Final Results Part 2.
British Land Co PLC
31 May 2000
PART 2
Chairman's Statement
--------------------
In the past year we have almost tripled profits to their all time high, up
183% to £156.4 million (1999 - £55.3 million). A major contribution this year
was £41 million from trading in properties to which we had added material
value by development. Net assets are up 10.2%, also to an all time high, at
694 pence per share (1999 - 630 pence). The total return was 11.9%
1999 - 8.1%).
The valuation uplift was £310 million. Led by our recent purchase of
Meadowhall, shopping centres provided a robust performance with an 8.3% rise,
and retail warehouses were also strong at 8.4%. For the two other significant
elements of the portfolio, offices (up 2.4%) and supermarkets (up 2.3%), the
growth is still to come, as the higher rents feed through into City of London
office values, and as we begin to approach full open market rents for our
supermarkets. We opened the process of obtaining new levels of improved rents
in the food superstores with a 21.5% increase to £17.80 per sq ft for a 40,000
sq ft store in suburban Maidstone, the highest rental so far achieved by a
third party expert's award on a foodstore with a petrol filling station.
Property is a long-term yet cyclical business for which the control of risk is
essential. The 100 largest tenants contribute 83% of our rent roll, and 69% of
them are Government or feature in the FT 500 listings for the UK, Europe, USA
or Global. This strong tenant base, coupled with the long lease maturity
pattern with an average lease length of 19.9 years (1999 - 19.7 years),
remains a fundamental of our business. 91% of our portfolio has been acquired
in the last ten years. We are active buyers and sellers, and see the best
prospects in new buildings. Conversely the greatest hazards are in older
properties which cannot earn the best rents and which need a lot of
expenditure to lift their standards to modern tenants' requirements, if it can
be done at all.
By hedging interest rate and foreign exchange exposures, and by continuously
extending debt maturities, we protect the liability side from sudden
volatilities in the financial markets. The weighted average debt maturity is
18.4 years and we have cut the weighted average interest rate still further by
0.25% down to only 7.05% - a reduction worth £10 million a year on the £4
billion debt book we manage.
Some risks are outside our control; most notably property companies and
property-owning institutions, indeed all property owners, have been severely
affected by Government action, particularly in the stealthy and retrospective
levy escalations of Stamp Duty. In calculating property values in accordance
with the Red Book of The Royal Institution of Chartered Surveyors, purchasers'
costs must be deducted, and the Stamp Duty element alone of those costs has
risen in three years from 1% to 4% - in British Land's case from £80 million
to £320 million, 15.4 pence to 61.8 pence per share. This retrospective tax
reduces the value of acquisitions undertaken years earlier, undermining the
basis of investment decisions. The uncertainty causes illiquidity in the
property market and places property assets under an unfair disadvantage in
comparison with other asset classes which are not similarly 'stamped' upon.
Total properties, including British Land's share of its joint ventures are now
up to £8.2 billion (1999 - £6.6 billion) with annualised net rents of £462.5
million (1999 - £398.8 million). Total funds under our property management,
including partners' shares of joint ventures, are £9.5 billion (1999 - £7.7
billion).
The Board is recommending a final dividend of 7.5 pence per share (1999 - 7.07
pence) making a total payment for the year of 10.9 pence (1999 - 10.3 pence)
an increase of 5.8% above last year's payment.
The Portfolio
-------------
Our external valuers have calculated the current net yield of the portfolio,
excluding developments, at 5.9% and the reversionary net yield at 7.1%, with a
reversionary potential of over £90 million of additional rent mainly within
the next four years. Of this amount, £12.4 million arises from guaranteed
uplifts. Any rise in rents above our valuers' estimates of today's levels
will of course produce further extra income.
The portfolio is 43% in offices, the principal being the 350,000 sq m
Broadgate Estate, the 48,000 sq m Ludgate Estate in the City of London, and
the 113,000 sq m Regent's Place in the West End.
The exceptional investment in the City's office core at Broadgate can be
expected to share fully the future growth prospects, as its location,
buildings and facilities are generally recognised as being among the best in
Europe.
We are currently adding by way of extension to Broadgate the development of
201 Bishopsgate (63,000 sq m). We have bought Hamilton House (8,200 sq m) in
the heart of Broadgate and Broadgate House and Eldon House (together 6,700 sq
m) at the south west corner. These properties provide scope for redevelopment
and refurbishment, in the meantime earning a holding return of some 7%.
At Regent's Place we have two major projects under way, the new Abbey National
Head Office of 18,200 sq m and also a new office building of 12,100 sq m which
will be available for leasing next year. The full £1+ billion ongoing
development programme is described in detail in the Operating and Financial
Review, and is projected to add over £86 million to Group net income when
complete.
The past year gave us the opportunity to add significantly to our retail
assets, which now account for 46% of the portfolio. We bought the Meadowhall
Shopping Centre near Sheffield, comprising 124,500 sq m and one of only six
major centres in the United Kingdom. It enjoys the twin benefits of
unparalleled excellence in communication with a proven retail mix. Tenant
quality is high and 71% of the leases have 25 years unexpired, adding to our
covenant strength. We are well pleased with its performance in the period of
our ownership, the uplift being 9.3% to £1.28 billion.
We own other principal shopping centres too: at Basildon in Essex (67,000 sq
m), East Kilbride in Scotland (21,500 sq m) and St. Stephen's Green in Dublin,
Ireland (28,000 sq m).
A particular management achievement was the major restructuring of the
occupational leases at 100 New Bridge Street, London EC4, as a result of which
the property has a single tenant for its 14,200 sq m (153,000 sq ft) office
space until June 2017. As part of the rearrangement and improvements to the
building, the tenant was happy to give up options to break the lease during
the term. The rent is £6.5 million per annum.
Joint Ventures
--------------
To widen the reach of our portfolio we enter into joint venture and
partnership arrangements, of which we now have twelve, with a total value of
£2.5 billion. During the year we added a £172.7 m joint venture with House of
Fraser PLC. The venture, BL Fraser Limited, owns fifteen House of Fraser
stores providing 176,510 sq m of retail space.
Property details of all the joint ventures are fully set out in the
Operating and Financial Review, together with summarised accounting statements
in Note 7.
Illustrating the intensive management in joint ventures, BL Universal, the £1
billion joint venture with The Great Universal Stores P.L.C. sold 92
properties during the year, with a value of £81.3 million. The number of
sales since the joint venture began in February 1997 now totals 672 properties
raising £375 million. The structure of the portfolio has significantly
changed with £331 million of sale proceeds being reinvested to acquire new
larger properties including retail parks in Cambridge, Wakefield, Leeds,
Castle Vale Birmingham, and most recently New Cross, London SE14.
e-commerce
----------
There are new services which British Land can offer, but the profitability of
doing so is highly unpredictable. Ways of reducing operating costs initially
appear to promise better rewards for a company of our size. In either case
the joint venturing route, which we have employed so extensively in property
investment, provides a method of limiting exposure while sharing in the
potential benefits.
Shareholders will wish to know that our web site is operational at
www.britishland.co.uk.
Finance
-------
An active year for financing opened with the £1.54 billion securitisation
supported by cash flows from the Broadgate Estate. The secured element of the
Notes is limited to £100 million and there is no recourse to British Land
itself, the Notes being obligations of fully ring-fenced subsidiaries. The
issue allows British Land to manage its Broadgate business and assets in an
effective and financially efficient manner for the foreseeable future, and
there is a range of maturities extending out to 2038 with significant early
repayment flexibility.
During the year we arranged and completed a £125 million non-recourse loan to
finance a £172.7 million new joint venture with House of Fraser PLC, and a
£210 million non-recourse loan to finance Tesco BL Holdings Limited. In all,
the various ventures between Tesco and British Land amount to £635 million of
property.
More recently British Land itself has concluded a new £300 million unsecured
bank facility with Barclays Bank PLC. This loan was put in place immediately
after we had taken an early opportunity to acquire five companies that
provided lease finance in respect of the Meadowhall Shopping Centre. The
aggregate consideration, including the repayment of intra group debt, was
£263.3 million.
In addition we took a surrender of other finance leases for a consideration of
£23.1 million, effectively extinguishing the third party lease financing that
was in place at the time British Land acquired Meadowhall in July 1999. As a
£75 million secured loan was repaid in December 1999, Meadowhall is now owned
freehold on a wholly unsecured basis.
Prospects
---------
By building and investing for the future, British Land has taken out a lot of
the risk in property. Its high quality portfolio of modern property, well
tenanted on long leases, its joint ventures, its property trading and big
development programme (also using joint ventures) show the way forward, using
a range of debt instruments to multiply the lower capital returns of a low
inflation era. There is reversionary income of £90 million to come, most of
it in the next four years, and another £86 million of income from developments
to add to existing annualised income of £462.5 million, making almost £640
million per annum in all. These are big numbers. We will add income too by
working the individual assets. There is still scope for entrepreneurial
initiatives in your Company which has grown large in assets but remains small
in management team numbers.
The predicted shortage of office space in the City of London has now created a
near-unanimity of view that rental levels are likely to rise there. The
significant costs of doing business in the City are no longer rents but staff
salaries and bonuses, and information technology. Our concern must be to
ensure that we offer to our tenants the size and type and quality of buildings
which suit their present needs yet are able to adapt easily to their future
changes.
The Broadgate Estate is widely recognised to have been designed and built with
occupiers' flexibility in mind, and it is not surprising that occupancy levels
remain at 100% virtually all the time. Any space that does become available
is soon snapped up, at rents now rising through the low £50s per sq. ft., and
there are indications from our valuers that rental values have risen in the
short space since our 31st March 2000 valuation date. Moreover, current
valuation methodology does not recognise the premium that is the value of
owning the whole, which is more than the sum of the parts.
We stand or fall by the free market, and the impost of Stamp Duty, to which I
have earlier alluded, is already a distortion when property is compared to
other asset classes. It is to be hoped that there will not be any ill-judged
Government intervention in the freedom of landlords and tenants alike to make
their own decisions on lease conditions in a totally free market. The market
works best when left alone and reacting to strident minorities only creates
artificial imbalances.
Chairman's Tributes
-------------------
Peter Simon, who has served as our senior non-executive director and as
chairman of the Audit and Remuneration Committees for a considerable period,
has decided that the time has come for him to retire. I express our grateful
thanks to him for all that he has done. We shall miss him, and hope that he
enjoys his leisure away from the cut and thrust of the property arena.
We were pleased that Robert Swannell, Vice Chairman of Schroder Salomon Smith
Barney, joined the Board as a non-executive director last August. Also we are
very happy to announce and look forward to welcoming Derek Higgs, an Executive
Director of Prudential plc and Chairman designate of Partnerships UK, and Lord
Burns, Permanent Secretary of H.M. Treasury 1991-8 and a Director of Pearson
plc and Legal & General Group PLC, who will become non-executive directors in
July.
My thanks go to my colleagues and in particular the new generation of young
people on all our boards and staff, with a special mention to our highly
focused management teams at Broadgate and Meadowhall, as well as to our many
agents and professional advisers.
John Ritblat
Chairman
OPERATING AND FINANCIAL REVIEW
------------------------------
Development Programme
---------------------
At 31st March 2000, the cost of the current development programme within the
Group and joint ventures was estimated at £1.2 billion, of which £202 million
has been spent. Development expenditure during last year was £93 million.
The programme will add progressively to the Group's annual net rental income
over the next several years as individual developments are completed and let,
resulting in an estimated overall addition of £120 million per annum on
completion, of which the Group's entitlement is estimated at £86 million.
In addition to the current development programme, there are a number of major
potential development projects being worked up which could add significantly
to the programme for the medium term.
The recent progress achieved in carrying out the current programme includes
the following:
Regent's Place, London NW1
--------------------------
The 18,200 sq m (196,000 sq ft) building which was pre-let last year to Abbey
National is under construction, as is a 12,100 sq m (130,000 sq ft) building
which is being developed for letting. The refurbishment of the Podium level
of the 33 storey Tower at Regent's Place and the creation of attractive retail
space has been completed.
201 Bishopsgate, Broadgate, London EC2 (joint venture with Railtrack)
---------------------------------------------------------------------
The 4,000 tonne steel raft over the operational railway has been successfully
completed, providing the ability to deliver a 63,000 sq m (680,000 sq ft)
building on a shortened programme. Detailed design is being finalised.
Plantation Place, London EC3
----------------------------
Demolition works have been completed and perimeter piling and archaeology are
in progress. The marketing suite is complete and, as with 201 Bishopsgate,
detailed design development of the 61,000 sq m (656,000 sq ft) building is
being finalised.
Blythe Valley Park, Solihull (joint venture with Prologis Kingspark)
--------------------------------------------------------------------
Infrastructure improvements, including a direct link to the M42 motorway, have
been completed on the 69 hectare Business Park of 111,500 sq m (1.2 million sq
ft) of office and other accommodation. The Oracle Corporation has completed
the construction and is in occupation of the first phase of its planned 23,200
sq m (250,000 sq ft) office complex. Further buildings totalling 31,500 sq m
(340,000 sq ft) are currently under construction, of which 26,000 sq m
(280,000 sq ft) is pre-let, including lettings to Ove Arup and Centrica.
Cherrywood, Dublin (joint venture with Dunloe Ewart Plc)
--------------------------------------------------------
This masterplanned mixed use development on a site of 170 hectares is situated
8 miles south of Dublin, at Loughlinstown, between the main Dublin-Rosslare
road and the new South East motorway. The development incorporates science
and technology parks totalling 102,000 sq m (1.1 million sq ft) of
accommodation with scope for significant further expansion, a golf course and
a district centre of mixed uses including retail, offices, hotels and leisure.
The first stage of the science and technology park, which is being developed
in association with Dun Laoghaire Rathdown County Council, is under way with
the first two buildings of 5,850 sq m (62,900 sq ft) and 5,100 sq m (54,700 sq
ft) having been completed and let to Lucent Technologies and Dell Corporation
respectively. Detailed planning permission has been granted for the next five
buildings totalling 23,200 sq m (250,000 sq ft), and preparatory work for the
construction of three of these is under way.
Watling House, London EC4
-------------------------
This 9,000 sq m (97,000 sq ft) office development has now been fully let.
Other Development Projects
--------------------------
Other projects include a 23,200 sq m (250,000 sq ft) extension to East
Kilbride Shopping Centre in Scotland and a 40,000 sq m (430,000 sq ft)
development of distribution space at Feltham near Heathrow Airport.
Properties
----------
The Investment Property Portfolio
---------------------------------
Total properties, including British Land's share of joint ventures, have risen
to £8.2 billion. 91% of the property portfolio has been bought within the last
ten years. Annualised net rents are £462.5 million and the weighted average
lease length is 19.9 years (1999 - 19.7 years). The current net yield on the
portfolio is 5.9% (1999 - 6.3%) and the reversionary net yield is 7.1% (1999 -
7.3%) on current rental values.
Valuation
---------
The valuation of all properties in the British Land portfolio and situated in
the United Kingdom (but excluding Tesco British Land Property Partnership and
Tesco BL Holdings Group of Companies) was undertaken by Chartered Surveyors
Weatherall Green and Smith. Their full certificate (excluding supporting
schedules) will appear in the Report and Accounts. They have also produced
separate certificates in respect of each of the joint ventures valued by them.
The Company will be undertaking a revaluation as at 30th September 2000.
After adjustment for purchases, sales and expenditure the like for like growth
for the portfolio, together with its proportion of joint ventures, was 3.9%
(1999 +3.8%).
The summarised breakdown of this uplift is: -
Property Valuation
------------------
2000 1999
City offices +1.4% +1.9%
West End offices +10.0% +9.9%
Other offices +1.1% +5.2%
All offices +2.4% +3.0%
Shops +2.2% +2.4%
Retail warehousing +8.4% +1.6%
Supermarkets +2.3% +6.0%
Shopping centres +8.3% +7.3%
All retail +5.9% +4.7%
Industrial and distribution +6.3% +3.7%
Leisure and other +2.2% +5.0%
Commentary by Weatherall Green & Smith on Major Valuation Issues
----------------------------------------------------------------
'General
--------
Across the portfolio the policy of concentrating on larger and higher quality
lot sizes has been rigorously pursued over the 12 months since the last
valuation. Consequently there is a very high proportion of modern property
let on generally long leases to good covenants. Aside from the City offices
there is a substantial stake in West End offices represented predominantly by
Regents Place. Retail warehouse and good quality retail has been increased
both by the sale of smaller more secondary lots within the BLU portfolio and
most significantly the acquisition of Meadowhall Shopping Centre. The company
is now one of the largest landlords of retail warehousing in excess of
3,000,000 sq ft including joint ventures. Industrial holdings are limited
being mainly focused in and around London where rental performance has been
greatest. The company also has a substantial stake in leisure via joint
ventures with Scottish & Newcastle and Rank.
The City of London
------------------
The portfolio is heavily weighted towards City offices, most notably at
Broadgate. Whilst for the very largest potential lettings the market is
considered to be in equilibrium, there is growing evidence, some post-dating
our valuation within Broadgate itself to suggest that competition for more
'standard' sized accommodation, is driving rents up. These may yet exceed
levels struck on more sizeable pre-letting transactions where the tenant's
bargaining position is stronger.
In both real and nominal terms City rents are low compared to the peak of the
previous cycle. Moreover they also appear modest compared to competing
locations such as Docklands, and the West End. The improvement of 'mid town'
to rental levels close to those achieved in The City has benefited the Ludgate
Estate properties at New Bridge Street and Fleet Place.
Although projections more than a year or two hence are difficult this will
depend on demand levels (as opposed to simply predicting supply), it seems
likely that headline rents will rise by a further £7-10 psf over the next two
years from a present peak of say £55 psf. By contrast within the Broadgate
Estate our highest ERV as at 31 March 2000 was about £47 psf.
As this evidence of rising rents becomes more commonplace there is also the
possibility that yields, where we currently have adopted 6% equivalent as our
prime benchmark, will harden, reflecting increased confidence on the back of
such transactions.
The West End of London
----------------------
Peak rentals, now close to £70 psf, seem likely to rise still further, based
upon a very restricted supply. A number of occupational requirements come
from e-commerce related businesses. Landlords have been reluctant to accept
them as tenants due to lack of historical trading figures and perceived risk
of default. In the current strong market, we anticipate that landlords will
be more flexible in their covenant requirements. This will produce benefit
most significantly for British Land at Regents Place, where our current ERV's
are just over £40 psf. There are many potential tenants who will consider
less traditionally core locations provided the accommodation and environment
meets their requirements, as here.
Shopping Centres, Retail, Retail Warehousing
--------------------------------------------
Retail in general is experiencing a pause as the impact of e-tailing is
evaluated. Latest developments in that sector do suggest that fears
concerning traditional retailing have been overplayed. As ever, growth, when
it re-emerges is likely to be rapid rather than gradual. Shopping centres,
where there is scope for active management allow exposure to sizeable retail
income flows. Whilst current planning prevails there is a virtual monopoly
of supply of substantial out of town schemes.
Most significant of these is Meadowhall where its unrivalled transport links,
future growth prospects, the opportunities to reconfigure units, and scope for
further extensions, are all reflected in our adopted equivalent yield of over
5.6%. Although rents are at the upper end of the spectrum in national terms,
the ability to create larger units to meet the needs of the most successful
retailers, should generate transactions which, if analysed on an overall
basis, are still low compared to rents achieved at the most successful out of
town shopping parks.
Within the out of town sector the company has now accumulated a substantial
holding where typically current rental levels are still low compared to the
highest achieved on the most successful parks.
In town yields have shifted to levels which are higher than recent averages.
There is therefore scope for a beneficial readjustment, particularly at the
prime level where British Land's holdings have been increasingly focused.
Leisure
-------
The company has in excess of 300 pubs within its joint venture with Scottish &
Newcastle. Although at the time of writing the key issue of how to treat
refurbishments carried out by the tenant is yet to be determined for rent
review there have been several cases where settlements have been ahead of
expectations. Those which have failed to produce large increases nonetheless
have the benefit of long leases to a blue chip covenant. There are
opportunities to exploit residual values within this portfolio and a number
are of a lot size that would also appeal to private individuals.
Within the main fund the most prominent leisure holding is the Swiss Centre,
Leicester Square. Although the risk of leisure investment is demonstrated by
the recent failure of the Planet Hollywood business, the building's main
leisure tenant, the Swiss Centre is a prime location and we are confident
that alternative leisure operators will always have a requirement for this
location. There are also opportunities to add value by redevelopment.
Department Stores
-----------------
There are several within main fund portfolios together with some 15 stores
held within a joint venture on a sale and leaseback basis with House of
Fraser. These are markets where rents have historically been low but they
represent sizeable amounts of real estate in town centre locations which could
long term be considered for alternative uses. One example is the Rackhams
Department Store in Birmingham where although immediate rental growth is hard
to obtain due to a lack of direct comparables it occupies a substantial site
in the centre of a part of the city undergoing significant regeneration. The
capital value per sq ft represented by its current value is a very small
proportion of its potential end development value for offices.
Supermarkets
------------
The largest single concentration of investment in this sector lies within
British Land. All are let on long leases to either Tesco, J Sainsbury or
Somerfield and all have in the order of 25 years unexpired. This is another
sector where because rents have remained low for so long there is scope for
growth in terms of the operators' ability to pay and catching up with other
out of town rents such as retail warehouses. One example of this is the
letting to Asda of a unit within British Land's Beehive Centre, Cambridge,
held within a joint venture. The base rent is about £18 per square foot. In
addition, a substantial premium was paid which can be devalued to show an
overall rent in excess of £22 per square foot. The properties are also
attractive as investments on account of their significant reversionary land
values which underpin the immediate benefit of long unexpired terms to good
covenants. In most cases the sites enjoy unrestricted A1 planning. Given the
current planning regime there are further active management opportunities as
operators are increasingly frequently seeking to extend and improve their
existing premises.'
____________________________________
Property Use, Location and Tenure
---------------------------------
Use (percentage by value) 2000 1999*
---- ----
Offices:
City 35.5% 43.9%
West End 5.4% 6.7%
Other- 2.5% 3.7%
---- ----
All offices 43.4% 54.3%
Retail:
Shops 5.7% 6.4%
Retail warehouses 6.4% 7.0%
Supermarkets 12.2% 14.7%
Shopping centres 21.6% 6.6%
---- ----
All retail 45.9% 34.7%
Industrial & Distribution: 1.2% 1.4%
Leisure and other: 4.2% 4.8%
Development: 5.3% 4.8%
---- ----
Total: 100 % 100 %
Location 2000 1999
---- ----
London:
City 38.7% 47.4%
West End 6.5% 7.0%
Greater London 4.5% 5.7%
South East England: 8.7% 10.2%
Wales & South West England: 5.0% 6.0%
Midlands & East Anglia: 7.8% 9.1%
North of England: 23.0% 8.1%
Scotland & Northern Ireland: 3.9% 4.7%
Republic of Ireland: 1.9% 1.8%
---- ----
Total: 100 % 100 %
* In 1999, the development properties were classified according to their end
use.
Asset Management Activities
---------------------------
A number of lease surrenders with profitable re-lettings were undertaken. The
most noteworthy were the restructuring at 100 New Bridge Street, London EC4;
the acquisition of the unit formerly occupied by Focus Do-It-All Limited at
Botley Road, Oxford and the re-letting to Dixons Group Retail Properties
Limited; and the creation of an atrium and further unit shops at The Plaza,
East Kilbride. The acquisition of the geared C. & A. lease at Eastgate
Shopping Centre, Basildon provides the opportunity to re-let profitably.
Similar opportunities have been created in some of the joint venture
properties including the restructuring of leases at 133 - 137 Houndsditch,
London EC3 and taking surrenders of units at Westgate Retail and Leisure Park,
Wakefield and at St. Nicholas Centre, Aberdeen, enabling lettings to take
place achieving new rental levels.
The British Land Group's Own Portfolio (Excluding Joint Ventures) Sales and
---------------------------------------------------------------------------
Purchases
---------
British Land's property sales in the year amounted to £234 million. The
principal sales were the Corn Exchange, Mark Lane, London EC3; 55 Old Broad
Street, London EC2; First Avenue House, High Holborn, London WC1; Swan Centre,
Rathmines, Dublin and Fairmile Place, Cobham, Surrey (50% owned). The
principal acquisitions, amounting to £1,301 million, were Meadowhall Shopping
Centre near Sheffield; 24.5% of the Swiss Centre, Leicester Square, London W1
(now 100% owned); Hamilton House, Broadgate, London EC2.
Joint Ventures
--------------
Through joint ventures The British Land Group is able to acquire interests in
major blocks of assets which would not otherwise have been accessible, earn
fees for the property management (and in some cases the administration) and
arrange separate financing.
Outline details of the joint ventures are set out below. Further information
is shown in Note 7.
Principal joint ventures are:
The Public House Company Limited
--------------------------------
This 50:50 joint venture with Scottish & Newcastle plc was established in
April 1995 to acquire a portfolio of 306 public houses let to Chef & Brewer
(an operating subsidiary of Scottish & Newcastle plc).
The joint venture arranged an unsecured ten year £164 million amortising bank
loan to fund a substantial proportion of the initial purchase, the balance
being funded through shareholders' equity. Recourse on this loan to each
shareholder is limited to £16 million.
During the year the joint venture acquired a further 14 public houses for £13
million, mainly funded by a further drawing of the bank loan, and disposed of
1. Since the year end, the joint venture has disposed of a further 27 public
houses. The joint venture now owns 302 public houses, totalling approximately
57,000 sq m of trading area, which are predominately freehold and located in
the South of England.
BL Universal PLC
----------------
This 50:50 joint venture with The Great Universal Stores P.L.C. was
established in February 1997 when it acquired 982 properties from the GUS
group. Since then 672 properties have been sold, and the funds from sales
have primarily been reinvested in new larger properties, including: Westgate
Retail Park, Wakefield; The Beehive Centre, Cambridge; a retail park in Castle
Vale, Birmingham which is anchored by Homebase; retail parks in Leeds, Bath,
Cardiff and West Bromwich and a 50% interest in the Microsoft Campus at Thames
Valley Park, Reading. Since the year end, the joint venture has completed the
acquisition of a Sainsbury's superstore in New Cross.
The BL Universal current portfolio of some 300 properties is mainly retail,
consisting of shopping centres, superstores, prime high street shops and
retail warehouse parks, located across the United Kingdom and Republic of
Ireland. The balance is offices located in Thames Valley Park, and
Houndsditch, City of London.
At 31 March 2000, the joint venture was financed by £300 million debentures, a
£180 million unsecured revolving bank loan and a £60 million secured bank
loan, together with shareholder loans and equity. The average life of the
debentures, which are without recourse to shareholders, is 17 years.
BL Rank Properties Limited
--------------------------
This 50:50 joint venture with The Rank Group Plc was completed in March 1998.
The joint venture now owns 21 leisure properties, all of which were
contributed by Rank. The portfolio comprises 4 leisure parks totalling
approximately 41,000 sq m located at Bromborough, Leicester, Southampton and
Glasgow; 3 multi-leisure centres at Stoke on Trent, Telford and Huddersfield;
2 multiplex cinemas at Southend and Lincoln and 12 bingo clubs totalling
approximately 40,000 sq m all located in major towns and cities. During the
year the retail and leisure park at Chandlers Wharf, Stockton-on-Tees was
profitably sold.
The properties were funded by an unsecured seven year bank loan of £113
million, shareholders' loans and equity. The recourse to each shareholder on
this bank loan is limited to £5 million.
BL Fraser Limited
-----------------
BL Fraser Limited, a joint venture with House of Fraser PLC, established in
July 1999, has acquired and leased back 15 of House of Fraser's freehold and
long leasehold department stores.
The stores, totalling around 177,000 sq m. were purchased for £172.7 million
and are in high street locations, mostly in major provincial towns and cities.
House of Fraser is carrying out a significant redevelopment of the Guildford
store, which is due to be completed later this year.
The joint venture arranged a £125 million, secured ten year bank loan without
recourse to the shareholders to fund a substantial proportion of the purchase.
The balance was funded through shareholders' loans.
Tesco plc
---------
BLT Properties Limited
----------------------
This 50:50 joint venture with Tesco plc, which was established in November
1996, owns: Harlech Retail Park, Newport; Marsh Mills Retail Park, Plymouth;
Tesco Distribution Centre and Christian Salvesen Distribution Centre,
Southampton; Tesco Metro, Southend-on-Sea and 8 Tesco superstores which total
approximately 47,800 sq m. During the year, an extension at Barnstaple was
completed.
The purchase was funded by a seven year £140 million secured bank loan,
shareholders' loans and equity. Recourse on the bank loan to each shareholder
is limited to £12 million.
The Tesco British Land Property Partnership
-------------------------------------------
The 50:50 partnership with Tesco plc was established in February 1998 and
acquired 12 retail properties from the partners. In November 1999, the
Partnership sold 9 properties to a newly formed joint venture company, Tesco
BL Holdings Limited.
The Partnership has retained 3 shopping centres at Leicester, Northampton and
Lisburn, all of which are anchored by Tesco.
Tesco BL Holdings Limited
-------------------------
This 50:50 new joint venture company was established in November 1999 to
acquire 9 properties from The Tesco British Land Property Partnership,
comprising: 5 Tesco superstores; 2 retail parks at Milton Keynes and Bury; a
district shopping centre at Lisnagelvin, Londonderry; together with Serpentine
Green, a major out of town shopping centre at Peterborough. All the centres
and retail parks are anchored by Tesco. Extensions have been completed to the
Tesco superstores at Burlesdon and Ferndown, and at Lisnagelvin.
The purchase of the properties was funded by an unsecured five year loan of
£210 million without recourse to the shareholders, together with loans and
equity from the shareholders.
Peacocks Centre Partnership
---------------------------
This 50:50 partnership with SPP Group was established in June 1998 to acquire
The Peacocks Centre, Woking. The Peacocks Centre provides 32,500 sq m of
retail space in a modern shopping centre with an arts and entertainment
complex.
Cherrywood Properties Limited (Republic of Ireland)
---------------------------------------------------
On 22 April 1999 this 50:50 joint venture with Dunloe Ewart Plc, the quoted
Irish property company, was formed to develop the 170 hectare site known as
Cherrywood at Loughlinstown, Co. Dublin.
The initial cost of the investment was IR£33.5 million, with any development
expenditure incurred to date funded equally by each joint venture party. It
is expected that further development expenditure will be funded by a mixture
of bank loans and shareholders' loans.
201 Bishopsgate, Broadgate
--------------------------
This 50:50 joint arrangement with Railtrack plc was established in September
1998 to develop a further phase at Broadgate.
The cost of the raft over the railway lines of approximately £30 million has
been funded equally by each joint venture party.
BVP Developments Limited
------------------------
On 14 June 1999, the existing arrangements with Prologis Kingspark for the
development of Blythe Valley Park, Solihull, were restructured and a 50:50
joint venture established in this formerly wholly owned subsidiary of British
Land.
Great Eastern Hotel
-------------------
This 50:50 joint venture with The Great Eastern Hotel Company Limited which is
owned by Conran Holdings Limited and Wyndham International, was established on
18 February 2000.
The joint venture company acquired a 125 years head lease interest in The
Great Eastern Hotel for £14.5 million, financed equally by The British Land
Company PLC and The Great Eastern Hotel Company Limited, which is also the
occupational tenant under a 125 years lease.
The Great Eastern Hotel is situated at Broadgate and has recently been
redeveloped into a high quality, modern, 267 bedroom hotel complex including
four restaurants and extensive conference facilities.
Finance
-------
Sources of Income
-----------------
Pre-tax profits under Financial Reporting Standard 3, including capital
movements, are up 182.8% to £156.4 million (1999 - £55.3 million). The
results for 1999 included an exceptional item of £68 million relating to the
termination of surplus derivatives as a result of the £1,540 million Broadgate
(Funding) PLC issue.
Revenue pre-tax profits increased significantly from £122.5 million last year
to £153.1 million.
Gross rental income continued to advance strongly by 18.1% to £368.3 million.
Revenues derive principally from net rents, which have risen 17.2% to £347.5
million (1999 - £296.5 million). The annualised net rental income including
our share of joint ventures is £462.5 million (1999 - £398.8 million).
Joint ventures contributed profits of £22.8 million (1999 - £21.8 million) and
interest earnings of £15.3 million (1999 - £19.3 million). The decline in
interest income arises from the reduction in shareholder loans in the joint
ventures, for which we have now arranged additional external borrowings
without recourse to British Land or its partners.
Another source of earnings is property trading where sales contributed £41.0
million (1999 - £13.7 million) achieved from active management of the
portfolio.
Looking forward, the portfolio is highly reversionary with a projected £90
million per annum of income to flow from rent reviews mostly arising over the
next four years. Of this amount, £12.4 million arises from guaranteed
uplifts. In addition, current developments within British Land and joint
ventures will generate an estimated £86 million of net rental income for the
Group when complete.
Distributions of Income
-----------------------
The increase in net interest payable to £282.9 million was equivalent to the
rise in profits, maintaining the interest cover in excess of 1.5 times.
The tax charge of £27.6 million, including capital movements, giving an
effective tax charge of 17.6% (1999 - 4.7%), continues to benefit from the
availability of capital allowances. The tax charge in 1999 was low because of
the exceptional write-off in respect of surplus derivatives, following the
Broadgate securitisation. The growth in revenue after-tax profits to £126.4
million increased earnings per share from 20.6 pence to 24.4 pence.
Balance Sheet
-------------
Total shareholders funds have increased by £331.8 million from £3,117.8
million to £3,449.6 million at the year end, arising mainly from the £259.9
million increase in the revaluation reserve and £72.2 million retained
earnings. Including the surplus of the external property valuation over the
book value of both developments and trading properties of £143.9 million (1999
- £143.9 million), the net asset value per share increased 10.2% from 630
pence at the end of 1999 to 694 pence at 31 March 2000. On a fully diluted
basis the increase was 9% from 625 pence to 681 pence per share.
At 31 March 2000 the market values of net debt for British Land and its share
of joint ventures were £172.5 million more than their book values, compared to
£446.3 million last year, reflecting the underlying rise in interest rates
over the year. After notional tax relief, the adjustment to net assets would
be 23 pence per share (1999 - 60 pence).
Financing, Treasury Policy and Financial Risk Management
--------------------------------------------------------
The Group finances its operations by a mixture of equity, convertible bonds,
public and private debt issues, securitisations and bank borrowings. The Group
borrows principally in Sterling at both fixed and floating rates of interest,
using derivatives where appropriate to generate the required interest rate
profile.
Objective and Policies
----------------------
Objective
---------
To maintain sufficient resources to meet the financing requirements of the
Group at the lowest achievable cost and minimal risk. Significant impacts on
these requirements are made by property purchases, sales, developments and
debt repayments.
Debt Management Policy
----------------------
The Group continually seeks new sources of finance and does not wait for
property opportunities to arise before doing so. The Group maintains a balance
between longer term (over ten years) and shorter term (under ten years) funds
that provide flexibility of repayment and redrawing at no penalty. The
acquisition of assets is often funded initially by shorter term revolving
credit facilities and then refinanced with longer term funding when market
conditions are favourable.
Funding risk is spread by using a range of banks and a variety of sources of
finance e.g. equity capital markets, and fixed income capital markets in
different countries and therefore economies. The maturity profile of debt is
managed by spreading the repayment dates and extending and expanding bank
facility terms. All Group bank borrowings are unsecured and on standard terms.
The Group enters into derivative transactions to manage exposures to
fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Management Policy
-------------------------------
The Group's income principally derives from fixed rents which are subject to
upward only review. The Group uses derivatives (swaps, swaptions and caps) to
maintain a suitable mixture of fixed rate, capped and variable rate debt so
that interest liabilities are contained.
Under normal circumstances the Group maintains an average of 15% of debt,
regularly less, at variable rates. In determining the appropriate level of
variable rate debt, anticipated cashflows from future property and financing
transactions, which have a substantial impact on debt levels, as well as the
Group's gearing are carefully considered.
In order to achieve the Group's objectives, the use of derivatives is managed
and reviewed by a Derivatives Committee, which includes three executive
directors. Individual counterparty creditworthiness as well as the overall
spread of counterparties is monitored and controlled. Derivative facilities
currently available, at no fee to the Group, are sufficient to hedge a further
£2,000 million of debt.
Foreign Currency Management Policy
----------------------------------
The Group borrows in euros to match the balance sheet foreign currency amount
of its portfolio of euro denominated assets. On occasion the Group borrows in
freely available currencies other than Sterling when attractive terms are
available to do so. The Group hedges its foreign currency risk on such
borrowings through derivatives. The Group has no material unhedged net assets
or liabilities denominated in foreign currencies.
Balance Sheet Management Policy
-------------------------------
The ratio of debt to assets is maintained at or around 50% in the medium term,
subject to the impact of transactions, past and planned, and the Board's view
of the market.
Cash Management Policy
----------------------
Cash is primarily used to reduce indebtedness. Deposits are held to maintain
an appropriate level of liquidity, and are placed having regard to the
standing of the counterparty and the appropriate rate of return.
Activity since 1 April 1999
---------------------------
At the beginning of the year the Group net debt was £2,708.2 million of which
15% was at a variable interest rate, the balance being at fixed or capped
rates. Available undrawn facilities were £619.2 million.
In May 1999, the Group completed the issue of £1,540 million fixed rate
Broadgate (Funding) PLC Notes. The proceeds of the securitisation were used
to repay bank debt on revolving facilities, which were then available for
redrawing.
In July 1999, the Group purchased Meadowhall Shopping Centre, Sheffield for
around £1.17 billion and has since refinanced the £365 million external
funding acquired under the purchase with unsecured bank facilities. With
sales, joint venture refinancing, property additions and development
expenditure, the increase in debt was £1,054.1 million to total net debt of
£3,762.3 million at the year end. The expenditure was financed by drawing down
revolving variable rate bank lines.
Facilities have been increased in the year by arranging a new £300 million,
unsecured, five-year revolving syndicated loan facility with Barclays Bank.
The ongoing process of renewing and extending other bank lines has continued.
The Group has maintained significant cash and available undrawn facilities
which now amount to £1,360.3 million Average debt maturity at March 2000 is
18.4 years.
At 31 March 2000, 85% of debt is at fixed rates, 4% capped and 11% at variable
rates. The joint ventures' borrowings were 90% fixed and 10% variable.
No derivative transactions of a speculative nature are undertaken and all
foreign exchange assets and liabilities are hedged fully into Sterling.
The weighted average interest rate has been reduced by 0.25% and is currently
7.05% (1999 - 7.3%).
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