Argentinian government to get what it wanted from one investment. That offer from Klépierre is something of a sword of Damocles hanging over Hammerson and its Chief Executive David Atkins. The new strategy is aimed at bridging the gap between that offer price and Hammerson’s current share price of 528p. The Sunday Times said last weekend that if the new strategy does not achieve that, Atkins’ job could be at risk.

So what are the key points of the new strategy?

First up, Hammerson is exiting the most difficult part of its portfolio, retail parks, to focus on the better-performing premium malls and premium outlets. It will sell £1.1B of assets, including all 15 of its retail parks, between now and 2020.

Well that sounds good.

Yes and no. It sold two parks this week for £164M, 10% below book value. It wants to reduce leverage, but selling assets below book value makes this difficult. It said that the two parks sold were at the poorer end of the spectrum. But that provides its own challenges.

“We see greater not less!, execution risk in the remaining portfolio sale which is valued at a much sharper — low-5% — net initial yield on average,” Green Street Advisors Managing Director Hemant Kotak said. “The financial buyer that can engineer double-digit returns with the use of high leverage won’t have that option when acquiring closer to a 5% yield. Absent financial buyers, who else then are the natural buyer of these ex-growth assets?”

“While this may be sensible, there is a risk that this saturates the market at an inopportune moment,” Libernum analysts added.

But focusing on prime malls and outlet malls seems sensible, right? Everyone still loves those. 

These sectors definitely seem a better bet than retail parks — Hammerson pointed out that its premium outlets business, including the stake it owns in Bicester Village, has provided a 26% return over the past five years. Colm Lauder at Goodbody called it “a step in the right direction”.

But again this focus does not come without problems. Kotak again: “We remain skeptical that growth/valuation increases can continue unabated in premium outlets over the medium-term given the current competitive environment; the higher rental base; and high valuations of around £2,400/SF for value retail, which on average is now at a premium to central London retail portfolios.” The growth for this segment may already be priced in by the stock market, so focusing on them may not actually increase the share price.

Is Hammerson still building?

Yes and no. Hammerson has committed to developing the 1.5M SF Whitgift Centre in Croydon, south London, a joint venture with Westfield that will cost £1.4B. But it is pulling back from the 1.1M SF extension to Brent Cross in North London, given the uncertainty around the retail sector. It said it could make better returns investing its money elsewhere.

What about diversifying its offer?

That is definitely on the agenda. Hammerson said in its malls it would be reducing exposure to department stores by 25% and fashion retail by 20% to add more flagship retail showrooms, marketplace food offers and enhanced event spaces. Although, given the struggles in the sector, it is questionable whether reducing exposure to department stores is Hammerson’s choice or something that will happen anyway.

And outside of its centres?

Like almost everyone in the retail world, Hammerson is cottoning on to the fact that non-retail uses like residential, leisure, flexible workspace and community facilities can be complementary to retail space. It has set up a new division called City Quarters to develop 65 acres around its schemes it has identified as ripe for development for these uses. “Why not before?” Stifel analyst Alan Carter asked.

How about geographic diversification?

Hammerson, which has shopping centres in the U.K., France and Ireland and outlet malls across Europe, said it would reduce its exposure to the U.K. by around 10%.

But, wait, hang on…

Yes, Carter has got there first. “The U.K.’s got issues and you wanted to buy Intu four months ago,” he said.

Atkins is on thin ice; how about other leadership?

There have been boardroom changes. Chief Investment Officer Peter Cole is retiring after 31 years with the company, and Jean-Philippe Mouton is stepping down from the board, leaving Atkins and Chief Financial Officer Timon Dakesmith as the two executive members of the board, which will take on more non-execs. From Elliott, perhaps?

How is the underlying portfolio performing?

Not that well, but not awful. Like-for-like rental growth dropped by 0.4% in the first half of 2018, but that is compared to a 1.7% rise in the whole of 2017, and occupancy fell from 98.3% to 96.6%. Carter noted the company said it expected to be offering more flexible lease structures in future, which he said could impact asset value.

How did the market react to the news?

Meh. Shares in the company opened at 529p and closed at 529p.

That implies this strategy might not get Hammerson’s shares above that 635p mark?

Opinion from analysts was mixed, but leaned toward being underwhelmed.

On the positive end: “The company has much to prove if the derating is to reverse, like rental growth sustainability and disposals at/above book value, in our view,” Morgan Stanley said. “On balance, we see risk-reward upward-skewed and are overweight.”

“In our view, those investors looking for drastic short-term action involving disposing of prime assets could be disappointed, but the announced plans protect value for longer-term holders by focusing on prime destinations and premium outlets,” JP Morgan Cazanove said. “The announcement walks the line between the two.”

Others were less impressed. “Investors were expecting bold changes,” Green Street’s Kotak said. “However, although a number of the initiatives announced are important steps in the right direction, they are best thought of as fine tuning. Instead of seeing the mountainous challenge that lies ahead, management maintain their hopeful stance — i.e. current retailer woes will diminish with top line growth and margin pressure easing soon — instead of preparing for what may be a perfect storm as cyclical and secular forces further tear into retailer profitability.”

“With management under pressure to deliver and the share price nearly 100p below the indicative bid that was turned down, there’s not a lot that can be done in my view to get the shares anywhere near that level for the foreseeable future,” Carter said bluntly.

And what of Klépierre?

The company is free to come back with another bid in September. Whether it will or not is another matter, given the U.K. retail sector is having its worst year in a decade, or consider itself lucky to have “swerved” buying Hammerson, as Carter said. Whether it does or not, the 635p it offered for Hammerson will remain a price on the company’s head.