British Land fails to provide foundations for a share price rally

Wednesday, May 15, 2019 - 14:02

“The trouble with potential value stocks is that you need a catalyst to unlock the value that may be there. Declines in net rental income, average lease length and net asset value per share, as well as an increase in the vacancy rate, are likely to attract far more attention than an increase in the dividend and a drop in net debt,” says Russ Mould, AJ Bell Investment Director.

“The shares still look cheap, on a 39% discount to their historic net asset value per share figure of 905p and a forwards dividend yield of 5.7%, but the risk remains that the gap to NAV is closed by the NAV going down rather than the shares going up.

“For that to change, a definitive conclusion to the Brexit negotiations could help, as tenants, their landlord investors alike would at least have some idea of where they stand. British Land also needs to prove that it can reduce its exposure to retail as planned, to around 30-35% of its assets (down from 45%), although any unexpected improvement in high street trading conditions would be a huge bonus.

“With wage growth running ahead of inflation and the General Retailers sector performing well in 2019, with an 18% advance enough to rank it sixth out of the 39 groupings that make up the FTSE All-Share in the year to date, this might not be the total longshot that it seems.

“But investors will only believe this if or when they see it filter through to rental income and net asset values and last year offered little encouragement, as NAV slipped below where it had been in fiscal 2016 (despite support from a share buyback scheme) and net rental income fell below the level generated in fiscal 2013.

Source: Company accounts. Financial year to March.

“A steady decrease in average lease length is also a concern, as this reached 6.4 years last year, down from 7.7 in the prior period and more than double that a decade ago.

Source: Company accounts. Financial year to March.

“Failed bid for fellow real estate investment trusts INTU, Hammerson and RDI may also dissuade investors from getting involved, though true contrarians are unlikely to give up the faith just yet.

“The 5.7% dividend yield, based on management’s forecast of a 3% increase for the current financial year, may appeal to income-seekers, especially as net debt and the loan-to-value ratio both continue to decline.

Source: Company accounts. Financial year to March.

“The shift in asset mix away from retail toward residential and mixed developments also offers some long-term potential.

“British Land is looking to develop its Canada Water asset as a Build-to-Rent site, while properties in Bromley-by-Bow, Ealing, Aldgate and Woolwich provide potential for 4,000 to 5,000 units in total, such that residential property could represent some 10% of the firm’s asset mix in over five years’ time.

“Perhaps this is one potential long-term catalyst to unlock value in the REITs’ portfolios and reduce the discount to net asset value, which remains historically high for those companies which have particular exposure to retail, the City of London, major new development projects or a combination of all three.

Source: Company accounts. Based on last published NAV per share figure.

These articles are for information purposes only and are not a personal recommendation or advice.

The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.