Property company shares, like British Land (BLND), are about location, quality of covenant (i.e. are the leaseholders good for the rent?) and rental yield. But like all equities they are also about quality of management. The management of British Land has played the UK’s recent and remarkable UK property boom brilliantly. Beginning speculatively and ending conservatively, with an almost fully let and reformed portfolio of properties that should support handsome estimated dividend yields, they have done shareholders proud. These shares have fully discounted a reversal of the UK property boom. They now look (to judge by the discount to assets) as though they are discounting a lot of likely post-Brexit ramifications. They appear good value on annual dividend yield and net asset value metrics.
I last wrote about the stock in April this year, before publication of the final and full year results to March 31st 2016. My conclusion then was that the shares looked attractive on fundamentals, but I was reluctant at that stage to recommend them for buying; the share price was then 702p. My precise words were: “If it were not for Brexit, the shares would look like a bit of a buy given the net asset position and the dividend yield.”
Since then the shares rose modestly to about 750p and then from Brexit day slumped 27 per cent to around (on chart inspection) 550p, from where they have recovered some 80p to 629p (last seen).
Where to from here?
So where are we now in the British Land saga? The share price of 629p, last seen, means that the shares are now about 16 per cent down on the Brexit dawn share price of near 753p. (Or 10 per cent down on the 702p share price at the time of my last observation in April 2016.) Logically, they remain attractive on those April fundamentals, the chief of which was the selling of ‘non-core’ assets to raise cash and to reinvest some of it in what would have been regarded as better quality, safer investments.
Good management…
With true entrepreneurship, the company had over a five-year period moved from having a notably speculative portfolio that anticipated demand and property prices to one which was largely occupied with a safer looking income rental stream to grow asset values and outgoing dividend payments. It was clearly a commercially well judged and well executed strategy.
When I last wrote, the then available balance sheet net asset value was recorded as 870p a share. Most of that was accounted for by the portfolio of properties, which constitutes the core of the Group’s investment attractions. After the last year end valuation, it has now risen to a reported 919p. In the UK the company has a portfolio of £14.6 billion of property assets. Half of that is in retail, nearly half in office investment and a small marginal balance of around 2 per cent in residential.
In fact, much of the investment is in a mixture of office, commercial retail and residential. The office investments are primarily in London, which was, pre Brexit, the focus of much property buying interest by international ‘hot’ and speculative money and created the liquidity which has allowed the company to exchange properties to suit its own risk profile.
The end of speculative investments…
Although the overwhelming majority of Group property assets are now on full rental leasing, there remains a stated 4 per cent of ‘speculative’ investments, which is marginal – particularly so compared with the position a few years ago. At the risk of repeating an attractive fact too often, this company really has done all that could be asked of its management in successfully foreseeing and riding the great pre-Brexit property boom, fuelled largely by overseas investors who liked the risk profile of the UK, which was leveraged by the advantages of EU membership. (One reasonably assumes that they must inevitably have been startled by the result of the referendum.)
The end of a phase…
Those were circumstances which are unlikely to be repeated again. Although new property deals at the margin may be done on lower rents and higher dividend yields, indicating a likely falling away of demand for prime UK property, the absolute value of British Land’s rental income role should in all, reasonably and probably, remain pretty much at current levels for some time, subject to company failures and voids etc. at the margin. However, as pointed out, the management has done a lot to make sure that the financial quality of the portfolio’s leaseholders is reliable. Clients include a diverse range of large corporations.
British Land’s property investments are reported as being 99 per cent occupied on a weighted, average lease term of nine years to the next break. That is encouraging to investors because property values are dependent on rentals and British Land seems to have locked most of that mainly into long-term, reliable looking rental income. It looks very supportive of cash flow and future dividend payments.
Q1 trading statement…
There was a strong increase in rents and rental renewals up to the 30th of June, which included only one week of post-Brexit reality. The interim dividend per share was increased 3 per cent 7.3p, with a proposed annual dividend of 29.2p, which gives a prospective annual dividend yield for the current year of 4.64 per cent. At 629p (last seen) the shares stand at a 32 per cent discount to the net asset value of 919p. The market in the shape of the most recent market consensus estimates for next year, shows the annual dividend increasing 2 per cent to 29.2p and putting the shares on a prospective annual dividend yield of 4.6 per cent.
Conclusion…
This looks like the peak in dividends and assets for some time. However, the existing estimated dividend yields and asset values are discounting a lot of down turn, making them look good value ex-Brexit.