Land Securities looks to lay foundations for future recovery

“Investors look to be shrugging off a 38% plunge in both rental income and a 10% decline net asset value per share and focusing instead on Land Securities’ confirmation of its return to the dividend list, with a first-half payment of 12p per share,” says Russ Mould, AJ Bell Investment Director. “Would-be buyers must now weigh forecasts of a further dividend increase – and thus a yield of nearly 5% - in 2021 and a 37% discount to the latest net asset value (NAV) per share figure against the risk of further pressure on rents and property valuations, as chief executive Mark Allan looks to reshape the group’s strategy and portfolio.

“Even after a big two-day rally, driven by news of Pfizer and BioNTech’s potential COVID-19 vaccine and the prospect of workers and consumers returning to their commute and the high street, Land Securities’ shares still trade well below the latest stated NAV per share figure of £10.79. 

“This is investors’ way of saying that they think property valuations will continue to fall, owing to either the near-term uncertain economic outlook or longer-term trends toward more working at home and more online shopping, whereby fewer people go to an office or visit brick-and-mortar shops. 

“The steepest drops across Land Securities’ asset valuations were in regional shopping centres (down 20%), London retail sites (down 17%), leisure venues (down 15%) and hotels (down 13%). Office space held up best, reflecting the prime nature of the Real Estate Investment Trust’s London sites, with a mere 2% drop in asset valuations.

“Equally, contrarians will say that this is a value opportunity, arguing that the big gap between the share price and NAV prices in a lot of bad news and little upside potential in the event that the world returns to anything like vaguely normal over the next year or two. 

 
Source: Company accounts. Financial year to March.

“The decline in NAV from the end of the last financial year in March was no worse and if anything slightly less than analysts had expected, although the drop in net rental income to £191 million in the first six months of the year from £309m million a year ago will worry some, even if £85 million of that was due to bad debt expenses. An overall increase in the vacancy rate to 3.4% helps to explain some of the underlying drop in rental income.

 
Source: Company accounts. Financial year to March.

“Much will now rest upon how quickly the nation gets over the pandemic, whether there are any truly long-lasting changes in commuters’ and consumers’ behaviour and whether chief executive Mark Allan’s new growth strategy pays off.

“The FTSE 100 firm first outlined this new plan on 19 October and has recategorised its portfolio across four sub-asset classes as a result: Central London, Regional Retail, Urban Opportunities and Sub-scale Sectors.

 
Source: Company accounts

“The plan is to divest the Sub-scale assets (hotels, retail parks and leisure sites), although it remains to be seen who may be willing buyers, or at least at what price relative to current asset valuations.

“The REIT will focus on and optimise its mix of central London office properties, look to reshape its retail exposure and generate growth from mixed-use, residential and commercial sites in major cities across the UK. 

“Shareholders and would-be buyers of the shares must now decide whether the discount to NAV and the prospective dividend yield give them enough downside protection and upside potential. For all of the current gloom, it seems unlikely that London will lose its status as a global city, given its positioning, language and culture, as well as the nation’s rule of law, independent central bank and cheap currency. Yet it could also take time for the recovery to kick in and for Land Securities to prove it can maximise value from its mixed-use sites as it seeks to reinvent itself. At least the resumed dividend payments give investors more reason to stick around and wait to find out.”

Source: Company accounts, Sharecast, consensus analysts’ forecasts, Refinitiv data