Land Securities Group
Annual Report 2005

Plain-text annual report

Annual Report 2005 Property today: what differentiates a leader from a follower? Creating value Using our expertise Acting responsibly We are delighted to report on an outstanding We have focused our activities on areas of Land Securities’ core values of integrity, year for Land Securities, generating a return the market where we can benefit fully from customer service, respect for the individual, on equity for shareholders of 21.3% (pre- the expertise of our people. Section Two of excellence and innovation instil in our exceptional charge), and a 16.6% increase in the Operating and Financial Review people a strong desire to manage the the total dividend this year. In the Chairman’s demonstrates how we are using this business in a responsible way. Section Three Statement and the first section of the expertise to create value. Here, we explain brings together all the elements of the Operating and Financial Review we discuss the the performance and activity of our Retail, Annual Report which demonstrate how key financial and operational highlights and London and Property Outsourcing we live up to these values. Page 57 performance drivers for the business. We also businesses as well as providing an update review our operating environment and the on our Urban Community Development prospects for the business. Page 11 activities. Page 31 2 12 16 Introduction 1.0 Chairman’s Statement 1.1 Operating and Financial Review Operating and financial review continued 32 34 40 46 54 2.0 Customer Service 2.1 Retail 2.2 London Portfolio 2.3 Property Outsourcing 2.4 Urban Community Development 58 60 66 70 72 79 80 3.0 Board of Directors 3.1 Corporate Responsibility 3.2 Corporate Governance 3.3 Risk Management 3.4 Remuneration Report 3.5 Directors’ Responsibilities 3.6 Independent Auditors’ Report Financial statements Business analysis Other information 126 127 128 6.0 Glossary 6.1 Index 6.2 Investor information 82 82 82 83 84 84 84 85 103 104 4.0 Consolidated profit and loss account 4.0 Statement of total recognised gains and losses 4.0 Note of historical cost profits and losses 4.1 Balance sheets 4.2 Consolidated cash flow statement 4.2 Reconciliation of net cash flow to movements in net debt 4.2 Reconciliation of Group operating profit to net cash inflow from operating activities 4.3 Notes to the financial statements 4.4 Five and 10 year record 4.5 Directors’ report 108 108 108 109 110 115 117 117 119 119 123 5.0 Investment property business Portfolio valuation Performance benchmarking Top 12 properties Portfolio analysis Development pipeline schedule 5.1 Property Outsourcing Contract analysis 5.2 Investment property information Major property holdings Property locations Land Securities Annual Report 2005 1 Introduction 2 Land Securities Annual Report 2005 Welcome to Land Securities’ Annual Report 2005 As the UK’s leading quoted property company our aim is to create attractive, sustainable returns for shareholders through a strategy of investing in commercial property in markets and activities where we believe we can deliver total business returns in excess of our cost of equity. Our focus will be on areas where we have expertise and operational skills, where we can benefit from our risk management skills and active recycling of capital. Today, as a result of this strategy, we own more than £10bn of commercial property across the UK which, together with the property we manage for our outsourcing customers, makes us responsible for over 10 million m2 of accommodation.This is equivalent in floorspace terms to more than all the offices in London’s West End. As a business we place great value on our private and public sector customers.We have 2,000 occupiers across our investment portfolio and six property outsourcing clients. We hope that you find this report informative and helpful; if you have any views on our progress, or the Report, we would be delighted to hear from you. Our contact details are on the inside back cover. We own or manage 10 million m2 of commercial property Cardinal Place, SW1 Annual Report 2005 3 Introduction continued About Land Securities Retail London Portfolio Richard Akers Managing Director, Retail Key points 21 shopping centres and 26 retail warehouse parks over 1.1 million m2 of retail accommodation more than 1,300 retailer occupiers nearly 300m shopper visits per year almost 60,000 people work in our shopping centres planning consents for some 300,000m2 of retail space recommended offer made for Tops Estates PLC, which owns seven shopping centres Mike Hussey Managing Director, London Portfolio Key points over 1 million m2 of office and retail accommodation more than 50,000 people work in offices owned by us provide accommodation for over 650 organisations potential to develop 500,000m2 of commercial and residential space over next 10 years over 100,000m2 of developments on-site Longmarket, Canterbury 30 Gresham Street, EC2 4 Land Securities Annual Report 2005 Introduction continued Property Outsourcing Urban Community Development Ian Ellis Chief Executive, Land Securities Trillium Key points Floorspace No of Properties 1,700 2.58m m2 174 0.37m m2 6,500 4.99m m2 24 0.12m m2 14 0.03m m2 58 0.09m m2 DWP BBC BT Norwich Union Barclays DVLA 10,000 people across the UK provide facilities management 250,000 people work in offices managed by us Mark Collins Chief Operating Officer, New Business Development, Group Operations and Urban Community Development Key points Kent Thameside Approximately 700 hectares of land with potential for 15,000 new homes 700,000m2 of commercial space 300,000m2 of retail, leisure and community facilities Eastern Park, Stansted, Essex 660 hectare site acquired in July 2004 for long-term redevelopment potential Coldhams Lane, Cambridge 32 hectare site DWP – Job Centre Plus Crossways Business Park, Kent Land Securities Annual Report 2005 5 Introduction continued Financial highlights Pre-tax loss £155.8m Revenue profit £401.1m Up 43.5% as a result of the exceptional costs relating to the debt refinancing carried out during the year Up 29.7% demonstrating a busy year and strong performance across the business Full year dividend 43.25p Adjusted diluted net assets per share 1460p Up 16.6% in recognition of the outstanding results this year and demonstrating our confidence in the future Up 9.7% reflecting the strong growth in the value of our portfolio even after a 102p reduction in net assets per share as a result of the exceptional costs Combined portfolio valuation £9.4bn Property Outsourcing segment profit £259.8m Up 10.3% demonstrating continued success at creating value from our retail and London portfolios. Up 65.9% this year, representing 26% of the Group’s operating profits 6 Land Securities Annual Report 2005 Introduction continued Financial highlights Gross property income 31/03/05 31/03/04 % change Property investment and trading (including share of joint ventures) £811.2m £650.2m Property outsourcing (including share of joint venture) Total Operating profit1 Pre-tax (loss)/profit Revenue profit (pre-tax)1 Adjusted earnings per share2 (Loss)/earnings per share Dividends per share Adjusted diluted net assets per share3 Diluted net assets per share Combined portfolio valuation4 Net borrowings Equity shareholders’ funds Gearing (net)5 £1,054.5m £830.9m £1,865.7m £1,481.1m £648.4m £565.8m (£155.8m) £373.1m £401.1m £309.2m 68.67p (7.69p) 43.25p 1460p 1414p 47.86p 61.84p 37.10p 1331p 1293p £9,388.8m £8,150.2m £2,923.1m £2,435.8m £6,636.6m £6,030.1m 44.0% 40.5% +24.8% +26.9% +26.0% +14.6% n/a +29.7% +43.5% n/a +16.6% +9.7% +9.4% +10.3% +20.0% +10.1% 1 2 3 4 5 Excludes results of fixed asset property sales and exceptional items Based on revenue profit. 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 Market value of investment portfolio including our share of joint ventures. Percentage change is valuation surplus Net borrowings (including bank overdraft less short-term deposits and cash), at book value, (plus in 2004 non-equity B shares) as a percentage of equity shareholders’ funds Dividends (pence) Dividends (pence) Dividends (pence) Revenue profit (pre-tax) (£m) Revenue profit (pre-tax) (£m) Revenue profit (pre-tax) (£m) 32.50 34.00 35.50 37.10 43.25 318.4 350.1 336.2 309.2 401.1 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Adjusted earnings per share (pence) Adjusted earnings per share (pence) Adjusted earnings per share (pence) Adjusted diluted net assets per share (pence) Adjusted diluted net assets per share (pence) Adjusted diluted net assets per share (pence) 68.67 45.22 49.18 50.89 47.86 1153 1157 1219 1460 1331 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Our accounts explained To help you understand our accounts we detail below some of the key terms we use and conventions we have adopted, with an explanation of their meaning: Revenue profit: This is our measure of underlying profits and comprise profit before tax, excluding profits on the sale of fixed asset properties and any exceptional items Adjusted earnings per share: These are based on revenue profits (after tax) and adjusted to exclude deferred tax associated with investment properties Net asset value per share: This is often used to evaluate the performance of a property company and is calculated by dividing equity shareholders’ funds by number of shares in issue Combined portfolio: The combined portfolio, see page 110 , is our wholly-owned investment portfolio combined with our share of the value of assets held in joint ventures. Unless stated these are the pro-forma numbers we use when discussing the investment property business Investment portfolio: This includes Land Securities’ wholly-owned properties and the value of the properties held in the development programme and excludes our share of the value of joint venture properties Operating properties: Land Securities Trillium properties acquired as part of property outsourcing contracts which do not meet the accounting definition of investment properties Retail: This business includes our shopping centres, shops, retail warehouse properties and assets held in retail joint ventures London Portfolio: This business includes all London offices and retail, but excludes those assets held in the Metro Shopping Fund Land Securities Annual Report 2005 7 Introduction continued Investor overview Focus on value creation Land Securities offers investors: A commitment to the creation of attractive, sustainable returns through its activities in the UK property market A strategic focus on its customers Ownership of £9.4bn of investment property in the UK (including joint ventures) Market leading positions in three sectors: – Retail – London offices – Property Outsourcing Cash flow through dividend payments every six months Potential for capital and revenue growth through: – superior management of assets – active recycling of capital – extensive development pipeline – new property outsourcing business IRR +++ Higher returns from development activity IRR ++ IRR + Innovative products accessing immature markets Diversified portfolio in sectors with supply side constraints WACC 7.5% Active management of balance sheet and effective recycling of capital 8 Land Securities Annual Report 2005 Introduction continued Total shareholder returns Land Securities FTSE 100 FTSE Real Estate Source: Datastream Land Securities’ returns % return for year to 31/03/05 % return for period since 31/03/00 21.6 14.8 24.9 110.3 (12.9) 108.2 % 24 21 18 15 12 9 6 3 0 Weak London office market 2000 2001 2002 2003 2004 2005* Years ended 31 March Return on equity Return on average capital employed Weighted average cost of capital (all figures are pre-tax) *Excludes exceptional charge Land Securities’ total property returns Year to 31/03/05 Shopping centres Retail warehouses Central London offices LS%(i) 16.2 22.1 18.1 Total portfolio/all property 17.7 Relative IPD%(i)(ii) return %(iii) 14.8 22.0 15.8 16.9 +1.2 +0.1 +2.0 +0.7 Source: IPD (i) Includes acquisitions, sales and developments (ii) IPD December Universe (extrapolated to March 2005) unfrozen (iii) Relative return relates to the geometric (not arithmetic) difference between Land Securities and IPD Vision Our vision is to be recognised as the UK’s leading property company. The achievement of this vision will be measured by returns generated for shareholders, new business wins, customer retention and satisfaction levels, employee satisfaction and third party recognition of our achievements. Strategy To invest in commercial property in markets and activities where we believe we can deliver total business returns in excess of our cost of equity. Our focus will be on areas where we have expertise and operational skills, where we can benefit from our risk management skills and active recycling of capital. Business objectives and achievements Since embarking upon this strategy, our business objectives have remained constant and this is our third year of reporting progress against them. We review our objectives regularly, in light of our competitive environment and market conditions, and from time to time will refine and augment them. Our objectives Our achievements • Maximise the returns from our investment portfolio. • In each of our core sectors of shopping centres, retail • Complete and let our development programme. • Continue to grow our property outsourcing business by winning new contracts and expanding existing ones. warehouses and London offices and on an overall portfolio basis, we outperformed the Investment Property Databank (IPD). • We sold £763.1 m of investment property, creating FRS3 profits of £82.4 m. • We completed 110,000m2 of development. We let, agreed subject to contract to let, or sold 200,000m2 of office and retail floorspace including Gresham Street, EC2; Bankside1, SE1; Empress State, SW6; and department stores in Bristol and Exeter. • We won three new property outsourcing contracts with Norwich Union, Barclays Bank and Driver and Vehicle Licensing Agency. • Focus on our customers with products that meet their needs. • We created new property outsourcing solutions for Barclays • Attract, develop, retain and motivate high performance teams and individuals. • Review the Group’s capital structure to ensure that it benefits fully from the credit strength of its investment portfolio and allows the Group to maximise its returns from capital invested. • Focus on earnings generation from capital investment and drive total returns, so creating value for our shareholders. and Norwich Union, provided tailored solutions for occupiers at Empress State, SW6; 50 Queen Anne’s Gate, SW1; and Bankside1, SE1. We also introduced flexibility into the BBC contract in response to their changed property requirements. • We continue to work towards Investors in People accreditation across the Group. This year we introduced a talent management and personal development planning system. We also received a 92% response rate to our employee survey. • We carried out a £3.2bn restructuring of our debt, resulting in future annual savings of some £25m of interest to the Group and a lower future cost of borrowing. Our existing debt investors benefited from an enhanced AA credit rating. • Revenue profit (excluding exceptional items) grew by 29.7% over the year. Our returns are detailed in the graphs and chart above right. Land Securities Annual Report 2005 9 10 Land Securities Annual Report 2005 12 16 1.0 Chairman’s Statement 1.1 Operating and Financial Review Creating value We are delighted to report on an outstanding year for Land Securities generating a return on equity for shareholders of 21.3% (pre-exceptional charge), together with a 16.6% increase in the total dividend this year. In the Chairman’s Statement and first section of the Operating and Financial Review we discuss the key financial and operational highlights and performance drivers for the business. We also look at our operating environment and the prospects for the business. Land Securities Annual Report 2005 11 1.0 Chairman’s Statement Peter G Birch CBE Chairman Full year dividend 43.25p Up 16.6% in recognition of the outstanding results this year and demonstrating our confidence in the future 12 Land Securities Annual Report 2005 Chairman’s Statement It is with pleasure that I can report an outstanding performance by Land Securities this year, distinguished by the securing of additional income from major new contracts across all our businesses. We are recommending a 20.8% increase in the final dividend to 32.85p making a total for the year of 43.25p, up 16.6% on last year. This is a higher level of growth than usual and reflects our exceptional performance this year. The Group’s continued achievements demonstrate the soundness of our strategy and its successful implementation by our people. It has been a busy year across the entire Group. The highlights were: The focusing of the business on three sectors where we have market-leading positions, namely retail, London offices and property outsourcing The Group’s exit from the industrial property market through an exchange of our industrial properties for a retail portfolio from Slough Estates PLC. The combined value of the properties exchanged was £709m The implementation of a highly successful £3.2bn debt restructuring, which resulted in an improved AA credit rating, a decrease in our future cost of debt and the provision of a long- term, flexible funding structure for the business. The costs associated with this transaction are accounted for as an exceptional charge The valuation uplift of 10.3% in the combined portfolio (which includes our share of the value of properties owned by joint ventures) to £9.4bn, demonstrating our continued success at creating value from our retail and London portfolios The rise of 9.7% in adjusted diluted net assets per share to 1460p per share or of 17.4% to 1562p, if the post-tax exceptional impact of our debt refinancing is ignored. Basic net assets per share were 1419p The growth of adjusted earnings per share by 43.5% reflecting higher revenue profits of £401.1m (2004: £309.2m). We report a loss per share of 7.69p. This is calculated on results after tax which include the exceptional refinancing charge this year The sale of £763.1m of property from the investment portfolio, which generated profits of £82.4m in excess of carrying values, as well as the purchase of £786.1m of property, thereby continuing the progress we are making to recycle capital into higher growth activities. This includes the values of the property swap with Slough Estates Three new property outsourcing contracts won by Land Securities Trillium as well as a significant contribution to the Group’s profits from existing contracts and the receipt of £321.5m as a result of the sale of Media Village, White City The agreement of contracts to occupy 101,500m2 of offices in our London development programme including lettings at Cardinal Place, SW1; New Street Square, EC4; Gresham Street, EC2; Empress State, SW6; and a further 46,400m2 relating to the forward sale of Bankside1, SE1 The completion of 43,400m2 of retail development lettings including the letting of anchor stores to House of Fraser for the Bristol Alliance and to Debenhams in Exeter The announcement, since the year end, of a recommended cash offer to acquire Tops Estates PLC, which owns seven shopping centres, for an enterprise value of £517.2m, including the assumption of £207.3m of Tops Estates’ debt. 1.0 Chairman’s Statement continued Results Before moving on to comment in more detail on the results, I thought it would be helpful to summarise the effect of the debt restructuring that we carried out last November, full details of which are contained in the Operating and Financial Review. In essence, we replaced our existing £1.8bn of secured and unsecured bond debt, at an average interest rate of 8.5%, with £2.3bn of new secured debt, at an average interest rate of 5.35%. This will initially reduce our future cash interest charge by some £25m per annum. As a result, in the year we have had to account for the one-off increase in the nominal value of the new debt together with associated costs through the profit and loss account as a £682.1m exceptional charge. While the effect of this accounting treatment is apparent on both the profit and loss account and our net asset value, it was very largely a non-cash item and we are therefore reporting our numbers on a pre- and post-exceptional basis. The exceptional nature of this charge is demonstrated by our decision to increase the dividend substantially this year. Revenue profit £401.1m Up 29.7% demonstrating a busy year and strong performance across the business Pre-tax profits (excluding the exceptional refinancing costs) grew by 41.1% to £526.3m (2004: £373.1m). The exceptional charge, however, results in this becoming a pre-tax loss of £155.8m. Revenue profits, our measure of underlying pre-tax profits, increased by 29.7% to £401.1m from £309.2m mainly as a result of: Adjusted diluted net assets per share 1460p Up 9.7% reflecting the strong growth in the value of our portfolio Interest savings of £10.3m over part of the year as a result of the debt refinancing A strong performance from Land Securities Trillium, with the extended DWP contract fully profitable and a strong contribution from Telereal which included a £17.6m (2004: £5.6m) contribution from sales of trading properties Construction profits of £11.6m mainly from our contract to develop Bankside1, SE1. Adjusted earnings per share, calculated on pre-tax revenue profits, were 43.5% higher at 68.67p per share (2004: 47.86p per share). The wholly-owned investment portfolio rose in value by 10.7% to £8.8bn, with the combined portfolio (including our share of joint ventures) showing a 10.3% increase to £9.4bn. The majority of our assets are now split between retail and London offices at 56.9% and 38.3% respectively (combined portfolio). Adjusted diluted net assets per share rose by 9.7% to 1460p per share or by 17.4% to 1562p, if the post-tax exceptional impact of our debt refinancing is ignored. In recognition of the outstanding results this year and our confidence in the future of the business, we are recommending a final dividend of 32.85p per share (2004: 27.2p), making a total distribution for the year of 43.25p (2004: 37.1p), a 16.6% increase on 2004. Following this one-off increase, we will revert to our historic pattern of steady dividend growth from this new base. At the Interim Results, we stated our intention to distribute more equally our dividend payments. In future we will aim to pay around 40% as an interim dividend payment with the balance making up the final dividend. Subject to approval by shareholders at the Annual General Meeting (AGM) to be held on 12 July 2005, the dividend will be paid on 25 July 2005 to shareholders on the register on 24 June 2005. The dividends paid and proposed are covered 1.6 times by adjusted earnings (2004: 1.3 times). Real Estate Investment Trusts and Lease Reform Land Securities Annual Report 2005 13 1.0 Chairman’s Statement continued 14 Land Securities Annual Report 2005 The Government has stated that, subject to agreeing the outstanding issues on Real Estate Investments Trusts (REITs) as detailed in its most recent consultation document, it would seek to introduce the relevant legislation with the 2006 Finance Bill. The structure now proposed appears to be more flexible but we will have to wait for full details of legislation, including the Government’s proposed conversion charge, before we can assess whether conversion will be in the best interests of shareholders. We were pleased that, for the time being, the Government has decided not to introduce legislation to prohibit upward only rent reviews in lease contracts. We believe that the industry has made great strides to introduce a range of more flexible leasing options and we continue to work with the British Property Federation (BPF) and major landlords to ensure that we deliver a satisfactory solution for our customers and the industry. To this end we have recently become a signatory to the BPF declaration on sub-letting, which we believe is a step towards creating a more flexible sub-letting environment for tenants. Acquisition of Tops Estates PLC On 6 May 2005, we announced that we had reached agreement with the Board of Tops Estates PLC in respect to the terms of recommended offers for the ordinary shares in and convertible unsecured loan stock of Tops Estates. The offers represent an enterprise value for Tops Estates of approximately £517.2m, including net debt at 30 September 2004 of approximately £207.3m. Since announcing the offer, we had purchased, by 4.30pm on Friday 13 May, 29.8% of the shares and 46.7% of the convertible unsecured loan stock in the market which, when combined with the irrevocable undertakings made by Tops Estates management, represent 72.9% of the fully- diluted share capital of the company. Tops Estates is a specialist investor in town and city centre shopping centres and its property portfolio comprises shopping centres with a total gross area of approximately 230,000m2 in seven locations: Corby (Town Centre and Oasis Retail Park); Harrogate (Victoria Shopping Centre); Leeds (Shopping Plaza and City Exchange Offices); Liverpool (Clayton Square Shopping Centre); London (West 12 Shopping and Leisure Centre at Shepherds Bush); Stafford (Guildhall Shopping Centre and Gaolgate Place Shopping Centre); and Worcester (Cathedral Plaza). This portfolio was independently valued as at 31 March 2005 at £566.7m, based on current annual net rental income of £30.4m and current estimated annual net rental value of £40.7m. The acquisition of Tops Estates will strengthen further Land Securities’ position in the retail sector and the shopping centres being acquired offer Land Securities asset management and development opportunities to create value. In particular, the Clayton Square Shopping Centre consolidates Land Securities’ position in Liverpool; Tops Estates’ sites in Corby provide a short- and long-term development opportunity; and the properties in Leeds provide Land Securities with an entry into one of the top 10 city centre retail markets in the UK. Land Securities will also continue to deliver the asset management programmes already initiated in Stafford, Harrogate, Worcester and Shepherd’s Bush. 1.0 Chairman’s Statement continued Board and senior management changes As reported at the half year Francis Salway, who joined the Company in 2000, assumed the role of Group Chief Executive at the Annual General Meeting on 14 July 2004, succeeding Ian Henderson who retired on that date. We would like to reiterate our thanks to Ian for his outstanding contribution over the past 30 years. Mark Collins, previously Chief Executive Portfolio Management, was appointed Chief Operating Officer and now has responsibility for new business development, Group operations and Urban Community Development (including projects such as Kent Thameside). Mike Hussey assumed the position of Managing Director, London Portfolio and was appointed to the Board in September. Richard Akers was promoted to the role of Managing Director, Retail and we announced his appointment to the Board on 17 May 2005. During the year we were pleased to appoint Bo Lerenius, Group Chief Executive of Associated British Ports Holdings PLC, and Alison Carnwath to the Board as non-executive directors. Our people The Group has changed substantially over the last few years. We have continued to implement our new strategy and been careful to ensure we have the skills and resources needed to sustain our success. I would like to offer my thanks and appreciation for the hard work and commitment shown by everyone in the Group over the last year. Their achievements speak for themselves. Outlook Sustained demand from investors for commercial property continues to establish it as a mainstream asset class. This position may be further enhanced by the introduction of REITs which, by removing tax inequalities, may bolster the attractiveness of quoted real estate and other indirect investment vehicles. Over the year investor demand has driven property yields down further, which has increased capital values. However, we believe that this trend has now largely run its course with the result that future growth in asset value will be more dependent on rental growth and success in securing lettings. In this environment of lower yields, we believe that our development and asset management skills, together with our ability to grow our outsourcing business, will be key to the creation of attractive returns for our shareholders. The London office market is showing evidence of a recovery as occupier demand improves, particularly in the West End. While the operating environment for retailers is more challenging, we believe the retail property market should be resilient for as long as unemployment levels remain low and earnings remain stable. The property outsourcing market continues to expand as occupiers recognise its core attractions of price certainty, risk transfer and customer service. Against this market background, we have moved the business into a position of strength from which it will benefit from these conditions. We have positioned the retail portfolio to concentrate primarily on more dominant assets; established a substantial London office development pipeline and engineered the London portfolio to benefit from rental growth. We have also created a market-leading position in property outsourcing. As demonstrated by the substantial increase in this year’s dividend, we remain confident in the future. Land Securities Annual Report 2005 15 1.1 Operating and Financial Review Andrew Macfarlane Group Finance Director Francis Salway Group Chief Executive Table A – UK core commercial property markets UK institutions Overseas investors UK listed property companies Land Securities Other Total listed property companies UK unlisted property companies Unlisted and pooled funds Limited partnerships Traditional estates and charities UK private investors Other Investors Total investment property Owner occupiers* Total UK commercial property* £bn 73 37 8.2 8.2 27.8 27.8 36 37 20 18 13 8 12 254 235 489 % 14.9 7.6 1.7 1.7 5.7 5.7 7.4 7.6 4.1 3.7 2.6 1.6 2.4 51.9 48.1 100 Source: “IPF: The size of the UK Commercial Property Market”, values at end 2003, (for all figures except Land Securities’ data) and Land Securities’ year end 2004 valuation. *Excludes property owned by government 16 Land Securities Annual Report 2005 Operating and Financial Review Introduction Land Securities has had an excellent 12 months, performing well in all areas of the business. Across the Group there is a sense of real achievement as we deliver a very strong performance from our investment portfolio, build and let our development programme and grow our property outsourcing business. We have restructured the business to focus on our market-leading positions in retail, London and property outsourcing and improved the debt structure for the Group. At the same time the commercial property industry as a whole is undergoing a renaissance as Government, investors and the wider public increasingly recognise the role our industry plays in the economic success of the country. A structural shift in the investment property market, upon which we commented last year, has come a step closer. We were very pleased with the positive response from Government in respect to the introduction of REITs as outlined in the last Budget statement. The Group has benefited from a strong investment market, improving central London occupier demand, increasing demand for property outsourcing and from our focus on driving returns from our investment portfolio. This has resulted in a return on capital of 17.3% (2004: 11.5%), more than 9% higher than our cost of capital. Return on equity was 11.3% (2004: 13.4%) which improves to 21.3%, if the exceptional charge relating to the debt restructuring is excluded. Competitive environment and business planning Land Securities operates in the UK primarily within the commercial property markets. Our activities include investment, development and the provision of commercial property accommodation and associated services. The market is diversified and, as illustrated in Table A, ownership is fragmented. In a fragmented market we need to be able to exploit our competitive advantages of financial strength, scale, specialist market expertise and our relationships with occupiers in order to maximise shareholders returns. We have now focused our activities almost entirely on three core markets where we have a market-leading position and where the strength of our relationships with customers will help drive outperformance. Our financial strength enables us to transact quickly and efficiently. Together the value of retail and London office investment property markets is some £187bn, and represents some 74% of the total UK commercial market, of this Land Securities’ ownership is 4.8%. As compared to Continental Europe and the United States, the UK commercial property market is characterised by supply side constraints caused by a more stringent planning regime and greenbelt restrictions around our major conurbations controlling land supply. Our share of the retail and London investment markets is summarised in Table B on page 18. We benefit from low asset concentration risk with our largest property representing only 3.5% of the value of the combined portfolio and an average investment property lot size of £48.4m. Land Securities has £5.3bn invested in retail property Bullring, Birmingham Annual Report 2005 17 1.1 Operating and Financial Review continued Property equivalent yield vs gilts 14 12 10 8 6 4 2 0 Jan 87 Jan 89 Jan 91 Jan 93 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Property yield 5-15 year gilts yield Note: Property yield is all-sector true equivalent yield Table B Retail Standard shops outside London Central London shops Shopping centres Retail warehouses All other retail Total retail Office Central London All other UK Office parks Total offices Standard industrial Other Total Total UK £bn Land Securities £bn 21 9 53 35 7 125 63 25 11 99 30 – 254 0.4 0.9 2.5 1.5 – 5.3 3.6 0.1 – 3.7 0.1 0.3 9.4 Source: “IPF: The size of the UK Commercial Property Market”, values at end 2003, (for all figures except Land Securities’ data) and Land Securities’ year end 2005 valuation. 18 Land Securities Annual Report 2005 Investment property has performed very well over the past few years, driven by investor recognition of its good returns compared to other asset classes. The macro-economic background which drives the performance of the commercial property investment market remains unchanged. Interest, inflation and employment rates have remained stable during the year. This has resulted in a competitive investment market and the yield shift which was evident in 2003/04 continued throughout 2004/05. While this has been of benefit to us, with improved property values and a profitable sales programme, it has made it more challenging to acquire assets which fulfil our return criteria. As a result we have allocated more of our capital to development and property outsourcing activities and sought to acquire income-producing investment properties with stock-specific attributes that we can exploit through our market expertise. We do not believe that yields, as a whole, will strengthen much further now that the margin of property yields over the cost of debt and gilt yields has narrowed. We would not however rule out further yield compression for well-let investment property, if interest rates were to fall. In an environment of low property yields, outperformance will increasingly be determined by leasing capabilities, asset management and development skills as well as exposure to new growing property markets. The bulk of our development programme comprises complex schemes in town and city centres across the UK and we continue to exploit opportunities within our existing portfolio. We benefit here from our expertise and our reputation for delivery which, we believe, few companies can match in the UK. Property outsourcing has emerged as a new market in the UK and we have developed a market- leading product and reputation. Property outsourcing provides us with access to the wider pool of commercial property held by owner-occupiers. At the same time it provides clients with an integrated property solution which combines property accommodation with associated property services. At present there are less than half a dozen companies offering a property outsourcing solution similar to that provided by us, since the need to create a national infrastructure to support the delivery of a major property outsourcing contract creates a high barrier to entry. However, competition exists in a number of disaggregated forms, examples of which are sale and leaseback transactions with separate facilities management contracts. The estimated total value of the property outsourcing market is approximately £511bn, of which we believe the addressable market is some £110bn. We estimate that our current share of this addressable market, including Telereal, is around 3%. In the London office market, the downturn in the occupational market between 2001 to 2003 can be predominantly attributed to employment factors. Similarly, its gradual recovery is being driven primarily by a resumption of employment growth allied to a moderating of the amount of new developments starting on-site. The London office markets have also benefited from some older, surplus office buildings being converted to alternative uses. We expect these trends to continue, resulting in progressive rental growth for the London office market over the medium-term, but with the recovery lagging in the City owing to higher current vacancy rates. 1.1 Operating and Financial Review continued Retail property markets in the UK benefit from a highly restrictive planning regime which constricts supply, while demand for accommodation from retailers has been driven in recent years by their desire to operate out of more efficient units, generally larger in size and of regular shape. These drivers of demand will continue, although the slowing of consumer expenditure will moderate levels of demand from retailers to a degree. However, so long as disposable incomes remain stable and unemployment is low, we expect the retail property market to be resilient. The occupational demand for property is driven by the health of the economy and an organisation’s desire either to grow or contract its operations and we collaborate with our occupiers to ensure that we can assist with their requirements. We have more than 2,000 occupiers and this diverse base protects us since no single occupier provides more than 2.9% of the Group’s gross rental income, with the exception of the Government which now accounts for some 9.2%. We have, therefore, examined the Government’s efficiency review proposals carefully and since then have worked closely with certain Government departments on their plans. We believe that the review may create further opportunities for our property outsourcing business. In order to execute our strategy and ensure we achieve our aim of delivering attractive, sustainable returns for shareholders in what can be cyclical markets, we conduct a rigorous business planning process. We have in place a five-year business plan and balanced scorecards both for the Group and individual business units which are reviewed and updated every six months. These reviews measure operating as well as financial performance and allow us to refine our plans against the prevailing operating environment, ensuring an allocation of capital which responds to our view of market conditions and opportunities. Financing strategy and debt restructuring Before commenting in greater detail on the financial results, we report on our financial strategy and debt restructuring since this is relevant to an understanding of the results. Table C summarises the accounting implications of the transaction. Our financial strategy is to maintain an appropriate net debt to equity ratio (gearing) to ensure that good asset-level performance is translated into good returns for shareholders. We manage our gearing according to our perception of market cycles, investment opportunities and so as to maintain an efficient capital structure. Given our view of the prospects for capital growth in our core markets, it is our intention to increase gearing for at least the next year as we invest in our development programme, Land Securities Trillium and continue to seek attractive investment properties to add to our portfolio. Our proposed acquisition of Tops Estates will, for example, add some £550m of investment properties and debt to our balance sheet. As well as having the right level of debt in the business we also need to ensure that we have flexible debt that can support our business strategy. We therefore put in place a new debt structure for the Group in November 2004 following approval from our bond and debenture holders. As a result of the transaction we issued £2.3bn of new bond debt at an average rate of 5.35% and made a £77.2m balancing cash payment to bondholders who were unable to hold the new bonds. Table C At 31/03/04 Bond debt £m 1,800.0 Payments to holders unable to accept new bonds Net costs of redeeming the private debentures due in 2008 and 2008/13 Exceptional costs £m Exceptional interest £m – – – – – 77.2 1.8 27.5 – – – Incentive payments Net Increase in nominal value of debt (being £575.5m less payment to ineligible bondholders) Transaction costs and commitment fees FRS4 costs on old debt, now written off Cost of cancellation of interest rates swaps Exceptional costs of refinancing 498.3 – 498.3 – – 14.8 9.8 – 10.7 2,298.3 14.8 625.3 – 42.0 14.8 667.3 Land Securities Annual Report 2005 19 1.1 Operating and Financial Review continued 1 The borrower under the Trillium Secured Bank Loan is Trillium (PRIME) Property GP Limited. 2 Limited to the higher of (i) £150m and (ii) 2% of total collateral value. 3 The borrower under the Secured Bank Facility is LS Property Finance Company Limited. Medium-term notes are issued from Land Securities Capital Markets PLC. 20 Land Securities Annual Report 2005 We implemented this alternative approach to financing the business to improve our operational and financial flexibility and to enhance the position of our noteholders by utilising the credit strength inherent in our investment portfolio. Land Securities Group PLC Non-restricted Group Asset transfers & inter-co funding permitted Secured Group LS Trillium (1) Telereal Other joint ventures & other assets Dedicated third party funding or loan from Secured Group Land Securities PLC Subsidiaries of Land Securities PLC Unsecured loans (2) Secured loans/notes etc.(3) Other lenders Secured lenders Fixed and floating charges over security group assets to secure all secured debt The structure created a security pool (the Secured Group) which grants our debt investors security over £7.4bn of investment properties at 31 March 2005, representing about 85% of the investment portfolio (excluding joint ventures). About £2.5bn (excluding Telereal) of the Group’s property assets, mainly comprising Land Securities Trillium properties, our joint venture holdings and certain other assets, are outside the Secured Group. As a result of this structure we have the flexibility to finance these assets separately without impacting upon the credit rating of the debt issued by the Secured Group. The new debt structure provides significant future flexibility which ensures our ability to buy and sell assets easily and to maintain our development programme. The secured debt structure has a tiered covenant regime that gives the Group flexibility to run its business, while increasing the protection available to debt holders if gearing rises materially. While loan to value and interest cover in the Secured Group are less than 65% and more than 1.45 times respectively, we retain substantial operational flexibility. If these limits are exceeded, operational restrictions increase and would act as an incentive to reduce gearing. Our loan to value ratio at the year end in the Secured Group was 35.4%, well below the 65% threshold. In addition to issuing £2.3bn of new notes, a further £77.2m was paid in cash to debt investors who could not accept the new bonds. The total nominal value of the Group’s bond debt has increased by £0.5bn as a result of this transaction. This compensated debt investors for the reduction in the rate of interest payable on the bonds, which fell from an average of 8.5% to 5.35% on exchange. The increase in the face value of the Group’s debt, together with the additional cash payments to non-eligible holders and the costs of the transaction, has resulted in a significant £682.1m exceptional accounting charge incurred during the second half of the year, including £42.0m of costs incurred to close out our interest rate hedge portfolio (see Hedging below). A further £12.7m of transaction costs will be deferred and amortised over the life of the underlying debt. Land Securities has £3.6bn invested in London offices 30 Gresham Street, EC2 Annual Report 2005 21 1.1 Operating and Financial Review continued 22 Land Securities Annual Report 2005 With the exception of transaction costs, incentive payments to noteholders and swap cancellation costs the exceptional charge is not a 2004/05 cash outflow and has had no impact on the dividend policy. Most of this exceptional loss is fully allowable for tax. A £25m annual initial reduction in interest payments on bond debt and immediate savings in tax more than offset the cost of the transaction and the net present value of the higher amounts payable on the ultimate maturity of the bonds. Although reported as an exceptional loss, the transaction is value creative and earnings enhancing. In addition, the Group now has lower future cost of financing on new debt raised. As part of the debt restructuring, we also renewed our bank facilities. At 31 March 2004, the Group had £1.55bn of committed bank facilities which would have expired in the normal course in 2005 and 2006. We have replaced these facilities with a new £2.0bn committed five-year facility which is available to the secured group. Profits As a result of the factors explained in Financing Strategy and Debt Restructuring, the Group incurred a loss of £155.8m before tax for the year to 31 March 2005 (2004: profit £373.1m). Excluding the refinancing charge, profits before tax were £526.3m, a 41.1% increase on 2004. Revenue profit, which we use as the measure of the underlying profitability of the Group, was £401.1m, 29.7% higher than last year. The principal causes of the changes in profits are detailed in Table D. Table D Year ended 31/03/04 Debt restructuring exceptional loss (A) Debt restructuring interest saving (B) Increase in profit on disposal of fixed assets (C) Increase in profit on the DWP outsourcing contract (D) Increase in profit in the Telereal outsourcing joint venture (E) Construction profits (F) Reduction in capitalised interest (G) Other factors (H) Year ended 31/03/05 (Loss)/ profit before tax £m 373.1 (682.1) 10.3 61.3 36.1 32.7 11.6 (15.4) 16.6 (155.8) Revenue profit* £m 309.2 – 10.3 – 36.1 32.7 11.6 (15.4) 16.6 401.1 *Revenue profit is pre-tax profit adjusted to exclude the impact of exceptional items and profits on the disposal of fixed assets. (A) Exceptional costs of the debt restructuring include the increase in the nominal value of the old debt, the costs of closing out the interest rate swap portfolio and associated fees and costs. (B) Reduction in interest charges as a result of the debt restructuring in November 2004. (C) The unusually high level of profits on disposal reflects the asset swap with Slough Estates and the sales of Bowater House, SW1 and Media Village, White City. (D) The Employment Services extension to the DWP contract was operational from November 2003 and significant start-up losses were incurred in 2003/04. The extension is now profitable, generating a significant improvement in the DWP contract profits, year-on-year. (E) Telereal has reduced costs and interest expense while also producing significant profits from the sale of trading properties. (F) Primarily first recognition of profits from the construction contract to build Bankside1 for IPC. 1.1 Operating and Financial Review continued (G) Capitalised interest is lower than in 2003/04 because we completed work at 30 Gresham Street, EC2; Media Village, White City; Table E – Net assets and Empress State, SW6. (H) Other factors, including rental growth, new outsourcing contracts, etc. Net assets At the year end, adjusted diluted net assets per share were 1460p, up 9.7% on last year. However, this figure has been reduced by 102p due to the exceptional cost of our debt financing. Before exceptional costs, therefore, our underlying adjusted net asset value grew by 17.4%, driven by a valuation surplus of £871.5m, equivalent to a 10.3% uplift in the combined portfolio book value. The increase in net assets is analysed in Table E. Cash flow and net debt We continue to recycle our capital to maximise returns and, during the year, we received cash totalling £734.1m from property disposals (including the disposal of Media Village, White City), a £65.4m distribution from Telereal and £146.3m from the Metro Shopping Fund. The Group reinvested £640.7m into property acquisitions and development and a further £122.5m into its property outsourcing activities. At 31 March 2005, the Group’s net debt was £2,923.1m (2004: £2,435.8m) and the increase in net debt of £487.3m during the year is explained in Table F. Although we have continued to invest in the business over the year, gearing has only increased slightly. This reflects the sale of two significant assets (Bowater House, SW1 and Media Village, White City) immediately before the year end and the increase in net assets caused by our strong valuation uplift. Details of the Group’s gearing are set out in Table G which includes pro- forma information if our notional debt in joint ventures is taken into consideration. The information is pro-forma because lenders to our joint ventures have no recourse to the Group’s balance sheet for repayment of the debt. Hedging Land Securities has used interest rate swaps for many years to manage its interest rate exposure. Over time we accumulated a portfolio of long-dated swaps, some extending up to 25 years, which had the effect of fixing the interest rate on substantially all of the Group’s debt. As part of our review of the Group’s financing arrangements we also revisited the appropriateness of this hedging strategy. We concluded that with property and interest rate cycles typically of four to seven years duration it would usually be unnecessary to hedge beyond this timeframe. We have set a target for the Group to have approximately 80% of planned debt for this period at fixed rates of interest and 20% floating, although we may choose to fix a higher percentage of this debt, depending upon our view of short-term (ie one to two year) interest rates. We rearranged our hedge portfolio in March 2005, crystallising a £42.0m loss which has been treated as an exceptional interest charge. New hedges are being put in place at lower average fixed rates than the previous portfolio. Net assets at beginning of year (Loss)*/profit after tax Dividends Valuation increase – Group – Share of joint ventures Other Increase in net assets Year ended 31/03/05 £m Year ended 31/03/04 £m 6,038.5 5,563.1 (35.8) 288.3 (202.5) (173.2) 842.2 400.7 29.3 6.2 (35.1) (46.6) 598.1 475.4 Net assets at end of year 6,636.6 6,038.5 *Includes effect of debt restructuring in the year to 31/03/05 Table F – Cash flow and net debt Net cash inflow from operating activities after interest and tax Net capital expenditure Cash inflow from Telereal Net cash inflow from other joint ventures Payment of dividends Purchase of B shares Other items Cash inflow before non-cash exceptional charge Increase in nominal value of debt on refinancing Year ended 31/03/05 £m Year ended 31/03/04 £m 122.6 193.2 (48.4) (48.8) 65.4 179.6 43.4 – (175.5) (167.5) (8.4) (22.0) 11.9 19.0 11.0 153.5 (498.3) – (Increase)/decrease in net debt (487.3) 153.5 Opening net debt Closing net debt (2,435.8) (2,589.3) (2,923.1) (2,435.8) Table G – Gearing 31/03/05 % 31/03/04 % Gearing – on balance sheet debt 44.0 40.5 Gearing – as above plus share of debt in investment property joint ventures 45.4 40.5 Gearing – as above plus share of debt in all joint ventures 61.2 58.2 Land Securities Annual Report 2005 23 1.1 Operating and Financial Review continued Taxation Effective tax rate Ordinary £m Exceptional £m Total £m Profit/(loss) before tax 401.1 (556.9) (155.8) Tax (charge)/credit (95.0) 215.0 120.0 Effective tax rate(%) 23.7 (38.6) (77.0) Taxation As a result of this year’s exceptional loss there will be no corporation tax payable for the year. Losses of £126.0m not relieved at 31 March 2005 are being carried forward for relief in future years. The Group’s effective tax rate was a credit of 77% of pre-tax losses compared with a charge of 22.7% last year. The effective tax rate on ordinary activities was lower than the standard rate of 30% primarily as a result of the release of certain prior year provisions no longer required. International Financial Reporting Standards International Financial Reporting Standards (IFRS) will first apply to the Land Securities Group for the year to 31 March 2006 and will be adopted when we report our interim results for the period to 30 September 2005. We are well advanced with our preparations for IFRS and in late June we will re-present an extract of the results for the year to 31 March 2005 under IFRS, with reconciliations to current GAAP. The main effects of IFRS for Land Securities will be: Recognition of investment property revaluation surpluses and deficits in the income statement and the associated deferred tax liability in the tax charge and balance sheet A change in the accounting treatment for the debt restructuring, which will result in the reinstatement of the nominal value of our old debt on the balance sheet and the amortisation up to the new, higher redemption amounts of the new debt over the life of the bonds. The amortisation charge will be treated as additional (non-cash) interest in the profit and loss account. The effect will be to under-report the Group’s actual liabilities on the face of the balance sheet. The interest charge in the income statement will exceed the actual cash interest that we will pay Our interest rate hedge portfolio may not meet the strict requirements for hedge accounting under IAS39. Therefore, we may be required to revalue certain hedges each time we report and account for the cost or profit that would arise were the hedges to be terminated The potential that a small number of leases will need to be classified as finance leases and accounted for as such Dividends will be recognised effectively when paid, rather than when proposed. We held a presentation on IFRS in February 2005, which is available on our website www.landsecurities.com/investorrelations. The IFRS presentation to be held in June will also be available on our website as soon as it has taken place. We will be modifying our usual definitions of adjusted earnings per share and net asset value per share to deal with some of the distortions introduced by IFRS. Pension schemes The Group operates a number of defined benefit pension schemes. These schemes are closed to new members. At 31 March 2005 the schemes had a combined deficit, net of deferred tax, on an FRS17 basis of £7.6m (2004: £12.0m). During the year the Group made a further special contribution of £10.0m to its principal defined benefit pension scheme and is maintaining an enhanced contribution rate to address the small deficit. 24 Land Securities Annual Report 2005 Land Securities Trillium contributes £1.1bn to the Group’s gross property income DVLA headquarters, Swansea Annual Report 2005 25 1.1 Operating and Financial Review continued Investment property business The performance of the £9.4bn combined investment portfolio is the responsibility of our Retail and London Portfolio businesses, with property management and project management skills being provided by the professional services departments headed up by the Chief Operating Officer. The portfolio valuation statistics are divided according to the categories set out by IPD. Retail Our Retail business is responsible for investment, asset management and development of the Group's shopping centres, shops and retail warehouse parks, including the assets held in the Group's three retail joint ventures, the Scottish Retail Property Limited Partnership, the Metro Shopping Fund Limited Partnership and the Buchanan Partnership. The combined retail portfolio primarily comprises 21 shopping centres, including two designer outlets, as well as 26 retail warehouse parks. Shopping centres £2,553.9m Joint ventures £540.7m Retail warehouses £1,481.7m Investment portfolio £2,013.2m Other in-town shops £445.6m Joint ventures £0.9m Investment portfolio £444.7m 26 Land Securities Annual Report 2005 Please note graphs are not to scale 1.1 Operating and Financial Review continued London Portfolio Our London Portfolio business is responsible for the London office portfolio and takes day-to-day responsibility for the performance of the Central London retail properties with the exception of the £51.8m Notting Hill retail and office assets held in the Metro Shopping Fund. The London Portfolio includes 910,000m2 of office accommodation and 110,000m2 of retail space. London retail £860.1m Joint ventures £39.3m Investment portfolio £820.8m Inner London offices £423.0m Joint ventures £12.5m Investment portfolio £410.5m Midtown offices £352.0m West End offices £1,737.2m City offices £1,085.5m Please note graphs are not to scale Please note graphs are not to scale Land Securities Annual Report 2005 27 1.1 Operating and Financial Review continued Investment property business – valuation We were very pleased with performance this year. The combined portfolio, which includes our share of joint ventures, showed a 10.3% increase in value to £9.4bn while the wholly-owned investment portfolio showed a 10.7% increase in value to £8.8bn. Investment portfolio – financial performance Rental income Year to 31/03/05 £m Rental income Year to 31/03/04 £m Open market value % Change 31/03/05 £m 31/03/04 £m Retail Shopping centres and shops Retail warehouses London retail London offices Industrial Other Like-for-like investment portfolio(1) Completed developments Purchases Sales, restructured interests and trading properties Development(2) Investment portfolio Joint ventures Combined portfolio 91.9 61.2 39.9 90.9 58.1 38.8 169.0 175.7 4.6 8.6 375.2 34.8 34.1 34.3 14.2 492.6 25.9 518.5 4.9 8.7 377.1 19.5 8.6 92.5 16.8 514.5 0.6 515.1 1.1 5.3 2.8 (3.8) (6.1) (1.1) (0.5) – – – – – – 1,478.9 1,361.9 676.0 1,343.1 1,154.4 625.5 2,311.5 2,189.1 83.0 126.5 72.4 115.6 6,037.8 5,500.1 974.3 904.2 – 857.2 777.2 221.7 880.6 527.1 8,773.5 7,906.7 615.3 243.5 Valuation surplus % 9.9 16.6 8.0 5.8 13.5 8.9 9.5 24.6 4.3 – 12.3 10.7 5.0 0.7 9,388.8 8,150.2 10.3 (1) Properties that have been in the investment portfolio for the whole of the current and previous financial year. (2) Development programme including Kent Thameside. The development programme comprises projects which are completed but less than 95% let, developments on site, committed developments (approved projects with the building contract let); and authorised developments (projects approved by the Board, but for which the building contract has not yet been let). The like-for-like investment portfolio showed a 9.5% increase in value over the period with the strongest growth from retail warehousing at 16.6%, shopping centres and shops at 9.9% and offices at 5.8%. This uplift takes account of the negative effect of the abolition of disadvantaged area Stamp Duty relief of £60.3m in the like-for-like portfolio following the recent Budget changes. This increase in value was achieved as a result of both rental growth in many sectors combined with yield compression. After adjusting for units materially altered during the year, rental values for retail warehousing have grown at 6.7%, shopping centres and shops at 2.2% and London offices at 2.6% producing a total rental growth for the like-for-like portfolio of 3.3%. The average equivalent yield for the whole like-for-like portfolio is now 6.0%. In terms of the net reversionary potential of our like-for-like portfolio, the over-rented element of our London offices has reduced as rental growth begins to feed through, helping to increase the overall net reversionary potential for the like-for-like portfolio to 2.9%. Void levels across the like-for-like portfolio were 3.0% at the year end, compared with 1.9% at the start of the year. The mean weighted unexpired lease term for the like-for-like portfolio is 9.0 years (2004: 11.0 years) assuming all lease breaks occur. 28 Land Securities Annual Report 2005 1.1 Operating and Financial Review continued Investment and development portfolio valuation movements Open market value at 31/03/04 Purchases Sales Net impact of exchange of properties with Slough Transfers into development Transfers out of development Transfers to partnerships and joint ventures Transfer to stock and surrender premiums received Capital expenditure Valuation increase Capitalised interest Other Investment portfolio at 31/03/05 Our share of joint ventures Combined portfolio as at 31/03/05 (pro-forma) Investment £m Development £m Total £m 7,172.6 734.1 7,906.7 392.7 (376.5) (12.2) (151.0) 485.4 (102.6) (50.7) 37.8 622.2 – 8.2 8,025.9 615.3 8,641.2 – (3.3) (92.4) 151.0 (485.4) – – 205.4 220.0 17.5 0.7 392.7 (379.8) (104.6) – – (102.6) (50.7) 243.2 842.2 17.5 8.9 747.6 8,773.5 – 615.3 747.6 9,388.8 Investment We had an active year, which included the property swap with Slough Estates, where we exchanged £345.3m of industrial property for four retail assets valued at £363.5m. Including these properties, during the year we sold a total of £763.1m of property out of the investment portfolio (net of sale costs) generating FRS3 profits of £82.4m (13.4% above book value) while buying £786.1m of investment properties (including assets bought into joint ventures). The average yield on the properties sold was 5.2% and the average initial yield on the assets acquired was 5.9%. Excluding the property swap with Slough Estates, the purchase activity was principally accounted for by nine London office investments, which were acquired for an aggregate of £340.2m (including acquisition costs) to show an average yield of 6.5% on an average passing rent of only £282.50 per m2. Development programme Development activity produced a valuation surplus of £220.0m in 2004/05, a 21.7% increase over the course of the year with a strong contribution from our London office projects. Six schemes were transferred into the investment portfolio from the programme. These generated rents of £9.5m in the current year and would contribute £23.3m to the profit and loss account in a full year. The significant schemes transferred were Empress State, SW6 and 30 Gresham Street, EC2. In addition a further seven developments were sold. Schemes transferred in the year to 31 March 2004 contributed £25.7m during the year to 31 March 2005. We spent £205.4m, excluding capitalised interest, on the programme, with most of the expenditure arising from Cardinal Place, SW1. Capitalised interest was only £17.5m during the period (2004: £25.4m) because significant developments on site in the year to 31 March 2004, including 30 Gresham Street, EC2 and the Bullring, Birmingham, reached practical completion during the previous financial year. We estimate that we will incur cash costs to complete the programme (excluding interest) of some £591m. In addition, capital expenditure on proposed developments could total £826m (excluding Kent Thameside) if a decision is made to proceed. These proposed schemes, which are held as part of the investment portfolio, have a current carrying value of £220.1m. Development estimated future spend 400 350 300 250 200 150 100 50 0 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Actual Actual Proposed developments Proposed developments Development programme Development programme Outstanding capital expenditure Programme Proposed Total 31/03/05 £m 31/03/04 £m 591 826 263 870 1,417 1,133 Land Securities Annual Report 2005 29 30 Land Securities Annual Report 2005 Using our expertise We have focused our activities on areas of the market where we can benefit fully from the expertise of our people and section two of the Operating and Financial Review demonstrates how we are using this expertise to create value. Here, we explain the performance and activity of our Retail, London and Property Outsourcing businesses as well as providing an update on our Urban Community Development activities. 32 34 40 46 54 2.0 Customer Service 2.1 Retail 2.2 London Portfolio 2.3 Property Outsourcing 2.4 Urban Community Development Land Securities Annual Report 2005 31 2.0 Customer Service Customer Service Customer satisfaction surveys – Shopping centres Objective Results Results Results 2004 2003 2002 Target Understanding needs 3.26 3.71 3.66 3.80 Communication 3.49 3.92 3.94 3.90 Willingness to recommend 80% 89% 97% 92% Responsiveness n/a 3.90 4.07 3.80* Overall satisfaction 3.71 3.81 3.77 3.75* Customer satisfaction surveys – London managed offices Objective Results Results Results 2004 2003 2002 Target Understanding needs 3.42 3.37 3.66 3.45 Communication 3.46 3.57 3.68 3.65 Land Securities has more than 2,000 occupiers and clients across the Group. With some 300 million customer visits being made each year to our retail properties and the management of office accommodation for over 320,000 people, customer service is important to all our business activities. In 2004/05, Land Securities continued its annual survey of investment portfolio occupiers and property outsourcing clients. Overall the results were strong, showing improvements in many areas. Shopping centres overview Our annual shopping centre survey, carried out independently, is conducted across our retail customer base. As well as surveying the retail occupiers at 11 shopping centres we also conduct our survey with the retailers’ property managers at head office, thus ensuring that we understand retailer requirements at a local, regional and national level. Willingness to recommend 74% 89% 94% 92% Key findings Responsiveness n/a 3.67 3.48 3.80* Overall satisfaction 3.50 3.53 3.70 3.75* Scale 1 = very poor, 2 = poor, 3 = average, 4 = good, 5 = excellent, * = by 2006 Improvements in core values of customer service and innovation Significant improvement in responsiveness of property management Facilities services and amenities continue to maintain a high standard Increase in perception of value for money for marketing activity. London managed offices Our annual London office survey, carried out independently, is conducted across a range of office occupiers. Given the nature of office occupation this may be an occupier’s facilities manager or property manager or an individual business’ director. Key findings Evidence of improved customer satisfaction mainly linked to increased communication Progress in demonstrating understanding of occupier needs Service levels across the portfolio are inconsistent and faster response is seen as a priority Building security, heating ventilation and air conditioning continue to be the prime concerns of many occupiers The efforts we are making to change to a service culture are beginning to be recognised by occupiers. Property outsourcing Through Land Securities Trillium we manage extensive outsourced property portfolios which provide accommodation to more than 250,000 office occupants. Customer satisfaction plays a major role in ensuring the success of these contracts and customer service surveys are undertaken regularly to monitor performance in this area. We completed the third annual DWP customer satisfaction survey to assess their level of satisfaction and saw an improvement of almost 4% on last year’s result. The latest BBC survey showed an increase of 5% on the previous year, the greatest increase in satisfaction to date. We believe that there is a direct relationship between customer satisfaction and the levels of performance penalties we incur. Penalties have continued to decrease as customer satisfaction levels rise. Customer satisfaction survey DWP DWP DWP % 100 BBC BBCBBC % 100 80 60 40 20 0 80 60 40 20 0 2002 2003 2004 2002 2003 2004 32 Land Securities Annual Report 2005 We have some 250,000m2 of planning permissions for retail led development schemes White Rose, Leeds Annual Report 2005 33 2.1 Retail IRR +++ Higher returns from development activity IRR ++ IRR + Innovative products accessing immature markets Diversified portfolio in sectors with supply side constraints WACC 7.5% Active management of balance sheet and effective recycling of capital 34 Land Securities Annual Report 2005 Retail Strategy Retail will contribute to the achievement of the Group’s aims through a strategy of: Investing in dominant retail assets which will benefit from active management to create growth in rental income and asset value Regeneration and renewal of the portfolio through an active development programme, creating new assets of a quality seldom available on the open market Delivering market leading levels of customer service and property management ensuring that our centres achieve an increasing share of retail demand and shopper visits Objectives During 2004/05 our core objectives were to: Achieve investment portfolio total returns by sub-sector which exceed total IPD sector returns by more than 1.0% per annum Recycle low growth assets and increase our investment in shopping centres as opposed to high street shops Achieve 40,000m2 of development pre-lettings, including the key anchor retailers for our major schemes 2.1 Retail continued Achievements 17.6% 43,400m2 total return on Retail (excluding London retail) exceeding IPD benchmark returns by 1.2 percentage points in shopping centres and 0.1 percentage points in retail warehouses of development lettings reflecting continued strong demand from retailers for modern well-configured space £474.2m £273.1m of acquisitions which included three shopping centres and one retail warehouse park through the Slough Estates exchange of property of disposals which included Upper Precinct, Coventry, a retail park in Slough, retail and office holdings in Reading and a portfolio of high street shops £245.1m capital invested into joint ventures we formed the Metro Shopping Fund combining three London shopping centres with our Notting Hill retail holdings and acquired a 50% interest in the Buchanan Partnership Land Securities Annual Report 2005 35 £517.2m enterprise value of recommended offer for Tops Estates PLC post year end offer, which will add a further seven shopping centres to our portfolio 2.1 Retail continued Retail portfolio valuation Total retail (a) Combined portfolio valuation £4,481.2m £3,668.5m 31/03/05 31/03/04 Like-for-like investment portfolio valuation Rental income Gross ERV(b) Voids by ERV Running yield Shopping centres £2,840.8m £2,497.5m £153.1m £149.0m £181.7m £169.3m 2.3% 5.3% 1.8% 5.7% Combined portfolio valuation £2,553.9m £1,834.5m 31/03/05 31/03/04 Like-for-like investment portfolio valuation Rental income Gross ERV Voids by ERV Running yield Retail warehouses £1,160.5m £1,055.9m £73.2m £72.2m £82.1m £78.7m 2.3% 5.9% 1.0% 6.1% Combined portfolio valuation £1,481.7m £1,292.8m 31/03/05 31/03/04 Like-for-like investment portfolio valuation Rental income Gross ERV Voids by ERV Running yield £1,361.9m £1,154.4m £61.2m £58.1m £77.0m £69.1m 2.5% 4.8% 2.3% 5.2% Extract from combined portfolio analysis (a) The combined retail portfolio excludes £51.8m of value in relation to assets held in the Metro Shopping Fund (b) Annual estimated rental value Shopping centres £2,553.9m Retail warehouses £1,481.7m Other in-town shops £445.6m 36 Land Securities Annual Report 2005 Retail Market commentary Many retailers continue to expand their operations in spite of a competitive retail marketplace, which has been characterised by price deflation and slowing consumer expenditure. However, achieving this expansion has proved difficult for them since the supply of new well-configured shops in prime locations is limited. The strength of demand is evidenced by the good progress we have made in letting our development programme, with 43,400m2 of retail space let during the year. Against this background, rental value growth has slowed but we have been reassured by the reasonably strong performance of our own portfolio, with rental value increases on our shopping centres and particularly on our retail warehouse portfolio, reflecting the ever increasing popularity of out-of-town shops with consumers. The investment market has seen a record year for volume of transactions with demand remaining strong and broadly based in terms of type of investor. As a result, yields have moved in steadily over the year further boosting capital growth. On a like-for-like basis the retail portfolio performed well with a 13.0% valuation surplus in the year, voids of 2.3% and net reversionary potential of 11.8%. Investment Our retail investment strategy is to acquire assets which provide opportunities to benefit from active management, thereby creating growth in rental income and asset value. We will also seek to create new assets through development. In light of this strategy we have been refocusing our retail portfolio away from high street shops and are reinvesting into shopping centres and retail parks. Given the competitive nature of the investment market we have acquired investment property in off-market transactions, examples of which are the exchange of properties with Slough Estates and the Metro Shopping Fund. Since the year end the recommended offer for Tops Estates PLC could also add a further seven shopping centres to our portfolio. In an active year we concluded £474.2m of acquisitions including the Slough Estates retail portfolio and the Metro Shopping Fund. We also acquired Princes Square and Southgate in East Kilbride adding to the Scottish Retail Property Limited Partnership with The British Land Company PLC. We took advantage of the strong investment market and completed £273.1m of sales, including the net property contribution in the Bristol Alliance, our share of Martineau Place, Birmingham, Upper Precinct, Coventry, Twinches Lane Retail Park, Slough, our retail and office holdings in Reading, and a portfolio of eight high street shops. In September 2002 we entered into a conditional agreement to purchase a 32,600m2 shopping centre development in Maidstone. The centre is now 89% let and will be fully open in June. This has generated a significant valuation surplus over the year. Land Securities has 1,300 retail occupiers Gunwharf Quays, Portsmouth Annual Report 2005 37 2.1 Retail continued Shopping centres £204.2m Valuation surplus Our shopping centres are now valued at £2,553.9m, representing 27.2% of the combined portfolio 38 Land Securities Annual Report 2005 The Metro Shopping Fund As we reported at the half year we have entered into a limited partnership with the private property company, Delancey. The 50/50 partnership owns over 39,000m2 of retail space initially valued in total at £283.3m. The properties included in the partnership are Delancey’s Shopstop @ Clapham Junction, SW11, N1 Islington and Victoria Place SW1, together with our holdings in Notting Hill Gate, W11. We remain confident about growth prospects for retail properties in the London suburbs and are seeking to acquire further properties for this partnership. Exchange of properties with Slough Estates In December 2004 we acquired Buchanan Galleries, Glasgow (50% interest); the Lewisham Centre in South London; the Howard Centre in Welwyn and the Bishop Centre in Taplow from Slough Estates. The portfolio totals some 91,300m2 of retail space, (based on 50% share of Buchanan Galleries) and the rent roll was £20.4m at 31 March 2005. We are very pleased with the progress being made to integrate these within Land Securities’ portfolio and we have initiated work on reviewing development options on all four properties. Recommended offer for Tops Estates PLC Since the year end we have announced a recommended cash offer for Tops Estates PLC. Tops Estates is a specialist in town and city shopping centre company and its portfolio comprises seven shopping centres. In a very active and competitive investment market we see this as an opportunity to strengthen further our position in shopping centre investment with assets offering opportunities for active management and development. Review of activity – shopping centres and shops Asset management Rental growth across the shopping centre and shop portfolio is created through a high volume of smaller transactions which will include rent reviews, new lettings and lease renewals as well as reconfiguration of shop units and small extensions. During the year we entered into an agreement with Sainsbury’s at White Rose to create an additional four double-height shop units, totalling some 7,000m2 of space that we negotiated to take back from SavaCentre, which is being reformatted as a new look Sainsbury’s. We also completed new lettings at Gunwharf Quays to Karen Millen, Next, Animal, Boots, and LK Bennett, which contributed to an increase in retail turnover of 18.8% over the year. We achieved new lettings creating rental growth at Bullring and White Rose, our two largest properties, and also at Stratford, the best performing property in the shopping centre portfolio. Development Our development activities provide us with opportunities to renew our investment portfolio with assets which would be difficult to obtain in a strong investment market. In Canterbury we are on target to open the final phase of the Whitefriars scheme in July. In total, the scheme comprises some 37,160m2 of retail and 3,260m2 of residential accommodation. We have now let all but two of the retail units in the new scheme to retailers including Tesco, Zara, H&M and River Island. We understand from the retailers already open that trading is above their initial expectations. 2.1 Retail continued In January we started the 37,360m2 redevelopment of Princesshay, Exeter. We have completed the demolition of properties in Bedford Street, started demolition of the main site and completed the initial archaeological investigations. The scheme is to be anchored by a new Debenhams department store and is now 35% pre-let or in solicitors’ hands to retailers including Next, Virgin Retail and Top Shop. We expect to open the scheme in Autumn 2007. Retail warehouses £213.5m Valuation surplus Our retail warehouses are now valued at £1,481.7m representing 15.8% of the combined portfolio At Cardiff, where we are planning the development of St Davids 2, an 85,000m2 scheme, in partnership with Capital Shopping Centres, we agreed Heads of Terms with John Lewis for the department store, its first in Wales. We continue with the plans for Bristol, a 140,000m2 mixed-use scheme incorporating 83,610m2 of retail which we are developing in a 50/50 partnership with Hammerson plc. We have exchanged contracts on the anchor store letting to House of Fraser, and we have agreed further lettings for major stores and for the cinema. On a smaller scale we are progressing the 5,200m2 Bradwells Court scheme in Cambridge which is now included in our development pipeline. We achieved a resolution to grant planning permission for this nine-unit scheme in October 2004 and expect to start on site in early 2006. Review of activity – retail warehouses We continue to respond to new demand by upgrading and reconfiguring our parks to incorporate more high street retailers where possible and during the year we completed or refurbished some 42,000m2 of accommodation. This activity was a key driver of the high level of rental value growth experienced on our portfolio over the year. Key achievements were: The acquisition, through the transaction with Slough Estates, of the 9,600m2 Bishop Centre, Taplow, a garden centre which has evolved into out-of-town retail and which we believe offers considerable development potential The sale of Slough Retail Park for £75m, where we had achieved a 46% growth in rents to £385.0 per m2 over a five year period The reconfiguration of some 15,150m2 and upgrading our parks at Swansea, Manchester and West Thurrock and completing new lettings to Currys, Marks & Spencer, Blacks Outdoor, Furniture Village and others The completion of the 1,410m2 Tesco extension at Bexhill where we have a further 2,720m2 under construction which is due for completion in June 2005. This space is fully let to Wickes and KFC The completion of 5,630m2 of additional space at Livingston with new tenants including M&S Simply Food and Toys R Us. Land Securities Annual Report 2005 39 2.2 London Portfolio IRR +++ Higher returns from development activity IRR ++ IRR + Innovative products accessing immature markets Diversified portfolio in sectors with supply side constraints WACC 7.5% Active management of balance sheet and effective recycling of capital 40 Land Securities Annual Report 2005 London Portfolio Strategy The London Portfolio will contribute to the achievement of the Group’s aims through a strategy of: Acquiring property which has good medium-term growth prospects and/or future development potential Exploiting our strong relationships with major occupiers in the London office market Creating enhanced returns through our development activities Recycling capital by capturing value as it is created Identifying opportunities to maximise value from our holdings whether for office, retail, residential or leisure uses Objectives During 2004/05 our core objectives were to: Achieve investment portfolio total returns by sub-sector which exceed total IPD sector returns by more than 1.0% per annum Recycle £400 m of the capital invested in the London Portfolio Let 90,000m2 of the development programme 2.2 London Portfolio continued Achievements 17.3% 150,500m2 total return on the London Portfolio (including London retail) demonstrating the positive impact of our development programme of development lettings and disposals which included transactions at Empress State, Gresham Street, 16 Palace Street and Bankside1 £340.2m £161.2m of acquisitions including Greater London House, Hill House, City Forum and Red Lion Court of sales including Bowater House 102,200m2 90,000m2 of development in progress including Cardinal Place, New Fetter Lane and Bankside1 proposed London development pipeline including our schemes at One New Change and Bankside2&3 Land Securities Annual Report 2005 41 2.2 London Portfolio continued London Portfolio London portfolio valuation London portfolio Combined portfolio valuation £4,457.8m £3,791.4m 31/03/05 31/03/04 Market commentary We continue to see an overall improvement in the Central London office market with occupier take-up increasing and a reduction in vacancy levels, from 10.1% in September 2004 to 9.3% in March 2005 (source: Jones Lang Lasalle). We believe that this positive trend will continue aided by a limited supply of new development to drive rental growth. Like-for-like investment portfolio valuation Rental income Gross ERV(a) Voids by ERV Running yield London offices (b) £2,987.5m £2,814.6m £208.9m £214.5m £208.0m £203.3m 3.3% 6.6% 2.0% 7.3% The overall improvement masks a varying picture across the different sub-markets. With constrained supply, we continue to be positive about the prospects for the West End market but are yet to see any significant reduction in availability in the City where we maintain our view that there will not be a return to rental growth until 2006. However, as we have demonstrated through our own progress with lettings, large-scale requirements for pre-lettings are absorbing development stock. Combined portfolio valuation £3,597.7m £2,985.6m 31/03/05 31/03/04 Like-for-like investment portfolio valuation Rental income Gross ERV Voids by ERV Running yield London shops (c) £2,311.5m £2,189.1m £169.0m £175.7m £164.7m £160.1m 4.1% 6.9% 2.6% 7.6% Combined portfolio valuation £860.1m £805.8m 31/03/05 31/03/04 Like-for-like investment portfolio valuation Rental income Gross ERV Voids by ERV Running yield £676.0m £625.5m £39.9m £38.8m £43.3m £43.2m 0.2% 5.8% – 6.2% Extract from combined portfolio analysis (a) Annual estimated rental value. (b) The combined London offices portfolio includes £12.5m (2004: Nil) of value in relation to assets held in the Metro Shopping Fund. (c) The combined London shops portfolio includes £39.3m (2004: Nil) of value in relation to assets held in the Metro Shopping Fund. West End offices £1,737.2m London retail £860.1m Inner London offices £423.0m City offices £1,085.5m Midtown offices £352.0m 42 Land Securities Annual Report 2005 London is one of the most affluent cities in Europe and is one of the few where population growth is forecast. Our substantial London retail holdings are in some of the stronger locations in London, including Oxford Street, Tottenham Court Road, Cheapside and Piccadilly Circus and these characteristics bode well for retail rental growth. Review of activity This year we made considerable progress across the London Portfolio, positioning both our investment portfolio and the development pipeline to benefit from improving London markets. We completed in total some £500m of sales and acquisitions and continued to progress our plans for our 90,000m2 of proposed developments. Investment Our strategy has been to refocus the London Portfolio to ensure that we benefit fully from market recovery and during the year we acquired £340.2m of property. The main characteristics of the majority of these assets are low passing rents and medium-term income streams with development and/or alternative use potential on lease expiry. The acquisitions made were: Greater London House, NW1. Acquired for £114.1m on a net initial yield of 6.75%, the property is a 30,907m2 freehold office building providing gross rental income of approximately £7.8m per annum. It is let to tenants including Young & Rubicam Holdings and Bertelsman Books and Magazine. The building is currently let at low rental levels, averaging approximately £250 per m2 Hill House, EC4 which was acquired for £80.8m, representing a net initial yield of about 6.5%. Developed in 1979, the 15,780m2 freehold building was substantially refurbished in 2002 and is entirely let to Deloitte & Touche LLP (Deloitte) until 2034. The property adjoins our development scheme at New Street Square, EC4 and forms part of Deloitte’s UK headquarters City Forum, City Road, EC1 was purchased for £46.4m. The 12,230m2 scheme, comprising 13 buildings, is situated on the edge of the City core and offers well-secured income of £2.9m per annum, representing an initial yield of 6.2%. Occupiers include Goldman Sachs, Deloitte and NatWest Red Lion Court, SE1, acquired for £67.4m. The 11,920m2 office building is let to Lloyds TSB and currently produces rent of £4.3m per annum, providing an initial yield of 6.4%. We let or disposed of some 150,000m2 of floorspace representing some 30% of new London office development lettings in 2004/05 Sixteen Palace Street, SW1 Annual Report 2005 43 2.2 London Portfolio continued West End £202.1m After the year end we acquired Times Square, London EC4, a 35,117m2 office building developed in 2003. We exchanged contracts for our 44.5% stake for £95m reflecting a net reversionary yield of around 6%. The property is let to Mellon Bank and Dechert, with 8,574m2 vacant. Our joint venture partner is Sableknight. During the year we sold £161.2m of property including Bowater House, SW1; 2/4 Temple Avenue, EC4; and 89 Southwark Street, SE1 which generated FRS3 profits of £29.7m. We were particularly pleased to complete the sale of Bowater House for £145.8m (net of sales costs) to a residential developer in advance of receiving a planning consent for a change of use to residential and to sell 30 Gresham Street for £274m (net) just after the year end. Development and letting We are making very good progress with our development programme as demonstrated by the completion of 101,500m2 of new leases during the year and the forward sale of Bankside1. These included: The first office letting at Cardinal Place, a mixed-use development in Victoria, where we let 5,570m2 at 16 Palace Street, London SW1 to 3i Group PLC. This was agreed just two months after the building was finished and leaves 3,880m2 of accommodation in the 16 Palace Street building to be let. The final two buildings, fronting Victoria Street totalling 41,680m2 of office accommodation, are due for completion in late summer. We have also pre-let over 80% of the retail space in the scheme to 12 leading retailers, including Marks & Spencer The letting of 30 Gresham Street to Dresdner Kleinwort Wasserstein (DrKW) and the subsequent sale of this property after the year end. The transaction included a surrender to us of DrKW’s current portfolio of office space in and around 20 Fenchurch Street, London EC3 and a transfer to us of DrKW’s part freehold interest The forward sale of Bankside1, SE1 to IPC Magazine Group Ltd (IPC) for the use of Time Warner’s London-based magazine and book publishing operations, full details of which are contained in our Interim Report The 43,300m2 letting of Empress State Building, SW6 to the Metropolitan Police Service (MPS). This transaction is a Landflex package which includes a conventional 15-year lease with an annual indexation of rents, an agreement with Landflex to manage the sub-letting of part of the building and provision of property services until the MPS is ready to occupy the whole building in five years’ time. There is a further agreement to cover the repairs, maintenance and life-cycle capital requirements of the building. As part of this transaction we have accepted a lease surrender on Wellington House, SW1 for which we have been compensated In April 2005 we exchanged contracts with Deloitte for the letting of Building B at the New Street Square development on New Fetter Lane, EC4. Deloitte will occupy 19,500m2 of offices over ten floors with an option over a further 3,930m2 in Building C. The offices will be ready for fit-out in the Summer of 2007. As part of the transaction we will assume responsibility for Deloitte’s leases at Arundel Great Court, approximately 23,500m2, the anticipated costs of which have been reflected in the overall transaction terms. Valuation surplus Our West End office portfolio is now valued at £1,737.2m representing 18.5% of the combined portfolio City £61.8m Valuation surplus Our City office portfolio is now valued at £1,085.5m representing 11.6% of the combined portfolio 44 Land Securities Annual Report 2005 2.2 London Portfolio continued We continue to make excellent progress with our development programme and with the forward planning of our development pipeline. We invested £138m on schemes in progress and have a further £438m to spend to complete the current programme. We achieved a “minded-to-grant” planning consent for our revised scheme at New Street Square (formerly New Fetter Lane), EC4 for a scheme of four main buildings comprising a total of 62,340m2 of office accommodation and 2,980m2 of retail space We secured a planning consent for our property at One Wood Street, formerly 120 Cheapside, EC2, which we acquired last year. We have now committed to start on the scheme in June 2005. We expect that this scheme, which comprises 15,000m2 of office and 1,500m2 of retail space, will complete in June 2007 We have committed to refurbish 7,690m2 of offices at 40 Eastbourne Terrace, W2 in Paddington for letting on a Landflex basis, in response to the positive reaction to date for the Landflex product We announced in April 2005 that we would be progressing the final two buildings on our Bankside123 scheme speculatively. Buildings 2 and 3 will provide approximately 15,690m2 and 19,860m2 of high quality office space, and 830m2 and 2,340m2 of retail respectively. We are progressing this scheme since we believe we can benefit from the growing list of corporate and professional service occupiers looking to the South Bank for well-priced, good quality accommodation. Midtown £11.5m Valuation surplus Our Midtown portfolio is now valued at £352.0m representing 3.7% of the combined portfolio London shops £60.8m Our London portfolio is well balanced with investment properties, active developments and a strong development pipeline. A number of our future schemes have progressed well through the pre-planning process. This year, planning applications will be submitted on One New Change, EC4, a 51,340m2 mixed used retail and office scheme; Bankside 4, SE1, a residential scheme; and 20 Fenchurch Street, EC3, an office and retail scheme. Any decision to proceed with these schemes will be made in the context of our overall exposure to development activity. Valuation surplus Our London shops portfolio is now valued at £860.1m representing 9.2% of the combined portfolio Land Securities Annual Report 2005 45 Property Outsourcing Strategy Land Securities Trillium will contribute to the achievement of the Group’s aims by growing the Property Outsourcing business, through a strategy of: Winning new property outsourcing contracts in a large but immature market Innovating by exploring new markets and winning new business by refining the product and service offer to ensure that it is flexible for different business models Growing business with existing clients by satisfying customers and delivering property solutions that meet their changing needs Objectives During 2004/05 our core objectives were: To grow the Property Outsourcing business by winning new contracts and expanding old ones To increase the contribution to Group profits To continue to satisfy existing clients and to achieve strong endorsements for our products 2.3 Property Outsourcing IRR +++ Higher returns from development activity IRR ++ IRR + Innovative products accessing immature markets Diversified portfolio in sectors with supply side constraints WACC 7.5% Active management of balance sheet and effective recycling of capital 46 Land Securities Annual Report 2005 2.3 Property Outsourcing continued Achievements £1.1bn £259.8m gross property income up 27% Land Securities Trillium now accounts for 57% of the Group’s gross property income segment profit up 66% Land Securities Trillium had a record year with all its existing contracts moving into profit 23% return on weighted average capital employed Land Securities Trillium returns are enhanced by our investment in Telereal which provides a healthy return for no capital invested £85m of investment into our existing and new contracts Three 8,400 new contracts won our new clients are Barclays, DVLA and Norwich Union buildings under management across the Property Outsourcing business providing accommodation to more than 250,000 office occupants Land Securities Annual Report 2005 47 2.3 Property Outsourcing continued Property Outsourcing Land Securities Trillium – property outsourcing Market commentary We are seeing good interest and activity in both the corporate and public sector markets. • Innovative approach to property ownership and management • Six main clients • 57% of Group’s gross property income • 26% contribution to Group’s operating profit at 31 March 2005 Land Securities Trillium – value proposition (cid:1)Freehold asset transfer (cid:1)Leasehold liability transfer (cid:1)Unitary charge Land Securities Trillium Client Capital value payment/release(cid:2) Integrated property services(cid:2) Occupational flexibility(cid:2) Price certainty(cid:2) Financial results Operating profit – DWP* – BBC Full Year 31/03/05 £m Full Year 31/03/04 £m 83.2 20.6 51.1 6.6 – – (6.2) (7.3) 44.2 (0.1) 44.1 112.5 156.6 30.3 – Norwich Union (excluding bid costs) 6.1 – Barclays Bid costs Central costs Profit on sale of fixed asset properties Segment profit Share of Telereal segment profit Share of Telereal profit before tax – (2.6) (7.8) 99.5 30.5 130.0 129.8 259.8 63.4 Corporate sector Following the commencement of our property outsourcing agreements with Norwich Union and Barclays during the year, interest in corporate property outsourcing remains strong, particularly within the financial services sector. Continuing occupier focus on balance sheet restructuring, business rationalisation, cost reduction and risk mitigation resonates well with our strengths in releasing capital, providing flexible occupation, managing leasehold liabilities and introducing supply chain efficiencies. We have several opportunities at early stages of development. Public sector There is also good potential for further public sector property outsourcing. The Government’s Efficiency Review, informed by the Lyons and Gershon reports, involving relocation, estate downsizing and a £30bn asset disposal programme, can be expected to generate further property outsourcing opportunities in the medium-term. We have made our own submission to Government specifically in terms of how property partnerships can offer an effective implementation model for departments in their response to the Efficiency Review. In parallel with this, we are pursuing a number of specific property outsourcing projects with public sector clients including the Ministry of Defence and the Northern Ireland Estate. We are also exploring other public sector initiatives where there are implicit property issues and opportunities, including Building Schools for the Future. This is a 15-year £30bn Government programme to upgrade every secondary school in the UK, which was launched at the end of 2004. The strong endorsement of the value for money and customer service offered by Land Securities Trillium, given by the National Audit Office report on our expanded contract with DWP, issued in January 2005, emphasises our successful relationship with Government and provides a firm foundation for further business in this sector. Financial results Land Securities Trillium contributed 26% of the Group’s operating profits and accounts for 57% of gross property income. Segment profit was £259.8m, representing a 66% increase over last year. *Aggregate of PRIME and Employment Services including amortisation of goodwill. In the year to 31 March 2004 profits for the DWP were depressed by a loss on the Employment Services element of the contract resulting from mobilisation costs. Review of activity We have seen extensive activity across our three existing contracts and added three new clients reflecting our ability to provide flexible outsourcing solutions to meet specific customer challenges. This applies equally for existing and new clients. 48 Land Securities Annual Report 2005 We released £321.5m of capital from the sale of Media Village by Land Securities Trillium Media Village, White City Annual Report 2005 49 2.3 Property Outsourcing continued Segment profits £259.8m Up 66% Land Securities Trillium had a record year with all its existing contracts moving into profit 50 Land Securities Annual Report 2005 Department for Work and Pensions As we have now merged the two estates, we have this year combined the reporting for the Department for Work and Pensions’ (DWP) contract which comprises the original PRIME contract and the Employment Services extension signed in December 2003. In total, this produced £603.1m of income and made a £83.2m contribution to operating profits. However, as previously indicated, we expect this contract to produce lower operating profits next year as our client makes use of the significant vacation allowances priced into the transaction. Since merging the estates, this is the first full year of delivery of day-to-day real estate and facilities management services to approximately 130,000 DWP occupants in some 1,700 buildings and customer feedback has been very positive. We continue to work with the DWP to formulate and implement its estate strategy in light of the requirement to reduce headcount to around 110,000 by March 2008. DWP has indicated that it intends to vacate some 80,000m2 of accommodation over the next 12–18 months, all of which is priced into our contract. At the same time the restructuring has also generated a requirement for new space in certain locations and we have received requests for a total of 25,000m2 of additional space. Sales of surplus properties generated profits of £7.0m which we shared with our customer. We continue to support the DWP in the management of its capital works programme including the rollout of the Jobcentre Plus organisation. Over the year our Capital Projects team has handled some £81m of work for the DWP. BBC During the year the BBC contract made a £20.6m contribution to operating profit (2004: £6.6m) provided primarily by the property income generated by Media Village, White City, following successful completion of that development in late 2003. In March 2005, we realised sales proceeds of £321.5m from the sale of Media Village, which generated a profit of £23m and the return of all our capital invested in the contract. As we announced at the time of this transaction, we undertook to review the future basis of the contract with the BBC in the knowledge that it would now consist of development management services, already covered under separate contracts, and the provision of facilities management services only. This joint review resulted in the announcement on 12 May 2005 that the BBC would be re-tendering the facilities management element of our contract; we decided not to participate in the re-tender process because we do not offer a facilities management service only. This decision will not have a material impact on the financial performance of Land Securities Trillium and we will continue to manage the outsourcing contract until at least March 2006. Over the past three years, we are pleased to have achieved cost savings for the BBC of £30m and a significant increase in customer satisfaction. 2.3 Property Outsourcing continued On the development management side, we continue with the construction of the new 81,390m2 Broadcasting House complex in London, which is being carried out by our London development project team, with phased construction completion occurring between Spring 2005 and 2008. On handover the BBC will complete its technical fit-out and aims to have all moves complete by the end of the decade. In July 2004 we also agreed terms and commenced work in a similar capacity on the construction of the BBC’s new 33,370m2 broadcasting facility at Pacific Quay in Glasgow, which is scheduled for completion in 2006. BT Telereal, the joint venture vehicle that has the property outsourcing contract with BT, continued to make a strong contribution, providing pre-tax profits (profits after interest on joint venture debt) of £63.4m (2004: £30.3m). Profits for the year from Telereal benefited from a high level of surplus property sales which accounted for £30m of that figure. These sales also benefited BT through profit sharing arrangements. Profits are not expected to continue at the same level in 2005/06 as 90% by floor area of the surplus freehold properties acquired from BT in 2001, or vacated since then, have now been sold. We have agreed with BT to restructure the corporate services element of the contract in order to ensure it is best suited to BT’s current requirements. This restructuring was agreed in March 2005 with BT having termination rights in 2012 and seven yearly thereafter, rather than at will as previously existed. The asset ownership elements of the contract are unaffected and the change is expected to be economically neutral to us. Norwich Union In June 2004 we were delighted to agree a corporate outsourcing contract with Norwich Union to manage and improve its core occupational estate. The range of services provided includes planned and reactive maintenance, life-cycle replacement of building components and the undertaking of capital projects work. The 25-year transaction also comprises the transfer of 115,000m2 of office accommodation and the commitment by Land Securities Trillium to invest £92m into the phased refurbishment of Norwich Union’s 30,890m2 Norwich headquarters. The first phase of works is due to complete in June 2005. The estate transferred to Land Securities Trillium comprises approximately 25% of Norwich Union’s operational space by floor area. As part of this transaction an innovative £100m onward sale was agreed involving seven freehold assets. Through this, Norwich Union realised sale proceeds in excess of its expectations while, under the occupational leases put in place, Land Securities Trillium has the freedom to carry out all of its outsourcing obligations. We will continue to manage and maintain these buildings on behalf of Norwich Union which will occupy the properties for a lease term, in most cases, of 25 years. Land Securities Annual Report 2005 51 Barclays In December 2004 we entered into a 20-year property outsourcing deal with Barclays Bank, combining the sale and leaseback of a regional headquarters building with the management of a portfolio of surplus leasehold properties. The transaction involved 14 properties totalling 31,540m2 and has two elements: Barclays has sold Westwood Business Park, Coventry (three buildings totalling 11,300m2) to us on a 20-year leaseback arrangement The transfer of responsibility for 13 short leaseholds surplus to Barclays’ requirements and largely vacant as a result of its property rationalisation in London and the south of England. Barclays will make a capped payment to reflect the letting risk, as we assume responsibility for all future benefits and liabilities relating to the transferred interests. The contract broke even in the fourth quarter and is expected to move into profit during the next financial year. Driver and Vehicle Licensing Agency (DVLA) In March 2005, we signed the property outsourcing contract with DVLA. This Government contract is expected to break even in the first 12 months and make profits in 2007. Under the terms of the transaction, DVLA has outsourced a major refurbishment project, life-cycle capital expenditure, estates management and facilities management across its entire UK estate to us for 20 years. There is no transfer of freehold property to us but we receive payment for the provision of services and refurbishment works via a performance-related index linked annual unitary charge. The estate comprises 58 properties, totalling 94,133m2, of which 14% by area involves the transfer of leasehold liabilities. The 24,471m2 refurbishment of part of DVLA’s headquarters site at Morriston, Swansea will result in a £30m investment by us over the next three years. 2.3 Property Outsourcing continued Gross property income £1.1bn Up 27% Land Securities Trillium now represents 57% of the Group’s gross property income 52 Land Securities Annual Report 2005 We handle over 650,000 customer service requests every year Customer Service Centre, 140 London Wall, EC2 Annual Report 2005 53 2.4 Urban Community Development 54 Land Securities Annual Report 2005 Urban Community Development We continue to invest in activities which we believe will, over time, produce above-average returns for shareholders. One of these areas is Urban Community Development, where we can benefit from the Group’s balance sheet strength and development skills. The largest of our projects is Kent Thameside, but we also have smaller holdings in Cambridge and at Stansted. Kent Thameside Our activities in Kent Thameside are currently focused on masterplanning and securing appropriate planning consents. At Eastern Quarry and Swanscombe Peninsula West, our two planning applications for major residential led mixed-use developments remain undetermined primarily as a result of issues raised by the Highways Agency in relation to the trunk road network. This issue is not unique to Land Securities and is currently affecting a number of the Government’s priority growth areas. Within our Ebbsfleet landholding, where we have a 48.5% interest, outline consent already exists, and we are moving towards the first phase of residential development. Countryside Properties has been selected as our preferred development partner for the Springhead Quarter. Countryside is now working towards the submission of a detailed application later this year for a scheme of over 300 dwellings. This joint venture arrangement with Countryside will follow on from completion of our first phase of work with them at Waterstone Park where 200 dwellings have been completed and sold. Work on the construction of the second phase of 450 homes has started following the grant of detailed planning permission in November for the next release of 88 private and 30 affordable dwellings. We have also had some recent notable successes at Crossways reinforcing its pre-eminence as the largest mixed use business park in the south-east quadrant of the M25. Following exchange of contracts in December, work is progressing on the construction of a new HQ office building for Moat Housing Group for their freehold owner occupation at the end of the calendar year. The sale of Building 5065, to Capital & Provident for £17m was completed in March 2005. Stansted In July we acquired 650 hectares (1,625 acres) of land adjacent to Stansted airport for approximately £15.3m. We believe that this acquisition may provide future opportunities for achieving change in use and other planning consents in the medium-term, although the land is not identified for development in current planning policy statements. South-east industrial We completed our property swap with Slough Estates and continue to own £72m of industrial property in the south-east. These properties, which produce £4.0m of income per annum, were retained since they offer medium-term potential for development for alternative uses. Developing 700 hectares in Kent, creating communities for the future Eastern Quarry, Kent Thameside Annual Report 2005 55 56 Land Securities Annual Report 2005 58 60 66 70 72 79 80 3.0 Board of Directors 3.1 Corporate Responsibility 3.2 Corporate Governance 3.3 Risk Management 3.4 Remuneration Report 3.5 Directors’ Responsibilities 3.6 Independent Auditors’ Report Acting responsibly Land Securities’ core values of integrity, customer service, respect for the individual, excellence and innovation instil in our people a strong desire to manage the business in a responsible way. This section brings together all the elements of the Annual Report which demonstrate how we live up to these values. Land Securities Annual Report 2005 57 3.0 Board of Directors Board of Directors 1. Peter G Birch CBE (67) 5. Ian D Ellis (49) 9. Sir Winfried Bischoff (63) Chairman and 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. Senior Independent Director at Trinity Mirror plc. Non-Executive Director of Travelex, Sainsbury’s Bank, Dah Sing Financial Holdings Limited and an advisor at N M Rothschild & Sons Limited. 2. Francis W Salway (47) Executive Director Joined the Group in October 2000. Previously an Investment Director at Standard Life Investments. He was initially appointed Head of Portfolio Management and was appointed to the Board in April 2001. Appointed Chief Operating Officer in January 2003 and Group Chief Executive in July 2004. 3. Andrew E Macfarlane (48) 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, Hotels and Resorts division of Bass plc (now Intercontinental Hotels Group plc). A Non-Executive Director of Invensys PLC. 4. A Mark Collins (48) 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. Appointed Chief Operating Officer in 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 Land Securities Trillium. 6. Mike R Hussey (39) Executive Director Appointed to the Board in September 2004 after joining the Group as Development Director in 2002. Previously Head of Leasing and Marketing at Canary Wharf Group. Appointed Managing Director, London Portfolio in July 2004. 7. Richard J Akers (43) Executive Director Joined the Board in May 2005, following his appointment as Managing Director, Retail in July 2004. Joined the Group in 1995 and previously held the position of Head of Retail Portfolio Management. 8. David Rough (54) 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 Non-Executive Director of Mithras, BBA Group PLC, EMAP Group PLC and Xstrata Group PLC. Non-Executive Director Appointed to the Board in November 1999. Chairman of Citigroup Europe, and a Non-Executive Director of The McGraw-Hill Companies, USA and Eli Lilly & Company, USA. 10. Stuart A R Rose (56) Non-Executive Director Joined the Board as a Non-Executive Director in May 2003. Chief Executive of Marks & Spencer Group plc. Previously Chief Executive of Arcadia Group until December 2002. Chief Executive of Booker PLC from 1998 until 2000. 11. Bo Lerenius (58) Non-Executive Director Appointed to the Board as a Non-Executive Director in June 2004. Group Chief Executive of Associated British Ports Holdings PLC. Previously Chief Executive Officer and Vice Chairman of Stena Line AB until 1999. A Non-Executive Director of Group 4 Securitas plc. 12. Alison J Carnwath (52) Non-Executive Director Appointed to the Board as a Non-Executive Director in September 2004. Chairman of The Vitec Group until December 2004. A Non- Executive Director of Friends Provident plc, Gallaher Group plc, Glas Cymru and Man Group plc. 58 Land Securities Annual Report 2005 3.0 Board of Directors continued 1 5 9 2 6 3 7 4 8 10 11 12 Land Securities Annual Report 2005 59 3.1 Corporate Responsibility 60 Land Securities Annual Report 2005 Corporate Responsibility In the year to 31 March, 2005 we continued to make advances on corporate responsibility (CR) initiatives across the Group. A full update of our CR activity is contained in our Corporate Responsibility 2004 Progress Report published recently, which included an update on progress in respect to our 2004 environment targets and the wider CR targets which we set for the first time. Recognition of our progress comes from our continued inclusion in the FTSE4Good and Dow Jones Sustainability Indices and inclusion in Business in the Community’s Top 100 Companies Which Count listing. In addition, Upstream, who run the Property Environment Group benchmark, widened the remit of this to include indicators on CR pertinent to the property industry. We were delighted to learn that we had come second in this revised benchmark overall and first in the quoted property company peer group. As a result of the senior management changes, we restructured Board responsibility for our key stakeholder groups and our health, safety and environmental activities.The table below lists these responsibilities and the means by which they are delivered. The sound management of our activities with our key stakeholder groups and a pro-active approach to our responsibilities for health, safety and the environment underpins the success of Land Securities’ business. Key stakeholder group/ area of responsibility Occupiers, clients and their customers Local communities Shareholders and debt investors Employees Suppliers, advisors, contractors and consultants Government Health and safety Environment How we deliver Board member/Senior executive Customer satisfaction initiatives Community initiatives Investor relations programme HR management Procurement Chief Executive, Land Securities Trillium Managing Director, Retail Managing Director, London Portfolio Group Chief Executive Group Finance Director Group Chief Executive Chief Operating Officer Lobbying and NGO relationship building Group Chief Executive process but no political donations Group-wide policies, training, management systems and audits Group-wide policies, training, management systems and audits Chief Executive, Land Securities Trillium Chief Operating Officer Corporate governance, business ethics, compliance and verification Processes and audit Entire Board Investors We have an equity shareholder base of approximately 27,000, of which some 95% by value are institutional investors together with several hundred of investors in our bonds. Our investor relations (IR) activity, which includes regular communication with equity, bond and private investors and equity and bond analysts, comprises financial presentations, site visits and one-on-one meetings. These activities are conducted to provide a clear, honest and accurate picture of the Group’s performance and future prospects, while remaining within the constraints imposed to ensure the protection of price sensitive information and avoidance of market abuse. We seek to achieve a best practice IR programme and in 2005 expanded our activities to include private client broker communication and non-transaction related communication with debt analysts and investors. We held our second institutional investor conference, our first “socially responsible investor” meeting which included a site visit to Canterbury and a further presentation to the UK Shareholders Association, a private shareholder investment forum. We receive some 300 million customer visits to our retail properties each year, many of whom benefit from our community services, including Shopmobility Designer Outlet, Livingston Annual Report 2005 61 3.1 Corporate Responsibility continued 62 Land Securities Annual Report 2005 All information provided at Group presentations is posted on the IR section of our website which allows for timely and efficient dissemination of information to all stakeholders and many of these meetings are broadcast live over the internet. We monitor the effectiveness of this programme directly through feedback to the Group, nominations for IR industry awards and indirectly through third party feedback and perception audits. Occupiers, clients, customers and the community We provide commercial accommodation to more than 2,000 occupiers and clients across the investment property and property outsourcing businesses and conduct annual customer satisfaction surveys, the results of which we report on in Section Two . With some 10 million m2 of commercial accommodation across the UK, our activities extend beyond the physical fabric of the buildings and often extend into the surrounding local communities. This is particularly true of the investment property business where ownership of shopping centres and our development activities enable us to be involved in a wide range of community initiatives across the UK. Our shopping centres engage in numerous initiatives, examples of which are: schools and education programmes; local truancy initiatives; charitable activities; business improvement districts; disability access programmes; health and environmental activities and community marketing programmes. We also conduct robust public consultation programmes during the development process to gain public support for our plans and to maintain this support during development we introduce change management initiatives, which include the appointment of local community liaison officers; regular community meetings; publishing newsletters and websites; and job creation and training. Our people We employ nearly 2,000 people across the UK, responsible for the management of our property portfolio, development and delivery of accommodation and services across our property outsourcing activities. Our main objective in relation to employees is to become the “employer of choice” in the quoted property sector with a focus on attracting, developing, retaining and motivating high performance teams and individuals. We were delighted to receive recognition of our success as an employer when a recently published survey recognised us as the leading UK property investment and development company to work for. We aim to create an environment where innovation and creativity are rewarded and career paths are clearly defined. Our reward structure is linked to performance and we provide our people with opportunities for personal and professional development through our training and development initiatives. Land Securities is committed to providing equal opportunities to all our 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 or national origin. Land Securities recognises the importance of providing employees with a continual and consistent flow of information. Our internal communication programme offers employees presentations on business activity and planning, management and team away days and regular news publications including an e-magazine and environmental newsletter. The intranet, which has enhanced our communication with employees, especially our remote workers, was updated and relaunched in 2004 with specific improvement made to the news function. 3.1 Corporate Responsibility continued We held our third Group-wide annual employee survey and obtained an excellent response rate of just under 92%. The feedback received showed that our employees feel positive about Land Securities as an organisation. In particular, we exceeded the ETSM benchmark in: fair reward for work done; information flow from senior management; being a good employer and satisfaction with benefits and we scored top marks for “culture and values”. Our training budget increased in 2004, reflecting the emphasis placed on developing our employees. This year we have expanded ‘Personal Development Plans’ across the Group to ensure we have a framework to maximise employee potential to help them achieve their own aims as well as the Group’s business objectives. We also introduced a work shadow programme, to share ideas, knowledge and experience between business units. It provides individuals with the chance to have hands-on learning with colleagues from other parts of the business and broadens understanding of how the Group functions, including different roles and methods of problem solving. Business exchange forums are being introduced across the Group in advance of the new regulations being implemented on workplace consultation. We are committed to becoming a leader in respect to human resource policies on employee engagement. Health and safety As detailed above Ian Ellis, Chief Executive of Land Securities Trillium, has now assumed responsibility for health and safety and during the year we strengthened and restructured the health and safety (H&S) team.This now comprises 16 H&S managers, who deliver services and support across the Group as well as 12 H&S trainers dedicated to the DWP contract. Our H&S activities are routinely reviewed by the Board on a quarterly basis, which includes a progress report against our stated objectives. A detailed report is made annually. The achievements of our H&S activities have been recognised by Royal Society for the Prevention of Accidents which presented us with a Gold award for Health and Safety Management. An important part of our role is to remain fully conversant with new H&S legislation and in the next 12 months we are anticipating H&S legislation in three areas which will directly impact on our activities. These are the Work At Heights Regulations, the Fire Safety Order and amendments to the Construction, Design and Management Regulations. We will continue to monitor the progress of these to ensure that we are in a position to conform to the new laws as they come into effect. We continue to implement a management system compliant with OHSAS: 18001. Our aim is to achieve certification to this standard for both the DWP and BBC contracts by the end of 2006. We are refining our asbestos management programme, which operates across the Group, to ensure compliance with legislation. Given the nature of our business, we need to ensure that the contractors and service providers working on our behalf achieve appropriate standards of health and safety. In conjunction with our Group Procurement team we are creating a database of relevant H&S information for all our contractors, who number some 3,000. We have introduced H&S auditing of our service partners and contractors, and this programme is running on schedule. We also developed and delivered training modules for Land Securities managers and staff in this area. Land Securities Annual Report 2005 63 3.1 Corporate Responsibility continued 64 Land Securities Annual Report 2005 We collate and analyse accident statistics monthly and publish key H&S statistics in our CR report. Accident trends continue to remain fairly static, although we have seen a progressive decrease in RIDDOR reportable accidents on Land Securities Trillium’s major contracts. We continue to deliver H&S risk assessments, inspections, audits and property health checks to take account of both legislative and contractual requirements and conducted a total of 355 of such audits in the year to 31 March 2005. Environment We were one of the first property companies to recognise the important role we have to manage our environmental impacts. We are delighted, once again, to have received strong third party endorsement of our environmental activities. Over the year we received a 82.3% score from Business in the Environment, won seven Green Apple awards for our activities and maintained our UK Wildlife Trust Business and Biodiversity Benchmark, one of only 11 organisations to receive the Benchmark in 2004. We launched an enhanced Environmental Management System (EMS) and trained almost 300 members of staff in the basic aspects of the system. We are seeking the BS 8555 accreditation for this EMS and have our final audit in July 2005 with Lloyds Register. Following a scheduled review Land Securities Trillium received confirmation that its EMS, which had been expanded to include the 1,000 additional Employment Services buildings, continued to meet the requirements of ISO 14001 standard, making this the largest certification to date under the 2004 revision of ISO 14001. We participated in the voluntary UK Emissions Trading Scheme once again this year. We met our target and have reduced emissions associated with our managed office portfolio by more than 9%, representing over 6,300 tonnes of CO2, since the scheme began three years ago. Despite the official closure of the MACC2 scheme, we remain committed to our declared target of a 10% reduction in average CO2 emissions by 2010. We continue our work with the Carbon Trust on developing strategies to reduce energy consumption. We introduced a new internal auditing scheme that enables us to benchmark the environmental management of our shopping centres and continue to run our successful shopping centre recycling league table, which has achieved an increase in recycling rates to an average over 26%, up from 20% in the prior year. We also significantly increased the amount of waste recycled by Land Securities Trillium for DWP and the BBC. We introduced voluntary Environmental Impact Assessments for all our development schemes and supply chain auditing for sustainable timber procurement. We participated in a working group with other leading developers and contractors to pioneer a common approach to addressing CR issues on construction procurement. We are working with selected suppliers to trial improved procurement routes to increase the proportion of sustainable timber used in our development projects and to provide greater levels of assurance that the products are from genuinely sustainable sources. 6,300 tonnes Three year reduction in CO2 emissions from our managed office portfolio Empress State, SW6 Annual Report 2005 65 3.2 Corporate Governance Corporate Governance The Combined Code – principles of good governance and code of best practice Statement of compliance Land Securities complied fully with the Combined Code on Corporate Governance (the Code) as it applied to the Company during the year, except in relation to Board composition (proportion of independent non-executive directors) and membership of the Nominations Committee. In accordance with the concept of “comply or explain”, explanations for non-compliance in these areas are detailed below. The Board applies the principles of the Code by monitoring corporate governance best practice and adopts appropriate recommendations of bodies such as the ABI and RREV (organisations which represent the views of institutional shareholders) and the Institute of Chartered Secretaries and Administrators. Additional information, including the terms of reference of Board Committees, the schedule of matters reserved for Board approval, the procedure for directors to take independent legal advice and the letter of appointment for non-executive directors, together with the Memorandum and Articles of Association of the Company, is available on the Group’s website at www.landsecurities.com or copies may be obtained on request from the Company Secretary. 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. Role of the Board The principal task of the Board is to formulate strategy and to monitor and control operating and financial performance in pursuit of the 66 Land Securities Annual Report 2005 Group’s strategic objectives. Nine principal Board meetings were held in 2004/05. The Board operates in accordance with a formal schedule of matters reserved to the Board for decision, which is renewed annually. It seeks to ensure that the needs and aspirations of all stakeholders are satisfied through the development of a balanced strategy which serves the interests of stakeholders. These matters include authorisation of significant transactions in excess of £50m, dividend policy, internal controls (via the Audit Committee), remuneration policy (via the Remuneration Committee), shareholder circulars and listing particulars, matters relating to share capital 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. The Board was 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 reviewed strategy at an off-site meeting arranged for this purpose, 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. In addition, the Investment Committee, comprising the Group Chief Executive, Finance Director and Chief Operating Officer, appraises and, where appropriate, approves funding proposals involving expenditure up to £50m taking into account key financial drivers, sensitivities, and project risk assessment. Board balance and independence The roles of Chairman and Group Chief Executive are split, with clear written guidelines to support the division of responsibility. There exists a strong non-executive element on the Board which currently consists of the Chairman, six executive and five non-executive directors. David Rough is the senior independent director. The Board considers that all the non-executive 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: Board (9 meetings) Audit Committee (5 meetings) Nominations Committee (1 meeting) Remuneration Committee (3 meetings) Peter Birch (Chairman) Francis Salway (Group Chief Executive) Andrew Macfarlane Mark Collins Ian Ellis Mike Hussey (appointed 30/09/04) David Rough (Senior Independent Director) Sir Winfried Bischoff Stuart Rose Bo Lerenius (appointed 01/06/04) Alison Carnwath (appointed 01/09/04) Ian Henderson (retired 14/07/04) Peter Freeman (retired 14/07/04) * Actual attendance/maximum number of meetings a director could attend as a member. 9 8 9 9 8 *5/5 9 8 8 *6/7 *6/6 *3/3 *2/3 – – – – – – 5 4 5 *2/3 *3/3 – – 1 1 – – – – 1 – – – – – – – – – – – – 3 3 2 *2/2 *1/1 – *1/1 3.2 Corporate Governance continued directors are independent. Under some definitions Sir Winfried Bischoff may not be regarded as ‘independent’ since he is a member of the management committee of the holding company of one of the Group’s principal relationship banks. However, the unanimous view of his colleagues on the Board is that, by virtue of his experience, he is robustly independent. At the date of this report less than half of the Board, excluding the Chairman, comprised independent non-executive directors. However, the Board considers that the experience and independent judgement of its non-executive directors are more important than absolute numbers. It is therefore satisfied that no individual or group has unfettered powers of discretion and that an appropriate and effective balance exists between the executive and non-executive members of the Board. In accordance with the Companies Acts and the Articles of Association of the Company, all directors are required to submit themselves to shareholders for re-election to the Board at the first Annual General Meeting following their appointment and at regular intervals thereafter. Every director is required to stand for re-election every three years. The directors to retire by rotation at the 2005 Annual General Meeting will be Stuart Rose, Francis Salway and Mark Collins. 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. As recommended by the Code, the non-executive directors meet at least annually, both with and without the Chairman. Director induction and training Directors were provided with training on a number of subjects, including, in particular, the impact of international financial reporting standards on the Group’s accounts. In the case of newly appointed directors, an 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. A tailored induction programme was provided for non-executive directors, which included meetings with senior managers within each of the Group’s business units. This process was coordinated by the Company Secretary in accordance with guidelines issued by the Institute of Chartered Secretaries and Administrators. The training needs of directors were reviewed periodically to ensure that they were kept up to date on relevant new legislation and changing commercial risks. Board appraisal A formal appraisal of the performance of the Board, its committees and individual directors is undertaken every year. This process is led by the Chairman with the assistance of the Company Secretary. The wide-ranging appraisal questionnaire is based on the process and questions outlined in the Higgs suggestions for good practice and the results were reviewed by the Board in March 2005. Following both self-assessment and evaluation by their fellow Board members, individual directors were evaluated in their role as members of the Board by the Chairman. The senior independent director was responsible for the evaluation of the Chairman and met annually with the other non-executive directors to consider the Chairman’s performance. The 2004/05 Board appraisal has led the directors to conclude that the range of skills and experience of the directors resulted in an effective and unified Board. Attention will be given to any matters arising from the appraisal process. Nominations Committee The principal role of the Nominations Committee is to review the balance and effectiveness of the Board and identify the skills required and the individuals who can best provide these skills. In reviewing potential candidates for appointment to the Board, the Committee considers the capabilities required such as independence of mind and, where a non-executive appointment is under consideration, the time available to fulfil that role. Independent external search consultants are always used to identify appropriate candidates for appointment as non-executive directors and candidates from a wide range of backgrounds are considered. The members of the Nominations Committee are the Chairman, who is Chairman of the Committee, the Senior Independent Director and the Group Chief Executive. Because this is not in accordance with the provisions of the Code, all key decisions relating to appointments and to membership of Board committees were considered by the full Board, which includes a strong representation of experienced independent non-executive directors. For all Board appointments the Committee consulted with the other members of the Board and put forward formal recommendations for consideration by the Board. The Committee reviewed the time required from a non-executive director and the annual performance evaluation was used to assess whether the non-executive director was spending enough time to fulfil his or her duties. The Committee made recommendations to the Board on succession for executive directors and on the reappointment of any non-executive director at the conclusion of their specified term of office. The Committee also kept under review the leadership needs of the Group, both executive and non-executive, with a view to ensuring the continued ability of the Group to compete effectively in the marketplace. Land Securities Annual Report 2005 67 3.2 Corporate Governance continued Remuneration Committee The Committee’s activity is described in the Remuneration Committee report on pages 72 to 78. Investor relations Land Securities is committed to maintaining the highest standards in its investor relations (IR) programme and we report on our IR activity in the Corporate Responsibility Section. The IR function reports directly to the Group Chief Executive and Group Finance Director and its activities are reported to and reviewed by the Board annually. Every two years an independent audit of IR is carried out, the results of which are also communicated to the Board. The Senior Independent Director attends the preliminary and interim results meetings to which investors are invited and his attendance is notified to investors in advance. In addition, each year, the Chairman writes to principal shareholders offering a clear line of contact with either him or the Senior Independent Director as recommended by the Higgs Proposals on Corporate Governance. 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. Audit Committee The Audit Committee consists of all the independent non-executive directors and is chaired by David Rough. Bo Lerenius and Alison Carnwarth joined the Board and Audit Committee during the year, with Alison having ‘recent and 68 Land Securities Annual Report 2005 relevant financial experience’ in line with the Code. Further details of each of the independent directors are set out on page 58. The Audit Committee’s written terms of reference are available on the Group’s website and its principal oversight responsibilities cover: internal control and risk management internal audit external audit (including auditor independence) financial reporting. The Committee met five times during the year. The Audit Committee Chairman invited all other Group Board directors to attend every meeting and from time to time other senior management. In addition, the Director of Risk Management and Internal Audit and representatives from the external auditors, PricewaterhouseCoopers LLP, were also present at each meeting. The Committee also met separately with the external and internal auditors and the valuers. The Committee undertook the following activities at these meetings: reviewed and approved the Company’s approach to implementing International Financial Reporting Standards (IFRS) reviewed the interim and annual results and considered any matters raised by management and the external auditors reviewed and approved the audit plans for the external and internal auditors monitored the scope, effectiveness, independence and objectivity of the external audit discussed the results of internal audit reviews, significant findings, management’s action plans and the timeliness of resolution review the scope, independence and objectivity of the external valuation by Knight Frank LLP reviewed the Group’s ‘Turnbull Report’ to support the Board’s sign-off on the system of internal control (see below for more details) discussed the Group’s response to the Turnbull Review being undertaken by the Flint Committee reviewed reports on the Group’s risk management measures and actions discussed the accounting and internal control impact of implementing the debt restructuring reviewed progress on the project to replace key finance IT systems received a report from the valuer on the 31 March 2005 valuation in conjunction with the Board appraisal detailed on page 67, the Committee reviewed its own effectiveness and concluded that it had continued to operate as an effective Audit Committee. External auditors The Audit Committee appraised the effectiveness of the external auditors and the external audit process.The evaluation process included feedback from relevant members of management and the results were reported to the Board and Audit Committee. The Company has a policy and procedures in place to monitor and maintain the objectivity and independence of the external auditors, PricewaterhouseCoopers LLP (PwC). The procedures include guidance on the non-audit services that PwC can provide after proper approval. On a six-monthly basis, the Audit Committee reviewed a summary of all non-audit work. In addition to the audit related services, PwC provided the following services during the year: accounting advice relating to the debt restructuring taxation advice, including planning and compliance advice on IFRS accounting; and pension fund audit. Details of the amounts paid to PwC are set out in Note 3 to the accounts. The external auditors reported to the Committee that they remained independent 3.2 Corporate Governance continued and had maintained internal safeguards to ensure their objectivity. 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 Audit Committee Chairman 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 proportion of total fees paid by the Company to the total fee income of Knight Frank was less than 5%. 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). Going concern 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 key features of our system of internal control include: (a) Strategic and business planning: the Group and each business unit 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, in accordance with delegated authority limits (c) Financial monitoring: profitability, cash flow and capital expenditure are closely monitored and key financial information is reported to the Board on a monthly basis, including explanations of variances between actual and budgeted performance (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. Operational and financial procedures and controls are maintained on the Group’s intranet (e) Risk management: we have an ongoing process to identify, evaluate and manage the 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 (before external reports are issued), which is signed off by senior managers, providing assurances that controls are both embedded and effective within the business, and (g) Internal audit: responsible for reviewing key business processes and controls, including following up the implementation of management actions. The Director of Internal Audit and Risk Management reports to the Group Chief Executive and has direct access to the Audit Committee Chairman. The internal audit function operates a risk-based audit approach and provides a summary report on the operation of the system of risk management and internal control to support the Board’s annual statement. The Audit Committee reviews the effectiveness of internal audit activities including the scope of work, authority and resources of the internal audit function. The Audit Committee on behalf of the Board has reviewed the effectiveness of the systems of internal control and risk management. The review covered all material areas of the business including financial, operational and compliance controls and risk management. In performing its review of effectiveness, the Audit Committee took into account the following reports and activities: Internal audit reports on reviews of business processes and activities, including action plans to address any identified control weaknesses. The status of these action plans was also monitored by internal audit and overdue actions reported to Audit Committee Management’s own assessments of the strengths and weaknesses of the overall control environment in their area, with action plans to address the weaknesses External auditor reports on any issues identified in the course of their work, including internal control reports on control weaknesses, which were provided to the Audit Committee as well as executive management Risk management reporting, including the status of actions to mitigate major risks and the quantification of selected risks. Land Securities Annual Report 2005 69 3.3 Risk Management Risk Management Doing business inherently involves taking risks and by taking measured risks, we seek to achieve long-term sustainable returns for our shareholders. 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 and business planning, investment appraisal and financial monitoring processes. Risk management process 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, including for each risk an indication of the areas of potential impact and our approach to managing and mitigating them. We have also provided cross-references to related and more detailed information elsewhere in the Annual Report. The diagram below 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 in more detail how we address the key social, environmental and ethical risks inherent in our business. 1 Goals & objectives 2 Identify 6 3 5 Reassess Report Assess 4 Action 1 Business goals and objectives set the context for our risk management process 2 Identify the risks 3 Assess and quantify the risks identified 4 Develop action plans to manage the risks 5 Reassess the risks after mitigating actions have been taken 6 Report on risks, extent of mitigation and status of action plans 70 Land Securities Annual Report 2005 3.3 Risk Management continued Market, regulatory and other external factors Risk Market Description and areas of impact Mitigation activities 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. We maintain an internal research capability, supplemented by external advice, to monitor current and future market trends and update our forecast ‘house view’ accordingly. This house view is a key element of our business planning, forecasting and capital allocation decision-making processes. Other relevant information Competitive environment and business planning, page 16 Asset management Regulation We have concentrated our investment portfolio in areas of the market and types of property that we believe will offer the prospect of superior 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, lease expiry profiles, progress on rent reviews and tenant defaults are reported on monthly and actively managed to mitigate risks. These measures inform our decisions to buy, hold or sell properties. Retail, page 34 London Portfolio, page 40 The Group is exposed to risks from increases in tax rates and changes to VAT, stamp duty land tax, and the bases of taxation of profits and capital gains. The Group is also exposed to changes in planning regulation. As set out in the Chairman’s statement, progress has been made towards the introduction of Real Estate Investment Trusts, however some uncertainty remains as to the impact for the Group. In relation to lease code reforms, the threat of legislation has been removed for the time being. Appropriate procedures are put in place to ensure that we comply with current regulations and legislation. 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. Real Estate Investment Trusts and Lease Reform, page 14 Financing Managing the level, cost and availability of funding is key to the financial performance of the Group and its ability to deliver returns to shareholders. Effective management of interest rate risk is an important factor. We have a centralised Treasury function with responsibility for funding across the Group. Decisions about current and future gearing level are a key part of our business planning process. Our hedging policy is detailed in the OFR. Financial strategy and debt restructuring, page 19 Hedging policy, page 23 Business, operational and other external factors Investment performance and returns Development Property outsourcing 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. We monitor actual performance against our targets, taking corrective actions as appropriate. Competitive environment and business planning, page 16 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. 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 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. Development programme, page 29 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. Information and experience gained from this monitoring process is in turn used to develop the pricing of new contracts. Property outsourcing, page 46 Human resources The Group’s objective in relation to employees is to be the “employer of choice” in the quoted property sector. Our ability to achieve this objective will be negatively impacted if we fail to attract, develop and retain the best people. We are pro-active in our approach to Human Resource management as described in the Corporate Responsibility section. 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. IT integrity and performance Health, safety and environment (HSE) Stakeholder relationships A major failure in our IT systems could result in financial and reputational loss. 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 reputation with stakeholders underpins our success in a number of ways, including attracting and retaining employees; providing efficient services to our occupiers, clients and their customers; delivering successful development projects; and communication with shareholders, debt investors and bank lenders. 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 which include the use of off-site facilities. The plans are regularly updated and rehearsed from time to time. IT back-up plans are a key element of our disaster recovery plans. We make use of third parties to provide back-up services for the Company. Our HSE responsibilities and management systems are detailed on pages 63 and 64. We conduct relationship management programmes to ensure we engage appropriately with our key stakeholder groups. Our 2004 Corporate Responsibility Report, the subsequent Progress Report and the Customer Service and Corporate Responsibility section of this Annual Report detail how we conduct our business to minimise the risks that could arise from poor management of these relationships. ‘Our people’, page 62 2004 Corporate Responsibility Progress Report – – Health and safety, page 63 Environment, page 64 2004 Corporate Responsibility Progress Report Corporate responsibility, page 60 Customer Service, page 32 2004 Corporate Responsibility Progress Report Land Securities Annual Report 2005 71 3.4 Remuneration Report Remuneration Report Directors’ remuneration The Company has complied throughout the accounting period with the requirements of the Combined Code in relation to directors’ remuneration and with the Directors’ Remuneration Report Regulations 2002. 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). The remuneration report relates to arrangements relating to the 2004/05 and previous financial years as well as the proposed policy for 2005/06 and future years. Following a review of the Group’s incentive arrangements, a number of new proposals have been developed. These are summarised in a letter to shareholders enclosed with the 2005 Annual Report. 1. Composition of the Remuneration Committee The Remuneration Committee (the Committee) is chaired by Sir Winfried Bischoff, with the other members being David Rough, Stuart Rose, Bo Lerenius and Alison Carnwath. All of the members of the Committee 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. Table 1 – Criteria for directors’ 2004/05 bonuses 2. Function of the Remuneration Committee The Committee reviews and determines, 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 participate. During the year the Committee met three times. The Committee consults the Group Chief Executive in relation to proposals for the remuneration of other executive directors. It also reviews the Group Chief Executive’s remuneration proposals for the Group’s staff other than the executive directors. During the year the human resources director also provided information and advice to the Committee. The Chairman, Group Chief Executive and the human resources director are generally invited to attend meetings of the Committee. No director is involved in any decisions relating to 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 its determination of market appropriate remuneration levels. 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 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, with an emphasis on delivering superior reward for achieving and exceeding the Company’s strategic plan. Levels of remuneration are set to ensure comparability across a range of UK based companies of similar size and complexity. The focus is on companies in the FTSE 100 Index but with particular emphasis on the property industry. A significant proportion of the executive directors’ total remuneration is performance-related to align their interests with those of shareholders. Base annual salary is supplemented by cash and share bonuses geared to achievement of short-term objectives, while the importance of longer term success of the business is emphasised through the Group’s long term incentive arrangements. 3. Remuneration strategy The Group’s remuneration strategy has three key objectives: The Committee has carried out a major review of executive directors’ remuneration over the past year. F W Salway A E Macfarlane A M Collins I D Ellis M R Hussey Total returns in excess of WACC Group profit Performance of our business units Organisation restructuring Total returns in excess of WACC Capital structure Investor relations Development of the finance function and management information Total returns in excess of WACC Investment performance Portfolio acquisitions and sales Project and property management Total returns in excess of WACC Trillium profit New business development Client satisfaction Total returns in excess of WACC Investment performance Portfolio acquisitions and sales Office development leasing 72 Land Securities Annual Report 2005 72 Land Securities Annual Report 2005 3.4 Remuneration Report continued This has resulted in a number of significant changes. The key elements of the changes (described more fully below) are: (a) an increase in annual bonus potential (explained below) (b) a new long-term incentive plan (including a matching element to encourage investment by senior executives in the Company’s shares) which will replace the existing performance share matching plan and executive share option scheme for executive directors and senior managers (c) an increase in the level of performance required for long-term incentives for earnings per share growth and a more focused property index benchmark (d) higher shareholding targets for executive directors. 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 and reports from specialist consultants.The Group’s policy is to set base salary around the mid-market rate. The Committee is mindful of the need to treat pay comparisons with caution to avoid an upward ratchet of remuneration levels with no corresponding improvement in performance. 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 (and, in brackets, revised salaries to take effect from July 2005) are as follows: Francis Salway Andrew Macfarlane Mark Collins Ian Ellis Mike Hussey Richard Akers £425,000 (£575,000) £340,000 (£385,000) £320,000 (£350,000) £320,000 (£350,000) £275,000 (£340,000) £185,000 (£285,000) The significant increases being awarded to Francis Salway, Mike Hussey and Richard Akers reflect their promotions since 1 April 2004 to Chief Executive and the Board respectively. Annual bonuses For the financial year ended 31 March 2005, the maximum bonus that was earned under the executive directors’ bonus plan was 105% of salary (38.5% of salary in shares and 66.5% of salary in cash). Other awards under the plan ranged from 97% of salary to 103%. These award levels reflect the truly exceptional performance of the Company with strong underlying Earnings Per Share (EPS) growth and an increase in net asset value over the previous years which are key measures of performance for the Group. Additionally, Mike Hussey received a payment of £100,000 in relation to the bonus parameters that were established for the year before he was promoted to the Board. This element of his bonus will be discontinued. In previous years executive directors have had 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 normal maximum of 40% of salary in cash and 40% of salary in shares for superior results. The shares will be deferred for three years and are normally forfeited if the executive leaves employment during that period. Following the Committee’s review of directors’ remuneration, the normal maximum bonus potential will in future be 100% of salary. 25% of any bonus will be payable in shares deferred for three years (and normally forfeited on leaving the Group in the deferral period). A higher bonus may be paid in exceptional circumstances but the circumstances surrounding this will be set out in the relevant remuneration report. As explained below, the deferred element of the bonus will be matched by an award of performance related shares under the new long-term incentive plan. Performance share plan As mentioned above, part of an executive’s bonus is in deferred shares. Under the performance share plan approved by shareholders in 2002 and which applied to the year under review, executives 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 that plan since it was implemented. Half of these performance shares are dependent on the real increase in the Company’s normalised adjusted diluted earnings per share (NADEPS) over three financial years. The other half of the performance shares are subject to the Company’s total property return equalling or exceeding 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: Real increase in NADEPS Less than 2.5% 2.5% 4% Between these limits Extent total property return exceeds the IPD Index Less than index Equal to index 1% % that vests 0% 25% 100% Pro rata % that vests 0% 25% 100% Pro rata The maximum amount of performance shares Between these limits which could potentially vest in respect of the executive directors is shown in table 2. Since the vesting date for his performance shares had not been reached at the date of Ian Henderson’s retirement from the Group, the performance shares potentially awarded to him lapsed. The Remuneration Committee has determined that the performance shares linked to EPS growth for the period 1 April 2002 to 31 March 2005 vested in full. The performance shares linked to IPD return did not vest for this period and accordingly will lapse. Land Securities Annual Report 2005 73 3.4 Remuneration Report continued Table 2 – Performance shares* F W Salway A E Macfarlane A M Collins I D Ellis M R Hussey *Subject to performance tests (see p73) New long-term incentive plan Shareholders are being asked at the forthcoming AGM to approve the establishment of a long-term incentive plan to replace the 2002 Share Option Scheme and the Performance Share Plan. The new plan is described in the shareholder circular for the AGM. In summary, it will allow the Committee to make grants of performance shares with a face value of up to 100% of salary. In addition, if an executive purchases shares or shares are deferred under the annual bonus plan, awards of “matching” performance shares may be awarded. The maximum level of matching is shares with a face value of 100% of salary. Performance conditions will be similarly structured to those applying to the Performance Share Plan described above. However, the EPS targets will increase from previous levels to the retail prices index (RPI) + 3% to 5% and the IPD index will be more targeted reflecting the asset classes the Company invests in rather than the more general “All Fund Universe Index”. Share options Under the Land Securities Group 2000 and 2002 Executive Share Option Schemes executives could over a period of ten years be granted options with a value of up to four times annual remuneration. All options granted under the schemes are subject to a performance test under 74 Land Securities Annual Report 2005 Cycle ending 2005 2006 2007 2005 2006 2007 2006 2007 2005 2006 2007 2007 Award date 11/07/2002 01/07/2003 12/07/2004 11/07/2002 01/07/2003 12/07/2004 01/07/2003 12/07/2004 11/07/2002 01/07/2003 12/07/2004 31/03/2004 Market price at award date(p) 854.0 787.2 1159.0 854.0 787.2 1159.0 787.2 1159.0 854.0 787.2 1159.0 1090.0 Shares at 01/04/04 7,142 13,190 9,050 13,962 8,090 11,472 10,798 20,000 Shares awarded Shares/value vested 12,794 13,034 14,174 28,290 – – – – – – – – – – – – Vesting date 11/07/2005 01/07/2006 12/07/2007 11/07/2005 01/07/2006 12/07/2007 01/07/2006 12/07/2007 11/07/2005 01/07/2006 12/07/2007 31/03/2007 which their exercise depends on the growth in the Company’s normalised adjusted earnings per share exceeding the growth in the retail prices index by at least 2.5% per year. An earnings per share target was chosen as executives will only be rewarded if there has been absolute improvement in the Company’s performance. For grants made in 2004 earnings per share performance will be assessed in 2007. If the required level of performance is not achieved in 2007, the relevant options lapse with no opportunities for retesting performance in subsequent years. During the year options were granted under the 2002 Scheme to the executive directors and also to a number of other employees. No payment is made by participants in the 2000 and 2002 Schemes for the grant of options. The options granted to executive directors are shown in table 4. Following adoption of the proposed new long term incentive plan, no further options will be granted under the 2000 and 2002 Schemes although a new option scheme using market purchase shares will be introduced for less senior executives. 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 therefore established share ownership guidelines for the Company’s executive directors. Following the Committee’s review of remuneration these will now require the chief executive to own shares with a value equal to twice his base salary and for other executive directors to own shares with a value equal to 1.5 times their base salary. An executive director must normally 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. The Committee ensures that both earnings per share and net asset value are calculated on consistent bases where there are accounting standard changes (such as the introduction of IFRS) over the performance period for incentives. 3.4 Remuneration Report continued Table 3 – Directors’ Emoluments (£’000) Executive: F W Salway A E Macfarlane (3) A M Collins (4) I D Ellis (5) M R Hussey (appointed 30/09/04) I J Henderson (6) (retired 14/07/04) Non-executive: P G Birch (Chairman) D Rough Sir Winfried Bischoff S A R Rose (appointed 21/05/03) B A Lerenius (appointed 01/06/04) A J Carnwath (appointed 01/09/04) P G Freeman (retired 14/07/04) Basic salary 409 331 309 309 271 412 Bonuses Benefits(1) Fees 74 76 82 164 634 3 19 13 13 11 6 2005 560 502 486 650 282 1,246 168 168 51 44 40 38 26 28 51 44 40 38 26 28 Total emoluments excluding pensions 2004 434 431 538 608 758 153 41 36 29 33 3,061 Pension contributions 2005 2004 98 83 76 69 58 – 80 75 107 69 – Deferred bonus shares(2) 2005 74 76 82 164 194 384 331 590 Total 2,041 1,030 65 395 4,121 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 awarded in respect of 2003/04 financial performance under the deferred bonus plan. 3. A E Macfarlane also received fees of £44,250 from Invensys plc in respect of his non-executive directorship of that company. 4. In accordance with his service contract and to reflect partially the amount and timing of incentive arrangements which he was eligible to receive from his former employer, A M Collins received an initial payment of £171,150 in 2004 and is due to receive a second further amount of £208,033 on 30 June 2007 provided 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 grounds of ill-health or redundancy. The 2004 pension contribution for A M Collins included £38,000 in respect of amounts due for payment in 2003. 5. In accordance with his service contract, I D Ellis received a payment of £215,000 in 2004. This amount reflected a change to his service contract following the acquisition of Trillium by Land Securities. 6. For the period 1 April to 14 July 2004, I J Henderson served as Group Chief Executive and participated in the existing management bonus plan. On 14 July 2004, I J Henderson stepped down as Chief Executive and accordingly revised performance measures were established to reflect his changed role within the Group for the period from 15 July to 31 December 2004. The revised performance measures related to a number of initiatives concerned with promoting the Group and the Group’s interests to central and local government, with particular reference to the Treasury’s proposals to introduce REITS. The bonus paid to I J Henderson in respect of the period 1 April to 31 December 2004 was as follows: Bonus for period 1 April to 14 July 2004 Bonus for period 15 July to 31 December 2004 £129,287 £201,666 £330,953 Since his original expected retirement date was 14 July 2003, I J Henderson did not receive any awards of either executive share options or performance shares for three and a half years prior to 31 December 2004. Under the rules of the respective schemes no executive share options can be granted within two years of an employee’s expected normal retirement date and performance shares lapse upon cessation of employment for any reason. In addition I J Henderson did not draw a pension from the date of his normal retirement on 14 July 2003 until 31 December 2004. I J Henderson received a payment in lieu of pension benefits for the period 15 July to 31 December 2004 of £170,947. The previous Long Term Incentive Plan closed to new entrants on 31 March 2000 and performance periods expired on 31 March 2005. I J Henderson was the sole remaining participating executive director during the year. In summary, an award of shares, up to a maximum of 55% of salary, could be made if, over the previous five years, the Company was ranked by total shareholder returns in the first four of the eight companies in the peer group. In respect of the period to 31 March 2005 the Company was ranked at position four and, accordingly an award of 25% of salary is payable amounting to £130,625. Half of the award is payable in cash and half in deferred shares that will be released on the second anniversary of the award. From 31 December 2004, until 31 March 2005, I J Henderson continued to work for the Group as a consultant at a fee of £5,000 per month. Apart from private medical insurance cover, the provision of an office and secretarial support and a benefit of £20,000 on the purchase of his company car, no further expenses or benefits were paid to I J Henderson during this period. 7. Pensions of £130,280 (2004: £138,840) were paid to former directors or their dependants. Land Securities Annual Report 2005 75 3.4 Remuneration Report continued Table 4 – Directors’ options over Ordinary Shares Granted during year Exercised during year Outstanding share options No. of options at 01/04/04 No. Grant price (pence) F W Salway A E Macfarlane A M Collins I D Ellis M R Hussey I J Henderson (1) (1) (1) (3) (3) (1) (1) (3) (3) (1) (3) (3) (4) (1) (1) (3) (3) (4) (1) (3) (3) (4) (5) (1) (1) (2) 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 51,500 40,000 27,000 174,562 27,500 3,585 * Weighted average exercise price 1. 2000 Executive Share Option Scheme 2. 1993 Savings Related Share Option Scheme 3. 2002 Executive Share Option Scheme. 4. 2003 Savings Related Share Option Scheme 5. 1984 Executive Share Option Scheme 43,065 1159 35,851 1159 34,965 1159 41,759 1159 23,727 1,726 1159 957 Exercise price (pence) 801 869 Market price on exercise (pence) 1215 1215 No. (35,000) (40,000) (75,000) 813 1289 (40,500) 869* 1244 No. of options at 31/03/05 Exercise price (pence) Exercisable dates 30,500 41,250 43,065 30,500 38,125 35,851 70,000 34,375 34,695 2,477 40,000 34,375 41,759 2,546 51,500 40,000 23,727 1,726 812 788 1159 812 788 1159 812 788 1159 677 812 788 1159 650 812 788 1159 957 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 09/2010-03/2011 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 08/2007-02/2008 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 10/2009-04/2010 (27,000) (174,562) (27,500) (2,709) 619 820 869 681* 1151 1289 1289 1,349 876 650 06/2005 The range of the closing middle market prices for Land Securities’ shares during the year was 1050p to 1470p. The middle market price at 31 March 2005 was 1293p. No options held by directors lapsed during the year under review. Table 5 – Directors’ interests in shares P G Birch F W Salway A E Macfarlane A M Collins I D Ellis M R Hussey (appointed 30/09/04) D Rough Sir Winfried Bischoff S A R Rose B A Lerenius (appointed 01/06/04) A J Carnwath (appointed 01/09/04) * At date of appointment 76 Land Securities Annual Report 2005 2005 2004 20,005 25,200 20,384 5,145 7,196 500 7,675 8,750 10,000 8,000 875 20,005 11,064 3,630 5,145 3,744 –* 7,675 8,750 10,000 2,000* 875* Deferred shares 2005 – 13,214 13,732 11,268 19,725 10,000 – – – – – 2004 – 6,661 7,050 4,086 5,452 – – – – – – 3.4 Remuneration Report continued 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 on page 75. Ian Henderson participates in a non-contributory defined benefit pension scheme which was open to property management and administration staff until 31 December 1998. This scheme is designed to provide, at normal retirement age and subject to length of service, a pension of up to two-thirds of final salary, subject to Inland Revenue limits and other statutory rules. The scheme also provides lump sum death-in-service benefits 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. Ian Henderson reached the pension scheme’s normal retirement age on 18 July 2003 and therefore accrued no further benefits in the Scheme between this date and his actual retirement on 31 December 2004. On late retirement his pension was the pension 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 when he retired on 31 December 2004. 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. 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 economic conditions which led to an increase in transfer values. 5. Fees for non-executive directors The annual fees of the Chairman of the Board, Peter G Birch, are determined by the Board 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. 6. Service agreements The unexpired term and the notice periods (both from the Company and from the Executive Director) are 12 months, except in the case of Andrew Macfarlane and Richard Akers where their notice period to the Company is six months. In May 2005, an amendment was made to the service agreements of the executive directors to provide for phased payments of amounts payable on termination, in order to mitigate amounts potentially payable by the Company. The Chairman and the other non-executive directors do not have service agreements with the Company. Table 6 – Defined benefit pension scheme Name of director Accrued pension at 1 April 2004 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 March 2005* I J Henderson £ 388,349 15,128 313,000 26,278 543,000 414,627 Transfer value of pension at 31 March 2004 7,926,000 Transfer value of pension at 31 March 2005* 8,567,000 Increase in transfer value less contributions made by directors 641,000 * This is based on accrued benefits as at 31 December 2004, as this was when I J Henderson retired. 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. This scheme expired on 24 April 1995 with the final grant of share options under this scheme being made in July 1994. 8. Directors’ interests in shares The interests of the directors in the shares of the Company as at 31 March are shown in table 5. There have been no changes in the shareholdings of the directors between the end of the financial year and 24 May 2005, save that on 17 May 2005 Alison Carnwath purchased 5,297 shares. 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 interests and holdings of options, which are open to inspection at the Company’s registered office, contain full details of directors’ interests. Land Securities Annual Report 2005 77 3.4 Remuneration Report continued 9. Information regarding senior managers below Board level The Group currently employs 32 senior managers in positions below Board level. None of these senior managers is paid at a rate higher than the executive directors and the structure of their remuneration package, including bonuses, is consistent with that of executive directors. During the year under review, bonuses for this group of employees ranged from 42% to 74% of salary, with an average bonus of 64% of salary. 10. Performance graph As required by 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 relatively 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. Signed for and on behalf of the Board by Sir Winfried Bischoff Chairman of the Committee Total shareholder return Source Thomson Financial ) £ ( e u l a V 200 175 150 125 100 75 50 6 Sep 02 31 Jul 02 31 Mar 03 31 Mar 04 31 Mar 05 Land Securities FTSE All-Share Real Estate Index This graph illustrates the value, by 31 March 2005 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 Total shareholder return Source Thomson Financial ) £ ( e u l a V 250 225 200 175 150 125 100 75 50 31 Mar 00 31 Mar 01 31 Mar 02 31 Mar 03 31 Mar 04 31 Mar 05 Land Securities FTSE All-Share Real Estate Index FTSE 100 This graph illustrates the value, by 31 March 2005 of £100 invested in Land Securities on 31 March 2000 compared with that of £100 invested in the FTSE All-Share Real Estate Index and in the FTSE 100 78 Land Securities Annual Report 2005 3.5 Directors Responsibilities Directors’ Responsibilities 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. The directors are required by company law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of their profit or loss for that period and comply with the Companies Act 1985. The directors are responsible for ensuring that applicable accounting standards have been followed and that suitable accounting policies, consistently applied and supported by reasonable and prudent judgments and estimates, have been used in the preparation of the financial statements. It is also the responsibility of the directors to prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are also responsible for maintaining proper accounting records so as to enable them to comply with company law. The directors have general responsibilities for safeguarding the assets of the Company and of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. Land Securities Annual Report 2005 79 3.6 Independent Auditors’ Report Independent Auditors’ Report to the members of Land Securities Group PLC We have audited the financial statements which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out in the statement of accounting policies. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the directors’ remuneration report (the auditable part). Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors' responsibilities. The directors are also responsible for preparing the directors’ remuneration report. Our responsibility is to audit the financial statements and the auditable part of the directors’ remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view 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 nine provisions of the 2003 FRC 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 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 2005 and of the loss 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 17 May 2005 80 Land Securities Annual Report 2005 82 82 82 83 84 84 4.0 Consolidated profit and loss account 4.0 Statement of total recognised gains and losses 4.0 Note of historical cost profits and losses 4.1 Balance sheets 4.2 Consolidated cash flow statement 4.2 Reconciliation of net cash flow to movements in net debt 84 4.2 Reconciliation of Group operating profit to net cash inflow from operating activities 85 103 104 4.3 Notes to the financial statements 4.4 Five and 10 year record 4.5 Directors’ report Financial statements Land Securities Annual Report 2005 81 4.0 Consolidated profit and loss account Consolidated profit and loss account for the year ended 31 March 2005 Gross property income – Group Plus share of joint ventures Gross property income – Total Operating profit/(loss) – Group Share of operating profits of joint ventures Operating profit/(loss) Profit on sales of fixed asset properties – Group Profit on sales of fixed asset properties – joint ventures Profit on ordinary activities before interest and taxation Net interest payable by Group Net interest payable by joint ventures Profit/(loss) on ordinary activities before taxation Taxation Profit/(loss) on ordinary activities after taxation Dividends Notes 2 2 2 2, 3 2 2, 3 2 2 2 6 6 7 8 Retained profit/(accumulated loss) for the financial year 23 Before exceptional items £m 1,641.4 224.3 1,865.7 508.8 139.6 648.4 – – 648.4 (176.4) (70.9) 401.1 (95.0) 306.1 (202.5) 103.6 Exceptional items £m – – – (14.8) – (14.8) 112.9 12.3 110.4 (667.3) – (556.9) 215.0 (341.9) – (341.9) Total 2005 £m 1,641.4 224.3 1,865.7 494.0 139.6 633.6 112.9 12.3 758.8 (843.7) (70.9) (155.8) 120.0 (35.8) (202.5) (238.3) (Loss)/earnings per share Basic (loss)/earnings per share Diluted basic (loss)/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. Statement of total recognised gains and losses for the year ended 31 March 2005 (Loss)/profit on ordinary activities after taxation Unrealised surplus on revaluation of investment properties Unrealised surplus on revaluation of joint ventures’ 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 (Loss)/profit 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 Historical cost retained profit for the financial year The notes on pages 85 to 102 form an integral part of these financial statements. 82 Land Securities Annual Report 2005 Before exceptional items £m 1,285.8 195.3 1,481.1 464.7 101.1 565.8 – – 565.8 (174.4) (82.2) 309.2 (103.1) 206.1 (173.2) 32.9 Notes 9 9 9 9 8 Exceptional items £m – – – – – – 52.0 11.9 63.9 – – 63.9 18.3 82.2 – 82.2 2005 pence (7.69) (7.66) 68.67 68.41 43.25 2005 £m (35.8) 842.2 29.3 (40.3) 795.4 2005 £m (155.8) 280.7 124.9 120.0 (40.3) 204.6 (202.5) 2.1 Total 2004 £m 1,285.8 195.3 1,481.1 464.7 101.1 565.8 52.0 11.9 629.7 (174.4) (82.2) 373.1 (84.8) 288.3 (173.2) 115.1 2004 pence 61.84 61.76 47.86 47.80 37.10 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 4.1 Balance sheets Balance sheets at 31 March 2005 Fixed assets Intangible assets Goodwill Negative goodwill Tangible assets Investment portfolio properties Outsourcing properties Total properties Other tangible fixed assets Investment in Group undertakings Investment in joint ventures (excluding Telereal) Share of gross assets of joint ventures Share of gross liabilities of joint ventures Current assets Stocks 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)/assets 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 venture (Telereal) Share of gross assets of joint venture Share of gross liabilities of joint venture Capital and reserves Called up share capital Own shares acquired 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) F W Salway A E Macfarlane Directors The financial statements on pages 82 to 102 were approved by the directors on 17 May 2005. Group 2005 £m Notes 11 12 13 13 13 13 13 14 15 15 16 17 17 18 19 20 21 15 15 22 23 23 23 23 23 23 23 10 10 Company 2005 £m 2004 £m – – – – – – – – – 5,037.1 – 4,092.7 2004 £m 34.3 – 34.3 7,880.9 769.2 8,650.1 51.0 8,701.1 257.2 (5.1) 252.1 31.9 (6.3) 25.6 8,737.1 546.3 9,283.4 57.9 9,341.3 634.3 (125.7) 508.6 9,875.5 8,987.5 5,037.1 4,092.7 150.9 496.2 33.4 2.8 8.3 691.6 (822.1) (130.5) 9,745.0 (2,856.9) (46.8) (133.6) 1,065.9 (1,137.0) (71.1) 6,636.6 46.8 (2.1) 31.4 – 30.5 3,703.6 2,826.4 6,636.6 1419p 1460p 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) 6,038.5 55.0 – 15.9 – 22.1 3,112.8 2,832.7 6,038.5 1294p 1331p – 325.5 – – 0.3 325.8 (153.7) 172.1 5,209.2 – – – – 7.8 – – 5.2 13.0 (591.9) (578.9) 3,513.8 – – – 5,209.2 3,513.8 46.8 – 31.4 373.6 30.5 – 4,726.9 5,209.2 55.0 – 15.9 373.6 22.1 – 3,047.2 3,513.8 Land Securities Annual Report 2005 83 4.2 Consolidated cash flow statement Consolidated cash flow statement for the year ended 31 March 2005 Net cash inflow from operating activities Distributions received from joint ventures Interest (paid to)/received from joint ventures Returns on investments and servicing of finance Interest received Interest paid Cost of purchase and redemption of bonds and debenture debt Cost of cancellation of interest rate swaps Cost of debt refinancing Net cash outflow from investments and servicing of finance Taxation (Corporation tax received/(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 (primarily refurbishment costs) 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 Acquisition of Slough Estates retail property portfolio (Note 27) (Advances)/repayment of loan capital by joint ventures Equity dividends paid Cash inflow before use of liquid resources Management of liquid resources (Investments: short-term deposits) Financing Issue of shares Purchase of own share capital (non-equity B shares) (Decrease)/increase in debt Net cash (outflow)/inflow from financing Decrease in cash in year Reconciliation of net cash flow to movements in net debt Decrease in cash in year Cash (inflow)/outflow from (decrease)/increase in liquid resources Cash outflow/(inflow) from decrease/(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 stocks Increase in debtors Increase in creditors and provisions Net cash inflow from operating activities 84 Land Securities Annual Report 2005 2005 £m 506.4 214.1 (0.3) 10.0 (221.5) (116.3) (42.0) (17.6) (387.4) 3.6 336.4 (215.3) (387.6) (37.8) (122.5) (763.2) 378.8 355.3 (29.1) (19.3) (48.4) (5.4) (105.0) (175.5) 2.1 216.2 13.6 (8.4) (238.0) (232.8) (14.5) 2005 £m (14.5) (216.2) 238.0 7.3 (494.6) (487.3) (2,435.8) (2,923.1) 2005 £m 494.0 37.1 (33.2) (91.5) 100.0 506.4 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) – 121.0 (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 4.3 Notes to the financial statements for the year ended 31 March 2005 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 an explanation of this departure is given in (h)(iii) below. With the exception of UITF37 ‘Purchase and Sale of own Shares’ which has been adopted for the first time this year by the Group, 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 2005. 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 2005. 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 also 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. 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. 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. 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 21. (ii) deferred tax is not recognised on revaluation gains and losses where these are not taken to the profit and loss account. (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) Positive and negative goodwill The positive 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. The negative goodwill arising on the acquisition from Slough Estates of companies holding certain retail properties will be recognised in the profit and loss account in the periods in which the properties are sold. (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 2005. 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 2005 85 (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. If 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 would be taken to the profit and loss account. (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. (p) Purchase and sale of own shares In accordance with UITF37 ‘Purchase and Sale of own Shares’ consideration paid for the Company’s own shares is deducted in arriving at shareholders’ funds. 4.3 Notes to the financial statements continued for the year ended 31 March 2005 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 portfolio investments. (iii) Depreciation 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 investment 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 only if a permanent diminution 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. 86 Land Securities Annual Report 2005 (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 cashflows of acquired Group undertakings are included in the consolidated profit and loss account and the consolidated cash flow statement from the date of acquisition. (l) Trading properties Trading properties are those properties held as stock for sale and, being current assets, are carried at the lower of cost and net realisable value, except as noted below. 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. 4.3 Notes to the financial statements continued for the year ended 31 March 2005 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. Business sectors including the results of joint ventures Business sectors including the results of joint ventures Property investment 2005 £m Property outsourcing 2005 £m Analysis of total results between Group and share of joint ventures Share of joint ventures 2005 £m Group 2005 £m Analysis of total results between Group and share of joint ventures Share of joint ventures 2004 £m Group 2004 £m (i) Profit and loss account Rental income (Note (a)) Service charges and other recoveries Unitary charge Capital projects and other reimbursable costs Third party rents Property services income Long-term contract income Proceeds of sales of trading properties Gross property income Rents payable Other direct property or contract expenditure (Note (b)) 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 (c)) Exceptional costs of debt restructuring 518.5 79.2 – – – – 191.2 22.3 811.2 (15.1) (104.2) (49.4) (179.6) – (15.9) 447.0 (3.8) – 443.2 82.4 525.6 Total 2005 £m 518.5 79.2 730.2 187.9 10.5 928.6 191.2 148.2 492.6 71.8 593.2 159.6 10.5 763.3 191.2 122.5 – – 730.2 187.9 10.5 928.6 – 125.9 1,054.5 (215.0) 1,865.7 (230.1) 1,641.4 (193.4) (542.0) (55.8) (179.6) (2.6) (112.2) 555.8 (32.8) (2.4) 520.6 112.9 633.5 (446.5) (23.8) – (2.6) (104.4) 262.2 (42.8) (2.4) 217.0 42.8 259.8 (550.7) (73.2) (179.6) (2.6) (120.3) 709.2 (46.6) (2.4) 660.2 125.2 785.4 (11.8) (14.8) 758.8 Property investment 2004 £m Property outsourcing 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 – – 572.6 216.3 13.1 802.0 – 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 25.9 7.4 137.0 28.3 – 165.3 – 25.7 224.3 (36.7) (8.7) (17.4) – – (8.1) 153.4 (13.8) – 139.6 12.3 151.9 Total 2004 £m 515.1 65.6 572.6 216.3 13.1 802.0 49.6 48.8 514.5 65.6 436.3 186.8 13.1 636.2 49.6 19.9 1,481.1 (179.6) 1,285.8 (139.7) (509.8) (56.8) (49.6) (6.2) (18.2) 505.5 (27.6) (2.4) 475.5 52.0 527.5 (509.8) (74.9) (49.6) (6.2) (41.5) 619.5 (40.5) (2.4) 576.6 63.9 640.5 (10.8) – 629.7 Profit on ordinary activities before interest and taxation Notes (a) Rental income includes £8.9m (2004: £9.3m) of rent receivable allocated to rent free periods. (b) Other direct property or contract expenditure includes pre-commitment costs written off of £3.4m (2004: £2.4m). (c) Common costs are costs associated with central Group management. (ii) Net assets Properties in development programme (Note 13) Other investment properties (within the investment property portfolio) Investment properties relating to the Barclays contract (property outsourcing) Operating properties 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 Total 2005 £m Property investment £m Property outsourcing £m 745.0 7,992.1 – – 3.3 8,740.4 508.6 79.5 9,328.5 – – 25.2 521.1 80.2 626.5 (71.1) 18.2 745.0 7,992.1 25.2 521.1 83.5 9,366.9 437.5 97.7 732.2 7,148.7 – – 9.1 7,890.0 252.1 (139.0) – – – 769.2 76.2 845.4 (47.9) 44.2 573.6 9,902.1 8,003.1 841.7 8,844.8 (3,085.1) (180.4) 6,636.6 (2,585.4) (220.9) 6,038.5 Land Securities Annual Report 2005 87 0.6 – 136.3 29.5 – 165.8 – 28.9 195.3 (39.9) – (18.1) – – (23.3) 114.0 (12.9) – 101.1 11.9 113.0 Total 2004 £m 732.2 7,148.7 – 769.2 85.3 8,735.4 204.2 (94.8) 4.3 Notes to the financial statements continued for the year ended 31 March 2005 3. Operating profit Operating profit is stated after charging Directors’ remuneration Depreciation Amortisation of goodwill Auditors’ remuneration: Audit fees (Company £85,000 (2004: £82,000)) Non-audit fees Bid support – Land Securities Trillium Limited Taxation Other advice Total non-audit 4. Revenue profit (Loss)/profit on ordinary activities before taxation Profit on sale of fixed asset properties Exceptional costs of debt restructuring Revenue profit before taxation 2005 £m 4.6 34.7 2.4 0.6 – 0.2 0.4 0.6 Group £m (236.8) (112.9) 682.1 332.4 Share of joint ventures £m 81.0 (12.3) – 68.7 Total 2005 £m (155.8) (125.2) 682.1 401.1 Group £m 342.3 (52.0) – 290.3 Share of joint ventures £m 30.8 (11.9) – 18.9 2004 £m 3.8 29.1 2.4 0.5 0.1 0.4 0.2 0.7 Total 2004 £m 373.1 (63.9) – 309.2 Revenue profits are 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 2005 No. 2004 No. 2005 £m 2004 £m 453 1,206 63 1,722 411 1,200 66 1,677 38.6 64.5 1.1 104.2 82.2 9.1 12.9 104.2 30.9 47.7 1.4 80.0 64.2 6.8 9.0 80.0 In addition to the above, 358 employees are employed by Land Securities Trillium Telecom Services Limited, a wholly-owned Group company until it was sold on 11 February 2005 to Telereal. These employees were made available to Telereal Services Limited, a joint venture company, to deliver services to BT. All related employee costs were reimbursed to the Group by Telereal Services Limited. Directors Aggregate emoluments excluding pensions Company contributions to pension schemes 2005 £m 3.7 0.4 4.1 2004 £m 3.1 0.3 3.4 Five directors (2004: four) have retirement benefits accruing under money purchase pension schemes. Retirement benefits accrue to one director (2004: 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 72 to 78. 88 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 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 2005 £m 8.0 4.2 0.5 12.7 2004 £m 3.3 2.3 4.2 9.8 The amount under other schemes includes the actual contributions paid to the Group’s defined contribution schemes. Defined benefit schemes 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 July 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 actuarial expectations of life expectancy. 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. Further annual contributions of £1.5m were made in March 2004 and March 2005. In September 2004 the Group made a further one-off cash contribution of £10.0m to improve the funding position of the Scheme. The £7.5m contribution paid in March 2003 and the £10.0m contribution paid in September 2004 are 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 2004 and 2005 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. BBC 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 BBC Trillium Plan’). As at 31 March 2005 the BBC Trillium Plan had assets of £13.4m (2004: £11.1m). This includes a bulk transfer payment of £8.1m that was received from the BBC pension scheme in May 2004. 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 BBC Trillium Plan. The assets and liabilities in respect of the BBC 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. Land Securities Annual Report 2005 89 4.3 Notes to the financial statements continued for the year ended 31 March 2005 5. Employees, directors and pensions continued 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 employees who transferred from BT to the scheme from 1 May 2002. All relevant pension costs are rechargeable to Telereal Services Limited. All death-in-service and benefits for incapacity arising during employment are wholly insured. No post retirement benefits other than pensions are made available to employees of the Group. 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 2005 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 2005 % 4.25* 3.00 5.40 3.00 2004 % 4.00* 2.75 5.50 2.75 2003 % 4.75 2.50 5.50 2.50 * plus an allowance of 1% per annum for promotional salary increases in respect of employee members of the Land Securities Scheme 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 schemes assets Actuarial value of schemes liabilities Deficit in the schemes Related deferred tax asset Net pension liability 2005 % 7.50 5.00 4.75 2004 % 7.50 5.00 4.00 2003 % 7.50 5.50 3.75 2005 £m 48.7 62.3 14.7 125.7 (136.6) (10.9) 3.3 (7.6) 2004 £m 42.9 58.8 2.9 104.6 (121.8) (17.2) 5.2 (12.0) 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 schemes. 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 the amount credited to other finance income* Expected return on pension schemes assets Interest on pension schemes liabilities Net return *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 schemes assets Experience gains and losses arising on the schemes liabilities Changes in assumptions underlying the present value of the schemes liabilities Actuarial (loss)/gain 2005 £m 3.7 0.2 3.9 6.4 (6.7) (0.3) 2005 £m 3.1 0.3 (8.3) (4.9) 2003 £m 31.9 34.1 10.4 76.4 (95.0) (18.6) 5.6 (13.0) 2004 £m 4.0 0.3 4.3 5.4 (6.0) (0.6) 2004 £m 13.7 0.2 (13.6) 0.3 90 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 Movement in deficit during year Deficit in the schemes at the beginning of the year Operating cost Employer contributions Other income plus any risk benefit premiums paid direct to insurer Net return Actuarial (loss)/gain Deficit in the schemes at the end of the year History of experience gains and losses Difference between the actual and expected return on schemes assets Value of pension schemes assets Percentage of pension schemes assets Experience gains on pension schemes liabilities Value of pension schemes liabilities Percentage of pension schemes liabilities Actuarial (loss)/gain Value of pension schemes liabilities Percentage of pension schemes liabilities 2005 £m (17.2) (3.9) 15.2 0.2 (0.3) (4.9) (10.9) 2004 £m 13.7 104.6 13.1% 0.2 121.8 0.1% 0.3 121.8 0.2% 2004 £m (18.6) (4.3) 5.8 0.2 (0.6) 0.3 (17.2) 2003 £m (16.3) 76.4 (21.3%) 2.7 95.0 2.8% (17.2) 95.0 (18.1%) 2005 £m 3.1 125.7 2.5% 0.3 136.6 0.2% (4.9) 136.6 (3.6%) The consolidated balance sheet includes a net pension asset of £14.5m (2004: £6.0m) representing the unamortised balance of the £7.5m special contribution made by the Group in March 2003 and the £10.0m special contribution made in September 2004. Full adoption of FRS17 would result in the pension asset being replaced by the net pension liability of £7.6m (2004: £12.0m), giving rise to a decrease in net assets of £22.1m (2004: £18.0m). 6. Net interest payable Interest payable Borrowings not wholly repayable within five years Borrowings wholly repayable within five years Other interest payable Loans to/from joint ventures Interest capitalised in relation to properties under development Interest receivable Short-term deposits Other interest receivable Loans to/from joint ventures Net interest payable – ordinary Cost of purchase and redemption of bonds and debenture debt Cost of cancellation of interest rate swaps Net interest payable – exceptional Group £m (149.9) (55.5) (0.9) (0.3) (206.6) 20.2 (186.4) 7.3 2.7 – (176.4) (625.3) (42.0) (667.3) Share of joint ventures £m (73.6) – – – (73.6) – (73.6) 2.5 – 0.2 (70.9) – – – Total 2005 £m (223.5) (55.5) (0.9) (0.3) (280.2) 20.2 (260.0) 9.8 2.7 0.2 (247.3) (625.3) (42.0) (667.3) Group £m (154.7) (70.4) (1.0) – (226.1) 35.6 (190.5) 5.7 2.8 7.6 Share of joint ventures £m (76.9) – – (7.6) (84.5) – (84.5) 2.3 – – Total 2004 £m (231.6) (70.4) (1.0) (7.6) (310.6) 35.6 (275.0) 8.0 2.8 7.6 (174.4) (82.2) (256.6) – – – – – – – – – Interest has been capitalised at the Group’s pre-tax weighted average borrowing rate for non-specific borrowings for the year of 6.8% (2004: 7.7%). Non-specific borrowings exclude certain bank debt which is specific to the PRIME contract. Group interest payable on borrowings includes £3.2m (2004: £4.8m) in respect of the amortisation of bond discounts and issue expenses. Land Securities Annual Report 2005 91 4.3 Notes to the financial statements continued for the year ended 31 March 2005 7. Taxation Analysis of tax (credit)/charge for the year Corporation tax on Group (loss)/profit for the year at 30% (2004: 30%) Adjustments to current tax in respect of prior years Share of joint ventures’ current tax Total current tax Deferred tax on Group timing differences arising in the year Deferred tax released in respect of fixed asset property disposals in the year Share of joint ventures’ deferred tax Total deferred tax Tax (credit)/charge for the year Factors affecting the tax (credit)/charge for the year The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 30% (2004: 30%) The differences are explained below: (Loss)/profit on ordinary activities before taxation Tax at 30% Effect of capital allowances Effect of 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 fixed assets Telereal depreciation and goodwill amortisation Non-allowable expenses and non-taxable items Prior year corporation tax adjustments Current tax 2005 £m (60.8) (26.0) 26.5 (60.3) (39.4) (20.3) – (59.7) (120.0) 2005 £m 2004 £m 73.3 (1.5) 14.7 86.5 31.5 (31.6) (1.6) (1.7) 84.8 2004 £m (155.8) 373.1 (46.7) (37.1) 5.0 (78.8) 49.4 (12.0) 4.6 2.5 (26.0) (60.3) 111.9 (26.8) 5.9 91.0 (8.4) (5.9) 4.7 6.6 (1.5) 86.5 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 £10.5m (2004: credit of £18.3m) attributable to fixed asset property sales, including the release of deferred taxation. A tax credit of £204.5m (2004: Nil) was attributable to exceptional items (excluding fixed asset property sales). 8. Dividends Ordinary shares – interim – final B shares Additional prior year dividends – ordinary shares Dividends per ordinary share Profit and loss account 2005 pence 10.40 32.85 2004 pence 9.90 27.20 43.25 37.10 2005 £m 48.6 153.7 0.1 0.1 202.5 2004 £m 46.1 126.8 0.3 – 173.2 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, 17 April 2004 and 15 October 2004 were 2.8%, 2.5%, 2.8% and 3.2% 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. 92 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 9. (Loss)/earnings per share Earnings (Loss)/profit after taxation B share dividends (Loss)/earnings Exceptional costs of debt restructuring after current and deferred tax Profits on fixed asset property disposals after current and deferred tax Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Adjusted earnings Weighted average number of ordinary shares Weighted average number of ordinary shares Effect of owned shares Weighted average number of ordinary shares after adjusting for owned shares Effect of dilutive share options Weighted average number of ordinary shares adjusted for dilutive instruments (Loss)/earnings per share Basic (loss)/earnings per share Diluted (loss)/earnings per share Adjusted earnings per share Adjusted diluted earnings per share 2005 £m (35.8) (0.1) (35.9) 477.6 (135.7) 9.3 5.2 320.5 No. m 466.9 (0.2) 466.7 1.8 468.5 pence (7.69) (7.66) 68.67 68.41 2004 £m 288.3 (0.3) 288.0 – (82.2) 8.3 8.8 222.9 No. m 465.7 – 465.7 0.6 466.3 pence 61.84 61.76 47.86 47.80 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 is a permanent timing difference, the deferred taxation arising on capitalised interest is also eliminated when calculating adjusted earnings per share. 10. Net assets per share Equity shareholders’ funds Net assets Non-equity B shares Net assets attributable to equity shareholders Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Negative investment in Telereal which does not represent a liability of the Group Adjusted net assets Number of ordinary shares Number of ordinary shares Effect of dilutive share options Number of ordinary shares adjusted for dilutive instruments Net assets per share Net assets per share Diluted net assets per share Adjusted net assets per share Adjusted diluted net assets per share 2005 £m 6,636.6 – 6,636.6 112.7 32.3 71.1 6,852.7 No. m 467.8 1.7 469.5 pence 1419 1414 1465 1460 2004 £m 6,038.5 (8.4) 6,030.1 101.4 30.0 47.9 6,209.4 No. m 465.9 0.6 466.5 pence 1294 1293 1333 1331 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. 11. Goodwill At 1 April 2004 Amortisation for the year At 31 March 2005 Cost £m 42.0 – 42.0 Amortisation £m (7.7) (2.4) (10.1) Net £m 34.3 (2.4) 31.9 Land Securities Annual Report 2005 93 4.3 Notes to the financial statements continued for the year ended 31 March 2005 12. Negative goodwill Acquired during the year and at 31 March 2005 Negative goodwill arose on the acquisition of a retail property portfolio from Slough Estates plc (Note 27). 13. Fixed assets Cost/valuation At 1 April 2004 Additions Sales Net properties contributed to the Metro Shopping Fund LP and the Bristol Alliance Investment properties transferred to stocks Unrealised surplus on revaluation Freehold £m 6,399.1 758.4 (887.1) (92.0) (30.0) 588.5 2,149.6 181.1 (138.2) (10.6) – 250.4 At 31 March 2005 Accumulated depreciation At 1 April 2004 Depreciation for the year Sales At 31 March 2005 Net book value At 31 March 2005 At 31 March 2004 6,736.9 2,432.3 (17.9) (15.4) 8.9 (24.4) (0.4) (0.3) – (0.7) 6,712.5 6,381.2 2,431.6 2,149.2 Leasehold Over 50 years to run £m Under 50 years to run £m Total properties £m Other tangible fixed assets £m 136.9 28.3 (9.1) – – 3.3 159.4 (17.2) (6.6) 3.7 (20.1) 139.3 119.7 8,685.6 967.8 (1,034.4) (102.6) (30.0) 842.2 9,328.6 (35.5) (22.3) 12.6 (45.2) 9,283.4 8,650.1 98.4 24.5 (10.3) – – – 112.6 (47.4) (12.4) 5.1 (54.7) 57.9 51.0 £m 6.3 Total £m 8,784.0 992.3 (1,044.7) (102.6) (30.0) 842.2 9,441.2 (82.9) (34.7) 17.7 (99.9) 9,341.3 8,701.1 Freeholds include £471.3m (2004: £442.9m) of leaseholds with unexpired terms exceeding 900 years; leaseholds under 50 years include £11.0m (2004: £11.4m) 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: Property investment Investment properties Investment portfolio £m Development programme £m 7,172.6 (23.9) 7,148.7 (151.0) 485.4 584.6 37.8 – (580.6) (30.0) (20.7) (102.6) (1.7) 7,369.9 622.2 7,992.1 33.8 8,025.9 8,641.2 734.1 (1.9) 732.2 151.0 (485.4) – 205.4 17.5 (95.7) – – – – 525.0 220.0 745.0 2.6 747.6 747.6 Property outsourcing Operating and investment properties £m Total £m 769.2 8,650.1 Total £m 7,906.7 (25.8) 7,880.9 – – – – 103.6 18.9 – (324.8) – – – (20.6) 546.3 – 546.3 – 688.2 262.1 17.5 (1,001.1) (30.0) (20.7) (102.6) (22.3) 8,441.2 842.2 9,283.4 – 584.6 243.2 17.5 (676.3) (30.0) (20.7) (102.6) (1.7) 7,894.9 842.2 8,737.1 36.4 8,773.5 9,388.8 Market value at 1 April 2004 Less amount included in prepayments in respect of UITF28 adjustments Net book value at 1 April 2004 Properties transferred from portfolio management into the development programme during the year (at 1 April 2004 valuation) Developments completed, let and transferred from the development programme into portfolio management during the year Property acquisitions Capital expenditure Capitalised interest Sales Transfer to stocks Surrender premiums received Net properties contributed to the Metro Shopping Fund LP and the Bristol Alliance Depreciation Unrealised surplus on revaluation Net book value at 31 March 2005 Plus amount included in prepayments in respect of UITF28 adjustments Market value at 31 March 2005 (Group) Market value at 31 March 2005 (Group and share of joint ventures) 94 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 Included within the property outsourcing operating and investment properties are investment properties with a market value of £24.4m (2004: £nil). Fixed asset properties include capitalised interest of £120.9m (2004: £111.0m). The historical cost of investment properties is £4,884.7m (2004: £4,589.5m). 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 £220.1m (2004: £179.3m) 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 30 Gresham Street, EC2; Empress State, SW6; and The Gate, Newcastle upon Tyne. The total development profit earned on schemes completed in the year was £26.5m (2004: £82.7m). Capital commitments Contracted 14. Investment in Group undertakings At 1 April 2004 Additions At 31 March 2005 2005 £m 522.5 2004 £m 665.0 £m 4,092.7 944.4 5,037.1 The investment represents 100% of the issued share capital of LS Intermediate Limited and LS Property Holdings Limited, companies incorporated and operating in the United Kingdom. 15. Investment in joint ventures Summary financial information of the 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)/receivable 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 Telereal 2005 £m 165.3 25.7 191.0 (35.9) (15.7) (8.1) (13.8) 117.5 12.3 129.8 (66.4) 63.4 (21.2) 42.2 Scottish Retail Property Limited Partnership 2005 £m Metro Shopping Fund LP 2005 £m Buchanan Limited Partnership 2005 £m Scottish Retail Property Limited Partnership 2004 £m Total 2005 £m Telereal 2004 £m 21.9 – 21.9 (0.7) (7.5) – – 13.7 – 13.7 0.2 13.9 (4.2) 9.7 8.5 – 8.5 (0.1) (2.3) – – 6.1 – 6.1 (4.7) 1.4 (0.4) 1.0 2.9 – 2.9 – (0.6) – – 2.3 – 2.3 – 2.3 (0.7) 1.6 198.6 25.7 224.3 (36.7) (26.1) (8.1) (13.8) 139.6 12.3 151.9 (70.9) 81.0 (26.5) 54.5 165.8 28.9 194.7 (39.9) (18.0) (23.3) (12.9) 100.6 11.9 112.5 (82.2) 30.3 (13.0) 17.3 162.5 – 4.5 167.0 (4.5) – (4.5) 162.5 614.6 1,015.4 70.2 1,700.2 (71.5) (1,191.2) (1,262.7) – 1,033.5 74.5 1,108.0 (56.1) (1,099.8) (1,155.9) 437.5 (47.9) – 1,015.4 50.5 1,065.9 (50.6) (1,086.4) (1,137.0) 302.3 – 10.8 313.1 (11.7) – (11.7) 149.8 – 4.4 154.2 (4.7) (104.8) (109.5) Net investment in joint ventures (71.1) 301.4 44.7 Notional 50% share of non-recourse net (debt)/cash within joint ventures (1,053.5) Notional 50% share of the fair value of financial liabilities (1,159.0) 7.7 – (103.8) (105.7) 2.2 (1,147.4) (1,073.0) – (1,264.7) (1,149.1) 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) 17.7 243.5 1,033.5 88.2 1,365.2 (61.2) (1,099.8) (1,161.0) 204.2 (1,068.1) (1,149.1) 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 4.9 – Land Securities Annual Report 2005 95 4.3 Notes to the financial statements continued for the year ended 31 March 2005 15. Investment in joint ventures continued Net investment in joint ventures At 1 April 2004 Properties contributed Cash contributed Cost of acquisition Share of post-tax profits Distributions Loan advances Loan repayments Unrealised surplus/(deficit) on revaluation At 31 March 2005 Scottish Retail Property Limited Partnership £m 252.1 – 31.7 – 9.7 – – (11.8) 19.7 301.4 Telereal £m (47.9) – – – 42.2 (65.4) – – – (71.1) Metro Shopping Fund LP £m Buchanan Limited Partnership £m – 92.1 87.1 – 1.0 (146.3) 86.2 (88.2) 12.8 44.7 – – – 166.5 1.6 (2.4) – – (3.2) 162.5 Total £m 204.2 92.1 118.8 166.5 54.5 (214.1) 86.2 (100.0) 29.3 437.5 The Group has four joint ventures, all of which are 50% owned, as follows: • Telereal consists of two partnership agreements with the B-Pears Family Trust and three joint ventures with William Pears Family Holdings, all of which are owned 50:50 and 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 City Wall Holdings Limited (a British Land PLC company), which owns and manages shopping centres in Aberdeen and East Kilbride. The partnership was created on 16 March 2004. • The Metro Shopping Fund LP is a joint venture between Land Securities Properties Limited and Delancey, which owns and manages a portfolio of shopping centres in London. The partnership was created on 8 June 2004. • The Buchanan Limited Partnership is a joint venture between Land Securities Properties Limited and Henderson Buchanan plc, which owns and manages the Buchanan Galleries shopping centre in Glasgow. Land Securities acquired its share in the partnership on 15 December 2004, as part of the transaction with Slough Estates plc. All the joint ventures prepare accounts to 31 March, with the exception of the Buchanan Limited Partnership, which prepares accounts to 31 December. The Telereal joint venture companies include 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. 16. Stocks Trading properties Amount recoverable under long-term construction contracts, less payments on account Group Company 2005 £m 95.8 55.1 150.9 2004 £m 85.0 – 85.0 2005 £m – – – 17. Debtors Group Company Falling due within one year Trade debtors – property investment – property outsourcing Property sales debtors Other debtors Prepayments and accrued income Taxation recoverable Loans to Group undertakings Falling due after one year Amounts receivable under finance leases Other debtors 96 Land Securities Annual Report 2005 2005 £m 28.7 186.8 77.0 55.7 148.0 – – 496.2 14.8 18.6 33.4 2004 £m 29.5 147.2 3.4 54.4 105.2 – – 339.7 – 20.4 20.4 2005 £m – – – – – – 325.5 325.5 – – – 2004 £m – – – 2004 £m – – – – – 7.8 – 7.8 – – – 4.3 Notes to the financial statements continued for the year ended 31 March 2005 18. Creditors falling due within one year Group Company Debentures, bonds and loans (Note 19) Loans from Group undertakings Trade creditors Taxation and Social Security Proposed Final Dividend Capital creditors Other creditors Accruals and deferred income 2005 £m 77.3 – 42.7 118.9 153.7 82.5 34.7 312.3 822.1 2004 £m 681.7 – 80.8 104.6 126.8 92.6 22.7 262.0 1,371.2 2005 £m – – – – 153.7 – – – 153.7 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. 19. Debentures, bonds and loans Nominal value Unamortised discount and issue costs Book value Unsecured 103/4 per cent Exchange Bonds due 2004 91/2 per cent Bonds due 2007 57/8 per cent Bonds due 2013 9 per cent Bonds due 2020 63/8 per cent Bonds due 2024 Syndicated bank debt Commercial paper Secured 5.016 per cent Notes due 2007 5.292 per cent Notes due 2015 5.425 per cent Notes due 2022 5.391 per cent Notes due 2026 5.391 per cent Notes due 2027 5.376 per cent Notes due 2029 5.396 per cent Notes due 2032 73/4 per cent Mortgage 2008 63/8 per cent First Mortgage Debenture Stock 2008/13 10 per cent First Mortgage Debenture Stock 2025 10 per cent First Mortgage Debenture Stock 2027 10 per cent First Mortgage Debenture Stock 2030 Syndicated bank debt PRIME term loan Falling due within one year (Note 18) Falling due after one year 2005 £m – – – – – 73.0 – 73.0 181.7 393.3 257.3 210.7 613.9 318.0 323.4 – – – – – 320.0 268.1 2,886.4 2,959.4 (77.3) 2,882.1 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 2005 £m – – – – – – – – (0.1) (0.9) (1.0) (1.1) (3.2) (1.9) (2.1) – – – – – (2.0) (12.9) (25.2) (25.2) – (25.2) 2004 £m – – (5.4) (3.0) (2.0) (1.4) – (11.8) – – – – – – – – – – – – – (9.7) (9.7) (21.5) 9.7 (11.8) 2005 £m – – – – – 73.0 – 73.0 181.6 392.4 256.3 209.6 610.7 316.1 321.3 – – – – – 318.0 255.2 2,861.2 2,934.2 (77.3) 2,856.9 2004 £m – 465.0 – – 126.8 – – 0.1 591.9 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 In accordance with FRS4 ‘Capital Instruments’ where Notes or Bonds are issued at a discount or incur issue expenses they are stated net of those costs. On 3 November 2004, the Group completed a debt exchange whereby a predominantly secured funding strategy was established. The debt exchange resulted in an exceptional charge of £682.1m. The exceptional charge has been calculated as follows: Pre-exchange nominal value of Bonds Payment to holders unable to accept the new Bonds Net cost of redeeming the private debentures due in 2008 and 2008/13 Incentive payments Net increase in the nominal value of Bonds (being £575.5m less payments to ineligible Bond holders) Transaction costs and commitment fees FRS4 costs on exchanged debt written off Cost of cancellation of interest rate swaps Exceptional costs of debt restructuring Bond debt £m 1,800.0 – – – 498.3 – – 2,298.3 Exceptional costs £m Exceptional interest £m – – – – – 14.8 – 14.8 – 14.8 – 77.2 1.8 27.5 498.3 9.8 10.7 625.3 42.0 667.3 Land Securities Annual Report 2005 97 4.3 Notes to the financial statements continued for the year ended 31 March 2005 19. Debentures, bonds and loans continued The Notes and the committed bank facilities are secured on a fixed and floating pool of assets (‘the Security Group’). This grants the Group’s debt investors security over a pool of investment properties valued at £7.4bn at 31 March 2005. The new secured debt structure has a tiered covenant regime which gives the Group substantial operational flexibility when loan to value and interest cover in the Security Group is less than 65% and more than 1.45 times, respectively. If these limits are exceeded, operational restrictions increase significantly and could act as an incentive to reduce gearing. In May 2004, the former PRIME portfolio was refinanced to include the Employment Services portfolio (a portfolio acquired in December 2003 from the Department for Work and Pensions). The combined portfolio was financed by a £280m syndicated term loan due to expire in December 2017 (‘the PRIME term loan’). This loan is secured by the freehold and long leasehold properties of the combined portfolio. The PRIME term loan has been hedged by interest rate swaps. This was performed by acquiring an interest rate swap, and reprofiling an existing swap at a cost of £21.1m (this will be amortised over the life of the PRIME term loan). 20. Other creditors falling due after one year Group Company Deferred income Other creditors 21. Provision for liabilities and charges At 1 April 2004 Net charge/(credit) for the year Released in respect of property disposals during the year Deferred taxation on acquisition of companies Deferred taxation on disposal of a company At 31 March 2005 Deferred tax is provided as follows Excess of capital allowances over depreciation – investment properties – operating properties Capitalised interest – investment properties – operating and trading properties Tax losses Other timing differences 2005 £m 18.0 28.8 46.8 2004 £m 15.5 20.4 35.9 2005 £m – – – Dilapidations £m Deferred taxation £m 11.7 6.0 – – – 17.7 Group £m 490.0 (75.0) 415.0 173.3 (39.4) (20.3) 6.4 (4.1) 115.9 2005 £m 112.7 22.9 32.3 0.9 (37.8) (15.1) 115.9 Share of joint ventures £m 19.0 – 19.0 2004 £m – – – Total £m 185.0 (33.4) (20.3) 6.4 (4.1) 133.6 2004 £m 101.4 34.8 30.0 4.4 – 2.7 173.3 Total 2004 £m 509.0 (75.0) 434.0 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 in 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 Share of joint ventures £m 64.0 – 64.0 Group £m 626.0 (90.4) 535.6 Total 2005 £m 690.0 (90.4) 599.6 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 £112.7m (2004: £101.4m), and a further £32.3m (2004: £30.0m) would be released in respect of capitalised interest. . 98 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 22. Called up share capital Authorised Allotted and full paid Ordinary shares of 10p each Non-equity B shares of £1.02 each Redeemable preference shares of £1 each 2005 Number m 600.0 540.0 0.1 2004 Number m 600.0 540.0 0.1 2005 £m 46.8 – – 46.8 2004 £m 46.6 8.4 – 55.0 The holders of B shares were 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 carried 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 were entitled to 102p in respect of each B share held together with the relevant proportion of the dividend payable. The holders of B shares had the right to have their shares redeemed at six-monthly intervals. On 17 April 2003, 17 October 2003 and 17 April 2004, 18,439,941, 3,099,927 and 1,661,077 B shares were redeemed respectively. On 13 September 2004, Land Securities Group PLC gave notice that it would redeem all remaining B shares on 15 October 2004. Movements in the share capital of the Company were: At 1 April 2004 Issued on the exercise of options under: 1993 Savings Related Share Option Schemes 1984 Executive Share Option Scheme 2000 Executive Share Option Scheme 2002 Executive Share Option Scheme At 31 March 2005 Executive and Savings Scheme Related Share Option Schemes At 1 April 2004 Granted Granted Exercised Lapsed At 31 March 2005 Number of shares 465,924,545 114,522 35,500 1,686,498 42,001 467,803,066 Option price 957p 1159p 2002 Executive Share Option Scheme 1,764,867 – 1,547,853 (42,001) (141,545) 2000 Executive Share Option Scheme 3,458,062 – – (1,686,498) (258,000) 1984 Executive Share Option Scheme 35,500 – – (35,500) – 1993 Savings Related Share Option Schemes 773,326 170,119 – (114,522) (30,979) Total 6,031,755 170,119 1,547,853 (1,878,521) (430,524) 3,129,174 1,513,564 – 797,944 5,440,682 The options outstanding under the 2002 Executive Share Option Scheme are exercisable at prices between 756p and 1159p up to 2014, provided the associated performance conditions are met and those under the 2000 scheme at prices between 801p and 869p up to 2012. The options outstanding under the Savings Related Share Option Schemes are exercisable at prices between 628p and 957p, after three, five or seven years from the date of grant. 23. Shareholders’ funds (i) Group Own Ordinary shares £m shares Non-equity B shares £m acquired £m Share Capital premium redemption Revaluation reserve reserve account £m £m £m At 1 April 2004 Repayment of B shares Exercise of options Unrealised surplus on revaluation of investment properties Unrealised surplus on revaluation of investment properties within joint ventures Realised on disposals of investment properties Taxation on revaluation surpluses realised on disposals of investment properties Own shares acquired Accumulated loss for the financial year At 31 March 2005 46.6 – 0.2 – – – – – – 46.8 – – – – – – – (2.1) – (2.1) 8.4 (8.4) – – – – – – – – 15.9 – 15.5 – – – – – – 31.4 22.1 8.4 – – – – – – – 3,112.8 – – 842.2 29.3 (280.7) – – – Profit and loss account £m 2,832.7 (8.4) – – – 280.7 (40.3) – (238.3) Total £m 6,038.5 (8.4) 15.7 842.2 29.3 – (40.3) (2.1) (238.3) 30.5 3,703.6 2,826.4 6,636.6 (ii) Company At 1 April 2004 Repayment of B shares Exercise of options Retained profit for the financial year At 31 March 2005 Ordinary Non-equity B shares £m shares £m Share Capital premium redemption reserve account £m £m 46.6 – 0.2 – 46.8 8.4 (8.4) – – – 15.9 – 15.5 – 31.4 22.1 8.4 – – 30.5 Merger reserve account £m 373.6 – – – Profit and loss account £m 3,047.2 (8.4) – 1,688.1 Total £m 3,513.8 (8.4) 15.7 1,688.1 373.6 4,726.9 5,209.2 Land Securities Annual Report 2005 99 4.3 Notes to the financial statements continued for the year ended 31 March 2005 23. Shareholders’ funds continued The own shares acquired in the year includes 117,093 shares owned at 31 March 2004 with a market value of £1.3m at that date. At 31 March 2005 the Group owned 194,139 shares in respect of its commitment to the deferred bonus scheme. Land Securities Group PLC has not presented its own profit and loss account, as permitted by Section 230(1)(b) Companies Act 1985. The retained profit for the year of the Company, dealt within its financial statements, was £1,688.1m (2004: loss £70.1m). 24. Analysis of net debt Net bank balance Liquid resources Debt due within one year Debt due after one year Cash movements Non-cash movements At 1 April 2004 £m 22.8 219.0 (681.7) (1,995.9) (2,435.8) Transfers £m – – 179.2 (179.2) – Ordinary cash flow £m (14.5) (216.2) 425.2 (187.2) 7.3 Cost of debt re- structuring £m Amortisation of discount and issue costs £m – – – 17.6 17.6 – – – (13.9) (13.9) Increase in nominal value of debt £m – – – (498.3) (498.3) At 31 March 2005 £m 8.3 2.8 (77.3) (2,856.9) (2,923.1) Included within the £13.9m of discount and issue cost amortisation, is £10.7m which is the exceptional charge in respect of the discount and issue costs relating to the debt that was exchanged on 3 November 2004. The costs of debt restructuring include £12.7m arising from the debt exchange that took place on 3 November 2004. 25. Financial assets and liabilities This Note should be read in conjunction with the comments set out in the Operating and Financial Review on pages 19-23. 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 denominated in sterling and, with the exception of the committed bank facilities and unsecured money market loans, 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 Financial instruments Interest rate swaps Book value Fair value 2005 £m 11.1 2004 £m 241.8 2005 £m 11.1 2004 £m 241.8 (2,934.2) – (2,677.6) (8.4) (3,000.7) – (3,249.1) (8.4) – – (3.3) (44.5) (2,923.1) (2,444.2) (2,992.9) (3,060.2) Excess of fair value over book value 2005 £m – (66.5) – (3.3) (69.8) 2004 £m – (571.5) – (44.5) (616.0) *At 31 March 2004 short-term investments and cash include £154.0m of short-term deposits charged as temporary security for borrowings. As a consequence of the Group’s debt restructuring, the use of short-term deposits as temporary security is not currently required. Weighted average period of fixed interest rates Weighted average fixed interest rate Financial liabilities 2005 2004 17.5 years 5.3% 12.4 years 7.3% 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 from the nominal value. As at 31 March 2004 the Group (excluding Land Securities Trillium) had a number of interest rate swaps with a net notional value of £600m. These swaps had the effect of fixing interest rates and were terminated during the financial year for a cost of £42.0m. Forward starting interest rate swaps (commencing January 2006) with a notional value of £250m and a term of five years were entered into in March 2005. On these swaps the Group pays fixed interest and receives floating interest. As the intention of the new 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. Land Securities Trillium currently has two interest rate swaps in place to hedge the interest rate risk on the PRIME term loan. Both swaps are amortising and their nominal amounts decrease in line with the repayment profile of the debt. Their notional values are currently £183.1m and £62.8m. 100 Land Securities Annual Report 2005 4.3 Notes to the financial statements continued for the year ended 31 March 2005 Unrecognised gains and losses on instruments used for hedging, and the movements therein are as follows: Unrecognised losses on hedges at 1 April 2004 Losses arising in previous years that were recognised in the year ended 31 March 2005 Net losses arising in the year ended 31 March 2005 that were not recognised in the year Unrecognised losses on hedges at 31 March 2005 Of which: Gains and (losses) expected to be recognised in the year ending 31 March 2006 Gains and (losses) expected to be recognised in the year ending 31 March 2007 or later Unrecognised losses £m (44.5) 42.0 (0.8) (3.3) – (3.3) (3.3) The maturity and repayment profiles of the Group’s financial assets and liabilities, excluding the non-equity B shares, and the expiry periods of its undrawn committed borrowing facilities are: Financial assets 2005 £m 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 11.1 – – – 11.1 Financial liabilities Undrawn committed borrowing facilities 2004 £m 241.8 – – – 241.8 2005 £m 77.3 191.1 362.9 2,302.9 2,934.2 2004 £m 681.7 – 374.0 1,621.9 2,677.6 2005 £m – – 1,680.0 – 1,680.0 2004 £m – 800.0 580.0 – 1,380.0 26. Principal Group and associated undertakings The principal wholly owned Group undertakings of Land Securities Group PLC are Land Securities Intermediate Limited and Land Securities Property Holdings Limited. The principal Group undertakings, 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 Associated undertakings Telereal Services Limited Telereal Trading Property Limited Telereal Securitised Property Limited Partnership Telereal General Property Partnership Scottish Retail Property Limited Partnership Metro Shopping Fund LP Buchanan Limited Partnership All principal Group undertakings are incorporated in England and Wales. During the year, the Group has been a member of the following limited partnerships (in addition to those disclosed in Note 15), 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 and the Bristol 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* Bristol Alliance Ebbsfleet Limited Partnership *forming the Birmingham Alliance Group share % 331/3 331/3 331/3 50 50 Gross assets 2005 £m 8.2 129.4 811.3 173.6 46.1 2004 £m 116.8 112.4 747.9 – 39.1 Gross liabilities 2005 £m (3.1) (0.4) (282.1) (154.5) (0.1) 2004 £m (4.5) (1.3) (316.1) – (0.1) Profit/(loss) before taxation 2005 £m (1.3) 4.1 36.4 5.8 – 2004 £m 5.0 3.5 18.4 – – Land Securities Annual Report 2005 101 4.3 Notes to the financial statements continued for the year ended 31 March 2005 26. Principal Group and associated undertakings continued 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 and The Bristol Alliance, £272.1m (2004: £290.3m) and £151.0m respectively of loans from partners; at 31 March 2005 there was no third party debt in these partnerships (2004: Nil). 27. Acquisition of Slough Estates retail property portfolio The Group acquired a retail property portfolio from Slough Estates plc on 15 December 2004 for a consideration of £350.7m, including costs. This has been accounted for by the acquisition method of accounting. The companies acquired were Bredero Buchanan PLC, Lewisham Centre Management Limited, Lewisham Investment Partnership Limited, Howard Centre Properties Limited and The Bishop Centre Limited. Fair value of assets acquired Investment properties Investment in a joint venture Debtors Creditors falling due within one year Deferred taxation Net assets acquired Fair value of consideration Investment properties Cash Costs Negative goodwill (Note 12) 28. Related party transactions Book value at acquisition £m Fair value adjustments £m Fair value acquired £m 184.7 141.2 5.0 (4.6) – 326.3 12.3 25.3 – (0.5) (6.4) 30.7 197.0 166.5 5.0 (5.1) (6.4) 357.0 345.3 3.2 2.2 350.7 6.3 357.0 The Group has a 50% interest in the Telereal partnerships and joint ventures (‘Telereal’). The Group, principally through Land Securities Trillium Telecom Services Limited, provides staff to Telereal to deliver services to BT, for which it received £16.1m (2004: £17.8m) in the year ended 31 March 2005. The Group has a 50% interest in the Metro Shopping Fund LP. During the year the Group made sales of investment properties to the Partnership for consideration of £91.8m. The Group receives fees in respect of accounting and asset management services from its joint ventures and joint arrangements. These fees are calculated on an arm’s length basis. 29. Contingent liabilities The Group has a contingent liability arising from a performance guarantee that Land Securities PLC 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 £50.0m 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. At 31 March 2005, the estimated amount of the Group’s exposure to the guarantee was approximately £100.7m (2004: £100.7m). 30. Post Balance Sheet Event On 6 May 2005 Retail Property Holdings Trust Limited, a wholly-owned subsidiary of Land Securities Group PLC announced a recommended offer for the whole of the issued share capital of Tops Estates PLC. At the offer price, the ordinary share capital and convertible loan stock of Tops Estates PLC is valued at £302m, which will be satisfied in cash or, if Tops Estates’ shareholders so elect, loan notes. 102 Land Securities Annual Report 2005 4.4 Five and 10 year record for the years ended 31 March Five year record Assets employed Goodwill and negative goodwill Investment portfolio properties Outsourcing properties Other tangible fixed assets Investment in joint ventures Short-term deposits, corporate bonds and cash Stocks Other assets Financed by Equity share capital Non-equity share capital Reserves Shareholders’ funds Borrowings Investment in joint venture Other liabilities Property movements (book value) Property additions Property sales Net property sales to joint ventures Revenue Gross property income Revenue profit Profit/(loss) on sales of fixed asset properties/ exceptional items Pre-tax (loss)/profit (Loss)/profit attributable to equity shareholders (Accumulated loss)/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) 10 year record Earnings per share (Loss)/earnings per share (pence) Adjusted earnings per share (pence)* Diluted (loss)/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) 2005 £m 2004 £m 2003 (restated) £m 2002 (restated) £m 2001 (restated) £m 25.6 8,737.1 546.3 57.9 508.6 11.1 150.9 529.6 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 10,567.1 9,674.4 9,007.7 8,867.5 8,504.1 46.8 – 6,589.8 6,636.6 2,934.2 71.1 925.2 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 10,567.1 9,674.4 9,007.7 8,867.5 8,504.1 967.8 (1,001.1) (102.6) 792.5 (632.5) (240.0) 625.7 (406.9) – 630.1 (510.4) – 588.8 (424.9) – 1,865.7 401.1 1,481.1 309.2 1,239.5 336.2 1,025.6 350.1 (556.9) (155.8) (35.9) (238.3) 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 64.5 506.4 456.4 484.4 406.2 462.0 336.4 160.9 2.1 251.8 84.3 156.5 163.9 (12.7) (177.2) 132.6 (39.9) (219.2) 280.5 116.4 (95.4) 2005 2004 2003 (restated) 2002 (restated) 2001 (restated) 2000 1999 1998 1997 1996 (7.69) 68.67 (7.66) 68.41 43.25 (0.18) 1.58 1419 1465 1414 1460 1293 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 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 *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. Land Securities Annual Report 2005 103 4.5 Directors’ report Directors’ report The directors submit their report with the financial statements for the year to 31 March 2005. 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 and leisure throughout the UK together with property outsourcing. The Group consists of three main business units, Retail, London Portfolio and Property Outsourcing. 2. Results for the year and dividends The results are set out in the consolidated profit and loss account on page 82 . An interim dividend of 10.40p per share was paid on 10 January 2005 and the directors now recommend the payment of a final dividend of 32.85p per share making a total of 43.25 p per share for the year ended 31 March 2005, an increase of 16.6 % over that for the previous year. Subject to authorisation at the Annual General Meeting to be held on 12 July 2005, the final dividend will be paid on 25 July 2005 to shareholders registered on 24 June 2005. It is expected that the shares will be quoted ex-dividend from 22 June 2005. 104 Land Securities Annual Report 2005 3. Valuation and net assets (i) Valuation Knight Frank LLP valued the Group’s investment properties at £8,773.5 m as at 31 March 2005. 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, the Metro Shopping Fund Limited Partnership and Buchanan Limited Partnership joint ventures, the portfolio had a value of £ 9,388.8m. This is an increase of £ 1,238.6m over that at the previous year end. (ii) Net assets The investment portfolio valuation has been included in the financial statements for the year ended 31 March 2005 and the net assets of the Group at that date amounted to £6,636.6 m. Without adjusting for any taxation which would become payable in the event of properties being sold, the net assets attributable to each share in issue on that date were 1419p. 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 1414p. 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 21 . The amount, in the region of £626.0m (2004: £ 490.0m), represents approximately 133 p per share on a fully diluted basis. 4. Directors The directors who held office during the year were: Peter G Birch CBE 1, 4 Francis Salway 4 Andrew Macfarlane Mark Collins Ian Ellis Mike Hussey (appointed 30/09/04) David Rough 1, 2, 3, 4 Sir Winfried Bischoff 1, 2, 3 Stuart Rose 1, 2, 3 Bo Lerenius (appointed 01/06/04) 1, 2, 3 Alison Carnwath (appointed 01/09/04) 1, 2, 3 Ian Henderson CBE 4 (retired 14/07/04) Peter Freeman 1, 3 (retired 14/07/04) 1 Non-executive 2 Member of the Audit Committee 3 Member of the Remuneration Committee 4 Member of the Nominations Committee In addition, Richard Akers was appointed a director on 17 May 2005. Biographical details of the directors appear on page 58 . Since Alison Carnwath, Mike Hussey and Richard Akers were appointed as directors after the last Annual General Meeting, they will retire from the Board, and, being eligible, offer themselves for re-election. Alison Carnwath does not have a service agreement with the Company. Mike Hussey has a service agreement which is terminable on one year’s notice from either the Company or the director. Richard Akers has a service agreement which is terminable on one year’s notice from the Company and on six months’ notice from the director. 2,000 employees across the Group Devonshire House, W1 Annual Report 2005 105 4.5 Directors’ report continued Francis Salway, Mark Collins and Stuart Rose will retire from the Board by rotation and, being eligible, offer themselves for re-election; Francis Salway and Mark Collins have service agreements which are terminable upon one year’s notice by either the Company or the Director. Stuart Rose does not have a service agreement with the Company. Particulars of the interests of each director in the shares of the Company, and of their holdings of options over ordinary shares and other long-term incentive arrangements, are shown in the Remuneration Report. 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 14 July 2004 to repurchase in the market ordinary shares representing up to approximately 10% of the issued share capital at that time with such authority to expire at the 2005 Annual General Meeting. No shares were repurchased in the year to 31 March 2005. A resolution to renew this authority in respect of up to approximately 10% of the issued share capital will be proposed at the 2005 Annual General Meeting. Number of shares % Barclays Global Investors 24,625,305 5.26% Legal & General Investment Management 22,780,277 4.87% ABP Investments 22,472,961 4.80% M&G (Prudential Plc) 16,629,212 3.55% 106 Land Securities Annual Report 2005 in accordance with contract or as required by law; that payment terms are agreed at the outset of a transaction and adhered to; that no amendments to payment terms are made without the prior agreement of suppliers and that there is a system which deals quickly with complaints and disputes to ensure that suppliers are advised accordingly without delay when invoices or parts thereof are contested. The effect of the Group’s payment policy is that its trade creditors at the financial year end represented eight 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 P M Dudgeon Secretary 17 May 2005 6. Substantial shareholders At 16 May 2005 the following interests in issued share capital had been notified to the Company under Part VI of the Companies Act 1985. 7. Employees Details of the Group’s policies on employment and on employee development are given on pages 62 and 64 . 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 63. 8. Donations During the year ended 31 March 2005 charitable donations amounted to £ 580,000. This amount included £ 273,000 paid to charitable trusts investigating sites of considerable archaeological importance. There were no contributions of a political nature during the year. 9. Environment We report on our environmental activities on page 64. The Group’s environmental policy is published on the Company’s website www.landsecurities.com 10. Payment policy The Group is a registered supporter of the CBI’s Better Payment Practice Code to which it subscribes when dealing with all of its suppliers. The code requires a clear and consistent policy that payments are made 108 108 108 109 110 115 117 117 119 119 123 5.0 Investment property business Portfolio valuation Performance benchmarking Top 12 properties Portfolio analysis Development pipeline schedule 5.1 Property Outsourcing Contract analysis 5.2 Investment property information Major property holdings Property by location Business analysis Land Securities Annual Report 2005 107 Performance benchmarking The analysis by Investment Property Databank (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 2005 10 years 20 years Land Securities % pa 12.1 11.4 IPD* % pa 11.7 10.7 IPD* – Upper quartile % pa 12.3 11.4 Table A above compares Land Securities’ ungeared total property return over the last 10 and 20 year periods to 31 March 2005 to the IPD December Universe (extrapolated to March 2005), which comprises the same portfolios that contributed to the IPD All Fund Universe in December 2004 (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 the 20 year time period. Table B – One year performance relative to IPD Ungeared total returns – period to 31 March 2005 Land Securities % 16.2 22.1 13.2 18.1 21.8 11.6 17.7 IPD* % 14.8 22.0 19.2 15.8 16.0 15.8 16.9 Industrial Other Commercial Total portfolio *IPD December Universe (extrapolated to March 2005) unfrozen Source: IPD (a) Central London defined as West End, City, Midtown and Inner London regions. Table B compares the performance of the Group’s portfolio to that of IPD on a similar basis at sector, sub-sector and total portfolio levels over the 12 month period to 31 March 2005. A key driver of out- performance was the strong performance from our Central London office holdings, particular developments and sales. Shopping centres and retail warehouses also recorded higher returns than IPD. Investment property business Portfolio valuation The combined portfolio including our property joint ventures were valued by Knight Frank LLP at £ 9,388.8m at 31 March 2005. After adjusting for sales, acquisitions and expenditure the value increased by 10.3% as compared to the position at 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 and leasehold investment properties held by the Group or held by way of limited partnership arrangements (excluding the outsourcing properties), with the exception of short leasehold accommodation occupied by the Group for the purposes of its business, were valued by External Valuers Knight Frank LLP, Chartered Surveyors, as at 31 March 2005. 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 2005 was £ 8,773.5m. 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 2005 was £615.3m. Additionally, Knight Frank LLP reported directly to the Scottish Retail Property Limited Partnership, the Metro Shopping Fund Limited Partnership and Buchanan Partnership on the Market Values of the properties held in those partnerships. The Market Values of those properties totalled £605.3m, £299.5m and £325.5m respectively and the Group’s share was £302.7m, £149.8m and £162.8 as at 31 March 2005. 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 £8,773.5m. 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. 108 Land Securities Annual Report 2005 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 £402.9m as at 31 March 2005. Retail – Shopping centres Retail warehouses Shops Central London offices (a) 5.0 Investment property business continued Top 12 properties (total value £2.7bn – values in excess of £150m) 1. Cardinal Place, SW1 2. Bullring, Birmingham 3. White Rose, Leeds 4. Gresham Street, EC2 5. St David’s Centre, Cardiff 6. 50 Queen Anne’s Gate, SW1 7. Gunwharf Quays, Portsmouth 8. Team Valley, Gateshead 9. East Kilbride Shopping Centre 10. The Bridges, Sunderland 11. Devonshire House, W1 12. Eland House, SW1 1. Cardinal Place, SW1 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. 2. Bullring, Birmingham (33.3% interest) Opened in September 2003, the award winning Bullring scheme totals 110,000m2 of retail space. The scheme has two department stores, Selfridges and Debenhams, and 130 high street and independent retailers. 3. White Rose, 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. 5. St David’s Centre, Cardiff A 39,735m2 covered shopping centre in the centre of Cardiff. This scheme is set to benefit from the development of St David’s 2 an 100,000m2 scheme which will be anchored by a John Lewis Department Store. 9. East Kilbride Shopping Centre (50% interest) The joint venture holdings in East Kilbride total 127,866m2 of retail accommodation and 3,500 car parking spaces. It has a Debenhams department store and over 235 major shops and stores, occupied by well-known high street multiple retailers. 6. 50 Queen Anne’s Gate, SW1 A 30,140m2 West End office building 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. 10. 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. 7. Gunwharf Quays, Portsmouth In 2003 Land Securities took full ownership from the Berkeley Group of this 41,290m2 designer outlet scheme. The property comprises 87 shops and is let to major High Street and Designer brands for discount retailing. 11. Devonshire House, W1 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. 4. Gresham Street, EC2 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. This property was sold after year end. 8. 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. 12. Eland House, SW1 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. Land Securities Annual Report 2005 109 5.0 Investment property business continued Portfolio analysis – combined portfolio The like-for-like portfolio(1) Open Market Value(6) 31/03/05 £m 31/03/04 £m Valuation Surplus Surp/(def) £m Surp/(def) % P&L basis: Gross Rental Income 31/03/05 £m 31/03/04 £m Annual net rent(7) Annual net estimated rental value(8) 31/03/05 £m 31/03/04 £m 31/03/05 £m 31/03/04 £m Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments(2) Total Acquisitions(3) Sales and restructured interests(4) Total development programme(5) (including Kent Thameside) Total combined portfolio Total combined portfolio analysis Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other 1,160.5 676.0 318.4 1,055.9 625.5 287.2 2,154.9 1,968.6 1,136.4 225.5 951.3 203.1 1,361.9 1,154.4 3,516.8 3,123.0 1,295.4 745.0 185.2 85.9 2,311.5 37.9 1,186.4 756.1 171.3 75.3 2,189.1 34.9 2,349.4 2,224.0 71.3 11.7 83.0 88.6 6,037.8 974.3 7,012.1 1,519.5 – 61.3 11.1 72.4 80.7 5,500.1 777.2 6,277.3 465.2 880.6 857.2 527.1 9,388.8 8,150.2 2,553.9 860.1 445.6 1,834.5 805.8 541.2 3,859.6 3,181.5 1,256.2 225.5 1,089.7 203.1 1,481.7 1,292.8 5,341.3 4,474.3 1,737.2 1,085.5 352.0 423.0 3,597.7 53.5 1,571.3 958.4 234.2 221.7 2,985.6 68.2 3,651.2 3,053.8 72.0 11.7 83.7 312.6 342.4 11.1 353.5 268.6 Total combined portfolio 9,388.8 8,150.2 110 Land Securities Annual Report 2005 103.3 49.8 29.6 182.7 172.2 21.2 193.4 376.1 119.5 (13.4) 14.0 5.7 125.8 2.6 128.4 9.3 0.6 9.9 7.7 522.1 189.0 711.1 66.8 – 93.6 871.5 204.2 60.8 40.6 305.6 192.3 21.2 213.5 519.1 202.1 61.8 11.5 42.0 317.4 3.4 320.8 9.3 0.6 9.9 21.7 871.5 9.8 8.0 10.3 9.3 18.0 10.4 16.6 12.0 10.2 (1.8) 8.2 7.1 5.8 7.4 5.8 15.0 5.4 13.5 9.5 9.5 24.6 11.3 4.6 – 12.3 10.3 8.7 7.6 10.1 8.6 18.2 10.4 16.9 10.8 13.2 6.1 3.4 11.2 9.7 6.8 9.7 14.8 5.4 13.4 7.5 10.3 73.2 39.9 18.7 72.2 38.8 18.7 68.9 39.0 17.6 64.7 38.8 16.8 74.9 42.1 20.5 71.6 42.4 19.6 131.8 129.7 125.5 120.3 137.5 133.6 46.9 14.3 61.2 44.5 13.6 58.1 53.5 11.4 64.9 48.2 11.5 59.7 63.4 13.6 77.0 56.2 12.9 69.1 193.0 187.8 190.4 180.0 214.5 202.7 80.5 70.6 13.4 4.5 169.0 3.2 172.2 3.4 1.2 4.6 5.4 375.2 34.8 410.0 60.0 34.3 14.2 518.5 128.8 47.3 33.5 209.6 54.3 14.3 68.6 83.4 74.3 13.3 4.7 175.7 3.0 178.7 3.8 1.1 4.9 5.7 377.1 19.5 396.6 9.2 92.5 16.8 515.1 102.8 47.4 39.8 190.0 50.2 14.5 64.7 77.8 64.1 13.3 4.1 159.3 3.1 162.4 4.0 0.7 4.7 5.5 363.0 32.4 395.4 91.9 n/a n/a n/a 140.7 46.3 24.1 211.1 58.5 11.4 69.9 79.7 70.0 12.9 4.3 166.9 3.1 170.0 4.3 0.7 5.0 5.5 360.5 22.4 382.9 28.7 n/a n/a n/a 100.4 47.1 32.7 180.2 54.0 11.5 65.5 85.1 60.2 12.1 5.2 162.6 3.7 166.3 4.8 0.9 5.7 5.7 392.2 61.8 454.0 98.9 n/a n/a n/a 175.7 56.5 27.7 259.9 70.7 13.6 84.3 82.0 58.8 11.4 5.2 157.4 3.5 160.9 4.1 0.8 4.9 5.1 373.6 57.6 431.2 30.1 n/a n/a n/a 124.2 58.3 37.8 220.3 64.9 12.9 77.8 278.2 254.7 281.0 245.7 344.2 298.1 95.3 80.4 16.5 16.9 209.1 5.7 214.8 15.3 1.2 16.5 9.0 98.7 77.7 31.5 10.0 217.9 6.9 224.8 22.4 3.2 25.6 10.0 87.3 71.0 19.1 17.7 195.1 4.1 199.2 4.0 0.7 4.7 13.5 94.3 73.5 19.5 6.1 193.4 6.8 200.2 19.2 0.7 19.9 10.0 125.8 91.6 47.2 29.3 293.9 5.3 299.2 4.8 0.9 5.7 14.2 128.7 76.6 19.7 18.5 243.5 7.6 251.1 26.4 0.8 27.2 12.5 518.5 515.1 498.4 475.8 663.3 588.9 5.0 Investment property business continued The like-for-like portfolio continued Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments(2) Total Acquisitions(3) Sales and restructured interests(4) Total development programme(5) (including Kent Thameside) Total combined portfolio Total combined portfolio analysis Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Total combined portfolio Gross income yield(9) 31/03/04 31/3/05 % % Net nominal equivalent yield(10) 31/03/05 % Annual gross estimated rental value(11) Voids by ERV(12) Lease length as at 31/03/05(13) 31/03/05 £m 31/03/04 £m 31/03/05 % 31/03/04 % Median years(i) Mean years(ii) 5.9 5.8 5.5 5.8 4.7 5.1 4.8 5.4 6.0 8.6 7.2 4.8 6.9 8.2 6.9 5.6 6.0 5.7 6.2 6.0 3.3 5.6 6.0 n/a n/a n/a 5.5 5.4 5.4 5.5 4.7 5.1 4.7 5.3 5.0 6.5 5.4 4.2 5.4 7.7 5.5 5.6 6.0 5.6 4.3 5.3 6.1 6.2 5.8 6.1 5.1 5.7 5.2 5.8 6.7 9.3 7.5 5.7 7.6 8.9 7.6 7.0 6.3 6.9 6.8 6.6 2.9 6.1 6.2 n/a n/a n/a 5.5 5.8 6.0 5.7 5.0 5.7 5.1 5.5 6.0 7.7 8.3 2.8 6.5 10.0 6.6 5.6 6.3 5.6 3.7 5.8 6.0 5.8 5.8 5.9 5.3 5.6 5.4 5.7 6.4 6.5 6.1 6.6 6.4 8.7 6.4 6.7 7.1 6.7 6.4 6.0 5.7 6.0 6.1 n/a n/a n/a 5.9 5.8 5.8 5.9 5.4 5.6 5.4 5.7 6.3 6.2 6.0 6.4 6.3 8.6 6.3 6.7 7.1 6.7 6.2 6.0 82.1 43.3 22.6 78.7 43.2 21.5 148.0 143.4 63.4 13.6 77.0 56.2 12.9 69.1 225.0 212.5 86.5 60.8 12.1 5.3 164.7 3.8 168.5 4.8 0.9 5.7 5.8 405.0 61.9 466.9 99.6 n/a n/a n/a 83.5 59.5 11.9 5.2 160.1 3.6 163.7 4.1 0.8 4.9 5.2 386.3 57.9 444.2 31.0 n/a n/a n/a 2.3 0.2 1.8 1.6 1.9 5.1 2.5 1.9 3.9 5.6 – – 4.1 10.5 4.3 10.4 – 8.8 – 3.0 1.3 2.7 2.1 n/a n/a n/a 1.0 – 2.8 1.0 2.7 0.8 2.3 1.4 2.8 3.0 – – 2.6 8.3 2.7 – – – – 1.9 48.9 8.0 5.5 n/a n/a n/a 8.8 6.8 8.3 7.8 14.3 16.3 15.3 10.0 6.5 1.5 4.3 1.3 4.3 2.0 4.3 5.8 21.8 5.8 7.3 6.5 13.0 6.8 8.8 n/a n/a n/a 9.3 8.5 10.7 9.2 14.1 13.9 14.1 10.8 9.8 2.8 5.7 2.4 6.5 5.9 6.5 5.4 19.6 7.6 19.6 9.0 11.7 9.2 11.5 n/a n/a n/a Notes (1) The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2003 but excluding 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. (2) 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 2003. Includes all properties acquired in the period since 1 April 2003. 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 2003. (3) (4) (5) Ongoing developments are properties in the development programme and Kent Thameside. They exclude completed developments as defined in note (2) above. (6) The open market value figures include the group share of the various joint ventures and exclude properties owned by Land Securities Trillium and Telereal. (7) Annual net rent is annual rents in payment at 31 March 2005 after deduction of ground rents. It excludes the value of voids and current rent free periods. (8) 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. (9) The gross income yield represents the annual net rent expressed as a percentage of the market value ignoring costs of purchase or sale. (10) The net nominal equivalent yield has been calculated on the gross outlays for a purchase of the property (including purchase costs) and assuming that rent is received annually in arrears. (11) Annual gross estimated rental value is calculated in the same way as net estimated rental value before the deduction of ground rents. (12) 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 (11) above. (13) The definition for the figures in each column is: (i) Median is the number of years until half of income is subject to lease expiry/break clauses. (ii) Mean is rent-weighted average remaining term on leases subject to lease expiry/break clauses. Land Securities Annual Report 2005 111 5.0 Investment property business continued Portfolio analysis – investment portfolio (wholly-owned) The like-for-like portfolio(1) Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments(2) Total Acquisitions(3) Sales and restructured interests(4) Total development programme(5) (including Kent Thameside) Total investment portfolio Total investment portfolio analysis Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Total investment portfolio Total share of joint ventures(6) Total combined portfolio 112 Land Securities Annual Report 2005 Open Market Value(7) 31/03/05 £m 31/03/04 £m Valuation Surplus Surp/(def) £m Surp/(def) % P&L basis: Gross Rental Income 31/03/05 £m 31/03/04 £m Annual net rent(8) Annual net estimated rental value(9) 31/03/05 £m 31/03/04 £m 31/03/05 £m 31/03/04 £m 1,160.5 676.0 318.4 1,055.9 625.5 287.2 2,154.9 1,968.6 1,136.4 225.5 951.3 203.1 1,361.9 1,154.4 3,516.8 3,123.0 1,295.4 745.0 185.2 85.9 2,311.5 37.9 1,186.4 756.1 171.3 75.3 2,189.1 34.9 2,349.4 2,224.0 71.3 11.7 83.0 88.6 61.3 11.1 72.4 80.7 6,037.8 974.3 7,012.1 904.2 – 5,500.1 777.2 6,277.3 221.7 880.6 857.2 527.1 8,773.5 7,906.7 2,013.2 820.8 444.7 3,278.7 1,591.0 805.8 541.2 2,938.0 1,256.2 225.5 1,089.7 203.1 1,481.7 1,292.8 4,760.4 4,230.8 1,737.2 1,085.5 352.0 410.5 3,585.2 46.1 1,571.3 958.4 234.2 221.7 2,985.6 68.2 3,631.3 3,053.8 72.0 11.7 83.7 298.1 342.4 11.1 353.5 268.6 8,773.5 7,906.7 615.3 243.5 9,388.8 8,150.2 103.3 49.8 29.6 182.7 172.2 21.2 193.4 376.1 119.5 (13.4) 14.0 5.7 125.8 2.6 128.4 9.3 0.6 9.9 7.7 522.1 189.0 711.1 37.5 – 93.6 842.2 181.4 56.7 40.6 278.7 192.3 21.2 213.5 492.2 202.1 61.8 11.5 41.3 316.7 3.0 319.7 9.3 0.6 9.9 20.4 842.2 29.3 871.5 9.8 8.0 10.3 9.3 18.0 10.4 16.6 12.0 10.2 (1.8) 8.2 7.1 5.8 7.4 5.8 15.0 5.4 13.5 9.5 9.5 24.6 11.3 4.3 – 12.3 10.7 10.0 7.4 10.1 9.3 18.2 10.4 16.9 11.6 13.2 6.1 3.4 11.3 9.7 7.0 9.7 14.8 5.7 13.5 7.4 10.7 5.0 10.3 73.2 39.9 18.7 72.2 38.8 18.7 68.9 39.0 17.6 64.7 38.8 16.8 74.9 42.1 20.5 71.6 42.4 19.6 131.8 129.7 125.5 120.3 137.5 133.6 46.9 14.3 61.2 44.5 13.6 58.1 53.5 11.4 64.9 48.2 11.5 59.7 63.4 13.6 77.0 56.2 12.9 69.1 193.0 187.8 190.4 180.0 214.5 202.7 80.5 70.6 13.4 4.5 169.0 3.2 172.2 3.4 1.2 4.6 5.4 375.2 34.8 410.0 34.1 34.3 14.2 492.6 106.8 45.4 33.4 185.6 54.3 14.3 68.6 83.4 74.3 13.3 4.7 175.7 3.0 178.7 3.8 1.1 4.9 5.7 377.1 19.5 396.6 8.6 92.5 16.8 514.5 102.2 47.4 39.8 189.4 50.2 14.5 64.7 77.8 64.1 13.3 4.1 159.3 3.1 162.4 4.0 0.7 4.7 5.5 363.0 32.4 395.4 55.7 n/a n/a n/a 109.2 44.0 24.0 177.2 58.5 11.4 69.9 79.7 70.0 12.9 4.3 166.9 3.1 170.0 4.3 0.7 5.0 5.5 360.5 22.4 382.9 14.4 n/a n/a n/a 86.7 47.1 32.6 166.4 54.0 11.5 65.5 85.1 60.2 12.1 5.2 162.6 3.7 166.3 4.8 0.9 5.7 5.7 392.2 61.8 454.0 58.3 n/a n/a n/a 140.5 53.7 27.6 221.8 70.7 13.6 84.3 82.0 58.8 11.4 5.2 157.4 3.5 160.9 4.1 0.8 4.9 5.1 373.6 57.6 431.2 12.8 n/a n/a n/a 107.6 58.3 37.8 203.7 64.9 12.9 77.8 254.2 254.1 247.1 231.9 306.1 281.5 95.3 80.4 16.5 16.2 208.4 5.0 213.4 15.3 1.2 16.5 8.5 492.6 25.9 518.5 98.7 77.7 31.5 10.0 217.9 6.9 224.8 22.4 3.2 25.6 10.0 514.5 0.6 515.1 87.3 71.0 19.1 16.7 194.1 3.5 197.6 4.0 0.7 4.7 12.8 462.2 36.2 498.4 94.3 73.5 19.5 6.1 193.4 6.3 199.7 19.2 0.7 19.9 10.0 461.5 14.3 475.8 125.8 91.6 47.2 28.3 292.9 4.6 297.5 4.8 0.9 5.7 13.4 622.7 40.6 663.3 128.7 76.6 19.7 18.5 243.5 6.9 250.4 26.4 0.8 27.2 12.5 571.6 17.3 588.9 5.0 Investment property business continued The like-for-like portfolio continued Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Like-for-like portfolio Completed developments(2) Total Acquisitions(3) Sales and restructured interests(4) Total development programme(5) (including Kent Thameside) Total investment portfolio Total investment portfolio analysis Shopping centres and shops Shopping centres Central London shops Other in-town shops Retail warehouses Retail parks Other Total retail London offices West End City Midtown Inner London Total London offices Rest of UK Total offices Industrial properties South-east Other Other Total investment portfolio Total share of joint ventures(6) Total combined portfolio Gross income yield(10) 31/03/04 31/3/05 % % Net nominal equivalent yield(11) 31/03/05 % Annual gross estimated rental value(12) Voids by ERV(13) Lease length as at 31/03/05(14) 31/03/05 £m 31/03/04 £m 31/03/05 % 31/03/04 % Median years(i) Mean years(ii) 5.9 5.8 5.5 5.8 4.7 5.1 4.8 5.4 6.0 8.6 7.2 4.8 6.9 8.2 6.9 5.6 6.0 5.7 6.2 6.0 3.3 5.6 6.2 n/a n/a n/a 5.4 5.4 5.4 5.4 4.7 5.1 4.7 5.2 5.0 6.5 5.4 4.1 5.4 7.6 5.4 5.6 6.0 5.6 4.3 5.3 5.9 5.3 6.1 6.2 5.8 6.1 5.1 5.7 5.2 5.8 6.7 9.3 7.5 5.7 7.6 8.9 7.6 7.0 6.3 6.9 6.8 6.6 2.9 6.1 6.5 n/a n/a n/a 5.4 5.8 6.0 5.7 5.0 5.7 5.1 5.5 6.0 7.7 8.3 2.8 6.5 9.2 6.5 5.6 6.3 5.6 3.7 5.8 5.9 5.8 6.0 5.8 5.8 5.9 5.3 5.6 5.4 5.7 6.4 6.5 6.1 6.6 6.4 8.7 6.4 6.7 7.1 6.7 6.4 6.0 5.7 6.0 6.1 n/a n/a n/a 5.9 5.8 5.8 5.9 5.4 5.6 5.4 5.7 6.3 6.2 6.0 6.4 6.3 8.6 6.3 6.7 7.1 6.7 6.2 6.0 6.0 6.0 82.1 43.3 22.6 78.7 43.2 21.5 148.0 143.4 63.4 13.6 77.0 56.2 12.9 69.1 225.0 212.5 86.5 60.8 12.1 5.3 164.7 3.8 168.5 4.8 0.9 5.7 5.8 405.0 61.9 466.9 58.4 n/a n/a n/a 83.5 59.5 11.9 5.2 160.1 3.6 163.7 4.1 0.8 4.9 5.2 386.3 57.9 444.2 13.0 n/a n/a n/a 2.3 0.2 1.8 1.6 1.9 5.1 2.5 1.9 3.9 5.6 – – 4.1 10.5 4.3 10.4 – 8.8 – 3.0 1.3 2.7 1.0 n/a n/a n/a 1.0 – 2.8 1.0 2.7 0.8 2.3 1.4 2.8 3.0 – – 2.6 8.3 2.7 – – – – 1.9 48.9 8.0 0.8 n/a n/a n/a 8.8 6.8 8.3 7.8 14.3 16.3 15.3 10.0 6.5 1.5 4.3 1.3 4.3 2.0 4.3 5.8 21.8 5.8 7.3 6.5 13.0 6.8 8.3 n/a n/a n/a 9.3 8.5 10.7 9.2 14.1 13.9 14.1 10.8 9.8 2.8 5.7 2.4 6.5 5.9 6.5 5.4 19.6 7.6 19.6 9.0 11.7 9.2 11.8 n/a n/a n/a Notes (1) The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2003 but excluding 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. (2) 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 2003. Includes all properties acquired in the period since 1 April 2003. 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 2003. (3) (4) (5) Ongoing developments are properties in the development programme and Kent Thameside. They exclude completed developments as defined in note (2) above. (6) Share of joint ventures includes the Group's share of assets in the Scottish Retail Property Limited Partnership, the Metro Shopping Fund LP and the Buchanan Partnership. (7) The open market value figures exclude properties owned by Land Securities Trillium and Telereal. (8) Annual net rent is annual rents in payment at 31 March 2005 after deduction of ground rents. It excludes the value of voids and current rent free periods. (9) 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. (10) The gross income yield represents the annual net rent expressed as a percentage of the market value ignoring costs of purchase or sale. (11) The net nominal equivalent yield has been calculated on the gross outlays for a purchase of the property (including purchase costs) and assuming that rent is received annually in arrears. (12) Annual gross estimated rental value is calculated in the same way as net estimated rental value before the deduction of ground rents. (13) 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 (12) above. (14) The definition for the figures in each column is: (i) Median is the number of years until half of income is subject to lease expiry/break clauses. (ii) Mean is rent-weighted average remaining term on leases subject to lease expiry/break clauses. Land Securities Annual Report 2005 113 5.0 Investment property business continued Portfolio analysis Portfolio value by location % figures calculated by reference to the combined portfolio value of £9,388.8m Top 12 occupiers Current gross rent roll % Shopping centres Retail Offices % and shops warehouses Other % % % Central, inner and outer London 38.4 12.5 South-east and eastern Midlands Wales and south-west North, north-west, Yorkshire and Humberside Scotland and Northern Ireland 0.1 0.1 0.1 0.1 0.1 5.0 4.1 5.3 7.2 7.0 0.7 3.6 2.5 1.4 5.4 2.2 1.0 2.3 – – 0.8 0.1 Total % 52.6 11.0 6.7 6.8 13.5 9.4 Total 38.9 41.1 15.8 4.2 100.0 1 2 3 4 5 6 7 8 9 Central Government Allen & Overy Dixons Group plc J Sainsbury plc Dresdner Bank AG Metropolitan Police Authority Argos and Homebase Arcadia Group The Boots Company PLC 10 Lloyds TSB Group plc 11 Deloitte & Touche 12 Marks & Spencer Group plc Average rents excludes properties in the development programme and voids Total Average rent £/m2 Average ERV £/m2 9.24 2.89 2.40 1.76 1.48 1.40 1.40 1.36 1.25 1.18 1.09 1.00 26.45 Retail Shopping centres and shops Retail warehouses (including supermarkets) Offices Central and Inner London Rest of UK n/a 162 346 92 n/a 186 323 92 Like-for-like reversionary potential Reversionary potential (ignoring additional income from the letting of voids) 31/03/05 % of rent roll 31/03/04 % of rent roll Gross reversions Over-rented Net reversionary potential 9.9 7.0 2.9 10.5 8.6 1.9 Note Average rents and estimated rental values (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 with the previous year. It excludes properties in the development programme and voids. Note 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 Portfolio Analysis on page 111. Of the over-rented income 50% is subject to a lease expiry or break clause in the next five years. % Portfolio by value and number of properties at 31 March 2005 £m 0 – 9.99 10 – 24.99 25 – 49.99 50 – 99.99 Over 100 Total Value % No. of properties 2.1 5.1 19.0 22.8 51.0 100.0 57 30 50 30 27 194 Note Includes Land Securities’ share of joint venture properties. 114 Land Securities Annual Report 2005 5.0 Investment property business continued Development pipeline schedule Retail Shopping centres and shops Caxtongate Phase III, New Street, Birmingham Rose Lane, Canterbury 50% – a limited partnership Description Retail Retail Whitefriars, Canterbury Retail/residential 37,160m2/3,260m2 Summerland Gate, Exeter Princesshay, Exeter Retail/residential 5,380m2/1,390m2 Retail/residential 37,360m2/7,200m2 Broadmead, Bristol (50%) The Bristol Alliance – a limited partnership with Hammerson plc Bradwell’s Court, Cambridge Retail Leisure Offices Residential Retail/leisure St David’s Cardiff (50%) St David’s Partnership – a partnership with Capital Shopping Centres Retail/leisure Residential Retail warehouses Almondvale South, Livingston, Phase II a Kingsway Retail Park, Dundee, Phase II Bexhill Retail Park, Extension Almondvale South, Livingston, Phase II b London portfolio Central and Inner London properties Retail warehouses Retail warehouses Retail warehouses Retail warehouses Description Size Status Planning Letting Estimated/actual completion date Cost £m 2,240m2 1,500m2 83,610m2 9,000m2 28,000m2 18,740m2 5,220m2 85,000m2 18,620m2 5,630m2 8,650m2 2,720m2 4,180m2 PR PR OPR PR MG OPR PR 100% 100% 91% 84% 32% 7% 26% 100% 55% 100% Feb 2005 Nov 2004 5 3 July 2005 113 Apr 2005 July 2007 2008 12 146 2007 2009 Mar 2005 May 2004 June 2005 2005 6 15 12 Size Status Planning Letting Estimated/actual completion date Cost £m Empress State Building, SW6 Offices/retail and leisure 41,290m2/2,040m2 30 Gresham Street, EC2 Cardinal Place, SW1 40 Eastbourne Terrace, W2 One Wood Street, EC2 (formerly 120 Cheapside) New Street Square, EC4(*) Bankside2&3, SE1 Offices/retail Offices/retail Offices Offices/retail Offices Retail/leisure Offices Retail/leisure 35,150m2/1,300m2 51,130m2/9,420m2 7,690m2 15,020m2/1,500m2 62,340m2 2,980m2 35,550m2 3,170m2 One New Change, EC4 Offices/retail 30,790m2/20,550m2 100% 100% 11/82% 29% PR Jul 2003 ( ‡)111 208 256 10 102 311 Dec 2003 Aug 2005 Oct 2005 Sep 2007 2008 2007 2010 (*) Included in these figures is part of the overall scheme which has yet to be approved by the Board. The cost relating to this part of the scheme is estimated at £52m. The letting was exchanged after 31 March 2005. (‡) The Landflex fit out costs have now been included in the total cost shown above. Other The Gate, Newcastle upon Tyne Leisure 17,560m2 92% Nov 2002 61 Industrial During the year all seven industrial schemes previously disclosed were sold to Slough Estates. These comprised properties in Kidlington, Guildford, Croydon, Fareham and three properties in Basildon. Cost (£m) refers to estimated capital expenditure required to develop the scheme from the start of the financial year in which the property is added to our Development Programme. Finance charges are excluded from cost. Floor areas shown above represent the full scheme whereas the cost represents our share of costs. Letting % is measured by ERV and shows letting status at 31 March 2005. Trading Property development schemes and the Kent Thameside project are excluded from the development pipeline. Key Developments, let and transferred or sold Developments completed Developments approved and in progress Proposed developments Planning status PR Planning received AS Application submitted MG Minded to grant PI Planning inquiry OPR Outline planning received Land Securities Annual Report 2005 115 5.0 Investment property business continued Development pipeline schedule continued Cumulative movements on the development programme to 31/03/05 Total scheme details Market value at start £m Capital expenditure to date £m Capitalised interest to date £m Cumulative revaluation surplus/ (deficit) to 31/03/05 £m Disposals UITF28 rent and other adjustments £m Market value at 31/03/05 £m Estimated total capital expenditure £m Estimated total capitalised interest £m Estimated total cost(2) £m Valuation surplus/ (deficit) for 12 months Net income/ ERV(3) to 31/03/05(1) £m £m 5 5 22 – – 32 74 6 165 245 8 6 319 80 60 473 148 22 268 438 – – 43 2 6 51 11 – 16 27 11 7 10 35 (16) 47 17 10 12 39 1 – 6 (117) – (110) (2) – – (2) Movements on the proposed developments for the year to 31/03/05 32 5 167 204 4 – 5 9 – – – – 12 – (5) 7 – – – – 25 18 400 – 50 493 248 38 461 747 48 5 167 220 8 6 319 80 61 474 271 27 679 977 452 3 371 826 – – 43 2 6 51 27 1 53 81 35 – 29 64 13 11 384 82 67 557 341 34 897 1,272 507 8 567 1,082 1 1 28 n/a 4 34 25 3 75 103 34 1 46 81 3 7 129 18 2 159 17 8 53 78 12 – (5) 7 Development programme let, transferred or sold Shopping centres and shops Retail warehouses London Portfolio Industrial Other Development programme completed, approved or in progress Shopping centres and shops Retail warehouses London Portfolio Proposed developments Shopping centres and shops Retail warehouses London Portfolio Notes (1) (2) Includes FRS3 profit realised on the disposal of property. Includes the property at the market valuation at the start of the financial year in which the property was added to the Development Programme. For proposed development properties, the market value of the property at 31 March 2005 is included in the estimated total cost. Estimated total cost is stated net of residential proceeds for shopping centres and shops of £31m for the developments in progress and £28m for proposed developments. Allowances for rent free periods are excluded from estimated total costs. (3) Net headline annual rental payable on let units plus net ERV at 31 March 2005 on unlet units. (4) For proposed development properties the estimated total capital expenditure represents the outstanding costs required to complete the scheme as at 31 March 2005. Development programme Development pipeline 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Princesshay One Wood Street (formerly 120 Cheapside) New Street Square Whitefriars, Canterbury Summerland Gate, Exeter Cardinal Place Eastbourne Terrace Caxtongate Phase III Concorde Way, Segensworth London offices Industrial Retail Retail warehouses 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Bradwell’s Court Bankside2&3 London offices Retail Development programme Bristol Cardiff One New Change 04/05 05/06 06/07 07/08 08/09 09/10 04/05 05/06 06/07 07/08 08/09 09/10 Maturity of development pipeline as at 31 March 2005 by year of anticipated completion and measured by development expenditure (excluding historical land costs and finance charges). 116 Land Securities Annual Report 2005 Property Outsourcing Contract analysis For 12 months to 31/03/05 Contract Contract length Term(1) Expiry date Income Unitary charge Third party (sublet) income Capital projects Other revenue Proceeds of sales of trading properties Gross property income Costs Rent payable Service partners (facilities management) Life cycle maintenance costs Capital projects Cost of sales of trading properties Other costs, including overheads Bid costs Operating profit/(loss) before depreciation and amortisation Depreciation and amortisation of goodwill Operating profit Profit/(loss) on sale of fixed assets Segment profit/(loss) Capital expenditures Life cycle maintenance costs capitalised Other Book value of assets Investment in Telereal (net liabilities) Investment properties Operating properties For 12 months to 31/03/05 Floorspace Client occupied Third party (sublet) Vacant Total Freeholds/valuable leaseholds Leaseholds Total Estate managed but not transferred Vacation(2) Allowance used to 31/03/05 Available allowance 31/03/05 Future allowance DWP BBC Norwich Union Barclays Other LS Trillium Total Telereal (50%) Total 20 yrs 30 yrs Mar 2018 Nov 2031 25 yrs Jun 2019 20 yrs Dec 2024 30 yrs Nov 2031 £m 504.8 7.9 81.1 9.3 – 603.1 (175.7) (148.2) (16.3) (77.1) (0.3) (79.5) – 106.0 (22.8) 83.2 7.2 90.4 (18.9) (3.0) – – 476.4 DWP 000m2 2,331.5 65.2 79.2 2,475.9 866.4 1,609.5 2,475.9 100.5 000m2 120.2 322.9 278.2 £m 77.2 0.3 44.9 24.1 – 146.5 – (50.2) (0.3) (39.6) – (28.1) – 28.3 (7.7) 20.6 23.6 44.2 (0.1) – – – – £m 9.3 0.7 0.1 – 100.2 110.3 (2.7) (2.0) (1.3) (0.1) (96.0) (1.7) (0.9) 5.6 (0.4) 5.2 – 5.2 (0.4) – – – 44.7 £m – 0.4 – – – 0.4 – – – – – (0.4) – – – – – – – – – 25.2 – £m 1.9 1.2 – 0.1 – 3.2 (0.7) (0.6) – – – (9.2) (1.7) (9.0) (0.5) (9.5) (0.3) (9.8) – – – – – £m 593.2 10.5 126.1 33.5 100.2 863.5 (179.1) (201.0) (17.9) (116.8) (96.3) (118.9) (2.6) 130.9 (31.4) 99.5 30.5 130.0 (19.4) (3.0) – 25.2 521.1 £m 137.0 – – 28.3 25.7 191.0 (35.9) – – – (8.1) (15.7) – 131.3 (13.8) 117.5 12.3 129.8 £m 730.2 10.5 126.1 61.8 125.9 1,054.5 (215.0) (201.0) (17.9) (116.8) (104.4) (134.6) (2.6) 262.2 (45.2) 217.0 42.8 259.8 – – (19.4) (3.0) (71.1) – 1,015.4 (71.1) 25.2 1,536.5 BBC 000m2 – – – – – – – 372.0 000m2 n/a n/a n/a Norwich Union 000m2 107.0 8.0 – 115.0 40.0 75.0 115.0 – 000m2 n/a n/a n/a Contract Barclays 000m2 11.3 10.2 10.0 31.5 11.3 20.2 31.5 – 000m2 n/a n/a n/a Other 000m2 – – – LS Trillium Total Telereal (50%) 000m2 2,449.8 83.4 89.2 000m2 4,825.0 141.0 22.0 Total 000m2 7,274.8 224.4 111.2 – – – – – 000m2 n/a n/a n/a 2,622.4 4,988.0 7,610.4 917.7 1,704.7 4,126.0 862.0 5,043.7 2,566.7 2,622.4 4,988.0 7,610.4 472.5 000m2 120.2 322.9 278.2 – £m 1.2 0.4 6.3 472.5 n/a n/a n/a Notes (1) For Barclays contract, this is the sale and leaseback term. (2) Vacation allowances linked to floor space in DWP contract and to income in BT contract. Amounts shown for Telereal are Land Securities Trillium’s share. Land Securities Annual Report 2005 117 5.1 Property outsourcing continued Contract analysis continued Regional breakdown by contract as at 31/03/05 Property transactions concluded by contract 12 months ending 31/03/05 000m2 DWP BBC NU Barclays Telereal Total No. of transactions DWP BBC NU Barclays Telereal Total Northern Ireland – – London, south-east and West England Northern England Scotland Midlands and Wales 868 917 305 487 348 – 24 – – 61 32 22 – Total 2,577 372 115 – 106 106 Sales 20 2,442 3,739 – – 11 31 969 447 1,918 798 1,024 1,522 4,988 8,083 New Lettings Rent Reviews Lease Renewals Freehold buy-ins Other Total 16 62 169 33 3 64 347 1 6 – – – – 7 2 1 – – 2 – 5 – 1 – – 1 – 2 29 11 44 4 – – 48 81 213 37 6 64 88 449 Number of people by occupation Service partner agreements as at 31/03/05 Service partner Service element Estimate of proportion of service providers’ turnover Total 109 156 305 54 666 Compass Dalkia Group 4 GS Hall ISS Amaryllis MITIE Norland 1,457 OCS Securitas Wilson James Total Catering Building maintenance Security Building maintenance Cleaning Furniture Cleaning Facilities management Cleaning Security Security <5% 10-15% 15-20% 20-25% <5% 15-20% <5% <5% <5% <5% 20-25% Average contract length of above Service Partners: 11 years Average contract time remaining of above Service Partners: 8 years Average annual contract value of above Service Partners: £17m/pa as at 31/03/05 Asset management Call centre Capital projects Quality assurance Facilities management HR/finance/business development 167 Total 118 Land Securities Annual Report 2005 Investment property information Major property holdings As at 31 March 2005 there were 194 properties within the portfolio including share of joint venture properties. In the lists which follow, the valuation level for inclusion is £25m. Certain of these properties have been combined for ease of description. Properties have been split into values of over £100m, £50m to £100m and £25 to £50m. 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 Shopping centres and shops – £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 3 major stores and a link into the adjacent John Lewis department store. With over 50 shops, food court, leisure, offices, this is the prime pitch for Aberdeen Primark, Woolworth, Boots, Laura Ashley, Disney, New Look, Dorothy Perkins 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 with a total of 1,104 car parking spaces Birmingham Part of the Birmingham Alliance – 33.3% interest Next, WHSmith River Island 1985 11,750 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 and 3,148 car parking spaces Debenhams, Selfridges, Next, H&M, Gap, Zara, Benetton, Borders 2003 (b) 110,000 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: Leasehold shopping centre with Fenwick department store, 2 further stores and over 35 shops with residential and car park Fenwick, Boots, Tesco To be completed 2005 37,160 Longmarket: Leasehold scheme of 16 shops, conservatory restaurant and museum Gap, Virgin, Link, Body Shop, Cardiff Clocktower: Leasehold scheme of 5 shops, offices and car park Marlowe Arcade and Graylaw House: Leasehold shopping centre with 1 store, 14 shops and 710m2 offices St David’s Centre (including St David’s Link): The principal covered shopping centre in Cardiff. St David’s anchored by Debenhams and with over 70 unit shops links into the adjacent Marks & Spencer and Boots stores. The centre will benefit from the 110,000m2 St David’s 2 mixed-use development, which will be anchored by John Lewis to be completed in 2009 East Kilbride Part of the Scottish Retail Property Limited Partnership – 50% interest Olympia: Leasehold shopping centre with 2 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 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 QS, Burger King, JJB Sports, Evans Bhs, Top Shop, Miss Selfridge, HMV Debenhams, Bhs, Mothercare, Peacocks, C&J Clark, Miss Selfridge, Alexon Safeway, H&M, Adams, Allsports, Argos, Bon Marche, Poundland, Farm Foods, Superdrug Debenhams, Next, Zara, French Connection, HMV Plaza: Shopping centre with over 50 shops and stores together with 15,000m2 of offices Marks & Spencer, Bhs, WHSmith, Boots, Mothercare, Primark Southgate: Shopping centre 14 units HBOS, Monsoon Princes Square: 34 units anchored by New Look, Sports Soccer Disney Store, New Look, Sportsworld East Kilbride centres comprise a total of 3,500 car parking spaces Exeter High Street shops and Princesshay: Leasehold shopping quarter under construction and a parade of prime High Street shops (existing) Princesshay under construction see development pipeline schedule p115 Glasgow The Buchanan Partnership – 50% interest Buchanan Galleries: Prime covered leasehold shopping centre comprises department store, food court, 4 major stores, 75 shop units and 200 car parking spaces Leeds White Rose: Opened in 1997, this centre is located on the edge of Leeds and is anchored by Debenhams and a supermarket. There are 11 further stores, over 70 shops and a food court and 4,800 car spaces John Lewis, Next, H&M, Gap, Mango Sainsbury’s, Debenhams, Clinton Cards, Argos, Bhs, Woolworth, Boots, WHSmith, Next, River Island 1992 (b) 1993 (b) 1985 (b) 4,650 2,100 10,400 1991 (r) 39,735 1989 (b) 32,520 1994 (r) 13,935 2003 (b) 26,000 1972 (b) 1989 (r) 1990 (b) 1990 (b) 43,000 4,258 8,153 44,560 1999 (b) 57,332 1997 (b) 60,390 Lewisham Liverpool Lewisham Centre: Prime covered shopping comprises 60 retail units, 2 restaurants, 2 multi-storey office blocks, 4,180m2 of leisure and 875 car parking spaces Sainsbury’s, Marks & Spencer, Boots, Woolworth, Next, Argos 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, 551 car parking spaces, hotel and Beacon. Williamson Square leasehold links directly with St John’s and includes 4 large shop units Wilkinsons, Woolworth, JD Wetherspoon, Argos, Mark One, Iceland, New Look 1975 (b) 1991 (r) St John’s 1989 (r) Williamson Square 1999 (b) 34,523 38,800 Land Securities Annual Report 2005 119 5.2 Investment property information continued Location Property name, address and description Shopping centres and shops – £100m and above continued 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. Total car parking spaces 7,500 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 1,400 car parking spaces Sunderland The Bridges & Market Square: This leasehold centre is the prime shopping in Sunderland with a Debenhams department store, over 100 shops and 981 associated car parking spaces Shopping centres and shops – £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 Phase III: 1 store for Tesco with residential above Bristol Part of the Bristol Partnership – 50% interest Broadmead, Merchant Street, Horsefair, Bond Street, and Penn Street: Leasehold. 89 shops Newcastle The Gate: Leisure complex including multiplex cinema and car parking Stratford Stratford Centre: Leasehold shopping centre with six stores, 58 shops and 2,580m2 of air-conditioned offices Welwyn Garden City The Howard Centre: 54 retail units, two mall cafes and 750 car spaces Shopping centres and shops – £25m to £50m Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 JJB Sports, New Look, HMV, Next, Superdrug, WHSmith, Bhs, Woolworth, Argos, Mothercare Phase I: 1996 (r) Phase II: 1996 (b) 48,310 Vue, Bowlplex, Marks & Spencer, Nike, Gap, C&J Clark, Polo, French Connection, Hobbs, Paul Smith, Gieves & Hawkes Debenhams, Tesco, Peacocks, Mark One, Boots, Clarks, H&M, Next, TK Maxx, New Look, Superdrug, Allsports, Gap 2001 (b) 41,290 47,840 The Bridges Phase I: 1969 and 1988 (r) Phase II: 2000 (b) Market Square 2001 (b) H&M, JD Sports, Slater Menswear Muji, Ted Baker, Jigsaw Tesco 1997 (b) 2000 (b) 2005 9,750 9,760 2,240 Dixons, Gap, Superdrug, McDonald’s 1957 and 1962 27,880 Odeon, Tiger Tiger, Pizza Hut, Frankie & Benny’s Sainsbury’s, WHSmith, Boots, Superdrug, Peacocks, New Look Marks & Spencer, Boots, WHSmith Next, Monsoon 2002 (b) 17,560 1976 and 1998 (r) 30,450 1990 (b) 22,296 Ealing Broadway Centre: Shopping centre with 11 shops and 2,020m2 air-conditioned offices (part) River Island, Russell and Bromley Clinton Cards, 1984 (b) 5,410 Hull 34 leasehold shops and public house Next, McDonald’s, C&J Clark 1952/1956 (b) Livingston Designer Outlet Centre: Designer retail outlet with 95 shops, leisure and food court (50% interest) Vue, Burberry, Aquascutum, Gap, Marks & Spencer, Reebok 2000 (b) London Part of the Metro Shopping Fund – 50% interest N1 SW1 Plymouth York N1 Centre: Shopping centre with 15 shops, four restaurants and cinema Victoria Place: Leasehold retail and six restaurants at Victoria Station Shops on New George Street, Cornwall Street, Oldtown Street and Armada Way (all leasehold properties) Coppergate Centre: Part freehold, part leasehold shopping centre with 3 stores, 18 shops, museum, 19 flats and car park Retail warehouse and food superstore properties – £100m and above Gateshead Retail World Team Valley: leasehold, 21 units and fast food restaurant. Extension planned Livingston Almondvale West: 6 units Almondvale Retail Park: 9 units Almondvale South: Phase I -1 unit, Phase IIa – 3 units and 2 restaurants built in 2004. Planning consent for a further 4,180m2 of retail space West Thurrock Lakeside Retail Park: 20 units and fast food restaurant, being upgraded and refurbished Benetton, French Connection, Gap, Mambo Dorothy Perkins, New Look, Books etc, Next C&J Clark, McDonald’s, Moss Bros Fenwick, Marks & Spencer, Prestons, C&J Clark, Boots Starbucks, Dolcis Homebase, TK Maxx, Boots, Next, MFI Matalan, TK Maxx, Marks & Spencer, Simply Food Halfords, Currys, MFI, JJB Sports Homebase Toys ‘R’ Us, SportsWorld Next, Borders, Currys, PC World, Toys ‘R’ Us 120 Land Securities Annual Report 2005 8,350 26,790 10,100 1987 (b) 5,530 1952/1965 (b) 10,630 1984 (b) 14,860 2003 (r) 35,240 2004 (e) 10,943 1997 (b) 2004 (e) 10,050 14,074 2002 (r) 33,890 5.2 Investment property information continued Location Property name, address and description Retail warehouse and food superstore properties – £50m to £100m Bexhill- on-Sea Dundee Ravenside Retail and Leisure Park: 9 units, food superstore, fast food restaurant, ten-pin bowling alley, 2,720m2 extension under construction Kingsway Retail Park: 11 units and fast food restaurant. Major enlargement and reconfiguration commenced Liverpool Aintree Racecourse Retail Park: Aintree, 11 units and fast food restaurant Manchester White City Retail Park: 11 retail warehouses and 2 restaurants Northampton Nene Valley Retail Park: 11 retail warehouses Retail warehouse and food superstore properties – £25m to £50m Birmingham Great Barr: food superstore Blackpool Blackpool Retail Park: 9 units. Extension planned Chesterfield Ravenside Retail Park: 7 units and 1 restaurant Derby Wyvern Centre: 6 units and fast food restaurant Meteor Centre:11 units, fast food restaurant and public house Edmonton Ravenside Retail Park: 4 units and fast food restaurant Erdington Ravenside Retail Park: Kingsbury Road, 10 units Gloucester Eastern Avenue, Gloucester: 3 units Hull Priory Way: food superstore and retail warehouse Manchester Cheetham Hill Road: 20 leasehold units and fast food restaurant Maidenhead Bishops Centre: 36 retail units Poole Commerce Centre: 5 units Swansea Pontarddulais Road Retail Park: 7 units London offices and retail properties – £100m and above EC2 EC4 W1 30 Gresham Street: leasehold air-conditioned City offices incorporating 1,300m2 of retail (sold after year end) One New Change: leasehold, air-conditioned City offices and 13 shops Portman House: 2 Portman Street, air-conditioned leasehold West End offices incorporating 3,546m2 of 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 of offices and 670m2 of illuminated advertising SW1 50 Queen Anne’s Gate: air-conditioned West End offices Portland House: Bressenden Place, part air-conditioned leasehold West End offices incorporating a 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) NW1 Greater London House: air-conditioned Inner London offices SW6 Empress State: Lillie Road, Fulham, air-conditioned Inner London offices with 2,040m2 retail/leisure London offices and retail properties – £50m to £100m Principal occupiers Date built (b)/ last refurbished (r) or extended (e) Total area m2 Homebase, Currys, PC World, Tesco Toys ‘R’ Us, Homebase, Currys, MFI B&Q, Comet, Halfords, Harveys Homebase, Halfords, Currys, DFS Currys, Staples, Comet Asda Currys, Halfords, Pets at Home Focus, Currys, PC World Currys, Homebase, Halfords, Carpetright Focus, DFS, MFI, Lidl Wickes, Mothercare MFI, Halfords, Currys Focus, MFI Homebase, Sainsbury’s Big W Habitat, Focus, Majestic Wines Homebase, Allied Carpets Marks & Spencer, MFI, Carpetright Dresdner Kleinwort Wasserstein (DrKW) Allen & Overy Cluttons, Conoco, Trafigura Alliance Capital, Boston Consulting Gap, Burger King, Boots, Signs: McDonald’s, Coca-Cola Secretary of State AMEX, Secretary of State, Angel Trains Secretary of State Secretary of State Under construction see development pipeline schedule p115 Young & Rubicam, Bertelsmann Books 2004 (e) 21,739 2004 (e) 27,768 2003 (r) 27,100 2004 (e) 17,207 2003 (r) 13,640 1998 (b) 1996 (e) 2004 (e) 1996 (e) 1994 (e) 1988 (b) 1999 (r) 1989 (b) 2003 (e) 2002 (b) 1978 (b) 1987 (b) 2004 (r) 8,600 11,270 9,722 11,290 17,330 12,040 14,130 10,450 10,250 9,270 9,598 13,290 11,110 2003 (b) 36,450 1990 (r) 2001 (b) 32,650 12,810 part 1996/97 (r) 14,190 part 2003 (r) 5,820 1977 (b) part 2002 (r) 1995 (b) 1987 (r) 30,140 29,120 23,170 18,640 60,550 1999 (r) 30,907 2003 (r) 43,330 Moorgate Hall: 143/171 Moorgate, air-conditioned leasehold City offices with 1,450m2 of retail Marks & Spencer, Clinton Cards, DLJ, Hamburgische Landesbank 1990 (b) 7,540 EC2 EC3 13/23 Fenchurch Street: part freehold, part leasehold, air-conditioned City offices and major retail unit 49 Leadenhall Street: air-conditioned City offices and leisure centre EC4 Cannon Street House and Martin House: air-conditioned City offices Nicholson Graham & Jones Fleetbank House: Salisbury Square, air-conditioned Midtown offices Regis House: King William Street, air-conditioned City offices incorporating public house and 530m2 of retail Secretary of State Sun Microsystems, GE Frankona International London Underwriting Centre DrKW 1984 (r) 15,620 1975 (b) 12,230 1996 (r) 1974 (b) 1998 (b) 8,100 11,370 8,670 Land Securities Annual Report 2005 121 5.2 Investment property information continued Major property holdings continued Location Property name, address and description London offices and retail properties – £50m to £100m continued EC4 New Street Square: 5 new leasehold buildings (formerly New Fetter Lane) Hill House: 1 Little New Street, air-conditioned Midtown offices, library and public house Times Square: Queen Victoria Street, 45% interest, air-conditioned City offices (post year end acquisition) 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 12/24 Oxford Street and 2/5 Tottenham Court Road: an 8,360m2 store and 3 shops 455/473 Oxford Street: 4 leasehold shops and restaurant WC1 WC2 W1 W11 Part of Metro Shopping Fund – 50% interest Notting Hill Gate: 52 shops, two stores, offices and cinema W2 SE1 SW1 10/20/30 Eastbourne Terrace: West End offices Red Lion Court: Bankside & Park Street, air-conditioned Inner London offices 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 Principal occupiers last refurbished (r) or extended (e) Total area m2 Under construction see development pipeline p115 65,320 Deloitte 2002 (r) 15,780 Mellon Bank, Dechert 2003 (b) 35,117 Secretary of State 1985 (r) 11,040 Warner Bros Bain & Co, ICL Virgin Megastore Mothercare Boots, Marks & Spencer McDonalds, WHSmith John Brown Lloyds TSB Secretary of State Curtis Brown, Tiger Tiger 1999 (b) 1997 (r) 1998 (r) 1963 1963 (b) 12,390 12,690 8,850 3,020 6,980 1958 18,280 1957/58 (b) 1990 (b) part 2003 (r) 16,780 11,920 10,030 Metropolitan Police 1966 (b) 35,670 475/497 Oxford Street and Park House: including 9 retail leasehold units Vacant offices, H&M, Dixons Clive House: Petty France, West End offices Secretary of State 2004 (r) 9,400 London offices and retail properties – £25m to £50m EC1 EC2 EC3 EC4 W1 WC1 SE1 W2 SW1 City Forum: 250 City Road, air-conditioned City offices Goldman Sachs, Deloitte, NatWest Dashwood House: 69 Old Broad Street, air-conditioned City offices ABN Amro, Pinsent Curtis and AMEX One Wood Street: new leasehold air-conditioned City office (formerly 120 Cheapside) 130 Wood Street: air-conditioned City offices and bar/restaurant planned development see p115 Allen & Overy Gracechurch House: 55 Gracechurch Street, air-conditioned City offices with 930m2 health club Royal London, Venton Services, David Lloyd Leisure 1989 (b) 1995 (r) 1999 (r) 1993 (b) 37/39 and 40 Lime Street and 4 Fenchurch Avenue: air-conditioned City offices Small insurance agencies Part 1998 (r) 109-114 Fenchurch Street: air-conditioned City office New London House: 6 London Street, air-conditioned City offices, 2 shops, 2 restaurants and public house 26 Old Bailey: air-conditioned City offices 7 Soho Square: air-conditioned West End offices and retail 6/17 Tottenham Court Road: Retail with 242m2 offices Multiple occupiers ED&F Man, Faraday Underwriting and other insurance agencies Secretary of State Expedia, Metropolitan Police, Tesco EasyEverything, Sainsbury’s, Boots Oxford House: 70/88 Oxford Street, air-conditioned West End offices and 5 shops Secretary of State, Universal Pictures 26/36 Oxford Street: air-conditioned bank, large shop, kiosk, restaurant and 1,050m2 educational use Lloyds Bank, Cromwells Madhouse 1976 (b) 1993 (r) 1984 (r) 2003 (r) 1999 (b) Part 1994 (r) 1983 (r) 12,230 10,550 16,520 5,380 6,720 9,380 7,500 6,180 6,310 5,720 5,920 5,680 5,010 Turnstile House: midtown apart-hotel building and retail Bankside2&3: office development project 40/50 Eastbourne Terrace: West End offices and 4 ground floor units 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 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 West End leasehold offices and 2 restaurants Citadines Under construction see development pipeline p115 Under construction see development pipeline p115 Royal Westminster Thistle Hotel, IIR 2003 (r) – 8,000 38,887 1950s (b) 12,960 1994 (r) 6,130 Rolls-Royce, Sainsbury’s 1997 4,530 Secretary of State Secretary of State Westminster City Council Burberry’s, McDonald’s 1980s (b) 1966 1965 2000 (r) 5,500 10,030 15,750 4,270 122 Land Securities Annual Report 2005 5.2 Investment property information continued Property locations Shopping centres 1 London 4 3 5 2 20 22 21 19 23 8 7 6 10 9 15 16 17 18 14 Scotland Aberdeen 1. Bon Accord Centre1 St Nicholas Centre1 East Kilbride 2. East Kilbride Shopping Centre1 Livingston 3. Almondvale Centre 4. Designer Outlet Centre 12 Glasgow 5. Buchanan Galleries2 11 13 North, north-west, Yorkshire and Humberside Leeds 6. White Rose Shopping Centre Wales and south-west Cardiff 15. St David’s Centre4 16. St David’s 2 4 York 7. Coppergate Centre Sunderland 8. The Bridges Liverpool 9. St Johns Centre Midlands Birmingham 10. Bullring3 South and south-east Canterbury 11. Whitefriars Quarter Welwyn Garden City 12. Howard Centre Maidstone 13. Fremlin Walk Portsmouth 14. Gunwharf Quays Bristol 17. Broadmead Exeter 18. Princesshay London 19. Stratford Centre, Stratford 20. Broadway Centre, Ealing 21. N1, Islington5 22. Victoria Place5 23. Lewisham Centre Notes 1 Part of Scottish Retail Property Limited Partnership 2 Part of Buchanan Partnership 3 Part of Birmingham Alliance 4 Part of St David’s 2 Partnership 5 Part of Metro Shopping Fund In course of development or refurbishment Development completed £100m and above £50m – £100m £25m – £50m Retail warehouses Scotland Dundee 1. Kingsway Retail Park Livingston 2. Almondvale West North, north-west, Yorkshire and Humberside Gateshead 3. Retail World, Team Valley Retail Park Almondvale Retail Park Almondvale South Hull 4. Priory Way Liverpool 5. Aintree Retail Park Manchester 6. White City Retail Park Cheetham Hill Blackpool 7. Blackpool Retail Park South and south-east West Thurrock 8. Lakeside Retail Park Bexhill-on-Sea 10. Ravenside Retail and leisure Park Edmonton 11. Ravenside Retail Park Midlands Erdington 12. Ravenside Retail Park, Kingsbury Road Chesterfield 13. Ravenside Retail Park Derby 14. Wyvern Centre Meteor Centre Northampton 15. Nene Valley Retail Park South-west Maidenhead 9. Bishop Centre Poole 16. Commerce Centre 1 2 3 4 7 5 6 13 14 12 15 11 8 9 10 16 In course of development or refurbishment Development completed £100m and above £50m – £100m £25m – £50m Land Securities Annual Report 2005 123 5.2 Investment property information continued Property locations continued London 49 50 41 40 47 42 45 48 43 46 44 23 25 1 22 51 37 5 6 18 15 4 2 3 11 7 9 10 8 12 17 14 21 35 36 38 20 13 16 19 39 24 31 34 32 28 27 29 30 26 33 EC1 1. City Forum NW1 22. Greater London House WC1 38. Warner House SW1 23. Haymarket House 24. New Scotland Yard 25. 50 Queen Anne’s Gate 26. Portland House 27. Eland House 28. Kingsgate House 29. Cardinal Place 30. 49/75 Buckingham Palace Road and 29 Bressenden Place 31. Selborne House 32. Westminster City Hall 33. Allington House 34. Clive House SE1 35. Bankside123 36. Red Lion Court and Park Street SW6 37. Empress State 30 Gresham Street EC2 2. 3. Dashwood House 4. Moorgate Hall 5. 130 Wood Street 6. One Wood Street EC3 7. 8. 9. 13/23 Fenchurch Street 49 Leadenhall Street 6/12 Fenchurch Street and 1 Philpot Lane 10. Gracechurch House 11. 37/39 and 40 Lime Street and 4 Fenchurch Avenue 12. New London House EC4 13. New Street Square 14. One New Change 15. Regis House 16. 50 Ludgate Hill 17. 26 Old Bailey 18. Cannon Street House and Martin House 19. Fleetbank House 20. Hill House 21. Times Square WC2 39. 40 Strand W1 40. 475/497 Oxford Street and Park House 41. Portman House 42. Devonshire House 43. Piccadilly Circus 44. 12/24 Oxford Street and 2/5 Tottenham Court Road 45. 6/17 Tottenham Court Road 46. Oxford House 47. 455/473 Oxford Street 48. 26/36 Oxford Street W2 49. 10/20/30 Eastbourne Terrace 50. 40/50 Eastbourne Terrace W11 51. Notting Hill Gate1 Note 1 Part of Metro Shopping Fund In course of development or refurbishment Development completed £100m and above £50m – £100m £25m – £50m 124 Land Securities Annual Report 2005 126 127 128 6.0 Glossary 6.1 Index 6.2 Investor information Other information Land Securities Annual Report 2005 125 Glossary Adjusted earnings per share Earnings per share based on revenue profit and adjusted to exclude deferred tax associated with investment properties. Initial yield Annualised net rents generated by the investment portfolio expressed as a percentage of the portfolio valuation, excluding development properties. Adjusted net asset value 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. Interest rate swap A financial instrument where two parties agree to exchange an interest rate obligation for a predetermined amount of time. These are used by the Group to convert floating rate debt to fixed rates. 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. SSAP19 Statement of Standard Accounting Practice (SSAP19) “Accounting for Investment Properties”. Stamp duty Government tax levied on certain legal transactions including the purchase of property. Total business return Dividends plus annual growth in net asset value. 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 shareholder return The growth in value of a shareholding 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. Turnover rent Rental income which is related to an occupier’s turnover. UITF28 Urgent Issue Task Force Abstract 28 (UITF28) “Operating Lease Incentives” requires the Group to treat incentives for lessees to enter a lease to be offset against the total rent due. UITF34 Urgent Issues Task Force Abstract 34 (UITF34) “Pre- contract Costs” requires bid costs incurred prior to exchange of contract to be expensed. Unitary charge The basic payment received by Land Securities Trillium under an outstanding contract. Voids The area in a property or portfolio, excluding developments, which is currently available for letting. Weighted average cost of capital (WACC) Weighted average of our cost of debt and our notional cost of equity, used as a bench-mark to assess investment returns. Investment portfolio The investment portfolio comprises Land Securities wholly-owned investment properties together with the properties held for development but excludes Land Securities Trillium properties. Investment properties Properties held for investment purposes, excluding development programme, Kent Thameside, Land Securities Trillium properties and trading properties. 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 or combined portfolio for the whole of the current and previous financial year. Net asset value (NAV) per share Equity shareholders’ funds divided by the number of ordinary shares in issue at the period end. Net nominal equivalent yield The internal rate of return from an investment property reflecting reversions to current market rent, and such items as voids and expenditures but disregarding potential changes in market rents and reflecting the actual cash flow rents. Open A1 planning permission Planning permission for the retail sale of any goods other than food. Open market value Open market value is an opinion of the best price at which the sale of an interest in the property would complete unconditionally for cash consideration on the date of valuation (as determined by the Group’s external valuers). In accordance with usual practice, the Group’s external valuers report valuations net, after the deduction of the prospective purchaser’s costs, including stamp duty, agent and legal fees. Operating properties Properties acquired and managed by Land Securities Trillium as part of its property outsourcing contracts with third parties and which do not meet the accounting definition of investment property. Over-rented Space that is let at a rent above its ERV. Passing rent The annual rental income receivable which may be more or less than the ERV (see over-rented and reversionary). 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 and comparing 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. 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. 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. Combined portfolio The combined portfolio is the total value of Land Securities investment portfolio together with our share of the value of the assets held in joint ventures. 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 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. Diluted figures Reported amount adjusted to include the effects of potential shares issuable under employee share schemes. 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. 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 capital expenditure in the period. FRS17 Financial Reporting Standard 17 (FRS17) “Retirement Benefits”. Gearing (net) Total borrowings, including bank overdrafts, less short- term deposits, corporate bonds and cash, at book value, plus non-equity shareholders’ funds as a percentage of equity shareholders’ funds. 126 Land Securities Annual Report 2005 Index A About Land Securities Accounting policies Accounts explained Annual General Meeting Auditors 4-5 85-86 7 68, 106 80, 106 B Balance sheets Barclays BBC Board and senior management changes Board of Directors BT (Telereal) Business Analysis Business of Group 83 52 50 15 58-59, 104-106 51, 95-96 107-124 104 C Called up share capital Cashflow and net debt Chairman's Statement Competitive environment and business planning Consolidated cash flow statement Consolidated profit and loss account Contingent liabilities Corporate Governance Attendance at Board and Committee meetings Audit Committee Board appraisal Board balance and independence Director induction and training External Auditors Financial reporting Going concern Internal control Investor relations Nominations Committee Non-executive directors Remuneration Committee Role of the Board Statement of compliance Valuers Corporate Responsibility Creditors Customer service D Debentures, bonds and loans Debtors Department for Work and Pensions Development estimated future spend Development programme Directors’ report Directors’ responsibilities Dividends Donations Driver and Vehicle Licencing Agency E Employees Employees, directors and pensions Environment F Financial assets and liabilities Financial Highlights Financial Statements Financing strategy and debt restructuring Five year record Fixed assets G Gearing Goodwill Glossary H Health and safety Hedging I Independent auditors report International Financial Reporting Standards Introduction 99 23 12-15 16 84 82 102 66-69 66 68 67 66-67 67 68 69 69 69 68 67 67 68, 72-78 66 66 69 60 97, 98 32 97, 98 96 50 29 29 104-106 79 92, 104 106 52 106 88-91 64, 106 100, 101 6,7 81-102 19 103 94-95 23 93, 94 126 63 23 80 24 2-9 Investment and development portfolio valuation movements Investment in Group undertakings Investment in joint ventures Investment property business Development programme Development pipeline schedule Investment Major property holdings Performance benchmarking Portfolio analysis - combined portfolio Portfolio analysis - investment portfolio Portfolio analysis - value by location Portfolio analysis - average rents Portfolio analysis - like for like reversionary potential Portfolio analysis - number of properties by value Property locations Total returns Valuation commentary Index Investor information Investor overview Investor relations K Kent Thameside 29 95 95, 96 26-29, 108-116 29 115-116 29 119-122 109 110-111 112-113 114 114 114 114 123-124 28 28 127 128 8-9 60, 68 54 L Land Securities’ total property returns Land Securities’ returns Land Securities’ investor overview Lease reforms London managed offices customer service London Portfolio 9 9 8 14 32 27, 40-45, 110, 116, 121, 122, 124 41 43 42 42 40 42 40 42 93 Achievements Development and letting Investment Market commentary Objectives Review of activity Strategy Valuation Loss/earnings per share M Metro Shopping Fund 38 23 93 100 91 51 82 N Net assets Net assets per share Net debt (analysis of) Net interest payable Norwich Union Note of historical cost profits and losses O Objectives and achievements Occupiers, clients, customers and the community Operating and Financial Review Operating profit Other information Our people Outlook Outstanding capital expenditure 9 62 16-29 88 125-128 15, 62, 106 15 29 P Payment policy Pension schemes Post-balance sheet events Profits Property equivalent yields Property Outsourcing Achievements Customer service Contract analysis Number of people by occupation Property transactions concluded by contract Regional breakdown by contract 106 24 102 22 18 46-52, 117, 118 47 32 117-118 118 118 118 Property Outsourcing continued Financial results Market commentary Objectives Review of activity Strategy Provisions 48 48 46 48 46 98 R Real estate investment trusts Reconciliation of net cash flow Reconciliation of Group operating profit Related party transactions Remuneration Report Annual bonus Base salary Composition of Remuneration Committee Defined benefit pension scheme Directors’ emoluments Directors’ interests in shares Directors’ options over Ordinary Shares Directors remuneration Fees for non-executive directors Information regarding senior managers Long-term incentive plan Pensions Performance graph Performance share plan Remuneration policy Remuneration strategy Service agreements Share options Shareholding guidelines Results Retail Achievements Asset management Development Investment Market commentary Objectives Portfolio valuation Retail warehouses Review of activity Shopping centres Strategy Revenue profit Risk Management 14 84 84 102 72-78 73 73 72 77 75 76-77 76 72 77 78 74, 77 77 78 73 72 72 77 74 74 13, 104 26, 34-39, 110-116, 119-121, 123 35 38 38 36 36 34 36 39, 110-116, 120, 121, 123 38 36, 110-116, 119, 120, 123 34 88 70, 71 S Segmental information Share capital Shareholders’ funds Shopping centre customer service Slough Estates South-east industrial Stansted Statement of total recognised gains and losses Stocks Strategy Substantial shareholders 87 106 99, 100 32 38, 102 54 54 82 96 9 106 T Taxation Telereal (BT) Ten year record Top 12 properties Top 12 occupiers Tops Estates, acquisition of Total shareholder returns 24. 92 51, 95-96 103 109 114 14, 38, 102 9 U UK core commercial property markets 16 Undertakings (Principal Group and associated) 101, 102 54 Urban Community Development V Valuation and net assets Vision 104 9 Land Securities Annual Report 2005 127 Investor information The report and financial statements, share price Low cost share dealing facilities Capital gains tax information, company presentations, primary These provide both existing and prospective For the purpose of capital gains tax, the price of the financial statements as excel downloads, the shareholders with simple, low cost ways of buying Company’s ordinary shares at 31 March 1982, corporate calendar, corporate governance and other and selling Land Securities Group PLC ordinary shares. adjusted for the capitalisation issue in November investor information on the Group are available 1983, was 205p. through the internet on www.landsecurities.com Shareview dealing is a telephone and internet Registrar 0870 850 0852 between 8.30am and respect of shares in Land Securities Group PLC All enquiries concerning holdings of ordinary shares 4.30pm Monday to Friday. issued under the Scheme of Arrangement in dealing service. For telephone dealing call The appropriate values to be used as base costs in in Land Securities Group PLC, including notification of change of address, queries regarding dividend For internet dealing log on to payments or the loss of a certificate, should be www.shareview.co.uk/dealing September 2002 are: Ordinary shares – 769p B shares – 101p addressed to: so that the new ordinary shares and the B shares A postal dealing service is also available. received in respect of the old ordinary shares in Lloyds TSB Registrars,The Causeway,Worthing, Full details and a form can be obtained Land Securities PLC will attract 86.99% and West Sussex, BN99 6DA. Telephone: 0870 600 3972 Textphone: 0870 600 3950 Website: www.shareview.co.uk by calling 0870 242 4244. 13.01% respectively of the base cost in those old ordinary shares. Sharegift Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, Unclaimed Assets Register The Company participates in the Unclaimed Assets The registrars provide an online service, enabling may wish to consider donating them to charity Register, which provides a search facility for shareholders to access details of their Land through Sharegift, a registered charity administered financial assets which may have been forgotten. For Securities shareholdings. Shareholders wishing to by the Orr Mackintosh Foundation. A Sharegift further information, contact: view this information, together with additional Donation form can be obtained from Lloyds TSB The Unclaimed Assets Register, Leconfield House, information such as indicative share prices and Registrars,The Causeway,Worthing,West Sussex, Curzon Street, London W1J 5JA. information on recent dividends, should visit BN99 6DA. Telephone: 0870 241 1713;Website: www.uar.co.uk www.shareview.co.uk Further information about Sharegift is available at Share price information Payment of dividends www.sharegift.org or by writing to: The latest information on Land Securities Group PLC Shareholders whose dividends are not currently paid Sharegift,The Orr Mackintosh Foundation, share price is available on our website to mandated accounts may wish to consider having 24 Grosvenor Street, London, SW1W 0DH www.landsecurities.com their dividends paid directly into their bank or Telephone: 020 7337 0501. building society account.This has a number of Registered office Offices advantages, including the crediting of cleared funds Corporate Individual Savings Accounts (ISAs) 5 Strand, 5 Strand, London WC2N 5AF into the nominated account on the dividend The Company has arranged for a Corporate ISA to London WC2N 5AF (Telephone: 020 7413 9000) payment date. If shareholders would like their future be managed by Lloyds TSB Registrars, who can be Registered in and at dividends to be paid in this way, they should contacted at: The Causeway,Worthing,West Sussex England and Wales 140 London Wall EC2, complete a mandate instruction available from the BN99 6UY. Telephone: 0870 242 4244. No. 4369054 Glasgow and Leeds Analysis of equity shareholdings At 31 March 2005 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 by size of holding Up to 500 501 to 1,000 reinvest cash dividends in Land Securities Group PLC 1,001 to 5,000 shares. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars, The Causeway,Worthing,West Sussex, BN99 6DA Telephone: 0870 241 3018 International dialing: +44 121 415 7049 5,001 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 to 500,000 500,000 to 1,000,000 1,000,001 and above 128 Land Securities Annual Report 2005 Number of holdings 11,646 7,190 6,813 601 670 160 258 77 87 % 42.35 26.14 24.77 2.18 2.44 0.58 0.94 0.28 0.32 Balance at 31/3/2005 3,070,525 5,272,624 13,417,788 4,268,792 15,274,977 11,420,657 59,768,526 54,754,883 300,554,294 27,502 100.00 467,803,066 % 0.66 1.13 2.87 0.91 3.26 2.44 12.78 11.70 64.25 100.00 Contact details If you have any comments in respect to this year’s Annual Report please write to Investor Relations Department Land Securities Group PLC 5 Strand London WC2N 5AF Email: investor.relations@ landsecurities.com Telephone: +44(0)20 7413 9000 Email: landsecurities@landsecurities.com www.landsecurities.com If you have any other comments or queries on any aspect of our business, please do not hesitate to contact us as above and we will pass your enquiry on to the relevant individual. Designed by SAS Design Photography by James Harris 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 total chlorine free (TFC) 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 

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