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The graph provides a snapshot of committed income and estimated
income based on ERV at 31 March 2003, including our share of joint
ventures. Upward only rent reviews across the portfolio protect
rental income from falling below passing rent (prior to expiry/break).
In addition, no account is taken of future acquisitions, disposals,
expenditures or other events. Rental income will be affected by
such transactions and future opportunities; the graph is not a forecast.
Annualised net rents are gross rents plus, where rent reviews are
outstanding, any increases to estimated rental value (as determined
by the Group’s external valuers), less any ground rents payable
under head leases.
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 £2.3 million
to £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 61/2% Convertible
Bonds 2007 (12 pence) and the purchase and cancellation of ordinary
shares (22 pence).
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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 £632.0 million of which only
£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 £4,361.4 million (2002: £3,840.4
million). Securitised debt of £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 £12 million
(2002: £33 million).
The Group’s weighted average interest cost has reduced to 6.31%,
(2002: 6.62%) reflecting the early redemption of the 61/2%
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 £527.3 million
(before tax relief) greater than their book values. This compares
to £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.
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Changes in financing
Convertible Bonds
On 24 June 2002 the Company redeemed the £323 million 61/2%
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 £50 million of bonds securitising
the rental income stream from Meadowhall. This is in addition to
the £825 million of bonds issued in December 2001. The weighted
average interest rate of the total £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 £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 £95.0 million
(2002: £98.8 million). Property disposals by the Group and
cash returns from joint ventures realised cash of £167.6 million.
Investments in properties, subsidiaries and developments amounted
to £438.2 million.
Cash and existing bank facilities were used to fund the £323
million redemption of the 61/2% Convertible
Bonds 2007 and £130.1 million purchase and cancellation of
ordinary share capital.
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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 £28.8 million (including
our share of negative goodwill in joint ventures), equivalent to
5.5 pence per share (diluted).
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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 £18,975,000
(£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 £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 £5.4 million
over this period.
Graham Roberts Finance Director
27 May 2003
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