Final Results

 Thursday 9 March 2023  

HAMMERSON plc - FULL YEAR 2022 RESULTS

Another year of good progress

Rita-Rose Gagné, Chief Executive of Hammerson, said:

"Today, Hammerson is a better, more agile, and resilient business. Our results are evidence of another year of significant strategic, operational and financial progress, against a volatile macroeconomic and market backdrop.  We have focused on what we can control - sharper operations growing like-for-like gross rental income and reducing the cost base - delivering a significant increase in adjusted earnings.  Notwithstanding downward revaluations at the end of the year, we have maintained a stable balance sheet. 

In the last two years, we have simplified and focused the core portfolio on city centres, delivering £628m of gross proceeds, strengthened the balance sheet, recycled capital for investment in our core assets and developments, and have made rapid progress on the transformation of our operating model and platform, resulting in a significantly reduced and reducing cost structure.

We have enlivened and reinvigorated our assets by introducing new occupiers, uses and concepts. We are actively re-purposing our destinations, with an increased emphasis on commercialisation, marketing and placemaking, in turn creating exceptional spaces for our occupiers and customers. We have brought a sharper focus to our development pipeline to create value and optionality.

We have set ourselves more to do and continue to be focused on disciplined execution of our strategy. Looking forward, we have strong momentum and are well placed to deliver another year of robust adjusted earnings and cashflow in 2023 and anticipate a return to cash dividends."

Summary financial and operating performance

·    Adjusted earnings up 60% to £105m (2021: £66m) benefiting from:

−     Like-for-like GRI up 8% as occupiers pivot to best-in-class destinations; Like-for-like NRI up 29% year-on-year

−     Gross administration costs down 17%, with more to come in 2023 and 2024

−     Lower finance costs following deleveraging

−     A continued recovery in adjusted earnings at Value Retail (+£12m)

·    Adjusted earnings per share up 62% to 2.1p; basic loss per share of -3.3p (2021: -8.7p)

·    Group portfolio value of £5.1bn (2021: £5.4bn), down 5% due to revaluation deficit and disposals

−     Capital return for the year of -5.8% (2021: -7.7%) and a total return of -0.7% (2021: -3.9%)

·    IFRS loss of £164m (2021: £429m loss), largely due to a £282m revaluation deficit, of which 96% was in Q4

·    EPRA NTA per share 53p (2021: 64p), 7.5p impact from enhanced scrip dividend

Stable balance sheet

·    Net debt down 4% to £1,732m at 31 December 2022 (2021: £1,799m)

−     Headline LTV 39% (2021: 39%)

−     Fully proportionally consolidated (FPC) LTV 47% (2021: 46%)

−     Net debt to EBITDA of 10.4x (2021: 13.4x)

−     Ample liquidity of £1bn, including undrawn committed facilities and £0.3bn of cash

·    Completed £195m disposals in the year and re-affirming guidance of a further £300m disposals by December 2023

·    Value Retail successfully refinanced over £1bn of debt facilities in relation to La Vallée and Bicester

Strong operational trends

·    Footfall improved 11% points from January to December 2022, ending the year at 90% of 2019 levels; sales remained ahead of 2019 levels

·    Positive footfall and sales trends have continued into the first few months of the year

·    317 leasing deals concluded in 2022 (+2% excluding disposals), representing £45m of headline rent (£25m at our share) (+10% LFL)

−     Headline leasing 34% ahead of previous passing (2021: flat)

−     Net effective rent +2% vs ERV (2021: -11%)

−     Diverse mix: 43% best-in-class fashion; 21% to restaurant, food and social; balance to non-fashion and services

−     Average WAULT 9.5 years; 8.0 years WAULB

−     Strong leasing pipeline for 2023

·    Flagship occupancy +1% to 96% from half year; stable year-on-year

·    Rent collection normalising: 2022 now at 95%; Q1 2023 90%

·    Strong recovery in footfall and sales continues in Value Retail

Dividend

The payments of cash and enhanced scrip dividends approved by shareholders and made in 2022 have satisfied our REIT and SIIC distribution requirements for 2022.  The Board will therefore not be recommending a further payment in respect of 2022 but continues to anticipate re-instating a cash dividend for 2023, which will be at least the minimum required to continue to meet our REIT/SIIC distribution obligations.

Outlook

Near term

Whilst we remain very mindful of the uncertain macroeconomic outlook, we have a strong operational grip on the business and are targeting a further 20% reduction in gross administration costs by the end of 2024, and to complete the £500m disposal programme by the end of the year.  We have strong momentum and are well placed to deliver another year of robust underlying earnings and cashflow and anticipate a return to cash dividends during the year. 

Medium term

Best-in-class occupiers recognise the importance of city centre locations and the symbiotic nature of their physical and online channels, and we are working in partnership to deliver our proposition to this new reality.  This integrated experience is the Hammerson offering and will continue to attract the very best occupiers during the ongoing flight to quality.  We are well placed to benefit from these trends.  Rents and rates have been largely re-based, vacancy is tight, and we have long term certainty in our lease expiry, and attractive yields in our managed portfolio, that offer the potential to deliver attractive total returns.

Our unique development opportunities provide a distinctive opportunity to create further value by bringing a broader mix of uses to the existing estate through integral and complementary repurposing and development which will enhance the proposition of the whole estate.  Meanwhile, we will also create option value on stand-alone projects.   

We have a strong platform and over the medium term we see multiple opportunities to continue to unlock deep value.

Results presentation today:

Hammerson will hold an online presentation for analysts and investors to present its financial results for the year ended
31 December 2022, followed by a Q&A session.

Please join the call 5 minutes before the booked start time to allow the operator to transfer you into the call by the scheduled start time

The presentation and press release will be available on:
www.hammerson.com/investors/reports-results-presentations/2022-full-year-results on the morning of results.

Enquiries:

Disclaimer

Certain statements made in this document are forward looking and are based on current expectations concerning future events which are subject to a number of assumptions, risks and uncertainties. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Group's control and which could cause actual results to differ materially from any expected future events or results referred to or implied by these forward looking statements. Any forward looking statements made are based on the knowledge and information available to Directors on the date of publication of this announcement. Unless otherwise required by applicable laws, regulations or accounting standards, the Group does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information, future developments or otherwise. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward looking statement. Nothing in this announcement should be regarded as a profit estimate or forecast.

This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to subscribe for or purchase any shares or other securities in the Company or any of its group members, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company or any of its group members. Statements in this announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this announcement shall be governed by English law. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

Index to key data

Unless otherwise stated, figures have been prepared on a proportionally consolidated basis, excluding premium outlets as outlined in the presentation of information section of the Financial Review.

†        2021 income statement figures have been restated to reflect the IFRIC Decision on Concessions and balance sheet figures have been restated to reflect the IFRIC Decision on Deposits with further information on both IFRIC decisions set out in note 1B to the financial information.

a       These results include discussion of alternative performance measures (APMs) which include those described as Adjusted, EPRA and Headline as well as constant currency (where current period exchange rates are applied to the prior period's results). Adjusted, EPRA and Headline measures are described in note 1B to the financial information and reconciliations for earnings and net assets measures to their IFRS equivalents are set out in note 10 to the financial information.

b       Adjusted earnings per share and basic loss per share for 2021 have been restated to reflect the bonus element of scrip dividends as set out in note 11 to the financial information.

c        Proportionally consolidated - basis as set out in notes 1C and 3 to the financial information.

Chief Executive's STATEMENT

We have delivered another strong year of strategic, operational and financial progress against a challenging economic backdrop. At the beginning of 2022, we could not have foreseen the extent of the volatility of the economic and political environment that unfolded driven by geopolitical events in Ukraine, China's zero covid policy, and political change in the UK.

We do not yet know the full impact of the cost of living crisis, a period of higher inflation and interest rates, and continued supply chain disruption. Moreover, this year highlighted the value of sustainable sources of energy. Our commitment to ESG and Net Zero remains absolute, and we finished the year with fully costed Net Zero Asset Plans for every flagship asset in the managed portfolio.

We set out a clear strategy in June 2021 and our performance in 2022 underscores our belief that we are strongly positioned to deliver attractive total returns over the medium term. Over the last two years, the new management team and I have focused on two key objectives:

·    Simplifying the business to stabilise the core income stream and to return it to underlying growth, reflected in like-for like GRI growing in 2022 by 8%

·    Starting to rebuild value in our existing portfolio whilst at the same time creating optionality on how we unlock the deep development value in our portfolio

We will continue to be disciplined allocators of capital and select the best returns for shareholders, mindful of our own cost of capital and all options for capital deployment including debt retirement, and distributions for shareholders.

Despite this uncertain and volatile backdrop, we have been disciplined in the execution against these objectives focusing on what we can control. Our operational and financial performance is proof positive that our strategy is working:

·    We are enlivening and reinvigorating our assets by introducing new occupiers, uses and concepts. In recognition of the importance of placemaking, we attracted a senior leader in a newly-created role who has already brought an increased emphasis on commercialisation, marketing, and advertising to create exceptional spaces for our customers and occupiers. We are actively repurposing our destinations and creating a sense of place that brings people and experiences together

·    We signed 317 leases representing £45m of headline rent (£25m at our share) demonstrating the attractiveness of our destinations and the continued flight to quality by occupiers

·    We have re-aligned the organisation to be asset-centric, more agile and focused on occupiers and customers. The rapid progress on the re-set of our operational model delivered a 17% reduction in gross administration costs. We have already taken steps that will deliver further efficiency gains in 2023 and 2024

·    We have continued to strategically refocus the portfolio on city centre destinations and to simplify our portfolio, disposing of £628m of non-core assets since the start of 2021

·    Our resulting financial position is stable, with net debt down 4% to £1,732m, headline LTV 39% and fully proportionally consolidated LTV 47%. Our net debt to EBITDA improved to 10.4x from 13.4x in 2021. We have ample liquidity in cash and undrawn committed facilities of c.£1bn

·    Underpinning all this progress, we are evolving to a sustainable high-performance culture, with increased focus on training and talent development

FINANCIAL AND OPERATIONAL REVIEW

Adjusted earnings were up 60% to £105m reflecting a strong operating performance across the board.

Like-for-like GRI increased 8% following two strong years of leasing performance and reduced vacancy resulting, in some leasing tension returning in our destinations.  Significant improvements in collections performance, and the growth in GRI resulted in like-for-like NRI improving 29% year-on-year.

In 2021 we committed to reduce our gross administration costs by 15-20% by 2023 which we have already delivered with a 17% reduction year-on-year.  There are more efficiencies to come from the digitalisation of our business.

Deleveraging remains an important priority and in 2022, we generated gross proceeds of £195m from the disposal of non-core assets, resulting in reduced finance costs. There was, however, a lack of liquidity in investment markets in the second half of the year.  We have refinanced RCFs and redeemed the remaining 2023 eurobonds.

Our financial position is stable. Net debt was £67m lower, reflecting disposals completed during the year. Headline LTV was unchanged at 39%, while fully proportionally consolidated LTV, including the Group's proportionate share of Value Retail debt was 47% (2021: 46%). Net debt to EBITDA was 10.4x down from 13.4x in 2021, reflecting both lower debt and the improved earnings performance.

EPRA NTA was £2,634m at 31 December 2022 (2021: £2,840m), a decline of 7% year-on-year, predominantly due to the impact of market-wide yield expansion and ERV decline on property valuations, reflecting higher base interest rates in the second half.

Overall, the Group recorded an IFRS loss of £164m (2021: £429m loss), largely due to a £282m revaluation deficit, of which 96% was in Q4.

Sales and footfall

The quality of our destinations and our stronger asset-centric focus means that the footfall and sales in our destinations continue to exceed national averages. 

During 2022 we saw a sustained recovery in footfall and sales performance. Footfall for the whole of 2022 was 39% up year-on-year (UK+41%, France +36% and Ireland +35%), and finished the year at around 90% of 2019 levels. Footfall recovered steadily throughout the year with the Group seeing an 11% point improvement between January and December. On the ground activity remains robust with strong footfall, sales and leasing trends continuing into the first few months of 2023.

Sales recovered strongly as consumers are shopping less frequently but visiting our destinations with more purpose, also avoiding increasingly expensive delivery and return costs charged by online retailers. The improvement in store like-for-like performance also illustrates fewer better performing retailers reflective of our shift away from reliance on legacy fashion to a broader mix of best-in-class retail, food and social, services and leisure. Overall, like-for-like turnover rents for 2022 were up 111% year-on-year, total like-for-like sales were up double digit year-on-year, and +3% vs. 2019.

Occupancy

Our core portfolio is well positioned to benefit from the increasing polarisation in the market and the flight to quality. Vacancy levels remain low across our assets with the UK and France at 4% and Ireland at only 2%. We are beginning to see leasing tension return in the core portfolio. Having some vacant space allows us to trial new concepts as well as initiate our longer-term strategic plans to make our destinations more relevant to evolving customer behaviour and spend.

Collections

Rent collections, both in terms of overall proportion collected and pace after the due date have continued to improve as trading normalised post the pandemic. As at February 2023, 2022 Group collections were 95%, with the UK and Ireland largely back to pre- pandemic norms and France slightly behind. For Q1 2023, Group rent collections were 90%. This compares with 90% for 2021 and 83% for Q1 2022 at this time last year.

Value Retail

Value Retail saw the performance of the Villages recover close to pre-pandemic levels. Brand sales increased by 34% year-on-year and were only 5% lower than 2019 levels. Footfall across the Villages was resilient; down only 9% on 2019. Spend per visit increased by 5% on 2019 following improved digital marketing of domestic high net worth customers. Value Retail expects to benefit from the return of the international traveller in 2023. These trends continue into 2023.

Overall, Value Retail signed 332 leases during the year, showcasing the attractiveness of the premium outlet sector. Occupancy for the year was at 94%. There have been 96 new openings in 2022; Dolce & Gabbana opened their fifth Value Retail store in Las Rozas, Christian Louboutin opened a new store at La Vallée and Cecconi's opened at Bicester.

The Group's share of adjusted earnings were £27.4m, up 72% on 2021. GRI has increased due to the recovery of turnover rents from 12 months of full trading. At 31 December 2022, the Group's interest in Value Retail's property portfolio was c.£1.9bn and the net assets were £1.2bn; the difference is principally due to £0.7bn of net debt within the Villages which is non-recourse to the Group. Value Retail also successfully refinanced over £1bn of debt facilities principally in relation to La Vallée and Bicester. The average LTV across the Villages is 36%.

OUTLOOK

Near term

Whilst we remain very mindful of the uncertain macroeconomic outlook, we have a strong operational grip on the business and are targeting a further 20% reduction in gross administration costs by the end of 2024, and to complete the £500m disposal programme by the end of the year.  We have strong momentum and are well placed to deliver another year of robust underlying earnings and cashflow and anticipate a return to cash dividends during the year. 

Medium term

Best-in-class occupiers recognise the importance of city centre locations and the symbiotic nature of their physical and online channels, and we are working in partnership to deliver our proposition to this new reality.  This integrated experience is the Hammerson offering and will continue to attract the very best occupiers during the ongoing flight to quality.  We are well placed to benefit from these trends.  Rents and rates have been largely re-based, vacancy is tight, and we have long term certainty in our lease expiry, and attractive yields in our managed portfolio, that offer the potential to deliver attractive total returns.

Our unique development opportunities provide a distinctive opportunity to create further value by bringing a broader mix of uses to the existing estate through integral and complementary repurposing and development which will enhance the proposition of the whole estate.  Meanwhile, we will also create option value on stand-alone projects.   

We have a strong platform and over the medium term we see multiple opportunities to continue to unlock deep value.

STRATEGIC AND BUSINESS REVIEW

We own city centre flagship destinations and adjacent land around which we can reshape entire neighbourhoods. Our strategy recognises the unique position that we have in our urban locations and the opportunities to leverage our experience and capabilities to create and manage exceptional city centre destinations that realise value for all our stakeholders, connects our communities and delivers a positive impact for generations to come.

Our aim is simple and clear - to chart a path to growth that delivers total returns for shareholders through consistent execution against our strategic goals:

·    Reinvigorate our assets

·    Accelerate development

·    Create an agile platform

·    Deliver a sustainable and resilient capital structure

Underpinning our strategy is our commitment to ESG. We refreshed our strategy in the first half of 2022 to demonstrate our commitment to Net Zero by 2030 to deliver benefits to our stakeholders, including comprehensive asset by asset plans to achieve our commitments.

We have made significant progress towards all our goals as follows:

Reinvigorate our assets

The quality and location of our assets is a key source of competitive advantage for Hammerson. We have some of the best assets in the very best prime city centre catchments and transportation hubs, and, due to the strong ties we have in the communities in which we operate, supportive local authorities.

There are both near and medium term opportunities to grow income through the repositioning of our assets. For example we see opportunities to repurpose department stores for both retail, experience and multi-use such as residential or office use which will in turn benefit the whole destination. Under-utilised space can also be repurposed for alternative uses with new income streams such as creating new and engaging spaces, with a greater focus on placemaking and a fresh approach to marketing and reach into social media channels, and attracting new occupiers and services. Our city centre locations are also attractive focal points for click and collect and last mile logistics.

In 2022, it was important to build on the momentum from the strong performance in 2021 and it was gratifying to see the strategy in action with 317 leases signed in 2022, 2% more than 2021 excluding disposals. In value terms, we secured £45m by value (£25m at our share) up 10% on a like-for-like basis and our strongest leasing performance since 2018.

For principal deals, headline rent was 34% above previous passing rent, equating to additional passing rent of £5.5m. Net effective rent deals were 2% above ERV.

We continue to pursue a leasing policy to diversify our mix, with non-fashion and services accounting for 32%, and restaurant, food and social 21%. Best-in-class and exciting new concepts in fashion remains core to our offer and demanded by customers, accounting for the balance, a high proportion of which were renewals including new concepts and experiences.

Short-term leasing of less than one year (2022: 74 deals) remains important to maintain vibrancy, trial new concepts, mitigate annual void costs of c.£2m, and allow time to secure longer term deals with the best occupier for a given unit.

Placemaking not only continues to enliven space and enhance the experience for customers and occupiers, but also contributes meaningfully in its own right. Our resulting commercialisation income is up 13% on a like-for-like basis. Indeed, as we look forward to an occupational market with a greater technological and social media integration in our spaces, we are moving from a stage of stabilisation and initial reinvigoration of the assets to one where the focus switches to a greater emphasis on experience, more focused and sophisticated marketing and advertising, and completing our planned repurposing.

We have continued to engage with major occupiers at a portfolio level, resetting and growing key relationships with those we see as key for the future of our destinations. For example:

·    We have regeared four Apple stores across the portfolio, bringing in new concepts, with a further two under discussion

·    We have secured new deals, renewals and expansions with Inditex and H&M, and key upsizes with JD Sports

·    We have signed two new Nike concepts into Bullring (Rise) and Dundrum (Live)

·    We have secured renewals with key footfall and income drivers such as Indigo and Monoprix in Les Terrasses du Port

·    We continue to bring other new occupiers and the newest concepts into the portfolio, such as Lane 7 bowling at Bullring, Reserved at Brent Cross, the first Watches of Switzerland in Ireland at Dundrum, and VR Sandbox on the Birmingham Estate, driving vibrancy, footfall and new revenue streams.

At the same time, we incubated digitally native brands into white-boxed and permanent units across the portfolio, including further openings for Gym & Coffee in Ireland, La Coque Française in our Colab project in France, and Kick Game taking permanent space at Bullring.

Commercialisation and placemaking often go hand in hand boosting footfall and revenues for occupiers, and enhancing the customer experience. It is worth highlighting in particular:

·    Pop-ups across the portfolio with key brands from diverse sub-sectors including: Barclays, Costa, Polestar, Dyson and Armani

·    The Commonwealth Games with events and pop-ups across the Birmingham Estate which attracted an estimated television audience in the hundreds of millions and footfall over the 11 weeks of the games of 1.8m

·    Our supercar weekend in Dundrum attracting more than 30% additional footfall

·    Les Cabanons des Terrasses during the summer in Marseille

·    Our usual stellar roster of seasonal outdoor bars and restaurants

We shifted our approach to marketing, switching agencies and using our spend in a more focused and higher-returning manner, generating a significant improvement in impressions and engagement from our customers, specifically:

·    A greater focus on digital marketing over traditional channels (75% of spend in Q4), including trials with TikTok and Snap Chat for the first time

·    Shifting our marketing away from general brand awareness to leveraging our data to target more catchment specific marketing

·    Bringing awareness of the local offer at our assets

·    Working with local influencers and celebrities to build and enhance our brand equity

In terms of the repurposing of department stores, we successfully completed the repurposing of the former House of Fraser unit in Dundrum to Brown Thomas and Penneys, with the backfill of the latter affording the opportunity to bring Dunnes Stores into Dundrum for the first time. In the UK, we have completed the feasibility studies and submitted a planning application for a major repurposing of former retail space, predominantly department store, at New Street Station, Birmingham, to create an amenity rich workspace-led proposal, 'Drum', directly served by the UK's most connected rail station.

At Bullring, work continues on the repurposing of the former Debenhams unit and we are excited to hand over to our new occupiers - TOCA Social and Marks & Spencer - later this year. Moreover, this project kickstarted the regeneration of this end of the scheme and underpinned a flurry of leasing demand in 2022.

In Reading, we have worked with the local council to submit a planning application for the major regeneration of the eastern quarter of The Oracle; to demolish obsolete department store space and develop around 450 rental apartments alongside renewed landscaping and commercial uses. At the same time, this will densify the core retail, restaurant, food and social pitch along the riverside into our existing scheme.

In France, we completed the 34,000m² extension in Les 3 Fontaines, with new units for a selection of major international brands including Lego, Lacoste, Rituals, Inditex and H&M. As part of the broader repositioning of the asset, we brought in a florist, bakery and improved restaurant and food options to the adjacent Rue des Galeries, elevating the tone of this important thoroughfare into our asset. We continue to investigate the potential to complete a final phase of the redevelopment and bring in a major new retail offer.

Finally in Dundrum, we have brought in alternative uses with the construction of The Ironworks, a 122 unit residential development, the first of its kind on the Dundrum Estate and a major proof of concept for the future of the wider Dundrum Estate.

Environmental, Social and Governance

To acknowledge the breadth of the sustainability agenda, we have realigned our strategy to Environmental, Social and Governance. In terms of the Environmental, our commitment to Net Zero by 2030 is absolute, and we achieved an 12% reduction in like-for-like emissions in 2022. During the year we invested in an independent assessment of our assets to align to the Paris agreement. We developed detailed asset-level plans with a clearly defined pathway to Net Zero, with an interim stage at 2025, aligned with the targets for our sustainability-linked bond issued in 2021.

These plans are fully costed as part of the Group's annual business planning process, with total expenditure over the period to 2028 of under £40m on the current asset base. During 2022 we also delivered a range of projects from EV charging, upgraded lighting and property management systems to PV arrays on our assets.

To match our asset-centric operating model, we revised our approach to Social with a new Board-approved strategy that determined that all social value activities would deliver for our local communities, acknowledging that each community in which we operate and support has diverse and specific needs. During the year, the Group provided assistance to colleagues in response to the emerging cost of living crisis. A salary supplement was awarded to all colleagues on annual salaries of less than £/€60,000. The Group has also made differentiated pay awards in March 2023 benefitting those in lower salary bands. As well as realising savings, the move of the head office to Marble Arch House aligned with a refresh of the Group's values and approach to ways of working, which was well received by colleagues.

In terms of Governance, we revised our structures with the ambition to operate in a more diligent way, with all elements of ESG embedded across the business. A central part of this is recognition that Diversity, Equality and Inclusion is far more than a box ticking exercise, but rather encourages ways of working that foster better decision-making processes through inclusion and open dialogue. Valuing this, it is pleasing to report that our senior- management sponsored Affinity Groups continue to attract broad engagement across the Group. We recognise that evolving and improving our Governance structures will remain a focus for Hammerson.

Accelerate development

Our strategy is to accelerate the development of the land and opportunities we own in the centre of some of Europe's highest growth and most exciting cities, particularly in and around London, Birmingham, Bristol and Dublin.

Over the last 12 months, we have further segmented our development opportunities between those that are integral to our existing assets such as department store repurposing; those that are complementary to our existing destinations and the development of which will benefit the whole estate; and those that stand-alone.

Our immediate focus has been on progressing our integral opportunities such as The Ironworks in Dundrum and Grand Central repurposing in Birmingham. In addition, we have a broad pipeline of complementary opportunities, which are projects adjacent or in close proximity to our existing assets and which have potential to increase our scale and critical mass and unlock development returns, as well as further halo and diversification effect on the retained estate.

Finally, we own valuable development opportunities in key cities that are stand-alone from our current estates, but which have the strength of location and potential scale to create critical mass and returns of their own. In the near term we remain focused on capital light initiatives to unlock value and generate optionality to take developments forward, to potentially bring in relevant partners with sectoral expertise or aligned capital, or to seek liquidity and focus on those projects with the highest returns and impact on our retained estate.

At Dublin Central, we have received further planning consents, which endorse our proposals to regenerate this important site and have begun discussions with potential operators and occupiers as part of plans to commence the first phases of development. We have also continued to work with Transport for Ireland to integrate a new metro station within the site.

At Martineau Galleries, part of the wider Birmingham Estate, we have continued to work with Birmingham City Council and the West Midlands Combined Authority to finalise details for the scheme and prepare for the first phases of demolition and development adjacent to the new Curzon Street HS2 station and the new tram connections.

At Brent Cross, we are working with the London Borough of Barnet to develop a holistic brief for long term regeneration, which includes in the short term reactivating the surrounding land for complementary uses that support the asset and local customer and will integrate with local infrastructure and the development of Brent Cross Town.

In Dundrum Phase II, we have submitted a planning application for nearly 900 residential apartments alongside other new town centre uses and transport connections.

In Bristol, we have been engaged with the City Council as they develop their post-Covid city centre development strategy and we have started to explore the potential uses and phasing of development on our land holdings, potentially to include residential, student, office and life science uses alongside additional customer facing city centre uses.

Turning to our stand-alone projects, in the UK we signed the s106 agreement for Bishopsgate Goodsyard, which has allowed us to commence the next stages of design, enabling and marketing for this development working with our partner Ballymore to set up the project management and delivery. In Leeds we are progressing the master planning process for our remaining c.10 acres of land and considering our next steps.

Create an agile platform

Improving and right sizing our platform, and creating more agile, responsive and efficient ways of working remains a priority. We took early action in 2021 and in the first half of 2022, shifting from a top-heavy, geographically oriented and siloed organisation to a simplified, asset-centric operating model. As a result, we achieved a 17% year-on-year reduction in gross administration costs in 2022, achieving our initial target of a 15-20% reduction by 2023.

We have taken further steps including more efficient ways of working, increasing speed of leasing, collections and prompt payments to our suppliers, and the consolidation of our property management suppliers in the UK, which formally started in February 2023. At the same time, we continue to implement more integrated, connected, and automated systems to drive further efficiency.

Necessarily, the actions we have taken over the last two years have resulted in a reduction of headcount, down 42% since 2019, and 25% year-on-year. We have not been immune to the challenges of navigating hybrid working, the 'Great Resign' and pressures from an increase in cost of living, and indeed we saw higher voluntary colleague turnover during the year.  We continue to invest in and promote key talent for the future, however, most notably this year in leasing, asset management, ESG and placemaking and marketing. Overall, we are targeting a further 20% reduction in gross administration costs by the end of 2024.

We have also made some progress in simplifying our asset structures. For example, we were delighted to expand our partnership in Birmingham with CPPIB, forming a new 50/50 joint venture at Bullring in the second half of the year, following their acquisition of Nuveen's one third stake.  There is more to do.

Deliver a sustainable and resilient capital structure

We have continued to re-align our portfolio through a disciplined programme of disposals of non-core assets, re-focusing the Group on a core portfolio of prime city centre estates, reducing indebtedness and generating capital for redeployment into core assets and developments.

Generating total gross proceeds of £195m, we completed the sale of Victoria for £120m and our 50% share of Silverburn for £70m, plus other non-core land. Net debt reduced by 4% to £1.7bn. The Group remains committed to total disposal proceeds of c.£500m over 2022 and 2023. Our track record of executing £628m of sales in the last two years in challenging conditions and the attractiveness of our assets gives us confidence we will deliver this target.

We refinanced £820m of expiring RCFs in late April into a new £463m facility on a 3+1+1 maturity with a smaller group of banks reducing cost. In December, we redeemed the remaining €236m of the 2023 eurobond at par.

In addition, we completed the triennial review of the defined benefit pension plan and moved to a full buy-in basis completed on 9 December 2022 with £nil contribution from the Company, a £2m surplus, and the reduction of the £120m Hammerson plc guarantee to £10m.

We remain committed to an IG credit rating. I am pleased to report that Fitch reaffirmed our rating and revised our outlook to stable in May, as did Moody's also with a stable outlook in December.

At 31 December 2022, the Group had liquidity of £1.0bn in the form of cash balances (£0.3bn) and undrawn committed RCFs of £0.7bn, and had no significant unsecured refinancing requirements until 2025 not covered by existing cash.

CONCLUSION

As evidenced above, a significant amount of change has taken place over the last two years, but there is more to do. Delivering that change whilst progressing our strategic, operational and financial KPIs against a challenging backdrop is a testament to the strength of the management team, the Board and the support of all our stakeholders. I am sincerely grateful.

In early January, we moved to a new head office in Marble Arch, marking a reset. It is a more efficient and collaborative space, and more reflective of who we are today. We are well positioned to continue to deliver another year of progress, and more agile to tackle challenges and capture opportunities that times like these offer.

FINANCIAL REVIEW

OVERVIEW

Over the last two years, the Group has made significant financial progress in re-basing its gross rental income, reducing costs and in strengthening the balance sheet.

IFRS reported losses decreased to £164m compared with a loss of £429m in 2021, predominantly due to the impact of market-wide yield and ERV expansion on property valuations, reflecting higher base interest rates in the second half.

Adjusted earnings for the year ended 31 December 2022 increased by 60% to £105m as a result of improved performance across the business.  On a like-for-like basis, gross rental income increased by 8% and like-for-like net rental income improved by 29%.  Our gross administration costs reduced 17% year-on-year with more efficiencies to come from continuing to refine our operating model and from automation and digitalisation.  We also reduced finance costs as a result of the continued deleveraging of the balance sheet, and we saw an improved recovery from Value Retail.

EPRA NTA was £2,634m at 31 December 2022, a decline of 7% year-on-year (2021: £2,840m), and EPRA NTA per share was 53p (2021:64p).

Net debt reduced by 4% to £1,732m at 31 December 2022 (2021: £1,799m) benefitting from £166m of cash generated from operations and gross disposal proceeds of £195m bringing total disposals since the beginning of 2021 to £628m. These were partially offset by capital expenditure of £76m and adverse foreign exchange movements of £131m.

Headline LTV was 39% and LTV on a fully proportional consolidation basis was 47%.  Our net debt: EBITDA improved to 10.4x from 13.4x in 2021.  The Group has ample liquidity in cash and undrawn committed facilities of c. £1bn.

During the year, Moody's and Fitch's senior unsecured investment grade credit ratings were re-affirmed as Baa3 and BBB+, respectively and outlooks from both rating agencies were changed from negative to stable reflecting the significant improvements in the business, debt reduction and the recovery from the Covid-19 pandemic. 

PRESENTATION OF FINANCIAL INFORMATION

The Group's property portfolio comprises properties that are either wholly owned or co-owned with third parties. 

Whilst the Group prepares its financial statements under IFRS (the 'Reported Group'), the Group evaluates the performance of its portfolio for internal management reporting by aggregating its wholly owned businesses together with its share of joint ventures and associates which are under the Group's management ('Share of Property interests') on a proportionally consolidated basis, line by line, including, where applicable, discontinued operations (in total described as the Group's 'Managed portfolio').

Both the IFRS and Management reporting bases are presented in the financial statements.

The Group's investment in Value Retail is not proportionally consolidated because it is not under the Group's management, is independently financed and has differing operating metrics to the Group's managed portfolio. Accordingly, it is accounted for separately as share of results of associates as reported under IFRS and is also excluded from the Group's proportionally consolidated key metrics such as net debt or like-for-like net rental income growth.

However, for certain of the Group's Alternative Performance Measures (APMs), for enhanced transparency, we do disclose metrics combining both the managed portfolio and Value Retail. These include property valuations and returns and certain credit metrics.

Following the full impairment of our share in the Highcross joint venture as at 31 December 2021, the Group has ceased to recognise the results of this joint venture in the income statement, however, the Group's share of its assets and liabilities continue to be incorporated in note 13 to the financial information. Since the year end, it was agreed that it was in the best interests of the lenders in the longer term to appoint a receiver to administer the asset for the benefit of the creditors. Accordingly, owing to control being in the hands of the receiver, going forward, Highcross will cease to be incorporated into the Group's financial statements.

Management reporting and IFRS accounting treatment

* Only applicable for 2021, whereby proportionally consolidated figures include results up to the date of disposal.

New accounting pronouncements resulting in restatements of 2021

During the year, the following agenda decisions were issued which have been considered as follows:

•     In April 2022, the IFRIC issued an agenda decision in respect of the presentation of 'Demand deposits with restrictions on use arising from a contract with a third party' ('the IFRIC Decision on Deposits') with further information provided in note 1B to the financial information.  The impact is to change the classification of certain amounts held by third party managing agents in respect of tenant deposits and service charges such that they have been reclassified from restricted monetary assets to cash and cash equivalents.  The effects of the restatement are set out in note 16 to the financial information.

•     In October 2022, the IFRIC issued an agenda decision in respect of 'Lessor forgiveness of lease payments (IFRS 9 and IFRS 16)' (the 'IFRIC Decision on Concessions'). This concluded that the losses incurred on granting retrospective rent concessions should be charged to the income statement on the date that the legal rights to income are conceded (i.e. immediate recognition in full).  Historically, the Group's treatment of such concessions, which arose as a result of the Covid-19 pandemic, was to recognise these as lease modifications such that the impact was initially held on the balance sheet and then spread forward into the income statement over the lease term or period to first break.  The impact is that 2021 figures have been restated whereby Reported Group revenue, gross rental income, net rental income and revaluation losses are affected although operating profit and income statement figures below are unaffected. The equivalent Adjusted figures are also affected including those down to Adjusted earnings. A more detailed analysis of the effects is set out in note 6 to the financial information.

Where figures in this Financial Review have been restated, these are marked †.

Alternative Performance Measures (APMs)

The Group uses a number of APMs, being financial measures not specified under IFRS, to monitor the performance of the business. Many of these measures are based on the EPRA Best Practice Recommendations (BPR) reporting framework which aims to improve the transparency, comparability and relevance of the published results of listed European real estate companies. Details on the EPRA BPR can be found on www.epra.com and the Group's key EPRA metrics are shown in Table 1 of the Additional information.

We present the Group's results on an IFRS basis but also on an EPRA, Headline and Adjusted basis as explained in note 1B to the financial information.  The Adjusted basis enables us to monitor the underlying operations of the business on a proportionally consolidated basis as described in the basis of preparation and excludes capital and non-recurring items such as revaluation movements, gains or losses on the disposal of properties or investments, as well as other items which the Directors and management do not consider to be part of the day-to-day operations of the business.  Such excluded items are in the main reflective of those excluded for EPRA earnings, but additionally exclude certain cash and non-cash items which we believe are not reflective of the normal routine operating activities of the Group.  We believe that disclosing such non-IFRS measures enables evaluation of the impact of such items on results to facilitate a fuller understanding of performance from period to period. These items, together with EPRA and Headline adjustments are set out in more detail in note 10A to the financial information.

For 2022, adjusting items additional to EPRA adjusting items comprised:

•     Exclusion of a charge of £5.1m (2021: £8.6m) in respect of business transformation as the Group continues its implementation of strategic change and comprises mainly non-capitalisable costs associated with digital transformation as well as severance costs following the reorganisation which occurred mainly in the second half of 2021.

•     A credit of £2.4m (2021: credit of £8.1m) for expected credit losses charged to the income statement but where the related income is deferred on the balance sheet such that the exclusion of this removes the distortive mismatch this causes.

•     Income of £1.6m from assets held for sale which relates to the Group's 50% joint venture investment in Silverburn, sold in March 2022.  The IFRS and EPRA accounting treatment is to offset the operating income until disposal against the loss on sale, therefore it is excluded from Adjusted earnings.  As a result we have added the income back in order to reflect the fact that the property remained under the Group's joint ownership and management up until completion of the disposal and is considered to still be part of underlying earnings.

INCOME STATEMENT

Summary income statement

Reported Group

The Group's IFRS reported loss was £164.2m (2021: £429.1m loss). The most significant elements of the reduction were reduced valuation losses of £82.7m (2021: £169.6m), where the key factors influencing this were the market driven yield shift in the second half of the year of £68m, a reduction in the share of losses in joint ventures to £41.5m (2021: losses of £171.3m) where again a reduced valuation deficit of £138.3m (2021: £274.5m) was a key contributor and an adverse swing in the Group's share of Value Retail of £25.3m again driven by valuation losses.

Proportionally consolidated

The Group evaluates the performance of its portfolio for internal management reporting by aggregating its wholly owned businesses together with its share of joint ventures and associates which are under the Group's management ('Share of Property interests') on a proportionally consolidated basis, line by line, including, where applicable, discontinued operations. A detailed reconciliation from Reported Group to the proportionally consolidated basis is set out in note 2 to the financial information and a summary reconciling to Adjusted earnings is set out below:

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6 to the financial information.

a    Proportionally consolidated figures are set out in more detail in note 2 and adjustments are described in more detail in note 10A to the financial information.

b    In addition to the IFRIC Decision on Concessions, comparative figures for 2021 have also been restated to take account of the bonus element of scrip dividends as explained further in note 11B to the financial information. Previously reported figures were: Reported Group: (9.8)p; Adjusted: 1.8p.

The table below bridges Adjusted earnings between the two periods.

Reconciliation of movements in Adjusted earnings*

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6 to the financial information.

*    Decreases and increases are all on an Adjusted basis and therefore exclude adjusting items as set out in note 10A to the financial information.

Rental income

Analysis of rental income

GRI and NRI for the Group are analysed below to break out Share of Property interests.

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6 to the financial information.

Gross Rental Income (GRI)

GRI decreased to £215.2m from £250.4m, reflecting the impact of disposals and lower surrender premiums than in 2021. These were partly offset by increased turnover and car park income, lower concessions and income from completion of the extension at Les 3 Fontaines.

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6 to the financial information.

*     Like-for-like GRI for the managed portfolio is calculated based on properties owned throughout both current and prior periods, calculated on a constant currency basis such that the comparatives have been restated accordingly.

Net Rental Income (NRI)

NRI decreased to £177.2m from £182.5m. Adjusted NRI was broadly unchanged at £174.8m (2021: £174.4m). In addition to the GRI movements highlighted above, NRI benefited from a significant improvement in collections enabling release of provisions for bad debts and tenant incentive impairments together with growth in variable income streams. This resulted in an improvement of the Adjusted NRI:GRI (after ground rents payable) ratio to 81.2% (2021: 69.6%).   

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6 to the financial information.

a    Like-for-like NRI for the managed portfolio is calculated based on properties owned throughout both current and prior periods, calculated on a constant currency basis such that the comparatives have been restated accordingly.

b    Relates to the change in provision for amounts not yet recognised in the income statement for expected credit losses whereby the related income is deferred on the balance sheet. The amount has been excluded from Adjusted net rental income to eradicate the distortion of cost being recognised in one accounting period and the related revenue being recognised in a different accounting period as further described in note 10A to the financial information. 

Like-for-like NRI increased by £31.7m (29%) against 2021 reflecting strong leasing performance, improved collections, increased variable turnover rent and net income from car parks and commercialisation.

The drivers of the like-for-like increase were consistent across all of the Group's geographies, offset by the loss of NRI from disposals in the UK in 2021 and 2022 being £20.3m of which £10.5m came from the sale of Victoria and Silverburn in the first half of 2022 and £8.4m from the 2021 sale of UK retail parks.

Further analysis of net rental income by segment is provided in Table 6 of the Additional information.

Administration expenses

During 2022, Adjusted net administration expenses decreased by £8.6m against 2021 reflecting the Group's continuing focus on cost reduction and principally relates to:

•     Employee costs following the reset of the organisation to an asset-centric structure which occurred in the second half of 2021. Average headcount during the year reduced from 494 to 370 with headcount at 31 December 2022 being 320.

•     Other corporate costs (comprising mainly professional fees, office rent and software licenses), where the most significant element was a decrease of £2.7m in Directors and Officers insurance premiums reflecting the strengthening of the Group's financial position. The remainder of the decrease was predominantly in professional fees.

Business transformation costs comprised mainly fees for contractors and consultants from the Group's digitalisation programme, which were not eligible for capitalisation, and severance costs relating to the ongoing strategic re-organisation initiated in the second half of 2021 (2021: comprised mainly consultancy fees and severance costs).

Disposals and assets held for sale

During 2022, we raised gross proceeds of £195m, relating mainly to the disposals of Silverburn and Victoria. Taken together with other smaller disposals and adjustments to historical disposals, an overall profit from disposals of £0.7m was generated..

Share of results of joint ventures and associates, including Value Retail

Reported Group

A full listing of our interests in joint ventures and associates is set out in Table 22 of the Additional information.  Our Reported share of results under IFRS was a combined loss of £48.6m (2021: loss of £155.7m). This year-on-year change was due to lower revaluation losses in 2022 compared with 2021.

Proportionally consolidated

On an Adjusted basis, because the Group's managed portfolio of joint ventures and associates is proportionally consolidated, the Group's share of results of joint ventures and associates comprises solely the Group's investment in Value Retail which generated Adjusted earnings of £27.4m (2021: £15.9m). The year-on-year improvement principally reflects higher GRI from increased sales resulting from the easing of Covid-19 restrictions where lockdowns in 2021 meant that Villages were closed for part of the year.

Net finance costs

Reported Group

Reported Group net finance costs were £63.0m, a decrease of £34.9m compared with 2021 attributable to higher interest income and lower debt and loan facility cancellation costs.

Proportionally consolidated

Adjusted net finance costs were £54.0m, a decrease of £17.8m compared with 2021.  The decrease was driven by the benefits of deleveraging since the start of 2021, early repayment of debt utilising proceeds from disposals, the related restructuring of hedging derivatives and higher interest income from cash deposits. Key components comprised:

•     a £6.8m reduction in finance costs driven by a reduction in interest on cross currency swaps and a reduction as a result of repayment of private placement notes and euro bonds

•     £11.0m higher interest income resulting from both increased cash balances in the year following disposals and a sharp rise in prevailing interest rates in the second half of the year

Proportionally consolidated net finance costs decreased by £38.0m to £65.6m compared to 2021, with £20.7m of the decrease relating to lower debt and loan facility cancellation costs partly offset by changes in the fair value of derivatives, both of which are treated as adjusting items and are described further in note 10A to the financial information. The debt and loan facility cancellations costs relate to unamortised facility fees in respect of revolving credit facilities which were extinguished and replaced with a new £463m facility as set out in the cash flow and net debt section below.

Tax

The Group's tax charge on a proportionally consolidated basis was £0.5m which compares to £1.8m  for 2021 with the reduction being due to certain changes in the Irish capital structure.

The tax charge remains low as the Group benefits from being a UK REIT and French SIIC and its Irish assets are held in a QIAIF. The Group is committed to remaining in these tax exempt regimes and further details on these regimes are given in note 8 to the financial information. In order to satisfy the REIT conditions, the Company is required, on an annual basis, to pass certain business tests. The Group has met all requirements for maintaining its REIT status for the year ended 31 December 2022.

Dividends

The payments of cash and enhanced scrip dividends approved by shareholders and made in 2022 have satisfied our REIT and SIIC distribution requirements.  The Board is not recommending a further payment in respect of 2022 but continues to anticipate re-instating a cash dividend for 2023, expected to be at least the minimum required to continue to meet our REIT/SIIC distribution obligations.  

The interim cash dividend and the enhanced scrip dividend alternative were paid as a non-Property Income Distribution ('Non-PID') and treated as an ordinary UK company dividend. As set out in note 19 to the financial information, the interim dividend of £77.1m was settled during the year, of which £1.4m was settled in cash.

NET ASSETS

A detailed analysis of the balance sheet on a proportionally consolidated basis is set out in Table 12 of the Additional information with a summary reconciling to EPRA NTA set out in the table below:

†     2021 figures have been restated to reflect the IFRIC Decision on Demand deposits where further information is provided in note 16 to the financial information and Tables 13 and 14 of the Additional information.

a    Comprises cash and cash equivalents, loans, fair value of currency swaps and cash and cash equivalent held within assets held for sale.

b    EPRA adjustments in accordance with EPRA best practice, principally in relation to deferred tax, as shown in note 10B to the financial information.

During 2022, net assets decreased 6% to £2,586m (2021: £2,746m). Net assets, calculated on an EPRA Net Tangible Assets (NTA) basis, were £2,634m, or 53 pence per share, a reduction of 11 pence compared to 31 December 2021 principally due to revaluation losses of £282m, partly offset by Adjusted earnings of £105m, together with dilution from scrip dividends of 7.5p. This is equivalent to a total accounting return of -6.8%. The key components of the movement in Reported Group net assets and EPRA NTA are as follows:

Movement in net assets

PROPERTY PORTFOLIO ANALYSIS

Investment markets

The improvement in the investment market seen in the first half of 2022 stalled in the second half due to rising interest rates, continuing high inflation, soaring energy prices and the ongoing war in Ukraine.

In the UK, there were 58 shopping centre transactions totalling £1.9bn, the majority of which were agreed in the first half of the year including transactions involving non-managed stakes in prime shopping centres and larger lot sizes, for example, CPP Investments' acquisition of Nuveen's one third stake in Bullring.  Investment volumes slowed in the second half of the year with a number of larger schemes failing to transact due to lack of debt finance. Second half investment activity was primarily at the discount/convenience end with lot sizes between £10-£30m (Source: JLL). Prime shopping centre yields moved out by 50 basis points in the last quarter of 2022. 

In France, retail investment activity reached €4.5bn with over 207 transactions and strong volume growth in large transactions with 13 deals above €100m (Source: JLL). Prime shopping centre yields increased slightly towards the end of the year.

In Ireland, there was limited retail investment activity with retail representing just 8% (€0.4m) of total transactions and no transactions of significance (Source: C&W).

Portfolio valuation

The Group's external valuations continue to be conducted by CBRE Limited (CBRE), Cushman & Wakefield (C&W) and Jones Lang LaSalle Limited (JLL), providing diversification of valuation expertise across the Group. At 31 December 2022 the majority of our UK flagship destinations have been valued by JLL and CBRE, the French portfolio by JLL, and the Irish portfolio, Value Retail and Brent Cross have been valued by C&W. This is unchanged from 31 December 2021.

At 31 December 2022, the Group's portfolio was valued at £5,107m, a decline of £265m (4.9%) since 31 December 2021. This movement was primarily due to revaluation losses of £282m and net disposals totalling £194m comprising mainly Silverburn and Victoria, being partly offset by capital expenditure of £79m and favourable foreign exchange gains of £157m.  Movements in the portfolio valuation are shown in the table below.

Movements in property valuation

a    Valuations and revaluation losses are further analysed in Table 9 of the Additional information.

b   The Highcross joint venture is excluded owing to the Group's share of net losses after revaluation being restricted to £nil as described in note 13 to the financial information .

During the year, capital expenditure on the managed portfolio was £73m and related mainly to the Les 3 Fontaines extension at Cergy, which opened in March 2022, cladding works at Bullring and works to repurpose the former House of Fraser anchor unit at Dundrum, in addition to £15m spent at Whitgift on acquiring long leasehold and freehold interests. Table 11 of the Additional information analyses the spend between the creation of additional area and that relating to the enhancement of existing space.

The Les 3 Fontaines extension expenditure was recorded in the Developments and other portfolio prior to the extension being reclassified to the Flagship portfolio upon opening.

Revaluation losses

Excluding Highcross, we recognised a total net revaluation loss of £282m across the Group portfolio, comprising £221m in respect of the managed portfolio and £61m in Value Retail. £271m of the revaluation loss occurred in the second half of the year,  the majority of which came from a market driven yield shift of £154m in the second half of the year as a result of higher interest rates which mostly occurred in the last quarter of 2022. The balance was principally due to the valuers reducing selective ERVs across the portfolio.

UK flagship destinations reported a revaluation deficit of £90m where half was due to an outward yield shift of 50 basis points with the remainder due to selected ERV reductions. In France, yields were more stable with a 10 basis point outward movement, equivalent to a revaluation deficit of £12m with the balance of £45m mainly due to ERV reductions. Ireland saw a positive movement in ERV most notably at Dundrum, however this was more than offset by a 20 basis point outward yield shift which resulted in a net revaluation deficit of £20m.

A deficit of £53m was recognised on the Developments and other portfolio of which £11m related to Croydon associated with lower income and £13m related to the future development schemes in Dublin due to inflationary concerns over development costs.

Despite a continued strong post pandemic recovery in trading at Value Retail in the year, the portfolio recorded an overall revaluation loss of £61m, of which £53m related to Bicester Village, driven by outward yield shifts.

Further valuation analysis is included in Table 9 of the Additional information.

Like-for-like ERV*

* Calculated on a constant currency basis for properties owned throughout the relevant reporting period.

Like-for-like ERVs fell 2.2% during 2022 with most of the decrease occurring in the second half of the year following a broadly flat performance in H1 where the decrease was only 0.3%.  

UK ERVs were 3.8% lower, reflecting the investment to attract 'best in class' occupiers in certain of our managed portfolio, while ERVs in France were marked down less at 1.6%. 

In Ireland, ERVs were up 0.3%, with Dundrum Town Centre reporting a 0.4% increase driven by the opening of Brown Thomas in the former House of Fraser unit in February, with Penneys relocating into the remaining space in the first half of 2023, offset by small decreases at the other destinations.

Property returns analysis

The Group's managed property portfolio generated a total property return of -2.3%, comprising an income return of +5.4% offset by a capital return of -7.3%.  Incorporating the income and capital returns from the Value Retail portfolio, this brought the Group's income return to +5.3% and the capital return to -5.8%, to generate a total return of -0.7% (2021: -3.9%).

†     2021 figures have been restated to reflect the IFRIC Decision on Deposits with further information provided in note 16 to the financial information and Tables 13 and 14 of the Additional information.

Shareholder returns analysis

a    Cash and scrip bases represent the return assuming investors opted for either cash or scrip dividends with the assumption that those opting for scrip dividends continued to hold the additional shares issued.

b    Benchmark is the FTSE EPRA/NAREIT UK index.

Hammerson's total shareholder return over one year for 2022 was -15.1% on a scrip basis (-26.2% on a cash basis), outperforming the FTSE EPRA/NAREIT UK index of -34.3%. Over five years however the Group underperformed compared to the benchmark of
-6.7% with shareholder returns of -35.2% and -30.8% on a cash and scrip basis, respectively.

INVESTMENT IN JOINT VENTURES AND ASSOCIATES

Details of the Group's joint ventures and associates are shown in notes 13 and 14, respectively, to the financial information. 

Reported Group

Joint ventures

During the year, our investment in joint ventures decreased to £1,342m (2021: £1,452m) where the most significant movements were the Group's share of net rental income of £96m offset by revaluation losses of £132m and cash distributions to the Group of £63m.

Associates

Our investment in associates increased to £1,297m (2021: £1,247m) of which the Group's investment in Value Retail was £1,189m. Key movements were in Value Retail where the Group's share of earnings were offset by revaluation losses of £61m together with foreign exchange gains of £35m.

TRADE RECEIVABLES

During 2020 and 2021, the intermittent closures of the majority of non-essential retail across all regions as a result of the Covid-19 pandemic, coupled with the UK government's restrictions on landlords' ability to enforce collections, adversely impacted collection rates and consequently, the level of trade receivables was high. To address these challenges, the Group put in place more rigorous procedures and clearer tracking of our trade receivables combining involvement of our asset management, leasing and finance teams to maintain clear focus on collections. 

Over the course of the year, the underlying environment improved.  This included the lifting of UK government restrictions on collections (in two phases in March and September 2022) and although restrictions differed in France and Ireland, similar improvements were also seen. The combination of these changes together with management's focus has meant that we have been able to reduce the provisioning rates for some ageing categories of receivable. However, with the backdrop of macroeconomic uncertainties, we consider it premature to be extrapolating this as a trend across all categories and accordingly our approach to provisioning remains cautious and prudent.

Gross trade (tenant) receivables on a proportionally consolidated basis totalled £74.1m (2021: £99.5m) against which a provision of £32.3m (2021: £53.3m) has been applied. This provision represents 60% (2021: 76%) of trade receivables of £53.9m (2021: £70.5m) after excluding tenant deposits, guarantees and VAT, although this also includes a provision of £1.6m (2021: £4.0m) in respect of income not yet recognised in the income statement owing to a technical interpretation of IFRS 9 as explained in note 10A to the financial information. Further analysis is set out below and in note 15 to the financial information.

PENSIONS

On 8 December 2022, the Company and the Trustees of the Group's principal defined benefit pension scheme ('the Scheme') entered into a bulk purchase annuity policy ('buy-in') contract with Just Retirement Limited for a premium of £87.3m in respect of insuring all future payments to existing pensioners of the Scheme at 9 December 2022. The pension buy-in transaction was funded through the existing investment assets held by the Trustees on behalf of the pension scheme and the impact of this transaction is reflected in the IAS 19 valuation.

This material balance sheet de-risking exercise is in line with the Group's long-term strategy to reduce future volatility of the Group's balance sheet.

FINANCING AND CASH FLOW

Financing strategy

Our financing strategy is to borrow predominantly on an unsecured basis to maintain flexibility. Secured borrowings are occasionally used, mainly in conjunction with joint venture partners. Value Retail also uses predominantly secured debt in its financing strategy. All secured debt is non-recourse to the rest of the Group.

The Group's borrowings are arranged to maintain access to short term liquidity and long term financing. Short term funding is principally through syndicated revolving credit facilities. Long term debt comprises the Group's fixed rate unsecured bonds and private placement notes. At 31 December 2022, the Group also had secured borrowings in Value Retail and three of the Group's joint ventures, although following the placing of Highcross into receivership in February 2023, this has since reduced to two. Acquisitions may initially be financed using short term funds before being refinanced with longer term funding depending on the Group's financing position in terms of maturities, future commitments or disposals, and market conditions.

Derivative financial instruments are used to manage exposure to fluctuations in foreign currency exchange rates and interest rates but are not employed for speculative purposes.

The Board reviews regularly the Group's financing strategy and approves financing guidelines against which it monitors the Group's financial structure. Where there is any non-compliance with the guidelines, this should not be for an extended period but the Group always strives to maintain an investment grade credit rating. The key financing metrics are set out below.

Key financial metrics 

†     2021 figures have been restated to reflect the IFRIC Decision on Deposits with further information provided in notes 1B and 16 to the financial information and Tables 13 and 14 of the Additional information.

a    Headline: Loan excludes Value Retail net debt and Value includes Value Retail net assets.

b    Full proportional consolidation of VR: Loan includes Value Retail net debt and Value includes Value Retail property values.

c     Applicable to bonds maturing in 2023, 2025 and 2027 (as set out in note 17 to the financial information).

Credit ratings

In recognition of the Group's strengthened financial position, Moody's and Fitch's senior unsecured investment grade credit ratings were re-affirmed during the year as Baa3 and BBB+ respectively and outlooks from both rating agencies were changed from negative to stable.

Leverage

At 31 December 2022, the Group's gearing was 68% (2021: 66%) and Headline loan to value ratio was 39% (2021: 39%). 

The Group's share of net debt in Value Retail totalled £675m (2021: £680m). Fully proportionally consolidating Value Retail's net debt, the Group's loan to value ratio was 47% (2021: 46%).  

Calculations for loan to value and gearing are set out in Tables 18 and 19 of the Additional information, respectively.

Borrowings and covenants

The terms of the Group's unsecured borrowings contain a number of covenants which provide protection to the lenders and bondholders as set out in the Key financial metrics table above. At 31 December 2022, the Group had significant headroom against these metrics.

In addition, some joint ventures and associates have secured debt facilities which include covenants specific to those properties, including covenants for loan to value and interest cover, however, there is no recourse to the Group. At 31 December 2021, certain covenants on the secured loan at the Highcross joint venture were in breach and an impairment of the full equity value was recognised at that time with the position remaining at 31 December 2022, but as described in the overview above, going forward, Highcross will cease to be incorporated into the financial statements following the appointment of a receiver on
9 February 2023.

Managing foreign exchange exposure

The Group's exposure to foreign exchange translation differences on euro-denominated assets is managed through a combination of euro borrowings and derivatives. At 31 December 2022, the value of euro-denominated liabilities as a proportion of the value of euro-denominated assets was 91% compared with 89% at the beginning of the year. Interest on euro-denominated debt also acts as a partial hedge against exchange differences arising on net income from our overseas operations. Sterling weakened against the euro during the year by 5%.

CASH FLOW AND NET DEBT

Proportionally consolidated net debt

Movement in proportionally consolidated net debt (£m) 

http://www.rns-pdf.londonstockexchange.com/rns/3627S_1-2023-3-8.pdf 

†     Net debt at 1 January 2022 has been restated to reflect the IFRIC Decision on Deposits with further information provided in notes 1B and 16 to the financial information as well as Tables 13 and 14 of the Additional information.

On a proportionally consolidated basis, net debt decreased by 4% to £1,732m (2021: £1,799m). This comprised loans of £2,038m and the fair value of currency swaps of £31m, less cash and cash equivalents of £336m, of which £219m is held by the Reported Group.  Disposals during the year generated net cash proceeds of £192m.  Cash generated from operations of £166m comprised profit from operating activities of £129m and £37m of movements in working capital and other non-cash items.

Refinancing

The Group completed significant refinancing during 2021, reinforcing the Group's capital structure, including the refinancing of €1bn near term bond maturities with a new €700m sustainability-linked bond and proceeds from disposals.  As at 31 December 2021, the Group had a number of Revolving Credit Facilities (RCFs) in place with a total of £1,030m commitments expiring between April 2022 and April 2024. During 2022, the following activities were undertaken to refinance and extend these facilities:    

•     £820m of facilities, comprising a £420m RCF with commitments expiring in 2023 and a £400m RCF with commitments expiring between 2023 to 2024 were refinanced with a new £463m RCF expiring in April 2025, which may be extended to April 2027 at the latest, subject to both lender and borrower consent.  A further £10m of commitments expired in April 2022

•     £100m and JPY7.7bn (£49m) of RCF commitments expiring in June 2024 were extended to a new expiry in June 2025.   The remaining £50m of commitments with an expiry of June 2024 remain unchanged

•     €235.5m eurobonds due 2023 were repaid on 16 December 2022 using available cash

Following these changes, committed facilities were reduced by £370m from £1,030m at 31 December 2021 to £662m at
31 December 2022 with £2m utilised to support ancillary facilities. This will result in an interest cost saving of £0.8m per annum in undrawn commitment fees whilst maintaining a strong balance sheet and extending the maturities of remaining commitments.

In addition, further to the £297m of private placement notes repaid in 2021, notes totalling £42m were repaid early at par in April 2022, saving £0.9m of interest on an annualised basis.

Liquidity

The Group's liquidity at 31 December 2022, calculated on a proportionally consolidated basis comprising cash of £336m and unutilised committed facilities of £660m, was £996m, £482m lower than at the beginning of the year.  This was primarily due to the £368m reduction in RCF committed facilities, the €236m early repayment of the Group's 2023 euro bond being partially offset by the retention of cash proceeds from disposals.   

Debt and facility profile

Maturity profile of loans and facilities

Proportionally consolidated (£m)

http://www.rns-pdf.londonstockexchange.com/rns/3627S_2-2023-3-8.pdf

The Group's weighted average maturity is 3.4 years (2021: 4.1 years).  The maturity of 2024 private placements are covered by existing cash with the Group having no further unsecured debt maturities until 2025.

Maturity analysis of loans

a    Redeemed in December 2022 using available cash resources, following the exercise of an early redemption option.

b    Debit balance comprises unamortised fees for RCFs against which no funds had been drawn at the year ends.

Risks and uncertainties

The Board continually reviews and monitors the principal risks and uncertainties which could have a material effect on the Group's results. During the year, a thorough review exercise was undertaken which resulted in the separation of three existing risks into six new risks as these were deemed to be significantly material to the Group on a stand alone basis.  The updated principal risks and uncertainties for 2022 are listed below with details of our assessment of the residual risk. Full disclosure of the risks, including the factors which mitigate them, is set out within the Risk and uncertainties section of the Annual Report 2022.

Consolidated income statement

Year ended 31 December 2022

†     2021 figures have been restated to reflect the IFRIC Decision on Concessions with further information provided in notes 1B and 6.

a    Includes a charge of £4.0m (2021: £13.5m) and an equivalent credit of £10.7m (2021: credit of £16.6m) relating to provisions for impairment of trade (tenant) receivables as set out in note 15B.

b    2021 loss per share figures have been restated to incorporate the bonus element of scrip dividends.

Consolidated statement of COMPREHENSIVE income

Year ended 31 December 2022

a    2021: Relates to the sale of the Group's 25% interest in Espace Saint-Quentin and 10% interest in Nicetoile.

b    All items within total other comprehensive income/(loss) relate to continuing operations.

Consolidated balance sheet

As at 31 December 2022