Final Results

Land Securities Group Plc 17 May 2005 17 May 2005 Land Securities Group PLC ('Land Securities' / 'the Group') Preliminary results for the year ended 31 March 2005 Highlights â€¢ Adjusted diluted net asset value per share up 9.7% to 1460p (2004: 1331p) â€¢ Combined portfolio valuation uplift of 10.3% to Â£9.4bn with strongest growth from retail warehouses (+16.6%), shops and shopping centres (+8.6%) and London offices (+9.7%) â€¢ Excluding the exceptional charge relating to the Group's debt restructuring, pre-tax profits rose 41.1% to Â£526.3m (2004: Â£373.1m); after the exceptional charge of Â£682.1m, the loss before tax was (Â£155.8m) â€¢ Revenue profits increased by 29.7% to Â£401.1m (2004: Â£309.2m) â€¢ Adjusted earnings per share, calculated on revenue profits up 43.5% to 68.67p (2004: 47.86p); basic loss per share, which included the exceptional refinancing charge, was 7.69p. â€¢ Final dividend of 32.85p (2004: 27.2p), making a total distribution for the year of 43.25p, an increase of 16.6%, reflecting the Group's strong results for the year and the Board's confidence in the future of the business â€¢ Major business development achievements including an exchange of properties with Slough Estates PLC, launch of the Metro Shopping Fund and a Recommended Offer, made following the year end, for Tops Estates PLC â€¢ Sales of assets from the investment portfolio generated profits of Â£82.4m â€¢ Lettings of 101,500 sq m and 43,400 sq m in the London office and retail development programmes respectively and the forward sale of a further 46,400 sq m relating to Bankside1 â€¢ Three new contracts won by Land Securities Trillium, with a substantial contribution to Group profits from existing contracts and the release of Â£321.5m of capital following the sale of Media Village, White City â€¢ Completion of Â£3.2bn debt restructuring, providing positive benefits for Land Securities' equity and debt investors. Commenting on the results, Peter Birch, Chairman of Land Securities, said: 'It is with pleasure that I can report an outstanding performance by Land Securities this year, distinguished by the securing of additional income from major new contracts across all areas of our business. 'The soundness of our strategy and its successful implementation by our people has ensured the business is now in a position of strength to benefit from changing market conditions. We have positioned the retail portfolio to concentrate primarily on more dominant assets; established a substantial London office development pipeline and engineered the London portfolio to benefit from rental growth. We have also created a market-leading position in property outsourcing. As demonstrated by the substantial increase in this year's dividend, we remain confident in the future.' For further information, please contact: Land Securities Francis Salway/Emma Denne Tel: 020 7413 9000 Financial Dynamics Stephanie Highett/Dido Laurimore Tel: 020 7831 3113 Preliminary results for the year ended 31 March 2005 Financial Highlights 31/03/05 31/03/04 % Change Gross property income Property investment Â£811.2m Â£650.2m +24.8% Property outsourcing Â£1,054.5m Â£830.9m +26.9% Total Â£1,865.7m Â£1,481.1m +26.0% Operating profit (total) Â£633.6m Â£565.8m +12.0% Pre-tax (loss)/profit (Â£155.8m) Â£373.1m n/a Revenue profit (pre-tax) 1 Â£401.1m Â£309.2m +29.7% Adjusted earnings per share 2 68.67p 47.86p +43.5% (Loss)/earnings per share (7.69p) 61.84p n/a Dividends per share 43.25p 37.10p +16.6% Adjusted diluted net assets per share 3 1460p 1331p +9.7% Diluted net assets per share 1414p 1293p +9.4% Combined portfolio valuation 4 Â£9,388.8 Â£8,150.2m +10.3% Net borrowings Â£2,923.1m Â£2,435.8m +20.0% Equity shareholders' funds Â£6,636.6m Â£6,030.1m +10.1% Gearing (net) 5 44.0% 40.5% 1 Excludes results of fixed asset property sales and exceptional items 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 and adding back the net liabilities of Telereal 4 Market value of investment portfolio including our share of the value of joint ventures. % change is valuation surplus. 5 Net borrowings (including bank overdraft less short term deposits and cash), at book value, (plus in 2004 non-equity B shares) as a percentage of equity shareholders' funds Chairman's statement It is with pleasure that I can report an outstanding performance by Land Securities this year, distinguished by the securing of additional income from major new contracts across all our businesses. We are recommending a 20.8% increase in the final dividend to 32.85p making a total for the year of 43.25p, up 16.6% on last year. This is a higher level of growth than usual and reflects our exceptional performance this year. The Group's continued achievements demonstrate the soundness of our strategy and its successful implementation by our people. It has been a busy year across the entire Group. The highlights were: â€¢ The focusing of the business on three sectors where we have market-leading positions, namely retail, London offices and property outsourcing â€¢ The Group's exit from the south-east industrial property market through an exchange of our industrial properties for a retail portfolio from Slough Estates PLC. The combined value of the properties exchanged was Â£709m â€¢ The implementation of a highly successful Â£3.2bn debt restructuring, which resulted in an improved AA credit rating, a decrease in our future cost of debt and the provision of a long-term, flexible funding structure for the business. The costs associated with this transaction are accounted for as an exceptional charge â€¢ The valuation uplift of 10.3% in the combined portfolio (which includes our share of the value of properties owned by joint ventures) to Â£9.4m, demonstrating our continued success at creating value from our retail and London portfolios â€¢ The rise of 9.7% in adjusted diluted net assets per share to 1460p per share or of 17.4% to 1562p, if the post-tax exceptional impact of our debt refinancing is ignored â€¢ The growth of adjusted earnings per share by 43.5% reflecting higher revenue profits of Â£401.1m (2004: Â£309.2m). We report a loss per share of 7.69p, this is calculated on profits after tax which include the exceptional refinancing charge this year . Basic net assets per share were 1419p â€¢ The sale of Â£763.1m of property from the investment portfolio, which generated profits of Â£82.4m in excess of carrying values, as well as the purchase of Â£786.1m of property, thereby continuing the progress we are making to recycle capital into higher growth activities. This includes the values of the property swap with Slough Estates â€¢ Three new property outsourcing contracts won by Land Securities Trillium as well as a significant contribution to the Group's profits from existing contracts and the receipt of Â£321.5m as a result of the sale of Media Village, White City â€¢ The agreement of contracts to occupy 101,500 sq m of offices in our London development programme including lettings at Cardinal Place, SW1, New Street Square, EC4, Gresham Street, EC2 and Empress State, SW6 and a further 46,400 sq m relating to the forward sale of Bankside1 â€¢ The completion of 43,400 sq m of retail development lettings including the letting of anchor stores to House of Fraser for the Bristol Alliance and to Debenhams in Exeter â€¢ The announcement, since the year end, of a recommended offer to acquire Tops Estates PLC, which owns seven shopping centres, for an enterprise value of Â£517.2m, including the assumption of Â£207.3m of Tops Estates' debt. Results Before moving on to comment in more detail on the results, I thought it would be helpful to summarise the effect of the debt restructuring that we carried out last November, full details of which are contained in the Operating and Financial Review. In essence, we replaced our existing Â£1.8bn of secured and unsecured bond debt, at an average interest rate of 8.5%, with Â£2.3bn of new secured debt, at an average interest rate of 5.35%. This will initially reduce our future cash interest charge by some Â£25m per annum. As a result, in the year we have had to account for the one-off increase in the nominal value of the new debt together with associated costs through the profit and loss account as a Â£682.1m exceptional charge. While the effect of this accounting treatment is apparent on both the profit and loss account and our net asset value, it is very largely a non-cash item and we are therefore reporting our numbers on a pre- and post-exceptional basis. The exceptional nature of this charge is demonstrated by our ability to increase the dividend substantially this year. Pre-tax profits (excluding the exceptional refinancing costs) grew by 41.1% to Â£526.3m (2004: Â£373.1m). The exceptional charge, however, results in this becoming a pre-tax loss of Â£155.8m. Revenue profits, our measure of underlying pre-tax profits, increased by 29.7% to Â£401.1m from Â£309.2m mainly as a result of: â€¢ Interest savings of Â£10.3m over part of the year as a result of the debt refinancing â€¢ A strong performance from Land Securities Trillium, with the extended DWP contract fully profitable and a strong contribution from Telereal which included a Â£17.6m (2004: Â£5.6m) contribution from sales of trading properties â€¢ Profits of Â£11.6m mainly from our contract to develop Bankside1, SE1. Adjusted earnings per share, calculated on pre-tax revenue profits, were 43.5% higher at 68.67p per share (2004: 47.86p per share). The wholly-owned investment portfolio rose in value by 10.7% to Â£8.8bn, with the combined portfolio (including our share of joint ventures) showing a 10.3% increase to Â£9.4bn. The majority of our assets are now split between the retail and London businesses at 56.9% and 38.9% respectively (combined portfolio). Adjusted diluted net assets per share rose by 9.7% to 1460p per share or by 17.4% to 1562p, if the post-tax exceptional impact of our debt refinancing is ignored. As mentioned earlier, in recognition of the outstanding results this year and our confidence in the future of the business, we are recommending a final dividend of 32.85p per share (2004: 27.2p), making a total distribution for the year of 43.25p (2004: 37.1p), a 16.6% increase on 2004. Following this one-off increase, we will revert to our historic pattern of steady dividend growth from this new base. At the Interim Results, we stated our intention to distribute more equally our dividend payments. In future we will aim to pay around 40% as an interim dividend payment with the balance making up the final dividend. Subject to approval by shareholders at the Annual General Meeting ('AGM') to be held on 12 July 2005, the dividend will be paid on 25 July 2005 to shareholders on the register on 24 June 2005. The dividends paid and proposed are covered 1.6 times by adjusted earnings (2004: 1.3 times). Real Estate Investment Trusts and Lease Reform The Government has stated that, subject to agreeing the outstanding issues on Real Estate Investments Trusts ('REITs') as detailed in its most recent consultation document, it would seek to introduce the relevant legislation with the 2006 Finance Bill. The structure now proposed appears to be more flexible but we will have to wait for full details of legislation, including the Government's proposed conversion charge, before we can assess whether conversion will be in the best interests of shareholders. We were pleased that, for the time being, the Government has decided not to introduce legislation to prohibit upward only rent reviews in lease contracts. We believe that the industry has made great strides to introduce a range of more flexible leasing options and we continue to work with the British Property Federation ('BPF') and major landlords to ensure that we deliver a satisfactory solution for our customers and the industry. To this end we have recently become a signatory to the BPF declaration on sub-letting, which we believe is a step towards creating a more flexible sub-letting environment for tenants. Acquisition of Tops Estates PLC On 6 May 2005, we announced that we had reached agreement with the Board of Tops Estates PLC in respect to the terms of recommended offers for the ordinary shares in and convertible unsecured loan stock of Tops Estates. The offers represent an enterprise value for Tops Estates of approximately Â£517.2m, including net debt at 30 September 2004 of approximately Â£207.3m. Since announcing the offer, we had purchased, by 4.30pm on Friday 13 May, 29.8% of the shares and 46.7% of the convertible unsecured loan stock in the market which, when combined with the irrevocable undertakings made by Tops Estates management, represent nearly 72.9% of the fully-diluted share capital of the company. Tops Estates is a specialist investor in town and city centre shopping centres and its property portfolio comprises shopping centres with a total gross area of approximately 230,000 sq m in seven locations: Corby (Town Centre and Oasis Retail Park), Harrogate (Victoria Shopping Centre), Leeds (Shopping Plaza and City Exchange Offices), Liverpool (Clayton Square Shopping Centre), London (West 12 Shopping and Leisure Centre at Shepherds Bush), Stafford (Guildhall Shopping Centre and Gaolgate Place Shopping Centre) and Worcester (Cathedral Plaza). This portfolio was independently valued as at 31 March 2005 at Â£566.7m, based on current annual net rental income of Â£30.4m and current estimated annual net rental value of Â£40.7m. The acquisition of Tops Estates will strengthen further Land Securities' position in the retail sector and the shopping centres being acquired offer Land Securities' management and development opportunities to create value. In particular, the Clayton Square Shopping Centre consolidates Land Securities' position in Liverpool; Tops Estates' sites in Corby provide a longer-term development opportunity; and the properties in Leeds provide Land Securities with an entry into one of the top 10 city centre retail markets in the UK. Land Securities will also continue to deliver the asset management programmes already initiated in Stafford, Harrogate, Worcester and Shepherd's Bush. Board and senior management changes As reported at the half year Francis Salway, who joined the company in 2000, assumed the role of Group Chief Executive at the Annual General Meeting on 14 July 2004, succeeding Ian Henderson who retired on that date. We would like to reiterate again our thanks to Ian for his outstanding contribution over the past 30 years. Mark Collins, previously Chief Executive Portfolio Management, was appointed Chief Operating Officer and now has responsibility for Group business development, Urban Community Development (including projects such as Kent Thameside) and investment portfolio services encompassing property management, project management and legal services. Mike Hussey assumed the position of Managing Director, London Portfolio and was appointed to the Board in September. Richard Akers was promoted to the role of Managing Director, Retail and we are pleased to announce today his appointment to the Board. During the year we were pleased to appoint Bo Lerenius, Group Chief Executive of Associated British Ports Holdings PLC, and Alison Carnwath to the Board as non-executive directors. Our people The Group has changed substantially over the last few years. We have continued to implement our new strategy and been careful to ensure we have the skills and resources needed to sustain our success. I would like to offer my thanks and appreciation for the hard work and commitment shown by everyone in the Group over the last year. Their achievements speak for themselves. Outlook Sustained demand from investors for commercial property continues to establish it as a mainstream asset class. This position may be further enhanced by the introduction of REITs which, by removing tax inequalities, may bolster the attractiveness of quoted real estate and other indirect investment vehicles. Over the year investor demand has driven property yields down further, which has increased capital values. However, we believe that this trend has now largely run its course with the result that future growth in asset value will be more dependent on rental growth and success in securing lettings. In this environment of lower yields, we believe that our development and asset management skills, together with our ability to grow our outsourcing business, will be key to the creation of attractive returns for our shareholders. The London office market is showing evidence of a recovery as occupier demand improves, particularly in the West End. While the operating environment for retailers is more challenging, we believe the retail property market should be resilient for as long as unemployment levels remain low and earnings remain stable. The property outsourcing market continues to expand as occupiers recognise its core attractions of price certainty, risk transfer and customer service. Against this market background, we have moved the business into a position of strength from which it will benefit from these conditions. We have positioned the retail portfolio to concentrate primarily on more dominant assets; established a substantial London office development pipeline and engineered the London portfolio to benefit from rental growth. We have also created a market-leading position in property outsourcing. As demonstrated by the substantial increase in this year's dividend, we remain confident in the future. Peter Birch Chairman Land Securities Group PLC 17 May 2005 Operating and Financial Review Introduction Land Securities has had an excellent 12 months, performing well in all areas of the business. Across the company there is a sense of real achievement as we deliver a very strong performance from our investment portfolio, build and let our development programme and grow our property outsourcing business. We have restructured the business to focus on our market-leading positions in retail, London and property outsourcing and improved the debt structure for the Group. At the same time the commercial property industry as a whole is undergoing a renaissance as Government, investors and the wider public increasingly recognise the role our industry plays in the economic success of the country. A structural shift in the investment property market, upon which we commented last year, has come a step closer. We were very pleased with the positive response from Government in respect to the introduction of REITs as outlined in the last Budget statement. The Group has benefited from a strong investment market, improving central London occupier demand, increasing demand for property outsourcing and from our focus on driving returns from our investment portfolio. This has resulted in a return on capital of 17.3% (2004: 11.5%), more than 9% higher than our cost of capital. Return on equity was 11.3% (2004: 13.4%) which improves to 21.3%, if the exceptional charge relating to the debt restructuring is excluded. Competitive environment and business planning Land Securities operates in the UK primarily within the commercial property markets. Our activities include investment, development and the provision of commercial property accommodation and associated services. The market is diversified and, as illustrated in Table A, ownership is fragmented: Table A UK Core Commercial Property Markets Â£bn Â£bn % % UK institutions 73 14.9 Overseas investors 37 7.6 UK listed property companies Land Securities 8.2 1.7 Other 27.8 5.7 ------- ------ Total listed property companies 36 7.4 UK unlisted property companies 37 7.6 Unlisted and pooled funds 20 4.1 Limited partnerships 18 3.7 Traditional estates and charities 13 2.6 UK private investors 8 1.6 Other investors 12 2.4 ------- ------- Total investment property 254 51.9 ------- ------- Owner occupiers (excluding Government) 235 48.1 ------- ------- Total UK Commercial Property (excluding Government) 489 100 ------- ------- Source: 'IPF The size of the UK Commercial Property Market', values at end 2003, (for all figures except Land Securities' data) and Land Securities' year end 2004 valuation. In a fragmented market we need to be able to exploit our competitive advantages of financial strength, scale, specialist market expertise and our relationships with occupiers in order to maximise shareholders returns. We have now focused our activities almost entirely on three core markets where we have a market-leading position and where the strength of our relationships with customers will help drive outperformance. Our financial strength enables us to transact quickly and efficiently. Together the value of retail and London office investment property markets is some Â£187bn, and represents some 74% of the total UK commercial market, of this Land Securities' ownership is 4.8%. As compared to Continental Europe and the United States, the UK commercial property market is characterised by supply side constraints caused by a more stringent planning regime and greenbelt restrictions around our major conurbations controlling land supply. Our share of the retail and central London investment markets is summarised in Table B. Table B Total UK Land Securities Â£bn Â£bn Retail Standard shops outside London 21 0.4 Central London shops 9 0.9 Shopping centres 53 2.5 Retail warehouses 35 1.5 All other retail 7 - ------- ------- Total retail 125 5.3 ------- ------- Office Central London 63 3.6 All other UK 25 0.1 Office parks 11 - ------- ------- Total offices 99 3.7 ------- ------- Standard Industrial 30 0.1 Other* 0.3 ------- ------- Total 254 9.4 ------- ------- Source: 'IPF: The size of the UK Commercial Property Market', values at end 2003, (for all figures except Land Securities' data) and Land Securities' year end 2005 valuation. We benefit from low asset concentration risk with our largest property representing less than 3.5% of the value of the combined portfolio and an average investment property lot size of Â£48.4m. Investment property has performed very well over the past few years, driven by investor recognition of its good returns compared to other asset classes. The macro-economic background which drives the performance of the commercial property investment market remains unchanged. Interest, inflation and employment rates have remained stable during the year. This has resulted in a competitive investment market and the yield shift which was evident in 2003/04 continued throughout 2004/05. While this has been of advantage to us, with improved property values and a profitable sales programme, it has made it more challenging to acquire assets which fulfil our return criteria. As a result we have allocated more of our capital to development and property outsourcing activities and sought to acquire income-producing investment properties with stock-specific attributes that we can exploit through our market expertise. We do not believe that yields, as a whole, will strengthen much further now that the margin of property yields over the cost of debt and gilt yields has narrowed. We would not however rule out further yield compression for well-let investment property, if interest rates fell. However, in an environment of low property yields, outperformance will increasingly be determined by leasing capabilities, asset management and development skills as well as exposure to new growing property markets. The bulk of our development programme comprises complex schemes in town and city centres across the UK and we continue to exploit opportunities within our existing portfolio. We benefit here from our expertise and our reputation for delivery which, we believe, few companies can match in the UK. Property outsourcing has emerged as a new market in the UK and we have developed a market-leading product and reputation. Property outsourcing provides us with access to the wider pool of commercial property held by owner-occupiers. At the same time it provides clients with an integrated property solution which combines property accommodation with associated property services. At present there are less than half a dozen companies offering a property outsourcing solution similar to that provided by us, since the need to create a national infrastructure to support the delivery of a major property outsourcing contract creates a high barrier to entry. However, competition exists in a number of disaggregated forms, examples of which are sale and leaseback transactions with separate facilities management contracts. The estimated total value of the property outsourcing market is approximately Â£511bn, of which we believe the addressable market is some Â£110bn. We estimate that our current share of this addressable market, including Telereal, is around 3%. In the London office market, the downturn in the occupational market between 2001 to 2003 can be predominantly attributed to employment factors. Similarly, its gradual recovery is being driven primarily by a resumption of employment growth allied to a moderating of the amount of new developments starting on-site. The London office markets have also benefited from some older, surplus office buildings being converted to alternative uses. We expect these trends to continue, resulting in progressive rental growth for the London office market over the medium term, but with the recovery lagging in the City owing to higher current vacancy rates. Retail property markets in the UK benefit from a highly restrictive planning regime which constricts supply, while demand for accommodation from retailers has been driven in recent years by their desire to operate out of more efficient units, generally larger in size and of regular shape. These drivers of demand will continue, although the slowing of consumer expenditure will moderate levels of demand from retailers to a degree. However, so long as disposable incomes remain stable and unemployment is low, we expect the retail property market to be resilient. The occupational demand for property is driven by the health of the economy and an organisation's desire either to grow or contract its operations and we collaborate with our occupiers to ensure that we can assist with their requirements. We have more than 2,000 occupiers and this diverse base protects us since no single occupier provides more than 2.9% of the Group's gross rental income, with the exception of the Government which now accounts for some 9.2%. We have, therefore, examined the Government's efficiency review proposals carefully and since then have worked closely with certain departments on their plans. We believe that the review may create further opportunities for our property outsourcing business. In order to execute our strategy and ensure we achieve our aim of delivering attractive, sustainable returns for shareholders in what can be cyclical markets, we conduct a rigorous business planning process. We have in place a five-year business plan and balanced scorecards both for the Group and individual business units which are reviewed and updated every six months. These reviews measure operating as well as financial performance and allow us to refine our plans against the prevailing operating environment, ensuring an allocation of capital which responds to our view of market conditions and opportunities. Financing strategy and debt restructuring Before commenting in greater detail on the financial results, we report on our financial strategy and debt restructuring since this is relevant to an understanding of the results. Our financial strategy is to maintain an appropriate net debt to equity ratio (gearing) to ensure that good asset-level performance is translated into good returns for shareholders. We manage our gearing according to our perception of market cycles, investment opportunities and so as to maintain an efficient capital structure. Given our view of the prospects for capital growth in our core markets, it is our intention to increase gearing for at least the next year as we invest in our development programme, Land Securities Trillium and continue to seek attractive investment properties to add to our portfolio. Our proposed acquisition of Tops Estates will, for example, add some Â£550m of investment properties and debt to our balance sheet. As well as having the right level of debt in the business we also need to ensure that we have flexible debt that can support our business strategy. We, therefore, put in place a new debt structure for the Group in November 2004 following approval from our bond and debenture holders. As a result of the transaction we issued Â£2.3bn of new bond debt at an average rate of 5.35% and made a Â£77.2m balancing cash payment to bond holders who were unable to hold the new bonds. We implemented this alternative approach to financing the business to improve our operational and financial flexibility and to enhance the position of our noteholders by utilising the credit strength inherent in our investment portfolio. The structure created a security pool ('the secured group') which grants our debt investors security over Â£7.4bn of investment properties at 31 March 2005, representing about 85% of the investment portfolio (excluding joint ventures). About Â£2.5bn of the Group's property assets, mainly comprising Land Securities Trillium properties, our joint venture holdings and certain other assets, are outside the secured group. As a result of this structure we have the flexibility to finance these assets separately without impacting upon the credit rating of the debt issued by the secured group. The new debt structure provides significant future flexibility which ensures our ability to buy and sell assets easily and to maintain our development programme. The secured debt structure has a tiered covenant regime that gives the Group flexibility to run its business, while increasing the protection available to debt holders if gearing rises materially. While loan to value and interest cover in the secured group are less than 65% and more than 1.45 times respectively, we retain substantial operational flexibility. If these limits are exceeded, operational restrictions increase and would act as an incentive to reduce gearing. Our loan to value ratio at the year end in the secured group was 35.4%. In addition to issuing Â£2.3bn of new notes, a further Â£77.2m was paid in cash to debt investors who could not accept the new bonds. The total nominal value of the Group's bond debt has increased by Â£0.5bn as a result of this transaction. This compensated debt investors for the reduction in the rate of interest payable on the bonds, which fell from an average of 8.5% to 5.35% on exchange. The increase in the face value of the Group's debt, together with the additional cash payments to non-eligible holders and the costs of the transaction, has resulted in a significant Â£682.1m exceptional accounting charge incurred during the second half of the year, including Â£42.0m of costs incurred to close out our interest rate hedge portfolio (see Hedging below). A further Â£12.5m of transaction costs will be deferred and amortised over the life of the underlying debt. With the exception of transaction costs and incentive payments to noteholders, the exceptional charge is not a 2004/05 cash outflow and has had no impact on the dividend policy. Most of this exceptional loss is fully allowable for tax. A Â£25m annual initial reduction in interest payments on bond debt and immediate savings in tax more than offset the cost of the transaction and the net present value of the higher amounts payable on the ultimate maturity of the bonds. Although reported as an exceptional loss, the transaction is value creative and earnings enhancing. In addition, the Group now has lower future cost of financing on new debt raised. Table C summarises the accounting implications of the transaction. Bond Exceptional Exceptional debt costs interest Table C Â£m Â£m Â£m Year ended 31/03/04 1,800.0 - - Payments to holders unable to accept new bonds 77.2 Net costs of redeeming the private debentures due in 2008 and 2008/13 - - 1.8 Incentive payments - - 27.5 Net increase in nominal value of debt (being Â£575.5m less payment to ineligible bondholders) 498.3 - 498.3 Transactions costs and commitment fees - 14.8 9.8 FRS4 costs on old debt, now written off - - 10.7 ------------ -------------- -------------- 2,298.3 14.8 625.3 Cost of cancellation of interest rates swaps - - 42.0 ------------ -------------- -------------- Exceptional costs of refinancing - 14.8 667.3 ------------ -------------- -------------- As part of the debt restructuring, we also renewed our bank facilities. At 31 March 2004, the Group had Â£1.55bn of committed bank facilities which would have expired in the normal course in 2005 and 2006. We have replaced these facilities with a new Â£2.0bn committed five-year facility which is available to the secured group. Earnings As a result of the factors explained in Financing Strategy and Debt Restructuring, the Group incurred a loss of Â£155.8m before tax for the year to 31 March 2005 (2004: profit Â£373.1m). Excluding the refinancing charge, profits before tax were Â£526.3m, a 41.1% increase on 2004. Revenue profits, which we use as the measure of the underlying profitability of the Group, were Â£401.1m, 29.7% higher than last year. The principal causes of the changes in profits are detailed in Table D. (Loss) / profit Revenue before tax profit* Table D Â£m Â£m Year ended 31/03/04 373.1 309.2 Debt restructuring exceptional loss (A) (682.1) - Debt restructuring interest saving (B) 10.3 10.3 Profit on disposal of fixed assets (C) 61.3 - DWP outsourcing contract (D) 36.1 36.1 Telereal outsourcing joint venture (E) 32.7 32.7 Bankside1 / Pacific Quay construction profits (F) 11.6 11.6 Reduction in capitalised interest (G) (15.4) (15.4) Other factors (H) 16.6 16.6 ---------- ---------- Year ended 31/03/05 (155.8) 401.1 ====== ====== *Revenue profits are pre-tax profits adjusted to exclude the impact of exceptional items and profits on the disposal of fixed assets. (A) Exceptional costs of the debt restructuring include the increase in the nominal value of the old debt, the costs of closing out the interest rate swap portfolio and associated fees and costs. (B) Reduction in interest charges as a result of the debt restructuring in November 2004. (C) The unusually high level of profits on disposal reflects the asset swap with Slough Estates and the sales of Bowater House and Media Village, White City. (D) The Employment Services extension to the DWP contract was operational from November 2003 and significant start-up losses were incurred in 2003/04. The contract is now profitable, generating a significant turn around in the DWP contract profits, year-on-year. (E) Telereal has had a very good year reducing costs and interest expense while also producing significant profits from the sale of trading properties. (F) Primarily first recognition of profits from the construction contract to build Bankside1 for IPC. (G) Capitalised interest is lower than in 2003/04 because we completed work at 30 Gresham Street, White City Phase II and Empress State Building. (H) Other factors, including rental growth, new outsourcing contracts, etc. Net assets At the year end, adjusted diluted net assets per share were 1460p, up 9.7% on last year. However, this figure has been reduced by 102p due to the exceptional cost of our debt financing. Before exceptional costs, therefore, our underlying adjusted NAV grew by 17.8%, driven by a valuation surplus of Â£871.5m, equivalent to 10.3% of our opening combined portfolio value. The increase in net assets is analysed in Table E. Year ended Year ended 31/03/05 31/03/04 Table E Â£m Â£m Net assets at beginning of year 6,038.5 5,563.1 (Loss)* / profit after tax (35.8) 288.3 Dividends (202.5) (173.2) Valuation increase - Group 842.2 400.7 - Share of joint ventures 29.3 6.2 Other (35.1) (46.6) ----------- ----------- Increase in net assets 598.1 475.4 ----------- ----------- Net assets at end of year 6,636.6 6,038.5 ====== ====== *Includes effect of debt restructuring in the year to 31/03/05 Cash flow and net debt We continue to recycle our capital to maximise returns and, during the year, we received cash totalling Â£734.1m from property disposals (including the disposal of White City), a Â£65.4m distribution from Telereal and Â£146.3m from the Metro Shopping Fund. The Group reinvested Â£640.7m into property acquisitions and development and a further Â£122.5m into its property outsourcing activities. At 31 March 2005, the Group's net debt was Â£2,923.1m (2004: Â£2,435.8m) and the increase in net debt of Â£487.3m during the year is explained in Table F. Table F Year ended Year ended 31/03/05 31/03/04 Â£m Â£m Net cash inflow from operating activities after interest and tax 122.6 193.2 Net capital expenditure (48.4) (48.8) Cash inflow from Telereal 65.4 179.6 Net cash inflow from joint ventures 43.4 - Payment of dividends (175.5) (167.5) Purchase of B shares (8.4) (22.0) Increase in nominal value of debt on refinancing (498.3) - Other items 11.9 19.0 ----------- ----------- (487.3) 153.5 Opening net debt (2,435.8) (2,589.3) -------------- --------------- Closing net debt (2,923.1) (2,435.8) ======= ======== Although we have continued to invest in the business over the year, gearing has only increased slightly. This reflects the sale of two significant assets (Bowater House and Media Village, White City) immediately before the year end and the increase in net assets caused by our strong valuation uplift. Details of the Group's gearing are set out in table G which includes pro-forma information if our notional debt in joint ventures is taken into consideration. The information is pro-forma because lenders to our joint ventures have no recourse to the Group's balance sheet for repayment of the debt. Table G At 31/03/05 At 31/03/04 Gearing - on balance sheet debt 44.0% 40.5% Gearing - as above plus debt in investment property joint ventures 45.4% 40.5% Gearing - as above plus all debt in joint ventures 61.2% 58.2% ----------- ----------- Hedging Land Securities has used interest rate swaps for many years to manage its interest rate exposure. Over time we accumulated a portfolio of long-dated swaps, some extending up to 25 years, which had the effect of fixing the interest rate on substantially all of the Group's debt. As part of our review of the Group's financing arrangements we also revisited the appropriateness of this hedging strategy. We concluded that with property and interest rate cycles typically of four to seven years duration it would usually be unnecessary to hedge beyond this timeframe. We have set a target for the Group to have approximately 80% of planned debt for this period at fixed rates of interest and 20% floating, although we may choose to fix a higher percentage of this debt, depending upon our view of short-term (ie one to two year) interest rates. We re-arranged our hedge portfolio in March 2005, crystallising a Â£42.0m loss which has been treated as an exceptional interest charge. New hedges are being put in place at lower average fixed rates than the previous portfolio. Taxation As a result of this year's exceptional loss there will be no corporation tax payable for the year. Losses of Â£126.0m not relieved at 31 March 2005 are being carried forward for relief in future years. The Group's effective tax rate was a credit of 77% of pre-tax losses compared with a charge of 22.7% last year. The effective tax rate on ordinary activities was lower than the standard rate of 30% primarily as a result of the release of certain prior year provisions no longer required. Effective tax rate Ordinary Exceptional Total Profit / (loss) before tax Â£401.1m (Â£556.9m) (Â£155.8m) Tax (charge) / credit (Â£95.0m) Â£215.0m Â£120.0m Effective tax rate 23.7% (38.6%) (77.0%) ------------ ------------ ------------ International Financial Reporting Standards International Financial Reporting Standards (IFRS) will first apply to the Land Securities Group for the year to 31 March 2006 and will be adopted when we report our interim results for the period to 30 September 2005. We are well advanced with our preparations for IFRS and in late June we will re-present an extract of the results for the year to 31 March 2005 under IFRS, with reconciliations to current GAAP. The main effects of IFRS for Land Securities will be: â€¢ Recognition of investment property revaluation surpluses and deficits in the income statement and the associated deferred tax liability in the tax charge and balance sheet â€¢ A change in the accounting treatment for the debt restructuring, which will result in the reinstatement of the nominal value of our old debt on the balance sheet and the amortisation up to the new, higher redemption amounts of the new debt over the life of the bonds. The amortisation charge will be treated as additional (non-cash) interest in the profit and loss account. The effect will be to under-report the Group's actual liabilities on the face of the balance sheet. The interest charge in the income statement will significantly exceed the actual cash interest that we will pay â€¢ Our interest rate hedge portfolio may not meet the strict requirements for hedge accounting under IFRS39. Therefore we may be required to revalue certain hedges each time we report and account for the cost or profit that would arise were the hedges to be terminated â€¢ The potential that a small number of leases will need to be classified as finance leases and accounted for as such â€¢ Dividends will be recognised effectively when paid, rather than when proposed. We held a presentation on IFRS in February 2005, which is available on our website www.landsecurities.com/investorrelations. The June 2005 presentation will also be available on our website as soon as it has taken place. We will be modifying our usual definitions of adjusted earnings per share and net asset value per share to deal with some of the distortions introduced by IFRS. Pension schemes The Group operates a number of defined benefit pension schemes. These schemes are closed to new members. At 31 March 2005 the schemes had a combined deficit on a FRS17 basis of Â£7.6m (2004: Â£12.0m). During the year the Group made a further special contribution of Â£10.0m to its principal defined benefit pension scheme and is maintaining an enhanced contribution rate to address the small deficit. Investment property business Valuation We were very pleased with performance this year. The combined portfolio, which includes our share of joint ventures, showed a 10.3% increase in value to Â£9.4bn while the wholly-owned investment portfolio showed a 10.7% increase in value to Â£8.8bn. On a like-for-like basis the increase was 9.5%. Rental Rental Income Income Open Open Year Year Market Market to to Value Value Valuation 31/03/05 31/03/04 % 31/03/05 31/03/04 Surplus Â£m Â£m Change Â£m Â£m % Retail Shops & shopping centres 91.9 90.9 1.1 1,478.9 1,343.1 9.9 Retail warehouses 61.2 58.1 5.3 1,361.9 1,154.4 16.6 London retail 39.9 38.8 2.8 676.0 625.5 8.0 London offices 169.0 175.7 (3.8) 2,311.5 2,189.1 5.8 Industrial 4.6 4.9 (6.1) 83.0 72.4 13.5 Other 8.6 8.7 (1.1) 126.5 115.6 8.9 ---------- ---------- ---------- ---------- ---------- ---------- Like-for-like investment portfolio (1) 375.2 377.1 (0.5) 6,037.8 5,500.1 9.5 Completed developments 34.8 19.5 - 974.3 777.2 24.6 Purchases 34.1 8.6 - 904.2 221.7 4.3 Sales, restructured interests and trading properties 34.3 92.5 - - 880.6 - Development (2) 14.2 16.8 - 857.2 527.1 12.3 ---------- ---------- ---------- ---------- ---------- ---------- Investment portfolio 492.6 514.5 - 8,773.5 7,906.7 10.7 Joint ventures 25.9 0.6 - 615.3 243.5 5.0 ---------- ---------- ---------- ---------- ---------- ---------- Combined portfolio 518.5 515.1 0.7 9,388.8 8,150.2 10.3 ====== ====== ====== ====== ====== ====== (1) Properties that have been in the investment portfolio for the whole of the current and previous financial year (2) Development programme including Kent Thameside. The development programme comprises projects which are completed but less than 95% let, developments on site, 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). The like-for-like investment portfolio showed a 9.5% increase in value over the period with the strongest growth from retail warehousing at 16.6%, shops and shopping centres (including London retail) at 9.3% and offices at 5.8%. This uplift takes account of the negative effect of the abolition of disadvantaged area Stamp Duty relief of Â£60.3m in the like-for-like portfolio following the Budget changes last year. This increase in value was achieved as a result of both rental growth in many sectors combined with yield compression. Rental values for retail warehousing have grown at 6.7%, shops and shopping centres at 2.2% and London offices at 2.6% producing a total rental growth for the like-to-like portfolio of 3.3%. The average equivalent yield for the whole like-for-like portfolio is now 6.0%. In terms of the net reversionary potential of our like-for-like portfolio, the over-rented element of our London offices has reduced as rental growth begins to feed through, helping to increase the overall net reversionary potential for the like-for-like portfolio to 2.9%. Void levels across the like-for-like portfolio were 3.0% at the year end, compared with 1.9% at the start of the year. The mean weighted unexpired lease term for the like-for-like portfolio is 9.0 years (2004: 10.4 years) assuming all lease breaks occur. Investment and development portfolio valuation movements Investment Development Total Â£m Open market value at 31 March 2004 7,172.6 734.1 7,906.7 Purchases 392.7 - 392.7 Sales (376.5) (3.3) (379.8) Net impact of exchange of properties with Slough (12.2) (92.4) (104.6) Transfers into development (151.0) 151.0 - Transfers out of development 485.4 (485.4) - Transfers to partnerships and joint ventures (102.6) - (102.6) Transfer to stock and surrender premiums received (50.7) - (50.7) Capital expenditure 37.8 205.4 243.2 Valuation increase 622.2 220.0 842.2 Capitalised interest - 17.5 17.5 Other 8.2 0.7 8.9 ------------ ------------ ------------ Investment portfolio at 31 March 2005 8,025.9 747.6 8,773.5 Our share of joint ventures 615.3 615.3 ------------ ------------ ------------ Combined portfolio as at 31 March 2005 (pro-forma) 8,641.2 747.6 9,388.8 ======= ======= ======= Investment We had an active year, which included the property swap with Slough Estates, where we exchanged Â£345.0m of industrial property for four retail assets valued at Â£363.8m. Including these properties, during the year we sold a total of Â£763.1m of property out of the investment portfolio (excluding joint ventures and net of sale costs) generating FRS3 profits of Â£82.4m (13.4% above book value) while buying Â£786.1m of investment properties (including assets bought into joint ventures). The average yield on the properties sold was 5.2% and the average initial yield on the assets acquired was 5.9%. Excluding Slough the purchase activity was principally accounted for by nine London office investments, which were acquired for an aggregate of Â£340.2m (including acquisition costs) to show an average yield of 5.9% on an average passing rent of only Â£282.50 per sq m. Development Schemes in the development programme produced an overall valuation surplus of Â£220m in 2004/05, a 21.7% increase over the course of the year with a strong contribution overall from our London office development projects. Six schemes were transferred from the development programme, the significant ones being Empress State, SW6 and 30 Gresham Street, EC2. In addition a further seven schemes were sold out of the development programme. The six schemes transferred out of the development programme into the like-for-like portfolio generated rents of Â£9.5m in the current year and would contribute Â£23.3m in a full year. Schemes transferred out of the development programme in the year to 31 March 2004 contributed Â£25.7m during the year to 31 March 2005. We spent Â£205.4m, excluding capitalised interest, on schemes in the development programme, with most of the expenditure arising from the continuing development at Cardinal Place, London SW1. Capitalised interest was only Â£20.2m during the period (2004: Â£35.6m) because the significant developments on site in the year to 31 March 2004, including 30 Gresham Street, EC2, White City Phase II and the Bullring, reached practical completion during the previous financial year. We estimate that we will incur cash costs to complete the development programme (excluding interest) of some Â£591m. In addition, capital expenditure on proposed developments could total Â£826m (excluding Kent Thameside) if a decision is made to proceed. These proposed schemes, which are held as part of the investment portfolio, have a current carrying value of Â£220m. Retail Land Securities' retail business is responsible for investment, management and development of the Group's shopping centres and retail warehouse parks, including the assets held in the Group's three retail joint ventures, the Scottish Retail Property Limited Partnership, the Metro Shopping Fund and the Buchanan Galleries Partnership. The London portfolio business takes day-to-day responsibility for the performance of the Central London retail properties. Market commentary Many retailers continue to expand their operations in spite of a competitive retail marketplace, which has been characterised by price deflation and slowing consumer expenditure. However, achieving this expansion has proved difficult for them since there is little new supply coming through from development and demand remains strong for prime locations and well-configured shops. The strength of demand is evidenced by the good progress we have made in letting our development programme, with 43,400 sq m of retail space let during the year. Against this background, rental value growth has slowed but we have been reassured by the reasonably strong performance of our own portfolio, with rental value increases on our shopping centres and particularly on our retail warehouse portfolio, reflecting the ever increasing popularity of out-of-town shops with consumers. The investment market has seen a record year for volume of transactions with demand remaining strong and broadly based in terms of type of investor. As a result yields have moved in steadily over the year which has further boosted capital growth. Retail portfolio valuation Total retail Total retail Shopping Shopping Retail Retail centres centres warehouses warehouses 31/3/05 31/03/04 31/03/05 31/03/04 31/03/05 31/03/04 Combined portfolio Valuation Â£4,481.2m Â£3,668.5m Â£2,553.9m Â£1,834.5m Â£1,481.7m Â£1,292.8m ---------------- --------------- --------------- --------------- --------------- --------------- Like-for-like investment portfolio valuation Â£2,840.8m Â£2,497.5 Â£1,160.5m Â£1,055.9m Â£1,361.9m Â£1,154.4m Rental income Â£153.1m Â£149.0m Â£73.2m Â£72.2m Â£61.2m Â£58.1m Gross ERV (a) Â£181.7m Â£169.3m Â£82.1m Â£78.7m Â£77.0m Â£69.1m Voids by ERV 2.3% 1.8% 2.3% 1.0% 2.5% 2.3% Running yield 5.3% 5.7% 5.9% 6.1% 4.8% 5.2% --------------- --------------- --------------- --------------- --------------- --------------- Combined portfolio extract from combined portfolio analysis (a) Annual estimated rental value On a like-for-like basis the retail portfolio performed well with a 13.0% valuation surplus in the year, voids of 2.3% and net reversionary potential of 11.8% Investment Our retail investment strategy is to acquire assets which provide opportunities to benefit from active management, thereby creating growth in rental income and asset value. We will also seek to create new assets through development. In light of this strategy we have been refocusing its retail portfolio away from high street shops and has been reinvesting into shopping centres and parks. Given the competitive nature of the investment market we have acquired investment property in off-market transactions, examples of which are the exchange of properties with Slough Estates and the Metro Shopping Fund. Since the year end the recommended offer for Tops Estates PLC could also add a further seven centres to our portfolio. In an active year we concluded Â£474.2m of acquisitions including the Slough Estates retail portfolio and the Metro Shopping Fund. We also acquired Princes Square and Southgate in East Kilbride adding to the Scottish Retail Property Limited Partnership with The British Land Company PLC. We took advantage of the strong investment market and completed Â£260.6m of sales profitably, including our share of Martineau Place, Birmingham, Upper Precinct, Coventry, Twinches Lane Retail Park, Slough, our retail and office holdings in Reading, and a portfolio of eight high street shops in Reading. In September 2002 we entered into a conditional agreement to purchase a 32,600 sq m shopping centre development in Maidstone. The centre is now 89% let and will be fully open in June. This has generated a significant valuation surplus over the year. The Metro Shopping Fund As we reported at the half year we have entered into a limited partnership with the private property company, Delancey. The 50/50 partnership owns over 39,000 sq m of retail space initially valued in total at Â£283.3m. The properties included in the partnership are Delancey's Stopshop @ Clapham Junction, SW11, N1 Islington and Victoria Place SW1, together with our holdings in Notting Hill Gate, W11. We remain confident about growth prospects for retail properties in the London suburbs and are seeking to acquire further properties for this partnership. Exchange of properties with Slough Estates In December 2005 we acquired Buchanan Galleries, Glasgow (50% interest); the Lewisham Centre in South London; the Howard Centre in Welwyn and the Bishop Centre in Taplow from Slough Estates. The portfolio totals some 91,300 sq m of retail space, (based on 50% share of Buchanan Galleries) and the rent roll was Â£20.4m at 31 March 2005. We are very pleased with the progress being made to integrate these within Land Securities' portfolio and we have initiated work on reviewing development options on all four properties. Recommended offer for Tops Estates PLC Since the year end we have announced a recommended cash offer for Tops Estates PLC. Tops Estates is a specialist in town and city shopping centre company and its portfolio comprises seven shopping centres. In a very active and competitive investment market we see this as an opportunity to strengthen further our position in shopping centre investment with assets offering opportunities for active management and development. Review of activity - shopping centres and shops Asset management Rental growth across the shopping centre and shop portfolio is created through a high volume of smaller transactions which will include rent reviews, new lettings and lease renewals as well as reconfiguration of shop units and small extensions. During the year we entered into an agreement with Sainsbury's at White Rose to create an additional four double-height shop units, totalling some 7,000 sq m of space that we negotiated to take back from SavaCentre, which is being reformatted as a new look Sainsbury's. We also completed new lettings at Gunwharf Quays to Karen Millen, Next, Animal, Boots, and LK Bennett, which contributed to an increase in retail turnover of 18.8% over the year. We achieved new lettings creating rental growth at Bullring and White Rose, our two largest properties and also at Stratford, the best performing property in the shopping centre portfolio. Development Our development activities provide us with opportunities to renew our investment portfolio with assets which would be difficult to obtain in a strong investment market. In Canterbury we are on target to open the final phase of the Whitefriars scheme in July. In total, the scheme comprises some 37,160 sq m of retail and 3,260 sq m of residential accommodation. We have now let all but two of the retail units in the new scheme to retailers including Tesco, Zara, H&M and River Island. We understand from the retailers already open that trading is above their initial expectations. In January we started the 37,360 sq m redevelopment of Princesshay, Exeter. We have completed the demolition of properties in Bedford Street, started demolition of the main site and completed the initial archaeological investigations. The scheme is to be anchored by a new Debenhams department store and is now 35% pre-let or in solicitors' hands to retailers including Next, Virgin Retail and Top Shop. We expect to open the scheme in Autumn 2007. At Cardiff, where we are planning the development of St Davids 2, a 85,000 sq m scheme, in partnership with Capital Shopping Centres, we agreed Heads of Terms with John Lewis for the department store, its first in Wales. We continue with the plans for Bristol, a 140,000 sq m mixed-used scheme incorporating 83,610 sq m of retail which we are developing in a 50:50 partnership with Hammerson plc. We have exchanged contracts on the anchor store letting to House of Fraser in Bristol, and we have agreed further lettings for major space units and for the cinema. On a smaller scale we are progressing the 5,200 sq m Bradwells Court scheme in Cambridge which is now included in our development pipeline. We achieved planning permission for this nine-unit scheme in October 2004 and expect to start on site in early 2006. Review of activity - retail warehouses We continue to respond to new demand by upgrading and reconfiguring our parks to incorporate more high street retailers where possible and during the year we completed or refurbished some 42,000 sq m of accommodation. This activity was a key driver of the high level of rental value growth experience on our portfolio over the year. Key achievements were: â€¢ The acquisition, through the transaction with Slough Estates, of the 9,600 sq m Bishop Centre, Taplow, a garden centre which has evolved into out-of-town retail and which we believe offers considerable development potential â€¢ The sale of Slough Retail Park for Â£75m, where we had achieved a 46% growth in rents to Â£385.0 per sq m over a five year period â€¢ The reconfiguration of some 15,150 sq m and upgrading our parks at Swansea, Manchester and West Thurrock and completing new lettings to Currys, Marks and Spencer, Blacks Outdoor, Furniture Village and others â€¢ The completion of the 1,410 sq m Tesco extension at Bexhill where we have a further 2,720 sq m under construction which is due for completion in June 2005. This space is fully let to Wickes and KFC â€¢ The completion of 5,630 sq m of additional space at Livingston with new tenants including M&S Simply Food and Toys R Us. London portfolio Market commentary We continue to see an overall improvement in the Central London office market with occupier take-up increasing and a reduction in vacancy levels, from 10.1% in September 2004 to 9.3% in March 2005 (source: Jones Lang Lasalle). We believe that this positive trend will continue aided by a limited supply of new development to drive rental growth. The overall improvement masks a varying picture across the various sub-markets. With constrained supply, we continue to be positive about the prospects for the West End market but are yet to see any significant reduction in availability in the City where we maintain our view that there will not be a return to rental growth until 2006. However, as we have demonstrated through our own progress with lettings, large-scale requirements for pre-lettings are absorbing development stock. London is one of the most affluent cities in Europe and is one of the few where population growth is forecast. Our substantial London retail holdings are in some of the stronger locations in London, including Oxford Street, Tottenham Court Road, Cheapside and Piccadilly Circus and these characteristics bode well for retail rental growth. London portfolio valuation London London London London London London portfolio portfolio offices (b) offices (b) Shops (c) shops (c) 31/03/05 31/03/04 31/03/05 31/03/04 31/03/05 31/03/04 Combined portfolio Â£4,457.8m Â£3,791.4m Â£3,597.7m Â£2,985.6m Â£860.1m Â£805.8m valuation -------------- -------------- -------------- -------------- -------------- -------------- Like-for-like investment portfolio valuation Â£2,987.5m Â£2,814.6m Â£2,311.5 Â£2,189.1m Â£676.0m Â£625.5m Rental income Â£208.9m Â£214.5m Â£169.0m Â£175.7m Â£39.9m Â£38.8m Gross ERV (a) Â£208.0m Â£203.3m Â£164.7m Â£160.1m Â£43.3m Â£43.2m Voids by ERV 3.3% 2.0% 4.1% 2.6% 0.2% - Running yield 6.6% 7.3% 6.9% 7.6% 5.8% 6.2% Extract from combined portfolio analysis (a) Annual estimated rental value (b) The combined London offices portfolio includes Â£12.5m (2004: Nil) of value in relation to assets held in the Metro Shopping Fund (c) The combined London shops portfolio includes Â£39.3m (2004: Nil) of value in relation to assets held in the Metro Shopping Fund Review of activity This year we made considerable progress across the London office portfolio, positioning both our investment portfolio and the development pipeline to benefit from improving London markets. We completed in total some Â£500m of sales and acquisitions and continued to progress our plans for our 90,000 sq m development pipeline. Investment Our strategy has been to refocus the London office portfolio to ensure that we benefit fully from market recovery and during the year we acquired Â£340.2m of property. The main characteristics of the majority of these assets are lower than average passing rents and medium term income streams with development and / or alternative use potential on lease expiry. The acquisitions made were: â€¢ Greater London House, NW1. Acquired for Â£114.1m on a net initial yield of 6.75%, the property is a 30,907 sq m freehold office building providing gross rental income of approximately Â£7.8m per annum. It is let to tenants including Young & Rubicam Holdings and Bertelsman Books and Magazine. The building is currently let at low rental levels, averaging approximately Â£250 per sq m â€¢ Hill House, EC4 which was acquired for Â£80.8m, representing a net initial yield of about 6.5%. Developed in 1979, the 15,780 sq m freehold building was substantially refurbished in 2002 and is entirely let to Deloitte & Touche LLP ('Deloitte') until 2034. The property adjoins our development scheme at New Street Square, EC4 and forms part of Deloitte's UK headquarters â€¢ City Forum, City Road, EC1 was purchased for Â£46.4m. The 12,230 sq m scheme, comprising 13 buildings, is situated on the edge of the City core and offers well-secured income of Â£2.9m per annum, representing an initial yield of 6.2%. Occupiers include Goldman Sachs, Deloitte and NatWest â€¢ Red Lion Court, SE1, acquired for Â£67.4m. The 11,920 sq m office building is let to Lloyds TSB and currently produces rent of Â£4.3m per annum, providing an initial yield of 6.4%. After the year end we acquired Times Square, London EC4, a 35,117 sq m office building developed in 2003. We exchanged contracts for our 44.5% stake for Â£95m reflecting a net reversionary yield of around 6%. The property is let to Mellon Bank and Dechert, with 8,574 sq m vacant. Our joint venture partner is Sableknight. In addition we sold Â£161.2m of property including Bowater House, SW1, 2/4 Temple Avenue EC4 and 89 Southwark Street SE1 which generated FRS3 profits of Â£29.7m. We were particularly pleased to complete the sale of Bowater House for Â£145.8m (net of sales costs) to a residential developer in advance of receiving a planning consent for a change of use to residential and to sell 30 Gresham Street for Â£274m just after the year end. Development and letting We are making very good progress with our development programme as demonstrated by the completion of 101,500 sq m of new leases during the year. These included: â€¢ The first office letting at Cardinal Place, a mixed-use development in Victoria, where we let 5,570 sq m at 16 Palace Street, London SW1 to 3i Group PLC. This was agreed just two months after the building was finished and leaves 3,880 sq m of accommodation in the 16 Palace Street building to be let. The final two buildings, fronting Victoria Street totalling 41,680 sq m of office accommodation, are due for completion in the autumn. We have also pre-let over 80% of the retail space in the scheme to 12 leading retailers, including Marks & Spencer â€¢ The letting of 30 Gresham Street to Dresdner Kleinwort Wasserstein (' DrKW') and the subsequent sale of this property after the year end. The transaction included a surrender to us of DrKW's current portfolio of office space in and around 20 Fenchurch Street, London EC3 and a transfer to us of DrKW's part freehold interest â€¢ The forward sale of Bankside1, SE1 to IPC Magazine Group Ltd (IPC) for the use of Time Warner's London-based magazine and book publishing operations, full details of which are contained in our Interim Report â€¢ The 43,300 sq m letting of Empress State Building, SW6 to the Metropolitan Police Service ('MPS'). This transaction is a Landflex package which includes a conventional 15-year lease with an annual indexation of rents, an agreement with Landflex to manage the sub-letting of part of the building and provision of property services until the MPS is ready to occupy the whole building in five years' time. There is a further agreement to cover the repairs, maintenance and life-cycle capital requirements of the building. As part of this transaction we have accepted a lease surrender on Wellington House, SW1 for which we have been compensated â€¢ In April 2005 we exchanged contracts with Deloitte for the letting of Building B at the New Street Square development on New Fetter Lane, EC4. Deloitte will occupy 19,500 sq m of offices over ten floors with an option over a further 3,930 sq m in Building C. The offices will be ready for fit-out in the Summer of 2007. As part of the transaction we will assume responsibility for Deloitte's leases at Arundel Great Court, approximately 23,500 sq m, the anticipated costs of which have been reflected in the overall transaction terms. We continue to make excellent progress with our development programme and with the forward planning of our development pipeline. We invested Â£138m on schemes in progress and have a further Â£438m to spend to complete the current programme. â€¢ We achieved a 'minded-to-grant' planning consent for our revised scheme at New Street Square (formerly New Fetter Lane), EC4 for a scheme of four main buildings comprising a total of 62,340 sq m of office accommodation and 2,980 sq m of retail space â€¢ We secured a planning consent for our property at 120 Cheapside, EC2, which we acquired last year. We have now committed to start on the scheme in June 2005. We expect that this scheme, which comprises 15,000 sq m of office and 1,500 sq m of retail space, will complete in June 2007 â€¢ We have committed to refurbish 7,690 sq m of offices at 40 Eastbourne Terrace, W2 in Paddington for letting on a Landflex basis, in response to the positive reaction to date for the Landflex product â€¢ We announced in April 2005 that we would be progressing the final two buildings on our Bankside123 scheme speculatively. Buildings 2 and 3 will provide approximately 15,690 sq m and 19,860 sq m of high quality office space, and 830 sq m and 2,340 sq m of retail respectively. We are progressing this scheme since we believe we can benefit from the growing list of corporate and professional service occupiers looking to the South Bank for well-priced, good quality accommodation. Our London portfolio is well balanced with investment properties, active developments and a strong development pipeline. A number of our future schemes have progressed well through the pre-planning process. This year, planning applications will be submitted on One New Change, EC4; a 51,340 sq m mixed used retail and office scheme, Bankside 4, SE1; a residential scheme and 20 Fenchurch Street, EC3, an office and retail scheme. Any decision to proceed with these schemes will be made in the context of our overall exposure to development activity. Property outsourcing Market commentary We are seeing good interest and activity in both the corporate and public sector markets. Corporate sector Following the commencement of our property outsourcing agreements with Norwich Union and Barclays during the year, interest in corporate property outsourcing remains strong, particularly within the financial services sector. Continuing occupier focus on balance sheet restructuring, business rationalisation, cost reduction and risk mitigation resonates well with our strengths in realising capital, providing flexible occupation, managing leasehold liabilities and introducing supply chain efficiencies. We have several opportunities at early stages of development. Public sector There is also good potential for further public sector property outsourcing. The Government's Efficiency Review, informed by the Lyons and Gershon reports, involving relocation, estate downsizing and a Â£30 billion asset disposal programme, can be expected to generate further property outsourcing opportunities in the medium term. We have made our own submission to Government specifically in terms of how property partnerships can offer an effective implementation model for departments in their response to the Efficiency Review. In parallel with this, we are pursuing a number of specific property outsourcing projects with public sector clients including the Ministry of Defence and the Northern Ireland Estate. We are also exploring other public sector initiatives where there are implicit property issues and opportunities, including Building Schools for the Future. This is a 15-year Â£30bn government programme to upgrade every secondary school in the UK, which was launched at the end of 2004. The strong endorsement of the value for money and customer service offered by Land Securities Trillium, given by the National Audit Office report on our expanded contract with DWP, issued in January 2005, emphasises our successful relationship with Government and provides a firm foundation for further business in this sector. Financial results Land Securities Trillium contributed 33% of the Group's operating profits and accounts for 57% of gross property income. Segment profit was Â£259.8m, representing a 66% increase over last year. Full year Full year 31/03/05 31/03/04 Â£m Â£m Operating profit DWP* 83.2 51.1 BBC 20.6 6.6 Norwich Union 6.1 - Barclays - - Bid costs (2.6) (6.2) Central costs (7.8) (7.3) -------------- -------------- 99.5 44.2 Profit on sale of fixed asset properties 30.5 (0.1) -------------- -------------- Segment profit 130.0 44.1 Share of Telereal segment profit 129.8 112.5 -------------- -------------- 259.8 156.6 ======= ======= -------------- -------------- Share of Telereal profit before tax 63.4 30.3 ======= ======= * Aggregate of PRIME and Employment Services including amortisation of Goodwill. In the year to 31 March 2004 profits for the DWP were depressed by a loss of Â£16.1m on the Employment Services element of the contract resulting from mobilisation costs. Review of activity We have seen extensive activity across our three existing contracts and added three new clients reflecting our ability to provide flexible outsourcing solutions to meet specific customer challenges. This applies equally for existing and new clients. Department for Work and Pensions As we have now merged the two estates, we have this year combined the reporting on the contract we have with the Department for Work and Pensions (DWP) which comprises the original PRIME contract and the Employment Services extension signed in December 2003. In total, this produced Â£603.1m income and made a Â£83.2m contribution to operating profits. However, as previously indicated, we expect this contract to produce lower operating profits next year as our client makes use of the significant vacation allowances priced into the transaction. Since merging the estates, this is the first full year of delivery of day-to-day real estate and facilities management services to approximately 140,000 DWP occupants in some 1,700 buildings and customer feedback has been very positive. We continue to work with the DWP to formulate and implement its estate strategy in light of the requirement to reduce headcount by 30,000 by March 2008. DWP has indicated that it intends to vacate 78,000 sq m of accommodation over the next 12-18 months, all of which is priced into our contract. At the same time the restructuring has also generated a requirement for new space in certain locations and we have received requests for a total of 25,000 sq m of additional space. Sales of surplus properties generated profits of Â£7.0m which we shared with our customer. We continue to support the DWP in the management of its capital works programme including the rollout of the Jobcentre Plus organisation. Over the year our Capital Projects team has handled some Â£81m of work for the DWP. BBC During the year the BBC contract made a Â£20.6m contribution to operating profit (2004: Â£6.6m) provided primarily by the property income generated by Media Village, White City, following successful completion of that development in late 2003. In March, 2005, we realised sales process of Â£321.5m from the sale of Media Village, which generated a profit of Â£23m and the return of all our capital invested in the contract. As we announced at the time of this transaction, we undertook to review the future basis of the contract with the BBC in the knowledge that it would now consist of development management services, already covered under separate contracts, and the provision of facilities management services only. This joint review resulted in the announcement on 12 May 2005 that the BBC would be re-tendering the facilities management element of our contract; we decided not to participate in the re-tender process because we do not offer a facilities management service only. This decision will not have a material impact on the financial performance of Land Securities Trillium and we will continue to manage the outsourcing contract until at least March 2006. Over the past three years, we are pleased to have achieved cost savings for the BBC of Â£30m and a significant increase in customer satisfaction. On the development management side, we continue with the construction of the new 81,390 sq m Broadcasting House complex in London, which is being carried out by our London development project team, with phased construction completion occurring between Spring 2005 and 2008. On handover the BBC will complete its technical fit-out and aims to have all moves complete by the end of the decade. In July 2004 we also agreed terms and commenced work in a similar capacity on the construction of the BBC's new 33,370 sq m broadcasting facility at Pacific Quay in Glasgow, which is scheduled for completion in 2006. BT Telereal, the joint venture vehicle that has the property outsourcing contract with BT, continued to make a strong contribution, providing pre-tax profits (profits after interest on joint venture debt) of Â£63.4m (2004: Â£30.3m). Profits for the year from Telereal benefited from a high level of surplus property sales which accounted for Â£30 million of that figure. These sales also benefited BT through profit sharing arrangements. Profits are not expected to continue at the same level in 2005/06 as 90% by floor area of the surplus freehold properties acquired from BT in 2001, or vacated since then, have now been sold. We have agreed with BT to restructure the corporate services element of the contract in order to ensure it is best suited to BT's current requirements. This restructuring was agreed in March 2005 with BT having termination rights in 2012 and seven yearly thereafter, rather than at will as previously existed. The asset ownership elements of the contract are unaffected and the change is expected to be economically neutral to us. Norwich Union In June 2004 we were delighted to agree a corporate outsourcing contract with Norwich Union to manage and improve its core occupational estate. The range of services provided includes planned and reactive maintenance, life cycle replacement of building components and the undertaking of capital projects work. The 25-year transaction also comprises the transfer of 115,000 sq m of office accommodation and the commitment by Land Securities Trillium to invest Â£92m into the phased refurbishment of Norwich Union's 30,890 sq m Norwich headquarters. The first phase of works is due to complete in June 2005. The estate transferred to Land Securities Trillium comprises approximately 25% of Norwich Union's operational space by floor area. As part of this transaction an innovative Â£100m onward sale was agreed involving seven freehold assets. Through this, Norwich Union realised sale proceeds in excess of its expectations while, under the occupational leases put in place, Land Securities Trillium has the freedom to carry out all of its outsourcing obligations. We will continue to manage and maintain these buildings on behalf of Norwich Union which will occupy the properties for a lease term, in most cases, of 25 years. Barclays In December 2004 we entered into an innovative 20-year property outsourcing deal with Barclays Bank, combining the sale and leaseback of a regional headquarters building with the management of a portfolio of surplus leasehold properties. The transaction involved 14 properties totalling 31,540 sq m and has two elements: â€¢ Barclays has sold Westwood Business Park, Coventry (three buildings totalling 11,300 sq m) to us on a 20-year leaseback arrangement â€¢ The transfer of responsibility for 13 short leaseholds surplus to Barclays' requirements and largely vacant as a result of its property rationalisation in London and the south of England. Barclays will make a capped payment to reflect the letting risk, as we assume responsibility for all future benefits and liabilities relating to the transferred interests. The contract broke even in the fourth quarter and is expected to move into profit during the next financial year. Driver and Vehicle Licensing Agency ('DVLA') In March 2005, we signed the property outsourcing contract with DVLA. This Government contract is expected to break even in the first 12 months and make profits in 2007. Under the terms of the transaction, DVLA has outsourced a major refurbishment project, life-cycle capital expenditure, estates management and facilities management across its entire UK estate to us for 20 years. There is no transfer of freehold property to us but we receive payment for the provision of services and refurbishment works via a performance-related index linked annual unitary charge. The estate comprises 58 properties, totalling 94,133 sq m, of which 14% by area involves the transfer of leasehold liabilities. The 24,471sq m refurbishment of part of DVLA's headquarters site at Morriston, Swansea will result in a Â£30 million investment by us over the next three years. Urban community development Although we have focused the Group's business on three core markets, we will continue to invest in activities which we believe will, over time, produce above average returns for shareholders. One of these areas is urban community development, where we can benefit from the Group's balance sheet strength and development skills to undertake projects which have long timeframes and which are of substantial scale. The largest of our projects is Kent Thameside, but we also have smaller scale holdings in Cambridge and last summer we made an investment in land at Stansted. Kent Thameside Our activities in Kent Thameside are currently focused on masterplanning and securing appropriate planning consents. At Eastern Quarry and Swanscombe Peninsula West, our two planning applications for major residential led mixed-use developments remain undetermined primarily as a result of issues raised by the Highways Agency in relation to the trunk road network. This issue is not unique to Land Securities and is currently affecting a number of the Government's priority growth areas. Significant technical supporting information has been supplied to the authorities to enable them to formulate their decision, although we do not expect to receive a planning determination until later this year. Within our Ebbsfleet landholding, where we have a 48.5% interest, outline consent already exists, and we are moving towards the first phase of residential development. Countryside Properties has been selected as our preferred development partner for the Springhead Quarter and a legal contract is currently being finalised with them. Following the recent approval of a number of project-wide strategies required by the outline consent, Countryside is now able to work towards the submission of a detailed application later this year for a scheme of over 300 dwellings. This joint venture arrangement with Countryside will follow on from completion of our first phase of work with them at Waterstone Park where 200 dwellings have been completed and sold. Work on the construction of the second phase of 450 homes has started following the grant of detailed planning permission in November for the next release of 88 private and 30 affordable dwellings. We have had some recent notable successes at Crossways that reinforces its pre-eminence as the largest mixed use business park in the South East quadrant of the M25. Following exchange of contracts in December, work is progressing on the construction of a new 2,370 sq m HQ office building for Moat Housing Group for their freehold owner occupation at the end of the calendar year. The sale of Building 5065, 6,300 sq m of offices, to Capital & Provident for Â£17m was completed in March 2005. Stansted In July we acquired 650 hectares (1,625 acres) of land adjacent to Stansted airport for approximately Â£15.3m. In line with our strategy of investing in long-term opportunities to create higher returns, we believe that this acquisition may provide future opportunities for achieving change in use and other planning consents in the medium term, although the land is not identified for development in current planning policy statements. South-east industrial We completed our property swap with Slough Estates and continue to own Â£72m of industrial property in the south-east. These properties, which produce Â£4.0m of income per annum, were retained since they offer medium term potential for development for alternative uses. Business Analysis Further non-statutory information, relating to the Group's Investment Portfolio and Property Outsourcing Businesses, is available on the Group's website at www.landsecurities.com/prelims2005. This includes more detailed information in respect to the Combined and Investment Portfolio valuations and further detail on Land Securities Trillium's existing contracts. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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