Real estate investment trusts (or REITs) are popular with investors seeking lifelong passive income. British Land (LSE: BLND) of the FTSE 100 is one that remains quite popular with investors today.
REITs are liked by dividend hunters because they often generate regular income through rental agreements. Regulations also mean that they’re required to pay 90% of annual profits out in the form of dividends.
Right now British Land offers a larger yield than the 3.9% average for FTSE 100 shares. It sits at a decent 5.2%. But this is a property stock I won’t touch with a bargepole.
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A plunging REIT
British Land’s share price has fallen 26% in 2022 as investors fret over its retail properties. News last week that retail sales slumped 1.6% month-on-month in August — the biggest drop since the end of 2021 — in response to surging inflation hasn’t improved the mood either.
In this environment British Land could struggle to collect rent if its tenants go to the wall. It also makes it tougher for the business to negotiate rate rises to mitigate the problem of rising costs such as energy.
The truth is that I’ve long avoided British Land shares even before inflationary pressures exploded. The growth of e-commerce means that the future of physical retail remains highly uncertain, creating huge uncertainty over British Land’s assets.
Fragile dividend forecasts
There’s also a big question mark over the firm’s office spaces as companies adopt more flexible working practices. British workers are only attending the office an average of 1.5 times a week. That’s according to consultancy Advanced Workplace Associates.
I’m particularly concerned for British Land given the huge amount of debt it has on its balance sheet. Net debt stood at a colossal £3.5bn as of March, latest financials show.
This adds extra uncertainty to current dividend forecasts given the company’s weak dividend cover. A predicted 21.4p per share reward is barely covered by anticipated earnings of 26.4p. This is well below a target of two times and above which provides a wide margin of safety.
Expensive but unexceptional
| British Land’s share price | 400.1p |
| 12-month price movement | -21% |
| Market cap | £3.8bn |
| Forward price-to-earnings (P/E) ratio | 15.3 times |
| Forward dividend yield | 5.2% |
| Dividend cover | 1.2 times |
I like the steps British Land is taking to embrace the lucrative residential rentals sector. It’s currently developing its first build-to-rent asset in Aldgate, London. I also think its decision to invest in logistics and fulfilment centres is a good idea to capitalise on the e-commerce boom.
But I believe the risks facing the rest of British Land’s business far outweigh the benefits of these steps. And what’s more, I don’t believe the company’s current valuation reflects its high risk profile.
At just above 400p per share British Land’s share price carries a forward price-to-earnings (P/E) ratio of 15.3 times. To put this in perspective the broader FTSE 100 average sits at just over 14 times. I’d rather buy other REITs today.
