Interim Results
Land Securities Group Plc
17 November 2004
17 November 2004
LAND SECURITIES GROUP PLC ('Land Securities' / 'Group')
Interim results for the six months ended 30 September 2004
Highlights
• Adjusted diluted net asset value per share up 8.4% to 1443p (31/03/2004:
1331p)
• Uplift of 5.3% in the valuation of the investment portfolio
• Pre-tax profits rose 8.2% to £196.6m (30/09/2003: £181.7m)
• Revenue profits increased by 13.4% to £189.3m (30/09/2003: £167.0m)
• Adjusted diluted earnings per share up 11.8% to 28.56p (30/09/2003:
25.55p)
• Increase of 5.1% in the interim dividend to 10.4p (30/09/2003: 9.9p),
reflecting the Board's confidence in the Group's prospects
• Strong progress within the investment property business demonstrated by:
- Ongoing improvement in Central London market and completion of
90,000 sqm of occupier transactions contributed to 4.4% increase in
value of London Office portfolio
- Continuing strength of retail portfolio shown by 5.8% increase in
valuation
- Properties worth £42.5m sold from investment portfolio, with
aggregate purchases totalling £254.3m
• Substantial increase in profits delivered by Land Securities Trillium and
completion, during the period under review, of a third corporate property
outsourcing contract with Norwich Union
• Decision taken to focus on Retail, London Offices and Property
Outsourcing, where the Group has market leading positions; strategy
reinforced by exchange of contracts with Slough Estates, following the
period end, for a swap of property with a combined value of over £700m
• Post half year completion of £3.2bn debt restructuring, providing positive
benefits for Land Securities' equity and debt investors.
Commenting on the results, Peter Birch, Chairman of Land Securities, said:
'As our results show the business has had a strong first half.
'We are very pleased with the excellent performance of our property outsourcing
business Land Securities Trillium, which continues to achieve results ahead of
our expectations for this year. In London the lettings that we have completed
in the first half, comprise a substantial share of those concluded during the
period, and we have the skills and resource to benefit from the improving London
markets. As anticipated, the rate of rental growth for retail has slowed but we
believe that our retail portfolio offers good opportunities to drive rental
growth from a relatively low base through asset management and development
activity.
'An increase of 5.1% in the interim dividend to 10.4p demonstrates our
confidence in the prospects for your Group.'
For further information, please contact:
Land Securities
Francis Salway/Emma Denne
Tel: 020 7413 9000
Financial Dynamics
Stephanie Highett/Jonathon Brill
Tel: 020 7831 3113
Financial Highlights
Six months to Six months to Full year
30 September 30 September 31 March
2004 2003 2004
-------------- -------------- --------------
Gross property income
Property investment and trading
(including 50% share of joint ventures) £384.4m £304.7m £650.2m
Property Outsourcing £581.5m £342.1m £830.9m
-------------- ------------ --------------
Total £965.9m £646.8m £1,481.1m
======== ======= ========
Operating profit (total) £316.7m £279.8m £565.8m
Pre-tax profit £196.6m £181.7m £373.1m
1 Revenue profit (pre-tax) £189.3m £167.0m £309.2m
2 Adjusted earnings per share 28.65p 25.56p 47.86p
Earnings per share 29.14p 28.10p 61.84p
Dividends per share 10.40p 9.90p 37.10p
3 Adjusted diluted net assets per share 1443p 1269p 1331p
Diluted net assets per share 1403p 1237p 1293p
4 Carrying value of investment properties £8,465.5m £7,976.8m £7,880.9m
Net borrowings £2,664.6m £2,647.4m £2,435.8m
Equity shareholders' funds £6,570.2m £5,767.4m £6,030.1m
5 Gearing (net) 40.7% 46.1% 40.5%
1. Excludes results of fixed asset property sales and exceptional items in
2003
2. Based on revenue profits. Tax charge adjusted to exclude deferred tax
arising from capital allowances and capitalised interest on investment
properties
3. Excludes deferred tax arising from capital allowances and capitalised
interest on investment properties
4. Market value less UITF28 adjustment of Group Investment Properties
5. Net borrowings (including bank overdraft less short term deposits and
cash), at book value, plus non-equity B shares as a percentage of equity
shareholders' funds
Corporate overview
We have made excellent progress in the first half of the year with a strong
performance from our development and property outsourcing activities and an 8.4%
increase in adjusted diluted net assets per share. Our progress is particularly
demonstrated by the following notable events:
• Our recently completed £3.2bn debt restructuring, which provides
positive benefits for both our equity and debt investors. The new debt has
an improved AA credit rating, the structure will decrease the Group's
future cost of debt and will provide a long-term, flexible funding
structure for the business. At the same time we arranged a new £1.5bn,
five-year, committed bank facility;
• The announcement that we would focus the business on markets where the
Group has market leading positions, namely
- Retail
- London offices, and
- Property outsourcing
and our intention to exit the south-east industrial property markets;
• Our subsequent announcement that, to effect this exit, we would be
swapping property with a combined value of just over £700m with Slough
Estates plc, which exchanged on 15 November 2004;
• The completion by Land Securities Trillium of a third corporate property
outsourcing contract - with a new partner, Norwich Union;
• The introduction of single building property outsourcing contracts for
major Central London occupiers; and
• An improved Central London market as demonstrated by the completion of
90,000 sq m of occupier transactions, which included a substantial letting
to the Metropolitan Police at Empress State, SW6 and a forward sale of
Bankside 1, SE1 to IPC Media.
In addition to the positive impact of these activities on the business, they
also illustrate how the Group is implementing its strategy to increase the
capital it invests in higher return activities and to focus on providing our
customers with the lease and property contracts best suited to their
requirements.
Total shareholder returns
% return for % return for % return for
six months to twelve months to period since
30/09/04 30/09/04 31/03/00
Land Securities 10.85 42.00 89.30
FTSE 100 5.46 13.36 -20.03
FTSE Real Estate 12.04 39.27 85.23
Source: Datastream
Results
During the six months to 30 September 2004, revenue profits (1) rose 13.4% to
£189.3m (30/09/03: £167.0m) and pre-tax profits were up 8.2% to £196.6m.
Adjusted diluted earnings per share were up by 11.8% to 28.56p (30/09/03:
25.55p) while earnings per share were also up by 3.7% to 29.14p (30/09/03:
28.10p). Adjusted diluted net assets per share have increased by 8.4% since 31
March 2004 to 1443p per share. However your attention is drawn to the Outlook
section of this review where we report on the second half effect on earnings and
net asset value of the debt restructuring.
(1) Revenue profits are pre-tax profits adjusted to exclude the impact of
exceptional items and profits on the disposal of fixed assets.
Net assets
The increase in net assets can be analysed as follows:
Six months Six months
ended ended Year ended
30/09/04 30/09/03 31/03/04
£m £m £m
Profits after tax 136.0 131.0 288.3
Dividends (48.8) (46.3) (173.2)
Valuation increase
- Group 427.1 153.0 400.7
- Joint ventures 18.6 - 6.2
Other 5.5 (21.8) (46.6)
_______ _______ _______
Increase in net assets 538.4 215.9 475.4
Net assets at beginning of period 6,038.5 5,563.1 5,563.1
_______ _______ _______
Net assets at end of period 6,576.9 5,779.0 6,038.5
======= ======= =======
Net assets have increased by 8.9% in the first six months of the year driven
largely by a total investment portfolio valuation uplift of 5.3%. Further
details of the valuation movements are contained in the Retail, London Office
and Industrial sections of this report.
Earnings
Profits before interest and tax increased to £329.2m for the six months to 30
September 2004, £34.7m or 11.8% higher than 2003. Exceptional costs relating to
the debt restructuring were £5.2m, but the main costs associated with this
transaction will appear in the second half as the transaction completed on 3
November 2004 after the half year ended. Revenue profits were 13.4% higher than
the same period last year.
Four main factors lie behind the changes in earnings:
• Before interest and tax, profits rose from £294.5m to £329.2m for the
period primarily as a result of a substantial increase in profit from
property outsourcing. This is due to the addition of the Employment
Services ('ES') and Norwich Union contracts, very strong trading at
Telereal and the move of the BBC contract into profit in the second half
of last year following completion of Media Village, White City.
• However, profits before interest and tax from the property investment
business were £20.5m lower. This reflects the impact on rental income of
selling more property last year than we bought.
• The sale of investment property last year had a corresponding benefit on
interest payable which was largely unchanged from the same period last year
(30/09/04: £144.5m; 30/09/03: £147.2m). However, capitalised interest fell
to £5.1m from £26.1m for the same period last year as we have fewer
development schemes on site at present. This has resulted in an increase
in the profit and loss interest charge from £112.8m to £132.6m. Higher
operating profits offset by an increased interest charge have resulted in
pre-tax profits of £196.6m as compared with £181.7m for the same period
last year.
• The tax charge for the current period is £60.6m, giving an effective tax
rate of 30.8% (30/09/03: 27.9%). This is higher than before because last
year's charge was reduced by the release of deferred tax on property sales.
The Group is unlikely to pay corporation tax for the full year as a result
of the costs incurred in the refinancing, which completed after the period
end.
Dividends
The Board has declared an interim dividend of 10.4p per share, an increase of
5.1%, which will be paid on 10 January 2005 to shareholders on the register at
10 December 2004.
We currently pay approximately a quarter of our annual dividend at the interim
stage, but our business is not seasonal. We intend to re-balance the dividend
next year so that a higher proportion of the dividend is paid at the interim
stage. We will provide details nearer the time. This change will take effect
from the interim dividend for 2005/06, payable in January 2006.
Board, management and organisational structure changes
As we announced at the year-end, Ian Henderson stepped down as Group Chief
Executive at the AGM in July. We would like to thank Ian again for the
outstanding contribution he made to both the Group and the property industry
during his illustrious career.
Francis Salway, who joined the Group in 2000, assumed the role of Group Chief
Executive on 14 July 2004. Shortly before this, Francis announced that he
intended to focus our activities on retail, London offices and property
outsourcing, with the objective of achieving our vision to become market leader
in these core markets. Good progress has been made to date to implement this
decision, which included the divestment of the Group's south-east industrial
properties.
We have restructured our investment property business into two market specialist
groups, London portfolio and retail, and created a new business development and
operations function for the Group. Mark Collins, previously Chief Executive
Portfolio Management, was appointed Chief Operating Officer. Mark's primary
responsibilities are group business development, urban community development
through projects such as Kent Thameside and investment portfolio services
encompassing property and project management and legal services.
We have created two new positions of Managing Director, London Portfolio and
Managing Director, Retail and were pleased to promote Mike Hussey and Richard
Akers respectively to these new roles and, more recently, to appoint Mike Hussey
to the Group Board.
We are also pleased that Bo Lerenius, Group Chief Executive of Associated
British Ports Holdings PLC, and Alison Carnwath, Chairman of the Vitec Group,
have joined the Board as non-executive Directors.
Our people
We recognise that the continued development of our employees is integral to the
successful delivery of our strategy. We successfully introduced a career
development and training programme, which has been designed to assist management
to identify development and career opportunities for employees across the
organisation.
Our colleagues across the business have positively embraced the organisational
changes announced this July and we would like to thank them all for their
contribution to our progress.
Regulatory
We await with interest the Government's statement on the introduction of Real
Estate Investment Trusts (REITs) expected at the pre-budget review in early
December. The introduction of REITs, we believe, will considerably improve
investment property's standing as an asset class. In the meantime we continue
to manage our business with an eye to driving future growth, with or without
REITS. We would also state that we do not believe that regulatory intervention
on lease contracts will have the desired effect. Intervention into free market
negotiations may well stifle the innovation and flexibility currently being
introduced into the commercial property contracts by companies like ours.
Outlook
As our results show the business has had a strong first half. As a result of
the debt refinancing we will report an estimated £678m exceptional accounting
charge in the second half of the year and a 145p reduction in net asset value,
for the reasons explained in the Finance and Tax section of this review. This
is likely to result in a loss for the year but it will not impact on our
dividend policy.
We are very pleased with the excellent performance of our property outsourcing
business, Land Securities Trillium, which continues to achieve results ahead of
our expectations for this year. In London the lettings that we have completed
in the first half comprise a substantial share of those concluded during the
period, and we have the skills and resource to benefit from the improving London
markets. As anticipated, the rate of rental growth for retail has slowed but we
believe that our retail portfolio offers good opportunities to drive rental
growth from a relatively low base through asset and property management.
An increase of 5.1% in the interim dividend to 10.4p (30/09/03: 9.9p)
demonstrates our confidence in the prospects for your Group.
Investment property business
Investment portfolio - financial performance
Rental Rental Rental
Income Income Income Open Open
6 mnths 6 mnths 6 mnths Market Market
to to to Value Value Valuation
30/09/04 31/03/04 30/09/03 30/09/04 31/03/04 surplus
£m £m £m £m £m %
Retail
Shops & shopping centres 49.3 51.6 49.3 1,600.2 1,499.1 6.1
Retail warehouses 32.4 31.3 30.1 1,323.0 1,228.7 6.8
London retail 20.2 19.6 19.0 646.6 625.5 3.3
London offices 91.7 93.6 94.9 2,434.4 2,355.3 3.7
Industrial 9.0 9.5 9.1 296.0 268.6 10.1
Other 5.0 6.1 6.1 144.4 137.0 3.8
====== ====== ====== ====== ====== ======
Like-for-like 207.6 211.7 208.5 6,444.6 6,114.2 5.2
Completed developments 11.9 13.0 6.5 636.0 567.0 12.8
Purchases 11.7 6.3 2.8 577.6 243.3 1.0
Sales, restructured
interests and trading
properties 4.0 21.0 35.4 - 248.9 -
Development (2) 8.8 5.3 4.0 834.4 733.3 4.2
Joint ventures 8.2 0.6 - 404.3 243.5 4.8
______ ______ ______ ______ ______ ______
Total portfolio 252.2 257.9 257.2 8,896.9 8,150.2 5.3
====== ====== ====== ====== ====== ======
(2) Development programme including Kent Thameside
The like-for-like investment portfolio (3) showed a 0.4% drop in rental income
over the half year, as compared to the same period in 2003/04. This was
primarily due to additional office voids in the City and Mid-town portfolios,
the latter arising in the properties that will form part of the New Street
Square development. This was offset by the effect of rent reviews in the retail
and retail warehouse portfolios. Our office portfolio is generally over-rented
and rental increases in the last year were an exception in this part of the
estate.
(3) Properties that have been in the investment portfolio for the whole of the
current and previous financial year.
In the six months to 30 September 2004, two schemes were transferred from the
development programme (4), the significant one being Empress State, SW6. These
schemes generated rents of £0.9m in the half year and would contribute £11m in a
full year. Schemes transferred out of the development programme in the year to
31 March 2004 contributed £11.9m in the first half of this year. Rental income
in the total portfolio has declined over the twelve-month period as a result of
the Group's net disinvestment of properties.
(4) The development programme comprises projects which are completed but less
than 95% let, developments on site, committed developments (approved projects
with the building contract let); and authorised developments (projects approved
by the Board, but for which the building contract has not yet been let).
During the period under review £91.8m of property was transferred to the Metro
Shopping Fund. Net property disposals to the Bristol Alliance resulted in a net
cash inflow of £19.9m. In the second half of the year the property swap with
Slough will mean that there will be a movement in rental income by a reduction
in the passing rent of the industrial portfolio by £17.8m and a corresponding
increase of £20.4m in retail rents.
Void levels across the like-for-like portfolio were 3.9% at the half-year,
compared with 2.7% at the start of the year. A substantial element of the void
amount is related to space purposely being made vacant in the properties which
will form part of the New Street Square development. If these properties were
excluded, the void rate at 30 September 2004 would drop to 2.4%.
We were pleased with the performance of the investment portfolio over the six
month period, showing a 5.2% increase in the value of the like-for-like
portfolio and a 5.3% increase in the total portfolio.
The net reversionary potential of the like-for-like portfolio, excluding voids,
is 2.4% as compared to 2.0% at the year-end and the half-year figure at
September 2003 of 2.2%. The mean weighted unexpired lease term for the
like-for-like portfolio is 10.1 years (31/03/04: 10.4 years) assuming all lease
breaks occur.
Total investment portfolio valuation movements (excluding developments)
£m
Investment portfolio at 31 March 2004 7,172.6
Purchases 254.3
Sales (42.5)
Transfers to partnerships and joint ventures (102.6)
Transfer in of completed developments 154.5
Transfer out for redevelopment (52.1)
Transfer to stock and surrender premiums received (48.3)
Valuation increase 356.6
Other (including refurbishment expenditure) 31.0
_______
Investment portfolio at 30 September 2004 7,723.5
=======
During the period under review, we sold a total of £42.5m of property out of the
investment portfolio (excluding joint ventures and net of sale costs) generating
FRS3 profits of £1.7m (8.3% above book value) while buying £254.3m of investment
properties. The average yield on the properties sold was 6.5% and the average
yield on the buildings acquired was 6.8%.
The purchase activity was principally accounted for by three London office
investments, which were acquired for an aggregate of £211m (including
acquisition costs) to show an average yield of 6.4% off an average passing rent
of only £290 per sq m.
Investment market outlook
As an asset class, investment property continues to offer rental yields in
excess of the cost of borrowing, as a result of which the investment property
market has remained buoyant. With the restructuring of the investment portfolio
largely complete, we have been acquiring investment property both directly on
the open market and indirectly through joint ventures and the property swap with
Slough.
In London the investment market remains strong across all sectors. There is a
shortage of investment grade property and the weight of money available in the
market place is dictating strong prices, even for lower quality investments.
For retail, investor demand remains extremely strong, particularly for retail
parks and shopping centres. With the supply of stock to the market increasing,
we would expect in 2004 to see a high volume of shopping centre transactions.
Development programme - financial performance
The carrying value of our development programme assets was £769.1m (31/03/04:
£734.1m). The movements in the development programme are summarised in the
table below.
£m
Programme at 31 March 2004 734.1
Capital expenditure 63.2
Capitalised interest 5.1
Sale of completed schemes (2.1)
Transfers of completed schemes to portfolio management (154.5)
Transfers of properties into the development programme 52.1
Valuation movements 70.5
Other 0.7
______
Programme at 30 September 2004 769.1
======
During the six months we spent £63.2m, excluding capitalised interest, on
schemes in the programme, with most of the expenditure arising from the
continuing development at Cardinal Place, London SW1. In the first six months
we sold or transferred out of the development programme two completed schemes,
Empress State, SW6 and Phase 1 Juniper, Basildon. These schemes contributed an
aggregate of £1m to profits over the development period.
Schemes in the development programme produced an overall valuation surplus of
£70.5m, an 8.3% increase, over the course of the six months with a strong
contribution overall from our London office development projects.
We estimate that we will incur cash costs to complete the development programme
(excluding interest) of some £262m. In addition, capital expenditure on
proposed developments could total £852m (excluding Kent Thameside) if a decision
is made to proceed with them. These schemes, which are held as part of the
investment portfolio, have a current carrying value of £174.7m. Capitalised
interested was only £5.1m during the period (30/09/03: £26.1m, full year £35.6m)
because we had five significant developments on site last year, three of which
have now reached practical completion.
Retail
30/09/04 31/03/04 30/09/03
Valuation £3,569.8m £3,353.3m £3,210.7m
Rental income (a) £101.9m £102.5m £98.4m
Gross ERV (b) £233.7m £227.3m £222.7m
Voids by ERV 1.9% 1.6% 2.0%
Running yield 5.5% 5.7% 5.9%
Like-for-like investment portfolio extract from total investment portfolio
analysis
(a) Six months figures
(b) Annual estimated rental value
Market commentary
Generally across all retail sub-sectors rental growth is subdued, with cost and
deflationary pressures serving to counter-balance relatively strong retail
volume growth. However, there has been good demand for well configured
efficient floorspace.
In the retail warehouse sector, demand for bulky goods stores has become more
selective with many occupiers expecting capital contributions towards their
fit-out costs. Demand for retail parks with open A1 planning consent is still
strong with increasing numbers of high street retailers evaluating the format.
Review of activity
The diversity of our activities in the retail property market provides us with
many different opportunities to create value and, while the prospects for growth
are less than they have been over the past few years, we will still be able to
benefit from our ability to generate value through asset management and
development. In addition to the highlights below, two transactions in
particular demonstrate the proactive approach we are taking to expand our
activities in the retail sector.
The Metro Shopping Fund
During the period we entered into a retail limited partnership in conjunction
with the private property company, Delancey. The 50/50 partnership owns over
39,000 sq m of retail space valued in total at £283.3m. The properties included
in the partnership are Delancey's Shopstop @ Clapham Junction, SW11, Islington,
N1and Victoria Place SW1 together with our holdings in Notting Hill Gate W11.
We are confident about growth prospects for retail properties in the London
suburbs and will be actively seeking to acquire further properties for this
partnership.
Exchange of properties with Slough Estates
We announced this week that we had exchanged contracts for the property swap
with Slough Estates, as a result of which our retail portfolio will expand by
approximately £350m of new assets, comprising a 50% interest in Buchanan
Galleries, Glasgow, the Lewisham Centre in South London, the Howard Centre in
Welwyn and the Bishop Centre in Taplow. Based on our share of the Glasgow
property, the portfolio totals some 91,300 sq m of retail space and the rent
roll was £20.4m at June 2004.
Shopping centres and shops
Values have moved ahead in all sub-sectors with in-town retail achieving 5.3%
like-for-like growth. Void levels remain low at 1.7% and reversionary potential
of 10.3% will help to drive income and values in the future. Lettings at
Stratford, Liverpool and Ealing have moved rental values up while good sales
growth at Gunwharf Quays has continued to drive income growth from that asset.
Notable activity during the period under review includes:
• The completion of the first phase of our 37,160 sq m Whitefriars scheme
in Canterbury. The second and final element of this development opens next
summer and is now 82% let or in solicitors' hands to retailers including
Next, Zara, Monsoon and H&M Hennes.
• The exchange of contracts with Debenhams to anchor our 37,360 sq m
mixed-use scheme in Princesshay, Exeter. We have started enabling works
for the scheme, which is now 27% let or in solicitors' hands, and the main
contractor is expected to start on site early next year with completion due
in Autumn 2007.
• The agreement of heads of terms with John Lewis for the anchor store at
St David's 2, Cardiff. The scheme which is being progressed in partnership
with Capital Shopping Centres, will provide 70,000 sq m of new retail
space, together with 39,750 sq m of leisure and residential space.
• The completion of the partnership agreements with Hammerson plc in respect
of the Bristol Alliance and the acquisition of Morley Fund Management's
one-third interest in the Alliance. The resultant 50:50 partnership will
continue to progress the development of a 139,350 sq m mixed-use project,
including 83,610 sq m of retail space, at Bristol's Broadmead which is
expected to start on site in mid-2005.
• The Scottish Retail Property Limited Partnership ('SRPLP') has progressed
well in its first six months. A number of new lettings have been secured
in Centre West, which helps consolidate East Kilbride as the regional
centre for south Glasgow. In Aberdeen we have launched an initiative to
connect Bon Accord and St Nicholas shopping centres and upgrade the public
realm.
• The sale of our one third share in Martineau Place, Birmingham for £31m.
London retail
London is one of the most affluent cities in Europe and is one of the few where
population growth is forecast. These trends bode well for retail rental growth.
Our London retail holdings either wholly-owned or owned through joint ventures
are not just shops beneath offices but consist of substantial retail holdings in
some of the stronger locations in London, including Oxford Street, Tottenham
Court Road, Notting Hill Gate, Cheapside and Piccadilly Circus as well as
holdings in Victoria.
In addition in suburban London we have an interest in properties in locations
such as Ealing, Stratford, Islington, Clapham and Lewisham, where increasing
affluence is moving these destinations' position up the retail hierarchy.
Retail parks
The like-for-like increase in the value of our retail warehouse portfolio was
6.8%, demonstrating the strength of this market with particularly strong rental
growth of 6.7%. Voids remain relatively low at 2.2% and the running yield is
4.9%. We are working with retailers to reposition a number of our retail parks
towards high street type shopping, taking advantage of the high percentage of
open A1 consents within the portfolio.
• We have completed the reconfiguration of 15,150 sq m of accommodation
on our parks at Fforestfach in Swansea, White City in Manchester and Lakeside
Retail Park at West Thurrock. The new units at Thurrock have been fully pre-let
at rents averaging £236 per sq m per annum to occupiers including Marks &
Spencer, Currys and Furniture Village.
• We have also completed developments totalling 14,000 sq m at Almondvale
Retail Park, Livingston which has been pre-let to Toys R Us and others and Phase
III, Dundee which is part pre-let to Homebase and SCS Furniture.
• At Almondvale West, Livingston, we completed an extension to the park
of 1,400 sq m for Marks & Spencer Simply Foods and at Chesterfield we built
additional units for Carphone Warehouse and Pizza Hut.
London offices
30/09/04 31/03/04 30/09/03
Valuation £2,434.5m £2,355.3m £2,283.6m
Rental income (a) £91.7m £93.6m £94.9m
Gross ERV (b) £179.7m £176.4m £175.1m
Voids by ERV 6.1% 3.1% 2.3%
Running yield 7.1% 7.6% 8.0%
Like-for-like investment portfolio extract from total investment portfolio
analysis
(a) Six months figures
(b) Annual estimated rental value
Market commentary
At the year-end we reported that we were becoming increasingly optimistic about
certain sub-sectors of the London office market, especially the West End and, as
anticipated, we have seen improved occupier demand in this market, particularly
for smaller lettings. We anticipate a limited pipeline of new development stock
in the West End in the next two to three years and believe this to be an area of
opportunity for the Group.
We have yet to see any significant uplift in occupier demand in the City or City
fringe markets. The transactions taking place in the City market during the
period under review have generally been for previously known requirements. We
maintain our view that no real return to rental growth will occur in this market
until 2006. However, we are confident that demand for good quality
accommodation will improve and that large scale transactions will begin to
absorb development stock.
Review of activity
We have made excellent progress this year across the London office portfolio,
which is being actively marketed under the Capital Commitment campaign. Our
activities are focused on managing our development pipeline. We are investing
in preparatory work on our developments to make sure that we are in a position
to respond to occupier demand as this picks up. We were pleased that our office
development activities received recognition from the industry when we won the
Property Week 'Office Developer of the Year' Award and Empress State, SW6
received a RIBA Award for its refurbishment.
During the period our activities included:
• The acquisition of Greater London House, NW1 and Hill House, EC4 for
£194.9m. These transactions continue our strategy of refocusing the London
office portfolio on properties that will offer future growth opportunities
as we believe that both buildings will enjoy rental growth off their low
current passing rents as the market recovers.
- Greater London House, NW1, acquired for £114.1m, is a 30,907 sq m
freehold office building providing gross rental income of approaching
£7.8m per annum. The property is let to tenants including Young &
Rubicam Holdings and Bertelsman Books and Magazine. The building is
currently let at low levels, averaging approximately £250 per sq m.
- Hill House, EC4, forms part of Deloitte & Touche LLP's ('Deloitte')
UK headquarters and was acquired for £80.8m, representing a net
initial yield of about 6.5%. Developed in 1979, the 15,780 sq m
freehold building was substantially refurbished in 2002 and is
entirely let to Deloitte until 2034. The property adjoins our
development scheme at New Street Square, EC4.
• The completion of two single building property outsourcing contracts:
- The 43,300 sq m letting of Empress State Building, SW6 to the
Metropolitan Police Service ('MPS'). This transaction is a Landflex
package but it has been structured as a conventional 15-year lease
with an annual indexation of rents; an agreement with Landflex to
manage the sub-letting of part of the building on behalf of the MPS
and provision of property services until the MPS is ready to occupy
the whole building in five years time. There is a further agreement
to cover the repairs, maintenance and life-cycle capital requirements
of the building. As part of this transaction we have accepted a
lease surrender on Wellington House, SW1 for which we have been
compensated.
- The signing of a further agreement with the Government in respect of
50 Queen Anne's Gate, SW1, the current Home Office Building
constructed in 1977, to be occupied by the Department for
Constitutional Affairs. Under the proposed contract the building
will be refurbished under a contract run by Land Securities and, over
the term of the lease, we will provide a maintenance and services
programme.
• Both the Empress State, SW6 and Queen Anne's Gate, SW1 agreements
demonstrate how we are combining our development, property management and
outsourcing expertise to generate additional earnings for the Group over
the longer term.
• We have received a very positive response to date to our Landflex product
and since the half year end have committed to refurbish 7,640 sq m of
offices at 40 Eastbourne Terrace, W2 in Paddington for letting on a
Landflex basis.
• The completion of the forward sale of Bankside1, SE1 to IPC Magazine
Group Ltd (IPC) for the use of Time Warner's London based magazine and book
publishing operations. This 46,350 sq m building is part of the 85,000
sq m Bankside 123, SE1 mixed-used development scheme on London's South
Bank. We will lease back the 3,500 sq m retail and leisure elements of the
building but have granted an option to IPC to buy back this element once it
has been let. This building is now under construction and will be handed
over to IPC for fit-out in Spring 2006. The profits generated from this
scheme will be recognised as long term contract income in our profit and
loss account over the development period.
• The receipt of a 'minded-to-grant' planning consent for our revised scheme
at New Street Square (formerly New Fetter Lane), EC4. The proposed
development consists of four main buildings equal to 62,340 sq m of office
accommodation and 2,980 sq m of retail space. The Group has agreed terms
and is progressing legal agreements with Deloitte in respect to the letting
of a building of 19,640 sq m.
• Good progress is being made at Cardinal Place, SW1, a 60,000 sq m office
and retail development in Victoria, where we secured a pre-letting of the
3,400 sq m anchor retail unit to Marks & Spencer, for its first clothing
and food store in Victoria. We have had a good response from retailers and
restaurant operators for the remaining retail units, 64% of which are now
let or under offer.
• We submitted a planning application for a substantial residential scheme
on the site of Bowater House, Knightsbridge which will create 101
apartments set above 1,500 sq m of flagship retail accommodation.
• Just after the half year we secured a 16,500 sq m planning consent for
our property at 120 Cheapside, EC2, which we acquired last year. The new
scheme comprises 15,000 sq m of retail and 1,500 sq m of office space. We
have concluded lease surrenders with the existing occupiers which will
allow us to start this scheme next Summer, as a result of which we have
added this scheme to our development programme.
• We also announced this week that we had signed Heads of Terms with
Dresdner Kleinwort Wasserstein for a 24-year lease at 30 Gresham Street,
London, EC2. At the same time we have agreed lease surrenders on their
existing properties at and around 20 Fenchurch Street, London EC3. We
anticipate this transaction to be broadly neutral in terms of the current
combined value of these assets.
Property outsourcing
Financial results
Land Securities Trillium contributed 29% of the Group's first half profits.
Segmental operating profit was £127.9m (30/09/03: £69.2m), with all contracts
now profitable, on segmental assets of £871.4m (30/09/03: £841.7m).
6 months to 6 months to Full year
30/09/04 30/09/03 31/03/04
£m £m £m
Operating profit
-DWP (PRIME) - including amortisation of goodwill 28.3 27.3 57.3
-DWP (Employment Services) 12.4 (3.0) (10.4)
-BBC 10.5 (3.4) 6.6
-Norwich Union 2.0 - -
-Central costs (1.8) (3.5) (9.3)
______ ______ ______
51.4 17.4 44.2
Profit on sale of properties 5.7 0.1 (0.1)
______ ______ ______
Segment profit 57.1 17.5 44.1
Share of Telereal segment profit 70.8 51.7 112.5
______ ______ ______
127.9 69.2 156.6
====== ====== ======
______ ______ ______
Share of Telereal profit before tax 37.7 16.3 30.3
______ ______ ______
Revenue and profits from PRIME, our original contract with the Department for
Work and Pensions (DWP), continue to perform in line with our expectations. The
Employment Services expansion to that contract has added £96.3m income in the
first half and made a £12.4m contribution to operating profits. We expect this
contract to produce lower operating profits next year as our client makes use of
the significant vacation allowances priced into the deal.
On the BBC contract, we now have a total of £286.0m invested, mainly resulting
from our investment in Media Village at White City. The BBC is now in
occupation of this building, paying the full accommodation charge and this
contract made a £10.5m contribution to profits (£3.4m loss to 30/09/03).
Telereal, the joint venture vehicle that has the property outsourcing contract
with BT, continued to make a good contribution, providing pre-tax profits
(profits after interest on joint venture debt) of £37.7m (30/09/03: £16.3m).
In June we completed and mobilised a new contract with Norwich Union, the UK arm
of Aviva. This has made a small contribution in the first half of the year and
we expect this contract to contribute circa £2.0m to pre-tax profits next year.
Market Commentary
We are seeing good interest and activity in both the corporate and public sector
markets.
Corporate
Following the completion of our property outsourcing agreement with Norwich
Union earlier this year, interest in corporate property outsourcing remains
strong, particularly within the financial services and other property intensive
sectors.
Continuing occupier focus on balance sheet restructuring, business consolidation
and cost reduction, resonates well with our strengths in realising capital,
providing flexible occupation, managing leasehold liabilities and introducing
supply chain efficiencies. Currently we have two possible corporate deals at
the final proposal stage and a further seven opportunities at various stages of
development. We therefore have a good level of confidence that we can win new
private sector contracts over the next six to twelve months.
Public Sector
There is also good potential for further public sector property outsourcing.
The Government's Efficiency Review, informed by the Lyons and Gershon reports,
involving relocation, estate downsizing and a £30bn asset disposal programme,
can be expected to generate further property outsourcing opportunities in the
medium term. We have made our own submission to Government specifically in
terms of how property partnerships can offer an effective implementation model
for departments in their response to the Efficiency Review.
In parallel with this, we are pursuing a number of specific property outsourcing
projects with public sector clients including that of the Driving and Vehicle
Licensing Agency, where we are one of two final bidders.
We are also exploring other public sector initiatives where there are implicit
property issues and opportunities, including Building Schools for the Future and
certain Ministry of Defence projects.
The strong underlying performance and levels of customer satisfaction being
achieved in our existing relationship with the DWP underpins our successful
relationship with Government, and we aim to build on this as further strategic
opportunities develop.
Review of Activity
Department for Work and Pensions
The PRIME contract was expanded in December 2003 to include the former
Employment Service estate, with the consequence that we are now delivering
day-to-day facilities management services to approximately 140,000 DWP occupants
in some 1,700 buildings. We have received very positive feedback from the DWP at
senior level for the successful mobilisation of this contract expansion and our
new customers have expressed their satisfaction with the service we are
providing.
The Budget announcement in March 2004 in relation to job cuts across the Civil
Service has created a particular challenge to DWP which has been allocated a
target headcount reduction of 30,000 posts by March 2008. Accordingly, we have
been working closely with the DWP to help formulate an estates strategy to
support its planned business reorganisation. This has enabled DWP to give notice
within the first half of the year to vacate 40,000 sq m of accommodation over
the next 12-18 months, all of which is already priced into our contract. At the
same time, this restructuring has also generated a requirement for new space in
certain locations and we have received requests for a total of 22,000 sq m of
additional space.
Meanwhile we continue to assist the DWP in the management of its capital works
programme, including the continuing rollout of the Jobcentre Plus organisation.
In the first half of this year our Capital Projects team handled some £50m of
work for the DWP.
The second half of this year will see us continuing to enhance our offering to
give the DWP the support it needs to reshape its estate without any adverse
impact on its day-to-day business.
BBC
During the first six months of the year we continued to manage the construction
of the new 81,390 sq m Broadcasting House facility in London, and remain on
target to complete the first phase of the project for occupation by the BBC in
April 2005. We have also agreed terms and have commenced work in a similar
capacity on the construction of the BBC's new 33,370 sq m broadcasting facility
at Pacific Quay in Glasgow, which is scheduled for completion in May 2006. In
addition to this we have delivered a series of smaller projects and
refurbishments across the BBC's national portfolio to a value of some £16m.
Following the completion of the BBC's new Media Village complex late in 2003, we
are continuing to manage a phased migration of 2,750 BBC personnel into their
new accommodation. To date this has been achieved effectively without any
interruption to the BBC business. Our success in managing this project was
marked by the recent recognition of our project leader as national Facilities
Manager of the Year by the British Institute of Facilities Management.
We are continuing to work with the BBC as it seeks to refine its future estates
strategy in the context of its business strategy review, which has been
initiated by the BBC's new Chairman and Director General.
BT
Telereal, our joint venture with the Pears Group, manages the BT portfolio and
continues to unlock latent property value for the benefit of Telereal and BT
continuing to exchange contracts for further property sales in the first half.
We are currently engaged on a major initiative with BT relating to the potential
restructuring of their network known as the 21CN (21st Century Network) project.
This is an important aspect of BT's planned modernisation and we are supporting
them with regard to a strategy for capital expenditure on our assets and
optimising the value of any space freed up for disposal.
Norwich Union
We were delighted to conclude our third corporate property outsourcing contract
in the first half of the year when we agreed with Norwich Union ('NU') a
contract to manage and improve its core occupational estate. The 25-year
transaction involved the transfer of 115,000 sq m of office accommodation and
the commitment by Land Securities Trillium to invest £92m into the refurbishment
of NU's 30,890 sq m Norwich headquarters. The estate transferred comprises
approximately 25% of NU's UK properties by floor area.
As part of this transaction an innovative onward sale was agreed involving seven
freehold assets. NU maximised the sale proceeds while, under the occupational
leases put in place, Land Securities Trillium has the freedom to carry out all
of its outsourcing obligations. The purchaser of the freeholds has the benefit
of the NU financial covenant underpinning its £100.5m purchase price. We will
continue to manage and maintain these buildings on behalf of NU which will
occupy the properties for a lease term, in most cases, of 25 years.
Urban community development
Although we have focused the Group's business on three core markets, we will
continue to invest in activities which we believe will, over time, produce above
average returns for shareholders. One of these areas is urban community
development, where we can benefit from the Group's balance sheet strength and
development skills to undertake projects which have long-term timeframes and
which are of substantial scale. The largest of our projects is Kent Thameside,
but we also have smaller scale holdings in Cambridge, Milton Keynes and most
recently an investment in land at Stansted.
Kent Thameside
Our activities in Kent Thameside remain largely concentrated upon the need to
secure appropriate planning consents.
At Eastern Quarry, additional information was requested by the Highways Agency,
which has now been supplied, and we expect our application for 7,250 homes and
approx 267,250 sq m of employment floor space will go to planning committee for
determination at the end of the financial year. At Swanscombe, where we are the
development manager, an application was submitted in June for a new urban
village of 1,750 homes and 31,000 sq m of employment and community facilities.
Within our Ebbsfleet land holding, where we have a 50% holding, outline consent
already exists, and we are moving towards the first phase of residential
development. Countryside Properties Plc has been selected as our preferred
development partner for the Springhead Quarter and, subject to detailed
permission, we expect to commence works on site next year with a scheme of 300
dwellings.
This joint venture arrangement with Countryside follows on from completion of
our first phase of work with them at Waterstone Park where 200 dwellings have
now been completed and sold. Outline permission has been received for an
additional 450 homes at Waterstone Park. Detailed permission for the next phase
of 118 dwellings is due to go to planning committee in November, prior to a
start of construction during 2005.
Stansted
In July we acquired 650 hectares (1,625 acres) of land adjacent to Stansted
airport for approximately £14.5m. In line with our strategy of investing in
long-term opportunities to create high returns, we believe that this acquisition
may provide future opportunities for achieving change in use and other planning
consents in the medium term, although the land is not identified for development
in current planning policy statements.
South-East Industrial
On completion of our property swap with Slough Estates we will continue to own
£65m of industrial property in the south-east. These properties, which produce
£3.5m of income per annum, have been retained since they offer medium term
potential for development for alternative uses.
Finance and Tax
Cash flow and net debt
At 30 September 2004, the Group's net debt was £2,664.6m (31/03/04: £2,435.8m),
representing gearing of 40.7% compared with 40.5% at the year-end. Even though
the Group has continued to invest significantly in its property portfolio,
gearing has only marginally increased because of the strong increase in property
values in the first half.
The increase in net debt of £228.8m during the six month period is explained
below.
Six months Six months Year
ended ended ended
30/09/04 30/09/03 31/03/04
£m £m £m
Net cash inflow from operating activities after
interest and tax 89.4 98.8 193.2
Net capital expenditure (302.2) (46.7) (48.8)
Cash inflow from Telereal 29.9 29.5 179.6
Net cash inflow from Metro and SRPLP 71.1 - -
Payment of dividends (126.9) (121.7) (167.5)
Purchase of B shares (1.7) (18.8) (22.0)
Other items 11.6 0.8 19.0
______ ______ ______
(228.8) (58.1) 153.5
Opening net debt (2,435.8) (2,589.3) (2,589.3)
______ ______ ______
Closing net debt (2,664.6) (2,647.4) (2,435.8)
====== ====== ======
Gearing (book value of debt) 40.7% 46.1% 40.5%
====== ====== ======
Debt Restructuring
On 27 September, we announced an offer to our bond and debenture holders,
inviting them to exchange our existing debt, which has a face value of £1.8bn
and an average interest rate of 8.51% for new secured bonds with interest
coupons reflecting current market rates. At this point we estimated that this
would result in the issue of some £2.4bn of new debt with an average interest
rate of 5.44%.
These proposals were subsequently approved by bond and debenture holders on 22
October, and the transaction became effective on 3 November 2004. The actual
new bond debt issued was £2.3bn at an average rate of 5.35%. A £0.1bn balancing
cash payment was made.
Since the early 1990s, Land Securities has predominantly issued unsecured debt,
with a legacy of long dated mortgage debenture stock issued between 1985 and
1991. We were attracted to unsecured debt because of its theoretical
flexibility. However, in late 2003 we became concerned that this funding policy
could constrain our medium term financing and business strategies. There were
three main reasons:
• First, we did not believe that the quality of the assets in our
investment portfolio was appropriately reflected in our credit rating. At
31 March 2004, our unmortgaged investment property assets had a value that
was approximately 3.8x our unsecured debt, but this only resulted in a weak
single A credit rating.
• Second, we were concerned that we only had limited headroom within our A
range rating target. although our financial forecasts indicated that we
would be able to maintain our credit rating for the foreseeable future, it
would unduly constrain the business.
• Third, in the current market environment, we need the ability to use
joint venture structures to grow the business. However, too much secured
debt in joint ventures, even if the lenders have no legal recourse to Land
Securities, had the potential to cause a credit rating downgrade for our
old debt.
Consequently, at the end of 2003, we reviewed our debt structure and concluded
that our current strategy, while sustainable, was capable of improvement. We
also concluded that the usual approaches to secured debt, including commercial
mortgage backed securities, would be too restrictive for our operational
requirements. We therefore developed an alternative approach designed to
improve our operational and financial flexibility, while also improving the
position of our noteholders by utilising the credit strength inherent in our
investment portfolio. It is important to emphasise that our decision to
restructure our debt was taken purely to resolve the inefficiencies in our
financing arrangements and does not signal any change to business strategy.
Our new funding structure involves the creation of a security pool which grants
our debt investors security over some £6.1bn of investment properties (at 31/03/
04 values), representing some 75% of the investment portfolio at that date.
About £3bn of the Group's property assets are outside the security pool and
these mainly comprise Land Securities Trillium properties, our joint venture
holdings and certain other assets.
We have taken care to ensure that the new debt structure gives us significant
flexibility for the future. In particular, we need the ability to buy and sell
assets easily and to maintain our development programme. We therefore developed
a secured debt structure with a tiered covenant regime that gives the Group the
flexibility that we need to run our business, while increasing the protection
available to debt holders if gearing rises materially. In summary, we will
enjoy substantial operational flexibility when Loan to Value and interest cover
in the secured group is less than 65% and more than 1.45 times respectively. If
these limits are exceeded, operational restrictions increase significantly and
would act as an incentive to reduce gearing.
As part of the debt restructuring, we have also renewed our bank facilities. At
31 March 2004, the Group had £1.55bn of committed bank facilities which would
have expired in the normal course in 2005 and 2006. We have replaced these
facilities with a new £1.5bn committed five year facility which is available to
the secured group.
On 3 November, the Group exchanged its existing bonds and debentures for new
double A rated secured bonds as follows:
Old bonds/ Old bonds/ Old bonds/ New New New
debentures debentures debentures bonds bonds bonds
Nominal Coupon % Maturity Nominal Coupon % Expected maturity
£200.0m 9.5 2007 £181.7m 5.016 2007
£400.0m 5.875 2013 £393.3m 5.292 2013
£200.0m 9.0 2024 £257.2m 5.425 2020
£200.0m 6.375 2020 £210.6m 5.391 2024
£400.0m 10.0 2025 £613.9m 5.391 2025
£200.0m 10.0 2027 £318.0m 5.376 2027
£200.0m 10.0 2030 £323.4m 5.396 2030
--------------- --------------- --------------
£1,800.0m 8.51 £2,298.3m 5.35
--------------- --------------- --------------
A further £77.2m was paid in cash to debt investors who did not accept the new
bonds. The total nominal value of the Group's bond debt will increase by £0.5bn
as a result of this transaction. This compensates debt investors for the
reduction in the rate of interest payable on the bonds which has fallen from an
average of 8.51% to 5.35% on exchange. The increase in the face value of the
Group's debt together with the additional cash payments to non-eligible holders
will result in a significant exceptional accounting charge in the second half of
the year. Together with the costs of the transaction, the debt exchange will
result in a charge of some £678m, and as a result the Group is likely to report
a loss for the year to March 2005. A further £20m of transaction costs will be
deferred and amortised over the life of the underlying debt.
With the exception of transaction costs and incentive payments to bond and
debenture holders, the exceptional charge is not a 2004/5 cash outflow. It will
have no impact on the dividend policy.
The exceptional loss that the Group will suffer in 2004/5 will be fully
allowable for tax. An approximate £26m annual initial reduction in interest
payments on bond debt, and immediate savings in tax, more than offset the cost
of the transaction and the higher amounts payable on the ultimate maturity of
the bonds. The transaction is also earnings enhancing. The Group will also
benefit from enhanced financial and operational flexibility and by being able to
access the credit strength of the investment portfolio. It will also benefit
from lower future funding costs on new debt raised by the security group.
The following summarises the effect of the transaction.
Before After
£1.80bn debentures and bonds £2.3 bn secured bonds
Weighted average interest rate 8.51% Weighted average interest rate 5.35%
A/A- rating (bonds only) AA/AA rating
£1.55bn committed unsecured facilities New £1.5bn committed bank facility expiring
-expiring 2005 and 2006 £690m late 2009
-drawn at 30 September 2004 (1) -Bank debt £960m migrates
Uncommitted borrowings £10m
At 30 September 2004 At 30 September 2004 pro-forma for transaction (2)
Gearing (net debt/equity) 40.7% Gearing 54.7%
Adjusted diluted NAV per share 1443p Adjusted diluted NAV per share 1342p
NNNAV per share (3) 1228p NNNAV per share 1223p
Group weighted average cost of debt 7.64% Group weighted average cost of debt 5.52%
(1) Pro-forma adjusted for private debentures and ineligible holders and
transaction costs
(2) As if exchange had happened at 30 September 2004
(3) NAV adjusted for debt mark-to-market and making full provision for latent
CGT and assumes that interest rate swaps were restructured.
Hedging
At 30 September 2004, the Group had a net £600m of general interest rate swaps
which hedge floating rate interest rates referenced to LIBOR. At 30 September
2004, these hedges were showing a loss of £37.8m (31/03/04: £44.5m loss). While
these interest rates swaps achieve the objective of hedging the Group's existing
floating rate borrowings, we will examine methods of further improving their
effectiveness. Such modifications could crystallise most or all of the mark to
market losses in our second half profit and loss account as an exceptional
interest cost. There would however be a limited economic, as opposed to
accounting, impact.
Taxation
The size of the exceptional loss means that the Group is likely to report a loss
for 2004/5 as a whole and there will be minimal current tax payable for the
year. Any losses not relieved at 31 March 2005 will be carried forward for
relief in future years.
International Financial Reporting Standards
International Financial Reporting Standards (IFRS) apply to all UK quoted
companies for accounting periods beginning on or after 1 January 2005. IFRS
will first apply to the Land Securities Group for the year to 31 March 2006 and
will be adopted when we report our interim results for the period to 30
September 2005. We are well advanced with our preparations for IFRS, and our
implementation timetable is summarised as follows:
• December 2004 and January 2005 - Audit Committee review of proposed IFRS
accounting policies and format of report and accounts
• February 2005 - Presentations to analysts on impact of IFRS
• May 2005 - Preliminary results for year to 31 March 2005 in current GAAP
• June 2005 - re-presentation to analysts of results for year to 31 March
2005 in IFRS, with reconciliation to current GAAP
• November 2005 - results for six months to September 2005 in IFRS with
IFRS comparative figures and reconciliation to current GAAP.
• May 2006 - preliminary results for year to 31 March 2006, in IFRS with
IFRS comparatives and reconciliation to current GAAP
• Thereafter - IFRS reporting only.
Copies of the presentations which will be given in February and June 2005 will
be available on our website www.landsecurities.com/investorrelations as soon as
they are given.
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