REG - British Land Co PLC British Land Jersey - Final Results - Part 1 <Origin Href="QuoteRef">BLND.L</Origin> - Part 2
17/05/2017 07:06
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refurbishment programme to coincide with the
centre's 25th anniversary. Our improvements focus on the public realm and
customer service facilities and will deliver more flexible space for our
occupiers.
Our insight has also guided our placemaking activities across the portfolio.
This year we staged a virtual Christmas present hunt at 21 Local and Regional
centres, the largest ever augmented reality game in UK retail property. Eats
from the Street, showcasing the best in UK street food returned to ten of our
centres and we launched Street Style a fashion and beauty event which ran
across seven of our assets. Our Young Readers Programme, run in partnership
with the National Literacy Trust and retail occupiers, is in its sixth year
and we are pleased that over 5,000 children took part this year. Our Bright
Lights skills programme provided work placements with our retail and leisure
occupiers for 70 local unemployed young people of which 75% moved into
permanent jobs soon after. Initiatives such as these help enliven our places,
attracting new and repeat visitors to our centres and foster stronger
connections with local communities and our occupiers. The people who live in
and around our assets are an important part of our catchment and their loyalty
is increasingly relevant as customers have greater choices around how and
where they shop.
Offices Placemaking
Key metrics
Year ended 31 March 2016 2017
Portfolio Valuation (BL share) £6,790m £6,844m
- Of which campuses £5,032m £4,960m
Occupancy 98.6% 97.7%
Weighted average lease length to first break 7.9 yrs 7.8 yrs
Total property return 15.4% 2.8%
- Yield shift (21) bps 15 bps
- ERV growth 9.6% 0.5%
- Valuation movement 12.1% (0.7)%
Lettings/renewals 296,000 sq ft 279,000 sq ft
Lettings/renewals vs ERV 5.6% 1.4%
On a proportionally consolidated basis including the Group's share of joint
ventures and funds
Our Offices business has had a strong year. The portfolio is virtually full
and we have made good progress letting space across our recently completed,
committed and near term pipeline. In line with our strategy to create
outstanding places for modern professional and consumer lifestyles we are
increasing the mix of uses across our campuses, to appeal to a broader range
of occupiers.
Office take up in central London has been led by the technology and media
sectors, which are now the most significant component of demand, accounting
for nearly one third of activity in 2016. With its pool of international
talent and reputation for innovation, London has proved to be a magnet for
these new and growing companies. This trend is driving a change in the type
of space which is succeeding, with a growing emphasis on flexibility,
co-working and wellbeing, as well as environments which are compatible with
the way people's work and leisure time overlap. Financial services accounted
for under 20% of take up, less than half the figure in 2010. This trend may
accelerate further with regulatory and policy changes following Brexit, but
the feedback we have is that the preference of financial services companies is
to retain the majority of their operations in London because overwhelmingly
this is where their employees want to live and work.
Our strategy focuses on providing the right space, the right services, and the
right environments to meet this broader spectrum of demand. We have engaged
more actively with the users of our space, and this year, launched the "Office
Agenda" an online platform where we share key insights with workers and
decision makers on topical issues including the role of real estate in
attracting and retaining talent and "smart" offices. Our surveys of nearly
4,000 office workers and decision-makers provided valuable insight into what
makes a great place to work, helping our occupiers refine their office
strategy and enabling us to better reflect their needs.
At the portfolio level, this includes broadening the range of uses on our
campuses with a higher allocation to retail and leisure, as well as delivering
more flexible office space with floorplates which are easily divisible,
enabling us to target a wider range of occupiers. At the campus level, we are
applying our placemaking framework by enhancing and enlivening our assets with
a comprehensive programme of events including exhibitions, art installations,
concerts, wellbeing activities, pop-up shops, bars, markets and restaurants,
and live screening of sports, theatre and film. We also partner with our
occupiers on community initiatives, such as the Regent's Place Community Fund,
where our partnership with occupiers has invested £30,000 this year to support
local community projects, making a positive difference and strengthening our
links with local communities. We survey occupiers across our campuses and our
results show that satisfaction levels are high, and have improved over the
last two years, particularly amongst key decision makers.
The success of our approach is demonstrated by our leasing activity, which
this year totalled 279,000 sq ft, 1.4% ahead of ERV. 33,000 sq ft related to
retail, leisure or community space. We have let a further 85,000 sq ft on a
short term or meanwhile basis, adding uses which enliven our campuses and
address lease expiries while preserving optionality for redevelopment. We
were pleased that a number of our major occupiers re-committed to our campuses
in the year, including Facebook who have agreed terms to further extend their
occupation of 106,000 sq ft at 10 Brock Street. At 20 Triton Street,
Dimensional Fund Advisors have agreed to a re-gear, taking their term to 10
years (original expiry June 2020), with an additional 12,000 sq ft and Credit
Agricole have agreed to extend their 140,000 sq ft lease at Broadwalk House
from 2019 to 2025. This activity, as well as the final lettings at Marble
Arch House and The Leadenhall Building has increased like for like rent across
the office portfolio by 4.5%.
We are also letting well across our recently completed and near term pipeline
whilst successfully expanding our mix of uses. At 4 Kingdom Street,
Paddington Central, we were almost 80% under offer on the office space within
a week of completion in April. In aggregate, these leases are on terms 3%
ahead of pre-referendum net effective ERVs and over 25% ahead of our
Investment Committee assumptions at commitment in 2014. We have signed a
two-year lease with Pergola Paddington Central for an 850-capacity pop-up
dining destination on the site of 5 Kingdom Street. The venue will feature
some of London's most popular restaurants and bars, including Patty & Bun, DF
/ Mexico and Raw Press and the offering will change each season. At
Broadgate, we are addressing vacancies at 2 Finsbury Avenue with 90,000 sq ft
of short term lettings, including to Theatre Delicatessen, a fintech company
and an architecture practice.
We started on site at 100 Liverpool Street in the year. It sits at the
gateway to our Broadgate campus, adjacent to Liverpool Street station where
the first Crossrail services will commence next year. It covers 520,000 sq ft
(an increase of 140,000 sq ft) and is designed to be divisible into units as
small as 3,000 sq ft with shared facilities catering to demand from smaller
businesses. 90,000 sq ft is allocated to retail and restaurants, and we are
committed to both the WELL standard for wellbeing and the WiredScore Platinum
rating for internet connectivity and infrastructure. This development is a
good illustration of our strategy in Offices to deliver buildings which meet
evolving customer needs and appeal to a broader range of occupiers. The
redevelopment is expected to more than double rents at the building.
The next phase of development will see the mix of uses continue to evolve.
Our revised plans for a 288,000 sq ft refurbishment at 1 Finsbury Avenue
include a cinema, retail and restaurants at ground floor, and our proposals at
135 Bishopsgate allocate 43,000 sq ft to retail. We have submitted plans for
refurbishment of these buildings, and are in discussions with prospective
occupiers on nearly half of the combined space. We expect to commit to both
refurbishments in the coming months with an associated cost of £90 million. At
Paddington Central, we are in advanced negotiations with an operator to
pre-let a boutique hotel and all day dining concept on the site of the
existing management suite (the Gateway Building). At Regent's Place we are
pleased that we are under offer on 310,000 sq ft representing all of the
office space at our proposed redevelopment of 1 Triton Square, and received
approval from the London Borough of Camden last week.
This means that across our campuses, we are under offer or in advanced
negotiations on over 700,000 sq ft of space with significant discussions
ongoing across the London business with potential occupiers on a further
850,000 sq ft of space, which could trigger further development commitments.
As part of our campus offering we will shortly launch a branded flexible
workspace offer which enables us to capture incremental demand from the
increasing number of small businesses taking space in London as well as
meeting a growing need amongst our existing occupiers for flexible space for
specific projects and teams. Our first flexible deal is on 25,000 sq ft at 2
Finsbury Avenue, extending our relationship with an existing occupier at
Paddington Central, who need additional space for their digital team. This
initiative strengthens existing relationships and attracts new occupiers to
our campus, potentially our core occupiers of the future. We have allocated
further space across our campuses including at 4 Kingdom Street, and we have
commenced fit-out across 80,000 sq ft.
Following the exchange of The Leadenhall Building, our standalone office
portfolio accounts for 22% of Offices. At 7 Clarges Street, the 51,000 sq ft
office element of our mixed use development in Mayfair, we were pleased that
over 80% of the space was let or under offer just four months after its launch
in September. We achieved an average rent of £113 psf, on terms in line with
pre-referendum net effective ERVs, demonstrating the continuing demand for
quality office space in London. At Yalding House (29,000 sq ft) we have let
four of the six floors and are under offer on the final two. Like The
Leadenhall Building, these are buildings where we can develop and trade
opportunistically, to provide liquidity in our portfolio and enhance returns.
FINANCE REVIEW
Year ended 31 March 2016 2017
Underlying Profit1,2 £363m £390m
Underlying earnings per share1 34.1p 37.8p
IFRS profit before tax £1,331m £195m
Dividend per share 28.36p 29.20p
Total accounting return1,3 +14.2% +2.7%
EPRA net asset value per share1,2 919p 915p
IFRS net assets £9,619m £9,476m
LTV 1,4,5 32.1% 29.9%
Weighted average interest rate 5 3.3% 3.1%
1 See Glossary for definitions
2 See Table B within supplementary disclosure for reconciliations to IFRS
metrics
3 See Note 2 within condensed financial statements for calculation
4 See Note 14 within condensed financial statements for calculation and
reconciliation to IFRS metrics
5 On a proportionally consolidated basis including the Group's share of joint
ventures and funds
Overview
We delivered a good set of results especially in the context of an uncertain
environment, with Underlying Profit growth of 7.4% and underlying earnings per
share (EPS) growth of 10.9%.
EPRA net asset value per share (NAV) decreased by 0.4% reflecting a portfolio
valuation fall of 1.4% on a proportionally consolidated basis. It also
includes the impact of no longer treating the 1.5% convertible bond as
dilutive, as the share price was below the exchange price of 693 pence at the
year end. Excluding this adjustment, NAV decreased by 1.7%.
We have been active, with £2.0 billion of gross capital activity (£1.1 billion
of net capital activity). This comprises £1.5 billion of disposals of
primarily single-let Retail assets and our 50% interest in The Leadenhall
Building which completes after the year end. We have reinvested £0.3 billion
in our developments and capital expenditure across the portfolio, and made
£0.2 billion of acquisitions, primarily of assets adjacent to existing
holdings.
The net proceeds from this activity improve our financial resilience and
provide capacity for reinvestment into our portfolio, particularly on the
broad range of development opportunities within our existing pipeline. The
proportionally consolidated loan to value ratio (LTV) has decreased to 29.9%
from 32.1% at March 2016. Our actions have reduced the proportionally
consolidated weighted average interest rate to 3.1% from 3.3% at March 2016.
Adjusting for the receipt of proceeds from the sale of our 50% interest in The
Leadenhall Building, LTV is 26.9% and the weighted average interest rate is
3.4%.
Underlying Profit increased by 7.4% to £390 million; the impact of net sales
has been more than offset by like-for-like rental growth, financing activity
and a reduction in administrative expenses. The Group's operating cost ratio
has reduced by 100 bps to 15.6% (2015/16: 16.6%).
IFRS profit before tax for the year of £195 million is lower than the prior
year profit of £1,331 million, primarily due to the negative property
valuation movement in the year.
As previously announced in May 2016, we increased the dividend for the year
ended 31 March 2017 by 3.0%. Looking forward to next year we intend to
increase the dividend by a further 3.0% to 30.08 pence per share, with a
quarterly dividend of 7.52 pence per share.
Presentation of financial information
The Group financial statements are prepared under IFRS where the Group's
interests in joint ventures and funds are shown as a single line item on the
income statement and balance sheet and all subsidiaries are consolidated at
100%.
Management considers the business principally on a proportionally consolidated
basis when setting the strategy, determining annual priorities, making
investment and financing decisions and reviewing performance. This includes
the Group's share of joint ventures and funds on a line-by-line basis and
excludes non-controlling interests in the Group's subsidiaries. The financial
key performance indicators are also presented on this basis.
A summary income statement and summary balance sheet which reconcile the Group
income statements to British Land's interests on a proportionally consolidated
basis are included in Table A within the supplementary disclosures.
Management monitors Underlying Profit as this more accurately reflects the
Group's financial performance and the underlying recurring performance of our
core property rental activity, as opposed to IFRS metrics which include the
non-cash valuation movement on the property portfolio. It is based on the Best
Practices Recommendations of the European Public Real Estate Association
(EPRA) which are widely used alternate metrics to their IFRS equivalents.
Management also monitors EPRA NAV as this provides a transparent and
consistent basis to enable comparison between European property companies.
Linked to this, the use of Total Accounting Return allows management to
monitor return to shareholders based on movements in a consistently applied
metric, being EPRA NAV, and dividends paid.
Loan to value (proportionally consolidated) is also monitored by management as
a key measure of the level of debt employed by the Group to meet its strategic
objectives, along with a measurement of risk. It also allows comparison to
other property companies who similarly monitor and report this measure.
Income statement
1. Underlying Profit
Underlying Profit is the measure that is used internally to assess income
performance. No company adjustments have been made in the current or prior
year and therefore this is the same as the pre-tax EPRA earnings measure which
includes a number of adjustments to the IFRS reported profit before tax. This
is presented below on a proportionally consolidated basis:
Section 2016 2017
£m £m
Gross rental income 654 643
Property operating expenses (34) (33)
Net rental income 1.1 620 610
Net fees and other income 17 17
Administrative expenses 1.3 (94) (86)
Net financing costs 1.2 (180) (151)
Underlying profit 363 390
Non-controlling interests in Underlying Profit 14 14
EPRA adjustments1 954 (209)
IFRS profit before tax 2 1,331 195
Underlying EPS 1.4 34.1p 37.8p
IFRS basic EPS 2 131.2p 18.8p
Dividend per share 3 28.36p 29.20p
1 EPRA adjustments consist of investment and development property
revaluations, gains/losses on investment and trading property disposals,
changes in the fair value of financial instruments and associated close out
costs. These items are presented in the 'capital and other' column of the
consolidated income statement.
1.1 Net rental income
£m
Net rental income for the year ended 31 March 2016 620
Capital activity (23)
Like-for-like rental income growth 11
Expiries on properties in the development pipeline (8)
Leasing of developments 10
Net rental income for the year ended 31 March 2017 610
The £10 million decrease in net rental income during the year was the result
of like-for-like growth and leasing of developments partially offsetting the
impact of capital activity and lease expiries.
Like-for-like rental income growth was 2.9% excluding the impact of surrender
premia. Retail growth was 2.0% (1.6% including the impact of surrender
premia). This was driven by strong leasing activity, asset management
activities, such as splitting units, and additional turnover and car park
income.
Office and Residential like-for-like growth was 4.5%; just over half of this
was due to the letting up of completed developments that are now in the
like-for-like portfolio, predominantly The Leadenhall Building and Marble Arch
House which are both now full. The remainder is attributable to strong rent
review activity, particularly at Regent's Place.
Lease expiries relating to properties in our development pipeline reduced net
rents by £8 million, including £3 million at 100 Liverpool Street where we are
on site and £3 million at 1 Triton Square which is under offer for
redevelopment on a pre-let basis; we have received approval for this
development from the London Borough of Camden. The successful letting of our
recently completed development programme provided £10 million of additional
rent this year. This brings the net impact of developments on net rental
income to £2 million.
Looking ahead to next year, we expect transactions completing post year end to
reduce rent by £18 million and future lease expiries relating to properties in
the development pipeline to reduce rent by £6 million. Rental income growth
will be driven by the letting up of developments and like-for-like growth.
1.2 Net financing costs
£m
Net financing costs for the year ended 31 March 2016 (180)
Financing activity - debt related transactions 16
Financing decisions - lower interest rates 9
Acquisitions (5)
Disposals 10
Completion of developments (1)
Net financing costs for the year ended 31 March 2017 (151)
Financing costs were £29 million lower this year.
Debt related transactions over the last two years, including the £350 million
zero coupon convertible bond, reduced costs by £16 million this year. In the
current year, we used sales proceeds to repay unsecured revolving credit
facilities and we completed the early repayment of the £295 million TBL
Properties Limited secured loan. We agreed one year extensions on a total of
£1.4 billion of our unsecured facilities and agreed a new £100 million
bi-lateral facility. Our liability management, which is NPV positive, reduced
NAV by 4 pence per share.
Our approach to interest rate management remains an important factor in
reducing interest costs. The decision to keep a portion of our debt at
floating rates has seen us benefit from lower market rates which has resulted
in a reduction in financing costs of £9 million. The proportion of our
projected debt held at fixed rates is 60% on average over the next 5 years. At
31 March 2017, our debt pro-forma for the sale of the Leadenhall Building was
78% fixed on a spot basis.
1.3 Administrative expenses
Administrative expenses decreased by £8 million this year as a result of
managing down our cost base and lower variable pay. The Group's operating cost
ratio has reduced by 100 bps to 15.6% (2015/16: 16.6%).
1.4 Underlying Earnings Per Share
Underlying EPS was 37.8 pence (2015/16: 34.1 pence) based on Underlying Profit
after tax of £390 million (2015/16: £363 million). The increase in underlying
EPS of 10.9% is more than the increase in Underlying Profit of 7.4% as the
1.5% convertible bond is no longer dilutive. As the share price was below the
693 pence exchange price at year end, no dilution adjustment was made
(2015/16: £6 million interest added back and shares increased by 57.8
million), in line with EPRA guidance.
2. IFRS profit before tax
The main difference between IFRS profit before tax and Underlying Profit is
that it includes the valuation movement on investment and development
properties and the fair value movements of financial instruments. In addition,
the Group's investments in joint ventures and funds are equity accounted in
the IFRS income statement but are included on a proportionally consolidated
basis within Underlying Profit.
The IFRS profit before tax for the year was £195 million, compared to a profit
before tax for the prior year of £1,331 million. This reflects the valuation
movement on the Group's properties which was £760 million less than the prior
year and the valuation movement on the properties held in joint ventures and
funds which was £338 million less than the prior year, in both cases resulting
from outward yield shift and a lower level of ERV growth in the current year.
IFRS basic EPS was 18.8 pence per share, compared to 131.2 pence per share in
the prior year, driven principally by property valuation movements. The basic
weighted average number of shares in issue during the year was 1,029 million
(2015/16: 1,025 million).
3. Dividends
In line with intention announced in May 2016, we increased the dividend by
3.0% for the year to March 2017 which gives a full year dividend of 29.20
pence per share.
The fourth interim dividend payment for the quarter ended 31 March 2017 will
be 7.30 pence per share. Payment will be made on 4 August 2017 to shareholders
on the register at close of business on 30 June 2017.
The increase in Underlying EPS of 10.9% resulted in a reduction in the
dividend pay-out ratio to 77% (2015/16: 83%).
In proposing the dividend for the coming year, the Board took into account the
current market environment, our target payout range and drivers of next year's
profits. It is the Board's intention to increase the dividend by 3.0% in
2017/18 to 30.08 pence per share, with a quarterly dividend of 7.52 pence per
share, reflecting confidence in our ability to grow income over the medium
term.
Balance sheet
Section 2016 2017
£m £m
Properties at valuation 14,648 13,940
Other non-current assets 138 156
14,786 14,096
Other net current liabilities (257) (364)
Adjusted net debt 6 (4,765) (4,223)
Other non-current liabilities (90) (11)
EPRA net assets (undiluted) 9,674 9,498
Dilution impact of convertible bond 400 -
EPRA net assets (diluted) 10,074 9,498
EPRA NAV per share 4 919p 915p
Non-controlling interests 277 255
1.5% convertible bond dilution (400) -
Other EPRA adjustments1 (332) (277)
IFRS net assets 5 9,619 9,476
1 EPRA net assets exclude the mark-to-market on effective cash flow hedges and
related debt adjustments, the mark-to-market on the convertible bonds as well
as deferred taxation on property and derivative revaluations. They include the
valuation surplus on trading properties and are adjusted for the dilutive
impact of share options. 2015/16 also includes an adjustment for the dilutive
impact of the 1.5% convertible bond maturing in 2017. No dilution adjustment
is made for the £350 million zero coupon convertible bond maturing in 2020.
Details of the EPRA adjustments are included in Table B within the
supplementary disclosures.
4. EPRA net asset value per share
pence
EPRA NAV per share at 31 March 2016 919
H1 valuation movement (39)
H2 valuation movement 19
Underlying Profit 36
Dividends (27)
Finance transaction costs (4)
1.5% convertible bond dilution reversal 12
Other (1)
EPRA NAV per share at 31 March 2017 915
The 0.4% decrease in EPRA NAV per share reflects a valuation decline of 1.4%.
Values fell by 2.8% in the first six months, followed by an upward revaluation
of 1.6% in the second half of the year. The movement in the year reflected
outward yield movement of 15 bps, partially offset by ERV growth of 1.1%. Net
sales exchanged of over £1.5 billion, including Debenhams, Oxford Street and
The Leadenhall Building, provided a positive contribution to the portfolio
capital return of 0.9%.
Retail valuations were down 1.8% with outward yield movement of 14 bps
partially offset by ERV growth of 1.6%; the multi-let portfolio saw stronger
ERV growth of 2.4%, driven by good leasing activity.
Office and Residential valuations were down 0.5% with outward yield movement
of 15 bps partially offset by ERV growth of 0.5%; We agreed the sale of
Leadenhall at a price 24% ahead of the 30 September 2016 valuation and the
valuers have recognised the majority of this increase in the 31 March 2017
valuation.
The 4 pence impact of finance transaction costs primarily relates to early
repayment of term debt and termination of associated interest rate swaps.
There is a 12 pence benefit to EPRA NAV due to the reversal of the 1.5%
convertible bond dilution included in 2015/16 results. As the share price was
below the 693 pence exchange price at year end, no dilution adjustment was
made (2015/16: £400 million debt deducted from net asset value and diluted
number of shares increased by 57.8 million). Excluding this adjustment, NAV
decreased by 1.7%.
5. IFRS net assets
IFRS net assets at 31 March 2017 were £9,476 million, a decrease of £143
million from 31 March 2016. This was primarily due to IFRS profit before tax
of £195 million being less than the dividends paid in the year of £296
million.
Cash flow, net debt and financing
6. Adjusted net debt1
£m
Adjusted net debt at 31 March 2016 (4,765)
Disposals 853
Acquisitions (103)
Development and capex (263)
Net cash from operations 363
Dividends (295)
UBS capital payment 10
Other (23)
Adjusted net debt at 31 March 2017 (4,223)
1 Adjusted net debt is a proportionally consolidated measure. It represents
the Group net debt as disclosed in Note 14 and the Group's share of joint
venture and funds' net debt excluding the mark-to-market on effective cash
flow hedges and related debt adjustments and non-controlling interests. A
reconciliation between the Group net debt and adjusted net debt is included in
Table A within the supplementary disclosures.
Capital activity reduced debt by £0.5 billion in the year. Completed disposals
during the year included the sale of Debenhams, Oxford Street for £400
million, a portfolio of non-core Retail assets for £191 million and 8
superstores totalling £111 million (BL share). Acquisitions completed in the
year included the New George Street Estate in Plymouth for £64 million which
will now be managed as an integrated part of Drake Circus. Other investments
included development expenditure of £189 million and capital expenditure of
£74 million related to asset management on the standing portfolio.
Net divestment including transactions completing after the year end increases
to £1.1 billion. This includes the expected completion of the sale of The
Leadenhall Building sale for £575 million (BL share) and the completion of the
Tesco JV swap transaction resulting in a net divestment of £73 million of
superstore assets.
We received a £10 million capital payment received in December 2016 from UBS
in relation to the development and occupation of 5 Broadgate, and subsequent
exit of 100 Liverpool Street, including 8-10 Broadgate.
7. Financing
Group Proportionally consolidated
2016 2017 2016 2017
Net debt / adjusted net debt 1 £3,617m £3,094m £4,765m £4,223m
Principal amount of gross debt £3,552m £3,069m £5,089m £4,520m
Loan to value 25.2% 22.6% 32.1% 29.9%
Weighted average interest rate 2.6% 2.4% 3.3% 3.1%
Interest cover 3.3 4.5 3.0 3.6
Weighted average debt maturity 7.2 years 6.9 years 8.1 years 7.7 years
1 Group data as presented in note 14 of the condensed financial statements.
The proportionally consolidated figures include the Group's share of joint
venture and funds' net debt and exclude the mark-to-market on effective cash
flow hedges and related debt adjustments and non-controlling interests.
The balance sheet remains resilient. LTV and weighted average interest rate on
drawn debt were reduced and interest cover improved. Our proportionally
consolidated LTV was 29.9% at 31 March 2017, down 220 bps from 32.1% at March
2016 mainly reflecting the impact of disposals. This reduces by a further 300
bps to 26.9% pro-forma for the sale of The Leadenhall Building. Note 14 of the
condensed financial statements sets out the calculation of the Group and
proportionally consolidated LTV.
The strength of the Group's balance sheet is reflected in British Land's
senior unsecured credit rating which continues to be rated by Fitch at A- with
the Outlook upgraded to 'Positive'.
Our proportionally consolidated weighted average interest rate reduced to 3.1%
at 31 March 2017 from 3.3% at 31 March 2016. This reflects a 60 bps reduction
principally as a result of our financing activity and decisions, partially
offset by a rise of 40 bps due to repayment of cheaper facilities with sales
proceeds received. This increases to 3.4% pro-forma for the sale of The
Leadenhall Building.
Our weighted average debt maturity is 8 years.
British Land has £1.8 billion of committed unsecured revolving banking
facilities. Of these facilities, £1.7 billion have maturities of more than two
years and £1.3 billion was undrawn at 31 March 2017. Based on our current
commitments, these facilities and scheduled debt maturities, we have no
requirement to refinance until early 2021 regardless of whether our
convertible bonds are cash or equity settled.
Lucinda Bell
Chief Financial Officer
FINANCIAL POLICIES AND PRINCIPLES
Leverage
We manage our use of debt and equity finance to balance the benefits of
leverage against the risks, including a magnification of property valuation
movements. A loan to value ratio ("LTV") measures our leverage, primarily on a
proportionally consolidated basis including our share of joint ventures and
funds and excluding non-controlling interests. Our current proportionally
consolidated LTV of 29.9% is higher than the Group measure of 22.6%.
We aim to manage our LTV through the property cycle such that our financial
position would remain robust in the event of a significant fall in property
values. This means we do not adjust our approach to leverage based on changes
in property market yields. Consequently our LTV may be higher in the low point
in the cycle and will trend downwards as market yields tighten.
Debt finance
The scale of our business combined with the quality of our assets and rental
income means that we are able to approach a diverse range of debt providers to
arrange finance on attractive terms. Good access to the capital and debt
markets is a competitive advantage, allowing us to take opportunities when
they arise.
The Group's approach to debt financing for British Land is to raise funds
predominantly on an unsecured basis with our standard financial covenants.
This provides flexibility and low operational cost. Our joint ventures and
funds are each financed in 'ring-fenced' structures without recourse to
British Land for repayment and are secured on the relevant assets.
Presented on the following page are the five guiding principles that govern
the way we structure and manage debt.
Monitoring and controlling our debt
We monitor our debt requirement by focusing principally on current and
projected borrowing levels, available facilities, debt maturity and interest
rate exposure. We undertake sensitivity analysis to assess the impacts of
proposed transactions, movements in interest rates and changes in property
values on key balance sheet, liquidity and profitability ratios. We also
consider the risks of a reduction in the availability of finance including a
temporary disruption of the debt markets.
Based on our current commitments and available facilities, the Group has no
requirement to refinance until early 2021 (irrespective of whether the
settlement of the 1.5% 2012 convertible bond is with equity or debt). British
Land's committed bank facilities total £1.8 billion, of which £1.3 billion is
undrawn.
Managing interest rate exposure
We manage our interest rate profile independently from our debt, considering
the sensitivity of underlying earnings to movements in market rates of
interest over a five-year period. The Board sets appropriate ranges of hedged
debt over that period and the longer term.
Our debt finance is raised at both fixed and variable rates. Derivatives
(primarily interest rate swaps and caps) are used to achieve the desired
interest rate profile across proportionally consolidated net debt. Currently
60% on average of projected net debt is hedged over the next five years, with
a decreasing profile over that period. The use of derivatives is managed by a
Derivatives Committee, using delegated authority from the Board. The interest
rate management of joint ventures and funds is considered separately by each
entity's Board, taking into account appropriate factors for its business.
Counterparties
We monitor the credit standing of our counterparties to minimise our risk
exposure in placing cash deposits and arranging derivatives. Regular reviews
are made of the external credit ratings of the counterparties.
Foreign currency
Our policy is to have no material unhedged net assets or liabilities
denominated in foreign currencies.
When attractive terms are available, the Group may choose to borrow in
currencies other than Sterling, and will fully hedge the foreign currency
exposure.
Our five guiding principles
Diversifyour sourcesof finance We monitor finance markets and seek to access different sources of finance when the relevant market conditions are favourable to meet the needs of our business and, where appropriate, those of our joint ventures and funds. The scale and quality of our
business enables us to access a broad range of unsecured and secured, recourse and non-recourse debt. We develop and maintain long term relationships with banks and debt investors. We aim to avoid reliance on particular sources of funds and borrow from a
large number of lenders from different sectors in the market across a range of geographical areas, with a total of 30 debt providers in bank facilities and private placements alone. We work to ensure that debt providers understand our business, adopting a
transparent approach to provide sufficient disclosures to enable them to evaluate their exposure within the overall context of the Group. These factors increase our attractiveness to debt providers, and in the last five years we have arranged £4.6 billion
(British Land share £3.9 billion) of new finance in unsecured and secured bank loan facilities,US Private Placements and convertible bonds. In addition we have existing long dated debentures and securitisation bonds. A European Medium Term Note programme
has also been maintained to enable us to access Sterling/Euro unsecured bond markets when it is appropriate for our business.
Phasematurityof debtportfolio The maturity profile of our debt is managed with a spread of repayment dates, reducing our refinancing risk in respect of timing and market conditions. We monitor the various debt markets so that we have the ability to act quickly to arrange new finance as
opportunities arise which meet our business needs. As a result of our financing activity, we are comfortably ahead of our preferred refinancing date horizon of not less than two years. The current range of debt maturities is within one to 19 years. In
accordance with our usual practice, we expect to refinance facilities ahead of their maturities.
Maintainliquidity In addition to our drawn debt, we always aim to have a good level of undrawn, committed, unsecured revolving bank facilities. These facilities provide financial liquidity, reduce the need to hold resources in cash and deposits, and minimise costs arising
from the difference between borrowing and deposit rates, while reducing credit exposure.We arrange these revolving credit facilities in excess of our committed and expected requirements to ensure we have adequate financing availability to support business
requirements and new opportunities.
Maintainflexibility Our facilities are structured to provide valuable flexibility for investment activity execution, whether sales, purchases, developments or asset management initiatives. Our revolving credit facilities provide full operational flexibility of drawing and
repayment (and cancellation if we require) at short notice without additional cost. These are arranged with standard terms and financial covenants and generally have maturities of five years. Alongside this unsecured revolving debt our secured term debt in
debentures has good asset security substitution rights, where we have the ability to move assets in and out of the security pool.
Maintainstrong balancesheet metrics We use both debt and equity financing. We aim to manage LTV through the property cycle such that our financial position would remain robust in the event of a significant fall in property values and we do not adjust our approach to leverage based on changes
in property market yields. We manage our interest rate profile independently from our debt, setting appropriate ranges of hedged debt over a five year period and the longer term.
Group borrowings
Unsecured financing for the Group includes bilateral and syndicated revolving
bank facilities (with initial terms usually of five years, often extendable);
US Private Placements with maturities up to 2027; and the convertible bonds
maturing in 2017 and 2020.
Secured debt for the Group (excluding debt in Hercules Unit Trust which is
covered under
'Borrowings in our joint ventures and funds') is provided by debentures with
longer maturities up to 2035.
Unsecured borrowings and covenants
The same financial covenants apply across each of the Group's unsecured
facilities.
These covenants, which have been consistently agreed with all unsecured
lenders since 2003, are:
· Net Borrowings not to exceed 175% of Adjusted Capital and Reserves
· Net Unsecured Borrowings not to exceed 70% of Unencumbered Assets
No income or interest cover ratios apply to these facilities, and there are no
other unsecured debt financial covenants in the Group.
The Unencumbered Assets of the Group, not subject to any security, stood at
£6.6 billion as at 31 March 2017.
Although secured assets are excluded from Unencumbered Assets for the covenant
calculations, unsecured lenders benefit from the surplus value of these assets
above the related debt and the free cash flow from them. During the year ended
31 March 2017, these assets generated £49 million of surplus cash after
payment of interest. In addition, while investments in joint ventures do not
form part of Unencumbered Assets, our share of free cash flows generated by
these ventures are regularly passed up to the Group.
Unsecured financial covenants
At 31 March 2013 % 2014 % 2015 % 2016 % 2017 %
Net borrowings to adjusted capital and reserves1 31 40 38 34 29
Net unsecured borrowings to unencumbered assets2 23 31 28 29 26
____________
Highest during the year to 31 March 2017:
134%; and
2 29%
Secured borrowings
Secured debt with recourse to British Land is provided by debentures at fixed
interest rates with long maturities and limited amortisation. These are
secured against a combined pool of assets with common covenants; the value of
those 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 once. 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 deal with any asset sales.
Secured debt without recourse to British Land comprises a fixed rate debenture
of £30 million for BLD Property Holdings Ltd to 2020 secured by a small
portfolio of properties.
The £295 million secured bank loan for TBL Properties Limited (and its
subsidiaries) was repaid early on 30 September 2016.
Borrowings in our joint ventures and funds
External debt for our joint ventures and funds has been arranged through long
dated securitisations or secured bank debt, according to the requirements of
the business of each venture.
Hercules Unit Trust and its joint ventures have term loan facilities maturing
in 2019 and 2020 arranged for their business and secured on property
portfolios, without recourse to British Land. These loans include LTV ratio
(with maximum levels ranging from 40% to 65%) and income based covenants.
The securitisations of Broadgate (£1,616 million), Meadowhall (£670 million)
and the Sainsbury's Superstores portfolio (£367 million), have weighted
average maturities of 11.4 years, 9.7 years, and 5.9 years respectively. The
key financial covenant applicable is to meet interest and scheduled
amortisation (equivalent to 1 times cover); there are no LTV covenants. These
securitisations have quarterly amortisation with the balance outstanding
reducing to approximately 20% to 30% of the original amount raised by expected
final maturity, thus mitigating refinancing risk.
There is no obligation on British Land to remedy any breach of these covenants
in the debt arrangement of joint ventures and funds.
RISK MANAGEMENT AND PRINCIPAL RISKS
For British Land, effective risk management is a cornerstone of delivering our
strategy and fundamental to the achievement of our objective of delivering
sustainable long term value. We maintain a comprehensive risk management
process which serves to identify, assess and respond to the principal risks
facing our business, including those risks that could threaten the Group's
solvency and liquidity, as well as identifying emerging risks. Our approach is
not intended to eliminate risk entirely, but instead to manage our risk
exposures across the business, whilst at the same time making the most of our
opportunities.
Our risk management framework
Our integrated approach combines a top down strategic view with a
complementary bottom up operational process.
The Board is responsible for the overall approach to risk management with a
particular focus on determining the nature and extent of exposure to principal
risks it is willing to take in achieving its strategic objectives. This is
assessed in the context of the core strengths of our business below and the
external environment in which we operate - this is our risk appetite.
British Land core strengths:
· High quality portfolio focused on multi-let retail across the UK and office-led campuses in London
· Placemaking to create Places People Prefer
· Customer orientation to respond to changing lifestyles
· Diverse and high quality occupier base
· High occupancy and long lease lengths provides secure cash flows
· Mixed use development expertise
· Ability to source and execute attractive investment deals
· Efficient capital structure with good access to capital and debt markets
· Sustainability embedded in our strategy
The Audit Committee takes responsibility for overseeing the effectiveness of
risk management and internal control systems on behalf of the Board, and also
advises the Board on the principal risks facing the Group including those that
would threaten its solvency or liquidity.
The Executive Directors are responsible for delivering the Company's strategy
and managing risk. Our risk management framework categorises our risks into
external, strategic and operational risks and the Risk Committee (comprising
the Executive Directors and Chaired by the Chief Financial Officer) is
responsible for managing the principal risks in each category in order to
achieve the Group's performance goals.
Whilst responsibility for oversight of risk management rests with the Board,
the effective day-to-day management of risk is embedded within our operational
business units and forms an integral part of our core values and how we work.
This bottom up approach ensures potential risks are identified at an early
stage, escalated as appropriate with mitigations put in place to manage such
risks. Each business unit maintains a comprehensive risk register which is
reviewed quarterly by the Risk Committee, with significant and emerging risks
escalated to the Audit Committee.
Our risk appetite
The Group's risk appetite is reviewed annually as part of the annual strategy
review process and approved by the Board. This evaluation guides the actions
we take in executing our strategy. We have identified a suite of Key Risk
Indicators (KRIs) to monitor the Group's risk profile which are reviewed
quarterly by the Risk Committee, to ensure that the activities of the business
remain within our risk appetite and that our risk exposure is well matched to
changes in our business and our markets. These include the most significant
judgements affecting our risk exposure, including our assessment of
prospective property returns; our asset selection and investment strategy; the
level of occupational and development exposure and our financial leverage.
The Board has considered the Group's risk appetite in light of the outcome of
the UK's referendum on continued membership of the EU. Our strategy, which is
based on long term trends, endures; we had already positioned the business for
a range of outcomes with modest development exposure, high occupancy and
robust finances. However, we have a range of tactical levers to address the
evolving political and economic uncertainties.
We have moderated our development activity, reflecting increased uncertainty.
We reduced our internal risk metric for the maximum we will develop
speculatively from 10% of the portfolio to 8%, although our current exposure
is much lower at 4%.
Our financial position is strong; our proportionally consolidated LTV has
reduced to 26.9% reflecting asset sales (pro-forma for the exchange of The
Leadenhall Building) and our financing has an average term of eight years on
drawn debt with no requirement to refinance until early 2021.
The Board considers that the Group's risk appetite is appropriate to achieve
our strategic objectives. Our business is both resilient and well placed to
capture value in the long term.
Our changing risks and focus
The Board has undertaken a robust assessment of the principal risks and
uncertainties that the Group is exposed to in light of the long term trends we
are facing and in light of the EU referendum result. Several of our principal
risks are elevated as a result of the increased political and economic
uncertainty.
Looking forward, risks that also could be impacted while the terms and timing
of exit are negotiated, and potentially beyond are: investor and occupier
demand, availability of finance, execution of investment strategy and income
sustainability. We remain mindful of potential headwinds going forward and our
risk appetite and tactical decisions will reflect the evolving environment to
ensure the business remains both resilient and well positioned to capture
upside in the future.
Also, several of our principal risks have evolved in nature; the regulatory
environment is now recognised within a broader 'Political and Regulatory
Outlook' risk; and the 'Development Strategy' risk has been expanded to
include development cost inflation.
Other areas of focus during the year included:
· Culture
· Cyber security
· Asset level crisis plan
· Fraud and whistleblowing
· Effectiveness review of our risk process
During the year, we have undertaken an effectiveness review of our risk
management process, as well as an Internal Audit. Our risk management process
appropriately supports the effective management of risks, whilst maintaining a
practical approach and meeting the requirements of the UK Corporate Governance
Code.
We have built on our existing process by embedding risk management discussions
in the relevant business unit management committees and provided training for
our risk specialists across the business.
This year we have hosted a major civil contingencies exercise simulating a
large scale critical incident at one of our multi-let retail assets. This was
undertaken with support from several police forces, fire and ambulance and
other national agencies and enabled us to test our capabilities and
preparedness in the event of a significant emergency.
The principal risks facing British Land are summarised in the table below.
PRINCIPAL RISKS
External risks
Economic The UK economic climate and future movements in interest rates present risks · The Risk Committee reviews the economic environment in which we operate quarterly to assess whether any changes to the ↑ The UK economy has remained robust and fared better than many expected following the EU referendum, with economic activity improving in the second half of 2016, albeit we have seen some evidence of softening retail spend in the first part of 2017. There is continuing uncertainty associated with the UK's future exit from the EU and other geopolitical changes, with a wide spectrum of views about future economic performance. Equity and foreign exchange markets have been volatile. Interest rates have remained low; but UK inflation is increasing, partly driven by the devaluation of sterling.
outlook and opportunities in property and financing markets and the businesses of our occupiers which can impact both the delivery of our strategy and our financial performance. economic outlook justify a re-assessment of the risk appetite of the business· Key Indicators include forecast GDP growth,
We remain mindful of potential headwinds and have the flexibility to scale our development activity and risk exposures up or down to respond to market conditions, to ensure the business remains both resilient and well positioned to capture upside in the future.
employment rates, business and consumer confidence, interest rates and inflation/deflation are considered, as well as central
bank guidance and government policy updates· We stress test our business plan against a downturn in economic outlook to ensure
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