3rd Quarter Results - Part 1
British Land Co PLC
14 February 2006
14 February 2006
THE BRITISH LAND COMPANY PLC
THIRD QUARTER REPORT - TO 31 DECEMBER 2005
Highlights
• British Land's first quarterly report - the only major UK property
company to provide this information
• Net Asset Value(1) per share up 10.7% to 1390 pence (up 23.2% for 9
months)
- Net Assets as adjusted(1) £7.3 billion
- IFRS Net Assets £5.8 billion
• Headline pre-tax profits(2) £672 million (£1.4 billion for 9 months)
Underlying Profits £71 million (£173 million for 9 months) before tax and
gains on asset disposals and revaluation
• Underlying Earnings per share(1) 11.5 pence (26.9 pence for 9 months)
- Headline EPS 97.5 pence (216.0 pence for 9 months)
• Portfolio Valuation increase of 4.6% (9.7% increase for 9 months)
- in line with IPD data for the quarter despite yield compression
- valuation uplift led by Retail Warehouse parks and London Offices
• Total properties under management £18.7 billion
• Activity levels remain high
- £597 million value enhancing disposals (£1.3 billion in year to date)
with more to come
- pro-active asset management stepping up; commencement of
822,000 sq ft 201 Bishopsgate/Broadgate Tower development
- £750 million superstores refinancing announced in January, reducing
future interest expense
• Benefits of Pillar acquisition underlined. The Pillar Unit Trusts (HUT,
HIF) have outperformed IPD and competitors since acquisition. Fee income has
also increased. The acquisition has been strongly accretive to British Land,
with continued favourable outlook. Management are contributing well.
(1) adjusted, diluted - Note 9
(2) includes shares of Funds and Joint Ventures - Table A
Prior periods have not been restated/revalued on a quarterly basis, hence
comparative date will only be available from next year.
Statement by the Chairman, Sir John Ritblat
This is British Land's first quarterly report to shareholders, forming part of a
range of communications improvements which we see as leading our industry. For
those with a longer perspective, we are also celebrating in 2006 the 150th
Anniversary of the foundation of British Land.
I am pleased to report that the Company is in rude health. It has strong
financial results with assets owned and under management exceeding £18.7 billion
and net assets per share of 1390 pence, up 134 pence, a rise of 10.7% for the
quarter.
Our property assets are positioned to perform well in the years ahead, and we
have the wherewithal to improve that performance still further with our strong
and talented management team. Headline pre-tax profits have well exceeded
£1 billion in the first 9 months of this year - though what our founders might
have thought of the IFRS reporting basis must be left to the imagination!
Property has had a very good run, and at present levels prime is the place to be
- its attractions in terms of total return and ability to sustain leverage
generate the best contribution for our shareholders. The benefits of secure and
growing long-term cashflow are a very significant element and, as we see from
the gilt market, remain in short supply. The recovery of City of London office
values underlines again the merit of a long view and diversity in asset choice.
On REITs, we await publication of the final legislation. We have been fully
involved in the discussions with H.M. Treasury, and we are hopeful of a
resolution that will be commercially viable as well as serving the public
interest.
Whatever the outcome, we could not be better placed.
I remain greatly optimistic for the future for British Land and continuing its
well practised adaptability and record of performance.
Review by the Chief Executive, Stephen Hester
British Land is reporting a very strong set of results for the quarter ended
31 December 2005. These results together with the activity that produced them
and which is ongoing, underline our confidence in the Company's positioning for
the future.
Our mission remains delivery of sustained and long-term outperformance for
shareholders from the pro-active working of our property assets, efficiently
structured and financed. We are well into the execution phase of the changes to
strategy outlined in May 2005 and pleased with progress to date.
Markets
Real Estate themes are little changed from our commentary in November with the
last results. Yield shift is dominating investment returns. While the shift is a
well-founded reaction to low real interest rates and the global economic trends
underpinning them, the process seems likely to be in its later phases. The
underlying challenges in the real economy continue to restrain rental growth and
take up of space overall. To outperform in the face of these demands requires
intense focus on meeting customer needs with prime modern and efficient space in
locations where those customers need to be. We see parts of the investment
market overpricing property with income risk or without good growth prospects
and the secondary yield compression that has occurred versus prime as becoming
vulnerable to setbacks.
In contrast, our key sector themes in Open A1 Out of Town Retail and Prime
London Offices are performing well and have every prospect of continuing to do
so in coming years when yield shift fades. Retailers are following their
customers' desire for shopping convenience whilst seeking operating efficiencies
themselves - this continues to allow above average rental growth in the right
out of town assets. In London, as we have predicted, the office cycle is turning
up. We are more cautious than some commentators on both rental growth and yield
shift prospects, but positive nonetheless. Elsewhere in the portfolio, asset
management "stories" drive our selection whilst our expansion in European Out of
Town Retail is adding a new growth area, albeit one we aim to develop carefully.
Portfolio Reshaping
The repositioning of British Land's portfolio to more focused concentration on
growth areas with competitive advantage continues apace.
Following on from some £1.3 billion of gross assets acquired in 2004/5 and a
further £1.8 billion in the first half of 2005/6, our disposal programme this
year has so far raised over £1.3 billion, with more to come. In each case we
have added value in both purchases and sales.
We have tightened British Land's sectoral focus and improved growth prospects
for the future. We are recycling capital actively as illustrated by our office
disposals at Fleet Place and Baker Street, and ongoing marketing of Plantation
Place, juxtaposed by our increased office development programme in London.
In our retail portfolio we have increased investment in large retail parks with
open A1 planning - providing greater opportunities for our management. Some
parks with more emphasis on bulky goods have been sold profitably following
improvements in rental income.
The table below sets out activity during the third quarter (and subsequent
announcements). This reflects both our original programme of sales and the first
results of refining our combined portfolio post the Pillar acquisition. In
January 2006 CLOUT, the Unit Trust advised by British Land, announced the
landmark £520 million sale of CityPoint - over 700,000 sq ft of office and
ancillary space.
Sales Price BL Share Gain
£m £m %(1)
3 months to 31 December 2005:
2-16 Baker Street, W1 57.2 57.2 31.6
1&2 Heathrow Gateway, Feltham 65.5 65.5 16.6
Manchester Fort Shopping Park 167.3 167.3 - (2)
1 Fleet Place, EC4 119.5 119.5 21.0
Microsoft Campus Reading 52.2 52.2 9.8
Greyhound Retail Park, Chester 66.5 66.5 -
Banbury Cross Retail Park, 69.3 12.0 0.4
Banbury(3)
Palace Grounds Retail Park, 64.6 22.4 4.1
Hamilton(3)
Others 42.7 34.6 9.4
704.8 597.2 9.5
Since 1 January 2006:
Legal & General House, 73.6 73.6 30.4
Kingswood
Priory Retail Park, Merton 42.7 42.7 6.8
CityPoint, EC2(4) 520.0 186.9 8.3
Others 28.7 24.4 18.8
665.0 327.6 13.2
1,369.8 924.8
(1) sale price above latest year end valuation (March 2005)/fair value on
acquisition
(2) sale contracted by Pillar prior to British Land acquisition
(3) Hercules Unit Trust (HUT) - Banbury 50% owned
(4) City of London Office Unit Trust (CLOUT)
Gross assets acquired in the 3 months amounted to £83 million (British Land's
share £33 million), with a further £62 million (our share £24 million) so far in
the current quarter, in each case reflecting retail warehousing activity.
Pro-active Asset Management
Across the business, the process of adding value to our real estate holdings
continues. Within this, an increasing focus on improved customer relations is
taking hold. Noticeably, our best performance also comes from our most customer
centric areas.
Since 30 September, the fruits of lease re-gears at Kingswood House and 1 Fleet
Place have facilitated profitable sales. Rental growth (ERV) in the Hercules
portfolio was up 2.25% in the quarter (10.2% in calendar 2005 - double the
'sector' average increase) with Pillar's customer focused model now being rolled
out across the broader British Land retail portfolio. The refurbishment and
remodelling works at Meadowhall continue to plan.
The Nugent Shopping Park development at Orpington has progressed well, achieving
completion on time and on budget. The first tenants will be starting to trade at
the end of March. Hercules is funding development of an open A1 retail scheme in
Hayle, West Cornwall scheduled for completion in September 2006 and PREF has
purchased a retail park development in Paris expected to open in Summer 2007.
In London, our first class development programme is accelerating and, we
believe, well timed. In the West End, construction of the York Building is well
advanced, part of which we will occupy as our new head office. A "resolution to
grant planning" for the next phase of Regent's Place (730,000 sq ft gross) has
now been received allowing this major development prospect to move forward.
In the City, our development at 51 Lime Street (475,000 sq ft) pre-let to Willis
is on track for top out in 4 months and completion early next year. Our 822,000
sq ft development at 201 Bishopsgate/Broadgate Tower received planning
permission and is being built speculatively for delivery in 2008. Contract
placement for construction is largely in place with on-site work now underway.
Work on the Basinghall and Coleman Street (pre-let & forward sold) developments
within CLOUT also continues. There are new lettings in documentation for both
Plantation Place South and 10 Exchange Square, confirmatory of City leasing
trends.
Valuation
The table below shows the principal valuation movements for the 3 month and 9
month periods to 31 December 2005. This represents British Land's first
quarterly valuation, Knight Frank's second valuation report on our portfolio and
the first full quarter since completing the Pillar acquisition.
The 4.6% portfolio uplift was in line with that reported by the IPD monthly
statistics for the quarter despite the continued secondary yield compression
that has disadvantaged British Land's prime property valuation trends in recent
periods. Contributing to this were like for like growth in rental value (ERV)
for the portfolio over the quarter of 0.7% (2.8% annualised, driven by 4.8%
annualised increase in the retail portfolio) and yield shift. The net equivalent
yield on the portfolio has tightened from 5.3% to 5.1% during the 3 months.
The main sector drivers of the valuation increase over the quarter were:
•retail warehouse parks at 21% of the portfolio, up 6.9%
•London offices (including developments) at 36% of the portfolio rose by
5.9%.
Vacancy rates remain very low.
------------
Valuation Group Funds/ Total Portfolio Uplift(2) %
JVs(1) -------------
by Sector £m £m £m % 3 mths 9 mths
------------- ------ -------- ------- ------- ------ ------
Retail
Shopping centres(3) 2,065 487 2,552 17.6 2.0 6.2
Superstores 1,410 210 1,620 11.2 2.5 8.1
Retail warehouses 1,560 1,505 3,065 21.1 6.9 9.7
Department Stores 694 137 831 5.7 2.0 10.2
High street 378 36 414 2.9 3.2 10.5
------------- ------ -------- ------- ------- -------- ------
All retail 6,107 2,375 8,482 58.5 3.9 8.4
Offices
City(4) 3,990 221 4,211 29.0 5.0 10.8
West End 628 46 674 4.7 6.0 10.6
Business parks, 217 7 224 1.5 2.3 13.4
provincial
Development 469 2 471 3.3 15.9 27.0
------------- ------ -------- ------- ------- -------- ------
All offices 5,304 276 5,580 38.5 5.8 12.1
Industrial, 376 64 440 3.0 3.3 4.2
distribution,
leisure, other(5)
------------- ------ -------- ------- ------- -------- ------
Total (5),(6) 11,787 2,715 14,502 100.0 4.6 9.7
------------- ------ -------- ------- ------- -------- ------
(1) Group's share of properties in Funds and Joint Ventures
(2) increase in value for 3 months and 9 months to 31 December 2005 - includes
valuation movement in developments, purchases and capital expenditure, and
excludes sales
(3) Meadowhall valuation up 1.9% to £1,545 million (up 3.0% pre cap-ex); ERV £81
million; net equivalent yield 4.76%
(4) Broadgate valuation up 5.2% to £3,127 million; ERV £37.50 - £45.00 per sq
ft; net initial yield 5.5%
(5) excludes the Group's residential portfolio valued at £290m on 31 December
2005 which (together with some further units acquired subsequently) is
intended to be sold
(6) annualised net rents (excluding residential) £664 million; portfolio current
yield (gross to British Land, without deduction of purchaser's costs) 4.7%;
current yield adding back rent frees 5.0%; reversionary yield (gross, 5
years) 5.5%
Balance Sheet
Total properties as at 31 December were £14.8 billion - £18.7 billion including
assets under management.
Adjusted diluted net assets rose in the quarter by 10.7% (£704 million) to £7.3
billion (unadjusted net assets £5.8 billion on an IFRS basis including
contingent CGT). Over the 9 months, the increase in adjusted diluted net assets
was 23.4%. Adjusted diluted NAV per share was 1390 pence (30 September 2005 1256
pence). NNNAV (triple net) was 1046 pence (see note 9).
The total return to shareholders for the quarter was 10.7% and 24.2% for the 9
months.
The values of Pillar's HUT and HIF Unit Trust holdings have increased 26% and
10% respectively (inclusive of capital distributions) since the March valuation
prior to acquisition, whilst Pillar's other assets have also risen in value
satisfactorily. These increases have produced strong accretion to British Land
shareholders, while the outlook remains positive.
British Land's gearing fell as a result of asset sales and valuation growth. The
Loan to Value ratio was 46% (50% proportionally consolidated) down from a
proforma peak of 55% (59% proportionally consolidated) on the acquisition of
Pillar. In the current final quarter, gearing will be affected (inter alia) by
revaluation movements, reducing debt from the proceeds of sales, payment of the
interim dividend (£27 million) and the charge to be incurred on the £750 million
superstores portfolio refinancing (see below).
Income Statement
Gross rental and related income for the quarter was £180 million (£520 million
for 9 months) - £211 million (£599 million) proportionally consolidated. Other
income (principally Fund Management fees and investment income) grew
substantially in the quarter to £25 million (£34 million for the 9 months) due
to a full period from Pillar and receipt of a £16 million dividend from Songbird
Estates. Songbird dividends are not declared on a recurring periodic basis. The
dividend received twice covers the financing cost to date of our original
£97 million investment. Performance fee income from the Unit Trusts (£4.8
million net booked in the quarter) is comparatively volatile and for calendar
2005 will be finalised in the current quarter when the benchmark is published.
Net financing costs for the quarter were £94 million (£284 million for 9 months)
for the Group - £111 million (£329 million) proportionally consolidated. Net
rents covered interest 1.6 times, virtually unchanged from the previous period.
The average interest rate for the Group was 5.92% as at 31 December 2005, up
from 30 September (5.87%) due to repayment of revolving bank facilities from
sales proceeds. This rate is expected to fall to some 5.75% as a result of the
£750 million superstores refinancing announced last month (with a one-off
pre-tax charge, subject to market rate movements, estimated at £104 million to
be taken in the current quarter). The transaction is expected to reduce annual
interest costs by some £7 million.
Underlying pre-tax profits for the quarter were £71 million (£173 million for 9
months), boosted by the Songbird dividend and fund performance fees. Excluding
these items underlying pre-tax profits would be some £50 million. On a headline
basis, pre-tax profits were £672 million for the quarter (£1.4 billion for 9
months), including £580 million of unrealised valuation gains and £24 million of
disposal gains.
Headline earnings per share were 97.5 pence (216.0 pence for 9 months).
Underlying earnings per share were 11.5 pence (26.9 pence for 9 months). The
Songbird dividend is not taxable, so the overall tax rate on underlying profits
is reduced from 22% for the six months to 30 September 2005 to 15% for the
quarter (19% for 9 months).
A proportionally consolidated income statement and balance sheet have been
prepared and attached as Tables A and B to view the results of British Land's
interests in Funds and Joint Ventures on a 'look through' basis.
This information is provided by RNS
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