24th Nov 2005 07:02
British Land Co PLC24 November 2005 24 November 2005 PRELIMINARY ANNOUNCEMENT THE BRITISH LAND COMPANY PLC INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2005 Financial Highlights: • Net asset value* per share up 11.3% to 1256 pence • Properties owned and managed up 32% to £18.3 billion • Net rental income+ up 30% to £351 million • Underlying profit before tax up 42% to £102 million before gains on asset disposals and revaluation Headline profits before tax+ up 66% to £777 million including, as required by IFRS, gains on asset disposals and revaluation. Profits on ordinary activities before tax £761 million, up 70.6% • Underlying earnings per share* up 32% to 15.4 pence (up 48% on restated# basis); unadjusted diluted earnings per share 118.3 pence, up 65% • Interim dividend up 8.3% to 5.2 pence per share Business Highlights: • Delivering on our promises to renew and work the business hard • Pillar acquisition integrated. Combination going well • £800 million value enhancing disposals, March to date • Now starting 822,000 sq ft 201 Bishopsgate development • Like for like rental growth of 2.7% underlines value of British Land's prime space, when yield shift subsides • Management and culture renewal also going well John Ritblat, Chairman, commented: "Discriminating investors now see the case for a more appropriate propertyweighting as it again becomes established as an asset class of choice.Property's yield and its growing income stream, coupled with the backing of realassets, are substantive merits." Stephen Hester, Chief Executive, commented: "We are pleased to be reporting an excellent set of half-year results at BritishLand. The Company's fine inheritance and track record is blending with anextensive programme of change and we are in confident mood overall." * adjusted, diluted - Notes 8, 19+ includes share of Funds and Joint Ventures - Table A# Note 8 STATEMENT BY THE CHAIRMAN, JOHN RITBLAT British Land now has over £18 billion of assets owned and under management, andan annualised gross income of some £700 million. In the half-year just ended wehave been comprehensively engaged in all the principal activities of a propertycompany - buying, building, leasing and selling - with a multitude ofasset-enhancing initiatives and financing as well. Our excellent half-year results are set out in this Report. I am very pleasedthat they more than justify continuation of our longstanding growth in dividendsat market leading rates - and with plenty of room to spare! The interim dividendis increasing by 8.3% to 5.2p per share. Growth British Land's focus has always been on generating growth with security. Our sixmonths total return of 12.3%, coming after the pre-exceptional 22.1% totalreturn for the year to 31 March 2005, reflects the effective operation of theCompany's long-term base model, which unites property of quality with managedgearing. We continually refine our portfolio, as a vibrant business should, andwe now manage over 36 million sq ft of space. We welcome our new Pillar colleagues and the new Fund Management activity theyhave brought to augment our own asset team, together with substantial holdingsin retail warehouses. We have long been accustomed to managing joint ventures inpartnership with, for example, Tesco and House of Fraser. Pillar's business is alogical extension of our existing activity in looking after property for otherswhile retaining up to a 50% stake ourselves, so that our interests are alignedwith our partners and we share in the growth we achieve. Development Our development programme extends to over 6 million sq ft and is focused onLondon. Both 51 Lime Street, EC3, the new headquarters building for WillisGroup, and the York Building, W1, which will be available for letting, arealready well advanced in construction. Going forward, our programme includes201 Bishopsgate, EC2; 122 Leadenhall Street, EC3; and Ludgate West, EC4. In theWest End of London we aim to add over 1 million sq ft to the major redevelopmentof the 14 acre Regent's Place Estate. Looking Forward Our market has remained attractive, with a sustained yield correction andimproving rents. We are not in a boom, but discriminating investors now see thecase for a more appropriate property weighting as it again becomes establishedas an asset class of choice. The recent 50 year Indexed Gilt tranche yieldingonly 1.1%, surely implies that the property market has some way still to go.Property's yield and its growing income stream, coupled with the backing of realassets, are substantive merits. Moreover, those investors confused - one mightsay thwarted - by the impenetrable oddities of the new International FinancialReporting Standards - the majority of us I suspect - can derive some solace fromthe presence on the balance sheet of bricks and mortar, or nowadays, glass andsteel. In one sense perhaps we should be grateful to this Standard, because itsconvolutions by contrast serve to emphasise that property is a lot easier tograpple with. The hoped-for introduction of Real Estate Investment Trusts(REITs) will add still further to property's attraction for investors, whoalready appreciate through ownership of their own homes that property enjoyseffective hedging qualities. Not surprisingly we are less than enthusiastic about any charge on development -a Planning Gain Supplement. Entrepreneurial ventures need encouragement inBritain not new taxes - we have plenty of them already! Development is currentlybeing strangled by waves of bureaucracy, which in British Land's case, asreported in our March 2005 Report and Accounts, can waste £5 million inadditional costs for a single building in the City of London. The Government iscurrently looking at ways to reduce over-regulation, and here is an easy route.The additional administration of this further tax imposition should be cut outbefore it begins. Board Changes We are sorry to say farewell to Lord Burns on his appointment as Chairman Electof Marks & Spencer plc, and our Deputy Chairman, Sir Derek Higgs, who has becomeChairman of Alliance & Leicester plc and will be departing from us in duecourse. They are both highly effective non-executive directors and theirperceptive and informed contributions will be missed. Greatly to our regret, Nicholas Ritblat decided that he wished to stand down asan executive director. We will miss him. The Board is grateful to him for themany financial innovations he has introduced during the 18 years he has servedthe Company. We wish him well. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER We are pleased to be reporting an excellent set of half-year results at BritishLand. Just as positive, however, are the strides we are making to deliver on ourpromises of business renewal, so building strong foundations for futureoutperformance. Just over a year since joining British Land, I am happy to report that themanagement transition has been smooth. Our course for the future has beenclearly set out and is summarised again in this statement. The Company's fineinheritance and track record is blending with an extensive programme of changeand we are in confident mood overall. The Results British Land's headline pre-tax profit on the new IFRS basis was up 66% to £777million for the 6 months to 30 September. More illuminating is the 42% rise inUnderlying Profits to £102 million and the 11.3% increase in adjusted Net AssetValue per share to 1256p. The results benefited from continued strength (via yield shift) of theunderlying property market. They also show the positive effects of managementdecisions and actions. These include portfolio selection and proactive assetmanagement which have delivered better rental income growth than the marketoverall (2.7% like for like). The immediate fruits of capital recycling are alsovisible with gains or valuation increases on practically all our recentacquisitions and disposals. Our development pipeline is coming into its own anddelivering good growth with landmark projects like our 201 Bishopsgate buildingsoffering prospects for more. And our strategic decision to run with temporarilyhigher gearing, in the face of a buoyant investment market and a range ofdisposal opportunities, is also paying off. Market Conditions As we have been predicting, property investment market conditions remain strong.Continued yield shift has been supported by real estate's attractive riskadjusted returns in comparison to those of equities and bonds. We see some moreyield shift to come, albeit less than has already occurred. The underlying occupancy market, which drives rental levels and thereforefundamental returns, remains well supported overall but restrained by modesteconomic growth and businesses' low pricing power in the economy. As alwayssectoral conditions vary with London office markets in particular showing goodrecovery prospects. In the demanding economy which we will face during coming years, the ability tooutperform through stock selection and asset management is clearer than ineasier times when 'all boats rise with the tide'. We are confident of theprospects for our key portfolio choices in Open A1 'Out-of-Town' Retail andprime London Office property. At the same time there are parts of the propertymarket where we see prices being pushed too high. In particular, yieldcompression has resulted in secondary property (whether by location, age, leaselength, covenant strength or income growth prospect) often being optimisticallyvalued versus prime. Delivering on Our Promises At the time of our 2004/5 Year End results presentation we set out BritishLand's focused strategy for the future. This builds on the bedrock of our Retailand Office sector expertise, our bias to prime property, long leases and ourfocus on secure, income led growth and disciplined risk management. We also laidout some important areas of change to enable British Land to outperform for ourshareholders in the years to come. I am pleased to report that substantialprogress has already been made in delivering on these promises. Intensified Portfolio Reshaping: We have stepped up the pace of change to betterposition our property portfolio for further risk-adjusted growth. In the last 12months this has involved £2.9 billion of attractive acquisitions and, sinceMarch to date, over £800 million of value enhancing disposals with furtherannouncements in the pipeline. In practically every case we report profits onboth purchases and sales. Proactive Asset Management: Achieving rental growth relies not just on goodasset selection but on how hard the assets are worked. We have created value,through a wide range of lease restructurings, lettings and tenancy moves.Pleasingly, during the period our rents have risen at a faster pace than themarket as a whole and faster than predicted by our valuers. This is the bottomline result of intense activity across the business. Management and Culture Renewal: Our people are the key building block to workingthe business harder and so outperforming for shareholders. Again we can reportgreat progress. The new management team is in place and functioning welltogether. We have doubled the professionals in our Asset Management & Investmentteam in the last year and substantially increased its representation atExecutive Committee level. Succession plans are formulated and happening whereneeded. And we are targeting a hard driving 'performance' culture using moreexplicit and demanding targets, greater individual responsibility and morevariable pay to match. Investor Friendly Positioning: British Land has now established itself as aleader in this regard - an important initiative to help improve translation ofthe economic value we create into value in the hands of our shareholders. A clear, focused strategy has been set out and is being implemented. Managementtransition has happened. Our new valuers, Knight Frank, have reaffirmed theCompany's strong asset values - the first time in many years a major company hasso demonstrated. Our first quarterly results and valuation (for the period to 31December 2005) will be released in February. And our business and financialdisclosure is further improved and at industry leading levels. Pillar One of the major events of this half-year was our agreed takeover of Pillarwhich completed in late July. I am pleased to report that this move has alreadyincreased shareholder value. We are confident it will continue to do so whilstalso supporting accelerated change at British Land. With Pillar we acquired £1.5 billion of top quality real estate including some£1.3 billion of the best retail warehouse parks in the market - deliveringsuperior value growth, even in tougher times for retailers, from an attractivecombination of location and hands-on asset management. We also attracted theiryoung and talented management team to add to our own, and a growing, distinctiveFund Management business. These offer the means to exploit our business furtherthrough new income streams, faster growth and give strategic options applicableto other British Land core assets. Since announcing the transaction in May we have closed the deal and completedits integration - a not insignificant human and logistical challenge. Futureprofits have been increased from fee renegotiation, a reduction in interestcosts (via a £1 billion securitisation) as well as other overhead costreductions. Pillar's European retail warehouse fund is being significantlyexpanded. And the UK flagship Unit Trust, Hercules, has not missed a beat with atotal trust return of 11% since March. So, lots going on then. And the pace of change will remain high as we deliver onour promises in pursuit of outperformance for shareholders. Let me close by paying tribute to the people who make this activity possible.Our staff are responding very well to the challenges. We have welcomed newcolleagues from Pillar and elsewhere who have already made a big difference.Both they and all our people have shown great willing and goodwill inintegration. We also said goodbye, with sadness and great gratitude to Nick Ritblat. I echothe Chairman's sentiments regarding his contribution to British Land. FINANCIAL HIGHLIGHTS Income Statement Six months to Six months to 30 September 2005 30 September 2004 (restated for IFRS)---------------------- -------------- ------------ Net rental income £351m £270mNet rental income (Group) £305m £237mNet financing costs £218m £178mUnderlying profit before £102m £72mtaxation1Profit on disposals of assets £37m £6mRevaluation gain £641m £390mProfits before taxation £777m £468mUnderlying tax rate 21.6% 25.0%Underlying diluted earnings per 15.4 pence 10.4 pence5share 1,4Diluted earnings per share 4 118.3 pence 71.7 pence Dividend per share 5.2 pence 4.8 pence---------------------- -------------- ------------ Balance Sheet 30 September 31 March 2005 2005 (restated for IFRS)---------------------- -------------- ------------ Total properties2 £14,651m £12,507m Net assets £5,299m £4,783mAdjusted diluted net assets3,4 £6,595m £5,913mAdjusted diluted net asset value 1256 pence 1128 penceper share3,4 Group:Net debt £6,870m £6,061mLoan to value6 51% 50% Including share of Funds and JointVentures:Net debt £8,104m £6,563mLoan to value6 54% 52% ---------------------- -------------- ------------ Total return (adjusted diluted net asset value per share growth plus finaldividend) for thehalf-year 12.3%. Data includes share of Funds and Joint Ventures (Tables A and B), unlessotherwise stated.'Group' excludes share of Funds and Joint Ventures. 1 excludes gains on disposals of assets and revaluation2 does not include the investment in Canary Wharf through Songbird Estates plc3 adjusted NAV includes the external valuation surplus on trading and financelease properties and excludes goodwill, the fair value adjustments for debt andrelated derivatives and the deferred taxation on revaluations and capitalallowances (Note 19)4 diluted for all potential share issues (Notes 8, 19, 21)5 restated from 11.7 pence (Note 8)6 borrowings to property and investments PORTFOLIO HIGHLIGHTS Valuation Group Funds/ Total Portfolio Uplift2by Sector £m JVs1 £m % % £m ---------------- -------- -------- ------- ------- ------- RetailShopping centres 2,001 480 2,481 16.9 4.2Superstores 1,378 202 1,580 10.8 5.4Retail warehouses 1,714 1,373 3,087 21.1 2.2Department Stores 680 135 815 5.6 8.1High street 384 32 416 2.8 7.1---------------- -------- -------- ------- ------- -------All retail 6,157 2,222 8,379 57.2 4.3 OfficesCity 3,908 214 4,122 28.1 6.0West End 653 39 692 4.7 6.0Business parks & 261 9 270 1.9 9.3ProvincialDevelopment 370 4 374 2.6 10.5---------------- -------- -------- ------- ------- -------All offices 5,192 266 5,458 37.3 6.1 Industrial and 169 73 242 1.6 1.4distributionResidential 302 1 303 2.1 1.3Leisure 257 12 269 1.8 2.5---------------- -------- -------- ------- ------- -------Total 12,077 2,574 14,651 100.0 4.9---------------- -------- -------- ------- ------- -------1 Group's share of properties in Funds and Joint Ventures2 including valuation movement in developments, purchases and capitalexpenditure, and excluding sales Total assets under management £18.3 billion, including all of Funds and JointVentures. ---------------- --------- ---------- ------- ----------Current Reversions Annualised Reversionary Current Reversionary Net Rents1 Income2 Yield3 Yield3(excluding £m (5 years) % (5 years)developments) £m %---------------- --------- ---------- ------- ---------- RetailShopping centres 123 19 5.0 5.7Superstores 83 2 5.3 5.4Retail warehouses 129 34 4.5 5.7Department Stores 40 5 4.8 5.5High street 21 2 5.2 5.6---------------- --------- ---------- ------- ----------All retail 396 62 4.9 5.6 OfficesCity 210 39 5.1 6.1West End 36 3 5.2 5.6Business parks & 14 2 5.2 5.8Provincial---------------- --------- ---------- ------- ----------All offices 260 44 5.1 6.0 Industrial and 11 1 5.6 6.0distributionResidential 14 - 4.6 4.6Leisure 15 2 5.6 6.3---------------- --------- ---------- ------- ----------Total 696 1094 5.0 5.7---------------- --------- ---------- ------- ----------1 net rental income under IFRS will differ from annualised net rents which arecash based, due to accounting items such as spreading lease incentives andcontracted future rental uplifts, as well as direct property costs2 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 gross yield to British Land4 £62 million (57%) contracted under expiry of rent free periods and minimumrental increases ------------------ ------------------ -----------Long Lease Profile Weighted average lease Vacancy rate(excluding residential1 & term, %developments) years to first break------------------ ------------------ ----------- RetailShopping centres 13.8 5.92Superstores 21.5 0.0Retail warehouses 14.8 3.42Department Stores 31.6 0.0High street 12.9 0.6------------------ ------------------ -----------All retail 17.5 3.22 OfficesCity 11.6 5.2West End 9.9 0.6Business parks & 8.2 1.8Provincial------------------ ------------------ -----------All offices 11.2 4.3 Industrial and 13.2 10.2distributionLeisure 27.5 0.4------------------ ------------------ -----------Total 15.4 3.72------------------ ------------------ -----------1 predominantly let on short leases2 65% of vacancies in shopping centres and retail warehouses have been initiatedby us under asset management projects, reducing the effective vacancy rate forall retail to 1.1% and the total portfolio vacancy rate to 2.4% --------------------- ------------------------Security of Income % of income remainingfrom 30 September 2005 (to first break)--------------------- ------------------------ 5 years 9910 years 7815 years 56--------------------- ------------------------assumes no re-letting after first break or expiry, includes contracted rentalincreases --------------- ------- --------- --------- ----------Development Net Area Rent (est) Construction Cost toProgramme 000 sq pa Cost £m complete ft1 £m £m--------------- ------- --------- --------- ---------- Completed 1,050 2.5 19.6 -Committed 1,198 40.0 337.3 203.8Development 4,833 158.6 1,377.0 1,327.0Prospects--------------- ------- --------- --------- ---------- 1 areas are shown at 100% Data includes share of Funds and Joint Ventures, unless otherwise stated. BUSINESS REVIEW 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. We set out in the March 2005 Annual Report ourupdated strategy for British Land and the changes we planned to make. In thefirst half of this year we have been delivering on those plans to renew and workthe business hard. Activity during the six months Portfolio Reshaping: Through an intensified asset review process, we are reshaping our portfolio toenhance risk adjusted returns, increasing focus on property where we see goodprospects for growth, particularly from improving rental income. In the presentmarket environment, this is leading us to increase our focus on out of townretail and prime London offices. Our holdings in a number of other sectors arebeing reduced into a strong and favourable investment market. Furthermore, evenin our preferred sectors, individual properties are being sold where we considerwe can utilise the proceeds more profitably elsewhere. Purchases £1,815m - 2.6% increase in value------------------------------------------- Price BL Share Value Uplift % £m £m 1---------------------- ------- ---------- ----------Pillar (wholly owned + share of 1,566 1,566 2.11funds)St Stephen's Shopping Centre, 135 135 -Hull 2Others 127 114 12.5---------------------- ------- ---------- ---------- 1,828 1,815 2.6---------------------- ------- ---------- ----------1 from purchase price on completion to 30 September - for Pillar only 2 monthssince 28 July 20052 forward purchase, expected completion mid 2007, not yet revalued Completion in July 2005 of the purchase of Pillar Property Plc added over £1.5billion of top quality assets, principally Open A1 planning permission retailparks offering the best prospects for continuing rental growth in a demandingretail sector. The properties were held directly by Pillar and through its shareof the Funds which it managed, including the Hercules Unit Trust. On completion,80% of the real estate was UK retail parks, 4% European retail parks and 16%City of London offices, with a total of over £3 billion under management. Pillaralso brought a strong management team to add to our own. Its growing FundManagement business provides attractive new income streams. The Funds businessis performing well whilst also giving us future options to launch new Funds,including introducing outside capital into existing British Land assets. St. Stephen's Shopping Centre, Hull, is a new 46,500 sq m (500,000 sq ft) edgeof town retail and leisure development project with strong prospects forimproving value through both rental growth and yield shift. 68% of the space isalready prelet, presold or under offer, with tenants to include Tesco, Next, NewLook, H&M, Zara, TK Maxx, Boots, Sportsworld and Gala. There will also be anhotel and over 200 residential units. In April 2005, we acquired our joint venture partners' 50% share in the BL Westcompanies, owning the office properties at 1 and 10 Fleet Place, EC4, which havesubsequently been profitably sold (see below). We have committed to increase our investment in PREF, the European retail parkfund, by €124 million as part of €214 million raised by PREF from a total of 4investors to fund future acquisitions of out of town retail parks in theeurozone. Core countries for PREF include Spain, Italy, France, Portugal and theBenelux region. The Fund's current gross assets, including contractedacquisitions, amount to some €418 million with an average net yield of 6.1%.Average passing rents are €13.70/£9.60 per sq ft, well below UK levels andgiving much scope for growth. With the new equity and a target of 60% gearing,PREF's objective is to achieve a portfolio size of some €1 billion by end 2006.While this European expansion is new in recent times for British Land, we areconfident of the prospects for attractive returns, especially given ourexpertise in the sector from our leading UK position. Sales £392m - 13.3 % above valuation------------------------------------------- Price £m BL Share Gain % 1 £m --------------------- -------- ---------- ----------10 Fleet Place, EC4 109 109 15.6ILAC Shopping Centre, Dublin 85 85 25.09 High Street retail units 52 52 11.6Daventry (Plots E4 & C1) 2 76 38 19.8Others 109 108 2.4--------------------- -------- ---------- ---------- 431 392 13.3--------------------- -------- ---------- ----------1 sale price above latest year end valuation2 International Rail Freight Terminal - BL Rosemound (JV)These are value enhancing disposals, resulting from our continuing review of theperformance of each asset. Significant gains above latest valuation have beenachieved in a strong investment market, enabling us to recycle capital intoproperties where we can achieve higher returns, or to reduce gearing. In somecases, our disposals have also taken advantage of where the market hasdiscounted risk factors such as location, lease length, income and forecastgrowth prospects, and where yield compression has also narrowed the gap in valuebetween prime and more secondary assets. In other cases, our disposals haverealised value created from completion of our asset management initiatives. 10 Fleet Place, EC4 had a weighted average lease length of some 4 years, withresulting void and capex risks, and passing rents above market levels. The ILAC Shopping Centre, Dublin was purchased through our subsidiary in Irelandin 2001 for €56.6 million and owned jointly with Irish Life. Significant assetmanagement during our ownership, including phased refurbishment and upgrade offacilities, new agreements with key tenants, remodelling of the principal MaryStreet entrance and provision of a flagship store for H&M, added substantialvalue and enabled an opportune sale. The sale of 9 retail properties included an average initial yield of less than4% for 5 prime high street shops. The market continues buoyant for suchinvestments and further sales from our High Street portfolio are planned. The distribution warehouse units we have developed at Daventry have beencompleted and profitably sold. Since 30 September 2005, significant sales at 12% overall above the March yearend valuation have also been achieved at: • 2-16 Baker Street, W1, an office and retail property, for £57.2 million, • Heathrow Gateway, Units 1 & 2, Feltham, high bay distribution warehouses developed by British Land, for £65.5 million, • Manchester Fort Shopping Park, for £167.3 million (a sale previously committed by Pillar), • 1 Fleet Place, EC4, City offices, after restructuring the principal lease, for £119.5 million. Profitable sales since 31 March 2005 amount in total to over £800 million and weexpect to achieve more over the second half of the year. Proactive Asset Management: Much of our energies, in every period, are devoted to improving the value of theproperty we own through proactive asset management and development. By improvingour investments and providing space best suited to our tenant base, we achievethe goals of effective customer focus and resultant improvements in rentalincome or other aspects of property value. 150 New lettings - £8.6m pa of new rent------------------------------------------- ------ --------- -------- -------- ---------- Number Sq ft Total1 BL Share BL Increase 000 Rent £m2 Rent £m Rent £m3------------ ------ --------- -------- -------- ----------Retail 9 111 2.9 1.9 1.3WarehousesShopping 53 100 5.0 4.7 2.2CentresHigh Street 7 8 0.5 0.5 0.3City Offices 15 112 4.6 4.6 4.3West End 12 28 0.8 0.6 0.1OfficesOther 54 114 1.2 0.8 0.4------------ ------ --------- -------- -------- ----------Total 150 473 15.0 13.1 8.6------------ ------ --------- -------- -------- ---------- 1 including 100% of Funds and Joint Ventures2 total annual rent including rent free periods3 above previous passing rent 124 Rent reviews - 3.6% higher than ERV------------------------------------------- ------ --------- -------- -------- ---------- Number Total BL share CAGR pa2 New rent increase increase over 5 yrs Above ERV rent £m1 £m % %3------------ ------ --------- -------- -------- ----------Retail 31 2.3 1.4 6.8 0.1WarehousesSuperstores 7 0.7 0.7 1.8 4.6Shopping 49 1.0 0.7 2.2 7.2CentresHigh Street 12 0.3 0.3 6.1 13.1City Offices 3 - - - -West End 5 0.3 0.3 0.6 3.3OfficesOther 17 0.5 0.5 2.9 ------------- ------ --------- -------- -------- ----------Total 124 5.1 3.9 2.1 3.6------------ ------ --------- -------- -------- ----------1 including 100% of Funds and Joint Ventures2 compound average growth rate3 ERV at valuation date prior to rent review In the 6 months to September 2005 (including our share of Funds and JointVentures): • 150 new lettings and lease renewals in respect of 44,000 sq m (473,000 sq ft) of property in all sectors have resulted in new rent to British Land of £8.6 million per annum, after expiry of any rent free periods, • 124 rent reviews were settled which have increased rent to us by £3.9 million per annum, 3.6% above our external valuer's estimates at the valuation date preceding the relevant rent review, • significant activity at Meadowhall Shopping Centre, Sheffield has included agreement of 13 new lettings to retailers including River Island, Apple and Adams. One of these (post 30 September 2005) reflected a Zone A of £440 per sq ft, setting a new open market rental level. These lettings will assist us in negotiation of the round of 50 rent reviews at Meadowhall due as at September 2005, • also at Meadowhall we have taken back the stores previously let to Sainsbury and Allders and are in the process of installing mezzanines to provide an additional retail area of around 3,700 sq m (40,000 sq ft). The new first floor area will be directly connected to the existing first floor mall by the construction of a new mall adjoining WH Smith. As part of this remodelling, the extension to the Boots store has been completed. We estimate that when complete, at a cost of £48 million, this project will increase rents by approximately £3.5 million per annum, • at Teesside Shopping Park we have agreed a key new letting to Marks & Spencer on a newly created 3,100 sq m (33,000 sq ft) store, opening Spring 2006 - a further major step forward for this open A1 retail park, and part of an on-going strategy to improve tenant line-up and the retail offer. As a result, top rents achieved on this park have risen to £40 per sq ft. Recent lettings at Teesside have included Borders, Sportsworld and TK Maxx, who join Next, Boots, Outfit, PC World and WH Smith, • we acquired 1 Fleet Place, EC4 in April 2005 as part of the purchase of our partners' interests in the BL West companies. This 15,900 sq m (171,000 sq ft) office building was let primarily to Denton Wilde Sapte for a remaining term of 4 years at a rent above current market levels. We negotiated a revised lease for a new term of 20 years without break and have recently sold the property (see above) for well above valuation, • we successfully negotiated the surrender and regrant of the lease to Legal & General in respect of its 24,000 sq m (259,000 sq ft) Headquarters office complex at Kingswood, Surrey. The existing lease contained a tenant's break clause in 2008 and a rent above current market levels. The new lease is for a term of 20 years with no break, at a revised rent, significantly improving the value of this investment. In October 2005 (just after the interim date and not included in the above data)we completed a letting of 3,900 sq m (42,000 sq ft) at our prime City officedevelopment at Plantation Place South, EC3 to the specialist insurer BeazleyGroup plc. Beazley has taken the top 3 floors of the building on a 15-year leaseat rents of £43 and £44 per sq ft. Plantation Place is already fully let and wehave good levels of interest in the remainder of Plantation Place South. Strong growth in rental income is targeted within the next 5 years from theexisting portfolio and from the committed development programme. At currentmarket rental values, without projecting any growth or inflation, settlement ofrent reviews and full letting of committed developments would add £149 millionto our annual passing net rents. Of this, £90 million per annum is alreadycontracted (as at September 2005), £62 million from expiry of rent free periodsand fixed/minimum rental uplifts, plus £28 million from pre-let agreements ondevelopments. Considerable additional potential for income growth is in thedevelopment prospects.------------------------------- ----------- -------------Rental growth - £90m contracted Total of which £m contracted £m------------------------------- ----------- -------------Annualised net rents, 30 696 696September 2005Reversion*, 5 years 109 62Committed developments+ 40 28 845Development prospects+ 159 -------------------------------- ----------- -------------Total 1,004 786------------------------------- ----------- ------------- * includes rent reviews, expiry of rent free periods, lease break/expiry and letting of vacant space at ERV (asdetermined by external valuers)+ to achieve income from developments the Group will incurconstruction and associated costs, which are notshown here - further details are set out in the Development ProgrammeNet rental income under IFRS will differ from annualised net rentswhich are cash based, due to accounting items such as spreading leaseincentives and contracted future rental uplifts, as well as directproperty costs. Development Programme British Land's development programme is based on opportunities created out ofexisting investments and from acquisitions. We commit to projects in controlledstages on the basis of pre-lets or anticipated market demand, adding qualityassets to the portfolio. Development Projects - adding value-------------- -------- ------- -------- ------- -------- Rent £m pa -------------------- Sq ft Total1 Let/ Cost PC3 000 pre-let £m2 -------------- -------- ------- -------- ------- --------Completed(since 31 March2005)Daventry (E4 & C1)4 1,050 2.5 2.5 19.6============== ======== ======= ======== ======= ========CommittedOffices:51 Lime Street, 475 21.3 21.0 191.0 Q1 2007EC3York Building, 138 6.6 - 56.0 Q4 2006W1Basinghall Street, 199 3.3 3.3 21.0 Q2 2007EC25Coleman Street, 180 2.7 2.7 21.8 Q1 2007EC25Business Parks:Blythe Valley 53 1.0 - 8.7 Q4 2005(Plot A1)Blythe Valley 35 0.7 0.7 6.9 Q4 2006(Plot G2)Retail Park:Nugent, 118 4.4 0.4 31.9 Q1 2006Orpington -------------- -------- ------- -------- ------- --------Total 1,198 40.0 28.1 337.3-------------- -------- ------- -------- ------- --------Cost to complete: 203.8 ============== ======== ======= ======== ======= ========1 current estimated headline rent2 construction cost, estimated or achieved3 estimated practical completion of construction4 International Rail Freight Terminal - BL Rosemound (JV) - rent and cost datashow BL's 50% share5 City of London Office Unit Trust (CLOUT)Data for Group and its share of Funds and Joint Ventures, except areas in sq ftshown at 100% Following successful completion of the Plantation Place and 10 Exchange Squareoffice developments in the City, work is well under way at 51 Lime Street (theWillis Building) where Willis Group are contracted to take all the offices undera 25-year lease without breaks. The 43,200 sq m (465,000 sq ft) offices and 930sq m (10,000 sq ft) retail are scheduled for completion in 2007. The York Building in London's West End is also being constructed on time and onbudget for completion at the end of 2006. This will provide over 12,800 sq m(138,000 sq ft) of high quality office, retail and residential apartments. The development by BL Rosemound of substantial distribution facilities at theDaventry International Rail Freight Terminal has successfully completed with allplots now sold at a significant surplus above cost. This joint venture intendsto acquire further projects for mixed use development. Nugent Shopping Centre in Orpington is a mixed use Open A1 (part restricted)scheme, providing a retail park together with a residential element. Pre-letshave been achieved to tenants including Debenhams, Next, Mothercare and HMV. CLOUT is undertaking two City office developments at Basinghall Street andColeman Street, EC2; both are forward sold (and Coleman Street is also forwardfunded). Development prospects, shown below, are sites and properties where we haveidentified opportunities and are progressing with design, planning applicationsand site preparation for development projects. Development Prospects Sector Sq ft Rent Cost1 Planning 000 £m pa £m ------------- ---------- ------- ------- ------ ---------201 Bishopsgate City Office 822 40.2 291 DetailedThe Leadenhall City Office 601 32.1 271 DetailedBuildingLudgate West City Office 127 5.8 46 DetailedRegents Place West End Office i) N.E. 347 15.4 134 Pending Quadrant ii) Osnaburgh 391 17.2 148 Submitted St Residential 282 6.1 102 Pending / submittedBlythe Valley Business Park 716 14.0 108 OutlinePark /detailedNew Century Business Park 582 8.1 84 OutlinePark / DistributionMeadowhall Leisure 409 12.2 124 SubmittedCasinoTheale Residential 204 4.3 35 SubmittedRedditch2 Distribution 227 0.6 4 DetailedGallions Reach, Retail Park 58 1.4 16 SubmittedBecktonPreston Retail Park 67 1.2 14 Submitted------------- ---------- ------- ------- ------ ---------Total3 4,833 158.6 1,377------------- ---------- ------- ------- ------ ---------Cost to complete: 1,327------------- ---------- ------- ------- ------ ---------1 estimated cost of construction, excluding land and interest2 BL Gazeley (JV)3 data for Group and its 50% share of JVs, except areas shown at 100% At 201 Bishopsgate, EC2 we have secured a revised planning consent (subject to aS106 agreement now in its final agreed form) for a 35-storey Broadgate Tower anda 13-storey building. These will provide 75,500 sq m (812,000 sq ft) of primeoffices plus 930 sq m (10,000 sq ft) retail, forming the next phase of theBroadgate Estate and designed to meet the needs of both financial andprofessional occupiers. Estimated construction costs are £291 million with anERV of £40 million per annum at market levels. Enabling works have commenced. Wewill proceed with development of this prime asset on a speculative basis andexpect completion mid 2008 - well ahead of most competing schemes and well timedfor delivery into the recovery in the City office market. Financial Results, six months to 30 September 2005 These results are the first reported under the International Financial ReportingStandards (IFRS) adopted from 1 April 2005. This change to the accounting basisarises from legislation requiring all EU listed companies to apply thesestandards in their financial statements. Comparative figures under IFRS areshown for the 6 months to 30 September 2004 and for 31 March 2005 whereappropriate. In anticipation of quarterly reporting, the Group has also changed the basis ofaccruing revenues between periods, which affects the allocation between thefirst and second halves of a financial year and aligns the Group with theindustry norm. Net rental income for the comparative period (September 2004)would have been £6 million higher on the new basis. For the same reason, theuplift in revenue from rent reviews is now recognised on an accruals basis,based on valuer's estimated rental values, rather than on settlement of the rentreview as previously. This gives rise to £2 million of additional revenue inthis period. September September 2004 Increase 2005 (restated for IFRS)------------------- ----------- ----------- ---------Revenue:Gross rental and related £340m £278m 22.3%incomeNet rental income £305m £237m 28.7%Underlying profit before £102m £72m 41.7%taxProfit before tax £761m £446m 70.6%Diluted earnings per 118.3 pence 71.7 pence 65.0%shareUnderlying diluted 15.4 pence 10.4 pence 48.1%earnings per shareDividend per share 5.2 pence 4.8 pence 8.3%------------------- ----------- ----------- September March 2005 2005 (restated for IFRS)------------------- ----------- -----------Capital growth:Net assets £5,299m £4,783m 10.8%Adjusted diluted net £6,595m £5,913m 11.5%assetsAdjusted diluted NAV per 1256 pence 1128 pence 11.3%share ------------------- ----------- ----------- --------- Revenue Returns The Group has prepared a proportionally consolidated income statement andbalance sheet (which are included as Tables A and B attached) for the benefit ofstakeholders who wish to see the results of the Group's interest in Funds andJoint Ventures on a look through basis. The following commentary (and the datain the above table) refers to the financial information of the Group asreported. Gross rental and related income for the half year increased by 22.3% to £340million. Net rental income increased by 28.7% to £305 million. The increasesreflect £45 million of purchases and sales of £3 million, with new lettingsadding £15 million of which £10 million arose from Plantation Place alone. Theassets acquired in the Debenhams and Spirit portfolios included leases withguaranteed minimum uplifts. IFRS requires such uplifts to be spread over thelease term leading to a £10 million increase in reported rental income. Underlying pre-tax profit from Funds and Joint Ventures was £14 million, £1million less than from 2004. Net rental income from Funds and Joint Venturesincreased by £13 million (+39.4%) reflecting £9 million from Funds acquired aspart of the Pillar acquisition for the two months post acquisition. IFRSrequires Funds and Joint Ventures to be accounted for as a single line in theincome statement showing a total profit of £80 million. This includes financingcosts (£28 million), valuation gains (£82 million) and a taxation charge(£16 million) which would have been reported separately under UK GAAP. Group net financing costs rose £29 million to £190 million. The increaseincludes the cost of financing acquisitions (£37 million) and a saving of £7million arising from the refinancing of the Broadgate securitisation. Net rentscovered interest 1.6 times. Our administrative expenses for the 6 months totalled £36 million, a 64%increase on the 6 months to September 2004, reflecting increased staff and othercosts following acquisitions and key personnel recruitment, and include one offcosts of £8 million. Underlying profit before tax (excluding profits on asset disposals andrevaluation gains) increased by 42% to £102 million. Underlying earnings pershare of 15.4 pence per share (after applying an underlying tax rate of 21.6%)increased 48%. Previously reported underlying earnings per share of 11.7 pencefor the period to September 2004 under IFRS have been restated to 10.4 pence,following analyst representations. The Group's policy now is only to include inunderlying EPS tax items relating to the reported period. Previously we includedtax items arising from prior periods. Group profits on asset disposals were £34 million representing net salesproceeds less March valuation. Profit before tax of £761 million includerevaluations of properties and investments as required by IFRS totalling £562million. Diluted earnings per share totalled 118.3 pence per share includingthese valuation gains. The tax rate for the 6 months is 20.8% with an underlying rate of 21.6%excluding tax on sales and the effects of prior year items. Corporation tax of£8 million is payable in respect of underlying profits, along with an underlyingdeferred tax charge of £14 million utilising losses including those arising fromthe refinancing of the Broadgate securitisation. Our progressive dividend policy continues with an interim dividend declared of5.2 pence per share, an increase of 8.3%. In accordance with IFRS this dividendhas not been accrued. Profits after interest, tax and working capital movements generated a positiveoperating cash flow of £62 million for the 6 months. As a significant netinvestor in the first half, acquisitions (including repayment of debt acquired)and development expenditure of £1,326 million outweighed disposal proceeds of£332 million. Funds and Joint Ventures have returned a further £240 million.During the period, secured assets and other assets of non-recourse companiesgenerated £44 million of surplus cash after payment of interest and debtamortisation. Capital Growth and Total Return The strong growth in portfolio valuation and increased profits has led to anincrease in adjusted diluted net assets since March 2005 of 11.5% to £6,595million; 1256 pence per share. Total return to shareholders (adjusted dilutednet asset value growth per share plus final dividend) in the half year was12.3%. Financing Activity Our financing and capital structure policies remain unchanged from those set outin our Annual Report as at 31 March 2005. It remains our strategy to manage theassets and liability mix in the business on a fully integrated basis, producinggrowth with a secure and attractive risk profile. Financing Statistics 30 September 31 March 2005 2005 (restated for IFRS)------------------------ ------------ -----------Group:Net Debt £6,870m £6,061mWeighted average debt maturity 13.0 yrs 14.3 yrsWeighted average interest rate 5.87% 6.00%% of net debt at fixed/capped 88% 90%interest ratesInterest cover (net rents to net 1.61 1.59interest)Loan to value (borrowings to property 51% 50%& investments)Unsecured debt to unencumbered 47% 42%assetsUndrawn committed facilities and £1,215m £969mcashGroup and share of Funds and Joint Ventures:Net debt £8,104m £6,563mWeighted average debt maturity 11.8 yrs 13.5 yrsInterest cover (net rents to net 1.61 1.63interest)Loan to value (borrowings to property 54% 52%& investments) ------------------------ ------------ ----------- As a result of good growth and profitable disposals our gearing is comfortablywithin our target loan to value range of 45-55%, notwithstanding the Pillaracquisition and development expenditure. During the last six months we raised over £1.3 billion of new (or renewed) banklines. £790 million was arranged in a successful, oversubscribed syndicatedfacility with a total of 25 banks, taking advantage of good market pricing. Inaddition, more than £510 million resulted from a number of bi-lateral agreementson similar terms. Hercules Unit Trust (HUT), the retail park fund advised by British Land PropertyAdvisers Limited and owned 34.6% by the Group, completed a £1 billionsecuritisation in September 2005. The seven year debt issue, secured against 16high quality retail parks located throughout Britain, incorporated significantasset management flexibility. Portfolio Valuation - Up 4.9% in six months (5.2% including Pillar anddisposals) The British Land property portfolio was valued at 30 September 2005 by our newlyappointed external valuers Knight Frank. This gives us a unique opportunity totest and validate values of our investment properties which we are pleased so toreport. It does, however, make precise comparison with prior periods a littlemore complex, given detailed approach and methodology variances between firms ofvaluers. Overall, the portfolio including our share of Funds and Joint Ventureshas increased in value by £2.1 billion over the six months to 30 September 2005,to £14.65 billion - over £1.4 billion from net additions and £680 million fromgrowth of 4.9%. This growth includes the Pillar properties and Funds from the date of completionof the acquisition (28 July 2005) to 30 September 2005. If we include growth inthe Pillar assets from the date of their last reported value to September 2005,together with the surplus over the last year end valuation achieved on all oursales in the six months, the growth in the overall portfolio increases to 5.2%. The improvement in value has resulted from further yield shift (as predictedlast year) driven by strong investment markets, plus achievement of rentalincome growth. Investor demand is supported by property fundamentals and thecontinuing favourable comparison of risks versus returns from alternative assetclasses. All sectors in the portfolio improved in value. The tables shown earlier in thisreport set out the details of the valuation by sector. All retail is up by 4.3% including an increase of 2.2% on our £3 billion retailwarehouse portfolio, following a rise of 13.7% for the year to March 2005. Thisreflects the short 2-month period that our interests in Pillar have been heldduring the half-year. If we included the Pillar portfolio for the full sixmonths, the increase in the retail warehouse portfolio would have been 3.4%. Ourretail in high street, superstores and department stores have all performedwell. Meadowhall, which continues to be the subject of much asset managementactivity (as set out earlier in this report) is up 3.9% to £1.5 billion. All offices are up 6.1% over the six months, which reflects the positiveposition of our prime City and West End investments at this early point in thecyclical recovery of the Central London office market. The Broadgate Estate,EC2, is up 4.7% to £2.974 billion; while the overall headline ERV determined bythe valuers under different methodology than previously is put in a£37.50-£45.00 per sq ft range, against an average contracted rent of£46.74 per sq ft, the net initial yield has tightened to 5.7%. Regent's Place, NW1 has increased in value by 5.2% to £536 million, based on ayield of 5.54%, with average contracted rents increased to £34.05 per sq ft. Thetwo development sites at Regent's Place (N.E. Quadrant and Osnaburgh Street) arenow valued separately. The ungeared change in property values is approximately 1% less than the IPD allproperty index movement for the same period. While British Land manages itsbusiness for absolute return, the aim also remains to beat this index atproperty level, as we have done at NAV level. Actions are in place to addressindividual asset issues. The positive news is that overall the portfoliooutperformed on fundamentals of rental growth and asset management, being heldback in aggregate by yield compression favouring less prime properties. Thisphenomenon is quite likely to reverse in time. Hercules Unit Trust, the largest of the Funds and valued by CBRE, has achievedan increase in the value of its retail park assets under management of 6.4%, to£2.7 billion, contributing to an ungeared total return of 8.2% over the last 6months (11% on a geared basis). There is strong appetite from investors for theunits, although few sellers in the market. The total funds under management byHUT, CLOUT, PREF and HIF have grown to over £3.6 billion, of which BritishLand's share is £1.3 billion. Outlook - Portfolio Positioned for Growth and Resilience 57% Retail - 73% of which is out of town 37% Office - 94% of which is in Central London Retail sales and profits continue to be under much scrutiny as consumerexpenditure growth has moderated. Retailers' experience in the current marketvaries but overall operating margins have built up some resilience and demandfor the right locations and accommodation remains healthy. Out of town retail sales growth is, and is expected to continue to be, abovetotal retail sales growth as out of town takes an increasing share of themarket. The size and configuration of out of town space is advantageous forretailers, and the overall costs of occupation and servicing such locations arelower. In particular, the larger retail parks with smaller unit sizes andflexible planning use are enjoying strong demand as retailers, such as Arcadia(Topshop, Topman), Boots, Next and Marks & Spencer, migrate or expand from thehigh street. The British Land and Funds portfolio has a high, and increasing,proportion of Open A1 (70% by value) and Open Restricted (12% by value) planningconsents - these provide the greatest flexibility and enable us to respond toretailer requirements. For example, some retailers are changing the preferredsizes of their stores and in our portfolio we are able to respond with therequired supply. In addition, as demand for traditional bulky goods parks slows,if tenants at those parks wish to move (or, indeed, if they fail) the warehouseparks in our portfolio have opportunities for reconfiguration and change of thetype of retailer. Our out of town portfolio has been boosted by the acquisition of Pillar,including the share of the important HUT retail park portfolio. This portfoliotoo is increasing focus on Open A1 use through active review of the assets andsignificant purchases of these investments, together with sales to reduceinvolvement with certain bulky goods schemes. British Land now has 171 out of town retail schemes including superstores,providing some 1.6 million sq m (17 million sq ft) in over 1,031 retail units.Flexible unit sizes accommodate more than 240 different retail and leisuretenants. We expect these assets to continue to perform well. Our investments in town - department stores, shopping centres and prime unitshops - have an important position in the portfolio. In these sectors weconcentrate on the best towns and high streets and particular assets which havegood opportunities for growth under our management. Income growth on ourdepartment stores is underpinned by the contracted 21/2 / 3% per annum rentalincreases. The Central London offices' occupational market is seeing good signs of recoveryin demand. Take up of space is improving, and now back to trend at 511,000 sq m(5.5 million sq ft) per annum. Grade A offices in the City are particularly indemand and their availability has fallen to its lowest level since 2003.Business and financial services account for over 50% of current demand; this isexpected to increase since employment in these sectors is predicted to grow, bysome 136,000 jobs by 2008. Forecast vacancy overall for the City is set toreduce from the current 10% to 4.9% in 2008. Against this increasing demand, supply continues to reduce as a result ofminimal new speculative development. An upturn in rents is expected to resultfrom these market factors and headline rents reported by Agents have increasedfor the first time in over 4 years, to £47.50 per sq ft. Projected City Rents: Agents' Consensus BL City rent reviews Range £psf Average increase % % of rent roll 2006 47.30 - 50.60 5.7 20 2007 52.00 - 55.40 8.0 15 2008 56.90 - 62.40 9.7 16 2009 59.30 - 67.10 6.6 32 2010 60.90 - 69.10 7.3 15 The investment market in Central London offices remains very strong, continuingto set new records in turnover. In the first 3 quarters of 2005 the volume oftransactions in the City has already exceeded that for all of 2004, which itselfwas a record year for investment in City offices. Yields are still tightening inthis sector. Property Market Analysis LLP (PMA), Europe's largest independent propertyresearch consultancy, has identified Central London offices and out of townretail as the sectors with best prospects for total returns driven by rentalgrowth over the next 5 years. British Land's portfolio is positioned as to 67%in these sectors.___________________________________________________ -----------PMA Forecast Total Property Average Ungeared British Land'sReturns Total Return Weighting %- next 5 years % paShopping centres 6.8 17Retail warehouses 10.8 +32High street 6.7 8Central London offices 11.0 35Provincial offices 8.0 2Industrial 7.6 2 + includes superstores___________________________________________________ ----------- So the British Land portfolio is positioned for growth, with security providedby the prime quality of the assets, well let on long leases to strong tenants,including a significant proportion of guaranteed minimum rental uplifts. We haveintensified our reshaping of the portfolio and proactive asset management andwill continue to focus on these areas to enhance risk adjusted returns. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
British Land