British Land : Transcript

British Land

Full Year Results Presentation

16th November 2022

British Land

Simon Carter, Chief Executive Officer Bhavesh Mistry, Chief Financial Officer Darren Richards, Head of Real Estate

Questions

Osmaan Malik, UBS

Hemant Kotak, Kolytics

Matt Saperia, Peel Hunt

Max Nimmo, Numis

Sander Bunck, Barclays

Thomas Buisson, Goldman Sachs

Miranda Cockburn, Panmure

Mike Prew, Jefferies

Paul Gorrie, BMO

Claire Demaine, Resolution Capital

Introduction and Key Highlights

Simon Carter, Chief Executive Officer

Good morning everyone. Thank you for joining us for our Half Year Results.

Today we will follow the normal running order, so Bhavesh will take you through our financial performance, Darren will provide an operational update and I will come back on strategy and outlook.

But before we do any of that I just wanted to take a step back. It is probably fair to say that the economic environment has changed quite a lot since we were last here in May. And against this tougher backdrop, it's pleasing to see how the business has performed operationally.

That is down to a number of things, but two stand out. First, we're clearly benefiting from our focus on markets with pricing power. You will hear about the favourable supply and demand dynamics across our chosen areas. That is our Campuses, Retail Parks and London Urban Logistics.

The second is due to good execution of the value-add strategy and that is right across the business. So I want to take this moment to thank the team for delivering that really strong performance.

Now let's just take a quick look at the headlines.

Earnings and dividend are both up 12%. Our leasing performance was very strong and as a result occupancy across the portfolio is high, at 97%.

Clearly interest rates have moved materially in the last six months. The five year swap is now 4%, compared to 2% in May. Investors are naturally demanding a higher return from their investments and real estate is not immune from that. There was a 17 basis point outward yield shift in the half, which was partly offset by ERV growth. The combined effect is that valuations are down 3%.

We have a very strong financial position, which we improved with £1bn of well timed disposals. This puts us in a good place to take advantage of the opportunities that are emerging given the currently dislocations that in capital markets. But more of that in a moment.

I'll now hand over to Bhavesh who will take you through the financial performance.

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Financial Update

Bhavesh Mistry, Chief Financial Officer

Thank you, Simon. Good morning and thank you for joining us. Over the next few slides, I'll provide an overview of our financial performance in the first half.

We have delivered strong earnings growth, and our balance sheet remains resilient. Underlying profit was £136m, up 13%. Driven by strong like-for-like rental growth, a tight control on costs, and the benefit of recently completed developments.

Net tangible asset value was 695 pence per share, down 4.4%. The key movement was a decrease in our portfolio valuation of 3%. This reflects yield expansion across the portfolio, as a result of rising market rates.

Our well-timed disposals have further strengthened our financial position. LTV has decreased 220 basis points to 30.7%.

We have access to £2bn of available facilities and cash and importantly, based on our current commitments, we have no requirement to refinance until late 2025.

We will pay an interim dividend in January of 11.6 pence per share, an increase of 12%, reflecting our improved EPS and in line with our dividend policy.

Our headline net rental income is up £17m, or 8% in the period. Net divestment reduced net rents by £1m. This primarily reflects the disposal of a 75% interest in Paddington Central, offset by the impact of acquisitions made last year.

The £10m increase from developments, reflects the practical completion of 1 Triton Square last year, and a rates rebate for Euston Tower, following its derating ahead of development.

Provisions for debtor and tenant incentives have normalised and added £1m to net rents Including the impact of historic CVA and admins, like-for-like net rents have grown by £7m.

Good operational performance across our portfolio, has driven strong rental growth, which you can see, when we disaggregate the moving parts within like-for-like net rents.

On Campuses, like-for-like growth was up 9.2%, or £7m. This was driven by strong letting activity across our Storey spaces, with 100 Liverpool Street and Orsman Road now fully let, as well as the impact of rent reviews with Dentsu at 10 Triton and Meta at 10 Brock Street.

We've also seen like-for-like growth across our Retail Parks, up 2.2%, or £1m. This is due to continued strong leasing, and occupancy increasing to 97.5%.

For Shopping Centres, like-for-like net rents declined by 4%, reflecting deals rebasing to market levels. The prior period growth was the result of car park income rebounding, following lockdown restrictions lifting. Darren will cover key leasing activity across our segments shortly.

Turning now to our income statement. Starting at the top of the slide. Gross rental income increased by 4.1%. Rent collection rates have returned to pre-pandemic levels significantly reducing property outgoing expenses. As a result, net rental income grew by 8.1% and our net- to-gross rent margin returned to a normalised level.

Fees & other income increased by £4m with our new Canada Water and Paddington joint ventures generating additional fee income.

Administrative expenses were flat in the period at £44m, as a result of our strong focus on cost control. And, we were pleased to have reduced our EPRA cost ratio by 650 basis points to 19.7%.

Net finance costs were up £5m in the period to £56m. The increase is a result of rising market rates, but we expect the impact of future rate rises to be limited, as we are fully hedged for the next 12 months. I will explain details of our financing activity later on.

Underlying earnings per share is 14.5 pence, up 12.4%, which results in a dividend of 11.6 pence per share. As usual, we've included a guidance slide in the appendices.

Turning now to our balance sheet. The decrease in NTA to 695 pence, was primarily due to property revaluations offset by the impact of profits in excess of dividends paid.

Our total property return was impacted by yield expansion notably for our lower yielding assets, where the impact of rising interest rates has been most acute. Importantly, our actions have helped mitigate this impact.

Active asset management and ERV growth added 1.2%. This includes leasing activity across our standing portfolio. For example, the significant renewals to Meta at 10 Brock Street and Credit Agricole at Broadwalk House. And particularly strong ERV growth across our Urban Logistics assets, up 17% in the period.

In addition, net rental income added 2% to returns. Including the impact of leverage, this resulted in a total accounting return of minus 2.8% in the period. While total accounting return reduced in the period, last year we delivered a return of 14.8% and so we are still targeting 8 to10% through the cycle.

At year end, I outlined our capital allocation framework. This detailed the four key considerations we think about, when making decisions on how we allocate capital to deliver our strategy. With more uncertainty around us, I wanted to share our view on the framework in the context of the current macroeconomic environment.