- Operational update well received by investors
- Portfolio built to withstand ‘higher for longer’ interest rates
- Market needs to focus on earnings not valuations
Shareholders gave a thumbs-up to the latest operational update from Land Securities (LAND), one of the UK’s leading real estate companies with a £10.9 billion property portfolio.
The shares gained 10p or 1.7% to 586p, stemming eight weeks of unabated selling which has knocked over 20% off the price.
ACTIVELY MANAGING ITS ASSETS
The main thrust of the latest update was to show how the firm is continually developing and upgrading its properties in response to customer demand as well as recycling capital out of mature assets into those with higher future returns.
In the case of the St David’s shopping centre in Cardiff, for example, where the firm owns a 50% stake which it bought from Intu, it has secured 100% ownership at a significant discount and a 9.7% initial yield after talks with debt holders.
Occupancy and lease momentum at the centre has been strong with 36 new leases signed or ‘in legals’ since March 2022 at an average premium of 11% to estimated rental value (ERV).
Across Landsec’s major retail destinations, which make up around 20% of its portfolio by value, like-for-like sales were 3% ahead of pre-Covid levels for the eleven months to February.
Meanwhile, the firm has sold out of the fully-let One New Street Square office development, which was fully let, for £350 million, and disposed of a fully-let leisure property in North London and a small non-core residential asset for a combined £49 million or a 26% premium to their March 2022 book value.
‘Over the past year we have been decisive in positioning Landsec for a ‘higher for longer’ interest rate environment’, said chief executive Mark Allan.
‘We have realised capital out of mature assets through well-timed disposals; reduced net debt to preserve a strong balance sheet; extended debt maturities while preserving a low cost of debt; invested selectively in new opportunities that offer a materially higher return and responded proactively to the continued high demand amongst occupiers for prime space.’
THE IMPORTANCE OF EARNINGS
While property companies can’t do anything about movements in interest rates or their effect on valuations, by actively managing their assets they can ensure they continue to maintain and grow earnings.
This is what matters, or should matter, to investors, as it is cash earnings not valuations which pay dividends.
Despite a 12% decline in the value of value of its portfolio last year - which compares favourably with the 17% decline in the MSCI benchmark - office property specialist Regional REIT (RGL) posted flat full-year EPS (earnings per share) of 6.6p, all of which it is paying out in dividends representing a yield of over 11% at today’s price.
Midlands-focused REIT Real Estate Investors (RLE) also posted its full year results today with earnings per share of 2.7p more than covering the 2.5p dividend (representing a yield of almost 9% at current prices).
The firm also committed itself to reducing the ‘significant’ share price discount to NTA (net tangible assets), if it persists, through a further share buyback, special dividend or other means of capital return.
Disclaimer: The author owns shares in Regional REIT and Real Estate Investors
