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Fitch Affirms Hammerson Plc at 'BBB+'; Outlook Stable
November 30, 2017 / 4:28 PM / 12 days ago

Fitch Affirms Hammerson Plc at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 30 (Fitch) Fitch Ratings has affirmed Hammerson Plc's (Hammerson) Long-Term Issuer Default Rating (IDR) at 'BBB+', Short-Term IDR at 'F2' and senior unsecured rating at 'A-'. The Outlook on the Long-Term IDR is Stable. Hammerson's prime portfolio of UK, French and Irish shopping centres demonstrate high occupancy ratios (around 98%) and stable rental income. The company's recent conversion of loan assets into prime Dublin shopping centre assets has further improved diversification. Fitch expects the company to gradually reduce the leverage on its balance sheet to remain in line with our rating guidelines. KEY RATING DRIVERS Leverage Remains High: Hammerson's leverage is somewhat higher than its peers in terms of loan-to-value (LTV) and net debt-to-EBITDA. New debt issuance in 2016 led to an increase in net debt-to-EBITDA to around 10.5x from around 10x at end-2015, while Fitch-defined LTV decreased slightly to 44% as GBP122 million of revaluation losses in the UK portfolio following Brexit were offset by additions to both the Irish and UK assets. Over the next two years, Fitch expects both LTV and net debt-to-EBITDA to improve to 40% and 9x respectively as Hammerson uses cash generated from its targeted GBP400 million of annual disposals to de-leverage its balance sheet. Completion of Irish Loan Conversion: Fitch believes the addition of the Irish assets improves Hammerson's portfolio diversification as well as providing exposure to the fast growing Irish market (the Irish Central Bank forecasts GDP growth of 3.5% p.a.). The conversion of the GBP910 million loans into Irish property assets was completed in September 2017. They now own a 50% share of Dundrum Town Centre and Dundrum Phase 2, alongside their JV partner Allianz, as well as a 50% share in The Pavilions Shopping Centre and The Ilac Centre. Secured Debt Issuance: The issuance of secured debt has moved Hammerson's debt structure from being nearly fully unsecured to now having around 10% in secured debt. However, Fitch expects the unencumbered asset cover to remain comparable to investment-grade peers at 2.4x in 2017. The EUR625 million, seven-year loan issued alongside Allianz was secured against the Dundrum Town Centre asset with an all-interest rate of 1.9%. Hammerson used its 50% share of loan proceeds to redeem a GBP250 million 6.875% bond due in 2020, bringing down the weighted average interest rate to below 3%. Extensive Capex Plans: Management states that it aims to spend an average of GBP300 million per year from 2017-2021. Existing developments, due to be completed in 4Q17 and 1Q18, have focused on smaller scale extensions of GBP10 million-GBP50 million on UK shopping centres and retail parks. However, scheduled developments for 2018 are expected to be much larger, with plans for a GBP475 million-GBP550 million JV development of Brent Cross Shopping Centre and a EUR230 million extension of their wholly owned Paris asset, Les 3 Fontaines. Current development projects have been around two thirds pre-let within one quarter of completion, and the success of the larger projects will be equally dependent on Hammerson's ability to pre-let its developments. A clear mitigating factor has been the low level of committed capex, which at under 2% of investment properties in 1H17, provides flexibility to adjust spending plans should market demand change. Strong Operating Performance: Hammerson's overall occupancy remained strong at 97% as at end-3Q17. In addition, like-for-like (lfl) rental growth across the portfolio was positive. Its UK shopping centres remained the drivers of growth with a 2.2% increase in lfl net rental income in 1H17, despite a slight uptick in vacancies to 2.7% and weaker retail sales. French lfl net rental income was also up 1.5%, despite a 3.1% fall in retail sales and the Irish assets exhibited strong rental growth following better rent negotiation. The portfolio's rental growth was slightly offset by the negative performance of UK retail parks, where an uptick in surrender premiums led to a 3% lfl decrease in net rental income in 1H17. Some Asset Concentration: Hammerson has some asset and tenant concentration, due in part to its ownership of large shopping mall assets. Hammerson's top 10 assets contributed 55% of total rent for 2016, and its top 10 tenants represented 17.8% of passing rent at end-1H17. Although this is a characteristic shared by some of its similar sized peers, further asset and tenant diversification would be viewed positively. DERIVATION SUMMARY Hammerson compares well with similarly rated UK real estate company, The British Land Company PLC (BBB+/Positive). British Land is of a similar size to Hammerson, but has a more diverse asset mix, stronger cashflow metrics and a lower LTV. Whereas Hammerson focuses on retail assets with some geographic spread across Europe, British Land's office and residential portfolio is concentrated in prime areas of London, which feature high demand and strong clients. With a Fitch-calculated LTV of 44%, and net debt-to-EBITDA of around 10.5x, Hammerson is rated one-notch above shopping centre owner NEPI Rockcastle plc, which has a stronger capital structure, but whose business risk is constrained by its exposure to lower-rated countries, including Romania. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Moderate rental growth; - Occupancies to remain strong; - Annual capex of GBP300 million from 2017-2020; - Annual disposals of GBP400 million from 2017-2020; and - Interest costs to decrease as new debt is used to re-finance more expensive bonds. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - LTV below 40% on a sustained basis. - EBIT net interest cover (NIC) above 2.5x on a sustained basis. - Unencumbered asset cover above 2.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Significant rise in tenant defaults and lease arrears, leading to a material fall in total rents. - LTV above 45% on a sustained basis. - EBIT NIC below 1.75x over a two-year period. LIQUIDITY Strong Liquidity: As of 1H17, Hammerson had an average debt maturity of 5.8 years. Following the repayment and cancellation of a EUR1.5 billion acquisition facility, the only near-term maturity is the GBP48 million O'Parinor secured debt, which is due in July 2018. Available cash of GBP67 million and the unutilised, committed revolving facilities of GBP554 million will be more than sufficient to cover this. The three separate revolving facilities were either refinanced or extended in 2017, and now all mature in April 2022, providing significant headroom. Hammerson has removed some medium-term maturities, through the refinance of its GBP250 million 6.875% bond due to mature in 2020 with the issuance of debt secured against their Dundrum asset in September 2017 (share EUR312.5 million). The next major maturity is its EUR500 million bond due in 2019, which the company expects to repay from expected disposal proceeds, lowering LTV. Contact: Principal Analyst Fredric Liljestrand Associate Director +46 8 562 80 910 Supervisory Analyst Shiv Kapoor Analyst +44 20 3530 1509 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Bram Cartmell Senior Director +44 20 3530 1874 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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