Half Yearly Report - Part 1

RNS Number : 8672S

British Land Co PLC

13 November 2013

 



                                                  13 November 2013

THE BRITISH LAND COMPANY PLC HALF YEAR RESULTS

Good first half results

·      Underlying PBT¹ + 6.6% to £146 million; IFRS PBT of £422 million (H1 2012/13: £109 million)

·      EPRA NAV¹ +4.5% to 623 pence; IFRS Net Assets at £6.1 billion (FY 2012/13: £5.7 billion)

·      Quarterly dividend of 6.75 pence; bringing the half year to 13.5 pence (+2.3%)

·      Total accounting return of 6.8% for 6 months

Portfolio returns boosted by stronger performance from standing investments

·      UK portfolio valuation +2.8%: Retail valuation +1.5% and Offices valuation +5.0%

·      Standing investments +2.1%: improving retail performance and further strength in London offices

·      Continued strong performance from developments +8.9%

·      Continued outperformance vs IPD benchmarks: All property total returns +60 bps; capital returns +100 bps

Significant investment activity further enhancing future growth potential

·      Gross investment activity of £1.2 billion focused on core markets/London and the South East

·      Fully deployed equity placing proceeds; expected to be accretive to 2013/14 earnings, ahead of expectations

·      Sold/exchanged £190 million UK retail assets; reinvested £101 million in SouthGate, Bath

·      Sold Puerto Venecia in Spain reducing Europe exposure to 1%

Successfully replenishing developments: recently committed/near-term pipeline over £1.1 billion

·      Acquisitions of Paddington Central and the Shoreditch Estate add over 700,000 sq ft (£412 million) to near term pipeline

·      Planning permission successfully achieved on 600,000 sq ft at Clarges, The Hempel and Aldgate Place; expect to start on site later this year

Completing and letting up 2010 London development programme: now 68% let/pre-let

·      637,000 sq ft of developments completed during the half in the West End

·      1.5 million sq ft of London development space now let/under-offer securing £51.5 million of rent

·      10 Brock Street offices fully let less than 3 months after practical completion

·      £400 million of development profits from 2010 office programme with £90 million to come based on valuers estimates

Increased leasing activity driven by stronger demand from broad range of high quality occupiers

·      Investment lettings/renewals, 5.4% ahead of ERV; leasing activity adds £14.1 million of new rent

·      Broader and higher quality demand in Retail: investment lettings/renewals 3.8% ahead of ERV; occupancy increased by 60bps to 98%

·      Continuing to capture demand in London: Offices investment lettings/renewals 9.5% ahead of ERV; occupancy at 94.7% including newly completed developments, up 170 bps on a like-for-like basis

Strong financial position with continued access to low cost finance

·      £610 million of low cost new borrowings agreed since the beginning of the year

·      Weighted average interest rate reduced from 4.6% to 4.2% (proportionally consolidated)

·      Proportionally consolidated LTV at 42.3% (31 March 2013: 40.2%)

Chris Grigg, Chief Executive said: "Our business is in good shape as evidenced by our good first half results and we are executing smartly, with conviction and according to plan. We expect to benefit from the decisions we have made over the last few years to reshape our portfolio which have increased our exposure to London and the South East; replenished our development pipeline; and further focused our retail portfolio on the best locally dominant assets. All of these decisions have positioned us well both for stronger profit growth and total returns."

Income statement metrics	H1 2013/14	H1 2012/13	Change
Underlying profit before tax1	£146m	£137m	+6.6%
IFRS profit before tax	£422m	£109m
Diluted Underlying EPS	14.5p	15.2p	-4.6%
Diluted EPS	42.8p	12.5p
Dividend per share	13.5p	13.2p	+2.3%
Balance sheet metrics	H1 2013/14	YE 2012/13	Change
UK Portfolio at valuation	£11,197m	£10,244m	+2.8%2
EPRA Net Asset Value1 per share	623p	596p	+4.5%
IFRS net assets	£6,106m	£5,687m
Loan to value ratio	42.3%	40.2%

¹ See Note 2 to the condensed set of financial statements

² Valuation movement during the period (after taking account of capital expenditure) of UK properties held at the balance sheet date, purchases and sales

Investor Presentation

A presentation of the results will take place 9:30 am today, 13 November 2013, and will be broadcast live via webcast (www.britishland.com) and conference call.  The details for the conference call are as follows:

UK Toll Free Number:                 0800 279 4992

UK Number:                              [phone]

Passcode:                                 3953007

A dial in replay will be available later in the day and the details are:

Replay number:                         [phone]

Passcode:                                 3953007

For Information Contact

Investor Relations

Sally Jones, British Land                                    020 7467 2942

Media 

Pip Wood, British Land                                       020 7467 2838

Gordon Simpson, Finsbury Group                        020 7251 3801

Guy Lamming, Finsbury Group

Forward-Looking Statements

This document contains certain "forward-looking" statements reflecting, among other things, current views on our markets, activities and prospects. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that may or may not occur and which may be beyond British Land's ability to control or predict (such as changing political, economic or market circumstances). Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements. Any forward-looking statements made by or on behalf of British Land speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Except to the extent required by law, British Land does not undertake to update or revise forward-looking statements to reflect any changes in British Land's expectations with regard thereto or any changes in information, events, conditions or circumstances on which any such statement is based.

Notes to Editors:

About British Land

British Land is one of Europe's largest Real Estate Investment Trusts (REITs). Through our property and finance expertise we attract experienced partners to create properties and environments which are home to over 1,000 different organisationsand receive over 300 million visits each year. Our property portfolio is focused on the UK, in prime retail locations and London offices which attract high quality occupiers committed to long leases. We have total assets in the UK, owned or managed, of £17.1 billion (British Land share £11.2 billion), as valued at 30 September 2013. Our occupancy rate of 97% and average lease length to first break of 11 years are among the highest of the major UK REITs.

UK retail assets account for 59% of our portfolio, around 80% of which are located at prime out of town sites. Comprising around 25 million sq ft of retail space across 69 retail parks, 89 superstores, 17 shopping centres and 13 department stores and 77 leisure assets, the retail portfolio is modern, flexible and adaptable to a wide range of formats. Our active asset management delivers space which is attractive and meets the needs of both retailers and consumers.

London offices, located in the City and West End, comprise 39% of the portfolio, which will rise to an estimated 41% on completion of current committed developments. Our 7 million sq ft of high quality office space includes Regent's Place and Paddington Central in the West End and Broadgate, the premier City office campus (50% share).

Our size and substance demands a responsible approach to business. We believe leadership on issues such as sustainability helps drive our performance and is core to the delivery of our overall objective of driving shareholder value.

Further details can be found on the British Land website at www.britishland.com

CHIEF EXECUTIVE'S REVIEW

We have had a good first half both operationally and strategically. Operationally, we are reporting a stronger set of numbers with improved performances from both our Retail and Offices businesses. Strategically, we have had another active six months, successfully executing our plans and increasing the growth potential of the business. We have already fully deployed the proceeds of our well-timed March equity placing ahead of the schedule we set out at the time; we have made good progress replenishing our development pipeline; and we have taken advantage of the strength in secondary markets to sell a number of retail properties at good prices and ahead of book value.

The movements in our income statement were significantly impacted by our high levels of corporate activity over the last twelve months - notably our equity placing in March and subsequent investment of the proceeds, along with capital recycling. Our underlying profit before tax is ahead by 6.6% to £146 million with the investment of the placing proceeds and development lettings more than offsetting the impact of disposals. While the impact of the share placing is neutral on earnings, underlying earnings per share were 4.6% lower at 14.5 pence because of disposals. All of our financing metrics remain strong: our LTV is 42.3% and we continue to access debt markets at highly competitive rates securing £610 million of new financing. This gives us significant investment flexibility.

Our Net Asset Value was 4.5% ahead at 623 pence per share reflecting the improved valuation performances. In line with expectations, the second interim dividend is 6.75 pence per share bringing the dividend for the half year to 13.5 pence per share, an increase of 2.3% contributing to a total accounting return of 6.8%.

At the property level, we generated total returns of 5.5% for the six months, continuing to outperform the market benchmarks on both capital and total returns. The valuation of our UK portfolio was up 2.8% with asset management, development and market yield compression all contributing. In our Retail business there was a marked valuation improvement +1.5% after 18 months of decline, and also a stronger performance from Offices (+5.0%). The UK economy has grown more strongly than had been expected: we have seen a real improvement in confidence in both our occupational and investment markets and this helped our performance. We also continue to benefit from the decisions we took in 2010 to start a number of large London development projects.

Development has been an important driver of performance in our offices business in recent years and this half has been no exception. We completed 637,000 sq ft of projects in the West End including our developments at Regent's Place (10-30 Brock Street) marking another significant milestone in the transformation of the Estate.  Only three months after completion, the offices at 10 Brock Street are already fully let to the likes of Debenhams, Facebook and Whitefoord, with the latest letting at over £70psf, securing £18 million of rent for an average term of 16 years. We now expect our 2010 development programme to deliver a profit on cost of over 40% and an IRR of around 30%. By taking a series of early decisions to develop, often on a speculative basis, we have been able to deliver significant value.

We have had a stronger period for leasing with higher levels of letting volumes across the portfolio.  In the standing investments, we continue to sign lettings and renewals ahead of ERV (+5.4%) and previous passing rent. In Retail, we have seen a material improvement in the breadth and quality of deals, particularly from fashion, homewares and leisure operators. Units in administration have fallen to 0.2% of total rent and our occupancy has moved up 60 bps to 98.0%. In Offices, we have seen a step-up in letting activity across both the City and the West End. Demand has been more diverse and we continue to successfully tap into demand notably in the TMT sector. Our occupancy is lower at 94.7% reflecting the completion of developments but on a like-for-like basis, occupancy is 170 bps ahead.

The bulk of our acquisition spend reflects the successful deployment of our placing proceeds and has been in line with our strategy to increase our exposure to London and the South East and replenish our development pipeline. At £470 million, Paddington Central, a 610,000 sq ft office led campus in the West End, was our most significant acquisition and our largest since 2005. As our success at Regent's Place demonstrates, this is an asset which plays to all of our strengths in managing large mixed use schemes in London, delivering value through well-planned asset management and development. It is still early days, but we are confident we can deliver significant value at Paddington Central. We have already let a third of the vacant space on terms ahead of ERV at acquisition. In the half year, we also signed an agreement with The City of London Corporation to be their development partner at the Shoreditch Estate, a two acre site on the City fringes, an increasingly sought after area both as a place to work and as a place to live.

As a result of these and other acquisitions made over the past 18 months (including Clarges) our development pipeline has been substantially replenished. We now have over 2 million sq ft of new developments - either recently committed or in our near-term pipeline - with a total development cost of over £1 billion and an anticipated profit of around £275 million. We also have nearly 1 million sq ft in our medium-term development pipeline.

We have said we intended to take advantage of improving sentiment in the investment markets and greater availability of debt finance to sell retail assets which do not fit with our strategy. We have done just that by selling £190 million of UK retail assets, on average 3.5% ahead of book value. We are reinvesting the capital raised in retail locations which offer our occupiers shopping environments where their businesses can thrive and which meet consumers' evolving needs. A good example is SouthGate, Bath, which we acquired a 50% share in during the half year. It is a large, newly built, open air scheme in the middle of the City. It is locally dominant, has a great occupier line up and on a fully let yield of 5.7% we believe the prospective returns are very good for a super prime asset in the south of England. In line with our decision to exit Europe, we sold our share of Puerto Venecia in Spain for £121 million (at book value). Europe now represents just 1% of our total assets.

Outlook

Looking forward, we are encouraged by the indicators across our markets. We believe the future of London will remain bright, underpinned by improving occupational demand for offices and residential properties and expect development in the capital to continue to offer superior returns. While the picture is more complex in UK retail, there are now clear signs of improvement in occupational markets, especially for strong real estate and we are optimistic that this progress will continue.

Our business is performing well as evidenced by our strong first half results. We expect to benefit from the strength of our assets and from the decisions we have taken over the last few years, notably our sizeable development programme as well as our increased exposure to the West End and more generally to London and the South East.  We have made major strides in re-building our London development pipeline and we intend to exploit this going forward. We are also excited by the investments we have made since our March equity placing, most notably Paddington Central, and expect these assets to make strong contributions to shareholder value over time. We will continue to execute smartly and according to plan.

Chris Grigg

Chief Executive

BUSINESS REVIEW

PORTFOLIO PERFORMANCE

Stronger returns from our portfolio in the half were driven by an improved performance from our standing investments and boosted by another good period for developments. Overall, our UK portfolio generated a total property return of 5.5% for the half made up of an income return of 2.5% and a capital return of 3.0%. We continued to outperform the market on both total and capital returns by 60 bps and 100 bps respectively. Both our Offices and Retail portfolios also outperformed their respective IPD sector benchmarks.

Total Property Return (as calculated by IPD excluding Europe)
6 mths to 30 September 2013	Retail		Offices		Total
%	British Land	IPD	British Land	IPD	British Land	IPD
Capital Return	1.5	1.0	5.4	3.8	3.0	2.0
- ERV Growth	0.6	(0.2)	1.7	1.7	0.9	0.4
- Yield Movement1	-8 bps	-8 bps	-13 bps	-11 bps	-10 bps	-12 bps
Income Return	2.9	2.8	1.8	2.5	2.5	2.8
Total Property Return	4.4	3.8	7.3	6.4	5.5	4.9
1 net equivalent yield movement

The value of our UK portfolio increased by 2.8% to £11.2 billion compared to 31 March 2013, with a 2.1% uplift from our standing investments and an 8.9% valuation uplift from developments. The performance was broadly spread across our portfolio reflecting the strength of our asset management initiatives and developments; sales and acquisitions, which were accretive to performance; and yield compression.  The UK economy has been growing at a faster rate in 2013 than had widely been expected and we also have seen an improvement in the occupational and investment markets in both Retail and Offices, which benefited our performance.

ERVs across the UK portfolio were 0.9% ahead compared with growth of 0.4% for the property market as a whole. We saw modest yield compression of 10 bps reflecting improved investor sentiment in retail and continued strong investor demand for London offices.  At 30 September 2013, our portfolio net equivalent yield was 5.7%.

In UK Retail, our portfolio valuation was 1.5% ahead, reversing the trend of the last 18 months. The increase was driven by a combination of yield shift and asset management with uplifts seen across all subsectors and particularly strong growth on our retail park, superstore and department store portfolios.  Our ERV was up 0.6% compared to the market where rental values continued to fall. Our Retail ERVs have now grown by 3.1% since the trough in June 2010 compared with a fall of 1.5% for the market as a whole, reflecting the ongoing polarisation between the performance of the best space where retailers want to trade and less attractive, more secondary space.

The net equivalent yield across our UK Retail portfolio tightened by an average of 8 bps to 5.8%. Investor sentiment has improved which, along with the greater availability of debt, has led to a significant increase in the volume of transactions, albeit off a low base. Yields across the retail market have tightened, particularly on secondary assets where the greater volume of transactions have taken place. We have seen increased investor demand for prime although there is limited product available.

The value of our European retail portfolio fell by 4.3% to £241 million. Adjusting for the sale of our 50% share in Puerto Venecia in Zaragoza, which was completed after the half year end at March 2013 book value, our European portfolio is 1% of the group's total gross assets.

In Offices, we have seen a further strengthening of the investment markets across London led by a positive outlook for rental growth and sustained investor demand.  The occupational market has improved with take-up in Central London estimated to be 30% up on the previous six months. The Central London residential market also continues to perform well with international buyers remaining an important part of the market.

Our Offices portfolio has been well positioned to benefit from the strengthening London market with the valuation ahead by over £200 million, or 5.0% over the half: standing investments and developments contributed equally to the uplift.  Our standing investments were ahead by 3.3% due to the combination of our leasing success and yield compression of 13 bps. Yield compression was relatively consistent across our West End portfolio but more focused on long-term income in the City.  Developments were ahead by 10.1% as we achieved further development milestones notably successful lettings; the completion of 10-30 Brock Street; achieving planning at Clarges and strengthening market conditions. Our performance has also benefited from our greater exposure to the West End where values are up 6.0% compared to 3.6% in the City.  ERVs continued to rise, up 1.7% across our standing investments, including 2.3% in the West End.

Portfolio Valuation, Yield and ERV Movement
At 30 September 2013	Portfolio1	Change²	Net equivalent yield %	Net equivalent yield movement bps3	ERV Growth %4
	£m	%
Retail5:
Retail parks	2,569	1.1	5.9	(7)	1.0
Superstores	1,306	2.0	5.1	(5)	0.5
Shopping centres	1,937	0.3	5.8	(5)	0.0
Department stores	513	6.5	6.0	(38)	0.1
Leisure	311	2.0	8.4	(6)	2.0
UK Retail	6,636	1.5	5.8	(8)	0.6
Offices5:
City	1,843	3.6	5.6	(9)	1.2
West End	2,468	6.0	5.4	(16)	2.3
Provincial	90	4.0	6.3	(23)	0.0
All Offices	4,401	5.0	5.5	(13)	1.7
Residential6	160	2.6			-
All Offices & Residential	4,561	4.9		(13)	1.7
UK Total	11,197	2.8	5.7	(10)	0.9
Table shows UK total, excluding assets held in Europe. Total portfolio valuation including Europe of £11.4bn at period end, +2.7% valuation movement.
1 Including group's share of properties in joint ventures and funds
2 valuation movement during the period (after taking account of capital expenditure) of properties held at the balance sheet date, including developments (classified by end use), purchases and sales
3 a positive yield movement indicates an increase in yields; a negative yield movement indicates a reduction
4 like for like (as calculated by IPD)
5 includes developments
6 stand-alone residential

INVESTMENT ACTIVITY

We continue to be active on the investment front with gross investment activity of £1.2 billion since the beginning of the year (measured by acquisitions, disposals and development spend). Our activity has been focused on deploying our March equity placing proceeds and reinvesting capital raised from disposals. We are pleased with our activity which has increased our exposure to London and the South East; significantly replenished our development pipeline; and invested in the best locally dominant retail schemes.

We continued to successfully access transactions to grow our portfolio taking advantage of our financial flexibility and our ability to source deals, move quickly and deal with complexity. Both of the key acquisitions agreed during the half year, Paddington Central and SouthGate, Bath, were secured off market.  We have already deployed the proceeds from our well-timed placing with the net impact neutral on earnings in the first half and expected to be positive for the year as a whole, ahead of expectations.

As a result of our investment activity, our development pipeline has been significantly replenished. Our exposure to London and the South East has increased from 50% in March 2010 to 61% on a pro-forma basis (including the estimated completed value of committed developments). On the same basis, within London, the West End now accounts for 59% of our Office business compared to 36% in March 2010.

UK Portfolio Weighting
At 30 September	2012	2013	2013
		(current)	(pro-forma1)
	%	%	%
Retail:
Retail parks	24.5	22.9	20.8
Superstores	12.6	11.7	10.9
Shopping centres	17.6	17.3	15.7
Department stores	4.6	4.6	4.1
Leisure	3.0	2.8	2.6
UK Retail	62.3	59.3	54.1
Offices:
City	17.1	16.5	17.3
West End	18.4	22.0	25.3
Provincial	0.8	0.8	0.7
All Offices	36.3	39.3	43.3
Residential2	1.4	1.4	2.6
All Offices & Residential	37.7	40.7	45.9
UK Total	100.0	100.0	100.0
Table shows UK total, excluding assets held in Europe.
1 pro forma for committed developments to date at estimated end value (as determined by the Group's external valuers) and disposals completed / exchanged post half end
2 stand-alone residential

Acquisitions and Disposals

In total, we have spent £688 million on acquisitions and raised £434 million from asset disposals since the beginning of the year.  Acquisitions added annual rental income of £32 million, with income generating properties acquired on an average net initial yield (NIY) of  5.3%. Assets with annual rental income of £19 million were sold on an average NIY of 5.8% and at 4.0% ahead of book value.

HY to 30 September 2013			Price	BL Share	Annual Passing
Acquisitions		Area	(gross) £m	£m	Rent £m4
Completed
Paddington Central	Offices	London	470	470	21
SouthGate Bath (50%)	Retail	South West	202	101	5
Hilden Block, Ealing Broadway Shopping Centre1	Retail	London	29	29	2
Tesco Extra, Craigavon1	Retail	N Ireland	23	23	1
1-5 Baker Street	Offices	London	22	22	1
Harmsworth Quays, Canada Water2	Residential	London	11	11	-
The Shoreditch Estate3	Mixed Use	London	6	6	-
Other			27	26	2
Total			790	688	32
1 Exchanged and completed post half end
2 Completed post half end
3 Entered into an option agreement with The City of London Corporation to draw down a development agreement subject to securing revised planning consent on the sites
4 BL share of net rent topped up for rent frees

In Offices, our largest acquisition was the £470 million purchase in July of a major interest in Paddington Central, on a NIY of 5.3% rising to 6.2% once fully let. It adds to our Offices portfolio as our third office-led campus, increasing our exposure to an emerging part of the West End London market which is expected to benefit from Crossrail and significantly increases our near-term development pipeline. The campus comprises 610,000 sq ft of income generating properties along with 355,000 sq ft of consented space at 4 and 5 Kingdom Street and an additional 80,000 sq ft of potential development. This acquisition plays to our strengths in managing and developing estates, providing both short and medium term opportunities to drive returns through: proactive management of the existing assets, including letting vacant space; improving the built environment; and by developing the sites to complete the campus.

We also entered into an option agreement with The City of London Corporation for the redevelopment of The Shoreditch Estate, further increasing our near-term development pipeline and broadening our access to occupiers in the vibrant and growing TMT sector. Shoreditch comprises three sites covering 2 acres fronting onto Shoreditch High Street just north of the core City of London market and close to the new Liverpool Street Crossrail station. The sites have potential for around 320,000 sq ft of office, retail and residential accommodation in a mix of new, retained and refurbished buildings. We have the option to draw down a development agreement subject to securing revised planning consent on the sites and on practical completion will be granted a long leasehold interest in the sites.

In Retail, we bought 50% of SouthGate, Bath, entering into a 50:50 joint venture agreement with Aviva. SouthGate is a new 430,000 sq ft, prime open air retail scheme in the centre of the city, which is a top ten tourist spend location in the UK. The scheme is locally dominant with a large and affluent catchment, is well located near the railway and bus stations and has a high annual footfall of around 18 million visitors. SouthGate, which is 93% let, offers some of the best configured retail space in Bath, with two-thirds of the units over 5,000 sq ft. It is anchored by Debenhams, H&M, Topshop and Boots, and has attracted several new, high profile retailers to the city including Hollister, Apple, Urban Outfitters, All Saints and Superdry.

The majority of our asset disposals were in Retail. In the UK we have exchanged contracts for the sale of the Bon Accord and St Nicholas Shopping Centres in Aberdeen for £94 million (BL share), along with 2 smaller food stores and 3 retail parks including St James Retail Park in Northampton. A small high street asset acquired in February as part of the Wereldhave portfolio was sold generating an uplift of 23%. These sales were on average 3.5% ahead of book value.  We also completed the sale of the majority of our residential units at 20 Brock Street (NEQ) for £93 million and have exchanged on a number of units at our Bedford Street and Marble Arch House residential developments where we are due to reach practical completion this financial year.

In line with our stated aim of exiting our European investments, post period end we have sold our 50% stake in Puerto Venecia, a 2.2 million sq ft shopping centre and retail park scheme, in Spain for £121 million, a NIY of 5.2%. Following the sale, our European exposure has been halved to 1% of our total gross assets.

HY to 30 September 2013			Price	BL Share	Annual Passing
Disposals		Area	(gross) £m	£m	Rent £m3
Completed
Puerto Venecia, Zaragoza1	Retail	Spain	242	121	7
20 Brock Street (NEQ) residential	Residential	London	93	93	-
St James Retail Park, Northampton1	Retail	Midlands	53	53	3
6 and 7-9 Eldon St (Princes Trust House)	Offices	London	17	17	1
Marsh Mills Retail Park, Plymouth	Retail	South West	13	13	1
Other			36	32	1
Exchanged
Bon Accord & St Nicholas, Aberdeen2	Retail	Scotland	189	94	6
Residential - pre sales	Residential	London	11	11	-
Total			654	434	19
1 Exchanged in the period, completed post half end
2 Exchanged post half end
3 BL share of net rent topped up for rent frees

Developments

We continued to progress our committed development projects, completing 637,000 sq ft of West End developments during the half at 10-30 Brock Street and 10 Portman Square. The space is 77% let with a weighted average lease length of 15 years and 81% of the residential units sold. We have made a profit on cost in excess of 50% on these schemes. We also completed our retail shopping scheme at Whiteley, Hampshire and our leisure extension at Glasgow Fort both of which are nearly fully let and trading well.

Committed & Near-Term Developments At 30 September 2013 BL Share Sq ft Current Value Cost to complete ERV Pre-let ERV Resi End Value Pre-sold Resi '000 £m £m £m £m £m £m Offices 2,275 1,097 157 79.9 51.6 133 101 Retail 367 49 3 3.1 2.9 - - Residential 24 26 3 - - 27 19 Total 2010 Programme 2,666 1,172 163 83.0 54.5 160 120 Offices 238 177 187 6.8 - 388 - Retail 520 43 58 7.5 4.2 - - Residential 286 75 86 - - 196 - Total Recently Committed 1,044 295 331 14.3 4.2 584 - Total Near-Term Pipeline 1,020 86 392

In Offices, within our 2010 programme, the remaining West End developments will complete later this calendar year and our City developments, 5 Broadgate and The Leadenhall Building, will complete over the next 18 months, delivering high quality properties into our standing investment portfolio. At 5 Broadgate, construction is progressing with completion scheduled for early 2015 and we have started the redevelopment of Broadgate Circle into a more vibrant restaurant and retail scheme as part of a wider refurbishment of Broadgate South. The Leadenhall Building topped out in June with building works due to be completed mid next year.  The 2010 office programme is now 68% let/under offer on accretive terms, capturing the upswing in the rental market with a weighted average lease length of 16.2 years. To date it has delivered a £400 million valuation uplift with a further £90 million to come based on the valuers' estimates.

In Retail, we are on site at Hereford where we are building a 310,000 sq ft open air scheme near the city centre on the site of the old cattle market. The scheme is now 88% pre-let or under offer (by area) and is due to complete in Summer 2014.

Given the ongoing shortage of high quality space and reduced speculative space coming on stream, we believe we can continue to make attractive risk adjusted returns from development over the coming years, particularly in London. We have therefore been focusing on replenishing our pipeline of developments, primarily through acquisitions.

During the half year, planning permission was approved on 600,000 sq ft of office and residential developments. The largest of these was at the Clarges Estate in Mayfair for an improved scheme which increases the area of attractive high end residential. We expect to start on site later this year. We were also granted planning for our residential schemes at The Hempel and Aldgate Place.

In Retail, our new developments are primarily focused on extensions to existing schemes where we see the greatest opportunity to deliver good returns.  In the half, we were granted planning permission on 403,000 sq ft of new space including leisure extensions at our newly opened scheme at Whiteley and Fort Kinnaird in Edinburgh. All of these projects have now moved into our committed pipeline (see recently committed projects in table above)

The acquisition of the development properties at Paddington Central and our agreement with the City of London Corporation to become their development partner on The Shoreditch Estate adds 700,000 sq ft to our near term pipeline.  As a result of all this activity, our near-term development pipeline now stands at 1.0 million sq ft, a total potential capital commitment (including land value) of £478 million. We expect to start on site once we have received planning permission on the majority of these developments within the next two years as our 2010 committed programme completes.

Taken together, our recently committed and near-term development pipeline totals 2.1 million sq ft with a total development cost of £1.1 billion (including land value). We also have nearly 1 million square foot of potential development projects in our medium-term pipeline.

ASSET MANAGEMENT

UK Retail

The volume of our leasing activity has been materially higher than the comparable period last year. There has been an overall strengthening in consumer confidence, albeit off a low base, with retailers' results generally better. Our operational metrics have strengthened with higher levels of leasing activity and the successful letting of units in administration improving overall occupancy levels by 60 bps to 98%.  At the end of the half, units in administration were 0.2% of total rent compared to 0.9% at 31 March 2013. Like-for-like income was 1.5% ahead, in part benefiting from our leasing activity and rent reviews in superstores.

We signed 721,000 sq ft of lettings and renewals across the portfolio on average 3.8% ahead of ERV within the standing portfolio. Rent reviews were signed on average 3.4% above previous passing rent. Our pipeline of lettings is strong with 430,000 sq ft of deals currently under offer at terms ahead of ERV on average. 

Looking at the type of deals we have been doing across the portfolio, the breadth and range of occupiers taking space is particularly notable. We believe this reflects a greater retailer confidence both about the market and the role that physical space will play in their portfolios. We are attracting occupiers across the retail spectrum with notable increases in demand seen in fashion, homewares, food and leisure. 

In the half year, over 125,000 sq ft of long term lettings and renewals were signed with homeware occupiers over a broad geographical spread, including Harveys, Wren Kitchens, DFS and CSL, on average at levels ahead of ERV.  We have continued to see strong activity with key fashion tenants in the form of Next, Arcadia and TK Maxx with over 248,000 sq ft of lettings, and have introduced further new out of town formats for Schuh at Glasgow, Nike at Chester and Rotherham, and Fat Face and Phase Eight at Whiteley. Demand within the food and leisure subsector has remained strong with 23 long term lettings including Cineworld taking a pre-let of the 30,000 sq ft cinema development at Whiteley, and Yo Sushi and Wagamama taking units within the existing scheme.

In May we signed an agreement with BT to provide free wi-fi in all of our shopping centres. This is now in place in all 17 of our shopping centres. Additionally, we have recently agreed terms with BT to provide 26 wi-fi hotspots across our larger retail parks.

Offices

We have had a good first half in Offices with another active and successful leasing period once again underlining the appeal of our buildings and built environments. On a like-for-like basis, occupancy was 170 bps ahead with particularly good letting activity at Broadgate. Occupancy was slightly lower at 94.7% reflecting newly completed developments at Regent's Place and 10 Portman Square moving into the standing investments and the acquisition of Paddington Central.  The majority of our vacant space is new Grade A accommodation, so we feel positive about letting prospects in a strengthening occupational environment. Like-for-like income growth was 0.4% reflecting continued letting activity partially offset by regears.

In total, we signed 439,000 sq ft of lettings and lease extensions across standing investments and developments in the period with a further 142,000 sq ft under offer. Lettings and renewals of standing investments were signed on average at 9.5% ahead of ERV. We continue to tap into the pockets of demand in the market with 37% of deals signed or under offer with occupiers in the TMT sector. Lease extensions with Close Brothers, Allianz and Bunzl maintain our strong track record of occupiers making longer term commitments to stay within our portfolio.

In the West End, the completion of 10-30 Brock Street marks another significant milestone in the transformation of Regent's Place which now comprises 13 acres of mixed use office, retail and residential space. The success of the transformation is underlined by both the quality of the occupiers which the most recent development has attracted and the speed at which the space has been let. We have let 139,000 sq ft of space since the beginning of the year to high quality occupiers including Facebook and Whitefoord at an average rent of £64.50 psf. The most recent residential development at 20 Brock Street (NEQ) is already 81% sold with only 6 of the 94 high end residential units remaining on the market.

At Paddington Central which we acquired in July, we have let nearly 20,000 sq ft, representing a third of the vacant space, at terms ahead of the acquisition appraisal, bringing occupancy on the campus to 92.9%. We are in the initial stages of master planning to form a long term vision of the campus and its immediate environment. This is likely to include: improved and larger buildings on the development sites at 4 & 5 Kingdom Street; works to the entrance points on the campus; plus an introduction of a greater variety of uses and occupiers.

In the City, we continued to progress the revitalisation of Broadgate, letting space in the standing investments and progressing with developments. At 199 Bishopsgate, which was completed last year, we continue to see interest from a broad range of occupiers. The building is now 55% let following 64,000 sq ft of lettings during the half including 11,000 sq ft to Dorsey & Whitney; 14,000 sq ft to SAS Software and 29,000 sq ft to Allianz on terms accretive to valuation.  At 1&2 Broadgate, we promptly let 89,225 sq ft of space to occupiers including Royal Mail and Precise Media on 5.4 year leases, substantially filling the space surrendered by UBS in June. These lettings tie in with the lease extensions to 2019 agreed with ICAP at which time we will be able to review the options for the refurbishment or redevelopment of the building.

Also in the City, at The Leadenhall Building we finalised our 95,000 sq ft pre-let to Amlin which together with our AON letting has successfully let the lower half of the building. We now have the upper half of this 45 level tower to let, which is generating good occupier interest. In this respect we have a further 12,000 sq ft under offer at terms ahead of ERV, meaning that 52% of the offices will be let.

FINANCIAL REVIEW

Highlights

·      Underlying PBT up 6.6% to £146 million, IFRS PBT of £422 million (HY 2012/13: £109 million)

·      EPRA Net Asset Value per share at 623 pence, 4.5% ahead of 31 March 2013 (596 pence)

·      Total accounting return of 6.8% for the 6 months to September 2013

·      Successful investment of equity placing proceeds ahead of schedule

·      Increased quarterly dividend to 6.75 pence reflecting confidence in future cashflows; making total for half year of 13.5 pence

Income Statement

The group financial statements are prepared under IFRS. The income statement includes valuation movements on investment properties and the after tax results of joint ventures and funds are shown as a single line. The balance sheet includes the net investment in joint ventures and funds as a single line. 

Management reviews the performance of the business principally on a proportionally consolidated basis (i.e. on a line-by-line basis) and comments on movements in the income statement provided in the financial review below are made on this basis. Income statements and balance sheets which show British Land's interests on this basis are also included in Table A within the supplementary disclosures.

6 months to 30 September	2013			2012
	Group	JVs & Funds	Prop Consol	Group	JVs & Funds	Prop Consol
	£m	£m	£m	£m	£m	£m
Gross rental income	157	134	291	149	135	284
Property outgoings	(9)	(7)	(16)	(7)	(5)	(12)
Net rental income	148	127	275	142	130	272
Net financing costs	(36)	(62)	(98)	(39)	(65)	(104)
Net rental income less finance	112	65	177	103	65	168
Fees & other income	7	-	7	8	-	8
JVs & Funds underlying profit	63			63
Administrative expenses	(36)	(2)	(38)	(37)	(2)	(39)
JVs & Funds underlying profit		63			63
Underlying profit before tax	146		146	137		137
IFRS profit before taxation	422		422	109		109
Underlying diluted EPS	14.5p		14.5p	15.2p		15.2p
Dividend per share	13.5p		13.5p	13.2p		13.2p

Net rental income, including our share of joint ventures and funds, increased 1.1% to £275 million for the 6 months ended 30 September 2013. 

The rental income movement of £3 million belies the significant activity reflected in these results. We have completed over £1 billion of sales in the last 12 months, principally Ropemaker, which has reduced half year rents by £15 million. This has been offset by the successful deployment of our equity placing proceeds ahead of schedule (principally Paddington Central), increasing rents by £13 million in the 6 months to September 2013.  Income from lettings at 10 Brock Street, which was fully let within 3 months of practical completion and 10 Portman Square which completed in the period have grown net rents by £3 million. 

On a like-for-like basis, UK net rental income was 1.2% higher than a year ago, with both Retail and Offices showing increases in the period. Like-for-like increases have added £3 million to net rental income in the period. We continue to make good progress on letting retail units previously in administration. 

We continue to focus on cost control, maintaining our competitive advantage from our efficient operating model.  Our EPRA cost ratio (including direct vacancy costs) for the half year was 16.4% (half year 2012: 15.1%).  This EPRA metric is substantially the same as the cost ratio the group has previously presented.  Our EPRA cost ratio (excluding direct vacancy costs) for the half year was 14.4% (half year 2012: 13.1%).  As anticipated, the increase in our direct and development property costs is due to our completed developments incurring void costs and marketing spend on developments. 

Net financing costs on a proportionally consolidated basis have decreased £6 million compared to prior half year.  We have benefited in the period from the temporary reduction in debt pending investment of the placing proceeds and the sale of Ropemaker, although this has been partially offset by investment of the proceeds which were fully invested mid-way through the period. 

The key drivers discussed above have increased underlying profit before tax by £9 million, or 6.6%, to £146 million for the 6 months ended 30 September 2013.  Underlying diluted earnings per share  for the 6 months ended 30 September 2013 decreased 4.6% to 14.5 pence (half year 2013: 15.2 pence) based on underlying profit after tax of £145 million (half year 2012: £136 million) and weighted average diluted number of shares of 997 million (half year 2012: 894 million).  As expected,  the EPS decline is primarily due to the disposal of Ropemaker.  Investment of the equity placing proceeds ahead of schedule means the placing is EPS neutral in the 6 months ended 30 September 2013 and is expected to be accretive in the second half.

CASH FLOW

Net cash inflow from operating activities for the six months was £87 million including receipts from joint ventures and funds of £31 million.  We have invested a net £654 million in the period, of which £592 million was spent on purchases (principally Paddington Central), £94 million on development and capital expenditure which has been at its peak phase over the period, £90 million on investments in and loans to joint ventures principally to fund London office developments, and this has been partially offset by receipts from disposals of £125 million (principally sales of residential units at 20 Brock Street).

We anticipate prospective development spend of £148 million over the next 3 years on our 2010 committed development programme and £282 million on our recently committed programme.

BALANCE SHEET

	As at 30 September 2013			As at 31 March 2013
	Group	JVs & Funds	Prop Consol	Group	JVs & Funds	Prop Consol
	£m	£m	£m	£m	£m	£m
Properties at valuation	6,219	5,219	11,438	5,554	4,945	10,499
Investment in JVs & Funds	2,758			2,463
Other non-current assets	124	(43)	81	76	(23)	53
	9,101	5,176	11,519	8,093	4,922	10,552
Other net current liabilities	(171)	(125)	(296)	(158)	(116)	(274)
Net debt	(2,628)	(2,292)	(4,920)	(1,963)	(2,303)	(4,266)
Other non-current liabilities	(4)	(1)	(5)	(5)	(40)	(45)
JVs & Funds' net assets		2,758			2,463
EPRA net assets1	6,298		6,298	5,967		5,967
EPRA adjustments1			(192)			(280)
IFRS net assets			6,106			5,687
EPRA NAV per share			623p			596p

¹ EPRA net assets exclude the mark to market on effective cash flow hedges and related debt adjustments and deferred taxation on revaluations. It also includes trading properties at fair value and is diluted for the impact of share options

EPRA Net Asset Value is 623 pence per share, an increase of 4.5% on the March 2013 comparative.  This strong Net Asset Value growth is driven by UK valuation uplift of 2.8% enhanced by the benefits of gearing, with growth being delivered evenly across the office, retail and development portfolios, reflecting strengthening investment and occupier markets and our actions.

Our actions have added 18 pence in addition to market yield shift of -10bps which has further benefitted us by 12 pence.  Recent investment activity from the placing has also contributed towards positive performance, with Paddington Central increasing in value by 2.3% post acquisition, already covering 1p of the initial 4p dilution.

Combined with the dividend, this translates to a total accounting return for the 6 months ended 30 September 2013 of 6.8%.

In Europe, which following the disposal of Puerto Venecia, Zaragoza post period end now represents only 1% of the portfolio, values continued to decline, albeit at a slower pace of 4%, reflecting the economic difficulties in these markets.  We successfully completed the disposal of Puerto Venecia, Zaragoza for £121 million at book value after the half year.

Net Debt and Financing

Net debt (EPRA basis) at 30 September 2013 was £2.6 billion for the Group and £4.9 billion including our share of joint ventures and funds.

The strength of the Group's balance sheet is reflected in British Land's senior unsecured credit rating which remains rated by Fitch at A-.

Financing statistics	Group	Prop Consol
EPRA Net debt	£2,628m	£4, 920m
Principal value of gross debt	£2,687m	£5,194m
Weighted average debt maturity 1	8.8 years	8.9 years
Weighted average interest rate of drawn debt	3.7%	4.2%
Interest cover2	3.3 times	2.5 times
Loan to value3	28.6%	42.3%

¹ Proforma for drawing down £200 million US private placement

² Underlying profit before interest and tax / net interest

³ Debt to property and investments

The proportionally consolidated LTV decreased to 42.3% at 30 September 2013 (30 September 2012: 46.0%), due to the impact of the equity placing, the valuation performance and our net investing activities.

We continue to achieve attractive financings which improve liquidity and our debt book is well diversified.  We have raised a further £610 million of debt finance in the last 6 months, bringing the total to £3.1 billion (of which £2.6 billion is BL share) since March 2011.  This includes a £310 million 5 year revolving credit facility provided by a syndicate of eight banks, and we signed a £200 million 12 year US private placement with 2 investors and swapped into floating rate at a margin of 103bp over LIBOR, with a delayed draw.

The weighted average interest rate reduced from 4.6% to 4.2% on a proportionally consolidated basis. We are currently benefiting from drawing historic cheaper rate facilities which expire over the next 2 years.  Average debt maturity of 8.9 years (proforma for drawing down the £200 million US private placement) compares to average lease lengths to first break of 10.7 years.

In the 6 months ended 30 September 2013 we have taken advantage of our cheaper rate short term borrowing and facilities, increasing the balances drawn to £772 million (BL share) from £44 million at 31 March 2013, at a group level.

At 30 September 2013, the Group had £2.3 billion of available committed banking facilities and £112 million of cash and short term deposits.  We now have £1.3 billion of facilities with a maturity of more than 2 years. 

We continue to manage our interest rate exposure in line with the policy set by the Board. Currently 75% of projected net debt (including our share of joint ventures and funds) is at fixed rate over the five year policy time period.

DIVIDENDS

The second quarter dividend of 6.75 pence per share, totalling £68 million, is payable on 14 February 2014 to shareholders on the register at close of business on 10 January 2014.  The Board will announce the availability of the Scrip Dividend alternative via the Regulatory News Service and on our website (www.britishland.com), not later than 4 business days before the ex-dividend date of 08 January 2014. The Board expects to announce the split between PID and non-PID income at that time.   In respect of the first quarter dividend for 2013-14, some 39% of shareholders opted for the scrip alternative, in lieu of £23 million in cash dividends. 

The total dividend for the half year is 13.5 pence per share, an increase of 2.3% on the 2012/13 half year dividend.  This is in line with the announcement previously made by the Board and reflects the successful deployment of the placing proceeds and our confidence in the future and the longevity of our cash flows.

ACCOUNTING JUDGEMENTS

In preparing these financial statements, the key accounting judgement relates to the carrying value of the properties and investments, which are stated at fair value.  The Group uses external professional valuers to determine the relevant amounts.

The primary source of evidence for property valuations should be recent, comparable market transactions on an arms-length basis.  However, the valuation of the Group's property portfolio is inherently subjective, as it is made on the basis of assumptions made by the valuers which may not prove to be accurate. It should be noted that the external valuations received for our properties in Portugal and Spain include a market uncertainty clause due to the lack of transactional evidence and uncertainty over the economic situation in those markets.

REIT status:  the Company has elected for REIT status.  To continue to benefit from this regime, the Group is required to comply with certain conditions as defined in the REIT legislation.  Management intends that the Group should continue as a REIT for the foreseeable future.

Accounting for joint ventures and funds:  an assessment is required to determine the degree of control or influence the Group exercises and the form of any control to ensure that financial statement treatment is appropriate.  Interest in the Group's joints ventures is commonly driven by the terms of the partnership agreements which ensure that control is shared between the partners.  These are accounted for under the equity method, whereby the consolidated balance sheet incorporates the Group's share of the net assets of its joint ventures and associates.  The consolidated income statement incorporates the Group's share of joint venture and associate profits after tax upon elimination of upstream transactions.

PRINCIPAL RISKS AND UNCERTAINTIES

Assessment of risk is a cornerstone of our strategy and our embedded risk management is fundamental to its delivery. Our approach to risk management remains as set out on pages 42-43 of the Annual Report and Accounts published in May 2013.

The Directors' assessment is that the principal risks and uncertainties that the company is exposed to and which may impact performance in the remaining six months of the financial year, are unchanged from those set out on pages 44-47 of the Annual Report and Accounts published in May 2013, save for a shift from 'Economic Uncertainty' to 'Economic Outlook' reflecting our focus on how the economic recovery, which appears to be under way, will develop and the risks and opportunities that will bring for our business.  The principal risks and uncertainties are summarised below.

External Risks

Economic outlook - The extent and timing of a global economic recovery, as well as the associated impact on medium term interest rates and the uncertainty that brings, present risks and opportunities in property and financing markets and the businesses of our occupiers.

Commercial property investor demand - Reduction in investor demand for UK real estate may result in falls in asset valuations and could arise from variations in the health of the UK economy, the attractiveness of investment in the UK, availability of finance to property investors and the relative attractiveness of other asset classes.

Occupier demand and tenant default - Underlying income, rental growth and capital performance could be adversely affected by weakening occupier demand resulting from variations in health of the UK economy and corresponding weakening of consumer confidence and business activity and investment. In addition, occupier failures may adversely impact underlying income and capital performance. Changing consumer and business practices (e.g. Internet shopping, flexible working practices and demand for energy efficient buildings), new technologies and alternative locations may result in earlier than anticipated obsolescence of our buildings if evolving occupier requirements are not met.

Availability and cost of finance - Reduced availability of financing to real estate investors may result in weaker investor demand for real estate and adversely impact British Land's ability to refinance expiring facilities. Increasing finance costs would reduce British Land's underlying income and increase required returns for real estate investors.

Catastrophic business event - An external event such as a civil emergency, including a large scale terrorist attack, extreme weather occurrence or environmental disaster could severely disrupt global markets (including property and finance) and cause significant damage and disruption to British Land's portfolio and operations.

Internal Risks

Investment strategy - Significant underperformance could result from inappropriate determination of property investment strategy, including consideration of: sector selection and weighting; timing of investment and divestment decisions; exposure to developments; sector, asset, tenant, region concentration; and co-investment arrangements.

Development - Development risks could adversely impact underlying income and capital performance including: development letting exposure; construction timing and costs; major contractor failure; and adverse planning judgements.

Income sustainability - Sustainability of our income streams is required to be considered in: execution of investment strategy and capital recycling, notably timing of reinvestment of sale proceeds; nature and structure of leasing activity; and nature and timing of asset management and development activity.

Capital Structure - gearing - Gearing provides the capacity for outperformance but also magnifies the impact of underperformance. An increase in the gearing level increases the risk of a breach of financing covenants and may increase borrowing costs.

Liquidity - Failure to manage the refinancing requirement may result in a shortage of funds to sustain the operations of the business or repay facilities as they fall due.

People - Failure to recruit, develop and retain staff and directors with the right skills and experience may result in significant underperformance.

DIRECTORS' RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

(a)  the condensed set of financial statements has been prepared in accordance with IAS 34;

(b)  the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c)  the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

GOING CONCERN

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive's Statement and Business Review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities, are described in the second half of this announcement.

The Group has considerable undrawn debt facilities and cash deposits in excess of current drawn banking facilities. There is substantial headroom against the covenants for its unsecured banking facilities, details of which are included in Note 7. It also benefits from a diverse and secure income stream from leases with long average lease terms. As a consequence, the directors believe that the Group is well placed to manage its business risks satisfactorily despite the current uncertain economic outlook.

The directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the financial statements.

By order of the Board, Lucinda Bell, Finance Director

 

END

 

 

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