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British Land - retail hit but offices still reasonably strong

Nicholas Hyett, Equity Analyst | 27 May 2020 | A A A
British Land - retail hit but offices still reasonably strong

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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: 493.40 | Buy: 493.80 | Change 16.50 (3.46%)
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Net rental income fell 10.2% in the year to 31 March, to £478m. That reflects the sale of some properties, lower rents in others and increases in delayed payments from tenants.

However, the real impact of the coronavirus outbreak didn't hit until the end of the year, with the group collecting just 68% of rent due between 2 March and 30 April. That affected property values at the year end, with net asset value down 14.5% to 774p per share.

As a result the group reported an after tax loss of £1.1bn for the year.

British Land still has significant headroom over its covenants (conditions set by its lenders) and access to substantial liquidity. As previously announced the group has suspended its dividend for the time being.

The shares rose 2.9% in early trading.

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Our View

British Land's retail 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 whether it would be forthcoming is unclear. In any case management have clearly decided that helping crisis hit tenants through the tough times is more important - with 44% of March and April retail rent either deferred or forgiven. 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 historically outperformed the wider market in terms of footfall and sales. However we think the current crisis will accelerate 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 consolidating the retail portfolio through asset sales, and is focussing on larger sites with the potential for mixed use. The combination of asset sales and falling property values means retail now accounts for less than 35% of the portfolio and it should steadily decline as times goes on.

By comparison property value and rents are still growing in the far larger London office portfolio. New developments should contribute to growth over time and the group also hopes to develop a moderate residential business. The huge 53 acre Canada Water development will play an important part in that transition. Whether the coronavirus outbreak, and shift to home working, affects long term demand for office space remains to be seen, but British Land's flagship assets should be some of the most resilient office assets out there.

Fortunately British Land's balance sheet was in relatively good shape going not the current crisis. Access to significant cash financing from banks should allow it to weather the immediate storm. However, the group has still decided to suspend the dividend. That's very unusual for a REIT, but management believe keeping cash in the business is in the long run interest of investors.

Always bearing that caution in mind, we flag that British Land's share price is currently around 50% lower than management's estimated asset value per share. It's very likely the value of British Land's properties will see further writedowns over the coming months, but at the current valuation you could assume the retail portfolio was worth nothing at all and still be getting a healthy discount on the remainder of the portfolio.

We think British Land could prove an interesting value opportunity for investors prepared to take a higher level of risk and a longer term view. Having said that the road to recovery isn't smooth and there's not guarantee the share price will ultimately recover.

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Full Year Results

While occupancy remains high in British Land's Retail portfolio, some 96%, there were significant challenges this year even before the coronavirus outbreak. Rental agreements signed during the year were 4% below previous rents. CVAs and bankruptcies affected 118 units, with the combination of store closures and rent reductions knocking £11.3m off the annualised rent roll.

Following the coronavirus outbreak all but two of British Land's Retail sites are trading to some extent, although only 15% of units are open. A further £5.1m of rental income has been affected by customers falling into administration, with retail valuations down 26.1%, with retail now accounting for 34.7% of the group total. British Land collected 43% of rents due between the start of March and end of April, with forgiving rents for smaller retailers and agreeing deferrals for others.

Occupancy in the group's Office portfolio also remain high, at 97%, with valuations rising 2.3%. Lettings and renewals within the portfolio were on average 9.1% ahead of estimated rental value. The group collected 97% of Office rent due between the start of March and end of April.

The Canada Water project received initial planning approval during the year, increasing the value of the site by 9.8%. Some other developmentas, including 100 Liverpool Street and 1 Triton Square, have seen speed of development affected as social distancing measures are introduced.

British Land completed £118m of acquisitions in year and £385m of capital investments, with £382m of disposals - a net investment of £121m. Disposals were concentrated in the retail portfolio, with some acquisitions in offices and residential.

The group finished the year with underlying net debt of £3.9bn, up 9.5% year-on-year. That reflects lower cash flows from operations as well as increased levels of investment. LTV at the year end stood at 34%.

British Land finished the year with access to £1.3bn in undrawn borrowing facilities and cash. The group could withstand a further 45% fall in valuation before needing to take any action on covenants.

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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.