25th May 2005 07:02
British Land Co PLC25 May 2005 25 May 2005 THE BRITISH LAND COMPANY PLC PRELIMINARY ANNOUNCEMENT RESULTS FOR THE YEAR ENDED 31 MARCH 2005 • Net asset value per share* up 15.0% to 1111 pence (2004: 966 pence). Without the exceptional charge of £180 million relating to the refinance ofBroadgate and the removal of stamp duty exemption for disadvantaged areas, netasset value would have risen by 20.8%. • Underlying profit before tax up 17.0% to £174.8 million (2004: £149.4 million) before gains on asset disposals of £27.0 million (2004: £36.6 million) and the exceptional charge. Profit before tax and exceptional item £201.8 million (2004: £186.0 million);after exceptional charge, profit before tax £21.8 million (2004: £186.0million). • Underlying earnings per share* up 9.9% to 34.3 pence (2004: 31.2 pence) before gains on asset disposals and the exceptional charge; unadjusted dilutedearnings per share 11.3 pence (2004: 34.5 pence). • Total return (adjusted diluted net asset value per share growth plus dividend) for the year 22.4% before the exceptional charge and stamp duty change; 16.6% including the exceptional and stamp duty. • Final dividend up 8.2% to 10.9 pence per share. Total distribution for the year up 8.3% to 15.7 pence (2004: 14.5 pence). • Net rents+ increased by 9.3% to £571.8 million (2004: £523.0 million). • Portfolio valuation increased 6.5% to £12.5 billion, including retail warehouses up 13.7%. This increase is 8% excluding the stamp duty change. Quarterly reporting: will be introduced from December 2005. New Valuers: Knight Frank appointed from September 2005. Pillar Property PLC: recommended offer for Pillar Property - see next page. All figures include British Land's share of joint ventures unless statedotherwise. * adjusted to exclude the capital allowance effects of FRS19 and, in calculatingNAV, to include the external valuation surplus on development and tradingproperties and, in calculating the number of shares, diluted for all potentialshare issues including, where relevant, the potential conversion of theConvertible Bonds (Notes 8, 19)+ (Note 2) Pillar Property PLC: On 23 May 2005 British Land and Pillar announced therecommended acquisition by British Land of Pillar for a total consideration ofapproximately £811 million; the terms are set out in the press release issued on23 May. Pillar is a leading property fund manager; it owns (directly and indirectly)approximately £1.3 billion of top quality property and has a portfolio undermanagement of £3.3 billion. The principal benefits of the transaction include: • unique opportunity to access a portfolio of this size and quality, principally in out of town retail parks, which are expected to offer the most attractive continuing fundamental growth in the retail sector • attractive Fund Management business creating an additional and growing revenue stream. Additionally, Fund expertise adds to British Land's strategic options within its existing portfolio • highly regarded management team; known for intensive asset management, performance orientation and customer focus. Commenting on the acquisition, Stephen Hester, Chief Executive of British Land,said: "The acquisition of Pillar provides British Land with an attractive opportunityto accelerate our stated strategy. We are reshaping the portfolio towards growthassets and intensifying property asset management activity. By adding over £3billion of fund assets under management a valuable new avenue of income growthalso opens up." STATEMENT BY THE CHAIRMAN, JOHN RITBLAT British Land has had a thoroughly good year. In attracting major new tenants tooccupy our new developments in the City of London our properties have passed theacid test. We have raised funds of £3.1 billion including a record financing inexcess of £2 billion on Broadgate, and we spent £1.3 billion. In November 2004we were delighted to welcome Stephen Hester as our new Chief Executive. Results Our financial results revealed profits - pre-tax, pre-exceptional - exceeding£200 million for the first time ever. We took a £180 million (24p per share netof tax) exceptional charge in respect of the Broadgate refinancing, and suffereda reduction (32p per share) in net assets as a consequence of the arbitraryremoval of the Stamp Duty exemption for disadvantaged areas but, even so, wemade a 15% increase in net assets per share, which rose 145p to 1111p on anadjusted diluted basis. The total return was 22.4% before the exceptional charge and the loss of StampDuty exemption, and still 16.6% after. The final dividend is up 8.2% to 10.9p per share, making a distribution of 15.7pfor the year. British Land's Approach We strive to buy or construct buildings to match what tenants need and want, notjust now but in the future. In today's market they are much better informed andmore selective than was the case when property was a scarce commodity. Energyefficiency, the quality of life and amenities for occupiers, and the impact onlocal communities, all must pass muster. Buildings also need to be capable ofbeing kept up-to-date by easy adaptation as technology evolves ever further.This is not a short-term business. British Land selects its portfolio to encourage tenants to take long leases inour high quality, well located buildings. Property offering these advantages isa good investment for our shareholders and will grow in value over time as itproduces increasing income. Property Market and Regulations There may be some disillusionment among private investors with equities, butthat makes the prospect of REITs (Real Estate Investment Trusts) even moresignificant. These Trusts will enable investors to put their funds into thoseproperty companies which convert to REIT status without, as at present, beingtaxed twice, at both the corporate and personal levels. This is not to suggestof course that investors should be beguiled by the blandishments of tax benefitsover the merits of the underlying assets. The foundation of the portfolio forour investors is always the prospects and quality of our buildings. The enactment, when the Government has ended its consultation process, ofconsidered legislation on REITs will signify real progress. We are pleased thatthe interests of all property companies are being represented by Lucinda Bell,our own Head of Tax and Accounting. I have every confidence in the current property market, but I must still stressthe skills, instincts and sometimes courage that are required to achieve goodreturns. A successful equity fund manager may make good picks, but does notmanage the companies selected. A successful property entrepreneur also has tomake good picks, but additionally has to apply creative managerial and assetmanagement skills, coupled with awareness of emerging trends to maximisereturns. The results can be only too obvious: there is nowhere to hide. The extra managerial dimension required is nowhere more evident than in thetesting aspects of new development of property, where the gap between successand failure, often the result of idiosyncrasies of personal judgments, can havesuch severe economic consequences. Many factors can influence the judgments, andthe resulting success or failure is all too apparent. See-through clothing maybe revealing, but a see-through building is a disaster! The risks are very real, and a constant reminder to those of us who devote ourlives to property that often we are exposed to changes in the businessenvironment over which we have no control. It is therefore salutary that onechange sought by some tenants - destroying upward only rent reviews - wasresisted by the Government after it had considered the facts. Of course thereshould be choices offered to tenants, and the movement towards shorter leaseterms and thus fewer rent reviews has accommodated this choice. That's what afree market is about. Many tenants insist on long leases even with reviews. They are aware thatlong-term security, often coupled with extracting substantial cash fromlease-back arrangements, can fully justify an upward only rent review clause,and may well be preferable as a better economic bet on market forces. Tenantscurrently exercising this preference include some with considerably greaterfinancial muscle than their poor landlords! Tenants and landlords have common commercial interests, and work together toachieve their separate objectives. British Land has made the use of jointventures and leasebacks a particular feature of its business. By co-operatingwith partners it has been possible to obtain the benefits of extending assetsunder management to £14 billion, well above our own assets of £12.5 billion. Andproperty owners risking capital have to work together - they are oftenneighbours - and communities gain from major redevelopment schemes carried outjointly. Financial Resources A major property business takes a lot of financing and as I have always said,half of our business is simply about money. Though the assets, our buildings,are highly visible counters, the liabilities demand almost as much attention.Since we launched the first securitisation by a British property company in 1996we have raised over £5.3 billion through this route, refining techniques andreducing costs to provide a range of maturities. The maintenance of adequatefinancial resource remains a key focus of our business, with managed andstructured gearing providing an important method of extracting superior returnsfrom our portfolio of quality. Yields may appear lower - but not the long-termprospects for gain and total return. In reality and in real estate there are no short cuts to sustained growth. Majorproperty decisions to buy, sell or develop, and related financial decisions,have to stand the tests of time. Though instant uplifts are nice, it is thelong-term projects that bring greater rewards for shareholders and at lowerrisk. _____________________________ Warmest thanks to Lord Burns, who leaves the Board on 30th September 2005. Hehas been a highly valued non-executive director since 2000, and chairman of ourAudit Committee. We wish him every success in his new appointment at Marks &Spencer plc. We are most grateful to Atisreal whose 20 years' exemplary professional serviceas valuers to the Group has now concluded. Shareholders have been well served in the past year by our staff at Head Office,Meadowhall, Broadgate and elsewhere. My warm thanks go to our entire team,including management and my colleagues on the Board, for their sustained andcohesive efforts in all aspects of our business. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER It is my pleasure to write this having enjoyed an active first six months atBritish Land. The Company, its people and its assets are everything I wasexpecting and I am greatly optimistic for British Land's future. Strategy As this is my first letter it makes sense to update you on British Land'sstrategy, characteristics and the evolution we are now embarked upon. British Land has long been about growth, quality and security in its chosenmarkets - and brings to this focus an entrepreneurial spirit, a willingness tochange and to embrace opportunity. These tenets are grounded on a deepunderstanding of both property and financial risk. British Land fullyappreciates the value of firm foundations to the portfolio and the Company'srole as a safe investment vehicle for its shareholders, but one whichnevertheless delivers superior bottom line performance. The Company has a strongbias to high quality real estate for its core, a portfolio feature that canoften be undervalued in bull markets but is essential in less certain times. And I should add to these core themes, three business principles. At all times,cliche though it may be, the primary mission is to deliver superior shareholdervalue; we need to be unafraid of radical change but equally happy to sit on ourhands where that is the wisest course - without being misled by temporary marketfads. We must stay true to medium and longer term value trends; especially asmany real estate decisions are made with at least five to ten years' progressionin mind. Companies which do not maintain a clear focus on where and why they will be goodat what they are doing can come unstuck, which of course is a lesson wellrehearsed in other sectors. That is not the same as saying a company can only doone thing, or can never nurture new initiatives - far from it - but it doesencourage an important strategic discipline. Finally, I believe in staying at the forefront of investor friendly behaviour;in disclosure and transparency; in straight talking and in open listening.British Land has already distinguished itself in this respect and we plan totake a further step by introducing quarterly reporting at the end of 2005 alongwith the early introduction in this Annual Report of new and fuller "Operatingand Financial Review" reporting. Business Results Turning to our business results for 2004/5, British Land delivered a totalreturn of 22.4% (underlying) which even after charges for Broadgate refinancingand stamp duty increases was still 16.6%. These attractive returns maintain oursuccessful record relative to our major competitors. Portfolio activity was high, as the Company showed its distinctive ability toadd value through purchases, sales, partnerships and developments. These skillswill remain important to complement organic growth in our long-term cash flows. During the year we took full advantage of many opportunities to improve ourassets. The misfortunes of Allders became the route to installing Debenhams atthe Queensmere Shopping Centre, Slough, at the Peacocks Centre, Woking and atthe Eastgate Centre, Basildon. British Land also bought the Allders store atClapham and leased it to Debenhams. Additionally a range of other retail, officeand leisure assets have been acquired, strengthening the portfolio in sectorswhere the Company's managers have a proven record of adding value. Nearly all the portfolio enjoys high occupancy, is of prime quality, withexcellent covenants on long leases. In turn the bias to quality allows room forgreater adventurousness in trading or development as well as in financialleverage. British Land is intrinsically low risk, and its properties aretherefore able to support gearing through debt on fine terms. We thereby improveshareholder returns at modest total risk compared to the less visible but veryreal challenges that too much secondary property can bring. The Future Our portfolio is well positioned for the next few years - though we willcontinue to actively reshape it. 55% is in top quality retail property,dominated by out-of-town assets benefiting from long-term fundamental growthtrends that will endure a more challenging retail climate. This is complementedby our prominent and prime exposure to the London office cycle with bothinvestments and future developments and is well protected against the downsideof short leases or of secondary buildings or of unpromising locations.On management matters, we are focused on adding to our capacity for pro-activeasset management and strong customer orientation. We also have introduced aregular, disciplined and dispassionate assessment of our assets. Each asset inthe portfolio has to be established as having good prospects for the future orwe will lessen our capital exposure to it over time. As to the prospects for our industry, it is encouraging that rents appear to beaffordable in most sectors of the economy. The yield shift that has occurred issupported by the fundamentals, particularly in comparison to alternative assetclasses and we see some more to come. Investors know that the risks and returnsof property offer a favourable mix. So investor demand for property has beenexceeding supply as a process of reweighting takes place, and the prospectiveestablishment of REITs seems likely to support this trend. However, it isimportant to note that we will continue to manage our business on the bedrock ofour properties and their cash flows - not for the ebbs and flows of transactionpricing and activity. To achieve the changes we target, and to continue to make our shareholders'money, one resource remains particularly crucial - our people. The talents andexperience of British Land's management are well recognised and it is our primeresponsibility to retain, develop and renew our team. This we are doing. I wouldlike to thank my new colleagues at British Land for all their efforts in 2004/5and their results in which we can have some pride. But I should also thank themespecially for a warm welcome and a fine inheritance! FINANCIAL HIGHLIGHTS---------------------- --------------- -----------Profit and Loss Account Year ended Year ended 31 March 2005 31 March 2004 ---------------------- --------------- ----------- Net rental income £571.8m £523.0mNet rental income (Group) £504.3m £450.3m Net interest payable £352.0m £336.2mProfit on property trading and £27.0m £36.6mdisposal of fixed assetsUnderlying profit before taxation1 £174.8m £149.4mExceptional item2 £(180.0)mPre-exceptional profit before taxation2 £201.8m £186.0mProfit before taxation £21.8m £186.0m Pre-exceptional tax charge £17.1m £14.5mTax (credit)/charge £(36.9)m £14.5m Earnings per share:Underlying adjusted diluted1,4,5 34.3 pence 31.2 pencePre-exceptional adjusted diluted2,4,5 38.9 pence 36.3 penceDiluted5 11.3 pence 34.5 pence Dividend per share 15.7 pence 14.5 pence ---------------------- --------------- ----------- Balance Sheet 31 March 2005 31 March 2004------------------------ ------------- ----------- Total properties3 £12,506.9m £10,639.4m Adjusted net assets4 £5,793.2m £4,877.3mNet assets £5,579.3m £4,669.4mAdjusted diluted net assets4,5 £5,823.6m £5,035.4mDiluted net assets5 £5,693.4m £4,922.5mAdjusted diluted net asset value per share4,5 1111 pence 966 penceDiluted net asset value per share5 1087 pence 944 pence Group:Net debt £6,040.6m £4,866.8mLoan to value (debt / property & investments) 50% 48% ------------------------ ------------- ----------- Total Return (adjusted diluted net asset value per share growth plus dividend)for theyear 22.4% before the exceptional item and the removal of stamp duty exemptionfor disadvantaged areas, 16.6% including the exceptional item and full stampduty. All figures in this preliminary announcement include British Land's share ofjoint ventures unless stated otherwise. 1 excludes profits on asset disposals and exceptional item (Note 2 forunderlying profit before tax)2 exceptional charge of £180 million relating to the refinance of Broadgate(Note 5)3 pre adjustments for lease incentive and minimum guaranteed rent review debtors(Note 9) and does not include theinvestment in Canary Wharf through Songbird Estates plc4 adjusted to exclude the capital allowance effects of FRS 19 and, incalculating NAV, to include the externalvaluation surplus on development and trading properties (Note 19 for net assets)5 diluted for all potential share issues (including, at March 2004, for thepotential conversion of the Convertible Bonds,which were converted in July 2004) (Notes 8, 19) PORTFOLIO HIGHLIGHTS----------------- -------- -------- -------- -----------Valuation by Use Total Portfolio Uplift2 % Uplift2 £m % % pre-stamp3 ----------------- -------- -------- -------- ----------- Retail Shopping centres 2,431.0 19.4 4.8 7.7 Superstores 1,548.8 12.4 4.2 5.4 Retail warehouses 1,678.0 13.4 13.7 16.1 High street 1,196.7 9.6 9.1 10.8 Development 24.4 0.2 2.2 6.6 ----------------- -------- -------- -------- ----------- All retail 6,878.9 55.0 7.4 9.6 OfficesCity 3,671.1 29.4 6.3 6.3West End 652.1 5.2 4.5 7.8Business parks & Provincial 248.8 2.0 3.1 3.3Development 277.3 2.2 0.9 1.4 ----------------- -------- -------- -------- -----------All offices 4,849.3 38.8 5.6 6.1 Industrial and distribution 205.5 1.6 6.4 7.7 Residential 292.1 2.3 -0.2 -0.2 Leisure 262.8 2.1 10.2 10.8 Other development 18.3 0.2 2.2 2.2 ----------------- -------- -------- -------- ----------- Total 12,506.91 100 6.5 8.0 ----------------- -------- -------- -------- ----------- 1 British Land's share of joint venture properties is £1,353 million2 including valuation movement in developments, purchases and capitalexpenditure, and excluding sales3 excluding the effect of removal of stamp duty exemption for disadvantagedareas Current Reversions(excluding developments)---------------- --------- ---------- ------- ---------- Annualised Net Reversionary Current Reversionary Rents £m Income* yield yield (5 years) £m % (5 years) %---------------- --------- ---------- ------- ---------- Retail Shoppingcentres 128.9 14.6 5.3 5.9 Superstores 85.0 2.1 5.5 5.6 Retailwarehouses 77.5 15.5 4.6 5.5 High street 62.9 7.8 5.3 5.9 ---------------- --------- ---------- ------- ---------- All retail 354.3 40.0 5.2 5.8 OfficesCity 178.2 55.9 4.9 6.4West End 34.0 3.3 5.2 5.7Business parks& Provincial 18.8 -0.2 7.6 7.5---------------- --------- ---------- ------- ----------All offices 231.0 59.0 5.1 6.3 Industrial anddistribution 10.5 2.5 5.1 6.3 Residential 14.6 0.1 5.0 5.0 Leisure 15.2 1.9 5.8 6.5 ---------------- --------- ---------- ------- ---------- Total 625.6 103.5+ 5.1 6.0---------------- --------- ---------- ------- ---------- * includes rent reviews, expiry of rent free periods, lease break/expiry andletting of vacant space at current estimatedrental value (as determined by external valuers)+ £66.9 million contracted under expiry of rent free periods and minimum rentalincreases Long Lease Profile Weighted average lease term, years Vacancy rate(excluding residential* & developments) to expiry to first %break --------------------------------------------- Retail Shopping centres 15.3 14.8 3.2 Superstores 21.8 21.8 0 Retail warehouses 16.2 16.0 1.5 High street 27.2 25.6 0.6 ----------------- ----------- ---------- ----------- All retail 19.0 18.5 1.8 OfficesCity 14.0 11.9 6.8West End 12.1 9.8 1.0Business parks & Provincial 12.2 8.4 2.9 ----------------- ----------- ---------- -----------All offices 13.6 11.4 5.7 Industrial and distribution 14.7 12.9 19.1 Leisure 34.0 33.7 1.0 ----------------- ----------- ---------- ----------- Total 17.1 15.9 3.5 ----------------- ----------- ---------- ----------- includes 100% joint ventures* predominantly let on short leases Security of Income % of income remaining at:(from 31 March 2005) expiry first break----------------------- ---------------- -------- 5 years 93.1 87.0 10 years 79.2 69.8 15 years 55.5 49.6----------------------- ------- ----------- -------- includes 100% joint venturesassumes no re-letting after first break or expiry Tenant Risk Profile: 88% of current rental income is rated negligible, low andlow/medium risk, by IPD using Experian Stress Score Development Programme ------------------- -------- ------- --------- -------- Net Area Rent Construction Cost to cost Complete sq m (est) pa ------------------- -------- ------- --------- -------- -------- Completed Total 104,290 £42.5m £309.7m British Land Share £41.5m £305.2m --------- ------------ -------- ------- --------- -------- Committed Total 159,430 £33.9m £292.9m £232.6m British Land Share £31.3m £274.1m £217.5m --------- ------------ -------- ------- --------- --------Developmentprospects Total 485,760 £152.6m £1,357.3m £1,330.4m British Land Share £151.1m £1,348.1m £1,321.3m --------- ------------ -------- ------- --------- -------- OPERATING AND FINANCIAL REVIEW Highlights of the Year to 31 March 2005Net Asset Value per share1 increased by 15.0% to 1111 pence, up 20.8%underlying3,4Underlying Profit before tax up 17.0% to £174.8 million2,3Underlying Earnings per share1 up 9.9% to 34.3 pence2,3 Introduction British Land has delivered to shareholders exceptional growth and value creationover the year reviewed herein. This stems from the combination of an outstandingportfolio of prime assets and the successful application of intense managementactivity in leasing, development, asset management and financing. At the same time, British Land is positioning itself clearly and actively forfuture success. Our new Chief Executive has led a review of strategy, output ofwhich is being implemented. The portfolio mix is moving to underpin futuregrowth and a significant refinancing has reduced costs and increased flexibilitymoving forward. The investment property market has remained strong with growth based on robustfundamentals relative to other asset classes. This looks set to continue, albeitperhaps at a slower pace overall. 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 distinctive ability to add value through purchases, disposals and partnerships • 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. How British Land will Evolve We plan to develop further: • the intensity of our asset management activities, withincreasing focus on our customers• the disciplined process of regular review of our assets'prospective performance, as individual properties and the portfolio composition,making changes as appropriate• our human capital, managing change and renewal, whilemaintaining focus on performance for shareholders• the company's positioning at the forefront of investorfriendly behaviour and so to build on our strong record of value creation for shareholders. 1 adjusted, diluted (Notes 8, 19)2 excludes profits on asset disposals (Note 2 for underlying profit before tax) 3 before exceptional charge of £180m relating to refinance of Broadgate (net oftax where relevant) (Note 5)4 without the removal of stamp duty exemption for disadvantaged areas Activity During the Year 2004/5 has been a year of intense and fruitful activity. Acquisitions and Disposals We have made a significant net investment this year reflecting our portfoliomanagement priorities as well as confidence in market fundamentals. Severalattractive opportunities became available to us, assisted by our strong marketand tenant relationships, and where our financial capacity and ability toexecute complex property transactions played a major part. Despite the shortperiod of ownership, these purchases have already produced an aggregate 7%increase in value over purchase price. A key feature of these acquisitions was the negotiation of minimum rentincreases for at least 20 years on £732 million of purchases. As a result,across the entire portfolio, minimum guaranteed income uplifts now apply at thenext rent review to property of some £1.6 billion, 13% of the total portfolio,underpinning rental growth and providing certainty of rising income. Thisincludes over £950 million of retail and leisure property, where such upliftsmay be of increasing importance should consumer sales result in slower rentalgrowth in these sectors. Purchases £1,361m - already making money Price £m Uplift in Value %-------------------------- ---------- -----------Group24 Debenhams stores 516 5.7Queensmere & Observatory Shopping Centres 192 1.665 freehold pubs 174 7.36 Homebase stores and Crawley, Sainsburys 102 3.6Investment in Canary Wharf 97 44.2471 residential units 71 2.3Other 17 11.0-------------------------- ---------- ----------- 1,169 8.2 -------------------------- ---------- -----------Joint Ventures4 retail parks and 1 industrial estate 122 2.97 interests at East Kilbride and Aberdeen 70 (1.2)-------------------------- ---------- ----------- 192 1.4 -------------------------- ---------- ----------- Total 1,3611 7.22 -------------------------- ---------- -----------1 Group and 100% of JVs (including our 50% share of JVs, £1,234 millionpurchases completed in the year)2 valuation uplift on purchase price The 24 Debenhams department stores were bought for £516 million and leased for aminimum of 30 years at an initial yield of 5.6%. The leases have been structuredwith rent increasing by a minimum of 2.5% per annum, with a review in March 2019and five yearly thereafter to market rent if higher. There are opportunities,with tenant agreement, to remodel stores and enhance value. Queensmere and Observatory Shopping Centres in Slough were bought for £192million. The initial yield is 6.0%. The zone A equivalent rents are relativelylow and we believe there is considerable scope for improving these assets; amasterplanning exercise is in hand. The 65 pubs were purchased from the Spirit Group for £174 million, an initialyield of 6.1%. The leases to Spirit are for 30 years with minimum annual rentaluplifts of 2.5% per annum for 20 years, and with a landlord's option to revertto open market rents from year 15. The six Homebase stores and an adjacent Sainsbury's store in Crawley were boughtfor £102 million at an overall initial yield of 4.75% with reversions to come.All these out of town Homebase stores share sites with a Sainsbury's food storeand five have open A1 planning status. The Scottish Retail Property Limited Partnership (a joint venture with LandSecurities) acquired further adjoining malls at the East Kilbride ShoppingCentre; these strategic purchases consolidated into the Partnership theownership of the entire town centre scheme and enable all the interconnectingmalls to be managed by the Partnership as an integrated shopping destination.The Partnership also purchased additional ancillary interests at the Bon Accordand St Nicholas Centres, Aberdeen. £97.1 million was invested in Songbird Estates plc, representing a 15.8%interest in the consortium which now owns 61.85% of Canary Wharf Group PLC. Atthe published 31 December 2004 values (adjusted for the change in stamp dutyrelief in March 2005) British Land's interest is supported by £486 million ofunderlying investment and development properties in Canary Wharf, financedthrough this leveraged vehicle. After 31 March 2005, we acquired our joint venture partners' 50% share in the BLWest companies, for £50 million plus repayment of the related £108 million bankloan. We now own the office properties at 1 and 10 Fleet Place, EC4. Sales £344m - 8% above valuation Price £m Gain £m-------------------------- ----------- -----------GroupSwiss Centre, Leicester Square 47 123 Somerfield supermarkets 13 133 residential units 8 -7 properties (retail, offices and industrial) 18 1-------------------------- ----------- ----------- 86 14 -------------------------- ----------- -----------Joint Ventures100 New Bridge Street and Watling House 151 -6 office properties 59 917 pubs 22 113 properties (residential, industrial) 26 2-------------------------- ----------- ----------- 258 12 -------------------------- ----------- ----------- Total 3441 261,2 -------------------------- ----------- -----------1 Group and 100% of JVs (including our 50% share of JVs, £215 million salescompleted in the year)2 gross gain over latest year end valuation The BL West joint venture sold the City office properties at 100 New BridgeStreet and Watling House, Cannon Street, EC2, for £151 million; the offer wasknown at the time of the valuation and reflected in it. The largest gain was on the Swiss Centre, Leicester Square, W1. We had relocatedthe Swiss Tourism office and put other tenants on break clauses, so creating apremium price for its development potential. Adding Value to our Assets We add value by a range of asset management and development initiatives,building on our quality assets and customer focus. The product of theseendeavours typically is increased rents and new lettings.----------------------- -------- -------- -----------New Lettings - value creation Number Sq ft Rent* Increase in rent+ 000 £m £m ----------------------- -------- -------- ----------- -----------Retail warehouses 25 330 6.1 3.4Shopping centres 138 226 9.9 4.5High street 26 71 3.4 2.3City offices 17 755 34.4 32.9West End offices 19 113 4.0 3.4Other 129 1,532 10.1 7.8------------ -------------- -------- -------- ----------- Total 354 3,027 67.9 54.3 ------------ -------------- -------- -------- -----------including 100% of joint ventures* total annual rent including rent free periods+ above previous passing rent In the year under review, including joint ventures: • 354 new lettings and lease renewals, covering 278,700 sq m(3 million sq ft) of property brought new rent of £67.9 million per annum, afterexpiry of rent free periods. These include letting all the available offices andmost of the retail at Plantation Place, EC3 and concluding agreement with Willisto develop their new City headquarters; • 226 rent reviews were settled which have increased rent byover £12.7 million per annum, 7% above our external valuers' estimates at thevaluation date preceding the rent review, and representing 4.6% per annum yearon year growth over the five year review pattern; • redevelopment of the ILAC Shopping Centre, Dublin, ownedjointly with Irish Life Assurance, has commenced. This major upgrade willinvolve relocating certain tenants, remodelling units and extensive works tocreate new facilities and amenities for tenants and shoppers in what has becomeDublin's premier retail destination. A return of 80% is projected on the cost of€60 million; • three extensions were completed at stores occupied byTesco providing 1,630 sq m (17,500 sq ft) at a cost of £4.1 million. Initialadditional rent is £300,000 per annum; • the surrender and re-letting to Next of a unit in BeaumontLeys shopping centre, Leicester has been agreed. In addition to improving thetenant mix, the new rent of £22 per sq ft will significantly increase the rentalvalues for the adjacent units, from the previous low level of £12-14 per sq ft.This is estimated to generate an increase in value after costs of some£2 million; • we were in active dialogue with Allders and Courts andfollowing their recent failures, we took the opportunity to negotiate the takeback, remodelling, reletting and/or assignment of the eight stores in ourportfolio, thereby improving tenant mix and increasing rents overall by anestimated £1.6 million per annum; all examples of the many asset management projects each year which add value butare not widely reported. Development Programme The Group's development programme is based on opportunities created from orotherwise complementing the existing portfolio. Development returns can involvesubstantial, unmanageable market risk and our approach often favours building tocustomer specifications, by agreeing pre-lets. We commit to projects incontrolled stages on the basis of the pre-lets or anticipated demand, addingvalue and quality assets to the portfolio and minimising income deficits,finance and other carrying costs. Projects of 104,300 sq m (1.1 million sq ft) have completed on time and withinbudget. In a testing market we have achieved considerable letting success atthese high quality office developments. At Plantation Place, EC3, the officeswere fully let by November 2004 and the retail space is also now substantiallylet. Plantation Place South, EC3 is now being marketed. We have committed to a further 159,400 sq m (1.7 million sq ft) of new projects,75% of which are already pre-let. Developments - 73% let---------------------- -------- ------ ------- --------- --------- Sector PC1 Sq ft % Let Income 000 by rent Contracted -------------- ---------- -------- ------ ------- ---------Completed projects £mPlantation Place City office Q2 2004 542 99 26.6Plantation Place South City office Q3 2004 161 1 0.110 Exchange Square City office Q2 2004 164 46 3.2Thatcham Distribution Q3 2004 256-------------- ---------- -------- ------ ------- --------- 1,123 72 29.9 -------------- ---------- -------- ------ ------- ---------Committed projects51 Lime Street City office Q4 2006/ 475 99 21.0 Q1 2007The York Building, W1 W/E office Q4 2006 138Daventry (Plot E4 & Distribution Q2/4 2005 1,050 100 2.5C1)Blythe Valley (Plot Business Q4 2005 53A1) Park -------- ------ ------- ----------------------- ---------- 1,716 75 23.5 -------------- ---------- -------- ------ ------- --------- Total 2,839 73 53.4 -------------- ---------- -------- ------ ------- ---------1 practical completion of construction, achieved or anticipatedBased on Group and 50% share of JVs (except areas which are at 100%) At 51 Lime Street, Willis Group have contracted to take all the offices under a25 year lease without breaks, take backs or put backs. In March 2005, weobtained a revised planning consent and have now started on site with a targetto enable Willis to occupy in 2007. The recent major pre-let of a 69,690 sq m (750,000 sq ft) distribution warehouseat the Daventry International Rail Freight Terminal on a 15 year lease to Tescois in addition to the letting to Exel/Mothercare of 27,870 sq m (300,000 sq ft),and reinforces Daventry's position as a leading distribution location. Bothdevelopments have been contracted for forward sale on completion, at asignificant surplus above cost. Development prospects, as shown below, are those sites and properties where wehave identified opportunities and are progressing with design, planningapplications and site preparation for development projects. For example, at TheLeadenhall Building a detailed planning consent has been obtained for a new 47storey tower to provide 55,800 sq m (601,000 sq ft) of office accommodation;that is three times the floor space of the existing building.--------------------------------------------Development prospectsProject Sector Sq ft 000 Cost £m1 Planning------------ ----------- -------- -------- -------------201 Bishopsgate City office 836 279 Revised submittedThe Leadenhall City office 601 270 DetailedBuildingRegent's Place West End 1,036 370 Osnaburgh submitted office/ NEQ pending ResidentialLudgate West West End office 123 47 DetailedBlythe Valley Park Business Park 751 115 Outline/DetailedNew Century Park Business Park 657 88 Outline /DistributionMeadowhall Casino Leisure 409 124 PendingTheale Residential 254 46 SubmittedDaventry (BLR) Distribution 335 5 OutlineRedditch (BLG) Distribution 227 4 Detailed------------ ----------- -------- -------- ------------- Total 5,229 1,348 ------------ ----------- -------- -------- -------------1 estimated costs of construction excluding land and interest costsBased on Group and 50% share of JVs (except areas which are at 100%) We have planning permission for 58% of the development prospects for commercialproperties which, if they were built at a total cost to the Group of £529million and fully let, would add further rental income of some £60 million perannum at current market rental values. This does not include 201 Bishopsgatewhere we have an existing permission but are in the process of seeking a revisedplanning consent for 77,630 sq m (835,600 sq ft). At current market rents, if all these development prospects were completed andlet, they would add a further £151 million per annum to rental income. Further details of our development projects are shown later in this report. Financial Results, year to 31 March 2005 Our asset management, development and investment activity has contributed to astrong financial performance: March 2005 March 2004 % Increase -------------------- ----------- ---------- ---------Revenue:Gross rental income £619.9m £565.6m 9.6%Net rental income £571.8m £523.0m 9.3%Underlying profit before tax1 £174.8m £149.4m 17.0%Underlying earnings per share1,2 34.3p 31.2p 9.9%Dividends per share 15.7p 14.5p 8.3%Capital Growth and Total Return:NAV per share2 1111p 966p 15.0%Total return3 per share 161p 122pTotal return3 16.6% 14.1%Pre-exceptional total return3,4 22.4% 14.1%-------------------- ----------- ---------- ---------1 excludes £180m exceptional charge relating to the refinance of Broadgate andprofits on asset disposals(Notes 2, 5)2 adjusted, diluted (Notes 8, 19)3 growth in adjusted, diluted net asset value per share plus dividends per share4 excludes exceptional charge (Note 5) and the removal of stamp duty exemptionfor disadvantaged areas (£166m) Our financial results are discussed below on the basis which includes our 50%share of joint ventures. Note 2 to the accounts shows pro-forma information inmore detail. Revenue returns: Gross rental income for the year increased by 9.6% to £619.9 million. Net rentalincome, rose 9.3% to £571.8 million. The gross rents for the year were increasedby £43 million due to the purchases and reduced by £10 million due to sales inthe year. New lettings added £23 million. Interest costs rose £15.8 million to £352 million (2004: £336.2 million)reflecting the cost of the acquisitions, the full year effect of acquiring ourpartners' share of BL Universal in November 2003, and the conversion into equityof the 6% £150 million Convertible Bond in July 2004. Net rents covered interest1.6 times (2004: 1.5 times). Our administrative expenses, which fell last year, have risen this year by £7.6million to £51.2 million, due to increased staff and other costs following majoracquisitions and key personnel recruitment. Our administration costs remain lowat only 0.4% of the value of the portfolio, a competitive advantage we intend tomaintain. These costs include all management and staff incentives charged atfull fair value. Broadgate was refinanced by a new £2.08 billion securitisation (details of whichare set out later in this review) resulting in an exceptional accounting chargeagainst pre-tax profits in the second half of the year of £180 million, mainlydue to the difference between the redemption value and book value of theexisting Broadgate debt. The effect on net asset value is a reduction of 24pence per share after tax. The impact on British Land's NNNAV ("triple net"asset value), broadly the NAV if debt was valued at market rates and withdeferred tax provided on unrealised capital gains, is a reduction of less than 3pence per share. Underlying profits before tax (excluding the exceptional charge and profits onasset disposals) were up by 17.0% to £174.8 million. Significant contributionsto this increase were the additional rental income from new lettings and theinterest saving following the redemption of the Convertible Bonds. Profits on asset disposals amounted to £27.0 million, representing salesproceeds less sales costs and the relevant properties' valuation at March 2004.After the exceptional charge of £180 million, profits before tax were£21.8 million. The pre exceptional tax rate this year is 8.5% (2004: 7.8%). This low ratearises principally through resolution of prior year items. The exceptionalcharge arising on the Broadgate refinancing has been used to relieve profits inthe current year. The balance is being carried forward for use in 2006 and lateryears. Earnings per share were also affected by the exceptional charge and are morecomparable on an underlying, pre-exceptional basis: Diluted earnings per share: March 2005 March 2004Underlying1 34.3 pence 31.2 pence +9.9%Reported 11.3 pence 34.5 pence -67.2%1 adjusted and excludes exceptional item and profits on asset disposals (Note 8) Growth in the dividend is maintained again this year; a final dividend of 10.9pence is proposed, making a total dividend for the year of 15.7 pence per share,up 8.3% on the year, covered 2.2x by the profits for the year after tax andbefore the exceptional item. This continues our policy of progressive dividendgrowth, delivered consistently for over 20 years. Capital Growth and Total Return: The effects of portfolio value growth and retained profits significantlyincreased net assets this year: Adjusted diluted: March 2005 March 2004Net assets1 £5,823.6m £5,035.4m +15.7%Net assets per share1 1111 pence 966 pence +15.0%1 Note 19 The underlying increase in the portfolio valuation was 8% before there-imposition of stamp duty in disadvantaged areas, which reduced values by £166million, or 32 pence per share, such that the valuation increase became 6.5%. As we restrict the amount of equity financing the business, the capital growthattributable to shareholders is more than double the growth in the portfoliovaluation. Total returns to shareholders, the increase in net assets plus the dividend,grew significantly this year, both pre and post the exceptional charge and theimpact of the re-imposition of stamp duty on disadvantaged areas: Adjusted diluted: March 2005 March 2004Total return +16.6% +14.1%Pre-exceptional and stamp duty +22.4% +14.1% The performance in the year builds on our strong record of value creation, withtotal returns of 14.7% per annum and 12.6% per annum over the last three andfive years, outperforming the average of our major peers by 48% and 31% overthose periods. We have also generated shareholder returns above the average ofour major peers and above the FTSE Real Estate Index over the three and fiveyears. Cash Flows Net cash flow from operating activities has grown strongly reflecting growingrents and the effects of consolidating the former BL Universal JV for a fullyear. A reduced level of cash dividend received from JVs against theparticularly high 2004 receipts and an extra interest payment due to the timingof the Broadgate refinancing have led to the £34 million reduction in preinvestment and financing cash flows. Notwithstanding this reduction cashdividends paid during the year have been covered over 1.6 times. The increasedinvestment and development cash flows in the year represent the Group'ssignificant net investment in assets, these investments being principallyfinanced by increased borrowings. March 2005 March 2004 £m £mNet cash flow from operating activities 462.2 381.4Net cash flow after JV dividends, interest, tax andworking capital movements 125.2 163.1Net investment cash flows (526.5) (185.6)Financing 440.0 136.5Dividends (76.6) (67.0) Strong Contracted Income Growth Our cash flow is generated from the rental income profile of our portfolio.Annualised net rents, including our share of joint ventures, were £625.6 millionat the year end. This income is generated from long leases to strong tenants,with a weighted average unexpired lease term of 15.9 years. The resulting cashflow is robust and long term: 69.8% (2004: 72.1%) of the current rent rollremains in place in ten years time, March 2015. Income quality has been measured by IPD using the Experian Stress Score andshows 88% of our current rental income is receivable from tenants ratednegligible, low and low/medium risk. Strong growth in rental income is expected within the next five years from theexisting portfolio and from the committed development programme. At currentmarket rental values, without projecting any growth or inflation, this would adda further £134.8 million per annum. Some £90.4 million of this cash flow growthis already contracted as at March 2005, being £66.9 million from expiry of rentfree periods and minimum rental uplifts, plus £23.5 million from pre-letagreements on developments. There is also further potential for income growthfrom the development prospects. Rental growth - £90.4m contracted Total of which contracted £m £m Annualised net rents, 31 March 2005 625.6 625.6Reversion*, 5 years 103.5 66.9Committed developments+ 31.3 23.5Development prospects+ 151.1 Total 911.5 716.0 * 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. Portfolio Valuation, up 6.5% in the year (8% underlying) Our portfolio focus is: Retail 55% - with the emphasis on out of town, representing 68% of total retailOffices 39% - 94% in Central London The British Land property portfolio has increased in value by £1.87 billion overthe year to March 2005 to £12.5 billion, £770 million from growth of 6.5% andthe balance £1.1 billion from net additions to the portfolio. The removal by the Chancellor of stamp duty relief applicable to properties indisadvantaged areas reduced the valuation of the British Land portfolio by £166million, or 1.5%, at a stroke. If that additional potential cost of transactionshad not been imposed, the underlying growth in the portfolio would have been 8%. All commercial sectors improved in value this year. The tables below set outdetails of the valuation.----------------- -------- -------- -------- -----------Valuation by Use Total Portfolio Uplift2 Uplift2 £m % % pre-stamp3 ----------------- -------- -------- -------- ----------- Retail Shopping centres 2,431.0 19.4 4.8 7.7 Superstores 1,548.8 12.4 4.2 5.4 Retail warehouses 1,678.0 13.4 13.7 16.1 High street 1,196.7 9.6 9.1 10.8 Development 24.4 0.2 2.2 6.6Related Shares:
British Land