Income and NAV attractions at British Land

British Land shares at 727p (last seen) after the third-quarter results. The latest balance sheet asset position along with a meaningful and progressive dividend yield make British Land Shares look attractive.

British Land (BLND) shares were unable to resist the gravitational downswing of the market as a whole. This is an unsurprising fact given that the share has a reported Beta co-efficient to the market of 0.977; a statistic which means that for most of the time British Land shares move in line with the market. In May the share price rose to about 891p, peaked and headed south along with market to the 694p low earlier this month, from which it has firmed up 4.7% to 727p (last seen).

Looking at the one-year and the three-year share price charts, the trend still appears to be on the downside. However, dearly beloved, a glance at the five-year, long-term chart, reveals that the share price appears to be perching on a five-year support line. If nothing else, that prompts a particularly good reason for a good look at the fundamentals of this share’s valuation.

Over the last year, the British Land share price, true to its Beta characteristic, has done slightly better than the market, having fallen about twelve per cent against the nearer fourteen per cent drop in the market over that time. You may make the point that if you know where the market is heading, you can reliably estimate where the British Land share price will be heading. Conversely, and considerably more usefully, perhaps, if you can tell where British Land is likely to go, you can take a swipe at guessing where the market might go…

The third quarter results from British Land were reassuring. The retail, office and leisure sectors of property all look robust. The summary of the Chief Executive was as follows: “We had another strong quarter: our occupational markets remained robust and we continued to be active in the investment markets.”

Looking at the company’s property investment segments individually, retail was reported good with the footfall for British Land property said to be out-performing. The company also saw what amounted to a commercial and strategic arbitrage opportunity in selling single let assets at prices above their book value and to invest the proceeds into multi-let assets, creating further value by doing so. In the case of office property, the assets were reported to be almost fully let at rates ahead of valuers’ estimates of what looked achievable.

Lettings and renewals

The picture appears one of buoyancy. Leasing of both retail and office property lettings and renewals was reported as being 8.5% higher than the estimated rental values of last September. Retail lettings and renewals alone were up 7.3% on September estimates. Some office lettings/renewals were up 11.2% and the Leadenhall Building was described as 94% let. It was a pretty-strong looking quarter.

Investing  

The company has spent money on the enhancement of existing assets; in particular the flag ship properties of Broadgate, Paddington Central and No. 4 King Street.

Dividends

The third quarter dividend was increased by 2.5% to 7.09p a share, which amounts to a yield of just under one percent on that payment to shareholders on the shareholder register on 1st April.

Glancing at the market consensus estimates, I note that the specialist analysts following this share have forecast earnings per share to increase by about 6.6% this year and by around 6.3% next year.

The convention in the valuation of property shares is to judge them by the relationship between asset value and market capitalisation, which makes them different from almost every other category of equity investment where earnings is often a dominant constituent of value. Most of the earnings of British Land, the ‘small change of valuation’, are related to paying dividends. Last year, dividends of 27.68p represented a ninety per cent dividend payout ratio – exactly the minimum rate required by law for a company to be incorporated as a REIT (real estate investment trust).

Net Asset Value (NAV)

The latest balance sheet as at the 30^th of September showed that the net attributable asset value of British Land had risen a reported 9% from what it had been the previous March; according to my arithmetic the net asset value of British Land had risen to approximately to an estimated 870p a share, meaning that British Land shares at the current share price of 730p are selling at a near sixteen per cent discount to net assets.

With the property market still looking healthy and given the sixteen per cent discount to assets, these shares look good value. As an afterthought, the fall in the market does not seem to adequately reflect the continuing hearty state of commercial property in the UK. The prospective, estimated consensus dividend yields, at a share price of 730p, are forecast as being 3.5% for this year and an estimated prospective 3.6% for next year. Good value, in my opinion.