In a world of near-zero interest rates, a stock yielding nearly 10% a year is a thing of wonder. That’s what shopping centre owner Hammerson (LSE: HMSO) is currently offering investors, and it’s one of the highest yields on the FTSE 250.
As you can imagine, the stock isn’t without risks.
This morning Hammerson published its half-yearly unaudited results after a tough year that has seen its share price almost halve to 265p. In February last year the £2bn real estate investment trust (REIT) dropped out of the FTSE 100 as investors recoiled at its move to snap up rival Intu, which they saw as doubling down on its exposure to struggling shopping centres.
The UK’s traditional bricks and mortar retail sector is under massive pressure as it struggles to keep up with the online shopping phenomenon, and Hammerson is responding by overhauling its business and making disposals, which totalled £456m over the period, 90% of its 2019 target of £500m. It is committed to the sale of UK retail parks over the medium term and made disposals of £33m in the first half.
This has cut debt to £3.1bn with gearing 61%, despite the fact that deals are taking longer in the current “tough environment”.
CEO David Atkins said with high street fashion under pressure it is shifting towards categories with greater customer appeal and rental growth potential, with more than 90% of new leasing to leading consumer and food and beverage (F&B) brands.
Delivering the goods
Performance was stronger in Ireland and France than in the UK, “which demonstrates the benefits of our diversified portfolio”. However, it hasn’t given up on the UK, submitting planning applications for Martineau Galleries in Birmingham and The Goodsyard in Shoreditch.
The £2bn group trades at just 9.6 times forecast earnings, adding a bargain valuation to its dizzying yield (covered 1.1 times). The share price is now at a whopping 60% discount to net asset value, which suggests a real opportunity, but with net rental income down 12.3% to £156.6m, investors are shying away. Hammerson is a risky recovery play that could pay off if we get a positive Brexit resolution and consumer confidence rebounds. That still leaves the internet shopping problem, though. Another danger is that further write-downs are a possibility.
All is not lost in the property sector as fellow REIT Segro (LSE: SGRO) has been booming, its share price up 20% in the last six months, and 120% over five years.
Last week, it reported “another period of strong performance with good earnings momentum driven by rental growth, active asset management and a record level of developments”, as its portfolio of “high quality and well-located warehouse assets” enjoys low vacancy rates and is benefiting from the surge in online shopping.
Adjusted pre-tax profit rose 19% to £131.8m, with profit before tax at £410.8m, as the online retail revolution drives up demand for its warehouses. The £8.6bn group boasts a strong pipeline of developments and acquisitions and increased its interim dividend by 13.5% to 6.3p.
The Segro share price currently trades at 7.3 times earnings and although the yield is much lower than Hammerson’s, a forecast 2.6% with cover of 1.2, investor demand remains strong with the REIT trading at a relatively small 15% discount to net asset value. Segro looks the more attractive bet, despite its dramatically lower yield.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.