Hammerson (LSE: HMSO) shares have faced a torrid few years. They traded at above 700p in 2015, yet the real estate investment trust is currently priced at just 84p. For many, the pandemic has been seen as the nail in the coffin for the underperforming company. After its rival Intu went into administration last week, it is also feared that the same fate may lie in wait for Hammerson. But with a price-to-book ratio of 0.1, and a 72% year-to-date fall, are Hammerson shares too cheap to ignore?
Hammerson shares are loaded with risk
The pandemic is not the only reason for Hammerson’s recent demise. In fact, the firm was forced to write down the value of its assets by a fifth last year, after shopping malls were deemed to be less attractive than they once were. This is in part due to the shift to online shopping, which has only accelerated over lockdown.
There is also the significant issue that the tenants can’t pay rent. It recently announced that it had only collected 16% of rent so-far this quarter, and there is an expectation that many tenants will be unable to pay at all. This means that the landlord will have to raise money in some way, either through an equity offering or an asset sale. Neither are attractive propositions and they would probably negatively affect the Hammerson share price.
Poor financial health
Despite selling some assets to help pay off debt, the landlord is still highly leveraged. In fact, its balance sheet includes £2.6bn in debt, compared to just £29m in cash. The firm’s operating cash flow is also insufficient to cover debt, which increases the likelihood of breaching debt covenants. Unsustainable amounts of debt led to Intu’s collapse, and this means that Hammerson’s debt should not be overlooked.
Although total assets are currently valued at over £7bn, I believe this is also an overvaluation. Shopping malls had already lost value before the pandemic, and now they seem even more undesirable. This is especially true as Intu’s lenders may push for a quick sale of its 17 shopping centres, thus potentially reducing the price of Hammerson’s assets. A fall in the Hammerson share price would seem the likely consequence.
What does the future hold?
The question now is whether the current Hammerson share price has already priced in the dire situation. Unfortunately, its future looks bleak. Whereas companies like British Land can rely on exposure to the office market to help offset losses, Hammerson is currently stuck in retail malls. This is at a time when the majority of stores are seriously struggling. As such, it seems increasingly likely that Intu may not be the only landlord to face collapse. This means that, even with such a cheap valuation, I’d stay well away from Hammerson shares.
