Annual Report 2004 What does it take to be a leader in the property industry? A clear understanding of our strengths and what it takes to be successful... 1 Strong heritage 04–05 Sixty years of Land Securities. How our heritage has shaped the business. 2 A clear strategy 3 Meeting expectations 06–07 Overview. An insight into our ambitions for the Group. 08–09 Chairman’s statement. Peter Birch highlights the Group’s achievements and future outlook. 10–35 Operating and ≤ew. financial revi≤ Ian Henderson and Andrew Macfarlane take a detailed look at our business and its performance. 5 Value creation 6 Innovative products 7 Customer focus 22–27 Development. 28–31 Property outsourcing. 32–33 Meeting needs. Bringing you up-to-date on development progress and our plans for future schemes. Generating new business through innovative customer solutions. Landflex. Responding to occupiers’ needs for more flexibility. 31 A review of our services through customer satisfaction surveys. 9 Sound management 10 Acting responsibly 11 Aware of the environment 36–37 Board of directors. 38–41 Corporate responsibility. 42–43 The environment. Developing strategy and leading our employees to deliver our objectives. Meeting the needs of our wider communities. Leading the industry on environmental issues. 4 A diverse portfolio 16–21 Portfolio management. An update on how we have generated value through our asset and property management activities. 8 Financial stability 34 –35 Finance and tax. Managing our finances to enhance performance. 1331 1153 1157 1219 12 Effective governance 44 –50 Corporate governance. Upholding the principles of corporate governance. 3 Assess 1 Goals & Objectives 2 Identify 6 Report 4 Action 5 Reasses LAND SECURITIES ANNUAL REPORT 2004 51–56 Remuneration report 57 57–58 Independent auditors’ report Directors’ responsibilities 59–82 Financials 60 60 60 61 62 62 62 Consolidated profit and loss account Statement of total recognised gains and losses Note of historical cost profits and losses Balance sheets Consolidated cash flow statement Reconciliation of net cash flow to movements in net debt Reconciliation of Group operating profit to net cash inflow from operating activities 63–79 Notes to the financial statements Five and ten year records 80 81–82 Directors’ report 83–97 Business analysis 84 Investment portfolio valuation 84 Performance benchmarking 85 Top twelve properties 86–87 Development pipeline schedule 88–90 Total investment portfolio analysis 91 Property outsourcing 92–93 Property by location 94 –97 Major property holdings 98 –100 Other 98 99 100 Glossary Index Investor information One New Change illustrates our approach to investing in Central London. Acquired in 2000 the property offers substantial redevelopment opportunities when it is vacated in 2006. 1 Adjusted diluted net assets per share (pence) 1331 Investment property (£bn) Revenue profit (pre-tax) (£m) 8.2 309.2 1153 1157 1219 7.5 7.9 7.8 7.8 323.4 318.4 350.1 336.2 2001* 2002* 2003* 2004 2000 2001 2002 2003 2004 2000 2001* 2002* 2003* 2004 Adjusted diluted net asset value per share up 9.2% to 1331p (2003: 1219p) Investment portfolio valuation uplift of 5.3% to £8.15bn (2003: £7.84bn), with the like-for-like portfolio recording a 6.7% increase to £6.22bn (2003: £5.73bn) Profit before tax rose by 16.7% to £373.1m (2003: £319.6m) Pre-tax revenue profit decreased, as expected, by 8.0% to £309.2m (2003: £336.2m) Adjusted earnings per share decreased, as expected, by 6.0% to 47.86p per share (2003: 50.89p per share) Proposed full year dividend increase of 4.5% to 37.1p (2003: 35.5p) 2 LAND SECURITIES ANNUAL REPORT 2004 Adjusted earnings per share (pence) Dividends per share (pence) 47.86 49.18 50.89 40.86 45.22 37.10 34.00 35.50 31.00 32.50 2000 2001* 2002* 2003* 2004 2000 2001 2002 2003 2004 *restated Financial highlights Gross property income Property investment and trading (including 50% share of joint ventures) Property outsourcing Total Operating profit (total) Pre-tax profit Revenue profit (pre-tax)1 Adjusted earnings per share2 Earnings per share Dividends per share Adjusted diluted net assets per share3 Diluted net assets per share Carrying value of investment properties4 Net borrowings Equity shareholders’ funds Gearing (net)5 *as restated – Notes 9 and 10 31/3/2004 31/3/2003 % Change +12.2% +25.9% +19.5% +2.8% +16.7% –8.0% –6.0% +33.1% +4.5% +9.2% +8.8% £650.2m £830.9m £579.3m £660.2m £1,481.1m £1,239.5m £565.8m £373.1m £309.2m 47.86p 61.84p 37.10p 1331p 1293p £550.2m £319.6m £336.2m 50.89p* 46.46p 35.50p 1219p* 1188p £7,880.9m £2,435.8m £6,030.1m 40.5% £7,823.9m £2,589.3m £5,532.7m 47.3% 1 2 Excludes results of fixed asset property sales and exceptional items in 2003 Based on revenue profits. Tax charge adjusted to exclude deferred tax arising from capital allowances and capitalised interest on investment properties Excludes deferred tax arising from capital allowances and capitalised interest on investment properties and adding back the net liabilities of Telereal 3 4 Market value less UITF28 adjustment of Group Investment Properties 5 Net borrowings (including bank overdraft less short term deposits and cash), at book value, plus non-equity B shares as a percentage of equity shareholders’ funds 6 The calculation basis has been refined this year and the comparatives have been restated LAND SECURITIES ANNUAL REPORT 2004 3 1Strong heritage Sixty years of Land Securities From modest beginnings Land Securities has grown steadily to become the UK’s leading property company.A member of the FTSE since the index was created in 1984, the Group now manages more than 10 million m2 of property across the UK. From three houses in Kensington the Group’s investment portfolio is now valued at more than £8bn. The Group’s objective is to create attractive and sustainable returns for shareholders. It will do this by providing its customers with products that match their needs.With a 25-year track record of dividend growth, Land Securities is recognised for its financial stability and responsible management. Over the course of 60 years the Group has, through investment, development, management and property outsourcing, become a major force in the UK property industry. Land Securities is proud of the reputation it has created. Lord Samuel of Wych Cross, Land Securities’ founder and chairman until 1987 (left). 4 Sir Peter Hunt, Lord Samuel’s successor and Land Securities’ chairman until 1997 (right). Land Securities Investment Trust 1944 Annual Report, the first issued after Lord Samuel bought the company, a copy of which is included in this year’s Annual Report. LAND SECURITIES ANNUAL REPORT 2004 60years of making property work 5 LAND SECURITIES ANNUAL REPORT 2004 2A clear strategy Overview Land Securities offers investors: A commitment to the creation of attractive and sustainable returns through its activities in the UK property market A strategic focus on its customers Ownership of £8bn of investment property in the UK Market leading positions in three sectors: – Retail (including retail warehouses) – Central London offices – Property outsourcing Cash flow through six-monthly dividend payments Potential for capital and revenue growth through: – Superior management of assets – 170,000m2 development pipeline – New property outsourcing business Aiming to be recognised as the UK’s leading property company 6 LAND SECURITIES ANNUAL REPORT 2004 Strategic focus on value creation IRR +++ IRR ++ Higher returns from development activity Innovative products accessing immature markets Diversified portfolio in sectors with supply side constraints Active management of balance sheet and effective recycling of capital IRR + WACC 7.5% • Land Securities Trillium successfully received its re-accreditation for Investors in People and, over time, we will roll this out across the Group. Our employee survey demonstrates upper quartile results for employee satisfaction and morale. • Since unveiling the Group’s new strategy in 2000, Land Securities has shown a total shareholder return (share price appreciation plus dividends re-invested) of 71.85% as compared to a negative 24.52% for the FTSE100 and 66.06% for the FTSE Real Estate Index. Over the 12-month period to 31 March 2004, Land Securities return has been 55.14% as compared to 25.74% for the FTSE and 61.67% for the FTSE Real Estate Index. Our objectives We have a clear view of what we are trying to achieve. The objectives for our business are to: • Maximise the returns from our investment portfolio. Our achievements Throughout this year’s Annual Report you will find evidence of the success we have had in meeting our objectives. However, we have taken the opportunity to outline below a few notable examples of our activities which particularly demonstrate our achievements to date. • Complete and let our development programme. • Continue to grow our property outsourcing business by winning new contracts and expanding existing ones. • Focus on our customers with products that meet their needs. • Build and retain the best team in the property industry. • Focus on earnings generation from capital investment and drive total returns, so creating value for our shareholders. • In each of our core sectors and on an overall portfolio basis, we have outperformed the Investment Property Databank. • We sold £682.1m of investment property, creating FRS3 profits of £52.1m. • We completed 152,500m2 of development, including the Birmingham Alliance’s award- winning Bullring, which opened September 2003 receiving more than 20 million visits from shoppers since then. • We let (or agreed subject to contract to let) 82,000m2 of development, which included fully letting the newly-launched Soho Square building, the first Landflex office scheme and a department store letting in Cardiff. • Land Securities Trillium agreed the expansion of the DWP contract to cover the Employment Services estate, welcoming a further 35,000 DWP customers to our property outsourcing business and was appointed preferred bidder by Aviva for part of its Norwich Union estate. LAND SECURITIES ANNUAL REPORT 2004 7 Peter G. Birch CBE Chairman Chairman’s statement Introduction We made good progress in the year to 31 March 2004 with adjusted diluted net asset value per share up by 9.2% to 1331p (2003: 1219p), once again demonstrating the benefits of a clearly defined strategy and a soundly financed and well-managed asset-backed business. During the year our asset and property management activities increased the value of our like-for-like investment portfolio by 6.7%; we completed 152,500m2 and let or agreed to let 82,000m2 of development; and won an expansion to our contract for the Department for Work and Pensions (‘DWP’) which went live in December, resulting in a further 1,078 properties coming under our management. The scale of our operations across the UK reinforces our market leading position. We now provide office accommodation to more than 2.6% of the UK office workforce and we estimate that our retail properties are visited more than 300 million times per annum by shoppers. A diversified portfolio, secure income from quality occupiers and strong and growing revenues from Land Securities Trillium back the Group’s progressive dividend policy and we are increasing the dividend by 1.6p this year, maintaining our long record of year-on-year increases. Results Pre-tax profit increased to £373.1m (2003: £319.6m), although last year’s profits were reduced by exceptional items associated with the return of capital to shareholders. As expected, revenue profits (our measure of underlying pre-tax profits) decreased from £336.2m to £309.2m as a result of: • mobilisation and bid costs relating to the expanded DWP contract (although these are mitigated by improved results from Telereal and the BBC); • the impact of our Central London development programme; • the full year impact of the increase in interest payable resulting from the return of capital; and • the dilutive effect of property sales in the past two years. Adjusted earnings per share (calculated on revenue profits) were 6.0% lower at 47.86p per share (2003: 50.89p per share). The Board recommends a final dividend of 27.2p per share (2003: 26.0p), making a total distribution for the year of 37.1p (2003: 35.5p), a 4.5% increase on 2003. The dividends paid and proposed will be covered 1.3 times by adjusted earnings (2003: 1.5 times). The dividend will be paid on 26 July 2004 to shareholders on the register on 25 June 2004. The Group is focused on the efficient use of its capital. During the year, it received cash totalling £700.2m from property disposals and a £172m distribution from Telereal. The Group reinvested £506.3m into property acquisitions and development and £234.5m into its property outsourcing activities. The total investment portfolio was valued at £8.15bn (2003: £7.84bn), representing an increase in assets, in spite of the level of sales activity. This portfolio includes 54.9% retail, 36.6% Central London office and 4.3% industrial. At the half-year, we introduced additional disclosure with a ‘like-for-like portfolio’ definition, which gives a better indication of the underlying performance of the portfolio. The like-for-like portfolio was valued at £6.22bn, showing a capital growth of 6.7% over the year. The retail assets, including retail warehouses, now represent 55.2% of the like-for-like portfolio. Retail continued to perform well with an 11.5% valuation surplus. In Central London, our holdings showed a nominal 0.8% increase in value over the year, demonstrating clear signs of improving market conditions. This trend was particularly evident in the second half of the year, when our Central London portfolio as a whole showed a positive valuation uplift of 2.5%. Regulatory environment We have come a step closer to the introduction of a liquid, tax transparent vehicle for property investment in the UK with the publication of the Government’s consultation document on Property Investment Funds (‘PIFS’), more commonly known as Real Estate Investment Trusts (‘REITS’).While welcoming the consultation, we would caution Government not to be too prescriptive about the structure of such a vehicle. To be able to deliver the regeneration and flexible property contracts desired by Government, and the returns that investors will find attractive, REITS will need to sustain a reasonable level of gearing, undertake some development activity and embrace property outsourcing activities. In addition, to encourage conversion, Government 8 LAND SECURITIES ANNUAL REPORT 2004 must make sure that it sets a fair, not punitive, conversion charge. In principle we are attracted by the idea that Land Securities might become a REIT, but our decision to convert or not will be determined by the details and costs of conversion.We will only convert if it is clearly in shareholders’ interests to do so. We were also pleased that Stamp Duty was not increased in the last Budget.We continue to remind Government of the adverse impact of higher Stamp Duty on commercial property, both on liquidity in the market and as an asset class compared to bonds and equities. The regulatory environment is becoming increasingly complex and onerous. In its last budget, the Government included proposals for, or references to, Stamp Duty on limited partnerships, a new development land tax, increased disclosure requirements for quoted companies and VAT avoidance on commercial property, among other things. All of these could directly impact upon our business. Furthermore, Government is about to start its consultation on lease reforms. We view regulation as unnecessary since the market has already taken steps to provide a wide range of lease options for occupiers. We have led the industry through our Landflex and property outsourcing solutions. on 14 July when Ian steps down from the Board. Ian will, however, remain with the Group until December 2004 to lead our representations on various Government and private sector initiatives. The Board would like to take this opportunity to thank Ian for his substantial contribution over 33 years of which 17 years were on the Board. During his tenure he has guided the Group through a period of great transformation while at the same time ensuring, through his work with the British Property Federation, that the industry is poised to benefit from the Government better understanding the contribution property makes to the wider economy. Peter Freeman will also be stepping down as a non-executive director from the Board at the AGM. The Board would like to thank Peter for his valuable input and are pleased that the Group will still benefit from his sage counsel as a consultant on property matters. During the year the Group appointed David Rough as senior independent director. It also established a formally constituted Nominations Committee and updated corporate governance processes to achieve compliance with current best practice. The Group will be appointing Bo Lerenius to the Board as a non-executive director. Bo, 57, is currently Chief Executive of Associated British Ports, and was previously Chief Executive of Stena. Board On 31 March 2004 we announced that Francis Salway will succeed Ian Henderson as Group Chief Executive at the Annual General Meeting People The team at Land Securities continues to demonstrate great enthusiasm and a positive approach to our business. We have had a good year and the Board would like to thank everyone who works for the Group for their valued contribution to our progress. Outlook In the year to 31 March 2004, the FTSE Real Estate index rose by 61.7% compared with a 25.7% rise in the All-Share index. Our share price has increased by 55.1%. There is no doubt that market interest in REITS has been a contributing factor, but institutions have also increased their weightings in the direct property market with yields tightening in all our markets, reflecting strong investment demand for commercial property assets. In the retail sector, we expect rents to continue to rise modestly and we are seeing firm evidence of a recovery in our London office markets, particularly the West End. We remain very encouraged by the potential for our investment portfolio and the schemes in our development programme and the opportunities available to us in the property outsourcing market. We are also pleased by the potential for the Group should an appropriate REIT structure be introduced. We believe that this will attract new capital into property and be positive for the economy. Over four years the Group has transformed itself from an asset accumulator to a modern, customer focused property business. The Board’s confidence in our prospects is reflected in this year’s dividend increase. LAND SECURITIES ANNUAL REPORT 2004 9 3Meeting expectations Operating and financial review Land Securities returns Return on equity Return on average capital employed Weighted average cost of capital (all figures are pre-tax) Weak London office market 2000 2001 2002 Years ended 31 March 2003 2004 % 16 14 12 10 8 6 4 2 0 For more than two years, economic and property market conditions have been challenging. It is therefore all the more gratifying that we have met and, at times, exceeded market expectations of our performance. The results to 31 March 2004 are no different. We have increased adjusted diluted net asset value per share by 9.2% and profit before tax is 16.7% higher. We are particularly pleased with the performance of the investment portfolio over the past twelve months where in each of our core sectors and on an overall portfolio basis we have outperformed the Investment Property Databank (‘IPD’). The restructuring of our investment portfolio is now broadly complete, although we continue to increase average lot sizes and seek active management opportunities. The development programme is on course to deliver good returns to shareholders in the future. We believe that both our investment and development properties are particularly well placed to benefit from a recovery in the Central London markets. Land Securities Trillium has made excellent progress this year and now represents 14.6% (ignoring the impact of Employment Services start-up costs) of the Group’s operating profit, leaving it on course to achieve our business plan target of a 25% contribution by 2007. The Group has performed well during the difficult conditions over the past few years but is now beginning to benefit from the upturn, as illustrated in the graph above. Although weak conditions in the Central London office market meant that returns on capital were disappointing in 2002 and 2003, in 2004 we have produced an encouraging return on capital employed of 11.5%, 4.0% ahead of our cost of capital. Return on equity was 13.4%. year’s revenue profits, adjusted earnings per share, and adjusted net asset value per share. Full details of the changes to the adjustments are contained in the Finance and Tax section of this review. The figures presented throughout this review, and in the financial statements that follow it, are all presented on the new basis and prior year figures have all been restated. The financial effect of the changes is summarised in the table below: Year to 31/3/2004 Change % Year to 31/3/2003 Revenue profits * £309.2m (8.0) £336.2m † £315.4m (7.5) £340.9m Adjusted earnings per share * † 47.86p 46.90p Adjusted net asset * 1333p value per share Adjusted diluted net asset value per share † * † 1316p 1331p 1314p Year to 31 March – * new basis † old basis (6.0) (6.9) 9.3 8.3 9.2 8.1 50.89p 50.39p 1220p 1215p 1219p 1215p Adjusted financial information We supplement our reporting by including certain adjusted financial information to demonstrate more clearly the Group’s underlying financial performance. This year we refined the basis on which we calculate adjusted information to reflect changes in our business.The changes affect this and prior Net asset value The performance of property companies is primarily measured by changes in net asset value. We believe this focus will continue until the introduction of REITS when, over time, investors may adopt a stronger focus on earnings, dividends and the growth in earnings and dividends. 10 Ian J Henderson Group chief executive Andrew Macfarlane Group finance director Piccadilly Circus, London W1. 5,820m2 of retail, restaurants, offices and the world famous illuminated advertising. LAND SECURITIES ANNUAL REPORT 2004 The West End represents 19%of our total investment portfolio LAND SECURITIES ANNUAL REPORT 2004 11 Sales and transfers (899.0) 237.3 (661.7) Exceptional items The main driver of net asset value was the performance of our investment portfolio, including the property joint venture, which notwithstanding sales is worth £306.2m more than a year ago at £8.15bn. This increase reflects a valuation uplift of £406.9m or 5.3% after accounting for the impact of property purchases, sales and development capital expenditure over the period, as shown below: At 1/4/2003* Purchases Group 7,844.0 205.1 Share of joint ventures Total £m – – 7,844.0 205.1 Development spend 324.6 Other property related expenditure Valuation increase 31.3 400.7 – – 324.6 31.3 6.2 406.9 At 31/3/2004* 7,906.7 243.5 8,150.2 (* Investment and development assets) Given the strength of investment demand for well-let commercial property, we found relatively few attractively priced opportunities to buy assets during the year but, conversely, we took advantage of market conditions to sell assets with low growth prospects at premium prices. As a result, we were net sellers of investment property over the period; although this was partially offset by the delivery of new schemes from the development programme, such as Bullring, Birmingham. The increase in net asset value was augmented by £115.1m of retained earnings, which has resulted in an adjusted diluted net asset value per share of 1331p. Further details of the valuation results are contained in the Portfolio Management and Business Analysis sections of this report. Earnings Profit before interest and tax was £629.7m for the year to 31 March 2004, a £37.8m or 6.4% increase over 2003. However revenue profits were 8.0% lower than last year. The principal causes for these changes are summarised below: Year ended 31/3/2003 Profit before tax and exceptional items Rental income growth (A) Net effect of asset sales and purchases (B) Impact of developments (C) Existing Land Securities Trillium contracts (D) Employment Services (E) Interest on return of capital (F) Other factors Profits before tax £m Revenue profits £m 319.6 336.2 58.3 – 377.9 336.2 10.8 10.8 15.8 (8.5) 23.7 (16.1) (12.1) (18.4) (9.7) (8.5) 27.0 (16.1) (12.1) (18.4) Year ended 31/3/2004 373.1 309.2 A. Rental income growth reflects increases in rent from rent reviews (predominantly from our retail portfolio) and the new rents from developments completed in the first half of the year. Rents from developments have been partially offset by the interest cost associated with financing these projects. B. We have sold more properties than we have bought over the last two years. This has reduced profits because average rental yields have exceeded the cost of borrowing. C. The cost of financing completed but unlet development projects and the loss of rent on properties on which redevelopment has started this year have reduced profits by £8.5m. D. Profits for existing Land Securities Trillium contracts have improved as a result of Telereal’s strong trading and the BBC contract becoming profitable. This follows the completion and occupation of the new White City Media Village by the BBC last autumn. E. The bid, mobilisation and initial costs associated with the Employment Services contract have reduced profits by £16.1m, as expected. The contract is on track to produce some £10m of operating profits in the year to 31 March 2005. F. We returned £511m to shareholders in September 2002. The associated debt was financed for the whole of the year as compared to 5 1⁄2 months in the prior period. This has cost an extra £12.1m. Boding well for a REIT environment, should these be introduced and we decide to convert, the Group has always had a high dividend distribution rate relative to the industry. This year is no exception and, as disclosed in the Chairman’s statement, the Group is proposing to increase its full year dividend by 4.5% to 37.1p per share for 2004. 12 LAND SECURITIES ANNUAL REPORT 2004 Investment property total returns (%pa)* Income return Lease effects Yield impact Rental value growth *IPD monthly index for March 2004 annualised Shopping centres Shops – rest of UK Shops Central London Retail warehouses Warehouses & industrial Offices – rest of UK Offices Central London % 30 20 10 0 -10 Competitive environment and our markets As mentioned in the Chairman’s statement, we welcome the consultation exercise currently being carried out by Government on REITS which, if introduced, could effect an enormous change on the competitive environment for quoted property companies. Not only could this substantially increase the flow of capital into our sector, but it could also provide a step change in the way in which investors hold property. In particular, certain smaller offshore limited partnerships, which are relatively illiquid and unregulated investment vehicles, could become less attractive and these assets may be transferred into a REIT. In addition, certain pension funds may elect to divest their direct property holdings and switch into REITS to minimise the cost of investing in property. Notwithstanding the potential for this major structural change in the quoted property investment market, we continue to exploit our competitive advantages of financial strength, scale and the ability to innovate to maximise shareholder returns. A significant proportion of our business, some 91.7% of our rents, is focused on two sectors of the UK property market. The office sector is defined by its geographic location within Central London, the other by its asset class, retail property across the UK. We believe that we have a leadership or top quartile position in both these markets. Both sectors are characterised by supply side constraints although, as evidenced in the City office market, supply can increase substantially during an occupier-led downturn. These sectors, and the property market as a whole, are also impacted by changes in inflation and interest rates. Shareholders also benefit from the diversified nature of the Group’s activities, its exposure to more than one market and its property outsourcing activities, where we believe that Land Securities Trillium now strongly demonstrates its market leadership credentials. Investment property market There continue to be substantial sums of money available to invest in property in the UK creating a pent-up demand for most types of investment property. Anecdotal market evidence suggests that institutions have made large allocations to property in 2004. Property yields are tightening and, for certain asset types, there is a disconnection between occupier demand and investment yields. We anticipate that this situation will exist for the foreseeable future, as investors continue to see the diversification benefits of property as an asset class and as a long-term investment for savings. At the same time, if Government creates attractive REITS, there is likely to be an ongoing, or even strengthening, flow of capital into the UK property market, to the benefit of occupiers. Retail market We have consistently stated that occupier demand in the retail market remains strongly dependent upon retailers’ performance and consumer spending. Over the past 12 months retailers’ performance has been less strong; with some continuing to trade well while others are finding market conditions more challenging. The consumer continues to be fairly resilient to increased interest rates and the threat of a slowing housing market as a result of low levels of unemployment and the improving outlook for the economy. Our experience of retailers’ requirements reflects these fortunes. Across our retail portfolio, particularly in the retail warehouse market, there is still strong demand for the right unit in the right location but demand has fallen off for more secondary locations. As we anticipated last year, while this market still shows positive rental growth, this rate of growth has slowed. With a portfolio of dominant shopping centres, development plans for four major new schemes and a large number of retail warehouse parks, we are one of the leaders in the retail sector. LAND SECURITIES ANNUAL REPORT 2004 13 We have received notification from the City Corporation that it is ‘minded to grant’ planning consent for our New Street Square scheme. Central London market At the half-year, we stated that we were increasingly optimistic about certain sub- sectors of the Central London office market, particularly the West End. This remains the case and we now believe that we have reached the low point for asset values in the Central London office markets. While conditions in the occupational market will continue to be difficult in the City, and we do not expect a return to rental growth in this sub-sector until 2006, rental growth will be evident in the West End this year. While tenant demand has been subdued there are now clear indications that it is improving. The Central London market vacancy rate has improved marginally over the last quarter, moving from 13.3% of total stock to 13.1% overall (Source: DTZ Research). Market void rates now stand at 15.5% in the City and 11.0% in the West End as a whole although vacancy rates in our own portfolio are significantly lower. Over the past few years we have been restructuring our Central London portfolio and forward planning our development pipeline. We believe that we are now well placed to benefit as market conditions improve. The range of development opportunities we have in several of the core sub-markets leaves us strongly positioned to satisfy occupier demand for new, large, modern office buildings across Central London between now and the end of the decade. In addition, in the public sector we are assessing how the property outsourcing model might work for local authorities while continuing to work with Government on their requirements. Although still waiting for the final document to be published, we believe that the Gershon public sector efficiency review may offer some real opportunities for us since we can demonstrate that property outsourcing assists organisations in meeting cost efficiency and quality targets. In this market each property outsourcing solution is bespoke to an individual occupier’s requirements. There is no such thing as a ‘one size fits all’ property outsourcing contract. Consequently we believe that growth will continue to be driven by a relatively small number of meaningful transactions each year. Last year we highlighted London as one of the main engines of the UK’s growth and the need to maintain its attraction to businesses as one of the foremost global financial centres. In particular, we focused on the continued neglect of the capital’s infrastructure. It is unfortunate to see little change over the year. We need to see investment of capital by the Government, both for existing services and new infrastructure projects such as Crossrail. Property outsourcing market Last year we reported that we were seeing an increase in the level of interest in property outsourcing. This remains the case. In the corporate sector, businesses are seeking to align property strategy to business drivers and are focused on minimising costs and streamlining operations, although financial criteria are not always the main driver of the decision to outsource. 14 We now own 100% of the award winning Gunwharf Quays, Portsmouth. A 41,290m2 designer outlet scheme. LAND SECURITIES ANNUAL REPORT 2004 Retail represents some 55%of our total investment portfolio 15 LAND SECURITIES ANNUAL REPORT 2004 4A diverse portfolio Portfolio management The success of the continued rationalisation and active management of the portfolio is demonstrated by a 6.7% like-for-like increase in value. Total investment portfolio valuation As at 31 March 2004 Industrial and other up 9.4% on 2003 to £352.9m Retail warehouses up 13.6% on 2003 to £1,293.4m In addition to our core sectors of retail and Central London, we own a number of south-east industrial properties. We have substantial land holdings in Kent where we plan to deliver major regeneration projects. , We have assembled a leading portfolio of retail warehouse properties. We provide accommodation to nearly 150 retailers in 24 properties, from Dundee, Scotland to Bexhill on the south coast. 16 LAND SECURITIES ANNUAL REPORT 2004 Central London offices down 2% on 2003 to £2,985.7m Regional shopping centres and shops up 9.5% on 2003 to £3,177.4m We are a market leader in London where we have a substantial office portfolio. Stretching from Stratford in the east to Earl’s Court in the west, the majority of these holdings are concentrated in the City and Westminster. For decades we have been enthusiastic about London and we remain committed to one of the world’s greatest capital cities. This portfolio covers a wide spectrum of the UK retail market, from Central London shopping districts to Land Securities’ managed shopping centres. We provide accommodation to more than 700 retail occupiers together with restaurant and leisure businesses. LAND SECURITIES ANNUAL REPORT 2004 17 Financial performance Rental income Market value 31/3/2004 £m 31/3/2003 £m Shopping centres and shops Retail warehouses Offices South-east industrial properties Other Like-for-like Completed developments Purchases Sales and restructured interests Development Joint venture Total portfolio 147.9 58.0 193.7 18.0 6.0 423.6 23.8 16.1 41.7 9.3 0.6 515.1 141.0 54.4 197.3 17.4 6.8 416.9 11.8 4.6 76.2 10.2 – 519.7 31/3/2004 £m 31/3/2003 £m Valuation surplus % 2,270.3 1,165.5 2,441.8 258.2 87.6 6,223.4 559.8 326.2 – 797.3 243.5 8,150.2 2,034.1 986.8 2,378.9 235.8 93.8 5,729.4 453.6 128.0 827.9 705.1 – 7,844.0 10.2 14.0 0.7 8.4 1.4 6.7 10.0 0.5 – –5.3 2.6 5.3 % 4.9 6.6 –1.8 3.4 –11.8 1.6 n/a n/a n/a n/a n/a – 0.9 Portfolio management continued While a proportion of the valuation change can be ascribed to yield shift, a substantial element is accounted for by the success of our asset and property management activities, and we are very positive about the potential we have to continue this year’s outperformance of the Investment Property Databank. Total property returns – year to 31 March 2004 Relative return % IPD%(i) (ii) LS%(i) Shopping centres Retail warehouses Central London offices South-east industrial properties 18.6 19.6 7.2 15.9 Total portfolio/All property 12.7 16.0 16.9 4.6 11.4 12.4 +2.2 +2.4 +2.5 +4.1 +0.3 Source: IPD (i) Includes acquisitions, sales and developments (ii) IPD December Universe (extrapolated to March 2004) unfrozen Financial performance As shown in the table above, the like-for-like investment portfolio showed a 1.6% growth in rental income over the year, mainly as a result of rent reviews in the retail and retail warehouse portfolios. Our office portfolio is generally over-rented and rental increases in the last year were an exception in this part of the portfolio. the like-for-like portfolio is 10.4 years (2003: 11.0 years) assuming all lease breaks and expiries occur. Total investment portfolio value movements Investment portfolio at 1/4/2003 Purchases £m 6,876.6 205.1 Sales (inc. properties sold to joint venture) (830.1) Transfer in of completed development Transfer out for redevelopment Joint venture properties Valuation increase Other (inc. refurbishment expenditure) 451.0 (18.1) 237.3 404.7 89.6 Investment portfolio at 31/3/2004* 7,416.1 (* including ouπr share of the property joint venture) To ensure that the properties we own provide good future growth opportunities, we continue to recycle capital through an active programme of sales and purchases. To this end, during the period under review, we sold a total of £636.4m of property out of the investment portfolio (excluding joint ventures and net of sale costs) generating FRS3 profits of £43.8m (7.4% above book value) while buying £205.1m of assets. Although the investment portfolio was reduced as a result of this net sales activity, the transfer of £451.0m of assets from the development programme meant that acquisitions and disposals were broadly equal. During the year, five schemes were transferred from the development programme, the four significant ones being Bullring, Birmingham, Phase 1, Kingsway West Retail Park, Dundee, 7 Soho Square and Portman House, London W1. These schemes generated rents of £17.4m to 31 March 2004 and will contribute £23.5m next year. Sales and purchases have decreased rental income by £23.0m as compared to the prior year. We have focused on keeping our buildings occupied and void levels across the like-for-like portfolio were 3.4% at the year-end, compared with 2.6% at the start of the year with almost half this void space currently undergoing refurbishment. We were pleased with the 6.7% increase in the value of the like-for-like portfolio over the year, which is a 4.3% increase over the six months since 30 September. As indicated in our interim results, approximately £55.6m (14.2%) of the valuation surplus is attributable to the removal of Stamp Duty from assets in Disadvantaged Areas until 2006. We review further the drivers of this change, which are predominantly attributable to the strong growth in retail, throughout this section of the report. During the last 12 months, the net reversionary potential of the like-for-like portfolio, excluding voids, has reduced to 1.8% at 31 March 2004, compared with 5.5% at the end of the prior year. However this is little changed from the half year figure at September 2003 of 1.9%. The mean weighted unexpired lease term for 18 LAND SECURITIES ANNUAL REPORT 2004 During the year we created the Scottish Retail Property Limited Partnership with the British Land Company PLC, pooling our Aberdeen (pictured) and East Kilbride properties. SRPLP is further evidence of our strategy of working with adjoining property owners to maximise the long-term value of our assets by creating an improved retail environment for shoppers and retailers alike. In Aberdeen, the Bon Accord Centre was transferred to the Partnership alongside British Land’s St Nicholas Centre. These centres make up the current prime retail pitch. In East Kilbride, British Land contributed the Plaza Centre and the recently completed Centre West while we added Princes Mall and Olympia. Progress at Maidstone, our forward funded 29,270m2 shopping centre which is being developed for us by Centros Miller, continues well with more than 77.5% of the scheme’s rental income by ERV now let or in solicitors’ hands. We are looking forward to it opening in March 2005. Including assets sold out of the development programme, total sales of investment property were £682.1m. These included a portfolio of industrial assets for £86.8m, four retail warehouse assets for £30.3m and £463.5m of Central London properties. In total we sold 35 investment properties (including developments) with an average yield of 6.1%. Again this year, we continued to see strong performance across our retail portfolio, with the in-town portfolio performing well and the net reversionary potential remaining strong. Our management activities are focused on ensuring that we remain in a position to satisfy retailer demand while also establishing market evidence in advance of rent reviews. Of the £205.1m invested, the most significant acquisitions were the purchase of 120 Cheapside and 4 Wood Street, London EC2 for £36.5m, Allington Towers, London SW1 for £36.6m and the acquisition of full control of Gunwharf Quays, Portsmouth for a further £88m. The average yield on present income for all purchases (taking into account the cost of stamp duty and acquisition fees) was 7%. Retail Shopping centres, shops and Central London retail 2004 2003 Increase Valuation £2,270.3m £2,034.1m 11.6% Rental income £147.9m £141.0m Gross ERV Void by ERV Running yield £165.0m £158.1m 1.5% 6.1% 1.5% 6.6% 4.9% 4.4% n/a n/a Like-for-like investment portfolio extract from total investment portfolio analysis on pages 88 and 89 Our like-for-like shopping centre portfolio showed strong growth with a 13.1% increase in value. Centres such as the White Rose Shopping Centre, Leeds continued to deliver strong rental growth while activity at Stratford, London E15, and St John’s Liverpool also created good returns. In Central London, our retail assets showed an 8.8% like-for-like increase in value despite the negative effects of congestion charging and a decline in tourism. During the year we took full control of the Gunwharf Quays limited partnership from the Berkeley Group Plc, as a result of which we became 100% owners of the 42,000m2 Gunwharf Quays Designer Outlet scheme in Portsmouth. This property benefits from strong retailer demand and demonstrates considerable growth potential. In March we created the £500m Scottish Retail Property Limited Partnership (‘SRPLP’) a 50/50 joint venture partnership with The British Land Company PLC. This resulted in the transfer of the shopping centre assets, totalling some 130,000m2 of retail space, of both companies in Aberdeen and East Kilbride to SRPLP. The assets currently produce gross rents of circa £30m per annum from over 330 tenancies. LAND SECURITIES ANNUAL REPORT 2004 19 The refurbishment of 50 Queen Anne’s Gate, London SW1, demonstrates how the business is working together to provide accommodation and a full range of property services for the Department for Constitutional Affairs’ occupation in 2007. Portfolio management continued Retail warehouses 2004 2003 Increase Valuation £1,165.5m £986.8m 18.1% Rental income £58.0m £54.4m Gross ERV Void by ERV Running yield £69.5m £66.3m 2.2% 5.1% 3.3% 5.7% 6.6% 4.8% n/a n/a Like-for-like investment portfolio extract from total investment portfolio analysis on pages 88 and 89 The continued strength of the out-of-town retail market is evidenced by another very strong like-for-like increase in value this year of 14.0%. We continue to manage actively this portfolio and are still experiencing strong demand from High Street retailers for out-of-town units. In a number of our assets, we created space for new lettings through the reconfiguration of units. At Team Valley, Gateshead, our largest retail warehouse asset, we secured lettings to Next and Boots and both these units have now opened. In Manchester, at White City we are reconfiguring the estate, replacing a two- storey leisure property with 2,790m2 pre-let to Currys and providing a further 2,040m2 with open A1 consent. In Swansea, we have taken the surrender of an 8,080m2 MFI unit, and reconfigured it to create pre-lets to M&S Simply Foods, Dreams and a smaller unit for MFI plus a further 1,120m2 which is available to let. At Thurrock, our second largest retail warehouse asset, work is proceeding well for the new M&S Lifestore, a 9,310m2 unit which is due to commence trading next year. We also successfully sold a portfolio of four smaller retail warehouse assets for £30.3m. Central London offices 2004 2003 Increase/ Decrease Valuation £2,383.8m £2,320.9m 2.7% Rental income £188.4m £192.3m –2.0% Gross ERV Void by ERV Running yield £175.7m £190.9m –8.0% 4.6% 7.5% 2.5% 7.8% n/a n/a Like-for-like investment portfolio extract from total investment portfolio analysis on pages 88 and 89 The overall increase of 0.8% in the like-for-like value of our Central London portfolio reaffirms our belief that we are beginning to see an upturn in the occupier market. As anticipated at the half year, this recovery is being led by the West End where we saw a 3.0% increase in the value of our like-for-like portfolio. The strong performance of the West End also reflects specific asset and property management activity such as the conclusion of the lease extension at Queen’s Anne’s Mansions, London SW1 which is currently the Home Office but, following refurbishment, will be occupied in 2007 by the Department for Constitutional Affairs. At the end of 2003, the Lyons Review was published. While there have been concerns expressed that it will have a major impact on the market, from our own analysis of the different Government departments cited and our own portfolio, we feel that the risk to us is less than 5% by area of the Central London office portfolio. 20 LAND SECURITIES ANNUAL REPORT 2004 We are firmly of the view that the action we have taken over the last three years to transfer more than £883m of capital out of certain types of long let over-rented Central London investment properties into other activities, offering better growth potential, leaves us extremely well placed to benefit from the market upturn. This is clearly illustrated by the sales of Salisbury Square House, London EC3 and Lacon House, London WC1. In the case of both buildings we created considerable value over time through development and subsequent successful lettings and taking advantage of strong investment market conditions for well-let Central London property, we secured attractive prices for both these properties. On the acquisition front, 120 Cheapside and 4 Wood Street, London EC4 were purchased for £36.5m, providing the opportunity to buy a well-located investment property with a Land Securities has some £600m invested in Scottish retail property. The Designer Outlet centre is part of our holdings in Livingston, which includes the Almondvale shopping centre and three retail park assets. strong income stream and future development potential at an attractive price. The two buildings are located between our existing holdings at One New Change, London EC4 and 30 Gresham Street, London EC2 and total some 9,280m2 of office and retail accommodation and 50 parking spaces. The net rent is approximately £3.4m, representing a net initial yield of 9.4%. At the half-year we reported that we intended to dispose of a portfolio of industrial properties for £86.8m taking advantage of this strong investor demand. This sale was concluded during the second half of the year. The remainder of the portfolio comprises a number of industrial properties let to a wide range of tenants generating £20.3m of income per annum and continues to provide good returns. South-east industrial properties 2004 2003 Increase Valuation £247.7m £226.0m Rental income £16.9m £16.6m Gross ERV Void by ERV Running yield £19.4m £19.0m 10.5% 6.8% 10.2% 7.0% 9.6% 1.8% 2.1% n/a n/a Like-for-like investment portfolio extract from total investment portfolio analysis on pages 88 and 89 The south-east industrial portfolio has shown a good like-for-like increase in value over the year of 8.1%. This performance has primarily been driven by the strong investment market, but we have also seen early signs of a stronger occupational market. At our 33,890m2 Lakeside Retail Park, the trend for High Street retailers to move to out-of-town locations is demonstrated by this 1,900m2 Borders Books outlet. LAND SECURITIES ANNUAL REPORT 2004 21 5Value creation Development Forecast spend on development pipeline Actual Proposed developments Development programme £m 450 400 350 300 250 200 150 100 50 0 Actual 2004 2005 2006 2007 Years ending 31 March 2008 2009 achieved 82,000m2 of lettings. Full details of our development pipeline are contained in the Business Analysis section. Programme at 31/3/2003 Capital expenditure Capitalised interest We aim to create value through our development programme by progressing and positioning schemes to take advantage of improving markets, while at the same time creating new assets for the investment portfolio, which are not readily available for purchase at attractive yield levels in today’s investment markets. During the year we completed 152,500m2 of developments, started 14,800m2 of new schemes, received planning consent or resolutions to grant consent for 193,400m2. In addition, we applied for planning permission for a further 65,300m2 of new space and Major development schemes require a substantial skills base. Over the years we have assembled a first class development team, encompassing a range of development skills. These skills are now a commodity that we can market to others. For example, following on from the success of the White City development, we have been selected by the BBC to project manage the Broadcasting House, London W1 development. In addition we are participating alongside Land Securities Trillium in its proposal to deliver the Aviva contract, where a substantial 33,000m2 refurbishment of Aviva’s head office in Norwich is required. Financial performance The carrying value of our development programme assets was £734.1m (2003: £967.4m). The movements in the development programme are summarised in the following table: £m 967.4 213.6 25.4 (40.4) Sale of completed schemes Transfers of completed schemes to Portfolio Management (451.0) Transfers of properties into the development programme Valuation movements Other Programme at 31/3/2004 18.1 2.2 (1.2) 734.1 During the year, we spent £213.6m, excluding capitalised interest, on schemes in the programme, with most of the expenditure being to complete Bullring, Birmingham and 30 Gresham Street, London EC2 and on the continuing development at Cardinal Place, London SW1. During the year, we sold or transferred out of the development programme seven completed schemes. Five were transferred fully let to the investment portfolio and 190 High Holborn, London WC1 and an industrial scheme in Hemel Hempstead were sold. We recognised total surpluses (including FRS3 profits) of £90m on these, equivalent to an average profit on cost of 21.8%. 22 At Cardinal Place we let the 3,760m2 major store to Marks & Spencer for its first ever mixed offer retail store in SW1. The Birmingham Alliance’s award-winning Bullring scheme which opened in September 2003, in which we have a one-third share. LAND SECURITIES ANNUAL REPORT 2004 Bullring, Birmingham attracts some visitors on average a week600,000 LAND SECURITIES ANNUAL REPORT 2004 23 The largest Tesco in Scotland is located adjacent to Land Securities’ Kingsway West Retail Park, Dundee, completed in December 2003. This 111,480m2 scheme, developed by the Birmingham Alliance, is now 98% let and our share of the annual rent roll income exceeds £13.0m. This is a material addition to Group rental income. We continue to assess our options for a further phase of retail-led, mixed-use development at Martineau Galleries, Birmingham and expect to submit an outline planning application within the next 12 months. At Whitefriars, Canterbury, we are making excellent progress. Our 37,690m2 retail scheme is now 62% let or in solicitors’ hands to retailers including Marks & Spencer, Boots, Next and Zara. The first phase will be opening on schedule this summer with the balance of the scheme completing in Summer 2005. In Exeter, where we have planning consent for a 37,360m2 retail-led scheme, we agreed to let the anchor department store to Debenhams in April, just after the financial year-end, and we are in active negotiations with retailers for a further 22% of the retail space. The main construction work will start early in 2005. Development continued Schemes in the development programme incurred a small overall valuation surplus (excluding FRS3 profits) of £2.2m over the course of the year, with surpluses on retail projects being largely offset by reductions in value of certain London office projects. We expect the value of the London assets to improve once they are let. We estimate that we will incur cash costs to complete the development programme (excluding interest) of some £262m. In addition, capital expenditure on proposed developments could total £870m (excluding Kent Thameside) if a decision is made to proceed. These schemes, which are currently held as part of the investment portfolio, have a current carrying value of £179.3m. Retail We made substantial progress with our retail developments,1 completing 40,500m2 and letting a further 53,000m2, and gained detailed planning consents for 83,700m2 of retail and 26,100m2 of associated residential. We have established one of the most exciting retail development pipelines in the UK with four substantial city centre shopping centre schemes. Shopping centres Since it opened in September, the award- winning Bullring, Birmingham has been attracting an average of 600,000 visitors a week. This is 20% higher than anticipated. 1 floor areas are based upon our proportionate share of areas on partnership schemes. 24 In Bristol, through the Bristol Alliance, we have outline consent for an 118,790m2 retail-led development, together with 260 residential units, and are in active discussions for the letting of the anchor store. In Cardiff, at the St David’s 2 scheme, we have agreed terms for a letting to John Lewis, for its first ever department store in Wales.We are delighted with the support for this scheme, where in partnership, we are seeking detailed planning consent for a 70,000m2 of retail space with 39,750m2 (gross) of hotel and residential space. Following the decision of the Office of the Deputy Prime Minister to reject our plans at York, we are awaiting supplementary planning guidance on the site from the City Council. Retail warehouses We are in the course of constructing approximately 13,900 m2 of new retail warehouse space, 54% of which is pre-let. This includes the final phase of Kingsway West, Dundee that will become a regional shopping park of 38,000m2. Despite restrictive planning policies, we have 9,000m2 of consents across the retail warehouse portfolio, which we shall implement once we have sufficient pre-lettings. This includes 7,300m2 at Livingston and Bexhill. Gresham Street, London EC2, our 36,450m2 office headquarter scheme, completed in December 2003. LAND SECURITIES ANNUAL REPORT 2004 The City represents 12%of our total investment portfolio 25 LAND SECURITIES ANNUAL REPORT 2004 We continue to prepare schemes for future development and, while not formally included in our development pipeline, are examining the potential for our holdings at Bankside Industrial Estate, London SE1, Bowater House, London SW1 and Park House, London W1. We are particularly excited by the potential for One New Change, London EC4 where, following an extensive selection process, we have appointed Atelier Jean Nouvel with Sidell Gibson as architects for the scheme. These schemes could produce more than 150,000m2 of new space, including over 37,500m2 of retail space. This, together with our scheme at Cardinal Place, represents a material percentage of the new retail accommodation likely to be developed in Central London over the next five years. Development continued Central London We progressed our activities in Central London in anticipation of the upturn. Earlier this year we launched the Capital Commitment marketing campaign targeting major occupiers. The campaign aims to build awareness of our activities across Central London and reinforces the strength of our development pipeline, which has been positioned so that we are able to respond to any major occupier’s requirement for new accommodation between now and 2010. Good progress has also been made on lettings and lettings enquiries. During the year Portman House, London W1, 190 High Holborn, London WC1 and 7 Soho Square, London W1 (our first Landflex building) were fully let, representing some 22,000m2 of Central London offices and 4,000m2 of retail space from the London development programme. We completed the 35,150m2 office headquarter scheme at 30 Gresham Street, London EC2 on schedule in December 2003 and are in discussions with three companies potentially interested in leasing half or more of the building. In July last year, we also completed the 41,290m2 office refurbishment at Empress State, London SW6 (our second Landflex building). We have been asked by the Metropolitan Police to submit a proposal for a significant letting at the building and this proposal is now subject to final approval by the Metropolitan Police Authority. Since opening last year, the new Fenwicks Store in Canterbury has vastly exceeded trading expectations. In addition, after the year-end, we exchanged contracts with IPC Media Limited on a forward sale of the whole of the office element of Building 1, Bankside 123, London SE1. The office floor area of the building is approximately 42,500m2. We will commence construction of Building 1 immediately and we will develop Buildings 2 and 3 only upon securing pre-lets. In April 2004, we received notice from the City Corporation that it was ‘minded to grant’ consent for our revised scheme at New Street Square, London EC4 (formerly New Fetter Lane) where we expect to secure vacant possession in September. This 62,530m2 office scheme is arranged in four buildings. We are seeking pre-lets for two of the buildings, but may take advantage of the flexibility of the layout to complete the balance of the scheme speculatively. At Cardinal Place, London SW1 construction continues and we expect to launch this 51,100m2 office scheme in late summer 2005, when we anticipate a shortage of new buildings in the West End. In the meantime we have let 40% (by area) of the 9,400m2 of retail accommodation to Marks & Spencer for its first mixed offer store in Victoria. Empress State, Earl’s Court, was completed during the year for leasing on a Landflex basis. 26 LAND SECURITIES ANNUAL REPORT 2004 A computer generated image of Building 1, at our 85,370m2 development scheme, Bankside 123, Southbank, which has been forward sold to IPC Media. South-east industrial properties We have completed 100,000m2 of our development programme, of which 50% has been let or sold. A further 11,600m2 is due for completion in June of this year. We continue to achieve rents at or above anticipated levels with satisfactory lease lengths. Leisure During the year, we continued to secure additional lettings at the Gate, Newcastle upon Tyne which is now 92% let, with Aspinalls taking a 4,180m2 unit as their first casino outside London, due to open towards the end of this year. Other From time to time opportunities arise outside our core markets which are ideal for a Group of our scale. These opportunities provide us with the potential to generate good returns for shareholders over a substantial period of time. Kent Thameside A prime example is Kent Thameside, where we continue to make good progress with our plans. At Eastern Quarry, we submitted an outline planning application for 7,250 residential units and approximately 200,000m2 of leisure, retail, office and community accommodation in January last year. We expect the application to be determined in the early summer of this year. At Ebbsfleet, where we already have outline planning consent, we have now received approval for the Quarter Master Plan for the first phase of office and residential development, which is the precursor to our submitting detailed planning applications next year. Where residential development is already under way at Waterstone Park in partnership with Copthorne Homes, a subsidiary of Countryside Properties, all of the units in the first phase have now been sold. Planning consent has been obtained for the second phase of up to 450 units. LAND SECURITIES ANNUAL REPORT 2004 27 Debenham’s is set to anchor our 37,360m2 retail- led development scheme in Exeter, where we are due to be on site in 2005. 6Innovative products Property outsourcing The achievements of our property outsourcing activities, through Land Securities Trillium, are evidenced by the strong performance of our existing contracts and the success we have had over the past 12 months in securing new business. Accommodation under management DWP – PRIME 1.7 millionm2 BBC 372,000m2 In 2001 we entered into a 30-year partnership covering property transfer, property development, ongoing capital investment and estate strategy development throughout England and Scotland. We have invested £257m to develop a new broadcasting centre at White City, enabling the BBC to free-up capital for investment in programme making. The pioneering PRIME contract was established with the DWP in 1998. The largest-ever government property transaction saw the transfer of some 700 buildings to Land Securities Trillium. The success of this contract has been verified by the National Audit Office which estimates that the DWP should save £560m over the life of the contract. 28 LAND SECURITIES ANNUAL REPORT 2004 Telereal 5.3 millionm2 DWP – Employment Services 870,000m2 2.6 million m2 In November 2003 we expanded the PRIME contract to include the former Employment Services Estate (‘ES’). As a result we now own, manage and service over 1,700 buildings accommodating 250,000 DWP employees. The partnership runs until 2018. In 2001, Telereal – a joint venture between Land Securities Trillium and The Pears Group – acquired 6,700 properties from BT. At the same time 350 BT property staff transferred to Telereal. The deal was financed by the largest ever bond issue in the UK which enabled Telereal to make a £2.38bn payment to BT. LAND SECURITIES ANNUAL REPORT 2004 29 Financial results Year ended 31 March Operating profit – DWP (PRIME) – DWP (ES) – BBC Central costs (including amortisation of goodwill) Profit on sale of properties Segment profit Share of Telereal segment profit Telereal interest Share of Telereal profit before tax Property outsourcing continued 2004 £m 59.7 (10.4) 6.6 (11.7) 44.2 (0.1) 44.1 112.5 (82.2) 30.3 2003 £m 62.9 – (11.5) (14.8) 36.6 0.1 36.7 102.9 (75.7) 27.2 £10.4m when bid and start-up costs resulting from contract mobilisation are added to this year’s revenue loss.We expect this contract to produce operating profits of some £10m next year as the start-up costs will not recur. On the BBC contract, we expended £106.7m in the year on the construction of the White City Media Village, bringing our total investment in the contract to £288.8m. The BBC is now in occupation of this building, paying the full accommodation charge and as expected this contract is now profitable. We made operating profits of £10m in the second half compared with an operating loss of £3.4m in the first half of the year. We will also earn fees from the management of the Broadcasting House refurbishment and redevelopment over the next six years. Telereal continued to make a good contribution, providing pre-tax profits (profits after interest on joint venture debt) of £30.3m compared with £27.2m last year. Telereal has successfully sold surplus properties from its portfolio, which has more than compensated for the reduction in revenue caused by the sale of its investment property portfolio last year. Department for Work and Pensions PRIME progresses well and we continue to deliver a range of services. The level of estate management and capital projects activity remains high. In the year we delivered a further 123 Job Centre Plus offices and four new pension processing centres. In total our Capital Projects Team delivered £124.3m of fee generating extra contract works funded by the DWP. In the past six months our major focus has been the mobilisation and integration of ES, which went live on 15 December, into the DWP contract. This estate comprises 1,078 Jobcentres and administrative buildings, totalling some 834,000m2, evenly spread across the UK. Of the properties, 70% are leasehold. We made a £100m payment to the DWP as part of the agreed valuation of the freehold estate. As with the original PRIME contract, the DWP purchased the ability to vacate part of the former ES estate. A total allowance of 228,000m2 becomes available over the next three years, which combined with the vacation allowance already factored into the original contract, means that the DWP could vacate up to approximately 440,000m2 of accommodation over the next three years. In light of the Treasury’s efficiency review and its intention to decrease the number of DWP employees, we would expect the DWP to take up this option over the next few years. However, the full use of the vacation allowance is already priced into the contract and historically we have been successful in re-letting and managing vacant space. BBC The BBC contract continues to make good progress, with some notable achievements during the year.We reached agreement with the BBC to manage the construction of the new 78,000m2 Broadcasting House facility in London, a development which will bring together on one site the BBC World Service, BBC Radio and BBC News by the time it is completed. Property outsourcing We have seen a 20% increase in profits from the existing DWP, BBC and BT (Telereal) contracts. Our new business successes include: the DWP contract expansion, the agreement to redevelop Broadcasting House for the BBC, our appointment as preferred bidder for the Aviva contract and our inclusion on the shortlist for the Driver and Vehicle Licensing Agency contract. The combination of these two factors has made it a very good year for this part of the business with contract income growing 22% to £802.0m, leaving us confident that we will grow property outsourcing to 25% of our operating profits within three years. Financial performance Land Securities Trillium generated some 56% of the total gross property income (2003: 53%). Segmental profit was £156.6m, despite the positive performance of the existing contracts being impacted by £10.4m of bid and start-up costs for the ES contract. The profits earned on our individual contracts are shown in the table above. Revenue and profits from PRIME continue to perform in line with our expectations and we have earned additional fees on client driven fit-out work. The ES expansion will add in excess of £150m annually to income generated from the DWP. As expected, ES reduced pre-tax profits in the year to 31 March 2004 by 30 LAND SECURITIES ANNUAL REPORT 2004 During the year the BBC took occupation of the newly developed White City Media Village, as a result of which this contract moved into profit. We completed the BBC’s new Media Village at White City ahead of schedule, enabling the BBC to commence occupation in October 2003. By the time we have completed the migration of BBC staff into this complex in the final quarter of 2004, we will have moved some 2,500 personnel into this new development. In addition we let 10 units to occupiers including Starbucks, Tesco and Davy’s Wine Bar, encouraging the general public to enter the complex, thereby supporting the BBC’s stated goal to become more accessible to the public. New business Following the success we have had in the past twelve months in securing new business, we remain confident that we are on track to achieve our growth ambitions. During the year, we completed and successfully mobilised the ES contract as previously described. We were delighted to be appointed preferred bidder on the Aviva contract, which encompasses some 107,000m2 of office accommodation, including the refurbishment of 33,000m2 in Norwich City Centre. The contract will be for 25 years. Telereal (BT) Telereal is progressing well. During the year we continued to rationalise the BT estate, with the disposal of over £92m of surplus property, including Faraday North Building in the City of London for £26m and two buildings in Leeds for £14.8m. Our new business pipeline remains strong and we are aware of activity in both the public and private sectors that should bring further opportunities to the market in the next 12 months. Currently we have a further one million m2 of accommodation under active discussion. In March 2004, Telereal re-financed part of its existing Floating Rate Note obligations and also raised further bank debt. The combined net proceeds totalling £231m were used to repay the joint venture partnership’s loan capital. Although, in accounting terms Telereal now has an excess of liabilities over assets, Telereal’s lenders have no recourse to Land Securities Group PLC. In practice, the economic value of Telereal’s assets exceeds their book value (these assets are held at depreciated cost), a fact upon which lenders to the joint venture rely. Landflex Landflex was officially launched in May 2003 following completion of the refurbishment of a 5,720m2 building at 7 Soho Square. Since then we have fully let this building to a number of clients, including Expedia and the Metropolitan Police, on leases ranging from one to 10 years with break clauses after two to three years. We continue negotiations with several potential occupiers for our 43,300m2 property at Earl’s Court, Empress State; including the Metropolitan Police proposal previously mentioned. Given the weak London market, we are very pleased with the response that this new product has received. We are achieving rents on current lettings at or slightly better than market rates, with shorter rent free periods, which results in an improved contribution to our profit and loss account. Created in response to our research into modern business needs, Landflex enables clients to create lease profiles that match their business plan and allows them to change the size of their accommodation over time. Rents are RPI linked and on an all-inclusive price and clients can purchase a variety of additional services.We believe that these features, in particular the ability to create a blend of lease lengths, are a strong differentiator of this product in current market conditions. In addition Landflex responds to the requirements under the Code of Practice for Commercial Leases. Once the existing buildings are let, we intend seeking further properties, both from our existing portfolio and new acquisitions, into which we can expand the Landflex concept. LAND SECURITIES ANNUAL REPORT 2004 31 7Customer focus Meeting needs Shopping centre results (1 equals very poor, 5 equals excellent) Objective Understanding retailer needs Communication Willingness to recommend Responsiveness Overall satisfaction Central London managed offices results Objective Understanding occupier needs Communication Willingness to recommend Responsiveness Overall satisfaction Results 2002 3.26 3.49 80% n/a 3.71 Results 2002 3.42 3.46 74% n/a 3.50 Target 3.39 3.58 85% 3.80 by 2005 3.75 by 2005 Target 3.84 3.73 78% 3.80 by 2005 3.75 by 2005 Result 2003 3.71 3.92 89% 3.90 3.81 Result 2003 3.37 3.57 89% 3.67 3.53 Land Securities’ open style and commitment to improve. Central London managed offices ∑Highlights from the 2003 survey were: • Evidence of improved communication and commitment to service. • Strong improvement in willingness to recommend. • Customer experience inconsistent across portfolio in terms of service delivery. • Disruption problems and post handover problems in connection with certain refurbishment and development projects. • Customer survey process is valued but feedback needs to be more timely. Landflex Landflex undertook its first independent survey with occupiers at 7 Soho Square to measure hand-over satisfaction. The study revealed that the new occupiers are ‘very satisfied’ with the design of the building, leasing package and service provided by the Landflex team. Property outsourcing Surveys are also carried out with the occupants of the buildings we manage through Land Securities Trillium particularly measuring customer satisfaction. DWP Our performance on the DWP contract is measured by an annual survey carried out by the DWP itself when it asks its staff to assess their level of satisfaction with the services they receive from us. This survey, which can be analysed at regional level, asks questions about every Land Securities Trillium service and generates a score across each of the primary areas of security, cleaning, maintenance and catering provision. Through this survey an overall level of satisfaction is derived from customer responses. In 2003 this overall measure increased to 89.6%, representing a material increase over the previous year’s score of 86.9%, reflecting the continuous improvement being achieved through our service delivery teams on the DWP contract. BBC A different methodology is applied to identify customer satisfaction levels on the BBC contract. The BBC retains an external organisation, the Leadership Factor, to undertake an independent survey of customer views each year and to set performance targets for the following year. The 2002 survey, the first since Land Securities Trillium won the BBC contract, saw the highest year-on-year increase in customer satisfaction levels since the BBC started these surveys some five years previously. Accordingly the target for 2003 was to maintain this increase, so we were delighted to secure a further meaningful increase in customer satisfaction from 65.4% in 2002 to a score of 70.8% in 2003. Our award-winning scheme The Gate, Newcastle upon Tyne, a 17,560m2 leisure and entertainment centre. LAND SECURITIES ANNUAL REPORT 2004 Land Securities has a total of more than 2,000 occupiers and three main property outsourcing clients. Client and occupier satisfaction therefore is key to the long-term success of our business. This is monitored through annual surveys. Portfolio management In October 2002 we carried out our first independent ‘Occupier Satisfaction Survey’ with 500 retailers across eight shopping centres. All areas of shopping centre management were covered, from the centre’s physical appearance and on-site management to service charges and marketing. As a result of the findings, we devised action plans for each centre and increased communication with retailers. Our second survey in 2003, showed clear improvement across all areas. Surveys are also carried out with the occupiers of our Central London managed office portfolio. Shopping centres – overview Highlights from the 2003 survey were: • Strong improvements in the Group’s demonstration of understanding customer needs and communication at Centre level. • Improved willingness to recommend Land Securities as a landlord. • Some significant improvements in service. • Some very good evidence of engaging retailers at local level. • Positive feedback from retail directors about 32 ∑ With more than 10 millionm2 under management our success depends upon helping our customers to succeed LAND SECURITIES ANNUAL REPORT 2004 33 Net debt Net cash inflow from operating activities after interest and tax Net capital expenditure Cash inflow from Telereal Payment of dividends Purchase of own share capital Other items £m 251.8 (48.8) 121.0 (167.5) (22.0) 19.0 153.5 8Financial stability Finance and tax The Group’s debt strategy is primarily based on unsecured funding and no new secured debt was added during the year. Land Securities Trillium funded the original PRIME contract with long-term amortising bank debt, secured on the project’s cash flow. Following the extension of the PRIME contract to incorporate the Employment Services estate, the relevant project finance facility was restructured and increased to £280m in May this year. During the year, the Group launched a ¤1bn Euro Commercial Paper programme to diversify its funding sources and lower the cost of short- term borrowing. At year-end, some £358.1m was outstanding under this programme. The programme is fully underwritten with committed bank facilities. At 31 March 2004, the Group had £1,550m of committed bank facilities, of which £800m matures in May 2005 and £600m in April 2006. Our intention is to renegotiate those facilities expiring in May 2005 during the course of this calendar year. The average maturity of the Group’s borrowings was 12.4 years (2003: 13.3 years) while the average cost of the Group’s debt is 7.3% compared with 7.9% at March 2003. At the balance sheet date, the Group’s interest rate exposure on floating rate debt was fully hedged. of Telereal’s recent distributions to its owners. Although Telereal’s liabilities exceed the book value of its assets, Telereal remains solvent and its lenders have no recourse to the partners. We have identified that the adjusted earnings per share figures presented in the financial accounts for the period to 30 September 2003 required revision. These revised figures are set out in Note 9 to the Accounts on page 70. Treasury management The Group operates a centralised Treasury function, which is responsible for funding activities, taxation and insurance across the Group. The Treasury function operates under delegated authority from the Board and follows policies and procedures designed to monitor, control and report on interest rate, liquidity, credit and other financial risks. Cash flow and net debt At 31 March 2004, Group net debt stood at £2,435.8m (2003: £2,589.3m), representing gearing of 40.5% against 47.3% a year ago. Gearing has reduced as a result of lower debt and the increase in net assets, largely attributable to this year’s valuation uplift. The reduction in net debt of £153.5m over the year is explained in the table above. Gross debt was £2,677.6m (2003: £2,688.7m) against which the Group had cash and short- term investments of £241.8m (2003: £99.4m). Adjusted financial information As explained on page 10, this year we refined the basis upon which we calculate adjusted financial information. Revenue profits no longer exclude Land Securities Trillium’s costs of bidding for new contracts, which are now an established feature of its business. Revenue profits are now defined as profits before tax, exceptional items and the sale of fixed assets. We exclude profits on the sale of fixed assets because they are volatile. Adjusted earnings per share are based on revenue profits.The tax associated with revenue profits does not include a deferred tax charge on capital allowances on investment properties because our experience is that such allowances are not clawed back in practice.We are now also adjusting for deferred tax on capitalised interest on these properties, as this too is not clawed back as Corporation Tax.This change is being made now because the amounts involved are becoming increasingly significant. Adjusted net asset value per share now reflects the write-back of deferred tax on capitalised interest as well as that on capital allowances on investment properties, for the reasons explained above. In addition, we have added back to net assets the £47.9m accounting deficit that has occurred this year as a result 34 LAND SECURITIES ANNUAL REPORT 2004 Credit rating The Group’s credit ratings are as follows: Agency Moody’s Standard and Poors Fitch Credit rating 2004 A3 A- A flat Outlook Stable Stable Stable Credit rating 2003 A2 A- A flat Our ECP programme has an A2/P2 rating. Interest charge Net interest payable was £256.6m for the year (2003: £220.3m), before taking into account the exceptional costs incurred last year to redeem the convertible bonds and cancel surplus interest rate swaps. Net interest payable, before capitalised interest and exceptional charges was covered 2.1 times (2003: 2.4 times) by Group profits before interest and tax. Taxation The Group’s effective tax rate was 22.7% (2003: 28.1%). The reduction reflects the release of deferred tax on capital allowances associated with properties that we sold during the year. We do not expect to sell such significant quantities of property in the year to 31 March 2005, with the result that the effective tax rate is likely to rise. As indicated last year the current or ‘cash’ tax charge, which was 12.1%, reflected the benefit of various transactions during the year which were not expected to recur. As expected, the rate rose to 23.2% in the year to 31 March 2004. This rate reflects the benefits of capital allowances on development and refurbishment expenditure, as well as a full deduction for interest that is capitalised in the profit and loss account. It is likely to be more representative of our tax position for the future. 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 £490m (2003: £435m). However, as indicated in the Notes to the Accounts, it is unlikely that this amount would be payable in full, 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 could reduce this amount by up to some £75m (2003: £110m). Pension schemes The Group operates a number of defined benefit pension schemes. These schemes are closed to new members. At 31 March 2004, the schemes had a combined deficit on an FRS17 basis of £12.0m (2003: £13.0m). The Group made a special contribution into its principal defined benefits pension scheme during the year to 31 March 2003 and has increased the contribution rate to address the deficit. However, it is possible that further special contributions may be appropriate in the year to 31 March 2005 and this is under review. International Financial Reporting Standards International Financial Reporting Standards (‘IFRS’) are obligatory for UK quoted companies for accounting periods ending on or after 31 December 2005. As a result, we will adopt them when we report our results during the year ending 31 March 2006, and our first statements under IFRS will be for the half-year to 30 September 2005. At that time, we will also restate the comparative figures for the prior period. IFRS has the potential to confuse significantly the accounts of property companies, particularly if any leases of buildings to tenants meet the definition of a ‘finance lease’. This is a complex area, requiring us to review the correct classification of each of our 4,000 leases. Because of the potential for confusion, we are supporting work being carried out by the Best Practices Committee of the European Public Real Estate Association and by the British Property Federation to help ensure that property companies deal with these issues in a consistent, pragmatic but compliant manner. We have an active project underway to manage the transition to IFRS which has wider ramifications than just the presentation of our financial statements. For example, because IFRS will change the way in which profits are measured and reported, performance criteria in the Group’s bonus and share schemes may need to be modified so as to be consistent with our new reporting. When we adopt IFRS for the first time, we will present information under both our current and new accounting polices, together with reconciliation statements to aid an understanding of the principal differences. LAND SECURITIES ANNUAL REPORT 2004 35 9Sound management Board of directors 1. Ian J Henderson CBE (60) 4. Ian D Ellis (48) 8. Peter G Freeman (48) Executive Director Joined the Group in 1971. Appointed to the Board in 1987 and Chief Executive in December 1997. 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. He will retire from the Board on 14 July 2004. 2. Andrew E Macfarlane (47) Executive Director Joined the Board as Finance Director in October 2001. Formerly a partner in Ernst & Young and, prior to joining Land Securities, Chief Financial Officer of Bass Hotels and Resorts division (now Intercontinental Hotels Group plc). A Non-Executive Director of Invensys PLC. 3. Francis W Salway (46) 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 and Group Chief Executive with effect from 14 July 2004. 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 Property Outsourcing business unit. 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 (66) 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, Travelex plc, Sainsbury’s Bank plc and Senior Independent Director at Trinity Mirror plc. 7. Sir Winfried Bischoff (62) Non-Executive Director Appointed to the Board in 1999. Chairman of Citigroup Europe, and a Director of the McGraw-Hill Companies, USA, Eli Lilly & Company, USA and Ifil-Finanziaria di Partecipazioni SpA Italy. 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 Publishing plc. He will retire from the Board on 14 July 2004. 9. David Rough (53) Non-Executive Director Joined the Board as a Non-Executive Director in April 2002 and appointed Senior Independent Director in November 2003. Group Director (Investments) of Legal and General Group PLC until December 2001. A Director of Mithras, BBA Group PLC, EMAP Group PLC and Xstrata Group PLC. 10. Stuart Rose (55) 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. 11. Bo Lerenius (57) Non-Executive Director Agreed to join the Board as a Non-Executive Director from June 2004. Group Chief Executive of Associated British Ports Holdings PLC. Previously Vice-Chairman of Stena Line and Director of new business investments at Stena AB until 1999. 36 LAND SECURITIES ANNUAL REPORT 2004 1 5 9 2 6 3 7 10 11 4 8 LAND SECURITIES ANNUAL REPORT 2004 37 10Acting responsibly Corporate responsibility With so many visitors to our retail assets we have wide-ranging community programmes. At White Rose, Leeds this includes tea dancing (pictured) and mall walking. • Appraisal and review of the Group’s • Organisational responsibilities for different CR objectives. aspects of CR. • Confirming and adopting a set of annual As a result the committee has: CR targets, supporting the agreed objectives. • Considering how the Group’s policy, objectives, targets and achievements should be communicated to all stakeholder groups, including: members of staff; shareholders; the financial community; occupiers and clients; suppliers and advisers; local authorities and statutory bodies; the general public. • Introduced a statement of business principles to define the way the Group aims to go about its business. • Revised the Group’s business ethics policy, and objectives relating to each stakeholder group (available on the Group’s website: www.landsecurities.com). • Appraisal and review of the CR activities • Set performance targets for the year to across the Group including the introduction of relevant CR business panels and the role of CR in the management of social, economic and environmental risks. • Ensuring that the business units are playing an appropriate role in achieving the Group’s CR objectives and targets. 31 March 2005. The Group maintained its membership of the FTSE4Good Index and the Dow Jones Sustainability Index, in addition it achieved membership of the BiTC Corporate Responsibility Index and was included in the Times listing of ‘Top 100 Companies that Count’. During the year the committee examined the Group’s CR management structure in relation to: • Policies, programmes, initiatives and case study examples addressing CR issues. • External standards and/or certification systems with which it already complies. • Existing measurement and monitoring systems and performance related information. A full copy of the CR report will be sent out on request or can be downloaded from our website. Employees We continued our long tradition of encouraging employees to participate in community based initiatives with the introduction of a Group-wide volunteering programme where we now match up to two days of an employee’s time spent on voluntary activities. In its 2003 Annual Report Land Securities updated shareholders on the steps taken to formalise its activity under corporate responsibility. During 2004 it completed this process and published its first Corporate Responsibility (CR) report, the objective of which is to provide stakeholders with a clear understanding of the Group’s CR policies, its key objectives and the performance indicators against which progress will be measured in the future. To ensure that its activities are in line with best practice, we retained external advisers who have worked with the Company on developing the CR framework and who will be monitoring future progress against objectives. As reported last year, the Group now has in place a CR committee, which is responsible for: • Appraisal and review of the Group’s CR policy and advising the Board of directors, through the director with CR responsibilities, on the committee’s activities. • Demonstrating the links between strong financial performance and good environmental and social performance, and using these to demonstrate to both shareholders and employees, as well as other stakeholders, the business benefits of an enlightened approach to CR. 38 LAND SECURITIES ANNUAL REPORT 2004 We receive more than 300 million visits by shoppers to our retail properties LAND SECURITIES ANNUAL REPORT 2004 39 Education initiatives play a part in our community programmes. Pictured is the White Rose Education Centre. The Red Cap wardens outside our Oxford Street, New Look Store, funded by us through our participation in the New West End Company in London. Corporate responsibility continued We gave 33 awards to employees, service partners and suppliers under our ‘Values into Action’ awards programme which aims to encourage employees to embrace our core values of: Integrity Respect for the Individual Customer Service Excellence Innovation. We also introduced ‘Ideas into Action’ an initiative aimed at encouraging all employees to suggest ideas which might improve business practices or results. This was launched in direct response to the employees’ survey which highlighted the need to encourage and reward staff for innovation and creativity. The survey, our second, once again received an above average response rate and demonstrated upper quartile results for employee satisfaction and morale, and second quartile results for loyalty as compared to the benchmark used by the external research group, ETS. The Group is committed to providing equal opportunities to all its employees, whether full-time, part-time, temporary, seconded, or job applicant regardless of age, gender, disability, marital status, sexual orientation, religion, race, colour, creed, ethnic origin or national origin. It also provides training and development opportunities to ensure that it maximises the potential of all employees and helps them to achieve their own aims and the Group’s business objectives. A wide range of further education and training initiatives are made available through the personal development planning process. • We have developed a new procurement tendering process that establishes an approved supplier list for service partners and contractors. The Group sets and closely monitors its targets for internal promotions and maintains a comprehensive succession and career development system. The new statement of business principles and revised business ethics policy was circulated during the year to all employees and is being provided to all new employees in their induction pack. All employees are required to abide by the provisions in the statements and relevant managers will be required in future to verify compliance on an annual basis. All our employment policies are available on our website. Health and safety The Corporate Health and Safety (‘H&S’) team’s objective is to deliver a uniform and fully compliant approach to Health and Safety across the business.We set specific objectives and targets which underpin our work and demonstrate our commitment to progress. . • We are developing processes and procedures with a view to achieving certification to the OHS18001 health and safety standard. First it is intended to seek certification for the PRIME estate and then to seek certification for our activities within the BBC. Our target is to achieve accreditation by the end of 2005. • In parallel, we are undertaking a review of our existing suppliers to ensure that they deliver the required level of H&S Management. • We have assessed staff training requirements and an appropriate training programme has been developed and implemented. During the year we trained 44 members of staff to the NEBOSH general certificate standard and 121 were trained in IOSH Managing Safety. • We have developed and implemented programmes to ensure that we comply with the Disability Discrimination Act and the Control of Asbestos at Work regulations, with extensive asbestos surveys being undertaken across our managed portfolios. • We are developing monitoring and inspection regimes to ensure the risks associated with the Construction and Development activities (all generally undertaken by contractors and service partners) are minimised. We also use these processes to monitor compliance with Construction Design and Management regulations. • We have implemented a quantifiable risk assessment and audit programme, with regular reporting to the Board. The statistics are used to identify areas of risk. 40 LAND SECURITIES ANNUAL REPORT 2004 The Group participates in 15town centre management and business improvement initiatives LAND SECURITIES ANNUAL REPORT 2004 41 11Aware of the environment The environment We have made considerable progress over the last 12 months. We were pleased to be ranked in the ‘Premier League’ amongst 177 companies in the annual Business in the Environment Index of environmental engagement and first in the real estate sector. We were also ranked first in the Property Environment Group environment survey of the property sector, which we consider to be our industry benchmark. Our achievements have also been recognised by a wide variety of external awards. In partnership with the DWP we jointly won the 2003 Premises and Facilities Management magazine ‘Partners In Sustainability’ award for the PRIME contract. We also collected three Green Apple Awards for our activities. We have bettered our reductions target in the UK Emissions Trading Scheme. In two years, emissions of CO2 have been cut by 4,906 tonnes across our portfolio of managed offices. We have also collaborated closely with the Carbon Trust on three projects designed to reduce emissions. 42 In 2003 we became one of the first companies in the UK to be awarded the UK Wildlife Trusts Business and Biodiversity Benchmark. This was a direct result of our participation in the initial benchmarking pilot study. Our biodiversity management programme is currently being applied to the 2000-plus sites managed by the Group. In 2004/05 we plan to broaden the coverage of our Environmental Management Systems (‘EMS’). The ISO 14001 certification held by Land Securities Trillium will be extended to cover the additional 1,100 properties within the expanded PRIME Contract. A revised EMS for the Group’s other activities will be implemented during 2004. Our Corporate Environment Day is now firmly established and 2003 saw significant public involvement at our shopping centres, with support provided for Rainforest Concern. We also helped to organise the BBC’s London Portfolio Environment Day. A fuller report of all of our activities, both Environmental and Health and Safety is contained in the Group’s 2004 Corporate Responsibility Report. All our shopping centres have developed and implemented site-specific environment policies and, having participated in a national benchmarking survey, are actively implementing programmes to increase waste recycling. White Rose and Bon Accord shopping centres have both received Tidy City awards. As one of the UK’s largest construction clients, the Group has a significant opportunity to influence business practices. We led, in conjunction with other developers and contractors, a project which has developed guidelines for procuring construction products and services based on the principles of Corporate Responsibility. For the DWP estate, we are also working closely with our principal suppliers to guarantee that all timber used on the DWP estate is legally logged and acquired from sustainable forests. The masterplan of Ebbsfleet Valley, a 20-year regeneration project in Kent, which will create 10,000 new homes as well as up to 700,000 m2 of commercial, retail and leisure buildings. LAND SECURITIES ANNUAL REPORT 2004 Transforming a 670 hectare site into Europe’s premier example of a sustainable regeneration project LAND SECURITIES ANNUAL REPORT 2004 43 12Effective governance Corporate governance The terms of reference of Board Committees, together with the schedule of matters reserved for Board approval, the procedure for directors to take independent legal advice and the revised letter of appointment for non-executive directors, together with the Memorandum and Articles of Association of the Company, are available on the Group’s website at www.landsecurities.com or copies may be obtained on request from the Company Secretary. Directors The Board meets at least nine 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 authorisation of expenditure on property developments, refurbishments, acquisitions and disposals and significant transactions in excess of £50m, and treasury policy. They also include the appointment or removal of directors and the company secretary and the introduction of any significant changes to employee share or pension schemes. In addition, the 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. No director made use of this facility during the year. The roles of chairman and chief executive are split and there exists a strong non-executive element on the Board which currently consists of the chairman, five executive and five non-executive directors. David Rough is the senior independent director. The Board is actively seeking to recruit an additional independent non-executive director.While the Board considers that all the non-executive directors are independent, 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 management reports of actual and forecast performance. In addition the Board formally reviews strategy at least once a year, resulting in a five year Business Plan. Each business unit is reviewed at regular intervals against the targets set each year in the Business Plan. The Combined Code – principles of good governance and code of best practice Land Securities complied with the Combined Code on Corporate Governance as it applied to the Company during the year, except initially with regard to the requirements to appoint a senior independent director and to establish a formally constituted Nominations Committee. These requirements were addressed in November 2003 with the appointment of David Rough as senior independent director and the establishment of a formally constituted Nominations Committee. As a result, with effect from that date, the Company complied fully with the version of the Combined Code applicable to the year under review. During the year under review, a comprehensive review of the Company’s corporate governance procedures was carried out following the publication in July 2003 of the revised Combined Code which applies to reporting years commencing on or after 1 November 2003. The principal outcomes of this review comprised: • updated terms of reference for the Audit and Remuneration Committee • new terms of reference for the Nominations Committee • adoption of a revised letter of appointment for non-executive directors 44 LAND SECURITIES ANNUAL REPORT 2004 Attendance at Board and Committee meetings The number of principal Board and Committee meetings attended by each director during the financial year was as follows: Peter Birch Sir Winfried Bischoff David Rough Peter Freeman Stuart Rose Ian Henderson Francis Salway Andrew Macfarlane Mark Collins Ian Ellis Board Meetings (11 meetings) Audit Committee Meetings (5 meetings) Nominations Remuneration Committee Meetings (4 meetings) Committee Meetings (3 meetings) 11 10 11 8 *7/8 11 11 11 11 11 5 2 5 – *3/3 – – – – – 3 – 3 – – 3 – – – – 4 4 4 3 *2/4 – – – – – * Actual attendance/maximum number of meetings a director could attend as a member. 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 as required. Their induction programme, which includes training on the responsibilities of a director occurs 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. Board appraisal A formal appraisal of the performance of the Board and Board Committees was carried out, for the first time, in autumn 2003. This was an internal process, led by the chairman. Further appraisals will be carried out each year. The wide-ranging, appraisal questionnaire was based on the process and questions outlined in the Higgs Review of Corporate Governance and the results were reviewed in detail by the Board in September 2003. Evaluation of individual directors in their role as members of the Board will also be conducted by the chairman in 2004. The senior independent director will be responsible for the evaluation of the chairman and he will meet at least annually with the other non-executive directors to appraise the chairman’s performance. During the year under review, the executive directors were evaluated under the Company’s standard performance appraisal system, with the performance of the Group chief executive being evaluated by the chairman. As recommended by the Combined Code, the non-executive directors meet at least annually, both with and without the presence of the chairman. 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 appointed for an initial period of three years subject to renewal for further periods and to the rotation provisions under the Articles of Association. They do not have service agreements with the Company. forward formal recommendations for consideration by the Board. In the event that the Committee deals with the appointment of a successor to the chairman of the Board, the chairman will step aside from the Committee to be replaced by another non-executive director who will act as his alternate. In such circumstances the Committee will be chaired by the senior independent director. Similarly, when dealing with the appointment of a successor to the position of chief executive, the present incumbent will step aside to be replaced by an alternate chosen from among the executive directors. The Committee meets periodically when required and external search consultants are generally used, both to identify appropriate candidates for appointment to the Board, or, if an internal appointment is being considered, to benchmark the internal candidate against potential external candidates. In relation to Board appointments made during the year under review and subsequently, external search consultants were used. Directors’ remuneration The report of the Company’s Remuneration Committee is on pages ∑51 to 56∑. Nominations committee The members of the Nominations Committee are the chairman, the senior independent director and the chief executive. For all Board appointments the Committee consults with the other members of the Board and puts Investor relations Land Securities is committed to maintaining the highest standards in its investor relations programme (‘IRP’). This activity, which is led by the chief executive and finance director, who call on other directors as required, includes LAND SECURITIES ANNUAL REPORT 2004 45 Corporate governance continued regular presentations and meetings with key audiences, including institutional, both equity and bond investors, private shareholders and sell- and buy-side analysts. These are conducted within the constraints imposed to ensure the protection of price sensitive information which has not already been made available to all investors. The effectiveness of the communication programme is monitored directly through feedback to the company and indirectly through third party perception audits, which are commissioned from time to time. The most recent independent survey was conducted in July 2003. The survey concluded that the company had conducted an extensive IRP, both in absolute terms and in comparison with the programmes of its other clients and concluded that the Group’s activities match what the consultants regard as investor relations best practice. Annual general meeting The Board welcomes the move towards a more constructive use of Annual General Meetings and regards the Annual General Meeting as the principal opportunity to meet private shareholders. 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 Report and Financial Statements and related papers to be posted to shareholders so as to allow at least 20 working days for consideration prior to the Annual General Meeting. 46 Audit Committee The Audit Committee consists of all the non- executive directors other than Peter Freeman and is chaired by David Rough. It operates in accordance with written terms of reference. The Audit Committee has no single member who fully meets the requirements of the revised Combined Code in respect of ‘recent and relevant’ financial experience. However, the Board considers that the collective and individual experience of the Audit Committee is more than adequate to enable them to carry out their role. The Committee met five times this year. The following items were covered: • ∑ongoing review and reports from management 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; • reporting and consultation with the internal and external auditors; • ∑reviewing the interim and annual results and consideration on any matters raised by the internal and external auditors; and • ∑monitoring the scope, cost effectiveness, independence and objectivity of the external audit. Auditors The directors, and our external auditors, PricewaterhouseCoopers LLP, have 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 ‘audit related services’. This is work which, by the nature of the services required, the external auditors are best placed to provide, either because they are required to do so for regulatory purposes, they have a significant depth of knowledge of the particular area of our business or issue, or because the work has a strong relationship to the audit itself. It is possible that certain tax work, together with 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 only participate in such tenders with the Audit Committee’s prior approval. • Approval procedures: senior management approval is required in advance of significant non-audit work being undertaken by the external auditors. Such approvals will be reported periodically to the Audit Committee. Soho Square, London W1, a 5,720m2 Landflex building which was fully-let during the year. LAND SECURITIES ANNUAL REPORT 2004 Our ambition is to grow Landflex to 15%of the Central London portfolio 47 LAND SECURITIES ANNUAL REPORT 2004 Corporate governance continued Valuers The Group gives the valuers 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 key valuation meetings (as do the auditors) to be assured of the independence of the process. In line with the Carsberg Committee report we have a fixed fee arrangement with our valuers, Knight Frank LLP. The fees paid to Knight Frank LLP for services other than valuation services amounted to less than 10% of the total amount of fees paid to other advisors for similar services. 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 (‘OFR’). In preparing the OFR, the directors have taken into account the guidance issued by the DTI, the OFR Working Party and the Accounting Standards Board. Recognising that these represent drafts only at this stage, we await publication of the final documentation before formally evaluating and reporting upon compliance with the relevant guidance. After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. 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 Board confirms that this system is designed to be in accordance with the Turnbull guidance and has been in place for the year under review and up to the date of approval of the Report and Financial Accounts. The Audit Committee on behalf of the Board has reviewed the effectiveness of the systems of internal control and risk management specifically for the purposes of this statement. 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. Balanced scorecards are prepared that set out targets for a wide variety of key performance indicators, including risk management; (b) Investment appraisal; capital projects, major contracts and business and property acquisitions are reviewed in detail and approved by the Investment Committee and/or the Board; (c) Financial monitoring; profitability, cash flow and capital expenditure are closely montored and key financial information is reported to the Board on a monthly basis; (d) Systems of control procedures and delegated authorities; there are clearly defined guidelines and approval limits for capital and operating expenditure and other key business transactions and decisions; (e) Risk management; we have an ongoing process to identify, evaluate and manage the significant risks faced by the Group. Further details of our risk management process and our principal business risks are set out in the separate section below; (f) Six-monthly assessments; 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; and; (g) An internal audit function; responsible for reviewing the business processes and controls including following up the implementation of management actions. The head of internal audit and risk management has direct access to the chairman of the Audit Commitee. The internal audit function operates a risk- based approach and provides a summary on the operation of the system of risk management and internal control to support the Board’s annual statement. 48 LAND SECURITIES ANNUAL REPORT 2004 Risk management process 5 Reassess 1 Goals & Objectives 2 Identify 6 Report 4 Action 1 Business goals and objectives set the context 4 Develop action plans to manage the risks for our risk management process 5 Reassess the risks after mitigating actions 2 Identify the risks have been taken 3 Assess 3 Assess and quantify the risks identified 6 Report on risks, extent of mitigation and status of action plans 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. in more detail how we address the key social, environmental and ethical risks inherent in our business. For the purposes of applying the Turnbull guidance we have not treated material joint ventures and partnerships as part of the Land Securities Group. We do not have management control of any of these joint ventures or partnerships, but do ensure that appropriate governance procedures are in place as part of the operating arrangements. Risk management Doing business inherently involves taking risks and by taking measured risks, we seek to achieve long-term sustainable returns for our shareholders. During the current year, we have continued to develop our risk management process, including our analysis of the potential impact of the major risks discussed below. We have also enhanced the related mitigating actions and controls. Risk management process Our risk management process is an important part of our system of internal control and has linkages with each of the other elements of the system, particularly the strategic planning, investment appraisal and financial monitoring processes. The diagram above shows the six steps in our risk management process, which covers a broad spectrum of business risks. The Group’s 2004 Corporate Responsibility Report sets out Major risk factors The Group undertakes comprehensive risk assessments and identifies the principal risks that affect it and its activities. Those risks that are considered by senior management to have the most significant potential impact on the Group are set out below. In line with the OFR guidance issued by the Accounting Standards Board, we include, for each risk, an indication of the areas of potential impact and our approach to managing them. Principal market risks and external factors We invest in commercial property to generate returns for shareholders, with rents contributing to profits and increases in capital values building the Group’s net asset value. The commercial property markets are typically cyclical. Rental levels are determined by the supply of suitable space in a market and occupiers’ demand. Markets tend to be location specific. The value of a commercial property depends upon the characteristics of the lease, the credit worthiness of the tenant, the prospects for rental growth and investors’ target returns. The latter are informed by their perception of the attractiveness of real estate compared with other types of investment and interest rates. Portfolio management We have concentrated our investment portfolio in areas of the market and types of property that we believe will offer the prospect of superior rental growth over the medium term as we consider this offers the best prospects for value creation. We are exposed to the risk of underperformance if we misjudge the dynamics of the markets, or if individual assets do not achieve their anticipated returns (for example due to tenant insolvency). We formally review the performance of each property at least annually. Key performance measures such as voids, expiry profiles, progress on rent reviews and tenant defaults are reported on monthly and actively managed to mitigate risks. Development Development offers the prospect of higher returns than standing investments. It also offers the ability to create new assets if purchasing is difficult because prices are high. However, the development process can be long and complex because it requires us to obtain planning permission, build to budget and schedule and let the buildings. Failure to manage any of these elements, and in particular to let the building, exposes us to the risk of loss or underperformance. We monitor development progress against budget and programme and report regularly on letting progress. We also set internal financial limits as to the amount of development, in particular speculative development, that we will undertake. LAND SECURITIES ANNUAL REPORT 2004 49 Corporate governance continued Property outsourcing An outsourcing contract will typically require the Group to provide accommodation and certain associated services to an occupier in return for an indexed unitary charge. Outsourcing clients may transfer significant elements of the risk in their property portfolios to the Group and it is our ability to manage these risks that creates profit for us. Land Securities is exposed to loss if the unitary charge set at the outset of the contract either does not reflect the property and operational risks involved, or if the Group does not deliver the contracted services to the required standard. We have developed rigorous financial models and systems to measure our performance against contract requirements, all of which, together with Land Securities Trillium’s financial performance, are reviewed monthly by senior management. Investment performance and returns There is a potential risk that management decisions about the allocation and investment of capital and other resources may not deliver the appraised returns, or may fail to maximise potential value for the Group. Our investment appraisal procedures and controls are designed to monitor and mitigate this risk. Commercial property is subject to cyclical fluctuations in value and we continuously monitor current and future market sentiment against industry benchmarks such as IPD and update our forecast ‘house view’ accordingly. This house view is a key element of our forecasting and capital allocation decision- making processes. Regulation As set out in the chairman’s statement, there remains uncertainty as to the impact of both REITS and the Government’s consultation on lease code reforms. The Group is exposed to risks from increases in tax rates and changes to VAT, stamp duty, and the basis of taxation of profits and capital gains. The Group is also exposed to changes in planning regulation. We are active participants in many industry organisations, including the British Property Federation, through whom we seek a constructive dialogue with government on issues affecting us. Other principal risks and internal factors Human resources Our objective is to build and retain the best team in the property industry. To ensure that we limit the risk to the successful achievement of this objective, we have succession planning and career development programmes in place. Disaster planning Without sufficient recovery planning, there is a risk that the business may fail to recover from a ‘disaster’ and potentially suffer long term damage. While we believe that our exposure in this area is lower than that faced by many other major companies, we have in place disaster recovery plans that are updated and rehearsed. IT integrity and performance A major failure in our IT systems could result in financial and reputational loss. To mitigate against this risk, IT back-up plans are a key element of our disaster recovery plans. Health, safety and environment (HSE) Failure to manage these risks across the Group may result in financial penalties, criminal proceedings and reputational impact. Further, the cost of complying with major changes in related laws and regulations could have a negative impact on profitability. Our HSE management systems are detailed on pages 40 and 42. Stakeholder relationships We conduct relationship management programmes to ensure we engage appropriately with our key stakeholder groups. Our 2004 Corporate Responsibility Report outlines in detail how we conduct our business to minimise the variety of risks that could arise from poor management of these relationships. 50 LAND SECURITIES ANNUAL REPORT 2004 Remuneration report Directors’ remuneration The Company complies with the requirements of the Combined Code in relation to directors’ remuneration and with the Directors’ Remuneration Report Regulations 2002, which 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 in tables 3, 4, 5 and 6 of the 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 which are available on the Company’s website. The Committee consists solely of the non-executive directors and is chaired by Sir Winfried Bischoff. 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 the one of the Group’s principal relationship banks. He does not participate in any discussions between or regarding the relationship between these two 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 four times. The Committee consults the chief executive in relation to proposals for the remuneration of other executive directors. It also reviews the chief executive’s remuneration proposals for the Group’s staff other than the executive directors. During the year the human resources director also provided information and advice to the Committee. Neither the chief executive nor any other director is involved in deciding their own remuneration. The Committee has appointed and during the year sought advice from New Bridge Street Consultants LLP on various aspects of remuneration. In considering future remuneration levels the human resources director also makes use of various published surveys to assist the Committee in their determination of 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, ∑• To align rewards with the interests of shareholders. To achieve this strategy, the Remuneration 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. 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. LAND SECURITIES ANNUAL REPORT 2004 51 ∑ ∑ Table 1 – Criteria for directors’ 2004/05 bonuses I J Henderson F W Salway Total returns in excess of WACC Group profit before tax Implementation of strategy Performance of our Business Units Total returns in excess of WACC Progress of Development Returns on developments Strategic projects programme A E Macfarlane Total returns in excess of WACC Capital structure Investor Relations Development of the finance function and management information I D Ellis A M Collins Total returns in excess of WACC New business development Client satisfaction Resource planning Total returns in excess of WACC Investment performance Portfolio sales and acquisitions Product development Remuneration report continued The Committee will keep the existing remuneration, as detailed in this report, under review during 2004/05 to ensure that Land Securities’ remuneration arrangements remain competitive and provide appropriate incentive for performance. 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 around the mid- market rate. 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 (Chief Executive) £550,000 F W Salway (Chief Operating Officer) A E Macfarlane (Group Finance Director) £330,000 £305,000 I D Ellis (Chief Executive Land Securities Trillium ) £275,000 A M Collins (Chief Executive Portfolio Management) £275,000 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 the executive directors are set in the areas shown in table 1. For the financial year ended 31 March 2004, the executive directors’ individual bonus payments range from 45% to 70% of salary except for I D Ellis whose bonus will be 119% of salary reflecting the exceptional nature of his contribution to the development of Land Securities Trillium new business activities, whose performance the Committee wished to see materialise before awarding any additional bonus. These bonus payments will be paid partly in cash in June 2004 and partly in deferred shares. Performance Share Plan As mentioned above, half of an executive’s bonus is in deferred shares. Under the Performance Share Plan, which was approved by shareholders at the 2002 Annual General Meeting, executives can receive up to two 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 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 Extent total property return exceeds the IPD Index pa Less than index Equal to index 1% Between these limits % that vests 0% 25% 100% Pro rata % that vests 0% 25% 100% Pro rata 52 LAND SECURITIES ANNUAL REPORT 2004 Table 2 – Performance shares I J Henderson F W Salway A E Macfarlane I D Ellis A M Collins Cycle ending 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 Award date 11/7/2002 1/7/2003 11/7/2002 1/7/2003 11/7/2002 1/7/2003 11/7/2002 1/7/2003 1/7/2003 Market price at award date(p) 854 787.2 854 787.2 854 787.2 854 787.2 787.2 Shares at 1/4/2003 25,292 7,142 9,050 11,472 Shares awarded Shares/value vested 25,724 13,190 13,962 10,798 8,090 0 0 0 0 0 0 0 0 0 Vesting date 11/7/2005 1/7/2006 11/7/2005 1/7/2006 11/7/2005 1/7/2006 11/7/2005 1/7/2006 1/7/2006 The maximum amount of performance shares which could potentially vest in respect of the executive directors is shown in table 2. Share Options Under the Land Securities Group 2000 Executive Share Option Scheme (the 2000 Scheme), over a period of ten years executives could be granted options with a value of up to four times annual remuneration on a phased basis. 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 exceeding the growth in the retail price index 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. During 2002/03 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. For grants made in 2003 earnings per share performance will be assessed in 2006, 2007 and 2008 and if not then met the options will lapse. The remuneration committee has recently reviewed the re-testing provision and has decided that future grants under this scheme will have no retesting opportunities under the performance conditions if the earnings per share test is not met after three years. During the year options were granted under the scheme to the executive directors and also to a number of employees of the Group. No payment is made by participants in the 2000 and 2002 Schemes in consideration for the grant of options. The options granted to executive directors are shown in table 4. Shareholding guidelines The committee believes that it is important for a significant part of the compensation of each executive director to be tied to ownership of the Company’s shares so that each executive’s interest in the growth and performance of the Company is closely aligned with the interests of our 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 long term incentives after appointment to qualify for future grants. In addition, non-executive directors are required to own shares with a value equal to their annual fees within three years of the date of their appointment. 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 table 6. 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 is designed to provide, at normal retirement age and subject to length of service, a pension of two-thirds of final salary subject to Inland Revenue limits and other statutory rules. The scheme also provides lump sum death-in-service benefits on death before normal retirement age of four times pensionable salary and pension provision for dependants of members. Only basic salary is treated as pensionable pay. I J Henderson reached the pension scheme’s normal retirement age on 18 July 2003 and is therefore no longer accruing further benefits in the Scheme. He has deferred drawing his pension. On late retirement his pension will be the pension that he had earned at normal retirement date increased in accordance with actuarial advice to reflect the late payment. The transfer value shown is the value of his benefits earned from qualifying service if he had retired on 31 March 2004. LAND SECURITIES ANNUAL REPORT 2004 53 Table 3 – Directors’ Emoluments Executive: I J Henderson F W Salway appointed 02.04.01 A E Macfarlane (3) appointed 01.10.01 I D Ellis (4) appointed 20.11.02 A M Collins (5) appointed 20.11.02 M R Griffiths (retired 08.07.02) NON-EXECUTIVE: P G Birch (Chairman) S A R Rose Sir Winfried Bischoff (6) D Rough P G Freeman P B Hardy (retired 08.07.02) G I Henderson (retired 20.11.02) Basic Salary 534 321 301 275 275 Bonuses £’000 Benefits(1) £’000 Fees £’000 Total Emoluments excluding pensions £’000 2003 2004 Pension Contributions 2003 2004 104 52 55 277 218 19 9 20 13 13 0 80 75 69 107 229 67 71 24 24 758 434 431 608 538 153 29 36 41 33 153 29 36 41 33 748 408 380 317 104 194 148 - 34 35 30 9 18 Deferred Bonus Shares (2) 2004 101 52 55 43 32 Total 1,706 706 74 292 3,061 2,425 331 415 283 (1) Benefits consist of the provision of a company car or car allowance, private medical facilities and life assurance premiums. (2) Deferred bonus shares represent the value ascribed to shares received under the deferred bonus plan. (3) A E Macfarlane also received fees of £39,000 from Invensys plc in respect of his non-executive directorship of that company. (4) In accordance with his service contract, I D Ellis received a payment of £215,000. This amount reflected a change to his service contract following the acquisition of Trillium by Land Securities. (5) In accordance with his service contract, A M Collins received a payment of £171,150 which reflected the amount and timing of incentive arrangements which he was eligible to receive from his former employer. A further amount of £208,033 is payable to A M Collins 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. The 2004 pension contribution for A M Collins includes £38,000 in respect of amounts due for payment in 2003 (6) Until 26 October 2003, the fees of Sir Winfried Bischoff were paid to Citigroup Europe; thereafter his fees were paid to Sir Winfried Bischoff himself. Pensions of £138,840 (2003: £140,117) were paid to former directors or their dependants. Table 4 – Directors’ options over Ordinary Shares Granted during year Exercised/Lapsed(L) during year No of Options at 1/4/2003 Grant price (pence) No. Exercise Price (pence) No. Market price on exercise (pence) I J Henderson F W Salway A E Macfarlane A M Collins I D Ellis (1) (2) (2) (3) (2) (2) (2) (4) (2) (2) (4) (2) (4) (5) (2) (2) (4) (3) 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 * Weighted average exercise price (1) 1984 Executive Share Option Scheme (2) 2000 Executive Share Option Scheme (3) 1993 Savings Related Share Option Scheme (4) 2002 Executive Share Option Scheme. (5) 2003 Savings Related Share Option Scheme 41,250 788.0 38,125 788.0 34,375 2,477 788.0 677.0 34,375 788.0 Options at 31/3/2004 No. 27,000 174,562 27,500 3,585 Exercise price (pence) 618.6 820.0 869.0 673.4* 35,000 40,000 30,500 41,250 75,000 30,500 38,125 70,000 34,375 2,477 40,500 40,000 34,375 2,546 801.0 869.0 812.0 788.0 813.0 812.0 788.0 812.0 788.0 677.0 869.0 812.0 788.0 650.0 Exercisable dates 07/1997-07/2004 09/2003-09/2010 07/2004-07/2011 07/2004-07/2005 07/2003-11/2010 07/2004-07/2011 07/2005-07/2012 07/2006-07/2013 11/2004-11/2011 11/2005-11/2012 07/2006-07/2013 07/2005-07/2012 07/2006-07/2013 07/2008 07/2004-07/2011 07/2005-07/2012 07/2006-07/2013 08/2007 The range of the closing middle market prices for Land Securities’ shares during the year was 724.5p to 1121.5p. The middle market price at 31 March 2004 was1090.0p. 54 LAND SECURITIES ANNUAL REPORT 2004 Table 5 – Directors’ interests in shares P G Birch I J Henderson D Rough F W Salway A E Macfarlane Sir Winfried Bischoff P G Freeman S A R Rose (appointed 21.05.03) A M Collins I D Ellis 2003 ‘B’ Shares 13,000 20,879 2,273 2004 20,005 106,210 7,675 17,725 10,680 8,750 4,375 10,000 9,231 9,196 2004 ‘B’ Shares – 1,928 – – – – 2003 20,005 93,102 5,175 11,064 3,485 8,750 4,375 5,145 3,744 Remuneration report continued 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. During the year there was a change in market conditions and a change to the actuarial assumptions used to calculate transfer values which led to an increase in transfer values. 5. Fees for non-executive directors The annual fees of the chairman of the Board, P G Birch, are 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. 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 service represents the value of assets that the pension scheme would need to transfer to another pension provider on transferring the liability in respect of the directors’ pension benefits that they earned in respect of qualifying service. They do not represent sums payable to individual directors and, therefore, cannot be added meaningfully to annual remuneration. Table 6 – Directors’ accrued pensions Name of director I J Henderson £ Accrued pension at 1/4/2003 Increase in accrued pension (excluding inflation) Transfer value of increase in accrued benefit (excluding inflation) Increase in accrued pension (including inflation) Transfer value of the increase Accrued pension at 31/3/2004 Transfer value of pension at 31/3/2003 Transfer value of pension at 31/3/2004 Increase in transfer value less contributions made by director 330,736 48,488 990,000 57,613 1,176,000 388,349 5,307,000 7,926,000 2,619,000 6. Service agreements I J Henderson F W Salway AE Macfarlane I D Ellis A M Collins Date of contract 4/6/1998 31/5/2001 12/6/2002 28/1/2003 13/3/2003 The unexpired term and the notice periods (both from the Company and from the executive director) are 12 months, except in the case of A E Macfarlane where his notice period to the Company is six months. In July 2003 I J Henderson reached his normal retirement date and a deed of variation to his service agreement was executed which provides for his employment to continue until 31 December 2004 and for his notice period to be reduced by 1/12 for every completed month (or proportion thereof) between 1 January 2004 and 31 December 2004. 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 expired on 24 April 1995. The Long Term Incentive Plan 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 2004. 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 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 2004. 8. Directors’ interests in shares The beneficial interests of the directors in the shares of the Company as at 31 March are shown in table 5. LAND SECURITIES ANNUAL REPORT 2004 55 Remuneration report continued There have been no changes in the beneficial shareholdings of the directors between the end of the financial year and 24 May 2004. No director had any other interests in securities of Land Securities Group PLC or any of its subsidiary undertakings during the year. The registers of directors’ share and debenture interests and holdings of options, which are open to inspection at the Company’s registered office, contain full details of directors’ interests. 9. Performance graph As required by recent legislation regarding the directors’ remuneration report, this graph illustrates the performance of the Company measured by total shareholder return (share price growth plus dividends paid) 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 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. Total shareholder return Source: Thomson Financial Land Securities FTSE All-Share Real Estate Index This graph illustrates the value, by 31 March 2004 of £100 invested in Land Securities Group on 6 September 2002 compared with that of £100 invested in the FTSE All-Share Real Estate Index ) £ ( e u l a V 150 140 130 120 110 100 90 80 70 60 6 Sep 02 31 Jul 02 31 Mar 03 31 Mar 04 Total shareholder return Source: Thomson Financial Land Securities FTSE All-Share Real Estate Index FTSE 100 This graph illustrates the value, by 31 March 2004 of £100 invested in Land Securities on 31 March 1999 compared with that of £100 invested in the FTSE All-Share Real Estate Index and in the FTSE 100 ) £ ( e u l a V 180 160 140 120 100 80 60 31 Mar 99 31 Mar 00 31 Mar 01 31 Mar 02 31 Mar 03 31 Mar 04 56 LAND SECURITIES ANNUAL REPORT 2004 Directors’ responsibilities Independent auditors’ report to the members of Land Securities Group PLC 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 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 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 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. We have audited the financial statements on pages 60 to 79 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. LAND SECURITIES ANNUAL REPORT 2004 57 Independent auditors’ report continued to the members of Land Securities Group PLC 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 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. The other information comprises only the directors’ report, the unaudited part of the directors’ remuneration report, the chairman’s statement, the financial highlights, the operating and financial review and the corporate governance statement. 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 2004 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 18 May 2004 58 LAND SECURITIES ANNUAL REPORT 2004 Financials 60 Consolidated profit and loss account 60 Statement of total recognised gains and losses 60 Note of historical cost profits and losses 61 Balance sheets 62 Consolidated cash flow statement 62 Reconciliation of net cash flow to movements in net debt 62 Reconciliation of Group operating profit to net cash inflow from operating activities 63 Notes to the financial statements 80 Five and ten year records 81 Directors’ report LAND SECURITIES ANNUAL REPORT 2004 59 Consolidated profit and loss account for the year ended 31 March 2004 Gross property income – Group Plus share of joint ventures Gross property income – Total Operating profit – Group Share of operating profits of joint ventures Profit on sales of fixed asset properties (including share of joint ventures) Profit on ordinary activities before interest and taxation Net interest payable by Group – ordinary Net interest payable by joint ventures – ordinary – exceptional – exceptional Profit on ordinary activities before taxation Taxation Profit on ordinary activities after taxation Dividends Retained profit for the financial year Earnings per share Basic earnings per share Diluted earnings per share Adjusted earnings per share* Adjusted diluted earnings per share* Dividends per share All income was derived from within the United Kingdom from continuing operations. No operations were discontinued during the year. *the comparatives in respect of the above have been restated as set out in Note 9 Statement of total recognised gains and losses for the year ended 31 March 2004 Profit on ordinary activities after taxation Unrealised surplus/(deficit) on revaluation of investment properties Unrealised surplus on revaluation of joint venture’s investment properties Taxation on revaluation surpluses realised on sales of investment properties Total gains and losses recognised since the last financial statements Note of historical cost profits and losses Profit on ordinary activities before taxation Revaluation surplus arising in previous years now realised on sales of investment properties Historical cost profit on ordinary activities before taxation Taxation Taxation on revaluation surpluses realised on sales of investment properties Historical cost profit on ordinary activities after taxation Dividends Retained historical cost profit for the financial year The Notes on pages 63 to 79 form an integral part of these financial statements. Notes 2 2 2 2,3 2 2 2 6 6 6 6 7 8 21 9 9 9 9 8 2004 £m 1,285.8 195.3 1,481.1 464.7 101.1 63.9 629.7 (174.4) – (82.2) – 373.1 (84.8) 288.3 (173.2) 115.1 61.84p 61.76p 47.86p 47.80p 37.10p 2004 £m 288.3 400.7 6.2 (27.3) 667.9 2004 £m 373.1 333.0 706.1 (84.8) (27.3) 594.0 (173.2) 420.8 2003 £m 1,071.3 168.2 1,239.5 462.4 87.8 41.7 591.9 (144.9) (51.7) (75.4) (0.3) 319.6 (89.7) 229.9 (167.4) 62.5 46.46p 46.44p 50.89p 50.88p 35.50p 2003 £m 229.9 (56.8) – (25.4) 147.7 2003 £m 319.6 281.2 600.8 (89.7) (25.4) 485.7 (167.4) 318.3 60 LAND SECURITIES ANNUAL REPORT 2004 Balance sheets at 31 March 2004 Fixed assets Intangible asset Goodwill Tangible assets Investment properties Operating properties Total properties Other tangible fixed assets Investment in Group undertaking Investment in joint ventures Share of gross assets of joint ventures Share of gross liabilities of joint ventures Current assets Trading properties Debtors falling due within one year Debtors falling due after 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 one year Debentures, bonds and loans Other creditors Provision for liabilities and charges Investment in joint ventures (Telereal) Share of gross assets of joint venture Share of gross liabilities of joint venture Capital and reserves Called up share capital Share premium account Merger reserve Capital redemption reserve Revaluation reserve Profit and loss account Shareholders’ funds (including non-equity interests) Net assets per share (basic) Adjusted net assets per share (diluted)* I J Henderson Directors A E Macfarlane Notes Group 2004 £m 2003 £m Company 2004 £m 2003 £m 34.3 36.7 11 12 12 12 12 12 13 14 14 15 15 16 17 18 19 14 14 20 21 21 21 21 21 21 10 10 7,880.9 769.2 8,650.1 51.0 8,701.1 257.2 (5.1) 252.1 8,987.5 85.0 339.7 20.4 219.0 22.8 686.9 (1,371.2) (684.3) 8,303.2 (1,995.9) (35.9) (185.0) 1,108.0 (1,155.9) (47.9) – – – – – – – – – – – 4,092.7 – 4,092.7 4,092.7 4,092.7 – 7.8 – – 5.2 13.0 (591.9) (578.9) – 5.1 – 0.9 0.1 6.1 (495.6) (489.5) 7,823.9 557.4 8,381.3 41.5 8,422.8 1,170.2 (1,063.4) 106.8 8,566.3 52.6 273.5 15.9 3.4 96.0 441.4 (594.9) (153.5) 8,412.8 3,513.8 3,603.2 – – – – – – (2,648.4) (22.3) (179.0) – – – 6,038.5 5,563.1 3,513.8 3,603.2 55.0 15.9 – 22.1 3,112.8 2,832.7 6,038.5 1294p 1331p 76.9 13.3 – 0.1 3,038.9 2,433.9 5,563.1 1188p 1219p 55.0 15.9 373.6 22.1 – 3,047.2 3,513.8 76.9 13.3 373.6 0.1 – 3,139.3 3,603.2 The financial statements on pages 60 to 79 were approved by the directors on 18 May 2004. *the comparative in respect of the above has been restated as set out in Note 10 LAND SECURITIES ANNUAL REPORT 2004 61 Consolidated cash flow statement for the year ended 31 March 2004 Net cash inflow from operating activities Distributions received from joint venture* Interest received from joint venture Returns on investments and servicing of finance Interest received Interest paid Cost of re-profiling an interest rate swap Net cash outflow from investments and servicing of finance Taxation (Corporation tax paid) Net cash inflow from operating activities and investments after finance charges Capital expenditure Development programme expenditure Acquisition of investment properties Other investment property related expenditure Capital expenditure associated with property outsourcing Capital expenditure on properties Sale of fixed asset investment properties Sale of fixed asset operating properties Net expenditure on properties Net expenditure on non-property related fixed assets Net cash outflow from capital expenditure Acquisitions Repayment of loan capital by joint venture* Equity dividends paid Cash inflow/(outflow) before use of liquid resources Management of liquid resources (Investments: short term deposits) Financing Issue of shares Purchase of own share capital Increase in debt Net cash inflow from financing (Decrease)/increase in cash in year Reconciliation of net cash flow to movements in net debt (Decrease)/increase in cash in year Cash outflow/(inflow) from increase/(decrease) 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 Reconciliation of Group operating profit to net cash inflow from operating activities Operating profit – Group Depreciation and amortisation Increase in trading properties Increase in debtors Increase in creditors Net cash inflow from operating activities 2004 £m 456.4 51.0 7.6 16.1 (221.1) (21.1) (226.1) (37.1) 251.8 (190.2) (205.1) (111.0) (234.5) (740.8) 698.2 2.0 (40.6) (8.2) (48.8) 2003 £m 484.4 55.3 7.7 4.3 (292.0) – (287.7) (95.8) 163.9 (301.4) (139.1) (52.5) (120.2) (613.2) 425.5 10.8 (176.9) (12.9) (189.8) 121.0 25.3 (167.5) 156.5 (215.6) 2.7 (22.0) 22.0 2.7 (56.4) 2004 £m (56.4) 215.6 (22.0) 137.2 16.3 153.5 (2,589.3) (2,435.8) 2004 £m 464.7 31.5 (3.6) (91.9) 55.7 456.4 (176.6) (177.2) 57.5 1.2 (516.2) 728.2 213.2 93.5 2003 £m 93.5 (57.5) (728.2) (692.2) 45.0 (647.2) (1,942.1) (2,589.3) 2003 £m 462.4 28.6 (15.7) (16.1) 25.2 484.4 *the presentation of the cash flow statement has been revised to show loan repayments and distributions from the joint ventures separately and the comparative figures have been reclassified accordingly 62 LAND SECURITIES ANNUAL REPORT 2004 1. Accounting policies The financial statements have been prepared in accordance with applicable accounting standards under the historical cost convention modified by the revaluation of investment properties. Compliance with SSAP19 ‘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 following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. (a) Consolidation The consolidated financial statements of the Group include the financial statements of the Company and its subsidiary undertakings made up to 31 March 2004. Subsidiaries, joint ventures and joint arrangements with an accounting reference date other than 31 March have been consolidated on the basis of management accounts made up to 31 March 2004. Group undertakings and interests in joint ventures and joint arrangements acquired during the year are accounted for from the date of acquisition. The joint ventures are included under the gross equity method in accordance with FRS9 ‘Associates and Joint Ventures’. This requires the Group’s share of the joint venture’s profit and loss account to be shown separately in the income statement, and the Group’s share of the joint venture’s gross assets and liabilities to be shown on the face of the balance sheet. The Group has interests in various partnerships 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 the 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 and trading properties, property services income earned by its 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. Rental income includes the net income from managed operations such as car parks, food courts, serviced offices and flats. Notes to the financial statements for the year ended 31 March 2004 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 19. 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. Service charges and other recoveries include income in relation to service charges and directly recoverable expenditure together with any chargeable management fee. (ii) deferred tax is not recognised on revaluation gains and losses where these are not taken to the profit and loss account. Property services income represents unitary charges and the recovery of other direct property or contract expenditure reimbursable by 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. 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. (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 The goodwill arising on the acquisition of Trillium, calculated as the excess of cost over the fair value of net assets acquired, was capitalised in the year in which it arose and is amortised to the profit and loss account over the life of the PRIME contract. (h) Investment properties (i) Valuation Investment properties, including those that comprise part of the development programme, are carried in the financial statements at market values based on the latest professional valuation. A valuation was carried out by Knight Frank as at 31 March 2004. 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. Prior to the decision being made as to whether a potential development or refurbishment scheme should proceed or be aborted, pre-commitment costs are carried as a prepayment in the balance sheet. Certain internal staff and associated costs directly attributable to the management of major development schemes during the construction phase are capitalised. Other overhead costs in respect of developments and refurbishments are treated as revenue expenditure and written off as incurred. LAND SECURITIES ANNUAL REPORT 2004 63 Notes to the financial statements for the year ended 31 March 2004 1. Accounting policies (continued) (ii) Capitalisation of interest Gross interest associated with direct expenditure on properties under development or undergoing major refurbishment 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 SSAP19, 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 market value. The effect of depreciation is implicitly reflected in the valuation of investment properties, and the amount attributable to this factor cannot reasonably be separately identified or quantified by the valuers. Had the provisions of the Act been followed, net assets would not have been affected but revenue profits would have been reduced for this and earlier years and revaluation surpluses/deficits would have been correspondingly increased/decreased. (i) Operating properties These are properties owned and managed by Land Securities Trillium, the Group’s property outsourcing business unit, and which 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 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, and improvements to Group offices 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 cash flows 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. Transfers of property from fixed assets – Investment Properties to current assets – Trading Properties are made at the current carrying value at the date of transfer. This departure from the requirements of the Companies Act 1985, which requires current assets to be held at the lower of cost or net realisable value, is, in the opinion of the directors, necessary for the financial statements to show a true and fair view in accordance with applicable accounting standards. Had the provisions of the Act been followed, the net assets of the Group could be artificially reduced on transfer and the profit on disposal, calculated by reference to a lower carrying value, could give rise to an artificially high profit. Transfers of property from current assets – Trading Properties to fixed assets – Investment Properties are made at the current carrying value at the date of transfer. Trading profits are recognised upon exchange of contracts for the unconditional sale of property. (m) Provisions for liabilities and charges 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 likely 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. (o) Long-term contracts Turnover on long-term contracts is recognised according to the stage reached in the contract by reference to the value of work completed. An appropriate estimate of the profit attributable to work completed is recognised once the outcome of the contract can be assessed with reasonable certainty. The amount by which the turnover exceeds payments on account is shown under debtors as amounts recoverable on contracts. The costs on long- term contracts not yet taken to the profit and loss account, less any related foreseeable losses and payments on account are shown in stocks. 64 LAND SECURITIES ANNUAL REPORT 2004 2. Segmental information An analysis of turnover, profit before interest and taxation, and net assets by business sector is set out below. The business sectors consist of property investment (which comprises the investment portfolio and development activities) and property outsourcing. Notes to the financial statements for the year ended 31 March 2004 Business sectors including the results of joint ventures Business sectors including the results of joint ventures Property investment 2004 £m Property out- sourcing 2004 £m 515.1 65.6 – 49.6 19.9 650.2 (14.9) (87.1) (44.5) (49.6) – (18.2) 435.9 (4.1) – 431.8 52.1 483.9 – – 802.0 – 28.9 830.9 (164.7) (422.7) (30.4) – (6.2) (23.3) 183.6 (36.4) (2.4) 144.8 11.8 156.6 (i) Profit and loss account Rental income (Note (a)) Service charges and other recoveries Property services income (Note (b)) Long term contract income Proceeds of sales of trading properties Gross property income Rents payable Other direct property or contract expenditure (Note (c)) Indirect property or contract expenditure Long term contract expenditure Bid costs Costs of sales of trading properties Operating profit before depreciation and amortisation Depreciation Amortisation of goodwill Profit on sale of fixed asset properties Segment profit Common costs (Note (d)) Group reorganisation costs Profit on ordinary activities before interest and taxation Total 2004 £m 515.1 65.6 802.0 49.6 48.8 514.5 65.6 636.2 49.6 19.9 1,481.1 1,285.8 (139.7) (179.6) (509.8) (509.8) (56.8) (74.9) (49.6) (49.6) (6.2) (6.2) (18.2) (41.5) 619.5 (40.5) (2.4) 576.6 63.9 505.5 (27.6) (2.4) 475.5 52.0 640.5 527.5 (10.8) – 629.7 Analysis of total results between Group and share of joint ventures Share of joint ventures 2004 £m Group 2004 £m Property investment 2003 £m Property out- sourcing 2003 £m 519.7 55.9 – – 3.7 579.3 (17.0) (71.1) (35.3) – – (2.4) 453.5 (9.8) – 443.7 26.6 470.3 – – 658.3 – 1.9 660.2 (146.0) (327.8) (23.7) – (4.7) (1.4) 156.6 (29.9) (2.2) 124.5 15.1 139.6 0.6 – 165.8 – 28.9 195.3 (39.9) – (18.1) – – (23.3) 114.0 (12.9) – 101.1 11.9 113.0 Analysis of total results between Group and share of joint ventures Share of joint ventures 2003 £m Total Group 2003 2003 £m £m – – 166.3 – 1.9 168.2 (48.0) - (16.0) – – (1.4) 102.8 (15.0) – 87.8 15.1 102.9 519.7 55.9 658.3 – 5.6 519.7 55.9 492.0 – 3.7 1,239.5 1,071.3 (115.0) (163.0) (398.9) (398.9) (43.0) (59.0) – – (4.7) (4.7) (2.4) (3.8) 610.1 (39.7) (2.2) 568.2 41.7 507.3 (24.7) (2.2) 480.4 26.6 609.9 507.0 (11.7) (6.3) 591.9 Notes (a) Rental income includes £9.3m (2003: £7.3m) of rent receivable allocated to rent free periods. (b) Property services income for property outsourcing comprises £449.4m (2003: £342.4m) in respect of unitary charge and £186.8m (2003: £149.6m) in respect of capital projects and other reimbursable costs. (c) Other direct property or contract expenditure includes pre-commitment costs written off of £2.4m (2003: £3.1m). (d) Common costs are costs associated with central Group management. (ii) Net assets Properties in development programme (Note 12) Other investment properties Operating properties – relating to the PRIME contract – relating to the Employment Services contract – relating to the BBC contract Goodwill and other tangible fixed assets Fixed assets Investment in joint ventures Net current assets/(liabilities) (excluding financing and dividends) Financing and dividends payable Long term liabilities and provisions Net assets Property investment £m Property outsourcing £m 732.2 7,148.7 – – – 9.1 7,890.0 252.1 (139.0) 8,003.1 – – 380.7 99.7 288.8 76.2 845.4 (47.9) 44.2 841.7 Property investment £m Property outsourcing £m 963.3 6,860.6 – – – 12.0 7,835.9 – (50.2) 7,785.7 – – 372.7 – 184.7 66.2 623.6 106.8 37.9 768.3 Total 2004 £m 732.2 7,148.7 380.7 99.7 288.8 85.3 8,735.4 204.2 (94.8) 8,844.8 (2,585.4) (220.9) 6,038.5 LAND SECURITIES ANNUAL REPORT 2004 Total 2003 £m 963.3 6,860.6 372.7 – 184.7 78.2 8,459.5 106.8 (12.3) 8,554.0 (2,789.6) (201.3) 5,563.1 65 Notes to the financial statements for the year ended 31 March 2004 3. Operating profit Operating profit is stated after charging Directors’ remuneration Depreciation Auditors’ remuneration: Audit fees (Company £82,000 (2003: £80,000)) Non-audit fees Bid support – Land Securities Trillium Limited Taxation Other advice Total non-audit 4. Revenue profit Profit on ordinary activities before taxation Profit on sale of fixed asset properties Exceptional items Deficit on purchase and redemption of convertible bonds Cost of cancellation/novation of interest rate swaps Group reorganisation costs Notes 6 6 Share of joint ventures £m 30.8 (11.9) – – – Group £m 342.3 (52.0) – – – Total 2004 £m 373.1 (63.9) – – – Revenue profit before taxation 290.3 18.9 309.2 Group £m 292.4 (26.6) 28.2 23.5 6.3 323.8 2004 £m 3.8 29.1 0.5 0.1 0.4 0.2 0.7 Share of joint ventures £m 27.2 (15.1) – 0.3 – 12.4 2003 £m 3.2 26.4 0.5 0.2 1.0 0.5 1.7 Total 2003 £m 319.6 (41.7) 28.2 23.8 6.3 336.2 As bid costs have become a normal part of Trillium’s business it is no longer considered appropriate to eliminate them when calculating revenue profit. The basis of the calculation of revenue profit has therefore been revised, and the comparatives have been restated in accordance with this new definition of revenue profit. Revenue profits are now defined as profits before taxation, adjusted to eliminate only profits on disposal of fixed asset properties and the effect of exceptional items. 5. Employees, directors and pensions Employees The average number of employees during the year, excluding directors, and the corresponding aggregate employee costs were: Indirect property or contract and administration Direct property or contract services: Full time Part time Employee costs Salaries Social Security Other pension 2004 No. 411 1,200 66 1,677 2003 No. 392 984 52 1,428 2004 £m 2003 £m 30.9 47.7 1.4 80.0 64.2 6.8 9.0 80.0 31.6 43.2 0.6 75.4 59.5 6.4 9.5 75.4 In addition to the above, 338 employees are employed by Land Securities Trillium Telecom Services Limited, a wholly owned Group company. These employees are made available to Telereal Services Limited, a joint venture company, to deliver services to BT. All related employee costs are reimbursed to the Group by Telereal Services Limited. Directors Aggregate emoluments excluding pensions Company contributions to pension schemes 2004 £m 3.1 0.3 3.4 2003 £m 2.4 0.5 2.9 Four directors (2003: four) have retirement benefits accruing under money purchase pension schemes. Retirement benefits accrue to one director (2003: one) 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 51 to 56. 66 LAND SECURITIES ANNUAL REPORT 2004 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 amount Notes to the financial statements for the year ended 31 March 2004 2004 £m 3.3 2.3 4.2 9.8 2003 £m 3.2 3.2 3.6 10.0 The amount under other schemes includes the actual contributions paid to the Group’s defined contribution schemes and, in respect of 2003, sums paid to the BBC scheme as required under the terms of the participation in the BBC scheme in the period to 31 March 2003. This is due to the Land Securities Trillium outsourcing arrangement with the BBC. Defined benefit scheme Land Securities Scheme The Pension & Assurance Scheme of the Land Securities Group of Companies (‘the Scheme’) is the most significant 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 1 July 2003. 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 1/7/2003 % 4.75 2.50 6.00 5.00 2.50 95.00 The deficit in the Scheme has increased from £1.2m as at 6 April 2001 to £22.0m as at 1 July 2003 and this decline has been reflected in the FRS17 figures disclosed in previous years. This increase is primarily due to the sharp fall in equity markets over that period (a fall of some 20%) and an increase in life expectancy that has been revealed by recent industry investigations. The market value of the Scheme’s invested assets (excluding the value of annuities purchased to provide certain pensions in payment) as at 1 July 2003 was £65.5m. The actuarial value of these assets represented 79% of the value of the Scheme’s liabilities at that date. As a result of this valuation, the actuary recommended that the employer contributions of 30% of pensionable salary be continued together with additional employer contributions to address the deficit. In order to address the deficit in the Scheme, the Group made an additional one-off cash contribution of £7.5m in March 2003 together with the first payment of an additional annual contribution of £1.5m recommended by the Scheme’s actuary. A further annual contribution of £1.5m was made in March 2004. The £7.5m contribution paid in March 2003 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 charges in 2003 and 2004 reflect the amortisation and the £1.5m additional annual contributions as variations from regular costs. Employer contributions will continue at 30% of pensionable salaries until completion of the next formal valuation, due no later than 1 July 2006. In addition, discussions are under way between the Trustees of the Scheme and the Group about the level of additional contributions that are required to address the deficit revealed in the 1 July 2003 valuation. Trillium Plan The Group participated in the BBC pension scheme until 31 March 2003 in respect of 168 employees who transferred from the BBC to Land Securities Trillium Media Services Limited as part of the Land Securities Trillium’s outsourcing contracts with the BBC. With effect from 1 April 2003, Land Securities Trillium Media Services Limited put in place a defined benefit scheme with the same terms and conditions as the BBC pension scheme for the employees who transferred from the BBC (‘the Trillium Plan’). As at 31 March 2004 the Trillium Plan had assets of £11.1m. This includes a bulk transfer payment of £8.1m that is expected to be received in due course from the BBC pension scheme. 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. This scheme is included within the Trillium Plan. The assets and liabilities in respect of the Trillium Plan have been included in the consolidated FRS17 disclosure below. Contributory money purchase scheme A contributory money purchase scheme was introduced on 1 January 1999 for all new administrative and senior property based employees, subject to eligibility, together with a separate similar scheme, effective 1 April 1998, for other property based employees. A further separate similar scheme, previously set up by Trillium, is also in operation for Land Securities Trillium employees. Other schemes Land Securities Trillium Telecom Services Limited has put in place a defined benefit pension 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 rechargeable 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. LAND SECURITIES ANNUAL REPORT 2004 67 Notes to the financial statements for the year ended 31 March 2004 5. Employees, directors and pensions (continued) Additional disclosures under FRS17 ‘Retirement Benefits’ As noted above, a full actuarial valuation of the Land Securities Scheme was undertaken on 1 July 2003. This valuation, and the latest formal valuation of the Trillium Plan, were updated to 31 March 2004 for the purposes of the following additional disclosures required by the transitional provisions of FRS17. The major assumptions used in this valuation, were (in nominal terms): Rate of increase in pensionable salaries Rate of increase in pensions in payment Discount rate Inflation 2004 % 4.00* 2.75 5.50 2.75 2003 % 4.75 2.50 5.50 2.50 2002 % 5.00 2.75 6.00 2.75 *plus an allowance of 1% per annum for promotional salary increases in respect of Land Securities Scheme employees. The market value of the assets in the Schemes (including 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 scheme assets Actuarial value of scheme liabilities Deficit in the scheme Related deferred tax asset Net pension liability 2004 % 7.50 5.00 4.00 2003 % 7.50 5.50 3.75 2002 % 7.50 6.00 4.00 2004 £m 42.9 58.8 2.9 104.6 (121.8) (17.2) 5.2 (12.0) 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) Set out below is an analysis of the amounts that would be charged to the profit and loss account and the statement of total recognised gains and losses in respect of the Group’s material defined benefit pension scheme. Analysis of the amounts that would be charged to the profit and loss account in accordance with FRS17 Analysis of the amount charged to operating profit* Current service cost Curtailment and settlement costs Operating cost Analysis of amount credited to other finance income* Expected return on pension scheme assets Interest on pension scheme liabilities Net return 2004 £m 4.0 0.3 4.3 5.4 (6.0) (0.6) *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 Analysis of the amounts that would be recognised in the statement of total recognised gains and losses in accordance with FRS17 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 assets Actuarial profit/(loss) Movement in deficit during year Deficit in the scheme at the beginning of the year Operating cost Employer contributions Other income plus any risk benefit premiums paid direct to insurer Net return Actuarial gain/(loss) Deficit in the scheme at the end of the year 2004 £m 13.7 0.2 (13.6) 0.3 (18.6) (4.3) 5.8 0.2 (0.6) 0.3 (17.2) 2003 £m 3.2 0.9 4.1 5.3 (5.3) – 2003 £m (16.3) 2.7 (3.6) (17.2) (9.9) (4.1) 12.3 0.3 – (17.2) (18.6) 68 LAND SECURITIES ANNUAL REPORT 2004 History of experience gains and losses Difference between the actual and expected return on scheme assets Value of pension scheme assets Percentage of pension scheme assets Experience gains on pension scheme liabilities Value of pension scheme liabilities Percentage of pension scheme liabilities Actuarial gain/(loss) Value of pension scheme liabilities Percentage of pension scheme liabilities Notes to the financial statements for the year ended 31 March 2004 2004 £m 13.7 104.6 13.1% 0.2 121.8 0.1% 0.3 121.8 0.2% 2003 £m (16.3) 76.4 –21.3% 2.7 95.0 2.8% (17.2) 95.0 –18.1% The consolidated balance sheet includes a net pension asset of £6.0m (2003: £6.7m) representing the unamortised balance of the £7.5m special contribution made by the Group in March 2003. Full adoption of FRS17 would result in the pension asset being replaced by the net pension liability of £12.0m (2003: £13.0m), giving rise to a decrease in net assets of £18.0m (2003: £19.7m). 6. Net interest payable Interest payable Borrowings not wholly repayable within five years Borrowings wholly repayable within five years Other interest payable Loans from joint venture partners Interest capitalised in relation to properties under development Interest receivable Short term deposits Other interest receivable Loan to joint venture Share of joint ventures £m (76.9) – – (7.6) (84.5) – (84.5) 2.3 – – Group £m (154.7) (70.4) (1.0) – (226.1) 35.6 (190.5) 5.7 2.8 7.6 Total 2004 £m (231.6) (70.4) (1.0) (7.6) (310.6) 35.6 (275.0) 8.0 2.8 7.6 Group £m (117.2) (76.2) (2.5) – (195.9) 39.0 (156.9) 0.9 3.4 7.7 Net interest payable – ordinary (174.4) (82.2) (256.6) (144.9) Deficit on purchase and redemption of convertible bonds Cost of cancellation/novation of interest rate swaps Net interest payable – exceptional – – – – – – – – – (28.2) (23.5) (51.7) Share of joint ventures £m (70.1) – – (7.7) (77.8) – (77.8) – 2.4 – (75.4) – (0.3) (0.3) Total 2003 £m (187.3) (76.2) (2.5) (7.7) (273.7) 39.0 (234.7) 0.9 5.8 7.7 (220.3) (28.2) (23.8) (52.0) Interest has been capitalised at the Group’s pre-tax weighted average borrowing rate for non-specific borrowings for the year of 7.7% (2003: 8.3%). Non-specific borrowings exclude certain bank debt which is specific to the PRIME contract. Group interest payable on borrowings includes £4.8m (2003: £0.7m) in respect of the amortisation of bond discounts and issue expenses. 7. Taxation Analysis of tax charge for the year Corporation tax on Group profit for the period at 30% (2003: 30%) Adjustments to current tax in respect of prior periods Share of joint venture’s current tax Total current tax Deferred tax on Group timing differences arising in the year Deferred tax released in respect of property disposals in the year Share of joint venture’s deferred tax Total deferred tax Tax charge for the year LAND SECURITIES ANNUAL REPORT 2004 2004 £m 73.3 (1.5) 14.7 86.5 31.5 (31.6) (1.6) (1.7) 84.8 2003 £m 32.0 (7.8) 14.5 38.7 59.2 (8.2) – 51.0 89.7 69 Notes to the financial statements for the year ended 31 March 2004 7. Taxation (continued) Factors affecting the tax charge for the year The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 30% (2003: 30%) The differences are explained below: Profit on ordinary activities before taxation Tax at 30% Effects of: Capital allowances Depreciation of fixed assets qualifying for capital allowances Tax relief on capitalised interest and other timing differences Reduced rate of tax on profit on disposal of assets Telereal depreciation and goodwill amortisation Non-allowable expenses and non-taxable items Prior year corporation tax adjustments Current tax 2004 £m 2003 £m 373.1 111.9 (26.8) 5.9 91.0 (8.4) (5.9) 4.7 6.6 (1.5) 86.5 319.6 95.9 (29.1) 7.9 74.7 (32.0) (3.4) 5.3 1.9 (7.8) 38.7 The Group’s share of Telereal’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 total tax charge is a net credit of £18.3m (2003: charge of £0.6m) attributable to property sales, including the release of deferred taxation. In 2003 a tax credit of £15.7m was attributable to exceptional items. 8. Dividends Dividends per ordinary share Profit and loss account Ordinary shares – interim – final B shares Additional prior year dividends – ordinary shares 2004 pence 9.90 27.20 2003 pence 9.50 26.00 37.10 35.50 2004 £m 46.1 126.8 0.3 – 173.2 2003 £m 44.1 121.1 0.5 1.7 167.4 B shares carry the right to a dividend of 70% of six month LIBOR paid twice yearly. The annualised dividend rates for the periods to 17 April 2003, 17 October 2003 and 17 April 2004 were 2.8%, 2.5% and 2.8% respectively 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 share options Diluted earnings per share Earnings per share Fixed asset property disposals after current and deferred tax Effect of exceptional items after taxation Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Adjusted earnings per share Diluted earnings per share Fixed asset property disposals after current and deferred tax Effect of exceptional items after taxation Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Adjusted diluted earnings per share Profit after taxation and B share dividends Weighted average number of ordinary shares Earnings per share 2004 £m 288.0 288.0 288.0 (82.2) – 8.3 8.8 222.9 288.0 (82.2) – 8.3 8.8 222.9 2003 £m 229.4 229.4 229.4 (41.1) 42.6 11.1 9.3 251.3 229.4 (41.1) 42.6 11.1 9.3 251.3 2004 No. m 465.7 0.6 466.3 465.7 2003 No. m 493.8 0.1 493.9 493.8 465.7 466.3 493.8 493.9 466.3 493.9 2004 pence 61.84 (0.08) 61.76 61.84 (17.65) – 1.78 1.89 47.86 61.76 (17.63) – 1.78 1.89 47.80 2003 pence 46.46 (0.02) 46.44 46.46 (8.32) 8.62 2.25 1.88 50.89 46.44 (8.32) 8.63 2.25 1.88 50.88 70 LAND SECURITIES ANNUAL REPORT 2004 Adjusted earnings per share is based on revenue profits. In calculating the tax charge on revenue profits, the deferred tax arising on capital allowances in respect of investment properties has been eliminated because experience has shown that these allowances are not in practice repayable. Because capitalised interest on the development programme is becoming increasingly significant, and it is a permanent timing difference, the deferred taxation arising on capitalised interest is also now eliminated when calculating adjusted earnings per share. Following the recalculation of the adjusted earnings on the revised basis described above, it became apparent that the calculation of the adjusted earnings per share for the six months ended 30 September 2003 required revision. The revised figures are set out below. Notes to the financial statements for the year ended 31 March 2004 Adjusted earnings per share Adjusted diluted earnings per share Six months ended 30/9/2003 Reported pence 26.66 26.65 Revised pence 24.74 24.73 10. Net assets per share Equity shareholders’ funds Number of ordinary shares Net assets per share Net assets per share Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Joint venture’s negative investment Adjusted net assets per share Net assets per share Exercise of outstanding share options Diluted net assets per share Diluted net assets per share Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Joint venture’s negative investment Adjusted diluted net assets per share 2004 £m 6,030.1 101.4 30.0 47.9 6,209.4 6,030.1 – 6,030.1 6,030.1 101.4 30.0 47.9 6,209.4 2003 £m 5,532.7 124.7 21.2 – 5,678.6 5,532.7 – 5,532.7 5,532.7 124.7 21.2 – 5,678.6 2004 No. m 465.9 465.9 465.9 0.6 466.5 466.5 2003 No. m 465.6 465.6 465.6 0.1 465.7 465.7 466.5 465.7 2004 pence 1294 23 6 10 1333 1294 (1) 1293 1293 22 6 10 1331 2003 pence 1188 27 5 – 1220 1188 – 1188 1188 26 5 – 1219 The additional deferred tax liability arising from capital allowances on investment properties is excluded from the calculation of the adjusted net assets as the Group’s experience is that deferred tax on capital allowances in relation to such properties is unlikely to crystallise in practice. In addition, the deferred tax on capitalised interest on these properties is added back as this is a permanent timing difference. This is a change to the basis of calculation and the prior year figures have been restated accordingly. 11. Goodwill At 1 April 2003 Amortisation for the year At 31 March 2004 Cost £m 42.0 – 42.0 Amortisation £m (5.3) (2.4) (7.7) Net £m 36.7 (2.4) 34.3 LAND SECURITIES ANNUAL REPORT 2004 71 Notes to the financial statements for the year ended 31 March 2004 12. Fixed assets Cost/valuation At 1 April 2003 Additions Reclassifications Sales Investment properties sold to joint venture Investment properties transferred to trading properties Unrealised surplus on revaluation At 31 March 2004 Accumulated depreciation At 1 April 2003 Depreciation for the year Reclassifications Sales At 31 March 2004 Net book value At 31 March 2004 At 31 March 2003 Leasehold Over 50 years to run £m Under 50 years to run £m Total properties £m Other tangible fixed assets £m Freehold £m 6,222.5 564.8 25.2 (585.4) (105.1) (28.5) 6,093.5 305.6 6,399.1 (10.2) (9.7) 1.8 0.2 (17.9) 2,057.1 217.5 (40.0) (47.3) (134.9) – 2,052.4 97.2 2,149.6 (2.0) (0.2) 1.8 – (0.4) 6,381.2 6,212.3 2,149.2 2,055.1 120.4 10.2 8.4 – – – 139.0 (2.1) 136.9 (6.5) (7.5) (3.2) – (17.2) 119.7 113.9 8,400.0 792.5 (6.4) (632.7) (240.0) (28.5) 8,284.9 400.7 8,685.6 (18.7) (17.4) 0.4 0.2 (35.5) 8,650.1 8,381.3 83.7 17.2 6.4 (8.9) – – 98.4 – 98.4 (42.2) (11.7) (0.4) 6.9 (47.4) 51.0 41.5 Total £m 8,483.7 809.7 – (641.6) (240.0) (28.5) 8,383.3 400.7 8,784.0 (60.9) (29.1) – 7.1 (82.9) 8,701.1 8,422.8 Freeholds include £442.9m (2003: £408.9m) of leaseholds with unexpired terms exceeding 900 years; leaseholds under 50 years include £11.4m (2003: £12.1m) with unexpired terms of 20 years or less. Other tangible assets include computers, motor vehicles, furniture, fixtures and fittings, and improvements to Group offices. Additional analysis in respect of the movements in investment and operating properties is set out below: Market value at 1 April 2003 Less amount included in prepayments in respect of UITF28 adjustments Net book value at 1 April 2003 Properties transferred from portfolio management into the development programme during the year (at 1 April 2003 valuation) Developments completed, let and transferred from the development programme into portfolio management during the year Transfer of investment properties to trading properties Reclassification of certain costs as other tangible fixed assets Property acquisitions Capital expenditure Capitalised interest Sales Properties sold to joint venture Depreciation Unrealised surplus on revaluation Net book value at 31 March 2004 Plus amount included in prepayments in respect of UITF28 adjustments Market value at 31 March 2004 (Group) Market value at 31 March 2004 (Group and share of joint venture) Fixed asset properties include capitalised interest of £111.0m (2003: £79.5m). Portfolio management £m Investment properties Development programme £m 6,876.6 (16.0) 6,860.6 (18.1) 451.0 (28.5) – 205.1 111.0 0.8 (590.1) (240.0) 6,751.8 (1.6) 398.5 7,148.7 23.9 7,172.6 7,416.1 967.4 (4.1) 963.3 18.1 (451.0) – 1.0 – 213.6 25.4 (40.4) – 730.0 – 2.2 732.2 1.9 734.1 734.1 Total £m 7,844.0 (20.1) 7,823.9 – – (28.5) 1.0 205.1 324.6 26.2 (630.5) (240.0) 7,481.8 (1.6) 400.7 7,880.9 25.8 7,906.7 8,150.2 Operating properties £m Total £m 557.4 8,381.3 – – – (7.0) 109.8 117.7 9.1 (2.0) – 785.0 (15.8) – 769.2 – – (28.5) (6.0) 314.9 442.3 35.3 (632.5) (240.0) 8,266.8 (17.4) 400.7 8,650.1 72 LAND SECURITIES ANNUAL REPORT 2004 The classification of properties between portfolio management and the development programme is defined in the Glossary (page 98). Operating properties are carried at depreciated cost and are not revalued. The historical cost of investment properties is £4,589.5m (2003: £4,577.9m). Proposed developments are excluded from the development programme as experience has shown that these schemes can be subject to substantial revision. In addition to the development programme, investment properties include properties to the value of £179.3m (2003: £180.5m) in respect of proposed developments. Developments are transferred out of the development programme when physically complete and 95% let. Schemes completed during the year include The Bullring (Birmingham), Kingsway West (Phase 1) (Dundee), Portman House (London W1), 7 Soho Square (London W1) and 25/31 Sidwell Street (Exeter). The total development profit earned on schemes completed in the year was £82.7m (2003: £24.3m). This comprises development profits on those properties completed during the first half of £78.8m plus a further uplift in the second half on those properties of £22.4m offset by losses on those projects completed in the second half of £18.5m. Notes to the financial statements for the year ended 31 March 2004 Capital commitments Contracted 13. Investment in Group undertaking At 1 April 2003 and 31 March 2004 The investment represents 100% of the issued share capital of Land Securities PLC, a company incorporated and operating in the United Kingdom. 14. Investment in joint ventures Summary financial information of Group’s share of joint ventures Profit and loss account Property services and rental income Proceeds of sales of trading properties Gross property income Rents payable Indirect property or contract expenditure Costs of sales of trading properties Depreciation Operating profit Profit on sale of fixed asset properties Profit before interest and taxation Net interest payable Profit before taxation Taxation Profit after taxation Balance sheet Fixed assets – Investment properties – Operating properties Current assets Liabilities due within one year Liabilities due after one year Net investment in joint ventures Net debt Scottish Retail Property Limited Partnership £m 0.6 – 0.6 – (0.1) – – 0.5 – 0.5 – 0.5 (0.1) 0.4 243.5 – 13.7 257.2 (5.1) – (5.1) 252.1 – Telereal £m 165.8 28.9 194.7 (39.9) (18.0) (23.3) (12.9) 100.6 11.9 112.5 (82.2) 30.3 (13.0) 17.3 – 1,033.5 74.5 1,108.0 (56.1) (1,099.8) (1,155.9) (47.9) (1,073.0) Total 2004 £m 166.4 28.9 195.3 (39.9) (18.1) (23.3) (12.9) 101.1 11.9 113.0 (82.2) 30.8 (13.1) 17.7 Telereal £m 166.3 1.9 168.2 (48.0) (16.0) (1.4) (15.0) 87.8 15.1 102.9 (75.7) 27.2 (14.5) 12.7 – 1,056.9 113.3 1,170.2 (75.3) (988.1) (1,063.4) 106.8 (949.6) 2003 £m 586.6 £m 4,092.7 Total 2003 £m 166.3 1.9 168.2 (48.0) (16.0) (1.4) (15.0) 87.8 15.1 102.9 (75.7) 27.2 (14.5) 12.7 2004 £m 665.0 Scottish Retail Property Limited Partnership £m – – – – – – – – – – – – – – – – – – – – – – – LAND SECURITIES ANNUAL REPORT 2004 73 Notes to the financial statements for the year ended 31 March 2004 14. Investment in joint ventures (continued) Net investment in joint ventures At 1 April 2003 Properties contributed Share of post tax profits Distributions Loan repayments Unrealised surplus on revaluation At 31 March 2004 Scottish Retail Property Limited Partnership £m – 245.5 0.4 – – 6.2 252.1 Telereal £m 106.8 – 17.3 (51.0) (121.0) – (47.9) Total £m 106.8 245.5 17.7 (51.0) (121.0) 6.2 204.2 The Group has two joint ventures, both of which are 50% owned and draw up accounts to 31 March, as follows: • ∑Telereal is a 50:50 joint venture between Land Securities Trillium and the Pears Group, which 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. • ∑The Scottish Retail Property Limited Partnership is a joint venture between Land Securities Properties Limited and British Land Property Management Limited, which manages four shopping centres in Aberdeen and East Kilbride. The partnership was created on 16 March 2004. The Group’s share of Telereals’ securitised and bank debt of £1,079.7m (2003: £988.1m) is non-recourse to the Group. The Group’s notional 50% share of the fair value of Telereal’s financial liabilities is £1,149.1m (2003: £1,050.8m). Telereal includes two limited 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 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. 15. Debtors Falling due within one year Trade debtors – property investment – property outsourcing Property sales debtors Other debtors Prepayments and accrued income Taxation recoverable Falling due after one year Other debtors Group 2004 £m 29.5 147.2 3.4 54.4 105.2 – 339.7 20.4 16. Creditors falling due within one year Group Debentures, bonds and loans (Note 17) Loans from Group undertakings Overdrafts Trade creditors Taxation and Social Security Proposed Final Dividend Capital creditors Other creditors Accruals and deferred income 2004 £m 681.7 – – 80.8 85.1 126.8 92.6 22.7 281.5 1,371.2 2003 £m 34.7 77.7 24.6 52.0 84.5 – 273.5 15.9 2003 £m 23.5 – 16.8 58.5 23.9 121.1 69.2 15.4 266.5 594.9 Company 2004 £m 2003 £m – – – – – 7.8 7.8 – Company 2004 £m – 465.0 – – – 126.8 – – 0.1 591.9 – – – – – 5.1 5.1 – 2003 £m – 374.1 – – – 121.1 – – 0.4 495.6 Capital creditors represent amounts due under contracts to purchase properties, which were unconditionally exchanged at the year-end, and for work completed on investment properties but not paid for at the financial year-end. Deferred income principally relates to rents received in advance. The Company’s loans from Group undertakings comprises £358.9m (2003: £338.1m) repayable on the earlier of 31 December 2005 and demand and £106.1m (2003: £36.0m) with no fixed repayment date. 74 LAND SECURITIES ANNUAL REPORT 2004 17. Debentures, bonds and loans Nominal value Unamortised discount and issue costs Book value Notes to the financial statements for the year ended 31 March 2004 Unsecured 10 3⁄4 per cent Exchange Bonds due 2004 9 1⁄2 per cent Bonds due 2007 5 7⁄8 per cent Bonds due 2013 9 per cent Bonds due 2020 6 3⁄8 per cent Bonds due 2024 Syndicated bank debt Commercial paper 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 16) Falling due after one year 2004 £m 21.2 200.0 400.0 200.0 200.0 289.0 358.1 1,668.3 – – 5.4 32.3 400.0 200.0 200.0 193.1 1,030.8 2,699.1 (691.4) 2,007.7 2003 £m 21.2 200.0 400.0 200.0 200.0 603.0 – 1,624.2 8.4 8.4 5.5 32.3 400.0 200.0 200.0 198.4 1,053.0 2,677.2 (23.5) 2,653.7 2004 £m – – (5.4) (3.0) (2.0) (1.4) – (11.8) – – – – – – – (9.7) (9.7) (21.5) 9.7 (11.8) 2003 £m – – (6.0) (3.2) (2.1) (2.5) – (13.8) – – – – – – – 8.5 8.5 (5.3) – (5.3) 2004 £m 21.2 200.0 394.6 197.0 198.0 287.6 358.1 1,656.5 – – 5.4 32.3 400.0 200.0 200.0 183.4 1,021.1 2,677.6 (681.7) 1,995.9 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) 2,648.4 In accordance with FRS4 ‘Capital Instruments’ where bonds are issued at a discount or incur issue expenses they are stated net of those costs. The carrying value of the secured bank loan comprises the loan amount (currently £193.1m (2003: £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 loan and swap were restructured after the year-end to reflect the Employment Services addition to the PRIME contract. 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 5.09%. Secured loans are charged on properties of Group undertakings. From time to time, short term deposits are charged as temporary security until substitutes have been agreed for properties taken out of charge. At 31 March 2004 short term deposits of £154.0m (2003: £nil) were charged as temporary security for borrowings 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. 18. Other creditors falling due after one year Group Company Deferred income Other creditors 19. Provision for liabilities and charges At 1 April 2003 Net charge for the year Released in respect of property disposals during the year Other movements At 31 March 2004 LAND SECURITIES ANNUAL REPORT 2004 2004 £m 15.5 20.4 35.9 2003 £m 16.9 5.4 22.3 Dilapidations £m 5.9 5.8 – – 11.7 2004 £m – – – Deferred taxation £m 173.1 31.5 (31.6) 0.3 173.3 2003 £m – – – Total £m 179.0 37.3 (31.6) 0.3 185.0 75 Notes to the financial statements for the year ended 31 March 2004 19. Provision for liabilities and charges (continued) Deferred tax is provided as follows Excess of capital allowances over depreciation – investment properties – operating properties Capitalised interest – investment properties – operating properties Other timing differences Estimated tax on contingent capital gains are as follows Tax on capital gains that would become payable by the Group, if it were to dispose of all of its investment properties at the amount stated on the balance sheet Potential reduction in tax on contingent capital gains if properties were sold within their owning companies Tax on contingent capital gains assuming no further mitigation 2004 £m 101.4 34.8 30.0 4.4 2.7 173.3 2004 £m 490.0 (75.0) 415.0 2003 £m 124.7 21.7 21.2 3.0 2.5 173.1 2003 £m 435.0 (110.0) 325.0 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 £101.4m (2003: £124.7m), and a further £30.0m (2003: £21.2m) would be released in respect of capitalised interest. 20. Called up share capital Authorised Allotted and fully paid Ordinary shares of 10p each Non-equity B shares of £1.02 each Redeemable preference shares of £1 each 2004 No. m 600.0 540.0 0.1 2003 No. m 600.0 540.0 0.1 2004 £m 46.6 8.4 – 55.0 2003 £m 46.5 30.3 0.1 76.9 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 the 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. On 17 April 2003 and 17 October 2003, 18,439,941 and 3,099,927 B shares were redeemed respectively. On 17 April 2004 a further 1,661,077 B shares were redeemed. 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. On 31 March 2004 all the redeemable preference shares of £1 each were redeemed at par. Movements in the share capital of the Company were At 1 April 2003 Issued on the exercise of options under: 1993 Savings Related Share Option Schemes 1984 Executive Share Option Scheme 2000 Executive Share Option Scheme At 31 March 2004 Executive and Savings Scheme Related Share Option Schemes At 1 April 2003 Granted Granted Exercised Lapsed At 31 March 2004 Number of shares 465,562,808 47,237 97,500 217,000 465,924,545 1993 Savings Related Share Option Schemes 653,790 – 227,578 (47,237) (60,805) Total 4,696,852 1,678,524 227,578 (361,737) (209,462) Option price 788p 677p 2002 Executive Share Option Scheme 107,500 1,678,524 – – (21,157) 2000 Executive Share Option Scheme 3,802,562 – – (217,000) (127,500) 1984 Executive Share Option Scheme 133,000 – – (97,500) – 1,764,867 3,458,062 35,500 773,326 6,031,755 The options outstanding under the 2002 Executive Share Option Scheme are exercisable at prices between 756p and 788p up to 2013, 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 628p and 736p, after three, five or seven years from the date of grant. 76 LAND SECURITIES ANNUAL REPORT 2004 21. Shareholders’ funds (i) Group At 1 April 2003 Repayment of B shares Redemption of redeemable preference shares Exercise of options Unrealised surplus on revaluation of investment properties Unrealised surplus on revaluation of investment properties within joint venture Realised on disposals of investment properties Taxation on revaluation surpluses realised on disposals of investment properties Retained profit for the financial year At 31 March 2004 Comprising Equity shareholders’ funds Non-equity shareholders’ funds Ordinary shares £m Non-equity B shares £m Redeemable preference shares £m Share premium account £m Capital redemption reserve £m 46.5 – – 0.1 – – – – – 46.6 46.6 – 46.6 30.3 (21.9) – – – – – – – 8.4 – 8.4 8.4 0.1 – (0.1) – – – – – – – – – – 13.3 – – 2.6 – – – – – 15.9 15.9 – 15.9 0.1 21.9 0.1 – – – – – – 22.1 22.1 – 22.1 (ii) Company At 1 April 2003 Repayment of B shares Redemption of redeemable preference shares Exercise of options Retained loss for the financial year At 31 March 2004 Comprising Equity shareholders’ funds Non-equity shareholders’ funds Ordinary shares £m Non-equity B shares £m Redeemable preference shares £m Share premium account £m Capital redemption reserve £m 46.5 – – 0.1 – 46.6 46.6 – 46.6 30.3 (21.9) – – – 8.4 – 8.4 8.4 0.1 – (0.1) – – – – – – 13.3 – – 2.6 – 15.9 15.9 – 15.9 0.1 21.9 0.1 – – 22.1 22.1 – 22.1 Notes to the financial statements for the year ended 31 March 2004 Revaluation reserve £m 3,038.9 – – – 400.7 6.2 Profit and loss account £m 2,433.9 (21.9) (0.1) – – – (333.0) 333.0 Total £m 5,563.1 (21.9) (0.1) 2.7 400.7 6.2 – – – (27.3) 115.1 (27.3) 115.1 3,112.8 2,832.7 6,038.5 3,112.8 – 3,112.8 Merger reserve account £m 373.6 – – – – 373.6 373.6 – 373.6 2,832.7 – 2,832.7 Profit and loss account £m 3,139.3 (21.9) (0.1) – (70.1) 3,047.2 3,047.2 – 3,047.2 6,030.1 8.4 6,038.5 Total £m 3,603.2 (21.9) (0.1) 2.7 (70.1) 3,513.8 3,505.4 8.4 3,513.8 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 loss for the year of the Company, dealt within its financial statements, was £70.1m (2003: profit £18.7m). 22. Analysis of net debt Net bank balance/(overdraft) Liquid resources Debt due within one year Debt due after one year Net debt Movements during year At 1/4/2003 £m Transfers £m Cash flow £m 79.2 3.4 (23.5) (2,648.4) (2,589.3) – – (221.8) 221.8 – (56.4) 215.6 (454.7) 432.7 137.2 Amortisation of discount and issue costs £m Cost of reprofiling an interest rate swap £m – – (2.8) (2.0) (4.8) – – 21.1 – 21.1 At 31/3/2004 £m 22.8 219.0 (681.7) (1,995.9) (2,435.8) LAND SECURITIES ANNUAL REPORT 2004 77 Notes to the financial statements for the year ended 31 March 2004 23. Financial assets and liabilities This note should be read in conjunction with the comments set out in the OFR on page 34. 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. All the Group’s financial assets and liabilities are either sterling based or have been swapped into sterling and, with the exception of the committed bank facilities and commercial paper, are 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 Non-equity B shares Redeemable preference shares Financial instruments Interest rate swaps Book value Fair value 2004 £m 241.8 2003 £m 102.1 2004 £m 241.8 (2,677.6) (8.4) – (2,688.7) (30.3) (0.1) (3,249.1) (8.4) – 2003 £m 102.1 (3,204.9) (30.3) (0.1) – – (44.5) (82.3) (2,444.2) (2,617.0) (3,060.2) (3,215.5) Excess of fair value over book value 2004 £m 2003 £m – – (571.5) – – (44.5) (616.0) (516.2) – – (82.3) (598.5) *short term investments and cash include £154.0m (2003: £nil) of short term deposits charged as temporary security for borrowings as disclosed in Note 17 Weighted average period of fixed interest rates Weighted average fixed interest rate Financial liabilities 2004 12.4 years 7.3% 2003 13.3 years 7.9% Fair value has been calculated by taking the market value, for those instruments which have a listing, or where one is not available, the fair value is calculated using a discounted cash flow approach. The difference between book value and fair value will not result in any change to the cash flows of the Group unless, at some stage in the future, fixed rate 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. Land Securities PLC has interest rate swaps with a nominal value of £800.0m upon which it pays a fixed rate of interest and receives six month LIBOR, all of which are operational. The interest rate swaps terminate between April 2007 and September 2030, and have fixed interest rates of between 4.999% and 5.585%. Land Securities PLC has a further interest rate swap with a nominal value of £200.0m upon which it receives a fixed rate of interest of 4.895% and pays six month LIBOR. This interest rate swap was entered into in March 2004 with a commencement date of 25 March 2004 and a termination date of April 2007. In the case of four £100m fixed rate payer swaps, the counterparties have a right to terminate the swaps mid-life. In December 2003, Land Securities PLC novated a swap with a nominal value of £100.0m to Trillium (Prime) Property GP Limited, a related Group company. The swap was repriced and reprofiled to match the expected amortisation of the project finance debt, which it is hedging. The current nominal value of the swap is £78.7m and the Group is paying interest at 4.975%. As the intention of the above interest rate swaps is to fix the interest rates on existing and new borrowings, their mark to market value has not been recognised in the financial statements and instead net interest is accrued through the profit and loss account. In addition, there is a further interest rate swap with a notional value of £191.0m, which was taken out by Trillium (Prime) Property Ltd Partnership to hedge the secured bank loan, which funds the PRIME contract. This swap mirrors the repayment schedule of the associated bank loan. As part of the fair value accounting exercise on the acquisition of Trillium, this swap was marked to market at a cost of £14.9m in November 2000. The cost is being amortised over the life of the interest rate swap as a credit to interest payable. The interest rate swap was repriced and reprofiled in December 2003 at a cost of £21.1m. The cost of the repricing and reprofiling is being amortised over the life of the interest rate swap. Unrecognised gains and losses on instruments used for hedging, and the movements therein are as follows: Unrecognised losses on hedges at 1 April 2003 Losses arising in previous years that were recognised in the year ended 31 March 2004 Gains arising in the year ended 31 March 2004 that were not recognised in the year Unrecognised gains and (losses) on hedges at 31 March 2004 Of which: Gains and (losses) expected to be recognised in the year ending 31 March 2005 Gains and (losses) expected to be recognised in the year ending 31 March 2006 or later Unrecognised losses £m (82.3) 3.0 34.8 (44.5) – (44.5) (44.5) 78 LAND SECURITIES ANNUAL REPORT 2004 23. Financial assets and liabilities 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 Notes to the financial statements for the year ended 31 March 2004 Financial assets Financial liabilities 2004 £m 2003 £m 2004 £m 2003 £m Undrawn committed borrowing facilities 2004 £m 2003 £m 241.8 – – – 241.8 102.1 – – – 102.1 681.7 – 374.0 1,621.9 2,677.6 40.1 29.8 829.8 1,789.0 2,688.7 – 800.0 580.0 – 1,380.0 – – 899.5 – 899.5 24. 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: Wholly owned Group undertakings Group operations Land Securities Properties Limited Property outsourcing Land Securities Trillium Limited Investment property business Ravenseft Properties Limited The City of London Real Property Company Limited Ravenside Investments Limited Ravenseft Industrial Estates Limited All principal Group undertakings are incorporated in England and Wales. Associated undertakings Telereal Services Limited Telereal Trading Property Limited Telereal Securitised Property Limited Partnership Telereal General Property Partnership Scottish Retail Property Limited Partnership During the year, 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 31 March (with the exception of the partnerships forming the Birmingham Alliance, which are prepared to 31 December), are dealt with in the Group’s financial statements as ‘joint arrangements’ on the basis explained in Note 1(a). The 100% results of the partnerships are set out below: Partnership Martineau Limited Partnership* Martineau Galleries Limited Partnership* Bullring Limited Partnership* Gunwharf Quays Limited Partnership** Ebbsfleet Limited Partnership Group share % 331⁄3 331⁄3 331⁄3 n/a 50 Gross assets 2004 £m 116.8 112.4 747.9 – 39.1 2003 £m 132.0 112.2 362.9 147.9 35.3 Gross liabilities 2004 £m (4.5) (1.3) (316.1) – (0.1) 2003 £m (3.5) (2.1) (213.5) (3.3) (0.4) Profit/(loss) before tax 2004 £m 5.0 3.5 18.4 – – 2003 £m 5.4 4.0 (0.7) 7.7 – *forming the Birmingham Alliance **on 30 November 2003 Land Securities Group PLC acquired the 50% interest in the Gunwharf Quays Limited Partnership it did not already own 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 Bullring Limited Partnership, £290.3m (2003: £195.5m) of loans from partners; at 31 March 2004 there was no third party debt in these partnerships (2003: £nil). 25. Related party transactions The Group has a 50% interest in Telereal. The Group, principally through Land Securities Trillium Telecom Services Limited, provides staff to Telereal to deliver services to BT, for which it received £17.8m (2003: £17.7m) in the year ended 31 March 2004. The subordinated loan from the Group to Telereal was repaid during the year, (2003: £121.0m). The Group has a 50% interest in the Scottish Retail Property Limited Partnership. During the year the Group made sales of investment properties to the Partnership for consideration of £240.0m. The Group receives fees in respect of accounting and asset management services from the partnerships forming the Birmingham Alliance. These fees are calculated on an arms length basis. 26. 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 2004, the estimated amount of the Group’s exposure to the guarantee was approximately £100.7m. Land Securities Group PLC (the Company) has given guarantees in the normal course of business to third parties in respect of the obligations of certain Group companies. The directors consider that the guarantees are unlikely to result in material loss to the Company. LAND SECURITIES ANNUAL REPORT 2004 79 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 ventures Short term deposits, corporate bonds and cash Trading properties Other assets Financed by Equity share capital Non-equity share capital Reserves Shareholders’ funds Borrowings Investment in joint venture Other liabilities Property movements and acquisitions (book value) Property additions Property sales Property sales to joint venture Acquisitions Revenue Gross 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 inflow/(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) 2003 2001 2004 (restated) (restated) (restated) £m 2002 £m £m £m 34.3 7,880.9 769.2 51.0 252.1 241.8 85.0 360.1 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 2000 £m – 7,453.7 – 14.7 – 140.1 – 182.6 9,674.4 9,007.7 8,867.5 8,504.1 7,791.1 46.6 8.4 5,983.5 6,038.5 2,677.6 47.9 910.4 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 9,674.4 9,007.7 8,867.5 8,504.1 7,791.1 792.5 (632.7) (240.0) 245.5 625.7 (406.9) – – 630.1 (510.4) – 146.4 588.8 (424.9) – 169.5 403.5 (314.3) – – 1,481.1 309.2 1,239.5 336.2 1,025.6 350.1 63.9 373.1 288.0 115.1 (16.6) 319.6 229.4 62.5 13.4 363.5 263.6 85.2 650.4 318.4 6.3 324.7 234.6 64.5 528.2 301.7 26.0 327.7 252.0 86.3 456.4 484.4 406.2 462.0 432.2 251.8 84.3 156.5 163.9 (12.7) (177.2) 132.6 (39.9) (219.2) 280.5 116.4 (95.4) 246.5 79.7 (114.9) 2001 2004 (restated) (restated) (restated) 2002 2003 61.84 47.86 61.76 47.80 37.10 1.67 1.29 1294 1333 1293 1331 1090 46.46 50.89 46.44 50.88 35.50 1.38 1.51 1188 1220 1188 1219 733 50.27 49.18 49.54 48.49 34.00 1.48 1.45 1151 1178 1132 1157 893 44.87 45.22 44.41 44.74 32.50 1.38 1.39 1149 1174 1130 1153 880 2000 1999 1998 1997 1996 1995 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 *these figures exclude the results of fixed asset property sales after tax and, for 2001 and thereafter, 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. 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. In addition 2001, 2002 and 2003 have been restated for the changes in calculation of revenue profit, adjusted earnings per share and adjusted net assets per share. However, figures for 2000 and prior years have not been restated to reflect changes in accounting policies made in 2002 or changes in definition of revenue profit made in 2004. 80 LAND SECURITIES ANNUAL REPORT 2004 Directors’ report For the year ended 31 March 2004 The directors submit their report with the financial statements for the year to 31 March 2004. 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. 1. Business of the Group During the year the Group has continued its business of property development and portfolio management of offices, shops, retail warehouses, food superstores, leisure, warehouse and industrial premises throughout the UK together with total property outsourcing. The Group 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 60∑. An interim dividend of 9.9p per share was paid on 5 January 2004 and the directors now recommend the payment of a final dividend of ∑27.2p per share making a total of 37.1∑p per share for the year ended 31 March 2004, an increase of ∑4.5% over that for the previous year. Subject to authorisation at the Annual General Meeting to be held on 14 July 2004, the final dividend will be paid on 26 July 2004 to shareholders registered on 25 June 2004. The shares are expected to be quoted ex-dividend from 23 June 2004. 3.Valuation and Net Assets (i) Valuation Knight Frank LLP valued the Group’s investment properties at £7,906.7∑m as at 31 March 2004. Taken with the Group’s holdings by way of limited partnership or joint venture arrangements and the Group’s share of the Scottish Retail Property Limited Partnership joint venture, the portfolio had a value of £8,150.2∑m. This is an increase of £306.2∑m over that at the previous year-end. Taking into account total expenditure on investment properties of £792.5∑m and the aggregate book value of properties sold during the year of £∑872.7m, including sales to Scottish Retail Property Limited Partnership, the surplus on valuation of the Group’s portfolio was £400.7m after adjusting for UITF28. (ii) Net assets The investment portfolio valuation has been included in the financial statements for the year ended 31 March 2004 and the net assets of the Group at that date amounted to £6,038.5m. 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 ∑1294p. 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 1293∑p. 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 ∑19 on page 76∑.The amount, in the region of £∑490m (2003: £435m), represents approximately 105∑p per share on a fully diluted basis. 4. Directors The directors who held office during the year were: Peter G Birch CBE 1, 2, 3, 4 Chairman Ian J Henderson CBE 4 Chief Executive Sir Winfried Bischoff 1, 2, 3 Mark Collins Ian D Ellis Peter G Freeman 1, 3 Andrew E Macfarlane David Rough 1, 2, 3, 4 Francis W Salway Stuart A R Rose (appointed 21/5/2003) 1, 2, 3 1 Non-Executive 2 Member of the Audit Committee 3 Member of the Remuneration Committee 4 Member of the Nominations Committee In addition, Bo Lerenius will be appointed a director on 1 June 2004. Biographical details of the directors appear on page 36. Since Bo Lerenius is to be appointed a director after the last Annual General Meeting, he will retire from the Board, and, being eligible, offers himself for reappointment. He does not have a service agreement with the Company. LAND SECURITIES ANNUAL REPORT 2004 81 Directors’ report For the year ended 31 March 2004 continued Peter Freeman and Ian Henderson will be retiring as directors on 14 July 2004 and will not be standing for re-election at the 2004 Annual General Meeting. Peter Birch, Sir Winfried Bischoff and David Rough will retire from the Board by rotation and, being eligible, offer themselves for re-election; none has a service agreement with the Company. Particulars of the interests of each director in the shares and debentures of the Company, as shown by the register of directors’ share and debenture interests, and of their holdings of options over ordinary shares, are set out on pages 54 and 55∑. Apart from share options, no contract subsisted during or at the end of the financial year in which a director of the Company is or was materially interested and which is or was significant in relation to the Group’s business. 5. Share capital The Company was authorised at the Annual General Meeting held on 17 July 2003 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 2004 Annual General Meeting. No shares were purchased in the year to 31 March 2004. A resolution to renew this authority in respect of up to approximately 10% of the issued share capital will be proposed at the 2004 Annual General Meeting. 6. Substantial shareholders At ∑12 May 2004 the following interests in issued share capital had been notified to the Company under Part VI of the Companies Act 1985. Barclays Global Investors ABP Investments Legal & General Investment Number of shares 22,505,549∑ 20,712,943 Management 19,119,179 ∑M&G Investment Management 17,764,019 % 4.83∑ 4.45 4.10 3.81 and adhered to; that no amendments to payment terms are made without the prior agreement of suppliers and that there is a system which deals quickly with complaints and disputes to ensure that suppliers are advised accordingly without delay when invoices or parts thereof are contested. 7. Employees Details of the Group’s policies on employment and on employee development are given on pages ∑38 and 40. 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 page 40.∑ 8. Donations During the year ended 31 March 2004 charitable donations amounted to £804,000∑. 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. The effect of the Group’s payment policy is that its trade creditors at the financial year-end represented 20∑ days’ purchases. 11. Annual General Meeting Accompanying this report is the Notice of the Annual General Meeting which sets out the resolutions for the meeting. These are explained in a letter from the chairman which accompanies the Notice. 12. Auditors A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting. By order of the Board 9. Environment The Group’s environmental policy is published on the Company’s website www.landsecurities.com P M Dudgeon Secretary 18 May∑ 2004. 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 82 LAND SECURITIES ANNUAL REPORT 2004 Business analysis 84 Investment portfolio valuation 84 Performance benchmarking 85 Top twelve properties 86 Development pipeline schedule 88 Total investment portfolio analysis 91 Property outsourcing 92 Property by location 94 Major property holdings LAND SECURITIES ANNUAL REPORT 2004 83 Investment portfolio valuation Performance benchmarking The total portfolio including our property joint venture was valued by Knight Frank LLP at £8,150.2m at 31 March 2004. After adjusting for sales, acquisitions and expenditure the value increased by 5.3% as compared to the position at 31 March 2003. 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 2004 Detailed breakdowns by sector, including comprehensive analyses of the Group’s valuation, rental income and yield profiles follow in the investment portfolio analysis. The freehold, feuhold 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 LLP, Chartered Surveyors, as at 31 March 2004. The valuation was on the basis of Market Value in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards. The aggregate of the Market Values of those properties held by the Group as at 31 March 2004 was £7,584.0m. The aggregate of the Market Values of the interests in land held by the Group by way of limited partnership interests or joint venture arrangements in which the Group had a share as at 31 March 2004 was £949.0m. This amount represents the total assets held by way of limited partnership interests or joint venture arrangements and is not a valuation of the Group’s shareholding therein which was £322.7m as at 31 March 2004. Additionally, Knight Frank LLP reported directly to the Scottish Retail Property Limited Partnership on the Market Values of the properties held in that partnership. The Market Values of those properties totalled £486.8m and the Group’s share was £243.5m as at 31 March 2004. 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 £7,906.7m. 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. 10 years 20 years Land Securities % 11.3 11.1 IPD* % 10.7 10.4 IPD* – Upper Quartile % 10.9 11.0 Table A above compares Land Securities’ ungeared total property return over the last 10 and 20 year periods to 31 March 2004 to the IPD December Universe (extrapolated to March 2004), which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2003 (many of these funds are now valued quarterly by IPD while the others were extrapolated forwards). It can be seen that Land Securities’ portfolio has outperformed and produced a return which places it in the top quartile of contributing portfolios over these two time periods. Table B – One year performance relative to IPD Ungeared total returns – 12 months to 31 March 2004 Retail Offices Industrial Other Commercial Total portfolio Land Securities % 17.9 6.1 16.0 11.4 12.7 IPD* % 16.4 6.1 12.2 12.8 12.4 *IPD December Universe (extrapolated to March 2004) unfrozen Source: IPD 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 2004. We have outperformed IPD due to strong performance from our specific property holdings in our core areas of Central London offices, shopping centres, retail warehouses and industrial property. Central London offices outperformed IPD as a result of higher than average rental value growth and downward yield movements which were greater than IPD. Sales also had a positive impact on overall porfolio performance. 84 LAND SECURITIES ANNUAL REPORT 2004 Top twelve properties (by value) 1. Bullring, Birmingham 2. White Rose Centre, Leeds 3. St David’s Centre, Cardiff 4. Queen Anne’s Mansions, London 5. Almondvale Centre and 6. Gunwharf Quays, Portsmouth Designer Outlet, Livingston 7. Cardinal Place, London 8. The Bridges, Sunderland 9. Gresham Street, London 10. Team Valley, Gateshead 11. Eland House, London 12. Devonshire House, London 1. Bullring, Birmingham Opened in September 2003, the award winning Bullring scheme totals 111,480m2 of retail space. The scheme has two department stores, Selfridges and Debenhams, and 130 high street and independent retailers. 2. White Rose Centre, Leeds White Rose Centre, Leeds was opened in 1997. The centre is located on the edge of Leeds and has a Debenhams department store. The 60,390m2 scheme also includes 11 major space units and a further 73 shops. 3. St David’s Centre, Cardiff A 39,740m2 covered shopping centre in the centre of Cardiff. This scheme is set to benefit from the development of St David’s 2 an 110,000m2 scheme which will be anchored by a John Lewis Department Store. 4. Queen Anne’s Mansions, London 30,140m2 of West End offices currently occupied by the Home Office. Queen Anne’s Mansions will be subject to a major refurbishment scheme following which it will be occupied by the Department for Constitutional Affairs. 5. Almondvale Centre and Designer Outlet, Livingston Adjoining assets that provide a total of 75,100m2 of retail and leisure space in the heart of Livingston, Scotland. The shopping centre has a range of high street names on offer, while the outlet centre provides consumers with discounted designer brands. 6. Gunwharf Quays, Portsmouth In 2004 Land Securities took ownership of the Berkeley Group’s 50% interest in this 41,290m2 designer outlet scheme. The property comprises 87 shops and is let to major High Street and Designer brands for discount retailing. 7. Cardinal Place, London Cardinal Place is a major West End development due to complete in 2005. The 60,550m2 scheme comprises modern offices in three buildings with ground floor retail. Marks and Spencer has signed a lease for a major retail store. 8. The Bridges, Sunderland The Bridges shopping centre has a Debenhams department store, as well as a further four major stores and 94 shops providing a major retail attraction in the heart of Sunderland. 9. Gresham Street, London Newly-developed, Gresham Street is a prestigious 36,450m2 office building overlooking the Guildhall in the City of London. The building incorporates a large trading floor, atrium, roof terrace and retail at ground floor. 10. Team Valley, Gateshead The largest retail park asset in our portfolio, Team Valley, has 22 retail warehouse units and a fast food restaurant. The park has undergone a programme of upgrading and an extension is planned. 11. Eland House, London Eland House, part of the Group’s major Victoria property portfolio, is 23,170m2 of offices, occupied by the Offices of the Deputy Prime Minister. 12. Devonshire House, London Devonshire House is located in the heart of London’s West End on Piccadilly. Refurbished in 1997, the 14,190m2 property includes offices, showrooms and retail space. Note: Total value £2.2bn (27.3% of investment portfolio). Values in excess of £145m. LAND SECURITIES ANNUAL REPORT 2004 85 Development pipeline schedule Developments, let and transferred or sold Developments completed Developments approved and in progress Proposed developments Planning received PR AS Application submitted MG Minded to grant PI Planning inquiry OPR Outline planning received Property Regional shopping centres Description Size (1) Status Planning Letting (2) Estimated/actual completion date Cost (3) £m 111,480m2 98% Sept 2003 141 Bullring, Birmingham (33%) The Birmingham Alliance – a limited partnership with Hammerson plc and Henderson Global Investors Sidwell Street, Exeter Caxtongate Phase III, New Street, Birmingham Rose Lane, Canterbury (50%) A limited partnership Summerland Gate, Exeter (formerly Cheeke Street) Whitefriars, Canterbury Retail Retail Retail Retail Retail/ residential Retail/ residential 2,420m2 2,240m2 1,640m2 5,380m2 1,390m2 37,690m2 2,610m2 Broadmead, Bristol (33%) The Bristol Alliance – a limited partnership with Hammerson plc, and Morley Fund Management Retail Leisure Offices/residential Princesshay, Exeter St David’s, Cardiff (50%) St David’s Partnership – a partnership with Capital Shopping Centres Retail/ residential Retail/ residential & leisure Retail warehouses Kingsway Retail Park, Dundee, Phase I Almondvale South, Livingston, Phase IIa Bexhill Retail Park Extension, Bexhill Kingsway Retail Park, Dundee, Phase II Almondvale South, Livingston, Phase IIb Retail warehouses Retail warehouses Retail warehouses Retail warehouses Retail warehouses 88,790m2/ 5,410m2/ 24,590m2/18,740m2 37,360m2 7,200m2 PR PR 70,000m2/ OPR 39,750m2 9,890m2 5,300m2 3,110m2 8,650m2 4,180m2 PR 100% 100% 76% 55% 56% 100% 51% 55% Mar 2003 Jan 2005 Nov 2004 Feb 2005 April 2005 2008 2007 2008 Jan 2003 Oct 2004 Nov 2004 May 2004 2005 Development programme – completed, authorised and committed schemes Development pipeline – proposed schemes Central London offices Regional shopping centres South-east industrial properties Retail warehouses Central London offices Regional shopping centres South-east industrial properties Retail warehouses Development programme Kidlington/Croydon/Basildon Bullring, Birmingham 30 Gresham Street Empress State Whitefriars, Canterbury Cardinal Place £m 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Bankside 123 Bankside 123 New Street Square 2004 2005 2006 2004 2005 2006 2007 2008 Maturity of development pipeline as at 31 March 2004 by year of anticipated completion and measured by development expenditure (excluding historical land costs and finance charges). Years ending 31 March. £m 650 600 550 500 450 400 350 300 250 200 150 100 50 0 86 LAND SECURITIES ANNUAL REPORT 2004 3 5 4 11 107 29 5 12 15 Exeter Cardiff Bristol New Street Square Property Description Size (1) Central London and Inner London properties 190 High Holborn, WC1 (sold February 2004) Portman House, W1 7 Soho Square, W1 Empress State Building, SW6 30 Gresham Street, EC2 Cardinal Place, SW1 Bankside 123, SE1 Offices Offices/retail Offices/retail 8,560m2 9,250m2/2,520m2 4,210m2/1,510m2 Offices/retail & leisure 41,290m2/2,040m2 Offices/retail Offices/retail 35,150m2/1,300m2 51,130m2/9,420m2 Offices/retail/leisure 75,330m2/8,080m2/1,960m2 New Street Square, EC4 (previously New Fetter Lane) Offices/retail & leisure 62,530m2/2,780m2 Status Planning Letting(2) Estimated/actual completion date Cost(3) £m 100% 100% 100% 41% 14% PR MG* Sept 2002 Oct 2001 Mar 2003 July 2003 Dec 2003 Sept 2005 2006 2008 Mar 2002 Aug 2002 Oct 2003 Nov 2001 April 2003 Sept 2003 June 2002 June 2004 41 44 9 103 210 253 11 11 12 18 8 9 12 9 65 South-east industrial properties Horizon Point, Hemel Hempstead, Phase I (sold Feb 2004) Cobbett Park, Guildford Commerce Way, Croydon Juniper, Phase I, Basildon Juniper, Phase II, Basildon Oxonian Park, Kidlington Zenith, Basildon Concorde Way, Segensworth, Fareham Other The Gate, Newcastle upon Tyne *Minded to grant consent received after 31 March 2004 Industrial Industrial Industrial 10,380m2 11,440m2 12,620m2 Industrial/offices 21,820m2/3,660m2 84%/100% Industrial Industrial Industrial Industrial 11,150m2 11,800m2 15,130m2 11,620m2 47% 5% 55% Leisure 17,560m2 92% Nov 2002 Notes (1) (2) (3) Cost (£m) refers to estimated capital expenditure including the cost of third party land acquisitions and excluding finance costs. For partnership schemes, the floor area figures are for the whole schemes, but the cost figures represent Land Securities’ share of cost. Letting % is measured by ERV and shows letting status at 31 March 2004. Development pipeline – financial statistics Book value at start £m Capital expenditure to date (1) £m Estimated total capital expenditure (1) £m Estimated total cost (2) £m Valuation surplus/ (deficit) Disposal 12 months to proceeds 31/3/2004 (3) £m £m Cumulative valuation surplus/ (deficit) to date (3) £m Net income/ERV (4) £m 109 171 143 265 635 52 283 413 (52) 49 90 878 970 1,115 1,208 – – (43) n/a (156) n/a 27 87 95 Completed, let and transferred out of development programme or sold during the year ended 31/3/2004 Active development programme (schemes in progress, completed but not let, committed and authorised) Proposed schemes (5) Notes (1) (2) Excludes capitalised interest. Includes land costs / book value of land and capitalised interest, but excludes any allowances for rent free periods. The estimated total cost of the proposed scheme are stated net of other receipts (eg sales of residential units). (3) Includes FRS3 profit realised on the disposal of property. (4) Net headline annual rental payable on let units plus net ERV at 31 March 2004 on unlet units. (5) The book value of the proposed schemes reflects the value as at 31 March 2003 which reflects any value attributable to expenditure incurred prior to 31 March 2003. Therefore the capital expenditure shown in the ‘capital expenditure to date’ column represents only that expenditure incurred in the year to 31 March 2004. LAND SECURITIES ANNUAL REPORT 2004 87 Total investment portfolio analysis Like-for-like portfolio(1) Shopping centres & shops Regional shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail Offices West End City Midtown Inner London Central London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments Total Acquisitions Sales and restructured interests Total development programme (inc. Kent Thameside) Total portfolio excluding joint ventures Joint ventures Total portfolio Total investment portfolio analysis Shopping centres & shops Regional shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail Offices West End City Midtown Inner London Central London offices Rest of UK Total offices Industrial properties South-east Other Other Total portfolio 88 Market value(6) Valuation surplus P&L basis Gross rental income Annual net rent(7) 31/3/2004 £m 31/3/2003 £m Surp/(def) £m Surp/def % 31/3/2004 £m 31/3/2003 £m 31/3/2004 £m 31/3/2003 £m (2) (3) (4) (5) 1,014.1 695.4 560.8 2,270.3 947.4 218.1 1,165.5 895.0 639.1 500.0 2,034.1 801.2 185.6 986.8 3,435.8 3,020.9 1,315.4 754.1 227.1 87.2 2,383.8 58.0 1,256.9 781.9 222.6 59.5 2,320.9 58.0 2,441.8 2,378.9 247.7 10.5 258.2 87.6 6,223.4 559.8 6,783.2 326.2 – 797.3 7,906.7 243.5 226.0 9.8 235.8 93.8 5,729.4 453.6 6,183.0 128.0 827.9 705.1 7,844.0 – 8,150.2 7,844.0 1,786.7 805.8 584.9 3,177.4 1,051.7 241.7 1,293.4 1,455.7 732.4 589.1 2,777.2 901.2 215.6 1,116.8 4,470.8 3,894.0 1,571.3 958.3 234.3 221.8 2,985.7 71.3 1,481.8 945.7 542.8 264.3 3,234.6 77.9 3,057.0 3,312.5 342.4 10.5 352.9 269.5 350.2 35.7 385.9 251.6 117.2 56.5 36.8 210.5 113.5 29.5 143.0 353.5 37.8 (28.4) 4.5 4.1 18.0 0.1 18.1 18.5 1.4 19.9 1.2 392.7 50.8 443.5 1.5 – (44.3) 400.7 6.2 406.9 172.8 60.7 42.7 276.2 121.9 32.5 154.4 430.6 24.9 (59.2) (2.5) (25.4) (62.2) 3.0 (59.2) 28.8 1.4 30.2 5.3 8,150.2 7,844.0 406.9 13.1% 8.8% 7.0% 10.2% 13.6% 15.7% 14.0% 11.5% 3.0% -3.6% 2.0% 4.9% 0.8% 0.2% 0.7% 8.1% 15.4% 8.4% 1.4% 6.7% 10.0% 7.0% 0.5% – -5.3% 5.3% 2.6% 5.3% 10.7% 8.1% 7.9% 9.5% 13.1% 15.5% 13.6% 10.7% 1.6% -5.8% -1.1% -10.3% -2.0% 4.4% -1.9% 9.2% 15.4% 9.4% 2.0% 5.3% 69.2 43.0 35.7 64.3 41.0 35.7 61.8 42.9 33.5 59.1 41.4 33.1 147.9 141.0 138.2 133.6 44.4 13.6 58.0 42.4 12.0 54.4 46.2 13.6 59.8 43.2 13.5 56.7 205.9 195.4 198.0 190.3 91.2 74.1 20.4 2.7 188.4 5.3 193.7 16.9 1.1 18.0 6.0 423.6 23.8 447.4 16.1 41.7 9.3 514.5 0.6 515.1 102.8 47.5 39.8 190.1 50.2 14.5 64.7 89.9 74.9 21.2 6.3 192.3 5.0 197.3 16.6 0.8 17.4 6.8 416.9 11.8 428.7 4.6 76.2 10.2 519.7 - 519.7 86.3 70.0 18.7 2.7 177.7 4.9 182.6 16.9 1.1 18.0 5.7 404.3 26.8 431.1 23.1 n/a n/a n/a n/a n/a 87.7 71.6 20.6 1.5 181.4 5.0 186.4 15.9 0.7 16.6 6.9 400.2 13.9 414.1 9.9 n/a n/a n/a n/a n/a 92.4 46.4 41.8 98.2 47.1 34.4 83.5 44.7 38.0 180.6 179.7 166.2 46.0 14.1 60.1 51.5 14.0 65.5 48.8 14.2 63.0 254.8 240.7 245.2 229.2 98.7 77.7 31.5 9.7 217.6 7.2 224.8 22.3 3.2 25.5 10.0 98.2 80.9 42.5 11.1 232.7 7.7 240.4 21.9 4.1 26.0 12.6 94.3 73.5 19.5 6.5 193.8 6.5 200.3 19.2 1.1 20.3 10.0 94.1 73.7 42.4 9.6 219.8 6.7 226.5 21.5 2.8 24.3 9.2 515.1 519.7 475.8 489.2 LAND SECURITIES ANNUAL REPORT 2004 Like-for-like portfolio year ended 31 March 2004 continued Annual net estimated rental value(8) Annual yield on present income Annual gross estimated rental value(9) Voids by ERV(10) Lease length as at 31/3/2004(11) 31/3/2004 £m 31/3/2003 £m 31/3/2004 % 31/3/2003 % 31/3/2004 £m 31/3/2003 £m 31/3/2004 % 31/3/2003 % Median Years(i) Mean Years(ii) Shopping centres & shops Regional shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail Offices West End City Midtown Inner London Central London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments Total Acquisitions Sales and restructured interests Total development programme (inc. Kent Thameside) Total portfolio excluding joint ventures Joint ventures Total portfolio 68.5 48.0 38.0 64.9 46.5 36.6 154.5 148.0 53.4 16.1 69.5 51.7 14.5 66.2 224.0 214.2 93.6 57.4 18.5 3.1 172.6 5.6 178.2 19.4 1.0 20.4 5.8 428.4 33.2 461.6 21.8 n/a n/a n/a n/a n/a 99.9 64.2 20.7 2.1 186.9 4.6 191.5 19.0 0.9 19.9 7.0 432.6 31.6 464.2 6.8 n/a n/a n/a n/a n/a Total investment portfolio analysis year ended 31 March 2004 continued Shopping centres & shops Regional shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail Offices West End City Midtown Inner London Central London offices Rest of UK Total offices Industrial properties South-east Other Other Total portfolio 120.9 63.7 40.8 225.4 61.6 16.4 78.0 112.2 51.5 43.7 207.4 59.9 15.6 75.5 303.4 282.9 123.9 75.4 19.7 18.9 237.9 7.3 245.2 26.7 1.0 27.7 12.7 141.5 83.4 45.1 19.4 289.4 6.1 295.5 31.2 3.0 34.2 13.4 589.0 626.0 6.1% 6.2% 6.0% 6.1% 4.9% 6.2% 5.1% 5.8% 6.6% 9.3% 8.2% 3.1% 7.5% 8.5% 7.5% 6.8% 10.6% 7.0% 6.5% 6.5% 4.8% 6.4% 7.1% n/a n/a n/a n/a n/a 5.5% 5.8% 5.9% 5.7% 4.9% 5.8% 5.1% 5.5% 6.0% 7.7% 8.3% 2.9% 6.5% 9.1% 6.6% 5.6% 10.6% 5.8% 3.7% 5.8% 6.6% 6.5% 6.6% 6.6% 5.4% 7.3% 5.7% 6.3% 7.0% 9.2% 9.3% 2.5% 7.8% 8.6% 7.8% 7.0% 7.1% 7.0% 7.4% 7.0% 3.1% 6.7% 7.7% n/a n/a n/a n/a n/a 5.7% 6.1% 6.5% 6.0% 5.4% 6.6% 5.6% 5.9% 6.4% 7.8% 7.8% 3.6% 6.8% 8.6% 6.8% 6.1% 7.8% 6.3% 3.7% 6.2% 75.5 48.9 40.6 71.3 47.5 39.3 165.0 158.1 53.4 16.1 69.5 51.8 14.5 66.3 234.5 224.4 95.2 58.1 19.3 3.1 175.7 5.7 181.4 19.4 1.0 20.4 5.9 442.2 33.3 475.5 22.3 n/a n/a n/a n/a n/a 101.3 65.1 21.5 3.0 190.9 4.7 195.6 19.0 0.9 19.9 7.0 446.9 31.6 478.5 6.8 n/a n/a n/a n/a n/a 1.1% 0.1% 3.9% 1.5% 2.2% 1.9% 2.2% 1.7% 5.5% 2.9% 5.3% 4.1% 4.6% 12.0% 4.9% 10.5% 12.4% 10.8% 2.2% 3.4% 0.9% 3.2% 2.2% n/a n/a n/a n/a n/a 0.7% 1.4% 3.1% 1.5% 4.2% – 3.3% 2.0% 2.0% 3.4% 0.9% 7.3% 2.5% 11.6% 2.7% 10.2% 0.3% 10.1% – 2.6% 22.5% 3.9% 1.5% n/a n/a n/a n/a n/a 9.3 7.3 7.8 8.0 16.8 15.0 16.5 9.8 6.5 3.3 5.0 1.8 6.3 1.5 5.3 5.5 13.8 6.3 9.3 7.0 14.0 7.5 6.3 n/a n/a n/a n/a n/a 10.4 9.1 9.7 9.8 15.2 13.4 14.8 11.3 10.7 9.4 5.1 1.6 9.4 5.9 9.4 5.8 18.9 6.6 21.0 10.4 12.6 10.5 6.9 n/a n/a n/a n/a n/a Notes to Portfolio Analysis: (1) The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2002 but excludes those which were acquired, sold or included in the development programme at any time during that period. Capital expenditure on refurbishments, acquisition of headleases and similar capital expenditure has been allocated to the like-for-like portfolio in preparing this table. Changes in valuation from period to period reflect this capital expenditure as well as the disclosed valuation surpluses. Completed developments represent those properties, previously included in the development programme, which have been completed, let and removed from the development programme in the period since 1 April 2002. Includes all properties acquired in the period since 1 April 2002. This also includes site assembly acquisitions for pre-development schemes. Includes all properties sold (other than directly out of the development programme), or where the ownership interest has been restructured, in the period since 1 April 2002. Ongoing developments are properties in the development programme and Kent Thameside. They exclude completed developments as defined in note (2) above. The market value figures include the group share of the various joint ventures and exclude properties owned by Land Securities Trillium and Telereal. Annual net rent is annual rents in payment at 31 March 2004 after deduction of ground rents. It excludes the value of voids and current rent free periods. Annual net estimated rental value includes vacant space, rent-frees and future estimated rental values for properties in the development programme and is calculated after deducting expected ground rents. Annual gross estimated rental value is calculated in the same way as net estimated rental value before the deduction of ground rents. (2) (3) (4) (5) (6) (7) (8) (9) (10) Voids represent all unlet space in the properties, including voids where refurbishment work is being carried out and voids in respect of pre-development properties. Voids are calculated based on their gross estimated rental value as defined in (9) above. (11) The definition for the figures in each column is: (i) Mean is rent-weighted average remaining term on leases subject to lease expiry/break clauses. (ii) Median is the number of years until half of income is subject to lease expiry/break clauses. (12) Acquisitions and sales and restructured interests reflect movements in the investment portfolio. Acquisitions and sales directly into or out of the development programme are analysed under the development heading. LAND SECURITIES ANNUAL REPORT 2004 89 Total investment portfolio analysis continued Portfolio value by location % figures calculated by reference to the portfolio value of £8,150.2m Top 12 investment portfolio tenants Current rents % Retail South-east industrial ware- Offices Shopping* houses properties Other % % % % % Central and Inner London 36.6 Rest of south-east and eastern 0.5 Midlands Wales and south-west North, north-west, Yorkshire and Humberside 0.2 0.2 0.1 Scotland and Northern Ireland 0.1 9.9 5.2 5.6 5.4 7.6 5.2 – 4.7 2.5 1.3 5.4 2.0 Total 37.7 38.9 15.9 0.1 4.1 – – 0.1 – 4.3 *Includes Regional shopping centres and shops, and Central London shops Total % 47.4 16.1 8.3 6.9 13.9 7.4 0.8 1.6 – – 0.7 0.1 3.2 100.0 1 2 3 4 5 6 7 8 9 10 11 Central Government Allen & Overy Dresdner Bank AG DSG Retail (Currys/Dixons/PC World) J Sainsbury PLC Metropolitan Police Authority Argos and Homebase Institute of London Underwriters MFI The Boots Company PLC B&Q 12 Virgin Retail Group Limited Total 9.8 2.9 2.3 2.1 1.7 1.4 1.4 1.0 1.0 1.0 0.9 0.9 26.4 Average rents Like-for-like reversionary potential at 31 March 2004 Average rent £/m2 Average ERV £/m2 Reversionary potential (ignoring additional income from the letting of voids) 31/3/2004 % of rent roll 31/3/2003 % of rent roll Offices Central and Inner London Rest of UK Retail Shopping centres and shops Retail warehouses (including supermarkets) Industrial premises London, south-east and eastern Rest of UK Hotels, leisure, residential and other 362 102 n/a 159 71 n/a n/a Gross reversions Over-rented Net reversionary potential 9.8 8.0 1.8 10.8 5.3 5.5 The reversion is calculated with reference to the gross secure rent roll and those properties which fall under the like-for-like definition as set out in the Notes to Portfolio Analysis in the Total Investment Portfolio Analysis on page 89. Only 36.7% of the over-rented income is subject to a lease expiry or break clause in the next five years. % Portfolio by value and number of properties at 31 March 2004 316 101 n/a 176 72 n/a 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 or where there is a combination of uses; or small sample sizes). This is not a like-for-like analysis on previous year. It excludes properties in the development programme and voids. £m 0 – 9.99 10 – 24.99 25 – 49.99 50 – 99.99 Over 100 Total Value % No. of properties 3.9 9.0 22.5 19.1 45.5 100.0 76 45 52 23 23 219 Excludes properties held through the Scottish Retail Property Limited Partnership. 90 LAND SECURITIES ANNUAL REPORT 2004 Property outsourcing Unexpired contract term years Service partner agreements under mgmt 000m2 Proportion of service providers’ turnover DWP BBC Telereal (BT) Property under management 000m2 Offices Telephone Exchanges Total Under management but estate not transferred Total 14 27 27 Total 1,667 834 82 1,377 3,867 1,134 588 – 553 32 2,307 7,827 n/a n/a n/a 67 40 290 8,224 Freehold Leasehold DWP (PRIME) DWP (ES) BBC BT BT DWP (PRIME) DWP (ES) BBC 533 246 82 824 3,835 5,520 n/a n/a n/a Service partner Compass Dalkia Group 4 GS Hall ISS MIB MITIE OCS Securitas Wilson James Total Service element Catering Building maintenance Security Building maintenance Cleaning Furniture Cleaning Cleaning Security Security Average contract tenure: 9.2 years Average annual contract value: £11.4m 1,999 1,878 1,671 1,070 1,704 2,874 1,618 372 814 372 14,372 Number of Land Securities Trillium employees by occupation Asset management Call centre Capital projects Quality assurance Facilities management <5% 10 to 15% 15 to 20% 20 to 25% <5% 15 to 20% <5% <5% <5% 20 to 25% Total 106 165 463 46 639 169 1,588 Unitary charge income received by contract £m DWP (PRIME) Unitary charge income 326 DWP (ES) 57 BBC Telereal Total 65 332 780 HR/Finance/Business development Note: The Telereal unitary charge is the total unitary charge payable by BT Total Note: These figures include all Telereal staff Regional breakdown by contract 000m2 DWP (PRIME) Northern Ireland London, south-east and west England Northern England Scotland Midland and Wales – 517 691 231 294 Total 1,733 DWP (ES) – 352 252 81 189 874 BBC Telereal Total – 121 121 346 2,665 – 26 – 372 989 458 1,012 5,245 3,880 1,932 796 1,495 8,224 Number of property transactions concluded by contract Sales New lettings Rent reviews Lease renewals Freehold buy-ins Other Total DWP BBC Telereal Total 5 35 63 28 5 15 151 – 2 – – – – 2 22 15 63 7 – – 107 27 52 126 35 5 15 260 Media Village White City A BT telephone exchange LAND SECURITIES ANNUAL REPORT 2004 91 Property by location Regional shopping centres 2 3 1 9 8 7 6 4 5 Scotland Aberdeen1 1. Bon Accord Centre 1. St Nicholas Centre East Kilbride1 2. The Olympia 2. Princes Mall 2. Centre West 2. Plaza Centre Livingston 3. Almondvale Centre 3. Designer Outlet Centre Midlands Birmingham 4. Bullring Coventry 5. Upper Precinct Wales and south-west Cardiff 10. St David’s Centre Portsmouth 11. Gunwharf Quays North, north-west, Yorkshire and Humberside Rest of south-east and eastern Leeds 6. White Rose Shopping Stratford 12. Stratford Centre Centre York 7. Coppergate Centre Sunderland 8. The Bridges Liverpool 9. St Johns Centre Ealing 13. Broadway Centre Canterbury 14. Whitefriars Quarter (cid:1) 10 13 12 14 11 (cid:1) In course of development or refurbishment (cid:2) £100 million and above (cid:2) £50 – £100 million (cid:2) £25 – 50 million 1 Assets form the Scottish Retail Property Limited Partnership Retail warehouses 1 2 3 Scotland Dundee 1. Kingsway Retail Park (cid:1) Livingston 2. Almondvale West (cid:1) 2. Almondvale Retail Park 2. Almondvale South (cid:1) 4 7 5 6 13 14 12 15 16 11 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 (cid:1) Edmonton 11. Ravenside Retail Park Hull 4. Priory Way Liverpool 5. Aintree Retail Park Manchester 6. White City Retail Park (cid:1) 6. Cheetham Hill Blackpool 7. Blackpool Retail Park Midlands Erdington 12. Ravenside Retail Park, Kingsbury Road Chesterfield 13. Ravenside Retail Park Derby 14. Wyvern Centre 14. Meteor Centre Rest of south-east and eastern Northampton 15. Nene Valley Retail Park Slough 8. Bath Road Retail Park West Thurrock 9. Lakeside Retail Park Wales and south-west Poole 16. Commerce Centre (cid:1) In course of development or refurbishment (cid:2) £100 million and above (cid:2) £50 – £100 million (cid:2) £25 – 50 million 92 LAND SECURITIES ANNUAL REPORT 2004 Central London 30 Gresham Street EC2 1. 2. Dashwood House 3. Moorgate Hall 4. 130 Wood Street EC3 5. 6. 7. 13/23 Fenchurch Street 49 Leadenhall Street 6/12 Fenchurch Street 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 Street Square 12. 1 New Change 13. 120 Cheapside and 4 Wood Street 14. Regis House 15. 50 Ludgate Hill 16. 26 Old Bailey 17. Cannon Street House and Martin House 18. Fleetbank House WC1 19. Warner House WC2 20. 40 Strand W1 21. 475/497 Oxford Street and Park House 22. Portman House 23. Devonshire House 24. Piccadilly Circus 25. 12/24 Oxford Street and 2/5 Tottenham Court Road 26. 6/17 Tottenham Court Road 27. Oxford House 28. 455/473 Oxford Street 29. 26/36 Oxford Street W2 30. 10/20/30 Eastbourne Terrace 31. 40/50 Eastbourne Terrace W11 32. Notting Hill Gate SW1 33. Bowater House 34. Haymarket House 35. 10 Broadway 36. The Home Office (Queen Anne’s Mansions) 37. Portland House 38. Eland House 39. Kingsgate House 40. Cardinal Place (cid:1) 41. 49/75 Buckingham Palace Road and 29 Bressenden Place 42. Wellington House 43. Selborne House 44. Westminster City Hall 45. Allington House 46. Clive House SE1 47. Bankside 1, 2, 3 32 31 30 SW6 48. Empress State 48 26 25 29 24 34 20 23 11 4 3 1 2 19 16 15 18 12 17 6 7 9 13 14 5 8 10 47 22 27 21 28 33 42 46 41 43 44 38 40 39 36 37 35 45 (cid:1) In course of development or refurbishment (cid:2) £100 million and above (cid:2) £50 – £100 million (cid:2) £25 – 50 million ` 6/17 Tottenham Court Road London W1 5,920m2 190 High Holborn London WC1 (Sold) Team Valley Retail Park Gateshead 35,240m2 LAND SECURITIES ANNUAL REPORT 2004 93 Major property holdings As at 31 March 2004 there were 219 properties within the portfolio. In the lists which follow, the valuation level for inclusion is £10m for industrial properties and £25m for properties in other sectors. Certain of these properties have been combined for ease of description. Properties have been split into values of over £100m, £50m to £100m, £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, later refurbishment (r) or last extended (e). All properties which are proposed developments are shown with current m2 _ see development pipeline schedule for new dimensions. Unless otherwise stated all properties are Freehold. Location Property name, address and description Regional shops and shopping centres - £100m and above Aberdeen Part of The Scottish Retail Property Limited Partnership – 50% interest Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 Bon Accord Centre: Leasehold shopping centre with three major stores and a link into the adjacent John Lewis department store. With over 50 shops, food court, leisure, offices and car park, this is the prime pitch for Aberdeen. Primark, Woolworth, Boots, Disney, Dorothy Perkins, Etam, Laura Ashley, New Look 1990 (b) 31,030 St Nicholas Centre: Leasehold shopping centre with over 20 units and linking in to the adjacent Marks & Spencer Store. This centre provides the main route between Union Street and Bon Accord Birmingham Bullring: Opened in September 2003, the award winning Bullring has transformed the retail provision in Birmingham with its Selfridges and Debenhams department stores and over 130 further shops and restaurants (one third interest) Canterbury Whitefriars Quarter: This includes all of the assets listed below which will work together to provide a majority part of the retail floorspace in Canterbury Whitefriars: Shopping centre with Fenwicks department store. Under construction. See Development Pipeline schedule Dixons, Miss Selfridge, Next, River Island, WHSmith 1985 11,750 Debenhams, Selfridges, Benetton, Borders, Gap, H&M, Next, Zara 2003 (b) 111,480 Fenwick, Boots, Tesco To be completed 2005 Longmarket: Leasehold scheme of 16 shops, conservatory restaurant and museum Body Shop, Gap, Link, Virgin Clocktower: Leasehold scheme of five shops, offices and car park Marlowe Arcade and Graylaw House: Leasehold shopping centre with one store, 14 shops and 710m2 offices Burger King, Evans, JJB Sports, QS Bhs, HMV, Miss Selfridge, Top Shop Cardiff St David’s Centre (including St David’s Link): Debenhams, Bhs, Alexon, C&J Clark, The principal covered shopping centre in Cardiff. St David’s anchored by Debenhams Miss Selfridge, Mothercare, Peacocks, and with over 70 unit shops links into the adjacent Marks & Spencer and Boots stores. The scheme is set to benefit from the development of the 110,000m2 St David’s 2, which is to be anchored by John Lewis East Kilbride Part of The Scottish Retail Property Limited Partnership – 50% interest Centre West: Leasehold shopping centre completed in March 2003 providing a department store for Debenhams and major stores for Next and Zara along with over 45 other shops and foodcourt. Debenhams, French Connection, HMV, Next, River Island, Superdrug, USC Zara, Olympia: Shopping centre with two stores, 50 shops, nine-screen cinema, library, restaurants, food court, nightclub Princes Mall: Shopping centre with over 40 shops, public house and 950m2 of offices Plaza: Shopping centre with over 50 shops and stores together with 15,000m2 of offices White Rose: Opened in 1997, this centre is located on the edge of Leeds and is anchored by Debenhams and Sava Centre. There are 11 further stores, over 70 shops and a food court St John’s and Williamson Square: St John’s is the largest covered centre in Liverpool with over 100 shops and stores, indoor market, food court, car park, hotel and Beacon. Williamson Square links directly with St John’s and includes four large shop units. Safeway, Adams, Allsports, Etam, H&M Argos, Bon Marche, Farm Foods, Poundland, Superdrug Marks & Spencer, Bhs, Boots, Mothercare, Primark WHSmith, Sainsburys, Debenhams, Argos, Bhs, Boots, Clinton Cards, Etam, Next, River Island, WHSmith, Woolworth Wilkinsons, Woolworth, Argos, Iceland, JD Wetherspoon, Mark One, New Look Leeds Liverpool Livingston Almondvale Centre: With over 100 shops and stores and accessible location close to the M8, the Almondvale Centre together with the designer outlet centre and retail parks acts as a major destination for the whole of the central belt of Scotland Bhs, Argos, Etam, HMV, JJB Sports, Mothercare, New Look, Next, Superdrug, WHSmith, Woolworth Portsmouth Gunwharf Quays: In late 2003, Land Securities took ownership of the Berkeley Group’s remaining 50% interest in this 41,290m2 mixed use waterfront destination. The scheme includes 87 shops, Cinema, Bowlplex, Comedy Club, Night Club, Casino, Hotel, Fitness Club, 22 restaurants, marina and car park Sunderland The Bridges & Market Square: This leasehold centre is the prime shopping in Sunderland with a Debenhams department store, over 100 shops and associated car parking. Vue, Bowlplex, C&J Clark, French Connection, Gap, Gieves & Hawkes Hobbs, Marks & Spencer, Nike, Paul Smith, Polo Debenhams, Allsports, Boots, Clarks, Etam, Gap, H&M, Mark One, New Look, Next, Peacocks, TK Maxx, Superdrug, Tesco 94 1992 (b) 1993 (b) 1985 (b) 4,650 2,100 10,400 1991 (r) 39,740 2003 (b) 26,000 1989 (b) 32,520 1994 (r) 13,940 1972 (b) 1989 (r) 1997 (b) 43,000 60,390 St John’s 1989 (r) Williamson Square 1999 (b) Phase I: 1996 (r) Phase II: 1996 (b) 38,800 48,310 2001 (b) 41,290 47,840 The Bridges Phase I: 1969 and 1988 (r) Phase II: 2000 (b) Market Square 2001 (b) LAND SECURITIES ANNUAL REPORT 2004 Location Property name, address and description Regional shops and shopping centres – £50m to £100m Birmingham Caxtongate: The three phases of Caxtongate provide quality retail units at the junction of New Street and Corporation Street Phase I: 15 shops and 1,390m2 of offices Phase II: 6 shops and residential Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 H&M, JD Sports, Jane Norman Jigsaw, Muji, Ted Baker, Tesco 1997 (b) 2000 (b) 9,750 9,760 Phase III: 1 store for Tesco with residential above. See Development Pipeline Schedule To be completed 2004 Bristol Broadmead, Merchant Street, Horsefair, Bond Street, and Penn Street: Leasehold. 89 shops Coventry Upper Precinct: Leasehold comprising 37 shops, public house and hotel Dixons, Gap, McDonald’s, Superdrug 1957 and 1962 27,880 Bay Trading, Clinton Cards, JD Sports, River Island, Top Shop, Virgin 1955 (b) and 1991 11,000 Exeter Leasehold comprising 3 stores, 90 shops, and 7,300m2 offices, residential and car park Dorothy Perkins, Gap, Monsoon, Virgin 1952, 1964 and1971 Newcastle The Gate: Leisure complex including multiplex cinema Stratford London E15: Shopping centre with 6 stores, 58 shops, and 2,580m2 of air-conditioned offices Regional shops and shopping centres – £25m to £50m Odeon, Frankie & Benny’s, Pizza Hut, Tiger Tiger Boots, New Look, Peacocks, Sainsburys, Superdrug, WHSmith 2002 (b) 15,000 17,560 1976 and 1998 (r) 30,450 Birmingham Martineau Place: Leasehold comprising 17,420m2 retail and 6,040m2 offices (one-third interest) Ealing Broadway Centre: Shopping centre with 11 shops and 2,020m2 air-conditioned offices (part) Benetton, First Sport, Gap, H&M, Sainsburys Clinton Cards, River Island, Russell and Bromley 2001 (b) 23,460 1984 (b) 5,410 Hull Leasehold: 34 shops and public house C&J Clark, Next 1952/1956 (b) Livingston Designer Outlet Centre: Designer retail outlet with 95 shops, leisure and food court (50% interest) Vue, Aquascutum, Burberry, Gap, Marks & Spencer, Reebok 2000 (b) Plymouth 38 shops York Coppergate Centre: Part freehold, part leasehold shopping centre with 3 stores, 18 shops, museum, 19 flats and car park C&J Clark, Next, McDonald’s 1952/1965 (b) Fenwick, Marks & Spencer, Allders, Boots, C&J Clark, Dolcis, Prestons, Starbucks 1984 (b) 8,350 26,790 10,630 14,860 Retail warehouse and food superstore properties – £100m and above Gateshead Team Valley Retail Park, Retail World, leasehold, 21 retail warehouses and fast food restaurant. Extension planned Livingston Almondvale West, 5 retail warehouses, 1,300m2 extension under construction Almondvale Retail Park, 9 retail warehouses Almondvale South, Phase I -1 unit, Phase II - being built (5,300m2) planning consent for 4,180m2 West Thurrock Lakeside Retail Park, 20 retail warehouses and fast food restaurant, being upgraded and refurbished Retail warehouse and food superstore properties – £50m to £100m Bexhill- on-Sea Dundee Liverpool Ravenside Retail and Leisure Park, 9 retail warehouses, food superstore, fast food restaurant, ten pin bowling alley, 3,065m2 extension under construction Kingsway Retail Park, 11 retail warehouses and fast food restaurant. Major enlargement and reconfiguration commenced Aintree Racecourse Retail Park, Aintree, 11 retail warehouses and fast food restaurant, being upgraded Manchester White City Retail Park, 11 retail warehouses and 2 restaurants being upgraded and extended Homebase, TK Maxx, Boots, Next, MFI Matalan, TK Maxx, JJB Sports, Pets at Home Halfords, Currys, MFI, JJB Sports Homebase Next, Borders, Currys, PC World, Toys ‘R’ Us Homebase, Currys, PC World, Tesco Toys ‘R’ Us, Halfords, Currys, MFI B&Q, Courts, Comet, Halfords, Harveys Homebase, Halfords, Currys, DFS 2003 (r) 35,240 2002 (r) 9,540 1997 (b) 2002 (b) 10,050 9,480 2002 (r) 33,890 1989 (b) 20,650 2002 (e) 27,730 2003 (r) 27,100 1990 (b) 12,290 Slough Bath Road Retail Park, 6 retail warehouses Homebase, MFI, Wickes, DFS 1998 (b) 14,200 Retail warehouse and food superstore properties – £25m to £50m Birmingham Great Barr, food superstore Asda Blackpool Blackpool Retail Park, 9 retail warehouses. Extension planned Currys, Halfords, Pets at Home Dartford Eastern Quarry, 245 hectares of land with development potential Derby Wyvern Centre, 6 retail warehouses and fast food restaurant Currys, Homebase, Halfords, Carpetright Meteor Centre, 11 retail warehouses, fast food restaurant and public house Focus, MFI, Lidl, Pets at Home Edmonton Ravenside Retail Park, 4 retail warehouses and fast food restaurant Wickes, Courts, Mothercare Erdington Ravenside Retail Park, Kingsbury Road, 10 retail warehouses Hull Priory Way, Food superstore and retail warehouse Northampton Nene Valley Retail Park, 11 retail warehouses Poole Commerce Centre, 5 retail warehouses MFI, Halfords, Currys Homebase, Sainsbury’s Currys, Staples, Comet Homebase, Courts, Allied Carpets LAND SECURITIES ANNUAL REPORT 2004 1998 (b) 1996 (e) 8,430 11,270 To be developed 1996 (e) 11,290 1994 (e) 1988 (b) 1999 (r) 2003 (e) 2003 (r) 1987 (b) 17,330 12,040 14,130 10,250 13,640 13,290 95 Major property holdings continued Location Property name, address and description Central and Inner London properties – £100m and above EC2 EC3 EC4 W1 30 Gresham Street, leasehold air-conditioned City offices incorporating 1,300m2 of retail 13/23 Fenchurch Street, part freehold, part leasehold, air-conditioned City offices and major retail unit One New Change, leasehold, air-conditioned City offices and 13 shops Portman House, 2 Portman Street, air-conditioned West End offices incorporating 3,546m2 retail Devonshire House, Piccadilly, air-conditioned West End offices, 9 showrooms and shops Piccadilly Circus, 44/48 Regent Street, 1-17 Shaftesbury Avenue, Denman Street, Sherwood Street and Glasshouse Street. 2 major retail trading units, 10 shops, kiosk, public house, 3 restaurants with 1,460m2 offices and 670m2 of illuminated advertising SW1 Bowater House, Knightsbridge, West End offices The Home Office, 50 Queen Anne’s Gate, air-conditioned West End offices Portland House, Bressenden Place, part air-conditioned West End offices incorporating 1,510m2 basement restaurant Eland House, Bressenden Place, air-conditioned West End offices Kingsgate House, Victoria Street, air-conditioned West End offices and 18 shops Cardinal Place (formerly Esso House, Glen House, 16 Palace Street) Central and Inner London properties – £50m to £100m 49 Leadenhall Street, air-conditioned City offices and leisure centre Fleetbank House, Salisbury Square, air-conditioned Midtown offices Regis House, King William Street, air-conditioned City offices incorporating public house and 530m2 retail New Street Square, 7 midtown offices (formerly New Fetter Lane) 50 Ludgate Hill, air-conditioned City offices with 12 shops, 2 public houses and 4 restaurants Warner House, Theobald’s Road, air-conditioned Midtown offices 40 Strand, air-conditioned Midtown offices and 8 shops Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 2003 (b) 36,450 DKW 1984 (r) 15,620 Allen & Overy Cluttons, Conoco, Trafigura 1990 (r) 2001 (b) 32,650 12,810 Alliance Capital, Boston Consulting Gap, Burger King, Boots, Signs: McDonald’s, Coca-Cola Lowe Lintas, Marriott Hotels Secretary of State AMEX, Secretary of State, Angel Trains Secretary of State Secretary of State Under construction see development pipeline schedule p86 International London Underwriting Centre Secretary of State Sun Microsystems, GE Frankona Secretary of State, Ernst & Young, DJ Freeman, Taylor Raffety Associates part 1996/97 (r) 14,190 part 2003 (r) 5,820 1958 (b) 1977 (b) part 2002 (r) 1995 (b) 1987 (r) 24,720 30,140 29,120 23,170 18,640 1975 (b) 12,230 1974 (b) 1998 (b) 11,370 8,670 various 30,340 Secretary of State 1985 (r) 11,040 Warner Bros Bain & Co, ICL 1999 (b) 1997 (r) 12/24 Oxford Street and 2/5 Tottenham Court Road, an 8,360m2 store and 3 shops Virgin Megastore part 1998 (r) 475/497 Oxford Street and Park House Vacant offices, H&M, Dixons W2 40/50 Eastbourne Terrace, Inner London offices and 4 ground floor units 10/20/30 Eastbourne Terrace, Inner London offices Notting Hill Gate, Inner London offices, 52 shops, 2 stores and cinema Haymarket House, Haymarket, part air-conditioned West End offices incorporating 3,410m2 of restaurants. 10 Broadway, New Scotland Yard, air-conditioned West End offices, banking space and restaurant NHS Estates John Brown WHSmith, Boots, McDonald’s, Crown Business Communications Secretary of State Curtis Brown, Tiger Tiger Metropolitan Police 1966 (b) 35,670 12,390 12,690 8,850 6,980 12,960 16,780 18,280 1963(b) 1950s (b) 1957/58 (b) 1958 part 2003 (r) 10,030 Clive House, Petty France, West End offices Secretary of State Empress State, Lillie Road, Fulham, air-conditioned Inner London offices with 2,040m2 retail/leisure Bankside 123 Under construction see development pipeline schedule 1950 (b) 2003 (r) 9,400 43,330 LAND SECURITIES ANNUAL REPORT 2004 EC3 EC4 WC1 WC2 W1 W11 SW1 SW6 SE1 96 Location Property name, address and description Central London and Inner London properties – £25m to £50m Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 EC2 Dashwood House, 69 Old Broad Street, air-conditioned City offices ABN Amro, Pinsent Curtis and AMEX Moorgate Hall, 143/171 Moorgate, air-conditioned City offices with 1,450m2 retail 143/171 Moorgate Marks & Spencer, Clinton Cards, DLJ, Hamburgische Landesbank 1995 (r) 1990 (b) 10,550 7,540 120 Cheapside & 4-9 Wood Street 130 Wood Street, air-conditioned City offices and bar/restaurant EC3 6/12 Fenchurch Street and 1 Philpot Lane, air-conditioned City offices and shops Citigroup Allen & Overy DKW Gracechurch House, 55 Gracechurch Street, air-conditioned City offices with 930m2 health club Royal London, Venton Services, David Lloyd Leisure 37/39 and 40 Lime Street and 4 Fenchurch Avenue, air-conditioned City offices Small insurance agencies New London House, 6 London Street, air-conditioned City offices, 2 shops, 2 restaurants and public house ED & F Man, Faraday Underwriting and other insurance agencies EC4 W1 26 Old Bailey, air-conditioned City offices Cannon Street House and Martin House, air-conditioned City offices 7 Soho Square, air-conditioned West End offices and retail. 6/17 Tottenham Court Road, Retail with 242m2 offices Secretary of State Nicholson Graham & Jones Expedia, Metropolitan Police, Tesco EasyEverything, Sainsbury’s, Boots 1970s (b) 1999 (r) 1985 1993 (b) Part 1998 (r) 1993 (r) 1984 (r) 1996 (r) 2003 (r) 1999 (b) Oxford House, 70/88 Oxford Street, air-conditioned West End offices and 5 shops Secretary of State, Universal Pictures Part 1994 (r) 9,340 5,380 4,780 6,720 9,380 6,180 6,310 8,100 5,720 5,920 5,680 3,020 5,010 455/473 Oxford Street, 4 shops and restaurant 26/36 Oxford Street, air-conditioned bank, large shop, kiosk, restaurant and 1,050m2 educational use SW1 49/75 Buckingham Palace Road and 29 Bressenden Place, West End offices, 136 bedroom hotel, 30 flats and 7 shops Allington House, 50 Victoria Street, air-conditioned West End offices incorporating 930m2 retail Allington Towers, 17 Allington Street Wellington House, Buckingham Gate, air-conditioned West End offices Selborne House, Victoria Street, air-conditioned West End offices Westminster City Hall, Victoria Street, air-conditioned West End offices St Albans House, Haymarket, air-conditioned 4,270m2 offices and 2 restaurants Location Property name, address and description South-east industrial properties – £25m to £50m Juniper, Phase I: 3 warehouses and 1 office building Phase II: 4 warehouse units under construction Albany Park, 30 industrial/warehouse units Basildon Frimley (near Camberley) Hatfield Welham Green, Regional distribution centre Heston (near Heathrow) Heston Centre and Spitfire Trading Estate, 19 industrial/distribution units of differing size and specification. Currently 10,240m2 is being refurbished Sunbury Cross West Thurrock Hanworth Road (includes Interchange West), 3 distribution warehouse units Motherwell Way, 37 warehouse/industrial units. Extension planned South-east industrial properties – £10m to £25m Barking Basildon Croydon Zenith, New development of 8 warehouse/industrial units and 1 refurbished unit Commerce Park, 11 warehouse industrial unis Guildford Cobbett Park, 10 warehouse/industrial units Hayes London NW10 Silverdale Road, 5 Industrial/warehouse units Acton Lane, 7 Industrial/warehouse units Oxford Oxonion Park, 12 warehouse industrial units Wimbledon Weir Road, 5 distribution warehouses LAND SECURITIES ANNUAL REPORT 2004 Mothercare Lloyds Bank, Cromwells Madhouse 1963 1983 (r) Royal Westminster Thistle Hotel, IIR 1994 (r) 6,130 Rolls-Royce, Sainsbury’s 1997 4,530 Secretary of State Metropolitan Police Secretary of State Westminster City Council Burberry’s, McDonald’s 1980s (b) 1978 (b) 1966 1965 2000 (r) 5,500 4,970 10,030 15,750 4,270 Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 TNT, Ford and Schenker 2002 (b) and 2003 (b) Lucas Industries, Travelex and Siemens Tesco Distribution Ltd Expeditors, P&O, Hays, and TNT 2001 (r) 36,630 1982 (b) and 1984 (b) 26,230 1986 (b) and extended 1988 1977 (b), 1982 (b), 1984 (b) and 2003 (r) 31,300 28,330 ICI, Unigate, Johnson & Johnson 1970 (b) and 1976 (b) 29,360 Debenhams, Weir Pumps, Avery Automotive 1973 (b), 1975 (b) and 1979 (b) 29,060 Ellis & Everard, Artisan Carpetright, Trinity Mirror Big Yellow and BOC 2002 (b) 2003 2002 (b) Siemans, Nalco Foods, Bridisco The Beer Seller, Nielsen & Bainbridge, Electric Trading Company, Sheraton Carriers 12,930 18,300 12,620 11,440 8,540 9,570 Interiors For The Office Oddbins 2003 1986 (b) 11,800 9,530 97 New England Industrial Estate, 6 warehouse/industrial units Sheffield Insulations, Royal Mail 1978 (b), 1981 (b) Glossary Adjusted EPS Earnings per share based on revenue profits and adjusted to exclude deferred tax associated with investment properties Adjusted NAV per share NAV per share adjusted to add back deferred tax associated with investment property together with any accounting deficits in joint ventures that do not represent actual liabilities of the Group 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 1990s 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 reported in the accounts BREEAM Building Research Establishment Environmental Assessment Method Contingent tax liability The unprovided further capital gains tax which may become payable if the Group’s investments and properties were sold at their balance sheet values including the valuation surplus on trading and development properties net of any tax losses which have not been recognised in the balance sheet 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 together with any proposed schemes that are not yet included in the development programme but which are more likely to proceed than not Development programme The Group’s development programme 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 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 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 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 Like-for-like portfolio Properties that have been in the investment portfolio for the whole of the current and previous financial year 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 property outsourcing contracts with third parties Diluted figures Reported amount adjusted to include the effects of potential shares issuable under employee share schemes Over-rented Space that is let at a rent above its ERV Dividend cover Number of times the 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 this will normally be different 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 FRS17 Financial Reporting Standards 17 (FRS17) ‘Retirement Benefits’. See Accounting Policy Note 1 Passing rent The annual rental income receivable which may be more or less than the ERV (see over-rented and reversionary) 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 Revenue profit Profit before tax, excluding FRS3 profits/(losses) and any exceptional items 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 Reversionary or under-rented Space where the passing rent is below the ERV Reversionary yield The anticipated yield, which the initial yield will rise to once the rent reaches 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 1 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 1 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 1 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 1 Unitary charge The basic payment received by Land Securities Trillium under an outstanding contract 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%, a risk free rate of 4.45% and a beta of 0.62 – calculated using the average Bloomberg beta for the last four quarters), applied to the fair value of debt and equity and then suitably weighted Yield on present income The annual net rents generated by the portfolio expressed as a percentage of the portfolio valuation Zone A A means of analysing the rental value of retail space by dividing it into zones parallel with the main frontage. The most valuable zone, Zone ‘A’, is at the front of the unit. Each successive zone is valued at half the rate of the zone in front of it 98 LAND SECURITIES ANNUAL REPORT 2004 Index A Aberdeen Accounting policies Achievements Adjusted financial information Analysis of net debt Annual general meeting Auditors Audit committee Auditors report B Balance sheets BBC Bid costs Birmingham Alliance/Bullring Board Business analysis C Canterbury, Whitefriars Cash flow and net debt Chairman’s statement Competitive environment Consolidation Contents Contingent liabilities Corporate governance Corporate responsibility Creditors Credit rating Customer focus D Debentures, bonds and loans Debtors Development Development pipeline Development programme Directors Directors’ report Directors’ responsibilities Dividend Dundee, Kingsway Retail Park E Earnings Earnings per share Employees/HR policy Environment East Kilbride F Five year record Fixed assets G Gateshead, Team Valley Glossary Goodwill Gross property income 19 63–64 7 10,34 77 46 46 46 57–58 H Health and safety Highlights 61 28,30,31,32 I 80 72 20 98 Nominations committee Notes of historical cost profits and losses O Objectives Operating and financial review 63,71 63 Operating profit Operating properties Other tangible fixed assets 45 60 7 10–35 66 64 64 9 Outlook P Pension scheme/pensions 35,63,66,67 Performance benchmarking Portfolio management Portsmouth, Gunwharf Quays 84 16–21,32 15,19 Principal group and associated undertakings 79 Profit and loss (consolidated) Property outsourcing/Land Securities Trillium 14,28–30,32,91 40 2–3 99 35 48 35 Index Interest charge Internal control International reporting financial standards Investment portfolio (total) 16,18,84,88–90 Property by location Investment properties Investments in group undertaking Investment portfolio (total) value movements Investor relations K 63 73 18 45 Provisions Purchases R Kent Thameside/Eastern Quarry 27,43 Regulatory environment L Land Securities Trillium Property outsourcing 14, 28–31,32,91 Related party transactions Remuneration report Results Retail Landflex 31,32 Retail warehouses Leeds, White Rose Centre 19,39,40 Revenue profit Leisure (The Gate, Newcastle Upon Tyne) 27,32 Risk management 64 22 9,36,45 83–98 24 34,62 8–9 13 63 ifc–1 79 44–50 38–39 74,75 35 32 75 74 22–27 22,86–87 22,86–87 36–37,44,66 Livingston, Almondvale Centre London 30 Gresham Street 50 Queen Anne’s Gate Bankside 123 Cardinal Place Empress State 81–82 Managed offices New Street Square Oxford Street Soho Square White City Long term contracts M 57 70 24 12 70 21 14,17,20,26 24 20 27 22 26 32 14 40 46 31 64 S Sales Strategy Swansea T Taxation Major property holdings 94–97 Telereal (BT) 38–40,66 Manchester, White City Retail Park Maidstone 42 19 Scottish Retail Property Limited Partnership 19,20 Segmental information Share capital Shareholders’ funds Shopping centres South-east industrial properties 65 76 77 24,32 16,21,27 Statement of total recognised gains and losses 20 19 10 71 69 31 45 Ten year record Thurrock, Lakeside Retail Park Top 12 properties (by value) Trading properties Treasury management V Valuations Valuers DWP – PRIME/Employment Services 28,29,30,32 Financial assets and liabilities Financial instruments Financial performance Financial reporting 78–79 64 18,22,30 34–35,59–80 LAND SECURITIES ANNUAL REPORT 2004 N Net asset value Net assets per share Net interest payable New business Non-executive directors 60,63 92–93 64,75 19,21 8 79 51–58 8 13,17,19,24 16,20,24 66 49–50 18,21 60 6,7 20 35,63,69–70 29,31 80 20,21 85 64 34 84 48 99 Investor information The report and financial statements, share price information, company presentations, primary financial statements as excel downloads, the corporate calendar, corporate governance and other investor information on the Group are available through the internet on www.landsecurities.com Low cost share dealing facilities These provide both existing and prospective shareholders with simple, low cost ways of buying and selling Land Securities Group PLC ordinary shares. 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. Textphone: 0870 600 3950. 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. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA. Telephone: 0870 241 3018. International dialling: +44 121 415 7049 Analysis of equity shareholdings At 31 March 2004 Number of holdings Balance at 31/3/2004 % 12,118 39.31 3,242,036 8,401 8,294 696 734 165 257 75 88 27.25 6,162,720 26.90 16,225,689 2.26 4,874,503 2.38 16,278,695 0.54 12,064,603 0.83 57,126,982 0.24 54,504,275 0.29 295,445,042 % 0.70 1.32 3.48 1.05 3.49 2.59 12.26 11.70 63.41 30,828 100.00 465,924,545 100.00 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 100 Shareview dealing is a telephone and internet dealing service. For telephone dealing call 0870 850 0852 between 8.30am and 4.30pm, Monday to Friday. For internet dealing log on to www.shareview.co.uk/dealing A postal dealing service is also available. Full details and a form can be obtained by calling 0870 242 4244. 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. 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. 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). 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 2004 From top (left to right): Almondvale South Retail Park, Livingston Bowater House, London, SW1 New Scotland Yard, London, SW1 Bullring, Birmingham Cobbett Park, Guildford Designer Outlet, Livingston Designed by SAS Photography by Simon Phipps Typeset by Orb Solutions Printed by St Ives Westerham Press, environmentally accredited printers ISO 14001. This report is printed on paper that meets international environmental standards, contains elemental chlorine free (ECF) virgin pulp, obtained from sustainably managed forests. making property work Land Securities Group PLC 5 Strand London WC2N 5AF Telephone: +44 (0)20 7413 9000 email: landsecurities@landsecurities.com www.landsecurities.com