Results today from FTSE 100 real estate investment trust (REIT) Hammerson(LSE: HMSO) failed to ignite market enthusiasm. The shares are trading modestly lower at 475p as I'm writing.
There wasn't a lot wrong with the numbers. Net rental income of £370m, underlying earnings of 31.1p a share and a 25.5p dividend were all in excess of 6% ahead of the prior year, while EPRA net asset value (NAV) increased 5% to 776p a share.
Furthermore, the stock appears to offer good value. A rating of just over 15 times earnings isn't unreasonable, a dividend yield of 5.4% is juicy and a 39% discount to NAV screams 'bargain.' So why on earth would I sell the shares?
Intu the future
On 6 December, Hammerson announced it had agreed a £3.4bn all-share offer to acquire FTSE 250 firm Intu Properties. If shareholders of both companies give the deal the go-ahead, it would create, in the words of the directors, "a £21bn pan-European portfolio of high-quality retail and leisure destinations."
I wasn't impressed by the deal. Hammerson had been deliberately reducing its exposure to the UK in recent years, but combining with Intu would up it again significantly. Intu's debt would also weaken Hammerson's balance sheet. Operating cost savings would be relatively low with potential refinancing synergies being the primary attraction. To me, it smacks of late-stage bull market M&A activity.
I'm not alone in being sceptical. The shares have fallen over 10% since the deal was announced and Hammerson is now flirting with demotion from the FTSE 100 to the FTSE 250. As I don't see a compelling case for the deal but significant risk and organisational stress in executing it, I rate the stock a 'sell'.
I believe there's a lot to be said for owning smaller, nimbler companies in the REIT sector. One I'd be happy to buy is Town Centre Securities(LSE: TOWN), which also released results today. It's listed in the FTSE SmallCap index and has a market value of about £150m at a share price of 276p -- little changed on the day but down from 300p when I wrote about it last September.
Established in 1959 and still run by the founding family, this Leeds-based property investor and car park operator has delivered excellent returns for its shareholders with a predominantly regional approach, playing to the strengths of its local knowledge and expertise.
It's outperformed the FTSE All Share REIT index over any meaningful period you'd care to look at. For example, at the last reckoning, the compound annual growth rate of total shareholder returns over 25 years was 10.9%, compared with 8.3% for the index.
Today's half-year results showed NAV at the period-end of 375p a share, trailing 12-month earnings of 12.8p and dividends of 11.5p. The resulting valuation metrics -- a 26% discount to NAV, 21.6 times earnings and 4.2% dividend yield -- are not as attractive as Hammerson's on paper. However, I believe they're attractive in their own right and that the risk/reward trade-off is skewed positively in favour of the well-managed smaller REIT.
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G A Chester 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.