We took a position in Land Securities (LAND) post the UK / European referendum in June 2016. It was at a price we felt very opportune, discounting much potential pain relating to ‘Brexit’ and the domestic economy, whilst offering an attractive re-entry yield in the region of 3.8%, a level not seen since 2012, and a price to book ratio of 0.61x (one would need to go back to the 2008/09 financial crisis to have last seen that kind of valuation).
Land Securities plc - Price to Book Ratio 3 years to 22/8/17
The price to book ratio isn’t quite as simple as a discount to net asset value – but it’s in the same ball park – representing in theory, the chance to buy 100p of assets at 61p.
However, despite those rather appealing valuation multiples, it’s been a frustrating investment. We’ve made some money, but we would have done better if we’d crudely put that allocation into a FTSE tracker.
But it doesn’t change the fact that we believe it is an investment where the risk reward dynamics are in our favour. A number of UK REITs are incredibly appealing and represent for the medium term investor, some potentially meaningful gains. None more so, in our opinion, than LAND.
Trading today at a little over £10, it trades at a price to book multiple of 0.69 and yields 3.94% once again. There are not too many assets listed in the UK that can be bought at such a discount to intrinsic value and offer a competitive yield as compensation for being patient. The FTSE 100 as a whole trades at a price to book ratio of 1.87.
Recently, both LAND and British Land, another dominant player in the UK Reit market, announced shareholder friendly initiatives in an effort to buoy their stock prices.
Firstly, LAND sold its share in 20 Fenchurch Street, otherwise known as the ‘Walkie Talkie’ building, for £641m (a 13% premium to latest valuation and representing a very material 167% profit). Rather than be recycled back into the market, the majority of the proceeds are to be returned to shareholders in the form of a 60p per share distribution.
Secondly, British Land is to implement a share buyback programme to the tune of £300m. It buoyed the entire sector. Chris Grigg, the Chief Executive, stated that ‘investment in the Company’s shares at the prevailing discount offers better value than further asset acquisitions’. This is a clear message to the market – there is no value to be added by deploying surplus funds back into bricks and mortar at this stage in the cycle, but there is value to be had by buying back one’s own shares at a very appealing price to book ratio.
Of course, both companies could have chosen to pay down debt with their cash balances, but we must not forget that the leverage ratio’s of both British Land and Land Securities are far below historical averages – with LAND having a current Loan to Value ratio of just 22% (to put that into context, as at March 2008 heading towards the eye of the storm, LAND was carrying an LTV of 56.2%). Additionally, much of the recent debt that has been issued has been at incredibly low rates in keeping with the broader bond markets, so in similar fashion to the UK government never (until recently) needing to repay their War Loan stock, LAND is in no rush to repay its cheap debt.
One doesn’t have to believe the UK property market is in rude health to buy Land Securities – one just has to believe that the pricing of LAND has overly discounted any economic unrest. In sterling terms, LAND remains 12% lower since the referendum, but perhaps more interesting is the fact that in dollar terms, it’s still 23% lower. This must represent to the overseas investor, a significantly attractive entry point into the largest, and what is deemed by many, the ‘prime-est’ Reit in the UK.
The Coram funds have exposure to LAND, which complements rather than duplicates the characteristics of our other property stocks – such as our Berlin Reit and our UK Social Housing REITs. It’s a theme that to date has worked well, but will be enhanced further when the value in LAND is recognised.Finding Real Opportunities in UK LAND