Final Results - Part 1

23rd May 2006 07:04

British Land Co PLC23 May 2006 23 May 2006 PRELIMINARY ANNOUNCEMENT THE BRITISH LAND COMPANY PLC RESULTS FOR THE YEAR TO 31 MARCH 2006 Financial Highlights: • Net Asset Value1 per share up 32% to 1486 pence - Total return 35%2 - Valuation up 13.5% (13.9% proforma for Pillar) • Properties owned or managed up 33% to £18.5 billion - EPRA Net assets1 £7.8 billion, up 32% - Net assets £6.0 billion, up 26% • Headline pre-tax profit 4 up 117% to £1,696 million - Headline earnings per share 240 pence, up 90% - Profit on ordinary activities before tax £1,590 million • Underlying pre-tax profit3 up 26% to £228 million - 19% increase in gross rental income4 to £751 million - Underlying earnings per share3 up 33% to 36 pence - Dividend up 8% to 17 pence per share for the year Business Highlights: • Delivering on our promises to renew and work the business hard - Pillar acquisition integrated; already a success - Over £2.2 billion of value enhancing disposals; improving growth prospects, tightening focus - Development programme accelerating; excellent prospects and timing • Yield shift unlikely to go much further but like for like rental growth of 2.7% underlines growth prospects for British Land's prime space • Decision 'in principle' to convert to REIT status from early 2007 • Clear market leadership in prime London Offices and Out of Town Retail; a great platform for outperformance 1 EPRA basis, Note 2 2 increase in EPRA NAV plus dividends paid, excluding refinancing charges 3 Note 2 4 with proportional consolidation of Funds and Joint Ventures, Table A Sir John Ritblat, Chairman, said: "Active property ownership and management atBritish Land has again produced returns which we hope will make investors proud. "The core values that built British Land successfully remain more valid thanever. I am confident that the company's merits, soon to be in REIT format, willcontinue to prove their worth for many years to come. "Our focus on prime property and on certainty of income, remain distinctivebenefits. With the firm foundation of quality assets providing strong,sustainable and growing cashflows, the company has a great deal to offercurrently and prospectively." Stephen Hester, Chief Executive, said: "British Land is in great shape. We arereporting record financial results and are well positioned for the future.Tribute is due to our people who throughout the year have risen to theperformance challenge. "We have added value to our portfolio, tightened our sector focus and improvedour growth prospects. In just 12 months we have bought or sold £4.8 billiongross of property, achieving significant profits on sales and purchases. "The course we set last year remains valid. While the advent of REITsfacilitates our strategy, the basic job - making money from efficiently financedreal estate - remains unchanged. Tangible, long-term value creation forShareholders will continue to drive our size, our strategies and our behaviour." The full preliminary results report follows. British Land contacts:John Weston Smith 020 7467 2899Laura De Vere 020 7467 2920Amanda Jones 020 7467 2946 Finsbury:Faeth Birch 020 7251 3801 STATEMENT BY THE CHAIRMAN, SIR JOHN RITBLAT This is my 35th Annual Report to Shareholders and I am pleased to tell you thatthe Company is in a position of great strength. Today British Land owns andmanages some £18 billion of prime property, making it Europe's largest quotedproperty company by this measure. In the year ended 31st March 2006, totalreturn (before refinancing charges) is 35% and for the fifth successive year thedividend increase exceeds 8%, with a final dividend of 11.8p per share, making atotal of 17p for the year. Shareholders will welcome these outcomes, not leastbecause the value they represent has taken our stock market capitalisation wellbeyond £6 billion. Net assets, now £7.8 billion, have risen by 32% to 1486p pershare on an EPRA basis. In 2006 we celebrate the 150th anniversary of The British Land Company'soriginal incorporation. The Company started as part of the great electoralReform movement of the mid-19th century, when few people had the vote, butownership of an interest in land worth only £2 in rent per year conferred thatright. British Land bought tracts of land, mostly in and around London, whichcould be sub-divided into plots on which houses could be built and so votesobtained. This early political significance did not last long. The Company soonconcentrated on conventional business, and for the first three-quarters of itsexistence it survived at a very modest level of activity, but it investedprudently and consistently made profits. It is only in the last quarter of itslong lifespan that British Land has grown to take its place among the top fiftyof all listed British companies. This is a source of pride to all who havecontributed to its considerable endeavours over this period. British Land's equity base in 1970 was just £20 million, so we have come a longway! In my second year we embarked on a double takeover, first of HaleybridgeInvestment Trust, and then using Haleybridge's holding in Regis Property as aplatform, we acquired Regis as well. Regis famously owned a prime City of Londonoffice building, the 365,000 sq ft net Plantation House, in scale quite beyondthe reach of the old British Land. It housed banks, insurers and commodityexchanges, enjoying international renown. Over the years we extended the site,redeveloped the building, and recently sold only a part of the new PlantationPlace offices for £527 million. Our underlying strategy has been consistently applied for many years. Achievingownership of the 30 acre Broadgate Estate in stages over a 20 year span wasanother long-term venture. It began with a participation in the One FinsburyAvenue office development in 1983, and now extends to over 4 million sq ft, withanother 820,000 sq ft currently under development. It was a similar story at theRegent's Place Estate, half purchased in 1984, the other half in 1986, which isstill in course of redevelopment and revitalisation to provide an additional 1million sq ft, making just over 2 million sq ft of space in all. We have joint-ventured with others throughout - Commercial Union, GUS, House ofFraser, Scottish & Newcastle, the Quantum Fund run by George Soros, and Tesco,to name a few of our many partners. So while there have been important changes in markets generally over the last 35years, the core values that built British Land successfully remain more validthan ever, and much of our current prosperity derives from earlier decisions,judgements and actions. Property is a long-term game and it is vital to have thestrength of conviction and strength of finances to build enduring value. Ourfocus on prime property and on certainty of income remain distinctive benefits,as they have been in past years. Freeholds are no less attractive now than theywere 150 years ago in 1856. We are also nimble and accomplished deal makers. With undoubted liquidity and alarge high quality asset base, we can take full advantage of marketopportunities to add to or reshape the portfolio as we did in the past and havedone again with Pillar this year. Sectoral trends come and go, as do commentator enthusiasms. We offer ourShareholders the transparency of quarterly reporting, but one of our perennialstrengths must be to look beyond temporary fashion, using our expertise toallocate and reallocate capital across sectors and types of property. In thisway we capture superior long-term gains, but avoid short-term diversions thatmay build column inches rather than substantive value. REITS and the future We welcome the Government's long overdue introduction of Real Estate InvestmentTrust (REIT) legislation to the U.K. which should be operational during thecurrent financial year. Much work has gone into REITs and it represents an important recognition, as ithas elsewhere, of the positive role that a vibrant, onshore, quoted propertyindustry can play in regeneration of the U.K.'s built infrastructure and as afacilitator of economic expansion. These outcomes rely on the operation of open markets to allocate capitalefficiently and to drive performance. We support the "market friendly" model ofREIT legislation, which has been selected here and is enjoyed by investors inother major economies. While not all the detail has been settled, we feel we already know enough toconclude that the REITs regime will benefit British Land. We therefore havedecided in principle to apply for this status from the earliest possible date.With a level playing field in tax terms, I am confident that a British Land REITwill prosper and be able to pursue creating growth and value from our propertyassets, and with little change from the fundamentals of our current businessmodel. My general view of property as an investment class is that it remains at leastas good as anything else, if not better. With the firm foundation of qualityassets providing strong, sustainable and growing cashflows, the Company has agreat deal to offer currently and prospectively. The Board We are very pleased to welcome some newcomers to the Board. Joining asNon-Executive Directors from 1st April are Lord Turnbull and Kate Swann, whowill both add considerable lustre and relevant experience to our deliberations.Lord Turnbull's distinguished career in public service, latterly as Secretary tothe Cabinet and Head of the Home Civil Service, is particularly apposite to theimportant public policy issues that regularly involve our industry. Ourextensive retail property interests will benefit from the deep insights andexperience in retail and consumer fields of Kate Swann, who is Chief Executiveof WH Smith Group PLC. We are also pleased to nominate, at the AGM, two new Executive Directors. AndrewJones, who joined us with Pillar in 2005, and Tim Roberts, who joined in 1997,have worked to great effect as Co-Heads of Asset Management since last summerand will lead our Retail and Office sectors going forward. Retiring at the AGM are three Directors, to each of whom we owe specialgratitude and appreciation. Sir Derek Higgs, our Deputy Chairman, joined theBoard in 2000 and has been a stalwart and leading light on the Board since then.Patrick Vaughan also retires having, as agreed, helped us through the successfulintegration of Pillar, of which he was Chief Executive. His contribution inthis, as well as more broadly, has been substantial. Finally, John Weston Smith.John joined me in 1971 at the beginning of the revival of the Company, and hiscontribution to the Company for 35 years has been immense. For five years hemanaged British Land of America, and on his return to the United Kingdom he tookover the role of Finance Director. He is both friend and colleague and has beenan enormous contributor to our success. Other forthcoming departures include the evergreen Cyril Metliss, a friend whohas concluded a further three years service on our operating boards following 32outstanding years as an Executive Director; and the retirements after manyinvaluable years of our long-serving Chief Surveyor, Michael Gunston, and DeputyChief Surveyor, John Iddiols. We shall be saying farewell also to our Cornwall Terrace headquarters, where wehave run out of space. In 2007 we move to our new building at Marble Arch, whereour team, energetic as always, will continue to flourish. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER British Land is in great shape. We are reporting record financial results as theoutcome of both intense and effective business activity. We have also madesubstantial progress to reposition the Company, building on strong foundationsand delivering on our promises made a year ago. This means we are well placed towelcome the advent of UK REITs as an industry leader and look forward to thechallenge of outperformance for Shareholders in this new guise. The 2005/6 Results Headline Pre-tax Profits are up 117% to £1.7 billion while Underlying Profitsrose 26% to £228 million. EPRA Net Asset Value was 1486p per share (up 32%).EPRA Net Assets are £7.8 billion. Our underlying profit growth was driven by three factors: rental growth, aheadof the market overall; strong gains in fee and other income from the acquisitionof Pillar and its subsequent outperformance and dividends from Songbird; and alower average interest rate reflecting the Broadgate debt refinancing in 2004/5. Our growth in asset value was primarily driven by property valuation gains andrealised profits on disposals. Continuing yield shift in the market benefitedall property. Company specific actions on sector weighting, asset management,development pipeline and gearing were responsible for outperformance, despitethe yield compression that penalised prime property. Market Conditions Real Estate markets offered another year of strong gains driven by yield shift.Overall markets now fairly reflect the value of property's rental growthprospects and strong, bond-like, downside protection compared to alternativefinancial market trade-offs from bonds to equities. This means that we expectgrowth rates to reduce, whilst remaining both positive and competitive withother asset classes on a risk-adjusted basis. The property market is also morevulnerable than in recent years to set backs should interest rates go higher. The economy's prospects (with modest inflation) should support both rental andoccupancy growth from current levels, which remain affordable in historic terms. However, without yield shift "drowning out" real performance, we see greaterdifferentiation in relative results likely in coming years. Success will comemore clearly from correct portfolio positioning, intense asset management andeffective risk-reward assessments. Delivering on our promises A year ago we presented British Land's focused strategy for the future. Thisbuilds on the bedrock of our Retail and Office expertise, our bias to primeproperty, focus on secure, income led growth and disciplined risk management. Wealso set forth some important areas of change to equip the Company to outperformfor Shareholders in years to come. I am pleased to report that we have delivered on these promises. Intensified portfolio reshaping In just 12 months we have bought or sold £4.8 billion (gross) of property. Thisis the result of a disciplined plan to reshape our property holdings withtighter focus on areas of probable outperformance and to work Shareholders'capital harder in the process. While the pace of asset turnover is likely toslow, this "process discipline" will remain in place. Not only will thereshaping benefit future performance, in practically every case we have reportedsignificant profit on both sales and purchases. Pro-active asset management An important source of value growth comes from working assets harder whilstunder our stewardship. Success is ultimately shown by rental growth - abovemarket at British Land. A wide range of lettings, tenancy changes, leaserestructurings and premises enhancement lie behind these figures. So too doesthe enhancement of our property development activity, which we believe is welltimed to capture value for Shareholders. Management and culture renewal The success of our strategy is measured by long-term outperformance forShareholders. Its key enabler is the expertise, resourcing and application ofour people, from whom more is being demanded. Here too we have made goodprogress. Our new Executive team is in place and functioning well together. Wehave doubled the professionals in our Asset Management and Development teams.Succession plans are in place and happening where needed. We are implementing a'performance' culture with explicit and demanding targets, greater individualresponsibility and more variable performance linked pay to match. We also expectto move to a new head office in the current financial year. Investor friendly positioning On top of our 'tangible' value creation strategies, we have sought to establishBritish Land at the forefront of investor friendly behaviour - to help improvetranslation of the economic value we create into value in the hands of ourShareholders. We aim to be a leader in frequency and quality of reporting and disclosure withhigh levels of transparency and thereby trust from our investors. Clarity of strategy, primacy of Shareholder value, focus on competitiveadvantage - all underpin this approach. As do strong Corporate Governancearrangements and Corporate Social Responsibility. Pillar The acquisition of Pillar in July last year was a major event for the Companyand one which has turned out well. Pillar's Hercules Unit Trust (HUT) produced total returns of 35.5% in 2005demonstrating the value of BL's leadership in Open A1 consented retail warehouseparks which we cemented with the £1.3 billion of these assets acquired withPillar. HUT also produced record "outperformance" for its investors furtherbenefiting British Land; fee income from third parties of some £40 million wasearned in the calendar year. The ability of the Fund Management model togenerate strategic options as well as fees was subsequently illustrated with thesale of BL's residential interests in February 2006 whilst retaining their assetmanagement. The integration success of Pillar is not only financial but has alsobeen a contributor to the Company's management and culture renewal describedabove. The Future The course we set last year remains valid. Our sector focus, asset managementand development potential and financial strength should provide a platform forsuperior results in coming years, though there is plenty of work still to do toembed the progress to date. The advent of REITs facilitates our strategy. It will allow the right propertydecisions to prevail with less fiscal distortions. It is positive to stated andfuture Net Assets as contingent tax based on past success is substantiallyeliminated in exchange for the entry charge. However our basic job - makingmoney from efficiently financed real estate - is unchanged. Total returns willcontinue to be the yardstick, with income certainty an important part of themix. While making sure that near and medium term execution is our main focus, we willcontinue to grow longer-term capabilities. This includes overseas, as ourEuropean out-of-town retail interests expand, or in other UK sectors or propertytypes such as the fixed uplift and indexed rental sector. We will staydisciplined to areas of competitive advantage, but be willing to exploit ourscale and expertise to add value within, across and between sectors. The record shows that our scale and breadth can bring opportunity, withoutsacrifice of manoeuvrability or focused returns. Above all the acid test islong-term, tangible value creation for Shareholders. This will drive our size,our strategies and our behaviour. In closing, tribute is due to the efforts of our people who throughout thebusiness have risen to the performance challenge. Change brings opportunity anduncertainty - it is gratifying to see our talented people welcoming the formerand prevailing over the latter. As the Chairman has noted, we have a number of retirements this year. We areimmensely grateful for their contribution to British Land, we will miss themindividually and we wish them all the best for the future. FINANCIAL HIGHLIGHTS ---------------------- -------------- ------------Income Statement Year ended Year ended 31 March 2006 31 March 2005 (restated for IFRS)---------------------- -------------- ------------ Gross rental income £751m £630mNet rental income £701m £585mNet interest costs6 £436m £360mUnderlying profit before taxation1 £228m £181mGain on disposals of assets £182m £26mRevaluation gain £1,658m £753mProfits before taxation7 £1,696m £780mUnderlying tax rate 19% 23%Underlying diluted earnings per share 1, 4 36 pence 27 penceDiluted earnings per share 4 240 pence 126 pence Dividend per share8 17.0 pence 15.7 pence---------------------- -------------- ------------ ----------------------- ------------ ------------Balance Sheet 31 March 2006 31 March 2005 (restated for IFRS)----------------------- ------------ ------------ Total properties2 £14,414m £12,507m Net assets £6,016m £4,783mEPRA net assets3 £7,802m £5,913mEPRA net asset value per share3 1,486 pence 1,128 pence Group:Net debt £5,593m £6,061mLoan to value5 42% 50% Including share of Funds and Joint Ventures:Net debt £6,684m £6,538mLoan to value5 46% 52% Total return6, 9 34.6% 18.8%----------------------- ------------ ------------ Data includes share of Funds and Joint Ventures (Tables A and B), unlessotherwise stated. 'Group' excludes share of Funds and Joint Ventures. 1 see Note 2 2 does not include the investment in Canary Wharf through Songbird Estates plc,Note 11 3 see Note 2 4 diluted for all potential share issues, Note 2 5 debt to property and investments 6 excludes refinancing charges of £122m (2005: £180m) 7 including valuation gains and after impairment charges for goodwill of £240m 8 interim paid plus final declared 9 increase in EPRA NAV plus dividends paid, Note 2 PORTFOLIO HIGHLIGHTS ---------------- -------- -------- ------- ------- -------Valuation by Sector Group Funds/JVs1 Total Portfolio Uplift2 £m £m £m % %---------------- -------- -------- ------- ------- ------- RetailRetail warehouses 1,556 1,556 3,112 21.6 14.4 Shopping centres 2,107 515 2,622 18.2 7.1 Superstores 1,513 254 1,767 12.3 16.0 Department Stores 757 143 900 6.2 17.7 High street 338 36 374 2.6 12.2 ---------------- -------- -------- ------- ------- ------- All Retail 6,271 2,504 8,775 60.9 12.6 OfficesCity 3,500 42 3,542 24.6 14.3West End 643 44 687 4.8 13.1Business parks & Provincial 174 6 180 1.2 14.9Development 790 1 791 5.5 23.7---------------- -------- -------- ------- ------- -------All Offices 5,107 93 5,200 36.1 15.5 Industrial, distribution,leisure, other 375 64 439 3.0 8.2 ---------------- -------- -------- ------- ------- ------- Total 11,753 2,661 14,414 100.0 13.5---------------- -------- -------- ------- ------- ------- 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2006 - includes valuation movementin developments, purchases and capital expenditure, and excludes sales ---------------- --------- ---------- ------- ---------- Annualised Net Reversionary Current Reversionary Rents1 £m Income2 Yield3 Yield3Current Reversions (5 years) £m % (5 years) %(excluding developments)---------------- --------- ---------- ------- ---------- Retail Retailwarehouses 123 35 4.0 5.1 Shoppingcentres 125 19 4.8 5.5 Superstores 85 2 4.8 5.0 DepartmentStores 42 6 4.6 5.3 High street 18 2 4.9 5.3 ---------------- --------- ---------- ------- ---------- All retail 393 64 4.5 5.2 OfficesCity 165 30 4.7 5.5West End 33 4 4.7 5.3Business parks& Provincial 10 2 5.8 6.7---------------- --------- ---------- ------- ----------All offices 208 36 4.7 5.5 Industrial,distribution,leisure, other 24 2 5.5 6.0 ---------------- --------- ---------- ------- ---------- Total 625 102 (5) 4.6 (4) 5.3---------------- --------- ---------- ------- ---------- 1 net rental income under IFRS differs from annualised net rents which are cashbased, due to accounting items such as spreading lease incentives and contractedfuture rental uplifts, as well as direct property costs 2 includes rent reviews, expiry of rent free periods, lease break/expiry andletting of vacant space at current estimated rental value (as determined byexternal valuers) 3 portfolio yield (gross to British Land, without deduction of purchaser'scosts) (4) current yield adding back rent frees 4.8% (5) £47 million contracted under expiry of rent free periods and minimum rentalincreases ------------------ ------------------ ------------Leases and Occupancy Weighted Vacancy rate average lease term,(excluding developments) years to first % break------------------ ------------------ ------------ Retail Retail warehouses 14.4 3.0 (1) Shopping centres 13.2 7.9 (1) Superstores 20.9 - Department Stores 30.9 - High street 11.9 2.9 ------------------ ------------------ ------------ All retail 17.1 3.8 (1) OfficesCity 10.0 5.3West End 11.7 0.8Business parks & Provincial 9.9 7.2------------------ ------------------ ------------All offices 10.3 4.7 Industrial, distribution,leisure, other 22.6 4.8 ------------------ ------------------ ------------ Total 15.0 4.1 (1)------------------ ------------------ ------------ (1) More than 50% of vacancies in shopping centres and retail warehouses have beeninitiated by us under asset management projects. The underlying vacancy rate,excluding these initiatives, for all retail is 1.8% and the total portfoliovacancy rate is 2.8% OPERATING AND FINANCIAL REVIEW Highlights of the year to 31 March 2006Net Asset Value1 per share increased by 32% to 1486 penceUnderlying pre-tax profit2 up 26% to £228 millionProperties owned or managed up 33% to £18.5 billion Introduction------------------------------------------- British Land has delivered outperformance to Shareholders through exceptionalgrowth and value creation over the year reviewed herein. This stems from thecombination of an outstanding portfolio of prime assets and successfulapplication of management effort in portfolio reshaping, leasing, development,asset management and financing. At the same time, British Land is positioning itself for future success. Thestrategy presented 12 months ago is being implemented as promised. Our asset mixhas been reshaped to promote future growth and refinancing has reduced costs andincreased flexibility moving forward. Our acquisition of Pillar has gone well,enhancing shareholder value and helping to underpin the changes at British Land. The investment property market has remained strong with growth based on robustfundamentals relative to other asset classes. However, this growth rate looksincreasingly due to slow down. Objectives------------------------------------------- British Land's primary objective is to produce superior, sustained and securelong term shareholder returns from management of our chosen real estateactivities and their financing. The bedrock of our strategy is: • to focus on areas of competitive advantage • a bias to high quality assets, with long lease profiles and favourable demand and supply characteristics, complemented by an efficient capital structure • a focus on meeting customer needs pro-actively, as the best route to occupancy and rental growth • a distinctive ability to add value through purchases, disposals, partnerships and Fund Management • excellent integrated risk management skills - blending leasing, development, asset and liability risk into a single attractive and secure growth proposition for Shareholders • superior long-term income/cash flow growth • a confident, entrepreneurial and, where justified, contrarian culture. 1 EPRA basis - Note 22 see Note 2All figures in this Review include British Land's share of Funds and JointVentures unless stated otherwise. Delivering the Capability to Outperform Beyond the results achieved in 2005/6, our activity during the year focused onrepositioning the Company and strengthening its capabilities to outperform forShareholders in the years to come. The property market will pass from its period of "super-normal" returns andfuture success will be determined by the ability to add value in a lower growth,more demanding environment. Therefore British Land's first priority is building still further our humancapital. The right resources, talents and "performance culture" arepre-requisites of success and were an area of great focus over the year. In turn our people's skills have been actively employed in repositioning ourreal estate portfolio to trim out underperformers and build distinctiveleadership positions in the two sectors expected to produce the best(risk-adjusted) returns in the next few years - prime London Offices and Out ofTown Retail. This discipline will continue, complemented by development ofpotential new areas for growth in the medium term. Whilst they are in our portfolio, we work our property assets hard, focusing onmeeting customer needs pro-actively, and so achieving improved performanceourselves from a myriad of asset management and development initiatives. Thiscapability and orientation is being extended still further. And finally, we are clear that the acid test of long-term performance is valuedelivered to Shareholders. The ease with which they develop comfort and trust inour strategy, our capabilities, our transparency and the performance it revealsis important and an area in which we also strive to excel. Portfolio reshaping------------------------------------------- Property purchases of £2 billion and sales of £2.2 billion have beensuccessfully completed in the year to March 2006. This activity resulted from the intensified asset review process put in place 15months ago oriented at improving the (risk adjusted) growth prospects of ourasset base. The process is a permanent part of how we intend to add value,although we do expect the level of asset turnover to be lower in a normal year. Our portfolio reshaping can be characterised by two principal themes - narrowingour sectoral focus to areas where we have both distinctive expertise andconfidence in performance - and recycling our capital within "advantaged"sectors to reinforce market leadership and enhance growth prospects. Sales Price BL Share Gain 12 months to 31 March 2006 £m £m %1 Offices: Plantation Place, EC3 527.0 527.0 20.2 CityPoint, EC22 520.0 186.9 8.3 1 Fleet Place, EC4 119.5 119.5 21.0 10 Fleet Place, EC4 109.1 109.1 15.6 Legal & General House, Kingswood 73.6 73.6 30.4 2-16 Baker Street, W1 57.2 57.2 31.6 Microsoft Campus, Reading 52.2 52.2 9.8 1,458.6 1,125.5 18.3 Retail: ILAC Shopping Centre, Dublin 85.2 85.2 25.0 Manchester Fort Shopping Park 167.3 167.3 -(3) Banbury Cross Retail Park, Banbury4 69.3 12.0 0.4 Greyhound Retail Park, Chester 66.5 66.5 - Palace Grounds Retail Park, 64.6 22.4 4.1 Hamilton4 Solarton Retail Park, Farnborough 47.6 47.6 -(3) Priory Retail Park, Merton 42.7 42.7 6.8 Auldhouse Retail Park, Glasgow 39.8 39.8 4.5 Matalan Unit, Romford 12.1 3.2 10.8 16 High Street retail units 86.3 86.1 14.1 6 in town supermarkets 48.7 48.7 3.8 730.1 621.5 6.0 Industrial & Distribution: Daventry (Plots E1,E3,E4 & C1)5 83.3 41.7 19.0 1&2, 3 Heathrow Gateway, Feltham 81.1 81.1 17.2 Residential Portfolio 300.0 300.0 - Others 44.4 34.6 - 2,697.5 2,204.4 11.51 sale price above last year end valuation (March 2005)/fair value onacquisition2 City of London Office Unit Trust (CLOUT)(3) sale contracted by Pillar prior to British Land acquisition4 Hercules Unit Trust (HUT) - Banbury 50% owned5 International Rail Freight Terminal - BL Rosemound (JV) Capital recycling - total sales of £1.5 billion, including: Offices - our sales in the Office sector have focused on assets where ourassessment of (risk adjusted) growth prospects was lower than that of ourdevelopment pipeline and other assets. This includes the two largest individualsales yet seen in the City, of Plantation Place and CityPoint. - Plantation Place was developed by British Land with completionin 2004. The offices in this 51,100 sq m (550,000 sq ft) high quality buildingare fully let to Accenture, Wachovia Bank, Aspen Insurance and Royal & SunAlliance. The £527 million sale, at a price above year end valuation andreflecting an exit yield of around 5%, enables us to take a development profitand to recycle the proceeds into further London developments, where we seebetter prospects for rental growth. - The sale of CityPoint for £520 million was announced by CLOUT,the Unit Trust advised by British Land, in January 2006. This landmark buildingbuilt in the 1960s and refurbished some five years ago provides over 65,000 sq m(700,000 sq ft) of office and ancillary space, let to over 20 tenants. Withoffice passing rents of up to £68 per sq ft the risk adjusted growth prospectsavailable elsewhere were seen to be better. - 1 & 10 Fleet Place were wholly acquired by us through thepurchase of our partner's 50% share in the BL West joint venture. Followingrestructuring of the principal lease at 1 Fleet Place, and to reduce exposure tovoid and capex risks at 10 Fleet Place, these office properties were both soldin the year for a combined £228.6 million. In each case we were able to takeprofits in a market featuring strong competition from a number of potentialpurchasers. - 2-16 Baker Street was sold for £57.2 million at some 32% abovevaluation. This office property had a weighted average lease length of 4 yearsand was overrented. Its development prospects were highly valued by others in acompetitive market. Retail - in the Retail portfolio, sales have reflected our original programmeand the refining of our combined portfolio following the Pillar acquisition.Investment has focused on larger retail parks with open A1 planning consents,which provide greater opportunities for growth through our management. - The ILAC Shopping Centre, Dublin, was purchased in 2001 for€56.6 million and owned jointly with Irish Life. Significant asset managementduring our ownership, including phased refurbishment and upgrade of facilities,new agreements with key tenants, remodelling of the principal Mary Streetentrance and provision of a flagship store for H&M, added substantial value andenabled an opportune sale for €125 million, (£85.2 million). - Eight retail parks with more emphasis on bulky goods have beensold profitably at a total of £510m, following achievement of improvements inrental income. Tightening sectoral focus - sales of £700 million included: - The sale of 16 in-town retail properties, where the prospectsfor tenant demand and therefore rental growth were seen as weaker, included anaverage initial yield of less than 4% for five prime high street shops. We alsosold six in-town supermarkets, in a market which has been buoyant for thesesmaller lot size high street investments. - The residential investment portfolio, being outside our corefocus, was sold in February 2006 for a total consideration of £300 million.However, we are pleased that as part of the transaction, we entered into acontract to provide on-going asset management services for the portfolio,thereby utilising our skills in the sector and extending our Fund Managementactivities and earnings. - At both Daventry International Rail Freight Terminal andHeathrow Gateway the developments of distribution warehouse units were completedand profitably sold. - Offices at Kingswood and Reading have also been sold, abovevaluation, where our confidence in rental growth was limited. Purchases Price BL Share Value Uplift 12 months to 31 March 2006 £m £m %1 Pillar (wholly owned + share of 1,565.8 1,565.8 9.4(1) funds) St Stephen's Shopping Centre, 135.0 135.0 -(2) Hull2 Ropemaker Place, EC2 131.0 131.0 -(3) 4 Retail Parks4 96.8 33.5 2.8 2 Retail Parks (France)5 50.4 17.2 - Others 166.9 150.2 6.5 2,145.9 2,032.7 7.8(1) from purchase price on completion to 31 March 2006 - for Pillar 8 monthssince 28 July 2005(2) forward purchase, expected completion mid 2007, not yet revalued(3) purchased 21 March 20064 Hercules Unit Trust (HUT)5 PREF - Europark Fund - purchases not yet revalued £2 billion of purchases - redeploying capital to primary markets: - The successful acquisition of Pillar Property Plc in July 2005added more than £1.5 billion of real estate, including some £1.3 billion of topquality retail warehouse parks, most with open A1 planning consent. These offergreater flexibility and superior prospects for continuing growth with our assetmanagement, in a demanding retail market. We have built a market leadingportfolio in this sector and are benefiting from improving wider relationshipswith our customers, the tenants. The Pillar properties were held either directly by the company or through itsshare of the Funds it managed, including the Hercules Unit Trust (HUT), with thelargest specialist UK retail park portfolio at £3.1 billion, and PREF, theEuropean Retail Park Fund. These assets have performed well, ahead ofexpectations. For the calendar year 2005, at a property level the HUT portfolioachieved a 19.5% increase in value. The Trust return for the year was 35.5%.PREF's Trust return for the same period was 18.7%. Pillar also brought a strong asset management team to add to our own. Itsgrowing Fund Management business provides attractive additional income streams.Fees earned by Pillar in the year to 31 December 2005 amounted to some £60million (a record level), from both asset management and Fund outperformance.British Land's net share is some £40 million, of which £26 million is recognisedin our accounts for the year, due to the Trust's fee structure provisions (setout in further detail below). - Ropemaker Place was acquired in March 2006 for £131 million. Thecleared island site of just over one acre close to Moorgate and Liverpool Streetstations, has detailed planning consent for 46,900 sq m (505,000 sq ft) offices.We intend to make a revised planning application and to start construction laterthis year for delivery of the development to the market in early 2009. - St. Stephen's Shopping Centre, Hull, forward purchased for £135million, is a new 46,450 sq m (500,000 sq ft) edge of town retail and leisuredevelopment project with strong prospects for improving value through bothrental growth and yield shift. 68% of the space is already pre-let, presold orunder offer, with tenants to include Tesco, Next, New Look, H&M, Zara, TK Maxx,Boots, Sportsworld and Gala. There will also be an hotel and over 200residential units. Investment in Europe We have embarked upon extending our investment in Europe, with the focus on Outof Town Retail, where attractive returns are expected in a market which has bothlower rent levels and higher yields than comparable assets in the UK. We aremarket leaders in the sector in the UK; we have the management infrastructureand expertise in our team following the acquisition of Pillar, and believe inthe prospects for growth in the European market as it develops driven by trendssimilar to those seen in the UK. Investment in Europe is currently through the PREF Fund - which we manage andcollect fee income from, and of which we own 34% (40% when new equity fullycontributed) - and development held directly by ourselves. We have committed to increase our investment in PREF by €124 million, as part ofa further €214 million raised by the Fund, to fund acquisitions of out of townretail parks in the eurozone. This equity and expected gearing puts PREF ontrack to achieve its objective of a portfolio under management or contracted inthe region of €1 billion by the end of 2006, of which €628 million is alreadypurchased or under contract. PREF owns six retail parks in Europe, two of which were acquired during theyear, both on the outskirts of Paris in established retail locations in goodcatchment areas. The Montgeron Retail Park was purchased for €23.8 million,fully let to a strong range of tenants at conservative rents. The purchase for€48.5 million of the Corbeil-Essonnes Retail Park, currently under constructionand 100% pre-let, is expected to be completed in time for pre-summer 2007opening. Both parks in Paris will provide a yield in excess of 6%. PREF has alsocontracted conditionally to acquire a further eight retail park schemes oncompletion of their development in Italy, France, Spain, Belgium and Portugal.In total these are expected to add a further 186,000 sq m (2 million sq ft) toPREF's existing 148,600 sq m (1.6 million sq ft) portfolio. A significant further step into Europe by British Land has been taken with thepurchase in May 2006 of a 50% joint venture interest (with Copcisa Corp, aSpanish construction company, and private investors) in a major project inZaragoza, Spain. Puerto Venecia will be a 195,000 sq m (2.1 million sq ft)€500 million development of a retail park, a specialist retail and leisure parkand a shopping centre, with ancillary facilities. Anchors secured for the parksinclude the major retailers IKEA, Leroy Merlin, Decathlon, Boulanger,Porcelanosa and Conforama. Zaragoza is Spain's fifth largest city approximately300 kilometres from each of Madrid, Barcelona and Valencia. This importantproject will provide a new regional centre for the city, which will host theinternational EXPO in 2008. Proactive Asset Management------------------------------------------- Considerable energy continues to be devoted to improving both the value andincome of the property we own with a range of intensive asset management anddevelopment activity. An increasing focus on customer requirements is enhancingperformance and outcomes. ---------------- -------- ---------- -----------------------New Lettings and Lease Renewals Number Sq ft Rent, £m pa(including Funds and Joint 000sVentures) -------- ---------- ----------------------- New Total BL Share of rent increase---------------- -------- ---------- -------- ---------Retail Warehouses 31 303 7.9 2.6Shopping Centres 131 400 16.7 5.3High Street 17 59 1.7 1.0City Offices 25 215 9.0 8.0West End Offices 18 52 1.5 0.4Other 110 180 1.8 0.7---------------- -------- ---------- -------- ---------Total 332 1,209 38.6 18.0---------------- -------- ---------- -------- --------- Included in these new lettings are: • lettings of 3,900 sq m (42,000 sq ft) at our prime City office development of Plantation Place South, EC3 to specialist insurer Beazley Group plc at rents of £43/44 per sq ft under a 15-year lease. Further lettings have been agreed at £45 per sq ft since the year end, • lettings of 1,350 sq m (14,500 sq ft) to solicitors Herbert Smith at £45 per sq ft (granted pursuant to a 2004 option, now reversionary) and 2,700 sq m (29,000 sq ft) to Close Asset Management at £48.50 per sq ft achieved in our development at 10 Exchange Square, Broadgate. Since the year end we have another letting here under offer at £50 per sq ft, • a new letting to Marks & Spencer at Teesside Shopping Park (due to open in August 2006 in a store extending to over 4,600 sq m (50,000 sq ft)) with further lettings to Superdrug, Mamas and Papas and Lilley & Skinner, continuing the improvement of the retailer line up. Examples of our asset management activity in the year include: Rent reviews - 229 reviews were settled across the portfolio, including Funds and JointVentures. These have increased rent to British Land by some £9 million perannum, a result averaging 5.3% above our external valuer's estimates of rentalvalue at the valuation date preceding the relevant review. Lease regearing - 1 Fleet Place, EC4 was acquired as part of the purchase of our partners'interests in the BL West companies. These offices were let primarily to DentonWilde Sapte for a remaining term of four years at a rent above current marketlevel. We negotiated a revised lease for a new term of 20 years without breakand then sold the property (as set out above) for a price well above valuation. The lease to Legal & General in respect of its 24,100 sq m (259,000 sq ft)Headquarters office complex at Kingswood which contained a tenant's break clausein 2008 and provided for a rent above market level was successfullyrenegotiated. The new lease was agreed for a term of 20 years without break, ata revised rent significantly improving the value of the investment and enablinga sale (reported above) some 30% above valuation. Unit reconfiguration - At The Peacocks, Woking we have improved prime rents from £90 to £110 per sq ft'Zone A' during the year, by negotiating the surrender of leases of a number ofunits which have been relet at higher rents, providing open market evidence forother reviews at the centre. By taking back a basement car park from the LocalAuthority, a new 1,300 sq m (14,000 sq ft) unit was created for New Look with arent of £281,000 per annum. A profitable project of reconfiguration and enlargement of five units at TheEastgate Shopping Centre, Basildon was completed, including letting of a newunit to Jane Norman at £150,000 per annum, enhancing the rental tone for thecentre. Meadowhall Shopping Centre, Sheffield - Significant activity included 25 new lettings, of which 13 are to retailers newto the centre, including Apple and TM Lewin, and Boots and W H Smith have openedtheir new stores. One of these new lettings reflected a Zone A rent of £440 persq ft, setting a new open market rental level for Meadowhall. Together theselettings have increased rent by some £2 million per annum. A further £880,000per annum has been added following completion of 21 rent reviews. We took back the stores previously let to Sainsbury's and Allders and are in theprocess of installing mezzanines to provide an additional retail area of around4,300 sq m (46,000 sq ft). The new first floor area will be directly connectedto the existing first floor mall by the construction of a new mall. Thereconfiguration is progressing well, with completion due in September 2007. Weestimate that, at a cost of £48 million, this project will enhance the retailenvironment and increase rents by approximately £3.5 million per annum. A major refurbishment programme for Meadowhall, featuring improvements to thelighting and installation of mall cooling, started in June 2005 and is set forcompletion in autumn 2007, at a total cost of some £38 million. Retailers' andshoppers' requirements develop over time and it is necessary to undertakeregular programmes of phased updating and refurbishment at major shoppingcentres. The expenditure at Meadowhall, as part of such a programme, willmaintain its standards as a pre-eminent regional shopping centre, althoughhaving an adverse effect on the asset's recent investment performance. Extensions - Agreements have been reached with Sainsbury's and Tesco Stores to extend sevenstores to provide a total of over 9,300 sq m (100,000 sq ft) additional space. Retail Park enhancement - A project recently completed at St. James Retail Park, Dumbarton is a goodexample of the range of our activity at retail parks; it included: • overcladding, new unit entrances and re-landscaping • construction of a new 985 sq m (10,600 sq ft) unit and letting to Argos • an extension of 1,860 sq m (20,000 sq ft) to the existing ASDA store • a new letting to Carpetright and an agreement (conditional on planning) to let a further unit to Marks and Spencer. Strong growth in rents is targeted within the next five years from the existingportfolio and from the committed development programme. At current market rentalvalues, without projecting any growth or inflation, settlement of rent reviewsand full letting of committed developments would add £210 million to our annualpassing net rents. Contracted increases include £47 million from expiry of rentfree periods and fixed/minimum rental uplifts. Approximately £1.6 billion of thetotal portfolio value comprises properties with fixed or minimum guaranteedrental increases included in their occupational leases. Considerable additional potential for income growth is in the developmentprospects, which will be progressed when market conditions are right. These are cash rents; it should be noted that accounting policies under IFRSrequire that certain portions of these contracted rents are anticipated in theGroup's income statement. Rental growth - £74m contracted Total of which contracted £m £m Annualised net rents, 31 March 2006 625 625Reversion*, 5 years 102 47Committed developments+ 108 28 835Development prospects+ 113Total 948 700 * includes rent reviews, expiry of rent free periods, lease break/expiry andletting of vacant space at ERV (asdetermined by external valuers)+ to achieve income from developments the Group will incur construction andassociated costs, which are notshown here - further details are set out in the Development Programme Customer Focus British Land has more than 1,400 occupiers across its portfolio. Whilst our longlease profile provides a solid bedrock, we recognise that the value of ourportfolio is derived from customers choosing to lease space from us. Although amajor part of this will be due to our commitment to invest in and maintain primeproperties, we are also committed to continue to adapt the way we work tosupport our customers' own changing business needs most effectively. Whereproperty management is being outsourced to managing agents, we are alsocontinuing to improve our support and direction of them. In 2005 we chose to accelerate improvements in our approach to customer service.This has resulted in a number of new initiatives, and changes to the way wework. The following is a summary of some of our customer initiatives: • We joined Real Service, the industry customer service group of 20 owners and 15 managing agents. The group has developed an Engagement Index to benchmark customer service processes in each business against a best practice model. We have used this framework to support our efforts to identify areas we can improve. • We undertook a Perception Study, interviewing senior decision makers from 60 of our largest customers to identify areas where we should improve. The following is a brief summary of their feedback: - We provide excellent property - very good buildings in strong locations. - The Pillar acquisition has been seen to be a positive move, merging Pillar's Out of Town Retail expertise with British Land's market leadership. - Our customers want closer relationships with our own property team. - There is an opportunity to provide more active direction to our managing agents and to monitor their performance more effectively. We will extend our customer surveys in 2006, across our portfolio as a whole, tobenchmark our performance year on year and to provide greater clarity regardingthe performance of our team and our service partners. • Our property team is undertaking more frequent communication and contact with occupiers to build closer ongoing customer relationships, to understand more clearly how we can support their businesses and to receive feedback on our performance as a supplier. • We have undertaken a review of our managing agents, resulting in a consolidation from 19 to eight partners. This will enable us to establish greater service consistency across the portfolio and to support our managing agents more actively. • We are standardising service charge management processes to enable our customers to benchmark costs across our portfolio and the industry as a whole so that they can have greater transparency that they receive value for money. • We introduced "Our Service Commitment" to communicate service expectations to our customers and to enable more effective performance management of our service providers. We have published this for our customers, staff and service providers. It is also available on our website. Accelerating Development Programme------------------------------------------- British Land's development programme is based on opportunities created both outof existing investments and from acquisitions. We commit to projects on thebasis of pre-lets or anticipated market demand, creating quality assets for theportfolio. Projects involving a total of 113,500 sq m (1,222,000 sq ft) have been completedduring the year, on time and within budget. New commitments to develop 201Bishopsgate and The Broadgate Tower, Ropemaker Place and Ludgate West have beenmade in the year, enhancing our important City offices development programme. Weexpect City rental growth to put rents significantly higher during 2007-2009;our speculative developments should be well timed for delivery into thisimproving market. Development Projects - adding value Completed Sq ft 000 Rent £m pa Site cost Construction Value Project ------------ £m cost + interest March 2006 Uplift Total1 Let/ £m £m %(since 31 pre-let March 2005) Distribution: 1,050 2.5 2.5 11 19 38 27Daventry (E4&C1)2Business Park: 55 1.1 0.4 2 8 13 30Blythe Valley(Plot A1)Retail Park: 117 4.3 2.0 26 30 72 29Nugent,Orpington3 ------------- ------ ------ ------ ------ -------- ------- ------ 1,222 7.9 4.9 39 57 123 28 ============= ====== ====== ====== ====== ======== ======= ====== 1 current headline rent (excludes provision for tenants' incentives) 2 International Rail Freight Terminal - BL Rosemound (JV) - rent, cost and valuedata show BL's 50% share 3 most of remaining space under offer, further uplift expected when fully let The distribution warehouse units at Daventry International Rail Freight Terminalhave been successfully completed and sold during the year. Another phase of the Blythe Valley Park development has completed and the firstletting of some 1,860 sq m (20,000 sq ft) has been achieved. Construction has completed of the Nugent Shopping Park and tenants alreadytrading well include Next, Debenhams, Mothercare, Cotswold, Game, Clarks andCarphone Warehouse. Other retailers 'under offer' include HMV, Waterstones, W HSmith, Mamas & Papas, Jessops, and Clintons, representing the majority of theremaining space. Committed PC1 Sq ft Cost £m2 Value Notional Rent £m pa ------------- ------------ 000 Total To March Interest Total4 Let/London Offices: Complete 2006 £m3 pre-let York Building5 Q4 2006 138 56 29 57 1 6.3 51 Lime Street Q1 2007 475 191 88 186 5 21.3 21.0Coleman Street6 Q1 2007 180 40 20 19 2.7 2.7Basinghall Street6 Q2 2007 199 38 18 20 3.3 3.3Ludgate West Q4 2007 127 48 37 39 2 6.1 201 Bishopsgate & The Broadgate Tower Q3 2008 822 292 245 212 20 40.4Ropemaker Place7 Q2 2009 548 208 208 131 10 27.6 2,489 873 645 664 38 107.7 27.0Business Parks: Blythe Valley (Plot G2) Q4 2006 35 6 4 3 - 0.7 0.7 1 estimated practical completion of construction 2 estimated construction cost 3 from 31 March 2006 during construction to PC 4 current estimated headline rent (excludes provision for tenants' incentives) 5 c 40,000 sq ft to be occupied by British Land 6 City of London Office Unit Trust (CLOUT) - BL Share 35.94% - forward sold 7 subject to revised planning - existing consent for 46,900 sq m (505,000 sq ft) Data for Group and its share of Funds and Joint Ventures, except areas in sq ftshown at 100% The construction of The York Building, W1, is programmed for completion in late2006 to provide some 8,640 sq m (93,000 sq ft) offices, 1,770 sq m (19,000 sqft) retail and ancillary space, and 22 residential apartments. It is intendedthat approximately 3,700 sq m (40,000 sq ft) of office space will be occupied byus as the new British Land head office. Revised planning consent for a 35 storey Broadgate Tower and a 13 storey 201Bishopsgate, Broadgate, EC2 has been obtained. The development has been madepossible by creating a raft over the railway lines servicing Liverpool Streetstation. This preparation has enabled the construction of these imposing newbuildings, commenced earlier this year, to be advanced quickly for completion in2008 - well timed for delivery into the cyclical recovery of the City officemarket. The buildings will form the next phase of the Broadgate Estate,providing offices designed to meet the needs of both financial and professionaloccupiers, and a new public space with shops, bars and cafes. The offices at 51 Lime Street, EC3, which will form a new City landmark, arefully pre-let to leading insurance broker Willis group under a 25-year leasewithout breaks. The 29 storey building, on a prime site opposite Lloyd's ofLondon, is on programme for completion early in 2007. CLOUT is undertaking two City office developments at Basinghall Street andColeman Street; both are fully pre-let and forward sold (Coleman Street is alsoforward funded). Construction of Ludgate West, EC4, began in April 2006, following demolition andsite preparation. The 10 storey building will provide high specification officeswith some ancillary retail space, close to St Paul's Cathedral. The principalentrance will be on Fleet Place, with significant frontage and further accessonto Farringdon Street. Ropemaker Place, EC2, an 'island' site close to Moorgate and Liverpool StreetStation, was purchased in March 2006. The site of 0.5 hectares (1.24 acres) hasan existing detailed planning consent for a 46,900 sq m (505,000 sq ft) officedevelopment. We are reviewing the 20 storey consented design and expect to makean amended planning application to maximise efficiency and floor area. Work islikely to start on site later this year with delivery of the completeddevelopment expected mid 2009. The development of the next plot at the successful Blythe Valley Business Parkis fully pre-let and continues on programme and within budget. In addition to completing development of over 92,900 sq m (1 million sq ft) ofdistribution warehouse accommodation at Daventry (and selling the residual landholding), the BL Rosemound joint venture completed the purchase and on-sale (inApril 2006) to Tesco of a 127 acre site at Livingstone, Scotland, realising asubstantial surplus. Development prospects, set out in the table below, are sites and propertieswhere we have identified opportunities and are progressing with designs,planning applications and site preparation for future development projects. At the Leadenhall Building, EC3, we have been negotiating with existing tenantsand are now able to obtain vacant possession of the building in early 2007.Alongside this process we have been designing and planning the new building tofacilitate the prospective development. Detailed planning consent is in placefor the striking new 47 storey tower - this will provide three times the officefloor space of the existing building on the site. At Regent's Place, NW1 (in conjunction with the Crown Estate) a resolution togrant planning consent has been received recently for 35,300 sq m (380,000 sqft) offices and 10,200 sq m (110,000 sq ft) residential accommodation atOsnaburgh Street, to extend the estate by a mixed use scheme including acommunity theatre and retail around a new public space. ------------------ ------ ------ ------ ------ ------ -------Development Prospects Sq ft Cost to Value, Notional Rent Planning Interest2 000 Complete March 2006 £m £m pa3 £m1------------------ ------ ------ ------ ------ ------ ------- TheLeadenhall City Office 601 278 103 26 31.4 DetailedBuildingRegent's West EndPlace Office i) NE 341 131 23 6 14.9 Pending Quadrant ii) 380 176 (4) 7 8 16.7 Resolution Osnaburgh St Residential 288 102 3 4 5.9 PendingBlytheValley Business 699 107 15 4 14.0 Outline/Park Park detailedNew CenturyPark Business 582 80 23 3 8.1 Outline Park/ DistributionMeadowhallCasino Leisure 409 123 - (5) 9 12.2 SubmittedMeadowhall Car show 171 29 - (5) 2 3.2 Pending roomsTheale Residential 204 32 13 2 4.3 SubmittedBeckton Gallions 94 9 1 - 1.4 Detailed Reach Retail ParkPreston Deepdale 67 12 3 - 1.2 Detailed Retail Park ----------- --------- ------ ------ ------ ------ ------ -------Total 3,836 1,079 191 64 113.3 ----------- --------- ------ ------ ------ ------ ------ -------Totalconstructioncost1: 1,110------------------ ------ ------ ------ ------ ------ ------- 1 estimated construction cost 2 during construction to PC 3 current estimated headline rent (excluding cost of tenant incentives) (4) including estimated cost of land to be acquired from Crown Estate underdevelopment agreement (5) value of these sites included in valuation of Meadowhall Shopping Centre All data for Group, projects 100% owned Retail Park Development: We actively pursue extension and other development potential at or adjacent toexisting investments. Planning consents have been obtained for such extensionand further development at 14 retail parks owned by British Land and by HUT,covering over 53,000 sq m (570,000 sq ft). Gallions Reach, Beckton, Phase 2, has received open A1 planning consent for8,700 sq m (94,000 sq ft), including a mezzanine level. The scheme is adjacentto a HUT retail scheme of 18,600 sq m (200,000 sq ft) let to occupiers includingTesco, HMV, Arcadia, New Look, Borders and Next. We are currently seekingpre-lets before committing to construction. In March 2006 we exchanged conditional contracts in an off-market transaction topurchase Giltbrook Retail Park, Nottingham. The conditions are expected to besatisfied for completion in late June 2006. Giltbrook is an existing retailwarehouse scheme of 5,600 sq m (60,000 sq ft) let to Decathlon and Next plc,with a 8.42 hectare (20.8 acre) site opposite, which we intend to develop(subject to revised planning) to provide up to 13,900 sq m (150,000 sq ft) offurther retail plus 7,000 sq m (75,000 sq ft) of industrial/officeaccommodation. The property adjoins a 17,650 sq m (190,000 sq ft) IKEAsuperstore which attracts over five million visitors per year. Next andDecathlon already trade well in this good location and, with the new park, weexpect this to become an important regional retail destination. Deepdale Retail Park, Preston is also adjacent to a major shopping park owned byHUT. A restricted use planning consent has been granted for a retail park of4,200 sq m (45,000 sq ft) plus sheltered housing, a creche and small industrialunits. The scheme is subject to further preparation and pre-lets. Schemes being prepared by HUT include: • Broughton Park, Chester - a new open A1 consent for 18,300 sq m (197,000 sq ft) (subject to formal confirmation) will enable a pre-sale to Marks and Spencer of 8,360 sq m (90,000 sq ft) and an extension of the Tesco Store of 2,600 sq m (28,000 sq ft) to 9,300 sq m (100,000 sq ft), together with 5,100 sq m (55,000 sq ft) of additional retail units where pre-lets are being negotiated. In its extended form Broughton Park will become a regional destination of some 46,450 sq m (500,000 sq ft). • Fort Kinnaird, Edinburgh - open A1 planning consent received for a 9,850 sq m (106,000 sq ft) extension will enable the Marks and Spencer store to be enlarged and provides flexibility for further extensions of units at ground and mezzanine levels. • Glasgow Fort Shopping Park, Phase II - plans for an additional 9,300 sq m (100,000 sq ft) are being discussed with the local authority. Terms have been agreed with a major retailer to anchor this phase, subject to receipt of planning consent. Portfolio Valuation - up 13.5% in the year------------------------------------------- The British Land property portfolio was valued at 31 March 2006 by externalvaluers Knight Frank, who now provide this analysis every three months in linewith our quarterly reporting. Overall, the portfolio including our share ofFunds and Joint Ventures, has increased in value over the year to £14.4 billion. The portfolio valuation increase includes the Pillar properties and Funds fromthe date of completion of the acquisition (28 July 2005) to our year end. If weinclude growth in those Pillar assets from the date of their last reported valueprior to the acquisition through to 31 March 2006, the increase in value in theoverall portfolio rises to 13.9%. The table below shows the valuation movements for the portfolio sectors, all ofwhich improved in value. Our key areas of focus, Out of Town Retail and LondonOffices both performed well, with the accelerated London office developmentprogramme achieving the highest rate of growth, driven by yield shift andimprovements in market rental values. ---------------- -------- -------- ------- ------- -------Valuation by Sector Group Funds/JVs1 Total Portfolio Uplift2 £m £m £m % %---------------- -------- -------- ------- ------- ------- Retail Retail warehouses 1,556 1,556 3,112 21.6 14.4 Shopping centres3 2,107 515 2,622 18.2 7.1 Superstores 1,513 254 1,767 12.3 16.0 Department Stores 757 143 900 6.2 17.7 High street 338 36 374 2.6 12.2 ---------------- -------- -------- ------- ------- ------- All Retail 6,271 2,504 8,775 60.9 12.6 OfficesCity4 3,500 42 3,542 24.6 14.3West End 643 44 687 4.8 13.1Business parks & Provincial 174 6 180 1.2 14.9Development 790 1 791 5.5 23.7---------------- -------- -------- ------- ------- -------All Offices 5,107 93 5,200 36.1 15.5 Industrial, distribution,leisure, other 375 64 439 3.0 8.2 ---------------- -------- -------- ------- ------- ------- Total 11,753 2,661 14,414 100.0 13.5---------------- -------- -------- ------- ------- ------- 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2006 - includes valuation movementin developments, purchases and capital expenditure, and excludes sales 3 Meadowhall valuation up 5.4% to £1,550 million (up 8.4% pre cap-ex); ERV £82million; net equivalent yield 4.75% 4 Broadgate valuation up 13.5% to £3,227 million; ERV £37.50 - £48.50 per sq ft;net initial yield 5.3% (assumes top up of rent free periods and guaranteedminimum uplift to first review) Performance against IPD Benchmark On an ungeared basis British Land's property portfolio total return was 1.1%less than the IPD index in 2005/6. This element of underperformance occurred inthe first half of the year (perhaps influenced in part by the change invaluers). In the second half the ungeared total return of 11.5% outstripped IPDfor the same period by 0.5%. British Land targets absolute risk adjusted returns; we are not anindex-tracker, and do not seek to mirror the composition of the benchmarkassets, though it is a goal to produce better returns over a multi-year period.In 2005/6 secondary property (more represented in the IPD Benchmark portfolio)saw greater yield shift than prime. Additionally the capital expenditure cycleat Meadowhall held back performance there, while the residential portfolio,since sold, had a dull year. Nevertheless, British Land's leveraged total return significantly outperformedat 34.6% (EPRA basis, excluding refinancing charges). Property Market Outlook In 2005/6 the UK property market saw: • another year of strong gains driven by yield shift and compression - yields for more secondary properties have moved closer to those for prime assets as their risk factors (such as location, age, lease length, covenant strength or income growth prospects) have been discounted by investors • the investment market continuing to be strong - transaction levels have been high, with demand from both UK and overseas investors, supported by availability of debt finance and relatively low interest rates (increasing recently) • rents remain affordable in most sectors and the economy's prospects should support continued modest growth. As a result we now believe that the value of property's rental flows and growthprospects with its strong, bond-like, downside protection are fairly reflectedoverall in the market and consequently we expect valuation growth rates to slow. Base returns from the UK property market overall in the next few years may beestimated at around 7% per annum, based on an average initial yield of 5% andexpected average rental growth of 2% per annum, though it is quite possible thata little more yield shift also benefits the next year. Our target is thatBritish Land's prime portfolio, with gearing and our asset managementactivities, will improve upon this level of return and we expect total returnsfrom property to continue to be attractive versus other asset classes (on a riskadjusted basis). Going forward, we expect that returns will be driven more by rental growth thanby yield shift, and there will be greater differentiation in relative assetperformance. Outperformance will require the right portfolio positioning andeffective assessment of the risk-reward position of prime versus secondaryproperty. Stock selection within the sectors, coupled with intense assetmanagement, will have a greater effect on portfolio performance. The British Land portfolio, well let on long leases to strong tenants, hasleading positions in the two main sectors with the best prospects for rentalgrowth over the next five years: - in retail warehouse parks and superstores, where there is a favourablesupply and demand imbalance for the types of accommodation on which we arefocused to meet tenants' requirements, and - in London offices, where there are clear signs of an upturn in theoccupational market, we are fully invested in prime assets. The acceleratedoffice development pipeline is designed to deliver, on a phased basis, furtherprime space into the improving market. Retail Sector------------------------------------------- £8.8 billion invested - total property including under management £12.4 billion. Retail Market Retail sales continue to be under scrutiny as consumer expenditure growthfluctuates. Trading remains extremely competitive and retailers' experience inthe current market varies, but demand for the right locations and accommodationremains healthy. Total retail sales are forecast to continue to grow over the next five years,with Out of Town shopping locations maintaining the trend of taking anincreasing share. Out of Town is expected to see sales growth of 3.1% per annumwith In Town at 1.7% per annum. Retailers find the size and layout of Out ofTown space advantageous and the overall costs of occupation and servicing suchlocations are typically lower. Migration or expansion by tenants from the highstreet to out of town is continuing with several utilising new store formats,generating strong demand for the types of retail parks in which we are invested.The preferred features of flexible use and unit configuration are also producinghigher than average rental growth, resulting in outperformance of these assets. Out of town - £6.5 billion portfolio: • 181 retail schemes, including superstores • providing 1.8 million sq m (19 million sq ft) • arranged in 1,402 retail units • let to 482 tenants. Strategy and positioning British Land has a distinctive portfolio, being the largest investor in UK Outof Town retail warehouses and superstores. In retail warehouse parks we favouropen A1 planning consents where supply is extremely restricted and demandremains high. Our occupier led strategy is focused on these assets which, due tothese factors, are expected to outperform. Key features in the Out of Town portfolio are: • open A1 use, applying to 71% of our retail park schemes (plus a further 10% 'open restricted'), which can attract high street retailers • larger schemes, usually over 9,300 sq m (100,000 sq ft), capable of dominating their catchment area • flexibility of unit size and configuration, to ensure that we can offer retailers their preferred floorplate at both shopping parks and superstores • schemes we can manage overall to provide better facilities in an environment which will increase shoppers' dwell time and improve sales densities for our retailers, while keeping occupational costs at a reasonable level in each case to benefit the retailers trading and our opportunities to generaterental growth. We are pursuing acquisitions and disposals which continue to strengthen theportfolio in these larger, open A1 use schemes. Sales in the year amounted to£510 million (our share £401 million) of retail warehouses primarily occupied by"bulky goods" tenants where demand for space is weaker. HUT has invested £97million in the year in four retail parks in Lincoln, Bristol, Glasgow and Hayle,all with open A1 or open restricted use. We calculate that we are the largest owner of UK superstores, other than theoccupiers themselves. In an increasingly restrictive planning environment andwith limited new supply, these assets are much in demand. The supermarketretailers continue to require more and larger, flexible stores and are preparedto commit to full lease lengths of over 20 years. The resultant profile ofrental growth with highly secure income is an attractive asset to British Land'sportfolio. The Meadowhall Shopping Centre of 132,800 sq m (1.4 million sq ft) is also animportant component of our Out of Town portfolio and probably the best scheme ofits kind in the UK, with exceptionally strong ongoing customer appeal. Ourstrategy is to leverage these strengths across the broader retail portfoliowhilst positioning Meadowhall itself for attractive low risk growth throughactive management and ongoing refurbishment. This may be complemented byintroduction of a Fund format to the asset's ownership structure in the future. In town - £2.3 billion portfolio: • 9 shopping centres - 363,000 sq m (3.9 million sq ft) • 39 department stores - 525,000 sq m (5.7 million sq ft) • 67 high street shops • 11 supermarkets Key features: • shopping centres £1.0 billion Our focus for "in-town" shopping centres is on those which have specific assetmanagement opportunities. The centres are typically:- located within large catchment populations- well anchored and the dominant retail scheme in the area- of sufficient size to enable future redevelopment to provide new retail sales space- where we believe income growth can be achieved through proactive asset management- where we can introduce additional customer facilities which will also be income generating, such as catering and leisure operations. • department stores £0.9 billion These stores are fully let to Debenhams and House of Fraser with a weightedaverage term of over 30 years. Income growth from these assets is underpinned byprovisions in the leases for guaranteed increases in rent, such that gross rentswill increase by at least £6million (14%) over the next five years.All the stores are located in town centre retailing locations and a number ofopportunities for adding value are being explored, including development. • high street shops £0.4 billion Disposals in the year of 16 high street shops, and six in town supermarkets havebeen made, for a total of £135 million, tightening our focus in the sector, andwhere particularly good market prices have been achieved. More disposals areplanned. Asset management and development initiatives continue apace, including theacquisitions and disposals, lettings, rent reviews, unit reconfigurations,refurbishment and developments as set out earlier in this report. In summaryacross the retail portfolio, during this year: • 192 rent reviews were concluded at £8.0 million per annum (BL share) above the previous rent and overall 5.8% above ERV • 179 lettings and renewals generated £8.9 million per annum (BL share) of new rent • planning consents for over 53,000 sq m (570,000 sq ft) of new retail gross lettable space have been achieved (including three approvals received in April 2006) • a development of 11,000 sq m (117,000 sq ft) retail park completed at Orpington, which is letting well. Further developments are in prospect at another six locations. The market is very competitive in the UK and we are expanding in Europe, throughPREF and our own developments, also as set out earlier in this review. Office Sector------------------------------------------- London Office Market London has unique and distinctive competitive advantages for 'white collar'employment, being a pre-eminent financial and business services centre, fuelledby international businesses employing a highly skilled and flexible workforce.These financial and other service activities, including insurance, accountingand law, are expanding faster than the overall UK GDP, so increasing employmentand the demand for accommodation. The London office occupational market is in the early stage of cyclicalrecovery, with demand and take up of accommodation improving and now back toaverage trend levels. There has been an increase in demand for prime offices inthe City and therefore the vacancy rate of Grade A accommodation has fallen to5%. Supply of new office space tends to display cyclicality with thecomplexities of planning regulations, infrastructure constraints and sitepreparation creating significant time lags. New supply has been limited andrents have begun to improve across the whole of London offices. The marketoutlook suggests an acceleration of these trends but, since supply is likely tobe re-established over time, the right product and timing are key. £5.2 billion portfolio - 96% in Central London: • over 450,000 sq m (4.9 million sq ft) prime offices in the City • over 135,000 sq m (1.4 million sq ft) prime offices in the West End • weighted average lease length of more than 10 years • 230,000 sq m (2.5 million sq ft) committed London office developments plus our investment in Canary Wharf through Songbird Estates. Strategy and positioning We have maintained and increased our portfolio weighting during the upturn inthe cycle, although where increased market prices have already built in growth,we have sold. Developments have been the principal route for the additionalinvestment, which is focused on prime London offices, providing flexible highquality accommodation in the locations best meeting occupiers' requirements. The market leading office portfolio has performed relatively well in the yearprimarily due to market yield shift, while having limited exposure to downsiderisks due to the strong income flows under average lease lengths of 12.2 yearsto lease expiry, 10.3 years to break. There is still very strong investmentdemand due to the improved prospects for rental growth and some yield shift istherefore expected to continue, although at a lower rate than recently seen. To continue this good performance, our activity includes: • recycling capital through the sale of more 'mature' investments, and those which in our view do not offer adequate risk adjusted returns. Total sales of over £1.1 billion of offices have been made in the year, achieving gains over valuation. It is likely that more sales will be made where we do not see adequate growth potential or where we believe the market is pricing too aggressively against the risks involved; • achieving lettings in the year to March 2006 of some 25,000 sq m (270,000 sq ft) in the City and West End, generating over £8 million of new rent to British Land. The prospects of letting further vacant accommodation are encouraging as existing vacancies are nearly all new or 'take back' accommodation; • employing asset management projects, such as taking back space and reletting it on the open market to establish new rental levels in otherwise fully let office investments, for example the 3,500 sq m (38,000 sq ft) we recently decided to take back at 155 Bishopsgate, one of the 15 buildings within the Broadgate Estate, EC2. The rents passing at Broadgate vary between £37 and £55 per sq ft some of which, as the market continues to improve, will become reversionary. Our aim is to refurbish the space and relet it in the open market later this year at a level which will demonstrate that rents at Broadgate are rising; • pursuing further rent reviews; 158,000 sq m (1.7 million sq ft) of the office space in the portfolio is due for review in 2008/9 at an average rent passing of £43 per sq ft, when we expect to see strongest growth; • increasing our investment in the sector through the development pipeline (set out earlier in this report), where we will be delivering the best quality product to the market, and well timed to meet rising demand at higher rents. A total of some 2.5 million sq ft is being scheduled for delivery in late 2006 - 2009. Financial Performance------------------------------------------- Total Return British Land has delivered a total return of 34.6% in the year, beforerefinancing charges, compared with 18.8% (restated for IFRS) in the previousyear. The valuation gains from active management and positive market conditionswere amplified by our gearing levels, which went up during the year as a resultof the Pillar acquisition and reduced through revaluation surpluses anddisposals later in the year. March 2006 March 2005 % increase (restated for IFRS) NAV per share1 1486 pence 1128 pence 31.7%Dividends paid per share 16.1 pence 14.87 pence 8.3%Total return1 per share 378 pence 161 pence 134.8%Total return1, 2 34.6% 18.8% 1 EPRA basis (Note 2) 2 excludes refinancing charges (Note 2) The principal drivers of total return were valuation uplifts on properties andinvestments in the Group and Joint Ventures which added £1,771 million or 337pence to NAV. Our capital structure proved its worth during a period of highasset value growth as this increase represents 30% of the NAV at the beginningof the year. Sales of properties added a further £182 million, 35 pence per share, as we soldproperties into the strong investment market, reducing the higher level of debtcreated by our acquisition of Pillar. Underlying profits added a further £228 million, 44 pence per share before tax,£185 million after tax. Valuation Movements and Capital Profits The revaluation surplus for the year was £1,771 million, £1,316 million arisingfrom wholly owned properties, £363 million from our share of Funds and JointVentures and £92 million from investments (principally Songbird Estates PLC).Our Songbird investment is now valued at £233 million. The reasons for the valuation gains and the gains in property disposals againstthe March 2005 values are fully set out earlier in this review. Underlyingprofits, the refinancing charges and goodwill are explained further below. Underlying profits Underlying profits have increased from £181 million in 2005 to £228 million. The£47 million increase is summarised below: £ m--------------------------------- ----- New lettings and rent reviews (net of lease expiries) 15Songbird dividend 16Pillar (8 months)1 (3)Debenhams and Spirit purchases 14Effect of other purchases and sales 7Broadgate & Sainsbury's refinancings 13Non recurring items (7)Other (8) -----Increase 47--------------------------------- ----- 1Net of £6 million management and £20 million performance fees The Group has prepared a proportionally consolidated income statement andbalance sheet (which are included as Tables A and B attached) for the benefitsof stakeholders who wish to see the results of the Group's interest in Funds andJoint Ventures on a look through basis. The following commentary refers tofinancial information of the Group as reported under IFRS where the after taxresults of Funds and Joint Ventures are shown as a single line on the incomestatement. Revenue Returns Gross rental and related income for the year is up 14.2% to £690 million and netrental income increased 13.9% to £589 million. The substantial acquisition anddisposal programme over the last two years being the key drivers of change, asfollows: Gross rental and related income £ m---------------------------- ------------------Year ended 31 March 2005 (restated for IFRS) 604Purchases 69Sales (14)New lettings and rent reviews 29Lease expiries (12)Other 14Year ended 31 March 2006 690---------------------------- ------------------ The growth principally arises from the benefit of a full year of acquisitionsmade in 2005 and new lettings net of the impact of sales. Significant sales weremade late in the year (e.g. the residential portfolio and our investment inPlantation Place) and so had a relatively small impact on this year's rents.Their full year impact will be visible in 2007. The impact of the purchases ofthe Spirit and Debenhams portfolios (purchased in 2005) includes the effect ofthe minimum guaranteed rent increases of 2.5%. Accounting standards requirethese increases to be spread over the lease term resulting in earlierrecognition of the income in the initial years of the lease. Net rental income is 85.4% of gross rental and related income, after developmentcosts and individual asset management initiatives charged to property income.The growth in rental income on a like for like basis (including our share ofJoint Ventures and Unit Trusts) - that is excluding purchases, sales,developments and adjusting for asset management initiatives - was 2.7%, ahead ofthe market overall (IPD at 2.1%). The 2.7% reflects 1.1% on offices and 4.0% onretail properties. The accounting policy for the recognition of rent reviews has been changed inthe year to recognise the benefit of rent reviews from the date of review. Thishas increased rents by £4 million. Funds and joint ventures The contribution to underlying profit from Funds and joint ventures is £39million, an increase of 25.8% from £31 million reflecting the purchase of theFund interests as part of the Pillar acquisition in July 2005. To make thetiming of reporting of Joint Ventures consistent with the group, the results ofDecember year end ventures have been included for a 15 month period to Marchresulting in a one off increase of £4 million to underlying profit. As requiredby IFRS the reported results for Funds and Joint ventures are included on a posttax basis as a single line with profits totalling £311 million, an increase of96.8% on the prior year. This profit includes financing costs (67 million),profits on sale and valuation gains (£378 million) and a taxation charge (£106million). Other Income Our fees and other income are up by £42 million to £50 million comprisingdividends from our investment in Songbird and performance and management feesfrom the newly acquired Fund Management business. In November 2005 we received our first dividend of £16 million in respect of ourholdings of A & B shares in Songbird, which owns 60.8% of Canary Wharf GroupPLC. The fees comprise £20 million of performance fees and £6 million of managementfees. The management fees are based on a percentage of the portfolio value. Theperformance fees are earned by exceeding stretching targets in the calendar yearmeasured against a benchmark. The third party element only of the fee earned isrecognised. Half of the performance fee earned is recognised immediately while the balanceis released over a vesting period provided there is not significantunderperformance against the benchmark in later years. The vesting period runsto the end of the Trust's life. Fees of £14 million are deferred. Administration expenses Administration expenses are £81 million, some £32 million more than the prioryear. The increase reflects increased staff numbers, primarily due to theacquisition of Pillar and recruitment of additional property professionals tosupport our intensified asset management and portfolio reshaping activities. £18million of costs represent performance related compensation from bonus and sharerelated plans. Administration costs include one-off costs of £13 million,including the costs of the closure of the Pillar head office, redundancies andchanges to actuarial assumptions in the Pension Scheme. Our administrationcosts, representing 0.4% of funds under management, continue to demonstrateefficient management of the portfolio. Financing Net interest payable (before refinancing charges) is some 13.2% higher at £369million, representing the increase in debt due to the Pillar acquisition earlierin the year, net of the savings made from refinancing Broadgate in 2005. Thelevel of interest expense is expected to reduce as a result of the salesprogramme reducing the level of debt in the second half of the year. Asannounced on 28 February 2006, the Group has restructured the financing of theSainsbury's portfolio and this has given rise to an exceptional charge. Inaddition as a result of the sales programme and consequent reduction in debt,certain derivatives have been closed out in accordance with our financial riskmanagement policies. These two items give rise to a charge in the year of £122million. The interest charge in future is estimated to reduce by £11 million asa result of the cheaper finance available under the new securitisation from BLSuperstores Finance PLC. Interest Cover remains stable with underlying profitbefore interest and tax representing 1.5 times the net interest charge. Net Valuation Gains The most significant contribution to IFRS profits are net valuation gainsamounting to £1,462 million, reflecting revaluation surpluses on the Group'sproperties and investments of £1,295 million and profits on disposals of £167million. This compares to total revaluation gains in 2005 of £610 million. Theincrease is due to the strong revaluation performance due to continued yieldshift and the profitable disposals made in the year. This amounts ignoresrevaluation gains of £378 million included within the results of Funds and JointVentures (see above) and on developments of £102 million, which are shown in theconsolidated statement of changes in equity. Intangible Assets and Goodwill IFRS require the Group to recognise an intangible asset of £75 million uponacquisition of Pillar representing the estimated fair value of anticipatedfuture income from Fund Management contracts. In accordance with IFRS thisintangible asset is being amortised over the life of the contracts. Consequentlyfees and other income included a non-cash charge of £10 million relating to thisamortisation. A non-cash impairment charge of £240 million has been recognised in respect ofgoodwill arising from the acquisitions of Pillar and the Spirit and Debenhamsportfolios. Accounting Standards require us to provide in full for deferred taxon corporate acquisitions and not the fair value of the contingent tax liabilityabsorbed on acquisition, and this inflates the value of goodwill on the balancesheet. This charge eliminates the goodwill that has arisen on theseacquisitions. Taxation The underlying tax rate this year is 18.8% (2005: 23.2%). This low rate arisesprincipally through the effect of non-taxable dividends, capital allowances andcapitalised interest. The actual corporation tax liability is lower than 18.8%due to the cost of refinancing of our Sainsbury's portfolio which has been usedto relieve taxable profits in the current year. The rate of tax on disposals islow because the Group's pool of capital losses and the Sainsbury's refinancingcosts have been used to relieve gains in the current year. Earnings Per Share Diluted earnings per share rose to 240 pence from 126 pence in 2005. Underlyingearnings per share have increased from 27 pence to 36 pence, as a result ofstrong growth in underlying profits and the reduced underlying tax rate. Our proposed final dividend of 11.8 pence per share continues our progressivedividend policy growing the level of distribution by 8.3%. Total dividends pershare declared for the year are 17 pence (2005: 15.7 pence). Underlying profitsafter tax twice cover dividends. As required by IFRS final dividends are onlyreflected in the financial statements once approved by Shareholders and as suchthe final 2006 dividend is not included in these results. Net Assets Net assets rose significantly as a result of the geared impact of revaluationgains and retained earnings for the year. March 2006 March 2005 % increase (restated for IFRS) NAV per share1 1486 pence 1128 pence 31.7%EPRA Net assets1 £7,802m £5,913m 31.9%Net Assets £6,016m £4,783m 25.8% 1 EPRA basis (note 2) Cash flows Net cash flow from operating activities is broadly unchanged. An increased levelof interest expense following the acquisition of Pillar has led to the decreasein pre investment and financing cash flows. The Group has been a net seller ofproperty during the year leading to the £1 billion net investment cash inflowfollowing net investment outflow of £527 million in the prior year. These netproceeds have been used to repay £1 billion of debt. ---------------------------- -------- ------------ March 2006 March 2005 £m £m (as restated for IFRS)---------------------------- -------- ------------Net cash flow from operating activities 455 464Net cash flow after JV dividends, Unit Trustdistributions, interest, tax and working capitalmovements 104 126Net investment cash flows 986 (527)Financing (1,025) 459Dividends (84) (77)---------------------------- -------- ------------ International Accounting Standards First time implementation This is the first year the Group reports its results under InternationalAccounting Standards ("IFRS") which were adopted on 1 April 2005. This change tothe accounting basis arises from legislation requiring all EU listed companiesto apply these standards to their financial statements. Comparative figures for2005 have been restated in accordance with IFRS. The principal impacts ofadopting IFRS, along with comparatives for the year ended 31 March 2005contained within this report, were published in a press release on 14 July 2005.Further details and reconciliations explaining the transition to IFRS areavailable on the Group's website, www.britishland.com. As permitted by IFRS theGroup has adopted material exemptions from full retrospective application ofIFRS accounting policies in respect of "Business Combinations", wherecombinations that took place before 1 April 2004 have not been restated, and"Employee Benefits" (where the accumulated actuarial gains and losses in respectof employee defined benefit plans have been recognised in full throughreserves). EPRA To assist stakeholders British Land has worked closely with other major Europeanproperty companies and the European Public Real Estate Association to publishguidelines on a standard net asset value and earnings per share calculation,designed to aid comparability between companies following implementation of IFRSand to assist in understanding the reported figures compared to previousaccounting practices. The EPRA calculations are set out in note 2 as well as areconciliation to our underlying earnings per share, which reflects company onlyadjustments. Accounting Judgements Significant accounting policy judgements are highlighted in our accountingpolicy note. The most important judgement affecting comparability with otherproperty companies is our approach to deferred tax. Many (but not all) haveadopted our policy of calculating deferred tax consistent with the principle ofan ultimate sale of investment properties capturing all available tax reliefs.Some others assume no sale. Both methods are appropriate under IFRS dependent oncompany specific strategies and practices. Finance and capital structure------------------------------------------- British Land is managed on an integrated basis to produce secure and attractiverisk-adjusted returns to Shareholders. Risk management is a distinctive skill atBritish Land where the mix of assets, leases, developments and debt are managedtogether to ensure the most effective result. Overall, the Group's prime assetsand their secure rental income present lower risks than many other propertyportfolios, enabling the returns to be enhanced using financial leverage. A45-55% loan to value ratio is currently targeted, subject to the Board's view ofthe market, the prospects of the portfolio and the recurring cashflows of thebusiness. Since we seek to maximise shareholder returns, we prefer to avoid equityissuance, except where the commercial opportunity clearly merits it. We alsowould expect to return capital to Shareholders if a surplus arises over what webelieve can be attractively deployed in the business. Debt is raised from a variety of sources with a spread of maturity dates. Longerterm debt is raised principally through securitisations and debentures.Securitisations have a range of benefits, including long maturities atcompetitive rates with no recourse to other companies or assets in the Group,and without financial covenants by British Land. Debentures also have longmaturities and no amortisation. Unsecured revolving and committed bank facilities tend to be for terms of fiveto seven years. We aim to spread the maturities of the different facilities froma wide range of banks. The Group borrows at fixed and floating rates and uses derivatives to achievethe desired interest rate profile; currently the policy is to maintain around85% (subject to 5% tolerance) of debt at fixed or capped rates. This interestrate profile is closely monitored as part of our management of the overallfinancial effects of transactions in the Group. The year end position of 95%fixed/capped reflects our expectation of increasing floating rate debt as wefund our committed development projects. The joint ventures are separately financed, and have their own interest ratederivatives, all with no recourse to British Land. Financing Statistics 31 March 2006 31 March 2005 (restated for IFRS) Group:Net Debt £5,593m £6,061mWeighted average debt maturity 15.0 yrs 14.3 yrsWeighted average interest rate 5.71% 6.00%% of net debt at fixed/capped interest rates 95% 90%Interest cover1 1.51 1.46Loan to value (debt to property & investments) 42% 50%Unsecured debt to unencumbered assets 26% 42%Undrawn committed facilities and cash £2,415m £969mGroup and share of Funds and Joint Ventures:Net debt £6,684m £6,538mWeighted average debt maturity 13.4 yrs 13.5 yrsInterest cover 1 1.52 1.50Loan to value (debt to property & investments) 46% 52% 1 Underlying profit before interest and tax/net interest excluding refinancingcharges Gearing increased on the acquisition of Pillar and then decreased over the yearto 46% (loan to value, including share of Funds and Joint Ventures) as a resultof asset value growth and repayment of debt following property disposals. During the year we have been active in both the banking and debt capital marketsto arrange financing of the business. We raised over £1.5 billion of new orrenewed bank lines, including £790 million arranged in a successful,oversubscribed syndicated facility with 25 banks, taking advantage of favourablemarket pricing. In addition, more than £700 million resulted from a number ofbi-lateral agreements with banks on similar (or improved) terms. In February 2006 we completed the refinancing of the Superstores portfolio. BLSuperstores Finance PLC issued £753 million of bonds at an average interest rateof 4.96%, with an average life of 13.4 years. The weighted average cost of debt has been reduced as at 31 March 2006 to 5.7%(2005: 6.0%) and the weighted average debt maturity has increased to 15 years(2005: 14.3 years). At 31 March 2006, the market value of the Group's net debt was £384 million morethan book values (£386 million including shares of joint ventures). Thisreflects the higher historical cost of debt compared to levels at which it mightbe available today. Tax relief currently available for the higher interest wouldnot be available if British Land were to become a REIT. Within unit trusts the most notable financing activity was the restructuring ofthe debt in HUT, completed in September 2005, reducing its average cost of debt.Three bank loan facilities, with combined debt of £758 million, were repaid orreduced with the proceeds of a new £1 billion securitisation. The seven yearissue, secured against 16 retail parks, incorporated significant assetmanagement flexibility. The Scottish Retail Property Partnership (a joint venture with Land SecuritiesPlc) was refinanced in April 2005 by a seven year securitisation, raising £430million, most of which was returned to the partners. Risks and Rewards------------------------------------------- The Company generates returns to Shareholders through long-term investmentdecisions relating to both income and capital growth. These decisions require usto evaluate opportunities arising in the following core areas: • demand for space from occupiers against available supply (including new developments); • differential pricing for premium locations and buildings; • alternative use for buildings (particularly redevelopment); • demand for returns from investors in property, compared to other asset classes; • price differentials for capital to finance the business; • legislative initiatives, including planning consents and taxation; • economic cycles, including their impact on tenant covenant quality, interest rates and inflation; and • mis-pricing of property assets by the equity markets (for example, share buy-backs or opportunistic investments). These opportunities can also represent risks. Demand for property and ability oftenants to pay rent can be affected by general economic conditions at both amacro and local level. Excessive levels of supply of property can also lead tofalling rental levels. Rising interest rates may impact the security of thetenant base, lower development margins significantly and reduce investmentappetite. Property values are also affected by changes in planning, taxes,technology and lease structures. Interest rates, bond yields and the relativeattractions of other asset classes also impact property values. These risks inthe UK property sector can be amplified by development exposure and gearing. Key Performance Indicators Property is a long term business. Decisions taken to create value over timefrequently affect current year's earnings and so the Board measures performanceover a range of time periods. Our management judgements over asset selection,sector views, redevelopments, financial structure, corporate and communityresponsibility all combine to deliver a single set of financial returns andthese should be judged against the risk profile adopted. In measuring and benchmarking performance the Group uses a number of keyperformance indicators to indicate the impact of management actions. At the'total company' level, the three most visible indicators are "profits growth","total shareholder return" and "total return" over one, three and five yearperiods reflecting the geared performance of the whole business. Benchmarking isundertaken against our major quoted peers (Land Securities, Hammerson, Libertyand Slough) and the FTSE Real Estate Index. We believe that the total returns ofthe company to be most important as these represent the returns our Shareholdersexperience. The low risk nature of our portfolio, focused on prime properties(with long leases and strong tenant covenants) and with a modest proportion ofdevelopment activity, enables the Group to finance itself at a higher level ofgearing than its peer group. The key performance indicators demonstrate British Land's strong track record inrelative and absolute value creation over the last one, three and five years. Key Performance Indicator One year Three Years ive Years Profits growth1 - British Land 26.0% 15.6% 13.6% - Peer group4 6.1% 3.9% 3.3% - Ranking 1 1 1Total shareholder return2 - British Land 57.1% 47.7% 22.9% - Peer group4 43.3% 38.5% 20.7% - FTSE Real Estate Index 49.3% 44.6% 19.3% - Ranking 1 1 2Total Return3 - British Land 33.2% 21.3% 15.0% - Peer group4 27.0% 16.1% 11.4% - Ranking 1 1 1 1 Growth in underlying profits excluding exceptional items, profits on disposalsand revaluation gains. 2 Growth in share price plus dividends per share. 3 Growth in adjusted, diluted net asset value per share plus dividends per share 4 Average of major peers - Land Securities, Hammerson, Liberty and Slough (somedifferences in year ends) One year, IFRS, others based on UK GAAP Corporate Responsibility - Supporting Business Objectives------------------------------------------- British Land's corporate responsibility programmes are based on an analysis ofthose risks and opportunities for the business which have been identifiedthrough research and engagement with our stakeholders, including investors,tenants, local communities and suppliers. Our 2005 Corporate ResponsibilityReport, published in April 2006, focuses on seven main areas of activity:British Land people, supply chain, regeneration, community, resource use, wastemanagement and biodiversity. Many of these issues are (of course) also important for occupiers of ourbuildings and much of our work is now a collaborative effort with them. We arefor example working with tenants to introduce programmes to reduce and recyclewaste at many of our properties. The Broadgate Environment Group, withrepresentatives from British Land and major tenants at Broadgate, is also takingthe lead in managing and reducing energy use on the Estate. For the third yearrunning British Land was, in 2005, identified as the financial services sectorworld market leader in corporate responsibility issues by the Dow JonesSustainability Indices. Operating and Financial Review------------------------------------------- In preparing this OFR we have had regard to the recommendations in ReportingStandard 1: Operating and Financial Review issued by the ASB in 2005 insofar aswe consider they are relevant to our business model and industry. We haveprovided herein a detailed management commentary on our markets, activities andprospects. Users will understand that where we make forward looking statementsthey reflect our current views; the future depends on many factors andinteractions which may cause outcomes to differ from those anticipated in thisassessment. Further details of: • Funds and Joint Ventures • Portfolio description • Development programme are available on the website www.britishland.com This information is provided by RNS The company news service from the London Stock Exchange

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