Annual Report 2003 Contents 01-42 Operating and financial review 02 Highlights 04 Chairman’s statement 08 Chief executive’s review 12 Financial review 16 Portfolio management 20 Development 24 Total property outsourcing 28 Corporate social responsibility 30 Health, safety and environment 32 Board of directors 33 Corporate governance 36 Remuneration report 42 Directors’ responsibilities 42 Auditors’ report 43-66 Financials 44 Consolidated profit and loss account 45 Balance sheets 46 Consolidated cash flow statement 47 Other primary statements 48 Notes to the financial statements 66 Five and ten year records 67-83 Business analysis 68 Market report and investment portfolio valuation 69 Performance benchmarking 70 Investment portfolio analysis 73 Total property outsourcing 74 Development pipeline schedule 76 Property by location 78 Major property holdings 84-88 Other 84 Directors’ report 86 Investor information 87 Glossary 88 Index Land Securities Group PLC provides commercial accommodation and property services to a wide range of occupiers across the United Kingdom. Our objective is to create long-term and sustainable returns for our shareholders through our activities, which include property investment, development and total property outsourcing. We focus on investing in four sectors of the commercial property market: offices and shops in central London, shopping centres, out of town retail parks across the UK and south-east industrial. Our development activities include delivering retail-led regeneration in several major UK cities, brownfield site regeneration in the south-east and new office schemes in central London. We are leaders in the new market of total property outsourcing where we provide accommodation and property-related services to Government and major corporations. Working together with our employees we aim to fulfil our objective of becoming the UK’s recognised leader in the provision of commercial property accommodation and property-related services. 01 Highlights Adjusted diluted net asset value increased 5.2% to 1215p (2002: 1155p) Adjusted diluted earnings per share decreased by 0.9% to 50.36p (2002: 50.81p) Pre-tax revenue profit down 6.6% to £340.9m (2002: £364.8m) Substantially completed £541m return of capital to shareholders High level of activity demonstrated by: - £0.4bn of property sales - £0.5bn investment in development and investment property activities - 617 transactions (rent reviews, lease renewals and lettings) across the portfolio Strong performance in retail portfolio substantially offset impact of weak central London office market Development progressing well with 81,500m2 completed this year, 250,600m2 under development, and 52,000m2 of lettings Strong contribution to Group returns from Land Securities Trillium Successful integration of Land Securities Trillium’s two major new contracts during the year 10 million m2 of commercial property owned or under management Proposed dividend increase of 4.4% to 35.5p (2002: 34.0p) 02 LAND SECURITIES ANNUAL REPORT 2003 I O P E R A T N G A N D F I N A N C I A L R E V I E W Financial highlights 31 March 2003 31 March 2002 % change £575.6m £579.0m –0.6% £1,239.5m £1,025.6m +20.9% £550.2m £516.8m +6.5% £319.6m £363.5m –12.1% –6.6% –0.9% –7.6% +4.4% +5.2% +4.9% £21.3m £1.3m £340.9m £364.8m 50.36p 46.46p 35.50p 2.42 1215p 1188p 50.81p 50.27p 34.00p 2.98 1155p 1132p £7,823.9m £7,800.0m £2,589.3m £1,942.1m £5,532.7m £6,036.6m 47.3% 32.2% Revenue profit (pre-tax) (£m) Financial highlights 1999 2000 2001 (restated) 2002 2003 292.7 301.7 323.4 364.8 340.9 Gross property income Property investment Adjusted diluted earnings per share (pence) Total Total property outsourcing (including 50% share of joint venture) £660.2m £406.2m +62.5% Property trading £3.7m £40.4m –90.8% Operating profit (total) Pre-tax profit Add back: profit on fixed asset property sales, bid costs and exceptional items (pre-tax) Revenue profit (pre-tax)1 Adjusted diluted earnings per share2 Earnings per share (basic) Dividends per share Interest cover (times)3 Adjusted diluted net assets per share4 Diluted net assets per share Carrying value of investment properties5 Net borrowings Equity shareholders’ funds Gearing (net)6 1999 2000 2001 (restated) 2002 2003 Dividends per share (pence) 1999 2000 2001 2002 2003 Diluted net assets per share (pence) 1999 2000 2001 (restated) 2002 2003 38.86 40.63 44.89 50.81 50.36 29.50 31.00 32.50 34.00 35.50 975 1090 1130 1132 1188 Adjusted diluted net assets per share (pence) 2001 (restated) 2002 2003 1152 1155 1215 1 2 Excludes results of fixed asset property sales, bid costs and exceptional items (deficit on purchase and redemption of convertible bonds, cost of cancellation/novation of interest rate swaps and the costs of reorganising the Group) Excludes results of fixed asset property sales, bid costs, exceptional items and deferred tax arising from capital allowances on investment properties 3 Number of times gross interest payable (i.e. pre-capitalisation) is covered by operating profit and interest receivable but excluding the activities of Telereal, the exceptional deficit on purchase and redemption of convertible bonds and the exceptional cost of cancellation/novation of interest rate swaps Excludes the additional deferred tax arising from capital allowances on investment properties 4 5 Market value less UITF28 adjustment; investment properties in this note refer to those properties included in the investment portfolio as defined in the Glossary (page 87) 6 Net borrowings (including bank overdrafts less short term deposits and cash), at book value, plus non-equity B shares and preference shares as a percentage of equity shareholders’ funds LAND SECURITIES ANNUAL REPORT 2003 03 Chairman’s statement Peter G. Birch Chairman Over the past 12 months, against a background of world instability and uncertainty in global economies and financial markets, the Group’s results continue to demonstrate the fundamental benefits of a soundly financed and well managed asset-backed business. The investment portfolio valuation benefited from a strong performance by our retail assets which substantially offset the impact of the downturn in the central London office markets. Adjusted diluted net asset value per share has increased by 5.2% to 1215p. This represents good progress given the difficult market conditions. The protection afforded to shareholders by our diversified portfolio, the quality of our occupiers and strong revenues from Land Securities Trillium underpins the Group’s progressive dividend policy and we are increasing the dividend by 1.5p, maintaining our long record of year-on- year increases. 04 LAND SECURITIES ANNUAL REPORT 2003 I O P E R A T N G A N D F I N A N C I A L R E V I E W Chairman’s statement Our strategy Our achievements Our objectives More than three years ago we recognised that asset accumulation alone would no longer deliver sufficient shareholder returns in a period of low inflation. To mitigate this we reviewed our business, its operations and areas of activity. Since then our core objectives have been to: • Focus our investment portfolio on four sectors of the UK commercial property market which we believe will benefit in the long-term from constraints on land supply. • Increase the scale of our development activities and operate in areas which are less accessible for competitors without our scale or skills base. • Enter into total property outsourcing which is still an immature market that we believe has strong growth prospects, as evidenced by the success we have had, since acquiring Trillium, in winning new contracts. • Develop our people to ensure that they have the appropriate skills to deliver our objectives. • Ensure that we have an appropriate capital structure and financial strategy. We are still in the process of delivering our strategy and five year business plan which aim to create long-term and sustainable returns for our shareholders. While the achievement of our objectives is always influenced by market and economic conditions we have made good progress to date and remain on track to continue to grow the business. Our future objectives will be to: In the period since announcing the restructuring of our business our achievements include: • Restructuring the business into three units, which allows for the efficient allocation of capital and effective performance measurement of both our activities and our people. • Focus on our customers with products that meet their needs. • Continue to grow our total property outsourcing business by winning new contracts and expanding existing ones. • Complete and let our development programme. • Completing £1,360m of sales and £840m • Maximise the returns from our of property acquisitions. investment portfolio. • Completing 300,000m2 of development • Build and retain the best team in the and starting over 500,000m2 of new schemes. property industry. • Focus on earnings generation from our • Winning two major new total property capital investment to drive total returns. outsourcing contracts with the BBC and BT, through the Telereal joint venture. • Enhancing our skills base through the recruitment of new people at all levels of the business. • Returning more than £500m of equity to • Promote better relationships with our our shareholders. occupiers and clients. • Continuing our unbroken record of growing our dividend at an average growth rate per annum of 4.6%. • Providing a total return of nearly 11%, as compared to a FTSE 100 Index total return of negative 40% and a positive 3% for FTSE Real Estate (31 March 2000 to 31 March 2003). LAND SECURITIES ANNUAL REPORT 2003 05 Chairman’s statement Results This year’s figures have been impacted by a number of exceptional factors. These include the return of capital, higher interest payments and certain costs relating to financing transactions. Pre-tax profit of £319.6m, which is posted after the exceptional costs, including those incurred on various financial transactions, decreased by £43.9m. Revenue profit (our measure of underlying pre-tax profits) also decreased by 6.6% to £340.9m, mainly as a result of £13.5m of additional interest incurred to finance the return of capital and the dilutive effect of sales in the past two years. Adjusted earnings per share (calculated on revenue profits) were 2.4% lower at 50.39p per share (2002: 51.61p per share). Activity levels remained high. The Group realised £436.3m from the sale of properties and the release of equity from the London Hilton and received a total of £80.6m in capital repayments from Telereal. We invested £613.2m in our portfolio, development activities and total property outsourcing. The Group also completed a capital restructuring which resulted in a return of capital of £511.1m to shareholders last September. A further £18.8m of B shares were redeemed in April, 2003, leaving £11.5m outstanding. The Board recommends a final dividend of 26p per share, making a total distribution for the year of 35.5p. The dividends paid and proposed will be covered 1.4 times by post-tax profits. The dividend will be paid on 28 July 2003 to shareholders on the register on 27 June 2003. Investment portfolio valuation Our total investment portfolio was valued at £7.84bn (2002: £7.81bn), representing a 0.4% increase in assets. After adjusting for sales, acquisitions and expenditure the value reduced on a like-for-like basis by 0.6% as compared to the prior year. The retail and retail warehouse portfolios performed particularly well, with 7.8% and 10.0% increases in value respectively, demonstrating the benefits of the high levels of asset management activity and the more resilient retail markets. This strong contribution to the performance of our portfolio from retail has been offset, once again this year, by a decrease in value in our central London holdings. Further details of the valuation results are contained in the business analysis section on pages 68 to 83. Government We have for some time been lobbying Government on our own behalf and through the British Property Federation to ensure that it understands clearly the potential damage of year-on-year increases in stamp duty. Not only does this taxation unfairly penalise property as an asset class compared to bonds and equities, but it also reduces liquidity in the market and impacts the flow of capital into major regeneration projects. We believe that Government is beginning to recognise this and were pleased that this duty was not increased again this year, but rather was reduced in some areas where Government is hoping to encourage regeneration. We are also grateful that Government has continued to leave the way open for dialogue on issues such as stamp duty on leases and lease-code reforms. We believe that the industry has come a long way in terms of providing occupiers with a wide range of accommodation and lease terms and that undue taxation and regulation will prevent our markets from operating efficiently. 06 LAND SECURITIES ANNUAL REPORT 2003 I O P E R A T N G A N D F I N A N C I A L R E V I E W Chairman’s statement In our view, retail currently offers greater potential for total returns than offices in the short term. For Land Securities Trillium, market conditions are more attractive, as corporations continue to seek operational efficiencies and ways to release capital for investment in their core activities, both of which can be achieved through total property outsourcing. While the economic outlook remains challenging, both in the UK and around the world, the diversified nature of the Group’s activities, its sound financial base, strong management team and focus on customer service mean that we are on track to continue to deliver our strategy. The Board’s confidence in the fundamental soundness of your business is demonstrated by the increased final dividend payment. Given the Government’s commitment to urban regeneration and attracting capital investment into these major, long-term and complex projects, we would encourage it to consider a more tax-efficient vehicle to encourage international and domestic investment in the UK property sector. While most other G7 countries now have tax-efficient vehicles, known as real estate investment trusts, we believe our ability to attract new equity investment to fund regeneration projects is being undermined by the tax position of the UK quoted property company. The Board In January 2003, the Board announced that Ian Henderson, Group chief executive, had accepted its invitation to remain in his position beyond his normal retirement date of July to oversee and implement the delivery of our plans and to allow for continuity of leadership. Francis Salway was appointed to the new role of chief operating officer, taking on a wider operational role supporting Ian Henderson, while retaining his responsibilities as chief executive of Development. Mark Collins and Ian Ellis, chief executives of Portfolio Management and Land Securities Trillium respectively, were appointed to the Board in November 2002. We would also like to thank Giles Henderson, who stepped down from the Board as a non- executive director in November, for his contribution to the Group’s progress. We are delighted that Stuart Rose has agreed to join the Board as an independent non-executive director, bringing substantial retail expertise to the Group. We are assessing the impact of the Higgs and Smith recommendations on corporate governance and audit committees. In due course, we will appoint a senior independent director and create a Board nominations committee. People We have a great team in place and, during the year, my colleagues throughout the organisation have continued to demonstrate enthusiasm and a positive approach to the new way in which we are conducting our business and the changes for them that this entails. I would like to thank them for their valued contribution to our progress. Outlook During the 12 months under review, property as an asset class continued to perform strongly, showing a total return of 9.3% as compared to 11.3% for bonds and a negative return of 30.0% for equities reflecting investors’ current preference for low-risk, cash positive investments. Demand for investment property with long-term leases continues to be strong while interest rates remain low. LAND SECURITIES ANNUAL REPORT 2003 07 Chief executive’s review Ian J Henderson Group chief executive During these demanding times, we have been rigorous in our approach to managing the Group to ensure that we maintain our reputation for delivering consistent results in difficult economic and property market conditions. We are not complacent and recognise that we have to work hard to increase income at a time when our business partners are facing challenging conditions. We are pleased that the results show a strong contribution from our new division, Land Securities Trillium. 08 LAND SECURITIES ANNUAL REPORT 2003 Chief executive’s review I O P E R A T N G A N D F I N A N C I A L R E V I E W From left Ian Ellis, Francis Salway, Ian Henderson, Andrew Macfarlane and Mark Collins In a capital-intensive business with significant investment plans, we are mindful of the importance of providing investment returns that exceed our cost of capital. While this remains challenging given the London office market conditions, all our activities are evaluated against the target returns we have set for each business unit. Structure of the report We have consistently endeavoured to remain at the forefront of our industry in terms of reporting and disclosure standards. This year we have changed the format of the report to improve clarity and to present all the analysis pertinent to the Group in one place. We have included on pages 68 to 83 a business analysis section that comprises details of the valuation and its analysis, a market report and a number of statistics in respect of the investment portfolio, our development programme and our total property outsourcing activities. We hope that you find this new format helpful. Portfolio management The Group’s investment portfolio, the majority of which is managed by Portfolio Management, underpins our activities. The total portfolio is diverse, with 254 properties, 2,000 occupiers and low property specific risk. The portfolio is now structured to provide the protection offered by diversity while, at the same time, being sufficiently focused to give us market leading positions in most of our areas of activity. We have and will continue to recycle the capital invested in the portfolio through an active programme of sales and purchases to ensure that the properties we own provide future growth opportunities. As described in more detail in the Portfolio Management review on pages 16 to 19 we are driving the performance of our properties through intensive management. Development In our interim report in November we said that we believed one of our competitive advantages is our ability to maintain our development activity through market cycles. This remains the case. However, we regularly review the timing and extent of our development programme in light of market conditions to ensure that the risks involved are manageable when markets weaken. The Group’s financial strength and internal risk management controls allow us to add value by progressing aspects of the development programme in such a way that we position schemes for future construction to take best advantage of improving markets. As a result, we have scaled back our central London activities but will progress our retail development programme and the projects at Kent Thameside. LAND SECURITIES ANNUAL REPORT 2003 09 Chief executive’s review Total property outsourcing We believe that the prevailing market conditions are positive for Land Securities Trillium, as occupiers seek to release capital and focus on their core business activities. The current contracts are performing well and making a significant contribution to Group income. Although progress has been slower than anticipated in concluding new business we are active in a greater number of negotiations than seen previously and maintain our ambitions of growing this business so that it contributes 25% of our future operating profits in four years’ time. Customer service We are making good progress with our focus on customer service and have been active in building strong relationships across the Group with our occupiers and clients. The introduction of a Group client relationship management system has allowed us to formalise relationship management procedures across the business and help ensure that we are pro-active in responding to our customers. To date, the results of customer surveys across Group activities have been encouraging. In an independent survey conducted with retailers in nine of our centres, 80% of those surveyed would be willing to recommend Land Securities as a landlord. The survey highlighted some areas where we could improve our performance and, although we exceeded the benchmark on most criteria, we continue to look at how we can further enhance our service levels. We were also delighted to note the impressive customer satisfaction ratings arising from surveys among our customers in the Department for Work and Pensions (‘DWP’) and the BBC. Competitive environment Although the UK property market is relatively mature, there are numerous opportunities to create value through development, active management and the provision of efficient customer service. There are also emerging markets and sectors where we can exploit our competitive advantages of financial strength, scale and the ability to innovate. The first of these is total property outsourcing. While this market is still in its infancy and competition is fragmented, we believe that not only the strength of our balance sheet but also the infrastructure and expertise we now have in place at Land Securities Trillium should enable the Group to lead this market. The second is major regeneration projects, where we can take a long-term approach to master planning complex schemes, while realising value throughout the life of the scheme. This is evidenced by our project at Kent Thameside. Third, we believe that continuing to drive innovation in the marketplace through products such as Landflex will keep us at the forefront of our industry in terms of anticipating future trends and meeting our customers’ changing accommodation needs. The downturn in the central London office market, particularly in the City, has adversely affected the performance of this part of the investment portfolio and our ambition to generate returns from development may, therefore, be delayed. However, the central London market comprises a series of sub- markets, all of which have different occupier characteristics. With a range of development opportunities in several of the core sub- markets, we are one of the few businesses that can satisfy occupier demand for new, large, modern office buildings across central London between now and 2008. London is one of the main engines of the UK’s growth and it is essential that we maintain its attraction to business at large as one of the foremost global financial centres. The infrastructure of the capital continues to be neglected, although the Prime Minister’s recent commitment to chair the Thames Gateway Committee is encouraging. It is vital 10 LAND SECURITIES ANNUAL REPORT 2003 Chief executive’s review I O P E R A T N G A N D F I N A N C I A L R E V I E W that this commitment is translated into a real investment in both existing services and new ones such as Crossrail. At present, the retail property environment remains stable, although it continues to be dependent on consumer demand. Any downturn will inevitably affect retailers’ profitability, their growth plans and demand for retail space. However, retailers are adapting quickly to changing consumer demands and new entrants continue to seek to build their presence in the UK market. With a portfolio of dominant shopping centres, development plans for six major new schemes and a large number of retail warehouse parks, we are well placed to strengthen our relationships with retailers and satisfy their requirements. As a result of the changes in our business, we have invested in new skills and new operations. While this has resulted in an increase in the Group’s cost base, we have thoroughly reviewed costs to ensure that we are maximising efficiencies and benefiting from the economic advantages of our scale. Financial structure and strategy As reported in the financial review on page 13, following the review of our capital structure and financial strategy in 2002, we established that we had surplus equity capital after taking into account the capital required to execute our business plan. As a result, during the year we carried out a structured return of capital to shareholders which contributed to a rise in the Group’s gearing to 47.3%. Subsequently, we also issued £600m of bonds to refinance short-term bank debt. While continuing to invest in total property outsourcing and development, we still remain committed to pursuing a prudent financial strategy and a progressive dividend policy. Recognising that the business has grown more complex, we completed during the year a review of the Group’s finance function. This resulted in a number of changes, including the creation of a Group Tax, Treasury, and Insurance department to strengthen and integrate these functions. Risk management and business planning We continue to evaluate our risk management processes. As a result, we have implemented a new risk management procedure across the business and put in place a comprehensive risk management plan that has been reviewed and approved by the Board. We are satisfied that the level of risk within the organisation is commensurate with a business of our size and believe that we have the appropriate controls and procedures in place to manage this risk effectively. We have also augmented the Group’s business planning process by adopting the balanced scorecard approach, to ensure that our people and our business units are firmly focused on achieving the Group’s long- and short-term goals. Prospects We look forward to taking advantage of the opportunities that today’s markets offer and believe that our strategy, people and financial strength leave the business well-placed to make good progress across all its operations. LAND SECURITIES ANNUAL REPORT 2003 11 Financial review Andrew Macfarlane Group finance director Profit before interest and tax (including joint ventures) for the year to 31 March 2003 was £591.9m (2002: £530.2m). This represents an 11.6% increase over the previous year and was driven by two main factors: • a full year’s contribution from Telereal, our 50:50 joint venture with The William Pears Group; and • profits of £43.5m (2002: £19.2m) from the sale of operating, trading and investment properties. At the pre-tax level, profits decreased by 12.1% from £363.5m to £319.6m largely as a result of exceptional costs related to our capital reorganisation, convertible bond redemptions and new debt issues. Revenue profits declined by 6.6% to £340.9m (2002: £364.8m), due to increased interest costs related to the return of capital in September 2002 and the dilutive effect of property sales over the last two years. After capitalisation of interest on developments, total interest charges were some £115.0m higher than the prior year, of which nearly half can be attributed to the full year effect of Telereal and the balance to exceptional interest costs incurred in redeeming convertible bonds and cancelling surplus interest rate hedges, following our bond issues. The Group’s gross interest payable, excluding Telereal, was covered 2.4 times by operating profits compared with 3.0 times in the prior year. During the year, we divested investment and operating properties with a book value of £539.1m (2002: £510.4m) generating an FRS3 profit of £41.7m, compared with £13.4m in the previous year. This includes our share of Telereal property disposals. Property disposals also crystallised revaluation surpluses earned in prior years of £281.2m. Profit after tax was £229.9m (2002: £263.6m) equivalent to a 7.6% decrease in basic earnings per share; however adjusted earnings per share only fell by 2.4% and the Directors are recommending a total dividend for the year of 35.5p per share (2002: 34.0p), a 4.4% increase. If approved, this will result in a final dividend of 26.0p per share (2002: 24.95p). At this level, adjusted dividend cover is 1.5 times (2002: 1.5 times). In absolute terms, the year end market value of the portfolio was some £33.1m higher than the previous year, an increase of 0.4%. This reflects increased development capital expenditure and the impact of property purchases and sales. However, the value of our like-for-like portfolio, and certain development schemes has declined, resulting in a valuation deficit for the year of £56.8m, after taking into consideration the accounting movement of £9.2m on the UITF28 debtor. The valuation deficit has been offset by £62.5m of retained earnings and this, coupled with the impact of our return of capital, resulted in an adjusted diluted net asset value per share of 1215p (2002: 1155p), up 5.2% over the year. In terms of cash flow, the Group realised £436.3m (2002: £549.2m) from property divestment and secured £80.6m from Telereal. These funds have been reinvested in the business and we returned £511.1m to shareholders during the year, spent £301.4m on investment property development expenditure and £311.8m on property acquisitions, including the costs incurred by Land Securities Trillium in constructing White City II for the BBC. Overall, there was a net cash outflow of £177.2m during the year before financing and return of capital to shareholders (2002: £219.2m). Net indebtedness increased by £647.2m in the year to £2,589.3m (2002: £1,942.1m) resulting in year-end gearing of 47.3% (2002: 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, plus dividends) was 8.2% compared with our estimated cost 12 LAND SECURITIES ANNUAL REPORT 2003 Financial review I O P E R A T N G A N D F I N A N C I A L R E V I E W Investment portfolio Rental income decreased by 1.2% from £525.9m to £519.7m, reflecting the sale of mature assets over the last two years. Adjusting for the effects of property acquisitions and disposals, rental income on properties owned throughout the last two years increased by £24.8m. The main contributors to this increase were £20.8m from reviews and renewals and £10.2m from the letting of new developments, which were offset by a loss of £7.5m due to the vacation of buildings for redevelopment. Some £39.8m of rental income was lost on disposals offset by £8.8m from property acquisitions. The cost of bad and doubtful debts was some £1.6m, equivalent to approximately 0.3% of the rent roll (2002: 0.3%). During the last 12 months, the net reversionary potential of the portfolio, excluding voids has reduced to 5.1% at 31 March 2003, compared with 9.6% at the end of the prior year. The mean weighted unexpired lease term over the portfolio as a whole is 11.2 years, assuming all lease breaks and expiries occur. During the year we divested investment properties with a book value of £396.1m (2002: £498.1m), at an average rental yield of 7.0%, realising profits on sale of £26.5m and crystallising £234.3m of previous valuation surpluses. 13 Tax and treasury (from left) Stephen Leung and Martin Wood Finance (from left) Richard Bushell, David Holt and Lyndsay Smailes scheme is approximately £18.6m. Cash pension costs are expected to be some £1.5m per annum higher than in previous years as a result of a recent decision to increase funding rates for the time being. New schemes will be set up to meet obligations to employees transferring to the Group under total property outsourcing contracts. In June 2002, the European Parliament approved a regulation requiring all listed companies in the European Union to prepare consolidated financial statements under International Financial Reporting Standards (IFRS) for financial years beginning on or after 1 January 2005 and this will apply to us for the first time in the year to 31 March 2006. As currently drafted, the implementation of IFRS will have a marked impact on financial reporting for property investment companies. However, it should also be noted that there is considerable activity, both at the International Accounting Standards Board (IASB) and at the UK’s Accounting Standards Board, to refine the reporting framework. The implications for the Group are under active review and we will provide an update when we report our half- year results at the end of the year. of equity of 9.1%. Total returns were held back this year as a result of the difficult London office market. During the year, we arranged to return £541m to shareholders. This was achieved by introducing a new holding company for the Group, combined with a B share issue to all shareholders. Approximately 94% of shareholders elected for an immediate redemption of their B shares in September at a cash cost to the Group of £511.1m, with a further 3.5% redeeming their B shares in April 2003 at a cash cost to the Group of £18.8m. The remaining 11.3m B shares are next redeemable in October 2003. At the same time we effected a capital reduction, which created some £3.1bn of distributable reserves in the new holding company, providing significant flexibility for the future. The return of capital and the purchase of convertible bonds had a positive influence on earnings per share and net asset value per share, while also reducing the diluted share capital of the Group. The Group has a defined benefit pension scheme. The scheme, which had gross liabilities of some £95m as at 31 March 2003, is now closed to new entrants. However, during the year, the Group made a special cash funding contribution of £9.0m following which the current deficit of the pension LAND SECURITIES ANNUAL REPORT 2003 Financial review Investment portfolio activity Year to 31 March 2003 Acquisitions/ developments £m Proceeds from sales and other divestments £m FRS3 profit £m Retail/leisure Offices Warehouses and industrial properties Hotels, leisure, residential and other Total 170.8 258.1 20.1 29.3 478.3 117.9 127.2 18.0 159.5 422.6 14.2 4.7 2.9 4.7 26.5 Development The projects that comprise the current development programme are listed in the development pipeline schedule on pages 76 to 77. 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 pre-lets). For reporting purposes we retain properties in the programme until they are 95% let. The carrying value of development programme assets, (which excludes the BBC development at White City, trading properties, proposed developments and the project at Kent Thameside) was £967.4m at 31 March 2003 (2002: £790.8m). During the year, we spent £291.1m on the development programme, and capitalised associated finance costs of £30.8m. The estimated future cash spend required to complete the development programme, excluding interest, will be approximately £440m. Proposed developments (excluding Kent Thameside) have a current carrying value of £180m and the estimated future cash spend required to complete these schemes, if we proceed with them, is approximately £900m, excluding interest. Total property outsourcing Land Securities Trillium (including our share of Telereal) generated some 53% of the Group’s gross property income (2002: 40%). This business unit is now making good progress towards achieving 25% of our operating profit in the medium term. Revenue and profits from the PRIME contract have exceeded expectations and we also earned fees on the substantial programme of capital works that we managed on behalf of the DWP. On the BBC contract, we incurred £111.8m in the year on the construction of the White City II building with an estimated £99.3m (excluding interest) to be spent mainly over the next year. We have incurred a full year’s start-up operating loss on this contract, but expect it to become profitable when the new building is occupied by the BBC later this year. Telereal has made a good contribution to earnings, despite a reduction in unitary charge reflecting the sale of its investment properties during the year. Sale proceeds were £270m, generating a profit on disposal of £18.8m, with our share being £9.4m. This transaction and Telereal’s profits enabled the joint venture to return £80.6m to us during the year. Telereal’s profits are growing in line with our expectations. Taxation The cash tax charge, equivalent to 12.1% (2002: 25.6%) of profit on ordinary activities, reflects the benefit of capital allowances from developments, refurbishments, acquisitions and financing transactions during the year. 14 The financing benefit is unlikely to recur in future periods and the 2002/3 cash tax rate may not be representative of our tax position for the future. The requirement in FRS19 to make full provision for timing differences means that, in profit and loss account terms, our reported tax rate for the year is 28.1% (2002: 27.5%) and the factors causing this are explained in the notes to the accounts. Following the latest property valuation and assuming that all properties are sold at the revalued amounts without any tax mitigation, the Group has an estimated potential capital gains tax liability in the region of £435m (2002: £535m). However, as indicated in the notes to the accounts, it is unlikely that such an amount would be payable even in the event of a sale of all investment property assets. In particular, the sale of property portfolios by means of the disposal of certain asset-owning companies would reduce this by some £110m. Treasury management The treasury function operates under delegated authority from the Board and maintains policies and procedures which monitor, control and report on interest rate, liquidity, credit and other financial risks. The function operates as a cost reduction centre rather than a profit centre. The Group’s finance policy is primarily based on an unsecured funding strategy which the Board believes offers the right balance LAND SECURITIES ANNUAL REPORT 2003 I O P E R A T N G A N D F I N A N C I A L R E V I E W Performance measures for the four years ended 31 March 2003 Forecast spend on development pipeline Financial review % 14 12 10 8 6 4 2 0 £m 450 400 350 300 250 200 150 100 50 0 1 year 2 years 3 years 4 years 02/03 Forecast 02/03 Actual 2003/04 2004/05 2005/06 2006/07 2007/08 IPD WACC Investment property return Development programme BBC Average: IPD Total investment property return Pre-tax weighted average cost of capital For year Over 2 yrs Over 3 yrs Over 4 yrs 6.6% 6.0% 7.5% 6.0% 5.6% 8.0% 7.4% 7.2% 8.1% 9.0% 8.8% 8.4% Proposed developments 02/03 Forecast 02/03 Actual Includes BBC, excludes Kent Thameside and interest between debt capacity, flexibility and cost. In limited circumstances the Group will still consider secured funding, but only after carefully reviewing the impact on its unsecured finance sources. The Group uses interest rate swaps to hedge the interest rate exposure on floating rate debt and to protect the cost of future borrowings. Due to the long-term nature of property investment and our expectation of increased gearing in the medium-term, we aim to take advantage of low interest rates to hedge the majority of our debt. The business has minimal direct foreign exchange exposures and consequently there are currently no foreign exchange hedging contracts in place. To provide access to immediate liquidity and to inject additional funding flexibility, the Group has in place two committed syndicated bank facilities. At the year-end, the total committed facilities available to the Group were £1.5bn, of which £0.6bn was utilised. At 31 March 2003, the average maturity of the Group’s debt was 13.3 years (2002: 14.1 years) or 16.3 years (2002: 16.2 years) if short-term bank facilities are excluded, reflecting the long-term nature of property investment. At the year-end, the fair values of the Group’s financial liabilities exceeded book value by £598.5m (2002: £474.9m), mirroring the LAND SECURITIES ANNUAL REPORT 2003 reduction in long-term interest rates since the Group’s fixed rate borrowings and interest rate hedges 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 90p (2002: 60p). At the time of our return of capital in May 2002, redemption notices were issued to the holders of our convertible bonds as these bonds were beginning to convert, with bondholders taking advantage of the difference between the share and conversion prices. So, where the opportunity arose at appropriate prices, we purchased bonds in the market to pre-empt conversion and successfully acquired some 80% of the bonds outstanding at 31 March 2002. This resulted in an exceptional loss of £28.2m, which is tax deductible and is reported as an interest expense in the profit and loss account. The amount of share capital to be returned to shareholders is £541m which reflected £48m of nominal new equity capital created as a result of bond conversions. The purchase of the convertible bonds and the return of capital to shareholders was financed by a new £1.5bn syndicated bank facility. £600m of our bank debt was subsequently refinanced by two new unsecured bonds, a 5.875% £400m bond maturing in 2013 and a 6.375% £200m bond maturing in 2024. Following this transaction, £700m of bank facilities and £300m of interest rate swaps were cancelled as surplus to requirements, leading to a £23.5m exceptional interest charge in the profit and loss account. The Group had a net cash outflow before the use of liquid resources and financing of £177.2m for the year (2002: £219.2m), primarily attributable to its return of capital, capital expenditure and investment activities. Insurance In common with other property owners, our insurers are applying terrorism exclusions to our policies as they become due for renewal in 2003. The Group continues to buy the most comprehensive terrorism insurance cover available from the Government-backed Pool Reinsurance Company Limited. 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. 15 Portfolio management managing property creatively ‘We needed to change the way in which we traded at three locations in Land Securities’ shopping centres. From the very beginning they were extremely co-operative and we are delighted with the solution they have provided. They really set the standard for the way in which a retailer and its landlord should work together.’ Michael Ziff, Chief Executive, Stylo PLC 16 LAND SECURITIES ANNUAL REPORT 2003 Portfolio management I O P E R A T N G A N D F I N A N C I A L R E V I E W ‘The transactions with Stylo demonstrate that if you build strong relationships with retailers, based on mutual trust, both parties can benefit. Each transaction had to be negotiated separately but Stylo are now trading more profitably and we have been able to generate additional income from new lettings.’ London Hilton In August 2002 we entered into a venture with London and Regional Properties which allowed us to release £154.1m of equity from the London Hilton and transfer management of the property to the venture. Clive House Last May we agreed a lease extension and refurbishment of Clive House, the former Passport Office for the Lord Chancellor’s Department, pending this Department’s move to our building at Queen Anne’s Gate. During the year to 31 March 2003, the resilient performance of the investment properties in difficult market conditions demonstrated clearly the benefits of a diversified portfolio and active asset management programme. Excluding the development programme, investment properties showed a modest decrease of 0.3%. The increase in value of our retail and retail warehouse properties, which together now represent approximately 50% of our assets, offset the decline in value of our central London office properties. For full details of the investment portfolio valuation, refer to pages 68 to 83. The high level of management activity is shown by the 617 transactions (rent reviews, lease renewals and lettings) carried out by Portfolio Management. As a direct result of this activity, annual rents payable grew by 3.4% over the past 12 months on a like-for-like basis. Rent reviews and lease renewals have been settled at an average of 7.3 % above our valuer’s assessment of estimated rental value. Excluding properties in development, voids across the investment portfolio are 1.6%, which although slightly higher than the prior 12 months, have been kept to this low level as a result of the management activities undertaken across the portfolio. This figure rises to 2.1% if all properties under refurbishment are included and to 2.3% with predevelopment voids. Investment properties – impact of development Capital valuation surplus/(deficit) – year to 31 March 2003 Investment properties excluding developments % Investment portfolio % Difference % Offices Shopping centres and shops Retail warehouse Industrial Hotels, leisure, residential and other Total (8.9) 7.1 9.4 1.4 2.9 (0.3) (9.9) 7.8 10.0 1.9 3.1 (0.6) (1.0) 0.7 0.6 0.5 0.2 (0.3) The above table illustrates how our retail and industrial properties in our development programme have contributed positively to performance, but our office development programme has impacted negatively. LAND SECURITIES ANNUAL REPORT 2003 17 Portfolio management Going Places at Lakeside Customer research has shown that high street and shopping centre retailers can add value to the consumer’s experience in out-of-town locations.As a result we completed lettings to Marks & Spencer, Borders Books, My Travel and Next at Lakeside Retail Park,West Thurrock. Cobbett Park, Guilford Last August we completed a ten unit, 11,500m2 industrial park in Guildford. Good quality industrial space is still in high demand in the south- east and as a result we were able to secure record rents for pre-lettings on the park. Current tenants include Big Yellow Self Storage, BOC and Colbornes. Investment activity Investment activity over the last 12 months remained modest. We purchased £122.0m of assets, which included entering into a forward funding agreement with Centros Miller for a 32,500m2 shopping centre in Maidstone which is due for completion in 2005 and is already 70% pre-let. Of the £122.0m invested, the most significant acquisitions included the purchase of the superior interest in the Bon Accord Centre, Aberdeen for £13.3m, and the acquisition of Newspaper House,which forms part of our New Fetter Lane, London EC4, holdings for £19.8m. Just prior to the year-end we acquired a small portfolio of properties on the South Bank in London from Sainsbury’s for £39.9m. This acquisition, comprising four properties the largest two of which are leased back to Sainsbury’s, continues our strategy of investing in properties that are income producing but which offer medium-term development opportunities. The average yield on these purchases (including the cost of stamp duty and acquisition fees) was 7.4%. To benefit from the strong central London hotel investment market and to effect a release of the equity generated during our ownership of the London Hilton on Park Lane, W1, we entered into a venture in association with London and Regional Properties in relation to the freehold interest of this asset. This transaction returned £154.1m of equity to the Group. We sold a further 21 investment properties for £264.4m (net of sale costs). The average yield on the properties sold and the equity release was 7.0%. The FRS3 profit was £26.5m (6.7% above book value). Central London The value of our central London office portfolio declined by 9.0%, reflecting the continued deterioration of market conditions and the nature of this portfolio, where we have a proportion of properties with shorter than average leases but which have medium to long- term development potential. A more detailed review of our lease expiry profile is contained on page 71. We continue to manage our central London assets actively, having concluded 75 rent reviews, 23 renewals and agreed 48 leases in the period under review. As anticipated, as leases terminate in our portfolio, investment voids, excluding properties under refurbishment, have increased marginally, but remain at a manageable 1.8% (excluding 0.2% of property under refurbishment). The central London portfolio management team has been working hard to renegotiate and extend leases in developments where we have rescheduled the future timing for redevelopment. Examples of this are New Fetter Lane, where we have agreed terms on 22 (out of 31) tenancies for occupiers to stay beyond their original planned termination date, and Eastbourne Terrace, where we have agreed a short lease extension with the existing office occupier and are in negotiation for new leases with some of the sub-tenants who have expressed an interest in continuing occupation. The submarkets in central London have performed very differently with a more marked deterioration in the City where we have 12% of our assets compared with the West End where we have 19% of our assets and where values have held up much better. Landflex We are just beginning to market our new Landflex product which we have developed to offer office occupiers a more flexible approach to planning their accommodation requirements. The refurbishment of 7 Soho Square, W1, is now complete, and 43% of this building is now in solicitors’ hands. Empress State, SW6, is on target for completion by June 2003. We are currently in negotiation with a number of occupiers in respect of 18 LAND SECURITIES ANNUAL REPORT 2003 Portfolio management Warner Bros, Livingston In Scotland the strength of our retail offer was demonstrated with the introduction of a host of new high street retailers. Warner Bros Studio stores opened in our centres at Livingston and East Kilbride. Scott Parsons and Gary Sherwin During the year we identified the need to improve our Business Development capabilities.We have appointed Scott Parsons to head up a new unit, alongside Gary Sherwin to ensure we maximise opportunities for site acquisitions and other transactions . I O P E R A T N G A N D F I N A N C I A L R E V I E W Landflex and, given the decline in occupier demand in central London, we are pleased with the level of interest being expressed. Shopping centres and shops The value of our shopping centre and retail properties increased by 7.1% demonstrating good growth from the retailer market and reflecting the excellent results we have had in our asset management activities. Across this portfolio we have achieved 111 new lettings, 25 renewals and 254 rent review settlements and voids are at 1.2%. We are continually seeking opportunities to reconfigure or redevelop new units to meet retailer requirements and have projects underway in virtually all of our centres. The existing strength of the portfolio and low levels of voids has required the retail team to work closely with occupiers to generate opportunities to improve our centres and thereby increase rental levels. An example of this active approach is the White Rose Centre, Leeds, where, as a result of our activities, we have increased rental values over the last 12 months by 13%. We are pleased that our efforts to increase our focus on the customer have already been recognised, as demonstrated by positive results received from recently completed independent, customer research on our retail occupier base throughout the majority of our shopping centres. LAND SECURITIES ANNUAL REPORT 2003 We are growing the income generated from other activities such as car parking, advertising and telecoms which this year increased from £6.7m to £6.9m on a like-for-like basis. One of our core objectives is to grow this income further. In addition to the 18,020m2 of planning consents, available for implementation as reported in the Development Review, we have 11,200m2 of consents, or ‘minded to grant’ consents on existing parks. This includes 5,390m2 at White City Retail Park, Manchester. Retail warehouses The value of the retail warehouse investment properties increased by 9.4%, demonstrating the very strong growth resulting from our active management of the portfolio. Occupier and investment demand for retail warehouses remains robust and this market continues to benefit from supply-side constraints and also the changing dynamics of the retail occupier base. Across the portfolio we negotiated surrenders and relettings and have taken back or agreed to take back 27,320m2 of which we have relet 25,520m2 at an average rental increase of 69%. This includes small investments at Hendon and Christchurch, which were subsequently sold at a surplus of 34% after all costs. At Lakeside Retail Park, West Thurrock, we have agreed to take back several stores and we have conditionally contracted with Marks & Spencer to provide them with a store of 5,810m2, anticipated to open in 2005. South-east industrial The sector has remained stable and lettings continue to be achieved on satisfactory terms with modest rental growth. We continue to invest in our existing holdings and improve rental levels, as demonstrated at our refurbished scheme in Coulsdon. Our refurbishment programme currently equates to 2.9% of the industrial portfolio, ensuring the sustainable long-term future of our industrial and warehouse products in an increasingly competitive market. The programme includes a major refurbishment of around 10,240m2 at Heston, Heathrow, which will raise the profile of our overall holdings on the estate, totalling 28,710m2. We are still increasing our exposure to the south-east industrial sector, predominantly through development which is reported on in more detail in the Development Review. 19 Development creating dynamic spaces ‘By its very nature development in a heritage city is sensitive and we wanted to work with a development partner who understood these sensitivities.We also needed a partner who could share our vision to regenerate the Whitefriars’ site in a way that is more appropriate to its historic setting within the medieval walls of Canterbury. In Land Securities we found that partner.’ Alex Perkins, Leader of Canterbury City Council 20 LAND SECURITIES ANNUAL REPORT 2003 Development I O P E R A T N G A N D F I N A N C I A L R E V I E W ‘Our long-term relationship with Canterbury City Council ensured that we shared their vision for the city centre and understood the complexities of delivering urban regeneration in an historic location.We have now successfully completed the initial phases of the development, which included the creation of a new department store for Fenwick and are progressing well with the main phase of development’ Cardinal Place,Victoria. We commenced demolition at Cardinal Place,Victoria where we will be delivering in two phases, 62,000m2 of office accommodation and 9,000m2 new retail space. The main phase will be complete in mid 2005. The Bristol Alliance obtained a resolution to grant outline planning consent in December 2002 for a 155,000m2 redevelopment of Bristol Broadmead which aims to create a major new retail destination in the south-west. We have made significant progress towards our objective of establishing the platform for delivering a range of major development schemes. We continue to evaluate projects in respect of occupier demand, and will reprogramme schemes if we believe that market conditions do not support the generation of shareholder value. However, we will progress certain aspects of development, such as planning and site assembly, so that we are in a position to implement schemes quickly as markets improve or pre-lettings are secured. During the year we completed 81,500m2 of the development programme, started 95,500m2 of new schemes, received planning consent or resolutions to grant consent for 212,500m2, applied for planning permission for 129,000m2 and achieved 52,000m2 of new lettings. In addition, we secured outline planning consent at Ebbsfleet, Kent Thameside for 395,000m2 of mixed use space representing our 50% share in the project. Seven projects with a valuation of £114.4m, which were completed and let during the 12-month period, were transferred out of the development programme. These were the Designer Outlet Shopping Centre, Livingston; Neptune Point, Cardiff; Centrapark, Welwyn Garden City; Cheetham Hill Road, Manchester; Almondvale Retail Park Phase I, Livingston; Lakeside Retail Park Phase II, Thurrock; and part of a property at Markham Road, Chesterfield. The aggregate surplus on these schemes over their full development period was £24.3m. We have added to the development programme industrial schemes in Kidlington, Oxford and Fareham, together with a small retail warehouse extension in Bexhill. We have removed from the development pipeline a small high street shopping redevelopment scheme in Plymouth, and an office scheme at 40/50 Eastbourne Terrace, W2, which is commented upon in more detail below, together with the second phase of our scheme in Hemel Hempstead, where we have sold the site. A development pipeline schedule is set out on pages 74 to 75. Including our share of joint ventures, this equates to approximately 708,800m2 of new development, of which 119,000m2 is completed, 250,600m2 in progress, 22,200m2 authorised and 317,000m2 proposed. The development pipeline schedule lists both schemes in the development programme and proposed developments. It is only properties in the development programme which we refer to as ‘development properties’ in the notes to the accounts and elsewhere in this report. Our development programme includes: • developments which are completed but less than 95% let; • developments on site; • committed developments (being projects which are approved and the building contract let); and LAND SECURITIES ANNUAL REPORT 2003 21 Development Eastern Quarry, Kent Thameside In January 2003 we submitted for planning permission a masterplan for the 310-hectare site at Eastern Quarry in Kent, adjacent to the Bluewater Shopping Centre.The masterplan, developed by Eric Kuhne, has the potential to create 7,250 houses as well as up to 280,000m2 of commercial, retail and leisure buildings.The scheme centres on the creation of five villages each of which will include homes, a school, community facilities and open spaces.At the centre of the Government’s regeneration proposals for the south-east, Eastern Quarry is located close to the site for the planned new Channel Tunnel Rail Link international and domestic station at Ebbsfleet, which when completed will result in a 17-minute journey time into Central London. Eastern Quarry forms part of our holdings at Kent Thameside which also includes 360 hectares of land at Crossways, Swanscombe Peninsula and Ebbsfleet. Over a 25-year time frame we have the potential to deliver up to 10,000 new houses and 700,000m2 of commercial space demonstrating how we can use our competitive advantage of scale and development skills to realise value for our shareholders over the short, medium and long-term. • authorised developments (those projects approved by the Land Securities Board for which the building contract has not yet been let). Projects in the development programme are sufficiently firm to ensure that reporting from period to period provides a good basis for performance comparison and they are separately analysed in the relevant notes to the accounts. Proposed developments are now excluded from the development programme as experience has shown that these schemes can be subject to revision. However, we give an indication of the likely size and timing of these schemes and their potential impact on cash flow when discussing our development pipeline, which combines both the development programme and proposed schemes. Central London The current market environment for office development in London is challenging. However, relative to the size of our portfolio, we have only a small amount of unlet space in schemes which have already been completed, totalling 14,300m2 in three buildings. Over the last year, we have taken a number of decisions which impact upon the timing of our development pipeline. At New Fetter Lane, EC4, we extended leases on the existing buildings from June 2003 to late 2004, while we seek planning consent for an alternative scheme offering a range of building sizes which will widen our marketing options. At 40-50 Eastbourne Terrace in Paddington, we have deferred development from 2003 to around 2010 to tie in with the lease expiry on our adjoining holding at 10-30 Eastbourne Terrace. This decision partially reflects current levels of occupier demand and also the results of analysis we have undertaken which shows that, by master planning the two sites together, we can maximise the developable floor area. At both New Fetter Lane and 40-50 Eastbourne Terrace, we are successfully extending income flows from the existing buildings. At Cardinal Place (formerly known as Stag Place) in Victoria, we awarded the building contract in autumn 2002 and the main phase of the scheme is due for completion in 2005, when we anticipate improved market conditions in the West End. At Bankside 1,2,3 (formerly known as St Christopher House), which is adjacent to Tate Modern on the South Bank, we have started demolition works but do not intend to commence construction until pre- lettings have been obtained, which has always been our policy for this site. We have two major development schemes due for completion during 2003. Empress State in Earls Court (43,000m2) is due for completion in June of this year and 30 Gresham Street in the City (37,000m2) will be completed in December. We have recently started to market Empress State, which is being offered in small to medium sized units through our Landflex leasing product. Our marketing programme for 30 Gresham Street is well advanced, and we are encouraged by the active discussions we are having with interested parties. Shopping centres and shops We have shopping centre development projects under construction in Birmingham and Canterbury and, during the year, made considerable progress in advancing town planning and other issues on schemes in Bristol, Cardiff and Exeter. The Bull Ring in Birmingham, being developed by the Birmingham Alliance Partnership, will open ahead of schedule on 4 September 2003 and is now 88% let or under offer. We are delighted with the progress on both 22 LAND SECURITIES ANNUAL REPORT 2003 Development The Bull Ring in Birmingham is a 110,000m2 retail development which will open in September this year and is 88% let or under offer. This is the second retail development to be successfully undertaken by the Birmingham Alliance since its formation in 2000. Caxtongate As well as its involvement in the Birmingham Alliance, Land Securities is also making good progress at Caxtongate in Birmingham where it has now pre-let the entire commercial element of the third phase of its development. I O P E R A T N G A N D F I N A N C I A L R E V I E W construction and letting. At Whitefriars in Canterbury, Fenwick opened their new department store in February of this year, at the same time as we launched our initial marketing campaign. A strong response from retailers has resulted in our agreeing terms on a further three stores and we will continue marketing until the scheme’s opening date in 2005. At Dundee we completed Phase II of the scheme comprising 9,800m2 with pre-lets to MFI, Carpetright, Currys and PC World and we plan to construct the final phase of 8,640m2 later this year. This will create a regional shopping park of 28,775m2 adjoining the 10,200m2 Tesco Extra store which is now under construction. At both Bristol and Exeter, we submitted planning applications during the period under review and obtained resolutions to grant consent. The scheme in Bristol is being undertaken in partnership with Hammerson, Henderson Global Investors and Morley Fund Management. In Cardiff, we are working in partnership with Capital Shopping Centres and submitted an outline planning application in Autumn last year for a development of approximately 70,000m2 of retail accommodation together with hotel and residential space. In York, we are still awaiting the planning decision on our 27,500m2 retail development proposal following the Public Inquiry in the summer of 2002. Retail warehouses We completed the construction of approximately 33,000m2 of new retail warehouse space, 94% of which is let and the remainder in solicitors’ hands. Despite restrictive planning policies, we have 18,020m2 of consents or ‘minded to grant’ consents across the retail warehouse portfolio, which we shall implement once we have pre-let sufficient space. This includes 9,400m2 at Livingston. Leisure Our City Centre leisure scheme ‘The Gate’ in Newcastle upon Tyne opened in November of last year and is trading well, with 84% by income either let or in solicitors’ hands. South-east industrial We continue to expand our industrial portfolio in the south-east principally through the acquisition of development land in strategic locations with limited land supply. We successfully acquired two sites, each of 2.5 hectares, in Oxford and Fareham for speculative development which will add 23,250m2 to our portfolio. We completed 41,200m2 at schemes in Basildon, Guildford, Hemel Hempstead and Welwyn Garden City and started on site on 35,500m2 at Basildon, Croydon and Oxford. A further 11,600m2 is planned for construction in the forthcoming year in Fareham. Of our completed industrial developments, 55% is let with total annual rental income of £3.14m secured. At Hemel Hempstead we took advantage of a strong land market and sold 2.9 hectares of surplus land purchased in 2001 for £4.9m for a net receipt of £7.3m. Kent Thameside We have made significant progress on our larger land holdings at Kent Thameside over the last year. At Ebbsfleet, in which we have a half share, we successfully obtained a flexible outline planning consent for approximately 790,000m2 of mixed use space including up to 455,000m2 of offices, 168,500m2 of other commercial space and supporting uses and 3,300 residential units. In January of this year, we also submitted an outline planning application for 7,250 residential units and up to 150,000m2 of commercial space and 130,000m2 of retail, leisure and community buildings at Eastern Quarry. LAND SECURITIES ANNUAL REPORT 2003 23 Total property outsourcing providing accommodation solutions ‘BBC buildings do not create a welcoming environment for either our employees or our customers.We wanted to change that and needed a property partner to help manage our property portfolio and to deliver new and exciting accommodation, accessible by all. Land Securities Trillium is such a partner’ Greg Dyke, BBC Director General BBC White City current (main) and as at 2001 (inset) The development of a major new facility for the BBC at White City is currently ahead of schedule, and set for completion in 4th quarter 2003.The current phase, comprising 50,400m2 of office and technical space, will house the biggest studio in Europe and be occupied by some 3,000 BBC employees. 24 LAND SECURITIES ANNUAL REPORT 2003 Total property outsourcing ‘Our partnership with the BBC demonstrates how we can add value to a business.The BBC can focus on what it does best – making great television, while we focus on what we do best – managing, servicing and developing property’ I O P E R A T N G A N D F I N A N C I A L R E V I E W Realising value from Telereal Jim D'Sylva transferred to Land Securities Trillium last year when we acquired the BT portfolio in our joint venture with Telereal. He and his team are responsible for disposing of properties that are surplus to BT's requirements. Working with the client at the DWP Sandra Cable manages six inner-city Birmingham DWP buildings. She has recently been responsible for resolving local security issues and has worked closely with the client implementing this project. A successful year for Land Securities Trillium saw important progress on all our existing contracts. Financially, we performed ahead of expectations, with income growing by 62.1% to £658.3m and operating profit by £76.6m to £139.7m, reflecting a full year’s contribution from Telereal. We supported the DWP through a period of significant business change, and the Partnership with the BBC completed an impressive first full year of operation both in terms of development activity and service delivery. The BT contract, operating through Telereal, had a strong first year delivering strategic asset management and facilities service management across BT’s estate, and, in the process, we successfully realised enhanced asset values, generating financial benefits for Telereal and BT. Department for Work and Pensions In operational terms, the platform for delivery of services under the PRIME contract for the DWP is now well established. However, organisational changes within DWP created new revenue-generating activity for us with the creation of three new DWP businesses, namely Job Centre Plus, The Pensions Service and The Debt Management Service. As a result, we have been extremely active over the last year in estate management and the delivery of capital projects. To support these new DWP businesses we received enquiries from the client for some 250,000m2 of additional accommodation, some 50,000m2 of which was taken on during the year. In the same period our Capital Projects business undertook around £95m of work for DWP, creating 80 new Job Centre Plus offices and 50 pensions processing centres, together with other refurbishment work across the estate. In the light of this growth in its requirements, the DWP did not wish to use any of its annual entitlement to vacate a proportion of its estate. However, in the latter part of the year, DWP gave notice of its intention to vacate a number of small buildings totalling 3,600m2 over the next 12 months as it seeks to consolidate its accommodation following its business reorganisation. This vacation is achieved by utilising some of the flexibility which was requested by DWP at the commencement of the contract, and which was priced accordingly by Land Securities Trillium. Responsibility for seeking tenants or sub-tenants for any vacant floor space in the portfolio rests with Land Securities Trillium, and the amount of space currently vacant across the portfolio stands at its lowest level since the contract began at 12,370m2, as compared to an annual average of around 70,000m2. LAND SECURITIES ANNUAL REPORT 2003 25 Total property outsourcing Sale of Telereal properties This year Telereal has sold 49 properties at a value of £296m.This included the sale of six sale and leaseback properties to Rotch while the remainder were surplus to BT’s requirements.All the parties have benefited from the cash generated by these sales. Mobilising the BBC White City development Caroline Finegan is responsible for the handover, mobilisation and occupation of the BBC White City development which will complete six months earlier than scheduled In terms of the delivery of our day-to-day facilities management services to over 100,000 DWP occupants, we continue to enhance and improve our offering throughout a period of substantial business change for our client. The annual customer satisfaction survey saw an improved score for the second successive year, with an exceptional customer satisfaction rating of 90% being achieved. This reflects well on the efforts of all our people working on this contract, and is a testament to the strength of the relationship between us and our long-term service partners. BBC The first full year of the BBC Property Partnership has delivered a series of successes. The 300 facilities management and projects staff who joined us from the BBC at the end of 2001 are now integrated into our business, delivering services to some 25,000 BBC staff across the UK, and managing capital projects valued at some £40m during the year. Through their efforts and those of our service partners the customer surveys undertaken at the end of our first year of operation reveal the biggest year-on-year increase in satisfaction levels recorded by the BBC staff. Land Securities Development is planning to complete later this year the first phase of the new 50,000m2 development for the BBC on the White City site. One element of this scheme is some six months ahead of schedule, which will provide operational benefits for the BBC and improved financial returns for the Group. Other proposed developments across the UK are currently at various stages of discussion as we work with the BBC to plan and deliver its vision of providing accommodation capable of attracting the best people in its industry. As we announced shortly after securing the BBC contract, we recognised that the contract would run at a loss prior to completion of the new White City development. Upon completion of the building in the autumn of 2003, income from the contract will increase by approximately £30m on an annualised basis, and the contract will move to a stabilised position, with a positive contribution to Group profits in the following financial year. Telereal The BT contract was secured in November 2001 by Telereal, our joint venture with The William Pears Group, with a total equity contribution by each partner of £146m. During the year under review, Telereal made a £27.2m contribution to Group pre-tax profits, largely due to our focus on working with BT to maximise asset values. Since acquiring the BT portfolio, Telereal has sold a total of 49 properties for some £296m, including the sale, in August 2002, of six properties to the Rotch Group for £270m. During the year, we delivered over £100m of capital projects for our BT customers, and we continued to work with BT to identify the potential for broadening the scope of our operation by transferring to Telereal further facilities management activities. Telereal is responsible for managing the vacation and subsequent subletting of vacated leasehold space on behalf of BT. BT has announced that it will be vacating parts of its leasehold office portfolio through restructuring and relocating certain activities. 26 LAND SECURITIES ANNUAL REPORT 2003 Total property outsourcing Sheffield rationalisation We worked closely with the DWP to determine an affordable property solution capable of meeting their existing and future service delivery initiatives. It resulted in the relocation of existing operations from a number of unsuitable buildings located around Sheffield to Hartshead Square (pictured) which is a centrally located modern office building, and the adjoining Churchill House which provides a customer facility. I O P E R A T N G A N D F I N A N C I A L R E V I E W This is across the country but the majority relates to its London property strategy. No liability will pass to Telereal, save on 2,360m2 in two buildings in Leeds which were anticipated at the time of the BT transaction and priced accordingly. In addition, Telereal continues to discuss with O2 (UK) the potential for growing the relationship between the two parties through Telereal extending its existing 18 months corporate real estate advisory contract. New business Although no new total property outsourcing contracts were completed in the market during the year, our new business pipeline has greater depth than at any time since Land Securities Trillium started operating in 1998. In recognition of the success of the PRIME contract and in the anticipation of synergies with the PRIME estate, the DWP has entered exclusive negotiations with us, subject to being able to agree terms, for the outsourcing of the 800,000m2 former Employment Services estate. In addition, a number of attractive opportunities are being pursued in the private sector, where current economic conditions are reinforcing the need for organisations to focus on their core business. In total, we are in active discussions with regard to potential new property outsourcing contracts entailing some 2.3 million m2 of accommodation. Total property outsourcing In 2002, a report on corporate ownership of property by Roger Bootle for the Royal Institution of Chartered Surveyors highlighted the fact that UK corporations own commercial property worth about £400bn, which represents about 34% of their total business assets. This figure excludes commercial property worth some £100bn held in Government and local authority portfolios. We are targeting all of these markets through Land Securities Trillium by providing a method for public and private organisations to procure accommodation in buildings 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 that are seeking alternative and more effective ways of fulfilling and managing their property requirements. As 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 services 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 Land Securities Group to design and build accommodation where our customers require new facilities. LAND SECURITIES ANNUAL REPORT 2003 27 Corporate social responsibility White Rose study support centre, Leeds The White Rose study support centre was developed in partnership with Leeds City Council and Education Leeds.We have equipped the centre with IT equipment and an area for arts and crafts sessions, and all facilities are fully accessible for people with disabilities. During the year we continued to develop our approach to corporate social responsibility (CSR) following the formation of our CSR committee last year, which is chaired by the Group chief executive, Ian Henderson. To ensure that our activities are in line with best practice we retained external advisers who have reviewed our current activities and who will be monitoring future progress against our objectives. Our CSR policy statement is being developed as a ‘statement of intent’ in relation to our activities in this area and will be closely aligned with our existing business ethics policy. This covers the Group’s most significant areas of corporate responsibility and is being updated to ensure that it captures our key stakeholder groups, priority CSR issues and areas of impact. The current policy sets out the Group’s operating principles and is available on our website. The table below details the key areas or stakeholder groups that this policy covers and the Board members with main responsibility for these. Stakeholder/area of responsibility Customers / occupiers Shareholders and other investors Employees Suppliers, advisers, contractors and consultants Government Community Health, safety and environment Corporate governance, business ethics, compliance and verification Board member Mark Collins/Ian Ellis Ian Henderson/Andrew Macfarlane Ian Henderson Ian Ellis/Francis Salway Ian Henderson Ian Henderson Francis Salway Board We are developing a Group-wide system for managing our CSR activities while, at the same time, each business unit and certain Group support functions are developing specific objectives and targets in relation to their activities and areas of impact. These objectives and targets will form the basis upon which we will measure and report on our CSR activities in future, and, we intend publishing a full review later this year complementing the progress we have made to date on reporting our environment activities. In future, we will aim to report on CSR, to include our Environment Report, every year in the autumn. During the review process we have examined our CSR management structure in relation to: ∑• policies, programmes, initiatives and case study examples addressing CSR issues; ∑• external standards certification systems; ∑• measurement and monitoring systems and performance related information; and ∑• organisational responsibilities for different aspects of CSR. 28 LAND SECURITIES ANNUAL REPORT 2003 Corporate social responsibility I O P E R A T N G A N D F I N A N C I A L R E V I E W Left At the Almondvale Shopping Centre, Livingston we have launched the first UK trial of a unique ‘Truancy-Free Zone’ initiative to build closer relationships with the local community and the police while encouraging more responsible centre management. Below The archaeological dig undertaken on 30 Gresham Street site and the special exhibition created to showcase the finds have both been recognised with awards from the British Archaeological Society and Interpret Britain Awards. Below right We believe that our employees make Land Securities, so by encouraging everyone to undertake personal development and training and to ‘live’ our core values, we are ensuring our future success. The review has enabled the Group to identify gaps in our CSR activities and is proving a useful communication tool internally with regard to our commitment to CSR. well as with other employees. An employee recognition and award programme helps maintain momentum and motivation. Our continued inclusion in the FTSE4Good Index as well as our leadership position in the Dow Jones Sustainability Index, where in 2002 we were named European Real Estate Market Leader, demonstrates our commitment to CSR. We are aware, however, of the need for continuous improvement and we have set out a three-year target of improving the Group’s score in these indices as well as attaining membership of the BIC Sustainability Index. Employees We have a tradition of encouraging our site- based staff to be involved in community initiatives in the locality in which they are based. More recently all our employees have been involved in workshops to establish and communicate our values. These values, which include Integrity and Respect for the individual, underpin our behaviours and relationships with our customers, suppliers and the community, as We are also keen to encourage employees to become involved in activities outside their normal work in a wide range of activities in the community, such as schools, colleges, hospitals and other voluntary organisations. The Group also closely monitors its employee policies and practices to ensure it maintains high standards and best practice, particularly in relation to equal opportunities in recruitment and internal career progression as well as fair and equitable remuneration. This year the Company has also carried out a Group-wide employee opinion survey with over 80% of the employees responding to a wide range of issues on a confidential basis. The Company communicated the results and management action plans to all employees and, overall, achieved a marginally higher rating on satisfaction than an external all-industry benchmark. HR policy The employment policies of the Group 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 Group. 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 policies are available on our website. LAND SECURITIES ANNUAL REPORT 2003 29 Health, safety and environment making sustainability work Environmental Panels exist in each business unit to set annual targets and ensure that the Group policy and objectives are translated into everyday actions. We also continue to integrate environmental and health and safety considerations into the daily activities of our various teams and at the end of 2002 we formed a new department of Health, Safety and Environment. During the year we merged existing teams to establish a new department for health, safety and environment, combining these related disciplines to provide a focused service to each business unit. Francis Salway retains Board responsibility for the department’s activities, with Neale Goff, director health safety and environment, responsible for directing operational delivery. Health and safety We continued to make good progress in enhancing the management of health and safety across the Group. We set and achieved several key objectives in the year to 31 March 2003. These were: • To review and update our health and safety policy and management systems and implement a programme for proactive monitoring. • To revise our procedure for accident reporting and develop a database to capture this information more effectively. Statistical information is available to the Board and health and safety team and used as a means for evaluating the effectiveness of our safety improvement programme. • To develop a more empirical approach to auditing compliance with internal and external health and safety requirements. • To reduce our reliance on outsourced audit expertise, which has resulted in annual savings of nearly £300,000 and our audit processes being more closely integrated with ongoing operations. ∑• To develop and implement a programme to comply with the revised Control of Asbestos at Work Regulations. The new programme has been devised and work on resurveying and implementing management controls commenced in April. ∑• We also made a major investment in training to increase the health and safety awareness and competencies of our professional staff. Some 35 people passed the NEBOSH certificate in occupational health and safety further complimenting our IOSH Managing and Working Safely training programmes. 30 LAND SECURITIES ANNUAL REPORT 2003 ∑ Health, safety and environment I O P E R A T N G A N D F I N A N C I A L R E V I E W Environment report In 2002 we produced our second stand-alone Environment Report outlining our impacts and communicating the 19 targets established for 2002/03.We continue working with our external partners to raise awareness of environmental matters. Crossways Business Park Our Crossways business park in Kent Thameside received the Millennium Marque as an excellent example of economic and environmental improvement at a former cement works in Dartford. Environment We developed further our programme for managing our environmental impacts, embedding these principles more firmly into our standard procedures. We published our second Environment Report, which described and quantified our achievements against a range of targets. For the year ending March 2003, we set 19 targets and, subject to external verification, successfully met them all. We are participating in the trial UK Emissions Trading Scheme, which runs until December 2007, and are committed to an ongoing cut of about 1% per year in aggregate emissions of CO2 across our portfolio of managed offices, which equates to more than 3,500 tonnes over five years. We comfortably beat our target for 2002, earning over £13,500 from the scheme for successful compliance, a reward we shared with our contractors who were instrumental in our success. We won three Green Apple Awards for our environmental activities, one for our environment day which is now to be an annual event. We won a gold award for Making a Corporate Commitment (MACC2)to reduce CO2 emissions and a bronze award for the intranet system implemented to control Land Securities Trillium’s ISO14001-certified environmental management system (EMS). We became a founder member of Trucost, a system for measuring and benchmarking total environmental footprints using both direct and supply chain impacts. Land SecuritiesTrillium encouraged and helped one major supplier to develop its own EMS to achieve certification to ISO14001. We continue to foster our relationship with clients in order to help them develop systems and procedures to meet their own environmental objectives. We have helped the DWP achieve a recycling rate of 60% by weight, compared to the national average of around 12%, and are already up to around 22% for the BBC, where we are also developing a combined heat and power plant. LAND SECURITIES ANNUAL REPORT 2003 We remain committed to ensuring that our people have the tools and training to ensure that we achieve our environmental objectives. As well as specialist environmental auditor training, last year we accumulated more than 150 person-hours of targeted training for key managers across the Group. Our successes were acknowledged in two influential surveys. In the Business in the Environment Index of corporate engagement our score rose from 67% to 78% in 2002, and in the sector-specific Property and Environment Group survey conducted by Upstream, our score increased from 69% to 76%, ranking us second overall. We have changed our mailing envelope for the annual report to a poly-wrap enclosure this year. It is a process that saved over £4,500 and supports our commitment to environmental policies, as the plastic used to make the poly- wrap is biodegradable. For more details on our environmental programme for 2003/4, and to see our 2002 environment report in full, please go to our website. 31 Board of directors 1 6 2 7 3 8 4 9 5 10 1. Ian J Henderson CBE (59) Executive director Joined the Group in 1971. Appointed to the Board in 1987 and chief executive in December 1997. Immediate Past 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. 4. Ian D Ellis (47) Executive director Joined the Board in November 2002. An original member of the management team which set up Trillium. Previously chief executive of the investment management division of Insignia Richard Ellis. Chief executive of the Group’s Land Securities Trillium business unit. 7. Sir Winfried Bischoff (61) Non-executive director 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. 2. Andrew E Macfarlane (46) Executive director Joined the Board as Group finance director in October 2001. Formerly partner in Ernst & Young and, prior to joining Land Securities, Chief Financial Officer of Bass (subsequently Six Continents) Hotels and Resorts division. A non- executive director of Invensys PLC. 3. Francis W Salway (45) Executive director 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. Appointed chief operating officer in January 2003. 5. A Mark Collins (47) Executive director Appointed to the Board in November 2002 after joining the Group in May 2002. Previously Senior Managing Director at GE Capital Real Estate. Chief executive of the Group’s Portfolio Management business unit. 6. Peter G Birch CBE (65) Non-executive director Appointed a director in 1997 and chairman in July 1998. Chief executive of Abbey National plc until March 1998. Chairman of Kensington Group plc. Director of NM Rothschild & Sons Limited, Dah Sing Financial Holdings Limited and Travellers Exchange Corporation Ltd. 32 8. Peter G Freeman (47) Non-executive director Joined the Board as a non-executive director in January 2002. Non-executive director of the Argent Group PLC and chairman of Freeman Business Information plc. 9. David Rough (52) Non-executive director 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 Mithras Investment Trust plc, BBA Group PLC, EMAP Group PLC and Xstrata Group PLC. 10. Stuart Rose (54) Non-executive director Joined the Board as a non-executive director in May 2003. Previously chief executive of Arcadia Group until December 2002. Chief executive of Booker PLC from 1998 until 2000. LAND SECURITIES ANNUAL REPORT 2003 Corporate governance The Combined Code – Principles of Good Governance and Code of Best Practice 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. Directors The Board meets at least eight 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 and significant transactions 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, an investment committee appraises and, where appropriate, approves 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. I O P E R A T N G A N D F I N A N C I A L R E V I E W Corporate governance The roles of chairman and chief executive are split and there exists a strong non-executive element on the Board which currently consists of five executive and five non-executive directors. The Board considers all of the non- executive directors to be independent. The Company does not currently have a senior independent non-executive director but the Board is currently seeking to recruit additional independent non-executive directors and, upon the conclusion of this process, intends to appoint a senior independent non-executive director. Under some definitions, Sir Winfried Bischoff may not be regarded as ‘independent’. However the unanimous view of his colleagues on the Board is that, by virtue of his personality, experience and knowledge of business, he is robustly independent. The Board is supplied with comprehensive management information on a regular and timely basis, principally by means of monthly financial and management reports and detailed reviews of medium-term financial projections every six months. At present the whole Board acts as a nomination committee and is responsible for the selection and approval of candidates for appointment to the Board. However, the Board is currently reviewing this position in the light of the Higgs Report. 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. 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 36∑ to ∑41. 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. In addition meetings are held periodically with the UK Shareholders Association, a body representing private shareholders in the UK. At its annual general meeting, the Company complies with the provisions of the Combined Code relating to the disclosure of proxy votes, the separation of resolutions and the attendance of committee chairmen. The Company arranges for the Annual Report 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. LAND SECURITIES ANNUAL REPORT 2003 33 Corporate governance Accountability and audit (d)Systems of control procedures and In addition, the audit committee receives: 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. During the year, balanced scorecards have been prepared that set out targets for a wide variety of key performance indicators. As part of the balanced scorecards, the Group and each business unit has set goals, measures, targets and actions in relation to risk management. (b)Investment appraisal; capital projects, major contracts and business and property acquisitions and disposals are reviewed in detail and approved by the investment committee and/or the Board. (c) Financial monitoring; profits, cash flow and capital expenditure are closely monitored and key financial information is reported to the Board on a monthly basis. 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; we undertake 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 Annual Report. This process is regularly reviewed by the audit committee on behalf of the Board and accords with the Turnbull guidance. (f) Review of controls; an assessment based upon a compliance questionnaire is completed twice a year 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. Their findings are reported directly to the audit committee and internal audit follows up implementation of the management actions from all reviews. The internal audit function operates on a risk- based approach. The audit committee on behalf of the Board reviews the scope of work, authority and resources of the internal audit function on an annual basis. (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 risk management and internal control to support the Board’s annual statement; and (b)Reports from the external auditors. 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 which consists solely of non-executive directors, is chaired by David Rough and operates in accordance with written terms of reference. The committee meets at least four times a year and its functions include the following: • seeking 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; • receiving reports from and consulting with the internal and external auditors; • reviewing the interim and annual results and considering any matters raised by the internal and external auditors; and • monitoring the scope, cost effectiveness, independence and objectivity of the external audit. 34 LAND SECURITIES ANNUAL REPORT 2003 Corporate governance I O P E R A T N G A N D F I N A N C I A L R E V I E W Valuations The Group has for many years given the external valuers, Knight Frank and auditors access to each other. These advisers have a dialogue and exchange of information which is entirely independent of the Group. The chairman of the audit committee attends the final valuation meeting (as do the auditors) to assure themselves of the independence of the process. In line with the Carsberg committee report, we have recently changed the previous ad valorem valuation fee arrangements to a fixed fee arrangement. 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 contracts with the Company. On 20 January 2003, the Group established by the Financial Reporting Council and chaired by Sir Robert Smith published its report on the roles and responsibilities of audit committees. The Board will, in due course, give full consideration to the revised Combined Code. Auditors The directors of Land Securities, and our external auditors, PricewaterhouseCoopers LLP, have for many years had safeguards in place to maintain the independence and objectivity of the audit. Set out below is our policy on the provision of services by our external auditors: • Audit related services: We will normally retain our auditors to provide ‘ 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 our business or issue, or because the work has a strong relationship to the audit itself. It is likely that certain tax work, including support for Land Securities Trillium’s bid activities and the work involved in the acquisition of new contracts, would fall within this category. • General consulting work: significant general consulting work will normally be put out to tender. We will not generally 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: senior management approval is required in advance of significant work being undertaken by the external auditors. Such approvals will be reported periodically to the audit committee. LAND SECURITIES ANNUAL REPORT 2003 35 Remuneration report Directors’ remuneration The Company complies with the requirements of the Combined Code in relation to directors’ remuneration. In preparing this report, the remuneration committee has also complied with the Directors’ Remuneration Report Regulations 2002, which has introduced new statutory requirements for the disclosure of directors’ remuneration. The Regulations require the auditors to report to the Company’s members on the information contained in Tables 2, 4 and 5 in this remuneration report and to state whether, in their opinion, those parts of the report have been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). 1. Composition of the committee The Board has established a remuneration committee which operates within written terms of reference. The committee consists solely of the non-executive directors: Sir Winfried Bischoff (Chairman of the committee) P G Birch P G Freeman D Rough S A R Rose All of the non-executive directors are considered to be independent by the Company. Sir Winfried Bischoff is a member of the management committee of the holding company of one of the Company’s bankers. He does not participate in any discussions between or regarding the relationship between the parties. 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. During the year the committee met five times. The committee consults the Group chief executive in relation to proposals for the remuneration of other executive directors. It also reviews the Group chief executive’s remuneration proposals for the Group’s staff other than the executive directors. During the year the human resources director, Keith Nash, also provided information and advice to the committee. Neither the Group chief executive nor any other director is involved in deciding their own remuneration. During the year external advice was sought from New Bridge Street Consultants who were appointed by the committee to provide advice on various aspects of remuneration. In considering future remuneration levels the human resources director also makes use of various published surveys to assist in determining market appropriate remuneration levels. 3. Remuneration strategy The Group’s remuneration strategy has three key objectives: • to allow the Company to attract and retain the talent needed to meet its business aims, • to motivate and encourage superior performance, and • to align rewards with the interests of shareholders. To achieve this strategy, the committee recommends policies to the Board for the design of pay and benefits of employees at all levels and in all companies across the Group. 4. 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 range of UK based companies of similar size and complexity, focusing on companies in the FTSE 100 Index 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 through 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 and performance share plan. A significant proportion of the directors’ total remuneration is comprised of performance related elements to align their interests with those of shareholders. It is the committee’s aim to deliver superior reward for achieving the Company’s strategic plan. The committee will keep the existing remuneration, as detailed in this report, under review during 2003/04 to ensure that Land Securities’ remuneration arrangements remain competitive and provide appropriate incentive for performance. Executive directors’ emoluments consist of salary, car benefit, medical and life insurance and executive share schemes, together with pension contributions and participation in savings related share option and annual bonus schemes which are also open to all employees. Details of each director’s emoluments and share options are shown on pages 40 and 41 of this report. Base salary Each executive director receives a salary which reflects his responsibilities, experience and performance. Salary is reviewed annually in July and the review process includes using comparator information (focusing on the companies in the FTSE 100 Index which are similar to the Company in size and complexity) and reports from specialist consultants. Our policy is to set base salary at the median.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 current salaries of the executive directors are as follows: Directors’ base salary I J Henderson (Group chief executive) F W Salway (Chief executive Development and Chief operating officer) £ 500,000 295,000 A E Macfarlane (Group finance director) 290,000 I D Ellis (Chief executive Land Securities Trillium ) 275,000 A M Collins (Chief executive Portfolio Management) 275,000 36 LAND SECURITIES ANNUAL REPORT 2003 Remuneration report Table 1 – Criteria for directors’ 2003/4 bonuses I J Henderson Total returns in excess of WACC* Group profit before tax Implementation of strategy Performance of business units F W Salway Total returns in excess of WACC Returns on development programme Delivery of development programme – on time and within budget Special projects A E Macfarlane Total returns in excess of WACC Capital structure and funding Management information Development of the finance function I D Ellis A M Collins Total returns in excess of WACC Profitable business development Client satisfaction Maximising productivity Total returns in excess of WACC Investment performance Portfolio sales and acquisitions Product development * estimated at 7.5% at 31 March 2003. I O P E R A T N G A N D F I N A N C I A L R E V I E W Annual bonus Under the annual bonus plan executive directors will have the opportunity to earn a bonus of up to 20% of salary in cash and 20% of salary in shares for meeting rigorous targets and the opportunity to receive up to a maximum of 40% of salary in cash and 40% of salary in shares for exceptional results. All shares are deferred for three years and are normally forfeited if the executive leaves employment during that period. The key performance criteria are reviewed annually to ensure that individual, business unit and group targets are set as a balanced scorecard and in line with prevailing business circumstances and the group strategy. Current criteria for 2003/4 for the executive directors are set in the areas outlined in Table 1 above. For the financial year ended 31 March 2003, the executive directors’ individual bonus payments range from 35% to 43% of salary as compared with a maximum of 80%.These will be paid partly in cash in June 2003 and partly in deferred shares. Performance share plan At the 2002 AGM, shareholders approved an amendment to the annual bonus plan to include a long term incentive in the form of performance shares. As mentioned above, half of an executive’s bonus is deferred in shares. Under the performance share plan executives can receive up to two additional shares for each deferred share depending on the extent to which the performance conditions are satisfied. No variations have been made to the rules of the performance share plan since it was implemented. One of the two additional performance shares will be dependent on the real increase in the Company’s normalised adjusted earnings per share over the three financial years, the first financial year being the financial year current at the date of grant. The other performance share is subject to the Company’s total property return compared to the Investment Property Databank All Fund Universe index (the IPD Index) over a three year rolling period. Vesting of the shares is as follows: Increase in real earnings per share pa Less than 2.5% 2.5% 4% Between these limits % that vests – 25 100 Pro rata Extent total property return exceeds the IPD Index pa Less than index Equal to index 1% Between these limits % that vests – 25 100 Pro rata Share options In 2000 shareholders approved the Land Securities PLC 2000 executive share option scheme (the 2000 scheme). Under this scheme, over a period of ten years, executives can be granted options with a value of up to four times annual remuneration. All options granted under the scheme are 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 any period of three financial years exceeding the growth in the retail price index over the corresponding period by at least 2.5% per annum. An earnings per share target was chosen as executives will only be rewarded if there has been absolute improvement in the Company's performance. Future grants under this scheme will have only two annual retesting opportunities under the performance conditions, each measured from the financial year prior to the grant of the option. No payment is made by participants in the 2000 scheme in consideration for the grant of options. 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 on page 41. During the year, the 2000 scheme was replaced by the Land Securities Group PLC 2002 executive share option scheme (the 2002 scheme) as a consequence of the return of capital and introduction of a new holding company implemented in September 2002. The rules of the 2000 scheme and the 2002 scheme are in all material respects the same. Shareholding guidelines The committee believes that it is important for a significant part of the compensation of each executive director to be tied to the ownership of the Company’s shares so that each executive’s interest in the growth and performance of the Company is closely aligned LAND SECURITIES ANNUAL REPORT 2003 37 Remuneration report Table 2 – Directors’ accrued pensions Defined benefit pension scheme (£) Accrued pension at 1 April 2002 Increase in accrued pension (excluding inflation) Transfer value of increase in accrued benefit (excluding inflation) I J Henderson M R Griffiths 294,719 156,718 31,007 498,000 686 10,000 * As at date of resignation (8 July 2002) Increase in accrued pension (including inflation) 36,017 1,348 Transfer value of pension at the increase 31 March 2003 31 March 2002 31 March 2003 Transfer value of pension at Accrued pension at Transfer value of 578,000 330,736 4,457,000 5,307,000 20,000 158,068* 2,119,000 2,201,000* Increase in transfer value less contributions made by directors 850,000 82,000 Date of contract 04/06/98 31/05/01 12/06/02 28/01/03 13/03/03 6. Directors’ service contracts I J Henderson F W Salway A E Macfarlane I D Ellis A M Collins The unexpired term and the notice periods (both from the Company and from the executive directors) are 12 months, except in the case of A E Macfarlane where his notice period to the Company is six months. The policy of the Company is for service contracts to provide for 12 months notice of termination by the Company, although for newly appointed directors there may be an initial contractual period of up to two years before the 12 months notice period applies. The service contract of A M Collins provides for an initial term of two years from the date of commencement of his employment by the Group (27 May 2002) before the 12 months notice period applies. His service contract also provides for A M Collins to receive payment of £171,150 on 30 June 2003 and £208,033 on 30 June 2007, provided that he has not left the Group of his own volition or his contract has not been terminated or he has not been given notice of termination other than on the grounds of ill-health or redundancy. In the event that the employment of A M Collins is terminated following a change of control of the Company, a sum of 12 months salary and benefits is payable. The service contact for I D Ellis provides for the payment of £215,000 on or before 1 July 2003 provided he continues LAND SECURITIES ANNUAL REPORT 2003 with the interests of our shareholders. The committee has established share ownership guidelines for the Company’s executive directors, requiring each executive to own shares with a value equal to his base salary. An executive director must satisfy the guidelines within five years of his first grant of share options after appointment to qualify for future grants. Pensions 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. Additional arrangements are in place for pension provisions in excess of the Inland Revenue regulations. Pension contributions made during the year are shown in the table on page 40. I J Henderson participates in a non-contributory defined benefit pension scheme which was open to property management and administrative staff until 31 December 1998. This scheme provides him, at normal requirement 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. (see Table 2) The ‘Increase in transfer value less contributions made by directors’ differs from the ‘Transfer value of increase in accrued benefit’ in that it reflects changes in market conditions over the year and includes the value of statutory revaluation on the accrued pension at the start of the year. M R Griffiths resigned as a director on 8 July 2002, retiring on pension with effect from that date. In accordance with his options under the scheme, he elected to receive an immediate and reduced early retirement pension. The Company was contractually required to make a payment to this scheme of £410,000 as M R Griffiths started to draw his pension before his assumed retirement age of 60. The Company also made a payment of £170,000 to the pension scheme in order to secure an additional payment of £7,600 per annum for M R Griffiths. These amounts are additional to those set out above. The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer values of the accrued entitlement in respect of qualifying services represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of the directors’ pension benefits that they earned in respect of qualifying services. They do not represent sums payable to individual directors and, therefore, cannot be added meaningfully to annual remuneration. 5. Remuneration of non-executive directors The annual remuneration of the chairman of the Board, P G 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. 38 Table 3 – Directors’ interests in ordinary shares P G Birch I J Henderson F W Salway A E Macfarlane Sir Winfried Bischoff P G Freeman D Rough A M Collins I D Ellis * at dates of appointment appointed 02/04/02 appointed 20/11/02 appointed 20/11/02 to be an employee of the company and has not given notice to terminate on or before 1 July 2003. The amount payable to A M Collins reflects the amount and timing of incentive arrangements which he was eligible to receive from his former employer. The amount payable to I D Ellis reflects a payment made in respect of a change to his service contract following the acquisition of Trillium by Land Securities. On three occasions since 2000, when directors of the Company have left office before their normal retirement age, Land Securities has made a lump sum superannuation payment into their pension fund. The Board has agreed that such payments will no longer be made. Save as disclosed above the service contracts and letters of appointment do not contain any specific arrangements for compensation for loss of office or early termination of their service agreements. The chairman and the other non-executive directors do not have service agreements with the Company. 7. Former long-term incentive arrangements 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 LAND SECURITIES ANNUAL REPORT 2003 Remuneration report I O P E R A T N G A N D F I N A N C I A L R E V I E W Ordinary Shares B Shares 31 March 2003 Ordinary Shares 31 March 2002 13,000 20,879 2,273 20,005 93,102 11,064 3,485 8,750 4,375 5,175 5,145 3,744 22,864 89,440 8,108 1,000 10,000 5,000 –* 4,145* 3,744* the time of its introduction and included such standard terms as 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. There were no changes to this scheme during the year under review. 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. Performance has been such that no awards were made under the plan in respect of the year to 31 March 2003. There have been no changes to the Plan during the year under review. The Land Securities PLC 2000 executive share option scheme was introduced in July 2000. Details of this scheme are given on page 37. The remainder of the options granted to directors under the savings related schemes are exercisable at prices between 650p and 697p per share after three, 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. The long term incentive plan (‘LTIP’) closed to new entrants on 31 March 2000 and current performance periods will expire on 31 March 2005. I J Henderson is the sole remaining participating executive director at 31 March 2003. In summary an award of shares, up to a maximum of 55% of salary, is made if over the previous five years the total shareholder return of the Company is such that it warrants an award. 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 8. Directors’ interests in ordinary shares The beneficial interests of the directors in the ordinary shares of the Company as at 31 March are disclosed in Table 3 above. There have been no changes in the beneficial shareholdings or share options of the directors between the end of the financial year and 27 May 2003, save that on 17 April 2003, in accordance with elections made prior to 31 March 2003, P G Birch, I J Henderson and F W Salway redeemed their entire holdings of B shares. No director had any other interests in securities of Land Securities Group PLC or any of its subsidiary undertakings during the year. The shareholdings above reflect the return of capital implemented in September 2002. 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. 39 Remuneration report 9. Performance graph As required by recent legislation regarding the directors’ remuneration report, the graph on page 41 illustrates the performance of the Company measured by total shareholder return (share price growth plus dividends reinvested) against a ‘broad equity market index’ over the period since the 6 September 2002 return of capital. As the Company is a constituent of the FTSE All Share Real Estate sector this index is considered to be the most appropriate benchmark for the purposes of the graph. Given the short time that has elapsed since the listing of the new holding company, Land Securities Group PLC, as part of the return of capital, the committee felt that it would be helpful to provide an additional graph illustrating performance compared with the FTSE 100 index and the FTSE All Share Real Estate sector over the previous five years of the Company and its predecessor. Table 4 – Directors’ emoluments Executive I J Henderson F W Salway (appointed 02/04/01) A E Macfarlane (appointed 01/10/01) I D Ellis (appointed 20/11/02) A M Collins (appointed 20/11/02) M R Griffiths (resigned 08/07/02) J I K Murray (retired 28/06/01) P Walicknowski (resigned 19/12/01) M J Chande (resigned 08/02/02) Non-Executive P G Birch (Chairman) P B Hardy (retired 08/07/02) Sir Winfried Bischoff G I Henderson (retired 20/11/02) D Rough (appointed 02/04/02) P G Freeman Total Salary £‘000 Bonuses £‘000 Benefits £‘000 Fees £‘000 500 295 290 100 100 71 125 75 38 213 – 110 16 8 20 4 4 13 Deferred bonus shares £‘000 107 30 32 – – – 148 9 34 18 35 30 Pension contributions 2003 £‘000 2002 £‘000 229 213 67 71 24 24 29 59 34 _ _ 104 702 84 105 Total emoluments excluding pensions 2003 £‘000 748 408 380 317 104 194 2002 £‘000 619 248 146 311 130 517 536 148 143 9 34 18 35 30 33 32 27 7 1,356 561 65 274 169 2,425 2,749 444 1,301 Benefits consist of the provision of a company car, private medical facilities and life assurance premiums. Deferred bonus shares represent the value ascribed to shares received under the annual bonus plan. F W Salway received a bonus of £30,000 as part of an agreed joining fee. The bonus received by I D Ellis amounting to £213,470 was part of an agreement relating to the Trillium acquisition. In addition to the above emoluments M R Griffiths received £350,000 as compensation for loss of office and £12,500 in lieu of outstanding annual leave on leaving the Company. The fees of Sir Winfried Bischoff are paid to Citigroup Europe. Pensions of £140,117 (2002 £166,000) were paid to former directors of Land Securities PLC or their dependants. No other excess retirement benefits were paid during the period. No payments were made to directors for expenses other than those incured wholly and directly in the course of their employment as a director. The total emoluments of the highest paid director, including gains before tax of £nil (2002 £5,800) made on the exercise of share options during the year but excluding pension contributions, amounted to £748,243 (2002 £624,900). The accrued pension as at 31 March 2003 for the highest paid director was £330,736 (2002 £294,719) 40 LAND SECURITIES ANNUAL REPORT 2003 Remuneration report Total shareholder return Source: Datastream Total shareholder return Source: Datastream 130 120 110 100 90 80 70 ) £ ( e u l a V 130 120 110 100 90 80 70 ) £ ( e u l a V 60 31 Jul 02 30 Nov 02 31 March 03 60 31 Mar 98 31 Mar 99 31 Mar 00 31 Mar 01 31 Mar 02 31 Mar 03 Land Securities FTSE Real Estate Index Land Securities FTSE Real Estate Index FTSE 100 Index This graph illustrates the value, at 31 March 2003, of £100 invested in Land Securities Group on 6 September 2002 compared with that of £100 invested in the FTSE Real Estate Index. This graph illustrates the value, at 31 March 2003, of £100 invested in Land Securities on 31 March 1998 compared with that of £100 invested in the FTSE Real Estate Index and FTSE 100 Index. I O P E R A T N G A N D F I N A N C I A L R E V I E W Table 5 – Directors’ options over ordinary shares Executive I J Henderson F W Salway A E Macfarlane A M Collins (appointed 20/11/02) I D Ellis (appointed 20/11/02) M R Griffiths (resigned 08/07/02) No. of options at 1 April 2002 27,000 174,562 27,500 2,709 35,000 40,000 75,000 70,000* 40,500* 40,000* 2,546* 33,500 50,000 41,000 3,010 (1) (2) (2) (3) (2) (2) (2) (2) (2) (2) (2) (2) (3) (1) (2) (2) (3) Granted during year Grant price (pence) No. 876 650.0 30,500 812.0 30,500 812.0 No of options at 31 March 2003 27,000 174,562 27,500 3,585 35,000 40,000 30,500 75,000 30,500 70,000 40,500 40,000 2,546 33,500* 50,000* 41,000* 3,010* Exercise price (pence) 618.6 820.0 869.0 673.4+ 801.0 869.0 812.0 813.0 812.0 Exercisable dates 07/97-07/04 09/03-09/10 07/04-07/11 07/01-07/05 11/03-11/10 07/04-07/11 07/05-07/12 11/04-11/11 07/05-07/12 812.0 07/05-07/12 869.0 812.0 650.0 618.6 820.0 869.0 646.1+ 07/04-07/11 07/05-07/12 08/07 07/97-07/04 09/03-09/10 07/04-07/11 07/02-07/05 * at date of appointment/retirement + weighted average exercise price (1) 1984 Executive Share Option Scheme (2) 2000 Executive Share Option Scheme (3) 1993 Savings Related Share Option Scheme No directors’ share options were exercised or lapsed. The range of the closing middle market prices for Land Securities shares during the year was 679.5p to 984.0p. The middle market price at 31 March 2003 was 732.5p. The options exercisable under the 1993 Savings Related Share Option Scheme are exercisable after three, five or seven years from the date of grant and are not subject to any performance condition. Sir Winfried Bischoff Chairman of the committee For and on behalf of the Board LAND SECURITIES ANNUAL REPORT 2003 41 Directors’ responsibilities and auditors’ reports 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 Group 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. Independent auditors’ report to the members of Land Securities Group PLC We have audited the financial statements on pages 44 to 65 which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out in the statement of accounting policies. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the directors’ remuneration report (‘the auditable part’). 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. The directors are also responsible for preparing the directors’ remuneration report. Our responsibility is to audit the financial statements and the auditable part of the directors’ remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view 42 and whether the financial statements and the auditable part of the directors’ remuneration report have been 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 received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions is not disclosed. 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 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority, 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 the auditable part of the directors’ remuneration report. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of 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 sufficient evidence to give reasonable assurance that the financial statements and the auditable part of the directors’ remuneration report 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 2003 and of the profit and cash flows of the Group for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and • those parts of the directors’ remuneration report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 21 May 2003 LAND SECURITIES ANNUAL REPORT 2003 Consolidated profit and loss account for the year ended 31 March 2003 Notes Group £m Interest in joint venture £m Total 2003 £m Gross property income Operating profit Profit on sales of fixed asset properties Profit on ordinary activities before interest and taxation Interest receivable and similar income Interest payable and similar charges Gross 3 3 3 3 4 4 Exceptional deficit on purchase and redemption of convertible bonds 4 Exceptional cost of cancellation/novation of interest rate swaps Interest capitalised Profit/(loss) on ordinary activities before taxation Taxation Profit on ordinary activities after taxation Dividends Retained profit for the financial period Profit/(loss) on ordinary activities before taxation Profit on sales of fixed asset properties Bid costs Exceptional items Deficit on purchase and redemption of convertible bonds Cost of cancellation/novation of interest rate swaps Group reorganisation costs Revenue profit before taxation Earnings per share Adjusted earnings per share Dividends per ordinary share 4 4 7 8 26 3 3 9 9 8 (195.9) (77.8) (273.7) (168.2) (24.6) (192.8) 1,071.3 168.2 1,239.5 462.4 26.6 489.0 12.0 87.8 15.1 102.9 2.4 550.2 41.7 591.9 14.4 (28.2) (23.5) 39.0 – (0.3) – (28.2) (23.8) 39.0 (208.6) (78.1) (286.7) 292.4 27.2 292.4 (26.6) 4.7 28.2 23.5 6.3 328.5 27.2 (15.1) – – 0.3 – 12.4 319.6 (89.7) 229.9 (167.4) 62.5 319.6 (41.7) 4.7 28.2 23.8 6.3 Group £m 977.1 497.5 13.4 510.9 4.2 Interest in joint venture £m 48.5 19.3 – 19.3 0.8 Total 2002 £m 1,025.6 516.8 13.4 530.2 5.0 – – 21.1 (147.1) 368.0 368.0 (13.4) 6.7 – – – – – – (24.6) (4.5) (4.5) – 8.0 – – – – – 21.1 (171.7) 363.5 (99.9) 263.6 (178.4) 85.2 363.5 (13.4) 14.7 – – – 340.9 361.3 3.5 364.8 2003 2002 Basic Diluted Basic Diluted 46.46p 50.39p 46.44p 50.36p 50.27p 51.61p 2003 35.50p 49.54p 50.81p 2002 34.00p All income was derived from within the United Kingdom from continuing operations. No operations were discontinued during the year. The interest in the joint venture was acquired on 13 December 2001. Results for the year ended 31 March 2002 therefore include three and a half months trading for that business. The notes on pages 48 to 65 form an integral part of these financial statements. 44 LAND SECURITIES ANNUAL REPORT 2003 Balance sheets 31 March 2003 Fixed assets Intangible asset 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 Investment in group undertaking 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 Provision for liabilities and charges Capital and reserves Called up share capital Share premium account Merger reserve Capital redemption reserve Revaluation reserve Other reserves Profit and loss account Shareholders’ funds Equity shareholders’ funds Non-equity shareholders’ funds Net assets per share Diluted net assets per share Adjusted net assets per share Adjusted diluted net assets per share Notes Group 2003 £m 2002 (restated) £m Company 2003 £m 2002 £m 11 12 14 15 17 33 33 18 19 19 20 21 22 23 24 25 26 26 26 26 26 26 26 26 26 26 10 10 10 10 36.7 38.9 7,823.9 557.4 8,381.3 41.5 7,800.0 428.9 8,228.9 45.3 1,170.2 (1,063.4) 1,297.8 (1,109.0) 106.8 188.8 8,566.3 8,501.9 52.6 273.5 15.9 3.4 96.0 441.4 (594.9) (153.5) 36.9 254.8 5.5 60.9 7.5 365.6 (690.9) (325.3) – – – – 4,092.7 4,092.7 – 5.1 – 0.9 0.1 6.1 (495.6) (489.5) 8,412.8 8,176.6 3,603.2 (2,648.4) (1,744.0) – (22.3) (179.0) (243.3) (22.8) (129.9) – – – – 5,563.1 6,036.6 3,603.2 76.9 13.3 373.6 0.1 – – 3,139.3 3,603.2 3,572.8 30.4 3,603.2 76.9 13.3 – 0.1 3,038.9 – 2,433.9 5,563.1 5,532.7 30.4 5,563.1 1188p 1188p 1215p 1215p 524.3 – – – 3,376.9 901.3 1,234.1 6,036.6 6,036.6 – 6,036.6 1151p 1132p 1176p 1155p – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – F I N A N C I A L S The combined reserves as at 31 March 2002 have been restated as required under merger accounting rules for the effects of the Scheme of Arrangement (‘scheme’), described in Note 1, to reflect the introduction of Land Securities Group PLC as the new holding Company.The restatement only affected consolidated reserves as Land Securities Group PLC did not trade prior to the scheme. I J Henderson A E Macfarlane Directors The financial statements on pages 44 to 65 were approved by the directors on 21 May 2003. LAND SECURITIES ANNUAL REPORT 2003 45 Consolidated cash flow statement for the year ended 31 March 2003 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 Investment property development expenditure Acquisitions and other capital expenditure* Additions to properties Sales of properties Investing in properties Increase in other tangible assets Net cash outflow on capital expenditure acquisitions Acquisitions Investment in joint venture Part repayment of loan capital by joint venture Equity dividends paid Cash outflow before use of liquid resources and financing Management of liquid resources Financing Issues of shares Repayment of B shares Purchase and cancellation of own ordinary shares Increase in debt Net cash inflow from financing Increase/(decrease) in cash in year *Includes £105.8m on the BBC developments and £14.4m on life cycle capital expenditure. Reconciliation of net cash flow to movements in net debt Increase/(decrease) in cash in year Cash (inflow)/outflow from (decrease)/increase in liquid resources Cash inflow from increase in debt Change in net debt resulting from cash flow Non-cash changes in debt Movement in net debt in year Net debt at 1 April Net debt at 31 March 46 Notes 27 2003 £m 484.4 12.0 (292.0) (280.0) (95.8) 2002 £m 406.2 4.2 (166.5) (162.3) (111.3) 108.6 132.6 (301.4) (311.8) (613.2) 436.3 (176.9) (12.9) (189.8) – 80.6 (176.6) (177.2) 57.5 1.2 (511.1) (5.1) 728.2 213.2 93.5 93.5 (57.5) (728.2) (692.2) 45.0 (256.4) (306.1) (562.5) 549.2 (13.3) (19.6) (32.9) (146.4) – (172.5) (219.2) (38.9) 1.1 – – 239.6 240.7 (17.4) (17.4) 38.9 (239.6) (218.1) 3.8 28(a) 25(a) 26(a) 26(a) 28(b) 28(a) 28(b) 29 29 (647.2) (1,942.1) (214.3) (1,727.8) 29 (2,589.3) (1,942.1) LAND SECURITIES ANNUAL REPORT 2003 Other primary statements for the year ended 31 March 2003 Statement of total recognised gains and losses Profit on ordinary activities after taxation (page 44) Unrealised deficit 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 recognised since last financial statements Note of historical cost profits and losses Profit on ordinary activities before taxation (page 44) 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 financial year Reconciliation of movements in shareholders’ funds Profit on ordinary activities after taxation (page 44) Dividends Retained profit for the financial year (page 44) Unrealised deficit on revaluation of investment properties Share of unrealised surplus on revaluation of properties held in joint venture Taxation on revaluation surpluses realised on sales of investment properties Issues of shares Repayment of B shares Purchase and cancellation of own ordinary shares Net change in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds Notes 26 26 26 Notes 26 26 7 8 Notes 8 26 26 26 26 26 26 26 26 2003 £m 229.9 (56.8) – (25.4) 147.7 2003 £m 319.6 281.2 (25.4) 575.4 (89.7) 485.7 (167.4) 318.3 2003 £m 229.9 (167.4) 62.5 (56.8) – (25.4) 62.4 (511.1) (5.1) 2002 £m 263.6 (105.5) 46.8 (12.0) 192.9 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) 4.3 – – (473.5) 6,036.6 5,563.1 18.8 6,017.8 6,036.6 F I N A N C I A L S LAND SECURITIES ANNUAL REPORT 2003 47 Notes to the financial statements for the year ended 31 March 2003 1. Basis of accounting In July 2002, Land Securities PLC announced proposals for the return of £541m to shareholders by way of a capital reorganisation, incorporating a Scheme of Arrangement. Following approval by shareholders in August 2002 and subsequent ratification by the Court in September, shareholders have exchanged their shareholdings in Land Securities PLC for a combination of shares in a newly formed Company, Land Securities Group PLC (“the Company”).This exchange, which was made on the basis of seven ordinary shares and eight B shares in the Company for every eight ordinary shares in Land Securities PLC, had the effect of introducing the Company as the new holding company of Land Securities PLC and its subsidiaries. Holders of B shares have the right to have their shares redeemed for 102p each in cash, although shareholders were given the choice of electing for an immediate redemption of these shares in September.Approximately 94% of shareholders elected for such immediate repayment with the remaining shareholders retaining their B shares for later redemption in accordance with their terms. The repayment of the B shares was effected by reducing the capital of the Company.This was achieved by cancelling and repaying the B shares held by those shareholders who had elected for immediate cash repayment and, in addition, the share capital of the Company was reduced by decreasing the nominal amount of each ordinary share issued pursuant to the scheme from 683p to 10p.This second reduction of capital has created distributable reserves of approximately £3.1bn which will be available to facilitate the repayment of the B shares held by shareholders who have elected for deferred repayment.The balance of the reserves will give the Company additional financial flexibility. The Company was incorporated on 7 February 2002 as Hackplimco (no. 104) plc and changed its name to Land Securities Group PLC on 25 June 2002. On 6 September 2002 the Company acquired 100% of the issued share capital of Land Securities PLC, following the implementation of the Scheme of Arrangement under section 425 of the Companies Act 1985, described above. In these results, the Company has accounted for its acquisition of Land Securities PLC using merger rather than acquisition accounting principles. Schedule 4A to the Companies Act 1985 and FRS6 ‘Acquisitions and Mergers’ requires acquisition accounting to be adopted where all the conditions laid down for merger accounting are not satisfied. Under the Scheme of Arrangement, not all of the conditions were satisfied because the fair value of the non-equity share element of the consideration (the redeemable B shares) issued by the Company for the shares in Land Securities PLC exceeded 10% of the nominal value of the equity share element of the consideration. However, in the opinion of the directors, the Scheme of Arrangement is a group reconstruction rather than an acquisition, since the shareholders of the Company are the same as the former shareholders in Land Securities PLC and the rights of each shareholder, relative to the others, are unchanged and no minority interest in the net assets of the Group is altered.Therefore, the directors consider that to record the Scheme of Arrangement as an acquisition by the Company, requiring the attribution of fair values to the assets and liabilities of the Group and reflecting only the post Scheme of Arrangement results within these financial statements would fail to give a true and fair view of the Group’s results and financial position. 48 Accordingly, having regard to the overriding requirement under section 227(6) of the Companies Act 1985 for the financial statements to give a true and fair view of the Group’s results and financial position, the directors have adopted merger accounting principles in drawing up these financial statements.The directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 1985 requirements. The financial information for the year ended 31 March 2002 has been restated for the effects of the Scheme of Arrangement.The combined reserves as at 31 March 2002 have been restated to reflect the introduction of the new holding company, as required under merger accounting rules.The impact of the reduction and return of capital is shown as movements in reserves in the current period when the Scheme of Arrangement was effected. However, as Land Securities Group PLC did not trade prior to the Scheme of Arrangement and had no material assets, the restatement only affected consolidated reserves. 2.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. 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 2003. Group undertakings and interests in joint ventures acquired during the year are accounted for from the date of acquisition. The joint venture is 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 which are treated as ‘joint arrangements’ in the Group’s financial statements.The Group’s share of the assets, liabilities, income and expenditure of these partnerships is included in the relevant sections of the consolidated profit and loss account and balance sheet as required by FRS9. (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. Surpluses and deficits relating to previous years realised on investment properties sold during the year are transferred directly from the revaluation reserve to retained profits and do not pass through the profit and loss account. Unrealised capital surpluses and deficits, including those arising on the periodic revaluation 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. Income is credited to the profit and loss account as space and other services are provided to customers. Gross property income includes costs recovered from tenants and outsourcing customers. In accordance with the Accounting Standards Board’s (ASB) Urgent Issues Task Force Abstract 28 ‘Operating Lease Incentives’ (UITF28) the Group treats any incentive for lessees to enter into lease agreements as a revenue cost and accounts for rental income from the commencement date of any rent-free period.The cost of all lease incentives (such as rent-free periods or contributions to tenants’ fitting out costs) is, therefore, offset against the total rent due and the net rental income is then spread evenly over the shorter of the period from the rent commencement date to the date of the next rent review or the lease end date. (d) Bid costs In accordance with the ASB’s Urgent Issues Task Force Abstract 34 ‘Pre-contract Costs’ (UITF34), bid costs incurred prior to the exchange of a contract, with no material pre- conditions to completion, and which do not comprise incidental costs associated with the acquisition of fixed assets or finance costs, are expensed. (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 costs 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 5. (f) Taxation In accordance with FRS16 ‘Current Taxation’, taxation arising on the sales of properties is charged to the profit and loss account in respect of the excess of net sale proceeds over book value and to the statement of total recognised gains and losses in respect of prior year revaluation surpluses realised on those sales. 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 which they are carried in the financial statements. However an estimate of the potential liability is shown in Note 24. In accordance with FRS19 ‘Deferred Tax’: (i) 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 (ii) deferred tax is not recognised on revaluation gains and losses where these are not taken to the profit and loss account LAND SECURITIES ANNUAL REPORT 2003 Notes to the financial statements for the year ended 31 March 2003 and a reasonable estimate can be made of the amount of the obligation. Provision is made for dilapidations that will crystallise in the future where, on the basis of the present condition of the property, an obligation already exists and can be reliably estimated.The estimate will be revised if necessary over the remaining period of the lease to reflect changes in the condition of the building or other changes in circumstances. Unless there is evidence to the contrary, it is assumed that the dilapidations obligation arises in the last five years of a lease.The estimate of the amount of the obligation takes account of relevant external advice. (n) Financial instruments The Group uses interest rate swaps to help manage its interest rate risk. Where interest rate swaps are hedging existing interest rate exposures or are expected to hedge future interest rate exposures, the differences between the interest payable by the Group and the interest payable to the Group by the swap counterparties are dealt with on an accruals basis. Where interest rate swaps are not deemed likely to hedge interest rate exposures for the foreseeable future, the mark to market value of the relevant interest rate swaps is taken to the profit and loss account. Gains and losses arising on the cancellation of swaps are taken to the profit and loss account unless the swaps had been pre-designated as hedging specific borrowings. In the latter case, the accounting treatment of the gain or loss on cancelling the swaps will typically mirror the accounting treatment of the hedged borrowing. F I N A N C I A L S (iii) full provision is made for timing differences which, in the Group’s case, arise primarily from capital allowances and industrial building allowances and the capitalisation and timing of recognition of certain interest payable. Following the sale or demolition of a property, any deferred tax provision not crystallised is released to the profit and loss account. (g) Goodwill Goodwill arising on the acquisitions of group undertakings, calculated as the excess of cost over the fair value of net assets acquired, is capitalised in the year in which it arises and amortised to the profit and loss account over 20 years or its useful life, whichever is the shorter. (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 2003. Properties are treated as acquired when the Group enters into an unconditional purchase contract and as sold when subject to an 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). Pre- commitment expenditure incurred in studying the feasibility of potential development and refurbishment schemes is written off to the profit and loss account and included in ‘other direct property expenditure’ if it is likely that the related project will be abortive or that the expenditure will be of no benefit to an alternative scheme that is being pursued. Other overhead costs in respect of developments and refurbishments are treated as revenue expenditure and written off as incurred. (ii) Capitalisation of interest Gross interest associated with direct expenditure on properties under development or undergoing major refurbishments 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. (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. 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 Land Securities 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, and are subject to periodic impairment reviews. Such reviews compare forecast book values with forecast net sales proceeds at the point in the future when the assets are expected to be sold. Provisions are made if any shortfall in value is identified. 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 freehold building is capitalised and depreciated over the appropriate periods up to a maximum of 50 years. Capital expenditure on leasehold properties is depreciated over the shortest of the life of the asset, the expected period of occupation of the relevant building and the remaining life of the underlying property outsourcing contract. Repair and maintenance expenditure is written off to the profit and loss account as incurred. (j) Other tangible fixed assets These comprise computers, motor vehicles, furniture, fixtures and fittings, improvements to Group offices and the costs of developing Landflex products and are depreciated on a straight-line basis over their estimated useful lives of between two and five years. (k) Investments in group undertakings The Company’s investments in the shares of group undertakings are carried at cost. 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 value of the net assets acquired, the difference is treated as goodwill and capitalised in the Group’s balance sheet in the year of acquisition.The goodwill arising is amortised to the profit and loss account in accordance with Note (g). 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 those properties held as stock for sale and, being current assets, are carried at the lower of cost and net realisable value.Trading profits are recognised upon exchange of contracts for the unconditional sale of property. Costs of sale include direct costs plus an appropriate proportion of infrastructure costs attributable to the property. 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 (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 LAND SECURITIES ANNUAL REPORT 2003 49 Notes to the financial statements for the year ended 31 March 2003 3. Segmental information Property (i) Profit and loss account Rental income (Note (iii)(b)) Service charges and other recoveries (Note (iii)(c)) £m (Note (iii)(a)) 519.7 55.9 Total Total investment outsourcing £m property Property trading £m Group £m 519.7 55.9 Joint venture £m 2003 Total £m 519.7 55.9 Property investment outsourcing £m property Property trading £m £m (Note (iii)(a)) 525.9 53.1 Group £m 525.9 53.1 Joint venture £m 2002 Total £m 525.9 53.1 Property services income (Note (iii)(d)) – Unitary charge – Capital projects and other reimbursable costs Proceeds of sales of trading properties Gross property income (page 44) Rents payable Other direct property or contract expenditure (Note (iii)(e)) Indirect property or contract expenditure (Note (iii)(f)) Bid costs Costs of sales of trading properties Depreciation (Note (iii)(g)) Amortisation of goodwill Profit on sales of fixed asset properties Segment profit Common costs (Note (iii)(h)) Group reorganisation costs Operating profit (page 44) Profit on sales of fixed asset properties (page 44) Profit on ordinary activities before interest and taxation (page 44) 342.4 149.6 492.0 575.6 (17.0) 492.0 (97.5) 3.7 3.7 – 492.0 3.7 166.3 1.9 658.3 5.6 1,071.3 (114.5) 168.2 1,239.5 (49.9) (164.4) 579.0 (17.4) 295.8 61.9 357.7 357.7 (92.7) 40.4 40.4 – 357.7 40.4 977.1 (110.1) 48.5 406.2 40.4 48.5 1,025.6 (124.5) (14.4) (71.1) (328.3) – (399.4) – (399.4) (62.0) (187.9) – (249.9) – (249.9) (33.8) – (104.9) 453.7 (9.8) – 443.9 26.5 470.4 (7.7) (4.7) (340.7) 53.8 (14.9) (2.2) 36.7 0.1 36.8 (1.5) – (1.5) (2.4) (0.2) – – (0.2) – (0.2) (43.0) (4.7) (447.1) (2.4) 507.3 (24.7) (2.2) 480.4 26.6 507.0 (14.1) – (57.1) (4.7) (14.1) (461.2) (3.8) (1.4) 102.8 (15.0) – 610.1 (39.7) (2.2) 87.8 15.1 568.2 41.7 102.9 609.9 (11.7) (6.3) 550.2 41.7 591.9 (29.4) – (91.4) 470.2 (4.0) – 466.2 10.1 476.3 (16.7) (6.7) (211.3) 53.7 (10.9) (2.3) 40.5 3.3 43.8 (1.5) – (1.5) (34.6) 4.3 – – 4.3 – 4.3 (47.6) (6.7) (304.2) (34.6) 528.2 (14.9) (2.3) 511.0 13.4 524.4 (3.0) (8.0) (11.0) – (50.6) (14.7) (315.2) (34.6) 23.1 (3.8) – 19.3 – 551.3 (18.7) (2.3) 530.3 13.4 19.3 543.7 (13.5) – 516.8 13.4 530.2 Property investment £m Total property outsourcing £m Property trading £m 2003 Total £m Property investment £m Total property outsourcing £m Property trading £m 2002 (restated) Total £m (ii) Net assets Properties in development programme (Note 13) Other investment properties Operating properties Other tangible and intangible fixed assets Fixed assets Investment in joint venture Net current (liabilities)/assets 967.4 6,856.5 – 12.0 7,835.9 – (excluding financing and dividends) (114.3) 7,721.6 Financing and dividends Long term liabilities and provisions Net assets – – 557.4 66.2 623.6 106.8 37.9 768.3 – – – – – – 64.1 64.1 967.4 6,856.5 557.4 78.2 8,459.5 106.8 (12.3) 8,554.0 (2,789.6) (201.3) 5,563.1 790.8 7,009.2 – 17.7 7,817.7 – (275.5) 7,542.2 – – 428.9 66.5 495.4 188.8 (22.2) 662.0 – – – – – – 43.7 43.7 790.8 7,009.2 428.9 84.2 8,313.1 188.8 (254.0) 8,247.9 (2,058.6) (152.7) 6,036.6 (iii) Notes to the segmental information (a) Includes the results of investment properties under development and the Group’s share of the results of its development partnerships (Note 32). (b) As a consequence of adopting UITF28, rental income includes £7.3m (2002 £3.5m) of rent receivable allocated to rent free periods falling in the respective financial years. Rental income also include the net income from managed operations e.g. car parks, food courts, serviced offices and flats. (c) Includes income in relation to service charges and directly recoverable expenditure together with any chargeable management fee. (d) Property services income represents unitary charges and the recovery of other direct property or contract expenditure reimbursable by customers. (e) Other direct property or contract expenditure are costs incurred in the direct maintenance and upkeep of properties together with the costs of rent reviews, lease renewals and relettings of properties and in providing services in compliance with outsourcing contracts together with additional costs incurred at the request of customers and reimbursable by them. Void costs, which include those relating to empty properties pending redevelopment and refurbishment costs, and costs of development schemes which are not proceeded with are also included. It includes pre-commitment costs written off of £3.1m (2002 £Nil). 50 LAND SECURITIES ANNUAL REPORT 2003 (f) Indirect property or contract expenditure are indirect costs of managing the portfolio. It includes the cost of staff involved in development projects and all office administration and operating costs other than common costs. (g) Depreciation includes £5.9m (2002 £Nil) of accelerated depreciation relating to a re-assessment of the remaining useful lives of certain information systems used by the property investment business. (h) Common costs comprise all costs associated with central Group management including Company secretarial and non-executive directors, their premises costs and non-segment related depreciation charges. The Group total of indirect property or contract expenditure, depreciation and common costs includes: Notes to the financial statements for the year ended 31 March 2003 Auditors’ remuneration: Audit fees (Company: £80,000; 2002 £Nil) Non-audit fees for: Bids – Land Securities Trillium new business Taxation Other advice Directors’ remuneration Depreciation (including depreciation in ‘common costs’ in (i) above) 2003 £m 0.5 0.2 1.0 0.5 1.7 3.2 26.4 In addition, the auditors also received non-audit fees of £0.5m (2002 £2.6m) from Telereal. £0.4m (2002 £1.6m) of this was paid to PwC Consulting before it was sold to IBM. 4. Finance Interest receivable: Short term deposits Other interest receivable Loan to joint venture Interest payable: Borrowings not wholly repayable within five years Borrowings wholly repayable within five years Other interest payable Loans from joint venture partners Deficit on purchase and redemption of convertible bonds (Note 22) Cost of cancellation/novation of interest rate swaps Less: Capitalised in relation to properties under development Group £m 2003 Joint venture £m 0.9 3.4 7.7 12.0 117.2 76.2 2.5 195.9 28.2 23.5 (39.0) 208.6 2.4 2.4 70.1 70.1 7.7 – 0.3 – 78.1 Total £m 0.9 5.8 7.7 14.4 187.3 76.2 2.5 266.0 7.7 28.2 23.8 (39.0) 286.7 Group £m 2002 Joint venture £m 3.3 0.9 – 4.2 132.6 32.6 3.0 168.2 – – – (21.1) 147.1 0.8 – 0.8 20.0 3.7 0.9 24.6 – – – – 24.6 2002 £m 0.3 0.2 0.4 0.7 1.3 4.2 16.0 Total £m 4.1 0.9 – 5.0 152.6 36.3 3.9 192.8 – – – (21.1) 171.7 F I N A N C I A L S Interest has been capitalised at the Group’s pre-tax weighted average borrowing rate for non-specific borrowings for the year of 8.3% (2002 8.5%) as explained in Note 2(h)(ii). Non-specific borrowings exclude certain bank debt which is specific to the PRIME contract. Interest payable on borrowings wholly repayable within five years includes £6.7m of arrangement fees out of a total of £8.4m incurred in relation to the utilised proportion of the £1.5bn of new committed bank facilities (Note 21) put in place during the year. The balance of the arrangement fees is being amortised over the remaining lives of the facilities. 5. Staff, directors and pensions 2003 No. 2002 No. 2003 £m 2002 £m 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 392 984 52 329 777 51 1,428 1,157 Staff costs Salaries Social Security Other pension Incentive schemes 31.6 43.2 0.6 75.4 52.3 6.4 9.5 7.2 75.4 22.9 32.8 0.6 56.3 40.1 4.7 4.9 6.6 56.3 In addition to the above, 338 staff have been transferred from BT, in accordance with TUPE regulations, to Land Securities Trillium Telecom Services Limited, a wholly owned subsidiary of Land Securities PLC.These staff are made available to Telereal Services Limited to deliver services to BT.All related staff costs are reimbursed to the Group by Telereal Services Limited. LAND SECURITIES ANNUAL REPORT 2003 51 Notes to the financial statements for the year ended 31 March 2003 5. Staff, directors and pensions (continued) Directors Aggregate emoluments excluding pensions Aggregate gains made on the exercise of share options (2003 £Nil; 2002 £48,100) Company contributions to pension schemes 2003 £m 2.4 – 0.5 2.9 2002 £m 2.8 – 1.3 4.1 Four directors (2002 four) have retirement benefits accruing under money purchase pension schemes. Retirement benefits accrue to one (2002 two) director under the Group’s defined benefit pension scheme. Information on directors’ emoluments, share options and interests in the Company’s shares is given in the Remuneration Committee’s Report on pages 36 to 41. Pensions The charge to 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 2003 £m 3.2 3.2 3.6 10.0 2002 £m 3.1 1.0 2.6 6.7 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 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 Actuarial value of assets (% of market value) At valuation 6 April 2001 % 5.00 2.75 6.50 5.50 2.75 106.00 The valuation showed that there was a deficit of £1.2m.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. However, the situation has deteriorated since April 2001 as explained below. 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 2003. 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 1 July 2003. The year to 31 March 2003 has been marked by further falls in the market value of equities and this has, in common with other UK pension schemes, resulted in a material deterioration of the funding position of the scheme and the deficit.The impact of this change is reflected in the additional disclosures required under FRS17 shown below. As a result of the decline in the funding position of the scheme since the last full actuarial valuation in April 2001, in March 2003 the Group made an additional one-off cash contribution of £7.5m together with the first payment of an additional annual contribution of £1.5m recommended by the scheme’s actuary.The additional annual contributions will be subject to review in the light of future market conditions and valuations.The £7.5m contribution is being amortised and charged to the profit and loss account over 10 years, the estimated remaining service life of the Scheme’s active members.The pension charge for the current year reflects the amortisation and the initial £1.5m additional contribution as variations from regular cost. 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 further separate similar scheme, previously set up by Trillium, is also in operation for Land Securities Trillium staff. Other schemes 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. During the year the Group participated in the BBC pension scheme in respect of 168 employees who were transferred from the BBC to Land Securities Trillium Media Services Limited as part of Land Securities Trillium’s outsourcing contracts with the BBC. Separate pension arrangements have been set up for these employees with effect from 1 April 2003. Land Securities Trillium Telecom Services Limited has put in place a defined benefit scheme with the same terms and conditions as the BT scheme for 333 staff who transferred from BT to the 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 of Land Securities PLC 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. 52 LAND SECURITIES ANNUAL REPORT 2003 Additional disclosures under FRS17 ‘Retirement Benefits’ As noted above, a full actuarial valuation of the Scheme was undertaken on 6 April 2001. This valuation has been updated to 31 March 2003 for the purposes of the following additional disclosures required by the transitional provisions of FRS17. The major assumptions used in this valuation, in nominal terms, were: Notes to the financial statements for the year ended 31 March 2003 Rate of increase in pensionable salaries Rate of increase in pensions in payment Discount rate Inflation 2003 % 4.75 2.50 5.50 2.50 2002 % 5.00 2.75 6.00 2.75 Following the increased contributions made in March 2003, the pension fund deficit was estimated at some £18.6m in March 2003. The market value of the assets in the Scheme (including the 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 Analysis of gains and losses* Actual return less expected return on pension scheme assets Experience gains and losses arising on the scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities Actuarial loss Movement in deficit during the year Deficit in the scheme at the beginning of the year Current service cost Employer contributions Other income plus any risk benefit premiums paid direct to insurer Impact of settlements and curtailments Actuarial loss Deficit in the scheme at the end of the year History of experience gains and losses Difference between the actual and expected return on scheme assets Value of plan assets Percentage of scheme assets Experience gains on scheme liabilities Present value of scheme liabilities Percentage of the present value of scheme liabilities Actuarial loss Present value of scheme liabilities Percentage of the present value of scheme liabilities Analysis of amount charged to operating profit* Current service cost Curtailment and settlement costs Total operating charge LAND SECURITIES ANNUAL REPORT 2003 Expected rate of return 2002 2003 % % 7.5 7.5 5.5 6.0 3.75 4.0 Fair value 2003 £m 31.9 34.1 10.4 76.4 (95.0) (18.6) 5.6 (13.0) 2002 £m 46.2 28.7 2.7 77.6 (87.5) (9.9) 3.0 (6.9) 2003 £m (16.3) 2.7 (3.6) (17.2) 2003 £m (9.9) (3.2) 12.3 0.3 (0.9) (17.2) (18.6) 2003 £m (16.3) 76.4 F I N A N C I A L S –21.3% 2.7 95.0 2.8% (17.2) 95.0 –18.1% 2003 £m 3.2 0.9 4.1 53 Notes to the financial statements for the year ended 31 March 2003 5. Staff, directors and pensions (continued) Analysis of amount credited to other finance income* Expected return on pension scheme assets Interest on pension liabilities Net return 2003 £m 5.3 (5.3) – *These analyses show the amounts that would have been recognised in the statement of recognised gains and losses and the profit and loss account had FRS17 been fully implemented. The consolidated balance sheet includes a net pension asset of £6.7m representing the unamortised balance of the £7.5m special contribution paid in March 2003.A full adoption of FRS17 would result in the pension asset being replaced by the net pension liability of £13.0m, giving rise to a decrease in net assets of £19.7m. 6. Executive and savings related share option schemes At 1 April 2002 Granted Exercised (Notes 25(a) & (b)) Lapsed At 31 March 2003 Option price 650p 812p 756p 2002 Executive share option scheme – 107,500 – – 107,500 No. of options 2000 Executive share option scheme 2,683,562 1984 1993 Executive Savings related share option schemes 519,900 363,386 share option scheme 205,750 1,159,000 – (40,000) (72,750) – (101,844) (128,242) 3,802,562 133,000 653,200 The options outstanding under the 2002 Executive Share Option Scheme are exercisable at 756p up to 2012, provided the associated performance conditions are met, those under the 2000 scheme at prices between 801p and 869p up to 2012, and those under the 1984 scheme at 618.6p up to July 2004. The options outstanding under the savings related share option schemes are exercisable at prices between 494p and 736p, after three, five or seven years from the date of grant. 7.Taxation Current tax Corporation tax on Group profit for the year at 30% (2002 30%) Adjustments to current taxation in respect of prior years Share of joint venture’s taxation Current tax Deferred tax – Group (Note 24) Tax charge for the period (page 44) Factors affecting the tax charge for the period The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 30% (2002 30%). The differences are explained below: Profit on ordinary activities before taxation (page 44) Profit on ordinary activities multiplied by the standard rate of corporation tax at 30% Add: Disallowable expenses/non-taxable items Add:Telereal depreciation and goodwill amortisation Release of deferred tax on property disposals (Note 24) Adjustments to current and deferred taxation in respect of prior years Reduced rate of tax on profits on disposal of assets Taxation charge for the period (page 44) Add back: Depreciation Add back: Capital allowances Add back: Capitalised interest and other timing differences Current tax 2003 £m 32.0 (7.8) 14.5 38.7 51.0 89.7 319.6 95.9 1.9 5.3 103.1 (8.2) (1.8) (3.4) 89.7 7.9 (26.9) (32.0) 38.7 2002 £m 92.8 0.2 – 93.0 6.9 99.9 363.5 109.1 2.2 1.8 113.1 (10.7) (0.2) (2.3) 99.9 5.6 (16.9) 4.4 93.0 The Group’s share of the joint venture’s tax charge is stated after disallowing depreciation charges but without the availability of capital allowances which were retained by British Telecom plc. Included in the tax charge is a net credit of £12.6m (2002 £1.2m) attributable to property sales, bid costs and the exceptional items analysed on page 44.A tax credit of £15.6m (2002 £Nil) is attributable to exceptional items. 54 LAND SECURITIES ANNUAL REPORT 2003 8. Dividends Dividends per ordinary share Profit and loss account Notes to the financial statements for the year ended 31 March 2003 Ordinary shares – interim – final B shares Additional prior year dividends – ordinary shares 2003 pence 9.50 26.00 2002 pence 9.05 24.95 35.50 34.00 2003 £m 44.1 121.1 0.5 1.7 167.4 2002 £m 47.5 130.9 – 178.4 B shares carry the right to a dividend of 70% of six month LIBOR paid twice yearly.The dividend rate for the first dividend period to 17 April 2003 was 2.8% of the nominal value of the shares. Additional prior year dividends relate to increases in share capital arising after the respective prior period ends but before their corresponding dividend record dates. 9. Earnings per share Earnings per share Effect of dilutive securities: Convertible bonds Share options Diluted earnings per share Adjusted earnings per share Earnings per share Effect of results of fixed asset property disposals, bid costs and exceptional items after taxation Effect of deferred tax arising from capital allowances on investment properties Adjusted earnings per share Diluted earnings per share Effect of results of fixed asset property disposals, bid costs and exceptional items after taxation Effect of deferred tax arising from capital allowances on investment properties Adjusted diluted earnings per share Profit after taxation and preference and B share dividends Weighted average number of ordinary shares 2003 £m 229.4 – 229.4 229.4 16.5 2.9 248.8 229.4 16.5 2.9 248.8 2002 £m 263.6 10.9 274.5 2003 m 493.8 – 0.1 493.9 2002 m 524.2 29.7 0.2 554.1 263.6 493.8 524.2 1.2 5.9 270.7 274.5 1.2 5.9 493.8 493.9 524.2 554.1 281.6 493.9 554.1 Earnings per share 2003 pence 46.46 2002 pence 50.27 46.44 49.54 46.46 3.35 0.58 50.39 46.44 3.34 0.58 50.36 50.27 0.24 1.10 51.61 49.54 0.23 1.04 50.81 As explained in Note 22, £196.8m of the nominal value of the Group’s convertible bonds were purchased and redeemed during the year at a loss over book value of £28.2m. FRS14 requires the post-tax effect of all changes in income or expense that would arise from conversions into dilutive potential ordinary shares to be taken into account in deriving earnings to be used in the calculation of diluted earnings per share. For the year ended 31 March 2003, the convertible bonds have not been included in the calculation of diluted earnings per share because adjusting earnings by the loss on redemption results in the convertible bonds becoming accretive, rather than dilutive, to earnings per share. In accordance with FRS14 ‘Earnings per share’, the earnings per share for the prior year have not been restated for the effects of the Group’s Scheme of Arrangement referred to in Note 1. Profits on the sales of fixed asset properties, bid costs and exceptional items (comprising the deficit arising on the purchase and redemption of convertible bonds, cost of cancellation/novation of interest rate swaps and the costs of reorganising the Group) are excluded from adjusted earnings as these are non-recurring items. The additional deferred tax arising from capital allowances on investment properties 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 also been disclosed, therefore, to show measures of earnings that better reflect the principal operating activities of the Group. 10. Net assets per share Equity shareholders’ funds Number of ordinary shares Net assets per share F I N A N C I A L S Net assets per share Effect of deferred tax arising from capital allowances on investment properties Adjusted net assets per share Net assets per share Adjustments for convertible bonds Exercise of outstanding share options Diluted net assets per share Diluted net assets per share Effect of deferred tax arising from capital allowances on investment properties Adjusted diluted net assets per share 2003 £m 5,532.7 124.7 5,657.4 5,532.7 – 2002 £m 6,036.6 128.3 6,164.9 6,036.6 243.3 5,532.7 6,279.9 5,532.7 124.7 5,657.4 6,279.9 128.3 6,408.2 2003 m 465.6 465.6 465.6 – 0.1 465.7 465.7 2002 m 524.3 524.3 524.3 29.7 0.8 554.8 554.8 465.7 554.8 2003 pence 1188 27 1215 1188 1188 1188 27 1215 2002 pence 1151 25 1176 1151 1132 1132 23 1155 The additional deferred tax liability arising from capital allowances on investment properties is excluded from the calculations of the adjusted values as the Group’s experience is that deferred tax on capital allowances in relation to such properties is unlikely to crystallise in practice. LAND SECURITIES ANNUAL REPORT 2003 55 Notes to the financial statements for the year ended 31 March 2003 11. Goodwill At 1 April 2002 Amortisation for the year At 31 March 2003 Cost Amortisation £m 42.0 42.0 £m (3.1) (2.2) (5.3) Net £m 38.9 (2.2) 36.7 The goodwill arose on the acquisition of Trillium Investments GP Limited in November 2000 by Land Securities PLC when it was calculated as the excess of cost over the fair value of net assets acquired. It was capitalised in the year in which it arose and is amortised on a straight-line basis over the remaining life of the PRIME contract. 12. Investment properties (including development programme assets) At 1 April 2002: Net book amount Additions Reclassifications Sales Depreciation Unrealised deficit on revaluation (Note 26(a)) At 31 March 2003: Net book amount Amount included in prepayments under UITF28 Market value (page 69) Leasehold Over 50 years to run £m 2,020.9 187.7 – (169.1) Under 50 years to run £m 63.8 0.8 (2.4) (1.7) 2,039.5 – (25.6) 2,013.9 8.0 2,021.9 60.5 (1.5) (8.9) 50.1 0.1 50.2 Freehold £m 5,715.3 289.8 2.4 (225.3) 5,782.2 – (22.3) 5,759.9 12.0 5,771.9 Total £m 7,800.0 478.3 (396.1) 7,882.2 (1.5) (56.8) 7,823.9 20.1 7,844.0 Investment properties in this note refer to those properties included in the Investment Portfolio as defined in the Glossary (page 87). At 31 March 2003, the cumulative interest capitalised in relation to investment properties under development amounts to £70.5m (2002 £39.7m). Freeholds include £408.9m (2002 £366.1m) of leaseholds with unexpired terms exceeding 900 years; leaseholds under 50 years to run include £12.1m (2002 £10.3m) with unexpired terms of 20 years or less. The historical cost of investment properties is £4,577.9m (2002 £4,261.4m). 13. Development programme The movements in the carrying value of investment properties forming the development programme (excluding the BBC developments and trading properties) included in Note 12, are as follows: At 1 April 2002: at market value – as previously reported Less: Prior year adjustment to adopt revised definition of development programme At 1 April 2002 as restated Properties transferred into the development programme during the year (at 1 April 2002 valuation) Part disposal during the year Expenditure during the year including development property acquisitions Capitalised interest Deficit on valuation Developments completed, let and transferred out of development programme during the year At 31 March 2003: at market value £m 1,050.1 (259.3) 790.8 2.5 (3.3) 291.1 30.8 (30.1) 1,081.8 (114.4) 967.4 To aid clarity, the classification of projects forming the ‘development programme’ was revised during the year.As a result the development programme now includes: – Developments which are completed but less than 95% let – Developments on site – Committed developments (being projects which are approved and the building contract let) – Authorised developments (Board approved projects for which the building contract has not yet been let) Projects in these classifications are sufficiently firm to ensure that reporting from period to period provides a good basis for performance comparison. ‘Proposed developments’ are excluded from the ‘development programme’ as experience has shown that these schemes can be subject to substantial revision. However, the Group will continue to give an indication of the likely size and timing of these schemes and their potential impact on cash flow when discussing the ‘development pipeline’, which combines both the development programme and proposed schemes. Developments are taken out of the development programme when physically complete and 95% let. Schemes completed during the year comprise retail parks at Cheetham Hill, Manchester, Phase 1 of Almondvale, Livingston, Designer Outlet Mall, Livingston, Lakeside Retail Park,West Thurrock, a new unit at Markham Road, Chesterfield, Neptune Point, Cardiff and Bessemer Road,Welwyn Garden City. In addition to the development programme, investment properties include properties to the value of £180.5m in respect of proposed developments. 56 LAND SECURITIES ANNUAL REPORT 2003 14. Operating properties Cost At 1 April 2002 Additions Sales At 31 March 2003 Accumulated depreciation At 1 April 2002 Depreciation for the year Sales At 31 March 2003 Net book amount* At 31 March 2003 At 31 March 2002 15. Properties Book amount/cost At 1 April 2002 Additions Reclassifications Sales Unrealised deficit on revaluation (Note 26(a)) At 31 March 2003 Accumulated depreciation At 1 April 2002 Depreciation for the year Sales At 31 March 2003 Net book amount At 31 March 2003 At 31 March 2002 Notes to the financial statements for the year ended 31 March 2003 Freehold land and buildings £m Leasehold buildings Over 50 years to run £m Under 50 years to run £m 341.6 129.3 (8.3) 462.6 (5.9) (4.4) 0.1 (10.2) 452.4 335.7 45.3 0.4 (2.5) 43.2 (1.1) (0.9) (2.0) 41.2 44.2 Total £m 8,238.0 625.7 – (406.9) 8,456.8 (56.8) 8,400.0 (9.1) (9.7) 0.1 (18.7) 50.0 17.7 – 67.7 (1.0) (2.9) (3.9) 63.8 49.0 7,801.1 478.3 – (396.1) 7,883.3 (56.8) 7,826.5 (1.1) (1.5) – (2.6) Investment properties (Note 12) £m Operating properties (Note 14) £m Leasehold Over 50 years to run £m Under 50 years to run £m 2,066.2 188.1 – (171.6) 2,082.7 (25.6) 2,057.1 (1.1) (0.9) – (2.0) 114.9 18.5 (2.4) (1.7) 129.3 (8.9) 120.4 (2.1) (4.4) – (6.5) Freehold £m 6,056.9 419.1 2.4 (233.6) 6,244.8 (22.3) 6,222.5 (5.9) (4.4) 0.1 (10.2) 6,212.3 2,055.1 113.9 8,381.3 7,823.9 6,051.0 2,065.1 112.8 8,228.9 7,800.0 Total £m 436.9 147.4 (10.8) 573.5 (8.0) (8.2) 0.1 (16.1) 557.4 428.9 F I N A N C I A L S 436.9 147.4 – (10.8) 573.5 – 573.5 (8.0) (8.2) 0.1 (16.1) 557.4 428.9 57 *comprises £184.7m (2002 £70.5m) relating to the BBC and the balance in respect of PRIME and other corporate assets. At 31 March 2003, the cumulative interest capitalised in operating properties under development amounts to £9.0m (2002 £0.8m). At 31 March 2003, the cumulative capitalised interest in investment and operating properties amounts to £79.5m (2002 £40.5m). LAND SECURITIES ANNUAL REPORT 2003 Notes to the financial statements for the year ended 31 March 2003 16. Commitments for future expenditure on properties (in the development pipeline) Group Company Under contract Board authorisations not contracted Contracted and authorised commitments 2003 £m 586.6 82.2 668.8 Less: Commitments outside the development programme Estimated additional expenditure on the development programme and proposed schemes (excluding future interest) Capital creditors (included in Note 20) relating to the development programme (175.4) 897.4 53.2 2003 £m – – – 2002 £m 574.1 312.1 886.2 (70.3) 918.2 86.9 Total outstanding cash outlay on the development pipeline and the BBC development 1,444.0 1,821.0 17. Other tangible fixed assets At 1 April 2002 Additions Disposals Depreciation for the year At 31 March 2003 Cost Depreciation £m 72.0 13.4 (1.7) 83.7 £m (26.7) 1.2 (16.7) (42.2) 2002 £m – – – Net £m 45.3 13.4 (0.5) (16.7) 41.5 Other tangible fixed assets include computers, motor vehicles, furniture, fixtures and fittings, improvements to Group offices and £1.0m (2002 £Nil) for Landflex product development costs. 18. Investment in group undertaking At 1 April 2002 On acquisition of Land Securities PLC Dividend receivable from group undertaking At 31 March 2003 £m – 4,087.1 5.6 4,092.7 On 6 September 2002 the Company acquired 100% of the issued share capital of Land Securities PLC, a Company incorporated and operating in the United Kingdom, under a share exchange following the implementation of the Scheme of Arrangement described in Note 1. The cost of acquiring Land Securities PLC has been determined based on the share price of that Company on 6 September 2002 of 770 pence per share.The excess of the cost of acquisition over the nominal value of the shares issued by the Company to acquire the investment in Land Securities PLC has been credited to the merger reserve of the Company.The merger reserve does not represent a realised or distributable profit. 19. 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 Group 2003 £m 112.4 24.6 52.0 84.5 – 273.5 15.9 15.9 2002 £m 96.1 27.9 49.6 81.2 – 254.8 5.5 5.5 Company 2003 £m 2002 £m – – – – 5.1 5.1 – – – – – – – – – – Included within trade debtors are balances of £58.7m (2002 £49.7m) and £15.0m (2002 £10.1m) due to Land Securities Trillium from the DWP and the BBC respectively. 58 LAND SECURITIES ANNUAL REPORT 2003 20. Creditors falling due within one year Group Company Notes to the financial statements for the year ended 31 March 2003 Debentures and loans (Note 21) Loans from group undertakings Overdrafts Trade creditors Taxation and Social Security Proposed final dividend Capital creditors Other creditors Accruals and deferred income 2003 £m 23.5 16.8 58.5 23.9 121.1 69.2 15.4 266.5 594.9 2002 £m 1.4 21.8 28.9 68.4 130.8 108.3 29.6 301.7 690.9 2003 £m – 374.1 – – – 121.1 – – 0.4 495.6 2002 £m – – – – – – – – – – 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 (2002 £0.3m) of instalments of borrowings that mature after more than one year. The Company’s loans from group undertakings comprises £338.1m repayable on the earlier of 31 December 2005 and demand and £36.0m with no fixed repayment date. 21. Debentures, bonds and loans Group Unsecured 10 3/4 per cent Exchange Bonds due 2004 9 1/2 per cent Bonds due 2007 £400m 5 7/8 per cent Bonds due 2013 £200m 9 per cent Bonds due 2020 £200m 6 3/8 per cent Bonds due 2024 Syndicated bank debt Secured 6 1/4 per cent Mortgage Debenture 2000/05 6 1/2 per cent Mortgages 2000/05 7 3/4 per cent Mortgage 2008 6 3/8 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 20) Falling due after more than one year 2003 £m 21.2 200.0 394.0 196.8 197.9 600.5 1,610.4 8.4 8.4 5.5 32.3 400.0 200.0 200.0 206.9 1,061.5 2,671.9 (23.5) 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 1,062.6 1,745.4 (1.4) 2,648.4 1,744.0 Company 2003 £m 2002 £m – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – F I N A N C I A L S The issues of £400m 5 7/8 per cent Bonds due 2013 and £200m 6 3/8 per cent Bonds due 2024 on 27 February 2003 at £98.99 per £100 and £99.69 per £100 respectively were made partly to re-finance the short term bank debt incurred in the return of capital and redemption of convertible bonds earlier in the year. In accordance with FRS4 ‘Capital Instruments’ these bonds are included net of the discount and the issue expenses which are being amortised at a constant rate over the remaining lives of the bonds. Notices have been issued to redeem the 6 1/4 per cent Mortgage Debenture 2000/05 and the 6 1/2 per cent Mortgages 2000/05 on 30 September 2003. The carrying value of the secured bank loan comprises the loan amount (currently £198.4m), the fair value of the linked interest rate swap outstanding at the time of the acquisition of Trillium and the upfront arrangement fees relating to this funding. Both the swap and the upfront fees are being written off over the life of the borrowings. Either party to the swap can terminate the agreement on 15 April 2005 and every second anniversary thereafter. The interest rate on the secured bank loan, which is variable, includes a margin which varies according to the Group’s credit rating.This has been swapped into a current fixed rate of 6.85%. Secured loans are charged on properties of group undertakings. From time to time, short term deposits are charged as temporary security until substitutions have been agreed for properties taken out of charge.The bank loan is secured on the unitary charge receivable from the DWP under the PRIME Agreement and also on most properties held by Land Securities Trillium. In May 2002 the Group put in place £1.5bn of additional bank facilities. £600m of these facilities were cancelled at the time of the issue of the £400m 5 7/8 per cent Bonds due 2013 and the £200m 6 3/8 per cent Bonds due 2024 and a further £100m of the facilities were cancelled in May 2003 shortly before their scheduled expiry date. LAND SECURITIES ANNUAL REPORT 2003 59 Notes to the financial statements for the year ended 31 March 2003 22. Convertible bonds £210m 6 per cent Guaranteed Convertible Bonds due 2007 7 per cent Convertible Bonds due 2008 Group Company 2003 £m – – – 2002 £m 207.3 36.0 243.3 2003 £m – – – 2002 £m – – – Redemption notices were issued for both series of convertible bonds on 22 May 2002 informing bondholders that all the bonds outstanding as at 27 June 2002 would be redeemed at 100 per cent of the original issue price together with any accrued interest. Bondholders were entitled to exercise their rights to convert the bonds up to the close of business on 20 June 2002. In the case of the 6 per cent Guaranteed Convertible Bonds due 2007, bondholders were entitled to convert their bonds into ordinary shares of Land Securities PLC at the exchange price of 874p per ordinary share. In the period 1 April 2002 to 20 June 2002, bonds with a nominal value of £27.8m were converted into 3.2m fully paid shares of £1 each. Bonds with a nominal value of £181.0m were purchased by Land Securities PLC in the open market and cancelled. Bonds with a nominal value of £1.2m were redeemed. In the case of the 7 per cent Convertible Bonds due 2008, bondholders were entitled to convert their bonds into ordinary shares of Land Securities PLC at the conversion price of 640p per ordinary share. In the period 1 April 2002 to 20 June 2002, bonds with a nominal value of £20.2m were converted into 3.2m fully paid shares of £1 each. Bonds with a nominal value of £15.8m were purchased by Land Securities PLC in the open market and cancelled. As shown in Note 4, a deficit of £28.2m arose on the purchase and redemption of the convertible bonds. 23. Other creditors falling due after more than one year Group Company Deferred income Other creditors 24. Provisions for liabilities and charges At 1 April 2002 Net charge for the year Released in respect of property disposals during the year Other movements At 31 March 2003 2003 £m 16.9 5.4 22.3 Dilapidations £m 5.3 0.6 2002 £m 16.7 6.1 22.8 Group Deferred taxation £m 124.6 59.2 (8.2) (2.5) 5.9 173.1 2003 £m – – – Total £m 129.9 59.8 (8.2) (2.5) 179.0 2002 £m – – – Company £m – – – – – The deferred taxation provision that would be released in the event of sales of investment properties on the assumption that the proceeds of qualifying assets equate for tax purposes to the tax written down value would be £124.7m (2002 £130.6m). On the same assumption the amount of tax on capital gains that would become payable by the Group on disposals at amounts at which they are stated in Note 12 is in the region of £435.0m (2002 £535.0m). If certain asset owning companies, which own portfolios of properties, were sold at underlying asset values the tax on capital gains would be in the region of £325.0m without taking into account any further mitigation that might be available. In addition, on the same assumption, there would be a release of deferred tax on capitalised interest, relating to investment properties, of £21.2m (2002 £11.9m). 60 LAND SECURITIES ANNUAL REPORT 2003 25. Called up share capital Authorised Allotted and fully paid Notes to the financial statements for the year ended 31 March 2003 Land Securities PLC Ordinary shares of £1 each Land Securities Group PLC Ordinary shares of 10p each Non-equity B shares of £1.02 each Redeemable preference shares of £1 each 2002 No. m 720.0 2003 No. m 600.0 540.0 0.1 2003 £m 46.5 30.3 0.1 76.9 2002 £m 524.3 524.3 18,439,941 B shares were redeemed at the holders’ option on 17 April 2003 for £18.8m. The sequence of events relating to the changes in the share capitals of Land Securities PLC, the former holding company of the Group, and Land Securities Group PLC, the successor holding company, respectively were as follows: (a) Land Securities PLC At 1 April 2002 Issued during the period: On the exercise of options under: 1983 and 1993 savings related share option schemes 1984 Executive Share Option Scheme On the conversions of: 6 per cent Guaranteed Convertible Bonds due 2007 7 per cent Convertible Bonds due 2008 To facilitate the transfer of the shares to the Company under the Scheme of Arrangement At 6 September 2002 No. of shares 524,345,045 51,499 62,750 3,176,950 3,155,128 12 530,791,384 (b) Land Securities Group PLC 7 February 2002 The Company was incorporated with an authorised share capital of 50,000 ordinary shares of £1 each and two shares were issued. 3 July 2002 14 July 2002 The authorised share capital was increased to £100,000 by the creation of 50,000 redeemable preference shares of £1 each which were all issued at par. The authorised share capital was increased from £100,000 to £4,648,850,000 by the creation of 409,795,000,000 additional ordinary shares of 1p each and 540,000,000 B shares of 102p each. 6 September 2002 17 September 2002 Each issued ordinary share of £1 each was sub-divided into 100 ordinary shares of 1p each and a further 1,166 ordinary shares were issued at par. All issued and unissued ordinary shares of 1p each were consolidated into shares of £6.83 each resulting in the issued share capital being consolidated into two ordinary shares of £6.83 each. 464,442,461 ordinary shares of £6.83 each and 530,791,384 B shares of £1.02p each with a total nominal value of £3,713,549,221 were issued in consideration for 100% of the issued ordinary share capital of the predecessor Company. F I N A N C I A L S Under a Court approved capital reduction: a) the nominal value of the ordinary shares was reduced from £6.83 each to 10p each. b) 501,057,544 of the B shares were cancelled and £511,078,695 was returned to shareholders. The holders of B shares are not entitled to receive notification of any general meeting of Land Securities Group PLC, or to attend, speak or vote at any such meeting. B shares carry the right to a dividend of 70% of six month LIBOR paid twice yearly. In the event of the winding up of Land Securities Group PLC, the holders of B shares will be entitled to 102p in respect of each B share held together with the relevant proportion of the dividend payable. The holders of B shares may elect to have their shares redeemed at six monthly intervals.The first redemption date (after the initial redemption of shares on 17 September 2002) was 17 April 2003 on which date 18,439,941 B shares were redeemed at the holders’ option.The next redemption date will be 17 October 2003. Land Securities Group PLC may, on giving notice in writing to the holders of B shares, redeem for £1.02 per share all, but not some, of the remaining B shares. The movements in the issued ordinary share capital of the Company from incorporation to 31 March 2003 were: Consolidation of shares issued on incorporation Issued as part consideration for 530,791,384 Land Securities PLC shares under the Scheme of Arrangement Issued as consideration for the purchase of a property interest Shares purchased and cancelled Issued on the exercise of options under: 1993 savings related share option schemes 1984 Executive Share Option Scheme At 31 March 2003 No. of shares 2 464,442,461 1,760,000 (700,000) 50,345 10,000 465,562,808 The exercise of all options outstanding at 31 March 2003, granted under the savings related and executive share option schemes, would result in the issue of a further 4,696,262 ordinary shares. The cash considerations received on the exercise of options under the 1993 savings related share option schemes and the 1984 Executive Share Option Scheme, for shares in both the Company and the predecessor company, were £0.7m and £0.5m respectively. LAND SECURITIES ANNUAL REPORT 2003 61 Notes to the financial statements for the year ended 31 March 2003 26. Shareholders’ funds (a) Group At 1 April 2002 Proforma restatement At 1 April 2002 as restated Shares issued prior to capital restructure (Note 25(a)) Transfer to profit and loss account Capital restructure Reduction of capital and repayment of B shares Purchase and cancellation of ordinary shares (Note 25(b)) Issue of ordinary shares (Note 25(b)) Exercise of options Unrealised deficit on revaluation of investment properties (Note 12) Realised on disposals of investment properties Taxation on revaluation surpluses realised on disposals of investment properties Retained profit for the financial year (page 44) Called up share capital (Note 25) Redeemable preference shares £m – Ordinary Non-equity B shares £m – shares £m 524.3 Share premium account £m 314.9 (314.9) Capital redemption Revaluation reserve £m 3,376.9 reserve £m 36.0 (36.0) Other reserves £m 550.4 350.9 Profit and loss account £m 1,234.1 Total £m 6,036.6 524.3 6.5 – – 0.1 2,641.3 541.4 (3,125.7) (511.1) (0.1) 0.2 – 42.3 (42.3) 12.9 0.4 – 3,376.9 901.3 1,234.1 6,036.6 (550.4) (350.9) 550.4 (2,789.5) 48.9 – – 3,125.7 (511.1) 0.1 (5.1) (56.8) (281.2) 281.2 (25.4) 62.5 (5.1) 13.1 0.4 (56.8) (25.4) 62.5 At 31 March 2003 46.5 30.3 0.1 13.3 0.1 3,038.9 Comprising: Equity shareholders’ funds Non-equity shareholders’ funds 46.5 46.5 30.3 30.3 0.1 0.1 13.3 13.3 0.1 0.1 3,038.9 3,038.9 As explained in Note 1, the reserves at 1 April 2002 have been restated under merger accounting rules to reflect the Group reconstruction. – – – 2,433.9 5,563.1 2,433.9 2,433.9 5,532.7 30.4 5,563.1 (b) Company At 1 April 2002 Issue of preference shares Issue of ordinary shares and B shares on acquisition of Land Securities PLC Reduction of capital and repayment of B shares Purchase and cancellation of ordinary shares Issue of ordinary shares Exercise of options Retained profit for the financial year Called up share capital (Note 25(b)) Redeemable preference shares £m – 0.1 Ordinary Non-equity B shares £m – shares £m – 541.4 (511.1) 3,172.1 (3,125.7) (0.1) 0.2 At 31 March 2003 46.5 30.3 0.1 Comprising: Equity shareholders’ funds Non-equity shareholders’ funds 46.5 46.5 30.3 30.3 0.1 0.1 Share premium account £m – Capital redemption reserve £m – Merger reserve account £m – 373.6 0.1 Profit and loss £m – 3,125.7 (5.1) 18.7 Total £m – 0.1 4,087.1 (511.1) (5.1) 13.1 0.4 18.7 0.1 373.6 3,139.3 3,603.2 0.1 0.1 373.6 3,139.3 373.6 3,139.3 3572.8 30.4 3,603.2 12.9 0.4 13.3 13.3 13.3 Land Securities Group 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 within its financial statements, was £18.7m (2002 £NiI). 27. Reconciliation of Group operating profit to net cash inflow from operating activities Operating profit (Group) (page 44) Depreciation and amortisation Increase in trading properties Increase in debtors Increase in creditors Net cash inflow from operating activities 62 2003 £m 462.4 28.6 (15.7) (16.1) 25.2 484.4 2002 £m 497.5 18.3 (36.9) (107.9) 35.2 406.2 LAND SECURITIES ANNUAL REPORT 2003 28.Analysis of net cash flows (a) Management of liquid resources Net decrease/(increase) in short term deposits Net cash inflow/(outflow) from management of liquid resources (b) Cash movement in debt Debt due within one year – Repayment of secured debt – Unsecured bank loans – Unsecured bank loans – Issue of new bonds – Purchase/redemption of convertible bonds Debt due after one year Expenses of new issues Increase in debt 29.Analysis of net debt Net bank balance/(overdraft) Liquid resources Debt due within one year Debt due after one year Net debt 30. Financial assets and liabilities 1 April 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 2003 2003 £m 57.5 57.5 2003 £m (1.4) – (1.4) 335.5 600.0 (198.0) (7.9) 729.6 728.2 Non-cash £m Movements during year Cash Flow £m 93.5 (57.5) 1.4 (729.6) (23.5) 68.5 2002 £m (38.9) (38.9) 2002 £m (0.4) (25.0) (25.4) 265.0 – – – 265.0 239.6 31 March 2003 £m 79.2 3.4 (23.5) (2,648.4) (692.2) 45.0 (2,589.3) This note should be read in conjunction with the comments set out in the Financial Review on page 14. 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 the Group’s financial assets and liabilities are sterling based and, with the exception of the committed bank facilities, 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 overdrafts Convertible bonds Non-equity B shares Redeemable preference shares Financial instruments Interest rate swaps Weighted average period of fixed interest rates Weighted average interest rate Book value Fair value 2003 £m 102.1 (2,688.7) – (30.3) (0.1) 2002 £m 72.3 (1,767.2) (243.3) – – 2003 £m 102.1 (3,204.9) – (30.3) (0.1) 2002 £m 72.3 (2,205.6) (274.9) – – (82.3) (4.9) (2,617.0) (1,938.2) (3,215.5) (2,413.1) F I N A N C I A L S 2002 £m – Excess of fair value over book value 2003 £m – (516.2) – – (82.3) (598.5) (438.4) (31.6) (4.9) (474.9) Financial assets Financial liabilities 2003 1 day 4.2% 2002 3 days 3.0% 2003 13.3 years 7.9% 2002 14.1 years 8.3% Fair value has been calculated by taking the 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 a number of interest rate swaps in the name of Land Securities PLC to hedge current and future interest rate risk. In each case the Group pays a fixed rate of interest and receives six-month LIBOR.The total notional value of the interest rate swaps is £900m all of which are now operational.The end dates of these swaps range from March 2012 to September 2030 and the interest rates are from 5.00% to 5.58%. In the case of four swaps, which have a total notional value of £400m and end dates of June 2022 and September 2030, the counterparties have the right to terminate the swaps mid-life. Interest rate swaps with a notional value of £500m were entered into during June 2002 with a start date of March 2003 and an end date of March 2013 and interest rates ranging from 5.46% to 5.5%. £300m of these swaps were cancelled at the time of the February 2003 bond issues, resulting in an exceptional interest cost of £23.5m. LAND SECURITIES ANNUAL REPORT 2003 63 Notes to the financial statements for the year ended 31 March 2003 30. Financial assets and liabilities (continued) As the intention of these swaps is to fix the interest rates on existing and new borrowings, their mark to market values have not been incorporated into the financial statements and instead net interest is accrued through the profit and loss account. In addition there is a further swap with a notional value of £198.4m which was taken out by Trillium to hedge the secured bank loan, referred to in Note 21, which funds the PRIME contract. Either party to the transaction may terminate the swap on 15 April 2005 and every second anniversary thereafter.This swap has a maximum life of 15 years and mirrors the repayment schedule for the associated bank loan.As part of the fair value accounting exercise for the acquisition of Trillium, this swap was marked to market in November 2000 and a provision of £14.9m was established.The provision is being amortised over the life of the swap as a credit to interest payable. Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows: Losses on hedges as at 1 April 2002 Recognised in 2002/3 profit and loss account Losses not recognised in 2002/3 – arising before 1 April 2002 – arising in 2002/3 Assuming actual and predicted short term interest rates remain at the 31 March 2003 levels, the losses expected to be included in future profit and loss accounts are: Financial year 2003/4 Later financial years Unrecognised losses £m 4.9 (7.7) – 82.3 82.3 15.2 67.1 The maturity and repayment profiles of the Group’s financial assets and liabilities, excluding the non-equity B shares and redeemable preference shares, 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 Financial assets Financial liabilities Undrawn committed borrowing facilities 2003 £m 2002 £m 2003 £m 2002 £m 2003 £m 2002 £m 102.1 – – – 102.1 72.3 – – – 72.3 40.1 29.8 829.8 1,789.0 2,688.7 23.2 6.7 537.6 1,443.0 2,010.5 – – 899.5 – 899.5 250.0 – 335.0 – 585.0 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 holders of the 50,000 redeemable preference shares may elect to have them redeemed by the Company on any fixed date following on or after 30 September 2003. The Company may, on giving notice in writing to the holders of the B shares, redeem all of the B shares then in issue on the date specified in the notice. The Company’s loans from group undertakings at 31 March 2003 of £374.1m (Note 20) comprises £338.1m repayable on the earlier of 31 December 2005 and demand and £36.0m with no fixed repayment date. 31. Principal Group and associated undertakings The principal wholly owned group undertaking of Land Securities Group PLC is Land Securities PLC. The principal group undertakings of Land Securities PLC, all of which are wholly owned, and its associated undertakings, which are 50% owned, are: Group operations Land Securities Properties Limited Investment property business Ravenseft Properties Limited The City of London Real Property Company Limited 32. Membership of certain undertakings Ravenside Investments Limited Ravenseft Industrial Estates Limited Total property outsourcing Land Securities Trillium Limited Associated undertakings Telereal Services Limited Telereal Trading Property Limited Telereal Securitised Property Limited Partnership Telereal General Property Partnership During the period, the Group has been a member of the following limited partnerships, all of which are registered in England.The accounts of the partnerships, drawn up to the dates indicated below, are dealt with in the Group’s financial statements as ‘joint arrangements’ on the basis explained in Note 2(a). Partnership Group share % 31/03/03 £m 31/03/02 £m 31/03/03 £m 31/03/02 £m Gross assets Gross liabilities Profit/(loss) before tax 31/03/03 £m 31/03/02 £m 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) 331/3 331/3 331/3 50 50 132.0 112.2 362.9 147.9 35.3 790.3 125.0 114.8 235.9 117.0 26.5 619.2 (3.5) (2.1) (213.5) (3.3) (0.4) (222.8) (4.8) (1.7) (85.9) (2.5) (13.4) (108.3) 5.4 4.0 (0.7) 7.7 – 16.4 3.9 5.1 (0.3) 5.2 – 13.9 *forming The Birmingham Alliance 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. The gross liabilities of these partnerships consist generally of capital and revenue accruals and also, in the case of Bull Ring Limited Partnership, £195.5m (2002 £64.9m) of loans from partners; at 31 March 2003 there was no third party debt in these partnerships (2002: Nil). 64 LAND SECURITIES ANNUAL REPORT 2003 33. Joint venture The Group has a 50% interest in the Telereal entities (‘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 an initial equity investment by the shareholders of £292.8m shared equally. Notes to the financial statements for the year ended 31 March 2003 Summary financial information of Telereal (Group’s share) Turnover Operating profit Depreciation Profit on sales of fixed asset properties Bid costs written off Finance costs (net) Profit/(loss) before tax Profit/(loss) after tax Fixed assets – properties Current assets Securitisation Bank debt Other liabilities Net assets Financed by: Shareholders Reserves Year ended 31/03/03 £m 13/12/01 to 31/03/02 £m 168.2 102.9 (15.0) 15.1 – (75.7) 27.2 12.7 48.5 19.3 (3.8) – (8.0) (23.8) (4.5) (4.5) 31/03/03 £m 1,056.9 113.3 31/03/02 £m 1,193.4 104.4 1,170.2 1,297.8 (878.0) (110.1) (75.3) (1,063.4) 106.8 65.8 41.0 106.8 (880.0) (195.6) (33.4) (1,109.0) 188.8 146.4 42.4 188.8 The above shows the Group’s 50% share of Telereal’s results adjusted to adopt the Group’s accounting policies. The properties held by Telereal at 31 March 2003 relate to the 30-year contract with BT and are held at cost to the joint venture. During the year ended 31 March 2003,Telereal sold its investment properties for a total consideration of £270m. Part of the proceeds were used to repay debts secured on those assets and part was returned to the partners. The Group’s 50% share of the fair value of Telereal’s financial liabilities as at 31 March 2003 is £1,050.8m (31 March 2002 £1,042.8m). The Telereal entities include two partnerships,Telereal Securitised Property Limited Partnership and Telereal General Property Limited Partnership, which are registered in England and Wales and whose accounts are dealt with in the Group financial statements by way of gross equity accounting and are consolidated in the Group’s financial information as 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. 34. Related party transactions The Group has a 50% interest in the Telereal entities (‘Telereal’).The Group, principally through Land Securities Trillium Telecom Services Limited, provides staff to Telereal to deliver services to BT, for which it received £17.7m (2002 £2.5m) in the year ended 31 March 2003. As at 31 March 2003, the Group was owed £66.0m (2002 £151.7m) by Telereal.This comprised a subordinated loan from the Group of £65.8m (2002 £149.4), including accrued interest, and an amount rechargeable to Telereal of £0.2m (2002 £2.3m) in respect of services provided by the Group. 35. 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 2003, the estimated amount of the Group’s exposure to the guarantee was approximately £100.7m (2002 £52.6m). LAND SECURITIES ANNUAL REPORT 2003 65 F I N A N C I A L S Five and ten year records for the years ended 31 March Five year record 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 Equity share capital Non-equity share capital Reserves Shareholders’ funds Borrowings Other liabilities Property movements and acquisitions (book value) Property additions Property sales Acquisitions Revenue Gross property income Net property income Revenue profit Profit/(loss) on sales of fixed asset properties/ bid costs/exceptional items 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 (excludes liquid resources and financing) Ten year record Earnings per share Earnings per share (pence) *Adjusted earnings per share (pence) Diluted earnings per share (pence) *Adjusted diluted earnings per share (pence) Dividends Dividends per share (pence) Dividend cover (times) *Adjusted dividend cover (times) Net assets per share Net assets per share (pence) *Adjusted net assets per share (pence) Diluted net assets per share (pence) *Adjusted diluted net assets per share (pence) Market price per share at 31 March (pence) 2001 2002 2003 (restated) (restated) £m £m £m 2000 £m 1999 £m 36.7 7,823.9 557.4 41.5 106.8 99.4 52.6 289.4 38.9 7,800.0 428.9 45.3 188.8 68.4 36.9 260.3 41.2 7,899.1 323.1 34.1 – 29.3 – 177.3 – 7,453.7 – 14.7 – 140.1 – 182.6 – 6,910.5 – 13.1 – 486.6 – 72.5 9,007.7 8,867.5 8,504.1 7,791.1 7,482.7 46.5 30.4 5,486.2 5,563.1 2,688.7 755.9 524.3 – 5,512.3 6,036.6 2,010.5 820.4 523.6 – 5,494.2 6,017.8 1,757.1 729.2 522.4 – 5,259.4 5,781.8 1,556.3 453.0 554.3 – 4,916.1 5,470.4 1,569.3 443.0 9,007.7 8,867.5 8,504.1 7,791.1 7,482.7 625.7 (406.9) – 630.1 (510.4) 146.4 588.8 (424.9) 169.5 403.5 (314.3) – 267.3 (125.4) – 1,239.5 582.1 340.9 1,025.6 602.2 364.8 (21.3) 319.6 229.4 62.5 (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 0.6 293.3 216.4 51.2 484.4 406.2 462.0 432.2 409.9 108.6 (68.0) 132.6 (39.9) 280.5 116.4 246.5 79.7 229.1 73.5 (177.2) (219.2) (95.4) (114.9) (61.9) 2003 46.46 50.39 46.44 50.36 35.50 1.38 1.49 1188 1215 1188 1215 733 2001 2002 (restated) 2000 1999 1998 1997 1996 1995 1994 50.27 51.61 49.54 50.81 34.00 1.48 1.52 1151 1176 1132 1155 893 44.87 45.38 44.41 44.89 32.50 1.38 1.39 1149 1172 1130 1152 880 45.44 40.86 44.97 40.63 31.00 1.52 1.37 1107 – 1090 – 749 39.21 39.11 38.95 38.86 29.50 1.31 1.31 987 – 975 – 820 36.84 37.07 36.55 36.77 28.00 1.30 1.31 924 – 910 – 1058 34.85 33.17 34.50 32.92 27.00 1.28 1.22 783 – 774 – 773 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 *These figures exclude the results of fixed asset property sales after tax and, for 2001 and thereafter, bid costs, exceptional items 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 became effective in 2003. However, figures for 2000 and prior years have not been restated to reflect changes in accounting policies made in 2002. 66 LAND SECURITIES ANNUAL REPORT 2003 B U S I N E S S A N A L Y S I S 68-83 Business analysis 68 Market report and investment portfolio valuation 69 Performance benchmarking 70 Investment portfolio analysis 73 Total property outsourcing 74 Development pipeline schedule 76 Property by location 78 Major property holdings Business analysis Market report Central London The key drivers of the central London office markets are weaker occupational demand, an increase in availability and a two tier investment market. This is particularly apparent in the City where demand has fallen away as financial institutions downsize and occupiers seek to sub let surplus space. However, in comparison with former cycles the development pipeline of new accommodation is limited and rental levels are being driven predominantly by lack of tenant demand rather than over supply of space. Rental values have been decreasing and a return to rental growth in the City is not anticipated before 2006/7. The West End markets, particularly Victoria, are more resilient predominantly as a result of constrained supply, a more diverse occupier base and continued demand from the public sector for new accommodation. It is expected that the return to positive rental growth in real terms will be experienced earlier here than in the City. Demand, however, is particularly reliant on housing market conditions and remains strong while mortgage equity withdrawals run at today’s high levels. However, these positive market conditions are at risk if either the housing market falls or interest rates increase. Investor appetite for this type of asset class remains high as evidenced by the strong interest in the Grantchester and Chartwell Land transactions. South-east industrial Industrial/distribution demand has slowed over the past six months and there has been little demand from general manufacturing for industrial units. However, sites with good transport links and good access to labour markets have been selling for high level values based on aggressive rental and yield forecasts. Investment demand remains strong for development sites in the south- east and for well-let distribution centres. The bond like characteristics of properties let to good covenants on long unexpired lease terms continue to attract strong investor demand and values for this type of property are holding up. For properties with shorter lease terms and other development opportunities, a significant re-pricing has occurred. The exception to this is the West End where there is still investment appetite for active management scenarios. Total property outsourcing The current challenging economic conditions are leading organisations to focus on maximising returns on capital deployed, minimising costs and streamlining their business operations. This has increased interest in total property outsourcing with the number of businesses actively discussing this option or due to bring proposals to the market at an all time high. Shopping centres and shops The main driver behind retail rental growth is consumer spending, which has been buoyant over the past two years. There are now some signs that this is slowing, as a result of concerns over the possibility of weaker south-east housing market conditions spreading to other regions in the UK. The central London retail markets have also been adversely affected recently by special factors, notably a reduction in tourism as a result of world instability and transport issues. Further weakening in the housing markets may continue to affect adversely consumers’ disposable income along with recent increases in National Insurance contributions. On the investment side demand has been strong and yields have hardened significantly. In future the rate of yield shift is not thought to be sustainable but allocation by investment funds still favours retail as an investment. Retail warehouses This asset class continues to evolve and certain parks are becoming more like the High Street as they move to open A1 consent and High Street retailers look to trade out of new formats and locations.The supply side will remain constrained in the medium term as a result of planning restrictions. Increased levels of interest are also coming from central and local Government as they seek to meet the demands of changing Government funding criteria and to deliver the most cost effective accommodation solutions. Investment portfolio valuation The portfolio was valued by Knight Frank at £7.84bn at 31 March 2003. After adjusting for sales, acquisitions and expenditure the value reduced marginally by 0.6% as compared to the year to 31 March 2002. A positive contribution from retail and industrial developments was offset by the negative impact of the revaluation of our London office holdings. In the first half of the Company’s financial year, the period to 30 September 2002, capital values for London office properties weakened due to adverse rental and yield movements. This rate of decline, driven by falling rents, was more marked in the second half of the year showing a total capital value decline of 10.1% for the twelve month period. In terms of sub sectors, the City saw a 16% decline in capital values whereas the West End, where we have 46% of our central London exposure, saw a 6.2% reduction. 68 LAND SECURITIES ANNUAL REPORT 2003 Retail property, which now makes up almost 50% of our portfolio, presented a very positive picture, producing good growth in capital value for the period with retail warehouses at 10.0% and other retail (shopping centres, central London shops and in town shops) at 7.8%. The industrial sector has shown a small increase in capital value of 1.9%. The investment market has seen 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. A large part of the investment market is driven by debt backed investors and, while there is evidence in some cases that lenders are seeking higher returns, there remains a reasonably buoyant market for investment property lending amongst UK and international banks along with an increasing depth to the securitisation market. ‘Bond’ type investments with the benefit of long institutional leases have, in some cases, produced increases in value during the last 12 months as a result of this debt driven market and the relationship with interest rates, which are at 30 year lows. After excluding development properties and Kent Thameside at 31 March 2003, the value of investment properties was £6.82bn. At the same date, the annual rent roll, net of ground rents and excluding the same properties, was £479.2m, producing a yield of 7.0%. Detailed breakdowns by sector, including comprehensive analyses of the Group’s valuation, rental income and yield profiles follow in the investment portfolio analysis. The feuhold, freehold and leasehold investment properties held by the Group or held by way of limited partnership arrangements (excluding Telereal), with the exception of short leasehold accommodation occupied by the Company for the purposes of its business, were valued by external valuers Knight Frank, Chartered Surveyors, as at 31 March 2003. The valuation was on the basis of market value in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. Business analysis Performance benchmarking The analysis by IPD includes properties in joint ventures and those held for development. Table A – Long term performance relative to IPD Ungeared total returns – periods to 31 March 2003 B U S I N E S S A N A L Y S I S 10 years 20 years Land Securities % 12.8 11.1 IPD* – Upper Quartile % IPD* % 11.9 10.2 12.3 10.9 *IPD December Universe (extrapolated to March 2003) unfrozen Source: IPD Table A above compares Land Securities’ ungeared total property return over the last 10 year and 20 year periods to 31 March 2003 to the IPD December Universe (extrapolated to March 2003), which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2002 (many of these funds are now valued quarterly while the others were extrapolated forwards). 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 20 year period has been selected as the longest time period over which IPD provides comparative performance figures. Table B – One year performance relative to IPD Ungeared total returns – 12 months to 31 March 2003 Offices Retail Industrial Other Commercial Portfolio Land Securities % (3.3) 15.8 9.4 11.0 6.6 IPD* % 1.6 14.6 10.6 10.9 9.3 The aggregate of market values of those properties held by the Group as at 31 March 2003 was £7,530,133,750. *IPD December Universe (extrapolated to March 2003) unfrozen Source: IPD The aggregate of market values of the interests in land held by the Group by way of limited partnership interests or joint venture arrangements as at 31 March 2003 was £853,690,000. Within the tables and figures provided in the Annual Report the valuation of the Group interests in land held by limited partnerships is included as a mathematical share in proportion with the Group holding in the limited partnerships and joint ventures, thus producing a total of £7,844,043,750. This does not represent a valuation of the Group shareholding in those limited partnerships. A more detailed extract from the external valuers’ report is available on our website. LAND SECURITIES ANNUAL REPORT 2003 Table B 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 2003. Our high exposure to London offices has had a negative impact on overall performance relative to IPD. Our London office holdings have underperformed due to the shorter lease expiries on our medium term development opportunities. Against that our retail stock, in particular shopping centres, has out-performed IPD. Our view remains that our sector focus and development activity will result in out-performance over the medium to long term. 69 Investment portfolio analysis Investment portfolio analysis Total (1) £m Valuation Invest (3) £m Invest (2) £m Valuation Total (1) % Invest (3) % 1,481.8 1,286.5 1,286.5 945.7 542.8 264.3 77.9 794.3 514.4 164.3 69.5 794.3 514.4 164.3 69.5 18.9 12.0 6.9 3.4 1.0 19.2 11.8 7.7 2.5 1.0 Valuation surplus/deficit Total (1) % (6.2) (16.1) (12.1) (2.8) (4.1) Invest (3) % (4.4) (15.1) (11.8) (2.6) (4.2) Like-for- like rental value growth (4) % (7.1) (15.9) (14.4) (2.9) (2.7) Yield on present income (2) % Rents received Gross (1) £m Invest (2) £m Net rental income (5) Total (1) £m 7.0 9.3 8.2 6.6 8.1 98.2 80.9 42.5 11.1 7.7 92.7 80.9 42.5 11.1 6.9 94.1 73.4 42.4 10.8 6.6 3,312.5 2,829.0 2,829.0 42.2 42.2 (9.9) (8.9) (11.1) 7.9 240.4 234.1 227.3 Market sector by type Offices West End City Midtown Inner London Rest of UK Sub-total Shopping centres and shops Shopping centres Central London shops Other in town shops 1,455.7 1,178.3 1,220.0 732.4 589.1 654.9 577.3 654.9 577.3 Sub-total 2,777.2 2,410.5 2,452.2 Retail warehouses Parks Other (inc. food superstore) Sub-total Industrial South East & Eastern Rest of UK Sub-total Other Total 901.2 215.6 835.9 194.9 871.7 215.6 1,116.8 1,030.8 1,087.3 350.2 35.7 259.1 32.4 274.6 35.7 385.9 291.5 310.3 251.6 148.0 139.1 18.6 9.3 7.5 35.4 11.5 2.7 14.2 4.5 0.5 5.0 3.2 17.5 9.8 8.6 35.9 12.5 2.9 15.4 3.8 0.5 4.3 2.2 9.6 6.0 5.8 7.8 8.8 15.5 10.0 1.5 5.3 1.9 3.1 8.4 5.9 5.8 7.1 8.4 13.7 9.4 0.9 5.8 1.4 2.9 5.2 3.8 1.6 4.0 5.3 8.5 6.1 1.0 1.1 1.0 3.0 6.8 6.5 6.6 6.7 5.5 6.6 5.7 7.2 8.0 7.3 6.2 7.0 92.4 46.4 41.8 90.7 42.6 41.6 85.0 44.6 38.0 180.6 174.9 167.6 46.0 14.1 60.1 21.9 4.1 26.0 12.6 46.0 14.1 60.1 20.2 4.1 24.3 12.5 48.8 14.2 63.0 21.5 2.8 24.3 9.2 519.7 505.9 491.4 7,844.0 6,709.8 6,817.9 100.0 100.0 (0.6) (0.3) (2.8) Turnover rents total £5.1m and represent 1% of the total net rental income figure given above. 4. The like-for-like rental value growth figures exclude properties in the development Notes The valuation figures include a one-third apportionment of the valuation attributed to properties owned by the Birmingham Alliance limited partnerships, a one-half apportionment in relation to property owned by the Gunwharf Quays limited partnership, the Ebbsfleet limited partnerships, the BBC Wood Lane joint venture and a one-quarter apportionment of properties held in the Bristol Alliance joint venture. The valuation figures exclude properties owned by Land Securities Trillium and Telereal. 1. The total figures relate to the investment portfolio business comprising all investment and development properties. 2. Represents investment properties excluding those which remain in the development programme as at 1 April 2003, the Kent Thameside development properties and forward funded acquisitions.This measure represents the portfolio which is held for investment purposes and properties proposed for development but not yet in the development programme and provides a basis for the yield calculations. 3. Includes all properties in (2) above but excludes those developments which have been completed, let and removed from the development programme during the year to 31 March 2003.The figures also include forward funded acquisitions.These figures are used for measuring the performance of investment properties. 70 programme and units of accommodation materially altered or refurbished during the period and is the change in the 12 months to 31 March 2003. 5. Net rental income is annual rents passing at 31 March 2003 after deduction of ground rents. 6. Net ERV includes vacant space and estimated future ERVs for properties in the development programme and is calculated after deducting expected ground rents. 7. Gross ERV is calculated in the same way as net ERV before the deduction of ground rents. 8. Represents investment property voids (excluding investment properties under refurbishment and predevelopment voids) which are vacant and are available to let at 31 March 2003. 9. Calculated by gross ERV for the investment portfolio. 10. The definition for the figures in each column is: (i) Median is the number of years until half of income is subject to lease expiry/break clauses (ii) Mean is rent weighted average number on leases subject to lease expiry/break clauses (iii) Mean is rent weighted average number on leases subject to lease expiry (ignoring break clauses) The calculation excludes authorised and committed developments and developments in progress. LAND SECURITIES ANNUAL REPORT 2003 B U S I N E S S A N A L Y S I S Investment portfolio analysis Investment portfolio analysis continued (for notes see page 70) Market sector by type (continued) Net rental income (3) Invest (2) £m Net ERV (6) Total (1) £m Invest (2) £m Gross ERV (7) Total (1) £m Invest (2) £m Invest voids (8) £m Vacancy rates (9) % No. of properties Total (1) Invest (2) Lease length (10) Median (i) years Mean (ii) years Mean (iii) years Offices West End City Midtown Inner London Rest of UK Sub-total 89.7 73.7 42.4 10.8 5.6 141.5 102.2 143.2 103.9 83.8 45.1 19.5 6.1 66.4 42.3 8.1 5.2 84.9 45.9 20.6 6.2 67.5 43.1 9.2 5.4 222.2 296.0 224.2 300.8 229.1 Shopping centres and shops Shopping centres Central London shops Other in town shops 82.9 42.7 37.9 114.1 51.5 43.8 91.3 48.5 41.9 121.0 52.6 46.7 98.3 49.6 44.7 Sub-total 163.5 209.4 181.7 220.3 192.6 Retail warehouses Parks Other (inc. food superstore) Sub-total Industrial South-east Rest of UK Sub-total Other Total 48.1 14.2 62.3 19.7 2.9 22.6 8.6 59.9 15.6 75.5 31.2 3.0 34.2 13.3 57.4 15.6 73.0 23.1 3.0 26.1 9.8 59.9 15.6 75.5 31.2 3.0 34.2 13.4 57.4 15.6 73.0 23.1 3.0 26.1 9.8 479.2 628.4 514.8 644.2 530.6 1.8 2.1 0.1 0.1 0.3 4.4 0.6 0.7 1.0 2.3 0.9 – 0.9 0.9 – 0.9 – 8.5 1.7 3.1 0.2 1.1 5.6 1.9 0.6 1.4 2.2 1.2 1.6 – 1.2 3.9 – 3.5 – 1.6 30 24 12 5 3 74 19 10 55 84 27 19 46 32 5 37 13 28 23 11 4 3 69 16 9 53 78 26 17 43 25 5 30 11 254 231 7.5 3.5 7.3 3.5 2.5 6.3 10.0 8.3 8.5 9.0 18.3 17.5 17.8 7.8 9.5 7.8 12.3 8.0 10.8 9.7 8.8 4.0 4.5 9.5 13.8 9.1 10.2 11.7 15.9 14.8 15.7 7.8 11.9 8.3 25.6 11.2 15.1 10.9 9.7 5.3 6.0 11.9 14.5 9.9 10.9 12.4 16.1 15.2 15.9 9.3 16.6 10.2 25.9 12.7 Rental income analysis (over a two year period) Average rents (excludes properties in the development programme and voids) 2001/02 (restated) 2002/03 Increase Average rent £/m2 Average ERV £/m2 Properties owned throughout period 459.4 484.2 24.8 Offices Sales (2001/02 and 2002/03) Acquisitions (2001/02 and 2002/03) 55.1 11.4 15.3 20.2 525.9 519.7 Increase/ (decrease) Review and renewals First lettings Net relettings of voids Voids for redevelopment Other* * Other includes prior year adjustments LAND SECURITIES ANNUAL REPORT 2003 Central and inner London Rest of UK Shopping centres and shops Retail warehouses (including supermarkets) Industrial London, south-east Rest of UK Hotels, leisure, residential and other 347 86 n/a 139 63 17 n/a 387 81 n/a 150 66 18 n/a Note: Average rents and ERVs have not been provided where it is considered that the figures would be potentially misleading (i.e., 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). This is not a like for like analysis with the previous year 20.8 10.2 (3.1) (7.5) 4.4 24.8 71 Investment portfolio analysis Portfolio value by location % figures calculated by reference to the portfolio value of £7,844m 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 Total Offices % 41.2 0.5 0.1 0.2 0.1 0.1 42.2 Shopping centres and shops % Retail warehouses % Industrial % Other % 9.3 3.8 4.8 5.0 7.0 5.5 – 4.0 2.3 1.3 4.9 1.7 35.4 14.2 0.1 4.4 0.2 0.1 0.2 – 5.0 1.2 1.1 – – 0.8 0.1 3.2 Total % 51.8 13.8 7.4 6.6 13.0 7.4 100.0 Investment property reversionary potential % Portfolio by value and number of properties at 31 March 2003 Ignoring additional income from the letting of voids 31 March 2002 ∞% of rent roll 31 March 2003 ∞% of rent roll Gross reversions Over-rented Net reversionary potential 11.5 (1.9) 9.6 10.5 (5.4) 5.1 £m 0 – 9.99 10 – 24.99 25 – 49.99 Over 50 The reversion is calculated with reference to the gross rent roll excluding properties in the development programme and excluding current voids. Value % No. of properties 5.5 11.5 22.5 60.5 101 56 51 46 254 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 occupiers. The ten largest occupiers account for 23.8% of current rents and are: Central Government (9.6%), Allen & Overy (2.8%), Dresdner Bank (2.2%), Dixons Group (1.8%), Enterprise Oil (1.7%), J Sainsbury (1.5%), The Metropolitan Police (1.2%), Hombase Ltd (1.0%), MFI Properties Ltd (1.0%) and the Institute of London Underwriters (1.0%). Analysis of voids Total investment properties – gross ERV £530.6m Investment properties: Available to let Under refurbishment Pre development properties Total Voids by gross ERV £m 8.5 2.8 11.3 0.9 12.2 % 1.6 0.5 2.1 0.2 2.3 Present income yield on valuation at 31 March 2003 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 9.9% 8.2% 8.1% 8.3% 7.8% 6.8% 6.6% 6.5% 6.7% 6.9% 7.0% 2002 is restated to account for the revised definition of the development properties excluded from the calculation. 72 LAND SECURITIES ANNUAL REPORT 2003 Total property outsourcing Unexpired contract term DWP ( PRIME) BBC Telereal (BT) Property under management 000m2 Offices Telephone Exchanges BBC Under Development Total Under management but estate not transferred Total years 15 28 28 Total 1,671 28 1,439 4,042 54 Freehold Leasehold 524 28 861 4,009 54 1,147 – 578 33 – 5,476 1,758 7,234 n/a n/a n/a n/a n/a n/a 77 290 – 7,601 DWP BBC BT BT DWP BBC BT Total property outsourcing B U S I N E S S A N A L Y S I S Property transactions concluded by contract Service partner Compass Dalkia Group 4 GS Hall ISS MIB MITIE OCS Wilson James Service element Catering Technical maintenance Security Technical maintenance Cleaning Furniture Cleaning Cleaning Security Average contract tenure: 8.7 years Average annual contract value: £9.8m under mgmt Proportion of service providers’ turnover 000m2 1,999 1,214 1,671 786 808 1,999 887 305 305 <5% 10 to 15% 15 to 20% 20 to 25% <5% 15 to 20% <5% <5% 20 to 25% Unitary charge income received by contract Capital spend by contract £m Unitary charge income DWP 299.0 BBC Telereal 43.4 308.8 Total 651.2 £m Capital spend DWP 125.7 BBC Telereal 42.0 105.0 Total 272.7 Note:The Telereal unitary charge is the total unitary charge payable by BT Regional breakdown by contract Number of people by occupation Asset management Call centre Capital projects Quality assurance Facilities management HR/Finance/IS/Business development Total Note:These figures include all Telereal staff 000m2 Northern Ireland London, south-east and west England Northern England Scotland Midland and Wales Total DWP BBC Telereal – 549 670 233 296 – 346 – 26 – 1,748 372 126 2,785 1,034 478 1,058 5,481 Total 126 3,680 1,704 737 1,354 7,601 Property transactions concluded by contract DWP No. of transactions Telereal No. of transactions Total No. of transactions Sales New lettings Rent reviews Lease renewals Total 1 28 76 26 131 49 17 39 – 105 50 45 115 26 236 Note:The percentages relate to the total rent receivable/payable as appropriate LAND SECURITIES ANNUAL REPORT 2003 Total 99 155 295 46 519 229 1,343 73 Development pipeline schedule Developments completed Developments in progress/authorised Proposed developments PR Planning received AS Application submitted MG Minded to grant Planning inquiry PI Description Size Status Planning Letting Estimated/actual completion date Cost £m Property Central London Portman House,W1 7 Soho Square,W1 190 High Holborn,WC1 30 Gresham Street, EC2 Empress State, SW6 Cardinal Place, SW1 New Fetter Lane, EC4 Bankside 1,2,3, SE1 Shopping centres and retail Sidwell Street Bull Ring, Birmingham (100%) The Birmingham Alliance – a limited partnership with Hammerson plc and Henderson Global Investors Offices/retail 9,249m2/2,521m2 79% Offices Offices 5,571m2 7,793m2 Offices/retail 35,876m2/1,304m2 Offices/retail/leisure 40,410m2/1,660m2 Offices/retail 50,750m2/9,250m2 Offices/retail/leisure 58,740m2/8,400m2 Offices/retail/leisure 73,990m2/5,385m2/1,589m2 PR MG Retail Retail Whitefriars, Canterbury Retail/residential Caxtongate Phase III, New Street, Birmingham Cheeke Street Retail Retail Broadmead, Bristol (100%) The Bristol Alliance – a limited partnership with Hammerson plc, Henderson Global Investors and Morley Fund Management Retail Leisure Offices/residential Princesshay, Exeter Retail/residential Coppergate Centre,York, Phase II Retail/leisure/offices/residential 24,247m2/1,450m2/1,282m2 St David’s, Cardiff (100%) St David’s Partnership – a partnership with Capital Shopping Centres Retail/leisure/ residential 70,000m2/ 39,750m2 2,420m2 111,484m2 37,685m2 2,238m2 5,359m2 94,229m2/ 6,491m2/ 24,973m2 37,368m2 71% 25% 100% MG PR PI AS 44 9 41 208 102 251 3 141 103 5 11 Oct 2001 Mar 2003 Oct 2002 Dec 2003 June 2003 June 2005 2007 2006 Mar 2003 Sept 2003 May 2005 Nov 2004 Dec 2004 2007 2007 2008 2008 Central London office/shops development pipeline Maturity of development costs Shopping centres development pipeline Maturity of development costs £m 500 400 300 200 100 0 Empress State 30 Gresham St 190 High Holborn Soho Square Bankside Cardinal Place Bankside New Fetter Lane £m 500 400 300 200 100 0 Sidwell St Exeter New Bull Ring Caxtongate III Cheeke St Exeter Canterbury York Exeter Cardiff Bristol 2002/3 2003/4 2004/5 2005/6 Development programme Proposed developments 2006/7 or later Years 2002/3 2003/4 2004/5 2005/6 Development programme Proposed developments 2006/7 or later Years These charts show the maturity profile of developments by the year of anticipated practical completion and measured by development capital expenditure (excluding historic land costs and finance charges). These charts show the maturity profile of developments by the year of anticipated practical completion and measured by development capital expenditure (excluding historic land costs and finance charges). 74 LAND SECURITIES ANNUAL REPORT 2003 Development pipeline schedule B U S I N E S S A N A L Y S I S Size Status Planning Letting Estimated/actual completion date Cost £m Property Retail warehouses Kingsway Retail Park, Dundee, Phase I Bexhill Retail Park Almondvale Retail Park, Livingston, Phase II Kingsway Retail Park, Dundee, Phase II Industrial Description Retail warehouses Retail warehouses Retail warehouses Retail warehouses 9,800m2 3,112m2 9,383m2 8,640m2 PR PR Juniper Phase I, Basildon refurbishment Industrial/offices 21,823m2/3,660m2 Horizon Point, Hemel Hempstead, Phase I Zenith, Basildon Cobbett Park, Guildford Commerce Way, Croydon Juniper, Phase II, Basildon Oxonian Park, Kidlington Concorde Way, Segensworth Other Industrial Industrial Industrial Industrial Industrial Industrial Industrial 10,384m2 15,511m2 11,440m2 12,777m2 11,148m2 11,654m2 11,613m2 78% 84% 30% 41% Jan 2003 Jul 2004 2004 2004 Nov 2001 Mar 2002 Jun 2002 Aug 2002 Oct 2003 April 2003 Sept 2003 May 2004 29 11 18 10 12 12 12 8 9 9 64 The Gate, Newcastle upon Tyne Leisure 18,556m2 67% Nov 2002 Cost (£m) refers to estimated capital expenditure including the cost of third party land acquisitions and excluding finance costs. Letting % is measured by ERV and shows letting status at 31 March 2003. Trading property development schemes and the Kent Thameside project are excluded from the development pipeline. Development pipeline – financial statistics Book value at start £m Capital expenditure to date (1) £m Estimated total capital expenditure (1) £m Valuation surplus/ (deficit) 12 months to 31/03/03 £m Cumulative valuation surplus/ (deficit) to date £m Estimated total cost (2) £m Net income/ERV (3) £m 16 59 61 79 16 24 6.9 262 180 659 44 1,097 950 1,454 1,179 (46) n/a (78) n/a 116.7 100.1 Project Completed, let and transferred out of development programme or sold during the year ended 31/3/03 Active development programme (schemes in progress, completed but not let, committed and authorised) Proposed schemes Notes (1) (2) Excludes capitalised interest. Includes land costs / book value of land and capitalised interest, but excludes any allowances for rent free periods. Stated net of other receipts (eg sales of residential units). (3) Net headline annual rental payable on let units plus net ERV at 31 March 2003 on unlet units. LAND SECURITIES ANNUAL REPORT 2003 75 Property by location Shopping centres 2 3 1 9 8 7 6 4 5 Scotland Midlands Wales and south-west Aberdeen 1. Bon Accord Centre East Kilbridge 2. The Olympia 2. Princes Mall Livingston 3. Almondvale Centre 3. Designer Outlet Centre Birmingham 4. Bull Ring ▲ Coventry 5. Holdings Cardiff 10. St David's Centre Portsmouth 11. Gunwharf Quays North, north-west,Yorkshire and Humberside Rest of south-east and Eastern Stratford 12. Stratford Centre Ealing 13. Broadway Centre Canterbury 14. Whitefriars ▲ Leeds 6. White Rose Shopping Centre York 7. Coppergate Centre Sunderland 8. The Bridges Liverpool 9. St Johns Centre 10 13 12 14 11 ▲ In course of development or refurbishment ● £50 million and above ● £25-50 million Retail warehouses Scotland Dundee 1. Kingsway Retail Park ▲ Livingston 2. Almondvale West 2. Almondvale Retail Park ▲ 2. Almondvale South 1 2 3 4 7 5 6 14 13 15 11 12 8 9 10 North, north-west,Yorkshire and Humberside Gateshead 3. Team Valley Retail Park: Retail World Bexhill-on-Sea 10. Ravenside Retail and leisure Park Poole 11. Commerce Centre Hull 4. Priory Way Edmonton 12. Ravenside Retail Park Liverpool 5. Aintree Retail Park Midlands Manchester 6. White City Retail Park Erdington 13. Ravenside Retail Park, Kingsbury Road Blackpool 7. Blackpool Retail Park Derby 14. Wyvern Centre Northampton 15. Nene Valley Retail Park Wales and south-west Slough 8. Bath Road Retail Park Rest of south-east and eastern West Thurrock 9. Lakeside Retail Park ▲ In course of development or refurbishment ● £50 million and above ● £25-50 million 76 LAND SECURITIES ANNUAL REPORT 2003 Property by location B U S I N E S S A N A L Y S I S Industrial 9 10 1 12 2 3 5 4 11 7 8 6 Hatfield 1. Welham Green Heston 2. Heston Centre and Spitfire Trading Estate Sunbury Cross 3. Hanworth Road (incl Interchange West) Basildon 4. Juniper ▲ 4. Zenith ▲ Barking 5. New England Industrial Estate Chandlers Ford 6. Omega Enterprise Park 6. Electron Way Frimley 7. Albany Park Guildford 8. Cobbett Park Tamworth 9. Centurion Park Welwyn Garden City 10.Bridge Road 10.Centra Park West Thurrock 11.Motherwell Way Wimbledon 12.Weir Road ▲ In course of development or refurbishment ● £25-50 million ● £10-25 million Central London EC2 1. 30 Gresham Street ▲ 2. Dashwood House 3. Moorgate Hall 4. 130 Wood Street EC3 5. 13/23 Fenchurch Street 6. 49 Leadenhall Street 7. 6/12 Fenchurch Street and and 1 Philpot Lane 8. Gracechurch House 9. 37/39 and 40 Lime Street and 4 Fenchurch Avenue 10.New London House EC4 11. New Fetter Lane 12. 1 New Change 13. Regis House 14. 50 Ludgate Hill 15. 8 Salisbury Square 16. 26 Old Bailey 17. Cannon Street House and Martin House 18. Fleetbank House WC1 19. Lacon House 20. 190 High Holborn 21. Warner House WC2 22. 40 Strand 23. Grand Buildings W1 24. 475/497 Oxford Street and Park House 25. Portman House 26. Devonshire House 27. Piccadilly Circus 28. 12/24 Oxford Street and 2/5 Tottenham Court Road 29. 6/17 Tottenham Court Road 30. Oxford House 31.455/473 Oxford Street 32.26/36 Oxford Street W2 33. 10/20/30 Eastbourne Terrace 34. 40/50 Eastbourne Terrace W11 35. Notting Hill Gate SW1 36. Bowater House 37. Haymarket House 38. 10 Broadway 39. The Home Office 40. Portland House 41. Eland House 42. Kingsgate House 43. Cardinal Place ▲ 44. 49/75 Buckingham Palace Road and 29 Bressenden Place 45. Wellington House 46. Selborne House 47. Westminster City Hall 48. Allington House 49. Clive House SE1 50. The IBM Building 51. Bankside 1, 2, 3 SW6 52. Empress State ▲ ▲ In course of development or refurbishment ● £50 million and above ● £25-50 million LAND SECURITIES ANNUAL REPORT 2003 52 34 33 35 25 30 24 31 2 32 21 19 15 16 14 18 20 22 12 17 6 7 9 13 5 8 10 26 50 51 45 49 44 46 47 41 43 42 39 40 38 48 77 Major property holdings As at 31 March 2003 there were 254 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, £25 to £50m and £10 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). Location Property name and address Property description Principal occupiers Date built (b)/ last refurbished (r) Total area m2 City,West End, midtown, and inner London properties – £50m and above Under construction 2003 (b) 37,180 ABN Amro, Pinsent Curtis and AMEX 1975 (b) / 1995 (r) 10,550 DKW 1968 (b) / 1984 (r) International London Underwriting Centre 1975 (b) Allen & Overy 1986 / 1990 (r) 15,620 12,230 32,650 8,670 1998 (b) 1985 (r) 11,040 1989 (b) 1999 (b) 1997 (r) 1991 (b) 10,700 19,580 8,570 18,080 Sun Microsystems GE Frankona Secretary of State KPMG Nabarro Nathanson Reed Elsevier Bain & Co, ICL Shell EC2 30 Gresham Street Dashwood House 69 Old Broad Street FH EC3 13/23 Fenchurch Street FH 49 Leadenhall Street PFPL EC4 1 New Change FH Regis House King William Street FH 50 Ludgate Hill FH 8 Salisbury Square FH Lacon House Theobald’s Road 40 Strand FH Grand Buildings Trafalgar Square FH 475/497 Oxford Street and Park House, Park Street Portman House 2 Portman Street Devonshire House Piccadilly FH FH Piccadilly Circus, 44/48 Regent Street 1-17 Shaftesbury Avenue, Denman Street, Sherwood Street and Glasshouse Street 12/24 Oxford Street and 2/5 Tottenham Court Road FH 10/20/30 Eastbourne Terrace Bowater House, Knightsbridge FH FH 35,876m2 city offices with 1,304m2 of retail City offices City offices and major retail unit City offices and leisure centre City offices and 13 shops 8,140m2 city offices with public house and 530m2 retail City offices, 12 shops, 2 public houses and 4 restaurants Midtown offices Midtown offices, restaurant and leisure centre Midtown offices and 8 shops 14,860m2 Midtown offices and 3,220m2 shops 9,330m2 West End offices and 1,740m2 retail West End offices, 9 showrooms and shops 2 major retail trading units, 10 shops, kiosk, public house, 3 restaurants, 1,460m2 offices and 670m2 of illuminated advertising West End offices and 9 shops Vacant offices, H&M, Dixons 1963 (b) 6,980 Cluttons, Conoco,Trafigura 2001 (b) 11,070 Alliance Capital, Boston Consulting 1983 (r), part 1994 (r) and part 1996/97 (r) Gap, Burger King, Boots, Signs: McDonald’s, Coca-Cola 14,190 4,120 8,850 16,780 24,720 10,930 Part 1977 (r), part 1979 (redevelopment) and part 1985 (r), part 2003 (r) Part 1995 (r) and part 1998 (r) 1957/58 (b) 1958 (b) 1955, part 1992 (r), part 1997/98 (r) and part 2003 (r) Metropolitan Police 1966 (b) 35,670 1 store 8,360m2 and 3 shops 490m2 Inner London offices Virgin Megastore John Brown West End offices Lowe Lintas, Marriott Hotels Secretary of State Curtis Brown,Tiger Tiger Haymarket House, Haymarket FH FH 10 Broadway New Scotland Yard 7,520m2 West End offices and 3,410m2 of restaurants. Part air-conditioned West End offices, banking space and restaurant The Home Office, 50 Queen Anne’s Gate FH Portland House, Stag Place FH Eland House, Stag Place FH Kingsgate House,Victoria Street FH Cardinal Place (formerly Esso House, Glen House 16 Palace Street) Victoria Street FH The IBM Building, 74-78 Upper Ground FH Notting Hill Gate FH Empress State, FH Lillie Road, Fulham, West End offices Secretary of State 1977 (b) 27,610m2 West End offices and 1,510m2 basement restaurant. Part air-conditioned West End offices West End offices and 18 shops 52,042m2 offices, 8,390m2 retail Inner London offices AMEX, Secretary of State, Angel Trains Secretary of State Secretary of State Under construction IBM Inner London offices, 52 shops, 2 stores and cinema WHSmith, Boots, McDonald’s, Crown Business Communications 1959 (b) part 1992/95 (r), part 1996/99 (r) and part 2002 (r) 1995 (b) 1987 (r) 1982 (b) 1958 28,310 29,120 23,170 18,820 60,432 20,160 8,680 40,210m2 Inner London offices and 2,770m2 retail/leisure Under construction 2003 (r) 42,980 LAND SECURITIES ANNUAL REPORT 2003 WC1 WC2 W1 W2 SW1 SE1 W11 SW6 78 B U S I N E S S A N A L Y S I S Major property holdings Date built (b)/ last refurbished (r) Total area m2 1990 (b) 7,540 1999 (r) 1985 1993 (b) 1971/72 (r), part 1988/ 1990 (r),part 1992/94 (r) and part 1998 (r) 5,380 4,780 6,720 9,380 1993 (r) 6,180 FH Freehold Leasehold Part freehold, part leasehold PFPL Air-conditioned In course of development or refurbishment Shopping centre Properties shown as freeholds include properties held on leases for 900 years or more. Location Property name and address Property description Principal occupiers City,West End, midtown, and inner London properties – £25m to £50m EC2 EC3 Moorgate Hall, 143/171 Moorgate 130 Wood Street FH 6/12 Fenchurch Street and 1 Philpot Lane FH Gracechurch House 55 Gracechurch Street FH 37/39 and 40 Lime Street and 4 Fenchurch Avenue PFPL New London House 6 London Street FH EC4 26 Old Bailey FH Cannon Street House and Martin House FH Fleetbank House Salisbury Square FH WC1 190 High Holborn FH Warner House Theobald’s Road FH 6,090m2city offices and 1,450m2 retail Marks and Spencer, Clinton Cards, DLJ, Hamburgische Landesbank City offices and bar/restaurant City offices and shops Allen & Overy DKW 5,790m2 city offices and 930m2 health club Royal London,Venton Services, David Lloyd Leisure City offices Small insurance agencies City offices, 2 shops, 2 restaurants and public house City offices City offices Midtown offices Midtown offices Midtown offices ED & F Man, Faraday Underwriting and other insurance agencies Secretary of State Nicholson Graham & Jones Secretary of State Vacant Warner Bros W1 6/17 Tottenham Court Road FH 5,682m2 retail and 242m2 offices EasyEverything, Sainsbury’s, Boots Secretary of State, Universal Pictures Mothercare Lloyds Bank, Cromwells Madhouse West End offices and 5 shops 4 shops and restaurant Air-conditioned bank, large shop, kiosk, restaurant and 1,050m2 educational use West End offices, 136 bedroom hotel, 30 flats and 7 shops West End offices Royal Westminster Thistle Hotel, IIR Metropolitan Police 1964 (b), offices 1994 (r) 1978 (b) West End offices Secretary of State West End offices 3,600m2 West End offices and 930m2 retail Westminster City Council Rolls Royce, Sainsbury’s 1966 1965 1997 West End offices Secretary of State 1950 (b) 1984 (r) 1996 (r) 1974 (b) 2002 (r) 1999 (b) 1999 (b) Part 1994 (r) 1963 1983 (r) 6,030 8,100 11,370 7,770 11,820 5,924 5,680 3,021 6,050 5,150 4,970 10,032 15,750 4,530 9,400 Inner London offices and 4 ground floor units NHS Estates 1950s (b) 12,963 Inner London offices, 8 shops Secretary of State 1960 (b) 55,420 FH Oxford House 70/88 Oxford Street 455/473 Oxford Street 26/36 Oxford Street FH SW1 FH 49/75 Buckingham Palace Road and 29 Bressenden Place Wellington House Buckingham Gate FH Selborne House Victoria Street FH Westminster City Hall Victoria Street FH FH Allington House 50 Victoria Street FH Clive House Petty France 40/50 Eastbourne Terrace FH Bankside 1, 2, 3 80/112 Southwark Street PFPL SW1 W2 SE1 LAND SECURITIES ANNUAL REPORT 2003 79 Major property holdings Location Property name and address Property description Principal occupiers Date built (b)/ last refurbished (r) Total area m2 City,West End, midtown, and inner London properties – £10m to £25m EC3 23/39 Eastcheap FH 34/36 Lime Street and 7/11 Cullum Street FH 14/15 Philpot Lane FH 1 Seething Lane FH Tower House 34/40 Trinity Square FH Newspaper House 8-16 Great New Street 12/16 Gough Square FH Lintas House New Fetter Lane 21 New Fetter Lane 2-4 Temple Avenue FH Turnstile House High Holborn 7/8 Essex Street FH 7 Soho Square 1/11 Hay Hill FH FH FH Elliot House Bressenden Place Roebuck House 1 Warwick Row Neville House Page Street FH FH FH St Albans House Haymarket Rennie House 17-25 Stamford Street FH Bankside Industrial Estate FH EC4 WC1 WC2 W1 SW1 SE1 Midtown offices and restaurant Gibson Dunn & Crutcher Ernst & Young, Taylor Rafferty Assocs 1978 (r), 1993 (r) and 1998 (r) City offices, 5 shops and restaurant. Part air-conditioned City offices and 6 shops Ingenhaag & Co, Alfred Blackmore Royal Sun Alliance City offices DKW City offices and restaurant Alexander Forbes City offices Bowring Services Midtown offices Midtown offices Midtown offices Midtown offices 192 room aparthotel, shop and 2 restaurants Midtown offices West End offices and retail 1,670m2 West End offices and 610m2 retail/showroom 2,720m2 West End offices and 710m2 retail 116 flats and fitness centre Secretary of State DJ Freeman Lewis Silkin Ernst & Young, Beachcroft Wansbroughs Citadines Barristers’ chambers Vacant offices,Tesco Arlington Management Services Residential flats Part 1986 (r) and part 1988 (r) 1974 (b) 1986 (b) 1977 (r) and part 1988 (r) 1979 (r) 1960s (b) 1992 (b) 1958 (b) and 1999 (r) 1999 (r) 1997 (b) 1998 (r) 2003 (r) 1987 (r) 1,730 3,340 3,010 4,250 4,140 5,032 2,540 8,180 6,220 3,317 2,610 5,720 West End offices BPF,WhizzKidz, Quality Hotels 103 flats Residential development 4,270m2 offices and 2 restaurants Burberry’s, McDonald’s McAlpines 1964 (b) 3,430 1960 (b) 1995 (r) 1952 (b) 1963 (b), part 1987 and 2000 (r) 3,400 4,780 4,270 Inner London offices Sainsbury’s 1960s (b) 11,610 2,550m2 offices and 3,720m2 industrial space Mobil Services, Gradesound Ltd 1980 (b) 6,270 The aggregate area of offices and retail accommodation including developments and refurbishments owned in the City, Midtown,West End and Inner London, including the properties listed in this section, amounts to some 862,562m2 of offices (including office storage) and approximately 98,788m2 of retail, banking and restaurants. Towns and cities, outside central London – £50m and above Aberdeen Bon Accord Centre PFPL 23,690m2 4 stores, 54 shops, food Dorothy Perkins, Etam,Woolworths, Disney, Dolcis, New Look,Adams, Laura Ashley, Oasis court, 4,650m2 leisure, 2,690m2 offices and car park Birmingham Caxtongate FH Phase I: 15 shops and 1,390m2 offices H&M, Legends,Tower Records, JD Sports, Jane Norman 1990 (b) 31,030 1997 (b) 9,750 2003 (b) 110,000 Birmingham Bull Ring Canterbury Whitefriars PFPL Cardiff St David’s Centre PFPL Retail space (one-third interest) Selfridges, Debenhams, Next, under development H&M, Gap, Zara, Benetton, Borders Department store, 2 major stores, 36 shops, library, residential and car park 1 store, 63 shops Fenwicks, Boots,Tesco To be completed 2005 37,685 Bhs, Burtons, Mothercare, Peacocks, C&J Clark, Miss Selfridge, Alexon,Vision Express, Stead & Simpson, Best, Clinton Cards 1981 and 1991 (r) 32,520 St David’s Link 12 shops and library Iceland, Greggs, Energy Centre 1986 32,520 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. 80 LAND SECURITIES ANNUAL REPORT 2003 Major property holdings Location Property name and address Property description Principal occupiers Date built (b)/ last refurbished (r) Total area m2 Towns and cities, outside central London – £50m and above (continued) East Kilbride The Olympia FH East Kilbride Princes Mall FH Exeter 32,520m2 – 2 stores, 48 shops, ice rink, 9 screen cinema, library, restaurant, public house, night club, food court and 690m2 offices, car park 13,940m2 – 2 stores, 61 shops, public house and 950m2 offices Safeway, Etam,Warner Bros, Littlewoods,Adams, Game, Vision Express, Clinton Cards Argos, Bon Marche, Poundland, Farmfoods, Superdrug, Mark One 1989 (b) 33,210 1994 (r) 14,890 3 stores, 82 shops and 2,580m2 offices, residential and car park Virgin, Dorothy Perkins, Gap, Monsoon 1952/1964 and 1971 15,000 B U S I N E S S A N A L Y S I S Leeds White Rose Shopping Centre FH 2 anchor stores, 11 major space units, 73 shops, restaurant and food court Liverpool St Johns Centre FH Livingston Almondvale Centre FH Portsmouth Gunwharf Quays FH Stratford E15 Stratford Centre Sunderland The Bridges Towns and cities, outside central London – £25m to £50m Belfast Castle Lane FH Birmingham Martineau Place Coventry Ealing Broadway Centre FH Livingston Designer Outlet Centre The Gate FH Newcastle upon Tyne Plymouth York 4 stores, 98 shops, 2 public houses, retail market, food court, hotel, car park and Beacon Phases I and II: 7 stores, 106 shops, public house, mall café and car parks Sainsbury’s,Top Shop, Debenhams, Clinton Cards,Argos, Bhs, Next, Woolworths, HMV, Etam, Superdrug, WHSmith, Next, River Island,Adams Wilkinsons,Woolworths JD Wetherspoon, Poundland, Mark One, Babycare, Evans 1997 (b) 60,390 1989 (r) 33,440 JJB Sports, New Look, HMV, Next, Phase I : 1989 and 1996 (r), Phase II: 1996 (b) Superdrug,WHSmith, Bhs,Woolworths,Argos, Mothercare, Etam 48,310 17,000m2 – 87 shops, 22,060m2 Warner Bros., Bowlplex, Gap, leisure and restaurants, Marks and Spencer, Nike, C&J Clark, Suits You, French Connection 2,230m2 offices (50% interest) 2001 (b) 41,290 27,870m2 – 6 stores, 58 shops and 2,580m2 of air-conditioned offices Sainsbury’s,WHSmith, HMV, Boots, Superdrug, Peacocks, New Look, Iceland 1976 and 1998 (r) 30,450 Phase I: 3 stores, 69 shops and mall café, Market Hall Tesco, Peacocks, Mark One, Boots, Phase I: 1969 and 1988 (r) 23,220 Etam, Clarks, Body Care, Vision Express Phase II: 2 stores, 25 shops and Debenhams, H&M, Next,TK Maxx, car park New Look, Superdrug,Allsport, Gap Phase II: 2000 24,620 9 shops River Island, Clinton Cards, JJB Sports 1957, part 1984 (b) 3,050 17,420m2 retail and 6,040m2 offices (one-third interest) Gap, First Sports, Sainsbury’s, Benetton 2001 (b) 23,460 37 shops, public house, 1,250m2 offices and hotel Virgin, Bay Trading,Top Shop, 1955/1961 and 1991 (b) 11,000 Adams, River Island, Clinton Cards Foot Locker, JD Sports 3,390m2 11 shops and 2,020m2 air-conditioned offices (part) River Island, Russell & Bromley, Clinton Cards 95 shops, leisure and food court (50% interest) Spean Bridge,Williams Hollins, Sports Soccer, C&J Clark, Speciality Retail, East by West Leisure complex including multiplex cinema Odeon,Tiger Tiger, Frankie & Benny’s, Pizza Hut 1984 (b) 5,410 2000 (b) 26,790 2002 (b) 17,770 Coppergate Centre PFPL 3 stores, 18 shops, museum, 19 flats Marks and Spencer, Evans, Prestons, C&J Clark, Boots, Starbucks, Dolcis and car park 1984 (b) 14,860 38 shops Next, McDonald’s, Moss Bros 1952/1965 (b) LAND SECURITIES ANNUAL REPORT 2003 81 Major property holdings Location Property name and address Property description Principal occupiers Date built (b)/ last refurbished (r) Total area m2 Towns and cities, outside central London – £10m to £25m 1961 (b) 2000 (b) 1965 (b) 1999 (r) 1992 (b) 1993 (b) 1985 (b) 1952/56 (b) 1900s (b) 1950s and 1999 (b) 1985 (r) 1966 (b) 1979 (b) 6,550 1,500 9,760 120,770 4,650 2,100 10,400 8,350 2,250 10,300 3,000 9,400 3,720 3,700 Basildon PFPL Bath Birmingham Caxtongate FH Birmingham Priory Square Canterbury Longmarket 39 shops Top Shop, KFC, Burger King, Hinds 1958/60, part 1985 (r) and part 1988 (r) 7 shops Bhs, Dolcis Phase II: 6 shops and residential Muji,Ted Baker, Jigsaw Up to 120,770m2 retail (one-third interest) Argos, Oasis,Virgin, Olivers, Adams, Next 16 shops, conservatory restaurant, and museum Gap,Ablegrand, Link, Body Shop Canterbury Clocktower 5 shops and 1,330m2 offices, car park QS, Burger King, JJB Sports, Evans Canterbury Marlowe Arcade and Graylaw House PFPL 1 store, 14 shops and 710m2 offices Bhs,Top Shop, Miss Selfridge, HMV Hull Leeds Briggate 34 shops and public house Next, McDonald’s, C&J Clark 2 shops Liverpool Lord Street and Williamson Square FH 16 shops and 370m2 offices 4 shops and 1,950m2 offices Starbucks,Thomas Cook, H Samuel Gap, Millets Home Bargains, JJB Sports, New Look British Rail Hogg Robinson Nottingham Alan House Reading Station Hill FH FH Hogg Robinson House Walsall Park Street and Bradford Street FH Dartford Ebbsfleet Sunderland Market Square 8,030m2 offices and 13 shops, car park 3,720m2 offices 13 shops 50% ownership of 153 hectares of land with development potential River Island,Thomas Cook, Abbey National 1970s and 1987 (b) 7 shops WHSmith, Poundland 2001 (b) 3,300 Retail warehouse and food superstore properties – £50m and above Dundee Kingsway Retail Park FH Gateshead Team Valley Retail Park Retail World Liverpool Aintree Racecourse Retail Park,Aintree FH Manchester White City Retail Park FH 10 retail warehouses and fast food restaurant. Major enlargement and reconfiguration commenced 22 retail warehouses and fast food restaurant. Being upgraded. Extension planned 11 retail warehouses and fast food restaurant 11 retail warehouses, 2 restaurants and 2 storey ten pin bowling Toys ‘R’ Us, Halfords, Currys, MFI Homebase,TK Maxx, Next, MFI B&Q, Courts, Comet, Halfords, Harveys Homebase, Halfords, Currys, DFS 1985 (b), 1987 (b), 1988 (b), 1994 (b) and 2002 (b) 18,970 1987 (b) / 2000 (b) 35,220 1986 (b), 1988 (b), 1990 (b), 2001 (b) 27,100 1990 (b) 17,830 Slough West Thurrock Bath Road Retail Park Lakeside Retail Park FH FH Livingston Almondvale West FH Almondvale Retail Park FH Almondvale South FH 6 retail warehouses Homebase, MFI,Wickes,DFS 1989 (b) and 1998 (b) 20 retail warehouses and fast food restaurant Next, Borders, Currys, PC World,Toy ‘R’ Us 1988 (b), 1989 (b), 1997 (b) and 2002 (b) 14,350 32,940 5 retail warehouses Extension planned Matalan,TK Maxx, JJB Sports, Pets at Home 9 retail warehouses Halfords, Currys, MFI, JJB Sports Phase I -1 unit, Phase II - planning consent for 9,383 m2 Homebase 1987 (b) and 2002 (r) 9,540 1997 (b) 2002 (b) 10,050 8,380 Retail warehouse and food superstore properties – £25m to £50m Bexhill- on-Sea Ravenside Retail and Leisure Park FH Blackpool Blackpool Retail Park FH Dartford Eastern Quarry Derby Wyvern Centre FH Edmonton Ravenside Retail Park FH 9 retail warehouses, food superstore, fast food restaurant, ten pin bowling alley and swimming pool. Planning consent for extension of 3,065m2 9 retail warehouses. Extension planned 245 hectares of land with development potential 6 retail warehouses and fast food restaurant 4 retail warehouses and fast food restaurant Homebase, Currys, PC World,Tesco Currys, Halfords, Pets at Home 1989 (b) 20,650 1993 (b), 1995 (b) and 1996 (b) To be developed 11,270 Currys, Homebase, Halfords, Carpetright Wickes, Courts, Mothercare 1990 (b) and 1996 (b) 11,290 1988 (b) 12,040 Erdington Ravenside Retail Park, Kingsbury Road FH 10 retail warehouses MFI, Halfords, Currys 1987 (b), 1989 (b) and 1999 (r) Food superstore and retail warehouse Sainsbury’s 1984 (b) and 2002 (b) 11 retail warehouses Currys, Staples, Comet 1987 (b), 2001 (r) and 2003 (r) 5 retail warehouses Homebase, Courts, MFI 1986 (b) and 1987 (b) 13,480 LAND SECURITIES ANNUAL REPORT 2003 14,130 10,250 13,690 Hull Priory Way FH Northampton Nene Valley Retail Park FH Poole Commerce Centre FH 82 Location Property name and address Property description Principal occupiers Date built (b)/ last refurbished (r) Total area m2 Retail warehouses and food superstore properties – £10m to £25m Major property holdings B U S I N E S S A N A L Y S I S Birmingham Great Barr FH Bolton Manchester Road FH Bristol Chadwell Heath Longwell Green FH High Road FH Chesterfield Ravenside Retail Park, FH Markham Road Derby Meteor Centre FH Fareham Southampton Road FH Gloucester Gloucester Retail Park FH Eastern Avenue Oldings Corner FH London Road FH Hatfield High Wycombe Manchester Cheetham Hill FH Plymouth Friary Centre, Exeter Street FH South-east industrial – £25m to £50m Basildon Juniper FH Basildon Zenith FH Omega Enterprise Park School Lane FH Electron Way FH Albany Park FH Chandlers Ford (near Southampton) Frimley (near Camberley) Guildford Cobbett Park Tamworth Centurion Park FH Welwyn Garden City Bridge Road FH Centrapark Motherwell Way FH West Thurrock Wimbledon Weir Road FH Asda 1998 (b) Focus, JJB Sports 1985 (b), 1989 (b) and 1997 (b) Homebase,Wickes 1985 (b) / 1986 (b) Wickes, Currys 1988 (b) and 1999 (b) PC World, Focus, Currys 1982 (b), 1997 (b) and 2002 (b) 7,750 7,630 7,200 8,520 9,140 Focus, MFI, Lidl, Pets at Home 1988 (b) and 1994 (b) 17,330 MFI,Argos Focus, MFI 3 retail warehouses Homebase, Habitat, Comet 2 retail warehouses Retail warehouse 2 retail warehouses B&Q Big W Focus, Courts 1985 (b) 1989 (b) 1988 (b) 1988 (b) 2002 (b) 1990 (b) 7,400 10,450 5,970 4,360 9,180 7,310 Superstore 6 retail warehouses 2 retail warehouses 5 retail warehouses 6 retail warehouses. Extension planned 11 retail warehouses, fast food restaurant and public house 3 retail warehouse units 3 retail warehouses Phase I: 3 warehouses and 1 office building Phase II: 4 warehouse units under construction TNT, Ford and Schenker 2001 (r) 34,580 2002 (b) and 2003 (b) 1986 (b) and extended 1988 31,300 28,730 Expeditors, P&O, Hays and TNT 1977 (b), 1982 (b), 1984 (b) and 2003 (r) ICI, Unigate and Johnson & Johnson 1970 (b) and 1976 (b) 29,360 Sheffield Insulations, Royal Mail Ellis & Everard,Artisan 1978 (b), 1981 (b) 12,932 2002 (b) 18,300 Securicor Geopost, (UK) Ltd 1988 (b) and 1989 (b) 10,790 New development of 8 warehouse/industrial units and 1 refurbished unit 7 warehouse/industrial units and 2 storey research & development building 1 industrial/warehouse unit APW Electronics 1988 (b) and 2001 (b) 28 industrial/warehouse units Lucas industries, Travelex and Siemens 1982 (b) and 1984 (b) 10 warehouse/industrial units Big Yellow and BOC 2002 (b) High bay warehousing UCI and DFDS 1996 (b) and 1999 (b) 3 warehouse/industrial units Argos 1955 (b), 1961 (b) and 1976 (b) 3 warehouse buildings WT Foods and John Lewis 2001 (b) 37 warehouse/industrial units. Extension planned Debenhams,Weir Pumps and Avery Automotive 1973 (b), 1975 (b) and 1979 (b) 15,060 21,640 11,440 24,430 17,070 16,800 29,060 5 distribution warehouses Oddbins 1986 (b) 9,530 Hatfield Welham Green FH Regional distribution centre Tesco Distribution Ltd Heston (near Heathrow) Heston Centre and Spitfire Trading Estate FH Sunbury Cross Hanworth Road (includes Interchange West) FH South-east industrial – £10m to £25m 19 industrial/distribution units of differing size and specification. Currently 10,240m2 is being refurbished 3 distribution warehouse units Barking New England Industrial Estate FH 6 warehouse/industrial units Outside central London the Group has holdings which total 450,000m2 of retail space, 90,500m2 of office space, 454,223m2 of warehouse and industrial space and 454,223m2 of out of town retail and food superstore space. LAND SECURITIES ANNUAL REPORT 2003 83 Directors’ report For the year ended 31 March 2003 The directors submit their report with the financial statements for the year to 31 March 2003. 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. Business of the Group 1. 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 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 44. An interim dividend of 9.5p per share was paid on 6 January 2003 and the directors now recommend the payment of a final dividend of 26p per share making a total of 35.5∑p per share for the year ended 31 March 2003, an increase of 4.4% over that for the previous year. Subject to authorisation at the Annual General Meeting to be held on 17 July 2003, the final dividend will be paid on 28 July 2003 to shareholders registered on 27 June 2003. The shares are expected to be quoted ex-dividend from 25 June 2003. 3. Valuation and net assets (i) Valuation Knight Frank, external valuers, valued the Group’s investment portfolio on an open market basis at £7,530.1m as at 31 March 2003. Taken with the Group’s one-third holding in the Birmingham Alliance limited partnerships; the one-half holdings in the Gunwharf Quays limited partnership, the Ebbsfleet limited partnership, the BBC Wood Lane joint venture and the one-quarter holding in the Bristol Alliance, the portfolio had a value of £7,844.0m. This is an increase of £33.0m∑ over that at the previous year end. Taking into account total expenditure on 84 investment properties of £478.3m and the aggregate book value of properties sold during the year of £396.1m, the deficit on valuation was £56.8m after adjusting for UITF28. (ii) Net assets The investment portfolio valuation has been included in the financial statements for the year ended 31 March 2003 and the net assets of the Group at that date amounted to £5,563.1∑m. 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 ∑1188p. Taking into account shares reserved for issue under the terms of the Group’s employee share schemes, the diluted net asset value per share was ∑1188p. 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 24∑ on page 60. The amount, in the region of £435m (2002 £535m), represents approximately 93∑p per share on a fully diluted basis. 4. Directors The directors who held office during the year were: + ❋ P G Birch CBE I J Henderson CBE M R Griffiths (retired 8/7/02) + ❋ P B Hardy (retired 8/7/02) + ❋ Sir Winfried Bischoff + ❋ G I Henderson CBE (retired 20/11/02) F W Salway A E Macfarlane P G Freeman ❋ + ❋ D Rough (appointed 2/4/02) A M Collins (appointed 20/11/02) I D Ellis (appointed 20/11/02) ❋ Non-executive and member of the Remuneration Committee + Member of the Audit Committee In addition, S A R Rose was appointed a director on 21 May 2003. Biographical details of the directors appear on page 32. Since A M Collins, I D Ellis and S A R Rose were appointed subsequent to the last Annual General Meeting, they will retire from the Board and, being eligible, offer themselves for reappointment. A M Collins and I D Ellis have service contracts which provide for notice of 12 months from the Company and the director. S A R Rose does not have a service contract with the Company. I J Henderson, F W Salway and A E Macfarlane retire from the Board by rotation and, being eligible, offer themselves for re-election; I J Henderson and F W Salway have service contracts which provide for notice of 12 months from the Company and from the director. A E Macfarlane has a service contract which provides for notice of 12 months from the Company and 6 months from the director. 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 the Report of the remuneration committee on pages 36 to 41. 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. Share capital 5. The Company was authorised at an Extraordinary General Meeting held on 14 July 2002, prior to the Company being introduced as the holding Company for the Group, 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 2003 Annual General Meeting. In the year to 31 March 2003, 700,000 shares were purchased and cancelled. A resolution to renew this authority will be proposed at the Annual General Meeting. Substantial shareholders 6. At 16 May 2003 the following interests in issued share capital had been notified to the Company under Part VI of the Companies Act 1985. LAND SECURITIES ANNUAL REPORT 2003 Number of shares 22,109,980 21,668,586 19,871,556 17,685,178 16,976,263 % 4.74∑ 4.65 4.27 3.80 3.65∑ delay when invoices or parts thereof are contested. The effect of the Group’s payment policy is that its trade creditors at the financial year end represented ∑18 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 During the year PricewaterhouseCoopers converted to a limited liability partnership (LLP). Accordingly PricewaterhouseCoopers resigned as auditors on 23 January 2003 and the directors appointed PricewaterhouseCoopers LLP as auditors on that date. A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting. By order of the Board P M Dudgeon Secretary 21 May 2003. Barclays Global Investors PLC M&G Investment Management Ltd Legal & General Investment Management ABP Investments Merrill Lynch Investment Managers Employees 7. Details of the Group’s policies on employment and on employee development are given on page ∑29. 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 30 and ∑31. 8. Donations During the year ended 31 March 2003 charitable donations amounted to £774,400. This amount included £635,800 paid to charitable trusts investigating sites of considerable archaeological importance. There were no contributions of a political nature during the year. Environment 9. The Group’s environmental policy and the Environmental Report 2002 are 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 LAND SECURITIES ANNUAL REPORT 2003 Directors’ report O T H E R 85 Investor information The report and financial statements and other information on the Group are available through the internet on www.landsecurities.com. Registrar All enquiries concerning holdings of ordinary shares, B shares, debentures or loan stocks in Land Securities Group PLC, including notification of change of address, queries regarding dividend/interest payments or the loss of a certificate, should be addressed to: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 0870 600 3972. Website: www.shareview.co.uk 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 Payment of dividends/interest Shareholders who wish to have their dividends/interest paid directly into a bank or building society account should complete a mandate instruction available from the registrars. Under this arrangement tax vouchers are sent to the shareholder’s registered address. Dividend reinvestment plan (DRIP) The Company offers shareholders the option to participate in a DRIP. This enables shareholders to reinvest cash dividends in Land Securities Group PLC shares. 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. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA. Telephone: 01903 50 2541. Low cost share dealing facility The Company operates with Cazenove & Co. Ltd a postal share dealing facility which provides both existing and prospective shareholders with a simple, low cost way of buying and selling Land Securities Group PLC ordinary shares. For further information, or dealing forms, contact: Cazenove & Co Ltd, 20 Moorgate, London EC2R 6DA. Telephone: 020 7606 1768. 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 242 4244. The appropriate values to be used as base costs in respect of shares in Land Securities Group PLC issued under the Scheme of Arrangement are: Ordinary shares – 769p B shares – 101p so that the new ordinary shares and the B shares received in respect of the old ordinary shares in Land Securities PLC will attract 86.99% and 13.01% respectively of the base cost in those old ordinary shares. 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, Leconfield House, Curzon Street, London W1J 5JA. Telephone: 0870 241 1713; website www.uar.co.uk Share price information The latest information on Land Securities Group PLC share price is available on our website www.landsecurities.com or on the Financial Times Cityline Service: telephone: 0906 8433133 (calls charged at 60p per minute). Analysis of equity shareholdings At 31 March 2003 by size of holding up to 500 501 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 to 500,000 500,001 to 1,000,000 1,000,001 and above 86 Number of holdings Balance at % 31 March 03 12,736 38.15 3,459,513 9,300 9,190 749 775 186 290 81 79 27.86 6,796,574 27.53 17,945,281 2.24 5,188,203 2.32 16,619,882 0.56 13,364,957 0.87 66,838,321 0.24 59,660,141 0.23 275,679,936 % 0.74 1.46 3.86 1.11 3.57 2.87 14.36 12.81 59.22 33,386 100.00 465,562,808 100.00 Registered office 5 Strand, London WC2N 5AF Registered in England and Wales No. 4369054 Offices 5 Strand, London WC2N 5AF (Telephone: 020 7413 9000) and at 140 London Wall EC2, Glasgow and Leeds LAND SECURITIES ANNUAL REPORT 2003 Glossary Adjusted figures Reported amount adjusted to exclude the results of fixed asset property sales, bid costs, exceptional items and additional deferred tax arising from the adoption of FRS19 ‘Deferred Tax’ Average unexpired lease term Excludes short-term lettings such as car parks and advertising hoardings, residential leases and long ground leases Balanced scorecard An approach to strategic management developed in the early 1990’s by Drs. Robert Kaplan and David Norton to translate an organisation’s vision into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth Book value The amount at which assets and liabilities are held in the accounting records BREEAM Building Research Establishment Environmental Assessment Method Credit rating An independent assessment by Credit Rating Agencies of a borrower’s overall ability to meet its financial obligations under debt and similar arrangements Development pipeline The Group’s development programme and proposed schemes that are not yet included in the development programme but are more likely to proceed than not Development programme The Group’s major development schemes comprises projects which are completed but less than 95% let; developments on site; committed developments (being projects which are approved and the building contract let); and authorised developments (those projects approved by the Board for which the building contract has not yet been let). For reporting purposes we retain properties in the programme until they are 95% let 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 Dividend cover Number of times equity dividend charge in the profit and loss account is covered by profit after tax attributable to ordinary shareholders Earnings per share (EPS) Profit after taxation attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year Estimated rental value (ERV) The estimated market rental value of lettable space as determined biannually by the Company’s valuers as opposed to the rent being paid FRS3 profit/(loss) Profit/(loss) on disposal of fixed asset properties calculated as the excess/(deficit) of net sale proceeds over the book value. For investment properties book value comprises the Company’s valuers’ annual valuation at the previous financial year end plus any additions in the period LAND SECURITIES ANNUAL REPORT 2003 FRS17 Financial Reporting Standards 17 (FRS17) ‘Retirement Benefits’. See Accounting policy Note 2(e) and Note 5 for FRS17 disclosure of retirement benefits Gearing (net) Total borrowings, including bank overdrafts, less short- term deposits, corporate bonds and cash, at book value, plus non equity shareholders funds as a percentage of equity shareholders’ funds IOSH The Institute of Occupational Safety and Health Revenue profit Profit before tax, excluding the impact of exceptional costs or profits such as bid costs, FRS3 profits/(losses), interest charges on termination of financial instruments and Group reorganisation costs Retail Includes shops, shopping centres, central London retail and retail warehouses Retail park A scheme of three or more retail warehouse units aggregating over 4,650m2 with shared parking 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 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 Interest rate swap A financial instrument where two parties agree to exchange an interest rate obligation for a pre-determined amount of time Investment portfolio All investment properties and development properties excluding Land Securities Trillium properties and trading properties Investment properties Properties held for investment purposes, excluding development programme, Kent Thameside, Land Securities Trillium properties and trading properties IPD Investment property databank. An independent information business which supplies market indices and portfolio benchmarks to the property industry 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 asset value (NAV) per share Equity shareholders’ funds divided by the number of Ordinary 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 Reversionary or under-rented Space where the passing rent is below the ERV South-east industrial Includes high bay distribution and estates suitable for distribution, storage and manufacturing use SSAP19 Statement of Standard Accounting Practice (SSAP19) “Accounting for Investment Properties”. See Accounting Policy Note 2(h) (iii) Stamp duty Government tax levied on certain legal transactions including the purchase of property 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 Total investment property return Valuation surplus, FRS3 profit/(loss) 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 Total return The growth in value of a share holding over a specified period, assuming that dividends are reinvested to purchase additional units of the stock Trading properties Properties held for trading purposes and shown as current assets in the Balance Sheet. See Accounting Policy Note 2(i) UITF28 Urgent Issue Task Force Abstract 28 (UITF28) ‘Operating Lease Incentive’ requires the Group to treat incentives for lessees to enter a lease to be offset against the total rent due. See Accounting Policy Note 2(c) UITF34 Urgent Issues Task Force Abstract 34 (UITF34) ‘Pre contract Costs’ requires bid costs incurred prior to exchange of contract to be expensed. See Accounting Policy Note 2(d) Passing rent The annual rental income receivable which may be more or less than the ERV (see over-rented and reversionary) Unitary charge A payment under a Private finance inniative or property partnership covering the costs of using a property or facility Pre-let A lease signed with an occupier 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 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 Bloomberg beta factor, average for last two years 0.56%) applied to fair value of debt and equity market capitalisation and then suitably weighted 87 O T H E R 3,4,12,45,50,55 10,19,27 5 49,57 47 49,58 7 69 9,16-19 12,44 44,48,50 57 11 49,60 65 36 36-41 13,70,71 6 4,11,68 Estimated rental value Exeter, Princesshay 71,72 N 22,23,74,81 Net asset value Index A Aberdeen, Bon Accord Centre Accountability Accounting policies Achievements Analysis of net debt Auditors Audit committee B Balance sheets BBC Bid costs 18,80 34 48,49 5 63 F Finance Financial assets and liabilities 35,42,85 Financial instruments 34 Financial reporting Financial review Financial structure 45 Five year record 5,10,12,14,24-26 48 G Birmingham, Caxtongate 23,74,80,82 Government Board Bristol Alliance/Bristol 7,32-35 21-23,74 Gross property income Guildford, Cobbett Park C H Canterbury, Whitefriars 20-24,74,76,80 Health and safety Commitments for future expenditure Capitalisation of interest 58 49 I Cardiff, St David’s Centre 22,23,74,76,80 Insurance 12,46,63 Investment activity New business O Objectives Operating properties Other primary statements 51 63,64 49 34 12-15 Other tangible fixed assets 11 66 Outlook P 18,75,77,83 Profit after tax Profit and loss Properties Prospects Provisions R Related party transactions 30,85 15 18 Birmingham Alliance/Bull Ring 22,23,74,76,80 Goodwill 49,56 Performance benchmarking Pension scheme/pensions 13,38,40,48,51-54 Portfolio management 6,7 48 Portfolio valuation (investment) 6,12,17,49,68-72 Cash flow Chairman’s statement Chief executive’s review Competitive environment Consolidation Contingent liabilities Convertible bonds Corporate governance Creditors Corporate social responsibility Customer service D Debentures, bonds and loans Debtors Depreciation and amortisation 4-7 8-11 10 48 65 15,60 7,33,35 59,60 28,29 10 59 58 49 Investment portfolio 6,9,12,13,17,49,56,57,68-72 Remuneration committee Investment properties 3,12-14,17-19,49,56,72,84,87 Remuneration report Investments in group undertaking 49,58 Rental income K Results Retail Kent, Crossways Business Park 31 Retail warehouses 19,23,68-72,75,76,82,83 Kent Thameside/Eastern Quarry 10,14,22,23 Return of capital 5,6,11,13,15,40,48 L Land Securities Trillium/Total property outsourcing S 4,5,7,8,10,12,14,24-27,31,32,49,51,52,56,64,65,68,73 Segmental information Landflex 10,18,22 Share capital Risk management 11,34 50 61,62 Leeds, White Rose Centre 19,28,76,81 Share option schemes Leisure (The Gate Newcastle Upon Tyne) 23 Shareholders’ funds 36,37,39,54 62 Livingston, Almondvale Centre 19,29,76,81 Shopping centres and shops 19,22,23,68-72,74,76, Development 5,9,14,20-23,26,74-75 London 80-82 Development pipeline 14,15,21,74-75 Development programme 14,15,21,56,74-75 Bankside 1,2,3, Cardinal Place 22,74,77,79 South-east industrial 19,23,68-72,75,77,83 21,22,74,77,78 Strategy 5 Directors Directors’ report Directors’ responsibilities Dividend Dundee, Kingsway Retail Park DWP E 32-42,51,52,84 Central London 6,10,17,18,22,68-72,74,77,78-80 84,85 42 5,6,12,55,84 23,75,76,82 Eastbourne Terrace 30 Gresham Street Hilton 18,21,22,77-79 T 22,29,74,77,78 Taxation 11,14,48,54 6,17,18 Telereal (joint venture) 5,12,14,25,26,65,73 New Fetter Lane 18,22,74,77,80 Ten year record 66 10,14,25,27,31,73 White City 12,14,24,26 Thurrock, Lakeside Retail Park 18,19,21,76,82 M Total property outsourcing/Land Securities Trillium 4,5,7,8,10,12,14,24-27,31,32,49,51,52,56,64,65,68,73 Earnings per share Employees/HR policy 6,12,44,55 7,29,51,85 Major property holdings Manchester, White City Retail Park 78-83 19,76,82 Trading properties Treasury management Empress State, London 18,22,74,77,78 Environment 31,85 V Valuations 49 14,15 35,49,68-72 88 LAND SECURITIES ANNUAL REPORT 2003 LAND SECURITIES GROUP PLC COPYRIGHT AND TRADE MARK NOTICES All rights reserved. Designed by SAS Photography Marcus Lyon Typeset by Asset Graphics © Copyright 2003 Land Securities Group PLC. Printed by St Ives Westerham Press, Land Securities, LandSecurities (stylised), the "LS" block logo, Making Property Work, and This report is printed on paper that meets international LandFlex are trade marks of Land Securities Group PLC. environmental standards, contains elemental chlorine free (ECF) virgin pulp, obtained from sustainably environmentally accredited printers ISO 14001. All other trade marks and registered trade marks are the property of their respective owners. managed forests. making property work Land Securities Group PLC 5 Strand London WC2N 5AF Telephone: 020 7413 9000 e-mail: landsecurities@landsecurities.com http://www.landsecurities.com