Interim Results - Part 1
Land Securities Group Plc
16 November 2005
16 November 2005
Land Securities Group PLC ('Land Securities' / 'the Group')
Interim results for the six months ended 30 September 2005
Highlights
• Adjusted diluted net asset value per share up 13.8% to 1694p (31/3/
2005: 1488p). Basic net assets per share were 1435p (31/3/2005: 1293p)
• Combined investment portfolio valuation increase of 22.7% over the
reporting period to £11.5bn with valuation uplift from retail warehouses of
6.0%, shopping centres 6.3% and London offices 9.2%
• Pre-tax profits rose 89.2% to £1,184.4m (30/09/04: £625.9m), including
gains on disposal of assets and revaluation surpluses, in accordance with IFRS
• Revenue profit increased by 16.1% to £218.5m (30/09/04: £188.2m)
• Adjusted earnings per share, calculated on revenue profits, up 24.5%
to 34.50p (30/09/04: 27.71p); basic earnings per share were 177.26p, an increase
of 82.6% (30/09/04: 97.06p)
• An interim dividend of 18.15p, up 74.5% (30/09/04: 10.40p), reflecting
both underlying growth of 5% and the board's decision to pay a greater
proportion of the dividend at the interim stage
• Major business development achievements included the successful
completion of the acquisition of Tops Estates PLC and the acquisition of a
private property company LxB; the Group's retail portfolio now includes 28
shopping centres, 32 retail warehouses and 11 supermarkets, with a development
pipeline including six town centre schemes totalling 330,110 sq m
• Strong progress in the London portfolio to ensure the Group benefits
fully from market recovery demonstrated by the acquisition of seven properties
totalling £343.0m, notable advances in the 270,280 sq m development pipeline and
the successful letting and subsequent sale of 30 Gresham Street
• Important changes made to Land Securities Trillium's existing
contracts, including the sale of its share in Telereal, with significant
activity in the public sector impacting positively on the new business pipeline;
notable opportunities with the Ministry of Defence and the Governments 'Building
Schools for the Future' initiative.
Commenting on the results, Peter Birch, Chairman of Land Securities, said:
'We have had an excellent start to this financial year exemplified by some
notable events, including the acquisition of Tops Estates, our first acquisition
of a quoted company for many years, which was followed swiftly by the
acquisition of LxB.
'We have taken active steps in the first half to position the Group strongly for
the future. We acquired retail property offering long-term asset management and
development opportunities, as well as good rental growth prospects, and our
experience of leasing space in our retail assets has been positive to date. In
our London portfolio, we secured a number of significant lettings and expect
positive rental growth to emerge in the City during the 2006 calendar year and
to accelerate in the West End, where there is now a shortage of good quality,
modern accommodation, a situation which our development pipeline is well
positioned to exploit. With regard to total property outsourcing, we were
pleased to have crystallised significant capital value from existing contracts
while increasing our focus on markets with strong deal flow, thereby putting
Land Securities Trillium into contention for a number of large new contracts
from the public sector.
'Building on this strong progress, we remain positive about the prospects for
the business as a whole for this financial year.'
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 six months ended 30 September 2005
Financial Highlights
30/09/05 30/09/04 % Change
________ ________ ________
Gross property income
Retail portfolio £171.2m £138.8m +23.3
London portfolio £245.4m £163.8m +49.8
Other £55.2m £78.5m -29.7
Property outsourcing £525.5m £581.6m -9.6
________ ________ ________
Total £997.3m £962.7m +3.6
Operating profit (total) £1,227.5m £648.5m +89.3
Pre-tax profit £1,184.4m £625.9m +89.2
Revenue profit (pre-tax) £218.5m £188.2m +16.1
Adjusted earnings per share 34.50p 27.71p +24.5
Earnings per share 177.26p 97.06p +82.6
Dividends per share 18.15p 10.40p +74.5
________ ________ ________
30/09/05 31/03/05 % Change
Adjusted diluted net assets per share 1694p 1488p +13.8
Diluted net assets per share 1428p 1289p +10.8
Combined portfolio valuation £11,494.2m £9,365.8m +22.7
Net borrowings £3,082.2m £2,438.1m +26.4
Equity shareholders' funds £6,726.4m £6,050.3m +11.2
Gearing (net) 45.8% 40.3%
________ ________ ________
Corporate Review
We have had an excellent start to this financial year exemplified by some
notable events. First, we completed the acquisition of Tops Estates PLC which
we announced in May this year, our first acquisition of a quoted company for
many years, which was followed swiftly by the acquisition of the private
property company LxB. Secondly, having successfully let the offices at 30
Gresham Street, we sold this asset enabling us to release capital to reinvest
across the Group. Thirdly, we sold our share of the Telereal joint venture,
crystallising substantial value for the Group.
While these events show the high levels of activity over the last six months and
typify the Group's transformation, we have also continued to deliver excellent
results across all areas of the business. Highlights are as follows:
• A pre-tax profit of £1,184.4m, representing an 89.2% increase over the
equivalent six month period a year ago. In accordance with IFRS, this pre-tax
profit includes gains on disposal of assets and revaluation surpluses
• A 16.1% increase in revenue profit to £218.5m (30/9/2004: £188.2m) and
a 24.5% growth in adjusted earnings per share to 34.50p per share. Basic
earnings per share have increased to 177.26p, up 82.6%
• Adjusted diluted net assets per share increased by 13.8% to 1694p per
share in the first six months of the year. Basic net assets per share increased
by 11.0% to 1435p
• A valuation surplus in the first six months of £761.5m or 7.2%. The
value of the combined investment portfolio (which includes our share of
properties owned by joint ventures) is now £11.5bn
• A continued focus on capital investment into higher growth activities.
In the first six months of this year we spent £1.6bn on corporate and
investment portfolio acquisitions, development and Land Securities Trillium
expenditure while realising some £0.7bn from sales (including the proceeds from
the sale of our interest in the Telereal joint venture)
• An interim dividend of 18.15p per share, up 74.5%. This increase
results from the Board's decision to pay a greater proportion of the dividend at
the interim stage and also from underlying growth in the dividend of
approximately 5% per annum.
Results
In preparing these interim results, we have applied International Financial
Reporting Standards ('IFRS') for the first time and re-stated all comparative
figures under IFRS.
Profits
We are pleased to report that profit before tax has increased by almost 90% to
£1,184.4m (30/9/2004: £625.9m). Revenue profit, which we use to demonstrate the
underlying profitability of the Group, was £218.5m, 16.1% higher than for the
same period last year.
The principal causes of the changes in profits are detailed in Table A.
Profit
Principal changes in first half profit before tax before tax
Table A £m
________
Six months ended 30 September 2004 625.9
Valuation surplus (A) 308.5
Profit on disposal of Telereal (B) 293.0
Distributions received from Telereal (C) (12.7)
Profit on sale of fixed asset properties 9.2
Profit on sale of trading properties 7.6
Debt restructuring interest saving (D) 12.5
Fair value swap volatility of interest hedges (E) (14.6)
Increase in capitalised interest (F) 10.3
Amortisation of bond de-recognition (G) (13.3)
Long term contract profits (H) 10.7
Goodwill impairment (I) (64.5)
Property outsourcing profit (J) (19.3)
Net rental income growth 16.9
Exceptional costs relating to debt restructuring 5.2
Other 9.0
________
Six months ended 30 September 2005 1,184.4
=======
(A) Under IFRS, revaluation gains, or losses, on investment properties, are
now reported in the income statement.
(B) The sale of our interest in the Telereal joint venture was completed on
30 September 2005.
(C) Distributions from Telereal were significantly higher in the first half
of 2004, reflecting the high levels of property sales last year.
(D) This represents the reduction in interest charges resulting from the debt
restructuring in November 2004.
(E) IFRS requires that, where an interest rate swap does not match perfectly
with borrowings, the difference between the opening and closing mark-to-market
values are charged to the income statement.
(F) Capitalised interest is higher because of the ongoing work at Cardinal
Place and Bankside 2 and 3.
(G) 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.
(H) Primarily recognition of profits from the construction contract to build
Bankside 1 for IPC.
(I) 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.
(J) Property outsourcing segment profit is lower primarily as a result of
the lower unitary charge from the BBC contract (following the sale of Media
Village, White City) together with lower profits on disposal of fixed asset
properties.
Revenue Profit
The principal changes in revenue profit, which is our measure of the underlying
performance of the Group, are detailed in table B below. Revenue profit is
profit before tax, excluding profits on the sale of fixed asset properties,
revaluation surpluses, mark-to-market adjustments on interest rate swaps and
similar instruments used for hedging purposes, the adjustment to interest
payable resulting from the amortisation of the bond exchange de-recognition and
any exceptional items.
Principal changes in revenue profit Revenue profit
Table B £m
_______
Six months ended 30 September 2004 188.2
Net rental income growth 16.9
Profit on sale of trading properties 7.6
Long-term contract profits (A) 10.7
Property outsourcing profit (B) (13.7)
Telereal profit (12.3)
Increase in capitalised interest (C) 10.3
Debt restructuring interest saving (D) 12.5
Other (1.7)
_______
Six months ended 30 September 2005 218.5
_______
(A) Primarily recognition of profits from the construction
contract to build Bankside 1 for IPC.
(B) Property outsourcing revenue profit pre-interest.
(C) Capitalised interest is higher because of the ongoing work at
Cardinal Place and Bankside 2 and 3.
(D) This represents the reduction in interest charges resulting
from the debt restructuring in November 2004.
Net assets
At the half-year, net assets per share were 1435p, up 11.0% from 31 March 2005.
However, this figure and the prior year figures have decreased as a result of
the adoption of IFRS and, in particular, the requirement to provide deferred tax
on revaluation surpluses. On an adjusted diluted basis, net assets per share
are up 13.8% to 1694p in the first six months of this financial year, of which
3.0% is attributable to the disposal of our share in the Telereal joint venture.
The increase in net assets is analysed in Table C.
Six Six Six
months months months
ended ended ended
30/09/05 31/03/05 30/09/04
Table C £m £m £m
Net assets at beginning of period 6,050.3 5,489.3 5,152.2
Profit after tax 829.2 608.4 452.5
Dividends paid (153.8) (48.6) (126.9)
Other 0.7 1.2 11.5
_________ _________ _________
Net assets at end of period 6,726.4 6,050.3 5,489.3
Deferred tax on investment properties 151.4 145.0 134.0
Deferred tax on revaluation surplus 1,470.7 1,180.7 1,110.8
Mark-to-market on interest rate hedges 17.9 3.6 27.8
Bond exchange (385.7) (395.0) -
_________ _________ _________
Adjusted net assets at end of period 7,980.7 6,984.6 6,761.9
======== ======== ========
Cash flow and net debt
We continue to invest to maximise returns and, during the period, received cash
totalling £727.4m from property disposals (including the disposals of Gresham
Street and our 50% share in the Telereal joint venture). The Group reinvested
£1,497.4m into property investment acquisitions, development and property
outsourcing activities.
At 30 September 2005, the Group's net debt was £3,082.2m (31/03/05: £2,438.1m).
The increase in net debt of £644.1m during the period is explained in Table D.
Six Six Six
months months months
ended ended ended
30/09/05 31/03/05 30/09/04
Table D £m £m £m
_________ _________ _________
Operating cash inflow after interest and tax 99.9 35.5 112.4
Dividends paid (153.8) (48.6) (126.9)
Total capital expenditure (1,497.4) (394.7) (320.3)
Property sales 434.4 638.2 54.9
Joint ventures 494.6 17.1 (37.8)
Other movements (21.8) 107.7 13.1
_________ _________ _________
(Increase)/decrease in net debt (644.1) 355.2 304.6
Opening net debt (2,438.1) (2,793.3) (2,488.7)
_________ _________ _________
Closing net debt (3,082.2) (2,438.1) (2,793.3)
======== ======== ========
Although we have invested heavily in the business, increasing net debt by 26.4%,
gearing has only increased from 40.3% to 45.8% at the period end, due to the
large valuation increases. Details of the Group's gearing are set out in table
E which includes information if the debt in joint ventures is taken into
consideration, although the lenders to our joint ventures have no recourse to
the Group's balance sheet for repayment of the debt.
Table E At 30/09/05 At 31/03/05 At 30/09/04
_________ _________ _________
Gearing - on book value of balance sheet debt 45.8% 40.3% 50.9%
Adjusted gearing (1) 45.5% 43.0% 41.3%
Adjusted gearing (1) - as above including notional share 50.2% 44.2% 42.6%
of joint ventures (excluding Telereal)
_________ _________ _________
(1) On book value of balance sheet debt increased to recognise nominal value
of debt on refinancing in 2004 divided by adjusted net asset value.
Funding and hedging
We have refinanced the legacy debt acquired with Tops Estate (nominal value of
£259.0m) using Land Securities' existing bank facilities together with an issue
of £121.0m redeemable 10-year loan notes. All associated interest rate swaps
have been terminated. We also issued a further £9.0m of loan notes in respect
of the LxB portfolio acquisition.
Land Securities uses derivatives products to manage its interest rate exposure
and has set a fixed/floating ratio of approximately 80:20, although the
proportion may vary depending on our view of short-term interest rates (ie one
to two years). Specific hedges are also used in geared joint ventures to hedge
the interest exposure on limited recourse debt.
Since the half-year, the Group issued a £400m 4.875% fixed-rate bond with an
expected maturity of 2017, which has been used to repay some of our existing
bank debt. This was the first major financing undertaken within the secured debt
structure which we established in November 2004.
Taxation
The tax charge for the period is £355.2m giving an effective rate of 30.0% (30/
09/04: 27.7%).
The tax rate on ordinary profits is slightly lower at 27.7%, largely due to a
net tax credit on property disposals and the impact of reflecting joint venture
profits net of tax.
Effective tax rate Ordinary Exceptional Total
_________ _________ _________
Profit before tax £955.9m £228.5m £1,184.4m
Tax charge £265.2m £90.0m £355.2m
Effective tax rate 27.7% 39.4% 30.0%
_________ _________ _________
IAS 12 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 £217.6m on revaluation gains arising in the
period (30/09/04: £122.5m).
Dividend
At the year-end we stated that we would aim to pay around 40% of the annual
dividend as an interim payment. This re-balancing of the dividend payment
represents the majority of the increase in the interim dividend which, when
combined with underlying growth of approximately 5%, has increased the interim
dividend payable to 18.15p per share. This will be paid on 9 January 2006 to
shareholders on the register on 9 December 2005. The shares are expected to
trade ex-dividend from 7 December 2005.
Regulatory
We are pleased that the Government continues its work to prepare for an
introduction of UK-Real Estate Investment Trusts ('REITs') with legislation
targeted for the 2006 calendar year. In a number of overseas countries, REITs
have proved to be a popular and successful investment vehicle for both private
investors and institutional shareholders, and we believe that they can be
equally successful in the UK provided that the detailed regulations are not
unduly restrictive.
By contrast, we are disappointed that the Government is proposing to introduce a
planning gain supplement or development land tax. We believe that any such levy
represents a 'super tax' and ignores the existing regime of capital gains and
corporation tax. The calculation of such a tax would be complex and, together
with the additional financial burden, this combination would act as a
disincentive to development and regeneration. Its impact would therefore run
contrary to the Government's stated objective of increasing the supply of new
homes. We support the alternative proposals from the British Property
Federation for pre-determined planning contribution tariffs which would create
certainty in the planning and development process but, at the same time ensure
that developments make an appropriate contribution to local infrastructure.
However, as all schemes in our current development programme, and some of the
schemes in our forward development pipeline, already have planning consent, our
activities should not be impacted in the short-term by any changes in this area.
Board and senior management changes
On 17 May 2005 we announced the appointment of Richard Akers (43), Managing
Director, Retail to the Group Board. Richard has been responsible for the
management of Land Securities' Retail portfolio and 250-strong team since 2004
and, in particular, has been focusing on improving customer service for some
2,000 retail occupiers across the UK. Previously, as the Head of Retail
Portfolio Management, he was responsible for the performance of the shopping
centre investment portfolio, which has outperformed IPD for the past four years.
In July 2005 Andrew Macfarlane, Group Finance Director since 2001, left to join
Rentokil Initial plc. We would like to thank Andrew for his significant
contribution to the Group.
On 1 September 2005 Martin Greenslade (40) joined Land Securities as Group
Finance Director. Prior to joining Land Securities he was Group Finance
Director of Alvis Plc, a leading European manufacturer of military vehicles,
which was acquired by BAE Systems in August 2004. We are delighted that Martin
has joined the Group, bringing with him an entrepreneurial background, a
successful track record as finance director of Alvis and a skill set which is
highly complementary to the existing management team.
Outlook
Commercial property has continued to deliver attractive returns, driven largely
by yield compression, at a time when the performance of the UK economy has been
mixed.
While demand for commercial property investment continues to be strong we
believe that property yields over the next year are likely to be heavily
influenced by movements in medium-term debt pricing.
Trading conditions have weakened for retailers, but retail property has so far
been protected by retailers' desire for efficient units and their strategy of
taking additional floor space in order to grow total sales. This trend explains
the difference between retailers' negative like-for-like sales growth and the
positive absolute sales growth. While we expect smaller sized shop units in
secondary locations to be affected by retailer insolvencies and weaker trading
conditions, we believe that demand for large and well-configured shops in strong
trading locations will remain firm. We have taken active steps in the first
half to acquire property offering long-term asset management and development
opportunities, as well as good rental growth prospects, and our experience in
leasing retail property has been positive to date.
The London economy has been an area of strength for the UK, buoyed by strong
profits from the financial services sector. This has been positive for the
London office market, where availability levels are now up to 30% below their
peak of December 2003. We have secured a number of significant lettings during
the period under review and expect positive rental growth to emerge in the City
during the 2006 calendar year and to accelerate in the West End where there is
now a shortage of good quality, modern accommodation, a situation which our
270,280 sq m development pipeline is well positioned to exploit.
In terms of the potential market for property outsourcing, we are pleased to
have crystallised significant capital value from existing contracts while
increasing our focus on markets with strong deal flow, thereby putting Land
Securities Trillium into contention for a number of large new contracts from the
public sector. These contracts reflect the Government's policy drive for
efficient use of public sector assets. Subject to the outcome of competitive
tendering processes, we are now considering potential new contracts with greater
potential value than at any time over the last three years.
Building on this strong progress we remain positive about the prospects for the
business.
Peter Birch Francis Salway Martin Greenslade
Chairman Group Chief Executive Group Finance Director
Land Securities Group PLC
16 November 2005
Investment property business
Valuation
We were pleased with performance in the first half of the year. The combined
investment portfolio, which includes our share of joint ventures, showed a 22.4%
increase in value to £11.5bn. After adjusting for expenditure (sales and
development spend), the valuation surplus on the combined portfolio over the six
month period was 7.2%.
Rental Rental Rental
Open Open income income income
market market 6 months 6 months 6 months
value value Valuation to to to
30/09/05 31/03/05 Surplus (1) 30/09/05(1) 31/03/05(1) 30/09/04(1)
£m £m % £m £m £m
_______ _______ _______ _____ _____ ______
Retail
Shopping centres and shops 2,324.3 2,156.8 7.4 70.6 71.6 63.2
Retail warehouses 1,464.0 1,344.1 8.8 30.7 29.9 31.3
London retail 803.9 756.2 6.1 22.0 22.3 22.2
London offices 2,563.8 2,402.0 6.7 85.7 86.5 88.7
Other 287.4 278.2 4.9 6.3 6.5 6.6
_______ _______ _______ _____ _____ ______
Like-for-like investment 7,443.4 6,937.3 7.2 215.3 216.8 212.0
portfolio (2)
Completed developments 504.5 448.8 8.2 12.3 10.5 4.1
Purchases 2,551.9 970.4 3.2 49.5 21.7 6.2
Sales and restructured interests - 281.8 n/a 1.6 15.9 23.6
Development programme (3) 994.4 727.5 18.6 5.2 3.7 7.2
_______ _______ _______ _____ _____ ______
Combined investment portfolio 11,494.2 9,365.8 7.3 283.9 268.6 253.1
_______ _______ _______ _____ _____ ______
Adjustment for finance leases n/a (6.4) (6.4) (4.7)
_______ _______ _______ _____ _____ ______
Combined investment portfolio 7.2 277.5 262.2 248.4
====== ====== ======= ===== ===== =======
(1) The valuation surplus and rental income values are stated after
adjusting for the effect of SIC15 under 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 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 combined investment portfolio showed a 7.2% increase in value
over the period with the strongest growth from retail warehousing at 8.8%,
shopping centres at 7.7% and London offices at 6.7%. This increase in value was
achieved primarily as a result of yield compression although we also benefited
from some growth in rental values for both retail and London office properties.
Rental values for shopping centres have grown at 2.8%, retail warehousing have
grown at 2.0% and London offices at 1.5%. The total rental value growth for the
like-to-like portfolio is 1.7%. The average equivalent yield for the whole
like-for-like portfolio is now 5.6% (31/3/05: 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 from 4.1% (31/03/05) to 5.2%.
The mean weighted unexpired lease term for the like-for-like portfolio is 8.4
years (31/03/05: 9.0 years) assuming all lease breaks occur. Void levels across
the like-for-like portfolio were 3.0% at the half-year, only marginally higher
than the 2.9% at the start of the year.
Investment and development portfolio valuation movements
Investment Development Total
£m £m £m
_______ _________ ________
Open market value at 31/03/2005 7,624.3 747.6 8,371.9
Purchases 1,378.5 - 1,378.5
Sales (330.0) (1.3) (331.3)
Transfers into development (37.2) 37.2 -
Transfers out of development 205.4 (205.4) -
Transfers to stock and surrender premiums received (27.8) - (27.8)
Capital expenditure 18.4 124.9 143.3
Valuation surplus 542.3 183.4 725.7
Capitalised interest - 12.8 12.8
Other 67.6 3.9 71.5
_______ _________ ________
Open market value at 30/09/2005 9,441.5 903.1 10,344.6
Our share of joint ventures 1,119.6 30.0 1,149.6
_______ _________ ________
Combined investment portfolio at 30/09/2005 10,561.1 933.1 11,494.2
======== ========= =======
Investment
During the period under review we sold a total of £331.3m of property out of the
combined investment portfolio (including joint ventures and net of sale costs)
generating profits of £16.5m (5.0% above book value) and bought approximately
£1.55bn of investment properties (including assets bought by way of corporate
acquisition and into joint ventures). The average yield on the properties sold
was 1.4% (the low figure being explained by the rent free period on 30 Gresham
Street) and the average initial yield on the assets acquired was 5.0%. The
purchase activity was principally accounted for by the acquisition of Tops
Estates, LxB and two retail assets as well as seven London office investments.
The London office investments were acquired for an aggregate of £342.9m
(including space acquisition costs) to show an average initial yield of 5.5% on
an average passing rent of only £276 per sq m.
Development
Including our share of joint ventures, development activity produced a valuation
surplus of £182.3m (19.3%) in the first six months, with a strong contribution
from our London office projects. Two schemes, Whitefriars, Canterbury and
Bexhill Retail Park, were transferred into the investment portfolio from the
programme. These generated rents of £4.7m in the period and will contribute
£12.1m of rental income in a full year. Two further schemes, Bankside 2 and 3
and Merchant's Quarter, Bristol were transferred to the development programme
during the period.
We spent £124.9m (excluding capitalised interest) on the development programme,
mainly Cardinal Place, SW1. Interest of £12.8m was capitalised during the
period (30/09/04: £5.1m). We estimate that we will incur cash costs (excluding
interest) of some £804.0m to complete the development programme. Capital
expenditure on proposed developments could total £873.0m (excluding Kent
Thameside) if a decision is made to proceed with these schemes, which are held
as part of the investment portfolio and have a current carrying value of
£223.3m.
Retail
The first six months of the year were notable for our major £1.0bn acquisition
programme which has enabled us to continue structuring our portfolio to benefit
from specific characteristics of the retail property market. This means that our
investment portfolio is focused for the long-term on dominant shopping centres,
which we believe are better able to withstand any downturn in consumer demand,
retail warehouse assets which benefit from supply side constraints and
supermarkets which we believe will continue to benefit from the shift to higher
margin non-food merchandise. At the same time, through our development
programme, we are creating new assets for the portfolio of a quality which would
be difficult to acquire in the investment market.
Our portfolio now includes 28 shopping centres, 32 retail warehouse parks and 11
supermarkets and our development pipeline includes six town centre schemes,
totalling some 330,110 sq m of retail space. We retain a small number of
strategic high street holdings some of which may provide future development
opportunities.
Market commentary
Retailers are being squeezed by price deflation combined with rising
expenditure, particularly relating to business rates, energy and employment
costs. At the same time, absolute growth in sales has dropped to very low
levels and like-for-like sales growth is negative. However, despite this, many
retailers are seeking new floor space which is well configured and located and
our development lettings have remained strong with a further 23,690 sq m let
during the period. The investment market continues to be strong and yields have
compressed further over the past six months.
Retail portfolio valuation
Total Total Shopping Shopping Retail Retail
retail(a) retail(a) centres centres warehouses warehouses
30/09/05 31/03/05 30/09/05 31/03/05 30/09/05 31/03/05
Combined £6,282.6m £4,736.6m £3,412.4m £2,553.8m £2,102.6m £1,481.7m
investment
portfolio
valuation
_________ _________ _________ _________ _________ _________
Like-for-like £3,926.1m £3,635.6m £1,980.9m £1,834.2m £1,464.0m £1,344.1m
investment
portfolio
valuation
Rental income £103.4m £103.9m £60.7m £61.7m £30.7m £29.9m
Gross ERV (b) £240.3m £234.7m £129.8m £127.5m £78.6m £76.1m
Voids by ERV 2.3% 2.6% 1.9% 2.4% 1.7% 2.6%
Running yield 5.1% 5.5% 5.6% 5.9% 4.5% 4.8%
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Combined investment portfolio extract from business analysis and reference to
the reconciliation table
(a) The retail portfolio includes retail warehouses, shopping centres,
shops outside Central London (with the exception of shops held through the Metro
Shopping Fund LP), regional offices and sundry other properties outside Central
London.
(b) Annual estimated rental value.
On a like-for-like basis the retail portfolio performed very well with a £280.8m
(7.8%) valuation surplus in the six months. The net reversionary potential is
12.5% for shopping centres, 18.7% for retail warehouses and 16.1% overall for
the total retail portfolio. As yet retailer insolvencies have not impacted
greatly on the levels of vacancy across the retail portfolio, in fact voids have
remained at very low levels and currently stand at 2.3%. This is well below the
average void level for retail property of 5.4% (IPD Monthly Index September
2005).
Review of activity
Investment
In the first six months of the year, we have been growing our retail property
business by acquiring property which we believe over the long-term will offer
good asset management and development opportunities as well as good future
rental growth prospects. We have also been capturing asset management
opportunities within our investment portfolio which have helped to create
additional value. The main activities included:
• The recommended cash offer for Tops Estates for an enterprise value
of £517.2m. We concluded this acquisition in June and took ownership of seven
shopping centres. Since then we have sold the Guildhall Centre in Stafford
ahead of book value and the remaining six properties showed a 7.2% increase in
value (as compared to the valuation on acquisition)
• The acquisition of LxB where we bought a portfolio of retail
warehouse parks and supermarkets for £360m. The portfolio included two retail
warehouse parks in Bracknell and Chester, a partnership interest in a joint
venture which owns a further two parks at Crayford, Greater London and Strood,
Kent as well as ten supermarket properties
• The purchase of:
• Southside, Wandsworth, London SW18: a 49,237 sq m shopping centre
incorporating retail, leisure and office accommodation, with five residential
blocks above and a 1,180 space multi-storey car park. This asset was acquired
jointly with Delancey for the Metro Fund for £188m
• The Fort, Westfield Cross, Thanet: a 32,230 sq m newly developed out of
town shopping centre/retail park which opened in June 2005.
• The creation of new space at White Rose Centre, Leeds enabling us to
provide large stores for Next, H&M and Zara and re-let space at rents which have
generated some 8.1% growth in rental values
• The progression of a number of surrender and re-letting transactions
in the retail warehouse portfolio, in particular at Retail World in Gateshead
where rents again moved ahead strongly.
After the period under review we also acquired the Galleria, Hatfield a
long-leasehold 30,650 sq m outlet centre for £123m to show an initial yield of
5.5%. The Galleria incorporates 85 shops and restaurants, a nine screen UCI
cinema and 1,745 car parking spaces.
Development
We are making good progress on our town centre development pipeline and during
the first six months of the year advanced well on the following schemes:
• Whitefriars, Canterbury. The final phase of Whitefriars opened in
July. This scheme, which comprises some 37,160 sq m of retail and 3,260 sq m of
residential accommodation, was almost fully let on opening and will produce some
£11.4m of rental income per annum
• Princesshay in Exeter, a 44,560 sq m retail-led scheme on which we
are making good progress and are on schedule for completion in 2007
• Merchant's Quarter (formerly Broadmead), Bristol. We have started
works in 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. In
addition to the House of Fraser anchor store, lettings have been announced to
Burton/Dorothy Perkins, H&M, Top Shop, New Look, Virgin and 9,290 sq m to Cinema
de Lux
• Almondvale Shopping Centre, Livingston. In July we submitted an
outline planning application for a £90m extension to our existing holdings in
Livingston. The plans, which have since been approved by the Local Authority,
incorporate an additional 35,770 sq m of retail and leisure accommodation
• Corby. At Corby, where we made some minor changes to the scheme
devised by Tops, we have completed demolition and aim to start work early in
2006, subject to finalising pre-lettings.
Bridgewater Park, Banbridge, North Ireland. We entered into a forward funding
arrangement with GML Estates to develop a major new retail-led mixed-use
development at Bridgewater Park, Northern Ireland. This scheme will include
60,000 sq m of retail accommodation, the first phase of which is the development
of a 20,000 sq m factory outlet with 80 retail units.
Across the retail warehouse portfolio a number of new opportunities have emerged
to reconfigure and improve space as a result of the liquidation of Courts, the
furniture retailer. In Plymouth we are proposing a 7,200 sq m redevelopment and
in Poole we will redevelop an existing MFI and Courts and refurbish the
remainder of the park.
London Portfolio
Our London portfolio comprises some 900,000 sq m of office space and 88,000 sq m
of retail predominantly located in the core London markets of the West End,
mid-town and City. We also own a cluster of properties on the South Bank.
Over the past few years we have been repositioning the portfolio through an
active programme of purchases and sales in order to benefit from anticipated
rental growth in the next few years. We have also increased the scale of our
development activities since we believe this will generate higher returns for
shareholders.
Market commentary
Conditions in the London office market continue to improve with overall vacancy
levels now at 8.7% (September 2005) down from 9.3% at the year end (source: DTZ
Debenham Tie Leung). As we remarked then, the limited supply of new
development, particularly in the West End, continues to drive demand for good
quality space and, as a consequence, rental growth.
We anticipate that the positive signs emerging from the West End will filter
through to the other London office markets as supply is absorbed.
There has also been a significant reduction in availability in the City office
market and we are optimistic that this will give rise to rental growth on
existing space towards the end of 2006 and possibly even earlier on rental
levels in the pre-letting market.
Our retail assets are proving to be resilient despite the general malaise
amongst retailers. Our more historic holdings are in recognised core locations
and these have been complemented by the recent introduction of new retail stock
at Cardinal Place, Victoria, which has let extremely well.
London Portfolio valuation
London London London London London London
portfolio(a) portfolio(a) offices offices shops shops
30/09/05 31/03/05 30/09/05 31/03/05 30/09/05 31/03/05
Combined portfolio £5,067.9m £4,485.5m £4,066.6m £3,583.8m £918.9m £820.9m
valuation
_________ _________ ________ ________ ________ _________
Like-for-like £3,444.1m £3,226.6m £2,562.4m £2,400.6m £803.9m £756.2m
investment
portfolio
valuation
Rental income £109.9m £110.7m £85.7m £86.5m £22.0m £22.3m
Gross ERV (b) £227.2m £224.3m £173.9m £171.7m £48.4m £48.1m
Voids by ERV 3.6% 3.1% 4.1% 3.8% 2.1% 0.4%
Running yield 6.2% 6.7% 6.5% 7.0% 5.3% 5.8%
(a) The London portfolio includes London offices, Central London shops (with the
exception of shops held through the Metro Shopping Fund LP) and sundry other
properties in Central London.
(b) Annual estimated rental value.
Review of activity
In the first half of the year we sold over £280.0m of property, largely
accounted for by the sale of 30 Gresham Street, following the letting to
Dresdner Kleinwort Benson, and acquired £342.9m of property. We also continue
to advance our 270,280 sq m development pipeline.
Investment
Our strategy continues to focus on structuring the London Portfolio to ensure
that we benefit fully from market recovery. During the first six months we
acquired seven properties, including three assets for future development. In
addition to Times Square, 160 Queen Victoria Street, EC4, details of which were
provided at the year end, these included:
• 42 Southwark Bridge Road, London SE1: Acquired for £32.8m representing
a net initial yield of 7.32%. This freehold 35,120 sq m building is let to
Schroders and is close to our development at Bankside123
• IPC Tower, Shoe Lane, EC4: acquired for £50.9m on a net initial yield
of 6.77% the property is a 11,400 sq m long-leasehold office building providing
net rental income of approximately £3.44m per annum. This tower building is
adjacent to New Street Square and offers good rental prospects being let at
average rental levels of £306 per sq m
• 15 Bonhill Street, EC2: Acquired for £34.7m, representing a net
initial yield of about 7.26%. This 9,330 sq m freehold building has been
recently refurbished and is located in a growth sector of the City market. It
is let at an average rent of £245 per sq m to tenants including RIBA, Transport
for London and American Express. We believe that this property will see good
rental and capital growth in future
• 140 Aldersgate Street, EC1: This 7,964 sq m long-leasehold, new office
building was purchased for £39.5m and was acquired vacant as the first City
building for Landflex. In October 2005 we announced that we had let
approximately half the building to Vibrant Media Ltd which took 658 sq m on the
7th floor and Flightbookers Ltd which will occupy a total of 2,989 sq m over the
4th, 5th and 6th floors, with an option on a further floor
Both companies took a Landflex lease at an RPI-linked inclusive rent including a
core services package. The total annual income (excluding the services element)
generated by both lettings will be £1.3m per annum and both companies have taken
a ten year term with a five year break option
• Holborn Gate, 330 High Holborn, WC1: was purchased for £85.8m. The
14,860 sq m office building is fully let to a number of tenants including the
Secretary of State, Financial Dynamics, Hogg Robinson and RBS and currently
produces rent of £5.3m per annum, providing a net initial yield of 6.20%.
Development and letting
We continue to make excellent progress with our development programme. Notable
events during the period under review were:
• Good progress is being made at Cardinal Place,our 60,550 sq m
mixed-use development in Victoria. This scheme comprises three office buildings
with ground floor retail. The office element is already 28% let at an average
rent of £594 per sq m to tenants including 3i Group PLC, P&O and Wellington
International Limited. The average lease term is 18 years, with the earliest
lease break being 15 years. In addition the retail element is now almost fully
let and has opened for trading. We are very pleased with the letting progress
to date and the way in which this scheme has transformed this key location close
to Victoria Station
• The transfer from the development pipeline to the development
programme of Bankside 2 and 3, SE1, where construction has now started. These
buildings 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
• The commencement of four out of five buildings at New Street Square,
EC4 which will provide 65,320 sq m including 2,980 sq m of retail space. An
additional 3,760 sq m has been taken by Deloittes who exercised an option over a
second building in October 2005, taking their total commitment to approximately
24,000 sq m.
As described at the year-end we continue to progress the planning application,
submitted in May 2005, for One New Change, EC4, a 51,340 sq m mixed-used retail
and office scheme.
Property Outsourcing
Market commentary
The period under review has seen a number of notable events for the future of
our Land Securities Trillium business. We made some important changes to our
existing contracts and we have also seen some significant activity in the public
sector which is impacting positively on our current pipeline of potential deals.
We are particularly excited by opportunities with the Ministry of Defence
where we are one of the final two bidders in three significant transactions. We
recently submitted our bids for two packages under the Defence Training Review
('DTR') and the Ministry of Defence Estates London ('MoDEL') project. DTR is
made up of two 25-year contracts for the provision of specialist training across
the entire MOD which covers 800,000 sq m of training accommodation. Working with
our joint venture training partner QinetiQ, we are proposing a solution which we
believe will provide world-class training in modern, purpose-built facilities to
meet the needs of the Armed Forces in the 21st Century. The MoDEL contract
involves the consolidation of five London airbases onto one facility at Northolt
with the resultant freeing up of the other bases for redevelopment.
We continue to explore other public sector initiatives where there are implicit
property issues and opportunities, including Building Schools for the Future ('
BSF'). The Government confirmed in its October White Paper on 'Higher Standards
Better Schools for All' that it remains committed to this £30bn programme over
15 years. We are currently working in partnership with Mill Group, through its
Investors in the Community programme, on a bid for the Leeds BSF. Mill Group is
a private company with a very strong reputation and successful results in the
schools market. In addition, the Northern Ireland Civil Estate project is
expected to come to the market by the end of 2005, and we will be actively
pursuing this.
Some £300m of corporate structured leaseback/leasehold liability packages have
come to the market but we were unwilling to match the prices paid by highly
leveraged purchasers. We are, however, encouraged by the levels of activity.
Financial results
In the first six months of the year Land Securities Trillium contributed 21% of
the Group's underlying operating profits and 53% of gross property income. This
compares to 29% and 60% respectively for the same period in 2004. Segment
profit was £37.0m (30/09/04: £56.3m); this reduction primarily reflects the
decrease in BBC income following the disposal of Media Village White City and
also central costs being lower in the comparable period due to the timing of
costs incurred.
6 months 6 months Full year
30/09/05 30/09/04 31/03/05
£m £m £m
________ ________ ________
Contract level operating profit
DWP 41.7 39.7 81.4
BBC - 10.5 20.6
Norwich Union 1.2 2.9 6.1
Barclays 1.3 - -
DVLA 0.3 - -
Bid costs (2.8) (0.7) (2.6)
Central costs (4.8) (1.8) (7.8)
________ ________ ________
36.9 50.6 97.7
Profit on sale of fixed asset properties (0.2) 5.7 30.5
Net gain on revaluation of investment property 0.3 - -
________ ________ ________
Segment profit 37.0 56.3 128.2
======= ======= =======
Distribution received from Telereal 11.7 24.4 65.4
Profit on sale of Telereal 293.0 - -
======= ======= =======
Review of activity
Department for Work and Pensions
Our contract with the Department for Work and Pensions ('DWP') produced £380.7m
of income for Land Securities and delivered operating profit of £41.7m in line
with our expectation. We still expect the DWP to vacate some 200,000 sq m of
accommodation over the next 12-18 months, all of which is priced into our
contract.
We are continuing to support DWP in the roll-out of the Jobcentre Plus
organisation which is successfully entering its final stage before completion in
2006. This project involves the refurbishment of 1,000 sites and the creation of
new style, open plan public areas in Jobcentres across the country.
BBC
In the period under review the BBC contract broke even at the operating profit
level (30/09/04: £10.5m). The decrease in profit reflects the sale at the end
of last year of Media Village, White City and the subsequent reduction in the
unitary charge payable to us by the BBC. We will continue to provide facilities
management services to the BBC until at least June 2006.
Our development project teams continue to progress with the two schemes they are
project managing on behalf of the BBC. At the new 81,390 sq m Broadcasting
House project in London, the first phase is nearing completion while the BBC's
new 33,370 sq m broadcasting facility at Pacific Quay, Glasgow remains on
schedule for completion in summer 2006.
BT
Following the announcement made in September, we received shareholders' approval
for the disposal of our share in our Telereal joint venture for a consideration
of £300.0m. As predicted previously our share of distributions received from
Telereal compared to the same period last year fell by £12.7m due to the lower
levels of disposal activity from the portfolio.
The sale ended our contractual relationship with BT on 30 September 2005.
Simultaneously we entered into new agreements with Telereal involving the
management of part of BT's leasehold estate and the provision of other services.
The agreement in relation to the leasehold estate runs until the end of 2031,
although both parties have the option to terminate the agreement at any time on
or after 31 March 2010. Under these new arrangements Land Securities Trillium
will receive annual gross revenues of approximately £50m, with anticipated
pre-tax profits of some £14m per annum. We have included this income in our
business plan only until March 2010.
Norwich Union
In the period under review the Norwich Union contract generated a £1.2m
contribution to operating profits, a reduction compared to the similar period
last year when we benefited from the proceeds of property disposals.
In June 2005 we delivered the first phase of the £92m project to refurbish
Norwich Union's 30,890 sq m headquarters in Norwich, and we continue to explore
the potential to expand our relationship beyond the 25% of the Norwich Union
estate we currently support.
Barclays
Good progress continues to be made in letting the vacant leasehold liability
properties transferred under the contract with Barclays. Since the contract
started 3,700 sq m has been let and the annual rent roll is now circa £2m per
annum.
Driver and Vehicle Licensing Agency ('DVLA')
On 4 April 2005 our contract with the DVLA went live. The 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 24,471 sq m refurbishment
of part of the DVLA's headquarters site at Morriston, Swansea will result in a
£30m investment by us over the next three years. We are currently advising our
customer on potential new space requirements to support its continuing business
modernisation programme.
Urban Community Development
The first six months of the year has seen good progress being made by Urban
Community Development.
At Kent Thameside we received a 'resolution to grant' planning consent for
Eastern Quarry and we have agreed terms for the sale of the Crossways Business
Park. As an example of how the Group continues to leverage synergies across the
organisation, our Urban Community Development team collaborated with Land
Securities Trillium on the bid for the MoDEL contract, where we are now on a
shortlist of two.
Kent Thameside
In July we announced that Dartford Borough Council had resolved to grant
planning permission for our proposals at Eastern Quarry to develop 6,250 homes
and a range of community and employment facilities, together with new parks and
lakes. This approval is subject to the negotiation of the planning conditions,
concluding the Section 106 agreement and securing the withdrawal of a holding
objection from the Highways Agency. We are making good progress on all these
fronts.
Our proposals include 30% 'affordable' homes, a range of new schools, community
facilities, local shops and over 120,000 sq m of offices. In addition, over a
third of the site's area will be dedicated to open space. New wildlife areas
including neighbourhood parks, ponds, wet and dry meadows, ecology areas,
woodland and lakes will transform the former chalk quarry which has been
inaccessible to the public for many years. The development in the quarry will
be brought forward in phases over the next twenty years. It is anticipated that
the first homes will be available in 2008 and we intend to work with carefully
selected house building partners to deliver the new homes to the highest
architectural standards.
At Ebbsfleet, where we have a 48.5% interest, we continue to progress the first
phase of residential development and are working with Countryside Properties,
our preferred development partner for the Springhead Quarter, on the submission
of a detailed planning application later this year for a scheme of over 300
dwellings.
At Waterstone Park, our other joint venture with Countryside Properties has seen
the completion and sale of the first phase of 200 units. Detailed consent has
been secured for the next phase which will see 400 units delivered to the market
over the next four years.
In October we agreed terms to sell our remaining freehold interest in Crossways
Business Park to Legal & General. Under our ownership, Crossways had become
recognised as the leading mixed-use business park in the South East quadrant of
the M25. The park has consent for 300,000 sq m of office and industrial
floorspace, 85% of which has been developed. Occupiers on the scheme include
Regus, Laing O'Rourke and John Lewis. This sale will enable us to concentrate
our activities on the much larger Ebbsfleet and Eastern Quarry schemes.
Business Analysis
Further non-statutory information, relating to the Group's Investment Portfolio
and Property Outsourcing, is available on the Group's website at
www.landsecurities.com/Interims2005. This includes more detailed information in
respect to the combined investment portfolio valuation and further detail on
Land Securities Trillium's existing contracts.
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