Landsec swings to first annual pre-tax loss since global crisis and appoints Cressida Hogg as chairman

By James Wallace - Tuesday, May 15, 2018 9:24

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Landsec, the UK’s largest REIT with a portfolio valued at £14bn, has swung to its first annual pre-tax loss since the global financial crisis, losing £251m in the year to the end of March, which the listed property owner attributed to the costs associated with a £1.5bn bond refinancing.

The £251m pre-tax loss for the year to 31 March 2018 is the REIT’s first annual loss since 2009 when the Land Securities reported a £4.7bn pre-tax loss, driven by a 34.2% fall in portfolio valuation and the costs of its £756m rights issue.

In a separate announcement this morning, Landsec has appointed Cressida Hogg as non-executive chairman following the REIT’s AGM on 12 July 2018, succeeding Dame Alison Carnwath who will retire from the board after 14 years in total including nine as chairman. Hogg joined the Landsec Board in January 2014 and has previously worked at JP Morgan, 3i Group, and the Canada Pension Fund Investment Board, where she managed a portfolio of investments worth £16bn.

Hogg said: “In a changing world, Landsec has a clear purpose and an exciting portfolio and I look forward to working more closely with its strong management team.  I would like to thank Alison on behalf of the board for her leadership, wisdom and commitment during her 14 years on the board, and nine years as chairman. She will be greatly missed, and we wish her all the best for the future.”

Landsec announced its legacy bond repurchase programme and financing two months ago, repurchasing in total £1.53bn of bonds at a premium of £446m, and issued a replacement £350m nine-year bond paying a coupon of 2.375%.  The REIT’s cost of debt has fallen from 4.2% in 2017 to 2.6% in 2018, saving c. £58.4m per annum in interest costs, wrote JP Morgan this morning. “With the market discounting the NAV so much it’s a good trade in our view. Landsec needs credit for reducing their debt cost so quickly and we see the increase in adjusted EPS and dividend as value enhancing.”

Annual net interest saving on the tendered bonds, taking into account the cost of the new issuance, will be circa £16.3m for the coming financial year. This debt management activity is also behind Land Securities loss per share of 32.9p and the reduction in its net assets, which fell by £826m to £10.4bn. Land Securities’ combined portfolio on a gross value basis declined 0.7%, or £0.3bn, to £14.1bn. Valuation performance is now more influenced by individual asset performance than wider market movements, the REIT said.

The bond repurchases, and refinancing, is a significant contributor to the increase in the REITs underlying earnings as a result of lower ongoing interest costs. Revenue profit was up 6.3% from £382m to £406m and adjusted diluted earnings per share were up 9.9% at 53.1p.

The 2018 annual loss compares to a relatively modest £112m pre-tax profit in 2017. Land Securities loss this year, and modest profit last year, is explained by UK market which features flat capital growth and the spectre of rising interest rates, arguably underscoring the wisdom in its bond repurchasing programme two months ago.  

To put these annual headline performance figures in context, Landsec delivered pre-tax profits of £1,335.6m in 2016; £2,416.5m in 2015; £1,108.9m in 2014; £533.0m in 2013; £515.7m in 2012; £1,227.3m in 2011; £1,069.3m in 2010; and, of course, that giant pre-tax loss of £4,773.2m in 2009.

Landsec’s chief executive, Robert Noel, said: “We’ve worked on both sides of our balance sheet during the year, returning £475m to shareholders and refinancing over £1.5bn of our bonds which reduced our weighted average cost of debt to 2.6% and lengthened its duration to 13.1 years.”

Landsec announced a final dividend of 14.65p – increasing the dividend for the year by 14.7% – following strong lettings in its speculative development programme and the increase in adjusted diluted earnings per share.

In London, the REIT has completed letting 560,000 sq ft of mixed use space at Nova, which is now 97% let; sold its our 50% interest in 20 Fenchurch Street at a headline price of £1.3bn, crystallising a profit on cost of £400m for its 50% share. In addition, construction has started of 564,000 sq ft at 21 Moorfields, where Deutsche Bank has committed to a minimum of 469,00 sq ft.  In retail, Land Securities has opened Westgate Oxford which is now 96% let or in solicitors' hands and acquired three new outlet destinations for £333m. The REIT is also working up feasibility plans for significant mixed-use development at its suburban London retail assets.

In total, Landsec sold £1.1bn in assets over the year – which also included Greyhound Retail Park in Chester and some Accor hotels, as well as The Printworks in Manchester and The Cornerhouse in Nottingham – and returned £475m to shareholders. The largest asset valuation movement in Land Securities portfolio over the year was in its 30% stake in the 1,.8m sq ft Bluewater shopping centre in Kent, which fell 11% as the valuer moved the yield out by 50 bps due to limited transactional evidence.

Noel added: “The business is in a strong position. Our portfolio is well let and adaptable to changing customer expectations. In a market facing short-term uncertainty, we have conservative gearing, market-leading debt facilities and a growing pipeline of opportunities for the future.”

JP Morgan’s real estate equity team wrote this morning: “Landsec’s balance sheet metrics are solid with LTV at 25.8% and the weighted-average cost of debt down 160 bps year-on-year to 2.6%. A further net interest saving of £24m is expected next year due to the company’s recent debt management activity. The group’s debt had a weighted average maturity of 13.1 years and 83% of the debt had fixed interest rates. The company continues to maintain significant flexibility to deploy capital quickly with £1.1bn of cash and available facilities.

James Wallace is a freelance consultant and can be reached via Linkedin or email: jawallace32@gmail.com

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