Earnings Transcript for HMSO.L - Q2 Fiscal Year 2024

Rita-Rose Gagné: Good morning, everyone, and thank you all for joining today's webinar on such a busy day. And welcome back to those who joined us on Monday. As usual, I'll start with the summary of our progress, then pass to Himanshu, who will run through the numbers and I'll be back to cover operational trends. Let me start by saying that I'm pleased to report we've had another strong first half, as we are realizing the benefits of our investments in recent years. I'm particularly pleased by the strength of our leasing activity, showing high demand for our destinations. I'm pleased also with the underlying growth in GRI and earnings, and I'm glad it enables us to increase the dividend by 5%. And while the big news this week was our agreed disposal of Value Retail for cash proceeds of around GBP 600 million, we have a strong operational grip on the business and that comes through the numbers. Our dominant city center destinations are in high demand as shown by steadily improving KPIs. Footfall was up 6.5% in Bullring, 5% in Westquay and Cergy, 3% in Les Terrasses du Port. Overall, up 1%, reflecting the ongoing repositioning we are doing elsewhere on the portfolio. We've welcomed a host of new occupiers, and are pleased to see these best-in-class brands generate sales densities that are 20% higher than their predecessors. When I look on a like-for-like basis, France and Ireland are up, but U.K. sales are down 3%, as the benefit of these new openings is not yet coming through in the like-for-like. Non like-for-like U.K. sales are actually up 1%, and follow a similar pattern to footfall. Where we have made investments, sales are up. For example, Bullring is up 4.6% on footfall and it's up 4% on total sales. Occupancy is robust, even while we continue our program of repositioning with heavy lift at Cabot and Oracle this year. We'll come back to that. This is all driving another year of increase in leasing. We printed GBP 23 million from 140 deals. That is up 24% in value, once again at a strongly positive spreads to previous passing and ERV. This momentum already continues into the second half. We're generating top line growth with more to come. The underlying GRI is, therefore, up 4%. So, that all shows you the positive impact of the repositioning we're doing and the flight-to-quality that is playing out. Then it's about adapting our product to both generate and responding to the evolving demand. At the same time, we delivered another outperformance on costs, down 16% year-on-year. Now, we have a strong, scalable platform as we look to further drive operating leverage. All this resulted in adjusted earnings of GBP 50 million, a new base to grow from, following the completion of our GBP 500 million disposal program. Turning now to the right-hand side of this slide. The agreed disposal of Value Retail is transformational for the company and it is a key driver of what is to come. So, I'll spend a few minutes recapping the key points for those who weren't able to join on Monday. It generates GBP 600 million of cash proceeds on an EV of GBP 1.5 billion, which represents an attractive EBITDA multiple of 40x and an exit cash yield of 3.4%. It's a clean exit and it removes a significant overhang on Hammerson shares. The proceeds go further -- sorry, the proceeds go to further strengthen the balance sheet, investing for growth and enhancing distributions with the buyback of up to GBP 140 million announced earlier this week. Furthermore, the Board intends to adopt an 80% to 85% payout ratio post-completion of the sale of Value Retail, in line with U.K. market REITS. Looking forward, after 3 years of intensive turnaround, we're entering a new phase with the capacity and capability to invest, to accelerate growth and focus on quality. We gave a new medium-term financial framework with all this in mind on Monday. I believe this business is able to achieve an annualized TAR of around 10% going forward, and that's assuming yields stay as they are. I'm really excited about the opportunity ahead and very confident we are growing the top line and earnings off our new base. Now, over to Himanshu for the numbers. Himanshu?

Himanshu Raja: Thank you, Rita-Rose, and good morning, everyone. I'll run you through the half-year performance, as well as provide the update to the pro forma numbers for the disposal of Value Retail based on the 30th of June actuals. Now let's jump straight in. We posted another period of positive underlying GRI and NRI growth of 4% and 5%. Our new base for adjusted earnings at the half year is GBP 50 million, following the completion of the disposals program. And let me deal right up front with full-year guidance. The second half is always a bit stronger and we will, of course, see some benefit from earnings from Value Retail until completion. The loss of earnings post-completion will be offset by interest receivable on the net cash proceeds. I'm, therefore, comfortable with where market consensus is today. The IFRS loss of GBP 517 million, and the associated NTA per share reduction to 38p, largely reflects the write-down of Value Retail to the agreed disposal price and the effect of earlier disposals and a modest revaluation loss in the half. Those are the highlights. Now let's look at the adjusted earnings walk. Starting from the left-hand side, we disposed of GBP 10 million of net rental income and fee income, leading to our new baseline for 2023 of GBP 46 million. From there, like-for-like NRI added GBP 1 million. The reduction in gross admin costs was GBP 4.2 million, and net finance costs of GBP 6.4 million, which benefited from interest receivable on our cash balances. Value Retail earnings were disappointing, GBP 1.7 million down year-on-year. And we also had non-recurring items of GBP 6.1 million, rounding out to our half-year '24 earnings to GBP 50 million, so a 9% uplift on an underlying basis off the new base of GBP 46 million. On to valuations. This chart shows the peak to now by geography for both yields and ERV, and the spreads to the underlying sterling and euro 5-year swaps. U.K. and French yields are again stable. You can see on the chart the continuing widespread to U.K. and European swaps, with the U.K. at 400 bps and France at 240 bps. Whilst Ireland remains economically tied to the EU, we have seen some outward yield movement there despite the lack of transactional evidence, with the spreads to 5-year swaps approaching those of the U.K. Turning to ERVs. All 3 territories posted positive ERV growth, with the U.K. up 1.5% and France and Ireland, up 1%, respectively. Now for the obligatory NTA walk. Starting with the 51p at FY '23, the dominant movement, of course, is the effect of the disposal of Value Retail of 11p per share. Revaluations and disposal losses and the FY '23 dividend are offset by adjusted earnings, bringing you back to 38p at the half year. Let me now turn to the balance sheet, credit metrics and debt stack. Reported net debt at GBP 1.2 billion was 8% lower than at the full year. Pro forma for the disposal of Value Retail, this falls to GBP 0.6 billion, 71% lower than we were at in FY '20. The resulting pro forma net debt-to-EBITDA is 5.3x compared to 14x at FY '20. And pro forma LTV is 25%, 15 points lower than FY '20. And of course, with the disposal, our FPC measure falls away. On to debt maturities. You know that we maintain cash on balance sheet as it is more accretive than settling lower coupon debt. And with the disposal of Value Retail, pro forma cash will be GBP 1.14 billion and total liquidity up to GBP 1.74 billion. This puts us in a great position to access capital markets and to fund our future growth. And what a turnaround that is from when I arrived in early 2021, and we faced a EUR 1 billion wall of refinancing from a much weaker position. Today, we have a strong balance sheet and a strong capital structure to go on the front foot. So, back to Rita-Rose to tell you some more about that.

Rita-Rose Gagné: Thanks, Himanshu. So within the -- with all the repositioning we've been doing over the last 2 years and are undergoing now, we can see that the value is flowing into the portfolio. So let's now look at the opportunity before us. Those who joined us on Monday will remember this slide, where 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 is a high-quality, highly regarded portfolio, with 93% of our destinations rated A by Green Street following recent upgrades where we have reinvested and repositioned. In addition, there's also that significant untapped potential of our 80 acres of strategic land where we continue to create optionality. And at the bottom of the slide, you can see our current scale and the potential for growth through existing asset enhancement initiatives through JV consolidations and other investments. So, there's a lot of upside in our reach here. The quality of our portfolio and our work on the assets has driven and continues to drive our strong leasing performance. We'll talk about that now. The trends we've seen in recent years are continuing. Occupiers are investing significant sums for the long-term, including new concepts and refurbishments. Over 80% of leases signed in the first half were on a long-term basis with a WAULB of 7 years. As you know, I pay a lot of attention to the passing rent, to the cash. Our leasing spreads remain positive, 61% ahead of previous passing, or 29% ahead if you exclude units with nil passing. Since the second half of '21, leasing has consistently been ahead of previous passing. We also continue to lease ahead of ERV, plus 10% in the first half. Note that in the U.K., we're leasing 15% over ERV and this provides another 6 months of solid evidence of rental growth to our valuers. It's pleasing to see this start to be reflected in the values as Himanshu just spoke about. So, another half of positive portfolio ERV growth. We're now in a positive reversion in all territories for the first time since 2018. The mix is diverse with top quality occupiers. We've seen the recent news on M&S coming into Cabot and Sephora coming into Bullring. And I'll come back to that. We've made a great start to the second half with 20 deals exchanged. And when you look ahead, the pipeline is very strong with around GBP 23 million in negotiation and more than GBP 10 million in solicitors' hands. Let me pull a few highlights for you on that front. The strategic relationships we've built with best-in-class brands continue to pay off. For example, we've completed the repurposing of the former Debenhams space in Bullring by bringing in an upsized Zara. JD Sports have also upsized, both at Brent Cross and Dundrum. And we have brought Pull&Bear and Les Terrasses du Port. That asset in Les Terrasses du Port is an asset that continues to outperform our expectations. We've now completed more than 80% of the leasing WAULT at its 10-year anniversary. We also renewed with Sephora at Les Terrasses du Port and therefore, leveraged that relationship to bring them into Bullring. And this is a first for Birmingham. Community and local relevance are vital for us. So, I was delighted, we've continued our relationship with Charity Super.Mkt, bringing them back to Brent Cross, and they've just been very successful with footfall and sales across our properties. So, congratulations to them for their concept. We also look to brands outside the norm to tailor to local taste and demand. As you can also see, particularly if you look on the right-hand side of this slide, we've continued to enhance our leisure and F&B offer because there is a strong demand for these. We are able to bring in this diverse mix of quality occupiers because of the attractiveness of the assets and their ability to house these concepts. And we are putting more and more emphasis on the quality of the mix. So, let me now talk about 2 assets where we've invested in recent years, significantly improving the mix, and we are now benefiting from strengthening KPIs and recognition from the market. And those are Dundrum and Bullring. And I know you've heard about those assets already, but they are continuing to evolve very positively and to have more and more impact and continue to benefit from the investments we've made. So it's important to understand that it's not just deals, but it's how deals materialize in time. So in Dundrum, as a reminder, we invested GBP 31 million to generate GBP 70 million of contracted rent on long-term leases with premium occupiers, Brown Thomas, Penneys, Dunnes Stores and Nike. The last was a first for Ireland. The impact of that in time has been that we're now seeing a younger demographic with higher spending conversion and average spend. Including the halo effect on ERVs, the overall uplift to passing rent has given us a total IRR of around over -- actually over 20%. In Bullring, we've invested around GBP 26 million in recent years, both in the department store repurposing, but also the wider repositioning and new offers. You've heard about this, but this has generated GBP 39 million of contracted rent with again, great occupiers we've announced recently, such as M&S, who is now open very successful; TOCA Social, Inditex and Lane 7. We're driving significant footfall and ERV growth, the latter, in particular, driving a project IRR of over 40%, given the low base. I'm pleased that both these super-prime destinations have recently been visited and upgraded by Green Street, both now in the A++ category alongside a handful of others in Europe. And there is more to do on these assets. There are incremental opportunities at both these destinations. For example, we just signed with Lane7 in Dundrum last week and are looking at upgrading the F&B offering. We're exploring bringing a cultural anchor in Bullring and a potential residential opportunity in an underutilized car park adjacent to the asset. So let me now turn to show how we are replicating the success of Bullring and Dundrum into Cabot Circus, we are currently in repositioning. In June, we exchanged with Marks & Spencer to take the former House of Fraser space, aiming to hand over in the second half and open in the spring of '25. We had already put House of Fraser on a short-term occupancy. So, we were ready to seize the opportunity and to execute this at pace. We took vacant possession of the cinema box space, where we anticipate bringing a new offer alongside increased leisure elsewhere, including bowling with King Pins. Together, we are already seeing this generating further occupier demand. Overall, we anticipate around GBP 3 million of uplift per annum in NRI and strong returns well above our cost of capital. ERVs are already up 3% in the first half of '24, with all this activity. Looking further ahead, there's an opportunity to refresh the historic Quakers Friars area within the estate. We expect to be in for planning later this year. Cabot Circus is at the heart of the city center of Bristol, with a strong catchment of over GBP 1 million. It is surrounded by several development projects at the moment, which will continue to grow and grow further the city center and densify the catchment area and we're going to be part of that. We also complement these larger projects across the portfolio by investing in better placemaking, not only to drive footfall and improve the vibrancy, but also to generate income in its own right. To pick out a few highlights from the first half, we hosted Dizzee Rascal album launch at Bullring and at Cabot, which generated about 7,000 extra visitors. The passing of the Olympic Flame at Les Terrasses du Port saw same-day footfall up 40%. We're increasing our marketing and commercialization efforts, both with existing partners and new brands as they enter our destinations or new geography for the first time. And we've continued our digital marketing transformation, now generating some strong KPIs. As an example, our TikTok following is up 8%, with Bullring having a particularly strong month of May. Looking ahead, we have an active summer, so a summer of sports that is already underway. 3 of the 10 team GB Fanzones will be in our U.K. assets, while Cergy will host a sports village for the duration of the Olympic Games. We're also in the process of refreshing our individual asset brands and corporate identity. In time, this will open further avenues to monetize our digital assets, particularly as we continue to invest and improve our data analytics capability. Just this week. we became the first operator in the U.K. to deploy AI analytics in the Bullring to quantify customer engagement across stores and media. This will provide a more robust and transparent measure of brand value for current and future occupiers and advertisers in Bullring. We will be rolling this technology out across the estate. I mentioned before the importance of our communities, and this intersects with our placemaking efforts. We remain committed to all our ESG goals, but have redoubled our efforts to drive our social impact in the first half of the year. We are progressing our Net Zero asset plans with a further 5% reduction year-on-year in carbon emissions. And that follows a 35% like-for-like reduction from full-year '19 to full-year '23. In June, we held our Annual Giving Back Day with colleagues across the group, supporting 15 local charities and organizations and building stronger links with our communities. We actually won 2 awards at the International CSR Excellence Awards for Bullring and Grand Central for their mental health support and awareness project in collaboration with Birmingham Mind. We're, therefore, not just paying lip service here. Because of the nature of our assets and their important footprint in city centers, social impact is an important part of our strategy for me and our team. Let's now go on to capital allocation. You will be familiar with this slide. I think we've showed this slide since mid-2021. This is our approach to capital allocation that we've been following in a very disciplined way. And now we are going to go into explaining further the opportunity that lies ahead for us. The key messages are, again, very disciplined and committed to a sustainable and resilient capital structure through the cycle. Our waterfall is as follows; further strengthening the balance sheet, investing for growth and value creation, which are with a bias to organic investment and consolidation within the existing portfolio and enhancing returns to shareholders. On this slide, you see the extent in some more detail of our opportunities in time. There's a lot of information on this slide, but it shows that we already have a wealth of opportunities to scale up Hammerson. So on the left side, you can see the JV consolidation for which we've earmarked GBP 350 million of capital with the agreed sale of VR. But we also have capacity on balance sheet, and we have a wealth of opportunities to scale up Hammerson. Doing that, doing some repurposing and enhancing existing assets, I've described what that is and the opportunity in the medium term to bring forward projects that are immediately adjacent to our assets. So, this slide again is a good slide to refer to when we're talking about timing and sizing of capital allocation, which, as you know, is not a linear thing. All that is at returns comfortably ahead of cost of capital. Again, we'll stay disciplined, selecting the best adjusted returns -- risk-adjusted returns for our shareholders and exploring alternative funding or liquidity where appropriate. To bring this all together and conclude, 3 years in and with the agreed VR transaction, a material portion of the strategy laid out to the market at half-year '21 has been successfully implemented. The balance sheet is fixed. The company is focused on a core quality portfolio of leading city center destinations. Our ways of working have been overhauled, digitized, automated and are cost reduced. Rents are increasing off a new base, and we are investing to accelerate growth. And we are far from done. I strongly believe that with all our work, we will grow in a sustainable manner, our income, our earnings and our NTA to deliver the best total returns to shareholders. This all underlies my confidence in our medium-term financial framework. Just take a second here and look at this picture you have in front of you, which describes as well an amazing crowd, energy, nightlife music -- this is a music event that we held in Westquay. And this is what we are investing into. These are city center living spaces. So, thank you for your time this morning. And now we will take a few questions. Back to you, Josh.

Josh Warren: Thanks, Rita-Rose. Let's turn to the phone lines first.

Operator: [Operator Instructions] We have our first question from Pranava from Barclays.

Pranava Boyidapu: I just wanted to get a bit more detail on the Dundrum secured loan. I know you mentioned that you're in advanced stages. But I was wondering, did this require you to put in any extra equity into the JV, also considering that Ireland is the segment that has seen a valuation decline this year in spite of other segments showing stronger valuations? And also, if you can give more information on the LTV or margins on that transaction?

Rita-Rose Gagné: Sure. I'll turn that question to Himanshu, actually. Himanshu?

Himanshu Raja: Thanks for your question. We referenced on Monday, we're in the advanced stages of completion and we expect to sign in early August. So, we'll make an announcement in due course. It will be inappropriate really to talk about it ahead of signature. So watch this space.

Pranava Boyidapu: And if I could also ask, in terms of redeployment of cash from the sale of Value Retail, you've put around GBP 95 million for debt reduction. Do you expect to see some tender activity? Or is that for the future when you have to deal with more debt maturities, including, for example, Dundrum?

Rita-Rose Gagné: Yes. Okay. So again, a nice question on debt, Himanshu, if you want to pick this one up?

Himanshu Raja: Again, you're not going to like the answer. It would be completely inappropriate for me to talk about intentions on tenders and the like. I think the key takeaway is that we now have a strong balance sheet. We're in a great position to access debt and capital markets at the right time.

Operator: Our next question is from Rob from BNP Paribas.

Rob Jones: Hopefully, a couple of questions that are more appropriate. One was on trust support. Obviously, great to see [8%] in the leasing or lease expiries in '24, you've now dealt with. In terms of the anniversary leasing, have you got a greater than kind of normalized run rate of lease expiries in '25 as well? I'm just thinking about if there's a kind of elevated level of expiries there, and I guess some of those may have started to be dealt with, but just a bit of color there. And then secondly, a less exciting question, probably for Himanshu on interest receivable going forwards. Obviously, GBP 600 million or circa GBP 600 million of net proceeds from VR sale. I appreciate that some of that's going to get utilized for buybacks. Some of that will get utilized for debt paydown. But on day 1, I guess that's going to be sitting on deposit. I think you said 4.4% annualized interest, so a significant percentage of your earnings. Do you pay or will you pay tax on that interest as it kind of counts as non-retail income and therefore, there's a net interest receipt that is taxable? Just some color on that would be helpful for my modeling.

Rita-Rose Gagné: Thanks, Rob, for your questions. So the first one on TDP, well, as I mentioned in the presentation, we've done a big part of the lease cycle in terms of that asset, and it's actually, as I said, been better than expected. It's doing really well. And the recent -- the leasing profile that lies ahead is just really -- it's really flat. There's no spikes and the pipeline is good. And we expect to finish that smoothly and continue to increase performance of the asset. And Himanshu, question on....

Himanshu Raja: Yes. I mean, on the interest question, Rob, thanks for your question. There's just 2 two components to draw out. The first is, of course, when we think of the VR proceeds, I'd just reference, to start with the hedging position, we're 90% hedged on euro assets. So, we have to top up the hedging on the euro assets equally. We have to put hedges in place for the Bicester element, all of which we've done. So as you unwind those on completion, we'll lose some interest on those euro swaps. But net-net, this will still be accretive compared with VR earnings. On the tax piece, it stays within the REIT wrap-up. There's no material tax effect for your modeling. Josh and I can take you offline as to then how to think about the rates that you apply.

Operator: Our next question is from Vincent from Kempen.

Vincent Willink: Three questions from my side. Firstly, on France, I see valuations are perfectly flat. So, just wanted to make sure if there was a revaluation round and could you perhaps highlight what discussions you're having with appraisers? Because in light of the lack of evidence, one could say there should be write-downs. Second would be on the like-for-like rental income. I see a big contribution from surrender premiums. Would you say this is a normal level of surrender premium? And third one on like-for-like in France. I see 2.4% and last year the ILC index was 6.5. Of course, there's a cap for SMEs, but that's still at 3.5. So, could you add more color there as well, please?

Rita-Rose Gagné: Yes. Thank you, Vincent. So the first question around the yield in France that has remained stable. Listen, again, I'm reminding everybody that we were now down to 2 assets that we hold 100% and that are really high-quality prime assets. The reference transactions that have taken place, for example, Italie Deux, has been done at a 4.7% net initial yield, 5% net equivalent yield. So the market for those types of assets is very strategic. And I think that these valuations have held stable for that reason. I mean, France has a longer-term view, if I can say, of assets. And I think that as the market comes back -- at the moment, we're seeing more interest. But I'm also aware of some processes ongoing, and I think that for very prime assets, you will see those yields coming back. And there's a question of polarization at the moment for the very best assets. These yields will come back and they're healthy versus the swap, the 5-year swap. So it's stable. Can it move a bit? Maybe, but I don't see any material move given the market, given what we've been able to achieve as transactions and what we know with the experience of these transactions and the solidity of these assets. So, we're comfortable at this point and they're in line with the overall market. Again, I feel, however, we're lucky to be concentrated on high quality. That's what I would say, because, again, I do feel there's going to be a lot of polarization and differentiation between top quality prime versus secondary, regional or those types of assets. So, that's what I would say on France. And actually, I think that addresses the 2 first questions. In terms of the like-for-like, surrender, Himanshu, do you want to take that up? I mean, it is -- you have to bear in mind that, as I said in my presentation, we're at the moment being extremely proactive. If you want to understand what we're doing in the last 3 years versus before, we're being extremely proactive in the asset management. I've talked to you about Oracle. Well, Oracle is another one we're repositioning at the moment. But Cabot, I mean, what we're doing now happens because we've been proactive in taking possession and securing deals, enabling us to do our repositioning. So, surrender premiums are part of our -- we don't shy away. If we have to do it, we do it because we have a better strategy. So personally, I don't think these are that exceptional. But Himanshu, maybe you want to add something on that?

Himanshu Raja: 100% agree. I'd just point out that it's not big numbers in absolute terms either. It's big sort of percentage swings. And then your last question was on like-for-like sort of France movement. You will know predominantly that's the effect of CVAs in France, which are coming through in the numbers and that's what explains the movement from the 6% last year to 2.4%.

Operator: [Operator Instructions]

Josh Warren: Okay. I think we have no further questions on the telephones, and we have no further questions online. So, I'll hand over to Rita-Rose very briefly to say thank you.

Rita-Rose Gagné: Thank you very much, everybody. As you know, we are always available. It's been a big week for Hammerson with the announcement earlier on and these results. So strong momentum, but also a big transformation ahead, extremely positive. So, we remain available if some need additional answers or feedback. Himanshu, Josh are always available for that. And again, thank you for your time. And also for those who did the 2 calls, thanks for that. So have a good week. Thank you.