Final Results - Part 1

Land Securities PLC 22 May 2002 22 May 2002 Land Securities Preliminary results for the year ended 31 March 2002 HIGHLIGHTS â€¢ Adjusted earnings per share increased by 13.7% to 51.61p (2001 45.38p). â€¢ Pre-tax profit up to Â£363.5m, an 11.9% increase (2001 Â£324.7m). â€¢ Adjusted diluted net asset value steady at 1155p (2001 1152p). â€¢ High level of activity demonstrated by â€¢ Â£0.5bn of property sales â€¢ Â£0.5bn investment in development and property activities â€¢ Â£146m investment in Telereal â€¢ Â£70m investment in Kent Thameside â€¢ Portfolio rationalisation substantially complete. â€¢ Development progressing well with 87,030 sq m completed and 260,160 sq m under development. â€¢ Land Securities Trillium secured two major new contracts during the year. â€¢ Proposed Â£500m return of capital to shareholders. â€¢ 100m sq ft of commercial property owned or under management. Peter Birch, Chairman, said 'Over two years ago we set out a clear strategy aimed at securing enhanced returns from property. Since that time, the Group has made significant progress towards implementing this strategy, by refocusing the investment portfolio, expanding the development programme and winning new property outsourcing contracts. 'Land Securities has a unique portfolio and has put in place a compelling strategy, the right team and the right structure for the future. The new generation of management relishes the challenge of building on our long-term record and continuing to generate value for shareholders.' For further information: Ian Henderson/Andrew Macfarlane/ Emma Denne Land Securities PLC 020 7413 9000 Steve Jacobs/Stephanie Highett Financial Dynamics 020 7831 3113 22 May 2002 Preliminary Announcement of the results for the year ended 31 March 2002 FINANCIAL HIGHLIGHTS 31 March 31 March 2001 2002 (restated) % change _________ _________ ________ Gross property income Â£1,025.6m Â£650.4m +57.7 Operating profit Â£516.8m Â£450.6m +14.7 * Revenue profit (pre-tax) Â£364.8m Â£323.4m +12.8 Pre-tax profit Â£363.5m Â£324.7m +11.9 ** Adjusted earnings per share (basic) 51.61p 45.38p +13.7 Earnings per share (basic) 50.27p 44.87p +12.0 Dividends per share 34.00p 32.50p +4.6 ** Adjusted dividend cover (times) 1.52 1.39 Dividend cover (times) 1.48 1.38 + Interest cover (times) 2.98 3.03 # Adjusted diluted net assets per share 1155p 1152p +0.3 Diluted net assets per share 1132p 1130p +0.2 Book value of properties sold Â£510.4m Â£424.9m Capital expenditure on properties, developments and acquisitions Â£776.5m Â£758.3m ## Valuation of investment properties Â£7,800.0m Â£7,899.1m Net borrowings Â£1,942.1m Â£1,727.8m Equity shareholders' funds Â£6,036.6m Â£6,017.8m + Gearing (net) 32.2% 28.7% _________ _________ ________ The comparative figures for the year ended 31 March 2001 have been restated to reflect the changes in accounting policies described in Note 1. Trillium was acquired in November 2000. Results for the year ended 31 March 2001 therefore include four months' trading for that business. * Excludes results of property sales and bid costs ** Excludes results of property sales, bid costs and additional deferred tax arising on adoption of FRS19 # Excludes the effects of additional deferred tax arising from adoption of FRS19 ## After adjusting for the effect of adopting UITF28 + See glossary Chairman's Statement Over two years ago we set out a clear strategy aimed at securing enhanced returns from property. Since that time, the Group has made significant progress towards implementing this strategy by refocusing the investment portfolio, expanding the development programme and winning new property outsourcing contracts. The Group's sound performance over a number of years is compelling evidence of the value of a long-term approach to property. Our dividends have grown by an average of 4.5% per annum since 1992, compared to inflation of 2.6% per annum. Over the same period, our net assets per share have increased by 7.6% per annum. These figures have underpinned our average total shareholder return of 13.8% over this period. The recent fall-out from the technology sector and other high-profile corporate failures has brought into sharp relief the benefits of concentrating on sustainable growth over the long term. The Board has long recognised this and while restructuring the business it has been mindful not to compromise the Group's reputation for dependability and its enviable financial position. Nevertheless, the performance of asset-backed businesses like ours is inextricably linked to the Group's capital structure and we have been reviewing this closely. Our starting point has been a belief that there are good business reasons for retaining a strong balance sheet. As part of this review we have concluded that around Â£500m of our capital is currently surplus to our requirements and are therefore proposing to return this surplus to shareholders. In assessing the appropriate amount, we have considered future capital requirements of the individual business units. We expect the return, which is likely to be on a structured pro-rata basis to all shareholders, to be achieved by the Autumn. More details of the capital return are contained in the Financial Review which follows. Results During the year revenue profit increased by Â£41.4m to Â£364.8m. The pre-tax profit of Â£363.5m, an increase of 11.9%, was assisted by a full year's contribution from Land Securities Trillium. Adjusted earnings per share are up 13.7% to 51.61p per share (2001 45.38p per share). Adjusted diluted net assets per share remained steady at 1155p per share. The Group has been particularly active and has sold over Â£0.5bn of properties, invested Â£0.5bn in its portfolio and development activities, Â£146.4m in the Telereal joint venture and a further Â£70.0m in Kent Thameside. The Board recommends a final dividend of 24.95p per share, an increase of 4.6% over last year, making a total distribution for the year of 34.0p, an increase of 4.6%. The dividends paid and proposed will be covered 1.52 times after excluding the effect of property sales, bid costs and additional deferred tax arising on adoption of FRS19. The dividend will be paid on 22 July 2002 to shareholders on the register on 28 June 2002. Valuation Since September 2001 there has been considerable uncertainty and a degree of instability in global economies and financial markets. Against this background we are pleased that the valuation of our portfolio has exhibited relative stability despite being adversely impacted by a decrease in value of our Central London development projects. Board and Senior Executive Group Changes In order to ensure the effective delivery of our strategy we have made changes to the Board and Senior Executive Group. We believe that we now have one of the strongest senior management teams in the sector, with substantial financial, property and management expertise. Succession planning at all levels within the organisation also remains firmly on the Board's agenda. In October 2001, Andrew Macfarlane was appointed to the Board as group finance director, joining from Six Continents PLC. In January this year, Peter Freeman, non-executive director of Argent Group plc and Chairman of Freeman Publishing plc, was appointed a non-executive director. In April 2002, David Rough, previously Group Director (Investments) of Legal & General Plc, also joined as a non-executive director. After a successful 20-year career at Land Securities Jim Murray retired in June. We would also like to pass on our thanks to Peter Walicknowski and Manish Chande who resigned during the year. Ian Ellis, chief executive, and David Godden, chief operating officer, of our total property outsourcing business joined the Senior Executive Group in January. Ian and David joined Land Securities when we acquired Trillium in November 2000 and have been instrumental in the development of this business. Following the year-end, in April, we announced that, after a successful 29-year career at Land Securities, Mike Griffiths would be stepping down. Francis Salway will move to the development business unit as chief executive and we have recruited Mark Collins from GE Capital Real Estate as chief executive of portfolio management and a member of the Senior Executive Group. After ten years as a non-executive director Peter Hardy has also indicated that he will be stepping down prior to this year's AGM. I would like to thank both Mike and Peter for their valued contribution to the group. I welcome the staff who transferred to the Group when we concluded the BBC and BT transactions. We have all been through a period of substantial change and I am impressed by the enthusiasm demonstrated by our employees, both old and new, and the positive way in which they are approaching new challenges. I should like to thank them for all they have achieved over the past year. Outlook The recovery of global economies following the events of 11 September remains fragile: there is still a risk of further instability in the international markets and the uncertainty over oil prices remains. However, the UK economy remains relatively robust and consumer confidence appears undiminished following the tax increases outlined in the recent Budget. With our focus on the UK property markets, we have good reason to be positive about the future prospects for the Group. The advantage of property as an investment is highlighted by the fact that UK direct commercial property returns continue to exceed those of the equity market. Over a five-year period the FTSE-All Share has produced annual total returns of 6.7%, compared with 11.9% for property. Over a ten year period the returns have been broadly similar at 11.9% for the FTSE All-Share and 10.6% for property. Demand for UK commercial property will, we believe, continue to increase as pension funds switch from equities to less risky investments in order to meet future funding requirements. We will continue to pursue our core principles of acquiring and owning real estate and optimising returns. Land Securities has a unique portfolio and has put in place a compelling strategy, the right team and the right structure for the future. The new generation of management relishes the challenge of building on our long-term record and continuing to generate value for shareholders. Peter G Birch Chairman Corporate Review Last year we described how we had set the company on course to become the provider of choice of real estate and associated occupational services. Over the past 12 months we have made substantial progress towards achieving that aim. Driving this new strategy were fundamental shifts in our macro- and micro-economic environment which required us to evolve our business activities in order that we could take maximum advantage of the opportunities that we saw in this new era. These drivers continue to influence the way we develop our business. Our new corporate structure is working well and each of the three business units has made good progress in achieving the objectives set for them last year. We have virtually completed the rationalisation of the investment portfolio while, at the same time, investing in buildings which will form the future development programme. We have also been looking for the most advantageous way of creating a partnership or joint venture in which to hold our Victoria properties, a topic which is expanded on in the portfolio management review. We have advanced the development pipeline and including our share of joint developments we now have 260,160 sq m of new developments in progress, a further 212,900 sq m with planning permission or minded to grant and more than 249,960 sq m at the pre-planning stage. We have also confirmed our position as one of the leaders in total property outsourcing through winning two major contracts with the BBC and BT. The level of activity over the past 12 months demonstrates our focus on the delivery of our strategy and increasing the returns we generate for shareholders. We are pleased that Land Securities Trillium has exceeded our expectations for performance. Our discussions with occupiers lead us to believe that there is good demand for property outsourcing and we are prepared to invest significantly in this business. Our ambition is to grow both the total property outsourcing and development business units over the next five years until each of these contribute approximately 25% of our total operating profit. We believe that this will provide a balance between the strong and secure performance of the investment portfolio and the higher rewards from our development and outsourcing activities. In this context we have reviewed our capital requirements for the medium term and, as reported in the Chairman's Statement and Financial Review, have concluded that we have surplus capital which we will be returning to shareholders later this year. Performance Benchmarking During 2001 we subscribed to the Investment Property Databank (IPD) property performance benchmarking service both for internal management purposes and also to ensure transparency of performance for the benefit of our shareholders. We consider that the most appropriate measure of our performance is total return in the form of NAV growth and dividend. Total property return, on an ungeared basis, in the form of the income yield and capital growth on properties, is an important ingredient of this wider measure. While we believe that benchmarking is a strong management tool, there are reasons why a comparison to IPD does not provide the definitive measure of our performance. For example, it is important to take into account the impact of gearing, the chosen sectors of focus of the company, and the constraints of capital gains tax on portfolio rotation when compared with typical institutional investors. I am pleased to report that the comparison to IPD shows that over the long term we have delivered significant value through our performance. Over the 19-year period covered by IPD, we are in the top quartile of contributing portfolios in terms of ungeared total return. Further details of our comparative performance over the last year are given in the portfolio management review. Responding to the Challenges set by Government In April the Government launched a New Code of Practice for Commercial Leases. It has been seen by some as an attack on the traditional leasing structure in the UK. We would see it rather as a call for building owners to offer occupiers an alternative to traditional lease forms. I am delighted that we have anticipated the Government's initiative in this area by responding to businesses' desire for new forms of occupational contracts both through the acquisition of Trillium and also through initiating the development of our LandFlex product. The Government continues to be challenged by the renewal of the country's infrastructure and the regeneration of inner urban areas. We have consistently highlighted the threat to the UK and, in particular, to London of neglecting these issues. Urgent priority needs to be given to emulating the success of Government strategies where deregulation and tax incentives have contributed to the successful implementation of urban renewal and infrastructure projects. Property investment can act as a catalyst for renewal in this way. However, it requires significant equity investment from specialist companies with deep pools of development expertise. Financial institutions tend not to have the sufficient skilled personnel for large-scale development and private property companies financed by high levels of debt do not have the necessary equity available. A quoted property company can deliver urban renewal, but the tax structures for such a company put it at a disadvantage as compared to other property vehicles. The Government needs to recognise and address this impediment to the quoted property sector's potential contribution to urban renewal. The Government's plans for reform of the planning system should assist in the process of regeneration. We generally welcome these proposals, but would ask that the Government listen to the representations of the property industry to ensure that there is a simple and consistent process and one which does not, by virtue of an effective development land tax, bias property owners towards retention of existing buildings which may be functionally obsolete. Through regeneration and the delivery of attractive and environmentally sustainable buildings, property companies can improve our daily lives and make businesses more efficient. We are involved in major regeneration programmes in Birmingham, Bristol, Cardiff and Kent Thameside and wish to continue this significant work to improve the fabric of those cities and other potential areas where we might get involved. We therefore need the Government to provide other developers and ourselves with a platform that encourages, rather than discourages, our potential contribution. Group Objectives Over the next year we shall seek to expand on the initial success of property outsourcing by developing partnerships with businesses that wish to rationalise their property holdings, releasing value to our respective shareholders' mutual advantage. The development unit will press on vigorously with the plans outlined in this report to ensure that we are well placed to secure lettings as the market improves, while portfolio management will continue to drive the returns from the investment assets. Businesses face the constant challenge of generating ever-increasing returns. Although, proportionally, property costs have fallen as compared to other costs, more efficient management of property can assist in improving profits. We are ideally positioned to deliver the accommodation and property services required to fulfil this need. Ian Henderson Group Chief Executive Investment Business Property Highlights Analysis of Investment Business valuation Portfolio valuation surplus/ at 31 March 2002 Total% (deficit) Â£m % _______ _______ _______ Offices West End 1,454.1 18.6 (4.3) City 1,157.5 14.8 (2.5) Midtown 590.7 7.5 (6.2) Inner London 254.9 3.3 (3.8) Rest of the United Kingdom 95.7 1.2 1.5 Shopping centres and shops Shopping centres 1,278.5 16.4 0.0 Central London shops 683.5 8.8 (0.5) Other in-town shops 566.1 7.2 (0.2) Retail warehouses Parks 822.3 10.5 3.0 Other (including food superstores) 173.0 2.2 4.7 Industrial premises and warehouses 375.4 4.8 0.6 Hotels, leisure, residential and other 359.2 4.7 3.3 _______ _______ _______ TOTAL VALUATION 7,811.0 100.0 (1.3) _______ _______ _______ The portfolio valuation figures given above relate to the investment portfolio business comprising investment and development properties. The figures exclude properties owned by Land Securities Trillium. The portfolio valuation figures include a one third apportionment of the valuation attributed to properties owned by the Birmingham Alliance limited partnerships and a one half apportionment in relation to property owned by the Gunwharf Portsmouth Limited Partnership and the Ebbsfleet Limited Partnership. Valuation The investment portfolio was valued by Knight Frank at approximately Â£7.81bn at 31 March 2002. After adjusting for sales, acquisitions and expenditure the value reduced by 1.3% as compared to the year to 31 March 2001. However, if development properties are excluded, the portfolio value, measured on a similar basis with adjustment for sales, acquisitions and expenditure, decreased by only 0.5%. A positive contribution from retail warehouse and industrial developments was more than offset by the negative impact of the revaluation of our office development projects which are currently in progress. This reflects a slight reduction in office rental values owing to current market conditions and the increased risk premium applied to speculative development at this stage in the cycle. However, most of the office developments are not due to be delivered until mid-2003 or later when we expect market conditions and rental values to have improved. In the first half of the Company's financial year to 30 September 2001, capital values for both London office and town centre retail properties weakened due to adverse yield movement. In the second half of our financial year, capital values for town centre retail properties increased with clear evidence that investors are being attracted back to the sector. For London offices, the second half of the year saw continuing small decreases in capital value and sharper falls in rental values. The fact that capital values for London offices decreased by less than rental values is attributable, in part, to the protection offered to investors by long leases and also by the continuing attraction of the yield levels which, for London offices, are at high levels by historic standards. Retail warehousing has shown the strongest capital growth over the last 12 months, and has been strongly favoured by UK institutions. The industrial sector has been broadly flat with positive rental growth being largely offset by adverse yield movement. Occupational markets have, with the exception of retail, weakened over the last year. However, capital values have generally been supported by high levels of investor interest in property, the attraction being the high yield on property relative to the cost of borrowing and also relative to the income yields available from other asset classes. After excluding development properties which were producing less than half of their anticipated income at 31 March 2002, together with other vacant pre-development holdings, the value of the portfolio at 31 March 2002 was Â£7.0bn. At the same date, the annual rent roll, net of ground rents and excluding the same properties, was Â£487.1m, 6.9% of this figure. Detailed breakdowns by sector, including comprehensive analyses of the Group's valuation, rental income and yield profiles follow in the investment portfolio analysis. Investment Portfolio Analysis This analysis excludes trading properties and all properties owned by Land Securities Trillium and Telereal. % Rental value growth by sector for 12 months to 31 March 2002 % ____ Offices (2.2) Shopping centres and shops 2.2 Retail warehouses 3.1 Industrial premises and warehouse 3.1 Hotels, leisure, residential and other 2.8 ____ Investment portfolio 0.2 ____ Yield on present income at 31 March 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 9.3% 9.9% 8.2% 8.1% 8.3% 7.8% 6.8% 6.6% 6.5% 6.7% 6.9% Yield on present income by sector at 31 March 2002 % ___ Offices 7.3 Shopping centres and shops 6.8 Retail warehouses 6.2 Industrial premises and warehouses 7.7 Hotels, leisure, residential and other 5.6 ___ Investment portfolio 6.9 ___ Rental income and portfolio valuation by type at 31 March 2002 Net rental income* Valuation ______ ______ Total Total % % Offices -central and inner London 45.8 44.3 -rest of UK 1.7 1.2 Central and inner London shops 8.6 8.8 Other in-town shops 7.7 7.2 Shopping centres 16.3 16.4 Retail warehouses and food superstores 11.6 12.7 Industrial premises and warehouses 4.9 4.8 Hotels, leisure and residential 3.4 4.6 ______ ______ 100.0 100.0 ______ ______ *Excludes developments % Portfolio by value and number of properties at 31 March 2002 Value No of Â£m % Properties ______ ______ ______ 5.68 110 0 - 10 10 - 25 12.97 65 25 - 50 19.60 44 Over 50 61.75 50 ______ ______ ______ 100.00 269 ______ ______ Number of Properties by Sector No. ______ London - office and retail City 26 West end 38 Mid-town 13 Inner London 9 Offices - rest of UK 4 Shopping centres and shops Shopping centres 18 Shops 62 Retail Warehouses Retail parks 27 Other retail warehouses 19 Food superstores 2 Industrial premises and warehouses London, south-east and eastern 31 Rest of UK 4 Hotels, leisure, residential and other 16 ______ Total 269 ______ Average Rents excludes developments and voids Average Average Rent ERV Â£/sq m Â£/sq m ______ ______ Offices Central and inner London 330 338 Rest of UK 76 74 Retail Shopping centres n/a n/a Shops n/a n/a Retail warehouses (including supermarkets) 131 151 Industrial premises and warehouses London, south-east and eastern 57 62 Rest of UK 23 24 Hotels, leisure, residential and other n/a n/a Note: Average rents and ERVs have not been provided where it is considered that the figures would be potentially misleading (i.e., where there is a combination of analysis of rents on an overall and Zone A basis in the retail sector and where there is a combination of uses). Analysis of Reversions, Voids & Lease Durations Excludes developments Average Net Unexpired Rental Vacancy Lease Income Net ERV Rates Term (1) (2) Voids (3) (4) Â£m Â£m Â£m % Years _____ _____ _____ _____ _____ London - office West end 83.0 100.6 0.5 0.5 8.50 Mid-town 40.3 47.7 0.0 0.0 8.00 City 81.9 83.1 0.3 0.3 4.75 Inner London 12.2 14.4 0.1 0.8 3.00 Offices - rest of UK 8.2 8.1 0.5 6.2 3.50 Retail Shopping centres 78.1 83.6 1.0 1.1 11.50 Central London shops 41.1 45.4 0.1 0.1 8.75 Shops 37.1 39.1 1.0 2.4 9.50 Retail Warehouses and food superstores Retail parks 42.4 46.9 1.1 2.4 16.25 Other 13.2 14.4 0.8 4.9 18.75 Industrial premises and warehouses South-east and eastern 20.2 21.3 0.3 1.3 8.25 Rest of UK 3.8 3.9 0.1 1.1 8.00 Hotels, leisure, residential and other 16.1 17.9 0.0 0.0 n/a _____ _____ _____ _____ _____ TOTAL 477.6 526.4 5.8 1.1 8.75 _____ _____ _____ _____ _____ Turnover rents total Â£3.1m and represent 0.6% of the total net rental income figure given above. Notes 1. 'Net Rental Income' is annual rents passing at 31 March 2002 after deduction of ground rents. 2. 'Estimated Rental Value' includes vacant space and is calculated after deducting current ground rents. 3. Calculated by ERV. 4. The figures in this column show the number of years until half of the income has been subject to a lease expiry or tenant or mutual break clause. Portfolio Value by Location % figures calculated by reference to a total portfolio value of Â£7.81bn Ware- Shopping houses Hotel, centres and leisure and Retail industrial residential Offices shops warehouses premises and other Total ____ ____ ____ ____ ____ ____ % % % % % % Central & Inner London 44.3 8.8 - 0.1 3.0 56.2 Rest of south east and eastern 0.6 3.3 3.7 4.1 1.0 12.7 Midlands 0.2 3.6 2.1 0.2 - 6.1 Wales and south west 0.1 4.6 1.0 0.1 - 5.8 North, north west, Yorkshire and Humberside 0.1 7.0 4.4 0.3 0.5 12.3 Scotland and Northern Ireland 0.2 5.1 1.5 - 0.1 6.9 ____ ____ ____ ____ ____ ____ Total 45.5 32.4 12.7 4.8 4.6 100.0 ____ ____ ____ ____ ____ ____ Portfolio Tenant Diversification As the Company's investment portfolio covers four principal sectors of the UK property market, it benefits from inherent diversification in terms of both tenant credit and business sector risk. The investment portfolio comprises over 4,000 tenancies and over 2,000 tenants. The 10 largest tenants account for 26.4% of current rents and are: Central Government (9.8%), Allen & Overy (2.4%), J Sainsbury (2.3%), Dresdner Bank (2.2%), Dixons Group (2.0%), Kingfisher (1.9%), Enterprise Oil (1.6%), Ladbroke Group (1.5%), CMS Cameron McKenna (1.4%), The Boots Company (1.3%). Portfolio Management Over the last 12 months we have completed most of the rationalisation of our investment portfolio to focus primarily on four core sectors of the market: central London offices and shops; shopping centres; retail warehouses and south-east industrial premises. These are the sectors that we consider will deliver superior rental growth over the medium and long term as a result of constraints on the supply of land. The nature of most of our individual holdings is such as to enable us to apply our asset management skills to generate growth in earnings. Performance Benchmarking Long Term Performance Relative to IPD Ungeared Total Returns - periods to 31 March 2002 Land Securities IPD* IPD* - Upper Quartile % % % _______ _______ _______ 10 years 12.3 10.8 11.4 19 years 11.4 10.2 11.0 *IPD All Fund Universe March 2002 (unfrozen) Source: IPD One Year Performance Relative to IPD Ungeared Total Returns - 12 months to 31 March 2002 Land Securities IPD* % % _______ _______ Offices 2.8 6.1 Retail 7.6 6.9 Industrial 7.7 7.9 Other Commercial 9.0 8.1 PORTFOLIO 5.4 6.8 * IPD All Fund Universe March 2002 (unfrozen) Source: IPD The upper table above compares Land Securities' ungeared total property return over the last 10 year and 19 year periods to 31 March 2002 to the IPD All Fund Universe March 2002, which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2001 (many of these funds are now valued quarterly by IPD, while the others were extrapolated forwards). It can be seen that Land Securities' portfolio has out-performed and produced a return which places it in the top quartile of contributing portfolios over these two time periods. The 19-year period has been selected as the longest time period over which IPD provide comparative performance figures. The lower table above compares the performance of the Company's portfolio to that of IPD on a similar basis at both sector and total portfolio levels over the 12 month period to 31 March 2002. Our sector focus means that the structure of the portfolio will impact adversely in some individual years, and this has been the case with our high exposure to offices over the last 12 months. It is also the case that our London office portfolio has under-performed, largely because of development schemes and other properties with short income profiles. We believe that in the medium and long term our chosen areas of sector focus will deliver superior performance and that our development activity will also boost returns. Review of Activity The Generation of Rental Income Growth Over the last 12 months growth in annual rents payable has been 5.6% on a like for like basis. Rent reviews have been settled at an average of 10% above our valuers' assessment of ERV. This highly satisfactory result is, at least in part, attributable to our active management of multi-tenanted holdings which has driven rental values forward. Investment Activity Purchases The level of investment portfolio purchases over the last 12 months was modest as we implemented our strategy of increasing the proportion of capital invested in our development activities and in Land Securities Trillium. We acquired seven investment properties for Â£144.6m. Five of these properties adjoin properties we already own and offer varying degrees of potential synergies with the existing holdings. The average yield on the purchase outlays (including the cost of stamp duty and acquisition fees) on these properties was 7.0%. Sales Over the last 12 months, we sold 44 investment properties for Â£508.9m (net of sale costs). This is the highest value of sales undertaken by Land Securities in a single year and reflects the extent of the portfolio rationalisation which has been undertaken. The average yield on the properties sold was 8.0%. The FRS3 profit on investment property sales was Â£10.1m. The most significant sale, and the company's largest ever single property transaction, was the disposal of six shopping centres in Ballymena, Newtownards, Irvine, Keighley, Walsall and Bootle, virtually completing our dis-investment from shopping centres in smaller towns. Only five of these have been recorded as a sale during our 2001/2002 financial year as the sale of the shopping centre in Bootle is conditional upon obtaining freeholder's consent. We also disposed of 17 high street shops for total net proceeds of Â£60.6m. The town centre retail portfolio outside London is now almost wholly focused upon shopping centres in larger towns or cities, which we anticipate will make a stronger contribution to earnings growth in the future. During the year, we also sold Â£106.9m of central London offices comprising eight smaller or more secondary properties. We also sold our largest office holding outside London, a building in Uxbridge, for just under Â£50m; the sale was completed in April 2001 before demand for Thames Valley offices weakened. From our out-of-town retail portfolio, we sold three supermarket investments and a stand-alone retail warehouse for Â£60m. We also sold eight industrial properties for Â£31.9m, all except three of which were located outside the south-east. We now have only four industrial property holdings located outside the south-east. As a result of the sales programme undertaken over the last few years, non-core holdings of offices outside London and industrial properties outside the south-east and eastern regions account for less than 2% of total portfolio value. London offices and retail The London office market experienced a sharp reduction in the take-up of accommodation by occupiers during the second half of 2001, a trend which was already evident before 11 September. Reduced demand has been accompanied by an increase in the amount of space being marketed by occupiers which now accounts for over half of the total vacant office accommodation in central London. Although the weakness of the occupier market has increased availability levels, the pipeline of speculative development in the West End continues to be small. In the City, however, it is slightly higher. Our own portfolio void levels for London offices are 0.7% across the investment portfolio and 2.6% overall including the development and refurbishment schemes either recently completed or due for completion in 2002. These void levels are low both from an historical perspective and as compared to current average void levels in this market, which are generally considered to be between 6% to 8%. During the year we acquired a recently refurbished property in Wood Street, EC2 for just over Â£30m, providing an initial yield of 7.72% and a reversionary yield in excess of 8.0% and a 7,770 sq m property at 190 High Holborn, WC1 for approximately Â£30m. The latter was subject to a short leaseback to the vendor and is now being refurbished. Two further purchases made during the year offer significant development opportunities in the medium term. The first was a mixed office and industrial holding at Bankside in Southwark, SE1 which is adjacent to our existing holding and proposed development at St Christopher House; the second a 13,310m(2) building, 40-50 Eastbourne Terrace, Paddington, W2 which is adjacent to our existing holding at 10-30 Eastbourne Terrace. The most significant rent review settlement over the last 12 months was on Eland House, SW1 where the increase in rent is in excess of Â£5m per annum. We have also established significantly higher rental values on our retail holdings in Victoria Street, SW1 through negotiating surrenders and re-lettings, moving retail rental values ahead by over 25%. During the year we started to examine the feasibility of introducing external investors into a fund or Limited Partnership comprising the major part of our holdings in Victoria. The properties provide an 'estate' of 5.2 hectares, which can be managed as an estate in a unified way that will support ongoing rental growth. We are exploring ways of matching our desire for long term ownership and extensive redevelopment with the aspirations of third party investors. The level of our investment in Victoria is likely to remain broadly constant, with our future expenditure on the Stag Place development being balanced by the introduction of new capital through the Partnership. LandFlex During the last 12 months we have been advancing our proposals for a new leasing product for London offices, which we have called LandFlex. The LandFlex product is designed to meet occupiers' desire for certainty of cost and flexibility in terms of lease length. The product anticipated the recently introduced Code of Practice on Commercial Leases. From the occupier's point of view, LandFlex offers: a range of lease lengths with the possibility of options to break or options to renew on pre-determined terms; rent reviews on the basis of RPI rather than conventional market rent reviews; and a rent that is inclusive of normal landlord's services, repairs and liability for dilapidations upon lease termination. From Land Securities' perspective, LandFlex will offer enhanced earnings through premium rents and the ability to extract and share in any procurement benefits arising from the scale of our operations and buying power. The LandFlex product will not be rolled out across all our existing London portfolio, but only on buildings specifically refurbished for this purpose. In late 2001 Land Securities Development placed contracts for the refurbishment and extension of two such buildings. The first is Empress State Building, a 43,000 sq m, 31-storey tower building in Earls Court, SW6. This building is due for completion in summer 2003. The second building is 7 Soho Square, W1 which is also being refurbished and extended to provide approximately 5,700 sq m of offices with completion in late Autumn 2002. As these buildings are let, we plan to expand the LandFlex offer to around 140,000 sq m of offices within the next three to five years. Shopping centres and shops The UK retail sector has had a buoyant year with strong growth in retail sales volumes and, in general, increasing levels of profitability for retailers. Rental growth across the sector was modest which, in our opinion, has resulted in a much lower proportion of retailers being stretched by prevailing rental levels. We view this as creating a good platform for ongoing rental growth. Our retail portfolio has been significantly repositioned as a result of the sales undertaken over the last year, which are described in the preceding section on 'Sales'. Subject to a small number of exceptions, which are not material in terms of value, the portfolio is now concentrated on larger conurbations, and predominantly on shopping centres as opposed to individual high street shops. Shopping centres offer excellent opportunities for active management to enhance both value and the retail environment for shoppers. We acquired properties or interests within or adjacent to our existing retail holdings in Cardiff, Sunderland, Aberdeen and Exeter for a total of Â£37m. In terms of asset management, we have had an extremely active year across the retail portfolio. This is exemplified by initiatives at The Bridges shopping centre in Sunderland. Following the extension to the scheme, which was completed and let in 2000, we have taken advantage of the increased critical mass of the centre to drive performance within the original phase I of the scheme. Over the last 12 months, we have negotiated the surrender of six leases, granted ten new leases and introduced five new retailers to the centre that were not previously represented in the city. We have also facilitated new shop fits in 14 units and introduced leases with a turnover element to eight of the units in phase I on a basis consistent with the leases granted on phase II. In addition, we have introduced a system to record retail sales which will both deepen our relationship with retailers by the sharing of daily turnover information and assist in focusing the promotional activity at the centre. The result of these various initiatives has been to increase footfall by 12% and prime rental values in phase I of the scheme by 12.5%. Retail Warehouses Retail warehousing has enjoyed some of the highest levels of rental growth within our portfolio. It has also benefited from strong demand from institutional investors, particularly since the start of the current calendar year. We purchased the Nene Valley Retail Park in Northampton for just over Â£30m to show an initial yield of 7.0% and a nominal equivalent yield of 7.5%. The park provides 13,700 sq m arranged in 10 units and benefits from a planning consent for open A1 use. It forms part of the town's largest area of out-of-town retailing comprising some 40,000 sq m. Since completing the acquisition at the beginning of the calendar year, we have let the one vacant unit at a rent in excess of 10% above the rental value estimated at the time of purchase. Similarly, at the Almondvale Retail Park in Livingston which we acquired in the first quarter of 2001, we have now taken a surrender of the lease of a unit and re-let at Â£172 per sq m thereby moving rental values on the park some 20% ahead of the level estimated at the time of purchase. This also benefits our other two retail park holdings in Livingston. We are continuing to introduce new retailers to Retail World, Team Valley in Gateshead. We have agreed terms whereby MFI downsize their unit from 5,100 sq m to 2,050 sq m and have pre-let the majority of the surplus space to Courts at Â£237 per sq m. Other lettings on the park have continued to push rental values ahead to Â£242 per sq m for smaller sized units. In addition to the larger scale development activity covered in the Development section of this report, we are undertaking smaller scale development or partial redevelopment schemes within a number of our retail parks. For example, we have recently obtained planning consent on appeal for a 3,110 sq m extension to our retail park in Bexhill. At Chesterfield we are also constructing a 1,400 sq m unit for PC World as an extension to our existing retail park. The asset management activity is not limited to our retail parks. Over the last year, we have particularly focused on the potential for asset management opportunities on stand-alone units. During the year, we concluded an agreement for a 1,400 sq m extension to a J Sainsbury supermarket in Hull. We also negotiated surrenders on two stand-alone retail warehouse units in Sheffield and Hendon in North London. In both instances, we plan to refurbish the units substantially and are currently negotiating re-lettings at higher rents. Industrial premises and warehouses Despite the severe decline in manufacturing output over the last 12 months, warehouse and industrial rental values have remained stable. This is consistent with the fact that the majority of investment grade property in this sector represents warehousing rather than manufacturing activity and, particularly in the south-east, is more closely aligned with distribution rather than manufacturing. With our sales programme continuing to focus on the disposal of properties outside the south-east, we now have just under 90% of our industrial and warehouse portfolio located in our core area of focus. Our strategy for increasing our industrial and warehouse holdings in the south-east is primarily via the acquisition of sites for development. This is covered in the Development Review. Our asset management activities were effective in generating additional rental income and minimising void levels which were kept down to 1.3% on the investment portfolio. Development Land Securities Development has one of the most extensive development programmes in the UK. We are one of the few organisations with the financial strength and human resource expertise to undertake a programme of this scale. This competitive advantage has been recognised by local authorities and, more recently, the BBC, where our combined outsourcing and development offer provided a compelling 'one-stop-shop' solution. The programme reflects the focus of our investment portfolio but we also seek to enter into other opportunities where we can see the potential to create higher returns for shareholders. This is demonstrated by our activity in Kent Thameside where we are master-planning the development one of Europe's largest regeneration schemes. Development Schedule During the year under review we completed some 87,030 sq m of the development programme. The most significant projects were Portman House, W1 which is now 70% let and Martineau Place, Birmingham which is 97% let. Completed developments have produced a total surplus of Â£28m over the period of development, which is mostly attributable to the aforementioned schemes. However, the overall contribution to the valuation results for the year from the development programme was negative, primarily as a result of a reduction in values on our ongoing London office development projects. Last year we reported a development programme with an estimated capital expenditure of Â£2bn exclusive of interest and the book values of those properties in our portfolio prior to assembling the programme. This included Â£49m in respect of projects completed in the year ended 31 March 2001 and now removed from the programme. After excluding trading properties, the White City development for the BBC and the Eastern Quarry and Ebbsfleet holdings in Kent Thameside, the estimated equivalent capital cost of the programme set out on the schedules below is approximately Â£2.2bn, which includes capital both expended and to be expended. Â£149m of this figure relates to the completed projects listed in each of the first sections of the schedules and Â£745m to those in progress listed in the second sections. The balance of Â£1.3bn relates to expenditure on the proposed developments. The outstanding expenditure of some Â£1.6bn required to complete the programme will be spread over a number of years. Including our share of joint ventures, the programme set out in the following schedules would provide approximately 829,210 sq m, of which 260,160 sq m is in progress and 462,860 sq m is proposed. The sector split of these schemes is: 240,290 sq m of new shopping development 300,380 sq m of central London offices 49,570 sq m of regional offices 24,790 sq m of leisure 62,600 sq m of retail warehouses 151,580 sq m of industrial premises and warehouses Central London Estimated/ actual Planning completion Cost Status Property Description Size date Â£m Developments completed + Portman House, W1 Offices 9,330 sq m Retail 1,740 sq m Oct 2001 44 Developments in progress 30 Gresham Street, EC2 Offices 36,330 sq m Retail 1,300 sq m Dec 2003 208 Empress State Building, SW6 Offices 40,210sq m Retail/Leisure 2,770 sq m June 2003 99 * 7 Soho Square, W1 Offices 5,720 sq m Dec 2002 7 * 190 High Holborn, WC1 Offices 7,630 sq m Sept 2002 41 Proposed developments New Fetter Lane, EC4 Offices 56,410 sq m Permission Retail/Leisure 6,410 sq m received 2006 St Christopher House, Offices 69,580 sq m Application Bankside, SE1 Retail/Leisure 7,170 sq m submitted 2006 Stag Place, SW1 Offices 50,170 sq m Minded to Retail 7,800 sq m grant 2005 * 40/50 Eastbourne Terrace, W2 Offices 25,000 sq m 2005 Retail Estimated/ actual Planning completion Cost Status Property Description Size date Â£m Developments completed + Designer Outlet Shopping Retail 18,910sq m Oct 2000 36 Centre, Livingston Leisure 7,880 sq m Joint ownership with BAA McArthur Glen + Martineau Place, Birmingham Retail 17,420sq m Dec 2001 15 The Birmingham Alliance - a Limited Partnership with Hammerson plc and Henderson Global Investors Retail Estimated/ actual Planning completion Cost Property Description Size Status date Â£m Developments completed contd # 6/16 Market Square, Sunderland Phase II Retail 1,840 sq m Dec 2001 3 Developments in progress + New Bull Ring, 110,000 Birmingham Retail sq m Sept 2003 141 The Birmingham Alliance - a Limited Partnership with Hammerson plc and Henderson Global Investors + Whitefriars, Canterbury Retail 37,220 + Residential sq m Aug 2005 98 Proposed developments Caxtongate Phase III, Minded to New Street, Birmingham Retail 2,490 sq m grant 2003 Broadmead, Bristol Retail 79,160 2007 sq m Leisure 3,670 sq m The Bristol Alliance - a Offices 13,750 m Limited Partnership with + Residential Hammerson plc, Henderson Global Investors and Morley Fund Management Princesshay, Exeter Retail 37,520 Application 2007 + Residential sq m submitted Plymouth Retail 3,040 sq m Minded to 2004 grant Coppergate Centre, Retail 24,260 Planning 2006 York, Phase II sq m inquiry Leisure 2,160 sq m Offices 1,100 sq m + Residential * St Davids , Cardiff Retail/leisure Up to 2008 St David's Partnership - Offices 70,000 a Partnership with + Residential sq m Capital Shopping Centres Retail Warehouse Estimated/ actual Completion Planning date Cost Property Description Size Status Â£m Developments completed Aintree Racecourse Retail Park, Liverpool # Phase I Retail 9,650 sq m Sept 2001 # Phase II warehousing 2,790 sq m Mar 2002 11 Developments in progress + Kingsway Retail Park, Retail Dundee, Phase I warehousing 9,760 sq m Mar 2003 34 # Almondvale Retail Retail Park, Livingston Phase I warehousing 8,360 sq m July 2002 14 # Cheetham Hill, Retail Manchester warehousing 9,280 sq m June 2002 7 # Lakeside Retail Park, Retail Thurrock warehousing 4,090 sq m Aug 2002 7 Proposed developments Kingsway Retail Park, Retail Minded to Dundee, Phase II warehousing 9,290 sq m grant 2003 Almondvale Retail Park, Retail Permission warehousing Livingston, Phase II 9,380sq m received 2003 Industrial Estimated/ actual Planning completion Cost Property Description Size Status date Â£m Developments completed + Neptune Point, Ocean Park, Cardiff Industrial 5,760 sq m Sept 2000 4 + Juniper Phase I, Basildon Industrial 21,820 Refurbishment sq m Offices 3,660 sq m Nov 2001 20 Horizon Point, Hemel Industrial 10,380 Hempstead Phase I sq m Mar 2002 16 Developments in progress + Zenith, Basildon Industrial 15,150 May 2002 12 sq m * + Cobbett Park, Guildford Industrial 11,410 June 2002 12 sq m + Welwyn Garden City, Site B Industrial 3,820 sq m May 2002 2 Proposed developments Hemel Hempstead, Phase II Industrial 13,010 Permission 2003 sq m received * Commerce Way, Croydon Industrial 12,870 Application 2003 sq m submitted Juniper Phase II, Basildon Industrial 11,150 2003 sq m Other Estimated/ actual Planning completion Cost Property Description Size Status date Â£m Developments in progress + The Gate, Newcastle upon Tyne Leisure 17,770 sq m Nov 2002 63 Trading stock Developments completed * + Crossways Business Park Offices 5070 sq m Dec 2001 13 Industrial 14,940 Mar 2002 11 sq m Developments in progress * + Coldhams Lane,Cambridge Industrial 12,670 June 2002 7 sq m Proposed developments * Crossways Business Park Offices 36,300 Outline 2003-2008 sq m Industrial 18,600 Permission 2003-2004 sq m received Â£m refers to estimated capital expenditure # Fully let or agreed to be let. + Part let or agreed to be let. * Added or significantly changed during 2001/2002 Review of Activity We have included above full details of the projects included in our development programme. In this review we set out highlights of the substantial progress we have made in implementing this programme during the year. Through each of the stages of site assembly, planning, negotiating agreements, placing building contracts, implementation and letting we seek to minimise the risks involved and increase the returns generated by this activity. Central London 56% of our development programme is in central London where we are developing or proposing to develop a total of 291,050 sq m of office accommodation and 25,450 sq m retail/leisure space. A large proportion of this comprises substantial office buildings with associated ground floor retail. In the year under review we achieved planning or minded to grant consents for a total of 163,770 sq m of office, retail and leisure space at Empress State Building, New Fetter Lane and Stag Place, Victoria. We have a total of 93,960 sq m of development in progress. We also applied for planning permission for a 76,750 sq m scheme at St Christopher House, Southwark. During the year we completed 11,070 sq m of new development and refurbishment and agreed lettings of Â£4.3m. Many of the buildings we are developing have floor plates in excess of 4,500 sq m which we believe match the demands of the modern occupier, whose accommodation requirements are being driven by continual advances in technology. With little speculative development underway in central London, we can use our financial strength to progress our development programme so that we have high-quality buildings ready for occupation when new supply is limited. However, it is unlikely that we would progress schemes such as New Fetter Lane or St Christopher House without having significant pre-lettings in place. We are also creating space to incorporate Portfolio Management's LandFlex product, in two properties, Soho Square and Empress State Building, as well as starting a major development at White City for the BBC. Retail We continue to make good progress with our urban regeneration programme. Working in close collaboration with local authorities and communities, we are committed to creating vibrant metropolitan centres. We are focusing our efforts on dominant locations that we believe will offer opportunities for providing the best returns. We have completed a total of 19,260 sq m of new retail space in Sunderland and at Martineau Place in Birmingham and secured a total of Â£6.7m of rental income. We have a further 147,220 sq m in progress in Canterbury and at the Bull Ring, Birmingham. 40% of the anticipated income at the Bull Ring is secured or in solicitors' hands. Martineau Place and the Bull Ring comprise part of our holdings in the Birmingham Alliance We are also in the early stages of planning a further 166,580 sq m of urban regeneration in Cardiff and Bristol. At the former we were pleased to be selected, in partnership with Capital Shopping Centres, as partners with Cardiff County Council on this major retail-led project. At Bristol we have now concluded our negotiations with the City Council and are progressing our plans in partnership with Morley Fund Management, Hammerson and Henderson Global Investors. We are making excellent progress at Canterbury where the early phases of archaeology and development have been completed. We also recently unveiled our new plans for Exeter, which have been well-received, and we expect the planning application to be resolved in late July 2002. While we are disappointed that the public inquiry at York continues, this delay is mitigated by the high income yield from our holdings on the site. Retail Warehouses During the year we completed 12,440 sq m of retail warehouse development which were entirely pre-let. We have also started work on a further 31,490 sq m and have planning or minded to grant consent for 18,670 sq m of additional development. We have a total of Â£7.5m of income secured or in solicitors' hands. We started on site on Phase I at Dundee and at West Thurrock, Livingston and Cheetham Hill in Manchester. All of the units under development have been pre-let or terms have been agreed and are in solicitors' hands. Leisure We are making good progress at 'The Gate', Newcastle upon Tyne. Our 17,770 sq m city centre leisure scheme is expected to open on schedule. Our pre-letting to Odeon Cinemas and other lettings total 9,320 sq m, together with a further 890 sq m in solicitors' hands, these account for 52% of the anticipated income. Industrial Premises and Warehouses We continue to refocus the industrial portfolio on the south-east and increase our exposure to this market with a development programme of over 100,000 sq m. We completed 35,860 sq m at our schemes in Basildon and Hemel Hempstead, started on site on 30,380 sq m at Basildon, Guildford and Welwyn Garden City, and have a further 37,030 sq m in the pipeline. We have a total of Â£2.5m of income secured or in solicitors' hands. Kent Thameside Following completion of the acquisition of Whitecliff in April 2001 we have purchased a 50% interest in a further 153 hectares of land adjoining the proposed Channel Tunnel Rail Link station at Ebbsfleet from Lafarge SA for Â£13.2m. This site immediately joins our land holdings of 245 hectares in Eastern Quarry and will enable us to optimise the master-planning of both sites. It is anticipated that an outline planning application for Eastern Quarry will be submitted by the end of 2002 and this, combined with Ebbsfleet, will give a total development potential of up to 10,000 residential units and over 700,000 sq m of employment, retail, leisure and other community uses. At Stone Castle the first phase of residential development, in partnership with Copthorn Homes, comprising 201 residential units has commenced. Sales are progressing well and achieving values in excess of Â£2,152 per sq m. Work on the master-planning of the second phase of development is in hand. At Swanscombe Peninsula, a development agreement has been entered into with Lafarge SA in respect of their 154 hectares landholding. We have commenced initial master-planning studies, which will lead to an application for planning in early 2003. We continue to release value from Crossways Business Park. A speculative development of 14,940 sq m of industrial/warehouse space, pre-sold to Railways Pension Fund, was completed in March. Two units totalling 6,500 sq m are either let or under offer at record rents of Â£83.40 per sq m. During the year we also sold 1.35 hectares of land to the O'Rourke Group. At Coldhams Lane, Cambridge, construction of three industrial/warehouse units will be completed during the summer and have been presold to the Railways Pension Scheme. A further part of the site has been sold for a leisure centre and a car showroom. We have obtained planning consent on the balance for an 80 bed hotel and expect to sell this later this year. Total Property Outsourcing In November 2000 total property outsourcing became an integral part of the Land Securities offer. The business case for a one-stop-shop approach for the provision of property accommodation and related services is compelling. Business and public sector organisations are increasingly seeking ways to release capital, achieve flexibility in their property commitments, reduce costs and focus on their core activities. We are now able to offer alternative structures to the traditional landlord and tenant relationship. Our confidence in this market has been endorsed by the two contracts we won last year. We believe that our market leadership position leaves us well placed to win further business as occupiers increasingly recognise the benefits of such arrangements. Review of Activity The year was one of significant activity and success for Land Securities Trillium. Two major new contracts, with the BBC and BT, were won and mobilised. This success has generated further interest in total property outsourcing from all sectors of the economy. We entered into our partnership with the BBC in September 2001, which included the transfer of some 350 BBC employees into the Group, and are now managing and servicing 320,000 sq m of accommodation in Scotland and London. As part of the transaction, the existing White City property and land assets have been transferred to the partnership property vehicle which we have consolidated in these financial statements. This has generated cash for the BBC to invest in its core business of programme making. We are making good progress on the White City development. We continue to work with the BBC to develop further the scope of this contract and have prepared business cases for additional buildings on the White City site. We have also submitted our views on the Broadcasting House scheme in London and the proposed new Scottish Headquarters in Glasgow for consideration. In December we announced that Telereal, a 50:50 joint venture with the Pears Group, had completed its agreement with BT for the Â£2.38bn acquisition of the majority of the BT property estate. The transaction was financed by a Â£1.8bn asset-backed securitisation, Â£400m of bank debt and Â£146m of equity from each of the joint venture partners. The estate comprises 6,700 properties with a total floor space of 5.5m sq m, 90% of which is freehold or valuable leasehold, with 10% short leasehold. Under the terms of the 30-year agreement, Telereal is responsible for providing accommodation and estates management services to BT. Early this year the BT in-house corporate property team transferred to Land Securities Trillium Telecom Services Limited. These employees are now dedicated to delivering Telereal's service to BT under the terms of the contract with all costs borne by the joint venture company. We have also formed a second joint venture with the Pears Group, Telereal Ventures, and entered into a contract with O2, formerly BTCellnet, to provide strategic outsourcing services across the O2 (UK) property estate. The O2 (UK) estate totals some 8,000 properties comprising offices, call centres, telecom switches and cell sites, and warehousing. At this stage, Telereal Venture's contract with O2 (UK) does not include the acquisition of assets and is for an initial period of 18 months. It is expected that the contract will generate income of around Â£1.5m over its term. We have made good progress in our objective of growing the business. At the beginning of the year we were a single contract operation with some 600 staff and we now have 1,330 staff operating across the entire country. The breadth of skills and expertise within our business unit as set out in the table below enables us to provide the complete accommodation solution to clients, and together with our specialist service partners we are able to deliver service and offer advice across the full spectrum of property issues. No of Skills People ____ Capital Projects 305 Quality Assurance 45 Facilities Management 478 HR/Finance/Information Systems/Business Development 177 Asset Management 173 Call Centre 152 ____ Total 1,330 ____ This growth in our contract base has also seen the number of properties under management increase to over 7,400 premises, amounting to 7.56 m sq m in total. In the table below, we show the location of these properties broken down by individual contract, demonstrating the national nature of our business. BBC PRIME Telereal Total 000 sq m 000 sq m 000 sq m 000 sq m ____ ____ ____ ____ London and south east 338 403 2,385 3,126 Midlands - 190 767 957 Wales and west - 214 693 907 North England - 625 1,072 1,697 Scotland 32 219 496 747 Northern Ireland - - 130 130 ____ ____ ____ ____ TOTAL 7,564 ____ ____ ____ ____ The mobilisation activity involved in the establishment of the Telereal and BBC operations has required involvement from all aspects of our support infrastructure. New employing companies are being created, trade union relationships have been implemented and developed, reward and remuneration schemes have been established, roadshows and training schemes have been held for transferring staff, and new service partner relationships have been put in place. At the same time, information systems have been implemented to ensure that all aspects of our property outsourcing operation are able to communicate with each other speedily, while at the same time ensuring that a consistently high level of service is delivered to all our customers and clients across the country. Business and Product Development Our property outsourcing contracts with the Department for Work and Pensions (DWP) , BBC and British Telecom are performing well which provides a sound platform for the development of further business with these customers. Particular opportunities include the potential outsourcing of the Employment Services estate which is currently the responsibility of the DWP, and contract extensions with the BBC such as life cycle cost transfer, facilities management for the remainder of the estate and new developments at Broadcasting House and Pacific Quay. The last year has seen a considerable increase in the level of interest in outsourced property solutions as businesses seek to improve balance sheet efficiency and returns to shareholders, achieve operating cost reduction, sustain cash flow, streamline property-related headcount costs and achieve flexibility in their property portfolios. This has created new opportunities for Land Securities Trillium and we have strengthened our new business team and marketing activities accordingly. Particular focus has been given to targeting companies with the right mix of characteristics to enable significant value to be created for both the company and us. These characteristics include portfolio size, which allows economies of scale to be created through integration with our operating cost infrastructure; covenant strength combined with underlying property value; and dynamic business change against which value can been derived from our flexible property outsourcing model and estate management expertise. Specific focus has been given to those sectors which we see as being potentially receptive to property outsourcing solutions. Our negotiations on deals with several organisations within these sectors are developing well. Within the public sector, we are looking to build on the success of the DWP PRIME contract, which continues to perform very well. The Government's public private partnership programme and 'best value initiatives', which apply to all local authority accommodation and property services, has created additional opportunities. Since each client's requirements are different, and the property outsourcing market continues to develop, we are constantly looking at new ways of developing innovative solutions in property. To meet this need we have a product development team that is currently working with our portfolio management team on LandFlex. This team also works closely with our new business team on specific projects for new clients to enable continuing innovation to be made in our property outsourcing deals. Financial Review Profit before interest and tax for the year to 31 March 2002 was Â£530.2m (2001 Â£456.9 m). This represents a 16% increase over last year and was driven by four main factors: â€¢ Rental income from the investment portfolio increased by 4.8% to Â£525.9m. â€¢ We recorded a full year's contribution from Land Securities Trillium, which was owned for only four months in 2001. â€¢ A Â£19.3m contribution to operating profits from Telereal which is our share of its operating profits for the period since formation in December 2001. (Telereal is a 50:50 joint venture with the Pears Group as described in the Total Property Outsourcing Review). â€¢ Profits of Â£4.3m from the sale of trading properties. This is a new activity for us, following the acquisition of Whitecliff in April last year. At the pre-tax level, profits increased by 11.9% from Â£324.7m to Â£363.5m. After capitalisation, total interest charges were some Â£31.9m higher than last year, of which Â£24.6m is Land Securities' notional share of Telereal's financing costs. Telereal's debt of Â£2.2bn is non-recourse to the Group. The underlying increase in interest reflects the cost of funding the Group's continuing investment programme. The Group's gross interest payable, excluding Telereal, was covered 2.98 times by operating profits compared with 3.03 times in the prior year and we remain in a strong financial position. During the year, we sold investment and operating properties with a book value of Â£510.4m (2001 Â£424.9m) generating an FRS3 profit of Â£13.4m compared with Â£6.3m last year. Property disposals this year also crystallised revaluation surpluses earned in prior years of Â£237.8m. Profits after tax were Â£263.6m (2001 Â£234.6m), equivalent to a 12% increase in basic earnings per share. The Directors recommend a total dividend for the year of 34.0p per share (2001 32.5p), a 4.6% increase. If approved, this will result in a final dividend of 24.95p per share (2001 23.85p). At this level the dividend is covered 1.48 times (2001 1.38 times). The year-end portfolio valuation was some Â£100m lower, which represents an overall reduction of 1.3% on the value of investment properties at 31 March 2001. This revaluation deficit has, however, been offset by Â£85.2m of retained earnings and our share of revaluation surpluses in Telereal, resulting in an adjusted diluted net asset value per share of 1155p compared with 1152p at 31 March 2001. In terms of cash flow, the Group realised Â£549.2m (2001 Â£491.3m) from the sale of properties during the year. These funds have been reinvested and the Group spent Â£306.1m on property acquisitions, Â£256.4m on development expenditure and invested Â£146.4m in Telereal. Overall, there was a net cash outflow of Â£219.2m during the year (2001 Â£95.4m) and net indebtedness at the year-end rose to Â£1,942.1m (2001 Â£1,727.8m). Year-end gearing increased from 28.7% to 32.2%. Over the last year, the Group's pre-tax total return (that is the percentage increase in pre-tax net asset value per share, adding back dividends) was 5.0% compared with our estimated weighted-average cost of capital of 8.4%. The shortfall was attributable to generally flat asset values as a result of market conditions over the last year. Accounting Policies This year's accounts have been affected by a number of changes to accounting policies and presentation. In the accounts for the six months to 30 September 2001, two accounting policies were changed to adopt Urgent Issues Taskforce Abstract 28 ('UITF28') 'Operating Lease Incentives' and FRS19 'Deferred Tax'. UITF28 requires lease incentives (such as rent-free periods or contributions to fitting-out expenses) to be treated as revenue costs. These are deducted from the contracted rent and the resulting net income is then spread evenly over the lease term (or the period to the first rent review if that is shorter). Previously rent was only recognised from the conclusion of any rent-free period and the cost of other incentives was capitalised. The impact of this change is to increase gross property income in the current and prior years by Â£3.5m and Â£3.2m respectively. FRS19 requires that deferred tax should be provided for, in-full, on all timing differences that are not permanent. The FRS does not require (or indeed permit) deferred tax to be recognised on the revaluation surplus. The Group's previous accounting policy had been to recognise deferred tax only to the extent that liabilities or assets were expected to crystallise. The Group's policy now is to make full provision for timing differences, which arise primarily from capital allowances. The effect of FRS19 is to increase the tax charge for the current and prior years by Â£5.8m and Â£4.8m respectively. The provision for deferred taxation at 31 March 2001 has been restated and increased by Â£121.7m. Experience shows that FRS19 liabilities on the investment portfolio are unlikely to crystallise in practice and these are excluded when calculating adjusted earnings and adjusted net assets per share. FRS19 has no impact on the actual taxes that we pay. In May 2002, the Urgent Issues Taskforce issued Abstract 34 ('UITF 34') ' Pre-contract costs'. This Abstract specifies the accounting treatment for the costs of bidding for PFI-type contracts and is relevant to Land Securities Trillium. UITF34 requires all contract costs which are not specifically dealt with by other accounting standards and which are incurred before it is ' virtually certain' that a contract will proceed, to be expensed as incurred. The Group's policy used to be to capitalise costs if it had been appointed as preferred bidder at the end of a reporting period. As a result Â£14.7m of costs associated with the BBC and Telereal contracts have been written off this year which would previously have been capitalised. A corresponding prior year adjustment has also been made. Finally, we have changed the Group's accounting policy for interest charges and the cost of financing some elements of development expenditure is now capitalised. This brings the Group into line with its peers and, given the increasing scale of the development programme, will give a better reflection of our costs and surpluses from that activity. The Group's policy is only to capitalise interest associated with expenditure on development or redevelopment projects from the start on site to practical completion. Details of the policy are set out in the Notes to the Accounts. It will be applied to all development schemes, including Land Securities Trillium's White City development for the BBC, and the construction of trading properties. The effect of this change is to increase reported pre-tax profits for the year to 31 March 2002 and 31 March 2001 by Â£21.1m and Â£11.3m respectively. Further details of the effect of these various changes in accounting policy are set out in Note 2. The combined impact has been to increase reported profits after tax for the year to 31 March 2001 by Â£1.5 m and to reduce net assets at the end of that year by Â£133.1m. The Group has a defined benefit pension scheme. The scheme, which had gross assets of some Â£77.6m as at 31 March 2002, is now closed to new entrants. We will adopt FRS17 in full in 2003. New schemes will be set up to meet obligations to employees transferring to the Group under property outsourcing contracts. In addition to these changes in policy, there are a number of changes to the presentation of our financial statements. Our 50% investment in Telereal is treated for accounting purposes as a 'joint venture'. As a result, our share of Telereal is included on the face of the Group's Profit and Loss Account, as a separate column. In the balance sheet, our share of Telereal's gross assets and gross liabilities is shown as an expansion of the 'investment in joint venture' line. In addition, in the notes to the accounts, we have expanded the segmental reporting to align more closely with our internal business unit structure. Operating profits have been analysed between property investment, total property services and property trading. Further information about the value of assets in the development programme is provided in the property notes. Portfolio Management Rental income increased by 4.8% from Â£501.6m to Â£525.9m, which has been achieved despite the continuing rationalisation of the portfolio. Adjusting for the effects of property acquisitions and disposals rental income on properties owned throughout the last two years increased by Â£42.0m. The main contributors to this increase were Â£22.5m from reviews and renewals and Â£10.7m from the letting of new developments. Some Â£40.1m of rental income was lost on disposals offset by Â£22.3m from property acquisitions. The net effect of re-letting vacant space added a further Â£6.5m, which was partly offset by a loss of Â£2.5m due to the emptying of buildings for redevelopment. The cost of bad and doubtful debts was some Â£1.5m, which was less than 0.25% of the rent roll (2001 0.26%). During the last 12 months, the net reversionary potential of the portfolio, excluding voids has reduced to 9.6% at 31 March 2002, compared with 14.6% a year ago. This is largely the result of reversions secured during the year through the settlement of reviews and renewals. There is now little significant over-renting in the portfolio, and within the next five years the potential shortfall is less than Â£3.1m of rental income in relation to renewals or options to break in over-rented property. The average unexpired lease term over the portfolio as a whole is 8.75 years (2001 10.25 years). During the year we sold investment property with a book value of Â£498.1m (2001 Â£424.9m), at an average rental yield of 8.0%, and we have identified a further Â£150m of assets as potential sales in the short term, given acceptable pricing. Thereafter we expect annual investment acquisitions and disposals to be broadly equal. Development The projects that comprise the current development programme are set out in the development review. To be included in the programme a project must have, or be close to, obtaining final approval to proceed (although that approval may be conditional on the receipt of planning consent or obtaining appropriate level of pre-lets.) Projects remain in the programme until they are 95% let. The carrying value of development programme assets (excluding the development for the BBC at White City and trading properties) was Â£1,050.1m at 31 March 2002 (2001 Â£904.5m) During the year, we spent Â£325.4m on development and capitalised associated finance costs of Â£19.9m. We added schemes principally at Soho Square, High Holborn, Eastbourne Terrace and Cadiff to the programme. Six projects with a book value of Â£137.6m were completed during the year. We have temporarily removed the Martineau Galleries scheme from the programme while we reappraise our plans for this site. The estimated future cash spend required to complete the current development programme, excluding interest and the project at Kent Thameside, will be some Â£1.6bn. Land Securities Trillium 2002 reflected our first full year's profit contribution from Land Securities Trillium. This year, Land Securities Trillium (including our share of Telereal) generated some 40% of the Group's gross property income, and 12% of our profit before interest and tax. Revenue and profits from the Prime contract have grown in line with expectations and we carried out significant extra work at the request of our customer. On the BBC contract, won during the year, we spent Â£50m on the construction of the White City 2 building with an estimated Â£215m (excluding interest) to be spent over the next three years. As anticipated, we have incurred a small operating loss on this contract, but expect it to become profitable when the new building is occupied by the BBC. In the year to 31 March 2002, Telereal has made a small contribution to earnings (before bid costs), and we expect its contribution to build over the next few years. At 31 March, Telereal revalued its portfolio of investment properties, as a result of which we have recognised a valuation surplus of Â£46.8m, being our share of the uplift. Taxation The cash tax charge, equivalent to 26.4% (2001 26.9%) of revenue profit, reflects the benefit of capital allowances from developments, refurbishments and acquisitions. The requirement in FRS19 to make full provision for timing differences means that in profit and loss account terms, our reported tax rate is 27.2% (2001 27.7%). Telereal has a higher effective tax rate reflecting the particular terms of the transaction with British Telecom. Following the latest property valuation, the Group has an estimated potential capital gains tax liability in the region of Â£535m (31 March 2001 Â£540m), were all its properties to be sold at the revalued amounts without any tax mitigation. This is equivalent to a 96p (2001 97p) reduction in diluted net assets per share. Cash Flow and Treasury Land Securities operates a central treasury, whose activities are carried out in accordance with Board approved policies. The Group maintains treasury control systems and procedures to monitor interest rate, liquidity, credit and other financial risks. The treasury does not operate as a profit centre. Land Securities uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from those operations. Derivative instruments, exclusively interest rate swaps, are used by treasury to swap borrowings from floating to fixed rate and to fix future borrowings. Due to the long-term nature of property investment, the Group's external borrowings are also primarily long term. To provide flexibility the Group has a Â£600m syndicated bank facility, which is used for short-term requirements. During the year, the average borrowing on our syndicated facility was Â£283.0m, at a cost of 5.6% over LIBOR. The overall weighted average cost of funding was 8.4% (2001 8.8%). The Group had a net cash outflow before the use of liquid resources and financing of Â£219.2m for the year (2001 Â£95.4m) primarily attributable to its capital expenditure and investment activities. The Group has funded this net outflow by drawing against its Â£600m syndicated bank facility. During the year, an additional Â£300m of interest rate swaps were executed to take advantage of the current low levels of interest rates and to hedge the cost of future borrowings. This was done because the Group's gearing is expected to rise as the development programme gathers pace. At the year end, the fair values of the Group's financial liabilities exceeded book value by Â£474.9m (2001 Â£507.3m), reflecting the reduction in long term interest rates since the Group's fixed rate borrowings were originally taken out. After tax, the implied adjustment to the Group's net asset value would be to reduce reported diluted adjusted net assets per share by 60p (2001 64p). Insurance In common with other property owners, our insurers are applying terrorism exclusions to our policies as they become due for renewal in 2002. The Group continues to buy the most comprehensive terrorism insurance cover available from the Government-backed Pool Reinsurance Company Limited. Capital Structure The Board has recently undertaken a review of the Group's capital structure and medium term financing requirements. We have concluded that, notwithstanding the future capital required to fund the development programme, and a desire to invest significant further sums in Land Securities Trillium, the Group has more capital than it currently requires. We have reached this conclusion after taking into account our aim to maintain a target credit rating in the A range. We believe that the Group's financial strength will be an important factor in its ability to win property outsourcing contracts in the future. We therefore intend to return approximately Â£500m to shareholders on a pro-rata basis, to be effected before the autumn. The Board has not taken a final decision on the method to be used to return the capital, but it is likely to involve a structured transaction. If this is the case, shareholder approval may be required and cash should be returned by the Autumn. In addition, redemption notices are being issued to the holders of our convertible bonds. Both the 2007 and 2008 series of bonds are convertible into shares at prices that are below current market value and it is therefore expected that these bonds will convert shortly. If conversions occur, it will reduce our outstanding debt, and increase our equity, so reducing gearing. In this case, we will increase the amount of money returned to shareholders to offset the bond conversions. As an alternative to conversion, the company may purchase bonds in the marketplace, if these are offered at attractive prices. On a pro-forma basis, the return represents an increase in gearing at 31 March 2002 from 32.2% to 44.8%. We have put in place an additional Â£1.5bn syndicated loan facility to finance the proposed return. This will also provide additional working capital to fund our medium term business plans, including the development programme and the expansion of Land Securities Trillium. Going Concern After reviewing detailed profit and cash flow projections, and taking account of available bank facilities and making such further enquiries as they consider appropriate, the directors are satisfied that the company and the group have adequate resources to continue to operate for the foreseeable future. For this reason, we have continued to adopt the going concern basis when preparing the financial statements. This information is provided by RNS The company news service from the London Stock Exchange

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