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British Land: one of our five to watch for 2018

George Salmon | 21 December 2017 | A A A
British Land: one of our five to watch for 2018

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

British Land Co plc Ordinary 25p

Sell: 510.20 | Buy: 510.60 | Change -15.20 (-2.91%)
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Despite continued asset sales, underlying profit for the half year is level at £198m, as lower financing and administration costs offset the effect of net rental income dropping £15m to £297m. The shares rose 1.5% on the news.

The half year dividend is increased 3% to 15.04p.

Our view

British Land's property portfolio includes shopping centres from Glasgow to Plymouth, and prime central London offices. Together, they cover an area equivalent to 328 Wembley pitches.

The group is a Real Estate Investment Trust, or REIT. This means it's legally required to return 90% of its rental profits to investors as dividends, making for a potentially attractive income.

With 97.6% of its buildings occupied, and an average lease that has eight years to run until first break, future rental income is very visible. A high quality, blue-chip tenant base should mean income is able to weather downturns.

However, with lots of exposure to financial services, and the drop in the pound squeezing consumers, Brexit fears are weighing heavily on the stock. Asset values have so far proven resilient. But a retreating share price has left the shares trading on a forward price to book value of 0.77 times, a 12% discount to its longer-term average.

A depressed share price means the prospective yield is higher than it might otherwise be, currently at 4.6% compared to roughly 4% if it were trading in line with its longer-term valuation. The risk is a disorderly Brexit, which could mean capital values have further to fall.

Those in search of an income, and prepared to weather Brexit-induced volatility, might consider British Land. Lower debt levels suggest management have half an eye on an uncertain outlook. Nonetheless, the company clearly thinks its shares are good value at present, reinvesting proceeds from recent sales in a £300m share buyback.

Half year results (16 November 2017)

Net asset value (NAV) is up 2.6% year to date, to £9.6bn. This equates to a NAV per share of 939p.

Occupancy has dipped marginally over the half to 97.6%, and the weighted average lease length is 8 years.

During the period, British Land secured an additional £32m of future rent by leasing 1.3m sq ft of space at net effective rents 6.8% ahead of estimated rental value (ERV). The majority of this was achieved in the Central London portfolio.

On the same day as results were released, the group announced it has secured a 20 year pre-let agreement with Dentsu Aegis Network, its largest West End office pre-let deal since 1995. Other notable developments include Facebook increasing its rented space at Regent's Place to nearly 185,000 sq ft.

The ERV of the group's committed pipeline stands at £55m, with 57% pre-let or under offer.

Disposals continue, with £992m of assets sold in the period at an average premium to book value of 13%, more than offsetting the £215m of acquisitions and capital spend. This has helped fund £156m of share buybacks so far this year, with another £144m expected by the year end. Sales have also helped reduce loan to value (LTV) by 3 percentage points to 26.9%. The group's average debt maturity is nine years.

Looking ahead, the group expects rents in the Retail and London Office market to be flat or dip slightly over the coming 12 months. However, in both areas the group is confident its strategy of focusing on prime assets will pay off as the best space attracts the strongest demand.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.