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British Land - Retail headwinds see portfolio creak

Nicholas Hyett | 13 November 2019 | A A A
British Land - Retail headwinds see portfolio creak

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British Land Co plc Ordinary 25p

Sell: 493.40 | Buy: 493.80 | Change 16.50 (3.46%)
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Net rental income fell 9% year-on-year, to £243m, reflecting £1.2bn of asset sales over the last 18 months. Underlying earnings per share fell 6.4% to 16.1p, with lower rental income partially offset by share buybacks.

However, ongoing challenges in retail meant the value of British Land's portfolio fell 4.3% to £11.7bn. That's equivalent to 856p per share.

The interim dividend rose 3% to 15.97p per share.

The shares fell 1.9% in early trading.

View the latest British Land share price and how to deal

Our View

Conditions are hardly rosy for British Land's portfolio of London office space and nationwide retail assets. Brexit's threatening to force finance and tech groups from London, while retailers are struggling in the face of ever rising costs and online competition. But while Brexit might attract the headlines, it's actually retail which is causing British Land the greater headaches.

High profile bankruptcies in the sector have dented the rental roll, while a series of Corporate Voluntary Agreements (CVAs) mean other retailers have been able to cut tenancies unexpectedly short. Increased empty space combined with a lack of buying activity in the sector has seen British Land take a substantial hit on the value of its portfolio.

The good news is most of the empty stores have been re-let fairly quickly, and British Land's sites have outperformed the wider market in terms of footfall and sales. 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.

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 41% now. Offices will pick up some of the slack, while Residential developments grow from next to nothing to around 10% of assets. The huge 53 acre Canada Water development, which has taken another step towards reality, will play an important part in that transition.

The good news is that although debt is rising, it's still reasonably comfortable. And with recent sales still coming in above book value, while the shares trade at 0.6 times book value, selling retail assets and recycling the cash elsewhere has the potential to do good things to the share price.

But while the portfolio revamp's going on under the surface, the more immediate issue for investors is the dividend - whether it's sustainable and whether it can grow.

As a Real Estate Investment Trust, or REIT, the dividend yield, currently 5.6% on a forwards basis, has always been British Land's main attraction. After all it's legally required to return 90% of its rental profits to investors as dividends.

A high quality list of blue chip tenants and relatively long leases means the group's traditionally enjoyed excellent visibility over future income, which helps it increase the dividend. But the group's more mindful of Brexit these days, and with the Retail business also struggling growth's not as certain as it once was and likely to be modest in any event.

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Half year results

British Land's Offices portfolio saw valuations creep up 0.4% to £ 6.4bn, thanks to increased demand for the group's prime central London campus assets, particularly in the City of London. Occupancy slipped slightly but remains high overall at 97.2%, with newly let space coming in 11.1% ahead of estimated rental values.

Average valuations in Retail fell 10.7%, and combined with asset sales means the portfolio is now worth £4.8bn. Occupancy was slightly lower at 96.3%, while new leases came in around 3.5% ahead of estimated rental value. The group completed £236m of retail asset sales during the half at a modest premium to book value.

The group's development opportunities are 87% pre-let, and expected to generate rental income of £63m once fully let. The value of the Canada Water development has increased 12.4% to £347m following the receipt of planning permission.

Weighted average lease length to first break fell from 6.4 years in March to 5.8 years at the end of September.

Loan-to-value across the portfolio rose to 30.8% (2018: 28.1%), as the now completed share buyback and development activity increased net debt.

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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.