Operating and Financial Review

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• Operating and Financial Review
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British Land is managed on an integrated basis to produce secure and attractive risk adjusted returns to shareholders. Risk management is a distinctive skill at British Land where the mix of assets, leases, developments and debt are managed together to ensure the most effective result. Overall, the Group's prime assets and their secure long term contracted rental income, primarily with upward only rent review clauses, present lower risks than many other property portfolios, enabling the returns to be enhanced using financial leverage. A 45-55% loan to value ratio is currently targeted, subject to the Board's view of markets, the prospects of and risks within the portfolio and the recurring cash flows of the business. At 31 March 2007, this was 41%, 45% proportionally consolidated (43% and 47% respectively pro forma for payment of REIT conversion charge).

Since we seek to maximise shareholder returns, we prefer to avoid equity issuance, except where the commercial opportunity clearly merits it. We also would expect to return capital to shareholders if over the medium term surplus funds arise over and above that which we believe can be attractively deployed in the business.

Debt is raised from a variety of sources with a spread of maturity dates. Longer term debt is raised principally through securitisations and debentures. Securitisations have a range of benefits, including long maturities at competitive rates with no recourse to other companies or assets in the Group, and without financial covenants by British Land. Debentures benefit from long maturities and bullet repayment.

Unsecured revolving bank facilities provide flexibility of drawing and repayment and are committed for terms of five to ten years. We aim to spread the maturities of the different facilities from a wide range of banks. Other unsecured funding includes US private placements, with terms of up to 20 years.

The Group borrows at fixed and floating rates and uses derivatives to achieve the desired interest rate profile; currently the policy is to maintain around 85% (subject to 5% tolerance) of debt at fixed or capped rates taking into account prospective transactions including development funding. This interest rate profile is closely monitored as part of our management of the overall financial effects of transactions. The year end position of 96% fixed/capped reflects recent disposals (and expenditure due in respect of the development programme).

The Funds and Joint Ventures are separately financed, and have their own interest rate derivatives, all with no recourse to British Land.

¹ Underlying profit before interest and tax/net interest excluding refinancing charges
² Debt to property and investments
³ See Table A

This has been another busy year for refinancings and raising new finance for the business, in each case reducing future interest costs and increasing distributable income:

• a £1 billion restructuring of the British Land debentures was completed in August 2006, creating a debenture security pool valued at £1.8 billion. A pre-tax refinancing charge of £228m, mainly due to the difference between the market and book values of the debentures, reduced EPRA NAVper share by 30 pence; there was virtually no effect on NNNAV(being NAVless the mark to market of debt and deferred taxation). British Land's annual interest costs are reduced by some £10m and the weighted average cost of debt is reduced by some 0.3% per annum. With the simplified uniform structure, improved common covenants and enhanced transparency, the new debentures are already showing benefits of greater liquidity;
• the refinancing of the Meadowhall Shopping Centre securitisation, with a new simplified structure provided rating improvements for bondholders and a lower on-going interest cost for the Company of 4.98% per annum. This refinancing incurred a charge of £39m;
• the last of British Land's higher coupon debentures (8.875% 2035 and 9.375% 2028) were refinanced by replacing them with a new amortising 2035 debenture at a rate of 5.0055% per annum, subject to a charge of £38m;
• we issued £98m 5.50% Senior Notes 2027 to US investors, effectively refinancing a similar amount of maturing notes. The new notes are unsecured and have a term of 20 years with no amortisation, with the same covenants as all other unsecured facilities;
• over £1 billion of new or renewed bank committed revolving credit facilities were raised during the year. These included a successful syndicated seven year loan facility of £405m, at lower market pricing to replace more expensive lines with shorter terms.

Over the last two calendar years we have taken advantage of financial market opportunities to refinance all British Land's secured and securitised debt of some £4.9 billion, and have agreed new or renewed bank facilities of over £2.7 billion. The refinancings have contributed to reducing our interest costs going forward; the weighted average interest rate at 31 December 2004 was 6.49% which reduced by 31 March 2007 to 5.36%.

In the Funds and Joint Ventures we have arranged the development finance for the Joint Venture project at Puerto Venecia, Zaragoza, provided in October 2006 by a syndicate of banks in Spain. The Tesco Aqua Limited Partnership was financed on completion in March 2007 by a term loan facility.