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British Land - support for retailers but dividend suspended

Nicholas Hyett, Equity Analyst | 26 March 2020 | A A A
British Land - support for retailers but dividend suspended

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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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British Land is taking steps to support its retail tenants through rent relief and delays. While underlying earnings for the year to March 2020 are expected to be broadly in line with previous expectations, valuations are subject to material uncertainty going forwards. Until there's greater clarity the group is unable to provide guidance for the coming financial year.

The board has decided to temporarily suspend dividend payments with immediate effect. This includes the third quarter payment which had been due for payment in May.

The shares fell 2% in early trading.

View the latest British Land share price and how to deal

Our View

British Land's tenants are among the hardest hit by the coronavirus outbreak. With stores shut, revenue will be zero.

In theory British Land is still entitled to collect rent, but management have clearly decided that helping crisis hit tenants through the tough times is more important. We think that's a sensible decision, ensuring there are still shops to open at the end of this comes above a few months' rent.

It comes at an already difficult time for retailers, with online competition mounting. Last year saw several high profile bankruptcies in the sector that 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. But there's a risk the current crisis speeds up the shift from bricks to clicks.

British Land isn't sitting on its hands while the retail world changes around it 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 will play an important part in that transition. It's worth bearing in mind though that a move towards home working could cause headaches in offices too.

The good news is that going into the current crisis British Land's balance sheet was in relatively good shape, with access to significant cash financing from banks. That should allow it to weather the immediate storm.

However, the group has still taken the decision to suspend the dividend payments. That's unusual because REITS, like British Land, are required to pay out 90% of rental profits and that might not happen this year. Management believe keeping cash in the business is in the long run interest of investors though, and are in discussions with HMRC about temporary non-compliance in these exceptional circumstances.

The long list of uncertainties have seen the shares fall to 0.4 times book value - a 50% discount to the long run average. However, we'd suggest investors are very cautious when using ratios like this at the moment. It seems very likely the book values of British Land's properties will be written down over the coming month and that means the discount may not be quite as good as it looks.

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Coronavirus Update

British Land's portfolio is made up of 55% London offices, 41% Retail and 4% Development and Residential.

All but one of the group's retail centres remain open. However, only 12% of individual units are open - those let to essential services like supermarkets and pharmacies.

The group is releasing its smaller, food & beverage and leisure customers from the rental commitments for three months to support them through the crisis. That is expected to cost the group £3m in lost rent and service charges.

For larger tenants, British Land is looking at delaying this quarter's rent payment and spreading it over the six quarters from September 2020. This is expected to affect £40m of revenue.

The group has recently extended it's a revolving credit facility to £450m, and loan-to-value (LTV) currently stands at 31%. It has significant headroom over its loan-to-value covenants and could withstand a fall in the value of its assets of more than 50% without having to take further action.

Activity on British Land's London developments has stopped as of the 25 March.

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.