Land Securities: 21% Discount Could Narrow on a ‘Remain’ Vote
Here, I outline the success of the company in riding the London commercial boom and largely arranging things suitably, in advance of the uncertainty of any Brexit vote late next month. Due to weakness in the share price last year and the rise in property values, the shares now stand at a massively defensive 21 per cent discount to the net asset value. By normal standards of valuation, they look very good value. With a vote to Brexit, the shares should rally but prove defensive in a vote against Brexit.
Land Securities Group PLC (LAND) is a United Kingdom-based real estate investment trust (REIT). It operates through two divisions of business: its Retail Portfolio and London Portfolio. The former includes all the shopping centres and shops (excluding central London shops), hotels and leisure assets, and retail warehouse properties. The retail portfolio comprises investment in floor space of approximately 19.6 million square feet, which includes around 13 shopping centres, 13 retail parks, seven stand-alone leisure assets and the 29 Accor Group hotels throughout the United Kingdom. The London Portfolio includes all London offices and central London shops, comprising total floor space of approximately 6.93 million square feet. It includes West End offices, City offices, mid-town offices, inner London offices and central London shops. It is thus a large quoted FTSE 100 player in UK property ownership, development and trading. It currently has a market Beta coefficient of just over 1 making it a good individual proxy for the FTSE 100 index. The recent market capitalisation of its equity stood at £9,250 million.
Taking the tide
In keeping with the spirit of the anniversary of Will Shakespeare’s death, I appropriately greet the preliminary results from Land Securities with his memorable words about there being a tide in the affairs of men which, taken at the flood, leads on to fortune. The managers of this company did exactly that in relation to the London property market over the last six years or so, by speculating hugely and correctly on the investment opportunity that presented itself. To be specific, they saw a market in which, after the great banking crisis, demand was rising at a time when little had been built in the previous few years. That initial shortage fed prospects and demand very well. In short, in 2010, a couple of years after we were hit by banking crisis of confidence and liquidity, Land Securities started to gear itself up for a major splash in London commercial property while at the same time recognising and acting on the challenge that online shopping presented to traditional shopping centre retailing.
Land Securities – a commercial property speculator
In the case of the former, the management committed itself to constructing 3.1 million square feet of commercial property space. This was done as a speculation without signed up tenants, on anticipation that demand would arrive to take up that degree of new supply.
Much of the time, the big institutional equity investment market pays lip service to the condemnation of property speculation; the ideal being that large property investment companies should make their money out of taking a turn out of supplying the needs of known, largely signed up clients to reduce risk.
Naturally, Land Securities was not alone in making such a judgment and acting upon it. The merit of such speculative investment action over five or six years lay in the fact that Land Securities is a large company acting ahead of a curve they were in a good position to correctly foresee: not smaller developers gambling at the end of a boom. In short, the Land Securities move was bankable.
The just published preliminary figures and results from Land Securities for the year that ended March 31st 2016 – we are now some six weeks into a new accounting year – tell us in greater triumphal detail what happened as to the outcome of that speculation. We now know that 84 per cent of that speculative construction and investment has been let, leaving a balance at March 31st, of only 0.5 million square feet for letting as a mercifully and comparatively small amount to have as a hostage of fortune to a ‘Brexit’ vote late next month. They were clearly pushing to let as much of what remained in a market that was showing interest.
Retail
At the same time as speculating on commercial property in London, the company also changed its strategy for retailing in relation to online competition to shopping centres. Basically, these had been designed to provide customers with convenience and efficiency in shopping. The internet came along to provide even greater convenience and efficiency, threatening to compete traditional shopping centres out of business. Land Securities, along with other property investment companies, responded by selling assets and redefining the competitive purpose of such sites.
In the case of Land Securities, they first re-emphasised and commercially re-defined shopping centres as a “great day out” where the shopper finds diversion and satisfaction that compete with lone online ordering by providing brands, eating out, entertainment, music and ‘atmosphere’ etc. – mostly the kind of things that persuade me to avoid them and go for a good walk in open country!
Second, they started to prune their retail asset portfolio by selling ‘stand alone’ super stores and secondary regional assets and putting the money into what they deemed to be ‘prime’ retail assets – examples of which include Bluewater, Trinity, Leeds and Westgate Oxford.
Financing
The company reports that by September 2015 it had invested a total of £4.4 billion. However, it also reports that this expansion was funded by asset disposals, leaving the balance sheet financially gearing at its lowest level for many years. They add, unsurprisingly perhaps, that investors should not expect significant disposals this year.
Moreover, the company has taken the period of low interest rates to re-fix its debt arrangements. Its revolving credit facility has been increased to a reliable £1.3 billion out to 2021. It also repurchased £400 million of its own corporate bonds. The outcome is that 95 per cent of the company‘s long-term debt is at a fixed rate with more than nine years to run.
The results for last year to March 31st 2016
First, the net asset value of the shares rose once more to a reported 1,482p, marking an increase of over 10 per cent, which means that at a share price of 1,170p (last seen) the shares stand at a pretty hefty 21% discount to assets. For those of us who thought that the property market had more to give last year, despite the decline in property-company share prices, these asset results are ample justification.
Next, the management increased the annual dividend by 9.9 per cent to 35p, which, at the last seen share price of 1,170p, outs these share on a 1.3 times covered dividend yield of a shade under 3%. We are informed that this is part of a progressive dividend policy which, in the shorter term, means that the dividend is not dependent on earnings. My interpretation of this is that even if earnings fall this year the dividend looks safe and may be relied upon. I add that a safe looking historic 3 per cent looks attractive given the aforementioned big discount to assets.
The company adds that last year was good for lettings with £37.6 million of lettings recorded. It was also a remarkably good year for disposals with a further £1,493 worth of disposals being made.
So what does the market think of prospects this year and next? Consensus estimates show the expectation of no increase in earnings this year but suggest a 7 per cent rise next year. Basically, the annual dividend of 35p declared for last year will be maintained this year and increased a touch next year. This means that this 21 per cent asset discounting share price is selling on an estimated prospective earnings per share multiples of 25 times for this year to next March and an estimated dividend yield of 3 per cent.
Conclusion
Land Securities is now a much improved equity investment in terms of quality. It has successfully and advantageously rented out most of its speculative commercial property portfolio.
It reports that leasing terms have been extended on average and that it has consolidated its balance sheet by reducing net debt and pegging most of that at a fixed rate for more than nine years ahead.
It has also produced a rational response to online shopping competition, partly through selling off those retails assets which do not fit that model.
Finally, it has boosted its net asset value to a level way above the current share price, last seen. Consequently, the shares have clear defensive qualities at this stage, most particularly in relation to a Brexit vote, which is likely to weaken the sustainability of the current property boom in London.
In short, the management have arranged things to make Land Securities look strong in relation to a Brexit vote. A dividend of 3 per cent looks solid and good value taken in conjunction with the NAV discount. The size of the discount seems large enough to keep the share moving ahead even in front of the June referendum. It seems a useful vehicle for those wishing to speculate against a Brexit victory.
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