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British Land - Retail troubles knock NAV and profits

Nicholas Hyett | 14 November 2018 | A A A
British Land - Retail troubles knock NAV and profits

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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: 510.60 | Buy: 511.20 | Change -3.60 (-0.70%)
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Underlying earnings per share were flat year-on-year, excluding one-off payments received for the early cancellation of leases. That reflects rental growth and share buybacks, which offset the effects of asset sales and problems in the retail sector.

The interim dividend rose 3% to 15.5p, while net asset value (NAV) per share fell 2.9% to 939p as retail property values declined.

The shares were broadly flat in early trading.

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Our View

With Brexit threatening to force bankers from London, and retailers struggling in the face of ever rising costs and online competition, conditions are hardly rosy for British Land.

The group's strategy of targeting high quality destination shopping centres and mixed use London campuses has been insulating it from the worst effects. Although it still saw NAV per share shrink in the first half.

But the reason for investing in British Land at the moment is really its dividend.

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.

A high quality list of blue chip tenants and relatively long leases means it has excellent visibility over future income and that's allowed it to steadily increase the dividend with confidence.

The risk of a disorderly Brexit has muddied the waters, and knocked the share price. As deal deadlines approach that risk has only increased, and it'd be foolish to think the shares wouldn't fall further if the UK ends up crashing out of the EU.

In some ways British Land's retail assets may actually be facing the bigger challenge though. Destination shopping centres may be faring better than the wider high street, but they're still feeling the online squeeze as footfall and sales fall. That's denting property values, and CVAs and administrations are hitting rents as well.

Longer term we think larger shopping destinations like British Land's Meadowhall have some defence against online retailers - shopping here is a pastime as much as a necessity - and the closure of other retail destinations can only help.

While management have added to the portfolio here and there, including a 4.9 acre slice of Woolwich for £103m, in the main they've moved to a more defensive position by selling assets and lowering debt levels.

We think that's a sensible move. We also like the decision to use some of the proceeds of those sales to buy back stock. Selling properties for book value and repurchasing shares at a healthy discount, currently 33%, should be in shareholders' interest.

A depressed share price means the prospective yield of 5% is higher than it might otherwise be. We think those in search of a steady income could do worse than consider British Land, as long as they're prepared to weather Brexit-induced volatility.

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Half Year Results

Total rental income in the first half of the year was £267m, versus £297m this time last year.

That reflects a £10m hit from divestments and the lack of £20m in surrender premia received in the previous period. A £6m loss from companies entering a CVA or administration was more than offset by £7m of rental increases.

With operating expenses broadly the same as last year, underlying profit fell 14.6% to £169m.

Leasing activity and occupancy remains strong. The London Campus estate is 98% occupied with the Retail estate 98% occupied.

The decline in NAV per share was driven largely by a 4.5% fall in retail valuations, partially offset by a 0.7% increase in valuations for the group's London office estate.

The group completed £842m of asset disposals in the period, including the £500m sales of a 50% stake in 5 Broadgate in central London and £139 of retail sales.

Debt repayments following asset sales mean British Land is now operating with a loan-to-value of 26.7% (March 2018: 28.4%).

Find out more about British Land shares including how to invest

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.