Overview
Chairman's Statement
"We are well focused
on the opportunities we
now expect to unfold."
Markets
The extreme financial market stress of the last 12 months continues to pose challenges to all businesses. The world banking crisis is unprecedented in scale and complexity, and the efforts of governments, central banks and regulators to support financial systems have only recently begun to take effect.
In the meantime we have felt the impact of a global recession. The effect on the so called real economy has yet to be fully felt, as consumers and businesses adjust their activities to mitigate both operational and financial risk. After a slow start, the response by governments to the slowing world economy has been massive - its benefits will, of course, take time to flow through. Schemes to restore banks' ability to lend are significant; it is confidence in the ongoing availability of debt rather than its overall cost that is holding back activity, so it is very important that banks are restored to full operation. We have also yet to see how the financial stimuli employed, including interest rate reductions, will affect personal and corporate behaviour. Given the powerful opposing forces in the markets, the range of possible outcomes for the world and UK economy is certainly wide.
Against this background, the real estate investment market behaved no differently than other financial markets. The turmoil dramatically hit valuations and introduced significant operational issues, not least reduced liquidity for transactions. Initially values fell indiscriminately across the board, as in other markets. The repricing was inevitably approximate and had less to do with changes in income security and longevity and more to do with the comparative pricing of alternative investments in a capital constrained environment. As market uncertainty lifts over the coming months, property specific valuations will become based once more on observable evidence, particularly as regards the sustainability of income. Prime property, whilst not immune, is the place to be. Secondary property has further to go as income risk becomes more readily quantifiable.
In these circumstances our actions have been decisive, looking to secure the Company's position and preserve its options. We followed basic disciplines: in the overall market conditions, caution dictated that we should be net sellers and that we should revisit capital expenditure projects.
Four decisions defined the year: first, the landmark sale of the Willis building for £400 million in June, reducing debt with a view to redeploying capital later for greater growth. Next we deferred construction of 122 Leadenhall Street, reflecting heightened construction and letting risk. Thirdly, in February we sold half our interest in Meadowhall, realising our long held ambition to lighten our weighting to this high quality steady performer, whilst simultaneously removing £1 billion of debt from our balance sheet. Finally we raised £740 million from shareholders in a pre-emptive Rights Issue: an insurance policy in an uncertain world which preserves our options as we look to capitalise on market opportunities.
Results
In the year to March 2009 our portfolio declined 28% in value. Taking the Rights Issue into account, this valuation reduction took our net asset value down from 1114 pence to 398 pence per share. Despite an average lease length of 13 years and a 96% occupancy level, the valuation decline to date has been similar to IPD, the industry benchmark, in which the comparable factors are nine years and 91% respectively. We expect to see these factors recognised, as secondary property is repriced. Indeed, we are encouraged by early signs of price stabilisation for prime, as equity investors begin to return, and expect the gradual re-emergence of pricing differentials between prime and secondary.
Dividends
We recognise the importance of dividends to investors and have increased the absolute amount paid out, reflecting the increased equity base after the Rights Issue. Our last quarterly dividend for the year to March 2009 is 6.5 pence per share. Adjusting for the effects of the Rights Issue the full year dividend is 29.8 pence per share, slightly ahead of the prior year.
For shareholders who wish to reinvest this fourth quarter dividend in the Company an enhanced scrip alternative will be offered, to enable receipt of shares instead of a cash dividend. Further details have been provided with the Annual General Meeting notice circular.
For the year to March 2010, the quarterly dividend is being continued at 6.5 pence per share, in line with guidance given at the time of the Rights Issue, equivalent for the full year to 26 pence per share.
Looking forward
The Board is focused on developing British Land as a leader amongst global REITs maximising shareholder value through the cycle. The markets may be volatile and at times threatening but we have the disciplines to ride through the rougher moments and to capitalise on opportunity.
In spite of absorbing an adjustment to our property values of some 37% from the peak of the property market, we remain well capitalised with long leases, high occupancy and long fixed rate debt. Our sights are now set firmly on the next stage of the course and on maximising the benefits of our relative strength. Investor support for our equity raising is valued and important to the Board, and we acknowledge the confidence bestowed in us. Whilst caution remains our master, we are well focused on the opportunities we now expect to unfold.
People
We had a number of significant changes to the Board this year. Sir David Michels stood down as a non-executive director at last year's Annual General Meeting; we thank him warmly for his important contribution over the five years with us. We are pleased to welcome Aubrey Adams and John Gildersleeve, exceptional additions to our Board, who joined as non-executive directors in September 2008. Due to the demands of other business commitments, Kate Swann has decided not to put herself forward for re-election as a non-executive director at this year's Annual General Meeting on 10 July 2009. We will be sorry to see her leave and thank her for her valuable contribution.
In November 2008 Stephen Hester left to take up his position as Chief Executive at The Royal Bank of Scotland. We thank him for his excellent contribution to the leadership and development of British Land over the last four years and wish him every success with his important new role.
After a few months during which I held the reins as interim Executive Chairman, I was delighted to announce in January 2009 the appointment of Chris Grigg as our Chief Executive. Chris brings deep knowledge of the investment and financial sectors from his time at Goldman Sachs and wide management experience from his roles at Barclays. His background and skills are already blending strongly with those of British Land's well established management team.
It is to the credit of all at British Land that our team has responded with focus and dedication to the tasks in hand during these times - my especial thanks for their resilience, determination and support under the heavy demands arising out of a difficult year in the markets.
Chris Gibson-Smith
Chairman
20 May 2009