Building wealth with REITs

Chad Padowitz

Talaria Asset Management

In the heart of London, SW1 the Zig Zag building seems to have been carved from the surrounding towers like a scene from Christopher Nolan’s Inception. The building, created in 2016 with a 10-minute walk to St James Park, is one of the many belongings of UK-based property group, Landsec. With a world class asset base comprised largely of prime Central London office towers (~60%), we believe Landsec is one of the best run Real Estate Investment Trusts (REITs) globally and is a smaller but meaningful holding for our Fund.

Being a property owner means COVID-19 has significantly impacted Landsec’s business. For example, revenue profit (the company’s measure of net income) declined by ~40% in FY21 and property valuations fell by ~14%.

The net of this resulted in a ~17% decline in Book Value/Share (which is the key driver of shareholder value).

That said, the bulk of these impairments has occurred in the non-Office portfolio comprised of retail, leisure, and development assets. In fact, Office values have actually held up quite well through COVID.

It can also be argued, that after allowing for these significant impairments, the carrying value of assets more broadly is a lot more conservative, i.e., their accounting value reflects more accurately their true market value. This has been demonstrated by recent divestments such as Landsec’s sale of 1 & 2 New Ludgate, which sold at a premium to carrying value. New Ludgate is a 183,000 sq ft mixed office and retail asset with, coincidently, Australia’s own Commbank being one of the key tenants. New Ludgate’s carrying value was £546m and sold for £552m, allowing Landsec to book a ~£5m profit after tax.

Other London- based REITs have also been busy on the transactions front. For example, in July Derwent London sold its interest in Angel Square to New York-based property group, Tishman Speyer for £86.5m. While Derwent doesn’t disclose the exact carrying value of individual properties, we do know this was towards the upper end of carrying value ranges. If anything, it also suggests that there is growing appeal amongst international buyers for prime London real estate.

Furthermore, given meaningful impairments to non-Office assets, the quality of the overall asset mix is higher given ~60% now comprises Office properties.   

Source: Talaria, Company Reports

The other positive news in recent months has been improving collection trends, driven pleasingly by non-Office assets.

However, despite the more ‘conservative’ carrying value of assets and recent improvements in business momentum, Landsec continues to trade at ~0.7x Book Value - a meaningful discount, making the stock look cheap in an absolute sense, versus peers, and versus what Landsec can sell its assets for in the private market (as demonstrated above by recent transactions).

We estimate that if the office assets are valued at ~95% of BV (consistent with other Office REITs) then we are getting the Retail/Leisure/Development portfolio for ~60% of BV.

   Source: Bloomberg

Finally, given a Loan-Value Ratio of ~32% (a key measure of a REIT’s gearing), we think Landsec still has the balance sheet optionality to keep buying and developing prime assets to further drive shareholder returns.

Given the above, we think Landsec continues to represent a good investment opportunity for the Fund and one which reflects our belief that investors need to diversify their holdings, by sector, style return type and region. 

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The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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