British Land is cheap, but for a reason

Investors like steady companies. So it makes sense British Land's (BLND) share price rose 5 per cent on the morning the real-estate investment trust (Reit) posted a stabilisation of its property value in its half-year results following a torrid 12 months.

The value of Reit's portfolio of offices, retail assets, warehouses and other buildings dipped 2.2 per cent over six months, from £8.9bn on 31 March to £8.7bn on 30 September, as high interest rates continue to hamper buyers' budgets. However, the drop was much less dramatic than the 15 per cent valuation plummet it posted over the year to 31 March, a period when interest rates rocketed following former prime minister Liz Truss' "mini" Budget.

Meanwhile, the news on rental income was mixed. On the one hand, the company said it had signed leases for 1.6mn square feet of space at 12.2 per cent above market value and is “under offer” to lease a further 1.1mn sq ft of space at 16.6 per cent above the market. As such, it expects rental growth to be at the top end of its 2024 guidance.

On the other hand, such promises may sound like jam tomorrow to investors when gross rental income is down 2.8 per cent. Net rental income was flat only because of a reduction in costs. Chief financial officer Bhavesh Mistry told Investors’ Chronicle its downbeat performance was due to its selling of some assets as it “recycles capital out of non-core areas”. In other words, the multi-billion landlord is offloading assets with lower rental growth potential and buying ones with higher potential.

But even if this buying and selling is stripped out, like-for-like rental growth has only climbed 2.4 per cent, a paltry increase when compared with the rental performance of other Reits. It also does not bode well that analyst Shore Capital is forecasting a drop in Ebitda and only a small bump in revenue for 2024. The analyst anticipates investors will need to wait until 2025 before adjusted earnings per share start to grow again.

Bad as all this sounds, we believe most of this has already been factored into the share price. As has been the case for several years now, British Land’s discount to net asset value is sizable, and so is its dividend yield. We are still not bullish enough on this stock to rate it as one investors should double down on, but there are some tentative signs it is close to the bottom. Hold.

Last IC View: Hold, 361p, 17 May 2023