Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

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November 8, 2022

Persimmon, Hammerson, Warehouse and Custodian (SN, HMSO, WHR, CREI)

Company news

Persimmon (PSN, 1,323p, £4,225m mkt cap)

UK number three housebuilder by volume, top by market cap. Trading update, 1 Jul – 7 Nov and capital allo.

Guidance: “We are well-positioned to deliver full year [Dec] completion numbers within our expected range of 14,500 – 15,000 homes. YE net cash, c. £700m, after total capital return of £750m paid in the year to date. However, it is too early for us to provide specific guidance for 2023 given the recent and rapid change in market conditions; our current expectation is for fewer legal completions than in 2022 and this together with a deterioration in average selling prices will have an impact on 2023 margins.

Trading: Ave net private reservations 0.60 per week (2021, 0.78); 0.48 in last six week. Forward sales, £0.77bn (£1.15bn); cancellation rate over past six week, 28%, from 21% in the preceding 12 weeks from 1 July. Higher selling prices [to date] have mitigated the impact of cost inflation of between 8% and 10%; ave selling price for private reservations in
past six week reduced by c. 2% compared with the 12 weeks commencing 1 July. Help-to-Buy has now closed for new applications, and was utilised on c. 20% of completions YTD.

Outlook: “Taking a highly selective approach to future land investment, and robustly control work in progress and costs, leaving the Group well placed to manage short term uncertainties and further strengthen our ability to capitalise on future opportunities. We anticipate our outlet numbers will remain broadly in line with the current position
throughout 2023”. Year-end (Dec) trading update, 12 January.

Capital allocation: “Reflecting the increased uncertainty in the political and macro-economic environment, alongside increased corporation tax and the residential property developer tax, the Board has decided to
conclude the previous capital return programme, which was introduced in 2012”. New policy: ensure sufficient capital is retained to continue disciplined and appropriately timed approach to land acquisition; low balance sheet risk, and a continued focus on achieving a superior return on capital; ordinary dividends will be set at a level that is well covered by post-tax profits; Any excess capital will be distributed to shareholders from time to time, through a share buyback or special dividend.

Building safety: Provision for remediation increased to £350m (from £69m at H1 22), reflecting “more detailed understanding of costs, which now include non-cladding fire related build defects, combined with the
broader scope required by Government, which has resulted both in an increase in the amount of work required and in the number of eligible buildings, and against a background of significant build cost inflation”.

Viewpoint: A more somber tone was adopted in the statement and conference call than in the recent Barratt and Bellway announcements (watch for Taylor Wimpey statement tomorrow; Redrow, Friday). Could this be because management needs to persuade shareholders of the need to curtail its then ground-breaking capital return programme, which has helped fuel the group’s share price outperformance over the past decade, but, alongside pay awards and questions over build quality, also attracted political and media ire? Under CEO Dean French, the group has managed to improve its public image and has substantially increased its building remediation provision, which should please new Housing Secretary, Michael Gove. Better to get most of the bad news out early; the conference call indicated the group’s enhanced focus on cash should provide lots of fire power to “capitalise on future opportunities” when the dust settles.

Hammerson (HMSO, 21p, £1,073m)

UK and European retail property group. Q3 update. Guidance: “FY 22 adjusted earnings to be not less than £100m”. Trading: YTD LFL gross rental income +11%; “net rental income continues to benefit from strong
leasing performance, improved collections and resulting lower bad debt charges. Earnings also benefited from lower administration and net finance costs, and a better than expected performance from Value Retail”. UK and Ireland footfall has continued to show an improving trend to currently c.90% of 2019 levels, with France at c.95%, consistently exceeding national indices. Sales continue to be above 2019 levels with UK Q3 sales +4%; France +3%; and Ireland +2%; footfall at Value Retail in Q3 was around 90% of 2019 levels, with brand sales
approaching 93%, while spend per visit is around 4% ahead of 2019. Leasing –Group occupancy at 95% including the Cergy extension; Q4 pipeline strong. Rent collection –Q3 rent collections to date, 93%; collection rates expected to continue to improve further by FY. Valuations – yields remained stable in aggregate at Q3 with only marginal adjustments to ERVs. Debt – No further Group unsecured debt maturities not covered by existing cash until 2025. £194m in disposals in H1; discussions are ongoing with a range of interested parties on a further c. £300m of non-core disposals; “we remain confident of completion of these disposals by the end of 2023 as previously guided”.

Warehouse REIT (WHR, 123p, £524m)

Specialist warehouse investor. HY (Sep) results. Gross property income +3.0%, £24.1m; IFRS EPS, -10.9p (H121, +20.4p); EPRA EPS -16%, 2.6p; div +3.2%, 3.2p; EPRA NAV, 153p (174p); LTV, 32.3% (25.1%). Outlook: “We remain confident that we own attractive and well-located assets and demand for our properties will withstand a downturn. The strong balance sheet and widely diversified occupier base also underpin our resilience. The portfolio continues to present opportunities to create value, including through targeted capital expenditure, and we therefore expect to make further progress with our strategy in the second half”.

Custodian REIT (CREI, 89p, £391m)

UK commercial real estate investment trust. Disposal of an industrial unit in Kilmarnock at auction for £1.4m at a 12% premium to its 30 June valuation. “The environmental credentials of the 18,424 sq ft warehouse and distribution unit no longer fit with the company’s ESG objectives and it was not considered practical to mitigate these risks. Having recently increased the lease term by 10 years it was considered the right time to sell and crystallise a valuation uplift”.

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