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British Land - retail remains a struggle, with offices glum

Nicholas Hyett, Equity Analyst | 26 May 2021 | A A A
British Land - retail remains a struggle, with offices glum

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British Land Co plc Ordinary 25p

Sell: 522.20 | Buy: 522.60 | Change 4.80 (0.93%)
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British Land reported underlying profits of £201m, down 34.3%. That reflects £65m of provisions for outstanding or deferred rent - money set aside to reflect uncertainty about whether British Land will ultimately be paid. The group has so far collected 83% of rents for the full year.

British Land's portfolio value fell 10.8% year-on-year to £9.1bn, driven by a decline in retail property valuations. Including this move, the group reported an overall loss of £1.1bn.

The group announced a dividend of 15.04p for the full year, down 5.8%.

The shares fell 1.4% in early trading.

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Our View

After an unpleasant year British Land's full year results show some signs that conditions are stabilising.

The group's retail estate is back open, and footfall and sales are approaching pre-pandemic levels, they're actually ahead in the crucial Retail Parks segment. Interest in new office space also picked up as the year progressed - particularly for newer, more energy efficient buildings.

That's something of a relief because British Land is still struggling against two major economic trends.

The first is the rapid rise of e-commerce accelerated by the pandemic. It's bad news for traditional retailers, and 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 retail portfolio has been consolidated through property sales, with a focus on larger, higher quality out of town sites that have performed better in terms of footfall through the pandemic.

The combination of sales and falling property values mean retail now accounts for only a touch over 28% 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 recent renegotiations have not tended to go in British Land's favour. Things are likely to get worse before they get better - the group has £119m of rent owed but not yet paid and assumes 66% of that will never arrive.

The second macro-trend British Land is fighting against is the sudden increase in remote working, and we actually think that's perhaps more concerning.

The group had been recycling the proceeds of its retail sales into mixed use London 'campus' portfolios. These combine topflight office facilities, with retail, leisure and hospitality facilities as well as carefully designed public spaces. Property value and rents have been growing steadily and new developments are 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.

The group's also dipping it toes in logistics and fulfilment assets - think warehouses servicing digital demand - with a 216,000 sq ft development site in Enfield.

However, the coronavirus pandemic has upset plans. While 95% of the office portfolio was technically occupied at the half year, just 18% of normally occupied desks actually had people sitting at them in mid-September. If anything like that level of remote working continues after the pandemic subsides it will hit 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. While write-downs in property values have hit loan-to-value levels, asset sales have offset that and helped reduce overall net debt. That should give the group the cash it needs to invest in its pipeline of new developments and also mean the group's been able to resume dividend payments. But with the new policy set at 80% of profits (rather than an absolute amount), the board is building in room for extra flexibility if conditions deteriorate.

Given the uncertainty, the current discount to book value seems reasonable by historic standards, especially as property values have been 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: 0.69
  • 10 year average Price/Book ratio: 0.79
  • Prospective dividend yield (next 12 months): 3.9%

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.

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Full Year Results

The estimated value of British Land's Retail portfolio fell 24.7% and now stands at £2.6bn. That reflects higher vaccines as tenants face CVAs or administrations. Occupancy in the portfolio now stands at 94.1%, down from 95.7% a year ago, although this falls to 90.6% if units currently in administration are treated as vacant. The group has collected 71% of 2021 retail rents.

Sticking with the retail portfolio, British Land completed 1.7m sq ft of renewals or lettings during the year, with average prices 19% lower than previous passing rents. The division's weighted average unexpired lease term (WAULT) fell from 5.9years to 5.1 years. Footfall and sales have recovered quickly since reopening, at 88.3% and 104.1% of pre-pandemic levels.

In Offices the group saw its portfolio value fall 3.8%, now standing at £6.0bn. Occupancy fell from 97.3% to 94.1%, although rental collection remains high, with 99% collected by the end of the year. Lettings and renewals activity remains subdued, completing just 395,000 compared to 946,000 last year, although this was completed on average 2.3% ahead of estimated rental value. WAULT fell from 5.7 years to 5.5 years.

The group's Development portfolio reached completion at 100 Liverpool Street, which is 89% let. A further 1.2m sq ft falls into committed developments, while Canada Water makes up the bulk of the1.2m sq ft near term pipeline and 6.9m sq ft medium term pipeline.

British Land completed £1.2bn of disposals in the year, including £643m of offices and £556m of retail, with average sales 6.2% ahead of book value. The group made £284m of acquisitions in out of town retail parks. Capital and development spend came in at £60m and £129m respectively.

The asset sales meant net debt fell 23.8% to £2.9bn, with a Loan-to-Value (LTV) of 32% down from 34% last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.