British Land : Half Yearly Report - Part 1

18 November 2014

THE BRITISH LAND COMPANY PLC HALF YEAR RESULTS

Chris Grigg, Chief Executive said: "This has been another good six months for British Land with strong results from both parts of our business. Our continued outperformance underlines the success of our actions: increasing our business in London; progressing our major development programme; evolving our retail offer; and buying and selling well. Looking forward, we remain confident about the outlook for the business. The economy is growing, interest rates are likely to stay low for some time and investor demand for quality properties in and outside London is strong.  Demand for offices in London is improving, supply remains constrained and rental growth now looks firmly established. In retail, economic growth is feeding through to consumer spend and the lead indicators of rental growth in our business are all positive."

Strong first half results

·      Underlying PBT1 +6.2% to £155 million; IFRS PBT of £1,043 million (H1 2013/14 £422 million)

·      EPRA NAV +11.8% to 769 pence; IFRS Net Assets at £8.0 billion (31 March 2014 £7.1 billion)

·      Quarterly dividend of 6.92 pence; bringing the half year to 13.84 pence (+2.5%)

·      Total accounting return of 13.7% for 6 months (H1 2013/14: 6.8%)

Valuation well ahead driven by strong markets and our own actions

·      Total portfolio valuation +7.2%; standing investments +6.6%; developments +12.8%

·      Strong uplift in both sectors: Retail & Leisure +6.0%; Offices & Residential +8.7%

·      ERV growth of 2.1% across the portfolio, boosted by refurbishment opportunities in Offices 

·      Continued outperformance vs IPD: all property total returns +50 bps; capital returns +70 bps

Excellent progress on leasing with near full occupancy across the portfolio

·      606,000 sq ft of Retail lettings and renewals; investment lettings and renewals 8.4% ahead of ERV

·      Strong and improving Retail operational metrics: footfall up 2.6% (+340 bps vs benchmark); occupancy up to 98.6% (up 20 bps like-for-like); retailer sales +4.4% (same store sales)

·      507,000 sq ft lettings and renewals in Offices; further 188,000 sq ft under offer; investment lettings and renewals 10.4% ahead of ERV

·      Office space at Broadgate and Regent's Place fully let; occupancy across the Office portfolio at 95.0% (up 600 bps like-for-like)

Development generating strong profits - well placed to move ahead on near-term pipeline

·      Around £1 billion of profits generated from the current development cycle (including £800 million from 2010 development programme), with more to go

·      The Leadenhall Building completed; nearly 60% let/under offer; setting rental highs for the City

·      £227 million pre-sales at Clarges Mayfair, residential development exposure now below £200 million

·      Expect to commit to 4 Kingdom Street and submit planning on Blossom Street, Shoreditch in the next few months

·      On site at five retail extensions adding nearly 350,000 sq ft; agreement on a leisure extension at Drake Circus, Plymouth

Strong financial position with continued access to low cost finance

·      Proportionally consolidated LTV lower at 36% (31 March 2014: 40%) reflecting valuation increase and asset disposals

·      Maintaining capital discipline: expect investment activity to be weighted to disposals over the year

·      Refinanced one of our Tesco JVs at around 250 bps below the rate on the previous loan finance

1 Underlying profit before tax attributable to shareholders of the Company (i.e. excludes non-controlling interests related to HUT)

2 See Note 2 to the condensed set of financial statements

3Valuation movement during the period (excluding effect of capital expenditure) of properties held at the balance sheet date, including purchases and sales

4 Excludes Europe

Investor Conference Call

A presentation of the results will take place at 9.30am today, 18 November 2014, and will be broadcast live via webcast (www.britishland.com) and conference call.  The details for the conference call are as follows:

Forward-Looking Statements

This Document contains certain 'forward-looking' statements. Such statements reflect current views on, among other things, our markets, activities and prospects. Such 'forward-looking' statements can sometimes, but not always, be identified by their reference to a date or point in the future or the use of 'forward looking' terminology, including terms such as 'believes', 'estimates', 'anticipates', 'expects', 'forecasts', 'intends', 'plans', 'projects', 'goal', 'target', 'aim', 'may', 'will', 'would', 'could', 'should' or similar expressions or in each case their negative or variations or comparable terminology.

By their nature, forward-looking statements involve inherent risks and uncertainties because they relate to future events and circumstances which may or may not occur and may be beyond our ability to control or predict. Therefore they should be regarded with caution. Important factors that could cause actual results, performance or achievements of British Land to differ materially from any outcomes or results expressed or implied by such forward-looking statements include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and other regulation, including in relation to the environment, health and safety and taxation (in particular, in respect of British Land's status as a Real Estate Investment Trust), labour relations and work stoppages, changes in political and economic stability, changes in occupier demand and tenant default and the availability and cost of finance. These and other risks are described in greater detail in the section of this Document headed "Principal Risks and Uncertainties". Such forward-looking statements should therefore be construed in light of such factors. Information contained in this Document relating to British Land or its share price, or the yield on its shares are not guarantees of, and should not be relied upon as an indicator of, future performance.

Any forward-looking statements made by or on behalf of British Land speak only as of the date they are made and no representation, assurance, guarantee or warranty is given in relation to them (whether by British Land or any of its associates, directors, officers, employees or advisers), including as to their completeness, accuracy or the basis on which they were prepared. Other than in accordance with our legal and regulatory obligations (including under the UK Financial Conduct Authority's Listing Rules and Disclosure Rules and Transparency Rules), British Land does not intend or undertake to update or revise forward-looking statements to reflect any changes in British Land's expectations with regard thereto or any changes in information, events, conditions or circumstances on which any such statement is based.

Notes to Editors:

About British Land

We are one of Europe's largest publicly listed real estate companies. We own, manage, develop and finance a portfolio of high quality commercial property, focused on retail locations around the UK and London Offices & Residential.We have total assets in the UK, owned or managed of £19.0 billion (British Land share of which is £12.8 billion), as valued at 30 September 2014. Our properties are home to over 1,000 different organisations and receive over 340 million visits each year. Our objective is to deliver long-term and sustainable total returns to our shareholders and we do this by focusing on Places People Prefer. People have a choice where they work, shop and live and we aim to create outstanding places which make a positive difference to people's everyday lives. Our customer orientation enables us to develop a deep understanding of the people who use our places. We employ a lean team of experts, who have the skills to translate this understanding into creating the right places, and we have an efficient capital structure which is able to effectively finance these places.

UK Retail assets account for 54% of our portfolio. As the UK's largest listed owner and manager of retail space, our portfolio is well matched to the different ways people shop today, from major regional shopping centres to single occupier locations. We are focused on being the destination of choice for retailers and their customers by being the best provider of spaces and services. Comprising around 25 million sq ft of retail space across retail parks, superstores, shopping centres, department stores and leisure assets, the retail portfolio is modern, flexible and adaptable to a wide range of formats.

Our Office and Residential portfolio, which accounts for 46% of our portfolio is focused on London.  We have an attractive mix of high‑ quality buildings in well‑ managed environments and a pipeline of development projects which will add significantly to our portfolio. Increasingly, our offices are in mixed-use environments which include retail and residential elements. Our 7.9 million sq ft of high quality office space includes Regent's Place and Paddington Central in the West End and Broadgate, the premier city office campus (50% share).

Our size and substance demands a responsible approach to business. We believe leadership on issues such as sustainability helps drive our performance and is core to the delivery of our overall objective of driving shareholder value and creating Places People Prefer.

Further details can be found on the British Land website atwww.britishland.com

CHIEF EXECUTIVE'S REVIEW

This has been a strong first half.  We are making good progress on priorities set at the start of the year - achieving important milestones in our development programme, making exceptional progress on leasing and continuing to evolve our retail portfolio.  All of this supports our investment themes of creating great environments; increasing our exposure to London and the South East, investing around key transport interchanges; reshaping the retail portfolio; and focusing on profitable development.    

Our net asset value was 11.8% ahead at 769p, reflecting both rising valuations driven by stronger markets and actions we have taken to shape the business and manage our assets for growth.  Valuations were up 7.2% at 30 September 2014, and we generated total property returns of 9.8% for the six months, continuing to outperform property market benchmarks on both a total and a capital returns basis. 

Our underlying profits were 6.2% ahead at £155 million, with underlying EPS up 5.5% at 15.3 pence per share.  In line with previous announcements, the second interim dividend is 6.92 pence per share, bringing the dividend for the half year to 13.84 pence per share, an increase of 2.5%.  Our total accounting return for the half year of 13.7% is significantly ahead of the same period last year (H1 2013/14: 6.8%). 

Leasing activity was strong in the period with good demand driving occupancy across the portfolio to 97.1% (up 240 bps like-for-like).  We signed 1.1 million sq ft of lettings and renewals which were comfortably ahead of ERV in both Retail and Offices (8.4% ahead in Retail and 10.4% ahead in Offices).  We have a further 486,000 sq ft of space under offer.  Leasing activity in Offices was exceptional with nearly 700,000 sq ft lettings and renewals, (including 188,000 sq ft under offer) driving occupancy up 600 bps ahead (like-for-like) to 95%. Two of our three campuses are now fully let. 

We are also almost fully let across the Retail portfolio, with occupancy 20 bps ahead (like-for-like) at 98.6%.  Our occupational metrics are strong and improving, including footfall which was up 2.6%, significantly ahead of the market benchmarks and retailer sales which were ahead by 4.4%.  We signed 606,000 sq ft lettings and renewals including 46,000 sq ft to food, beverage and leisure operators, in line with our strategy of creating environments which meet our customers' needs and increase dwell time.   

We continue to deliver significant value from development in London.  Our highly successful 2010 development programme is 87% let and very close to completion and we are progressing our recently committed programme, notably at Clarges Mayfair, a super-prime residential development.  Taken together, we have delivered around £1 billion of profits from the current development cycle with more to come.

The Leadenhall Building was launched in September with a number of high quality occupiers agreeing to take space in the period.  Two bolts have recently fractured at the building and a full investigation is being carried out with the results available in the new year.  Existing occupiers are carrying on with their fit out and we continue to show interested occupiers around the building. The final project in the 2010 programme, 5 Broadgate which is fully let to UBS, is on schedule for completion next year.

We have made £318 million of residential sales since the beginning of the financial year, including £227 million at Clarges Mayfair.  This decreases our residential committed development exposure to below £200 million, well within our £500 million limit.  We are now well positioned to move ahead with our near-term pipeline, which is focused on office-led projects at Paddington Central and Blossom Street, Shoreditch.  Capitalising on its location close to Paddington station, we expect to commit to 4 Kingdom Street in the coming months.  We also expect to submit a planning application for our mixed use development at Blossom Street, Shoreditch, which benefits from its proximity to London's Liverpool Street station as well as our Broadgate campus.  

We continue to take advantage of investment market strength to sell selected assets although have been less active on the acquisition front, maintaining our disciplined approach to capital allocation.  Our disposals have principally been in UK Retail, where we have sold £201 million of assets since the beginning of the financial year including £121 million of superstores and we have a further £166 million of retail assets under offer.  We reinvested some of the proceeds into HUT units increasing our ownership from 59% at the year end to 63.5% currently. We are also investing in existing retail assets, improving the quality through upgrades and extensions.    

As expected, LTV continued to trend downwards to 36% (from 40% at 31 March 2014), reflecting both valuation gains, and disposals made in the half year. We have raised over £1.1 billion of debt finance since the start of the financial year, including a £785 million unsecured revolving credit facility, and the successful refinancing of one of our Tesco joint ventures with a new £325 million five year term loan at pricing which is around 250 bps below the rate on the previous loan finance.  

Outlook

Looking forward, from a macro perspective, the UK recovery looks more established, interest rates globally are likely to stay lower for longer and investment flows into UK property remain broad and deep.  Some risks remain, notably the UK general election next year along with economic conditions in Continental Europe.  In our markets, we expect London to remain strong, particularly in Offices where demand overall is above the long-term average, vacancy rates are low and the pipeline of new space remains constrained.  Yields have compressed further, but this is supported by rental growth which now seems to be firmly established.  We are comfortable with our current residential exposure following our pre-sales, notably at Clarges Mayfair. In our Retail business, the improving economy is feeding through and the lead indicators of rental growth are positive.  We see some parallels with London offices where yields compressed before rental growth was fully established.  From an investment perspective, we have been a more active seller than buyer and we expect this to continue reflecting our disciplined approach to capital allocation.

Our strong results and continued outperformance underlines the success of our actions in driving performance.  We have made significant changes to the business in recent years: increasing our exposure to London; evolving our retail offer; and taking advantage of investment markets to buy and sell well.  As a result, we are well positioned to take advantage of London's growth with a significant new development pipeline which we will build out over time, and our Retail business remains highly relevant in a fast changing world.  So we feel well positioned for the future.

Chris Grigg

Chief Executive

BUSINESS REVIEW

PORTFOLIO OVERVIEW

·      Portfolio valuation up 7.2% to £12.8billion (FY14: £12.0 billion)

·      Total property return of 9.8%; ERV growth of 2.1% and capital return of 7.3%

·      Lettings/renewals 9.6% ahead of ERV

·      Occupancy of 97.1% (FY14: 96.1%); lease length to first break of 10.1 years (FY14: 10.3 years)

·      Gross investment activity of £802 million comprising: committed development capex (£115 million); acquisitions (£74 million); and disposals (£613 million)

Overview

UK property markets strengthened further over the half with investors and occupiers more confident, reflecting an overall positive economic outlook along with low interest rates.  At the start of the recovery, investor activity was focused on London but investment flows are now evident in prime centres across the regions.  Sources of capital are diverse with sovereign wealth funds, UK institutions and leveraged funds all competing for assets.

In London, office vacancy rates are low and take up is strong reflecting an improving occupational market.  Demand was good across Central London with occupiers more flexible about where they take space.  The residential market performed well over the period, although more recently, overall volumes and price growth have slowed. The super-prime segment, as evidenced by the strong demand for Clarges Mayfair, has been more resilient.

Retail investment markets rallied strongly over the six months with a significant increase in activity at the prime end of the market, tightening retail yields.  Operationally, retailers have become much clearer about the role of physical space in their proposition and are more confident about taking space albeit they remain focused on the best located, high quality sites.     

Our portfolio generated a total property return of 9.8% over the period, which comprised an income return of 2.3% and a capital return of 7.3%.  We continued to outperform the IPD benchmarks, by 50 bps on a total returns and 70 bps on a capital returns basis. ERVs were up 2.1% across the portfolio, ahead of the market by 60 bps, with ERV growth of 3.9% in Offices, and 1.1% in Retail. 

Portfolio Performance

At £12.8 billion, the value of the portfolio was £872 million ahead, up 7.2%, with yield shift contributing two thirds of the uplift and with our actions - our timely decisions on development and our significant progress on leasing - accounting for the remainder.  Both sectors recorded strong performances. The Offices & Residential portfolio was ahead by 8.7% with City and West End offices both up 9.0%; standing investments were up 7.7% and developments were up 12.6%.  The Retail portfolio was 6.0% ahead, accelerating markedly from the previous six months with shopping parks recording the strongest growth at 7.2%.  The total value of the HUT portfolio was nearly 6% ahead over the first half. 

Investment Activity

The gross value of our investment activity since 1 April 2014, as measured by our share of acquisitions, disposals and capital investment in developments, was £802 million.  We continued to take advantage of strong investment demand across all our sectors to sell assets at attractive prices but have made fewer acquisitions, maintaining our capital discipline in competitive markets.

Acquisitions and Disposals

Acquisitions related entirely to the purchase of HUT (Hercules Unit Trust) units.  We have steadily increased our ownership in HUT from 41% at 31 March 2013, to 62.5% at 30 September 2014.  With further acquisitions post period end, our current holding now stands at 63.5%.  Over the last 18 months, we have made a gross investment of £340 million in HUT at an average yield of 6%.

We completed or exchanged on £613 million of sales of which £266 million were residential pre-sales in our recently committed pipeline. This has reduced our residential development exposure to less than £200 million (measured by costs incurred to date and costs to come), well within our £500 million limit.  Clarges Mayfair accounted for the majority of the pre-sales, with additional sales at 20 Brock Street, Regents Place, Bedford Street, Aldgate Phase 1 and The Hempel Phase 1.  In Offices, we completed the sale of 52 Poland Street for £26 million at a net initial yield of 2.5%, 51% above our March valuation, demonstrating the strength of demand for West End property.  A further £90 million of office assets are currently under offer.

In Retail, we completed or exchanged on the sale of £201 million of assets.  Significant sales included the Leamington Spa retail park which sold for £72 million (100%) on a yield of 4.4% and Cwmbran Retail Park which sold for £32 million on a 6.4% yield.   Superstores accounted for £121 million of this and were sold 5.5% ahead of book value, on an average yield of 4.9%.  Over the last four years, our total exposure to superstores (both standalone and within shopping centres and shopping parks) has reduced from 20% of total assets in 2010 to 12% currently .  We have a further £166 million of retail assets under offer. 

Development

Since 2010, we have committed significant capital to developments, particularly in London and this has generated strong returns for our shareholders. To date, we have generated around £1 billion of profits from the current development cycle with more to come.  Around £800 million of this relates to the 2010 development programme. 

With the completion of The Leadenhall Building over the summer and expected completion of 5 Broadgate early next year, our 2010 development programme is drawing to a close.  We continue to see opportunities to deliver good returns from developments and over the last two years have built a strong pipeline of new projects, some of which we have already committed to (our "recently committed developments") .  These are focused on London, particularly in up and coming areas which we believe will benefit disproportionately from London's growth. Based on our valuers' estimates, we expect to generate £288 million of profit from recently committed projects and a further £161 million from our near-term pipeline.  We also have a significant medium-term pipeline which we expect to progress over a longer period of time.

We are making good progress with our recently committed pipeline. The most significant project is our mixed use residential and office scheme at Clarges Mayfair.  Here, we have made £227 million of residential pre-sales, well ahead of our original investment case on both price and timing.  At Broadgate Circle, where we are redeveloping our restaurant and leisure offer, this is on track for completion in the new year, with over 90% of the space already let/ under offer to a good line up of operators.

In Retail, we completed 327,000 sq ft of developments in the half, including the 305,000 sq ft Old Market shopping centre in Hereford, which opened in May.  We are making good progress on our leisure schemes, we are on site at Whiteley Shopping, with a nine-screen cinema pre-let to Cineworld and 30,000 sq ft of additional restaurant and leisure space.  We are also on site at extensions at four shopping parks, including Fort Kinnaird and Glasgow Fort, covering nearly 300,000 sq ft. 

Looking ahead to our near-term prospects, with the Office portfolio close to full occupancy, we are progressing the pipeline so we are able to commit to new developments when the time is right.  At 4 Kingdom Street, Paddington Central, we have improved the scheme within the original planning consent introducing more flexible floor plates, roof terraces and public amenity space and expect to commit in the next few months. At 5 Kingdom Street, we are working with Hopkins Architects to improve the design on this 240,000 sq ft office scheme. 

At Broadgate, we expect to make an application for the redevelopment of 100 Liverpool Street before the end of the year.  At Blossom Street, Shoreditch, we are working with the Corporation of London to regenerate 350,000 sq ft of mixed use space.  We plan to submit our planning application before the end of the year and will make a decision on this development once we have achieved planning consent.  

Our near-term prospects in Retail include the development of Drake Circus Leisure, a £35 million cinema and restaurant scheme adjacent to our Drake Circus Shopping Centre.  We have exchanged conditional contracts with Plymouth City Council and will submit a planning application early next year. 

As part of our medium-term pipeline, work has begun on a potential masterplan for our 40 acre site at Canada Water, where we are working with the London Borough of Southwark on a mixed use development.  Our site, which includes Harmsworth Quays and Surrey Quays, will benefit from the wider regeneration of the area; and is just 2 minutes from Canary Wharf on the Jubilee line.  We expect to submit a planning application next year.

See Office & Residential and Retail & Leisure sections for further details on developments. 

See The Supplementary Tables in the second half of this announcement for further details on the portfolio, our investment activity and development pipeline.

ASSET MANAGEMENT

Retail & Leisure

·      Portfolio valuation up 6.0% to £7.2 billion (FY14: £6.9 billion)

·      Total property return of 9.0%; ERV growth of 1.1% and capital return of 6.1%

·      Lettings/renewals 8.4% ahead of ERV

·      Occupancy of 98.6% (FY14: 98.5%); lease length to first break of 11.0 years (FY14:11.3 years)

·      Footfall up 2.6% (Experian benchmark -0.8%)

The combination of physical and online retailing is proving increasingly complementary, allowing consumers to shop in a way that suits them.  Today, the physical store is central to the majority of consumer journeys, but shoppers have much higher expectations of their whole shopping experience.  We are successfully evolving our portfolio to ensure it meets the needs of our occupiers and their consumers and this is reflected in our strong lettings performance and improved operational metrics.

We signed 606,000 sq ft of lettings and renewals in the half with investment lettings and renewals on average signed 8.4% ahead of ERV.  Rent reviews were 3.1% above previous passing rent.  ERV growth across the portfolio was 1.1% and like-for-like income was up 2.9%. 

Our operational metrics are strong and improving.  Occupancy remains high at 98.6% (up 20 bps like-for-like) and units in administration remain low at 0.1% of total rent.  Of the 29 units falling into administration over the half, 16 have already been re-let or re-assigned.  Footfall was up 2.6% outperforming the market by 340 bps with an additional 13 million people visiting our assets over the past year. Our latest exit surveys, which cover over 50% of our multi-let portfolio, show that average spend has increased 12% over the past year, and dwell time is up 5%.  Retailer sales were up 4.4% in the period, on a same store basis.

Shopping parks, accounting for over 40% of our Retail assets had a particularly strong first half.  Occupancy was 98.5%, 30 bps ahead (like-for-like) and footfall was 5.0% up, outperforming the market by 430 bps.  Click and collect is one important driver of footfall, with our exit surveys showing that over 20% of visitors to shopping parks are collecting on site.  We have seen operational metrics improve in response to refurbishment projects with footfall up 30% at Mayflower, Basildon, 13% at Glasgow Fort, and 10% at Westside, Leeds in the first half.

At Fort Kinnaird, Edinburgh, we recently concluded a series of lettings to high profile retailers including Primark, Fat Face and TK Maxx who will open their first ever TK Maxx/HomeSense dual fascia store there.  Simply Be and Ed's Diner will also open their first outlets in Scotland at Fort Kinnaird, and a £13 million leisure extension is underway which will feature a 7 screen Odeon cinema, and additional restaurant offering.  Old Market, Hereford, which completed in the half year, is an open-air, market square styled development with leisure accounting for over 20% of the space.  The scheme is almost fully let, to a strong line-up of retailers including Next, Arcadia, Waitrose, Joules and Fat Face. 

At Drake Circus, Plymouth, in our four years of ownership, we have improved the food and beverage offer, introducing popular brands such as Ed's Diner and Yo Sushi! and re-invigorated the occupier mix with new retailers such as Apple, Bank, Paperchase, Schuh Kids and Boux Avenue; 10 lettings were agreed in the first half.  More recently we have announced an agreement with Plymouth Council to develop a 100,000 sq ft leisure scheme adjacent to the centre.  We have also been active at Meadowhall, signing 14 long term deals in the first half, with over 20 under instruction.  One of the main shopping avenues at Meadowhall has been realigned and refreshed, enabling us to improve the tenant mix with more premium brands, and we have completed on a Next and Costa Coffee on the surrounding land.

Across the whole portfolio, we have let 46,000 sq ft to food, beverage and leisure operators, including Rock Up, an indoor climbing experience which was signed at Whiteley Shopping.  In addition, Regus Express (which provides drop-in office space) was signed at Drake Circus, Chester and Edinburgh, following a positive experience at Meadowhall.    

Digital is an integral part of our approach. A year ago, we signed an agreement with BT to provide Wi-Fi at our sites and this is now available at 18 shopping centres and retail parks with 207 Wi-Fi access points.  We have also upgraded the websites of our individual assets, making them easier to navigate and consistent across the portfolio.

Offices & Residential

·      Portfolio valuation up 8.7% to £5.6 billion (FY14: £5.1 billion)

·      Total property return of 10.8%; ERV growth of 3.9% and capital return of 9.0%

·      Lettings/renewals 10.4% ahead of ERV

·      Occupancy of 95.0% (FY14: 92.1%); lease length to first break of 8.5 years (FY14: 8.4 years)

Offices had an excellent half with increased occupational demand across the portfolio.  Since the start of the financial year, we have completed or placed under offer 695,000 sq ft of lettings and renewals. As a result, occupancy is 95%, up 600 bps on a like-for-like basis. Two of our three office campuses are now fully occupied, with West End occupancy of 97.0% (up 860 bps like-for-like) and City occupancy of 92.6% (up 270 bps like-for-like). 

Investment lettings and renewals were 10.4% ahead of ERV reflecting a strong contribution from recently completed developments.  ERVs across the Office portfolio were up 3.9% in the first half, partly reflecting increased opportunities from potential refurbishment. Like-for-like rental growth was 2.8%.

In the West End, we agreed 212,000 sq ft of deals to a broad range of occupiers on terms, which overall, are materially accretive to performance, including at 39 Victoria Street and 10 Portman Square.  39 Victoria Street was fully let to a single occupier on a lease of nearly 12 years.  At 10 Portman Square, lettings to Ardagh Glass (10,250 sq ft) and Ontario Teachers' Pension Plan (18,500 sq ft) were agreed in the period, taking occupancy to 97%, for an average lease term of over 10 years.  We also made good progress at Marble Arch House, where 11,500 sq ft was recently signed with NERA Economic Consulting bringing occupancy to 53% with all the residential units now sold. 

The office space at Regent's Place is fully occupied, following the letting of 30 Brock Street to The Guinness Partnership. We will take vacant possession of 10 floors at 338 Euston Road in May 2015, freeing up 72,000 sq ft of office space.  With occupancy high across the wider portfolio, this represents an opportunity to refurbish and re-let.  At Paddington Central, phase 1 of an extensive programme of public realm improvements is already underway, covering the amphitheatre, vehicle access, overall landscape and an active schedule of leisure events.    

In the City, we are seeing good levels of interest at The Leadenhall Building where the leasing strategy is focused on the upper floors, with views across London.  The building is now 58% let or under offer and recent lettings have set a new rental high for space in the City.  Recently two bolts broke at The Leadenhall Building.  No one was injured and the building is structurally sound.  A full investigation is being conducted by the building's contractor and structural engineer. We expect to make a further announcement concerning the results in of the investigations in the new year. In the meantime, our occupiers continue to fit out; we are receiving fresh interest in the building and carrying out inspections. 

At Broadgate, our largest campus, we agreed a 5.8 year extension to Deutsche Bank's lease of 1 Appold Street taking the expiry date to 2023. This accounted for 185,000 sq ft of a total of 226,000 sq ft of lease extensions.  We are also under offer for the final 60,000 sq ft at 199 Bishopsgate, which will add an exciting new tech-related occupier to the campus, and brings office occupancy at Broadgate to 100%.  We have a strong vision of how the area will develop as a vibrant mixed use environment in the heart of the City.  We expect it to benefit from its position around Liverpool Street, one of London's most important transport hubs, and from the opening of Crossrail in 2018.  The redevelopment of Broadgate Circle is an important part of this strategy, and we were pleased that Michelin starred restaurant Yauatcha, and The Botanist, the latest bar from ETM Group, will anchor the scheme which is now over 90% pre-let.   

Residential had a strong half, with excellent progress made at Clarges Mayfair.  The 192,000 sq ft mixed use scheme is close to Bond Street and Piccadilly, with stunning views across Green Park and Buckingham Palace.  Over the summer, a selected number of apartments were marketed to a shortlist of potential buyers and we have now exchanged on 20 out of 34 apartments, totalling £227 million.  Interest from both UK and overseas purchasers was strong, demonstrating both the appeal of well-located apartments of this quality and the continued strength of the super-prime residential market.  Several units were sold at prices ahead of the previous record for Mayfair, averaging around £4,720 psf overall.  We look forward with confidence to marketing the remaining units, which are generally on higher floors, nearer to completion.

FINANCIAL REVIEW

Highlights

·      Underlying PBT up 6.2% to £155 million

·      EPRA Net Asset Value per share at 769 pence, 11.8% ahead of 31 March 2014 (688 pence)

·      Total accounting return of 13.7% for the six months to 30 September 2014

·      £1.1 billion of new financing raised in the six month period

·      Loan to value at 36% on a proportionally consolidated basis

INCOME STATEMENT

The group financial statements are prepared under IFRS where the after tax results of joint ventures and funds are shown as a single line item on the income statement, and the net investment in joint ventures and funds is shown as a single line on the balance sheet. Management reviews the performance of the business principally on a proportionally consolidated basis (i.e. on a line-by-line basis) and comments on movements in the income statement provided in the financial review below are made on this basis. Income statements and balance sheets which show British Land's interests on this basis are also included in Table A within the supplementary disclosures.

12014 Group and JVs & Funds results are presented after elimination of HUT non-controlling interest

Net rental income, including our share of joint ventures and funds, increased 6.2% to £292 million for the 6 months ended 30 September 2014.  We have made significant progress in letting up our 2010 development programme in the half year, with developments adding £11 million to net rents in the period, £8 million of this in our West End programme.  Net rental income increased by 2.9% on a like-for-like basis, adding £6 million, with strong growth in both Retail & Leisure and Offices as we have continued to let vacant space.  Current period disposals have reduced net rents by £4 million in the half year. 

Net financing costs on a proportionally consolidated basis were £103 million, an increase of £5 million compared with the prior half year.  Interest on completion of our West End developments has driven an increase of £3 million and our investment market activity has added £2 million, due primarily to acquisition of further HUT units. 

Our EPRA cost ratio (including direct vacancy costs) for the half year is consistent with the same period last year at 16.0%.  Our EPRA cost ratio (excluding direct vacancy costs) for the half year was 13.7% (2013: 14.1%).

Underlying earnings per share for the six months ended 30 September 2014 increased 5.5% to 15.3 pence (half year 2013: 14.5 pence) based on underlying profit after tax of £155 million (half year 2013: £145 million) and weighted average diluted number of shares of 1,019 million (HY 2013: 997 million). 

CASH FLOW

Net cash inflow from operating activities for the six months was £131 million including receipts from joint ventures and funds of £40 million.  £137 million was generated from the disposal of investment properties, including a number of assets being recycled in the Retail portfolio, Poland Street in the Office portfolio and PREF's Spanish assets. 

£73 million was utilised on development and capital expenditure, reflecting spend on our committed development programme and on replenishing the development pipeline.  We anticipate the prospective development spend of £345 million over the next 3 years on our 2010 and recently committed development programmes to be more than offset by sale proceeds from our residential developments.     

DIVIDENDS

The second quarter dividend of 6.92 pence per share, totalling £71 million, is payable on 13 February 2015 to shareholders on the register at the close of business on 9 January 2015.  The Board will announce the availability of the Scrip Dividend Alternative via the Regulatory News Service and on our website (www.britishland.com), no later than 4 business days before the ex-dividend date of 8 January 2015.  The Board expects to announce the split between PID and non-PID income at that time.  In respect of the first quarter dividend for 2014/15, some 9% of shareholders opted for the scrip alternative.

The total dividend for the half year is 13.84 pence, an increase of 2.5% on the 2013/14 half year dividend.  This is in line with the previous announcement made by the Board, reflecting our confidence in future outlook. 

BALANCE SHEET

1 Includes UK portfolio of £12,801m and European portfolio of £41m

2 The EPRA net asset figures are presented after elimination of HUT non-controlling interest

3 EPRA net assets exclude the mark to market on effective cash flow hedges and related debt adjustments, as well as deferred taxation on revaluations.  It also includes trading properties at fair value and is adjusted for the impact of share options and the convertible bond, which are dilutive.

EPRA Net Asset Value is 769 pence per share, an increase of 11.8% on the March 2014 comparative.  The valuation surplus in the six months is 84 pence per share, with the majority of the increase driven by the standing investment portfolio.  Retail has contributed just under half of the total uplift.   Our actions have contributed to over a third of the valuation uplift, with the remaining increase being due to yield shift.  The impact of diluting for the convertible was 4 pence per share, due to the share price being above the convertible bond conversion price for the first time at 30 September 2014.

Combined with the dividend, this translates to a total accounting return for the 6 months ended 30 September 2014 of 13.7%.

NET DEBT AND FINANCING

Balance sheet metrics remain strong.  Adjusted net debt at 30 September 2014 was £2.8 billion for the Group (£2.9 billion at March 2014) and £4.7 billion including our share of joint ventures and funds (£4.9 billion at March 2014).  The principal value of gross debt excluding cash, short term deposits and liquid investments was £2.9 billion for the Group (£3.0 billion at March 2014) and £5.0 billion on a proportionally consolidated basis (£5.2 billion at March 2014). The strength of the Group's balance sheet has been reflected in British Land's senior unsecured credit rating which remains rated by Fitch at A-.

1 Adjusted net debt and Principal value of gross debt presented after elimination of HUT non-controlling interest.  Adjusted Net debt differs from IFRS net debt by excluding the mark to market on effective cash flow hedges and related debt instruments

2 Debt to property and investments

3 Underlying profit before interest and tax / net interest

Proportionally consolidated loan to value has reduced to 36% at 30 September 2014, compared with 45% at 31 March 2012.  This has reduced due to both market improvements in investment yields (yield shift) and our actions.  We will not increase borrowings solely as a result of yield shift and that means at today's values we would not take loan to value above 40%.  The weighted average interest rate at 4.1% on a proportionally consolidated basis compares with 4.1% at 31 March 2014 and 4.2% at 30 September 2013.  Average debt maturity has increased marginally compared with the prior half year at 8.9 years.

We have raised £1.1 billion of debt finance since the start of the financial year.  The unsecured Revolving Credit Facility at £785 million with a syndicate of 14 banks signed in April on competitive terms, adds further flexibility and term to our already strong and well diversified debt portfolio. 

In September, Tesco BL Properties Limited (TBL), a 50/50 joint venture, completed the refinance of its retail portfolio with a new £325 million five-year term loan provided by Helaba and Svenska Handelsbanken. This secured financing closed at overall pricing around 250 bps per annum below TBL's previous loan finance. 

At 30 September 2014, the Group had £2.0 billion of undrawn committed banking facilities, with £1.7 billion of total facilities with maturities of more than 2 years.

We continue to manage our interest rate exposure and currently on average 76% of projected net debt (including our share of joint ventures and funds) over the next five years is fixed. 

ACCOUNTING JUDGEMENTS

Valuation: in preparing these financial statements, the key accounting judgement relates to the carrying value of the properties and investments, which are stated at fair value.  The Group uses external professional valuers to determine the relevant amounts. The primary source of evidence for property valuations should be recent, comparable market transactions on an arms-length basis.  However, the valuation of the Group's property portfolio is inherently subjective, as it is made on the basis of assumptions made by the valuers which may not prove to be accurate.

REIT status:  the Company has elected for REIT status.  To continue to benefit from this regime, the Group is required to comply with certain conditions as defined in the REIT legislation.  Management intends that the Group should continue as a REIT for the foreseeable future.

Accounting for joint ventures and funds:  an assessment is required to determine the degree of control or influence the Group exercises and the form of any control to ensure that financial statement treatment is appropriate.  Interest in the Group's joint ventures is commonly driven by the terms of the partnership agreements which ensure that control is shared between the partners.  These are accounted for under the equity method, whereby the consolidated balance sheet incorporates the Group's share of the net assets of its joint ventures and associates.  The consolidated income statement incorporates the Group's share of joint venture and associate profits after tax upon elimination of upstream transactions. 

Accounting for transactions: property transactions are complex in nature and can be material to the financial statements. Assessment is required to determine the most appropriate accounting treatment of assets acquired and of potential contractual arrangements in the legal documents for both acquisitions and disposals. Management consider each transaction separately and, when considered appropriate, seek independent accounting advice.

Principal Risks and Uncertainties

Assessment of risk is a cornerstone of our strategy and our embedded risk management is fundamental to its delivery. Our approach to risk management remains as set out on pages 36-37 of the Annual Report and Accounts published in June 2014.

The Directors' assessment is that the principal risks and uncertainties that the Company is exposed to and which may impact performance in the remaining six months of the financial year are unchanged from those set out on pages 38-41 of the Annual Report and Accounts published in June 2014, save for the separation of the 'Economic and political outlook' risk into two distinct economic and political risks, reflecting the differing drivers of these risks and their divergent paths.

Our principal risks and uncertainties are summarised below.

External Risks

Economic outlook - The prospects for economic growth and of increasing interest rates present risks and opportunities in property and financing markets and the businesses of our occupiers.

Political outlook - Significant upcoming political events, including the UK General Election in May 2015, bring risks both in terms of uncertainty until the outcome is known and the impact of policies introduced, including on the investment case for the UK, and the UK's relationship with Europe.

Commercial property investor demand - Reduction in investor demand for UK real estate may result in falls in asset valuations and could arise from variations in the health of the UK economy, the attractiveness of investment in the UK, availability of finance and the relative attractiveness of other asset classes.

Occupier demand and tenant default - Underlying income, rental growth and capital performance could be adversely affected by weakening occupier demand resulting from variations in the health of the UK economy and corresponding weakening of consumer confidence, business activity and investment as well as London's status as a leading global city. In addition, occupier failures may adversely impact underlying income and capital performance. Changing consumer and business practices (including the growth of internet retailing, flexible working practices and demand for energy efficient buildings), new technologies, new legislation and alternative locations may result in earlier than anticipated obsolescence of our buildings if evolving occupier and regulatory requirements are not met.

Availability and cost of finance - Reduced availability of property financing may adversely impact British Land's ability to refinance facilities and result in weaker investor demand for real estate. Increasing finance costs would reduce British Land's underlying income.

Catastrophic business event - An external event such as a civil emergency, including a large-scale terrorist attack, extreme weather occurrence or environmental disaster could severely disrupt global markets (including property and finance) and cause significant damage and disruption to British Land's portfolio and operations.

Internal Risks

Investment strategy - In order to meet our strategic objectives we must invest in and exit from the right properties at the right time. Significant underperformance could result from inappropriate determination and execution of our property investment strategy, including: sector selection and weighting; timing of investment and divestment decisions; exposure to developments; sector, asset, tenant, region concentration; and co-investment arrangements.

Development - Development provides an opportunity for outperformance but this brings with it elevated risk. The care with which we make our decisions around which schemes to develop and when, as well as our execution of these projects, must reflect this. Development risks could adversely impact underlying income and capital performance including: development letting exposure; construction timing and costs; major contractor failure; and adverse planning judgements.

Income sustainability - We must be mindful of maintaining sustainable income streams in order to continue to generate returns for our shareholders and provide the platform from which to grow the business through development and capital appreciation. We consider sustainability of our income streams in: execution of investment strategy and capital recycling, notably timing of reinvestment of sale proceeds; nature and structure of leasing activity; and nature and timing of asset management and development activity.

Capital Structure (Gearing) - We must maintain a capital structure which recognises the balance between performance, risk and flexibility. Gearing magnifies returns, both positive and negative. An increase in the gearing level increases the risk of a breach of covenants on borrowing facilities and may increase finance costs.

Finance Strategy Execution - We must be judicious in the management of our financing as our strategy here addresses risks both to our continuing solvency and the stability of our profits. Failure to manage the refinancing requirement may result in a shortage of funds to sustain the operations of the business or repay facilities as they fall due. This and a breach of financing covenant limits are considered to be the most significant risks to the continuing operation of British Land as a going concern.

People - British Land runs a heavily outsourced model which means that critical business processes and decisions lie in the hands of a few people. Failure to recruit, develop and retain staff and Directors with the right skills and experience may result in significant underperformance.

DIRECTORS' RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

(a)  the condensed set of financial statements has been prepared in accordance with IAS 34;

(b)  the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c)  the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

GOING CONCERN

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive's Review and Business Review.  The financial position of the Group, its cash flows, liquidity position and borrowing facilities, are described in the second half of this announcement.

The Group has considerable undrawn debt facilities and cash deposits in excess of current drawn banking facilities. There is substantial headroom against the covenants for its unsecured banking facilities, details of which are included in note 7. It also benefits from a diverse and secure income stream from leases with long average lease terms. As a consequence, the Directors believe that the Group is well placed to manage its business risks satisfactorily despite the current uncertain economic outlook.

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the financial statements.

By order of the Board, Lucinda Bell, Finance Director