Business Review

Financing and capital structure

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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 over the medium-term using financial leverage. A 45-55% loan to value ratio (LTV) is 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. Earlier in this year we considered the markets fully valued and brought gearing down through sales such that, despite the mark-downs in the valuation of the portfolio over the year, at 31 March 2008 LTV was 41%, 47% proportionally consolidated (2007: 43% and 47% respectively, pro forma for payment of REIT conversion charge).

In seeking 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. We spent £139m on share buy-backs during the year to take advantage of share prices below net asset value and to highlight management’s view that buy-backs remain an option to be considered alongside other competing uses of capital.

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 10 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 costs to be funded by further drawings under committed facilities. This interest rate profile is closely monitored as part of our management of the overall financial effects of transactions. The year end position of debt being 100% at fixed rate results from the repayment of floating rate debt following sales and our retention of existing interest rate derivatives at favourable rates which will hedge the increased debt arising from borrowing to fund expenditure in respect of the development programme; accordingly, we are not exposed to rising interest rates in this respect.

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

This has been another good year for refinancings and raising new finance for the business, in each case reducing future interest costs and increasing distributable income. In spite of the uncertainties emerging in the financial markets, we arranged:

• in early August 2007 a £620m seven-year syndicated multicurrency revolving loan facility at 42.5bps over LIBOR;
• in October 2007 a £250m bilateral loan and guarantee facility;
• a further £85m of new and extended bilaterals during the year; and
• in July 2007 a €220m bank facility to assist with the acquisition jointly by PREF and British Land of Nueva Condomina, the major shopping centre in Murcia, Spain.

Over the last three 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 overall of £3.5 billion. These refinancings have replaced more expensive shorter-term facilities with lower margin longer-dated lines, reducing our interest costs going forward. The average margin over LIBOR applicable to our bank facilities is now 48 bps per annum.

The combination of these transactions and the interest rate derivatives to fix the applicable LIBOR has (despite recent rising market rates) reduced our weighted average interest rate from 6.49% at 31 December 2004 to 5.29% at 31 March 2008.

British Land has current total committed bank facilities of £3.2 billion, of which some £2.4 billion is undrawn. Only £190m of these facilities expire in the next two years and £1.8 billion are for a term of more than five years.

Financing statistics	31 March 2008	31 March 2007
Group:
Net debt	£ 5,032 m	£6,404 m
Weighted average debt maturity	14.6 yrs	14.1 yrs
Weighted average interest rate	5.27%	5.32%
% of net debt at fixed/capped interest rates	100%	96%
Interest cover1	1.8x	1.7x
Loan to value2	41%	41%4
Unsecured debt to unencumbered assets	22%	28%
Undrawn committed facilities	£2,433m	£1,657m
Group and share of Funds and Joint Ventures:
Net debt3	£6,413 m	£7,741m
Weighted average debt maturity	12.9 yrs	12.7 yrs
Weighted average interest rate	5.29%	5.36%
Interest cover1	1.8x	1.7x
Loan to value2	47%	45%4

¹ Underlying profit before interest and tax/net interest excluding refinancing charges
² Debt to property and investments
³ See Table A
⁴ Proforma for payment of REIT conversion charge (made July 2007) 43% Group and 47% including share of Funds and Joint Ventures

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