Hammerson Plc (HMSO) Earnings Call Transcript & Summary

Good morning everyone and thank you for joining this call. I am with Himanshu Raja, our CFO and Josh Warren, our IR Director. And as you will have seen this morning, we have announced a transformation deal for Hammerson. I'd like to say it's a game changer. We announced this earlier on, and this is a GBP 1.5 billion enterprise value transaction generating circa GBP 600 million of cash proceeds to Hammerson. So let me run through the highlights starting from the left-hand side of this slide. As you know, Value Retail has been noncore for us for some time. Our interest in value retail is oversized. It's a highly complex structure. It's 42% of our portfolio. It's a noncontrolling, illiquid and highly dilutive stake. On average, it gives us only 1.7% cash yield. So this is a very low cash yield versus the cash we get in the company and what we can do with it. It has no synergies with our operating structure, and we've said it before, it is not consistent with our strategy of being an owner and operator of urban destinations. Now let's look at the price. The sale price represented a 24x EBITDA multiple and an implied cash yield of 3.4%. This is well priced. It crystallizes a 10-year IRR of 13% for the company and generates GBP 600 million of cash proceeds and Hammerson Enterprise Value of GBP 1.5 billion. It's a clean exit and it's an all-cash deal, and it removes significant overhang on Hammerson's shares. Moreover, it means that we can now seize opportunities in the current market and decisions at higher yields and more in line with our strategy. Let's now look at the middle column, which talks to use of proceeds. They go to further strengthening the balance sheet, investing for growth and enhancing distributions. So based on December pro forma numbers, the LTV immediately reduces to 23% post closing and the net debt-to-EBITDA to 5.1x. This cements for our IG rating and gives us balance sheet flexibility. It creates 350 million of capacity for deployment at higher yields, and we will return cash to shareholders of up to circa GBP 140 million, that's around 10% of preannouncement market cap. The Board also intends to increase the ordinary dividend payout ratio to 80% to 85%. And to finish this slide, on the right-hand side, you see this creates the opportunity to accelerate strategic and financial delivery. Post disposal, it means Hammerson is a retail-anchored specialist cities business, well positioned for growth and value creation. Our entire portfolio now comprises leading city center destinations. The company is primed to drive rental and earnings growth through reinvestment and continue to drive operating leverage from our lean and scalable platform. You will see at our interims on Thursday, the great momentum that we have. In time, I expect this company to be able to deliver a total accounting return of around 10%. Let's turn to Slide 3, which takes you through the transaction terms and rationale. Let me first remind you of our motivation to make this disposal. You will have seen the headline price, which is a highly attractive EBITDA multiple of 24x and an exit cash yield of 3.4%. For 42% of the portfolio, the contribution to earnings and cash has been limited, as I mentioned before. We have had little or no control in a very complex and illiquid structure. In other words, significant capital is tied up and at risk. We are not paid to hold this, and we have higher yielding opportunities elsewhere. Important also in our consideration is the opportunity it unlocks for us, putting Hammerson on the front foot to build on our momentum. And talking about that momentum, let's take a step back. Since I jumped in about 3.5 years ago, this team has achieved a lot. We've realigned the portfolio to our core city center destinations completing GBP 950 million of disposals. The LTV has gone from 40% at full year '20 to 34% end of '23 and to 23% pro forma for the closing of this transaction. And net debt to EBITDA went from 14.1x to 5.1x. At the same time, we've reset our platform, reducing our cost by 24%, with a further 10% cost reduction to come in '24. This will be a 30% cost reduction over this time. We have a scalable and fit for future platform, which will give us operating leverage as we grow back. For example, we've invested in skills in placemaking, urban regeneration, digital marketing and data mining, which is now part of our DNA. We've rebased rents, completing over GBP155 million of leasing consistently ahead of ERV and previous passing. Our city center destinations remain in high occupier demand and we've built enduring relationships with best-in-class occupiers. We continue to lease very well so far this year and have a strong pipeline ahead of us. Our flagship rent roll is therefore growing up 3% like-for-like over the last year -- over the last 3 years, notwithstanding the 3 very challenging years covered. So we've also invested during that time about GBP 100 million of CapEx already including marquee repositioning projects in Bullring and Dundrum where we've generated IRRs in excess of 20% and completely repositioned those assets. And in the process, we've returned in 2023 to a cash dividend. Overall, we now have a proven portfolio and a scalable platform positioned for accelerated growth and value creation at the right time in the cycle. So let's now look at that opportunity. On this slide, you can see we now have a portfolio that comprises a unique footprint in some of the U.K., Ireland and France's fastest-growing cities. Our destinations are focused on high-growth urban catchments with young, affluent and growing populations. This includes the significant untapped potential of our 80 acres of land. Our portfolio generates over GBP 200 million of gross rental income. Our flagship occupancy is high at around 96%, and our 1,500 occupiers create physical sales of GBP 3.6 billion from 180 million visitors a year. This additionally drives significant brand value for our occupiers. At the bottom, you can see our current scale and the potential for growth in existing asset enhancement activities, JV consolidations and other investments. Which now brings me to our approach to capital allocation. You will be familiar with this slide. We are disciplined and committed to a sustainable and resilient capital structure through the cycle. With this in mind, our waterfall is as follows: further strengthened the balance sheet, investing for growth and value creation with a bias to organic investment and consolidation within the existing core portfolio and enhancing returns to shareholders. Today's announcement also significantly increases our total cash capacity. Let's now go into this in a bit more detail. Starting from the left-hand side of this slide, we have around GBP 688 million of existing cash. Add to this the GBP 600 million of proceeds from Value Retail and that brings us to pro forma cash of GBP 1.3 billion. This cash capacity gives us a strong and flexible balance sheet. We already had enough cash to cover upcoming group debt maturities until '26. This now extends that by another year until '27. It's indeed more earnings accretive to hold the cash for now or invest in high yields, given the low cost of near-term maturities, which averaged 3.3%. We've then earmarked GBP 350 million for investment for growth and up to GBP 140 million to repurchase shares. The next slide shows the cash cover on our debt through '27. We have GBP 1 billion of refinancing covered basically. This includes Dundrum, where we have credit approval and expect to sign in the coming days. A strong position from which to access debt markets. So I'm really excited about this and about the opportunities that now lie ahead of us. In the near term, we have compelling opportunities in JV consolidation and at attractive yields alongside repurposing and enhancing existing assets at double-digit returns. You will be familiar with what we achieved at Dundrum and Bullring. We are now underway with the repositioning of Oracle and Bristol. Investment in our existing assets gives us the clearest visibility and solid underwriting of attractive risk-adjusted returns. We are uniquely positioned to create this value and leverage our occupier relationships. In the medium term, we also have the opportunity to bring forward projects that are immediately adjacent to our assets. One example of that is the residential opportunities in within our estates, both near term at Reading and Birmingham and near term in Dublin. Indeed, in totality, we have line of sight to over 3,000 residential units on those sites and in the medium term and the potential for over 7,000 in the long term. These kinds of opportunities serve to densify the overall estates and create value beyond the sum of the parts. We will stay disciplined selecting the best returns for shareholders and exploring alternative funding or liquidity where appropriate. So it just all goals to show the wealth of organic opportunities to scale back up Hammerson in the right way. Let me talk a bit about how I see our financial framework in the medium term. The combination of existing and new opportunities gives us confidence in our ability to drive growth and returns. From the left-hand side, on Slide 10, a on the existing portfolio, we will continue to grow rents and revenues from repurposing, reducing vacancy, improving the brand mix and new sources of income. This is what creates the leasing tension we're seeing and the rental growth with more to come. This rental growth drops to the bottom line due to the operating leverage from the platform. In time, this rental growth will be reflected in growth in ERVs and increased property returns because there is a lag. We have seen this already start to materialize in '23. In terms of new opportunities shown in the second column. With our new capacity, we can then turbocharge that rental growth by consolidating some of our JVs or expand our footprint in line with our strategy, both at higher yields and stronger returns. Rising earnings means rising dividends alongside the higher payout ratio announced today. The track record of the team here over the last years and the performance of our assets gives me confidence that the business will generate sustainable, attractive growth and returns in the medium term. On the right-hand side is the way I look at our medium-term financial framework. Knowing this business as I do, I expect us to be able to deliver a GRI growth of 4% to 6% range, with operating leverage driving earnings and dividends ahead of that, both annual growth of 6% to 8% and a total accounting return of around 10%, assuming stable yields. Well, of course, stay within our IG guide rails of 30% to 35% LTV, and net debt-to-EBITDA of 6x to 8x through the cycle. For your models, for full year '24, we are largely expecting cash interest to offset this both earnings from Value Retail. Therefore, our earnings outlook is in line with market consensus. Importantly, and for more immediate rewards, today, the Board announces an on-market buyback program of up to circa GBP 140 million or 10% of preannouncement market cap, reflecting the growth prospects of the company, the Board also today announces its intention to move to an enhanced payout ratio of 80% to 85% of adjusted earnings. This brings the company in line with U.K. REIT market. Before I move to my close, a quick word on timetable and next steps. Under the current rules, this is a Class 1 transaction. However, with the amended U.K. listing rules coming into effect at the end of the month, a shareholder vote will not be required. There will be a 1 for 10 share consolidation executed prior to the commencement of the share buyback. This will bring our number of shares back in line with peers, also reducing day-to-day price volatility. A circular convening a meeting on the buyback, consolidation and proposed capital reduction to increase distributable reserves will be published in due course. There are no material conditions attached to the sale other than customary antitrust filings. So we expect the completion to occur in the second half. So in summary, you can see that this is transformational for Hammerson and it unlocks significant opportunity. We now have the capacity and capability to accelerate our strategy in higher-yielding opportunities while also enhancing returns to shareholders. The disposal focuses our portfolio on unique prime city center urban real estate, our capital structure is now set for growth. After 3 years of relentless execution, we have a deep understanding of our assets and markets. This team here is uniquely positioned to drive value in our portfolio. We bring the expertise in city center destinations with the strong relationships we've built with our brand partners and with our communities. I'm excited about the opportunity that this gives us to build on our momentum and track record of the last three years. We're at a point in the cycle where we can now be on the front foot to capture the exceptional value creation opportunities I see in the near, medium and long term. And that's exactly what this transaction will deliver. So you will be seeing us again on Thursday or hearing from us for our earnings call. But we are happy to open up to a quick Q&A session. Josh?

Thanks, everyone. I believe if we can turn to the phones first. Is there anyone on the phone? Thank you.

[Operator Instructions] Our first question for today comes from Ventsi Iliev from Kempen. Please go ahead.

And first of all, congratulations on the disposal. I have a question on the financial policy, could you perhaps review a bit more on the rationale for net debt EBITDA to be in the 6% to 8% range, specifically looking at projects. If you are willing to scale those up, then one could argue it should be closer to the lower end.

Yes. I mean it's -- we agree with that, is what I can say.

And then maybe just on FFO accretion. I haven't seen a specific figure that relates to the disposal and the impact of reinvestments. You target 6% to 8% FFO growth over the medium term, but I'm assuming that includes the impact from reinvestments. Can you please indicate a target in a steady state?

Well, to your first question, it does include the reinvestment. I guess that is the steady state for us.

And maybe last one. Of course, VR has been the noncore part of the portfolio. Now that you have designed, are you reconsidering any other parts of the portfolio?

Yes, you're right about Value Retail. As you know, we had a remaining program of disposals of noncore assets of GBP 500 million, which we completed in H1. So when you look at all the disposals that have been done over the last 2, 3 years, these are the noncore asset disposals that we've completed basically. So when we land on the current portfolio, which are all prime Grade A properties. For the time being, given these assets are -- some of them are in repositioning, some of them are in asset enhancement and very good contributors to the stream of cash flow to the company. For the time being, we -- this is the rebased portfolio, call it like that of prime quality portfolio, and we will see it in time. But obviously, opportunities come, and we're always open to that. But at the moment, I'm quite happy with the quality of the portfolio of these, as I said, key city center assets that are doing quite well.

Our next question comes from Marc Mozzi from Bank of America.

Can you give us a little bit more color on your guidance for your medium term financial metrics. Number one, the CAGR on what sort of period that we're talking about here? Is that 3 years, 5 years, 8 years, 10 years? And number two, what is the starting point? Is it 2024? Is it 2025? And I have a follow-up question, then on the reinvestment years and so on.

Yes. For the period, what I'm stating is a medium-term financial framework. And that, as we said, includes the reinvestment in the assets and the reinvestment of the cash proceeds we're receiving so when all this flows into -- back into the portfolio, I'd say medium term is anywhere between 3 years approx and it's a financial framework. So the next 3 to 5 years to grow the portfolio at those levels. The starting point is 2024.

And in terms of reinvestment, what sort of amount of CapEx are you targeting over the period? And what sort of internal rate return or yield on cost because you've got plenty of development you're targeting? If you can help us on that?

We're not giving -- and we'll talk a bit -- frankly, we'll talk a bit more about our CapEx in our earnings call. So we base all this and give you more specific information around that. There's no CapEx guidance per se. We're recycling GBP 350 million. Would you've seen -- in terms of the returns, you've seen how we manage those returns. Very high double digit in the 20% and plus IRRs from our repositionings. We're basically repositioning space that is ultimately costing the company money and basically big, large department stores that are -- that -- and you've heard -- you've seen that in the news, for example, the MNS deals or et cetera. So just doubling, tripling their revenues on that space, and just repositioning the assets. So that's what we're talking about. When we're talking about the CapEx, the repositioning, and that's, again, double over 20% plus IRRs. Very accretive to the asset overall.

Our next question comes from Robert Jones of BNP Paribas.

I've got three questions that they are linked. So I'll try and put them all together. The first one is on the buyback GBP 140 million. When I look at your trading volumes and the GBP 140 million in context of that? And obviously, I appreciate you're not going to be buying back a high percentage of the ADV. Is the limiting factor on the GBP 140 million size, the liquidity in the stock, in an idea what some investors might have liked GBP 140 million to be larger, but maybe limiting factor is going to take in 9 to 12 months to buy back that kind of volume, if you were 25% of the ADV? The second question is linked to that. The benefit of having GBP 140 million versus, say, I don't know GBP 300 million buyback or whatever is that it gives you greater firepower for JV reinvestment and your GBP 350 million that you're guiding towards for that reinvestment. When I look at your largest assets and the percentage that you don't own, something like Bullring, you might need GBP 250 million to buy out the non-owned stake, something like I don't know, Cabot Circus talking north of 100, [indiscernible] obviously weigh more than 200 million. So that GBP 350 million, I guess, it gives you some firepower, but you need to be I guess, quite targeted around JV reinvestments. So maybe some bit of color in terms of the types of assets you'd be looking to grow your stakes in rather than just all of your U.K. portfolio? And then the final one is, you rightly have sold an exposure where you were overweight and it was yield dilutive or at least the return on capital delivery was materially lower than your cost of capital. In a way, potentially one could argue that France now sits in that category. It's obviously your largest country by GAV. The yield of 5% is lower than your cost of capital. What about selling France and then utilizing those proceeds to also reinvest into further U.K. non-owned JV exposure?

Thanks, Rob, for your three questions. First question is, I believe, is sort of the -- ultimately, I agree with you, you mentioned...

Why not to pick a buyback. Yes.

Yes. It's there is going to be some time. But you have to think about the buyback and the GBP 350 million of investments and the dividend, et cetera, and the deleveraging of the balance sheet, which in itself creates capacity. Think about that as an overall package that we will work our targets in which we will be working in the next year. So it's really a carefully crafted package. And obviously, yes, because of the volumes in the share. It will take a bit of time, but we think it's a very attractive proposition as it stands. And then the question of the JVs. Yes, you're right. In terms of -- if you look at the overall amount of the JVs in our portfolio, and Himanshu correct me, but it's over GBP 1 billion. Not all JVs are -- some of these JVs are solid, or larger pieces of real estate. And not all JVs are necessarily for immediate buybacks. I would say to you that when we look at the opportunity on which we've been working, you would have maybe 500 of ultimately of realistic JVs relative to parties that would be agreeable to an exit of the JVs because they basically have noncontrolling stakes. So the capacity we have is GBP 350 million plus, obviously, some capacity on balance sheet where we can -- if there is additional opportunity, we would be able to take it. But I would say to you that, that tells you that, yes, we have to be targeted. And yes, there is competition for our capital and people have to line up, and that's going to help us to achieve our goals on that side of things. In the third question about France, as you know, we now own 200% assets in France that are Grade A rated. And we have also realigned the operational model over there. So they are managed now in a very, very efficient way, cost-wise and ways of managing. And we are currently, particularly on the CGI doing asset enhancement and also on [indiscernible], we are finishing the turn of the leases if the tenth year anniversary of that asset. So those are our two assets that are going well at the moment, strong contributors, as I said earlier, into our cash flows as we continue to do the next phase of the strategy. And for the time being, again, we're creating additional value on these assets. So that's what I would say on your questions, Rob.

Our next question comes from Ben Richford of Bernstein.

Just a question on the scale of the business post this disposal. So firstly, congratulations for coming to the end of a long restructuring process and rebalancing the balance sheet for the front foot. When I look at the business now, I think the scale is maybe not as big as it could be, especially versus bigger shopping center owners as look through the EPRA cost ratio. Perhaps you can firstly indicate where that ratio can stabilize. I'm just thinking about that scale, whether this isn't the end of the journey, and the company should combine with another portfolio.

Thanks, Ben. So on the scale of the business, you're totally right by saying that this is not a -- this is it. It's a passage towards making sure in our environment and in the sector in which we are that we own top quality. I think for all sorts of reasons in this sector, there's been oversupply and now it's very important to concentrate on quality and make sure that your product is fit for future. So having a big part of a portfolio and spreading out on all sorts of things for me is not the best strategy at this point in time. Focus is really important and value creation. There's this expression that says diamonds come into small boxes. That's at the moment, we're polishing that diamond and continue to grow back. So definitely, that is the case. It is a scalable platform. So the operating leverage at the moment, yes, it's the cost ratio needs continuous work and we've done a lot, and you'll see again on Thursday, where we continue to do progress on costs, but perfectly aware that per se spot at the moment, there is -- the cost is still high. But as we scale back, certainly, we have the opportunity to reinject in the company what we will replace value retail basically and even more. Eventually, we have more organic opportunities. So that operating leverage will continue to flow through into the numbers. That's how I see things. Now we did a lot of work on the costs. So you know, so you shouldn't necessarily stick on that number at the moment because we've done a lot of work in the last 2 or 3 years. Obviously, realigning the platform. A lot of reduction of headcount but also technology tools. So we're now seeing -- we've changed the operating model. We've consolidated suppliers. So we're now seeing additional flow-through in the operational costs. So I'm quite comfortable we're getting at the right place, but also conscious that will scale back, and we need to make sure we have the proper platform to create maximum value.

Just a follow-up question. On Slide 9, you've got a GDV of GBP 5 billion to GBP 6 billion for the medium to long-term pipeline. I want to see that's beyond the capital resources of the company. And I just wondered to what extent you expect to retain those opportunities? Or is it best to sell them on?

Listen, these are opportunities, as we've mentioned in the last -- I guess, the last 2, 3 years, we are doing site enabling planning, et cetera, creating maximum value on predevelopment work essentially to make sure that we will have all the possible options at any point in time, be it liquidity or going ahead on some of those with other capital, with partners or whatever. So it's about keeping the optionality. At the moment, there is nothing apart from the iron works that we're finalizing in Ireland that really is up and growing or committed to at the moment. But the rest, we're not at that time yet. So we are still in enabling works. So for me, we will take the time to focus on reinvesting the capital, growing the company. And in time, these opportunities will come. And we will, as I said, either maximize by liquidity. And I think that's what we say in the slides or we'll have other opportunities that will present to us because a lot of those are extremely attractive and strategic land. And they are around the estates. So -- well, some of them are on the estates, but others are around the estates and a huge potential to just densify and continue to develop the attractiveness of our estates. So for the time being, we're minded to continue to do the maximum we can to unlock value, whatever that is in time on those sites.

Our next question comes from Othman El Iraki from Fidelity International.

Congratulations from me as well on the disposal. So what kind of fixed income question. But when you mentioned net debt reduction, are you considering tendering some of the bonds especially the one that are trading below par to have more -- a bit more deleveraging or happy to stay with the cash on balance sheet and investing in that, how you're looking at?

Thank you for your question. I think I'll have my esteemed CFO, jumped in on that one. Himanshu?

As you know, we have retained a large cash balance on balance sheet and with the expected proceeds here. We'll have over GBP 1 billion of debt maturities covered. The reason we hold it is that the average, the weighted average interest rate that we pay is around 3.3% on a December pro forma. And I can earn in excess of 4.5% on the cash. So we're in a good place from which to access your capital markets at the right time from here and make the appropriate announcements at the appropriate time. you wouldn't expect me to comment on tendering of bonds and such like today.

We have no further questions on the phone and no questions online, which we have not already covered. So I'll just hand back to Rita Rose to sum up.

Thank you, everybody, for being there this morning. Again, we are very pleased, excited, this is a game changer and a transformation for us. As I said at the beginning, we will be online again on Thursday. So happy to talk to you again and don't hesitate to call us up, Josh and Himanshu and we'll give you the time to digest all this. But again, I appreciate your interest this morning and your questions. Thank you.