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British Land - continues to shrink the retail portfolio

George Salmon | 15 May 2019 | A A A
British Land - continues to shrink the retail portfolio

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British Land Co plc Ordinary 25p

Sell: 533.60 | Buy: 534.00 | Change 2.80 (0.53%)
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British Land's full year results are broadly as expected, with net asset value (NAV) falling 6.4%, as lower valuations in the retail business were only partially diluted by share repurchases.

The full year dividend rose 3.1% to 31p, including a final payment of 7.75p.

The shares were little moved following the announcement.

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Our View

Conditions are hardly rosy for British Land's property portfolio of London office space and nationwide retail assets. That's because Brexit is threatening to force bankers from London, and retailers are struggling in the face of ever rising costs and online competition.

But we think the reason for investing in British Land at the moment is its dividend, which offers a prospective yield of 5.6%.

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 traditionally enjoyed excellent visibility over future income, which helps it increase the dividend. But the group's more mindful of Brexit these days, and the unknowns make it harder to predict what future increases might look like.

Destination shopping centres may be faring better than the wider high street, but they're still feeling the online squeeze as footfall and sales slump. That's denting property values, while CVAs and administrations are hitting rents as well.

Looking ahead, the group expects its exposure to retail to fall to around a third of the asset base in 5 years' time, down from 45% now. Office will pick up some of the slack, and Residential developments growing from next to nothing to around 10% of assets.

British Land isn't sitting on its hands while the retail world changes though. The group's making strides to consolidate the retail portfolio through asset sales, and is focussing on larger sites with the potential for mixed use.

And choosing to sell a larger number of assets is helping lower debt levels. We think that's the right call as the group prepares to charter unknown economic waters. 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 38%, should be in shareholders' interest.

With a prospective yield of 5.6%, we think those in search of income could do worse than consider British Land, as long as they're prepared to weather Brexit-induced volatility.

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Full year results

Despite like-for-like rental growth of 2.4%, net rental income fell 7.6% to £532m due to the non-repeat of one-off break fees received in the prior year, asset sales and losses from companies entering a CVA or administration.

With administrative fees and finance costs only falling slightly, underlying profit declined 10.53% to £340m. £200m of share buybacks limited the decline in underlying earnings per share, which dropped 6.7% to 34.9p.

Over the year British Land oversaw £938m of net disposals, £472m of which was in retail - including 12 Sainsbury's stores for £193.5m. Residential net sales totalled £348m, with £139m in offices.

This helped reduce net debt by £452m to £3.5bn, so despite the fall in property valuations, the loan-to-value ratio declined slightly to 28.1%.

The London office estate is 97.7% occupied, with the Retail estate 96.7% occupied. However, once units expected to become vacant are taken into account, that number falls to 96.1%.

British Land remains mindful of the ongoing Brexit uncertainty, particularly around increased development costs. To mitigate concerns, the group's costs are now 93% fixed.

The buyback scheme has been extended by up to £125m.

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 disclosure for more information.