REG - British Land Co PLC - Final Results- Part 1 <Origin Href="QuoteRef">BLND.L</Origin> - Part 2
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of space, with a further 550,000 in the medium term.
At Regent's Place, we are progressing our vision to evolve the campus through
redevelopment works. We completed the refurbishment of 79,000 sq ft at 338
Euston Road with Facebook taking occupation of the majority of the space.
Levels 2 and 7 (13,000 sq ft) are available and we are seeing good interest
both from existing and new occupiers. We have made good progress with rent
reviews at 20 Triton Street, growing rents on average from £52 psf to £70 psf
on 151,000 sq ft of space and adding £2.5 million to annualised rents with a
further 600,000 sq ft to be negotiated in the next 18 months. The next phase
of major works is at 1 Triton Square where we are in the early stages of
designing a significant refurbishment.
At Paddington Central, we are making good progress towards our vision to
complete the campus through development and transforming the public realm. We
completed phase 1 of the public realm enhancement works and phase 2, which
will be focussed around Kingdom Street, is out to tender and will start this
summer. We have secured 4 moorings on the canal and we have also purchased 2
canal boats to be used to host events and enliven the surrounding area. We saw
ERV growth of 5% across the campus in the second half of the year and settled
rent reviews on 75,000 sq ft of space at 2 Kingdom Street, taking rents from
£45 psf to £54 psf and adding £0.6 million to annualised rents.
Investment Activity
Gross investment activity over the year was £621 million, with total sales of
£198 million (BL share) and total acquisitions of £232 million (BL share).
We continued to make progress at our Residential schemes, The Hempel
Collection and Aldgate Place, selling £59 million of apartments at prices on
average 3% ahead of valuation. At Clarges Mayfair, having pre-sold over 50% of
the gross development value of the residential element of the scheme in
September 2014, it remains our intention to undertake no further marketing
until the remaining apartments have reached practical completion.
In July last year, we sold an office building at 39 Victoria Street for a net
price of £139 million. We acquired the building for £40 million in 2009 and
it was let in its entirety to the Corporate Officer of The House of Commons in
2013 following a substantial refurbishment. The disposal, at a yield of less
than 4%, crystallised an attractive IRR of over 20% per annum since purchase.
At the start of the year we acquired One Sheldon Square for £210 million.
This is in line with our strategy of expanding our interests in and around our
core campuses. It also increases our exposure to an up and coming area of
London, and Paddington station, a major London transport interchange, which
will benefit from the opening of Crossrail in 2018. The acquisition adds
nearly 200,000 sq ft to our office space, bringing the assets we own in
Paddington Central to 806,000 sq ft.
We completed 739,000 sq ft of developments in the period, with 5 Broadgate
accounting for 710,000 sq ft. UBS began fitting out 5 Broadgate in the summer,
and we expect them to move in later this year. We achieved a BREEAM Excellent
rating at 5 Broadgate and we are on track to achieve BREEAM Excellent across a
further 2.7 million sq ft of office space.
We also completed Yalding House, a 29,000 sq ft office led refurbishment in
the heart of Fitzrovia. The building, which was launched in February, has
variable floor plates and is targeted at small and medium sized businesses in
the creative sectors. We are pleased with the level of enquiries seen to
date.
Our under construction programme covers 617,000 sq ft with total speculative
commitment (including land) of £530 million. This includes 192,000 sq ft at
our super prime residential led development Clarges Mayfair, where both the
relocation of the Kennel Club and the affordable housing element were
delivered in the period. We are on track to complete the 48,000 sq ft office
element in the summer, with the residential to complete in late 2017.
At 4 Kingdom Street we are making good progress. We are on track to 'top out'
later this month and on target to deliver 147,000 sq ft of office space in
2017. At 2 Kingdom Street, Broadgate Estates achieved the world's first BREEAM
Outstanding Fit Out. As well as being highly efficient, the new environment is
helping Broadgate Estates attract and retain the best talent.
There are signs that increases in construction costs are moderating,
reflecting lower raw material costs. However, tender prices still reflect
limited capacity in the industry with contractors seeking to restore margins
and limit their risk exposure. In central London, we are currently
forecasting cost inflation of 5% per annum and for our projects under
construction all our costs are fixed.
We made good progress with our near term development pipeline, which has
increased from 1.3 million sq ft in March last year to 1.8 million sq ft. We
recently received consent for a revised 520,000 sq ft redevelopment of 100
Liverpool Street at Broadgate incorporating a larger retail component than in
the previous consent, in line with our plans to add 400,000 sq ft of retail to
the campus in the medium term. Subject to UBS completing the fit out works at
5 Broadgate we expect to be in a position to commence with 100 Liverpool
Street in early 2017.
At 1 Finsbury Avenue, we received planning consent for a 303,000 sq ft
redevelopment, and at 1 Triton Square, on our Regent's Place campus, we are
progressing the design. We will make the decision whether to commit to these
schemes at the appropriate time, but we are pleased with the level of interest
we are seeing from occupiers for potential pre-lets, despite the fact that the
projects are still at an early stage.
Our planning application for 340,000 sq ft of mixed use space at Blossom
Street, Shoreditch was also granted consent, having been called in by the
Mayor of London. The High Court has since rejected a Judicial Review of the
Mayor's decision take over in the application but it is unlikely that we will
start onsite in 2016 as had been our intention. While we are concerned with
the delay, we do not own the site and instead have an option to acquire the
site from the City of London Corporation. At 5 Kingdom Street we have made
good progress on the proposed design and we expect to submit a planning
application by the end of the year.
Looking ahead to our medium term pipeline we submitted a planning application
for the redevelopment of 2 and 3 Finsbury Avenue, increasing the area from
189,000 sq ft to 550,000 sq ft.
FINANCE REVIEW
YE 31 March 2015 2016
Total accounting return1 24.5% 14.2%
EPRA net asset value per share 1 829p 919p
Dividend per share 27.7p 28.4p
Underlying Profit 1 £313m £363m
IFRS profit before tax £1,789m £1,331m
IFRS net assets £8,565m £9,619m
LTV proportionally consolidated 1 35% 32%
Weighted average interest rate 3.8% 3.3%
1 See glossary for definitions
Overview
The strong performance this year is reflected in our operating results and the
total accounting return of 14.2%.
Our focus on placemaking and accelerating ERV growth have delivered a
portfolio valuation uplift of 6.7% on a proportionally consolidated basis and
a 10.9% increase in NAV per share to 919 pence; excluding the impact of the 1%
increase in stamp duty on commercial property NAV per share would have been
932 pence (an increase of 12.4%).
We have completed £1.3 billion of investment activity with acquisition and
development spend broadly balancing disposals. We have sold mature and
non-core assets and have reinvested in our existing business and in selected
acquisitions adjacent to existing assets.
Our balance sheet metrics remain strong. The proportionately consolidated loan
to value ratio has decreased to 32% from 35% due to a combination of our
actions, including the results of our placemaking activity, and market
movements. We have raised £915 million of new debt, including a £350 million
zero coupon convertible bond. Together with the £110 million debenture bonds
tender offer and purchase we have completed over £1 billion of financing
activity in the year. This drove the 50 bps reduction in the Group's
proportionately consolidated weighted average interest rate to 3.3% from
3.8%.
Underlying Profit increased to £363 million as a result of our successful
financing activity, leasing of our completed developments and rental income
growth in the investment portfolio, including a number of significant rent
reviews in Offices.
Underlying earnings per share increased by less than profits due to the
requirement to anticipate conversion into new shares of the £400 million 1.5%
convertible bond, issued in 2012 and maturing in 2017 with a conversion price
of 693 pence.
IFRS profit before tax for the year of £1,331 million is lower than the prior
year, primarily due to a reduced level of property valuation movement
reflecting the slowdown in yield compression and the recent increase in stamp
duty on commercial property.
Looking forward to next year we intend to increase the dividend by 3% to 29.20
pence per share, with a quarterly dividend of 7.30 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
financial statements to British Land's interests on a proportionally
consolidated basis are included in Table A within the supplementary
disclosures.
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 2015 1 2016
£m £m
Gross rental income 618 654
Property operating expenses (33) (34)
Net rental income 1.1 585 620
Net fees and other income 17 17
Administrative expenses 1.3 (88) (94)
Net financing costs 1.2 (201) (180)
Underlying Profit 313 363
Non-controlling interest in Underlying Profit 16 14
EPRA adjustments 2 1,460 954
IFRS profit before tax 2 1,789 1,331
Underlying earnings per share 1.4 30.6p 34.1p
IFRS basic earnings per share 2 168.3p 131.2p
Dividend per share 3 27.68p 28.36p
1 Fees and other income and administrative expenses have been restated to
reflect the change in presentation of the results of Broadgate Estates, a
wholly owned subsidiary of the Group. This restatement has had no impact on
Underlying Profit. Refer to note 1 of the financial statements for further
details.
2 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 2015 585
Developments 23
Like-for-like rental income growth 15
Acquisitions 40
Disposals (43)
Net rental income for the year ended 31 March 2016 620
The £35 million increase in net rental income during the year was the result
of strong letting activity.
The successful letting of our development programme provided £23 million of
this increase, primarily due to the start of the lease at 5 Broadgate and the
lettings we have made at the Leadenhall Building which is now almost full,
with recent leasing deals setting new records for City rents.
Like-for-like rental income growth was 3.4%. Office and Residential growth was
almost 7%; just over half of this was due to the letting up of completed
developments that are now in the like-for-like portfolio with the remainder
being attributable to strong rent review activity, particularly at Regent's
Place and Paddington. Retail and Leisure growth was 1.4% (1.8% excluding the
impact of surrender premia).
Our near term development pipeline could add a further £68 million of net
rental income over the next 5 years. The three largest schemes in the near
term pipeline are income producing investments with a current passing rent of
£24 million which is expected to run off in the last quarter of 2016/17.
1.2 Net financing costs
£m
Net financing costs for the year ended 31 March 2015 (201)
Financing activity 27
Acquisitions (11)
Disposals 10
Completion of developments (5)
Net financing costs for the year ended 31 March 2016 (180)
We completed over £1 billion of financing activity in the current year
including the £350 million zero coupon convertible bond and the £110 million
debenture bonds tender offer and purchase. We have raised and refinanced a
total of £915 million of debt at lower margins and in a lower interest rate
environment. Together with the impact of last year's financing activity, this
resulted in a £27 million decrease in financing costs this year.
Our approach to interest rate management was also important in reducing
interest costs. At the year end we had reduced the proportion of our debt held
at fixed rates to 60% on average over the next 5 years (64% at 31 March
2015).
Overall, our actions during the year drove the reduction in our proportionally
consolidated weighted average interest rate to 3.3% at 31 March 2016 from 3.8%
at 31 March 2015.
Lower capitalised interest in the current year reflected our reduced
development commitment. This resulted in an additional £5 million of interest
cost in the year.
1.3 Administrative expenses
During the year, we brought the property management of our retail assets
in-house to Broadgate Estates, a wholly owned subsidiary, in line with our
strategic focus on customer orientation and placemaking. In recognition of the
core role Broadgate Estates now plays in how we run the business, we have
changed the way its results are presented in the Group income statement. This
has resulted in a £5 million increase in administrative expenses and an equal
and offsetting increase in net fee and other income; importantly this change
has no impact on Underlying Profit. The prior year comparatives for net fee
and other income and administrative expenses have also been restated to
reflect this change in presentation.
Development team costs of £4 million were capitalised for the first time this
year as we progress our development pipeline.
Overall, administrative expenses increased by £6 million this year in line
with our planned investment in people and technology in order to enhance the
capability of the business, which includes a £2 million increase related to
Broadgate Estates. The Group's operating cost ratio remains sector leading at
16.6% (2014/15: 16.4%).
1.4 Underlying EPS
Underlying EPS for 2015/16 was 34.1 pence (2014/15: 30.6 pence) based on
Underlying Profit after tax of £365 million (2014/15: £313 million), adjusted
to add back interest on the £400 million 1.5% convertible bond of £6 million
(2014/15: £nil), and the weighted average diluted number of shares of 1,089
million (2014/15: 1,022 million).
The increase in Underlying EPS of 11.4% is less than the increase in
Underlying Profit because we are now required to anticipate conversion into
shares of the £400 million 1.5% convertible bond, which matures in 2017, in
our reported Underlying EPS.
2. IFRS profit before tax
The main difference between IFRS profit before tax and Underling 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 proportionately consolidated
basis within Underlying Profit.
The IFRS profit before tax for the year was £1,331 million, a decrease of £458
million, primarily due to the slowdown in yield compression and the 1% stamp
duty increase on commercial property in the current year, resulting in lower
levels of property valuation movement. This impacts IFRS profit before tax
through the valuation movement on the Group's properties which was £268
million less than last year and the valuation movement on the properties held
in joint ventures and funds which was £344 million less than last year.
The £77 million decrease in net financing costs to £75 million was principally
due to revaluation gains recorded in respect of the Group's convertible
bonds.
The £50 million increase in net rental income to £425 million was primarily
the result of the purchase of a controlling interest in New Mersey in Speke in
March 2015, the purchase of controlling interests in two mixed portfolios of
single and multi-let assets (the 'Tesco transaction') also completed in March
2015 and like-for-like rental income growth in the standing portfolio.
Basic earnings per share decreased by 22% to 131.2 pence per share. The
weighted average number of shares in issue during the period was 1,025 million
(2014/15: 1,016 million).
3. Dividends
The quarterly dividend was increased to 7.09 pence per share in the year,
bringing the total dividend declared for the current financial year to 28.36
pence per share (2014/15: 27.68 pence per share), an increase of 2.5% over the
prior year. The dividend paid in the financial year was 28.02 pence per share
(2014/15: 27.34 pence per share).
It is the Board's intention to increase the dividend by 3.0% in 2016/17 to
29.20 pence per share, with a quarterly dividend of 7.30 pence per share.
Balance sheet
Section 2015 2016
£m £m
Properties at valuation 13,677 14,648
Other non-current assets 256 138
13,933 14,786
Other net current liabilities (307) (257)
Adjusted net debt 6 (4,918) (4,765)
Other non-current liabilities (73) (90)
EPRA net assets (undiluted) 8,635 9,674
Dilution impact of convertible bond 400 400
EPRA net assets (diluted) 9,035 10,074
EPRA NAV per share 4 829p 919p
Non-controlling interest 333 277
EPRA adjustments1 (803) (732)
IFRS net assets 5 8,565 9,619
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 and the £400 million convertible bond maturing in
2017. No adjustment is made for the £350 million zero coupon convertible bond
because this is not currently dilutive. Details of the EPRA adjustments are
included in Table A within the supplementary disclosures.
4. EPRA net asset value per share
pence
EPRA NAV per share at 31 March 2015 829
Offices and Residential valuation uplift 68
Retail and Leisure valuation uplift 17
Underlying Profit 34
Dividends (26)
Finance transaction costs (3)
EPRA NAV per share at 31 March 2016 919
The EPRA NAV per share of 919 pence includes the 13 pence adverse impact from
the 1% rise in Stamp Duty Land Tax on commercial property announced in the
budget this year.
The 10.9% increase in EPRA NAV per share reflects a strong valuation
performance across the portfolio of 6.7%. Our portfolio is broadly split
equally between Offices and Retail. The valuation uplift in the year is
primarily due to ERV growth of 5.3% with an accelerated trend compared to last
year reflecting our focus on placemaking and the strength of the markets we
invest in. Yield compression was 17 bps and contributed significantly less to
the valuation uplift compared to the prior year.
Returns were driven by our standing investments, up 6.4%, boosted by an
increase of 9.4% in our developments.
Office and Residential valuations were up 11.8% with strong ERV growth of
9.6%; the West End performed slightly more strongly than the City, in part due
to the valuation uplift on our developments. Retail and Leisure valuations
were up 2.4%; underpinned by strong performance in our multi-let portfolio
which saw ERV growth of 3.4%.
The finance transaction costs primarily relate to the debenture bond tender
offer and purchase completed in the year and are compensated for by lower
interest costs over the remaining period of the finance.
5. IFRS net assets
IFRS net assets at 31 March 2016 were £9,619 million, an increase of £1,054
million. This was primarily due to property revaluation gains in the current
year, which were £616 million for the Group and £245 million for the Group's
share of joint ventures and funds.
In August 2015 the loan provided by the Group to the Broadgate joint venture
was repaid. This was funded by additional shareholder contributions to the
joint venture and resulted in a £137 million decrease in net debt and a £137
million increase in the Group's investments in joint ventures and funds.
Cash flow, net debt and financing
6. Adjusted net debt 1
£m
Adjusted net debt at 31 March 2015 (4,918)
Acquisitions (332)
Development and capex (310)
Disposals 611
Net cash from operations 294
Dividends (235)
Other 125
Adjusted net debt at 31 March 2016 (4,765)
1 Adjusted net debt is a proportionally consolidated measure. It represents
the Group net debt as disclosed in Note 17 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.
The impact of our investment activity in the year was broadly balanced.
Significant acquisitions completed in the year included One Sheldon Square and
the purchase of an additional 6.1% of the units in Hercules Unit Trust
bringing the Group's ownership to 75.3% at the year end.
Development expenditure of £190 million related to the spend on our committed
development programme and capital expenditure of £120 million related to asset
management on the standing portfolio. Forecast development spend of £204
million is anticipated over the next three years on the Group's committed
development programme and £720 million on the Group's near term development
pipeline. This compares to £358 million of contracted residential sales along
with a further £292 million of residential units yet to be contracted for sale
on existing committed projects.
Significant disposals in the year included 39 Victoria Street at an attractive
yield which generated an IRR of over 20%, Rotherham Parkgate and Leeds
Birstall. In addition, disposals of standalone superstores totalling £122
million were completed including the sale of Tesco Bursledon for £60 million
and Sainsbury's Islington for £32 million, reducing the Group's total
superstore exposure to under £0.8 billion. We currently have a further £100
million of mature or non-core retail assets under offer.
7. Financing
Group Proportionally consolidated
2015 2016 2015 2016
Net debt / adjusted net debt 1 £3,828m £3,617m £4,918m £4,765m
Principal amount of gross debt £3,717m £3,552m £5,202m £5,089m
Loan to value 28% 25% 35% 32%
Weighted average interest rate 3.3% 2.6% 3.8% 3.3%
Interest cover 2.9 3.3 2.6 3.0
Weighted average debt maturity 7.5 years 7.2 years 8.7 years 8.1 years
1 The Group figures represent net debt as presented in note 17 of the
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.
Balance sheet metrics remain strong. LTV and the weighted average interest
rate on drawn debt were reduced and interest cover improved. The decrease in
both our Group and proportionally consolidated LTV measures is due to a
combination of our actions and market movements. Note 17 of the financial
statements sets out the calculation of the Group and proportionally
consolidated LTV.
Our proportionally consolidated LTV was 32% at March 2016, down from 40% two
years ago. Pro-forma for the full conversion of the £400 million 1.5%
convertible bond maturing in 2017, proportionately consolidated LTV is 29%.
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-.
Financing activity during the year amounted to over £1 billion. We continue to
achieve attractive financings which improve earnings and liquidity, including
£915 million of new debt finance since 31 March 2015.
Taking advantage of favourable market conditions, we raised a £350 million
zero coupon senior unsecured convertible bond due 2020, which includes
flexible settlement options and provides further diversification of our
sources of finance.
Following a tender offer in respect of British Land's 6.75% First Mortgage
Debenture Bonds due 2020, we purchased £110 million of bonds. The purchase was
funded by existing committed facilities and the bonds were cancelled.
Financing activity in our joint venture and funds in the year consisted of the
repayment of £100 million of a Hercules Unit Trust term loan, reducing the
facility to £250 million, and its subsequent refinancing at pricing less than
half the previous facility. The Gibraltar Limited Partnership £140 million
loan facility was also refinanced in the year at significantly lower pricing.
Overall, financing activity we completed in the year was the principal factor
in the reduction of the proportionally consolidated weighted average interest
rate from 3.8% to 3.3%.
We have also agreed one year extensions to both our bank syndicated unsecured
revolving credit facilities, in total £1,245 million.
British Land has £1.8 billion of committed unsecured revolving banking
facilities and £83 million of cash and short term deposits. Of these
facilities £1.6 billion have maturities of more than two years and £1.2
billion was undrawn at 31 March 2016. Based on our current commitments and
these facilities, the Group has no requirement to refinance for four years.
Further information on our approach to financing is provided in the financial
policies and principles section.
Tax
The Group elected for REIT status on 1 January 2007, paying a £308 million
conversion charge to HMRC in the same year. As a consequence of the Group's
REIT status, tax is levied on the distribution of income from our qualifying
property rental business rather than at the corporate level. Any income which
does not qualify as property income within the REIT rules is subject to tax in
the normal way. This includes profits on properties developed and sold within
3 years as well as fees and interest. The tax credit for the year is £2m
(excluding deferred tax).
Our 2016 Total Tax Contribution was more than £240 million mainly arising from
taxes collected from others which we administered together with taxes and
levies paid directly.
HMRC continue to award British Land a low risk tax rating which is in part a
reflection of our REIT status together with the open and regular dialogue we
maintain with them. We continue to comfortably pass all REIT tests to ensure
our REIT status is maintained.
Lucinda Bell
Chief Financial Officer
FINANCIAL POLICIES AND PRINCIPLES
Leverage
Our mix of equity and debt financing is managed to achieve the appropriate
balance between enhancing returns for shareholders and the risk of higher
leverage. We use a loan to value ratio (debt as a percentage of the gross
value of our assets, "LTV") to measure our leverage, primarily on a
proportionally consolidated basis including our share of joint ventures and
funds and excluding non-controlling interests.
We seek to manage our leverage such that our LTV should not exceed a maximum
threshold if market yields were to rise to previous peak levels. This means we
will not increase our LTV if asset values increase only as a result of market
yield improvement. Consequently our maximum LTV may be higher in the low point
in the cycle and will trend downwards as market yields tighten.
We leverage our equity and achieve benefits of scale while spreading risk
through joint ventures and funds, which are typically partly financed with
debt without recourse to British Land.
Our current proportionally consolidated LTV of 32% includes our share of the
debt in joint ventures and funds and is higher than the Group measure of 25%.
Debt finance
The scale of our business combined with the quality of our assets and rental
income means that we are attractive to a broad range of debt providers and
able to arrange finance on favourable 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 (set
out below). This provides the greatest 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 below are the five guiding principles that govern the way we
structure and manage our debt.
Debt financing involves risk from adverse changes in the property and
financing markets. In arranging and monitoring our financing we include
important risk disciplines, ensuring that relevant risks are fully evaluated
and managed.
Monitoring and controlling our debt
We monitor our projected LTV and our debt requirement using several key
internally generated reports focused principally on borrowing levels, debt
maturity, available facilities and interest rate exposure. We also undertake
sensitivity analysis to assess the impact of proposed transactions, movements
in interest rates and changes in property values on the key balance sheet,
liquidity and profitability ratios.
In assessing our ongoing debt requirements, including for our development
programme, we consider potential downside scenarios such as a fall in
valuations and the effect that might have on our covenants.
Based on our current commitments and available facilities, the Group has no
requirement to refinance for four years (irrespective of whether the
settlement of the 2012 convertible bond is with equity or debt).
British Land's current committed undrawn bank facilities are £1.2 billion.
Managing interest rate exposure
We manage our interest rate profile independently from our debt. The Board
considers the appropriate maximum level of sensitivity of underlying earnings
to movements in market rates of interest over a five-year period and the
appropriate ranges of fixed rate debt over relevant time periods.
Our debt finance is raised at both fixed and variable rates. Derivatives
(primarily interest rate swaps) are used to achieve the desired interest rate
profile across proportionally consolidated net debt. Currently 60% on average
of projected net debt is fixed over the next five years, with a decreasing
profile over the period. The use of derivatives is managed by a Derivatives
Committee. The interest rate management of joint ventures and funds is
addressed by each entity for its business.
Counterparties
We monitor the credit standing of our counterparties to minimise our risk
exposure in respect of placing cash deposits and 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 freely
available currencies other than sterling, and will fully hedge the foreign
currency exposure.
Our five guiding principles
Diversify our sources of finance
We monitor finance markets and seek to access different types 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 the our business enables us to access a broad range of
unsecured and secured, recourse and non-recourse debt.
We enjoy and encourage 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 and a range of
geographical areas, with a total of 33 debt providers of bank facilities and
private placements alone. We also aim to ensure that debt providers understand
our business; we adopt a transparent approach to provide sufficient
disclosures so that lenders can 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 over £6 billion (British Land share over £5
billion) of new finance in unsecured and secured bank loan facilities, US
Private Placements and convertible bonds.
Phase maturity of debt portfolio
The maturity profile of our debt is managed with a spread of repayment dates.
We monitor the various debt markets so that we have the ability to act quickly
to arrange new finance as opportunities arise. Maturities of different types
of drawn debt are well spread, reducing our refinancing risk in respect of
timing and market conditions. 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 one to 20 years. In accordance with
our usual practice, we expect to refinance facilities ahead of their
maturities.
Maintain liquidity
In addition to our drawn debt, we aim always to have a good level of undrawn,
committed, unsecured revolving bank facilities in British Land. 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 opportunities.
Maintain flexibility
Our facilities are structured to provide valuable flexibility for investment
deal execution, whether sales or purchases, developments or asset management.
Our bank revolving credit facilities in British Land provide full 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. Flexibility is
maintained with our combination of this unsecured revolving debt and secured
term debt in debentures with good substitution rights, where we have the
ability to move assets in and out of the security.
Maintain strong balance sheet metrics
We actively manage our mix of equity and debt financing to achieve a balance
between our ability to generate an attractive return for shareholders with the
risks of having more debt.
Our capital strategy is responsive to the need to manage our exposure such
that we aim not to exceed a maximum proportionally consolidated LTV threshold
in an economic downturn if market yields rise to previous peak levels.
Group borrowings
Unsecured financing for the Group is raised through: bilateral and syndicated
unsecured revolving bank facilities, with initial terms of five years (often
extendable); US Private Placements with maturities up to 2027; and the
convertible bonds maturing in 2017 and 2020.
Secured debt is provided by debentures with longer maturities up to 2035 at
fixed rates of interest and a bank term loan.
Unsecured borrowings
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;
and
· net Unsecured Borrowings not to exceed 70% of Unencumbered Assets.
Covenant ratio
No income/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
£6.5 billion as at 31 March 2016.
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 2016, these assets generated £63 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 profits generated by these
ventures are regularly passed up to the Group.
At 31 March 2012% 2013% 2014% 2015% 2016%
Net borrowings to adjusted capital and reserves1 44 31 40 38 34
Net unsecured borrowings to unencumbered assets2 34 23 31 28 29
Highest during the year to 31 March 2016:
142%; and
233%
Secured borrowings
Secured debt with recourse to British Land is provided by debentures at fixed
interest rates with long maturities and no amortisation. These are secured
against a single 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 the following, each of
which is secured on a specific portfolio of properties:
· a fixed rate debenture of £30 million for BLD Property Holdings Ltd to
2020; and
· a bank loan of £295 million for TBL Properties Limited (and its
subsidiaries) to 2019.
Borrowings in our joint ventures and funds
External debt for our joint ventures and funds has been arranged through long
dated securitisations or bank debt, according to the requirements of the
business of each venture.
Hercules Unit Trust has term loan facilities maturing in 2019 and 2020
arranged for its business and secured on its property portfolios, without
recourse to British Land. These loans include value and income based
covenants.
The securitisations of Broadgate (£1,667 million), Meadowhall (£696 million)
and the Sainsbury's Superstores portfolio (£463 million), have weighted
average maturities of 12.1 years, 10.4 years, and 6.5 years respectively. The
only financial covenant applicable is to meet interest and scheduled
amortisation (equivalent to 1 times cover); there are no LTV covenants. These
securitisations provide for quarterly principal repayments with the balance
outstanding reducing to approximately 20% to 30% of the original amount raised
by expected final maturity, thus mitigating refinancing risk.
Other debt arrangements with banks include LTV ratio covenants with maximum
levels ranging from 40% to 65%, and most have rental income to interest or
debt service cover requirements.
There is no obligation on British Land to remedy any breach of these covenants
and any remedy needed would be considered by the parties on a case-by-case
basis.
RISK MANAGEMENT AND PRINCIPAL RISKS
For British Land, effective risk management is a cornerstone of our strategy
and fundamental to the achievement of our strategic objectives in delivery of
long term sustainable returns. We focus on the management of the principal
risks facing our business, including those risks that could threaten the
Group's solvency and liquidity as well as identifying emerging risks, 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 outlined in the diagram below.
Top-down strategic risk management Bottom-up operational risk management
Board/Audit Committee · Review external environment· Robust assessment of principal risks· Set risk appetite and parameters· Determine strategic action points · Assess effectiveness of risk management systems· Report on principal risks and uncertainties
Risk Committee (Executive Directors) · Identify principal risks· Direct delivery of strategic actions in line with risk appetite· Monitor key risk indicators · Consider completeness of identified risks and adequacy of mitigating actions· Consider aggregation of risk exposures across the business
Business units · Execute strategic actions· Report on key risk indicators · Report current and emerging risks· Identify, evaluate and mitigate operational risks recorded in risk register
The Board takes overall responsibility for risk management with a particular
focus on determining the nature and extent of principal risks it is willing to
take in achieving its strategic objectives. This is set in the context of the
external environment in which we operate - this is our risk appetite. 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. The Risk Committee (which is Chaired by the Chief Financial
Officer and consists of all Executive Directors) is responsible for managing
strategic and operational risk in achieving 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 in all areas of our
business 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 and mitigations are 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 for consideration as appropriate.
Our Risk Appetite
The Group's risk appetite is reviewed annually (in the context of the core
strengths of our business model) and approved by the Board. This evaluation
guides the actions we take in executing our strategy. The most significant
judgements affecting our risk appetite include our assessment of prospective
property returns; our asset selection and investment strategy; the level of
development exposure and our financial leverage.
British Land core strengths
· High quality commercial property focused on regional and local
multi-let retail assets around the UK and London office campuses
· Placemaking strategy of creating Places People Prefer
· Customer orientation enables us to develop a deep understanding of the
people who use our places
· Strong and diverse occupier base
· High occupancy and long lease lengths provides stable, 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 credentials
We have identified a suite of Key Risk Indicators (KRIs) to monitor our
principal risks, 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 the business and operating
environment.
The Board has considered the Group's risk appetite and it is considered
appropriate to achieve our strategic objectives. Our business is both
resilient and well placed for the long term. Our portfolio is modern and
nearly fully let to quality occupiers on long leases. We have maintained our
capital discipline, with investment and development being broadly balanced by
asset disposals, and reduced our proportionally consolidated LTV to 32%.
Development continues to remain a core part of our business, and whilst our
current commitment has reduced as our 2010 programme has recently completed,
we are progressing an attractive future pipeline of development opportunities,
with the flexibility to move forward when the time is right.
Risk Focus in 2015
The Board has undertaken a robust assessment of the principal risks facing
British Land and our principal risks have evolved as a result of the
uncertainty as to the outcome of the pending referendum on the UK's membership
of the EU, increased geopolitical instability and cyber security. External
factors, such as the macro economic environment, continue to dominate the risk
landscape. Whilst we cannot control the external environment, we continue to
actively monitor leading indicators on the economic and property cycle.
We continue to drive improvements in our risk management process and the
quality of risk information generated, whilst at the same time maintaining a
practical approach. During the year, we introduced an enhanced Information
Security Policy with the aim of providing greater protection of British Land's
electronic data by mandating increasingly secure processes, appropriate
controls and operations and promoting awareness of cyber security. We have
also reviewed and refreshed our Anti-Bribery and Corruption policies and
controls.
The principal risks facing British Land are summarised below.
External Risks
Risks and impacts How we monitor and manage the risk Change in the period
Economic outlook The economic climate and projections for interest rates present risks and opportunities in property and financing markets and the businesses of our occupiers. · 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 however there is continued economic and political uncertainty and concerns over the forthcoming EU referendum. Uncertainty remains over when interest rates will rise, albeit consensus has pushed back their expectations for interest rate rises and expects the increase will not be steep.
economic outlook justify a re-assessment of the strategy or risk appetite of the business.· Indicators such as forecast GDP
growth, employment rates, business and consumer confidence, interest rates and inflation/deflation are considered, as well as
central bank guidance and government policy updates.· We focus on prime assets and sectors which we believe will deliver
outperformance over the medium term, benefiting from continuing occupier demand and investor appetite.
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