Final Results - Part 1

British Land Co PLC 25 May 2005 25 May 2005 THE BRITISH LAND COMPANY PLC PRELIMINARY ANNOUNCEMENT RESULTS FOR THE YEAR ENDED 31 MARCH 2005 â€¢ Net asset value per share* up 15.0% to 1111 pence (2004: 966 pence). Without the exceptional charge of Â£180 million relating to the refinance of Broadgate and the removal of stamp duty exemption for disadvantaged areas, net asset value would have risen by 20.8%. â€¢ Underlying profit before tax up 17.0% to Â£174.8 million (2004: Â£149.4 million) before gains on asset disposals of Â£27.0 million (2004: Â£36.6 million) and the exceptional charge. Profit before tax and exceptional item Â£201.8 million (2004: Â£186.0 million); after exceptional charge, profit before tax Â£21.8 million (2004: Â£186.0 million). â€¢ Underlying earnings per share* up 9.9% to 34.3 pence (2004: 31.2 pence) before gains on asset disposals and the exceptional charge; unadjusted diluted earnings per share 11.3 pence (2004: 34.5 pence). â€¢ Total return (adjusted diluted net asset value per share growth plus dividend) for the year 22.4% before the exceptional charge and stamp duty change; 16.6% including the exceptional and stamp duty. â€¢ Final dividend up 8.2% to 10.9 pence per share. Total distribution for the year up 8.3% to 15.7 pence (2004: 14.5 pence). â€¢ Net rents+ increased by 9.3% to Â£571.8 million (2004: Â£523.0 million). â€¢ Portfolio valuation increased 6.5% to Â£12.5 billion, including retail warehouses up 13.7%. This increase is 8% excluding the stamp duty change. Quarterly reporting: will be introduced from December 2005. New Valuers: Knight Frank appointed from September 2005. Pillar Property PLC: recommended offer for Pillar Property - see next page. All figures include British Land's share of joint ventures unless stated otherwise. * adjusted to exclude the capital allowance effects of FRS19 and, in calculating NAV, to include the external valuation surplus on development and trading properties and, in calculating the number of shares, diluted for all potential share issues including, where relevant, the potential conversion of the Convertible Bonds (Notes 8, 19) + (Note 2) Pillar Property PLC: On 23 May 2005 British Land and Pillar announced the recommended acquisition by British Land of Pillar for a total consideration of approximately Â£811 million; the terms are set out in the press release issued on 23 May. Pillar is a leading property fund manager; it owns (directly and indirectly) approximately Â£1.3 billion of top quality property and has a portfolio under management of Â£3.3 billion. The principal benefits of the transaction include: â€¢ unique opportunity to access a portfolio of this size and quality, principally in out of town retail parks, which are expected to offer the most attractive continuing fundamental growth in the retail sector â€¢ attractive Fund Management business creating an additional and growing revenue stream. Additionally, Fund expertise adds to British Land's strategic options within its existing portfolio â€¢ highly regarded management team; known for intensive asset management, performance orientation and customer focus. Commenting on the acquisition, Stephen Hester, Chief Executive of British Land, said: "The acquisition of Pillar provides British Land with an attractive opportunity to accelerate our stated strategy. We are reshaping the portfolio towards growth assets and intensifying property asset management activity. By adding over Â£3 billion of fund assets under management a valuable new avenue of income growth also opens up." STATEMENT BY THE CHAIRMAN, JOHN RITBLAT British Land has had a thoroughly good year. In attracting major new tenants to occupy our new developments in the City of London our properties have passed the acid test. We have raised funds of Â£3.1 billion including a record financing in excess of Â£2 billion on Broadgate, and we spent Â£1.3 billion. In November 2004 we were delighted to welcome Stephen Hester as our new Chief Executive. Results Our financial results revealed profits - pre-tax, pre-exceptional - exceeding Â£200 million for the first time ever. We took a Â£180 million (24p per share net of tax) exceptional charge in respect of the Broadgate refinancing, and suffered a reduction (32p per share) in net assets as a consequence of the arbitrary removal of the Stamp Duty exemption for disadvantaged areas but, even so, we made a 15% increase in net assets per share, which rose 145p to 1111p on an adjusted diluted basis. The total return was 22.4% before the exceptional charge and the loss of Stamp Duty exemption, and still 16.6% after. The final dividend is up 8.2% to 10.9p per share, making a distribution of 15.7p for the year. British Land's Approach We strive to buy or construct buildings to match what tenants need and want, not just now but in the future. In today's market they are much better informed and more selective than was the case when property was a scarce commodity. Energy efficiency, the quality of life and amenities for occupiers, and the impact on local communities, all must pass muster. Buildings also need to be capable of being kept up-to-date by easy adaptation as technology evolves ever further. This is not a short-term business. British Land selects its portfolio to encourage tenants to take long leases in our high quality, well located buildings. Property offering these advantages is a good investment for our shareholders and will grow in value over time as it produces increasing income. Property Market and Regulations There may be some disillusionment among private investors with equities, but that makes the prospect of REITs (Real Estate Investment Trusts) even more significant. These Trusts will enable investors to put their funds into those property companies which convert to REIT status without, as at present, being taxed twice, at both the corporate and personal levels. This is not to suggest of course that investors should be beguiled by the blandishments of tax benefits over the merits of the underlying assets. The foundation of the portfolio for our investors is always the prospects and quality of our buildings. The enactment, when the Government has ended its consultation process, of considered legislation on REITs will signify real progress. We are pleased that the interests of all property companies are being represented by Lucinda Bell, our own Head of Tax and Accounting. I have every confidence in the current property market, but I must still stress the skills, instincts and sometimes courage that are required to achieve good returns. A successful equity fund manager may make good picks, but does not manage the companies selected. A successful property entrepreneur also has to make good picks, but additionally has to apply creative managerial and asset management skills, coupled with awareness of emerging trends to maximise returns. The results can be only too obvious: there is nowhere to hide. The extra managerial dimension required is nowhere more evident than in the testing aspects of new development of property, where the gap between success and failure, often the result of idiosyncrasies of personal judgments, can have such severe economic consequences. Many factors can influence the judgments, and the resulting success or failure is all too apparent. See-through clothing may be revealing, but a see-through building is a disaster! The risks are very real, and a constant reminder to those of us who devote our lives to property that often we are exposed to changes in the business environment over which we have no control. It is therefore salutary that one change sought by some tenants - destroying upward only rent reviews - was resisted by the Government after it had considered the facts. Of course there should be choices offered to tenants, and the movement towards shorter lease terms and thus fewer rent reviews has accommodated this choice. That's what a free market is about. Many tenants insist on long leases even with reviews. They are aware that long-term security, often coupled with extracting substantial cash from lease-back arrangements, can fully justify an upward only rent review clause, and may well be preferable as a better economic bet on market forces. Tenants currently exercising this preference include some with considerably greater financial muscle than their poor landlords! Tenants and landlords have common commercial interests, and work together to achieve their separate objectives. British Land has made the use of joint ventures and leasebacks a particular feature of its business. By co-operating with partners it has been possible to obtain the benefits of extending assets under management to Â£14 billion, well above our own assets of Â£12.5 billion. And property owners risking capital have to work together - they are often neighbours - and communities gain from major redevelopment schemes carried out jointly. Financial Resources A major property business takes a lot of financing and as I have always said, half of our business is simply about money. Though the assets, our buildings, are highly visible counters, the liabilities demand almost as much attention. Since we launched the first securitisation by a British property company in 1996 we have raised over Â£5.3 billion through this route, refining techniques and reducing costs to provide a range of maturities. The maintenance of adequate financial resource remains a key focus of our business, with managed and structured gearing providing an important method of extracting superior returns from our portfolio of quality. Yields may appear lower - but not the long-term prospects for gain and total return. In reality and in real estate there are no short cuts to sustained growth. Major property decisions to buy, sell or develop, and related financial decisions, have to stand the tests of time. Though instant uplifts are nice, it is the long-term projects that bring greater rewards for shareholders and at lower risk. _____________________________ Warmest thanks to Lord Burns, who leaves the Board on 30th September 2005. He has been a highly valued non-executive director since 2000, and chairman of our Audit Committee. We wish him every success in his new appointment at Marks & Spencer plc. We are most grateful to Atisreal whose 20 years' exemplary professional service as valuers to the Group has now concluded. Shareholders have been well served in the past year by our staff at Head Office, Meadowhall, Broadgate and elsewhere. My warm thanks go to our entire team, including management and my colleagues on the Board, for their sustained and cohesive efforts in all aspects of our business. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER It is my pleasure to write this having enjoyed an active first six months at British Land. The Company, its people and its assets are everything I was expecting and I am greatly optimistic for British Land's future. Strategy As this is my first letter it makes sense to update you on British Land's strategy, characteristics and the evolution we are now embarked upon. British Land has long been about growth, quality and security in its chosen markets - and brings to this focus an entrepreneurial spirit, a willingness to change and to embrace opportunity. These tenets are grounded on a deep understanding of both property and financial risk. British Land fully appreciates the value of firm foundations to the portfolio and the Company's role as a safe investment vehicle for its shareholders, but one which nevertheless delivers superior bottom line performance. The Company has a strong bias to high quality real estate for its core, a portfolio feature that can often be undervalued in bull markets but is essential in less certain times. And I should add to these core themes, three business principles. At all times, cliche though it may be, the primary mission is to deliver superior shareholder value; we need to be unafraid of radical change but equally happy to sit on our hands where that is the wisest course - without being misled by temporary market fads. We must stay true to medium and longer term value trends; especially as many real estate decisions are made with at least five to ten years' progression in mind. Companies which do not maintain a clear focus on where and why they will be good at what they are doing can come unstuck, which of course is a lesson well rehearsed in other sectors. That is not the same as saying a company can only do one thing, or can never nurture new initiatives - far from it - but it does encourage an important strategic discipline. Finally, I believe in staying at the forefront of investor friendly behaviour; in disclosure and transparency; in straight talking and in open listening. British Land has already distinguished itself in this respect and we plan to take a further step by introducing quarterly reporting at the end of 2005 along with the early introduction in this Annual Report of new and fuller "Operating and Financial Review" reporting. Business Results Turning to our business results for 2004/5, British Land delivered a total return of 22.4% (underlying) which even after charges for Broadgate refinancing and stamp duty increases was still 16.6%. These attractive returns maintain our successful record relative to our major competitors. Portfolio activity was high, as the Company showed its distinctive ability to add value through purchases, sales, partnerships and developments. These skills will remain important to complement organic growth in our long-term cash flows. During the year we took full advantage of many opportunities to improve our assets. The misfortunes of Allders became the route to installing Debenhams at the Queensmere Shopping Centre, Slough, at the Peacocks Centre, Woking and at the Eastgate Centre, Basildon. British Land also bought the Allders store at Clapham and leased it to Debenhams. Additionally a range of other retail, office and leisure assets have been acquired, strengthening the portfolio in sectors where the Company's managers have a proven record of adding value. Nearly all the portfolio enjoys high occupancy, is of prime quality, with excellent covenants on long leases. In turn the bias to quality allows room for greater adventurousness in trading or development as well as in financial leverage. British Land is intrinsically low risk, and its properties are therefore able to support gearing through debt on fine terms. We thereby improve shareholder returns at modest total risk compared to the less visible but very real challenges that too much secondary property can bring. The Future Our portfolio is well positioned for the next few years - though we will continue to actively reshape it. 55% is in top quality retail property, dominated by out-of-town assets benefiting from long-term fundamental growth trends that will endure a more challenging retail climate. This is complemented by our prominent and prime exposure to the London office cycle with both investments and future developments and is well protected against the downside of short leases or of secondary buildings or of unpromising locations. On management matters, we are focused on adding to our capacity for pro-active asset management and strong customer orientation. We also have introduced a regular, disciplined and dispassionate assessment of our assets. Each asset in the portfolio has to be established as having good prospects for the future or we will lessen our capital exposure to it over time. As to the prospects for our industry, it is encouraging that rents appear to be affordable in most sectors of the economy. The yield shift that has occurred is supported by the fundamentals, particularly in comparison to alternative asset classes and we see some more to come. Investors know that the risks and returns of property offer a favourable mix. So investor demand for property has been exceeding supply as a process of reweighting takes place, and the prospective establishment of REITs seems likely to support this trend. However, it is important to note that we will continue to manage our business on the bedrock of our properties and their cash flows - not for the ebbs and flows of transaction pricing and activity. To achieve the changes we target, and to continue to make our shareholders' money, one resource remains particularly crucial - our people. The talents and experience of British Land's management are well recognised and it is our prime responsibility to retain, develop and renew our team. This we are doing. I would like to thank my new colleagues at British Land for all their efforts in 2004/5 and their results in which we can have some pride. But I should also thank them especially for a warm welcome and a fine inheritance! FINANCIAL HIGHLIGHTS ---------------------- --------------- ----------- Profit and Loss Account Year ended Year ended 31 March 2005 31 March 2004 ---------------------- --------------- ----------- Net rental income Â£571.8m Â£523.0m Net rental income (Group) Â£504.3m Â£450.3m Net interest payable Â£352.0m Â£336.2m Profit on property trading and Â£27.0m Â£36.6m disposal of fixed assets Underlying profit before taxation1 Â£174.8m Â£149.4m Exceptional item2 Â£(180.0)m Pre-exceptional profit before taxation2 Â£201.8m Â£186.0m Profit before taxation Â£21.8m Â£186.0m Pre-exceptional tax charge Â£17.1m Â£14.5m Tax (credit)/charge Â£(36.9)m Â£14.5m Earnings per share: Underlying adjusted diluted1,4,5 34.3 pence 31.2 pence Pre-exceptional adjusted diluted2,4,5 38.9 pence 36.3 pence Diluted5 11.3 pence 34.5 pence Dividend per share 15.7 pence 14.5 pence ---------------------- --------------- ----------- Balance Sheet 31 March 2005 31 March 2004 ------------------------ ------------- ----------- Total properties3 Â£12,506.9m Â£10,639.4m Adjusted net assets4 Â£5,793.2m Â£4,877.3m Net assets Â£5,579.3m Â£4,669.4m Adjusted diluted net assets4,5 Â£5,823.6m Â£5,035.4m Diluted net assets5 Â£5,693.4m Â£4,922.5m Adjusted diluted net asset value per share4,5 1111 pence 966 pence Diluted net asset value per share5 1087 pence 944 pence Group: Net debt Â£6,040.6m Â£4,866.8m Loan to value (debt / property & investments) 50% 48% ------------------------ ------------- ----------- Total Return (adjusted diluted net asset value per share growth plus dividend) for the year 22.4% before the exceptional item and the removal of stamp duty exemption for disadvantaged areas, 16.6% including the exceptional item and full stamp duty. All figures in this preliminary announcement include British Land's share of joint ventures unless stated otherwise. 1 excludes profits on asset disposals and exceptional item (Note 2 for underlying profit before tax) 2 exceptional charge of Â£180 million relating to the refinance of Broadgate (Note 5) 3 pre adjustments for lease incentive and minimum guaranteed rent review debtors (Note 9) and does not include the investment in Canary Wharf through Songbird Estates plc 4 adjusted to exclude the capital allowance effects of FRS 19 and, in calculating NAV, to include the external valuation surplus on development and trading properties (Note 19 for net assets) 5 diluted for all potential share issues (including, at March 2004, for the potential conversion of the Convertible Bonds, which were converted in July 2004) (Notes 8, 19) PORTFOLIO HIGHLIGHTS ----------------- -------- -------- -------- ----------- Valuation by Use Total Portfolio Uplift2 % Uplift2 Â£m % % pre-stamp3 ----------------- -------- -------- -------- ----------- Retail Shopping centres 2,431.0 19.4 4.8 7.7 Superstores 1,548.8 12.4 4.2 5.4 Retail warehouses 1,678.0 13.4 13.7 16.1 High street 1,196.7 9.6 9.1 10.8 Development 24.4 0.2 2.2 6.6 ----------------- -------- -------- -------- ----------- All retail 6,878.9 55.0 7.4 9.6 Offices City 3,671.1 29.4 6.3 6.3 West End 652.1 5.2 4.5 7.8 Business parks & Provincial 248.8 2.0 3.1 3.3 Development 277.3 2.2 0.9 1.4 ----------------- -------- -------- -------- ----------- All offices 4,849.3 38.8 5.6 6.1 Industrial and distribution 205.5 1.6 6.4 7.7 Residential 292.1 2.3 -0.2 -0.2 Leisure 262.8 2.1 10.2 10.8 Other development 18.3 0.2 2.2 2.2 ----------------- -------- -------- -------- ----------- Total 12,506.91 100 6.5 8.0 ----------------- -------- -------- -------- ----------- 1 British Land's share of joint venture properties is Â£1,353 million 2 including valuation movement in developments, purchases and capital expenditure, and excluding sales 3 excluding the effect of removal of stamp duty exemption for disadvantaged areas Current Reversions (excluding developments) ---------------- --------- ---------- ------- ---------- Annualised Net Reversionary Current Reversionary Rents Â£m Income* yield yield (5 years) Â£m % (5 years) % ---------------- --------- ---------- ------- ---------- Retail Shopping centres 128.9 14.6 5.3 5.9 Superstores 85.0 2.1 5.5 5.6 Retail warehouses 77.5 15.5 4.6 5.5 High street 62.9 7.8 5.3 5.9 ---------------- --------- ---------- ------- ---------- All retail 354.3 40.0 5.2 5.8 Offices City 178.2 55.9 4.9 6.4 West End 34.0 3.3 5.2 5.7 Business parks & Provincial 18.8 -0.2 7.6 7.5 ---------------- --------- ---------- ------- ---------- All offices 231.0 59.0 5.1 6.3 Industrial and distribution 10.5 2.5 5.1 6.3 Residential 14.6 0.1 5.0 5.0 Leisure 15.2 1.9 5.8 6.5 ---------------- --------- ---------- ------- ---------- Total 625.6 103.5+ 5.1 6.0 ---------------- --------- ---------- ------- ---------- * 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) + Â£66.9 million contracted under expiry of rent free periods and minimum rental increases Long Lease Profile Weighted average lease term, years Vacancy rate (excluding residential* & developments) to expiry to first % break ----------- ---------------------------------- Retail Shopping centres 15.3 14.8 3.2 Superstores 21.8 21.8 0 Retail warehouses 16.2 16.0 1.5 High street 27.2 25.6 0.6 ----------------- ----------- ---------- ----------- All retail 19.0 18.5 1.8 Offices City 14.0 11.9 6.8 West End 12.1 9.8 1.0 Business parks & Provincial 12.2 8.4 2.9 ----------------- ----------- ---------- ----------- All offices 13.6 11.4 5.7 Industrial and distribution 14.7 12.9 19.1 Leisure 34.0 33.7 1.0 ----------------- ----------- ---------- ----------- Total 17.1 15.9 3.5 ----------------- ----------- ---------- ----------- includes 100% joint ventures * predominantly let on short leases Security of Income % of income remaining at: (from 31 March 2005) expiry first break ----------------------- ---------------- -------- 5 years 93.1 87.0 10 years 79.2 69.8 15 years 55.5 49.6 ----------------------- ------- ----------- -------- includes 100% joint ventures assumes no re-letting after first break or expiry Tenant Risk Profile: 88% of current rental income is rated negligible, low and low/medium risk, by IPD using Experian Stress Score Development Programme ------------------- -------- ------- --------- -------- Net Area Rent Construction Cost to cost Complete sq m (est) pa ------------------- -------- ------- --------- -------- -------- Completed Total 104,290 Â£42.5m Â£309.7m British Land Share Â£41.5m Â£305.2m --------- ------------ -------- ------- --------- -------- Committed Total 159,430 Â£33.9m Â£292.9m Â£232.6m British Land Share Â£31.3m Â£274.1m Â£217.5m --------- ------------ -------- ------- --------- -------- Development prospects Total 485,760 Â£152.6m Â£1,357.3m Â£1,330.4m British Land Share Â£151.1m Â£1,348.1m Â£1,321.3m --------- ------------ -------- ------- --------- -------- OPERATING AND FINANCIAL REVIEW Highlights of the Year to 31 March 2005 Net Asset Value per share1 increased by 15.0% to 1111 pence, up 20.8% underlying3,4 Underlying Profit before tax up 17.0% to Â£174.8 million2,3 Underlying Earnings per share1 up 9.9% to 34.3 pence2,3 Introduction British Land has delivered to shareholders exceptional growth and value creation over the year reviewed herein. This stems from the combination of an outstanding portfolio of prime assets and the successful application of intense management activity in leasing, development, asset management and financing. At the same time, British Land is positioning itself clearly and actively for future success. Our new Chief Executive has led a review of strategy, output of which is being implemented. The portfolio mix is moving to underpin future growth and a significant refinancing has reduced costs and increased flexibility moving forward. The investment property market has remained strong with growth based on robust fundamentals relative to other asset classes. This looks set to continue, albeit perhaps at a slower pace overall. Objectives 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. The bedrock of our strategy is: â€¢ to focus on areas of competitive advantage â€¢ a bias to high quality assets, with long lease profiles and favourable demand and supply characteristics, complemented by an efficient capital structure â€¢ a distinctive ability to add value through purchases, disposals and partnerships â€¢ excellent integrated risk management skills - blending leasing, development, asset and liability risk into a single attractive and secure growth proposition for shareholders â€¢ superior long-term income/cash flow growth â€¢ a confident, entrepreneurial and, where justified, contrarian culture. How British Land will Evolve We plan to develop further: â€¢ the intensity of our asset management activities, with increasing focus on our customers â€¢ the disciplined process of regular review of our assets' prospective performance, as individual properties and the portfolio composition, making changes as appropriate â€¢ our human capital, managing change and renewal, while maintaining focus on performance for shareholders â€¢ the company's positioning at the forefront of investor friendly behaviour and so to build on our strong record of value creation for shareholders. 1 adjusted, diluted (Notes 8, 19) 2 excludes profits on asset disposals (Note 2 for underlying profit before tax) 3 before exceptional charge of Â£180m relating to refinance of Broadgate (net of tax where relevant) (Note 5) 4 without the removal of stamp duty exemption for disadvantaged areas Activity During the Year 2004/5 has been a year of intense and fruitful activity. Acquisitions and Disposals We have made a significant net investment this year reflecting our portfolio management priorities as well as confidence in market fundamentals. Several attractive opportunities became available to us, assisted by our strong market and tenant relationships, and where our financial capacity and ability to execute complex property transactions played a major part. Despite the short period of ownership, these purchases have already produced an aggregate 7% increase in value over purchase price. A key feature of these acquisitions was the negotiation of minimum rent increases for at least 20 years on Â£732 million of purchases. As a result, across the entire portfolio, minimum guaranteed income uplifts now apply at the next rent review to property of some Â£1.6 billion, 13% of the total portfolio, underpinning rental growth and providing certainty of rising income. This includes over Â£950 million of retail and leisure property, where such uplifts may be of increasing importance should consumer sales result in slower rental growth in these sectors. Purchases Â£1,361m - already making money Price Â£m Uplift in Value % -------------------------- ---------- ----------- Group 24 Debenhams stores 516 5.7 Queensmere & Observatory Shopping Centres 192 1.6 65 freehold pubs 174 7.3 6 Homebase stores and Crawley, Sainsburys 102 3.6 Investment in Canary Wharf 97 44.2 471 residential units 71 2.3 Other 17 11.0 -------------------------- ---------- ----------- 1,169 8.2 -------------------------- ---------- ----------- Joint Ventures 4 retail parks and 1 industrial estate 122 2.9 7 interests at East Kilbride and Aberdeen 70 (1.2) -------------------------- ---------- ----------- 192 1.4 -------------------------- ---------- ----------- Total 1,3611 7.22 -------------------------- ---------- ----------- 1 Group and 100% of JVs (including our 50% share of JVs, Â£1,234 million purchases completed in the year) 2 valuation uplift on purchase price The 24 Debenhams department stores were bought for Â£516 million and leased for a minimum of 30 years at an initial yield of 5.6%. The leases have been structured with rent increasing by a minimum of 2.5% per annum, with a review in March 2019 and five yearly thereafter to market rent if higher. There are opportunities, with tenant agreement, to remodel stores and enhance value. Queensmere and Observatory Shopping Centres in Slough were bought for Â£192 million. The initial yield is 6.0%. The zone A equivalent rents are relatively low and we believe there is considerable scope for improving these assets; a masterplanning exercise is in hand. The 65 pubs were purchased from the Spirit Group for Â£174 million, an initial yield of 6.1%. The leases to Spirit are for 30 years with minimum annual rental uplifts of 2.5% per annum for 20 years, and with a landlord's option to revert to open market rents from year 15. The six Homebase stores and an adjacent Sainsbury's store in Crawley were bought for Â£102 million at an overall initial yield of 4.75% with reversions to come. All these out of town Homebase stores share sites with a Sainsbury's food store and five have open A1 planning status. The Scottish Retail Property Limited Partnership (a joint venture with Land Securities) acquired further adjoining malls at the East Kilbride Shopping Centre; these strategic purchases consolidated into the Partnership the ownership of the entire town centre scheme and enable all the interconnecting malls to be managed by the Partnership as an integrated shopping destination. The Partnership also purchased additional ancillary interests at the Bon Accord and St Nicholas Centres, Aberdeen. Â£97.1 million was invested in Songbird Estates plc, representing a 15.8% interest in the consortium which now owns 61.85% of Canary Wharf Group PLC. At the published 31 December 2004 values (adjusted for the change in stamp duty relief in March 2005) British Land's interest is supported by Â£486 million of underlying investment and development properties in Canary Wharf, financed through this leveraged vehicle. After 31 March 2005, we acquired our joint venture partners' 50% share in the BL West companies, for Â£50 million plus repayment of the related Â£108 million bank loan. We now own the office properties at 1 and 10 Fleet Place, EC4. Sales Â£344m - 8% above valuation Price Â£m Gain Â£m -------------------------- ----------- ----------- Group Swiss Centre, Leicester Square 47 12 3 Somerfield supermarkets 13 1 33 residential units 8 - 7 properties (retail, offices and industrial) 18 1 -------------------------- ----------- ----------- 86 14 -------------------------- ----------- ----------- Joint Ventures 100 New Bridge Street and Watling House 151 - 6 office properties 59 9 17 pubs 22 1 13 properties (residential, industrial) 26 2 -------------------------- ----------- ----------- 258 12 -------------------------- ----------- ----------- Total 3441 261,2 -------------------------- ----------- ----------- 1 Group and 100% of JVs (including our 50% share of JVs, Â£215 million sales completed in the year) 2 gross gain over latest year end valuation The BL West joint venture sold the City office properties at 100 New Bridge Street and Watling House, Cannon Street, EC2, for Â£151 million; the offer was known at the time of the valuation and reflected in it. The largest gain was on the Swiss Centre, Leicester Square, W1. We had relocated the Swiss Tourism office and put other tenants on break clauses, so creating a premium price for its development potential. Adding Value to our Assets We add value by a range of asset management and development initiatives, building on our quality assets and customer focus. The product of these endeavours typically is increased rents and new lettings. ----------------------- -------- -------- ----------- New Lettings - value creation Number Sq ft Rent* Increase in rent+ 000 Â£m Â£m ----------------------- -------- -------- ----------- ----------- Retail warehouses 25 330 6.1 3.4 Shopping centres 138 226 9.9 4.5 High street 26 71 3.4 2.3 City offices 17 755 34.4 32.9 West End offices 19 113 4.0 3.4 Other 129 1,532 10.1 7.8 ------------ -------------- -------- -------- ----------- Total 354 3,027 67.9 54.3 ------------ -------------- -------- -------- ----------- including 100% of joint ventures * total annual rent including rent free periods + above previous passing rent In the year under review, including joint ventures: â€¢ 354 new lettings and lease renewals, covering 278,700 sq m (3 million sq ft) of property brought new rent of Â£67.9 million per annum, after expiry of rent free periods. These include letting all the available offices and most of the retail at Plantation Place, EC3 and concluding agreement with Willis to develop their new City headquarters; â€¢ 226 rent reviews were settled which have increased rent by over Â£12.7 million per annum, 7% above our external valuers' estimates at the valuation date preceding the rent review, and representing 4.6% per annum year on year growth over the five year review pattern; â€¢ redevelopment of the ILAC Shopping Centre, Dublin, owned jointly with Irish Life Assurance, has commenced. This major upgrade will involve relocating certain tenants, remodelling units and extensive works to create new facilities and amenities for tenants and shoppers in what has become Dublin's premier retail destination. A return of 80% is projected on the cost of â‚¬60 million; â€¢ three extensions were completed at stores occupied by Tesco providing 1,630 sq m (17,500 sq ft) at a cost of Â£4.1 million. Initial additional rent is Â£300,000 per annum; â€¢ the surrender and re-letting to Next of a unit in Beaumont Leys shopping centre, Leicester has been agreed. In addition to improving the tenant mix, the new rent of Â£22 per sq ft will significantly increase the rental values for the adjacent units, from the previous low level of Â£12-14 per sq ft. This is estimated to generate an increase in value after costs of some Â£2 million; â€¢ we were in active dialogue with Allders and Courts and following their recent failures, we took the opportunity to negotiate the take back, remodelling, reletting and/or assignment of the eight stores in our portfolio, thereby improving tenant mix and increasing rents overall by an estimated Â£1.6 million per annum; all examples of the many asset management projects each year which add value but are not widely reported. Development Programme The Group's development programme is based on opportunities created from or otherwise complementing the existing portfolio. Development returns can involve substantial, unmanageable market risk and our approach often favours building to customer specifications, by agreeing pre-lets. We commit to projects in controlled stages on the basis of the pre-lets or anticipated demand, adding value and quality assets to the portfolio and minimising income deficits, finance and other carrying costs. Projects of 104,300 sq m (1.1 million sq ft) have completed on time and within budget. In a testing market we have achieved considerable letting success at these high quality office developments. At Plantation Place, EC3, the offices were fully let by November 2004 and the retail space is also now substantially let. Plantation Place South, EC3 is now being marketed. We have committed to a further 159,400 sq m (1.7 million sq ft) of new projects, 75% of which are already pre-let. Developments - 73% let ---------------------- -------- ------ ------- --------- --------- Sector PC1 Sq ft % Let Income 000 by rent Contracted -------------- ---------- -------- ------ ------- --------- Completed projects Â£m Plantation Place City office Q2 2004 542 99 26.6 Plantation Place South City office Q3 2004 161 1 0.1 10 Exchange Square City office Q2 2004 164 46 3.2 Thatcham Distribution Q3 2004 256 -------------- ---------- -------- ------ ------- --------- 1,123 72 29.9 -------------- ---------- -------- ------ ------- --------- Committed projects 51 Lime Street City office Q4 2006/ 475 99 21.0 Q1 2007 The York Building, W1 W/E office Q4 2006 138 Daventry (Plot E4 & Distribution Q2/4 2005 1,050 100 2.5 C1) Blythe Valley (Plot Business Q4 2005 53 A1) Park -------- ------ ------- --------- -------------- ---------- 1,716 75 23.5 -------------- ---------- -------- ------ ------- --------- Total 2,839 73 53.4 -------------- ---------- -------- ------ ------- --------- 1 practical completion of construction, achieved or anticipated Based on Group and 50% share of JVs (except areas which are at 100%) At 51 Lime Street, Willis Group have contracted to take all the offices under a 25 year lease without breaks, take backs or put backs. In March 2005, we obtained a revised planning consent and have now started on site with a target to enable Willis to occupy in 2007. The recent major pre-let of a 69,690 sq m (750,000 sq ft) distribution warehouse at the Daventry International Rail Freight Terminal on a 15 year lease to Tesco is in addition to the letting to Exel/Mothercare of 27,870 sq m (300,000 sq ft), and reinforces Daventry's position as a leading distribution location. Both developments have been contracted for forward sale on completion, at a significant surplus above cost. Development prospects, as shown below, are those sites and properties where we have identified opportunities and are progressing with design, planning applications and site preparation for development projects. For example, at The Leadenhall Building a detailed planning consent has been obtained for a new 47 storey tower to provide 55,800 sq m (601,000 sq ft) of office accommodation; that is three times the floor space of the existing building. -------------------------------------------- Development prospects Project Sector Sq ft 000 Cost Â£m1 Planning ------------ ----------- -------- -------- ------------- 201 Bishopsgate City office 836 279 Revised submitted The Leadenhall City office 601 270 Detailed Building Regent's Place West End 1,036 370 Osnaburgh submitted office/ NEQ pending Residential Ludgate West West End office 123 47 Detailed Blythe Valley Park Business Park 751 115 Outline/Detailed New Century Park Business Park 657 88 Outline /Distribution Meadowhall Casino Leisure 409 124 Pending Theale Residential 254 46 Submitted Daventry (BLR) Distribution 335 5 Outline Redditch (BLG) Distribution 227 4 Detailed ------------ ----------- -------- -------- ------------- Total 5,229 1,348 ------------ ----------- -------- -------- ------------- 1 estimated costs of construction excluding land and interest costs Based on Group and 50% share of JVs (except areas which are at 100%) We have planning permission for 58% of the development prospects for commercial properties which, if they were built at a total cost to the Group of Â£529 million and fully let, would add further rental income of some Â£60 million per annum at current market rental values. This does not include 201 Bishopsgate where we have an existing permission but are in the process of seeking a revised planning consent for 77,630 sq m (835,600 sq ft). At current market rents, if all these development prospects were completed and let, they would add a further Â£151 million per annum to rental income. Further details of our development projects are shown later in this report. Financial Results, year to 31 March 2005 Our asset management, development and investment activity has contributed to a strong financial performance: March 2005 March 2004 % Increase -------------------- ----------- ---------- --------- Revenue: Gross rental income Â£619.9m Â£565.6m 9.6% Net rental income Â£571.8m Â£523.0m 9.3% Underlying profit before tax1 Â£174.8m Â£149.4m 17.0% Underlying earnings per share1,2 34.3p 31.2p 9.9% Dividends per share 15.7p 14.5p 8.3% Capital Growth and Total Return: NAV per share2 1111p 966p 15.0% Total return3 per share 161p 122p Total return3 16.6% 14.1% Pre-exceptional total return3,4 22.4% 14.1% -------------------- ----------- ---------- --------- 1 excludes Â£180m exceptional charge relating to the refinance of Broadgate and profits on asset disposals (Notes 2, 5) 2 adjusted, diluted (Notes 8, 19) 3 growth in adjusted, diluted net asset value per share plus dividends per share 4 excludes exceptional charge (Note 5) and the removal of stamp duty exemption for disadvantaged areas (Â£166m) Our financial results are discussed below on the basis which includes our 50% share of joint ventures. Note 2 to the accounts shows pro-forma information in more detail. Revenue returns: Gross rental income for the year increased by 9.6% to Â£619.9 million. Net rental income, rose 9.3% to Â£571.8 million. The gross rents for the year were increased by Â£43 million due to the purchases and reduced by Â£10 million due to sales in the year. New lettings added Â£23 million. Interest costs rose Â£15.8 million to Â£352 million (2004: Â£336.2 million) reflecting the cost of the acquisitions, the full year effect of acquiring our partners' share of BL Universal in November 2003, and the conversion into equity of the 6% Â£150 million Convertible Bond in July 2004. Net rents covered interest 1.6 times (2004: 1.5 times). Our administrative expenses, which fell last year, have risen this year by Â£7.6 million to Â£51.2 million, due to increased staff and other costs following major acquisitions and key personnel recruitment. Our administration costs remain low at only 0.4% of the value of the portfolio, a competitive advantage we intend to maintain. These costs include all management and staff incentives charged at full fair value. Broadgate was refinanced by a new Â£2.08 billion securitisation (details of which are set out later in this review) resulting in an exceptional accounting charge against pre-tax profits in the second half of the year of Â£180 million, mainly due to the difference between the redemption value and book value of the existing Broadgate debt. The effect on net asset value is a reduction of 24 pence per share after tax. The impact on British Land's NNNAV ("triple net" asset value), broadly the NAV if debt was valued at market rates and with deferred tax provided on unrealised capital gains, is a reduction of less than 3 pence per share. Underlying profits before tax (excluding the exceptional charge and profits on asset disposals) were up by 17.0% to Â£174.8 million. Significant contributions to this increase were the additional rental income from new lettings and the interest saving following the redemption of the Convertible Bonds. Profits on asset disposals amounted to Â£27.0 million, representing sales proceeds less sales costs and the relevant properties' valuation at March 2004. After the exceptional charge of Â£180 million, profits before tax were Â£21.8 million. The pre exceptional tax rate this year is 8.5% (2004: 7.8%). This low rate arises principally through resolution of prior year items. The exceptional charge arising on the Broadgate refinancing has been used to relieve profits in the current year. The balance is being carried forward for use in 2006 and later years. Earnings per share were also affected by the exceptional charge and are more comparable on an underlying, pre-exceptional basis: Diluted earnings per share: March 2005 March 2004 Underlying1 34.3 pence 31.2 pence +9.9% Reported 11.3 pence 34.5 pence -67.2% 1 adjusted and excludes exceptional item and profits on asset disposals (Note 8) Growth in the dividend is maintained again this year; a final dividend of 10.9 pence is proposed, making a total dividend for the year of 15.7 pence per share, up 8.3% on the year, covered 2.2x by the profits for the year after tax and before the exceptional item. This continues our policy of progressive dividend growth, delivered consistently for over 20 years. Capital Growth and Total Return: The effects of portfolio value growth and retained profits significantly increased net assets this year: Adjusted diluted: March 2005 March 2004 Net assets1 Â£5,823.6m Â£5,035.4m +15.7% Net assets per share1 1111 pence 966 pence +15.0% 1 Note 19 The underlying increase in the portfolio valuation was 8% before the re-imposition of stamp duty in disadvantaged areas, which reduced values by Â£166 million, or 32 pence per share, such that the valuation increase became 6.5%. As we restrict the amount of equity financing the business, the capital growth attributable to shareholders is more than double the growth in the portfolio valuation. Total returns to shareholders, the increase in net assets plus the dividend, grew significantly this year, both pre and post the exceptional charge and the impact of the re-imposition of stamp duty on disadvantaged areas: Adjusted diluted: March 2005 March 2004 Total return +16.6% +14.1% Pre-exceptional and stamp duty +22.4% +14.1% The performance in the year builds on our strong record of value creation, with total returns of 14.7% per annum and 12.6% per annum over the last three and five years, outperforming the average of our major peers by 48% and 31% over those periods. We have also generated shareholder returns above the average of our major peers and above the FTSE Real Estate Index over the three and five years. Cash Flows Net cash flow from operating activities has grown strongly reflecting growing rents and the effects of consolidating the former BL Universal JV for a full year. A reduced level of cash dividend received from JVs against the particularly high 2004 receipts and an extra interest payment due to the timing of the Broadgate refinancing have led to the Â£34 million reduction in pre investment and financing cash flows. Notwithstanding this reduction cash dividends paid during the year have been covered over 1.6 times. The increased investment and development cash flows in the year represent the Group's significant net investment in assets, these investments being principally financed by increased borrowings. March 2005 March 2004 Â£m Â£m Net cash flow from operating activities 462.2 381.4 Net cash flow after JV dividends, interest, tax and working capital movements 125.2 163.1 Net investment cash flows (526.5) (185.6) Financing 440.0 136.5 Dividends (76.6) (67.0) Strong Contracted Income Growth Our cash flow is generated from the rental income profile of our portfolio. Annualised net rents, including our share of joint ventures, were Â£625.6 million at the year end. This income is generated from long leases to strong tenants, with a weighted average unexpired lease term of 15.9 years. The resulting cash flow is robust and long term: 69.8% (2004: 72.1%) of the current rent roll remains in place in ten years time, March 2015. Income quality has been measured by IPD using the Experian Stress Score and shows 88% of our current rental income is receivable from tenants rated negligible, low and low/medium risk. Strong growth in rental income is expected within the next five years from the existing portfolio and from the committed development programme. At current market rental values, without projecting any growth or inflation, this would add a further Â£134.8 million per annum. Some Â£90.4 million of this cash flow growth is already contracted as at March 2005, being Â£66.9 million from expiry of rent free periods and minimum rental uplifts, plus Â£23.5 million from pre-let agreements on developments. There is also further potential for income growth from the development prospects. Rental growth - Â£90.4m contracted Total of which contracted Â£m Â£m Annualised net rents, 31 March 2005 625.6 625.6 Reversion*, 5 years 103.5 66.9 Committed developments+ 31.3 23.5 Development prospects+ 151.1 Total 911.5 716.0 * 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. Portfolio Valuation, up 6.5% in the year (8% underlying) Our portfolio focus is: Retail 55% - with the emphasis on out of town, representing 68% of total retail Offices 39% - 94% in Central London The British Land property portfolio has increased in value by Â£1.87 billion over the year to March 2005 to Â£12.5 billion, Â£770 million from growth of 6.5% and the balance Â£1.1 billion from net additions to the portfolio. The removal by the Chancellor of stamp duty relief applicable to properties in disadvantaged areas reduced the valuation of the British Land portfolio by Â£166 million, or 1.5%, at a stroke. If that additional potential cost of transactions had not been imposed, the underlying growth in the portfolio would have been 8%. All commercial sectors improved in value this year. The tables below set out details of the valuation. ----------------- -------- -------- -------- ----------- Valuation by Use Total Portfolio Uplift2 Uplift2 Â£m % % pre-stamp3 ----------------- -------- -------- -------- ----------- Retail Shopping centres 2,431.0 19.4 4.8 7.7 Superstores 1,548.8 12.4 4.2 5.4 Retail warehouses 1,678.0 13.4 13.7 16.1 High street 1,196.7 9.6 9.1 10.8 Development 24.4 0.2 2.2 6.6 ----------------- -------- -------- -------- ----------- All retail 6,878.9 55.0 7.4 9.6 Offices City 3,671.1 29.4 6.3 6.3 West End 652.1 5.2 4.5 7.8 Business parks & Provincial 248.8 2.0 3.1 3.3 Development 277.3 2.2 0.9 1.4 ----------------- -------- -------- -------- ----------- All offices 4,849.3 38.8 5.6 6.1 Industrial and distribution 205.5 1.6 6.4 7.7 Residential 292.1 2.3 -0.2 -0.2 Leisure 262.8 2.1 10.2 10.8 Other development 18.3 0.2 2.2 2.2 ----------------- -------- -------- -------- ----------- Total 12,506.91 100 6.5 8.0 ----------------- -------- -------- -------- ----------- 1 includes British Land's share of joint ventures at Â£1,353 million 2 including valuation movement in developments, purchases and capital expenditure, and excluding sales 3 excluding the effect of removal of stamp duty exemption for disadvantaged areas Further details of the principal investment properties are shown after this review. Meadowhall Shopping Centre, Sheffield, was up Â£22 million, or 1.6%, after an adverse stamp duty change of some Â£59 million on this property alone. Activity continues apace at this prime shopping centre: examples include: taking back the Allders, Sainsbury's and part of Boots space for reconfiguration; letting alternative adjoining space to Boots; installing a mezzanine level in the 9,290 sq m (100,000 sq ft) ex-Sainsbury unit to create over 50% more space; then splitting the unit for reletting - all expected to result in a significant uplift in income. Superstores rose by 4.2%, a little disappointing following the increase of 15.1% last year. We are making more good progress with rent reviews and expect further growth. Retail warehouses performed well, up 13.7% this year, building on a rise of 15.1% last year. Broadgate, our prime City of London office estate, has risen in value by Â£98 million, 3.6%, due to a small yield shift and expiry of rent free periods. The offices are well let with a low vacancy rate of only 2%. Broadgate is low rise and low density, with 372,000 sq m (4 million sq ft) on 12 hectares (30 acres), excluding the station; the plot ratio is only 3:1. We have started a masterplanning exercise looking into the long term future of the Estate, where we believe we can significantly increase the density. Plantation Place is up 25.3%, which reflects the completion of the building and the successful letting of all the offices and substantially all the retail. (Plantation Place South is being marketed for letting.) A small uplift was seen at Regent's Place; this property was hit by the stamp duty changes but benefited from a yield shift. Our in town retail investments, shops, shopping centres and department stores, have increased in value overall by 9.5%. Our investment in Songbird Estates plc has been independently valued at Â£140 million, an increase over the year of 44% on cost. This investment also includes a 'D' share which gives a prior return to British Land on the performance of the Canary Wharf retail assets. Performance against IPD index For several years the Group has used Investment Property Databank ('IPD') to provide independent benchmarking of property returns as one tool in assessing portfolio performance. The statistics below show the ungeared total property returns of the Group, including our share of joint venture properties and excluding overseas properties, in comparison to the index of fund performance. Ungeared Returns: Year to March 2005 British Land % IPD1 % Relative % ---------------------- ----------- -------- --------- All retail 13.8 18.4 -3.9 ---------------------- ----------- -------- --------- Retail warehouses 20.2 22.0 -1.4 Shopping centres 9.1 14.8 -5.0 High street 13.8 19.2 -4.6 ---------------------- ----------- -------- --------- All offices 11.3 14.8 -3.0 ---------------------- ----------- -------- --------- City 11.7 12.9 -1.1 West End 9.8 17.9 -6.8 ---------------------- ----------- -------- --------- Total portfolio 12.6 16.9 -3.7 ---------------------- ----------- -------- --------- Of which Stamp Duty change -1.5 -0.52 -1.0 ---------------------- ----------- -------- --------- 1 IPD December Universe (extrapolated to March 2005) unfrozen 2 IPD estimate based on monthly index in March 2005 British Land's leveraged total returns outperformed the index at 22.4% on an pre-exceptional basis and were similar at 16.6% on a headline basis. However, at the ungeared level there was a shortfall versus the index of 2.7% after adjusting for stamp duty changes. In considering the shortfall it is important to note that we target absolute risk adjusted total return and are not an index tracker. We do not mirror the composition of the benchmark assets; indeed we select concentrations of assets significantly different from the benchmark. This will give rise to volatility in relative returns in any given period. The principal reason for the difference in 2004/5 performance when measured against IPD is that the IPD benchmark portfolio has a greater mix of secondary assets than British Land. Secondary property, not forming a significant part of the British Land portfolio, has performed particularly well in the year as investors have had to search for acquisitions in a competitive market and the risk factors normally associated with secondary property have been discounted. Approximately 4.3% of the IPD benchmark total return is accounted for by the additional yield shift on secondary properties. British Land's higher weighting in prime City offices has also tended to lower its comparative ungeared performance in this period. We expect these factors to adjust favourably for British Land going forward, as City offices move further into recovery and as investors reassess the relative risks of prime and secondary. Views on the Property Market Current conditions Investors across a broad range, including overseas purchasers and new property funds, find UK property attractive because: â€¢ over the last 10 years total returns from property have been higher at 11.2% per annum than those from equities and gilts at 8.1/8.8% per annum â€¢ income yield on property is higher than both gilts and equities, and above inflation â€¢ property returns have been much less volatile â€¢ well let property remains readily financeable with income yield remaining above the cost of borrowing â€¢ property provides diversification benefits in an investment portfolio â€¢ further rental and capital growth is expected. In addition, readers familiar with the UK real estate market will already be aware of these key structural features: â€¢ lease contracts usually have a term of between 10 and 25 years, regular rent reviews, typically every five years and upwards only, with tenants fully responsible for repairs and insurance â€¢ demand drivers, from the UK's overall density and population growth, with a growing open market economy and a flexible labour force, particularly in London's experienced multinational financial sector â€¢ supply constraints due to limited availability of land and a restrictive planning regime which tend to create barriers to new supply and support land values (although the pre-requisite work and costs of submitting planning applications have risen) â€¢ transparency of the market with an established legal and transactional system, open access to land registry and a regulated and established valuation profession. These current attractions and fundamentals of the market have been and are still resulting in competition between buyers for available property, and increasing upward pressure on market prices. UK institutional weighting to property has been low and is being re-rated, with institutions seeking to match commitments with bond-like income and growth potential. Overseas purchasers represented about one-third of total property acquisitions and European investors are now meeting competition from US and Australian purchasers. As we anticipated at the interim report, the continued pressure of investment demand for UK property has resulted in further tightening of yields and consequently higher values. This yield shift has affected higher yielding secondary properties to a greater extent than for prime assets, as strong investor demand has led to the greater risk factors in secondary property being heavily discounted. Investors have reviewed their approach to UK property as an asset class and there is now a more favourable appreciation of its merits and investment qualities. Retail Retail sales have been much in the news recently and it is widely reported that in many cases the rate of sales growth has slowed. The high levels of consumer expenditure have paused as individuals' earnings growth has moderated and discretionary spending power has come under some pressure. For the retailers, overall operating margins have built up some resilience and rents as a proportion of sales is steady, so rents are not too high. More significantly for British Land's portfolio positions, out of town retail, where our retail portfolio is focused, continues to take an increasing share of the total consumer spend; out of town sales grew 6% in 2004 with further growth forecast over the next five years, such that by 2009 out of town is expected to take over 34% of total retail sales. Fashion retailers need open A1 planning consents and these properties, which have good potential, represent 59% of our out of town retail warehouse portfolio. All retailers are continuing to require the large floorplate units provided on good out of town sites where they achieve on average a higher ratio of the value of sales per cost of rent. At the same time, the planning regime continues to limit the supply of new retail parks, concentrating both occupier and investor demand and maintaining pressure on rental and capital values. The introduction later this year of further planning restrictions relating to mezzanine levels, which has prompted a flurry of construction, will further add to the limitation of floorspace at these preferred locations. In town retail still has an important position in the portfolio, where we concentrate on the best towns and high streets, and assets which have good opportunities for growth under our management. Retailers' demand for trading space remains strong and overall retail rents have continued to grow, particularly out of town, and while the retail climate is feeling more challenging, we expect the supply and demand factors to continue to be favourable for our assets. Offices London is a financial centre of global importance with competitive advantages including its highly skilled and flexible labour force, ideally located time zone, stable political, economic and legal system and a workable regulatory environment. The Central London office occupier market has been through a testing few years with tenant demand subdued and rental values declining. During the last 12 months tenant demand has picked up and is now running at a level around the average for the last 10 years. Occupiers are seeking well designed and high quality space. British Land design and development standards have met these requirements and our developments have let well. Overall in the year we have agreed lettings of 63,000 sq m (680,000 sq ft) of City office developments. Projected City Rents: Agents' Consensus BL City rent reviews Range Â£psf Average increase % of rent roll 2005 45.00-48.00 +1.9% 14 2006 47.50-50.40 +5.1% 19 2007 52.50-55.40 +9.3% 14 2008 57.00-59.00 +8.3% 23 2009 59.75-63.00 +5.1% 28 As the City office market is now considered to be in the early stages of recovery with demand for space at trend levels, the take up of space is expected to increase. Due to reduced availability of required accommodation as a result of new speculative developments all but ceasing in 2003, rising rental values can be expected from 2006. Agents' forecasts show an average increase in headline City office rents in the range of 5-9% per annum over the next three/ four years. We are aware of early indications of new development starts increasing, but any potential increased supply will only arise in the longer term cycle. Outlook Looking at the principal features of the UK property investment market we see that: â€¢ rents are affordable in most sectors across the UK economy â€¢ global competitiveness issues may restrain occupancy and rental growth, except where supply and demand imbalances exist â€¢ the yield shift seen for property has been supported by fundamentals of comparison of the risks versus returns from alternative asset classes; this yield correction is now slower but continuing â€¢ investor demand is still exceeding supply as property reweighting is in progress, which REITs can only reinforce. Sentiment towards the property sector overall is also affected by the UK's economic performance and, in particular, levels of interest rates. There are no signs of rate increases at present and UK property yields overall remain significantly above market spot and 10 year interest rates. Property Market Analysis LLP, Europe's largest independent property research consultancy, has identified Central London offices and out of town retail as the sectors with the best prospects for total returns over the next five years. British Land's portfolio is strongly weighted in these sectors. Portfolio Positioned for Growth with Security ----------------- --------------- ---------------- PMA* Forecast - next 5 years Average British Land's Ungeared Total Return Weighting % % pa Shopping centres 5.5 20 Retail warehouses 10.1 +26 High street 6.0 10 Central London offices 7.9 37 Provincial offices 5.9 2 Industrial 6.6 2 ----------------- --------------- ---------------- * Property Market Analysis LLP + including superstores British Land is positioned for growth through investment in prime assets, principally out of town retail and central London offices. Security against any downside risk is provided by the quality of the assets, let on long leases to strong tenants, including a significant proportion of guaranteed minimum rental uplifts. Finance and capital structure British Land is managed on a fully integrated basis to produce secure and attractive shareholder returns. Risk management is a distinctive skill at British Land where the mix of assets, leases, developments and debt are managed together to ensure the most effective risk adjusted result. Overall, the Group's prime assets and their uniquely secure rental income present lower risks than other property portfolios, enabling the returns to shareholders to be enhanced using financial leverage: a 45-55% loan to value ratio is targeted. The financing policy is also highly risk averse, to ride out any cycle. Since we seek to maximise shareholder returns, we prefer to avoid equity issuance, except where the commercial opportunity clearly merits it. We also would expect to return capital to shareholders if surplus arises over what we believe can be attractively deployed in the business. Debt is raised from a variety of sources with a spread of maturity dates; the weighted average maturity is 14.3 years. Longer term debt is raised principally through securitisations and debentures. Securitisations have a range of benefits, including long maturities at competitive rates with no recourse to other companies or assets in the Group, and without financial covenants by British Land. The securitisations of Â£3.5 billion include Â£2.4 billion, about 40% of Group net debt, rated AAA or AA. Unsecured bank facilities tend to be for terms of five to seven years, and we aim to spread the maturities of the different facilities from a wide range of banks. Further details are set out later in this report. The Group borrows at fixed and floating rates and uses derivatives to achieve the desired interest rate profile; currently the policy is to maintain around 85% (subject to 5% tolerance) of debt at fixed and capped rates. This interest rate profile is closely monitored as part of our management of the overall financial effects of transactions in the Group. The joint ventures are separately financed, and have their own interest rate derivatives, all with no recourse to British Land. Our principal liabilities comprise net debt of Â£6 billion, increased over the year as funds were drawn for net property acquisitions and offset by a Â£150 million reduction as a result of the conversion of the Convertible Bonds. Financing statistics 31 March 2005 31 March 2004 ------------------------- ------------ ---------- Group: Net debt Â£6,040.6m Â£4,866.8m Weighted average debt maturity 14.3 years 16.9 years Weighted average interest rate 6.00% 6.38% % of net debt at fixed/capped interest rates 90% 84% % of gross debt ringfenced with no recourse to other Group companies/assets 63% 64% Interest cover (net rents/net interest) 1.59x 1.55x Loan to value (debt/property & investments) 50% 48% ------------------------- ------------ ---------- Cash and available committed facilities Â£2,632.2m Â£2,149.6m - of which drawn Â£1,663.4m Â£1,011.0m ------------------------- ------------ ---------- Group and share of joint ventures: Net debt Â£6,536.2m Â£5,396.6m Weighted average debt maturity 13.5 years 15.7 years Loan to value (debt/property & investments) 52% 51% Weighted average interest rate 6.03% 6.41% ------------------------- ------------ ---------- The reduction in weighted average debt maturity reflects three main factors: the new Broadgate securitisation has a longer term than the Notes redeemed, offset by the conversion of the Â£150 million Convertible Bonds and the significant net investment in property, predominantly financed by unsecured facilities. At 31 March 2005, the market value of the Group's net debt and interest rate derivatives was Â£293.9 million more than book values (Â£302.4 million including share of joint ventures). Financing activity We have also been active this year in arranging financing of the business, in the banking and capital markets. In the year some Â£500 million from 13 facilities came to the end of their terms and all but one was renewed or replaced. New bank lines of over Â£1 billion were agreed, including a Â£600 million syndicated loan facility. The major refinancing of Broadgate was completed in March 2005: Â£2.08 billion of bonds were issued at an average interest rate of 5.05% and a weighted average maturity of 20 years. After repayment of the existing debt previously securitised on the Estate, the costs of closing out interest rate hedging and payment of transactions costs, the net additional finance raised was approximately Â£500 million. British Land's future interest charges are reduced by some Â£13 million per annum. The timing of the transaction was particularly advantageous, achieving tight market pricing of the bonds, particularly at the AAA rated level. This financing reduces the Group's interest costs overall and extends the maturity profile of borrowings. Broadgate refinancing - Â£2.08 billion at an average rate of 5.05% pa Key benefits Key financial effects 2004/5 Additional Â£500m of long term funding Pre-tax exceptional charge of Â£180m Interest costs reduced by Â£13m per NAV reduced by 24p per share annum Weighted average maturity of 20 years NNNAV reduced by less than 3p per share Attractive shareholder post-tax return Improved prepayment provisions The Tesco BL Properties Limited joint venture was refinanced by a group of banks in January 2005, repaying existing debt and returning some Â£50 million surplus to each of British Land and Tesco. As we reported at the interim, the Â£150 million 6% Subordinated Irredeemable Convertible Bonds all converted to ordinary shares, resulting in the issue of 30 million new shares, and an interest saving from April 2004 of Â£9 million per annum. The Scottish Retail Property Limited Partnership, a joint venture established in March 2004 with funding from the partners, was refinanced after the year end by a seven year securitisation, returning some Â£210 million to each of the British Land and Land Securities partners. Important Trends in the UK market Real Estate Investment Trusts - prospects The introduction of a tax efficient property investment vehicle is widely anticipated. It is still an uncertain process and might be available only on unattractive conditions. However, we do expect REITs to happen and with a structure to which the market will respond positively. British Land is fully supportive and deeply engaged in the process. We believe that British Land will make an attractive REIT due to our: - outstanding property portfolio - strong brand name - significant range of structural alternatives - safe financial structure. Code of Practice for Commercial Leases British Land is a supporter of the code of Practice for Commercial Leases and remains committed to promoting greater flexibility in leasing practices. In common with other major landlords it has signed a declaration allowing sub-letting at below passing rents reserved in the lease. Following a period of study and consultation the Government announced that it did not intend to legislate to ban upward only rent review clauses in commercial leases. Planning Town and Country Planning legislation sets the statutory and policy framework for our development programme, as well as for extensions and changes of use to the investment portfolio. The planning background is also an important consideration when acquisitions are made. The 2004 Planning and Compulsory Purchase Act has changed nearly all aspects of the planning regime. The additional importance given to planning policy and the requirement for local planning authorities to keep their planning policies up to date makes it more important than ever that we engage with local and regional planning authorities. The new Act also stresses the need for more public consultation at the beginning of the process on major planning applications. At the same time, the scope and complexity of the technical issues influencing planning decisions continue to increase. The Government's commitment to creating sustainable communities requires a considered approach to the long term masterplanning of our major development projects. At Regent's Place, Canada Water, New Century Park in Coventry and the development land around Meadowhall for example, we are working with local authorities to plan the mix of uses and the necessary infrastructure which create value and gain local support. The Government is also issuing new and revised planning guidance to support the reforms to the planning system in the new Act. The recently published PPS 6 dealing with town centres confirms the Government's commitment to restricting out of town retail development and requires local authorities to take positive action to promote redevelopment in central areas. There are some exceptions to the general presumption against out of town centre retail development but the long trail of refused applications for this type of development will continue to dissuade all but the most determined. Corporate Responsibility and relationships with key Stakeholders The corporate responsibility programmes bring real benefits to the business. They build relationships with stakeholders, improving our reputation with tenants, investors, lenders, analysts, employees and local communities, reducing risk and costs by efficient resource management. We are pleased to report that in 2004, for the second year running, British Land was designated by the Dow Jones Sustainability Indices as the financial services sector world market leader in corporate responsibility issues. Our 2004 Corporate Responsibility Report was published in April 2005. A key feature is the launch of the Sustainability Brief, a process that establishes sustainable design and construction in our developments, and has been recognised by government as a leading example. We have also been working with the Carbon Trust to develop and implement a Carbon Management Programme for the multi-let property portfolio. This enables the Company to benchmark the energy performance for all multi-let buildings' common areas and set targets to reduce carbon emissions, and, as a result, make cost savings. Technology and innovation There have been a number of initiatives designed to support our occupiers and improve operational efficiency. Occupier initiatives include: â€¢ our onsite replenishment and storage facility at Meadowhall (ARC), which has experienced increased retailer take up and has also won the ICSC (International Council for Shopping Centres) Award for Centre Productivity in 2005 â€¢ the Broadgate Environmental Working Group, where we have worked collaboratively with Broadgate occupiers to improve waste management and increase the incidence of recycling at Broadgate. Operational efficiency initiatives include: â€¢ wider deployment of the British Land portal (web based access to our systems) for our agents and other consultants, improving operational effectiveness â€¢ a pilot project to explore ways to improve procurement and to improve the quality of the provision of services relating to the service charge, which are costs incurred by the building manager and paid for by the occupier. Risks and Uncertainties The Group's objective is to achieve attractive long term total returns whilst minimising risks. In order to identify and evaluate risks and design controls to mitigate them, a regular comprehensive assessment is undertaken which has identified some 50 individual risks affecting the Group. Responsibility for management of each key risk is clearly identified and delegated by the Board to specific executive directors and senior executives within the Group. Most of the risks faced by the Group arise out of natural market volatility, relating to supply and demand imbalances in the following core areas: â€¢ demand for space from occupiers against available space (including new developments) â€¢ differential pricing for previous locations and buildings â€¢ alternative use for buildings (particularly redevelopment) â€¢ demand for returns from investors in property, compared to other asset classes â€¢ price differentials for capital to finance the business â€¢ legislative initiatives, including planning consents and taxation â€¢ economic cycles, including the impact on tenant covenant quality, interest rates and inflation â€¢ mis-pricing of property assets by the equity markets. Our preference for long term investments let on long leases to strong tenants with upward only rent reviews provides stable long term cash flows which enables the Group to ride out much of this natural market volatility. Following discussions held in 2002 and 2003, there has been a further round of consultation on corporation tax reform, in advance of intended legislation. We operate, in common with most other corporate entities, with considerable uncertainty as to when and how any legislation will take effect. Explanatory Notes The following sections provides shareholders with general information to assist with understanding the results. Operating and Financial Review From April 2006 British Land is required to publish an Operating and Financial Review in accordance with new regulations. Although guidance on its preparation is not finalised, this OFR aims to anticipate most of the new requirements. In preparing this operating and financial review, we are required to advise the reader that by their nature, all forward looking statements made involve uncertainty since future events often cause outcomes and results to differ from those anticipated. International Accounting Standards This will be the Group's last set of results prepared under generally accepted accounting principles in the UK ("UK GAAP"). As from 1 April 2005 we have adopted International Accounting Standards ('IAS') as required for all European Union listed companies. We made a presentation to analysts of the expected impact of adoption of IAS on 21 January 2005, a copy of which can be found on our website www.britishland.com. We will be re-presenting our 2005 results in IAS format during summer 2005. Understanding capital and revenue performance Major accounting policies: The Group's results comprise profits arising from revenues less expenses (revenue profits) and capital growth, some realised in the year through sales and the rest unrealised but quantified by way of external valuations. This is the last time we present the results under UK GAAP, which recognises in the profit and loss account only revenue profits and that element of capital profits on assets sold which derives from net sales proceeds exceeding valuation. Investment properties and investments are revalued to market values each year. In assessing total returns, return on capital is therefore rebased each year. Returns on historical cost are considerably higher. Tenant incentives such as rent free periods are spread to the nearest date when a rebasing to open market rent is expected. This means that net rental income in the profit and loss account is not the same as cash rents received. To avoid double counting, the asset arising from this rent adjustment is deducted from the valuation. Accounting policies that may be different from other major property companies: We account for rent reviews only on settlement. Other companies often accrue rent reviews on the basis of estimates of markets rents. Our policy, whilst conservative, does not smooth earnings and where commercially we decide to prolong negotiations or arbitrate, significant rent adjustments can arise in later years (back rents). We account for equity settled share based incentives for directors and staff by charging the fair value as determined at the date of grant over the vesting period. We also account on balance sheet for our defined benefit scheme. Other companies are in the process of moving towards both of these bases as they implement IAS. On acquisitions through corporate vehicles, any discount received in respect of contingent tax taken on, is treated as negative goodwill and is not added back to net asset value. The negative goodwill already recognised is taken into account when calculating contingent capital gains. Some companies add negative goodwill back to reserves thereby increasing net assets. Application of policies for new material circumstances: As a result of the acquisition in the second half of over Â£732 million of properties with minimum periodic uplifts in rents, we have followed UK GAAP in spreading the total minimum contracted rents evenly over the lease term. This recognises income substantially earlier than the cash flows. To avoid double counting the asset recognised is deducted from the valuation. The additional net rental income recognised is Â£5 million in the year to March 2005 (annualised Â£19 million). Key Performance Indicators British Land is focused on achieving attractive and sustainable risk adjusted total returns for shareholders. The property business is influenced by many factors and decisions are judged over multi-year periods. We do pay careful attention to a range of KPIs, which are presented elsewhere in this review. However, movements up or down in any of these indicators are not of themselves definitive performance indicators since, when seen in the light of other indicators, management strategies and market events, they may have quite different significance. The more prominent KPIs include: Financial measures: return on equity; growth in total returns; earnings per share and underlying earnings per share; loan to value gearing; interest cover; average debt maturities; management of interest rate exposure and percentage of interest costs fixed; administrative costs as a percentage of revenues; tax rate. Asset measures: average lease lengths; vacancy rate; security of income and tenant covenants; irrecoverable property costs as a percentage of rental income; income at risk from development programme. PRINCIPAL INVESTMENT PROPERTIES The Broadgate Centre, London EC2 ---------------- Value Â£2,838m Broadgate is the premier City of London office estate. We have continued to invest in the development of the Estate. Works to enhance the public spaces providing new landscaped areas, retail amenities, improved lighting and signage are complete and the completion of 10Exchange Square during the year, has added a further 15,180 sq m (163,400 sq ft) to the Estate. As for all other buildings at Broadgate, its frame and mechanical and electrical services are designed to permit ongoing flexible updating of tenants' space as technology and operating requirements change. Broadgate Estates Limited, a wholly owned subsidiary of British Land, manages the estate and maintains the external and common areas. During the course of the year lease agreements were ---------------- completed on a total of 13,100 sq m (141,000 sq ft) of office accommodation with Ambac in 6 Broadgate, Bank of Scotland in 155 Bishopsgate, F&C Management in Exchange House and with Western Asset and Herbert Smith in 10 Exchange Square. In addition, a further 740sq m (8,000 sq ft) of retail accommodation has been agreed for letting to Monsoon and Gaucho Grill, complementing the retail and leisure facilities already available at Broadgate. The total rent passing of Â£150.9million per annum has fallen by Â£0.8 million over last year principally as a result of a rent free period granted as part of a lease renewal negotiation. Total rent reverts to Â£177.3million per annum after expiry of EBRD's nil rent period in November 2006, upon rent reviews (with minimum uplifts) and upon expiry of rent free periods in respect of recent lettings. 372,000 sq m (4m sq ft) office, retail and leisure accommodation ---------------- 12 hectare (30 acre) site ---------------- Adjoins Liverpool Street station (mainline and underground) ---------------- Distinctive environment for some of the world's largest corporations and leading professional practices ---------------- Approximately 30,000 employees based at Broadgate ---------------- Community website www.vicinitee.com ---------------- Tenants include: ---------------- ABN AMRO Holdings ---------------- Allianz Dresdner ---------------- Ambac ---------------- Ashurst ---------------- Bank of Scotland ---------------- Barclays Bank ---------------- Baring Investment Services ---------------- Calyon ---------------- Deutsche Bank ---------------- European Bank for Reconstruction & Development (EBRD) ---------------- F&C Management ---------------- Henderson Administration ---------------- Herbert Smith ---------------- ICAP ---------------- Lehman Brothers ---------------- Norinchukin ---------------- Prebon Marshall Yamane ---------------- Royal Bank of Scotland ---------------- Societe Generale ---------------- Sumitomo Trust ---------------- Tokyo Mitsubishi ---------------- UBS ---------------- Western Asset Management ---------------- Williams de Broe ---------------- The Broadgate Club ---------------- Freehold/virtual freehold ---------------- 100% owned ---------------- Rent passing Â£150.9m pa ---------------- Average office passing rent Â£46.75 per sq ft ---------------- Weighted average lease term including breaks 11.8 years, to expiry 13.9 years ---------------- Meadowhall Shopping Centre, Sheffield ---------------- Value Â£1,430m Meadowhall is one of the largest and most successful shopping centres in the UK. The two level, fully enclosed mall with excellent transport links continues to be attractive to both retailers and their customers. For multiple retailers at Meadowhall, 80% of the units are in the top 10 performing outlets of their company, and for 26% they are the retailers' best performing outlet in the country. Initiatives to benefit retailers and consumers include: the centre's interactive customer loyalty scheme, now with 100,000 subscribers; an on-line gift buying service; further development of technology to communicate effectively with both customers and retailers, including the introduction of 20plasma screens. The accelerated response centre (ARC), provides on-site warehousing and stock replenishment facilities and is being expanded during 2005. In total 70 retailers have now used this facility. The Source, a training and development centre, receives over 60,000 visits per annum. Meadowhall's management has received more awards this year, including the British Council of Shopping Centres (BCSC) Merits award and the International Council of Shopping Centres (ICSC) productivity award for the ARC. Rents passing are Â£72.2 million per annum and are ---------------- expected to increase to Â£73.4 million per annum when outstanding rent reviews and lettings have been completed. 132,800 sq m (1,430,000 sq ft) retail ---------------- Site area 68 hectares (167.3 acres, 57.7 acres undeveloped) ---------------- 199 shop units, 10 anchor stores, 11 screen Warner Village cinema, 26 speciality kiosks, 20 mall kiosks ---------------- 28 restaurants and cafes (including Oasis food court) seating for some 3,300 ---------------- Up to 800,000 visitors per week at peak time ---------------- Direct access to junction 34 of M1 motorway ---------------- Free parking for over 12,000 vehicles ---------------- On site transport interchange with bus, train and supertram services ---------------- www.meadowhall.co.uk ---------------- Anchor stores: ---------------- BHS ---------------- Boots ---------------- Debenhams ---------------- H&M ---------------- House of Fraser ---------------- Marks & Spencer ---------------- Next ---------------- Sports Soccer ---------------- WH Smith ---------------- Freehold ---------------- 100% owned ---------------- Rent passing Â£72.2m pa ---------------- Average rent (excl M&S) Â£56.16 per sq ft ---------------- Weighted average lease term including breaks 16.1 years, to expiry 16.7 years ---------------- Superstores Portfolio ---------------- Total value British Land's investment in supermarkets now represents 12% Â£1,738m of the total portfolio. British Land's We calculate that we are the largest owner of UK supermarket share Â£1,549m properties, other than the occupiers themselves. In an increasingly restrictive planning environment and with limited new supply, the retailers continue to require more and larger stores and are prepared to commit to full lease lengths of over 20 years. These investments, acquired over some 15 years, have been enlarged by 45 extensions adding a total of 60,850sq m (655,000 sq ft), of which 1,625 sq m (17,500sq ft) has been completed during the year. In addition to these, British Land also owns, directly or 50% in joint ventures, a further 15 superstores which are included in other sectors of the portfolio (such as retail warehouse parks), and total a further 125,000sqm (1,350,000 sq ft). 19 rent reviews were concluded during the year, adding some ---------------- Â£4.5 million rent per annum. The most significant was the determination on the Sainsbury store at Islington. The store is 6,200 sq m (67,000 sq ft). The arbitrator's award, was Â£26 per sq ft as a base rent which equated to Â£29.21 per sq ft after the adjustments for fixtures and fittings and lease terms. This now represents the highest award for a food superstore in the country. 71 supermarkets located across England, Wales and Northern Ireland ---------------- Total floor area 441,000 sq m (4.7m sq ft) ---------------- Total site area 165 hectares (407 acres) ---------------- Total car spaces c.28,000 ---------------- Tenants: ---------------- Safeway (3 stores) ---------------- Sainsbury's (44 stores) ---------------- Somerfield (9 stores) ---------------- Tesco (14 stores) ---------------- Waitrose (1 store) ---------------- 66 freeholds, 5 long leaseholds ---------------- 58 stores 100% owned ---------------- 13 stores owned 50% in joint ventures ---------------- Total rent passing Â£95.7m pa, British Land's share Â£85.0m pa ---------------- Average rent Â£20.19 per sq ft ---------------- Weighted average lease term to break and expiry 21.8 years ---------------- Out of Town Retail Warehouse Portfolio ---------------- Total value British Land's retail warehouse investments represent 13% Â£1,986m of the total portfolio. British Land's share Included in these investments are: Â£1,678m Teesside Retail Park, Stockton on Tees This freehold property is located at the intersection of the A66 and A19 trunk roads between Stockton on Tees and Middlesbrough and comprises: Phase 1: 31,500 sq m (340,000 sq ft) of open A1 retail space arranged in 29 units, on a site of 19 hectares (47acres). Phase 2: a 3.3 hectare (8.1 acre) site located on the Park's principal access, comprises two retail units totalling 3,900 sq m (42,000 sq ft) and three restaurant units totalling 1,090 sq m (11,700sq ft). Phase 3: an 11 hectare (27 acre) site, surrounding an existing leisure development (not in the Company's ownership), which may be considered for future development for commercial uses. A standalone Pets at Home unit comprising 740 sq m (8,000 sq ft) and the reversionary interest in the adjoining Toys R Us unit. Total passing rent from Teesside is Â£7.3 million per annum. Greyhound Retail Park, Chester This freehold investment extends to 19,100sq m (205,000sq ft) of mainly retail floor space, located to the west of the town centre, close to other areas of retail warehousing. Included on the park are two leisure units (cinema and bowling alley) where the rents are based on retail values. Almost all the retail units have a valuable open A1 non food planning consent. The total passing rent is Â£3.9 million per annum. Homebase DIY Stores The portfolio of stand alone Homebase stores has been ---------------- expanded to 22 properties following the acquisition in March 2005 of a further portfolio from J Sainsbury. Located mainly in the South East of England, annual rents total Â£12.5 million, averagesÂ£153.60persq m (Â£14.27 per sq ft). The majority are let on 20year leases from December 2000. Total floor area is 81,430 sq m (876,500sq ft). 69 retail warehouse properties, of which: ---------------- 40 retail parks with total 355 units; and ---------------- 29 solus units ---------------- Total floor area 541,800 sq m (5.8m sq ft) 59% with open A1 use ---------------- Total site area 212 hectares (524 acres) ---------------- Tenants include: ---------------- Argos ---------------- Asda ---------------- B&Q ---------------- Boots ---------------- Borders ---------------- Carpetright ---------------- Comet ---------------- DFS ---------------- Dixons Group ---------------- Focus Group ---------------- Halfords ---------------- Homebase ---------------- Homestyle Group ---------------- JJB Sports ---------------- Marks & Spencer ---------------- Matalan ---------------- Mothercare ---------------- Next ---------------- Pets At Home ---------------- Poundstretcher ---------------- PRG Powerhouse ---------------- Sainsbury's ---------------- Sports World ---------------- Tesco ---------------- TK Maxx ---------------- Toys R Us ---------------- Predominantly freehold ---------------- Total rent passing Â£94.3m pa, British Land's share Â£77.5m pa ---------------- Average rent Â£16.17 per sq ft ---------------- Weighted average lease term including breaks 16 years, to expiry 16.5 years ---------------- The Kingston Centre, Kingston, Milton Keynes (50% owned in joint venture) The Kingston Centre occupies a freehold 14 hectare (35acre) site, close to junctions 13and 14 of the M1 motorway and provides a total of 22,500 sq m (242,000 sq ft) of open A1 retail space. The Centre includes a 12,670 sq m (136,400 sq ft) Tesco Extra superstore with a petrol filling station and five retail warehouses totalling 7,100 sq m (76,500 sq ft). There is a covered shopping mall with 12 units totalling a further 850sq m (9,200 sq ft), a drive-thru McDonalds, a pub and a car showroom. Tesco has an overriding lease covering the superstore and mall units. A further unit is in the course of construction for Next. Planning consent exists for a further retail warehouse unit which is under offer. The total current rent is Â£5.0 million per annum. Orbital Shopping Park, Swindon This retail park adjoins a 13,935sqm (150,000 sq ft) Asda superstore and comprises 18,650 sq m (200,700 sq ft) in 6retail warehouse units and 7 shop units, together with a health club. Rental income is Â£3.6 million per annum. The Beehive Centre, Coldhams Lane, Cambridge The site extends to 7 hectares (17 acres) in an area where major retailers are represented. Accommodation includes 14 non-food retail units totalling 14,600 sq m (156,900sqft) and a supermarket of 6,500 sq m (70,000sq ft) let to Asda. Rental income is Â£4.3 million per annum. Castle Vale Retail Park, Birmingham This scheme, close to junction 5 of the M6 motorway, is anchored by a 7,430 sq m (80,000 sq ft) Sainsbury store, with five non-food units, together 17,000 sq m (183,000sqft) with open A1 planning consent. Rental income is Â£2.8 million per annum. Regent's Place, London NW1 ---------------- Value Â£547m This thriving West End business quarter has a major Euston Road frontage and excellent transport links. Passing rents fell from Â£28.9 million to Â£28.5 million per annum over the course of the year, principally as a result of the pre-agreed surrender of the University of Westminster lease in preparation for the further redevelopment of the North East Quadrant. During the year, the letting of a further 4,740 sq m (51,000 sq ft) in 350 Euston Road to the General Medical Council was completed at a rent equating to Â£39.00 per sq ft pa, and the last available office floor in 350 Euston Road of 1,440sq m (15,500 sq ft) was let to Balfour Beatty at a rent equating to Â£39.50 per sq ft. As a result of these lettings, the offices at Regent's Place are now 100% let and the passing rent of Â£28.5 million per annum is forecast to increase to Â£31.1 million per annum by July 2007 as rent free periods expire. Retail offers within Regent's Place enhance the estate, including a Sainsbury's convenience supermarket, Holmes Place Health Club, Starbucks and Pret a Manger, a Davy's wine bar, hairdressers and a large creche. 350Euston Road incorporates further retail units which are available for letting to a mix of tenants. Based on the Regent's Place Travel Plan, the transport initiatives at Regent's Place are featured in Government best practice guidance documents on travel plans. Triton Square, a large public open space in the heart of ---------------- Regent's Place, with a diverse collection of art, has recently won a Civic Trust Award. Broadgate Estates Limited continues to manage the external and common areas. 114,100 sq m (1.3m sq ft) office, retail, leisure and residential accommodation ---------------- 4.2 hectare (10.4 acre) site, West End of London ---------------- Close to Euston mainline and 4 underground stations ---------------- 2.0 hectares (4.9 acres) for further development at the North-East quadrant and site to the West of the estate ---------------- Community website www.vicinitee.com ---------------- Tenants include: ---------------- Abbey ---------------- Atos Origin ---------------- Balfour Beatty ---------------- Capital One ---------------- Elexon ---------------- General Medical Council ---------------- HM Government ---------------- Hodder Headline ---------------- JP Morgan Chase Bank ---------------- WS Atkins ---------------- Mainly freehold ---------------- 100% owned ---------------- Rent passing Â£28.5m pa ---------------- Average office passing rent Â£33.57 per sq ft ---------------- Weighted average lease term including breaks 11.0 years, to expiry 14.0 years ---------------- Plantation Place, London EC3 ---------------- Value Â£499m The Plantation Place Estate includes two newly completed office buildings: Plantation Place and Plantation South located on a strategic site in the centre of the insurance district of the City of London. Plantation Place is the larger of the two buildings, with 48,150 sq m (518,000 sq ft) of office and ancillary accommodation and a further 2,200 sq m (24,000 sq ft) of retail accommodation. It was completed to shell and core in April 2005. The office accommodation is fully let to Accenture, Wachovia Bank, Aspen Re and Royal & SunAlliance. All but three of the retail units (650sqm/7,000 sq ft) are also let to a range of first class high street retailers, restaurants and bars, such as Next, Molton Brown, Ernest Jones and Chez Gerard. Passing rents will rise to Â£26.6 million per annum by November 2007 on expiry of rent free periods. Plantation Place South comprises 14,670 sq m (158,000sq ft) ---------------- of office and ancillary accommodation and a further 280sqm (3,000 sq ft) of retail space. It was completed to shell and core in the summer of 2004 and brought to the market in the autumn. The retail unit has been let to Davy's wine bar whilst the office accommodation is currently available for letting. 65,300 sq m (703,000 sq ft) offices and retail accommodation ---------------- 1.0 hectare (2.4 acre) site in the City of London ---------------- Close to Fenchurch Street and Cannon Street mainline stations and six tube stations ---------------- Tenants include: ---------------- Accenture ---------------- Aspen Re ---------------- Chez Gerard (Bertorellis) ---------------- Davy's Wine Bar ---------------- Ernest Jones ---------------- Lady of Leisure ---------------- Molton Brown ---------------- Next ---------------- Royal and SunAlliance ---------------- Wachovia Bank NA ---------------- Freehold ---------------- 100% owned ---------------- Rent passing Â£1.7m pa ---------------- Contracted rents Â£26.7m pa ---------------- Average office passing rent Â£52.05 per sq ft ---------------- Weighted average lease term including breaks 20.6 years, to expiry 21.4 years ---------------- In-Town Retail Portfolio ---------------- Value Â£2,813m This portfolio includes shopping centres, department stores and high street shops in selected locations in major towns and cities. Purchases this year have added the Debenhams stores and two shopping centres in Slough. British Land's share Queensmere and Observatory Shopping Centres, Slough Â£2,187m Two adjoining freehold covered shopping malls comprising the major part of the retail centre of the town, acquired in October 2004. Queensmere links with an existing 7,430 sq m (80,000 sq ft) Debenhams department store on the High Street. The Queensmere centre was built in 1970; extended in 1986 and 1999; and refurbished in 1996. The scheme comprises 83 units, in total 32,500 sq m (350,000 sq ft), and benefits from 700 car parking spaces. In addition to Debenhams, tenants include Littlewoods, Woolworths, New Look, HMV, H&M and Virgin. Although not within the ownership, Marks & Spencer also links into the scheme. The Observatory was built in two phases in 1989 and 1991. It comprises: 52 retail units in 17,400 sq m (187,000sq ft); a health and fitness club; and 840 car parking spaces. Major tenants include TK Maxx, Top Shop and Argos. Eastgate Shopping Centre, Basildon A freehold covered shopping mall that constitutes a major part of the town centre. Eastgate was built in two phases in 1980 and 1985 and refurbished in 1994. In addition to over 65,030 sq m (700,000 sq ft) of retail space there are three blocks of offices totalling 11,800 sq m (127,000 sq ft) and 1,000 car parking spaces. The centre has benefited from the arrival of ASDA Wal-Mart and more recently Debenhams as anchor tenants (the latter taking over from Allders). Other major tenants include Primark, New Look, Next, HMV and TK Maxx. A 360 seat food court is proving very successful. We are members of the Basildon Renaissance Partnership, ---------------- one of whose aims is regeneration of the town centre under the auspices of the Government's Thames Gateway project. 10 Shopping Centres 418,060 sq m (4.5m sq ft) ---------------- 39 Department Stores 554,150 sq m (5.9m sq ft) ---------------- 91 High Street Shops ---------------- 16 Supermarkets 27,760 sq m (298,800 sq ft) ---------------- Major Tenants: ---------------- Debenhams ---------------- House of Fraser ---------------- Miss Selfridge ---------------- New Look ---------------- Next ---------------- Primark ---------------- Somerfield ---------------- Predominantly freehold ---------------- Total rent passing Â£156.8m pa, British Land's share Â£119.5m pa ---------------- Weighted average lease term including breaks 19.1 years, to expiry 20.0 years ---------------- The Peacocks Centre, Woking A long-leasehold covered shopping mall of 29,730 sq m (320,000 sq ft) on three levels. Completed in 1992, the scheme is the prime retail destination in the town. There is a direct link to the theatre and multi-screen cinema complex, and parking for 2,500 cars. Debenhams have recently taken over from Allders as the centre's principal anchor and tenant's among the 77 other units include Marks & Spencer, Miss Selfridge, Next, Primark. TK Maxx and Woolworths. A newly created 1,300 sq m (14,000 sq ft) unit has recently been let to New Look and all public facilities adjacent to the food court, an important element in the Centre's appeal, have been upgraded. East Kilbride Shopping Centre, Scotland We have a 50% ownership of The Scottish Retail Property Limited Partnership, a joint venture with Land Securities. Following further acquisitions this year, the Partnership owns and manages the six principal malls forming the East Kilbride Shopping Centre as an integrated shopping destination, providing virtually all of the retail facilities in the town centre. The principal anchor is Debenhams, with many other major multiple retailers represented in the 240units. The investment, including adjacent offices, comprises over 130,000 sq m (1.4 million sq ft). Bon Accord and St Nicholas Centre, Aberdeen The Scottish Retail Property Limited Partnership also owns these prime shopping malls in the principal retail centre for north-east Scotland, providing more than 80retail units with leisure and office facilities. A master plan is being developed to explore how to integrate the malls to provide a dominant, modern retail environment. Through two joint venture companies we have 50% ownership of four shopping centres that are all anchored by Tesco superstores: Serpentine Green Shopping Centre, Hampton, Peterborough; Weston Favell Shopping Centre, Northampton; Beaumont Leys Shopping Centre, Leicester; Lisnagelvin Shopping Centre, Londonderry. Serpentine Green Shopping Centre, Hampton, Peterborough is a freehold covered centre with a 12,080sq m (130,000 sq ft) Tesco Extra plus 26 retail units totalling 15,610 sq m (168,000 sq ft). Other tenants include Boots, H& M, New Look, Gap, Next and WH Smith. There is a dedicated catering area, petrol station and 2,100 car parking spaces. Department Stores We are now investors in 39 department stores, 27 owned directly and 12 owned within the BL Fraser joint venture. In March 2005, we invested in 23 Debenhams stores subject to leasebacks to Debenhams for a minimum of 24years unexpired. In total there is 304,720 sq m (3.28million sq ft) and locations include the flagship store in London's Oxford Street (34,070 sq m/366,700 sq ft); Market Street, Manchester (43,290 sq m/466,000 sq ft) and St Davids, Cardiff (13,010 sq m/140,000 sq ft). The total annual rent passing is approximately Â£28 million. The leases provide for minimum 2.5% per annum indexed rental increases as well as the opportunity for five-yearly open market reviews from 2019 onwards. In a separate transaction, the 12,910 sq m (139,000 sq ft) former Allders store at Arding & Hobbs, Clapham Junction was acquired subject to a 25 year leaseback to Debenhams at Â£1.25 million per annum initial rent. The lease also provides for 2.5% per annum minimum rental increases and five-yearly open market rent reviews from 2015. The 12 stores within the BL Fraser joint venture comprise a total of approximately 81,750 sq m/880,000 sq ft in locations including Cardiff, Guildford and Leeds. All are let on leases to House of Fraser with approximately 34years unexpired. The aggregate rent passing of approximately Â£14 million per annum is subject to open market review in 2009, when a minimum rent based on 3% per annum indexation applies, and five-yearly thereafter. Separately but on similar lease terms, the company owns 100% the 46,450 sq m (500,000 sq ft) House of Fraser store in Corporation Street, Birmingham. High Street Shops The majority are owned 100% and are located in prime retail positions throughout the UK. The 17 held within the BL Davidson joint venture are located within London. 68% by value is located within a Top 20 Centre as defined by retail consultants CACI Limited. In-Town Supermarkets 16 stores mainly located in smaller, market towns and all except one are let to Somerfield. DEVELOPMENT PROGRAMME -------------- ---------- -------- ------ ------- -------- Committed projects Sector PC1 Sq ft % Let Income 000 by rent Contracted 51 Lime Street City office Q4 2006/ 475 99 21.0 Q1 2007 The York Building, W1 W/E office Q4 2006 138 - - Daventry (Plot E4 & Distribution Q2/4 2005 1,050 100 2.5 C1) Blythe Valley (Plot Business Q4 2005 53 - - A1) Park -------- ------ ------- --------- -------------- ---------- 1,716 75 23.5 -------------- ---------- -------- ------ ------- --------- 1 anticipated practical completion of construction Based on Group and 50% share of JVs (except areas which are at 100%) Committed Projects Valuation Costs Current Costs Notional Current valuation + Net BL Share at start to date Valuation to complete Interest to PC1 cost to complete + Income (March '05) Interest / ERV2 Â£m 60 57 128 217 20 365 31 1 estimated interest to practical completion, at 6.25% per annum, excludes allowances for rent free periods 2 current estimated headline annual rent 51 Lime Street, EC3. In November 2004 we announced that the Company had exchanged a binding agreement with Willis Group, the leading risk management and insurance intermediate, for a new development at 51 Lime Street. This will comprise two buildings designed by Foster and Partners. Willis is to take the entire office content of the buildings totalling 43,200 sq m (465,000 sq ft) on 25-year leases without breaks or take-backs of existing accommodation. The new headquarters offices will enable Willis to bring all its London based operations. In March 2005 the Company secured revised planning approval for the development and construction work has now started on site with a target completion to enable Willis to take occupation in 2007. Construction Cost : Â£191m Lettable Area : 43,200 sq m (465,000 sq ft) Office 920 sq m (10,000 sq ft) Retail/Storage Site Area : 1.24 acres Tenure : Freehold Ownership : 100% owned ERV : Â£21.3 pa Prelettings : 43,200 sq m (465,000 sq ft) to Willis Group The York Building, London, W1. Following demolition in April 2005 of the former York House, construction of the new building, to be known as The York Building, has commenced. Completion is programmed for the fourth quarter of 2006 to provide 8,630 sq m (92,900 sq ft) of efficient and adaptable office accommodation on a generous floorplate, taking advantage of its imposing island site close to Marble Arch. West End buildings such as this, offering corporate presence, operating efficiencies and contemporary architectural style, are rare. In addition to the offices there will be 1,780 sq m (19,200 sq ft) of retail leisure space and 22 high quality residential apartments. Construction Cost : Â£55m Lettable Area : 8,630 sq m (92,900 sq ft) Office 1,780 sq m (19,200 sq ft) Retail/Leisure 2,420 sq m (26,000 sq ft) Residential Site Area : 0.7 acres Tenure : Geared long leasehold Ownership : 100% owned ERV : Â£6.6m pa Blythe Valley Park, Solihull. Construction has begun of two speculative, high quality flexible, 2 storey office buildings measuring 4,920 sq m (52,950 sq ft) in total at the successful 170 acre Blythe Valley Business Park, which includes an 87 acre Countryside Park. Completion is targeted for the 4th Quarter of 2005 to meet an improving occupational market. Construction Cost : Â£9m Lettable Area : 4,920 sq m (52,950 sq ft) Site Area : 3.1 acres Tenure : Freehold Ownership : 100% owned ERV : Â£1.0m pa Daventry International Rail Freight Terminal (DIRFT), Daventry. Following acquisition of this 74-acre site in joint venture with Rosemound Developments in March 2004, BL Rosemound has entered into pre-lettings for some 97,560 sq m (1,050,000 sq ft) of distribution warehouse accommodation with Tesco Stores Ltd and Exel Europe Limited. The two buildings are scheduled for completion in October and May 2005 respectively. Forward commitments to sell have been entered into on both buildings at a significant surplus to cost. Construction Cost : Â£38m Lettable Area : 97,560 sq m (1,050,000 sq ft) Site Area : 59 acres Tenure : Freehold Ownership : 50% Joint venture ERV : Â£5.0m pa Prelettings : 750,000 sq ft to Tesco Stores Limited 300,000 sq ft to Exel Europe Limited -------------------------------------------- Development prospects Project Sector Sq ft ,000 Cost Â£m1 Planning ------------ ----------- -------- -------- ------------- 201 Bishopsgate City office 836 279 Revised submitted The Leadenhall City office 601 270 Detailed Building Regent's Place West End 1,036 370 Osnaburgh submitted office/ NEQ pending Residential Ludgate West West End office 123 47 Detailed Blythe Valley Park Business Park 751 115 Outline/Detailed New Century Park Business Park 657 88 Outline /Distribution Meadowhall Casino Leisure 409 124 Pending Theale Residential 254 46 Submitted Daventry (BLR) Distribution 335 5 Outline Redditch (BLG) Distribution 227 4 Detailed ------------ ----------- -------- -------- ------------- Total 5,229 1,348 ------------ ----------- -------- -------- ------------- 1 estimated costs of construction excluding land and interest costs Based on Group and 50% share of JVs (except areas which are at 100%) Development Prospects Costs to date Current Valuation Costs to complete1 Current valuation Net Income + cost to complete /ERV 2 BL Share 27 286 1321 1607 151 Â£m 1 excluding interest 2 current estimated headline annual rent The Leadenhall Building, EC3. A detailed planning consent has been obtained for the new 47-storey tower at 122 Leadenhall Street. Designed by Richard Rogers Partnership the new building will rise to 224 m (736 ft) and provide 55,830 sq m (601,000 sq ft) of office accommodation. The offices have been designed to give a range of floor sizes but all providing highly practical, useable space. The spectacular scale of the public space at the base of the building, featuring mature trees, shops, cafes and performance areas, would be unprecedented in the City. The existing building on the site is presently held as an income producing investment and a decision to proceed with redevelopment will be taken when circumstances are favourable. Construction Cost : Â£270m Lettable Area : 55,830 sq m (601,000 sq ft) Site Area : 0.86 acres Tenure : Freehold Ownership : 100% owned ERV : Â£29m pa Broadgate Tower & 201 Bishopsgate, EC2. Although we have planning consent for 201 Bishopsgate our view is that it will be advantageous to offer a wider choice to potential occupiers, so we have submitted a revised planning application to the City Corporation for a larger development comprising two buildings totalling 77,630 sq m (836,000 sq ft). The 35-storey tower and adjoining 13-storey building are both designed by the Chicago office of architects Skidmore Owings & Merrill (SOM) and have been meticulously researched to meet the needs of both financial and professional occupiers. The two buildings will form the next phase of Broadgate and will be centred around a new piazza and galleria. Construction Cost : Â£279m Lettable Area : 77,630 sq m (836,000 sq ft) Site Area : 2.3 acres Tenure : Long leasehold Ownership : 100% owned ERV : Â£36m pa Ludgate West, EC4. The next phase of the successful Ludgate development, Ludgate West, will provide 11,470 sq m (123,450 sq ft) of offices with ancillary retail. Designed by SOM the new building will front both Fleet Place and Farringdon Street. Demolition and site clearance has been completed and substructure works commenced pending a decision to proceed with full construction. Construction Cost : Â£47m Lettable Area : 11,470 sq m (123,450 sq ft) Site Area : 0.45 acres Tenure : Freehold Ownership : 100% owned ERV : Â£5m pa Regent's Place, NW1. Regent's Place is now an established West End business location offering a mix of high quality offices, shops, health club, cafes and bars. The lively public spaces are attractively designed and landscaped and feature especially commissioned works by leading modern artists. A detailed planning application has been submitted for 36,600 sq m (394,000 sq ft) of offices and 10,980 sq m (118,200 sq ft) of residential accommodation for the west side of the estate, in partnership with the Crown Estate. Detailed negotiations are underway with the London Borough of Camden planning department. On the northeast quarter (NEQ) of the estate our active programme is preparing the way for a further phase of development for 32,680 sq m (352,000 sq ft) of offices and 15,940 sq m (171,500 sq ft) of residential. A planning application will be submitted later in the year. Construction Cost : Â£370m Lettable Area : 69,280 sq m (746,000 sq ft) Commercial 26,920 sq m (290,000 sq ft) Residential Site Area : 15 acres Tenure : Freehold / long leasehold Ownership : 100% owned Development agreement with Crown ERV : Â£32m pa - Commercial floor space only Blythe Valley Park, Solihull. Considerable potential remains at Blythe Valley Park for new development. Outline planning consent is in place for up to 111,500 sq m (1.2m sq ft) of office accommodation across the park. Individual plots will be brought forward for development to meet market demand. The results of the recently published inspectors' report into the Solihull UDP give support to the release of further land for development and an expansion of the Business Park. Construction Cost : Â£115m Lettable Area : 69,790 sq m (751,000 sq ft) Site Area : 47 acres Tenure : Freehold Ownership : 100% owned Development Agreement with Solihull Council ERV : Â£15m pa New Century Park, Coventry. This site of 67 developable acres is substantially let to Marconi Corporation. The Company entered into negotiations with Marconi to develop a new headquarters facility on part of the site and a resolution to grant detailed planning consent was obtained. Discussions with Marconi are ongoing in the light of its current trading position. Opportunities for further development at the site are being pursued whilst maintaining the current income stream. Construction Cost : Â£88m Lettable Area : 61,070 sq m (657,000 sq ft) Site Area : 67 acres developable Tenure : Freehold Ownership : 100% owned ERV : Â£9m pa In addition to the Company's significant commercial development pipeline, we are actively pursuing a number of residential led mixed-use projects. At Canada Water, in joint venture with Canada Quays Ltd, the Company has entered into a Development Agreement with the London Borough of Southwark for the development of a major mixed-use scheme, which includes masterplanning 40 acres on the Rotherhithe Peninsula. The Company aims to submit a planning application later this year. In Sheffield, the Company is continuing to work closely with Sheffield City Council on the strategic masterplanning of the Lower Don Valley and the lands surrounding Meadowhall Shopping Centre. Working with Countryside Properties, we are continuing to pursue a residential planning consent at Theale. A detailed planning application has been submitted and negotiations with the local planning authority are being actively progressed. JOINT VENTURES Introduction British Land's net investment in joint ventures is Â£804 million (2004: Â£658 million) at 31 March 2005. This investment is principally in 12 (2004: 12) active joint ventures which hold Â£2.7 billion (2004: Â£2.4 billion) of properties in retail, offices and development. The joint ventures are financed by Â£496 million (2004: Â£530 million) of external debt, without recourse to British Land. British Land has proven its sustained ability to work constructively with other major companies, and its reputation enables it to continue to attract new ventures. Joint venture model All British Land's joint ventures share a common framework: â€¢ a separate entity formed to own property; â€¢ the joint venture entity is controlled on a 50:50 basis by a board on which each partner is equally represented (with no casting votes); â€¢ established with a specific term, at the expiry of which, unless otherwise agreed, it will terminate in accordance with the terms agreed at the outset (with additional provisions for early termination if the partners reach deadlock); and â€¢ funding is by a varying combination of equity and subordinated loans (which enable income to be received gross) from the two joint venture partners and external debt. Joint venture rationale Joint ventures benefit British Land because: â€¢ they have provided access to desirable properties that were not on the market; â€¢ they enhance relationships and negotiations with tenants across a greater number of locations; â€¢ they are able to raise finance on the strength of their own balance sheets with minimal or no support from either partner, thereby significantly lowering the initial equity investments and enhancing the returns on capital; â€¢ they restrict the risks associated with a specific property investment or development by sharing the project with a partner; and â€¢ British Land earns fees from services provided to joint ventures. Joint venture activity Key activities since April 2004 were: â€¢ the sale in February 2005 of the Bristol store by BL Fraser Limited, significantly above valuation, with Â£26 million being returned to the shareholders from the proceeds; â€¢ the refinancing in February 2005 of Tesco BL Holdings Limited which resulted in over Â£100 million being returned to the shareholders; â€¢ the refinancing in April 2005 of The Scottish Retail Property Limited Partnership, joint venture with Land Securities Group PLC, with Â£430 million raised by way of a seven year securitisation, most of which was returned to the joint venture partners; â€¢ The Public House Company continued with its programme of auction sales, in which 17 public houses were profitably sold in the year, raising Â£22 million; â€¢ the acquisition by British Land of the outstanding 50% interest in the four BL West joint venture companies for Â£50 million (and the repayment of these companies' debt) in April 2005. Summary of British Land's share in joint ventures 2005 2004 Change Â£m Â£m Â£m Profit and loss account Gross rental income 73.4 78.9 (5.5) ---------------------------- ------ ------ ------- Operating profit 67.7 67.5 0.2 Disposal of fixed assets 8.1 7.4 0.7 Net interest - external (32.3) (40.0) 7.7 Net interest - shareholders (3.2) (6.6) 3.4 ---------------------------- ------ ------ ------- Profit before tax 40.3 28.3 12.0 ---------------------------- ------ ------ ------- Balance sheet Gross assets 1,444.9 1,299.8 145.1 Gross liabilities (640.9) (641.6) 0.7 ---------------------------- ------- ------- ------- Net investment 804.0 658.2 145.8 ---------------------------- ------- ------- ------- Number of active joint ventures 12 12 ---------------------------- ------- ------- ------- The Scottish Retail Property Limited Partnership JV Partner: Land Securities Group PLC Date Established: March 2004 Portfolio value: Â£605m, comprising shopping centres in Aberdeen and East Kilbride Annualised net rent: Â£33m Finance: Â£430m raised in April 2005, without recourse to the joint venture parties Value of British Land net investment: Â£301m The joint venture properties comprise over 130,060 sq m (1.4 million sq ft) of retail space in major shopping centres: The St Nicholas and Bon Accord Centre, Aberdeen and the East Kilbride shopping centre. The Partnership provides benefits of scale and enables the partners to maximise the long-term value of the centres. During the year the Partnership has acquired further strategic interests at East Kilbride such that the six principal malls are now managed and operated as an integrated shopping destination, providing almost all of the retail for the town centre of East Kilbride. Following the year end, the joint venture raised Â£430 million though a seven year securitisation. Joint ventures with Tesco PLC British Land has three joint ventures with Tesco PLC, which together own Â£923 million of retail properties, comprising 13 superstores, four retail parks and four shopping centres, anchored by Tesco stores. BLT Properties JV Partner: Tesco PLC Date Established: November 1996 Portfolio value: Â£283m, comprising two retail parks and eight Tesco superstores Annualised net rent: Â£15m Finance: Â£185m loan provided by a syndicate of banks, without recourse to the joint venture partners Value of British Land net investment: Â£58m One of the first joint ventures, BLT has been active in extending the properties, making capital contributions to the cost of further development and achieving increases in rental income. During the year, the joint venture completed the funding of a 1,000 sq m (10,800 sq ft) extension at Formby and four other stores within the portfolio are being planned for extension, including mezzanine floor levels, or redevelopment in the next few years. In November 2003, when the joint venture reached the end of its initial contracted term, it was renewed for a further seven year term and refinanced. Tesco BL Holdings JV Partner: Tesco PLC Date Established: November 1999 Portfolio value: Â£491m, comprising two retail parks and two shopping centres each anchored by Tesco, and five Tesco supermarkets Annualised net rent: Â£26m Finance: Â£315m loan provided by a syndicate of banks, without recourse to the joint venture partners Value of British Land net investment: Â£92m This joint venture was established to acquire nine properties from The Tesco British Land Property Partnership in November 1999. During the year the joint venture has successfully negotiated the surrender of the Focus unit at The Kingston Centre, Milton Keynes, which has been pre-let to Marks and Spencer. These transactions have increased the income to the joint venture and raised the overall rental value of the property. Next PLC have also signed an agreement to lease to move into a new unit at The Kingston Centre, which will enhance the Centre's retail offer. The rent review of the Tesco store at the Serpentine Green Centre, Peterborough has been settled at a level of Â£23 per sq ft, representing one of the highest superstore rents achieved to date. In February 2005 the joint venture was refinanced with a new Â£315 million loan, provided by a syndicate of banks led by WestLB and without recourse to the joint venture shareholders. This loan repaid the Â£200 million outstanding loan and returned over Â£100 million to the shareholders. Tesco British Land Property Partnership JV Partner: Tesco PLC Date Established: February 1998 Portfolio value: Â£149m, being two district shopping centres anchored by Tesco Annualised net rent: Â£10m Finance: Â£87m loan, with recourse only to the partnership assets Value of British Land net investment: Â£26m The partnership with Tesco was originally established to acquire 12 retail properties from the partners, and in November 1999 it sold nine properties to the newly formed Tesco BL Holdings, retaining three properties, one of which was sold in 2001. During the year the partnership settled both of the main Tesco store rent reviews at Weston Favell, Northampton and Beaumont Leys, Leicester. The partnership has developed and let a new unit to Wilkinson of 2,800 sq m (30,000 sq ft) and has recently agreed terms with Next PLC who will take a 930 sq m (10,000 sq ft) store in a prominent position at Beaumont Leys. BL Davidson JV Partner: Manny Davidson, his family and family trusts Date Established: September 2001 Portfolio value: Â£616m, comprising circa 70 properties, principally retail warehouses Annualised net rent: Â£33m Finance: Â£114m loan facilities provided by Royal Bank of Scotland, without recourse to the joint venture partners. The joint venture subsidiaries also have debentures of Â£115m, and other smaller bank loans. Value of British Land net investment: Â£166m This joint venture was established to acquire Asda Property Holdings plc, which owned a portfolio of properties, principally retail warehousing and Central London offices. During the year, BL Davidson purchased Harris Ventures' half share of the Retail Warehouse Company joint venture, containing four high quality retail parks and a new industrial and warehouse development, together valued at Â£122m. BL Fraser JV Partner: House of Fraser PLC Date Established: July 1999 Portfolio value: Â£286m, comprising 13 department stores Annualised net rent: Â£14m Finance: Â£138m loan provided by a syndicate of banks, without recourse to the joint venture partners Value of British Land net investment: Â£72m This joint venture was established to acquire and leaseback 15 House of Fraser freehold and long leasehold department stores, mostly in major provincial towns and cities. The joint venture has purchased a further store in Bristol from Bentalls, funded a significant redevelopment of the Guildford store, and profitably sold the stores in Doncaster, Perth and Darlington. In February 2005, the store in Bristol was sold at well above valuation, with funds totalling Â£26 million returned to the shareholders. All properties are let on 40 year full repairing and insuring leases to House of Fraser with minimum guaranteed uplifts for each of the first two 5-yearly rent reviews, based on the higher of 3% per annum uplift (since 1999) or open market value. BL West companies JV Partners: WestLB, WestImmo and Provinzial (together 50%) Date Established: September 2000 Portfolio value: Â£181m, comprising two city office buildings Annualised net rent: Â£13m Finance: Â£108m bank loan provided by a syndicate, without recourse to the joint venture partners Value of British Land net investment: Â£49m In April 2005 British Land obtained 100% ownership by acquiring the shares of its joint venture partners for Â£50 million and repaying the related debt. We also have joint ventures with: â€¢ Rosemound Developments to develop distribution warehouse accommodation at the Daventry International Rail Freight Terminal; â€¢ Gazeley Properties to develop primarily distribution warehouses at Enfield (now all complete and sold), Redditch and Thatcham; â€¢ Scottish & Newcastle (Public House Company) for the small remaining pubs investment; â€¢ Conran Holdings and Wyndham International (GEH Properties) in respect of the long leasehold interest in the Great Eastern Hotel; â€¢ Solihull Metropolitan Borough Council to provide the Blythe Valley Innovation Centre for start up, technology based businesses; â€¢ The Royal Bank of Scotland plc, established in April 2005, for new residential investments. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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