Interim Results

Land Securities Group Plc 15 November 2006 15 November 2006 Land Securities Group PLC ('Land Securities' / 'Group') Interim Results for the six months to 30 September 2006 Highlights â€¢ Net assets per share up - Basic NAV at 1747p - Adjusted diluted NAV up 10.9% to 2121p â€¢ Combined portfolio totalling Â£14.4bn, including a valuation surplus of 7.3% - Valuation uplifts from London offices of 10.8%, shopping centres of 6.1%, retail warehouses of 3.9% and central London shops 5.9% â€¢ Total investment portfolio outperformed the Investment Property Databank by 1.0% â€¢ Pre-tax profit of Â£1,178.2m, down 0.5%; excluding exceptional items pre-tax profit rose 23.3% â€¢ Revenue profit marginally down at Â£193.1m â€¢ Earnings per share - Basic at 183.25p up 3.4% - Adjusted diluted 32.84p, down 4.4% â€¢ Interim dividend of 19.00p per share, up 4.7%, payable to shareholders on 8 January 2007 â€¢ Intentionally quieter on acquisition front reflecting the limited number of purchase opportunities which now offer prospective returns sufficiently above our cost of capital â€¢ Continued investment in the development pipeline with spend of Â£243.0m and the ongoing development programme has generated a valuation surplus of Â£252.5m over the period â€¢ Planning consents achieved for 138,850 sq m of development as well as completing 91,400 sq m of development lettings â€¢ Strong pipeline of new business at Land Securities Trillium; bidding on 1.1 million sq m of additional accommodation - representing a potential 40% increase in accommodation under management Commenting on the results, Peter Birch, Chairman of Land Securities, said: 'I am delighted with another strong six months for the Group. Since I joined in April 1997, Land Securities has delivered a total shareholder return of some 259% as compared to 84% for the FTSE100 Index. It is my privilege to be stepping down at a time when the outlook for the Group is positive and when the prospects for commercial property in the UK remain sound. 'We have REIT conversion on the horizon which will bring benefits to shareholders in terms of tax efficiencies; we are making excellent progress with our development activities; and we have a high quality investment portfolio with reversionary potential as well as an outsourcing business which is poised for further growth. 'Since this is one of the last times that I will address shareholders as the Chairman of the Land Securities Group, I welcome this opportunity to thank you for your support over the years and wish my colleagues continued success in the future.' For further information, please contact: Land Securities Financial Dynamics Francis Salway/Emma Denne Stephanie Highett/Dido Laurimore Tel: 020 7413 9000 Tel: 020 7831 3113 Interim Results for the six months to 30 September 2006 Financial Highlights 30/9/06 30/9/05 Â£m Â£m % change Operating profit 1,229.6 1.230.5 -0.1 Operating profit (pre-exceptionals) 1,229.6 1,002.0 +22.7 Pre-tax profit 1,178.2 1,184.4 -0.5 Pre-tax profit (pre-exceptionals) 1,178.2 955.9 +23.3 Revenue profit (pre-tax) 193.1 195.9 -1.4 Pence Pence Earnings per share 183.25 177.26 +3.4 Adjusted diluted earnings per share 32.84 34.35 -4.4 Dividends per share 19.00 18.15 +4.7 30/9/06 31/3/06 Net assets per share 1747 1597 +9.4 Adjusted diluted net assets per share 2121 1912 +10.9 Â£m Â£m Combined portfolio valuation 14,439.8 12,892.9 +12.0 Net debt 4,100.8 3,685.9 +11.3 Equity shareholders' funds 8,191.7 7,493.9 +9.3 % % Gearing (net) 50.1 49.2 Chairman and Chief Executive's Review We continued to deliver a strong performance over the past six months with a 10.9% growth in adjusted diluted net assets per share, driven by a 7.3% valuation surplus from our Â£14bn investment portfolio. Pre-tax profit was Â£1,178.2m, down 0.5% on the comparable period. Before exceptional items, pre-tax profit was up 23.3%. As expected, revenue profit, our measure of underlying pre-tax results, was marginally down by 1.4% to Â£193.1m. The interim dividend will be 19.00p per share, which represents a 4.7% increase on last year's interim dividend. Over a 12-month period we benchmark our performance against three key performance indicators, providing shareholders with a clear indication of the value we are creating. Over a six month period, however, the most relevant indicator of our performance is a comparison to the Investment Property Databank, the industry standard. During the period under review our ungeared total investment portfolio return was 10.0% as compared to 8.9% for the IPD quarterly benchmark(*). We believe that our focus on creating value through development and the scale of our activities in the London office market have helped to drive this outperformance. Performance Highlights Over the past six months we continued to progress with our strategy of investing capital into higher return activities. We have intentionally been quieter on the acquisition and disposal front. In part this reflects the substantial changes to the portfolio over the past three years, which has seen the Group dispose of Â£3.5bn of assets while investing Â£4.0bn* in acquisitions and development. It is also due to the difficulties we perceive in buying assets with sufficiently attractive prospective returns at this stage in the market cycle, together with our belief that it is prudent to await REIT conversion before concluding sales. As a result, during the period under review, we invested Â£477.9m in acquisitions, of which Â£446.0m was in the London Portfolio, and we received Â£175.7m from disposals. We have continued to invest heavily in development. Including our share of joint ventures, over the six months our development pipeline spend was Â£243m and the valuation surplus on the ongoing development projects was Â£252.5m (a surplus of 17.3%). Value is created from development by securing planning consents and achieving lettings and we were therefore delighted to have received planning consent for a further 138,850sq m of development and to have let 91,400 sq m of commercial accommodation to date this financial year. At Land Securities Trillium, if our current bids are successful this business could expand to cover some 1.1 million sq m of additional accommodation a 40% increase on Land Securities Trillium's current portfolio. We are awaiting a decision from the Government on the Defence Training Review, where we are bidding jointly with QinetiQ for a contract which could see us provide 0.6 million sq m of accommodation. We have also recently submitted our bid for the Northern Ireland Civil Service. In addition to these two substantial contracts we are in the process of developing further bids for the corporate sector and the Government's Building Schools for the Future programme. We also continue to manage actively our balance sheet. We extended the duration and renegotiated the terms of our bank facility and concluded a Â£300m bond issue at an all in cost of just under 5%. These bonds were issued from our funding structure established in November 2004 and have been rated AA by both Fitch and Standard and Poor's. We also took the opportunity to buy back Â£21m of our shares in June 2006, at a time when the market was temporarily depressed. (*)The IPD Quarterly Benchmark is comprised of 184 quarterly and monthly-revalued funds, valued at Â£115.9 billion at the end of September 2006. This benchmark includes direct domestic property only. The Board We announced two changes to the Board in the period under review. We would like to welcome Paul Myners as a non-executive director and Chairman dsesignate. Paul brings to the Board a wealth of experience, having had an illustrious career in the City, most notably running fund manager Gartmore for 15 years, together with wider expertise garnered as non-executive director of several leading corporate and non-financial institutions, including the role of Chairman at Marks & Spencer plc. In October we also announced that Mark Collins would be stepping down from the Board after a very successful four and a half years with the Company. Mark has made a significant contribution to the Group, most notably leading our business development activities through the property swap with Slough Estates and the corporate acquisition of Tops Estates. He will be leaving the Group at the end of November and we would like to thank him for his contribution to our success. Real Estate Investment Trusts Over the past few months much has been written about the introduction of Real Estate Investment Trusts ('REITs') and we are delighted to confirm that we are planning to elect for REIT status from 1 January 2007. Shareholders will shortly receive a circular convening an EGM in December 2006 which contains details of changes proposed to our Memorandum and Articles of Association to accommodate REIT status. Subject to receiving shareholder approval to these changes we see no obstacle to conversion. It is worthwhile stressing here that REIT conversion represents a change in tax status. As we are already a quoted entity, with a listing on the London Stock Exchange, conversion to a REIT does not necessitate any amendment to the Group's structure. The main difference will be that, having paid a conversion charge calculated at 2% of the Group's gross assets, around 90% of our activities become tax exempt. As a result we anticipate distributing the taxed saved to shareholders in the form of an increased dividend which, over a full year, is expected to represent around a 30% increase. Shareholders should note that for the year to 31 March 2007, the Group will only benefit from three months status as a REIT. Further information on the impact of REIT conversion on the Group's income statement, balance sheet and dividend policy will be detailed in the circular to shareholders. In addition an illustrative income statement and balance sheet will be available on our website after the presentation to analysts today. In order to establish the amount we will have to pay to HM Revenue and Customs as a REIT conversion charge, we will be conducting a valuation of our qualifying property assets as at 31 December 2006. This will be a one-off exercise and will include an external valuation of both our investment portfolio and also the properties held by Land Securities Trillium, representing the first valuation of these assets since we acquired Trillium in 2000. We expect to announce the results of this valuation exercise in February 2007. Outlook After an extended period when buyers of commercial property investments significantly outnumbered sellers, we are moving closer to equilibrium conditions, with less parties bidding for investments and an increasing number of properties being marketed for sale. This is likely to herald an end to yield compression, but also to increase the scope for the Group to find opportunities where we can create value for shareholders. We are now benefiting from our decision to initiate large scale development projects early in the recovery cycle in London, and also from the effective management of our existing outsourcing contracts. We also look forward to a further phase of growth for Land Securities Trillium from our strong new business pipeline. Prospects for growth in rental values for London offices remain attractive for at least the next two years and retail sales figures have been stronger in 2006 than 2005, although retailers are still experiencing pressure on their cost bases. The outlook for the Group remains positive. REIT conversion is on the horizon bringing undoubted benefits to shareholders in terms of tax efficiencies; we are making excellent progress with our development activities; and we have a high quality investment portfolio with reversionary potential as well as an outsourcing business which is poised for growth. Financial Review Headline results Profit before tax stayed broadly constant, marginally decreasing by 0.5% to Â£1,178.2m as compared to Â£1,184.4m for the six months to 30 September 2005. Revenue profit, our measure of underlying profit before tax, decreased by 1.4% from Â£195.9m to Â£193.1m. Earnings per share were 183.25p, up 3.4% (30/9/05: 177.26p) with adjusted diluted earnings per share at 32.84p showing a 4.4% decrease (30/9/05: 34.35p). The combined investment portfolio rose in value from Â£12.9bn to Â£14.4bn, which included a valuation surplus of Â£962.1m or 7.3%. More detail of this performance is contained in the Investment Property Business review. Net assets per share rose by 9.4% to 1747p from 1597p, with adjusted diluted net assets per share rising by 10.9% to 2121p (31/3/06: 1912p). Profit before tax Our profit before tax represents the total pre-tax return to shareholders for the period, including both realised and unrealised gains and losses on the value of our investment properties as well as exceptional items. In the first six months of the year, this fell slightly by 0.5% to Â£1,178.2m, notwithstanding the fact that the prior period included an exceptional profit of Â£293.0m on the disposal of our interest in the Telereal joint venture. The principal drivers behind this change are set out in Table A. Table A - Principal changes in profit before tax and revenue profit Profit Revenue before tax profit Â£m Â£m Six months ended 30 September 2005 1,184.4 195.9 Valuation surplus (A) 200.6 - Profit on disposal of Telereal (B) (293.0) - Distributions received from Telereal (C) (11.7) - Impact of Telereal sale 30 September 2005 (D) - (16.1) Profit on disposal of non-current properties 17.1 - Profit on sale of trading properties 1.1 - Decrease in capitalised interest (3.5) (3.5) Amortisation of bond de-recognition (E) 4.7 - Long-term development contract profits (F) (1.3) - Goodwill impairment (G) 64.5 - Property outsourcing profit (H) 13.8 13.8 Net rental and service charge income(I) 35.7 35.7 Indirect costs (J) (8.2) (8.2) Interest on increased debt (24.5) (24.5) Debt restructuring charges (6.3) - Other 4.8 - Six months ended 30 September 2006 1,178.2 193.1 A. The valuation surplus was Â£200.6m higher than the first six months last year as described in the Investment Property Business review. B. The disposal of our interest in the Telereal joint venture was completed on 30 September 2005. C. Distributions from Telereal ceased on 30 September 2005 following its disposal. D. The impact of the sale of Telereal has been partially offset by operating profit of Â£7.0m on the Telereal II contract which is included as part of the property outsourcing profit, Note H. Additionally, Â£7.5m of interest income was earned on the disposal proceeds which is part of the net change in interest. E. The debt instruments issued as part of the refinancing in November 2004 do not meet the requirements of IAS 39 as they are not deemed to be substantially different from the debt they replaced. As a result, the book value of the new instruments is reduced to the book value of the debt it replaced and the difference is amortised over the life of the new instruments. The decrease in amortisation over the comparable period is a reflection of the maturity profile of debt replaced. F. Lower levels of activity, with the recognition of profits on the development contract at Broadcasting House being below the profit recognised on Bankside1 in the comparable period. G. Goodwill arising on the acquisition of Tops Estates PLC in June 2005 was impaired in the comparable period. There was no goodwill impairment in the current period. H. Inclusion of Telereal II contract, for the first time and better performance on DWP contract. I. Increase in rental income offset by greater service charge under recovery is largely driven by acquisitions. Higher volume of vacant properties and increase in marketing costs have also impacted the result. J. Primarily due to higher staff costs for existing employees and increased employee numbers following acquisitions. Revenue profit Revenue profit is the financial measure we use internally to assess our underlying results and includes the pre-tax results of our joint ventures but excludes capital and other one-off items such as the valuation surplus, long-term contract income and gains on disposals, including trading properties. Revenue profit for the six months was 1.4% lower, falling to Â£193.1m from Â£195.9m in the comparable period. The main reasons for this change are detailed in Table A. A reconciliation between profit before tax and revenue profit is shown in Table B. Table B - Reconciliation of profit before tax to revenue profit 6 months 6 months ended ended 30/9/06 30/9/05 Â£m Â£m Profit before tax 1,178.2 1,184.4 Revaluation - Group (896.7) (726.0) surpluses - joint ventures (65.7) (35.8) Non-current property disposals (33.6) (17.4) Goodwill impairment - 64.5 Mark-to-market adjustment on interest rate swaps (6.2) 7.9 Eliminate effect of bond exchange de-recognition 8.6 13.3 Debt restructuring charges 6.3 - Profit on disposal of Telereal joint venture - (293.0) Adjustment to restate the Group's share of Telereal earnings from a distribution basis to an equity basis - 5.0 Joint venture tax adjustment 20.4 15.6 Profit on sale of trading properties (8.8) (11.9) Long-term development contract profits (9.4) (10.7) Revenue profit 193.1 195.9 Earnings per share Basic earnings per share grew by 3.4% to 183.25p (30/9/05: 177.26p), the change being mainly attributable to the same factors as set out for profit before tax in Table A. The growth in earnings per share compared to the slight decline in revenue profit is due to a decrease in the tax rate for the current period. Reasons for the change in tax rate are set out in the section on taxation. In the same way that we adjust profit before tax to remove capital and one-off items to give revenue profit, we also report an adjusted earnings figure. Adjusted earnings are based on our revenue profit after tax but also include long-term development contract profits and profit on the sale of trading properties. The adjustments made to our profit for the financial period to arrive at adjusted earnings are set out in Note 7 to the financial statements. As a result of lower revenue profits, a slight decline in long-term contract and trading profits and a small increase in the weighted average number of shares, adjusted diluted earnings per share declined to 32.84p per share in the first six months of the year from 34.35p per share for the same period in 2005, a 4.4% decrease. Dividend We are paying an interim dividend of 19.00p per share, an increase of 4.7% compared to the 18.15p paid for the same period in 2005. The interim dividend will be paid on 8 January 2007 to shareholders on the register on 8 December 2006. The shares will trade ex-dividend from 6 December 2006. Net assets At 30 September 2006, net asset value per share was 1747p, an increase of 150p from 31 March 2006. In common with other property companies, we also calculate an adjusted measure of net assets, which we believe better reflects the underlying net assets attributable to shareholders. The adjustments required to arrive at our adjusted diluted net assets per share are listed in Table C and also set out in Note 8 to the financial statements. The adjusted diluted net assets per share were 2121p at 30 September 2006, an increase of 209p or 10.9% since the last financial year end. Table C - Net assets 6 months ended 6 months ended 6 months ended 30/9/06 31/3/06 30/9/05 Â£m Â£m Â£m Net assets at beginning of period 7,493.9 6,726.4 6,050.3 Profit after tax 859.8 846.7 829.2 Dividends paid (133.8) (85.1) (153.8) Other (28.2) 5.9 0.7 Net assets at end of period 8,191.7 7,493.9 6,726.4 Deferred tax on investment properties 151.5 145.0 151.4 Deferred tax on net revaluation surpluses 2,007.7 1,739.7 1,470.7 Mark-to-market on interest rate hedges 1.1 8.6 17.9 Debt adjusted to nominal value (369.3) (375.3) (385.7) Adjusted net assets at end of period 9,982.7 9,011.9 7,980.7 Cash flow and net debt During the six months, cash receipts from investment property disposals were Â£319.5m. In total we spent Â£667.5m on our investment properties including Â£473.4m on acquisitions and Â£158.2m on developments. We also invested a net Â£38.4m in our joint ventures. At 30 September 2006, the Group's net debt was Â£4,100.8m, an increase of Â£414.9m over the position at 31 March 2006. The factors contributing to this increase are shown in Table D. Table D - Cash flow and net debt 6 months 6 months 6 months ended ended ended 30/9/06 31/3/06 30/9/05 Â£m Â£m Â£m Operating cash inflow after interest and tax 174.1 213.8 162.1 Dividends paid (133.8) (85.1) (153.8) Property acquisitions (473.4) (632.9) (1,375.4) Development and refurbishment capital expenditure (219.0) (222.2) (122.9) Investment in properties (692.4) (855.1) (1,498.3) Other capital expenditure (9.1) (14.8) (12.1) Total capital expenditure (701.5) (869.9) (1,510.4) Disposals (including Telereal in 2005) 334.2 245.8 726.8 Joint ventures (38.4) (67.8) 201.6 Other movements (49.5) (40.5) (70.4) (Increase) in net debt (414.9) (603.7) (644.1) Opening net debt (3,685.9) (3,082.2) (2,438.1) Closing net debt (4,100.8) (3,685.9) (3,082.2) Despite the 11.3% increase in our net debt since 31 March 2006, gearing levels have barely changed. The main reason for this is that the valuation uplift during the period has resulted in increased net assets which have offset the growth in net debt. Details of the Group's gearing are set out in Table E, which includes the effects of our share of joint venture debt, although the lenders to our joint ventures have no recourse to the Group for repayment. Table E - Gearing At At 30/9/06 31/3/06 % % Gearing - on book value of balance sheet debt 50.1 49.2 Adjusted gearing* 46.4 46.9 Adjusted gearing* - as above plus notional share - of joint venture debt 50.2 51.1 * Book value of balance sheet debt increased to recognise nominal value of debt on refinancing in 2004 divided by adjusted net asset value. Funding and Hedging In the six month period, we issued a Â£300m 17 year sterling bond within the secured funding structure through our Â£6bn note programme. The debt carries a coupon of 4.875% and was issued at a yield to maturity of 4.939%. We also took the opportunity to replace the Â£2bn five year secured group bank facility with a seven year Â£1.5bn agreement. This has allowed us to consolidate our banking group, extend the facility's maturity and to reduce ongoing interest margins. We use derivative products to manage our interest rate exposure and have a hedging policy which seeks to have at least 80% of our existing debt plus our net committed capital expenditure at fixed interest rates for the coming five years. Specific hedges are also used in geared joint ventures to fix the interest exposure on limited recourse debt. At the period end we had Â£1,048.2m of interest rate swaps in place, and our debt was 92% fixed. Consequently, based on 30 September 2006 debt levels, a 1% rise in interest rates would increase full year interest charges by only Â£3.3m. Taxation The tax charge for the period is Â£318.4m, giving an effective rate of 27.0% (30/ 9/05: 30.0%). The lower tax rate in 2006 is primarily due to larger deferred tax releases on property disposals and the absence of non-tax deductible goodwill impairment. IFRS requires that full provision is made for the deferred tax liability associated with the revaluation of investment properties. Accordingly, the tax charge includes deferred tax of Â£269.0m on revaluation gains arising in the period (30/9/05: Â£217.7m). The current or 'cash' tax charge for the period, before property disposals, is Â£48.5m. If we adjust this to reflect our definition of revenue profit, we have an effective current tax rate of 23.0% (30/9/05: 13.6%). This rate reflects the benefits of approximately Â£24m of gross capital allowances on developments as well as tax deductions available for capitalised interest. The equivalent rate for 2005 is not directly comparable due to the use of losses generated by the Group refinancing in the prior period. Investment Property Business The performance of our Â£14.4bn combined investment portfolio is the responsibility of our Retail and London Portfolio businesses. The day-to-day responsibility for the performance of the London retail properties, with the exception of Â£251.3m of retail and Â£15.1m of office assets held in the Metro Shopping Fund, is with the London Portfolio business. However, to assist comparison with our performance against the Investment Property Databank ('IPD'), we include the performance of our London retail properties under Retail in order to disclose our portfolio valuation statistics according to the IPD categories. Performance The combined investment portfolio was revalued at Â£14.4bn at 30 September 2006 as compared to Â£12.9bn at 31 March 2006 and Â£11.54bn at 30 September 2005. Table F - Combined investment portfolio performance summary Open Open Open Rental Rental Rental market market market income income income Value value Value Valuation 6 months 6 months 6 months 30/9/06 31/3/06 30/9/05 surplus 30/9/06 31/3/06 30/9/05 (1) (1) (1) (1) Â£m Â£m Â£m % Â£m Â£m Â£m Retail Shopping centres and shops 3,115.1 2,910.5 2,699.2 6.5 79.8 76.0 80.9 Retail warehouses 1,601.6 1,534.4 1,404.5 3.8 33.0 31.9 30.0 London retail 959.6 911.3 840.3 5.3 28.1 31.5 22.2 London offices 3,456.2 3,176.7 2,891.3 8.4 97.9 100.3 93.5 Other 394.4 375.8 351.2 4.8 9.0 7.6 7.8 Like-for-like investment portfolio (2) 9,526.9 8,908.7 8,186.5 6.5 247.8 247.3 234.4 Completed developments 314.3 306.2 278.5 1.6 6.8 4.6 5.9 Purchases 2,872.0 2,277.9 1,540.2 4.9 66.0 51.2 21.1 Disposals and restructured interests - 147.9 564.8 - 1.7 11.6 18.5 Development programme (3) 1,726.6 1,252.2 924.2 17.3 14.8 12.2 7.2 Combined investment portfolio 14,439.8 12,892.9 11,494.2 7.3 337.1 326.9 287.1 Adjustment for finance leases - - - - (6.3) (6.8) (6.4) Combined investment portfolio - - - - 330.8 320.1 280.7 1. The valuation surplus and rental income are stated after adjusting for the effect of spreading of rents and rent free periods over the duration of leases in accordance with IFRS but before restating for finance leases. 2. Properties that have been in the combined investment portfolio for the whole of the current and previous financial periods. 3. Development programme comprising projects which are completed but less than 95% let, developments on site, committed developments (approved projects with the building contract awarded), and authorised developments (projects approved by the Board, but for which the contract has not yet been awarded). On the like-for-like portfolio the valuation surplus was 6.5% and we saw the strongest performance from London offices with a surplus of 8.4%, followed by a 6.9% surplus from shopping centres. In addition our ongoing extensive development programme, currently valued at Â£1.7bn, has continued to be a significant differentiator in terms of performance with a valuation surplus of 17.3% for the six months. The overall valuation surplus from our combined investment portfolio over the last six months, including acquisitions and developments, was Â£962.1m or 7.3% and the total property return (including income) was 10.0%. Our contribution to performance In terms of ungeared total property return, our investment portfolio outperformed the UK commercial property market, as represented by the IPD Quarterly benchmark by 1.0% on a relative basis, as a result of our exposure to London offices and the scale and success of our development activities. While yield shift has again contributed to the overall portfolio performance we illustrate below how the application of our skills can drive the creation of excess value. Table G details the top six performing properties in each sector by revaluation increase together with an explanation of the key drivers of that performance. This table also demonstrates clearly the strong contribution from London development. Table G - Top six performing properties by business unit Valuation Valuation Retail surplus London Portfolio surplus (%) (%) Lewisham 15.3 Rental value growth Dashwood House, 54.4 Proposed refurbishment Shopping Centre and EC2 and extension yield compression Gunwharf Quays, 12.0 Rental value growth New Street Square, 38.2 Development Portsmouth and yield compression EC4 Princesshay, 11.0 Development Bankside 2&3, SE1 23.3 Development Exeter Greyhound Retail 10.5 Yield compression and 1 Wood Street, EC2 21.1 Development Park, Chester new lettings The Mall, 10.1 Reconfiguration and 10/20/30 19.7 Potential refurbishment Stratford new lettings Eastbourne Terrace, W2 opportunity The Bridges, 9.5 Rental value growth Cardinal Place, 17.0 Development Sunderland and SW1 yield compression At 30 September 2006 the net reversionary potential of the like-for-like portfolio was 9.7%, markedly higher than the 6.8% six months ago. Growth in rental values for London offices, together with the impact of reversionary London office acquisitions now moving into the like-for-like portfolio, account for most of this change. Our London office portfolio now has a positive net reversionary potential of 4.5% (even after off-setting residual over-renting of 5.9%). In addition, the reversionary potential on our retail assets has moved up slightly from 12.3% to 12.9%. Set against this positive news on rental growth, voids on the like-for-like portfolio have increased from their historically low levels to 5.3%, although a significant proportion are strategic voids where we are keeping units vacant prior to redevelopment. Table H - Investment and development portfolio valuation movements Investment Development Total Â£m Â£m Â£m Net book value at 1/4/06 10,211.2 1,229.3 11,440.5 Purchases 461.1 12.3 473.4 Disposals (145.3) (5.3) (150.6) Transfers into development (6.4) 6.4 - Transfers out of development 32.5 (32.5) - Surrender premiums received (1.0) - (1.0) Capital expenditure 35.9 148.8 184.7 Valuation surplus (*) 648.8 247.6 896.4 Capitalised interest - 10.9 10.9 Depreciation (1.7) - (1.7) Net book value at 30/9/06 11,235.1 1,617.5 12,852.6 Combined investment portfolio at 30/9/06 12,713.2 1,726.6 14,439.8 (*) Excludes joint ventures Investment As previously stated, levels of activity during the first half of the year were lower. We have sold Â£175.7m of property (net of sale costs) out of the combined investment portfolio, generating a profit of Â£25.1m (16.7% above book value). Including our share of joint ventures, we purchased Â£477.9m of investment properties. The average yield on the properties sold was 3.7% and the average initial yield on the assets acquired was 4.5%. Some 75% of the purchase activity was accounted for by the acquisitions in London of Arundel Great Court, WC2 and 22 Kingsway, WC2. Development Our development programme produced a valuation surplus of Â£250.2m, including our share of joint ventures and those properties completed and let in the six months. Including our share of joint ventures and land acquisitions we spent Â£243m (excluding capitalised interest) on the development pipeline projects including New Street Square, EC4, Bankside 2&3, SE1 and 50 Queen Anne's Gate, SW1 and shopping centre developments in Bristol, Cardiff, Exeter and Corby. We have an estimated further spend of Â£692m on the projects currently underway which, when complete and fully let, will produce Â£144m of annual cash income (using today's estimated rental value for the available space). Further capital expenditure on proposed developments could total Â£1,321m if we proceed with these schemes, which are held as part of the combined investment portfolio and have a current carrying value of Â£546m. The figures given above for capital expenditure represent the Group's actual or forecast cash outlays on developments. Including land values and capitalised interest, the total development cost for the full development pipeline is Â£3.7bn, of which Â£1.8bn relates to our current development programme. We have been undertaking two developments on behalf of the BBC. We handed over the new headquarters for BBC Scotland at Pacific Quay in Glasgow in August 2006, having completed the project on programme and within budget. The much larger development of Broadcasting House has been more complex than originally envisaged, but the first phase was handed over earlier this year and we have now recognised a profit on this. The final phase is now underway and is scheduled for completion in 2010. Business Unit Review Retail We own 1.9 million sq m of retail accommodation including 30 shopping centres and 31 retail parks which represent a 5.8% share of the UK's retail commercial property market (excluding high street shops). We have over 1,600 occupiers across this portfolio. Many of our retail properties form the central shopping districts of major cities and towns across the UK and, over a year, we estimate that some 332 million visits are made by consumers to our locations. We are also investing Â£0.9bn to create the next generation of retail locations through a 360,000 sq m development pipeline. Market conditions have remained broadly constant since we reported at the year end. However, demand from retailers across the UK continues to be patchy as a result of fragile consumer confidence and rising costs, and retailers are seeking greater incentives in terms of rent free periods and capital contributions. Despite these market conditions, we have been successful in letting or agreeing terms for nearly 140,000 sq m of retail floor space, creating future cash rental income of approximately Â£29m per annum. Table I - Retail valuation and performance summary 30/9/06 31/3/06 30/9/05 Total retail* Combined investment portfolio valuation Â£7,315.6m Â£6,877.7m Â£6,291.9m Like-for-like investment portfolio valuation Â£5,025.4m Â£4,783.3m Â£4,372.7m Rental income Â£124.5m Â£123.3m Â£114.8m Gross estimated rental value Â£288.3m Â£284.0m Â£274.3m Voids by estimated rental value Â£11.8m Â£9.8m Â£5.1m Gross income yield 4.8% 5.0% 5.3% Shopping centres Combined investment portfolio valuation Â£4,114.6m Â£3,816.5m Â£3,352.6m Like-for-like investment portfolio valuation Â£2,820.8m Â£2,628.6m Â£2,434.5m Rental income Â£74.4m Â£70.6m Â£74.8m Gross estimated rental value Â£174.2m Â£171.5m Â£164.1m Voids by estimated rental value Â£6.0m Â£5.3m Â£3.3m Gross income yield 5.2% 5.5% 5.9% Retail warehouses Combined investment portfolio valuation Â£2,405.3m Â£2,298.8m Â£2,102.6m Like-for-like investment portfolio valuation Â£1,601.6m Â£1,534.4m Â£1,404.5m Rental income Â£33.0m Â£32.3m Â£29.64m Gross estimated rental value Â£77.7m Â£76.7m Â£74.7m Voids by estimated rental value Â£3.3m Â£1.9m Â£0.3m Gross income yield 4.1% 4.2% 4.5% * Retail includes shopping centres, retail warehouses, shops outside London, shops held through the Metro Shopping Fund LP, regional offices and sundry other properties outside London In terms of valuation the retail portfolio continues to perform well. On a like-for-like basis this portfolio increased in value to Â£5.0bn with a 5.6% valuation surplus over the six months. The strongest performance was in shopping centres with a 6.9% valuation surplus. Retail warehouse returns have reduced from the very high levels of recent years but still showed a 3.8% surplus over the six month period. The valuation uplifts were driven largely by yield shift with low levels of rental value growth. Our focus has been on improving the tenant mix and overall attractiveness of our shopping centres and retail parks, the success of which is evidenced by data showing increased footfall across our shopping centres. The portfolio is 13.5% reversionary and void levels remain low at 4.1% within the like-for-like portfolio. Activity Update Asset Management The success of our asset management activities is evidenced by the performance of some of our larger shopping centres. White Rose Centre, Leeds, Lewisham Shopping Centre, London and Gunwharf Quays, Portsmouth have all performed well in the first six months. In particular Gunwharf Quays saw strong like-for-like sales growth and numerous asset management initiatives. New tenants attracted to this property include Guess UK, The Works, L'Occitane, Elle and Lee Cooper. One of our largest retail parks, Lakeside Retail Park, Thurrock also benefited from the recent opening of the new ILVA store and the letting of a 2,000 sq m store to Next. In addition our recently purchased Greyhound Retail Park, Chester also demonstrated a strong valuation uplift as a result of yield compression and new lettings ahead of assumed rental value at purchase. Development We made good progress with our development programme which will create 228,680 sq m of new predominantly retail and leisure accommodation over the next three years. We also have a further 131,750 sq m of proposed developments in the pipeline. In the first six months of the year we completed or agreed terms for Â£10.3m of lettings across the development programme. At Exeter, a 44,600 sq m scheme scheduled to open next year, our lettings programme is on target with 64% of the retail accommodation already let or in solicitors' hands. At Bristol, a 140,000 sq m partnership development with Hammerson plc, due to complete in autumn 2008, 45% of the retail accommodation is let or in solicitors' hands. Christ's Lane, Cambridge, a 7,150 sq m mixed-use scheme, comprising eight shops, a cafe overlooking Christ's Pieces and 15 residential apartments, is 76% let and on target to open in autumn 2007. We have now secured a number of pre-lettings at our scheme in Cardiff, the St Davids 2 development, which we are carrying out in partnership with Capital Shopping Centres. We awarded the construction contract to Bovis Lend Lease and will be starting on site in January. The scheme, which will bring the first John Lewis department store to Wales, comprises 106,400 sq m of new accommodation in Cardiff's city centre. We also received planning consent for our proposals at Livingston to create an additional 32,000 sq m of new retail space, 5,670 sq m of leisure space, 28 flats, including affordable housing and new public spaces in the town centre. We were very pleased to announce that we have secured M&S and Debenhams as anchors to the scheme. We are also making good progress at Willow Place, Corby where we are progressing 16,260 sq m of retail accommodation in 27 units and we now have 35% of the retail accommodation let or in solicitors' hands. We are also progressing with 33,730 sq m of development across our retail park portfolio with schemes underway in Peterborough and due to commence in Plymouth and Thanet. At Peterborough we have pre-let 91% of the scheme to Matalan and B& Q. London Portfolio Our London Portfolio comprises 930,000 sq m of office accommodation and 81,000 sq m of retail floor space. Our office portfolio represents approximately 4% of London's total office floor space with over 600 occupiers accommodating more than 45,000 people. We are investing Â£1.9bn on development, responding to our customers' needs with innovative, relevant buildings and top quality customer service. Availability levels continue to decline for Central London offices. As a result, rental value growth has emerged strongly in the City and continues in the West End and Mid-town. Retail sales levels in London are also now showing stronger growth than the rest of the UK. At the same time demand from investors remains buoyant. Table J - London Portfolio valuation and performance 30/9/06 31/3/06 30/9/05 London Portfolio* Combined investment portfolio valuation Â£7,039.8m Â£5,932.5m Â£5,069.4m Like-for-like investment portfolio valuation Â£4,438.9m Â£4,109.1m Â£3,753.7m Rental income Â£121.4m Â£121.9m Â£117.5m Gross estimated rental value Â£261.5m Â£253.3m Â£248.3m Voids by estimated rental value Â£17.2m Â£7.9m Â£9.9m Running yield 4.8% 5.5% 5.9% London offices Combined investment portfolio valuation Â£5,731.9m Â£4,788.3m Â£4,068.1m Like-for-like investment portfolio valuation Â£3,441.8m Â£3,163.1m Â£2,878.5m Rental income Â£98.0m Â£100.2m Â£93.6m Gross estimated rental value Â£208.1m Â£200.5m Â£195.3m Voids by estimated rental value Â£14.6m Â£6.4m Â£8.8m Running yield 4.9% 5.7% 6.1% London shops Combined investment portfolio valuation Â£1,121.2m Â£1,053.8m Â£918.9m Like-for-like investment portfolio valuation Â£907.5m Â£863.5m Â£797.5m Rental income Â£21.5m Â£20.0m Â£21.8m Gross estimated rental value Â£48.3m Â£48.1m Â£48.0m Voids by estimated rental value Â£2.5m Â£1.5m Â£1.0m Running yield 4.6% 4.8% 5.3% *The London Portfolio includes London offices, London shops (with the exception of shops held through the Metro Shopping Fund LP) and sundry other properties in London. We continue to deliver strong performance across the London Portfolio which, on a like-for-like basis, increased in value to Â£4.4bn representing a 7.7% valuation surplus for the first half of the year. Our development activity made a significant contribution to performance with a valuation surplus of 21.4%. As a result of growth in rental values, like-for-like London office investments now have a 4.5% net reversionary potential. London office voids have risen to 7.0% on a like-for-like basis. This is primarily attributable to a number of substantial pre-development properties falling vacant, including 20 Fenchurch Street, EC3 and One New Change, EC4. London retail is 9.3% reversionary and void levels are 5.2% on a like-for-like basis. Activity update Asset management The strong valuation increase of those properties purchased over the past three years demonstrates the success of the portfolio restructuring and our asset management activities. Times Square, EC4, purchased some 18 months ago, is now fully let and has achieved rental value growth of 9.5%. At Holborn Gate, WC1, both yield shift and rental value growth contributed to a strong valuation increase of 15.7%. Development We are also making excellent progress with our development programme, which is generating substantial value to shareholders. Over the first six months of the year the surplus created by our development activities was Â£234.3m. Developments currently on site will provide 143,050 sq m of new office accommodation together with some 7,650 sq m of retail floor space. Our future pipeline of projects will provide another 115,130 sq m of offices and 31,590 sq m of retail, together with 39 residential units. We are delighted that we achieved the first or second largest lettings in each of our core markets of City, Mid-town and West End, with the lettings to Eversheds, Taylor Wessing and Microsoft. At Cardinal Place, SW1 only 33% of the office accommodation is now available to let and we continue to see good demand for the remaining space. The retail element, which is trading above expectations, is 98% occupied. At New Street Square, the scheme is now 61% pre-let and construction of the four buildings continues according to plan with completion due on a phased basis between June 2007 and March 2008. Since 30 September 2006 we have pre-let another 16,000 sq m in the 21,370 sq m office building, 5 New Street Square, to Taylor Wessing. The final building, a 17-storey 18,000 sq m office block which we intend to multi-let, is already receiving strong interest from a number of occupiers. We continue to make good progress with Bankside 2&3, where we are creating some 35,550 sq m of speculative office accommodation together with 3,170 sq m of retail accommodation in two buildings, which are due for completion in August 2007. This is in addition to Bankside 1 which is a 46,350 sq m office building previously sold to IPC Media. We announced that we have decided to proceed with our development at One New Change on the basis of a 50/50 joint venture with Beacon Capital Partners LLC. The Jean Nouvel designed scheme close to St Paul's Cathedral will provide 31,660 sq m of office accommodation and 19,830 sq m of retail floor space. We were also very pleased to receive outline planning consent at three further schemes, totalling 101,180 sq m of accommodation, namely Park House, W1, 20 Fenchurch Street, EC3 and Dashwood House, EC2. At Park House we received approval for 31,200 sq m mixed used scheme incorporating retail, office and residential accommodation, designed by Hamilton Associates. Two schemes in the City, 20 Fenchurch Street, EC3 the Raphael Vinoly designed 55,370 sq m office tower and our 14,610 sq m refurbishment scheme at Dashwood House, EC2 designed by Fletcher Priest, have also received approval. Property Outsourcing - Land Securities Trillium Land Securities Trillium produced 17% of the Group's underlying profit in the six months under review. This business has a commercial portfolio totalling 2.87 million sq m and six clients for whom it provides business accommodation services to 175,000 people. Our performance Land Securities Trillium has had a good first half, producing a segment profit of Â£60.6m. This is lower than the corresponding period last year which included the exceptional profit on the disposal of our Telereal joint venture. Table K - Land Securities Trillium financial results 6 months ended 6 months ended 6 months ended 30/9/06 31/3/06 30/9/05 Â£m Â£m Â£m Contract level operating profit - Barclays 1.2 1.2 1.3 - BBC 3.3 0.5 - - Driver and Vehicle Licensing Agency ('DVLA') 0.7 0.7 0.3 - Department for Work and Pensions ('DWP') 42.8 56.0 41.7 - Norwich Union 3.9 3.8 1.2 - Telereal II 7.0 6.9 - Bid costs (1.4) (4.6) (2.8) Central costs (5.7) (4.8) (4.8) Underlying profit 51.8 59.7 36.9 Profit on sale of non-current properties 8.5 1.2 (0.2) Net surplus on revaluation of investment property 0.3 1.6 0.3 Profit on disposal of joint venture (Telereal) - - 293.0 Segment profit 60.6 62.5 330.0 Share of loss from Investors in the Community ('IIC') joint venture (1.1) - - Distribution received from Telereal - - 11.7 Underlying profit is stronger at Â£51.8m compared to Â£36.9m for the six months ended 30 September 2005. Profit on disposal of fixed asset properties was Â£8.5m compared to a small loss in the six months ended 30 September 2005. The increase in operating profit is driven by three key factors: i) the inclusion of the Telereal II contract which commenced on 1 October 2005 ii) improved contributions from both DVLA and Norwich Union as a result of the refurbishment programmes starting to generate income iii) conclusion of the BBC contract in June 2006 with lower exit costs than previously provided for Notwithstanding increased utilisation of its vacation allowances by the DWP, profits from that contract remained stable because the loss of some Â£15m of income following vacations was offset by indexation increases, the addition of new facilities and successful asset management of head rent liabilities. Activity update Existing contracts We continue to work with the DWP to reduce costs to meet its Government efficiency and Comprehensive Spending Review targets. These targets include the rationalisation of the DWP estate. In the six months to 30 September 2006, the Department vacated 73,800 sq m of flexible space, and served notice to vacate a further 85,360 sq m. Vacant property is managed through the Corporate Real Estate Group's specialist disposals team who seek to mitigate leasehold liabilities through lettings and surrenders and to maximise the proceeds on freehold disposals. Advantage is also taken of head lease expiries and tenant lease break opportunities. Where possible, through working closely with the DWP, opportunities are identified where mutual capital value gains or risk mitigation can be achieved. We are now 67% through the refurbishment programme for the DVLA in Swansea and are currently running slightly ahead of schedule. In August we signed an extension to this contract to provide a new 4,800 sq m print facility in Swansea. This is scheduled for completion in autumn 2007 and will then be provided with full services as in the original agreement running until 31 March 2025. In August, we also started providing services to a new 2,800 sq m building known as the Shared Services Centre on the Swansea Estate. Our other major refurbishment is for Norwich Union on their Norwich Headquarters. We have now delivered 40% of that scheme with the customer responding very positively to the refurbished accommodation. In September we also completed the 7,000 sq m refurbishment of the Colegate building in Norwich, which was an addition to the original contract. New business We continue to make good progress on potential new business, with a record pipeline and a number of opportunities at an advanced stage of development. This month, in competition with three other parties, we submitted our bid for the Northern Ireland Civil Service ('NICS') Workplace 2010 contract. This 20 year partnership aims to transform the NICS office estate by improving the working environment for staff and facilitating new ways of working across 309,000 sq m of accommodation. In January we formed the Investors in the Community joint venture with the Mill Group. Since then, and in line with our plans, we have developed its resource base and almost doubled staff numbers to 52. During the current financial year, IIC has closed three transactions (Bristol Building Schools for the Future (' BSF'), Peterborough Schools and Barnet and Enfield Street Lighting) and reached preferred bidder status on the Â£25m Redcar & Cleveland Street Lighting project. IIC is actively bidding on five projects including three BSF contracts. As in all competitive markets some bids are unsuccessful. We were disappointed on the Leeds BSF where we were down to the final two but were not chosen as preferred bidder. We also expect to hear imminently from Government on the outcome of its Defence Training Review ('DTR'). The DTR is being procured by the MoD in two packages, with a combined estimated total value of about Â£13bn over a 25 year term. Package One is primarily technical training, including aeronautical engineering and communications and information systems. Package Two incorporates logistics, joint personnel administration, security, languages, intelligence and photography as well as supply training. We are bidding for both elements as part of Metrix , which is a special purpose 50/50 joint venture company between ourselves and our training partner QinetiQ. If successful, we will be providing Metrix with 570,000 sq m of accommodation and maintenance and facilities management services for 25 years. Metrix is the only provider shortlisted in both packages. Urban Community Development Kent Thameside In Kent Thameside, our focus continues to move away from an emphasis on strategic planning towards the delivery of development. We completed the sale of our remaining interests in Crossways Business Park to Legal & General generating some Â£17.7m of proceeds and a profit of Â£5.5m. We are working with Countryside Properties on two residential development joint ventures. The first, Waterstone Park, is now approximately 40% complete with some 254 apartments and houses completed and sold out of the 650 new homes approved. The construction of a further 186 apartments and houses is currently underway. The second joint venture, at Springhead, has outline planning permission for 600 new houses and received detailed planning permission for the first phase of 388 new homes in September 2006. Work on delivering the site infrastructure has started with the first sales of the completed new homes due to take place in late 2007. We have now named the adjoining developments at Ebbsfleet and Eastern Quarry, Ebbsfleet Valley. Earlier this year we officially opened our new marketing centre, The Observatory, which has generated a very favourable reaction from our partners, in the Ebbsfleet project, including the local authorities. In relation to our outline planning application at Eastern Quarry, we have made good progress towards resolving the remaining outstanding issues with respect to our planning gain obligations and we continue discussions around solutions to the strategic highways issues. In the meantime, this spring we awarded the earth moving contract for this site and the works to create the new landscape to accommodate development at the eastern end of Eastern Quarry is nearing completion. This summer we submitted our application for the Station Quarter South master plan at Ebbsfleet., where we have a 48.5% interest. This comprises some 250,000 sq m and the proposals include plans for up to 1,300 new homes as well as office accommodation, hotel and retail space. A decision on this is expected towards the end of the year. Stansted Easton Park, our 650-hectare landholding adjoining Stansted Airport, has continued to be actively managed and we are promoting the site as a development opportunity within the East of England Regional Spatial Strategy and the Uttlesford Local Development Framework. Following completion of the option agreement with Aggregate Industries, work is well advanced on the submission of a planning application for the excavation of up to 4.0 million tonnes of sand and gravel reserves which is identified in the Essex Mineral Plan. Cambridge Having completed the commercial element at Coldhams Lane, Cambridge we have decided to sell the residual land and will start marketing this in the period leading up to Christmas 2006. Milton Keynes We have now exercised our options to acquire the land at Magna Park, Milton Keynes, with our joint venture partner Gazeley Limited where, following receipt of planning consent, we have the potential to develop up to 315,000 sq m of accommodation within a sustainable logistics park in two phases. We were delighted to initiate the development with a pre-letting to John Lewis for a new 60,400 sq m automated distribution centre. Business Analysis Further non-statutory information, relating to the Group's Investment Portfolio and Property Outsourcing businesses, is available on the Group's website at www.landsecurities.com. Unaudited consolidated income statement for the six months ended 30 September 2006 Six months ended 30/9/06 Six months ended 30/9/05 Year ended 31/3/06 Before Before Before except- Except- except- Except- except- Except- ional ional ional ional ional ional items items Total items items Total items items Total Notes Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Income: Group and 853.9 - 853.9 1,007.1 - 1,007.1 1,988.2 - 1,988.2 share of joint ventures Less: share of joint 12 (39.5) - (39.5) (122.6) - (122.6) (159.5) - (159.5) ventures income Group revenue 2 814.4 - 814.4 884.5 - 884.5 1,828.7 - 1,828.7 Costs 2 (515.1) - (515.1) (624.8) - (624.8) (1,267.8) - (1,267.8) 299.3 - 299.3 259.7 - 259.7 560.9 - 560.9 Profit on disposal of 2 33.6 - 33.6 16.3 - 16.3 74.5 - 74.5 non-current properties Net surplus on 2 896.7 - 896.7 726.0 - 726.0 1,579.5 - 1,579.5 revaluation of investment properties Goodwill impairment 2,4 - - - - (64.5) (64.5) - (64.5) (64.5) Profit on disposal of 2,4 - - - - 293.0 293.0 - 293.0 293.0 joint venture (Telereal) Operating profit 1,229.6 - 1,229.6 1,002.0 228.5 1,230.5 2,214.9 228.5 2,443.4 Interest expense 3 (114.7) - (114.7) (99.7) - (99.7) (201.8) - (201.8) Interest income 3 4.2 - 4.2 4.5 - 4.5 7.3 - 7.3 1,119.1 - 1,119.1 906.8 228.5 1,135.3 2,020.4 228.5 2,248.9 Share of the profit 12 59.1 - 59.1 37.4 - 37.4 98.6 - 98.6 of joint ventures (post-tax) Distribution received 12 - - - 11.7 - 11.7 11.7 - 11.7 from joint venture (Telereal) Profit before tax 2 1,178.2 - 1,178.2 955.9 228.5 1,184.4 2,130.7 228.5 2,359.2 Income tax expense 5 (318.4) - (318.4) (265.2) (90.0) (355.2) (593.3) (90.0) (683.3) Profit for the 23 859.8 - 859.8 690.7 138.5 829.2 1,537.4 138.5 1,675.9 financial period Basic earnings per 7 183.25p 177.26p 357.95p share* Diluted earnings per 7 182.51p 176.46p 356.50p share* Dividend per share 6 19.00p 18.15p 46.70p *adjusted earnings per share is given in note 7 Unaudited consolidated statement of recognised income and expense for the six months ended 30 September 2006 Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Actuarial (losses) / profits on defined benefit pension schemes (3.5) 5.2 (5.0) Deferred tax on actuarial losses / (profits) on defined benefit 1.0 (1.6) 1.5 pension schemes Fair value movement on cash flow hedges taken to equity - Group 2.6 (5.3) (2.2) Fair value movement on cash flow hedges taken to equity - joint 1.9 (7.3) (2.7) ventures Deferred tax on fair value movement on cash flow hedges taken to equity (0.7) 1.6 0.6 - Group Deferred tax on fair value movement on cash flow hedges taken to equity (0.6) 2.2 0.8 - joint ventures Net gains / (losses) recognised directly in equity 0.7 (5.2) (7.0) Profit for the financial period 859.8 829.2 1,675.9 Total recognised income and expense 860.5 824.0 1,668.9 Unaudited consolidated balance sheet at 30 September 2006 30/9/06 30/9/05 31/3/06 Notes Â£m Â£m Â£m Non-current assets Investment properties 9 12,852.6 10,140.4 11,440.5 Property, plant and equipment Property outsourcing properties 9 573.9 554.9 563.2 Other property, plant and equipment 9 75.4 64.9 73.6 9 13,501.9 10,760.2 12,077.3 Net investment in finance leases 10 247.0 221.5 233.9 Goodwill 11 34.3 34.3 34.3 Investment in joint ventures 12 928.3 697.3 829.5 Total non-current assets 14,711.5 11,713.3 13,175.0 Current assets Trading properties and long-term development contracts 13 156.9 220.2 255.9 Trade and other receivables 14 577.9 409.3 578.9 Cash and cash equivalents 15 25.2 28.2 15.6 Total current assets 760.0 657.7 850.4 Total assets 15,471.5 12,371.0 14,025.4 Current liabilities Short-term borrowings 16 (316.8) (55.4) (46.7) Trade and other payables 17 (630.6) (559.0) (585.0) Current tax liabilities (229.0) (179.9) (212.5) Total current liabilities (1,176.4) (794.3) (844.2) Non-current liabilities Provisions 18 (57.3) (76.8) (58.2) Borrowings 19 (3,809.2) (3,055.0) (3,654.8) Pension benefits 20 (9.5) (4.9) (6.5) Deferred tax liabilities 21 (2,227.4) (1,713.6) (1,967.8) Total non-current liabilities (6,103.4) (4,850.3) (5,687.3) Total liabilities (7,279.8) (5,644.6) (6,531.5) Net assets 8,191.7 6,726.4 7,493.9 Equity Ordinary shares 23 47.0 46.9 46.9 Own shares 23 (18.6) (4.0) (3.4) Share-based payments 23 8.9 4.5 6.3 Share premium 23 47.9 37.9 43.2 Capital redemption reserve 23 30.5 30.5 30.5 Retained earnings 23 8,076.0 6,610.6 7,370.4 Total shareholders' equity 8,191.7 6,726.4 7,493.9 The following financial statements were approved by the Board of Directors on 15 November 2006 and were signed on its behalf by: F W Salway M F Greenslade Directors Cash flow statement for the six months ended 30 September 2006 30/9/06 30/9/05 31/3/06 Notes Â£m Â£m Â£m Net cash generated from operations Cash generated from operations 24 335.3 244.5 591.5 Interest paid (121.4) (92.1) (187.7) Interest received 3.8 4.5 7.3 Funding pension scheme deficit (1.6) (2.6) (4.9) Taxation (corporation tax (paid) / received) (42.0) 7.8 (30.3) Net cash inflow from operations 174.1 162.1 375.9 Cash flows from investing activities Investment property development expenditure (158.2) (88.0) (236.6) Acquisition of investment properties (473.4) (796.3) (1,429.2) Other investment property related expenditure (35.9) (18.4) (78.8) Capital expenditure associated with property outsourcing (24.9) (16.5) (29.7) Capital expenditure on properties (692.4) (919.2) (1,774.3) Disposal of non-current investment properties 319.5 432.6 675.5 Disposal of non-current operating properties 14.7 1.2 4.1 Net expenditure on properties (358.2) (485.4) (1,094.7) Net expenditure on non-property related fixed assets (9.1) (12.1) (26.9) Net cash outflow from capital expenditure (367.3) (497.5) (1,121.6) Receivable finance leases acquired (18.9) (60.6) (84.8) Receipts in respect of receivable finance leases 1.5 1.1 2.3 Net loans made to joint ventures (45.3) (5.3) (72.8) Distributions from joint ventures 6.9 206.9 206.6 Proceeds from disposal of joint venture (Telereal) - 293.0 293.0 Acquisitions of Group undertakings (net of cash acquired) - (321.2) (321.2) Net cash used in investing activities (423.1) (383.6) (1,098.5) Cash flows from financing activities Issue of shares 4.8 6.6 11.9 Purchase of own share capital (35.7) (1.9) (1.9) Increase in debt 424.5 652.1 1,221.2 Debt repaid on acquisition of Tops Estates PLC - (257.9) (257.9) Decrease in finance leases payable (1.2) (0.4) (1.2) Dividend paid to ordinary shareholders (133.8) (153.8) (238.9) Net cash from financing activities 258.6 244.7 733.2 Increase in cash and cash equivalents at end of the period 9.6 23.2 10.6 1. Basis of preparation The interim financial information comprises the consolidated balance sheets as at 30 September 2006, 30 September 2005, and 31 March 2006 and related consolidated statements of income, cash flow, and recognised income and expense and the related notes for periods then ended. The interim financial information contained in this report is unaudited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Annual Report and Accounts for the year ended 31 March 2006, which were prepared under IFRS, as adopted by the European Union, received an unqualified auditors report and did not contain a statement under Section 237 (2) of(3) of the Companies Act 1985 and have been filed with the Registrar of Companies. The unaudited interim financial information has been prepared in accordance with the Listing Rules of the Financial Services Authority. The accounting policies adopted are consistent with those set out in the Annual Report and Accounts for the year ended 31 March 2006, as amended to reflect the adoption of the new standards, amendments to standards, and interpretations described below. There are a number of new Standards, Amendments to Standards and Interpretations which are mandatory for the year ending 31 March 2007. In most cases, these new requirements are not relevant for the Group. This is the case for the Amendments to IAS 39, IAS 21, and IFRS 4, to the new Standard IFRS 6, and to the new Interpretations IFRIC 5 and IFRIC 6. In accordance with the requirements of IFRIC 4 'Determining whether an arrangement contains a lease', the Group has reviewed its sales and purchase arrangements to ascertain whether any of them effectively contain a lease with the Group acting as either lessor or lessee. No changes to the accounting treatments of the Group's sales and purchase arrangements have been necessary. The following new Standards and Interpretations have been issued but are not effective for the year ending 31 March 2007, and have not been early adopted: IFRIC 7, IFRIC 8, IFRIC 9, IFRIC 10 and IFRS 7. Management are currently assessing the impact of these new requirements. 2. Segmental information Six months ended 30/9/06 Six months ended 30/9/05 Other Other London Investment Property London Investment Property Retail Portfolio Portfolio Outsourcing Total Retail Portfolio Portfolio Outsourcing Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Income statements Rental income 139.2 154.0 4.9 - 298.1 118.4 132.8 2.2 - 253.4 Service charge income 24.2 21.8 0.4 - 46.4 20.2 19.5 0.1 - 39.8 Property services income - - - 395.5 395.5 - - - 439.2 439.2 Trading property sale - 12.7 27.6 - 40.3 - 41.7 3.6 - 45.3 proceeds Long-term development - - 29.5 - 29.5 - 52.6 49.1 - 101.7 contract income Finance lease interest 1.7 2.9 - - 4.6 3.0 2.1 - - 5.1 Revenue 165.1 191.4 62.4 395.5 814.4 141.6 248.7 55.0 439.2 884.5 Rents payable (5.6) (2.7) - (88.3) (96.6) (4.6) (2.5) - (91.0) (98.1) Other direct property or (34.3) (31.1) (0.7) (233.9) (300.0) (26.9) (22.4) (0.4) (293.2) (342.9) contract expenditure Indirect property or (17.6) (16.0) (2.4) (6.3) (42.3) (14.4) (11.2) (1.7) (4.0) (31.3) contract expenditure Long-term development - - (20.1) - (20.1) - (42.4) (48.6) - (91.0) contract expenditure Bid costs - - - (1.4) (1.4) - - - (2.8) (2.8) Cost of sales of trading - (10.7) (20.8) - (31.5) - (34.9) (2.7) - (37.6) properties Depreciation (0.8) (2.5) (0.2) (13.8) (17.3) (1.0) (1.5) - (11.3) (13.8) 106.8 128.4 18.2 51.8 305.2 94.7 133.8 1.6 36.9 267.0 Profit on disposal of 4.1 20.9 0.1 8.5 33.6 2.2 14.5 (0.2) (0.2) 16.3 non-current properties Net surplus on 283.9 611.3 1.2 0.3 896.7 312.4 412.7 0.6 0.3 726.0 revaluation of investment properties Goodwill impairment - - - - - (64.5) - - - (64.5) Profit on disposal of - - - - - - - - 293.0 293.0 joint venture (Telereal) Segment result 394.8 760.6 19.5 60.6 1,235.5 344.8 561.0 2.0 330.0 1,237.8 Credit arising from - - change in pension scheme benefits Unallocated expenses (5.9) (7.3) Operating profit 1,229.6 1,230.5 Net financing costs (110.5) (95.2) 1,119.1 1,135.3 Share of the profit of 59.1 37.4 joint ventures (post-tax) Distribution received - 11.7 from joint venture (Telereal) Profit before tax 1,178.2 1,184.4 2. Segmental information continued Included within rents payable for Retail and London Portfolio is finance lease interest payable of Â£1.0m (30 September 2005: Â£0.6m; 31 March 2006: Â£1.8m) and Â£1.6m (30 September 2005: Â£1.5m; 31 March 2006: Â£2.8m) respectively. Of the share of the profit of joint ventures (post-tax) Â£58.2m (30 September 2005: Â£37.4m; 31 March 2006: Â£98.6m) is attributable to Retail and Â£0.9m (30 September 2005: Â£nil; 31 March 2006: Â£nil) is attributable to Other Investment Portfolio. The distribution received from the joint venture (Telereal) for the six months ended 30 September 2005 and year ended 31 March 2006 of Â£11.7m was attributable to Property Outsourcing. Year ended 31/3/06 Other London Investment Property Retail Portfolio Portfolio Outsourcing Total Â£m Â£m Â£m Â£m Â£m Income statement Rental income 255.9 278.5 4.3 - 538.7 Service charge income 38.3 40.0 0.2 - 78.5 Property services income - - - 924.8 924.8 Trading property sale proceeds - 93.8 5.9 - 99.7 Long-term development contract income - 95.7 78.4 - 174.1 Finance lease interest 4.4 6.0 - 2.5 12.9 Revenue 298.6 514.0 88.8 927.3 1,828.7 Rents payable (12.0) (4.1) - (183.9) (200.0) Other direct property or contract expenditure (59.7) (47.9) (0.9) (610.1) (718.6) Indirect property or contract expenditure (32.7) (28.7) (4.8) (8.8) (75.0) Long-term development contract expenditure - (74.7) (77.5) - (152.2) Bid costs - - - (7.4) (7.4) Cost of sales of trading properties - (78.0) (4.2) - (82.2) Depreciation (1.0) (4.1) (0.1) (20.5) (25.7) 193.2 276.5 1.3 96.6 567.6 Profit on disposal of non-current properties 40.1 33.2 0.2 1.0 74.5 Net surplus on revaluation of investment properties 636.9 935.5 5.2 1.9 1,579.5 Goodwill impairment (64.5) - - - (64.5) Profit on disposal of joint venture (Telereal) - - - 293.0 293.0 Segment result 805.7 1,245.2 6.7 392.5 2,450.1 Credit arising from change in pension scheme benefits 8.3 Unallocated expenses (15.0) Operating profit 2,443.4 Net financing costs (194.5) 2,248.9 Share of the profit of joint ventures (post-tax) 98.6 Distribution received from joint venture (Telereal) 11.7 Profit before tax 2,359.2 All the Group's operations are in the UK and are organised into four main business segments against which the Group reports its primary segment information. These are Retail, London Portfolio, Other Investment Portfolio and Property Outsourcing. 3. Net finance costs Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Interest expense Bond and debenture debt (80.8) (72.4) (143.1) Bank borrowings (39.9) (21.1) (56.8) Other interest payable (2.1) (0.6) (1.3) Fair value gains / (losses) on interest rate swaps 4.2 (7.9) (2.2) Amortisation of bond exchange de-recognition (note 19) (8.6) (13.3) (26.6) Bond exchange de-recognition adjustment written - - (1.5) off on redemption of bonds (note 19) Expected return on pension scheme assets 4.4 3.9 7.3 Interest on pension scheme liabilities (3.8) (3.7) (7.2) Net financing income on pension scheme 0.6 0.2 0.1 (126.6) (115.1) (231.4) Interest capitalised in relation to properties under development 11.9 15.4 29.6 Total interest and similar charges payable (114.7) (99.7) (201.8) Interest income Short-term deposits 0.4 0.2 1.0 Other interest receivable 2.0 1.7 1.7 Interest receivable from joint ventures 1.8 2.6 4.6 Total interest receivable 4.2 4.5 7.3 Net finance costs (110.5) (95.2) (194.5) Included within rents payable (note 2) is finance lease interest payable of Â£2.6m (30 September 2005: Â£2.1m; 31 March 2006: Â£4.6m). 4. Exceptional items Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Profit on disposal of joint venture (Telereal) - (293.0) (293.0) Goodwill impairment - 64.5 64.5 On 30 September 2005 the Group sold its interest in the Telereal joint venture for Â£293.0m (net of costs), resulting in an exceptional profit of Â£293.0m, as the book value of the joint venture was Â£nil. The tax charge arising on the disposal was Â£90.0m. Where goodwill arises as a result of recognising deferred tax on a business combination, the goodwill is written off immediately to the income statement. The goodwill impairment arose on the acquisition of Tops Estates PLC on 10 June 2005. Exceptional items are defined in note 1(s) of the 2006 Annual Report. 5. Income tax expense Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Current tax Corporation tax charge for the period 48.5 123.4 181.6 Adjustment in respect of prior years - (0.6) (14.7) Corporation tax in respect of property disposals 10.3 10.3 38.0 Total current tax charge 58.8 133.1 204.9 Deferred tax Origination and reversal of timing differences 15.0 21.9 34.6 Released in respect of property disposals (24.4) (17.5) (30.1) On valuation surplus 269.0 217.7 473.9 Total deferred tax charge 259.6 222.1 478.4 Total income tax charge in the income statement 318.4 355.2 683.3 Income tax expense is recognised based on management's best estimate of the expected tax rate for the full year. However, no account has been taken of any reduction in the full year's rate if the Group was to convert to a REIT. 5. Income tax expense continued Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m The tax for the period is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Profit on activities before taxation 1,178.2 1,184.4 2,359.2 Profit on activities multiplied by rate of corporation tax in the 353.5 355.3 707.8 UK of 30% Effects of: Deferred tax released in respect of property disposals (24.4) (17.5) (34.7) Corporation tax on disposal of non-current assets - 5.9 23.0 Goodwill impairment - 19.3 19.4 Joint venture accounting adjustments (14.3) (8.0) (26.5) Prior year corporation tax adjustments - (0.6) (14.7) Prior year deferred tax adjustments - - 0.8 Non-allowable expenses and non-taxable items 3.6 0.8 8.2 Total income tax expense in the income statement (as above) 318.4 355.2 683.3 The calculation of the Group's tax charge and liability necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until a formal resolution has been reached with the relevant tax authorities. If all such issues are resolved in the Group's favour, provisions established in previous periods of up to Â£225.0m could be released in the future. 6. Dividends Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Ordinary dividends paid Final dividend for the year ended 31 March 2005 (32.85p per share) - 153.8 153.8 Interim dividend for the year ended 31 March 2006 (18.15p per - - 85.1 share) Final dividend for the year ended 31 March 2006 (28.55p per share) 133.8 - - 133.8 153.8 238.9 The Board has proposed an interim dividend of 19.00p per share (interim dividend for the year ended 31 March 2006: 18.15p) which will result in a further distribution of Â£89.1m. It will be paid on 8 January 2007 to shareholders who are on the register of members on 8 December 2006. 7. Earnings per share Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Profit for the financial period 859.8 829.2 1,675.9 Revaluation surplus net of deferred taxation - Group (627.7) (508.3) (1,105.6) (45.9) (25.1) (73.8) - joint ventures Non-current property disposals after current and deferred tax (47.7) (24.6) (66.5) Goodwill impairment on Tops Estates PLC - 64.5 64.5 Deferred tax arising from capital allowances on investment 6.7 4.5 12.2 properties Mark-to-market adjustment on interest rate swaps (net of deferred (4.3) 5.5 1.5 tax) Eliminate effect of bond exchange de-recognition (net of deferred 6.0 9.3 19.7 tax) Eliminate effect of debt restructuring charges (net of taxation) 4.4 - - Deferred tax arising from capitalised interest on investment 3.4 4.4 7.2 properties Credit arising from change in pension scheme benefits (net of - - (5.8) deferred tax) Profit on disposal of joint venture (net of taxation) - (203.0) (203.0) Adjustment to restate the Group's share of Telereal's earnings from - 5.0 5.0 a distribution to an equity basis Adjusted earnings 154.7 161.4 331.3 Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 No. m No. m No. m Weighted average number of ordinary shares 469.5 468.1 468.5 Effect of own shares (0.3) (0.3) (0.3) Weighted average number of ordinary shares after 469.2 467.8 468.2 adjusting for own shares Effect of dilutive share options 1.9 2.1 1.9 Weighted average number of ordinary shares adjusted 471.1 469.9 470.1 for dilutive instruments Six Six months months Year ended ended ended 30/9/06 30/9/05 31/3/06 pence pence pence Basic earnings per share 183.25 177.26 357.95 Diluted earnings per share 182.51 176.46 356.50 Adjusted earnings per share 32.97 34.50 70.76 Adjusted diluted earnings per share 32.84 34.35 70.47 Management have chosen to disclose adjusted earnings per share in order to provide an indication of the Group's underlying business performance. Accordingly, it excludes the effect of all exceptional items, debt restructuring charges, the one-off benefit from the pension scheme changes and other items of a capital nature (excluding trading properties and long-term contract profits) as indicated above. In addition, the deferred tax arising on capital allowances in respect of investment properties has been eliminated as experience has shown that these allowances are not in practice repayable. Deferred tax on capitalised interest is also added back as this is effectively a permanent difference. 8. Net assets per share 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Net assets attributable to equity shareholders 8,191.7 6,726.4 7,493.9 Deferred tax arising on revaluation surpluses - Group 1,829.1 1,332.8 1,580.9 Deferred tax arising on revaluation surpluses - joint ventures 95.3 54.6 75.5 Deferred tax arising on revaluation surpluses - acquired 83.3 83.3 83.3 Cumulative mark-to-market adjustment on interest rate 0.6 11.5 5.4 swaps (net of deferred tax) - Group Cumulative mark-to-market adjustment on in) - joint ventures 0.5 6.4 3.2 Deferred tax arising from capital allowances on investment 119.9 125.8 116.8 properties Deferred tax arising from capitalised interest on investment 31.6 25.6 28.2 properties Reverse bond exchange de-recognition adjustment (net of deferred (369.3) (385.7) (375.3) tax) Adjusted net assets attributable to equity shareholders 9,982.7 7,980.7 9,011.9 30/9/06 30/9/05 31/3/06 No. m No.m No. m Number of ordinary shares 469.9 468.6 469.3 Effect of own shares (1.0) (0.3) (0.3) Number of ordinary shares after adjusting for own shares 468.9 468.3 469.0 Effect of dilutive share options 1.8 2.4 2.1 Number of ordinary shares adjusted for dilutive instruments 470.7 470.7 471.1 30/9/06 30/9/05 31/3/06 pence pence pence Net assets per share 1747 1435 1597 Diluted net assets per share 1740 1428 1590 Adjusted net assets per share 2129 1703 1920 Adjusted diluted net assets per share 2121 1694 1912 Adjusted net assets per share excludes the deferred tax arising on revaluation surpluses, mark-to-market adjustments on financial instruments used for hedging purposes and the bond exchange de-recognition adjustment as management consider that this better represents the expected future cash flows of the Group. In addition, the deferred tax arising on capital allowances in respect of investment properties is excluded as experience has shown that these allowances do not in practice crystallise. Deferred tax on capitalised interest is also added back as this is effectively a permanent difference. The adjusted net assets per share does not take into account management's estimate of the tax on property disposals as referred to in note 21. 9. Non-current assets Property Property investment outsourcing Other Investment properties Operating Other and property, Portfolio Development investment plant and management programme Total properties equipment Total Â£m Â£m Â£m Â£m Â£m Â£m Net book value at 31 March 2005 7,484.5 755.6 8,240.1 546.3 57.9 8,844.3 Properties transferred from portfolio management into the development programme during the year (at 1 April 2005 valuation) (102.4) 102.4 - - - - Developments completed, let and transferred from the development programme into portfolio management during the year 271.6 (271.6) - - - - Property acquisitions 1,414.1 24.7 1,438.8 - - 1,438.8 Acquisitions through business combinations 592.6 - 592.6 - - 592.6 Capital expenditure 78.8 239.3 318.1 29.7 27.4 375.2 Capitalised interest - 24.5 24.5 - - 24.5 Disposals (641.8) (7.8) (649.6) (3.1) (0.5) (653.2) Transfer to trading properties (84.7) - (84.7) - - (84.7) Surrender premiums received (14.0) - (14.0) - - (14.0) Depreciation (2.9) - (2.9) (11.6) (11.2) (25.7) 8,995.8 867.1 9,862.9 561.3 73.6 10,497.8 Surplus on revaluation 1,215.4 362.2 1,577.6 1.9 - 1,579.5 Net book value at 31 March 2006 10,211.2 1,229.3 11,440.5 563.2 73.6 12,077.3 Properties transferred from portfolio management into the development programme during the period (at 1 April 2006 valuation) (6.4) 6.4 - - - - Developments completed, let and transferred from the development programme into portfolio management during the period 32.5 (32.5) - - - - Property acquisitions 461.1 12.3 473.4 - - 473.4 Capital expenditure 35.9 148.8 184.7 24.9 9.1 218.7 Capitalised interest - 10.9 10.9 - - 10.9 Disposals (145.3) (5.3) (150.6) (6.2) - (156.8) Surrender premiums received (1.0) - (1.0) - - (1.0) Depreciation (1.7) - (1.7) (8.3) (7.3) (17.3) 10,586.3 1,369.9 11,956.2 573.6 75.4 12,605.2 Surplus on revaluation 648.8 247.6 896.4 0.3 - 896.7 Net book value at 30 September 2006 11,235.1 1,617.5 12,852.6 573.9 75.4 13,501.9 The following table reconciles the net book value of the investment properties to the market value. The components of the reconciliation are included within their relevant balance sheet headings. Investment properties Portfolio Development management programme Total Â£m Â£m Â£m Net book value at 30 September 2006 11,235.1 1,617.5 12,852.6 Plus: amount included in prepayments in respect of lease incentives 87.5 24.6 112.1 Less: head leases capitalised (note 22) (64.4) (8.4) (72.8) Plus: properties treated as finance leases 178.1 - 178.1 Market value at 30 September 2006 - Group 11,436.3 1,633.7 13,070.0 Market value at 31 March 2005- plus: share of joint 1,369.8 ventures (note 12) Market value at 30 September 2006 - Group and share of joint 14,439.8 ventures Net book value at 30 September 2005 9,244.9 895.5 10,140.4 Plus: amount included in prepayments in respect of lease incentives 62.0 7.6 69.6 Less: head leases capitalised (note 22) (57.3) - (57.3) Plus: properties treated as finance leases 191.9 - 191.9 Market value at 30 September 2005 - Group 9,441.5 903.1 10,344.6 Market value at 31 March 2006 - plus: share of joint 1,149.6 ventures (note 12) Market value at 30 September 2005 - Group and share of joint 11,494.2 ventures Net book value at 31 March 2006 10,211.2 1,229.3 11,440.5 Plus: amount included in prepayments in respect of lease incentives 76.8 4.6 81.4 Less: head leases capitalised (note 22) (66.1) (8.5) (74.6) Plus: properties treated as finance leases 171.7 - 171.7 Market value at 31 March 2006 - Group 10,393.6 1,225.4 11,619.0 Market value at 31 March 200 6 - plus: share of joint ventures 1,273.9 (note 12) Market value at 31 March 2006 - Group and share of joint ventures 12,892.9 10. Net investment in finance leases 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Non-current Finance leases - gross receivables 582.0 576.1 595.6 Unearned finance income (364.4) (387.8) (391.1) Unguaranteed residual value 29.4 33.2 29.4 247.0 221.5 233.9 Current Finance leases - gross receivables 14.7 13.2 14.8 Unearned finance income (10.8) (10.5) (10.6) 3.9 2.7 4.2 Total net investment in finance leases 250.9 224.2 238.1 Gross receivables from finance leases: Not later than one year 14.7 13.2 14.8 Later than one year but not more than five 109.8 70.8 72.5 More than five years 472.2 505.4 523.1 596.7 589.4 610.4 Unearned future finance income (375.2) (398.4) (401.7) Unguaranteed residual value 29.4 33.2 29.4 Net investment in finance leases 250.9 224.2 238.1 The Group has leased out a number of investment properties under finance leases ranging between 15 and 100 years in duration. These are accounted for as finance lease receivables rather than investment properties. The fair value of the Group's finance lease receivables approximates to the carrying amount. 11. Goodwill 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m At beginning of period 34.3 34.3 34.3 Arising on acquisitions during the period - 64.5 64.5 Impaired during the period - (64.5) (64.5) At end of period 34.3 34.3 34.3 Represented by: Gross goodwill recognised 119.2 119.2 119.2 Total accumulated impairment losses (84.9) (84.9) (84.9) 34.3 34.3 34.3 12. Investment in joint ventures Six months ended 30/09/06 and at 30/09/06 Scottish Retail Buchanan Martineau Summary financial Property Metro Galleries Galleries Bullring information of Group's Limited Shopping Limited Parc Limited Limited Bristol share of joint ventures Partnership Fund LP Partnership Tawe Partnership Partnership Alliance Other* Telereal Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Income statement Rental income 10.8 6.5 4.6 0.6 0.8 7.4 1.7 0.3 - 32.7 Service charges income 2.0 1.5 0.8 0.2 0.1 1.1 - - - 5.7 Property services - - - - - - - 1.1 - 1.1 income Trading property sale - - - - - - - - - - proceeds Revenue 12.8 8.0 5.4 0.8 0.9 8.5 1.7 1.4 - 39.5 Rents payable (0.1) - - - - - - - - (0.1) Other direct property (4.2) (2.0) (1.3) (0.2) (0.5) (2.0) (0.1) (1.8) - (12.1) expenditure Indirect property (1.0) (0.1) - - - (0.1) (0.1) (0.4) - (1.7) expenditure Cost of sales of - - - - - - - - - - trading properties Depreciation - - - - - - - - - - 7.5 5.9 4.1 0.6 0.4 6.4 1.5 (0.8) - 25.6 Profit on disposal of - - - - - - - - - - non-current properties Net surplus / (deficit) 10.2 18.4 10.8 0.5 2.5 18.7 4.4 0.2 - 65.7 on revaluation of investment properties Operating profit 17.7 24.3 14.9 1.1 2.9 25.1 5.9 (0.6) - 91.3 Net finance (expense) / (5.8) (4.3) (1.8) - - 0.1 0.1 (0.1) - (11.8) income Profit before tax 11.9 20.0 13.1 1.1 2.9 25.2 6.0 (0.7) - 79.5 Income tax (expense) / (3.1) (6.1) (3.2) (0.2) (0.8) (5.6) (1.3) (0.1) - (20.4) credit Profit after tax 8.8 13.9 9.9 0.9 2.1 19.6 4.7 (0.8) - 59.1 Adjustment due to net - - - - - - - - - - liabilities Share of profits of joint ventures after tax 8.8 13.9 9.9 0.9 2.1 19.6 4.7 (0.8) - 59.1 Distribution received - - from Telereal Balance sheet Investment properties ** 356.0 294.7 184.7 21.9 25.4 314.4 155.6 11.4 - 1,364.1 Current assets 12.8 6.3 4.4 0.3 2.5 11.9 12.2 70.5 - 120.9 368.8 301.0 189.1 22.2 27.9 326.3 167.8 81.9 - 1,485.0 Current liabilities (14.1) (5.7) (2.1) (0.2) (0.6) (5.3) (6.5) (14.1) - (48.6) Non-current liabilities (221.5) (184.3) - - - - (2.4) (0.3) - (408.5) Deferred tax (17.2) (16.0) (6.5) (0.2) (2.1) (49.2) (8.2) (0.2) - (99.6) (252.8) (206.0) (8.6) (0.4) (2.7) (54.5) (17.1) (14.6) - (556.7) Net assets 116.0 95.0 180.5 21.8 25.2 271.8 150.7 67.3 - 928.3 Market value of investment properties ** 349.8 292.9 188.5 21.9 26.6 320.0 158.7 11.4 - 1,369.8 Net investment At 1 April 2006 105.2 81.0 173.0 24.9 23.1 259.3 118.5 44.5 - 829.5 Properties contributed - - - - - - - - - - Cash contributed - 0.8 - - - - - 21.5 - 22.3 Cost of acquisition - - - - - - - - - - Share of post-tax 8.8 13.9 9.9 0.9 2.1 19.6 4.7 (0.8) - 59.1 results Adjustment to restate the Group's share of Telereal's earnings from an equity to a - - - - - - - - - - distribution basis Distributions - - (2.4) (4.0) - - - (0.5) - (6.9) Fair value movement on cash flow hedges taken to equity 2.0 (0.7) - - - - - - - 1.3 Loan advances - - - - - - 29.8 2.6 - 32.4 Loan repayments - - - - - (7.1) (2.3) - - (9.4) At 30 September 2006 116.0 95.0 180.5 21.8 25.2 271.8 150.7 67.3 - 928.3 * Other principally includes the St Davids Limited Partnership, the Ebbsfleet Limited Partnership, the A2 Limited Partnership and Investors in the Community. ** The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as finance leases. Six months ended 30/09/05 and at 30/09/05 Scottish Retail Buchanan Martineau Summary financial Property Metro Galleries Galleries Bullring information of Group's Limited Shopping Limited Parc Limited Limited Bristol share of joint ventures Partnership Fund LP Partnership Tawe Partnership Partnership Alliance Other* Telereal Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Income statement Rental income 9.3 5.1 4.2 - 0.5 6.1 1.9 0.2 - 27.3 Service charges income 3.4 1.0 1.1 - 0.2 3.3 - - - 9.0 Property services - - - - - - - - 80.8 80.8 income Trading property sale - - - - - - - - 5.5 5.5 proceeds Revenue 12.7 6.1 5.3 - 0.7 9.4 1.9 0.2 86.3 122.6 Rents payable (0.1) - - - - - - - (17.1) (17.2) Other direct property (4.5) (1.2) (1.2) - (0.4) (3.2) (0.2) - - (10.7) expenditure Indirect property (0.4) (0.4) (0.1) - (0.1) (0.4) - - (7.6) (9.0) expenditure Cost of sales of - - - - - - - - (1.3) (1.3) trading properties Depreciation - - - - - - - - (7.1) (7.1) 7.7 4.5 4.0 - 0.2 5.8 1.7 0.2 53.2 77.3 Profit on disposal of - - - - - - - 0.2 0.9 1.1 non-current properties Net surplus / (deficit) on revaluation of investment 13.1 7.4 2.5 - (0.4) 13.7 (0.4) (0.1) - 35.8 properties Operating profit 20.8 11.9 6.5 - (0.2) 19.5 1.3 0.3 54.1 114.2 Net finance (expense) / (5.1) (4.0) (2.5) - - - - - (32.9) (44.5) income Profit before tax 15.7 7.9 4.0 - (0.2) 19.5 1.3 0.3 21.2 69.7 Income tax (expense) / (3.9) (2.4) (0.8) - 0.1 (4.2) 0.1 - (4.5) (15.6) credit Profit after tax 11.8 5.5 3.2 - (0.1) 15.3 1.4 0.3 16.7 54.1 Adjustment due to net - - - - - - - - (16.7) (16.7) liabilities Share of profits of joint ventures after tax 11.8 5.5 3.2 - (0.1) 15.3 1.4 0.3 - 37.4 Distribution received 11.7 11.7 from Telereal Balance sheet Investment properties ** 328.2 257.8 161.8 - 22.4 278.3 87.0 23.6 - 1,159.1 Current assets 16.0 10.1 5.2 - 2.6 9.4 7.9 1.5 - 52.7 344.2 267.9 167.0 - 25.0 287.7 94.9 25.1 - 1,211.8 Current liabilities (14.3) (9.9) (3.4) - (0.6) (4.1) (3.0) (4.9) - (40.2) Non-current liabilities (228.5) (187.2) - - - - (2.3) - - (418.0) Deferred tax (10.0) (5.0) 0.2 - (1.3) (38.1) (2.1) - - (56.3) (252.8) (202.1) (3.2) - (1.9) (42.2) (7.4) (4.9) - (514.5) Net assets 91.4 65.8 163.8 - 23.1 245.5 87.5 20.2 - 697.3 Market value of investment properties ** 319.8 256.0 165.7 - 23.4 284.5 89.6 10.6 - 1,149.6 Net investment At 1 April 2005 293.6 39.6 163.5 - 23.5 238.2 82.0 14.5 - 854.9 Properties contributed - - - - - - - - - - Cash contributed - 19.8 - - - - - - - 19.8 Cost of acquisition - - - - - - - 6.7 - 6.7 Share of post-tax 11.8 5.5 3.2 - (0.1) 15.3 1.4 0.3 16.7 54.1 results Adjustment to restate the Group's share of Telereal's earnings from an equity to a - - - - - - - - (5.0) (5.0) distribution basis Distributions (190.1) - (2.9) - (0.9) - - (1.3) (11.7) (206.9) Fair value movement on cash flow hedges taken to equity (4.0) (1.1) - - - - - - - (5.1) Loan advances - 2.0 - - 0.6 - 7.1 - - 9.7 Loan repayments (19.9) - - - - (8.0) (3.0) - - (30.9) At 30 September 2005 91.4 65.8 163.8 - 23.1 245.5 87.5 20.2 - 697.3 * Other principally includes the Martineau Limited Partnership, the Ebbsfleet Limited Partnership and the A2 Limited Partnership. ** The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as finance leases. 12. Investment in joint ventures continued Year ended 31/03/06 and at 31/03/06 Scottish Retail Buchanan Martineau Summary financial Property Metro Galleries Galleries Bullring information of Group's Limited Shopping Limited Parc Limited Limited Bristol share of joint ventures Partnership Fund LP Partnership Tawe Partnership Partnership Alliance Other* Telereal Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Income statement Rental income 20.8 11.8 9.1 0.5 1.3 14.6 3.5 0.5 - 62.1 Service charges income 4.8 2.3 1.5 - 0.4 2.1 - - - 11.1 Property services - - - - - - - - 80.8 80.8 income Trading property sale - - - - - - - - 5.5 5.5 proceeds Revenue 25.6 14.1 10.6 0.5 1.7 16.7 3.5 0.5 86.3 159.5 Rents payable - - - - (0.1) - - - (17.1) (17.2) Other direct property (8.8) (3.2) (2.5) (0.1) (1.2) (4.0) (0.5) - - (20.3) expenditure Indirect property (1.0) (0.6) (0.1) - - (0.3) (0.3) - (7.6) (9.9) expenditure Cost of sales of - - - - - - - - (1.3) (1.3) trading properties Depreciation - - - - - - - (7.1) (7.1) 15.8 10.3 8.0 0.4 0.4 12.4 2.7 0.5 53.2 103.7 (Loss) / profit on - - - - - (0.2) - 0.1 0.9 0.8 disposal of non-current properties Net surplus / (deficit) on revaluation of investment properties 20.7 23.2 14.4 0.1 (0.3) 31.3 15.7 0.4 - 105.5 Operating profit 36.5 33.5 22.4 0.5 0.1 43.5 18.4 1.0 54.1 210.0 Net finance (expense) / (10.8) (9.4) (4.3) - 0.1 0.1 0.3 (0.3) (32.9) (57.2) income Profit before tax 25.7 24.1 18.1 0.5 0.2 43.6 18.7 0.7 21.2 152.8 Income tax (expense) / (6.5) (7.8) (4.3) - 0.1 (9.7) (4.7) (0.1) (4.5) (37.5) credit Profit after tax 19.2 16.3 13.8 0.5 0.3 33.9 14.0 0.6 16.7 115.3 Adjustment due to net - - - - - - - - (16.7) (16.7) liabilities Share of profits of joint ventures after tax 19.2 16.3 13.8 0.5 0.3 33.9 14.0 0.6 - 98.6 Distribution received 11.7 11.7 from Telereal Balance sheet Investment properties ** 345.3 275.9 173.9 21.4 22.8 297.2 120.7 11.2 - 1,268.4 Current assets 12.0 7.8 6.6 3.9 2.0 10.6 16.3 39.0 - 98.2 357.3 283.7 180.5 25.3 24.8 307.8 137.0 50.2 - 1,366.6 Current liabilities (17.7) (8.5) (4.2) (0.4) (0.4) (4.9) (9.2) (5.6) - (50.9) Non-currentliabilities (221.2) (184.0) - - - - (2.4) - - (407.6) Deferred tax (13.2) (10.2) (3.3) - (1.3) (43.6) (6.9) (0.1) - (78.6) (252.1) (202.7) (7.5) (0.4) (1.7) (48.5) (18.5) (5.7) - (537.1) Net assets 105.2 81.0 173.0 24.9 23.1 259.3 118.5 44.5 - 829.5 Market value of investment properties ** 339.2 274.1 177.5 21.4 23.8 303.0 123.7 11.2 - 1,273.9 Net investment At 1 April 2005 293.6 39.6 163.5 - 23.5 238.2 82.0 14.5 - 854.9 Properties contributed - - - - - - - 6.4 - 6.4 Cash contributed - 24.7 - 24.8 - - - 0.8 - 50.3 Cost of acquisition - - - - - - - 26.5 - 26.5 Share of post-tax 19.2 16.3 13.8 0.5 0.3 33.9 14.0 0.6 16.7 115.3 results Adjustment to restate the Group's share of Telereal's earnings from an equity to a - - - - - - - - (5.0) (5.0) distribution basis Distributions (185.9) (1.5) (4.3) (0.4) (1.5) - - (1.3) (11.7) (206.6) Fair value movement on cash flow hedges taken to equity (1.8) (0.1) - - - - - - - (1.9) Loan advances - 2.0 - - 0.8 - 27.5 - - 30.3 Loan repayments (19.9) - - - - (12.8) (5.0) (3.0) - (40.7) At 31 March 2006 105.2 81.0 173.0 24.9 23.1 259.3 118.5 44.5 - 829.5 * Other principally includes the Martineau Limited Partnership, the Ebbsfleet Limited Partnership, the A2 Limited Partnership and Investors in the Community. ** The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as finance leases 13. Trading properties and long-term development contracts 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Trading properties 140.0 132.2 163.5 Amount recoverable under long-term development contracts less 16.9 88.0 92.4 payments on account 156.9 220.2 255.9 The amounts for contracts in progress at the balance sheet date are as follows: Contract revenue recognised as revenue in the period 29.5 101.7 174.1 Contract costs incurred and recognised profits (less recognised 448.1 353.0 414.0 losses) to date Advances received (440.9) (278.7) (339.0) 7.2 74.3 75.0 Plus: gross amount due to customers for contract work (included in 9.7 13.7 17.4 accruals and deferred income) Gross amount due from customers for contract work 16.9 88.0 92.4 14. Trade and other receivables 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Trade receivables - property investment 60.2 35.5 27.1 Trade receivables - property outsourcing 94.4 98.7 107.4 Property sales receivables 6.4 3.2 145.2 Other receivables 93.2 61.6 61.4 Prepayments and accrued income 319.8 207.6 233.6 Finance leases receivable within one year (note 10) 3.9 2.7 4.2 577.9 409.3 578.9 Trade receivables are net of provisions for doubtful debts of Â£17.3m (30 September 2005: Â£9.8m; 31 March 2006: Â£12.6m). 15. Cash and cash equivalents 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Cash at bank and in hand 15.5 20.0 5.1 Short-term deposits 9.7 8.2 10.5 25.2 28.2 15.6 The effective interest rate on short-term deposits was 4.4% (30 September 2005: 4.6%; 31 March 2006: 4.6%) and the deposits have an average maturity of 3 days (30 September 2005: 3 days; 31 March 2006: 2 days). 16. Short-term borrowings and overdrafts 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Borrowings falling due within one year (note 19) 327.2 76.3 59.2 Bond exchange de-recognition adjustment falling due within (12.5) (21.8) (15.6) one year (note 19) Amounts payable under finance leases falling due within one 2.1 0.9 3.1 year (notes 19 and 22) 316.8 55.4 46.7 17. Trade and other payables 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Trade payables 29.8 39.5 42.9 Capital payables 75.8 119.4 85.2 Other payables 68.9 37.1 28.2 Accruals and deferred income 456.1 363.0 428.7 630.6 559.0 585.0 Capital payables represent amounts due under contracts to purchase properties, which were unconditionally exchanged at the period end, and for work completed on investment properties but not paid for at the financial period end. Deferred income principally relates to rents received in advance. 18. Provisions Onerous Dilapidations leases Other Total Â£m Â£m Â£m Â£m At 1 April 2005 22.7 - 19.3 42.0 Charged to income statement for year 1.9 25.0 8.9 35.8 Utilised in year (1.5) (5.2) (12.9) (19.6) At 31 March 2006 23.1 19.8 15.3 58.2 Charged to income statement for period 0.1 0.5 5.9 6.5 Utilised in period (5.0) (2.4) - (7.4) At 30 September 2006 18.2 17.9 21.2 57.3 19. Borrowings 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Unsecured Amounts payable under finance leases (note 22) 72.8 57.3 74.6 Acquisition loan notes 2015 120.7 129.8 122.8 Money market borrowings 135.2 70.4 43.6 328.7 257.5 241.0 Secured 5.016 percent Notes due 2007 181.7 181.6 181.6 4.625 percent Notes due 2013 299.5 - 299.5 5.292 percent Notes due 2015 390.6 392.4 390.6 4.875 percent Notes due 2019 395.5 - 395.4 5.425 percent Notes due 2022 254.4 256.3 254.3 4.875 percent Notes due 2023 296.8 - - 5.391 percent Notes due 2026 209.7 209.6 209.7 5.391 percent Notes due 2027 608.3 610.5 608.2 5.376 percent Notes due 2029 316.2 316.1 316.2 5.396 percent Notes due 2032 320.9 321.3 320.9 Bank facility due 2010 15.4 - 15.4 Syndicated bank debt 800.0 848.2 748.4 DWP term loan 235.0 251.4 248.8 4,324.0 3,387.4 3,989.0 4,652.7 3,644.9 4,230.0 Bond exchange de-recognition adjustment (527.6) (551.0) (536.2) Fair value of interest rate swaps - qualifying hedges 1.7 7.4 4.3 Fair value of interest rate swaps - non-qualifying hedges (0.8) 9.1 3.4 Total borrowings 4,126.0 3,110.4 3,701.5 Less: borrowings falling due within one year (note 16) (327.2) (76.3) (59.2) Plus: bond exchange de-recognition falling due within one year (note 16) 12.5 21.8 15.6 Less: amounts payable under finance leases falling due within one year (2.1) (0.9) (3.1) (notes 16 and 22) Falling due after one year 3,809.2 3,055.0 3,654.8 All borrowings are denominated in Sterling. On 3 November 2004 a debt refinancing was completed resulting in the Group exchanging all of its outstanding bond and debenture debt for new Notes. The new Notes do not meet the IAS 39 requirement to be substantially different from the debt that it replaced. Consequently the book value of the new Notes is reduced to the book value of the original debt ('the bond exchange de-recognition adjustment'). The adjustment will be amortised to zero over the life of the new Notes. The Notes and the committed bank facilities are secured on a fixed and floating pool of assets ('the Security Group'). This grants the Group's investors security over a pool of investment properties valued at Â£10.9bn at 30 September 2006 (30 September 2005: Â£8.8bn; 31 March 2006: Â£9.4bn). The secured debt structure has a tiered covenant regime which gives the Group substantial operational flexibility when the loan to value and interest cover ratio in the Security Group are less than 65% and more than 1.45 times respectively. If these limits are exceeded, operational restrictions increase significantly and could act as an incentive to reduce gearing. The acquisition loan notes were issued by Retail Property Holdings Trust Limited, a subsidiary of the Group, as partial consideration for the purchase of Tops Estates PLC and the LxB portfolio. The notes are unsecured, however they have the benefit of a commercial bank guarantee. Interest is calculated with reference to six month LIBOR. The DWP term loan is a syndicated term loan due to expire in December 2017 and is secured on the freehold and long leasehold properties acquired from the Department of Work and Pensions. The carrying amount of the properties concerned was Â£391.8m at 30 September 2006 (30 September 2005: Â£386.4m; 31 March 2006: Â£388.1m). The Group had interest rate swaps outstanding with a notional principal of Â£805.0m (30 September 2005: Â£390.0m; 31 March 2006: Â£615.0m) which do not qualify for hedge accounting and which terminate over the period 2007 to 2011. The contracts have fixed interest payments at an average rate of 4.9% and have floating interest receipts at LIBOR. In addition, there were interest rate swaps outstanding with a notional principal of Â£243.2m (30 September 2005: Â£235.6m; 31 March 2006: Â£243.2m) which qualify for hedge accounting and which terminate over the period 2009 to 2017. The contracts have fixed interest payments at an average rate of 5.1% and have floating interest receipts at LIBOR. The fair value of interest rate swaps is based on the market price of comparable instruments at the balance sheet date. The fair values of short-term deposits, loans and overdrafts are assumed to approximate to their book values, as are the values of longer-term, floating rate bank loans. The Group's Notes are listed on the Irish Stock Exchange and their fair values are based on their respective market prices. Borrowings Undrawn committed facilities 30/9/06 30/9/05 31/3/06 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Â£m Â£m Â£m The maturity profiles of the Group's borrowings and the expiry periods of its undrawn committed borrowing facilities are: One year or less, or on demand 316.8 55.4 46.7 - - - More than one year but no more than two 14.1 180.5 185.7 - - - years More than two years but no more than five 819.0 861.8 780.8 702.0 1,150.0 1,252.0 years More than five years 2,976.1 2,012.7 2,688.3 - - - 4,126.0 3,110.4 3,701.5 702.0 1,150.0 1,252.0 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m The fair value of the Group's borrowings are: Book value 4,126.0 3,110.4 3,701.5 Fair value 4,782.2 3,808.2 4,426.0 Excess of fair value over book value (656.2) (697.8) (724.5) Of the excess of fair value over book value, Â£527.6m (30 September 2005: Â£551.0m; 31 March 2006: Â£536.2m) is the bond exchange de-recognition adjustment. 20. Pension benefits 30/9/06 30/9/05 31/3/06 Analysis of the movement in the balance sheet deficit Â£m Â£m Â£m At beginning of period 6.5 10.9 10.9 Charge / (credit) to operating profit 1.7 2.0 (4.4) Expected return on plan assets (4.4) (3.9) (7.3) Interest on schemes liabilities 3.8 3.7 7.2 Employer contributions (1.6) (2.6) (4.9) Actuarial losses / (gains) 3.5 (5.2) 5.0 At end of period 9.5 4.9 6.5 21. Deferred taxation Accelerated tax Capitalised Revaluation depreciation interest surplus Other Total Deferred tax liabilities Â£m Â£m Â£m Â£m Â£m At 1 April 2005 (135.6) (28.9) (1,136.9) (158.7) (1,460.1) Net (charge) / credit to income statement for the (20.4) (8.9) (473.9) 8.1 (495.1) year Released in respect of property disposals during 17.8 11.3 10.9 (4.6) 35.4 the year Deferred tax on acquisition of a company (9.7) - (64.3) 0.5 (73.5) At 31 March 2006 (147.9) (26.5) (1,664.2) (154.7) (1,993.3) Net (charge) / credit to income statement for the (9.2) (3.6) (269.0) 3.1 (278.7) period Released in respect of property disposals during 3.6 - 20.8 - 24.4 the period Deferred tax on acquisition of a company - - - (0.3) (0.3) At 30 September 2006 (153.5) (30.1) (1,912.4) (151.9) (2,247.9) Pension Tax losses Hedges deficit Other Total Â£m Â£m Â£m Â£m Â£m Deferred tax assets At 1 April 2005 37.8 1.0 3.3 - 42.1 Net (charge) / credit to income statement for the (20.3) 0.7 (2.8) 9.0 (13.4) year Released in respect of property disposals during (5.3) - - - (5.3) the year Charged to equity - 0.6 1.5 - 2.1 At 31 March 2006 12.2 2.3 2.0 9.0 25.5 Net charge to income statement for the period (3.6) (1.3) (0.4) - (5.3) Released in respect of property disposals during - - - - - the period Charged to equity - (0.7) 1.0 - 0.3 At 30 September 2006 8.6 0.3 2.6 9.0 20.5 30/9/06 30/9/05 31/3/06 Deferred tax is provided as follows: Â£m Â£m Â£m Excess of capital allowances over depreciation - investment properties 119.9 125.8 116.8 Excess of capital allowances over d atio - operating 33.6 26.0 31.1 properties Capitalised interest - investment properties 27.3 21.3 23.9 Capitalised interest - operating and trading properties 2.8 1.0 2.6 Revaluation surpluses - own 1,829.1 1,332.8 1,580.9 Revaluation surpluses - acquired 83.3 83.3 83.3 Tax losses (8.6) (23.1) (12.2) Other differences 140.0 146.5 141.4 Total deferred tax 2,227.4 1,713.6 1,967.8 Tax on capital gains that would become payable by the Group if it were to dispose of all of its investment properties at the amount stated in the balance sheet 1,196.8 773.1 991.2 Potential reduction in tax on contingent capital gains if properties were (25.1) (31.6) (28.3) sold within their owning companies Tax on contingent capital gains assuming no further mitigation 1,171.7 741.5 962.9 It has not been possible to determine the amounts that will crystallise within one year as required by IFRS as it is not possible to determine which properties, if any, will be sold in the next financial period. It is the current intention of the Group to hold investment assets for the long-term and the deferred tax provision has been calculated on this basis. 22. Obligations under finance leases 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m The minimum lease payments under finance leases fall due as follows: Not later than one year 7.0 5.3 7.2 Later than one year but not more than five 27.2 19.5 27.7 More than five years 432.6 454.9 438.4 466.8 479.7 473.3 Future finance charges on finance leases (394.0) (422.4) (398.7) Present value of finance lease liabilities (notes 9 and 19) 72.8 57.3 74.6 The present value of finance lease liabilities is as follows: Not later than one year (notes 16 and 19) 2.1 0.9 3.1 Later than one year but not more than five 8.8 2.8 5.6 More than five years 61.9 53.6 65.9 72.8 57.3 74.6 The fair value of the Group's lease obligations, using a discounting rate of 5.5%, is Â£90.6m (30 September 2005: Â£77.7m; 31 March 2006: Â£92.7m). 23. Total shareholders' equity Ordinary Own Share- Capital based Share redemption Retained shares shares payments premium reserve earnings* Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 April 2005 46.8 (2.1) 3.3 31.4 30.5 5,940.4 6,050.3 Exercise of options 0.1 - - 6.5 - - 6.6 Fair value movement on - - - - - (3.7) (3.7) cash flow hedges - Group Fair value movemes - joint - - - - - (5.1) (5.1) ventures Fair value of share-based - - 1.2 - - - 1.2 payments Own shares acquired - (1.9) - - - - (1.9) Actuarial gains on defined - - - - - 3.6 3.6 benefit pension schemes Dividend paid (note 6) - - - - - (153.8) (153.8) Profit for the financial period - - - - - 829.2 829.2 At 30 September 2005 46.9 (4.0) 4.5 37.9 30.5 6,610.6 6,726.4 Exercise of options - - - 5.3 - - 5.3 Fair value movement on - - - - - 2.1 2.1 cash flow hedges - Group Fair value movement - joint - - - - - 3.2 3.2 ventures Fair value of share-based - - 2.4 - - - 2.4 payments Cost of shares awarded to - 0.6 (0.6) - - - - employees Actuarial losses on defined - - - - - (7.1) (7.1) benefit pension schemes Dividend paid (note 6) - - - - - (85.1) (85.1) Profit for the financial period - - - - - 846.7 846.7 At 31 March 2006 46.9 (3.4) 6.3 43.2 30.5 7,370.4 7,493.9 Exercise of options 0.1 - - 4.7 - - 4.8 Fair value movement - - - - - 1.9 1.9 on cash flow hedges - Group Fair value movement - joint - - - - - 1.3 1.3 ventures Fair value of share-based - - 2.6 - - - 2.6 payments Own shares acquired - (15.2) - - - (21.1) (36.3) Actuarial losses on defined - - - - - (2.5) (2.5) benefit pension schemes Dividend paid (note 6) - - - - - (133.8) (133.8) Profit for the financial period - - - - - 859.8 859.8 At 30 September 2006 47.0 (18.6) 8.9 47.9 30.5 8,076.0 8,191.7 * Included within retained earnings is Â£0.3m (30 September 2005: Â£nil; 31 March 2006: Â£3.5m) of losses in respect of cash flow hedges. Own shares represents the cost of shares purchased in Land Securities Group PLC by the Employee Share Ownership Plan ('ESOP') which is operated by the Group in respect of its commitment to the Deferred Bonus scheme. The number of shares held by the ESOP at 30 September 2006 was 961,057 (30 September 2005: 296,101; 31 March 2006: 292,703). In addition, the Group has acquired shares in Land Securities Group PLC to be held in treasury. 24. Cash flow from operating activities before tax Reconciliation of profit to net cash inflow from operating activities: 30/9/06 30/9/05 31/3/06 Â£m Â£m Â£m Cash generated from operations Profit for the financial period 859.8 829.2 1,675.9 Income tax expense 318.4 355.2 683.3 Profit before tax 1,178.2 1,184.4 2,359.2 Distribution received from joint venture (Telereal) - (11.7) (11.7) Share of the profits of joint ventures (post-tax) (59.1) (37.4) (98.6) 1,119.1 1,135.3 2,248.9 Interest income (4.2) (4.5) (7.3) Interest expense 114.7 99.7 201.8 Operating profit 1,229.6 1,230.5 2,443.4 Adjustments for: Depreciation 17.3 13.8 25.7 Profit on disposal of non-current properties (33.6) (16.3) (74.5) Profit on disposal of joint venture (Telereal) - (293.0) (293.0) Net surplus on revaluation of investment properties (896.7) (726.0) (1,579.5) Goodwill impairment - 64.5 64.5 Pension scheme charge / (credit) 1.7 2.0 (4.4) Changes in working capital: Decrease / (increase) in trading properties and long-term development 100.0 (37.6) (2.1) contracts (Increase) / decrease in receivables (135.7) 45.9 23.0 Increase / (decrease) in payables 52.7 (39.3) (11.6) Net cash generated from operations 335.3 244.5 591.5 Independent review report to Land Securities Group PLC Introduction We have been instructed by the company to review the financial information for the six months ended 30 September 2006 which comprises the consolidated interim balance sheet as at 30 September 2006 and the related consolidated interim statements of income, cash flows and recognised income and expense for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out in Note 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2006. PricewaterhouseCoopers LLP Chartered Accountants London 15 November 2006 Notes: (a) The maintenance and integrity of the Land Securities Group PLC web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. This information is provided by RNS The company news service from the London Stock Exchange

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