Landsec looks to reassure that its shares are cheap and not a value trap

Russ Mould
13 November 2018

“A 15% increase in the dividend, a drop in property vacancies and a mere 1% decline in net asset value per share at Landsec means that shares in the real estate investment trust are holding on to their recent gains this morning,” says Russ Mould, AJ Bell investment director. 

“Whether this proves to be another suckers’ rally, following this spring’s failed surge, remains to be seen.

“But with the shares trading near five-year lows and on a 38% discount to their stated net asset value per share (NAV) you can see why deep-value hunters could be inclined to think that an awful lot of bad news about Brexit and the decline of bricks-and-mortar retail is already factored into the valuation. 

“That 1% drop in NAV looks pretty modest in the context of that huge discount and the dividend yield is nearly 5.5%, based on consensus analysts’ forecasts and an 860p share price.

“Sceptics will point out that NAV per share peaked at £14.34 in March 2016 and that the 1% drop in the first half sets Landsec on course for a third straight annual decline. Value-seekers may counter that the 1% interim drop is a lot lower than many had expected and certainly nothing in the region called for by the discount at which the shares are trading relative to NAV.

 
Source: Company accounts. Financial year to March.

“Real estate bulls will also point out how the void rate remained low at just 1.9%, down from 2% in the financial year to March, despite the high-profile High-Street woes of several retail and restaurant chains. In addition, net rental income rose slightly to £308 million in the first half of this financial year, compared to £303 million in the equivalent period a year ago.

“With the company’s finances also much more solid than they were going into the 2007 property cycle peak – net debt is £3.7 billion and the loan-to-value ratio 26.2% compared to £5.7 billion and 44% just over a decade ago, while the average loan maturity is 12.6 years.

“Supporters will again point to the discount to NAV and the dividend yield while bears will growl that unless net asset per share valuations stabilise at the very least there is no potential catalyst on the horizon to unlock any value that is there. In addition, sceptics will continue to fret about the firm’s £5.5 billion retail and leisure park assets, which represent 40% of the total combined portfolio, as well as what Brexit might mean for its £5.4 billion of London office space and its £1.5 billion development programme.

“Landsec currently trades at the second-highest discount to NAV among the major real estate investment trusts. Only Hammerson trades on a bigger discount and it received a bid this year, while Intu, which used to trade on the biggest discount, has just received a second approach, so merger and acquisition activity in the sector could be one possible trigger for improved performance – although whether any potential trade buyer will be willing to take a chance before the Brexit talks are concluded is unclear, especially as the possibility of further weakness in the pound may persuade any overseas predator to wait and see if they can get an even lower price for any potential prey.”

 

Share price

Historic NAV

Premium / (discount)

Safestore

559.8

357.0

56.8%

Big Yellow

914.3

665.0

37.5%

SEGRO

633.7

556.0

14.0%

Londonmetric Property

187.8

165.2

13.7%

Hansteen

96.1

100.0

(3.9%)

TRITAX Big Box

139.7

146.2

(4.5%)

Shaftesbury

924.8

983.0

(5.9%)

Workspace

960.3

1,037.0

(7.4%)

Harworth

119.0

130.8

(9.0%)

A & J Mucklow

508.0

559.0

(9.1%)

Great Portland Estates

735.2

845.0

(13.0%)

Newriver

239.8

292.0

(17.9%)

Derwent London

3,046.0

3,713.0

(18.0%)

St. Modwen

377.0

474.4

(20.5%)

Capital & Counties

256.3

334.0

(23.3%)

CLS

212.5

294.7

(27.9%)

Town Centre Securities

255.0

384.0

(33.6%)

INTU

193.2

297.0

(34.9%)

British Land

619.6

967.0

(35.9%)

LandSec

860.8

1,384.0

(37.8%)

Hammerson

440.6

790.0

(44.2%)

Source: Company accounts, Refinitiv data

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