British Land Keeps Delivering Solid Results (OTCMKTS:BTLCY)

Investment Thesis

Most REITs are being hammered in this environment, with rising interest rates and for office space the fear of WFH reducing demand.

When compared to the general stock market, British Land (OTCPK:BTLCY) is down 21% over the last 3 months since our previous analysis, while the FTSE100 is down just 3%

With British Land’s FY 2023 financial results ending 31st March just out, we want to share our view on potentially investing in it.

2023 FY Financial Results

For the full year, BTLCY delivered a strong underlying profit of £264 million for the year, which was a growth of 7% Y-o-Y. It was driven by a like-for-like net rental growth of 6%.

Underlying earnings per share was 28.3 GB pence, up 4.8% from the previous year.

Here in SA, there are plenty of good analyses on U.S. REITs. If you follow some of the analysts, you will have noticed that there are lots of concerns out there, especially in the office sector. BTLCY does have office space, but they are more than just offices.

One thriving sector is their retail parks, which continued to do well with an occupancy level of 99%.

Real estate is cyclical. In order to ride through low periods, it is important that the company has a fairly long duration on its leases. BTLCY has a WALE, or weighted average lease to expiries for the entire portfolio, of 6.8 years. That is quite good.

In the last FY, they managed to keep a tight grip on costs despite the inflationary environment. The EPRA cost ratio was 19.5%, which was 610 basis points lower Y-o-Y.

The first thing we wanted to zoom in on this year was its financing costs, as this could potentially be the Achilles heel for a property company.

Fortunately, due to their hedging strategy where 97% of the loans were hedged for future interest rate rises, the net finance costs were only up £9 million for the full year to £111 million. As such, they are guiding that this FY the interest costs should be around £110 to £115

The full-year dividend was 22.64 GB pence per share, an increase of 3% from last year’s dividend. However, when we look at their dividend history over the last 10 years, we can see that it is lower than what it used to be 10 years ago.

One thing which is good about BTLCY is its solid balance sheet.

Thanks to the well-timed disposal last year of £750 million worth of assets, their liquidity is now quite strong. It stands at £1.8 billion. Their net debt-to-EBITDA is 8.4x and their loan-to-value ratio is 36%. This is somewhat higher than last year, due to lower valuation for the properties.

When we look at their debt maturity profile, we can see that there is not that much debt coming due in the next two years.

It is only in 2026 that over £1 billion is coming due. It is hard to predict what the valuation of their properties will be by then, and what kind of interest rate environment we will have. This will determine how easy, or difficult, it will be to refinance their debt.

We need to see this upcoming debt in the context of their free cash flow generation, ability to increase rent slightly year by year, and their solid pipeline of development projects coming on stream.

Their net cash inflow from operating activities was £240 million last year, from which they paid out £213 million in dividends. So there is room to allocate more towards financing at the cost of reducing the dividend if that becomes necessary.

The total pipeline of new space which will complete by Q4 of 2023 is 1.8 million square feet. This is within the office, residential, and mixed-use sectors.

BTLCY entered the modern logistic center segment a few years back and now has a pipeline of 2.9 million square feet with a gross development value of £1.3 billion.

Net tangible asset value per share is down 19.5% to £5.88.

This should make refinancing their debt on attractive terms very doable going forward.

Conclusion

There are many positive elements to British Land. It is well managed, and we can see a good chance of growth coming in the next few years.

When we look at the present valuation, we have to say that it is good value here. The share is trading at a share price of £3.54 on the London Stock Exchange. That gives investors a dividend yield of 6.4% and a very attractive price to net tangible book value of just 0.6.

That should offer investors some safety margin.

However, we do think that it is too early to buy BTLCY right now, as the share price could still be under pressure in the near term of 3 to 6 months.

As such, we prefer to maintain our Hold stance for now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.