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 A Strong Market
Active Financing
Development
Joint Ventures
Prospects
Finance was a key factor of the half year ended
30 September 2003, as we raised over £670 million before
interest rates moved.
Profits were up 33% at £87 million for the six months.
Property sales showed an 11% uplift from the recent
31 March 2003 valuation, bringing increased capital profits
of £15.9 million and trading profits of £6 million.
Earnings per share, adjusted diluted, were up 47% to
15.5 pence per share, so we are well placed to lift the
Interim Dividend by 8% to 4.43 pence per share. Interest
cover is over 1.5 times, debt maturity is unchanged at a
weighted average of 18 years with the interest down at an
average rate of 6.26%. 83% of debt remains at fixed or
capped interest rates. We thus have an excellent base
for the upturn, and committed and future development
expenditures are not only well within our own resources,
but can be met without impairing continuance of our 22
years run of uninterrupted increases in dividends.
Fully diluted net assets per share have risen 10
pence to 870 pence - thus overall our values have held up
well. A 4.1% uplift in the retail sector compensates for a
3.9% decline in office values, proving again the merits of
our well diversified portfolio. Within these broad sectors, as
one would expect, there are considerable variances. City
offices are down 4.8%, while supermarkets are up 4.7%.
With the benefit of the stamp duty adjustment for 'disadvantaged'
areas, the outcome is a minor uplift of some £18
million in value over the six months. Even so, the valuation
and hence shareholders are still suffering a £160 million
hit from Government's arbitrary increases in stamp duty.
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A Strong Market
The investment market has been strong, as our capital
and trading profits clearly demonstrate. Including joint
ventures, sales at £192 million have been higher than
the £17 million of purchases. There is plenty of investor
demand and our asset managers continually seek out
buildings in the portfolio where a sale is appropriate.
A noteworthy sale completed in the half year was the
residual 27% of the St Stephen’s Green Shopping Centre
in Dublin for 64 million euros. The Centre was a highly
successful development by British Land in 1988 and
further extended in 1997. It has been a good time to take
profits on smaller units, such as three Somerfield stores in
Chepstow, Kingswinford and Monmouth which together
realised over £10.7 million. Overall we like what we have in
the portfolio but we are always ready to alter course to
meet changes in the market.
We took sales opportunities in the joint ventures too.
Sales by BL Universal, the joint venture with GUS plc,
raised £47.6 million and those by the Public House
Company, the joint venture with Scottish & Newcastle plc,
brought in £16.3 million.
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Active Financing
Managing and finessing finance have long been features
at British Land, and we have been very active in this area
recently, a business in itself, raising over £670 million. The
liquidity was available and interest rates were attractive.
Our approach has been diverse with no less than six
separate financing initiatives completed.
To turn to our banking, for many years we have maintained
an extensive unsecured book of committed bilateral
and syndicated bank facilities, and we have good relations
with 60 banks in all. These bank lines underpin our flexibility
in the market. Recently Barclays Bank, Danske Bank,
The Royal Bank of Scotland and Sumitomo Mitsui Banking
Corporation Europe were mandated to raise a new syndicated
facility of £250 million, which was over-subscribed
by 14%, closing at £285 million. Agreed new or renewed
bilateral bank facilities have added a further £155 million.
A continuing source of funding for British Land is the
borrowing capacity deriving from the increasing rental
income from securitised properties. We have raised an
additional £50 million on the rental income of the
Meadowhall Shopping Centre, which now sustains a total
issue of £875 million of fixed rate debt at an average interest
rate of 5.5% and an average maturity of 19.9 years. The
Centre’s rental income has now risen to £69.9 million. The
average rent per sq ft is £54.50 (excluding M&S), up 36%
from the £40 when we bought the Centre and there is
more to come, now and over time. Increased rental income
has arisen also on the 35 Sainsbury supermarkets securitised
in 2001. To the £575 million already raised we have
tapped the market for an additional £84 million at an effective
rate of 5.8% for 15.5 years.
We again took advantage of the private placement
market in the USA, where our name continues to be well
known, raising fixed dollars, swapped into Sterling in the
amount of £97.8 million, with a 12 year life at just under 6%.
On the equity side, just before the end of the half
year we bought back a further one million shares at a
price of 497 pence per share. We took a further step
towards raising the Company’s international profile
and constituency among a wider US investor audience
by launching a Level 1 American Depository Receipt
programme, trading under the symbol BTLCY. Two investor
relations visits to the USA this year have been
well received.
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Development
A year ago I indicated that we had anticipated the
moderation in the current development market and
reduced our programme accordingly. The cost to complete
this current work is £109 million and principally
involves 1 Plantation Place (539,000 sq ft, two-thirds let
to Accenture), 2 Plantation Place (163,000 sq ft) and
10 Exchange Square (163,000 sq ft at Broadgate). Next
stage projects, which mainly have planning consents in
place, will produce 3.89 million sq ft when we are ready
to go: there is only a written down £160 million, 1.8% of
gross assets, tied up in pre-development sites which are
non-income producing.
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Joint Ventures
It is nearly nine years since we first embarked on a series
of joint ventures with major UK corporations. The aim –
which has been achieved – was to unlock portfolios of
desirable properties which were not on the market and
assist our partners through our management capability.
By placing those properties in joint ventures the vendors
retained half of their interest but, because of the
financing which we were able to arrange, they typically
realised 85% of their capital tied up in these assets, while
British Land acquired a series of investment half interests
with potential.
We manage them actively, as exemplified by the
Public House and BL Universal ventures. Most of the pubs
in The Public House Company, the joint venture with
Scottish & Newcastle plc, have been profitably sold and all
external debt has been repaid. BL Universal, the 1997 joint
venture with GUS plc, originally owned 982 units of which
894 have been sold profitably. Capital released has been
recirculated, largely into retail parks selected by our asset
managers, and in repayment of debt. The venture has
shown a 12% annualised ungeared return before tax, and
we have carried through the rationalisation for GUS for
which BL Universal was designed.
The needs of the successful GUS business have
changed, creating an appropriate moment for us to buy
out the GUS interest in this £761 million portfolio on
acceptable – and cordial – terms. 80% of the portfolio is
retail warehouses and shops, the remainder offices. Such
a purchase avoids all the transactional costs of buying
individual properties; there are no staff, we know all the
buildings, we have ample finance to cover the £120 million
price for half the equity, and we have total control.
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Prospects
The stock market has sustained serious losses over the
past three years, from which it now appears to be making
some recovery. This, and renewed financial sector recruiting,
are encouraging for our prime City of London holdings.
Our confidence in the City remains. We own and control
the entire Broadgate Estate, recognised as a unique
complex. In particular Broadgate has never looked better –
following the £35 million improvements to its public
spaces which are appreciated by its tenants and ensure
that it retains the best modern standards. Property has
remained an attractive asset class throughout – particularly
if it is buttressed by long leases to strong tenants, and
the buildings themselves are modern, of high quality, efficient
design, well located and will appeal in the future.
With its strong out-of-town retail content British
Land’s diversified portfolio also meets these tests, and its
business model makes it well placed to maximise the
upside with assured and increasing cash flow safeguarding
the downside, especially when the assets are financed
with long, largely fixed interest finance. Serious owners of
property know that rents and thus values give consistent
growth over time but at irregular intervals. Rental movements
are not a smooth progression but occur in a series
of spikes, giving in British Land’s case a superior return
multiplied by closely managed gearing.
We undertake to be fast on our feet, whether it is
in buying or selling or in taking advantage of structural
changes – such as any REIT proposals – or in seeking out
other ways to maximise our shareholders’ wealth and store
of value.
John Ritblat Chairman
25 November 2003
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