Land Securities Group Annual Report 2006

Plain-text annual report

Annual Report ’06 Annual Report ’06 Financial Statements Business Analysis 18 Performance overview 99 Financial statements and business analysis contents 100 Five year summary 101 Income statement 101 Statement of recognised income and expense 102 Balance sheets 103 Cash flow statements 104 Notes to the financial statements 137 Directors’ report 20 Chairman’s statement 24 Operating and financial review 37 Understanding our numbers under IFRS 38 Financial review 44 Investment property business 48 Retail 58 London Portfolio 68 Property Outsourcing – Land Securities Trillium 76 Urban Community Development 78 Board of directors 80 Corporate responsibility 85 Corporate governance 89 Risk management 90 Remuneration report 97 Directors’ responsibilities 98 Independent auditors’ report 139 Introduction 140 Investment property business – Combined portfolio 142 Investment property business – Retail 146 Investment property business – London Portfolio 150 Investment property business – Combined portfolio analysis 153 Property Outsourcing – Land Securities Trillium 158 Investor information 159 Glossary 160 Index Ibc Contact details “Everyone knows what a bicycle looks like. “So draw one, from memory. We’ll even give you a head start... “Hard isn’t it? Don’t worry if you got it wrong – 80% of people do. “To draw a bicycle correctly, you have to look at one, to understand how it works. “As you can see, the pedals don’t drive both wheels. “In Autumn last year we sent six hundred children from 14 towns across Britain into their local surroundings to draw... “Working with professional illustrators, they learned to look at their worlds, to understand their environments, and how they could be a creative part of them. “It’s a process we understand. We are a creative part of those environments too. “Take the Bullring in Birmingham. Where others saw a roundabout, we saw an opportunity. And with our partners we created a new retail heart for Birmingham, moving the city to the number two spot in the retail hierarchy rankings. “Sometimes it’s about identifying basic human needs. “At lunchtime, St Paul’s, London is one of the most densely populated areas of Britain...but there are no shops (unless you live on sandwiches). It’s amazing what gets overlooked. “So, we are going to develop One New Change into the largest ofﬁce and retail site the City of London has ever seen. “And because we don’t want to miss out on the view of St Paul’s Cathedral, we’ve cut our development in half to ensure those inside can experience the breathtaking views. “Would you like a gherkin with that? “Remaining the number one property company in the UK means thinking creatively, spotting new opportunities and keeping an open mind. Recent developments like Cardinal Place, Whitefriars Canterbury and the project for Norwich Union are testament to our expertise in making property work.” Annual Report ’06 18 Performance overview 20 Chairman’s statement 24 Operating and ﬁnancial review 37 Understanding our numbers under IFRS 38 Financial review 44 Investment property business 48 Retail 58 London Portfolio 68 Property Outsourcing – Land Securities Trillium 76 Urban Community Development 78 Board of directors 80 Corporate responsibility 85 Corporate governance 89 Risk management 90 Remuneration report 97 Directors’ responsibilities 98 Independent auditors’ report 17 i F n a n c i a l S t a t e m e n t s Land Securities Annual Report 2006 18 Performance overview Pre-tax proﬁt up 80.4% Revenue proﬁt up 8.2% Total dividend up 8.0% £2,359.2m £391.3m 46.70p Includes revaluation surplus as well as Our measure of the underlying pre-tax proﬁt Final proposed dividend of 28.55p together with exceptional items including proﬁt of £293.0m on sale of Telereal joint venture the paid interim dividend of 18.15p. Over two years the dividend has increased by 25% reﬂecting conﬁdence in the business Net assets per share up 23.5% Adjusted diluted net assets per share up 28.5% Combined portfolio valuation surplus 15.3% 1597p 1912p £12.9bn Net assets with full provision for deferred tax on Impressive portfolio valuation surplus combined Strong contribution from development activities revaluation surpluses with exceptional proﬁt from sale of Telereal as well as rental growth and continued yield shift joint venture Net assets per share (p) UK GAAP Dividends per share (p) 02 03 04 05 Basic Adjusted diluted IFRS 05 06 Basic Adjusted diluted 1151 1157 1188 1219 1294 1331 1419 1460 02 03 04 05 1293 1488 1597 1912 06 34.00 35.50 37.10 43.25 46.70 xxx Land Securities Annual Report 2006 19 Performance overview continued Welcome. We’ve had an excellent year and we hope that you enjoy reading the 2006 Annual Report to discover more about our achievements. Our accounts explained To help you understand our accounts we detail here some of the key terms we use and conventions we have adopted, with an explanation of their meaning: Financial highlights Gross property income (including joint ventures) Revenue proﬁt: Proﬁt before tax, excluding proﬁts on the sale of ﬁxed asset and trading properties, proﬁts on long-term development contracts, revaluation surpluses, mark-to- market adjustments on interest rate swaps and similar instruments used for hedging purposes, 31/03/06 31/03/05 % change Retail London Portfolio Other investment portfolio Property outsourcing Total Operating proﬁt Pre-tax proﬁt Revenue proﬁt Earnings per share Adjusted diluted earnings per share Dividends per share Diluted net assets per share Adjusted diluted net assets per share Combined portfolio valuation Net borrowings Equity shareholders’ funds Gearing (net) £371.8m £514.0m £88.8m £298.1m £358.1m £165.2m £1,013.6m £1,054.8m £1,988.2m £1,876.2m £2,443.4m £1,404.8m £2,359.2m £1,307.5m £391.3m 357.95p 70.47p 46.70p 1590p 1912p £361.8m 227.32p 66.87p 43.25p 1289p 1488p £12,892.9m £9,365.8m £3,685.9m £2,438.1m £7,493.9m £6,050.3m 49.2% 40.3% +24.7% +43.5% -46.2% -3.9% +6.0% +73.9% +80.4% +8.2% +57.5% +5.4% +8.0% +23.4% +28.5% +37.7% +51.2% +23.9% the adjustment to interest payable resulting from the amortisation of the bond exchange de-recognition, the one-off pension credit and any exceptional items Adjusted diluted earnings per share: These are based on revenue proﬁts plus proﬁts on trading properties and long-term development contracts after tax Adjusted diluted net assets per share: This is often used to evaluate the performance of a property company and is calculated by dividing equity shareholders’ funds, adjusted primarily for deferred tax arising on revaluation surpluses and capital allowances and the bond exchange de-recognition, by the number of shares in issue Combined portfolio: The combined portfolio, see page 150, is our wholly-owned investment portfolio combined with our share of the value of properties held in joint ventures. Unless stated these are the pro-forma numbers we use when discussing the investment property business Retail: This business unit includes shopping centres, retail warehouses, shops outside London, shops held through the Metro Shopping Fund LP, regional ofﬁces and sundry other regional properties London Portfolio: This business unit includes all London ofﬁces and London retail, but excludes those assets held in the Metro Shopping Fund LP Other investment portfolio: This comprises all other investment properties not included in Retail or London Portfolio Land Securities Annual Report 2006 20 Chairman’s Statement “We’ve delivered a total business return of 32.4%, demonstrating a strong performance from all areas of the business.” Peter Birch Chairman The outstanding performance of Land Securities over the past 12 months can be summed up by the 28.5% growth in adjusted diluted net assets per share, driven largely by the 15.3% valuation surplus on our investment portfolio and the £293.0m proﬁt on the sale of Telereal. Growth in net assets is one of the leading ﬁnancial measures against which we are benchmarked and I am delighted with this result in a year which was exceptional for both Land Securities and the property industry. Under International Financial Reporting Standards (‘IFRS’) our pre-tax proﬁt was £2,359.2m and now includes revaluation surpluses as well as exceptional items, providing a simple measure of the value we have created for shareholders. Revenue proﬁt, our measure of underlying pre-tax income, was up 8.2% to £391.3m and we are recommending a ﬁnal dividend of 28.55p per share. Over the year we have delivered a total business return of 32.4%. Benchmarking We have reported against key benchmarks for three years now, allowing you to evaluate our performance against our major competitors and the underlying commercial property market. Once again this year the Group outperformed all its key benchmarks and, given the important role benchmarks play, I hope you will not mind if I expand a little on these here. Total shareholder return Total shareholder returns Total shareholder return is the most widely recognised way to compare returns from one publicly quoted company against another. As a constituent of the FTSE100 we compare our performance against both this and the FTSE Real Estate Index, over the 12 month period under review and since 1 April 2000 when we embarked upon the reinvigoration of the business. This year we produced a total shareholder return of 54.3% compared to 25.5% for the FTSE100 and 48.6% for FTSE Real Estate Index. The returns over the six years since 1 April 2000 are even more impressive recording 224.4% for Land Securities compared to 9.8% for the FTSE100 and 210.9% for FTSE Real Estate. Land Securities FTSE100 FTSE Real Estate Source: Datastream % return for year to 31/03/06 % return for six years to 31/03/06 54.3 25.5 48.6 224.4 9.8 210.9 Investment Property Databank The next benchmark we employ is an external commercial property benchmark, known as the Investment Property Databank (‘IPD’). By participating in this benchmark, which is the industry standard, we are able to compare the performance of our underlying property portfolios against the commercial property industry average. It also enables us to set key performance indicators for our Retail and London Portfolio business units. Our ungeared total investment portfolio return was 23.3% as compared to 20.6% for the IPD quarterly benchmark. Total property returns Year to 31/03/06 LS%(i) IPD%(i) Relative return %(ii) Total portfolio 23.3 20.6 2.2 Source: IPD quarterly benchmark to March 2006 (i) includes acquisitions, sales and developments (ii) Relative return relates to the geometric (not arithmetic) difference between Land Securities and IPD Land Securities Annual Report 2006 Weighted average cost of capital (‘WACC’) We also compare our return on average capital employed against our WACC which reﬂects the cost of the Group’s equity and debt capital. As well as providing a minimum hurdle rate for our investment decisions this also provides a sharp focus on the returns we make from our property investment, development and outsourcing activities.This is essential in a capital intensive industry. Over the past year our pre-tax WACC moved to 7%, which is half a percent lower than it was a year ago as a result of a lower cost of debt. Our returns signiﬁcantly exceeded our cost of capital with a return on average capital employed of 26.4% and a return on average equity of 35.5%. Performance highlights In a year of high activity, I ﬁnd it extremely hard to pick key highlights to demonstrate to you why I believe that this business is truly different to the organisation I joined when I became Chairman some eight years ago. I have, therefore, chosen three examples which not only demonstrate links to our sources of competitive advantage of scale, ﬁnancial strength and skills but also ones which link clearly to our values. The ﬁrst is our acquisition of Tops Estates PLC which was the ﬁrst acquisition of a publicly-quoted company made by us for over 35 years. The fact that we could purchase a business for over £0.5bn (including debt) and ﬁnance this out of existing resources is testament to our ﬁnancial strength, particularly as we also invested a further £1.8bn across our business in the same year.We now own 30 shopping centres, which receive some 300 million visits per annum and provide some 5.8% of the retail accommodation across our core markets. This represents scale in a fragmented industry and can only be of beneﬁt to our customers, the retailers. However, the reason that this acquisition so manifestly fulﬁls our values criteria is because the founder Chairman and majority shareholder of Tops Estates, Everard Goodman, had sufﬁcient conﬁdence in our Company values that he recommended the sale to us of a business that he had spent a lifetime creating. Second on my list is the completion of two of our substantial developments, namely the mixed-use development at Cardinal Place, London SW1 and Whitefriars retail scheme in Canterbury. To date, we have invested a total of £369.8m in developing these two schemes and our development and project management teams delivered 46,580m2 of retail space and 51,130m2 of ofﬁce space. The return on our investment, including acquisition costs, was 46.3%. Cardinal and the Whitefriars Quarter are now in the top ten properties in our £12.9bn combined portfolio. These schemes created 2,400 retail jobs and, at Cardinal Place, we will provide new accommodation for some 4,000 ofﬁce workers. The link here with our values? Our values underpin our approach to development enabling us, in complex and difﬁcult circumstances, to create attractive and economically thriving environments. The third example is the sale of Telereal, which generated £293.0m of proﬁt for shareholders.While it is always difﬁcult to sell out of successful ventures, we made this decision in anticipation of future reinvestment opportunities. The proﬁt generated speaks volumes about the value Land Securities Trillium has created for the Group, leaving it poised for further growth from new business, the winning of which is supported by the excellent reputation for customer service that this business has developed. The Board We are fortunate to identify and recruit individuals to the Board with wide-ranging and complementary skills, who provide clear strategic direction, strong guidance and leadership to the Group. It is our primary responsibility to support and challenge executive management as they pursue our strategic objective of creating long-term sustainable returns for shareholders as well as ensuring the governance of the business on your behalf. I would like to welcome our new ﬁnance director, Martin Greenslade (41) who joined the Board earlier this year from BAE Systems and has supported the organisation through the transition to IFRS. 21 Chairman’s Statement continued Land Securities’ returns (%) Years ended 31 March 40 35 30 25 20 15 10 5 . 0 0 0 00 01 02 03 04 05 06 0 ■ Return on average equity ■ Return on average capital employed ■ Weighted average cost of capital (all figures are pre-tax) * Excludes exceptional charge Note: 2002/03 weak London office market Our values Integrity Respect for the individual Excellence Customer service Innovation Land Securities Annual Report 2006 Communicating We launched our new occupier portal, a property management tool, which has been well-received by retailers, further evidence of the importance we place on making life easy for our customers. 22 Chairman’s Statement continued Strategic direction Six years ago we set out a new strategic direction and embarked upon a series of business initiatives aimed at the transformation of the Land Securities Group. The ambition was to create a modern, dynamic property business with a strategic focus on the customer and on income as well as asset value growth.We have been very successful in our ambitions.We have re-invigorated the investment property business, through an active sales and acquisitions programme, creating two highly-focused business units which, through scale, are now meaningful providers of accommodation to retail and London-based ofﬁce occupiers.We have also invested in our property outsourcing business, Land Securities Trillium, creating the market-leading property solutions provider. This represents real innovation in an industry which can be slow to accept change.We have also become a more demanding employer, focusing our people with stretching performance-based reward schemes and challenging many to adopt new ways of working and new skills. Outlook We have made considerable progress on all fronts this year and, in particular, have positioned our London Portfolio business to beneﬁt from the strong growth that the London ofﬁce market is enjoying and which, we believe, it will continue to enjoy. Our Retail business has a scale and quality of assets positioning it to generate ongoing income growth in a more challenging retail environment, and Land Securities Trillium is now pursuing a wider range of new business opportunities than at any time in the past. However, over the next 12 months we expect certain aspects of our environment to be more challenging. The Department for Work and Pensions, the largest of our property outsourcing customers, has started to use its ﬂexible accommodation allowance, so, as expected, income from that contract will decrease over the next few years.We also do not believe that the unprecedented levels of growth in property values will continue at the same rate or necessarily be sustainable across all property types, particularly more secondary buildings. This growth occurred against a background of low interest rates which have increased recently in both Europe and America and it is for this reason that I sound a note of caution. At this time in the cycle we need to be particularly astute when purchasing standing investments and also take the opportunity to capture value through selective sales. However, if growth should slow or stall, we are in a strong ﬁnancial position to be acquisitive once more while at the same time continuing to use our skills to create value from within our portfolio.We can also invest more in development and property outsourcing, which rely more heavily on our skills to deliver value to shareholders rather than the forces of investment markets. We now also have the prospect of a thriving Real Estate Investment Trust (‘REIT’) sector in the UK and we are enthusiastic about the opportunities this will present to us. Our preliminary assessment is that the regulations being introduced with REITs will not adversely inhibit ﬂexibility and we believe that our existing strategy and mix of business can be accommodated within them.While we will not announce any ﬁnal decision on REITs in advance of enacted legislation, our view at present is that we are ideally positioned to beneﬁt from this status. I would hope to announce our intentions and the implications for shareholders in the coming months and, subject to any unforeseen obstacles, am of the view that it will be in shareholders’ interests to convert as soon as is practical after 1 January 2007. Land Securities has enjoyed a year of strong growth helped by continuing low interest rates. The outlook is positive for the business with a strong development pipeline, a high quality investment portfolio and an outsourcing business which has growth potential. I would like to congratulate everyone who has made this possible, most especially our people. Land Securities Annual Report 2006 Piccadilly lights, London We look after many important properties, but Piccadilly Circus is such a national icon and global tourist attraction that the advertising generates more income than the buildings. Who would have thought that the lights would be worth more than the bricks? Land Securities Annual Report 2006 24 Operating and Financial Review “An increase in the adjusted net assets of the Group of just under 30% in a year is of some signiﬁcance. This value creation was founded upon an exceptionally high level of activity with over £3.5 billion of capital turnover in the year.” Francis Salway Group Chief Executive Twelve months ago we reported that there was a real sense of achievement across the Land Securities Group as we delivered a very strong performance. This remains the case as we continue to deliver across all areas of the business. Our combined portfolio outperformed the IPD quarterly benchmark by 2.2%, we completed 161,000m2 of new development and Land Securities Trillium made a substantial contribution to Group proﬁt. So what is different? We are about to enter into a new environment for the quoted property sector with the introduction of REITs, which are widely expected to beneﬁt both us and the industry. In addition, we believe that the property yield shift is almost complete, and therefore, the creation of value will come from development and asset management activity rather than market-determined valuation movements. One of our most important groups of customers, retailers, are facing more difﬁcult trading conditions and we will need to continue to work assiduously to ensure that we provide them with the best possible trading environment. After an outstanding year in terms of proﬁt performance, Land Securities Trillium expects proﬁts to decline as the Department for Work and Pensions (‘DWP’) uses part of its ﬂexible accommodation allowance and as we invest in new business. We also report our numbers differently this year; so we have tried to communicate clearly the principal changes under IFRS so that you understand fully the Group’s ﬁnancial position.We endeavour to be at the forefront of reporting and this year we have also ofﬁcially adopted the principles of the Operating and Financial Review (‘OFR’) which we have been anticipating for the past two years.We are delighted to report that our efforts on this front were recognised by the award for the second consecutive year of the EPRA (‘European Public Real Estate Association’) Annual Report Trophy for best annual report in the European quoted property sector. The demands of IFRS and the OFR have this year resulted in a longer report so, in order to minimise our impact on the environment, we are encouraging investors to sign up for online shareholder services, including online reports, further details of which are on page 158. Core purpose and strategy At Land Securities our core purpose is making property work. This simple statement masks the enormous inﬂuence we have on the day-to-day lives of thousands of people across the UK. For occupiers and clients it means providing buildings and services which help them to operate successfully every day. For communities, it means providing the buildings and places where people live, work and relax. For our people, it is the satisfaction of the positive impact we have on communities. For shareholders it is the superior investment returns that we have generated. Our strategy is pragmatic. It is to invest in commercial property in sectors where we have expertise and operational skills which give us competitive advantage. In these sectors we will apply our risk management skills and actively recycle capital in order to deliver total returns in excess of our cost of equity. To deliver this strategy, the business is focused on three core sectors of the UK property market: retail property, London ofﬁces and property outsourcing. Land Securities Annual Report 2006 Active capital management (£bn) Investment Receipt Investment Receipt 06 05 04 03 02 01 1.5 2.0 1.0 0.5 2.5 ■ LS Trillium disposals ■ Disposals ■ Property investment expenditure ■ Development expenditure ■ LS Trillium acquisitions ■ Corporate acquisition ■ Capital returns -0.5 -1.0 -1.5 -2.0 0 -2.5 Making property work Mark Collins (left) Chief Operating Ofﬁcer Martin Greenslade (right) Group Finance Director We discuss the ﬁnancial strategy for our business later on in the review, but it is worth noting here that we operate in a capital intensive industry and our performance, therefore, is linked closely to the investment decisions taken by management. One of the key decisions we made on this front was to invest more into development and property outsourcing activities and we are pleased to note that this strategic shift of focus has resulted in enhanced returns for shareholders. Our investment property business comprises two business units operating in the retail and London property markets. Combined, these businesses produced £469.7m of our underlying operating proﬁt, representing approximately 85% of the total. Their activities include property investment, development and management and, in our core markets of retail property and London ofﬁces, we provide about 5.8% and 4% respectively of the market ﬂoorspace. Land Securities Trillium, our property outsourcing business which provides bespoke property solutions incorporating the provision of property accommodation and related property services, produced £96.6m of our operating proﬁt. This relatively young business has a proven track record for returns and proﬁt growth, having met its target of contributing 25% of Group operating proﬁts in 2005, two years ahead of plan. Last ﬁnancial year we took capital out of the BBC contract through the sale of White City and this ﬁnancial year we disposed of our interest in Telereal.These actions have left us well positioned to invest in the new opportunities Land Securities Trillium is currently pursuing. The property outsourcing business offers the Group opportunities for growth in a market which is not exposed to the property cycle or the economy in the same way as our traditional investment property business. It is also a market which offers signiﬁcant growth opportunities through Government outsourcing and Public Private Partnerships (‘PPP’) procurement.With this growth opportunity and diversiﬁcation in mind, we apportion capital between our investment property business and property outsourcing. In addition, following publication of the proposed REIT legislation, we believe that the Land Securities Trillium business is capable of being included, with the rest of our business, in a REIT. Our markets Regulatory The Government published its proposed legislation for the introduction of REITs in the UK in April 2006. The legislation is likely to be enacted in the Finance Act in July 2006 allowing REITs to be formed from 1 January 2007. UK-REITs will be publicly listed, limited liability companies resulting in no change in the corporate status for quoted property companies such as Land Securities. Conversion to a REIT will involve a change in tax status, and is the means by which the Government intends to create a level playing ﬁeld in terms of taxation between owning shares in a quoted property company and direct ownership of property. In return for paying a conversion charge, equal to 2% of the gross value of qualifying property assets, REITs will then be exempt from both corporation and capital gains tax on their qualifying property activities. Dividends paid by REITs will be subject to withholding tax. Operating and ﬁnancial review continued 25 Developing property We have the potential to deliver some 880,000m2 of new commercial accommodation across the UK by 2010. Floorspace – million m2 3.3 1.9 1.0 Retail London Portfolio Land Securities Trillium Other Land Securities Annual Report 2006 26 Operating and ﬁnancial review continued As detailed in the Chairman’s Statement we are waiting for ﬁnal legislation to be enacted, following which we will announce whether the Board believes conversion to a REIT will be in the interest of our shareholders. At present, we consider it likely to be so. Should the Board decide to make a positive recommendation we will need to alter our Memorandum and Articles of Association which will need the approval of our shareholders at an Extraordinary General Meeting. Competitive landscape Land Securities operates wholly in the UK commercial property market.We are the largest quoted property company in Europe measured by market capitalisation, which at £8.4bn represents 21% of the UK quoted property sector.We have a diversiﬁed business model, focused on retail property, London ofﬁces and property outsourcing.Within these core sectors, our activities include property management, investment, development and the provision of property related services.We are one of only two quoted property companies which operate on a signiﬁcant scale in the property outsourcing market. In the past year the investment property market has become even more competitive, with enormous domestic and overseas investor appetite for UK property. This has been driven by the low cost of ﬁnance, economic and political stability and the UK’s long-term lease structure (described in more detail in the ‘Owning property’ section of this review). Our response has been to pursue more opportunities in development and property outsourcing where we see prospects to achieve higher returns, and to acquire property not openly available on the investment market.While we are selective in our acquisitions, we have also been able to acquire portfolios of property through corporate acquisitions, beneﬁting from our ﬁnancial strength and the cost efﬁciencies of corporate as opposed to asset speciﬁc acquisitions. We believe that the scale of our business will continue to be a source of competitive advantage, as evidenced by our ability to ﬁnance large scale development and investment projects at a lower cost of debt than many others in the industry.We also have a relatively large market share of the sectors in which we invest, providing competitive advantage in terms of relationship management with key customers. Over time we plan to capitalise on this to increase further our market share in each of our core markets. In 1988, at its peak, the property sector represented 5.65% of the FTSE Index.Today it represents only 2.25% as a result of the growth in the size of other sectors together with a number of quoted property companies becoming private. However, with the expected removal of the tax inefﬁciencies of holding property in a quoted vehicle through the introduction of UK-REITs, we are anticipating growth in the quoted property sector.We expect to see, over time, the emergence of substantial new quoted companies as owner-occupiers and pension funds use this opportunity to reduce their direct property holdings in exchange for UK-REIT shares which will be more liquid and less management intensive. Land Securities combined portfolio value at 31/03/06 £12.9bn Last year we reported that the UK commercial property market had a total value of nearly £500bn, excluding Government-owned property, with 50% of this market held by owner occupiers. Of the balance, which comprises the property investment market, only 14% is held by the quoted sector. Experience in other countries following the introduction of REIT structures suggests that it is reasonable to anticipate a doubling of the size of the quoted sector in the medium-term even if, as we expect, only a small proportion of pension funds and other property investors take advantage of the UK-REIT opportunity. Commercial property market value £500bn Source IPF: The size of the UK commercial property markets 2003 Business Although diversiﬁed in terms of our activities, there are some common elements to our business environment which impact on the business as a whole. Land Securities Annual Report 2006 Buchanan Galleries Glasgow is the third biggest retail destination in the UK, and Buchanan Galleries is its premier retail development. We were keen to establish a major presence, so through a complex joint- venture transaction, we swapped a portfolio of industrial assets for shopping centre assets. Others might see competition.We saw a partnership. 28 Operating and ﬁnancial review continued While it is easier to predict the supply side for the property market by examining trends on new ﬂoorspace under construction, it is our experience that the demand side, whether it be business expansion or consumer expenditure trends, is a more important factor in determining growth in rental values. Consumer trends are inﬂuenced by earnings growth, unemployment levels and interest rates. Trends in consumer expenditure also impact growth prospects for an increasing proportion of business in the UK.While macro-economic conditions have remained reasonably stable over the past year, there is evidence of a weakness in consumer spending as the impact of tax increases, higher energy costs, personal debt and, in some regions, concerns about job security impact on the retail sector’s prospects.With continued growth in average earnings and unemployment still at relatively low levels, we do not expect severe weaknesses in the retail property sector, but rental growth prospects are likely to moderate. By contrast, employment growth in London has been strongly buoyed by the performance of the ﬁnancial services sector, which has generated rental growth for our London ofﬁce portfolio and will continue to do so as vacancy rates for London ofﬁces reduce to low levels. There is also a correlation between property and interest rates or bond yields. Last year we felt there was little scope for further yield shift. The past twelve months have proven us wrong as bond yields continued to fall during the 2005 calendar year.We beneﬁted from the buoyancy of the property investment market both in terms of the underlying value growth of our portfolio and through our sales programme. In 2006, however, property yields have continued to fall whereas bond yields have risen. These contrasting trends make it unlikely that we will see sustained ongoing capital growth in property purely through yield shift, although the weight of money still looking to be invested in the sector means that yield shift may continue for a few more months. Our business model Later in the operating and ﬁnancial review we examine in detail each of our separate business units but we thought it would be useful to review here some of the common activities undertaken by our business. Owning property At the core of our activities is the ownership of commercial property. One of the fundamental changes over the past few years is that we have concentrated our portfolio on larger assets which provide better opportunities for us to beneﬁt from our scale and asset and property management skills.We now own 220 investment properties across the country with an average property value of £58.6m compared to £24.5m ﬁve years ago. The combined portfolio, which includes our share of the value of assets held in joint ventures, was valued at £12.9bn at 31 March 2006 by Knight Frank, our external valuers. In addition, through Land Securities Trillium, we manage or own over 2,500 buildings. Those we own are held as operating properties on our balance sheet at £0.6bn. One of the differences between our investment and operating properties is that, with the former, we are free to sell the buildings when we like, whereas with the latter we can only sell when they are surplus to our clients’ requirements.We hold the operating properties on our balance sheet at depreciated book cost and do not revalue them in the balance sheet, unlike the investment property portfolio which is independently valued twice each year. Efﬁciently ﬁnanced and actively managed, investment in well-let property is reasonably low risk and the vast majority of our portfolio is just that. This is particularly true if the property beneﬁts from the traditional UK lease structure which has two unique attributes from an international perspective. The ﬁrst is the long-term nature of the leases which usually last more than 10 years and in many instances can be as long as 25 years. The second is that most leases include an upward-only Land Securities Annual Report 2006 Investment portfolio outlook (%) yield pricing 7 6 5 4 3 2 1 0 Jul 05 Jun 05 Sep 05 Oct 05 May 05 Jan Aug Apr 06 05 05 ■ Property equivalent yield ■ 10 year gilt yield ■ Difference between above yields Source: IPF and Reuters Nov 05 Dec 05 Feb 06 Mar 06 Combined portfolio valuations £bn as at 31 March 6 7 . 3 5 . 8 4 . 5 4 . 6 3 . 9 3 . 0 3 . 5 3 . . 5 23 3 . 02 03 04 05 06 ■ Total retail property ■ London offices rent review clause.This has and continues to create controversy between the owners of property and occupiers and we explain later in the review what we have been doing to address this particular issue. We expect our activities to generate investment returns in excess of our cost of capital with target returns of 8-9% on investment property, before taking borrowing into account, and slightly higher returns from our property outsourcing and development activities reﬂecting the higher degree of risk in these activities. In Table 1 we list some of the key risks we believe are involved in property investment. Table 1: Property investment risk management Risk Description Market cycles Property markets are cyclical Property risk Asset value concentration Impact Mitigation Underperformance of investment portfolio impacting on ﬁnancial performance Diversiﬁed business model – outsourcing is less impacted by market cycles Secure income ﬂows under UK lease structure Annual investment appraisals Poor performance of a single asset having material impact on overall performance Diversiﬁed portfolio Largest property represents only 4.6% of combined portfolio Average investment property lot size of £58.6m Tenant risk Tenant concentration Impact on revenue if a major occupier fails Health, safety and environment risk Impact on reputation or potential criminal proceedings resulting in ﬁnancial impact Responsibility for the safety of visitors to our properties and our environmental performance Diversiﬁed tenant base Government largest single customer representing 9.4% of gross rents, the next largest represents only 2.1% Of our income 74% is derived from tenants which make less than a 1% contribution to rent roll Annual cycle of health and safety audits Quarterly Board reporting Dedicated specialist personnel for environment and health and safety Established policy and procedures including award-winning health and safety system and BS8555 certiﬁed environmental system Active environment programme addressing key areas of impact (energy and waste) Developing property One of Land Securities’ key differentiators is our ability to deliver large, complex, mixed-use developments both on our own behalf and for third party clients.We are one of only a handful of UK companies today which has these capabilities. Our target investment return for development activities is between 11% and 14% depending upon whether the project is started with or without any lettings in place. Through development we continue to renew our portfolio and create assets of a quality seldom available on the open investment market. It is an activity where our achievements demonstrate real competitive advantage, especially if you consider that negotiating the labyrinthine planning system in the UK is but one element of an enormously complex regeneration process. Table 2 shows all the development currently being planned by us. In the year under review we spent £488.7m on development activity and we expect this level of spend will continue at similar levels as compared to an average annual spend of some £250m in the previous ﬁve years. Operating and ﬁnancial review continued 29 Table 2: Group development activity No of projects Floorspace m2 TDC £m 620 456 221,070 143,110 364,180 1,076 211,250 1,172 89,820 883 301,070 2,055 157,610 55,360 n/a n/a ERV £m 43 32 75 101 61 162 n/a n/a Retail Programme Proposed development Total pipeline London Portfolio Programme Proposed development Total pipeline Land Securities Third party 8 4 12 5 3 8 3 Land Securities Trillium 2 Third party TDC: Total development cost ERV: Estimated rental value Land Securities Annual Report 2006 30 Operating and ﬁnancial review continued Our ability to deliver complex development projects relies upon a range of skills built up over a number of years which incorporate site assembly, design, project management, public consultation and change management capabilities.We now have a team of 80 people involved in the delivery of development projects addressing the numerous requirements of our stakeholder groups. Stakeholder groups Stage Site assembly Design Development is one way to create additional value for shareholders with our ongoing developments contributing £317.6m (32.9% valuation surplus) this year to the uplift in our valuation. However we have to manage the risks inherent in this activity as described in Table 3. Public consultation Table 3: Development risk management Risk Description Impact Mitigation Site assembly risk Third party interests in part of site cannot be acquired Planning risk Development proposals fail to gain sufﬁcient support and therefore planning consent Construction risk Construction cost over-runs or poor management of construction Letting risk Development remains unlet after completion or fails to meet lettings target Unable to progress development either at all or within budget for site assembly Policy of buying into all or part of future development sites early as income-producing investments Experience of Compulsory Purchase Order procedures Unable to progress developments in a timely manner Development expertise including: Skilled development management teams Public consultation and change management capabilities Long-standing relationships with key development stakeholders Reputation Returns are eroded by cost overruns or project completion is delayed Transfer of risk to specialist contractors Skilled project management teams Impact on proﬁt Health, safety and environment risk Impact on reputation or potential criminal proceedings resulting in ﬁnancial impact Construction is a high risk activity in terms of health and safety; and the environmental performance of a building is increasingly important Experienced and skilled in-house leasing teams Risk evaluation model to ensure that dividend remains covered by forecast earnings in the unlikely situation that all our London developments remain 100% vacant and retail schemes are only 65% let Advanced health and safety training programme in place, working in conjunction with our contractors All our ofﬁce development schemes are subject to BREEAM (energy performance) ratings with a target rating of Very Good Implementation of sustainable development process checklist (see below) Stakeholder Adjacent owners Local authorities CABE Energy consultants and BREEAM Heritage bodies Local authorities Businesses Local authorities Residents Schools and other community organisations Transport Department for Communities and Local Government Local authorities Local communities Contractors Design team Local communities Agents Occupiers Planning Construction Letting Sustainable development We are very aware of the long-term impact of development activities, both economically and environmentally, on the communities these developments support.We address this issue in greater detail in both our recently published 2006 Corporate Responsibility Report and our sustainable development brochure which are available on our website and which detail the key aspects we consider when planning a major new project as described below: Regenerating With restrictive planning policies in the UK, the majority of our activities are on brownﬁeld sites helping to drive the regeneration of our towns and cities. Signiﬁcant environmental aspects Other sustainability issues Mitigation of local environmental import Economic regeneration and attracting inward investment Re-use and recycling of demolition waste and use of recycled materials in construction Community/stakeholder involvement in decision- making process Habitat enhancement to promote biodiversity Reduction of carbon emissions of developments through design, energy efﬁcient technology and use of renewable energy sources Inclusion of facilities for the storage and collection of waste to facilitate recycling Transport surveys and integration of developments with public transport systems Design and integration into existing communities, including uses and housing Building an effective social infrastructure Employment creation and skills training Crime prevention – through better design of public spaces Use of local labour, suppliers and materials Land Securities Annual Report 2006 New Street Square, London We recycled 93% of the waste that was created when we demolished the original building and gave 180 tonnes of carpet tiles to social projects. When it comes to recycling we don’t just stop at paper Property outsourcing 2 m 3.32 million Commercial accommodation under management 32 Operating and ﬁnancial review continued Property outsourcing Property outsourcing is probably the largest transformation our industry has seen in the past 10 years. Land Securities Trillium, the market leader in property outsourcing, is now responsible for providing business accommodation across 3.32 million m2 of property as well as a wide range of property related services, including: Release of capital through sale of freehold properties Transfer of leasehold property risks Estate and asset planning Facilities management Maintenance and life-cycle capital investment Property development Property outsourcing differs from property investment in that it offers a tailor-made solution to a client in terms of their commercial accommodation requirements. In the past an occupier has had to purchase or lease its business accommodation, procure separately all the services that it needs to maintain, manage and run that accommodation and retain a property team to manage its activities. Through property outsourcing, an occupier can transfer the entire responsibility for this to the property outsourcing company, releasing it from the responsibility of running a property business. The client will receive a capital sum for any freehold properties that are transferred while the property outsourcing provider will receive an annual index-linked all inclusive payment (called the unitary charge). This provides our clients with predictability of pricing.We also offer clients ﬂexibility with the ability to vacate a proportion of their accommodation on a pre-priced basis and at a timing of their choice. Land Securities Trillium has a different risk proﬁle to the investment property business and detailed in Table 4 are its principal risks together with our mitigating activities. Table 4: Property outsourcing risk management Impact Mitigation Risk Description New business risk Winning attractive new deals Service partners risk Performance of service partners Unable to establish new business pipeline and close deals impacts on growth strategy Impact on reputation and potential ﬁnancial penalties should service partners not deliver to agreed standards Vacation of space risk Clients space remains unlet after vacation Impact on income as a result of shortfall of rental income Dedicated new business team Established bid process framework Regular Investment Committee review Regular assessment of service partners’ performance Ongoing suppliers performance reviews Contingency plan set up with alternative suppliers where appropriate Specialist national disposals team manages surplus space Head rent growth risk Inﬂation on head rents payable higher than increases in unitary charge Growth of head rent on leasehold properties with negative effect on income statement Budgetary forecasts to asset level Lease restructuring/rent review processes Freehold buy-ins Hedging income from freehold against leasehold properties Health, safety and environment risk Responsibility for the health and safety and environmental risks on behalf of clients and their employees Impact on reputation or potential criminal proceedings resulting in ﬁnancial impact Annual cycle of health and safety audits Quarterly and annual board reporting Dedicated specialist personnel for environment and health and safety Established policy and procedures including Award winning health and safety system and ISO14001 certiﬁed environmental system Active environment programme addressing key areas of impact (energy and waste) Land Securities Annual Report 2006 Operating and ﬁnancial review continued 33 Our customers We are responsible for providing business accommodation to over 2,000 organisations across our three million m2 investment property business and have a total of 5,000 separate leases with occupiers as well as six property outsourcing clients. The majority of our relationships are long-term, with an average lease length of 8.7 years and an average property outsourcing contract length of 15.2 years. Our investment portfolio customers fall into two main groups: occupiers of retail accommodation and occupiers of commercial accommodation in London. Our tenants include multi-national retailers, leisure and restaurant operators, Government departments, ﬁnancial service and banking organisations, law ﬁrms and consultancy practices, major corporations as well as small independent retailers and ofﬁce occupiers. Over the past few years we have seen enormous changes to the contractual relationship between occupiers and property owners. The key drivers to these changes are global businesses seeking more ﬂexible ways to procure accommodation in line with practices overseas, together with occupier dissatisfaction with certain aspects of the typical UK lease structure. In response to this our business units have developed a wide variety of different products for occupiers which include: Property outsourcing Landﬂex Index-linked leases Outsourced service contracts Turnover-linked retail leases The majority of these products are focused on the ofﬁce occupier but we continue to develop new leasing products for retail occupiers who have different occupational needs.We believe that there will still be demand for traditional leases but, as the demands of modern business change, so will the dynamics of the way in which we provide accommodation. The challenge for us is to ensure that we satisfactorily blend the introduction of new products with more traditional leases, which we believe will continue to be the preferred option for occupiers and for us in many situations. Landﬂex At the forefront of innovation we introduced Landﬂex. This offers occupiers lease ﬂexibility, service guarantee and price certainty. New business Our new business activities incorporate the acquisition of single buildings or portfolios together with corporate acquisitions; the creation and expansion of joint ventures; identiﬁcation and entry into new markets; the letting of new developments as well as the securing of lettings and renewal of leases across the investment portfolio and the winning of new property outsourcing contracts. Much of this activity is conducted at business unit level. For example, our Retail and London Portfolio businesses have leasing, asset and investment professionals who are focused on securing lettings across the development programme as well as ensuring that we minimise the levels of vacancy across the portfolio. This year we have let 83,600m2 of new developments, attracting seven new occupiers to the portfolio. This represents future annual income of £31.7m. Three years ago we created a Group business development team to assist with more complex corporate or portfolio transactions and to examine opportunities for expansion into new non-core activities. Since formation it has been instrumental in the completion of some £2.3bn of transactions, including the property swap with Slough Estates, the corporate acquisitions of Tops Estates and LxB and the creation of our joint ventures with British Land and Delancey. We report on Land Securities Trillium’s new business activities later on in this review, since these are carried out by a dedicated team within this business unit. Land Securities Annual Report 2006 34 Operating and ﬁnancial review continued Our people The Chairman remarked that we were becoming “a more demanding employer” which has resulted in a period of sustained change for our 1,800 employees. In response to this, the past year has seen the Group make considerable progress in terms of the way in which it delivers its human resources strategy which has now been structured into four core areas: Employee satisfaction 81% of employees feel positive about their jobs Communication and engagement Rewards and recognition Learning and development Succession planning and talent management People are key to the ongoing growth and success of our business which drives our strategy to become the employer of choice in the property company sector. Our objective is to attract, retain and develop high performing employees who can add value to the business and to our stakeholders. Over the next few months we will be facing the challenge of transferring our Media Services employees to the BBC’s new facilities management partner.We have implemented change in the DWP contract as we consolidate the expanded contract and in the investment property business we have introduced new ways of working, including the implementation of a new accounting system. We are very pleased by the way in which all our employees have embraced these new circumstances. Land Securities as an employer 87% of employees believe Land Securities is a better employer than other companies Work/life balance 74% of employees believe they have a reasonable work/life balance Communication and engagement We have a mobile workforce, with about half our employees located outside our headquarters or regional ofﬁces and we are keen to engage with these employees as well as their ofﬁce-based colleagues.We also want to ensure that all employees see communication as a two-way process. To achieve this we have introduced business exchange forums in advance of legislative requirements. These forums, which meet every three months, comprise an elected representative group of employees who meet with senior management. Last year we also took the opportunity to change our employee survey to provide more scope for employees to comment on business issues and increase the focus on employee engagement rather than just opinions.We also have a wide range of communication tools in place, such as newsletters, intranet and videos. Reward and recognition To remain competitive and to recruit and retain the people we need, we externally benchmark remuneration packages against a range of comparable organisations and professional skills areas. In addition to base salary, the majority of our employees participate in performance related bonus schemes and are eligible for a range of beneﬁts including deﬁned beneﬁt (now closed to new members) or deﬁned contribution pension schemes, health and life insurance, and a range of ‘salary sacriﬁce’ beneﬁts. We previously received approval from shareholders for a revised bonus and long-term incentive scheme which was introduced to managers last year. This enables managers at all levels to be rewarded for their contribution at a personal, business unit and Group level. In keeping with many companies we have reviewed our ﬁnal salary pension scheme following extensive consultation with participating employees. Having received Trustee approval, we have introduced some changes to this scheme which we describe on page 42 of this review. Engagement Business exchange forums allow elected representatives to meet and engage with senior management. Land Securities Annual Report 2006 Eastbourne Terrace, London While renovating this 1970s block into highly desirable ofﬁces, we drilled down into London’s water table, and now pump up grey water for all the heating and cooling requirements. You don’t add to a drought problem if you have your own borehole 36 Operating and ﬁnancial review continued Business planning Land Securities has in place a rigorous business planning process, with a ﬁve-year rolling Group forecast supported by annual Group and business unit plans and balanced scorecards. Every six months our performance against these is reviewed and communicated to employees. Business plan Our business plan is produced annually and updated after six months. It is based on inputs from our ﬁve-year asset based forecast, which reﬂect the current structure of our business together with our predictions for market conditions.We then overlay assumptions on target gearing levels and capital allocation across our core sectors and between investment acquisitions and sales, development and outsourcing. The objective is to ensure a balance between maximising growth in net asset value and ensuring ongoing growth in earnings. Balanced scorecard We are strong advocates of balanced scorecards which look at quantitative performance measures across the full spectrum of ﬁnance, customer, employee, process and innovation.We have had a balanced scorecard in place for two years and it has particularly helped us to focus on customer service and the interaction between our people and customers.We see the results of the non- ﬁnancial elements of the balanced scorecard as a lead indicator for the health of the business and include selected key performance indicators in ‘Our performance’ section below. Our performance Before moving on to comment in more detail on our ﬁnancial performance for the year to 31 March 2006 as well as examining more closely the activities of our individual business units, we thought it opportune to discuss here the Group’s core business objectives, our key performance indicators (extracted from the balanced scorecard) and our performance against these as set out in Table 5. Table 5: Key performance indicators Business objective Key performance indicators Progress To create sustainable, long-term returns for shareholders Sustained real growth in earnings per share to be at least 3% per annum over rolling three-year periods Annual revenue proﬁt to exceed budget target To maximise the returns from the investment portfolio Normalised adjusted earnings per share growth over three years to 31 March 2006 exceeded RPI by 7.5% per annum Achieved for this ﬁnancial year IPD outperformance in each core sector and on an overall portfolio basis by 1% Outperformed all three criteria, but Retail was below our target performance range (see right) To complete and let our development programme >£11m retail development lettings to be completed >£30m of ofﬁce development lettings to be completed Development to be completed on budget and time Just under £11m of retail lettings achieved with a further £3m in solicitors’ hands >£12m of lettings achieved with a further £8m agreed after year end Slight delay in achieving practical completion at Cardinal Place, otherwise schemes completed on schedule To grow our property outsourcing business by winning new contracts and expanding existing ones Secure two new business contracts, one with a new client Barclays and Norwich Union extensions and Mill Group joint venture Introduce new products and services which meet the need of our customers Acquire additional 15,000m2 of accommodation for Landﬂex Develop and introduce occupier portal Acquired 8,720m2 of new accommodation in one building Developed during year, introduced shortly after year end Ensure high levels of customer satisfaction Overall customer satisfaction in retail and London to exceed targets 90% satisfaction ratings from outsourcing clients Achieved in year Achieved in year Attract, develop, retain and motivate high performance teams and individuals Employee engagement to exceed ETS industry benchmark Grand mean score of 2.96 compared to benchmark of 2.86 – this is on a scale of 1 to 4 with over 3 being considered excellent Land Securities Annual Report 2006 Total property returns year to 31 March 2006 All property Retail(1) London Portfolio(1) Land Securities % pa 23.3 19.3 28.3 IPD %pa 20.6 19.1 24.6 Source: IPD Quarterly benchmark to March 2006 (1) Based on Land Securities business unit structure as deﬁned on page 19. Understanding our numbers under IFRS Operating and ﬁnancial review continued 37 statement (the IFRS term for the proﬁt and loss account) and not as a movement on the revaluation reserve. b. Revaluation surplus on those properties held for the long-term and at an appropriate rate for those held for disposal, and the tax related to the suplus period appears in the income statement. There will be no change to the amounts of tax we actually have to pay. c. There is no longer a distinction between joint ventures and JANEs (‘joint arrangements that are not entities’) and both are now reported under one line in the income statement and balance sheet. d. We have had to restate how we accounted for the bond reﬁnancing, described as the bond exchange de-recognition adjustment, which took place in November 2004.We originally presented this as a repayment of the existing bonds and the issue of new bonds, but, under IFRS, we need to reinstate the value of our old bonds and gradually e. increase our liability up to the nominal value of our new bonds. This gradual increase occurs over the life of the bonds and is charged through the interest line in the income statement. There will be no change to the amounts of interest we actually pay. IFRS requires that we only recognise dividends once they are approved at the Annual General Meeting for the ﬁnal dividend or by the Board for the interim. Therefore proposed dividends are no longer shown as a liability in the Group balance sheet, and the change recognised in equity represents the dividends approved in the year. How have the numbers changed? The following summary picks out the signiﬁcant changes from how our results would have been presented under UK GAAP to how they are now presented under IFRS. The reference to Notes a to e refer to the items listed above. Since this is the ﬁrst time that we report our full year’s results under IFRS, we have reproduced our guide “Understanding our numbers under IFRS” which we provided at the half year. What is IFRS? From 1 January 2005, all groups in the European Union that are listed on a regulated stock exchange are required to report their ﬁnancial ﬁgures using IFRS. What impact has this had on Land Securities? The most important point is that IFRS affects accounting only. There is no impact on the underlying business or its cash ﬂows. The main numerical impacts on the ﬁnancial statements are that: a. The surpluses and deﬁcits arising on the revaluation of the investment property portfolio will now appear in the income Key ﬁnancial impacts of IFRS UK GAAP Description Gross property income UK GAAP £m 1,982.5 Revaluation surplus Note a £m – Proﬁt before interest and taxation 1,063.3 1,579.5 Proﬁt before taxation 844.4 1,579.5 Change of accounting for JVs & Janes Note c £m (159.5) (158.9) Amortisation of bond exchange Goodwill derecognition Note d £m impairment £m – (64.5) – – 8.5 (64.5) (28.1) Deferred tax Note b £m – – – Dividend Note e £m – – – – – Other £m 5.7 24.0 19.4 IFRS £m IFRS Description 1,828.7 Group revenue 2,443.4 Operating proﬁt 2,359.2 Proﬁt before tax Proﬁt for the ﬁnancial period Basic earnings per share Total shareholders’ equity Proﬁt after taxation 658.5 1,579.5 (473.9) 14.1 (64.5) (19.7) Basic earnings per share (p) 140.65 337.34 (101.21) 3.01 (13.78) (4.21) (18.1) 1,675.9 (3.85) 357.95 Shareholders’ funds 8,750.2 – (1,664.2) (79.7) – 375.3 134.0 (21.7) 7,493.9 This represents the valuation surplus over the 12 months to 31 March 2006. In proﬁt after tax, the deferred tax principally represents the charge for the valuation surplus in the year, while under shareholders’ equity it represents the cumulative charge for all revaluations. Our acquisition of Tops Estates PLC gave rise to goodwill because of the requirement to provide deferred tax on all historic valuations. This charge represents our decision to provide against this goodwill. This charge shows the effect before and after tax of gradually increasing the value of our old bonds to the nominal value of our new bonds. Represents the ﬁnal dividend payable in July 2006. We also include a more detailed reconciliation of equity and proﬁt in note 35 to the ﬁnancial statements. Land Securities Annual Report 2006 38 Operating and ﬁnancial review continued Financial Review Headline results Proﬁt before tax increased by 80.4% to £2,359.2m as compared to £1,307.5m for 2005. Revenue proﬁt, our measure of underlying proﬁt before tax, increased by 8.2% from £361.8m to £391.3m. Earnings per share were 357.95p, up 57.5% (2005: 227.32p) with adjusted, diluted earnings per share at 70.47p showing a 5.4% increase on the prior year (2005: 66.87p). The combined portfolio rose in value from £9.4bn to £12.9bn, which included a valuation surplus of £1,683.1m or 15.3%. More detail of this performance is contained in the Investment Property Business review. Net assets per share rose by 23.5% to 1597p from 1293p, with adjusted diluted net assets per share rising by 28.5% to 1912p (2005: 1488p). Proﬁt before tax Under IFRS, proﬁt before tax effectively represents the total pre-tax return to shareholders for the year, including both realised and unrealised gains and losses on the value of our investment properties. Previously, unrealised gains and losses were taken directly to reserves without being recognised in the income statement. In 2006, proﬁt before tax increased by 80.4% to £2,359.2m, representing a pre-tax return of 39.0% on shareholders’ equity at the beginning of the year. The principal drivers behind the increase in proﬁt before tax are detailed in Table 6. oﬁt Revenue Table 6: Proﬁt before tax and revenue proﬁt Principal changes Year ended 31 March 2005 Valuation surplus (A) Proﬁt on disposal of Telereal (B) Distributions received from Telereal (C) Impact of Telereal sale 30 September 2005 Proﬁt on disposal of ﬁxed asset properties Proﬁt on sale of trading properties Debt restructuring interest saving (D) Increase in capitalised interest (E) Amortisation of bond de-recognition (F) Long-term contract proﬁts (G) Goodwill impairment (H) Property outsourcing proﬁt (I) Net rental income (J) Exceptional costs relating to debt restructuring (K) Interest on increased debt Other Year ended 31 March 2006 Proﬁt before tax £m Revenue proﬁt £m 1,307.5 361.8 787.6 293.0 (53.7) – – – – (17.4) (35.8) 7.2 14.7 9.4 (16.9) 10.3 (51.8) 2.8 50.7 64.6 (30.7) 0.3 – – 14.7 9.4 – – – 2.8 50.7 – (30.7) – 2,359.2 391.3 (A) The valuation surplus was £787.6m higher than last year as described in the Investment Property Business section. (B) The disposal of our interest in the Telereal joint venture was completed on 30 September 2005. (C) Distributions from Telereal were signiﬁcantly higher in 2005, reﬂecting a full year and higher levels of property sales. (D) This represents a full year’s reduction in interest charges compared to a part year in the prior period resulting from the debt restructuring in November 2004. (E) Capitalised interest is higher than last year due to greater levels of investment in developments, principally at Cardinal Place and Bankside 2 and 3. (F) The debt instruments issued as part of the reﬁnancing in November 2004 do not meet the requirements of IAS 39 as they are not deemed to be substantially different from the debt they replaced. As a result, the book value of the new instruments is reduced to the book value of the debt it replaced and the difference is amortised over the life of the new instruments. This year’s charge was for the full year compared to ﬁve months in the prior period. (G) Higher levels of activity, primarily the recognition of proﬁts from the development contract to build Bankside 1 for IPC. (H) Goodwill arising on the acquisition of Tops Estates PLC in June 2005, against which full provision has been made, is principally attributable to deferred tax on the revaluation of its investment properties. (I) Better performance on DWP contract, largely offset by the lower unitary charge from the BBC contract. (J) Largely driven by acquisitions and developments coming on-stream. (K) Costs incurred last year related to the debt reﬁnancing and not repeated in the current year. Land Securities Annual Report 2006 Revenue proﬁt Revenue proﬁt is our measure of the underlying pre-tax income of the Group. It is a ﬁnancial measure we use internally to report our results and includes the pre-tax results of our joint ventures but excludes capital and other one-off items such as the valuation surplus and gains on disposals. For this year end, we have amended our deﬁnition of revenue proﬁt to exclude trading proﬁts and long-term contract income as both of these are considered more capital in nature than revenue. Furthermore, unlike the majority of our revenue proﬁt, trading proﬁts and long-term contract income will remain taxable even if we convert to REIT status. Revenue proﬁt for the year grew by 8.2% from £361.8m to £391.3m. The main reasons for this increase are detailed in Table 6. Under our old deﬁnition, revenue proﬁt including trading proﬁts and long-term contract income increased by 8.4% from £401.3m to £434.9m. A reconciliation between proﬁt before tax and revenue proﬁt is shown in Table 7. Earnings per share Basic earnings per share grew by 57.5% to 357.95p (2005: 227.32p), the increase being mainly attributable to the same reasons as set out for proﬁt before tax in Table 6. The growth in earnings per share, however, has also been impacted by a rise in the tax rate. Reasons for the change in tax rate are set out in the section on taxation. In the same way that we adjust proﬁt before tax to remove capital and one-off items to give revenue proﬁt, we also report an adjusted earnings per share ﬁgure, although this includes some additional adjustments to revenue proﬁt. The adjustments to earnings per share are set out in note 11 to the ﬁnancial statements and are based on the guidance given by EPRA with a limited number of further adjustments to reﬂect better our underlying earnings. Adjusted diluted earnings per share rose from 66.87p per share in 2005 to 70.47p per share in 2006, a 5.4% increase. The growth in adjusted diluted earnings per share is largely due to the items related to changes in revenue proﬁt as well as the lower proﬁts on sale of trading properties and higher long-term contract income. Adjusted diluted earnings per share has not grown as strongly as revenue proﬁt because of the higher current tax rate discussed below. Dividend We are recommending a ﬁnal dividend of 28.55p per share this year, compared to 32.85p in 2005. Taken together with the interim dividend of 18.15p (2005: 10.40p), the total dividend of 46.70p represents an increase of 8% over last year’s total of 43.25p. The lower proposed ﬁnal dividend is more than offset by this year’s higher interim dividend, which reﬂected our move to pay approximately 40% of our total dividend at the interim stage. This dividend for 2006 is covered 1.5 times by adjusted earnings (2005: 1.6 times). Subject to approval by shareholders at the Annual General Meeting to be held on 19 July 2006, the ﬁnal dividend will be paid on 24 July 2006 to shareholders on the register on 23 June 2006. The decision to increase our dividend by 8% is both a reﬂection of the growth in revenue proﬁt and our view that the introduction of REITs will increase the focus of listed property companies on dividend payout ratios, irrespective of whether or not they convert to REIT status. Our aim will continue to be to deliver steady dividend growth, although we recognise the quantum of future dividends will be inﬂuenced by whether or not we choose to become a REIT. Operating and ﬁnancial review continued 39 Table 7: Reconciliation of proﬁt before tax to revenue proﬁt Proﬁt before tax Revaluation surpluses – Group – joint ventures Fixed asset property disposals Goodwill impairment Exceptional costs of debt restructuring Mark-to-market adjustment on interest rate swaps 2006 £m 2005 £m 2,359.2 1,307.5 (1,579.5) (105.5) (75.3) 64.5 – 2.2 (827.9) (69.5) (122.5) 12.7 64.6 2.7 Eliminate effect of bond exchange de-recognition 28.1 11.2 Credit arising from change in pension scheme beneﬁts (8.3) Proﬁt on disposal of Telereal joint venture (293.0) Adjustment to restate the Group’s share of Telereal earnings from a distribution basis to an equity basis Joint venture tax adjustment Revenue proﬁt (old deﬁnition) Proﬁt on sale of trading properties 5.0 37.5 434.9 (21.7) Long-term development contract income (21.9) Revenue proﬁt (new deﬁnition) 391.3 – – (23.2) 45.7 401.3 (27.9) (11.6) 361.8 Land Securities Annual Report 2006 40 Operating and ﬁnancial review continued Net assets At the ﬁnancial year end, net asset value per share was 1597p, an increase of 304p. In common with other property companies, we also calculate an adjusted measure of net assets, which we believe reﬂects better the underlying net assets attributable to shareholders. IFRS has increased the number and value of these adjustments, the largest of which is to reverse out the requirement under IFRS to provide deferred tax on valuation surpluses. The adjustments required to arrive at our adjusted net assets are listed in Table 8. Table 8: Net assets Net assets at beginning of year Proﬁt after tax Dividends paid Other Year ended Year ended 31/03/05 £m 31/03/06 £m 6,050.3 1,675.9 5,152.2 1,060.9 (238.9) (175.5) 6.6 12.7 The adjusted diluted net assets per share were 1912p at 31 March 2006, an increase of 424p or 28.5% over the previous year end. Cash ﬂow and net debt During the year cash receipts totalled £972.6m from property disposals (including the disposal of our 50% share in the Telereal joint venture). In total we invested £2,353.4m in our properties including £1,429.2m on direct acquisitions and £579.1m on corporate acquisitions. From our joint ventures, we received a net £133.8m, largely as a result of new ﬁnancing that was put in place during the year. At 31 March 2006, the Group’s net debt was £3,685.9m, some £1,247.8m higher than 2005 (£2,438.1m). The factors contributing to this increase in net debt are shown in Table 9. Net assets at end of year 7,493.9 6,050.3 Deferred tax on investment properties 145.0 145.0 Deferred tax on net revaluation surpluses 1,739.7 1,180.7 Mark-to-market on interest rate hedges 8.6 3.6 Debt adjusted to nominal value (375.3) (395.0) Adjusted net assets at end of year 9,011.9 6,984.6 Table 9: Cash ﬂow and net debt Operating cash inﬂow after interest and tax Dividends paid Property acquisitions (including Tops Estates) Development and refurbishment capital expenditure Investment in properties Other capital expenditure Total capital expenditure Disposals (including Telereal) Joint ventures Other movements (Increase)/decrease in net debt Opening net debt Closing net debt Year ended 31/03/06 £m Year ended 31/03/05 £m 375.9 (238.9) (2,008.3) (345.1) (2,353.4) (26.9) (2,380.3) 972.6 133.8 (110.9) (1,247.8) (2,438.1) (3,685.9) 216.6 (175.5) (315.2) (378.4) (693.6) (19.3) (712.9) 690.4 157.0 (125.0) 50.6 (2,488.7) (2,438.1) Although we have continued to invest substantially during the year, increasing net debt by over 50%, gearing levels have only increased modestly. The main reason for this is that the large valuation uplift has resulted in increased net assets which have largely offset the growth in net debt. Details of the Group’s gearing are set out in Table 10, which includes the effects of our share of joint venture debt, although the lenders to our joint ventures have no recourse to the wider Group for repayment. Financing strategy and ﬁnancial structure Our ﬁnance strategy is to maintain an appropriate net debt to equity ratio (gearing) to ensure that asset-level performance is translated into good returns for shareholders as well as optimising our cost of capital. It has been our stated intention over the last 12 months to increase gearing through investment in our development programme and suitable investment properties. As noted above, we have successfully invested in the business but strong growth in the valuation of our portfolio has limited the increase in gearing. It is important, however, to put our gearing ratio into context. The gearing ratio only reﬂects our year end net debt position and not the average net debt during the period, which was £3.1bn (2005: £2.7bn). Furthermore, the increase in value of our Land Securities Annual Report 2006 Table 10: Gearing Gearing – on book value of balance sheet debt Adjusted gearing(1) Adjusted gearing(1) – as above plus notional share of joint venture debt (excluding Telereal) At 31/03/06 % At 31/03/05 % 49.2 46.9 40.3 43.0 51.1 44.2 (1) Book value of balance sheet debt increased to recognise nominal value of debt on reﬁnancing in 2004 divided by adjusted net asset value. properties is largely driven by yield shift as opposed to increased rental income. The gearing ratio is not the key measure of our ability to service the increase in debt. The more appropriate measure is interest cover. Despite the increase in our year end net debt, our interest cover ratio, excluding our share of joint ventures, has improved from 2.39 times in 2005 to 2.65 times in 2006. This reﬂects our higher earnings, a full year of lower interest costs due to our debt reﬁnancing and a smaller difference in the average net debt between 2005 and 2006 than the respective year end positions might suggest. While Land Securities may have lower ﬁnancial gearing than some other listed property companies, it has signiﬁcant operational gearing through its exposure to a large development pipeline. Developments tend to provide a greater percentage valuation change than conventional investment properties, with this being magniﬁed by any change in yields or in occupier demand. Developments also carry a higher risk around timing, cost to completion and subsequent letting. On the basis of our interest cover ratio and the signiﬁcant amount of funds available to us we would be prepared to see our ﬁnancial gearing rise modestly from its current position. However, given the recent strong rise in property valuations and our caution about future growth prospects from investment properties, it may prove difﬁcult for us to ﬁnd suitable investment properties to acquire at this stage in the cycle. It is also becoming increasingly difﬁcult to acquire investment properties with good medium-term prospects which yield above the marginal cost of our debt although we continue to invest heavily in development and outsourcing activities. As well as having the right level of debt in the business, we also need to ensure that we have a ﬁnancing structure that is both ﬂexible and cost effective. Both of these issues were addressed in the last ﬁnancial year with the introduction of a new funding structure as illustrated in Figure 1. Operational ﬂexibility is afforded through provisions which allow us to buy and sell assets easily as well as maintain our development programme. A committed revolving credit facility as part of the funding structure provides us with the ﬁnancial ﬂexibility to draw and repay loans at will, and react swiftly to investment opportunities. The cost effectiveness of the structure is achieved by providing lenders with security over a large proportion of our investment properties, resulting in lower interest margins than an unsecured structure. During the course of the year, we issued our ﬁrst two new sterling bonds within the secured structure through our £4bn Note programme. The ﬁrst was an issue of £400m with a ﬁxed coupon of 4.875% and an expected maturity of 2017. The second was a £300m 4.625% ﬁxed rate bond with an expected maturity of 2011. To illustrate the efﬁciency and ﬂexibility of our funding structure, the more recent of the two bond issues took four working days from Board approval to pricing at an effective spread to the prevailing LIBOR of 0.09%. As at 31 March 2006 Land Securities’ total borrowing amounted to £3,701.5m, of which £750.0m was drawn under our £2.0bn secured bank facility, and £74.6m related to ﬁnance leases. Committed but undrawn facilities amounted to £1,252.0m. The Group also has £123.5m of uncommitted facilities. The maturity proﬁle of the Group’s debt is shown in Figure 2. The majority of debt in less than one year relates to drawings under the committed facility which has a ﬁnal maturity in November 2009. Hedging We use derivative products to manage our interest rate exposure and have a hedging policy which requires at least 80% of our existing debt plus our net committed capital expenditure to be at ﬁxed interest rates for the coming ﬁve years. Speciﬁc hedges are also used in geared joint ventures to ﬁx Operating and ﬁnancial review continued 41 Figure 1: Funding structure C L P p u o r G s e i t i r u c e S d n a L Secured Group (Total property assets: £9.4bn(3 )) Land Securities PLC Subsidiaries of Land Securities PLC Unsecured loans(1) Secured loans/notes etc(2) Other lenders Secured lenders Fixed and floating charges over security group assets to secure all secured debt Asset transfers and inter-company funding permitted Non-restricted Group Land Securities Trillium Other joint ventures & other assets Dedicated third party funding or loan from Secured Group (1) Limited to the higher of £150m or 2% of total collateral value. (2) The borrower under the Secured Bank facility is LS Property Finance Company Limited. Notes are issued from Land Securities Capital Markets PLC. (3) Source: Knight Frank Valuation Report for 31 March 2006. Figure 2: Expected debt maturities (nominal) £m 1000 900 800 700 600 500 400 300 200 100 0 1 1-2 2-5 10-15 15-20 >20 5-10 Years Secured group Non-restricted group Joint ventures Land Securities Annual Report 2006 42 Operating and ﬁnancial review continued the interest exposure on limited recourse debt. At the year end we had £858.2m of hedges in place, and our debt was 92% ﬁxed. Consequently, based on year end debt levels, a 1% rise in interest rates would increase full year interest charges by only £3.2m. Future funding The Group’s modest gearing levels and interest cover provide signiﬁcant debt capacity to meet its projected capital requirements. Market capacity remains in Sterling and the Group has the ﬂexibility if necessary to tap other markets such as the Euro. With £1.25bn of committed but undrawn facilities, the Group is conﬁdent that it will be able to ﬁnance its planned capital commitments. Taxation The tax charge for the year is £683.3m, giving an effective rate of 29.0% (2005: 18.9%). The lower tax rate in 2005 was primarily due to higher prior year adjustments and a lower effective rate of tax on property disposals. The tax rate on proﬁt before exceptional items is lower at 27.8% (2005: 19.2%). The tax rate on exceptional items is higher than the standard rate largely due to the impact of the Tops Estates’ goodwill impairment, which cannot be offset against taxable proﬁts. Table 11: Taxation Effective tax rate Ordinary Exceptional Total Proﬁt before tax Tax charge Effective tax rate 2,130.7 593.3 27.8% 228.5 2,359.2 90.0 683.3 39.4% 29.0% IFRS requires that full provision is made for the deferred tax liability associated with the revaluation of investment properties. Accordingly, the tax charge includes deferred tax of £473.9m on revaluation gains arising in the period (2005: £248.3m). The current or ‘cash’ tax charge for the year, before tax on exceptional items and property disposals, is £76.9m. If we adjust this for tax related to prior years and the IFRS bond amortisation which is not tax deductible, we have an effective rate of 23.2%. This rate reﬂects the beneﬁts of approximately £80m of gross capital allowances on developments as well as tax deductions available for capitalised interest. The equivalent rate for 2005 is not comparable due to the losses generated by the Group reﬁnancing in the period. Pension schemes The Group operates a number of deﬁned beneﬁt pension schemes which are closed to new members. At 31 March 2006 the schemes had a combined deﬁcit, net of deferred tax of £4.5m (2005: £7.6m). During the year we made a further special contribution of £1.5m (2005: £11.5m) to the principal deﬁned beneﬁt pension scheme and we are maintaining our enhanced contribution rate to address the relatively small deﬁcit. During the year we introduced amendments to the main scheme which were adopted by the Trustees for active members who have given their consent. As a result, active members will have their accrued entitlement at 31 March 2006 linked to inﬂation, with future beneﬁts accruing according to annual earnings. The effect of this has been a reduction of approximately £8.3m (£5.8m net of tax) in the Group’s pension liability associated with funding future anticipated salary increases. Key ﬁnancial risks Table 12 outlines the main tax, treasury and accounting risks facing the business. The ﬁrst three risks are discussed elsewhere in the report as indicated in the table. The risk around IFRS mainly relates to uncertainty within the accounting community on how the new standards should be applied to speciﬁc circumstances. An example of this is our treatment of the goodwill arising on the acquisition of Tops Estates, where an alternative view of the relevant accounting standard may require us, initially at least, to retain the goodwill arising on the acquisition as opposed to impairing it immediately. The potential for uncertainty in accounting treatment, however, is more likely to occur in Land Securities Trillium where the complicated nature and interaction of the risks being borne under each contract can result in different views on accounting treatment. On potential new contracts, differences in interpretation of, or future amendments to, IFRS present some risk to proﬁt recognition. However, the primary consideration for all new contracts is cashﬂow which is unaffected by accounting treatment. Land Securities Annual Report 2006 Table 12: Financial risk management Risk Description Funding Impact Mitigation Lack of available funds Unable to progress investment opportunities Flexible funding structure. Sizeable committed, undrawn facilities – see page 42 Interest rates Exposure to prevailing market rates Increased borrowing costs following interest rate rise Hedging policy – see page 41 Taxation Inefﬁciencies due to poor tax reporting and insufﬁcient planning IFRS Higher tax rate and uncertain liability position Internal tax specialists and appropriate use of external advisers Prudent approach to tax provisions – see note 9 to the ﬁnancial statements Insufﬁcient clarity on new accounting standards Unexpected impact on income statement and balance sheet. No impact on cash ﬂows Internal and external review of IFRS treatment for all proposed investments Investor relations The aim of our communication programme with the investment community is to encourage two- way dialogue with existing and potential debt and equity investors.We maintain an investor relations programme which extends beyond legislative requirements and believe that our approach results in a better understanding of our activities and a more open relationship. We hold regular ﬁnancial presentations, site visits and meetings with key audiences, including institutions, private shareholders, private client intermediaries and both equity and debt analysts. Our aim is to provide a clear, balanced picture of the Group within the constraints of protecting price-sensitive information from selective disclosure. Our objective is to ensure a diversiﬁed share register, both in terms of type and geographic location of holdings.We have placed particular emphasis on helping investors to improve their understanding of Land Securities Trillium and on increasing the geographic diversity of our share register. One region which was substantially under-represented on our share register is the USA, although through our efforts this has improved by 1.35% over the 12 months to 6.85%. We monitor the effectiveness of our communication programme through feedback to the Company and independent perception audits, which are commissioned bi-annually. A bond and equity shareholder audit was conducted by Makinson Cowell in July 2005, which concluded that there were no material issues of concern to investors in relation to strategy, performance, management or governance and that the programme conducted over the previous 15 months “represented a high level of contact by any standard”. The Makinson Cowell audit was presented to the Board, which also receives quarterly reports and conducts an annual Board review of investor relations. We re-launched the investor section of the Group website this year and promoted e-communications via a ‘plant-a-tree’ campaign, where we donate £5 towards tree planting for each investor signing up for electronic communications. Legal proceedings There are no legal proceedings which would have a material effect on the ﬁnancial position or operations of the Group. Operating and ﬁnancial review continued 43 Geographical spread of equity shareholders 14.8 6.9 6.6 8.2 UK France USA Asia 58.0 Netherlands Other Europe other Unidentified % by region Analysis of equity shareholdings by size of holding At 31 March 2006 Number of holdings Balance at 31/03/06 % Up to 500 11,453 44.60 3,002,738 501 to 1,000 6,591 25.67 4,853,892 1,001 to 5,000 6,005 23.39 11,856,169 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 533 555 134 250 73 85 2.08 2.16 0.52 0.97 0.28 3,805,805 12,490,529 9,460,426 60,419,807 12.87 51,244,379 10.92 % 0.64 1.03 2.53 0.81 2.66 2.02 0.33 312,150,037 66.52 25,679 100.00 469,283,782 100.00 Land Securities Annual Report 2006 Combined portfolio £12.9bn 4.8 6.9 1.1 Retail London retail London offices Other 44 Operating and ﬁnancial review continued Investment Property Business The performance of our £12.9bn combined portfolio is the responsibility of our Retail and London Portfolio businesses, with property management and project management skills being provided to them by the professional services departments headed up by our Chief Operating Ofﬁcer. The day- to-day responsibility for the performance of the London retail properties, with the exception of £234.5m of retail and £14.5m of ofﬁce assets held in the Metro Shopping Fund, is with the London Portfolio business. However, to assist comparison with our performance against the Investment Property Databank (‘IPD’), we include the performance of our London retail properties under Retail in order to disclose our portfolio valuation statistics according to the IPD categories. Performance The strong performance over the year of the combined portfolio, which includes our share of the value of joint ventures, reﬂects not only the continued yield shift but also the value we have created through our development and asset management activities, with a particularly strong contribution from development.We revalue our investment portfolio every six months. It was valued at £9.4bn at 31 March 2005, £11.4bn at 30 September 2005 and £12.9bn at 31 March 2006. Part of the 37.7% increase in the size of the portfolio over the year is attributable to our expenditure on acquisitions and developments, net of disposals. The like-for-like valuation surplus for the year was £1,047m or 15.9% of which £573.9m or 8.7% occurred in the six months since 30 September 2005. Shopping centres and shops Retail warehouses London retail London ofﬁces Other Open market value 31/03/06 £m 2,335.1 1,494.1 865.6 2,710.4 292.9 Open market value 31/03/05 £m 1,996.3 1,254.6 752.4 2,310.1 264.8 Like-for-like investment portfolio (2) 7,698.1 6,578.2 Completed developments Purchases Disposals and restructured interests Development programme (3) 565.3 3,337.6 – 1,291.9 437.6 970.4 627.5 752.1 Combined portfolio 12,892.9 9,365.8 Adjustment for ﬁnance leases Combined portfolio – – – – Rental income year to 31/03/06 £m Rental income year to 31/03/05 £m Rental income change % 140.7 61.7 41.8 167.3 13.1 424.6 26.1 123.0 20.8 19.5 614.0 (13.2) 600.8 133.6 56.6 44.7 172.3 11.2 418.4 12.5 22.5 56.9 16.8 527.1 (10.9) 516.2 5.3 9.0 (6.5) (2.9) 17.0 1.5 – – – – 16.5 n/a 16.4 Valuation surplus(1) % 14.2 18.3 14.7 16.9 11.7 15.9 21.4 7.6 – 32.9 15.3 – – (1) The valuation surplus and rental income value are stated after adjusting for the effect of spreading of rents and rent free periods over the duration of leases in accordance with IFRS but before restating for ﬁnance leases. (2) Properties that have been in the combined portfolio for the whole of the current and previous ﬁnancial periods. (3) Development programme comprising 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 contract has not yet been let). As we have previously commented, continued yield shift was one of the factors behind the strong performance of the investment portfolio this year, which also beneﬁted from 4.8% like-for-like rental growth. On the like-for-like portfolio we have seen the strongest total return from our London Portfolio, which has delivered 24.2%, followed closely by retail warehousing with 21.9% and shopping centres and shops with a 19.8% total return over the period. Land Securities Annual Report 2006 Returns are boosted further when the £565.3m of completed developments are included. These comprise Empress State, SW6;Whitefriars, Canterbury; 40 Eastbourne Terrace,W2 and the Ravenside Retail Park, Bexhill. In addition, our ongoing extensive development programme, currently valued at £1.3bn, has delivered a 32.9% valuation surplus, with the largest contribution from Cardinal Place, SW1. The overall total return from our combined portfolio over the last 12 months, including acquisitions and developments, was 23.3%. Our contribution to performance In terms of ungeared total property return, our combined portfolio outperformed the UK commercial property market, as represented by the IPD Quarterly benchmark, by 2.2%. Our London ofﬁces outperformed the equivalent sector benchmark by the substantial margin of 4.8% largely as a result of development proﬁts. Retail delivered a total return slightly ahead of its sector benchmark, up by 0.2%.While a combination of factors, including yield shift, contributed to the overall portfolio performance, we illustrate below how the application of skills can drive the creation of value. Table 13 details the top six performing properties in each sector by revaluation surplus together with an explanation of the key drivers of that performance. It is clear that yield shift played only a part in the creation of shareholder value. This also demonstrates clearly the strong contribution from London developments. Table 13: Key drivers of valuation change Retail % valuation surplus Meteor Centre, Derby 34.5 Ravenside Retail Park, Bexhill Lakeside Retail Park, West Thurrock 31.3 26.0 White Rose Centre, Leeds 25.5 Retail World, Team Valley, Gateshead N1 Shopping Centre, Islington 24.3 23.1 Description London % valuation surplus Description Lettings, rental value growth Cardinal Place, SW1 and yield shift 44.1 Development Completed development and new lettings driving rental growth New lettings driving rental growth Reconﬁguration and new lettings Reconﬁguration and new lettings New Street Square, EC4 43.7 Development 1 Theobald’s Court, WC1 Devonshire House, W1 36.7 31.1 Rental value growth and yield shift Reconﬁguration, new letting and yield shift 1 Wood Street, EC2 30.1 Development regions. Rental value growth and yield shift Fenchurch Street Estate, EC3 26.4 Potential development Rents are reviewed in ﬁve year cycles, as a result of which the current rents on the portfolio can be less than the estimated rental value of the property (‘ERV’), in which case a property is described as having reversionary potential. Equally, as happened most recently in the London ofﬁce markets, if the ERV drops below the current rent a property becomes over-rented. This, together with the level of vacancies (‘voids’) across the portfolio, is an important factor both in terms of risk management and future growth in values. At the year end the net reversionary potential of the like-for-like portfolio was 6.5% compared to 3.9% 12 months ago. This improvement has arisen from a reduction in the over-rented element of London ofﬁces, which are now only slightly over-rented, and from continued rental growth on retail assets, which now have a net reversionary potential of 12.2%. Set against this positive news on rental growth, voids on the like-for-like portfolio have increased from their historically low levels to 3.1%, although a proportion are strategic voids where we are keeping units vacant prior to redevelopment. Operating and ﬁnancial review continued 45 Long-term performance relative to IPD Ungeared total returns – periods to 31 March 2006 Land Securities % pa 13.8 12.1 IPD % pa 12.8 11.1 IPD upper quartile % pa 13.4 12.1 10 years 20 years Source: IPD quarterly and monthly valued funds at March 2006. Land Securities’ ungeared total property return compared over the last 10 and 20 year periods to 31 March 2006 to the IPD. 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 last 10 and 20 year time periods. One year performance relative to IPD Ungeared total returns – period to 31 March 2006 Retail – Shopping centres Retail warehouses Shops Central London ofﬁces* Total portfolio Land Securities % pa 19.1 20.4 18.4 30.0 23.3 IPD % pa 17.6 22.1 20.3 24.1 20.6 Source: IPD Quarterly benchmark to March 2006. * Central London deﬁned as West End, City, Mid-town and Inner London The performance of the Group’s portfolio compared to that of IPD on a similar basis at sector, sub-sector and total portfolio levels over the 12 month period to 31 March 2006. A key driver of outperformance was the strong performance from our Central London ofﬁce holdings, particularly developments. Shopping centres also recorded higher returns than IPD. Retail warehouses performed in line with IPD when the impact of purchases is excluded. Land Securities Annual Report 2006 46 Operating and ﬁnancial review continued Table 14: Investment and development portfolio movements Investment £m Development £m Net book value at 31/03/05 Purchases Disposals Transfers into development Transfers out of development Transfers to trading properties and surrender premiums received Capital expenditure Valuation surplus Capitalised interest Depreciation Net book value at 31/03/06 Combined portfolio valuation at 31/03/06 7,484.5 2,006.7 (655.8) (102.4) 271.6 (84.7) 78.8 1,215.4 – (2.9) 10,211.2 11,601.0 755.6 24.7 (7.8) 102.4 (271.6) – 239.3 362.2 24.5 – 1,229.3 1,291.9 Total £m 8,240.1 2,031.4 (663.6) – – (84.7) 318.1 1,577.6 24.5 (2.9) 11,440.5 12,892.9 Investment During the year we sold a total of £735.9m of property out of the combined portfolio (including joint ventures and net of sale costs), generating a proﬁt of £73.4m (11% above book value).We also had our most active year ever in terms of acquisitions with the purchase of £2.2bn of investment properties (including assets bought by way of corporate acquisitions and joint ventures), which have shown a valuation surplus of 5.7% over the period since acquisition. The average yield on the properties sold was 3.3% (the low ﬁgure being explained by the rent free period on 30 Gresham Street) and the average initial yield on the assets acquired was 5.2% or 5.4% excluding properties acquired vacant. The purchase activity was principally accounted for by the acquisitions of Tops Estates, the LxB portfolio, and 15 London ofﬁce investments. Development Our development programme, including our share of joint ventures and those properties completed and let in the year, produced a valuation surplus of £364.7m of which £181.3m occurred in the second half of the year. Four schemes were transferred into the investment portfolio from the development programme. These were 99% let and generated rents of £9.4m in the year under review. In a full year these will contribute £14.4m of rental income. Including our share of joint ventures and land acquisitions we spent £313.6m (excluding capitalised interest) on the development pipeline on projects including Cardinal Place, New Street Square, Bankside 2 and 3 in London and shopping centre developments in Bristol and Exeter. Cardinal Place has now reached practical completion and we have therefore stopped capitalising interest on this project. However, during the year interest of £11.5m on Cardinal Place was capitalised (2005: £9.0m).We have an estimated further spend of £821m on the projects underway currently which, when complete and fully let, will produce £144.2m of annual income (at today’s ERV). Capital expenditure on proposed developments could total £973m if we proceed with these schemes, which are held as part of the investment portfolio and have a current carrying value of £383.8m. Land Securities Annual Report 2006 Timing of completion of development pipeline 800 600 400 200 m £ t s o c t n e m p o e v e d l l a t o T 0 Key d o o W t S 3 / 2 e d i s k n a B e t a G s ’ e n n A n e e u Q e r a u q S t e e r t S w e N I I I e s a h P , n o t s g n i v i L l o t s i r B r e t e x E f f i d r a C e s u o H d o o w h s a D e s u o H k r a P e g n a h C w e N e n O e c a P l l i a n d r a C 06 07 08 09 Year to 31 March 10 11+ Retail – development programme Retail – development pipeline London Portfolio – development programme London Portfolio – development pipeline Operating and ﬁnancial review continued 47 The ﬁgures given on page 46 for capital expenditure represent the Group’s actual or forecast cash outlays on developments. Including land values and capitalised interest, the total development cost for the full development pipeline is £3.1bn, of which £1.8bn relates to our current development programme. We are currently developing two projects on behalf of the BBC, Paciﬁc Quay, Glasgow and Broadcasting House, W1. The BBC’s new headquarters in Glasgow is on programme for completion by the target date of mid-July and within budget. Broadcasting House has shown some slippage, however, the ﬁrst phase has now been completed and preliminary works have started on the second and ﬁnal phase.We, the BBC and Bovis Lend Lease, our building contractor have agreed in principle the construction programme and costs for Phase 2 and we have also reached agreement on the ﬁnal account on Phase I. Property management We are also responsible for the provision of property management services across the communal areas of buildings in our investment portfolio. These include: Repairs and maintenance Security and building reception services Cleaning Key services, such as electricity, water and waste Insurance Promotional and marketing activity (at shopping centres) We procure and manage these and charge the related costs back to our occupiers through an annual service charge. This is potentially an area of contention between an occupier and the property owner and we have worked hard over the past few years to provide transparent communication on service charges to our occupiers. Unlike many of our peer group, we do not outsource the property management of our investment portfolio. Instead we have developed a strong in-house capability which we believe improves dialogue and lines of communication with our occupiers and is increasingly a differentiator as we seek to consolidate those relationships. In the past year we have looked closely at the way in which we deliver services across our portfolios and the way in which we manage the relationship with our occupiers. As a result we have restructured the teams responsible for the day-to-day management of our London multi-let premises and are in the process of introducing changes to the structure of our retail property management teams. Managing Through our in-house team and our service partners we are responsible for providing a range of property management services across both our investment portfolio and property outsourcing contracts. At the same time we have recently announced the introduction of a new occupier portal, an online system which will give occupiers direct access to our internal systems to view property lease and service charge information. Not only will this improve the availability of data to our occupiers but we also hope that it will make our organisation more accessible to our customers by providing details of the individual people an occupier might need to contact about their property needs. We conduct annual customer satisfaction surveys across our business and believe that willingness to recommend Land Securities as a landlord is a key measure of our performance. In the last year we were pleased to note a greater than 94% willingness to recommend us as a landlord by those customers surveyed. We believe our approach to property management differentiates Land Securities from other providers of commercial property accommodation, strengthening our ability to attract new and retain existing customers and enhancing our market leading reputation. Land Securities Annual Report 2006 Operating and ﬁnancial review continued 49 Retail Every year we receive 300 million customer visits to our 1.9 million m2 retail portfolio. That’s a lot of footfall – which might explain why every four seconds one of those customers will walk away with a pair of new shoes from one of our100 specialist shoe shops. Land Securities Annual Report 2006 50 Retail Achievements Retail share of operating proﬁt £243.7m Like-for-like valuation surplus of 15.6% £1.5bn of acquisitions, including the purchase of Tops Estates and the LxB portfolio £0.3bn of disposals Current development programme to provide 221,070m2 of new accommodation Proposed developments to create 143,110m2 of ﬂoorspace Land Securities Annual Report 2006 48 Retail Land Securities Annual Report 2006 Retail Operating and ﬁnancial review continued 51 “Following a year of unprecedented activity we have now assembled a retail property portfolio of substantial scale, providing 5.8% of the retail ﬂoorspace in our core markets. This provides real competitive advantage in a fragmented market place.” Richard Akers Managing Director, Retail Our retail business represents 53.3% of the combined portfolio and produced £193.2m of the Group’s operating profit together with £50.5m of joint venture profit.We own 1.9 million m2 of retail accommodation including 30 shopping centres and 30 retail parks which represent a core market share of 5.8%.We have over 1,600 occupiers across this portfolio. Many of our retail properties form the central shopping districts of major cities and towns across the UK and over a year, we estimate that some 300 million visits are made by consumers to our locations. We are also investing £1bn to create the next generation of retail locations through a 64,000m2 development pipeline. The retail market The past year was noticeably tougher for retailers as retail sales growth slowed and rising costs, price deflation and increasing competition made trading conditions considerably more difficult than in previous years.The impact of this on like-for-like retail sales has been widely reported.While like- for-like performance is an important indicator of the underlying health of the retail market the most important trend indicator for us, as a retail property owner, is absolute sales performance.The reason is that to grow absolute sales in the face of flat or declining like-for-like sales, a retailer needs to take on new or improved floor space.The trend here remains positive and our experience to date, especially when it comes to letting our retail developments, is satisfactory. There has also been an increasing polarisation of spend away from the traditional high street towards supermarket and large format stores which provide consumers with more choice and perceived value for money while providing retailers with more cost effective trading formats.The internet, which is, for the most part, focused on specific market segments is growing its market share but still has some way to go in terms of overall impact on retail sales. Recent research from Verdict showed that in 2005 the internet represented almost half of retail sales growth but that it still only accounted for around 3% of total retail sales. Although the long-term economic outlook at present is still reasonably benign, market conditions remain difficult for retailers. A further indicator of consumer confidence is the housing market and, while Government statistics show that house price inflation has slowed, the market has not gone into a period of decline and has recently picked up in London and parts of the south-east. The UK retail property market The retail property market extends to some 115 million m2 and is highly diversified both in terms of ownership and type.This is exemplified by looking at any medium-sized town in the UK where you will find high street shops, covered parades, a shopping centre and on the edge of town, retail parks and a supermarket. A number of different owners will be involved too, from private individuals and owner-occupiers to property companies, pension funds and institutional investors. Furthermore each retail location is unique, with different catchment populations, transport infrastructure, local economy and townscape. Certain retail market sectors are also highly constrained in terms of supply side growth, as a result of planning restrictions aimed at preventing new development on greenfield sites and the huge Retail portfolio by value £6.9bn 2.3 4.2 Shopping centres and shops Retail warehouses Other UK retail sales growth 10 8 6 4 2 0 -2 -4 02 03 04 05 06 Like-for-like sales Total sales Source: British Retail Consortium/KPMG Retail property – floorspace Market Type of retail property million m2 million m2 LS % market share Shopping centres Retail parks Total core markets Other retail markets Total 14.9 14.5 29.4 85.5 114.9 1.2 0.5 1.7 0.2 1.9 8.0 3.4 5.8 n/a n/a Source: Property Market Analysis/Office of the Deputy Prime Minister Land Securities Annual Report 2006 52 Retail complexity of developing town and city centre sites in multiple ownerships. This effectively prevents the development of new out-of-town retail parks and major regional shopping centres and slows down in-town development, resulting in a highly competitive investment and development market for existing assets and development opportunities. Against this background it is hardly surprising that retailers can experience frustration with the difﬁculties of procuring and occupying retail property. It is here that major retail property owners like Land Securities can beneﬁt both from the way we manage our relationship with retailers as well as our considerable expertise in urban regeneration. Our strategy Over the last year we have continued to strengthen our position as a leading owner of retail property through: Investment in dominant retail assets Regeneration and renewal of the portfolio Provision of market leading levels of customer service and property management In pursuit of the above we had an extremely active year.We made a further £1,543.3m of acquisitions, and sold £336.8m of properties.We invested £76.9m in the development programme including the redevelopment of Exeter and starting on site at Bristol.We carried out further customer satisfaction surveys and, as described earlier in the review, developed a new occupier portal and reviewed the way in which we provide property management services across the portfolio. Our performance In terms of valuation the retail portfolio continued to perform well. On a like-for-like basis this portfolio increased in value to £4.0bn with a 15.6% valuation surplus over the year. The retail park portfolio again demonstrated the strongest absolute growth, driven by strong investment demand for this type of asset and continued supply side constraints.While the continued yield shift was a factor in the performance of the retail portfolio, rental value growth of 4.0% also made a contribution. In addition, our skills are also making a difference with the valuation increases of the ﬁve top performing properties being driven by development or asset management activity. The portfolio is 12.8% net reversionary and void levels remain low at 3.4% on a like-for-like basis. Retail 31/03/06 31/03/05 Combined portfolio valuation £6,877.8m £4,750.4m Like-for-like investment portfolio valuation Rental income £3,978.5m £3,388.9m £207.4m £193.1m Gross estimated rental value £236.7m £223.8m Voids by estimated rental value Gross income yield £8.1m 4.9% £4.9m 5.6% Combined portfolio extracted from Business Analysis and by reference to the combined portfolio reconciliation tables on page 150. Our contribution to performance Over the past few years we have focused our retail portfolio in response to the longer-term trends in the retail markets, particularly retailers’ desire for more efﬁcient retail units.We have been successful in executing this strategy as we discuss in more detail in the sections below. Investment in dominant retail assets We have substantially restructured the portfolio which now predominantly comprises larger and more dominant retail assets. The drivers behind this approach is our belief that these properties will perform better over the long term and are more likely to beneﬁt from changing consumer trends. Our research shows that shopping is now the third most popular way that a family will spend time together, with over 40% of respondents seeing shopping as a way in which they spend quality time together. It is our view that a great proportion of that time is spent in shopping destinations similar to those that we own – dominant shopping centres. Top ﬁve retail destinations Land Securities ownership London West End Birmingham Glasgow Leeds Nottingham Source: Experian Retail Ranking 2004 Oxford Street and Tottenham Court Road Bullring Buchanan Galleries Leeds Plaza and White Rose No major ownership Land Securities Annual Report 2006 Gunwharf Quays, Portsmouth This sensitive and innovative development has proved so popular, even the ocean-going yachts on the Volvo Round the World Yacht Race stop over for a spot of retail therapy. Sometimes shopping isn’t the main attraction… Shopping We measure the number of visits to our shopping centre portfolio and benchmark this against a national footfall indicator. In 2005 the number of visitors to our portfolio increased by 1.3% whereas overall the national footfall indicator registered a modest decline. 54 Retail A dominant shopping centre is one which has a large local population (‘catchment’ area) for whom it is their primary shopping destination. All but one of our shopping centres are located in central in-town shopping districts, many providing the prime retail accommodation and main consumer shopping experience. As a result of our portfolio restructuring efforts, we no longer have any substantial exposure to high street retail in smaller towns, the segment which we believe in the longer term will be most impacted by the changing retail environment. Over the year we invested further in shopping centre assets with the acquisition of Tops Estates with a portfolio valued at £566.7m. This added a further six properties to our shopping centre portfolio after the proﬁtable disposal of one of the centres. Since acquisition, the Tops Estates properties have shown a combined increase in underlying value of £43.0m, an uplift of 8%. A further manifestation of the changed nature of our shopping centre portfolio is our greater exposure to the leading retail destinations in the UK, which we believe perform better in a less buoyant retail environment. We are also keen to create strategic joint ventures to provide enhanced asset management or development opportunities or to increase our exposure to speciﬁc market segments. The Scottish Retail Property Limited Partnership is an example of the former while the Metro Shopping Fund LP demonstrates the latter. In terms of changing consumer trends, consumers have more choice and are more mobile so it is important to provide an exceptional experience to attract them and encourage longer stays and repeat visits. At Gunwharf Quays, Portsmouth, for example, the unique environment and mix of uses has resulted in a 16% increase in net income over the year. In the period under review we acquired a further designer outlet centre, The Galleria, Hatﬁeld and agreed to forward purchase a development at Banbridge in Northern Ireland. Another trend is for convenience, accessibility and good car parking. Here we have invested signiﬁcantly in retail parks and supermarkets. Bulky goods retailers have found trade to be more difﬁcult but high street retailers have been keen to expand into this larger format with lower rents and operating costs. During the year we acquired the LxB retail park and supermarket portfolio, comprising 14 properties, all of which beneﬁt from open A1 planning consent. As a result of this acquisition, together with £108.6m of selective disposals, our retail park portfolio is now 70% open consent. Changing demand for retail park accommodation has helped us improve the average passing rent on this portfolio from £162 per m2 to £177 per m2 and combined with supply side constraints, make this segment one of the most attractive property investments. This is evidenced by the 14.1% valuation surplus of this portfolio driven partially by yield shift but also by our asset management activities. Regeneration and renewal of the portfolio In a competitive investment market, we are able to use our skills to develop new retail shopping centres of a calibre seldom available to purchase on the open market.We are fortunate to beneﬁt here from the development opportunities inherent within the portfolio as well as our approach to developing in partnership with other leading retail property owners. Our current development programme will provide 221,070m2 of new retail and leisure accommodation with a further 143,110m2 of proposed developments in the pipeline. Land Securities Annual Report 2006 Schemes in progress today include Exeter, a 44,600m2 scheme scheduled to open next year. Our lettings programme is on target here, with 56% of the retail accommodation already let or in solicitors’ hands. At Bristol, a 140,000m2 partnership development with Hammerson plc, due to complete in Autumn 2008, 36% of the retail accommodation is let or in solicitors’ hands. Christ’s Lane, Cambridge started around 15 months later than originally planned due to delays in obtaining freeholders’ consent to redevelop. The 7,150m2 mixed-use scheme, comprising eight shops, a café overlooking Christ’s Piece and 15 residential apartments, has already secured lettings with H&M, Zara, Bank and Giraffe café ahead of its scheduled completion in Autumn 2007. We also have three further proposed developments which we are planning to start this year. The St David’s 2 development, undertaken in partnership with Capital Shopping Centres, will bring the ﬁrst John Lewis department store to Wales, anchoring the 103,600m2 retail-led scheme in Cardiff’s city centre. New retail, cafés, restaurants and 300 homes will be created as well as new public spaces and amenities which include a state-of-the-art public library. At Livingston, our proposals will create an additional 32,000m2 of new retail space, 5,670m2 of leisure space, 28 one and two-bedroom ﬂats, including affordable housing, an 84-bed hotel and new public spaces in the town centre. At Corby our proposals for Willow Place comprise 16,260m2 of retail accommodation in 27 units, the ﬁrst phase of our regeneration activity in this high-growth town. We are also in the process of carrying out development appraisals in Leeds, Liverpool and Glasgow which could offer a further 100,000m2 of development over the next ﬁve years. These and other schemes at the feasibility stage should provide a continued stream of future development opportunities, even though, due to the complexities of the UK planning system, it may be several years until we actually start on site. In addition to our major new development schemes we carry out smaller scale development activities across our retail park and shopping centre portfolio to reconﬁgure and improve these properties. Such activities covered 26,300m2 of accommodation in the past year. Two prime examples are: White Rose, Leeds: we agreed a reduction in the size of the existing Sainsbury’s store from which an additional 6,720m2 was created in ﬁve new units with lettings to Next, River Island, Zara and Schuh Ravenside Retail Park, Bexhill: this 24,710m2 park, comprising 14 units, has recently undergone a 2,720m2 extension and facilities upgrade. These signiﬁcant improvements attracted fashion retailer Next to a 930m2 unit. In addition, the main anchor, Tesco, has occupied a 1,115m2 extension. This activity has improved ERV’s by 30% Provision of market-leading levels of customer service and property management The ﬁnal strand of our strategy is our desire to provide market leading levels of customer service and property management. In addition to the obvious beneﬁts this provides in terms of relationship management with our direct customer, the retailer, there are also a number of beneﬁts to our indirect customer, the visitor to our retail assets. Operating and ﬁnancial review continued 55 Building We are already building in Exeter and Bristol and this year plan to start on further retail-led development schemes in Cardiff, Livingston and Corby. Land Securities Annual Report 2006 56 Retail Customer satisfaction surveys Each year we conduct surveys across the occupiers of our shopping centre and retail park portfolios to establish how we are performing as a landlord.We publish the most pertinent key performance indicators annually. Shopping centres Objective Understanding needs Communication In the shopping centre survey we are very pleased to note that our efforts have resulted in improved performance across all our key indicators as detailed below. This is our fourth year of conducting this survey and we are enthusiastic about the beneﬁts to us and our customers. Willingness to recommend us Responsiveness Overall satisfaction 2004 Actual 2005 Target 2005 Actual 3.59 3.84 94% 3.93 3.97 3.80 3.90 92% 3.80 3.75 3.66 3.87 94% 3.85 3.97 Retail parks Objective Understanding needs Communication Willingness to recommend us Responsiveness Overall satisfaction 2004 Actual 2005 Target 2005 Actual 2.98 2.74 84% 3.24 3.27 2.95 2.69 n/a n/a n/a 3.03 3.21 89% 3.25 3.33 Note: Customer satisfaction surveys are for calendar year period. Scale: 1 = very poor, 5 = excellent It is only the second year of surveying our retail park customer. In terms of management, these are very different as historically they do not beneﬁt from an on-site management presence.We believe that this is one of the factors explaining the lower level of customer satisfaction across this portfolio. We are currently addressing this through a trial using Land Securities Trillium Building Services Managers to visit a sample of retail parks regularly to provide support and a communication channel for the retail managers. We have also conducted a trial whereby retail park occupiers use our customer service centre to notify us of any problems on site, especially maintenance and security issues. These initiatives are, we believe, unique to Land Securities and demonstrate the way in which we are beneﬁting from Group synergies in terms of service provision. Evaluating our own performance improves the delivery of services to our customers but it does not provide an opportunity for us to compare how we perform against our competitors. Last year saw the introduction of a new benchmark for shopping centre customer service of which we are a founder member.We hope that as this benchmark becomes established we will also be able to publish our performance as compared to our peers. Environment management We take the impact of our retail activities on the environment seriously and seek to progress incremental improvements across our retail portfolio each year. To this end we are currently progressing two projects: Evaluating how we can benchmark our shopping centres’ carbon footprint and exploring various avenues to offset this impact Progressing an MSc research project with Imperial College, to provide a cost beneﬁt analysis of introducing environmentally friendly cleaning at our shopping centres following our success on this front at Sunderland, where we have replaced all our cleaning products with ‘green’ products We are also pleased to have successfully reduced the amount of waste we are sending to landﬁll by increasing our recycling ratio across the shopping centre portfolio to 25.8%. Land Securities Annual Report 2006 Retail continued Operating and ﬁnancial review continued 57 Whitefriars, Canterbury Historic cities cannot live only in the past; they need new life breathed into them. Our retail development in Canterbury has made it a very successful shopping destination. Giving an ancient city a new lease of life 58 London Portfolio Land Securities Annual Report 2006 Operating and ﬁnancial review continued 59 London Portfolio Our development schemes neighbour cultural and historic sites as well as transport and pedestrian links, like London’s Millennium Bridge which has joined our Bankside scheme behind Tate Modern to the City. We’re well connected. Land Securities Annual Report 2006 60 60 London Portfolio Achievements London share of operating proﬁt £276.5m Development valuation surplus of 42.4% £0.6bn of acquisitions £0.4bn of disposals Current development programme to provide 211,250m2 of new accommodation Proposed developments to create 60,210m2 of ofﬁce accommodation and 29,610m2 of retail ﬂoorspace Land Securities Annual Report 2006 London Portfolio Operating and ﬁnancial review continued 61 “London development made a substantial contribution to our returns this year and we have positioned our portfolio to beneﬁt from the rental growth predicted for our core markets.” Mike Hussey Managing Director, London Portfolio Our London business represents 46.0% of the combined portfolio and produced £276.5m of the Group’s underlying operating proﬁt.We own 940,000m2 of ofﬁce accommodation and 90,000m2 of retail ﬂoorspace. Our ofﬁce portfolio represents approximately 4% of the total central London ofﬁce ﬂoorspace with over 650 occupiers accommodating more than 50,000 people.We are also investing £1.5bn on development, responding to our customers’ needs with innovative, relevant buildings and top quality customer service. London economy It is worthwhile considering what it is that makes London so different to the rest of the UK in terms of its economy. It is undoubtedly one of the world’s leading ﬁnancial centres but it is also the heart of Government and a major tourist destination with outstanding cultural, arts and retail experiences. More than that, it is home to some seven million people as well as numerous businesses and beneﬁts from a highly-skilled and ﬂexible workforce. London’s economy is also growing at a faster rate than that of the rest of the UK, being forecast to grow by 2.7% per annum over the next four years compared to UK growth of 2.4%. As London grows it will need continued investment in new buildings, homes and infrastructure.We have been investing in London’s commercial landscape since 1944 and predict that over the next few years we will invest more in our capital city than at any time previously, timing our investment to beneﬁt from London’s forecast growth. London ofﬁce markets The London ofﬁce market extends to some 19.8 million m2 across several geographic locations. The West End, Mid-town, City, South Bank and Docklands form the core of a highly diversiﬁed market. The majority of our portfolio is located in three of these markets: the West End, Mid-town and the City, but we have also expanded away from our traditional market place and invested in the South Bank, on the edge of the City and, more recently, in Docklands. While the London market is very fragmented in terms of ownership and type of property, it has the added complexity of a highly diversiﬁed occupier base. It provides commercial accommodation to numerous international and domestic organisations typically located in clusters of similar businesses across its core markets. The London ofﬁce market has been historically more volatile than the retail market. This reﬂects general economic conditions and the health of the occupier markets, particularly that of the ﬁnancial services industry. It is also affected by the supply of new development stock and vacant space. In terms of market conditions today, they are much improved compared to the past few years, particularly 2002 and 2003. As we predicted last year, the West End market now has low levels of vacancy and positive rental growth is well established. In the City, vacancy levels have dropped to 10.5% overall, with Grade A stock at 3% or less and there is evidence of emerging rental growth for good quality accommodation. London Portfolio valuation breakdown £5.9bn 1.1 0.7 1.1 0.6 2.4 Inner London offices West End offices Mid-town offices City offices London retail Gross domestic product forecast growth 4% 3% 2% 1% 0% 02 01 London GDP 03 04 05 06 07 08 09 UK excluding London (estimated) Source: Centre for Economics and Business Research Limited West End and City vacancy rates 16% 14% 12% 10% 8% 6% 4% 2% 0% 00 01 02 03 Jan 04 05 06 West End City Source: Knight Frank Land Securities Annual Report 2006 62 London Portfolio Ofﬁce ﬂoorspace by market and type of occupiers Market current ﬂoorspace m2 Land Securities current ﬂoorspace (Note 2) m2 Market Market vacancy 31/03/06 % Market development m2 Land Securities development m2 West End 8,247,100 285,600 6.7 258,400 88,960 South Bank Mid-town (Note 1) (Note 1) City 10,253,200 Sub-total 10,253,200 Docklands 1,253,200 Total 19,753,500 46,500 77,800 263,500 387,800 24,300 697,700 (Note 1) (Note 1) 478,400 478,400 35,550 62,340 15,020 112,910 n/a – 736,800 201,870 10.5 10.5 7.1 8.7 Type of occupiers Government and NGOs, media technology, telecoms, HQs, consulting Media, HQs, consulting Legal, accountancy and consulting practices International and domestic ﬁnancial institutions, related support services As City Source of market data – Knight Frank Note 1 – No separate market data is available analysing the areas and vacancy rates between South Bank, Mid-town, Inner London and City. Note 2 – Empress State Building, SW6, 41,290m2, is not included within the above analysis. London retail We have discussed in detail the market conditions facing retailers at present. It is worth noting, however, that in London, retail is also dependent on tourism and trends in overseas visitors. So, for example we expect London retail to beneﬁt from the Olympic Games in 2012 as well as in the preceding and following years. Our strategy Against a background of more volatile markets in London we are seeking to: Redeploy capital to maximise portfolio growth prospects while realising value as it is created Enhance returns through development activities Create strong relationships with occupiers in the London ofﬁce and retail markets We have acquired £643.4m and sold £396.3m of property, including the £272.5m sale of our recently completed development in Gresham Street.We have also made substantial progress on our development programme; we spent £185.2m over the year on development, started 107,330m2 of new projects, achieved 38,100m2 of lettings (including those secured after our ﬁnancial year end) and submitted planning applications for a further 118,480m2 of commercial accommodation. Our performance We were very pleased with the performance of the London Portfolio this year which, on a like-for- like basis, increased in value to £3,658.2bn representing a 16.3% valuation surplus over the year. Speciﬁc properties within the London ofﬁce portfolio remain over-rented but the amount of over- rented income has reduced from 14.0% to 9.3%. Taking into account reversionary income, the net position is that the like-for-like London ofﬁce portfolio is now 1.2% over-rented.Void levels have reduced over the year and stand at 4.5% for London ofﬁces on a like-for-like basis. London retail is 10% reversionary and retail voids in London remain low at 3.1% on a like-for-like basis. Our contribution to performance We recognised some time ago that the London occupational markets would be returning to a period of growth and have targeted our activities to beneﬁt from this. This is evidenced by the restructuring of our portfolio together with our development activities where we were especially pleased to note that we created a 42.4% valuation surplus over the year. Land Securities Annual Report 2006 London Portfolio 31/03/06 31/03/05 Combined portfolio valuation £5,932.4m £4,486.8m Like-for-like investment portfolio valuation Rental income £3,658.2m £3,131.9m £213.0m £221.3m Gross estimated rental value £228.8m £217.8m Voids by estimated rental value Gross income yield £9.5m 5.8% £9.9m 6.7% Combined portfolio extracted from Business Analysis and by reference to the combined portfolio reconciliation tables on page 150. Cardinal Place, London We create buildings that appeal to the people who live and work in and around them, by providing beautiful gardens, clean environments, places to meet and spaces for public art. Communities welcome new developments if you invite them to get involved London office portfolio (1) London acquisitions (2) £30.93/ft2 – £333/m2 £30.10/ft2 – £324/m2 £28.50/ft2 – £307/m2 £29.43/ft2 – £317/m2 Average passing rent Average ERV (1) Excluding voids and properties in the current development programme (2) Acquisitions completed between 1 April and 31 March 2006 ignoring the vacant property acquired at 140 Aldersgate Street, EC1 and the trading property at Wilton Plaza 64 London Portfolio Redeploy capital to maximise future growth prospects while realising value as it is created An idiosyncracy of the institutional lease is that, in a market downturn, such that we experienced in London in 2002/03, the investment value of a property is partially protected by the security of the underlying rental income, especially where this is higher than the current market rent. As occupational markets improve, this over-renting creates a drag on future income growth resulting in lower levels of capital value growth. In anticipation of a return to market growth and particularly given the very high levels of demand for well-let London ofﬁce investments, we have made and will continue to consider selective disposals from the portfolio to enable the redeployment of capital in properties with better medium-term growth prospects. Examples of this type of capital redeployment are purchases such as: Ashdown House, SW1 acquired for £166.9m on a net initial yield of 5.8% and a passing rent on the ofﬁces of £380 per m2 Holborn Gate,WC1 acquired for £85.8m on a net initial yield of 6.2% at an average passing rent of £360 per m2 6/7 Harbour Exchange and 8/9 Harbour Exchange, E14. These properties were acquired for £82.6m at a combined net initial yield of 5.9% at an average passing rent of £200 per m2 In total our acquisitions during the year have been at an average initial yield of 5.6% and have low average rents of only £307 per m2 with good prospects for future rental income growth and asset management opportunities. A further strand to our investment approach is our desire to acquire or develop ‘clusters’ of properties in key locations enabling us to provide managed environments and an enhanced experience for our occupiers. In Victoria, for example, Ashdown House is strategically located directly opposite our Cardinal Place development. Not only will the ofﬁce element of this property beneﬁt from the rental growth now emerging in this market, but we have the opportunity to improve the retail element of this scheme taking advantage of the renewed enthusiasm from retailers for this location as a result of the success of Cardinal Place’s retail offer. A further example is at New Street Square in Mid-town where we have recently acquired two properties, IPC Tower and Hill House, that will beneﬁt from our expenditure on the adjacent development and the subsequent regeneration of this location. The ﬁnal strand to our investment approach in London is to ensure that we crystallise value as it is created. This is demonstrated by Gresham Street where, following the successful letting to Dresdner Kleinwort Wasserstein, we sold this property to GIC Real Estate. Enhance returns through development activities At this stage in the cycle it is also opportune that we have expanded our London development activities. Over the year, developments underway in London contributed just under a third of the valuation surplus but represented only 16.4% of the capital employed with a particularly strong performance from Cardinal Place which has now reached practical completion. Developments currently on site will provide 143,050m2 of new ofﬁce accommodation together with some 7,650m2 of retail ﬂoorspace. At Cardinal Place, the retail element which opened earlier this year is virtually fully let with only one unit available. Of the ofﬁce accommodation, 52% is let or in solicitors’ hands at an average rent of £600 per m2. This is now the only large Grade A newly-developed ofﬁce accommodation available in the West End. It is interesting to note that we have attracted a new and diverse range of occupiers to Victoria including Wellington Asset Management, P&O, 3i and KCCI and we expect this trend to continue. Land Securities Annual Report 2006 At New Street Square, we initially started construction of three buildings totalling 43,370m2, two of which have been pre-let to Deloittes and are due for occupation in Spring 2008. To capitalise further on improving market conditions, we have also started the fourth and ﬁnal building comprising 21,950m2 of ofﬁces. On the South Bank, we completed Bankside 1 which we forward sold to IPC and are making good progress with Bankside 2 and 3, where we are creating some 35,550m2 of speculative ofﬁce accommodation together with 3,170m2 of retail accommodation in two buildings. The third development project we started during the year was One Wood Street which we pre-let in its entirety to Eversheds just after the ﬁnancial year end. This global law ﬁrm has taken an 18-year lease on all of the 15,020m2 ofﬁce accommodation and will occupy all eight ﬂoors, with an option to lease back 1,860m2 to Land Securities. In addition to the ofﬁce space, the building incorporates 1,500m2 of ground ﬂoor retail which is being let separately. As a result of our success to date in terms of both the timing and letting of development, we have decided to proceed with our development at One New Change, close to St Paul’s Cathedral, a Jean Nouvel designed scheme which will provide 30,790m2 of ofﬁce accommodation and 20,550m2 of retail ﬂoorspace. Given the sensitive location of the site and our innovative proposals we were very pleased to achieve a resolution to grant planning consent for this project. As we progress our development programme, we are also looking to secure a pipeline of future projects so that we are in a position to respond to occupier requirements as appropriate. To this end we are advancing a further 109,000m2 of schemes, in Oxford Street and Fenchurch Street, through the planning system. At Oxford Street, we have made a planning application for a 30,000m2 mixed- used scheme incorporating retail, ofﬁce and residential accommodation. At Fenchurch Street, the City Corporation is currently considering our application for a 79,000m2 ofﬁce tower, designed by Raphael Vinoly.We have also contributed to the Victoria Station Area Planning Brief proposals for a large site to the north of Victoria Station (Bressenden Place) where we have signiﬁcant holdings. We are delighted with our progress to date on development and the level of interest in our current schemes. As with One New Change, we will only bring a scheme forward if we feel comfortable with the timing and fundamentals of the project in the context of the market. Securing planning does not necessarily mean we will develop. We have described the complexity of developing across the UK. This is particularly pertinent to London where, as well as the signiﬁcant planning and consultation issues, sustainability brings a number of challenges. Many of these can be turned to our advantage, since we believe that the environmental credentials of buildings will become a more important factor for occupiers, particularly in relation to energy usage and costs.We report fully on this in our Corporate Responsibility Report 2006 but highlight here a number of achievements: We have used borehole technology at Eastbourne Terrace to provide heating and cooling to the building reducing the need for non-renewable sources of energy We introduced a Sustainability Charter at New Street Square with external evaluation of our performance against the Charter provided by Element 4, a specialist construction consultant. The impact of this has been signiﬁcant in terms of waste management and procurement Operating and ﬁnancial review continued 65 Designing We develop alongside London’s iconic architecture, which requires vision and creativity. As a result we have sought the world’s leading architects enabling us to plan a new generation of iconic buildings. Land Securities Annual Report 2006 66 London Portfolio We have a dedicated London Community Liaison Manager to manage relationships with the communities surrounding our London projects We included £1.0m of specially commissioned public art at Cardinal Place and opened the SW1 Art Gallery All of our schemes are rated by BREEAM with a target of Very Good. Of those rated, many of which are still under construction, seven out of nine achieved this target, with ﬁve achieving a rating of Excellent Create strong relationships with occupiers in the London ofﬁce and retail market The London occupier market is highly competitive. To differentiate Land Securities from other property owners we have sought to strengthen our relationship with existing occupiers and more actively target new occupiers through an innovative marketing campaign, Capital Commitment.We have also introduced new lease terms and new ways for occupiers to procure property services, most distinctly through Landﬂex, which offers lease ﬂexibility, service guarantee and price certainty. Landﬂex Our Landﬂex portfolio now incorporates 65,500m2 of business accommodation across four buildings and we are actively seeking to acquire more property as we expand this over time to 150,000m2 of accommodation. The size of letting across this portfolio varies between 250m2 to 43,000m2, with an average inclusive rent of £400 per m2. During the year under review we introduced two new Landﬂex buildings. The ﬁrst is 140 Aldersgate Street, an 8,270m2 newly developed, vacant building which we acquired for £40.3m. This building is now 62% let and provides accommodation to three companies, on a variety of lease lengths ranging from 10 to 12 years at an average inclusive charge of £520 per m2. The second is our newly developed building at 40 Eastbourne Terrace,W2, which we completed and let during the ﬁnancial year. The letting we achieved here for the entire building demonstrates how our new approach to occupier management is beneﬁting the Group. CB&I Limited, a leading international engineering contractor, are existing occupiers of our neighbouring property at 10-30 Eastbourne Terrace where they occupy about 50% of the available accommodation. CB&I had expressed a desire for new accommodation in response to which we agreed a new 15-year lease at a rent of £377 per m2 for the whole of 40 Eastbourne Terrace.We have also agreed to provide a range of Landﬂex property services through a separate agreement and to take back the existing accommodation. This solution to their property requirements has secured the income on the recently completed building while enabling us to evaluate the possibility of refurbishing 10-30 Eastbourne Terrace as a possible additional Landﬂex facility. Customer service More than 70% of our London Portfolio is multi-let and we provide a full range of management services to these buildings. The property management restructuring carried out recently has been implemented to improve the way in which we provide those services. In addition to the customer service initiatives across the London Portfolio, we are also responsible for the provision of energy and waste management to our managed properties. This is an area where we can inﬂuence positively the environmental impacts of our portfolio. On the energy front, our managed ofﬁce portfolio participates in the carbon trading emissions scheme where, for the fourth calendar year running, we have beaten our energy reduction target. Given the nature of our occupier base, it is more difﬁcult to introduce waste management schemes similar to those at the shopping centres. However, we persevere on this front and have introduced waste recycling schemes at three of our managed ofﬁce properties. Land Securities Annual Report 2006 Working At the end of a working day in London some 50,000 people will head home having spent the day in a Land Securities owned ofﬁce. Customer satisfaction surveys – London ofﬁces Objective Understanding needs Communication Willingness to recommend us Responsiveness Overall satisfaction 2004 Actual 2005 Target 2005 Actual 3.74 3.77 94% 3.77 3.70 3.50 3.65 92% 3.80 3.75 3.67 3.75 94% 3.88 3.79 Note: Customer satisfaction surveys are for calendar year period. Scale: 1=very poor 5=excellent Devonshire House, London This is on the market demonstrating our commitment to recycling capital to reinvest in higher growth activities. We don’t keep all our trophies in the cabinet forever 68 Property Outsourcing – Land Securities Trillium Land Securities Annual Report 2006 Operating and ﬁnancial review continued 69 Property Outsourcing We think warmly about customers at Land Securities Trillium, not surprising when we look after nearly 3,000 boilers across 3.3 million m2 of accommodation, taking pressure off our customers so they can focus on what is important to them. Land Securities Annual Report 2006 70 70 Property Outsourcing Achievements Land Securities Trillium share of Group operating proﬁt £96.6m Exceptional proﬁt of £293.0m from our sale of Telereal DWP contract performed ahead of our expectations Customer satisfaction of 90% across the DWP contract 55,360m2 of development underway for clients Land Securities Annual Report 2006 Property Outsourcing – Land Securities Trillium Operating and ﬁnancial review continued 71 “We generated substantial proﬁts for the Group this year through the sale of Telereal, leaving Land Securities Trillium poised to grow its business through new contracts in new markets.” Ian Ellis Chief Executive, Land Securities Trillium Land Securities Trillium produced 17% (£96.6m) of the Group’s operating proﬁt. This was a small decline on last year despite the disposal of Media Village,White City in March 2005 and the sale of the Telereal joint venture in September 2005. This business has a commercial portfolio totalling 3.32 million m2 and six clients for whom we provide business accommodation services to 175,000 people. Land Securities Trillium provides innovative property outsourcing solutions offering a more efﬁcient approach to owning and managing property by eliminating the complexity of property management and provision of services while reducing the cost. Also known as property partnerships, we provide property outsourcing solutions to the corporate and the public sector. Property outsourcing and its markets Property outsourcing is the transfer of an organisation’s risks and management on some or all of its property to an expert property partner, converting its property assets and liabilities into an integrated property contract. This allows organisations to align their property requirements with their business strategy, so that their accommodation supports their needs. The target market for property outsourcing is corporate and public sector organisations which are seeking to optimise their accommodation efﬁciency and transfer the responsibility and risk of procuring and running their property estates to a third party. Typically these are organisations who are seeking to introduce change, either to the way in which they procure, occupy and manage property or to their business model.While it is not easy to identify the addressable market, commercial organisations hold more than £250bn of assets while Local Government owns some £100bn and Central Government owns approximately £70bn. These ﬁgures exclude any leasehold property which may also be included in a property outsourcing contract. Full property outsourcing has been undertaken by a small number of major public sector organisations and Land Securities Trillium has won three of the four public sector contracts let to date. Property outsourcing is also a signiﬁcant element of many PPP/PFI projects. It is for this reason that we have increasingly focused on this area and in particular on defence, education and community assets. Because these are new markets, with non-property activities procured alongside property, we have used joint ventures to address a number of these opportunities (with QinetiQ on the Defence Training Review and through Investors in the Community in education and community assets). In the corporate sector, there is a wider variety of outsourcing models. Some contracts are relatively wide-ranging from day one but others have typically included a smaller number of elements with the potential for the relationship to grow and evolve over time.We expect this to remain the norm in this sector, with the focus on providing differentiated products and solutions tailored to the particular needs of the individual client at the time. Table 15: Contract features Barclays BBC DVLA DWP NU Telereal II Freehold transfer Leasehold transfer ● ● Estates strategy consultancy New building and workplace services Asset management implementation Portfolio ﬂexibility ● ● ● ● ● ● Facilities management ● ● Management/ provision of capital works Price predictability ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Table 15 illustrates how this business differs from Land Securities’ investment property business. It demonstrates the unique features of each of the contracts we currently have under management and the way in which we tailor our product offering to meet the clients’ individual requirements. Land Securities Annual Report 2006 72 Property Outsourcing – Land Securities Trillium Our strategy Land Securities Trillium has been pursuing a growth strategy and achieved its target of contributing 25% of the Group operating proﬁt in 2005 ahead of plan. It has ﬁrmly established itself as the market leader in property outsourcing in terms of the number of contracts it has won to date and is seeking to maintain this position by continuing to invest in the development of new property outsourcing models as well as developing market leading technological and customer service solutions. Following this year’s sale of our share of the Telereal joint venture, we are now positioned to continue to grow our business by: Accessing new opportunities for outsourcing contracts in existing and new markets Growing our business with existing clients Leading innovation in the outsourcing industry Our performance The ﬁnancial performance of Land Securities Trillium is measured differently to that of the investment property business, focusing more on income growth since its operating properties are not revalued. Once again this business had an excellent year, driven by the sale of its share of the Telereal joint venture together with a strong performance from the DWP contract. Land Securities Trillium made a segment proﬁt of £392.5m compared to £128.2m for the year to 31 March 2005. Excluding proﬁt on the sale of ﬁxed assets, net surplus on revaluation and proﬁt on disposal of Telereal segment proﬁt was £96.6m (2005: £97.7m). This proﬁt level was maintained despite the anticipated reduction in the BBC proﬁt following the disposal of White City which generated capital receipts of £321.5m.We achieved a stronger than expected performance from the Department for Work and Pensions (‘DWP’) contract together with positive contributions from DVLA, Norwich Union and Barclays in line with our expectations. Following our exit from the Telereal joint venture, which generated an exceptional proﬁt of £293.0m, after costs, we entered into new agreements maintaining our relationship with Telereal. These new agreements are called Telereal II and, over the last six months, have contributed £6.9m to operating proﬁt. Operating proﬁt from the BBC reduced to £0.5m as a consequence of the sale of Media Village White City and the subsequent reduction in the unitary charge paid to us by the BBC. As this left no real estate in the partnership, we agreed with the BBC that it would be better to re-tender the remaining facilities management services, reﬂecting the BBC desire for a shorter duration contract. We did not bid for that business and following a procurement exercise will be transferring our facilities management responsibilities to a new provider at the end of June 2006. The projects at Broadcasting House and Paciﬁc Quays are unaffected by this change. The increase in bid costs reﬂects the considerable amount of activity on new bids, the largest of which, the Defence Training Review (‘DTR’), is still in progress. The DWP has not utilised as much of its vacation allowance as we anticipated 12 months ago and additional services have also been contracted giving rise to an increase in the unitary charge.While this delay in using its ﬂexible accommodation allowance has had a positive effect on our results to date, the impact of this is to create a bigger future allowance which will decrease our income and proﬁt more steeply as it is used. The DWP has indicated that it intends vacating some 150,000m2 of free ﬂexible space over the next two years and has given notice on 94,000m2 as compared to 26,000m2 this time last year. Our contribution to performance When Land Securities acquired Land Securities Trillium, it had one contract as compared to the six and the Investors in the Community joint venture today. Over the course of the past six years, Land Land Securities Annual Report 2006 Land Securities Trillium ﬁnancial results Contract level operating proﬁt 31/03/06 £m 31/03/05 £m – Barclays – BBC – DVLA – DWP – Norwich Union – Telereal II Bid costs Central costs Proﬁt on sale of ﬁxed asset properties Net surplus on revaluation of investment property Proﬁt on disposal of joint venture (Telereal) Segment proﬁt Distribution received from Telereal 2.5 0.5 1.0 97.7 5.0 6.9 (7.4) (9.6) 96.6 1.0 1.9 293.0 392.5 11.7 – 20.6 – 81.4 6.1 – (2.6) (7.8) 97.7 30.5 – – 128.2 65.4 Norwich Union, Norwich We integrated a group of disparate buildings under one huge glass atrium, and built cafés, bars and informal meeting spaces, that are a magnet for staff and ﬂooded with natural light. How do you help staff to be happy and more productive? Create an inspirational environment. 74 Property Outsourcing – Land Securities Trillium Securities Trillium’s performance has exceeded our expectations and delivered early on the Group’s growth ambitions for this part of the business.We believe that this can be attributed to the way in which Land Securities Trillium pursues its strategic objectives as detailed above. Accessing new opportunities for outsourcing contracts in existing and new markets We have developed substantial expertise in the Government outsourcing markets and are now using that experience to bid for new contracts, examples of which are: Northern Ireland Civil Service (‘NICS’) Workplace 2010 – a 20 year partnership to transform the NICS ofﬁce estate, improve the working environment for staff and facilitate new ways of working to enhance the delivery of services to the citizens of Northern Ireland. This opportunity is likely to be delivered through a PFI solution. Building Schools for the Future (‘BSF’) – the Government intends to invest £40bn in the BSF programme which is the largest ever Government schools investment initiative.The programme aims to rebuild or renew every secondary school in England over the next 15 years.To support this initiative, Land Securities Trillium has made an initial investment of about £20m into a 50/50 joint venture with the Mill Group called Investors in the Community (‘IIC’). IIC is the preferred bidder for the Peterborough schools PFI and Bristol BSF projects and is shortlisted on the Leeds and Waltham Forest BSF projects. In addition, IIC is progressing several further local government and health sector bids. Defence Training Review (‘DTR’) – DTR is a PPP programme developed to modernise the delivery of professional and trade training in the military and the continued professional development of the armed forces. The DTR is being procured by the MoD in two packages, with a combined estimated total value of about £13bn over a 25-year term. Package 1 is primarily technical training, including aeronautical engineering and communications and information systems. Package 2 incorporates logistics, joint personnel administration, security, languages, intelligence and photography as well as supply training.We are bidding as part of the Metrix consortium, which is a special purpose 50/50 joint venture company between ourselves and QinetiQ. Metrix is the only provider shortlisted in both packages. The MoD’s timetable currently envisages an announcement of Preferred Bidder in late 2006. During the year we were one of two shortlisted parties bidding for MoDEL, a £200m MoD project to rationalise land holdings in West London. Although unsuccessful in this bid we believe that the experience gained will assist us in appraising future opportunities arising around surplus land holdings. Growing our business with existing clients We have worked with our existing clients to deliver extensions to their contracts to meet their changing needs. During the year we agreed three contract extensions, the largest of which was the Telereal II agreement which involves the continued management of leasehold risk on part of BT’s estate and the provision of other services. The leasehold estate agreement runs until the end of 2031 (although Telereal and Land Securities have the option to terminate the agreement at any time on or after 31 March 2010 with not less than three months’ notice). Under these new agreements we will receive annual revenues of approximately £50m leading to anticipated pre-tax proﬁts of some £14m per annum. We also extended our relationship with Barclays Bank, where we assumed responsibility for an additional 16 properties located across the UK, totalling 6,350m2 of accommodation.These are short- leasehold properties that are surplus to Barclays’ requirements and are largely vacant as a result of its property rationalisation. Barclays made a capped payment to reﬂect the letting risk and we have assumed responsibility for all future beneﬁts and liabilities relating to the transferred interests. Land Securities Annual Report 2006 During the year we agreed an extension to our current Norwich Union operations to include a project delivering a new working environment and comfort cooling scheme at their Colegate facility in Norwich. Our contract with Norwich Union is now completing its second year, and we are working with them to explore how we might extend further our partnership and service provision. Leading innovation in the property outsourcing industry Competitive advantage comes from our ability to deliver a wide range of diverse services across property portfolios in an efﬁcient and cost-effective manner. Since inception we have built up internal and external competencies allowing us to do this.We also believe we are unique in the way that we have structured our model into one integrated business.We discuss below some of these elements. Corporate Real Estate Group The role of our Corporate Real Estate Group is to work in partnership with our clients to develop and then implement an estate strategy suited to the clients’ business needs. In addition to ongoing asset management activity, this also extends to the acquisition of new space, the refurbishment of existing space, and, where appropriate, the disposal of space no longer required. In the past year we acquired 14,000m2 of new space, while disposing of 49,000m2 and subletting 6,800m2. Customer service Our Service Centres are available 24 hours a day throughout the year to receive calls from our customers, the 175,000 client staff who occupy our buildings. In the past year we responded to over 500,000 customer calls, the majority from our DWP client whose customer satisfaction survey recorded a 90% overall satisfaction level with our service delivery performance. Service delivery Our ability to deliver facilities management services and capital works extends across the UK, enabling us to respond 24 hours a day to our clients’ property needs. Through our well-established supply chain we delivered £223m of capital projects during the year, and responded to some 500,000 customer work requests, ranging from setting up meeting rooms or providing additional security services to the provision of a comprehensive maintenance service. Health, safety and environment We are responsible for providing health, safety and environment services to certain of our clients, most notably the DWP. On this contract we have introduced online interactive health and safety (‘H&S’) training for all DWP staff. Also in the H&S ﬁeld, we secured certiﬁcation under Occupational Health & Safety Assessment Series 18001 for the DWP contract. This challenging standard, which is the industry benchmark for H&S Management systems, provides external veriﬁcation that our policies, procedures and systems are robust and being effectively applied. Environment We focus strongly on the environmental aspects of our business, with our operations on the DWP contract being certiﬁed to ISO14001. In this context we have been instrumental in helping the DWP achieve its sustainable development targets with 47% of all waste across DWP being recycled (Government target 40%) and 30% of energy being procured from renewable sources (Government target 10%). All our other contracts are run under the scope of our Environmental Management System which is certiﬁed to BS8555.This requires all signiﬁcant environmental aspects in our business to be identiﬁed, and for each major project we compile an Environmental Compliance Register through which we audit the project and our supply chain. On our construction project at Norwich Union’s headquarters we require that all timber is sourced from Forestry Stewardship Council-approved forests, and we have followed this timber trail through our supply chain back to its sources in Bavaria. Operating and ﬁnancial review continued 75 Customer satisfaction survey DWP 03 04 05 89.6% 93.0% 90.0% Strong levels of customer satisfaction continue across expanded portfolio Land Securities Annual Report 2006 76 Urban Community Development Our Urban Community Development activities represent long-term investment by Land Securities in non-core markets which will, we believe, deliver above average returns for shareholders. It is also an area where we can beneﬁt from our balance sheet strength and development skills. Our activities here have progressed from a predominantly strategic planning focus to a focus on delivery on the ground. This is set against a background of lower growth but a stable residential housing market in the south east. Kent Thameside Our efforts have been focused on concluding negotiations with Dartford Borough Council on the planning gain package for our proposed development in Eastern Quarry, where a resolution to grant planning permission was awarded in July 2005. We have also made slow but steady progress in resolving outstanding issues with the Highways Agency regarding their objections to our application and remain conﬁdent that an acceptable solution will be found.We therefore committed to a £8.6m earth-moving contract which will see the creation of the new landscape needed for the development of the eastern end of the Quarry. We also completed the construction of and occupied our new 860m2 marketing and management centre creating the hub for our future activities in Kent Thameside. At Ebbsﬂeet, where we have a 48.5% interest in the land surrounding the new Channel Tunnel Rail Link station opening in 2007, we have been working towards securing masterplan approval for part of the site. This will provide the framework against which our development partners, Countryside Properties, can make a detailed application for the ﬁrst phase of development of over 300 new homes at Springhead. Our other joint venture with Countryside Properties at Waterstone Park continues with the development of the latest phase of new homes and apartments, which are selling well and achieving premium values for the location. This supports our commitment to work with partners who share our aspirations to invest in and deliver innovative and quality design. We agreed terms for the sale of our remaining interests at Crossways Business Park to Legal & General enabling a phased handover of the remaining development plots (approx 15% of the overall area of the park) to take place this year. Stansted As part of the review of the Regional Spatial Strategy for the East of England (RSS 14), we have promoted our 650 hectare (1,625 acre) site at Stansted for a range of uses to serve the future expansion of Stansted Airport and the growth in housing being forecast by the Government in respect of the M11 Corridor.We have also entered into a new option agreement with Aggregate Industries PLC for the rights to extract some four million tonnes of sand and gravel reserves on the site. Land Securities Annual Report 2006 Eastern Quarry, Kent Thameside This is regeneration on a visionary scale. On a 1,450-acre site we plan to deliver 13,000 new homes, 580,000m2 of commercial space and 300,000m2 retail, leisure and community space. Some developments are worth taking time over… 78 Board of Directors Peter G Birch CBE (68) 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. Francis W Salway (48) Executive Director Joined the Group in October 2000. Previously an Investment Director at Standard Life Investments. He was appointed to the Board in April 2001. Appointed Chief Operating Ofﬁcer in January 2003 and Group Chief Executive in July 2004. Martin F Greenslade (41) Executive Director Joined the Board from BAE Systems as Group Finance Director in September 2005. Previously Group Finance Director of Alvis PLC and a member of the executive committee of Nordea’s investment banking division and Managing Director of its UK business. A Mark Collins (49) 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. Ian D Ellis (50) 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. Non-Executive Director of Rok plc. Michael R Hussey (40) 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. Land Securities Annual Report 2006 79 Board of Directors continued Richard J Akers (44) 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. David Rough (55) 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. Sir Winfried Bischoff (64) 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. Stuart A R Rose (57) 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. Bo Lerenius CBE (59) 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 Securicor plc. Alison J Carnwath (53) 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. Land Securities Annual Report 2006 80 Corporate Responsibility We see Corporate Responsibility (‘CR’) as the driver for our business to achieve the balance between its environmental, social and economic responsibilities and we recently published our third CR report which is available on our website. CR Committee Committee Chair Chief Operating Ofﬁcer of Land Securities Trillium Board representative Group Chief Executive Customers Community Head of Property and Occupier Services Retail Operations Manager and Community Liaison Ofﬁcer Employees Group HR Director Environment Assistant Director of Environment Health and safety Director of Health and Safety and Environment Suppliers Head of Group Procurement Investors and Communication Risk Management and Internal Audit Director of Corporate Communication Business Standards Manager To help achieve our objectives we have established a representative Group- wide CR Committee, which seeks to support and provide a framework for the range of CR initiatives undertaken nationally by all parts of our business.The CR Committee comprises senior representatives from each area of the business and is chaired by the Chief Operating Ofﬁcer of Land Securities Trillium.The Group Chief Executive is a member of the Committee. In part, the focus on CR issues over recent years has been driven by Government regulation, but equally there has been a growing level of shareholder and other stakeholder interest in the non- ﬁnancial aspects of a company’s performance.We also recognise that an effective CR programme can help to identify and manage business risks, generate operational competitiveness through resource efﬁciencies, and contribute towards enhancing our reputation and achieving differentiation in the market place. The nature of Land Securities’ business is such that we are closely aligned with the communities within which we operate. In designing, specifying and managing our developments and property portfolio, be they retail or ofﬁces, we need to have regard to their impact on the local environment.We want to create spaces the public enjoy using and employees are delighted to work in.We want to contribute to our local communities, notably in the areas of education and local enterprise, and we want our 1,800 staff across the country to be proud to work for Land Securities. We therefore want to achieve our vision and objectives within a framework of high standards that takes account of the needs of all of our stakeholders and our impact on the environment and communities in which we operate. Stakeholder engagement The CR Committee also establishes and publishes annual targets for each of the seven streams of activity we have identiﬁed as being key to Land Securities CR performance: Customers Community Employees Environment Health and safety Suppliers Investors Our response to CR is organised by these seven work streams as we believe this stakeholder/interest group structure best reﬂects the range of issues for a property business and how Land Securities is structured. It also allows us to place clear responsibility for each group at Senior Management level. We encourage active and consistent communication with each stakeholder group which we achieve through satisfaction surveys, benchmarking exercises, audits, conferences, one to one meetings, participation in industry working groups, the corporate website, and reporting. Our inclusion in various indices eg Dow Jones, FTSE4Good and Global 100 Most Sustainable Companies; demonstrates that we continue to lead the property industry with our CR practices and activities. Social, ethical and environmental (‘SEE’) risks As a capital intensive company with a relatively low number of employees, we have identiﬁed health and safety, climate change and business ethics as the key SEE risks relevant to our business. We report on our approach to health and safety on page 83. In respect to the environment and in particular climate change we report on our activities on page 84 as well as in the business unit reviews in the OFR. Employees The Group has in place a number of policies and procedures including diversity and equal opportunities (including equal opportunities for disabled employees) as well as the business ethics policy described on page 82, all of which are published on the Group’s website.We comment in detail upon our people and our people strategy on page 34. Land Securities Annual Report 2006 The Bridges, Sunderland This invigorating development has given Sunderland a new lease of life and attracts over 450,000 shoppers a week. It is cleaned every day with environmentally friendly products. 450,000 visits a week…that’s a lot of people to clean up after 82 Corporate Responsibility continued The Group has in place a statement of business principles and a business ethics policy, which can be found on our website. It also has a ‘whistle-blowing’ procedure which incorporates a telephone hotline and e-mail facility. Employees are provided with the business ethics policy on appointment together with guidance as to raising any concerns in respect to the business. Every six months managers across the business are audited as to compliance with the Group’s policies in this area and in the 12 months under review there were no notiﬁed infringements. To ensure that employees remain aware of the policies and procedures in the area from time to time we speciﬁcally communicate to them using the intranet, staff notice e-mail and weekly news update communication channels. Community Land Securities makes grants and donations to charities and community groups through third party managed charitable funds and its Group charity committee which together have donated over £600,000.We estimate that through our 30 shopping centres we contribute over £500,000 of free ﬂoor space to charities and other organisations to promote their activities. Performance highlights The following examples of performance highlights capture our achievements against 2004/05 targets and further progress in the period 2005/06. They also serve to illustrate the breadth and range of activities addressed under our CR programme. We achieved second place ranking in the 2005 Property Environment Group benchmark and were listed in the FTSE4Good and SAM Dow Jones Indices Environmental Impact Assessments were produced on all major development projects A biodiversity survey was undertaken across the entire DWP estate (no other property company has achieved this across its portfolio) Recycling improved by 21% against a target of 10% A process was established to trace back to source all timber used on major developments and DWP projects Minimum CR standards were introduced into all supplier selection and evaluation documentation Community Liaison Managers were appointed on development projects There was a major increase in the provision of homeworking facilities to Land Securities staff We became an active member of the Employers’ Forum on Disability Future outlook – key challenges All businesses face the inevitable challenge of seeking continuous improvement across their activities. Land Securities is no different. It has, however, gained invaluable experience from its focus on the environment where, over the years, through a process of incremental steps and target setting, it now leads the property sector in environmental management. This approach has now been adopted across all the CR work streams, where each work stream manager has been empowered to agree and set targets which will provide the opportunity for further improvements across our business. And we have learnt from experience. The ﬁrst targets set were, with the beneﬁt of hindsight, over-ambitious and for that reason we needed to extend the timeframe in which to achieve them. Our new targets for the year to 31 March 2007 are different in two ways.While fewer in number, they are more focused in output and therefore more ‘measurable’. We look forward to being able to report positively on our achievements next year. While we can demonstrate that we are making good progress across many areas of our business activities we still struggle with elements of supply chain management. As a business we have to balance shareholder value against the economic and practical aspects of supply chain management. In our CR Report we report on the progress we are making in the major impact areas of construction, procurement and Land Securities Trillium key supplier chain management.We are looking at how Land Securities Annual Report 2006 CR Group model E n v i ronment E m p loyees t h and safe t y l a e H s r o t s e v n I Customers S u p p l i e r s Community Customers Client and occupier satisfaction Health and safety Health and safety training Accident reporting Risk assessment and audits Employees Communication and engagement Rewards and recognition Learning and development Succession planning and talent management Diversity Suppliers Investing in suppliers Sharing knowledge Health and safety and the environment Monitoring supplier performance Community Learning and development Charitable funds Employee volunteering Community consultation Community communication Investors Awards Shareholder analysis Analysis of investors meetings CR governance structures Environment External benchmarking Environmental assessments Recycling and waste management Energy use, CO2 emissions Water use, environmental innovation and when we should apply similar supply chain evaluation criteria more widely across our investment portfolio. We have continued our focus on the customer, which brings the challenge of providing new and better customer focused services and products. It is our people who have anticipated and responded to this on-going challenge. And in return, we continue and will continue to seek to provide career and personal development opportunities to ensure that we attract and retain the best people in the industry, who in turn contribute to our continued success. Health and safety The Group’s health and safety policy is published on our intranet and website.We produce a health and safety plan every year containing measurable objectives and report progress against these objectives to the Board every month. Health and safety performance is included in the Group’s ‘balanced scorecard’ measurement approach.We increased the number of full-time employees in the health, safety and environment team from 23 to 28. The team now has 16 health and safety managers, two environmental managers and 10 health and safety trainers. We achieved Stage One of the occupational health and safety management system OHSAS 18001 for the DWP estate and are seeking full accreditation. The Health and Safety Executive asked to feature our approach to health and safety as a best-practice case study, recognising Land Securities as a leader.We have also been recognised in the Top 10 FTSE100 companies for reporting health and safety in Annual Reports and for achieving targets. There were 295 notiﬁable incidents under the RIDDOR regulations (2005: 187). This was a signiﬁcant increase over the previous year due to new accident reporting processes, the introduction of a company-wide accident reporting database, additional property outsourcing contracts and expansion of our investment portfolio. Key performance indicator The key performance indicator for health and safety is to ensure that we receive less than ﬁve health and safety improvement and prohibition notices a year.We have received none in the 2006 reporting period. During 2006, health and safety will be introduced as a personal key performance indicator for all related managers. Health and safety training Occupational health and safety training to NEBOSH and IOSH standard was provided to 78 employees. In addition, we trained 1,163 managers and staff, making a total of 1,241 employees receiving health and safety training.We revised the health and safety induction programme for new starters and plan to provide this training via an interactive platform in 2006. Accident reporting We introduced a new system, SOLAR (‘Safety On-line Accident and Reporting database’), to record all health and safety incidents, improving reporting and management. SOLAR has been trialled successfully in the DWP estate and will be extended to the rest of the business during 2006.We received a Royal Society for the Prevention of Accidents Gold Award for our health and safety management systems and for the development of SOLAR. Risk assessment and audits In 2005, we carried out 340 risk assessments and health and safety audits across our investment and development portfolios. These assess compliance with legislation – scores across the portfolio were between 97–100%.We also conducted health and safety audits across Land Securities Trillium’s contracts in line with contractual requirements. 83 Corporate Responsibility continued Land Securities Annual Report 2006 84 Corporate Responsibility continued Construction skills certiﬁcation scheme In 2005, we set out to ensure all staff involved in construction related activities were accredited under the Construction Skills Certiﬁcation Scheme (‘CSCS’). Approximately 40% are now certiﬁed. We hope that this scheme will improve the competence of the construction industry, make it possible to measure the competence of site-based staff and make comparisons between contractors. After 2008 we will only work with CSCS certiﬁed contractors. Environment Environmental management systems The Group environment policy is published on its intranet and website.We introduced an upgraded environmental management system (‘EMS’), across the entire Group. In September 2005 this was certiﬁed to Phase IV of the British Standard BS8555, which helped us win the 2005 Liveable City award for environmental management.We are now seeking accreditation to ISO14001, which is the standard we have achieved across the DWP contract (at around 1,800 sites one of the largest global certiﬁcations to date). Asbestos We have established an in-house asbestos management team which conducted 2,256 surveys across our property management and property outsourcing portfolios in 2006 (2005: 1,200). Energy and waste management We have a comprehensive energy management system in place which we use to identify opportunities to reduce energy across our managed portfolios.We gather and report our energy usage across nearly 2,000 buildings, the results of which are published annually in the autumn on our website. CO2 emissions We are the only property company participating in the voluntary UK Emissions Trading Scheme with a multi-site portfolio and beat our reductions target for the fourth consecutive year and in 2005 reduced the emissions covered by the scheme by 17% We participated in a programme of energy audits subsidised by the Carbon Trust, and implemented many of the recommendations in a year long trial at Regis House, one of our London managed properties. This scheme was second in the European Energy Trophy and reduced emission at Regis House by 29% saving £44,000 on the energy bill at that site Waste management We have continued to target waste management and overall have made good progress across the portfolio. At our head ofﬁces in London paper consumption has decreased for the third year running, assisted by the introduction of double sided printers/copiers in 2005.We report further on waste and energy management throughout the business unit reviews in the OFR. Biodiversity We retained our accreditation under the Business and Biodiversity Benchmark scheme run by The UK Wildlife Trusts. The Stage II survey programme has identiﬁed several locations with potential to enhance the local biodiversity and we are investing £10,000 on these initiatives across the DWP estate and our retail portfolio. Climate change Climate change is one of the challenges facing us and we have established a working group with a long-term remit to consider the potential impacts of climate change predictions on our business and how we might mitigate adverse effects or take advantage of new opportunities. Land Securities Annual Report 2006 Electric car Our G-Wiz electric car will replace courier runs between our London ofﬁces, thereby reducing our overall emissions. 85 Corporate Governance Introduction The Board is responsible for providing leadership for the Group and for ensuring that the right strategy and controls are in place in order to deliver value not only to shareholders but also to a wider community of individuals and organisations which beneﬁt from the Group’s activities. Land Securities is committed to high standards of Corporate Governance and supports the Combined Code on Corporate Governance (the ‘Code’) published in July 2003. Further details of how Land Securities complies with the Code can be found in the Corporate Governance section of the Company’s website, together with the terms of reference of the Audit, Nomination and Remuneration Committees. The role of the Board The Board formulated strategy and monitored the operating and ﬁnancial performance of the Group. It operated in accordance with a written schedule of matters reserved to the Board, a copy of which is available on the Company’s website. Key matters reserved to the Board include: authorisation of signiﬁcant transactions in excess of £100m dividend policy internal controls (via the Audit Committee) remuneration policy (via the Remuneration Committee) shareholder circulars and listing particulars matters relating to share capital such as share buy backs treasury policy and signiﬁcant fundraising appointment/removal of directors and Company Secretary to support the Company’s strategy, further details of which are on page 36. Progress reporting – at Board meetings a detailed monthly Board report was reviewed and the heads of business units provided an update on progress within their areas of responsibility. In addition, the interim and ﬁnal results, together with a comparison of investment portfolio performance to IPD on a six-monthly basis, were reviewed in detail. Compliance and external relationships – at least annually the Board reviewed investor relations, HR policy, corporate governance, health and safety (with quarterly updates), environmental performance, Board performance evaluation and corporate responsibility matters. The schedule below sets out the number of principal Board and Committee meetings held during the year together with individual attendance by Board members at those meetings. Board balance and independence The roles of the Chairman and Chief Executive are split, with clear written guidance to support the division of responsibility. No single individual has unfettered powers of decision. As Chairman, Peter Birch was responsible for the effective working of the Board, ensuring that all directors were able to play a full part in its activities. He was also responsible for ensuring effective communication with shareholders and making sure that all Board members were aware of the views of major investors. Francis Salway, as Group Chief Executive, was responsible for all aspects of the operation and management of the Group and its business. His role included developing, for Board approval, an appropriate business strategy and ensuring that the agreed strategy was implemented in a timely and effective manner. There existed a strong non-executive element on the Board which currently consists of the Chairman, six executives and ﬁve non-Executive Directors. David Rough is the Senior Independent Director.While the Board regards each of the ﬁve non-Executive Directors as being independent, Sir Winfried Bischoff is the Chairman of Citigroup Europe which provides investment banking services to the Group and as a result did not fully meet the independence criteria set out in the Code. However the unanimous view of his colleagues on the Board is that, by virtue of his character and experience, he is robustly independent. Throughout the majority of the year the Board was non-compliant with the provision of the Code which provides that at least half of the 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 (4 meetings) Nominations Committee (3 meetings) Remuneration Committee (5 meetings) The Board used an annual process timetable to ensure that relevant matters were given due consideration as follows: Peter Birch (Chairman) Francis Salway (Group Chief Executive) Mark Collins 9 9 9 Strategy – the Board held an annual off-site meeting at which the Company’s strategy was reviewed in the context of the macro- and micro-economic environment, potential legislative changes, competitor strategies and the need for the Company to create and exploit competitive advantage. Business plans – the Board reviewed at six- monthly intervals ﬁve year forecasts, the annual budget and business plan and the balanced scorecard, all of which are designed Martin Greenslade (appointed 01/09/05) *6/6 Ian Ellis Mike Hussey Richard Akers (appointed 17/05/05) David Rough (Senior Independent Director) Sir Winfried Bischoff Stuart Rose Bo Lerenius Alison Carnwath 8 9 *5/7 9 9 9 8 9 Andrew Macfarlane (resigned 05/08/05) *3/3 _ _ _ _ _ _ _ 4 4 4 3 4 _ 3 3 _ _ _ _ _ 3 _ _ _ _ _ _ _ _ _ _ _ _ 5 4 5 4 5 _ * Actual attendance/maximum number of meetings a director could attend as a Board/Committee member Land Securities Annual Report 2006 86 Corporate Governance continued Board, excluding the Chairman, should comprise 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 of directors has unfettered powers of discretion and that an appropriate balance exists between the executive and non- executive members of the Board. The Chairman holds at least two meetings a year with the non-Executive Directors without Executive Directors being present. The Company Secretary, through the Chairman, is responsible for advising the Board on governance matters and for ensuring good information ﬂows within the Board. All directors have access to the advice and services of the Company Secretary, as well as access to external advice, if required, at the expense of the Group. Director induction and training Directors were provided with training on a number of subjects, including the impact of International Financial Reporting Standards on the Group’s accounts and in the new listing and disclosure rules regime. In the case of newly appointed directors, an induction programme, which includes training on the responsibilities of a director, occurred prior to or immediately following their appointment to the Board, if that appointment was the ﬁrst occasion that they have been appointed to the Board of a listed company. A tailored induction programme is now provided for non-Executive Directors on appointment, co-ordinated by the Company Secretary in accordance with guidelines issued by the Institute of Chartered Secretaries and Administrators. March 2006. The process covered both Board and Committee performance and the output from the appraisal was reviewed at a subsequent Board meeting. Overall the appraisal process revealed a high level of satisfaction with the functioning of the Board and its Committees. In addition, individual performance as Board directors was appraised, based on one-to-one interviews with the Chairman or, where appropriate, the Senior Independent Director. Nominations Committee The Nominations Committee, which comprised Peter Birch (Chairman), David Rough and Francis Salway met on three occasions to review Board structure, size, composition and succession needs, keeping under review the balance of membership and the required blend of skills, knowledge and experience of the Board.While the membership of the Nominations Committee was non-compliant with the Code, all key decisions relating to appointments and membership of Board Committees are considered by the full Board which includes a strong representation of experienced independent non-Executive Directors. The Committee reviewed the time required from non-Executive Directors and the annual performance evaluation was used to assess whether non-Executive Directors were spending sufﬁcient time to fulﬁl their duties. The Committee also reviewed succession plans for Executive Directors and senior managers and made recommendations to the Board on the reappointment of non-Executive Directors at the conclusion of their speciﬁed terms of ofﬁce. Remuneration Committee The Committee’s activity is described in the Remuneration Committee Report on pages 90 to 96. Board appraisal The formal annual appraisal of the performance of the Board, its Committees and individual directors was undertaken in early 2006. This process was led by the Chairman with the assistance of the Company Secretary. The wide- ranging appraisal questionnaire was based on the process and questions outlined in the Code and the results were reviewed by the Board in Investor relations Land Securities has a comprehensive Investor Relations programme which aims to provide existing and potential equity and bond investors with a means of developing their understanding of the Group and raising any concerns or issues they may have. Further detail on the Group’s Investor Relations activity is provided in the OFR on page 43. The Senior Independent Director attended the preliminary and interim results meetings to which investors are invited and his attendance was notiﬁed to investors in advance. In addition, the Chairman wrote to principal shareholders offering a clear line of contact with either him or the Senior Independent Director as recommended by the code. The Annual General Meeting provided all shareholders with an opportunity to question the Company on matters put to the meeting including the Annual Report. The results of proxy voting at general meetings were published on the Company’s website as requested by the Code. 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 Code relating to the disclosure of proxy votes, the separation of resolutions and the attendance of Committee Chairmen. The Company arranges for the Annual Report and related papers to be posted to shareholders so as to allow at least 20 working days for consideration prior to the Annual General Meeting. Audit committee The Audit Committee consists of all the independent non-Executive Directors and is chaired by David Rough. Although all of the Committee members are considered as appropriately experienced to fulﬁl their role, Alison Carnwarth is considered as having signiﬁcant, recent and relevant ﬁnancial experience in line with the Code. Further details of each of the independent directors are set out on pages 78 and 79. 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 Land Securities Annual Report 2006 The Committee met four 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 the interim and annual results and considered any matters raised by management and the external auditors reviewed and approved the Company’s approach to implementing IFRS 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 reviewed the Group’s ‘Turnbull Report’ to support the Board’s sign-off on the system of internal control (see below for more details) reviewed reports on the Group’s risk management measures and actions reviewed progress on the project to replace key ﬁnance IT systems reviewed the plans in place to manage risks associated with the termination of the BBC contract reviewed the approach to periodic valuation of Land Securities Trillium’s operating properties using Independent Valuers reviewed the Group’s approach to developing a ‘best practice’ OFR, including considering the advice of external consultants in conjunction with the Board appraisal detailed on page 86, 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 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 accounting advice associated with acquisition of Tops Estates taxation advice, including planning and compliance advice on IFRS accounting pension fund audit advice on a number of Land Securities Trillium bids advice on the accounting for the disposal of the Group’s share in Telereal Details of the amounts paid to PwC are set out in note 7 to the ﬁnancial statements. The external auditors reported to the Committee that they remained independent 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%. 87 Corporate Governance continued 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 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 Annual Report. 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 Land Securities Annual Report 2006 88 Corporate Governance continued 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 OFR as well as on page 89 (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 (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 2006 89 Risk Management All organisations face risks as they conduct their operations and Land Securities is no different. We need to understand and evaluate the risks in order to achieve our objective of creating long- term, sustainable returns for shareholders. This will allow us to minimise the adverse potential that measured risk taking presents rather than prevent us from taking measured risk. Risk management is an important part of our system of internal controls and has linkages with each of the other elements of this business planning process, particularly the investment appraisal and ﬁnancial forecasting processes. 4. Develop action plans to manage risks 5. Reassess risks after mitigating actions have been taken 6. Report to the Board on risks, extent of mitigation and status of action plans At both Group and business unit level we categorise risks across the four areas of external, organisational, property and operational. We rate each of these in terms of probability of occurrence, its impact on our performance and we identify mitigating actions, risk control measures and management responsibility. We have in place a six step risk management process: 1. Contextualise risk in terms of the Group’s business goals and objectives 2. Identify material risks 3. Assess and quantify the risks identiﬁed This year throughout the OFR we provide detailed disclosure in respect to certain of these risks particularly those in respect to owning property; developing property and property outsourcing as well as our key ﬁnancial risks. This disclosure includes commentary on type of risk, risk impact and mitigating activity. We believe that these risks have the greatest potential impact on the organisation should they occur and for this reason merit comment. There are also other risks that we face as an organisation many of which are inherent to all businesses and which we believe have a lesser impact on us as an organisation which we refer to in a less structured fashion throughout the Annual Report. In respect to Social Ethical and Environmental risks, our key risks are outlined in the CR section. In the table below we list our business risks and provide a cross reference to the relevant section of the OFR and to other sources of information such as our 2006 CR Report. If the risk is not covered elsewhere we provide a brief explanation as to mitigating activities. Risk management process Business risks Risk group External factors 1 Goals and objectives 2 Identify 5 Reassess 6 Report 3 Assess 4 Action Type of risk Explained in Economic Regulatory Market Planning Customer Business environment Chairman’s statement and competitive environment Business environment, Retail, London Portfolio and property outsourcing Developing property Owning property, Retail, London Portfolio, property outsourcing and customer section Organisational People Our people, corporate responsibility, 2006 CR Report Succession planning We review succession plans on at least an annual basis. We also have in and talent management place a learning and development programme to nurture talent across Property Asset management Investment Development the organisation Owning property Owning property Developing property Construction management Developing property Supplier management Property outsourcing Service delivery Property management, property outsourcing Contract mobilisation Property outsourcing Operational Finance Finance review and notes to ﬁnancial statements Customer satisfaction Retail, London Portfolio and property outsourcing Health and safety Owning property, developing property, corporate responsibility Environment Corporate responsibility and 2006 CR Report Information technology To protect the integrity of our IT system from external threats, we have in place stringent security controls. In the event of system failures we have an off-site back-up facility which can be fully operational in 24 hours Disaster planning We have in place comprehensive disaster recovery plans which include the use of off-site facilities. These plans are regularly updated and rehearsed Ethics Corporate responsibility Land Securities Annual Report 2006 90 Remuneration Report remuneration levels. NBSC has no connection with the Group other than in the provision of advice on executive and employee remuneration. and dialogue with major shareholders. The key elements of these changes were: The Chairman, Group Chief Executive and Group Human Resources Director are generally invited to attend meetings of the Committee but no director is involved in any decisions relating to their own remuneration. 3. Remuneration policy and philosophy The Group’s remuneration policy which applies to the year under review and is intended to apply in all future years seeks 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 Group’s strategic plan. A substantial proportion of the Executive Directors’ remuneration is delivered through performance related pay. The principal components of Executive Directors’ remuneration are as follows: Salary An increase in annual bonus potential for meeting stretching performance targets The opportunity to earn substantially higher bonus payouts for performance above the annual bonus targets set at the start of the 2005/06 ﬁnancial year Shareholders approved a new long-term incentive plan (‘LTIP’) at the 2005 AGM to replace the executive share option arrangements for Executive Directors in the year under review. The LTIP will also replace the Performance Share Matching plan from 2006/07 onwards through its facility to make awards of Matching Shares to encourage investment by senior executives in the Company’s shares An increase in the level of performance required for long-term incentives for earnings per share growth and the introduction of a more focused property index benchmark Higher shareholding requirements for Executive Directors The Committee seeks to set salaries at mid- market levels compared to a range of UK based companies of similar size and complexity but with particular emphasis on the property and ﬁnancial sectors. The chart below illustrates the balance between ‘ﬁxed’ and ‘variable’ pay at the target and maximum performance levels assuming maximum participation in the new LTIP in 2006/07. Target Maximum Basic salary (excluding pension contributions and benefits) Performance related bonus Value of shares vesting Notes • Target performance delivers a bonus award of 50% of base salary and 25% vesting under the LTIP • Maximum performance delivers a bonus award of 300% of base salary (based on the changes to the annual bonus arrangements set out below) and full vesting under the LTIP • 5% per annum share price growth is assumed for target performance and 10% per annum for maximum performance • Deferred shares (and any shares invested in the LTIP) benefit from share price growth Short-term incentives The Group’s incentive plans include annual cash and share bonuses, geared to the achievement of short-term objectives. Long-term incentives These are designed to emphasise and support the long-term success of the business and comprise incentives which are measured over a three year timescale. Other beneﬁts These include pension, car, life and medical insurance cover 4. 2005/06 Directors’ remuneration During the year, the Group implemented a number of changes to directors’ remuneration which were introduced following consultation 1. Introduction and Compliance In preparing this Remuneration Report, the Remuneration Committee (‘the Committee’) has followed the requirements of Section 1 of the Combined Code on Corporate Governance, the Companies Act 1985, as amended by the Directors’ Remuneration Report Regulations 2002, and the Listing Rules of the Financial Services Authority. This report will be submitted to shareholders for approval at the Annual General Meeting to be held on 19 July 2006. The Regulations require the auditors to report to the Company’s shareholders on the information in tables 3, 4, 5 and 6 of this 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). 2. The Committee The Committee is chaired by Sir Winfried Bischoff, with the other members being David Rough, Stuart Rose, Bo Lerenius and Alison Carnwath. All 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 one of the Group’s principal relationship banks. However, since he does not participate in any discussions between or regarding the relationship between these two parties, the Company does not consider this relationship to compromise his independence. The terms of reference of the Committee are available on the Company’s website at www.landsecurities.com The Committee recommends to the Board the remuneration framework to attract and retain its Executive Directors. In line with the Combined Code, it also monitors and makes recommendations on remuneration for senior managers across the Group. The Group Human Resources Director provides information and advice to the Committee. The Committee has appointed and receives advice from New Bridge Street Consultants LLP (‘NBSC’) and also makes use of various published surveys to help the Committee determine appropriate Land Securities Annual Report 2006 91 Remuneration Report continued The individual components of Executive Directors’ remuneration are set out below: Base salary Executive Directors receive a salary which reﬂects their responsibilities, experience and performance. Salaries are reviewed annually in July and the review process includes the use of comparator information and reports from the Group’s remuneration consultants. The Group’s policy is to set salary around the mid-market rate but 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 also takes account of pay and employment conditions across 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 2006) are as follows: Francis Salway Mark Collins Martin Greenslade Ian Ellis Mike Hussey Richard Akers £575,000 £350,000 £325,000 £350,000 £340,000 £285,000 (£600,000) (£390,000) (£340,000) (£390,000) (£390,000) (£340,000) The above inﬂationary salary increase provided to Richard Akers reﬂects the increase in his Group level responsibilities and performance in post since his promotion to the Board in May 2005. The salary increases awarded to Mark Collins, Ian Ellis and Mike Hussey reﬂect the need to maintain market competitive salary levels at a time of high performance. Annual bonuses The maximum potential bonus opportunity was set at 100% of base salary for 2005/06 with 25% of any bonus being payable in shares deferred for three years. During the year, the Committee approved an increase in the annual bonus opportunity for Executive Directors from 100% to 300% of base salary for the delivery of exceptional ﬁnancial returns over and above the levels of ﬁnancial performance covered under previous bonus and LTIP plans. The additional bonus opportunity is being introduced after dialogue with our major shareholders. The additional bonus opportunity is structured to permit signiﬁcant reward for signiﬁcant ﬁnancial out- performance in a manner consistent with remuneration packages now being offered to executives of high calibre in the sector. No additional bonus is payable unless ﬁnancial performance targets in excess of those set at the start of the ﬁnancial year to achieve a payout of 100% of salary are met. Half of any additional bonus is payable in shares and deferred for three years. Any bonus deferral is normally forfeited on leaving the Group within the deferral period. In the ﬁrst year only following the introduction of the additional bonus opportunity, a recipient of a cash payment will be required to repay the net amount of any such payment if they leave the Group within 12 months. Executive Directors are also eligible to participate in a discretionary bonus pool for all employees which can amount to up to 30% of salary. The criteria for Executive Directors’ annual bonuses are shown in Table 1. For 2005/06 annual bonuses, including bonuses payable under the additional bonus opportunity and the discretionary bonus pool described above, ranged from 59% to 300% of annual salary. Long-term incentives Shareholders approved the new LTIP at the 2005 AGM.The LTIP replaced the share option scheme approved in 2002 for the year under review and will replace the Performance Share Matching Plan, also approved in 2002, from 2006/07. The LTIP consists of the facility to make annual awards of Performance Shares and Matching Shares. LTIP Performance Shares In the year under review, Executive Directors were eligible to receive conditional awards of shares of up to 100% of salary and this will continue to be the case in future years. LTIP Matching Shares Executive Directors were not eligible to receive a Matching Award of shares under the LTIP in 2005/06 since this year is a transitional year in which, for the ﬁnal time, Executive Directors participated in the Performance Matching Share Plan approved in 2002. In future years Executive Directors will be eligible to receive awards of Matching Shares under the LTIP which will be made at a ratio of up to 2 for 1 on a gross to net tax basis (up to 100 shares for every 30 purchased out of net income). The maximum Matching Share award per annum will be over shares with a value of 100% of salary. Awards of Performance Shares and Matching Shares are subject to the same performance conditions. Half of any award will vest based on achieving increases in earnings per share (‘EPS’) measured over three years and the other half will vest dependent on the Group’s ungeared total property return (‘TPR’) over three years equalling, or exceeding, IPD weighted indices reﬂecting the sector mix of Land Securities investment portfolio. The targets are as follows: EPS target Growth of RPI + 3% per annum – 12.5% of the award vests Growth of RPI + 5% per annum – 50.0% of the award vests Straight line vesting occurs between these points Table 1: Criteria for directors’ 2005/06 bonuses F W Salway Total returns in excess of WACC Group proﬁt Performance of all business units M F Greenslade Total returns in excess of WACC Group proﬁt Performance of group support functions Net investment target Implementation of IFRS A M Collins Total returns in excess of WACC Group proﬁt Project and property management targets Corporate and portfolio acquisitions I D Ellis Total returns in excess of WACC Group proﬁt Land Securities Trillium proﬁt M R Hussey Total returns in excess of WACC Group proﬁt Investment performance New business wins/opportunities Ofﬁce development lettings R J Akers Total returns in excess of WACC Group proﬁt Investment performance Retail leasing Land Securities Annual Report 2006 92 Remuneration Report continued TPR Performance equal to the weighted index – 12.5% of the award vests Performance equal to the weighted index plus 1% per annum – 50.0% of the initial award vests, and Straight line vesting occurs between these points The Committee considers EPS and TPR to be key long-term measures of the Group’s performance and is committed to reviewing their appropriateness on an ongoing basis. As set out above, Executive Directors were eligible to receive awards under the Performance Share Matching Plan approved in 2002 during the year. Under this plan, executives can receive up to two performance shares for each deferred share, depending on the extent to which performance conditions are satisﬁed. Similarly to the LTIP, half of these Matching Performance Shares depend on achieving a real increase in EPS (deﬁned to be normalised adjusted diluted EPS (‘NADEPS’)) measured over a three year period, with the other half depending on the Company’s TPR equalling, or exceeding, the IPD All Fund Universe Index over a rolling three year period. The same sliding scale applies to these performance conditions as the LTIP with the only difference being that the NADEPS element has a threshold vesting level of RPI + 2.5% with full vesting at RPI + 4% per annum. The maximum amount of performance shares which could potentially vest is shown in Table 2. The Committee determined that the performance shares linked to NADEPS growth for the period 1 April 2003 to 31 March 2006 vested in full while the performance shares linked to IPD return for this period vested to the extent of 89.5%. Share options Land Securities has historically operated share option arrangements for Executive Directors. Following the adoption of the LTIP, no further awards of share options will be made to the Executive Directors. During the year, a new share option scheme has been introduced, using market purchased shares only, for more junior managers. For grants made over the period 2000 to 2003, the Committee has determined that the required level of increase in NADEPS over the three years to 31 March 2006 was achieved. Cycle ending Award date Market price at award date (p) Shares awarded Shares/ value vested 2005 2006 2007 2008 2005 2006 2007 2005 2006 2007 2008 2006 2007 2008 2007 2008 2005 2006 2007 2008 11/07/02 01/07/03 12/07/04 04/07/05 11/07/02 01/07/03 12/07/04 11/07/02 01/07/03 12/07/04 04/07/05 01/07/03 12/07/04 04/07/05 31/03/04 04/07/05 11/07/02 01/07/03 12/07/04 04/07/05 854 787 1159 1405 854 787 1159 854 787 1159 1405 787 1159 1405 1090 1405 854 787 1159 1405 7,142 13,190 12,794 21,234 9,050 13,962 13,034 11,472 10,798 28,290 17,536 8,090 14,174 15,988 20,000 14,600 5,262 3,946 2,506 8,228 3,571 – – – 4,525 – – 5,736 – – – – – – – – 2,631 – – – Vesting date 11/07/05 01/07/06 12/07/07 04/07/05 11/07/05 01/07/06 12/07/07 11/07/05 01/07/06 12/07/07 04/07/08 01/07/06 12/07/07 04/07/08 31/03/07 04/07/08 11/07/05 01/07/06 12/07/07 04/07/08 Table 2: Performance shares* F W Salway A E Macfarlane I D Ellis A M Collins M R Hussey R J Akers *Subject to performance tests (see above). Land Securities Annual Report 2006 93 Remuneration Report continued Table 3: Directors’ emoluments (£’000 – amounts received by directors in the respective periods) (audited) Total emoluments excluding pensions Pension contributions Deferred bonus shares(2) Performance shares vested Gain on exercise of share options Bonuses Beneﬁts(1) 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Basic salary and fees Executive: F W Salway A M Collins(3) I D Ellis(4) M R Hussey (appointed 30/09/04) R J Akers(5) (appointed 17/05/05) M F Greenslade (appointed 01/09/05) A E Macfarlane(6) (resigned 05/08/05) 537 342 342 323 272 189 127 268 201 212 279 109 – 213 2,132 1,282 Non-Executive: P G Birch (Chairman) D Rough Sir Winfried Bischoff S A R Rose B A Lerenius (appointed 01/06/04) A J Carnwath (appointed 01/09/04) 202 60 50 45 45 45 – – – – – – 134 85 96 80 66 47 30 538 98 76 69 58 – – 83 384 149 112 123 102 57 – – 543 74 82 164 – – – 76 396 50 – 81 – 37 – 64 232 – – – – – – – – 250 425 310 319 200 – 242 1,746 280 – 151 – – – 357 788 13 14 11 12 13 6 1 70 – – – – – – 818 557 565 614 394 195 341 560 486 650 282 – – 502 3,484 2,480 202 60 50 45 45 45 168 51 44 40 38 26 Total 2,579 1,282 70 3,931 2,847 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 2004/05 and 2003/04 ﬁnancial performance under the deferred bonus plan. 3. 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 is due to receive an 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. 4. I D Ellis received fees of £4,936 from Rok plc in respect of his non-Executive Directorship of that company. 5. R J Akers’ capped DB pension contributions are taken at Group average employee DB cost (30%) rather than using speciﬁc actuarial assumptions as an individual executive. 6. A E Macfarlane also received fees of £4,500 from Invensys plc in respect of his non-Executive Directorship of that company. 7. When M F Greenslade joined the Company, the Company undertook to award him LTIP shares to the value of 100% of annual salary and, as a consequence, an award of 22,679 LTIP shares was granted in September 2005. In addition, subject to the purchase and retention by M F Greenslade of shares with a value of 30% of salary, the Company undertook to make an award of matching shares to the value of 100% of salary. An award of 16,666 Matching Shares was made in September 2005 following an initial purchase of shares by M F Greenslade. 8. Pensions of £90,738 (2005: £130,280) were paid to former directors or their dependants. 9. P G Freeman served as a director of the Company until 14 July 2004 and thereafter served as a consultant advising on matters relating to development projects. Fees paid to P G Freeman amounted to £25,330 in 2004/05 and £27,565 in 2005/06. Table 4: Directors’ options over ordinary shares (audited) Granted during year Exercised during year Outstanding share options Exercise Market price on exercise (pence) price (pence) No. of options at 31/03/06 Exercise price (pence) No of options at 01.04.05 Grant price (pence) No. F W Salway A M Collins I D Ellis M R Hussey R J Akers (1) (3) (3) (1) (3) (3) (4) (1) (3) (3) (4) (1) (3) (3) (4) (1) (3) (3) (2) (4) 30,500 41,250 43,065 70,000 34,375 34,695 2,477 40,000 34,375 41,759 2,546 51,500 20,000 20,500 6,000 7,750 11,500 1,420 747 No. 30,500 66,306 3,694 812 1632 812 812 1420 1415 40,000 812 1587 40,000 7,806 3,694 20,000 10,000 812 812 812 820 869 1415 1455 1581 1434 1650 41,250 43,065 34,375 34,695 2,477 34,375 41,759 2,546 40,000 23,727 1,726 10,500 6,000 7,750 11,500 1,420 747 788 1159 788 1159 677 788 1159 650 788 1159 957 869 812 788 1159 713 957 Exercisable dates 07/2006-07/2013 07/2007-07/2014 07/2006-07/2013 07/2007-07/2014 09/2010-03/2011 07/2006-07/2013 07/2007-07/2014 08/2007-02/2008 07/2006-07/2013 07/2007-07/2014 10/2009-04/2010 07/2004-07/2011 07/2005-07/2012 07/2006-07/2013 07/2007-07/2014 07/2001-07/2006 07/2004-10/2011 Weighted average exercise price 1. 2000 Executive Share Option Scheme. Vesting of awards is dependent on the Company’s growth in NADEPS exceeding the growth in RPI by 2.5% per year. 2. 1993 Savings Related Share Option Scheme Not subject to performance conditions because it is available to all staff and Inland Revenue rules do not permit performance conditions to be set for this type of scheme. 3. 2002 Executive Share Option Scheme. Vesting of awards is dependent on the Company’s growth in NADEPS exceeding the growth in RPI by at least 2.5% per year. 4. 2003 Savings Related Share Option Scheme. Not subject to performance conditions because it is available to all staff and Inland Revenue rules do not permit performance conditions to be set for this type of scheme. The range of the closing middle market prices for Land Securities’ shares during the year was 1292p to 2080p. The middle market price at 31 March 2006 was 1928p. Options over 73,976 shares held by a former director lapsed during the year under review. Land Securities Annual Report 2006 94 Remuneration Report continued Table 5: Directors’ interests in shares (audited) Deferred shares LTIP performance shares** 2006 20,005 36,286 15,877 17,080 500 7,675 8,750 10,000 12,000 6,365 6,670 5,000 2005 20,005 11,986 5,145 7,196 500 7,675 8,750 10,000 8,000 875 2006 – 24,506 19,825 29,425 18,048 – – – – – 2005 – 13,214 11,268 19,725 10,000 – – – – – 2006 – 40,464 24,631 24,631 23,927 – – – – – 4,228* 7,589 3,315* –* – –* 20,056 22,679 2005 – – – – – – – – – – –* –* P G Birch F W Salway A M Collins I D Ellis M R Hussey D Rough Sir Winfried Bischoff S A Rose B A Lerenius A J Carnwath R J Akers (appointed 17/05/05) M F Greenslade (appointed 01/09/2005) * At date of appointment ** Subject to performance conditions (see page 91) The options granted to, and exercised by, Executive Directors are shown in Table 4. The Committee ensures that EPS is calculated on a consistent basis where there are accounting standard changes (such as the introduction of IFRS) over the performance period for incentives. 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 date of appointment or the date of introduction of this requirement in order to qualify for future awards of long-term incentives. In addition, non-Executive Directors are required to own shares with a value equal to their annual fees within three years of the date of their appointment. Pensions During the year the Committee reviewed the pension arrangements applicable to Executive Directors and senior executives in preparation for the Government’s tax simpliﬁcation changes which came into effect on 6 April 2006. It concluded, as a general principle, that the Company would not provide additional compensation to executives who may be adversely affected by the tax changes. 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. Additional arrangements have been in place for pension provisions in excess of the HM Revenue & Customs regulations. Pension contributions made during the year are shown on page 93. Richard Akers participates in a non-contributory deﬁned beneﬁt (‘DB’) pension scheme which was open to property management and administration staff until 31 December 1998. The pension beneﬁts under this scheme are described below. 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 Salary. The beneﬁts provided to Richard Akers have been based on a Pensionable Salary which is subject to the statutory earnings cap. 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. “A day” changes Following the changes in pension tax legislation from April 2006 the Company made the commitment that while providing information to affected executives there would be no tax advantage given thus ensuring a cost neutral position for the Company. The Committee decided that from 1 April 2006: A scheme speciﬁc cap would be introduced into the Land Securities and Land Securities Trillium DB schemes commencing at the current rate of £108,600 and that both caps will be increased by Inland Revenue recommendations until 2010 and then by RPI. The existing cap will be removed for the Land Securities Deﬁned Contribution (‘DC’) schemes and all employees, excluding those affected by the Life Time Allowance, will be able to increase their contributions to their full salary A separate pension arrangement solely for ‘top up’ pensions for the Executive Directors should not be introduced The Executive Directors continue to be entitled to a beneﬁt that is equivalent to 25% of their total salary and that this could be invested as individuals are independently advised and may include: – pension contributions into the DC scheme up to the personal level that is advised plus a cash contribution on the balance – pension contributions into the DB scheme up to capped level of £108,600 plus a cash balance on the remaining amount when this DB contribution cost is deducted from 25% of total salary. This cash balance can be paid as a lump sum or into the DC Land Securities Annual Report 2006 pension arrangement as employer contributions. This arrangement applies to Richard Akers only (see below) – 25% cash payment on total salary to invest outside Land Securities pension arrangements Presentations were made by the Company’s pension advisers to Executive Directors and senior executives and a contribution made to the provision of independent ﬁnancial advice for individuals. With Richard Akers’ appointment to the Board in May 2005 he became eligible under his new service agreement, and in line with other Executive Directors, to a pension beneﬁt equivalent to 25% of his base salary. Under the DB pension arrangement his pension beneﬁts were restricted based on a capped salary of £105,600 p.a. As the DB cap remains in place after April 2006 Richard Akers’ DB pension beneﬁts will remain calculated on the capped amount increased in line with the Government sponsored notional cap published until 2010 (then at RPI thereafter). The remainder of his Executive Director’s pension allowance of 25% is made available for investment either in the DC pension scheme or outside Land Securities’ pension arrangements. In addition with effect from 1 April 2006 the DB pension scheme has moved to future accrual on a “CARE” (Career Averaged Revalued Earnings) basis and either on 1/80th accrual or on 1/60th accrual subject to an employee contribution. Richard Akers has chosen to accrue future beneﬁts on a 1/60th basis with employee contributions in accordance with the new scheme provisions of 1% of base salary in 2006, 3% of base salary in 2007 and 5% of base salary thereafter. 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. Table 6: Deﬁned beneﬁt pension scheme (audited) Name of director Accrued beneﬁt at 31 March 2006 Increase in accrued beneﬁts excluding inﬂation Increase in accrued beneﬁts including inﬂation Transfer value of increase in accrued beneﬁt excluding inﬂation R J Akers £ 19,653 1,193 1,466 12,200 Transfer value of accrued beneﬁts at 1 April 2005 158,600 Transfer value of accrued beneﬁts at 31 March 2006 201,100 Increase in transfer value 42,500 5. 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. The Board also takes into account the time commitments of the non-Executive Directors, which is reviewed annually as part of the Board appraisal process. 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. Non-Executive Directors are appointed under letters of appointment which provide for an initial term of service of three years. A specimen letter of appointment is available on the Group’s website at www.landsecurities.com. 6. Service agreements The Committee’s policy on service agreements for Executive Directors is that they should provide for 12 months’ rolling notice of termination by the Company. As a result, the unexpired term and the notice periods (both from the Company and from the Executive Director) are 12 months, except in the case of Richard Akers where his notice period to the Company is six months. Any proposals for the early termination of the service agreements of Directors or senior executives are considered by the Committee. 95 Remuneration Report continued The dates of appointment and the dates of the service agreements of the Executive Directors are as follows: Name Date of appointment Date of contract F W Salway 5 July 2002 31 May 2001 A M Collins 20 November 2002 13 March 2003 M F Greenslade 1 September 2005 1 September 2005 I D Ellis 20 November 2002 28 January 2003 M R Hussey 30 September 2004 1 January 2006 R J Akers 17 May 2005 19 April 1999 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. 7. 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 23 May 2006 save that on 18 May 2006 Martin Greenslade purchased 1,600 shares in the Company. 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 2006 9. 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 reinvested) against a ‘broad equity market index’ over the period since the 6 September 2002 return of capital. As the Company is a constituent of the FTSE All-Share Real Estate sector this index is considered to be the most appropriate benchmark for the purposes of the graph. The Committee also considered that it would be helpful to provide an additional graph illustrating performance going back before the return of capital compared with the FTSE100 index and the FTSE All-Share Real Estate sector over the previous ﬁve years of the Company and its predecessor company, Land Securities PLC. Signed for and on behalf of the Board by Sir Winfried Bischoff Chairman of the Committee 96 Remuneration Report continued 8. Information regarding senior managers below Board level The Group currently employs 36 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 broadly consistent with that of Executive Directors. The senior managers are not eligible to participate in the additional bonus opportunity for the delivery of exceptional ﬁnancial returns described in section 4 of this report. During the year under review, bonuses for this group of employees ranged from 33% to 73% of salary, with an average bonus of 65% of salary. Total shareholder return Source: Thomson Financial 300 250 ) £ ( l e u a V 200 150 100 50 6 Sep 02 31 Jul 02 31 Mar 03 31 Mar 04 31 Mar 05 31 Mar 06 Land Securities Group PLC FTSE All-Share Real Estate Index This graph illustrates the value, by 31 March 2006, of £100 invested in Land Securities Group PLC on 6 September 2002 compared with that of £100 invested in the FTSE All-Share Real Estate Index. The other points plotted are the values at intervening financial year ends. Total shareholder return Source: Thomson Financial ) £ ( l e u a V 300 250 200 150 100 50 31 Mar 01 31 Mar 02 31 Mar 03 31 Mar 04 31 Mar 05 31 Mar 06 Land Securities Group PLC FTSE All-Share Real Estate Index FTSE100 Index This graph illustrates the value, by 31 March 2006, of £100 invested in Land Securities Group PLC on 6 September 2002 compared with that of £100 invested in the FTSE All-Share Real Estate Index and in the FTSE100 Index. The other points plotted are the values at intervening financial year ends. Land Securities Annual Report 2006 97 Directors’ Responsibilities The directors are required by company law to prepare ﬁnancial statements for each ﬁnancial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the ﬁnancial year and of their proﬁt or loss for that period and comply with the Companies Act 1985. The directors are responsible for ensuring that applicable accounting standards have been followed and that suitable accounting policies, consistently applied and supported by reasonable and prudent 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 conﬁrm that they have complied with the above requirements in preparing the ﬁnancial statements. The directors are also responsible for maintaining proper accounting records so as to enable them to comply with company law. The directors have general responsibilities for safeguarding the assets of the Company and of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The maintenance and integrity of the Land Securities Group PLC website is the responsibility of the Company; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the ﬁnancial statements since they were initially presented on the website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Land Securities Annual Report 2006 98 Independent Auditors Report to the members of Land Securities Group PLC We have audited the Group and parent company ﬁnancial statements (the ‘ﬁnancial statements’) of Land Securities Group PLC for the year ended 31 March 2006 which comprise the Group Income Statement, the Group and Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statement of Change in Shareholders’ Equity and the related notes. These ﬁnancial statements have been prepared under the accounting policies set out therein.We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the ﬁnancial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). 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 part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.We report to you whether, in our opinion, the information given in the Directors’ Report includes that speciﬁc information presented in the Operating and Financial Review that is cross-referenced from the Business Review section of the Directors’ Report.We also report to you if, in our opinion, 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 other transactions is not disclosed. 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. We read other information contained in the Annual Report and consider whether it is consistent with the audited ﬁnancial statements. The other information comprises only the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, the Chairman’s Statement, the Operating and Financial Review and the Corporate Governance Statement.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁnancial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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 part of the Directors’ Remuneration Report to be audited. 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 Group’s and 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 part of the Directors’ Remuneration Report to be audited 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 and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: the Group ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 March 2006 and of its proﬁt and cash ﬂows for the year then ended the parent company ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 March 2006 and cash ﬂows for the year then ended the ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation the information given in the Directors’ Report is consistent with the ﬁnancial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 23 May 2006 Land Securities Annual Report 2006 99 Financial Statements Business Analysis 99 Financial statements and business analysis contents 100 Five year summary 101 Income statement 101 Statement of recognised income and expense 102 Balance sheets 103 Cash ﬂow statements 104 Notes to the ﬁnancial statements 137 Directors’ report 139 Introduction 140 Investment property business – Combined portfolio 142 Investment property business – Retail 146 Investment property business – London Portfolio 150 Investment property business – Combined portfolio analysis 153 Property Outsourcing – Land Securities Trillium 158 Investor information 159 Glossary 160 Index Ibc Contact details i F n a n c i a l S t a t e m e n t s Land Securities Annual Report 2006 100 Five Year Summary Income statement Before exceptional items Group revenue Costs Proﬁt on disposal of ﬁxed asset properties Net surplus on revaluation of investment properties Operating proﬁt Net ﬁnance expenses Income from joint ventures (post-tax) Proﬁt before tax Income tax expense Proﬁt after tax Exceptional items Goodwill impairment Proﬁt on disposal of joint venture (Telereal) Debt restructuring costs Total exceptional items Tax on exceptional items Exceptional items post tax Proﬁt for the ﬁnancial year Revaluation surplus/(deﬁcit) for the year Group Joint ventures Total Revenue proﬁt (old deﬁnition) Less: trading properties Less: long-term contracts Revenue proﬁt (new deﬁnition) Balance sheet Investment properties Property outsourcing properties Net investment in ﬁnance leases Goodwill Investment in joint ventures Other ﬁxed assets Total non-current assets Trading properties and long-term development contracts Cash and cash equivalents less short-term borrowings and overdrafts Other current assets and liabilities Total current assets and liabilities Provisions Borrowings Pension beneﬁts Deferred tax liabilities Total non-current liabilities Net assets Net debt Results per share Total dividend per share# Basic earnings per share Diluted earnings per share Adjusted earnings per share Adjusted diluted earnings per share Net assets per share Diluted net assets per share Adjusted net assets per share Adjusted diluted net assets per share 2006 IFRS £m 2005 IFRS £m 2004 UK GAAP* £m 2003 UK GAAP* £m 2002 UK GAAP* £m 1,828.7 (1,267.8) 560.9 74.5 1,579.5 2,214.9 (194.5) 2,020.4 110.3 2,130.7 (593.3) 1,537.4 (64.5) 293.0 – 228.5 (90.0) 138.5 1,675.9 1,579.5 105.5 1,685.0 434.9 (21.7) (21.9) 391.3 11,440.5 563.2 233.9 34.3 829.5 73.6 13,175.0 255.9 (31.1) (218.6) 6.2 (58.2) (3,654.8) (6.5) (1,967.8) (5,687.3) 7,493.9 (3,685.9) 46.70p 357.95p 356.50p 70.76p 70.47p 1597p 1590p 1920p 1912p 1,627.1 (1,134.7) 492.4 112.0 827.9 1,432.3 (189.0) 1,243.3 141.5 1,384.8 (265.8) 1,119.0 (12.7) – (64.6) (77.3) 19.2 (58.1) 1,060.9 827.9 69.5 897.4 401.3 (27.9) (11.6) 361.8 8,240.1 546.3 163.4 34.3 854.9 57.9 9,896.9 164.0 (45.8) (101.6) 16.6 (42.0) (2,392.3) (10.9) (1,418.0) (3,863.2) 6,050.3 (2,438.1) 43.25p 227.32p 226.45p 67.13p 66.87p 1293p 1289p 1493p 1488p 1,285.8 (821.1) 464.7 52.0 – 516.7 (174.4) 342.3 17.7 360.0 (71.7) 288.3 – – – – – – 288.3 400.7 6.2 406.9 309.2 (7.3) – 301.9 7,880.9 769.2 – 34.3 204.2 51.0 8,939.6 85.0 (439.9) (365.3) (720.2) (11.7) (1,995.9) – (173.3) (2,180.9) 6,038.5 (2,435.8) 37.10p 61.84p 61.76p 47.86p 47.80p 1294p 1293p 1333p 1331p 1,071.3 (608.9) 462.4 26.6 – 489.0 (144.9) 344.1 13.0 357.1 (90.8) 266.3 – – (52.0) (52.0) 15.6 (36.4) 229.9 (56.8) – (56.8) 336.2 (1.8) – 334.4 7,823.9 557.4 – 36.7 106.8 41.5 8,566.3 52.6 59.1 (287.5) (175.8) (5.9) (2,648.4) – (173.1) (2,827.4) 5,563.1 (2,589.3) 35.50p 46.46p 46.44p 50.89p 50.88p 1188p 1188p 1220p 1219p 977.1 (479.6) 497.5 13.4 – 510.9 (142.9) 368.0 (4.5) 363.5 (99.9) 263.6 – – – – – – 263.6 (105.5) 46.8 (58.7) 350.1 (5.8) – 344.3 7,800.0 428.9 – 38.9 188.8 45.3 8,501.9 36.9 45.2 (430.2) (348.1) (5.3) (1,987.3) – (124.6) (2,117.2) 6,036.6 (1,942.1) 34.00p 50.27p 49.54p 49.18p 48.49p 1151p 1132p 1178p 1157p * note 35 indicates the IFRS adjustments (and their magnitude) that would be required to be made to restate the UK GAAP results for 2002, 2003 and 2004 under IFRS. # all amounts represent the interim dividend paid and ﬁnal proposed dividend. Land Securities Annual Report 2006 Financial Statements Income statement for the year ended 31 March 2006 Group Income: Group and share of joint ventures Less: share of joint ventures income Group revenue Costs Proﬁt on disposal of ﬁxed asset properties Net surplus on revaluation of investment properties Goodwill impairment Proﬁt on disposal of joint venture (Telereal) Operating proﬁt Interest expense Interest income Share of the proﬁt of joint ventures (post-tax) Distribution received from joint venture (Telereal) Proﬁt/(loss) before tax Income tax (expense)/credit Proﬁt/(loss) for the ﬁnancial year Earnings per share Basic earnings per share* Diluted earnings per share* *adjusted earnings per share is given in note 11 Before exceptional items £m 1,988.2 (159.5) 1,828.7 (1,267.8) 560.9 74.5 1,579.5 – – 2,214.9 (201.8) 7.3 2,020.4 98.6 11.7 2,130.7 (593.3) 1,537.4 Exceptional items £m – – – – – – – (64.5) 293.0 228.5 – – 228.5 – – 228.5 (90.0) 138.5 Notes 17 4 4 4 4 4, 8 4, 8 6 6 17 17 4 9 30 11 11 Before exceptional items £m 1,876.2 (249.1) 1,627.1 (1,134.7) 492.4 112.0 827.9 – – 1,432.3 (198.8) 9.8 1,243.3 76.1 65.4 1,384.8 (265.8) 1,119.0 Exceptional items £m – – – (14.8) (14.8) – – (12.7) – (27.5) (49.8) – (77.3) – – (77.3) 19.2 (58.1) 2006 Total £m 1,988.2 (159.5) 1,828.7 (1,267.8) 560.9 74.5 1,579.5 (64.5) 293.0 2,443.4 (201.8) 7.3 2,248.9 98.6 11.7 2,359.2 (683.3) 1,675.9 357.95p 356.50p Statement of recognised income and expense for the year ended 31 March 2006 Group Proﬁt for the ﬁnancial year Actuarial losses on deﬁned beneﬁt pension schemes Deferred tax on actuarial losses on deﬁned beneﬁt pension schemes Fair value movement on cash ﬂow hedges taken to equity – Group Deferred tax on fair value movement on cash ﬂow hedges taken to equity – Group – joint ventures – joint ventures Net losses recognised directly in equity Total recognised income and expense Company The Company has no other recognised income or expense other than that recognised in the income statement. 101 2005 Total £m 1,876.2 (249.1) 1,627.1 (1,149.5) 477.6 112.0 827.9 (12.7) – 1,404.8 (248.6) 9.8 1,166.0 76.1 65.4 1,307.5 (246.6) 1,060.9 227.32p 226.45p 2005 £m 1,060.9 (4.9) 1.5 – – – – 2006 £m 1,675.9 (5.0) 1.5 (2.2) (2.7) 0.6 0.8 (7.0) (3.4) 1,668.9 1,057.5 Land Securities Annual Report 2006 102 Financial statements continued Balance sheets at 31 March 2006 Non-current assets Investment properties Property, plant and equipment Property outsourcing properties Other property, plant and equipment Net investment in ﬁnance leases Goodwill Investment in subsidiary undertakings Investment in joint ventures Total non-current assets Current assets Trading properties and long-term development contracts Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Short-term borrowings and overdrafts Trade and other payables Current tax liabilities Total current liabilities Non-current liabilities Provisions Borrowings Pension beneﬁts Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Ordinary shares Treasury shares Share-based payments Share premium Capital redemption reserve Merger reserve Retained earnings Total shareholders’ equity Notes 2006 £m Group 2005 £m 2006 £m Company 2005 £m 13 13 13 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28, 30 30 30 30 30 30 30 11,440.5 8,240.1 563.2 73.6 12,077.3 233.9 34.3 – 829.5 13,175.0 255.9 578.9 15.6 850.4 546.3 57.9 8,844.3 163.4 34.3 – 854.9 9,896.9 164.0 513.5 5.0 682.5 – – – – – – 5,037.1 – 5,037.1 – 142.7 5.0 147.7 – – – – – – 5,037.1 – 5,037.1 – 325.5 0.3 325.8 14,025.4 10,579.4 5,184.8 5,362.9 (46.7) (585.0) (212.5) (844.2) (58.2) (3,654.8) (6.5) (1,967.8) (5,687.3) (6,531.5) 7,493.9 46.9 (3.4) 6.3 43.2 30.5 – 7,370.4 7,493.9 (50.8) (577.2) (37.9) (665.9) (42.0) (2,392.3) (10.9) (1,418.0) (3,863.2) (4,529.1) 6,050.3 46.8 (2.1) 3.3 31.4 30.5 – 5,940.4 6,050.3 (34.0) – (3.6) (37.6) – – – – – (37.6) – – – – – – – – – – 5,147.2 5,362.9 46.9 – – 43.2 30.5 373.6 4,653.0 5,147.2 46.8 – – 31.4 30.5 373.6 4,880.6 5,362.9 The ﬁnancial statements on pages 101 to 136 were approved by the Board of Directors on 23 May 2006 and were signed on its behalf by: F W Salway M F Greenslade Directors Land Securities Annual Report 2006 Cash ﬂow statements for the year ended 31 March 2006 Group Net cash generated from operations Cash generated from operations Interest paid Interest received Funding pension scheme deﬁcit Taxation (corporation tax received) Net cash inﬂow from operations Cash ﬂows from investing activities Investment property development expenditure Acquisition of investment properties Other investment property related expenditure Capital expenditure associated with property outsourcing Capital expenditure on properties Disposal of ﬁxed asset investment properties Disposal of ﬁxed asset operating properties Net expenditure on properties Net expenditure on non-property related ﬁxed assets Net cash outﬂow from capital expenditure Receivable ﬁnance leases acquired Receipts in respect of receivable ﬁnance leases Net loans made to joint ventures Distributions from joint ventures Proceeds from disposal of joint venture (Telereal) Acquisitions of Group undertakings (net of cash acquired) Net cash (used in)/from investing activities Cash ﬂows from ﬁnancing activities Issue of shares Purchase of own share capital Increase/(decrease) in debt Debt repaid on acquisition of Tops Estates Decrease in ﬁnance leases payable Repayment of B shares Dividend paid to ordinary shareholders Net cash from/(used in) ﬁnancing activities Increase/(decrease) in cash and cash equivalents at end of the year Company Net cash generated from operations Cash generated from operations Interest paid Interest received Taxation (corporation tax received) Net cash inﬂow from operations Cash ﬂows from ﬁnancing activities Issue of shares Repayment of B shares Dividend paid to ordinary shareholders Net cash used in ﬁnancing activities Decrease in cash and cash equivalents at end of the year 103 Financial statements continued Notes 31 31 2006 £m 2006 £m 2005 £m 591.5 (187.7) 7.3 (4.9) (30.3) 375.9 (1,098.5) 733.2 10.6 182.8 (5.4) 17.5 2.8 197.7 (227.0) (29.3) (236.6) (1,429.2) (78.8) (29.7) (1,774.3) 675.5 4.1 (1,094.7) (26.9) (1,121.6) (84.8) 2.3 (72.8) 206.6 293.0 (321.2) 11.9 (1.9) 1,221.2 (257.9) (1.2) – (238.9) 11.9 – (238.9) (215.3) (309.8) (40.6) (122.5) (688.2) 335.1 355.3 2.2 (19.3) (17.1) (92.6) 2.3 (88.8) 245.8 – (5.4) 15.7 (2.1) (322.2) – (1.0) (8.4) (175.5) 15.7 (8.4) (175.5) 2005 £m 523.4 (313.5) 18.3 (15.2) 3.6 216.6 44.2 (493.5) (232.7) 165.0 (17.9) 8.4 7.8 163.3 (168.2) (4.9) Land Securities Annual Report 2006 104 Notes to the ﬁnancial statements for the year ended 31 March 2006 1. Basis of preparation These ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) and International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The ﬁnancial statements have also been prepared in accordance with IFRS as adopted by the European Union (‘EU’) and therefore comply with Article 4 of the EU IAS Regulation. The ﬁnancial statements have been prepared under the historical cost convention as modiﬁed by the revaluation of land and buildings, available for sale investments, ﬁnancial assets and liabilities held for trading. A summary of the more important group accounting policies is set out in note 2 below. The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The disclosures required by IFRS 1 ‘First time adoption of International Financial Reporting Standards’ concerning the transition from UK GAAP to IFRS are given in note 35. 2. Signiﬁcant accounting policies (a) Basis of consolidation The consolidated ﬁnancial statements of the Group include the ﬁnancial statements of Land Securities Group PLC (‘the Company’) and its subsidiaries up to 31 March 2006. Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts from its activities. The ﬁnancial statements of subsidiaries are included in the consolidated ﬁnancial statements from the date that control commences until the date control ceases. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint ventures are accounted for using the equity method of accounting as permitted by IAS 31 ‘Interests in joint ventures’ and following the procedures for this method set out in IAS 28 ‘Investments in associates’. The equity method requires the Group’s share of the joint venture’s proﬁt or loss for the period to be presented separately in the income statement and the Group’s share of the joint venture’s net assets to be presented separately in the balance sheet. Joint ventures (Telereal) with net liabilities are carried at zero value in the balance sheet where there is no commitment to fund the deﬁcit and any distributions received are included in the consolidated proﬁt for the year. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated ﬁnancial statements. Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group’s interest in the joint venture concerned. Unrealised losses are eliminated in the same way, but only to the extent that there is no evidence of impairment. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included in the income statement as a valuation gain or loss.When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such. (b) Acquisitions and business combinations Where properties are acquired through corporate acquisitions and there are no signiﬁcant assets or liabilities other than property, the acquisition is treated as an asset acquisition. In all other cases the acquisition is accounted for as a business combination, in which case, the assets and liabilities of a subsidiary or joint venture are measured at their estimated fair value at the date of acquisition. (c) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Group is organised into business segments. Unallocated expenses are costs incurred centrally which are neither directly attributable nor reasonably allocatable to individual segments. Unallocated assets are cash and cash equivalents. Unallocated liabilities include short-term borrowings and overdrafts, and certain non-current liabilities (borrowings, pension deﬁcit and deferred tax liabilities). (d) Investment properties Investment properties are those properties, either owned by the Group or where the Group is a lessee under a ﬁnance lease, that are held either to earn rental income or for capital appreciation or both. In addition, properties held under operating leases are accounted for as investment properties when the rest of the deﬁnition of an investment property is met. In such cases, the operating leases concerned are accounted for as if they were ﬁnance leases. Investment properties are measured initially at cost, including related transaction costs. After initial recognition at cost, investment properties are carried at their fair values based on a professional valuation made as of each reporting date. Properties are treated as acquired at the point when the Group assumes the signiﬁcant risks and returns of ownership and as disposed when these are transferred to the buyer. Investment property is measured on initial recognition at cost, including related transaction costs. Additions to investment properties consist of costs of a capital nature and, in the case of investment properties under development, capitalised interest. Certain internal staff and associated costs directly attributable to the management of major schemes during the construction phase are also capitalised. When the Group begins to redevelop an existing investment property with a view to sale, the property is transferred to trading properties and held as a current asset. The property is re-measured to fair value as at the date of the transfer with any gain or loss being taken to proﬁt or loss. The re-measured amount becomes the deemed cost at which the property is then carried in trading properties. Property that is being constructed or developed for future use as an investment property, but which has not previously been classiﬁed as such, is classiﬁed as investment property under development within property, plant and equipment. This is recognised initially at cost but is subsequently re-measured to fair value at each reporting date. Any gain or loss on re-measurement is taken direct to equity unless any loss in the period exceeds any net cumulative gain previously recognised in equity. In the latter case, the amount by which the loss in the period exceeds the net cumulative gain previously recognised is taken to proﬁt or loss. On completion, the property is transferred to investment property with any ﬁnal difference on re-measurement accounted for in accordance with the foregoing policy. Gross borrowing costs associated with direct expenditure on properties under development or undergoing major refurbishment are capitalised. The interest capitalised is calculated using the Group’s weighted average cost of borrowings after adjusting for borrowings associated with speciﬁc developments.Where borrowings are associated with speciﬁc developments, the amount capitalised is the gross interest incurred on those borrowings less any investment income arising on their temporary investment. Interest is capitalised as from the commencement of the development work until the date of practical completion. The capitalisation of ﬁnance costs is suspended if there are prolonged periods when development activity is interrupted. Interest is also capitalised on the purchase cost of a site or property acquired speciﬁcally for redevelopment in the short term but only where activities necessary to prepare the asset for redevelopment are in progress. (e) Property, plant and equipment Operating properties These are properties owned and managed by Land Securities Trillium, the Group’s property outsourcing business, and which do not satisfy the deﬁnition of an investment property. Operating properties are stated at cost less accumulated depreciation. Depreciation is charged to the income statement on a straight-line basis Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 105 2. Signiﬁcant accounting policies continued over the estimated useful lives of the properties concerned. The estimated useful lives are as follows: Freehold land Freehold buildings Leasehold properties – Not depreciated – Up to 50 years – Shorter of the unexpired lease term and 50 years Other property, plant and equipment This category comprises computers, motor vehicles, furniture, ﬁxtures and ﬁttings and improvements to Group ofﬁces. These assets are stated at cost less accumulated depreciation and are depreciated on a straight-line basis over their estimated useful lives of between two and ﬁve years. The residual values and useful lives of all property, plant and equipment are reviewed, and adjusted if appropriate, at least at each ﬁnancial year end. (f) Goodwill At the date of the Group’s transition to IFRS, 1 April 2004, the goodwill in the Group balance sheet represented that arising on the acquisition of Trillium less amortisation to that date. In accordance with IFRS 1 ‘First-time adoption of IFRS’, this amount has been adopted as the carrying amount of the goodwill for IFRS accounting purposes and the goodwill was reviewed for impairment at 31 March 2004 and at each subsequent year end. In accordance with IFRS 3 ‘Business combinations’, the goodwill is not amortised but is reviewed for impairment at each reporting date. The Group’s policy on impairment is set out in (t) below. (g) Investment in subsidiary undertakings Investments in subsidiaries are stated at cost less any provision for permanent impairment in value. (h) Trading properties and long-term development contracts Trading properties are those properties held for sale and are shown at the lower of cost and net realisable value. Revenue on long-term development contracts is recognised according to the stage reached in the contract by reference to the value of work completed using the percentage of completion method. An appropriate estimate of the proﬁt attributable to work completed is recognised once the outcome of the contract can be estimated reliably. The gross amount due from customers for contract work is shown as a receivable. The gross amount due comprises costs incurred plus recognised proﬁts less the sum of recognised losses and progress billings.Where the sum of recognised losses and progress billings exceeds costs incurred plus recognised proﬁts, the amount is shown as a liability. (i) Trade and ﬁnance lease receivables Trade and ﬁnance lease receivables are recognised initially at fair value. A provision for impairment is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. (j) Cash and cash equivalents Cash and cash equivalents comprises cash balances, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are deducted from cash and cash equivalents for the purpose of the statement of cash ﬂows. (k) Trade and other payables Trade and other payables are stated at cost. (l) Provisions A provision is recognised in the balance sheet when the Group has a constructive or legal obligation as a result of a past event and it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash ﬂows at a pre-tax rate that reﬂects current market assessments of the time value of money and, where appropriate, the risks speciﬁc to the liability. A provision for onerous contracts is recognised when the expected beneﬁts to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. Provision is made for dilapidations that will crystallise in the future where, on the basis of the present condition of the property, an obligation exists at the reporting date and can be reliably measured. The estimate is revised over the remaining period of the lease to reﬂect changes in the condition of the building or other changes in circumstances. The estimate of the obligation takes account of relevant external advice. (m) Borrowings Borrowings other than bank overdrafts are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in the income statement over the period of the borrowings, using the effective interest method. Where existing borrowings are exchanged for new borrowings and the terms of the existing and new borrowings are not substantially different (as deﬁned by IAS 39), the new borrowings are recognised initially at the carrying amount of the existing borrowings. The difference between the amount initially recognised and the redemption value of the new borrowings is recognised in the income statement over the period of the new borrowings, using the effective interest method. (n) Pension beneﬁts The Group accounts for pensions under IAS 19 ‘Employee Beneﬁts’. In respect of deﬁned beneﬁt pension schemes, obligations are measured at discounted present value while scheme assets are measured at their fair value except annuities, which are valued to match the liability or beneﬁt value. The operating and ﬁnancing costs of such plans are recognised separately in the income statement. Service costs are spread using the projected unit method. Financing costs are recognised in the periods in which they arise and are included in interest expense. Actuarial gains and losses arising from either experience differing from previous actuarial assumptions or changes to those assumptions are recognised immediately in the statement of recognised income and expense. Contributions to deﬁned contribution schemes are expensed as incurred. (o) Share capital Ordinary shares are classed as equity. External costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. The consideration paid, including any directly attributable incremental costs, by any Group entity to acquire the Company’s equity share capital (treasury shares), is deducted from equity until the shares are cancelled, reissued or disposed of. Where treasury shares are sold or reissued, the net consideration received is included in equity. (p) Share-based payments The cost of granting share options and other share-based remuneration to employees and directors is recognised through the income statement.These are equity-settled and therefore the cost is measured at the grant date.The Group has used the Black-Scholes option valuation model to establish the relevant costs.The resulting values are amortised through the income statement over the vesting period of the options and other grants.The charge is reversed if it appears probable that applicable performance criteria will not be met although the performance criteria are not market related. (q) Revenue Revenue comprises rental income, service charges and other recoveries from tenants of the Group’s investment and trading properties, property services income earned by its property outsourcing business, proceeds of sales of its trading properties and income arising on long-term contracts. Rental income includes the income from managed operations such as car parks, food courts, serviced ofﬁces and ﬂats. Service charges and other recoveries include income in relation to services charges and directly recoverable expenditure together with any chargeable management fees. Property services income Land Securities Annual Report 2006 106 Notes to the ﬁnancial statements continued 2. Signiﬁcant accounting policies continued represents unitary charges and the recovery of other direct property or contract expenditure reimbursable by customers.Where revenue is obtained from the rendering of services, it is recognised by reference to the stage of completion of the relevant transactions at the reporting date. The Group discloses its joint venture revenue on a gross basis as this is considered to be a more meaningful presentation. Rental income from investment property leased out under an operating lease is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the net consideration for the use of the property and are therefore also recognised on the same, straight-line basis. When property is let out under a ﬁnance lease, the Group recognises a receivable at an amount equal to the net investment in the lease at inception of the lease. Rentals received are accounted for as repayments of principal and ﬁnance income as appropriate. Minimum lease payments receivable on ﬁnance leases are apportioned between ﬁnance income and reduction of the outstanding receivable. Finance income is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining net investment in the ﬁnance lease. Contingent rents, being those lease payments that are not ﬁxed at the inception of a lease, for example turnover rents are recorded as income in the periods in which they are earned. Where revenue is obtained by the sale of assets, it is recognised when the signiﬁcant risks and returns have been transferred to the buyer. In the case of sales of properties, this is generally on unconditional exchange except where payment or completion is expected to occur signiﬁcantly after exchange. For conditional exchanges, sales are recognised as the conditions are satisﬁed. Sales of investment and other ﬁxed asset properties, which are not included in revenue, are recognised on the same basis. (r) Expenses Property and contract expenditure, including bid costs incurred prior to the exchange of a contract, is expensed as incurred with the exception of expenditure on long- term development contracts (see (h) above). Rental payments made under an operating lease are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the net consideration for the use of the property and also recognised on a straight-line basis. Minimum lease payments payable on ﬁnance leases and operating leases accounted for as ﬁnance leases under IAS 40 are apportioned between ﬁnance expense and reduction of the outstanding liability. Finance expense Land Securities Annual Report 2006 is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining liability. Contingent rents (as deﬁned in (q) above) are charged as expense in the periods in which they are incurred. (s) Exceptional items Items which are sufﬁciently material by either their size or nature to require separate disclosure are disclosed as exceptional items within the relevant consolidated income statement category. Items that management consider fall into this category are presented separately in the consolidated income statement in the column headed ‘Exceptional items’. Events that may give rise to exceptional items include gains or losses on the disposal of joint ventures or other investments, impairment of assets including goodwill arising as a result of recognising deferred tax on a business combination and ﬁnancial restructurings. (t) Impairment The carrying amounts of the Group’s non-ﬁnancial assets, other than investment property (see (f) above), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see below). An impairment loss is recognised in proﬁt or loss whenever the carrying amount of an asset exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped together at the lowest levels for which there are separately identiﬁable cash ﬂows. Where a derivative is designated as a hedge of the variability of a highly probable forecasted transaction, i.e. an interest payment, the element of the gain or loss on the derivative that is an effective hedge is recognised directly in equity.When the hedge of a forecasted transaction subsequently results in the recognition of a ﬁnancial asset or a ﬁnancial liability, the associated gains or losses that were recognised directly in equity are reclassiﬁed into proﬁt or loss in the same period or periods during which the asset acquired or liability assumed affects proﬁt or loss, i.e. when interest income or expense is recognised. The gain or loss on any ineffective element of any hedge is recognised in the income statement immediately. (v) Income tax Income tax on the proﬁt for the year comprises current and deferred tax. Current tax is the tax payable on the taxable income for the year and any adjustment in respect of previous years. Deferred tax is provided in full using the balance sheet liability method on temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. In particular, deferred tax is provided on the full difference between the original cost of investment properties and their carrying amounts at the reporting date without taking into account deductions and allowances which would only apply if the properties concerned were to be sold, except where such properties are classiﬁed as held for disposal. The recoverable amount of an asset is the greater of its net selling price and its value in use. The value in use is determined as the net present value of the future cash ﬂows expected to be derived from the asset, discounted using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount after the reversal does not exceed the amount that would have been determined, net of applicable depreciation, if no impairment loss had been recognised. No provision is made for temporary differences (i) arising on the initial recognition of assets or liabilities that affect neither accounting nor taxable proﬁt and (ii) relating to investments in subsidiaries to the extent that they will not reverse in the foreseeable future. (w) Leases A Group company is the lessee i) Operating lease – leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classiﬁed as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (u) Derivative ﬁnancial instruments (‘derivatives’) The Group uses interest rate swap derivatives to help manage its interest rate risk. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes. Derivatives are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in proﬁt or loss unless the derivatives qualify for hedge accounting, in which case recognition depends on the nature of the item being hedged. ii) Finance lease – leases of assets where the Group has substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and ﬁnance charges so as to achieve a constant rate on the ﬁnance balance outstanding. The corresponding rental obligations, net of ﬁnance charges, are included in current and non-current borrowings. The ﬁnance charges are charged to the income statement over the lease period so as to produce (e) Trade receivables The Group is required to judge when there is sufﬁcient objective evidence to require the impairment of individual trade receivables. It does this on the basis of the age of the relevant receivables and external evidence of the credit status of the debtor entity. (f) Exceptional items Exceptional items are deﬁned as those items which are sufﬁciently material by either their size or nature as to require separate disclosure. Deciding which items meet this deﬁnition requires the Group to exercise its judgement. (g) Investment property valuation The Group uses the valuation performed by its independent valuers as the fair value of its investment properties. The valuation is based upon assumptions including future rental income, anticipated maintenance costs and the appropriate discount rate. The valuers also make reference to market evidence of transaction prices for similar properties. (h) Unagreed rent reviews Where the rent review date has passed, and the revised annual rent has not yet been agreed, rent is accrued from the date of the rent review based upon an estimation of the revised annual rent. The estimate is derived from knowledge of market rents for comparable properties. 2. Signiﬁcant accounting policies continued a constant periodic rate of interest on the remaining balance of the liability for each period. The investment properties acquired under ﬁnance leases are subsequently carried at their fair value. A Group company is the lessor i) Operating lease – properties leased out to tenants under operating leases are included in investment properties in the balance sheet. ii) Finance lease – when assets are leased out under a ﬁnance lease, the present value of the minimum lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned ﬁnance income. Lease income is recognised over the term of the lease using the net investment method before tax, which reﬂects a constant periodic rate of return.Where only the buildings element of a property lease is classiﬁed as a ﬁnance lease, the land element is shown within operating leases. (x) Dividends Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s ﬁnancial statements in the period in which the dividends are approved by the Company’s shareholders. 3. Signiﬁcant judgements, key assumptions and estimates (a) Goodwill Goodwill arising from the difference between how deferred tax is calculated for accounting purposes and the value ascribed to it in negotiations has been judged not to be an asset and is accordingly impaired on completion of the relevant acquisition. (b) Distinction between operating properties and investment properties A property is classiﬁed as an operating property rather than an investment property where the degree of ancillary services supplied is judged to be signiﬁcant in the context of the arrangements between the landlord and tenant. (c) Finance lease calculations In apportioning rentals on ﬁnance lease properties, the Group is required to estimate the split of the fair values of the properties concerned between land and buildings. The inception of many of the Group’s leases took place many years ago so that reliable estimates are very difﬁcult to obtain. Accordingly, the Group has had to apply its judgement in estimating the split at inception of certain ﬁnance lease properties. (d) Trading properties Trading properties are carried at the lower of cost and net realisable value. The latter is assessed by the Group having regard to suitable external advice and knowledge of recent comparable transactions. Notes to the ﬁnancial statements continued 107 Land Securities Annual Report 2006 108 Notes to the ﬁnancial statements continued 4. Segmental information Group Income statements Rental income Service charge income Property services income Trading property sale proceeds Long-term development contract income Finance lease interest Revenue Rents payable Other direct property or contract expenditure Indirect property or contract expenditure Long-term development contract expenditure Bid costs Cost of sales of trading properties Depreciation London Portfolio £m Other Investment Portfolio £m Property Outsourcing £m 278.5 40.0 – 93.8 95.7 6.0 514.0 (4.1) 4.3 0.2 – 5.9 78.4 – 88.8 – – – 924.8 – – 2.5 Retail £m 255.9 38.3 – – – 4.4 298.6 (12.0) 2006 Total £m 538.7 78.5 924.8 99.7 174.1 12.9 London Portfolio £m Other Investment Portfolio £m Property Outsourcing £m 252.1 34.2 – 1.0 64.4 6.4 358.1 (3.8) 15.8 1.3 – 21.3 126.8 – 165.2 – – – 763.6 100.2 – – Retail £m 204.0 33.9 – – – 2.1 240.0 (9.7) 927.3 (183.9) 1,828.7 (200.0) 863.8 (183.6) 1,627.1 (197.1) 2005 Total £m 471.9 69.4 763.6 122.5 191.2 8.5 (59.7) (47.9) (0.9) (610.1) (718.6) (41.6) (46.1) (3.8) (446.5) (538.0) (32.7) (28.7) (4.8) (8.8) (75.0) (22.7) (22.0) (1.7) (8.1) (54.5) – – – (1.0) 193.2 (74.7) – (78.0) (4.1) 276.5 Proﬁt on disposal of ﬁxed asset properties 40.1 33.2 Net surplus on revaluation of investment properties Goodwill impairment Proﬁt on disposal of 636.9 (64.5) 935.5 – joint venture (Telereal) – – Segment result 805.7 1,245.2 Credit arising from change in pension scheme beneﬁts Unallocated expenses Exceptional costs Operating proﬁt Net ﬁnancing costs – ordinary – exceptional Share of the proﬁt of joint ventures (post-tax) Distribution received from joint venture (Telereal) Proﬁt before tax (77.5) – (4.2) (0.1) 1.3 0.2 5.2 – – 6.7 – (7.4) – (20.5) 96.6 1.0 1.9 – 293.0 392.5 (152.2) (7.4) (82.2) (25.7) 567.6 74.5 1,579.5 (64.5) 293.0 2,450.1 8.3 (15.0) – 2,443.4 (194.5) – 2,248.9 98.6 11.7 2,359.2 – – – (1.9) 164.1 14.1 397.4 (12.7) – 562.9 (53.2) – (0.8) (4.5) 227.7 29.8 412.1 – – 669.6 (126.4) – (15.1) (0.2) 18.0 37.6 18.4 – – 74.0 – (2.6) (96.3) (29.0) 97.7 (179.6) (2.6) (112.2) (35.6) 507.5 30.5 112.0 – – – 827.9 (12.7) – 128.2 1,434.7 – (15.1) (14.8) 1,404.8 (189.0) (49.8) 1,166.0 76.1 65.4 1,307.5 Included within rents payable is ﬁnance lease interest payable of £1.8m (2005: £2.0m) and £2.8m (2005: £2.4m) respectively for Retail and London Portfolio. The share of the proﬁt of joint ventures (post-tax) of £98.6m (2005: £76.1m) is attributable to Retail. The distribution received from the joint venture (Telereal) of £11.7m (2005: £65.4m) is attributable to Property Outsourcing. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 109 London Portfolio £m 4,418.3 – 4.3 108.9 – Other Investment Portfolio £m Property Outsourcing £m 143.5 – 0.5 – – – 546.3 48.3 14.8 34.3 2005 Total £m 8,240.1 546.3 57.9 163.4 34.3 4. Segmental information continued Group Balance sheets Investment properties Operating properties Other property, plant and equipment Net investment in ﬁnance leases Goodwill Investment in equity accounted joint ventures Trading properties and long-term development contracts Trade and other receivables Segment assets Unallocated assets Total assets Trade and other payables Non-current payables Segment liabilities Unallocated liabilities Total liabilities Other segment items Capital expenditure London Portfolio £m Other Investment Portfolio £m Property Outsourcing £m Retail £m 2006 Total £m Retail £m 5,514.6 – 5,856.5 – – 563.2 11,440.5 563.2 3,678.3 – 73.6 233.9 34.3 4.8 39.7 – 69.4 – 4.7 – – 104.3 9.7 229.3 – 41.2 7.3 73.8 – 768.5 – 158.7 6.5 107.1 – 150.5 207.5 6,522.9 6,328.1 55.1 53.0 34.3 19.8 1.1 202.7 929.2 (153.4) – (153.4) (135.0) – (135.0) (31.5) – (31.5) (235.6) (58.2) (293.8) 829.5 841.9 – 13.0 – 854.9 255.9 578.6 – 181.4 125.3 53.8 14,009.5 4,746.1 4,710.6 15.9 14,025.4 (555.5) (58.2) (613.7) (5,917.8) (6,531.5) (135.4) – (135.4) (143.3) – (143.3) 36.9 11.2 205.1 (19.6) – (19.6) 1.8 267.1 912.6 (256.9) (42.0) (298.9) 164.0 513.5 10,574.4 5.0 10,579.4 (555.2) (42.0) (597.2) (3,931.9) (4,529.1) 121.3 207.8 0.6 45.5 375.2 89.7 160.2 5.8 33.7 289.4 All the Group’s operations are in the UK and are organised into four main business segments against which the Group reports its primary segment information. These are Retail, London Portfolio, Other Investment Portfolio and Property Outsourcing. Company The Company’s business is to invest in its subsidiaries, and therefore it operates in a single segment. 5. Employee costs Group 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 Share-based payments Directors Aggregate emoluments excluding pensions Company contributions to pension schemes 2006 No. 499 1,258 85 1,842 2005 No. 453 1,218 63 1,734 2006 £m 44.9 52.0 1.5 98.4 74.3 13.6 8.2 2.3 98.4 4.2 0.8 5.0 2005 £m 38.7 48.2 1.1 88.0 67.2 8.0 11.6 1.2 88.0 3.7 0.4 4.1 With the exception of the directors, who are employed by Land Securities Group PLC, all employees are employed by subsidiaries of the Group. Five directors (2005: ﬁve) have retirement beneﬁts accruing under money purchase pension schemes. Retirement beneﬁts accrue to one director (2005: 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 Report on pages 90 to 96. Land Securities Annual Report 2006 110 Notes to the ﬁnancial statements continued 6. Net ﬁnance costs Interest expense Bond and debenture debt Bank borrowings Other interest payable Loans from joint ventures Fair value losses on interest rate swaps Amortisation of bond exchange de-recognition (note 24) Bond exchange de-recognition adjustment written off on redemption of bonds (note 24) Expected return on pension scheme assets Interest on pension scheme liabilities Net ﬁnancing income/(expense) on pension scheme B share dividends Interest capitalised in relation to properties under development Total interest and similar charges payable – ordinary Cost of purchase and redemption of bonds and debenture debt Total interest and similar charges payable – exceptional Interest income Short-term deposits Other interest receivable Interest receivable from joint ventures Total interest receivable Net ﬁnance costs Included within rents payable (note 4) is ﬁnance lease interest payable of £4.6m (2005: £4.4m). 7. Proﬁt before taxation The following items have been charged or (credited) in arriving at proﬁt before taxation: Employee costs (note 5) Depreciation of property, plant and equipment (note 13): Investment properties Operating properties Other property, plant and equipment Impairment of goodwill (note 15) Proﬁt on disposal of ﬁxed asset properties Proﬁt on disposal of joint venture (Telereal) Bad debts written off and provision for doubtful debts Services provided by the Group’s auditor During the year the Group obtained the following services from the Group’s auditor at costs as detailed below: Audit services Statutory audit (Company: 2006: £0.1m; 2005: £0.1m) Further assurance services Tax services Compliance services Advisory services Land Securities Annual Report 2006 2006 £m (143.1) (56.8) (1.3) – (2.2) (26.6) (1.5) 7.3 (7.2) 0.1 – (231.4) 29.6 (201.8) – – 1.0 1.7 4.6 7.3 Group 2005 £m (149.9) (55.5) (0.9) (0.3) (0.8) (11.2) – 6.4 (6.7) (0.3) (0.1) (219.0) 20.2 (198.8) (49.8) (49.8) 7.1 2.7 – 9.8 (194.5) (238.8) 2006 £m Company 2005 £m – – (5.4) – – – – – – – – (5.4) – (5.4) – – – 17.5 – 17.5 12.1 2006 £m 98.4 2.9 11.6 11.2 64.5 (74.5) (293.0) 13.1 0.8 0.5 0.2 0.3 1.8 – – (17.8) – – – – – – – (0.1) (17.9) – (17.9) – – 0.2 8.2 – 8.4 (9.5) 2005 £m 88.0 2.6 20.6 12.4 12.7 (112.0) – 5.3 0.6 0.4 0.2 – 1.2 Notes to the ﬁnancial statements continued 111 2006 £m (293.0) 64.5 – – 2005 £m – 12.7 14.8 49.8 8. Exceptional items Proﬁt on disposal of joint venture (Telereal) Goodwill impairment Debt restructuring – charged to costs – charged to interest On 30 September 2005 the Group sold its interest in the Telereal joint venture for £293.0m (net of costs), resulting in an exceptional proﬁt of £293.0m, as the book value of the joint venture was £nil. The tax charge arising on the disposal was £90.0m. Where goodwill arises as a result of recognising deferred tax on a business combination, the goodwill is written off immediately to the income statement. The goodwill impaired arose on the acquisition of Tops Estates PLC on 10 June 2005 and on the assets acquired from Slough Estates PLC on 15 December 2004. On 3 November 2004, the Group completed a debt exchange whereby a predominately secured funding strategy was established. The costs of this debt restructuring have been treated as exceptional. 9. Income tax expense Current tax Corporation tax charge/(credit) for the year Adjustment in respect of prior years Corporation tax in respect of property disposals Total current tax charge/(credit) Deferred tax Origination and reversal of timing differences Released in respect of property disposals On valuation surplus Total deferred tax charge Total income tax charge in the income statement The tax for the year is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Proﬁt on activities before taxation Proﬁt on activities multiplied by rate of corporation tax in the UK of 30% Effects of: Deferred tax released in respect of property disposals Corporation tax on disposal of ﬁxed assets Goodwill impairment Joint venture accounting adjustments Prior year corporation tax adjustments Prior year deferred tax adjustments Non-allowable expenses and non-taxable items Total income tax expense in the income statement (as above) 2006 £m 181.6 (14.7) 38.0 204.9 34.6 (30.1) 473.9 478.4 683.3 Group 2005 £m (66.8) (26.0) 46.7 (46.1) 149.4 (105.0) 248.3 292.7 246.6 2,359.2 707.8 1,307.5 392.2 (34.7) 23.0 19.4 (26.5) (14.7) 0.8 8.2 683.3 (105.0) 13.6 3.8 (37.7) (26.0) (3.4) 9.1 246.6 2006 £m 3.6 (2.8) – 0.8 – – – – 0.8 12.1 3.6 – – – – (2.8) – – 0.8 Company 2005 £m – – – – – – – – – 1,890.5 567.1 – – – – – – (567.1) – The calculation of the Group’s tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be ﬁnally deter- mined until a formal resolution has been reached with the relevant tax authorities. In such cases the Group has reserved on the basis that these provisions will be required. If all such issues are resolved in the Group’s favour, provisions of up to £225.0m could be released in the future. 10. Dividends Ordinary dividends paid Final dividend for the year ended 31 March 2005 (32.85p per share) Final dividend for the year ended 31 March 2004 (27.20p per share) Interim dividend for the year ended 31 March 2006 (18.15p per share) Interim dividend for the year ended 31 March 2005 (10.40p per share) 2006 £m 153.8 – 85.1 – 238.9 Group 2005 £m – 126.9 – 48.6 175.5 2006 £m 153.8 – 85.1 – 238.9 Company 2005 £m – 126.9 – 48.6 175.5 The Board has proposed a ﬁnal dividend of 28.55p per share (ﬁnal dividend for the year ended 31 March 2005: 32.85p) which will result in a further distribution of £134.0m. It will be paid on 24 July 2006 to shareholders who are on the register of members on 23 June 2006. Land Securities Annual Report 2006 112 Notes to the ﬁnancial statements continued 11. Earnings per share Earnings Proﬁt for the ﬁnancial year Revaluation surpluses net of deferred taxation – Group – joint ventures Fixed asset property disposals after current and deferred tax Goodwill impairment Deferred tax arising from capital allowances on investment properties Mark-to-market adjustment on interest rate swaps (net of deferred tax) Eliminate effect of bond exchange de-recognition (net of deferred tax) Deferred tax arising from capitalised interest on investment properties Exceptional costs of debt restructuring Credit arising from change in pension scheme beneﬁts (net of deferred tax) Proﬁt on disposal of joint venture (net of taxation) Adjustment to restate the Group’s share of Telereal’s earnings from a distribution to an equity basis Adjusted earnings Weighted average number of ordinary shares Weighted average number of ordinary shares Effect of own shares Weighted average number of ordinary shares after adjusting for own shares Effect of dilutive share options Weighted average number of ordinary shares adjusted for dilutive instruments Earnings per share Basic earnings per share Diluted earnings per share Adjusted earnings per share Adjusted diluted earnings per share 2006 £m 1,675.9 (1,105.6) (73.8) (66.5) 64.5 12.2 1.5 19.7 7.2 – (5.8) (203.0) 5.0 331.3 No. m 468.5 (0.3) 468.2 1.9 470.1 pence 357.95 356.50 70.76 70.47 2005 £m 1,060.9 (579.6) (48.7) (178.4) 12.7 9.3 1.9 7.8 5.2 45.4 – – (23.2) 313.3 No. m 466.9 (0.2) 466.7 1.8 468.5 pence 227.32 226.45 67.13 66.87 Management have chosen to disclose adjusted earnings per share in order to provide a better indication of the Group’s underlying business performance. Accordingly, it excludes the effect of all exceptional items, the one-off beneﬁt from the pension scheme changes and other items of a capital nature (excluding trading properties and long-term contract proﬁts) as indicated above. In addition, the deferred tax arising on capital allowances in respect of investment properties has been eliminated as experience has shown that these allowances are not in practice repayable. Deferred tax on capitalised interest is also added back as this is effectively a permanent timing difference. 12. Net assets per share Shareholders’ equity Net assets attributable to equity shareholders Deferred tax arising on revaluation surpluses – Group – joint ventures – acquired Cumulative mark-to-market adjustment on interest rate swaps (net of deferred tax) – Group – joint ventures Deferred tax arising from capital allowances on investment properties Deferred tax arising from capitalised interest on investment properties Reverse bond exchange de-recognition adjustment (net of deferred tax) Adjusted net assets attributable to equity shareholders 2006 £m 7,493.9 1,580.9 75.5 83.3 5.4 3.2 116.8 28.2 (375.3) 9,011.9 2005 £m 6,050.3 1,117.9 43.8 19.0 2.3 1.3 112.7 32.3 (395.0) 6,984.6 Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 113 2006 No. m 469.3 2.1 471.4 pence 1597 1590 1920 1912 2005 No. m 467.8 1.7 469.5 pence 1293 1289 1493 1488 12. Net assets per share continued 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 Adjusted net assets per share excludes the deferred tax arising on revaluation surpluses, mark-to-market adjustments on ﬁnancial instruments used for hedging purposes and the bond exchange de-recognition adjustment as management consider that this better represents the expected future cash ﬂows of the Group. In addition, the deferred tax arising on capital allowances in respect of investment properties is excluded as experience has shown that these allowances do not in practice crystallise. Deferred tax on capitalised interest is also added back as this is effectively a permanent timing difference. The adjusted net assets per share does not take into account management’s estimate of the tax on property disposals as referred to in note 26. 13. Non-current assets Net book value at 1 April 2004 Properties transferred from portfolio management into the development Property investment Investment properties Property Outsourcing Portfolio Development programme £m management £m Operating and investment properties £m Total £m Other Other property, plant and equipment £m Total £m 6,763.1 731.1 7,494.2 769.2 51.0 8,314.4 programme during the year (at 1 April 2004 valuation) (151.0) 151.0 – – – – Developments completed, let and transferred from the development programme into portfolio management during the year Property acquisitions Acquisitions through business combinations Capital expenditure Transfer from ﬁnance leases Capitalised interest Disposals Transfer to trading properties Surrender premiums received Properties contributed to the Metro Shopping Fund LP and the Bristol Alliance Depreciation Surplus on revaluation Net book value at 31 March 2005 Properties transferred from portfolio management into the development 485.4 311.9 197.0 40.6 29.1 – (558.6) (30.0) (20.7) (175.9) (2.6) 6,888.3 596.2 7,484.5 (485.4) – – 205.4 – 17.5 (95.7) – – – – 523.9 231.7 755.6 – 311.9 197.0 246.0 29.1 17.5 (654.3) (30.0) (20.7) (175.9) (2.6) 7,412.2 827.9 8,240.1 – 103.6 – 18.9 – – (324.8) – – – (20.6) 546.3 – 546.3 – – – 24.5 – – (5.2) – – – (12.4) 57.9 – 57.9 – 415.5 197.0 289.4 29.1 17.5 (984.3) (30.0) (20.7) (175.9) (35.6) 8,016.4 827.9 8,844.3 programme during the year (at 1 April 2005 valuation) (102.4) 102.4 – – – – Developments completed, let and transferred from the development programme into portfolio management during the year Property acquisitions Acquisitions through business combinations Capital expenditure Capitalised interest Disposals Transfer to trading properties Surrender premiums received Depreciation Surplus on revaluation Net book value at 31 March 2006 271.6 1,414.1 592.6 78.8 – (641.8) (84.7) (14.0) (2.9) 8,995.8 1,215.4 (271.6) 24.7 – 239.3 24.5 (7.8) – – – 867.1 362.2 – 1,438.8 592.6 318.1 24.5 (649.6) (84.7) (14.0) (2.9) 9,862.9 1,577.6 10,211.2 1,229.3 11,440.5 – – – 29.7 – (3.1) – – (11.6) 561.3 1.9 563.2 – – – 27.4 – (0.5) – – (11.2) 73.6 – 73.6 – 1,438.8 592.6 375.2 24.5 (653.2) (84.7) (14.0) (25.7) 10,497.8 1,579.5 12,077.3 Land Securities Annual Report 2006 114 Notes to the ﬁnancial statements continued 13. Non-current assets continued The following table reconciles the net book value of the investment properties to the market value. The components of the reconciliation are included within their relevant balance sheet headings. Net book value at 31 March 2005 Plus: amount included in prepayments in respect of lease incentives Less: head leases capitalised (note 27) Plus: properties treated as ﬁnance leases Market value at 31 March 2005 – Group – plus: share of joint ventures (note 17) Market value at 31 March 2005 – Group and share of joint ventures Net book value at 31 March 2006 Plus: amount included in prepayments in respect of lease incentives Less: head leases capitalised (note 27) Plus: properties treated as ﬁnance leases Market value at 31 March 2006 – Group Market value at 31 March 2006 – Group and share of joint ventures – plus: share of joint ventures (note 17) Investment properties Portfolio Development programme £m management £m 7,484.5 59.1 (58.2) 138.9 7,624.3 755.6 3.7 (11.7) – 747.6 10,211.2 1,229.3 76.8 (66.1) 171.7 4.6 (8.5) – 10,393.6 1,225.4 Total £m 8,240.1 62.8 (69.9) 138.9 8,371.9 993.9 9,365.8 11,440.5 81.4 (74.6) 171.7 11,619.0 1,273.9 12,892.9 Included in investment properties are leasehold properties with a net book value of £1,419.8m (2005: £1,283.2m). In accordance with IFRS1 ‘First time adoption of International Reporting Standards’ and IAS 17 ‘Leases’, the Group has reviewed the classiﬁcation of all leases at the opening balance sheet date of 1 April 2004. In reviewing leases of land and buildings in accordance with IAS 17 the land and buildings elements of the lease need to be considered separately. On this basis, leases on 43 properties entered into between 1923 and 2003 were reclassiﬁed as ﬁnance leases in these accounts.This resulted in an increase in ﬁxed assets of £77.2m and a ﬁnance lease creditor of the same amount at ﬁrst time adoption on 1 April 2004.At 31 March 2006 leases on 34 properties entered into between 1936 and 2005 were classiﬁed as ﬁnance leases.The corresponding increase in ﬁxed assets and ﬁnance lease creditor was £74.6m (2005: £69.6m). Operating lease expense has reduced by £5.8m (2005: £5.4m). The fair value of the Group’s investment properties at 31 March 2006 has been arrived at on the basis of a valuation carried out at that date by Knight Frank LLP, independent valuers. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. Included within the property outsourcing operating and investment properties are investment properties with a market value of £27.1m (2005: £24.4m). Fixed asset properties include capitalised interest of £115.8m (2005: £120.9m). The average rate of capitalisation is 5.5% (2005: 6.8%). The historical cost of investment properties is £6,265.5m (2005: £4,594.7m). The current value of investment properties in respect of proposed developments is £383.8m (2005: £189.2m). Developments are transferred out of the development programme when physically complete and 95% let. Schemes completed during the year were Bexhill Retail Park; Whitefriars, Canterbury; Eastbourne Terrace, W2; and Summerland Gate, Exeter. The property rental income earned by the Group from its investment properties amounted to £537.2m (2005: £471.2m). Capital commitments Development contracts 14. Net investment in ﬁnance leases Non-current Finance leases – gross receivables Unearned ﬁnance income Unguaranteed residual value Current Finance leases – gross receivables Unearned ﬁnance income Total net investment in ﬁnance leases Land Securities Annual Report 2006 2006 £m 689.8 2005 £m 522.5 2006 £m 595.6 (391.1) 29.4 233.9 14.8 (10.6) 4.2 238.1 2005 £m 372.1 (241.9) 33.2 163.4 11.2 (8.7) 2.5 165.9 Notes to the ﬁnancial statements continued 115 14. Net investment in ﬁnance leases continued Gross receivables from ﬁnance leases: Not later than one year Later than one year but not more than ﬁve More than ﬁve years Unearned future ﬁnance income Unguaranteed residual value Net investment in ﬁnance leases 2006 £m 14.8 72.5 523.1 610.4 (401.7) 29.4 238.1 The Group has leased out a number of investment properties under ﬁnance leases ranging between 15 and 100 years in duration. These are accounted for as ﬁnance lease receivables rather than investment properties. The fair value of the Group’s ﬁnance lease receivables approximates to the carrying amount. 15. Goodwill At beginning of year Arising on acquisitions during the year (note 32) Impaired during the year At end of year Represented by: Gross goodwill recognised Total accumulated impairment losses 2006 £m 34.3 64.5 (64.5) 34.3 119.2 (84.9) 34.3 2005 £m 11.2 81.8 290.3 383.3 (250.6) 33.2 165.9 2005 £m 34.3 12.7 (12.7) 34.3 54.7 (20.4) 34.3 The goodwill carried in the Group balance sheet relates entirely to the Group’s property outsourcing business, Land Securities Trillium, which is a cash-generating unit as deﬁned in IAS 36 ‘Impairment of Assets’. This goodwill is tested annually for impairment or more frequently if there are indications that the goodwill might be impaired. Impairment is tested by comparing the carrying amount of the business’ assets and liabilities with its recoverable amount, being its value in use. The latter is calculated by reference to the cash ﬂow projections prepared annually by the business for its major contracts and covering the entire term of the contracts concerned but without assuming any renewals. The main assumptions underlying the forecasts are the relative inﬂation rates applying to costs and revenues and the amount of expenditure required for the business to fulﬁl its service level commitments. The cash ﬂows are discounted at a rate reﬂecting market assessments of the time value of money and the risks speciﬁc to the business. The discount rate used for the 2006 test was 8.5%. During the year, the Group acquired 100% of Tops Estates PLC. The fair value exercise gave rise to goodwill of £64.5m. Similarly, during the prior year the Group acquired a retail property portfolio from Slough Estates plc. The fair value exercise gave rise to goodwill of £12.7m. The goodwill arises primarily from the difference between how deferred tax is calculated for accounting purposes and the value ascribed to it in negotiations. The former is based on the difference between the values of the assets and liabilities concerned for accounts purposes and those applying for taxation. The latter is based on tax payments likely to be made. In the Group’s opinion, the carrying amount of this goodwill cannot be justiﬁed by reference to future cash ﬂows and it has accordingly been impaired. 16. Investment in Group undertakings Company At beginning of year Additions At end of year 2006 £m 5,037.1 – 5,037.1 2005 £m 4,092.7 944.4 5,037.1 Certain subsidiaries and joint ventures have non-coterminous year ends. In these circumstances management accounts prepared at 31 March 2006 are used for the purposes of the Group consolidation. The directors consider that to give full particulars of all subsidiary undertakings would lead to a statement of excessive length. The principal Group undertakings, all of which are wholly owned, either directly by the Company or through a fellow subsidiary undertaking, and its joint ventures, which are 50% owned (with the exception of the Bullring Limited Partnership which is 33% owned), are: Wholly owned Group undertakings Group operations Land Securities Properties Limited Property Outsourcing Land Securities Trillium Limited Investment property business Land Securities Intermediate Limited Land Securities Property Holdings Limited Ravenseft Properties Limited The City of London Real Property Company Limited Ravenside Investments Limited Joint ventures Scottish Retail Property Limited Partnership Metro Shopping Fund LP Buchanan Galleries Limited Partnership Bullring Limited Partnership All principal Group undertakings are incorporated in England and Wales. A full list of subsidiary undertakings at 31 March 2006 will be annexed to the Company’s next annual return. Land Securities Annual Report 2006 116 Notes to the ﬁnancial statements continued 17. Investment in joint ventures Year ended 31/03/06 and at 31/03/06 Summary ﬁnancial information of Group’s share of joint ventures Scottish Retail Property Limited Partnership £m Metro Shopping Fund LP £m Buchanan Galleries Limited Partnership £m Martineau Galleries Limited Partnership £m Bullring Limited Partnership £m Parc Tawe £m Bristol Alliance £m Other* £m Telereal £m Income statement Rental income Service charges income Property services income Trading property sale proceeds Revenue Rents payable Other direct property expenditure Indirect property expenditure Cost of sales of trading properties Depreciation Proﬁt on disposal of ﬁxed asset properties Net surplus/(deﬁcit) on revaluation of investment properties Operating proﬁt Net ﬁnance costs Proﬁt before tax Income tax (expense)/credit Proﬁt after tax Adjustment due to net liabilities Share of proﬁts of joint ventures after tax Distribution received from Telereal 20.8 4.8 – – 25.6 – (8.8) (1.0) – – 15.8 – 20.7 36.5 (10.8) 25.7 (6.5) 19.2 – 11.8 2.3 – – 14.1 – (3.2) (0.6) – – 10.3 – 23.2 33.5 (9.4) 24.1 (7.8) 16.3 – 9.1 1.5 – – 10.6 – (2.5) (0.1) – – 8.0 – 14.4 22.4 (4.3) 18.1 (4.3) 13.8 – 19.2 16.3 13.8 Balance sheet Investment properties** Operating properties Current assets Current liabilities Non-current liabilities Deferred tax Adjustment due to net liabilities Net assets Capital commitments Market value of investment 345.3 – 12.0 357.3 (17.7) (221.2) (13.2) (252.1) – 105.2 – 275.9 – 7.8 283.7 (8.5) (184.0) (10.2) (202.7) – 81.0 – 173.9 – 6.6 180.5 (4.2) – (3.3) (7.5) – 173.0 – properties** 339.2 274.1 177.5 Net investment At 1 April 2005 Properties contributed Cash contributed Cost of acquisition Share of post-tax results Adjustment to restate the Group’s 293.6 – – – 19.2 share of Telereal’s earnings from an equity to a distribution basis Distributions Fair value movement on cash ﬂow hedges taken to equity Loan advances Loan repayments At 31 March 2006 – (185.9) (1.8) – (19.9) 105.2 39.6 – 24.7 – 16.3 – (1.5) (0.1) 2.0 – 81.0 163.5 – – – 13.8 – (4.3) – – – 0.5 – – – 0.5 – (0.1) – – – 0.4 – 0.1 0.5 – 0.5 – 0.5 – 0.5 21.4 – 3.9 25.3 (0.4) – – (0.4) – 24.9 – 21.4 – – 24.8 – 0.5 – (0.4) – – – 1.3 0.4 – – 1.7 (0.1) (1.2) – – – 0.4 – (0.3) 0.1 0.1 0.2 0.1 0.3 – 0.3 22.8 – 2.0 24.8 (0.4) – (1.3) (1.7) – 23.1 – 14.6 2.1 – – 16.7 – (4.0) (0.3) – – 12.4 (0.2) 31.3 43.5 0.1 43.6 (9.7) 33.9 – 3.5 – – – 3.5 – (0.5) (0.3) – – 2.7 – 15.7 18.4 0.3 18.7 (4.7) 14.0 – 33.9 14.0 297.2 – 10.6 307.8 (4.9) – (43.6) (48.5) – 259.3 – 120.7 – 16.3 137.0 (9.2) (2.4) (6.9) (18.5) – 118.5 153.2 23.8 303.0 123.7 23.5 – – – 0.3 – (1.5) – 0.8 – 23.1 238.2 – – – 33.9 – – – – (12.8) 259.3 82.0 – – – 14.0 – – – 27.5 (5.0) 118.5 0.5 – – – 0.5 – – – – – 0.5 0.1 0.4 1.0 (0.3) 0.7 (0.1) 0.6 – 0.6 11.2 – 39.0 50.2 (5.6) – (0.1) (5.7) – 44.5 – 11.2 14.5 6.4 0.8 26.5 0.6 – (1.3) – – (3.0) 44.5 – – 80.8 5.5 86.3 (17.1) – (7.6) (1.3) (7.1) 53.2 0.9 – 54.1 (32.9) 21.2 (4.5) 16.7 (16.7) – 11.7 – – – – – – – – – – – – – – – – 16.7 (5.0) (11.7) – – – – Total £m 62.1 11.1 80.8 5.5 159.5 (17.2) (20.3) (9.9) (1.3) (7.1) 103.7 0.8 105.5 210.0 (57.2) 152.8 (37.5) 115.3 (16.7) 98.6 11.7 1,268.4 – 98.2 1,366.6 (50.9) (407.6) (78.6) (537.1) – 829.5 153.2 1,273.9 854.9 6.4 50.3 26.5 115.3 (5.0) (206.6) (1.9) 30.3 (40.7) 829.5 173.0 24.9 **Other principally includes the Martineau Limited Partnership, the Ebbsﬂeet Limited Partnership, the A2 Limited Partnership and the Mill Group. **The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as ﬁnance leases. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 117 17. Investment in joint ventures continued Year ended 31/03/05 and at 31/03/05 Summary ﬁnancial information of Group’s share of joint ventures Scottish Retail Property Limited Partnership £m Metro Shopping Fund LP £m Buchanan Galleries Limited Partnership £m Martineau Galleries Limited Partnership £m Bullring Limited Partnership £m Parc Tawe £m Bristol Alliance £m Other* £m Telereal £m Income statement Rental income Service charges income Property services income Trading property sale proceeds Revenue Rents payable Other direct property expenditure Indirect property expenditure Cost of sales of trading properties Depreciation Proﬁt on disposal of ﬁxed asset properties Net surplus/(deﬁcit) on revaluation of investment properties Operating proﬁt/(loss) Net ﬁnance costs Proﬁt/(loss) before tax Income tax (expense)/credit Proﬁt/(loss) after tax Adjustment due to net liabilities Share of proﬁts/(losses) of joint ventures after tax Distribution received from Telereal 16.3 5.6 – – 21.9 (0.2) (6.4) (1.1) – – 14.2 – 19.7 33.9 (0.3) 33.6 (10.1) 23.5 – 23.5 Balance sheet Investment properties** Operating properties Current assets Current liabilities Non-current liabilities Deferred tax Adjustment due to net liabilities Net assets Capital commitments Market value of investment 311.1 – 10.9 322.0 (12.2) (8.4) (7.8) (28.4) – 293.6 0.2 7.2 1.3 – – 8.5 – (1.7) (0.6) – – 6.2 – 12.8 19.0 (6.7) 12.3 (3.6) 8.7 – 8.7 151.7 – 4.4 156.1 (4.8) (108.4) (3.3) (116.5) – 39.6 – 2.4 0.6 – – 3.0 – (0.7) – – – 2.3 – (3.2) (0.9) – (0.9) 0.3 (0.6) – (0.6) 159.3 – 7.7 167.0 (4.5) – 1.0 (3.5) – 163.5 – properties** 302.7 149.8 162.8 Net investment At 1 April 2004 Properties contributed Cash contributed Cost of acquisition Share of post-tax results Adjustment to restate the Group’s 250.2 – 31.7 – 23.5 share of Telereal’s earnings from an equity to a distribution basis Distributions Loan advances Loan repayments – – – (11.8) At 31 March 2005 293.6 – 92.1 87.1 – 8.7 – (146.3) 86.2 (88.2) 39.6 – – – 166.5 (0.6) – (2.4) – – 163.5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1.6 0.6 – – 2.2 (0.1) (0.9) – – – 1.2 – 0.9 2.1 – 2.1 (0.3) 1.8 – 1.8 22.6 – 2.5 25.1 (0.2) – (1.4) (1.6) – 23.5 – 12.8 5.5 – – 18.3 – (6.1) (0.2) – – 12.0 – 31.9 43.9 0.1 44.0 (9.6) 34.4 – 34.4 264.8 – 11.0 275.8 (3.7) – (33.9) (37.6) – 238.2 3.4 23.7 271.0 21.7 – – – 1.8 – – – – 23.5 209.9 – – – 34.4 – – 5.8 (11.9) 238.2 3.1 – – – 3.1 – (0.1) – – – 3.0 – 7.4 10.4 – 10.4 (2.2) 8.2 – 8.2 81.2 – 8.0 89.2 (5.0) – (2.2) (7.2) – 82.0 0.7 83.9 – 85.6 – – 8.2 – (1.7) 14.9 (25.0) 82.0 0.9 0.2 – – 1.1 (0.3) – – – – 0.8 (1.8) – (1.0) 0.1 (0.9) 1.0 0.1 – 0.1 13.0 – 2.7 15.7 (1.2) – – (1.2) – 14.5 – – 44.4 – – – 0.1 – (30.0) – – 14.5 Total £m 44.3 13.8 165.3 25.7 249.1 (36.5) (15.9) (17.6) (8.1) (13.8) 157.2 – – 165.3 25.7 191.0 (35.9) – (15.7) (8.1) (13.8) 117.5 12.3 10.5 – 129.8 (66.4) 63.4 (21.2) 42.2 (42.2) – 65.4 – 1,015.4 50.5 1,065.9 (50.6) (1,086.4) – (1,137.0) 71.1 – – – – – – – 42.2 23.2 (65.4) – – – 69.5 237.2 (73.2) 164.0 (45.7) 118.3 (42.2) 76.1 65.4 1,003.7 1,015.4 97.7 2,116.8 (82.2) (1,203.2) (47.6) (1,333.0) 71.1 854.9 4.3 993.9 526.2 177.7 118.8 166.5 118.3 23.2 (245.8) 106.9 (136.9) 854.9 **Other includes the Martineau Limited Partnership and the Ebbsﬂeet Limited Partnership. **The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as ﬁnance leases. Land Securities Annual Report 2006 118 Notes to the ﬁnancial statements continued 18. Trading properties and long-term development contracts Trading properties Amount recoverable under long-term development contracts less payments on account The amounts for contracts in progress at the balance sheet date are as follows: Contract revenue recognised as revenue in the year Contract costs incurred and recognised proﬁts (less recognised losses) to date Advances received Plus: gross amount due to customers for contract work (included in accruals and deferred income) Gross amount due from customers for contract work 19. Trade and other receivables Trade receivables – property investment – property outsourcing Property sales receivables Other receivables Prepayments and accrued income Finance leases receivable within one year (note 14) Loans to Group undertakings Trade receivables are net of provisions for doubtful debts of £12.6m (2005: £6.5m). 20. Cash and cash equivalents Cash at bank and in hand Short-term deposits 2006 £m 27.1 107.4 145.2 61.4 233.6 4.2 – 578.9 2006 £m 5.1 10.5 15.6 Group 2005 £m 18.4 186.8 77.0 49.2 179.6 2.5 – 513.5 Group 2005 £m 5.0 – 5.0 The effective interest rate on short-term deposits was 4.6% (2005: 4.2%) and the deposits have an average maturity of 2 days (2005: 6 days). 21. Short-term borrowings and overdrafts Borrowings falling due within one year (note 24) Overdrafts Bond exchange de-recognition adjustment falling due within one year (note 24) Amounts payable under ﬁnance leases falling due within one year (notes 24 and 27) Where the Group operates a notional cash pooling arrangement the cash and overdraft balances are netted off. 2006 £m 59.2 – (15.6) 3.1 46.7 Group 2005 £m 76.3 – (26.5) 1.0 50.8 2006 £m 163.5 92.4 255.9 174.1 414.0 (339.0) 75.0 17.4 92.4 2006 £m – – – – – – 142.7 142.7 2006 £m 5.0 – 5.0 2006 £m – 34.0 – – 34.0 2005 £m 108.9 55.1 164.0 191.2 262.9 (214.8) 48.1 7.0 55.1 Company 2005 £m – – – – – – 325.5 325.5 Company 2005 £m 0.3 – 0.3 Company 2005 £m – – – – – Land Securities Annual Report 2006 22. Trade and other payables Trade payables Capital payables Other payables Accruals and deferred income Notes to the ﬁnancial statements continued 119 2006 £m 42.9 85.2 28.2 428.7 585.0 2005 £m 42.7 82.5 34.7 417.3 577.2 Capital payables 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. 23. Provisions At 1 April 2004 Charged to income statement for year Utilised in year At 31 March 2005 Charged to income statement for year Utilised in year At 31 March 2006 24. Borrowings Unsecured Amounts payable under ﬁnance leases (note 27) Acquisition loan notes 2015 Money market borrowings Secured 5.016 per cent Notes due 2007 4.625 per cent Notes due 2013 5.292 per cent Notes due 2015 4.875 per cent Notes due 2019 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 Bank facility due 2010 Syndicated bank debt DWP term loan Bond exchange de-recognition adjustment Fair value of interest rate swaps – qualifying hedges – non-qualifying hedges Total borrowings Less: borrowings falling due within one year (note 21) Plus: bond exchange de-recognition falling due within one year (note 21) Less: amounts payable under ﬁnance leases falling due within one year (notes 21 and 27) Falling due after one year Dilapidations £m 11.7 12.0 (1.0) 22.7 1.9 (1.5) 23.1 Barclays surplus leases £m – – – – 25.0 (5.2) 19.8 Nominal value 2005 £m 2006 £m Unamortised discount and issue costs 2005 £m 2006 £m 74.6 122.8 43.6 241.0 181.7 300.0 391.5 400.0 255.3 210.7 611.3 317.9 322.9 15.5 750.0 260.0 4,016.8 4,257.8 (527.6) 4.3 3.4 3,737.9 (62.3) 14.8 (3.1) 3,687.3 69.9 – 73.0 142.9 181.7 – 393.3 – 257.3 210.7 613.9 318.0 323.4 – 320.0 268.1 2,886.4 3,029.3 (554.9) 2.1 1.2 2,477.7 (79.0) 25.7 (1.0) 2,423.4 – – – – (0.1) (0.5) (0.9) (4.6) (1.0) (1.0) (3.1) (1.7) (2.0) (0.1) (1.6) (11.2) (27.8) (27.8) (8.6) – – (36.4) 3.1 0.8 – (32.5) – – – – (0.1) – (0.9) – (1.0) (1.1) (3.2) (1.9) (2.1) – (2.0) (12.9) (25.2) (25.2) (9.4) – – (34.6) 2.7 0.8 – (31.1) Other £m 7.9 14.7 (3.3) 19.3 8.9 (12.9) 15.3 2006 £m 74.6 122.8 43.6 241.0 181.6 299.5 390.6 395.4 254.3 209.7 608.2 316.2 320.9 15.4 748.4 248.8 3,989.0 4,230.0 (536.2) 4.3 3.4 3,701.5 (59.2) 15.6 (3.1) 3,654.8 Total £m 19.6 26.7 (4.3) 42.0 35.8 (19.6) 58.2 Book value 2005 £m 69.9 – 73.0 142.9 181.6 – 392.4 – 256.3 209.6 610.7 316.1 321.3 – 318.0 255.2 2,861.2 3,004.1 (564.3) 2.1 1.2 2,443.1 (76.3) 26.5 (1.0) 2,392.3 Land Securities Annual Report 2006 120 Notes to the ﬁnancial statements continued 24. Borrowings continued All borrowings are denominated in Sterling. On 3 November 2004 a debt reﬁnancing was completed resulting in the Group exchanging all of its outstanding bond and debenture debt for new Notes. The new Notes do not meet the IAS 39 requirement to be substantially different from the debt that it replaced. Consequently the book value of the new Notes is reduced to the book value of the original debt (‘the bond exchange de-recognition adjustment’). The adjustment will be amortised to zero over the life of the new Notes. 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 investors security over a pool of investment properties valued at £9.4bn at 31 March 2006 (2005: £7.4bn). The secured debt structure has a tiered covenant regime which gives the Group substantial operational ﬂexibility when the loan to value and interest rate cover in the Security Group are 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. The acquisition loan notes were issued by Retail Property Holdings Trust Limited, a subsidiary of the Group, as partial consideration for the purchase of Tops Estates PLC and the LxB portfolio. The notes are unsecured, however, they have the beneﬁt of a commercial bank guarantee. Interest is calculated with reference to six month LIBOR. The DWP term loan is a syndicated term loan due to expire in December 2017 and is secured on the freehold and long leasehold properties acquired from the Department of Work and Pensions. The carrying amount of the properties concerned was £388.1m at 31 March 2006 (2005: £389.4m). The Group had interest rate swaps outstanding with a notional principal of £615.0m (2005: £250.0m) which do not qualify for hedge accounting and which terminate over the period 2007 to 2011. The contracts have ﬁxed interest payments at an average rate of 4.9% and have ﬂoating interest receipts at LIBOR. In addition, there were interest rate swaps outstanding with a notional principal of £243.2m (2005: £245.9m) which qualify for hedge accounting and which terminate over the period 2009 to 2017. The contracts have ﬁxed interest payments at an average rate of 5.1% and have ﬂoating interest receipts at LIBOR. The fair value of interest rate swaps is based on the market price of comparable instruments at the balance sheet date. The fair values of short-term deposits, loans and overdrafts are assumed to approximate to their book values, as are the values of longer-term, ﬂoating rate bank loans. The Group’s Notes are listed on the Irish Stock Exchange and their fair values are based on their respective market prices. The maturity proﬁles of the Group’s borrowings and the expiry periods of its undrawn committed borrowing facilities are: One year or less, or on demand More than one year but no more than two years More than two years but no more than ﬁve years More than ﬁve years The fair value of the Group’s borrowings are: Book value Fair value Excess of fair value over book value 2006 £m Borrowings 2005 £m Undrawn committed facilities 2005 £m 2006 £m 46.7 185.7 780.8 2,688.3 3,701.5 50.8 – 505.9 1,886.4 2,443.1 – – 1,252.0 – 1,252.0 – – 1,680.0 – 1,680.0 2006 £m 2005 £m 3,701.5 4,426.0 (724.5) 2,443.1 3,074.1 (631.0) Of the excess of fair value over book value £536.2m (2005: £564.3m) is the bond exchange de-recognition adjustment. Financial risk management Financial risk factors The Group’s operations and debt ﬁnancing expose it to a variety of ﬁnancial risks that include the effects of changes in debt market prices, credit risks, liquidity and interest rates. Interest rate risk The Group uses interest rate swaps and similar instruments (forward rate agreements, forward starting swaps, etc) to manage its interest rate exposure.With property and interest rate cycles typically of four to seven years duration, the Group’s target is to have a minimum of 80% of anticipated debt at ﬁxed rates of interest and 20% ﬂoating over this timeframe. Due to a combination of factors, principally the high level of certainty required under IAS 39 ‘Financial Instruments: Recognition and Measurement’, hedging instruments used in this context do not qualify for hedge accounting. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 121 Credit risk The Group’s principal ﬁnancial assets are bank balances and cash, trade and other receivables, ﬁnance lease receivables and short-term investments. The Group’s credit risk is primarily attributable to its trade and ﬁnance lease receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. The credit risk on liquid funds and derivative ﬁnancial instruments is limited due to the Group’s policy of monitoring counterparty exposures. The Group has no signiﬁcant concentration of credit risk, with exposure spread over a large number of counterparties. Liquidity risk The Group actively maintains a mixture of long-term and short-term committed facilities that are designed to ensure that the Group has sufﬁcient available funds for operations and planned future investments. Accounting for derivative ﬁnancial instruments and hedging activities Derivatives are initially accounted for and measured at fair value on the date a derivative contract is entered into and subsequently measured at fair value. The gain or loss on remeasurement is taken to the income statement except where the derivative is a designated cash ﬂow hedging instrument. In order for a derivative to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument which shows that the hedge will be effective on an ongoing basis. The effectiveness testing is re-performed at each year end to ensure that the hedge remains highly effective. Gains or losses on cash ﬂow hedges that are regarded as highly effective are recognised in equity. Where the forecasted transaction results in a ﬁnancial asset or liability only, gains or losses previously recognised in equity are reclassiﬁed to proﬁt or loss in the same period as the asset or liability affects proﬁt or loss. Where the forecasted transaction results in a non-ﬁnancial asset or liability, gains or losses previously recognised in equity are included in the cost of the related asset or liability. If the forecasted transaction or commitment results in future income or expenditure, gains or losses deferred in equity are transferred to the income statement in the same period as the underlying income or expenditure. Ineffective portions of the gain or loss on the hedging instrument are recognised in proﬁt or loss as they arise. For the portion of hedges deemed ineffective or transactions that do not qualify for hedge accounting, any change in assets or liabilities is recognised immediately in the income statement. Where a hedge no longer meets the effectiveness criteria, any gains or losses deferred in equity are only transferred to the income statement when the forecasted or committed transaction is recognised in the income statement. However, where cash ﬂow hedge accounting has been applied for a forecasted or committed transaction that is no longer expected to occur, then the cumulative gain or loss recorded in equity is transferred to the income statement. When a hedging instrument expires or is sold, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecasted hedged transaction itself is ultimately recognised in the income statement. 25. Pension beneﬁts 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 is a wholly funded scheme, and 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. 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. Pension costs for deﬁned contribution schemes are as follows: Deﬁned contribution schemes 2006 £m 1.7 2005 £m 0.9 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. Land Securities Annual Report 2006 122 Notes to the ﬁnancial statements continued 25. Pension beneﬁts continued A full actuarial valuation of the Land Securities Scheme was undertaken on 1 July 2005 by the independent actuaries, Hymans Robertson Consultants & Actuaries. This valuation, and the latest formal valuation of the Trillium Plan, were updated to 31 March 2006. 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 Expected return on plan assets 2006 % 3.25# 3.00 4.90 3.00 5.90 2005 % 4.25* 3.00 5.40 3.00 5.90 #plus an allowance of 1.25% per annum for promotional salary increases in respect of employee members of the Trillium Plan * plus an allowance of 1% per annum for promotional salary increases in respect of employee members of the Land Securities Scheme The expected return on plan assets is based on expectations for bonds and equities. At the year end, the expected return on bonds is based on market yields of long dated bonds at that date. The estimated expected return on equities includes an additional equity risk premium. The mortality assumptions used in this valuation were: Life expectancy at age 60 for current pensioners – Men – Women Life expectancy at age 60 for future pensioners (current age 40) – Men – Women 2006 years 26.6 29.5 27.8 30.6 2005 years 23.2 26.2 26.5 29.4 The fair 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 Fair value of schemes assets Present value of schemes liabilities Deﬁcit in the schemes Related deferred tax asset Net pension liability The major categories of plan assets as a percentage of total plan assets are as follows: Equities Bonds and insurance contracts Other 2006 % 7.50 4.60 4.50 2005 % 7.50 5.00 4.75 2004 % 7.50 5.00 4.00 2006 £m 64.1 82.9 3.0 150.0 (156.5) (6.5) 2.0 (4.5) 2005 £m 48.7 62.3 14.7 125.7 (136.6) (10.9) 3.3 (7.6) 2006 % 43 55 2 2004 £m 42.9 58.8 2.9 104.6 (121.8) (17.2) 5.2 (12.0) 2005 % 39 50 11 The plan assets do not include any directly owned ﬁnancial instruments issued by Land Securities Group PLC. Indirectly owned ﬁnancial instruments had a fair value of less than £0.2m. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 123 2006 £m 3.9 – (8.3) (4.4) (7.3) 7.2 (0.1) 2005 £m 3.7 0.2 – 3.9 (6.4) 6.7 0.3 25. Pension beneﬁts continued Analysis of the amounts (credited)/charged to the income statement Analysis of the amount (credited)/charged to operating proﬁt Current service cost Losses on curtailments and settlements Past service cost (Credit)/charge to operating proﬁt Analysis of amount (credited)/charged to interest expense Expected return on plan assets Interest on schemes liabilities Net (return)/charge During the year, the Group introduced amendments to the main scheme, which were adopted by the Trustees for active members who had given their consent. As a result, active members will have their accrued entitlement at 31 March 2006 linked to inﬂation, with future beneﬁts according to annual earnings. The effect of this has been a reduction of £8.3m in the Group’s pension liability associated with funding future anticipated salary increases. Changes in the present value of the deﬁned beneﬁt obligation At beginning of year Current service cost Past service cost Interest cost Actuarial losses Beneﬁts paid Losses on curtailments Contributions by plan participants At end of year Changes in the fair value of plan assets At beginning of year Expected return on plan assets Employer contributions Actuarial gains Beneﬁts paid Contributions by plan participants At end of year Analysis of the movement in the balance sheet deﬁcit At beginning of year (Credit)/charge to operating proﬁt Expected return on plan assets Interest on schemes liabilities Employer contributions Actuarial losses At end of year 2006 £m 136.6 3.9 (8.3) 7.2 20.5 (3.6) – 0.2 156.5 2006 £m 125.7 7.3 4.9 15.5 (3.6) 0.2 150.0 2006 £m 10.9 (4.4) (7.3) 7.2 (4.9) 5.0 6.5 2005 £m 121.8 3.7 – 6.7 8.0 (4.0) 0.2 0.2 136.6 2005 £m 104.6 6.4 15.4 3.1 (4.0) 0.2 125.7 2005 £m 17.2 3.9 (6.4) 6.7 (15.4) 4.9 10.9 Land Securities Annual Report 2006 124 Notes to the ﬁnancial statements continued 25. Pension beneﬁts continued Analysis of the amounts recognised in the statement of recognised income and expense Analysis of gains and losses Actual return less expected return on schemes assets Experience gains and losses arising on schemes liabilities Actuarial losses Actuarial gains and losses are recognised immediately through the statement of recognised income and expense. History of experience gains and losses Experience adjustments arising on schemes assets Amount Percentage of schemes assets Experience adjustments arising on schemes liabilities Amount Percentage of the present value of funded obligations Present value of schemes liabilities Fair value of schemes assets Deﬁcit 2006 £m 15.5 (20.5) (5.0) 2005 £m 3.1 (7.8) (4.7) 2005 £m 2004 £m 2003 £m 3.1 2.5% 7.8 5.7% 13.7 13.1% (16.3) –21.3% 0.2 0.1% (121.8) 104.6 (17.2) 2.7 2.8% (95.0) 76.4 (18.6) 2006 £m 15.5 10.3% 20.5 13.1% (156.5) 150.0 (6.5) (136.6) 125.7 (10.9) The contributions expected to be paid in respect of the deﬁned beneﬁt schemes during the ﬁnancial year ending 31 March 2007 amount to £5.0m. The Company did not operate any deﬁned contribution schemes or deﬁned beneﬁt schemes during the ﬁnancial year ended 31 March 2006 or in the previous ﬁnancial year. Accelerated tax depreciation £m Capitalised interest £m Revaluation surplus £m (136.2) (11.9) 15.4 3.5 (6.4) (135.6) (20.4) 17.8 (9.7) (30.1) (5.2) 5.8 0.6 – (28.9) (8.9) 11.3 – (953.5) (248.3) 83.9 – (19.0) (1,136.9) (473.9) 10.9 (64.3) Other £m (4.3) (154.3) (0.1) – – (158.7) 8.1 (4.6) 0.5 Total £m (1,124.1) (419.7) 105.0 4.1 (25.4) (1,460.1) (495.1) 35.4 (73.5) (147.9) (26.5) (1,664.2) (154.7) (1,993.3) Tax losses £m – 37.8 – 37.8 (20.3) (5.3) – 12.2 Hedges £m 13.4 (12.4) – 1.0 0.7 – 0.6 2.3 Pension deﬁcit £m 5.2 (3.4) 1.5 3.3 (2.8) – 1.5 2.0 Other £m – – – – 9.0 – – 9.0 Total £m 18.6 22.0 1.5 42.1 (13.4) (5.3) 2.1 25.5 26. Deferred taxation Deferred tax liabilities At 1 April 2004 Net charge to income statement for year Released in respect of property disposals during the year Disposal of a company Deferred tax on acquisition of a company At 1 April 2005 Net charge to income statement for year Released in respect of property disposals during the year Deferred tax on acquisition of a company At 31 March 2006 Deferred tax assets At 1 April 2004 Net charge to income statement for year Charged to equity At 1 April 2005 Net charge to income statement for year Released in respect of property disposals during the year Charged to equity At 31 March 2006 Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 125 26. Deferred taxation continued Deferred tax is provided as follows: Excess of capital allowances over depreciation – investment properties – operating properties Capitalised interest – investment properties – operating properties Revaluation surpluses – own – acquired Tax losses Other temporary timing differences Total deferred tax 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 2006 £m 116.8 31.1 23.9 2.6 1,580.9 83.3 (12.2) 141.4 1,967.8 991.2 (28.3) 962.9 2005 £m 112.7 22.9 28.0 0.9 1,117.9 19.0 (37.8) 154.4 1,418.0 586.5 (90.4) 496.1 It has not been possible to determine the amounts that will crystallise within one year as required by IFRS as it is not possible to determine which properties, if any, will be sold in the next ﬁnancial year. It is the current intention of the Group to hold investment assets for the long-term and the deferred tax provision has been calculated on this basis. 27. Obligations under ﬁnance leases The minimum lease payments under ﬁnance leases fall due as follows: Not later than one year Later than one year but not more than ﬁve More than ﬁve years Future ﬁnance charges on ﬁnance leases Present value of ﬁnance lease liabilities (notes 13 and 24) The present value of ﬁnance lease liabilities is as follows: Not later than one year (notes 21 and 24) Later than one year but not more than ﬁve More than ﬁve years The fair value of the Group’s lease obligations, using a discounting rate of 5.5%, is £85.2m (2005: £75.6m). 28. Called up share capital Ordinary shares of 10p each Non-equity B shares of £1.02 each Redeemable preference shares of £1 each Movements in the share capital of the Company were At beginning of year 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 end of year The number of ordinary shares that would be issued if all options were exercised at 31 March 2006 is 4,217,859 (2005: 5,440,682). 2006 £m 7.2 27.7 438.4 473.3 (398.7) 74.6 3.1 5.6 65.9 74.6 2005 £m 5.1 19.1 436.7 460.9 (391.0) 69.9 1.0 2.9 66.0 69.9 2006 No. m 600.0 38.9 0.1 Authorised 2005 No. m 600.0 38.9 0.1 Allotted and fully paid 2005 £m 2006 £m 46.9 – – 46.9 46.8 – – 46.8 Number of shares 2005 2006 467,803,066 465,924,545 174,715 – 1,176,464 129,537 114,522 35,500 1,686,498 42,001 469,283,782 467,803,066 Land Securities Annual Report 2006 126 Notes to the ﬁnancial statements continued 29. Share-based payments The Group’s share-based payments are all equity-settled and comprise the Savings Related Share Option Schemes (Sharesave), various Executive Share Option Schemes (ESOS), Performance and Deferred Bonus share schemes related to the annual bonus scheme, and the Long-Term Incentive Plan. In accordance with IFRS 2 ‘Share-based Payment’ the fair value of equity-settled share-based payments to employees is determined at the date of grant and is expensed on a straight-line basis over the vesting period based on the Group’s estimate of shares or options that will eventually vest. Fair value is calculated using a Black-Scholes pricing model. Savings Related Share Option Schemes Under the 2003 Savings Related Share Option Scheme all staff who have been with the Group for a continuous period of not less than six months are eligible to make regular monthly contributions into a Sharesave scheme operated by Lloyds TSB Bank Plc. On completion of the three, ﬁve or seven year contract period ordinary shares in Land Securities Group PLC may be purchased at a price based upon the current market price at date of invitation less 20% discount. Options are satisﬁed by the issue of new shares. Options are normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within six months of the bonus date. In certain circumstances leavers may exercise their options early based upon current savings. Alternatively, they may continue saving to receive the tax-free bonus at the end of the contract or withdraw their cash immediately. Fair value calculations assume a lapse rate, based upon historic values, of approximately 20% for employees leaving the Group before vesting. Details of the share options outstanding during the year are as follows: At beginning of year Granted Exercised Forfeited Lapsed At end of year Exercisable at end of year Weighted average remaining contractual life (years) Number of options 2005 2006 797,944 171,233 (174,715) (24,923) (21,722) 747,817 14,406 773,326 170,119 (114,522) (22,933) (8,046) 797,944 25,580 Weighted average exercise price 2005 pence 2006 pence 725 1146 652 742 855 834 724 Years 2.22 667 957 686 690 728 725 688 Years 2.39 The options outstanding under the scheme are exercisable at prices between 628p and 1146p after three, ﬁve or seven years from the date of grant. 428,143 of the options outstanding are exercisable at prices between 628p and 713p during the period 2004 to 2010. Of the remaining options, 153,482 are exercisable at 957p, and 166,192 at 1146p during the periods 2007 to 2011 and 2008 to 2012 respectively. The weighted average share price at the date of exercise during the year was 1468p (2005: 1234p). During the year, options were granted on 30 September 2005 (2005: 1 October 2004). The estimated fair value of the options granted on that date was £0.6m (2005: £0.5m). During the year, the Group recognised total expenses of £0.2m (2005: £0.1m) relating to Savings Related Share Option. 1984 Executive Share Option Scheme The contract period for the 1984 Executive Share Option Scheme expired during 2005. The scheme was not subject to performance conditions. The weighted average share price at the date of exercise for share options exercised during 2005 was 1163p. No expense was recognised by the Group during the year, or during the corresponding year as the grants preceded the date relevant for IFRS 2 ‘Share-based Payment’. Details of the share options outstanding during the year are as follows: At beginning of year Exercised At end of year Exercisable at end of year Weighted average remaining contractual life (years) Number of options 2005 2006 – – – – 35,500 (35,500) – – Weighted average exercise price 2005 pence 2006 pence – – – – Years – 619 619 – – Years – 2000 Executive Share Option Scheme No new grants to directors and senior management of the Group have been made under this scheme since 19 July 2002. These options have fully vested as the growth in the Group’s normalised adjusted diluted earnings per share exceeded the growth in the Retail Prices Index by 2.5% per annum over the vesting period. Options are satisﬁed by the issue of new shares. Options are forfeited, in most circumstances, when an employee leaves the Group before vesting or lapse if they are not exercised within 10 years of the date of grant. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 127 Number of options 2005 2006 1,513,564 (1,176,464) (24,500) 312,600 312,600 3,458,062 (1,686,498) (258,000) 1,513,564 478,564 Weighted average exercise price 2005 pence 2006 pence 827 824 849 836 836 Years 5.73 838 850 818 827 860 Years 6.94 29. Share-based payments continued Details of the share options outstanding during the year are as follows: At beginning of year Exercised Forfeited At end of year Exercisable at end of year Weighted average remaining contractual life (years) The options outstanding under the scheme are exercisable at prices between 812p and 869p up to 2012. The weighted average share price at the date of exercise for share options exercised during the year was 1516p (2005: 1222p). No expense was recognised by the Group during the year, or during the corresponding year as the grants preceded the date relevant for IFRS 2 ‘Share-based Payment’. 2002 Executive Share Option Scheme The ﬁnal grants to directors and senior management of the Group under this scheme were made on 12 July 2004. Vesting is subject to growth in the Group’s normalised adjusted diluted earnings per share exceeding the growth in the Retail Prices Index by 2.5% per annum over the three year vesting period. For options granted in the year ended 31 March 2004 there are a maximum of two re-tests for performance criteria in years 4 and 5. For options granted in the year ended 31 March 2005 there is no re-testing of performance criteria. Options are satisﬁed by the issue of new shares. Options are normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within 10 years of the date of grant. Fair value calculations assume a lapse rate, based upon historic values, of between 2% and 5% per annum for employees leaving the Group before vesting. Details of the share options outstanding during the year are as follows: At beginning of year Granted Exercised Forfeited At end of year Exercisable at end of year Weighted average remaining contractual life (years) Number of options 2005 2006 3,129,174 – (129,537) (181,063) 1,764,867 1,547,853 (42,001) (141,545) 2,818,574 3,129,174 26,200 – Weighted average exercise price 2005 pence 2006 pence 965 – 852 978 970 – Years 7.76 786 1159 788 900 965 – Years 8.74 26,200, 1,409,359 and 1,383,015 of the options outstanding under the 2002 Executive Share Option Scheme are exercisable at 756p, 788p and 1159p respectively up to 2014, provided the associated performance conditions are met. The weighted average share price at the date of exercise for share options exercised during the year was 1653p (2005: 1182p). In 2005, options were granted on 12 July 2004. The estimated fair value of the options granted on that date is £2.6m. During the year, the Group recognised an expense of £0.8m (2005: £1.2m) relating to 2002 Executive Share Option Scheme. Land Securities Annual Report 2006 128 Notes to the ﬁnancial statements continued 29. Share-based payments continued 2005 Executive Share Option Scheme The 2005 Executive Share Option Scheme is open to executives and management staff not eligible to participate in the Land Securities 2005 Long-Term Incentive Plan for senior executives. Options are granted in the ordinary shares of Land Securities Group PLC at the middle market price on the three dealing days immediately preceding the date of grant. The 3 year vesting period is not subject to performance conditions. Options are satisﬁed by the transfer of shares. Options are normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within 10 years of the date of grant. Fair value calculations assume a lapse rate, based upon historic values, of 2% per annum for employees leaving the Group before vesting. Details of the share options outstanding during the year are as follows: At beginning of year Granted Exercised Lapsed At end of year Exercisable at end of year Weighted average remaining contractual life (years) Number of options 2005 2006 Weighted average exercise price 2005 pence 2006 pence – 350,737 (898) (10,971) 338,868 – – – – – – – – 1421 1421 1421 1421 – Years 9.33 – – – – – – Years – The options outstanding under the scheme are exercisable at 1421p up to 2015. The weighted average share price at the date of exercise for share options exercised during the year was 1696p. During the year, options were granted on 29 July 2005. The estimated fair value of the options granted on that date is £0.7m. During the year, the Group recognised an expense of £0.1m (2005: £nil) relating to the 2005 Executive Share Option Scheme. Performance Shares Under the performance share plan approved by shareholders in 2002, senior executives of the Group receive up to two shares for each deferred share received under the separate management bonus scheme depending on the extent to which performance criteria are satisﬁed. Half of these performance shares are dependent on the real increase in the Group’s normalised adjusted diluted earnings per share over three ﬁnancial years. The other half of the performance shares are subject to the Group’s total property return equalling or exceeding the Investment Property Databank All Fund Universe Index over a three year rolling period. The ﬁnal grant under the scheme was made in July 2005. Awards under the plan are satisﬁed by transfer of existing shares. Fair value calculations have been adjusted for participants who have left the Group but no adjustment has been made for future anticipated lapses. Details of the rights over shares outstanding during the year are as follows: At beginning of year Granted Exercised Forfeited Lapsed At end of year Exercisable at end of year Weighted average remaining contractual life (years) The performance shares outstanding under the scheme are to be issued at £nil consideration provided that performance conditions are met. Number of shares 2005 2006 311,834 171,940 (31,528) (9,072) (31,528) 411,646 – Years 1.45 185,078 126,756 – – – 311,834 – Years 1.65 Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 129 29. Share-based payments continued The mid-market share price at the date of exercise for performance shares exercised during the year was 1416p. During the year, shares were granted on 4 July 2005 (2005: 12 July 2004). The estimated fair value of the shares granted on that date is £1.1m (2005: £1.5m). During the year, the Group recognised an expense of £1.0m (2005: £0.7m) relating to Performance Shares. Deferred Bonus Shares Under the Executive Directors’ and senior management bonus plan participants are eligible for awards in cash and deferred shares. The underlying performance criteria are earnings per share and increase in net asset value over the previous year. 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 up to a maximum of 40% of salary in cash and 40% of salary in shares for superior results. Following a review of the reward structure by the Remuneration Committee, Executive Directors are in future eligible for awards of up to 100% of salary, 25% of which must be taken in deferred shares. Other management grades must now take their entire bonus in cash. Awards under the plan are satisﬁed by transfers of existing shares. The shares are deferred for three years and normally forfeited if the executive leaves employment during the period. Fair value has been adjusted for participants who have left the Group, but no adjustment has been made for future anticipated lapses. Details of the rights over shares outstanding during the year are as follows: At beginning of year Granted Capitalisation of dividends Exercised Forfeited At end of year Exercisable at end of year Weighted average remaining contractual life (years) Number of shares 2005 2006 195,095 103,246 6,551 (8,895) (25,370) 270,627 – Years 1.36 147,848 82,801 2,809 (33,368) (4,995) 195,095 – Years 1.83 The deferred shares outstanding under the scheme are to be to be issued at nil consideration subject to vesting conditions being met. The mid-market share price at the date of exercise for shares exercised during the year was 1483p (2005: 1396p). During the year, rights were granted over deferred shares on 4 July 2005 (2005: 12 July 2004). The estimated fair value of the rights over shares granted on that date is £1.3m (2005: £1.2m). During the year, the Group recognised an expense of £0.7m (2005: £0.5m) relating to Deferred Bonus Shares. 2005 Long-Term Incentive Plan The new Long-Term Incentive Plan (‘LTIP’) for Executive Directors and senior executives authorises the Remuneration Committee to make grants of LTIP shares with a face value of up to 100% of salary for Executive Directors and up to 75% of salary for senior executives. In addition, an award of matching shares can be made, linked to co-investment in shares by participants. The employee’s investment can be made through deferral of an annual bonus award and/or through optional pledging of shares purchased in the market. The maximum level of matching is shares with a face value of 50% of salary for Executive Directors and 25% of salary for senior executives. Performance conditions are similarly structured to those applying to the Performance Share Plan except that the EPS targets are increased and the IPD index measure is more closely targeted to the Group’s asset classes. Awards may be satisﬁed by the issue of new shares and/or transfer of treasury shares and/or transfer of shares other than treasury shares. Fair value calculations include the assumption that LTIP and matching shares will be awarded at 50% of the maximum possible under the scheme and have been adjusted for participants who have left the scheme but no adjustment has been made for future anticipated lapses. Details of the rights over shares outstanding during the year are as follows: At beginning of year Granted Forfeited At end of year Exercisable at end of year Weighted average remaining contractual life (years) The shares outstanding under the scheme are to be issued at £nil consideration provided performance conditions are met. Number of shares 2005 2006 – 359,870 (8,445) 351,425 – Years 2.35 – – – – – Years – Land Securities Annual Report 2006 130 Notes to the ﬁnancial statements continued 29. Share-based payments continued No shares vested during the year. Rights to receive 320,525 performance shares were granted on 29 July 2005, and 22,679 on 30 September 2005. Rights to receive 16,666 matching shares were granted on 30 September 2005. The estimated fair value of the rights over the shares granted on those dates is £4.4m. During the year, the Group recognised an expense of £0.8m (2005: £nil) relating to the 2005 Long-Term Incentive Plan. Fair values are calculated using the Black-Scholes option pricing model. Inputs into this model for each scheme are as follows: Range of share prices at grant date 846p to 1433p 756p to 1159p 1421p 787p to 1405p 787p to 1392p 1421p to 1478p 1993 Savings Related Share Option Schemes 2002 Executive Share Option Scheme 2005 Executive Share Option Scheme Performance Share Plan Deferred Bonus Shares 2005 Long-Term Incentive Plan Range of exercise prices Expected volatility Expected life Risk free rate Expected dividend yield 677p to 1146p 756p to 1159p 19% 19% 1421p 19% nil 19% nil 19% nil 19% 3 to 7 years 3 to 5 years 3 to 5 years 3 years 3 to 5 years 3 to 5 years 4.17% to 4.84% 3.60% to 5.10% 4.17% to 4.22% 3.60% to 5.03% 4.08% to 5.03% 4.17% to 4.22% 3.81% to 4.37% 4.11% to 4.34% 3.81% 3.81% to 4.34% 3.81% to 4.34% 3.81% Expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous 10 years. The expected life used in the model has been determined, based upon management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Risk free rate is the yield, at the date of the grant of an option, on a gilt-edged stock with a redemption date equal to the anticipated exercise of that option. 30. Total shareholders’ equity Group At 1 April 2004 Repayment of B shares Exercise of options Fair value of share-based payments Treasury shares acquired Actuarial losses on deﬁned beneﬁt pension schemes Dividend paid (note 10) Proﬁt for the ﬁnancial year At 31 March 2005 Exercise of options Fair value movement on cash ﬂow hedges – Group – joint ventures Fair value of share-based payments Treasury shares acquired Cost of shares awarded to employees Actuarial losses on deﬁned beneﬁt pension schemes Dividend paid (note 10) Proﬁt for the ﬁnancial year At 31 March 2006 Ordinary shares £m Treasury shares £m Share-based payments £m Share premium £m Capital redemption reserve £m 46.6 – 0.2 – – – – – 46.8 0.1 – – – – – – – – 46.9 – – – – (2.1) – – – (2.1) – – – – (1.9) 0.6 – – – (3.4) 0.8 – – 2.5 – – – – 3.3 – – – 3.6 – (0.6) – – – 6.3 15.9 – 15.5 – – – – – 31.4 11.8 – – – – – – – – 43.2 22.1 8.4 – – – – – – 30.5 – – – – – – – – – 30.5 Retained earnings* £m 5,066.8 (8.4) – – – (3.4) (175.5) 1,060.9 5,940.4 – (1.6) (1.9) – – – (3.5) (238.9) 1,675.9 7,370.4 Total £m 5,152.2 – 15.7 2.5 (2.1) (3.4) (175.5) 1,060.9 6,050.3 11.9 (1.6) (1.9) 3.6 (1.9) – (3.5) (238.9) 1,675.9 7,493.9 *Included within retained earnings is £3.5m (2005: £nil; 2004: £nil) of losses in respect of cash ﬂow hedges. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 131 30. Total shareholders’ equity continued Treasury shares represent the cost of shares purchased in Land Securities Group PLC by the Employee Share Ownership Plan (‘ESOP’) which is operated by the Group in respect of its commitment to the Deferred Bonus scheme (note 29). The number of shares held by the ESOP at 31 March 2006 was 292,703 (2005: 194,139). Company At 1 April 2004 Repayment of B shares Exercise of options Dividend paid (note 10) Proﬁt for the ﬁnancial year At 31 March 2005 Exercise of options Dividend paid (note 10) Proﬁt for the ﬁnancial year At 31 March 2006 *Available for distribution Ordinary shares £m Share premium £m Capital redemption reserve £m 46.6 – 0.2 – – 46.8 0.1 – – 46.9 15.9 – 15.5 – – 31.4 11.8 – – 43.2 22.1 8.4 – – – 30.5 – – – 30.5 Merger reserve £m 373.6 – – – – 373.6 – – – 373.6 Retained earnings* £m 3,174.0 (8.4) – (175.5) 1,890.5 4,880.6 – (238.9) 11.3 4,653.0 Total £m 3,632.2 – 15.7 (175.5) 1,890.5 5,362.9 11.9 (238.9) 11.3 5,147.2 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 £11.3m (2005: £1,890.5m). The merger reserve arose on 6 September 2002 when the Company acquired 100% of the issued share capital of Land Securities PLC. The merger reserve represents the excess of the cost of acquisition over the nominal value of the shares issued by the Company to acquire Land Securities PLC. The merger reserve does not represent a realised or distributable proﬁt. 31. Cash ﬂow from operating activities Reconciliation of operating proﬁt to net cash inﬂow from operating activities: Cash generated from operations Proﬁt for the ﬁnancial year Income tax expense Proﬁt before tax Distribution received from joint venture (Telereal) Share of the proﬁts of joint ventures (post-tax) Interest income Interest expense Operating proﬁt Adjustments for: Depreciation Proﬁt on disposal of ﬁxed asset properties Proﬁt on disposal of joint venture Net surplus on revaluation of investment properties Goodwill impairment Pension scheme (credit)/charge Changes in working capital: Decrease in trading properties and long-term development contracts Decrease/(increase) in receivables (Decrease)/increase in payables Net cash generated from operations 2006 £m 1,675.9 683.3 2,359.2 (11.7) (98.6) 2,248.9 (7.3) 201.8 2,443.4 25.7 (74.5) (293.0) (1,579.5) 64.5 (4.4) (2.1) 23.0 (11.6) 591.5 Group 2005 £m 1,060.9 246.6 1,307.5 (65.4) (76.1) 1,166.0 (18.3) 248.6 1,396.3 35.7 (112.0) – (827.9) 12.7 3.7 (31.2) (49.1) 95.2 523.4 2006 £m 11.3 0.8 12.1 – – 12.1 (17.5) 5.4 – – – – – – – Company 2005 £m 1,890.5 – 1,890.5 – – 1,890.5 (8.4) 17.9 1,900.0 – – – – – – – 182.8 – 182.8 – (1,735.0) – 165.0 Land Securities Annual Report 2006 132 Notes to the ﬁnancial statements continued 32. Acquisition of Tops Estates PLC The Group acquired 100% of the voting rights of Tops Estates PLC on 10 June 2005 for a consideration of £334.1m, including costs. This has been accounted for as a business combination. Fair value of assets acquired Investment properties Debtors Cash and cash equivalents Current liabilities Non-current liabilities Deferred taxation Net assets acquired Fair value of consideration Cash Costs Goodwill (note 15) Book value at acquisition £m Fair value adjustments £m Fair value acquired £m 573.0 21.9 12.9 (19.4) (230.6) (9.2) 348.6 19.6 (7.0) – – (27.3) (64.3) (79.0) 592.6 14.9 12.9 (19.4) (257.9) (73.5) 269.6 325.3 8.8 334.1 (64.5) 269.6 Set out below are the results of Tops Estates PLC from the date of acquisition (10 June 2005) to 31 March 2006 and for the period from 1 April 2005 to the date of acquisition: Results for Tops Estates PLC from Results for Results for the the Group Group for the 10 June 2005 to excluding Tops 31 March 2006 £m Estates PLC 31 March 2006 £m year ended 1 April 2005 to 9 June 2005 £m £m Results for Tops Estates Results for the Group as if Tops Estates PLC from PLC had been acquired on 1 April 2005 £m Revenue Proﬁt before tax Taxation expense Proﬁt after tax 27.6 11.2 (3.3) 7.9 1,801.1 2,348.0 (680.0) 1,668.0 1,828.7 2,359.2 (683.3) 1,675.9 7.5 5.4 (0.4) 5.0 1,836.2 2,364.6 (683.7) 1,680.9 There were no recognised gains or losses in the year other than the proﬁt attributable to shareholders. Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 133 33. Related party transactions During the year ended 31 March 2005 the Group had a 50% interest in the Telereal partnerships and joint ventures (‘Telereal’). The Group, principally through Land Securities Trillium Telecom Services Limited, provided staff to Telereal to deliver services to BT, for which it received £16.1m. The interests in the Telereal partnerships and joint ventures were sold on 30 September 2005. The Group has a 50% interest in the Metro Shopping Fund LP. During the year ended 31 March 2005 the Group made sales of investment properties to the Partnership for consideration of £91.8m. The Group has a 50% interest in the Bristol Alliance. During the year ended 31 March 2005 the Group made net sales of investment properties to the Partnership for net consideration of £10.8m. The Group receives fees in respect of accounting and asset management services and development services from its joint ventures. These fees are calculated on an arms length basis. The Group receives interest income from the Buchanan Galleries Limited Partnership. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the applicable categories speciﬁed in IAS 24 ‘Related Party Disclosures’. Further information about the remuneration of individual directors is provided in the audited part of the Remuneration Report on pages 90 to 96. Short-term employee beneﬁts Post-employment beneﬁts Share-based payments 2006 £m 3.9 0.8 0.7 5.4 2005 £m 3.5 0.4 0.6 4.5 Land Securities Annual Report 2006 134 Notes to the ﬁnancial statements continued 34. Operating lease arrangements The Group earns non-rental income by leasing its investment and operating properties to tenants under non-cancellable operating leases. At the balance sheet date, the Group had contracted with tenants to receive the following future minimum lease payments: Not later than one year Later than one year but not more than ﬁve More than ﬁve years The total of contingent rents recognised as income during the year was £7.4m (2005: £6.7m). 2006 £m 496.7 1,927.3 3,724.5 6,148.5 2005 £m 592.7 1,956.1 3,836.8 6,385.6 35. Reconciliation of UK GAAP to IFRS The Group’s transition date for the adoption of IFRS is 1 April 2004. This transition date has been selected in accordance with IFRS 1 ‘First-time adoption of International Financial Reporting Standards’. The Group has also adopted IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ from 1 April 2004. The principal differences for the Group between reporting under IFRS as compared to UK GAAP as at 31 March 2005 are: (i) Recognising revaluation surpluses and deﬁcits in the income statement (ii) Providing in full for deferred tax on revaluations and charging movements on this provision through the income statement (iii) Restating the ﬁnancial effects of the November 2004 debt reﬁnancing (iv) Showing the Group’s share of the proﬁt after tax and net assets of all its joint ventures and joint arrangements as single lines in the income statement and balance sheet respectively (v) Ceasing to amortise goodwill but instead testing for impairment (vi) No longer recognising dividends payable to shareholders prior to their approval by the Annual General Meeting in the case of the ﬁnal dividend and by the Board in the case of the interim dividend The application of IFRS has also changed the presentation of the cash ﬂow statement which now shows cash ﬂows derived from three types of activities – operating, investing and ﬁnancing. In addition, under IFRS, the cash ﬂow statement includes all cash ﬂows in respect of cash and cash equivalents. This is a broader deﬁnition of cash than under UK GAAP. As a general rule, the Group is required to establish its IFRS accounting policies for the year ended 31 March 2006 and apply these retrospectively to determine its opening IFRS balance sheet at the transition date of 1 April 2004 and the comparative information for the year ended 31 March 2005. However, advantage has been taken of certain exemptions afforded by IFRS 1 ‘First-time adoption of International Financial Reporting Standards’ as follows: Business combinations prior to 1 April 2004 The Group has applied IFRS 2 ‘Share-based Payment’ retrospectively only to awards made after 7 November 2002 that had not vested at 1 January 2005 Presentation of a ﬁve year history of experience gains and losses as required by IAS 19 ‘Employee Beneﬁts’. A four year history has been presented Land Securities Annual Report 2006 Notes to the ﬁnancial statements continued 135 35. Reconciliation of UK GAAP to IFRS continued In preparing the IFRS accounts, the Group has adjusted amounts reported previously in the ﬁnancial statements prepared in accordance with UK GAAP. An explanation of how the transition has affected the Group’s ﬁnancial performance and position is set out in the following tables and accompanying narrative. Group Reconciliation of equity Equity shareholders’ funds under UK GAAP* IFRS adjustments Deferred tax on revaluations – Group – joint ventures – on acquisitions Dividend** Finance leases – Group – joint ventures Pension beneﬁt (net of deferred tax)** Tenant lease incentives Fair value of interest rate swaps – Group (net of deferred tax) – joint ventures (net of deferred tax) Non-amortisation of goodwill (Land Securities Trillium) Share-based payments Write off negative goodwill arising Adjustment to restate the Group’s share of Telereal’s earnings from an equity to a distribution basis – investment – taxation Bond exchange de-recognition (net of deferred tax) Other Equity shareholders’ funds under IFRS Company Reconciliation of equity Equity shareholders’ funds under UK GAAP * IFRS adjustments Dividend Equity shareholders’ funds under IFRS Notes 2006 £m 2005 £m 2004 £m 8,750.2 6,636.6 6,030.1 (i) (i) (i) (ii) (iv) (iv) (iii) (v) (vi) (vi) (vii) (viii) (ix) (ix) (x) Notes (1,580.9) (75.5) (83.3) 134.0 4.3 (0.2) (13.6) (23.0) (5.4) (3.2) 4.8 4.1 6.3 – – 375.3 – 7,493.9 2006 £m (1,117.9) (43.8) (19.0) 153.7 8.5 (0.3) (17.7) (16.5) (2.3) (1.3) 2.4 3.0 6.3 71.1 (10.6) 395.0 3.1 6,050.3 2005 £m (953.5) (24.0) – 126.8 (9.2) (0.2) (16.2) (13.6) (31.1) – – 1.4 – 47.9 (10.6) – 4.4 5,152.2 2004 £m 5,013.2 5,209.2 3,505.4 (ii) 134.0 5,147.2 153.7 5,362.9 126.8 3,632.2 * UK GAAP referred to in these reconciliations is that existing as at 31 March 2005. **Adjustment to UK GAAP as at 31 March 2005, most of which would no longer be required under UK GAAP following the adoption of FRS 17 ‘Retirement beneﬁts’ and FRS 21 ‘Events after the balance sheet date’. Notes (i) Deferred tax is required to be provided in full on all differences between carrying values for accounts purposes and those for taxation. In particular, deferred tax is now provided on revaluation surpluses. (ii) Dividends are now only provided when ﬁnally approved, either by the Annual General Meeting in the case of ﬁnal dividends or by the Board for interim dividends. (iii) The actuarial deﬁcit in the Group’s deﬁned beneﬁt pension schemes is now recognised as a liability in the consolidated balance sheet. (iv) Tenant leases which transfer substantially all of the risks and rewards of ownership to the tenant are treated as ﬁnance leases. The property is de-recognised from the balance sheet and a receivable recognised in its place. (v) The cost of tenant lease incentives, such as rent free periods, are now amortised over the term of the leases concerned rather than over the period to the ﬁrst review to market rents. (vi) The fair value of all derivatives such as interest rate swaps is now recognised in the Group balance sheet at each reporting date. (vii) Goodwill arising on acquisition is no longer amortised but kept on the balance sheet and reviewed regularly for impairment. (viii) The cost of share based payments is now recognised through the income statement. (ix) Joint ventures cease to be consolidated once their net assets become negative. This is the case with Telereal during the year under review. (x) The bond exchange which took place in November 2004 qualiﬁed as an extinguishment of the existing debt and an issue of new debt under UK GAAP. Under IFRS, this is not the case and the existing debt is reinstated with the difference in redemption amounts being amortised over the life of the new debt. Land Securities Annual Report 2006 136 Notes to the ﬁnancial statements continued 35. Reconciliation of UK GAAP to IFRS continued Group Reconciliation of proﬁt Proﬁt/(loss) attributable to ordinary shareholders under UK GAAP* IFRS adjustments Revaluation surplus on investment properties – Group – joint ventures Deferred tax on revaluations – Group – joint ventures Taxation on revaluation surpluses realised on disposal of investment properties Finance leases – Group – joint ventures Pension beneﬁt (net of deferred tax)** Tenant lease incentives Fair value of non-qualifying interest rate swaps (net of deferred tax) Non-amortisation of goodwill (Land Securities Trillium) Share-based payments Goodwill impairment on the acquisition of businesses Adjustment to restate the Group’s share of Telereal’s earnings from an equity to a distribution basis B share dividends Bond exchange de-recognition – originating adjustment (net of deferred tax) Proﬁt attributable to ordinary shareholders under IFRS – adjustment in year (net of deferred tax) Company Reconciliation of proﬁt Proﬁt attributable to ordinary shareholders under UK GAAP* IFRS adjustments B share dividends Proﬁt attributable to ordinary shareholders under IFRS Notes (xi) (xi) (xii) (xii) (xiii) (iv) (iv) (iii) (v) (vi) (vii) (viii) (ix) Notes 2006 £m 658.5 1,579.5 105.5 (463.0) (31.7) (43.3) 9.1 0.1 7.6 (0.1) (1.5) 2.4 (2.5) (64.5) (60.5) – – (19.7) 1,675.9 2006 £m 11.3 – 11.3 2005 £m (35.8) 827.9 69.5 (164.4) (19.8) (40.3) (9.4) (0.1) 1.9 (3.0) 27.5 2.4 (0.9) (12.7) 23.2 (0.1) 402.8 (7.8) 1,060.9 2005 £m 1,890.6 (0.1) 1,890.5 *UK GAAP referred to in these reconciliations is that existing as at 31 March 2005. **Adjustment to UK GAAP as at 31 March 2005, most of which would no longer be required under UK GAAP following the adoption of FRS 17 ‘Retirement beneﬁts’ and FRS 21 ‘Events after the balance sheet date’. (xi) The surpluses and deﬁcits arising on the periodic revaluation of the investment property portfolio are now taken through the income statement. (xii) Deferred tax is provided in full on the revaluation surpluses and deﬁcits and taken through the income statement. (xiii) Deferred tax provided on revaluation surpluses does not become payable on disposal of the properties concerned and so has to be written back through the income statement. Land Securities Annual Report 2006 Directors’ Report The directors submit their report with the audited ﬁnancial statements for the year to 31 March 2006. 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 (‘OFR’), which should be read in conjunction with this report. 1. Business of the Group Land Securities Group PLC is the Group holding company, and during the year the principal activity of its operating subsidiaries continued to be the 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. Business review, results for the year and dividends The information that fulﬁls the requirements of the business review can be found in the OFR on pages 24 to 77, which are incorporated in this report by reference. The results are set out in the income statement on page 101. An interim dividend of 18.15p per share was paid on 9 January 2006 and the directors now recommend the payment of a ﬁnal dividend of 28.55p per share making a total of 46.70p per share for the year ended 31 March 2006, an increase of 8.0% over that for the previous year. Subject to authorisation at the Annual General Meeting to be held on 19 July 2006, the ﬁnal dividend will be paid on 24 July 2006 to shareholders registered at the close of business on 23 June 2006. It is expected that the shares will be quoted ex-dividend from 21 June 2006. 3.Valuation and net assets (i) Valuation Knight Frank LLP valued the Group’s investment properties at £11,619.0m as at 31 March 2006. (ii) Net assets The investment portfolio valuation has been included in the ﬁnancial statements for the year ended 31 March 2006 and the net assets of the Group at that date amounted to £7,493.9m. 4. Directors The directors who held ofﬁce during the year were: Peter G Birch CBE 1, 4 Francis Salway 4 Martin Greenslade (appointed 01/09/05) Mark Collins Ian Ellis Mike Hussey Richard Akers (appointed 17/05/05) David Rough 1, 2, 3, 4 Sir Winfried Bischoff 1, 2, 3 Stuart Rose 1, 2, 3 Bo Lerenius CBE 1, 2, 3 Alison Carnwath 1, 2, 3 Andrew Macfarlane (resigned 05/08/05) 1 Non-executive 2 Member of the Audit Committee 3 Member of the Remuneration Committee 4 Member of the Nominations Committee Biographical details of the directors appear on pages 78 and 79. Since Martin Greenslade was appointed as a director after the last Annual General Meeting, he will retire from the Board, and, being eligible, offers himself for re-election. He has a service agreement which is terminable on one year’s notice from either the Company or the director. Peter Birch, David Rough, Sir Winfried Bischoff and Ian Ellis will retire from the Board by rotation and, being eligible, offer themselves for re-election. Peter Birch, David Rough and Sir Winfried Bischoff do not have a service agreement with the Company; Ian Ellis has a service contract which is terminable on one year’s notice from either the Company or the director. 137 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 12 July 2005 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 2006 Annual General Meeting. No shares were repurchased in the year to 31 March 2006. A resolution to renew this authority in respect of up to approximately 10% of the issued share capital will be proposed at the 2006 Annual General Meeting. 6. Substantial shareholders At 19 May 2006 the following interests in issued share capital had been notiﬁed to the Company under Part VI of the Companies Act 1985. Barclays plc M&G Investments Legal & General Investment Management Number of shares 28,199,037 18,933,720 15,329,367 Merrill Lynch Investment Managers 15,129,595 % 6.01 4.03 3.27 3.22 Land Securities Annual Report 2006 138 Directors’ report continued 7. Employees Details of the Group’s policies on employment and on employee development are given on pages 34 and 80. 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 83. 8. Donations During the year ended 31 March 2006 charitable donations amounted to £559,000. This amount included £50,000 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 84. The Group’s environmental policy is published on the Company’s website www.landsecurities.com 10. Corporate responsibility We report on corporate responsibility including employees, health, safety and the environment both in this Annual Report and our recently published 2006 Corporate Responsibility Report. 11. Payment policy The Group is a registered supporter of the CBI’s Better Payment Practice Code to which it subscribes when dealing with all of its suppliers. The code requires a clear and consistent policy that payments are made in accordance with contract or as required by law; that payment terms are agreed at the outset of a transaction and adhered to; that no amendments to payment terms are made without the prior agreement of suppliers and that there is a system which deals quickly with complaints and disputes to ensure that suppliers are advised accordingly without delay when invoices or parts thereof are contested. The effect of the Group’s payment policy is that its trade creditors at the ﬁnancial year end represented 11 days’ purchases. 12. Directors’ indemnities On 5 May 2006 the Company agreed in writing to indemnify each of the directors against any liability incurred by the director in respect of acts or omissions arising in the course of their ofﬁce. The indemnity only applies to the extent permitted by law. A copy of the deed of indemnity is available for inspection at the registered ofﬁce and at the Annual General Meeting. 13.Treasury operations and ﬁnancial instruments The Group’s policy in relation to ﬁnancial risk management and use of ﬁnancial instruments is set out in notes 2(u) and 24 to the ﬁnancial statements. 14.Auditors and disclosure of information to auditors So far as the directors are aware, there is no relevant audit information of which the auditors are unaware and each director has taken all reasonable steps to make himself or herself aware of any relevant audit information and to establish that the auditors are aware of that information. A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting. 15.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. By order of the Board P M Dudgeon Secretary 23 May 2006 Land Securities Annual Report 2006 139 Business Analysis In this section we provide more detailed information about our major investment properties and facts and ﬁgures about the development programme and property outsourcing contracts to help you understand more about our business activities. Introduction Land Securities owns 220 investment properties across the UK and is delivering an extensive development programme as well as managing the property portfolios for six major occupiers, so we have tried to bring all of this activity to life in the following pages. The images, key facts, occupier data, graphs and maps will hopefully give you a feel for what is important in our business and what we are doing that is different to others in the property industry. We have split the portfolio into market sectors to assist with analysis and presented the information in different formats, by region for example, to make detailed analysis easier. Land Securities sees itself as an industry leader and has provided examples of property activity which demonstrates how we are achieving this position. The detailed list of major property holdings is no longer included in this section but you will ﬁnd it on our website www.landsecurities.com Portfolio valuation The value of the property interests in the combined portfolio, including a pro-rata share of our property joint ventures totalled £12,892.9m at 31 March 2006 (31 March 2005: £9,365.8m). Detailed breakdowns by sector, including comprehensive analyses of the Group’s valuation, rental income and yield proﬁles follow in the investment portfolio analysis. The aggregate of the Market Values of those properties held by the Group, excluding joint ventures, as at 31 March 2006 was £11,619.0m (31 March 2005: £8,371.9m). The valuation of the freehold and leasehold properties at 31 March 2006 was undertaken by Knight Frank LLP as External Valuer. The valuations were in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards and the International Valuation Standards. The valuation of each property was on the basis of Market Value, subject to the assumptions that investment properties would be sold subject to any existing leases and that properties held for development would be sold with vacant possession in existing condition. The Valuer’s opinion of Market Value was primarily derived using comparable recent market transactions on arm’s length terms. Retail This business unit includes our shopping centres, retail warehouses, shops outside London, shops held through the Metro Shopping Fund LP, regional ofﬁces and sundry other regional properties. London Portfolio This business unit includes all London ofﬁces and retail, but excludes those assets held in the Metro Shopping Fund LP Combined portfolio valuation £12.9bn 5.9 6.9 Retail London Portfolio Other Land Securities Annual Report 2006 140140 Investment property business – combined portfolio Top twelve properties Cardinal Place, SW1 A trio of ofﬁce buildings has created a new focal point for Victoria with shopping and cafés, art gallery and improved public spaces. Completed in January 2006. White Rose Centre, Leeds An award winning 60,390m2 shopping centre on the edge of Leeds.White Rose is anchored by a Debenhams department store. Bullring, Birmingham Opened in 2003, the 110,000m2 shopping centre transformed retail in Birmingham’s city centre (one-third ownership). 50 Queen Anne’s Gate, SW1 This iconic 30,140m2 building is undergoing a major refurbishment and will be occupied by the Department for Constitutional Affairs when completed in 2007. Combined portfolio value by location Shopping centres Retail and shops warehouses % % Ofﬁces % Other % Central, inner and outer London South East and Eastern Midlands Wales and South West North, North West, Yorkshire and Humberside Scotland and Northern Ireland Total 12.5 5.8 3.7 4.5 8.7 5.7 40.9 0.6 5.5 2.5 1.4 6.0 37.3 0.1 0.1 0.1 0.3 1.9 17.9 0.1 38.0 1.0 1.3 0.1 0.1 0.6 0.1 3.2 St David’s Centre, Cardiff The principal covered shopping centre in Cardiff provides 39,735m2 of ﬂoorspace. The centre will beneﬁt from the 103,620m2 St David’s 2 mixed-use development planned for completion in 2009. Total Retail Almondvale shopping centre and designer outlet mall, (50% ownership), Livingston Forming the heart of the retail offer in Livingston these two adjacent properties total 75,000m2 of retail space. Principal tenants include JJB Sports, New Look, Gap and Marks & Spencer. £6.9bn Total London Portfolio £5.9bn 7.8% 1 1 Land Securities Annual Report 2006 % ﬁgures calculated by reference to the combined portfolio value of £12.9bn % Portfolio by value and number of property holdings at 31 March 2006 15.6% 4 6.4% 12.7% 6.1% 51.4%* * Retail and London Portfolio combined £m 0 – 9.99 10 – 24.99 25 – 49.99 50 – 99.99 100 – 149.99 150 – 199.99 Over 200 Total Value % No. of properties 2.0 3.6 15.0 17.2 20.2 12.4 29.6 64 27 51 33 22 9 14 100.0 220 Notes: Includes Land Securities’ share of joint venture properties. Average rents – excluding properties in the development programme and voids Retail Shopping centres and shops Retail warehouses (including supermarkets) Ofﬁces Central and inner London Rest of UK Average rent £/m2 Average ERV £/m2 n/a 177 333 149 n/a 208 324 163 Notes: Average rent and estimated rental value have not been provided where it is considered that the ﬁgures would be potentially misleading (ie where there is a combination of analysis of rents on an overall and Zone A basis in the retail sector; 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. Gunwharf Quays, Portsmouth This 41,290m2 mixed-use waterfront destination includes an outlet centre of 87 shops, cinema, Bowlplex, comedy club, night club, hotel, 22 restaurants, ﬁtness club and marina. Retail World,Team Valley, Gateshead The retail park was acquired in 1996 and comprises 26 units totalling 35,240m2. Following a major refurbishment we have introduced key retailers such as Next, Boots and Borders. Devonshire House,W1 14,190m2 of air-conditioned ofﬁces on Piccadilly with nine showrooms and shops at ground ﬂoor. Occupiers include Alliance Capital and Boston Consulting. The Bridges, Sunderland Extended in 2000, the shopping centre now offers over 100 retailers and is anchored by Debenhams. It receives over 26 million shopper visits each year. Major occupiers Dresdner Kleinwort Wasserstein 141141 Business analysis continued Whitefriars Quarter, Canterbury Whitefriars Quarter includes our award winning retail-led scheme which opened in 2005. This has regenerated the city centre with new fashion retailers, restaurants, public spaces and residential apartments. Top 12 occupiers 1 Central Government 2 J Sainsbury plc 3 Dixons Group 4 Allen & Overy 5 Dresdner Kleinwort Wasserstein 6 Arcadia Group 7 The Boots Company PLC 8 Argos and Homebase 9 Metropolitan Police Authority 10 Marks & Spencer Group PLC 11 Lloyds TSB Group plc 12 Virgin Group Total Eland House, SW1 A key property within the Victoria portfolio, the 23,170m2 ofﬁce building is occupied by the Government. Current gross rent roll % 9.4 2.1 2.1 2.0 1.8 1.6 1.5 1.3 1.1 1.1 1.1 1.0 26.1 Like-for-like reversionary potential at 31 March 2006 Reversionary potential (ignoring additional income from the letting of voids) Gross reversions Over-rented Net reversionary potential 31/03/06 31/03/05 % of rent roll % of rent roll 10.9 4.4 6.5 11.0 5.5 5.5 Notes: The reversion is calculated with reference to the gross secure rent roll after the expiry of rent free periods on those properties which fall under the like-for-like deﬁnition as set out in the notes to combined portfolio analysis on page 150. Of the over-rented income 78.3% is subject to a lease expiry or break clause in the next ﬁve years. Land Securities Annual Report 2006 Land Securities Annual Report 2006 142 Investment property business – Retail Top twelve properties White Rose Centre, Leeds This prime shopping centre includes a Debenhams department store, 12 large space users, over 70 shops and a food court. Bullring, Birmingham This award-winning shopping centre is anchored by Selfridges and Debenhams and offers over 130 shops and restaurants (one-third ownership). . St David’s Centre, Cardiff St David’s occupies the prime retail position in Cardiff city centre. The centre is anchored by Debenhams and provides over 70 shops including Bhs, Mothercare and Miss Selfridge. Almondvale shopping centre and designer outlet mall (50% ownership), Livingston This destination acts as a major attraction for the whole of the central belt of Scotland. Planning has been received for Phase III of development. Gunwharf Quays, Portsmouth In 2003, Land Securities acquired 100% ownership of this unique designer outlet centre.The waterfront location makes this a leading south-east shopping and leisure destination. Team Valley, Gateshead Acquired in 1996 and refurbished in 2003 this leading retail park comprises 26 units totalling 35,240m2. Key retailers include TKMaxx and Arcadia. Retail portfolio value £6.9bn 0.8 2.3 3.8 Shopping centres Retail parks Other Top 12 properties £bn 2.8 4.1 Top 12 Other Retail accommodation m2 1.9 million Total retail occupiers 1,600 Retail occupiers Land Securities Annual Report 2006 143 Business analysis continued The Bridges, Sunderland This shopping centre includes Debenhams as its anchor department store together with Tesco, Peacocks, Mark One, Boots, H&M, Next, TK Maxx, New Look and Superdrug. Whitefriars Quarter, Canterbury Together with our award- winning Whitefriars scheme, the Clocktower and Marlowe Arcade form the retail heart of Canterbury. Lakeside Retail Park, Thurrock Currently undergoing refurbishment, the leading retail park in Essex offers 33,890m2 of retail space including Blacks, Mothercare, Argos and Habitat. East Kilbride Part of the Scottish Retail Property Limited Partnership (50% ownership), East Kilbride combines four malls to create the biggest shopping centre in Scotland offering over 230 shops and a Debenhams department store. Buchanan Galleries, Glasgow Prime positioned shopping centre comprising John Lewis department store, 4 major stores, over 75 shops and a food court (50% ownership). The Fort,Westwood Cross, Thanet Acquired in 2005, the new fashion park offers 31,413m2 of retail space including Marks & Spencer, Debenhams, Next and a further 38 shops and health and ﬁtness facilities. Top retail properties over £50m by location 13 22 25 21 26 24 23 1 1 2 3 4 2 1 1 5 3 6 5 9 4 6 4 7 8 7 11 10 8 19 20 18 17 13 15 9 14 10 12 11 12 16 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 LP Shopping centres Scotland Aberdeen 1. Bon Accord Centre1 * St Nicholas Centre1 East Kilbride 2. East Kilbride Shopping Centre1* Livingston 3. Almondvale Centre * Glasgow 4. Buchanan Galleries2 * North, north-west,Yorkshire and Humberside Newcastle 5. The Gate Sunderland 6. The Bridges * Leeds 7. White Rose Shopping Centre * 8. Leeds Plaza & Albion St * Liverpool 9. St Johns Centre & Williamson Sq, Clayton Sq * Midlands Corby 10. Corby Town Centre Birmingham 11. Bullring3 * Retail warehouses Scotland Dundee 1. Kingsway Retail Park * Livingston 2. Almondvale West * Almondvale Retail Park Almondvale South North, north-west,Yorkshire and Humberside Gateshead 3. Retail World, Team Valley Retail Park * Liverpool 4. Aintree Retail Park * Manchester 5. White City Retail Park £100m and above * £50m–£100m In the development pipeline South and south-east Canterbury 12. Whitefriars Quarter * Welwyn Garden City 13. Howard Centre Maidstone 14. Fremlin Walk * Hatﬁeld 15. The Galleria * Portsmouth 16. Gunwharf Quays * Wales and south-west Exeter 17. Princesshay * Bristol 18. Broadmead Cardiff 19. St David’s 24 20. St David’s Centre* London 21. Stratford Centre, Stratford 22. N1, Islington5 23. Lewisham Centre * 24. Southside,Wandsworth5 25. Notting Hill Gate,W115 26. W12 Centre, Shepherds Bush Midlands Chester 6. Chester Retail Park Greyhound Retail Park Derby 7. The Meteor Centre Northampton 8. Nene Valley Retail Park South and south-east West Thurrock 9. Lakeside Retail Park * Thanet 10. The Fort,Westwood Cross * Bexhill-on-Sea 11. Ravenside Retail and Leisure Park * Bracknell 12. The Peel Centre London 13. Ravenside Retail Park, Edmonton Land Securities Annual Report 2006 144 Investment property business – Retail Development timeline | 2007 Princesshay, Exeter 44,560m2 – Opening 2007 This mixed-use development is planned around a series of pedestrian streets and public spaces and will provide a vibrant new retail and leisure destination for the south west. Feature property Princesshay, Exeter Situated in the heart of historic Exeter, Princesshay, a mixed-use retail development, will create 60 new shops, cafés and restaurants as well as 120 apartments. Using innovative design, the architecture, ﬁnish and landscaping will reﬂect the beauty of the Cathedral, the surrounding countryside and the dramatic Devon coastline. The regeneration of the city centre, led by the Princesshay scheme, will re-afﬁrm Exeter as the regional capital and is one of the most long- awaited and signiﬁcant developments in the South West this decade. Architects for the scheme are Panter Hudspith, Wilkinson Eyre and Chapman Taylor while the public realm has been designed by Livingston Eyre. The scheme will be anchored by a Debenhams 2010 department store and has already attracted a wide range of retailers including Next, Zara, Quicksilver and Top Shop/Top Man. We are also targeting independent retailers to ensure a vibrant retail mix. Exeter’s primary catchment population totals 345,000 with a total catchment population of 642,000 with an estimated total comparison goods spend of over £1bn(1). (1) Source The Retail Group – Retail Strategy Study June 2004 Major retail joint ventures Birmingham Alliance Land Securities, Hammerson plc and Henderson Global Investors Ltd formed a partnership which has regenerated 40 acres in Birmingham city centre. The ﬁrst phase was Martineau Place (sold in 2004), the Bullring followed in 2003 and the third and ﬁnal phase will be Martineau Galleries, a mixed-use development linking the city with the East side. Bristol Alliance In Bristol, Land Securities and Hammerson plc have formed a partnership to invest £400 million to regenerate the city and provide a new urban centre with retail, leisure facilities, residential apartments, ofﬁces and public spaces. The development is set to propel the south west’s capital city into a top ten retail position. Land Securities Annual Report 2006 Willow Place, Corby 16,260m2 – Opening 2007 Willow Place reﬂects the aspirations of Corby, a town rapidly expanding and set to double its population by 2021. The scheme will provide modern retail units for quality multiple retailers, and is the ﬁrst step in the rejuvenation of the town centre. Christ’s Lane, Cambridge 7,150m2 – Opening 2007 This retail and residential scheme is located within the city centre conservation area and will re-establish the historic street, Christ’s Lane, to create a new retail thoroughfare in the city. Key facts Anchored by Debenhams 60 new shops 120 city centre apartments Restaurants and cafés New public spaces The Buchanan Partnership Through the swap with Slough Estates in 2004 we entered a partnership with Henderson Global Investors for the ownership of Buchanan Galleries. The shopping centre is located in Glasgow’s prime retail area and we are currently assessing the property’s further development potential. The Metro Shopping Fund LP Land Securities and Delancey created The Metro Shopping Fund LP to combine a selection of central London retail assets to enable more effective management. The portfolio includes properties in Victoria, Notting Hill, lslington and Clapham and the recent purchase of Southside Shopping Centre, Wandsworth. | 2008 Broadmead, Bristol 50% ownership 139,350m2 – Opening 2008 This mixed-use development will create a new retail core and leisure facilities in a regenerated historic quarter, bringing activity to the city centre day and night. Phase III, Livingston 37,670m2 – Opening 2008 Plans have been approved for the next phase of expansion of Livingston town centre, providing new shops and apartments alongside new public spaces including a winter garden. 145 Business analysis continued | 2009 St David’s 2, Cardiff 50% ownership 103,620m2 – Opening 2009 This mixed-use development set within new public spaces, arcades and treelined boulevards, will help establish Cardiff as one of the top retail destinations in Europe. Development pipeline Retail Shopping centres and shops Whitefriars, Canterbury Summerland Gate, Exeter Description Size m2 Planning Letting % Estimated/actual completion date Cost £m Retail/residential 37,160m2/3,260 Retail and leisure/residential 5,380m2/1,390 Broadmead, Bristol The Bristol Alliance – a limited partnership with Hammerson plc Christ’s Lane (formerly Bradwell’s Court), Cambridge Retail Leisure Ofﬁces Residential Retail/leisure Residential 83,610 9,000 28,000 18,740 5,800 1,350 Princesshay, Exeter Retail/residential 37,360/7,200 St David’s Cardiff – St David’s Partnership – a partnership with Capital Shopping Centres Willow Place, Corby Retail/leisure Residential Retail 85,000 18,620 16,260 Almondvale Centre Phase III, Livingston Retail/leisure 32,000/5,670 Retail warehouses Bexhill Retail Park, extension Kingsway Retail Park, Dundee, Phase II Maskew Avenue, Peterborough Commerce Centre, Poole (part) Friary Retail Park, Plymouth Thanet Leisure, Thanet Almondvale South, Livingston, Phase IIb Retail warehouses Retail warehouses Retail warehouses Retail warehouses Retail warehouses Retail warehouses Retail warehouses 2,720 8,650 13,380 6,040 7,200 8,970 4,180 99 100 26 76 48 2 13 100 64 91 54 32 July 2005 Apr 2005 Sept 2008 113 14 200 Dec 2007 26 Sept 2007 150 2009 2007 2008 June 2005 May 2004 Sept 2007 Sept 2006 Dec 2007 Apr 2007 2007 11 15 32 22 8 22 PR PR RG PR Key Developments let and transferred or sold Developments approved and in progress Developments completed Proposed developments Planning status PR AS RG Planning received Application submitted Resolution to grant PI OPR Planning inquiry Outline planning received Major retail joint ventures continued Retail park developments Scottish Retail Property Limited Partnership A joint venture was created with British Land to combine our retail assets in Aberdeen and East Kilbride. This provided beneﬁts of scale and the ability to maximise the long-term value of the centres through development and other property activity. Thanet Leisure, Thanet We have acquired an 8.5 acre site adjacent to Westwood Cross fashion park, Thanet, which has planning consent for a leisure and entertainment scheme including a hotel, multi-screen cinema, casino, bingo, restaurants and car spaces. The St David’s 2 Partnership As substantial landowners in Cardiff city centre, Land Securities and Capital Shopping Centres created the St David’s Partnership to deliver a new heart for the Welsh capital. St David’s 2 will breathe new life and vibrancy into Cardiff and consolidate it as a major national and international capital city. Maskew Avenue, Peterborough We shall shortly be building three new superstores on Maskew Avenue, next to the existing Boulevard Retail Park, to house retailers B&Q and Matalan. Their relocation from Peterborough’s South Bank will free up land in Peterborough’s town centre to help facilitate their ambitious regeneration programme. Land Securities Annual Report 2006 146 Investment property business – London Portfolio Top twelve properties Cardinal Place, SW1 The 60,550m2 scheme provides modern ofﬁce accommodation and ground ﬂoor retail, anchored by Marks & Spencer. New retailers to Victoria include Molton Brown, Hobbs and Zara. 50 Queen Anne’s Gate, SW1 Formerly occupied by the Home Ofﬁce, a major refurbishment will be completed in 2007. Devonshire House,W1 After many years of ownership this property is now being marketed for sale. Eland House, SW1 Forming part of our Victoria holdings this building has beneﬁted from the Cardinal Place redevelopment. Portland House, SW1 Refurbished in 2002, the 29,120m2 ofﬁce building is located in the heart of the Victoria portfolio. It is multi- let to occupiers such as American Express and the Government. Portman House,W1 A 12,810m2 ofﬁce building located adjacent to Oxford Street incorporating 3,540m2 of prime retail space. London Portfolio value £5.9bn 1.1 4.8 London offices London retail Top 12 properties £bn 3.2 2.7 Top 12 Other Total accommodation 940,000m2 Total London occupiers 650 Dresdner Kleinwort Wasserstein London occupiers international plc Land Securities Annual Report 2006 147 Business analysis continued Empress State Building, SW6 Following a major refurbishment in 2003, as part of the Landﬂex portfolio, the 43,330m2 building is let to the Metropolitan Police and incorporates 2,040m2 of retail and leisure space. New Street Square, EC4 Contemporary ofﬁce buildings arranged around a new public square will replace a series of post war ofﬁce blocks. One-third of the ofﬁce accommodation has been pre- let to Deloitte. Ground ﬂoor retail and restaurant space will complete the scheme. Ashdown House, SW1 The 21,000m2 ofﬁce and retail property holds a prominent position in Victoria and is fully let to the Government (DEFRA HQ). The ground ﬂoor retail includes various tenants including Dixons and Boots. Kingsgate House, SW1 The 18,640m2 ofﬁce building on Victoria Street is let to the Secretary of State and has 18 shops at ground level. Piccadilly Circus,W1 Iconic illuminated advertising in the heart of the West End. The site includes 1,460m2 of ofﬁces and 3,690m2 of ground ﬂoor retail, restaurants and a public house. One New Change, EC4 The current building opposite St Paul’s is occupied by Allen & Overy until 2006, following which the site will be redeveloped to create new ofﬁce and retail accommodation and unique public spaces. Top London properties over £50m by location EC2 1. Moorgate Hall 2. One Wood Street EC3 3. 13/23 Fenchurch Street EC4 4. New Street Square * 5. One New Change * 6. Regis House 7. 50 Ludgate Hill and 26 Old Bailey * 8. Cannon Street House and Martin House 9. Fleetbank House 10. Hill House * 11. Times Square * 12. IPC Tower, Shoe Lane NW1 13. Greater London House * SW1 14. Haymarket House 15. New Scotland Yard * 16. 50 Queen Anne’s Gate * 17. Portland House * 18. Eland House * 19. Kingsgate House * 20. Cardinal Place * 21. Westminster City Hall 22. Clive House 23. Ashdown House * SE1 24. Bankside 2 & 3 25. Red Lion Court SW6 26. Empress State *L WC1 27. 1 Theobald’s Court 28. Holborn Gate, 330 High Holborn WC2 29. 40 Strand * W1 30. 455/475 and 475/497 Oxford Street and Park House * 31. Portman House * 32. Devonshire House * 33. Piccadilly Circus * 34. 12/24 Oxford Street and 2/5 Tottenham Court Road 35. Oxford House 70/80 Oxford Street W2 36. 40 Eastbourne Terrace L E14 37. 6/7 and 8/9 Harbour Exchange EC2 1 EC3 3 WC1 EC1 W1 31 30 35 33 32 SW1 28 WC2 29 27 34 14 16 15 21 23 19 20 22 18 17 W2 36 SW6 4 12 9 10 2 7 5 11 8 EC4 6 24 25 SE1 13 37 26 * £100m and above £50-100m In the development pipeline L Landflex building Land Securities Annual Report 2006 148 Investment property business – London Portfolio Development timeline | 2007 Bankside 123, SE1 This major mixed-use scheme will create a focal point for the area’s expanding business community, providing ofﬁce and retail accommodation in three stunning buildings. Building 1 has been completed and sold to IPC Media. One Wood Street, EC2 The delivery of this high quality ofﬁce space and much needed modern retail accommodation is the ﬁrst step in the transformation of the Cheapside area. Global law ﬁrm, Eversheds, has pre- let the ofﬁce accommodation. 50 Queen Anne’s Gate, SW1 This iconic building is undergoing a major refurbishment, both externally and internally, to create high speciﬁcation ofﬁces for occupation by the Department for Constitutional Affairs in 2007. Feature property Cardinal Place – case study Cardinal Place, located on Victoria Street, SW1 has literally transformed the heart of Victoria. New ofﬁce accommodation has been created in three modern buildings, one with a distinctive curving glass entry, to replace a series of outdated 1960s ofﬁces. New ground ﬂoor retail, anchored by Marks & Spencer and including fashion brands such as Zara and Hobbs, has provided much needed high street retail, while the café and restaurants have given the residents and people working in the area a much needed place to meet, eat and socialise. Designed by EPR Architects Limited, the 60,550m2 contemporary scheme has opened up new views of Westminster Cathedral and provided new pedestrian passages connecting Victoria Street with Bressenden Place. In addition to the new public piazza and walkways, an art gallery is centred within the scheme, drawing tourists, locals and ofﬁce workers to view the regularly changing exhibitions. Completed in January 2006, it is estimated that the 51,130m2 ofﬁce accommodation will house up to 4,000 people when fully let and that the 9,420m2 retail space has created 400 new retail jobs. Key facts 51,130m2 of ofﬁces in 3 buildings 14 shops anchored by Marks & Spencer 9,420m2 of retail ﬂoorspace 7 restaurants and cafés Art gallery New public spaces Landﬂex is an integrated accommodation package which provides occupiers with lease ﬂexibility, service guarantee and price certainty. 7 Soho Square, W1 The ﬁrst property in the Landﬂex portfolio is located within a vibrant and creative business community in the heart of London’s West End. The 3,760m2 property offers ﬂexible space in one of London’s best known squares and is home to Expedia.co.uk and Ryder HKS. Empress State, SW6 Located in Earl’s Court, SW6, the Metropolitan Police Authority occupies the property under a single building property outsourcing Landﬂex solution. Land Securities Annual Report 2006 40 Eastbourne Terrace, W2 The recently refurbished building now with striking glass and terracotta ﬁnishes is centrally located in Paddington. The 7,690m2 property is let to CB&I and is fully serviced under the Landﬂex solution. 140 Aldersgate Street, EC1 The most recent addition to the portfolio, the Sidell Gibson designed building is Landﬂex’s ﬁrst exposure to the City of London market. Occupiers include Vibrant Media and Flightbookers. 149 Business analysis continued | 2008 | 2010 | 2010 New Street Square, EC4 Replacing a jumble of post war ofﬁce blocks, four contemporary buildings will create workspaces and a striking public square surrounded by retail and restaurant space, furthering the regeneration of Mid-town. Park House,W1 On Oxford Street, close to Marble Arch, we are looking to redevelop the whole block to provide a mix of ofﬁces, prime retail and residential apartments. One New Change, EC4 Adjacent to St Paul’s Cathedral, the Jean Nouvel designed One New Change development represents a rare opportunity for comprehensive redevelop- ment in the heart of the City and to create new amenities and seven day retail trading. Development pipeline London portfolio Central and Inner London properties 40 Eastbourne Terrace, W2 Cardinal Place, SW1 Bankside 2&3, SE1 1 Wood Street, EC2 New Street Square, EC4 50 Queen Anne’s Gate, SW1 Dashwood House, EC2 One New Change, EC4 Park House, W1 Description Ofﬁces Ofﬁces/retail Ofﬁces Retail/leisure Ofﬁces/retail Ofﬁces Retail/leisure Ofﬁces Ofﬁces Retail Ofﬁces/retail Ofﬁces/retail Residential Size m2 Planning Letting % Estimated/actual completion date Cost £m 7,690 51,130/9,420 35,550 3,170 15,020/1,500 62,340 2,980 30,140 13,870 590 30,790/20,550 15,550/8,470 5,950 100% 34/98% 100%(*) 35% Dec 2005 Jan 2006 Aug 2007 Sep 2007 Mar 2008 12 256 121 102 312 100% Dec 2007 126 AS RG AS 2009 2010 2010 The letting was achieved after 31 March 2006. Notes: (*) Cost (£m) refers to the 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 2006. Trading Property development schemes and the Kent Thameside project are excluded from the development pipeline. Key Developments let and transferred or sold Developments approved and in progress Developments completed Proposed developments Planning status PR AS Planning received Application submitted Resolution to grant RG PI Planning inquiry OPR Outline planning received London clusters – areas of London on which we are focusing our investment and development activities: South Bank The pace of development here on the South Bank has been astonishing, with new art galleries and theatres and high-tech ofﬁce space. We realise that many major companies are choosing to locate themselves here to beneﬁt from the regenerated surroundings with easy access to the City, and we are providing more opportunities with our major mixed-use scheme, Bankside 123, adjacent to Tate Modern. Victoria Politics, art, churches, iconic squares, parks and royalty all reside in SW1 and our properties and their occupiers reﬂect this exciting mix. The creation of Cardinal Place has given the area a focus, and further plans for development around Bressenden Place will continue the regeneration of the area. Mid-town Traditionally the home to journalism and law, the area between Holborn and the City is undergoing a major transformation driven by the New Street Square development on New Fetter Lane. This major scheme will replace an assortment of post-war ofﬁce blocks with contemporary ofﬁce buildings and create a new urban square with retail, cafés, and public spaces. Oxford Street As the world renowned shopping heart of London, Oxford Street offers some of the best retail in the UK. Our portfolio in the area includes modern retail accommodation, ofﬁces, the Park House development at the west end and longer-term development opportunities at the east end of the street. Land Securities Annual Report 2006 150 Investment property business Combined portfolio analysis The like-for-like portfolio(2) Open Market Value(7) Valuation Surplus(1) Gross Rental Income(1) Annual net rent(8) Annual net estimated rental value(9) 31/03/06 £m 31/03/05 £m Surp/(def) £m Surp/(def) % 12 mths to 31/03/06 £m 12 mths to 31/03/05 £m 31/03/06 £m 31/03/05 £m 31/03/06 £m 31/03/05 £m 267.9 110.6 19.7 398.2 203.7 25.8 229.5 627.7 247.3 91.9 40.8 8.8 388.8 5.8 394.6 24.7 1.047.0 95.7 1,142.7 236.6 – 317.6 1,696.9 (13.8) 1,683.1 405.5 153.9 27.5 586.9 227.7 56.7 284.4 871.3 453.3 135.9 121.4 73.8 784.4 8.7 793.1 32.5 1,696.9 (13.8) 1,683.1 1,577.5 105.6 1,683.1 2,128.8 865.6 206.3 3,200.7 1,308.7 185.4 1,494.1 4,694.8 1,696.5 737.2 225.5 51.2 2,710.4 52.3 2,762.7 240.6 7,698.1 565.3 8,263.4 3,337.6 – 1,291.9 12,892.9 3,816.5 1,101.5 357.5 5,275.5 1,904.9 409.8 2,314.7 7,590.2 2,416.4 1,059.7 654.8 675.6 4,806.5 88.0 4,894.5 408.2 12,892.9 1,816.4 752.4 179.9 2,748.7 1,094.6 160.0 1,254.6 4,003.3 1,436.1 647.1 185.2 41.7 2,310.1 45.5 2,355.6 219.3 6,578.2 437.6 7,015.8 970.4 627.5 752.1 9,365.8 2,553.8 860.1 445.6 3,859.5 1,256.2 225.5 1,481.7 5,341.2 1,737.2 1,085.5 352.1 423.0 3,597.8 53.4 3,651.2 373.4 9,365.8 11,619.0 1,273.9 12,892.9 8,371.9 993.9 9,365.8 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 Mid-town Inner London Total London ofﬁces Rest of UK Total ofﬁces Other Like-for-like portfolio(2) Completed developments(3) Total Acquisitions(4) Sales and restructured interests(5) Total development programme(6) Combined portfolio Properties treated as ﬁnance leases Combined portfolio Total 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 Mid-town Inner London Total London ofﬁces Rest of UK Total ofﬁces Other Combined portfolio Properties treated as ﬁnance leases Combined portfolio Represented by: Investment portfolio Share of joint ventures Combined portfolio Land Securities Annual Report 2006 14.5 14.7 10.6 14.3 18.6 16.2 18.3 15.5 17.2 14.3 22.6 20.8 16.9 12.8 16.8 11.5 15.9 21.4 16.2 7.6 – 32.9 15.3 n/a 15.3 12.0 16.3 8.4 12.6 13.7 16.1 14.1 13.0 23.3 14.8 22.9 12.6 19.7 11.1 19.6 8.7 15.3 n/a 15.3 16.0 9.1 15.3 129.9 41.8 10.8 182.5 51.7 10.0 61.7 244.2 92.5 58.1 13.4 3.3 167.3 1.7 169.0 11.4 424.6 26.1 450.7 123.0 20.8 19.5 614.0 122.5 44.7 11.1 178.3 47.3 9.3 56.6 234.9 93.2 62.6 12.8 3.7 172.3 1.7 174.0 9.5 418.4 12.5 430.9 22.5 56.9 16.8 527.1 (13.2) 600.8 (10.9) 516.2 194.5 58.9 20.7 274.1 69.1 18.5 87.6 361.7 102.8 88.7 13.5 30.2 235.2 1.7 236.9 15.4 614.0 (13.2) 600.8 538.7 62.1 600.8 139.5 46.3 30.8 216.6 55.2 15.3 70.5 287.1 97.7 82.2 15.8 16.1 211.8 3.7 215.5 24.5 527.1 (10.9) 516.2 471.9 44.3 516.2 115.4 41.7 9.2 166.3 53.3 8.6 61.9 228.2 90.4 58.0 13.2 3.2 164.8 3.7 168.5 11.4 408.1 15.4 423.5 164.2 – 10.4 598.1 194.4 51.3 17.0 262.7 75.4 17.6 93.0 355.7 101.3 80.8 13.4 23.2 218.7 6.4 225.1 17.3 598.1 112.2 43.5 9.7 165.4 50.4 8.6 59.0 224.4 87.1 57.2 13.3 3.7 161.3 4.0 165.3 13.9 403.6 10.7 414.3 57.4 22.1 9.0 502.8 145.1 46.3 24.4 215.8 58.5 11.4 69.9 285.7 87.0 77.1 13.0 17.6 194.7 4.1 198.8 18.3 502.8 130.9 46.8 12.2 189.9 64.6 9.9 74.5 264.4 101.9 53.7 12.8 4.9 173.3 4.7 178.0 13.1 455.5 32.0 487.5 196.0 – 144.7 828.2 256.0 58.9 23.1 338.0 95.7 23.9 119.6 457.6 160.9 84.3 42.7 49.8 337.7 7.9 345.6 25.0 828.2 123.6 46.4 11.7 181.7 60.5 9.5 70.0 251.7 93.0 53.4 12.1 4.8 163.3 5.1 168.4 13.2 433.3 33.2 466.5 61.1 41.2 99.0 667.8 179.6 56.6 28.3 264.5 70.7 13.6 84.3 348.8 125.5 97.4 41.3 29.3 293.5 5.4 298.9 20.1 667.8 533.6 64.5 598.1 445.1 57.7 502.8 739.0 89.2 828.2 604.3 63.5 667.8 151 Business analysis continued The like-for-like portfolio(2) Gross income yield(10) 31/03/05 % 31/03/06 % Equivalent yield(11) 31/03/06 % 31/03/05 £m Annual gross estimated rental value(12) 31/03/06 £m 31/03/05 £m Voids (by ERV)(13) 31/03/06 % 31/03/05 % Lease length as at 31/03/06(14) Median years(i) Mean years(ii) 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 Mid-town Inner London Total London ofﬁces Rest of UK Total ofﬁces Other Like-for-like portfolio(2) Completed developments(3) Total Acquisitions(4) Sales and restructured interests(5) Total development programme(6) Combined portfolio Total 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 Mid-town Inner London Total London ofﬁces Rest of UK Total ofﬁces Other Combined portfolio Represented by: Investment portfolio Share of joint ventures Combined portfolio 5.4 4.8 4.5 5.2 4.1 4.6 4.1 4.9 5.3 7.9 5.9 6.3 6.1 7.1 6.1 4.7 5.3 2.7 5.1 4.9 n/a 0.8 4.6 5.1 4.7 4.8 5.0 4.0 4.3 4.0 4.7 4.2 7.6 2.0 3.4 4.6 7.3 4.6 4.2 4.6 4.6 5.1 4.6 6.2 5.8 5.4 6.0 4.6 5.4 4.7 5.6 6.1 8.8 7.2 8.9 7.0 8.8 7.0 6.3 6.1 2.4 5.9 5.9 3.5 1.2 5.4 5.7 5.4 5.5 5.6 4.7 5.1 4.7 5.3 5.0 7.1 3.7 4.2 5.4 7.7 5.4 4.9 5.4 5.3 5.8 5.4 5.3 5.1 5.1 5.2 4.7 5.0 4.7 5.1 5.5 5.9 5.4 6.2 5.6 7.7 5.6 6.1 5.3 5.3 5.3 5.4 n/a 5.3 5.3 5.3 5.1 5.2 5.3 4.8 4.9 4.8 5.1 5.5 5.6 5.4 5.8 5.5 7.4 5.6 5.9 5.3 5.3 5.2 5.3 5.9 5.8 5.7 5.9 5.3 5.6 5.3 5.7 6.3 6.5 6.1 6.8 6.4 8.8 6.4 6.5 6.0 6.0 6.0 6.0 5.9 5.5 6.0 5.9 5.8 5.8 5.9 5.4 5.6 5.4 5.7 6.3 6.2 6.0 6.4 6.2 8.6 6.3 6.4 6.0 6.0 5.8 6.0 139.5 48.0 13.7 201.2 64.6 9.9 74.5 275.7 103.3 54.5 13.2 4.9 175.9 4.8 180.7 13.3 469.7 33.0 502.7 197.7 n/a n/a n/a 131.0 47.6 13.4 192.0 60.5 9.5 70.0 262.0 94.5 54.0 12.1 4.8 165.4 5.1 170.5 13.3 445.8 33.2 479.0 61.3 n/a n/a n/a 3.0 3.1 6.6 3.3 2.9 0.0 2.6 3.1 3.0 8.8 0.0 2.0 4.5 20.8 5.0 2.3 3.8 1.5 3.6 5.1 n/a n/a n/a 2.4 0.4 0.7 1.8 2.0 0.0 1.7 1.8 7.0 5.6 0.0 0.0 5.8 9.8 5.9 2.3 3.4 9.9 3.8 1.1 n/a n/a n/a 8.5 6.0 7.5 7.5 13.3 14.5 13.3 9.0 5.5 0.5 3.3 0.5 3.3 2.8 3.3 6.3 5.8 13.0 6.0 8.8 n/a n/a n/a 7.1 7.7 13.0 7.7 13.0 12.7 12.9 9.1 8.0 1.8 4.8 0.7 5.4 6.9 5.5 13.2 7.7 13.9 7.9 10.7 n/a n/a n/a Notes 1 The valuation surplus and rental income values are stated after adjusting for the effect of SIC 15 under IFRS, but before restating for ﬁnance leases. 8 Annual net rent is annual rents in payment at 31 March 2006 after deduction of ground rents. It excludes the value of voids and current rent free periods. 2 The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2004 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. 3 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 2004. 4 Includes all properties acquired in the period since 1 April 2004, other than those included in the development programme. 5 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 2004. 6 Ongoing developments are properties in the development programme. They exclude completed developments as deﬁned in note (3) above. 7 The open market value ﬁgures include the Group share of the various joint ventures and exclude properties owned by Land Securities Trillium and Telereal. 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 2006 152 Investment property business Combined portfolio reconciliation Investment statement – gross rental income reconciliation Combined portfolio Central London shops (excluding Metro Shopping Fund LP) Inner London ofﬁces in Metro Shopping Fund LP Rest of UK ofﬁces Allocation of other Less: ﬁnance lease adjustment Total rental income Open market value reconciliation Combined portfolio Central London shops (excl. Metro Shopping Fund LP) Inner London ofﬁces in Metro Shopping Fund LP Rest of UK ofﬁces Allocation of other Combined portfolio Rental value reconciliation Combined portfolio Central London shops (excl. Metro Shopping Fund LP) Inner London ofﬁces in Metro Shopping Fund LP Rest of UK ofﬁces Allocation of other Combined portfolio Development pipeline ﬁnancial summary Other London Investment Portfolio £m Portfolio £m Year ended 31/03/06 £m Retail £m London Portfolio £m Other Investment Portfolio £m Year ended 31/03/05 £m 235.2 47.0 – 0.1 4.3 286.6 (8.1) 278.5 15.4 – – 0.1 (11.2) 4.3 – 4.3 612.3 – – 1.7 – 614.0 (13.2) 600.8 287.1 (45.2) 0.5 3.3 4.3 250.0 (2.6) 247.4 211.8 45.2 (0.5) – 4.7 261.2 (8.3) 252.9 24.5 – – 0.4 (9.0) 15.9 – 15.9 523.4 – – 3.7 – 527.1 (10.9) 516.2 Retail £m 361.7 (47.0) – 1.5 6.9 323.1 (5.1) 318.0 7,590.2 (1,053.7) 18.3 87.4 235.6 6,877.8 4,806.5 1,053.7 (18.3) – 90.5 5,932.4 408.2 – – 0.6 (326.1) 82.7 12,804.9 – – 88.0 – 12,892.9 5,341.2 (820.8) 12.5 53.4 164.1 4,750.4 3,597.8 820.8 (12.5) – 80.7 4,486.8 373.4 – – – (244.8) 128.6 9,312.4 – – 53.4 – 9,365.8 457.6 (56.0) 0.9 4.9 13.3 420.7 337.7 56.0 (0.9) 2.9 6.5 402.2 25.0 – – 0.1 (19.8) 5.3 820.3 – – 7.9 – 828.2 348.8 (53.7) 1.0 5.3 8.9 310.3 293.5 53.7 (1.0) – 6.8 353.0 20.1 – – 0.1 (15.7) 4.5 662.4 – – 5.4 – 667.8 Cumulative movements on the development programme to 31/03/06 Total scheme details Capital Disposals SIC15 rent Market value expenditure Capitalised Revaluation surplus and other to date(1) adjustments £m at start of scheme £m incurred to date £m interest to date £m £m Market value at Estimated total capital 31/03/06 expenditure(4) £m £m Estimated total capitalised interest £m Estimated total cost less proceeds(2) £m Valuation surplus for Net 12 months to income/ ERV(3) 31/03/06(1) £m £m Development programme let, transferred or sold Shopping centres and shops Retail warehouses London Portfolio 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 27 – 14 41 83 66 188 337 126 11 12 149 91 42 439 572 11 – – 11 5 1 35 41 45 3 28 76 20 18 299 337 (7) 1 – (6) – – 5 5 Movement on proposed developments for the year to 31/03/06 11 5 321 337 16 – 1 17 – – – – – 1 29 30 – – – – 202 15 54 271 199 127 966 1,292 27 6 351 384 127 11 12 150 376 100 917 1,393 415 4 554 973 11 – – 11 31 3 67 101 34 – 58 92 154 11 26 191 451 169 1,172 1,792 446 10 883 1,339 11 1 3 15 32 11 101 144 31 1 61 93 22 3 24 49 23 8 285 316 – 1 29 30 Notes: (1) (2) Includes 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 together with estimated capitalised interest. For Proposed Development properties, the market value of the property at 31 March 2006 is included in the estimated total cost. Estimated total cost is stated net of residential proceeds for Shopping Centres and shops of £11m, £39m and £30m for developments transferred or sold, completed or in progress and proposed developments respectively. The London Portfolio proposed developments are stated net of residential proceeds of £80m. Allowances for rent free periods are excluded from cost. (3) Net headline annual rental payable on let units plus net ERV at 31 March 2006 on unlet units. (4) For those schemes transferred or sold, completed or in progress the cost for each scheme is shown on the preceding pages. The costs of the Proposed Development properties are not shown on a scheme by scheme basis as the schemes have not yet been ﬁnalised and could still be subject to material change. For Proposed Development properties the estimated total capital expenditure represents the outstanding costs required to complete the scheme as at 31 March 2006. Land Securities Annual Report 2006 Property Outsourcing - Land Securities Trillium 153 Business analysis continued Barclays Barclays transferred 50,100m2 of property to Land Securities Trillium and is free from property responsibility and risks on that portfolio. BBC After ﬁve years, and the sale of Media Village White City, the BBC and Land Securities Trillium property partnership will end in July 2006 when the facilities management services of the contract will handover to new providers. DVLA Land Securities Trillium is undertaking a £30m refurbishment of DVLA’s headquarters and provides full services to the DVLA’s 94,133m2 estate supporting new work practices. DWP Our 20 year partnership with DWP has delivered an improved, integrated service and major cost savings to the department. Norwich Union We are investing £90m in the refurbishment of Norwich Union‘s headquarters and provide full maintenance and repair services to 115,000m2 of its accommodation. Telereal Following the sale of our Telereal stake, we retain leasehold risk on 50 properties and provide Telereal with IT and Helpdesk services. Clients Customer service centre Land Securities Trillium’s award winning Customer Service Centre is at the heart of the business. It is a fully resilient function managed across two sites 24 hours a day, seven days a week, 365 days a year. It currently manages seven contracts resulting in 600,000 customer contacts per year. Service levels are met consistently while customer satisfaction remains very high. Total income £927.3m Total accommodation under management m2 3.3 million Customer service contacts per annum 600,000 Land Securities Annual Report 2006 154 Property Outsourcing – Land Securities Trillium DVLA refurbishment, Swansea We have enabled DVLA to implement cultural, operational and organisational change across the Agency by delivering cost effective upgrades to modernise its headquarters and implement new working practices. Norwich Union Headquarters The new atrium for Norwich Union, designed and delivered by Land Securities Trillium, offers new facilities and a vibrant working environment for Norwich Union staff. Job Centre Plus We continue to support transformation in the way that DWP serves the public through delivery of Job Centre Plus. Feature contract DWP In 1998, DWP transferred the ownership and management of its estate to us for 20 years. The original portfolio included 650 buildings covering a ﬂoor area of over 1.6 million m2. Known as PRIME, the agreement included the purchase of all the freehold premises, responsibility for rental costs, dilapidation liabilities on leased buildings and the cost of maintaining the buildings as well as the provision of building-related facilities management services. All surplus space was transferred to us for disposal.We paid £250m for the freehold portfolio and received annual revenue of £250m, for full services across the freehold and leasehold portfolios. Unlike a conventional sale and leaseback arrangement, the contract provides the ﬂexibility to vacate buildings as necessary to match DWP’s changing business requirements. The contract also offers life cycle risk transfer. In 2003, the contract was expanded to include an additional 1,100 properties covering 900,000m2. We paid a further £100m for the freehold properties. New business opportunities Mill Group joint venture Investors in the Community Group Ltd (‘IIC’) is a joint venture between Land Securities Trillium and Mill Group which aims to achieve a leading position in the Building Schools for the Future (‘BSF’) and community Public Private Partnership markets through investment in new socially responsible projects. IIC is short-listed for Leeds BSF. Land Securities Annual Report 2006 Key facts Overall customer satisfaction – 90% Portfolio of 1,639 properties covering 2.5 million m2 Accommodating 115,000 staff Metrix Metrix is a 50:50 joint venture between Land Securities Trillium and QinetiQ to bid for the Defence Training Review (‘DTR’), the largest PFI contract ever with a £13bn training and accommodation package covering over 600,000m2. DTR aims to modernise the delivery of professional and trade training throughout the armed forces, including provision of new and refurbished accommodation and full range estates services. 155 Business analysis continued DWP, Hinchley Wood Residential consent for part of DWP’s Hinchley Wood site shows value generated by innovative thinking for both Land Securities Trillium and our customer. Barclays leasehold property We have achieved 100% sub-letting of all ﬁve ﬂoors at 8 Angel Court since taking on the lease in 2005. Telereal leasehold property Telephone House, Brighton one of the 50 Telereal properties where rent review risk has been transferred to us. Regional breakdown by contract (000m2) and number of employees Average length of contract 798m2 28 106m2 4 1,918m2 289 1,522m2 35 3,739m2 734 15.2 years Number of people by occupation as at 31/03/06 Asset management Call centre Capital projects Quality assurance Facilities management HR/ﬁnance/business development Total Note: These ﬁgures exclude all Telereal staff Total 42 95 214 36 585 118 1,090 Service partner agreements at 31/03/06 Service partner Service element Estimate of proportion of service providers’ turnover <5% <5% <5% Catering Building maintenance Security Building maintenance 20-25% Cleaning Furniture Cleaning Facilities Management Cleaning Security Security <5% 15-20% <5% <5% <5% <5% 20-25% Compass Dalkia Group 4 GS Hall ISS Amaryllis/MiB MITIE Norland OCS Securitas Wilson James Average contract length of above service partners: 11 years Average contract time remaining of above service partners: 7 years Average annual contract value of above service partners: £18m Land Securities Annual Report 2006 DWP BBC Norwich Union DVLA Barclays Telereal II Other Total Telereal (50%) Contract 20 yrs 5 yrs 25 yrs 20 yrs 20 yrs 4.5 yrs Mar 2018 Jun 2006 Jun 2029 Mar 2025 Dec 2024 Mar 2010 £m 67.5 – – 13.3 5.5 – 86.3 (17.1) – – – (1.3) (7.6) – (7.1) 53.2 0.9 – – 54.1 – – – – – £m – 1.4 – – – – £m 642.0 13.1 222.7 47.0 – 2.5 1.4 927.3 £m 13.7 1.0 0.3 – – 2.4 17.4 (3.4) (2.7) (3.2) (0.3) – (1.9) – (0.9) 5.0 – – – 5.0 (2.9) – – – 43.7 Norwich Union 000m2 107.0 5.2 2.8 115.0 40.0 75.0 115.0 8.7 £m 8.2 – 3.8 0.7 – 0.1 12.8 (1.7) (3.8) (0.5) (3.6) – (2.1) – (0.1) 1.0 – – – 1.0 – – – – – DVLA 000m2 13.3 – – 13.3 – 13.3 13.3 81.4 £m 0.5 1.7 – – – – 2.2 – – – – – 0.3 – – 2.5 – 1.9 – 4.4 – – – 27.1 – £m – – – 21.1 – – 21.1 – – – – – (14.2) – – 6.9 – – – 6.9 – – – – – (0.7) (1.2) – – – (8.6) (7.4) (0.5) (17.0) – – 293.0 276.0 – (0.2) 19.8 – – Barclays 000m2 Telereal II 000m2 Other 000m2 11.4 14.8 23.9 50.1 11.3 38.8 50.1 – – – – – – – – 150.0 – – – – – – – – – (52.6) (0.5) (17.3) – (32.5) – – 0.5 – – – 0.5 – – – – – BBC 000m2 – – – – – – – 364.2 (183.9) (229.3) (26.1) (215.7) – (147.8) (7.4) (20.5) 96.6 1.0 1.9 293.0 392.5 (17.5) (1.4) 19.8 27.1 536.2 Total 000m2 2,347.9 86.4 190.2 2,624.5 912.8 1,711.7 2,624.5 697.4 156 Property outsourcing – Land Securities Trillium Contract analysis Year ended 31/03/06 Contract length Term(1) Expiry date Income Unitary charge Third party (sublet) income Capital projects Other revenue Proceeds of sales of trading properties Finance lease income Gross property income Costs Rent payable Service partners (maintenance, facilities etc) Life cycle maintenance costs Capital projects Cost of sales of trading properties Other costs, including overheads Bid costs Depreciation Contract level operating proﬁt Proﬁt on sale of ﬁxed assets £m 553.0 9.0 198.0 9.0 – – £m 66.6 – 20.6 16.2 – – 769.0 103.4 (178.1) (169.0) (21.9) (194.5) – (88.8) – (19.0) 97.7 1.0 Net surplus on revaluation of investment property Proﬁt on disposal of investment in joint venture (Telereal) Segment proﬁt Capital expenditures Life cycle maintenance costs capitalised Estates capitalised Book value of assets at 31 March 2006 Investment in joint venture Investment properties Operating properties (1) For Barclays contract, this is the sale and leaseback term. – – 98.7 (14.6) (1.2) – – 492.4 Contract analysis Floorspace Client occupied Third party (sublet) Vacant Total Freeholds/ valuable leaseholds Leaseholds Total Estate managed but not transferred DWP 000m2 2,216.2 66.4 163.5 2,446.1 861.5 1,584.6 2,446.1 93.1 Land Securities Annual Report 2006 Vacation allowance and portfolio activity – DWP 000m2 Client occupied* Third party (sublet) Vacant Total Freeholds/valuable leaseholds Leaseholds Total Estate managed but not transferred Vacation allowance used to date Available allowance Future allowance *Includes core vacations Vacation allowance and portfolio activity – Barclays 000m2 Client occupied Third party (sublet) Vacant Total Freeholds/valuable leaseholds Leaseholds Total Estate managed but not transferred Note: The ‘Disposals’ column includes – lease surrenders, lease expiries and disposals. Regional breakdown by contract at 31/03/06 000m2 London, South East and West England Northern England Scotland Midlands and Wales Total DWP 856 890 298 495 2,539 157 Business analysis continued 31/03/05 Acquisitions Vacations Lettings Disposals 31/03/06 2,331.5 65.2 79.2 2,475.9 866.4 1,609.5 2,475.9 100.5 120.2 322.9 278.2 19.4 – – 19.4 1.3 18.1 19.4 – – – – (134.7) (5.6) 140.3 – – – – (7.4) – – – – 6.8 (6.8) – – – – – – – – – – (49.2) (49.2) (6.2) (43.0) (49.2) – – – – 2, 216.2 66.4 163.5 2,446.1 861.5 1,584.6 2,446.1 93.1 234.1 289.1 198.2 31/03/05 Acquisitions Vacations Lettings Disposals 31/03/06 11.3 10.2 10.0 31.5 11.3 20.2 31.5 – BBC 340 – 24 – 364 0.1 0.2 18.3 18.6 – 18.6 18.6 – NU 63 32 29 – 124 – – – – – – – – – 4.4 (4.4) – – – – – – – – – – – – – DVLA Barclays Telereal 10 6 2 77 95 39 – – 11 50 150 – – – 11.4 14.8 23.9 50.1 11.3 38.8 50.1 – Total 1,458 928 353 583 150 3,322 Land Securities Annual Report 2006 158 Investor Information The report and ﬁnancial statements, share price information, company presentations, primary ﬁnancial statements as excel downloads, the ﬁnancial calendar, corporate governance, contact details and other debt and equity investor information on the Group are available through the internet on www.landsecurities.com/investorrelations. Registrar All general enquiries concerning holdings of ordinary shares in Land Securities Group PLC, should be addressed to: Lloyds TSB Registrars, The Causeway,Worthing, West Sussex BN99 6DA. Telephone: 0870 600 3972 Textphone: 0870 600 3950 Website: www.shareview.co.uk An online share management service is available, enabling shareholders to access details of their Land Securities shareholdings electronically. Shareholders wishing to view this information, together with additional information such as indicative share prices and information on recent dividends, should visit the online shareholder centre at www.landsecurities.com/investorrelations or www.shareview.co.uk. E-communication UK shareholders may elect to receive communications electronically. Shareholders who opt to receive electronic communications can also submit their proxy votes electronically. To register for this service, shareholders should visit the online shareholder centre at www.landsecurities.com/investorrelations or www.shareview.co.uk. Payment of dividends Shareholders whose dividends are not currently paid to mandated accounts may wish to consider having their dividends paid directly into their bank or building society account. This has a number of advantages, including the crediting of cleared funds into the nominated account on the dividend payment date. If shareholders would like their future dividends to be paid in this way, they should complete a mandate instruction available from the Land Securities Annual Report 2006 registrars. Under this arrangement tax vouchers are sent to the shareholder’s registered address. Dividend reinvestment plan (DRIP) The Company offers shareholders the option to participate in a DRIP. This enables shareholders to reinvest their cash dividends in Land Securities Group PLC shares. For further details, contact: The Share Dividend Team, Lloyds TSB Registrars, The Causeway,Worthing,West Sussex BN99 6DA Telephone: 0870 241 3018 International dialling: +44 121 415 7049. For participants in the plan, key dates can be found in the online ﬁnancial calendar at www.landsecurities.com/investorrelations. Low cost share dealing facilities Shareview provides both existing and prospective UK shareholders with simple, low cost ways of buying and selling Land Securities Group PLC ordinary shares by telephone, internet or post. For telephone dealing, call 0870 850 0852 between 8.30am and 4.30pm Monday to Friday. For internet dealing, log on to www.shareview.co.uk/dealing For postal dealing, call 0870 242 4244 for full details and a form. Existing shareholders will need to provide the account/shareholder reference number, shown on the share certiﬁcate. Sharegift Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to the charity ShareGift, (registered charity 1052686) which specialises in using such holdings for charitable beneﬁt. A ShareGift Donation form can be obtained from Lloyds TSB Registrars, The Causeway,Worthing,West Sussex BN99 6DA. Further information about ShareGift is available at www.sharegift.org or by writing to: ShareGift, 46 Grosvenor Street, London W1K 3HN Telephone: 020 7828 1151. Corporate Individual Savings Accounts (ISAs) The Company has arranged for a Corporate ISA to be managed by Lloyds TSB Registrars, who can be contacted at: The Causeway,Worthing,West Sussex BN99 6UY. Telephone: 0870 242 4244. Capital gains tax For the purpose of capital gains tax, the price of the Company’s ordinary shares at 31 March 1982, adjusted for the capitalisation issue in November 1983, was 205p. The appropriate values to be used as base costs in respect of shares in Land Securities Group PLC issued under the Scheme of Arrangement in September 2002 are: Ordinary shares – 769p B shares – 101p so that the new ordinary shares and the B shares received in respect of the old ordinary shares in Land Securities PLC will attract 86.99% and 13.01% respectively of the base cost in those old ordinary shares. Unclaimed Assets Register The Company participates in the Unclaimed Assets Register, which provides a search facility for ﬁnancial assets which may have been forgotten. For further information, contact: The Unclaimed Assets Register, Bain House, 16 Connaught Place, London W2 2ES. Telephone: 0870 241 1713 Website: www.uar.co.uk Share price information The latest information on Land Securities Group PLC share price is available on our website www.landsecurities.com. Registered ofﬁce 5 Strand, London WC2N 5AF Registered in England and Wales No. 4369054 Ofﬁces 5 Strand, London WC2N 5AF and at 140 London Wall, London EC2Y 5DN 1 City Walk, Leeds S11 9DX 120 Bath Street, Glasgow G2 2EN 159 Glossary Adjusted earnings per share (‘EPS’) Earnings per share based on revenue proﬁt plus proﬁts on trading properties and long-term development contracts. Adjusted net asset value (‘NAV’) per share NAV per share adjusted to add back deferred tax associated with investment properties and capitalised interest, the adjustment arising from the de-recognition of the bond exchange, together with cumulative mark-to-market adjustment arising on interest swaps and similar instruments used for hedging purposes. 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 ﬁnancial statements. CABE Commission for Architecture and the Built Environment (‘CABE’). Combined portfolio The combined portfolio is our wholly-owned investment portfolio combined with our share of the value of properties held in joint ventures. Unless stated these are the pro-forma numbers we use when discussing the investment property business. 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 (‘TDC’). 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. Equivalent yield The internal rate of return from an investment property, based on the gross outlays for the purchase of a property (including purchase costs), 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. 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. Exceptional item An item of income or expense that is deemed to be sufﬁciently material to require separate disclosure. Finance lease A lease that transfers substantially all the risks and rewards of ownership from the lessor to the lessee. Flexible accommodation allowance Allowance agreed between a property outsourcing client and Land Securities Trillium, to vacate a given amount of ﬂoor space or to expand over the life of the contract. 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. Gross income yield The annual net rent on investment properties expressed as a percentage of the valuation ignoring costs of purchase or sale. Head lease A lease under which the Group holds an investment property. Initial yield Annualised net rents on investment properties expressed as a percentage of the valuation. 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. 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. Investment portfolio The investment portfolio comprises our wholly-owned investment properties together with the properties held for development but excludes Land Securities Trillium properties. Resolution to grant planning consent The formal resolution by a local planning authority to grant planning permission, usually conditional upon the completion of a section 106 or other legal agreement. 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. LIBOR The London Interbank Offered Rate, the interest rate charged by one bank to another for lending money. Like-for-like portfolio Properties that have been in the investment or combined portfolio for the whole of the current and previous ﬁnancial year. London Portfolio This business includes all London ofﬁces and London retail, but excludes those assets held in the Metro Shopping Fund LP. Mark-to-market adjustment An accounting adjustment to change the book value of an asset or liability to its market value. Net asset value (‘NAV’) per share Total equity divided by the number of ordinary shares in issue at the period end. Open A1 planning consent Planning permission for the retail sale of any goods. 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. Other investment portfolio This comprises all other investment properties not included in Retail or London Portfolio. Outline planning consent This gives consent in principle for a development, and covers matters such as use and building mass. Full details of the development scheme must be provided in an application for full planning consent, including detailed design, external appearance and landscaping before a project can proceed. An outline planning permission will lapse if full planning permission is not granted within three years. Over-rented Space that is let at a rent above its ERV. Retail This business includes our shopping centres, shops, retail warehouse properties and assets held in retail joint ventures but not London retail. Retail park A scheme of three or more retail warehouse units aggregating over 4,650m2 with shared parking. Return on average capital employed Group proﬁt before interest, plus joint venture proﬁt before tax, divided by the average capital employed (deﬁned as shareholder’s funds plus net debt). Return on average equity Group proﬁt before tax plus joint venture tax divided by the average equity shareholder’s funds. Revenue proﬁt Proﬁt before tax, excluding proﬁts on the sale of ﬁxed asset and trading properties, proﬁts on long-term development contracts, revaluation surpluses, mark-to-market adjustments on interest rate swaps and similar instruments used for hedging purposes, the adjustment to interest payable resulting from the amortisation of the bond exchange de-recognition and any exceptional items. Reversionary or under-rented Space where the passing rent is below the ERV. Reversionary yield The anticipated yield to which the initial yield will rise once the rent reaches the ERV. Section 106 agreement An agreement, under the Town and Country Planning Act 1990, between a local planning authority and a developer negotiated in the context of granting planning permission. It provides a means of ensuring that developers contribute towards infrastructure and services that the local authority believes to be necessary to facilitate the proposed development. Contributions may either be in cash or in kind. Total business return Dividend per share, plus the increase in adjusted diluted net asset value per share, divided by the adjusted diluted net asset value per share at the beginning of the period. Total development cost (‘TDC’) All capital expenditure on a project including the opening book value of the property on commencement of development, together with all ﬁnance costs less residential proceeds. Total property return Valuation surplus, 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. Passing rent The annual rental income receivable which may be more or less than the ERV (see over-rented and reversionary). Trading properties Properties held for trading purposes and shown as current assets in the balance sheet. Public Private Partnership (‘PPP’) A partnership that brings together, for mutual beneﬁt, a public body and a private company in a long-term joint venture for the purpose of delivering public projects or services. Pre-let A lease signed with an occupier prior to completion of a development. Private Finance Initiative (‘PFI’) A particular form of PPP, that is a government or public authority initiative to acquire private ﬁnancing for public sector infrastructure. Real Estate Investment Trust (‘REIT’) In the context of the draft legislation for the introduction of REITs in the UK, a REIT must be a publicly quoted company with at least three quarters of its proﬁts derived from a qualifying property rental business. Income and capital gains from the property rental business will be exempt from tax but the REIT will be required to distribute a signiﬁcant proportion of those proﬁts to shareholders. Corporation tax will be payable on non-qualifying activities in the normal way. Turnover rent Rental income which is related to an occupier’s turnover. Unitary charge The basic payment received by Land Securities Trillium under a property outsourcing 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 cost of debt and notional cost of equity, used as a benchmark to assess investment returns. Yield shift A movement (negative or positive) in the equivalent yield of a property asset. 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. Land Securities Annual Report 2006 160 Index A Accounts explained B Benchmarking Total shareholder return Investment Property Databank Weighted average cost of capital (‘WACC’) Board, The Board of Directors Business analysis Portfolio valuation Investment property business – combined portfolio Investment property business – Retail Investment property business – London Portfolio Investment property business – combined portfolio analysis Property outsourcing Business model Owning property Developing property Property outsourcing Business Planning Business plan Balanced scorecard Our performance C Chairman’s Statement Contact details Contents Core purpose and strategy Corporate Governance Introduction Role of the Board Board balance and independence Director induction and training Board appraisal Nominations Committee Remuneration Committee Investor relations Annual General Meeting Audit committee External auditors Valuers Financial reporting Going concern Internal control Corporate Responsibility Stakeholder engagement Social, ethics and environmental risks Employees Community Performance highlights Future outlook – key challenges Health and safety Key performance indicator Health and safety training Accident reporting Risk assessments and audits Construction skills certification scheme Environment Environmental management systems Asbestos Energy and waste management CO2 emissions Waste management Biodiversity Climate change Customers D Developing property Sustainable development Development risk management Director’s report Directors responsibilities Land Securities Annual Report 2006 19 38 – 47 38 38 39 39 39 40 40 40 40 41 41 41 42 42 42 42 43 43 101 – 136 101 101 102 103 100 159 98 160 44 – 47 44 45 45 46 46 47 158 36 58 – 67 60 61 61 62 62 62 62 64 64 66 66 66 25 25 26 26 19 F Financial highlights Financial Review Headline results Profit before tax Revenue profit Earnings per share Dividend Net assets Cash flow and net debt Financing strategy and financial structure Gearing Funding structure Expected debt maturities Hedging Future funding Taxation Pension schemes Key financial risks Investor relations Legal proceedings Financial Statements Income statement Statement of recognised income and expense Balance sheets Cash flow statements Five Year Summary G Glossary I Independent Auditors Report Index Investment Property Business Performance Contribution to performance Key drivers of valuation change Investment Development Property management Investor information K Key performance indicators L London Portfolio Achievements London economy London office markets London retail Strategy Performance Contribution to performance Redeploy capital to maximise future growth prospects Enhance returns through development activities Create strong relationships with occupiers Landflex Customer service M Markets Regulatory Competitive landscape Business N New business Notes to the financial statements O Operating and Financial Review Owning property Outlook 20 20 20 21 21 78 – 79 139 – 157 139 140 – 141 142 – 145 146 – 149 150 – 152 153 – 157 28 28 29 32 36 36 36 36 20 – 23 161 IFC, 17, 99 24 85 – 88 85 85 85 86 86 86 86 86 86 86 87 87 87 87 87 80 – 84 80 80 80 82 82 82 83 83 83 83 83 84 84 84 84 84 84 84 84 84 33 29 30 30 137 – 138 97 P People Communication and engagement Reward and recognition Performance highlights Performance overview Property investment risk management Property outsourcing Achievements Markets Contract features Strategy Performance Contribution to performance Accessing new opportunities Northern Ireland Civil Service Workplace 2010 Building Schools for the Future Defence Training Review Growing our business Leading innovation Corporate Real Estate Group Customer service Service delivery Health, safety and environment Environment Property outsourcing risk management R Remuneration Report Introduction and compliance The Committee Remuneration policy and philosophy 2005/06 Directors’ remuneration Base salary Annual bonuses Long-term incentives LTIP performance shares LTIP matching shares EPS Target TPR Share options Shareholding guidelines Pensions “A day” changes Non-Executive Directors Service agreements Directors’ interest in shares Information regarding senior managers Performance graph Retail Retail achievements Retail market UK retail property market Strategy Performance Contribution to performance Investment in dominant retail assets Regeneration and renewal of the portfolio Customer service and property management Customers satisfaction surveys Environment management Risk Management S Strategic direction U Understanding IFRS Urban Community Development 34 34 34 21 18 29 32, 68 – 75 70 71 71 72 72 72 74 74 74 74 74 75 75 75 75 75 75 32 90 – 96 90 90 90 90 91 91 91 91 91 91 92 92 94 94 94 95 95 95 96 96 48 – 57 50 51 51 52 52 52 52 54 55 56 56 89 22 37 76 – 77 76 76 21 33 104 – 136 Kent Thameside Stansted V Values 24 – 77 28 22 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 T: +44(0)20 7413 9000 E: investor.relations@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. We couldn’t let our Chairman and Executive Directors get away without trying to draw a bicycle – here’s how they did. Design by SAS and BOB Design Illustrations by Laura Carlin Location photography by James Harris Board photography by George Brooks 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 virgin pulp, obtained from sustainably managed forests. Land Securities Group PLC Copyright and trade mark notices All rights reserved. ©Copyright 2006 Land Securities Group PLC. Land Securities, LandSecurities (stylised), the “LS” block logo, Making Property Work, and Landflex are trade marks of Land Securities Group PLC. All other trade marks and registered trade marks are the property of their respective owners. Peter Birch Chairman Francis Salway Group Chief Executive Mark Collins Chief Operating Officer Martin Greenslade Group Finance Director Mike Hussey Managing Director – London Portfolio Richard Akers Managing Director – Retail Ian Ellis Chief Executive – Land Securities Trillium Land Securities Group PLC 5 Strand, London WC2N 5AF T: +44 (0)20 7413 9000 E: investor.relations@landsecurities.com www.landsecurities.com

Continue reading text version or see original annual report in PDF format above