British Land Company plc: an unloved 4.9% yielder trading at a 35% discount to NAV

Shares in British Land (LSE: BLND) are trading near 3% higher after the company released better-than-expected first-half results today.

The UK’s second largest commercial REIT reported a 2.6% rise in its EPRA net asset value per share to 939p, following healthy revaluation gains which demonstrated the resilience of its prime property assets.

It’s not all rosy though. Net rental income, a key measure of underlying profits, fell by £15m to £297m in the first half of the year. The decrease in net rental income during the period was mainly down to recent divestitures and lease expiries, although like-for-like rental growth also slowed considerably to 1.8%, from 3.4% in the same period last year.

In addition, amid a continuing overhang of uncertainty, chief executive Chris Grigg warned that he expects “rental growth across the market to be flat-to-down over the next 12 months.”

Big discount to NAV

Still, buying into a prime property portfolio at roughly 65p to the pound sounds to me like a great opportunity. The shares’ 35% discount to NAV also gives its dividends a nice boost. Following a 3% increase in its quarterly dividend to 7.52p per share, the shares offer an enticing prospective yield of 4.9%.

And while I don’t expect the valuation gap to close anytime soon, I have high hopes that medium-term upside could come from its development pipeline. Committed developments are forecast to generate an extra £55m in annual rents over the next five years. At first glance, this may seem speculative to some investors, but it’s important to realise the company is defensively positioned with 57% of committed pipeline already pre-let or under offer.

Together with contracted rent rises and upcoming open market rent reviews, British Land expects to earn an extra £109m in annual cash flow by 2022/23. This equates to nearly a fifth of its current passing rent, which could lead to some serious dividend growth and additional share buybacks.

Discounted REITs are not always better

However, it’s not a simple case of buying those with the biggest discounts. A well-run REIT with attractive fundamentals may be worth backing even if the shares trade at a premium to its NAV.

I reckon that Hansteen Holdings (LSE: HSTN), which trades at a 3% premium to its NAV, is perhaps one such REIT.

The industrial property investment company has recently undergone a major transformation after selling its entire property portfolio in Germany and the Netherlands and doubling down on the UK. It’s a strategy which crystallises value for shareholders with the euro at a high point, and allows it to take advantage of opportunistic pricing of UK assets.

Market fundamentals have also fared more resiliently in the industrial sector, with rents rising modestly and vacancies historically low and stable. And although industrial units have not made the same valuation gains experienced for prime central London property, investment yields have been far greater. This is especially true for newly built stock as Hansteen earns an 8% yield on passing rent.

At current prices, it has a prospective dividend yield of 4.4%.