Broadly speaking everything is either a little bit or a lot worse than it used to be. Overall management are saying that the overall underlying property valuation is down circa 5%. Clearly this is very variable as retail is down 11%
Management claim an underlying profit decline of 10.5%.
In reality it is a lot worse. IFRS profits went from £501m to a loss of £319m. This is principally revaluations on properties.
I believe that as British Land is a property company and they are all about rental streams (cashflow) and property values (net assets). So when they adjust to take out property valuations from performance I call rubbish.
Even where they have made notable progress they admit that they rather missed the boat and are reacting late to events. An example of this would be their move to reduce their retail exposure. It used to be 66% of the portfolio, it is now under 50% but the desired target is 30-35%. They are however struggling to get there. Whilst they have assets they would like to sell they either cannot find buyers, or cannot find buyers at the valuations they have in mind.
They have also had to write of over £14m on CVA and administrations this year. One does have to wonder whether they might need a better credit checking facility and some improvement in their credit control function. Though I do recognise that some of these leases were set up a long time ago and the tenants looked more secure. That being said much of the problem is identified as being in smaller multi let sites so I am not sure the mistakes were made all that long ago.
Not everything is gloomy. The Clarges development has gone well and is largely sold. Though I am guessing the harder to sell units are the ones remaining.
New developments are 76% pre let and the company obviously believes its mixed use campus format has potential. That being said the development of 1 Finsbury Circus has reached practical completion, but it is only 58% let or under offer. 100 Liverpool street is less completed but 56% let and 135 Bishopsgate is 90% let or under offer.
The group has a number of potential developments at various stages of progression. Quite properly these seem to be being progressed both to ensure that too much is not taken on at one time and also to allow for clarity on Brexit and its impact on prime London office space.
Occupancy levels across the portfolio have moved up to 97.7% from 96.7% Though the weighted average lease length has fallen from 7.3 years to 5.7 years. ( I expect something around 5 years will become the new normal).
The company has bought back £500m of shares in the last 2 years and is looking to buy back another £125 at current prices. This is close to 10% of market cap, though much was at higher than current prices. The share price at the time of writing is 545p. Average buy back last year was at 594p.
10% is the sort of amount that is normally seen as making a real change in the company. It might also be seen as management truly believing that the share price is too low and are preparing for a recovery over time. Equally it could be seen as either an attempt to manipulate the eps or recognition by management that they have no better ideas than returning cash and should be running a smaller business going forward.
The fact that they have spent so much on this and yet the share price continues to fall, and the fact that they have added another £125m to the buy back does suggest to me that this is less a clear strategic plan but more a reaction to where they find themselves.
The Storey (workspace) brand seems to be gaining traction and does allow British Land to both temporarily repurpose office space in a weak market and offer much shorter lease periods and greater flexibility without impacting the main British Land brand and lease terms. I think this is a genuinely clever approach and the fact that 35% of lessors by rent are existing tenants does suggest the flexibility is valued.
There are a number of initiatives, smaller offerings, better technology, space management software and support that are likely to end up decreasing top line revenue and possibly margins, but should enable British Land to retain customers, particularly those that value the added service. The value add (space management) may be of particular use to the larger customer.
The company is working with Southwark council on a major development of Canada Water. Whilst this does look potentially positive the involvement of the council may limit profitability and already costs have been higher than expected.
British Land has a NAV of £8,689m against a market cap of £5,151m. This I think offers a fair level of safety even with retail devaluations probable for the next few years. Office value will equally be driven by Brexit and this too many be downwards. The yield is over 5% and looks reasonably secure for a while yet. (Losses on valuation are of course not a cashflow).
The biggest potential short term upside may be that Brexit has caused the UK to be one of the least favoured world markets due to the uncertainty. Resolution which will presumably eventually come will allow overseas fund managers to return and British Land, with its size, yield and property assets may well be one of the most easily understandable and investable opportunities for that money.
I have a position in British Land but following these results do not intend to add to this.