StockBeat: Landsec, Unibail Prove There's Life Left in Landlords

This post was originally published on this site — Few sectors have been hit as hard by the pandemic as commercial landlords, so anyone looking for a sharp rebound from distressed levels may want to cast an eye on the news out of two of Europe’s biggest this Tuesday morning.

WFD Unibail Rodamco  (AS:URW) stock rose 24% and U.K.-based Landsec (LON:LAND) rose 7.5% after news releases that – though different in nature – both pointed to a brighter future.

For Unibail, the issue is relatively simple. The management had wanted to raise fresh capital to see it through the crisis. Unibail went into this year still burdened by its debt-financed acquisition of Westfield in 2017. Shareholders led by French tycoon Xavier Niel felt that management should instead raise more funds through asset sales, specifically, through the sale of Westfield shopping malls in the U.S.  

At a shareholder meeting on Monday, enough shareholders swung behind Niel and his allies to block the share issue and remove the dilution risk.

That vote is one of the first concrete consequences of the announcement from Pfizer (NYSE:PFE) and Biontech on Monday about the effectiveness of their Covid-19 vaccine (which will be distributed first in the U.S.).  Faster vaccine availability means a faster return of consumer confidence, which means management should find it easier to raise the money it needs by selling Westfield malls in the U.S.

With Landsec, the issue is more nuanced. The company is the biggest owner of offices in London, which account for over two-thirds of its portfolio. Its more modern assets have sailed through the crisis reasonably comfortably. After a dip in the second quarter, rent collection was back at 99% in the three months through September.

But the company acknowledges it’s going to have to “reimagine” many of its older offices, acknowledging that the old model of cramming workers into the smallest space possible is no longer a viable model.

“As we emerge from the pandemic, the way employers and people seek to use office space will change as greater levels of remote working become the norm,” chief executive Mark Allan said in a statement Tuesday. “Many of the trends of recent years – the importance of sustainability, greater levels of flexibility, the role of the workplace in a health and wellbeing context – will accelerate.”

Allan has already said he will look at repurposing some assets as housing, always a safe bet in a market as structurally under-supplied as London.

To be sure, this is going to cost Landsec a lot of money. Like Unibail, Landsec will need to find someone to pay up for disposable assets in a market where the long-term damage of Covid-19 is still far from clear.

However, the company is confident that it has the money to do both that and resume payouts to shareholders. It will pay 12 pence a share for the first six months of the current fiscal year, a yield equivalent to 3.5% at the current price (Unibail is also still paying dividends but anything above 250 million euros this year will be paid out in the form of shares).

Given its London focus, Landsec is exposed heavily to a high-impact Brexit transition that hits the financial services industry. However, having lost over half its value since the 2016 referendum, that seems firmly priced in.

More interestingly, and in defiance of much commentary about the future of work after the coronavirus,  Landsec still believes in the Big City as a concept in the post-pandemic era.  

“While Covid-19 has instilled a fear of densely populated areas in the near term, it is also increasingly highlighting people’s desire to come together, the challenges and limitations that emerge when they can’t and the significant network effects of mixing commerce, arts, science and power in one place. Cities, and London in particular, have bounced back from many such crises in the past and will do so again.”

Despite bouncing 35% in the last two weeks alone, the shares still appear to offer a cheap entry point for anyone willing to buy into that vision.

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