Final Results - Part One

British Land Co PLC 28 May 2003 28 May 2003 PRELIMINARY ANNOUNCEMENT BY THE BRITISH LAND COMPANY PLC RESULTS FOR THE YEAR ENDED 31 MARCH 2003 â€¢ Net Assets per share rise 7.1% to 860 pence* (2002: 803 pence) on an adjusted diluted basis. Adjusted undiluted net assets per share 884 pence* (2002: 833 pence) â€¢ Net rents up 7.6% to Â£513.3m (2002: Â£476.9m) including additional income resulting from settlement of rent reviews at Broadgate of Â£10.2 million â€¢ Underlying profits, before asset disposals up 14.3% to Â£145.7m (2002: Â£127.5m). Gains from asset disposals, including trading properties, Â£26.7 million (2002: Â£43.8 million) â€¢ Profits before tax Â£172.4m (2002: Â£171.3m) â€¢ Total return (adjusted diluted net asset value per share growth and dividend) for the year 8.8% â€¢ Final dividend up 8.1% to 9.3 pence per share. Total distribution for the year up 8.1% to 13.4 pence (2002: 12.4 pence) â€¢ Portfolio valuation up 0.7% (on a like for like basis) to Â£9,645.6 million â€¢ Property sales Â£612 million, purchases Â£328 million in the year, including the joint ventures â€¢ Convertible Bond redemption and share buy-backs reduce diluted shares by 78.4 million (13.1%) â€¢ Preliminary indications are Â£3 billion of portfolio within Budget's proposed Stamp Duty exemption for disadvantaged areas â€¢ Net assets per share tripled over the last 10 years â€¢ Earnings per share tripled over the last 10 years * adjusted to exclude the capital allowance effects of FRS19 and to include the external valuation surplus on development and trading properties (Note 18) All figures include British Land's share of joint ventures unless stated otherwise. CONTACTS The British Land Company PLC John Ritblat, Chairman ) 020 7467 2831/2829 Graham Roberts, Finance Director ) 020 7467 2948 Finsbury Limited Edward Orlebar ) 020 7251 3801 Faeth Birch ) Portfolio Valuation Group JVs+ Total Portfolio Change* Â£m Â£m Â£m % % Offices City 2,949.4 236.8 3,186.2 33.0 -6.4 West End 575.8 38.2 614.0 6.4 -0.9 Business parks & Provincial 103.9 72.7 176.6 1.8 -0.3 Development 507.5 65.4 572.9 6.0 -11.3 All offices 4,136.6 413.1 4,549.7 47.2 -6.1 Retail Shopping centres 1,739.1 114.5 1,853.6 19.2 3.3 Supermarkets 1,061.8 206.1 1,267.9 13.2 11.0 Retail warehouses 743.1 321.9 1,065.0 11.0 11.7 Shops 89.7 298.3 388.0 4.0 11.7 Development 19.2 0.7 19.9 0.2 2.9 All retail 3,652.9 941.5 4,594.4 47.6 7.9 Industrial and distribution 147.4 17.3 164.7 1.7 5.3 Residential 213.5 2.5 216.0 2.2 4.7 Leisure 76.1 35.6 111.7 1.2 6.6 Other development 9.1 9.1 0.1 Total 8,235.6 1,410.0 9,645.6 100 0.7 + British Land's share * after adjustment for purchases, sales and capital expenditure Total funds under British Land property management over Â£11 billion (after sales of Â£612 million this year) including partners' shares of joint ventures. This involves in excess of 25 million sq ft of commercial space. Profit and Loss Account Year ended Year ended 31 March 2003 31 March 2002 Net rental income Â£513.3m Â£476.9m Net rental income (Group) Â£418.2m Â£386.6m Net interest payable Â£326.4m Â£317.9m Profit on property trading and disposal of fixed assets Â£26.7m Â£43.8m Underlying profit before tax Â£145.7m Â£127.5m Profit before taxation Â£172.4m Â£171.3m Tax charge Â£33.1m Â£11.9m Dividend per share 13.4 pence 12.4 pence STATEMENT BY THE CHAIRMAN, JOHN RITBLAT This was a vintage year. British Land's tried and tested business model achieved record pre-tax profits of Â£172.4 million and our highest ever adjusted diluted net assets of 860p per share, up 57p, a rise of 7.1%. Adjusted undiluted assets per share were up 51p, a rise of 6.1% to 884p. The total return was 8.8%. We are lifting the final dividend by 8.1% to 9.3p per share. Including the interim of 4.1p already paid, the distribution for the full year is also up 8.1% at 13.4p. With reversions of Â£58 million on the investment portfolio still to come plus income from developments, we expect to go on raising dividends, and thus carry forward our existing 24 year record of increasing payouts every year. Net assets per share growth was helped by a combined programme of buying back 30.3 million shares at a cost of Â£130.1 million and of exercising the provision we built in for early redemption of the 6.5% Â£323 million Convertible Bonds 2007 at par. This redemption removed the prospectively dilutive effect of 48.1 million shares due to be issued on conversion. Overall we have thus reduced the number of diluted shares by 78.4 million, that is a cut of 13.1%. We timed our purchases to take advantage of market weakness derived from forced selling, thereby achieving the very beneficial outcome of one of the largest and the cheapest buybacks in the sector. The Portfolio In valuation terms, overall the portfolio was up 0.7%. Quality assets even in sectors under pressure still hold up. While our other City office values are off 8.8%, Broadgate itself has declined only 6.0%. In this context the European Bank for Reconstruction and Development's decision to remain at Broadgate until 2022 is very positive for us. The imminence of the 2006 break clause is reflected in a lower value attributed by our independent valuers as at March 2003. With the break now removed we can look forward to significant accretions in value as both the rent-free period runs off and we enjoy the benefit of the value of the lease extension from 2016 to 2022. The lease remains full repairing, and the building is to be reinstated by the tenant to open space with all partitions removed. The net-of-tax cost of the rent-free is around Â£42 million, and we rather like the marble! At Â£4.6 billion, retail represents some half of the entire portfolio and provided a counterbalance. The retail portfolio shows an overall increase of 7.9%, with department stores being the star performers, up 16.4%. Retail warehouses were up 11.7%. The supermarkets, up another 11%, also added value strongly, and we still believe they are under-rented. Our use of joint ventures, the route we have employed to achieve access to properties that were not on the market, also paid off last year with growth of 4.5% on the Â£2.8 billion joint venture portfolios. Our income is largely provided by rents paid by strong tenants on long leases. The weighted average lease length, assuming all breaks are exercised at the earliest date, is 16 years. We have granted no options to tenants to put back space. Gross rents, including our share of joint ventures, were up 7.3% at Â£551.6 million last year and net rents were up 7.6% at Â£513.3 million. There is no substitute for sustained and rising cash flow, which is of course the basis of property valuation and its attraction to investors. Including joint ventures, property purchases in the year were Â£328 million, with 1 Appold Street being the largest item and completing our 20 year assembly at Broadgate of 4 million sq ft on over 34 acres. Profitable property sales including the joint ventures and only minimal trading were Â£612 million. Specialist Management Our specialist teams have been particularly active in managing their dedicated joint ventures. Reflecting our market views we sold our share of Cherrywood, the development near Dublin. We have made substantial sales in Public House Company, our joint venture with Scottish & Newcastle plc. In BLU, our joint venture with Great Universal Stores plc, we have continued our programme of sales. We also realised all the properties in BL Rank, our joint venture with Rank Group plc. On the other side of the coin we took advantage of opportunities to buy out our partners in 201 Bishopsgate, London EC2 and in the residential company London & Henley. We continue to seek further ventures and will apply the same selective and long-term approach to prospective partners. A Balanced View We are long-term investors in real estate, but we are not in the business of fabricating quarterly firecrackers to suit short-term speculators in the market. The portfolio's performance in the present testing times shows the value of the long view and how important it is to have the right assets - modern, functional buildings of adaptable design for easy updating, situated in locations of enduring appeal to a spread of occupiers. British Land's balanced portfolio provides significant benefits and attractions at a time of economic stress. Fashion is fickle and though it can be made to appear superficially attractive at the time to be focused on whatever sector of the market is in vogue, it is naive - not to mention tax inefficient and costly - to imagine that one can flit between the sectors on a whim. Every building, each parcel of land is different. Good property, once sold, may be impossible to retrieve or replicate - and in a difficult and less liquid market it is often only good property that will attract buyers. We have always been active in the market in pursuit of performance. Over the last 6 years profitable sales have been over Â£3 billion. Property is a long-term business but has stood up well as an asset class while alternatives, and particularly stock markets, have slumped. Development As we announced at the interim stage, we have orchestrated our development programme to suit current market conditions. Last year British Land and its joint ventures completed just under 1 million sq ft at a construction cost of Â£115 million. This space, already 90% let, will yield Â£13 million a year when fully leased. A major element of this completed space was Centre West, the 285,000 sq ft extension to the East Kilbride Shopping Centre in Scotland. Centre West opened in March 2003, on time and on budget, and is already 89% committed. Significant committed transactions now under construction are limited to Plantation Place, London EC3 principally pre-let to Accenture, and the 163,000 sq ft office building at 10 Exchange Square in the middle of Broadgate. Overall we have now spent Â£135 million of the Â£319 million cost, funded from our own resources. Joint venture development sales, primarily at Cherrywood near Dublin, Thatcham and Enfield, have reduced the extent of next stage projects by some 14%. We have also reduced the amount of the Company's capital tied up in non-earning sites to below Â£200 million, only 1.8% of the managed portfolio. We are continuing with preparatory moves on next stage projects, which we are happy to own until we judge the time is right to commence the development. British Land's management ethos is exemplified in its development team. With just 8 executives the largest and most complex of projects are managed highly efficiently. For example at Plantation Place, the office development providing 700,000 sq ft in two buildings, each has been run with a discrete project team. Together, the design phase has involved 5 different firms of consultants using more than 150 people. The construction phase involves 92 contractors with a peak number of people on the sites per day of 550 and with roughly 5,000 people engaged altogether. The steel frame contract for No. 1 Plantation Place specifies the manufacture, delivery and assembly of 9,000 pieces of precision-cut steel weighing 7,000 tonnes in total and requiring over 75,000 man-hours to erect. Active Financial Management The weighted average interest rate on our Â£4.4 billion net debt is improved again at 6.31% with 83% of debt at fixed rates of interest and 64% on terms which restrict lenders' recourse to specified assets only. By raising non-recourse, ring-fenced, securitised debt, the Company can realise value from property without the selling costs, stamp and tax bill that a profitable sale would incur. It also retains all the future growth. The redemption of our 6.5% Â£323 million Convertible saved interest which as planned has mitigated the financing cost of our share buy-back programme. Our share buy-backs in turn brought our mortgage ratio back up to almost 50%, which we regard as comfortable: tax cost is minimised because of deductible interest, our equity capital requirement is kept modest and shareholders gain a higher level of growth per share out of our property performance than if we were less geared. Moreover, the combined market value of our shares and our debt stand at a similar discount to those of our peers. It is rather simplistic to ignore the capital efficiencies which debt provides by taking only the net discount. Tax The 2003 Budget contained some positive proposals for property companies. We expect to gain from the proposed exclusion of disadvantaged areas from Stamp Duty, as some Â£3 billion of our assets, including the Meadowhall and Eastgate Shopping Centres, Stockton-on-Tees Retail Park and Serpentine Green, Peterborough, are expected to be beneficiaries. This is not a real bonus, just a redress of some of the previous retrospective levy. On the other hand, the proposed hike in Stamp Duty on leases can hardly be described as helpful. We are active within our industry, especially through the British Property Federation, in addressing the numerous and highly technical issues which may arise for our tenants. Part of our remit is to research ways to improve the return we can offer to shareholders. The prospect of tax transparent vehicles, also raised in the latest Budget, has clear attractions and if it materialises will be beneficial, and we have made our views known to H.M. Treasury and the Bank of England. Management Initiatives British Land's dispositions for its own portfolio are carried out by specific teams of surveyors and controllers working through our outsourced agents, but there are several other distinctive operational features. The strength of the Meadowhall management team has brought added value to our other shopping centres such as Eastgate in Basildon and East Kilbride in Scotland. We have been able to pool our resources to provide cross-fertilisation of initiatives and enjoy the benefits of scale. Meadowhall has been the focus for our use of the new technologies. GO SHOP's 70,000 cardholders use touch screen kiosks at Meadowhall to take advantage of special offers within the Centre, enabling retailers to target brands to specific groups. The Meadowhall website now has 86,000 hits a day. We have also launched a retailer warehousing and delivery service on site at Meadowhall, the ARC. This enables retailers to consolidate storage, reduce delivery costs and improve stock replenishment and visibility through a data link between their store and the warehouse. We have set up a joint venture company, Comgenic, with our software partners PoulterNet, selling the shopping centre management systems we have developed at Meadowhall to other shopping centre operators here and abroad. Our own specialist building and estate management company, Broadgate Estates, provides services to the Group and to many other clients in Greater London. It is a profit centre in its own right and more than half of its profits come from outside the Group. It was at Broadgate that we launched Vicinitee, a website that offers local information and services to 60,000 desktops at tenants and occupiers. It is now in use at 22 of our City buildings and 6 more at Regent's Place, besides having been sold to landlords of 6 other buildings. Our collaboration with other major property investors continues. We have taken an active position in PISCES, the standardised information exchange for the property industry, in Propex, the on-line property investment market, and in HSO, which provides high speed connections for offices. A Coded Message As I have reported before, we are conforming to the Lease Code, but finding little interest from takers. My previous stated view that market forces rather than the Government can best handle commercial transactions has been reinforced by a recent advertisement in the property press. A nationally known name wants to sell properties it currently owns and lease them back for 25 years - with 5 yearly upward only rent reviews. That is the choice of the prospective tenant, not of the oppressed landlord! Our own very recent transactions with Deutsche Bank at Appold Street and with the European Bank for Reconstruction and Development, both at Broadgate, and both requiring long leases on an upward only rent review basis, show what sophisticated tenants seek to secure. Corporate and Social Responsibility Late last year we published our first Environment and Social Report. Our approach to investment, development and management of property is based on a clear appreciation of the economic environment and social objectives, and the need to take a long-term sustainable view of our operations. Our staff have voluntarily undertaken a variety of projects in their local communities, from helping blind shoppers to teaching English as a second language to staff working in our shops. In March 2003 the Home Secretary, the Rt. Hon. David Blunkett M.P., opened The Source which we have built at Meadowhall. The 34,000 sq ft Source has been welcomed by the local community as it provides employment advice, various forms of training including IT, a gym and other leisure facilities, a creche and a coffee bar. The non-productive element of corporate and social responsibility is filling in those agonising questionnaires! One of the leading institutional inquisitors in this field has 53 pages of questions and 58 pages of notes. Most adopt a "one size fits all" stance so that we, with very few employees, can be statistically compared with multi-nationals employing tens of thousands. It really is time that the various researchers agreed on standard quiz sheets, tailored to differing sizes and types of enterprise, and stopped moving the goalposts every year. Then we could concentrate on performing CSR profitably without the distraction of box-ticking for competing questioners. We actively care for the environment and access for the community and together with our sponsorships have strong empathy for the public good and public art. The new piazza at Regent's Place in particular is exhilarating, with works by modern artists and magnificent lighting effects. Prospects British Land's business model is designed to extract maximum benefit from long-term property investment and development. And our strategy does just that: net assets per share and earnings per share have each tripled over the last 10 years. Because of the nature of property we adopt a long-term horizon, but that involves a myriad of rapid response judgements, through buying and selling and leasing and refurbishing, and transactions to seize advantages wherever and whenever they arise. We are at the mercy of economic wind and tide, and have to make decisions the efficacy of which will show up very clearly in future valuations and performance. The market is cyclical and its pitfalls can be very damaging. We are risk averse and so hedge property risk both by diversifying between sectors and by constructing or selecting well built assets of high quality in good locations, occupied on long leases by a spread of tenants who are themselves strong credits. Risk on the finance side is also tightly controlled. We fix the interest rates on a high proportion of debt, use a range of lenders and have a long average debt maturity. At present the investment market remains strong, as do our assets. The Board believes that shareholders can have every confidence in the Company, and that they hold a fine investment. Corporate Governance Our corporate governance continues to evolve. I stated at the 2002 Annual General Meeting that we would add to the Board, and we are fortunate to have found two exceptional new independent non-executive directors in Dr. Chris Gibson-Smith and Mr. David Michels. We welcome them both. After the AGM we will have a majority of non-executive directors on the Board. Dr. Gibson-Smith is Chairman of National Air Traffic Services Ltd. and a non-executive director of Lloyds TSB Bank plc. Formerly he was Group Managing Director of BP plc. Recently he has been appointed Chairman of the London Stock Exchange. In March 2003 we appointed him Senior Independent Non-Executive Director. Mr. Michels is Chief Executive of Hilton Group plc. He is a non-executive director of Hilton Hotels Corporation and until recently was a non-executive director of Arcadia plc. We have also announced that the Board's Nomination Committee has set out to select a new Chief Executive by the 2004 AGM. Thereafter I will be remaining as Chairman for a period. We are all more than grateful to our colleague and friend, Cyril Metliss, who joined the Board as an executive director in 1971, and stands down at the Annual General Meeting. We will retain in an executive role the benefit of his experience, skill, perseverance and acumen which have served the Company so well over the years. ____________________________ For an Â£11 billion business our Board, executive and staff are not large. More than three quarters work directly at our properties, primarily Meadowhall and Broadgate, with around 150 at Head Office. Especial thanks go to our exceptionally talented and skilled teams. They share in creating a strong spirit and a congenial atmosphere in the Company. Their loyalty, enthusiasm and hard work are a great contribution to our success. FINANCIAL HIGHLIGHTS Profit and Loss Account Year ended Year ended 31 March 2003 31 March 2002 Net rental income Â£513.3m Â£476.9m Net rental income (Group) Â£418.2m Â£386.6m Net interest payable Â£326.4m Â£317.9m Profit on property trading and disposal of fixed assets Â£26.7m Â£43.8m Underlying profit before taxation Â£145.7m Â£127.5m Profit before taxation Â£172.4m Â£171.3m Tax charge Â£33.1m Â£11.9m Adjusted diluted earnings per share 27.1 pence 31.5 pence Diluted earnings per share 26.9 pence 30.2 pence Dividend per share 13.4 pence 12.4 pence Balance Sheet 31 March 2003 31 March 2002 Total properties* Â£9,645.6m Â£9,300.3m Adjusted net assets+ Â£4,318.5m Â£4,320.8m Net assets Â£4,129.3m Â£4,107.9m Adjusted diluted net asset value per share+ 860p 803p Group: Debt / equity ratio 101% 89% Mortgage ratio (debt / property & investments) 49% 46% * Pre adjustments for UITF 28 + Adjusted to exclude the capital allowance effects of FRS 19 and to include the external valuation surplus on development and trading properties Total Return (adjusted diluted net asset value per share growth and dividend) for the year 8.8%. 31 March 2003 31 March 2002 Financing statistics (Group) Net debt Â£4,361.4m Â£3,840.4m - Weighted average debt maturity 18.0 years 19.8 years - Weighted average interest rate 6.31% 6.62% - % of net debt at fixed / capped interest rates 83% 95% - % of debt ringfenced with no recourse to other Group companies/assets 64% 69% Interest cover (net rents / net interest) 1.60x 1.53x Cash and available committed facilities Â£1,635.4m Â£2,286.4m - of which drawn Â£899.0m Â£240.4m All figures include British Land's share of joint ventures unless stated otherwise. FINANCIAL REVIEW â€¢ Adjusted diluted net asset value per share up 7.1% â€¢ Underlying profits before tax up 14.3% â€¢ Net rents, including share of joint ventures up 7.6% â€¢ Progressive dividend - up 8.1% â€¢ Portfolio valuation - up 0.7% â€¢ Total return on adjusted diluted net assets per share for year 8.8% Drivers of Value Our adjusted diluted net asset value per share rose 7.1%. This gain was achieved from three main sources: â€¢ the strong growth in our retail portfolio valuation off-setting falls in the Central London office portfolio; â€¢ strong earnings growth; â€¢ the opportunistic repurchase and cancellation of shares. The length of our leases within the London office portfolio and the strength of the investment market mean that the fall in estimated rental values ('ERVs'), due to reduced tenant demand, does not translate into an equivalent fall in valuation. The long lease profile within the retail sector on the other hand, contributed to its particular attractiveness to investors and the strong growth in demand for department stores and supermarkets resulted in a significant increase in value of the retail portfolio, more than offsetting the fall in Central London offices. Group earnings for the year were boosted by income from settlement of rent reviews and new lettings of Â£24.3 million plus net back rents of Â£4.8 million. Although ERVs in Central London have fallen over the year, the rent reviews concluded at Broadgate were on leases with passing rents substantially below the market rents at the review date so increased rents were still achieved. The opportunistic repurchase and cancellation of 13.1% of the diluted share capital - with Â£323 million of convertibles redeemed in June 2002 and 30.3 million shares bought back between September 2002 and March 2003 at an average price of 429p per share - added 34 pence to the adjusted diluted NAV per share. In practice we have used the returns generated in the year to 31 March 2003 to buy back shares and to fund a dividend increased by 8.1% to 13.4p per share. At the end of the year shareholders' funds remained virtually unchanged at Â£4.3 billion, after adding back the FRS19 capital allowance provision and the external valuation surplus on development and trading properties. An additional piece of symmetry: by redeeming the convertible, the annualised interest we have saved represents 90% of the additional cost of funds used to repurchase shares. Operating performance Gross rental income, including our share of joint ventures, increased by 7.4% (Â£37.8 million) to Â£551.6 million (2002: Â£513.8 million). Properties wholly owned by the Group contributed Â£34.1 million of the increase, whereas our share of joint ventures gross rents grew by Â£3.7 million. Group net rental income increased by 8.2% (Â£31.6 million) to Â£418.2 million (2002: Â£386.6 million) including as a result of rent reviews and new lettings (Â£24.3 million), net back rents (Â£4.8 million) and acquisitions (Â£8.2 million), less reductions from sales of properties (Â£5.6 million). British Land's share of joint venture operating profits rose 4.2% to Â£92.3 million (2002: Â£88.6 million). This is driven by rent reviews and the full year impact of BL Davidson which was acquired in September 2001. Profit before tax increased slightly to Â£172.4 million compared to Â£171.3 million in 2002. Profit before tax in 2002 included a much higher level of profits on disposal of fixed assets and property trading of Â£43.8 million (including Â£25.6 million relating to the disposal of shares in Haslemere N.V.), Â£17.1 million higher than the Â£26.7 million profits achieved in these areas during the year. Excluding these items underlying profits before tax increased by Â£18.2 million (14.3%) to Â£145.7 million (2002: Â£127.5 million). Adjusted earnings per share have decreased to 27.4 pence per share (2002: 32.1 pence per share) and on a diluted basis to 27.1 pence per share (2002: 31.5 pence per share) as a result of the increased tax charge. Earnings per share were 27.2 pence per share (2002: 30.8 pence per share) and on a diluted basis 26.9 pence per share (2002: 30.2 pence per share). Total return on adjusted diluted net assets was 70.4 pence per share representing an 8.8% return for the year. Taxation The Group taxation charge comprises a corporation tax charge of Â£12.4 million, deferred tax of Â£3.1 million and Â£10.6 million attributable to joint ventures, equivalent to a current year charge of 15.1% (2002: 20.8%) compared to a prevailing corporation tax rate of 30%. The charge has been increased by Â£7.0 million in respect of items relating to earlier periods (2002: reduced by Â£23.8 million). The overall charge of Â£33.1 million (2002: Â£11.9 million) represents a tax rate of 19.2% (2002: 6.9%). The tax which would arise on the disposal of properties and investments at the amount at which they are carried in the balance sheet, and including trading and development surpluses is estimated at Â£470 million (2002: Â£510 million), after taking account of available losses and provisions. Adjusted net assets Adjusted net asset value includes the revaluation surplus on trading and development properties and excludes deferred taxes provided on capital allowances where no tax payment is expected to crystallise. Adjusted net asset value decreased only slightly by Â£2.3 million to Â£4,318.5 million during the year in spite of the reduction in share capital. Adjusted net asset value per share (undiluted) grew by 51 pence, an increase of 6.1%, to 884 pence per share. Adjusted diluted net asset value per share increased by 57 pence (7.1%), to 860 pence per share. The key drivers in the increase in adjusted diluted net assets per share included retained earnings (14 pence), revaluation surplus (10 pence), redemption of 6.5% Convertible Bonds 2007 (12 pence) and the purchase and cancellation of ordinary shares (22 pence). Finance and capital structure Approximately 50% of the Group's property value is financed by borrowings. British Land uses debt as a means of maximising equity returns and minimising tax leakage. The Group mortgage ratio at 31 March 2003 was 49% (2002: 46%). The mortgage ratio including joint venture debt (which totals Â£632.0 million of which only Â£12.0 million is with recourse to the Group) is 52% (2002: 50%). British Land uses a variety of methods to finance property assets with the aim of employing the most capital efficient method for each asset's particular characteristics. Financing is raised through a mixture of securitisations, public and private debt issues, convertible bonds and bank borrowings. The Group's financial risk management policy is to maintain approximately 85% of debt at fixed and capped rates with debt taken out under long-term facilities in order to match the Group's income profile from its long lease lengths. These policies concentrate economic exposure to the property market and our portfolio's performance and minimise exposure to short to medium term interest rate movements. The Group borrows using fixed and floating rate debt and uses interest rate derivatives to produce the desired interest rate profile for the Group's finances. At 31 March 2003 net debt is Â£4,361.4 million (2002: Â£3,840.4 million). Securitised debt of Â£2,878.2 million is ringfenced with no recourse for repayment to other Group companies or assets. The joint ventures are separately financed with no recourse to the Group, except for limited guarantees totalling Â£12 million (2002: Â£33 million). The Group's weighted average interest cost has reduced to 6.31%, (2002: 6.62%) reflecting the early redemption of the 6.5% Convertible Bonds 2007 and the increased proportion of cheaper floating rate debt. At 31 March 2003 83% of debt was at fixed or capped rates of interest (2002: 95%) with a weighted average debt maturity of 18.0 years (2002: 19.8 years). Interest cover has increased slightly to 1.60 times (net rents/net interest) (2002: 1.53 times). The market value of net debt and interest rate derivatives (including British Land's share of joint ventures) was Â£527.3 million (before tax relief) greater than their book values. This compares to Â£320.7 million (before tax relief) last year, the increase reflecting the effect of significantly lower gilt yields, and to a lesser extent credit spreads, on the market value of debt issued prior to the start of the year. The Group continues to maintain a significant level of committed undrawn facilities to enable it to rapidly respond to opportunities in the market and to fund developments, without the need for project specific financing. Changes in financing Convertible Bonds On 24 June 2002 the Company redeemed the Â£323 million 6.5% Convertible Bonds 2007 at par eliminating 48.1 million shares which would have been issued on conversion. This redemption contributed 12 pence to the increase in adjusted diluted net assets per share during the year. Securitisations There have been no new securitisations during the year. On 14 April 2003 the Company issued a further Â£50 million of bonds securitising the rental income stream from Meadowhall. This is in addition to the Â£825 million of bonds issued in December 2001. The weighted average interest rate of the total Â£875 million issue is 5.5% and the weighted average maturity is 18 years. The Group has now raised over 80% of the original net purchase price of Meadowhall through these securitisation issues at a competitive interest rate. Purchase and Cancellation of Ordinary Shares The Group purchased and cancelled 30.3 million Ordinary Shares during the year for a consideration of Â£130.1 million at an average price of 429 pence per share out of existing resources. These purchases contributed 22 pence to the increase in adjusted diluted net assets per share during the year. The Group's policy on the purchase of own shares - to do so when the share price is at a level that offers a good, low risk investment opportunity and if we feel buybacks offer better returns than new property investment, or to do so as one means of returning surplus capital should that circumstance arise - remains unchanged after these purchases. Dividends The Directors propose a final dividend of 9.3 pence per share, making a total dividend of 13.4 pence, an increase of 8.1% over 2002. This increase is in line with our continuing policy of dividend growth. The total dividend is covered 2.1 times by profits for the year. Cash Flow Profits after interest, tax and working capital movements, generated a positive operating cash flow for the year of Â£95.0 million (2002: Â£98.8 million). Property disposals by the Group and cash returns from joint ventures realised cash of Â£167.6 million. Investments in properties, subsidiaries and developments amounted to Â£438.2 million. Cash and existing bank facilities were used to fund the Â£323 million redemption of the 6.5% Convertible Bond 2007 and Â£130.1 million purchase and cancellation of ordinary share capital. Accounting Issues There have been no Accounting Standard changes affecting the Group's results during the year. The Group continues to report under the transitional arrangements of Financial Reporting Standard (FRS17) 'Retirements Benefits' following the extension of the transitional arrangements for the full adoption of FRS17 by the Accounting Standards Board (ASB). This extension was made because the International Accounting Standards ('IAS') Board announced that IAS19 'Employee Benefits' is to be revised. The Group plans to adopt IAS19 in its accounts for the year ending 31 March 2006 when it will be required to report under IAS for the first time in line with other UK public companies. The Group's net pension liabilities at 31 March 2003 amount to only 0.1% of adjusted diluted net assets after taking account of the market value of the scheme assets and deferred tax, reflecting the Group's small employee numbers and payroll costs. Implementation of IAS in 2006 will potentially have a material impact on the Group's results. However as a number of major Accounting Standards are scheduled for review before 2006 it is not possible to estimate accurately the likely impact of adopting IAS. These include Standards relating to Financial Instruments and Investment Property which are clearly fundamental to British Land. However, for example, should we be required to recognise financial instruments at market rather than book value in the balance sheet then the adjusted diluted net asset value per share would decrease. By way of illustration, this amounted at 31 March 2003 to 101 pence, calculated in accordance with FRS13 before taking into account any tax relief (or 71 pence if full tax relief is taken into account). In addition, in respect of deferred taxation, IAS requires contingent tax on revaluation of investment properties and investments to be provided in the balance sheet. Recognition of a contingent deferred tax liability on such revaluations in the balance sheet would decrease the Group's adjusted diluted net asset value per share by 90.3 pence (calculated in accordance with FRS19). Offset against the contingent tax should be any negative goodwill, which arises in respect of discounts received against the value of contingent tax in corporate acquisitions. At 31 March 2003 negative goodwill in the Group's balance sheet totalled Â£28.8 million (including our share of negative goodwill in joint ventures), equivalent to 5.5 pence per share (diluted). European Bank for Reconstruction and Development Lease On 16 April 2003 the Group agreed revised lease terms with the European Bank for Reconstruction and Development ('EBRD'), a prime tenant at Broadgate. The revised lease removes EBRD's option to break the lease on this building in 2006 and extends the end of the lease from 2016 to 2022. The revised lease is for an unchanged annual rental of Â£18,975,000 (Â£52.50 per sq ft) with an upward only rent review in December 2006 and then every five years until the end of the lease. In addition EBRD will receive a rent free period of 3 years and 5 months from June 2003. The net present value of the cost to the Group of the rent free period amounts to Â£41.5 million (after tax relief) . In accordance with UITF 28 'Operating Lease Incentives' the cost of the rent free period will be spread in the profit and loss account over the period from June 2003 to December 2011 resulting in an annualised reduction in profit after tax of Â£5.4 million over this period. PORTFOLIO HIGHLIGHTS Portfolio Valuation by Use Group JVs+ Total Portfolio Change* Â£m Â£m Â£m % % Offices City 2,949.4 236.8 3,186.2 33.0 -6.4 West End 575.8 38.2 614.0 6.4 -0.9 Business parks & Provincial 103.9 72.7 176.6 1.8 -0.3 Development 507.5 65.4 572.9 6.0 -11.3 All offices 4,136.6 413.1 4,549.7 47.2 -6.1 Retail Shopping centres 1,739.1 114.5 1,853.6 19.2 3.3 Supermarkets 1,061.8 206.1 1,267.9 13.2 11.0 Retail warehouses 743.1 321.9 1,065.0 11.0 11.7 Shops 89.7 298.3 388.0 4.0 11.7 Development 19.2 0.7 19.9 0.2 2.9 All retail 3,652.9 941.5 4,594.4 47.6 7.9 Industrial and distribution 147.4 17.3 164.7 1.7 5.3 Residential 213.5 2.5 216.0 2.2 4.7 Leisure 76.1 35.6 111.7 1.2 6.6 Other development 9.1 9.1 0.1 Total 8,235.6 1,410.0 9,645.6 100 0.7 + British Land's share * after adjustment for purchases, sales and capital expenditure Total funds under British Land property management over Â£11 billion (after sales of Â£612 million this year) including partners' shares of joint ventures. Portfolio Valuation by Location Total Portfolio Â£m % London: City 3,608.0 37.4 West End 670.0 7.0 Greater London 518.6 5.4 Total London 4,796.6 49.8 South East England 1,023.2 10.6 Wales & South West England 506.2 5.2 Midlands & East Anglia 748.1 7.8 North of England 2,071.5 21.5 Scotland & Northern Ireland 379.3 3.9 Republic of Ireland 120.7 1.2 4,849.0 50.2 Total 9,645.6 100 Long Lease Profile Weighted average lease term, years (excluding residential* & developments) to expiry to first break mean mean median Offices City 14.5 12.2 13.8 West End 12.9 10.7 8.9 Business parks & Provincial 12.7 8.2 5.8 All offices 14.2 11.8 11.5 Retail Shopping centres 19.5 16.6 21.4 Supermarkets 22.5 22.5 21.7 Retail warehouses 17.9 17.7 17.7 Shops 26.2 23.4 22.1 All retail 20.0 19.5 21.0 Industrial and distribution 15.6 15.2 12.9 Leisure 26.6 25.5 19.7 Total 17.4+ 16.1+ 16.3+ * predominantly let on short leases + at 31 March 2003 as adjusted for EBRD lease restructure Vacancy rate only 2.7% of total portfolio ERV. Security of Income - sensitivity analysis % of income remaining at: (from 31 March 2003) expiry first break 5 years 93.8 90.2 10 years 81.2 72.4 15 years 63.9 56.8 includes joint ventures assumes no re-letting after first break or expiry Tenant Risk Profile: British Land TICCS Dun & Bradstreet Stress Score % Benchmark %* Rental income rated: Negligible, low and low / medium risk 88.1 76.2 Medium / high risk 8.1 16.0 High risk 2.2 4.1 Unmatched 1.6 3.7 Total 100 100 * Tenant Income Credit rating Covenant Strength (IPD) Annualised Net Reversionary Current Reversionary Current Reversions Rents Â£m income net yield net yield (5 years) Â£m % (5 years) % (excluding developments) Offices City 199.6 6.5 6.3 6.5 West End 27.3 16.6 4.4 7.2 Business parks & Provincial 15.2 1.0 8.6 9.2 All offices 242.1 24.1 6.1 6.7 Retail Shopping centres 104.7 16.5 5.7 6.5 Supermarkets 79.8 2.1 6.3 6.5 Retail warehouses 62.6 9.6 5.8 6.8 Shops 24.7 2.8 6.4 7.1 All retail 271.8 31.0 5.9 6.6 Industrial and distribution 11.4 2.2 6.9 8.3 Residential 12.9 0.1 6.0 6.0 Leisure 7.6 0.6 6.8 7.3 Total 545.8 58.0 6.0 6.7 Development Programme Size Rent*, pa Construction Cost to (est) cost complete sq m Â£m+ Â£m+ Â£m+ Committed projects 88,940 42.9 319.3 184.6 Development prospects 358,360 104.4 716.6 689.9 Total 447,300 147.3 1,035.9 874.5 * Headline rent + British Land share Further income Contracted Not Contracted Total Â£m Â£m Â£m Annualised net rents, 31 March 2003 545.8 545.8 Reversions, within 5 years 21.6 36.4 58.0 Committed developments 19.4 23.5 42.9 Development prospects 104.4 104.4 Total 586.8 164.3 751.1 PROPERTY REVIEW Sales: Â£612 million during the year With continuing emphasis on quality properties we have pursued our strategy of portfolio review and selection. In a climate of low interest rates and finer yields, we have disposed of properties which have not been expected to meet our performance criteria, taking advantage of buoyant prices being achieved in the investment market. During the year we have completed sales of Â£612 million, including joint ventures and involving 181 properties (excluding residential units). Aggregate sales prices in each class of property, offices, retail, leisure, industrial and residential, have exceeded the relevant March 2002 valuations, in total by some Â£48 million, or 9%. Significant disposals were: â€¢ the BL Rank leisure portfolio of bingo clubs, leisure parks and centres and a cinema, which concluded our sales programme from this joint venture and significantly reduced our investment in the leisure sector; â€¢ the programme of 24 auction sales by the Public House Company and the sale of a portfolio of a further 79 public houses to Scottish & Newcastle; â€¢ 29 retail units with total sales prices of Â£56 million, predominantly in high street locations, from the portfolio and that of the BLU joint venture; â€¢ residential properties totalling some Â£53 million, to capitalise on exceptional prices, particularly in London; â€¢ 2 department stores at Doncaster and Perth (where House of Fraser assigned their lease), the BL Fraser joint venture realising prices well above valuation; â€¢ 2 distribution units at Nursling, Southampton, of 36,700 sq m (395,000 sq ft) for Â£36.7 million, let to Tesco and Christian Salvesen. The premium price achieved reflected the good covenant and low yield in the market, despite limited rental growth prospects for the property; â€¢ sales by BL Davidson of 5 retail parks totalling Â£62 million; â€¢ distribution units at Thatcham and Enfield by BL Gazeley at significant surpluses, which are reported further under Developments below. Since the year end, we have also sold our 50% interest in Cherrywood Properties Limited, which owns a mixed use development near Dublin, to our former joint venture partner, Dunloe Ewart. Purchases: Â£328 million during the year We have selectively added to our balanced portfolio in both the retail and office sectors. Retail acquisitions during the year totalled Â£71 million including: â€¢ Meadowbank Retail Park, Edinburgh, with a total of 13,950 sq m (150,000 sq ft) arranged in 8 retail warehouse units, anchored by a Sainsbury's superstore of 4,050 sq m (43,800 sq ft), plus 2 smaller units and a restaurant; â€¢ Cuckoo Bridge Retail Park, Dumfries, comprising 9 retail warehouse units and a restaurant totalling 11,900 sq m (128,000 sq ft) anchored by a 4,460 sq m (48,000 sq ft) Homebase. Adjoining the park is a site owned by Tesco with planning consent for a store of 5,400 sq m (58,000 sq ft); â€¢ the purchase of the 70% interest in the Sainsbury's superstore at Purley Way, Croydon (where we already owned the 30% interest) and the funding of an extension of 2,050 sq m (22,000 sq ft) to the store. Further acquisitions included: â€¢ the purchase of the virtual freehold interest held by Deutsche Bank at 1 Appold Street, completed the assembly of the entire Broadgate office estate, in the City of London, into our ownership. The offices and ancillary accommodation of 17,200 sq m (185,100 sq ft) are leased back to Deutsche Bank for 15 years without break; â€¢ during the restructuring of Railtrack to form Network Rail, we took the opportunity of buying out Railtrack Development Limited's 50% interest in the joint venture that we had with them in respect of 201 Bishopsgate, London EC2, with a resolution for planning consent for a 69,500 sq m (747,800 sq ft) proposed development. The raft over the railway line had already been completed by the joint venture company, thus eventual construction costs are limited to the structure above ground, â€¢ residential investments through the purchase of FRP Group and our joint venture partner's interest in London & Henley, which each own a portfolio of residential investments primarily in Greater London. These properties, purchased at a total of Â£328 million, have risen in value during the period since acquisition averaging approximately 4 months by Â£45 million. Property Asset Management: annualised net rents up Â£21.2 million Settlement of 317 rent reviews during the year across the portfolio including joint ventures produced an increase in rental income of Â£31.2 million per annum, 34% above the previous passing rent. Further new income of Â£16.5 million per annum was achieved on 84 lease renewals and relettings in the year. In the supermarket portfolio, significant progress continues to be made with rent reviews, resulting in record levels of rent at Chiswick, Â£23.15 per sq ft and Â£23.11 per sq ft at Croydon. The supermarket operators desire for increased trading floor areas (and the restrictive planning regime for new stores) has channelled demand to concentrate on extensions. During the year, 10 extensions with a total of 16,100 sq m (173,000 sq ft) have been added, at a cost of Â£39.6 million and generating additional rents of over Â£2.9 million per annum. Voids in the portfolio remain a very low total of 2.7% by rental value; 0.3% is under offer and 0.1% is the subject of our asset management initiatives, so just 2.3% is vacant where tenants are being sought. Reversionary income from the current investment portfolio is expected to increase rents by Â£58.0 million in the next 5 years, including Â£21.6 million already committed on the expiry of rent free periods and contracted minimum rental uplifts. Further income will be achieved from the development programme, of which Â£19.4 million per annum is committed under a pre-let. Further income Contracted Not Contracted Total Â£m Â£m Â£m Annualised net rents, 31 March 2003 545.8 545.8 Reversions, within 5 years 21.6 36.4 58.0 Committed developments 19.4 23.5 42.9 Development prospects 104.4 104.4 Total 586.8 164.3 751.1 At Broadgate in April 2003, just after the year end, the lease to EBRD of the 34,100 sq m (367,000 sq ft) building at One Exchange Square was restructured. The tenant's break clause in 2006 was removed and the new lease extended from 2016 to December 2022, while the office rent was maintained at Â£18,975,000 (Â£52.50 per sq ft) per annum. Upward only rent reviews are due next in 2006 and every 5 years thereafter. The cost to British Land is a tax efficient 3 years and 5 months nil rent period from June 2003, with a net present value of Â£41.5 million. There are no take backs or other put options. We are pleased to have retained this very good covenant for an extended term at Broadgate. The removal of the tenants' break clause in 2006 will have a positive effect on valuation since the reduction in value which would have occurred as the break in 2006 approached has been avoided. The value of the investment should also increase as the nil rent period runs off. Retail: 48% of the total portfolio by value Our primary retail focus is on out of town which accounts for 80% of the retail portfolio, while the remaining 20% is in high street and town centre shopping schemes. While the rate of increase of total UK retail sales has been slower recently, the level of such sales has continued to grow, at the rate of 4.2% per annum for year to December 2002. Out of town retail has continued to take an increasing share (out of town sales growth in 2002 was 6.4%) benefiting from both consumer preference for this type of shopping experience and the limited supply of such property. These factors have resulted in sustained retailer demand, improved rents and values. The department store properties are performing well. We reported at the interim stage our payment to House of Fraser for major works as part of their refurbishment of the Rackhams store in Birmingham, which produced a substantially increased rent. At Meadowhall we have continued our policy of enhancing tenant mix and have achieved 28 new lettings to excellent retailers, including Zara, Tucci, USC, Elle, Holland & Barrett, The Model Centre, Pumpkin Patch and Sony. Rents achieved on these lettings and the 29 rent reviews completed in the year have been in line with our expectations. Total income has increased over the year by Â£5.6 million per annum to Â£68 million per annum. Visitor numbers have risen marginally over the year while the spend per party, in the off peak June survey and to a greater extent during the peak December survey, has increased considerably on the equivalent period last year. Offices: 47% of the total portfolio by value Central London investments represent 94% of our office portfolio. It is clear that during the year letting activity relating to Central London offices has declined significantly. There have been few transactions, although the recent letting to ICAP, at a rent of Â£48 per sq ft for 9,000 sq m (96,900 sq ft) from Lehman Brothers at Broadgate, is an excellent endorsement of our premier City estate. This transaction also enabled us to amend the headleases relating to the 31,260 sq m (336,000 sq ft) building let to Lehman Brothers under which the tenant pays rent calculated as a percentage of open market rental value. The rent receivable at the rent review will be calculated at 95% of open market rental value (up from 90%). Overall, market take-up in the City for the first quarter of 2003 was still below average. The vacancy level has increased to around 10.8% (end Q1 2003) of City office space and is expected to rise further over the next year or so, as a result of new supply and releases by tenants of existing space. However, given take-up even at the existing low levels, by 2006 the market is predicted to return to a balance of supply and demand and we can then expect rental growth to return. Open market rental values have softened over the year but our income from the Central London office portfolio is generated from long leases with upward only rents from strong covenants. The weighted average lease length of the office portfolio is 11.8 years to first break and 14.2 years to expiry. With upward only rent reviews, rental income can only fall at lease expiries or tenant breaks, thus our long lease profile means that despite rental value falls, capital values are not equivalently adversely affected. Development: adding quality assets to the portfolio Completed projects during the year totalled 91,300 sq m (983,000 sq ft), in our preferred investment sectors of retail and business parks. The 3 largest completions were: â€¢ Centre West, a 26,500 sq m (285,000 sq ft) shopping centre in East Kilbride, adjoining and complementing our existing Plaza Centre. The centre is 89% by area let or under offer and is anchored by a 11,150 sq m (120,000 sq ft) Debenhams department store; â€¢ Mill Park, Thatcham (held in the BL Gazeley joint venture) a 33,060 sq m (356,000 sq ft) distribution centre completed and let to Scottish & Newcastle, now sold creating a significant surplus over cost; â€¢ Delta Park, Enfield (also BL Gazeley) where on completion of a further 23,950 sq m (257,700 sq ft) of distribution units, the substantially let park was sold to Legal & General, again realising a significant surplus over cost. Committed developments now comprise 4 projects, as set out in the table below, all progressing within programme and budget, with remaining costs to complete of Â£184.6 million. Committed Projects, as at 31 March 2003 Project Prime Use Size Rent++ Cost * PC + Pre-lettings sq m (est) pa (est) (sq m) 1 Plantation Accenture Place EC3 Offices 50,150 Â£26.8m Â£201.3m Q2 2004 (34,840) 2 Plantation Place EC3 Offices 14,930 Â£7.4m Â£59.6m Q2 2004 10 Exchange Square EC2 Offices 15,180 Â£7.7m Â£53.2m Q2 2004 Heathrow Gateway Distrib- Phase 3 ution 8,680 Â£1.0m Â£5.2m Q2 2003 Total 88,940 Â£42.9m Â£319.3m Â£19.4m pa (45%) Cost to complete Â£184.6m * Construction cost + Practical completion of construction ++ Headline rent Development prospects are those sites and properties where we have identified opportunities for development and are progressing design and planning stages. As an example, during the year we have reached agreement with the Mayor's office regarding provision of a walkway on the site at 201 Bishopsgate, EC2 and have achieved a resolution to grant an improved planning permission. We will undertake these projects in controlled stages, in line with our strategy of adding quality assets to our investment portfolio, with construction commitments made either on pre-lets or on the basis of anticipated market demand. The sale of our 50% interest in the mixed use development site at Cherrywood, Dublin, has removed a significant element from the programme, although further areas of Regent's Place where master planning is being progressed are now included. Controlled Development Programme, summary Net Area Rent+ Construction cost Cost to As at 31 March 2003 sq m (est) pa Complete Completed Total 91,300 Â£13.1m Â£115.4m - British Land Share Â£10.5m Â£98.2m - Committed Total 88,940 Â£42.9m Â£319.3m Â£184.6m British Land Share Â£42.9m Â£319.3m Â£184.6m Development prospects Total 358,360 Â£114.5m Â£792.7m Â£760.9m British Land Share Â£104.4m Â£716.6m Â£689.9m Total 447,300 Â£157.4m Â£1,112.0m Â£945.5m British Land Share Â£147.3m Â£1,035.9m Â£874.5m + Headline rent Valuation: total portfolio up by 0.7% All the properties owned by British Land and the joint ventures were valued by independent valuers, principally Chartered Surveyors, ATIS REAL Weatheralls. A commentary on the commercial property market by ATIS REAL Weatheralls appears later in this report. The Portfolio, including British Land's share of joint ventures, was valued at Â£9,645.6 million. On a like-for-like basis (after adjustment for purchases, sales and capital expenditure) the Portfolio showed an overall increase in value of 0.7%. Offices, primarily in the City, decreased in value overall by 6.1%, while our retail portfolio performed well, up by 7.9%. Retail warehouse investments increased by 11.7%, shopping centres increased by 3.3%, supermarkets and shops rose by 11.0% and 11.7% respectively. The Chancellor in his 2003 Budget in April gave full unlimited stamp duty relief on properties in defined 'disadvantaged areas'. This may have a beneficial effect on the valuations of such properties, which could be enhanced by up to 4%. Our portfolio will benefit from this change in that significant properties now free from stamp duty include Meadowhall, the Eastgate Centre, Basildon, Teesside Retail Park, Stockton, Serpentine Green, Peterborough and a further 150 properties with a value in the region of Â£3 billion. Our portfolio valuation being dated 31 March 2003 does not take account of this relief. We are already seeing that the benefit of this saving to purchasers is resulting in higher prices being paid. This concession on stamp duty, which required EC approval, is to be reviewed by the EC in 2006. Performance benchmarking 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 provided below relate to 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 total returns British Land* IPD** %pa %pa 10 years to 31 March 2003 12.7 11.9 Year to 31 March 2003 6.8 9.3 Year to 31 March 2002 6.9 6.7 *British Land and share of joint ventures ** IPD December Universe (extrapolated to March 2003) - formerly "IPD All Fund Universe March (unfrozen)" Source: IPD Over the one year period to 31 March 2003 British Land has underperformed the benchmark primarily due to its higher weighting of London office properties compared with the benchmark. British Land's long term ungeared total returns for the ten years to 31 March 2003 have out-performed IPD and place the portfolio's performance in the upper quartile of funds included in the benchmark. Strategy The UK occupational property market over the last year has been categorised by a softening of office rents coupled with some growth in retail rents, more particularly for out of town retail. However, the property investment market saw an increase in demand from investors ranging from high net worth individuals through to property companies and institutions. This has resulted in a downward shift on yields, especially for properties with secure and long income flows. Interest rates remaining low and poor returns from the equities market have contributed to this increase in demand for property investment. Our strategy, combining an emphasis on retail investments and Central London office investments to form a balanced portfolio, coupled with our philosophy of long secure income flows has proved sound; the increase in value of our retail investments has more than compensated for the downturn in value of the Central London offices. The City of London, a principal world financial centre, has excellent long term prospects. We will continue to stress and analyse our property holdings and anticipate further sales in the forthcoming year. We will seek out new acquisitions within our overall investment strategy, being selective and opportunistic across all the sectors and buying only where we perceive true value. ATIS REAL WEATHERALLS - COMMERCIAL PROPERTY MARKET SUMMARY The comments below reflect our views as at 31 March 2003 and underlie our approach to the valuation of the portfolio. General Commercial property has enjoyed another year of strong performance compared to other asset types. This has arisen principally from the high income returns available relative to today's low interest rate environment, combined with capital increases due to yield movements across the retail spectrum where further rental growth is still anticipated. By contrast, over the period leading up to the valuation date, there have been continuing declines in the stock markets, and over a 3, 5 or 10 year view, lack-lustre performance from fixed income investments such as Gilts. Although overall future property investment performance in some areas is forecast to be more modest than in recent years - reflecting declining occupational markets - the appeal of well let property with long leases should continue. We suspect that shorter leases will become more prevalent in the future. Although these may in time become the "norm", longer term income streams, particularly those which cover current vagaries in the occupational market, will continue to command a premium. Exceptionally long income streams, due to increasing scarcity, are, and will be, correspondingly even more sought after. We therefore see a polarisation of the market with, on the one hand, investments with long term income streams which appeal to, for example, pension providers concerned principally with certainty and the ability to match liabilities. On the other, there will be those with shorter term income where strong property fundamentals will become crucial. Much of the British Land portfolio benefits from both characteristics. It includes a substantial number of prime High Street retails, and significant investments located "out of town" where the fundamentals of demand and supply are favourable. Central London offices, although experiencing short term occupational difficulties, are also strategically sound propositions. Looking forward, we expect some upward movement in Gilt yields but do not necessarily subscribe to the often quoted view that property and Gilt yields are, or should be, linked. Empirically the evidence is scant. We therefore see this as another 'plus' for property with the potential for continuing out-performance compared to other asset types. Offices Declining stock markets have continued to erode confidence and activity in The City. The problems of other European centres have also had negative consequences for occupational requirements amongst the many international banks and other organisations who make up the City office market. Although, as always, the return of demand will probably be more sudden than expected, forecasts are now that this will not now happen until, say, 2006. As a consequence, the value of City development sites and other shorter leased investments here have reduced as, respectively, schemes are deferred and both yields and rental values have moved in an adverse direction. In contrast, yields for well let long leased investments, which make up the majority of British Land's City holdings, moved favourably during the final quarter of 2002 with an upward impact on values. Examples of this in the market include the sales of Winchester House, London Wall and 1 Great St Helen's, Bishopsgate. This reflects a flight to certainty, and more immediately the ability of such properties to provide a secure return with a duration that exceeds the current short term problems in the lettings market. Notwithstanding this, we have reduced the valuation of the Broadgate Estate to reflect much more conservative estimated rental values. Whilst the letting to ICAP demonstrates the continued appeal of Broadgate, even in the thinnest of markets, we have, nonetheless, adopted lower rental values for reviews looking forward over the next few years. As a consequence, the valuation of the Estate is now largely initial yield driven. There is, therefore, limited risk attached to current reversions and any subsequent increases in reversionary value should feed through to improved capital values In the West End, although the occupational market is thin, sentiment is currently more favourable than in the City. This is in part thanks to a more diversified tenant base and the shortage of supply as a consequence of planning and more precisely defined geographical boundaries. Occupiers are typically looking for well specified buildings that offer reasonable value for money. The company's substantial stake at Regent's Place satisfies these requirements and, as a consequence, progress with lettings has been made at 350 Euston Road. Meanwhile, the majority of the Regent's Place Estate offers well secured long term income in top quality buildings let to tenants such as Bank One and Abbey National. In the medium term there is also significant development potential at the North East corner, which in a more benign climate could offer some 500,000 sq ft net of additional office space. The landmark Euston Tower, currently let to the Government for another 16 years, was recently substantially refurbished by the tenant at no cost to British Land, and longer term has a number of potential alternatives including, subject to planning, residential on the upper levels. In the investment market, as in the City, yields for well secured long income streams have improved since our last valuation in September 2002. Examples of this in the market include the sale of 151 Buckingham Palace Road, SW1 and 3-8 Whitehall Place, SW1. Provincial offices have generally held steady as progress with lettings and active management initiatives have proceeded. Retail Retail Warehousing has yet again out-performed all other investment classes. The Company has invested significantly in this sector over recent years and continues to make carefully chosen purchases, an example being the Orbital Shopping Park in Swindon. Rents have moved on in many locations across the country and parks offering scope for active management are very strongly sought after, an example being Pillar's purchase of the former Chartwell Land portfolio. This transaction suggests that prime yields have improved over the last few months reflecting investors' perceptions and expectations of future rental growth. With rents regionally achieving Â£35 per square foot or more, and in excess of Â£25 per sq ft in a large number of locations, British Land's retail warehousing portfolio such as Homebase, spread across Greater London and the South East, should also produce a rising income. The Homebase covenant has been enhanced since its acquisition by Great Universal Stores. Furthermore, in terms of future rental growth, it has been suggested that many occupiers of out-of-town stores have not refined their "offer" to the extent that they have in the High Street. As the out-of-town market reaches maturity these factors should enable the better retailers to increase their ability to pay higher rentals, despite the pressure on margins in the current climate. Supermarkets are rarely available as investments but given the eagerness of investors (of many types) to secure long income streams with longer term robust residual values, we are confident that a modern long let food-store, rack rented, would command an initial yield of 5.75%, possibly less. Department store values have improved, particularly those within the BL Fraser joint venture where guaranteed minimum increases are now approaching. We have adjusted the emphasis of our approach to the near reversionary yields and reflected the unusually long unexpired term (around 30 years) remaining at that time. Yields adopted reflect the popularity of long, secure incomes. In the High Street, there are mixed signals coming from retailers and rental growth prospects are therefore variable. Underlying strength of location and rent affordability remain key considerations. More recent sales figures create some uncertainty as to the extent of rental growth anticipated in the short term. Despite this, yields for prime shops fell by around 25 basis points between September last year and March 2003 and small lot sizes continue to attract very aggressive bids from a range of private investors. Some centres still offer scope for an uplift in rentals, and these naturally find most favour. Shopping Centre values have generally improved, in line with the High Street. At the Company's Peacocks Centre, in Woking, rental values have increased by around 20%. Progress continues at the recently completed Centre West, adjoining the established Plaza Centre at East Kilbride, Scotland. Here, 26 tenants have been secured so far including Next and Debenhams, with a further 9 units already under offer. There should be a reflected benefit to Plaza Centre as uncertainty and delay on the part of retailers, pending the opening of Centre West, has now passed. At Meadowhall, active management initiatives have continued including a number of strategic tenant relocations within the centre. Reversions and income have remained broadly in line with expectations. For both in, and out of, town retail, we have sharpened yields reflecting also the quality and length of the income stream and the positive attitude to prime retail. Budget proposals to exempt a number of areas in the UK from stamp duty, including the area within which Meadowhall is located, have been announced by the Government. This measure would produce potential savings to an incoming purchaser, which could in this case be reflected in an increase in the price achievable, of up to Â£50m. This has not been reflected in our current valuations as the budget measures occurred after the date of our valuation. Other Sectors Demand remains strong for Industrial Property, which offers steady rather than volatile performance. Although in Greater London, where a number of developments have been successfully completed, let and sold on, values have probably peaked. The relatively high yield available, in this low interest rate environment, means that we have been able to improve the value of regional estates such as Clifton Moor in York. A number of Public Houses held within the joint venture with Scottish and Newcastle have sold recently at auction and have achieved prices ahead of previous valuations, reflecting the beneficial yield shift that has occurred since then. Several others have been sold out of the joint venture, back to Scottish and Newcastle. Our current valuation of those remaining reflects these factors. ATIS REAL Weatheralls Norfolk House 31 St James's Square London SW1Y 4JR PRINCIPAL INVESTMENT PROPERTIES The Broadgate Centre, London EC2 Value Â£2.8bn Broadgate is the premier City of London office estate. 360,000 sq m (3.9m sq ft) office, retail and leisure accommodation Our interest in Broadgate dates back more than 20 years and the assembly of the entire estate into British Land's ownership was 13 hectare (34 acre) site finally completed by the acquisition in March 2003 of the virtual freehold interest held by Deutsche Bank at 1 Appold Street. The Adjoins Liverpool Street station offices and ancillary accommodation of 17,200 sq m (185,100 sq ft) (mainline and underground) was leased back to the bank for a period of 15 years, without break. Earlier in the year the 50% holding of 201 Bishopsgate not already Distinctive environment for some owned was purchased for Â£40.25 million. This site has a resolution of the world's largest to grant an improved planning permission for a 69,500 sq m (747,800 corporations and leading sq ft) office development. professional practices Approximately 30,000 employees based at Broadgate In April 2003, the lease to EBRD of the 34,100 sq m (367,000 sq ft) building at One Exchange Square was restructured. The tenant's Community website break clause in 2006 was removed and the new lease extended from www.vicinitee.com 2016 to December 2022. The office rent has been maintained at Â£18,975,000 (Â£52.50 per sq ft) per annum with upward only rent Tenants include: reviews, next in 2006 and every 5 years thereafter. There will be a 3 years and 5 months nil rent period from June 2003. There are no ABN AMRO Holdings take-backs or put options. Allianz Ashurst Morris Crisp The external and common areas of the estate are being further enhanced by a major improvement programme to provide new landscaped Barclays Bank areas, retail amenities, improved lighting and signage. Broadgate Circle and the Octagon are complete, with new lettings to a variety Baring Investment Services of retailers, and the works underway in Finsbury Avenue Square are due to complete at the end of this year. Broadgate Estates Limited, Credit Lyonnais a wholly owned subsidiary of British Land, manages the estate and maintains the external and common areas. Deutsche Bank European Bank for Reconstruction & Development (EBRD) Construction of the new 10 Exchange Square is expected to be completed in spring 2004, adding 15,180 sq m (163,400 sq ft) to the F&C Management Broadgate Estate. As for all other buildings at Broadgate, its frame and mechanical and electrical services are designed to permit Henderson Administration ongoing flexible updating of tenants' space as technology and operating requirements change. Herbert Smith Lehman Brothers The total rent passing of Â£168.5 million per annum is subject to Norinchukin upward only rent reviews. The weighted average unexpired lease term, including breaks, for the whole of Broadgate incorporating 1 Prebon Yamane Appold Street and the recent agreement with EBRD, has increased from 12.2 years to 14.0 years. The weighted average lease length to Royal Bank of Scotland expiry has increased from 15.2 years to 15.8 years. Societe Generale Sumitomo Trust Tokyo Mitsubishi UBS Warburg Williams de Broe The Broadgate Club Freehold/virtual freehold 100% owned Rent passing Â£168.5m pa Average office passing rent Â£45.75 per sq ft Weighted average lease term including breaks 14 years, to expiry 15.8 years Meadowhall Shopping Centre, Sheffield Value Â£1.3bn Meadowhall is one of the largest and most successful shopping centres in the UK. 132,000 sq m (1,420,000 sq ft) retail Site area 68 hectares The two level fully enclosed mall with excellent transport links continues to be attractive to both retailers and their customers. (167.3 acres, 57.7 acres For multiple retailers at Meadowhall, 80% of the units are in the undeveloped) top 10 performing outlets of their company, and for 26% they are the retailers' best performing outlet in the country. Customer visits 195 shop units, 11 anchor and average spend per party continue to increase. In the June 2002 stores, 11 screen Warner Village off peak survey, spend per party was up 3% to an average of Â£101.92 cinema, 27 speciality kiosks, 22 and in the December 2002 peak survey it rose to Â£180.75 per party, mall kiosks up 23% on the equivalent period in the previous year. 25 restaurants and cafes (including Oasis food court) seating for some 3,300 Initiatives to benefit retailers and consumers include: a new on-line gift buying service; major advances in the centre's Up to 800,000 visitors per week interactive customer loyalty scheme, which now has over 70,000 at peak time subscribers; and the development of the latest technology to communicate effectively with both customers and retailers, setting Direct access to junction 34 of new industry standards. This technology, developed by Comgenic, a M1 motorway joint venture with PoulterNet, is being successfully marketed to other shopping centres throughout the UK. The accelerated response Free parking for over 12,000 centre (ARC), was launched in August 2002, providing on-site vehicles warehousing and stock replenishment facilities. Significant benefits to retailers have been demonstrated and the scheme is being On site transport interchange introduced to further retailers during 2003. In March 2003 a unique with bus, train and supertram learning and development centre known as The Source was opened to services provide premier training facilities, principally directed at the retail sector. www.meadowhall.co.uk Anchor stores: Meadowhall and its management have received more awards this year, Allders Home including British Council of Shopping Centres (BCSC) and International Council of Shopping Centres (ICSC) marketing awards BHS and the attainment of OHSAS 18001 award in recognition of Meadowhall's strong commitment to Health and Safety. Boots Debenhams The rents passing are expected to increase to approximately Â£69.5 H&M million per annum when the outstanding rent reviews and lettings have been completed. House of Fraser Marks & Spencer Next Sainsbury's Sports Soccer WH Smith Freehold 100% owned Rent passing Â£68m pa Average rent (excl M&S) Â£53.83 per sq ft Weighted average lease term including breaks 18.6 years, to expiry 18.9 years Supermarkets Portfolio Total value Â£1.5bn British Land's investment in supermarkets now represents 13.2% of the total portfolio. British Land's share Â£1.3bn 93 supermarkets located across England, Wales and Northern We calculate that we are the largest owner of UK supermarket Ireland properties, other than the occupiers themselves. Total floor area 464,000 sq m (5.0m sq ft) In an increasingly restrictive planning environment and limited new Total site area 166 hectares supply, the retailers continue to require more and larger stores and (411 acres) are prepared to commit to full lease lengths of over 20 years. Total car spaces c.30,000 Tenants: These investments, acquired over some 14 years, have been enlarged by 40 extensions adding a total of 56,600 sq m (609,000 sq ft), of Sainsbury's (44 stores) which 16,100 sq m (173,000 sq ft) has been completed during the year. Somerfield (30 stores) Tesco (14 stores) During the year 42 rent reviews have been settled, with rents Safeway (3 stores) achieved at Chiswick and Croydon of over Â£23 per sq ft. At Croydon, we also acquired the 70% interest in the property we did not already Waitrose (1 store) own and funded an extension of 2,050 sq m (22,000 sq ft). Co-op (1 store) 86 freeholds, 7 long leaseholds 71 stores 100% owned In addition to this supermarket portfolio, British Land also owns, directly or 50% in joint ventures, a further 20 supermarkets which 22 stores owned 50% in joint are included in the retail park and shopping centre portfolios, and ventures total a further 125,000 sq m (1,345,000 sq ft). Total rent passing Â£92.8m pa, British Land's share Â£66.7m pa Average rent Â£18.61 per sq ft Weighted average lease term to break and expiry 22.5 years Out of Town Retail Warehouses Portfolio Total value Â£1.4bn British Land's retail warehouse investments represent 11% of the total portfolio. British Land's share Â£1.1bn 69 retail warehouse properties, of which: 41 retail parks with total 329 Major retail parks in the portfolio include: units; and 28 solus units Teesside Retail Park, Stockton on Tees Total floor area 532,000 sq m (5.7m sq ft) Total site area 214 hectares This freehold property is located at the intersection of the A66 and (528 acres) A19 trunk roads between Stockton on Tees and Middlesbrough. Tenants include: Asda Phase 1: purchased in 1992 and extended in 1998 now provides 31,500 sq m (340,000 sq ft) of open A1 retail space arranged in 28 units, B&Q on a site of 19 hectares (47 acres). Carpetright Phase 2: a 3.3 hectare (8.1 acre) site, purchased in 1998 and located on the Park's principal access, has planning consent for Comet 1,500 sq m (16,300 sq ft) of restaurant and 3,900 sq m (42,000 sq ft) of retail space. Restaurant units of total 1,090 sq m (11,700 Courts sq ft) have been constructed and let. Construction of the retail space was completed in October 2002 and 2,800 sq m (30,000 sq ft) Dixons Group let to Comet; the remaining 1,115 sq m (12,000 sq ft) is under offer. Focus Group Phase 3: an 11 hectare (27 acre) site, surrounds the existing Homebase leisure development (not in the Company's ownership) and is available for development for commercial uses. A planning consent in Homestyle Group respect of part of the site for a 100 bedroom hotel and a public house is in place. JJB Sports The Pets at Home unit comprising 740 sq m (8,000 sq ft) and the Matalan reversionary interest in the adjoining Toys R Us are also in the Company's ownership. Powerhouse Sainsbury's Total passing rent from Teesside is Â£7.1 million per annum. Tesco TK Maxx Greyhound Retail Park, Chester Predominantly freehold Total rent passing Â£81.9m pa, British Land's share Â£62.2m pa This freehold retail park investment was purchased in 1992 and is located to the west of the town centre close to other areas of Average rent Â£14.31 per sq ft retail warehousing. The Park extends to 19,100 sq m (205,000 sq ft) of mainly retail floor space. There are also two leisure units Weighted average lease term (cinema and bowling alley) where the rents are based on retail including breaks 17.7 years, to values. Tenants include Carpetright, Kingsbury Furniture, DFS, Pets expiry 17.9 years at Home and Powerhouse. Almost all the retail units have a valuable open A1 non food planning consent. The total passing rent is Â£3.4 million per annum. The Kingston Centre, Kingston, Milton Keynes (50% owned in joint venture) The Kingston Centre was constructed in 1992 on a freehold 14 hectare (35 acre) site on the A421, close to junctions 13 and 14 of the M1 motorway and provides a total of 21,200 sq m (228,000 sq ft) of open A1 retail space. The Centre includes a 12,700 sq m (136,400 sq ft) Tesco Extra superstore with a petrol filling station and five retail warehouses totalling 7,400 sq m (79,300 sq ft). There is a covered shopping mall with 12 units totalling a further 1,150 sq m (12,400 sq ft), a drive-thru McDonalds, a public house, a car showroom and a car wash. Tesco has an overriding lease covering the superstore and mall units. Tenants of the retail warehouses are Boots, Mothercare, Benson's Bed Centre, Focus DIY and Holiday Hypermarket. Planning consent exists for 2 further retail warehouse units and a restaurant. The total current rent is Â£3.5 million per annum. The Beehive Centre, Coldhams Lane, Cambridge (50% owned in joint venture) The site extends to 7 hectares (17 acres) with a frontage to Coldhams Lane, off Newmarket Road, where other major retailers are represented. Accommodation includes 11 non-food retail units totalling 14,200 sq m (152,800 sq ft) and a supermarket of 6,500 sq m (70,000 sq ft) let to Asda. The construction of a further retail unit of 570 sq m (6,100 sq ft) was completed in December 2002 and is let to Multiyork Furniture. Other tenants include Carpetright, Homebase, JJB Sports and Currys. Rental income is Â£3.8 million per annum. Orbital Shopping Park, Swindon This retail park was recently acquired following completion of its construction by Asda Walmart, adjoining a 13,935 sq m (150,000 sq ft) Asda superstore. The park comprises 18,950 sq m (204,000 sq ft) in 6 retail warehouse units let to Homebase, Comet, Next, Borders, JJB Sports and Boots and 7 shop units let to a variety of retailers including Blockbuster, Lunn Poly and Carphone Warehouse, together with a health club. Rental income is Â£3.6 million per annum. Homebase D.I.Y. Stores The portfolio of stand alone Homebase stores is now 19 properties located mainly in the South East of England. Three smaller stores were sold in December 2002. Annual rents total Â£11 million which averages Â£147.70 per sq m (Â£13.72 per sq ft) and all are let on 20 year leases from December 2000. Total floor area is 75,065 sq m (808,000 sq ft). Regent's Place, London NW1 Value Â£505m This thriving West End business quarter has a major Euston Road frontage and excellent transport links. 114,100 sq m (1.3m sq ft) office, retail, leisure and residential accommodation Two new buildings, the 18,500 sq m (199,000 sq ft) headquarters office building for Abbey National plc at 2/3 Triton Square and the 350 Euston Road building with 12,000 sq m (130,000 sq ft) offices 4.2 hectare (10.4 acre) site, and retail accommodation are complete, incorporating broadband West End of London technology. 43% of the office space at 350 Euston Road has been let in the year, to Capital One and Elexon at Â£46.50 per sq ft and Â£48.50 per sq ft respectively. Close to Euston mainline and 4 underground stations Preliminary master planning and massing studies are being progressed 2.0 hectares (4.9 acres) for for the North-East Quadrant of Regent's Place, comprising 1.0 further development at the hectare (2.4 acres). Additionally, in September 2002 a conditional North-East quadrant and site to Development Agreement was entered into with The Crown Estate to the West of the estate explore the development potential of a 1 hectare (2.5 acre) site to the West of the estate. These 2 projects have the potential to add in the region of a further 93,000 sq m (1.0 million sq ft) to Community website Regent's Place. Ultimately the entire estate is projected to cater www.vicinitee.com for a working population of some 10,000 people. Tenants include: Retail offers within Regent's Place enhance the working environment, including a Sainsbury's convenience supermarket, Holmes Place Health Abbey National Club, Starbucks and Pret a Manger, a wine bar, hairdressers and a large creche. 350 Euston Road incorporates further retail units which will be available for letting to a mix of tenants. Bank One Capital One Triton Square, a large public area, provides landscaped open space facilities for all occupiers of the estate. Broadgate Estates Limited continues to manage the external and common areas. Elexon HM Government Following the launch of the Regent's Place Travel Plan, the transport initiatives at Regent's Place are now featured in Government best practice guidance documents on travel plans. Hodder Headline Sema 350 Euston Road has been selected for an award in the "Large Commercial" category of the London Borough of Camden Built in Quality Awards 2003, part of a national scheme to promote good Mainly freehold building practice. 100% owned The rents passing are expected to increase to Â£26.4 million per annum on expiry of rent free periods in September 2003. Rent passing Â£17.7m pa Average office passing rent Â£29.10 per sq ft Weighted average lease term including breaks 14.1 years, to expiry 16.9 years Ludgate and Watling House, London EC4 53,350 sq m (574,250 sq ft) The Ludgate Estate: 1 Fleet Place, 10 Fleet Place, 100 New Bridge offices Street; and Watling House, Cannon Street. 2,400 sq m (26,250 sq ft) retail Near Blackfriars and Farringdon mainline and underground The development of 1 and 10 Fleet Place and 100 New Bridge Street, stations completed in 1992, was an urban regeneration of land previously www.vicinitee.com occupied by railway lines which are now re-sited below ground. Tenants include: Watling House was developed in 1998, close to St Paul's Cathedral. Baker & McKenzie The standards of construction, finish and services are similar to Bryan Cave LLP those found at Broadgate. Clydesdale Bank CRESTCo Denton Wilde Sapte Dow Jones Kroll Buchler Phillips MCI WorldCom Scottish Widows Virtual freehold and long leasehold 50% owned in joint venture Rent passing Â£23.7m pa 122 Leadenhall Street, London EC3 16,650 sq m (179,150 sq ft) Situated opposite the Lloyds of London building in the City, the offices building was first constructed in 1969 and substantially rebuilt in 1996. It is located in an area of the City designated as suitable 812 sq m (8,740 sq ft) retail for high rise buildings. The majority of the leases are due to 0.4 hectare (1 acre) site expire in 2008 and the potential of the site for a tower www.vicinitee.com redevelopment post lease expiry is being promoted, with the Tenants include: appointment of architect Richard Rogers Partnership. Banca Monte Dei Paschi Di Siena Credit Agricole Marks & Spencer Freehold 100% owned Rent passing Â£6.9m pa Blythe Valley Park, Solihull 36,200 sq m (390,000 sq ft) The joint venture to own and develop BVP was established in 1999. offices It has successfully developed and let some 36,200 sq m (390,000 sq 69 hectares (170 acres) business ft) of primarily B1 office space on a landscaped park with direct park access from junction 4 of the M42. The park has ancillary retail, Planning consent for 111,500 sq day nursery and Virgin health and fitness facilities. The 2,350 sq m (1.2m sq ft) m (25,500 sq ft) Innovation Centre, managed by University of Warwick www.blythevalleypark.co.uk Science Parks, was developed and is owned jointly with Solihull Tenants include: Metropolitan Borough Council. Development of further areas of the Centrica park will be undertaken subject to market demand. Logica Ove Arup Vodafone Predominantly freehold Rent passing will increase to Â£6.1 million per annum on expiry of 50% owned in joint venture current rent free periods. Rent passing Â£5.8m pa The Plaza Centre, Plaza Tower and Centre West, East Kilbride, Scotland Plaza Centre: 28,000 sq m The new Centre West and the established Plaza Centre together create (300,000 sq ft) retail, 45 units a prime retail destination in East Kilbride. Plaza Tower: 15,000 sq m (161,000 sq ft) offices Centre West: 26,000 sq m (279,860 sq ft) retail, 49 units In 2000 the enclosed Plaza was substantially refurbished including Multi-storey and level car parks the creation of a new atrium, which now provides the direct link to Major tenants: our new adjoining shopping centre development known as Centre West. Plaza Centre: BHS Boots Marks & Spencer During the year, in addition to the new lettings, the lease of the Primark Somerfield supermarket in the Plaza Centre was acquired by the WH Smith company and, after store improvements, relet to Primark. Plaza Tower: Inland Revenue Centre West: Debenhams The 26,500 sq m (285,000 sq ft) Centre West, which is held on a French Connection geared leasehold interest from feuholders South Lanarkshire Council, HMV was completed and opened in March 2003. Anchored by a 11,150 sq m JJB Sports (120,000 sq ft) Debenhams department store, Centre West is 89% by Next area let or under offer. River Island Superdrug USC Plaza: feuhold Technology previously developed for Meadowhall has been installed at Centre West: long leasehold Centre West including a retailer intranet developed by Comgenic, the 100% owned joint venture company launched in October by British Land and Plaza: rent passing Â£5.3m pa PoulterNet. Centre West: rent (let or under offer) Â£5.6 m pa The Peacocks Centre, Woking 29,700 sq m (320,000 sq ft) Completed in 1992, this fully enclosed Centre is the prime shopping retail scheme in Woking. Major stores: Allders There are three principal levels of retail trading, anchored by Allders (12,700 sq m/137,000 sq ft), Marks & Spencer Food Store, Marks & Spencer Primark, TK Maxx and Woolworths. In a further 80 retail units tenants include Next, Monsoon, Accessorize, River Island and Virgin. Primark During the year, a record prime rent was achieved with a letting to the German retailer Tchibo, one of their first shops in this TK Maxx country. The lower trading level has a 400 seat food court with popular offers from Aroma, Burger King and KFC, plus independent Woolworths specialists. There is also a direct link to the adjacent Toys R Us Superstore (not in the Company's ownership) and the multi-storey car Long leasehold park. 100% owned Rent passing Â£5.8m pa Eastgate Shopping Centre, Basildon 56,300 sq m (605,750 sq ft) The Eastgate Centre represents a major part of Basildon Town Centre retail and is visited by over 13 million customers a year. 3 office buildings 11,800 sq m (127,000 sq ft) The retail mall contains 3 anchor stores and 116 units. Following Multi-storey car park significant lettings at the end of 2001 to Next, HMV and New Look, new interest is being shown by a variety of retailers. During the Major stores: last 12 months 7 further lettings have been achieved to tenants including Holland and Barratt and Clinton Cards. Allders HMV Eastgate's commitment to environmental improvement and quality has New Look been recognised by achievement of ISO 14001 certification, and by winning the Essex Countywide Award 2003 for Environmental Awareness. Next Primark The office buildings are let to tenants which include CGNU and the Sainsbury's Savacentre Secretary of State. Superdrug Freehold 100% owned Rent passing Â£8.8m pa Serpentine Green Shopping Centre, Hampton, Peterborough 27,700 sq m (298,000 sq ft) Serpentine Green is located on the southern outskirts of retail Peterborough at the junction of the A15/A1139 and a short distance from the A1. 2,100 car spaces Major stores: Tesco Extra superstore Boots The covered Centre, completed in 1999, comprises a Tesco Extra H & M superstore of 12,100 sq m (130,000 sq ft) plus a further 15,600 sq m Hennes (168,000 sq ft) including 26 retail units and a dedicated catering Carphone Warehouse area. New Look Gap Next WH Smith The Centre also has a petrol station, operated by Tesco. Freehold 50% owned in joint venture Rent passing Â£5.1m pa JOINT VENTURES Introduction British Land currently has 12 (2002: 14) active joint ventures which hold Â£2.8 billion (2002: Â£3.2 billion) of properties in the principal areas of retail, office and development. British Land's share of Â£1.4 billion (2002: Â£1.6 billion), is financed to the extent of Â£632 million (2002: Â£792 million) by external net debt, of which only Â£12 million (2002: Â£33 million) is guaranteed by British Land. The net investment in joint ventures at the year end is Â£700 million (2002: Â£727 million). 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€¢ the joint venture is 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. There are, however, provisions for early termination if the partners reach deadlock; and â€¢ the joint venture is funded by a varying combination of equity and subordinated loans (which enable income to be received gross) from the two joint venture partners, and by external debt. 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 rationale Joint ventures benefit British Land because: â€¢ they have provided access to desirable properties that were not on the market and enhance contacts 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 investment with a partner; and â€¢ British Land earns fees from services provided to joint ventures. Joint venture activity The key activities of the joint ventures during the year are: â€¢ the acquisition in December 2002 of the remaining 50% interest in London & Henley, from the joint venture partner, Security Capital, for approximately Â£27 million; this residential portfolio is now entirely owned by British Land; â€¢ BL Universal has further rationalised its portfolio, with sales of 27 properties, primarily high street shops, realising proceeds of Â£55 million; â€¢ BL Rank Properties disposed of the remaining properties in its leisure portfolio, with the proceeds of Â£109 million being used to repay debt and return funds to the joint venture partners; â€¢ The Public House Company continued with its programme of auction sales, in which 24 public houses were sold in the year, raising Â£29 million. Additionally, a further 79 public houses were sold to Scottish & Newcastle for Â£90 million in March 2003; â€¢ BL Gazeley sold completed developments at Enfield and Thatcham, realising total proceeds of Â£71.9 million, substantially above cost; and â€¢ British Land's interest in the Cherrywood joint venture, comprising the Dublin mixed commercial development, was sold in April 2003 to Dunloe Ewart the joint venture partner. Other joint ventures have continued to rationalise and upgrade their portfolios through acquisitions, disposals and development of assets. The summary profit and loss account and balance sheet information for the major joint ventures is set out later in this report. Summary of British Land's share in joint ventures 2003 2002 Change Â£m Â£m Â£m Profit and loss account Gross rental income 102.2 98.5 3.7 Operating profit 92.3 88.6 3.7 Disposal of fixed assets 20.4 (2.5) 22.9 Net interest - external (56.4) (50.0) (6.4) Net interest - shareholders (8.9) (16.1) 7.2 Profit before tax 47.4 20.0 27.4 Balance sheet Gross assets 1,470.3 1,689.6 (219.3) Gross liabilities (770.1) (962.4) 192.3 Net investment 700.2 727.2 (27.0) Number of active joint ventures 12 14 BL Universal JV Partner: Great Universal Stores PLC Date Established: February 1997 Portfolio value: Â£796m, comprising 121 principally retail properties Annualised net rent: Â£53m Finance: Â£300m listed debentures and Â£45m bank loan provided by Eurohypo; the loan is without recourse to the joint venture partners Value of British Land net investment: Â£212m When this joint venture was established, it acquired 982 properties from the GUS group. Since then, the joint venture has sold 856 properties and has reinvested the proceeds primarily in retail parks, as well as using the proceeds to repay debt and return cash to the partners. The largely repositioned portfolio now totals 121 properties, comprising retail warehouse parks, prime high street shops, shopping centres, superstores and offices. During the year, 27 properties have been sold, for total proceeds of Â£55 million. Additionally, at the year-end, 3 further sales were exchanged and 3 agreed at an aggregate price of Â£15 million. A redevelopment was completed in Donegall Place, Belfast to provide an 800 sq m (8,600 sq ft) shop for River Island. At New Cross Gate, London, a 2,300 sq m (25,000 sq ft) former bingo unit has been refurbished to provide retail-warehousing accommodation, divided and let to Currys and JJB Sports. Joint ventures with Tesco plc British Land has 3 joint ventures with Tesco plc, which together own Â£717 million of retail properties, comprising 13 superstores, 4 retail parks and 4 shopping centres, all of which are anchored by Tesco stores. BLT Properties JV Partner: Tesco plc Date Established: November 1996 Portfolio value: Â£239m, comprising 2 retail parks and 8 Tesco superstores Annualised net rent: Â£15m Finance: Â£111m loan provided by a syndicate of banks, led by HSBC; with recourse to the joint venture partners limited to Â£12m each Value of British Land net investment: Â£68m One of the first joint ventures, BLT has been active in extending the properties, making capital contributions to the cost of development and achieving increases in rental income. During the year, the extension programme has continued: the Tesco store at Harlech Retail Park, Newport, has recently been extended by 2,500 sq m (26,600 sq ft), resulting in a substantial increase in rental income from the enlarged store. The joint venture has also agreed an extension of 500 sq m (5,400 sq ft) at Formby. Rent reviews have been settled at 4 properties, while 2 distribution units at Nursling, Southampton were profitably sold in June 2002 for approximately Â£37million. Tesco BL Holdings JV Partner: Tesco plc Date Established: November 1999 Portfolio value: Â£369m, comprising 2 retail parks and 2 shopping centres each anchored by Tesco, and 5 Tesco supermarkets Annualised net rent: Â£22m Finance: Â£210m loan provided by a syndicate of banks, led by WestLB; the loan is without recourse to the joint venture partners Value of British Land net investment: Â£78m This joint venture was established to acquire 9 properties from The Tesco British Land Property Partnership in November 1999. The properties are actively managed and the joint venture is currently funding a 230 sq m (2,500 sq ft) extension to the Tesco store in Bury. Tesco British Land Property Partnership JV Partner: Tesco plc Date Established: February 1998 Portfolio value: Â£109m, being 2 shopping centres anchored by Tesco Annualised net rent: Â£7m Finance: No external finance Value of British Land net investment: Â£47m The partnership with Tesco was originally established to acquire 12 retail properties from the partners, and in November 1999 it sold 9 properties to the newly formed Tesco BL Holdings, retaining 3 properties. In 2001, one of these properties was sold. The remaining 2 properties are now undergoing a significant programme of refurbishment. At Weston Favell, Northampton, an extension adding 5,200 sq m (56,000 sq ft) has recently completed with 70% now let or under offer. Following successful completion and letting of an extension at Beaumont Leys, Leicester, which included an addition to the Tesco store, a redevelopment of one of the malls is under consideration. BL Davidson JV Partner: Manny Davidson, his family and family trusts Date Established: September 2001 Portfolio value: Â£459m, comprising circa 70 properties, principally retail warehouses and Central London offices Annualised net rent: Â£29m Finance: Â£114m investment, development and working capital loan facilities provided by Royal Bank of Scotland, which are without recourse to the joint venture partners. The joint venture group also has debenture financing of Â£124m, as well as other bank loans totalling Â£14m Value of British Land net investment: Â£92m This joint venture was established to acquire Asda Property Holdings plc, which owned a portfolio of approximately 80 properties, comprising principally retail warehousing and Central London offices. During the year, the office and retail development programme has been completed (funded within the RBS facility) and sales with proceeds totalling Â£58 million have completed. BL West companies JV Partners: WestLB, WestImmo and Provinzial (together 50%) Date Established: September 2000 Portfolio value: Â£333m, comprising 4 City of London office buildings Annualised net rent: Â£24m Finance: Â£257m bank loan provided by a syndicate, led by WestLB; the loan is without recourse to the joint venture partners Value of British Land net investment: Â£37m In September 2000, British Land sold a 50% interest in 4 prime city offices to a new joint venture with WestLB, WestImmo and Provinzial. British Land retains a 50% interest in the venture. The properties comprise: 3 office buildings developed in 1992; 1 Fleet Place, Ludgate EC4, 10 Fleet Place, Ludgate EC4, 100 New Bridge Street, Ludgate EC4 and Watling House, Cannon Street EC4, an office building constructed in 1998. During the year, further rent reviews have been settled at 10 Fleet Place and 100 New Bridge Street. BL Fraser JV Partner: House of Fraser plc Date Established: July 1999 Portfolio value: Â£230m, comprising 14 department stores Annualised net rent: Â£14m Finance: Â£140m loan provided by a syndicate of banks, led by Eurohypo; the loan is without recourse to the joint venture partners Value of British Land net investment: Â£50m 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. In 2001, the joint venture purchased a further store in Bristol from Bentalls, funded by an increase in the bank loan, which also assisted with a significant redevelopment of the Guildford store resulting in higher rental income for the joint venture. All properties are let on 40 year full repairing and insuring leases to House of Fraser with minimum guaranteed uplifts for the first 2 rent reviews, based on the higher of 3% per annum uplift (since 1999) or open market value. During the year, the stores in Doncaster (4,800 sq m/51,700 sq ft) and Perth (5,500 sq m/ 59,200 sq ft) were sold for total proceeds significantly above their valuations. The Public House Company JV Partner: Scottish & Newcastle plc Date Established: April 1995 Portfolio value: Â£53m, comprising 49 public houses Annualised net rent: Â£4m Finance: Loan provided by a syndicate of banks, led by Bank of Scotland, fully repaid in the year Value of British Land net investment: Â£29m Since formation in 1995 to acquire a portfolio of 306 public houses let to Scottish & Newcastle, this joint venture has rationalised its portfolio through a large number of sales of smaller portfolios and single properties and purchase of further public houses. In June 2001 the joint venture completed the sale of 151 public houses to Scottish and Newcastle for Â£111 million. In the current year, a further 79 public houses were sold to Scottish and Newcastle for Â£90 million in March 2003, while, as part of the on-going disposals programme, 24 sales at auction have realised Â£29 million, well above valuation. In each case the sales proceeds have been utilised to repay debt and to return funds to the joint venture partners, with the result that the bank loan of Â£85 million has now been fully repaid. G. E. H. Properties Limited JV Partners: Conran Holdings Limited and Wyndham International Date Established: November 1999 Portfolio value: Â£18m, comprising the Great Eastern Hotel Annualised net rent: Â£1m Finance: No external finance Value of British Land net investment: Â£9m The joint venture retains a 125 year head lease in the recently refurbished 267 bedroom hotel and restaurants complex at Broadgate. BL Gazeley JV Partner: Gazeley Properties Date Established: January 2001 Portfolio: Â£17m, comprising 2 development properties Annualised net rent: Â£nil - all properties still under development Finance: No external finance Value of British Land net investment: Â£8m This joint venture is funded by the shareholders to acquire and develop sites at Thatcham, Redditch and Enfield, providing principally distribution and warehouse accommodation. During the year the joint venture built, pre-let to Scottish & Newcastle and subsequently sold a distribution unit of 33,060 sq m (356,000 sq ft) at Thatcham for Â£38.5 million. At Enfield, the joint venture has developed over 21,500 sq m (232,000 sq ft) of distribution units, of which 18,300 sq m (197,000 sq ft) has been let. The completed investment has been sold to Legal & General for Â£25.3 million. A further 10,500 sq m (113,000 sq ft) has been developed and pre-sold to Warburtons. Both sales showed a significant surplus over cost. BVP Developments JV Partner: ProLogis Developments Date Established: June 1999 Portfolio: Â£106m, comprising the Blythe Valley Business Park Annualised net rent: Â£6m Finance: Â£49m loan from Bank of Scotland; without recourse to the joint venture partners Value of British Land net investment: Â£23m A total of 36,200 sq m (390,000 sq ft) of development has been completed to date. During the year, 1,760 sq m (19,000 sq ft) has been completed, of which approximately 700 sq m (8,000 sq ft) has been let. Additionally, negotiations are at a detailed stage for a 200 sq m (2,200 sq ft) retail/cafe facility to service the current park tenants. Terms have been agreed for pre-let of a further 6,000 sq m (65,000 sq ft) and solicitors instructed. In August the company purchased approximately 4 hectares (10 acres) of development land within the park, with planning consent for 15,500 sq m (167,000 sq ft) from Oracle Corporation. This information is provided by RNS The company news service from the London Stock Exchange

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Tuesday, 1st October 2024

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