Head To Head: Land Securities vs British Land

Published in Investing on 24 October 2012

Which FTSE property giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are FTSE property giants Land Securities (LSE: LAND) and British Land (LSE: BLND).

Land Securities and British Land have outperformed the FTSE 100 over the past six months. The Footsie is up 2%, but Land Securities has risen 12% and British Land 11%.

Let's take our seats at ringside.

Round 1: earnings

 Land SecuritiesBritish Land
Recent share price804p530p
Last year price-to-earnings (P/E) ratio20.917.8
Current year forecast P/E23.217.8
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%)-11-9
Current year forecast eps growth (%)-100
Forecast operating margin (%)4757

Source: Digital Look. Winners in bold.

It's a clean sweep for British Land in round one. Land Securities only manages to come close on one point: historic earnings growth, where its poor performance is just a little worse than that of its rival.

As you can see from those historic earnings numbers (and the historic dividend numbers in the next table), Land Securities and British Land have some way to go to recover from the financial crisis, which well and truly hammered them.

Round 2: dividends

 Land SecuritiesBritish Land
Last year dividend yield (%)3.64.9
Current year forecast dividend yield (%)3.75.0
Four-year dividend CAGR (%)-16-7
Current year forecast dividend growth (%)+3+2
Forecast dividend cover1.21.1

Source: Digital Look. Winners in bold.

British Land continues where it left off in round one, taking the first three points in the second round. Land Securities fights back, scoring narrowly on forecast dividend growth and dividend cover, but it's too little, too late.

You may have noticed that dividend cover is very low for both companies. This is because Land Securities and British Land are structured as real-estate investment trusts (REITs). One of the rules for REITs is that they must distribute at least 90% of their tax-exempt profits to shareholders. In other words, REITs can't help but have low dividend cover. If you'd like to learn more about REITs, take a look at my article ‘A Guide To REITs'.

Round 3: balance sheet

 Land SecuritiesBritish Land
Price-to-book (P/B) ratio0.90.9
Net gearing (%)4549

Source: Digital Look. Winners in bold.

In round three, Land Securities takes one point for its marginally more conservative gearing, while the companies share one point for P/B.

At the end of the contest, British Land has won two rounds and Land Securities has won one. The overall points tally is British Land 8.5 and Land Securities 3.5.

Post-match assessment

This was a comfortable win for British Land and its points tally included four of the five valuation-ratio points -- historic and forecast P/E and historic and forecast dividend yield -- while it matched Land Securities on the fifth point (P/B).

In the case of property companies, though, it's worth noting that P/B, being asset-based, is probably the single most useful of the five valuation measures. Nevertheless, even allowing for that, the overall picture presented by the numbers suggests British Land may be the better buy at the present time.

One word of warning: don't get too excited about the P/Bs being less than one, because shares in property companies typically trade at a discount to book value -- and have been known to trade at a wider discount than they are at present.

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Further investment opportunities:

> G A Chester does not own shares in any of the companies mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Gerry557 24 Oct 2012 , 5:07pm

Just looked at the same figures for another, smaller REIT, It's company ticker TCSC. (Town Center) It compares well with your winner but you dont state the discount to NAV. This, I think adding this would enable you to identify if one was "cheaper" than the other.

M0byDick 24 Oct 2012 , 6:45pm

Hi Gerry557

For the year ended 31 March, British Land's balance sheet NAV was £5.10bn or 564p per share. So the shares, currently at 531.5p, are at a 6% discount to NAV. (Incidentally, you can work out the discount from the P/B in the table in the article, albeit somewhat roughly because I only give the P/B to one decimal place. It's simply the difference between the P/B -- 0.9 in BLND's case -- and 1, giving a discount of 9%).

As you've probably noticed, property companies also quote an "EPRA NAV" which they reckon is a better measure than the balance sheet NAV. In BLND's case this is 595p per share, putting the shares at a discount of 11%.

Foolish best
MobyDick (G A Chester -- article author)

IDPickering 24 Oct 2012 , 8:23pm

Excellant article GA Chester, thanks.

I actually hold both of these two, BLND in my HYP(ISA),
and LAND inmy HYP(SIPP). A sort of hedge your/my bets thing.

Regards,

Ian.

brightncheerful 25 Oct 2012 , 1:07pm

LSR is another REIT, but yields approximately 9.5%
Okay its assets are not prime, on the contrary, this is local shopping. But unlike LAND and BLND, LSR's sp to NAV is where it should be.

GnomeYOB 25 Oct 2012 , 4:52pm

Just been looking to invest in a REIT as its a whole in my portfolio right now. Just been struggling to find the numbers talked about in the 'How To Value A Property Company' fool article on Digital Look and found the link to this. So happy to see it, so dispointed on reading it to find the fool does not follow its own published methodology.

'How To Value A Property Company' is linked from the ‘A Guide To REITs' link on this page.

Interest cover is there in the Digital Look version of the P&L account even if some of the other numbers are a bit more obscure. Any reason not to use that over the Divi cover as suggested earlier?

M0byDick 26 Oct 2012 , 2:31pm

Hi GnomeYOB -- this series of Head to Head articles uses a standard set of measures. I tried to point out where these measures don't work so well for property companies. Hopefully, readers who wanted to learn more about REITs will, like you, have followed the link in the article to 'A Guide to REITs' and on to the 'How to Value a Property Company' article -- the latter can be reached directly with this link http://www.fool.co.uk/news/investing/2010/09/20/how-to-value-a-property-company.aspx
Foolish best, MobyDick (G A Chester)

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