Embargoed until 7.00 a.m. - Monday 22 February 2010

Hammerson plc - Audited Results for the year ended 31 December 2009

Financial highlights

Notes

Key points

·             Increase in UK property values over second half of 2009. Hammerson's portfolio fell in value by 9% over the year, however it increased by 6% in the second half of 2009 (UK +11%, France -3%). Adjusted net asset value per share fell by 18% over the year, but increased by 13% since 30 June 2009.

·             Net rental income resilient. Although net rental income was down 2.1% on 2008, principally reflecting disposals in the period, there was like-for-like income growth of 1.1% in the investment portfolio over the year.

·             Total dividend for the year of 15.45 pence, covered 1.3 times by adjusted earnings. The Board has declared a second interim dividend of 8.5 pence, with a scrip alternative, payable on 1 April 2010. Pro forma dividend for 2008: 15.0 pence per share.

·             Year-end occupancy of 95% (31 December 2008: 95%). Following an increase in vacancy in the first half of 2009, good progress has been made on lettings, with occupancy increasing from 93% at the half year.

·             Two major acquisitions in December 2009, capitalising on opportunities presented by current markets. Hammerson invested £152 million in a 50% interest in Silverburn shopping centre in Glasgow and acquired the Terrasses du Port development scheme in Marseille. Both acquisitions offer good growth

·             Commencing developments in 2010. We are starting work on the redevelopment of 54-60 rue du Faubourg Saint-Honoré, Paris, which is now fully pre-let (total cost £30 million). We expect to start on site at Les Terrasses du Port, Marseille (total cost £400 million), later this year. Encouragingly, the scheme is already over 40% pre-let.

·             Net debt reduced by £1.2 billion principally as a result of the rights issue and £767 million at the year end. property disposals. Net debt at 31 December 2009 was £2.1 billion, and gearing was 72%. 97% of debt is unsecured. Hammerson has just £63 million of debt maturing before 2012, and cash and undrawn committed facilities of £767 million at the year end.

John Nelson, Chairman of Hammerson, said:

"Recently there has been a recovery in property markets, supported by strong investor demand and the policy of central banks supporting financial markets. The economic outlook, however, remains uncertain, and against this background the Board intends to maintain a prudent approach to financing.

Our reinvigorated management team, under David Atkins, is focused on creating value by maximising the income from our assets and improving operational efficiency. We rigorously evaluate the projected performance of our properties against financial benchmarks and will progress selected developments. We will continue to capitalise on opportunities which are being presented by the markets. This is likely to lead to more active management and evolution of our portfolio."

Enquiries:

Results presentation today:

Webcast:

A live webcast of Hammerson's results presentation will be broadcast today at 9.30 a.m. via the Company's website: www.hammerson.com.

Financial calendar:

Contents:

The terms used in this announcement are defined in the glossary on pages 53 and 54.

CHAIRMAN'S STATEMENT

This was a year of intense activity for the Company in volatile conditions. In the first half of the year we addressed rising gearing through a combination of an equity rights issue and asset disposals. In the second half we took advantage of our strengthened position to acquire assets with good growth potential.

RESULTS

The first six months of 2009 saw continued falls in commercial property values, however in the second half of the year investment activity increased and there was a recovery in values, particularly for prime properties in the UK. Against this background, although the value of Hammerson's portfolio has increased by 6% since June, for the year as a whole it showed a decline of 9%. Adjusted net asset value per share was £4.21 at the year end, an 18% fall over the year, but a 13% increase since 30 June. At 31 December 2009 gearing was 72%, compared to 118% at the end of 2008.

The Group's adjusted profit before tax for 2009 increased by £16 million to £130 million. However, reflecting the increased number of shares in issue following the rights issue, adjusted earnings per share fell to 19.7 pence. The Board has declared a second interim dividend of 8.5 pence per share, with a scrip alternative, giving a total dividend for the year of 15.45 pence. This compares with a pro forma dividend for 2008 of 15.0 pence per share. The second interim dividend, in lieu of the final dividend, will be payable on 1 April 2010, so that it will be received in the current tax year. Full details are included in the circular which will be issued to shareholders today.

PORTFOLIO

I am pleased to report that we made good progress during the year in the four areas which we identified as key: managing the existing portfolio to ensure it is well positioned to benefit from the recovery in markets; focusing on letting remaining space in recently completed developments; ensuring that we can exploit the development pipeline when conditions permit; and taking advantage of opportunities presented by current market conditions.

In 2009 we signed 395 leases in respect of approximately 176,000m² across our portfolio. In our shopping centres we continued to refresh the tenant mix bringing major international retailers into our schemes. We opened Union Square, Aberdeen, in October. Despite letting in the midst of the recession, the centre is over three-quarters let or in solicitors' hands, and has an attractive retail and leisure line up. We completed three retail park extensions, all of which were fully let at the year end, and our recently completed London office developments at 60 Threadneedle Street and 125 Old Broad Street were both over 90% let or in solicitors' hands at 31 December. At the year end the Group's overall occupancy rate was 95%, compared to 93% in June.

Our prime, modern portfolio, much of which we have developed ourselves, is at the forefront of sustainability in terms of design, construction, and resource utilisation. We also engage actively with the communities in which we operate, not only creating jobs but running training and education programmes to support our retailers in their recruitment. I am delighted that we have been recognised as an industry leader in this area.

Hammerson's proven expertise in retail property puts us in a strong position to take advantage of opportunities presented by current markets. In December we bolstered the portfolio with two significant acquisitions. We invested £152 million in the Silverburn shopping centre in Glasgow, undertaken in joint venture with the Canada Pension Plan Investment Board. We also acquired the Terrasses du Port retail development scheme in Marseille. This three year project has an anticipated total cost of £400 million, and we expect work to start on site later this year. In January 2010, following the appointment of administrators to Thornfield Ventures Limited, we were appointed as the development and asset manager for a partially completed retail development scheme.

BOARD

We announced in August that John Richards would be retiring as Chief Executive. John had been with Hammerson for nearly 30 years, the last ten as Chief Executive. We owe him a huge debt of gratitude for all that he did for the Company.

I am delighted that the Board appointed David Atkins as John's successor as Chief Executive. David has been with the Company for 12 years, was previously Managing Director of the UK business, and is one of the outstanding property executives in the industry.

We welcomed Terry Duddy, Chief Executive of Home Retail Group, to the Board as a non-executive Director in December. John Clare, who served on the Board for 11 years and was, most recently, the Senior Independent Director, retired at the end of 2009. I thank him for his particularly valuable contribution to the Company over such a long period. Tony Watson has succeeded John as the Senior Independent Director. In November, Christophe Clamageran, Managing Director of Hammerson France, resigned to take up a position in the quoted French real estate sector.

FINANCING

Net debt at the year end was £2.1 billion, down by £1.2 billion from 31 December 2008. 97% of our debt is unsecured, and we have liquidity (cash and undrawn facilities) of £767 million, giving us good financial flexibility. We have just £63 million of debt maturing before the end of 2011, and nearly three quarters of our debt is drawn from the bond markets, reducing our reliance on the bank market.

OUTLOOK

On behalf of the Board, I would like to take this opportunity to thank our shareholders for their continued support throughout 2009. I believe the actions which we have taken put the Company in a strong position for the future.

Hammerson has a clear strategy of concentrating on high quality retail assets in the UK and France, whilst exploiting opportunities in the office sector.

Recently there has been a recovery in property markets, supported by strong investor demand and the policy of central banks supporting financial markets. The economic outlook, however, remains uncertain, and against this background the Board intends to maintain a prudent approach to financing.

Our reinvigorated management team, under David Atkins, is focused on creating value by maximising the income from our assets and improving operational efficiency. We rigorously evaluate the projected performance of our properties against financial benchmarks and will progress selected developments. We will continue to capitalise on opportunities which are being presented by the markets. This is likely to lead to more active management and evolution of our portfolio.

John Nelson

Chairman

22 February 2010 

PROPERTY MARKETS AND OUTLOOK

Investment market

The commercial property markets in the UK saw a notable improvement during the second half of 2009, whilst the French markets stabilised.  Following systemic failures within the international financial system, the global economy fell into the deepest post-war recession on record during early 2009.  The extent of the downturn prompted coordinated action by central banks and governments, providing extensive support for financial markets and economic activity.  This in turn led to an improvement in real estate investor sentiment during the second half of 2009 and saw demand for commercial property investment increase, supporting lower yields and higher property valuations.

In the UK, the volume of property transactions increased in 2009 by around 6%, compared with 2008, reflecting a rapid increase in sales activity during the second half of the year.  The quarterly IPD all-property equivalent yield moved out 80 basis points during the first half of the year, before falling back 100 basis points in the second half to 8.0%.  As a result, both retail properties and offices recorded total returns of more than 10% in the last six months of 2009.

In France, where the Group has 34% of its portfolio, sales volumes reached a ten year quarterly low during the first three months of 2009.  Transaction levels steadily improved throughout the year but the weakness of the first half meant that the volume of transactions was 40% below that seen in 2008. The latest market analysis shows shopping centre and office yields stabilising and moving in for the best assets.  Shopping centre values fell during 2009 by an estimated 8.0%.

Property yields are still above their long term average and greater than many other investment classes.  As such the investment market in 2010 should improve further, provided investor demand is sustained. The level of improvement will remain dependent upon the strength of economic recovery and sustained policy support. Outstanding bank loans to UK commercial property remain very high at around £250 billion and around £160 billion of this debt is due to be refinanced before the end of 2013. The need for banks to reduce their lending to commercial property and the refinancing requirement are likely to dampen the recovery in property values.

Retail property

In the UK, non-food retail sales values fell by around 2% in 2009, significantly less than forecast at the start of the year.  The higher than expected level of sales came in the face of rising unemployment and low consumer confidence and has been attributed in part to the impact of lower interest rates on mortgages.  Whilst sales were better than expected, trading conditions for retailers remained difficult throughout the year, reducing the demand for new stores.  Looking ahead, the recovery in retail is likely to be fragile as improved confidence is set to be tempered by rising taxation, the potential for rising interest rates and the level of unemployment.

Following a rise in new retail space in 2008, the level of development completions fell by around half in 2009, and is expected to fall again in 2010.  With demand for new space remaining low and some retailers closing stores, UK retail vacancy rates were higher in the year, weighing negatively upon rental levels. According to the IPD Quarterly Index, retail rents fell by 6.1% in 2009, the largest annual fall on record.

In Hammerson's experience, the rise in vacancies has been less severe in prime locations, with retailers in some cases deciding to use the opportunity to open new stores in the best retail centres.

PROPERTY MARKETS AND OUTLOOK

Continued

In France, consumer confidence remained low throughout 2009, resulting in falling retail sales.  However, with the French economy returning to growth in the second quarter, consumer confidence has shown a gradual improvement and retail sales grew throughout much of the second half of the year.  Unlike the UK, the downturn in sales did not result in a large number of retailers entering administration.

Although a difficult retail environment precluded an expansion of operations in France, fewer administrations and the payment of key money by retailers prevented a significant increase in the level of vacancies and supported rental values, particularly in the most prime shopping centres.  For existing leases, the rate of indexation under the ILC index fell to 0.84% at 1 January 2010, down from 3.85% in the previous year, following lower inflation and weaker retail sales.

Office property

The Central London office market closely mirrored the fall and recovery experienced across global financial markets.  Having fallen to its lowest level on record in the first quarter of the year, the take-up of office space in Central London progressively improved throughout the rest of 2009, ending the year strongly with 0.3 million m² of space leased in the fourth quarter. 

Despite the pick-up in leasing activity in the latter part of the year, take-up was down 23% on 2008, and coincided with the completion of an additional 0.6 million m² of new space.  The Central London vacancy rate increased from 5.3% at the start of the year to 7.2% by the end of 2009, with the highest rates in the City at 8.5%.  City rents fell by around 20% in the year to £43.50/ft², whilst incentive packages increased to the equivalent of a 30 month rent free period on a ten year lease.

City office vacancy rates, which fell in the second half of 2009, are expected to continue to decline in 2010 as sustained take-up and fewer developments erode availability, providing a firm base for rental stabilisation and subsequent growth.  Following delays and cancellations over the past two years, new completions are set to fall further throughout the early part of this decade, increasing the probability of a medium term recovery in net rents as demand returns.

PRINCIPAL RISKS AND UNCERTAINTIES

PROPERTY VALUATIONS

Our property portfolio is the largest component of the Group's net asset value. The value of the portfolio is affected by the conditions prevailing in the property investment market and the general economic environment. Accordingly, the Group's net asset value can change due to external factors beyond management's control. In light of the improved economic conditions and government support for the financial sector, investors have recently become more active in the real estate investment market with the result that property values have started to rise for the first time in two years.

Hammerson has a high quality portfolio which is geographically diversified and let to a large number of tenants. These factors should continue to mitigate any negative impact arising from changing conditions in the financial and property markets. The Property Markets and Outlook section of this report provides further discussion of these issues.

Our property portfolio is valued in compliance with international standards by external professionally qualified valuers. The primary source of evidence for valuations should be recent, comparable market transactions. As the economic environment has improved, the number of transactions for the types of property owned by Hammerson in the UK and France has increased, and this in turn has made property valuations more reliable.

LIQUIDITY RISK

Although conditions in the financial markets have improved significantly in 2009, companies with short-term refinancing requirements may continue to find it difficult to secure adequate funding at costs comparable with their existing facilities. Hammerson has just £63 million of debt maturing before 2012, and we have time to plan for an optimal debt maturity and cost profile, with the option of further property sales if considered necessary.

Following the completion of the rights issue in March 2009 and the receipt of the proceeds of our disposal programme, gearing has decreased from 118% at the end of 2008 to 72% at 31 December 2009. The risk that the Group could breach its borrowing covenants, the most stringent of which is that gearing should not exceed 150%, has therefore receded. We estimate that, on a proforma basis, the value of our portfolio would have to fall by 30% to endanger our most rigorous gearing covenant.

DEVELOPMENT AND LETTING

The recent recession has made many potential occupiers cautious about entering into commitments to lease space. Therefore it has taken longer than originally anticipated to agree new leases at our recently completed developments. However, the improvements seen in the economy in the last few months have resulted in greater interest in the vacant space at the developments we completed in 2008 and 2009, as discussed in the Business Review on pages 11 to 14. We currently have no significant developments underway.

TENANT DEFAULT

The trading environment has improved during 2009, and the rate at which retail companies in the UK are going into administration has fallen. However some tenants, principally in the UK retail sector, continue to face difficult operating conditions and there is a risk that they will be unable to pay their rents. The large number of tenants and their geographical spread mean the risk of individual tenant default to Hammerson is low. Furthermore, our occupational leases are long-term contracts, thus making the income relatively secure. The quality of the Group's income is discussed on pages 14 and 15 of the Business Review.

PRINCIPAL RISKS AND UNCERTAINTIES

Continued

INTEREST RATES

Interest charged on borrowings is a significant cost for Hammerson and we set guidelines for our exposure to fixed and floating interest rates and use interest rate and currency swaps to manage this risk. At 31 December 2009, 78% of the Group's gross debt was at fixed rates of interest. The short-term outlook for interest rates is uncertain, but our hedging programme would partly mitigate the impact of any rise.

EXCHANGE RISK

Exchange risk is managed by matching foreign currency assets with foreign currency debt, using derivatives where appropriate. As at 31 December 2009, 80% of the value of the French property portfolio was hedged. We estimate that a 1% strengthening of the euro relative to sterling would have the effect of increasing shareholders' funds by around £3 million and increasing net debt by approximately £13 million.

BUSINESS REVIEW

Real estate strategy

There are three elements to our real estate strategy, which aims to maximise the total returns from the portfolio:

·             the allocation of the majority of the portfolio to regionally dominant shopping centres and retail parks;

·             the management of our investment properties so that they continue to be attractive to occupiers, enabling us to increase the Group's rental income and other revenues over time; and

·             the generation of attractive income and capital returns through development, in both the retail and office sectors.

This Business Review provides more detail on our performance in these areas during 2009, together with information on the potential future growth in income and value in the portfolio.

All references in this Business Review to the property portfolio exclude the Group's 25% interest in Bishops Square, which is accounted for as an associate.

Property portfolio and allocation

We use external and internal research to analyse in detail the markets in which we operate and base our decisions on overall portfolio allocation using this analysis. As part of our annual business planning process, we review the current and projected performance of each of our properties and identify assets for disposal. The result of this active approach to managing the portfolio is the £2.1 billion raised from disposals in the last five years, whilst £2.2 billion has been invested in acquisitions and new developments over the same period.

At 31 December 2009, Hammerson's retail portfolio in the UK and France provided 1.6 million m² of space including 16 major shopping centres and 16 retail parks. Our office portfolio includes six prime buildings in central London, providing 169,000m² of accommodation.

Our property portfolio was valued at £5.1 billion at the end of 2009, with our investment portfolio valued at £5.0 billion and developments making up the balance. Joint ventures, including eight major shopping centres in the UK, accounted for 37% by value of the total portfolio.

During 2009, acquisitions, disposals, development completions and the effects of changes in exchange rates have combined to change the weighting of the portfolio. At the end of the year, the retail portfolio represented 88% of the total, whilst the UK accounted for 66%. The comparative figures for 31 December 2008 were 76% and 60% respectively.

During 2009, the value of the portfolio reduced by £1.3 billion and the movement is analysed in the table below.

BUSINESS REVIEW

Continued

The 2009 capital return for the UK and French portfolios was -8.9% as shown in the table below.

In the UK and France, the underlying valuation decreases for 2009 were 5.9% and 14.2% respectively. For the year as a whole, more than half of the decline in values resulted from changes to investment yields with the remainder principally due to lower rental values. However, this masked contrasting performances in the first and second halves of the year. In the UK portfolio in the first six months, investment yields weakened and rental values fell. The second half saw investment yields recover and the rate of decline of rental values slow. Investment yields in the French portfolio increased in both halves of the year, although the rate of increase slowed significantly in the last six months. Rental values in France increased slightly in the first half, but were virtually unchanged in the second.

The components of the valuation change in 2009 for the UK and France are shown in the charts below

http://www.rns-pdf.londonstockexchange.com/rns/4432H_-2010-2-19.pdf

BUSINESS REVIEW

Continued

Investment portfolio

In the table above, the initial yield calculation is based on passing rents excluding rent of £21.6 million per annum which will be received after the expiry of rent free periods.

On 29 October, Union Square, our 49,600m² major shopping and leisure development in Aberdeen, opened to the public. The scheme received its one millionth visitor just three weeks after opening and was 79% let or in solicitors' hands at the end of December. Anchored by Marks & Spencer, and featuring a 203-bed Jurys hotel and Cineworld, Aberdeen's largest cinema, Union Square was awarded a BREEAM Very Good environmental rating and created over one thousand retail and leisure jobs.

In 2009, we successfully completed a number of extensions in our retail parks portfolio. The extension of Westwood Retail Park, Thanet, was completed in June and was fully let on opening to Bhs Homestore, Brantano and Dunelm. The extension to Cleveland Retail Park, Middlesbrough, was finished in July and the scheme was fully let by the end of the year. At Fife Central Retail Park in Kirkcaldy, we completed in August an 11,000m² extension which is fully let to tenants including B&Q, Mothercare and Toys R Us. The total cost of these three projects was £59 million and the annual rent receivable is £4.8 million.

We pursued our disposal programme during the year, which commenced with the exchange of contracts for the sale of Forum Steglitz, our remaining German asset, in May. The net proceeds of £58 million for the 31,600m² shopping centre were received in July and the comparable book value of the property at the end of 2008 was £79 million. We expect the sale to reduce administration expenses by around £0.5 million per annum.

June saw three further disposals. Les Trois Quartiers, the 29,700m² retail and office building in Paris 1er was sold for net proceeds of £172 million and its comparable book value at

BUSINESS REVIEW

Continued

31 December 2008 was £238 million. Hammerson loaned the purchaser €30 million for a two year term, extendable at the option of the purchaser for a further two years.

We sold a 75% interest in Bishops Square, London E1 in June. The principal tenant of the 71,500m² building is international law firm Allen & Overy and the asset is now held in a 25:75 joint venture between Hammerson and the Oman Investment Fund, an investment arm of the Government of Oman. The consideration for the property was £445 million compared with its book value at the end of 2008 of £486 million. Hammerson's interest in the property, including the related secured debt, is accounted for as an associate and the balance sheet includes Hammerson's share of the associate's net asset value. We provide asset management services to the joint venture for which we receive a fee of £300,000 per annum.

In December, our office building at 148 rue de l'Université, Paris 7ème was sold for £74 million. The equivalent book value of the property at 31 December 2008 was £108 million and at the time of sale, the property was 38% vacant and passing rents were £3.6 million.

During the year we disposed of five retail parks: Victoria Retail Park, Nottingham; Les Rives de L'Aa, St Omer; Cap Malo Boutiques, Rennes; Seacourt Retail Park, Oxford; and Berkshire Retail Park, Theale for total proceeds of £114 million.

In January 2010, we started work on a £30 million extension and refurbishment of our building at 54-60 rue du Faubourg Saint-Honoré in the eighth arrondissement of Paris. The scheme will result in a 7,400m² mixed-use property comprising 4,100m² of retail space and 3,300m² of residential accommodation and is expected to be completed in January 2011. The estimated rental income from the refurbishment is £4.6 million per annum and all of the space has been pre-let.

We completed our first major acquisition since 2007 in December, with the purchase of a 50% interest in Silverburn, a 91,100m² shopping centre in Glasgow. The scheme, which opened in 2007, is a single-level covered mall anchored by Debenhams, Marks & Spencer, New Look, Next and Tesco Extra. It has 98 retail units let to high quality retailers and is 97% occupied with an average unexpired lease term of 12 years. The centre is held in a 50:50 joint venture with the Canada Pension Plan Investment Board and Hammerson's share of the acquisition cost of the property was £152 million. There are opportunities to increase the value of the scheme through active asset management and by extending the property. Hammerson is the asset manager for the joint venture.

Investment portfolio overview

BUSINESS REVIEW

Continued

The table above analyses the net and gross valuations, income and yields for the Group's investment portfolio, excluding developments. Purchasers' costs equate to 5.5% of the net portfolio value.

Rental income

Rental data for investment portfolio

for the year ended 31 December 2009

For the year ended 31 December 2009, net rental income was £294 million, whilst passing rents from the investment portfolio totalled £318 million at that date. Further details of net rental income, including a like-for-like analysis, are provided in the Financial Review on pages 21 and 22.

In the UK we agreed 77 rent reviews in 2009, for which the current rents receivable were £8.5 million, and secured additional income of £1.3 million per annum. Assuming that rent reviews outstanding at the end of the year are settled at ERV, annual rents could increase by a further £3.4 million.

Rents at shopping centres in France change annually according to either a composite index, partly based on retail prices, or a construction cost index. From 1 January 2010, indexation of 0.84% will be applied to around 60% by value of the retail leases in Hammerson's French portfolio. The corresponding index for 2009 was 3.85%. The balance of the leases is indexed according to construction costs, for which the index for 2010 is -4.1%.

BUSINESS REVIEW

Continued

Occupancy/ vacancy

EPRA has issued revised guidance for the calculation of vacancy. Previously, vacancy was reported as a percentage of the total ERV of a property or portfolio. The revised definition expresses vacancy as a percentage of rents passing plus the ERV of vacant space. We have adopted this new definition and restated our 2008 comparatives for vacancy and occupancy data.

By the end of 2009, occupancy in the investment portfolio returned to its December 2008 level of 95.2%. A strong letting performance at the developments completed in 2008 offset the effects of the inclusion of 60 Threadneedle Street and Union Square following their completion in 2009.

The retail schemes at Highcross, Leicester; Cabot Circus, Bristol; and, O'Parinor, to the north of Paris, were respectively 94%, 95% and 99% let at 31 December 2009, whilst, in the City of London, 125 Old Broad Street was 91% let and 60 Threadneedle Street was 73% let. At the latter property, leases for the remaining space are in solicitors' hands.

Income security and quality

The weighted average unexpired lease term in our investment portfolio was around nine years at the end of 2009, indicating both a secure income stream and the potential for rental growth.

In the UK at 31 December 2009, 45 retail units were let to tenants in administration, and of these, 23 were still trading. The equivalent figures for France were 19 and 13 units respectively. The number of tenants in administration is lower than at the beginning of 2009, and substantially lower than at 30 June 2009. For the Group as a whole, income from tenants in administration represents 1.6% of passing rent at 31 December 2009.

Hammerson's largest tenants by rental income are shown in the table below. The ten largest retail tenants account for £52 million or 16% of total passing rents at 31 December 2009. In the office portfolio, the five largest tenants represented £23 million or 7% of total passing rents.

In addition to the above, our share of the rent passing from the lease to Allen & Overy at Bishops Square is £8.6 million. Hammerson's investment in Bishops Square is now accounted for as an associate and is excluded from the rental and other data presented for the investment portfolio.

BUSINESS REVIEW

Continued

All new leases are assessed for the covenant strength of prospective tenants. Our credit control team monitors the credit ratings of all key tenants, using a credit rating agency's risk indicator scale of one to five, with one being low risk and two lower-than-average risk. At 31 December 2009, all but two of the top ten retail tenants had a rating of one, whilst the remainder scored two. Tenants with a low or lower-than-average risk indicator comprised 78% by passing rent of the UK retail portfolio.

Our office tenants are generally of lower risk than retailers, although we also monitor their risk indicators. At 31 December 2009, four of the top five office tenants had a low or lower-than-average risk indicator and the rent of the fifth was guaranteed by its parent company. There have been no significant rent payment defaults in our office portfolio in 2009.

Retailer performance

In the UK, like-for-like turnover at Hammerson's core shopping centres rose by 0.4% during 2009 when compared with 2008, with a poor first half offset by a strong finish to the year.  The Bullring in Birmingham saw like-for-like growth of 3.8%, outperforming the Hammerson portfolio average.  At Highcross, Leicester, the extension, which opened in September 2008, diluted turnover at comparable retail stores. 

In the UK, like-for-like sales at medium-sized stores increased by an average of 4.0% in 2008 and by 0.4% in 2009, whilst sales at department stores have fallen by 4.5% over the same period.  Across merchandising ranges, fashion, non-fashion and leisure have performed reasonably well, but general merchandise has suffered.

Footfall trends have been mixed with growth at Highcross, Leicester, following the opening of the extension and at WestQuay, Southampton, as a consequence of the opening of an IKEA store next door which also attracted customers to the shopping centre.  Elsewhere footfall declined slightly, suggesting a general picture of fewer visits but higher spending per visit.

In France, retail spending was subdued in 2009, despite a good Christmas season.  Nationally, sales at regional shopping centres fell by 4.2%, with Hammerson centres showing a decline of 3.6%.  Italie 2 recorded the best performance with sales stable, thanks to the introduction of new concepts and the rebranding of the supermarket.  O'Parinor, Espace Saint Quentin and Cergy 3 Fontaines also performed better than the national average whilst Bercy 2 and Place des Halles suffered from competitor activity.

In the Hammerson France portfolio, turnover at unit shops was flat whilst larger stores saw sales decline by 2.8%; hypermarket sales decreased by 7.5%.

Footfall performances matched the national benchmark at -3.7% year-on-year.  Bercy 2 (+0.6%) and O'Parinor (-1.5%) outperformed within the portfolio.

Affordability of rents

In the UK, affordability levels, measured as rents as a percentage of sales turnover, at stronger locations such as Bullring, WestQuay and Oracle were marginally lower at the end of 2009, which should enable future rental growth as turnover levels recover.  Elsewhere, and particularly at the recently completed centres in Bristol and Leicester, rent to sales ratios are high.  As these centres mature and sales grow, affordability is expected to improve. 

BUSINESS REVIEW

Continued

In France, the level of rents in relation to turnover is generally lower than in the UK. However passing rents have risen due to increases in the rental indices in 2008 and 2009 and there is pressure on turnover due to the economic downturn.

Lease expiries and breaks

The table above shows that leases with current rents passing of £80.7 million will expire, or are subject to tenants' break clauses, during the period from 2010 to 2012. Assuming renewals take place at current rental values, we estimate that additional rents of £5.2 million per annum would be secured. Rental uplifts in the retail portfolio would be partly offset by over-renting in the UK office portfolio. This is not a forecast and takes no account of void periods, lease incentives or possible changes in rental values.

BUSINESS REVIEW

Continued

Rent reviews

The investment portfolio as a whole was 4.1% reversionary at the end of 2009, compared with 3.8% at 31 December 2008. Although reversion in the UK portfolio has fallen, particularly at our office buildings where rental values have declined, the impact was more than offset by the sale of over-rented properties in France.

The table above shows that in the UK, leases with passing rents of £84.4 million are subject to review over the next three years. On review, we estimate that rents receivable in respect of these leases would increase by £4.4 million per annum by 2012, if reviewed at current rental values. Assuming that outstanding rent review negotiations are concluded at current rental values, an additional £3.4 million per annum would be secured. This is not a forecast and takes no account of potential changes in rental values before the relevant review dates.

In France, the majority of leases are subject to annual indexation.

Contracted income: Developments completed in 2008 and 2009

In 2010, our cash flow will increase substantially due to leases and contracts that have been signed at recently completed developments. The table below shows contracted income on both cash flow and accounting bases.

BUSINESS REVIEW

Continued

Developments

Our objectives from development are:

·      to create assets which generate an attractive initial yield with significant future growth in income;

·      to create assets valued at a surplus above our costs; and

·     to create prime assets of a type which are difficult to obtain in the open market.

Hammerson has built a reputation as one of the leading developers in the UK and France, managing complex urban regeneration schemes and forging strong links with local authorities and key occupiers. In April 2009, we were named Property Week's Developer of the Year. The completion of Union Square in October marked the end of our recent programme of major developments. The developments shown in note 8 to the accounts on page 42 principally represent the costs incurred to date on the development pipeline.

Hammerson has a substantial pipeline of potential future development opportunities. We have maintained close contact with the local authorities involved with these schemes and continued to progress planning, legal and design work so that we may benefit from them as market conditions improve.

In December, we acquired Les Terrasses du Port, Marseille, one of the largest shopping centre developments anticipated in France over the next few years. The initial capital commitment, including the acquisition cost, is expected to be approximately £45 million in the first six months. The 52,000m² centre will provide 150 stores, a 260m-wide restaurant terrace overlooking the sea and 2,850 car parking spaces.  There is strong retailer interest in the scheme, with leases in respect of 44% of the retail income pre-let or under offer. Net rental income is anticipated to be £29 million per annum and the total development cost will be around £400 million. We expect to start enabling work later in 2010.

We have also achieved the following milestones during 2009:

·             In April, Southampton City Council granted outline planning consent for Watermark WestQuay, a project set on a four hectare brownfield site adjacent to our existing WestQuay Shopping Centre. The consent was subject to confirming S106 provisions, which were agreed in February 2010, and a development agreement with the Council is now in place. The mixed-use scheme will include up to 24,000m² of retail space, a hotel, a residential building with up to 240 apartments and leisure facilities.

·             We have entered into an agreement with The City of London Corporation, which provides us with a development option for the St Alphage House, London EC2 site. We intend to follow a full consultation process and work up the scheme design over the next two years.

·             In November, The London Borough of Hackney approved Hammerson's Bishops Place Regeneration Project. The scheme will open up a 1.3 hectare site in the heart of London and almost half of the scheme's footprint will be allocated to the public realm. The 140,000m² project, designed by Foster + Partners, will include high quality offices, residential accommodation, a hotel, serviced apartments and retail space. The site will also accommodate 50 affordable housing units, comprising properties for both shared ownership and rental.

·             The London Borough of Barnet passed a resolution to grant planning consent in November for the £4.5 billion Brent Cross Cricklewood regeneration plan. The partners of the joint venture proposing the scheme are the owners of Brent Cross Shopping Centre, Hammerson and Standard Life, and a separate joint venture between Hammerson and Brookfield Europe. A new town centre will be created, incorporating the delivery of 7,500 new homes, 27,000 jobs, three schools, a new train station, six bridges, new open spaces and an extension to Brent Cross Shopping Centre.

·             Our proposed retail-led regeneration of Leeds city centre, Eastgate Quarter, has outline planning consent. We have a development agreement with Leeds City Council and agreements for lease with anchors John Lewis and Marks & Spencer.

·             In Sheffield, we have outline planning consent for the retail-led Sevenstone development and detailed planning consent for some of the buildings within that scheme. A development agreement is in place with Sheffield City Council and we have an agreement for lease with John Lewis to anchor the centre. Discussions continue with the city council to complete the land acquisition phase of the project.

Since the year end, Hammerson has been appointed as development and asset manager by the administrators of Thornfield Ventures Limited (TVL), a non-trading holding company within the Thornfield Capital Limited group. Hammerson has not committed any capital to TVL or its subsidiaries. The principal asset of TVL is The Rock in Bury, a 60,000m² shopping centre development which is scheduled for completion this summer. As well as managing the development and the letting process, we will manage and evaluate the other properties and potential developments of the group.

FINANCIAL REVIEW

The financial information contained in this review is extracted or calculated from the attached income statement, balance sheet, cash flow statement, other financial statements, notes and the glossary of terms.

Result before tax

There was a loss before tax of £453.1 million for the year ended 31 December 2009, compared with the loss of £1,611.5 million for 2008. The reduction in the deficit reflects the slowing decline and, in the second half of the year, partial recovery, in property values during 2009. Accordingly, for the first six months of the year, the Group reported a loss of £818.5 million, but a profit of £365.4 million in the second half. Development properties are now accounted for under IAS 40 'Investment Property' and revaluation changes for developments are recognised in the income statement alongside those for investment properties.

In note 2 to the accounts, we have reanalysed the income statement to separately identify recurring, or 'adjusted', income and expenditure from large one-off items and valuation changes, categorised as 'capital and other'. The table below reconciles the loss for the year to the adjusted profit before tax of £130.0 million.

Adjusted profit before tax was £16.3 million, or 14%, higher than the previous year. Disposals and the cessation of capitalised interest at the recently completed developments reduced profit. However, these effects were more than offset by the interest saved by using the rights issue proceeds to repay debt, lower interest rates, the movement in exchange rates, rental indexation in France and rent reviews in the UK.

Adjusted earnings per share were 19.7 pence for 2009, a reduction of 6.1 pence compared with 25.8 pence for the year ended 31 December 2008. The comparative figure for 2008 has been restated to take account of the bonus share element of the rights issue in March 2009. Note 7A to the accounts on page 41 provides detailed calculations for earnings per share.

The following table summarises the calculation of adjusted earnings per share in 2008 and 2009:

FINANCIAL REVIEW 

Continued

Net rental income

At £293.6 million, net rental income for 2009 was £6.2 million, or 2.1%, lower than in 2008. The income lost from disposals was greater than that gained from recently completed developments, the effects of exchange and indexation in France. The tables below compare net rental income for 2009 and 2008, analysing the portfolio between investment properties owned throughout both years and those properties which have been acquired, sold or been under development at any time during the two year period.

Included within net rental income in 2009 is net income from car parks of £8.6 million and rent related to tenants' turnover, which amounted to £3.5 million. The comparative figures for 2008 were £8.4 million and £3.0 million respectively.

There is a trend in advertising away from television and radio and towards other media.  This has worked to the advantage of retailing destinations such as shopping centres, so that Hammerson benefits from additional income through the sale of advertising and merchandising opportunities in its malls.  In total this income amounted to £5.4 million in 2009 (2008: £6.0 million).

Property outgoings were £52.5 million in 2009, up from £38.2 million in the previous year. The increase principally reflected higher costs of vacancy, including unrecovered service charges, together with lease incentives written off and bad debt expense.

Our investment portfolio generated an increase in net rental income of 1.1% on a like-for-like basis, as the impact of lettings, indexation and rent reviews more than offset the increased cost of vacancy in the UK retail portfolio.

The table above reconciles net rental income disclosed in the income statement to the net income receivable, which is a proxy for the net cash inflow from tenant leases. The amortisation of lease incentives and rent allocated to rent free periods have both increased year on year reflecting a full year's adjustment for the developments completed in 2008 and 2009. The increase in tenant incentives written off is principally a result of tenants going into administration.

FINANCIAL REVIEW 

Continued

Administration expenses

Administration expenses were £41.0 million for the year ended 31 December 2009, compared with £42.3 million for 2008. Lower staff numbers following the reorganisation in 2008 and reduced performance related bonuses contributed £2.6 million to the reduction. A charge of £0.8 million is included in administration expenses in 2009 in respect of John Richards' retirement. Management fees receivable were £1.6 million lower than in 2008 due to the completion of several joint venture developments late in 2008 and the reduction of asset management fees linked to property values.

FINANCIAL REVIEW 

Continued

Net finance costs

Excluding the change in fair value of derivatives, capitalised interest and one-off investment income, net finance costs were £133.5 million in 2009, some £46.2 million or 26% lower than the equivalent 2008 figure of £179.7 million. The reduction reflected the use of the proceeds of the rights issue and disposals to reduce indebtedness, together with lower interest rates.

Interest capitalised in respect of developments was £10.0 million, virtually all of which related to Union Square, which completed in October. In 2008, interest capitalised totalled £35.9 million.

The Group's average cost of borrowing in 2009 was 5.1%, slightly lower than the average cost of 5.4% for 2008.

Share of results of associate

During 2009, we sold a 75% interest in Bishops Square. Our remaining 25% investment in the company which owns the property and its related debt is accounted for as an associate. The share of results of the associate includes £0.9 million in respect of Hammerson's share of net rental income and interest costs.

Tax

Due to its status as a UK REIT and French SIIC, the Group bears minimal current tax.

Until mid-2009, a deferred tax provision was made for the UK tax that could arise on dividends to be received by Hammerson plc from French subsidiaries under the SIIC rules. However in July 2009, a corporation tax exemption for foreign dividends, introduced by the UK Government, was enacted. The result of this is the release of virtually all of the opening deferred tax provision for 2009 of £108 million.

The tax case relating to capital gains incurred by Grantchester prior to its acquisition by Hammerson in 2002, for which the Group paid a total of £52.0 million in tax and interest in 2008, has been settled in favour of HM Revenue & Customs. No further tax costs were incurred in 2009.

Dividend

The Board has approved a second interim dividend, in lieu of a 2009 final dividend, of 8.5 pence per share. Together with the first interim dividend of 6.95 pence, this makes a total dividend of 15.45 pence per share for 2009. The total dividend for 2008 was 27.9 pence and this year's dividend reflects the increased number of shares in issue following the rights issue.

The second interim dividend, for which the record date is 5 March 2010, will be paid as a PID, net of withholding tax if appropriate. Following the success of 2009's first interim dividend scrip alternative, shareholders will be offered a similar arrangement for the second interim dividend and have until 19 March 2010 to elect for the scrip alternative. Further details of the scheme are provided in a letter which is being sent to shareholders today. Where shareholders elect for the scrip dividend alternative, this will not be treated as a PID and will not be subject to withholding tax.

Shareholders should note that, whilst the scrip dividend scheme enables the Directors to offer an alternative to the cash dividend, there is no guarantee that the Board will offer a scrip dividend alternative for any future dividends.

FINANCIAL REVIEW 

Continued

Cash flow

Cash generated from operations was £239 million in 2009 compared with £346 million in the previous year. The figure for 2008 was particularly high due to the effects of exchange, the timing of receipts from tenants for the December quarters of 2007 and 2008 and the timing of VAT receipts and other changes to working capital. The cash generated from operations in 2009 also reflected disposals in 2008 and 2009. The increase in the cash inflow from operating activities from £30 million in 2008 to £105 million in 2009 reflected lower interest payments as a result of the rights issue, property disposals, lower interest rates and large tax payments in 2008 in respect of the final instalment of the UK REIT entry charge, the settlement of prior year tax liabilities and overseas disposals.

Capital expenditure, including acquisitions, was £227 million in 2009, whilst £424 million was raised from disposals.

After taking account of the net cash outflow from financing activities of £204 million, including the £584 proceeds from the rights issue, there was a net increase in cash and deposits of £68 million in 2009.

Balance sheet

At 31 December 2009, equity shareholders' funds were slightly up on the year at £2.9 billion, as the decline in property values was offset by the proceeds from the rights issue and retained profit. After adjusting for deferred tax and other items, adjusted net asset value per share was £4.21. Detailed calculations for net asset value per share are provided in note 7B to the accounts and the table below shows a reconciliation of the movement in net asset value over the year.

^{* Excluding deferred tax and the fair value of derivatives, calculated in accordance with EPRA best practice.}

FINANCIAL REVIEW 

Continued

Changes to IFRS mean that developments are now accounted for under IAS 40 Investment Properties. Properties on which development is ongoing have been separately identified within note 8 to the accounts. Income generating properties which were acquired with the intention of being developed have been reclassified as investment properties within the note. These properties will be categorised as developments in the event that a development commences.

Financing

Our policy is to optimise the Group's weighted average cost of capital by using an appropriate mix of debt and equity. The Group's financial structure is monitored with reference to guidelines approved by the Board which currently include a minimum interest cover of 2.0 times, gearing of no more than 85% for an extended period and a net debt to EBITDA ratio of less than ten times. For 2009, these ratios were 2.2 times, 72% and 8.3 times respectively.

We manage the Group's exposure to interest rate and currency fluctuations using appropriate hedging policies.

At 31 December 2009, borrowings were £2.3 billion and cash and deposits were £183 million so that net debt totalled £2.1 billion, compared with £3.3 billion at the beginning of the year. Property disposals and the rights issue reduced net debt by approximately £1.4 billion. Hammerson's share of the debt secured on Bishops Square is included in the balance sheet within 'investment in associate'.

At the year end, the Group's borrowings had a weighted average maturity of around eight years and 78% of gross debt was at fixed rates of interest. The chart below shows the maturity profile of our debt portfolio.

http://www.rns-pdf.londonstockexchange.com/rns/4432H_1-2010-2-19.pdf

Undrawn committed facilities were £584 million at the end of 2009, which, together with cash and short-term deposits, provided liquidity of £767 million. Just £97 million of the undrawn facilities mature by the end of 2011. Committed expenditure at the end of 2009 amounted to £60 million.

FINANCIAL REVIEW 

Continued

The Group's unsecured bank facilities contain financial covenants that the Group's gearing, broadly equivalent to the ratio of net debt to shareholders' equity, should not exceed 150% and that interest cover, defined as net rental income divided by net interest payable, should be not less than 1.25 times. Three of the Company's unsecured bonds contain a similar gearing covenant and two contain a covenant that gearing should not exceed 175%. The bonds do not contain an interest cover covenant.

Gearing at the end of 2009 was 72%. The substantial reduction from the figure of 118% at 31 December 2008 resulted from lower levels of net debt, partly offset by the reduction in shareholders' equity arising from the decline in the value of the property portfolio.

At 31 December 2009, the market value of the Group's debt was £5 million lower than its book value. The corresponding figure for 2008 was £614 million and the substantial reduction during the year is principally the result of narrower credit margins.

Responsibility statement OF THE DIRECTORS ON THE ANNUAL REPORT

The Responsibility Statement has been prepared in connection with the Company's full Annual Report for the year ended 31 December 2009. Certain parts of the Annual Report are not included within this announcement.

We confirm to the best of our knowledge:

Signed on behalf of the Board on 22 February 2010

Consolidated INCOME STATEMENT

Consolidated balance sheet