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British Land - Paddington Central sale

British land sold 75% of its stake in Paddington Central to GIC for £694m. The deal is set to complete within three months...

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British Land sold 75% of its stake in Paddington Central to GIC for £694m. The deal is set to complete within three months and will create a joint venture between the two firms.

The price was 1% below book value as of September 2021 and represents a Net Interest Yield, which compares annual rent to the purchase price, of 4.5%. It's expected to reduce leverage by around 5% and bring Net Tangible Assets per share down marginally.

Paddington is a mixed-use campus with offices as well as retail and leisure space.

Shares were down 2.1% following the announcement.

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Our view

British Land's tempering its investment obligations in London as it looks for ways to expand further afield. The group's decision to sell its majority stake in Paddington follows a similar move to sell half of its interest in Canada Water.

The rapid rise of e-commerce accelerated by the pandemic is bad news for traditional retailers, and worse for the landlords like British Land that own physical stores. Retail made up about 30% of the portfolio at the last count, but rather than exit completely the group's looking for ways to shift exposure. Management's snapping up out-of-town retail park real estate and increasing exposure to logistics. The recent acquisition of three warehouses in Wembley shows the group's making moves. This is an admirable strategy, but with over £1bn in the logistics development pipeline, execution risk hangs heavy.

On the bright side, the reopening of offices has alleviated some of our concerns about the impact of an uptick in remote working. Footfall and sales are approaching pre-pandemic levels across the retail portfolio. Less uncertainty meant the group was able to release some of the money it set aside in case its tenants defaulted, which provided a welcome boost to profits. Occupancy's risen considerably from last year and businesses are signing longer leases, suggesting most employers see employees returning for the most part.

London "campus" portfolios have been an area of focus recently. These combine topflight office facilities, with retail, leisure and hospitality facilities as well as carefully designed public spaces. Property value and rents are back on track, 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 traditional retail, and requires significant investment. The group's decision to sell 50% of its stake in the project means it can offload some of the investment obligations while still keeping a finger in the pot. Similarly, the group's getting rid of the majority of its Paddington Central obligations. Of course, future revenue from the projects will also be impacted, but British Land is hoping to reinvest cash from the sale into new developments.

British Land's balance sheet is in reasonable condition too. That should give the group the cash it needs to invest in its pipeline of new developments, and has allowed the dividend to return. But with the new policy set at 80% of profits (rather than an absolute amount), the board's built in room for flexibility if conditions deteriorate.

Uncertainty surrounding the future of retail in the current climate has brought British Land's valuation slightly below the long-term average. This reflects investors' worries about rising inflation and its impact on British Land's tenants. The group's pivot should insulate from the negative impacts of this somewhat, but it certainly won't be immune.

British Land key facts

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 (17 November 2021)

Half year underlying profit rose 12.1% to £120m, reflecting a 10% increase in net rental income, to £210m, driven by a reduction in money set aside for debtors and tenant incentives, as covid-related uncertainty eased. 96% of first half rent was collected.

Including the upwards revision of the value of its property portfolio, the group reported a £370m profit after tax, compared to a £730m loss last year.

So far this year, the group's made £501m worth of acquisitions. Several logistics purchases mean Urban Logistics now accounts for 4% of the Retail & Fulfilment portfolio.

The Board proposed a 10.32p per share interim dividend.

Net rental income for Retail & Fulfilment rose from £82m to £113m, with occupancy levels at 95.9%. Footfall in the retail estate was 89% of pre-pandemic levels, led by traffic at retail parks. A 7.1% increase in the value of the group's Retail parks portfolio helped the overall value of Retail & Fulfilment rise 2.7% to £2.9bn.

The group's average lease length increased to 6 years from 5.3 years, reflecting a significant jump in the duration of Campuses leases and a slight decline in Retail and fulfilment lease lengths.

British Land's loan-to-value ratio, which measures the group's debt against the value of its assets, rose to 33.4% from 32%.

Underlying net debt as at 30 September increased to £3.3bn, from £2.9bn at the end of March. Operating cash flow rose from £62m to £107m, reflecting improved profits.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 25th April 2022