If you could buy a house for less than half its advertised price, would you do it?
You might be tempted. But I suspect that you’d stop and ask yourself why it was so cheap. Has the property been reduced for a quick sale? If so, why?
Today I want to look at a property stock that currently trades at a 67% discount to its book value, and offers a dividend yield of 11%.
This stock could be a bargain for brave buyers who can go against the trend. But the current share price could also be a sign that this business has shaky foundations.
An impressive history
The company concerned is FTSE 250-listed REIT Hammerson (LSE: HMSO). This real estate investment trust has been listed on the London market since 1954, making it one of the older stocks on the market today.
Hammerson’s flagship properties include London’s Brent Cross shopping centre and the Birmingham Bullring. Properties such as this – and many more – have provided attractive dividends for shareholders over the last 30 years, although the payout has been cut on a few occasions.
Bad timing
However, over the last few years, Hammerson has been caught on the wrong side of the retail property slump.
In 2018, the company’s rental income fell by 6.2% as tenants moved out or negotiated lower rents. The value of Hammerson’s property portfolio fell by 5.9% to £9,938m. Unfortunately, the trust wasn’t able to repay debt quickly enough to offset this decline, so its loan-to-value ratio rose from 40% to 43%.
In the first half of 2019, things got worse. Rental income fell by 12.3% to £156.6m, and the value of Hammerson’s property slid 4% to £9,542m. Its loan-to-value ratio rose again, to 46%.
Throughout this time, the company had held its generous dividend unchanged, even though chief executive David Atkins said his “absolute priority remains to reduce debt”.
Instead of cutting the dividend, Atkins has been selling property to repay debt. But an update on Friday suggests to me that this process is becoming quite desperate.
Ouch
Would you knock 22% off the price of your house for a quick sale? I suspect you’d only agree to this if you were desperate. But that’s exactly what Hammerson has done with its latest property disposal.
On Friday, the company said that it had sold seven retail parks across the UK for £400m. This represented “a discount to a June 2019 book value of 22.2%”. I can only see two ways to read this. One is that property prices for retail parks are really crashing hard. I suspect prices are falling, but I don’t think they’re falling as fast as that. The other explanation is that Hammerson is becoming a distressed seller, desperately flogging assets to raise cash. In this scenario, the sale price would make sense to me.
What next?
Hammerson hasn’t yet cut its dividend. But the company is due to issue its 2019 results on Tuesday and I believe investors should be prepared for a cut.
Even if the company doesn’t cut the payout this time, my analysis of the firm’s latest accounts suggests that the dividend is unaffordable and will eventually be chopped. In my view, Hammerson is a stock to avoid under its current management.
