14th Feb 2006 07:01
British Land Co PLC14 February 2006 14 February 2006 THE BRITISH LAND COMPANY PLC THIRD QUARTER REPORT - TO 31 DECEMBER 2005 Highlights • British Land's first quarterly report - the only major UK property company to provide this information • Net Asset Value(1) per share up 10.7% to 1390 pence (up 23.2% for 9 months) - Net Assets as adjusted(1) £7.3 billion - IFRS Net Assets £5.8 billion • Headline pre-tax profits(2) £672 million (£1.4 billion for 9 months) Underlying Profits £71 million (£173 million for 9 months) before tax and gains on asset disposals and revaluation • Underlying Earnings per share(1) 11.5 pence (26.9 pence for 9 months) - Headline EPS 97.5 pence (216.0 pence for 9 months) • Portfolio Valuation increase of 4.6% (9.7% increase for 9 months) - in line with IPD data for the quarter despite yield compression - valuation uplift led by Retail Warehouse parks and London Offices • Total properties under management £18.7 billion • Activity levels remain high - £597 million value enhancing disposals (£1.3 billion in year to date) with more to come - pro-active asset management stepping up; commencement of 822,000 sq ft 201 Bishopsgate/Broadgate Tower development - £750 million superstores refinancing announced in January, reducing future interest expense • Benefits of Pillar acquisition underlined. The Pillar Unit Trusts (HUT, HIF) have outperformed IPD and competitors since acquisition. Fee income has also increased. The acquisition has been strongly accretive to British Land, with continued favourable outlook. Management are contributing well. (1) adjusted, diluted - Note 9 (2) includes shares of Funds and Joint Ventures - Table A Prior periods have not been restated/revalued on a quarterly basis, hencecomparative date will only be available from next year. Statement by the Chairman, Sir John Ritblat This is British Land's first quarterly report to shareholders, forming part of arange of communications improvements which we see as leading our industry. Forthose with a longer perspective, we are also celebrating in 2006 the 150thAnniversary of the foundation of British Land. I am pleased to report that the Company is in rude health. It has strongfinancial results with assets owned and under management exceeding £18.7 billionand net assets per share of 1390 pence, up 134 pence, a rise of 10.7% for thequarter. Our property assets are positioned to perform well in the years ahead, and wehave the wherewithal to improve that performance still further with our strongand talented management team. Headline pre-tax profits have well exceeded£1 billion in the first 9 months of this year - though what our founders mighthave thought of the IFRS reporting basis must be left to the imagination! Property has had a very good run, and at present levels prime is the place to be- its attractions in terms of total return and ability to sustain leveragegenerate the best contribution for our shareholders. The benefits of secure andgrowing long-term cashflow are a very significant element and, as we see fromthe gilt market, remain in short supply. The recovery of City of London officevalues underlines again the merit of a long view and diversity in asset choice. On REITs, we await publication of the final legislation. We have been fullyinvolved in the discussions with H.M. Treasury, and we are hopeful of aresolution that will be commercially viable as well as serving the publicinterest. Whatever the outcome, we could not be better placed. I remain greatly optimistic for the future for British Land and continuing itswell practised adaptability and record of performance. Review by the Chief Executive, Stephen Hester British Land is reporting a very strong set of results for the quarter ended31 December 2005. These results together with the activity that produced themand which is ongoing, underline our confidence in the Company's positioning forthe future. Our mission remains delivery of sustained and long-term outperformance forshareholders from the pro-active working of our property assets, efficientlystructured and financed. We are well into the execution phase of the changes tostrategy outlined in May 2005 and pleased with progress to date. Markets Real Estate themes are little changed from our commentary in November with thelast results. Yield shift is dominating investment returns. While the shift is awell-founded reaction to low real interest rates and the global economic trendsunderpinning them, the process seems likely to be in its later phases. Theunderlying challenges in the real economy continue to restrain rental growth andtake up of space overall. To outperform in the face of these demands requiresintense focus on meeting customer needs with prime modern and efficient space inlocations where those customers need to be. We see parts of the investmentmarket overpricing property with income risk or without good growth prospectsand the secondary yield compression that has occurred versus prime as becomingvulnerable to setbacks. In contrast, our key sector themes in Open A1 Out of Town Retail and PrimeLondon Offices are performing well and have every prospect of continuing to doso in coming years when yield shift fades. Retailers are following theircustomers' desire for shopping convenience whilst seeking operating efficienciesthemselves - this continues to allow above average rental growth in the rightout of town assets. In London, as we have predicted, the office cycle is turningup. We are more cautious than some commentators on both rental growth and yieldshift prospects, but positive nonetheless. Elsewhere in the portfolio, assetmanagement "stories" drive our selection whilst our expansion in European Out ofTown Retail is adding a new growth area, albeit one we aim to develop carefully. Portfolio Reshaping The repositioning of British Land's portfolio to more focused concentration ongrowth areas with competitive advantage continues apace. Following on from some £1.3 billion of gross assets acquired in 2004/5 and afurther £1.8 billion in the first half of 2005/6, our disposal programme thisyear has so far raised over £1.3 billion, with more to come. In each case wehave added value in both purchases and sales. We have tightened British Land's sectoral focus and improved growth prospectsfor the future. We are recycling capital actively as illustrated by our officedisposals at Fleet Place and Baker Street, and ongoing marketing of PlantationPlace, juxtaposed by our increased office development programme in London. In our retail portfolio we have increased investment in large retail parks withopen A1 planning - providing greater opportunities for our management. Someparks with more emphasis on bulky goods have been sold profitably followingimprovements in rental income. The table below sets out activity during the third quarter (and subsequentannouncements). This reflects both our original programme of sales and the firstresults of refining our combined portfolio post the Pillar acquisition. InJanuary 2006 CLOUT, the Unit Trust advised by British Land, announced thelandmark £520 million sale of CityPoint - over 700,000 sq ft of office andancillary space. Sales Price BL Share Gain £m £m %(1) 3 months to 31 December 2005: 2-16 Baker Street, W1 57.2 57.2 31.6 1&2 Heathrow Gateway, Feltham 65.5 65.5 16.6 Manchester Fort Shopping Park 167.3 167.3 - (2) 1 Fleet Place, EC4 119.5 119.5 21.0 Microsoft Campus Reading 52.2 52.2 9.8 Greyhound Retail Park, Chester 66.5 66.5 - Banbury Cross Retail Park, 69.3 12.0 0.4 Banbury(3) Palace Grounds Retail Park, 64.6 22.4 4.1 Hamilton(3) Others 42.7 34.6 9.4 704.8 597.2 9.5 Since 1 January 2006: Legal & General House, 73.6 73.6 30.4 Kingswood Priory Retail Park, Merton 42.7 42.7 6.8 CityPoint, EC2(4) 520.0 186.9 8.3 Others 28.7 24.4 18.8 665.0 327.6 13.2 1,369.8 924.8 (1) sale price above latest year end valuation (March 2005)/fair value on acquisition (2) sale contracted by Pillar prior to British Land acquisition (3) Hercules Unit Trust (HUT) - Banbury 50% owned (4) City of London Office Unit Trust (CLOUT) Gross assets acquired in the 3 months amounted to £83 million (British Land'sshare £33 million), with a further £62 million (our share £24 million) so far inthe current quarter, in each case reflecting retail warehousing activity. Pro-active Asset Management Across the business, the process of adding value to our real estate holdingscontinues. Within this, an increasing focus on improved customer relations istaking hold. Noticeably, our best performance also comes from our most customercentric areas. Since 30 September, the fruits of lease re-gears at Kingswood House and 1 FleetPlace have facilitated profitable sales. Rental growth (ERV) in the Herculesportfolio was up 2.25% in the quarter (10.2% in calendar 2005 - double the'sector' average increase) with Pillar's customer focused model now being rolledout across the broader British Land retail portfolio. The refurbishment andremodelling works at Meadowhall continue to plan. The Nugent Shopping Park development at Orpington has progressed well, achievingcompletion on time and on budget. The first tenants will be starting to trade atthe end of March. Hercules is funding development of an open A1 retail scheme inHayle, West Cornwall scheduled for completion in September 2006 and PREF haspurchased a retail park development in Paris expected to open in Summer 2007. In London, our first class development programme is accelerating and, webelieve, well timed. In the West End, construction of the York Building is welladvanced, part of which we will occupy as our new head office. A "resolution togrant planning" for the next phase of Regent's Place (730,000 sq ft gross) hasnow been received allowing this major development prospect to move forward. In the City, our development at 51 Lime Street (475,000 sq ft) pre-let to Willisis on track for top out in 4 months and completion early next year. Our 822,000sq ft development at 201 Bishopsgate/Broadgate Tower received planningpermission and is being built speculatively for delivery in 2008. Contractplacement for construction is largely in place with on-site work now underway.Work on the Basinghall and Coleman Street (pre-let & forward sold) developmentswithin CLOUT also continues. There are new lettings in documentation for bothPlantation Place South and 10 Exchange Square, confirmatory of City leasingtrends. Valuation The table below shows the principal valuation movements for the 3 month and 9month periods to 31 December 2005. This represents British Land's firstquarterly valuation, Knight Frank's second valuation report on our portfolio andthe first full quarter since completing the Pillar acquisition. The 4.6% portfolio uplift was in line with that reported by the IPD monthlystatistics for the quarter despite the continued secondary yield compressionthat has disadvantaged British Land's prime property valuation trends in recentperiods. Contributing to this were like for like growth in rental value (ERV)for the portfolio over the quarter of 0.7% (2.8% annualised, driven by 4.8%annualised increase in the retail portfolio) and yield shift. The net equivalentyield on the portfolio has tightened from 5.3% to 5.1% during the 3 months. The main sector drivers of the valuation increase over the quarter were: •retail warehouse parks at 21% of the portfolio, up 6.9% •London offices (including developments) at 36% of the portfolio rose by 5.9%. Vacancy rates remain very low. ------------Valuation Group Funds/ Total Portfolio Uplift(2) % JVs(1) -------------by Sector £m £m £m % 3 mths 9 mths------------- ------ -------- ------- ------- ------ ------RetailShopping centres(3) 2,065 487 2,552 17.6 2.0 6.2Superstores 1,410 210 1,620 11.2 2.5 8.1Retail warehouses 1,560 1,505 3,065 21.1 6.9 9.7Department Stores 694 137 831 5.7 2.0 10.2High street 378 36 414 2.9 3.2 10.5------------- ------ -------- ------- ------- -------- ------All retail 6,107 2,375 8,482 58.5 3.9 8.4 OfficesCity(4) 3,990 221 4,211 29.0 5.0 10.8West End 628 46 674 4.7 6.0 10.6Business parks, 217 7 224 1.5 2.3 13.4provincialDevelopment 469 2 471 3.3 15.9 27.0------------- ------ -------- ------- ------- -------- ------All offices 5,304 276 5,580 38.5 5.8 12.1 Industrial, 376 64 440 3.0 3.3 4.2distribution, leisure, other(5)------------- ------ -------- ------- ------- -------- ------Total (5),(6) 11,787 2,715 14,502 100.0 4.6 9.7------------- ------ -------- ------- ------- -------- ------ (1) Group's share of properties in Funds and Joint Ventures (2) increase in value for 3 months and 9 months to 31 December 2005 - includes valuation movement in developments, purchases and capital expenditure, and excludes sales (3) Meadowhall valuation up 1.9% to £1,545 million (up 3.0% pre cap-ex); ERV £81 million; net equivalent yield 4.76% (4) Broadgate valuation up 5.2% to £3,127 million; ERV £37.50 - £45.00 per sq ft; net initial yield 5.5% (5) excludes the Group's residential portfolio valued at £290m on 31 December 2005 which (together with some further units acquired subsequently) is intended to be sold (6) annualised net rents (excluding residential) £664 million; portfolio current yield (gross to British Land, without deduction of purchaser's costs) 4.7%; current yield adding back rent frees 5.0%; reversionary yield (gross, 5 years) 5.5% Balance Sheet Total properties as at 31 December were £14.8 billion - £18.7 billion includingassets under management. Adjusted diluted net assets rose in the quarter by 10.7% (£704 million) to £7.3billion (unadjusted net assets £5.8 billion on an IFRS basis includingcontingent CGT). Over the 9 months, the increase in adjusted diluted net assetswas 23.4%. Adjusted diluted NAV per share was 1390 pence (30 September 2005 1256pence). NNNAV (triple net) was 1046 pence (see note 9). The total return to shareholders for the quarter was 10.7% and 24.2% for the 9months. The values of Pillar's HUT and HIF Unit Trust holdings have increased 26% and10% respectively (inclusive of capital distributions) since the March valuationprior to acquisition, whilst Pillar's other assets have also risen in valuesatisfactorily. These increases have produced strong accretion to British Landshareholders, while the outlook remains positive. British Land's gearing fell as a result of asset sales and valuation growth. TheLoan to Value ratio was 46% (50% proportionally consolidated) down from aproforma peak of 55% (59% proportionally consolidated) on the acquisition ofPillar. In the current final quarter, gearing will be affected (inter alia) byrevaluation movements, reducing debt from the proceeds of sales, payment of theinterim dividend (£27 million) and the charge to be incurred on the £750 millionsuperstores portfolio refinancing (see below). Income Statement Gross rental and related income for the quarter was £180 million (£520 millionfor 9 months) - £211 million (£599 million) proportionally consolidated. Otherincome (principally Fund Management fees and investment income) grewsubstantially in the quarter to £25 million (£34 million for the 9 months) dueto a full period from Pillar and receipt of a £16 million dividend from SongbirdEstates. Songbird dividends are not declared on a recurring periodic basis. Thedividend received twice covers the financing cost to date of our original£97 million investment. Performance fee income from the Unit Trusts (£4.8million net booked in the quarter) is comparatively volatile and for calendar2005 will be finalised in the current quarter when the benchmark is published. Net financing costs for the quarter were £94 million (£284 million for 9 months)for the Group - £111 million (£329 million) proportionally consolidated. Netrents covered interest 1.6 times, virtually unchanged from the previous period.The average interest rate for the Group was 5.92% as at 31 December 2005, upfrom 30 September (5.87%) due to repayment of revolving bank facilities fromsales proceeds. This rate is expected to fall to some 5.75% as a result of the£750 million superstores refinancing announced last month (with a one-offpre-tax charge, subject to market rate movements, estimated at £104 million tobe taken in the current quarter). The transaction is expected to reduce annualinterest costs by some £7 million. Underlying pre-tax profits for the quarter were £71 million (£173 million for 9months), boosted by the Songbird dividend and fund performance fees. Excludingthese items underlying pre-tax profits would be some £50 million. On a headlinebasis, pre-tax profits were £672 million for the quarter (£1.4 billion for 9months), including £580 million of unrealised valuation gains and £24 million ofdisposal gains. Headline earnings per share were 97.5 pence (216.0 pence for 9 months).Underlying earnings per share were 11.5 pence (26.9 pence for 9 months). TheSongbird dividend is not taxable, so the overall tax rate on underlying profitsis reduced from 22% for the six months to 30 September 2005 to 15% for thequarter (19% for 9 months). A proportionally consolidated income statement and balance sheet have beenprepared and attached as Tables A and B to view the results of British Land'sinterests in Funds and Joint Ventures on a 'look through' basis. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
British Land