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Financial Review

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Financial Review

Financial Review
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Financial Review

Financial highlights

Adjusted diluted net asset value per share up 12.5%
Portfolio valuation up 4.7%
Progressive dividend up 8.2% for the year
Adjusted diluted earnings per share up 33.0%
Total return on adjusted diluted net assets per share for year 14.1%

Operating performance

Gross rental income, including our share of joint ventures, increased by 2.5% (£14.0 million) to £565.6 million (2003: £551.6 million). Rents from properties wholly owned by the Group increased by £37.3 million, whereas our share of joint ventures’ gross rents reduced by £23.3 million following the buyout of GUS plc’s interest in BL Universal and taking full control of BVP Developments.

Group net rental income increased by 7.6% (£31.7 million) to £450.3 million (2003: £418.6 million). Factors increasing net rental income included rent reviews and new lettings (£36.9 million), the consolidation of former joint ventures (£29.4 million) and purchases (£10.9 million). Reductions in net rental income arose from the restructured European Bank for Reconstruction and Development lease (£5.9 million) reflecting commencement of their rent free period, UITF 28 adjustments (£10.6 million), reduced back rents (£7.1 million) and sales of properties (£10.4 million).

British Land’s share of joint venture operating profits decreased by 26.9% to £67.5 million (2003: £92.3 million). This reflects the active property disposal programme in the joint ventures, and the consolidation of former joint ventures.

Profit before tax increased by £11.7million (6.7%) to £186.0 million (2003: £174.3 million). Profits on disposal of fixed assets and property trading increased by £12.2 million (45.7%) to £38.9 million (2003: £26.7 million). Excluding these items underlying profits before tax decreased slightly to £147.1 million (2003: £147.6 million).

Adjusted earnings per share have increased by 9.4 pence per share to 37.0 pence per share (2003: 27.6 pence per share) and on a diluted basis by 9.0 pence per share to 36.3 pence per share (2003: 27.3 pence per share). Earnings per share were 35.1 pence per share (2003: 27.4 pence per share) and on a diluted basis 34.5 pence per share (2003: 27.1 pence per share).

Taxation

The Group taxation charge comprises a current year corporation tax charge of £17.5 million, deferred tax of £5.7 million and £9.2 million attributable to joint ventures, equivalent to a current year charge of 17.4% (2003: 15.3%) compared to a prevailing corporation tax rate of 30%. The total charge has been decreased by £17.9 million in respect of items relating to earlier periods (2003: increased by £7.0 million). The overall tax charge of £14.5 million (2003: £33.7million) represents a tax rate of 7.8% (2003: 19.3%).

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 £570 million (2003: £470 million), after taking account of available losses and provisions.

Net rental income*
year ended 31 March
£m

Net rental income*, year ended 31 March, £m

Net rental income*, year ended 31 March, £m

* including share of joint ventures
d

Underlying profit before tax
year ended 31 March
£m

Underlying profit before tax, year ended 31 March, £m

Net asset value per share†, as at 31 March, pence

†adjusted, diluted
d

Dividends per share
year ended 31 March
pence

Dividends per share, year ended 31 March, pence

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 increased by £564.8 million (13.1%) to £4,877.3 million (2003: £4,312.5 million) reflecting the £467.9 million valuation surplus in the year and £100.7million retained earnings.

Adjusted net asset value per share (diluted) increased by 12.5% (107 pence). The key drivers in the increase in adjusted diluted net assets per share included retained earnings (19 pence) and revaluation surpluses (90 pence).

Income

Current annualised net rents, including our share of joint ventures, amount to £567.7million. This rental income is supported by long leases to strong covenants with regular upward only rent reviews.

The average unexpired lease term within the portfolio is 17.0 years with 79.2% of the rent roll remaining in place until 2014 (ten years). Assuming break clauses are exercised at the earliest date this average is still 15.8 years with 72.1% of the current rent roll remaining in place in ten years time.
Income quality has been measured by Investment Property Databank (IPD) (using a Dun and Bradstreet Stress Score) and shows 91.8% of our rent roll is derived from negligible, low and low/medium risk covenants (2003: 88.1%) with only 2.1% from high risk covenants (2003: 2.2%).
Reversionary income from investment properties and rental income from committed developments are currently estimated at a further £103.1million within five years, of which £49.1million is contracted through pre-lets or the expiry of rent-free periods and minimum rental uplifts.

* No rental value growth is assumed.
† includes rent reviews, letting of vacant space and expiry of rent free periods
(as determined by external valuers).

The graph provides a snapshot of committed income and estimated income based on ERV at 31 March 2004, 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.

Finance and capital structure

Approximately 50% of the value of the Group’s property and investments 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 2004 was 48% (2003: 49%). The mortgage ratio including our share of joint ventures net debt (which totals £529.8 million, without recourse to the Group) is 51% (2003: 52%).

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 and debt is taken out under long term facilities to balance the Group’s income profile from 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 fixed and floating rate debt and uses derivatives to produce the desired interest rate profile.

Financing statistics (Group)	31 March 2004	31 March 2003

Net debt	£4,866.8m	£4,361.4m
Weighted average debt maturity	16.9 years	18.0 years
Weighted average interest rate	6.38%	6.31%
% of net debt at fixed/capped interest rates	84%	83%
% of debt ringfenced with no recourse to other Group companies/assets	64%	64%
Interest cover (net rents/net interest)	1.55x	1.61x
Cash and available committed bank facilities,	£2,149.6m	£1,635.4m
of which drawn	£1,011.0m	£899.0m

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At 31 March 2004 net debt is £4,866.8 million (2003: £4,361.4 million). The joint ventures are separately financed with no recourse to British Land (2003: guarantees totalling £12 million).

The Group’s weighted average interest cost is 6.38% (2003: 6.31%). At 31 March 2004 84% of debt was at fixed or capped rates of interest (2003: 83%) with a weighted average debt maturity of 16.9 years (2003: 18.0 years). Interest cover is 1.55 times (net rents/net interest) (2003: 1.61 times).

The market value of net debt and derivatives (including British Land’s share of joint ventures) was £499.2million (before tax relief) greater than their book values. This compares to £527.3 million (before tax relief) last year, the reduction resulting principally from a combination of higher underlying market interest rates and lower credit spreads.

The Group continues to maintain a significant level of committed undrawn bank facilities to enable it to respond rapidly to opportunities in the market and to fund developments without the need for project specific financing.

Changes in financing

Securitisations
On 14 April 2003 the Group issued a further £50 million of Notes securitising the rental income stream from Meadowhall. This is in addition to the £825 million of Notes issued in December 2001. The weighted average interest rate of the issues is 5.5% per annum and the weighted average maturity is currently 19.4 years.

On 7 July 2003 the Group paid £73.5 million to redeem the outstanding Class D Fixed/Floating Rate Unsecured Notes 2014 issued as part of the Broadgate Securitisation. These Notes, which had a coupon of 7.1107% and a weighted average maturity of less than two years, were redeemed at a premium of £1.7 million.

On 6 October 2003 the Group issued a further £75.5 million of Notes securitising the rental income stream of certain Sainsbury’s supermarkets raising proceeds of £84 million at an effective rate of 5.8% per annum. The weighted average interest rate of the total issue is 6.77% per annum. The current weighted average maturity is 14.7 years.

US Dollar Private Placement 2015
On 3 October 2003 British Land issued US$154 million 6.30% Senior Notes due 2015 as a further US private placement to institutional debt investors. A cross-currency swap was simultaneously executed, effectively converting the issue into Sterling at a fixed rate of 5.999% per annum for the term.

Dividends

The Directors propose a final dividend of 10.07 pence per share, making a total dividend of 14.5 pence, an increase of 8.2% over 2003. This increase is in line with our continuing policy of dividend growth. The total dividend is covered 2.4 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 £163.1million (2003: £95.0 million). Property and investment disposals by the Group and cash returns from joint ventures realised cash of £281.3 million. Property acquisitions, developments and investment expenditure by the Group amounted to £466.9 million.

REITS

On 17 March 2004 the Government issued a consultation paper related to the potential introduction of a tax transparent property vehicle (REIT) in the UK. The Group is actively involved in this consultation process both directly with the Government and also through industry bodies such as the BPF. In principle the Group supports the introduction of a tax transparent property vehicle and believes such a vehicle would be beneficial to investors in property. Whilst the consultation process takes place the Group is seeking to be as flexible as possible in respect of its financing policy.

* Floating rate bonds with related fixed rate swaps.

d

Accounting issues

International Accounting Standards (IAS) will be applied, as required for all European Union listed companies, for our financial year ending 31 March 2006. The Group continues its preparations, which include changes to systems and methodologies, and will give further guidance on the accounting impact in due course.

The underlying performance of the business including cash flows will, of course, be unaffected. The reported results will however look significantly different and the accounting net asset value will be significantly lower than that shown under the Group’s existing accounting policies. The five major areas identified to date where IAS differs from UK GAAP affecting British Land are as follows:

UK GAAP does not permit deferred tax to be recognised where a business is not obliged to pay more tax at a future date. IAS on the other hand requires provision for all taxable and deductible differences between book values for tax purposes and accounting book values that are not ‘permanent’ timing differences. The effect of this change will be to reduce net assets.

The most significant such difference for British Land are the base costs for tax purposes of its properties and investments, including shares in joint ventures, and the accounting book values which include material revaluation adjustments. Tax payments will arise only if British Land sells those assets and the amount of tax crystallised will reflect the price received at the time, the structure of the transaction, any tax benefits available such as loss relief and benefits derived from the tax position of the purchaser or of the Group at that time. None of these mitigating factors are accurately quantifiable where no transaction is in contemplation and negotiation, accordingly the provision to be booked under IAS will not represent an amount which the company expects to pay. IAS does not permit the deferred tax provision to be discounted to present value.

The disclosures in note 7 to the financial statements show the calculation of the tax payable assuming all properties and investments are sold at the amount at which they are carried in the balance sheet, including trading and development surpluses but without regard to future events or tax planning.
The definitions of finance and operating leases are different between UK GAAP and IAS. Most of the Group’s leases will be unaffected. In the case of head leases on the Group’s leasehold properties, IAS will require a financial liability and corresponding asset to be recognised in the balance sheet. Currently the financial effect of head leases is reflected by our valuers as a reduction from their valuations. The net asset effect of this change is not expected to be material.
British Land uses derivatives to manage its interest rate risk. A description of financing policy and risk management is shown in the section Business Opportunity and Business Risk Management. In accordance with UK GAAP British Land’s derivatives are not valued when they are hedges and any income or costs are recognised in the profit and loss account consistently with the underlying hedged transaction. IAS requires all derivatives to be carried at their fair values in the balance sheet and, where the related debt is not carried at market value, this could reduce or increase reported net assets. Hedge accounting whereby profits and losses are matched with those of the underlying (instrument or) cash flow is subject to restrictive tests under IAS and as a result there may be more earnings volatility. The European Union has yet to ratify the use of the International Financial Reporting Standard covering hedge accounting (IAS 39) and there is uncertainty whether amendments may arise to IAS 39 as a result of the ratification process.
Unlike UK GAAP which requires proposed final dividends to be accrued, IAS only permits recognition of the liability to pay a final dividend when this has been approved by the shareholders. This will lead to an increase in net asset value.
IAS will require a portion of the Group’s irredeemable convertible bonds to be recognised as equity. This will lead to an increase in net asset value.

In preparation for IAS the Group has fully adopted Financial Reporting Standard (FRS 17) ‘Retirement Benefits’ and chosen early adoption of Financial Reporting Standard (FRS 20) ‘Share-based payment’. Adoption of these UK Accounting Standards is expected to result in substantially the same accounting treatment as that which will be required upon adoption of IAS.

The impact of the adoption of FRS 17 is to decrease profit before tax by £1.0 million (2003: increase £1.9 million). The Group has recorded a net pension asset of £0.1 million at 31 March 2004 (2003: liability £6.0 million) which represents only 0.002% of the Group’s adjusted net assets, reflecting the Group’s small employee numbers and payroll costs.

FRS 20 requires the fair value of equity-settled share based payments to be determined at the date of grant and for this fair value to be expensed over the vesting period. The impact of the adoption of FRS 20 is immaterial and hence no prior year adjustment is necessary.

Canary Wharf

The Group is a member of the consortium which has formed Songbird Estates PLC (‘Songbird’) to acquire Canary Wharf Group PLC (‘Canary’). On 21 May 2004 Songbird declared its offer for Canary unconditional in all respects having received valid acceptances from, or contracted to acquire, 60.9% of Canary’s existing issued share capital. British Land will own between 14.1% and 16.4% of Songbird (assuming 100% acceptances) – the exact percentage is dependent upon the eventual level of acceptances by Canary shareholders and whether they accept any of their consideration in the form of Songbird shares.

On completion the investment in Songbird will be accounted for as a fixed asset investment at directors’ valuation in accordance with the Group’s accounting policies.

Signature of Graham Roberts, Finance Director

Graham Roberts Finance Director
24 May 2004

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