Final Results

Land Securities Group Plc 18 May 2004 18 May 2004 LAND SECURITIES GROUP PLC ('Land Securities' / 'Group') Preliminary results for the year ended 31 March 2004 (Part 1) Highlights â€¢ Adjusted diluted net asset value per share up 9.2% to 1331p (2003: 1219p) â€¢ Investment portfolio valuation uplift of 5.3% to Â£8.15bn (2003: Â£7.84bn), with the like-for-like portfolio recording an 6.7% increase to Â£6.22bn (2003: Â£5.73bn) â€¢ Profit before tax rose by 16.7% to Â£373.1m (2003: Â£319.6m) â€¢ Pre-tax revenue profit decreased, as expected, by 8.0% to Â£309.2m (2003: Â£336.2m) â€¢ Adjusted earnings per share decreased, as expected, by 6.0% to 47.86p per share (2003: 50.89p per share) â€¢ Notable activity within the investment portfolio demonstrated by: - Continued strong performance of the retail portfolio, rising 11.5% over the year - Improving Central London market demonstrated by a 0.8% like-for-like increase in value - Sale of Â£682.1m of investment property, creating FRS3 profits of Â£52.1m â€¢ Completion of 153,000 sq m of development, with 82,000 sq m let, or agreed subject to contract â€¢ Land Securities Trillium on target to achieve Group's aspirations for growth. New business highlights included the expansion of the DWP contract and being selected as preferred bidder by Aviva for a major outsourcing project â€¢ Proposed full year dividend increase of 4.5% to 37.1p (2003: 35.5p). Peter G Birch, Chairman, commented: 'We made good progress in the year to 31 March 2004, with the 9.2% rise in adjusted diluted net asset value per share once again demonstrating the benefits of a clearly defined strategy and a soundly financed and well-managed asset-backed business. 'We remain very encouraged by the potential for our investment portfolio, the schemes in our development programme and the opportunities available to us in the property outsourcing market. 'We are also pleased by the potential for the Group should an appropriate REIT structure be introduced. We believe that this will attract new capital into property and will be positive for the economy. 'Over four years the Group has transformed itself from an asset accumulator to a customer focused modern property business. The Board's confidence in our prospects is reflected in this year's dividend increase.' -ends- For further information: Ian Henderson/Andrew Macfarlane/Emma Denne Land Securities Group PLC Tel: 020 7413 9000 Jonathon Brill/Stephanie Highett Financial Dynamics Tel: 020 7831 3113 Financial Highlights 31 March 31 March 2004 2003 % change Gross property income Property investment and trading (including 50% share of joint ventures) Â£650.2m Â£579.3m +12.2 Property Outsourcing Â£830.9m Â£660.2m +25.9 ------------- ------------- ----------- Total Â£1,481.1m Â£1,239.5m +19.5 ======== ======== ======= Operating profit (total) Â£565.8m Â£550.2m +2.8 Pre-tax profit Â£373.1m Â£319.6m +16.7 Revenue profit (pre-tax) Â£309.2m Â£336.2m (8.0) Adjusted earnings per share 47.86p 50.89p * (6.0) Earnings per share 61.84p 46.46p +33.1 Dividends per share 37.10p 35.50p +4.5 Adjusted diluted net assets per share 1331p 1219p * +9.2 Diluted net assets per share 1293p 1188p +8.8 Carrying value of investment properties Â£7,880.9m Â£7,823.9m Net borrowings Â£2,435.8m Â£2,589.3m Equity shareholders' funds Â£6,030.1m Â£5,532.7m Gearing (net) 40.5% 47.3% * as restated - note 6 1. Excludes results of fixed asset property sales and exceptional items in 2003 2. Based on revenue profits. Tax charge adjusted to exclude deferred tax arising from capital allowances and capitalised interest on investment properties 3. Excludes deferred tax arising from capital allowances and capitalised interest on investment properties 4. Market value less UITF28 adjustment of Group Investment Properties 5. Net borrowings (including bank overdraft less short term deposits and cash), at book value, plus non-equity B shares as a percentage of equity shareholders' funds 6. The calculation basis has been refined this year and the comparatives have been restated Chairman's Statement Introduction We made good progress in the year to 31 March 2004 with adjusted diluted net asset value per share up by 9.2% to 1331p (2003: 1219p), once again demonstrating the benefits of a clearly defined strategy and a soundly financed and well-managed asset-backed business. During the year our asset and property management activities increased the value of our like-for-like investment portfolio by 6.7%; we completed 152,500 sq m of development, let or agreeing to let 82,000 sq m; and won an expansion to our contract for the Department for Work and Pensions ('DWP') which went live in December, resulting in a further 1,078 properties coming under our management. The scale of our operations across the UK reinforces our market leading position. We now provide office accommodation to more than 2.6% of the UK office workforce and we estimate that our retail properties are visited more than 300 million times per annum by shoppers. A diversified portfolio, secure income from quality occupiers and strong and growing revenues from Land Securities Trillium back the Group's progressive dividend policy and we are increasing the dividend by 1.6p this year, maintaining our long record of year-on-year increases. Results Pre-tax profit increased to Â£373.1m (2003: Â£319.6m), although last year's profits were reduced by exceptional items associated with the return of capital to shareholders. As expected, revenue profits (our measure of underlying pre-tax profits) decreased from Â£336.2m to Â£309.2m as a result of: â€¢ mobilisation and bid costs relating to the expanded DWP contract (although these are mitigated by improved results from Telereal and the BBC); â€¢ the impact of our Central London development programme; â€¢ the full year impact of the increase in interest payable resulting from the return of capital; and â€¢ the dilutive effect of property sales in the past two years. Adjusted earnings per share (calculated on revenue profits) were 6.0% lower at 47.86p per share (2003: 50.89p per share). The Board recommends a final dividend of 27.2p per share (2003: 26.0p), making a total distribution for the year of 37.1p (2003: 35.5p), a 4.5 % increase on 2003. The dividends paid and proposed will be covered 1.3 times by adjusted earnings (2003: 1.5 times). The dividend will be paid on 26 July 2004 to shareholders on the register on 25 June 2004. The Group is focused on the efficient use of its capital. During the year, it received cash totalling Â£700.2m from property disposals and a Â£172m distribution from Telereal. The Group reinvested Â£506.3m into property acquisitions and development and Â£234.5m into its property outsourcing activities. The total investment portfolio was valued at Â£8.15bn (2003: Â£7.84bn), representing an increase in assets, in spite of the level of sales activity. This portfolio includes 54.9% retail, 36.6% Central London office and 4.3% industrial. At the half-year, we introduced additional disclosure with a ' like-for-like portfolio*' definition, which gives a better indication of the underlying performance of the portfolio. The like-for-like portfolio was valued at Â£6.22bn, showing a capital growth of 6.7% over the year. The retail assets, including retail warehouses, now represents 55.2% of the like-for-like portfolio. Retail continued to perform well with 11.5% valuation surplus. In Central London, our holdings showed a nominal 0.8% increase in value over the year, demonstrating clear signs of improving market conditions. This trend was particularly evident in the second half of the year, when our Central London portfolio as a whole showed a positive valuation uplift of 2.5%. * The like-for-like portfolio comprises investment properties that have been in the total investment portfolio throughout the current and prior financial year and which have not been part of the development programme during that time. It also excludes sales and recent purchases. Regulatory Environment We have come a step closer to the introduction of a liquid, tax transparent vehicle for property investment in the UK with the publication of the Government's consultation document on Property Investment Funds ('PIFS'), more commonly known as Real Estate Investment Trusts ('REITS'). While welcoming the consultation, we would caution Government not to be too prescriptive about the structure of such a vehicle. To be able to deliver the regeneration and flexible property contracts desired by Government, and the returns that investors will find attractive, REITS will need to sustain a reasonable level of gearing, undertake some development activity and embrace property outsourcing activities. In addition, to encourage conversion, Government must make sure that it sets a fair, not punitive, conversion charge. In principle we are attracted by the idea that Land Securities might become a REIT, but our decision to convert or not will be determined by the details and costs of conversion. We will only convert if it is clearly in shareholders' interests to do so. We were also pleased that Stamp Duty was not increased in the last Budget. We continue to remind Government of the adverse impact of higher Stamp Duty on commercial property, both on liquidity in the market and as an asset class compared to bonds and equities. The regulatory environment is becoming increasingly complex and onerous. In its last budget, the Government included proposals for, or references to, Stamp Duty on limited partnerships, a new development land tax, increased disclosure requirements for quoted companies and VAT avoidance on commercial property, among other things. All of these could directly impact upon our business. Furthermore Government is about to start its consultation on lease reforms. We view regulation as unnecessary since the market has already taken steps to provide a wide range of lease options for occupiers. We have led the industry through our Landflex and property outsourcing solutions. Board On 31 March 2004 we announced that Francis Salway will succeed Ian Henderson as Group Chief Executive at the Annual General Meeting on 14 July when Ian steps down from the Board. Ian will, however, remain with the Group until December 2004 to lead our representations on various Government and private sector initiatives. The Board would like to take this opportunity to thank Ian for his substantial contribution over 33 years of which 17 years were on the Board. During his tenure he has guided the Group through a period of great transformation while at the same time ensuring, through his work with the British Property Federation, that the industry is poised to benefit from the Government better understanding the contribution property makes to the wider economy. Peter Freeman will also be stepping down as a non-executive director from the Board at the AGM. The Board would like to thank Peter for his valuable input and are pleased that the Group will still benefit from his sage counsel as a consultant on property matters. During the year the Group appointed David Rough as senior independent director. It also established a formally constituted Nominations Committee and updated corporate governance processes to achieve compliance with current best practice. The Group has also appointed Bo Lerenius to the Board as a non-executive director. Bo, 57, is currently Chief Executive of Associated British Ports, and was previously Chief Executive of Stena. People The team at Land Securities continues to demonstrate great enthusiasm and a positive approach to our business. We have had a good year and the Board would like to thank everyone who works for the Group for their valued contribution to our progress. Outlook In the year to 31 March 2004, the FTSE Real Estate Index rose by 61.7% compared with a 25.7% rise in the All-Share index. Our share price has increased by 55.1%. There is no doubt that market interest in REITS has been a contributing factor, but institutions have also increased their weightings in the direct property market with yields tightening in all our markets, reflecting strong investment demand for commercial property assets. In the retail sector, we expect rents to continue to rise modestly and we are seeing firm evidence of a recovery in our London office markets, particularly the West End. We remain very encouraged by the potential for our investment portfolio and the schemes in our development programme and the opportunities available to us in the property outsourcing market. We are also pleased by the potential for the Group should an appropriate REIT structure be introduced. We believe that this will attract new capital into property and be positive for the economy. Over four years the Group has transformed itself from an asset accumulator to a modern, customer focused property business. The Board's confidence in our prospects is reflected in this year's dividend increase. Peter G Birch Chairman 18 May 2004 Operating and Financial Review For more than two years, economic and property market conditions have been challenging. It is therefore all the more gratifying that we have met and, at times, exceeded market expectations of our performance. The results to 31 March 2004 are no different. We have increased adjusted diluted net asset value per share by 9.2% and profit before tax is 16.7% higher. We are particularly pleased with the performance of the investment portfolio over the past twelve months where in each of our core sectors and on an overall portfolio basis we have outperformed the Investment Property Databank ('IPD'). The restructuring of our investment portfolio is now broadly complete although we continue to increase average lot sizes and seek active management opportunities. The development programme is on course to deliver good returns to shareholders in the future. We believe that both our investment and development properties are particularly well placed to benefit from a recovery in the Central London markets. Land Securities Trillium has made excellent progress this year and now represents 14.6% (ignoring the impact of Employment Services start-up costs) of the Group's operating profit, leaving it on course to achieve our business plan target of a 25% contribution by 2007. The Group has performed well during the difficult conditions over the past few years but is now beginning to benefit from the upturn, as illustrated in the table below . Although weak conditions in the Central London office market meant that returns on capital were disappointing in 2002 and 2003, in 2004 we have produced an encouraging return on capital employed of 11.5%, 4.0% ahead of our cost of capital. Return on equity was 13.4%. Total returns Year to 31 March 2000 2001 2002 2003 2004 5 yr average % % % % % % Return on equity 13.9 10.6 4.3 4.5 13.4 9.2 Return on average capital employed 12.6 10.1 5.1 5.7 11.5 9.0 Weighted average cost of capital 8.9 8.8 8.4 7.5 7.5 8.2 (all figures are pre-tax) Adjusted financial information We supplement our reporting by including certain adjusted financial information to demonstrate more clearly the Group's underlying financial performance. This year we refined the basis on which we calculate adjusted information to reflect changes in our business. The changes affect this and prior year's revenue profits, adjusted earnings per share and adjusted net asset value per share. Full details of the changes to the adjustments are contained in the Finance and Tax section of this review. The figures presented throughout this review, and in the financial statements that follow it, are all presented on the new basis and prior year figures have all been restated. The financial effect of the changes is summarised in the table below: Year to 31 2004 Change % 2003 March Revenue profits new basis Â£309.2m (8.0) Â£336.2m old basis Â£315.4m (7.5) Â£340.9m Adjusted earnings per share new basis 47.86p (6.0) 50.89p old basis 46.90p (6.9) 50.39p Adjusted net asset value per share new basis 1333p 9.3 1220p old basis 1316p 8.3 1215p Adjusted diluted net asset value per share new basis 1331p 9.2 1219p old basis 1314p 8.1 1215p Net asset value The performance of property companies is primarily measured by changes in net asset value. We believe this focus will continue until the introduction of REITS when, over time, investors may adopt a stronger focus on earnings, dividends and the growth in earnings and dividends. The main driver of net asset value was the performance of our investment portfolio, including the property joint venture, which notwithstanding sales is worth Â£306.2m more than a year ago at Â£8.15bn. This increase reflects a valuation uplift of Â£406.9m or 5.3% after accounting for the impact of property purchases, sales and development capital expenditure over the period, as shown below: Share of Group Joint Venture Total Â£m Â£m Â£m At 1 April 2003* 7,844.0 - 7,844.0 Purchases 205.1 - 205.1 Sales and transfers (899.0) 237.3 (661.7) Development spend 324.6 - 324.6 Other property related expenditure 31.3 - 31.3 Valuation increase 400.7 6.2 406.9 ---------- ---------- ---------- At 31 March 2004* 7,906.7 243.5 8,150.2 ---------- ---------- ---------- (*Investment and development programme assets) Given the strength of investment demand for well-let commercial property, we found relatively few attractively priced opportunities to buy assets during the year but, conversely, we took advantage of market conditions to sell assets with low growth prospects at premium prices. As a result, we were net sellers of investment property over the period; although this was partially offset by the delivery of new schemes from the development programme, such as Bullring, Birmingham. The increase was augmented by Â£115.1m of retained earnings, which has resulted in an adjusted diluted net asset value per share of 1331p. Further details of the valuation results are contained in the Portfolio Management and Business Analysis sections of this report. Earnings Profit before interest and tax was Â£629.7m for the year to 31 March 2004, a Â£37.8m or 6.4% increase over 2003. However revenue profits* were 8.0% lower than last year. The principal causes for these changes are summarised below: Profit before tax Revenue profits Â£m Â£m Year ended 31 March 2003 319.6 336.2 Exceptional items 58.3 - ---------- ---------- Profits before tax and exceptional items 377.9 336.2 Rental income growth (A) 10.8 10.8 Net effect of asset sales and purchases (B) 15.8 (9.7) Impact of developments (C) (8.5) (8.5) Existing Land Securities Trillium contracts (D) 23.7 27.0 Employment Services (E) (16.1) (16.1) Interest on return of capital (F) (12.1) (12.1) Other factors (18.4) (18.4) ---------- ---------- Year ended 31 March 2004 373.1 309.2 ---------- ---------- A. Rental income growth reflects increases in rent from rent reviews (predominantly from our retail portfolio) and the new rents from developments completed in the first half of the year. Rents from developments have been partially offset by the interest cost associated with financing these projects. B. We have sold more properties than we have bought over the last two years. This has reduced profits because average rental yields have exceeded the cost of borrowing. C. The cost of financing completed but unlet development projects and the loss of rent on properties on which redevelopment has started this year have reduced profits by Â£8.5m. D. Profits for existing Land Securities Trillium contracts have improved as a result of Telereal's strong trading and the BBC contract becoming profitable. This follows the completion and occupation of the new White City Media Village by the BBC last autumn. E. The bid, mobilisation and initial costs associated with the Employment Services contract have reduced profits by Â£16.1m, as expected. The contract is on track to produce some Â£10m of operating profits in the year to 31 March 2005. F. We returned Â£511m to shareholders in September 2002. The associated debt was financed for the whole of the year as compared to 5.5 months in the prior period. This has cost an extra Â£12.1m. Boding well for a REIT environment, should these be introduced and we decide to convert, the Group has always had a high dividend distribution rate relative to the industry. This year is no exception and, as disclosed in the Chairman's Statement, the Group is proposing to increase its full year dividend by 4.5% to 37.1p per share for 2004. * Revenue profits equal pre-tax profits adjusted to exclude the impact of exceptional costs and profits on the disposal of fixed assets. Revenue profits have been redefined as disclosed on page 2 and in the Finance and Tax section. Competitive environment and our markets As mentioned in the Chairman's Statement, we welcome the consultation exercise currently being carried out by Government on REITS which, if introduced, could effect an enormous change on the competitive environment for quoted property companies. Not only could this substantially increase the flow of capital into our sector, but it could also provide a step change in the way in which investors hold property. In particular, certain smaller offshore limited partnerships, which are relatively illiquid and unregulated investment vehicles, could become less attractive and these assets may be transferred into a REIT. In addition, certain pension funds may elect to divest their direct property holdings and switch into REITS to minimise the cost of investing in property. Notwithstanding the potential for this major structural change in the quoted property investment market, we continue to exploit our competitive advantages of financial strength, scale and the ability to innovate to maximise shareholder returns. A significant proportion of our business, some 91.7% of our rents, is focused on two sectors of the UK property market. The office sector is defined by its geographic location within Central London, the other by its asset class, retail property across the UK. We believe that we have a leadership or top quartile position in both these markets. Both sectors are characterised by supply side constraints although, as evidenced in the City office market, supply has increased substantially during the recent occupier-led downturn. These sectors, and the property market as a whole, are also impacted by changes in inflation and interest rates. Shareholders also benefit from the diversified nature of the Group's activities, its exposure to more than one market and its property outsourcing activities, where we believe that Land Securities Trillium now strongly demonstrates its market leadership credentials. Investment property market There continue to be substantial sums of money available to invest in property in the UK creating a pent-up demand for most types of investment property. Anecdotal market evidence suggests that institutions have made large allocations to property in 2004. Property yields are tightening and, for certain asset types, there is a disconnection between occupier demand and investment yields are widening. We anticipate that this situation will exist for the foreseeable future, as investors continue to see the diversification benefits of property as an asset class and as a long-term investment for savings. At the same time, if Government creates attractive REITS, there is likely to be an ongoing, or even strengthening, flow of capital into the UK property market, to the benefit of occupiers. Retail market We have consistently stated that occupier demand in the retail market remains strongly dependent upon retailers' performance and consumer spending. Over the past twelve months retailers' performance has been less strong; with some continuing to trade well while others are finding market conditions more challenging. The consumer continues to be fairly resilient to increased interest rates and the threat of a slowing housing market as a result of low levels of unemployment and the improving outlook for the economy. Our experience of retailers' requirements reflects these fortunes. Across our retail portfolio, particularly in the retail warehouse market, there is still strong demand for the right unit in the right location but demand has fallen off for more secondary locations. As we anticipated last year, while this market still shows positive rental growth, this rate of growth has slowed. With a portfolio of dominant shopping centres, development plans for four major new schemes and a large number of retail warehouse parks, we are one of the leaders in the retail sector. Central London market At the half-year, we stated that we were increasingly optimistic about certain sub-sectors of the Central London office market, particularly the West End. This remains the case and we now believe that we have reached the low point for asset values in the Central London office markets. While conditions in the occupational market will continue to be difficult in the City, and we do not expect a return to rental growth in this sub-sector until 2006, rental growth will be evident in the West End this year. While tenant demand has been subdued there are now clear indications that it is improving. The Central London market vacancy rate has improved marginally over the last quarter, moving from 13.3% of total stock to 13.1% overall (Source: DTZ Research). Market void rates now stand at 15.5% in the City and 11.0% in the West End as a whole although vacancy rates in our own portfolio are significantly lower. Over the past few years we have been restructuring our Central London portfolio and forward planning our development pipeline. We believe that we are now well placed to benefit as market conditions improve. The range of development opportunities we have in several of the core sub-markets leaves us strongly positioned to satisfy occupier demand for new, large, modern office buildings across Central London between now and the end of the decade. Last year we highlighted London as one of the main engines of the UK's growth and the need to maintain its attraction to businesses as one of the foremost global financial centres. In particular, we focused on the continued neglect of the capital's infrastructure. It is unfortunate to see little change over the year. We need to see investment of capital by the Government, both for existing services and new infrastructure projects such as Crossrail. Property outsourcing market Last year we reported that we were seeing an increase in the level of interest in property outsourcing. This remains the case. In the corporate sector, businesses are seeking to align property strategy to business drivers and are focused on minimising costs and streamlining operations, although financial criteria are not always the main driver of the decision to outsource. In addition, in the public sector we are assessing how the property outsourcing model might work for local authorities while continuing to work with Government on their requirements. Although still waiting for the final document to be published, we believe that the Gershon public sector efficiency review may offer some real opportunities for us since we can demonstrate that property outsourcing assists organisations in meeting cost efficiency and quality targets. In this market each property outsourcing solution is bespoke to an individual occupier's requirements. There is no such thing as a 'one size fits all' property outsourcing contract. Consequently we believe that growth will continue to be driven by a relatively small number of meaningful transactions each year. Portfolio Management The success of the continued rationalisation and active management of the portfolio is demonstrated by the 6.7% like-for-like increase in value. While a proportion of the valuation change can be ascribed to yield shift, a substantial element is accounted for by the success of our asset and property management activities, and we are very positive about the potential we have to continue this year's outperformance of the Investment Property Databank. Total property returns - year to 31 March 2004 LS % (i) IPD % (i) (ii) Relative return % Central London offices 7.2 4.6 +2.5 Shopping centres 18.6 16.0 +2.2 Retail warehouses 19.6 16.9 +2.4 South-east industrial premises 15.9 11.4 +4.1 Total portfolio/All property 12.7 12.4 +0.3 Source: IPD (i) Includes acquisitions, sales and developments (ii) IPD December Universe (extrapolated to March 2004) unfrozen Financial performance Rental Rental Rental Open Open Open income income income market market market value value value Valuation 31.03.04 31.03.03 31.03.04 31.03.03 surplus Â£m Â£m % Â£m Â£m % Offices 193.7 197.3 (1.8) 2,441.8 2,378.9 0.7 Shops & shopping centres 147.9 141.0 4.9 2,270.3 2,034.1 10.2 Retail warehouses 58.0 54.4 6.6 1,165.5 986.8 14.0 Industrial 18.0 17.4 3.4 258.2 235.8 8.4 Other 6.0 6.8 (11.8) 87.6 93.8 1.4 ---------- ---------- ---------- ---------- ---------- ---------- Like-for-like 423.6 416.9 1.6 6,223.4 5,729.4 6.7 Completed developments 23.8 11.8 n/a 559.8 453.6 10.0 Purchases 16.1 4.6 n/a 326.2 128.0 0.5 Sales and restructured Interests 41.7 76.2 n/a - 827.9 - Development* 9.3 10.2 n/a 797.3 705.1 (5.3) Joint venture 0.6 - n/a 243.5 - 2.6 ---------- ---------- ---------- ---------- ---------- ---------- Total portfolio 515.1 519.7 (0.9) 8,150.2 7,844.0 5.3 ---------- ---------- ---------- ---------- ---------- ---------- * Development programme including Kent Thameside The like-for-like investment portfolio showed a 1.6% growth in rental income over the year, mainly as a result of rent reviews in the retail and retail warehouse portfolios. Our office portfolio is generally over-rented and rental increases in the last year were an exception in this part of the portfolio. During the year, five schemes were transferred from the development programme*, the four significant ones being the Bullring in Birmingham, Phase 1 of Kingsway West Retail Park in Dundee, 7 Soho Square and Portman House London W1. These schemes generated rents of Â£17.4m to 31 March 2004 and will contribute Â£23.5m next year. Sales and purchases have decreased rental income by Â£23.0m as compared to the prior year. We have focused on keeping our buildings occupied and void levels across the like-for-like portfolio were 3.4% at the year-end, compared with 2.6% at the start of the year with almost half this void space currently undergoing refurbishment. We were pleased with the 6.7% increase in the value of the like-for-like portfolio over the year, which is a 4.3% increase over the six months since 30 September. As indicated in our interim results, approximately Â£55.6m (14.2%) of the valuation surplus is attributable to the removal of Stamp Duty from assets in Disadvantaged Areas until 2006. We review further the drivers of this change, which are predominantly attributable to the strong growth in retail, throughout this section of the report. During the last 12 months, the net reversionary potential of the like-for-like portfolio, excluding voids, has reduced to 1.8% at 31 March 2004, compared with 5.5% at the end of the prior year. However this is little changed from the half year figure at September 2003 of 1.9%. The mean weighted unexpired lease term for the like-for-like portfolio is 10.4 years (2003: 11 years) assuming all lease breaks and expiries occur. * The development programme comprises projects which are completed but less than 95% let, developments on sites, committed developments (approved projects with the building contract let); and authorised developments (projects approved by the Board, but for which the building contract has not yet been let). Investment value movements Â£m Investment portfolio at 1 April 2003 6,876.6 Purchases 205.1 Sales (inc. properties sold to joint venture) (830.1) Transfer in of completed developments 451.0 Transfer out for redevelopment (18.1) Joint venture properties 237.3 Valuation increase 404.7 Other (including refurbishment expenditure) 89.6 ------------ Investment portfolio at 31 March 2004* 7,416.1 ------------ (*including our share of the property joint venture) To ensure that the properties we own provide good future growth opportunities, we continue to recycle capital through an active programme of sales and purchases. To this end, during the period under review, we sold a total of Â£636.4m of property out of the investment portfolio (excluding joint ventures and net of sale costs) generating FRS3 profits of Â£43.8m (7.4% above book value) while buying Â£205.1m of assets. Although the investment portfolio was reduced as a result of this net sales activity, the transfer of Â£451.0m of assets from the development programme meant that acquisitions and disposals were broadly equal. Including assets sold out of the development programme, total sales of investment property were Â£682.1m. These included a portfolio of industrial assets for Â£86.8m, four retail warehouse assets for Â£30.3m and Â£463.5m of Central London properties. In total we sold 35 investment properties (including developments) with an average yield of 6.1%. Of the Â£205.1m invested, the most significant acquisitions were the purchase of 120 Cheapside and 4 Wood Street, London EC2 for Â£36.5m, Allington Towers, London SW1 for Â£36.6m and the acquisition of full control of Gunwharf Quays, Portsmouth for a further Â£88m. The average yield on present income for all purchases (taking into account the cost of stamp duty and acquisition fees) was 7%. Retail Shopping centres, shops and Central London retail Increase/ 2004 2003 (decrease) Valuation Â£2,270.3m Â£2,034.1m 11.6% Rental income Â£147.9m Â£141.0m 4.9% Gross ERV* Â£165.0m Â£158.1m 4.4% Void by ERV 1.5% 1.5% n/a Running yield 6.1% 6.6% n/a *Estimated rental value Like-for-like investment portfolio extract from total investment portfolio analysis Again this year, we continued to see strong performance across our retail portfolio, with the in-town portfolio performing well and the net reversionary potential remaining strong. Our management activities are focused on ensuring that we remain in a position to satisfy retailer demand while also establishing market evidence in advance of rent reviews. Our like-for-like shopping centre portfolio showed strong growth with a 13.1% increase in value. Centres such as the White Rose Shopping Centre, Leeds continued to deliver strong rental growth while activity at Stratford in London and Liverpool also created good returns. In Central London, our retail assets showed an 8.8% like-for-like increase in value despite the negative effects of congestion charging and a decline in tourism. During the year we took full control of the Gunwharf Quays limited partnership from the Berkeley Group Plc, as a result of which we became 100% owners of the 42,000 sq m Gunwharf Quays Designer Outlet scheme in Portsmouth. This property benefits from strong retailer demand and demonstrates considerable growth potential. In March we created the Â£500m Scottish Retail Property Limited Partnership (' SRPLP') a 50/50 joint venture partnership with The British Land Company PLC. This resulted in the transfer of the shopping centre assets, totalling some 130,000 sq m of retail space, of both companies in Aberdeen and East Kilbride to SRPLP. The assets currently produce gross rents of circa Â£30m per annum from over 330 tenancies. SRPLP is further evidence of our strategy of working with adjoining property owners to maximise the long-term value of our assets by creating an improved retail environment for shoppers and retailers alike. In Aberdeen, the Bon Accord Centre was transferred to the Partnership alongside British Land's St Nicholas Centre. These centres make up the current prime retail pitch. In East Kilbride, British Land contributed the Plaza Centre and the recently completed Centre West while we added Princes Mall and Olympia. Progress at Maidstone, our forward funded 29,265 sq m shopping centre which is being developed for us by Centros Miller, continues well with more than 77.5% of the scheme's rental income by ERV now let or in solicitors' hands. We are looking forward to it opening in March 2005. Retail warehouses Increase/ 2004 2003 (Decrease) Valuation Â£1,165.5m Â£986.8m 18.1% Rental income Â£58.0m Â£54.4m 6.6% Gross ERV Â£69.5m Â£66.3m 4.8% Void by ERV 2.2% 3.3% n/a Running yield 5.1% 5.7% n/a Like-for-like investment portfolio extract from total investment portfolio analysis The continued strength of the out-of-town retail market is evidenced by another very strong like-for-like increase in value this year of 14.0%. We continue to manage this portfolio and are still experiencing strong demand from High Street retailers for out-of-town units. In a number of our assets, we created space for new lettings through the reconfiguration of units. At Team Valley, Gateshead, our largest retail warehouse asset, we secured lettings to Next and Boots and both these units have now opened. In Manchester, we are reconfiguring the estate, replacing a two-storey leisure property with 2,787sq m pre-let to Currys and providing a further 2,044 sq m with open A1 consent. In Swansea, we have taken the surrender of an 8,082 sq m MFI unit, reconfigured it to create pre-lets to M&S Simply Foods, Dreams and a smaller unit for MFI plus a further 1,115 sq m which is available to let. At Thurrock, our second largest retail warehouse asset, work is proceeding well for the new M&S Lifestore, a 9,308 sq m unit which is due to commence trading next year. We also successfully sold a portfolio of four smaller retail warehouse assets for Â£30.3m. Central London offices Increase/ 2004 2003 (Decrease) Valuation Â£2,383.8m Â£2,320.9m 2.7% Rental income Â£188.4m Â£192.3m (2.0%) Gross ERV Â£175.7m Â£190.9m (8.0%) Void by ERV 4.6% 2.5% n/a Running yield 7.5% 7.8% n/a Like-for-like investment portfolio extract from total investment portfolio analysis The overall increase of 0.8% in the like-for-like value of our Central London portfolio reaffirms our belief that we are beginning to see an upturn in the occupier market. As anticipated at the half year this recovery is being led by the West End where we saw a 3.0% increase in the value of our like for like portfolio. The strong performance of the West End also reflects specific asset and property management activity such as the conclusion of the lease extension at Queen's Anne's Mansions, London SW1 which is currently the Home Office but, following refurbishment, will be occupied in 2007 by the Department for Constitutional Affairs. At the end of 2003, the Lyons Review was published. While there have been concerns expressed that it will have a major impact on the market, from our own analysis of the different Government departments cited and our own portfolio, we feel that the risk to us is less than 5% by area of the Central London office portfolio. We are firmly of the view that the action we have taken over the last three years to transfer more than Â£883m of capital out of certain types of long let over-rented central London investment properties into other activities offering better growth potential leaves us extremely well placed to benefit from the market upturn. This is clearly illustrated by the sales of Salisbury Square House, London EC3 and Lacon House, London WC1. In the case of both buildings we created considerable value over time through development and subsequent successful lettings and taking advantage of strong investment market conditions for well-let central London property, we secured attractive prices for both these properties. On the acquisition front, 120 Cheapside and 4 Wood Street, London EC4 were purchased for Â£36.5m, providing the opportunity to buy a well-located investment property with a strong income stream and future development potential at an attractive price. The two buildings are located between our existing holdings at One New Change, London EC4 and 30 Gresham Street, London EC2 and total some 9,280 sq m of office and retail accommodation and 50 parking spaces. The net rent is approximately Â£3.4m, representing a net initial yield of 9.4%. South east industrial premises Increase/ 2004 2003 (Decrease) Valuation Â£247.7m Â£226.0m 9.6% Rental income Â£16.9m Â£16.6m 1.8% Gross ERV Â£19.4m Â£19.0m 2.1% Void by ERV 10.5% 10.2% n/a Running yield 6.8% 7.0% n/a Like-for-like investment portfolio extract from total investment portfolio analysis The south east industrial portfolio has shown a good like-for-like increase in value over the year of 8.1%. This performance has primarily been driven by the strong investment market, but we have also seen early signs of a stronger occupational market. At the half-year we reported that we intended to dispose of a portfolio of our total industrial properties for Â£86.8m taking advantage of this strong investor demand. This sale was concluded during the second half of the year. The remainder of the portfolio comprises a number of industrial properties let to a wide range of tenants generating Â£20.3m of income per annum and continues to provide good returns. Development We aim to create value through our development programme by progressing and positioning schemes to take best advantage of improving markets while at the same time creating new assets for the investment portfolio, which are not readily available for purchase at attractive yield levels in today's investment markets. During the year we completed 152,500 sq m of developments, started 14,800 sq m of new schemes, received planning consent or resolutions to grant consent for 193,400 sq m. In addition, we applied for planning permission for a further 65,300 sq m of new space and achieved 82,000 sq m of lettings. Full details of our development pipeline* are contained in the Business Analysis section. Major development schemes require a substantial skills base. Over the years we have assembled a first class development team, encompassing a range of development skills. These skills are now a commodity that we can market to others. For example, following on from the success of the White City development, we have been selected by the BBC to project manage the Broadcasting House, London W1 development. In addition we are participating alongside Land Securities Trillium in its proposal to deliver the Aviva contract, where a substantial 33,350 sq m refurbishment of Aviva's head office in Norwich is required. *Development pipeline comprises the development programme and proposed schemes not yet included in the development programme but which are more likely to proceed than not Financial Performance The carrying value of our development programme assets was Â£734.1m (2003: Â£967.4m). The movements in the development programme are summarised in the following table: Â£m Programme at 1 April 2003 967.4 Capital expenditure 213.6 Capitalised interest 25.4 Sale of completed schemes (40.4) Transfers of completed schemes to portfolio management (451.0) Transfers of properties into the development programme 18.1 Valuation movements 2.2 Other (1.2) Programme at 31 March 2004 734.1 During the year, we spent Â£213.6m, excluding capitalised interest, on schemes in the programme, with most of the expenditure being to complete the Bullring, Birmingham and 30 Gresham Street, London EC2 and on the continuing development at Cardinal Place, London SW1. During the year, we sold or transferred out of the development programme seven completed schemes. Five were transferred fully let to the investment portfolio and 190 High Holborn, London WC1 and an industrial scheme in Hemel Hempstead were sold. We recognised total surpluses (including FRS3 profits) of Â£90m on these, equivalent to an average profit on cost of 21.8%. Schemes in the development programme incurred a small overall valuation surplus (excluding FRS3 profits) of Â£2.2m, over the course of the year, with surpluses on retail projects being largely offset by reductions in value of certain London office projects. We expect the value of the London assets to improve once they are let. We estimate that we will incur cash costs to complete the development programme (excluding interest) of some Â£262m. In addition, capital expenditure on proposed developments could total Â£870m (excluding Kent Thameside) if a decision is made to proceed. These schemes, which are currently held as part of the investment portfolio, have a current carrying value of Â£179.3m. Retail We made substantial progress with our retail developments completing 40,500 sq m and letting a further 53,000 sq m, and gained detailed planning consents for 83,700 sq m of retail and 26,100 sq m of associated residential*. We have established one of the most exciting retail development pipelines in the UK with four substantial city centre shopping centre schemes. * Floor areas are based upon our proportionate share of areas on partnership schemes Shopping centres Since it opened in September, the award-winning Bullring, Birmingham development has been attracting an average of 600,000 visitors a week. This is 20% higher than anticipated. This 110,000 sq m scheme, developed by the Birmingham Alliance, is now 98% let and our share of the annual rent roll income exceeds Â£13.0m. This is a material addition to Group rental income. We continue to assess our options for a further phase of retail-led, mixed-use development at Martineau Galleries, Birmingham and expect to submit an outline planning application within the next 12 months. At Whitefriars, Canterbury, we are making excellent progress. Our 37,685 sq m retail scheme is now 62% let or in solicitors' hands to retailers including Marks & Spencer, Boots, Next and Zara. The first phase will be opening on schedule this summer with the balance of the scheme completing in Summer 2005. In Exeter, where we have planning consent for a 37,400 sq m retail-led scheme, we agreed to let the anchor department store to Debenhams in April, just after the financial year-end, and we are in active negotiations with retailers for a further 22% of the retail space. The main construction work will start early in 2005. In Bristol, through the Bristol Alliance, we have outline consent for an 118,800 sq m retail-led development, together with 260 residential units, and are in active discussions for the letting of the anchor store. In Cardiff, at the St David's 2 scheme, we have agreed terms for a letting to John Lewis, for its first ever department store in Wales. We are delighted with the support for this scheme, where in partnership, we are seeking detailed planning consent for a 70,000 sq m of retail space with 39,750 sq m (gross) of hotel and residential space. Following the decision of the Office of the Deputy Prime Minister to reject our plans at York, we are awaiting supplementary planning guidance on the site from the City Council. Retail warehouses We are in the course of constructing approximately 13,900 sq m of new retail warehouse space, 54% of which is pre-let. This includes the final phase of Kingsway West, Dundee that will become a regional shopping park of 38,000 sq m. Despite restrictive planning policies, we have 9,000 sq m of consents across the retail warehouse portfolio, which we shall implement once we have sufficient pre-lettings. This includes 7,300 sq m at Livingston and Bexhill. Central London We progressed our activities in Central London in anticipation of the upturn. Earlier this year we launched the Capital Commitment marketing campaign targeting major occupiers. The campaign aims to build awareness of our activities across Central London and reinforces the strength of our development pipeline, which has been positioned so that we are able to respond to any major occupier's requirement for new accommodation between now and 2010. Good progress has also been made on lettings and lettings enquiries. During the year Portman House, London W1, 190 High Holborn, London WC1 and 7 Soho Square, London W1 (our first Landflex building) were fully let, representing some 22,000 sq m of Central London offices and 3,600 sq m of retail space from the London development programme. We completed the 35,150 sq m office headquarter scheme at 30 Gresham Street, London EC2 on schedule in December 2003 and are in discussions with three companies potentially interested in leasing half or more of the building. In July last year, we also completed the 41,300 sq m office refurbishment at Empress State, London SW6 (our second Landflex building). We have been asked by the Metropolitan Police to submit a proposal for a significant letting at the building and this proposal is now subject to final approval by the Metropolitan Police Authority. In addition, after the year-end, we exchanged contracts with IPC Media Limited on a forward sale of the whole of the office element of Building 1, Bankside 123, London SE1. The office floor area of the building is approximately 42,500 sq m. We will commence construction of Building 1 immediately and we will develop Buildings 2 and 3 only upon securing pre-lets. In April 2004, we received notice from the City Corporation that it was ' minded-to-grant' consent for our revised scheme at New Street Square, London EC4 (formerly New Fetter Lane) where we expect to secure vacant possession in September. This 62,500 sq m office scheme is arranged in four buildings. We are seeking pre-lets for two of the buildings, but may take advantage of the flexibility of the layout to complete the balance of the scheme speculatively. At Cardinal Place, London SW1 construction continues and we expect to launch this 51,100 sq m office scheme in late summer 2005 when we anticipate a shortage of new buildings in the West End. In the meantime we have let 40% (by area) of the 9,400 sq m of retail accommodation to Marks & Spencer for its first mixed offer store in Victoria. We continue to prepare schemes for future development and, while not formally included in our development pipeline, are examining the potential for our holdings at Bankside Industrial Estate, London SE1, Bowater House, London SW1 and Park House, London W1. We are particularly excited by the potential for One New Change, London EC4 where, following an extensive selection process, we have appointed Atelier Jean Nouvel with Sidell Gibson as architects for the scheme. These schemes could produce more than 150,000 sq m of new space, including over 37,500 sq m of retail space. This, together with our scheme at Cardinal Place, represents a material percentage of the new retail accommodation likely to be developed in Central London over the next five years. South-east industrial premises We have completed 100,000 sq m of our development programme, of which 50% has been let or sold. A further 11,600 sq m is due for completion in June of this year. We continue to achieve rents at or above anticipated levels with satisfactory lease lengths. Leisure During the year, we continued to secure additional lettings at the Gate, Newcastle upon Tyne which is now 92% let, with Aspinalls taking a 4,180 sq m unit as their first casino outside of London, due to open towards the end of this year. Other From time to time opportunities arise outside of our core markets which are ideal for a Group of our scale. These opportunities provide us with the potential to generate good returns for shareholders over a substantial period of time. Kent Thameside A prime example is Kent Thameside, where we continue to make good progress with our plans. At Eastern Quarry, we submitted an outline planning application for 7,250 residential units and approximately 200,000 sq m of leisure, retail, office and community accommodation in January last year. We expect the application to be determined in the early summer of this year. At Ebbsfleet, where we already have outline planning consent, we have now received approval for the Quarter Master Plan for the first phase of office and residential development, which is the precursor to our submitting detailed planning applications next year. Where residential development is already under way at Waterstone Park in partnership with Copthorne Homes, a subsidiary of Countryside Properties, all of the units in the first phase have now been sold. Planning consent has been obtained for the second phase of up to 450 units. Property Outsourcing The achievements of our property outsourcing activities, through Land Securities Trillium, are evidenced by the strong performance of our existing contracts and the success we have had over the past twelve months in securing new business. The former can be demonstrated by the 20% increase in profits from the existing DWP, BBC and BT (Telereal) contracts; the latter through the DWP contract expansion, the agreement to redevelop Broadcasting House for the BBC, our appointment as preferred bidder for the Aviva contract and our inclusion on the shortlist for the Driver and Vehicle Licensing Agency contract. The combination of these two factors has made it a very good year for this part of the business with contract income growing 22% to Â£802.0m, leaving us confident that we will grow property outsourcing to 25% of our operating profits within three years. Financial results Land Securities Trillium generated some 56% of the total gross property income (2003: 53%). Segmental profit was Â£156.6m, despite the positive performance of the existing contracts being impacted by Â£10.4m of bid and start-up costs for the DWP Employment Services ('ES') contract. The profits earned on our individual contracts are shown in the table below. Year to 31 March 2004 2003 Â£m Â£m Operating profit - DWP (PRIME) 57.3 60.7 - DWP (ES) (10.4) - - BBC 6.6 (11.5) Central costs (9.3) (12.6) 44.2 36.6 Profit on sale of properties (0.1) 0.1 Segment profit 44.1 36.7 Share of BT Telereal PBT 30.3 27.2 Revenue and profits from PRIME, our existing contract with the DWP, continue to perform in line with our expectations and we have earned additional fees on client driven fit-out work. The ES expansion will add in excess of Â£150m annually to income generated from this contract. As expected, ES reduced pre-tax profits in the year to 31 March 2004 by Â£10.4m when bid and start-up costs resulting from contract mobilisation are added to this year's revenue loss. We expect this contract to produce operating profits of some Â£10m next year as the start-up costs will not recur. On the BBC contract, we expended Â£106.7m in the year on the construction of the White City Media Village, bringing our total investment in the contract to Â£288.8m. The BBC is now in occupation of this building, paying the full accommodation charge and as expected this contract is now profitable. We made operating profits of Â£10m in the second half compared with an operating loss of Â£3.4m in the first half of the year. In addition we will earn fees from the management of the Broadcasting House refurbishment and redevelopment work over the next six years. Telereal, the joint venture vehicle that manages our contract with BT, continued to make a good contribution, providing pre-tax profits (profits after interest on joint venture debt) of Â£30.3m compared with Â£27.2m last year. Telereal has successfully sold surplus properties from its portfolio, which has more than compensated for the reduction in revenue caused by the sale of its investment property portfolio last year. Department for Work and Pensions PRIME progresses well and we continue to work with the DWP to deliver a range of services. The level of estate management and capital projects activity remains high. In the year we delivered a further 123 Job Centre Plus offices and four new pension processing centres. In total our Capital Projects Team delivered Â£124.3m of fee generating extra contract works funded by the DWP. The major focus for us in the past six months has been the mobilisation and integration of ES, which went live on 15 December, into the DWP contract. This estate comprises 1,078 Jobcentres and administrative buildings, totalling some 834,000 sq m, evenly spread across the UK. Of the properties, 70% are leasehold. We made a Â£100m payment to the DWP as part of the agreed valuation of the freehold estate. As with the original PRIME contract, the DWP purchased the ability to vacate part of the former Employment Services estate. A total allowance of 228,000 sq m becomes available over the next three years, which combined with the vacation allowance already factored into the original contract means that the DWP could vacate up to approximately 440,000 sq m of accommodation over the next three years. In light of the Treasury's efficiency review and its intention to decrease the number of DWP employees, we would expect the DWP to take up this option over the next few years. However, the full use of the vacation allowance is already priced into the contract and historically we have been successful in re-letting and managing vacant space. BBC The BBC contract continues to make good progress, with some notable achievements during the year. We reached agreement with the BBC to manage the construction of the new 78,000 sq m Broadcasting House facility in London, a development which will bring together on one site the BBC World Service, BBC Radio and BBC News by the time it is completed. We completed the BBC's new Media Village at White City ahead of schedule, enabling the BBC to commence occupation in October 2003. By the time we have completed the migration of BBC staff into this complex in the final quarter of 2004, we will have moved some 2,500 personnel into this new development. In addition we let ten units to occupiers including Starbucks, Tesco and Davy's Wine Bar, encouraging the general public to enter the complex, thereby supporting the BBC's stated goal to become more accessible to the public. BT Telereal is progressing well. During the year we continued to rationalise the BT estate, with the disposal of over Â£92m of surplus property, including Faraday North Building in the City of London for Â£26m and two buildings in Leeds for Â£14.8m. In March 2004, Telereal re-financed part of its existing Floating Rate Note obligations and also raised further bank debt. The combined net proceeds totalling Â£231m were used to repay the joint venture partnership's loan capital. Although, in accounting terms Telereal now has an excess of liabilities over assets, Telereal's lenders have no recourse to Land Securities Group PLC. In practice, now the economic value of Telereal's assets exceeds their book value (these assets are held at depreciated cost), a fact upon which lenders to the joint venture rely. New business Following the success we have had in the past twelve months in securing new business, we remain confident that we are on track to achieve our growth ambitions. During the year, we completed and successfully mobilised the ES contract as previously described. We were delighted to be appointed preferred bidder on the Aviva contract, which encompasses some 107,000 sq m of office accommodation, including the refurbishment of 33,000 sq m in Norwich City Centre. The contract will be for 25 years. Our new business pipeline remains strong and we are aware of activity in both the public and private sectors that should bring further opportunities to the market in the next 12 months. Currently we have a further one million sq m of accommodation under active discussion. Landflex Landflex was officially launched in May 2003 following completion of the refurbishment of a 5,300 sq m building at 7 Soho Square. Since then we have fully let this building to a number of clients, including Expedia and the Metropolitan Police, on leases ranging from one to 10 years with break clauses after two to three years. We continue negotiations with several potential occupiers for our 43,300 sq m property at Earl's Court, Empress State; in particular we have been asked by the Metropolitan Police to make them a proposal for a significant letting at the building, which is now subject to final approval by the Metropolitan Police Authority. Given that market conditions in London have been very weak over the past two years, we are very pleased with the response that this new product has received. We are achieving rents on current lettings at or slightly better than market rates, with shorter rent free periods, which results in an improved contribution to our profit and loss account. Created in response to our research into modern business needs, Landflex enables clients to create lease profiles that match their business plan and allow them to change the size of their accommodation over time. Rents are RPI linked and on an all-inclusive price and clients can purchase a variety of additional services. We believe that these features, in particular the ability to create a blend of lease lengths, are a strong differentiator of this product in current market conditions. In addition Landflex responds to the requirements under the Code of Practice for Commercial Leases. Once the existing buildings are let, we intend seeking further properties, both from our existing portfolio and new acquisitions, into which we can expand the Landflex concept. Customer Service Land Securities has a total of more than 2,000 occupiers and three main property outsourcing clients. We see client and occupier satisfaction, therefore, as key to the long-term success of our business. We monitor this through annual surveys of our retail, office and property outsourcing clients. Investment Portfolio In October 2002 we carried out our first 'Occupier Satisfaction Survey' with 500 retailers across eight shopping centres. All areas of shopping centre management were covered from the centre's physical appearance and on-site management to service charges and marketing. As a result of the findings, we devised action plans for each centre and increased communication with retailers through newsletters, intranets and one-to-one management meetings. We carried out our second survey in 2003, which showed clear improvement across all areas. Similar surveys are carried out with the occupiers of our Central London managed office portfolio. Independent research companies carried out both these surveys. Shopping centres - overview The 2003 shopping centre survey highlighted the following: â€¢ Strong improvements in the Group's demonstration of understanding customer needs and communication at Centre level. â€¢ Improved willingness to recommend Land Securities as a landlord. â€¢ Some significant improvements in service. â€¢ Some very good evidence of engaging retailers at local level. â€¢ Positive feedback from retail directors about Land Securities' open style and commitment to improve. Shopping centre results Objective Results 2002 Target 2003 Result 2003 Understanding retailer needs 3.26 3.39 3.71 Communication 3.49 3.58 3.92 Willingness to recommend 80% 85% 89% Responsiveness N/a 3.80 by 2005 3.90 Overall satisfaction 3.71 3.75 by 2005 3.81 The scale of the scoring is: 1 equals very poor, 5 represents excellent. Central London managed offices The 2003 Central London managed office survey highlighted the following: â€¢ Evidence of improved communication and commitment to service. â€¢ Strong improvement in willingness to recommend. â€¢ Customer experience inconsistent across portfolio in terms of service delivery. â€¢ Disruption problems and post handover problems in connection with certain refurbishment and development projects. â€¢ Customer survey process is valued but feedback needs to be more timely. Central London managed offices - results Objective Results 2002 Target 2003 Result 2003 Understanding occupier needs 3.42 3.84 3.37 Communication 3.46 3.73 3.57 Willingness to recommend 74% 78% 89% Responsiveness N/a 3.80 by 2005 3.67 Overall satisfaction 3.71 3.75 by 2005 3.53 The scale of the scoring is: 1 equals very poor, 5 represents excellent. Landflex Landflex undertook its first independent survey with occupiers at 7 Soho Square to measure hand-over satisfaction. The study revealed that the new occupiers are 'very satisfied' with the design of the building, leasing package and service provided by the Landflex team. In general, Landflex customers are very positive about their experiences. Property Outsourcing Surveys are also carried out with the occupants of the buildings we manage through Land Securities Trillium particularly measuring customer satisfaction. DWP Our performance on the DWP contract is measured by an annual survey carried out by the DWP itself when it asks its staff to assess their level of satisfaction with the services they receive from us. This survey, which can be analysed at regional level, asks questions about every Land Securities Trillium service and generates a score across each of the primary areas of security, cleaning, maintenance and catering provision. Through this survey an overall level of satisfaction is derived from customer responses. In 2003 this overall measure increased to 89.6%, representing a material increase over the previous year's score of 86.9%, reflecting the continuous improvement being achieved through our service delivery teams on the DWP contract. BBC A different methodology is applied to identify customer satisfaction levels on the BBC contract. The BBC retains an external organisation, the Leadership Factor, to undertake an independent survey of customer views each year and to set performance targets for the following year. The 2002 survey, the first since Land Securities Trillium won the BBC contract, saw the highest year on year increase in customer satisfaction levels since the BBC started these surveys some five years previously. Accordingly the target for 2003 was to maintain this increase, so we were delighted to secure a further meaningful increase in customer satisfaction from 65.4% in 2002 to a score of 70.8% in 2003. Finance and Tax Adjusted financial information As explained earlier, this year we refined the basis upon which we calculate adjusted financial information. Revenue profits no longer exclude Trillium's costs of bidding for new contracts, which are now an established feature of its business. Revenue profits are now defined as profits before tax, exceptional items and the sale of fixed assets. We exclude profits on the sale of fixed assets because they are volatile. Adjusted earnings per share are based on revenue profits. The tax associated with revenue profits does not include a deferred tax charge on capital allowances on investment properties because our experience is that such allowances are not clawed back in practice. We are now also adjusting for deferred tax on capitalised interest on these properties, as this too is not clawed back as Corporation Tax. This change is being made now because the amounts involved are becoming increasingly significant. Adjusted net asset value per share now reflects the write-back of deferred tax on capitalised interest as well as that on capital allowances on investment properties, for the reasons explained above. In addition, we have added back to net assets the Â£47.9m accounting deficit that has occurred this year as a result of Telereal's recent distributions to its owners. Although Telereal's liabilities exceed the book value of its assets, Telereal remains solvent and its lenders have no recourse to the partners. We have identified that the adjusted earnings per share figures presented in the financial accounts for the period to 30 September 2003 required revision. These revised figures are set out in Note 6 to the accounts. Treasury Management The Group operates a centralised Treasury function, which is responsible for funding activities, taxation and insurance across the Group. The Treasury function operates under delegated authority from the Board and follows policies and procedures designed to monitor, control and report on interest rate, liquidity, credit and other financial risks. Cash flow and net debt At 31 March 2004, Group net debt stood at Â£2,435.8m (2003: Â£2,589.3m), representing gearing of 40.5% against 47.3% a year ago. Gearing has reduced as a result of lower debt and the increase in net assets, largely attributable to this year's valuation uplift. The reduction in net debt of Â£153.5m over the year is explained in the following table: Â£m Net cash inflow from operating activities after interest and tax 251.8 Net capital expenditure (48.8) Cash inflow from Telereal 121.0 Payment of dividends (167.5) Purchase of own share capital (22.0) Other items 19.0 153.5 Gross debt was Â£2,677.6m (2003: Â£2,688.7m) against which the Group had cash and short-term investments of Â£241.8m (2003: Â£99.4m). The Group's debt strategy is primarily based on unsecured funding and no new secured debt was added in 2003/4. Trillium funded the original PRIME contract with long-term amortising bank debt, secured on the project's cash flow. Following the extension of the PRIME contract to incorporate the Employment Services estate, the relevant project finance facility was restructured and increased to Â£280m in May this year. During the year, the Group launched a â‚¬1bn Euro Commercial Paper programme to diversify its funding sources and lower the cost of short-term borrowing. At year-end, some Â£358.1m was outstanding under this programme. The programme is fully underwritten with committed bank facilities. At 31 March 2004, the Group had Â£1,550m of committed bank facilities, of which Â£800m matures in May 2005 and Â£600m in April 2006. Our intention is to renegotiate those facilities expiring in May 2005 during the course of this calendar year. The average maturity of the Group's borrowings was 12.4 years (2003: 13.3 years) while the average cost of the Group's debt is 7.3% compared with 7.9% at March 2003. At the balance sheet date, the Group's interest rate exposure on floating rate debt was fully hedged. Credit rating The Group's credit ratings are as follows: Agency Credit Rating 2004 Outlook Credit Rating 2003 Moody's A3 Stable A2 Standard and Poors A- Stable A- Fitch A flat Stable A flat Our ECP programme has an A2/P2 rating. Interest Charge Net interest payable was Â£256.6m for the year (2003: Â£220.3m), before taking into account the exceptional costs incurred last year to redeem the convertible bonds and cancel surplus interest rate swaps. Net interest payable, before capitalised interest and exceptional charges was covered 2.1 times (2003: 2.4 times) by Group profits before interest and tax. Taxation The Group's effective tax rate was 22.7% (2003: 28.1%). The reduction reflects the release of deferred tax on capital allowances associated with properties that we sold during the year. We do not expect to sell such significant quantities of property in the year to 31 March 2005, with the result that the effective tax rate is likely to rise. As indicated last year the current or 'cash' tax charge, which was 12.1%, reflected the benefit of various transactions during the year which were not expected to recur. As expected, the rate rose to 23.2% in the year to 31 March 2004. This rate reflects the benefits of capital allowances on development and refurbishment expenditure, as well as a full deduction for interest that is capitalised in the profit and loss account. It is likely to be more representative of our tax position for the future. Following the latest property valuation, and assuming that all properties are sold at the revalued amounts, without any tax mitigation, the group has an estimated potential capital gains tax liability in the region of Â£490m (2003: Â£435m). However, as indicated in the Notes to the Accounts, it is unlikely that this amount would be payable in full, even in the event of a sale of all investment property assets. In particular, the sale of property portfolios by means of the disposal of certain asset owning companies could reduce this amount by up to some Â£75m (2003: Â£110m). Pension Schemes The Group operates a number of defined benefit pension schemes. These schemes are closed to new members. At 31 March 2004, the schemes had a combined deficit on an FRS17 basis of Â£12.0m (2003: Â£13.0m). The Group made a special contribution into its principal defined benefits pension scheme during the year to 31 March 2003 and has increased the contribution rate to address the deficit. However, it is possible that further special contributions may be appropriate in the year to 31 March 2005 and this is under review. International Financial Reporting Standards International Financial Reporting Standards ('IFRS') are obligatory for UK quoted companies for accounting periods ending on or after 31 December 2005. As a result, we will adopt them when we report our results during the year ending 31 March 2006, and our first statements under IFRS will be for the half-year to 30 September 2005. At that time, we will also restate the comparative figures for the prior period. IFRS has the potential to confuse significantly the accounts of property companies, particularly if any leases of buildings to tenants meet the definition of a 'finance lease'. This is a complex area, requiring us to review the correct classification of each of our 4,000 leases. Because of the potential for confusion, we are supporting work being carried out by the Best Practices Committee of the European Public Real Estate Association and by the British Property Federation to help ensure that property companies deal with these issues in a consistent, pragmatic but compliant manner. We have an active project underway to manage the transition to IFRS which has wider ramifications than just the presentation of our financial statements. For example, because IFRS will change the way in which profits are measured and reported, performance criteria in the Group's bonus and share schemes may need to be modified so as to be consistent with our new reporting. When we adopt IFRS for the first time, we will present information under both our current and new accounting polices, together with reconciliation statements to aid an understanding of the principal differences. Business Analysis Investment Portfolio Valuation The total portfolio including our property joint venture was valued by Knight Frank at Â£8,150.2m at 31 March 2004. After adjusting for sales, acquisitions and expenditure the value increased by 5.3% as compared to the position at 31 March 2003. Detailed breakdowns by sector, including comprehensive analyses of the Group's valuation, rental income and yield profiles follow in the investment portfolio analysis. The freehold, feuhold and leasehold investment properties held by the Group or held by way of limited partnership arrangements (excluding Telereal), with the exception of short leasehold accommodation occupied by the company for the purposes of its business, were valued by External Valuers, Knight Frank LLP, Chartered Surveyors, as at 31 March 2004. The valuation was on the basis of Market Value in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards. The aggregate of market values of those properties held by the Group as at 31 March 2004 was Â£7,906.7m excluding joint ventures. The aggregate of market values of the interests in land held by the Group by way of limited partnership interests or joint venture arrangements as at 31 March 2004 was Â£243.5m. Within the tables and figures provided in the Annual Report the valuation of the Group interests in land held by limited partnerships is included as a mathematical share in proportion with the Group holding in the limited partnership and the joint ventures, thus producing a total of Â£8,150.2m. This does not represent a valuation of the Group shareholding in those limited partnerships. A more detailed extract from the external valuers' report is available on our website. Performance Benchmarking The analysis by IPD includes properties in joint ventures and those held for development. Table A - Long term performance relative to IPD Ungeared total returns - periods to 31 March 2004 Land Securities IPD* IPD* - Upper Quartile % % % 10 years 11.3 10.7 10.9 20 years 11.1 10.4 11.0 *IPD December Universe (extrapolated to March 2004) unfrozen Source: IPD Table A above compares Land Securities' ungeared total property return over the last 10 year and 20 year periods to 31 March 2004 to the IPD December Universe (extrapolated to March 2004), which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2003 (many of these funds are now valued quarterly by IPD, while the others were extrapolated forwards). It can be seen that Land Securities' portfolio has outperformed and produced a return which places it in the top quartile of contributing portfolios over these two time periods. Table B - One year performance relative to IPD Ungeared total returns - 12 months to 31 March 2004 Land Securities IPD* % % Offices 6.1 6.1 Retail 17.9 16.4 Industrial 16.0 12.2 Other Commercial 11.4 12.8 PORTFOLIO 12.7 12.4 * IPD December Universe (extrapolated to March 2004) unfrozen Source: IPD Table B compares the performance of the Group's portfolio to that of IPD on a similar basis at both sector and total portfolio levels over the 12 month period to 31 March 2004. We have outperformed IPD due to strong performance from our specific stock holdings in our core areas of Central London offices, shopping centres, retail warehouses and industrials. Central London offices outperformed IPD as a result of higher than average rental value growth and downward yield movements which were greater than IPD. Sales also had a positive impact on overall portfolio performance. Total Investment Portfolio Analysis, Year Ended 31 March 2004 Open Open Open Valuation Valuation P&L P&L Market Market Market Surplus Surplus basis: basis: Value (6) Value (6) Value (6) Surp/ Surp/ Gross Gross 31-Mar-04 30-Sep-03 31-Mar-03 (def) (def) Rental Rental Income Income 31-Mar-04 31-Mar-03 Â£m Â£m Â£m Â£m % Â£m Â£m ______ ______ ______ ______ ______ ______ ______ The (1) like-for-like portfolio Offices West 1,315.4 1,267.8 1,256.9 37.8 3.0% 91.2 89.9 End City 754.1 757.4 781.9 (28.4) (3.6)% 74.1 74.9 Midtown 227.1 218.5 222.6 4.5 2.0% 20.4 21.2 Inner 87.2 59.8 59.5 4.1 4.9% 2.7 6.3 London ______ ______ ______ ______ ______ ______ ______ Central 2,383.8 2,303.5 2,320.9 18.0 0.8% 188.4 192.3 London Offices Rest of 58.0 56.6 58.0 0.1 0.2% 5.3 5.0 UK ______ ______ ______ ______ ______ ______ ______ 2,441.8 2,360.1 2,378.9 18.1 0.7% 193.7 197.3 ______ ______ ______ ______ ______ ______ ______ Shops & shopping centres Centres 1,014.1 945.7 895.0 117.2 13.1% 69.2 64.3 London 695.4 668.9 639.1 56.5 8.8% 43.0 41.0 shops Other 560.8 526.7 500.0 36.8 7.0% 35.7 35.7 in-town shops ______ ______ ______ ______ ______ ______ ______ 2,270.3 2,141.3 2,034.1 210.5 10.2% 147.9 141.0 Retail ______ ______ ______ ______ ______ ______ ______ warehouses Parks 947.4 885.0 801.2 113.5 13.6% 44.4 42.4 Other 218.1 197.5 185.6 29.5 15.7% 13.6 12.0 ______ ______ ______ ______ ______ ______ ______ 1,165.5 1,082.5 986.8 143.0 14.0% 58.0 54.4 ______ ______ ______ ______ ______ ______ ______ Industrial SE 247.7 230.4 226.0 18.5 8.1% 16.9 16.6 Other 10.5 10.7 9.8 1.4 15.4% 1.1 0.8 ______ ______ ______ ______ ______ ______ ______ 258.2 241.1 235.8 19.9 8.4% 18.0 17.4 ______ ______ ______ ______ ______ ______ ______ Other 87.6 86.2 93.8 1.2 1.4% 6.0 6.8 ______ ______ ______ ______ ______ ______ ______ Like-for-like 6,223.4 5,911.2 5,729.4 392.7 6.7% 423.6 416.9 portfolio Completed (2) 559.8 523.0 453.6 50.8 10.0% 23.8 11.8 Developments ______ ______ ______ ______ ______ ______ ______ Total 6,783.2 6,434.2 6,183.0 443.5 7.0% 447.4 428.7 Acquisitions (3) 326.2 184.3 128.0 1.5 0.5% 16.1 4.6 Sales and (4) - 611.9 827.9 - - 41.7 76.2 restructured interests Total (5) 797.3 765.7 705.1 (44.3) (5.3)% 9.3 10.2 development programme (including Kent Thameside) ______ ______ ______ ______ ______ ______ ______ Total 7,906.7 7,996.1 7,844.0 400.7 5.3% 514.5 519.7 portfolio excluding JVs JVs 243.5 - - 6.2 2.6% 0.6 - ______ ______ ______ ______ ______ ______ ______ Total 8,150.2 7,996.1 7,844.0 406.9 5.3% 515.1 519.7 portfolio ______ ______ ______ ______ ______ ______ ______ Total portfolio analysis Offices West 1,571.3 1,470.5 1,481.8 24.9 1.6% 98.7 98.2 End City 958.3 975.2 945.7 (59.2) (5.8)% 77.7 80.9 Midtown 234.3 355.1 542.8 (2.5) (1.1)% 31.5 42.5 Inner 221.8 268.2 264.3 (25.4) (10.3)% 9.7 11.1 London ______ ______ ______ ______ ______ ______ ______ Central 2,985.7 3,069.0 3,234.6 (62.2) (2.0)% 217.6 232.7 London Offices Rest of 71.3 73.2 77.9 3.0 4.4% 7.2 7.7 UK ______ ______ ______ ______ ______ ______ ______ 3,057.0 3,142.2 3,312.5 (59.2) (1.9)% 224.8 240.4 ______ ______ ______ ______ ______ ______ ______ Shops & shopping centres Centres 1,786.7 1,594.7 1,455.7 172.8 10.7% 102.8 92.4 London 805.8 766.7 732.4 60.7 8.1% 47.5 46.4 shops Other 584.9 601.1 589.1 42.7 7.9% 39.8 41.8 in-town shops ______ ______ ______ ______ ______ ______ ______ 3,177.4 2,962.5 2,777.2 276.2 9.5% 190.1 180.6 ______ ______ ______ ______ ______ ______ ______ Retail warehouses Parks 1,051.7 995.2 901.2 121.9 13.1% 50.2 46.0 Other 241.7 230.5 215.6 32.5 15.5% 14.5 14.1 ______ ______ ______ ______ ______ ______ ______ 1,293.4 1,225.7 1,116.8 154.4 13.6% 64.7 60.1 ______ ______ ______ ______ ______ ______ ______ Industrial SE 342.4 367.0 350.2 28.8 9.2% 22.3 21.9 Other 10.5 38.4 35.7 1.4 15.4% 3.2 4.1 ______ ______ ______ ______ ______ ______ ______ 352.9 405.4 385.9 30.2 9.4% 25.5 26.0 ______ ______ ______ ______ ______ ______ ______ Other 269.5 260.3 251.6 5.3 2.0% 10.0 12.6 ______ ______ ______ ______ ______ ______ ______ Total 8,150.2 7,996.1 7,844.0 406.9 5.3% 515.1 519.7 portfolio ______ ______ ______ ______ ______ ______ ______ Total Investment Portfolio Analysis, Year Ended 31 March 2004 Annual Annual Annual Annual Annual Annual net rent(7)net rent(7) Net Net Yield on Yield on 31-Mar-04 31-Mar-03 Estimated Estimated Present Present Rental Rental Income Income Value (8) Value (8) 31-Mar-04 31-Mar-03 31-Mar-04 31-Mar-03 Â£m Â£m Â£m Â£m % % ______ ______ ______ ______ ______ ______ The (1) like-for-like portfolio Offices West 86.3 87.7 93.6 99.9 6.6% 7.0% End City 70.0 71.6 57.4 64.2 9.3% 9.2% Midtown 18.7 20.6 18.5 20.7 8.2% 9.3% Inner 2.7 1.5 3.1 2.1 3.1% 2.5% London ______ ______ ______ ______ ______ ______ Central 177.7 181.4 172.6 186.9 7.5% 7.8% London Offices Rest of 4.9 5.0 5.6 4.6 8.5% 8.6% UK ______ ______ ______ ______ ______ ______ 182.6 186.4 178.2 191.5 7.5% 7.8% ______ ______ ______ ______ ______ ______ Shops & shopping centres Centres 61.8 59.1 68.5 64.9 6.1% 6.6% London 42.9 41.4 48.0 46.5 6.2% 6.5% shops Other 33.5 33.1 38.0 36.6 6.0% 6.6% in-town shops ______ ______ ______ ______ ______ ______ 138.2 133.6 154.5 148.0 6.1% 6.6% Retail ______ ______ ______ ______ ______ ______ warehouses Parks 46.2 43.2 53.4 51.7 4.9% 5.4% Other 13.6 13.5 16.1 14.5 6.2% 7.3% ______ ______ ______ ______ ______ ______ 59.8 56.7 69.5 66.2 5.1% 5.7% ______ ______ ______ ______ ______ ______ Industrial SE 16.9 15.9 19.4 19.0 6.8% 7.0% Other 1.1 0.7 1.0 0.9 10.6% 7.1% ______ ______ ______ ______ ______ ______ 18.0 16.6 20.4 19.9 7.0% 7.0% ______ ______ ______ ______ ______ ______ Other 5.7 6.9 5.8 7.0 6.5% 7.4% ______ ______ ______ ______ ______ ______ Like-for-like 404.3 400.2 428.4 432.6 6.5% 7.0% portfolio Completed (2) 26.8 13.9 33.2 31.6 4.8% 3.1% Developments ______ ______ ______ ______ ______ ______ Total 431.1 414.1 461.6 464.2 6.4% 6.7% Acquisitions (3) 23.1 9.9 21.8 6.8 7.1% 7.7% Sales and (4) n/a n/a n/a n/a n/a n/a restructured interests Total (5) n/a n/a n/a n/a n/a n/a development programme (including Kent Thameside) ______ ______ ______ ______ ______ ______ Total n/a n/a n/a n/a n/a n/a portfolio excluding JVs JVs n/a n/a n/a n/a n/a n/a ______ ______ ______ ______ ______ ______ Total n/a n/a n/a n/a n/a n/a portfolio ______ ______ ______ ______ ______ ______ Total portfolio analysis Offices West 94.3 94.1 123.9 141.5 6.0% 6.4% End City 73.5 73.7 75.4 83.4 7.7% 7.8% Midtown 19.5 42.4 19.7 45.1 8.3% 7.8% Inner 6.5 9.6 18.9 19.4 2.9% 3.6% London ______ ______ ______ ______ ______ ______ Central 193.8 219.8 237.9 289.4 6.5% 6.8% London Offices Rest of 6.5 6.7 7.3 6.1 9.1% 8.6% UK ______ ______ ______ ______ ______ ______ 200.3 226.5 245.2 295.5 6.6% 6.8% ______ ______ ______ ______ ______ ______ Shops & shopping centres Centres 98.2 83.5 120.9 112.2 5.5% 5.7% London 47.1 44.7 63.7 51.5 5.8% 6.1% shops Other 34.4 38.0 40.8 43.7 5.9% 6.5% in-town shops ______ ______ ______ ______ ______ ______ 179.7 166.2 225.4 207.4 5.7% 6.0% ______ ______ ______ ______ ______ ______ Retail warehouses Parks 51.5 48.8 61.6 59.9 4.9% 5.4% Other 14.0 14.2 16.4 15.6 5.8% 6.6% ______ ______ ______ ______ ______ ______ 65.5 63.0 78.0 75.5 5.1% 5.6% ______ ______ ______ ______ ______ ______ Industrial SE 19.2 21.5 26.7 31.2 5.6% 6.1% Other 1.1 2.8 1.0 3.0 10.6% 7.8% ______ ______ ______ ______ ______ ______ 20.3 24.3 27.7 34.2 5.8% 6.3% ______ ______ ______ ______ ______ ______ Other 10.0 9.2 12.7 13.4 3.7% 3.7% ______ ______ ______ ______ ______ ______ Total 475.8 489.2 589.0 626.0 5.8% 6.2% portfolio ______ ______ ______ ______ ______ ______ Total Investment Portfolio Analysis, Year Ended 31 March 2004 (continued) Annual Annual Annual Voids Voids Voids Lease Lease Gross Gross Gross (by ERV) (by ERV) (by ERV) Length Length Estimated Estimated Estimated (10) (10) (10) as at as at Rental Rental Rental 31-Mar-04 30-Sep-03 31-Mar-03 31st 31st Value (9) Value (9) Value (9) March March 31-Mar-04 30-Sep-03 31-Mar-03 2004 2004 Median Mean (11) (11) The like-for-like Â£m Â£m Â£m % % % Years Years portfolio (i) (ii) ______ ______ ______ ______ ______ ______ ______ ______ Offices West End 95.2 93.5 101.3 5.5% 1.2% 2.0% 6.5 10.7 City 58.1 58.9 65.1 2.9% 3.5% 3.4% 3.3 9.4 Midtown 19.3 19.5 21.5 5.3% 4.3% 0.9% 5.0 5.1 Inner London 3.1 2.7 3.0 4.1% 0.2% 7.3% 1.8 1.6 ______ ______ ______ ______ ______ ______ ______ ______ Central London 175.7 174.6 190.9 4.6% 2.3% 2.5% 6.3 9.4 Offices Rest of UK 5.7 4.7 4.7 12.0% 15.7% 11.6% 1.5 5.9 ______ ______ ______ ______ ______ ______ ______ ______ 181.4 179.3 195.6 4.9% 2.6% 2.7% 5.3 9.4 ______ ______ ______ ______ ______ ______ ______ ______ Shops & shopping centres Centres 75.5 72.4 71.3 1.1% 1.0% 0.7% 9.3 10.4 London shops 48.9 48.5 47.5 0.1% 1.6% 1.4% 7.3 9.1 Other in-town shops 40.6 39.7 39.3 3.9% 3.2% 3.1% 7.8 9.7 ______ ______ ______ ______ ______ ______ ______ ______ 165.0 160.6 158.1 1.5% 1.7% 1.5% 8.0 9.8 ______ ______ ______ ______ ______ ______ ______ ______ Retail warehouses Parks 53.4 53.5 51.8 2.2% 3.6% 4.2% 16.8 15.2 Other 16.1 14.8 14.5 1.9% - - 15.0 13.4 ______ ______ ______ ______ ______ ______ ______ ______ 69.5 68.3 66.3 2.2% 2.8% 3.3% 16.5 14.8 ______ ______ ______ ______ ______ ______ ______ ______ Industrial SE 19.4 19.3 19.0 10.5% 9.1% 10.2% 5.5 5.8 Other 1.0 0.8 0.9 12.4% 0.3% 0.3% 13.8 18.9 ______ ______ ______ ______ ______ ______ ______ ______ 20.4 20.1 19.9 10.8% 9.0% 10.1% 6.3 6.6 ______ ______ ______ ______ ______ ______ ______ ______ Other 5.9 5.6 7.0 2.2% 1.1% - 9.3 21.0 ______ ______ ______ ______ ______ ______ ______ ______ Like-for-like 442.2 433.9 446.9 3.4% 2.6% 2.6% 7.0 10.4 portfolio Completed 33.3 33.1 31.6 0.9% 8.8% 22.5% 14.0 12.6 Developments ______ ______ ______ ______ ______ ______ ______ ______ Total 475.5 467.0 478.5 3.2% 3.0% 3.9% 7.5 10.5 Acquisitions 22.3 14.4 6.8 2.2% 1.4% 1.5% 6.3 6.9 Sales and n/a n/a n/a n/a n/a n/a n/a n/a restructured interests Total development n/a n/a n/a n/a n/a n/a n/a n/a programme (including Kent Thameside) ______ ______ ______ ______ ______ ______ ______ ______ Total portfolio n/a n/a n/a n/a n/a n/a n/a n/a excluding JVs JVs n/a n/a n/a n/a n/a n/a n/a n/a ______ ______ ______ ______ ______ ______ ______ ______ Total portfolio n/a n/a n/a n/a n/a n/a n/a n/a ______ ______ ______ ______ ______ ______ ______ ______ Notes (1) The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2002 but excludes those which were acquired, sold or included in the development programme at any time during that period. Capital expenditure on refurbishments, acquisition of headleases and similar capital expenditure has been allocated to the like-for-like portfolio in preparing this table. Changes in valuation from period to period reflect this capital expenditure as well as the disclosed valuation surpluses. (2) Completed developments represent those properties, previously included in the development programme, which have been completed, let and removed from the development programme in the period since 1 April 2002. (3) Includes all properties acquired in the period since 1 April 2002. This also includes site assembly acquisitions for pre-development schemes. (4) Includes all properties sold (other than directly out of the development programme), or where the ownership interest has been restructured, in the period since 1 April 2002. (5) Ongoing developments are properties in the development programme and Kent Thameside. They exclude completed developments as defined in note (2) above. (6) The open market value figures include the group share of the various joint ventures and exclude properties owned by Land Securities Trillium and Telereal. (7) Annual net rent is annual rents in payment at 31 March 2004 after deduction of ground rents. It excludes the value of voids and current rent free periods. (8) Annual net estimated rental value includes vacant space, rent-frees and future estimated rental values for properties in the development programme and is calculated after deducting expected ground rents. (9) Annual gross estimated rental value is calculated in the same way as net estimated rental value before the deduction of ground rents. (10) Voids represent all unlet space in the properties, including voids where refurbishment work is being carried out and voids in respect of pre-development properties. Voids are calculated based on their gross estimated rental value as defined in (9) above. (11) The definition for the figures in each column is: (i) Mean is rent-weighted average remaining term on leases subject to lease expiry/break clauses. (ii) Median is the number of years until half of income is subject to lease expiry/break clauses. (12) Acquisitions and sales and restructured interests reflect movements in the investment portfolio. Acquisitions and sales directly into or out of the development programme are analysed under the development heading. Top 12 properties Total value Â£2.2 bn (27.3% of portfolio). Values in excess of Â£145m. 1 Bullring, Birmingham 2 White Rose Centre, Leeds 3 St David's Centre, Cardiff 4 Queen Anne's Mansions, London 5 Almondvale Centre and Designer Outlet, Livingston 6 Gunwharf Quays, Portsmouth 7 Cardinal Place, London 8 The Bridges, Sunderland 9 Gresham Street, London 10 Team Valley, Gateshead 11 Eland House, London 12 Devonshire House, London Top 12 investment portfolio tenants Current rents % 1 Central Government 9.75 2 Allen & Overy 2.95 3 Dresdner Bank AG 2.32 4 DSG Retail (Currys/Dixons /PC World) 2.06 5 J Sainsbury PLC 1.65 6 Metropolitan Police Authority 1.44 7 Argos and Homebase 1.42 8 The Institute of London Underwriters 1.02 9 MFI 0.98 10 The Boots Company PLC 0.97 11 B&Q 0.91 12 Virgin Retail Group Limited 0.90 Total 26.37 Portfolio value by location % figures calculated by reference to the portfolio value of Â£8,150.2m Shopping centres Retail Offices and shops Warehouse Industrial Other Total % % % % % % Central and Inner London 36.6 9.9 - 0.1 0.8 47.4 Rest of south east and eastern 0.5 5.2 4.7 4.1 1.6 16.1 Midlands 0.2 5.6 2.5 - - 8.3 Wales and south west 0.2 5.4 1.3 - - 6.9 North, north west, Yorkshire and 0.1 7.6 5.4 0.1 0.7 13.9 Humberside Scotland and Northern Ireland 0.1 5.2 2.0 - 0.1 7.4 ------------ ------------ ------------ ------------ ------------ -------- Total 37.7 38.9 15.9 4.3 3.2 100.0 ======= ======= ======= ======= ======= ==== Average rents excludes properties in the development programme and voids Average Average Rent ERV Â£/sq m Â£/sq m Offices Central and Inner London 362 316 Rest of UK 102 101 Retail Shopping centres and shops n/a n/a Retail warehouses (including supermarkets) 159 176 Industrial premises and warehouses London, south-east and eastern 71 72 Rest of UK n/a n/a Hotels, leisure, residential and other n/a n/a Note: Average rents and estimated rental values (ERVs) have not been provided where it is considered that the figures would be potentially misleading (i.e. where there is a combination of analysis of rents on an overall and Zone A basis in the retail sector; or where there is a combination of uses; or small sample sizes). This is not a like-for-like analysis with the previous year. It excludes properties in the development programme and voids. Like-for-like reversionary potential at 31 March 2004 Reversionary potential 31.03.04 31.03.03 (ignoring additional income from the letting of voids) % of rent roll % of rent roll Gross reversions 9.8 10.8 Over-rented 8.0 5.3 Net reversionary potential 1.8 5.5 Note: The reversion is calculated with reference to the gross secure rent roll and those properties which fall under the like-for-like definition as set out in the Notes to Portfolio Analysis in the Total Investment Portfolio Analysis above. Only 36.7% of the over-rented income is subject to a lease expiry or break clause in the next five years. % Portfolio by value and number of properties at 31 March 2004 Â£m Value % No of Properties 0 - 9.99 3.9 76 10 - 24.99 9.0 45 25 - 49.99 22.5 52 50 - 99.99 19.1 23 Over 100 45.5 23 ----------- ----------- 100.0 219 ====== ====== Note: Excludes properties held through the Scottish Retail Limited Partnership. Development pipeline schedule Central London Planning - PR = planning received; AS = application submitted; MG = minded to grant; PI = planning inquiry; OPR = outline planning received. Estimated/ Size Status actual Cost Sq m Status letting completion Â£m Property Description (Note 1) planning (Note 2) date (Note 3) Developments completed, let and transferred or sold Portman House, W1 Offices 9,249 100% Oct 2001 44 Retail 2,521 7 Soho Square, W1 Offices 4,214 100% Mar 2003 9 Retail 1,095 190 High Holborn, WC1 (sold February 2004) Offices 8,560 100% Sep 2002 41 Developments completed 30 Gresham Street, EC2 Offices 35,147 Dec 2003 210 Retail 1,304 Empress State Building, SW6 Offices 41,291 Jul 2003 103 Retail/Leisure 2,040 Developments approved and in progress Cardinal Place, SW1 Offices 51,130 Sep 2005 253 Retail 9,415 Proposed Developments New Street Square, EC4 Offices 62,526 MG* 2008 Retail/Leisure 2,783 Bankside 123, SE1 Offices 75,326 PR 2006 Retail 8,080 Leisure 1,957 * Minded to grant consent obtained after 31 March 2004. Retail Estimated/ Size Status actual Cost Sq m Status letting completion Â£m Property Description (Note 1) planning (Note 2) date (Note 3) Developments completed, let and transferred or sold Bullring, Birmingham (33%) The Birmingham Alliance - a limited partnership with Hammerson plc and Henderson Global Investors Retail 111,484 98% Sep 2003 141 Sidwell Street, Exeter Retail 2,420 100% Mar 2003 3 Developments approved and in progress Whitefriars, Retail 37,685 56% Apr 2005 107 Canterbury Residential 2,614 Caxtongate Phase III, New Street, Birmingham Retail 2,238 100% Jan 2005 5 Summerland Gate, Exeter (formerly Cheeke Street) Retail 5,377 55% Feb 2005 11 Residential 1,390 Rose Lane, Canterbury (50%)- a limited partnership Retail 1,638 76% Nov 2004 4 Proposed developments Broadmead, Bristol (33%) The Bristol Alliance - a limited partnership with Hammerson plc, & Morley Fund Management Retail 88,788 PR 2008 Leisure 5,409 Offices 24,585 Residential 18,743 Princesshay, Exeter Retail 37,360 PR 2007 Residential 7,197 St Davids, Cardiff (50%) Retail 70,000 OPR 2008 St David's Partnership - a partnership with Capital Shopping Leisure Centres Residential 39,750 Retail warehouse Estimated/ Size Status actual Cost Sq m Status letting completion Â£m Property Description (Note 1) planning (Note 2) date (Note 3) Developments completed, let and transferred or sold Kingsway Retail Park, Dundee, Phase I Retail 9,893 100% Jan 2003 29 Warehouse Developments approved and in progress Bexhill Retail Park Extension, Bexhill Retail 3,112 Nov 2004 12 Warehouse Kingsway Retail Park, Dundee, Phase II Retail 8,649 55% May 2004 15 Warehouse Almondvale South, Livingston, Phase II a Retail 5,295 51% Oct 2004 5 Warehouse Proposed Developments Almondvale South, Livingston, Phase II b Retail 4,181 PR 2005 Warehouse Industrial Estimated/ Size Status actual Cost Sq m Status letting completion Â£m Property Description (Note 1) planning (Note 2) date (Note 3) Developments completed, let and transferred or sold Horizon Point, Hemel Hempstead Phase I (sold February 2004) Industrial 10,384 Mar 2002 11 Developments completed Juniper Phase I, Industrial 21,823 84% Nov 2001 18 Basildon Office 3,660 100% Juniper Phase II, Industrial 11,148 47% April 2003 8 Basildon Zenith, Basildon Industrial 15,128 55% June 2002 12 Cobbett Park, Guildford Industrial 11,440 41% Aug 2002 11 Commerce Way, Industrial 12,617 14% Oct 2003 12 Croydon Oxonian Park, Industrial 11,796 5% Sep 2003 9 Kidlington Developments approved and in progress Concorde Way, Segensworth, Fareham Industrial 11,617 June 2004 9 Other Developments completed The Gate, Newcastle upon Tyne Leisure 18,556 92% Nov 2002 65 Notes (1) For partnership schemes, the floor area figures are for the whole scheme, but the cost figures represent Land Securities' share of cost. (2) Letting % is measured by ERV and shows letting status at 31 March 2004. (3) Cost (Â£m) refers to estimated capital expenditure including the cost of third party land acquisitions and excluding finance costs. Development pipeline - financial statistics Valuation Cumulative Capital Est. total surplus/ valuation Book expend- capital Est. (deficit) surplus / Net value iture expend- total Disposal 12 mth to (deficit) to income/ at to date iture cost proceeds 31/03/04 date ERV start (1) (1) (2) (3) (3) (4) Project Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------- ---------- ------------ ------- ------------ ------------ --------------- ---------- Completed, let and transferred out of Development Programme or sold during the year ended 31/03/04 109 265 283 413 (52) 49 90 27 Active development programme (schemes in progress, completed but not let, committed and authorised) 171 635 878 1,115 - (43) (156) 87 Proposed schemes 143 52 970 1,208 - n/a n/a 95 (5) Notes (1) Excludes capitalised interest. (2) Includes land costs / book value of land and capitalised interest, but excludes any allowances for rent free periods. The estimated total cost of the proposed schemes are stated net of other receipts (eg sales of residential units). (3) Includes FRS3 profit realised on the disposal of property. (4) Net headline annual rental payable on let units plus net estimated rental value (ERV) at 31 March 2004 on unlet units. (5) The book value of the proposed schemes reflect the value as at 31 March 2003 which reflects any value attributable to expenditure incurred prior to 31 March 2003. Therefore the capital expenditure shown in the 'capital expenditure to date' column represents only that expenditure incurred in the year to 31 March 2004. Property Outsourcing Unexpired contract term years DWP 14 BBC 27 Telereal (BT) 27 Property under management Freehold Leasehold TOTAL 000 sq m 000 sq m 000 sq m ------------ --------------- ----------- Offices DWP 533 1,134 1,667 ES 246 588 834 BBC 82 - 82 BT 824 553 1,377 Telephone Exchanges BT 3,835 32 3,867 --------- --------- --------- TOTAL 5,520 2,307 7,827 ===== ===== Under management but estate not transferred DWP n/a n/a 67 ES n/a n/a 40 BBC n/a n/a 290 BT n/a n/a 0 -------- TOTAL 8,224 ===== Regional breakdown by contract DWP ES BBC Telereal Total 000 sq m 000 sq m 000 sq m 000 sq m 000 sq m --------- --------- --------- --------- --------- Northern Ireland - - - 121 121 London, south-east and West 517 352 346 2,665 3,880 England Northern England 691 252 - 989 1,932 Scotland 231 81 26 458 796 Midlands and Wales 294 189 - 1,012 1,495 --------- -------- ------- -------- -------- TOTAL 1,733 874 372 5,245 8,224 ===== ===== ==== ===== ===== Number of people by occupation Total Asset management 106 Call centre 165 Capital projects 463 Quality assurance 46 Facilities management 639 HR/Finance/ IS/BD 169 -------- TOTAL 1,588 ===== Note: These figures include all Telereal staff Property transactions concluded by contract DWP ES BBC Telereal No of No of No of No of Total no of transactions transactions transactions transactions transactions Sales 4 1 - 22 27 New Lettings 35 - 2 15 52 Rent Reviews 62 1 - 63 126 Lease Renewals 28 - - 7 35 Freehold buy-ins 5 - - - 5 Other 11 4 - - 15 ------ ------ ------ ------ ------ TOTAL 145 6 2 107 260 === === ==== ==== ==== Unitary charge income received by contract DWP ES BBC Telereal TOTAL Â£m Â£m Â£m Â£m Â£m Unitary Charge Income 326 57 65 332 780 Note: The Telereal unitary charge is the total unitary charge payable by BT Service partner agreements '000 sq m Proportion under of service providers' Service Partner Service Element management turnover Compass Catering 1,999 <5% Dalkia Building maintenance 1,878 10 - 15% Group 4 Security 1,671 15 - 20% GS Hall Building maintenance 1,070 20 - 25% ISS Cleaning 1,704 <5% MiB Furniture 2,874 15 - 20% MITIE Cleaning 1,618 <5% OCS Cleaning 372 <5% Securitas Security 814 <5% Wilson James Security 372 20 - 25% Total 14,372 Average contract tenure: 9.2 years Average annual contract value: Â£11.4m This information is provided by RNS The company news service from the London Stock Exchange PBBKKQPD

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