Final Results - Part 1

British Land Co PLC 22 May 2007 22 May 2007 PRELIMINARY ANNOUNCEMENT THE BRITISH LAND COMPANY PLC RESULTS FOR THE YEAR TO 31 MARCH 2007 Financial Highlights: â€¢ Net Asset Value (1) per share 1682 pence after REIT charges and refinancings, pre-charges up 20% over the year (2) - EPRA Net Assets (1) Â£8.9 billion (2006: Â£7.8 billion) - Net Assets Â£8.7 billion (up Â£2.7 billion including Â£1.6 billion deferred tax release) â€¢ Underlying pre-tax profit(3) Â£257 million, up 13% - Headline pre-tax profit (4) Â£1,270 million (2006: Â£1,604 million(5)) - Profit on ordinary activities before tax Â£1,440 million (2006: Â£1,498 million(5)) â€¢ Underlying earnings per share (3) 43 pence, up 22% - Earnings per share 470 pence (2006: 227 pence(5)) - Total dividends for the year 20.35 pence per share (2006: 17.0 pence) - Final quarter dividend 8.25 pence per share, payable August â€¢ Total return (6) for the year 21.3%2 â€¢ Portfolio valuation increase of 9.7% for the year (Q4 2.1%) - 10.9% capital return (7) ahead of IPD Benchmark due to rental growth (8) - Valuation uplift led by both London Offices (including development) and Out of Town Retail â€¢ Properties owned or managed Â£21.3 billion, up 15% Business Highlights: â€¢ British Land became a REIT on 1 January 2007 - Confident that new status adds to shareholder value - First full year (to March 2008) REIT dividends not less than 33 pence, 94% higher than 2005/6 â€¢ Delivering on our promises - renewing and working the business hard - 3.4 million sq ft London Office development projects progressing well with excellent prospects; 98% of completed offices, and 69% of completions due 2007/8, already let or under offer - Â£3.4 billion (gross) asset turnover since March 2006, tightening focus, recycling capital and improving growth prospects - Refinancings complete (some Â£4.9 billion total over last 2 years); overall interest rate now favourable 5.36% â€¢ Portfolio positioned to capture rental growth with market leadership in prime London Offices and Out of Town Retail; a strong platform for outperformance (1) EPRA (European Public Real Estate Association) basis - Note 2 to the accounts (2) before charges for REIT conversion and refinancings (3) see Note 2 (4) with proportional consolidation of Funds and Joint Ventures - Table A (5) restated, see Note 1 (6) increase in EPRA NAV plus dividends paid, see Note 2 (7) IPD calculate capital return (excluding Europe) based on average capital employed and excluding capitalised interest (8) ERV growth of 6.9% for the year (IPD 4.3%) Chris Gibson-Smith, Chairman comments: It is with great pleasure I make this inaugural report to you as a REIT. British Land is a flagship of the new regime and focused on making the most of this reform. The company enjoyed an excellent year in 2006/7 and looks forward with confidence to the challenges ahead. Stephen Hester, Chief Executive comments: We are intent on delivering continuing outperformance for shareholders. The implementation of our strategy and strengthening of our capabilities is clearly visible in strong 2006/7 results. In the exacting, customer driven markets ahead, British Land is well positioned and working hard to perform. The full preliminary results report follows. British Land contacts: Laura De Vere - Media 020 7467 2920 Amanda Jones - Investors 020 7467 2946 Finsbury: Faeth Birch/Ed Simpkins 020 7251 3801 STATEMENT BY THE CHAIRMAN, CHRIS GIBSON-SMITH It is with great pleasure I make this inaugural report to you in British Land's new guise as a Real Estate Investment Trust (REIT). Having taken up the Chairman's role on 1 January 2007 after 4 years on the Board as a non-Executive Director, I can report that on closer scrutiny your Company looks even better. Results As you will read, British Land enjoyed an excellent year in 2006/7. Our Net Assets are up, our Earnings per Share up and our owned and managed assets now total Â£21.3 billion. On top of that shareholder returns again outperformed the real estate index and the FTSE 100. In the light of these results we have declared a final quarterly dividend of 8.25 pence per share (to be paid in August), making 20.35 pence for the year (up 20% on 2005/6) and reaffirm our minimum dividend pledge for 2007/8 of 33 pence per share. REITs In January it was a pleasure to celebrate the start of REIT trading in the UK with the property industry in my other role as Chairman of the London Stock Exchange. British Land is a flagship of the new regime and focused on making the most of this reform. Quoted REIT vehicles are a vital and growing part of international capital markets. As a REIT, British Land is unchanged in all structural senses from before, but now has the benefit of being substantially tax free as to both income and capital gains. Our dividends are going up and will take a slightly different form as explained in the Financial Performance section of the following Review. We also submit to a light touch regulatory regime, underpinning our property focus and secure capital structure. However, in strategic terms, REITs are also an important development. UK property companies previously operated under a disadvantageous tax regime relative to most other real estate participants which limited the size of the quoted sector and its delivery of shareholder value. With a level playing field now granted, REITs can further improve returns from active, tax efficient portfolio management. And with the benefits of liquidity, governance, management talent and gearing, I expect UK REITs to take market share from less liquid private and institutional property vehicles over the medium term. There will be property cycles, but overall we are confident that British Land will be more valuable to shareholders in REIT format than otherwise. Property Industry The property industry is a fascinating one. Its central role in developing our built environment is increasingly important. Providing the modern space for our service industries to grow whilst intermediating society's need for social and environmental advances in physical space is itself a major challenge. But less appreciated by many is the property industry's unique dynamics at the interplay of two markets - the global investment markets that establish traded values for real estate alongside and in competition with other financial asset classes - and the 'bricks and mortar', occupier driven markets where space is manufactured to compete for demand and value created or lost in ways comparable to most other non-traded industries. This juxtaposition is particularly relevant at present as a period of major change in investment markets' relative valuation of real estate ebbs, while a period of continuing change and growing demand in occupier markets flows. In this context British Land's enduring characteristic has been the ability to understand and respond to both markets. Strong capital market skills leverage investment market trends and are complemented by an increasingly impressive property level activism to ensure we capture superior asset value from meeting our customers' needs. We are also very much alive to our influencing role on the built environment and the community and environmental responsibilities implied thereby. British Land is leading the industry in these areas, partnering with customers, suppliers, communities and public authorities to advance the cause of sustainability. York House British Land is changing - building on its distinguished past and adapting decisively to the challenges ahead. Our move to new headquarters at York House in March was an exemplar of this change - a transformation in our own space, efficiency and culture, highlighting the importance of modern well located space to service industry occupiers in general whilst also showcasing our own development skills. The Board Nowhere are the changes more notable than at the human level. May I pay tribute to my predecessor as Chairman, Sir John Ritblat. John was truly a giant of the real estate industry over the last 35 years. From very small beginnings he built an industry leader in British Land. Along the way he created immense shareholder value whilst never diluting his charismatic, entrepreneurial personality. We are proud to keep a symbolic connection with John as our Honorary President and owe him a debt of gratitude for the Company he built and for its timely handover in the best of health. Similarly there is much other human change ongoing at British Land. Across the Company, our Chief Executive is working swiftly with his colleagues to renew our management ranks and install a determined performance culture. In so doing we are all conscious of the debt owed to those retiring from the Company and thank them for their sterling service. This is especially true at Board level. 2006/7 saw the retirement of John Weston Smith and Patrick Vaughan as Executive Directors and Michael Cassidy retires as non-Executive at our AGM this July. I am pleased to note that we are already back to full strength as a Board. Andrew Jones and Tim Roberts joined the Board last July running our Retail and Office sectors and have made a major contribution. Our non-Executive ranks were ably boosted by Kate Swann and Lord Turnbull who joined last May. I am delighted also to welcome Clive Cowdery (Chairman of Resolution plc) and John Travers (ex CEO, Cushman & Wakefield EMEA) as non-Executive Directors. The coming years will almost certainly bring more exacting market conditions. I am therefore delighted at the close partnership that is developing with Stephen Hester our Chief Executive and have every confidence in him and the whole Executive team taking our business forward. We look forward to the challenges and believe your Company to be facing them in fine shape. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER 2006/7 was a notable year for British Land. We reported strong financial results. The election to REIT status was successfully made. Our overhaul of the Company to boost future prospects is being well executed. And most importantly, our customer-led strategies are producing high occupancy of our buildings, profitable delivery of more and attractive rising rental streams as testimony to the appeal of our real estate. British Land is well placed for continuing success. 2006/7 Results Underlying earnings per share grew 22% to 43 pence on the back of record underlying profits of Â£257 million and headline pre-tax profits of Â£1,270 million. The headline figures are distorted by REIT related charges which saw a balance sheet offset in the release of Â£1.6 billion in deferred tax provisions to boost statutory net assets. EPRA net asset value was 1682 pence per share (up 20% before charges for REIT conversion and refinancings). EPRA net assets are Â£8.9 billion. Our underlying profit growth was driven by three factors: like-for-like rental growth ahead of the market overall; strong income from asset management fees and our Canary Wharf investment; lower average interest rates reflecting debt refinancings. Total rents fell slightly as a result of asset sales but more than offset by associated falls in interest cost. Our growth in asset value was driven by property valuation gains and profits on asset disposals. Rental growth prospects drove our valuations along with development profits and yield shift - the latter now largely complete. These gains translated to outperformance at the Net Asset level as a result of our efficient gearing policy. British Land's total return (Net Asset growth plus dividends pre-charges) was 21.3%. British Land's Strategy We are focused on delivering outperformance for shareholders. With real estate markets increasingly customer driven, we are building our business around meeting their needs and thereby capturing the superior total return resulting from high occupancy and rental growth. We seek to "add value" at each level of the business from an activist approach to: - sector and market selection - asset creation and selection - asset management - balance sheet management - partnership and structuring. Superimposed upon all this are the twin disciplines of attention to shareholder value creation and concentration on markets where we have or can build competitive advantage. Delivery on our promises The implementation of our strategy and continued strengthening of our capability to outperform was clearly visible in our 2006/7 activities. Our market leadership in prime retail and office property was made more distinctive by increased focus on London offices and out of town retail, including the leadership position we have built in Europe in this latter category since 2005. An intense pace of activity saw over Â£3 billion of asset sales and purchases to improve the growth prospects of our assets and ensure our capital is working hard. The development programme is the biggest in our history with successful pipeline building, starts and completions to deliver space at the forefront of customer appeal. Throughout the business, asset management initiatives honed the appeal of our buildings and contributed to rental growth outperformance. All of this rests on the capabilities of our people. The year saw a continuation of our substantive management renewal process and further embedding of a strong 'performance driven' culture. Our activity enabled the financial outperformance British Land delivered 2006/7. But perhaps of greater import, it gives us good prospects to deliver more in the future. Real Estate Markets Real estate markets produced another strong year as the repricing of the asset class by investment markets in relation to other financial assets was completed. Real estate's growing cash flows and strong downside protection position it between bonds and equities in the hierarchy of total return prospects. Superimpose the benefits of active management, development and gearing and you have, in British Land, an attractive equity vehicle, defensively priced. Markets' relative relationships fluctuate in response to changes in investor sentiment and movements in other asset classes which are hard to accurately predict. Real estate's current positioning seems to represent a fair equilibrium on which to build fundamental value, though rises in long term interest rates may have an impact if sustained. Real estate markets are now reverting, therefore, to a more normal position as occupier driven markets where quality and location of space capture occupancy and rental growth which in turn drives asset values forward. The UK is a densely populated island, with concomitant scarcity of modern space. The service industries that are powering economic growth and employment are the real drivers of property values. We are pleased that the appeal of British Land's space drove rents forward in 2006/7 which in turn underpinned the quality of our asset valuation growth in greater measure than the market overall. Looking Ahead 2007/8 will be one of our most active years as we capitalise on REIT status to accelerate portfolio repositioning whilst driving home the strategic themes discussed above. The investment market is likely to be more challenging than last year, underlining the importance of value creation from rental growth. We believe in the Company's strategy and capabilities. Our size and shape will be an outcome of value creation from our property dealings. We expect our industry leading position, our market leadership positions and our efforts to make the assets perform well to combine and continue to present British Land as 'the company of choice' in our sector. As ever, we would have achieved nothing this year without the efforts of our people. My thanks and gratitude, on shareholders' behalf, go to them. FINANCIAL HIGHLIGHTS Income Statement Year ended Year ended 31 March 2007 31 March 2006(1) Gross rental income Â£706m Â£751m Net rental income Â£661m Â£701m Net interest costs2 Â£370m Â£436m Underlying profit before Â£257m Â£228m taxation3 Valuation gains4 Â£1,424m Â£1,748m REIT conversion charge and costs Â£338m - Profits before taxation5 Â£1,270m Â£1,604m Underlying diluted earnings per 43 pence 36 pence share 1, 6 Diluted earnings per share 6 470 pence 227 pence Dividend per share7 20.35 pence 17.0 pence Balance Sheet 31 March 2007 31 March 2006 Total properties8 Â£16,903m Â£14,414m Net assets Â£8,747m Â£6,016m EPRA net assets9 Â£8,862m Â£7,802m EPRA net asset value per share9 1682 pence 1486 pence Group: Net debt Â£6,404m Â£5,593m Loan to value10 41% 42% Including share of Funds and Joint Ventures: Net debt Â£7,741m Â£6,684m Loan to value10 45% 46% Total return2, 11 21.3% 34.6% Data includes share of Funds and Joint Ventures (Table A), unless otherwise stated. 'Group' excludes share of Funds and Joint Ventures. 1 restated - see Note 1 to the accounts 2 excludes refinancing charges of Â£305m (2006: Â£122m) 3 see Note 2 4 includes Â£1,274m revaluation gains, Â£82m gain on disposal of assets and Â£68m gain on appropriation of trading properties to investment properties at market value. A further Â£206m (2006: Â£194m) revaluation gain is included in the statement of recognised income and expense, see Note 5 5 including valuation gains and after impairment charges for goodwill of Â£111m (2006: Â£240m) 6 diluted for all potential share issues, Note 2 7 interim paid plus final declared 8 does not include the investment in Canary Wharf through Songbird Estates plc, Note 10 9 see Note 2 10 debt to property and investments 11 increase in EPRA NAV plus dividends paid, Note 2 PORTFOLIO HIGHLIGHTS Valuation by Sector Group Funds/ Total Portfolio Uplift2 JVs1 Â£m Â£m Â£m % % Retail Retail warehouses 2,503 1,566 4,069 24.1 10.3 Superstores 1,678 622 2,300 13.6 9.5 Shopping centres3 1,999 512 2,511 14.8 3.4 Department Stores 797 148 945 5.6 5.1 High street 348 - 348 2.1 4.6 All retail 7,325 2,848 10,173 60.2 7.6 Offices City4 4,126 - 4,126 24.5 13.1 West End5,6 964 - 964 5.7 18.0 Business parks & 172 3 175 1.0 5.6 provincial Development6 899 1 900 5.3 13.6 All offices 6,161 4 6,165 36.5 13.6 Industrial, 531 34 565 3.3 7.4 distribution, leisure, other Total 14,017 2,886 16,903 100.0 9.7 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2007 - includes valuation movement in developments, purchases and sales, net of capital expenditure 3 Meadowhall Shopping Centre valuation up 3.5% to Â£1,640 million (up 5.8% pre cap-ex); ERV Â£83 million; net equivalent yield 4.63% (true equivalent yield 4.76%) 4 Broadgate valuation up 10.6% over 12 months to Â£3,569 million; headline ERV range Â£44-55 per sq ft (average headline ERV is Â£48.60 per sq ft); net initial yield 4.78% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 5 Regent's Place valuation up 12.3% over 12 months to Â£651 million; headline ERV range Â£23.50-49.00 per sq ft; net initial yield 4.5% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 6 West End now includes York House, previously shown under Development Portfolio yields Annualised Reversionary Current Reversionary (excluding net rents(1) income(2) yield(3) yield (2),(3) developments) Â£m Â£m % % All retail 427 61 4.2 4.8 All offices 216 47 4.1 5.1 Other 30 4 5.2 5.9 Total 673 112(4) 4.2(5) 4.9 1 net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs 2 includes rent reviews and lease break/expiry and letting of vacant space at current ERV (as determined by external valuers) within 5 years, plus expiry of rent free periods 3 portfolio yield (gross to British Land, without notional purchasers' costs) 4 Â£59m contracted under expiry of rent free periods and fixed/minimum rental increases 5 current yield after adding back rent frees 4.5% Leases and occupancy Average lease Underlying1 Vacancy rate term, years to vacancy rate % % (excluding first break developments) All retail 16.3 1.2 2.5 All Offices 10.9 2.2 4.8 Total 14.7 1.6 3.3 1 the underlying vacancy rate excludes asset management initiatives and units under offer OPERATING AND FINANCIAL REVIEW Introduction This Operating and Financial Review ('OFR') sets out what British Land has achieved in the year under review. It shows how our actions fit the strategies we have laid out. It shows the business and financial results of those actions. We seek to highlight positioning for the future, risks in our business and how we are managing them as well as giving Key Performance Indicators ('KPI') to judge progress. Importantly we show also the way our business is shaped by and responding to the needs of our customers and the wider needs of society in relation to the built environment of which we represent an important part. Objectives & Strategy British Land's primary objective is to produce superior, sustained and secure long-term shareholder returns from management of our chosen real estate activities and their financing. Our strategy aims to capture superior total return through the high occupancy and rental growth which results from successfully building our business around customer needs. We seek to do this in a number of ways. Property sales and purchases adjust the market and sector mix of our property portfolio to best capture growth trends in customer demand. Within our selected markets we also recycle capital, buying and selling buildings to improve the appeal and growth prospects of our holdings. And we look to create more value from new development in areas where demand for the best new space is highest. Our occupancy and rental growth is further enhanced by active asset management to hone our buildings' customer appeal. The importance of the investment markets which interlink with our occupier markets also dictates that adroit financial management, partnerships and deal-doing complement our property based strategies to capture and translate property returns most efficiently to our shareholders. In executing these strategies our "bedrock" disciplines are: â€¢a focus on areas where we have or can build competitive advantage â€¢clarity that our business success will come from serving customers well â€¢a bias to high-quality assets, with long lease profiles and favourable demand and supply characteristics â€¢strong integrated risk management skills - blending leasing, development, asset and liability risk into a single attractive and secure growth proposition for shareholders â€¢a confident, entrepreneurial, performance-driven culture â€¢particular regard for long-term income/cash flow growth â€¢an appreciation of the importance of sustainability to our customers and other stakeholders in the built environment on which we operate. British Land's Activity in 2006/7 This was a year of real progress and achievement for British Land. We delivered outperformance for shareholders whilst strengthening the Company's prospects to deliver more in the future. As we noted last year, investment market led capital growth is slowing. Our focus on adding-value in a more demanding environment is founded on our customer-led strategy. This way we can capture high occupancy levels and rental growth to provide future outperformance for shareholders. The commentary in this Review highlights the actions we have taken to produce financial outperformance in line with the strategy we describe above. These actions rest on the effectiveness of our people and as before, much work has gone into building still further our human capital and a performance culture with which to execute our business plans. Under "Portfolio Reshaping" we report on over Â£3 billion (gross) property purchases and sales. These reduced our holdings in market sectors where we forecast weaker customer demand and reinforced our market leadership positions where prospects are strong. It also shows how, even in favoured markets, we keep capital working hard by investing in property best placed to capture demand trends whilst reducing our holdings in more mature assets where we cannot do much more to improve them. We highlight newer initiatives in Europe and indexed-lease property which leverage our existing market skills into areas where customer demand can drive growth and we perceive pricing to be attractive. The "Development" section showcases one of our more distinctive added-value areas. By creating new buildings at the forefront of modern service industry needs, we use our property skills and financial strength to make attractive incremental return. Our notable success in letting these buildings is the acid test of their customer appeal. Under "Asset Management" we show the range of work we undertake to better tailor our existing buildings to areas of greatest customer demand. In turn this results in the above market rental growth. Our "Property Sectoral Outlook" and market commentaries explain in more detail the implementation of strategy and its rationale. In the "Financial Performance" section and the "Partnerships" section, the ways we have added value to supplement our property activity are described alongside an explanation of the financial results of this activity and the KPIs that show its effectiveness. Our balance sheet and debt management continue to be distinctive strengths, amplifying property returns. Equally fiscal management and especially our REIT election were major value creators during the year. And by working with others, inter alia through Joint Ventures and Unit Trusts, we earn valuable extra income, leverage our skills and capital and increase manoeuvrability in the property markets. This year we also highlight more fully, in our Corporate Responsibility Report, our actions on sustainability including the commitment to lead our industry and become carbon neutral. We are a business of the built environment. Our careful use of scarce resources and our buildings' impact in improving our communities and facilitating growth remain integral to our business success. The CR Report may be viewed in full on our website www.britishland.com. Portfolio Reshaping We continually review the prospects and expected performance of each asset in our portfolio in the light of market conditions, deciding across the portfolio when to buy, hold or sell, as part of the ongoing process of improving risk adjusted returns. Our occupier led strategy informs these decisions, concentrating on markets, sectors and properties with positive supply/demand characteristics, and focusing on providing efficient and flexible accommodation in the right locations. Our principal themes are: - to amend and refine the sector and market mix of our portfolio to best capture trends in customer demand and rental growth; and - within our selected markets to recycle capital, buying and selling properties to improve the appeal and growth prospects of our holdings. We have further strengthened our positions in our favoured markets: - prime offices, especially in London, with new investment primarily via our development programme, to capture the increasing rental values driven by strong demand for accommodation from the financial and business services industries; - UK out of town retail, principally open A1 use parks and superstores, where consumer sales are growing fastest and retailers require increasing representation and new flexible trading formats. Together with the constrained supply characteristics of this sector, these factors are resulting in rising rental values; - European out of town retail where initial and prospective returns are favourable, responding to changing customer demographics and shopping trends which are expected to follow similar growth patterns to those seen in the UK; and - properties subject to long leases with fixed or indexed annual rental increases. The RPI indexed increases are both more certain and potentially higher than 'all property' rental growth estimates and therefore are likely to be increasingly valued investments in a market with slower capital growth and intense focus on rental improvements. Conversely, we have decreased our holdings where we see limited remaining opportunities to add value under our management and where we are less confident of their growth prospects in comparison with the alternatives available to us. The sectors reduced this year are in town shopping centres and high street units, retail parks with bulky goods profiles, provincial offices and industrial units. The strong investment market has provided good opportunities to achieve high sale prices; proceeds which we have reinvested into areas where we can create greater value. Our portfolio choices have already added value as the sectors and assets picked have performed more strongly than those reduced. Sales Price BL Share Gain/ 12 months to 31 March 2007 Â£m Â£m (Loss) %(1) Retail: Queensmere & Observatory 200 200 (9.0) Shopping Centres, Slough Gallions Reach Shopping Park, 192 35 8.4 E6 2 29 in town retail units 146 146 9.0 Weston Favell Shopping 122 61 22.0 Centre, Northampton3 9 Retail Warehouse Parks 112 75 9.2 Marsh Mills Retail Park, 57 28 12.6 Plymouth4 4 Homebase stores 56 56 22.2 New Cross Gate, SE1 4, 48 48 20.5 Sainsbury's and retail units5 Purley Way, Croydon, Units 44 44 12.5 1-3 2 B&Q warehouses: 41 41 (1.1) Stockton-on-Tees and Dagenham Sainsbury's, Hanley 21 21 (5.0) 1,039 755 5.2 Offices: Plumtree Court, EC4 6 120 43 18.8 133 Houndsditch, EC3 110 110 41.2 51 Eastcheap, EC3 55 55 7.1 2-12 & 20-21 Cornwall 50 50 59.8 Terrace, NW1 5 Provincial Offices 39 39 8.3 374 297 27.7 Others: 60 50 82.3 1,473 1,102 12.7 1 sale price versus last year end valuation (March 2006) 2 Hercules Unit Trust (HUT) 3 The Tesco British Land Property Partnership 4 BLT Properties Ltd 5 completed April 2007 6 City of London Office Unit Trust (CLOUT) We also continue to adjust holdings within our favoured markets. This is because, even where our sector view is positive, there may be assets which for their own specific reasons have less we can do to improve them further or represent outsize commitments overall. Disposals of retail parks, for example, included the sale by HUT (and others) of Gallions Reach Shopping Park, Beckton for Â£192 million. The 'Phase 2' site adjoining Gallions Reach owned by British Land was also sold for Â£15 million, against a book value of less than Â£1 million. Our decision to sell the in town Slough shopping centres (at a loss versus March 2006 valuation) also reflects our disciplined focus on future trading prospects. The City offices sold were less prime, mature investments and we had the opportunity to take profits and recycle the proceeds more effectively in our developments. After the year end, in April 2007 we began marketing for sale the landmark building at One Exchange Square, in the heart of Broadgate, currently the headquarters of the European Bank for Reconstruction and Development. Contracts have recently been exchanged for the sale to KanAm Grund for Â£406.3 million, with completion due in June. We also launched in April 2007 proposals to introduce investment partners for our 1.5 million sq ft regional shopping centre, Meadowhall, Sheffield. Investors will have the opportunity to acquire a stake in Meadowhall. Since this is an exceptional asset, British Land expects to remain the largest individual investor and will act as Fund and Property Asset Manager, enhancing the returns from our in-house skills. Further details of Meadowhall are shown later in this report. In May 2007 our joint venture, the Scottish Retail Property Limited Partnership, exchanged contracts for the sale of the East Kilbride Shopping Centre. Purchases Price BL Share Value 12 months to 31 March 2007 Â£m Â£m uplift % 1 Retail: UK - 50% share of 21 Tesco 325 325 - superstores portfolio 2 50% share of BL Davidson 269 269 9.7 portfolio 9 B&Q warehouses3 230 221 6.8 Centre Retail Park, Oldham 115 115 - Hatters Way Retail Park, 39 14 - Luton4 Giltbrook Retail Park, 35 35 - Nottingham5 2 further retail parks: 24 16 8.9 Dartford6 and Hyde Worcester Road, Evesham7 20 5 0.1 8 Somerfield Supermarkets 20 20 4.1 Europe - Nueva Condomina, Murcia, 237 118 - Spain8 9 retail parks in Europe9 200 63 - 50% share of Puerto Venecia, 69 69 - Zaragoza10 1,583 1,270 3.4 Offices: 50% share of BL Davidson 96 96 26.2 portfolio 9 Cable & Wireless offices/ 88 88 - network sites11 Osnaburgh Street Estate, 55 55 - NW1 12 Colmore Row, Birmingham12 25 25 2.0 264 264 9.7 Others: Leisure, hotel & office 47 36 - ancillary investments 14 TGI Friday restaurants 11 44 44 8.0 91 80 4.4 1,938 1,614 4.5 1 from purchase price to March 2007 valuation (or earlier sale price) 2 Â£650 million portfolio acquisition in new Limited Partnership, March 2007 3 includes 7 acquired in portfolio, 1 in Hercules Income Fund (HIF) 4 HUT (completed May 2007) 5 existing park and new development project 6 Dartford acquired by HUT 7 HIF - forward purchase of retail development 8 joint venture BL/PREF (Pillar Retail Europark Fund), exchanged contracts with completion due summer 2007 9 PREF - 3 parks in Portugal, 2 in Spain, 2 in Switzerland, 1 in Belgium and Italy 10 purchase of 50% interest from and joint venture development agreement with Copcisa Corp (a Spanish construction company) and private investors 11 completed April 2007 12 for development The retail parks acquired are part open A1 schemes in prominent positions which attract strong customer demand. With scope for our proactive asset management to tailor the accommodation and amenities to further increase the appeal of parks for both tenants and shoppers, we expect to achieve increasing rents. The new Limited Partnership with Tesco PLC (our fourth joint venture with them) incorporates 21 high quality Superstores across the UK, on leases subject to annual RPI indexed increases. Tesco is a strong superstore operator, attracting increasing numbers of customers and spending, and these investments are in limited supply due to land and planning restrictions. We expect the properties will rise in value, reflecting these attributes, while the lease structure guarantees increasing rental income. The occupational leases to Tesco also provide tenant operational flexibility, reflecting both Tesco's strategy and our customer focused approach. The purchases of the B&Q stores (each of c 100,000 sq ft), the TGI Friday's restaurants and the Somerfields stores, all in good trading locations, together with the Cable and Wireless offices, also involve long leases with fixed or indexed annual rental increases, subject to a cap. Our holdings of properties subject to this type of lease, with a certain level of cash flow and security of return, now amount to some Â£1.6 billion. The market is not presently attributing full value to these types of leases - they provide attractive initial yields with guaranteed increasing cash flow growth, plus where market rental growth for the property exceeds RPI, the further increase is recognised in valuations and captured at the open market review or at lease expiry. The acquisition of the outstanding 50% of the BL Davidson joint venture brought into our portfolio properties including further retail parks and London offices. We are making selective profitable disposals of the smaller assets. Post year end, in April 2007, HUT formed a new Â£680 million joint venture limited partnership with The Crown Estate incorporating three major retail investments: HUT's Â£480 million Fort Kinnaird Shopping Park in Edinburgh (550,000 sq ft) and The Crown Estate's Gallagher Retail Park, Cheltenham (246,000 sq ft) and The Shires Retail Park, Leamington Spa (140,000 sq ft), together Â£200 million. British Land will act as property adviser to the new limited partnership. HUT unitholders will benefit from diversification of investment, gaining exposure to two new high quality retail parks (not available on the market) which, together with Fort Kinnaird, offer further asset management opportunities under joint ownership. It also enables HUT to realise cash for reinvestment and degearing. Investment in European retail In an important strategic step, we extended our investment in Europe, becoming market leaders in its growing out of town retail park market. This profitably leverages the management infrastructure and expertise we have built in the UK and our European representation. There is an under provision of modern out of town retail parks in many of the major countries in Europe, resulting in attractive supply/demand characteristics. The Eurozone retail market currently has lower rents and higher initial yields than in the UK, with similar customer preference trends which indicate that the market will develop and grow. 'Out of town' retail offers customers great value compared with the high street, with rents on average only 10/15% of those in town - and some 50% of a fashion park in the UK. These assets have strong prospects for growth and are attracting increasing international investor interest. In May 2006 we completed the purchase of a 50% joint venture interest in the Puerto Venecia retail and leisure development project of 200,000 sq m (2.2 million sq ft) in Zaragoza, Spain. British Land also has an effective 40% interest in PREF, which now owns 12 income producing retail parks in Spain, Italy, Portugal, Belgium, France and Switzerland, and has contracted conditionally to acquire a further six schemes currently under development. The combined area of these PREF schemes and developments when completed will total 340,000 sq m (3.6 million sq ft) with an estimated market value of over â‚¬745 million (Â£510 million). In March 2007, British Land and PREF formed a joint agreement to acquire a new prime regional shopping centre and retail park known as Nueva Condomina in Murcia, Spain for c â‚¬350 million (Â£237 million) with completion expected in the summer. The 120,000 sq m (1.3 million sq ft) scheme includes a two storey enclosed shopping centre, which opened in September last year, with a multiplex cinema and a hypermarket, and a retail park due for completion shortly. The scheme is overall 96% let to major international and Spanish retail brands. In the office sector, the acquisition of the remaining freehold interest in Osnaburgh Street, NW1, from the Crown Estate has enabled us to begin construction of the next phase of development of the Regent's Place estate, as set out below. The freehold of the former Natwest building in Colmore Row, Birmingham, is a prominent and prime office site in the centre of the city for prospective redevelopment. We are designing some 250,000 sq ft of new high quality offices, to provide an attractive addition to the Birmingham office market. Development The objectives of our development activities are to: - add high quality assets to the portfolio in areas of strong customer demand - provide new buildings to meet modern business requirements in both the retail and office sectors - create investments with potential for growth - realise attractive capital returns. Important elements of development projects include the transport and other infrastructure attributes of the location, quality of specification, configuration and flexibility of accommodation, and timing of delivery into market demand. Emphasis is also placed on working with talented architects to create well designed and sustainable buildings that enhance their location. Construction is rigorously managed to achieve efficient completion with high health and safety standards. Our London Office development programme represents an ideal way for us to meet customer needs in this sector, producing high quality buildings of architectural merit in the right locations, offering flexible, efficient floor plates and an attractive working environment. In turn, the programme is an effective way to increase our holdings in this sector, generating higher returns than those available in the current investment market. ------------- ------ --------------- ----- ----------- ------- ------- Completed Sq ft Rent Â£m pa Site Construction Value Project projects 000 --------------- cost cost + March Uplift (since 31 March Total(1) Let/ Â£m interest 2007 % 2006) pre-let Â£m Â£m ------------- ------ ------ ------ ------ --------- ------- ------- York House 137 7.4 6.1 23 60 127 53 Blythe Valley 35 0.7 0.7 1 7 11 38 (G2) Willis Building 491 21.4 21.1 48 230 360 29 ------------- ------ ------ ------ ------ --------- ------- 663 29.5 27.9 72 297 498 Coleman Street 180 - - 9 30 44 13 (CLOUT - forward sold) ============= ====== ====== ===== ===== ======== ======= ====== (1) current headline rent (excludes provision for tenants' incentives) Data for Group and its share of Funds and Joint Ventures (except areas which are shown at 100%) Four projects totalling 843,000 sq ft have completed since 31 March 2006, on schedule and generating significant profits. The Willis Building at 51 Lime Street, EC3, designed by Foster and Partners, with all the offices pre-let to leading insurance broker Willis Group, is now in the fit out phase. The new 29 storey tower and adjoining 10 storey building occupy a prime site opposite Lloyd's of London, and are a striking new addition to the City skyline. York House, W1, is complete and we now occupy c 40,000 sq ft as our new head office. In May 2007 we contracted to let 33,700 sq ft, the majority of the remainder of the office space, to Government of Singapore Investment Corporation at Â£67.50 sq ft. Three of the four retail units also have terms agreed for letting. The 22 residential apartments in York House have all been let, or reserved for letting, on assured shorthold tenancies. Aside from its profitability, York House is a prime example of the merits of modern flexible office space with strong design, redefining the attractions of its location and capturing customer demand in so doing. ------------------------------------------------------------------------ Cost Â£m2 Committed -------------- developments PC(1)Sq ft Total To Value Notional Rent Sales complete March Interest pa Â£m5 07 Â£m Â£m3 Â£m4 ----------- ------- ------ ----- ------ ------ ------- ----- ----- London Offices: 201 Q3 2008 822 302 174 369 17 42.1 - Bishopsgate/ Broadgate Tower The Q1 2011 612 396 368 114 46 36.9 - Leadenhall Building Ropemaker Q2 2009 593 229 211 175 29 31.5 - Osnaburgh Q3 2009 490 228 214 77 19 19.4 51 Street6 Basinghall Q2 2007 199 40 8 32 - - 43 Street7 Ludgate West Q4 2007 127 49 20 71 2 6.2 - ----------- ------- ------ ----- ------ ------ ------- ----- ----- Total Offices 2,843 1,244 995 838 113 136.1 94 Retail Parks Puerto Q4 2007/ 2,159 106 88 77 8 9.3 21 Venecia, Q4 2009 Zaragoza8 Giltbrook, Q2 2008 199 46 44 10 3 3.9 2 Nottingham ----------- ------- ------ ----- ------ ------ ------- ----- ----- Total 5,201 1,396 1,127 925 124 149.3 117 =========== ======= ====== ===== ====== ====== ======= ===== ===== 1 estimated practical completion of construction 2 estimated construction cost 3 from 1 April 2007 to PC 4 current estimated headline rent (excludes provision for tenants' incentives) 5 parts of development expected to be sold, no rent allocated - see also footnotes 6 and 7 below 6 Regent's Place, development includes 110,000 sq ft residential, expected to be sold 7 CLOUT - BL share 35.9% - forward sold 8 joint venture (Eurofund Investments Zaragoza) - BL share 50% Data for Group and its share of Funds and Joint Ventures (except areas shown at 100%) London offices developments, customer focused and carefully timed 201 Bishopsgate and The Broadgate Tower are well underway and on programme for completion in 2008. The steel frame for the tower has reached its full height at level 35, establishing its position, with the adjoining 13 storey building, as the next phase of Broadgate. This project is the largest speculative office development undertaken in the City of London and has already attracted considerable tenant interest. Contracts have been exchanged with Henderson Group plc for a pre-letting of 124,000 sq ft at 201 Bishopsgate. Henderson will relocate from 4 Broadgate which we plan to redevelop; the first element of unlocking the future development potential at Broadgate under our '2020' master planning exercise. In addition at 201 Bishopsgate head of terms have been agreed for a pre-let of 223,000 sq ft with Mayer, Brown, Rowe & Maw LLP, one of the largest international law practices. Taking into account the additional accommodation over which Henderson and Mayer Brown have options, all the offices at 201 Bishopsgate are fully reserved. We have also agreed heads of terms for a pre-let of 155,000 sq ft at The Broadgate Tower. Construction of Ludgate West is also progressing as scheduled, towards estimated completion in late 2007. We have recently announced heads of terms agreement to pre-let about 69% of the offices to Charles Russell LLP, a leading firm of lawyers. London offices Total Lettings: developments pre-let, heads of terms, under offer, or forward sold Completed developments 754,000 sq ft 98% Under development with PC 1,148,000 sq ft 69% 2007/8 Our development of the Regent's Place estate has redefined this area of London's West End, creating a new working environment with modern office floorplates, together with retail and public spaces - meeting occupier demand with accommodation not otherwise available in the crowded West End, and generating rental growth. We have already developed 1 million sq ft and at Osnaburgh Street and the North East Quarter will provide another 1 million sq ft. Osnaburgh Street is a 2.5 acre site on the west side of Regent's Place where demolition of the existing buildings has begun in preparation for a mixed use scheme of 380,000 sq ft offices and 110,000 sq ft of residential accommodation for completion in the second half of 2009. The North East Quarter will be the next phase; a detailed planning application has been submitted to provide a further 384,000 sq ft of offices and 124,000 sq ft of residential units. Ropemaker, a prominent 1.2 acre City site close to Moorgate, was purchased in March 2006 with planning consent in place for an office development of 505,000 sq ft. During the year we changed the design and have obtained a revised and increased planning consent for a building of 593,000 sq ft, which will maximise the efficiency, floor areas and tenant appeal of the project we are taking forward. Construction is well underway. At Leadenhall, following achievement of revised planning, demolition of the existing building is also underway to prepare for construction of a new striking City office tower which we consider destined to be recognised as London's finest such tower. The Building Research Establishment Environmental Assessment Method (BREEAM) was established to evaluate a broad range of the environmental impacts of various new building types. All our London offices developments have target or provisional BREEAM ratings for the buildings of Very Good or Excellent (at the top of the scale). As examples of these environmental factors, the appeal of The Broadgate Tower and 201 Bishopsgate is enhanced by their energy efficiency (they are expected to produce a 29% lower level of emissions than is stipulated by current building regulations) and the design of Ropemaker also incorporates highly efficient plant to reduce energy use and carbon emissions. 2.4 million sq ft retail development - projects in UK and Spain Giltbrook Retail Park, Nottingham was purchased in mid-2006. We redesigned the project, achieved a revised planning consent and are proceeding with a 199,000 sq ft mixed used scheme of retail and industrial space, with improved environmental attributes. The development of the park is expected to complete in 2008, anchored by an adjacent existing IKEA store. Approximately 50% of the new area is under offer, attracting premium rents and confirming our expectations that Giltbrook will become an important regional retail destination. The joint venture development project, Puerto Venecia, Zaragoza, Spain, will provide a retail park, a shopping centre and a specialist retail and leisure park, with ancillary facilities. Zaragoza is Spain's fifth largest city, approximately 300 kilometres from each of Madrid, Barcelona and Valencia. This important project will provide a new regional centre for the city, which will host the International EXPO in 2008. Infrastructure works for Puerto Venecia are making good progress - including the access required to enable the opening of the IKEA store in May 2007. IKEA will anchor the retail park and we have exchanged contracts with El Corte Ingles, Spain's largest department store operator, to anchor the shopping centre with an owner occupied store of distinctive design, providing over 400,000 sq ft. Other tenants for the retail park include Leroy Merlin, Conforama and Porcelanosa. Over 70% of the retail park has been pre-let, pre-sold or is under offer, with units planned to begin opening from the end of this year. We are in the process of further design enhancement for the retail and leisure centre, with good interest from major retailers. Development prospects Sq ft Cost Value, Notional Rent Sales Planning 000 Â£m1 March Interest2 Â£m Â£m 2007 Â£m pa3 ----------- --------- ------ ----- ----- --------- ------ ----- ------- Regent's NE Quarter 508 222 38 13 18 64 Submitted Place Colmore Row Provincial 249 70 26 9 8 - Pending Office Blythe Valley Park Phase 1 Business 697 116 16 4 14 - Outline/ Park - Detailed Blythe Valley Park Phase 2 Business 680 114 - 3 14 - Outline Park New Century Business 582 76 21 3 8 12 Detailed Park4 Park/ Distribution Meadowhall Mixed use 1,270 293 24 6 22 38 Pending additional land Theale Residential 204 31 15 2 4 - Submitted Preston Deepdale 67 14 3 - 1 - Detailed Retail Park ----------- --------- ------ ----- ----- --------- ------ ----- ------- 4 Broadgate City Office ) Pending Euston West End ) master planning in Pending Station5 Retail, progress office, ) residential Canada Water6 Mixed use ) Outline =========== ========= ====== ===== ===== ========= ===== ==== ======= 1 estimated construction cost to complete 2 during construction to PC 3 current estimated headline rent (excluding cost of tenant incentives) 4 post year end to be sold to BL Rosemound JV 5 in partnership with Network Rail 6 joint venture with Canada Quays Limited Network Rail recently chose British Land as the preferred partner for a major mixed use redevelopment of Euston Station. We will work with Network Rail to prepare a masterplan for the creation of a landmark station interchange. The 15 acre site will accommodate up to 4 million sq ft of mixed use development including retail, office, residential and the new station, realising its commercial potential and assisting with the on-going regeneration of the area. Following settlement of legal agreements a planning application is expected to be submitted in early 2009. We are also working with Sheffield City Council for the master-planning of the land we own adjacent to Meadowhall Shopping Centre. The proposals, including offices, residential and car showroom facilities have attracted strong interest from potential commercial occupiers and will provide a further boost to the economic activity and amenity of the area. 'Broadgate 2020' is a master planning exercise for Broadgate - presently a relatively low rise and low density estate. We are exploring the possibilities of higher rise development in certain areas and adding extra floors to some existing buildings. In particular, 4 Broadgate has been identified as a redevelopment prospect for a new tower scheme with substantially increased floor areas. We aim to submit a planning application in due course. Other elements include working with Crossrail which has proposed an adjacent station with a new Broadgate ticket hall, giving opportunities for improved transport links and additional amenities. Asset Management Our aim to add value to the portfolio and our attention to customer needs and service across the business are reflected in the range of asset management and development activity. Good results have been generated from new and renewed lettings, rent reviews, lease restructurings, planning improvements and scheme refurbishments. Our market leadership in Retail and in Central London offices offers tenants an unrivalled choice - and this scale benefits both parties. New lettings and lease Number Sq ft Rent, Â£m pa renewals 000s ------------------ (including Funds and Joint New BL Ventures) total share of increase ------------------ -------- --------- ------- -------- Retail Warehouses 75 554 13.3 8.0 Shopping Centres 135 485 16.9 6.9 High Street 16 87 1.3 0.1 Central London Offices 22 197 8.1 4.4 Other 129 543 5.4 2.5 ------------------ -------- --------- ------- -------- Total 377 1,866 45.0 21.9 ------------------ -------- --------- ------- -------- Retail parks During the year we have achieved more lettings at our out of town locations to retailers who are either moving from in town or introducing new formats for out of town trading. We are able to deliver both revised unit sizes and new formats at these properties, responding flexibly and meeting retailers' changing requirements. Our completed development at Nugent Shopping Park, Orpington is now fully let or under offer; major retailers represented there include Game, HMV, Vision Express and WH Smith Stationery. The latter two are first lettings to these companies in out of town retail park formats. HUT has secured the first out of town lettings to Stylo Barratt's new concept store, Shutopia, at Parkgate, Rotherham and Borehamwood Shopping Park. HSBC also took their first out of town unit at Borehamwood. Marks and Spencer is one of the retailers active in developing new out of town formats, and extending their 'Simply Food' outlets. Across our portfolio this year we have concluded seven new lettings to M&S over a total floor area of 250,000 sq ft at locations including Stockton, Edinburgh, Preston and Hayle - and there are more in negotiation. In several cases we have been able to revise planning and design, and improve configurations, to meet the customer's individual requirements. Meadowhall Shopping Centre Letting activity has included 29 new lettings and renewals covering over 220,000 sq ft. These include the reconfiguration of the area previously occupied by Sainsbury's where Primark and Next have taken units of 73,000 sq ft and 66,000 sq ft in the new space, recently delivered to these tenants for their fit out. The major refurbishment programme is well advanced and expected to complete on schedule in October 2007. These works have included the balcony bulkheads being cut back to improve the visibility of the shops when viewed between ground and first floor levels. The Arcade columns have been reduced in diameter, lighting and signage have been enhanced, and escalators and lifts are being renewed. All these improvements are designed not only to maintain Meadowhall as a pre-eminent regional shopping centre but also to provide customers with ease of movement around the centre and a more comfortable shopping environment. Superstores In this sector of the portfolio we see operators continuing to prefer long leases to secure their trading positions. During the year we completed a surrender and renewal of the lease to Sainsbury's at a store in Surbiton which was due to expire in 2014. The new lease has a term of 30 years from March 2007 (an effective extension of 23 years) at an increased rent. Our joint ventures with Tesco have agreed and funded extensions to provide a total of 72,000 sq ft of new space at four stores - another way to add to our holdings in this selected sub-sector where there is restricted supply. The extensions include one complete redevelopment (increasing the store size by over 50,000 sq ft) to provide a new Tesco Extra store with ancillary units. Further extensions of a total 50,000 sq ft have been agreed and are being implemented over the course of this year. London offices New lettings at Plantation Place South, EC3 in the year of a total of 73,000 sq ft have been achieved, including 28,000 sq ft to AIG Global and 19,000 sq ft to Arch Insurance. Plantation Place South is now 76% let. We have also let (after the year end) the last remaining floor of 14,500 sq ft at 10 Exchange Square, Broadgate, to Herbert Smith at Â£55 per sq ft - a new rental high for the estate. A number of value enhancing initiatives have been taken at our London offices over the year. Reflecting our confidence in the market, we negotiated the take-back of the lease to Baring Investment Services in respect of 38,000 sq ft at 155 Bishopsgate. We have refurbished this area, as part of our ongoing programme, and it is now available for open market letting. UBS, an existing tenant at Broadgate, had a requirement for further office accommodation. To meet their needs we were able to agree with two other tenants the surrenders of leases at 6 Broadgate and re-let 66,000 sq ft to UBS. This established a revised open market rental value for unrefurbished space, and another indication of the improvement in City occupational market conditions. A planning application has been submitted and preparatory works are in hand at 338 Euston Road, Regent's Place in respect of a major refurbishment and extension of the ground floor and common parts, together with at least 20,000 sq ft on three floors; this project is intended to create a new standard and profile, and to establish new market rental evidence on relettings. ----------------------------------------------------------------------- Rent reviews Number Rent, Â£m pa (including Funds and Joint ----------------------- Ventures) New Increase BL share total of increase ------------------ -------- -------- -------- -------- Retail Warehouses 57 20.4 5.1 3.6 Superstores 27 31.0 2.6 2.1 Shopping Centres 115 28.8 2.4 1.8 High Street 15 3.4 0.4 0.4 Central London Offices 20 39.3 0.1 0.1 Other 23 5.1 0.2 0.2 ------------------ -------- -------- -------- -------- Total 257 128.0 10.8 8.2 ------------------ -------- -------- -------- -------- Good progress has been made with rent reviews across the portfolio, concluding 257 reviews over the year at overall 5.5% above the external valuer's applicable ERV, and generating an increase in current rental income to British Land of over Â£8 million per annum. Customer focus In our 2005 Annual Report we recorded major changes in our approach to customer service. There have been encouraging results from this activity. To assess our progress, in early 2007 we undertook independent Customer Surveys to understand our occupiers' perception of our management effectiveness: â€¢73% rated British Land as excellent or good in fulfilling its role as a landlord â€¢84% said they would recommend British Land. Portfolio Valuation The table below shows the principal valuation movements for the year to 31 March 2007, by sector across our Â£16.9 billion portfolio. All sectors improved in value, contributing to the 9.7% uplift for the 12 months. The capital return from the portfolio at 10.9%, as measured by IPD (calculated, excluding Europe, on average capital employed and excluding capitalised interest) was slightly ahead of the IPD Benchmark at 10.7%. Contributing to this performance was like for like growth in rental value (ERV) for the portfolio, ahead of the market at 6.9% (IPD Benchmark 4.3%), generated from both Central London offices and out of town retail. The net equivalent yield (after notional purchaser's costs) on the portfolio also tightened by 23 bps to 4.7% over the year. The main sector drivers of the valuation increase were: â€¢London offices, including developments, at 35.1% of the portfolio rose by 14%, including 12.8% ERV growth on the investments, reflecting the improving occupational market and sustained investment demand, â€¢retail warehouse parks at 24.1% of the portfolio were up by 10.3% led by rental growth and sustained demand for open A1 parks in particular, â€¢superstores, which represent 13.6% of the portfolio, increased in value by 9.5%, based on ERV growth and a measure of further yield compression under strong investor demand. Valuation by Sector Group Funds/ Total Portfolio Uplift2 JVs1 Â£m Â£m Â£m % % ---------------- -------- -------- ------- ------- ------- Retail Retail warehouses 2,503 1,566 4,069 24.1 10.3 Superstores 1,678 622 2,300 13.6 9.5 Shopping centres3 1,999 512 2,511 14.8 3.4 Department Stores 797 148 945 5.6 5.1 High street 348 - 348 2.1 4.6 ---------------- -------- -------- ------- ------- ------- All retail 7,325 2,848 10,173 60.2 7.6 Offices City4 4,126 - 4,126 24.5 13.1 West End5,6 964 - 964 5.7 18.0 Business parks & 172 3 175 1.0 5.6 provincial Development6 899 1 900 5.3 13.6 ---------------- -------- -------- ------- ------- ------- All offices 6,161 4 6,165 36.5 13.6 Industrial, 531 34 565 3.3 7.4 distribution, leisure, other ---------------- -------- -------- ------- ------- ------- Total 14,017 2,886 16,903 100.0 9.7 ---------------- -------- -------- ------- ------- ------- 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2007 - includes valuation movement in developments, purchases and sales, net of capital expenditure 3 Meadowhall Shopping Centre valuation up 3.5% to Â£1,640 million (up 5.8% pre cap-ex); ERV Â£83 million; net equivalent yield 4.63% (true equivalent yield 4.76%) 4 Broadgate valuation up 10.6% over 12 months to Â£3,569 million; headline ERV range Â£44-55 per sq ft (average headline ERV is Â£48.60 per sq ft); net initial yield 4.78% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 5 Regent's Place valuation up 12.3% over 12 months to Â£651 million; headline ERV range Â£23.50-49.00 per sq ft; net initial yield 4.5% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 6 West End now includes York House, previously shown under Development British Land also owns 17.8% of Songbird Estates PLC, which in turn owns 60.8% of Canary Wharf Group PLC, providing a "look through" 10.8% economic interest in the London Docklands estate, comprising 7.9 million sq ft of high quality investment properties valued at over Â£6 billion. Canary Wharf is an internationally recognised premier office estate, having established new standards of construction, and has done much to facilitate London's financial services sector growth. British Land invested Â£97 million in Songbird in June 2004. Cash dividends totalling Â£67 million have been received since that date. The investment was independently valued for accounting purposes at 31 March 2007 at Â£255 million, equivalent to 227 pence per share. The market value of the AIM listed B shares at 31 March 2007 was 323 pence per share. Portfolio yields Annualised Reversionary Current Reversionary (excluding net rents1 income2 yield3 yield2,3 developments) Â£m Â£m % % ---------------- --------- ---------- ------- ---------- Retail Retail Warehouses 153 30 3.8 4.6 Superstores 102 6 4.4 4.7 Shopping Centres 114 17 4.6 5.2 Department Stores 42 6 4.5 5.1 High Street 16 2 4.6 5.1 ---------------- --------- ---------- ------- ---------- All retail 427 61 4.2 4.8 Offices City 173 32 4.2 5.0 West End 35 12 3.9 5.2 Business Parks & 8 3 4.5 6.1 Provincial ---------------- --------- ---------- ------- ---------- All offices 216 47 4.1 5.1 Industrial, 30 4 5.2 5.9 distribution, leisure, other ---------------- --------- ---------- ------- ---------- Total 673 112(4) 4.2(5) 4.9 ---------------- --------- ---------- ------- ---------- 1 net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs 2 includes rent reviews and lease break/expiry and letting of vacant space at current ERV (as determined by external valuers) within five years, plus expiry of rent free periods 3 portfolio yield (gross to British Land, without notional purchasers' costs) 4 Â£59m contracted under expiry of rent free periods and fixed/minimum rental increases 5 current yield after adding back rent frees 4.5% Strong growth in cash rents is targeted within the next five years from the existing portfolio and from the committed development programme. At current market rental values, without projecting any growth or inflation, achievement of the reversionary income and letting of committed developments would add Â£261 million to our annual passing rents (while interest costs on the funding for the development costs would also increase). Contracted increases of Â£59 million per annum are due from expiry of rent free periods and fixed/minimum rental uplifts. (It should be noted that accounting policies under IFRS require that portions of these contracted rents are anticipated in the Group's income statement). Leases and occupancy Average lease Underlying1 Vacancy rate (excluding term, years to vacancy rate % % developments) first break ----------------- ------------ ----------- ---------- Retail Retail Warehouses 13.4 0.8 2.2 Superstores 20.4 - - Shopping Centres 12.8 2.8 5.3 Department Stores 29.8 - - High Street 10.0 0.5 1.7 ----------------- ------------ ----------- ---------- All retail 16.3 1.2 2.5 Offices City 11.0 1.7 2.9 West End 10.1 2.4 11.4 Business Parks & 12.2 11.2 11.5 Provincial ----------------- ------------ ----------- ---------- All Offices 10.9 2.2 4.8 Industrial, 22.2 4.1 4.1 distribution, leisure, other ----------------- ------------ ----------- ---------- Total 14.7 1.6 3.3 ----------------- ------------ ----------- ---------- 1 the underlying vacancy rate excludes asset management initiatives and units under offer Our portfolio income is low risk, from leases with an overall weighted average term of 14.7 years to first break. Occupancy is very high across all the sectors, with only 1.6% of the total accommodation being available for letting. Vacancies in West End offices at the year end are primarily due to completion of York House (where the majority of the space is now let or under offer) and our asset management project at Regent's Place where we have taken back accommodation for refurbishment and extension. Property Sectoral Outlook The UK property investment market continued to be strong during the year as the repricing of the asset class in relation to other financial assets was completed. Real estate's growing cash flows and strong downside protection position it between bonds and equities in the hierarchy of total return prospects, while value can be added by active management, development and gearing to produce enhanced equity returns. As the rate of yield shift subsides future performance is likely to be more dependent upon rental value growth. Rents remain affordable in most sectors and the economy's prospects should support continued growth in the service industries, with rising employment and consumer spending. However, all occupiers face their own competitive pressures and will be discriminating as to which space is most appropriate for them. Investor demand has been good and continues to be so, albeit increasingly selective. Transaction levels have been high, with maintained liquidity and demand from both UK and overseas investors. The British Land portfolio has leading positions in the two main sectors with the best prospects for rental growth - out of town retail and London offices. Retail Sector â€¢Â£10.3 billion invested, including completed value of committed developments â€¢total property under management Â£14.5 billion â€¢80% out of town Investment Market Demand for prime retail, in the right locations and providing well configured trading floorspace, continues to be healthy and market prices are robust. Superstores and Open A1 retail parks are experiencing particularly strong demand with limited supply. The majority of available supply is of secondary assets and there are initial signs of differentiation in yield levels between these and prime. We consider this differentiation should widen to reflect correctly their relative growth prospects. Occupier Market While retail trading remains competitive and retailers' experience in the current market varies, with some affected by the impact of e-commerce, consumer spending is continuing to grow, albeit at a lower rate. Total retail sales are forecast to grow over the next five years, with out of town shopping locations maintaining the trend of taking an increasing share. Driven by factors including convenience and enhanced choice, out of town is expected to see sales growth of 18.5% to 2011 compared to in town at 5.8% (Verdict). Retailers find the size and layout of out of town space advantageous, while the overall costs of occupation and servicing such locations are typically lower. Migration or expansion by tenants from the high street to out of town is continuing with several utilising new store formats. The UK food retail sector is also strong with operators stepping up expansion to provide increasing non-food sales capacity. All retailers require ongoing flexibility of unit use and configuration, with favourable car parking ratios. Accordingly, there is strong demand for the types of out of town retail parks and superstores in which we are invested, against an increasingly constrained supply. Conversely, the market development pipeline is expected to increase availability of in town shopping centre space over the next five years. These features are producing higher than average rental growth for out of town retail. Strategy and positioning British Land has a distinctive retail portfolio, being the largest investor in UK out of town retail warehouses and superstores. In retail warehouse parks we favour open A1 planning consents where supply is extremely restricted and customer demand remains high. Our occupier led strategy, understanding the customer and providing the preferred trading space, is focused on these assets - their popularity with both tenants and shoppers bring continuing prospects of superior returns. We also hold selected in town assets where we see opportunities for adding value. We pursue acquisitions and disposals which further strengthen the portfolio. Assets are subject to regular review as we recycle capital into those retail assets which offer best prospects for rental growth. Sales in the year amounted to over Â£1 billion (our share Â£755 million) including: retail warehouses either primarily occupied by "bulky goods" tenants where demand for space is lower, or open A1 schemes which are highly rented following our asset management and where advantageous market prices have been obtained; shopping centres which are similarly 'mature' or where our expectations of future growth is more limited; and in town retail where we consider trading is likely to be weaker going forward. We have purchased new retail parks within our preferred sub-sectors, for example parks in the BL Davidson portfolio and at Oldham, where Centre Retail Park is dominant in its catchment and offers good asset management opportunities for us to generate increased value. Out of town - Â£8.0 billion invested - Â£8.2 billion including completed value of committed developments â€¢ 208 retail schemes, including superstores â€¢ providing 22 million sq ft â€¢ arranged in 1680 retail units â€¢ let to over 590 tenants â€¢ average lease length to first break of 15.6 years Key features in the out of town portfolio are: â€¢ open A1 use, applying to 74% of our retail park schemes (plus a further 11% 'open restricted'), which can attract high street retailers â€¢ larger schemes, usually over 100,000 sq ft, capable of dominating their catchment area â€¢ flexibility of unit size and configuration, to ensure that we can offer retailers their preferred floorplate at both shopping parks (where trend is towards smaller units for efficient trading) and superstores â€¢ schemes we can manage overall to improve the tenant mix and to provide better facilities (from cafes to cash points) in an environment which will increase shoppers' dwell time and improve sales densities for our retailers, while keeping occupational costs at a reasonable level in each case to benefit the retailers trading and our opportunities to generate rental growth. We calculate that we are the largest owner of UK superstores, other than the occupiers themselves. The superstore operators are gaining an increasing share of consumer expenditure through broadening product ranges, especially non-food, while maintaining their customer appeal of convenience and accessibility. In an increasingly restrictive planning environment which is limiting new supply of these assets, the retailers continue to require more and larger, flexible stores, and are prepared to commit to full lease lengths of over 20 years. The profile of rental growth with highly secure income is an attractive asset for British Land's portfolio. We have added to our portfolio in this sub-sector this year through the purchase of a 50% interest in 21 Tesco superstores - high quality assets in good locations let on 20 year leases to Tesco with RPI linked annual rent increases. The sale of New Cross Gate, with a Sainsbury superstore, at a sub-4% yield and 20% above book value, provides further evidence of market demand and pricing, which should assist our superstore portfolio valuation going forward. The Meadowhall Shopping Centre of 1.5 million sq ft is also an important component of our out of town portfolio and probably the best scheme of its kind in the UK, with exceptionally strong ongoing customer appeal. Our strategy is to capitalise on these strengths, positioning Meadowhall for attractive low risk growth through active management and ongoing refurbishment. This is expected to be complemented by the introduction of investment partners to the asset's ownership structure, and we have recently announced our plans to offer the market the opportunity to acquire such a stake in Meadowhall. In town - Â£2.1 billion portfolio: â€¢ 7 shopping centres - 3.7 million sq ft â€¢ 38 department stores - 5.6 million sq ft â€¢ 53 high street shops â€¢ 11 supermarkets Key features: â€¢ shopping centres Â£839 million Our focus for in-town shopping centres is on those which have specific asset management opportunities. The centres are typically: - located within large catchment populations - well anchored and the dominant retail scheme in the area - of sufficient size to enable future redevelopment to provide new sales space - where we believe income growth can be achieved through our proactive asset management, including introduction of additional customer facilities which will also be income generating, such as catering and leisure operations. â€¢ department stores Â£945 million These stores are fully let to Debenhams and House of Fraser with a weighted average term of over 30 years. Income growth from these assets is underpinned by provisions in the leases for guaranteed increases in rent, such that gross rents will increase by some Â£5 million (14%) over the next five years. All the stores are located in town centre retailing locations and opportunities for adding value are under review, including sales and development. â€¢ high street shops Â£348 million Disposals in the year of 27 high street shops, and two in town supermarkets have been made, for a total of Â£146 million, tightening our focus in the sector, and where particularly good market prices have been achieved. More such disposals are planned. Asset management and development initiatives continue apace, including the acquisitions and disposals, lettings, rent reviews, unit reconfigurations, refurbishments, developments and the major project at Meadowhall, all as set out earlier in this report. In summary across the retail portfolio, during this year: â€¢ 214 rent reviews were concluded at Â£7.9 million per annum (BL share) above the previous rent and overall 5.8% above ERV â€¢ 226 lettings and renewals generated Â£15 million per annum (BL share) of new rent â€¢ implementation of 225,000 sq ft of additional space at mezzanine level in retail park units (part of the c 1 million sq ft of potential such projects within the portfolio) â€¢ improving tenant mix and shoppers' choice at out of town retail parks by replacing catering units of c 4,000 sq ft with several smaller units of c 1,000 sq ft let to retailers including Costa and Subway â€¢ amendment of the planning consent for the development of the retail park at Giltbrook, Nottingham has been achieved. Some 50% of the new floor area is under offer and we expect to generate premium rents at this attractive regional destination park. The market is very competitive in the UK and retailers are focused on margins and selective on trading locations. As a result tenants are becoming more demanding and we are seeing an increase in market incentives for less than prime space. We expect modest rental growth rates for the sector overall, with increasing differentiation depending on location, planning, trading performance, tenant mix and unit flexibility. However, the diversity and quality of our portfolio enables us to respond positively to trends, deliver the required accommodation to our tenants and take advantage of new retailing concepts, such as Marks and Spencer Simply Food, Tesco Home Plus and Asda Living stores. We are also expanding in Europe, through PREF and our own investments and developments, as set out earlier in this review. Office Sector â€¢Â£6.2 billion invested â€¢Â£7.6 billion including completed value of committed developments London Office Investment Market London's global stature as a place to do business continues to grow with its unique competitive advantages as a pre-eminent financial and business service centre. To boot, these markets, including insurance, accounting and law, are themselves expanding. As a result, London's GDP is growing at a rate of 3.6%, higher than the UK's overall GDP growth of 2.8%, and employment is increasing. The investment market demand is still strong with the favourable expectations of rental growth keeping yields low, although yield compression is slowing. Transaction levels continue high, with improved prospects maintaining liquidity from a diverse range of investors. Occupier Market The employment growth in London has been fuelling demand for accommodation, in particular top quality Grade A. Increased demand has led to a significant improvement in take up of offices and, on the supply side, vacancy rates in London are low and falling. In the City, where the majority of our office portfolio is located, vacancy rates have reduced by 34% over the year, now standing at 6.1% overall, or 3.4% for Grade A offices, while rents are increasing. The immediate outlook is positive. We expect the strong levels of rental growth seen last year to continue this year, as rents remain affordable both in real terms and compared with other operating costs. Towards the end of the decade, primarily in the City and in response to rising rents, we do anticipate increased supply, although building cost inflation and the overall economics of many redevelopment opportunities may be limiting factors. That is why, especially in relation to our development programme, we are keeping our focus on capturing occupier demand by delivering the right product for our customers at the right time in the market, and thereby increasing rents. Portfolio 97% in Central London: â€¢ 5 million sq ft prime offices in the City â€¢ 1.4 million sq ft prime offices in the West End â€¢ weighted average lease length of 11 years â€¢ 3.4 million sq ft London office developments plus our investment in Canary Wharf through Songbird Estates. Strategy and positioning Our strategy is focused on four themes: - concentrating our efforts on and increasing our weighting in London offices where relative returns are likely to be attractive over the medium term - focus on providing occupiers with the right accommodation and best in class property and management services - actively varying the amount invested and assessing development starts and timing of completions, depending on our judgement of the stage of the office cycle - enhancing returns through active management and recycling capital from the sale of mature assets into our carefully timed, customer focused development programme. Our market leading office portfolio has performed well in the year due to increasing rental value, particularly in the second half of the year, and yield shift, which was a feature of the market in the first half of the year and is now slowing. We have limited exposure to downside risks in the investment portfolio due to the strong income flows under average lease lengths of 13 years to lease expiry, 11 years to break. Activity during the year to progress our strategy included: â€¢ recycling capital through the sale of 'mature' investments, and those which in our view do not offer adequate risk adjusted returns. Total sales of over Â£370 million of offices have been made in the year, achieving significant gains over valuation. Further sales will be made where we do not see adequate growth potential or where we believe the market is pricing too aggressively against the risks involved; â€¢ increasing our weighting in the sector through the development pipeline (set out earlier in this report), where we are delivering the best quality product to the market, and well timed to meet rising demand at higher rents. During the year the development programme has risen, through a combination of spending of over Â£250 million and value increase. Completed London office developments this year have added some 600,000 sq ft to our investments, and a further 2.2 million sq ft is being scheduled for delivery in 2007 - 2009; â€¢ achieving lettings in the year to March 2007 of some 200,000 sq ft in the City and West End, generating over Â£8 million of rent and, importantly, the recent further 600,000 sq ft let or under offer at our committed developments. These are confirming the improved market rental levels, overall in line with or ahead of our projections, and generate development profits through higher values - mostly to follow after the year end valuation. The prospects of further lettings of the accommodation becoming available in the developments are good, and we expect to achieve new higher rental levels. The minimal current vacancies in completed buildings are nearly all new or 'take back' accommodation; â€¢ employing asset management projects, such as taking back space and reletting it on the open market to establish new rental levels in otherwise fully let office investments, demonstrating our confidence in market rental levels and demand and enabling us to establish increased rents in open market transactions. We have reported, as part of our asset management activities, earlier in this report our taking back and reletting of offices at Broadgate and Regent's Place. In the case of Broadgate, the rents passing at present range between Â£44 and Â£55 per sq ft some of which, as the market continues to improve, will become reversionary. Our aim for the accommodation taken back at 155 Bishopsgate, having refurbished the offices, is to relet it in the open market at a level which will demonstrate further that rents at Broadgate are rising; â€¢ further rent reviews and preparation for the 1.9 million sq ft of London offices in the portfolio which is due for review in 2008/9, presently at an average rent passing of Â£41.75 per sq ft, where we expect to see strongest growth; â€¢ working hard to improve the services we offer, and our relationships with occupiers. This has led, as outlined below, to a marked increase in our customer satisfaction ratings. It also means we are closer to key occupiers like UBS and Henderson at Broadgate, so we can work with them to meet their changing accommodation requirements. Financial Performance Introduction The intense reshaping of the business over two years is reflected in a strong financial performance. The focus on rental growth, asset management, sector and asset specific buy and hold decisions and dispassionate view when selecting assets for disposal, the refinancing programme and finally our positive engagement with the REIT process, each contributed to financial outperformance. The election for REIT status became effective on 1 January 2007 enabling our UK property rental activities to operate largely on a tax exempt basis. Nonetheless taxation will continue to arise on our overseas businesses, interest and fee income and surpluses on investments, including the units we hold in the HUT, HIF and PREF funds. The impact of REITs on the financials are explained further below. Total Return British Land has delivered a total return for the year of 21.3%, before refinancing and REIT charges, which follows the 34.6% return in the previous year. Over five years, our annualised total return has been 18.6% (pre-exceptional charges). The valuation gains from our development programme, our active management as well as continuing positive market conditions and gearing contributed to this strong performance. March 2007 March 2006 % increase ----------------------- --------- --------- --------- NAV per share1 1682p 1486p 13 Underlying earnings per share2 43p 36p 22 Dividends paid per share 17.4p 16.1p 8 Total return per share1,3 21.3% 34.6% ----------------------- --------- --------- --------- 1 EPRA basis - note 2 to the accounts 2 see Note 2 3 before charges for REIT conversion and refinancings Total returns are delivered from capital growth and income - the key components are described below. Capital Growth Net revaluation gains for the year were Â£1,630 million. A revaluation surplus of Â£1,234 million arose on wholly owned properties, and Â£22 million from investments (principally Songbird Estates PLC). Net revaluation gains from our share of Funds and Joint Ventures amounted to Â£257 million. The quirks of IFRS require us to recognise this unrealised surplus in different parts of the financial statements and a reconciliation is provided in Note 5 to the accounts. During the year, the Group appropriated its trading properties to investment properties, giving rise to a gain of Â£68 million, which is unrealised but is recognised in the income statement in accordance with IFRS. This amount is not included in underlying profits. The largest component of growth is the valuation uplift of 9.7% which includes the valuation movement in developments, purchases and sales, net of capital expenditure. Offices contributed 13.6%, all retail 7.6%. Capital profits realised on sales of properties amounted to Â£82 million, measured against the carrying value at 31 March 2006. Net Asset Value Growth EPRA net assets at 31 March 2007 were Â£8.9 billion, 1682 pence per share, 13% ahead of the previous year and 20% ahead before charges for REITs and refinancings. The principal components of the 196 pence increase in EPRA NAV per share are as follows: Pence per share --------------------------- ------------------ At 31 March 2006 1486 Revaluation of properties and gains on 292 asset disposal Underlying profit after tax 43 Dividend paid (17) REIT conversion charge (see REIT section (64) below) Refinancing charges, net of tax relief (40) Other (18) --------------------------- ------------------ NAV per share at 31 March 2007 1682 --------------------------- ------------------ Income Returns A proportionally consolidated Income Statement and Balance Sheet are included as Table A to the accounts for the benefit of Stakeholders who wish to see the results of British Land's interest in Funds and Joint Ventures on a look-through basis. The following commentary refers to financial information of the Group as reported under IFRS where the after tax results of Funds and Joint Ventures are shown as a single line on the Income Statement. Gross rental and related income for the year is down 6% at Â£649 million, principally due to sales as shown below. Gross rental and related income Â£m ------------------------------------ --------- Year ended 31 March 2006 690 Purchases 24 Sales (76) Like for like growth 10 Other 1 ------------------------------------ --------- Year ended 31 March 2007 649 ------------------------------------ --------- On a like for like basis rental income (including our share of Joint Ventures and Unit Trusts) showed growth of 3.5%, which is ahead of the market overall (IPD at 2.9%). The rental income growth was strongest on retail properties at 4.0% and 2.6% on offices. Office market rental levels have been growing and in so doing have largely eliminated the gap between market rents and the higher passing rents in our portfolio. Future rent review settlements in Central London above these levels will increase income. Net rental income has reduced to Â£561 million (2006: Â£589m) and represents 93.9% of gross rental income, after taking into account void costs and the expenses of individual asset management initiatives charged to property income. This is an improvement on the previous year (92.8%), partly due to the impact of sales. The contribution to underlying profits from Funds and Joint Ventures is Â£37 million, a reduction of Â£2 million from the previous year reflecting BL Davidson becoming a subsidiary during the year. As required by IFRS the reported results for Funds and Joint Ventures are included on a post tax basis as a single line with profits totalling Â£459 million, an increase of 47.6% on the prior year. This profit includes financing costs of Â£57 million, profit on sale and valuation gains Â£257 million and a taxation credit of Â£170 million. Underlying fees and other income were Â£50 million, the same level as the prior year, and include dividends from our investment in Songbird of Â£18 million (2006: Â£16m) and performance and management fees from our fund management business of Â£30 million (2006: Â£29m). A further special dividend from Songbird of Â£33 million results in total reported fees and other income of Â£83 million. We again enjoyed a healthy level of performance fees where the HUT Fund enjoyed a total return of 17.5% and so outperformed its relevant IPD benchmark (15%) by 2.5%. The absolute amount of the performance fees is lower than the previous year, which had benefited from the effect of stronger yield shift in that period. The performance fees are earned by exceeding stretching targets in a calendar year and are measured against the relevant benchmark. Our management fees are based on a percentage of the portfolio value. The third party element only of fees earned are recognised in the Income Statement. Only half of the performance fee earned is recognised immediately, while the balance is released over a vesting period at the rate of 50% of the undistributed amount, provided there is no significant underperformance against the benchmark in each subsequent year. There is no clawback of released income. At 31 March 2007 fees of Â£13 million have been deferred and are subject to potential clawback. Underlying administration expenses amount to Â£78 million which is Â£3 million lower than the previous year partially due to one-off items in the current and prior year. In December and January a group reorganisation was carried out allowing the Group to reduce complexity in its corporate structure and ongoing compliance and operating costs. Retirements and redundancies in the year have largely offset salary and other cost inflation. Finance costs include net interest payable and exceptional refinancing charges. Net interest payable (before refinancing charges) is some Â£313 million, 15.2% lower than the previous year representing the reduced interest costs through the sales in the current and prior period, as well as the effect of refinancing the superstores and Meadowhall securitisations and our higher coupon legacy debentures. The refinancings gave rise to an exceptional cost of Â£305 million and have the beneficial effect of reducing ongoing interest costs. Underlying Profits Underlying profits have increased by 12.7% from Â£228 million in 2006 to Â£257 million in 2007. The Â£29 million increase is due to the following factors: Â£m ------------------------------------ --------- New lettings and rent reviews (net of Â£17m lease 10 expiries) Effect of purchases and sales 3 Interest savings from refinancings 14 Administration cost savings 3 Other (1) ------------------------------------ --------- Increase 29 ------------------------------------ --------- Amortisation of Intangible Assets and Goodwill The fair value of fund management contracts acquired with Pillar is amortised over the contractual lives. The charge for the year is Â£15 million (2006: Â£10m) leaving an unamortised balance of Â£50 million. Taxation The underlying tax rate this year is 12% (2006: 19%). This low rate arises principally through the effect of REIT exempt income in the fourth quarter, non-taxable Songbird dividends, capital allowances and capitalised interest. The rate of tax on disposals is low because refinancing costs have been used to relieve gains in the current year. The conversion to REIT status leads to a release of some Â£1.6 billion of deferred taxation representing the amount of tax provided for under IFRS on valuation surpluses, which is now exempt from tax on a disposal. This deferred taxation was previously added back under EPRA guidelines in calculating NAV, so this release does not affect reported NAV. The Â£338 million cost of the REIT election represents a conversion charge of 2% of the relevant assets payable for the most part in July 2007 and includes related costs of Â£13 million. Unlike deferred tax, this item has reduced NAV in the year. Impact of REITs Â£m ------------------------------------- -------- Deferred tax benefit on investment properties 1,673 on development properties 84 Goodwill impairment (106) -------- Elimination of deferred tax, net of goodwill 1,651 REIT conversion charge and costs (338) -------- Net effect of REIT conversion 1,313 ------------------------------------- -------- Goodwill impaired during the year amounted to Â£106 million (2006: Â£240m). Goodwill primarily arose through the recognition of deferred tax on acquisition of subsidiary companies and such goodwill has been expensed as a result of the decision to become a REIT. The related deferred tax has also been released. Dividends In November we announced a move to a quarterly dividend cycle, which mirrors rental cash inflows, as rents are typically settled quarterly. Together with our final dividend proposal for the year of 8.25 pence, our total dividend for the year will amount to Â£107 million, 20.35 pence per share, an increase of 20% on the previous year. Dividends 2007, pence 2006, pence ----------------------- ------------ ---------- February (interim) 5.6 5.2 May (first quarterly dividend) 6.5 August (final, proposed) 8.25 11.8 ------------ ---------- 20.35 17.0 ------------ ---------- As announced in November, our dividend for the year to 31 March 2008 is expected to be not less than 33 pence per share, a 94% increase on 2006. We intend to maintain a progressive dividend policy thereafter, growing dividends in line with our underlying business. The REIT rules provide for a minimum payout of 90% of relevant profits, being UK rental business profits adjusted for capital allowances and interest capitalised (Property Income Distribution ("PID")). Our dividend proposals for 2007 and 2008 however will exceed this minimum by a substantial margin. Accordingly future distributions will comprise a combination of PID and normal dividend. The coupons sent to investors will make the split clear. Withholding tax will be applied at the rate of 22% (20% from April 2008) to the PID element. Certain investors, such as pension funds and charities, may receive their PID income without withholding tax (but to do so must first complete formalities with our registrars). The PID calculation for the quarter to 31 March 2007 must be distributed before 31 March 2008. As the PID for the year to 31 March 2008 is currently expected to be unusually low, the final dividend for 2007, due in August, will be payable out of non-PID income, that is as a normal dividend. The split of the November distribution between PID and normal dividend will be announced at the same time as the results for the quarter to 30 June 2007. Investors should note that the split between PID and non-PID will vary over time. Earnings per share Diluted earnings per share increased to 470 pence from 227 pence in 2006. Underlying earnings per share have risen 22% to 43 pence, due to both the increase in underlying profits and reduced tax charge. Cash flows Cash generated from operations has increased by Â£24 million to Â£479 million. Reduced interest costs and higher levels of cash distributions from Funds and Joint Ventures have increased the net cash flow from operating activities by Â£100 million (96%). March 2007 Â£m March 2006 Â£m ---------------------------- ---------- ----------- Cash generated from operations 479 455 Net cash flow from operating activities 204 104 Net investment cash flows (39) 986 Financing (11) (1,025) Dividends paid (91) (84) ---------------------------- ---------- --------- Accounting Judgements The most significant judgements made in preparing these accounts relate to the carrying value of properties and investments which are stated at open market value. The Group uses external professional valuers to determine the relevant amounts. Significant accounting policy judgements are highlighted in our accounting policy note. The most important judgement affecting comparability with other property companies is the approach to deferred tax, albeit following the introduction of the REIT regime this has become of less significance. Finance and capital structure British Land is managed on an integrated basis to produce secure and attractive risk-adjusted returns to Shareholders. Risk management is a distinctive skill at British Land where the mix of assets, leases, developments and debt are managed together to ensure the most effective result. Overall, the Group's prime assets and their secure long term contracted rental income, primarily with upward only rent review clauses, present lower risks than many other property portfolios, enabling the returns to be enhanced using financial leverage. A 45-55% loan to value ratio is currently targeted, subject to the Board's view of markets, the prospects of and risks within the portfolio and the recurring cash flows of the business. At 31 March 2007, this was 41%, 45% proportionally consolidated (43% and 47% respectively pro forma for payment of REIT conversion charge). Since we seek to maximise shareholder returns, we prefer to avoid equity issuance, except where the commercial opportunity clearly merits it. We also would expect to return capital to Shareholders if over the medium term surplus funds arise over and above that which we believe can be attractively deployed in the business. Debt is raised from a variety of sources with a spread of maturity dates. Longer term debt is raised principally through securitisations and debentures. Securitisations have a range of benefits, including long maturities at competitive rates with no recourse to other companies or assets in the Group, and without financial covenants by British Land. Debentures benefit from long maturities and bullet repayment. Unsecured revolving bank facilities provide flexibility of drawing and repayment and are committed for terms of five to ten years. We aim to spread the maturities of the different facilities from a wide range of banks. Other unsecured funding includes US private placements, with terms of up to 20 years. The Group borrows at fixed and floating rates and uses derivatives to achieve the desired interest rate profile; currently the policy is to maintain around 85% (subject to 5% tolerance) of debt at fixed or capped rates taking into account prospective transactions including development funding. This interest rate profile is closely monitored as part of our management of the overall financial effects of transactions. The year end position of 96% fixed/capped reflects recent disposals (and expenditure due in respect of the development programme). The Funds and Joint Ventures are separately financed, and have their own interest rate derivatives, all with no recourse to British Land. Financing statistics 31 March 31 March 2007 2006 ----------------------------- ---------- -------- Group: Net debt Â£6,404m Â£5,593m Weighted average debt maturity 14.1 yrs 15.0 yrs Weighted average interest rate 5.32% 5.71% % of net debt at fixed/capped interest rates 96% 95% Interest cover1 1.70 1.51 Loan to value2 41% 42% Unsecured debt to unencumbered assets 28% 26% Undrawn committed facilities and cash Â£1,855m Â£2,415m Group and share of Funds and Joint Ventures: Net debt3 Â£7,741m Â£6,684m Weighted average debt maturity 12.7 yrs 13.4 yrs Weighted average interest rate 5.36% 5.69% Interest cover1 1.69 1.52 Loan to value2 45% 46% ----------------------------- ---------- -------- 1 Underlying profit before interest and tax / net interest excluding refinancing charges 2 debt to property and investments 3 see Table A This has been another busy year for refinancings and raising new finance for the business, in each case reducing future interest costs and increasing distributable income: â€¢a Â£1 billion restructuring of the British Land debentures was completed in August 2006, creating a debenture security pool valued at Â£1.8 billion. A pre-tax refinancing charge of Â£228 million, mainly due to the difference between the market and book values of the debentures, reduced EPRA NAV per share by 30 pence; there was virtually no effect on NNNAV (being NAV less the mark to market of debt and deferred taxation). British Land's annual interest costs are reduced by some Â£10 million and the weighted average cost of debt is reduced by some 0.3% per annum. With the simplified uniform structure, improved common covenants and enhanced transparency, the new debentures are already showing benefits of greater liquidity, â€¢the refinancing of the Meadowhall Shopping Centre securitisation, with a new simplified structure provided rating improvements for bondholders and a lower on-going interest cost for the Company of 4.98% per annum. This refinancing incurred a charge of Â£39 million, â€¢the last of British Land's higher coupon debentures (8.875% 2035 and 9.375% 2028) were refinanced by replacing them with a new amortising 2035 debenture at a rate of 5.0055% per annum, subject to a charge of Â£38 million, â€¢we issued Â£98 million 5.50% Senior Notes 2027 to US investors, effectively refinancing a similar amount of maturing notes. The new notes are unsecured and have a term of 20 years with no amortisation, with the same covenants as all other unsecured facilities, â€¢over Â£1 billion of new or renewed bank committed revolving credit facilities were raised during the year. These included a successful syndicated seven year loan facility of Â£405 million, at lower market pricing to replace more expensive lines with shorter terms. Over the last two calendar years we have taken advantage of financial market opportunities to refinance all British Land's secured and securitised debt of some Â£4.9 billion, and have agreed new or renewed bank facilities of over Â£2.7 billion. The refinancings have contributed to reducing our interest costs going forward; the weighted average interest rate at 31 December 2004 was 6.49% which reduced by 31 March 2007 to 5.36%. In the Funds and Joint Ventures we have arranged the development finance for the Joint Venture project at Puerto Venecia, Zaragoza, provided in October 2006 by a syndicate of banks in Spain. The Tesco Aqua Limited Partnership was financed on completion in March 2007 by a term loan facility. Key Performance Indicators Property is a long term business. Decisions taken to create value over time frequently affect current year's earnings and so the Board measures performance over a range of time periods. Our management judgements over sector views, asset selection, redevelopments, financial structure, corporate and community responsibility all combine to deliver a single set of financial returns and these should be judged against the risk profile adopted. In measuring and benchmarking performance, a number of key performance indicators are used to indicate the impact of management actions. At the 'total company' level, the three most visible indicators are "total shareholder return", "total return" and "earnings per share growth", reflecting the performance of the whole business. Benchmarking is undertaken against our major quoted peers and the FTSE Real Estate Index. The key performance indicators demonstrate British Land's strong track record in relative and absolute value creation over the last one, three and five years. Performance Indicator One year Three Years Five Years ------------------- ----------- ----------- --------- Total shareholder return1 - British Land 24.3% 49.4% 23.7% - Peer group2 21.7% 39.6% 20.8% - FTSE Real Estate Index 22.3% 45.4% 19.4% - Ranking in peer group 2 1 1 Total Return3 - British Land 21.3% 24.3% 18.6% - Peer group 20.8% 21.2% 14.6% - Ranking 2 2 1 Earnings per share growth4 - British Land 22.0% 7.9% 7.5% - Peer group 5.2% 5.4% 4.7% - Ranking 1 1 2 ------------------- ----------- ----------- --------- 1 total shareholder return represents growth in share price plus dividends per share (assuming reinvested) 2 average of major peers - Land Securities, Hammerson, Liberty and Slough (some differences in year ends) 3 total return (pre-exceptional) represents growth in adjusted, diluted net asset value per share plus dividends per share 4 adjusted diluted earnings per share (excluding exceptional items, profits on asset disposals and revaluation gains) Non financial performance indicators which are also key to the business and used as measures of progress are, as reported under Portfolio Valuation above: Year to March 2007 British Land IPD Benchmark ------------------- --------------- -------------- Like for like rental value 6.9% 4.3% growth (ERV) Portfolio capital return 10.9% 10.7% per IPD (ungeared) ------------------- --------------- -------------- Risk Management British Land generates returns to shareholders through long-term investment decisions requiring the Company to evaluate opportunities arising in the following core areas: â€¢demand for space from occupiers against available supply; â€¢differential pricing for premium locations and buildings; â€¢alternative use for buildings; â€¢demand for returns from investors in property, compared to other asset classes; â€¢economic cycles, including their impact on tenant covenant quality, interest rates, inflation and property values; â€¢price differentials for capital to finance the business; â€¢legislative changes, including planning consents and taxation; and â€¢construction pricing and programming. These opportunities also represent risks, the most significant being change to the value of the property portfolio. This risk has high visibility to senior executives and is considered and managed on a continuous basis. Executives use their knowledge and experience to knowingly accept a measured degree of market risk. The principal external business risks identified can be summarised as follows: Risk: Principal Mitigations: Property Market Market pricing and other changes Regular investment appraisals affecting property value, assess prospects and identify including: properties for disposal where justified - Change in investor and Upward only long leases on good occupier demand quality well located buildings - Letting risk on speculative Occupier led development strategies development with a phased pipeline of projects - Environmentally unsustainable New developments built in line with buildings a formal Sustainability Brief - Tenant default Spread of tenants with strong financial covenants and regular covenant review process Debt Market Reduced availability or increased Leverage regularly reviewed cost of finance Borrowing covenant headroom maintained Spread of sources and maturities of facilities Sufficient lines maintained for spending commitments Interest rate management policy with high level of hedging Currency exchange movement Foreign currency assets financed by matching currency borrowings Development Poor control of design and Contractor performance closely construction programme, or monitored within project management contractor failure leading to cost process overruns and programme delays Regular monitoring and forecasting of project costs Contractor financial covenant review process Reputation Health and safety Health and Safety Policy and defined responsibilities and reporting throughout the Group Non-compliance with regulation Independent compliance auditing programme People Retention of key staff Career development and succession planning for key executive positions Key man insurance Remuneration structure reviewed and benchmarked Key internal management and process risks are also identified within British Land's formal risk management process. These internal risks are the focus of assurance work performed by the Group's Internal Audit function. The risk management process includes defined risk areas and a risk scoring methodology based on the assessed impact of the risk event and the likelihood of its occurrence. The principal risks identified are considered and reviewed at various stages in the process, culminating in consideration of and discussion by the Executive Directors, the Audit Committee and the Board. Partnerships British Land's net investment in Funds and Joint Ventures is Â£1,610 million (2006: Â£1,234m) at 31 March 2007. This investment is principally in four active funds and 15 (2006: 13) active Joint Ventures, which hold in total Â£7 billion (2006: Â£6.4 billion) of properties in retail, offices and development. The Funds and Joint Ventures are financed by Â£3.1 billion (2006: Â£2.8 billion) of external debt, all of which is without recourse to British Land. The Funds provide British Land with interests in properties in our key sectors. British Land acts as property adviser to the Funds and receives performance and management fees. Fund Portfolio Value Net Finance BL BL Â£m Rent Â£m Share Interest Â£m % Â£m (1) --------------- --------- ------ ------ ------ ------ ------- Hercules Unit Trust Retail 3,408 112 1,225 36.27 787 ('HUT') Shopping Parks Pillar Retail European 340 20 201 22.35(2) 29 Europark Fund Retail ('PREF') Parks City of London Offices - (3) - 69 35.94 10 Office Unit Trust ('CLOUT') Hercules Income Fund Retail 153 6 6 26.12 39 ('HIF') Warehouses --------------- --------- ------ ------ ------ ------ ------- (1) annualised (2) will increase to 40% when committed new equity fully contributed (3) CLOUT investments all forward sold or sold during the year HUT The Hercules Unit Trust ("HUT") was established in 2000 as a Jersey based closed ended property unit trust with a fixed life to September 2010, subject to extension with consent of unitholders. Its aim is to acquire and own retail warehouse and shopping park investment properties throughout the UK, with a view to providing an annual total return on the portfolio in excess of the IPD Annual Retail Warehouse Index over the life of the Trust. The Trust return for the year to 31 December 2006 was 22.5%, with a three year annualised return of 31.5% per annum. At the property level, without the effect of gearing, the portfolio returned 17.5% for the year, compared to the IPD Annual Retail Warehouse Universe (excluding HUT) of 15% for the same period. Drivers of this performance were: â€¢ rental value growth of the portfolio of 4.4% over the year (IPD Retail Warehouse Index 2.9%) â€¢ low vacancy rate at 2.3% (IPD Retail Warehouse Index 7.5%). In HUT's year to December 2006: â€¢ the net asset value of the Trust increased to Â£2.1 billion (2005: Â£1.7 billion) â€¢ the net asset value per unit rose 20.8% to Â£1,635 (2005: Â£1,354) â€¢ the underlying property portfolio increased in value to Â£3.4 billion (2005: Â£3.0 billion), despite net property sales of Â£87 million. At 31 December 2006, gearing equated to 35.6% of the aggregate Trust value, well within the Trust's limit of 60%. The secondary market has continued to be active, with no new units issued in the year. A total of 174,532 units were traded over the year with a total value of Â£252.5 million. The units traded at a premium of 7% above their net asset value during the year with the exception of one large portfolio sale. British Land Property Advisers Ltd is HUT's property adviser, and Schroder Property Managers (Jersey) Ltd is the Fund Manager. PREF PREF (Pillar Retail Europark Fund) was created in March 2004 as a closed-end Luxembourg based Fonds Commun de Placement to invest in out of town retail parks in the Eurozone - particularly France, Spain, Italy, Portugal and the Benelux countries together with Switzerland. On completion of outstanding contracted acquisitions, the target of a â‚¬1 billion portfolio, set when the fund was launched, will be exceeded. The annualised total return for the year to 31 December 2006 was 15.2%. Gearing at 31 December 2006 was 58%. PREF gears up to 60% loan to value with debt provided by a syndicate of banks. The Investment Manager is BL European Fund Management LLP, in which British Land has a 70% interest. HIF Hercules Income Fund ("HIF") was established in September 2004 as a Jersey based closed ended property unit trust with a fixed life of 10 years, subject to extension with unitholder consent. Its objective is to target smaller retail park assets, and with an emphasis on a higher distributable yield. The Trust return for the year to 31 December 2006 was 18.9% and the property return was 19.3% compared with the IPD Annual Retail Warehouse Universe Benchmark of 15.3%. HIF's loan to value is currently low, but it is intended to raise the level of gearing to nearer HIF's target of 50% in order to further enhance returns when acquisition opportunities arise. In the year to December 2006: â€¢ net assets have increased to Â£145 million â€¢ the net asset value per unit has risen from Â£1,137 to Â£1,307 â€¢ the underlying property portfolio has increased in value to Â£149 million (2005: Â£144 million) despite net property sales of Â£13 million. British Land Property Advisers Ltd is the property adviser, and Pillar Property Management (Jersey) Ltd is the Fund Manager. The Joint Ventures provide British Land with access to desirable properties (often off market), within a separate entity formed for the purpose, and controlled on a 50:50 basis by a board carrying equal representation from each partner. The entities are able to raise finance on the strength of their assets, usually with no support from the partners, thereby significantly lowering the initial equity investments and enhancing returns on capital. The enterprise is shared by the partners, over a specific agreed lifetime for the venture. Key activity since April 2006 included: â€¢ In March 2007 a fourth joint venture with Tesco PLC was formed, The Tesco Aqua Limited Partnership. The Â£650 million portfolio has an initial rent of Â£29 million per annum from 21 superstores let to Tesco. â€¢ The formation in May 2006 of the new joint venture in respect of Zaragoza, Spain, to develop a 2.2 million sq ft out of town shopping scheme. â€¢ The acquisition of the outstanding 50% ownership of BL Davidson for approximately Â£256 million in August 2006. Although some of the Joint Ventures have different year ends from British Land, the accounting periods recognised have now been aligned to the Group's March year end using management accounts, to assist the requirements of quarterly reporting. The summary details of the principal Joint Ventures in which we have a 50% share are shown below. Joint Venture JV Partner Portfolio Net Finance BL Portfolio Valuation Rent Â£m interest Â£m Â£m1 Â£m2 ----------------------------------------------------------------------- BLT Properties Ltd Tesco PLC 363 15 185 115 1 retail park, 8 Tesco superstores Tesco BL Holdings Ltd Tesco PLC 705 29 315 195 2 retail parks, 2 shopping centres each anchored by Tesco, 5 Tesco superstores Tesco British Land Tesco PLC 109 5 45 26 Property Partnership district shopping centre anchored by Tesco Tesco Aqua Limited Tesco PLC 652 29 487 84 Partnership 21 Tesco superstores The Scottish Retail Land 703 37 430 137 Property Securities Limited Partnership PLC shopping centres in Aberdeen and East Kilbride BL Fraser Ltd House of 296 14 130 80 12 department stores Fraser PLC Eurofund Investments Private 154 - 16 73 Zaragoza SL3 Investors Puerto Venecia, out of and Copcisa town shopping scheme Corp ----------------------------------------------------------------------- 1 annualised net rent 2 BL share of net assets 3 development project People Individuals are essential ingredients in our long term success. It is important that we retain and attract motivated and skilled professionals able to deliver our strategy and work effectively in a small and focused team. The business model is people light and asset heavy - it leverages the work, skill and judgement of a relatively small staff over a large value of efficiently financed assets. The strategy and business changes introduced in 2005 are designed to emphasise the "human value added" in order to lift performance at the property level, whilst retaining efficient translation to profits and net asset value via financial and fiscal structure. This is all the more important in a market where outperformance is going to be delivered through superior rental growth and an activist approach to asset selection and management. To accomplish our performance goals and the shift in business model, the Company is engaged in a process of management renewal and culture change, targeting a high performance, open and meritocratic culture where its people are motivated individually and as a team to outperform competitors, subject to maintenance of quality and security overall. During the year that process has included: â€¢reinforcement of the annual appraisal process introduced in 2005 with specific financial and non-financial goals for executives, and alignment of the remuneration structure to support performance against objectives â€¢succession planning for a number of key retirements during the period â€¢recruiting further property professionals to assist the execution of our intensive asset review and management process â€¢expanding our development team in response to the increased programme activity â€¢reshaping the Finance & Tax teams following the major restructuring of the Group's internal corporate structure on REIT conversion. At a time of intense business activity, our staff have responded to the challenge presented by major changes in the composition of our teams. Our move to a new Head Office is aimed at providing our staff with the modern efficient environment we offer to our customers and we are already reaping the benefits of improved communication and effectiveness at York House. Corporate Responsibility Our full Corporate Responsibility Report 2006 may be viewed at www.britishland.com/crReport/2006. It is designed to be accessible and provide easy navigability for users. The switch to on line reporting, rather than circulation of full printed copies, is part of our efforts to improve our environmental performance. A summary of the report will be included in our Annual Report and Accounts 2007. Operating and Financial Review In preparing this Business Review we have had regard to the recommendations and guidance issued by the Accounting Standards Board, insofar as we consider they are relevant to our business model and industry. We have provided herein a commentary on our markets, activities and prospects. Readers will understand that where we make forward looking statements they reflect our current views; future results will depend on many factors and interactions which may cause outcomes to differ from those anticipated. Supplementary information regarding the Portfolio Description and the Development Programme are available on our website www.britishland.com This information is provided by RNS The company news service from the London Stock Exchange

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