It was a hot day in London yesterday for the British Land AGM, but shareholders stayed cool in the meeting despite the share price being way down from last year. This is a only a very brief summary of the full report I have written for ShareSoc members and just covers the interesting aspects so far as investing in commercial property is concerned.
First a bit of background. British Land is a FTSE-100 company REIT with assets of £9,619 million. It’s a favourite of retired investors who appreciate its high dividend yield (currently 4.5% which is a lot better than keeping your money in the bank), and its historic stability. The share price reached a peak of about 875p in mid 2015 but it’s been downhill since. It’s been as low as 550p recently and at the time of writing is 640p. The causes of the unusual decline, and volatility, seem to have been some recognition that commercial property had been on a long bull run and may have reached it’s peak, then the uncertainty of the Brexit referendum on property prices (might deter foreign investors who are the big buyers of commercial property) and the result of the referendum was the final nail in the coffin as it was perceived that City of London offices might become vacant as financial institutions moved some of their staff to Europe. Of course this is all guesswork as what ultimately drives prices is often difficult to determine.
British Land has two main focuses for its assets which are split roughly 50/50 – retail/leisure property around the UK and offices/residential in London. They own such properties as the Meadowhall retail development in Yorkshire and the Leadenhall building (the “Cheesegrater”) in London.
Opening the meeting, the Chairman referred to Brexit by saying change presents opportunity and he is confident they will be successful in the new world we are entering. He said they are entering it with the best management team in the industry.
They have low capital commitments, high resilience including long leases which are on 99% occupancy) and modern buildings. Their loan to value ration is less than 30% and the average interest rate is 3.5% with no need to raise new finance for 4 years. Note: the last property crash was caused by property companies becoming highly geared and interest rates then rising sharply causing major distress with banks unwilling to refinance loans – that seems a very different scenario to the present difficulties in the property sector where prices have come down in general not just in the share price of British Land. The problems of open-ended property funds have been widely reported of course.
The Chairman said that current development plans are modest. They are developing the portfolio so it keeps up to date with market demands. Place making is at the heart of what they do.
The CEO then spoke. He said they want to own places where they can control the environment – in retail and offices campuses in London. In retail, 90% of spending is still in stores. Retailers need a broad mix of store sizes integrated with their on-line investment. Foot-fall is 300 million per year and it was up 3%. Retail sales are up 2.4%.
In offices, they are diversifying occupiers (only 2 of the top 20 occupiers are in the financial services sector). Rental growth was 10% last year. There was a significant uplift in historic rent reviews. Profits were up 16%. They are particularly pleased by the rental growth.
They issued a convertible loan note with a zero interest coupon. Total accounting return was 14%.
The Chairman then invited questions. Here are a few of the questions and responses:
- Phil Clark – a “happy shareholder” said the company had a robust position but the share price has taken a beating. He invited comments on that. The Chairman said they are the most liquid stock in the FTSE and their shares qualify as a liquid asset for open-ended property funds. They have been forced sellers of the shares to meet redemptions which has depressed the British Land share price (and also that of Land Securities).
- A spokesman from the LAPF complimented the company on renewable energy use and asked questions on the key risks mentioned in the Annual Report – Brexit and the new Mayor of London. How will it impact on development plans? The Chairman said that as regards Brexit, “clearly you all voted for it”. They took prudent steps to protect your interests and they have great “optionality” in the development portfolio. The cost of capital is at an all time low, the loan to value ratio near its low. He looked forward to the future with confidence.
- A shareholder commented that many people believe share price falls were caused by panic created by the Chancellor, Mark Carney, et al. Chairman: they are prepared for any eventuality. Brexit affected them because most of their investments are in the UK and they have not benefited as have other companies from the fall in the pound.
We then moved to a vote via poll cards – highly unsatisfactory and the proxy counts were not displayed so one could ask questions on the figures before the meeting closed. In reality though the poll results announced later in the day showed all resolutions passed with very large majorities with minor exceptions. Remuneration report got 3.99% against, 2.87% against the Remuneration Policy, 3.03% against Lord Turnbull (Chair of Remuneration Committee), 9.45% against share allotment limit, and 17.15% against change to the notice period for General Meetings – this shows that they probably have a high percentage of foreign/US shareholders.
This rather demonstrates how difficult it is to get institutional shareholders to vote against large pay awards (the CEO got a single figure remuneration total of £3.7 million last year although this was down on the previous year when he got £6.5 million, and the Non-Executive Chairman got £429,000 last year which was higher than the previous year!).
In general this was a useful meeting to attend in terms of the questions answered. The Chairman ran the meeting well. Whether commercial property is a good investment at this time is something you will need to judge yourself. Property prices can be volatile in the short term but ultimate value is driven by rental demand and rental price levels/yields. I think this company is particularly suffering because it has “British” in its name and is focussed on British assets so far as overseas investors are concerned. But as we have seen recently with ARM, some British assets are now more attractively priced so far as overseas investors are concerned, so the worm might turn.
Roger Lawson
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