Land Securities shares crumble as rents and asset values slide

“Land Securities’ shares are on the slide after its results and it is hard to work out what is upsetting investors more – the cancellation of the fourth quarter dividend; a £23 million provision against next year’s rental income; a drop in net tangible value per share that wipes out most of the increases seen in the previous five years or management’s forecast that economic activity may not return to pre-COVID-19 levels until 2022,” says Russ Mould, AJ Bell Investment Director. “This testing quartet means the shares trade no higher now than they did in summer 2010, in the wake of the Great Financial Crisis, and at a 55% discount to their £11.92 net tangible value per share, a figure which means investors think rents and property values are going to stay under pressure for some time to come. 

 
Source: Refinitiv data

“It is easy to accentuate the negatives when you look at the FTSE 100 firm’s results. Rental income fell to a six-year low as Land Securities booked a £23 million provision against the new financial year’s rental income. More than four-fifths of that charge was taken against expected income from retail customers and the rest from the company’s specialist assets, which include cinemas and hotels. The firm collected barely two-thirds of rental income in March and April within ten days of the due date, compared to 94% a year ago, although office occupancy rates are holding firm and 89% rents were collected on time (even if the number of people actually working there is down by 90%).

 
Source: Company accounts. Financial year to March.

“Pressure on rents and weaker valuations for leisure facilities post-COVID-19, as well as retail parks and regional retail sites in particular weighed on the overall group’s net tangible value, which fell 12% to £11.92p a share. 

“Over the year, office valuations rose 1% but specialist sites lost 8% of their value and the value of Land Securities’ retail assets was lowered by 21%.

 
Source: Company accounts. Financial year to March. Net tangible value per share metric adopted under EPRA rules for 2020, with 2019 restated.

“Shareholders will also be casting a careful eye at Land Securities’ balance sheet. The REIT’s loan-to-value ratio of 30.7% is way below the near-50% level seen during the Great Financial Crisis but this is mainly because of rising asset valuations, rather than falling debt. Sustained pressure on the 46% of the portfolio that is retail and leisure related could force that ratio higher, even if the £6.9 billion office portfolio holds relatively firm.

 
Source: Company accounts. Financial year to March.

“Yet much of this will be little surprise to investors, so the question they need to be asking themselves is to what degree is this already factored into the valuation. At 540p, Land Securities is trading at a 55% discount to net tangible value, a level which factors in further big drops in asset values and rental incomes.

Source: Refinitiv data, last published net asset or net tangible value per share figure from company accounts

“The business still has a purpose in that it provides tenants with the facilities they need to operate. It is tempting to think that none of us will ever need to work in an office again, but that it not likely to be the case. Winter weather will make working from home less appealing than it is now in spring, boredom will set in as the novelty wears off and the lack of human interaction could be as bad for mental health as the lack of exercise is for physical health. 

“In addition, Land Securities’ assets are heavily skewed toward London, a global city whose appeal to investors, especially overseas ones, is likely to dim for long. The UK offers rule of law, so assets cannot be appropriated, an independent central bank and a cheap currency for starters. 

“As CEO Mark Allan stresses, the REIT can make itself an integral part of designing offices which are best-suited to a post-COVID world, in terms of access to and movement within them. Moreover, the company is already looking to repurpose four sites in London that are currently purely retail so they become mixed use, with a residential property element. To say those sites have little or no value is surely not correct and the job for investors to gauge now is whether sentiment is sufficiently washed out and valuations sufficiently lowly for the REIT to be worth another look at a potential investment."