Jefferies downgrades Land Securities, British Land
Jefferies has downgraded Land Securities and British Land to ‘hold’ and cut price targets on both stocks.
The broker said that the cost of doing business for both real estate investment trusts was "rising, with earnings dependency on shops and decarbonising costs".
"We have downsized our dividend forecasts to boost earnings retentions, and both stocks are demoted to ‘hold’ on reduced price targets." Both previously had ‘buy’ ratings.
The government’s energy white paper, Powering Our Net Zero Future - which Jefferies expects to become law - wants rented non-domestic buildings to meet minimum energy standards, and around 70% of Land Securities’ and British Land’s portfolios will "fall short", Jefferies said.
"Reits risk becoming forced developers, with Land Securities and British Land facing possible ‘greening’ costs of around £700m-£800m versus 2022 dividend costs of £209m and £147m respectively," it added.
On rents, Jefferies said: "Prime shopping centre rents haven’t rebased sufficiently.
"Land Securities and British Land seem to have containable shop exposure of 29% and 28% respectively. By value, but untenably high income, with Land Securities at £231m (43% rent, +12% leisure) and British Land at £231m or 54%, with the tenant eviction ban extended to March 2022 and into CVA season."
Jefferies said US reits generate high revenue retentions to reinvest in their portfolios, but UK reits must distribute 90% of property income distribution earning where disclosure is wanting, and are thus dependent on sources of external capital.
"Land Securities and British Land equity are trading at 22% and 29% discounts to net asset value respectively, with post-GFC resistance to gearing more than 30% loan to value.
"We conclude that Land Securities and British Land are under increasing earnings and dividend pressure and downgrade."
Price targets have been lowered to 725p for Land Securities, and 525p for British Land, from 809p and 617p respectively.
As at 1100 BST, shares in Land Securities were off 2% at 688.4p, while British Land was down 3% at 507.2p.