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Chairman's Statement
This was a vintage year. British Land’s tried and tested business model achieved record pre-tax profits of £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 £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 £130.1 million and of exercising the provision we built in for early redemption of the 6 1/2% £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 At £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 £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 £551.6 million last year and net rents were up 7.6% at £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 £328
million, with 1 Appold Street being the largest item and completing our
20 year assembly at Broadgate of four million sq ft on over 34 acres.
Profitable property sales including the joint ventures and only minimal
trading were £612 million.
Specialist
Management
A Balanced View 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 six years profitable
sales have been over £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 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 £135 million of the £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 £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 eight 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
five 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 redemption of our 61/2% £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 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 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 six more at Regent’s Place, besides having been sold to landlords of six 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 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 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 crèche 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 multinationals 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 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 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 £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.
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