Strategy update and 2018 Half-Year Results

HAMMERSON plc – STRATEGY UPDATE AND UNAUDITED 2018 HALF-YEAR RESULTS 

ENHANCED STRATEGY TO ACCELERATE RETURNS 

Following a comprehensive business review, Hammerson plc today announces its reshaped strategy to elevate and accelerate performance with a higher quality portfolio of winning destinations, enhanced by greater levels of operational excellence and capital efficiency. 

Strategy update highlights 

Enhanced quality through optimised portfolio 

• New focus solely on two winning retail segments with enhanced LFL NRI growth prospects 

• Flagship retail destinations 
• Premium Outlets 

• Exit retail parks sector over the medium term 
• Disposal target of £1.1 billion by end of 2019, with £300 million already achieved this year and an increased overall 2018 target of £600 million 
• New City Quarters concept established to maximise value from the highly attractive land surrounding our shopping centres 
• Greater geographical diversification with non-UK retail exposure increasing by c.10% 

Operational excellence and cost savings  

• Step change in retailer line-up: shrinking department store space by a quarter and high street fashion by a fifth, replaced by differentiated brands, aspirational fashion, leisure, events and lifestyle spaces 
• Devoting more resource to meet increased consumer demand for experience enhancing events and a sophisticated digital offer 
• Deliver cost savings of at least £7 million p.a. through operational efficiencies and lower corporate costs associated with disposals and Board and other management changes 

Focus on capital efficiency 

• Commencing a share buyback of up to £300 million 

• Deleverage with the intention to reduce LTV to mid-30s% level over the medium term 
• Due to increased risks in the current market environment, the start on site of the development at Brent Cross is to be deferred 

David Atkins, Chief Executive of Hammerson, said: “Our reshaped strategy sees us taking decisive action to further reposition our portfolio. Through increasing the level of disposals, including exiting the retail parks sector, we will now focus solely on winning destinations of the highest quality: Flagship retail destinations and Premium Outlets. These are the venues we believe will maintain relevance and outperform against the shifting retail backdrop. 

“Our customer and retailer offer will be amplified, and this includes a step change in our retailer line up.  We will reduce the amount of floor space let to department stores and high street fashion as we actively focus on the latest consumer trends and take bolder steps to provide the best retail mix. 

“Our results today demonstrate the resilience of our business. We are taking tough decisions and have absolute conviction in our ability to deliver.  By reprioritising our capital deployment and repositioning our portfolio, we will accelerate future shareholder value and returns.” 

Half-year 2018 performance 

• Group valuations stable with continued growth in Premium Outlets and Ireland offsetting a small yield-driven valuation decline in the UK 
• Adjusted earnings per share unchanged at 15.1p 
• Solid demand for our retail space from retailers, £13.6 million of new leases signed, 4% ahead of ERV and 5% ahead of previous passing rent 
• 97.2% occupancy and a small uplift in leasing volume at our UK shopping centres (£6.8 million HY2018 vs 
  £6.6 million HY2017) despite an unusually turbulent retail backdrop 

• 104 units across the portfolio are in administration or are subject to CVAs, with 87 of those units currently trading. These have reduced HY2018 NRI by £2.1 million. The full year impact is anticipated to be £5.8 million (1.5% of passing rent). 
• £300 million of disposals achieved this year including four UK retail parks, in total 10% below December book value 
• Construction commenced on extensions at Les 3 Fontaines, Cergy and Italie Deux, Paris and on track to deliver an attractive estimated yield on cost of around 6% 
• Value Retail portfolio sales up 6% with Bicester Village trading well; remerchandising and reconfigurations supported retail sales growth of 6% at VIA Outlets 
• LTV marginally up at 37% and substantial liquidity of £878 million 

Half-year 2018 results at a glance 

Six months ended:	30 June  2018	30 June  2017	Change
Net rental income (1)	£178.5m	£184.0m	-3.0%
Adjusted profit (2)	£120.0m	£119.4m	+0.5%
Adjusted earnings per share (2)	15.1p	15.1p	–
IFRS profit (including non-cash valuation changes) (3)	£55.7m	£287.1m	-80.6%
Basic earnings per share (3)	7.0p	36.2p	-80.7%
Interim dividend per share	11.1p	10.7p	+3.7%
As at:	30 June  2018	31 December  2017
Portfolio value (4)	£10,626m	£10,560m	+0.6%
Equity shareholders’ funds	£5,955m	£6,024m	-1.1%
EPRA net asset value per share (2)	£7.76	£7.76	–
Gearing (5)	60%	58%	+2p.p.
Loan to value (5)	37%	36%	+1p.p.

• On a proportionally consolidated basis, excluding interests in Premium Outlets. See page 17 of the Financial Review for a description of the presentation of financial information. 
• Calculations for adjusted and EPRA figures are shown in note 8 to the financial statements on pages 43 and 44. 
• Attributable to equity shareholders, includes portfolio non-cash revaluation losses of £40 million (30 June 2017: gains of £188 million). 
• Proportionally consolidated, including Premium Outlets. See page 17 of the Financial Review for a description of the presentation of financial information. 
• See Table 17 on page 61 for supporting calculations for gearing and loan to value. 

Results presentation today: 

The results presentation is being held today at 8.00 a.m. at London Stock Exchange, 10 Paternoster Square, EC4M 7LS. A live webcast of Hammerson’s results presentation will be broadcast today at 8.00 a.m. via the Company’s website, www.hammerson.com. At the end of the presentation you will be able to participate in a question and answer session by dialling: +44 (0)330 336 9411 (UK), +27 11 844 6118 (South Africa), 
+33 (0)1 76 77 22 57 (France), +31 (0)20 703 8261 (Netherlands) and +1 929 477 0402 (USA). Please quote confirmation code 9998219. 

Financial calendar: 

Ex-dividend date (SA)	29 August 2018
Ex-dividend date (UK)	30 August 2018
Record date (UK and SA)	31 August 2018
Interim dividend payable (UK and SA)	8          October 2018

Enquiries: 

David Atkins, Chief Executive Officer	Tel: +44 (0)20 7887 1000
Timon Drakesmith, Chief Financial Officer and MD, Premium Outlets
Rebecca Patton, Head of Investor Relations	Tel: +44 (0)20 7887 1109
	[email protected]
Catrin Sharp, Head of Corporate Communications	Tel: +44 (0)20 7887 1063
	[email protected]
John Waples, Dido Laurimore and Tom Gough, FTI Consulting	Tel: +44 (0)20 3727 1000

STRATEGY UPDATE 

Overview 

Hammerson is a best-in-class business with a portfolio of leading European retail destinations and a strong financial track record. With 440 million annual shopper visits, we create dynamic destinations where people, brands and partners thrive. 

We are a dynamic business. Adjusted EPS has grown by 49% over the last five years and we have grown our portfolio by 64% over the same period. By successfully recycling capital we have increased our average asset size by 47%. We entered Ireland, Europe’s fastest-growing market in 2015 and our Premium Outlets portfolio has grown to £2.4 billion and generated an IRR of 26% since 2011. We have developed exceptional European flagship shopping centres such as: Bullring, Birmingham; Les Terrasses du Port, Marseille; and Victoria, Leeds. 

Market trends driving change 

Our comprehensive business review was informed by new quantitative and qualitative data on our consumer markets and the future trends in retail. This has given us insights on how best to position our portfolio and identify winning retail destinations over the long term based on the following key market trends: 

Urbanisation transforms the built environment: The majority of our retail destinations are in the top-15 European cities. Urban populations are growing, with 78% of the European population expected to live in cities by 2030 (source: United Nations). Large cities are differentiated by the relative wealth and density of their catchment and significant transport and digital infrastructure. Greater urbanisation has the potential to transform the built environment surrounding our assets, for example, creating more mixed-use lifestyle venues or reducing car park requirements. 

Physical retail remains core: The UK is the most advanced multichannel retail market in Europe with the highest online penetration rate. However, 85% of sales still involve a store and two thirds of sales growth over the next five years is expected to come from store-driven sales (source: GlobalData (Verdict)). The store remains fundamental to consumers for discovering and buying products, building a relationship with brands, fulfilling the growing demand for social and stimulating experiences and accessing customer service. 

Occupier and consumer demand polarised towards flagship retail locations: Over the last three years, demand for space at large flagship shopping centres has grown at twice the rate of other shopping centres (source: GlobalData (Verdict)). Demand from more leisure and food and beverage (F&B) operators has been positive across all venues. However, for fashion retailers there is a sharper polarisation effect where retailers are closing stores in smaller shopping centres and taking new larger space in flagship centres (source: GlobalData). 

Consumer habits driven by ‘experience’: The fastest growing shopping mission to UK shopping centres is the ‘big day out’, accounting for a quarter of visits, generating the highest average spend per visit (source: CACI). Linked to this, discretionary spend on restaurants (CAGR 4.3%) and recreation & culture (CAGR 3.6%) were among the fastest growing categories over the last five years (source: ONS). 

Online penetration shifts the retail category mix: Patterns of online penetration vary across product categories with health & beauty having the lowest penetration and a more store-based model. Online penetration of fashion sales is growing rapidly, though this category also has one of the highest measured rates of ‘store influenced’ online sales (source: GlobalData (Verdict)), driving a new role for stores as a brand showroom. There is also growing evidence that more brands are going direct to consumers (D2C) with physical stores and, while this trend currently represents only a small portion of total space, there is clear headroom to grow. 

Luxury outlets positioned to outperform: There continues to be strong growth in spend from long-haul tourists to Europe. Tourists from China make up the largest share and delivered sales growth of 16% per annum over the last three years (source: Global Blue). Luxury off-price outlets make up around 12% of the market for luxury personal goods and the market is expected to remain resilient to online spend with an increase of around 7.5% p.a. over the next three years (source: Bain). 

Enhanced quality through optimised portfolio 

Responding to these trends, we have identified those assets within our high-quality portfolio that are expected to be the relative winners. Our more specialised portfolio will therefore focus on two market sectors: 

Flagship retail destinations: Top-tier city shopping centres underpinned by strong demographics and consumer catchments. 

Premium Outlets: Must-visit Premium Outlets which are attractive to high-spending local catchments, European and global visitors and the world’s leading brands. It remains the fastest-growing retail format in Europe. 

As we optimise our portfolio, we will exit the retail parks sector over the medium term. We believe our skills are best deployed on assets with more opportunities to proactively influence outperformance through operational expertise in customer service and events. 

We will take decisive action to deliver this strategic repositioning. We have increased our 2018 disposal target to £600 million, of which £300 million has been delivered, and a further £500 million of disposals are planned during 2019. 

The optimised portfolio will have greater pan-European diversity with non-UK retail exposure increasing by c.10%. 

The historical financial performance of our chosen winning assets is higher than the current portfolio average which is expected to result in higher future rental growth. 

Our Premium Outlets portfolio has delivered exceptional returns, with an IRR of 26% over the last five years thanks to strong market dynamics and our unique partnership model with Value Retail and VIA Outlets. We have a number of opportunities to grow our investment further in this key sector. 

Operational excellence and cost savings 

We are leading operators with a recognised depth of retail knowledge and a skilful team focused on delivering our Product Experience Framework. This is embedded across everything we do and ensures we constantly challenge ourselves to apply best practice in retail design and digital solutions, customer engagement and sustainability. The latter includes our continued commitment to our ambitious sector-leading target to become Net Positive by 2030. 

In the current market, a more agile approach to tenant mix is required, as the winners and losers in retail shift at an ever faster pace. 

We will implement a step change in the retailer line-up at our centres. UK department store space will shrink by a quarter and high-street fashion coverage will reduce by a fifth. This reallocation will allow us to benefit from the strong demand from categories such as aspirational fashion, leisure, consumer and digital native brands all which see value in a physical store in the very best retail locations. A more responsive retailer strategy will also include investigating the structure of our leases and contracts to create versatility and flexibility. 

We will devote more resource to meet increased consumer demand for experience enhancing events and a sophisticated digital offer to amplify the consumer experience at our winning destinations. These will include initiatives such as repurposing department store space, the introduction of flagship retail showrooms, marketplace food offers and enhancing event spaces. This will drive customers’ frequency of visit and grow our retailers’ total catchment spend. 

In line with a more specialised portfolio, we have identified opportunities to reduce our cost base by at least £7 million per annum from the end of 2019. This will be achieved through £2 million of operational savings principally relating to procurement and £2 million of savings relating to our Retail Parks team associated with our exit from this sector. In addition, a further £3 million will be achieved through Board (see below) and other management changes. The one-off implementation cost to deliver these savings is estimated to be £4 million. 

To ensure we are aligned with modern best practice governance we have evaluated the Board composition to ensure an optimum number of executive and non-executive directors to best represent the interests of our shareholders. As a result David Atkins and Timon Drakesmith will be the sole executive members. Peter Cole has decided to retire and he will officially step down from the Board as of 31 December 2018, and formally retire from his position as Chief Investment Officer following the 2019 Annual General Meeting at the end of April 2019. Simon Travis will assume responsibility for Investments, and Mark Bourgeois for Development.  Jean-Philippe Mouton will also step down from the Board as of 31 December 2018 and will continue to lead the French business as Managing Director and be responsible for Group marketing. 

Intense focus on capital efficiency 

As we progress with our disposal programme, the Board has concluded that, at present an on-market buyback of the Company’s shares, investing in our high-quality portfolio at a discount to NAV, offers the best risk-weighted capital returns. A total of up to £300 million from realised disposal proceeds will be returned to shareholders over the next 12 months. The proposed buyback will be accretive to EPS and NAV per share. 

We remain committed to maintaining a prudent balance sheet and will deleverage over the medium term using disposal proceeds to pay down debt, with the ambition to reduce LTV to a mid-30% level. 

Hammerson has a successful track-record of delivering iconic retail developments. In France, we are on-site with two extensions with an estimated yield on cost of 6%. 

In the UK, due to increased market risks and while alternative uses of capital offer higher immediate financial returns, we will defer starting on site with our development at Brent Cross. The scheme remains an important strategic project and we continue to recognise its role as one of London’s leading retail destinations and will support its future success. 

Within our pipeline of development projects, we hold a valuable land bank of at least 65 acres in prime city locations, mostly adjoining our existing retail hubs. We recognise the accelerating urbanisation trend in Europe and have the ability to leverage our existing strong retail position with other complementary lifestyle uses, such as residential, leisure, cultural and flexible workspaces. We will progress opportunities to extract value from these strategic land holdings with our newly created City Quarters concept. 

Financial impact 

In the near term, while we dispose of assets to optimise the portfolio mix, income will be negatively impacted. There will, however, be benefits to EPS from organic growth in Dublin and Premium Outlets, refinancing and cost reduction programmes as well as the proposed share buyback. As a result, we aim to mitigate the effect of the disposals over the next two years. 

From today, the dividend growth rate guidance will be adjusted to a level of 3% to 5% per annum. 

Our optimised portfolio should support higher LFL NRI growth from the focus on higher quality properties and a greater weighting towards faster growth market sectors. In combination with a leaner cost structure and balance sheet optimisation we envisage attractive EPS growth from 2020 onwards. This is coupled with a more resilient and higher quality income profile of the Group and the result is a strategy which delivers compelling returns for shareholders. 

  

CONTENTS 

	Page			Page
Strategy Update	3		Statement of Directors’ Responsibilities	27
Index to Key Data	5		Financial Statements	28
Business Review	6		Notes to the Financial Statements	35
Property Portfolio Review	14		Additional Disclosures	53
Financial Review	17		Development Pipeline	62
Principal Risks and Uncertainties	24		Glossary	63
Independent Review Report	26

 

  

INDEX TO KEY DATA  Unless otherwise stated, figures have been prepared on a proportionally consolidated basis, excluding Premium Outlets			Page
Income and operational – Six months ended:	30 June 2018	30 June 2017
Occupancy	96.6%	97.3%	54
Like-for-like NRI growth	-0.4%	0.7%	18
Adjusted earnings per share	15.1p	15.1p	17
Leasing activity	£13.6m	£18.1m	2
Leasing v ERV	+4%	+8%	2
Like-for-like ERV growth	+0.2%	+0.6%	16
Retail sales growth – UK shopping centres	-2.5%	-3.9%	6
Footfall growth – UK shopping centres	-1.6%	-1.7%	6
Retail sales growth – France	2.9%	-3.1%	9
Footfall growth – France	2.3%	-2.3%	9
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