Final Results - Part 1

Land Securities Group Plc 21 May 2003 21 May 2003 LAND SECURITIES GROUP PLC ('Land Securities' / 'Group' / 'Company') Preliminary results for the year ended 31 March 2003 HIGHLIGHTS â€¢ Adjusted diluted net asset value increased 5.2% to 1215p (2002: 1155p) â€¢ Adjusted earnings per share decreased by 2.4% to 50.39p (2002: 51.61p) â€¢ Pre-tax revenue profit down 6.6% to Â£340.9m (2002: Â£364.8m) â€¢ Substantially completed Â£541m return of capital to shareholders â€¢ High level of activity demonstrated by: â€¢ Â£0.4bn of property sales â€¢ Â£0.5bn investment in development and investment property activities â€¢ 617 transactions (rent reviews, lease renewals and lettings) across the portfolio â€¢ Strong performance in retail portfolio substantially offset impact of weak Central London office market â€¢ Development progressing well with 81,500 sq m completed this year, 250,600 sq m under development, and 52,000 sq m of lettings â€¢ Strong contribution to Group returns from Land Securities Trillium â€¢ Successful integration of Land Securities Trillium's two major contracts during the year â€¢ 10 million sq m of commercial property owned or under management â€¢ Proposed dividend increase of 4.4% to 35.5p (2002: 34.0p) Peter G Birch, Chairman, commented: 'While the economic outlook remains challenging, both in the UK and around the world, the diversified nature of the Group's activities, sound financial base, strong management team and focus on customer service mean that we are on track to continue to deliver our strategy. The Board's confidence in the fundamental soundness of your business is demonstrated by the enhanced final dividend payment.' For further information: Ian Henderson/Andrew Macfarlane/Emma Denne Land Securities Group PLC 020 7413 9000 Steve Jacobs/Stephanie Highett Financial Dynamics 020 7831 3113 FINANCIAL HIGHLIGHTS 31 March 31 March 2003 2002 % change -------------- -------------- ------------ Gross property income Property investment (including 50% share of joint ventures) Â£575.6m Â£579.0m -0.6% Total Property Outsourcing Â£660.2m Â£406.2m +62.5% Property trading Â£3.7m Â£40.4m -90.8% -------------- -------------- ------------ Total Â£1,239.5m Â£1,025.6m +20.9% ======== ======== ======= Operating profit (total) Â£550.2m Â£516.8m +6.5% Pre-tax profit Â£319.6m Â£363.5m -12.1% Add back: Fixed asset property sales, bid costs and exceptional items (pre-tax) Â£21.3m Â£1.3m 1 Revenue profit (pre-tax) Â£340.9m Â£364.8m -6.6% 2 Adjusted earnings per share (basic) 50.39p 51.61p -2.4% Earnings per share (basic) 46.46p 50.27p -7.6% Dividends per share 35.50p 34.00p +4.4% 3 Interest cover (times) 2.42 2.98 4 Adjusted diluted net assets per share 1215p 1155p +5.2% Diluted net assets per share 1188p 1132p +4.9% 5 Carrying value of investment properties Â£7,823.9m Â£7,800.0m Net borrowings Â£2,589.3m Â£1,942.1m Equity shareholders' funds Â£5,532.7m Â£6,036.6m 6 Gearing (net) 47.3% 32.2% 1. Excludes results of fixed asset property sales, bid costs and exceptional items (deficit on purchase and redemption of convertible bonds, cost of cancellation/novation of interest rate swaps and the costs of reorganising the Group) 2. Excludes results of fixed asset property sales, bid costs, exceptional items and deferred tax arising from capital allowances on investment properties 3. Number of times gross interest payable (i.e. pre-capitalisation) is covered by operating profit and interest receivable but excluding the activities of Telereal, the exceptional deficit on purchase and redemption of convertible bonds and the exceptional cost of cancellation/novation of interest rate swaps 4. Excludes the additional deferred tax arising from capital allowances on investment properties 5. Market value less UITF28 adjustment 6. Net borrowings (including bank overdraft less short term deposits and cash), at book value, plus non-equity B shares and preference shares as a percentage of equity shareholders' funds Chairman's Statement Introduction Over the past twelve months, against a background of world instability and uncertainty in global economies and financial markets, the Group's results continue to demonstrate the fundamental benefits of a soundly financed and well managed asset-backed business. The investment portfolio valuation benefited from a strong performance by our retail assets which substantially offset the impact of the downturn in the Central London office markets. Adjusted diluted net asset value per share has increased by 5.2% to 1215p. This represents good progress given the difficult market conditions. The protection afforded to shareholders by our diversified portfolio, the quality of our occupiers and strong revenues from Land Securities Trillium underpins the Group's progressive dividend policy and we are increasing the dividend by 1.5p, maintaining our long record of year-on-year increases. Results This year's figures have been impacted by a number of exceptional factors. These include the return of capital, higher interest payments and certain costs relating to financing transactions. Pre-tax profit of Â£319.6m, which is posted after the exceptional costs, including those incurred on various financial transactions, decreased by Â£43.9m. Revenue profit (our measure of underlying pre-tax profits) also decreased by 6.6% to Â£340.9m, mainly as a result of Â£13.5m of additional interest incurred to finance the return of capital and the dilutive effect of sales in the past two years. Adjusted earnings per share (calculated on revenue profits) were 2.4% lower at 50.39p per share (2002: 51.61p per share). Activity levels remained high. The Group realised Â£436.3m from the sale of properties and the release of equity from the London Hilton and received a total of Â£80.6m in capital repayments from Telereal. We invested Â£613.2m in our portfolio, development activities and total property outsourcing. The Group also completed a capital restructuring which resulted in a return of capital of Â£511.1m to shareholders last September. A further Â£18.8m of 'B' Shares were redeemed in April, 2003, leaving Â£11.5m outstanding. The Board recommends a final dividend of 26p per share, making a total distribution for the year of 35.5p. The dividends paid and proposed will be covered 1.4 times by post-tax revenue profits. The dividend will be paid on 28 July 2003 to shareholders on the register on 27 June 2003. Valuation Our total investment portfolio was valued at Â£7.84bn (2002: Â£7.81bn), representing a 0.4% increase in assets. After adjusting for sales, acquisitions and expenditure the value reduced on a like-for-like basis by 0.6% as compared to the prior year. The retail and retail warehouse portfolios performed particularly well, with 7.8% and 10.0% increases in value respectively, demonstrating the benefits of the high levels of asset management activity and the more resilient retail markets. This strong contribution to the performance of our portfolio from retail has been offset, once again this year, by a decrease in value in our Central London holdings. Further details of the valuation results are contained in the Business Analysis section. Government We have for some time been lobbying Government on our own behalf and through the British Property Federation to ensure that it understands clearly the potential damage of year-on-year increases in Stamp Duty. Not only does this taxation unfairly penalise property as an asset class compared to bonds and equities, but it also reduces liquidity in the market and impacts the flow of capital into major regeneration projects. We believe that Government is beginning to recognise this and were pleased that this Duty was not increased again this year, but rather was reduced in some areas where Government is hoping to encourage regeneration. We are also grateful that Government has continued to leave the way open for dialogue on issues such as Stamp Duty on leases and lease-code reforms. We believe that the industry has come a long way in terms of providing occupiers with a wide range of accommodation and lease terms and that undue taxation and regulation will prevent our markets from operating efficiently. Given the Government's commitment to urban regeneration and attracting capital investment into these major, long-term and complex projects, we would encourage it to consider a more tax-efficient vehicle to encourage international and domestic investment in the UK property sector. While most other G7 countries now have tax-efficient vehicles, known as real estate investment trusts, we believe our ability to attract new equity investment to fund regeneration projects is being undermined by the tax position of the UK quoted property company. Board In January 2003, the Board announced that Ian Henderson, Group Chief Executive, had accepted its invitation to remain in his position beyond his normal retirement date of this July to oversee and implement the delivery of our plans and to allow for continuity of leadership. Francis Salway was appointed to the new role of Chief Operating Officer, taking on a wider operational role supporting Ian Henderson, while retaining his responsibilities as Chief Executive of Development. Mark Collins and Ian Ellis, Chief Executives of Portfolio Management and Land Securities Trillium respectively, were appointed to the Board in November 2002. We would also like to thank Giles Henderson, who stepped down from the Board as a non-executive Director in November, for his contribution to the Group's progress. We are delighted that Stuart Rose has agreed to join the Board as an independent non-executive director, bringing substantial retail expertise to the Group. We are assessing the impact of the Higgs and Smith recommendations on corporate governance and audit committees. In due course, we will appoint a Senior Independent Director and create a Board Nominations Committee. People We have a great team in place and, during the year, my colleagues throughout the organisation have continued to demonstrate enthusiasm and a positive approach to the new way in which we are conducting our business and the changes for them that this entails. I would like to thank them for their valued contribution to our progress. Outlook During the 12 months under review, property as an asset class continued to perform strongly, showing a total return of 9.3% as compared to 11.3% for bonds and a negative return of 30.0% for equities reflecting investors' current preference for low-risk, cash positive investments. Demand for investment property with long-term leases continues to be strong while interest rates remain low. Since unveiling our new strategy three years ago Land Securities total return (share price plus dividend re-invested) has been 10.77% as compared to a FTSE 100 Total return of negative 39.97% and a positive 2.71% for FTSE Real Estate (period 31/3/00 - 31/3/03). In our view, retail currently offers greater potential for total returns than offices in the short term. For Land Securities Trillium, market conditions are more attractive, as corporations continue to seek operational efficiencies and ways to release capital for investment in their core activities, both of which can be achieved through total property outsourcing. While the economic outlook remains challenging, both in the UK and around the world, the diversified nature of the Group's activities, sound financial base, strong management team and focus on customer service mean that we are on track to continue to deliver our strategy. The Board's confidence in the fundamental soundness of your business is demonstrated by the enhanced final dividend payment. Peter G Birch Chairman 21 May 2003 Chief Executive's Review During these demanding times, we have been rigorous in our approach to managing the Group to ensure that we maintain our reputation for delivering consistent results in difficult economic and property market conditions. We are not complacent and recognise that we have to work hard to increase income at a time when our business partners are facing challenging conditions. We are pleased that the results show a strong contribution from our new division, Land Securities Trillium. In a capital-intensive business with significant investment plans, we are mindful of the importance of providing investment returns that exceed our cost of capital. While this remains challenging given the London office market conditions, all our activities are evaluated against the target returns we have set for each business unit. Structure of the Report We have consistently endeavoured to remain at the forefront of our industry in terms of reporting and disclosure standards. This year we have changed the format of the report to improve clarity and to present all the analysis pertinent to the Group in one place. We have included a Business Analysis section that comprises details of the valuation and analysis, a market report and a number of statistics in respect of the investment portfolio, our development programme and our total property outsourcing activities. We hope that you find this new format helpful. Portfolio Management The Group's investment portfolio, the majority of which is managed by Portfolio Management, underpins our activities. The total portfolio is diverse, with 254 properties, 2,000 tenants and low property specific risk. The portfolio is now structured to provide the protection offered by diversity while at the same time being sufficiently focused to give us market leading positions in most of our areas of activity. We have and will continue to re-cycle the capital invested in the portfolio through an active programme of sales and purchases to ensure that the properties we own provide future growth opportunities. As described in more detail in the Portfolio Management Review we are driving the performance of our properties through intensive management. Development In our interim report in November we said that we believed one of our competitive advantages is our ability to maintain our development activity through market cycles. This remains the case. However, we regularly review the timing and extent of our development programme in light of market conditions to ensure that the risks involved are manageable when markets weaken. The Group's financial strength and internal risk-management controls allow us to add value by progressing aspects of the development programme in such a way that we position schemes for future construction to take best advantage of improving markets. As a result, we have scaled back our Central London activities but will progress our retail development programme and the projects at Kent Thameside. Total Property Outsourcing We believe that the prevailing market conditions are positive for Land Securities Trillium, as occupiers seek to release capital and focus on their core business activities. The current contracts are performing well and making a significant contribution to Group income. Although progress has been slower than anticipated in concluding new business we are active in a greater number of negotiations than seen previously and maintain our ambitions of growing this business so that it represents 25% of our future operating profits in four years time. Customer Service We are making good progress with our focus on customer service and have been active in building strong relationships across the Group with our occupiers and clients. The introduction of a Group client relationship management system has allowed us to formalise relationship management procedures across the business and help ensure that we are pro-active in responding to our customers. To date, the results of customer surveys across Group activities have been encouraging. In an independent survey conducted with retailers in nine of our centres, 80% of those surveyed would be willing to recommend Land Securities as a landlord. The survey highlighted some areas where we could improve our performance and, although we exceeded the benchmark on most criteria, we continue to look at how we can further enhance our service levels. We were also delighted to note the impressive customer satisfaction ratings arising from surveys among our customers in the Department for Work and Pensions ('DWP') and the BBC. Competitive Environment Although the UK property market is relatively mature, there are numerous opportunities to create value through development, active management and the provision of efficient customer service. There are also emerging markets and sectors where we can exploit our competitive advantages of financial strength, scale and the ability to innovate. The first of these is total property outsourcing. While this market is still in its infancy and competition is fragmented, we believe that not only the strength of our balance sheet but also the infrastructure and expertise we now have in place at Land Securities Trillium should enable the Group to lead this market. The second is major regeneration projects, where we can take a long-term approach to master planning complex schemes, while realising value throughout the life of the scheme. This is evidenced by our project at Kent Thameside. Third, we believe that continuing to drive innovation in the marketplace through products such as Landflex will keep us at the forefront of our industry in terms of anticipating future trends and meeting our customers' changing accommodation needs. The downturn in the Central London office market, particularly in the City, has adversely affected the performance of this part of the investment portfolio and our ambition to generate returns from development may, therefore, be delayed. However, the Central London market comprises a series of sub-markets, all of which have different occupier characteristics. With a range of development opportunities in several of the core sub-markets, we are one of the few businesses that can satisfy occupier demand for new, large, modern office buildings across Central London between now and 2008. London is one of the main engines of our growth and it is essential that we maintain its attraction to business at large as one of the foremost global financial centres. The infrastructure of the capital continues to be neglected, although the Prime Minister's recent commitment to chair the Thames Gateway Committee is encouraging. It is vital that this commitment is translated into a real investment in both existing services and new ones such as Crossrail. At present, the retail property environment remains stable, although it continues to be dependent on consumer demand. Any downturn will inevitably affect retailers' profitability, their growth plans and demand for retail space. However, retailers are adapting quickly to changing consumer demands and new entrants continue to seek to build their presence in the UK market. With a portfolio of dominant shopping centres, development plans for six major new schemes and a large number of retail warehouse parks, we are well placed to strengthen our relationships with retailers and satisfy their requirements. As a result of the changes in our business, we have invested in new skills and new operations. While this has resulted in an increase in the Group's cost base, we have thoroughly reviewed costs to ensure that we are maximising efficiencies and benefiting from the economic advantages of our scale. Financial Structure and Strategy As reported in the Financial Review, following the review of our capital structure and financial strategy in 2002, we established that we had surplus equity capital after taking into account the capital required to execute our business plan. As a result, during the year we carried out a structured return of capital to shareholders which contributed to a rise in the Group's gearing to 47.3%. Subsequently, we also issued Â£600m of bonds to refinance short-term bank debt. While continuing to invest in total property outsourcing and development, we still remain committed to pursuing a prudent financial strategy and a progressive dividend policy. Recognising that the business has grown more complex, we completed during the year a review of the Group's finance function. This resulted in a number of changes, including the creation of a Group Tax, Treasury, and Insurance department to strengthen and integrate these functions. Risk Management and Business Planning We continue to evaluate our risk management processes. As a result, we have implemented a new risk management procedure across the business and put in place a comprehensive risk management plan that has been reviewed and approved by the Board. We are satisfied that the level of risk within the organisation is commensurate with a business of our size and believe that we have the appropriate controls and procedures in place to manage this risk effectively. We have also augmented the Group's business planning process by adopting the ' Balanced Scorecard' approach, to ensure that our people and our business units are firmly focused on achieving the Group's long and short-term goals. Prospects We look forward to taking advantage of the opportunities that today's markets offer and believe that our strategy, people and financial strength leave the business well-placed to make good progress across all its operations. Ian J Henderson Group Chief Executive 21 May 2003 Financial Review Profit before interest and tax (including joint ventures) for the year to 31 March 2003 was Â£591.9m (2002: Â£530.2m). This represents an 11.6% increase over the previous year and was driven by two main factors: â€¢ a full year's contribution from Telereal, our 50:50 joint venture with the Pears Group, and â€¢ profits of Â£43.5m (2002: Â£19.2) from the sale of operating, trading and investment properties. At the pre-tax level, profits decreased by 12.1% from Â£363.5m to Â£319.6m largely as a result of exceptional costs related to our capital reorganisation, convertible bond redemptions and new debt issues. Revenue profits declined by 6.6% to Â£340.9m (2002: Â£364.8m), due to increased interest costs related to the return of capital in September 2002 and the dilutive effect of property sales over the last two years. After capitalisation of interest on developments, total interest charges were some Â£115.0m higher than the prior year, of which nearly half can be attributed to the full year effect of Telereal and the balance to exceptional interest costs incurred in redeeming convertible bonds and cancelling surplus interest rate hedges, following our bond issues. The Group's gross interest payable, excluding Telereal, was covered 2.4 times by operating profits compared with 3.0 times in the prior year. During the year, we divested investment and operating properties with a book value of Â£533.3m (2002: Â£510.4m) generating an FRS3 profit of Â£41.7m, compared with Â£13.4m in the previous year. This includes our share of Telereal property disposals. Property disposals also crystallised revaluation surpluses earned in prior years of Â£281.2m. Profit after tax was Â£229.9m (2002: Â£263.6m) equivalent to a 7.6% decrease in basic earnings per share; however adjusted earnings only fell by 2.4% and the Directors are recommending a total dividend for the year of 35.5p per share (2002: 34.0p), a 4.4% increase. If approved, this will result in a final dividend of 26.0p per share (2002: 24.95p). At this level, adjusted dividend cover is 1.5 times (2002: 1.5 times). In absolute terms, the year-end value of the portfolio was some Â£33.1m higher than the previous year, an increase of 0.4%. This reflects increased development capital expenditure and the impact of property purchases and sales. However, the value of our like-for-like portfolio, and certain development schemes has declined, resulting in a valuation deficit for the year of Â£56.8m, after taking into consideration the accounting movement of Â£9.2m on the UITF28 debtor. The valuation deficit has been offset by Â£62.5m of retained earnings and this, coupled with the impact of our return of capital, resulted in an adjusted diluted net asset value per share of 1215p (2002: 1155p), up 5.2% over the year. In terms of cash flow, the Group realised Â£436.3m (2002: Â£549.2m) from property divestment and secured Â£80.6m from Telereal. These funds have been reinvested in the business and we returned Â£511.1m to shareholders during the year, spent Â£301.4m on investment property development expenditure and Â£311.8m on property acquisitions, including the costs incurred by Land Securities Trillium in constructing White City II for the BBC. Overall, there was a net cash outflow of Â£177.2m during the year before financing and return of capital to shareholders (2002: Â£219.2m). Net indebtedness increased by Â£647.2m in the year to Â£2,589.3m (2002: Â£1,942.1m) resulting in year-end gearing of 47.3% (2002: 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, plus dividends) was 8.2% compared with our estimated cost of equity of 9.1%. Total returns were held back this year as a result of the difficult London office market. During the year, we arranged to return Â£541m to shareholders. This was achieved by introducing a new holding company for the Group, combined with a 'B' Share issue to all shareholders. Approximately 94% of shareholders elected for an immediate redemption of their 'B' Shares in September at a cash cost to the Group of Â£511.1m, with a further 3.5% redeeming their 'B' Shares in April 2003 at a cash cost to the Group of Â£18.8m. The remaining 11.3m 'B' Shares are next redeemable in October 2003. At the same time we effected a capital reduction, which created some Â£3.1bn of distributable reserves in the new holding company, providing significant flexibility for the future. The return of capital and the purchase of convertible bonds had a positive influence on earnings per share and net asset value per share, while also reducing the diluted share capital of the Group. The Group has a defined benefit pension scheme. The scheme, which had gross liabilities of some Â£95m as at 31 March 2003, is now closed to new entrants. However, during the year, the Company made a special cash funding contribution of Â£9.0m following which the current deficit of the pension scheme is approximately Â£18.6m. Cash pension costs are expected to be some Â£1.5m per annum higher than in previous years as a result of a recent decision to increase funding rates for the time being. New schemes will be set up to meet obligations to employees transferring to the Group under total property outsourcing contracts. In June 2002, the European Parliament approved a Regulation requiring all listed companies in the European Union (EU) to prepare consolidated financial statements under International Financial Reporting Standards (IFRS) for financial years beginning on or after 1 January 2005 and this will apply to us for the first time in the year to 31 March 2006. As currently drafted, the implementation of IFRS will have a marked impact on financial reporting for property investment companies. However, it should also be noted that there is considerable activity, both at the International Accounting Standards Board (IASB) and at the UK's Accounting Standards Board, to refine the reporting framework. The implications for the Group are under active review and we will provide an update when we report our half-year results at the end of the year. Investment Portfolio Rental income decreased by 1.2% from Â£525.9m to Â£519.7m, reflecting the sale of mature assets over the last two years. Adjusting for the effects of property acquisitions and disposals, rental income on properties owned throughout the last two years increased by Â£24.8m. The main contributors to this increase were Â£20.8m from reviews and renewals and Â£10.2m from the letting of new developments, which were offset by a loss of Â£7.5m due to the vacation of buildings for redevelopment. Some Â£39.8m of rental income was lost on disposals offset by Â£8.8m from property acquisitions. The cost of bad and doubtful debts was some Â£1.6m, equivalent to approximately 0.3% of the rent roll (2002: 0.3%). During the last 12 months, the net reversionary potential of the portfolio, excluding voids has reduced to 5.1% at 31 March 2003, compared with 9.6% at the end of the prior year. The mean weighted unexpired lease term over the portfolio as a whole is 11.2 years, assuming all lease breaks and expiries occur. During the year we divested investment properties with a book value of Â£396.1m (2002: Â£498.1m), at an average rental yield of 7.0%, realising profits on sale of Â£26.5m and crystallising Â£234.3m of previous valuation surpluses. Investment portfolio activity Year to 31 March 2003 Acquisitions/ Sales and other FRS3 developments divestments profit Â£m Â£m Â£m ---------- ---------- ---------- Retail/leisure 170.8 117.9 14.2 Offices 258.1 127.2 4.7 Warehouses and industrial properties 20.1 18.0 2.9 Hotels, leisure, residential and other 29.3 159.5 4.7 ---------- ---------- ---------- TOTAL 478.3 422.6 26.5 ---------- ---------- ---------- Development The projects that comprise the current Development Programme are listed in the Development Pipeline Schedule. 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 an appropriate level of pre-lets). For reporting purposes we retain properties in the Programme until they are 95% let. The carrying value of Development Programme assets, (which excludes the BBC development at White City, trading properties, Proposed Developments and the project at Kent Thameside) was Â£967.4m at 31 March 2003 (2002: Â£790.8m). During the year, we spent Â£291.1m on the Development Programme, and capitalised associated finance costs of Â£30.8m. The estimated future cash spend required to complete the Development Programme, excluding interest, will be approximately Â£440m. Proposed Developments (excluding Kent Thameside) have a current carrying value of Â£180m and the estimated future cash spend required to complete these schemes, if we proceed with them, is approximately Â£900m, excluding interest. Land Securities Trillium Land Securities Trillium (including our share of Telereal) generated some 53% of the Group's gross property income (2002: 40%). Land Securities Trillium is now making good progress towards achieving 25% of our operating profit in the medium term. Revenue and profits from the PRIME contract have exceeded expectations and we also earned fees on the substantial programme of capital works that we managed on behalf of the DWP. On the BBC contract, we incurred Â£111.8m in the year on the construction of the White City 2 building with an estimated Â£99.3m (excluding interest) to be spent mainly over the next year. We have incurred a full year's start-up operating loss on this contract, but expect it to become profitable when the new building is occupied by the BBC later this year. Telereal has made a good contribution to earnings, despite a reduction in unitary charge reflecting the sale of its investment properties during the year. Sale proceeds were Â£270m, generating a profit on disposal of Â£18.8m, with our share being Â£9.4m. This transaction and Telereal's profits enabled the joint venture to return Â£80.6m to us during the year. Telereal's profits are growing in line with our expectations. Taxation The cash tax charge, equivalent to 12.1% (2002: 25.6%) of profit on ordinary activities, reflects the benefit of capital allowances from developments, refurbishments, acquisitions and financing transactions during the year. The financing benefit is unlikely to reoccur in future periods and the 2002/3 cash tax rate may not be representative of our tax position for the future. The requirement in FRS19 to make full provision for timing differences means that, in profit and loss account terms, our reported tax rate for the year is 28.1% (2002: 27.5%) and the factors causing this are explained in the notes to the accounts. Following the latest property valuation and assuming that all properties are sold at the revalued amounts without any tax mitigation, the Group has an estimated potential capital gains tax liability in the region of Â£435m (2002: Â£535m). However, as indicated in the notes to the accounts, it is unlikely that such an amount would be payable even in the event of a sale of all investment property assets. In particular, the sale of property portfolios by means of the disposal of certain asset owning companies would reduce this by some Â£110m. Treasury Management The treasury function operates under delegated authority from the Board and maintains policies and procedures which monitor, control and report on interest rate, liquidity, credit and other financial risks. The function operates as a cost reduction centre rather than a profit centre. The Group's finance policy is primarily based on an unsecured funding strategy which the Board believes offers the right balance between debt capacity, flexibility and cost. In limited circumstances the Group will still consider secured funding, but only after carefully reviewing the impact on its unsecured finance sources. The Group uses interest rate swaps to hedge the interest rate exposure on floating rate debt and to protect the cost of future borrowings. Due to the long-term nature of property investment and our expectation of increased gearing in the medium-term, we aim to take advantage of low interest rates to hedge the majority of our debt. The business has minimal direct foreign exchange exposures and consequently there are currently no foreign exchange hedging contracts in place. To provide access to immediate liquidity and to inject additional flexibility, the Group has two committed syndicated bank facilities in place. At the year-end, the total committed facilities available to the Group were Â£1.5bn, of which Â£0.6bn was utilised. At 31 March 2003, the average maturity of the Group's debt was 13.3 years (2002: 14.1 years) or 16.3 years (2002: 16.2 years) if short-term bank facilities are excluded, reflecting the long-term nature of property investment. At the year-end, the fair values of the Group's financial liabilities exceeded book value by Â£598.5m (2002: Â£474.9m), mirroring the reduction in long term interest rates since the Group's fixed rate borrowings and interest rate hedges 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 90p (2002: 60p). In May 2002 we announced our intention to return capital to shareholders. At that time, redemption notices were issued to the holders of our convertible bonds as these bonds were beginning to convert, with bondholders taking advantage of the difference between the share and conversion prices. So, where the opportunity arose at appropriate prices, we purchased bonds in the market to pre-empt conversion and successfully acquired some 80% of the bonds outstanding at 31 March 2002. This resulted in an exceptional loss of Â£28.2m, which is tax deductible and is reported as an interest expense in the profit and loss account. The amount of share capital to be returned to shareholders is Â£541m which reflected Â£48m of nominal new equity capital created as a result of bond conversions. The purchase of the convertible bonds and the return of capital to shareholders was financed by a new Â£1.5bn syndicated bank facility. Â£600m of our bank debt was subsequently refinanced by two new unsecured bonds, a 5.875% Â£400m bond maturing in 2013 and a 6.375% Â£200m bond maturing in 2024. Following this transaction, Â£700m of bank facilities and Â£300m of interest rate swaps were cancelled as surplus to requirements, leading to a Â£23.5m exceptional interest charge in the profit and loss account. The Group had a net cash outflow before the use of liquid resources and financing of Â£177.2m for the year (2002: Â£219.2m), primarily attributable to its return of capital, capital expenditure and investment activities. Insurance In common with other property owners, our insurers are applying terrorism exclusions to our policies as they become due for renewal in 2003. The Group continues to buy the most comprehensive terrorism insurance cover available from the Government-backed Pool Reinsurance Company Limited. 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. Portfolio Management Review During the year to 31 March 2003, the resilient performance of the investment properties in difficult market conditions demonstrated clearly the benefits of a diversified portfolio and active asset management programme. Excluding the Development Programme, investment properties showed a modest decrease of 0.3%. The increase in value of our retail and retail warehouse properties, which together now represent 51% of our assets, offset the decline in value of our Central London office properties. For full details of the Investment Portfolio valuation, please refer to the Business Analysis Section. The high level of management activity is shown by the 617 transactions (rent reviews, lease renewals and lettings) carried out by Portfolio Management. As a direct result of this activity, annual rents payable grew by 3.4% over the past twelve months on a like-for-like basis. Rent reviews and lease renewals have been settled at an average of 7.3 % above our valuers' assessment of ERV. Excluding properties in development, voids across the investment portfolio are 1.6%, which although slightly higher than the prior 12 months, have been kept to this low level as a result of the management activities undertaken across the portfolio. This figure rises to 2.1% if all properties under refurbishment are included and to 2.3% with predevelopment voids. Investment properties - impact of developments Capital valuation surplus/(deficit) - year to 31 March 2003 Investment Properties Investment Difference Excluding Portfolio Developments % % % ---------- ---------- ---------- Offices (8.9) (9.9) (1.0) Shopping centres & shops 7.1 7.8 0.7 Retail warehouse 9.4 10.0 0.6 Industrial 1.4 1.9 0.5 Hotels, leisure, residential & Other 2.9 3.1 0.2 ---------- ---------- ---------- Total (0.3) (0.6) (0.3) ---------- ---------- ---------- The above table illustrates how our office Development Programme has impacted negatively, but for retail and industrial properties our Development Programme has contributed positively to performance. Review of Activity Investment Activity Investment activity over the last twelve months remained modest. We purchased Â£122.0m of assets, including entering into a forward funding agreement with Centros Miller for a 32,500 sq m shopping centre in Maidstone which is due for completion in 2005 and is already 70% pre-let. Of the Â£122.0m invested, the most significant acquisitions included the purchase of the superior interest in the Bon Accord Centre, Aberdeen for Â£13.3m, and the acquisition of Newspaper House,which forms part of our New Fetter Lane, London EC4 holdings for Â£19.8m. Just prior to the year-end we acquired a small portfolio of properties on the South Bank in London from Sainsbury's for Â£39.9m. The four properties, the largest two of which are leased back to Sainsbury's, continue our strategy of investing in properties that are income producing but which offer medium term development opportunities. The average yield on these purchase outlays (including the cost of stamp duty and acquisition fees) was 7.4%. To benefit from the strong Central London hotel investment market and to effect a release of the equity generated during our ownership of the London Hilton on Park Lane, W1, we entered into a venture in association with London and Regional Properties in relation to the freehold interest of this asset. This transaction returned Â£154.1m of equity to the Group. We sold a further 21 investment properties for Â£264.4m (net of sale costs). The average yield on the properties sold and the equity release was 7.0%. The FRS3 profit was Â£26.5m (6.7% above book value). Central London The value of our Central London office portfolio declined by 9.0%, reflecting the continued deterioration of market conditions and the nature of this portfolio, where we have a proportion of properties with shorter than average leases but which have medium to long-term development potential. A more detailed review of our lease expiry profile is contained later in this report. We continue to manage our Central London assets actively, having concluded 75 rent reviews, 23 renewals and agreed 48 leases in the period under review. As anticipated, as leases terminate in our portfolio, investment voids, excluding properties under refurbishment, have increased marginally, but remain at a manageable 1.8% (excluding 0.2% of property under refurbishment). The Central London portfolio management team has been working hard to renegotiate and extend leases in developments where we have rescheduled the future timing for redevelopment. Examples of this are New Fetter Lane, where we have agreed terms on 22 (out of 31) tenancies for occupiers to stay beyond their original planned termination date, and Eastbourne Terrace, where we have agreed a short lease extension with the existing office occupier and are in negotiation for new leases with some of the sub-tenants who have expressed an interest in continuing occupation. The submarkets in Central London have performed very differently with a more marked deterioration in the City where we have 12% of our assets compared with the West End where we have 19% of our assets, where values have held up much better. Landflex We are just beginning to market our new Landflex product which we have developed to offer office occupiers a more flexible approach to planning their accommodation requirements. The refurbishment of 7 Soho Square, W1 is now complete, and 43% of this building is now in solicitors' hands. Empress State Building, SW6 is on target for completion by June 2003. We are currently in negotiation with a number of occupiers in respect of this product and, given the decline in occupier demand in Central London, we are pleased with the level of interest being expressed in Landflex. Shopping Centres and Retail The value of our shopping centre and retail properties increased by 7.1% demonstrating good growth from the retailer market and reflecting the excellent results we have had in our asset management activities. Across this portfolio we have achieved 111 new lettings, 25 renewals and 254 rent review settlements and voids are at 1.2%. We are continually seeking opportunities to reconfigure or redevelop new units to meet retailer requirements and have projects underway in virtually all of our centres. The existing strength of the portfolio and low levels of voids has required the retail team to work closely with occupiers to generate opportunities to improve our centres and thereby increase rental levels. An example of this active approach is the White Rose Centre, Leeds where, as a result of our activities, we have increased rental values over the last 12 months by 13%. We are pleased that our efforts to increase our focus on the customer have already been recognised, as demonstrated by positive results received from recently completed independent, comprehensive, customer research on our retail occupier base throughout the majority of our shopping centres. We are growing the income generated from other activities such as car parking, advertising and telecoms which this year increased from Â£6.7m to Â£6.9m on a like-for-like basis. One of our core objectives is to grow this income further. Retail Warehouses The value of the retail warehouse investment properties increased by 9.4%, demonstrating the very strong growth resulting from our active management of the portfolio. Occupier and investment demand for retail warehouses remains robust and this market continues to benefit from supply-side constraints and also the changing dynamics of the retail occupier base. Across the portfolio we negotiated surrenders and relettings and have taken back or agreed to take back 27,320 sq m of which we have relet 25,520 sq m at an average rental increase of 69%. This includes small investments at Hendon and Christchurch, which were subsequently sold at a surplus of 34% after all costs. At Lakeside Retail Park, West Thurrock, we have agreed to take back several stores and we have conditionally contracted with Marks & Spencer to provide them with a store of 5,810 sq m, anticipated to open in 2005. In addition to the 18,020 sq m of planning consents available for implementation as reported in the Development Review, we have 11,200 sq m of consents, or ' minded to grant' consents on existing parks. This includes 5,390 sq m at White City Retail Park, Manchester. Industrial The sector has remained stable and lettings continue to be achieved on satisfactory terms with modest rental growth. We continue to invest in our existing holdings and improve rental levels, as demonstrated at our refurbished scheme in Coulsdon. Our refurbishment programme currently equates to 2.9% of the industrial portfolio, ensuring the sustainable long-term future of our industrial and warehouse products in an increasingly competitive market. The programme includes a major refurbishment of around 10,240 sq m at Heston, Heathrow, which will raise the profile of our overall holdings on the estate, totalling 28,710 sq m. We are still increasing our exposure to the south east industrial sector, predominantly through development which is reported on in more detail in the Development Review. Development Review We have made significant progress towards our objective of establishing the platform for delivering a range of major development schemes. We continue to evaluate projects in respect of occupier demand, and will re-programme schemes if we believe that market conditions do not support the generation of shareholder value. However, we will progress certain aspects of development, such as planning and site assembly, so that we are in a position to implement schemes quickly as markets improve or pre-lettings are secured. During the year we completed 81,500 sq m of the Development Programme, started 95,500 sq m of new schemes, received planning consent or resolutions to grant consent for 212,500m2, applied for planning permission for 129,000 sq m and achieved 52,000 sq m of new lettings. In addition we secured outline planning consent at Ebbsfleet for 395,000 sq m of mixed use representing our 50% share in the project. Seven projects with a valuation of Â£114.4m, which were completed and let during the 12-month period, were transferred out of the Development Programme. These were the Designer Outlet Shopping Centre, Livingston; Neptune Point, Cardiff; Site B, Welwyn Garden City; Cheetham Hill Road, Manchester; Almondvale Retail Park Phase I, Livingston; Lakeside Retail Park Phase II, Thurrock; and part of a property at Markham Road, Chesterfield. The aggregate surplus on these schemes over their full development period was Â£24.3m. We have added to the Development Programme industrial schemes in Kidlington, Oxford and Fareham together with a small retail warehouse extension in Bexhill. We have removed from the Development Pipeline a small High Street shopping redevelopment scheme in Plymouth, and an office scheme at 40/50 Eastbourne Terrace, W2 which is commented upon in more detail below together with the second phase of our scheme in Hemel Hempstead, where we have sold the site. A Development Pipeline Schedule which, including our share of joint ventures, equates to approximately 708,800 sq m of new development, of which 119,000 sq m is completed, 250,600 sq m in progress, 22,200 sq m authorised and 317,000 sq m proposed. The Development Pipeline schedule lists both schemes in the Development Programme and Proposed Developments. It is only properties in the Development Programme which we referred to as 'development properties' in the notes to the accounts and elsewhere in this report. Our Development Programme includes: â€¢ Developments which are completed but less than 95% let; â€¢ Developments on site; â€¢ Committed developments (being projects which are approved and the building contract let); â€¢ Authorised developments (those projects approved by the Land Securities Board for which the building contract has not yet been let). Projects in the Development Programme are sufficiently firm to ensure that reporting from period to period provides a good basis for performance comparison and they are separately analysed in the relevant notes to the accounts. 'Proposed Developments' are now excluded from the Development Programme as experience has shown that these schemes can be subject to revision. However, we give an indication of the likely size and timing of these schemes and their potential impact on cash flow when discussing our 'Development Pipeline', which combines both the Development Programme and Proposed Schemes. Central London The current market environment for office development in London is challenging. However, relative to the size of our portfolio, we have only a small amount of unlet space in schemes which have already been completed, totalling 14,300 sq m in three buildings. Over the last year, we have taken a number of decisions which impact upon the timing of our Development Pipeline. At New Fetter Lane, EC4, we extended leases on the existing buildings from June 2003 to late 2004, while we seek planning consent for an alternative scheme offering a range of building sizes which will widen our marketing options. At 40-50 Eastbourne Terrace in Paddington, we have deferred development from 2003 to around 2010 to tie in with the lease expiry on our adjoining holding at 10-30 Eastbourne Terrace. This decision partially reflects current levels of occupier demand and also the results of analysis we have undertaken which shows that, by master planning the two sites together, we can maximise the developable floor area. At both New Fetter Lane and 40-50 Eastbourne Terrace, we are successfully extending income flows from the existing buildings. At Cardinal Place (formerly known as Stag Place) in Victoria, we awarded the building contract in Autumn 2002 and the main phase of the scheme is due for completion in 2005, when we anticipate improved market conditions in the West End. At Bankside 1,2,3 (formerly known as St Christopher House), which is adjacent to Tate Modern on the South Bank, we have started demolition works but do not intend to commence construction until pre-lettings have been obtained, which has always been our policy for this site. We have two major development schemes due for completion during 2003. Empress State in Earls Court (43,000 sq m) is due for completion in June of this year and 30 Gresham Street in the City (37,000 sq m) will be completed in December. We have recently started to market Empress State, which is being offered in small to medium sized units through our Landflex leasing product. Our marketing programme for 30 Gresham Street is well advanced, and we are encouraged by the active discussions we are having with interested parties. Retail We have shopping centre development projects under construction in Birmingham and Canterbury and, during the year, made considerable progress in advancing town planning and other issues on schemes in Bristol, Cardiff and Exeter. The Bull Ring in Birmingham, being developed by the Birmingham Alliance Partnership, will open ahead of schedule on 4 September 2003 and is now 88% let or under offer. We are delighted with the progress on both construction and letting. At Whitefriars in Canterbury, Fenwick opened their new department store in February of this year, at the same time as we launched our initial marketing campaign. A strong response from retailers has resulted in our agreeing terms on a further three stores and we will continue marketing until the scheme's opening date in 2005. At both Bristol and Exeter, we submitted planning applications during the period under review and obtained resolutions to grant consent. The scheme in Bristol is being undertaken in partnership with Hammerson, Henderson Global Investors and Morley Fund Management. In Cardiff, we are working in partnership with Capital Shopping Centres and submitted an outline planning application in Autumn last year for a development of approximately 70,000 sq m of retail accommodation together with hotel and residential space. In York, we are still awaiting the planning decision on our 27,500 sq m retail development proposal following the Public Inquiry in the summer of 2002. Retail Warehouses We completed the construction of approximately 33,000 sq m of new retail warehouse space, 94% of which is let and the remainder in solicitors' hands. At Dundee we completed Phase II of the scheme comprising 9,800 sq m with pre-lets to MFI, Carpetright, Currys and PC World and we plan to construct the final phase of 8,640 sq m later this year. This will create a regional shopping park of 28,775 sq m adjoining the 10,200 sq m Tesco Extra store which is now under construction. Despite restrictive planning policies, we have 18,020 sq m of consents or ' minded to grant' consents across the retail warehouse portfolio, which we shall implement once we have pre-let sufficient space. This includes 9,400 sq m at Livingston. Leisure Our City Centre leisure scheme 'The Gate' in Newcastle upon Tyne opened in November of last year and is trading well, with 84% by income either let or in solicitors' hands. Industrial Premises and Warehouses We continue to expand our industrial portfolio in the south-east principally through the acquisition of development land in strategic locations with limited land supply. We successfully acquired two sites, each of 2.5 hectares, in Oxford and Fareham for speculative development which will add 23,250 sq m to our portfolio. We completed 41,200 sq m at schemes in Basildon, Guildford, Hemel Hempstead and Welwyn Garden City and started on site on 35,500 sq m at Basildon, Croydon and Oxford. A further 11,600 sq m is planned for construction in the forthcoming year in Fareham. Of our completed industrial developments, 55% is let with total annual rental income of Â£3.14m secured. At Hemel Hempstead we took advantage of a strong land market and sold 2.9 hectares of surplus land purchased in 2001 for Â£4.9m for a net receipt of Â£7.3 m. Kent Thameside We have made significant progress on our larger land holdings at Kent Thameside over the last year. At Ebbsfleet, in which we have a half share, we successfully obtained a flexible outline planning consent for approximately 790,000 sq m of mixed use including up to 455,000 sq m of offices, 168,500 sq m of other commercial space and supporting uses and 3,300 residential units. In January of this year, we also submitted an outline planning application for 7,250 residential units and up to 150,000 sq m of commercial space and 130,000 sq m of retail, leisure and community buildings at Eastern Quarry. Total Property Outsourcing Review A successful year for Land Securities Trillium saw important progress in all our existing contracts. Financially, we performed ahead of expectations, with income growing by 62.1% to Â£658.3m and operating profit by Â£76.6m to Â£139.7m reflecting a full year's contribution from Telereal. We supported the DWP through a period of significant business change, and the Partnership with the BBC completed an impressive first full year of operation both in terms of development activity and service delivery. The BT contract, operating through Telereal, had a strong first year delivering strategic asset management and facilities service management across BT's estate, and, in the process, we successfully realised enhanced asset values, generating financial benefits for Telereal and BT. Department for Work and Pensions In operational terms, the platform for delivery of services under the PRIME contract for the DWP is now well established. However, organisational changes within DWP created new revenue-generating activity for us with the creation of three new DWP businesses, namely Job Centre Plus, The Pensions Service and The Debt Management Service. As a result, we have been extremely active over the last year in estate management and the delivery of capital projects. To support these new DWP businesses we received enquiries from the client for some 250,000 sq m of additional accommodation, some 50,000 sq m of which was taken on during the year. In the same period our Capital Projects business undertook around Â£95m of work for DWP, creating 80 new Job Centre Plus offices and 50 Pensions processing centres, together with other refurbishment work across the estate. In the light of this growth in its requirements, the DWP did not wish to use any of its annual entitlement to vacate a proportion of its estate. However, in the latter part of the year, DWP gave notice of its intention to vacate a number of small buildings totalling 3,600 sq m over the next twelve months as it seeks to consolidate its accommodation following its business reorganisation. This vacation is achieved by utilising some of the flexibility which was requested by DWP at the commencement of the contract, and which was priced accordingly by Land Securities Trillium. Responsibility for seeking tenants or sub-tenants for any vacant floor space in the portfolio rests with Land Securities Trillium, and the amount of space currently vacant across the portfolio stands at its lowest level since the contract began at 12,370 sq m, as compared to an annual average of around 70,000 sq m. In terms of the delivery of our day-to-day facilities management services to over 100,000 DWP occupants, we continue to enhance and improve our offering throughout a period of substantial business change for our client. The annual customer satisfaction survey saw an improved score for the second successive year, with an exceptional customer satisfaction rating of 90% being achieved. This reflects well on the efforts of all our people working on this contract, and is a testament to the strength of the relationship between us and our long-term service partners. BBC The first full year of the BBC Property Partnership has delivered a series of successes. The 300 Facilities Management and Projects staff who joined us from the BBC at the end of 2001 are now integrated into our business, delivering services to some 25,000 BBC staff across the UK, and managing capital projects valued at some Â£40m during the year. Through their efforts and those of our service partners the customer surveys undertaken at the end of our first year of operation reveal the biggest year-on-year increase in satisfaction levels recorded by the BBC staff. Land Securities Development is planning to complete later this year the first phase of the new 50,000 sq m development for the BBC on the White City site. One element of this scheme is some six months ahead of schedule, which will provide operational benefits for the BBC and improved financial returns for the Land Securities Group. Other proposed developments across the UK are currently at various stages of discussion as we work with the BBC to plan and deliver its vision of providing accommodation capable of attracting the best people in its industry. As we announced shortly after securing the BBC contract, we recognised that the contract would run at a loss prior to completion of the new White City development. Upon completion of the building in the Autumn of 2003, income from the contract will increase by approximately Â£30m on an annualised basis, and the contract will move to a stabilised position, with a positive contribution to Group profits in the following financial year. BT The BT contract was secured in November 2001 by Telereal, our joint venture with the Pears Group, with a total equity contribution by each partner of Â£146m. During the year under review, Telereal made a Â£27.2m contribution to Land Securities Group pre-tax profits, largely due to our focus on working with BT to maximise asset values. Since acquiring the BT portfolio, Telereal has sold a total of 49 properties for some Â£296m, including the sale in August 2002 of six properties to the Rotch Group for Â£270m. During the year, we delivered over Â£100m of capital projects for our BT customers, and we continued to work with BT to identify the potential for broadening the scope of our operation by transferring to Telereal further facilities management activities. Telereal is responsible for managing the vacation and subsequent subletting of vacated leasehold space on behalf of BT. BT has announced that it will be vacating parts of its leasehold office portfolio through restructuring and relocating certain activities. This is across the country but the majority relates to its London property strategy. No liability will pass to Telereal, save for 2,360 sq m in two buildings in Leeds which were anticipated at the time of the BT transaction and priced accordingly. In addition, Telereal continues to discuss with O2 (UK) the potential for growing the relationship between the two parties through Telereal extending its existing 18 months corporate real estate advisory contract. New Business Although no new total property outsourcing contracts were completed in the market during the year, our new business pipeline has greater depth than at any time since Land Securities Trillium started operating in 1998. In recognition of the success of the PRIME contract and in the anticipation of synergies with the PRIME estate, the DWP has entered exclusive negotiations with us, subject to being able to agree terms, for the outsourcing of the 800,000 sq m former Employment Services estate. In addition, a number of attractive opportunities are being pursued in the private sector, where current economic conditions are reinforcing the need for organisations to focus on their core business. In total, we are in active discussions with regard to potential new property outsourcing contracts entailing some 2.3 million sq m of accommodation. Business Analysis This year we have created a new Section comprising the investment portfolio valuation, relevant analysis and statistics, and development schedules. In addition this year we have included a number of statistics relevant to our total property outsourcing activities. This also includes the major property holdings schedule. Investment Portfolio Valuation The portfolio was valued by Knight Frank at Â£7.84bn at 31 March 2003. After adjusting for sales, acquisitions and expenditure the value reduced marginally by 0.6% as compared to the year to 31 March 2002. A positive contribution from retail and industrial developments was offset by the negative impact of the revaluation of our London office holdings. In the first half of the Company's financial year, the period to 30 September 2002, capital values for London office properties weakened due to adverse rental and yield movements. This rate of decline, driven by falling rents, was more marked in the second half of the year showing a total capital value decline of 10.1% for the twelve month period. In terms of sub sectors, the City saw a 16% decline in capital values compared with the West End, where we have 46% of our Central London exposure, which saw a 6.2% reduction. Retail property, which now makes up almost 50% of our portfolio, presented a very positive picture, producing good growth in capital value for the period with retail warehousing at 10.0% and other retail (shopping centres, Central London shops and in town shops) at 7.8%. The industrial sector has shown a small increase in capital value of 1.9%. The investment market has seen 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. A large part of the investment market is driven by debt backed investors and, while there is evidence in some cases that lenders are seeking higher returns, there remains a reasonably buoyant market for investment property lending amongst UK and international banks along with an increasing depth to the securitisation market. 'Bond' type investments with the benefit of long institutional leases have, in some cases, produced increases in value during the last 12 months as a result of this debt driven market and the relationship with interest rates, which are at 30 year lows. After excluding development properties and Kent Thameside at 31 March 2003, the value of investment properties was Â£6.82bn. At the same date, the annual rent roll, net of ground rents and excluding the same properties, was Â£479.2m, producing a yield of 7.0%. Detailed breakdowns by sector, including comprehensive analyses of the Group's valuation, rental income and yield profiles follow in the investment portfolio analysis. Performance Benchmarking The analysis by IPD includes properties in joint ventures and those held for development. Table A - Long term performance relative to IPD Ungeared total returns - periods to 31 March 2003 Land Securities IPD* IPD* - Upper Quartile % % % _____ _____ _____ 10 years 12.8 11.9 12.3 20 years 11.1 10.2 10.9 *IPD December Universe (extrapolated to March 2003) unfrozen Source: IPD Table B - One year performance relative to IPD Ungeared total returns - 12 months to 31 March 2003 Land Securities IPD* % % _____ _____ Offices (3.3) 1.6 Retail 15.8 14.6 Industrial 9.4 10.6 Other Commercial 11.0 10.9 PORTFOLIO 6.6 9.3 * IPD December Universe (extrapolated to March 2003) unfrozen Source: IPD Table A above compares Land Securities' ungeared total property return over the last 10 year and 20 year periods to 31 March 2003 to the IPD December Universe (extrapolated to March 2003), which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2002 (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 20 year period has been selected as the longest time period over which IPD provides comparative performance figures. Table B compares the performance of the Group's portfolio to that of IPD on a similar basis at both sector and total portfolio levels over the 12 month period to 31 March 2003. Our high exposure to London offices has had a negative impact on overall performance relative to IPD. London office holdings have underperformed due to the shorter lease expiries on our medium term development opportunities. Against that our retail stock, in particular shopping centres, has out-performed IPD. Our view remains that our sector focus and development activity will result in out-performance over the medium to long term. Market Report Central London The key drivers of the Central London office markets are weaker occupational demand, an increase in availability and a two tier investment market. This is particularly apparent in the City where demand has fallen away as financial institutions downsize and occupiers seek to sub let surplus space. However, in comparison with former cycles the development pipeline of new accommodation is limited and rental levels are being driven predominantly by lack of tenant demand rather than over supply of space. Rental values have been decreasing and a return to rental growth in the City is not anticipated before 2006/7. The West End markets, particularly Victoria, are more resilient predominantly as a result of constrained supply, a more diverse occupier base and continued demand from the public sector for new accommodation. It is expected that the return to positive rental growth in real terms will be experienced earlier here than in the City. The bond like characteristics of properties let to good covenants on long unexpired lease terms continue to attract strong investor demand and values for this type of property are holding up. For properties with shorter lease terms and other development opportunities, a significant re-pricing has occurred. The exception to this is the West End where there is still investment appetite for active management scenarios. Retail The main driver behind retail rental growth is consumer spending, which has been buoyant over the past two years. There are now some signs that this is slowing, as a result of concerns over the possibility of weaker south east housing market conditions spreading to other regions in the UK. The Central London retail markets have also been adversely affected recently by special factors, notably a reduction in tourism as a result of world instability and transport issues. Further weakening in the housing markets may continue to affect adversely consumers' disposable income along with recent increases in National Insurance contributions. On the investment side demand has been strong and yields have hardened significantly. In future the rate of yield shift is not thought to be sustainable but allocation by investment funds seems to favour retail as an investment. Retail Warehousing This asset class continues to evolve and certain parks are becoming more like the High Street as they move to open A1 consent and High Street retailers look to trade out of new formats and locations. The supply side will remain constrained in the medium term as a result of planning restrictions. Demand, however, is particularly reliant on housing market conditions and remains strong while mortgage equity withdrawals run at today's high levels. However, these positive market conditions are at risk if either the housing market falls or interest rates increase. Investor appetite for this type of asset class remains high as evidenced by the strong interest in the Grantchester and Chartwell Land transactions. Industrial Industrial/distribution demand has slowed over the past six months and there has been little demand from general manufacturing for industrial units. However, sites with good transport links and good access to labour markets have been selling for high level values based on aggressive rental and yield forecasts. Investment demand remains strong for development sites in the south east and for well-let distribution centres. Total Property Outsourcing The current challenging economic conditions are leading organisations to focus on maximising returns on capital deployed, minimising costs and streamlining their business operations. This has increased interest in total property outsourcing with the number of businesses actively discussing this option or due to bring proposals to the market at an all time high. Increased levels of interest are also coming from Central and Local Government as they seek to meet the demands of changing Government funding criteria and to deliver the most cost effective accommodation solutions. Investment Portfolio Analysis Valuation Market Sector Surplus/ Like- by Type Valuation Valuation Deficit for-like Yield on ------------- ------------- ------------- rental present Total Note Note Total Note Total Note growth income (1) (3) (2) (1) (3) (1) (3) (4) (2) Â£m Â£m Â£m % % % % % % ------------- ---------- -------- ------------- ---------- ------------- ---------- ---------- ------------ Offices West End 1,481.8 1,286.5 1,286.5 18.9 19.2 (6.2) (4.4) (7.1) 7.0 City 945.7 794.3 794.3 12.0 11.8 (16.1) (15.1) (15.9) 9.3 Midtown 542.8 514.4 514.4 6.9 7.7 (12.1) (11.8) (14.4) 8.2 Inner 264.3 164.3 164.3 3.4 2.5 (2.8) (2.6) (2.9) 6.6 London Rest of UK 77.9 69.5 69.5 1.0 1.0 (4.1) (4.2) (2.7) 8.1 ------------- ---------- -------- ------------- ---------- -------------- ---------- ---------- ------------ Sub-total 3,312.5 2,829.0 2,829.0 42.2 42.2 (9.9) (8.9) (11.1) 7.9 ------------- ---------- -------- ------------- ---------- -------------- ---------- ---------- ------------ Shopping centres & shops Shopping centres 1,455.7 1,178.3 1,220.0 18.6 17.5 9.6 8.4 5.2 6.8 Central London shops 732.4 654.9 654.9 9.3 9.8 6.0 5.9 3.8 6.5 Other in town shops 589.1 577.3 577.3 7.5 8.6 5.8 5.8 1.6 6.6 ------------- ---------- -------- ------------ ---------- -------------- ---------- ---------- ------------ Sub-total 2,777.2 2,410.5 2,452.2 35.4 35.9 7.8 7.1 4.0 6.7 ------------ ---------- -------- ------------ ---------- -------------- ---------- ---------- ----------- Retail warehouses Parks 901.2 835.9 871.7 11.5 12.5 8.8 8.4 5.3 5.5 Other (inc. food superstore) 215.6 194.9 215.6 2.7 2.9 15.5 13.7 8.5 6.6 ------------- ---------- -------- ------------- ---------- -------------- ---------- ---------- ------------ Sub-total 1,116.8 1,030.8 1,087.3 14.2 15.4 10.0 9.4 6.1 5.7 ------------ ---------- -------- ------------- ---------- -------------- ---------- ---------- ------------ Industrial South East & Eastern 350.2 259.1 274.6 4.5 3.8 1.5 0.9 1.0 7.2 Rest of UK 35.7 32.4 35.7 0.5 0.5 5.3 5.8 1.1 8.0 ------------ ---------- -------- ------------ ---------- ------------- ---------- ---------- ------------ Sub-total 385.9 291.5 310.3 5.0 4.3 1.9 1.4 1.0 7.3 ------------- ---------- -------- ------------ ---------- ------------- ---------- ---------- ------------ Other 251.6 148.0 139.1 3.2 2.2 3.1 2.9 3.0 6.2 ------------- ---------- -------- ------------ ---------- ------------- ---------- ---------- ------------ TOTAL 7,844.0 6,709.8 6,817.9 100.0 100.0 (0.6) (0.3) (2.8) 7.0 ======= ====== ==== ======= ===== ======== ====== ====== ======= Market Sector Rents Net Net by Type received rental ERV (6) Gross ERV (7) (continued) income (5) -------------- ----------- ------------ ------------ ---------------- ----------- ----------- --------- Gross Invest Total Invest Total Invest Total Invest (1) (2) (1) (2) (1) (2) (1) (2) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m -------------- ---------- ----------- ----------- ---------------- ------------ ---------- --------- Offices West End 98.2 92.7 94.1 89.7 141.5 102.2 143.2 103.9 City 80.9 80.9 73.4 73.7 83.8 66.4 84.9 67.5 Midtown 42.5 42.5 42.4 42.4 45.1 42.3 45.9 43.1 Inner London 11.1 11.1 10.8 10.8 19.5 8.1 20.6 9.2 Rest of UK 7.7 6.9 6.6 5.6 6.1 5.2 6.2 5.4 -------------- ---------- ----------- ----------- ---------------- ----------- ----------- --------- Sub-total 240.4 234.1 227.3 222.2 296.0 224.2 300.8 229.1 -------------- ----------- ------------ ----------- ---------------- ------------ ----------- --------- Shopping centres & shops Shopping 92.4 90.7 85.0 82.9 114.1 91.3 121.0 98.3 centres Central London shops 46.4 42.6 44.6 42.7 51.5 48.5 52.6 49.6 Other in town 41.8 41.6 38.0 37.9 43.8 41.9 46.7 44.7 shops -------------- ---------- ------------ ------------ ---------------- ----------- ---------- --------- Sub-total 180.6 174.9 167.6 163.5 209.4 181.7 220.3 192.6 -------------- ---------- ------------ ----------- ---------------- ------------ ---------- --------- Retail warehouses Parks 46.0 46.0 48.8 48.1 59.9 57.4 59.9 57.4 Other (inc. food superstore) 14.1 14.1 14.2 14.2 15.6 15.6 15.6 15.6 -------------- ----------- ------------ ------------ ---------------- ----------- ---------- --------- Sub-total 60.1 60.1 63.0 62.3 75.5 73.0 75.5 73.0 -------------- ----------- ------------ ----------- ---------------- ------------ ----------- --------- Industrial South East & Eastern 21.9 20.2 21.5 19.7 31.2 23.1 31.2 23.1 Rest of UK 4.1 4.1 2.8 2.9 3.0 3.0 3.0 3.0 -------------- ----------- ------------ ------------ ---------------- ------------ ----------- --------- Sub-total 26.0 24.3 24.3 22.6 34.2 26.1 34.2 26.1 -------------- --------- ------------ ------------ ---------------- ------------ ----------- --------- Other 12.6 12.5 9.2 8.6 13.3 9.8 13.4 9.8 -------------- ---------- ------------ ------------ ---------------- ------------ ----------- --------- TOTAL 519.7 505.9 491.4 479.2 628.4 514.8 644.2 530.6 ======== ====== ====== ====== ========= ====== ===== ======= Market Sector No of Properties Lease length (10) by Type (continued) -------------- ---------------- ------------ ---------- ---------- Invest Vacancy Voids rates (9) Total (1) Invest (2) Median Mean Mean (8) % (i) (ii) (iii) Â£m years years years ---------- ------------ --------------- ------------- ------------ ---------- ---------- Offices West End 1.8 1.7 30 28 7.5 10.8 15.1 City 2.1 3.1 24 23 3.5 9.7 10.9 Midtown 0.1 0.2 12 11 7.3 8.8 9.7 Inner London 0.1 1.1 5 4 3.5 4.0 5.3 Rest of UK 0.3 5.6 3 3 2.5 4.5 6.0 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Sub-total 4.4 1.9 74 69 6.3 9.5 11.9 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Shopping centres & shops Shopping centres 0.6 0.6 19 16 10.0 13.8 14.5 Central London shops 0.7 1.4 10 9 8.3 9.1 9.9 Other in town shops 1.0 2.2 55 53 8.5 10.2 10.9 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Sub-total 2.3 1.2 84 78 9.0 11.7 12.4 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Retail warehouses Parks 0.9 1.6 27 26 18.3 15.9 16.1 Other (inc. food superstore) - - 19 17 17.5 14.8 15.2 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Sub-total 0.9 1.2 46 43 17.8 15.7 15.9 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Industrial South East & Eastern 0.9 3.9 32 25 7.8 7.8 9.3 Rest of UK - - 5 5 9.5 11.9 16.6 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Sub-total 0.9 3.5 37 30 7.8 8.3 10.2 ---------- ------------ --------------- ------------- ------------ ---------- ---------- Other - - 13 11 12.3 25.6 25.9 ---------- ------------ --------------- ------------- ------------ ---------- ---------- TOTAL 8.5 1.6 254 231 8.0 11.2 12.7 ====== ======= ======== ======= ======= ===== ===== Turnover rents total Â£5.1m and represent 1% of the total net rental income figure given above. Notes The 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 Quays Limited Partnership and the Ebbsfleet Limited partnerships. The valuation figures exclude properties owned by Land Securities Trillium and Telereal. 1. The total figures relate to the investment portfolio business comprising all investment and development properties. 2. Represents all properties excluding those which remain in the development programme, the Kent Thameside development properties and forward funded acquisitions. This measure represents the portfolio which is held for investment purposes or properties earmarked for development but not yet in the development programme and provides a basis for the yield calculations. 3. Includes all properties included in (2) above except for those developments which have been completed, let and removed from the development programme during the year, but also includes forward funded acquisitions. This provides a measure of the performance of the investment managed business. 4. The like for like rental value growth figures exclude properties in the development programme and units of accommodation materially altered or refurbished during the period and is the change in the 12 months to 31 March 2003. 5. Net rental income is annual rents passing at 31 March 2003 after deduction of ground rents. 6. Net ERV includes vacant space and estimated future ERVs for properties in the development programme and is calculated after deducting expected ground rents. 7. Gross ERV is calculated in the same way as Net ERV before the deduction of ground rents. 8. Represents investment property voids (excluding investment properties under refurbishment and predevelopment voids) which are vacant and are available to let at 31 March 2003. 9. Calculated by Gross ERV for the investment portfolio. 10. The definition for the figures in each column is: (i) Median is the number of years until half of income is subject to lease expiry / break clause (ii) Mean is rent weighted average number on leases subject to lease expiry / break clauses (iii) Mean is rent weighted average number on leases subject to lease expiry / ignoring break clauses The calculation excludes authorised developments and developments in progress Present income yield on valuation at 31 March 2003 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 9.9% 8.2% 8.1% 8.3% 7.8% 6.8% 6.6% 6.5% 6.7% 6.9% 7.0% 2002 is restated to account for the revised definition of the development properties excluded from the calculation. % Portfolio by Value and Number of Properties at 31 March 2003 Â£m Value % No of Properties 0 - 9.99 5.50% 101 10 - 24.99 11.44% 56 25 - 49.99 22.52% 51 Over 50 60.54% 46 ----------- 254 ====== Average Rents excludes properties in the development programme and voids Average Average Rent ERV Â£/ sq m Â£/sq m Offices Central and inner London 347 387 Rest of UK 86 81 Retail Shopping centres n/a n/a Shops n/a n/a Retail warehouses (including supermarkets) 139 150 Industrial premises and warehouses London, south-east and eastern 63 66 Rest of UK 17 18 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). This is not a like for like analysis with the previous year Portfolio value by location % figures calculated by reference to the portfolio value of Â£7,844m Industrial Hotel, Shopping premises leisure centres Retail and residential, Offices and shops W'houses w'houses other Total % % % % % % ------------ ------------ ------------ ------------ ------------ --------- Central and Inner London 41.2 9.3 - 0.1 1.2 51.8 Rest of south east and eastern 0.5 3.8 4.0 4.4 1.1 13.8 Midlands 0.1 4.8 2.3 0.2 - 7.4 Wales and south west 0.2 5.0 1.3 0.1 - 6.6 North, north west, Yorkshire and Humberside 0.1 7.0 4.9 0.2 0.8 13.0 Scotland and Northern Ireland 0.1 5.5 1.7 - 0.1 7.4 ------------ ------------ ------------ ------------ ------------ -------- Total 42.2 35.4 14.2 5.0 3.2 100.0 ======= ======= ======= ======= ======= ==== 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 occupiers. The ten largest occupiers account for 23.8% of current rents and are: Central Government (9.6%), Allen & Overy (2.8%), Dresdner Bank (2.2%), Dixons Group (1.8%), Enterprise Oil (1.7%), J Sainsbury (1.5%), The Metropolitan Police (1.2%), Homebase Ltd (1.0%), MFI Properties Ltd (1.0%) and the Institute of London Underwriters (1.0%). Investment property information at 31 March 2003 31-Mar 31-Mar 2002 2003 % of rent roll % of rent roll Reversionary potential Ignoring additional income from the letting of voids Gross reversions 11.5 10.5 Over-rented -1.9 -5.4 Net reversionary potential 9.6 5.1 The reversion is calculated with reference to the gross rent roll excluding properties in the development programme and excluding current voids. Rental income analysis (over a two year period) 2001/02 2002/03 Increase (restated) Â£m ------------- ------------- ------------- Properties owned throughout period 459.4 484.2 24.8 Sales (2001/02 and 2002/03) 55.1 15.3 Acquisitions (2001/02 and 2002/03) 11.4 20.2 525.9 519.7 Increase/ (decrease) Reviews and renewals 20.8 First lettings 10.2 Net relettings of voids (3.1) Voids for redevelopment (7.5) Other* 4.4 24.8 * Other includes prior year adjustments Analysis of voids Total portfolio gross ERV Â£530.6m Voids - by Gross ERV Â£m % Investment Properties: - Available to let 8.5 1.6% - Under refurbishment 2.8 0.5% ---------- ---------- Subtotal 11.3 2.1% - Pre development properties 0.9 0.2% ---------- ---------- 12.2 2.3% ---------- ---------- Development Schedule Central London Planning - PR = planning received; AS = application submitted; MG = minded to grant; PI = planning inquiry; OPR = outline planning received Estimated/ Actual Size Status Status completion Cost Property Description Sq m Planning Letting date Â£m Developments Completed Portman House, W1 Offices 9,249 79% Oct 2001 44 Retail 2,521 7 Soho Square, W1 Offices 5,571 Mar 2003 9 190 High Holborn, WC1 Offices 7,793 Sep 2002 41 Developments Approved and in Progress 30 Gresham Street, EC2 Offices 35,876 Retail 1,304 Dec 2003 208 Empress State Building, SW6 Offices 40,410 Retail/Leisure 1,660 Jun 2003 102 Cardinal Place, SW1 Offices 50,750 Retail 9,250 Jun 2005 251 Proposed Developments New Fetter Lane, EC4 Offices 58,740 PR Retail/Leisure 8,400 2007 Bankside 1,2,3, SE1 Offices 73,990 MG Retail/Leisure 5,385 2006 1,569 Retail Estimated/ Actual Size Status Status completion Cost Property Description Sq m Planning Letting date Â£m Developments Completed Sidwell Street Retail 2,420 Mar 2003 3 Developments Approved and in Progress New Bull Ring, Retail 111,484 71% Sep 2003 141 Birmingham 100% The Birmingham Alliance - a limited partnership with Hammerson plc and Henderson Global Investors Whitefriars, Canterbury Retail 37,685 25% May 2005 103 + Residential Caxtongate Phase III, Retail 2,238 100% Nov 2004 5 New Street, Birmingham Cheeke Street Retail 5,359 Sep 2005 11 Retail Estimated/ Actual Size Status Status completion Cost Property Description Sq m Planning Letting date Â£m Proposed Developments Broadmead, Bristol 100% Retail 94.229 MG 2007 The Bristol Alliance - a Leisure 6,491 limited partnership with Offices 24,973 Hammerson plc, + Residential Henderson Global Investors & Morley Fund Management Princesshay, Exeter Retail 37,368 MG 2007 + Residential Coppergate Centre, York, Retail 24,247 PI 2008 Phase II Leisure 1,450 Offices 1,282 + Residential St Davids, Cardiff (100%) Retail 70,000 AS 2008 St David's Partnership - a Leisure Partnership with + Residential 39,750 Capital Shopping Centres Retail Warehouse Estimated/ Actual Size Status Status completion Cost Property Description Sq m Planning Letting date Â£m Developments Completed Kingsway Retail Park, Retail 9,800 78% Jan 2003 29 Dundee, Phase I Warehousing Developments Approved and in Progress Bexhill Retail Park Retail 3,112 Jul 2004 11 Warehousing Proposed Developments Almondvale Retail Park, Retail 9,383 PR 2004 Livingston, Phase II Warehousing Kingsway Retail Park, Retail 8,640 PR 2004 Dundee, Phase II warehousing Industrial Estimated/ Actual Size Status Status completion Cost Property Description Sq m Planning Letting date Â£m Developments Completed Juniper Phase I, Basildon Industrial 21,823 84% Nov 2001 18 Refurbishment Offices 3,660 Horizon Point, Hemel Hempstead Phase I Industrial 10,384 Mar 2002 10 Zenith, Basildon Industrial 15,511 30% Jun 2002 12 Cobbett Park, Guildford Industrial 11,440 41% Aug 2002 12 Developments Approved and in Progress Commerce Way, Croydon Industrial 12,777 Oct 2003 12 Juniper Phase II, Basildon Industrial 11,148 April 2003 8 Oxonian Park, Kidlington Industrial 11,654 Sep 2003 9 Concorde Way, Industrial 11,613 May 2004 9 Segensworth, Fareham Other Developments Completed The Gate, Newcastle upon Leisure 18,556 67% Nov 2002 64 Tyne Cost (Â£m) refers to estimated capital expenditure including the cost of third party land acquisitions and excluding finance costs. Letting % is measured by ERV and shows letting status at 31 March 2003. Development pipeline - financial statistics Valuation Cumulative surplus/ valuation Net Book Capital Estimated Estimated (deficit) surplus / Income/ value expenditure total capital total 12 mth to (deficit) to ERV at start to date Expenditure cost 31.03.03 date (1) (1) (2) (3) Project Â£m Â£m Â£m Â£m Â£m Â£m Â£m -------------- ----------------- ----------------- ------------- ------------- ----------------- ------- Completed, let and transferred out of development programme or sold during the year ended 31.3.03 16 59 61 79 16 24 6.9 Active development programme (schemes in progress, completed but not let, committed and authorised) 262 659 1,097 1,454 (46) (78) 116.7 Proposed 180 44 950 1,179 n/a n/a 100.1 schemes Notes (1) Excludes capitalised interest. (2) Includes land costs / book value of land and capitalised interest, but excludes any allowances for rent free periods, stated net of other receipts (eg sales of residential units). (3) Net headline annual rental payable on let units plus net ERV at 31 March 2003 on unlet units. Total Property Outsourcing Unexpired contract term - years Prime 15 BBC 18 Telereal 28 Property under management Freehold Leasehold TOTAL 000 sq m 000sq m 000 sq m ------------- --------------- ----------- Offices DWP 524 1,147 1,671 BBC 28 - 28 BT 861 578 1,439 Telephone Exchanges BT 4,009 33 4,042 BBC Under development 54 - 54 --------- --------- --------- TOTAL 5,476 1,758 7,234 ===== ===== Under management but estate DWP 77 not transferred BBC 290 BT - -------- TOTAL 7,601 ===== Regional breakdown by contract DWP BBC Telereal Total 000 sq m 000 sq m 000 sq m 000 sq m --------- --------- --------- --------- Northern Ireland - - 126 126 London, south east and west England 549 346 2,785 3,680 North England 670 - 1,034 1,704 Scotland 233 26 478 737 Midlands and Wales 296 - 1,058 1,354 -------- ------- -------- -------- TOTAL 1,748 372 5,481 7,601 ===== ==== ===== ===== Capital spend by contract DWP BBC Telereal TOTAL Â£m Â£m Â£m Â£m ----------- ----------- ----------- ----------- Capital spend 125.7 42.0 105.0 272.7 ====== ====== ====== ====== Number of people by occupation Total Asset management 99 Call centre 155 Capital projects 295 Quality assurance 46 Facilities management 519 HR/Finance/ IS/BD 229 -------- TOTAL 1,343 ===== Note: These figures include all Telereal staff Property transactions concluded by contract DWP Telereal No of No of Total no of transactions transactions transactions Sales 1 49 50 New Lettings 28 17 45 Rent Reviews 76 39 115 Lease Renewals 26 - 26 ------ ------ ------ TOTAL 131 105 236 === === ==== Unitary charge income received by contract DWP BBC Telereal TOTAL Â£m Â£m Â£m Â£m Unitary Charge Income 299.0 43.4 308.8 651.2 Note: The Telereal unitary charge is the total unitary charge payable by BT Service partner agreements Proportion Sq m under of service providers' Service Partner Service Element mgmt turnover Compass Catering 1,999,441 <5% Dalkia Technical Maintenance 1,213,491 10 to 15% Group 4 Security 1,671,182 15 to 20% GS Hall Technical Maintenance 785,950 20 to 25% ISS Cleaning 807,964 <5% MIB Furniture 1,999,441 15 to 20% MITIE Cleaning 886,689 <5% OCS Cleaning 304,788 <5% Wilson James Security 304,788 20 to 25% Average contract tenure: 8.7 years Average annual contract value: Â£9.8 m This information is provided by RNS The company news service from the London Stock Exchange

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