It looks like the Hammerson (LSE: HMSO) share price is surging! From a five-year low of 48p on 1 September, the troubled retail landlord is now trading around 275p. Indeed, Hammerson shares appeared to rise by over five times in one day on 1 September.
But, and there’s a big but, the apparent price rise is due to a 1-for-5 share consolidation as part of the firm’s capital reorganisation plan.
This means, on 1 September, every five shares owned by a Hammerson investor were consolidated into one single share, reducing the number of shares available on the FTSE by five times. Consequently, the price of a single share increased fivefold, with a bit extra for increased demand.
The consolidation is necessary for Hammerson to raise more funds as part of its upcoming rights issue. Hammerson needs cash. And it’s flooding the FTSE with stock for sale to get it. This will cause its shares to drop in price.
Hence, the initial share consolidation before the dilution occurs.
How will the rights issue affect Hammerson’s share price?
The company is hoping to raise £825m from a £552m rights issue and by selling £274m of assets. Hammerson is bringing 153m shares to market, which will lower the current share price substantially. It may also mean Hammerson’s relegation from the FTSE 250.
The firm is hoping this course of action will bring down its loan-to-value (LTV) ratio from 51% to 42%. This ratio compares the level of borrowing to the value of property owned by the firm and is important to debt rating agencies when analysing Hammerson’s commercial bonds. The higher the ratio, the more severe the debt ratings, and the more expensive Hammerson’s financing becomes.
However, the current challenges facing retailers means keeping this ratio lower will be difficult.
The future for Hammerson
Hammerson owns many large shopping centres, such as Birmingham’s Bull Ring, and Bicester Village. Many of these have been empty since the coronavirus-induced shutdown earlier this year. And with many people still shunning in-person shopping, the problems for retailers continue.
It is the drop in rents for premises like these that has caused a revaluation of Hammerson’s assets, and with it, the increase in its LTV ratio. Unless the current climate changes for retailers, valuations will stay low, meaning Hammerson will have to keep its debt even lower.
In a climate where many firms are borrowing to survive, Hammerson will likely find this a struggle. Its efforts are certainly not helped by a 28% shortfall in rent for the first half of this year. On top of this, only 34% of the rent due to the company was collected by August.
However, management is hoping the rights issue and disposal will provide much-needed cash, and with it an improvement in the Hammerson share price. In addition, it also has other plans for the future, such as a new leasing model that could see turnover-based rent and more flexible leases.
But I think its hopes are dependent on finding a buyer for premises that rely on the future of bricks and mortar retail.
