Having followed a contrarian investment approach for years, I am very familiar with market overreactions and the opportunities that often result from such irrational market behaviors.
One of my more recent contrarian bets was on UK real estate securities in the aftermath of Brexit. It is rare to find blue chip real estate firms selling at extreme discounts to NAV, so when these opportunities presented itself, I immediately questioned the rationality of the market. It was clear that the Brexit event created uncertainty and that property markets could experience a slowdown, but given the very high sell-offs, we felt that the pessimism had gotten out of hand.
Today, we provide an update on British Land (OTCPK:BTLCY), a UK REIT that I have regularly covered during the last year.
High-Quality Company Delivers High-Quality Results: An Update on British Land
British Land is the only international holding within the “High Quality REIT Portfolio” at High Dividend Opportunities. It owns a vast portfolio of office and retail properties throughout the UK with a particular focus on the London Metropolitan area. Ever since the Brexit vote, which happened last year in March, the company has been suffering from a very low market perception - causing its share price to decline by over 30% in the months leading to and after Brexit.
This caught our interest because while the common perception was that the UK and its property market would greatly suffer from the Brexit event, we thought differently. According to our “big picture” analysis of the situation, we saw no need to panic, and rather considered the massive sell off to be a great opportunity for contrarian investors.
We summarized the buy thesis by noting that the assets owned by British Land are of very high quality and that their value should remain relatively stable despite the negative expectations of the market. Moreover, we noted that the 43% discount to NAV was historically opportunistic and should result in market outperformance if our thesis proved to be correct.
Today, as we are reviewing the first half year results (ending 09/30/2017) of British Land, we are pleased to see that we were right on point. In other words, our contrarian thesis is proving itself and the common wisdom of the market is losing in credibility.
NAV is up, Rents are growing, Dividend is increased, and Buybacks Continue…
The main highlight of the first half year is that the NAV increased by 2.6%. This came as a surprise to many who were expecting values to decrease, but not to us. It proves the bears wrong and demonstrates the high resiliency of BL’s portfolio. Additionally, British Land achieved strong leasing results with renewals 6.8% ahead of ERV - securing £32 million of additional future rent.
Half year dividend was also increased by 3%, sending another bullish signal to the very pessimistic market. The balance sheet was already strong, but once again got even stronger with a loan-to-value of only 26.9% - representing a decrease of 300 basis points.
Finally, British Land undertook significant share buybacks of £156m and plans to buy more by the end of the financial year – which is very accretive considering the currently discounted valuation.
As the CEO noted, this is a fantastic performance:
"British Land has delivered a strong first half performance as a result of our high level of successful activity and firm capital discipline. Net asset value is up 2.6%; profit and EPS remain steady despite considerable recent disposals; and we've increased the size of our committed development pipeline while reducing LTV further.”
" We have deliberately created a portfolio consisting of the high-quality assets and development opportunities required to succeed in today's environment. As a result, we continue to achieve valuable leasing success and strong pricing, enabling us to increase the dividend by 3%, while progressing our unique development opportunities to create long-term value for shareholders."[Emphasis added]
As a result, the market is finally warming up for British Land with its shares being up by about 15% in the recent weeks:
Source: Google Finance
We are today sitting on a nice gain, on top of the high dividends that we have been collecting for a little while now. Should we take our gain or keep on holding?
We answer this question by simply looking at the current spread between share price and underlying net asset value. The current NAV stands at 939p compared to a share price 679.5, or put differently a close to 30% discount to NAV.
We consider this discount to remain excessive for a high-quality REIT, and as such, we believe that there is still upside to be realized. Compare this to high quality US REITs such as Realty Income (O), National (NNN), Boston (BXP), Prologis (PLD), and others all trading at premiums rather than discounts to NAV.
Long term, we believe that British Land has the potential to close this valuation gap completely, and trade at around its NAV – resulting in material share price appreciation from today. In this sense, we remain patient holders and remain confident in the long-term outlook. We expect dividends, growth, and appreciation.
Takeaway
As we have often seen in the past, the market oversold a given stock based on short-term fears that are yet to be reflected in the fundamentals.
British Land keeps posting solid numbers and we expect this to eventually turn around the market sentiment and unlock substantial value to shareholders. Until then, we consider the +4% dividend yield to be attractive and sustainable.
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Note: All images/tables above were extracted from the Company's website, unless otherwise stated.
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.
This article was written by
Jussi Askola, CFA
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Jussi Askola is the President of Leonberg Capital, a value-oriented investment boutique that consults hedge funds, family offices, and private equity firms on REIT investing. He has authored award-winning academic papers on REIT investing, has passed all three CFA exams, and has built relationships with many top REIT executives.
He is the leader of the investing group High Yield Landlord, where he shares his real-money REIT portfolio and transactions in real-time. Features of the group include: three portfolios (core, retirement, international), buy/sell alerts, and a chat room with direct access to Jussi and his team of analysts to ask questions. Learn more.
Analyst’s Disclosure: I am/we are long BTLCY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am part of the "High Dividend Opportunities" (HDO) research team. Rida Morwa has also covered BTLCY recently.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
I'm Jussi Askola, a CFA and the President of Leonberg Capital, specializing in value-oriented investment consulting for hedge funds, family offices, and private equity firms with a focus on REIT investing. I've authored award-winning academic papers on REIT investing, passed all three CFA exams, and established relationships with top REIT executives. I lead the investing group High Yield Landlord, where I share my real-money REIT portfolio and transactions in real-time. My expertise and deep understanding of the market dynamics have enabled successful contrarian investment strategies, as exemplified by my recent contrarian bet on UK real estate securities post-Brexit.
In the provided article, I covered British Land (OTCPK:BTLCY), a UK REIT, detailing its performance and the rationale behind my contrarian investment approach. Here's an overview of the concepts used in the article:
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Contrarian Investment Approach: The author follows a contrarian investment strategy, exploiting market overreactions and identifying opportunities arising from irrational behaviors. This approach involves going against prevailing market sentiments.
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Brexit Impact on UK Real Estate: The article discusses the contrarian bet on UK real estate securities following the Brexit event. Despite market pessimism and a perceived slowdown in property markets, the author believed the sell-offs were excessive and presented an opportunity for contrarian investors.
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British Land (BTLCY): British Land is a UK REIT with a vast portfolio of office and retail properties, particularly in the London Metropolitan area. The company faced a decline in market perception and a share price drop of over 30% after the Brexit vote.
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Net Asset Value (NAV): The author emphasizes the historical 43% discount to NAV, considering it an opportunistic entry point. The article highlights the importance of the quality of assets owned by British Land, suggesting that they should remain relatively stable despite negative market expectations.
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Financial Performance: The update on British Land's first-half results reveals a 2.6% increase in NAV, strong leasing results, a 3% increase in dividends, and a decrease in loan-to-value to 26.9%. Share buybacks of £156 million further strengthen the company's position.
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Market Reaction: The market is shown to be warming up to British Land, with a recent 15% increase in share prices. The author indicates a belief in the potential for further upside based on the current discount to NAV.
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Valuation Comparison: A comparison is made between British Land and high-quality US REITs like Realty Income (O), National (NNN), Boston (BXP), and Prologis (PLD), emphasizing the significant discount to NAV in British Land's case.
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Investment Decision: The author considers the current discount to NAV as excessive for a high-quality REIT and expresses confidence in the long-term outlook. The article concludes by suggesting patience in holding British Land shares for potential future appreciation.
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Dividend Yield: The article notes a +4% dividend yield from British Land, which is considered attractive and sustainable, providing additional incentive for patient holders.
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Author's Position: The author, Jussi Askola, discloses that he is long on BTLCY, indicating a personal investment in the discussed REIT. The disclosure adds transparency to the author's potential biases.
In summary, the article provides a comprehensive analysis of British Land's performance, supporting a contrarian investment thesis based on a detailed examination of market dynamics and the company's fundamentals.
