- Company has recovered from big losses
- Plans to invest further £3bn
This week, commercial property developer Landsec’s (LAND) chief executive Mark Allan chalked up the completion of another hefty real estate deal for the company under his tenure. In the UK’s second biggest office transaction this year, Landsec sold the building it is developing to be Deutsche Bank’s London headquarters, 21 Moorfields, to Lendlease (AU:LLC) for £809mn.
Since Allan took the reins two and a half years ago, the company has sold off a total of £1.89bn – or 17 per cent – of its portfolio and invested £920mn in new assets. This strategy will now be tested as the office market continues to feel the effects of home working and debt becomes far more expensive.
But Allan is far from done.
In the company’s most recent results in May, he said the business would continue to sell assets in order to spend £3bn on “sustainable London offices and mixed-use development over the next five years at attractive returns”. Getting under the skin of what Allan has traded and why reveals a lot about his vision for Landsec.
Swings and roundabouts
When Allan first took up the role, he said it was an “extraordinary time” for the business. This was neither hyperbole nor flattery. He joined in April 2020 as the company’s results for the year to the end of March revealed its pre-tax loss had deepened from £123mn to £837mn. Covid-19 then hit the company even harder as it posted a £1.39bn pre-tax loss for the year to March 2021 before swinging to a £875mn pre-tax profit in the year to March 2022.
A lot of the eventual recovery can be attributed to the return of rental income as Landsec’s retail tenants once again began trading, but that’s only part of the picture. In the year to March 2021, his first accounting period at the helm, the company sold off £631mn in property assets compared with just £45mn the year before. It also acquired £99mn in properties, compared with just £16mn the year before.
This deal-making was not piecemeal either. Just a handful of developments made up the bulk of Landsec’s selling activity that year while a single acquistion, 55 Old Broad Street for £87mn, made up most of its buying.
Since then, Landsec has doubled down on its selling activity as its investment activity has soared eightfold. Not including the Moorfields at Broad Street Properties, the company has sold £445mn in what it described as “mature or non-core assets” and invested £821mn into new ventures (see table below).
No risk, no reward
The company has said it is “recycling” cash through the sale of low-yielding assets in order to invest in higher yielding assets. This means selling off ‘safe’ assets on long leases to companies that want the passive income and spending that money on assets which will require more work but could generate greater returns as a result. It is exchanging lower risks and lower rewards for the opposite.
Landsec could fund these new ventures through loans or equity raising rather than asset sales, but Stifel real estate analyst John Cahill said rising interest rates and the company’s current discount to net asset value made both of those options unappealing.
“If they don’t do this, if they just sit with what you might consider to be a ‘safe’ asset, the management team is not doing anything to create new value,” he added.
| MAKING HIS MARK: LANDSEC'S BIGGEST DEALS SINCE ALLAN JOINED | |||||
| Bought | Sold | ||||
| Asset | Price | Year | Asset | Price | Year |
| 55 Old Broad Street | £87mn | 2020 | 1 & 2 Ludgate | £552mn | 2020 |
| 75 per cent stake in MediaCity | £426mn | 2021 | 7 Soho Square | £78mn | 2020 |
| 18.75 per cent stake in Bluewater | £126mn | 2021 | 32-50 Strand | £195mn | 2022 |
| U+I | £269mn | 2021 | 21 Moorfields | £809mn | 2022 |
| Total (including smaller deals) | £920mn | Total (including smaller deals) | £1.89bn | ||
Some deals have their own specific motivation.
With the increase in its stake in Bluewater, Allan is making the best out of his predecessor Rob Noel’s decision to buy a stake in the shopping centre at what turned out to be the top of that market.
The company can’t regain the value it lost from paying too much initially, so it may as well attempt to gain value from a retail recovery. As Cahill put it, “while that original decision was really stupid, there’s no point cutting off your nose to spite your face if that’s what you’ve inherited as a position”.
As for 21 Moorfields, the Deutsche Bank building, Cahill said that one of the reasons the company may have agreed to that deal at a 9 per cent discount on the asset’s value from March is that real-estate investment trusts (Reits) such as Landsec get a tax break if they sell an asset before it has completed construction.
Waiting until the building was finished might have meant getting full price, but it would have also meant paying tax. Another reason for the discount, of course, could be that London office assets are not as prized as they once were thanks to the rise of homeworking and recession jitters.
Still, even with the price drop, the deal still created a 25 per cent profit for Landsec based on the development cost and reduced the company's loan to value from 34 per cent to 30 per cent. Another shrewd move for Allan, but more challenges await.
