16th Nov 2005 07:02
Land Securities Group Plc16 November 2005 16 November 2005 Land Securities Group PLC ("Land Securities" / "the Group")Interim results for the six months ended 30 September 2005 Highlights • Adjusted diluted net asset value per share up 13.8% to 1694p (31/3/2005: 1488p). Basic net assets per share were 1435p (31/3/2005: 1293p) • Combined investment portfolio valuation increase of 22.7% over thereporting period to £11.5bn with valuation uplift from retail warehouses of6.0%, shopping centres 6.3% and London offices 9.2% • Pre-tax profits rose 89.2% to £1,184.4m (30/09/04: £625.9m), includinggains on disposal of assets and revaluation surpluses, in accordance with IFRS • Revenue profit increased by 16.1% to £218.5m (30/09/04: £188.2m) • Adjusted earnings per share, calculated on revenue profits, up 24.5%to 34.50p (30/09/04: 27.71p); basic earnings per share were 177.26p, an increaseof 82.6% (30/09/04: 97.06p) • An interim dividend of 18.15p, up 74.5% (30/09/04: 10.40p), reflectingboth underlying growth of 5% and the board's decision to pay a greaterproportion of the dividend at the interim stage • Major business development achievements included the successfulcompletion of the acquisition of Tops Estates PLC and the acquisition of aprivate property company LxB; the Group's retail portfolio now includes 28shopping centres, 32 retail warehouses and 11 supermarkets, with a developmentpipeline including six town centre schemes totalling 330,110 sq m • Strong progress in the London portfolio to ensure the Group benefitsfully from market recovery demonstrated by the acquisition of seven propertiestotalling £343.0m, notable advances in the 270,280 sq m development pipeline andthe successful letting and subsequent sale of 30 Gresham Street • Important changes made to Land Securities Trillium's existingcontracts, including the sale of its share in Telereal, with significantactivity in the public sector impacting positively on the new business pipeline;notable opportunities with the Ministry of Defence and the Governments "BuildingSchools for the Future" initiative. Commenting on the results, Peter Birch, Chairman of Land Securities, said: "We have had an excellent start to this financial year exemplified by somenotable events, including the acquisition of Tops Estates, our first acquisitionof a quoted company for many years, which was followed swiftly by theacquisition of LxB. "We have taken active steps in the first half to position the Group strongly forthe future. We acquired retail property offering long-term asset management anddevelopment opportunities, as well as good rental growth prospects, and ourexperience of leasing space in our retail assets has been positive to date. Inour London portfolio, we secured a number of significant lettings and expectpositive rental growth to emerge in the City during the 2006 calendar year andto accelerate in the West End, where there is now a shortage of good quality,modern accommodation, a situation which our development pipeline is wellpositioned to exploit. With regard to total property outsourcing, we werepleased to have crystallised significant capital value from existing contractswhile increasing our focus on markets with strong deal flow, thereby puttingLand Securities Trillium into contention for a number of large new contractsfrom the public sector. "Building on this strong progress, we remain positive about the prospects forthe business as a whole for this financial year." 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 six months ended 30 September 2005 Financial Highlights 30/09/05 30/09/04 % Change ________ ________ ________Gross property income Retail portfolio £171.2m £138.8m +23.3London portfolio £245.4m £163.8m +49.8Other £55.2m £78.5m -29.7Property outsourcing £525.5m £581.6m -9.6 ________ ________ ________Total £997.3m £962.7m +3.6 Operating profit (total) £1,227.5m £648.5m +89.3Pre-tax profit £1,184.4m £625.9m +89.2Revenue profit (pre-tax) £218.5m £188.2m +16.1Adjusted earnings per share 34.50p 27.71p +24.5Earnings per share 177.26p 97.06p +82.6Dividends per share 18.15p 10.40p +74.5 ________ ________ ________ 30/09/05 31/03/05 % ChangeAdjusted diluted net assets per share 1694p 1488p +13.8Diluted net assets per share 1428p 1289p +10.8Combined portfolio valuation £11,494.2m £9,365.8m +22.7Net borrowings £3,082.2m £2,438.1m +26.4Equity shareholders' funds £6,726.4m £6,050.3m +11.2Gearing (net) 45.8% 40.3% ________ ________ ________ Corporate Review We have had an excellent start to this financial year exemplified by somenotable events. First, we completed the acquisition of Tops Estates PLC whichwe announced in May this year, our first acquisition of a quoted company formany years, which was followed swiftly by the acquisition of the privateproperty company LxB. Secondly, having successfully let the offices at 30Gresham Street, we sold this asset enabling us to release capital to reinvestacross the Group. Thirdly, we sold our share of the Telereal joint venture,crystallising substantial value for the Group. While these events show the high levels of activity over the last six months andtypify the Group's transformation, we have also continued to deliver excellentresults across all areas of the business. Highlights are as follows: • A pre-tax profit of £1,184.4m, representing an 89.2% increase over theequivalent six month period a year ago. In accordance with IFRS, this pre-taxprofit includes gains on disposal of assets and revaluation surpluses • A 16.1% increase in revenue profit to £218.5m (30/9/2004: £188.2m) anda 24.5% growth in adjusted earnings per share to 34.50p per share. Basicearnings per share have increased to 177.26p, up 82.6% • Adjusted diluted net assets per share increased by 13.8% to 1694p pershare in the first six months of the year. Basic net assets per share increasedby 11.0% to 1435p • A valuation surplus in the first six months of £761.5m or 7.2%. Thevalue of the combined investment portfolio (which includes our share ofproperties owned by joint ventures) is now £11.5bn • A continued focus on capital investment into higher growth activities. In the first six months of this year we spent £1.6bn on corporate andinvestment portfolio acquisitions, development and Land Securities Trilliumexpenditure while realising some £0.7bn from sales (including the proceeds fromthe sale of our interest in the Telereal joint venture) • An interim dividend of 18.15p per share, up 74.5%. This increaseresults from the Board's decision to pay a greater proportion of the dividend atthe interim stage and also from underlying growth in the dividend ofapproximately 5% per annum. Results In preparing these interim results, we have applied International FinancialReporting Standards ('IFRS') for the first time and re-stated all comparativefigures under IFRS. Profits We are pleased to report that profit before tax has increased by almost 90% to£1,184.4m (30/9/2004: £625.9m). Revenue profit, which we use to demonstrate theunderlying profitability of the Group, was £218.5m, 16.1% higher than for thesame period last year. The principal causes of the changes in profits are detailed in Table A. ProfitPrincipal changes in first half profit before tax before taxTable A £m ________ Six months ended 30 September 2004 625.9Valuation surplus (A) 308.5Profit on disposal of Telereal (B) 293.0Distributions received from Telereal (C) (12.7)Profit on sale of fixed asset properties 9.2Profit on sale of trading properties 7.6Debt restructuring interest saving (D) 12.5Fair value swap volatility of interest hedges (E) (14.6)Increase in capitalised interest (F) 10.3Amortisation of bond de-recognition (G) (13.3)Long term contract profits (H) 10.7Goodwill impairment (I) (64.5)Property outsourcing profit (J) (19.3)Net rental income growth 16.9Exceptional costs relating to debt restructuring 5.2Other 9.0 ________Six months ended 30 September 2005 1,184.4 ======= (A) Under IFRS, revaluation gains, or losses, on investment properties, arenow reported in the income statement. (B) The sale of our interest in the Telereal joint venture was completed on30 September 2005. (C) Distributions from Telereal were significantly higher in the first halfof 2004, reflecting the high levels of property sales last year. (D) This represents the reduction in interest charges resulting from the debtrestructuring in November 2004. (E) IFRS requires that, where an interest rate swap does not match perfectlywith borrowings, the difference between the opening and closing mark-to-marketvalues are charged to the income statement. (F) Capitalised interest is higher because of the ongoing work at CardinalPlace and Bankside 2 and 3. (G) The debt instruments issued as part of the refinancing in November 2004do not meet the requirements of IAS 39 as they are not deemed to besubstantially different from the debt they replaced. As a result the book valueof the new instruments is reduced to the book value of the debt it replaced andthe difference is amortised over the life of the new instruments. (H) Primarily recognition of profits from the construction contract to buildBankside 1 for IPC. (I) Goodwill arising on the acquisition of Tops Estates PLC in June 2005,against which full provision has been made, is principally attributable todeferred tax on the revaluation of its investment properties. (J) Property outsourcing segment profit is lower primarily as a result ofthe lower unitary charge from the BBC contract (following the sale of MediaVillage, White City) together with lower profits on disposal of fixed assetproperties. Revenue Profit The principal changes in revenue profit, which is our measure of the underlyingperformance of the Group, are detailed in table B below. Revenue profit isprofit before tax, excluding profits on the sale of fixed asset properties,revaluation surpluses, mark-to-market adjustments on interest rate swaps andsimilar instruments used for hedging purposes, the adjustment to interestpayable resulting from the amortisation of the bond exchange de-recognition andany exceptional items. Principal changes in revenue profit Revenue profitTable B £m _______Six months ended 30 September 2004 188.2Net rental income growth 16.9Profit on sale of trading properties 7.6Long-term contract profits (A) 10.7Property outsourcing profit (B) (13.7)Telereal profit (12.3)Increase in capitalised interest (C) 10.3Debt restructuring interest saving (D) 12.5Other (1.7) _______Six months ended 30 September 2005 218.5 _______ (A) Primarily recognition of profits from the constructioncontract to build Bankside 1 for IPC. (B) Property outsourcing revenue profit pre-interest. (C) Capitalised interest is higher because of the ongoing work atCardinal Place and Bankside 2 and 3. (D) This represents the reduction in interest charges resultingfrom the debt restructuring in November 2004. Net assets At the half-year, net assets per share were 1435p, up 11.0% from 31 March 2005.However, this figure and the prior year figures have decreased as a result ofthe adoption of IFRS and, in particular, the requirement to provide deferred taxon revaluation surpluses. On an adjusted diluted basis, net assets per shareare up 13.8% to 1694p in the first six months of this financial year, of which3.0% is attributable to the disposal of our share in the Telereal joint venture. The increase in net assets is analysed in Table C. Six Six Six months months months ended ended ended 30/09/05 31/03/05 30/09/04Table C £m £m £mNet assets at beginning of period 6,050.3 5,489.3 5,152.2Profit after tax 829.2 608.4 452.5Dividends paid (153.8) (48.6) (126.9)Other 0.7 1.2 11.5 _________ _________ _________Net assets at end of period 6,726.4 6,050.3 5,489.3Deferred tax on investment properties 151.4 145.0 134.0Deferred tax on revaluation surplus 1,470.7 1,180.7 1,110.8Mark-to-market on interest rate hedges 17.9 3.6 27.8Bond exchange (385.7) (395.0) - _________ _________ _________Adjusted net assets at end of period 7,980.7 6,984.6 6,761.9 ======== ======== ======== Cash flow and net debt We continue to invest to maximise returns and, during the period, received cashtotalling £727.4m from property disposals (including the disposals of GreshamStreet and our 50% share in the Telereal joint venture). The Group reinvested£1,497.4m into property investment acquisitions, development and propertyoutsourcing activities. At 30 September 2005, the Group's net debt was £3,082.2m (31/03/05: £2,438.1m).The increase in net debt of £644.1m during the period is explained in Table D. Six Six Six months months months ended ended ended 30/09/05 31/03/05 30/09/04Table D £m £m £m _________ _________ _________Operating cash inflow after interest and tax 99.9 35.5 112.4Dividends paid (153.8) (48.6) (126.9)Total capital expenditure (1,497.4) (394.7) (320.3)Property sales 434.4 638.2 54.9Joint ventures 494.6 17.1 (37.8)Other movements (21.8) 107.7 13.1 _________ _________ _________(Increase)/decrease in net debt (644.1) 355.2 304.6Opening net debt (2,438.1) (2,793.3) (2,488.7) _________ _________ _________Closing net debt (3,082.2) (2,438.1) (2,793.3) ======== ======== ======== Although we have invested heavily in the business, increasing net debt by 26.4%,gearing has only increased from 40.3% to 45.8% at the period end, due to thelarge valuation increases. Details of the Group's gearing are set out in tableE which includes information if the debt in joint ventures is taken intoconsideration, although the lenders to our joint ventures have no recourse tothe Group's balance sheet for repayment of the debt. Table E At 30/09/05 At 31/03/05 At 30/09/04 _________ _________ _________Gearing - on book value of balance sheet debt 45.8% 40.3% 50.9%Adjusted gearing (1) 45.5% 43.0% 41.3%Adjusted gearing (1) - as above including notional share 50.2% 44.2% 42.6%of joint ventures (excluding Telereal) _________ _________ _________ (1) On book value of balance sheet debt increased to recognise nominal valueof debt on refinancing in 2004 divided by adjusted net asset value. Funding and hedging We have refinanced the legacy debt acquired with Tops Estate (nominal value of£259.0m) using Land Securities' existing bank facilities together with an issueof £121.0m redeemable 10-year loan notes. All associated interest rate swapshave been terminated. We also issued a further £9.0m of loan notes in respectof the LxB portfolio acquisition. Land Securities uses derivatives products to manage its interest rate exposureand has set a fixed/floating ratio of approximately 80:20, although theproportion may vary depending on our view of short-term interest rates (ie oneto two years). Specific hedges are also used in geared joint ventures to hedgethe interest exposure on limited recourse debt. Since the half-year, the Group issued a £400m 4.875% fixed-rate bond with anexpected maturity of 2017, which has been used to repay some of our existingbank debt. This was the first major financing undertaken within the secured debtstructure which we established in November 2004. Taxation The tax charge for the period is £355.2m giving an effective rate of 30.0% (30/09/04: 27.7%). The tax rate on ordinary profits is slightly lower at 27.7%, largely due to anet tax credit on property disposals and the impact of reflecting joint ventureprofits net of tax. Effective tax rate Ordinary Exceptional Total _________ _________ _________Profit before tax £955.9m £228.5m £1,184.4mTax charge £265.2m £90.0m £355.2mEffective tax rate 27.7% 39.4% 30.0% _________ _________ _________ IAS 12 requires that full provision is made for the deferred tax liabilityassociated with the revaluation of investment properties. Accordingly the taxcharge includes deferred tax of £217.6m on revaluation gains arising in theperiod (30/09/04: £122.5m). Dividend At the year-end we stated that we would aim to pay around 40% of the annualdividend as an interim payment. This re-balancing of the dividend paymentrepresents the majority of the increase in the interim dividend which, whencombined with underlying growth of approximately 5%, has increased the interimdividend payable to 18.15p per share. This will be paid on 9 January 2006 toshareholders on the register on 9 December 2005. The shares are expected totrade ex-dividend from 7 December 2005. Regulatory We are pleased that the Government continues its work to prepare for anintroduction of UK-Real Estate Investment Trusts ('REITs') with legislationtargeted for the 2006 calendar year. In a number of overseas countries, REITshave proved to be a popular and successful investment vehicle for both privateinvestors and institutional shareholders, and we believe that they can beequally successful in the UK provided that the detailed regulations are notunduly restrictive. By contrast, we are disappointed that the Government is proposing to introduce aplanning gain supplement or development land tax. We believe that any such levyrepresents a 'super tax' and ignores the existing regime of capital gains andcorporation tax. The calculation of such a tax would be complex and, togetherwith the additional financial burden, this combination would act as adisincentive to development and regeneration. Its impact would therefore runcontrary to the Government's stated objective of increasing the supply of newhomes. We support the alternative proposals from the British PropertyFederation for pre-determined planning contribution tariffs which would createcertainty in the planning and development process but, at the same time ensurethat developments make an appropriate contribution to local infrastructure.However, as all schemes in our current development programme, and some of theschemes in our forward development pipeline, already have planning consent, ouractivities should not be impacted in the short-term by any changes in this area. Board and senior management changes On 17 May 2005 we announced the appointment of Richard Akers (43), ManagingDirector, Retail to the Group Board. Richard has been responsible for themanagement of Land Securities' Retail portfolio and 250-strong team since 2004and, in particular, has been focusing on improving customer service for some2,000 retail occupiers across the UK. Previously, as the Head of RetailPortfolio Management, he was responsible for the performance of the shoppingcentre investment portfolio, which has outperformed IPD for the past four years. In July 2005 Andrew Macfarlane, Group Finance Director since 2001, left to joinRentokil Initial plc. We would like to thank Andrew for his significantcontribution to the Group. On 1 September 2005 Martin Greenslade (40) joined Land Securities as GroupFinance Director. Prior to joining Land Securities he was Group FinanceDirector of Alvis Plc, a leading European manufacturer of military vehicles,which was acquired by BAE Systems in August 2004. We are delighted that Martinhas joined the Group, bringing with him an entrepreneurial background, asuccessful track record as finance director of Alvis and a skill set which ishighly complementary to the existing management team. Outlook Commercial property has continued to deliver attractive returns, driven largelyby yield compression, at a time when the performance of the UK economy has beenmixed. While demand for commercial property investment continues to be strong webelieve that property yields over the next year are likely to be heavilyinfluenced by movements in medium-term debt pricing. Trading conditions have weakened for retailers, but retail property has so farbeen protected by retailers' desire for efficient units and their strategy oftaking additional floor space in order to grow total sales. This trend explainsthe difference between retailers' negative like-for-like sales growth and thepositive absolute sales growth. While we expect smaller sized shop units insecondary locations to be affected by retailer insolvencies and weaker tradingconditions, we believe that demand for large and well-configured shops in strongtrading locations will remain firm. We have taken active steps in the firsthalf to acquire property offering long-term asset management and developmentopportunities, as well as good rental growth prospects, and our experience inleasing retail property has been positive to date. The London economy has been an area of strength for the UK, buoyed by strongprofits from the financial services sector. This has been positive for theLondon office market, where availability levels are now up to 30% below theirpeak of December 2003. We have secured a number of significant lettings duringthe period under review and expect positive rental growth to emerge in the Cityduring the 2006 calendar year and to accelerate in the West End where there isnow a shortage of good quality, modern accommodation, a situation which our270,280 sq m development pipeline is well positioned to exploit. In terms of the potential market for property outsourcing, we are pleased tohave crystallised significant capital value from existing contracts whileincreasing our focus on markets with strong deal flow, thereby putting LandSecurities Trillium into contention for a number of large new contracts from thepublic sector. These contracts reflect the Government's policy drive forefficient use of public sector assets. Subject to the outcome of competitivetendering processes, we are now considering potential new contracts with greaterpotential value than at any time over the last three years. Building on this strong progress we remain positive about the prospects for thebusiness. Peter Birch Francis Salway Martin GreensladeChairman Group Chief Executive Group Finance Director Land Securities Group PLC16 November 2005 Investment property business Valuation We were pleased with performance in the first half of the year. The combinedinvestment portfolio, which includes our share of joint ventures, showed a 22.4%increase in value to £11.5bn. After adjusting for expenditure (sales anddevelopment spend), the valuation surplus on the combined portfolio over the sixmonth period was 7.2%. Rental Rental Rental Open Open income income income market market 6 months 6 months 6 months value value Valuation to to to 30/09/05 31/03/05 Surplus (1) 30/09/05(1) 31/03/05(1) 30/09/04(1) £m £m % £m £m £m _______ _______ _______ _____ _____ ______Retail Shopping centres and shops 2,324.3 2,156.8 7.4 70.6 71.6 63.2 Retail warehouses 1,464.0 1,344.1 8.8 30.7 29.9 31.3 London retail 803.9 756.2 6.1 22.0 22.3 22.2London offices 2,563.8 2,402.0 6.7 85.7 86.5 88.7Other 287.4 278.2 4.9 6.3 6.5 6.6 _______ _______ _______ _____ _____ ______Like-for-like investment 7,443.4 6,937.3 7.2 215.3 216.8 212.0portfolio (2) Completed developments 504.5 448.8 8.2 12.3 10.5 4.1Purchases 2,551.9 970.4 3.2 49.5 21.7 6.2Sales and restructured interests - 281.8 n/a 1.6 15.9 23.6Development programme (3) 994.4 727.5 18.6 5.2 3.7 7.2 _______ _______ _______ _____ _____ ______Combined investment portfolio 11,494.2 9,365.8 7.3 283.9 268.6 253.1 _______ _______ _______ _____ _____ ______ Adjustment for finance leases n/a (6.4) (6.4) (4.7) _______ _______ _______ _____ _____ ______Combined investment portfolio 7.2 277.5 262.2 248.4 ====== ====== ======= ===== ===== ======= (1) The valuation surplus and rental income values are stated afteradjusting for the effect of SIC15 under IFRS but before restating for financeleases. (2) Properties that have been in the combined investment portfolio for thewhole of the current and previous financial periods. (3) Development programme including Kent Thameside. The developmentprogramme comprises projects which are completed but less than 95% let,developments on site, committed developments (approved projects with thebuilding contract let), and authorised developments (projects approved by theBoard, but for which the building contract has not yet been let). The like-for-like combined investment portfolio showed a 7.2% increase in valueover the period with the strongest growth from retail warehousing at 8.8%,shopping centres at 7.7% and London offices at 6.7%. This increase in value wasachieved primarily as a result of yield compression although we also benefitedfrom some growth in rental values for both retail and London office properties.Rental values for shopping centres have grown at 2.8%, retail warehousing havegrown at 2.0% and London offices at 1.5%. The total rental value growth for thelike-to-like portfolio is 1.7%. The average equivalent yield for the wholelike-for-like portfolio is now 5.6% (31/3/05: 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 from 4.1% (31/03/05) to 5.2%. The mean weighted unexpired lease term for the like-for-like portfolio is 8.4years (31/03/05: 9.0 years) assuming all lease breaks occur. Void levels acrossthe like-for-like portfolio were 3.0% at the half-year, only marginally higherthan the 2.9% at the start of the year. Investment and development portfolio valuation movements Investment Development Total £m £m £m _______ _________ ________Open market value at 31/03/2005 7,624.3 747.6 8,371.9Purchases 1,378.5 - 1,378.5Sales (330.0) (1.3) (331.3)Transfers into development (37.2) 37.2 -Transfers out of development 205.4 (205.4) -Transfers to stock and surrender premiums received (27.8) - (27.8)Capital expenditure 18.4 124.9 143.3Valuation surplus 542.3 183.4 725.7Capitalised interest - 12.8 12.8Other 67.6 3.9 71.5 _______ _________ ________Open market value at 30/09/2005 9,441.5 903.1 10,344.6Our share of joint ventures 1,119.6 30.0 1,149.6 _______ _________ ________Combined investment portfolio at 30/09/2005 10,561.1 933.1 11,494.2 ======== ========= ======= Investment During the period under review we sold a total of £331.3m of property out of thecombined investment portfolio (including joint ventures and net of sale costs)generating profits of £16.5m (5.0% above book value) and bought approximately£1.55bn of investment properties (including assets bought by way of corporateacquisition and into joint ventures). The average yield on the properties soldwas 1.4% (the low figure being explained by the rent free period on 30 GreshamStreet) and the average initial yield on the assets acquired was 5.0%. Thepurchase activity was principally accounted for by the acquisition of TopsEstates, LxB and two retail assets as well as seven London office investments.The London office investments were acquired for an aggregate of £342.9m(including space acquisition costs) to show an average initial yield of 5.5% onan average passing rent of only £276 per sq m. Development Including our share of joint ventures, development activity produced a valuationsurplus of £182.3m (19.3%) in the first six months, with a strong contributionfrom our London office projects. Two schemes, Whitefriars, Canterbury andBexhill Retail Park, were transferred into the investment portfolio from theprogramme. These generated rents of £4.7m in the period and will contribute£12.1m of rental income in a full year. Two further schemes, Bankside 2 and 3and Merchant's Quarter, Bristol were transferred to the development programmeduring the period. We spent £124.9m (excluding capitalised interest) on the development programme,mainly Cardinal Place, SW1. Interest of £12.8m was capitalised during theperiod (30/09/04: £5.1m). We estimate that we will incur cash costs (excludinginterest) of some £804.0m to complete the development programme. Capitalexpenditure on proposed developments could total £873.0m (excluding KentThameside) if a decision is made to proceed with these schemes, which are heldas part of the investment portfolio and have a current carrying value of£223.3m. Retail The first six months of the year were notable for our major £1.0bn acquisitionprogramme which has enabled us to continue structuring our portfolio to benefitfrom specific characteristics of the retail property market. This means that ourinvestment portfolio is focused for the long-term on dominant shopping centres,which we believe are better able to withstand any downturn in consumer demand,retail warehouse assets which benefit from supply side constraints andsupermarkets which we believe will continue to benefit from the shift to highermargin non-food merchandise. At the same time, through our developmentprogramme, we are creating new assets for the portfolio of a quality which wouldbe difficult to acquire in the investment market. Our portfolio now includes 28 shopping centres, 32 retail warehouse parks and 11supermarkets and our development pipeline includes six town centre schemes,totalling some 330,110 sq m of retail space. We retain a small number ofstrategic high street holdings some of which may provide future developmentopportunities. Market commentary Retailers are being squeezed by price deflation combined with risingexpenditure, particularly relating to business rates, energy and employmentcosts. At the same time, absolute growth in sales has dropped to very lowlevels and like-for-like sales growth is negative. However, despite this, manyretailers are seeking new floor space which is well configured and located andour development lettings have remained strong with a further 23,690 sq m letduring the period. The investment market continues to be strong and yields havecompressed further over the past six months. Retail portfolio valuation Total Total Shopping Shopping Retail Retail retail(a) retail(a) centres centres warehouses warehouses 30/09/05 31/03/05 30/09/05 31/03/05 30/09/05 31/03/05 Combined £6,282.6m £4,736.6m £3,412.4m £2,553.8m £2,102.6m £1,481.7minvestmentportfoliovaluation _________ _________ _________ _________ _________ _________ Like-for-like £3,926.1m £3,635.6m £1,980.9m £1,834.2m £1,464.0m £1,344.1minvestmentportfoliovaluationRental income £103.4m £103.9m £60.7m £61.7m £30.7m £29.9mGross ERV (b) £240.3m £234.7m £129.8m £127.5m £78.6m £76.1mVoids by ERV 2.3% 2.6% 1.9% 2.4% 1.7% 2.6%Running yield 5.1% 5.5% 5.6% 5.9% 4.5% 4.8% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Combined investment portfolio extract from business analysis and reference tothe reconciliation table (a) The retail portfolio includes retail warehouses, shopping centres,shops outside Central London (with the exception of shops held through the MetroShopping Fund LP), regional offices and sundry other properties outside CentralLondon. (b) Annual estimated rental value. On a like-for-like basis the retail portfolio performed very well with a £280.8m(7.8%) valuation surplus in the six months. The net reversionary potential is12.5% for shopping centres, 18.7% for retail warehouses and 16.1% overall forthe total retail portfolio. As yet retailer insolvencies have not impactedgreatly on the levels of vacancy across the retail portfolio, in fact voids haveremained at very low levels and currently stand at 2.3%. This is well below theaverage void level for retail property of 5.4% (IPD Monthly Index September2005). Review of activity Investment In the first six months of the year, we have been growing our retail propertybusiness by acquiring property which we believe over the long-term will offergood asset management and development opportunities as well as good futurerental growth prospects. We have also been capturing asset managementopportunities within our investment portfolio which have helped to createadditional value. The main activities included: • The recommended cash offer for Tops Estates for an enterprise valueof £517.2m. We concluded this acquisition in June and took ownership of sevenshopping centres. Since then we have sold the Guildhall Centre in Staffordahead of book value and the remaining six properties showed a 7.2% increase invalue (as compared to the valuation on acquisition) • The acquisition of LxB where we bought a portfolio of retailwarehouse parks and supermarkets for £360m. The portfolio included two retailwarehouse parks in Bracknell and Chester, a partnership interest in a jointventure which owns a further two parks at Crayford, Greater London and Strood,Kent as well as ten supermarket properties • The purchase of: • Southside, Wandsworth, London SW18: a 49,237 sq m shopping centreincorporating retail, leisure and office accommodation, with five residentialblocks above and a 1,180 space multi-storey car park. This asset was acquiredjointly with Delancey for the Metro Fund for £188m • The Fort, Westfield Cross, Thanet: a 32,230 sq m newly developed out oftown shopping centre/retail park which opened in June 2005. • The creation of new space at White Rose Centre, Leeds enabling us toprovide large stores for Next, H&M and Zara and re-let space at rents which havegenerated some 8.1% growth in rental values • The progression of a number of surrender and re-letting transactionsin the retail warehouse portfolio, in particular at Retail World in Gatesheadwhere rents again moved ahead strongly. After the period under review we also acquired the Galleria, Hatfield along-leasehold 30,650 sq m outlet centre for £123m to show an initial yield of5.5%. The Galleria incorporates 85 shops and restaurants, a nine screen UCIcinema and 1,745 car parking spaces. Development We are making good progress on our town centre development pipeline and duringthe first six months of the year advanced well on the following schemes: • Whitefriars, Canterbury. The final phase of Whitefriars opened inJuly. This scheme, which comprises some 37,160 sq m of retail and 3,260 sq m ofresidential accommodation, was almost fully let on opening and will produce some£11.4m of rental income per annum • Princesshay in Exeter, a 44,560 sq m retail-led scheme on which weare making good progress and are on schedule for completion in 2007 • Merchant's Quarter (formerly Broadmead), Bristol. We have startedworks in Bristol, a 140,000 sq m mixed-used scheme incorporating 83,610 sq m ofretail which we are developing in a 50:50 partnership with Hammerson plc. Inaddition to the House of Fraser anchor store, lettings have been announced toBurton/Dorothy Perkins, H&M, Top Shop, New Look, Virgin and 9,290 sq m to Cinemade Lux • Almondvale Shopping Centre, Livingston. In July we submitted anoutline planning application for a £90m extension to our existing holdings inLivingston. The plans, which have since been approved by the Local Authority,incorporate an additional 35,770 sq m of retail and leisure accommodation • Corby. At Corby, where we made some minor changes to the schemedevised by Tops, we have completed demolition and aim to start work early in2006, subject to finalising pre-lettings. Bridgewater Park, Banbridge, North Ireland. We entered into a forward fundingarrangement with GML Estates to develop a major new retail-led mixed-usedevelopment at Bridgewater Park, Northern Ireland. This scheme will include60,000 sq m of retail accommodation, the first phase of which is the developmentof a 20,000 sq m factory outlet with 80 retail units. Across the retail warehouse portfolio a number of new opportunities have emergedto reconfigure and improve space as a result of the liquidation of Courts, thefurniture retailer. In Plymouth we are proposing a 7,200 sq m redevelopment andin Poole we will redevelop an existing MFI and Courts and refurbish theremainder of the park. London Portfolio Our London portfolio comprises some 900,000 sq m of office space and 88,000 sq mof retail predominantly located in the core London markets of the West End,mid-town and City. We also own a cluster of properties on the South Bank. Over the past few years we have been repositioning the portfolio through anactive programme of purchases and sales in order to benefit from anticipatedrental growth in the next few years. We have also increased the scale of ourdevelopment activities since we believe this will generate higher returns forshareholders. Market commentary Conditions in the London office market continue to improve with overall vacancylevels now at 8.7% (September 2005) down from 9.3% at the year end (source: DTZDebenham Tie Leung). As we remarked then, the limited supply of newdevelopment, particularly in the West End, continues to drive demand for goodquality space and, as a consequence, rental growth. We anticipate that the positive signs emerging from the West End will filterthrough to the other London office markets as supply is absorbed. There has also been a significant reduction in availability in the City officemarket and we are optimistic that this will give rise to rental growth onexisting space towards the end of 2006 and possibly even earlier on rentallevels in the pre-letting market. Our retail assets are proving to be resilient despite the general malaiseamongst retailers. Our more historic holdings are in recognised core locationsand these have been complemented by the recent introduction of new retail stockat Cardinal Place, Victoria, which has let extremely well. London Portfolio valuation London London London London London London portfolio(a) portfolio(a) offices offices shops shops 30/09/05 31/03/05 30/09/05 31/03/05 30/09/05 31/03/05 Combined portfolio £5,067.9m £4,485.5m £4,066.6m £3,583.8m £918.9m £820.9mvaluation _________ _________ ________ ________ ________ _________Like-for-like £3,444.1m £3,226.6m £2,562.4m £2,400.6m £803.9m £756.2minvestmentportfoliovaluationRental income £109.9m £110.7m £85.7m £86.5m £22.0m £22.3mGross ERV (b) £227.2m £224.3m £173.9m £171.7m £48.4m £48.1mVoids by ERV 3.6% 3.1% 4.1% 3.8% 2.1% 0.4%Running yield 6.2% 6.7% 6.5% 7.0% 5.3% 5.8% (a) The London portfolio includes London offices, Central London shops (with theexception of shops held through the Metro Shopping Fund LP) and sundry otherproperties in Central London. (b) Annual estimated rental value. Review of activity In the first half of the year we sold over £280.0m of property, largelyaccounted for by the sale of 30 Gresham Street, following the letting toDresdner Kleinwort Benson, and acquired £342.9m of property. We also continueto advance our 270,280 sq m development pipeline. Investment Our strategy continues to focus on structuring the London Portfolio to ensurethat we benefit fully from market recovery. During the first six months weacquired seven properties, including three assets for future development. Inaddition to Times Square, 160 Queen Victoria Street, EC4, details of which wereprovided at the year end, these included: • 42 Southwark Bridge Road, London SE1: Acquired for £32.8m representinga net initial yield of 7.32%. This freehold 35,120 sq m building is let toSchroders and is close to our development at Bankside123 • IPC Tower, Shoe Lane, EC4: acquired for £50.9m on a net initial yieldof 6.77% the property is a 11,400 sq m long-leasehold office building providingnet rental income of approximately £3.44m per annum. This tower building isadjacent to New Street Square and offers good rental prospects being let ataverage rental levels of £306 per sq m • 15 Bonhill Street, EC2: Acquired for £34.7m, representing a netinitial yield of about 7.26%. This 9,330 sq m freehold building has beenrecently refurbished and is located in a growth sector of the City market. Itis let at an average rent of £245 per sq m to tenants including RIBA, Transportfor London and American Express. We believe that this property will see goodrental and capital growth in future • 140 Aldersgate Street, EC1: This 7,964 sq m long-leasehold, new officebuilding was purchased for £39.5m and was acquired vacant as the first Citybuilding for Landflex. In October 2005 we announced that we had letapproximately half the building to Vibrant Media Ltd which took 658 sq m on the7th floor and Flightbookers Ltd which will occupy a total of 2,989 sq m over the4th, 5th and 6th floors, with an option on a further floor Both companies took a Landflex lease at an RPI-linked inclusive rent including acore services package. The total annual income (excluding the services element)generated by both lettings will be £1.3m per annum and both companies have takena ten year term with a five year break option • Holborn Gate, 330 High Holborn, WC1: was purchased for £85.8m. The14,860 sq m office building is fully let to a number of tenants including theSecretary of State, Financial Dynamics, Hogg Robinson and RBS and currentlyproduces rent of £5.3m per annum, providing a net initial yield of 6.20%. Development and letting We continue to make excellent progress with our development programme. Notableevents during the period under review were: • Good progress is being made at Cardinal Place,our 60,550 sq mmixed-use development in Victoria. This scheme comprises three office buildingswith ground floor retail. The office element is already 28% let at an averagerent of £594 per sq m to tenants including 3i Group PLC, P&O and WellingtonInternational Limited. The average lease term is 18 years, with the earliestlease break being 15 years. In addition the retail element is now almost fullylet and has opened for trading. We are very pleased with the letting progressto date and the way in which this scheme has transformed this key location closeto Victoria Station • The transfer from the development pipeline to the developmentprogramme of Bankside 2 and 3, SE1, where construction has now started. Thesebuildings will provide approximately 15,690 sq m and 19,860 sq m of high qualityoffice space, and 830 sq m and 2,340 sq m of retail respectively • The commencement of four out of five buildings at New Street Square,EC4 which will provide 65,320 sq m including 2,980 sq m of retail space. Anadditional 3,760 sq m has been taken by Deloittes who exercised an option over asecond building in October 2005, taking their total commitment to approximately24,000 sq m. As described at the year-end we continue to progress the planning application,submitted in May 2005, for One New Change, EC4, a 51,340 sq m mixed-used retailand office scheme. Property Outsourcing Market commentary The period under review has seen a number of notable events for the future ofour Land Securities Trillium business. We made some important changes to ourexisting contracts and we have also seen some significant activity in the publicsector which is impacting positively on our current pipeline of potential deals. We are particularly excited by opportunities with the Ministry of Defencewhere we are one of the final two bidders in three significant transactions. Werecently submitted our bids for two packages under the Defence Training Review('DTR') and the Ministry of Defence Estates London ('MoDEL') project. DTR ismade up of two 25-year contracts for the provision of specialist training acrossthe entire MOD which covers 800,000 sq m of training accommodation. Working withour joint venture training partner QinetiQ, we are proposing a solution which webelieve will provide world-class training in modern, purpose-built facilities tomeet the needs of the Armed Forces in the 21st Century. The MoDEL contractinvolves the consolidation of five London airbases onto one facility at Northoltwith the resultant freeing up of the other bases for redevelopment. We continue to explore other public sector initiatives where there are implicitproperty issues and opportunities, including Building Schools for the Future ('BSF'). The Government confirmed in its October White Paper on 'Higher StandardsBetter Schools for All' that it remains committed to this £30bn programme over15 years. We are currently working in partnership with Mill Group, through itsInvestors in the Community programme, on a bid for the Leeds BSF. Mill Group isa private company with a very strong reputation and successful results in theschools market. In addition, the Northern Ireland Civil Estate project isexpected to come to the market by the end of 2005, and we will be activelypursuing this. Some £300m of corporate structured leaseback/leasehold liability packages havecome to the market but we were unwilling to match the prices paid by highlyleveraged purchasers. We are, however, encouraged by the levels of activity. Financial results In the first six months of the year Land Securities Trillium contributed 21% ofthe Group's underlying operating profits and 53% of gross property income. Thiscompares to 29% and 60% respectively for the same period in 2004. Segmentprofit was £37.0m (30/09/04: £56.3m); this reduction primarily reflects thedecrease in BBC income following the disposal of Media Village White City andalso central costs being lower in the comparable period due to the timing ofcosts incurred. 6 months 6 months Full year 30/09/05 30/09/04 31/03/05 £m £m £m ________ ________ ________Contract level operating profit DWP 41.7 39.7 81.4 BBC - 10.5 20.6 Norwich Union 1.2 2.9 6.1 Barclays 1.3 - - DVLA 0.3 - -Bid costs (2.8) (0.7) (2.6)Central costs (4.8) (1.8) (7.8) ________ ________ ________ 36.9 50.6 97.7Profit on sale of fixed asset properties (0.2) 5.7 30.5Net gain on revaluation of investment property 0.3 - - ________ ________ ________Segment profit 37.0 56.3 128.2 ======= ======= ======= Distribution received from Telereal 11.7 24.4 65.4Profit on sale of Telereal 293.0 - - ======= ======= ======= Review of activity Department for Work and Pensions Our contract with the Department for Work and Pensions ('DWP') produced £380.7mof income for Land Securities and delivered operating profit of £41.7m in linewith our expectation. We still expect the DWP to vacate some 200,000 sq m ofaccommodation over the next 12-18 months, all of which is priced into ourcontract. We are continuing to support DWP in the roll-out of the Jobcentre Plusorganisation which is successfully entering its final stage before completion in2006. This project involves the refurbishment of 1,000 sites and the creation ofnew style, open plan public areas in Jobcentres across the country. BBC In the period under review the BBC contract broke even at the operating profitlevel (30/09/04: £10.5m). The decrease in profit reflects the sale at the endof last year of Media Village, White City and the subsequent reduction in theunitary charge payable to us by the BBC. We will continue to provide facilitiesmanagement services to the BBC until at least June 2006. Our development project teams continue to progress with the two schemes they areproject managing on behalf of the BBC. At the new 81,390 sq m BroadcastingHouse project in London, the first phase is nearing completion while the BBC'snew 33,370 sq m broadcasting facility at Pacific Quay, Glasgow remains onschedule for completion in summer 2006. BT Following the announcement made in September, we received shareholders' approvalfor the disposal of our share in our Telereal joint venture for a considerationof £300.0m. As predicted previously our share of distributions received fromTelereal compared to the same period last year fell by £12.7m due to the lowerlevels of disposal activity from the portfolio. The sale ended our contractual relationship with BT on 30 September 2005.Simultaneously we entered into new agreements with Telereal involving themanagement of part of BT's leasehold estate and the provision of other services.The agreement in relation to the leasehold estate runs until the end of 2031,although both parties have the option to terminate the agreement at any time onor after 31 March 2010. Under these new arrangements Land Securities Trilliumwill receive annual gross revenues of approximately £50m, with anticipatedpre-tax profits of some £14m per annum. We have included this income in ourbusiness plan only until March 2010. Norwich Union In the period under review the Norwich Union contract generated a £1.2mcontribution to operating profits, a reduction compared to the similar periodlast year when we benefited from the proceeds of property disposals. In June 2005 we delivered the first phase of the £92m project to refurbishNorwich Union's 30,890 sq m headquarters in Norwich, and we continue to explorethe potential to expand our relationship beyond the 25% of the Norwich Unionestate we currently support. Barclays Good progress continues to be made in letting the vacant leasehold liabilityproperties transferred under the contract with Barclays. Since the contractstarted 3,700 sq m has been let and the annual rent roll is now circa £2m perannum. Driver and Vehicle Licensing Agency ('DVLA') On 4 April 2005 our contract with the DVLA went live. The DVLA has outsourced amajor refurbishment project, life-cycle capital expenditure, estates managementand facilities management across its entire UK estate to us for 20 years. Thereis no transfer of freehold property to us but we receive payment for theprovision of services and refurbishment works via a performance-relatedindex-linked annual unitary charge. The estate comprises 58 properties, totalling 94,133 sq m, of which 14% by areainvolves the transfer of leasehold liabilities. The 24,471 sq m refurbishmentof part of the DVLA's headquarters site at Morriston, Swansea will result in a£30m investment by us over the next three years. We are currently advising ourcustomer on potential new space requirements to support its continuing businessmodernisation programme. Urban Community Development The first six months of the year has seen good progress being made by UrbanCommunity Development. At Kent Thameside we received a 'resolution to grant' planning consent forEastern Quarry and we have agreed terms for the sale of the Crossways BusinessPark. As an example of how the Group continues to leverage synergies across theorganisation, our Urban Community Development team collaborated with LandSecurities Trillium on the bid for the MoDEL contract, where we are now on ashortlist of two. Kent Thameside In July we announced that Dartford Borough Council had resolved to grantplanning permission for our proposals at Eastern Quarry to develop 6,250 homesand a range of community and employment facilities, together with new parks andlakes. This approval is subject to the negotiation of the planning conditions,concluding the Section 106 agreement and securing the withdrawal of a holdingobjection from the Highways Agency. We are making good progress on all thesefronts. Our proposals include 30% 'affordable' homes, a range of new schools, communityfacilities, local shops and over 120,000 sq m of offices. In addition, over athird of the site's area will be dedicated to open space. New wildlife areasincluding neighbourhood parks, ponds, wet and dry meadows, ecology areas,woodland and lakes will transform the former chalk quarry which has beeninaccessible to the public for many years. The development in the quarry willbe brought forward in phases over the next twenty years. It is anticipated thatthe first homes will be available in 2008 and we intend to work with carefullyselected house building partners to deliver the new homes to the highestarchitectural standards. At Ebbsfleet, where we have a 48.5% interest, we continue to progress the firstphase of residential development and are working with Countryside Properties,our preferred development partner for the Springhead Quarter, on the submissionof a detailed planning application later this year for a scheme of over 300dwellings. At Waterstone Park, our other joint venture with Countryside Properties has seenthe completion and sale of the first phase of 200 units. Detailed consent hasbeen secured for the next phase which will see 400 units delivered to the marketover the next four years. In October we agreed terms to sell our remaining freehold interest in CrosswaysBusiness Park to Legal & General. Under our ownership, Crossways had becomerecognised as the leading mixed-use business park in the South East quadrant ofthe M25. The park has consent for 300,000 sq m of office and industrialfloorspace, 85% of which has been developed. Occupiers on the scheme includeRegus, Laing O'Rourke and John Lewis. This sale will enable us to concentrateour activities on the much larger Ebbsfleet and Eastern Quarry schemes. Business Analysis Further non-statutory information, relating to the Group's Investment Portfolioand Property Outsourcing, is available on the Group's website atwww.landsecurities.com/Interims2005. This includes more detailed information inrespect to the combined investment portfolio valuation and further detail onLand Securities Trillium's existing contracts. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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