Unsettled. Tough. Challenging. Uneven. Volatile. Use whichever adjective you like to describe the markets – and the thesaurus-wielding teams at British Land and Landsec used all these and more in their results announcements this week – the message is clear: it’s hard out there.
British Land’s EPRA net asset value declined by 5.4% to £8.56 per share over the six months to September 2019. The real estate investment trust’s portfolio value dropped by £593m over the same period, to £11.7bn. This was driven by another tumble in retail asset values, which fell by 10.7% to £4.7bn. The REIT made a loss of £404m.
British Land posted its results a day after peer Landsec revealed that the decline in the valuation of its own portfolio was picking up pace. Values fell by £368m to £13.4bn over the six months, compared with a fall of £188m during the same period in 2018. Retail parks suffered particularly badly, with values down 11%. The company posted a loss of £147m.
Looking on the bright side
The REITs’ bosses put an expected brave face on the numbers as they outlined the efforts made to reposition their businesses. They also highlighted the relative strength of their office assets compared with retail investments.
“Ultimately, I don’t think Landsec will own retail parks in the long term,” said its chief financial officer, Martin Greenslade. “However, there is no point rushing for the exit along with others who are perhaps more pressured into selling at the moment. We will play that one by ear, but I don’t see retail parks as particularly a long-term ambition or strategy of Landsec.”
At British Land, chief executive Chris Grigg said: “We expect our markets to remain uneven, but we have kept debt levels low, our balance sheet is strong and flexible, and we have a broad spread of expertise across our business.
“We expect retail to remain challenging, so we will focus on driving operational performance and maintaining occupancy. We see early signs that some liquidity may be returning to parts of the market, and our focus will remain on thoughtfully progressing our strategy to reduce exposure.”
At Royal Bank of Canada, equity analyst Julian Livingston-Booth described Landsec’s headline results as “solid”, adding: “The negative impact from retail property is limited by Landsec’s relatively limited exposure to mainstream retail property outside London and a relatively resilient performance by its mainstream retail.”
British Land’s numbers, by comparison, were below RBC’s estimate. “The management changes earlier this year further highlight the extent to which British Land has shifted its focus from being a cyclical investor to a mixed-use, customer-focused operator,” Livingston-Booth said. “We believe the change results in different risks, where redevelopments and £2bn of planned disposals are likely to be a drag on its current rents.”
Management no-show
Michael Prew, managing director of Jefferies, noted that the British Land management team “didn’t meet analysts to face the music on this poor 1H20 data”. Retail assets were “a horror show” for the REIT, he added.
“In financing terms, it’s all about the LTV being excessively elevated, with the V falling faster than the L, especially given management talk of ‘money on the sidelines’ with Brexcuses wearing thin and unconvincing,” Prew wrote.
“There are probably cheap buyers for the assets British Land wants to keep rather than those it needs to sell – retail – with it not making much of a dent in cutting its retail exposure from 40% to 30-35%, which we think is still excessive.”
On Landsec, Prew questioned how the eventual successor to chef executive Rob Noel would tackle the company’s commitment to more London development.
“The outcome may be used by the British Land board to map Chris Grigg’s [chief executive from 2009] successor and read across from Landsec doesn’t look too promising,” Prew added.
“Running REITs used to be cushy, with long-dated ‘let and forget’ leases, but these are increasingly complex operating businesses with [long-term incentive plans] under water and boards timid in tackling over-costing.”
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