17th May 2005 07:01
Land Securities Group Plc17 May 2005 17 May 2005 Land Securities Group PLC ("Land Securities" / "the Group")Preliminary results for the year ended 31 March 2005 Highlights • Adjusted diluted net asset value per share up 9.7% to 1460p (2004:1331p) • Combined portfolio valuation uplift of 10.3% to £9.4bn with strongestgrowth from retail warehouses (+16.6%), shops and shopping centres (+8.6%) andLondon offices (+9.7%) • Excluding the exceptional charge relating to the Group's debtrestructuring, pre-tax profits rose 41.1% to £526.3m (2004: £373.1m); after theexceptional charge of £682.1m, the loss before tax was (£155.8m) • Revenue profits increased by 29.7% to £401.1m (2004: £309.2m) • Adjusted earnings per share, calculated on revenue profits up 43.5% to68.67p (2004: 47.86p); basic loss per share, which included the exceptionalrefinancing charge, was 7.69p. • Final dividend of 32.85p (2004: 27.2p), making a total distributionfor the year of 43.25p, an increase of 16.6%, reflecting the Group's strongresults for the year and the Board's confidence in the future of the business • Major business development achievements including an exchange ofproperties with Slough Estates PLC, launch of the Metro Shopping Fund and aRecommended Offer, made following the year end, for Tops Estates PLC • Sales of assets from the investment portfolio generated profits of£82.4m • Lettings of 101,500 sq m and 43,400 sq m in the London office andretail development programmes respectively and the forward sale of a further46,400 sq m relating to Bankside1 • Three new contracts won by Land Securities Trillium, with asubstantial contribution to Group profits from existing contracts and therelease of £321.5m of capital following the sale of Media Village, White City • Completion of £3.2bn debt restructuring, providing positive benefitsfor Land Securities' equity and debt investors. Commenting on the results, Peter Birch, Chairman of Land Securities, said: "It is with pleasure that I can report an outstanding performance by LandSecurities this year, distinguished by the securing of additional income frommajor new contracts across all areas of our business. "The soundness of our strategy and its successful implementation by our peoplehas ensured the business is now in a position of strength to benefit fromchanging market conditions. We have positioned the retail portfolio toconcentrate primarily on more dominant assets; established a substantial Londonoffice development pipeline and engineered the London portfolio to benefit fromrental growth. We have also created a market-leading position in propertyoutsourcing. As demonstrated by the substantial increase in this year'sdividend, we remain confident in the future." For further information, please contact: Land SecuritiesFrancis Salway/Emma DenneTel: 020 7413 9000 Financial DynamicsStephanie Highett/Dido LaurimoreTel: 020 7831 3113 Preliminary results for the year ended 31 March 2005Financial Highlights 31/03/05 31/03/04 % ChangeGross property incomeProperty investment £811.2m £650.2m +24.8%Property outsourcing £1,054.5m £830.9m +26.9%Total £1,865.7m £1,481.1m +26.0%Operating profit (total) £633.6m £565.8m +12.0%Pre-tax (loss)/profit (£155.8m) £373.1m n/aRevenue profit (pre-tax) 1 £401.1m £309.2m +29.7%Adjusted earnings per share 2 68.67p 47.86p +43.5%(Loss)/earnings per share (7.69p) 61.84p n/aDividends per share 43.25p 37.10p +16.6%Adjusted diluted net assets per share 3 1460p 1331p +9.7%Diluted net assets per share 1414p 1293p +9.4%Combined portfolio valuation 4 £9,388.8 £8,150.2m +10.3%Net borrowings £2,923.1m £2,435.8m +20.0%Equity shareholders' funds £6,636.6m £6,030.1m +10.1%Gearing (net) 5 44.0% 40.5% 1 Excludes results of fixed asset property sales and exceptional items 2 Based on revenue profits. Tax charge adjusted to exclude deferred taxarising from capital allowances and capitalised interest on investmentproperties 3 Excludes deferred tax arising from capital allowances and capitalisedinterest on investment properties and adding back the net liabilities ofTelereal 4 Market value of investment portfolio including our share of the value ofjoint ventures. % change is valuation surplus. 5 Net borrowings (including bank overdraft less short term deposits andcash), at book value, (plus in 2004 non-equity B shares) as a percentage ofequity shareholders' funds Chairman's statement It is with pleasure that I can report an outstanding performance by LandSecurities this year, distinguished by the securing of additional income frommajor new contracts across all our businesses. We are recommending a 20.8%increase in the final dividend to 32.85p making a total for the year of 43.25p,up 16.6% on last year. This is a higher level of growth than usual and reflectsour exceptional performance this year. The Group's continued achievementsdemonstrate the soundness of our strategy and its successful implementation byour people. It has been a busy year across the entire Group. The highlights were: • The focusing of the business on three sectors where we havemarket-leading positions, namely retail, London offices and property outsourcing • The Group's exit from the south-east industrial property marketthrough an exchange of our industrial properties for a retail portfolio fromSlough Estates PLC. The combined value of the properties exchanged was £709m • The implementation of a highly successful £3.2bn debt restructuring,which resulted in an improved AA credit rating, a decrease in our future cost ofdebt and the provision of a long-term, flexible funding structure for thebusiness. The costs associated with this transaction are accounted for as anexceptional charge • The valuation uplift of 10.3% in the combined portfolio (whichincludes our share of the value of properties owned by joint ventures) to £9.4m,demonstrating our continued success at creating value from our retail and Londonportfolios • The rise of 9.7% in adjusted diluted net assets per share to 1460p pershare or of 17.4% to 1562p, if the post-tax exceptional impact of our debtrefinancing is ignored • The growth of adjusted earnings per share by 43.5% reflecting higherrevenue profits of £401.1m (2004: £309.2m). We report a loss per share of7.69p, this is calculated on profits after tax which include the exceptionalrefinancing charge this year . Basic net assets per share were 1419p • The sale of £763.1m of property from the investment portfolio, whichgenerated profits of £82.4m in excess of carrying values, as well as thepurchase of £786.1m of property, thereby continuing the progress we are makingto recycle capital into higher growth activities. This includes the values ofthe property swap with Slough Estates • Three new property outsourcing contracts won by Land SecuritiesTrillium as well as a significant contribution to the Group's profits fromexisting contracts and the receipt of £321.5m as a result of the sale of MediaVillage, White City • The agreement of contracts to occupy 101,500 sq m of offices in ourLondon development programme including lettings at Cardinal Place, SW1, NewStreet Square, EC4, Gresham Street, EC2 and Empress State, SW6 and a further46,400 sq m relating to the forward sale of Bankside1 • The completion of 43,400 sq m of retail development lettings includingthe letting of anchor stores to House of Fraser for the Bristol Alliance and toDebenhams in Exeter • The announcement, since the year end, of a recommended offer toacquire Tops Estates PLC, which owns seven shopping centres, for an enterprisevalue of £517.2m, including the assumption of £207.3m of Tops Estates' debt. Results Before moving on to comment in more detail on the results, I thought it would behelpful to summarise the effect of the debt restructuring that we carried outlast November, full details of which are contained in the Operating andFinancial Review. In essence, we replaced our existing £1.8bn of secured andunsecured bond debt, at an average interest rate of 8.5%, with £2.3bn of newsecured debt, at an average interest rate of 5.35%. This will initially reduceour future cash interest charge by some £25m per annum. As a result, in theyear we have had to account for the one-off increase in the nominal value of thenew debt together with associated costs through the profit and loss account as a£682.1m exceptional charge. While the effect of this accounting treatment isapparent on both the profit and loss account and our net asset value, it is verylargely a non-cash item and we are therefore reporting our numbers on a pre- andpost-exceptional basis. The exceptional nature of this charge is demonstratedby our ability to increase the dividend substantially this year. Pre-tax profits (excluding the exceptional refinancing costs) grew by 41.1% to£526.3m (2004: £373.1m). The exceptional charge, however, results in thisbecoming a pre-tax loss of £155.8m. Revenue profits, our measure of underlyingpre-tax profits, increased by 29.7% to £401.1m from £309.2m mainly as a resultof: • Interest savings of £10.3m over part of the year as a result of thedebt refinancing • A strong performance from Land Securities Trillium, with the extendedDWP contract fully profitable and a strong contribution from Telereal whichincluded a £17.6m (2004: £5.6m) contribution from sales of trading properties • Profits of £11.6m mainly from our contract to develop Bankside1, SE1. Adjusted earnings per share, calculated on pre-tax revenue profits, were 43.5%higher at 68.67p per share (2004: 47.86p per share). The wholly-owned investment portfolio rose in value by 10.7% to £8.8bn, with thecombined portfolio (including our share of joint ventures) showing a 10.3%increase to £9.4bn. The majority of our assets are now split between the retailand London businesses at 56.9% and 38.9% respectively (combined portfolio).Adjusted diluted net assets per share rose by 9.7% to 1460p per share or by17.4% to 1562p, if the post-tax exceptional impact of our debt refinancing isignored. As mentioned earlier, in recognition of the outstanding results this year andour confidence in the future of the business, we are recommending a finaldividend of 32.85p per share (2004: 27.2p), making a total distribution for theyear of 43.25p (2004: 37.1p), a 16.6% increase on 2004. Following this one-offincrease, we will revert to our historic pattern of steady dividend growth fromthis new base. At the Interim Results, we stated our intention to distributemore equally our dividend payments. In future we will aim to pay around 40% asan interim dividend payment with the balance making up the final dividend.Subject to approval by shareholders at the Annual General Meeting ("AGM") to beheld on 12 July 2005, the dividend will be paid on 25 July 2005 to shareholderson the register on 24 June 2005. The dividends paid and proposed are covered1.6 times by adjusted earnings (2004: 1.3 times). Real Estate Investment Trusts and Lease Reform The Government has stated that, subject to agreeing the outstanding issues onReal Estate Investments Trusts ("REITs") as detailed in its most recentconsultation document, it would seek to introduce the relevant legislation withthe 2006 Finance Bill. The structure now proposed appears to be more flexiblebut we will have to wait for full details of legislation, including theGovernment's proposed conversion charge, before we can assess whether conversionwill be in the best interests of shareholders. We were pleased that, for the time being, the Government has decided not tointroduce legislation to prohibit upward only rent reviews in lease contracts.We believe that the industry has made great strides to introduce a range of moreflexible leasing options and we continue to work with the British PropertyFederation ("BPF") and major landlords to ensure that we deliver a satisfactorysolution for our customers and the industry. To this end we have recentlybecome a signatory to the BPF declaration on sub-letting, which we believe is astep towards creating a more flexible sub-letting environment for tenants. Acquisition of Tops Estates PLC On 6 May 2005, we announced that we had reached agreement with the Board of TopsEstates PLC in respect to the terms of recommended offers for the ordinaryshares in and convertible unsecured loan stock of Tops Estates. The offersrepresent an enterprise value for Tops Estates of approximately £517.2m,including net debt at 30 September 2004 of approximately £207.3m. Sinceannouncing the offer, we had purchased, by 4.30pm on Friday 13 May, 29.8% of theshares and 46.7% of the convertible unsecured loan stock in the market which,when combined with the irrevocable undertakings made by Tops Estates management,represent nearly 72.9% of the fully-diluted share capital of the company. Tops Estates is a specialist investor in town and city centre shopping centresand its property portfolio comprises shopping centres with a total gross area ofapproximately 230,000 sq m in seven locations: Corby (Town Centre and OasisRetail Park), Harrogate (Victoria Shopping Centre), Leeds (Shopping Plaza andCity Exchange Offices), Liverpool (Clayton Square Shopping Centre), London (West12 Shopping and Leisure Centre at Shepherds Bush), Stafford (Guildhall ShoppingCentre and Gaolgate Place Shopping Centre) and Worcester (Cathedral Plaza). Thisportfolio was independently valued as at 31 March 2005 at £566.7m, based oncurrent annual net rental income of £30.4m and current estimated annual netrental value of £40.7m. The acquisition of Tops Estates will strengthen further Land Securities'position in the retail sector and the shopping centres being acquired offer LandSecurities' management and development opportunities to create value. Inparticular, the Clayton Square Shopping Centre consolidates Land Securities'position in Liverpool; Tops Estates' sites in Corby provide a longer-termdevelopment opportunity; and the properties in Leeds provide Land Securitieswith an entry into one of the top 10 city centre retail markets in the UK. LandSecurities will also continue to deliver the asset management programmes alreadyinitiated in Stafford, Harrogate, Worcester and Shepherd's Bush. Board and senior management changes As reported at the half year Francis Salway, who joined the company in 2000,assumed the role of Group Chief Executive at the Annual General Meeting on 14July 2004, succeeding Ian Henderson who retired on that date. We would like toreiterate again our thanks to Ian for his outstanding contribution over the past30 years. Mark Collins, previously Chief Executive Portfolio Management, was appointedChief Operating Officer and now has responsibility for Group businessdevelopment, Urban Community Development (including projects such as KentThameside) and investment portfolio services encompassing property management,project management and legal services. Mike Hussey assumed the position of Managing Director, London Portfolio and wasappointed to the Board in September. Richard Akers was promoted to the role ofManaging Director, Retail and we are pleased to announce today his appointmentto the Board. During the year we were pleased to appoint Bo Lerenius, GroupChief Executive of Associated British Ports Holdings PLC, and Alison Carnwath tothe Board as non-executive directors. Our people The Group has changed substantially over the last few years. We have continuedto implement our new strategy and been careful to ensure we have the skills andresources needed to sustain our success. I would like to offer my thanks andappreciation for the hard work and commitment shown by everyone in the Groupover the last year. Their achievements speak for themselves. Outlook Sustained demand from investors for commercial property continues to establishit as a mainstream asset class. This position may be further enhanced by theintroduction of REITs which, by removing tax inequalities, may bolster theattractiveness of quoted real estate and other indirect investment vehicles.Over the year investor demand has driven property yields down further, which hasincreased capital values. However, we believe that this trend has now largelyrun its course with the result that future growth in asset value will be moredependent on rental growth and success in securing lettings. In thisenvironment of lower yields, we believe that our development and assetmanagement skills, together with our ability to grow our outsourcing business,will be key to the creation of attractive returns for our shareholders. The London office market is showing evidence of a recovery as occupier demandimproves, particularly in the West End. While the operating environment forretailers is more challenging, we believe the retail property market should beresilient for as long as unemployment levels remain low and earnings remainstable. The property outsourcing market continues to expand as occupiersrecognise its core attractions of price certainty, risk transfer and customerservice. Against this market background, we have moved the business into a position ofstrength from which it will benefit from these conditions. We have positionedthe retail portfolio to concentrate primarily on more dominant assets;established a substantial London office development pipeline and engineered theLondon portfolio to benefit from rental growth. We have also created amarket-leading position in property outsourcing. As demonstrated by thesubstantial increase in this year's dividend, we remain confident in the future. Peter BirchChairmanLand Securities Group PLC17 May 2005 Operating and Financial Review Introduction Land Securities has had an excellent 12 months, performing well in all areas ofthe business. Across the company there is a sense of real achievement as wedeliver a very strong performance from our investment portfolio, build and letour development programme and grow our property outsourcing business. We haverestructured the business to focus on our market-leading positions in retail,London and property outsourcing and improved the debt structure for the Group. At the same time the commercial property industry as a whole is undergoing arenaissance as Government, investors and the wider public increasingly recognisethe role our industry plays in the economic success of the country. Astructural shift in the investment property market, upon which we commented lastyear, has come a step closer. We were very pleased with the positive responsefrom Government in respect to the introduction of REITs as outlined in the lastBudget statement. The Group has benefited from a strong investment market, improving centralLondon occupier demand, increasing demand for property outsourcing and from ourfocus on driving returns from our investment portfolio. This has resulted in areturn on capital of 17.3% (2004: 11.5%), more than 9% higher than our cost ofcapital. Return on equity was 11.3% (2004: 13.4%) which improves to 21.3%, ifthe exceptional charge relating to the debt restructuring is excluded. Competitive environment and business planning Land Securities operates in the UK primarily within the commercial propertymarkets. Our activities include investment, development and the provision ofcommercial property accommodation and associated services. The market isdiversified and, as illustrated in Table A, ownership is fragmented: Table A UK Core Commercial Property Markets £bn £bn % % UK institutions 73 14.9Overseas investors 37 7.6UK listed property companies Land Securities 8.2 1.7 Other 27.8 5.7 ------- ------Total listed property companies 36 7.4UK unlisted property companies 37 7.6Unlisted and pooled funds 20 4.1Limited partnerships 18 3.7Traditional estates and charities 13 2.6UK private investors 8 1.6Other investors 12 2.4 ------- -------Total investment property 254 51.9 ------- -------Owner occupiers (excluding Government) 235 48.1 ------- -------Total UK Commercial Property (excluding Government) 489 100 ------- ------- Source: "IPF The size of the UK Commercial Property Market", values at end2003, (for all figures except Land Securities' data) and Land Securities' yearend 2004 valuation. In a fragmented market we need to be able to exploit our competitive advantagesof financial strength, scale, specialist market expertise and our relationshipswith occupiers in order to maximise shareholders returns. We have now focusedour activities almost entirely on three core markets where we have amarket-leading position and where the strength of our relationships withcustomers will help drive outperformance. Our financial strength enables us totransact quickly and efficiently. Together the value of retail and London office investment property markets issome £187bn, and represents some 74% of the total UK commercial market, of thisLand Securities' ownership is 4.8%. As compared to Continental Europe and theUnited States, the UK commercial property market is characterised by supply sideconstraints caused by a more stringent planning regime and greenbeltrestrictions around our major conurbations controlling land supply. Our share of the retail and central London investment markets is summarised inTable B. Table B Total UK Land Securities £bn £bn Retail Standard shops outside London 21 0.4 Central London shops 9 0.9 Shopping centres 53 2.5 Retail warehouses 35 1.5 All other retail 7 - ------- -------Total retail 125 5.3 ------- -------Office Central London 63 3.6 All other UK 25 0.1 Office parks 11 - ------- -------Total offices 99 3.7 ------- -------Standard Industrial 30 0.1Other* 0.3 ------- -------Total 254 9.4 ------- ------- Source: "IPF: The size of the UK Commercial Property Market", values at end2003, (for all figures except Land Securities' data) and Land Securities' yearend 2005 valuation. We benefit from low asset concentration risk with our largest propertyrepresenting less than 3.5% of the value of the combined portfolio and anaverage investment property lot size of £48.4m. Investment property has performed very well over the past few years, driven byinvestor recognition of its good returns compared to other asset classes. Themacro-economic background which drives the performance of the commercialproperty investment market remains unchanged. Interest, inflation andemployment rates have remained stable during the year. This has resulted in acompetitive investment market and the yield shift which was evident in 2003/04continued throughout 2004/05. While this has been of advantage to us, with improved property values and aprofitable sales programme, it has made it more challenging to acquire assetswhich fulfil our return criteria. As a result we have allocated more of ourcapital to development and property outsourcing activities and sought to acquireincome-producing investment properties with stock-specific attributes that wecan exploit through our market expertise. We do not believe that yields, as a whole, will strengthen much further now thatthe margin of property yields over the cost of debt and gilt yields hasnarrowed. We would not however rule out further yield compression for well-letinvestment property, if interest rates fell. However, in an environment of lowproperty yields, outperformance will increasingly be determined by leasingcapabilities, asset management and development skills as well as exposure to newgrowing property markets. The bulk of our development programme comprises complex schemes in town and citycentres across the UK and we continue to exploit opportunities within ourexisting portfolio. We benefit here from our expertise and our reputation fordelivery which, we believe, few companies can match in the UK. Property outsourcing has emerged as a new market in the UK and we have developeda market-leading product and reputation. Property outsourcing provides us withaccess to the wider pool of commercial property held by owner-occupiers. At thesame time it provides clients with an integrated property solution whichcombines property accommodation with associated property services. At presentthere are less than half a dozen companies offering a property outsourcingsolution similar to that provided by us, since the need to create a nationalinfrastructure to support the delivery of a major property outsourcing contractcreates a high barrier to entry. However, competition exists in a number ofdisaggregated forms, examples of which are sale and leaseback transactions withseparate facilities management contracts. The estimated total value of theproperty outsourcing market is approximately £511bn, of which we believe theaddressable market is some £110bn. We estimate that our current share of thisaddressable market, including Telereal, is around 3%. In the London office market, the downturn in the occupational market between2001 to 2003 can be predominantly attributed to employment factors. Similarly,its gradual recovery is being driven primarily by a resumption of employmentgrowth allied to a moderating of the amount of new developments startingon-site. The London office markets have also benefited from some older, surplusoffice buildings being converted to alternative uses. We expect these trends tocontinue, resulting in progressive rental growth for the London office marketover the medium term, but with the recovery lagging in the City owing to highercurrent vacancy rates. Retail property markets in the UK benefit from a highly restrictive planningregime which constricts supply, while demand for accommodation from retailershas been driven in recent years by their desire to operate out of more efficientunits, generally larger in size and of regular shape. These drivers of demandwill continue, although the slowing of consumer expenditure will moderate levelsof demand from retailers to a degree. However, so long as disposable incomesremain stable and unemployment is low, we expect the retail property market tobe resilient. The occupational demand for property is driven by the health of the economy andan organisation's desire either to grow or contract its operations and wecollaborate with our occupiers to ensure that we can assist with theirrequirements. We have more than 2,000 occupiers and this diverse base protectsus since no single occupier provides more than 2.9% of the Group's gross rentalincome, with the exception of the Government which now accounts for some 9.2%.We have, therefore, examined the Government's efficiency review proposalscarefully and since then have worked closely with certain departments on theirplans. We believe that the review may create further opportunities for ourproperty outsourcing business. In order to execute our strategy and ensure we achieve our aim of deliveringattractive, sustainable returns for shareholders in what can be cyclicalmarkets, we conduct a rigorous business planning process. We have in place afive-year business plan and balanced scorecards both for the Group andindividual business units which are reviewed and updated every six months.These reviews measure operating as well as financial performance and allow us torefine our plans against the prevailing operating environment, ensuring anallocation of capital which responds to our view of market conditions andopportunities. Financing strategy and debt restructuring Before commenting in greater detail on the financial results, we report on ourfinancial strategy and debt restructuring since this is relevant to anunderstanding of the results. Our financial strategy is to maintain an appropriate net debt to equity ratio(gearing) to ensure that good asset-level performance is translated into goodreturns for shareholders. We manage our gearing according to our perception ofmarket cycles, investment opportunities and so as to maintain an efficientcapital structure. Given our view of the prospects for capital growth in ourcore markets, it is our intention to increase gearing for at least the next yearas we invest in our development programme, Land Securities Trillium and continueto seek attractive investment properties to add to our portfolio. Our proposedacquisition of Tops Estates will, for example, add some £550m of investmentproperties and debt to our balance sheet. As well as having the right level of debt in the business we also need to ensurethat we have flexible debt that can support our business strategy. We,therefore, put in place a new debt structure for the Group in November 2004following approval from our bond and debenture holders. As a result of thetransaction we issued £2.3bn of new bond debt at an average rate of 5.35% andmade a £77.2m balancing cash payment to bond holders who were unable to hold thenew bonds. We implemented this alternative approach to financing the business to improveour operational and financial flexibility and to enhance the position of ournoteholders by utilising the credit strength inherent in our investmentportfolio. The structure created a security pool ("the secured group") which grants ourdebt investors security over £7.4bn of investment properties at 31 March 2005,representing about 85% of the investment portfolio (excluding joint ventures).About £2.5bn of the Group's property assets, mainly comprising Land SecuritiesTrillium properties, our joint venture holdings and certain other assets, areoutside the secured group. As a result of this structure we have theflexibility to finance these assets separately without impacting upon the creditrating of the debt issued by the secured group. The new debt structure provides significant future flexibility which ensures ourability to buy and sell assets easily and to maintain our development programme.The secured debt structure has a tiered covenant regime that gives the Groupflexibility to run its business, while increasing the protection available todebt holders if gearing rises materially. While loan to value and interestcover in the secured group are less than 65% and more than 1.45 timesrespectively, we retain substantial operational flexibility. If these limitsare exceeded, operational restrictions increase and would act as an incentive toreduce gearing. Our loan to value ratio at the year end in the secured groupwas 35.4%. In addition to issuing £2.3bn of new notes, a further £77.2m was paid in cash todebt investors who could not accept the new bonds. The total nominal value ofthe Group's bond debt has increased by £0.5bn as a result of this transaction.This compensated debt investors for the reduction in the rate of interestpayable on the bonds, which fell from an average of 8.5% to 5.35% on exchange.The increase in the face value of the Group's debt, together with the additionalcash payments to non-eligible holders and the costs of the transaction, hasresulted in a significant £682.1m exceptional accounting charge incurred duringthe second half of the year, including £42.0m of costs incurred to close out ourinterest rate hedge portfolio (see Hedging below). A further £12.5m oftransaction costs will be deferred and amortised over the life of the underlyingdebt. With the exception of transaction costs and incentive payments to noteholders,the exceptional charge is not a 2004/05 cash outflow and has had no impact onthe dividend policy. Most of this exceptional loss is fully allowable for tax. A £25m annual initialreduction in interest payments on bond debt and immediate savings in tax morethan offset the cost of the transaction and the net present value of the higheramounts payable on the ultimate maturity of the bonds. Although reported as anexceptional loss, the transaction is value creative and earnings enhancing. Inaddition, the Group now has lower future cost of financing on new debt raised. Table C summarises the accounting implications of the transaction. Bond Exceptional Exceptional debt costs interestTable C £m £m £m Year ended 31/03/04 1,800.0 - -Payments to holders unable to accept new bonds 77.2Net costs of redeeming the private debentures due in 2008 and 2008/13 - - 1.8Incentive payments - - 27.5Net increase in nominal value of debt (being £575.5m less payment to ineligible bondholders) 498.3 - 498.3Transactions costs and commitment fees - 14.8 9.8FRS4 costs on old debt, now written off - - 10.7 ------------ -------------- -------------- 2,298.3 14.8 625.3Cost of cancellation of interest rates swaps - - 42.0 ------------ -------------- --------------Exceptional costs of refinancing - 14.8 667.3 ------------ -------------- -------------- As part of the debt restructuring, we also renewed our bank facilities. At 31March 2004, the Group had £1.55bn of committed bank facilities which would haveexpired in the normal course in 2005 and 2006. We have replaced thesefacilities with a new £2.0bn committed five-year facility which is available tothe secured group. Earnings As a result of the factors explained in Financing Strategy and DebtRestructuring, the Group incurred a loss of £155.8m before tax for the year to31 March 2005 (2004: profit £373.1m). Excluding the refinancing charge, profitsbefore tax were £526.3m, a 41.1% increase on 2004. Revenue profits, which weuse as the measure of the underlying profitability of the Group, were £401.1m,29.7% higher than last year. The principal causes of the changes in profits are detailed in Table D. (Loss) / profit Revenue before tax profit*Table D £m £m Year ended 31/03/04 373.1 309.2Debt restructuring exceptional loss (A) (682.1) -Debt restructuring interest saving (B) 10.3 10.3Profit on disposal of fixed assets (C) 61.3 -DWP outsourcing contract (D) 36.1 36.1Telereal outsourcing joint venture (E) 32.7 32.7Bankside1 / Pacific Quay construction profits (F) 11.6 11.6Reduction in capitalised interest (G) (15.4) (15.4)Other factors (H) 16.6 16.6 ---------- ----------Year ended 31/03/05 (155.8) 401.1 ====== ====== *Revenue profits are pre-tax profits adjusted to exclude the impact ofexceptional items and profits on the disposal of fixed assets. (A) Exceptional costs of the debt restructuring include the increase inthe nominal value of the old debt, the costs of closing out the interest rateswap portfolio and associated fees and costs. (B) Reduction in interest charges as a result of the debtrestructuring in November 2004. (C) The unusually high level of profits on disposal reflects the assetswap with Slough Estates and the sales of Bowater House and Media Village, WhiteCity. (D) The Employment Services extension to the DWP contract wasoperational from November 2003 and significant start-up losses were incurred in2003/04. The contract is now profitable, generating a significant turn aroundin the DWP contract profits, year-on-year. (E) Telereal has had a very good year reducing costs and interestexpense while also producing significant profits from the sale of tradingproperties. (F) Primarily first recognition of profits from the constructioncontract to build Bankside1 for IPC. (G) Capitalised interest is lower than in 2003/04 because we completedwork at 30 Gresham Street, White City Phase II and Empress State Building. (H) Other factors, including rental growth, new outsourcing contracts,etc. Net assets At the year end, adjusted diluted net assets per share were 1460p, up 9.7% onlast year. However, this figure has been reduced by 102p due to the exceptionalcost of our debt financing. Before exceptional costs, therefore, our underlyingadjusted NAV grew by 17.8%, driven by a valuation surplus of £871.5m, equivalentto 10.3% of our opening combined portfolio value. The increase in net assets isanalysed in Table E. Year ended Year ended 31/03/05 31/03/04Table E £m £m Net assets at beginning of year 6,038.5 5,563.1(Loss)* / profit after tax (35.8) 288.3Dividends (202.5) (173.2)Valuation increase - Group 842.2 400.7 - Share of joint ventures 29.3 6.2Other (35.1) (46.6) ----------- -----------Increase in net assets 598.1 475.4 ----------- -----------Net assets at end of year 6,636.6 6,038.5 ====== ====== *Includes effect of debt restructuring in the year to 31/03/05 Cash flow and net debt We continue to recycle our capital to maximise returns and, during the year, wereceived cash totalling £734.1m from property disposals (including the disposalof White City), a £65.4m distribution from Telereal and £146.3m from the MetroShopping Fund. The Group reinvested £640.7m into property acquisitions anddevelopment and a further £122.5m into its property outsourcing activities. At 31 March 2005, the Group's net debt was £2,923.1m (2004: £2,435.8m) and theincrease in net debt of £487.3m during the year is explained in Table F. Table F Year ended Year ended 31/03/05 31/03/04 £m £m Net cash inflow from operating activitiesafter interest and tax 122.6 193.2Net capital expenditure (48.4) (48.8)Cash inflow from Telereal 65.4 179.6Net cash inflow from joint ventures 43.4 -Payment of dividends (175.5) (167.5)Purchase of B shares (8.4) (22.0)Increase in nominal value of debt on refinancing (498.3) -Other items 11.9 19.0 ----------- ----------- (487.3) 153.5Opening net debt (2,435.8) (2,589.3) -------------- ---------------Closing net debt (2,923.1) (2,435.8) ======= ======== Although we have continued to invest in the business over the year, gearing hasonly increased slightly. This reflects the sale of two significant assets(Bowater House and Media Village, White City) immediately before the year endand the increase in net assets caused by our strong valuation uplift. Detailsof the Group's gearing are set out in table G which includes pro-formainformation if our notional debt in joint ventures is taken into consideration.The information is pro-forma because lenders to our joint ventures have norecourse to the Group's balance sheet for repayment of the debt. Table G At 31/03/05 At 31/03/04 Gearing - on balance sheet debt 44.0% 40.5%Gearing - as above plus debt in investment property joint ventures 45.4% 40.5%Gearing - as above plus all debt in joint ventures 61.2% 58.2% ----------- ----------- Hedging Land Securities has used interest rate swaps for many years to manage itsinterest rate exposure. Over time we accumulated a portfolio of long-datedswaps, some extending up to 25 years, which had the effect of fixing theinterest rate on substantially all of the Group's debt. As part of our reviewof the Group's financing arrangements we also revisited the appropriateness ofthis hedging strategy. We concluded that with property and interest rate cyclestypically of four to seven years duration it would usually be unnecessary tohedge beyond this timeframe. We have set a target for the Group to haveapproximately 80% of planned debt for this period at fixed rates of interest and20% floating, although we may choose to fix a higher percentage of this debt,depending upon our view of short-term (ie one to two year) interest rates. Were-arranged our hedge portfolio in March 2005, crystallising a £42.0m loss whichhas been treated as an exceptional interest charge. New hedges are being put inplace at lower average fixed rates than the previous portfolio. Taxation As a result of this year's exceptional loss there will be no corporation taxpayable for the year. Losses of £126.0m not relieved at 31 March 2005 arebeing carried forward for relief in future years. The Group's effective taxrate was a credit of 77% of pre-tax losses compared with a charge of 22.7% lastyear. The effective tax rate on ordinary activities was lower than the standardrate of 30% primarily as a result of the release of certain prior yearprovisions no longer required. Effective tax rate Ordinary Exceptional TotalProfit / (loss) before tax £401.1m (£556.9m) (£155.8m)Tax (charge) / credit (£95.0m) £215.0m £120.0mEffective tax rate 23.7% (38.6%) (77.0%) ------------ ------------ ------------ International Financial Reporting Standards International Financial Reporting Standards (IFRS) will first apply to the LandSecurities Group for the year to 31 March 2006 and will be adopted when wereport our interim results for the period to 30 September 2005. We are welladvanced with our preparations for IFRS and in late June we will re-present anextract of the results for the year to 31 March 2005 under IFRS, withreconciliations to current GAAP. The main effects of IFRS for Land Securities will be: • Recognition of investment property revaluation surpluses and deficitsin the income statement and the associated deferred tax liability in the taxcharge and balance sheet • A change in the accounting treatment for the debt restructuring, whichwill result in the reinstatement of the nominal value of our old debt on thebalance sheet and the amortisation up to the new, higher redemption amounts ofthe new debt over the life of the bonds. The amortisation charge will betreated as additional (non-cash) interest in the profit and loss account. Theeffect will be to under-report the Group's actual liabilities on the face of thebalance sheet. The interest charge in the income statement will significantlyexceed the actual cash interest that we will pay • Our interest rate hedge portfolio may not meet the strict requirementsfor hedge accounting under IFRS39. Therefore we may be required to revaluecertain hedges each time we report and account for the cost or profit that wouldarise were the hedges to be terminated • The potential that a small number of leases will need to be classifiedas finance leases and accounted for as such • Dividends will be recognised effectively when paid, rather than whenproposed. We held a presentation on IFRS in February 2005, which is available on ourwebsite www.landsecurities.com/investorrelations. The June 2005 presentationwill also be available on our website as soon as it has taken place. We will bemodifying our usual definitions of adjusted earnings per share and net assetvalue per share to deal with some of the distortions introduced by IFRS. Pension schemes The Group operates a number of defined benefit pension schemes. These schemesare closed to new members. At 31 March 2005 the schemes had a combined deficiton a FRS17 basis of £7.6m (2004: £12.0m). During the year the Group made afurther special contribution of £10.0m to its principal defined benefit pensionscheme and is maintaining an enhanced contribution rate to address the smalldeficit. Investment property business Valuation We were very pleased with performance this year. The combined portfolio, whichincludes our share of joint ventures, showed a 10.3% increase in value to £9.4bnwhile the wholly-owned investment portfolio showed a 10.7% increase in value to£8.8bn. On a like-for-like basis the increase was 9.5%. Rental Rental Income Income Open Open Year Year Market Market to to Value Value Valuation 31/03/05 31/03/04 % 31/03/05 31/03/04 Surplus £m £m Change £m £m %Retail Shops & shopping centres 91.9 90.9 1.1 1,478.9 1,343.1 9.9 Retail warehouses 61.2 58.1 5.3 1,361.9 1,154.4 16.6 London retail 39.9 38.8 2.8 676.0 625.5 8.0London offices 169.0 175.7 (3.8) 2,311.5 2,189.1 5.8Industrial 4.6 4.9 (6.1) 83.0 72.4 13.5Other 8.6 8.7 (1.1) 126.5 115.6 8.9 ---------- ---------- ---------- ---------- ---------- ----------Like-for-like investment portfolio (1) 375.2 377.1 (0.5) 6,037.8 5,500.1 9.5 Completed developments 34.8 19.5 - 974.3 777.2 24.6Purchases 34.1 8.6 - 904.2 221.7 4.3Sales, restructured interests and trading properties 34.3 92.5 - - 880.6 -Development (2) 14.2 16.8 - 857.2 527.1 12.3 ---------- ---------- ---------- ---------- ---------- ----------Investment portfolio 492.6 514.5 - 8,773.5 7,906.7 10.7Joint ventures 25.9 0.6 - 615.3 243.5 5.0 ---------- ---------- ---------- ---------- ---------- ----------Combined portfolio 518.5 515.1 0.7 9,388.8 8,150.2 10.3 ====== ====== ====== ====== ====== ====== (1) Properties that have been in the investment portfolio for the whole ofthe current and previous financial year (2) Development programme including Kent Thameside. The development programmecomprises projects which are completed but less than 95% let, developments onsite, committed developments (approved projects with the building contract let);and authorised developments (projects approved by the Board, but for which thebuilding contract has not yet been let). The like-for-like investment portfolio showed a 9.5% increase in value over theperiod with the strongest growth from retail warehousing at 16.6%, shops andshopping centres (including London retail) at 9.3% and offices at 5.8%. Thisuplift takes account of the negative effect of the abolition of disadvantagedarea Stamp Duty relief of £60.3m in the like-for-like portfolio following theBudget changes last year. This increase in value was achieved as a result ofboth rental growth in many sectors combined with yield compression. Rentalvalues for retail warehousing have grown at 6.7%, shops and shopping centres at2.2% and London offices at 2.6% producing a total rental growth for thelike-to-like portfolio of 3.3%. The average equivalent yield for the wholelike-for-like portfolio is now 6.0%. In terms of the net reversionary potential of our like-for-like portfolio, theover-rented element of our London offices has reduced as rental growth begins tofeed through, helping to increase the overall net reversionary potential for thelike-for-like portfolio to 2.9%. Void levels across the like-for-like portfolio were 3.0% at the year end,compared with 1.9% at the start of the year. The mean weighted unexpired leaseterm for the like-for-like portfolio is 9.0 years (2004: 10.4 years) assumingall lease breaks occur. Investment and development portfolio valuation movements Investment Development Total £m Open market value at 31 March 2004 7,172.6 734.1 7,906.7Purchases 392.7 - 392.7Sales (376.5) (3.3) (379.8)Net impact of exchange of properties with Slough (12.2) (92.4) (104.6)Transfers into development (151.0) 151.0 -Transfers out of development 485.4 (485.4) -Transfers to partnerships and joint ventures (102.6) - (102.6)Transfer to stock and surrender premiums received (50.7) - (50.7)Capital expenditure 37.8 205.4 243.2Valuation increase 622.2 220.0 842.2Capitalised interest - 17.5 17.5Other 8.2 0.7 8.9 ------------ ------------ ------------Investment portfolio at 31 March 2005 8,025.9 747.6 8,773.5Our share of joint ventures 615.3 615.3 ------------ ------------ ------------Combined portfolio as at 31 March 2005 (pro-forma) 8,641.2 747.6 9,388.8 ======= ======= ======= Investment We had an active year, which included the property swap with Slough Estates,where we exchanged £345.0m of industrial property for four retail assets valuedat £363.8m. Including these properties, during the year we sold a total of£763.1m of property out of the investment portfolio (excluding joint venturesand net of sale costs) generating FRS3 profits of £82.4m (13.4% above bookvalue) while buying £786.1m of investment properties (including assets boughtinto joint ventures). The average yield on the properties sold was 5.2% and theaverage initial yield on the assets acquired was 5.9%. Excluding Slough theRelated Shares:
Land Securities