Land Securities Group
Annual Report 2002

Plain-text annual report

Report and Financial Statements 31 March 2002 L a n d S e c u r i t i e s P L C R e p o r t a n d F i n a n c i a l S t a t e m e n t s 3 1 M a r c h 2 0 0 2 Land Securities PLC 5 Strand London WC2N 5AF Telephone: 020 7413 9000 e-mail:landsecurities@landsecurities.com http://www.landsecurities.com making property work . . . Land Securities provides an integrated approach to the commercial property and outsourcing needs of customers to create long-term and sustainable returns for shareholders. Investor information balance sheets 31 March 2002 31 March 2002 Registrar Enquiries concerning holdings of ordinary shares, debentures or loan stocks in Land Securities PLC should be addressed to: Lloyds TSB Registrars,The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 0870 600 3972. Corporate individual savings accounts (ISAs) The company has arranged for a Corporate ISA to be managed by Lloyds TSB Registrars, who can be contacted at The Causeway, Worthing, West Sussex BN99 6UY. Telephone: 0870 24 24 244. The Registrars provide an on-line service, enabling shareholders to access details of their Land Securities shareholdings. Shareholders wishing to view this information, together with additional information such as indicative share prices and information on recent dividends, should visit www.shareview.co.uk Capital gains tax For the purpose of capital gains tax, the price of the company’s ordinary shares at 31 March 1982, adjusted for the capitalisation issue in November 1983, was 205p. Holders of the company’s ordinary shares, debentures and loan stocks should notify the Registrar promptly of any change of their address. Low cost share dealing facility The company operates with Cazenove & Co. Ltd a postal share dealing facility which provides shareholders with a simple, low cost way of buying and selling Land Securities PLC ordinary shares. For further information, or dealing forms, contact: Cazenove & Co Ltd, 12 Tokenhouse Yard, London EC2R 7AN. Telephone: 020 7606 1768. Dividend reinvestment plan (DRIP) The company has introduced a DRIP to enable shareholders to use cash dividends to purchase Land Securities shares in the market. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars,The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 01903 502541. Unclaimed Assets Register The Company participates in the Unclaimed Assets Register, which provides a search facility for financial assets which may have been forgotten. For further information, contact: The Unclaimed Assets Register, Lloyds Chambers, 1 Portsoken Street, London E1 8DF – Telephone: 0870 241 171; website www.uar.co.uk Share price information The latest information on the Land Securities PLC share price is available on the Financial Times Cityline Service: telephone: 0906 8433133 (calls charged at 60p per minute). Share price information is also available on the company’s website (www.landsecurities.com) under investor relations/share price. ANALYSIS OF EQUITY SHAREHOLDINGS at 31 March 2002 B Y S I Z E O F H O L D I N G U P TO 5 0 0 5 0 1 TO 1 , 0 0 0 1 , 0 0 1 TO 5 , 0 0 0 5 , 0 0 1 TO 1 0 , 0 0 0 1 0 , 0 0 1 TO 5 0 , 0 0 0 5 0 , 0 0 1 TO 1 0 0 , 0 0 0 1 0 0 , 0 0 1 TO 5 0 0 , 0 0 0 5 0 0 , 0 0 1 TO 1 , 0 0 0 , 0 0 0 1 , 0 0 0 , 0 0 1 a n d a b ove Number of holdings 1 1 , 7 9 4 9 , 9 0 3 1 0 , 6 8 7 8 9 4 7 8 6 1 6 6 2 9 0 7 8 9 0 % Balance at 31 March 02 3 4 . 0 0 2 8 . 5 5 3 0 . 8 1 2 . 5 8 2 . 2 6 0 . 4 8 0 . 8 4 0 . 2 2 0 . 2 6 3 , 4 0 2 , 0 8 1 7 , 5 3 7 , 1 0 9 2 1 , 6 1 9 , 8 8 8 6 , 3 1 1 , 5 0 4 1 7 , 2 1 0 , 8 0 8 1 1 , 6 8 0 , 9 6 6 6 6 , 4 9 6 , 2 4 4 5 7 , 4 8 9 , 3 0 2 3 3 2 , 5 9 7 , 1 4 3 % 0 . 6 5 1 . 4 4 4 . 1 2 1 . 2 0 3 . 2 9 2 . 2 3 1 2 . 6 8 1 0 . 9 6 6 3 . 4 3 3 4 , 6 8 8 1 0 0 . 0 0 5 2 4 , 3 4 5 , 0 4 5 1 0 0 . 0 0 Registered office 5 Strand, London WC2N 5AF Registered in England and Wales No. 551412 Offices 5 Strand, London WC2N 5AF (Telephone: 020 7413 9000) and at 140 London Wall EC2, Glasgow and Leeds Designed by SAS Board Photography by Chris Moyse Location Photography Marcus Lyon Typeset by Asset Graphics Printed by St Ives Westerham Press This report is printed on paper that meets international environmental standards, contains elemental chlorine free (ECF) virgin pulp, obtained from sustainably managed forests. Financial Calendar 2002 22 May Preliminary announcement 26 June Ex-dividend date 28 June Record date for final dividend 9 July Annual general meeting 22 July Final dividend payable November Announcement of interim results (unaudited) 2003 January Interim dividend payable Contents Corporate Statement IFC 2 Financial Highlights 4 Chairman’s Statement 6 Corporate Review Valuation Portfolio Management Development Total Property Outsourcing Financial Review Property in Context – Making property work Environment, Health and Safety Human Resources Directors Corporate Governance Remuneration Committee Directors’ Report 8 10 18 26 32 36 38 40 42 44 46 48 50 Directors’ Responsibilities and Auditors’ Report Consolidated Profit and Loss Account Balance Sheets Consolidated Cash Flow Statement 52 53 54 55 Other Primary Statements 56 Notes to the Financial Statements 77 Ten Year Record Valuers’ report 78 79 Portfolio analysis 80 Major Property Holdings Glossary of Terms 84 Investor Information IBC 1 0 | 11 assets 1 2 | 13 space 1 4 | 15 acquisitions 1 6 | 17 resources 1 8 | 19 regeneration 2 0 | 21 innovation 2 2 | 23 projects making property work 2 4 | 25 development 2 6 | 27 relationships 2 8 | 29 accommodation 3 0 | 31 outsourcing 3 6 | 37 property 3 8 | 39 sustainability 4 0 | 41 values Land Securities Highlights • Adjusted earnings per share increased by 13.7% to 51.61p (2001 45.38p) • Pre-tax profit up to £363.5m, an 11.9% increase (2001 £324.7m) • Adjusted diluted net asset value steady at 1155p (2001 1152p) • High level of activity demonstrated by: – £0.5bn of property sales – £0.5bn investment in development and investment property activities – £146m investment in Telereal – £70m investment in Kent Thameside • Portfolio rationalisation substantially complete • Development progressing well with 87,030m2 completed this year and 260,160m2 under development • Land Securities Trillium secured two major new contracts during the year • Proposed £500m return of capital to shareholders • 10m m2 of commercial property owned or under management. financial highlights . . . REVENUE PROFIT (PRE-TAX) £m ADJUSTED EARNINGS PER SHARE (PENCE) 265.9 292.7 301.7 (restated) 323.4 364.8 1998 1999 2000 2001 2002 37.07 39.11 40.86 (restated) 45.38 51.61 1998 1999 2000 2001 2002 2 | 3 Gross property income Operating profit * Revenue profit (pre-tax) Pre-tax profit ** Adjusted earnings per share (basic) Earnings per share (basic) Dividends per share ** Adjusted dividend cover (times) Dividend cover (times) † Interest cover (times) # Adjusted diluted net assets per share Diluted net assets per share Book value of properties sold Capital expenditure on properties, developments and acquisitions ø Valuation of investment properties Net borrowings Equity shareholders’ funds † Gearing (net) 31 March 2002 31 March 2001 (restated) Change % +57.7 +14.7 +12.8 +11.9 +13.7 +12.0 +4.6 +0.3 +0.2 £1,025.6m £516.8m £364.8m £363.5m 51.61p 50.27p 34.00p 1.52 1.48 2.98 1155p 1132p £510.4m £776.5m £7,800.0m £1,942.1m £6,036.6m 32.2% £650.4)m £450.6m £323.4)m £324.7)m 45.38)p 44.87)p 32.50)p 1.39 1.38 3.03 1152)p 1130p £424.9m £758.3m £7,899.1)m £1,727.8)m £6,017.8m 28.7)% The comparative figures for the year ended 31 March 2001 have been restated to reflect the changes in accounting policies described on page 32 and in Note 1 to the financial statements. Trillium was acquired in November 2000. Results for the year ended 31 March 2001 therefore include four months’ trading for that business. * Excludes results of property sales and bid costs. ** Excludes results of property sales, bid costs and additional deferred tax arising on adoption of FRS19. # Excludes the effects of additional deferred tax arising from adoption of FRS19. ø After adjusting for the effect of adopting UITF28. † See glossary (page 84). DIVIDENDS PER SHARE (PENCE) DILUTED NET ASSETS PER SHARE (PENCE) 1998 1999 2000 2001 2002 28.00 29.50 31.00 32.50 34.00 1998 1999 2000 2001 2002 910 975 1090 (restated) 1130 1132 Land Securities Over two years ago we set out a clear strategy aimed at securing enhanced returns from property. Since that time, the Group has made significant progress towards implementing this strategy by refocusing the investment portfolio, expanding the development programme and winning new property outsourcing contracts. The Group’s sound performance over a number of years is compelling evidence of the value of a long-term approach to property. Our dividends have grown by an average of 4.5% per annum since 1992, compared to inflation of 2.6% per annum. Over the same period, our net assets per share have increased by 7.6% per annum. These figures have underpinned our average total shareholder return of 13.8% over this period. Pe t e r G B i rc h C h a i r m a n chairman’s statement . . . The recent fall-out from the technology sector and other high-profile corporate failures has brought into sharp relief the benefits of concentrating on sustainable growth over the long term. The Board has long recognised this and while restructuring the business it has been mindful not to compromise the Group’s reputation for dependability and its enviable financial position. Nevertheless, the performance of asset-backed businesses like ours is inextricably linked to the Group’s capital structure and we have been reviewing this closely. Our starting point has been a belief that there are good business reasons for retaining a strong balance sheet. As part of this review we have concluded that around £500m of our capital is currently surplus to our requirements and are therefore proposing to return this surplus to shareholders. In assessing the appropriate amount, we have considered future capital requirements of the individual business units. We expect the return, which is likely to be on a structured pro rata basis to all shareholders, to be achieved by the autumn. More details of the capital return are contained in the Financial Review which follows. Results During the year revenue profit increased by £41.4m to £364.8m. The pre-tax profit of £363.5m, an increase of 11.9%, was assisted by a full year’s contribution from Land Securities Trillium. Adjusted earnings per share are up 13.7% to 51.61p per share (2001 45.38p per share). Adjusted diluted net assets per share remained steady at 1155p per share. The Group has been particularly active and has sold over £0.5bn of properties, invested £0.5bn in its portfolio and development activities, £146.4m in the Telereal joint venture and £70.0m in Kent Thameside. The Board recommends a final dividend of 24.95p per share, making a total distribution for the year of 34.0p, an increase of 4.6%. The dividends paid and proposed will be covered 1.52 times after excluding the effect of property sales, bid costs and additional deferred tax arising on adoption of FRS19. The dividend will be paid on 22 July 2002 to shareholders on the register on 28 June 2002. Valuation Since September 2001 there has been considerable uncertainty and a degree of instability in global economies and financial markets. Against this background we are pleased that the valuation of our portfolio has exhibited relative stability despite being adversely impacted by the decrease in value of our Central London development projects. Board and Senior Executive Group changes In order to ensure the effective delivery of our strategy we have made changes to the Board and Senior Executive Group. We believe that we now have one of the strongest senior management teams in the sector, with substantial financial, property and management expertise. Succession planning at all levels within the organisation also remains firmly on the Board’s agenda. In October 2001, Andrew Macfarlane was appointed to the Board as group finance director, joining from Six Continents PLC. In January this year, Peter Freeman, non-executive director of Argent Group plc and chairman of 4 | 5 Freeman Publishing plc, was appointed a non-executive director. In April 2002, David Rough, previously Group Director (Investments) of Legal & General Plc, also joined as a non-executive director. After a successful 20-year career at Land Securities Jim Murray retired in June. We would also like to pass on our thanks to Peter Walicknowski and Manish Chande who resigned during the year. Ian Ellis, chief executive, and David Godden, chief operating officer, of our total property outsourcing business, joined the Senior Executive Group in January. Ian and David joined Land Securities when we acquired Trillium in November 2000 and have been instrumental in the development of this business. Following the year-end, in April, we announced that, after a successful 29-year career at Land Securities, Mike Griffiths would be stepping down. Francis Salway will move to the development business unit as chief executive and we have recruited Mark Collins from GE Capital Real Estate as chief executive of portfolio management and a member of the Senior Executive Group. After ten years as a non-executive director Peter Hardy has also indicated that he will be stepping down prior to this year’s AGM. I would like to thank both Mike and Peter for their valued contribution to the Group. I welcome the staff who transferred to the Group when we concluded the BBC and BT transactions. We have all been through a period of substantial change and I am impressed by the enthusiasm demonstrated by our employees, both old and new, and the positive way in which they are approaching new challenges. I should like to thank them for all they have achieved over the past year. Outlook The recovery of global economies following the events of 11 September remains fragile: there is still a risk of further instability in the international markets and the uncertainty over oil prices remains. However, the UK economy remains relatively robust and consumer confidence appears undiminished following the tax increases outlined in the recent Budget. With our focus on the UK property markets, we have good reason to be positive about the future prospects for the Group. The advantage of property as an investment is highlighted by the fact that UK direct commercial property returns continue to exceed those of the equity market. Over a five-year period the FTSE-All Share has produced average annual total returns of 6.7%, compared with 11.9% for property. Over a ten-year period the returns have been broadly similar at 11.9% for the FTSE All-Share and 10.6% for property. Demand for UK commercial property will, we believe, continue to increase as pension funds switch from equities to less risky investments in order to meet future funding requirements. We will continue to pursue our core principles of acquiring and owning real estate and optimising returns. Land Securities has a unique portfolio and has put in place a compelling strategy, the right team and the right structure for the future. The new generation of management relishes the challenge of building on our long-term record and continuing to generate value for shareholders. Land Securities Last year we described how we had set the company on course to become the provider of choice of real estate and associated occupational services. Over the past 12 months we have made substantial progress towards achieving that aim. Driving this new strategy were fundamental shifts in our macro- and micro-economic environment, which required us to evolve our business activities to take maximum advantage of the opportunities that we saw in this new era. These drivers continue to influence the way we develop our business. I a n J H e n d e rs o n C h i e f E xe c u t i ve corporate review . . . Our new corporate structure is working well and each of the three business units has made good progress in achieving the objectives set for them last year. We have virtually completed the rationalisation of the investment portfolio while, at the same time, investing in buildings which will form the future development programme. We have also been looking for the most advantageous way of creating a partnership or joint venture in which to hold our Victoria properties, a topic which is expanded on in the portfolio management review. We have advanced the development pipeline and including our share of joint developments we now have 260,160m2 of new developments in progress, a further 212,900m2 with planning permission or minded to grant and more than 249,960m2 at the pre-planning stage. We have also confirmed our position as one of the leaders in total property outsourcing through winning two major contracts with the BBC and BT. The level of activity over the past 12 months demonstrates our focus on the delivery of our strategy and increasing the returns we generate for shareholders. We are pleased that Land Securities Trillium has exceeded our expectations for performance. Our discussions with occupiers lead us to believe that there is good demand for property outsourcing and we are prepared to invest significantly in this business. Our ambition is to grow both the total property outsourcing and the development business units over the next five years until each of these contribute approximately 25% of our total operating profit. We believe that this will provide a balance between the strong and secure performance of the investment portfolio and the higher rewards from our development and outsourcing activities. In this context we have reviewed our capital requirements for the medium term and, as reported in the Chairman’s Statement and Financial Review, have concluded that we have surplus capital which we will be returning to shareholders later this year. Performance benchmarking During 2001 we subscribed to the Investment Property Databank (IPD) property performance benchmarking service both for internal management purposes and also to ensure transparency of performance for the benefit of our shareholders.We consider the most appropriate measure of our performance is total return in the form of NAV growth and dividends. Total property return, on an ungeared basis, in the form of the income yield and capital growth on properties, is an important ingredient of this wider measure. While we believe that benchmarking is a strong management tool, there are reasons why a comparison to IPD does not provide the definitive measure of our performance. For example, it is important to take into account the impact of gearing, the chosen sectors of focus of the Group, and the constraints of capital gains tax on portfolio rotation when compared with typical institutional investors. I am pleased to report that the comparison to IPD shows that over the long term we have delivered significant value through our performance. Over the 19-year period covered by IPD, we are in the top quartile of contributing portfolios in terms of ungeared total return. Further details of our comparative performance over the last year are given in the portfolio management review. Responding to the challenges set by Government In April the Government launched a New Code of Practice for Commercial Leases. It has been seen by some as an attack on the traditional leasing structure in the UK. We would see it rather as a call for building owners to offer occupiers 6 | 7 an alternative to traditional lease forms. I am delighted that we have anticipated the Government’s initiative in this area by responding to businesses’ desire for new forms of occupational contracts both through the acquisition of Trillium and also through initiating the development of our LandFlex product. The Government continues to be challenged by the renewal of the country’s infrastructure and the regeneration of inner urban areas. We have consistently highlighted the threat to the UK and, in particular, to London of neglecting these issues. Urgent priority needs to be given to emulating the success of Government strategies where deregulation and tax incentives have contributed to the successful implementation of urban renewal and infrastructure projects. Property investment can act as a catalyst for renewal in this way. However, it requires significant equity investment from specialist companies with deep pools of development expertise. Financial institutions tend not to have sufficient skilled personnel for large-scale development, and private property companies financed by high levels of debt do not have the necessary equity available. A quoted property company can deliver urban renewal, but the tax regime for such a company put it at a disadvantage as compared to other property vehicles. The Government needs to recognise and address this impediment to the quoted property sector’s potential contribution to urban renewal. The Government’s plans for reform of the planning system should assist in the process of regeneration. We generally welcome these proposals, but we would ask that the Government listens to the representations of the property industry to ensure that there is a simple and consistent process and one which does not, by virtue of an effective development land tax, bias property owners towards retention of existing buildings which may be functionally obsolete. Through regeneration and the delivery of attractive and environmentally sustainable buildings, property companies can improve our daily lives and make businesses more efficient. We are involved in major regeneration programmes in Birmingham, Bristol, Cardiff and Kent Thameside and wish to continue this significant work to improve the fabric of those cities and other potential areas where we might get involved. We therefore need the Government to provide other developers and ourselves with a platform that encourages, rather than discourages, our potential contribution. Group objectives Over the next year we shall seek to expand on the initial success of property outsourcing by developing partnerships with businesses that wish to rationalise their property holdings, releasing value to our respective shareholders’ mutual advantage. The development unit will press on vigorously with the plans outlined in this report to ensure that we are well placed to secure lettings as the market improves, while portfolio management will continue to drive the returns from the investment assets. Businesses face the constant challenge of generating ever-increasing returns. Although, proportionally, property costs have fallen as compared to other costs, more efficient management of property can assist in improving profits. We are ideally positioned to deliver the accommodation and property services required to fulfil this need. Land Securities The investment portfolio was valued by Knight Frank at approximately £7.81bn at 31 March 2002. After adjusting for sales, acquisitions and expenditure the value reduced by 1.3% as compared to 31 March 2001. However, if development properties are excluded, the portfolio value measured on a similar basis with adjustment for sales, acquisitions and expenditure decreased by only 0.5%. A positive contribution from retail warehouse and industrial developments was more than offset by the negative impact of the revaluation of our office development projects which are currently in progress. This reflects a slight reduction in office rental values owing to current market conditions and the increased risk premium applied to speculative development at this stage in the cycle. However, most of the office developments are not due to be delivered until mid-2003 or later when we expect market conditions and rental values to have improved. Retail warehousing has shown the strongest capital growth over the last 12 months, and has been strongly favoured by UK institutions. The industrial sector has been broadly flat with positive rental growth being largely offset by adverse yield movement. Occupational markets have, with the exception of retail, weakened over the last year. However, capital values have generally been supported by high levels of investor interest in property, the attraction being the high yield on property relative to the cost of borrowing and also relative to the income yields available from other asset classes. In the first half of the Company’s financial year, the period to 30 September 2001, capital values for both London office and town centre retail properties weakened due to adverse yield movement. In the second half of our financial year, capital values for town centre retail properties increased with clear evidence that investors are being attracted back to the sector. For London offices, the second half of the year saw continuing small decreases in capital values and sharper falls in rental values. The fact that capital values for London offices decreased by less than rental values is attributable, in part, to the protection offered to investors by long leases and also to the continuing attraction of the yield levels which, for London offices, are high by historic standards. After excluding development properties which were producing less than half of their anticipated income at 31 March 2002, together with other vacant pre- development holdings, the value of the portfolio at 31 March 2002 was £7.0bn. At the same date, the annual rent roll, net of ground rents and excluding the same properties, was £484.1m, 6.9% of this figure. Detailed breakdowns by sector, including comprehensive analyses of the Group’s valuation, rental income and yield profiles, are shown below and on pages 15 and 79. valuation . . . % YIELD ON PRESENT INCOME By sector at 31 March 2002 % YIELD ON PRESENT INCOME At 31 March Offices Shopping centres and shops Retail warehouses Industrial premises and warehouses Hotels, leisure, residential and other Investment portfolio This analysis excludes trading properties and all properties owned by Land Securities Trillium and Telereal. 7.3 6.8 6.2 7.7 5.6 6.9 % 3 9 . 9 9 . 2 8 . 1 8 . 3 8 . 8 7 . 8 6 . 6 6 . 5 6 . 7 6 . 9 6 . year 92 93 94 95 96 97 98 99 00 01 02 8 | 9 Investment Properties PORTFOLIO VALUATION at 31 March 2002 Offices West End City Midtown Inner London Rest of the United Kingdom Shopping centres and shops Shopping centres Central London shops Other in town shops Retail warehouses Parks Other (including food superstores) Industrial premises and warehouses Hotels, leisure, residential and other Total valuation £m 1,454.1 1,157.5 590.7 254.9 95.7 1,278.6 683.5 566.1 822.3 173.0 375.4 359.2 Total % 18.6 14.8 7.6 3.3 1.2 16.4 8.8 7.2 10.5 2.2 4.8 4.6 7,811.0 100.0 Analysis of valuation surplus/(deficit) % (4.3) (2.5) (6.2) (3.8) 1.5 0.0 (0.5) (0.2) 3.0 4.7 0.6 3.3 (1.3) The portfolio valuation figures given above relate to the investment portfolio business comprising investment and development properties. The figures exclude properties owned by Land Securities Trillium and Telereal. The portfolio valuation figures include a one-third apportionment of the valuation attributed to properties owned by the Birmingham Alliance Limited Partnerships and a one-half apportionment in relation to property owned by the Gunwharf Quays Limited Partnership and the Ebbsfleet Limited Partnership. % RENTAL VALUE GROWTH By sector for 12 months to 31 March 2002 PORTFOLIO BY VALUE At 31 March 2002 Offices Shopping centres and shops Retail warehouses Industrial premises and warehouses Hotels, leisure, residential and other Investment portfolio This analysis excludes trading properties and all properties owned by Land Securities Trillium and Telereal. (2.2) 2.2 3.1 3.1 2.8 0.2 % Number of properties 61.75 50 19.60 12.97 5.68 £50m £25m £10m 44 65 110 Land Securities making assets work . . . 1 0 | 1 1 Portfolio Management Over the last 12 months we have completed most of the rationalisation of our investment portfolio to focus primarily on four core sectors of the market: Central London offices and shops, shopping centres, retail warehouses, and south-east industrial premises. These are the sectors that we consider will deliver superior rental growth over the medium and long-term as a result of constraints on the supply of land. The nature of most of our individual holdings is such as to enable us to apply our asset management skills to generate growth in earnings. Fra n c i s S a l way Below Retailer relationship management meeting. Opposite top Portman House, an 11,070m2 development in Oxford Street, London W1. Opposite bottom A new format Comet Superstore at Aintree Retail Park. Empress State Building Following receipt of planning permission last year, Land Securities Development is now progressing work on the flagship building for LandFlex, Empress State Building in Earls Court, SW6. Representing a dramatic element of West London’s skyline the 43,000m2 building is being extensively refurbished and extended and will be surrounded by landscaping incorporating a new piazza. The entire building is being reclad and the existing floor plates extended five metres on one elevation to increase floor plates to 1,400m2. On the top of the building three glass- clad storeys are being added, creating spectacular penthouse offices and accommodation for exhibition, office and corporate functions. Above this a circular revolving top floor will house a bar with panoramic views across London for the use of the occupants. making space work . . . Land Securities’ product development team. LandFlex™ During the last 12 months we have been advancing our proposals for a new leasing product for London offices, which we have called LandFlex. The LandFlex product is designed to meet occupiers’ desire for certainty of cost and flexibility in terms of lease length. The product anticipated the recently introduced Code of Practice on Commercial Leases. From the occupier’s point of view, LandFlex offers: a range of lease lengths with the possibility of options to break or options to renew on pre- determined terms; rent reviews on the basis of RPI rather than conventional market rent reviews; and a rent that is inclusive of normal landlord’s services, repairs and liability for dilapidations upon lease termination. From Land Securities’ perspective, LandFlex will offer enhanced earnings through premium rents and the ability to extract and share in any procurement benefits arising from the scale of our operations and buying power. The LandFlex product will not be rolled out across all our existing London portfolio, but only on buildings specifically refurbished for this purpose. In late 2001, Land Securities Development placed contracts for the refurbishment and extension of two such buildings. The first is Empress State Building, a 43,000m2 31-storey tower building in Earls Court, SW6. This building is due for completion in summer 2003. The second building is 7 Soho Square, W1, which is also being refurbished and extended to provide approximately 5,700m2 of offices with completion in December 2002. As these buildings are let we plan to expand the LandFlex offer to around 140,000m2 of offices within the next three to five years. 1 2 | 1 3 Portfolio Management Almondvale shopping centre Our retail space in Livingston, which includes the Almondvale Centre, approaches 100,000m2 equivalent to a regional shopping centre. The lights at Piccadilly Circus Land Securities owns the building upon which the Piccadilly lights are located which generate in excess of £2.5m of income per annum. Eastbourne Terrace In 2000 we acquired an office building at 10-30 Eastbourne Terrace and last year purchased the adjacent building, 40-50 Eastbourne Terrace. This 13,310m2 office building with four retail units provides a development opportunity with the potential to increase its floor area once the current leases expire in June 2003. Together the buildings give us a frontage in excess of 300 metres opposite Paddington Station. Portfolio Management Each of our core areas of focus have dedicated portfolio management teams who are responsible for managing the investment portfolio with the objective of maximising returns by creating additional value, as well as looking for new opportunities. St David’s Centre, Cardiff Ongoing property management at the St David’s Centre, Cardiff, is focused on enhancing the existing retail offer while we continue to develop our plans for a significant extension in partnership with Capital Shopping Centres. During the year we acquired the Bhs store in Queen Street, Cardiff, which backs on to the principal mall. As well as having a rear frontage into the mall, the store occupies a 100% prime frontage on to Queen Street and consolidates our holdings at the front of the Centre. It was acquired for a little under £25m to show a yield of 6.25%. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities INVESTMENT PORTFOLIO PERFORMANCE RELATIVE TO IPD UNGEARED TOTAL RETURNS – LONG TERM (Table 1) Periods to 31 March 2002 Land Securities IPD* IPD* Upper quartile 10 years % 19 years % 12.3 10.8 11.4 11.4 10.2 11.0 *IPD All Fund Universe March 2002 (unfrozen) Source: IPD UNGEARED TOTAL RETURNS – ONE YEAR (Table 2) 12 months to 31 March 2002 Land Securities % 2.8 7.6 7.7 9.0 5.4 IPD* % 6.1 6.9 7.9 8.1 6.8 Offices Retail Industrial Other commercial PORTFOLIO *IPD All Fund Universe March 2002 (unfrozen) Source: IPD INVESTMENT PORTFOLIO NET ANNUAL RENT ROLL Year ended 31 March 2002 Offices – Central and Inner London £221.8m | 45.8% Offices – elsewhere in the UK £8.3m | 1.7% Central and Inner London shops £41.6m | 8.6% Other in town shops £37.3m | 7.7% Shopping centres £78.9m | 16.3% Retail warehouses and food superstores £56.1m | 11.6% Industrial premises and warehouses £23.9m | 4.9% Hotels, Leisure and Residential £16.2m | 3.4% *The figures in the chart exclude developments which are producing less than 50% of their anticipated income Total £484.1m* making acquisitions work . . . Review of activity Performance benchmarking Table 1 above compares Land Securities’ ungeared total property return over the last ten-year and 19-year periods to 31 March 2002 to the IPD All Fund Universe March 2002, which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2001 (many of these funds are now valued quarterly by IPD, while the others were extrapolated forward). It can be seen that Land Securities’ portfolio has out-performed and produced a return which places it in the top quartile of contributing portfolios over these two time periods. The 19-year period has been selected as the longest time period over which IPD provide comparative performance figures. Table 2 above compares the performance of the Group’s portfolio to that of IPD on a similar basis at both sector and total portfolio levels over the 12-month period to 31 March 2002. Our sector focus means that the structure of the portfolio will impact adversely in some individual years, and this has been the case with our high exposure to offices over the last 12 months. It is also the case that our London office portfolio has under-performed, largely because of development schemes and other properties with short income profiles.We believe that in the medium and long term our chosen areas of sector focus will deliver superior performance and that our development activity will also boost returns. The generation of rental income growth Over the last 12 months growth in annual rents payable has been 5.6% on a like-for-like basis. Rent reviews have been settled at an average of 10% above our valuers’ assessment of ERV. This highly satisfactory result is, at least in part, attributable to our active management of multi-tenanted holdings which has driven rental values forward. Investment activity – purchases The level of investment portfolio purchases over the last 12 months was modest as we implemented our strategy of increasing the proportion of capital invested in our development activities and in Land Securities Trillium.We acquired seven investment properties for £144.6m. Five of these properties adjoin properties we already own and offer varying degrees of potential synergies with the existing holdings. The average yield on these purchase outlays (including the cost of stamp duty and acquisition fees) was 7.0%. Investment activity – sales Over the last 12 months, we sold 44 investment properties for £508.9m (net of sale costs). This is the highest value of sales undertaken by Land Securities in a single year and reflects the extent of the portfolio rationalisation which has been undertaken. The average yield on the properties sold was 8.0%. The FRS3 profit on investment property sales was £10.1m. The most significant sale, and the Company’s largest-ever single investment property transaction, was the disposal of six shopping centres in Ballymena, Newtownards, Irvine, Keighley, Walsall and Bootle, virtually completing our disinvestment from shopping centres in smaller towns. Only five of these have been recorded as a sale during our 2001/2002 financial year as the sale of the shopping centre in Bootle is conditional upon obtaining freeholder’s consent. 1 4 | 1 5 Portfolio Management – Review of Activity INVESTMENT PORTFOLIO VALUATION BY TYPE At 31 March 2002 Offices – Central and Inner London £3,457.2m | 44.3% Offices – rest of UK £95.7m | 1.2% Central and Inner London shops £683.5m | 8.8% Other in town shops £566.1m | 7.2% Shopping centres £1,278.6m | 16.4% Total £7.81bn Total £7.81bn Retail warehouses and food superstores £995.3m | 12.7% Industrial premises and warehouses £375.4m | 4.8% Hotels, leisure and residential £359.2m | 4.6% INVESTMENT PORTFOLIO VALUE BY LOCATION At 31 March 2002 % figures calculated by reference to a total portfolio value of £7.81bn Central and Inner London £4,380.3m | 56.2% Rest of South East and Eastern £999.0m | 12.7% Midlands £479.7m | 6.1% Wales and South West £459.2m | 5.8% North, North West, Yorkshire and Humberside £955.9m | 12.3% Scotland and Northern Ireland £536.9m | 6.9% We also disposed of 17 high street shops for total net proceeds of £60.6m. The town centre retail portfolio outside London is now almost wholly focused upon shopping centres in larger towns or cities, which we anticipate will make a stronger contribution to earnings growth in the future. During the year, we also sold £106.9m of Central London offices comprising eight smaller or more secondary properties. We also sold our largest office holding outside London, a building in Uxbridge, for just under £50m; the sale was completed in April 2001 before demand for Thames Valley offices weakened. From our out-of-town retail portfolio we sold three supermarket investments and a stand-alone retail warehouse for £60m.We also sold eight industrial properties for £31.9m, all except three of which were located outside the south-east. We now have only four industrial property holdings located outside the south-east. As a result of the sales programme undertaken over the last few years, non-core holdings of offices outside London and industrial properties outside the south-east and eastern regions account for less than 2% of total portfolio value. London offices and retail The London office market experienced a sharp reduction in the take-up of accommodation by occupiers during the second half of 2001, a trend which was already evident before 11 September. Reduced demand has been accompanied by an increase in the amount of space being marketed by occupiers which now accounts for over half of the total vacant office accommodation in Central London. Although the weakness of the occupier market has increased availability levels, the pipeline of speculative development in the West End continues to be small. In the City, however, it is slightly higher. Our own portfolio void levels for London offices are 0.7% across the investment portfolio and 2.6% overall, including the development and refurbishment schemes either recently completed or due for completion in 2002. These void levels are low both from an historical perspective and as compared to current average void levels in this market, which are generally considered to be between 6% to 8%. During the year we acquired a recently refurbished property in Wood Street, EC2 for just over £30m, providing an initial yield of 7.72% and a reversionary yield in excess of 8.0%, and a 7,770m2 property at 190 High Holborn, WC1 for approximately £30m. The latter was subject to a short leaseback to the vendor and is now being refurbished. Two further purchases made during the year offer significant development opportunities in the medium term. The first was a mixed office and industrial holding at Bankside in Southwark SE1, which is adjacent to our existing holding and proposed development at St Christopher House; the second a 13,310m2 building, 40-50 Eastbourne Terrace, Paddington W2, which is adjacent to our existing holding at 10-30 Eastbourne Terrace. The most significant rent review settlement over the last 12 months was on Eland House SW1, where the increase in rent is in excess of £5m per annum. We have also established significantly higher rental values on our retail holdings in Victoria Street SW1, through negotiating surrenders and relettings, moving retail rental values ahead by over 25%. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities making resources work . . . During the year we started to examine the feasibility of introducing external investors into a fund or limited partnership comprising the major part of our holdings in Victoria. The properties provide an ‘estate’ of 5.2 hectares, which can be managed as an estate in a unified way that will support ongoing rental growth. We are exploring ways of matching our desire for long-term ownership and extensive redevelopment with the aspirations of third-party investors. The level of our investment in Victoria is likely to remain broadly constant, with our future expenditure on the Stag Place development being balanced by the introduction of new capital through the partnership. Shopping centres and shops The UK retail sector has had a buoyant year with strong growth in retail sales volumes and, in general, increasing levels of profitability for retailers. Rental growth across the sector was modest which, in our opinion, has resulted in a much lower proportion of retailers being stretched by prevailing rental levels. We view this as creating a good platform for ongoing rental growth. Our retail portfolio has been significantly repositioned as a result of the sales undertaken over the last year, which are described on page 14. Subject to a small number of exceptions, which are not material in terms of value, the portfolio is now concentrated on larger conurbations, and predominantly on shopping centres as opposed to individual high street shops. Shopping centres offer excellent opportunities for active management to enhance both value and the retail environment for shoppers. We acquired properties within or adjacent to our existing retail holdings in Cardiff, Sunderland, Aberdeen and Exeter for a total of £37m. In terms of asset management, we have had an extremely active year across the retail portfolio. This is exemplified by initiatives at The Bridges shopping centre in Sunderland. Following the extension to the scheme, which was completed and let in 2000, we have taken advantage of the increased critical mass of the centre to drive performance within the original phase I of the scheme. Over the last 12 months, we have negotiated the surrender of six leases, granted ten new leases and introduced five new retailers to the centre that were not previously represented in the city. We have also facilitated new shop fits in 14 units and introduced leases with a turnover element to eight of the units in phase I on a basis consistent with the leases granted on phase II. In addition, we have introduced a system to record retail sales which will both deepen our relationship with retailers by the sharing of daily turnover information and assist in focusing the promotional activity at the centre. The result of these various initiatives has been to increase footfall by 12% and top rents in phase I of the scheme by 12.5%. Retail warehouses Retail warehousing has enjoyed some of the highest levels of rental growth within our portfolio. It has also benefited from strong demand from institutional investors, particularly since the start of the current calendar year. We purchased the Nene Valley Retail Park in Northampton for just over £30m to show an initial yield of 7.0% and a nominal equivalent yield of 7.5%. The park provides 13,700m2 arranged in ten units and benefits from a planning consent for open A1 use. It forms part of the town’s largest area of out-of-town retailing comprising some 40,000m2. Since completing the acquisition at the beginning of the calendar year, we have let the one vacant unit at a rent in excess of 10% above the rental value estimated at the time of purchase. 1 6 | 1 7 Portfolio Management – Review of Activity Racecourse Retail Park, Aintree Horizon Point, Hemel Hempstead Team Valley, Gateshead Industrial premises and warehouses Despite the severe decline in manufacturing output over the last 12 months, warehouse and industrial rental values have remained stable. This is consistent with the fact that the majority of investment grade property in this sector represents warehousing rather than manufacturing activity and, particularly in the south-east, is more closely aligned with distribution rather than manufacturing. With our sales programme continuing to focus on the disposal of properties outside the south-east, we now have just under 90% of our industrial and warehouse portfolio located in our core area of focus. Our strategy for increasing our industrial and warehouse holdings in the south-east is primarily via the acquisition of sites for development. This is covered in the Development Review. Our asset management activities were effective in generating additional rental income and minimising void levels which were kept down to 1.3% on the investment portfolio. Similarly, at the Almondvale Retail Park in Livingston, which we acquired in the first quarter of 2001, we have now taken a surrender of the lease of a unit and relet it at £172 per m2, thereby moving rental values on the park some 20% ahead of the level estimated at the time of purchase. This also benefits our other two retail park holdings in Livingston. We are continuing to introduce new retailers to Retail World, Team Valley in Gateshead. We have agreed terms whereby MFI downsize their unit from 5,100m2 to 2,050m2 and have prelet the majority of the surplus space to Courts at £237 per m2. Other lettings on the park have continued to push rental values ahead to £242 per m2 for smaller sized units. In addition to the larger scale development activity covered in the Development section of this report, we are undertaking smaller scale development or partial redevelopment schemes within a number of our retail parks. For example, we have recently obtained planning consent, on appeal, for a 3,110m2 extension to our retail park in Bexhill. At Chesterfield we are also constructing a 1,400m2 unit for PC World as an extension to our existing retail park. The asset management activity is not limited to our retail parks. Over the last year, we have particularly focused on the potential for asset management opportunities on stand-alone units. During the year, we concluded an agreement for a 1,400m2 extension to a J Sainsbury supermarket in Hull. We also negotiated surrenders on two stand-alone retail warehouse units in Sheffield and Hendon in North London. In both instances we plan to refurbish the units substantially and are currently negotiating relettings at higher rents. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities making regeneration work . . . 1 8 | 1 9 Development Land Securities Development has one of the most extensive development programmes in the UK. We are one of the few organisations with the financial strength and human resource expertise to undertake a programme of this scale. This competitive advantage has been recognised by local authorities and, more recently, the BBC, where our combined outsourcing and development offer provided a compelling one-stop- shop solution. The programme reflects the focus of our investment portfolio but we also seek to enter into other opportunities where we can see the potential to create higher returns for shareholders. This is demonstrated by our activity in Kent Thameside where we are master-planning the development of one of Europe’s largest regeneration schemes. M i ke G ri ffi t h s Below Kent Thameside project control group. Opposite top Portman House interior, Oxford Street, London W1. Opposite bottom Soho Square, London W1. Exeter development team making innovation work . . . leading national and international centre not only for business and commerce, but also for culture, sport and recreation. We intend to make a planning application during the autumn. As part of this process we have recently commenced a major public consultation exercise involving the wider community to ensure our proposals fulfil the needs of both our occupiers and their customers. St David’s Centre, Cardiff We believe that partnerships, where we work together with others to deliver a shared vision, can create added value for the benefit of all stakeholders. Working in partnership helps us to participate in larger city centre schemes, bringing together a diverse but complementary range of mixed uses and releasing latent value. At the same time we are also spreading our exposure to risk. The principles and benefits of partnership are well illustrated in Cardiff where we are working with both the County Council and adjacent property owners. Last November, in partnership with Capital Shopping Centres, we were invited by the Council to progress proposals for a retail-led mixed use extension of up to 70,000m2 to our existing St David’s Centre. This is an exciting opportunity to build upon and consolidate Cardiff’s potential as a 2 0 | 2 1 Exeter (see left) We now find ourselves in an era where mixed-use urban regeneration is being actively encouraged in city centres to promote 24-hour living. Our objective in Princesshay, Exeter is to lead the way by adopting a fresh and innovative approach to urban design and architecture. Following our decision to withdraw from the November 2000 planning inquiry, we embarked upon a complete overhaul of our previous proposals and, in March 2002, we submitted a detailed planning application for a new 37,520m2 mixed use scheme. The proposals have been drawn up by three leading UK architectural practices and an urban landscape design practice. The development will incorporate a department store, 55 large, medium and standard retail and catering units, 104 residential units, basement heritage centre, tourist information BBC White City In partnership with the BBC we are developing a major new facility at White City. The first phase, comprising 50,400m2 of office and technical space, is now under construction with overall completion expected in May 2004. We are refining the master-plan for the site with the BBC and developing proposals for further mixed use. Facilities management will also be provided, the cost of which will be included as a part of the overall unitary charge. Development Our plans were submitted after an extensive period of consultation with the local residential and business communities. We believe that our investment in the redevelopment of St Christopher House will contribute to the emerging local tourist and business economy. centre and a 300-space multi-storey car park. Essential characteristics in promoting a successful planning application have been teamwork and the consultation process, which go hand in hand. The former has been critical in uniting all stakeholders to achieve a common objective within a specified programme. The latter has enabled early and regular contact to be made with English Heritage, CABE, local amenity groups and the public to ensure that our vision conforms as far as possible to local and national aspirations for good quality designs and architecture. St Christopher House Our commitment to ensuring long- term sustainability of our developments can be seen through our proposals for St Christopher House. These aim to maximise the potential of Bankside’s heritage and integrate the new development both physically and economically within its environment. The infrastructure improvements in the vicinity such as the Jubilee Line extension are creating a location that will help deliver further regeneration and vitality in Bankside. The proposed scheme will replace the existing 1960s 13-storey office blocks and adjoining Tabard House, which, together, act as a barrier to the Tate Modern and have restricted the momentum of regeneration to this key area.Vibrant public spaces are proposed as well as new links between Southwark Street and Tate Modern to the Thames. The Gate, Newcastle The Gate demonstrates the positive economic impact of our activities in the rejuvenation of cities in the UK. Adjacent to the Grainger Town area of Newcastle, our 17,770m2 city centre leisure scheme is already acting as a catalyst for new investment and has attracted major leisure operators such as Tiger Tiger and Odeon Cinemas. The development has created more than 450 construction jobs and when open in late November 2002 will provide full- and part-time employment for more than 300 people. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Development schedule During the year under review we completed some 87,030m2 of the development programme. The most significant projects were Portman House W1, which is now 70% let and Martineau Place, Birmingham, which is 97% let. Completed developments have produced a total surplus of £28m, over the period of development, which is mostly attributable to the aforementioned schemes. However, the overall contribution to the valuation results for the year from the development programme was negative, primarily as a result of a reduction in values on our ongoing London office development projects. Last year we reported a development programme with an estimated capital expenditure of £2bn exclusive of interest and the book values of those properties in our portfolio prior to assembling the programme. This included £49m in respect of projects completed in the year ended 31 March 2001 and now removed from the programme. After excluding trading properties, the White City development for the BBC and the Eastern Quarry and Ebbsfleet holdings in Kent Thameside, the estimated equivalent capital cost of the programme set out in the schedules below is approximately £2.2bn, which includes capital both expended and to be expended. Of this figure £149m relates to the completed projects listed in each of the first sections of the schedules and £745m to those projects in progress listed in the second sections. The balance of £1.3bn relates to expenditure on the proposed developments. The outstanding expenditure of some £1.6bn required to complete the programme will be spread over a number of years. Including our share of joint ventures, the programme set out in the following schedules would provide approximately 829,210m2, of which 260,160m2 is in progress and 462,860m2 is proposed. The sector split of these schemes is: 240,290m2 of new shopping development 300,380m2 of Central London offices 49,570m2of regional offices 24,790m2 of leisure 62,600m2 of retail warehouses 151,580m2 of industrial premises and warehouses. making projects work . . . CENTRAL LONDON Property Developments completed Portman House, W1 Developments in progress 30 Gresham Street, EC2 Empress State Building, SW6 7 Soho Square, W1 190 High Holborn, WC1 Proposed developments New Fetter Lane, EC4 St Christopher House, Bankside, SE1 Stag Place, SW1 40–50 Eastbourne Terrace, W2 RETAIL Developments completed Designer Outlet Shopping Centre, Livingston Joint ownership with BAA McArthur Glen Martineau Place, Birmingham The Birmingham Alliance – a limited partnership with Hammerson plc and Henderson Global Investors 6/16 Market Square, Sunderland Phase II Developments in progress New Bull Ring, Birmingham The Birmingham Alliance – a limited partnership with Hammerson plc and Henderson Global Investors Whitefriars, Canterbury 2 2 | 2 3 Description Size Planning status Estimated/actual completion date Offices Retail Offices Retail Offices Retail/Leisure Offices Offices Offices Retail/Leisure Offices Retail/Leisure Offices Retail Offices Retail Leisure Retail Retail Retail 9,330m2 1,740m2 36,330m2 1,300m2 40,210m2 2,770m2 5,720m2 7,630m2 56,410m2 6,410m2 69,580m2 7,170m2 50,170m2 7,800m2 25,000m2 18,910m2 7,880m2 17,420m2 1,840m2 110,000m2 Permission received Application submitted Minded to grant Oct 2001 Dec 2003 June 2003 Dec 2002 Sept 2002 2006 2006 2005 2005 Oct 2000 Dec 2001 Dec 2001 Sept 2003 Retail + Residential 37,220m2 Aug 2005 Cost £m 44 208 99 7 41 36 15 3 141 98 (cid:2) (cid:2) (cid:2) (cid:3) RETAIL (continued) Property Proposed developments Caxtongate Phase III, New Street, Birmingham Broadmead, Bristol The Bristol Alliance – a limited partnership with Hammerson plc, Henderson Global Investors and Morley Fund Management Princesshay, Exeter Plymouth Coppergate Centre, York, Phase II St David’s, Cardiff – A partnership with Capital Shopping Centres RETAIL WAREHOUSE Developments completed Aintree Racecourse Retail Park, Liverpool Phase I Phase II Developments in progress Kingsway Retail Park, Dundee, Phase I (cid:3) Almondvale Retail Park, Livingston, Phase I (cid:3) Cheetham Hill, Manchester Lakeside Retail Park, Thurrock Proposed developments Kingsway Retail Park, Dundee, Phase II Almondvale Retail Park, Livingston, Phase II INDUSTRIAL Property Developments completed Neptune Point, Ocean Park, Cardiff Juniper Phase I, Basildon Refurbishment Horizon Point, Hemel Hempstead Phase I Developments in progress Zenith, Basildon Cobbett Park, Guildford Welwyn Garden City, Site B Proposed developments Hemel Hempstead, Phase II (cid:2) Commerce Way, Croydon Juniper Phase II, Basildon OTHER Developments in progress The Gate, Newcastle upon Tyne TRADING STOCK Developments completed Crossways Business Park Developments in progress Coldhams Lane, Cambridge Proposed developments (cid:2) Crossways Business Park £m refers to estimated capital expenditure excluding finance costs. Fully let or agreed to be let. Part let or agreed to be let. Added or significantly changed during 2001/2002. Development Description Size Planning status Estimated/actual completion date Cost £m Retail Retail Leisure Offices + Residential Retail + Residential Retail Retail Leisure Offices + Residential Retail/Leisure Offices + Residential Minded to grant 2,490m2 79,160m2 3,670m2 13,750m2 37,520m2 Application submitted Minded to grant Planning inquiry 3,040m2 24,260m2 2,160m2 1,100m2 Up to 70,000m2 Retail Warehousing Retail warehousing Retail warehousing Retail warehousing Retail warehousing Retail warehousing Retail warehousing 9,650m2 2,790m2 9,760m2 8,360m2 9,280m2 4,090m2 9,290m2 9,380m2 Minded to grant Permission received 2003 2007 2007 2004 2006 2008 Sept 2001 Mar 2002 Mar 2003 July 2002 June 2002 Aug 2002 2003 2003 11 34 14 7 7 Description Size Planning status Estimated/actual completion date Cost £m Industrial Industrial Offices Industrial Industrial Industrial Industrial Industrial Industrial Industrial 5,760m2 21,820m2 3,660m2 10,380m2 15,150m2 11,410m2 3,820m2 13,010m2 12,870m2 11,150m2 Permission received Application submitted Sept 2000 Nov 2001 Mar 2002 May 2002 June 2002 May 2002 2003 2003 2003 Leisure 17,770m2 Nov 2002 Offices Industrial Industrial Offices Industrial 5,070m2 14,940m2 12,670m2 36,300m2 18,600m2 Outline permission received Dec 2001 Mar 2002 June 2002 2003-2008 2003-2004 4 20 16 12 12 2 63 13 11 7 O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities (cid:3) (cid:3) (cid:3) (cid:3) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) CENTRAL LONDON OFFICE/SHOPS Maturity of development costs SHOPPING CENTRES Maturity of development costs £m 500 450 400 350 300 250 200 150 100 50 0 Empress State Gresham St St Christopher Hse New Fetter Lane Stag Place Eastbourne Terrace Portman Hse 190 High Holborn Soho Square £m 500 450 400 350 300 250 200 150 100 50 0 York Bristol Cardiff Canterbury Exeter Caxtongate III New Bull Ring Sunderland Martineau Place Plymouth 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 or later Years 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 or later Years These charts show development costs, excluding finance charges, in the year of anticipated practical completion making development work . . . Review of activity We have included on pages 22 and 23 full details of the projects included in our development programme. In this review we set out highlights of the substantial progress we have made to implement this programme during the year. Through each of the stages of site assembly, planning, negotiating agreements, placing building contracts, implementation and letting, we seek to minimise the risks involved and increase the returns generated by this activity. Central London Of our development programme, 56% is in Central London where we are developing or proposing to develop a total of 291,050m2 of office accommodation and 25,450m2 retail/leisure space. A large proportion of this comprises substantial office buildings with associated ground floor retail. In the year under review we achieved planning or minded to grant consents for a total of 163,770m2 of office, retail and leisure space at Empress State Building, New Fetter Lane and Stag Place,Victoria. We have a total of 93,960m2 of development in progress. We also applied for planning permission for a 76,750m2 scheme at St Christopher House, Southwark (page 21). During the year we completed 11,070m2 of new development and refurbishment and agreed lettings of £4.3m. Many of the buildings we are developing have floor plates in excess of 4,500m2 which we believe match the demands of the modern occupier, whose accommodation requirements are being driven by continual advances in technology. With little speculative development underway in Central London, we can use our financial strength to progress our development programme so that we have high-quality buildings ready for occupation when new supply is limited. However, it is unlikely that we would progress schemes such as New 2 4 | 2 5 Fetter Lane or St Christopher House without having significant pre-lettings in place. We are also creating space to incorporate Portfolio Management’s LandFlex product, in two properties, Soho Square and Empress State Building, as well as starting a major development at White City for the BBC (page 21). Retail We continue to make good progress with our urban regeneration programme. Working in close collaboration with local authorities and communities we are committed to creating vibrant metropolitan centres. We are focusing our efforts on dominant locations that we believe will offer opportunities for providing the best returns. We have completed a total of 19,260m2 of new retail space in Sunderland and at Martineau Place, Birmingham and secured a total of £6.7m of rental income. We have a further 147,220m2 in progress in Canterbury and at the Bull Ring, Birmingham. We have 40% of the anticipated income at the Bull Ring secured or in solicitors’ hands. Martineau Place and the Bull Ring comprise part of our holdings in the Birmingham Alliance limited partnership. We are also in the early stages of planning a further 166,580m2 of urban regeneration in Cardiff and Bristol. At the former, we were pleased to be selected, in partnership with Capital Shopping Centres, as partners with Cardiff County Council on this major retail-led project (page 20). At Bristol, we have now concluded our negotiations with the City Council and are progressing our plans in partnership with Morley Fund Management, Hammerson and Henderson Global Investors. We are making excellent progress at Canterbury where the early phases of archaeology and development have been completed. We also recently unveiled Development – Review of Activity our new plans for Exeter, which have been well received (page 21), and we expect the planning application to be resolved in late July 2002. While we are disappointed that the public inquiry at York continues, this delay is mitigated by the high income yield from our holdings on the site. Retail warehouses During the year we completed 12,440m2 of retail warehouse development which were entirely prelet. We have also started work on a further 31,490m2 and have planning or minded to grant consent for 18,670m2 of additional development. We have a total of £7.5m of income secured or in solicitors’ hands. We started on site on phase I at Dundee and at West Thurrock, Livingston and Cheetham Hill in Manchester. All of the units under development have been prelet or terms have been agreed and are in solicitors’ hands. Leisure We are making good progress at ‘The Gate’ in Newcastle upon Tyne. Our 17,770m2 city centre leisure scheme is expected to open on schedule. Our preletting to Odeon Cinemas and other lettings total 9,320m2, together with a further 890m2 in solicitor’s hands, these account for 52% of the anticipated income. Industrial premises and warehouses We continue to refocus the industrial portfolio on the south-east and increase our exposure to this market with a development programme of over 100,000m2. We completed 35,860m2 at our schemes in Basildon and Hemel Hempstead, started on site on 30,380m2 at Basildon, Guildford and Welwyn Garden City, and have a further 37,030m2 in the pipeline. We have a total of £2.5m of income secured or in solicitors’ hands. Kent Thameside Following completion of the acquisition of Whitecliff in April 2001 we have purchased a 50% interest in a further 153 hectares of land adjoining the proposed Channel Tunnel Rail Link station at Ebbsfleet from Lafarge SA for £13.2m. This site immediately adjoins our landholdings of 245 hectares in Eastern Quarry and will enable us to optimise the master-planning of both sites. It is anticipated that an outline planning application for Eastern Quarry will be submitted by the end of 2002 and this, combined with Ebbsfleet, will give a total development potential of up to 10,000 residential units and over 700,000m2 of employment, retail, leisure and other community uses. At Stonecastle the first phase of residential development, in partnership with Copthorn Homes, comprising 201 residential units has commenced. Sales are progressing well and achieving values in excess of £2,152 per m2. Work on the master-planning of the second phase of development is in hand. At Swanscombe Peninsula, a development agreement has been entered into with Lafarge SA in respect of their 154 hectares landholding. We have commenced initial master- planning studies, which will lead to an application for planning in early 2003. We continue to realise value from Crossways Business Park. A speculative development of 14,940m2 of industrial/warehouse space, presold to the Railways Pension Fund, was completed in March. Two units totalling 6,500m2 are either let or under offer at record rents of £83.40 per m2. During the year we also sold 1.35 hectares of land to the O’Rourke Group. At Coldhams Lane, Cambridge, construction of three industrial/warehouse units will be completed during the summer and have been presold to the Railways Pension Fund. A further part of the site has been sold for a leisure centre and a car showroom. We have obtained planning consent on the balance for an 80-bed hotel and expect to sell this later this year. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities making relationships work . . . 2 6 | 2 7 In November 2000 total property outsourcing became an integral part of the Land Securities offer. The business case for a one-stop-shop approach for the provision of property accommodation and related services is compelling. Business and public sector organisations are increasingly seeking ways to release capital, achieve flexibility in their property commitments, reduce costs and focus on their core activities. We offer alternative structures to the traditional landlord and tenant relationship. Our confidence in this market has been endorsed by the two contracts we won last year. We believe that our market leadership position leaves us well placed to win further business as occupiers increasingly recognise the benefits of such arrangements. I a n E l l i s Total Property Outsourcing Below Land Securities Trillium new business team. Opposite top Faraday Building, Queen Victoria Street, London – a Telereal owned property. Opposite bottom Land Securities Trillium’s new reception at its 140 London Wall headquarters. OVERVIEW BY CONTRACT SCOPE AND KEY FEATURES Prime BBC Estates strategy Asset management Development Management of facilities management services (FM) Provision of FM Services Management of capital works Provision of capital works Flexible occupation Unavailability and performance penalties Price predictability X X X X X X X X X X X X X X X X X BT X X X X X X X Property outsourcing We provide total property outsourcing to public and private organisations to enable them to procure accommodation in the same way that they purchase other goods and services. This enables organisations to focus on their core activities while leaving the delivery of accommodation and associated services in our hands. The need for greater flexibility to meet changing accommodation needs as well as the desire for certainty of costs make this a viable alternative for businesses who are seeking alternative ways of fulfilling their requirements. As a market leader in property outsourcing, we have developed the capabilities to enable us to deliver a first class solution for customers, from the development of long-term strategic solutions to the delivery of service through our customer service centres and our network of service providers. We work closely with our clients to identify their requirements and then to provide the solution. The range of service we offer combines the ownership and maintenance of property, together with the management of services provided by service partners in the areas of catering, cleaning and security. We are also able to harness extensive development expertise from within the Group to design and build accommodation where new facilities are required by our customers. Our approach to property outsourcing is based upon achieving the highest possible standards of service. Over the last four years, Land Securities Trillium has invested over £30m in developing best-in-class customer service capabilities that deliver 24-hour support. Jobcentre Plus site at Chancel House, Neasden. making accommodation work . . . Facilities and business services managers meeting in the North East region with a representative from Service Partner, Eurest Sutcliffe. 2 8 | 2 9 Total Property Outsourcing to ensure that, over time, the relationship can be extended right across the BBC’s portfolio. Already the property partnership owns the existing BBC site at White City, and through Land Securities Development is responsible for developing BBC facilities at the six hectare site (see page 21). In addition, some 330 employees have transferred from the BBC to provide facilities management services across the entire BBC estates in London and Scotland, together with assuming responsibility for construction and capital projects works at BBC locations across the UK. The BBC Property Partnership In 1998 the BBC outlined its future property strategy which described its vision to deliver a working environment to attract and retain the best people, support the business at an affordable cost and be flexible as its needs change. In order to deliver this vision, and to fund the significantly increased investment in property that this strategy required, the BBC sought to develop a property partnership with the private sector. Following an extensive bidding and evaluation process, Land Securities Trillium was chosen as the BBC’s partner and we have entered into an agreement to provide accommodation and services to the BBC for a 30-year period. The partnership with the BBC is expected to grow and develop over the years. While, at the outset, the partnership has a clearly defined scope of operation, its financial and operating model has been developed Edinburgh regional office provides an integrated property management service for the PRIME and BBC contracts. DWP modernisation project One of our key tasks is to identify and deliver a solution to each client’s changing accommodation requirements. Over the past year, we have been working closely with the Department of Work and Pensions (DWP) to do just this. The DWP established a new Pension Service and formed Jobcentre Plus, and we have been actively working to identify new properties to enable these organisations to meet their business needs. For The Pension Service we delivered in three months some 12,750m2 of space to accommodate approximately 1,500 new staff. The fit out of the properties included new open plan office space, training rooms and a new staff café facility. As part of a second stage exercise we are also locating and acquiring another six new properties to house a further 2,500 staff. These amount to some 22,000m2 of office space and will be ready for occupation between June and September 2002. In March 2001, we also became involved in the DWP’s new business concept, named Jobcentre Plus, to deliver benefit and work interviews in a combined location. This new business model introduced a need to offer an improved environment in which to conduct interviews and receive members of the public. We were responsible for implementing the design, delivery and management of this project while at the same time the DWP continued to deliver its services to the public. Projects to the value of approximately £16m were delivered on schedule to allow the opening of these new offices to the public. Building on the success of these pilot sites, the DWP is now planning the conversion of a further 1,000 properties around the country, and we have been appointed to manage the strategy for implementation of the roll-out across the DWP portfolio over the next four years. Telereal With BT’s decision to outsource its property portfolio came the announcement that 350 employees from the BT property team were to be transferred to the successful bidder. When in March 2001 Telereal, the joint venture partnership between Land Securities Trillium and the Pears Group, was selected, BT’s focus on the reputation of the selected bidders as an employer as well as the obvious commercial imperatives of the deal had a strong positive impact on the people involved in this transfer. A customer service representative at the Customer Service Centre in Leeds, where customers from BT and O2 call to report building faults and to book conference rooms, touch-down desks and car parking. The employees would be moving from a major corporate where property was generally viewed as a distraction, often diverting both capital and management away from its core business areas, to a business where property is its core activity. While BT Property enjoyed an excellent reputation within the external property world, the team had spent substantial management time ‘proving’ its value internally. For BT’s property team, the transaction has presented an opportunity and they are now part of a company where there are improved career and personal development opportunities.The benefits for Telereal were that it gained a team of property professionals with a wide range of skills and in-depth knowledge of the BT portfolio and business which will prove critical in offering a high quality service back to BT. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities LAND SECURITIES TRILLIUM Employee Analysis Asset Management 173 Call Centre 152 Capital Projects 305 Number of people 1,330 Quality Assurance 45 Facilities Management 478 HR/Finance/Information Systems/Business Dev. 177 Northern Ireland Telereal 130 Total 130 North England PRIME 625 Telereal 1,072 Total 1,697 Midlands PRIME 190 Telereal 767 Total 957 Total 7,564m2 LAND SECURITIES TRILLIUM Regional Breakdown by Contract 000,m2 London and South East BBC 338 PRIME 403 Telereal 2,385 Total 3,126 Scotland BBC 32 PRIME 219 Telereal 496 Total 747 Wales and West PRIME 214 Telereal 693 Total 907 BBC (cid:4) PRIME (cid:4) Telereal making outsourcing work . . . Review of activity The year was one of significant activity and success for Land Securities Trillium. Two major new contracts, with the BBC and BT, were won and mobilised. This success has generated further interest in total property outsourcing from all sectors of the economy. We entered into our partnership with the BBC in September 2001, which included the transfer of some 330 BBC employees into the Group, and are now managing and servicing 320,000m2 of accommodation in Scotland and London. As part of the transaction, the existing White City property and land assets have been transferred to the partnership property vehicle which we have consolidated in these financial statements. This has generated cash for the BBC to invest in its core business of programme making. We are making good progress on the White City development (page 21). We continue to work with the BBC to develop further the scope of this contract and have prepared business cases for additional buildings on the White City site. We have also submitted our views on the Broadcasting House scheme in London and the proposed new Scottish Headquarters in Glasgow for consideration. In December we announced that Telereal, a 50:50 joint venture with the Pears Group, had completed its agreement with BT for the £2.38bn acquisition of the majority of the BT property estate. The transaction was financed by a £1.8bn asset-backed securitisation, £400m of bank debt and £146m of equity from each of the joint venture partners. The estate comprises 6,700 properties with a total floor space of 5.5m m2, 90% of which is freehold or valuable leasehold, with 10% short leasehold. Under the terms of the 30-year agreement, Telereal is responsible for providing accommodation and estates management services to BT. 3 0 | 3 1 Early this year the BT in-house corporate property team transferred to Land Securities Trillium Telecom Services Limited. These employees are now dedicated to delivering Telereal’s service to BT under the terms of the contract with all costs borne by the joint venture company. We have also formed a second joint venture with the Pears Group,Telereal Ventures, and entered into a contract with O2, formerly BTCellnet, to provide strategic outsourcing services across the O2 (UK) property estate. The O2 (UK) estate totals some 8,000 properties comprising offices, call centres, telecom switches and cell sites, and warehousing. At this stage,Telereal Venture’s contract with O2 (UK) does not include the acquisition of assets and is for an initial period of 18 months. It is expected that the contract will generate income of around £1.5m over its term. We have made good progress in our objective of growing the business. At the beginning of the year we were a single contract operation with some 600 staff and we now have 1,330 staff operating across the entire country. The breadth of skills and expertise within our business unit as set out in the chart above (left) enables us to provide the complete accommodation solution to clients, and together with our specialist service partners we are able to deliver service and offer advice across the full spectrum of property issues. This growth in our contract base has also seen the number of properties under management increase to over 7,400 premises, amounting to 7.56m m2 in total. In the chart above (right) we show the location of these properties broken down by individual contract, demonstrating the national nature of our business. (cid:4) Total Property Outsourcing – review of activity The mobilisation activity involved in the establishment of the Telereal and BBC operations has required involvement from all aspects of our support infrastructure. New employing companies are being created, trade union relationships have been implemented and developed, reward and remuneration schemes have been established, roadshows and training schemes have been held for transferring staff, and new service partner relationships have been put in place. At the same time, information systems have been implemented to ensure that all aspects of our property outsourcing operation are able to communicate with each other speedily, while at the same time ensuring that a consistently high level of service is delivered to all our customers and clients across the country. Business and product development Our existing property outsourcing contracts with the Department for Work and Pensions (DWP), BBC and, through Telereal, with BT are performing well which provides a sound platform for the development of further business with these customers. Particular opportunities include the potential outsourcing of the Employment Services estate and contract extensions with the BBC such as life cycle works, facilities management for the remainder of the estate and new developments at Broadcasting House and Pacific Quay. The last year has seen a considerable increase in the level of interest in outsourced property solutions as businesses seek to improve balance sheet efficiency and returns to shareholders, achieve operating cost reduction, sustain cash flow, streamline property-related head-count costs and achieve flexibility in their property portfolios. This has created new opportunities for Land Securities Trillium and we have strengthened our new business team and marketing activities accordingly. Particular focus has been given to targeting companies with the right mix of characteristics to enable significant value to be created for both the company and us. These characteristics include portfolio size, which allows economies of scale to be created through integration with our operating cost infrastructure; covenant strength combined with underlying property value; and dynamic business change against which value can be derived from our flexible property outsourcing model and estate management expertise. Specific focus has been given to those sectors, which we see as being potentially receptive to property outsourcing solutions. Our negotiations on deals with several organisations within these sectors are developing well. Within the public sector, we are looking to build on the success of the DWP PRIME contract, which continues to perform very well. The Government’s public private partnership programme and ‘best value initiatives’, which apply to all local authority accommodation and property services, has created additional opportunities. Since each client’s requirements are different, and the property outsourcing market continues to develop, we are constantly looking at new ways of developing innovative solutions in property. To meet this need we have a product development team that is currently working with our portfolio management team on LandFlex. This team also works closely with our new business team on specific projects for new clients to enable continuing innovation to be made in our property outsourcing deals. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Profit before interest and tax for the year to 31 March 2002 was £530.2m (2001 £456.9m). This represents a 16% increase over last year and was driven by four main factors: • Rental income from the investment portfolio increased by 4.8% to £525.9m. • We recorded a full year’s contribution from Land Securities Trillium, which was owned for only four months in 2001. • A £19.3m contribution to operating profits from Telereal which is our share of its operating profits for the period since formation in December 2001. (Telereal is a 50:50 joint venture with the Pears Group as described in the Total Property Outsourcing Review). • Profits of £4.3m from the sale of trading properties. This is a new activity for us, following the acquisition of Whitecliff in April last year. A n d rew M a c fa r l a n e financial review . . . At the pre-tax level, profits increased by 11.9% from £324.7m to £363.5m. After capitalisation of interest on developments, total interest charges were some £31.9m higher than last year, of which £24.6m is Land Securities’ notional share of Telereal’s financing costs. Telereal’s debt of £2.2bn is non-recourse to the Group. The underlying increase in interest reflects the cost of funding the Group’s continuing investment programme. The Group’s gross interest payable, excluding Telereal, was covered 2.98 times by operating profits compared with 3.03 times in the prior year and we remain in a strong financial position. During the year, we sold investment and operating properties with a book value of £510.4m (2001 £424.9m) generating an FRS3 profit of £13.4m compared with £6.3m last year. Property disposals this year also crystallised revaluation surpluses earned in prior years of £237.8m. Profits after tax were £263.6m (2001 £234.6m), equivalent to a 12% increase in basic earnings per share. The directors recommend a total dividend for the year of 34.0p per share (2001 32.5p), a 4.6% increase. If approved, this will result in a final dividend of 24.95p per share (2001 23.85p). At this level the adjusted dividend cover is 1.52 times (2001 1.39 times). The year-end portfolio valuation was some £100m lower, which represents an overall reduction of 1.3% on the value of investment properties at 31 March 2001. This revaluation deficit has, however, been offset by £85.2m of retained earnings and our share of revaluation surpluses in Telereal, resulting in an adjusted diluted net asset value per share of 1155p compared with 1152p at 31 March 2001. In terms of cash flow, the Group realised £549.2m (2001 £491.3m) from the sale of properties.These funds have been reinvested and the Group spent £306.1m on property acquisitions, £256.4m on development expenditure and invested £146.4m in Telereal. Overall, there was a net cash outflow of £219.2m during the year (2001 £95.4m) and net indebtedness at the year-end rose to £1,942.1m (2001 £1,727.8m).Year-end gearing increased from 28.7% to 32.2%. Over the last year, the Group’s pre-tax total return (that is the percentage increase in pre-tax net asset value per share, adding back dividends) was 5.0% compared with our estimated weighted-average cost of capital of 8.4%. The shortfall was attributable to generally flat asset values as a result of market conditions over the last year. Accounting policies This year’s accounts have been affected by a number of changes to accounting policies and presentation. In the accounts for the six months to 30 September 2001, two accounting policies were changed to adopt Urgent Issues Task Force Abstract 28 (UITF28) ‘Operating Lease Incentives’ and FRS19 ‘Deferred Tax’. UITF28 requires lease incentives (such as rent-free periods or contributions to fitting-out expenses) to be treated as revenue costs. These are deducted from the contracted rent and the resulting net income is then spread evenly over the lease term (or the period to the first rent review if that is shorter). Previously, rent was only recognised from the conclusion of any rent-free period and the cost of other incentives was capitalised. The impact of this change is to increase gross property income in the current and prior years by £3.5m and £3.2m respectively. 3 2 | 3 3 PERFORMANCE MEASURES for the four years ended 31 March 2002 RENTAL INCOME ANALYSIS 14 12 10 8 6 4 2 0 % 1 year 2 years 3 years 4 years Investment property return WACC 2000/01 (restated) 2001/02 £m Increase Properties owned throughout period 422.6 464.6 42.0 Sales (2000/01 and 2001/02) Acquisitions (2000/01 and 2001/02) 67.8 11.2 27.7 33.6 501.6 525.9 Increase/(decrease) Reviews and renewals First lettings Net relettings of voids 22.5 10.7 6.5 Average: For year Over 2 yrs Over 3 yrs Over 4 yrs Total investment property return 5.1% 7.8% 9.7% 10.3% Pre-tax weighted average cost of capital 8.4% 8.6% 8.8% 9.1% Voids for redevelopment (2.5) Other 4.8 42.0 FRS19 requires that deferred tax should be provided for, in-full, on all timing differences that are not permanent. The FRS does not require (or indeed permit) deferred tax to be recognised on the revaluation surplus. The Group’s previous accounting policy had been to recognise deferred tax only to the extent that liabilities or assets were expected to crystallise. The Group’s policy now is to make full provision for timing differences, which arise primarily from capital allowances. The effect of FRS19 is to increase the tax charge for the current and prior years by £5.9m and £4.8m respectively. The provision for deferred taxation at 31 March 2001 has been restated and increased by £121.7m. Experience shows that FRS19 liabilities on the investment portfolio are unlikely to crystallise in practice and these are excluded when calculating adjusted earnings and adjusted net assets per share. FRS19 has no impact on the actual taxes that we pay. In May 2002, the Urgent Issues Task Force issued Abstract 34 (UITF 34) ‘Pre-contract costs’. This Abstract specifies the accounting treatment for the costs of bidding for PFI-type contracts and is relevant to Land Securities Trillium. UITF34 requires all contract costs which are not specifically dealt with by other accounting standards and which are incurred before it is ‘virtually certain’ that a contract will proceed, to be expensed as incurred. The Group’s policy used to be to capitalise costs if it had been appointed as preferred bidder at the end of a reporting period. As a result £14.7m of costs associated with the BBC and Telereal contracts have been written off this year which would previously have been capitalised. A corresponding prior year adjustment has also been made. Finally, we have changed the Group’s accounting policy for interest charges and the cost of financing some elements of development expenditure is now capitalised. This brings the Group into line with its peers and, given the increasing scale of the development programme, will give a better reflection of our costs and surpluses from that activity. The Group’s policy is only to capitalise interest associated with expenditure on development or redevelopment projects from the start on site to practical completion. Details of the policy are set out in Note 1 to the Financial Statements. It will be applied to all development schemes, including Land Securities Trillium’s White City development for the BBC, and the construction of trading properties. The effect of this change is to increase reported pre-tax profits for the year to 31 March 2002 and 31 March 2001 by £21.1m and £11.3m respectively. Further details of the effect of these various changes in accounting policy are set out in Note 3 to the Financial Statements. The combined impact has been to increase reported profits after tax for the year to 31 March 2001 by £1.5m and to reduce net assets at the end of that year by £133.1m. The Group has a defined benefit pension scheme. The scheme, which had gross assets of some £77.6m as at 31 March 2002, is now closed to new entrants. We will adopt FRS17 in full in 2004. New schemes will be set up to meet obligations to employees transferring to the Group under property outsourcing contracts. In addition to these changes in policy, there are a number of changes to the presentation of our financial statements. Our 50% investment in Telereal is treated for accounting purposes as a ‘joint venture’. As a result, our share of Telereal is included on the face of the Group’s profit and loss account, as a separate column. In the balance sheet, our share of Telereal’s gross assets and gross liabilities is shown as an expansion of the ‘investment in joint venture’ line. In addition, in Note 4 to the Financial Statements, we have expanded O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities INVESTMENT PROPERTY INFORMATION at 31 March 2002 INVESTMENT PORTFOLIO ACTIVITY Year to 31 March 2002 Shops and shopping Retail centres warehouses 1.14 8.6 2.96 9.4 Offices 0.56 10.8 % rent roll Industrial 1.28 5.5 Total 1.0 9.6 7.5 9.75 17.75 8.25 8.75 Voids by rental value Net reversionary Average unexpired lease term (years) Reversionary potential Ignoring additional income from the letting of voids Gross reversions 31 March 2001 31 March 2002 % of rent roll % of rent roll 17.1 11.5 Over-rented (2.5) (1.9) Net reversionary 14.6 9.6 Retail/leisure Offices Acquisitions/ developments Sales 269.7 319.4 201.8 157.5 Warehouses and Industrial 34.1 32.0 £m FRS3 profit/ (loss) 4.3 2.9 2.9 505.6 508.9 10.1 financial review . . . the segmental reporting to align more closely with our internal business unit structure. Operating profits have been analysed between property investment, total property services and property trading. Further information about the value of assets in the development programme is provided in Note 14 to the Financial Statements. During the year we sold investment properties with a book value of £498.1m (2001 £424.9m), at an average rental yield of 8.0%, and we have identified a further £150m of assets as potential sales in the short-term, given acceptable pricing. Thereafter, we expect annual investment acquisitions and disposals to be broadly equal. Portfolio management Rental income increased by 4.8% from £501.6m to £525.9m, which has been achieved despite the continuing rationalisation of the portfolio. Adjusting for the effects of property acquisitions and disposals, rental income on properties owned throughout the last two years increased by £42.0m. The main contributors to this increase were £22.5m from reviews and renewals and £10.7m from the letting of new developments. Some £40.1m of rental income was lost on disposals offset by £22.3m from property acquisitions. The net effect of reletting vacant space added a further £6.5m, which was partly offset by a loss of £2.5m due to the emptying of buildings for redevelopment. The cost of bad and doubtful debts was some £1.5m, which was less than 0.25% of the rent roll (2001 0.26%). During the last 12 months, the net reversionary potential of the portfolio, excluding voids, has reduced to 9.6% at 31 March 2002, compared with 14.6% a year ago. This is largely the result of reversions secured during the year through the settlement of reviews and renewals. There is now little significant over-renting in the portfolio, and within the next five years the potential shortfall is less than £3.1m of rental income in relation to renewals or options to break in over-rented property. The average unexpired lease term over the portfolio as a whole is 8.75 years (2001 10.25 years). Development The projects that comprise the current development programme are set out in the development review. To be included in the programme a project must have, or be close to obtaining, final approval to proceed (although that approval may be conditional on the receipt of planning consent or obtaining an appropriate level of prelets). Projects remain in the programme until they are 95% let. The carrying value of development programme assets (excluding the development for the BBC at White City and trading properties) was £1,050.1m at 31 March 2002 (2001 £904.5m). During the year, we spent £325.4m on development and capitalised associated finance costs of £19.9m. We added schemes principally at Soho Square, High Holborn, Eastbourne Terrace and Cardiff to the programme. Six projects with a book value of £137.6m were completed during the year. We have temporarily removed the Martineau Galleries scheme from the programme while we reappraise our plans for this site. The estimated future cash spend required to complete the current development programme, excluding interest, the White City development for the BBC and the project at Kent Thameside, will be some £1.6bn. 3 4 | 3 5 Land Securities Trillium We reflected our first full year’s profit contribution from Land Securities Trillium in 2002. This year, Land Securities Trillium (including our share of Telereal) generated some 40% of the Group’s gross property income, and 12% of our profit before interest and tax. Revenue and profits from the PRIME contract have grown in line with expectations and we carried out significant extra work at the request of our customer which generated additional fees. On the BBC contract, won during the year, we spent £50m on the construction of the White City 2 building with an estimated £215m (excluding interest) to be spent over the next three years. As anticipated, we have incurred a small operating loss on this contract, but expect it to become profitable when the new building is occupied by the BBC. In the year to 31 March 2002, Telereal has made a positive contribution to earnings (before bid costs), and we expect its contribution to build over the next few years. At 31 March, Telereal revalued its portfolio of investment properties, as a result of which we have recognised a valuation surplus of £46.8m, being our share of the uplift. Taxation The cash tax charge, equivalent to 26.4% (2001 26.9%) of revenue profit, reflects the benefit of capital allowances from developments, refurbishments and acquisitions. The requirement in FRS19 to make full provision for timing differences means that in profit and loss account terms, our reported tax rate is 27.2% (2001 27.7%). Telereal has a higher effective tax rate reflecting the particular terms of the transaction with BT. Following the latest property valuation, the Group has an estimated potential capital gains tax liability in the region of £535m (31 March 2001 £540m), were all its properties to be sold at the revalued amounts without any tax mitigation. This is equivalent to a 96p (2001 97p) reduction in diluted net assets per share. Cash flow and treasury Land Securities operates a central treasury, whose activities are carried out in accordance with Board approved policies. The Group maintains treasury control systems and procedures to monitor interest rate, liquidity, credit and other financial risks. The treasury does not operate as a profit centre. Land Securities uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from those operations. Derivative instruments, exclusively interest rate swaps, are used by treasury to swap borrowings from floating to fixed rate and to fix future borrowings. Due to the long-term nature of property investment, the Group’s external borrowings are also primarily long term. To provide flexibility the Group has a £600m syndicated bank facility, which is used for short-term requirements. During the year, the average borrowing on our syndicated facility was £283.0m, at a cost of 5.6%. The overall weighted average cost of funding was 8.4% (2001 8.8%). The Group had a net cash outflow before the use of liquid resources and financing of £219.2m for the year (2001 £95.4m), primarily attributable to its capital expenditure and investment activities. The Group has funded this net outflow by drawing against its £600m syndicated bank facility. During the year, an additional £300m of interest rate swaps were executed to take advantage of the current low levels of interest rates and to hedge the cost of future borrowings. This was done because the Group’s gearing is expected to rise as the development programme gathers pace. At the year end, the fair values of the Group’s financial liabilities exceeded book value by £474.9m (2001 £507.3m), reflecting the reduction in long-term interest rates since the Group’s fixed rate borrowings were originally taken out. After tax, the implied adjustment to the Group’s net asset value would be to reduce reported diluted adjusted net assets per share by 60p (2001 64p). Insurance In common with other property owners, our insurers are applying terrorism exclusions to our policies as they become due for renewal in 2002. The Group continues to buy the most comprehensive terrorism insurance cover available from the Government-backed Pool Reinsurance Company Limited. Capital structure The Board has recently undertaken a review of the Group’s capital structure and medium-term financing requirements. We have concluded that, notwithstanding the future capital required to fund the development programme, and a desire to invest significant further sums in Land Securities Trillium, the Group has more capital than it currently requires. We have reached this conclusion after taking into account our aim to maintain a target credit rating in the A range. We believe that the Group’s financial strength will be an important factor in its ability to win property outsourcing contracts in the future. We therefore intend to return approximately £500m to shareholders, on a pro rata basis, this year. The Board has not taken a final decision on the method to be used to return the capital, but it is likely to involve a structured transaction. If this is the case, shareholder approval may be required. On a pro forma basis, the return represents an increase in gearing at 31 March 2002 from 32.2% to 44.1%. In addition, redemption notices are being issued to the holders of our convertible bonds. Both the 2007 and 2008 series of bonds are convertible into shares at prices that are below current market value and it is therefore expected that these bonds will convert shortly. If conversions occur, it will reduce our outstanding debt, and increase our equity, so reducing gearing. In this case, we will increase the amount of money returned to shareholders to offset the bond conversions. As an alternative to conversion, the Company may purchase bonds in the marketplace, if these are offered at attractive prices. We have put in place an additional £1.5bn syndicated loan facility to finance the proposed return. This will also provide additional working capital to fund our medium-term business plans, including the development programme and the expansion of Land Securities Trillium. Going concern After reviewing detailed profit and cash flow projections, and taking account of available bank facilities and making such further enquiries as they consider appropriate, the directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future. For this reason, we have continued to adopt the going concern basis when preparing the financial statements. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Property in context At Land Securities, as a result of the scale of our operations, we have long held the view that many of our properties have an environmental and social impact which extends beyond the physical and financial investment we make in them. This is particularly evident across our shopping centres and our development projects and we work hard to integrate our activities into local communities. We are conscious that by recognising Our strategy for corporate social the views of a wider pool of stakeholders responsibility (CSR) continues to evolve. and closely aligning our interests, we While we have always aimed to take an enhance the sustainability and long- active and responsible approach to the term financial performance of our delivery of our business activities, as the business. At the same time we minimise examples on these pages demonstrate, the risks and maximise the benefits to we continue to seek to improve across our customers, local communities, all areas of our business. employees and shareholders. making property work . . . Enhancing retail Our retail portfolio comprises shopping centres, retail warehouse parks and Central London retail. A thriving retail environment plays an important role in enhancing the community within which it is located and our activities are focused on providing services and facilities to ensure the shopping environment has a positive impact. We aim to provide a safe, clean, pleasant and accessible environment for our visitors and create strong links with local communities. Across the UK our shopping centres are involved in many charitable, educational and community initiatives. We participate in nine Town Centre Management schemes and are involved in some 20 CCTV schemes. All our CCTV schemes are independently audited annually to check operational procedures and compliance with the Data Protection Act. In London we are founder members of the New West End Company, which will, over the next few months, launch initiatives aimed at enhancing the shopping experience in the West End. All of our activities in this area are designed to improve the retail environment and shopping experience. This not only benefits our shoppers but also improves the trading performance of our retailers, which will, over time, enhance the returns for our shareholders. We are also involved in four of the five Central London Circle Initiatives which are private sector led partnerships responsible for improving and helping to manage Central London areas. These are in Bankside, Coventry Street, Holborn and Paddington. Addressing corporate social responsibility Last year we formed a CSR Committee. This comprises senior representatives from each of the business units as well as the Group HR director and head of corporate communication and is chaired by the group chief executive. Over the next 12 months the objectives of the Committee will be to review our performance, set objectives and targets for the Group and communicate more clearly our activities under corporate social responsibility. In the meantime, we are delighted that our commitment to environmental initiatives and community involvement has been recognised by the inclusion of the Company within the FTSE 4 Good Index, which is intended as a guide for those committed to Socially Responsible Investment. 3 6 | 3 7 Property in context Helping others In addition to our charitable donations, in Central London we help a number of organisations that provide facilities and support to the homeless and elderly. These include the Cecil and Central Housing Trust where we helped to raise funds for a new hostel in Waterloo Road to provide accommodation, training, counselling and other services for women. We are participating in the LWT ‘Whose London’ project with the St Giles Trust in Southwark and are involved in the Appeal Committee for the refurbishment of the social care unit of St Martin-in-the-Fields. Progressing education At the White Rose shopping centre we have been working with the Leeds Local Education Authority and ten local teachers to develop a Key Stage 3 numeracy pack which has been introduced across the Leeds area. This pack is designed to help local children improve their numeracy skills by using information from the shopping environment in examples and activities, which makes the learning experience more familiar and relevant. A similar initiative is also underway in Canterbury and we are examining ways of launching this scheme across our other centres. Improving access Improving access to our centres is a constant challenge, not just for visitors with disabilities but also for parents and their children. Where we own the car parks we provide parent and child parking spaces at our centres.We also provide ‘kiddie carts’ and crèches in many of these. Over the past six months we have introduced ‘Shopmobility’ at East Kilbride, Livingston and Sunderland. This service enables shoppers to access centres easily and to benefit from the free provision of either a powered scooter or wheelchair for the duration of their visit to the centre or the city centre area.At Sunderland approximately 600 shoppers have already registered for the service since its introduction. In addition, at the White Rose centre we have established a group made up of disabled shoppers and centre staff. The group meets quarterly to discuss current issues and provide feedback, which is used to trial new initiatives. improved transport infrastructure and community facilities. While these often result from our responsibilities under Section 106 agreements we also provide additional facilities. For example, in Canterbury we have funded an on-site employment centre and community liaison officer as well as providing a local community information website and newsletter. Under our development responsibilities we also fund major archaeological excavations, an example of which is at Gresham Street where a £1m nine-month archaeological dig was undertaken. Working with the Museum of London, the dig uncovered finds of great historical value from Roman times. Such was the importance of these finds that a temporary exhibit was established at the museum, which we funded, to enable the finds to be displayed. At the same time we sponsored an interactive exhibit to enable schoolchildren to experience an ‘archaeological dig’ first hand. Implementing regeneration Land Securities’ extensive development and refurbishment programme aims to regenerate town and city centres across the UK, providing benefits for the local community by upgrading facilities and creating new public spaces. Our approach to regeneration seeks to engage with our local stakeholders and provide vibrant and economically sustainable schemes. As part of this approach we deliver benefits to the community such as O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Environment, health and safety Over the last year we have taken further steps to integrate environmental and health and safety considerations into the daily activities of our various teams. Overall responsibility for both environmental and health and safety matters rests with Francis Salway at Board level, and he has strengthened the specialist team covering these areas by the recruitment of a group health and safety manager. To establish a culture of continuous improvement in the areas of environment, health and safety, we have set up separate panels covering these two areas across each of our business units. We have also set specific targets by which we can measure our progress. making sustainability work . . . Carbon emissions trading scheme Early in 2002 we subscribed to the Government’s Carbon Emissions Trading Scheme, which is designed to assist companies in the reduction of carbon emissions by establishing financial rewards and penalties for meeting target reductions in carbon emissions. Current proposals are that a scheme of this nature will become compulsory within the EU by 2008, and a voluntary scheme has been set up in advance in the UK by the Government to assist companies to operate in the new environment. We are one of only two companies in the property sector to have elected to participate in the voluntary scheme. We believe that it will assist us in the meeting of carbon emission reduction targets and, if we are successful in meeting these targets, it may also generate a small financial profit. We are delighted to have met ten of these targets and are close to completing the other three. We have set 18 new targets for the current financial year. A number of the achievements which flowed from the setting of targets for the last year are described over these pages. Environmental reporting In 2001, we became the first company in the property sector to publish a stand-alone environment report. We have also developed an environmental section on our Corporate Website. Our achievements in this area were recognised during the year by our being accredited with Green Apple Gold Award for Best Practice in Environmental Management. In our Environmental Report, we set out 13 specific targets for the Company’s 2001/2 financial year. 3 8 | 3 9 Environmental Management Systems (EMS) Land Securities Trillium developed an Environmental Management System tailored to meet the needs of the PRIME contract and has recently submitted an application for ISO 14001 certification. Land Securities Trillium now has 15 members of staff trained as Environmental Auditors. Health and safety Within the last 12 months, in accordance with the requirements of corporate governance, we have introduced a new health and safety policy which clarifies responsibilities for health and safety matters across the Group. We have also introduced health and safety panels within each of our business units. The health and safety risk profile of the Company is low. Our hazards and risks vary on a business unit basis, ranging from trips and falls within Portfolio Management, the building owners Construction Design and Management (CDM) risks within Development and a range of generally low risk office-based hazards within our total property outsourcing business. No enforcement notices have been served on the Company by the Health and Safety Executive during the period under review. Environment, health and safety The requirements of risk assessment based legislation and the need for a robust risk management strategy continue to be of high importance. Significant resource has and will continue to be provided into the identification and management of workplace hazards and risk. During the current financial year, we will be introducing a number of quantitative measures of performance within the health and safety area. We will also be seeking to integrate health and safety considerations into our staff’s daily activities. This will be done through a combination of having a higher proportion of our health and safety audit activity undertaken by in-house staff and also continuing the training programmes we have instituted. Within the last 12 months, we have had over 250 members of staff attending various health and safety training courses. Much of this has been externally accredited training through IOSH and NEBOSH. We have in place strict risk management controls and are introducing systematic record-keeping systems which will serve to minimise exposure under public liability claims. These will be the focus of all property management, insurance and health and safety teams in future, adding to our ethos of continual improvement. Sustainable development We have assessed the environmental impact of all our major office refurbishments and developments using BREEAM for a number of years. During the last 12 months, we submitted a warehouse development for the BREEAM assessment for the first time and were encouraged to receive a rating of ‘Very Good’ for our new warehouse development at Horizon Point in Hemel Hempstead. We will now be submitting all future warehouse developments for BREEAM assessment. We are also working with the Building Research Establishment to develop an environmental assessment method for retail developments. Working with the Property Environment Group, we ran a seminar on sustainability for our Development team. Over the course of the next two years, we are planning more extensive training on environmental issues, working in conjunction with specialist consultants, WSP, who will be producing a structured and targeted programme of training across the Group. During the year, we moved to purchasing electricity for our own offices at 5 Strand and 140 London Wall in London from renewable sources, bought on ‘Eco-tariffs’. Environment day In January 2002, we held the Company’s first Environment Day, the purpose of which was to raise awareness of environmental issues among our staff and also the wider public. We liaised with the Environment Agency and a number of other local environmental organisations in planning the various initiatives and training sessions. Events were held both at our London offices and, more importantly, in malls at most of our shopping centres. The involvement of local community initiatives at a number of shopping centres was particularly successful. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Human Resources Over the last 12 months our employees have gone through a period of significant change due to changes in management, reorganisation and diversification of activities. The challenges for HR are to ensure that employee relations and internal the business units have the capability to communication processes to be achieve growth targets and to support strengthened.The organisation structure our employees in making the necessary has become flatter, less hierarchical with performance improvements. It is more decision making and authority important to ensure that synergies being delegated. between business units can be maximised, new business initiatives are The integration of acquisitions, new nurtured and integration, where total property outsourcing contracts and appropriate, is managed smoothly and development of new business will achieves the desired results. With the continue to require a significant amount addition of new total property of flexibility and adaptability. This, and outsourcing contracts the overall other factors, has focused attention on number of employees has grown training, employee development and substantially and this will require reward programmes. making values work . . . Across the Group, customer service will be promoted and developed. This will enhance our relationships with occupiers, service partners and contractors and support our new business. We have run a number of customer service programmes across our property outsourcing teams and within shopping centres, which will be continued during 2002. During this period of growth we have continued to ensure our internal communication processes are fully effective by introducing regular briefings, team away days, management conferences, a corporate intranet accessible by all staff and an integrated induction programme. Training and development To further enhance performance in all aspects of the business, the Company is investing strongly in training and development of employees. A group training and development manager has been appointed to provide a consistent and focused approach across the Group. The key aim for 2002 is to equip the organisation to respond quickly and effectively to change by demonstrating that Land Securities’ managers add value to the assets of the Group. With the introduction of a process that links performance to bonus, all managers and employees have been trained in their role in performance management. During 2001, we successfully delivered a wide range of training as part of the mobilisation programme for our new total property outsourcing contracts. 4 0 | 4 1 HR policy The employment policies of the Company maintain its commitment to equal opportunities. The criteria for selection and promotion are the individual’s suitability for the position of employment offered and his or her skills and abilities. We maintain our policy of giving full and fair consideration to the employment of applicants who are disabled and for incorporating the needs of people who may become disabled during the course of their employment with the Company. Our business ethics policy is circulated to all staff and provided to all new employees in their induction pack. All staff are required to abide by its provisions. Copies of our employment and business ethics policies are available on our website. Our core values We have revisited our core values for the 21st century and reworded these as: • Integrity • Respect for the individual • Innovation • Customer service • Excellence. A series of workshops have been run throughout the Group in which employees have had the opportunity to input into how our values can be integrated into business. These values are the foundation to the way that we operate our business and will continue to underpin our culture in future. These core values are the foundation for building on our business success and reputation. By following our core values, we will continue to build a culture where each employee feels valued and is able to contribute to the ongoing success of the Land Securities Group. We will build a business that our occupiers, customers and service partners are keen to work with and thus ensure our competitive edge. Values into action The demonstration of these core values in the workplace will build our reputation in the marketplace and to this end, a Values into Action Award is in place that rewards those individuals that actively demonstrate the core values in the workplace. All training and development and HR policies support the core values and we aim to work with contractors and service partners who demonstrate a clear commitment to these values. Rewards and recognition The Company has conducted a full review of its rewards policy to ensure each employee has clear and measurable targets, so performance and contribution to the Company’s objectives is recognised and rewarded accordingly. Where appropriate, these measures are made against external benchmarks to ensure Land Securities is striving to lead and exceed market performance in all its business areas. To further align rewards with shareholder interests a proportion of the new management bonus plan is awarded in deferred shares. Land Securities is committed to maximising the performance and potential of all our people and the Company is establishing succession plans for all key positions. We are creating an environment where innovation and creativity are rewarded, as well as a strong collaborative spirit across the Group. A company that provides people with clear direction and opportunity to grow, helps to attract and retain the highest calibre employees. Human Resources Broadening horizons We are keen to encourage our employees to become involved in activities outside of their normal work experience. For example, we have a project in place with St Anne’s RC Primary School in Whitechapel, London as part of our association with Tower Hamlet’s Education Business Partnerships.Volunteers visit the school on a weekly basis to help children aged 10 and 11 improve their reading skills. This education scheme benefits all participants. Our employees have the opportunity to broaden personal experiences and develop interpersonal skills while, most importantly, the children gain from one-to-one tuition. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities Executive Directors Ian Henderson Michael Griffiths Andrew Macfarlane Francis Salway directors ... Ian J Henderson CBE 58 Joined the Group in 1971. Appointed to the Board in 1987 and chief executive in December 1997. President of the British Property Federation,Vice-Chairman of the Board of Management of Central and Cecil Housing Trust and Chairman of the New West End Company. Andrew E Macfarlane 45 Joined the Board as finance director in October 2001. Formerly partner in Ernst & Young and, prior to joining Land Securities, Chief Financial Officer of Bass (now Six Continents) Hotels and Resorts division. Michael R Griffiths 57 Joined the Group in 1973. Appointed a director of Land Securities Properties Limited in 1986 and to the Board in 1990. Francis W Salway 44 Joined the Group in October 2000. Previously an investment director at Standard Life Investments. He is chief executive of the Group’s Development business unit and was appointed to the Board in April 2001. Board of Directors Peter G Birch CBE Ian J Henderson CBE Michael R Griffiths Peter B Hardy Sir Winfried Bischoff Giles I Henderson CBE Francis W Salway Andrew E Macfarlane Peter G Freeman David Rough 4 2 | 4 3 Non Executive Directors Peter Birch Sir Winfried Bischoff Peter Freeman Peter Hardy Giles Henderson David Rough Peter G Birch CBE 64 Appointed a director in 1997 and chairman in July 1998. Chief executive of Abbey National plc until March 1998. Chairman of the Legal Services Commission and Kensington Group plc. Director of NM Rothschild & Sons Limited, Dah Sing Financial Holdings Limited and Travellers Exchange Corporation Ltd. Peter B Hardy 63 Appointed to the Board in 1992. Managing director, Investment Banking with SG Warburg Group plc until 1992. Director of Foreign & Colonial PEP & ISA Investment Trust plc, Howard de Walden Estates Limited and Barnardos. Sir Winfried Bischoff 60 Appointed to the Board in 1999. Chairman of Citigroup Europe, deputy chairman of Cable and Wireless plc and a director of the McGraw-Hill Companies, USA, Eli Lilly & Company, USA, Ifil-Finanziaria di Partecipazioni SpA Italy and Siemens Holdings Plc. Giles I Henderson CBE 60 Joined the Board as a non-executive director in October 2000. Senior partner of Slaughter and May until April 2001. Member of the Hampel Committee on Corporate Governance and previously a member of the Financial Reporting Council and chairman of the Law Committee of the UK/China Forum. Non-executive director of Standard Life Assurance Company. Master of Pembroke College, Oxford, since July 2001. Peter G Freeman 46 Joined the Board as a non-executive director in January 2002. Non- executive director of the Argent Group PLC and chairman of Freeman Publishing plc. David Rough 51 Joined the Board as a non-executive director in April 2002. Group Director (Investments) of Legal and General Group PLC until December 2001. A Director of Legal and General Select Investment Trust PLC, BBA Group PLC, EMAP Group PLC and Xstrata Group PLC. O p e r a t i n g a n d F i n a n c i a l R e v i e w | Land Securities appropriate, approve funding proposals taking into account key financial drivers, sensitivities, and project risk assessment. All directors have access to the company secretary who is responsible for ensuring that Board procedures are complied with and who advises the Board on corporate governance and compliance matters. The Board has resolved that directors may seek independent professional advice at the Group’s expense in the furtherance of their duties as directors. The roles of chairman and chief executive are split and there exists a strong non-executive element on the Board which currently consists of four executive and six non-executive directors. The Board considers that all the non-executive directors should be regarded as being independent. The Company does not currently have a senior independent non-executive director. The Board believes that the present balance and composition of the Board is appropriate in the light of prevailing circumstances. The Board is supplied with comprehensive management information on a regular and timely basis, principally by means of monthly Board reports and detailed reviews of rental income and financial projections every six months. The Group’s cash management and treasury activities are reviewed at each Board meeting. The Board does not consider it appropriate to establish a Nomination Committee; instead the entire Board acts as a Nomination Committee and is responsible for the selection and approval of candidates for appointment to the Board. In accordance with the Companies Acts and the Articles of Association of the Company, all directors are required to submit themselves to shareholders for re-election to the Board at the first Annual General Meeting following their appointment and at regular intervals thereafter. A resolution was passed at the 1999 Annual General Meeting to amend the Company’s Articles of Association so that every director is required to stand for re-election every three years. Non- executive directors are appointed for an initial period of three years which is extendable upon mutual agreement. Directors are provided with training and induction into the responsibilities of a director prior to, or immediately following, their appointment to the Board, if that appointment is the first occasion that they have been appointed to the board of a listed company. The training needs of directors are reviewed periodically to ensure that they are kept up to date on relevant new legislation and changing commercial risks. Directors’ remuneration The report of the Company’s Remuneration Committee is on pages 46 and 47. Relations with shareholders The Company values dialogue with institutional and private shareholders, and the chief executive together with the finance director hold regular meetings with institutional shareholders to discuss strategic and other issues within the constraints imposed to ensure the protection of price sensitive information which has not already been made available generally to the Company’s shareholders. The Board welcomes moves towards a more constructive use of Annual General Meetings and regards the Annual General Meeting as the principal opportunity to meet private shareholders. Details of proxy voting are disclosed on each resolution after it has been dealt with by a show of hands. The chairmen of the Audit and Remuneration Committees normally attend each Annual General Meeting in order to answer any questions relating to the activities of these committees. The Company supports the concept of individual resolutions on each substantially separate issue at General Meetings and will continue to propose a separate resolution relating to the Report and Financial Statements. The Company arranges for the Report and Financial Statements and related papers to be posted to shareholders so as to allow at least 20 working days for consideration prior to the Annual General Meeting. Corporate governance The Combined Code – Principles of Good Governance and Code of Best Practice (derived from the Cadbury, Greenbury and Hampel Committee Reports) The policy of the Board is to manage the affairs of the Company in accordance with the Principles of Good Governance and Code of Best Practice as set out in Section 1 of the Combined Code annexed to the Listing Rules of the Financial Services Authority. The Company has complied with Section 1 with the exception of the matters set out below. While strongly endorsing the importance of accountability, the Board supports the view expressed in the final report issued by the Hampel Committee that ‘the board’s first responsibility is to enhance the prosperity of the business over time’. It is the Board’s responsibility to ensure good governance but this process cannot be an end in itself. Directors The Board meets at least six times a year. Its principal task is to formulate strategy and to monitor and control operating and financial performance in pursuit of the Group’s strategic objectives. It operates in accordance with a formal schedule of matters reserved to the Board for decision. These matters include property developments, refurbishments, acquisitions and disposals in excess of £50m, fund raising, loan repayments and treasury policy. They also include the appointment or removal of directors and the company secretary and the introduction of any significant changes to employee share or pension schemes. In addition, the Group has established an Investment Committee to appraise and, where 4 4 | 4 5 Accountability and Audit Financial reporting The Board seeks to present a balanced and understandable assessment of the Group’s position and prospects, and details are given in the Chairman’s Statement and the Operating and Financial Review. Internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to meet business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The key features of our system of internal control include: (a) Strategic planning; each business unit must produce and agree a business plan each year, against which the performance of the business is regularly monitored; (b) Investment appraisal; capital projects, major contracts and business and property acquisitions are reviewed in detail and approved by the Investment Committee and/or the Board; (c) Financial monitoring; cash flow and capital expenditure are closely monitored and key financial information is reported to the Board on a monthly basis; (d) Systems of control procedures and delegated authorities; there are clearly defined guidelines and approval limits for capital expenditure and disposals, detailed appraisal and authorisation procedures and defined, activity-based expenditure authorisation guidelines; (e) Risk management; through an ongoing process of identifying, evaluating and managing the significant risks faced by the company. The Board confirms that this process has been in place for the year under review and up to the date of approval of the Report and Financial Accounts. This process is regularly reviewed by the Board and accords with the Turnbull guidance; and; (f) Annual assessments; an annual assessment based upon a compliance questionnaire completed and signed off by senior managers, providing assurances that controls are both embedded and effective within the business; (g) An internal audit function; responsible for reviewing the business processes and controls. The findings are reported directly to the Audit Committee. In addition, the Audit Committee receives: (a) Reports from the head of Risk Management and Internal Audit on the work carried out during the year, including an annual summary on the operation of the system of internal control to support the Board’s annual statement; and (b) Reports from the external auditor. For the purposes of applying the Turnbull guidance we have not included material joint ventures and associates as part of the Land Securities Group. We do not have management control of any of these joint ventures or associates, but do ensure that appropriate Corporate Governance procedures are in place as part of the operating arrangements. Audit Committee The Audit Committee consists solely of the non-executive directors, is chaired by Peter Hardy and operates in accordance with written terms of reference. Upon the retirement of Peter Hardy, David Rough will assume the chair. At its regular meetings the committee seeks to ensure that appropriate accounting systems and financial controls are in operation and that the Group’s financial statements comply with statutory and other requirements. The committee receives reports from and consults with the internal and external auditors. It reviews the interim and annual results and considers any matters raised by the internal and external auditors. It also monitors the scope, cost effectiveness, independence and objectivity of the external audit. Auditors The Directors of Land Securities, and our external auditors, PricewaterhouseCoopers, have for many years had safeguards in place to maintain the independence and objectivity of the audit. We have recently reviewed our procedures in the area of the provision of services by our external auditors and, subject to the results of the DTI review expected later this year, have adopted the following interim policy: Audit related services: We will normally retain our auditors to provide “audit related services”. This is work which, by the nature of the services required, the external auditors are best placed to provide, either because they are required to do so for regulatory purposes, they have a significant depth of knowledge of the particular area of the business or issue, or because the work has a strong relationship to the audit itself. It is likely that support for Land Securities Trillium’s bid activities and the work involved in the acquisition of new contracts would fall within this category. – Tax consulting services: the tax consulting practice of our external auditor has a long association with Land Securities and has built up a significant knowledge of our affairs. This makes them best placed to undertake the majority of Land Securities tax work, for which we will continue to retain them. Any significant pieces of tax consulting work which we consider the external auditors are not best placed to conduct will be put out to tender. – General consulting work: significant general consulting work will normally be put out to tender. With effect from the Annual General Meeting we will not, except under exceptional circumstances, invite the external auditor to tender for such work. The auditors may participate in such tenders with the Audit Committee’s prior approval. – Approval procedures: the Senior Executive Group has reviewed and adapted its authorisation procedures which now require approval in advance of significant work to be undertaken by the external auditors. Such approvals will be reported periodically to the Audit Committee. Valuations The Group has for many years given the valuers and auditors access to each other. These advisers have a dialogue and exchange of information which is entirely independent of the Group. Non-executive directors Remuneration for the chairman and non-executive directors is determined by the Board within the levels set in the Articles of Association. They do not participate in any of the Company’s share incentive, bonus or pension schemes. The chairman and non-executive directors are currently appointed for an initial period of three years subject to renewal for further periods and to the rotation provisions under the Articles of Association. They do not have service agreements with the Company. Land Securities Remuneration committee Report for the year ended 31 March 2002 Directors’ remuneration The Company complies with the requirements of the Combined Code in relation to directors’ remuneration. The Board has established a Remuneration Committee which operates within written terms of reference. The chief executive makes recommendations to the committee on the Company’s framework for, and cost of, executive remuneration and the committee then reviews these recommendations. No director is involved in deciding his own remuneration. 1 Composition of the committee The committee consists solely of the non-executive directors and is chaired by Sir Winfried Bischoff. 2 Function of the committee The function of the committee is to review and determine annually within the context of the Board’s remuneration policy the individual salaries and other terms and conditions of employment of the executive directors, together with any incentive or bonus scheme in which the executive directors and other senior executives may be invited to participate.The committee also reviews the chief executive’s remuneration proposals for the Group’s staff other than the executive directors.The committee consults the chief executive in relation to proposals for the remuneration of the other executive directors and the committee has access to professional advice where this is considered appropriate. A full review with advice from external consultants including the Monks partnership and William M Mercer has been carried out into the remuneration and incentives for all staff and the main recommendations implemented in the year under review.This has increased the proportion of total remuneration which is performance related. 4 6 | 4 7 3 Remuneration policy The objective of the Group’s remuneration policy is to provide remuneration in a form and amount to attract, retain and motivate high quality management. The levels of remuneration are set to ensure comparability across a broad spectrum of UK based companies of similar size from all sectors, but with particular emphasis on the property industry. In deciding on the appropriate level of remuneration, the Board is mindful of the long-term nature of the business and the importance of aligning any performance awards with returns to shareholders. It attempts to achieve this balance through a base annual salary and cash and share bonuses which are geared to the achievement of short-term objectives while providing an incentive to achieve longer term success through the Group’s Share Option Schemes. Each executive director receives a salary which reflects his responsibilities, experience and performance. Salary is reviewed annually and the review process includes using comparator information and reports from specialist consultants. However, the committee is mindful of the need to treat such comparisons with caution so that they do not result in an upward ratchet of remuneration levels with no corresponding improvement in performance and it takes account of pay and employment conditions elsewhere in the Group, especially when determining annual salary increases. The performance related elements of directors’ remuneration are designed to form an important part of their total remuneration package, to align their interests with those of shareholders. Details of each director’s emoluments and share options are shown in Note 8 on pages 63 and 64. 4 Remuneration of non-executive directors The annual remuneration of the chairman of the Board, Peter Birch, is determined by the committee having regard to independent advice. The other non-executive directors each receive a fee agreed by the Board following a review of fees paid by comparable organisations. Neither the chairman nor the other non-executive directors receive any pension benefits from the Company, nor do they participate in any bonus or incentive schemes. 5 Emoluments and share options Executive directors’ emoluments consist of salary, car benefit, pension contribution, medical and life insurance, together with participation in savings related share option and annual bonus schemes which are also open to all employees. The annual bonus scheme has used adjusted earnings per share data as its key measure of performance. To make the transition from a calendar year basis for the previous bonus plan, a final payment of 3/12 of the calculation was made in November 2001 amounting to 3.5% of base salary. At the 2001 AGM, shareholders approved a revised bonus scheme for executive directors and senior management. The revised scheme replaced both the previous annual bonus scheme and the senior management bonus scheme. Participants will have the opportunity to receive an on target bonus of up to 30% for meeting rigorous targets, with the opportunity to receive up to a maximum of 60% for exceptional results. A proportion (ranging from one-third to one-half) of this bonus will be paid in shares on a deferred basis. The key performance criteria are reviewed annually to ensure that targets are set in line with prevailing business circumstances. Current criteria cover such areas of the business as progress with the development programme, property disposal programme, portfolio performance measured against the IPD index, and success in winning and delivering returns under Total Property Services contracts. For the financial year ended 31 March 2002, the executive directors’ individual bonus payments range from 34% to 52% of salary. These will be paid in cash and deferred shares in June 2002. The 1984 Executive Share Option Scheme expired in April 1995. As a result, no options have been granted under the scheme since July 1994. A long-term incentive plan was introduced to replace the 1984 Executive Share Option Scheme and awards under the plan depend on the Group’s total shareholder return achieved over a series of five-year performance periods as compared with the total shareholder returns achieved by a selected peer group of companies carrying on comparable businesses. No award will be paid in respect of any particular period unless the Group is ranked in the first four of the eight companies in the peer group in that period. Awards for ranking positions in the first four of the group range from 25% for fourth position to a maximum of 55% of salary for first position. Half of any award will be payable in cash and half in shares, such shares to be released to the beneficiary on the second anniversary of the award. There are currently 19 participants in the plan, consisting of senior executives and management who were in office prior to the closure of the plan. Following the expiry of the five year performance period ending on 31 March 2002, the Group achieved a ranking of sixth position within the peer group, which resulted in no award being made in respect of that period. The plan closed to new entrants on 31 March 2000 and current performance periods will expire on 31 March 2005. The interests of the participating executive directors at 31 March 2002 under the plan could amount to a maximum of 55% of their basic salaries for the three outstanding performance periods if a ranking position of first is achieved for each period. Existing participation in the plan will continue until the current performance periods have expired. At the Annual General Meeting held on 11 July 2000, shareholders approved the introduction of the Land Securities PLC 2000 Executive Share Option Scheme. During the year options were granted under the scheme to the executive directors and also to a number of employees of the Group. The options granted to executive directors are shown in Note 8 on page 64. All options granted under the scheme during the year were subject to a performance test under which the exercise of options is dependent on the growth in the Company’s normalised adjusted earnings per share over a period of three financial years exceeding the growth in the retail price index over the corresponding period by at least 2.5% per annum. The committee believes that it is important for a significant part of the compensation of each executive director to be tied to ownership of the Company’s shares so that each executive’s interest in the growth and performance of the Company is closely aligned with the interests of our shareowners. The committee has established share ownership guidelines for the Company’s executive directors, requiring each executive to own shares with a value equal to a multiple of one times base salary. An executive director must satisfy the guidelines within five years of their first grant after appointment to qualify for future grants of equity- based compensation. to the pension scheme of £675,663 as J I K Murray started to draw his pension before his assumed retirement age of 60. With effect from 1 January 1999 a contributory Money Purchase Pension Scheme was introduced for all staff joining the Group from that date. Directors may participate in the scheme subject to Inland Revenue regulations. The following table summarises pension allowances received by directors during the year. M J Chande A E Macfarlane F W Salway P Walicknowski £ 105,126 34,375 59,124 83,756 7 Service agreements I J Henderson and M R Griffiths have service agreements with a notice period of one year. F W Salway has a service agreement under which he is employed initially on a two-year fixed term contract then subject to one year’s rolling notice by either party, such notice not to be given to take effect before the second anniversary of this commencement date of 9 October 2000. Details of the service agreements of A E Macfarlane are set out in the Directors’ Report on page 48. The chairman and the other non-executive directors do not have service agreements with the Company. Sir Winfried Bischoff Chairman of the Committee for and on behalf of the Board 6 Pensions Ian J Henderson and Michael R Griffiths participate in a non- contributory defined benefit pension scheme which was open to property management and administrative staff until 31 December 1998. This scheme provides them, at normal retirement age and subject to length of service, with a pension of up to two-thirds of final salary, subject to Inland Revenue limits and other statutory rules. The scheme also provides lump sum death-in-service benefits of four times pensionable salary and pension provision for dependants of members. Only basic salary is treated as pensionable pay. The following table shows the executive directors’ accrued pension entitlements as at 31 March 2002. The increase in accrued pension during the year excludes any increase for inflation. The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The values represent a liability on the Group’s pension scheme and not a sum payable to individual directors. Accrued pensions year ended 31 March 2002 Accrued at Increase 31.3.2002 during Transfer value of the year increase £ £ £ I J Henderson 294,719 67,759 1,025,000 M R Griffiths 156,718 19,091 258,000 J I K Murray 163,996 10,924 167,000 J I K Murray resigned as a director on 28 June 2001, retiring on pension with effect from that date. In accordance with his options under the scheme, he has elected to receive an immediate undiscounted early retirement pension. The Company has been required to make a payment Land Securities Directors’ report for the year ended 31 March 2002 The directors submit their report with the financial statements for the year to 31 March 2002. A review of the Group’s business and results for the year is contained in the Chairman’s Statement and the Operating and Financial Review, which should be read in conjunction with this report. 4 8 | 4 9 1 Business of the Group During the year the Group has continued its business of property development and portfolio management of offices, shops, retail warehouses, food superstores, leisure, warehouse and industrial premises throughout the UK together with total property outsourcing. The Group now consists of three main business units, Land Securities Development, Land Securities Portfolio Management and Land Securities Trillium. 2 Results for the year and dividends The results are set out in the consolidated profit and loss account on page 52. An interim dividend of 9.05p per share was paid on 7 January 2002 and the directors now recommend the payment of a final dividend of 24.95p per share making a total of 34.00p per share for the year ended 31 March 2002, an increase of 4.6% over that for the previous year. Subject to authorisation at the Annual General Meeting to be held on 9 July 2002, the final dividend will be paid on 22 July 2002 to shareholders registered on 28 June 2002. The shares are expected to be quoted ex-dividend from 26 June 2002. * * * * * * 4 Directors The directors who held office during the year were: P G Birch CBE I J Henderson CBE M R Griffiths J I K Murray (retired 28.6.01) P B Hardy Sir Winfried Bischoff P Walicknowski (resigned 19.12.01) G I Henderson CBE M J Chande (resigned 28.2.02) F W Salway (appointed 2.4.01) A E Macfarlane (appointed 1.10.01) P G Freeman (appointed 1.1.02) Non-executive and member of the Remuneration and Audit Committees. In addition, D Rough was appointed a director on 2.4.02. Biographical details of the directors appear on pages 42 and 43. Since A E Macfarlane, P G Freeman and D Rough were appointed subsequent to the last Annual General Meeting, they will retire from the Board and, being eligible, offer themselves for reappointment. P G Freeman and D Rough do not have service agreements with the Group. The service agreement of A E Macfarlane provides for one year’s rolling notice by the Company and six months’ notice by A E Macfarlane. P B Hardy and M R Griffiths informed the Company that they do not wish to stand for re-election at this year’s Annual General Meeting. P G Birch and Sir Winfried Bischoff retire from the Board by rotation and, 3 Valuation and net assets (i) Valuation In accordance with their report reproduced on page 78, Knight Frank valued the Group’s investment properties at £7,598.6m as at 31 March 2002. Taken with the Group’s one-third holding in the Birmingham Alliance and the one-half holdings in the Gunwharf Quays Limited Partnership and the Ebbsfleet limited partnership, the portfolio had a value of £7,811.0m. This is a decrease of £94.9m over that at the previous year end. Taking into account total expenditure on investment properties of £505.6m and the aggregate book value of properties sold during the year of £498.1m, the deficit on valuation was £105.5m after adjusting for UITF28. (ii) Net assets The investment portfolio valuation has been included in the financial statements for the year ended 31 March 2002 and the net assets of the Group at that date amounted to £6,036.6m. Without adjusting for any taxation which would become payable in the event of properties being sold, the net assets attributable to each share in issue on that date were 1151p. Taking into account shares reserved for issue under the terms of the Group’s convertible bonds and employee share schemes, the diluted net asset value per share was 1132p. The amount of tax on capital gains, which would become payable in the event of sales of the properties at the amounts at which they are included in the financial statements, is given in Note 25 on page 71. The amount, in the region of £535m (2001 £540m), represents approximately 96p per share on a fully diluted basis. being eligible, offer themselves for re-election; neither has a service agreement with the Company. Particulars of the interests of each director in the shares and debentures of the Company, as shown by the register of directors’ share and debenture interests, and of their holdings of options over ordinary shares, are set out in Note 8 on page 64. Apart from share options, no contract subsisted during or at the end of the financial year in which a director of the Company is or was materially interested and which is or was significant in relation to the Group’s business. 5 Share capital The Company was authorised at the Annual General Meeting held on 10 July 2001 to purchase in the market ordinary shares representing up to approximately 14.9% of the issued share capital at that time with such authority to expire at the 2002 Annual General Meeting. However, no shares were purchased in the year to 31 March 2002. A resolution to renew this authority will be proposed at the Annual General Meeting. 6 Substantial shareholders At 13 May 2002 the following interests in issued share capital had been notified to the Company under Part VI of the Companies Act 1985. AXA S.A. Barclays PLC Number of shares % 16,274,283 3.10 18,066,280 3.44 Legal & General Investment Management 18,058,106 3.43 M&G Investment Management Ltd 17,748,762 3.38 Merrill Lynch 55,430,328 10.57 7 Staff Details of the Group’s policies on employment and on employee development are given on page 40. The effect of the Group’s payment policy is that its trade creditors at the financial year end represented 23.1 days’ purchases. 11 Annual General Meeting Accompanying this report is the Notice of the Annual General Meeting which sets out the resolutions for the meeting. These are explained in a letter from the chairman which accompanies the Notice. 12 Auditors A resolution to reappoint PricewaterhouseCoopers as auditors to the Company will be proposed at the Annual General Meeting. By order of the Board P M Dudgeon Secretary 22 May 2002. The Group is committed to achieving a high standard of health and safety and continually reviews its policies and practices to ensure that those standards are maintained. Further details are given on pages 38 and 39. 8 Donations During the year ended 31 March 2002 charitable donations amounted to £1,086,000. This amount included £722,000 paid to charitable trusts investigating sites of considerable archaeological importance. There were no contributions of a political nature during the year. 9 Environment The Group’s environmental policy is published on the Company’s website www.landsecurities.com 10 Payment policy The Group is a registered supporter of the CBI’s Better Payment Practice Code to which it subscribes when dealing with all of its suppliers. The code requires a clear and consistent policy that payments are made in accordance with contract or as required by law; that payment terms are agreed at the outset of a transaction and adhered to; that no amendments to payment terms are made without the prior agreement of suppliers and that there is a system which deals quickly with complaints and disputes to ensure that suppliers are advised accordingly without delay when invoices or parts thereof are contested. Land Securities sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2002 and of the profit and cash flows of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 22 May 2002 Directors’ responsibilities & auditors’ report 31 March 2002 Directors’ responsibilities The directors are required by company law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of their profit or loss for that period and comply with the Companies Act 1985. The directors are responsible for ensuring that applicable accounting standards have been followed and that suitable accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, have been used in the preparation of the financial statements. It is also the responsibility of the directors to prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are also responsible for maintaining proper accounting records so as to enable them to comply with company law. The directors have general responsibilities for safeguarding the assets of the Company and of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The maintenance and integrity of the Land Securities PLC website is the responsibility of the Company; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. received all the information and explanations we require for our audit, or if information specified by law of the Listing Rules regarding directors’ remuneration and transactions is not disclosed. Independent Auditors’ Report to the members of Land Securities PLC We have audited the financial statements on pages 52 to 76 which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out on pages 56 and 57. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors’ responsibilities on this page. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We review whether the corporate governance statement on pages 44 and 45 reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with 5 0 | 5 1 making finance work . . . Consolidated profit and loss account for the year ended 31 March 2002 GROSS PROPERTY INCOME OPERATING PROFIT Profit on sales of properties PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION Interest receivable and similar income Interest payable and similar charges – gross – interest capitalised Revenue profit Profit/(loss) on sales of properties and bid costs Share of loss before taxation of joint venture PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Taxation on: Revenue profit Property sales and bid costs Taxation PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION Dividends RETAINED PROFIT FOR THE FINANCIAL YEAR EARNINGS PER SHARE ADJUSTED EARNINGS PER SHARE DIVIDENDS PER SHARE Interest in joint venture £m Total 2002 £m 48.5 1,025.6 19.3 – 19.3 .8 516.8 13.4 530.2 5.0 2001 (restated) £m 650.4 450.6 6.3 456.9 7.6 Group £m 977.1 497.5 13.4 510.9 4.2 (168.2) (24.6) (192.8) (151.1) 21.1 – 21.1 11.3 (147.1) (24.6) (171.7) (139.8) 361.3 6.7 364.8 (1.3) 3.5 (8.0) (4.5) 323.4 1.3 – 368.0 (4.5) 363.5 324.7 (100.0) .1 (99.9) 263.6 (178.4) 85.2 (91.0) .9 (90.1) 234.6 (170.1) 64.5 2001 (restated) Basic 44.87p 45.38p 2002 34.0p Diluted 44.41p 44.89p 2001 32.5p 2002 Basic Diluted 50.27p 51.61p 49.54p 50.81p Notes 4 4 4 5 5 5 33 9 10 27 11 11 10 All income was derived from within the United Kingdom from continuing operations. No operations were discontinued during the year. The comparative figures for the year ended 31 March 2001 have been restated to reflect the changes in accounting policies described on page 32 and in Note 1. Trillium was acquired in November 2000. Results for the year ended 31 March 2001 therefore include four months’ trading for that business. The interest in the joint venture was acquired on 13 December 2001. Results for the year ended 31 March 2002 therefore include just over three months’ of the group’s share of the trading results of that business. The notes on pages 56 to 76 form an integral part of these financial statements. 5 2 | 5 3 Balance sheets 31 March 2002 FIXED ASSETS Intangible assets Goodwill Tangible assets Investment properties Operating properties Properties Other tangible assets Investment in joint venture Share of gross assets of joint venture Share of gross liabilities of joint venture Investments in group undertakings CURRENT ASSETS Trading properties Debtors falling due within one year Debtors falling due after more than one year Investments: short term deposits Cash at bank and in hand CREDITORS falling due within one year NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS falling due after more than one year Debentures, bonds and loans Convertible bonds Other creditors PROVISIONS FOR LIABILITIES AND CHARGES CAPITAL AND RESERVES Called up share capital Share premium account Capital redemption reserve Revaluation reserve Other reserves Profit and loss account EQUITY SHAREHOLDERS’ FUNDS NET ASSETS PER SHARE DILUTED NET ASSETS PER SHARE ADJUSTED NET ASSETS PER SHARE ADJUSTED DILUTED NET ASSETS PER SHARE I J Henderson A E Macfarlane Directors The financial statements on pages 52 to 76 were approved by the directors on 22 May 2002. Group Company 2002 £m 2001 (restated) £m 2002 £m 2001 (restated) £m Notes 13 14 15 16 18 33 33 19 20 20 21 22 23 24 25 26 27 27 27 27 27 12 12 12 12 38.9 41.2 – – 7,800.0 7,899.1 2,505.5 2,664.5 428.9 323.1 – – 8,228.9 8,222.2 2,505.5 2,664.5 45.3 34.1 1,297.8 (1,109.0) 188.8 – – – – – 8,501.9 8,297.5 5,099.0 7,604.5 4,866.5 7,531.0 36.9 254.8 5.5 60.9 7.5 365.6 (690.9) (325.3) – 176.0 1.3 22.0 7.3 206.6 (594.6) (388.0) – 65.8 .2 .1 – 66.1 (285.8) (219.7) – 60.3 .2 9.1 – 69.6 (246.6) (177.0) 8,176.6 7,909.5 7,384.8 7,354.0 (1,744.0) (1,480.4) (1,267.0) (1,267.0) (243.3) (22.8) (129.9) (246.1) (31.8) (133.4) (36.0) (11.7) (44.1) (39.3) (12.1) (39.1) 6,036.6 6,017.8 6,026.0 5,996.5 524.3 314.9 36.0 523.6 312.0 36.0 524.3 314.9 36.0 523.6 312.0 36.0 3,376.9 3,673.4 3,820.0 3,959.0 550.4 1,234.1 6,036.6 324.6 1,148.2 6,017.8 160.5 1,170.3 6,026.0 .1 1,165.8 5,996.5 1151p 1132p 1176p 1155p 1149p 1130p 1172p 1152p Land Securities Consolidated cash flow statement for the year ended 31 March 2002 NET CASH INFLOW FROM OPERATING ACTIVITIES RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE TAXATION – Corporation tax paid NET CASH INFLOW FROM OPERATING ACTIVITIES AND INVESTMENTS AFTER FINANCE CHARGES AND TAXATION CAPITAL EXPENDITURE Development expenditure Acquisitions and other capital expenditure Additions to properties Sales of properties Investing in properties Increase in other tangible assets Notes 28 £m 2002 £m 406.2 (162.3) (111.3) 132.6 4.2 (166.5) (256.4) (306.1) (562.5) 549.2 (13.3) (19.6) 2001 (restated) £m 462.0 (94.0) (87.5) 280.5 £m 9.8 (103.8) (161.9) (419.5) (581.4) 491.3 (90.1) (7.5) NET CASH OUTFLOW ON CAPITAL EXPENDITURE (32.9) (97.6) ACQUISITIONS Acquisition of group undertaking Investment in joint venture EQUITY DIVIDENDS PAID CASH OUTFLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING MANAGEMENT OF LIQUID RESOURCES FINANCING Issues of shares Purchase and cancellation of own shares Increase/(decrease) in debt NET CASH INFLOW/(OUTFLOW) FROM FINANCING (DECREASE)/INCREASE IN CASH IN YEAR RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT (Decrease)/increase in cash in year Cash inflow from increase/(decrease) in liquid resources Cash (inflow)/outflow from (increase)/decrease in debt Change in net debt resulting from cash flow Non-cash changes in debt Loans acquired with new group undertaking Movement in net debt in year Net debt at 1 April Net debt at 31 March 5 4 | 5 5 – 33 (146.4) (114.2) – (146.4) (172.5) (219.2) (38.9) 240.7 (17.4) (17.4) 38.9 (239.6) (218.1) 3.8 – (214.3) (1,727.8) (1,942.1) 29(a) 26 1.1 – 29(b) 239.6 29(a) 29(b) 30 30 30 30 1.2 (6.0) (14.1) (114.2) (164.1) (95.4) 118.1 (18.9) 3.8 3.8 (118.1) 14.1 (100.2) 1.4 (212.8) (311.6) (1,416.2) (1,727.8) Other primary statements for the year ended 31 March 2002 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Profit on ordinary activities after taxation (page 52) Unrealised (deficit)/surplus on revaluation of investment properties Share of unrealised surplus on revaluation of investment properties held in joint venture Taxation on revaluation surpluses realised on sales of investment properties Total gains and losses relating to the financial year Prior year adjustment Total gains and losses recognised since last financial statements NOTE OF HISTORICAL COST PROFITS AND LOSSES Profit on ordinary activities before taxation (page 52) Revaluation surplus arising in previous years now realised on sales of investment properties Taxation on revaluation surpluses realised on sales of investment properties Historical cost profit on ordinary activities before taxation Taxation Historical cost profit on ordinary activities after taxation Dividends Retained historical cost profit for the year RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS’ FUNDS Profit on ordinary activities after taxation (page 52) Dividends Retained profit for the financial year (page 52) Unrealised (deficit)/surplus on revaluation of investment properties Share of unrealised surplus on revaluation of investment properties held in joint venture Taxation on revaluation surpluses realised on sales of investment properties Issues of shares Premium arising on issues of shares Purchase and cancellation of own shares Net change in shareholders’ funds Opening equity shareholders’ funds: As previously reported Prior year adjustment As restated Closing equity shareholders’ funds Notes 27 27 27 3 Notes 27 27 9 10 Notes 10 27 27 27 26 27 2002 £m 263.6 (105.5) 46.8 (12.0) 192.9 (133.1) 59.8 2002 £m 363.5 237.8 (12.0) 589.3 (99.9) 489.4 (178.4) 311.0 2002 £m 263.6 (178.4) 85.2 (105.5) 46.8 (12.0) .7 3.6 – 2001 (restated) £m 234.6 284.8 – (1.8) 517.6 – 517.6 2001 (restated) £m 324.7 185.3 (1.8) 508.2 (90.1) 418.1 (170.1) 248.0 2001 (restated) £m 234.6 (170.1) 64.5 284.8 – (1.8) 1.2 7.5 (.1) 18.8 356.1 6,150.9 5,781.8 3 (133.1) (120.1) 6,017.8 6,036.6 5,661.7 6,017.8 Land Securities Notes to the financial statements for the year ended 31 March 2002 1 Accounting Policies The financial statements have been prepared in accordance with applicable accounting standards under the historical cost convention modified by the revaluation of investment properties and, in the case of the holding company, investments in group undertakings. Compliance with SSAP 19 “Accounting for Investment Properties” requires a departure from the requirements of the Companies Act 1985 relating to depreciation and amortisation and an explanation of this departure is given in (h) (iii) below. The significant accounting policies adopted by the group are set out below. (a) Consolidation The consolidated financial statements of the group include the audited financial statements of the company and group undertakings, all of which were for the year ended 31 March 2002. Group undertakings and interests in joint ventures acquired during the year are accounted for from the date of acquisition. Joint ventures are included under the gross equity method in accordance with FRS9 ‘Associates and Joint Ventures’.This requires the group’s share of the joint venture’s profit and loss account to be shown separately in the income statement, and the group’s share of the joint venture’s gross assets and liabilities to be shown on the face of the balance sheet. The group has interests in various partnerships.The group’s share of the assets, liabilities, income and expenditure are included in the relevant sections of the consolidated profit and loss account and balance sheet as required by FRS9. 5 6 | 5 7 (b) Consolidated Profit and Loss Account and Other Primary Statements The profit on ordinary activities before taxation is arrived at after taking into account income and outgoings on all properties, including those under development. In accordance with FRS3 “Reporting Financial Performance”, profits and losses on properties sold during the year are calculated by comparing net sales proceeds with book values. Realised surpluses and deficits relating to previous years on properties sold during the year are taken to other reserves, net of attributable taxation. They are not included in the profit and loss account. Unrealised capital surpluses and deficits, including those arising on valuation of properties, are taken to revaluation reserve. (c) Gross Property Income The group’s gross property income comprises rental income, service charges and other recoveries from tenants of its investment properties, property services income earned by its total property outsourcing business and proceeds of sales of trading properties. The Accounting Standards Board’s Urgent Issues Task Force Abstract 28 ‘Operating Lease Incentives’ (UITF28) requires property companies to treat any incentive for lessees to enter into lease agreements as a revenue cost and also to account for rental income from the commencement and not, as was the group’s prior practice, the expiry date, of any rent-free period. The group has, therefore, changed its accounting policy for leases commencing on or after 1 April 2000.The cost of all lease incentives (such as rent-free periods or contributions to fitting out costs) is now offset against the total rent due and the net rental income is then spread evenly over the shorter of the period from the rent-free or rent commencement date, as appropriate, to the date of the next rent review or the lease end date. which they are carried in the financial statements. However an estimate of the potential liability is shown in Note 25. (d) Bid Costs The Accounting Standards Board’s Urgent Issues Task Force Abstract 34 ‘Pre-Contract Costs’ (UITF34) requires bid costs which do not comprise incidental costs associated with the acquisition of fixed assets or finance costs to be expensed until the group is virtually certain of entering into a contract.The group has, therefore, changed its accounting policy for these bid costs and will now expense costs incurred prior to exchange of contract. Previously the group capitalised bid costs where it was known that preferred bidder status had been achieved. (e) Pensions Contributions to defined benefit pension schemes, which are based on independent actuarial advice, are charged to the profit and loss account on a basis that spreads the expected cost of benefits over the employees’ working lives with the group. Variations from regular costs are spread over the anticipated remaining working lives of employees in the schemes. The group has applied the transitional provisions of FRS17 “Retirement Benefits” and appropriate additional disclosures have been included in Note 6.The group will fully adopt FRS17 in its financial statements for the year ending 31 March 2004. (f) Taxation In accordance with FRS 16 “Current Taxation”, taxation arising on the sale of properties is charged to the profit and loss account and to the statement of total recognised gains and losses as appropriate. No provision is made for the taxation which would become payable under present legislation if the group’s properties were sold at the amounts at FRS19 ‘Deferred Tax’ requires that deferred tax is recognised in full in respect of transactions or events that have taken place by the balance sheet date and which could give the group an obligation to pay more or less tax in the future. However, FRS19 requires that deferred tax is not recognised on revaluation gains and losses where these are not taken to the profit and loss account.The group’s accounting policy had been to account for deferred tax to the extent that liabilities or assets were expected to be payable or receivable in the foreseeable future. In accordance with FRS19, the group has now changed its policy to make full provision for timing differences which, in the group’s case, arise primarily from capital allowances and industrial building allowances. Following the sale or demolition of a property, any deferred tax provisions not required will be released to the profit and loss account. (g) Goodwill Goodwill arising on the acquisition of Trillium, calculated as the excess of cost over the fair value of net assets acquired, was capitalised in the year in which it arose and amortised over the remaining life of the PRIME contract. (h) Investment Properties (i) Valuation Investment properties, including those that comprise part of the development programme, are carried in the financial statements at open market values based on the latest professional valuation. A valuation was carried out by Knight Frank as at 31 March 2002 and a copy of their report is set out on page 78.The valuation treats properties as acquired when the group enters into an unconditional purchase contract and as sold when subject to an Notes to the financial statements for the year ended 31 March 2002 unconditional contract for sale. Additions to properties consist of costs of a capital nature and, in the case of investment properties under development, certain capitalised interest (see note h(ii) below). Other costs in respect of developments and refurbishments are treated as revenue expenditure and written off as incurred. (ii) Capitalisation of interest Interest associated with direct expenditure on properties under development is capitalised.The rate used is the group’s pre-tax weighted average cost of borrowings or, if appropriate, the rate on specific associated borrowings. Interest is capitalised as from the commencement of the development work until the date of practical completion.The capitalisation of finance costs is suspended, however, if there are prolonged periods when development activity is interrupted. Interest is also capitalised on the purchase cost of a site or property if it was acquired specifically for redevelopment in the short term. Interest is not capitalised on the acquisition cost of properties previously held as investments, or on refurbishment projects. The above represents a change in accounting policy from previous years when all interest costs were expensed as incurred. Financing costs are potentially a material element of the total costs of development projects. As the group’s development programme gathers momentum, the inclusion of interest in development costs will give a better view of the expenditure on developments and the surpluses created by this activity. (iii) Depreciation and amortisation In accordance with SSAP 19, depreciation is not provided on investment properties that are held as freeholds or on leases having more than 20 years unexpired.This is a departure from the Companies Act 1985 which requires all tangible assets to be depreciated. In the opinion of the directors, this departure is necessary for the financial statements to give a true and fair view and comply with applicable accounting standards which require properties to be included in the financial statements at open market value. The effect of depreciation on the value is already reflected in the valuation of investment properties, and the amount attributable to this factor cannot reasonably be separately identified or quantified by the valuers. Had the provisions of the Act been followed, net assets would not have been affected but revenue profits would have been reduced for this and earlier years and revaluation surpluses/deficits would have been correspondingly increased/ decreased. (i) Operating Properties These are properties owned and managed by LS Trillium, the group’s total property outsourcing business unit, and which typically do not satisfy the definition of “investment properties”. Operating properties are carried at depreciated cost and not revalued. Freehold land is carried at historical cost and is not depreciated. Freehold buildings are depreciated in equal annual instalments over 50 years. Any premiums paid to acquire leaseholds are amortised over their unexpired lease terms. Expenditure which enhances the economic benefits of a building is capitalised and depreciated over the shorter of its useful life and the remaining life of the building up to a maximum of 50 years. Repair and maintenance expenditure is written off to the profit and loss account as incurred. (j) Other Tangible Assets These comprise computers, motor vehicles, furniture, fixtures and fittings and improvements to group offices and are depreciated on a straight-line basis over their estimated useful lives of between two to ten years. (k) Investments in Group Undertakings (i) Valuation The company’s investments in the shares of group undertakings are stated at directors’ valuation on a basis which takes account of the net assets of the group undertakings at 31 March 2002 which will include, where applicable, the professional valuation of properties. Surpluses and deficits arising from the directors’ valuation are taken to revaluation reserve. (ii) Acquisitions Assets and liabilities of acquired entities are brought into consolidation at fair value as at the date of acquisition. Where the cost of acquisition exceeds the fair values attributable to the net assets acquired, the difference is treated as goodwill and capitalised in the group’s balance sheet in the year of acquisition. Goodwill is amortised to the profit and loss account over 20 years or its useful life whichever is the shorter. The results and cashflows of acquired group undertakings are included in the consolidated profit and loss account and the consolidated cash flow statement from the date of acquisition. (l) Trading Properties Trading properties are carried at the lower of cost and net realisable value. (m) Provisions for Liabilities and Charges A provision is recognised where there is a present obligation, whether legal or constructive, as a result of a past event for which it is probable that a transfer of economic benefits will be required to settle the obligation and a reasonable estimate can be made of the amount of the obligation. (n) Financial Instruments The group uses interest rate swaps to help manage its interest rate risk. Where interest rate swaps have commenced the differences between the rates payable by the group and the rates payable by the counterparties are dealt with on an accruals basis. 2 Comparatives The consolidated profit and loss account, consolidated cash flow statement and other primary statements for the year ended 31 March 2001 together with the balance sheets at that date have been restated for the effects of adopting UITF28 and FRS19 as explained in Notes 1(c) and 1(f ) respectively, UITF34 relating to pre-contract costs in Note 1(d) and the change in accounting policy relating to the capitalisation of interest in Note 1h(ii). Trillium, the group’s total property outsourcing business, was acquired in November 2000. Its results are included in the prior year for the four months to 31 March 2001. Land Securities Notes to the financial statements for the year ended 31 March 2002 Year ended 31 March 2002 Year ended 31 March 2001 Effects of changes in accounting policies Effects of changes in accounting policies Without changes in accounting Capital- Adoption of isation UITF28 policies of interest £m £m £m Adoption of FRS19 £m Adoption of UITF34 £m As reported £m As previously reported £m Capital- isation of interest £m Adoption of UITF28 £m Adoption of FRS19 £m Adoption of UITF34 £m As restated £m 1,022.1 528.0 541.4 (192.8) 340.2 353.6 (88.2) 265.4 50.59 49.89 39.6 7,810.9 36.5 263.0 (691.0) 9.9 3,424.1 1,346.0 6,195.7 1178 1158 3.5 3.5 3.5 3.5 3.5 (1.3) 2.2 .42 .40 (10.9) 10.9 (2.4) (6.7) (5.9) (5.9) (1.1) (1.1) (.7) (127.6) 1,025.6 516.8 530.2 (14.7) (14.7) 647.2 451.8 458.1 (171.7) (151.1) 364.8 363.5 (14.7) 1.8 (99.9) (12.9) 263.6 308.9 314.6 (81.5) 233.1 (2.46) (2.32) 50.27 49.54 44.57 44.14 38.9 41.9 7,800.0 7,905.9 36.9 – (19.1) 254.8 173.6 2.5 (690.9) (594.2) (129.9) (5.8) 3,376.9 3,696.4 4.3 (128.3) (16.6) 1,234.1 1,258.3 (2.4) (128.3) (16.6) 6,036.6 6.150.9 1 1 (24) (23) (3) (3) 1151 1132 1175 1154 21.1 21.1 21.1 (6.3) 14.8 2.82 2.67 .4 (12.2) (40.5) 28.7 (11.8) (1) (1) 11.3 11.3 11.3 (3.4) 7.9 1.51 1.43 (5.9) (19.8) 13.9 (5.9) (1) (1) 3.2 3.2 3.2 3.2 3.2 (1.1) 2.1 .41 .38 (6.8) 6.8 (1.1) (3.2) 2.1 (4.8) (4.8) (.92) (.87) (.7) (121.7) (122.4) (1.1) (122.4) (24) (23) 650.4 450.6 456.9 (139.8) 323.4 324.7 (90.1) (4.4) (4.4) (4.4) .7 (3.7) 234.6 (.7) (.67) 44.87 44.41 41.2 7,899.1 – (4.4) 176.0 .7 (3.7) (3.7) (1) (594.6) (133.4) 3,673.4 1,148.2 6,017.8 1149 1130 3 Restatement of Comparatives The effects of adopting UITF28, FRS19, UITF34 and capitalisation of interest for the current and comparative prior years are as follows: (i) PROFIT AND LOSS ACCOUNT Gross property income Operating profit Profit before interest and taxation Interest payable and similar charges Revenue profit before taxation Profit before taxation Taxation Profit after taxation EARNINGS PER SHARE – basic (pence) – diluted (pence) (ii) BALANCE SHEET Goodwill Investment properties Trading properties Debtors falling due within one year Creditors falling due within one year Provisions for liabilities and charges Revaluation reserve Profit and loss account Equity shareholders’ funds NET ASSETS PER SHARE – basic (pence) – diluted (pence) 5 8 | 5 9 Notes to the financial statements balance sheets for the year ended 31 March 2002 4 Segmental Information (i) PROFIT AND LOSS ACCOUNT Rental income (c) Service charges and other recoveries Property services income Proceeds of sales of trading properties GROSS PROPERTY INCOME (page 52) Rents payable Other direct property or contract expenditure (d) Indirect property or contract expenditure (e) Bid costs Costs of sales of trading properties Depreciation Amortisation of goodwill Profit on sales of properties SEGMENT PROFIT Less: Common costs (f ) OPERATING PROFIT (page 52) Profit on sales of properties (page 52) PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION (page 52) (ii) NET ASSETS Properties in development programme Other investment properties Operating properties Other fixed assets FIXED ASSETS INVESTMENT IN JOINT VENTURE NET CURRENT (LIABILITIES)/ASSETS LONG TERM LIABILITIES AND PROVISIONS NET ASSETS (308.0) (333.4) 2002 2001 (restated) Property Land Securities Trillium £m Total Property Outsourcing Joint Venture £m Investment £m Property Trading £m (Note (a)) (Note (b)) (Note (b)) (Note (b)) Total £m Property Total Property Outsourcing £m Investment £m (Note (a)) (Note (b)) 357.7 48.5 525.9 53.1 579.0 (17.4) (62.0) (33.2) – 357.7 (92.7) (187.9) (16.7) (6.7) (95.2) (211.3) 466.4 (.2) 466.2 10.1 476.3 53.7 (10.9) (2.3) 40.5 3.3 43.8 48.5 – (14.4) (3.0) (8.0) (25.4) 23.1 (3.8) – 19.3 – 19.3 40.4 40.4 – – (1.5) – (1.5) (34.6) 4.3 – – 4.3 – 4.3 2002 Property Total Property Investment Outsourcing £m £m 1,050.1 6,749.9 – 17.7 7,817.7 – (346.8) 7,470.9 – – 428.9 66.5 495.4 188.8 (22.2) 662.0 Group £m 525.9 53.1 357.7 40.4 977.1 (110.1) (249.9) (51.4) (6.7) (34.6) 524.4 (11.1) (2.3) 511.0 13.4 524.4 Property Trading £m – – – – – – 43.7 43.7 501.6 51.5 553.1 (17.5) (57.4) (25.3) – (82.7) 452.9 (0.2) 452.7 6.3 459.0 97.3 97.3 (30.2) (41.5) (8.7) (5.0) (55.2) 11.9 (3.9) (0.8) 7.2 – 7.2 2001 (restated) (Note (b)) Property Total Property Investment Outsourcing £m £m 525.9 53.1 406.2 40.4 1,025.6 (110.1) (264.3) (54.4) (14.7) (34.6) 547.5 (14.9) (2.3) 530.3 13.4 543.7 (13.5) 516.8 13.4 530.2 Total £m 1,050.1 6,749.9 428.9 84.2 904.5 6,994.6 15.7 8,313.1 7,914.8 – (382.9) 7,531.9 188.8 (325.3) 8,176.6 (2,140.0) 6,036.6 – – 323.1 59.6 382.7 – (5.1) 377.6 Total £m 501.6 51.5 97.3 – 650.4 (47.7) (98.9) (34.0) (5.0) (137.9) – 464.8 (4.1) (0.8) 459.9 6.3 466.2 (9.3) 450.6 6.3 456.9 Total £m 904.5 6,994.6 323.1 75.3 8,297.5 – (388.0) 7,909.5 (1,891.7) 6,017.8 Notes: (a) Includes the results of investment properties under development and the group’s share of the results of its partnerships (Note 34). (b) No comparatives exist for the joint venture and property trading segments, as these activities commenced in the year ended 31 March 2002. Also, as Trillium was acquired in November 2000, the results for the year ended 31 March 2001 include only four months’ trading for that business. (c) As a consequence of adopting UITF28, rental income includes £3.5m (2001 £3.2m) of rent receivable allocated to rent free periods falling in the respective financial years. (d) Other direct property or contract expenditure, previously described as other property outgoings, are costs incurred in the direct maintenance and upkeep of properties and in providing services in compliance with outsourcing contracts. Void costs, which include those relating to empty properties pending redevelopment and refurbishment costs, and costs of investigating potential development schemes which are not proceeded with are also included. (e) Indirect property or contract expenditure are indirect costs of managing the portfolio. It includes the costs of staff involved in development projects, together with the costs of rent reviews and renewals, relettings of properties and all office administration and operating costs other than common costs. (f) Common costs, comprise all costs, including premises costs, associated with the Senior Executive Team, company secretarial and non-executive directors and non-segment related depreciation charges. Land Securities Notes to the financial statements for the year ended 31 March 2002 4 Segmental Information (continued) The group total of indirect property or contract expenditure, depreciation and common costs includes: Auditors’ remuneration: Audit fees (Company: £72,000; 2001 £70,000) Non-audit fees for: Bids – Trillium Acquisitions Taxation and other advice Directors’ remuneration Depreciation In addition, the auditors also received non-audit fees of £2.6m (2001 £Nil) from Telereal as part of Telereal’s bid costs. 5 Interest RECEIVABLE: Short term deposits and corporate bonds Other interest receivable PAYABLE: Borrowings not wholly repayable within five years Borrowings wholly repayable within five years Other interest payable Less: Capitalised as costs of properties under development 2002 £m 2001 £m .3 .2 .1 1.0 1.3 4.2 16.0 Total 2002 £m 4.1 .9 5.0 152.6 36.3 3.9 192.8 (21.1) 171.7 .3 .7 .6 1.0 2.3 2.8 7.8 2001 (restated) £m 6.9 .7 7.6 140.5 8.2 2.4 151.1 (11.3) 139.8 Group £m Telereal £m 3.3 .9 4.2 132.6 32.6 3.0 168.2 (21.1) 147.1 .8 – .8 20.0 3.7 .9 24.6 – 24.6 Interest payable includes £16.0m (2001 £4.5m) in respect of bank borrowings. Interest has been capitalised at the group’s pre-tax weighted average borrowing rate for the year of 8.5% (2001 9%), as explained in Note 1(h)(ii). 6 Staff and Pensions EMPLOYEES The average number of employees during the year, excluding directors, and the corresponding aggregate staff costs were: Indirect property or contract and administration Direct property or contract services: Full time Part time STAFF COSTS Salaries Social Security Other pension Incentive schemes 2002 No. 2001 No.* 2002 £m 2001 £m* 329 431 22.9 1,026 56 1,411 615 50 1,096 32.8 .6 56.3 40.1 4.7 4.9 6.6 56.3 20.8 6.6 .3 27.7 21.1 2.3 3.1 1.2 27.7 In addition to the above, on 1 February 2002, 338 staff transferred from BT, in accordance with TUPE regulations, to Land Securities Trillium Telecom Services Limited, a wholly owned subsidiary of Land Securities PLC, formed for the purpose. These staff are made available to Telereal Services Limited to deliver services to BT. All related staff costs are reimbursed by *includes Land Securities Trillium for the period 29 November 2000 to 31 March 2001 only Telereal Services Limited. 6 0 | 61 Notes to the financial statements for the year ended March 2002 PENSIONS The charge to the profit and loss account for pension costs during the year is made up as follows: Regular pension cost Variations from regular cost Other schemes Net pension cost 2002 £m 3.1 1.0 2.6 6.7 2001 £m 2.8 .6 .9 4.3 The amount under other schemes includes the actual contributions paid to the group’s defined contribution schemes and sums paid to the BBC and BT schemes, as required under the terms of the participation agreements in those schemes, explained below. DEFINED BENEFIT SCHEME The Pension & Assurance Scheme of the Land Securities Group of Companies (“the Scheme”) is the only material defined benefit pension scheme of the group. The Scheme, which is closed to new entrants and which is non-contributory for employees, provides defined benefits based on final pensionable salary.The assets of the Scheme are held in a self-administered trust fund which is separate from the group’s assets. Contributions to the Scheme are determined by a qualified independent actuary on the basis of triennial valuations using the projected unit method. As the Scheme is closed to new members, the current service cost will be expected to increase as a percentage of salary, under the projected unit method, as members approach retirement. The last formal actuarial valuation, undertaken for the purposes of setting the ongoing contribution rate, was carried out as at 6 April 2001.The valuation showed that there was a deficit of £1.2m. The actuary recommended that the employer contribution rate be increased from 25% to 30% of pensionable salaries with effect from April 2001. Employer contributions were paid at this rate during the year to 31 March 2002. Employer contributions will continue at 30% of pensionable salaries until completion of the next formal valuation to be carried out no later than as at 6 April 2004. Interim valuations will, however, be undertaken to monitor the adequacy of the contribution rate. The market value of the Scheme’s invested assets (excluding the value of annuities purchased to provide certain pensions in payment) as at 6 April 2001 was £60.8m.The actuarial value of these assets represented 99% of the value of the Scheme’s liabilities at that date. The key assumptions adopted for this valuation were as follows: Rate of increase in pensionable salaries Rate of increase in pensions in payment Discount rate – prior to retirement – in retirement Inflation assumption Actuarial value of assets (% of market value) At valuation 6 April 2001 % 5.00 2.75 6.50 5.50 2.75 106.00 CONTRIBUTORY MONEY PURCHASE SCHEME A contributory money purchase scheme was introduced on 1 January 1999 for all new administrative and senior property based staff, subject to eligibility, together with a separate similar scheme, effective 1 April 1998, for other property based staff. A separate similar scheme, previously set up by Trillium, is also in operation for Land Securities Trillium staff. In addition, as part of the PRIME Agreement, the group is obliged to provide pension benefits under a now closed funded defined benefit scheme applicable to less than 20 employees. OTHER SCHEMES During the year the group participated in the BBC and BT pension schemes in respect of employees who were transferred from those businesses to the group as part of Land Securities Trillium’s outsourcing contracts with those entities. Separate pension arrangements will be set up for these employees in due course. Land Securities Trillium Telecom Services Limited has put in place a defined benefit scheme with the same terms and conditions as the BT scheme. Staff who transferred from BT on 1 February 2002 can transfer to this new scheme from 1 May 2002. All relevant pension costs are recharged to Telereal Services Limited. There are also certain historic unfunded pensions being paid to three former directors or their dependants in accordance with their service contracts. All death-in-service and benefits for incapacity arising during employment provided by the group are wholly insured. No post-retirement benefits other than pensions are made available to employees of the group. Land Securities Notes to the financial statements for the year ended 31 March 2002 6 Staff and Pensions (continued) ADDITIONAL DISCLOSURES UNDER FRS17 ‘RETIREMENT BENEFITS’ As noted above, a full actuarial valuation was undertaken on 6 April 2001.This valuation was updated to 31 March 2002 by a qualified actuary for the purposes of the following additional disclosures required by the transitional provisions of FRS17. The major assumptions used by the actuary in this valuation were (in nominal terms): Rate of increase in pensionable salaries Rate of increase in pensions in payment Discount rate Inflation assumption 2002 % 5.00 2.75 6.00 2.75 The market value of the assets in the scheme (including the value of annuities purchased to provide certain pensions in payment) and the expected rate of return (net of investment management expenses) were: Equities Bonds and insurance contracts Other Total market value of assets Actuarial value of scheme liabilities Deficit in the scheme Related deferred tax asset Net pension liability Expected rate of return % Fair Value £m 7.5 6.0 46.2 12.9 18.5 77.6 (87.5) (9.9) 3.0 (6.9) 7 Executive and Savings Related Share Option Schemes No. of Options At 1 April 2001 Granted Exercised (Note 26) Lapsed At 31 March 2002 Option price 713p 869p 813p 2000 Executive Share Option Scheme 1984 1983 & 1993 Executive Savings Related Share Option Schemes Share Option Scheme 1,176,562 295,250 399,655 232,003 1,601,000 122,000 – (89,500) (81,835) (216,000) – (29,923) 2,683,562 205,750 519,900 The options outstanding under the 2000 scheme are exercisable at prices between 801p and 869p up to 2012, provided the associated performance conditions are met, and those under the 1984 executive share option scheme at 618.6p up to July 2004. The options outstanding under the savings related share option schemes are exercisable at prices between 487p and 736p, after three, five or seven years from the date of grant. 6 2 | 6 3 Notes to the financial statements for the year ended 31 March 2002 8 Directors’ Emoluments, Share Options and Interests in Ordinary Shares EMOLUMENTS The emoluments of the directors, including pension contributions and the value of shares in the company awarded under the company’s long-term incentive plan (‘LTIP’), of £Nil (2001 £190,800 at 880p per share), amounted to £4,050,000 (2001 £3,580,000). £’000 Basic Salary Profit Sharing & Bonuses LTIP Shares Benefits Car & Medical Total emoluments excluding pensions Pension contributions Fees 2002 2001 2002 2001 480 EXECUTIVE: I J Henderson M R Griffiths K Redshaw (retired 20.3.2001) J I K Murray (retired 28.6.2001) P Walicknowski (resigned 19.12.2001) 309 M J Chande (appointed 29.11.2000; resigned 28.2.2002) 310 F W Salway (appointed 2.4.2001) A E Macfarlane (appointed 1.10.2001) 200 260 137 75 – NON-EXECUTIVE: P G Birch (Chairman) P B Hardy Sir Alistair Grant (to 22.1.2001) Sir Winfried Bischoff G I Henderson (appointed 2.10.2000) P G Freeman (appointed 1.1.2002) Total 2002 Total 2001 – – – – – – 1,771 1,514 130 37 – 52 198 200 42 – – – – – – – 659 611 – – – – – – – – – – – – – – – 191 9 14 – 3 10 26 6 9 – – – – – – 77 60 – – – – – – – – 619 311 – 130 517 536 248 146 143 143 33 – 32 27 7 33 – 32 27 7 242 232 573 350 350 533 446 124 – – 138 31 21 29 13 213 104 – 702 84 105 59 34 – – – – – – 151 81 620 87 8 25 – – – – – – – – 2,749 1,301 2,608 972 Benefits include all taxable benefits arising from employment within the group comprising: the provision of a company car, private medical facilities, the value of shares allocated under the 1989 and 1999 profit sharing schemes and a bonus of 18 per cent of salary payable under the senior executive annual bonus scheme apportioned equally in cash and shares. Bonuses received by I J Henderson include £69,000 in recognition of 30 years service to the group. In addition to the emoluments set out above, the following compensations for loss of office were also paid: J I K Murray P Walicknowski £452,708 (plus a benefit of £10,500 on his purchase of his company car) £125,000 In addition, J I K Murray received £16,500 for consultancy services during the year after his retirement. The company was required to make a payment of £676,000 towards J I K Murray’s pension scheme funds as he commenced drawing his undiscounted pension before his normal retirement date. The total emoluments of the highest paid director, including £Nil (2001 £43,900) received in shares under the long term incentive plan and gains before tax of £5,800 (2001 £Nil) made on the exercise of share options during the year but excluding pension contributions, amounted to £624,900 (2001 £588,700). The accrued pension as at 31 March 2002 for the highest paid director was £294,700 (2001 £153,100). Pensions of £166,000 (2001 £175,000) were paid to former directors or their dependants. A brief explanation of pension arrangements for directors, including a table of accrued pension entitlements as at 31 March 2002, and details of amounts receivable under the LTIP are provided on pages 46 and 47. Land Securities Notes to the financial statements for the year ended 31 March 2002 8 Directors’ Emoluments, Share Options and Interests in Ordinary Shares (continued) OPTIONS OVER ORDINARY SHARES No. of options at 1 April 2001 (1) 27,000 (2) 174,562 (2) (3) 4,310 (1) 33,500 (2) 50,000 (2) (3) 3,539 (2) 35,000 (2) (2) (1) 12,500 (3) 3,481 (2) 200,000 (2) 150,000 Granted during year Grant price (pence) No. Exercised/Lapsed (L) during year Market price on exercise (pence) Exercise price (pence) No. 27,500 869 (1,601) 487 850 41,000 271 40,000 75,000 869 713 869 813 (800) 487 851 (12,500) 618.6 (823) (2,104) (L) (337) (L) (217) 672 504 672 504 863 771 884 (L) (200,000) No. 27,000 174,562 27,500 2,709 33,500 50,000 41,000 3,010 35,000 40,000 75,000 – – – Exercise price (pence) 618.6 820 869 680.9* 618.6 820 869 646.1* 801 869 813 – Options at 31 March 2002 Exercisable dates 7/1997 – 7/2004 9/2003 – 9/2010 7/2004 – 7/2011 7/2001 – 7/2004 7/1997 – 7/2004 9/2003 – 9/2010 7/2004 – 7/2011 7/2001 – 7/2005 11/2003 – 11/2010 7/2004 – 7/2011 11/2004 – 11/2011 150,000 824 05/2004 I J Henderson M R Griffiths F W Salway A E Macfarlane J I K Murray P Walicknowski M J Chande (1) 1984 Executive Share Option Scheme (2) 2000 Executive Share Option Scheme (3) 1983 & 1993 Savings Related Share Option Schemes *weighted average exercise price The range of the closing middle market prices for Land Securities shares during the year was 762p to 929.5p. The middle market price at 31 March 2002 was 893p. The aggregate of gains before tax made by directors on exercise of share options during the year amounted to £48,100 (2001 £58,000). The 1984 Executive Share Option Scheme was approved by the Inland Revenue on 24 April 1985 and permitted the Remuneration Committee to grant options to directors and key executives for a consideration of £1 for each grant. The Scheme, which expired on 24 April 1995, complied with best practice at the time of its introduction and included such standard terms as a limitation on the aggregate value of grants to each selected executive of four times that individual’s annual remuneration and a bar on the exercise of options within three years of their issue. The Land Securities PLC 2000 Executive Share Option Scheme was introduced in July 2000 and a summary of this scheme is set out in the Remuneration Committee Report on pages 46 and 47. The remainder of the options granted to directors under the savings related schemes are exercisable at prices between 504p and 736p per share after five or seven years from date of grant. Non-executive directors do not participate in, and hence do not hold any options under, the group’s share option schemes. INTERESTS IN ORDINARY SHARES The beneficial interests of the directors in the ordinary shares of the company as at 31 March were: P G Birch I J Henderson M R Griffiths F W Salway A E Macfarlane P B Hardy Sir Winfried Bischoff G I Henderson P G Freeman No. of shares 2001 22,864 82,433 30,771 2,273* 1,000* 19,200 10,000 3,000 5,000* 2002 22,864 89,440 34,931 8,108 1,000 19,200 10,000 3,000 5,000 *at date of appointment There have been no changes in the beneficial and non-beneficial shareholdings of the directors between the end of the financial year and 22 May 2002. No director had any other interests in the securities of Land Securities PLC or any of its subsidiary undertakings during the year. The registers of directors’ share and debenture interests and holdings of options, which are open to inspection at the company’s registered office, contain full details of directors’ interests. 6 4 | 6 5 Notes to the financial statements for the year ended 31 March 2002 9 Taxation Current tax Corporation tax on revenue profit for the year at 30% (2001 30%): Adjustments in respect of previous years Deferred taxation on revenue profit (Note 25) Release of deferred taxation (Note 25) On joint venture’s revenue profit On property sales and bid costs Current taxation Joint venture Factors affecting the tax charge for the year The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 30% (2001 30%). The differences are explained below: Profit on ordinary activities before taxation (page 52) Profit on ordinary activities multiplied by the standard rate of corporation tax at 30% Expenses disallowed Reduced tax on property sales Deferred tax – principally capital allowances Other items Current tax including current tax on property sales and bid costs (Less)/add: Current taxation (charge)/credit on property sales and bid costs Current taxation on revenue profit 10 Equity Dividends Interim paid Proposed final 11 Earnings per Share EARNINGS PER SHARE Earnings per share Effect of dilutive securities: Convertible bonds Share options Diluted earnings per share 2002 pence per share 9.05 24.95 34.00 2001 pence per share 8.65 23.85 32.50 Weighted average no. of shares 2002 m 524.2 29.7 .2 554.1 2001 m 523.0 30.2 .2 553.4 Profit after taxation 2002 £m 263.6 2001 (restated) £m 234.6 10.9 11.1 274.5 245.7 2002 £m 2001 (restated) £m 91.6 .2 91.8 17.6 (10.7) 1.3 100.0 1.2 (1.3) 99.9 86.8 (.6) 86.2 12.2 (7.4) – 91.0 (.9) – 90.1 363.5 324.7 109.1 2.9 (2.3) (17.6) .9 93.0 (1.2) 91.8 2002 £m 47.5 130.9 178.4 97.4 2.4 (2.1) (12.2) (.2) 85.3 .9 86.2 2001 £m 45.2 124.9 170.1 Earnings per share 2002 pence 50.27 2001 (restated) pence 44.87 49.54 44.41 ADJUSTED EARNINGS PER SHARE Earnings per share Effect of results of property sales and bid costs after taxation Effect of additional deferred tax arising on the adoption of FRS19 Adjusted earnings per share Diluted earnings per share Effect of results of property sales and bid costs after taxation Effect of additional deferred tax arising on the adoption of FRS19 Adjusted diluted earnings per share 263.6 1.2 5.9 270.7 274.5 1.2 5.9 281.6 234.6 (2.2) 4.8 237.2 245.7 (2.2) 4.8 248.3 524.2 523.0 524.2 523.0 554.1 553.4 554.1 553.4 50.27 .24 1.10 51.61 49.54 .23 1.04 50.81 44.87 (.41) .92 45.38 44.41 (.39) .87 44.89 Profits on the sales of properties and bid costs are excluded from adjusted earnings as these are potentially non-recurring items. The additional deferred tax arising from the adoption of FRS19 is also excluded as the group’s experience is that it is very unusual for plant allowances to be claimed back through balancing charges on the disposal of a property. Adjusted earnings and adjusted diluted earnings per share have been disclosed, therefore, to show measures of earnings that better reflect the principal operating activities of the group. Land Securities Notes to the financial statements for the year ended 31 March 2002 12 Net Assets per Share Net assets Number of shares Net assets per share Net assets per share Effect of additional deferred tax arising on the adoption of FRS 19 Adjusted net assets per share Net assets per share Adjustments for: convertible bonds Exercise of oustanding share options Diluted net assets per share Diluted net assets per share Effect of additional deferred tax arising on the adoption of FRS 19 Adjusted diluted net assets per share 2002 £m 6,036.6 128.3 6,164.9 6,036.6 243.3 27.6 6,307.5 6,307.5 128.3 6,435.8 2001 (restated) £m 6,017.8 122.4 6,140.2 6,017.8 246.1 14.0 6,277.9 6,277.9 122.4 6,400.3 2002 m 524.3 2001 m 523.6 524.3 523.6 524.3 29.7 3.4 557.4 523.6 30.2 1.9 555.7 557.4 555.7 557.4 555.7 2002 pence 1151 25 1176 2001 (restated) pence 1149 23 1172 1151 1149 1132 1130 1132 23 1155 1130 22 1152 The additional deferred tax liability arising on the adoption of FRS19 has been excluded from the calculations of the adjusted values as the group’s experience is that deferred tax on capital allowances in relation to properties is unlikely to crystallise in practice. 13 14 Goodwill At 1 April 2001 Prior year adjustment At 1 April 2001 as restated Amortisation for the year At 31 March 2002 £m 42.7 (.7) 42.0 Cost Amortisation £m (.8) – (.8) (2.3) 42.0 (3.1) Net £m 41.9 (.7) 41.2 (2.3) 38.9 Goodwill, which arose on the group’s acquisition of Trillium Investments GP Limited (‘Trillium’) in November 2000, has been restated for the effects of pre-acquisition deferred tax resulting from the adoption of FRS19 by Trillium. The prior year adjustment has no material effect on amortisation. Leasehold Investment Properties (a) GROUP At 1 April 2001: at valuation Prior year UITF28 adjustment At 1 April 2001 as restated: Net book amount Additions Sales Depreciation Unrealised deficit on revaluation (Note 27(a)) At 31 March 2002: Net book amount Amount included in prepayments under UITF28 Open market value (page 78) Freehold £m Over 50 years to run £m Under 50 years to run £m 5,842.5 (3.1) 5,839.4 345.0 (395.1) 5,789.3 – (74.0) 5,715.3 5.4 5,720.7 1,993.4 (3.6) 1,989.8 160.3 (99.3) 2,050.8 – (29.9) 2,020.9 5.4 2,026.3 70.0 (.1) 69.9 .3 (3.7) 66.5 (1.1) (1.6) 63.8 .1 63.9 The movement on investment properties forming part of the group’s development programme, excluding the BBC development and the trading properties, included above are as follows: At 1 April 2001: at open market value Properties transferred into the development pipeline during the year (at cost or at 1 April 2001 valuation) Expenditure during the year including development property acquisitions Capitalised interest Deficit on valuation Developments completed, let and transferred out of development pipeline during the year Developments removed from the development programme At 31 March 2002: at open market value Total £m 7,905.9 (6.8) 7,899.1 505.6 (498.1) 7,906.6 (1.1) (105.5) 7,800.0 10.9 7,810.9 £m 904.5 29.2 325.4 19.9 (70.3) 1,208.7 (137.6) (21.0) 1,050.1 The current schemes in the development programme are set out on pages 22 and 23. The new schemes added during the year, including acquisitions, are 7 Soho Square, W1, 190 High Holborn, WC1, 40/50 Eastbourne Terrace, W2, Commerce Way, Croydon and St. David’s Centre, Cardiff. Developments are taken out of the development programme when physically completed and 95% let. Schemes completed during the year comprise Martineau Place, Birmingham, 6/16 Market Square, Sunderland, Racecourse Retail Park, Liverpool and Industrial units at Juniper Phase I, Basildon, and Horizon Point Phase I, Hemel Hempstead. 6 6 | 6 7 balance sheets Notes to the financial statements for the year ended 31 March 2002 (b) COMPANY At 1 April 2001: at valuation Prior year UITF28 adjustment At 1 April 2001 as restated: Net book amount Additions Transfer to group undertaking Sales Depreciation Unrealised deficit on revaluation (Note 27(b)) At 31 March 2002: Net book amount Amount included in prepayments under UITF28 Open market value Leasehold Freehold £m Over 50 years to run £m Under 50 years to run £m Total £m 2,316.0 335.7 13.2 2,664.9 (.4) 2,315.6 91.9 (146.0) (3.1) 2,258.4 – (89.4) 2,169.0 .7 2,169.7 – 335.7 26.3 – (22.6) 339.4 – (12.0) 327.4 .1 327.5 – (.4) 13.2 2,664.5 .2 – (3.7) 9.7 (.5) (.1) 9.1 .1 9.2 118.4 (146.0) (29.4) 2,607.5 (.5) (101.5) 2,505.5 .9 2,506.4 At 31 March 2002, the cumulative interest capitalised in investment properties under development are: group £39.7m (2001 – restated £19.8m); company £2.7m (2001 – restated £1.3m). In respect of the group: freeholds include £366.1m (2001 £376.7m) of leaseholds with unexpired terms exceeding 900 years; leaseholds under 50 years to run include £10.3m (2001 £10.9m) with unexpired terms of 20 years or less. The historical cost of investment properties are: group £4,261.4m (2001 – restated £4,016.1m); company £1,016.3m (2001 £913.8m). 15 Operating Properties COST At 1 April 2001 Additions Sales At 31 March 2002 ACCUMULATED DEPRECIATION At 1 April 2001 Depreciation for the year Sales At 31 March 2002 NET BOOK AMOUNT At 31 March 2002 At 31 March 2001 Freehold land and buildings £m Leasehold buildings Over 50 years to run £m Under 50 years to run £m 257.6 96.3 (12.3) 341.6 (1.3) (4.7) .1 (5.9) 34.2 11.1 – 45.3 (.2) (.9) – (1.1) 32.9 17.1 – 50.0 (.1) (.9) – (1.0) Total £m 324.7 124.5 (12.3) 436.9 (1.6) (6.5) .1 (8.0) 335.7 256.3 44.2 34.0 49.0 32.8 428.9 323.1 Certain of the assets acquired under the PRIME Agreement are subject to a first charge granted to the DWP (formerly known as the DSS). The amount of this charge at 31 March 2002 is £13m (2001 £26m) which reduces to nil on a straight line basis after a further year. The charge secures amounts which would become payable to the DWP on early termination of the PRIME Agreement in the relevant year. At 31 March 2002, the cumulative interest capitalised in operating properties under development amounts to £0.8m (2001 £Nil). Land Securities Notes to the financial statements for the year ended 31 March 2002 16 Properties BOOK AMOUNT/COST At 1 April 2001 Prior year UITF28 adjustment At 1 April 2001 as restated Additions Sales Unrealised deficit on revaluation At 31 March 2002 ACCUMULATED DEPRECIATION At 1 April 2001 Depreciation for the year Sales At 31 March 2002 NET BOOK AMOUNT At 31 March 2002 At 31 March 2001 Leasehold Freehold £m Over 50 years to run £m Under 50 years to run £m Investment Properties (Note 14(a)) £m Operating Properties (Note 15) £m Total £m 6,100.1 2,027.6 102.9 8,230.6 7,905.9 324.7 (3.1) (3.6) (.1) (6.8) (6.8) 6,097.0 2,024.0 102.8 8,223.8 7,899.1 441.3 (407.4) 171.4 (99.3) 17.4 (3.7) 630.1 505.6 (510.4) (498.1) 6,130.9 2,096.1 116.5 8,343.5 7,906.6 (74.0) (29.9) (1.6) (105.5) (105.5) – 324.7 124.5 (12.3) 436.9 – 6,056.9 2,066.2 114.9 8,238.0 7,801.1 436.9 (1.3) (4.7) .1 (5.9) (.2) (.9) – (1.1) (.1) (2.0) – (2.1) (1.6) (7.6) .1 (9.1) – (1.1) – (1.1) (1.6) (6.5 ) .1 (8.0) 6,051.0 6,095.7 2,065.1 2,023.8 112.8 102.7 8,228.9 8,222.2 7,800.0 7,899.1 428.9 323.1 At 31 March 2002, the cumulative capitalised interest in properties amounts to £40.5m (2001 – restated £19.8m). 17 Commitments for Future Expenditure on Properties Under contract Board authorisations not contracted Contracted and authorised commitments Group Company 2002 £m 574.1 312.1 886.2 2001 £m 254.8 293.2 548.0 2002 £m 36.8 221.6 258.4 2001 £m 12.6 7.9 20.5 Less: Commitments outside the development programme Estimated additional expenditure on the development programme (excluding future interest) Capital creditors (included in Note 21) relating to the development programme Total outstanding costs of the development programme (including the BBC development) (70.3) (135.4) 918.2 86.9 1,141.3 26.0 1,821.0 1,579.9 18 Other Tangible Assets At 1 April 2001 Additions during the year Disposals Depreciation for the year At 31 March 2002 Other tangible assets include computers, motor vehicles, furniture, fixtures and fittings and improvements to group offices. Cost Depreciation £m £m 54.0 19.8 (1.8) 72.0 (19.9) 1.6 (8.4) (26.7) Net £m 34.1 19.8 (.2) (8.4) 45.3 6 8 | 6 9 Notes to the financial statements for the year ended 31 March 2002 19 Investments in Group Undertakings At 1 April 2001 Prior year adjustment At 1 April 2001 as restated Increase during the year Unrealised revaluation surplus (Note 27(b)) At 31 March 2002 Shares £m 4,564.6 (93.3) 4,471.3 14.0 122.0 Loans £m 395.2 – 395.2 96.5 Total £m 4,959.8 (93.3) 4,866.5 110.5 122.0 4,607.3 491.7 5,099.0 The prior year adjustment is a consequence of the group undertakings adopting FRS19, UITF28, UITF34 and the deferred tax effect of capitalising interest in their financial statements. Shares comprise ordinary shares of group undertakings and are stated in accordance with the accounting policy explained in Note 1(k). Shares at 1 April 2001 included revaluation surpluses of £2,496.1m. Loans to group undertakings have no fixed repayment dates. The principal group undertakings, all of which are wholly owned, incorporated and operating in the United Kingdom, are noted in Note 32. As permitted by Section 231 Companies Act 1985, a complete listing of all of the group undertakings has not been provided on the grounds that the information would be of an unduly excessive length. A complete list of group undertakings will, however, be filed with the Annual Return. 20 Debtors Falling due within one year: Trade debtors Property sales debtors Other debtors Prepayments and accrued income Taxation recoverable Falling due after more than one year: Other debtors 21 Creditors falling due within one year Debentures and loans (Note 22) Overdraft Trade creditors Taxation and Social Security Proposed final dividend Capital creditors Other creditors Accruals and deferred income Group Company 2002 £m 96.1 27.9 49.6 81.2 – 2001 (restated) £m 33.4 52.1 29.4 61.1 – 254.8 176.0 5.5 5.5 1.3 1.3 2002 £m 8.4 – 4.3 6.2 46.9 65.8 .2 .2 2001 (restated) £m 9.5 – 4.6 11.7 34.5 60.3 .2 .2 Group Company 2002 £m 1.4 21.8 28.9 68.4 130.8 108.3 29.6 301.7 690.9 2001 (restated) £m 26.4 4.2 15.5 61.5 124.9 59.5 29.2 273.4 594.6 2002 £m .3 – – – 2001 (restated) £m .3 – – – 130.8 124.9 51.8 6.7 96.2 12.4 9.1 99.9 285.8 246.6 Capital creditors represent amounts due under contracts to purchase properties, which were unconditionally exchanged at the year end, and for work completed on investment properties but not paid for at the financial year end. Debentures and loans include £0.4m (2001 £0.4m) and £0.3m (2001 £0.3m) of instalments of borrowings, repayable by the group and company respectively, that mature after more than one year. Land Securities Notes to the financial statements for the year ended 31 March 2002 22 Debentures, Bonds and Loans UNSECURED 103⁄4 per cent Exchange Bonds due 2004 91⁄ 2 per cent Bonds due 2007 £200m 9 per cent Bonds due 2020 Bank borrowings SECURED 61⁄4 per cent Mortgage Debenture 2000/05 61⁄ 2 per cent Mortgages 2000/05 73⁄4 per cent Mortgage 2008 63⁄ 8 per cent First Mortgage Debenture Stock 2008/13 10 per cent First Mortgage Debenture Stock 2025 10 per cent First Mortgage Debenture Stock 2027 10 per cent First Mortgage Debenture Stock 2030 Bank loan Falling due within one year (Note 21) Falling due after more than one year Group Company 2001 £m 21.2 200.0 196.4 25.0 442.6 8.7 8.7 5.6 32.3 400.0 200.0 200.0 208.9 2002 £m 21.2 200.0 196.6 – 417.8 8.6 8.6 – 32.3 400.0 200.0 200.0 – 2001 £m 21.2 200.0 196.4 – 417.6 8.7 8.7 – 32.3 400.0 200.0 200.0 – 2002 £m 21.2 200.0 196.6 265.0 682.8 8.6 8.6 5.5 32.3 400.0 200.0 200.0 207.6 1,745.4 1,506.8 1,267.3 1,267.3 (1.4) (26.4) (.3) (.3) 1,744.0 1,480.4 1,267.0 1,267.0 The interest rate on the secured bank loan, which is variable and includes a margin which varies according to the group’s credit rating, has been swapped to an effective rate of 6.8%. Secured loans are charged on properties of the company and its group undertakings. The bank loan is guaranteed by the holding company, Land Securities PLC, and secured on the unitary charge receivable from the DWP under the PRIME Agreement and also on most properties held by Land Securities Trillium. From time to time, short term deposits are charged as temporary security until substitutions have been agreed for properties taken out of charge. At 31 March 2002, short term deposits of the group £Nil (2001 £9.1m) and of the company £Nil (2001 £9.1m) were charged as temporary security for borrowings until substitutions have been agreed for properties taken out of charge. Borrowings of group undertakings of £5.5m (2001 £5.6m) are secured by charges on properties of the company and its group undertakings. 23 Convertible Bonds £210m 6 per cent Guaranteed Convertible Bonds due 2007 7 per cent Convertible Bonds due 2008 Group Company 2002 £m 207.3 36.0 243.3 2001 £m 206.8 39.3 246.1 2002 £m – 36.0 36.0 2001 £m – 39.3 39.3 In accordance with the terms of their relevant Trust Deeds: 1) The 6 per cent Guaranteed Convertible Bonds, issued by Land Securities Finance (Jersey) Limited and guaranteed by the company, (i), at the holder’s option may be converted, up to and including 22 March 2007, into 21⁄2 per cent Exchangeable Redeemable Preference Shares in the issuer which are exchangeable for up to a maximum of 24,027,345 ordinary shares of £1 each in Land Securities PLC at 874p per share or (ii), at the option of the issuer may be redeemed at par. 2) The 7 per cent Convertible Bonds (i), at the holders’ option may be converted, up to and including 23 September 2008, into a maximum of 5,620,937 fully paid shares of £1 each at a conversion price of 640p per share or (ii), at the option of the company, may be redeemed at par. During the year, £3,310,000 of the bonds were converted into 517,186 fully paid shares of £1 each. On 22 May 2002 redemption notices were issued on the 2007 and 2008 bonds. 24 Other Creditors falling due after more than one year Deferred income Other creditors Group Company 2002 £m 16.7 6.1 22.8 2001 £m 20.4 11.4 31.8 2002 £m 6.6 5.1 11.7 2001 £m 7.1 5.0 12.1 7 0 | 71 Notes to the financial statements for the year ended 31 March 2002 25 Provisions for Liabilities and Charges At 1 April 2001 Prior year adjustment (Note 3) At 1 April 2001 as restated Net charge for the year Released in respect of property disposals during the year Other movements At 31 March 2002 Dilapidations £m Deferred taxation £m 4.7 – 4.7 .6 5.3 1.1 127.6 128.7 17.6 (10.7) (11.0) 124.6 Group Company Total £m 5.8 127.6 133.4 18.2 (10.7) (11.0) 129.9 Deferred taxation £m – 39.1 39.1 5.3 (.3) – 44.1 The amount of tax on capital gains which would become payable in the event of sales of the investment properties at the amounts at which they are stated in Note 14 is in the region of £535m (2001 £540m) for the group and £170m (2001 £230m) for the company. The deferred taxation which would be released in such circumstances, on the assumption that no balancing charge would be incurred, is £130.6m (2001 £122.3m). 26 Called up Share Capital Ordinary shares of £1 each: Authorised Allotted and fully paid The movements in share capital during the year were: Allotted: On the exercise of options granted under: 1983 and 1993 Savings Related Share Option Schemes (Note 7) 1984 Executive Share Option Scheme (Note 7) On conversion of 7 per cent Convertible Bonds due 2008 (Note 23) 2002 £m 720.0 524.3 2001 £m 720.0 523.6 Cash consideration received £m No. of shares .5 .6 1.1 81,835 89,500 517,186 688,521 The exercise of all options outstanding at 31 March 2002, granted under the savings related and executive share option schemes, would result in the issue of a further 3,409,212 ordinary shares. 27 Reserves Capital Share premium redemption reserve £m account £m Revaluation reserve £m Other reserves £m Profit and loss account £m Total £m (a) GROUP At 1 April 2001 Prior year adjustment (Note 3) At 1 April 2001 as restated Premium arising on issues of shares Unrealised deficit on revaluation of investment properties (Note 14(a)) Share of unrealised surplus on revaluation of properties held in joint venture (Note 33) Realised on sales of investment properties Taxation on revaluation surpluses realised on sales of properties Retained profit for the year (page 52) Amortised discount and issue expenses of bonds At 31 March 2002 312.0 – 312.0 3.6 (.7) 314.9 36.0 3,696.4 324.6 1,258.3 5,627.3 – (23.0) – (110.1) (133.1) 36.0 3,673.4 324.6 1,148.2 5,494.2 (105.5) 46.8 (237.8) 237.8 (12.0) 3.6 (105.5) 46.8 (12.0) 85.2 85.2 .7 36.0 3,376.9 550.4 1,234.1 5,512.3 Land Securities Notes to the financial statements for the year ended 31 March 2002 27 Reserves (continued) (b) COMPANY At 1 April 2001 Prior year adjustment (Note 3) At 1 April 2001 as restated Premium arising on issues of shares Unrealised deficit on revaluation of investment properties (Note 14(b)) Realised on sales of properties Revaluation of shares in group undertakings (Note 19) Taxation on revaluation surpluses realised on sales of properties Retained profit for the year Amortised discount and issue expenses of bonds Capital Share premium redemption reserve £m account £m Revaluation reserve £m Other reserves £m Profit and loss account £m Total £m 312.0 – 312.0 3.6 (.7) 36.0 4,058.9 – (99.9) 36.0 3,959.0 .1 – .1 1,198.4 5,605.4 (32.6) (132.5) 1,165.8 5,472.9 (101.5) (159.5) 122.0 159.5 .9 3.6 (101.5) 122.0 .9 3.8 3.8 .7 At 31 March 2002 314.9 36.0 3,820.0 160.5 1,170.3 5,501.7 Land Securities PLC has not presented its own profit and loss account, as permitted by Section 230(1)(b) Companies Act 1985. The retained profit for the year of the company, dealt with in its financial statements, was £3.8m (2001 – restated £56.4m). 28 Reconciliation of Group Operating Profit to Net Cash Inflow from Operating Activities Operating profit (group) (page 52) Depreciation and amortisation Increase in trading properties (Increase)/decrease in debtors Increase/(decrease) in creditors Net cash inflow from operating activities 29 Analysis of Net Cash Flows (a) MANAGEMENT OF LIQUID RESOURCES Net (increase)/decrease in short term deposits Net cash (outflow)/inflow from management of liquid resources Liquid resources comprise short term deposits which are readily realisable within one year. (b) CASH MOVEMENT IN DEBT Debt due within one year – Repayment of secured debt – Repayment of unsecured debt – Unsecured bank loan Debt due after one year – Unsecured bank loan Repayment of secured debt Increase/(decrease) in debt 30 Analysis of Net Debt Net bank balance/(overdraft) Liquid resources Debt due within one year Debt due after one year Net debt 7 2 | 7 3 2002 £m 497.5 18.3 (36.9) (107.9) 35.2 406.2 2002 £m (38.9) (38.9) 2002 £m (.4) – (25.0) (25.4) 265.0 – 265.0 239.6 1 April 2001 £m 3.1 22.0 (26.4) (1,726.5) (1,727.8) Movements during year Cash Flow £m Non-Cash £m (17.4) 38.9 25.4 (265.0) (218.1) (.4) 4.2 3.8 2001 (restated) £m 450.6 8.6 – 14.1 (11.3) 462.0 2001 £m 118.1 118.1 2001 £m (.4) (28.7) 25.0 (4.1) – (10.0) (10.0) (14.1) 31 March 2002 £m (14.3) 60.9 (1.4) (1,987.3) (1,942.1) Notes to the financial statements for the year ended 31 March 2002 31 Financial Assets and Liabilities This note should be read in conjunction with the comments set out in the Financial Review on page 32. The group has defined financial assets and liabilities as those assets and liabilities of a financial nature, namely cash, investments, borrowings and interest rate swaps. Short term debtors/creditors, capital debtors/creditors, taxation and prepayments and accruals have been excluded. All of the group’s financial assets and liabilities are sterling based and, with the exception of the committed bank facility, at fixed rates. The group’s financial assets and liabilities and their fair values are: FINANCIAL ASSETS Short term investments and cash FINANCIAL LIABILITIES Debentures, bonds, other loans and overdraft Convertible bonds FINANCIAL INSTRUMENTS Interest rate swaps Weighted average period of fixed interest rates Weighted average interest rate Book value Fair value Excess of fair value over book value 2002 £m 2001 £m 2002 £m 2001 £m 2002 £m 2001 £m 72.3 31.8 72.3 31.8 – – (1,767.2) (1,511.0) (2,205.6) (1,964.5) (243.3) (246.1) (274.9) (287.7) – – (4.9) (12.2) (438.4) (31.6) (4.9) (474.9) (453.5) (41.6) (12.2) (507.3) Financial assets Financial liabilities 3 days 3.0% 35 days 14.1 years 17.1 years 5.3% 8.3% 8.8% Fair value has been calculated by taking the mid-market value, where one is available, or using a discounted cash flow approach for those financial assets and liabilities that do not have a published market value. The difference between book value and fair value will not result in any change to the cash outflows of the group unless, at some stage in the future, borrowings are purchased in the market, or repaid, at a price different to the nominal value. The group has entered into the following interest rate swaps: Each for £m Start date 100 100 100 100 100 100 100 29 September 2000 29 September 2000 28 June 2002 30 June 2002 31 March 2002 31 March 2002 31 March 2002 Receives Pays 6-month LIBOR 5.59% 6-month LIBOR 5.58% 6-month LIBOR 5.00% 6-month LIBOR 5.00% 6-month LIBOR 5.46% 6-month LIBOR 5.45% 6-month LIBOR 5.28% Duration (years) 30* 30* 20* 20* 10 10 18 *The counterparties have the right to terminate the swaps mid-way through the life of the swaps. As the intention of these swaps is to fix the interest rate on existing and new borrowings, the value of the swaps have not been incorporated into the financial statements. Once they have commenced operating, interest receipts and payments on swaps are dealt with on an accruals basis. In addition there is a further swap which was taken out by Trillium to hedge the secured bank loan included in Note 22. This swap has a maximum life of 16 years and mirrors the repayment schedule for that bank loan. As part of the fair value accounting for the acquisition of Trillium, this swap was marked to market at a cost of £14.9m. The cost, which is included in the bank loan, is being amortised over the life of the swap as a credit to interest payable. Land Securities Financial assets Financial liabilities Borrowing facilities 2002 £m 72.3 – – – 2001 £m 29.8 2.0 – – 72.3 31.8 2002 £m 23.2 6.7 537.6 1,443.0 2,010.5 2001 £m 30.6 1.4 62.3 1,662.8 1,757.1 2002 £m 250 – 335 – 585 2002 £m .3 .3 37.8 1,264.9 1,303.3 2001 £m 50.0 – – 600.0 650.0 Company 2001 £m .3 .3 38.1 1,267.9 1,306.6 Notes to the financial statements consolidated profit and loss account for the year ended 31 March 2002 31 Financial Assets and Liabilities (continued) The maturity and repayment profiles of the group’s financial assets and liabilities and the expiry periods of its undrawn committed borrowing facilities are: One year or less, or on demand More than one year but no more than two years More than two years but no more than five years More than five years The amount of debt that is repayable by instalments, where any of the instalments fall due after more than five years, is not material. The repayment profile of the company’s financial liabilities is: Repayable in: One year or less, or on demand More than one year but no more than two years More than two years but no more than five years More than five years 32 Principal Group and Associated Undertakings The principal group undertakings of Land Securities PLC, all of which are wholly owned, and its associated undertakings are: GROUP UNDERTAKINGS GROUP OPERATIONS Land Securities Properties Limited INVESTMENT PROPERTY BUSINESS Ravenseft Properties Limited The City of London Real Property Company Limited Ravenside Investments Limited Ravenseft Industrial Estates Limited TOTAL PROPERTY OUTSOURCING Land Securities Trillium Limited ASSOCIATED UNDERTAKINGS The principal associated undertakings, all of which are 50% owned, are: Telereal Services Limited Telereal Trading Property Limited Telereal Securitised Property Limited Partnership Telereal General Property Limited Partnership 7 4 | 7 5 Notes to the financial statements for the year ended 31 March 2002 33 Joint Venture The group has a 50% interest in the Telereal group of companies (“Telereal”), which draws up accounts to 31 March.Telereal, a 50:50 joint venture between Land Securities Trillium and The William Pears Group, acquired the majority of the properties of British Telecommunications (“BT”) on 13 December 2001.Telereal is responsible for providing accommodation and estate management services to BT in return for a total availability and service charge under a 30-year contract. Telereal was funded with £2.5bn to meet the consideration of £2.4bn due to BT and the other costs of £112m associated with bidding for and mobilising the contract. The funding was provided externally by way of securitisation of £1.8bn and bank debt of £400m, both secured on Telereal’s properties without any recourse to the shareholders of Telereal, and equity investment by the shareholders of £292.8m shared equally.The property portfolio has been financed according to the different occupational needs within the BT portfolio. The “specialised estate” consists primarily of telephone exchanges and associated property and is characterised by a long term commitment for occupation by BT. The purchase of these assets was funded through a securitisation. The “general purpose estate” consists of properties, such as offices and vehicle depots, where the occupational requirements are more normal.The purchase of this part of the estate was primarily funded through bank debt to reflect the need for greater flexibility in the management of these assets. SUMMARY FINANCIAL INFORMATION OF TELEREAL Turnover Operating profit Depreciation Bid costs written off Finance costs (net) Loss before tax Loss after tax Distributions to shareholders Fixed assets – properties Current assets Securitisation Bank debt Other liabilities Net assets Financed by: Shareholders’ equity Reserves 13 December 2001 to 31 March 2002 Group’s share Telereal 50% 100% £m £m 97.0 38.6 (8.2) (16.0) (47.6) (9.0) (9.0) – Telereal 100% £m 2,386.8 208.8 2,595.6 (1,760.0) (391.2) (66.8) (2,218.0) 377.6 292.8 84.8 377.6 48.5 19.3 (4.1) (8.0) (23.8) (4.5) (4.5) – At 31 March 2002 Group’s share 50% £m 1,193.4 104.4 1,297.8 (880.0) (195.6) (33.4) (1,109.0) 188.8 146.4 42.4 188.8 The majority of properties held by Telereal are part of a 30-year contract with BT and will be held at cost to the group. The accounting policy adopted for dealing with the properties in Telereal’s financial statements is: Freehold land is stated at historical cost and is not depreciated. Freehold buildings are depreciated in equal annual instalments over 50 years. Expenditure which enhances the value of a building is capitalised and depreciated over the remaining life of the building up a maximum of 50 years or, if appropriate, its expected life. Repair and maintenance expenditure is written off to the profit and loss account as incurred. Six properties are held outside the 30-year contract and are treated as investment properties. These properties are included in the financial statements at open market values based on the latest professional valuation. At 31 March 2002 valuations were carried out by GVA Grimley and The Wheelan Partnership. The group’s 50% share of the fair value of Telereal’s financial liabilities as at 31 March 2002 is £1,042.8m. The group’s 50% share of reserves includes £46.8m of valuation surplus arising from the revaluation of Telereal’s investment properties. The Telereal entities include two partnerships, Telereal Securitised Property Limited Partnership and Telereal General Property Limited Partnership, which are registered in England and whose accounts, drawn up to 31 March 2002, are dealt with in the group financial statements by way of gross equity accounting and are consolidated in the group’s financial information set out above. Advantage has been taken of the exemption conferred by Regulation 7 of The Partnership and Unlimited Companies (Accounts) Regulations 1993 in not delivering the financial statements of the partnerships to the Registrar of Companies. Land Securities Notes to the financial statements for the year ended March 2002 34 Membership of Certain Undertakings During the year, the group has been a member of the following limited partnerships, all of which are registered in England, and whose accounts, drawn up to 31 December or 31 March (as indicated below) are dealt with in the group’s financial statements as joint arrangements: Partnership Martineau Limited Partnership (31 December) Martineau Galleries Limited Partnership (31 December) Bull Ring Limited Partnership (31 December) Gunwharf Quays Limited Partnership (31 March) Ebbsfleet Limited Partnership (31 March) Group share % 331⁄3 331⁄3 331⁄3 50 50 At 31 March 2002 Year ended 31 March 2002 Gross assets £m 125.0 114.8 235.9 117.0 26.5 619.2 Gross liabilities £m (4.8) (1.7) (85.9) (2.5) (13.4) Gross property income £m Profit/(loss) before tax £m 4.4 6.5 .2 5.6 – 3.9 5.1 (.3) 5.2 – (108.3) 16.7 13.9 Advantage has been taken of the exemption conferred by Regulation 7 of The Partnerships and Unlimited Companies (Accounts) Regulations 1993 in not delivering the financial statements of the partnerships to the Registrar of Companies: 35 Related Party Transactions The group has a 50% interest in the Telereal group of companies (“Telereal”).The group, principally through Land Securities Trillium Telecom Services Limited, provides staff to Telereal to deliver services to BT, for which it received £2.5m in the year ended 31 March 2002. As at 31 March 2002, the group was owed £151.7m by Telereal.This comprised a subordinated loan from the group of £149.4m, including accrued interest, and an amount rechargeable to Telereal of £2.3m in respect of services provided by the group. 36 Contingent Liabilities The group has a contingent liability arising from a performance guarantee that Land Securities PLC, as the parent company of Land Securities Trillium Limited, has given, severally with its Telereal joint venture partner, for the performance by Telereal Services Limited of its service obligations to BT together with a guarantee related to transaction issues associated with the BT outsourcing contract.The group’s maximum liability under the guarantee is £50m plus a further amount which is capped by reference to amounts either distributed or available for distribution to each shareholder by certain of the Telereal companies up to a further £50.7m. The transaction element of the guarantee is capped at £10m.The maximum potential liability which the company could be exposed to under such arrangements is capped at £110.7m.The total maximum liability of £110.7m will, however, amortise over time in accordance with a contractual formula included and defined in the agreement with BT. At 31 March 2002, the estimated amount of the group’s exposure to the guarantee was approximately £52.6m. 37 Post Balance Sheet Events On 22 May 2002 the group issued redemption notices in respect of its 6% 2007 and 7% 2008 convertible bonds. As an alternative to conversion, the company may purchase bonds in the market place, if these are offered at attractive prices. On the same date, the company announced its intention to return approximately £500m to shareholders. It is also intended that this sum will be increased, pound for pound, to the extent that the bonds convert into issued share capital.These transactions are being funded by additional bank facilities put in place for the purpose. 7 6 | 77 – 5,265.7 – 4.8 – 335.2 – 89.8 5,695.5 510.2 3,014.3 3,524.5 1,767.2 403.8 5,695.5 199.0 (53.3) – 462.2 400.6 238.7 (1.1) 237.6 171.9 39.3 – 5,169.6 – 4.9 – 209.6 – 97.6 5,481.7 510.0 3,023.8 3,533.8 1,572.6 375.3 5,481.7 190.9 (81.0) – 460.4 400.0 241.3 3.4 244.7 179.7 52.2 – 5,032.4 – 4.3 – 241.5 – 94.4 5,372.6 509.8 2,943.3 3,453.1 1,573.3 346.2 5,372.6 – 4,098.6 – 4.8 – 234.2 – 88.5 4,426.1 504.8 2,039.5 2,544.3 1,515.6 366.2 4,426.1 150.6 (40.8) – 237.1 (132.0) – 448.9 389.4 234.8 2.3 237.1 180.6 58.4 436.9 380.7 233.4 (4.3) 229.1 165.7 50.4 Ten year record for the year ended March 2002 2002 £m 2001 (restated) £m 2000 £m 1999 £m 1998 £m 1997 £m 1996 £m 1995 £m 1994 £m 1993 £m ASSETS EMPLOYED Goodwill Investment properties Operating properties Other tangible fixed assets Investment in joint venture Short term deposits, corporate bonds and cash Trading properties Other assets FINANCED BY Share capital Reserves EQUITY SHAREHOLDERS’ FUNDS Borrowings Other liabilities 38.9 7,800.0 428.9 45.3 188.8 68.4 36.9 260.3 8,867.5 524.3 5,512.3 6,036.6 2,010.5 820.4 8,867.5 41.2 7,899.1 323.1 34.1 – 29.3 – 177.3 8,504.1 523.6 5,494.2 6,017.8 1,757.1 729.2 8,504.1 – 7,453.7 – 14.7 – 140.1 – 182.6 7,791.1 522.4 5,259.4 5,781.8 1,556.3 453.0 7,791.1 – 6,910.5 – 13.1 – 486.6 – 72.5 7,482.7 554.3 4,916.1 5,470.4 1,569.3 443.0 7,482.7 – 6,435.7 – 9.7 – 547.4 – 98.0 7,090.8 541.1 4,460.4 5,001.5 1,652.3 437.0 7,090.8 – 5,760.0 – 7.5 – 486.7 – 84.1 6,338.3 515.5 3,521.7 4,037.2 1,849.4 451.7 6,338.3 PROPERTY MOVEMENTS AND ACQUISITIONS (book value) Property additions Property sales Acquisitions 630.1 (510.4) 146.4 588.8 (424.9) 169.5 403.5 (314.3) – 267.3 (125.4) – 189.6 (246.9) – 261.9 (206.1) – REVENUE Gross property income Net property income Revenue profit Profit/(loss) on sales of properties/bid costs Pre-tax profit Profit attributable to shareholders Retained profit for the year CASH FLOWS Operating activities Operating activities and investments less finance charges and taxation Free cash flow (post dividend) for investing Net cash (outflow)/inflow (excludes liquid resources and financing) EARNINGS PER SHARE (pence) *ADJUSTED EARNINGS PER SHARE (pence) DILUTED EARNINGS PER SHARE (pence) *ADJUSTED DILUTED EARNINGS PER SHARE (pence) DIVIDENDS PER SHARE (pence) DIVIDEND COVER (times) *ADJUSTED DIVIDEND COVER (times) NET ASSETS PER SHARE (pence) *ADJUSTED NET ASSETS PER SHARE (pence) DILUTED NET ASSETS PER SHARE (pence) *ADJUSTED DILUTED NET ASSETS PER SHARE (pence) 1,025.6 606.0 364.8 (1.3) 363.5 263.6 85.2 650.4 499.7 323.4 1.3 324.7 234.6 64.5 528.2 457.2 301.7 26.0 327.7 252.0 86.3 500.2 427.5 292.7 .6 293.3 216.4 51.2 484.0 414.1 265.9 .1 266.0 196.7 45.1 471.0 405.1 235.7 8.1 243.8 178.4 39.3 406.2 462.0 432.2 409.9 399.5 366.8 389.0 374.6 375.9 373.8 132.6 (39.9) 280.5 116.4 246.5 79.7 229.1 73.5 (219.2) (95.4) (114.9) (61.9) 50.27 51.61 49.54 50.81 34.00 1.48 1.52 1151 1176 1132 1155 44.87 45.38 44.41 44.89 32.50 1.38 1.39 1149 1172 1130 1152 45.44 40.86 44.97 40.63 31.00 1.52 1.37 1107 – 1090 – 39.21 39.11 38.95 38.86 29.50 1.31 1.31 987 – 975 – 168.2 25.7 72.3 36.84 37.07 36.55 36.77 28.00 1.30 1.31 924 – 910 – 194.7 60.5 34.6 34.85 33.17 34.50 32.92 27.00 1.28 1.22 783 – 774 – 773 183.4 54.6 196.2 72.6 184.7 67.7 175.4 64.1 (69.9) (32.4) (76.8) (73.0) 33.69 33.92 33.46 33.67 26.00 1.30 1.30 691 – 688 – 626 35.23 34.56 34.91 34.28 25.00 1.41 1.38 693 – 691 – 594 35.66 35.20 35.30 34.87 24.00 1.48 1.46 677 – 676 – 628 32.83 33.68 32.76 33.59 22.85 1.44 1.47 504 – 504 – 526 MARKET PRICE PER SHARE AT 31 MARCH (pence) 893 880 749 820 1058 *These figures exclude the results of property sales after tax and after deducting (i) in 1997, the cost of terminating interest rate swaps and (ii) in 2001 and 2002, as appropriate, bid costs and the effects of adopting FRS19. Properties, reserves and net assets per share reflect valuations of investment properties made by Knight Frank at each year end. In 2002, however, reserves and net assets also include the group’s 50% share of Telereal’s revaluation surplus arising on the revaluation of its investment properties. With the introduction of FRS3 effective for the year ended 31 March 1994, comparatives, where appropriate, have been restated. 2001 has been restated, as appropriate, for prior year adjustments arising from the adoption of FRS19 and UITF28 which became effective for the year ended 31 March 2002 and the change in accounting policy to capitalise interest effective from 1 April 2000. 2001 and 2002 also reflect the change in accounting policy introduced in 2002 in response to the treatment of bid costs under UITF34 which will become effective in 2003. However, figures for 2000 and prior years have not been restated to reflect changes in accounting policies made in 2002. Land Securities Valuers’ report for the year ended 31 March 2002 The Directors, Land Securities PLC, 5 Strand, London WC2N 5AF. 24 April 2002 Dear Sirs, In accordance with your instructions to prepare a valuation for financial reporting purposes we have made all relevant enquiries, and obtained such further information as necessary to provide you with our opinion of the current Open Market Values of all the freehold and leasehold investment properties owned by your Company and its subsidiaries or held by way of Limited Partnership arrangements (excluding Telereal) as at 31st March 2002, with the exception of short leasehold accommodation occupied by the Company for the purposes of its business. As is your customary practice, all properties for which there was an unconditional contract to purchase at the valuation date have been included in the valuation and those for which there was an unconditional contract for sale have been excluded. The properties have been valued individually on the basis of “Open Market Value” in accordance with the Appraisal and Valuation Manual published by the Royal Institution of Chartered Surveyors and the valuation has been undertaken by us as External Valuers. Open Market Value is defined as:- “an opinion of the best price at which the sale of an interest in property would have been completed unconditionally for cash consideration on the date of valuation, assuming: a) a willing seller; b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of the price and terms and for the completion of the sale; c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation; d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and 7 8 | 7 9 e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion”. No allowance has been made for expenses of realisation or for any taxation which might arise and our valuations are expressed exclusive of any Value Added Tax that may become chargeable. As in previous years, investment properties held for, or in the course of, development are included at Open Market Value. Our valuations reflect usual deductions in respect of Purchaser’s costs and, in particular, full liability for UK Stamp Duty. Our valuations assume that the properties have good and marketable titles and are free of any undisclosed onerous burdens, outgoings or restrictions. We have not seen planning consents and, except where advised to the contrary, have assumed that the properties have been erected and are being occupied and used in accordance with all requisite consents and that there are no outstanding statutory notices. We have not read documents of title or leases and, for the purpose of our valuations, have accepted the details of tenure, tenancies and all other relevant information with which we have been supplied by your Company. When considering the covenant strength of individual tenants we have not carried out credit enquiries but have reflected in our valuations our general understanding of purchasers’ likely perceptions of tenants’ financial status. We have, in addition, discussed with the Company any bad debts or material arrears of rent such as might reflect on covenant. We last reported upon the value of the properties as at 30th September 2001. We have not re-inspected all properties for the purpose of this re-valuation but can confirm that the properties have been inspected within the last twelve months. We were not instructed to carry out structural surveys of the properties, nor to test the services, but have reflected in our valuations, where necessary, any defects, items of disrepair or outstanding works of alteration or improvement which we noticed during the course of our inspections or of which you have advised us. Our valuations assume the buildings contain no deleterious materials and that the sites are unaffected by adverse soil conditions except where we have been notified to the contrary. We have not carried out any scientific investigations of the sites or any of the properties to establish the existence or otherwise of any environmental contamination. The Company has established procedures for identifying and investigating environmental matters and we have been provided with reports for certain properties which we have discussed with the Company. The environmental reviews which have been carried out by or on behalf of the Company have not, we understand, led the Directors to believe that there are any significant potential environmental problems within the Group’s portfolio. In accordance with our enquiries of the Company, and the contents of the above mentioned reports, we have assumed that the land and buildings, the subject of our valuations, do not suffer from any significant environmental problems. Having regard to the foregoing we are of the opinion that the values of those properties held by the Company and its subsidiaries as at 31st March 2002 totalled £7,598,646,000 (Seven Thousand, Five Hundred and Ninety Eight Million, Six Hundred and Forty Six Thousand Pounds). In addition, we have undertaken valuations of those properties held by way of Limited Partnership interests. These comprise the Birmingham Alliance Limited Partnership, in which the Company holds a one third share, and the Ebbsfleet Limited Partnership and Gunwharf Quays Limited Partnership, in each of which the Company holds a one half share. In respect of the Gunwharf Quays Limited Partnership, the Company has acquired its interest subject to an agreement under which part only of the total purchase consideration has been paid and which provides for the balance, to be determined in relation to performance criteria, to be paid at specified future dates. For the avoidance of doubt, our valuation reflects the obligation to meet these payments when due. We are of the opinion that the aggregate values of the interests in land held by the Limited Partnerships in which the Company held an interest as at 31st March 2002 totalled £564,945,000 (Five Hundred and Sixty Four Million, Nine Hundred and Forty Five Thousand Pounds). For the avoidance of doubt, we confirm that this valuation is of the total assets held by the Limited Partnerships and is not a valuation of the Company’s shareholdings therein. We understand that the tables which accompany this valuation, giving a breakdown of the portfolio by tenure, property types and regional distribution, are to be reproduced elsewhere in the Company’s Report and Financial Statements as will a listing of the majority of properties by value. Within the following tables our valuation of the Company’s interests in land held by Limited Partnerships is included as a mathematical share (The Birmingham Alliance Limited Partnership at one third; Gunwharf Quays Limited Partnership and Ebbsfleet Limited Partnership each at one half) of the value reported above, thus producing a total as at 31st March 2002 of £7,810,961,000. We must emphasise that the apportioned figures do not represent a valuation of the Company’s shares in those Limited Partnerships. Our valuation is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents. If our opinion of value is disclosed to persons other than the addressees of this report, the basis of valuation should be stated. If it is proposed to publish the figure, the form and context in which the figure is to appear should be approved by us beforehand. Yours faithfully, Knight Frank Portfolio analysis This analysis excludes trading properties and all properties owned through Land Securities Trillium’s property outsourcing business. ANALYSIS OF REVERSIONS, VOIDS AND LEASE DURATIONS Excludes developments NUMBER OF PROPERTIES BY SECTOR Net rental income (1) £m Net ERV (2) £m Voids £m Vacancy rates (3) % Average unexpired lease term Years (4) Offices West End Mid-town City Inner London Rest of UK Retail Shopping Centres Central London Shops Shops elsewhere in the UK Retail Warehouses and Food Superstores Parks Other Industrial premises and warehouses South East and Eastern Rest of UK Hotels, Leisure, Residential and Other 83.0 40.3 83.7 14.8 8.2 78.9 41.6 37.3 42.9 13.2 20.2 3.8 16.2 100.4 47.7 84.9 17.1 8.1 84.3 45.5 38.9 47.1 14.4 21.3 3.9 18.0 Total 484.1 531.6 0.5 – 0.3 0.1 0.5 1.0 0.1 1.0 1.1 0.8 0.3 0.1 – 5.8 0.5 – 0.3 0.6 6.1 1.1 0.1 2.4 2.4 4.9 1.3 1.1 – 1.0 8.50 8.00 4.75 3.00 3.50 11.50 8.75 9.50 16.25 18.75 8.25 8.00 N/A 8.75 Turnover rents total £3.1m and represent 0.6% of the total net rental income figure given above. Notes: 1. ’Net Rental Income’ is annual rents passing at 31 March 2002 after deduction of ground rents. 2. ’Estimated Rental Value’ includes vacant space and is calculated after deducting current ground rents. 3. Calculated by ERV. 4. The figures in this column show the number of years until half of the income has been subject to a lease expiry or tenant or mutual break clause. London – Office and Retail City West End Mid-town Inner London Offices – Rest of UK Shopping Centres and Shops Shopping Centres Shops Retail Warehouses Retail Parks Other Retail Warehouses Food Superstores Industrial premises and warehouses London, South East and Eastern Rest of UK Number of properties 26 38 13 9 4 18 27 19 31 2 4 62 Hotels, Leisure, Residential and Other 16 Total 269 PORTFOLIO VALUE BY LOCATION % figures calculated by reference to a portfolio value of £7.81bn AVERAGE RENTS Excludes developments and voids Shopping centres Retail premises and warehouses % Industrial Hotel, Leisure Residential and Other % and shops Warehouses % % Central and Inner London Rest of South East and Eastern Midlands Wales and South West North, North West, Yorkshire and Humberside Scotland and Northern Ireland Offices % 44.3 0.6 0.2 0.1 0.1 0.2 8.8 3.3 3.6 4.6 7.0 5.1 – 3.7 2.1 1.0 4.4 1.5 Total % 56.2 12.7 6.1 5.8 Offices Central and Inner London Rest of UK Retail Shopping Centres Shops 3.0 1.0 – – 0.5 12.3 Retail Warehouses (including Supermarkets) 0.1 4.1 0.2 0.1 0.3 – 0.1 6.9 Industrial premises and warehouses London, South East and Eastern Rest of UK Hotels, Leisure, Residential and Other Average Rent £/m2 Average ERV £/m2 330 76 N/A N/A 131 57 23 N/A 388 74 N/A N/A 151 62 24 N/A Total 45.5 32.4 12.7 4.8 4.6 100.0 Note: Average rents and ERVs have not been provided where it is considered that the figures would be potentially misleading (ie, where there is a combination of analysis of rents on an overall and Zone A basis in the retail sector and where there is a combination of uses). PORTFOLIO TENANT DIVERSIFICATION As the company’s investment portfolio covers four principal sectors of the UK property market, it benefits from inherent diversification in terms of both tenant credit and business sector risk. The investment portfolio comprises over 4,000 tenancies and over 2,000 tenants.The ten largest tenants account for 26.4% of current rents and are: Central Government (9.8%), Allen & Overy (2.4%), J Sainsbury(2.3%), Dresdner Bank (2.2%), Dixons Group (2.0%), Kingfisher (1.9%), Enterprise Oil (1.6%), Ladbroke Group (1.5%), CMS Cameron McKenna (1.4%), and The Boots Company (1.3%). Land Securities Major property holdings at 31 March 2002 At 31 March 2002 there were 269 properties within the portfolio. In the lists which follow, the valuation level for inclusion is £10m and certain of these properties have been combined for ease of description. Properties have been split into values of over £50m, £25m to £50m and £10m to £25m. Office areas are approximate net areas and generally exclude basements, storage and car parking spaces. Dates indicate initial construction or later refurbishment (R). FREEHOLD† PART FREEHOLD, PART LEASEHOLD AIR CONDITIONED IN COURSE OF DEVELOPMENT OR REFURBISHMENT SHOPPING CENTRE † Properties shown as freeholds include properties held on leases for 900 years or more. West End, Mid-town, City and Inner London properties: £50m and above EC1 Mitre House 160 Aldersgate Street: 17,510m2 offices, 20 flats and car park, 1990. Fleetbank House Salisbury Square: 11,370m2 offices, 1974. EC2 30 Gresham Street 36,330m2 offices and 1,300m2 retail. 8 Salisbury Square 10,700m2 offices, 1989. Dashwood House 69 Old Broad Street:10,550m2 offices, 1975 and reinstatement after bomb damage, 1995. WC1 Warner House Theobald’s Road: 11,820m2 offices, 1999. EC3 13/23 Fenchurch Street 15,620m2 offices and major retail unit, 1968 and 1984 (R). Lacon House Theobald’s Road: 19,580m2 offices and restaurant/leisure, 1999. WC2 40 Strand Devonshire House Piccadilly: 14,190m2 offices and 9 showrooms and shops,1983 (R), part 1994 (R) and part 1996/97(R). Piccadilly Circus 44/48 Regent Street, 1/17 Shaftesbury Avenue, Denman Street, Sherwood Street and Glasshouse Street: 2 major retail trading units, 10 shops, kiosk, public house, 3 restaurants, 1,460m2 offices and 670m2 of illuminated advertising, part 1977 (R), part 1979 (redevelopment) and part 1985 (R). 49 Leadenhall Street 12,230m2 offices and leisure, 1975. 8,570m2 offices and 8 shops, 1997 (R). W2 10/20/30 Eastbourne Terrace 16,780m2 offices, 1957/58. EC4 1 New Change 32,650m2 offices, 13 shops 1986/1990 (R). Cannon Street House and Martin House 8,100m2 offices, 1996 (R). Regis House King William Street: 8,140m2 offices, public house and 530m2 retail, 1998. 50 Ludgate Hill 11,040m2 offices, 12 shops, 2 public houses and 4 restaurants, 1985 (R). Grand Buildings Trafalgar Square: 14,860m2 offices and 3,220m2 shops, 1991. W1 475/497 Oxford Street and Park House Park Street: 6,980m2 offices and 9 shops, 1963. Portman House 9,330m2 offices and 1,740m2 retail, 2001. London Hilton on Park Lane 500 rooms, casino and numerous restaurants, 1963. SW1 Bowater House Knightsbridge: 24,720m2 offices, 1958. Haymarket House Haymarket: 7,520m2 offices and 3,410m2 of restaurants, 1955, part 1992 (R) and part 1997/98 (R). Part air conditioned. 10 Broadway New Scotland Yard: 35,670m2 offices, banking space and restaurant, 1966. £25m to £50m EC2 Moorgate Hall 143/171 Moorgate: 6,090m2 offices and 1,450m2 store, 1990. 130 Wood Street 5,380m2 offices and bar/restaurant 1999 (R). 6/12 Fenchurch Street and 1 Philpot Lane 4,780m2 offices and shop, 1985. 109/114 Fenchurch Street 6,610m2 offices and banking space and 2 shops, 1976, part 1991(R) and part 1993/94/95 (R). Gracechurch House 55 Gracechurch Street: 5,790m2 offices and 930m2 health club, 1993. 37/39 and 40 Lime Street and 4 Fenchurch Avenue 9,380m2 offices, 1971/72 (R) part 1988/1990 (R), part 1992/94 (R) and part 1998 (R). 8 0 | 81 New London House 6 London Street: 6,180m2 offices, 2 shops, 2 restaurants and public house, 1993 (R). SW1 49/75 Buckingham Palace Road and 29 Bressenden Place 5,150m2 offices, 136 bedroom hotel, 30 flats and 7 shops, 1964, offices 1994 (R). EC4 26 Old Bailey 6,030m2 offices, 1984 (R). 190 High Holborn 7,770m2 offices, 2002 (R). W1 6/17 Tottenham Court Road 5,710m2 retail and 210m2 offices, 1999. 12/24 Oxford Street and 2/5 Tottenham Court Road 1 store 8,360m2 and 3 shops 490m2 pre-war, part 1995 (R) and part 1998. Oxford House 70/88 Oxford Street: 5,680m2 offices and 5 shops. Part 1994 (R). 455/473 Oxford Street 4 shops and restaurant, 1963. Wellington House Buckingham Gate: 4,970m2 offices, 1978. Glen House Stag Place: 9,030m2 offices and 16 shops, 1962, part 1983/84 and 1994 (R). Selborne House Victoria Street: 10,360m2 offices, 1966. Westminster City Hall Victoria Street: 15,750m2 office and bank, 1965. Allington House 50 Victoria Street: 3,600m2 offices and 930m2 retail, 1997. The Home Office 50 Queen Anne’s Gate: 28,310m2 offices, 1977. Portland House Stag Place: 27,610m2 offices and 1,510m2 basement restaurant, 1959, part 1986/87(R), part 1992/95 (R) and part 1996/99 (R). Part air conditioned. Eland House Stag Place: 23,170m2 offices, 1995. Kingsgate House Victoria Street: 14,160m2 offices and 18 shops, 1987 (R). Esso House Victoria Street: 20,060m2 offices, 2 banks, 14 shops and restaurant, 1963 and part 1991 (R). SE1 The IBM Building 74-78 Upper Ground: 20,160m2 offices, 1982. W11 Notting Hill Gate 8,680m2 offices, 52 shops, 2 stores and cinema 1958. St Albans House Haymarket: 4,270m2 offices and 2 restaurants, 1963 and part 1987 and 2000 (R). W2 40/50 Eastbourne Terrace 13,310m2 offices and four ground floor units, 1950s. SE1 St Christopher House 80/112 Southwark Street, 55,420m2 offices, 8 shops, 1960. SW6 Fulham Empress State Building, Lillie Road: 40,210m2 offices and 2,770m2 retail/leisure. West End, Mid-town, City and Inner London properties (continued): £10m to £25m Lintas House New Fetter Lane: 8,180m2 offices, 1958 and 1999 (R). 1/11 Hay Hill 1,670m2 offices and 610m2 retail/showroom, 1987 (R). 21 New Fetter Lane 6,220m2 offices, 1978 (R), 1993 (R) and 1998 (R). SW1 Elliot House Bressenden Place: 2,720m2 offices and 710m2 retail, 1964. EC3 23/39 Eastcheap 1,730m2 offices, 5 shops and restaurant, part 1986 (R) and part 1988 (R). Part air conditioned. 14 Fenchurch Avenue 2,490m2 offices, 1940s and part 1993 (R). 34/36 Lime Street and 7/11 Cullum Street 3,340m2 offices and 6 shops, 1974. 14/15 Philpot Lane 3,010m2 offices, 1986. 2/4 Temple Avenue 2,540m2 offices and leisure unit, 1999 (R). WC1 Turnstile House High Holborn: 192 room aparthotel, shop and 2 restaurants, 1997. SE1 Bankside Industrial Estate 2,550m2 offices and 3,720m2 industrial space, 1980. Development opportunity 2005. The aggregate area of offices and retail accommodation including developments and refurbishments owned in the City, Mid-town,West End and Inner London, including the properties listed in this section, amounts to some 826,400m2 of offices and approximately 93,300m2 of retail, banking and restaurants. 16 Palace Street 5,240m2 offices, 1960. Roebuck House 116 flats and fitness centre, 1960. 1 Warwick Row 3,400m2 offices, 1995 (R). Neville House Page Street, 4,780m2 offices and a public house, 1952. Clive House Petty France, 9,400m2 offices, 1950. 1 Seething Lane 4,250m2 offices and restaurant, 1977 (R) and part 1988 (R). WC2 7/8 Essex Street 2,610m2 offices, 1998 (R). Tower House 34/40 Trinity Square: 4,140m2 offices, 1979 (R). W1 26/36 Oxford Street Air conditioned bank, large shop, kiosk, restaurant and 1,050m2 educational use, 1983 (R). 12/16 Gough Square 2,540m2 offices, 1992. 7 Soho Square 5,720m2 offices. Towns and cities, outside Central London: £50m and above Aberdeen Bon Accord Centre: 23,690m2 4 stores, 53 shops, food court, 4,650m2 leisure, 2,690m2 offices and car park, 1990. Birmingham Caxtongate Phase I: 15 shops and 1,390m2 offices, 1997. Birmingham Martineau Place: 17,420m2 retail, and 6,040m2 offices (one-third interest), 2001. Bull Ring: 110,000m2 retail (one-third interest). Martineau Galleries: up to 120,770m2 retail (one-third interest). Bristol 3 stores, 61 shops, 1957/1962/ 2000/1(Penn Street). Canterbury Whitefriars: department store, 2 major stores, 37 shops, residential and car park. Cardiff St David’s Centre 32,520m2 1 store 63 shops, 1981 and 1991 (R). St David’s Link: 12 shops and library, 1986. East Kilbride The Olympia 32,520m2 2 stores, 50 shops, ice rink, 9 screen cinema, library, restaurant, public house, night club, food court and 690m2 offices, 1989. Note: ‘Shops’ in this section denotes number of current tenancies, rather than number of units originally constructed. Stores, supermarkets, banks and combined units are each shown as one tenancy. Exeter 3 stores, 67 shops and 2,580m2 offices, residential and car park, 1952/1964 and 1971. Leeds White Rose Shopping Centre 60,390m2 2 anchor stores, 12 major space units, 73 shops, restaurant and food court, 1997. Liverpool St Johns Centre 33,440m2 4 stores, 100 shops, 2 public houses, retail market, food court, hotel, car park and Beacon, 1989 (R). Livingston Almondvale Centre 48,310m2 Phases I and II: 7 stores, 106 shops, public house, mall café and car parks, Phase I 1989 and 1996 (R), Phase II 1996. Portsmouth Designer Outlet Shopping and Leisure Centre: 17,000m2 87 shops, 22,060m2 leisure and restaurants, 2,230m2 offices, 2001 (50% interest). Sunderland The Bridges Phase I: 23,220m2 3 stores, 69 shops and mall café, 1969 and 1988 (R): Phase II 24,620m2 2 stores, 25 shops and car park, 2000. Land Securities Major property holdings at March 2002 Towns and cities, outside Central London: £25m to £50m Stratford E15 Stratford Centre: 27,870m2 6 stores, 57 shops and 2,580m2 of air conditioned offices, 1976 and 1998 (R). Belfast 9 shops, 1957, part 1984 and 1995. Bootle Strand Centre: 37,160m2 Phases I and II: 3 stores, 130 shops, 2 public houses and 690m2 offices, 1989 (R) and 1998. Coventry 45 shops, public house, 1,250m2 offices and hotel, 1955/1961 and 1991. Ealing Broadway Centre (part) 3,390m2 11 shops and 2,020m2 air conditioned offices, 1984. East Kilbride Princes Mall 13,940m2 2 stores, 39 shops, public house and 950m2 offices,1994 (R). Livingston Designer Outlet Shopping and Leisure Centre, 18,910m2 95 shops, 7,880m2 leisure and food court, 2000 (50% interest). Plymouth 1 store, 35 shops, 1952/1965. York Coppergate Centre 14,860m2 3 stores, 18 shops, museum, 19 flats and car park, 1984. £10m to £25m Basildon 39 shops, 1958/60, part 1985 (R) and part 1988 (R). Bath 7 shops, 1961. Birmingham Caxtongate Phase II: 6 shops and residential, 2000. Canterbury Longmarket 4,650m2 16 shops, conservatory restaurant and museum, 1992. Canterbury Clocktower: 5 shops and 1,330m2 offices, 1993. Canterbury Marlowe Arcade and Graylaw House: store, 14 shops and 710m2 offices, 1985. Glasgow Buchanan House 16,110m2 offices, 1960s. Hull 34 shops and public house 1952/56. Kilmarnock Burns Centre: 2 Phases 17,000m2 3 stores, 27 shops, public house and 1,760m2 offices, 1975/79 and 1991 (R). Leeds Briggate 2 shops, 1900s. Liverpool 16 shops and 370m2 offices, 1950s and 1999. Nottingham Alan House: 4 shops and 1,950m2 offices, 1985 (R). Reading Station Hill: 8,030m2 offices and 13 shops, 1966. Hogg Robinson House: 3,720m2 offices, 1979. Walsall 13 shops, 1970s and 1987. Dartford Ebbsfleet 50% ownership of 153 hectares of land with development potential. Newcastle upon Tyne The Gate: 17,770m2 leisure complex including multiplex cinema. Completion November 2002. Sunderland Market Square 7 shops, 2001. Retail warehouse and food superstore properties: £50m and above Liverpool Racecourse Retail Park, Aintree: 27,100m2 11 retail warehouses and fast food restaurant, 1986, 1988, 1990 and 2001. Manchester White City Retail Park: 17,830m2 11 retail warehouses, 2 restaurants and ten pin bowling, 1990. Slough Retail Park Bath Road: 14,350m2 6 retail warehouses, 1989 and 1998. West Thurrock Lakeside Retail Park: 28,860m2 17 retail warehouses and fast food restaurant, 1988, 1989 and 1997. 4,090m2 extension under construction. Livingston Almondvale West: 9,540m2 5 retail warehouses, 1987. Almondvale Retail Park 10,055m2 9 retail warehouses 1997. Almondvale South: Phase 1, 8,360m2 under constuction, Phase II planned. Dartford Eastern Quarry 245 hectares of land with development potential. Derby Wyvern Centre: 11,290m2 6 retail warehouses and fast food restaurant, 1990 and 1996. Erdington Ravenside Retail Park, Kingsbury Road: 14,170m2 8 retail warehouses, 1987 and 1989. Northampton Nene Valley, 13,700m2 10 retail warehouses 1988. Dundee Kingsway Retail Park: 17,350m2 7 retail warehouses and fast food restaurant, 1985, 1987, 1988 and 1994. Major enlargement and reconfiguration commenced. Gateshead Team Valley, Retail World Retail Park: 35,270m2 22 retail warehouses and fast food restaurant, 1987/2000. Being upgraded. Extension planned. £25m to £50m Bexhill-on-Sea Ravenside Retail and Leisure Park: 20,650m2 9 retail warehouses, food superstore, fast food restaurant, ten pin bowling alley and swimming pool, 1989. Extension planned. Blackpool Retail Park 11,270m2 9 retail warehouses, 1993, 1995 and 1996. Extension planned. 8 2 | 8 3 Retail warehouse and food superstore properties (continued): £10m to £25m Birmingham Great Barr: 7,760m2 superstore,1998. Bolton Manchester Road: 7,630m2 6 retail warehouses, 1985, 1989 and 1997. Bristol Longwell Green: 7,200m2 2 retail warehouses, 1985/86. Chadwell Heath (Near Romford): 8,520m2 5 retail warehouses, 1988 and 1999. Chesterfield Ravenside Retail Park, Markham Road: 7,730m2 5 retail warehouses, 1982 and 1997. 1,390 m2 Extension commenced. Derby Meteor Centre: 17,330m2 11 retail warehouses fast food restaurant and public house,1988 and 1994. Edmonton Ravenside Retail Park: 12,040m2 4 retail warehouses and fast food restaurant, 1988. Gloucester Retail Park Eastern Avenue: 10,450m2 4 retail warehouses, 1989. Manchester – Cheetham Hill 9,280m2 retail warehouse under construction. Hatfield Oldings Corner: 5,970m2 3 retail warehouses, 1988. High Wycombe London Road: 4,370m2 2 retail warehouses, 1988. Hull Priory Way: 10,250m2 food superstore and retail warehouse, 1984 and 2002. Plymouth Friary Centre, Exeter Street: 7,310m2 2 retail warehouses, 1990. Poole Commerce Centre 6,580m2 4 retail warehouses 1986 and 87. Warehouse and industrial: £25m to £50m Hatfield Welham Green: 31,310m2 1986 and extended 1988. £10m to £25m Basildon Juniper: 25,480m2 3 warehouses and 1 office building, 6.3 acres for industrial development. Zenith, 3,070m2 1unit 1986 and 15,150m2 under construction. Blackpool Squires Gate Industrial Estate. 107,200m2 1940s. Heston (Near Heathrow) Heston Centre and Spitfire Trading Estate: 28,730m2 1977, 1982 and 1984. Sunbury Cross Hanworth Road (includes Interchange West): 29,360m2 1970 and 1976. Chandlers Ford (Near Southampton) School Lane: 25,850m2 1985, 1988, 1989 and 2001. Frimley (Near Camberley): 21,600m2 on Albany Park, 1982/84. Guildford Cobbett Park, 11,410m2 under construction. Hemel Hempstead Horizon Point. 10,380m2 4 units 2002. Phase II 13,010m2 planned. Heston (Near Heathrow) The Harlequin Business Centre: 6,280m2 two storey offices, 1989. Tamworth Centurion Park: 24,420m2 high bay warehousing 1996 and 1999. Welwyn Garden City Bridge Road: 17,070m2 1955, 1961 and 1976. Centrapark, 12,920m2 unit 2001 and 3,820m2 under construction. West Thurrock Motherwell Way: 29,070m2 1973, 1975 and 1979 and trailer park of 0.5 hectares. Outside Central London the Group has holdings which total 450,000m2 of retail space, 90,500m2 of office space, 512,170m2 of warehouse and industrial space and 439,340m2 of out of town retail and food superstore space. Land Securities Total investment property return Valuation surplus, profit on property sales and net rental income in respect of investment properties expressed as a percentage of opening book value of the investment property portfolio Unitary charge A payment under a PFI or property partnership covering the costs of using a property or facility Weighted average cost of capital (WACC) Market cost of debt and cost of equity capital (equity capital cost calculated assuming equity risk premium of 4% and using London Business School beta factor, average for last year 0.43%) applied to fair value of debt and equity market capitalisation and then suitably weighted Glossary of terms Adjusted figures Reported amount adjusted to exclude the results of property sales, bid costs and additional deferred tax arising from the adoption of FRS19 ‘Deferred Tax’ Gearing (net) Total borrowings, including bank overdraft, less short-term deposits, corporate bonds and cash, at book value, as a percentage of equity shareholders’ funds Average unexpired lease term Excludes short-term lettings such as car parks and advertising hoardings, residential leases and long ground leases BREEAM Building Research Establishment Environmental Assessment Method CPO Compulsory Purchase Order Development Programme The group’s pipeline of major developments comprising the properties held under development as scheduled in the Development Section Development surplus Excess of latest valuation over the total development cost Diluted figures Reported amount adjusted to include the effects of potential shares issuable under convertible bonds or employee share schemes Earnings per share Profit after taxation divided by the weighted average number of shares in issue during the year ERV The estimated market rental value of lettable space as determined biannually by the company’s valuers Forward dated swap An agreement to pay a fixed rate of interest for a period beginning at a future date IOSH The Institute of Occupational Safety and Health Interest cover Number of times gross interest payable (i.e. pre interest capitalisation) is covered by operating profit and interest receivable but excluding the activities of Telereal Joint venture An entity in which the group holds an interest on a long term basis and is jointly controlled by the group and one or more venturers under a contractual arrangement whereby decisions on financial and operating policies essential to the operation, performance and financial position of the venture require each venturer’s consent NEBOSH The National Examining Board in Occupational Safety and Health Net assets per share Equity shareholders’ funds divided by the number of shares in issue at the period end Open A1 planning permission Planning permission for the retail sale of any goods other than food Operating properties Properties acquired and managed by Land Securities Trillium as part of its total property outsourcing contracts with third parties Over-rented Space that is let at a rent above its ERV Passing rent The annual rental income receivable which may be more or less than the ERV (see over-rented and reversionary) PFI Private Finance Initiative under which a public sector (or in the case of Corporate PFI the private sector) passes the risks and responsibilities associated with the ownership or leasing of property to a third party Prelet A lease signed with a tenant prior to completion of a development Rental value growth Increase in the current rental value, as determined by the company’s valuers, over the 12-month period on a like- for-like basis Retail park A scheme of three or more retail warehouse units aggregating over 4,650m2 with shared parking Return on shareholders’ equity Increase in diluted net asset value per share plus dividends per share for the year expressed as a percentage of diluted net asset value per share at the beginning of the year Reversionary or under-rented Space where the passing rent is below the ERV Total development cost All capital expenditure on a project including the opening book value of the property on commencement of development, together with all finance costs 8 4 | Land Securities provides an integrated approach to the commercial property and outsourcing needs of customers to create long-term and sustainable returns for shareholders. Investor information balance sheets 31 March 2002 31 March 2002 Registrar Enquiries concerning holdings of ordinary shares, debentures or loan stocks in Land Securities PLC should be addressed to: Lloyds TSB Registrars,The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 0870 600 3972. Corporate individual savings accounts (ISAs) The company has arranged for a Corporate ISA to be managed by Lloyds TSB Registrars, who can be contacted at The Causeway, Worthing, West Sussex BN99 6UY. Telephone: 0870 24 24 244. The Registrars provide an on-line service, enabling shareholders to access details of their Land Securities shareholdings. Shareholders wishing to view this information, together with additional information such as indicative share prices and information on recent dividends, should visit www.shareview.co.uk Capital gains tax For the purpose of capital gains tax, the price of the company’s ordinary shares at 31 March 1982, adjusted for the capitalisation issue in November 1983, was 205p. Holders of the company’s ordinary shares, debentures and loan stocks should notify the Registrar promptly of any change of their address. Low cost share dealing facility The company operates with Cazenove & Co. Ltd a postal share dealing facility which provides shareholders with a simple, low cost way of buying and selling Land Securities PLC ordinary shares. For further information, or dealing forms, contact: Cazenove & Co Ltd, 12 Tokenhouse Yard, London EC2R 7AN. Telephone: 020 7606 1768. Dividend reinvestment plan (DRIP) The company has introduced a DRIP to enable shareholders to use cash dividends to purchase Land Securities shares in the market. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars,The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 01903 502541. Unclaimed Assets Register The Company participates in the Unclaimed Assets Register, which provides a search facility for financial assets which may have been forgotten. For further information, contact: The Unclaimed Assets Register, Lloyds Chambers, 1 Portsoken Street, London E1 8DF – Telephone: 0870 241 171; website www.uar.co.uk Share price information The latest information on the Land Securities PLC share price is available on the Financial Times Cityline Service: telephone: 0906 8433133 (calls charged at 60p per minute). Share price information is also available on the company’s website (www.landsecurities.com) under investor relations/share price. ANALYSIS OF EQUITY SHAREHOLDINGS at 31 March 2002 B Y S I Z E O F H O L D I N G U P TO 5 0 0 5 0 1 TO 1 , 0 0 0 1 , 0 0 1 TO 5 , 0 0 0 5 , 0 0 1 TO 1 0 , 0 0 0 1 0 , 0 0 1 TO 5 0 , 0 0 0 5 0 , 0 0 1 TO 1 0 0 , 0 0 0 1 0 0 , 0 0 1 TO 5 0 0 , 0 0 0 5 0 0 , 0 0 1 TO 1 , 0 0 0 , 0 0 0 1 , 0 0 0 , 0 0 1 a n d a b ove Number of holdings 1 1 , 7 9 4 9 , 9 0 3 1 0 , 6 8 7 8 9 4 7 8 6 1 6 6 2 9 0 7 8 9 0 % Balance at 31 March 02 3 4 . 0 0 2 8 . 5 5 3 0 . 8 1 2 . 5 8 2 . 2 6 0 . 4 8 0 . 8 4 0 . 2 2 0 . 2 6 3 , 4 0 2 , 0 8 1 7 , 5 3 7 , 1 0 9 2 1 , 6 1 9 , 8 8 8 6 , 3 1 1 , 5 0 4 1 7 , 2 1 0 , 8 0 8 1 1 , 6 8 0 , 9 6 6 6 6 , 4 9 6 , 2 4 4 5 7 , 4 8 9 , 3 0 2 3 3 2 , 5 9 7 , 1 4 3 % 0 . 6 5 1 . 4 4 4 . 1 2 1 . 2 0 3 . 2 9 2 . 2 3 1 2 . 6 8 1 0 . 9 6 6 3 . 4 3 3 4 , 6 8 8 1 0 0 . 0 0 5 2 4 , 3 4 5 , 0 4 5 1 0 0 . 0 0 Registered office 5 Strand, London WC2N 5AF Registered in England and Wales No. 551412 Offices 5 Strand, London WC2N 5AF (Telephone: 020 7413 9000) and at 140 London Wall EC2, Glasgow and Leeds Designed by SAS Board Photography by Chris Moyse Location Photography Marcus Lyon Typeset by Asset Graphics Printed by St Ives Westerham Press This report is printed on paper that meets international environmental standards, contains elemental chlorine free (ECF) virgin pulp, obtained from sustainably managed forests. Financial Calendar 2002 22 May Preliminary announcement 26 June Ex-dividend date 28 June Record date for final dividend 9 July Annual general meeting 22 July Final dividend payable November Announcement of interim results (unaudited) 2003 January Interim dividend payable Contents Corporate Statement IFC 2 Financial Highlights 4 Chairman’s Statement 6 Corporate Review Valuation Portfolio Management Development Total Property Outsourcing Financial Review Property in Context – Making property work Environment, Health and Safety Human Resources Directors Corporate Governance Remuneration Committee Directors’ Report 8 10 18 26 32 36 38 40 42 44 46 48 50 Directors’ Responsibilities and Auditors’ Report Consolidated Profit and Loss Account Balance Sheets Consolidated Cash Flow Statement 52 53 54 55 Other Primary Statements 56 Notes to the Financial Statements 77 Ten Year Record Valuers’ report 78 79 Portfolio analysis 80 Major Property Holdings Glossary of Terms 84 Investor Information IBC Report and Financial Statements 31 March 2002 L a n d S e c u r i t i e s P L C R e p o r t a n d F i n a n c i a l S t a t e m e n t s 3 1 M a r c h 2 0 0 2 Land Securities PLC 5 Strand London WC2N 5AF Telephone: 020 7413 9000 e-mail:landsecurities@landsecurities.com http://www.landsecurities.com making property work . . . 

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