Business Review
Financing and cash flow
The management actions taken over recent years have given us exceptional asset based cash flow strengths and financing structure, managed together to achieve the most effective result.
British Land's prime property assets generate secure long term contracted rental income. The weighted average lease length is over 13 years (15 years to expiry). If no other management action is taken (and if all tenants with a break clause in their leases choose to exercise them) after three years (to March 2012) 94% of our current rents (96% including fixed/minimum uplifts) will continue to be contracted.
This reliable cash flow, offering considerable downside protection, is increased under lease terms which contractually provide for growth in income at regular rent reviews. In outline, of our total UK rent roll including our share of Funds and Joint Ventures:
- 98% are subject to upward only reviews;
- included in these, 74% have open market rent reviews, usually every five years (with reviews across the portfolio well spread over the next five year period);
- 24% are subject to RPI-linked (subject to a floor of zero), fixed or minimum uplifts. Over the next five years, £39 million further income is contracted to be added to the rent roll on the expiry of current rent-free periods and when minimum rental increases become effective under existing leases. (It should be noted that accounting policies under IFRS require that portions of these contracted increases are anticipated in the Group's income statement.);
- 2% are from short term leases;
- less than 0.5% are related to the occupier's turnover; and
- over 98% of the March 2009 quarter rents were collected within 10 working days of the due date, in line with our previous collection rates.
A wide spread of good tenant covenants contributes to the security of our income. No single entity accounts for more than 8% of the total rents. The top 10 office tenants include major international banks, firms of lawyers and HM Government, accounting for 24% of the rent roll. Top 10 retail tenants include the largest food operators, department stores and fashion/homeware retailers and provide 27% of rents.
| Leases and occupancy | Average lease length, years | Occupancy rate % | ||
|---|---|---|---|---|
| (excluding developments) | to expiry | to first break | Underlying1 | Overall |
| Retail | ||||
| Retail warehouses | 12.9 | 11.6 | 97.8 | 96.5 |
| Superstores | 18.1 | 18.1 | 100.0 | 100.0 |
| Shopping centres | 12.2 | 11.7 | 95.3 | 92.1 |
| Department stores | 30.2 | 28.3 | 100.0 | 100.0 |
| All retail | 16.3 | 15.3 | 97.8 | 96.5 |
| Offices | ||||
| City | 11.0 | 9.0 | 92.9 | 91.3 |
| West End | 11.9 | 9.3 | 99.3 | 97.6 |
| All offices | 11.3 | 9.1 | 94.4 | 92.8 |
| Industrial, distribution, leisure, other | 22.7 | 22.5 | 94.2 | 93.6 |
| Total | 14.8 | 13.3 | 96.4 | 94.9 |
1 The underlying occupancy rate includes accommodation subject to asset management initiatives and under offer
Occupancy is high across all sectors. The only significant areas available to let are in the development programme, where almost all the accommodation remaining is at the completed developments, being new Grade A City offices.
Financing policy
The principal objectives under this policy are to:
- minimise the cost of capital through a mix of debt and equity finance;
- raise debt from a variety of sources and maintain a spread of maturities, including longer-term financing supported by committed income under long leases;
- maintain significant committed undrawn loan facilities, to support current and future business requirements; and
- actively manage financial risks, including interest rate, foreign exchange, liquidity and counterparty risks.
Liability management is not a profit centre - no speculative transactions are undertaken. The Group's debt and derivative positions are continuously reviewed to meet current and expected debt requirements.
The Group maintains a balance between longer-term and shorter-term financings. Short-term financing is principally raised through bilateral and syndicated revolving bank facilities. Medium to longer-term financing comprises public and private bond issues, including private placements and securitisations. Financing risk is spread by using a variety of types of debt. The maturity profile is managed by spreading the repayment dates and extending facilities.
Interest rate management
To manage exposure to interest rate fluctuations the Board determines a range for the proportion of projected debt to be maintained at fixed or capped rates of interest. At present the target is 85% (subject to a 5% tolerance either side) over a rolling three to five year time horizon. With financing raised at both fixed and variable rates, derivatives (primarily interest rate swaps) are used to achieve the desired interest rate profile across all the Group debt. The use of derivatives is managed by the Board of British Land Financing Limited and its Derivative Sub-Committee. The Group's exposure to each derivative counterparty is monitored on a regular basis, as are their external credit ratings.
Foreign currency management
The Group's policy is to have no material unhedged net assets or liabilities denominated in foreign currencies. The currency risk on overseas investments is hedged via foreign currency denominated borrowings and derivatives.
When attractive terms are available to do so, the Group borrows in freely available currencies other than Sterling. The Group fully hedges its foreign currency risk on such borrowings through derivatives.
Liquidity and cash management
The Group maintains undrawn revolving bank facilities to provide financial liquidity. These can be drawn/repaid at short notice, reducing the need to hold liquid resources in cash and deposits. This minimises costs arising from the difference between borrowing and deposit rates, while reducing credit exposure. Deposits are placed as necessary to optimise the rate of return, subject to the creditworthiness of the counterparty.
Profit and loss account and balance sheet management
The Group monitors its current and projected financial position using several key internally generated reports: cash flow, borrowing, debt maturity and derivatives schedules. The Group also undertakes sensitivity analysis to assess the impact of proposed transactions and movements in interest rates on the key balance sheet, liquidity and profitability ratios.
Financing structure
At 31 March 2009 Group gross borrowings were £3,765 million; including our share of debt in Funds and Joint Ventures, gross borrowings were £5,649 million.
| Financing statistics | 31 March 2009 |
31 March 2008 |
|---|---|---|
| Group: | ||
| Net debt | £3,242m | £5,032m |
| Weighted average debt maturity | 15.1 yrs | 14.6 yrs |
| Weighted average interest rate | 5.33% | 5.27% |
| % of debt at fixed/capped interest rates | 100% | 100% |
| Interest cover 1 | 2.0x | 1.8x |
| Loan to value 2 | 46% | 41% |
| Undrawn committed facilities | £2,950m | £2,433m |
| Group and share of Funds and Joint Ventures: | ||
| Net debt 3 | £4,941m | £6,413m |
| Weighted average debt maturity | 12.7 yrs | 12.9 yrs |
| Weighted average interest rate | 5.27% | 5.29% |
| Interest cover 1 | 1.9x | 1.8x |
| Loan to value 2 | 57% | 47% |
1 Underlying profit before interest and tax/net interest
2 Debt to property and investments
3 See Table A
A loan to value ratio (LTV) for the business in the range of 45-55% is normally targeted, subject to the Board's view of the market, the prospects for the portfolio and its recurring cash flows. The LTV for the Group at 31 March 2009 was 46%, proportionally consolidated (including our share of Funds and Joint Ventures) 57%. We were alert to the markets being fully valued in 2007 and the prospects of ongoing falls in values over the last two years. Management actions have been proactive: £6.6 billion of sales have been achieved over the last three years, including £1.9 billion this year, to bring gearing down and the balance sheet has been further strengthened by the Rights Issue.
Interest cover has risen to 2 times for the Group, 1.9 times including our share of Funds and Joint Ventures.
Facilities with recourse to British Land
Secured debt at fixed interest rates with long maturities and no amortisation is provided by debentures. The £1 billion of Debentures issued by British Land are secured against a single combined pool of assets with common covenants: the value of assets is required to cover the amount of these debentures by a minimum of 1.5 times and net rental income must cover the interest at least 1 times. We use our rights under the debentures to withdraw, substitute or add properties (or cash collateral) in the security pool, in order to manage these cover ratios effectively and remedy if necessary. Secured debt issued by the Group as part of the acquisition in 2006 of the BL Davidson former joint venture also includes asset value and income ratios, similarly managed by us and remediable as necessary. The assets of the Group not subject to any security stood at over £2.5 billion as at 31 March 2009.
Unsecured bank revolving credit facilities raised by British Land provide full flexibility of drawing and repayment at short notice without additional cost, providing valuable operational support, and are committed for terms up to a further seven years. These lines are based on relationships with a large and diverse range of banks, reducing reliance on any particular lender. At 31 March 2009, 32 different financial institutions from 13 countries provided finance to the Group via bilateral or syndicated facilities. Current facilities amount to some £3.1 billion at floating interest rates based on LIBOR plus an average margin of 48bps per annum. These facilities were mostly undrawn at 31 March 2009 following repayments of bank loans from the proceeds of the Rights Issue.
The maturities of the Group bank facilities are such that only £355 million expire within the next two years and some £1 billion has a maturity of more than five years. Longer maturing facilities are sufficient to fund our committed development programme, and there is no scheduled Group refinancing requirement before 2014.
Other unsecured funding includes US private placements, issued at fixed rates, requiring no amortisation and with terms up to 20 years. British Land currently has two outstanding US private placements: £98 million 5.5% Senior Notes 2027 and $154m 6.3% Senior US Dollar Notes 2015 (which is swapped back into Sterling at 6.0%). Issuing in this market widens the debt investor base.
Covenants applying across each of these unsecured facilities
are the same:
a) Net Borrowings not to exceed 175% of Adjusted Capital
and Reserves; and
b) Net Unsecured Borrowings not to exceed 70% of
Unencumbered Assets.
No income/interest cover ratios apply to these facilities.
There are no other unsecured debt financial covenants in the Group.
| Covenant ratio | 31 March 2005 |
31 March 2006 |
31 March 2007 |
31 March 2008 |
31 March 2009 |
|---|---|---|---|---|---|
|
Net Unsecured Borrowings to Unencumbered Assets1 |
42% | 26% | 28% | 22% | 6% |
|
Net Borrowings to Adjusted Capital and Reserves2 |
106% | 73% | 74% | 74% | 83% |
See note 18 to the accounts for the calculations of ratios
Highest during the year to 31 March 2009: 30% 1; 115% 2
Although secured assets and other assets of non-recourse companies are excluded from unencumbered assets for the covenant calculations, unsecured lenders benefit from the surplus value of these assets above the related debt and from the free cash flow from them. During the year ended 31 March 2009 these assets generated £108 million of surplus cash after payment of interest and debt amortisation. Surplus cash is passed up to the Group on a quarterly basis. In addition, while investments in Joint Ventures do not form part of unencumbered assets, profits generated by these ventures are passed up to the Group.
Non-recourse to British Land
Funds and Joint Ventures are each financed and interest rate managed separately, according to the requirements of their property business, including superstores, department stores and shopping centres, without recourse to British Land. The debt has been arranged through securitisation or bank debt specifically for each venture. At 31 March 2009, our share of the total bank or securitised debt in the Funds and Joint Ventures is some £1.9 billion. Over the next two years a total of £362 million of this debt will mature and these facilities will be addressed by the relevant entities as appropriate for their businesses.
The majority of these debt arrangements in Funds and Joint Ventures include a variety of loan to value cover ratios and covenants, with maximum levels ranging from 55% to 90% (except for one Fund in which we have a small interest where the LTV is 35%) and several of them also have rental income to interest or debt service cover requirements. While there is no obligation on British Land to remedy any breach of these covenants, by way of example, if values of all the properties involved fell by 20% (from March 2009) our share of the total amount required to remedy the resulting loan to value ratios would be in the region of £140 million.
Transaction specific derivatives are employed to achieve the desired interest rate profile when floating rate debt is raised in these ventures.
Debentures without recourse to British Land are those issued by BLD Property Holdings Limited (formerly Asda Property Holdings Limited), a company acquired by the Group in 2006 as part of the BL Davidson transaction. There are three fixed rate debentures of £111 million in total:
- 10.3125% First Mortgage Debenture Stock 2011;
- 6.125% First Mortgage Debenture Stock 2014; and
- 9.125% First Mortgage Debenture Stock 2020.
Asset value and income ratio cover requirements are managed by us and remediable as necessary, in line with our other debentures.
Securitisations are used to raise long-term debt based on the cash flows generated from specific assets or pools of assets. The strength of these cash flows allows credit-rated debt to be raised with long maturities and at low interest costs. Securitisations are arranged in ring-fenced, special purpose subsidiaries with no recourse to other companies or assets in the Group (and no cross-default to the Group). Flexibility is included to manage the assets actively and provide suitable substitute assets or cash collateral if appropriate. Additional flexibility permits British Land to introduce third-party capital without repaying the existing debt (as seen in the formation of the new Meadowhall Joint Venture this year).
The securitisations by the Group of the Broadgate Estate (£2 billion) and now in the Joint Ventures of Meadowhall (£835 million) and the Sainsbury's superstores portfolio (£699 million) have weighted average maturities of 17 years, 15 years, and 11 years respectively. The only financial covenant applicable to these securitisations is that income must cover interest and scheduled amortisation (1 times). Investors may view further details of the securitisations on our website. These securitisations provide for quarterly principal repayments with the balance outstanding reducing to approximately 20-30% of the original amount raised by expected final maturity.
Although a combination of fixed and floating rate debt has been issued via securitisations, all the floating rate instruments have been fully swapped into fixed rate debt, from the date of issue, to provide certainty of interest cost.