Tesco completes property swap with British Land

LONDON (ShareCast) - Supermarket group Tesco (Xetra: 852647 - news) has swapped ownership of a number of stores and retail parks with commercial real estate giant British Land (LSE: BLND.L - news) in a deal worth £733m. Tesco has agreed to take back 21 stores that were part of a joint venture agreement with British Land and were subject to RPI-indexed rent increases.

British Land sold its 50% interest in a joint venture portfolio of the stand-alone food stores to Tesco and acquired Tesco's 50% interest in two joint venture portfolios comprising three Tesco-anchored shopping centres, three retail parks and three standalone stores.

Tesco, which will also receive £96m as part of the transaction, said it completed the deal in order to increase the proportion of owned stores and protect itself from indexed rent reviews.

The FTSE 100 supermarket group will continue to lease the stores at these sites at market rents which are not subject to RPI-indexed increases.

For its part, British Land said the move was part of a strategy to reduce its exposure to food stores and increase the weighting of its portfolio of retail parks and shopping centres.

"Overall, the transaction is accretive to earnings in 2016 reflecting a £2m increase in net rent and an £8m reduction in net interest," said Charles Maudsley, Head (Other OTC: HEDYY - news) of Retail & Leisure at British Land.

He added that the deal is mutually beneficial transaction that clearly demonstrates its relationship with Tesco. "It plays to our strengths of managing multi-let assets and gives Tesco more control of their stand-alone portfolio. We see significant opportunity to add value and drive returns through asset management and development," said Maudsley.

Tesco's chief executive Dave Lewis said that in 2014, the supermarket group identified the opportunity to increase the proportion of the stores it owned as freehold.

"This transaction with British Land allows us to increase our ownership and thereby insulate more of our businesses from indexed rent reviews. We have a long way to go but it's a transaction which takes us in the right direction. This agreement makes our business simpler and stronger," added Lewis.

Broker Shore Capital said the "interesting" deal simplified Tesco's business "a little".

"Whilst modest in the big scheme of things, we see this as an intelligent move with management de-risking the business a notch. The deals are further evidence of gradual improvement under Dave Lewis," analysts wrote.