British Land's gross rental income fell 2.5% in the first half to £268m. However, significant provisions for outstanding rental and service charge payments meant net rent fell 21.4% to £191m.
As a result, underlying operating profits fell 29.6% to £107m. After accounting for a significant decline in the value of the property portfolio, which has fallen 10.3% to 693p per share, British Land reported a loss after tax of £730m.
The group declared an interim dividend of 8.4p per share.
The shares fell 3.4% in early trading to 494p.
Commercial real estate in general, and British Land in particular, is struggling against two major economic trends.
The first is the rapid rise of e-commerce. It's a long running trend, but coronavirus has seen it accelerate. That's bad news for traditional retailers, and even worse for the landlords like British Land that own physical stores.
To be fair, the group has been looking to adapt to that trend for some time. The group's consolidating the retail portfolio through property sales, and is focussing on larger sites with the potential for mixed use. The combination of sales and falling property values mean retail now accounts for only a touch over 30% of the portfolio and it should steadily decline as times goes on. Occupancy remains high, but many tenants are now on very short term agreements, and renegotiations have not tended to go in British Land's favour.
The second is the sudden increase in remote working, and we actually think that's perhaps more concerning.
The group has been recycling the proceeds of its retail sales into its mixed use 'campus' London office portfolio. Property value and rents has been growing steadily and new developments were expected to contribute to growth over time. The 53 acre Canada Water development in particular is expected to play an important part in the transition away from retail, and requires significant investment.
However, the coronavirus pandemic has upset plans. While 95% of the office portfolio is technically occupied, just 18% of normally occupied desks actually had people sitting at them in mid-September. If that trend continues after the pandemic subsides that would affect long term demand for office space. While British Land's flagship assets should be some of the most resilient office assets out there, lower demand is still likely to hit rental rates and property values across the spectrum.
The good news is that British Land's balance sheet was in relatively good shape going into the current crisis. Access to significant cash financing from banks should allow it to weather the immediate storm. As a result the group has resumed dividend payments. But with the new policy set at 80% of profits (rather than an absolute amount), the board are building in room for extra flexibility if conditions deteriorate.
Given the uncertainty the current discount to book value seems reasonable, especially as book values continue to be written down as rent reviews drive lower rental value. While we think the quality of British Land assets probably mean it's one of the better placed property companies in the UK, the disruption striking the industry will not leave it unscathed
British Land key facts
- Price/Book ratio: 0.68
- 10 year average Price/Book ratio: 0.8
- Prospective dividend yield (next 12 months): 3.6%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
British land reported a 14.9% decline in the value of its Retail estate. Shopping centres have particularly suffered, with values down 18.1%, while Retail Parks performed slightly better, down 13.1%.
Across the Retail portfolio 95.5% of stores are occupied. The group received 64% of the rent it was due between the end of September and 10 November. The group completed 439,000 sq. ft. of new lettings agreements in the half, averaging 7.8% behind estimated rental value. The majority of these new agreements cover less than one year.
Retail footfall for September and October was 82% of last year, with retailer sales at 85% of last year.
Since April British Land has completed the disposal of £456m of non-core retail assets - primarily three Tesco stores and four B&Q stores.
In Campus Offices the group reported a 3.1% decline in valuation, with occupancy of 94.7%. Rent collection remains strong at 97% in September. The group agreed 130,000 sq. ft. of new lettings in the half, averaging 9.4% ahead of estimated rental value.
The group sold £219m of standalone office in November. That includes the mixed use Clarges development, which sold for 177m, 7.6% ahead of book value.
The group continued to commit to new development activity in and around its London campus sites. Full approval for the Canada Water Masterplan has now been received, although changing market condition and rising costs mean the group has cut the net value of its assets in the area by 6% to £354m.
Operating cash flows in the half of £62m were down on the £185m achieved a year ago. That was partially offset by asset sales, however, overall loan-to-value (LTV) rose to 35.7% (2019:34.0%).
Going forwards the group will pay dividends semi-annually rather than quarterly.
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