Fitch: Hammerson's Loan Portfolio Acquisition Neutral for Rating
Hammerson announced on 29 September a EUR1.85bn (GBP1.37bn) debt-financed acquisition of a loan portfolio of non-performing loans with EUR2.6bn face value. The transaction is in partnership with Allianz and Hammerson's share of the total transaction is GBP0.91bn. The loans are secured by 2.2m sq ft of prime shopping centres in Dublin and the objective is to gain full ownership of the underlying collateral. Fitch views the acquisition as neutral to the rating as the short-term increase in leverage will be mitigated by asset disposals and management's commitment to an LTV below 40%.
Once the loans are successfully converted into property ownership, the new properties would constitute 10% of Hammerson's investment property assets making it one of the largest owners of prime retail assets in Ireland. The main asset in the portfolio is Dundrum Town Centre shopping centre (which forms 66% of Hammerson's share of contracted rents of the acquired portfolio) in Dublin and an adjacent development property, which would be 50-50 owned between Hammerson and Allianz in a new JV. The ownership shares in the two remaining shopping centres: Swords Pavilions (50% owned) and the Ilac Shopping Centre (50% owned) as well as a development property (100% owned) in central Dublin would be taken over by Hammerson. We do not expect any changes in ownership in these existing JVs as the partners, pension fund Irish Life and property fund IPUT, would be in line with Hammerson's current JV partners.
A transaction of this size and nature carries execution risks as the borrower may delay or dispute the transfer of ownership over the collateral. Hammerson aims to close the transaction through a consensual deal, which would be the fastest route. If no consensual agreement is made, the company will have to go through court proceedings, which would delay Hammerson's direct ownership and may add additional costs. Fitch acknowledges that Hammerson has some previous experience of a similar loan-to-ownership conversion in the UK involving an Irish borrower in the acquisition of the Whitgift shopping centre and furthermore notes that Hammerson collects 3.5% cash interest on the acquisition price of the loan portfolio in meantime, paid directly from rents through accounts controlled by the lender.
The deal will initially be financed through a EUR1bn (GBP0.74bn) bridge loan maturing in 18 months, later refinanced by proceeds from accelerated asset disposals (GBP500m) over the coming year and further capital market issuances. Disposals include GBP200m of assets already on the market or identified for sale and an additional GBP300m of assets expected to be sold in 2016. Fitch notes that investor appetite for retail assets remains high, supporting the company's disposal plans. Hammerson successfully completed the sale of GBP155m of assets during 1H2015 at prices slightly above book values.
The transaction implies an initial increased LTV, due to the initial 100% debt financing, the timing of disposals and financial nature of the acquired assets but management has publicly re-affirmed the company's commitment to a LTV below 40% and plans to deleverage through the asset disposals. We forecast ongoing portfolio recycling activity will be commensurate with the current rating guidelines as most acquisitions are funded by disposals. Positively, Fitch notes that Hammerson raised almost GBP400m in new equity in 2014 to finance past acquisitions and development capex.
Management expects 15% revisionary rent potential (i.e. a 3-4% rental growth per year) as retail sales are recovering in Ireland (+7% last 12 months), GDP growth is picking up (Fitch forecast 4.3% real growth for 2015 and 2.4% in 2016) and unemployment is falling. Fitch notes that comparable rents in central Dublin have started to pick up from levels significantly below the pre-crisis peak. Hammerson's management may be able to leverage existing client relationships to bring new tenants into the Irish shopping centres, providing some upside potential.
We note that existing leases in the Irish portfolio are above the Hammerson portfolio average of 8.1 years at end-1H15, effectively extending the overall lease length of the portfolio and that the Irish portfolio have limited vacancies, suggesting high demand for its retail space. The rent on the majority of leases is adjusted upwards only but newly signed leases can be adjusted in both directions in line with current Irish law, which is in contrast to most of Hammerson's portfolio.
The transaction includes development property that will require additional capital expenditure to develop. With Hammerson's current sizable committed capex in mind, we note that it will take at least two years before larger amounts of capital would be committed and thus not increasing near-term capex.