Final Results - Part 1
Land Securities Group Plc
17 May 2006
17 May 2006
Land Securities Group PLC ('Land Securities' / 'Group')
Preliminary results for the year ended 31 March 2006
Highlights
• Basic net assets per share increased 23.5% to 1597p (2005: 1293p);
adjusted diluted net asset value per share up 28.5% to 1912p (2005: 1488p)
• The combined portfolio valuation increased by 15.3% over the reporting
period to £12.9bn (2005: £9.4bn) with valuation uplift from retail warehouses of
14.1%, shopping centres of 12.0% and London offices of 19.7%
• Pre-tax profit rose 80.4% to £2,359.2m (2005: £1,307.5m), including
revaluation surpluses and an exceptional profit of £293.0m on the sale of the
Group's share in Telereal
• Revenue profit increased by 8.2% to £391.3m (2005: £361.8m)
• Basic earnings per share were 357.95p, an increase of 57.5% (2005:
227.32p); adjusted diluted earnings per share up 5.4% to 70.47p (2005: 66.87p)
• Total dividend for the year of 46.70p, an increase of 8.0% compared to
last year (2005: 43.25p); lower final dividend of 28.55p (2005: 32.85p) more
than offset by the increased interim dividend, reflecting the board's decision
in 2005 to pay a greater proportion of the dividend at the interim stage
• Major business development achievements included the successful
acquisition of Tops Estates PLC and the LxB portfolio.
• Good progress within the Group's retail portfolio, which now comprises
30 shopping centres, 30 retail parks and 11 supermarkets, and a retail led
development pipeline totalling 364,000 sq m. Whitefriars, our major new retail
scheme in Canterbury, was completed during the year and has won several notable
industry awards
• Strong progress in London offices with a 19.7% increase in value, the
acquisition of 15 properties at a total cost of £643.4m and notable advances in
the 301,000 sq m development pipeline. We reached practical completion at
Cardinal Place our retail and office development, where we are making good
progress with letting. We started on site at New Street Square and One Wood
Street, which we let just after the year end
• Significant strategic changes during the year for Land Securities
Trillium, with the sale of Telereal. Capital released to be invested into
further development of its offer, including new sectors such as Defence and
Education.
Commenting on the results, Peter Birch, Chairman of Land Securities, said:
'We have made considerable progress on all fronts this year and, in particular
have positioned our London Portfolio business to benefit from the strong growth
that the London office market is enjoying and which, we believe, it will
continue to enjoy. Our Retail business now has a scale and quality of assets
positioning it to generate ongoing income growth in a more challenging retail
environment, and Land Securities Trillium is now pursuing a wider range of new
business opportunities than at any time in the past.
'We now also have the prospect of a thriving REIT sector in the UK and we are
enthusiastic about the opportunities this will present to us. Our preliminary
assessment is that the regulations being introduced with REITs will not
adversely inhibit flexibility and we believe that our existing strategy and mix
of business can be accommodated within them. While we will not announce any
final decision on REITs in advance of legislation, our view at present is that
we are ideally positioned to benefit from this status. I would hope to announce
our intentions and the implications for shareholders in the coming months and,
subject to any unforeseen obstacles, am of the view that it will be in
shareholders' interests to convert as soon as is practical after 1 January 2007.
'Land Securities has enjoyed a year of strong growth helped by continuing low
interest rates. The outlook is positive for the business with a strong
development pipeline, a high quality investment portfolio and an outsourcing
business which has growth potential. I would like to congratulate everyone who
has made this possible, most especially our people.'
For further information, please contact:
Land Securities Financial Dynamics
Francis Salway/Emma Denne Stephanie Highett/Dido Laurimore
Tel: 020 7413 9000 Tel: 020 7831 3113
Preliminary results for the year ended 31 March 2006
Financial Highlights
31/03/06 31/03/05 % change
£m £m
Gross property income (including joint ventures)
Retail portfolio 371.8 298.1 24.7%
London portfolio 514.0 358.1 43.5%
Other 88.8 165.2 -46.2%
Property outsourcing 1,013.6 1,054.8 -3.9%
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Total 1,988.2 1,876.2 6.0%
Operating profit 2,443.4 1,404.8 73.9%
Pre-tax profit 2,359.2 1,307.5 80.4%
Revenue profit (pre-tax) 391.3 361.8 8.2%
pence pence
Earnings per share 357.95 227.32 57.5%
Adjusted diluted earnings per share 70.47 66.87 5.4%
Dividends per share 46.70 43.25 8.0%
Diluted net assets per share 1590 1289 23.4%
Adjusted diluted net assets per share 1912 1488 28.5%
£m £m
Combined portfolio valuation 12,892.9 9,365.8 37.7%
Net borrowings 3,685.9 2,438.1 51.2%
Equity shareholders' funds 7,493.9 6,050.3 23.9%
% %
Gearing (net) 49.2 40.3
Preliminary Results for the year to 31 March 2006
Chairman's Statement
The outstanding performance of Land Securities over the past 12 months can be
summed up by the 28.5% growth in adjusted diluted net assets per share, driven
largely by the 15.3% valuation surplus on our investment portfolio and the
£293.0m profit on the sale of Telereal. Growth in net assets is one of the
leading financial measures against which we are benchmarked and I am delighted
with this result in a year which was exceptional for both Land Securities and
the property industry. Under International Reporting Financial Standards ('
IFRS') our pre-tax profit was £2,359.2m and now includes revaluation surpluses
as well as exceptional items, providing a simple measure of the value we have
created for shareholders. Revenue profit, our measure of underlying pre-tax
income, was up 8.2% to £391.3m and we are recommending a final dividend of
28.55p per share. Over the year we have made a total business return of 32.4%.
Benchmarking
We have reported against key benchmarks for three years now, allowing you to
evaluate our performance against our major competitors and the underlying
commercial property market. Once again this year the Group outperformed all its
key benchmarks and given the important role benchmarks play, I hope you will not
mind if I expand a little on these here.
• Total shareholder return
Total shareholder return is the most widely recognised way to compare returns
from one publicly quoted company against another. As a constituent of the
FTSE100 we compare our performance against both this and the FTSE Real Estate
Index, over the 12 month period under review and since 1 April 2000 when we
embarked upon the reinvigoration of the business. This year we produced a total
shareholder return of 54.3% compared to 25.5% for the FTSE100 and 48.6% for FTSE
Real Estate Index. The returns over the six years since 1 April 2000 are even
more impressive recording 224.4% for Land Securities compared to 9.8% for the
FTSE100 and 210.9% for FTSE Real Estate.
• Investment Property Databank
The next benchmark we employ is an external commercial property benchmark, known
as the Investment Property Databank ('IPD'). By participating in this
benchmark, which is the industry standard, we are able to compare the
performance of our underlying property portfolios against the commercial
property industry average. It also enables us to set key performance indicators
for our Retail Property and London Portfolio business units. Our ungeared total
investment portfolio return was 23.3% as compared to 20.6% for the IPD quarterly
benchmark.
• Weighted average cost of capital
We also compare our return on average capital employed against our weighted
average cost of capital ('WACC') which reflects the cost of the company's equity
and debt capital. As well as providing a minimum hurdle rate for our investment
decisions this also provides a sharp focus on the returns we make from our
property investment, development and outsourcing activities. This is essential
in a capital intensive industry. Over the past year our pre-tax WACC moved to
7%, which is half a percent lower than it was a year ago as a result of a lower
cost of debt. This compared to a return on average capital employed of 26.4%
and a return on average equity of 35.5%.
Performance highlights
In a year of high activity, I find it extremely hard to pick key highlights to
demonstrate to you why I believe that this business is truly different to the
organisation I joined when I became Chairman some eight years ago. I have,
therefore, chosen three examples which not only demonstrate links to our sources
of competitive advantage of scale, financial strength and skills but also ones
which link clearly to our values.
The first is our acquisition of Tops Estates PLC which was the first corporate
acquisition made by us for over 35 years. The fact that we could purchase a
business for over £0.5bn (including debt) and finance this out of existing
resources is testament to our financial strength, particularly as we also
invested a further £1.8bn across our business in the same year. We now own 30
shopping centres, which receive some 300 million visits per annum and provide
some 5.8% of the retail accommodation across our core markets. This represents
scale in a fragmented industry and can only be of benefit to our customers, the
retailers. However, the reason that this acquisition so manifestly fulfils our
values criteria is because the founder Chairman and majority shareholder of Tops
Estates, Everard Goodman, had sufficient confidence in our company values that
he recommended the sale to us of a business that he had spent a lifetime
creating.
Second on my list is the completion of two of our substantial developments,
namely the mixed-use development at Cardinal Place, London SW1 and Whitefriars
retail scheme in Canterbury. To date, we have invested a total of £369.8m in
developing these two schemes and our development and project management teams
delivered 46,580 sq m of retail space and 51,130 sq m of office space. The
return on our investment, including acquisition costs, was 46.3%. Cardinal and
Canterbury are now in the top ten properties in our £12.9bn investment
portfolio. These schemes created 2,400 retail jobs and, at Cardinal Place, we
will provide new accommodation for some 4,000 office workers. The link here
with our values? Our values underpin our approach to development enabling us,
in complex and difficult circumstances, to create attractive and economically
thriving environments.
The third example is the sale of Telereal, which generated £293.0m of profit for
shareholders. And while it is always difficult to sell-out of successful
ventures, we made this decision in anticipation of future reinvestment
opportunities. The profit generated speaks volumes about the value Land
Securities Trillium has created for the Group, leaving it poised for further
growth from new business, the winning of which is supported by the excellent
reputation for customer service that this business has developed.
The Board
We are fortunate to identify and recruit individuals to the Board with
wide-ranging and complementary skills, who provide clear strategic direction,
strong guidance and leadership to the Group. It is our primary responsibility
to support and challenge executive management as they pursue our strategic
objective of creating long-term sustainable returns for shareholders as well as
ensuring the governance of the business on your behalf.
I would like to welcome our new finance director, Martin Greenslade (41) who
joined the Board earlier this year from BAE Systems and has supported the
organisation through the transition IFRS.
Strategic direction
Six years ago we set out a new strategic direction and embarked upon a series of
business initiatives aimed at the transformation of the Land Securities Group.
The ambition was to create a modern, dynamic property business with a strategic
focus on the customer and on income as well as asset value growth. We have been
very successful in our ambitions. We have re-invigorated the investment
property business, through an active sales and acquisitions programme, creating
two highly-focused business units which, through scale, are now meaningful
providers of accommodation to retail and London-based office occupiers. We have
also invested in our property outsourcing business, Land Securities Trillium,
creating the market-leading property solutions provider. This represents real
innovation in an industry which can be slow to accept change. We have also
become a more demanding employer, focusing our people with stretching
performance based reward schemes and challenging many to adopt new ways of
working and new skills.
Regulatory
We were very pleased with the Government's proposed legislation for the
introduction of UK-REITs which it published in April 2006. This is likely to be
enacted in the Finance Act in July 2006 allowing REITs to be formed from 1
January 2007. UK-REITs will be publicly listed, limited liability companies
resulting in no change in the corporate status for quoted property companies
like us. Conversion to a REIT will involve a change in tax status, and is the
means by which the Government intends to create a level playing field in terms
of taxation between owning shares in a quoted property company and direct
ownership of property. In return for paying a conversion charge equal to 2% of
the gross value of qualifying property assets, REITs will then be exempt from
both corporation and capital gains tax on their qualifying property activities
although dividends paid by REITs will be subject to withholding tax.
We are waiting for final legislation to be enacted following which we will
announce whether the Board believes conversion to a REIT will be in the interest
of our shareholders. At present, we consider it likely to be so. Should the
Board decide to make a positive recommendation we will need to alter our
Memorandum and Articles of Association which will need the approval of our
shareholders at an Extraordinary General Meeting.
Outlook
We have made considerable progress on all fronts this year and, in particular
have positioned our London Portfolio business to benefit from the strong growth
that the London office market is enjoying and which, we believe, it will
continue to enjoy. Our Retail business now has a scale and quality of assets
positioning it to generate ongoing income growth in a more challenging retail
environment, and Land Securities Trillium is now pursuing a wider range of new
business opportunities than at any time in the past.
However, over the next 12 months we expect certain aspects of our environment to
be more challenging. The Department for Work and Pensions, the largest of our
property outsourcing customers, has started to use its flexible accommodation
allowance, so, as expected, income from that contract will decrease over the
next few years. We also do not believe that the unprecedented levels of growth
in property values will continue at the same rate or necessarily be sustainable
across all property types, particularly more secondary buildings. This growth
occurred against a background of low interest rates which have increased
recently in both Europe and America and it is for this reason that I sound a
note of caution. At this time in the cycle we need to be particularly astute
when purchasing standing investments and also take the opportunity to capture
value through selective sales. However, if growth should slow or stall, we are
in a strong financial position to be acquisitive once more while at the same
time continuing to use our skills to create value from within our portfolio. We
can also invest more in development and property outsourcing, which rely more
heavily on our skills to deliver value to shareholders rather than the forces of
investment markets.
We now also have the prospect of a thriving REIT sector in the UK and we are
enthusiastic about the opportunities this will present to us. Our preliminary
assessment is that the regulations being introduced with REITs will not
adversely inhibit flexibility and we believe that our existing strategy and mix
of business can be accommodated within them. While we will not announce any
final decision on REITs in advance of legislation, our view at present is that
we are ideally positioned to benefit from this status. I would hope to announce
our intentions and the implications for shareholders in the coming months and,
subject to any unforeseen obstacles, am of the view that it will be in
shareholders' interests to convert as soon as is practical after 1 January 2007.
Land Securities has enjoyed a year of strong growth helped by continuing low
interest rates. The outlook is positive for the business with a strong
development pipeline, a high quality investment portfolio and an outsourcing
business which has growth potential. I would like to congratulate everyone who
has made this possible, most especially our people.
Operating and Financial Review
Headline results
Profit before tax increased by 80.4% to £2,359.2m as compared to £1,307.5m for
2005. Revenue profit, our measure of underlying profit before tax, increased by
8.2% from £361.8m to £391.3m. Earnings per share were 357.95p, up 57.5% (2005:
227.32p) with adjusted, diluted earnings per share at 70.47p showing a 5.4%
increase on the prior year (2005: 66.87p).
The combined portfolio rose in value from £9.4bn to £12.9bn, which included a
valuation surplus of £1,683.1m or 15.3%. More detail of this performance is
contained in the Investment Property Business review. Net assets per share rose
by 23.5% to 1597p from 1293p, with adjusted diluted net assets per share rising
by 28.5% to 1912p (2005: 1488p).
Profit before tax
Under IFRS, profit before tax effectively represents the total pre-tax return to
shareholders for the year, including both realised and unrealised gains and
losses on the value of our investment properties. Previously, unrealised gains
and losses were taken directly to reserves without being recognised in the
income statement. In 2006, profit before tax increased by 80.4% to £2,359.2m,
representing a pre-tax return of 39.0% on shareholders' equity at the beginning
of the year. The principal drivers behind the increase in profit before tax are
detailed in Table A.
Profit Revenue
Table A - before tax profit
Principal changes in profit before tax and revenue profit £m £m
Year ended 31 March 2005 1,307.5 361.8
Valuation surplus (A) 787.6 -
Profit on disposal of Telereal (B) 293.0 -
Distributions received from Telereal (C) (53.7) -
Impact of Telereal sale 30 September 2005 - (17.4)
Profit on disposal of fixed asset properties (35.8) -
Profit on sale of trading properties 7.2 -
Debt restructuring interest saving (D) 14.7 14.7
Increase in capitalised interest (E) 9.4 9.4
Amortisation of bond de-recognition (F) (16.9) -
Long-term contract profits (G) 10.3 -
Goodwill impairment (H) (51.8) -
Property outsourcing profit (I) 2.8 2.8
Net rental income (J) 50.7 50.7
Exceptional costs relating to debt restructuring (K) 64.6 -
Interest on increased debt (30.7) (30.7)
Other 0.3 -
------------ ------------
Year ended 31 March 2006 2,359.2 391.3
======= =======
(A) The valuation surplus was £787.6m higher than last year as described in
the Investment Property Business review.
(B) The disposal of our interest in the Telereal joint venture was completed
on 30 September 2005.
(C) Distributions from Telereal were significantly higher in 2005,
reflecting a full year and higher levels of property sales.
(D) This represents a full year's reduction in interest charges compared to
a part year in the prior period resulting from the debt restructuring in
November 2004.
(E) Capitalised interest is higher than last year due to greater levels of
investment in developments, principally at Cardinal Place and Bankside 2 and 3.
(F) The debt instruments issued as part of the refinancing in November 2004
do not meet the requirements of IAS 39 as they are not deemed to be
substantially different from the debt they replaced. As a result, the book
value of the new instruments is reduced to the book value of the debt it
replaced and the difference is amortised over the life of the new instruments.
This year's charge was for the full year compared to five months in the prior
period.
(G) Higher levels of activity, primarily the recognition of profits from the
development contract to build Bankside 1 for IPC.
(H) Goodwill arising on the acquisition of Tops Estates PLC in June 2005,
against which full provision has been made, is principally attributable to
deferred tax on the revaluation of its investment properties.
(I) Better performance on DWP contract, largely offset by the lower
unitary charge from the BBC contract.
(J) Largely driven by acquisitions and developments coming on stream.
(K) Costs incurred last year related to the debt refinancing and not
repeated in the current year.
Revenue profit
Revenue profit is our measure of the underlying pre-tax income of the Group. It
is a financial measure we use internally to report our results and includes the
pre-tax results of our joint ventures but excludes capital and other one-off
items such as the valuation surplus and gains on disposals. For this year end,
we have amended our definition of revenue profit to exclude trading profits and
long-term contract income as both of these are considered more capital in nature
than revenue. Furthermore, unlike the majority of our revenue profit, trading
profits and long-term contract income will remain taxable even if we convert to
REIT status.
Revenue profit for the year grew by 8.2% from £361.8m to £391.3m. The main
reasons for this increase are detailed in Table A. Under our old definition,
revenue profit including trading profits and long-term contract income increased
by 8.4 % from £401.3m to £434.9m.
A reconciliation between profit before tax and revenue profit is shown in Table
B.
Table B - Reconciliation of profit before tax to 2006 2005
revenue profit
£m £m
Profit before tax 2,359.2 1,307.5
Revaluation surpluses
- Group (1,579.5) (827.9)
- joint ventures (105.5) (69.5)
Fixed asset property disposals (75.3) (122.5)
Goodwill impairment 64.5 12.7
Exceptional costs of debt restructuring - 64.6
Mark-to-market adjustment on interest rate swaps 2.2 2.7
Eliminate effect of bond exchange de-recognition 28.1 11.2
Credit arising from change in pension scheme benefits (8.3) -
Profit on disposal of Telereal joint venture (293.0) -
Adjustment to restate the Group's share of Telereal
earnings from a distribution basis to an equity basis 5.0 (23.2)
Joint venture tax adjustment 37.5 45.7
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Revenue profit (old definition) 434.9 401.3
Profit on sale of trading properties (21.7) (27.9)
Long-term development contract income (21.9) (11.6)
----------- -----------
Revenue profit (new definition) 391.3 361.8
======= =======
Earnings per share
Basic earnings per share grew by 57.5% to 357.95p (2005: 227.32p), the increase
being mainly attributable to the same reasons as set out for profit before tax
in Table A. The growth in earnings per share, however, has also been impacted
by a rise in the tax rate. Reasons for the change in tax rate are set out in
the section on taxation.
In the same way that we adjust profit before tax to remove capital and one-off
items to give revenue profit, we also report an adjusted earnings per share
figure, although this includes some additional adjustments to revenue profit.
The adjustments to earnings per share are set out in Note 7 and are based on the
guidance given by the EPRA (European Public Real Estate Association) with a
limited number of further adjustments to reflect better our underlying earnings.
Adjusted diluted earnings per share rose from 66.87p per share in 2005 to
70.47p per share in 2006, a 5.4% increase. The growth in adjusted diluted
earnings per share is largely due to the items in Table A related to changes in
revenue profit as well as the lower profits on sale of trading properties and
higher long-term contract income. Adjusted diluted earnings per share has not
grown as strongly as revenue profit because of the higher current tax rate
discussed below.
Dividend
We are recommending a final dividend of 28.55p per share this year, compared to
32.85p in 2005. Taken together with the interim dividend of 18.15p (2005:
10.40p), the total dividend of 46.70p represents an increase of 8% over last
year's total of 43.25p. The lower proposed final dividend is more than offset
by this year's higher interim dividend, which reflected our move to pay
approximately 40% of our total dividend at the interim stage.
The total dividend for 2006 is covered 1.5 times by adjusted earnings (2005: 1.6
times). Subject to approval by shareholders at the Annual General Meeting to be
held on 19 July 2006, the final dividend will be paid on 24 July 2006 to
shareholders on the register on 23 June 2006.
The decision to increase our dividend by 8% is both a reflection of the growth
in revenue profit and our view that the introduction of REITs will increase the
focus of listed property companies on dividend payout ratios, irrespective of
whether or not they convert to REIT status. Our aim will continue to be to
deliver steady dividend growth, although we recognise the quantum of future
dividends will be influenced by whether or not we choose to become a REIT.
Net assets
At the financial year end, net asset value per share was 1597p, an increase of
304p. In common with other property companies, we also calculate an adjusted
measure of net assets, which we believe reflects better the underlying net
assets attributable to shareholders. IFRS has increased the number and value of
these adjustments, the largest of which is to reverse out the requirement under
IFRS to provide deferred tax on valuation surpluses. The adjustments required
to arrive at our adjusted diluted net assets per share are listed in Table C.
The adjusted diluted net assets per share were 1912p at 31 March 2006, an
increase of 424p or 28.5% over the previous year end.
Year ended Year ended
Table C - Net assets 31/03/06 31/03/05
£m £m
Net assets at beginning of year 6,050.3 5,152.2
Profit after tax 1,675.9 1,060.9
Dividends paid (238.9) (175.5)
Other 6.6 12.7
-------------- --------------
Net assets at end of year 7,493.9 6,050.3
Deferred tax on investment properties 145.0 145.0
Deferred tax on net revaluation surpluses 1,739.7 1,180.7
Mark-to-market on interest rate hedges 8.6 3.6
Debt adjusted to nominal value (375.3) (395.0)
-------------- --------------
Adjusted net assets at end of year 9,011.9 6,984.6
========== ==========
Cash flow and net debt
During the year cash receipts totalled £972.6m from property disposals
(including the disposal of our 50% share in the Telereal joint venture). In
total we invested £2,353.4m in our properties including £1,429.2m on direct
acquisitions and £579.1m on corporate acquisitions. From our joint ventures, we
received a net £133.8m, largely as a result of new financing that was put in
place during the year. At 31 March 2006, the Group's net debt was £3,685.9m,
some £1,247.8m higher than 2005 (£2,438.1m). The factors contributing to this
increase in net debt are shown in table D.
Year ended Year ended
31/03/06 31/03/05
Table D - Cash flow and net debt £m £m £m £m
Operating cash inflow after interest and tax 375.9 216.6
Dividends paid (238.9) (175.5)
Property acquisitions (including Tops Estates) 2,008.3 315.2
Development and refurbishment capital expenditure 345.1 378.4
---------- ----------
Investment in properties 2,353.4 693.6
Other capital expenditure 26.9 19.3
---------- ----------
Total capital expenditure (2,380.3) (712.9)
Disposals (including Telereal) 972.6 690.4
Joint ventures 133.8 157.0
Other movements (110.9) (125.0)
-------------- --------------
(Increase)/decrease in net debt (1,247.8) 50.6
Opening net debt (2,438.1) (2,488.7)
-------------- --------------
Closing net debt (3,685.9) (2,438.1)
======== ========
Although we have continued to invest substantially during the year, increasing
net debt by over 50%, gearing levels have only increased modestly. The main
reason for this is that the large valuation uplift has resulted in increased net
assets which have largely offset the growth in net debt. Details of the Group's
gearing are set out in Table E, which includes the effects of our share of joint
venture debt, although the lenders to our joint ventures have no recourse to the
wider Group for repayment.
At At
Table E - Gearing 31/03/06 31/03/05
% %
Gearing - on book value of balance sheet debt 49.2 40.3
Adjusted gearing (1) 46.9 43.0
Adjusted gearing (1) - as above plus notional share
of joint venture debt (excluding Telereal) 51.1 44.2
---------- ----------
(1) Book value of balance sheet debt increased to recognise nominal value of
debt on refinancing in 2004 divided by adjusted net asset value.
Financing strategy and financial structure
Our finance strategy is to maintain an appropriate net debt to equity ratio
(gearing) to ensure that asset-level performance is translated into good returns
for shareholders as well as optimising our cost of capital. It has been our
stated intention over the last 12 months to increase gearing through investment
in our development programme and suitable investment properties.
As noted above, we have successfully invested in the business but strong growth
in the valuation of our portfolio has limited the increase in gearing. It is
important, however, to put our gearing ratio into context. The gearing ratio
only reflects our year end net debt position and not the average net debt during
the period, which was £3.1bn (2005: £2.7bn). Furthermore, the increase in value
of our properties is largely driven by yield shift as opposed to increased
rental income. The gearing ratio is not the key measure of our ability to
service the increase in debt. The more appropriate measure is interest cover.
Despite the increase in our year end net debt, our interest cover ratio,
excluding our share of joint ventures, has improved from 2.39 times in 2005 to
2.65 times in 2006. This reflects our higher earnings, a full year of lower
interest costs due to our debt refinancing and a smaller difference in the
average net debt between 2005 and 2006 than the respective year end positions
might suggest.
While, Land Securities may have lower financial gearing than some other listed
property companies, it has significant operational gearing through its exposure
to a large development pipeline. Developments tend to provide a greater
percentage valuation change than conventional investment properties, with this
being magnified by any change in yields or in occupier demand. Developments
also carry a higher risk around timing, cost to completion and subsequent
letting.
On the basis of our interest cover ratio and the significant amount of funds
available to us we would be prepared to see our financial gearing rise modestly
from its current position. However, given the recent strong rise in property
valuations and our caution about future growth prospects from investment
properties, it may prove difficult for us to find suitable investment properties
to acquire at this stage in the cycle. It is also becoming increasing difficult
to acquire investment properties with good medium term prospects which yield
above the marginal cost of our debt although we continue to invest heavily in
development and outsourcing activities.
As well as having the right level of debt in the business, we also need to
ensure that we have a financing structure that is both flexible and cost
effective. Both of these issues were addressed in the last financial year with
the introduction of a new funding structure. Operational flexibility is
provided through provisions which allow us to buy and sell assets easily as well
as maintain our development programme.
A committed revolving credit facility as part of the funding structure provides
us with the financial flexibility to draw and repay loans at will, and react
swiftly to investment opportunities. The cost effectiveness of the structure is
achieved by providing lenders with security over a large proportion of our
investment properties, resulting in lower interest margins than an unsecured
structure.
During the course of the year, we issued our first two new sterling bonds within
the secured structure through our £4bn Note programme. The first was an issue
of £400m with a fixed coupon of 4.875% and an expected maturity of 2017. The
second was a £300m 4.625% fixed rate bond with an expected maturity of 2011. To
illustrate the efficiency and flexibility of our funding structure, the more
recent of the two bond issues took four working days from Board approval to
pricing at an effective spread to a prevailing LIBOR of 9 basis points.
As at 31 March 2006 Land Securities total borrowing amounted to £3,701.5m, of
which £750.0m was drawn under our £2.0bn secured bank facility, and £74.6m
related to finance leases. Committed but undrawn facilities amounted to
£1,252.0m. The Group also has £123.5m of uncommitted facilities.
Hedging
We use derivative products to manage our interest rate exposure and have a
hedging policy which requires at least 80% of our existing debt plus our net
committed capital expenditure to be at fixed interest rates for the coming five
years. Specific hedges are also used in geared joint ventures to fix the
interest exposure on limited recourse debt. At the year end we had £858.2m of
hedges in place, and our debt was 92% fixed. Consequently, based on year end
debt levels, a 1% rise in interest rates would increase full year interest
charges by only £3.2m.
Future funding
The Group's modest gearing levels and interest cover provide significant debt
capacity to meet its projected capital requirements. Market capacity remains in
Sterling and the Group has the flexibility if necessary to tap other markets
such as the Euro.
With £1.25bn of committed but undrawn facilities, the Group is confident that it
will be able to finance its planned capital commitments.
Taxation
The tax charge for the year is £683.3m, giving an effective rate of 29.0% (2005:
18.9%). The lower tax rate in 2005 was primarily due to higher prior year
adjustments and a lower effective rate of tax on property disposals.
The tax rate on profit before exceptional items is lower at 27.8% (2005: 19.2%).
The tax rate on exceptional items is higher than the standard rate largely due
to the impact of the Tops Estates' goodwill impairment, which cannot be offset
against taxable profits.
Table F - Taxation
Effective tax rate Ordinary Exceptional Total
Profit before tax 2,130.7 228.5 2,359.2
Tax charge 593.3 90.0 683.3
Effective tax rate 27.8% 39.4% 29.0%
----------- ----------- -----------
IFRS requires that full provision is made for the deferred tax liability
associated with the revaluation of investment properties. Accordingly, the tax
charge includes deferred tax of £473.9m on revaluation gains arising in the
period (2005: £248.3m).
The current or 'cash' tax charge for the year, before tax on exceptional items
and property disposals, is £76.9m. If we adjust this for tax related to prior
years and the IFRS bond amortisation which is not tax deductible, we have an
effective rate of 23.2%. This rate reflects the benefits of approximately £80m
of gross capital allowances on developments as well as tax deductions available
for capitalised interest. The equivalent rate for 2005 is not comparable due to
the losses generated by the Group refinancing in the period.
Pension schemes
The Group operates a number of defined benefit pension schemes which are closed
to new members. At 31 March 2006 the schemes had a combined deficit, net of
deferred tax of £4.5m (2005: £7.6m). During the year we made a further special
contribution of £1.5m (2005: £11.5m) to the principal defined benefit pension
scheme and we are maintaining our enhanced contribution rate to address the
relatively small deficit. During the year we introduced amendments to the main
scheme which were adopted by the Trustees for active members who have given
their consent. As a result, active members will have their accrued entitlement
at 31 March 2006 linked to inflation, with future benefits according to annual
earnings. The effect of this has been a reduction of approximately £8.3m in the
Group's pension liability associated with funding future anticipated salary
increases.
Investment property business
The performance of our £12.9bn combined investment portfolio is the
responsibility of our Retail and London Portfolio businesses, with property
management and project management skills being provided to them by the
professional services departments headed up by our Group Chief Operating
Officer. The day-to-day responsibility for the performance of the London retail
properties, with the exception of £234.5m of retail and £14.5m of office assets
held in the Metro Shopping Fund, is with the London Portfolio business.
However, to assist comparison with our performance against the Investment
Property Databank ('IPD'), we include the performance of our London retail
properties under Retail in order to disclose our portfolio valuation statistics
according to the IPD categories.
Performance
The strong performance over the year of the combined investment portfolio, which
includes our share of the value of joint ventures, reflects not only the
continued yield shift but also the value we have created through our development
and asset management activities with a particularly strong contribution from
development. We revalue our investment portfolio every six months. It was
valued at £9.4bn at 31 March 2005, £11.4bn at 30 September 2005 and £12.9bn at
31 March 2006. Part of the 37.7% increase in the size of the portfolio over the
year is attributable to our expenditure on acquisitions and developments, net of
disposals. The like-for-like valuation surplus for the year was £1,047m or
15.9% of which £573.9m or 8.7% occurred in the six months since 30 September
2005.
Table G Open Open Rental Rental
market market income income
value value Valuation year to year to
31/03/06 31/03/05 surplus (1) 31/03/06 31/03/05
£m £m % £m £m %
Retail
Shopping centres and shops 2,335.1 1,996.3 14.2 140.7 133.6 5.3
Retail warehouses 1,494.1 1,254.6 18.3 61.7 56.6 9.0
London retail 865.6 752.4 14.7 41.8 44.7 (6.5)
London offices 2,710.4 2,310.1 16.9 167.3 172.3 (2.9)
Other 292.9 264.8 11.7 13.1 11.2 17.0
---------- ---------- ---------- ---------- ---------- ---------
Like-for-like investment portfolio 7,698.1 6,578.2 15.9 424.6 418.4 1.5
(2)
---------- ---------- ---------- ---------- ---------- ---------
Completed developments 565.3 437.6 21.4 26.1 12.5 -
Purchases 3,337.6 970.4 7.6 123.0 22.5 -
Disposals and restructured - 627.5 - 20.8 56.9 -
interests
Development programme (3) 1,291.9 752.1 32.9 19.5 16.8 -
---------- ---------- ---------- ---------- ---------- ---------
Combined investment portfolio 12,892.9 9,365.8 15.3 614.0 527.1 16.5
---------- ---------- ---------- ---------- ---------- ---------
Adjustment for finance leases - - - (13.2) (10.9) n/a
Combined investment portfolio - - - 600.8 516.2 16.4
---------- ---------- ---------- ---------- ---------- ---------
(1) The valuation surplus and rental income value are stated after adjusting
for the effect of spreading of rents and rent free periods over the duration of
leases in accordance with IFRS but before restating for finance leases.
(2) Properties that have been in the combined investment portfolio for the
whole of the current and previous financial periods.
(3) Development programme comprising 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 contract has not yet been let).
As we have previously commented, continued yield shift was one of the factors
behind the strong performance of the investment portfolio this year. For the
whole year we experienced a 13.2% uplift in value from compression in yields on
the like-for-like portfolio where the net equivalent yield is now 5.3%.
On the like-for-like portfolio we have seen the strongest total return from our
London Portfolio, which has delivered 24.2%, followed closely by retail
warehousing with 21.9% and shopping centres and shops with a 19.8% total return
over the period.
Returns are boosted further when the £565.3m of completed developments are
included. These comprise Empress State; Whitefriars, Canterbury; 40 Eastbourne
Terrace, W2 and the Ravenside Retail Park, Bexhill. In addition our ongoing
extensive development programme, currently valued at £1.3bn, has delivered a
32.9% valuation surplus, with the largest contribution from Cardinal Place, SW1.
The overall total return from our combined investment portfolio over the last
12 months, including acquisitions and developments, was 23.3%.
Our contribution to performance
In terms of ungeared total property return, our investment portfolio
outperformed the UK commercial property market, as represented by the IPD
Quarterly benchmark, by 2.2%. Our London offices outperformed the equivalent
sector benchmark by the substantial margin of 4.8% largely as a result of
development profits. Our combined retail portfolio delivered a total return
slightly ahead of its sector benchmark, up by 0.1%. While a combination of
factors including yield shift contributed to the overall portfolio performance
we illustrate below how the application of skills can drive the creation of
value. Table P details the top six performing properties in each sector by
revaluation increase together with an explanation of the key drivers of that
performance. It is clear that yield shift played only a part in the creation of
shareholder value. This table also demonstrates clearly the strong contribution
from London development.
Table H % %
uplift in uplift in
Retail value Description London value Description
Meteor Centre, 34.5 Lettings, rental value 40 Eastbourne 80.5 Completion of
Derby growth and yield Terrace, W2 development and letting
compression to
CB&I Limited
Ravenside Retail 31.3 Completed development Cardinal Place, 44.1 Development
Park, Bexhill and new lettings driving SW1
rental growth
Lakeside Retail 26.0 New lettings driving New Street 43.7 Development
Park, West rental Square, EC4
Thurrock growth
White Rose 25.5 Reconfiguration and new 1 Theobald's 36.7 Rental value growth and
Centre, Leeds lettings Court, WC1 yield compression
Retail World, 24.3 Reconfiguration and new Devonshire 31.1 Reconfiguration, new
Team Valley, lettings House, W1 letting and yield
Gateshead compression
N1 Shopping 23.1 Rental value growth and 1 Wood Street, 30.1 Development
Centre, yield compression EC2
Islington
At the year end the net reversionary potential of the like-for-like portfolio
was 6.5% slightly higher than the 5.5% 12 months ago. This improvement has
arisen from a reduction in the over-rented element of London offices, which are
now only slightly over-rented, and from continued rental growth on retail
assets, which now have a net reversionary potential of 12.2%. Set against this
positive news on rental growth, voids on the like-for-like portfolio have
increased from their historically low levels to 3.8%, although a proportion are
strategic voids where we are keeping units vacant prior to redevelopment.
Over the past year we also completed 270 rent reviews at an average rental level
11.7% ahead of ERV, generating £7.1m of additional income which will drive an
increase in the value of our assets. We have also grown income on the
like-for-like portfolio by 1.5% through a combination of new lettings and
renewals.
Table I - Investment and development portfolio valuation movements Investment Development Total
£m £m £m
Net book value at 31/03/05 7,484.5 755.6 8,240.1
Purchases 2,006.7 24.7 2,031.4
Disposals (655.8) (7.8) (663.6)
Transfers into development (102.4) 102.4 -
Transfers out of development 271.6 (271.6) -
Transfers to trading properties and surrender premiums received (84.7) - (84.7)
Capital expenditure 78.8 239.3 318.1
Valuation surplus 1,215.4 362.2 1,577.6
Capitalised interest - 24.5 24.5
Depreciation (2.9) - (2.9)
Net book value at 31/03/06 10,211.2 1,229.3 11,440.5
------------- ------------- -------------
Combined investment portfolio at 31/03/06 (including joint ventures) 11,601.0 1,291.9 12,892.9
------------- ------------- -------------
Investment
During the year we sold a total of £735.9m of property out of the combined
investment portfolio (including joint ventures and net of sale costs),
generating a profit of £73.4m (11% above book value). We also had our most
active year ever in terms of acquisitions with the purchase of £2.2bn of
investment properties (including assets bought by way of corporate acquisitions
and joint ventures), which have shown a valuation surplus of 5.7% over the
period since acquisition. The average yield on the properties sold was 3.3%
(the low figure being explained by the rent free period on 30 Gresham Street)
and the average initial yield on the assets acquired was 5.2% or 5.4% excluding
properties acquired vacant. The purchase activity was principally accounted for
by the acquisitions of Tops Estates, the LxB portfolio, and 15 London office
investments.
Development
Our development programme, including our share of joint ventures and those
properties completed and let in the year, produced a valuation surplus of
£364.7m of which £181.3m occurred in the second half of the year. Four schemes
were transferred into the investment portfolio from the development programme.
These were 99% let and generated rents of £9.4m in the year under review. In a
full year these will contribute £14.4m of rental income.
Including our share of joint ventures and land acquisitions we spent £313.6m
(excluding capitalised interest) on the development pipeline on projects
including Cardinal Place, New Street Square, Bankside 2 and 3 in London and
shopping centre developments in Bristol and Exeter. Cardinal Place has now
reached practical completion and we have therefore stopped capitalising interest
on this project. However, during the year interest of £11.5m was capitalised on
Cardinal Place (31/03/05: £9.0m). We have an estimated further spend of £821m
on the projects underway currently which, when complete and fully let, will
produce £144.2m of annual income (at today's ERV). Capital expenditure on
proposed developments could total £973m if we proceed with these schemes, which
are held as part of the investment portfolio and have a current carrying value
of £383.8m.
We have been undertaking two developments on behalf of the BBC. Their new
headquarters in Scotland at Pacific Quay in Glasgow is on programme for
completion by the target date of mid July - and within budget. Of our various
projects for the BBC, the only one which has shown some slippage has been
Broadcasting House. However, the first phase has now been completed and
preliminary works have started on the second and final phase. We, the BBC and
Bovis Lend Lease, our building contractor have agreed in principle the
construction programme and costs for Phase 2 and we have also reached agreement
on the final account on Phase I.
The figures given above for capital expenditure represent the company's actual
or forecast cash outlays on developments. Including land values and capitalised
interest, the total development cost for the full development pipeline is
£3.1bn, of which £1.8bn relates to our current development programme.
Retail
Our retail business represents 53.3% of the investment property business and
produces £243.7m of the Group's operating profit. We own 1.9 million sq m of
retail accommodation including 30 shopping centres and 30 retail parks which
represent a core market share of 5.8%. We have over 1,600 occupiers across this
portfolio. Many of our retail properties form the central shopping districts of
major cities and towns across the UK and, over a year, we estimate that some 300
million visits are made by consumers to our locations. We are also investing
£1bn to create the next generation of retail locations through a 340,000 sq m
development pipeline.
The retail market
The past year was noticeably tougher for retailers as retail sales growth slowed
and rising costs, price deflation and increasing competition made trading
conditions considerably more difficult than in previous years. The impact of
this on like-for-like retail sales has been widely reported. While
like-for-like performance is an important indicator of the underlying health of
the retail market the most important trend indicator for us, as a retail
property owner, is absolute sales performance, since to grow absolute sales a
retailer needs to take on new or improved floor space. The trend here remains
positive and our experience to date, especially when it comes to letting our
retail developments, is satisfactory.
There has also been an increasing polarisation of spend away from the
traditional High Street towards supermarket and large format stores which
provide consumers with more choice and perceived value for money while providing
retailers with more cost effective trading formats. The internet, which is, for
the most part, focused on specific market segments is growing its market share
but still has some way to go in terms of overall impact on retail sales. Recent
research from Verdict showed that in 2005 the internet represented almost half
of retail sales growth but that it still only accounted for around 3% of total
retail sales.
Although the long-term economic outlook at present is still reasonably benign,
market conditions remain difficult for retailers. A further indicator of
consumer confidence is the housing market and, while Government statistics show
that house price inflation has slowed, the market has not gone into a period of
decline and has recently picked up in London and parts of the south-east.
Our strategy
Over the last year we have continued to strengthen our position as a leading
owner of retail property through:
• Investment in dominant retail assets
• Regeneration and renewal of the portfolio
• Provision of market leading levels of customer service and property
management
In pursuit of the above we had an extremely active year. We made a further
£1,543.3m of acquisitions, and sold £336.8m of properties. We invested £76.9m
in the development programme including the redevelopment of Exeter and starting
on site at Bristol.
Our performance
In terms of valuation the retail portfolio continued to perform well. On a
like-for-like basis this portfolio increased in value to £4.0bn with a 15.6%
valuation surplus over the year. The retail park portfolio again demonstrated
the strongest absolute growth, driven by strong investment demand for this type
of asset and continued supply side constraints. While the continued yield shift
was a factor in the performance of the retail portfolio, rental value growth of
4.0% also made a contribution. In addition, our skills are also making a
difference with the valuation increases of the five top performing properties
being driven by development or asset management activity.
The portfolio is 13.6% gross reversionary and void levels remain low at 3.4% on
a like-for-like basis.
Table J 31/03/06 31/03/05
Total retail (a)
Combined investment portfolio valuation £6,877.8m £4,750.4m
Like-for-like investment portfolio valuation £3,978.5m £3,388.9m
Rental income £207.4m £193.1m
Gross estimated rental value £236.7m £223.8m
Voids by estimated rental value £8.1m £4.9m
Running yield 4.9% 5.6%
------------------ ------------------
Shopping centres
Combined investment portfolio valuation £3,816.5m £2,553.8m
------------------ ------------------
Like-for-like investment portfolio valuation £2,128.8m £1,816.4m
Rental income £129.9m £122.5m
Gross estimated rental value £139.5m £131.0m
Voids by estimated rental value £4.2m £3.1m
Running yield 5.4% 6.2%
------------------ ------------------
Retail warehouses
Combined investment portfolio valuation £2,298.8m £1,481.7m
------------------ ------------------
Like-for-like investment portfolio valuation £1,494.1m £1,254.6m
Rental income £61.7m £56.6m
Gross estimated rental value £74.5m £70.0m
Voids by estimated rental value £1.9m £1.1m
Running yield 4.1% 4.7%
------------------ ------------------
Combined investment portfolio extracted from Business Analysis and by reference
to the Reconciliation Tables.
(a) The retail portfolio includes shopping centres, retail warehouses, shops
outside London, shops held through the Metro Shopping Fund LP, regional offices
and sundry other properties outside London
Our contribution to performance
Over the past few years we have focused our retail portfolio in response to the
longer-term trends in the retail markets, particularly retailers' desire for
more efficient retail units. We have been successful in executing this strategy
as we discuss in more detail in the sections below.
Investment in dominant retail assets
We have substantially restructured our retail portfolio which now predominantly
comprises larger and more dominant retail assets. The drivers behind this
approach is our belief that these properties will perform better over the long
term and are more likely to benefit from changing consumer trends. Our research
shows that shopping is now the third most popular way that a family will spend
time together, with over 40% of respondents seeing shopping as a way in which
they spend quality time together. It is our view that a great proportion of
that time is spent in shopping destinations similar to those that we own -
dominant shopping centres.
A dominant shopping centre is one which has a large local population ('
catchment' area) for whom it is their primary shopping destination. All but one
of our shopping centres are located in central in-town shopping districts, many
providing the prime retail accommodation and main consumer shopping experience.
As a result of our portfolio restructuring efforts, we no longer have any
substantial exposure to High Street retail in smaller towns, the segment which
we believe in the longer term will be most impacted by the changing retail
environment. Over the year we invested further in shopping centre assets with
the acquisition of Tops Estates with a portfolio valued at £566.7m. This added
a further six properties to our shopping centre portfolio after the profitable
disposal of one of the centres. Since acquisition, the Tops Estates properties
have shown a combined increase in underlying value of £43.0m, an uplift of 8%.
A further manifestation of the changed nature of our shopping centre portfolio
is our greater exposure to the leading retail destinations in the UK, which we
believe perform better in a less buoyant retail environment.
Top 5 retail destinations Land Securities' ownership
• London West End • Oxford Street and Tottenham Court Road
• Birmingham • Bullring
• Glasgow • Buchanan Galleries
• Leeds • Leeds Plaza and White Rose
• Nottingham • No major ownership
Source: Experian retail ranking
We are also keen to create strategic joint ventures to provide enhanced asset
management or development opportunities or to increase our exposure to specific
market segments. The Scottish Retail Property Limited Partnership is an example
of the former while the Metro Shopping Fund demonstrates the latter.
In terms of changing consumer trends, consumers have more choice and are more
mobile so it is important to provide an exceptional experience to attract them
and encourage longer stays and repeat visits. At Gunwharf Quays, for example,
the unique environment and mix of uses has resulted in a 16% increase in net
income over the year. In the period under review we acquired a further designer
outlet centre, The Galleria, Hatfield and agreed to forward purchase a
development at Banbridge in Northern Ireland.
Another trend is for convenience, accessibility and good car parking. Here we
have invested significantly in retail parks and supermarkets. Bulky goods
retailers have found trade to be more difficult but High Street retailers have
been keen to expand into this larger format with lower rents and operating
costs. During the year we acquired the LxB retail park and supermarket
portfolio, comprising 14 properties, all of which benefit from open A1 planning
consent. As a result of this acquisition, together with £108.6m of selective
disposals, our retail park portfolio is now 70% open consent.
Changing demand for retail park accommodation has helped us improve the average
passing rent on this portfolio from £162 per sq m to £177 per sq m and combined
with supply side constraints, make this segment one of the most attractive
property investments. This is evidenced by the 14.1% valuation surplus of this
portfolio driven partially by yield shift but also by our asset management
activities.
Regeneration and renewal of the portfolio
In a competitive investment market, we are able to use our skills to develop new
retail shopping centres of a calibre seldom available to purchase on the open
market. We are fortunate to benefit here from the development opportunities
inherent within the portfolio as well as our approach to developing in
partnership with other leading retail property owners.
Our current development programme will provide 238,330 sq m of new retail and
leisure accommodation with a further 143,110 sq m of proposed developments in
the pipeline.
Schemes in progress today include Exeter, a 44,600 sq m scheme scheduled to open
next year. Our lettings programme is on target here, with 56% of the retail
accommodation already let or in solicitors' hands. At Bristol, a 140,000 sq m
partnership development with Hammerson plc, due to complete in Autumn 2008, 36%
of the retail accommodation is let or in solicitors' hands.
Christ's Lane, Cambridge started around 15 months later than originally planned
due to delays in obtaining freeholders' consent to redevelop. The 7,150 sq m
mixed-use scheme, comprising eight shops, a cafe overlooking Christ's Pieces and
15 residential apartments, has already secured lettings with H&M, Zara, Bank and
Giraffe cafe ahead of its scheduled completion in Autumn 2007.
We also have three further proposed developments which we are planning to start
this year. The St Davids 2 development, undertaken in partnership with Capital
Shopping Centres, will bring the first John Lewis department store to Wales,
anchoring the 103,600 sq m retail-led scheme in Cardiff's city centre. New
retail, cafes, restaurants and 300 homes will be created and new public spaces
and amenities will include a state-of-the-art public library.
At Livingston, our proposals will create an additional 32,000 sq m of new retail
space, 5,670 sq m of leisure space, 28 one and two-bedroom flats, including
affordable housing, an 84-bed hotel and new public spaces in the town centre.
At Corby our proposals for Willow Place comprise 16,260 sq m of retail
accommodation in 27 units, the first phase of our regeneration activity in this
high-growth town.
We are also in the process of carrying out development appraisals in Leeds,
Liverpool and Glasgow which could offer a further 100,000 sq m of development
over the next five years. These and other schemes at the feasibility stage
should provide a continued stream continued stream of future development
opportunities, even though, due to the complexities of the UK planning system,
it may be several years until we actually start on site.
In addition to our major new development schemes we carry out smaller scale
development activities across our retail park and shopping centre portfolio to
reconfigure and improve these properties. Such activities covered 26,300 sq m
of accommodation in the past year. Two prime examples are:
• White Rose, Leeds: we agreed a reduction in the size of the existing
Sainsbury's store from which an additional 6,720 sq m was created in five new
units with lettings to Next, River Island, Zara and Schuh.
• Ravenside Retail Park, Bexhill: this 24,710 sq m park, comprising 14
units, has recently undergone a 2,720 sq ft extension and facilities upgrade.
These significant improvements attracted fashion retailer Next to a 930 sq m
unit. In addition, the main anchor, Tesco, has occupied a 1,115 sq m extension.
This activity has improved ERV's by 30%.
London Portfolio
Our London business represents 46.0% of the investment property business and
produces £276.5m of the Group's underlying operating profit. We own 940,000 sq
m of office accommodation and 90,000 sq m of retail floorspace. Our office
portfolio represents approximately 4% of the total London office floorspace with
over 650 occupiers accommodating more than 50,000 people. We are also investing
£1.5bn on development, responding to our customers' needs with innovative,
relevant buildings and top quality customer service.
London economy
It is worthwhile considering what it is that makes London so different to the
rest of the UK in terms of its economy. It is undoubtedly one of the world's
leading financial centres but it is also the heart of Government and a major
tourist destination with outstanding cultural, arts and retail experiences.
More than that, it is home to some seven million people as well as numerous
businesses and benefits from a highly-skilled and flexible workforce.
London's economy is also growing at a faster rate than that of the rest of the
UK being forecast to grow by 2.7% over the next four years compared to UK growth
of 2.4%. As London grows it will need continued investment in new buildings,
homes and infrastructure. We have been investing in London's commercial
landscape since 1944 and predict that over the next few years we will invest
more in our Capital City than at any time previously, timing our investment to
benefit from London's forecast growth.
London retail
We have discussed in detail the market conditions facing retailers at present.
It is worth noting, however, that in London retail is also dependent on tourism
and trends in overseas visitors. So, for example we expect London retail to
benefit from the Olympic Games in 2012 as well as in the preceding and following
years.
Our strategy
Against a background of more volatile markets in London we are seeking to:
• Redeploy capital to maximise portfolio growth prospects while
realising value as it is created
• Enhance returns through development activities
• Create strong relationships with occupiers in the London office and
retail markets
We have acquired £643.4m and sold £396.3m of property, including the £272.5m
sale of our recently completed development in Gresham Street. We have also made
substantial progress on our development programme; we spent £185.2m over the
year on development, started 107,330 sq m of new projects, achieved 38,100 sq m
of lettings (including those secured after our financial year end) and submitted
planning applications for a further 118,480 sq m of commercial accommodation.
Our performance
We were very pleased with the performance of the London Portfolio this year
which, on a like-for-like basis, increased in value to £3,658.2bn representing a
16.3% valuation surplus over the year.
Specific properties within the London office portfolio remain over-rented but
has reduced from 12.0% to 9.3%. Our acquisition programme has improved the
reversionary potential of the London office portfolio from 5.4% to 6.0%. Void
levels remain low at 4.5% on a like-for-like basis. London retail is 10%
reversionary and void levels remain low at 3.1% on a like-for-like basis.
Table K 31/03/06 31/03/05
London Portfolio (a)
Combined investment portfolio valuation £5,932.4m £4,486.8m
---------------- ----------------
Like-for-like investment portfolio valuation £3,658.2m £3,131.9m
Rental income £213.0m £221.3m
Gross estimated rental value £228.8m £217.8m
Voids by estimated rental value £9.5m £9.9m
Running yield 5.8% 6.7%
---------------- ----------------
London offices
Combined investment portfolio valuation £4,788.3m £3,585.2m
---------------- ----------------
Like-for-like investment portfolio valuation £2,710.4m £2,310.1m
Rental income £167.3m £172.3m
Gross estimated rental value £175.9m £165.4m
Voids by estimated rental value £8.0m £9.6m
Running yield 6.1% 7.0%
---------------- ----------------
London shops
Combined investment portfolio valuation £1,053.7m £820.8m
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Like-for-like investment portfolio valuation £865.6m £752.4m
Rental income £41.8m £44.7m
Gross estimated rental value £48.0m £47.6m
Voids by estimated rental value £1.5m £0.2m
Running yield 4.8% 5.8%
---------------- ----------------
Combined investment portfolio extracted from Business Analysis and by reference
to the Reconciliation Table.
(a) The London portfolio includes London offices, London shops (with the
exception of shops held through the Metro Shopping Fund LP) and sundry other
properties in London.
Our contribution to performance
We recognised some time ago that the London occupational markets would be
returning to a period of growth and have targeted our activities to benefit from
this. This is evidenced by the restructuring of our portfolio together with our
development activities where we were especially pleased to note that we created
a 42.4% valuation surplus over the year.
Redeploy capital to maximise future growth prospects while realising value as it
is created
An idiosyncracy of the institutional lease is that, in a market downturn, such
that we experienced in London in 2002/2003, the investment value of a property
is partially protected by the security of the underlying rental income,
especially where this is higher than the current market rent. As occupational
markets improve, this over-renting creates a drag on future income growth
resulting in lower levels of capital value growth. In anticipation of a return
to market growth and particularly given the very high levels of demand for
well-let London office investments, we have made and will continue to consider
selective disposals from the portfolio to enable the redeployment of capital in
properties with better medium term growth prospects. Examples of this type of
capital redeployment are purchases such as:
• Ashdown House, SW1 acquired for £166.9m on an net initial yield of
5.8% and a passing rent on the offices of £380 per sq m
• Holborn Gate, WC1 acquired for £85.8m on an net initial yield of 6.2%
at an average passing rent of £360 per sq m
• 6/7 Harbour Exchange and 8/9 Harbour Exchange, E14. These properties
were acquired for £82.6m at a combined net initial yield of 5.9% at an average
passing rent of £200 per sq m
In total our acquisitions during the year have been at an average initial yield
of 5.6% and have low average rents of only £307per sq m with good prospects for
future rental income growth and asset management opportunities.
A further strand to our investment approach is our desire to acquire or develop
'clusters' of properties in key locations enabling us to provide managed
environments and an enhanced experience for our occupiers. In Victoria, for
example, Ashdown House is strategically located directly opposite our Cardinal
Place development. Not only will the office element of this property benefit
from the rental growth now emerging in this market, but we have the opportunity
to improve the retail element of this scheme taking advantage of the renewed
enthusiasm from retailers for this location as a result of the success of
Cardinal Place's retail offer.
A further example is at New Street Square in Mid-town where we have recently
acquired two properties, IPC Tower and Hill House that will benefit from our
expenditure on development and the subsequent regeneration of this location.
The final strand to our investment approach in London is to ensure that we
crystallise value as it is created. This is demonstrated by Gresham Street
where, following the successful letting to Dresdner Kleinwort Wasserstein, we
sold this property to GIC Real Estate.
Enhance returns through development activities
At this stage in the cycle it is also opportune that we have expanded our London
development activities. Over the year, developments underway in London
contributed just under a third of the valuation surplus but represented only
16.0% of the capital employed with a particularly strong performance from
Cardinal Place which has now reached practical completion. Developments
currently on site will provide 143,050 sq m of new office accommodation together
with some 7,650 sq m of retail floorspace. At Cardinal Place, the retail
element which opened earlier this year is virtually fully let with only one unit
available. Of the office accommodation, 52% is let or in solicitors' hands at
an average rent of £600 per sq m. This is now the only Grade A newly-developed
office accommodation available in the West End. It is interesting to note that
we have attracted a new and diverse range of occupiers to Victoria including
Wellington Asset Management, P&O, 3i and KCCI and we expect this trend to
continue.
At New Street Square, we initially started construction of three buildings
totalling 43,370 sq m, two of which have been pre-let to Deloittes and are due
for occupation in Spring 2008. To capitalise further on improving market
conditions, we have also started the fourth and final building comprising 21,950
sq m of offices. On the South Bank, we completed Bankside 1 which we forward
sold to IPC and are making good progress with Bankside 2 and 3, where we are
creating some 35,550 sq m of speculative office accommodation together with
3,170 sq m of retail accommodation in two buildings.
The third development project we started during the year was One Wood Street
which we pre-let in its entirety to Eversheds just after the financial year-end.
This global law firm has taken an 18-year lease on all of the 15,020 sq m
office accommodation and will occupy all eight floors, with an option to lease
back 1,860 sq m to Land Securities. In addition to the office space, the
building incorporates 1,500 sq m of ground floor retail which is being let
separately.
As a result of our success to date in terms of both the timing and letting of
development, we have decided to proceed with our development at One New Change,
close to St Paul's Cathedral, a Jean Nouvel designed scheme which will provide
30,790 sq m of office accommodation and 20,550 sq m of retail floorspace. Given
the sensitive location of the site and our innovative proposals we were very
pleased to achieve a resolution to grant planning consent for this project.
As we progress our development programme, we are also looking to secure a
pipeline of future projects so that we are in a position to respond to occupier
requirements as appropriate. To this end we are advancing a further 109,000 sq
m of schemes, in Oxford Street and Fenchurch Street, through the planning
system. At Oxford Street, we have made a planning application for a 30,000 sq
m mixed used scheme incorporating retail, office and residential accommodation.
At Fenchurch Street, the City Corporation is currently considering our
application for a 79,000 sq m office tower, designed by Raphael Vinoly. We have
also contributed to the Victoria Station Area Planning Brief proposals for a
large site to the north of Victoria Station (Bressenden Place) where we have
significant holdings.
We are delighted with our progress to date on development and the level of
interest in our current schemes. As with One New Change, we will only bring a
scheme forward if we feel comfortable with the timing and fundamentals of the
project in the context of the market. Securing planning does not necessarily
mean we will develop.
Property Outsourcing
Land Securities Trillium produced 16% (£96.6m) of the Group's operating profit
after the sale of its share of the Telereal joint venture in September 2005 and
the prior year disposal of Media Village, White City. This business has a
commercial portfolio totalling 3.32 million sq m and six clients for whom we
provide business accommodation services to 175,000 people.
Land Securities Trillium provides innovative property outsourcing solutions
offering a more efficient approach to owning and managing property by
eliminating the complexity of property management and provision of services
while reducing the cost. Also known as property partnerships, we provide
property outsourcing solutions to the corporate and the public sector.
Our Strategy
Land Securities Trillium has been pursuing a growth strategy and achieved its
target of contributing 25% of the Group operating profit in 2005. It has firmly
established itself as the market leader in property outsourcing in terms of the
number of contracts it has won to date and is seeking to maintain this position
by continuing to invest in the development of new property outsourcing models as
well as developing market leading technological and customer service solutions.
Following this year's sale of our share of the Telereal joint venture, we are
now positioned to continue to grow our business by:
• Accessing new opportunities for outsourcing contracts in existing and
new markets
• Growing our business with existing clients
• Leading innovation in the outsourcing industry
Our performance
The financial performance of Land Securities Trillium is measured differently to
that of the investment property business focusing more on income growth since
its operating properties are not revalued. Once again this business had an
excellent year, driven by the sale of its share of the Telereal joint venture
together with a strong performance from the DWP contract.
31/03/06 31/03/05
Table L - Land Securities Trillium Financial results £m £m
Contract level operating profit
- Barclays 2.5 -
- BBC 0.5 20.6
- DVLA 1.0 -
- DWP 97.7 81.4
- Norwich Union 5.0 6.1
- Telereal II 6.9 -
Bid costs (7.4) (2.6)
Central costs (9.6) (7.8)
-------- --------
96.6 97.7
-------- --------
Profit on sale of fixed asset properties 1.0 30.5
Net surplus on revaluation of investment property 1.9 -
Profit on disposal of joint venture (Telereal) 293.0 -
-------- --------
Segment profit 392.5 128.2
-------- --------
Distribution received from Telereal 11.7 65.4
-------- --------
Land Securities Trillium made a segment profit of £392.5m compared to £128.2m
for the year to 31 March 2005. Excluding profit on the sale of fixed assets,
net surplus on revaluation and profit on disposal of Telereal segment profit was
£96.6m (2005: £97.7m). This profit level was maintained despite the anticipated
reduction in the BBC profit following the disposal of White City which generated
capital receipts of £321.5m. We achieved a stronger than expected performance
from the DWP contract together with positive contributions from DVLA, Norwich
Union and Barclays in-line with our expectations.
Following our exit from the Telereal joint venture, which generated an
exceptional profit of £293.0m, after costs, we entered into new agreements
maintaining our relationship with Telereal. These new agreements are called
Telereal II and, over the last six months, it has contributed £6.9m to operating
profit.
Operating profit from the BBC reduced to £0.5m as a consequence of the sale of
Media Village White City and the subsequent reduction in the unitary charge paid
to us by the BBC. As this left no real estate in the partnership we agreed with
the BBC that it would be better to re-tender the remaining facilities management
services, reflecting the BBC desire for a shorter duration contract. We did not
bid for that business and following a procurement exercise will be transferring
our facilities management responsibilities to a new provider at the end of June
2006. The projects at Broadcasting House and Pacific Quays are unaffected by
this change.
The increase in bid costs reflects the considerable amount of activity on new
bids, the largest of which, the Defence Training Review ('DTR'), is still in
progress.
The DWP has not utilised as much of its vacation allowance as we anticipated 12
months ago and additional services have also contracted giving rise to an
increase in the unitary charge. While this delay in using its flexible
accommodation allowance has had a positive effect on our results to date, the
impact of this is to create a bigger future allowance which will decrease our
income and profit more steeply as it is used. The DWP has indicated that it
intends vacating some 150,000 sq m of free flexible space over the next two
years and has given notice on 94,000 sq m as compared to 26,000 sq m this time
last year.
Our contribution to performance
When Land Securities acquired Land Securities Trillium, it had one contract as
compared to the six and the Investors in the Community joint venture today.
Over the course of the past six years, Land Securities Trillium's performance
has exceeded our expectations and delivered early on the Group's growth
ambitions for this part of the business. We believe that this can be attributed
to the way in which Land Securities Trillium pursues its strategic objectives as
detailed below.
Accessing new opportunities for outsourcing contracts in existing and new
markets
We have developed substantial expertise in the Government outsourcing markets
and are now using that experience to bid for new contracts, examples of which
are:
Northern Ireland Civil Service ('NICS') Workplace 2010 - a 20 year partnership
to transform the NICS office estate, improve the working environment for staff
and facilitate new ways of working to enhance the delivery of services to the
citizens of Northern Ireland. This opportunity is likely to be delivered through
a PFI solution.
Building Schools for the Future ('BSF') - the Government intends to invest £40bn
in the BSF programme which is the largest ever Government schools investment
initiative. The programme aims to rebuild or renew every secondary school in
England over the next 15 years.
To support this initiative, Land Securities Trillium has made an initial
investment of about £20m into a 50/50 joint venture with the Mill Group called
Investors in the Community ('IIC'). IIC is the preferred bidder for the
Peterborough schools PFI and Bristol BSF projects and is shortlisted on the
Leeds and Waltham Forest BSF projects. In addition, IIC progresses several
further local government and health sector bids.
Defence Training Review ('DTR') - DTR is a PPP programme developed to modernise
the delivery of professional and trade training in the military and the
continued professional development of the armed forces. The DTR is being
procured by the MoD in two packages, with a combined estimated total value of
about £13bn over a 25-year term. Package 1 is primarily technical training,
including aeronautical engineering and communications and information systems.
Package 2 incorporates logistics, joint personnel administration, security,
languages, intelligence and photography as well as supply training. We are
bidding as part of the Metrix consortium, which is a special purpose 50/50 joint
venture company between ourselves and QinetiQ. Metrix is the only provider
shortlisted in both packages. The MoD's timetable currently envisages an
announcement of Preferred Bidder in late 2006.
During the year we were one of two shortlisted parties bidding for MoDEL, a
£200m MoD project to rationalise land holdings in West London. Although
unsuccessful in this bid we believe that the experience gained will assist us in
appraising future opportunities arising around surplus land holdings.
Growing our business with existing clients
We have worked with our existing clients to deliver extensions to their
contracts to meet their changing needs. During the year we agreed three
contract extensions, the largest of which was the Telereal II agreement which
involves the continued management of leasehold risk on part of BT's estate and
the provision of other services. The leasehold estate agreement runs until the
end of 2031 (although Telereal and Land Securities have the option to terminate
the agreement at any time on or after 31 March 2010 with not less than three
months' notice). Under these new agreements we will receive annual revenues of
approximately £50m leading to anticipated pre-tax profits of some £14m per
annum.
We also extended our relationship with Barclays Bank, where we assumed
responsibility for an additional 16 properties located across the UK, totalling
6,347 sq m of accommodation. These are short-leasehold properties that are
surplus to Barclays' requirements and are largely vacant as a result of its
property rationalisation. Barclays made a capped payment to reflect the letting
risk and we have assumed responsibility for all future benefits and liabilities
relating to the transferred interests.
During the year we agreed an extension to our current Norwich Union operations
to include a project delivering a new working environment and comfort cooling
scheme at their Colegate facility in Norwich. Our contract with Norwich Union is
now completing its second year, and we are working with them to explore how we
might extend further our partnership and service provision.
Urban Community Development
Our Urban Community Development activities represent long-term investment by
Land Securities in non-core markets which will, we believe, deliver above
average returns for shareholders. It is also an area where we can benefit from
our balance sheet strength and development skills. Our activities here have
progressed from a predominantly strategic planning focus to a focus on delivery
on the ground. This is set against a background of lower growth but a stable
residential housing market in the south east.
Kent Thameside
Our efforts have been focused on concluding negotiations with Dartford Borough
Council on the planning gain package for our proposed development in Eastern
Quarry, where a resolution to grant planning permission was awarded in July
2005.
We have also made slow but steady progress in resolving outstanding issues with
the Highways Agency regarding their objections to our application and remain
confident that an acceptable solution will be found. We therefore committed to
a £8.6m earth-moving contract which will see the creation of the new landscape
needed for the development of the eastern end of the Quarry.
We also completed the construction of and occupied our new 860 sq m marketing
and management centre creating the hub for our future activities in Kent
Thameside.
At Ebbsfleet, where we have a 48.5% interest in the land surrounding the new
Channel Tunnel Rail Link station opening in 2007, we have been working towards
securing masterplan approval for part of the site. This will provide the
framework against which our development partners, Countryside Properties, can
make a detailed application for the first phase of development of over 300 new
homes at Springhead.
Our other joint venture with Countryside Properties at Waterstone Park continues
with the development of the latest phase of new homes and apartments, which are
selling well and achieving premium values for the location. This supports our
commitment to work with partners who share our aspirations to invest in and
deliver innovative and quality design.
We agreed terms for the sale of our remaining interests at Crossways Business
Park to Legal & General enabling a phased handover of the remaining development
plots (approx 15% of the overall area of the park) to take place this year.
Stansted
As part of the review of the Regional Spatial Strategy for the East of England
(RSS 14), we have promoted our 650 hectare (1,625 acre) site at Stansted for a
range of uses to serve the future expansion of Stansted Airport and the growth
in housing being forecast by the Government in respect of the M11 Corridor. We
have also entered into a new option agreement with Aggregate Industries PLC for
the rights to extract some four million tonnes of sand and gravel reserves on
the site.
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/prelims2006. This includes more detailed information in
respect to the combined portfolio valuation and further detail on Land
Securities Trillium's existing contracts.
This information is provided by RNS
The company news service from the London Stock Exchange