Conference Call Transcript

Transcription

1 3 FINAL TRANSCRIPT Conference Call Transcript BLND.L - Full Year 2009/10 British Land Company plc Earnings Conference Call Event Date/Time: May 18, 2010 / 08:30AM GMT 45 Seymour Street London W1H 7LX T +44 (0) F +44 (0) W Registered Office at business address Reg No England Established 1856

2 CORPORATE PARTICIPANTS Chris Grigg British Land Company plc - Chief Executive Graham Roberts British Land Company Plc - Finance Director Steve Smith British Land Company Plc - Chief Investment Officer Charles Maudsley British Land Company Plc - Head of Retail and Business Development Tim Roberts British Land Company Plc - Head of Offices CONFERENCE CALL PARTICIPANTS Valerie Guezi Exane BNP Paribas - Analyst Harm Meijer JPMorgan Cazenove - Analyst John Lutzius Green Street Advisors - Analyst Kristian Bandy Citigroup - Analyst Quentin Freeman UBS - Analyst Bernd Stahli Merrill Lynch - Analyst Julian Livingston-Booth Goldman Sachs - Analyst Graham Jones Arbuthnot - Analyst Robbie Duncan Nomura - Analyst Remco Simon Kempen & Company - Analyst - 2 -

3 PRESENTATION Good morning everybody, welcome and thanks for coming. Today, our agenda is as follows. First, I'll give you an outline of the year, and highlight the important achievements. Then Graham will give you more detail on our performance, including the sustainability of our income flow. Steve Smith, in front of me, our new Chief Investment Officer, will update you on the performance of our portfolio, and where we see the real estate market moving in the next 12 months or so. Then I'll wrap up by telling you why we believe we can generate superior total returns over time. We're also joined today by Tim Roberts, who heads up Offices, as you know, by Charles Maudsley, our new Head of Retail and Business Development. As you know, Steve and Charles joined us at the beginning of the year and are here for the first time. We'll all be taking questions from you later. In many ways, 2009 was an extraordinary year. Remember, in the 12 months previously, UK commercial property prices had dropped by some 30% and, at the start of the year, prices were still falling. Yet by the end of our financial year, the IPD property index had risen nearly 10% on the year, on a capital basis. That volatility made it remarkable. Equally noteworthy was our own performance. In the first half, the value of our portfolio fell by just over 2%, but in the second half, it rose by 16%, leaving the valuation 13.5% ahead for the year as a whole. Our portfolio significantly outperformed IPD, as you can see on this slide. In Retail, we outperformed by 4.8%, in Offices by 3.8%. And the portfolio as a whole was 4.3% ahead of the IPD index. This performance reflects two things that are very important about British Land today. First, that we have high quality assets in sectors which have performed well and second, that our asset management activities have driven incremental value in the portfolio. You can see the effects of this performance reflected in our results today. Net asset value per share of 504p compares to 398p a year ago, an increase of 27%, which is substantially greater than the growth in the portfolio valuation reflecting, as you know, the gearing. Underlying profit for the year was GBP249 million, which is 7% below 2009, reflecting the disposals that we've made, principally Broadgate this year and Meadowhall the year before. Graham will explain these movements in more detail. Earnings per share were 28.4p and our dividend for the full year was 26p per share. The Board proposes maintaining the dividend at the same level for 2011, reflecting our confidence in the strength of our income and our business going forward. The combination of income and capital has produced a total return of over 33% for the year. As I said, these results reflect both the quality of our portfolio and the actions we've taken over the last 12 months. So I'll talk now about what we've been doing. In Retail, the amount of leasing activity during the year grew by almost 30% to 600 transactions, made up of lettings, lease renewals and rent reviews. There were 255 new lettings, accounting for 864,000 square feet, 82% of these are what we categorize as long-term deals. The average lease length on new deals and rent renewals is very similar to the existing portfolio. Leasing activity adds GBP11.7 million to our annual rent review. Our occupancies levels now stand at 99%. And I want here to counter the suggestion that high occupancy means there's no room for rental growth. Put simply, high occupancy improves our negotiating position and signals that retailers want to be in that location. The competition for space drives rental growth. If you look at our superstore portfolio, for example, we've had 100% occupancy for the last 10 years. And rental growth has been 4.6% per annum, which is higher than other sectors. The number of tenants in administration is now just 0.6% of the rent roll, compared to 2.2% a year ago. And estimated rental value trends have also improved. During the fourth quarter, they fell by only 0.2%, compared to a 3.7% decline for the year as a whole. Overall, these results are a testament to the strength of our Retail portfolio and the way we've been able to improve it, despite the economic environment. In Offices, we've also seen a very high level of activity during the year. And our occupancy levels currently stand at 93%. We completed over 1 million square feet of developments, which are now substantially let. About two thirds of this space was let during - 3 -

4 the year on top of pre-lets the previous year. So altogether, occupancy is already nearly 80% on that part of the portfolio, within a year of completion. These transactions added GBP25 million to our annual Office rent roll. Ropemaker provides 600,000 square feet of City offices. It was completed last May and is 91% let. At Regent's Place in the West End, we completed two significant office buildings, totaling over 360,000 square feet. One of the office buildings, number 10 Triton Street, is 100% let and the other, 20 Triton Street, is 36% let. We've also sold all of the units in our residential development on the same site. All of these deals were accretive to value. Taken together with the leasing actions in Retail, this increases our total rent roll by GBP37 million. During the year, we also improved the balance of the portfolio by making disposals. In Offices, the Broadgate transaction reduced our exposure to very large assets and improved flexibility within the portfolio. In Retail, we further reduced our High Street exposure and sold several retail parks out of joint ventures. These are examples of us selling assets where they've gone ex-growth, or where they're over-rented. Our portfolio is now 66% Retail and 32% Offices. I'm going to turn now to investments, both what we've done and what we're going to do. Over the year, we've made some excellent purchases. We've spent GBP247 million on buildings that offer real growth potential through asset management or development, and we've bought at a very good price. In Retail, we've purchased a 50% stake in joint ventures with Tesco at Surrey Quays in London and at the Clifton Moor Retail Park in York. We've also bought another Sainsbury's Superstore. In Offices, we've invested in 39 Victoria Street at an 8.75% initial yield, with plenty of refurbishment potential in In addition to that, we repurchased a potential development site at Baker Street in April this year for GBP29 million. You'll know that we sold this site for GBP58 million five years ago. Since capital value has bounced very quickly in the second half, we haven't chased deals for the sake of it. Prime has become much more fully priced, and we've seen relatively few opportunities that represented good value. But the economics associated with development have improved in some areas because of supply/demand imbalances. And as a result, we've committed around GBP500 million to new office developments. I'm very pleased to announce this morning that we've decided to develop the last remaining site at our Regent's Place estate, comprising 380,000 square feet of offices, together with 120,000 square feet of high quality residential accommodation. This has a total development cost of around GBP230 million and completes in The Baker Street purchase, which we made in April, enables us to develop 139,000 square feet of offices in the heart of the West End. The development costs are around GBP79 million and we intend to start construction in September. At Broadgate, we're intending to develop about 700,000 square feet of offices, which will retain UBS as an anchor tenant on the estate. Their new office will be on the site of the existing buildings at number 4 and number 6 Broadgate. We're sharing the development costs of GBP350 million with our joint venture partner, Blackstone. And though the transaction's still subject to final contract and to planning, we expect it to be completed and occupied by This transaction represents a very important step forward for the entire Broadgate estate. Altogether, these transactions represent over 1.3 million square feet in prime London locations. We're also in discussion with potential partners regarding our site at Leadenhall. During the year, we strengthened the senior management team as well. We've appointed two Directors with excellent track records and decades of hands-on experience in Steve Smith and Charles Maudsley. As Chief Investment Officer, Steve is here to help us reach decisions with regard to sectors and to weightings, as well as buying and selling individual assets. He also chairs our investment committee. Steve has over 30 years of experience in real estate, including 15 years as Global Head of Asset Management at AXA. Charles is Head of Retail and Business Development and he joins us from LaSalle Investment Management, with more than 20 years' experience in the industry, including investment and asset management in all sectors, including Retail. Steve and Charles have already started to make a very significant contribution to our business

5 We've also strengthened the team below Board level. We've appointed three new Heads of Asset Management for City and West End Offices, as well as for Retail. We've also hired a new Managing Director for Broadgate Estates. This gives us both strength and depth in the team going forward. So in summary, it's been a year where we've managed through a period of real volatility, started to invest again where there's good value and put development back on the map in order to create further value for our shareholders. With that, let me hand it over to Graham to give you more detail on the results. Graham Roberts - British Land Company Plc - Finance Director Thank you, Chris, and good morning everyone. As you've heard, it's been a good year for British Land in what were difficult occupier markets and, as Chris said, quite a volatile investment markets. Our business is in good financial shape; our balance sheet is stronger benefiting from the additional capital from shareholders last year. Our income remains exceptional, the best in the sector. We significantly replaced the income given up with the disposal of the 50% interest in Broadgate, and we continue to enjoy access to ample financial liquidity as we screen the market for opportunities. Looking briefly now at the financial highlights; our portfolio valuation rose strongly by 13.5% in the year, with a 7.5% increase in the fourth quarter alone. And, with the leverage, this has driven our asset value by 27% to 504p per share. As I signaled earlier in the year, our reported income and profits have come in lower, mainly reflecting disposals of 50% interests in Meadowhall and Broadgate, as well as the completion of a number of office developments before full occupancy. We have confirmed the 26p dividend for 2009/'10 with a final quarterly dividend of 6.5p per share. And, as Chris announced, we are continuing at the same level for the current year. The strong rise in net assets means our loan to value ratio is lower at 47%, leaving us with a balance sheet capacity to finance both our new development program and further investment opportunities. Starting with the balance sheet and capital growth, this slide shows you the main drivers of change in our gross asset value. Overall gross asset value ended the year slightly lower at GBP8.5 billion, and you can see the significant impact of disposals, mainly the Broadgate joint venture. This reduced gross assets by GBP1 billion and gross liabilities by a similar amount, and this was largely offset by GBP950 million, or 13.5% increase in the underlying value of the portfolio. The charts illustrate the impact on gearing ratios, with the disposals reducing debt and hence gearing, and the revaluations increasing equity and so also reducing gearing. Looking at how this translates into the movement in net assets, you can see that disposals have had a negligible effect, and we have a small benefit from retained earnings. The 13.5% portfolio revaluation is amplified by leverage to leave net assets at GBP4.4 billion, and net asset value per share for the year ahead by 26% at 504p. The fourth quarter NAV growth was a healthy 15.1%. You can see from the table on the right that yield compression drove the valuation increase for the year as a whole, absorbing an ERV decline of 6.2%. The valuation remains primarily an initial yield based approach reflecting current investment conditions. In the fourth quarter the 7.5% increase in value is driven by yield compression of 42 basis points, an increase in ERV of 1.2% and the effect of major office lettings. Turning now to the individual sectors and starting with Retail, which represents two thirds of our portfolio and is valued at GBP5.6 billion. Retail valuation increased by GBP660 million or 13.4%. The capital return for the year was a whole 4.8% more than IPD, and 1.7% ahead for the fourth quarter, helped by GBP4 million of new rents from lettings and rent reviews. This reflects the quality of our retail assets and our asset selection and asset management skills. For example, decisions taken early to exit high street retail and secondary shopping centers have paid off. For the year as a whole we saw significant yield compression of 90 basis points across our retail assets, and the top-up initial yield across the portfolio is now 6.3%. ERVs are down by 3.7% with only superstores recording positive ERV growth but, importantly, the momentum of ERV decline has slowed and in the fourth quarter it had decelerated significantly to only minus 0.2%. In Offices the portfolio valuation of GBP2.7 billion is after an increase of GBP334 million or 13.9%. Capital return exceeded IPD by 3.8% for the year and 5.3% in the fourth quarter, boosted to the tune of GBP66 million as a result of development lettings. Yield shift in the Office market has been less pronounced than in Retail with an initial yield shift of 37 basis points and a decline in rental values of 8% across the year. But the fourth quarter saw a recovery in ERV with growth of 3% in the City and 5.2% in the West End. This increase is reflected in the good letting activity, which Chris mentioned earlier. In Q4 alone, GBP20 million of new rental income were signed up. As expected, our underlying profits have been significantly affected by our high levels of corporate activity over the last two years, mainly the creation of the Meadowhall and Broadgate joint ventures and the completion of developments

6 Before I talk about the full year, I just want to draw your attention to the fourth quarter profits of GBP62 million. These are GBP4 million ahead of Q3 and are flattered by some one-off items aggregating about GBP5 million. Importantly, for a sense of our run rate, the whole quarter was after establishing the Broadgate joint venture and is therefore broadly indicative of the business volume today, including interest costs prior to the new lettings, which I mentioned earlier. The quarter only reflected GBP1 million of the GBP20 million of rental income from the London office lettings and the GBP4 million of retail lettings and rent reviews agreed in that quarter. On a full year basis this increased income broadly offsets the earnings dilution effect of the Broadgate joint venture seen in full in this quarter. In the appendices you will also find some useful disclosures on annualized gross rental income and net debt. Now let me walk you through the individual lines of the full year income statement. Gross rental income is down to GBP561 million due to disposal and, as I'll show you in a moment, we had some pleasing growth in like-for like-income. Property outgoings are significantly down, mainly reflecting the net impact of the credit risk provisions whereas, as some of you will know, we took a charge last year which we have been able to release this year. Administration costs at GBP65 million were actually flat compared to the prior year, adjusted for one-off credits in that year. And net interest costs fell is GBP246 million benefiting from the disposals which we have made, and the rights issue. All this leaves underlying profits at GBP249 million, a reduction of GBP19 million on the previous year. Underlying earnings per share are down by a higher percentage at 28.4p due to the additional impact of the rights issue. Now on the right-hand side of the slide I've shown you how the different factors impact underlying profit, and I'm afraid it's complicated. The first two items relate to the prior year, a charge for the credit risk of GBP17 million and the release of share incentive accruals. We then have earnings dilution from the disposal activity of some GBP33 million, offset only partly in the period by organic growth in rents and lettings. Developments diluted earnings by GBP22 million as the interest expense and void costs, post completion, are not covered by rental income during the letting phase. Finally, we benefited from the release of the credit risk provision by GBP16 million earlier this year. Moving on to gross rental income, the table compares the two periods and shows positive like-for-like income growth of 1.4%, which we view as good against the market backdrop. Retail warehouses were the strongest performers within this at 3.7%, and superstores grew by 3.1%, both lifting Retail to 2.1% growth and offsetting reductions in shopping centers. Office rental income declined slightly. Now just to remind you this is an accounting income calculation so we do not take credit here for the increases we get year-on-year from fixed and minimum uplifts, which relate to GBP63 million of rental income. I'd like to spend some time now on our income profile; we have the best income profile in this sector. Long leases, 12.6 years on average to first break, underpinned by high quality tenants and buildings with enduring occupier appeal. And as this table shows, it has an income stream of growth potential. I show you here the gross reversion of our portfolio based on our valuer's assumption at the end of March, I show it on a cash flow basis and an accounting basis. And a total highlighted in the center of GBP546 million and GBP524 million represents the annualized cash on accounting figures after contracted growth. We also get the benefit of letting up space and re-pricing rents on review of market levels. Market momentum, particularly in Central London offices is favorable, so we would be disappointed only to achieve our valuer's estimates at March, which are shown here and take the reversionary income up to GBP577 million on a cash basis and GBP551million on an accounting basis. Only 7% of our rents expire over the next three years, and a good proportion of these we'd expect to review promptly. Future lettings and lease renewals, future rental growth, Steve will talk to that later. And future investments and capital recycling and our development program will all add to earnings. Our strong contracted rental stream, together with our rental potential, is reflected in our dividend announcement today. We've declared a fourth quarter dividend of 6.5p making 26p for the year as a whole, and this quarter's dividend will be a non-pid distribution. The dividend for the year is 1.1 times covered by earnings; cash cover is a little under 1 times, due to rent freeze on recently completed developments. This is, however, 1.4 times covered when reflecting the scrip. For the current year we intend to pay a dividend of 26p, reflecting our confidence in the underlying income and our ability to grow it. And just to remind you, our approach remains to pass income through to investors, consistent with underlying rental growth. And finally, let's look at the balance sheet statistics. The portfolio valuation is GBP8.5 billion, that's broadly unchanged over the year, as we've discussed. Due to disposals, net debt is down GBP4.9 billion to GBP4.1 billion. The net debt now represents 47% of the value of our properties and investment. Our policy for gearing takes into account judgments about market cycles ranging from a maximum of 55% LTV and lower at cyclical market peaks. Where we are today gives us plenty of capacity for further investment and developments

7 Now the Group loan to value at 25% is significantly down from last year. This measure is relevant to our unsecured borrowing lines and, in particular, the headroom capacity against our covenants. As of today, for example, the covenants would not be breached if there was a fall in property values of some 44%. I say this, not to suggest that we expect a fall of this magnitude, but only to show the measure of our capacity and to put into context the 55% and 47% that I mentioned earlier. Just to talk a little bit about debt, our debt finance taps into the broad range of sources and is of long average maturity. We have GBP2.9 billion worth of committed undrawn bank lines, and we have no Group refinancing requirements until However, it's pleasing in fact that the lending markets are steadily improving, and improving for our sector. And particularly, they continue to favor investment grade companies and also established borrowers. And also our joint ventures, as you've seen with the Tesco joint venture which we refinanced earlier this year, are also successfully refinancing. So the market has continued to improve and continues to improve from there. So in summary, we've outperformed IPD, we have maintained our strong income position and achieved a total return of 33%. On that note, I'd like to hand back to Steve. Steve Smith - British Land Company Plc - Chief Investment Officer Thank you, Graham, and good morning. I'm going to cover three topics today. First, I'll talk about our portfolio, then our view of the market and, finally, I'm going to talk about our plans for the coming period. In the few months of being at British Land I've had a good look at the portfolio. I expected it to be strong, that was a major reason for joining, and I've not been disappointed. It's strong because the majority of the assets are prime, and that's ideal for a Company of this size aiming to deliver consistent outperformance with low volatility. You can argue about what prime means, but in general it comes down to quality of location and quality of building. Of course, things change over time and historically change has been slow, but in more recent years the rate of change has increased. We're benefiting from those changes in Retail and in Offices because, in essence, our properties are in the right places, and they match the needs of today's occupiers. I'm going to start with Retail. The major change in Retail stems from the fact that large retails have greatly increased market share at the expense of smaller operators. The graph on the left shows Retail sales over the last decade and, as you can see, the polarization between large and small retailers is huge. Large retailers have grown their market share by about a third, while small retailers have seen their share almost halved. You can also see on the top line the impact of the major food store operators. What's interesting is the correlation between the trends in the graph on the left and the numbers on the right. As you can see, the income growth in retail parks and superstores is much stronger than in shopping centers and in the high street. As competition has increased, retailers have had to run faster in order to improve or at least maintain margins. One way to do this is to increase volume, so they're looking for bigger more flexible formats that are easily acceptable. Ideally, they also want to be surrounded by complementary retailers who attract customers and drive footfall. The net result is that sales have concentrated into fewer, larger formats. In 1971, 50% of all retail spend in the UK occurred in 200 locations. Today, the same volume occurs in just 90. A perfect example of what retailers are looking for is our Glasgow Fort scheme. It comprises 390,000 square feet of A1 space, is perfectly positioned on a motorway junction between Glasgow and Edinburgh, and it combines a high street environment with the convenience and flexibility of large out-of-town units. It's one of the early open A1 fashion parks and was built at relatively low cost. Average rents are GBP39 per square foot, with estimated rental values at GBP43 per square foot. The Fort has been highly adaptable to new retail formats; today it has over 70 high quality tenants focused on fashion, food and health and beauty. Occupancy is high at 97%, and average income growth has been 7.4% per annum since it opened five years ago. Over the last year we've agreed 10 new lettings at rents 4% ahead of rental value on average, and that's in a deflationary environment. We also have 175,000 square feet of consented extensions, including an 80,000 square feet pre-let to Marks & Spencer. Moving to Offices, the changes have been equally significant, and one of the biggest factors has been new technology. Buildings have to be capable of housing the technology for modern communications, and they have to be flexible so you can change the configuration of the office whenever you need to. They also have to take the heating and lighting load you'd expect in highly specified airconditioned offices. Most offices are now open plan and more densely occupied in order to improve efficiency

8 If you look at the size and floor plates of buildings developed during the 1980s boom and those being developed today, you can see what I mean. The chart on the left shows how City offices averaged less than 50,000 square feet in the 1980s whereas today, the average development is well over 100,000 square feet with much larger floor plates. These changes mean that older buildings become less attractive and, in many respects, a large number of buildings constructed before 1990 are either physically or technically obsolete, or both. The chart on the right shows the take-up of London office buildings over the last five years. You can see there's been consistently more demand for Grade A space, and that secondary space is lagging by some margin. Regent's Place estate is a good example of the kind of location business is moving to. It consists of 1.2 million square feet built in two phases, with the third and final phase starting shortly, which will add around 0.5 million square feet. The estate enjoys an attractive self-contained environment and more recent buildings have been completed to BREEAM excellent standard, which guarantees high quality and sustainability. It's also close to a number of major public transport interchanges. As you can see, the estate has attracted a broad mix of tenants, including oil companies, ad agencies, financial services and government. The second phase was completed six months ago, and already it's more than half let at average rents of GBP39 per square foot with the latest headline rent at GBP50 per square foot. If you look at our Office portfolio as a whole, the average age is 15 years versus 32 years for the industry. Over 37% of our portfolio is less than five years old, and that's in part why we've grown occupancy levels and lease lengths. New lettings are, on average, 11% ahead of the independent valuer's opinion of rental value. So the portfolio is a strong one, and it's been further strengthened by a well thought through disposal program over the last few years. We sold secondary ahead of the curve, we sold high street retail before the worst impact of the recession, and we sold offices with limited growth potential. We also reduced our exposure to very large assets, which was important not only to control risk but also to have greater flexibility to manage the portfolio. In the case of Broadgate, we reduced exposure to a mature asset and to City offices, which are more volatile than the West End in both occupier and investment markets. And instead of a long-term refurb program across the whole estate carrying all of the cost and market uncertainty, we're now able to reduce risk at the portfolio level by sharing development costs with Blackstone. What this adds up to is a portfolio where, over five years, we've halved our exposure to the high street while increasing retail warehouse assets to almost a third of the portfolio. And we've reduced city offices by a third while doubling our exposure to the West End. Effectively, we've refocused on properties that will deliver future growth, both income and capital. The chart on the left shows predicted growth rates for the next five years and, as you can see, retail parks, superstores and London offices are all expected to outperform the market. On the right are the weightings of our portfolio, and you can see we're overweight in each of these areas. Going forward, our strategy in Retail will continue to be a buy and hold approach focused on prime assets. In Offices we're modifying our approach. City offices have been volatile and below average performers for many years. The major reason for this is Canary Wharf, which dramatically changed the supply/demand dynamic for financial services, so we're adopting a more tactical strategy in City offices. The disposal of 50% of Broadgate should be seen in this context. The West End is rather different as supply/demand dynamics are rather more balanced. Planning constraints mean we're unlikely to see significant expansion in space and, looking forward, we expect higher and less volatile returns from the West End. So over time, you'll see us increasing our commitment to West London offices. We're adopting a long-term strategy, as we have in Retail. I'm going to move now to our view of the market, starting with the occupier market. It's been apparent for some time there's a shortage of Grade A space in the London market. The chart on the left shows lease expiries over the next five years; occupiers who took 25 year leases during the last boom in the late 80s are now looking for new space. The really striking image I take from the graph on the right is the rapid depletion of space to almost nothing in As a result, prime office rents are rising, and looking at supply I can easily see rents of GBP80 to GBP90 a square foot in Mayfair. In Retail, underlying consumer demand is likely to remain weak and overall retail rents are expected to continue to fall in 2010, picking up slowly thereafter. Despite this, there's growing pressure on key locations, and we expect to see wide differences in performance between the best locations and the rest. In one of our major retail parks, for example, we've just done a deal that's 10% ahead of estimated rental value. In a market where rental growth rates are expected to fall during the year, we're not unaffected, but in many of our locations, we expect to do considerably better than the market as a whole

9 Looking at the investment market, there's still a shortage of prime with too many people chasing it. At a time when the UK looks good value, particularly for overseas buyers, a growing number of investors are coming to the market hoping to buy ahead of further price inflation. Of course, there are banks and others who have to sell, but a lot of the assets are not of good quality, and this will inevitably lead to a spread in yields. Sellers of secondary assets in the coming market may well be disappointed. We're still screening lots of property, and volumes are growing, but we're still not seeing assets that can deliver value in the way that retail store extensions and office developments will. We do think that markets will start to offer value over the near term, however, especially for assets that need repositioning. Against that background, we'll deliver growth in the existing portfolio through a combination of contracted rental uplifts and letting [of] space. And you can see from the chart on this slide that projected revenue growth is slightly ahead of IPD. What reversionary potential doesn't always capture is the scope for rental value growth. You've already seen that our portfolio is biased to higher growth sectors. And if I take superstores as an example, which by capital value represent about 15% of our portfolio, forecasters are predicting rental growth of 3% to 4% per annum. Our historic track record suggests this could be higher. For the last 10 years, actual rental growth for our superstores has been 4.6% per annum, compared to the average of the retail index which grew at 2.7%. In addition, we have significant development potential, which implies projected rental growth well ahead of IPD. As you heard from Chris, we're committed to three new office schemes, and while you'll be aware of deals in the City at initial yields somewhere between 5% and 5.25%, we believe we'll deliver schemes producing development returns of at least 7% on today's rents. If you factor in potential rental growth in a supply constrained environment, those earnings yields will be significantly higher. In Retail, we have 750,000 square feet of potential extensions, most of which is already consented. If we build all of this over the next five years, it could add around GBP15 million of rent and more than GBP200 million in capital value, a major part of which would accrue to our bottom line. We'll be starting some of those schemes in the near future. So in short, we have a strong portfolio that's well positioned to deliver consistent outperformance with low volatility. Thank you very much, and I'll now hand back to Chris. Thanks, Steve. There are three things I'd like to highlight about the last year. First, in a period of real volatility, British Land has outperformed. Second, we've done several smart deals which will add value to shareholders over time. And third, we're developing again. Looking forward, we see real prospects of growth from our existing portfolio. That's because of the way we strengthened it in recent years so that we're focused on those areas most likely to outperform, and because of the way we've been able to create value through our asset management skills. High occupancy in Retail indicates high occupier demand which will drive future rental growth. In Offices, we expect to see both rental growth and continued strength in new lettings, and we'll also capture the potential from conversions. So let me leave you with some thoughts about where we see the opportunity for further value creation in current market conditions. We think that demand from both occupiers and investors will continue for prime real estate in London Offices and in Retail, though we're not expecting the sort of yield compression seen in the last six months. Other types of commercial real estate may well disappoint. We'll continue to focus most of our energy on our two big businesses, Retail and Offices, and we'll be opportunistic where we see exceptional value. The process of moving large amounts of real estate from involuntary holders to longer term holders has only just started. Because of that, patience will continue to be a virtue. We do know that our access to capital, combined with our specialist property skills, give us a real competitive advantage. And that's important, because the biggest drivers of value for British Land will continue to be our ability to buy the right assets, to develop the right assets, and then to manage those assets really well. Taken together, it's these factors that underpin our ability to deliver both income and capital growth for our shareholders; in other words, to generate superior total returns

10 Thank you very much, and with that, I'll ask my colleagues to join me for questions. While they get organized, let me just give you a couple of house suggestions. We've got microphones dotted about the place, and because we've got people on the phones, if you could use the microphones, that's going to make it more useful for everybody, particularly those people -- and we'll all be able to hear. And the second thing is if you could, when you get to ask a question, if you could just remind us of your name and organization, that would be useful. Now that my colleagues have assembled, just to introduce them. Working my way from the wall, Tim Roberts, as you know, runs the Office business; Graham you've already heard from; Charles Maudsley runs Retail; and Steve, again, you've already heard for

11 QUESTION AND ANSWER So that's the kind of formal bit of the presentation over. Let me turn it over to questions. Valerie Guezi - Exane BNP Paribas - Analyst Hi, I'm Valerie Guezi from Exane. Yes, I was just wondering if you could give us a bit of color on your investment strategy and where do you see opportunities within the next 12 months coming from? Well, I think you've heard some of the things that we've said, hopefully, in terms of the market rallying quickly and, therefore, that we haven't seen a huge number of opportunities. What you have seen is where we've seen value, we've taken advantage in terms of several purchases. And, obviously, the development represents another way of creating prime. Steve, I don't know if you want to add anything? Steve Smith - British Land Company Plc - Chief Investment Officer Well, we'll continue to have a strong focus in Central London Offices and in Retail where we see assets that can be reengineered to create prime for tomorrow. Obviously, we're deploying capital into developments, because we see better returns there in the short term. But over the longer term, we think we'll see some opportunities in secondary markets as yields move out which we can exploit. And I think, in terms of alternative investments to offices and retail, we'll keep our eye open for those. But clearly, we'll look at things on a case-by-case process where we see strong value. Next question. One there. Harm Meijer - JPMorgan Cazenove - Analyst Good morning, Meijer, JP Morgan Cazenove. Just on secondary values potentially falling. Anything what you are seeing today already, anything what you can add, any numbers which those can go to, and whether this can impact also prime at on stage? Graham Roberts - British Land Company Plc - Finance Director I think if you want to look -- it's difficult for us to comment on prime in our own portfolio because we don't have much of it, any, arguably. If you look at the -- secondary -- I'll re-phrase that. We don't have much secondary in our predominantly prime portfolio. If you look at the IPD numbers, they actually do a survey which is basically just mechanical. They look at the highest yielding and lowest yielding and they calculate the difference. And that's running at about 3% now, which is actually historically quite high, so that's quite a good way to get at it on a somewhat objective basis. So I don't know if -- Charlie, do you want to just comment? Charles Maudsley - British Land Company Plc - Head of Retail and Business Development I think one of the thing is we don't think the rental fall's yet reflected in the market, so if you just look at vacancies in the retail sector, average vacancy and IPD 5.5%. If you think that, in the next five years in the shopping center market you're going to have 41% lease expiries, you can see that there's going to be an increase in the amount of vacancy. If you look at the anecdotal evidence coming from retailers, for example, Arcadia have 300 lease expiries coming up in the next three years, and they've publicly said they're only going to renew 100 of those

12 So as those lease expiries get reflected in the market, that's why we think secondary yields could move further out over -- sorry, Steve. Steve Smith - British Land Company Plc - Chief Investment Officer Can I just add something to that? I think the other thing you need to be conscious of is that a lot of the secondary we're talking about sits outside the visible medium, because it's not within IPD. So there are, I think, a lot of things going on that are not apparent to the mainstream part of the market. But I think where you can take some comfort is the fact that the real estate market is a global market, so for prime, prices are going to hold up. Quite frankly, capital is moving around so effortlessly these days that it's difficult to visualize a situation in which prime is going to fall from where it is today. Harm Meijer - JPMorgan Cazenove - Analyst Okay, something else. When you mention GBP80 to GBP90 per square foot, I was hoping you were mentioning City offices rents, but unfortunately it was Mayfair. So what about City office rents are we going to? Tim? Tim Roberts - British Land Company Plc - Head of Offices Well, Harm, I think the outlook is encouraging. We're in a position where we're seeing a cyclical upturn in demand. And you've seen in today's results that we've taken advantage of that in that we've let 650,000 square feet of buildings through the year at a premium to the ERV. So that's the good news for British Land. Also, if you look at the supply outlook, and Steve gave you a chart during his presentation, supply across London, and in particular in the City, is very limited. So I believe that over the next two to three years, which is a reasonable period for me to be giving a view of where the market will go, I believe we're going to get rental growth in the City. Again, in our portfolio, if you look at ERV growth this quarter, the final quarter, we've seen ERV growth approaching 4%. So again, it shows there's a bit of a bounce in rent. Harm Meijer - JPMorgan Cazenove - Analyst Okay, and maybe a last one, if I may? It may be a bit of a cheeky one, but there have been some comments over the last months just on the Company strategy and all that kind of stuff from the press and analysts. Is there anything you would like to add on that? Do you agree with that, or you would say what? I think if you do my job, it's a dangerous job to start commenting on what analysts say. It could become somewhat of a closed loop. Look, what we've tried to be today is very clear about where we see our business and where we see the opportunity. And that's not a coincidence. We've tried to be very clear. If you read what we said afterwards, what we talked about is our focus on Retail and on Offices. What we've talked about is where we see opportunities that we think that they will be predominantly in those sectors, though we will look around opportunistically if we see something elsewhere, but we do think that opportunities will occur. I think there are just two things I would add. One, the market did move very quickly over the last six months, and we've stayed disciplined. Now I think there are people, why haven't you invested more? Just ticking the box to say, hey, we've invested, is potentially a bad use of shareholders' money. What you've seen is us invest in good quality existing investments where we see opportunity. And if you haven't been down to Surrey Quays, I really encourage you to go, because it's only by walking around down there you can see the opportunity, and it plays to our core strengths. We understand what the retailers want there; we understand what Tesco want

13 Because unlike anybody else, we've got a whole pile of JVs and great relationship going back a long time with them, so that adds to that. And you've seen in development as the market's changed, so we've taken advantage of that. So I'm not quite sure how much clearer I can be, but that's how we see the business going forward. Harm Meijer - JPMorgan Cazenove - Analyst Thank you very much. Next question. John Lutzius - Green Street Advisors - Analyst Good morning. Hi, it's John Lutzius from Green Street. A couple of questions on Broadgate, please. I'm particularly interested in the space that may get left behind with the new development of 4 and 6 Broadgate. I'm thinking particularly of 8 and 12 Broadgate and 100 Liverpool Street. Can you make a few comments, please, on your ability to increase the volume of those buildings and your perception of the condition of those buildings vis-a-vis Steve's remarks regarding obsolescence issues? Tim? Tim Roberts - British Land Company Plc - Head of Offices Morning, John. First of all, as you are aware, Chris has told you that we've agreed terms with UBS on a 700,000 square feet pre-let, which is fantastic news for Broadgate, and indeed, the Office portfolio. They at the moment occupy about 1 million square feet, and the buildings that you refer to, John, are part of that 1 million square feet. We understand that UBS will look to consolidate more people on to Broadgate. That's logical; it's going to be their main campus. So we would therefore hope that they are going to stay on a proportion of the 1 million square feet. The accommodation that they are likely to move out of, our valuers more and more are having regard to refurbishment values. On average, they are valued at an initial yield of 10%, which starts to give you an idea they're no longer viewed as straightforward investments. And I think that they will become pretty good refurbishment opportunities, albeit again, what I'm trying to do is give a view of worth over the next five years, because if the building at 4 and 6 Broadgate is completed in 2014, UBS will not actually take occupation until John Lutzius - Green Street Advisors - Analyst And I know it's difficult, because you're in negotiations with UBS, but what guidance or comment can you make about the rental level at 4 and 6 Broadgate? Tim Roberts - British Land Company Plc - Head of Offices On the basis -- this is going to be a long way of saying, no. Tim, I'd just keep it to no. Look, I'll save his blushes, because he's got to do the negotiation, right? I hope you would not expect us to have shaken hands on a transaction that was not good value for British Land and its shareholders. It would be inappropriate in the

14 middle of negotiations, and frankly, it wouldn't be fair on UBS; it wouldn't be fair on Blackstone or on us to make any more comments, but I would just keep that fact in mind. And you've also seen us make judgments. We had an alternative; we talked about it before in terms of refurb. So we've done it in that context, not out of any sense of desperation. We're very comfortable what we've achieved. We just can't be more specific. And I don't actually think it would be good for shareholders of our own, let alone anybody else. I'm sorry, but I'm not that sorry, John. Tim Roberts - British Land Company Plc - Head of Offices John, I'll just add one more thing to Chris. The terms that we have agreed with UBS will show us that you would expect us to want, bearing in mind the construction risk that we're taking and the CapEx that we have to put in to build the buildings. John Lutzius - Green Street Advisors - Analyst Thanks very much. Kristian Bandy - Citigroup - Analyst Morning guys, it's Kristian Bandy from Citigroup. There's been recent press speculation that you might start the cheese grater. I wonder if you might be able to give us any color on that? No, but one of my colleagues has won money as to how long before that question came up; I'm just not sure who. I think what I said is where we are, which is we're in discussion with a number of parties, and that was supposed to imply both in terms of potential occupiers and potential investors. Tim, I don't know if you want to say anything else? Tim Roberts - British Land Company Plc - Head of Offices First of all, everybody will be aware we've got planning consent for 600,000 square feet. We've cleared the site, we've done the enabling work so, within reason, we're ready to go. At the moment, we're carrying out more detailed design, and we're also reengaging with the contractors to see what the prices are likely to be for developing. I think also it's a building that generates a lot of interest, both from an occupier and investor perspective. It's a stunning, truly worldclass building, but also it's very, very good. It offers excellent functional accommodation. And I'm pleasantly surprised by the level of interest that we're receiving from occupiers for potential pre-lets. We've not agreed anything, but I think that there is interest out there, and we're trying to gauge that interest. And at the same time, as Chris has said, we're at the very early stages of talking to one or two parties to see if there is any way that we could perhaps share the cost, the risk and the reward of doing Leadenhall. But, at this stage, no firm decision on whether and when to build has been made. Steve, do you have anything to add? Steve Smith - British Land Company Plc - Chief Investment Officer Not really thank you, Chris

15 Good, next question. Quentin Freeman - UBS - Analyst Hello, Quentin Freeman, UBS. Can I ask two City related questions? Tim, if you were to do a development in the City, what kind of economic return would you expect? Tim Roberts - British Land Company Plc - Head of Offices Fantastic. On a speculative basis, so I'm not talking about UBS, on a speculative basis most developers would want a 15% to 20% profit. Quentin Freeman - UBS - Analyst On a cash return, income return? Tim Roberts - British Land Company Plc - Head of Offices On a development yield basis. Really, Steve's already alluded to it; it's going to be around 7%. Quentin Freeman - UBS - Analyst Thanks very much. Steve, you talked about being tactical in the City. Obviously, you've got quite a high exposure to the City at the moment, and also, the City is expected to be an area of quite strong growth in the short term. What is your medium-term target for the City exposure, compared to your West End exposure? And against the retail portfolio, which is, obviously, a very large proportion of your portfolio? And then, also, the timing of when you'd expect to get there? Steve Smith - British Land Company Plc - Chief Investment Officer I think we're very happy with our exposure to Central London generally, with an increase in exposure in the West. In the short-term we're very happy with where we are in the City. So the job in the coming period is to deploy capital, regroup 12 months down the road and then to look at the situation at that point. As to what the long-term exposure that we would want to maintain in the City is at present, it's difficult to say. But at this point we're very happy to put that money into a couple of schemes, and we will review as we move forward. Quentin Freeman - UBS - Analyst But in the very long term would you expect the West End to be bigger than the City? Steve Smith - British Land Company Plc - Chief Investment Officer Yes, I would hope so, because it is more consistent and you don't get quite the same dramatic shifts as you do in the City. Over time we consistently move money in and out of the City, and I don't think that there is an opportunity here to clear the decks completely from time to time. We have sold part of Broadgate, but it is still the premier estate in the City, and it still does have a lot of potential. And taking someone's point earlier about obsolescence the key about Broadgate is the envelopes of the building they can still be sustained, even though they are older buildings today, and that isn't true of the majority of the stock. We will have a strategic holding in the City but, clearly, we do want to adjust our weighting from time to time