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In
December 2001, as part of a wider property outsourcing
arrangement, BT completed the sale and leaseback of
the majority of its UK properties to Telereal, a joint
venture partnership formed by Land Securities Trillium
and The William Pears Group. Around 6,700 properties
were transferred totalling some 5.5 million square metres.
The consideration received amounted to £2,380
million. BT has leased the properties back at a total
annual rental commencing at £190 million and subject
to a 3% annual increase. In addition, BT has transferred
the economic risk on a large portion of its leased properties
to Telereal in return for an annual rental commencing
at approximately £90 million per annum. This is
broadly equivalent to the current level of rentals.
In February 2002, BT outsourced its property management
unit to Telereal.
BT
has the option to purchase the reversionary interest
from Telereal (i) when BT vacates a property at open
market value (ii) at the end of 30 years for the specialised
estate (buildings of an operational nature such as telephone
exchanges) at open market value or (iii) if BT wishes
to terminate all arrangements with Telereal at any time,
in which circumstances BT would pay open market values
for the property and compensation to Telereal covering
funding costs and equity return. BT can also re-acquire
the reversion of the general estate (non-operational
buildings such as offices and warehousing) at the end
of the headlease term of 999 years. BT has the right
to renew the lease of the specialised estate for successive
periods which, in total, amount to 130 years. After
130 years, the freehold specialised properties revert
to BT. The leases include normal commercial restrictions
and covenants.
BT’s
divestment of its property estate provides a flexible
approach to BT’s office arrangements and building
requirements. BT expects to reduce its property needs
over time and the transaction allows BT to vacate properties
covering approximately 35% by rental value of the estate,
including existing lease ends, over the contract term
without penalty.
The
profit on the sale of the properties amounted to £1,019
million and was determined after allowing £129
million for BT’s actual and future obligations
under the terms of the legal agreement with Telereal
and for the cost of advisors’ fees. The obligations
include expenditure of £34 million to be incurred
on completing nearly finished new properties and remedial
work to be undertaken on several properties.
Part
of the proceeds of sale were used in novating fixed
interest rate obligations to support Telereal’s
financing. An exceptional cost of £162 million
was incurred in unwinding this position and was included
in the interest charge for the year.
In
summary, the property transaction benefited the results
for the 2002 financial year by £857 million as
shown below:
|
Profit
on sale and leaseback of properties
|
£m |
|
|
|
|
| Sales
proceeds |
2,380 |
|
| Net
book value of assets disposed |
(1,232 |
) |
| Estimated
cost of BT’s future obligations |
(129 |
) |
|
|
|
| Profit
on properties sold |
1,019 |
|
| Interest
rate swap novation costs |
(162 |
) |
|
|
|
| Net
profit on sale and leaseback of properties |
857 |
|
|
|
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The
rentals payable under the lease have an adverse impact
on other operating costs in future years, which is initially
around £190 million for the 2003 financial year
which is wholly offset by reduced depreciation and interest
charges.
In
advance of the property transaction being completed
with Telereal, BT also completed the sale of one of
its major properties in London at a profit of £43
million.
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