Interim Results - Part One
British Land Co PLC
24 November 2005
24 November 2005
PRELIMINARY ANNOUNCEMENT
THE BRITISH LAND COMPANY PLC
INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2005
Financial Highlights:
• Net asset value* per share up 11.3% to 1256 pence
• Properties owned and managed up 32% to £18.3 billion
• Net rental income+ up 30% to £351 million
• Underlying profit before tax up 42% to £102 million before gains on
asset disposals and revaluation
Headline profits before tax+ up 66% to £777 million including, as required
by IFRS, gains on asset disposals and revaluation. Profits on ordinary
activities before tax £761 million, up 70.6%
• Underlying earnings per share* up 32% to 15.4 pence
(up 48% on restated# basis); unadjusted diluted earnings per share 118.3
pence, up 65%
• Interim dividend up 8.3% to 5.2 pence per share
Business Highlights:
• Delivering on our promises to renew and work the business hard
• Pillar acquisition integrated. Combination going well
• £800 million value enhancing disposals, March to date
• Now starting 822,000 sq ft 201 Bishopsgate development
• Like for like rental growth of 2.7% underlines value of British Land's
prime space, when yield shift subsides
• Management and culture renewal also going well
John Ritblat, Chairman, commented:
"Discriminating investors now see the case for a more appropriate property
weighting as it again becomes established as an asset class of choice.
Property's yield and its growing income stream, coupled with the backing of real
assets, are substantive merits."
Stephen Hester, Chief Executive, commented:
"We are pleased to be reporting an excellent set of half-year results at British
Land. The Company's fine inheritance and track record is blending with an
extensive programme of change and we are in confident mood overall."
* adjusted, diluted - Notes 8, 19
+ includes share of Funds and Joint Ventures - Table A
# Note 8
STATEMENT BY THE CHAIRMAN, JOHN RITBLAT
British Land now has over £18 billion of assets owned and under management, and
an annualised gross income of some £700 million. In the half-year just ended we
have been comprehensively engaged in all the principal activities of a property
company - buying, building, leasing and selling - with a multitude of
asset-enhancing initiatives and financing as well.
Our excellent half-year results are set out in this Report. I am very pleased
that they more than justify continuation of our longstanding growth in dividends
at market leading rates - and with plenty of room to spare! The interim dividend
is increasing by 8.3% to 5.2p per share.
Growth
British Land's focus has always been on generating growth with security. Our six
months total return of 12.3%, coming after the pre-exceptional 22.1% total
return for the year to 31 March 2005, reflects the effective operation of the
Company's long-term base model, which unites property of quality with managed
gearing. We continually refine our portfolio, as a vibrant business should, and
we now manage over 36 million sq ft of space.
We welcome our new Pillar colleagues and the new Fund Management activity they
have brought to augment our own asset team, together with substantial holdings
in retail warehouses. We have long been accustomed to managing joint ventures in
partnership with, for example, Tesco and House of Fraser. Pillar's business is a
logical extension of our existing activity in looking after property for others
while retaining up to a 50% stake ourselves, so that our interests are aligned
with our partners and we share in the growth we achieve.
Development
Our development programme extends to over 6 million sq ft and is focused on
London. Both 51 Lime Street, EC3, the new headquarters building for Willis
Group, and the York Building, W1, which will be available for letting, are
already well advanced in construction. Going forward, our programme includes
201 Bishopsgate, EC2; 122 Leadenhall Street, EC3; and Ludgate West, EC4. In the
West End of London we aim to add over 1 million sq ft to the major redevelopment
of the 14 acre Regent's Place Estate.
Looking Forward
Our market has remained attractive, with a sustained yield correction and
improving rents. We are not in a boom, but discriminating investors now see the
case for a more appropriate property weighting as it again becomes established
as an asset class of choice. The recent 50 year Indexed Gilt tranche yielding
only 1.1%, surely implies that the property market has some way still to go.
Property's yield and its growing income stream, coupled with the backing of real
assets, are substantive merits. Moreover, those investors confused - one might
say thwarted - by the impenetrable oddities of the new International Financial
Reporting Standards - the majority of us I suspect - can derive some solace from
the presence on the balance sheet of bricks and mortar, or nowadays, glass and
steel.
In one sense perhaps we should be grateful to this Standard, because its
convolutions by contrast serve to emphasise that property is a lot easier to
grapple with. The hoped-for introduction of Real Estate Investment Trusts
(REITs) will add still further to property's attraction for investors, who
already appreciate through ownership of their own homes that property enjoys
effective hedging qualities.
Not surprisingly we are less than enthusiastic about any charge on development -
a Planning Gain Supplement. Entrepreneurial ventures need encouragement in
Britain not new taxes - we have plenty of them already! Development is currently
being strangled by waves of bureaucracy, which in British Land's case, as
reported in our March 2005 Report and Accounts, can waste £5 million in
additional costs for a single building in the City of London. The Government is
currently looking at ways to reduce over-regulation, and here is an easy route.
The additional administration of this further tax imposition should be cut out
before it begins.
Board Changes
We are sorry to say farewell to Lord Burns on his appointment as Chairman Elect
of Marks & Spencer plc, and our Deputy Chairman, Sir Derek Higgs, who has become
Chairman of Alliance & Leicester plc and will be departing from us in due
course. They are both highly effective non-executive directors and their
perceptive and informed contributions will be missed.
Greatly to our regret, Nicholas Ritblat decided that he wished to stand down as
an executive director. We will miss him. The Board is grateful to him for the
many financial innovations he has introduced during the 18 years he has served
the Company. We wish him well.
STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER
We are pleased to be reporting an excellent set of half-year results at British
Land. Just as positive, however, are the strides we are making to deliver on our
promises of business renewal, so building strong foundations for future
outperformance.
Just over a year since joining British Land, I am happy to report that the
management transition has been smooth. Our course for the future has been
clearly set out and is summarised again in this statement. The Company's fine
inheritance and track record is blending with an extensive programme of change
and we are in confident mood overall.
The Results
British Land's headline pre-tax profit on the new IFRS basis was up 66% to £777
million for the 6 months to 30 September. More illuminating is the 42% rise in
Underlying Profits to £102 million and the 11.3% increase in adjusted Net Asset
Value per share to 1256p.
The results benefited from continued strength (via yield shift) of the
underlying property market. They also show the positive effects of management
decisions and actions. These include portfolio selection and proactive asset
management which have delivered better rental income growth than the market
overall (2.7% like for like). The immediate fruits of capital recycling are also
visible with gains or valuation increases on practically all our recent
acquisitions and disposals. Our development pipeline is coming into its own and
delivering good growth with landmark projects like our 201 Bishopsgate buildings
offering prospects for more. And our strategic decision to run with temporarily
higher gearing, in the face of a buoyant investment market and a range of
disposal opportunities, is also paying off.
Market Conditions
As we have been predicting, property investment market conditions remain strong.
Continued yield shift has been supported by real estate's attractive risk
adjusted returns in comparison to those of equities and bonds. We see some more
yield shift to come, albeit less than has already occurred.
The underlying occupancy market, which drives rental levels and therefore
fundamental returns, remains well supported overall but restrained by modest
economic growth and businesses' low pricing power in the economy. As always
sectoral conditions vary with London office markets in particular showing good
recovery prospects.
In the demanding economy which we will face during coming years, the ability to
outperform through stock selection and asset management is clearer than in
easier times when 'all boats rise with the tide'. We are confident of the
prospects for our key portfolio choices in Open A1 'Out-of-Town' Retail and
prime London Office property. At the same time there are parts of the property
market where we see prices being pushed too high. In particular, yield
compression has resulted in secondary property (whether by location, age, lease
length, covenant strength or income growth prospect) often being optimistically
valued versus prime.
Delivering on Our Promises
At the time of our 2004/5 Year End results presentation we set out British
Land's focused strategy for the future. This builds on the bedrock of our Retail
and Office sector expertise, our bias to prime property, long leases and our
focus on secure, income led growth and disciplined risk management. We also laid
out some important areas of change to enable British Land to outperform for our
shareholders in the years to come. I am pleased to report that substantial
progress has already been made in delivering on these promises.
Intensified Portfolio Reshaping: We have stepped up the pace of change to better
position our property portfolio for further risk-adjusted growth. In the last 12
months this has involved £2.9 billion of attractive acquisitions and, since
March to date, over £800 million of value enhancing disposals with further
announcements in the pipeline. In practically every case we report profits on
both purchases and sales.
Proactive Asset Management: Achieving rental growth relies not just on good
asset selection but on how hard the assets are worked. We have created value,
through a wide range of lease restructurings, lettings and tenancy moves.
Pleasingly, during the period our rents have risen at a faster pace than the
market as a whole and faster than predicted by our valuers. This is the bottom
line result of intense activity across the business.
Management and Culture Renewal: Our people are the key building block to working
the business harder and so outperforming for shareholders. Again we can report
great progress. The new management team is in place and functioning well
together. We have doubled the professionals in our Asset Management & Investment
team in the last year and substantially increased its representation at
Executive Committee level. Succession plans are formulated and happening where
needed. And we are targeting a hard driving 'performance' culture using more
explicit and demanding targets, greater individual responsibility and more
variable pay to match.
Investor Friendly Positioning: British Land has now established itself as a
leader in this regard - an important initiative to help improve translation of
the economic value we create into value in the hands of our shareholders.
A clear, focused strategy has been set out and is being implemented. Management
transition has happened. Our new valuers, Knight Frank, have reaffirmed the
Company's strong asset values - the first time in many years a major company has
so demonstrated. Our first quarterly results and valuation (for the period to 31
December 2005) will be released in February. And our business and financial
disclosure is further improved and at industry leading levels.
Pillar
One of the major events of this half-year was our agreed takeover of Pillar
which completed in late July. I am pleased to report that this move has already
increased shareholder value. We are confident it will continue to do so whilst
also supporting accelerated change at British Land.
With Pillar we acquired £1.5 billion of top quality real estate including some
£1.3 billion of the best retail warehouse parks in the market - delivering
superior value growth, even in tougher times for retailers, from an attractive
combination of location and hands-on asset management. We also attracted their
young and talented management team to add to our own, and a growing, distinctive
Fund Management business. These offer the means to exploit our business further
through new income streams, faster growth and give strategic options applicable
to other British Land core assets.
Since announcing the transaction in May we have closed the deal and completed
its integration - a not insignificant human and logistical challenge. Future
profits have been increased from fee renegotiation, a reduction in interest
costs (via a £1 billion securitisation) as well as other overhead cost
reductions. Pillar's European retail warehouse fund is being significantly
expanded. And the UK flagship Unit Trust, Hercules, has not missed a beat with a
total trust return of 11% since March.
So, lots going on then. And the pace of change will remain high as we deliver on
our promises in pursuit of outperformance for shareholders.
Let me close by paying tribute to the people who make this activity possible.
Our staff are responding very well to the challenges. We have welcomed new
colleagues from Pillar and elsewhere who have already made a big difference.
Both they and all our people have shown great willing and goodwill in
integration.
We also said goodbye, with sadness and great gratitude to Nick Ritblat. I echo
the Chairman's sentiments regarding his contribution to British Land.
FINANCIAL HIGHLIGHTS
Income Statement Six months to Six months to
30 September 2005 30 September
2004
(restated for
IFRS)
---------------------- -------------- ------------
Net rental income £351m £270m
Net rental income (Group) £305m £237m
Net financing costs £218m £178m
Underlying profit before £102m £72m
taxation1
Profit on disposals of assets £37m £6m
Revaluation gain £641m £390m
Profits before taxation £777m £468m
Underlying tax rate 21.6% 25.0%
Underlying diluted earnings per 15.4 pence 10.4 pence5
share 1,4
Diluted earnings per share 4 118.3 pence 71.7 pence
Dividend per share 5.2 pence 4.8 pence
---------------------- -------------- ------------
Balance Sheet 30 September 31 March 2005
2005 (restated for
IFRS)
---------------------- -------------- ------------
Total properties2 £14,651m £12,507m
Net assets £5,299m £4,783m
Adjusted diluted net assets3,4 £6,595m £5,913m
Adjusted diluted net asset value 1256 pence 1128 pence
per share3,4
Group:
Net debt £6,870m £6,061m
Loan to value6 51% 50%
Including share of Funds and Joint
Ventures:
Net debt £8,104m £6,563m
Loan to value6 54% 52%
---------------------- -------------- ------------
Total return (adjusted diluted net asset value per share growth plus final
dividend) for the
half-year 12.3%.
Data includes share of Funds and Joint Ventures (Tables A and B), unless
otherwise stated.
'Group' excludes share of Funds and Joint Ventures.
1 excludes gains on disposals of assets and revaluation
2 does not include the investment in Canary Wharf through Songbird Estates plc
3 adjusted NAV includes the external valuation surplus on trading and finance
lease properties and excludes goodwill, the fair value adjustments for debt and
related derivatives and the deferred taxation on revaluations and capital
allowances (Note 19)
4 diluted for all potential share issues (Notes 8, 19, 21)
5 restated from 11.7 pence (Note 8)
6 borrowings to property and investments
PORTFOLIO HIGHLIGHTS
Valuation Group Funds/ Total Portfolio Uplift2
by Sector £m JVs1 £m % %
£m
---------------- -------- -------- ------- ------- -------
Retail
Shopping centres 2,001 480 2,481 16.9 4.2
Superstores 1,378 202 1,580 10.8 5.4
Retail warehouses 1,714 1,373 3,087 21.1 2.2
Department Stores 680 135 815 5.6 8.1
High street 384 32 416 2.8 7.1
---------------- -------- -------- ------- ------- -------
All retail 6,157 2,222 8,379 57.2 4.3
Offices
City 3,908 214 4,122 28.1 6.0
West End 653 39 692 4.7 6.0
Business parks & 261 9 270 1.9 9.3
Provincial
Development 370 4 374 2.6 10.5
---------------- -------- -------- ------- ------- -------
All offices 5,192 266 5,458 37.3 6.1
Industrial and 169 73 242 1.6 1.4
distribution
Residential 302 1 303 2.1 1.3
Leisure 257 12 269 1.8 2.5
---------------- -------- -------- ------- ------- -------
Total 12,077 2,574 14,651 100.0 4.9
---------------- -------- -------- ------- ------- -------
1 Group's share of properties in Funds and Joint Ventures
2 including valuation movement in developments, purchases and capital
expenditure, and excluding sales
Total assets under management £18.3 billion, including all of Funds and Joint
Ventures.
---------------- --------- ---------- ------- ----------
Current Reversions Annualised Reversionary Current Reversionary
Net Rents1 Income2 Yield3 Yield3
(excluding £m (5 years) % (5 years)
developments) £m %
---------------- --------- ---------- ------- ----------
Retail
Shopping centres 123 19 5.0 5.7
Superstores 83 2 5.3 5.4
Retail warehouses 129 34 4.5 5.7
Department Stores 40 5 4.8 5.5
High street 21 2 5.2 5.6
---------------- --------- ---------- ------- ----------
All retail 396 62 4.9 5.6
Offices
City 210 39 5.1 6.1
West End 36 3 5.2 5.6
Business parks & 14 2 5.2 5.8
Provincial
---------------- --------- ---------- ------- ----------
All offices 260 44 5.1 6.0
Industrial and 11 1 5.6 6.0
distribution
Residential 14 - 4.6 4.6
Leisure 15 2 5.6 6.3
---------------- --------- ---------- ------- ----------
Total 696 1094 5.0 5.7
---------------- --------- ---------- ------- ----------
1 net rental income under IFRS will differ from annualised net rents which are
cash based, due to accounting items such as spreading lease incentives and
contracted future rental uplifts, as well as direct property costs
2 includes rent reviews, expiry of rent free periods, lease break/expiry and
letting of vacant space at current estimated rental value (as determined by
external valuers)
3 gross yield to British Land
4 £62 million (57%) contracted under expiry of rent free periods and minimum
rental increases
------------------ ------------------ -----------
Long Lease Profile Weighted average lease Vacancy rate
(excluding residential1 & term, %
developments) years to first break
------------------ ------------------ -----------
Retail
Shopping centres 13.8 5.92
Superstores 21.5 0.0
Retail warehouses 14.8 3.42
Department Stores 31.6 0.0
High street 12.9 0.6
------------------ ------------------ -----------
All retail 17.5 3.22
Offices
City 11.6 5.2
West End 9.9 0.6
Business parks & 8.2 1.8
Provincial
------------------ ------------------ -----------
All offices 11.2 4.3
Industrial and 13.2 10.2
distribution
Leisure 27.5 0.4
------------------ ------------------ -----------
Total 15.4 3.72
------------------ ------------------ -----------
1 predominantly let on short leases
2 65% of vacancies in shopping centres and retail warehouses have been initiated
by us under asset management projects, reducing the effective vacancy rate for
all retail to 1.1% and the total portfolio vacancy rate to 2.4%
--------------------- ------------------------
Security of Income % of income remaining
from 30 September 2005 (to first break)
--------------------- ------------------------
5 years 99
10 years 78
15 years 56
--------------------- ------------------------
assumes no re-letting after first break or expiry, includes contracted rental
increases
--------------- ------- --------- --------- ----------
Development Net Area Rent (est) Construction Cost to
Programme 000 sq pa Cost £m complete
ft1 £m £m
--------------- ------- --------- --------- ----------
Completed 1,050 2.5 19.6 -
Committed 1,198 40.0 337.3 203.8
Development 4,833 158.6 1,377.0 1,327.0
Prospects
--------------- ------- --------- --------- ----------
1 areas are shown at 100%
Data includes share of Funds and Joint Ventures, unless otherwise stated.
BUSINESS REVIEW
British Land's primary objective is to produce superior, sustained and secure
long-term shareholder returns from management of our chosen real estate
activities and their financing. We set out in the March 2005 Annual Report our
updated strategy for British Land and the changes we planned to make. In the
first half of this year we have been delivering on those plans to renew and work
the business hard.
Activity during the six months
Portfolio Reshaping:
Through an intensified asset review process, we are reshaping our portfolio to
enhance risk adjusted returns, increasing focus on property where we see good
prospects for growth, particularly from improving rental income. In the present
market environment, this is leading us to increase our focus on out of town
retail and prime London offices. Our holdings in a number of other sectors are
being reduced into a strong and favourable investment market. Furthermore, even
in our preferred sectors, individual properties are being sold where we consider
we can utilise the proceeds more profitably elsewhere.
Purchases £1,815m - 2.6% increase in value
-------------------------------------------
Price BL Share Value Uplift %
£m £m 1
---------------------- ------- ---------- ----------
Pillar (wholly owned + share of 1,566 1,566 2.11
funds)
St Stephen's Shopping Centre, 135 135 -
Hull 2
Others 127 114 12.5
---------------------- ------- ---------- ----------
1,828 1,815 2.6
---------------------- ------- ---------- ----------
1 from purchase price on completion to 30 September - for Pillar only 2 months
since 28 July 2005
2 forward purchase, expected completion mid 2007, not yet revalued
Completion in July 2005 of the purchase of Pillar Property Plc added over £1.5
billion of top quality assets, principally Open A1 planning permission retail
parks offering the best prospects for continuing rental growth in a demanding
retail sector. The properties were held directly by Pillar and through its share
of the Funds which it managed, including the Hercules Unit Trust. On completion,
80% of the real estate was UK retail parks, 4% European retail parks and 16%
City of London offices, with a total of over £3 billion under management. Pillar
also brought a strong management team to add to our own. Its growing Fund
Management business provides attractive new income streams. The Funds business
is performing well whilst also giving us future options to launch new Funds,
including introducing outside capital into existing British Land assets.
St. Stephen's Shopping Centre, Hull, is a new 46,500 sq m (500,000 sq ft) edge
of town retail and leisure development project with strong prospects for
improving value through both rental growth and yield shift. 68% of the space is
already prelet, presold or under offer, with tenants to include Tesco, Next, New
Look, H&M, Zara, TK Maxx, Boots, Sportsworld and Gala. There will also be an
hotel and over 200 residential units.
In April 2005, we acquired our joint venture partners' 50% share in the BL West
companies, owning the office properties at 1 and 10 Fleet Place, EC4, which have
subsequently been profitably sold (see below).
We have committed to increase our investment in PREF, the European retail park
fund, by €124 million as part of €214 million raised by PREF from a total of 4
investors to fund future acquisitions of out of town retail parks in the
eurozone. Core countries for PREF include Spain, Italy, France, Portugal and the
Benelux region. The Fund's current gross assets, including contracted
acquisitions, amount to some €418 million with an average net yield of 6.1%.
Average passing rents are €13.70/£9.60 per sq ft, well below UK levels and
giving much scope for growth. With the new equity and a target of 60% gearing,
PREF's objective is to achieve a portfolio size of some €1 billion by end 2006.
While this European expansion is new in recent times for British Land, we are
confident of the prospects for attractive returns, especially given our
expertise in the sector from our leading UK position.
Sales £392m - 13.3 % above valuation
-------------------------------------------
Price £m BL Share Gain % 1
£m
--------------------- -------- ---------- ----------
10 Fleet Place, EC4 109 109 15.6
ILAC Shopping Centre, Dublin 85 85 25.0
9 High Street retail units 52 52 11.6
Daventry (Plots E4 & C1) 2 76 38 19.8
Others 109 108 2.4
--------------------- -------- ---------- ----------
431 392 13.3
--------------------- -------- ---------- ----------
1 sale price above latest year end valuation
2 International Rail Freight Terminal - BL Rosemound (JV)
These are value enhancing disposals, resulting from our continuing review of the
performance of each asset. Significant gains above latest valuation have been
achieved in a strong investment market, enabling us to recycle capital into
properties where we can achieve higher returns, or to reduce gearing. In some
cases, our disposals have also taken advantage of where the market has
discounted risk factors such as location, lease length, income and forecast
growth prospects, and where yield compression has also narrowed the gap in value
between prime and more secondary assets. In other cases, our disposals have
realised value created from completion of our asset management initiatives.
10 Fleet Place, EC4 had a weighted average lease length of some 4 years, with
resulting void and capex risks, and passing rents above market levels.
The ILAC Shopping Centre, Dublin was purchased through our subsidiary in Ireland
in 2001 for €56.6 million and owned jointly with Irish Life. Significant asset
management during our ownership, including phased refurbishment and upgrade of
facilities, new agreements with key tenants, remodelling of the principal Mary
Street entrance and provision of a flagship store for H&M, added substantial
value and enabled an opportune sale.
The sale of 9 retail properties included an average initial yield of less than
4% for 5 prime high street shops. The market continues buoyant for such
investments and further sales from our High Street portfolio are planned.
The distribution warehouse units we have developed at Daventry have been
completed and profitably sold.
Since 30 September 2005, significant sales at 12% overall above the March year
end valuation have also been achieved at:
• 2-16 Baker Street, W1, an office and retail property, for £57.2 million,
• Heathrow Gateway, Units 1 & 2, Feltham, high bay distribution warehouses
developed by British Land, for £65.5 million,
• Manchester Fort Shopping Park, for £167.3 million (a sale previously
committed by Pillar),
• 1 Fleet Place, EC4, City offices, after restructuring the principal
lease, for £119.5 million.
Profitable sales since 31 March 2005 amount in total to over £800 million and we
expect to achieve more over the second half of the year.
Proactive Asset Management:
Much of our energies, in every period, are devoted to improving the value of the
property we own through proactive asset management and development. By improving
our investments and providing space best suited to our tenant base, we achieve
the goals of effective customer focus and resultant improvements in rental
income or other aspects of property value.
150 New lettings - £8.6m pa of new rent
-------------------------------------------
------ --------- -------- -------- ----------
Number Sq ft Total1 BL Share BL Increase
000 Rent £m2 Rent £m Rent £m3
------------ ------ --------- -------- -------- ----------
Retail 9 111 2.9 1.9 1.3
Warehouses
Shopping 53 100 5.0 4.7 2.2
Centres
High Street 7 8 0.5 0.5 0.3
City Offices 15 112 4.6 4.6 4.3
West End 12 28 0.8 0.6 0.1
Offices
Other 54 114 1.2 0.8 0.4
------------ ------ --------- -------- -------- ----------
Total 150 473 15.0 13.1 8.6
------------ ------ --------- -------- -------- ----------
1 including 100% of Funds and Joint Ventures
2 total annual rent including rent free periods
3 above previous passing rent
124 Rent reviews - 3.6% higher than ERV
-------------------------------------------
------ --------- -------- -------- ----------
Number Total BL share CAGR pa2 New rent
increase increase over 5 yrs Above ERV
rent £m1 £m % %3
------------ ------ --------- -------- -------- ----------
Retail 31 2.3 1.4 6.8 0.1
Warehouses
Superstores 7 0.7 0.7 1.8 4.6
Shopping 49 1.0 0.7 2.2 7.2
Centres
High Street 12 0.3 0.3 6.1 13.1
City Offices 3 - - - -
West End 5 0.3 0.3 0.6 3.3
Offices
Other 17 0.5 0.5 2.9 -
------------ ------ --------- -------- -------- ----------
Total 124 5.1 3.9 2.1 3.6
------------ ------ --------- -------- -------- ----------
1 including 100% of Funds and Joint Ventures
2 compound average growth rate
3 ERV at valuation date prior to rent review
In the 6 months to September 2005 (including our share of Funds and Joint
Ventures):
• 150 new lettings and lease renewals in respect of 44,000 sq m (473,000
sq ft) of property in all sectors have resulted in new rent to British Land
of £8.6 million per annum, after expiry of any rent free periods,
• 124 rent reviews were settled which have increased rent to us by £3.9
million per annum, 3.6% above our external valuer's estimates at the
valuation date preceding the relevant rent review,
• significant activity at Meadowhall Shopping Centre, Sheffield has
included agreement of 13 new lettings to retailers including River Island,
Apple and Adams. One of these (post 30 September 2005) reflected a Zone A of
£440 per sq ft, setting a new open market rental level. These lettings will
assist us in negotiation of the round of 50 rent reviews at Meadowhall due
as at September 2005,
• also at Meadowhall we have taken back the stores previously let to
Sainsbury and Allders and are in the process of installing mezzanines to
provide an additional retail area of around 3,700 sq m (40,000 sq ft). The
new first floor area will be directly connected to the existing first floor
mall by the construction of a new mall adjoining WH Smith. As part of this
remodelling, the extension to the Boots store has been completed. We
estimate that when complete, at a cost of £48 million, this project will
increase rents by approximately £3.5 million per annum,
• at Teesside Shopping Park we have agreed a key new letting to Marks &
Spencer on a newly created 3,100 sq m (33,000 sq ft) store, opening Spring
2006 - a further major step forward for this open A1 retail park, and part
of an on-going strategy to improve tenant line-up and the retail offer. As a
result, top rents achieved on this park have risen to £40 per sq ft. Recent
lettings at Teesside have included Borders, Sportsworld and TK Maxx, who
join Next, Boots, Outfit, PC World and WH Smith,
• we acquired 1 Fleet Place, EC4 in April 2005 as part of the purchase of
our partners' interests in the BL West companies. This 15,900 sq m (171,000
sq ft) office building was let primarily to Denton Wilde Sapte for a
remaining term of 4 years at a rent above current market levels. We
negotiated a revised lease for a new term of 20 years without break and have
recently sold the property (see above) for well above valuation,
• we successfully negotiated the surrender and regrant of the lease to
Legal & General in respect of its 24,000 sq m (259,000 sq ft) Headquarters
office complex at Kingswood, Surrey. The existing lease contained a tenant's
break clause in 2008 and a rent above current market levels. The new lease
is for a term of 20 years with no break, at a revised rent, significantly
improving the value of this investment.
In October 2005 (just after the interim date and not included in the above data)
we completed a letting of 3,900 sq m (42,000 sq ft) at our prime City office
development at Plantation Place South, EC3 to the specialist insurer Beazley
Group plc. Beazley has taken the top 3 floors of the building on a 15-year lease
at rents of £43 and £44 per sq ft. Plantation Place is already fully let and we
have good levels of interest in the remainder of Plantation Place South.
Strong growth in rental income is targeted within the next 5 years from the
existing portfolio and from the committed development programme. At current
market rental values, without projecting any growth or inflation, settlement of
rent reviews and full letting of committed developments would add £149 million
to our annual passing net rents. Of this, £90 million per annum is already
contracted (as at September 2005), £62 million from expiry of rent free periods
and fixed/minimum rental uplifts, plus £28 million from pre-let agreements on
developments. Considerable additional potential for income growth is in the
development prospects.
------------------------------- ----------- -------------
Rental growth - £90m contracted Total of which
£m contracted
£m
------------------------------- ----------- -------------
Annualised net rents, 30 696 696
September 2005
Reversion*, 5 years 109 62
Committed developments+ 40 28
845
Development prospects+ 159 -
------------------------------- ----------- -------------
Total 1,004 786
------------------------------- ----------- -------------
* includes rent reviews, expiry of rent free periods, lease break/
expiry and letting of vacant space at ERV (as
determined by external valuers)
+ to achieve income from developments the Group will incur
construction and associated costs, which are not
shown here - further details are set out in the Development Programme
Net rental income under IFRS will differ from annualised net rents
which are cash based, due to accounting items such as spreading lease
incentives and contracted future rental uplifts, as well as direct
property costs.
Development Programme
British Land's development programme is based on opportunities created out of
existing investments and from acquisitions. We commit to projects in controlled
stages on the basis of pre-lets or anticipated market demand, adding quality
assets to the portfolio.
Development Projects - adding value
-------------- -------- ------- -------- ------- --------
Rent £m pa
--------------------
Sq ft Total1 Let/ Cost PC3
000 pre-let £m2
-------------- -------- ------- -------- ------- --------
Completed
(since 31 March
2005)
Daventry (E4 & C1)4 1,050 2.5 2.5 19.6
============== ======== ======= ======== ======= ========
Committed
Offices:
51 Lime Street, 475 21.3 21.0 191.0 Q1 2007
EC3
York Building, 138 6.6 - 56.0 Q4 2006
W1
Basinghall Street, 199 3.3 3.3 21.0 Q2 2007
EC25
Coleman Street, 180 2.7 2.7 21.8 Q1 2007
EC25
Business Parks:
Blythe Valley 53 1.0 - 8.7 Q4 2005
(Plot A1)
Blythe Valley 35 0.7 0.7 6.9 Q4 2006
(Plot G2)
Retail Park:
Nugent, 118 4.4 0.4 31.9 Q1 2006
Orpington
-------------- -------- ------- -------- ------- --------
Total 1,198 40.0 28.1 337.3
-------------- -------- ------- -------- ------- --------
Cost to complete: 203.8
============== ======== ======= ======== ======= ========
1 current estimated headline rent
2 construction cost, estimated or achieved
3 estimated practical completion of construction
4 International Rail Freight Terminal - BL Rosemound (JV) - rent and cost data
show BL's 50% share
5 City of London Office Unit Trust (CLOUT)
Data for Group and its share of Funds and Joint Ventures, except areas in sq ft
shown at 100%
Following successful completion of the Plantation Place and 10 Exchange Square
office developments in the City, work is well under way at 51 Lime Street (the
Willis Building) where Willis Group are contracted to take all the offices under
a 25-year lease without breaks. The 43,200 sq m (465,000 sq ft) offices and 930
sq m (10,000 sq ft) retail are scheduled for completion in 2007.
The York Building in London's West End is also being constructed on time and on
budget for completion at the end of 2006. This will provide over 12,800 sq m
(138,000 sq ft) of high quality office, retail and residential apartments.
The development by BL Rosemound of substantial distribution facilities at the
Daventry International Rail Freight Terminal has successfully completed with all
plots now sold at a significant surplus above cost. This joint venture intends
to acquire further projects for mixed use development.
Nugent Shopping Centre in Orpington is a mixed use Open A1 (part restricted)
scheme, providing a retail park together with a residential element. Pre-lets
have been achieved to tenants including Debenhams, Next, Mothercare and HMV.
CLOUT is undertaking two City office developments at Basinghall Street and
Coleman Street, EC2; both are forward sold (and Coleman Street is also forward
funded).
Development prospects, shown below, are sites and properties where we have
identified opportunities and are progressing with design, planning applications
and site preparation for development projects.
Development Prospects
Sector Sq ft Rent Cost1 Planning
000 £m pa £m
------------- ---------- ------- ------- ------ ---------
201 Bishopsgate City Office 822 40.2 291 Detailed
The Leadenhall City Office 601 32.1 271 Detailed
Building
Ludgate West City Office 127 5.8 46 Detailed
Regents Place West End
Office
i) N.E. 347 15.4 134 Pending
Quadrant
ii) Osnaburgh 391 17.2 148 Submitted
St
Residential 282 6.1 102 Pending
/
submitted
Blythe Valley Business Park 716 14.0 108 Outline
Park /detailed
New Century Business Park 582 8.1 84 Outline
Park /
Distribution
Meadowhall Leisure 409 12.2 124 Submitted
Casino
Theale Residential 204 4.3 35 Submitted
Redditch2 Distribution 227 0.6 4 Detailed
Gallions Reach, Retail Park 58 1.4 16 Submitted
Beckton
Preston Retail Park 67 1.2 14 Submitted
------------- ---------- ------- ------- ------ ---------
Total3 4,833 158.6 1,377
------------- ---------- ------- ------- ------ ---------
Cost to complete: 1,327
------------- ---------- ------- ------- ------ ---------
1 estimated cost of construction, excluding land and interest
2 BL Gazeley (JV)
3 data for Group and its 50% share of JVs, except areas shown at 100%
At 201 Bishopsgate, EC2 we have secured a revised planning consent (subject to a
S106 agreement now in its final agreed form) for a 35-storey Broadgate Tower and
a 13-storey building. These will provide 75,500 sq m (812,000 sq ft) of prime
offices plus 930 sq m (10,000 sq ft) retail, forming the next phase of the
Broadgate Estate and designed to meet the needs of both financial and
professional occupiers. Estimated construction costs are £291 million with an
ERV of £40 million per annum at market levels. Enabling works have commenced. We
will proceed with development of this prime asset on a speculative basis and
expect completion mid 2008 - well ahead of most competing schemes and well timed
for delivery into the recovery in the City office market.
Financial Results, six months to 30 September 2005
These results are the first reported under the International Financial Reporting
Standards (IFRS) adopted from 1 April 2005. This change to the accounting basis
arises from legislation requiring all EU listed companies to apply these
standards in their financial statements. Comparative figures under IFRS are
shown for the 6 months to 30 September 2004 and for 31 March 2005 where
appropriate.
In anticipation of quarterly reporting, the Group has also changed the basis of
accruing revenues between periods, which affects the allocation between the
first and second halves of a financial year and aligns the Group with the
industry norm. Net rental income for the comparative period (September 2004)
would have been £6 million higher on the new basis. For the same reason, the
uplift in revenue from rent reviews is now recognised on an accruals basis,
based on valuer's estimated rental values, rather than on settlement of the rent
review as previously. This gives rise to £2 million of additional revenue in
this period.
September September 2004 Increase
2005 (restated for
IFRS)
------------------- ----------- ----------- ---------
Revenue:
Gross rental and related £340m £278m 22.3%
income
Net rental income £305m £237m 28.7%
Underlying profit before £102m £72m 41.7%
tax
Profit before tax £761m £446m 70.6%
Diluted earnings per 118.3 pence 71.7 pence 65.0%
share
Underlying diluted 15.4 pence 10.4 pence 48.1%
earnings per share
Dividend per share 5.2 pence 4.8 pence 8.3%
------------------- ----------- -----------
September March 2005
2005 (restated for
IFRS)
------------------- ----------- -----------
Capital growth:
Net assets £5,299m £4,783m 10.8%
Adjusted diluted net £6,595m £5,913m 11.5%
assets
Adjusted diluted NAV per 1256 pence 1128 pence 11.3%
share
------------------- ----------- ----------- ---------
Revenue Returns
The Group has prepared a proportionally consolidated income statement and
balance sheet (which are included as Tables A and B attached) for the benefit of
stakeholders who wish to see the results of the Group's interest in Funds and
Joint Ventures on a look through basis. The following commentary (and the data
in the above table) refers to the financial information of the Group as
reported.
Gross rental and related income for the half year increased by 22.3% to £340
million. Net rental income increased by 28.7% to £305 million. The increases
reflect £45 million of purchases and sales of £3 million, with new lettings
adding £15 million of which £10 million arose from Plantation Place alone. The
assets acquired in the Debenhams and Spirit portfolios included leases with
guaranteed minimum uplifts. IFRS requires such uplifts to be spread over the
lease term leading to a £10 million increase in reported rental income.
Underlying pre-tax profit from Funds and Joint Ventures was £14 million, £1
million less than from 2004. Net rental income from Funds and Joint Ventures
increased by £13 million (+39.4%) reflecting £9 million from Funds acquired as
part of the Pillar acquisition for the two months post acquisition. IFRS
requires Funds and Joint Ventures to be accounted for as a single line in the
income statement showing a total profit of £80 million. This includes financing
costs (£28 million), valuation gains (£82 million) and a taxation charge
(£16 million) which would have been reported separately under UK GAAP.
Group net financing costs rose £29 million to £190 million. The increase
includes the cost of financing acquisitions (£37 million) and a saving of £7
million arising from the refinancing of the Broadgate securitisation. Net rents
covered interest 1.6 times.
Our administrative expenses for the 6 months totalled £36 million, a 64%
increase on the 6 months to September 2004, reflecting increased staff and other
costs following acquisitions and key personnel recruitment, and include one off
costs of £8 million.
Underlying profit before tax (excluding profits on asset disposals and
revaluation gains) increased by 42% to £102 million. Underlying earnings per
share of 15.4 pence per share (after applying an underlying tax rate of 21.6%)
increased 48%. Previously reported underlying earnings per share of 11.7 pence
for the period to September 2004 under IFRS have been restated to 10.4 pence,
following analyst representations. The Group's policy now is only to include in
underlying EPS tax items relating to the reported period. Previously we included
tax items arising from prior periods.
Group profits on asset disposals were £34 million representing net sales
proceeds less March valuation. Profit before tax of £761 million include
revaluations of properties and investments as required by IFRS totalling £562
million. Diluted earnings per share totalled 118.3 pence per share including
these valuation gains.
The tax rate for the 6 months is 20.8% with an underlying rate of 21.6%
excluding tax on sales and the effects of prior year items. Corporation tax of
£8 million is payable in respect of underlying profits, along with an underlying
deferred tax charge of £14 million utilising losses including those arising from
the refinancing of the Broadgate securitisation.
Our progressive dividend policy continues with an interim dividend declared of
5.2 pence per share, an increase of 8.3%. In accordance with IFRS this dividend
has not been accrued.
Profits after interest, tax and working capital movements generated a positive
operating cash flow of £62 million for the 6 months. As a significant net
investor in the first half, acquisitions (including repayment of debt acquired)
and development expenditure of £1,326 million outweighed disposal proceeds of
£332 million. Funds and Joint Ventures have returned a further £240 million.
During the period, secured assets and other assets of non-recourse companies
generated £44 million of surplus cash after payment of interest and debt
amortisation.
Capital Growth and Total Return
The strong growth in portfolio valuation and increased profits has led to an
increase in adjusted diluted net assets since March 2005 of 11.5% to £6,595
million; 1256 pence per share. Total return to shareholders (adjusted diluted
net asset value growth per share plus final dividend) in the half year was
12.3%.
Financing Activity
Our financing and capital structure policies remain unchanged from those set out
in our Annual Report as at 31 March 2005. It remains our strategy to manage the
assets and liability mix in the business on a fully integrated basis, producing
growth with a secure and attractive risk profile.
Financing Statistics 30 September 31 March 2005
2005 (restated for
IFRS)
------------------------ ------------ -----------
Group:
Net Debt £6,870m £6,061m
Weighted average debt maturity 13.0 yrs 14.3 yrs
Weighted average interest rate 5.87% 6.00%
% of net debt at fixed/capped 88% 90%
interest rates
Interest cover (net rents to net 1.61 1.59
interest)
Loan to value (borrowings to property 51% 50%
& investments)
Unsecured debt to unencumbered 47% 42%
assets
Undrawn committed facilities and £1,215m £969m
cash
Group and share of Funds and Joint Ventures:
Net debt £8,104m £6,563m
Weighted average debt maturity 11.8 yrs 13.5 yrs
Interest cover (net rents to net 1.61 1.63
interest)
Loan to value (borrowings to property 54% 52%
& investments)
------------------------ ------------ -----------
As a result of good growth and profitable disposals our gearing is comfortably
within our target loan to value range of 45-55%, notwithstanding the Pillar
acquisition and development expenditure.
During the last six months we raised over £1.3 billion of new (or renewed) bank
lines. £790 million was arranged in a successful, oversubscribed syndicated
facility with a total of 25 banks, taking advantage of good market pricing. In
addition, more than £510 million resulted from a number of bi-lateral agreements
on similar terms.
Hercules Unit Trust (HUT), the retail park fund advised by British Land Property
Advisers Limited and owned 34.6% by the Group, completed a £1 billion
securitisation in September 2005. The seven year debt issue, secured against 16
high quality retail parks located throughout Britain, incorporated significant
asset management flexibility.
Portfolio Valuation - Up 4.9% in six months (5.2% including Pillar and
disposals)
The British Land property portfolio was valued at 30 September 2005 by our newly
appointed external valuers Knight Frank. This gives us a unique opportunity to
test and validate values of our investment properties which we are pleased so to
report. It does, however, make precise comparison with prior periods a little
more complex, given detailed approach and methodology variances between firms of
valuers. Overall, the portfolio including our share of Funds and Joint Ventures
has increased in value by £2.1 billion over the six months to 30 September 2005,
to £14.65 billion - over £1.4 billion from net additions and £680 million from
growth of 4.9%.
This growth includes the Pillar properties and Funds from the date of completion
of the acquisition (28 July 2005) to 30 September 2005. If we include growth in
the Pillar assets from the date of their last reported value to September 2005,
together with the surplus over the last year end valuation achieved on all our
sales in the six months, the growth in the overall portfolio increases to 5.2%.
The improvement in value has resulted from further yield shift (as predicted
last year) driven by strong investment markets, plus achievement of rental
income growth. Investor demand is supported by property fundamentals and the
continuing favourable comparison of risks versus returns from alternative asset
classes.
All sectors in the portfolio improved in value. The tables shown earlier in this
report set out the details of the valuation by sector.
All retail is up by 4.3% including an increase of 2.2% on our £3 billion retail
warehouse portfolio, following a rise of 13.7% for the year to March 2005. This
reflects the short 2-month period that our interests in Pillar have been held
during the half-year. If we included the Pillar portfolio for the full six
months, the increase in the retail warehouse portfolio would have been 3.4%. Our
retail in high street, superstores and department stores have all performed
well. Meadowhall, which continues to be the subject of much asset management
activity (as set out earlier in this report) is up 3.9% to £1.5 billion.
All offices are up 6.1% over the six months, which reflects the positive
position of our prime City and West End investments at this early point in the
cyclical recovery of the Central London office market. The Broadgate Estate,
EC2, is up 4.7% to £2.974 billion; while the overall headline ERV determined by
the valuers under different methodology than previously is put in a
£37.50-£45.00 per sq ft range, against an average contracted rent of
£46.74 per sq ft, the net initial yield has tightened to 5.7%.
Regent's Place, NW1 has increased in value by 5.2% to £536 million, based on a
yield of 5.54%, with average contracted rents increased to £34.05 per sq ft. The
two development sites at Regent's Place (N.E. Quadrant and Osnaburgh Street) are
now valued separately.
The ungeared change in property values is approximately 1% less than the IPD all
property index movement for the same period. While British Land manages its
business for absolute return, the aim also remains to beat this index at
property level, as we have done at NAV level. Actions are in place to address
individual asset issues. The positive news is that overall the portfolio
outperformed on fundamentals of rental growth and asset management, being held
back in aggregate by yield compression favouring less prime properties. This
phenomenon is quite likely to reverse in time.
Hercules Unit Trust, the largest of the Funds and valued by CBRE, has achieved
an increase in the value of its retail park assets under management of 6.4%, to
£2.7 billion, contributing to an ungeared total return of 8.2% over the last 6
months (11% on a geared basis). There is strong appetite from investors for the
units, although few sellers in the market. The total funds under management by
HUT, CLOUT, PREF and HIF have grown to over £3.6 billion, of which British
Land's share is £1.3 billion.
Outlook - Portfolio Positioned for Growth and Resilience
57% Retail - 73% of which is out of town
37% Office - 94% of which is in Central London
Retail sales and profits continue to be under much scrutiny as consumer
expenditure growth has moderated. Retailers' experience in the current market
varies but overall operating margins have built up some resilience and demand
for the right locations and accommodation remains healthy.
Out of town retail sales growth is, and is expected to continue to be, above
total retail sales growth as out of town takes an increasing share of the
market. The size and configuration of out of town space is advantageous for
retailers, and the overall costs of occupation and servicing such locations are
lower. In particular, the larger retail parks with smaller unit sizes and
flexible planning use are enjoying strong demand as retailers, such as Arcadia
(Topshop, Topman), Boots, Next and Marks & Spencer, migrate or expand from the
high street. The British Land and Funds portfolio has a high, and increasing,
proportion of Open A1 (70% by value) and Open Restricted (12% by value) planning
consents - these provide the greatest flexibility and enable us to respond to
retailer requirements. For example, some retailers are changing the preferred
sizes of their stores and in our portfolio we are able to respond with the
required supply. In addition, as demand for traditional bulky goods parks slows,
if tenants at those parks wish to move (or, indeed, if they fail) the warehouse
parks in our portfolio have opportunities for reconfiguration and change of the
type of retailer.
Our out of town portfolio has been boosted by the acquisition of Pillar,
including the share of the important HUT retail park portfolio. This portfolio
too is increasing focus on Open A1 use through active review of the assets and
significant purchases of these investments, together with sales to reduce
involvement with certain bulky goods schemes.
British Land now has 171 out of town retail schemes including superstores,
providing some 1.6 million sq m (17 million sq ft) in over 1,031 retail units.
Flexible unit sizes accommodate more than 240 different retail and leisure
tenants. We expect these assets to continue to perform well.
Our investments in town - department stores, shopping centres and prime unit
shops - have an important position in the portfolio. In these sectors we
concentrate on the best towns and high streets and particular assets which have
good opportunities for growth under our management. Income growth on our
department stores is underpinned by the contracted 21/2 / 3% per annum rental
increases.
The Central London offices' occupational market is seeing good signs of recovery
in demand. Take up of space is improving, and now back to trend at 511,000 sq m
(5.5 million sq ft) per annum. Grade A offices in the City are particularly in
demand and their availability has fallen to its lowest level since 2003.
Business and financial services account for over 50% of current demand; this is
expected to increase since employment in these sectors is predicted to grow, by
some 136,000 jobs by 2008. Forecast vacancy overall for the City is set to
reduce from the current 10% to 4.9% in 2008.
Against this increasing demand, supply continues to reduce as a result of
minimal new speculative development. An upturn in rents is expected to result
from these market factors and headline rents reported by Agents have increased
for the first time in over 4 years, to £47.50 per sq ft.
Projected City Rents: Agents' Consensus BL City rent
reviews
Range £psf Average increase % % of rent roll
2006 47.30 - 50.60 5.7 20
2007 52.00 - 55.40 8.0 15
2008 56.90 - 62.40 9.7 16
2009 59.30 - 67.10 6.6 32
2010 60.90 - 69.10 7.3 15
The investment market in Central London offices remains very strong, continuing
to set new records in turnover. In the first 3 quarters of 2005 the volume of
transactions in the City has already exceeded that for all of 2004, which itself
was a record year for investment in City offices. Yields are still tightening in
this sector.
Property Market Analysis LLP (PMA), Europe's largest independent property
research consultancy, has identified Central London offices and out of town
retail as the sectors with best prospects for total returns driven by rental
growth over the next 5 years. British Land's portfolio is positioned as to 67%
in these sectors.
___________________________________________________ -----------
PMA Forecast Total Property Average Ungeared British Land's
Returns Total Return Weighting %
- next 5 years % pa
Shopping centres 6.8 17
Retail warehouses 10.8 +32
High street 6.7 8
Central London offices 11.0 35
Provincial offices 8.0 2
Industrial 7.6 2
+ includes
superstores
___________________________________________________ -----------
So the British Land portfolio is positioned for growth, with security provided
by the prime quality of the assets, well let on long leases to strong tenants,
including a significant proportion of guaranteed minimum rental uplifts. We have
intensified our reshaping of the portfolio and proactive asset management and
will continue to focus on these areas to enhance risk adjusted returns.
This information is provided by RNS
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