Land Securities Group
Annual Report 2017

Plain-text annual report

Annual Report 2017 The A–Z of experience Landsec at a glanceWelcome to Landsec. We buy, sell, develop and manage commercial property in the UK. Our aim is to create a great experience for everyone we rely on, from our customers to our communities, partners and employees. We believe that’s the best way to create long-term sustainable value for our shareholders and everyone else we affect. With the background of geopolitical and economic uncertainty affecting the UK, our markets lost momentum during the year. However, by having a clear strategy and acting early, we’ve been able to achieve a good relative performance this year. We consider both the short and long-term effects of our actions. And in this Annual Report, we’ve further integrated important content about our broader social and environmental impacts.London PortfolioRetail PortfolioPerformance measures:£112mProfit before tax (2016: £1,336m)1.4%Total business return (2016: 13.4%)3.7%Total property return (2016: 11.5%)38.55pDividend up 10.1%4.3 out of 5Customer satisfaction, both London and Retail18.5%Reduced carbon intensity (kgCO2/m2) by 18.5% compared to 2013/14 baseline 962Employment created for 962 disadvantaged people to date6.5million sq ft portfolio 3.1million sq ft development programme completed£8.3billion of assets16.7million sq ft portfolio13shopping centres13retail parks20leisure destinations£14.4bn portfolio or 23.2 million sq ft638 employees Number of staff Founded 1944 Largest commercial property company in UK by market capitalisation120 assetsEverything we do starts with understanding the changing needs and expectations of the people who matter most to us – our customers, communities, partners and employees. We then draw on our experience to create the very best experiences for them. By getting that right we’re able to create long-term value for our shareholders. Put simply, for us “Everything is experience”. Over the following pages we explore 26 stories that capture our approach in action, from A to Z. And we report on what our approach achieved this year – financially, socially and physically. Visit our new website www.landsec.com S t r a t e g i c R e p o r t Contents Strategic Report 16 Chief Executive’s statement 18 Our market 20 Our strategy 24 Key performance indicators 26 Our business model 28 Creating sustainable long-term value 30 Financial review 36 Physical review 38 Social review 42 Managing risk 44 Our principal risks and uncertainties 46 London Portfolio review 50 Retail Portfolio review 54 Going Concern 54 Viability Statement Governance 56 Letter from the Chairman 58 Board of Directors 60 Executive Committee 61 64 Leadership Letter from the Chairman of the Nomination Committee 66 Effectiveness 68 Letter from the Chairman of the Audit Committee 70 Accountability 75 76 Investor relations Directors’ Remuneration Report – Chairman’s Annual Statement 78 Remuneration at a glance 80 Annual Report on Remuneration 90 Summary of Directors’ Remuneration Policy 92 Directors’ Report Financial statements Statement of Directors’ Responsibilities Independent Auditor’s Report Income statement Statement of comprehensive income 96 97 103 103 104 Balance sheets 105 106 Statement of cash flows 107 Notes to the financial statements Statement of changes in equity Additional information 156 Business analysis – Group 160 Business analysis – London 161 Business analysis – Retail 162 Sustainability reporting 168 Combined Portfolio analysis 170 Lease lengths 171 Development pipeline and trading property development schemes 172 Alternative performance measures 172 Five year summary 174 Acquisitions, disposals and capital expenditure 175 Remuneration policy 180 Subsidiaries, joint ventures and associates 183 Shareholder information 186 Key contacts and advisers 187 Glossary IBC Cautionary statement Landsec Annual Report 2017 1 A breath of fresh air2Landsec Annual Report 2017We design our buildings to be healthy, efficient and productive spaces. Which is why our ventilation system at The Zig Zag Building supplies air as fresh as you’d find at the coast. At Bluewater, our upgraded system is so effective we’ve turned off the air conditioning. That’s cut costs and energy use, and helps make the place even more inviting for visitors.S t r a t e g i c R e p o r t Our year This year brought political, social and economic uncertainty. That affected our markets, weakening demand for space. Put simply, our markets don’t know what’s next. In London, the office market reached a turning point. Supply-constrained conditions eased and the vacancy rate rose, with the Brexit vote a catalyst for change. In the retail sector, a range of factors impacted retailers’ confidence, from the threat of cost inflation to online sales growth. But we also saw opportunities. Successful businesses continued to look for innovative, technically resilient space in London. And in retail, there remained continued demand from dynamic brands for new and repurposed space in the best locations. Landsec Annual Report 2017 3 4Landsec Annual Report 2017We also saw the continuation of four long-term trends – each driven by expectation, each creating opportunities for us:Smart office occupiers expect their work environment to deliver business benefits. That includes operational efficiency, but it’s also about attracting, inspiring and enabling talent.People expect more from their shopping experience. Destination centres must go way beyond convenience and choice and provide a truly memorable day (and night) out.People also expect the best businesses to lead on creating better environmental and social outcomes. That means recognising the deeper, long-term effects of decisions and actions.And talented employees expect a great career experience. Which is why a compelling employer brand is an increasingly valuable asset.Designed with careWe work to create memorable customer experiences while minimising our impact. For example, at 1 New Street Square smart design choices saved 200 tonnes of carbon and reduced material costs by more than £600,000.5Landsec Annual Report 2017Strategic ReportEmployer brandWe aim to provide employees with a great career experience, so we’re delighted to be one of Property Week’s ‘Best Places to Work in Property’ list – the only listed REIT included in their list.Film starsDestination centres give people plenty of reasons to spend time as well as money. Which is why you’ll now find 28 boutique and multiplex cinemas within our Retail Portfolio.Blend of experienceIt’s vital our team has the right blend of experience, skills and knowledge – including at the top. This year, Nicholas Cadbury joined the Board, further enhancing our financial and consumer expertise.Community impactWe’ve launched the UK’s first scaffolding academy inside a prison, helping offenders at HMP Brixton get the skills and experience they need to find employment outside – reducing the risk of re-offending.Lighting up LondonAt Piccadilly Lights we’re creating Europe’s most technically advanced digital screen, giving customers extraordinary new ways to interact with two million people each week.Healthy HQFrom collaborative working spaces and smart acoustics to a healthy food bar, our new HQ in Victoria has transformed the workplace experience for our employees.Knowing our marketFrom smart technologies embedded in buildings to more flexible leases, we’re using our experience to prepare now for what our customers will need tomorrow.6Landsec Annual Report 2017Girls Can Do It TooThe proportion of female workers in UK construction is just 11%. To give young women an experience of working in construction, our Girls Can Do It Too project invited students at two girls’ schools to plan, design and model a development, pitching their ideas to a panel of ‘dragons’.Jobs change livesAt our Lewisham shopping centre we’re supporting an innovative approach to work experience, helping young people gain skills, develop self-discipline and find jobs.Multi-channel opportunitiesFashionista Missguided opens at Bluewater this summer, part of the trend for online retailers to provide a deeper brand experience through physical stores. Insights drive relationshipsBy working to understand the business, we’ve helped TripAdvisor grow. Their customer experience has inspired them to triple space with us at Soho Square and commit through to 2023.7Landsec Annual Report 2017Strategic ReportNova shines bright We’ve created a stunning new destination in the heart of SW1, with landmark office space and an array of eateries making this a stylish and delicious place to work, visit and play. 17 new restaurants and three pop-up kiosks are set to open this summer, together with hundreds of alfresco dining seats. Pedestrianisation, public art and striking architecture complete the transformation of this area between Victoria Station and the Royal Parks. 8Landsec Annual Report 2017S t r a t e g i c R e p o r t So how did we address our opportunities this year? We drew our speculative London development programme to a close and sharpened our focus on letting space, actively managing assets and patiently tracking potential acquisitions. We worked to improve further our Retail Portfolio, finding new ways to help retailers and restaurateurs delight customers. We became the first property company in the world to have its science-based carbon targets formally approved. We also helped take our industry forward on community employment and wellbeing. And we enhanced the career experience we offer, moving to a new headquarters designed for collaborative working and developing new ways to strengthen our culture. Landsec Annual Report 2017 9 10Landsec Annual Report 2017Queuing around the blockOur student lock-ins promise discounts, freebies and a top night out. They really draw the crowds, with over 27,700 students at our event this year at St David’s.Our resilient results this year are down to the actions we have taken over the past few years to upgrade our assets and strengthen our balance sheet.In March 2010 when we restarted development, our Combined Portfolio was valued at £9.5bn and debt was £4.2bn. Today, our portfolio is valued at £14.4bn and we’ve reduced debt to £3.3bn. Our net assets have increased by £4.9bn over seven years. And at the same time, we have increased revenue profit by 52%.Our balance sheet is in robust health, with low levels of gearing and development. That gives us the firepower to buy when the time is right. Our high quality assets are well matched to the changing needs of our customers and communities – a vital advantage in uncertain times.We’ve recommended a full year dividend of 38.55p per share, up 10.1%.Oxford welcomes Westgate Opening in October, Westgate will provide everything from global brands to a boutique cinema, from street food to rooftop dining. Developed with The Crown Estate – and the strong support of local people – it’s a place set to inspire and delight. S t r a t e g i c R e p o r t Sustainability Matters All employees are taking part in Sustainability Matters, a training experience designed to embed sustainable thinking in decision- making across the Company. Re-imagining space By taking a fresh approach to design at 20 Eastbourne Terrace – a 1960s office tower in Paddington – we’ve been able to raise ceiling heights, bring in more daylight and introduce a planted roof terrace. The asset was fully let within a year of completion. Pride at work Inspired by our support for Pride – the biggest lesbian, gay, bisexual and transgender parade in the UK – this year employees launched the Company’s first LGBT network. Landsec Annual Report 2017 11 12Landsec Annual Report 2017Understanding shoppers’ needsWe now measure customer satisfaction across every one of our retail destinations, using online surveys to track feedback on events and the overall customer experience. Tastes changeFood is a vital ingredient in the shopping centre experience; that’s why we’re constantly refreshing our restaurant mix – like bringing Indian street food brand Mowgli to Trinity Leeds this year.Young talentIn an industry lagging on diversity, our Trainee Academy provides opportunities for school leavers from a broad range of backgrounds to develop a career here.S t r a t e g i c R e p o r t Validated carbon targets We are the first property company in the world to have its science- based emissions target formally approved – clear evidence we’re serious about sustainability and the environment. Working together Through our Customer Improvement Groups we bring supply partners together regularly – so they understand our priorities, we hear their views and customers are assured of terrific service. X marks the spot We focus our activity where businesses and people want to spend their time and money, from regional cities to London’s most dynamic and well-connected centres. Landsec Annual Report 2017 13 Zig Zag – truly world-class14Landsec Annual Report 2017Research tell us that enriching the work environment makes employees happier, healthier and much more productive. The Zig Zag Building combines high-end office space with retail, restaurants and re-imagined public realm in SW1. The offices feature outdoor terraces, shower rooms, filtered air, stunning views and exceptional natural light – just some of the reasons it was named ‘Best office scheme in the world’ at the World Architecture Festival.S t r a t e g i c R e p o r t Uncertainty will continue to shape our markets, but we go forward in great shape – with clear priorities: In London, we’ll focus on active asset management and preparations for future acquisitions and developments. In Retail, we’ll continue to enhance our destination assets and strengthen our portfolio. We will do even more to sustain the success of our Company, customers and communities, further embedding sustainability in our approach. And we’ll keep developing our people, enhancing the know-how we need to compete, thrive and lead our industry. Above all else, we’ll work to understand and address people’s changing needs, using our experience to create great experiences for others. Because – ultimately – Everything is experience. Landsec Annual Report 2017 15 Chief Executive’s statementRobert Noel Chief Executive16Landsec Annual Report 2017Landsec is in a great position. We have a portfolio of first-class assets combined with historically low levels of operational and financial gearing at a time of geopolitical and economic uncertainty. We’ve largely completed and let our speculative development programme. Despite being net sellers in the previous year, revenue profit is up 5.5% to £382m and adjusted diluted earnings per share are up 5.7% to 48.3p. Our adjusted diluted net asset value per share is down marginally to 1,417p. Our Combined Portfolio is valued at £14.4bn and, with adjusted net debt broadly unchanged over the year at £3.3bn, our loan-to-value is 22.2%. We’ve reduced our cost of debt and have access to the funds needed to buy when opportunities appear. Despite uncertainty in the outside world, we remain confident of our core strengths inside the Company and we’re recommending a final dividend of 11.7p – raising the dividend for the year by 10.1%.Market environmentPut simply, our markets remain in good health but they’ve paused for breath.In the London office market, we expected the occupational balance to shift from demand to supply during the course of 2017. The Brexit vote brought that inflexion point forward. In last year’s report, I said a vote to leave the EU would create business uncertainty, leading to lower occupational demand, falling rental values and a reduction in construction commitments. This is happening, though less than we expected. Overall, the UK economy continued to perform well during the year.In the retail market, the effect of the referendum was less clear-cut although, faced with pressure on disposable income, shoppers have started to show more caution. Retailers were a little slower to take up new space during the year but we continued to see opportunities to meet the ever-evolving needs of the most successful brands.We won’t be sure of the long-term effect of Brexit on our markets for some time. Negotiations with the EU can only begin in earnest after the general election. Although the business community remains in uncharted territory, that doesn’t mean we should wait for change to happen to us. We’re taking this time to prepare the business for the opportunities and challenges we see ahead.We hope the new government can give businesses as much certainty as possible on areas including tax, regulation, access to skilled labour and public spending such as investment in infrastructure – including desperately needed homes. A clear and ambitious strategy for improving digital connectivity would have a particularly powerful impact.Robert Noel reports on our performance during the year and shares his outlook for the next 12 months.17Landsec Annual Report 2017Strategic ReportFirst class portfolio The foundations of the business are rock solid, underpinned by our resilient portfolio and low leverage. In London, our modern, well-located assets are well let, with a weighted average unexpired lease term on offices of 10.3 years. Having already scaled back speculative development activity before the year started, the last 12 months saw us put the finishing touches on over 1 million sq ft of space, including high-profile developments at 1 New Street Square, EC4; 20 Eastbourne Terrace, W2; and Nova, Victoria, SW1, which completed shortly after the year end. Of the 3.1 million sq ft programme we started in 2010, we have let or sold all but 283,000 sq ft.Our Retail Portfolio is a collection of vibrant destinations that attract dynamic brands and are well-matched to consumer trends. During the year, we built and let a leisure extension at White Rose, Leeds. Our newest destination, Westgate Oxford, is on schedule to open in October and is 80% spoken for. Since the year end, we’ve acquired a portfolio of three outlet centres, establishing our position as the leading owner-manager of outlets in the UK.Strong relationshipsThroughout the year, we pursued our vision of being the best property company in the UK in the eyes of our customers, communities, partners and employees. Ultimately, their experience drives our performance. We’re responsible for ensuring that Landsec can thrive for many years to come. That’s why we set ourselves even higher expectations this year on issues we share with our customers and communities, such as local employment and place-making. We’ve also improved the way we address our climate impacts and risks.Great peopleIn January, we completed the move into new headquarters at 100 Victoria Street, SW1. This is one of our buildings and it expresses the best of who we are and what we do. We’re on one floor of open-plan workspace supported by innovative technology. Thought has gone into everything from the way we collaborate to how we minimise energy and waste. It’s the UK’s highest rated office fit-out according to sustainability assessment scheme BREEAM. Our results3.7% Ungeared total property return 1.2% Decrease in adjusted diluted net assets per share 1.4% Total business returnOur activity£28mof investment lettings £13mof development lettings£15mof acquisitions£286mof development and refurbishment expenditure £413mof disposalsWe go forward in excellent shape, ready to make acquisitions when the time is right.”Evolving market conditions require role changes in our teams as our emphasis shifts from selling and development to management and buying. Our people relish these challenges. We are also enriching our culture, recruiting more from outside our industry so we gain fresh perspectives and new capabilities. During the year, we introduced stretching targets on gender and ethnic diversity and fairness.OutlookWe’ve achieved our plan to have minimal development exposure and longer lease terms in London offices, a transformed Retail Portfolio and low gearing at this point. Over the next 12 months, we’re unlikely to see rental values grow in London unless we have more certainty on movement of people and the UK’s terms of trade with the EU and the rest of the world. In the retail sector, the extent to which higher supply chain costs are passed on to customers remains to be seen. Whatever the outcome, higher costs tend to reduce take up of space.In the short term, with significantly reduced risk and a portfolio of first-class assets, we go forward in excellent shape, ready to make acquisitions when the time is right. Longer-term, we remain confident in our market and our ability to deliver sustainable growth. We’ll continue to address the trends that shape our business in coming years. For example, the combination of an ageing population and technological progress will have a huge effect on the way we live, work, shop, play, travel and are cared for. In turn, this will affect the way we design, construct and manage buildings, and how we attract the best talent.The importance of thinking ahead and acting early was brought home to me by our completion of Nova in April. Design on this project started in 2003, when the iPhone was still an idea in Steve Jobs’ head. We must continue to anticipate change so that we can keep providing the right space for our customers and communities whatever their future demands – helping businesses and people to thrive.Robert NoelChief Executive18Landsec Annual Report 20175Product innovationTechnology and design innovation have the potential to change the face and functionality of buildings in exciting ways. They will also impact the construction process. While markets evolve at remarkable speed, the design, construction, leasing and operational processes for commercial property remain relatively slow and inflexible. Our industry must do more to reduce time-to-market, cut cost and increase flexibility, resilience, efficiency and sustainability. And we will have to continue designing buildings today that will appeal to and work well for a new generation tomorrow.6Sustainability as an advantageBusinesses, government and the public increasingly recognise the need for long-term thinking on social and environmental issues. The best companies in our industry are expected to take a lead on diversity, local employment, community, responsible supply chains, the wellbeing of occupiers and visitors, climate risks, energy and biodiversity. Smart, progressive thinking can help to support the people and resources companies rely on to prosper and grow – and bring all sorts of business benefits. See how we’re responding to these opportunities and challenges on page 21Our market1Evolving customer needsFor many London office occupiers, location is no longer the only consideration. Flexibility of layout and lease terms; efficient, attractive space; technical resilience; and physical and digital connectivity are now just as important. And cost per head is more important than £ per sq ft. In retail, successful operators are generally looking for fewer but larger spaces where they can showcase their entire online range and provide a brand experience. People are shopping less often but will travel further for – and stay longer in – the most successful destination centres. 2Balance of supply and demand We anticipated that the balance between occupational supply and demand in the London office market would shift during 2017. Since Brexit, we have seen lower levels of demand. As a result, the vacancy rate is rising, headline rents have stalled and net effective rents have weakened. If investment values fall further, this may present opportunities for companies with capital to buy assets. In retail, the market is over-supplied with space but assets providing a great experience or convenience will do better than those caught between the two. As catchments evolve, shopping destinations must ensure they can compete against others further afield.Six big drivers of opportunities and challenges3Economic uncertaintyWider uncertainty has affected the ability of many customers to plan and take decisions. For consumers, increased economic uncertainty may lead to lower spending. For businesses that have to take new space, there’s generally a combination of good choice and attractive incentives available. Others are opting to sit tight, extending leases and taking additional space if required. The impact of this has not yet been seen in investment values. Brexit brings potential for economic and financial benefits as well as challenges, not least for exporters and businesses looking to move into or expand in the UK. 4UK competitiveness In the short term, ongoing Brexit negotiations are likely to fuel uncertainty and commercial caution. Looking further out, we see the potential for the UK to emerge from this period in good shape. We fully expect London to continue as one of the world’s most successful financial and cultural centres.6 market drivers19Landsec Annual Report 2017Strategic ReportDynamicsThis year we moved from supply-constrained conditions into a market with more supply and weaker occupational demand. The UK’s vote to leave the EU triggered a weakening in demand for London office space, stalling growth in rental values and asset prices. The market is also driven by the evolving needs and expectations of customers and communities.Enduring appeal Central London has enduring appeal for investors and occupiers offering:— Capabilities and opportunities of a global financial centre — Deep and liquid property investment market — International gateway — Reasonable and relatively stable tax rates — Strong business and transport infrastructure — Diverse community and English-speaking population — Access to top universitiesDynamicsWe’re continuing to see the market polarised between destination centres and convenience. The growth of online shopping is driving the rationalisation of store estates, with only the strongest locations holding ground. Some online brands are moving into physical stores as convergence drives efficiency and they see opportunities to create great brand experiences. Stores are the best place to see, touch, feel and buy and they remain at the heart of most transactions.London’s strengths attract a large and diverse mix of property investors, many from overseas. This helps us when selling assets but increases competition when buying. ChallengesChallenges for London include:— Uncertainty over the outcome of the Brexit negotiations — Limitations on economic growth due to restrictions on immigration — Lack of housing at affordable or attractive prices — Pressure on an ageing infrastructure — Continued lack of clarity around airport expansion — High levels of stamp duty— Demand for better/faster digital connectivityOutlookWe expect current uncertainty will continue to impact demand for space. Headline rents have started to fall and we expect incentives to increase and average lease terms to shorten further. London is an increasingly polycentric city and location is no longer the only consideration for occupiers. This may result in buying opportunities outside traditional core areas. Opportunities The best destinations continue to drive above average performance for retailers and attract the greatest demand for space from the broadest range of retailers. A retreat from the UK by some international retailers has been balanced by the expansion plans of others. Successful shopping destinations deliver higher dwell time and average spend per visit by providing consumers with a great experience and an appropriate mix of retail, food and beverage and leisure. Challenges An uncertain economic environment is putting pressure on discretionary spending. At the same time, retailer confidence is muted as they deal with the challenges of increased business rates, increases to the living wage and the requirement to continue investment in multi-channel offers and fulfilment. OutlookWe expect to see consumer caution led by concern about higher cost of living combined with lower wage growth. Destination and convenience centres will continue to outperform compared with those centres that fail to meet consumers’ needs and respond to online retailing: and the gap in performance is likely to widen further. London Portfolio’s market in 2017We buy, develop, manage and sell office, retail, leisure and residential space in central London. Retail Portfolio’s market in 2017We buy, develop, manage and sell retail and leisure space in the best locations. Market during the year -1.9%Physical retail store sales1 +0.3%All retail sales (including online)1-2.5%UK footfall2Source: 1. British Retail Consortium2. ShopperTrakMarket during the year 11.7m sq ftTake-up of office space in central London (2016: 14.7 million sq ft)4.7%Vacancy rate (2016: 2.7%) 8.3%Decline of the prime headline office rents in the West EndPrime headline office rents in the City were flat Source: CBRE20Landsec Annual Report 2017Our strategyOur strategy is designed to ensure we are a sustainable business through the market cycles, creating and protecting value over the long-term. Our strategy helps us pursue our vision of being the best property company in the UK in the eyes of our customers, communities, partners and employees. We make understanding and meeting people’s needs our top priority, always looking to use our experience to provide them with great experiences. We act early in response to changes and trends in our markets. And we aim to lead our industry forward on critical long-term issues, from diversity to community employment, carbon and climate resilience.We buy assets and start development early in the cycle; manage assets actively to ensure they generate strong income; and sell at the appropriate time and recycle capital. We aim to make sound, long-term investments so our assets keep their appeal, meet changing regulations and generate returns for years to come.Nova: our strategy in actionCompleted in April 2017, Nova’s extraordinary office, residential and restaurant spaces reflect the changing expectations of our customers.— Deliver sustainable long-term shareholder value— Maximise the returns from the investment portfolio— Manage our balance sheet effectively— Maximise development performance— Ensure high levels of customer satisfaction— Attract, develop, retain and motivate high performance individuals — Continually improve sustainability performance Go to page 24 for more informationOur strategic objectives21Landsec Annual Report 2017Strategic ReportRelationshipsDevelop close relationships with our customers, communities, partners and employees, so we understand their evolving needs and they trust us to meet their expectations.MarketFocus on two dynamic sectors of the UK commercial property market – offices, retail and leisure in London; and retail and leisure outside London. Being active in these two sectors rather than one provides us with greater financial stability as they work to different cycles. Timing Apply our experience and insight so we buy, develop, manage and sell assets at the appropriate time in the property cycle. Scale Maintain our size and strength so when we judge the timing is right we can deploy our capital and acquire or develop a number of major assets at the same time. Locations Buy and develop in thriving locations or places with excellent potential. Good transport links are becoming more highly valued than fashionable postcodes.Finance Enhance returns through appropriate levels of debt using our assets as security to drive down costs.Risk Address the risk that space will be left unlet – or let at low rents – if supply outstrips demand by owning assets with strong appeal, developing early in the cycle and managing actively. Act early to mitigate risks related to changes in climate, legislation and resource availability.Our strategic choices6 opportunitiesHow we’re addressing our biggest opportunities and challenges1Evolving customer needs— Strategic focus on creating great experiences— Designing in greater flexibility, connectivity and technical resilience— Focus on well-connected locations in London and dominant retail destinations — Prioritising cost per head over cost per sq ft 2Balance of supply and demand — Speculative development programme brought to a close in London— Monitoring buying opportunities closely— Significant asset management activity across the business— Delivering the largest current retail development in the UK this year in a city with a significant shortage of contemporary retail space 3Economic uncertainty— Operational and financial gearing at historic low— Access to capital for acquisitions— Preparing now for the next cycle 4UK competitiveness — Strong belief in prospects of London and the UK— Ongoing investment in London’s physical and social infrastructure— Company well represented in public debate and industry groups5Product innovation— Investment in customer insight and forecasting— Strengthening our customer-led culture— Leadership on sustainable design and innovation— Working groups with partners to improve industry processes 6Sustainability as advantage— Vision is to lead UK listed real estate sector in sustainability— Innovative collaboration on community employment— First property company to have an approved science-based carbon target— Pioneering use of green gas and renewable electricity Get an overview of these opportunities and challenges on page 1822Landsec Annual Report 2017Market cycleLondon The London office market sees marked periods of over- and under-supply, and the balance can shift from one to the other quite quickly. BuyWe aim to buy assets when values are falling or low, or when we see a long-term opportunity to enhance value. We’re currently watching the market carefully, monitoring around £2 billion of potential acquisitions. Our strong balance sheet and access to capital mean we can buy when we spot the right opportunity.DevelopWe start to develop early in the cycle so we benefit from lower construction costs, aiming to deliver completed schemes when demand from customers is rising and levels of available space are low. We’ve drawn our large speculative development programme to a close for this cycle. We have plenty of options for development within our portfolio and the financial capacity to acquire new development sites.ManageWe talk to our customers regularly so we understand their changing needs and can respond quickly. This helps us to retain customers and improve rental values, keeping our portfolio attractive and resilient. Sell We sell assets when we see better ways to use the capital. We aim to sell when there’s strong demand for the space and ahead of a turn in the cycle from demand to supply. We look to add value through asset management or refurbishment ahead of selling an asset. For more on our London Portfolio see pages 46-49Retail The retail property market is less volatile than London offices and is fundamentally driven by long-term structural changes such as consumer spending, population trends or the impact of online retailing. We are focused on London and the best regional destinations. BuyWe acquire when we see an opportunity to transform an under-managed property or land into a great destination for shoppers and visitors. DevelopWe put strong emphasis on creating attractive, well considered space where people want to spend time and return frequently. We help customers pursue multi-channel strategies and we ensure our environments use new technology to enhance the shopper’s experience. We de-risk developments by seeking substantial pre-lettings before we start construction. And we ensure we contribute to the environmental, social and economic fabric of the local area and community, which helps to make our centres busy and well regarded. ManageWe are proactive managers, constantly looking for opportunities to enhance our space in line with the changing needs of our customers and communities. We continually refresh the tenant mix in our destinations and work hard to create the most compelling blend of retail and leisure. SellWe dispose of an asset when we see opportunities to use capital elsewhere to create better, more valuable space with greater appeal. For more on our Retail Portfolio see pages 50-53Develop Starting schemes at the right point in a rising market helps maximise value and minimise risk.BuyFalling values bring opportunities to buy assets at attractive prices.SellSelling some assets at the right point in a rising market means value can be crystallised and the portfolio can be biased towards high quality assets with long lease lengths.ManageActive management of assets through the cycle helps to reduce voids and ensure space meets occupiers’ changing needs.Property valuesProperty values23Landsec Annual Report 2017Strategic ReportInvesting through the life-cycleWe aim to buy, develop, manage and sell assets in a way that benefits those closest to us – our customers, communities, partners and employees. BuyWe acquire an asset if it has the potential to meet the evolving needs of our customers and communities, can be acquired at the right price, and is likely to create financial value for us over time. Published this year, our Responsible Property Investment Policy sets out the standards for acquisitions.DevelopWe develop when we see an opportunity to create space that will appeal to customers, enhance the area and create financial value for us. We design for the safety, health and wellbeing of occupants. We also design for efficiency and productivity. And we design to improve the public realm around our buildings, including connectivity and wider infrastructure. Our development activity creates job opportunities, both during construction and when the development opens.To help us pursue our aim of being a sustainability leader in our industry, by the end of this year we had enhanced the Sustainable Development Brief we give to partners. Going forward, we will set tougher targets and higher expectation levels around innovation. The brief gives equal weight to social and environmental issues.ManageWe work with customers, communities and partners to ensure our buildings operate efficiently and to help increase local prosperity.We redesign and refurbish space if we spot an opportunity to make it more attractive, useful and valued. We work with occupiers to manage energy, waste and water as cost efficiency and environmental factors. 100% of the electricity we buy for our managed portfolio is now renewable and we collaborate with customers to reduce energy consumption. Thinking about sustainability helps us to protect the building from external risks such as price volatility, changing regulation, supply issues and premature obsolescence. And it enables us and them to meet our commitments.SellWe sell an asset when we see an opportunity to deploy our capital more effectively elsewhere. Through our investment and activity, the building we sell should perform at a higher level than the building we bought – financially, socially and environmentally. This should make it more valuable. We aim to build a positive legacy, leaving a place in a better state than when we arrived. By helping to improve people’s lives, we strengthen our reputation and add value to our asset.We believe that responding to people’s needs, and giving careful consideration to the environment, economy and community, helps us to create enduring financial, social and physical value over the long term. Where we acquire or develop, we work closely with customers and communities to ensure the new space meets their needs and expectations. We manage most of the buildings we own (by value) which means we get to see how people interact with them and hear their views. When we have control of assets we can take decisive action to improve things for the better.We aim to develop and manage buildings in a sustainable and innovative way; make efficient use of natural resources in everything we do; and create jobs and opportunities for the people who live near our assets, including disadvantaged groups who are furthest from employment.Refurbish or retrofit to re-letInvest capitalReinvest capitalKey performance indicatorsThree year total shareholder return (TSR) (%)Progress: Not Achieved Three year TSR performance compared to the TSR performance of a comparator group (weighted by market capitalisation) of property companies within the FTSE 350 Real Estate Index TSR of 9.2% for the three year period from April 2014 did not exceed our comparator group at 16.2%Chart 1Revenue profit (£m)Progress: Achieved Revenue profit compared to an internal minimum threshold which is re-set every three yearsRevenue profit of £382m was above the internal threshold for 2016/17 set in April 2015Chart 4Three year total property return (TPR) (%)Progress: Achieved Three year TPR performance compared to the IPD Quarterly Universe, weighted to the sectors in which the Group is invested TPR of 12.7% per annum for the three year period from April 2014 exceeded our benchmark at 11.5% per annumChart 2Development lettings (£m)Progress: Partially Achieved Progress development lettings and residential sales within our development programme £28.0m of lettings achieved against a threshold of £23.4mChart 5One year total property return (TPR) (%)Progress: Not Achieved One year TPR compared to all March valued properties within IPD One year TPR of 3.9% was below the estimated IPD benchmark of 4.8%Chart 3Customer satisfactionProgress: Achieved Maintain overall customer satisfaction rates in Retail and London customer surveysLondon and Retail both achieved 4.3 out of 5Chart 6514222We work to turn our strategic objectives into tangible performance, using individual key performance indicators to measure our progress.Strategic objectivesEnsure high levels of customer satisfactionAttract, develop, retain and motivate high performance individualsContinually improve sustainability performanceDeliver sustainable long- term shareholder valueMaximise the returns from the investment portfolioManage our balance sheet effectivelyMaximise development performance5147362ReportedThreshold3292593623153823252014/152015/162016/17ReportedThreshold47.633.828.02014/152015/162016/17LandsecIPD Quarterly Universe2014/152015/162016/173 years p.a.23.319.611.713.03.92.512.711.5London Portfolio3.13.44.71.13.94.8Retail PortfolioTotal portfolioLandsecIPD relevant sectorIPD March universe excluding Landsec (estimate)RetailLondon4.24.24.34.34.34.32014/152015/162016/17LandsecComparator group2014/152015/162016/173 years22.925.2(12.7)(8.1)1.90.89.216.224Landsec Annual Report 2017Strategy Delivery Reward Strategic objectives Performance vs KPIs Management of risk Remuneration S t r a t e g i c R e p o r t Read more on page 42 Read more on pages 81-82 Internal customer focus programme 5 External customer focus programme New ways of working 5 6 Progress: Not Achieved Progress: Achieved Progress: Achieved Deliver an internal customer focus programme Deliver an external customer focus programme Not achieved as the programme was delayed to coincide with the launch of the new Landsec brand in June 2017 A programme of external customer engagement activities has been delivered Ensure that the new ways of working, including those associated with the head office move, help to embed the purpose, vision and values in a measurable way The office move to Victoria embedded the purpose, vision and values and created a step change in a more collaborative and innovative culture 35% increase in Leesman employee survey score versus 2016 Sustainability Matters Operational efficiency 7 7 Community Employment Programme 7 Progress: Achieved Progress: Achieved Progress: Achieved Deliver an impactful “Sustainability Matters” awareness raising and training programme Sustainability Matters level 1 and level 2 modules delivered to employees Support operational efficiency by conducting site-specific energy reduction assessments of the like-for-like portfolio to accelerate our existing energy management programme Initiatives selected from the assessments will be implemented in at least two-thirds of our most energy-intensive sites A further 173 people into jobs via our Community Employment Programme and Trainee Academy 95% of employees completed the Sustainability Matters programme during the year 89% of our most energy-intensive sites have initiatives selected for implementation 186 Our programmes placed 186 people into jobs this year Landsec Annual Report 2017 25 Our business modelCreating and protecting valueWe aim to be a sustainable business through the market cycles by anticipating and responding to the changing needs of our customers, communities, partners and employees. We always try to act early to position the Group for the conditions we see ahead. How we set about creating sustainable, long-term value for our shareholders and the wider world.InputsCore activitiesFinancialIncluding the different types of funds we use to invest in our business, from shareholder capital to borrowings.£PhysicalIncluding our land and buildings, the materials and technologies we use, and the natural environment.SocialIncluding the relationships we have with customers, communities and partners and the capabilities of our employees.26Landsec Annual Report 2017SellBuyManageDevelopCapital reinvestmentCapital reinvestmentFurther readingRead more about our value outputs over the page on page 28 Further reading Read more about our value outputs over the page on page 29 Further reading Read more about our value outputs over the page on page 29 OutputsWe take a long-term view of value creation. For us, that’s about returning financial value to our shareholders while making a positive contribution to society. We work hard to provide our customers with a great experience, support local communities, recruit and develop great people, enhance the built environment and minimise our impact.FinancialLong-term growth in income and asset values, creating capacity for us to increase dividends for our shareholders.£PhysicalSpace that creates value for us by meeting the changing requirements of our customers and communities and a healthy environment for all.SocialOur ability to help businesses and people to thrive – including our own employees.27Landsec Annual Report 2017Strategic ReportCreating sustainable long-term valueHere’s some more insight on the breadth of outputs our activities can generate and how we work to both create and protect value.Profit We aim to grow our long-term underlying profit. We manage the business for the long term and growth in underlying profit ensures we can provide a sustainable dividend for shareholders. Revenue profit and earnings per share are particularly helpful indications of how we’re doing.Asset value Our markets are cyclical. The London office market tends to have greater swings between rising and falling values. Our valuations reflect where we’re at in the cycle and how we’re doing in relative terms to our peers. Our strategy is to act early, reshaping our portfolios so we can be resilient through the downturns and ready for opportunities to buy and develop as the cycle evolves.Balance sheetLoan-to-value (LTV) shows the amount of our debt relative to the value of our assets. While a low LTV tends to represent a strong balance sheet, at times we will want to increase debt so we can fund buying and development activity. At other times, we will fund that activity by selling assets. Our adjusted diluted net assets per share measure is important because it enables shareholders to monitor the movement in the value of the net assets of the business and to compare this with the share price.DividendWe judge the level of dividend payments carefully, paying out most of our underlying earnings, but retaining some funds so that we have maximum flexibility around investments and disposals. Our progressive dividend policy means we aim to increase returns to shareholders at a sustainable level over time.£500400300200100020152016201720132014329362382291320504030201002015201620172013201441.545.748.336.840.52015201620172013Adjusted net debt (LHS)Group LTV (RHS)20144,5004,0003,5003,0002,5002,0001,5001,0005000£00040302010%3,2614,1723,9484,2903,2391,6001,4001,2001,0008006004002000201520162017201320141,2931,4341,4179031,01340353025202015201620172013201431.8535.038.5529.830.72,5002,0001,5001,0005000(500)201520162017201320142,037907(147)218764Revenue profit1 (£m) Chart 7Adjusted diluted Chart 8 earnings (pence per share)Valuation surplus/ Chart 9 (deficit)1, 2 (£m)Adjusted net debt and Chart 11 loan-to-value ratioAdjusted diluted Chart 10 net assets (pence per share)Dividend Chart 12 (pence per share)1. Includes proportionate share of joint ventures and subsidiaries as explained in the notes to the financial statements.1. Includes proportionate share of joint ventures and subsidiaries as explained in the notes to the financial statements.2. The surplus/(deficit) represents the increase/decrease in value of the Combined Portfolio over the year, adjusted for net investment.28Landsec Annual Report 2017FinancialJobs and opportunitiesWe create income for our employees and those of our many suppliers. We aim to ensure that everyone who works on our behalf is treated and paid fairly and promptly. We believe our business should reflect the diversity of the communities we serve. And we help disadvantaged people and young people to access job opportunities in our industry.Customers From retailers to shoppers and diners, from office occupiers and their employees who work in our spaces to their visitors, we aim to provide our customers with a fabulous experience. We design our buildings to support the wellbeing and productivity of those who visit and work in them.Health, safety and security We work to maintain an exceptional standard of health, safety and security in all the working environments we control. We also partner and collaborate with others to help raise standards in our industryTarget —To help a total of 1,200 disadvantaged people secure jobs by 2020 —To ensure the working environments we control are fair and ensure that everyone who is working on our behalf – within an environment we control – is paid at least the Living Wage by 2020.Sustainable design and innovation We think about the long-term appeal, impacts and resilience of our assets, designing with long-term value in mind. We look to enhance biodiversity and support the wellbeing of those who use our buildings. And we work closely with our partners to minimise environmental impacts.Natural resourcesBeing efficient helps us to mitigate our impacts and reduce cost. Our aim is to reduce carbon intensity, energy and waste while maximising the benefits of the space we create and manage. We always look to be thoughtful and smart in the way we buy, use, re-use and dispose of resources.SocialNew HQOur new headquarters is designed to promote productivity and enrich our employees’ time at work.Living wall Featuring 52,000 plants, 20 Fenchurch Street’s living wall enriches both the visitor experience and urban biodiversity.Diversity A broad range of backgrounds and perspectives make us a stronger business.Target —To reduce carbon intensity (kgCO2/m2) by 40% by 2030 compared with a 2013/14 baseline, for property under our management for at least two years, with a longer-term ambition of an 80% reduction by 2050 —To continue to procure 100% renewable electricity across our portfolio and achieve 3 MW of renewable electricity capacity by 2030 —To send zero waste to landfill with at least 75% recycled across all our operational and construction activities by 2020.29Landsec Annual Report 2017Strategic ReportPortfolio quality We constantly look to strengthen our portfolio, ensuring it meets the changing needs of our customers and communities. We always aim to bring social, economic and environmental benefits to the areas where we operate. PhysicalFinancial review£Martin Greenslade Chief Financial OfficerHighlights£382m Revenue profit1 (2016: £362m)48.3p Adjusted diluted earnings per share1 (2016: 45.7p)38.55pDividend per share (2016: 35.0p)£14.4bnCombined Portfolio1 (2016: £14.5bn)1,417pAdjusted diluted net assets per share (2016: 1,434p)1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information on page 31.30Landsec Annual Report 2017Martin Greenslade reports on our financial performance in detail and explains the movements in our key financial measures. In my financial review last year, I explained how the quality and resilience of our assets had been enhanced this decade through investment in developments and acquisitions, funded by the sale of weaker assets. Our balance sheet had also been strengthened by rising values leading to lower gearing, with the additional disposals in the second half of last year reinforcing the position. This year, as the property market lost direction following the EU referendum, our high quality assets and low gearing have helped limit the impact of declining values in our core markets. Over the year, our assets fell in value by 1.0% or £147m (including our proportionate share of subsidiaries and joint ventures) compared with an increase last year of £907m. The decline in asset values is behind both the fall in earnings per share (14.3p compared with 169.4p last year) and the reductions in basic and adjusted diluted net assets per share. In contrast, the Group has delivered strong underlying earnings growth despite the impact of disposals we made last year. Both revenue profit and adjusted diluted earnings per share increased this year; revenue profit was up 5.5% from £362m to £382m and adjusted diluted earnings per share were up 5.7% at 48.3p. S t r a t e g i c R e p o r t Presentation of financial information Our property portfolio is a combination of properties that are wholly owned by the Group, part owned through joint arrangements and those owned by the Group but where a third party holds a non-controlling interest. Internally, management review the results of the Group on a basis that adjusts for these forms of ownership to present a proportionate share. The Combined Portfolio, with assets totalling £14.4bn, is an example of this approach, reflecting the economic interest we have in our properties regardless of our ownership structure. We consider this presentation provides a better explanation to stakeholders of the activities and performance of the Group, as it aggregates the results of all of the Group’s property interests which under IFRS are required to be presented across a number of line items in the statutory financial statements. The same principle is applied to many of the other measures we discuss and, accordingly, a number of our financial measures include the results of our joint ventures and subsidiaries on a proportionate basis. Measures that are described as being presented on a proportionate basis include the Group’s share of joint ventures on a line-by-line basis, but exclude the non- owned elements of our subsidiaries. This is in contrast to the Group’s statutory financial statements, where the Group’s interest in joint ventures is presented as one line on the income statement and balance sheet, and all subsidiaries are consolidated at 100% with any non-owned element being adjusted as a non-controlling interest or redemption liability, as appropriate. Our joint operations are presented on a proportionate basis in all financial measures. Most of the measures discussed in this financial review are presented on a proportionate basis. Measures presented on a proportionate basis are alternative performance measures as they are not defined under IFRS. For further details see table 119 on page 172. Landsec Annual Report 2017 31 Income statement Our income statement has two key components: the income we generate from leasing our investment properties net of associated costs (including finance expense), which we refer to as revenue profit, and items not directly related to the underlying rental business, principally valuation changes, profits or losses on the disposal of properties and exceptional items, which we refer to as capital and other items. We present two measures of earnings per share; the IFRS measure of earnings per share is based on the total profit for the year attributable to owners of the parent, while adjusted diluted earnings per share is based on tax-adjusted revenue profit, referred to as adjusted earnings. Income statement Revenue profit (see table 14) Capital and other items (see table 17) Profit before tax Taxation Profit attributable to owners of the parent Table 13 Year ended 31 March 2016 £m Year ended 31 March 2017 £m 382 (270) 112 1 113 362 974 1,336 2 1,338 Basic earnings per share Adjusted diluted earnings per share 14.3p 48.3p 169.4p 45.7p Profit before tax was £112m, £1,224m lower than last year principally due to the valuation deficit this year compared with a valuation surplus last year. The same movement drives a 155.1p reduction in earnings per share from 169.4p last year to 14.3p this year. Adjusted diluted earnings per share increased by 5.7% from 45.7p last year to 48.3p this year as a result of an increase in revenue profit from £362m to £382m. The reasons behind the movements in each component of our income statement are discussed in more detail below. Revenue profit Revenue profit is our measure of underlying pre-tax profit. It excludes all capital items, such as valuation movements and profits and losses on disposals, as well as items of an exceptional nature. Revenue profit is presented on a proportionate basis. We believe revenue profit better represents the results of the Group’s operational performance to stakeholders as it focuses on the rental income performance of the business and excludes capital and other items which can vary significantly from year to year. A full definition of revenue profit is given in the glossary. The main components of revenue profit, including the contributions from London and Retail, are presented in the table below. Revenue profit increased by £20m from £362m last year to £382m for the year ended 31 March 2017. Following asset disposals we made last year, net rental income declined. However, this was more than offset by lower net interest expense as explained further below. Net rental income Net rental income (£m) Net rental income1 (£m) Year ended 31 March 2017 10 10 604 17 2 (40) 650 600 550 500 Chart 15 (3) 600 6 1 0 2 h c r a M 1 3 e m o c n i l a t n e r t e N d e d n e r a e y e h t r o f e k i l - r o f - e k L i s e i t r e p o r p t n e m t s e v n i e m m a r g o r p t n e m p o e v e D l l s t n e m p o e v e d d e t e p m o C l 5 1 0 2 l i r p A 1 e c n i s s n o i t i s i u q c A 5 1 0 2 l i r p A 1 e c n i s l s e a S y t r e p o r p - n o N e m o c n i d e t a e r l 7 1 0 2 h c r a M 1 3 e m o c n i l a t n e r t e N d e d n e r a e y e h t r o f Net rental income movement in the year 1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Net rental income decreased by £4m this year as rental income growth from our developments and like-for-like portfolio was more than offset by the impact of properties sold since 1 April 2015. Significant disposals included The Printworks, Manchester and The Cornerhouse, Nottingham, both sold this year, and Thomas More Square, E1, Holborn Gate, WC1 and Times Square, EC4 in London and three retail parks in Gateshead, Dundee and Derby, all sold last year. The impact of this year’s disposals will continue to be felt in the coming year as they contributed £9m of net rental income to this year’s results. Our developments generated £27m of additional rent following completion of 20 Eastbourne Terrace, W2 and 1 New Street Square, EC4, alongside a full year’s income at The Zig Zag Building and 62 Buckingham Gate, both SW1 and 1 & 2 New Ludgate, EC4. Like-for-like net rental income growth was £10m due to rent reviews and higher turnover related rents, together with a reduction in bad debts. Further information on the net rental income performance of the London and Retail portfolios is given in the respective business reviews. Revenue profit Gross rental income1 Net service charge expense Net direct property expenditure Net rental income Indirect costs Segment profit before finance expense Net unallocated expenses Net finance expense Revenue profit 1. Includes finance lease interest, after rents payable. 32 Landsec Annual Report 2017 Retail Portfolio £m Year ended 31 March 2017 London Portfolio £m Total £m 335 (4) (16) 315 (22) 293 302 (1) (16) 285 (17) 268 637 (5) (32) 600 (39) 561 (40) (139) 382 Year ended 31 March 2016 Retail Portfolio £m London Portfolio £m 355 (2) (24) 329 (25) 304 293 (1) (17) 275 (19) 256 Total £m 648 (3) (41) 604 (44) 560 (34) (164) 362 Table 14 Change £m (11) (2) 9 (4) 5 1 (6) 25 20 Net indirect expenses The indirect costs of the London and Retail portfolios and net unallocated expenses should be considered together as collectively they represent the net indirect expenses of the Group including joint ventures. In total, net indirect expenses were £79m compared with £78m last year. The £1m increase is largely the result of higher IT and corporate communication and sustainability costs, largely offset by lower staff costs due to decreased headcount and reduced share-based payment costs. Our net finance expense has decreased by £25m to £139m, primarily due to interest savings following the redemption of the £400m A8 bond in March 2016 and other refinancing undertaken this year, together with lower average drawings under our bank facilities. This has been partly offset by lower capitalised interest following completion of developments. Net finance expense (£m) Net finance expense (included in revenue profit)1 (£m) 31 March 2017 Chart 16 164 (21) (7) 6 (3) 139 200 175 150 125 100 75 e c n a n fi t e N d e d n e r a e y 6 1 0 2 h c r a M 1 3 e h t r o f e s n e p x e i g n c n a n fi e R t b e d t e n e g a r e v a r e w o L t s e r e t n i d e s i l a t i p a c r e w o L r e h t O d e d n e r a e y 7 1 0 2 h c r a M 1 3 e c n a n fi t e N e h t r o f e s n e p x e 1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Valuation analysis Shopping centres and shops Retail parks Leisure and hotels London offices Central London shops Other (Retail and London) Total like-for-like portfolio Proposed developments Development programme Completed developments Acquisitions Total Combined Portfolio S t r a t e g i c R e p o r t Capital and other items An explanation of the main capital and other items is given below. Capital and other items1 Valuation and profits on disposal Valuation (deficit)/surplus Movement in impairment of trading properties Profit on disposal of investment properties Profit on disposal of trading properties Other profits on disposal Net finance expense Exceptional items Head office relocation Redemption of medium term notes Other Capital and other items Table 17 Year ended 31 March 2016 £m Year ended 31 March 2017 £m (147) 907 12 20 36 11 34 1 (170) 1 (270) 16 79 41 – (39) (6) (27) 3 974 1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Valuation of investment properties Our Combined Portfolio declined in value by 1.0% or £147m compared with an increase last year of £907m. A breakdown of valuation movements by category is shown in table 18. Market value 31 March 2017 £m Valuation movement % Rental value change1 % Net initial yield % Equivalent yield % 3,663 855 1,361 4,153 1,267 61 11,360 6 1,138 1,841 94 14,439 (1.3) (4.2) 2.3 (4.4) 6.9 (6.0) (1.4) (33.2) 1.3 (0.4) 0.4 (1.0) 1.6 0.6 0.2 2.5 4.7 3.4 1.9 n/a n/a 1.9 n/a 1.9 4.3 5.5 5.2 4.0 2.5 1.9 4.2 – 0.1 2.0 3.7 3.6 4.8 5.6 5.4 4.7 4.1 3.6 4.8 n/a 4.2 4.2 3.8 4.7 Table 18 Movement in equivalent yield bps 9 24 (6) 18 7 2 11 n/a n/a 10 n/a 9 1. Rental value change excludes units materially altered during the year and Queen Anne’s Gate, SW1. Over the year to 31 March 2017, we have seen values fall in most categories of our Combined Portfolio, largely due to outward yield movements. Within the like-for-like portfolio, our shopping centres fell in value by 1.3% as rental value growth was insufficient to offset a 9 basis points increase in yields. The value of our retail parks was down 4.2% as lower investor appetite led to yields increasing by 24 basis points. In contrast, leisure and hotels saw yields reduce by 6 basis points with little change in rental values. In London, our offices saw values decline 4.4% as yields increased. The 2.5% rental value increase in London offices is distorted by the valuer moving from net effective to headline rents on a number of assets. On a consistent basis, net effective rents in London offices were virtually unchanged over the year. The 6.9% valuation uplift in central London shops is largely due to Piccadilly Lights where a replacement screen is being installed. Outside the like-for-like portfolio, the development programme saw values increase as construction risk reduced at Nova, Victoria, SW1 and Westgate Oxford. Completed developments, which largely comprises our recent London office schemes, proved more resilient than our like-for-like London office assets, falling in value by 0.4%. Movement in impairment of trading properties The movement in impairment of trading properties of £12m (2016: £16m) relates to the reversal of previous impairment charges related to residential land at Ebbsfleet, Kent, where the valuer’s assessment of net realisable value has increased over the year. Landsec Annual Report 2017 33 Profits on disposals Profits on disposals relate to the sale of investment properties, trading properties, joint ventures and other investments. We made a total profit on disposals of £67m, compared with £120m last year. The profit on disposal of investment properties of £20m includes the disposal of The Printworks, Manchester and Ealing Filmworks. The profit on disposal of trading properties of £36m includes a profit on the settlement of our remaining interest in the Kodak land at Harrow, together with the sale of residential units at Nova and Kings Gate, both SW1. Other profits on disposal amounted to £11m. Net finance expense (included in capital and other items) This largely comprises the amortisation of the bond exchange de-recognition adjustment (as explained in the notes to the financial statements) and the fair value movement on interest-rate swaps. Exceptional items This year we’ve classified two items totalling £169m as exceptional. They’re excluded from revenue profit by virtue of their exceptional nature, but form part of our pre-tax profits. During the year, we purchased some of our bonds with a nominal value of £690m, paying a premium of £137m. The redemption premium and £30m of the bond exchange de-recognition adjustment associated with the redeemed bonds, £2m of unamortised issue costs and £1m of associated fees (£170m in total) have been charged to the income statement as a finance expense. Further details are given in the financing section below. At 31 March 2016, we provided for the onerous lease on our head office at 5 Strand, which arose following our commitment to move to 100 Victoria Street, SW1. During the year, we agreed to assign the lease on 5 Strand to a third party at a lower net cost than originally estimated and we’ve therefore released the balance of the provision of £2m. Partly offsetting this release is £1m of relocation costs incurred during the year. Our net assets principally comprise the Combined Portfolio less net debt. We calculate an adjusted measure of net assets, which is lower than our net assets reported under IFRS due to an adjustment to increase our net debt to its nominal value. We believe this better reflects the underlying net assets attributable to shareholders as it more accurately reflects the future cash flows associated with our debt instruments. At 31 March 2017, our net assets per share were 1,458p, a decrease of 24p or 1.6% from 31 March 2016. At 31 March 2017, adjusted diluted net assets per share were 1,417p, a decrease of 17p or 1.2% from 31 March 2016, driven by the reduction in the valuation of the Combined Portfolio. Chart 20 summarises the key components of the £159m decrease in our adjusted net assets over the year. Movement in adjusted net assets (£m) Movement in adjusted net assets1 (£m) Year ended 31 March 2017 Chart 20 12,000 11,000 10,000 11,365 6 1 0 2 l i r p A 1 t a s t e s s a t e n d e t s u j d A 382 (147) 67 (289) (140) (32) 11,206 t fi o r p e u n e v e R t i c fi e d n o i t a u a V l s l a s o p s i d n o s t fi o r P s d n e d v D i i r e h t O f o n o i t p m e d e R s e t o n m r e t i m u d e m 7 1 0 2 h c r a M 1 3 t a s t e s s a t e n d e t s u j d A 1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Taxation Net debt and gearing Net debt and gearing Table 21 Net debt Adjusted net debt Gearing Adjusted gearing1 Group LTV2 Security Group LTV Weighted average cost of debt2 31 March 2017 31 March 2016 £2,905m £2,861m £3,261m £3,239m 25.2% 29.1% 22.2% 28.3% 4.2% 24.5% 28.5% 22.0% 23.4% 4.9% 1. Adjusted net debt divided by adjusted net assets. 2. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Over the year, our net debt increased by £44m to £2,905m. The main elements behind this increase are set out in our statement of cash flows and note 21 to the consolidated financial statements. Adjusted net debt was up £22m to £3,261m. For a reconciliation of net debt to adjusted net debt, see note 20 to the financial statements. Chart 22 sets out the main movements behind the small increase in our adjusted net debt. As a consequence of the Group’s REIT status, income and capital gains from the qualifying property rental business are exempt from corporation tax. A property income distribution of at least 90% of this qualifying income must be made, and this distribution is taxed as property income at the shareholder level to give a similar tax position to direct property ownership. Profits on non-qualifying activities, such as residential sales, are subject to corporation tax and can be distributed as ordinary dividends. This year, we were able to offset taxable gains on non-qualifying activities with brought forward losses. In the year, there was a tax credit of £1m (2016: £2m) being a current tax credit of £nil (2016: £1m) and a deferred tax credit of £1m (2016: £1m). The Group fully complies with tax regulations and HMRC confirmed the Group’s low risk rating. In the year, total taxes borne and collected by the Group were £129m (2016: £109m), of which we directly incurred £41m (2016: £32m), including environmental taxes, business rates and stamp duty land tax. Balance sheet Balance sheet Combined Portfolio Adjusted net debt Other net assets Adjusted net assets Fair value of interest-rate swaps Bond exchange de-recognition adjustment Net assets Net assets per share Adjusted diluted net assets per share 34 Landsec Annual Report 2017 Table 19 31 March 2016 £m 14,471 31 March 2017 £m 14,439 (3,261) (3,239) 28 11,206 (4) 314 133 11,365 (34) 368 11,516 11,699 1,458p 1,417p 1,482p 1,434p Adjusted net debt (£m) Adjusted net debt1 (£m) Year ended 31 March 2017 Chart 22 Purchase of medium term notes Table 23 3,239 (379) 289 26 140 33 35 3,261 Nominal value purchased 288 (410) 4,000 3,000 2,000 g n i t a r e p O w o fl n i h s a c 6 1 0 2 l i r p A 1 t a t b e d t e n d e t s u j d A i d a p s d n e d v D i i s n o i t i s i u q c A e r u t i d n e p x e / t n e m p o e v e D l l a t i p a c t n e m h s i b r u f e r r e h t O s l a s o p s i D f o n o i t p m e d e R s e t o n m r e t i m u d e m i f o g n c n a n fi e R s p a w s e t a r - t s e r e t n i 7 1 0 2 h c r a M 1 3 t a t b e d t e n d e t s u j d A 1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information above. Net operating cash inflow was £379m, largely offset by dividend payments of £289m. Capital expenditure was £288m (£258m on investment properties and £30m on trading properties), largely relating to our development programme. Net cash flows from the disposal of investment properties were £297m, from the disposal of trading properties £110m and the disposal of investments in joint ventures £3m. The premium payable for the purchase of the medium term notes was £137m. Most of our gearing measures have increased marginally since 31 March 2016 due to the decrease in the value of our assets and the small increase in our adjusted net debt. The measure most widely used in our industry is loan- to-value (LTV). We focus most on Group LTV, presented on a proportionate basis, which increased marginally from 22.0% at 31 March 2016 to 22.2% at 31 March 2017. The increase in our Security Group LTV from 23.4% to 28.3% relates to the medium term notes we purchased this year. These are held in a different entity to the issuing company and, for the purposes of calculating this measure, cannot be offset. Financing At 31 March 2017, our committed revolving facilities totalled £1,940m (31 March 2016: £1,865m). The £75m increase in committed facilities is the result of two new debt facilities totalling £560m, offset by the cancellation of two existing facilities. The pricing of our facilities which fall due in more than one year are between LIBOR +75 basis points and LIBOR +80 basis points. Borrowings under our commercial paper programme typically have a maturity of less than three months, carry a weighted average interest rate of approximately LIBOR +29 basis points and are unsecured. Overall, the amounts drawn under the syndicated bank debt and commercial paper programme totalled £441m (31 March 2016: £432m). During the year, we purchased £690m (nominal value) of our medium term notes (MTNs). On 8 February 2017, we conducted a tender exercise which resulted in us buying back £635m (nominal value) of MTNs in three series. In addition during the year, we bought back £55m (nominal value) of MTNs in a number of ad hoc purchases, following enquiries by bondholders. Further details are set out in the table below and note 21 to the financial statements. In conjunction with the tender offer, we issued a new £400m MTN with an expected maturity of 2024 and a £300m MTN with an expected maturity of 2029. A premium to par of £137m was paid across all of the MTN purchases, reflecting future coupon savings of £206m. Taking into account the interest cost of the facilities used for the purchases, we estimate the Group’s net interest saving next year will be a further £16m. The Group’s debt (on a proportionate basis) has a weighted average maturity of 9.4 years, a weighted average cost of 4.2% and 89% is at fixed interest rates. At 31 March 2017, we had £1.6bn of cash and available facilities. This gives the business considerable flexibility to deploy capital quickly should acquisition opportunities arise. Since the end of the year, we have redeemed the Queen Anne’s Gate bond in its entirety. The nominal value amounted to £273m at 31 March 2017 and the premium paid was £63m. The redemption was funded by our existing short term facilities and is expected to result in an interest saving of £8m in the year to 31 March 2018. Our pro forma cost of debt at 31 March 2017, taking into account this transaction, is 3.7%. – Tender offer – Ad hoc purchases Premium paid – Tender offer – Ad hoc purchases Fees/unamortised finance fees written off Amortisation of bond exchange de-recognition adjustment S t r a t e g i c R e p o r t Medium term note series A3 £m A10 £m A4 £m A5 £m A7 £m Total £m 206 265 164 3 7 20 209 272 184 – 23 23 – 635 2 55 2 690 28 1 29 – 29 19 56 1 57 2 59 40 4 44 1 45 – 6 – 6 6 – 6 5 – 1 1 – 1 – 1 124 13 137 3 140 30 170 Redemption of medium term notes – total cost 48 59 51 11 Dividend We’re recommending a final dividend of 11.7p to be paid on 27 July 2017 entirely as a Property Income Distribution to shareholders registered at the close of business on 23 June 2017. Taken together with the three quarterly dividends of 8.95p per share already paid, our full year dividend will be up 10.1% at 38.55p per share (2016: 35.0p) or £305m (2016: £276m). The first quarterly dividend for 2017/18 will be 9.85p per share (2016: 8.95p). Landsec has a progressive dividend policy, which aims to deliver sustainable growth in dividends over time, broadly in line with our underlying earnings growth as measured by our adjusted earnings per share. The reason we use underlying earnings is that it excludes capital and other items such as valuation movements and non-recurring income or costs. We don’t pay out a fixed percentage of adjusted earnings each year, due to the earnings volatility that can come from our investment decisions. For example, when we empty a building in advance of development, we lose rent which isn’t recovered until after the new building has been built and let. Similarly, selling assets in the current low interest rate environment is likely to be earnings dilutive. Our dividend policy aims to smooth out that earnings volatility with a more consistent dividend progression. The degree to which our adjusted earnings per share exceeds the dividend per share (known as our dividend cover) will vary for the reasons described above. In addition, when setting our dividend, we’re mindful of the earnings risks we have in the business (for example, from unlet speculative developments) and the degree of flexibility we believe we require (for example, if we intend to sell properties despite the negative impact on earnings). Last year, we raised our dividend by almost 10% as earnings rose due to our successful development programme. This year, we’ve increased the dividend above our underlying earnings growth as we’ve now completed our disposal programme, our speculative development risk is lower than for many years and we’re unlikely to add to that risk in the short term. In addition to our focus on risk and flexibility when setting the dividend, we also consider underlying cash flows, recognising that these are generally lower than underlying earnings due to the lease incentives we give our customers and refurbishment capital expenditure. Taking all these factors together, we anticipate that dividend cover will be in the range of 1.2x to 1.3x. This range is indicative only although it’s unlikely that we would consistently pay a dividend per share in excess of our adjusted earnings per share and, as a minimum, we will satisfy our dividend obligation under the REIT legislation. At 31 March, the Company had distributable reserves of £3.5bn which compares to the dividend payable in respect of this year of £305m. We don’t anticipate that the level of distributable reserves will limit distributions for the foreseeable future. Martin Greenslade Chief Financial Officer Landsec Annual Report 2017 35 Physical reviewA focus on the materials and technologies we use to create and operate our assets, and the effect our spaces have on people and the natural environment. Our portfolioTop ten assets by value01 New Street Square, EC4 Contemporary offices with retail and restaurants. Annualised net rent £33.1m02 Cardinal Place, SW11 Landmark site, home to blue-chip businesses and retailers. Annualised net rent £22.7m03 Bluewater, Kent The dominant shopping centre in the south east of England. Annualised net rent £28.6m (Landsec share)04 One New Change, EC4 Office and leisure destination in an iconic building. Annualised net rent £28.3m05 1 Sherwood Street/Piccadilly Lights, W1 Offices, retail, leisure and a world famous advertising landmark. Annualised net rent £7.3m06 20 Fenchurch Street, EC3 688,000 sq ft of offices and a unique public Sky Garden. Annualised net rent £20.3m (Landsec share)07 Trinity Leeds 778,000 sq ft retail destination developed by us. Annualised net rent £28.0m08 Gunwharf Quays, Portsmouth Outlet shopping, leisure and entertainment on a waterfront location. Annualised net rent £27.1m09 1 & 2 New Ludgate, EC4 396,000 sq ft of modern, technically resilient office space, restaurant and retail. Annualised net rent £3.1m10 Queen Anne’s Gate, SW1 BREEAM ‘Excellent’ offices: built by us in 1977, refurbished in 2008. Annualised net rent £31.6mNatural resourcesWhen we buy, use, re-use and dispose of resources efficiently we see big benefits. We minimise our impact on the environment. We reduce costs, both for us and for our customers and partners. And we give our assets and our business greater resilience in the face of climate change challenges, from scarcity of resources to new regulation. CarbonLast year we set a science-based target for reducing emissions. This target helps companies determine how much they must cut emissions to prevent the worst impacts of climate change and stay in line with the Paris Agreement. This year the Science-based Targets initiative approved our target, making us the first real estate company in the world to achieve this. During the year we reduced our carbon intensity by 18.5% compared to our 2013/14 baseline, which puts us well on track to achieving our target for 2030 of a 40% reduction and our 2050 ambition of an 80% reduction. EnergyThis year’s carbon intensity performance is largely due to our active energy management programme, which is reducing the energy we use to power our offices and shopping centres. This year we set our first Group KPI for energy. This required us to create detailed energy reduction plans for each of our properties and approve energy reduction measures at those consuming the most energy. We’re now generating more of our own electricity through on-site renewable sources such as solar panels on our properties. We set ourselves a new target this year to achieve 3 megawatts (MW) capacity of renewable electricity by 2030. Currently we have a renewable electricity capacity of 0.6 MW across eight assets. The solar installation schemes in progress at White Rose and Trinity Leeds will add an additional 0.8 MW this coming year, taking us to a total of 1.4 MW.As of 1 April 2016, all the sites we manage are supplied by SmartestEnergy, the UK’s first officially certified 100% renewable electricity producer. We are also helping to pioneer the use of green gas, a low-carbon substitute for mined or fracked gas. Green gas made up 15% of our forward gas purchases for the coming year. 1. Cardinal Place, SW1 now excludes 16 Palace Street, SW1.36Landsec Annual Report 2017Sustainable design and innovationThe way we design buildings has a huge impact on how people use them. Great design increases efficiency and encourages people to spend time in our spaces, improving wellbeing. This is good for our customers, communities and partners – and good for us. Climate resilienceClimate change is affecting our business today. Warmer temperatures, higher rainfall and more variable weather are putting new pressures on our buildings. This year we introduced a new resilience commitment – ‘assess and mitigate site-specific climate change adaptation risks which are material across our portfolio’. Our new assets will be designed to resist the onset of climate change and we’ll also focus on how we can upgrade existing assets to meet climate challenges.Scope 3 emissions and embodied carbonScope 3 emissions are those outside our direct control. They include the emissions involved in constructing our properties, including the manufacture and transportation of materials, and they represent 91% of our total emissions. Since embodied carbon makes up such a big part of our carbon footprint, we need to find ways to reduce it. We’re already hard at work on this. For example, our approach to sustainable design at Westgate has enabled us to avoid as many carbon emissions during construction as the centre is expected to generate in operation over the next 30 years, putting us well ahead of Oxford City Council’s environmental requirements. This year we worked with the Carbon Trust to develop a consistent and transparent way of reporting Scope 3 emissions across our business. With better data, we can focus on identifying and implementing the measures that will make the most difference. BiodiversityThis year we continued our work with The Wildlife Trusts, exploring ways to increase biodiversity across our Retail Portfolio. Together, we’ve developed a methodology that enables us to determine each site’s potential for biodiversity and to measure biodiversity at a local and Company-wide level. We’ve now identified the properties with the greatest potential for biodiversity gain and will focus our activity there, giving particularly close attention to how our sites connect with the wider landscape.WellbeingWhenever we design a new development we think hard about the experience of the people who will use and visit it – everyone from office workers and their clients to shoppers and retail staff, local neighbours and tourists. This year we developed two stretching metrics on wellbeing for new developments:— To assess and design optimum air quality, daylight, lighting and noise factors— Where appropriate, to design and construct new developments to be prepared for certification by the WELL Building Institute, which recognises buildings that maximise positive effects on people.We’re now pursuing these across our developments. This year we also continued to sponsor the Better Places for People Campaign, an initiative from the World Green Building Council that aims to inspire companies to think about the effects of property on people.Thanks to our scale and the amount of green gas we buy, we can drive demand, boost the renewables industry and increase the proportion of green gas in the UK’s energy mix. This makes the whole industry greener – and in turn helps us hit our carbon targets.Landsec energy intensity Chart 240501001502002502013/2014BaselineLondonRetailLandsecKWh/m22016/20172013/2014Baseline2016/20172013/2014Baseline2016/20172030 target247213646212911277WasteWaste can have a significant effect on the environment. It also has financial impacts. For example, our proactive approach to waste management over the past three years has enabled us to avoid over £8m in landfill tax. This year, our London business sent over 77% of used materials for recycling – an improvement on last year’s rate of 74%; and we continued to divert 100% of waste from landfill. In Retail, we diverted 99.9% of waste from landfill, up from 99.0% the previous year. We also sent 68.4% of used materials for recycling – a slight decrease on last year’s 69.3%. We are now investigating circular economy principles for further waste reduction across the portfolio.37Landsec Annual Report 2017Strategic ReportThe table below shows the key actions we took to reduce embodied carbon at Westgate Oxford:ActionsCarbon Savings (TCO2)Earthworks and excavation – local disposal10,70096% recycled content steel reinforcement9,000Replacing cement with industrial waste products9,850100% recycled content sheet piling1,000Total savings to date30,55038Landsec Annual Report 2017Social reviewA focus on some of the key activities we carry out to support our customers, communities, partners and employees.CustomersWe aim to use our experience to ensure we give our customers a great experience. We work with a diverse mix of businesses and organisations, from global corporations and international consumer brands to trend operators, fast-growing tech companies and dynamic local businesses. Understanding and meeting customers’ changing needs is at the heart of everything we do. We work hard to understand future market dynamics and anticipate evolving expectations and requirements. Ensuring high levels of customer satisfaction is one of our KPIs and we carry out annual surveys with customers to assess our performance and gain insight. For more on our work with occupiers see our London Portfolio and Retail Portfolio reviews on pages 46-53.Jobs and opportunitiesCommunity employmentOur Community Employment Programme is a collection of employment initiatives involving training providers, charities and partners from our supply chain. It targets those furthest from the job market, including homeless people, the long-term unemployed, people with learning disabilities, ex-offenders and serving prisoners. The programme plays a real part in the planning process and beyond, showing local authorities how our work can benefit an area. In 2016/17, 183 people found work through our Community Employment Programme. During the year we extended our prison work, launching a scaffolding training centre in HMP Brixton – a UK first.When we started the programme in 2011, we focused on helping candidates in London find work on construction sites. In 2015, we launched the programme at our Westgate development in Oxford. This year we expanded the programme geographically, from Portsmouth to Leeds. We’re now offering more opportunities in customer service – a reflection of our strategic shift from development activity towards asset management. So far we have helped 962 people from disadvantaged backgrounds.EducationOur education programmes help us engage the wider community, including students, schools and families. The programmes raise awareness of our developments, start conversations, and develop our local relationships. In many of the areas where we work there’s a degree of social inequality – so we particularly want to reach out to those pockets of disadvantage and support our ambitions to improve diversity in our sector. This year we worked with over 400 students between the ages of 12 and 18. Projects included Girls Can Do It Too, an inspiring partnership with two girls’ schools that challenged students to design, model and pitch a new property development. And we’re supporting The Sir Simon Milton Westminster University Technical College: a new kind of college for students wishing to pursue a career in construction, engineering and other roles that require both academic and technical ability.Charity partnershipsThis was the third and final year of our national partnership with Mencap, the UK’s leading learning disability charity. Across our business we raised over £360,000 over the three years. This year we asked employees to nominate charities that could help us achieve our goal of creating jobs and opportunities, and we put our final shortlist to a Company vote – 70% of respondents chose Barnardo’s. They will become our national partner from 2017. During the year our teams in London continued to help tackle homelessness. We also expanded our work in homelessness across the UK. We’re particularly focusing on Oxford, where homelessness is rising.FairnessWe were delighted this year when we became an accredited Living Wage Employer by The Living Wage Foundation. All of our own employees are paid at least the Living Wage. In our London business, 100% of those working on our behalf – within an environment we control – are paid at least the Foundation Living Wage (£9.75 an hour in London; £8.45 outside London). In Retail, we’re confident we’ll meet our commitment that everyone working on our behalf is paid at least the Foundation Living Wage by 2020. In 2015 we asked construction supply chain partners to pay the Foundation Living Wage in their own supply chain. This year we started to check whether this is being achieved across our developments. Moving forward, we’ll also include a formal commitment in every contract.The Modern Slavery Act came into force in 2015. We’ve taken steps to make sure our staff and supply chain partners are aware of the Act and its requirements. In 2016 we issued our first statement explaining how we’re addressing the risk of slavery and human trafficking in our business. We then examined our recruitment processes, and trained teams to help them spot the risks of modern slavery. 02004006008001,0001,200201120122014201520162017JobsTarget201396277958342610526206Cumulative total number of jobs secured Chart 2585.7% “Landsec is acting responsibly and making tangible improvements to the management of Energy, Water and Waste” (2015: 82.9%, 2.8% increase)84.5% “We feel that Landsec is  acting responsibly and is having a positive effect on the local community” (2015: 82.2%, 2.5% increase)Landsec’s customer engagement survey39Landsec Annual Report 2017Strategic Report21people to get a job52people to get work placements1,000+Over 1,000 people took part in Mencap eventsHealth, safety and securityOur priorities are:— Health: to make sure every worker has a transferable occupational health record, and to make sure all our maintenance and construction partners have a wellbeing policy— Safety: to have zero reportable health and safety incidents— Security: to raise awareness of physical and cyber security, in our own organisation and across our industryDespite our efforts, incidents reported under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 (RIDDORs) increased this year. This is partly because our system for logging and reporting of incidents is better, and partly because we worked on several complex developments – including Nova, which had over 2,000 people on site at one time. The good news is that, by bringing our many partners together in Customer Improvement Groups, we’ve created a more transparent culture. Partners are more likely to tell us about safety incidents instead of hiding them. Clive Johnson, our Group Head of Health, Safety and Security, continued to chair the Health in Construction Leadership Group (HCLG). This aims to make sure health gets as much attention as safety in our industry. In January 2017, HCLG held its second summit, drawing over 300 industry leaders. This saw the launch of Mates in Mind, a programme that shows people how to support colleagues with mental ill health. In future, we’ll require all contractors to sign up.For the coming year, we have set new objectives to train all our people in physical and cyber security. The training will help with everything from protecting data when working remotely to staying safe during terrorist incidents.Our partnership with Mencap helped:40Landsec Annual Report 2017— We were the only listed REIT to make the published list of 32 Best Places to Work— Overall engagement – 86%— Proud to work for Landsec – 93%— Willing to give extra effort to help this organisation succeed – 92%National Equality Standard assessment— At the first assessment, we fully met 27 out of 49 criteria, and partially met the remaining 22 — Key positives: leadership; training and external partnerships; diversity aspects of new HQ— Improvements needed: setting of clear targets; measurement of the impact of our diversity initiativesRICS Inclusive Employer Quality Mark— Seen as a role model against all six criteria – leadership, recruitment, staff development, staff retention, staff engagement and continuous improvementProperty Week Best Places to Work Survey 2016Our employees DiversityGetting greater diversity into the Company – including gender, ethnicity, social mobility, disability and sexuality – is very important for us. It means we better reflect the character of our customers and communities and are more likely to understand their changing needs. This year we’ve set out these very specific objectives for the business, to be achieved by 2020:— Ensure that Landsec continues to meet all the voluntary targets set by the Hampton-Alexander Review. Currently 36% of senior management (including the Executive Committee) are female— Improve female representation at Leader level to 30%— Improve the Engagement scores for Black, Asian and Minority Ethnic colleagues – bringing them into parity with employee scores overall— Improve the transparency of our reporting of all diversity data, including the accurate measurement, and tracking of engagement of other specific groups – including LGBT and disabled colleagues. Investment in our people 2016 has been another year of significant investment in our people. We continued to roll out our established management and leadership programmes, Positive Impact and Positive Influence. Almost 150 managers and leaders have now taken part, and the feedback continues to be positive. We have also invested in our senior executives, who have been given access to a bespoke development offer including one-to-one coaching, business school programmes, and peer-to-peer networking and mentoring. In all, 67% of our people have undergone some form of training. In line with the focus from the Health, Safety and Security team, improving our wellbeing offer has been a key priority, and we have taken advantage of the move to Victoria to re-design the way all our people (including those based outside London) can access high quality medical care, including detailed health assessments. This has been supported by a new, healthier catering provision, and a range of wellbeing initiatives including stress awareness, mindfulness and yoga. We are proud that our investment in people has been recognised externally. In November 2016, we were the only listed REIT to be named in the Property Week “Best Places to Work” survey. 93% of our people said that they were proud to work for Landsec. Key employee figures: Gender pay The UK Government has introduced legislation that will require employers with 250 or more UK employees to disclose information on their gender pay gap. The first disclosures will be based on amounts paid in April 2017 and must be published by 4 April 2018. Improving all aspects of the diversity of our workforce is a key people priority for Landsec, as is being a leader in promoting change across our sector. We have therefore chosen to publish our data in this year’s Annual Report. The table below shows the gender pay picture for Landsec, calculated in accordance with the published requirements. The definition of pay shown is an hourly pay rate for each relevant employee as at 5 April 2017, reflecting base salary and certain allowances. The bonus figures shown include total variable pay over the previous 12 months (bonus paid plus any proceeds on exercise of SAYE, ESOP or vesting of LTIP awards). Pay element Mean hourly salary Median hourly salary Proportion of employees receiving a bonus Mean bonus Median bonus Male £43.26 £33.36 79.0% £42,894 £12,741 S t r a t e g i c R e p o r t Female £28.86 £21.27 77.1% £14,282 £4,780 % difference (33.3) (36.3) (66.7) (62.5) Total headcount 638 20.4% Employee turnover – 12% resignations (stable year-on-year) 50% Percentage of Senior Leader and Leader roles filled by internal people 46:54% Overall male:female ratio (female representation up 1%) While at a headline level, the figures would suggest a significant pay gap between males and females in our business, we are satisfied that the issue is one of female representation in higher- paying roles, rather than of equal pay for equivalent roles. The analysis below, which includes additional data on hourly rate and mean bonus levels by pay quartile, illustrates this more fully: Quartile split Number Lower 138 Lower middle Upper middle Upper 138 138 138 % Male 23.9 40.6 58.0 69.6 % Female 76.1 59.4 42.0 30.4 Male mean hourly rate Female mean hourly rate % difference in hourly rate % difference in mean bonus £14.15 £15.00 £21.98 £22.13 £33.17 £74.08 £32.95 £71.03 6.0 0.7 (0.7) (4.1) (17.4) (18.3) (25.9) (20.7) Like other companies across our industry, we have a lower proportion of females in senior roles than we would like. As we have said elsewhere in the Annual Report, we have seen encouraging progress at the most senior levels, and we already exceed the Hampton-Alexander review target of 33% female representation at Executive Committee and the level below (the top 28 executives). However, the majority of our upper quartile roles (encompassing our Executive, Senior Leader and Leader levels) are still occupied by males. In the pay quartiles where there is a greater prevalence of females, their hourly pay matches, or even exceeds, that of their male counterparts. Given this, the differential in mean bonus payments at the lower levels of pay may seem surprising. However, this can partly be explained by the relatively high proportion in these groups of part-time females, whose bonus payments are pro-rated. For example, in the lower quartile, 14.2% of our employees are part-time and they are all female. Encouraging more females into senior roles has become a key priority for us, which is why we have committed to a specific target of improving our female representation at Leader level (broadly the lower end of upper quartile) from 20% to 30% by 2020. This is underpinned by some specific initiatives such as the female mentoring programme and a new set of industry-wide recruitment guidelines which we have developed in collaboration with our peers. Landsec Annual Report 2017 41 Managing risk By being both risk-agile and risk-resilient, we will be in a stronger position to embrace opportunities, deliver sustained success and enhance shareholder value. Our key focus areas in 2016/17— Third party review of our risk management processes— Crisis management exercises for the Executive Committee and senior management — Third party review of our crisis management processes — Cyber threats and other security risks, including building management systems — Disruptors to our key target marketsOur key priorities for 2017/18 — Continue to enhance the risk management framework and further embed the risk management culture amongst all employees— Deep dive reviews into specific areas of risk— Enhanced reporting for the Board and executive management— Continue to enhance our approach to crisis management — Construct scenarios to determine the impact of climate change on our existing portfolio and our future developmentsGovernanceThe Board has overall responsibility for oversight of risk and for maintaining a robust risk management and internal control system. It recognises the importance of identifying and actively monitoring the full range of financial and non-financial risks, and other longer-term threats or challenges potentially facing the business. The Audit Committee supports the Board in the management of risk and is responsible for reviewing the effectiveness of the risk management and internal control systems during the year. The Executive Committee is responsible for the day-to-day management of risk, which includes the ongoing identification, assessment and mitigation of risk as well as the design, implementation and evaluation of the system of internal control, and for ensuring its operational effectiveness. The Company’s Risk Management and Internal Audit function supports the Audit Committee and Executive Committee in evaluating the design and operating effectiveness of the risk mitigation strategies and internal controls implemented by management.The Board undertakes an annual assessment of the principal risks, taking account of those that would threaten our business model, future performance, solvency or liquidity as well as the Group’s strategic objectives.Risk appetiteThe Board is responsible for the level and type of risk that the Group is willing to take and ensuring that it remains in line with our strategy. By regularly reviewing the risk appetite of the business and re-assessing the latest risk related information, the Board seeks to ensure risk exposure remains appropriate at any point in the cycle. Our risk appetite is cascaded throughout the organisation by being embedded within our policies and delegated authorities.Risk management frameworkWe have an established risk management and control framework that enables us to identify, evaluate and manage our principal risks. This is supported by a strong risk management culture amongst our employees. Our approach is not intended to eliminate risk entirely but to provide a structure by which we’re risk aware and able to respond effectively and appropriately to create value for our shareholders.Identification, evaluation and management of riskThe identification of risk is a continual process through discussion with management, external agencies and stakeholders. A full and detailed review of the risks, the controls and the mitigation strategies is undertaken with the executive committees of the London and Retail businesses four times a year. These form the basis for the principal risks and uncertainties, as well as emerging risks, which are challenged and validated by the Executive Committee. These are then presented to the Audit Committee to ensure representatives of the Board are aware of, and contribute to, the latest position. In addition, a wholesale and in-depth risk session is held with the Board every two years to ensure full Board participation in our risk management process. Such a session is next due to be undertaken in 2017/18.Senior management from across the business will also attend the Executive Committee and the Audit Committee to discuss specific risk areas, such as a continuing focus on cyber risk, accompanied by external advisers where relevant. The Risk Management function, headed by the Director of Risk Management and Internal Audit, assists management by facilitating the risk discussions and providing challenge and insight where appropriate. We evaluate each risk on three factors: likelihood; financial impact, both to income and capital values; and reputational impact, from the business unit through to Group level. We also consider the inherent (gross) risk (the impact of the risk before any mitigating action is taken) and the residual (net) risk (the risk that remains after the effect of mitigating actions and controls are considered). From this we identify principal risks (current risks with relatively high impact and certainty) and emerging risks (those risks for which the extent and implications are not yet fully understood). This also informs the business as to those risks that have a high dependency on the internal control systems, which then directly helps to focus the work of the internal audit team. The business considers the full range of external and internal risk, including strategic, operational, people and technology. A risk scoring matrix is used to ensure a consistent approach is followed.Ownership and management of the risks are assigned to members of the Executive Committee. They are responsible for ensuring the operating effectiveness of the internal control systems and for implementing key risk mitigation plans.Internal Audit independently reviews the internal control systems using a risk based approach and, on a quarterly basis, management self-certify that the key controls within their area of responsibility have been operating effectively.42Landsec Annual Report 2017Risk heat mapThe risk heat map illustrates the relative positioning of our principal risks before and after mitigating actions.LikelihoodUnlikelyAlmost certainImpactVery highLow253174986 01 Customers — Structural changes in customer and consumer behaviours.02 Market cyclicality — Market and political uncertainty or change in legislation.03 Disruption — Failure to react effectively to new disruptors within our sectors, including technological advances. 04 People and skills — Inability to attract, retain and develop the right people and skills.05 Major health and safety incident — Accident causing injury or loss of life to employees, contractors, occupiers or visitors to our properties.Risk management frameworkTop-downOversight, identification, assessment and mitigation of risk at a Group levelBottom-upIdentification, assessment and mitigation of risk at business unit and functional levelRisk governance Board — Oversight of risk— Set the risk culture — Approve risk appetite— Annual assessment of the principal risks.1st line of defence2nd line of defence3rd line of defenceRisk managementExecutive Committee:— Define the risk appetite— Evaluate proposed strategies against risk appetite— Identify the principal risks— Design, implementation and evaluation of the system of internal control, and for ensuring its operational effectiveness.Risk Management:— Assist management with the identification and assessment of principal risks— Aggregate risk information— Monitor risks and risk response plans— Create a common risk framework and language— Provide direction on applying framework— Provide guidance and training— Facilitate risk escalations.Audit Committee— Supports the Board in monitoring risk exposure against risk appetite— Review the effectiveness of our risk management and internal control systems. Internal Audit:— Provide assurance on effectiveness of the risk programme, testing of key controls and risk response plans for significant risks.Risk ownershipBusiness units:— Identify and assess risks— Respond to risks— Monitor risks and risk response— Ensure operational effectiveness of key controls.Support functions:— Provide guidance/ support to the risk team and business units.06 Security threat or attack — Failure to identify or prevent a major physical security related threat or attack or react immediately and effectively. 07 Cyber threat or attack — External and internal intrusion to corporate and building management systems and data.08 Sustainability — Increasing environment pressure and/or properties do not comply with legislation, or meet customer expectations or are unable to withstand the expected challenges of climate change.09 Development — Unable to deliver capex programme to agreed returns and/or occupiers reluctant to commit to take new space in our developments. Key movement of risk after mitigating actions43Landsec Annual Report 2017Strategic ReportOur principal risks and uncertaintiesChange in the yearIncreasedNo changeReducedNewRisk Mitigation Opportunity Strategic objectiveChange in the yearCustomersStructural changes in customer and consumer behaviours leading to an adverse change in demand for office and retail space and the consequent impact on rental growth.Executives responsible: Colette O’Shea/Scott Parsons— Large and diversified customer base (no single customer represents more than 5.2% of rents)— Of our total income, 68.0% is derived from occupiers who individually make less than a 1% contribution to rent roll— Clear retail strategy focused on “Everything is experience”— Development programme has delivered a modern office portfolio well suited to occupier requirements— Experienced asset management team— Strong relationships with occupiers.Enhance and maintain our position as the partner of choice for our customers.— Shareholder value— Investment portfolio— Customer satisfactionKPI— Total shareholder return— Total property return— Customer satisfaction ratesMarket cyclicalityMarket and political uncertainty or change in legislation leading to a reduction in demand or deferral of decisions by occupiers, impacting real estate values, the ability to sell assets and to raise further funding.Executive responsible: Robert Noel— Large multi-asset portfolio— Monitor asset concentration (our largest asset is 5.5% of the total portfolio)— Average investment property lot size of £120m— Average unexpired lease term of 9.1 years with a maximum of 10.4% of gross rental income expiring or subject to break clauses in any single year.Acquisition or development opportunities could arise out of the uncertainty.— Shareholder value— Investment portfolioKPI— Total shareholder return— Total property returnDisruptionFailure to react effectively to new disruptors within our sectors, including technological advances, innovation, resulting in asset obsolescence and loss of competitive advantage.Executive responsible: Robert Noel— Regular Board and Executive Committee discussion item— Dedicated resources focused on innovation.Recognising and managing change effectively will enable us to maintain our competitive advantage and increase the attractiveness of our assets to customers.— Shareholder value— Investment portfolio— Development— Customer satisfaction— High performance individualsKPI— Total shareholder return— Total property return— Lettings and sales— Customer satisfaction rates— New ways of working Advances in emerging technologies, such as the merging of the virtual and physical environments, threaten to disrupt organisations’ core business assumptions.New entrants focused on disrupting existing business models are likely to impact most sectors, including ours and those of our customers.44Landsec Annual Report 2017S t r a t e g i c R e p o r t Risk Mitigation Opportunity Strategic objective Change in the year People and skills Inability to attract, retain and develop the right people and skills required to deliver the business objectives. Executive responsible: Diana Breeze — Strong employee brand and dynamic, proactive resourcing strategy — Competitive remuneration plans — Appropriate mix of insourcing and outsourcing — Clear employee objectives and development plans — Clear organisation and individual accountabilities — Annual employee engagement survey to identify issues early — Succession planning and talent management — High profile, market leading developments and assets to manage. Major health and safety incident — CEO chairs Group Health, Safety and Security Accident causing injury or loss of life to employees, contractors, occupiers or visitors to our properties, leading to: — criminal/civil proceedings and resultant reputational damage Committee — Regular Board reporting — Dedicated specialist personnel — Sharing of best practice across the business and industry through our “One Best Way” approach — Annual cycle of health and safety audits across — delays to building projects and access the portfolio restrictions to shopping centres. — Established policy and procedures including Executive responsible: Robert Noel ISO 18001 certification — Engagement with the enforcing authorities Security threat or attack Failure to identify or prevent a major security related threat or attack or react immediately and effectively, resulting in injury, loss of life, damage to buildings and a loss of consumer confidence and the consequent impact on rental growth and loss of income. Executive responsible: Robert Noel — Dedicated property security teams, supported by CCTV and other physical security measures — Experienced property management teams — Regular on-site and national security training — Group insurance programme protects against losses of rent and service charge due to terrorism — Business continuity and crisis management practice — Sharing of best practice with our external customers through our Customer Improvement Groups — Engagement with the National Counter Terrorism Security Office (NaCTSO). Build further expertise, knowledge and capability in the business. — Shareholder value — High performance individuals KPI — Total shareholder return — New ways of working Lead the industry in health and safety to reduce incident levels. — Customer satisfaction KPI — Customer satisfaction rates Enhance our reputation as a trusted and responsible partner. — Customer satisfaction KPI — Customer satisfaction rates Cyber threat or attack External and internal threat to corporate and building management systems and data resulting in a negative reputational impact and adverse operational and financial impact. — Dedicated Information Security team, which monitors information security risk — Regular review of Information Security policy — Independent information security audit and penetration testing — Employee awareness training. Enhance our reputation as a trusted and responsible partner. — Customer satisfaction KPI — Customer satisfaction rates Executive responsible: Martin Greenslade Sustainability Increasing environmental pressure and/ or properties that do not comply with legislation, meet customer expectations or are unable to withstand the expected challenges of climate change resulting in an increased cost base; an inability to attract or retain occupiers, premature obsolescence and loss of asset value. Executive responsible: Miles Webber Development Unable to deliver capex programme to agreed returns and/or occupiers reluctant to commit to take new space in our developments leading to negative valuation movements and a reduction in income. Executives responsible: Colette O’Shea/Scott Parsons — ISO accredited environmental and energy management systems — Active involvement in legislative working parties — Active environmental programme addressing key areas of carbon, energy, waste and biodiversity — Energy reduction plan for every key asset — Scenarios to determine how climate change will affect the existing portfolio and future developments. — Amount of speculative development restricted so that the impact of failing to lease the un-let element of our development programme does not exceed the Group’s retained earnings — Proportion of capital employed in development programme (based on total costs to completion) will not exceed 20% of our total capital employed, save that where a material part of the development programme is pre-let, this proportion can rise to 25% — Monitor market cycle and likely occupier demand before committing to new developments and secure pre-lets where appropriate — Assessment of developments against hurdle rates — Pre-let targets set for Retail developments. Consolidate our position as a leader in sustainability and an environmentally responsible partner. — Customer satisfaction — Sustainability performance KPI — Customer satisfaction rates — Sustainability matters — Energy reduction plans Refer to our sustainability report for more details. Maximise returns by delivering developments at the right point in the cycle. — Shareholder value — Development performance KPI — Total shareholder return — Lettings and sales Enhance and maintain our position as the partner of choice for our customers. As we have less capital invested our risk is considered to be lower. Landsec Annual Report 2017 45 46Landsec Annual Report 2017“ As a result of our actions, the portfolio is in great shape. It’s occupied by a broad customer base and we now have our longest ever weighted average lease term.”Colette O’Shea Managing Director, London PortfolioLondon Portfolio review S t r a t e g i c R e p o r t Actions and outcomes Our results Focus for 2016/17 Progress in 2016/17 Focus for 2017/18 — Outperform IPD — The total return of sector benchmark the London Portfolio was 3.1% underperforming its IPD sector benchmark at 3.4% — Complete the letting of 1 & 2 New Ludgate, EC4; The Zig Zag Building, SW1; and 20 Eastbourne Terrace, W2 — 1 & 2 New Ludgate fully let; The Zig Zag Building 89% let; and 20 Eastbourne Terrace 90% let — Progress development lettings at Nova, Victoria, SW1 — Nova, Victoria 47% let — Submit a planning application at Southwark Street, SE1 and secure planning consent for new screens at Piccadilly Lights, W1 — Planning resolution granted at Southwark Street and planning consent secured for new screens at Piccadilly Lights — Progress to revised time and to budget at our committed developments — Secure employment for a further 129 candidates via our Community Employment Programme — All achieved except Nova, Victoria over budget and delayed — Secured employment for 134 candidates — Outperforming IPD sector benchmark — Growing like-for-like net rental income — Completing the letting of The Zig Zag Building, 20 Eastbourne Terrace and Nova, Victoria — Completing the construction and letting of Piccadilly Lights — Progressing build to grade to time and budget at 21 Moorfields, EC2 — Growing future development pipeline through acquisitions and 1.4 million sq ft of existing opportunities within portfolio — Securing employment for a further 95 candidates via our Community Employment Programme — Improving energy management in support of 2030 corporate commitments Valuation deficit 1.3%1 3.1% Ungeared total property return underperformed its IPD Quarterly Universe sector benchmark at 3.4% of investment lettings £13m £9m of development lettings 7.0%2 Like-for-like voids (31 March 2016: 2.9%) 1. On a proportionate basis. 2. Reduces to 3.3% when Piccadilly Lights, SW1, which remains in like-for-like during the screen replacement, is excluded. Landsec Annual Report 2017 47 This year supply-constrained conditions in the occupational market gave way to weaker demand.48Landsec Annual Report 2017However, we’ve been positioning the business for these conditions, and so are well-placed. Over the past 12 months, we’ve completed our speculative development programme, focused on letting the remaining space, worked to maximise income and lease length through proactive asset management and readied the business to start buying when conditions are right. In addition, we’ve increased our emphasis on anticipating change to ensure our buildings and our service meet our customers’ needs, while at the same time enhancing the environment for our communities. This approach will deliver long-term value for us.As a result of our actions, the portfolio is in great shape. It’s occupied by a broad customer base spanning sectors from finance to fashion and we now have our longest ever weighted average unexpired lease term of 10.3 years. BuyWe made no material acquisitions this year. We have the firepower needed for when the right opportunities appear, but we will be patient and disciplined.DevelopAt 20 Eastbourne Terrace, W2, we completed a major refurbishment during the year, creating 93,000 sq ft of contemporary space in an 18-storey tower overlooking Paddington Crossrail station. The building offers 6,000 sq ft floorplates and a stunning communal rooftop garden. All of the space is now let, on an average lease length of more than ten years at record rents. In the City, we completed 1 New Street Square, EC4. This 275,000 sq ft scheme was pre-let in its entirety to Deloitte on a 20 year lease.Nova, Victoria, SW1 completed just after the year end in April – a high point in our long-term regeneration of Victoria. The scheme features two exceptional office buildings, 170 apartments and a fantastic line-up of restaurants, creating London’s newest food destination. 49% of the 480,000 sq ft office space and 93% of the retail and food-related space is now let. 148 of the apartments have now been sold, 10 of them during the year. The complexities of construction – together with competition for labour in a busy sector – delayed final completion and impacted costs. However, the scheme is proving very popular and we’re confident we’ll let the remaining space in good time. At Nova East, the second phase of Nova, Victoria, we’re finalising statutory approvals ready to start on site when the time is right.We secured planning consent for 798,000 sq ft of space in three London boroughs. In the City at 21 Moorfields, EC2, we’ve completed demolition and will shortly commence piling and construction of a raft that will sit above the eastern entrance to Liverpool Street Crossrail station, ready for building 522,000 sq ft in two buildings. Completing the raft in July 2018 will mean we can complete construction of the buildings in 24 months, providing an excellent prospect for the pre-letting market.In Westminster at 1 Sherwood Street, W1 behind Piccadilly Lights, we secured planning consent for a 142,000 sq ft mixed use scheme and in Southwark, at Sumner Street, SE1, resolution to grant planning consent for 134,000 sq ft.We have a further 360,000 sq ft in feasibility at Red Lion Court, SE1.ManageWe were very active asset managers this year, moving early to address lease expiries and rent reviews, as well as securing reversions ahead of expectation.At Dashwood House, EC2, we completed rent reviews on £6m (86%) of the income, increasing the rent by 26%. At One New Change, EC4, we reviewed £19m (65%) of the rent increasing the offices by 3% and the retail by 18%. At Cardinal Place, SW1, we reviewed £11m (48%) of rent increasing the offices by 14% and the retail by 23%, as well as letting 113,000 sq ft of available space. At 140 Aldersgate Street, EC1, we reviewed £1m (44%) of the rent and achieved a 33% uplift, as well as letting 25,000 sq ft of available space.At Piccadilly Lights, W1, we obtained planning consent to replace the six screens with Europe’s most technically advanced digital screen, maintaining the heritage of the site while giving advertisers innovative ways to interact with more than 100 million passers-by each year. Coca-Cola committed to continuing its 60 year residence and will be joined by Samsung and Hyundai. We have three remaining advertising opportunities and are in discussion with other major brands to complete the line-up. We’ll be launching the new screen at this major tourist attraction in November. S t r a t e g i c R e p o r t Sell In 2015, to reduce risk, we started a disposal programme of weaker assets after we had completed asset management plans to maximise value. The majority of these sales were executed last year and we successfully completed the programme this year with disposals totalling £46m. Trading property disposals of £135m include sales at Nova, Victoria, SW1 following completion of residential units, further disposals at Kings Gate, SW1 and the disposal of our remaining interest in the Kodak land at Harrow. Sales of other investments totalled £13m. Net rental income Net rental income in the London Portfolio has increased by £10m from £275m to £285m, with additional income from recently completed developments largely offset by lost income from properties sold last year. Income from our developments contributed an additional £28m this year, principally at 1 New Street Square, EC4, 20 Eastbourne Terrace, W2 and Nova, Victoria, SW1. We also benefited from a full year’s income at The Zig Zag Building, SW1, 1 & 2 New Ludgate, EC4 and 62 Buckingham Gate, SW1. The increase in the like-for-like portfolio of £4m reflects new lettings and settled rent reviews, partly offset by reduced income at Piccadilly Lights following the start of refurbishment. Overall, these increases are largely offset by a £21m reduction in net rental income from disposals since 1 April 2015, most notably Thomas More Square, E1, Times Square, EC4 and Haymarket House, SW1. Outlook In the current uncertain environment, investment demand is likely to be lower for all but the very best assets. In the occupational market, we expect net effective rental values to weaken but demand from dynamic businesses to continue for high quality, resilient space. We’re well prepared for these conditions with a portfolio of assets designed to meet the needs of these customers. We’re ready to add to our portfolio when the time is right. Our team is tracking around £2bn of opportunities, building up our intelligence network ready for a future investment phase. In addition, we’re preparing 1.4 million sq ft of future development opportunities for when conditions are right to proceed. Net rental income1 Like-for-like investment properties Proposed developments Development programme Completed developments Acquisitions since 1 April 2015 Sales since 1 April 2015 Non-property related income Net rental income 1. On a proportionate basis. 31 March 2017 £m 203 31 March 2016 £m 199 – 16 62 2 – 2 – 5 45 1 21 4 285 275 Table 26 Change £m 4 – 11 17 1 (21) (2) 10 Landsec Annual Report 2017 Landsec Annual Report 2017 49 49 Retail Portfolio review Our results Actions and outcomes Focus for 2016/17 Progress in 2016/17 Focus for 2017/18 — Outperform IPD sector benchmark — Progress lettings at Westgate Oxford; Selly Oak, Birmingham; and the White Rose, Leeds leisure extension — The total return of the Retail Portfolio was 4.7% outperforming its IPD sector benchmark at 1.1% — Westgate Oxford 68% pre-let; Selly Oak 73% pre-let; and White Rose leisure extension 100% let — Resolution to grant planning consent at Worcester Woods — Planning consent at Worcester Woods rejected — Achieve planning — Planning consent for consent and progress lettings for Glow space at Bluewater, Kent Glow space at Bluewater achieved. Space 69% pre-let — Progress to time and budget at our committed developments — Expand the Community Employment Programme to other retail sites — Westgate Oxford on time and budget — Expanded the Community Employment Programme to St David’s, Cardiff; White Rose; and Gunwharf Quays, Portsmouth and secured employment for 49 candidates — Outperforming IPD sector benchmark — Growing like-for-like net rental income — Progressing lettings at Westgate Oxford; Selly Oak, Birmingham; and the Plaza reconfiguration at Bluewater — Progressing the Plaza reconfiguration at Bluewater to time and budget — Successfully launching Westgate Oxford after achieving practical completion on time and on budget — Integrating the three newly acquired outlet centres — Further developing the Community Employment Programme beyond its current focus on construction with 75 people being supported into jobs in retail — Improving energy management in support of 2030 corporate commitments Valuation deficit 0.8%1 4.7% Ungeared total property return outperformed its IPD Quarterly Universe sector benchmark at 1.1% £15m Investment lettings £4m Development lettings 2.8% Like-for-like voids (31 March 2016: 2.0%) 0.4% Units in administration: (31 March 2016: 0.5%) 1. On a proportionate basis. 50 Landsec Annual Report 2017 “ It’s been a productive year in our Retail business. In a challenging retail and economic environment, we’ve delivered a good set of results.” Scott Parsons Managing Director, Retail Portfolio S t r a t e g i c R e p o r t Landsec Annual Report 2017 51 We went into the year with a portfolio well matched to the evolving needs and expectations of our customers. 52Landsec Annual Report 2017Despite uncertainty in the wider market, retail destinations that provide consumers with a great experience held up well.Retailers’ and consumers’ use of online retailing continues to influence demand for physical space, and inflation is now putting pressure on consumer spending. However, we’ve continued to see good demand for the best space in the right locations.BuyOur acquisitions during the year were limited to a small number of properties adjacent to space we own. Since the year end, we’ve acquired a portfolio of three outlet centres for £333m, which, alongside our existing outlet centres at Gunwharf Quays, Portsmouth, and The Galleria, Hatfield, establishes our position as the leading owner-manager of outlets in the UK.DevelopOur Westgate Oxford development with The Crown Estate is on time and on budget for opening in October 2017. We’ve made good progress on lettings with 80% of the scheme now pre-let or in solicitors’ hands. The latest brands to sign up include Uniqlo, Cath Kidston, Levis and Molton Brown. We’ve also invested to ensure the sustainability of the development, including extending our Community Employment Programme so local disadvantaged people will continue to benefit from job opportunities after the centre opens. At Selly Oak, Birmingham, 91% of the retail is either pre-let or in solicitors’ hands, demonstrating occupier support for this potential retail and student housing scheme.ManageThis year we’ve secured £15m of investment lettings. Our like-for-like portfolio is virtually full, with voids of just 2.8% and a weighted average lease term of 8.2 years. We have strong relationships with vibrant customers, from groundbreaking start-ups to global brands. Trinity Leeds continues to be the beating heart of the city and we’ve brought new brands to the centre including Lindt, Côte Brasserie and Indian street food operator Mowgli. We’re also creating an upsized unit for New Look and expanding the centre’s vibrant leisure offer with two new operators.At White Rose, Leeds, the demise of BHS enabled us to deliver a 55,000 sq ft Next store, doubling its previous space. We also upsized space for JD Sports, Pandora, Schuh and Holland & Barrett. Construction of our leisure extension is now complete and fully let, with the six new restaurants and IMAX cinema units being fitted out to open later this year.At Gunwharf Quays, Portsmouth, we introduced Armani and Coach to build on the centre’s strong aspirational offer. We also opened one of the first Under Armour ‘athleisure’ outlet stores in the UK. At Bluewater, Kent, we delivered a 40,000 sq ft flagship for H&M, who had outgrown their existing unit. We’ve continued to broaden the wide range of retail brands on offer, with eight new openings including Mint Velvet and Michael Kors, and upgraded stores for LK Bennett and Jigsaw. Online retailer Missguided also committed to Bluewater. We started construction of the Plaza leisure reconfiguration this year and expect to complete by December. The project enables us to bring new leisure operators to Bluewater and the scheme is 80% pre-let or in solicitors’ hands, with Showcase taking a lease for a four screen extension. We’ve also continued to invest in the Learning Shop, which connects retailers and local unemployed people. Throughout the year, we developed new relationships and ideas to keep the customer experience fresh and exciting. For example, we attracted on trend operators out of central London and into regional locations, including Dirty Bones and Sticks’n’Sushi at Westgate. We brought Mercedes into St David’s, Cardiff, and Buchanan Galleries, Glasgow. Cycle brand Ribble’s pop-up at St David’s was so successful they’re looking at more sites. In total, we brought 150 pop-up stores and kiosk operators into our assets this year. Our retail parks are well matched to customers’ needs and remain 100% let. Our leisure parks are 99% let and are all anchored by the dominant cinema for their catchment, providing a broad, family-friendly entertainment and food offer. Sell Disposals totalled £219m during the year. We sold the Ealing Filmworks development site to a residential developer, crystallising an element of the development profit up front, without risk. As we continue our focus on family-orientated leisure assets, we sold our two drinks-led city centre leisure schemes, The Printworks, Manchester, and The Cornerhouse, Nottingham. And since the year end, we’ve sold our 50% interest in Clapham Shopstop, SW11 to our former joint venture partner. In February 2016, Accor exercised its right to break the leases on seven of their 29 hotels. All seven hotels have since been sold at a premium to their investment values and the remaining Accor leases, where breaks weren’t exercised, now extend to 2031. Net rental income Net rental income reduced by £14m from £329m to £315m. This was largely due to disposals since 1 April 2015. These include The Cornerhouse, Nottingham and The Printworks, Manchester both sold in the current year and retail parks in Gateshead, Dundee and Derby, a leisure park in Maidstone and a supermarket in Crawley, all sold in the second half of last year. The increase in our like-for-like portfolio of £6m is due to a combination of new lettings, improved turnover performance and a reduction in bad debt provisions compared to last year. Net rental income1 Like-for-like investment properties Proposed developments Development programme Completed developments Acquisitions since 1 April 2015 Sales since 1 April 2015 Non-property related income Net rental income 1. On a proportionate basis. Outlook Current uncertainty and rising costs will continue to affect consumer confidence and retailers’ readiness to invest and expand. As a result, we expect letting activity to larger occupiers of retail space and leisure operators to slow in the year ahead. However, we believe that the best physical stores will play a critical role for retailers, not least in enabling them to create memorable brand experiences and to engage with their customers. Internet sales provide competition to physical space, but we’re also seeing opportunities to help brands develop their multi-channel offer. We’ll remain alert to buying opportunities over the next 12 months, but our focus will be on enhancing the space and offer at our most successful destinations, launching Westgate Oxford in October and successfully integrating the three new outlet centres into the portfolio. S t r a t e g i c R e p o r t Key indicators 1.6% Footfall in our shopping centres was down 1.6% (national benchmark down 2.5%) 1.7% Same centre non-food retail sales, taking into account new lettings and occupier changes, were up 1.7% (national benchmark for same centre physical store non-food retail sales down 1.9%; national benchmark for all retail sales, including online, up 0.3%) 1.1% Same store non-food retail sales were down 1.1% (national benchmark for same store physical store non-food retail sales down 2.2%) 10.3% Retailers’ rent to sales ratio in our portfolio was 10.3%, with total occupancy costs (including rent, rates, service charges and insurance) representing 17.6% of sales 31 March 2017 £m 31 March 2016 £m 295 289 – – – 2 9 9 315 – 1 – 1 28 10 329 Table 27 Change £m 6 – (1) – 1 (19) (1) (14) Landsec Annual Report 2017 53 54Landsec Annual Report 2017The Directors have assessed the viability of the Group over a five year period to March 2022, taking account of the Group’s current position and the potential impact of our principal risks. The Directors have determined five years to be the most appropriate period for the viability assessment as it fits well with the Group’s development and leasing cycles, and is broadly aligned to the maturity of the Group’s floating rate debt facilities. Our financial planning process comprises a budget for the next financial year, together with a forecast for the following four financial years. Achievement of the one year budget has a greater level of certainty and is used to set near-term targets across the Group. Achievement of the five year plan is less certain than the budget, but provides a longer-term outlook against which strategic decisions can be made. The financial planning process considers the Group’s profitability, capital values, gearing, cash flows and other key financial metrics over the plan period. These metrics are subject to sensitivity analysis, in which a number of the main underlying assumptions are flexed to consider alternative macro-economic environments. Additionally, the Group also considers the impact of potential structural changes to the business in light of varying economic conditions, such as significant additional sales and acquisitions or refinancing.The Directors consider the key principal risks that could impact the viability of the Group to be ‘Customers’, Market cyclicality’, ‘Development’, ‘Liability structure’ and ‘Financing’. We have considered the potential impact of these on the Group’s ability to remain in operation and meet its liabilities as they fall due through a ‘viability scenario’.The viability scenario assesses the impact of considerably worse macro-economic conditions than are currently expected. In London, it is assumed that rental values are impacted by an excess of available space in the market, while, in Retail, inflationary pressure on consumer spending, together with a faster migration to on-line sales, maintain downward pressure on rental values. In London, rental values are assumed to fall for three financial years before starting to recover in the final two years of the plan. In Retail, rental values are assumed to fall for the next four financial years, and only start to recover slowly in the final year. Where voids occur, these are expected to take longer to fill across the portfolio. The fall in rental values, together with an outward movement on yields, results in lower rental income and a significant fall in capital values over the next two financial years. In this viability scenario, we assume that any uncommitted forecast acquisitions, disposals or developments do not take place. Similarly, we assume no uncommitted debt refinancing takes place, and no new debt or bank facilities are raised. We have assessed the impact of these assumptions on the Group’s key financial metrics over the period, including profitability, net debt, loan-to-value ratios and available financial headroom. The scenario represents a significant contraction in the size of the business over the five year period considered, with net asset value falling by around 35% at the lowest point. However, our assessment is that such a scenario would not threaten the viability of the Group. The Group would be required to renew a minimum of £1bn of its debt facilities at the end of the period considered, but the Directors consider this would be possible considering the Group’s expected loan-to-value ratio, and the range of alternative financing options if bank facilities were not available.Based on this assessment, the Directors have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the period to March 2022.This Strategic Report was approved by the Board of Directors on 17 May 2017 and signed on its behalf by:Robert NoelChief ExecutiveThe Directors confirm they have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least 12 months from the date of signing these financial statements. This confirmation is made after having reviewed assumptions about future trading performance, valuation projections, capital expenditure, asset sales and debt requirements contained within the Group’s current five year plan. The Directors also considered potential risks and uncertainties in the business, credit, market and liquidity risks, including the availability and repayment profile of bank facilities, as well as forecast covenant compliance. Based on the above, together with available market information and the Directors’ knowledge and experience of the Group’s property portfolio and markets, the Directors continue to adopt the going concern basis in preparing the accounts for the year ended 31 March 2017.Viability StatementGoing ConcernGovernanceContents56 Letter from the Chairman58 Board of Directors60 Executive Committee61 Leadership64 Letter from the Chairman of the Nomination Committee66 Effectiveness68 Letter from the Chairman of the Audit Committee70 Accountability75 Investor relations76 Directors’ Remuneration Report – Chairman’s Annual Statement78 Remuneration at a glance80 Annual Report on Remuneration90 Summary of Directors’ Remuneration Policy92 Directors’ Report56Landsec Annual Report 2017Letter from the ChairmanDear Shareholder,OverviewDuring the year, Landsec continued to deliver against its business objectives. Our retail assets focus on thriving shopping destinations and our teams work in partnership with our occupiers to deliver a great experience to our consumers. Our London assets are prime and our regeneration in Victoria has been hugely successful. Landsec is in a strong financial position, with historically low levels of financial and operational gearing and a portfolio of first class, enduring assets. Board prioritiesGiven the political events we are witnessing, the Board has spent considerable time assessing the possible effects on the property Dame Alison Carnwath ChairmanHighlights —More time allocated to risk in an unpredictable year —Nicholas Cadbury joined the Board —Strong supportive relationships with shareholders and stakeholders —Sector leadership in Health, Safety and Security.market of various economic outcomes flowing from decisions which might be taken. We continue to believe in the sustainability of our business model and the deliverability of superior relative returns. Our revenue profit is up 5.5% and we are confident in the underlying strength and prospects for the Group. Consequently, we are recommending a 10.1% increase in the full year dividend.We expect a continuation of a wide range of technological innovations in the near future and we are discussing the speed at which they will affect the way we work and the requirements for our business and our customers’ businesses. Examples of anticipated change range from different construction techniques and materials, more sophisticated building management systems, greater use of pre-fabrication, the use of customer data and the seamless digital environment which envelops us today. The diverse experience of our Directors has informed and expanded our debates on these matters. The Board recognises and, by its own example, promotes the importance of a strong culture within the organisation and the benefits which such a culture brings to the Company and its employees. Our recent office move puts our people at the centre of our business by providing a modern workplace with a cross-functional and collaborative atmosphere. I believe we will be a more efficient and effective business as a result of this move. Furthermore, during the year, Rob and his executive team focused on refreshing the Company’s brand to ensure that it reflects the values of our people and the aspirations of our customers. We continue to embrace the benefits of workforce diversity and the need to prioritise the growth of leadership and development skills within our teams. Women represent 30% of the Board and 36% of the Senior Management (including the Executive Committee) but we still have work to do on embracing ethnic minorities and disabled people. The Board allocates significant time on its agenda to succession planning and talent development. In all these ways, Landsec is and will be better placed to address the pace of change. Shareholders and stakeholders We are proud of the strength of our investor relations programme and during the year I was pleased to meet shareholders representing a significant percentage of our register in the UK and the Netherlands to discuss the business and its strategy and answer Board composition and succession planning questions. The meetings were timely with most being held the week following the Brexit vote. We are grateful for the time that shareholders set aside for these meetings and their feedback is always welcome. There were other occasions, at Investor Days and results presentations, at which shareholders could meet me and our Non-executive Directors. We have recently completed a detailed third party feedback survey of our shareholders and were reassured by the positive results. In particular, our Senior Management and execution capabilities are highly valued. Shareholders contributed widely to the survey and provided some constructive suggestions which we are including in our Board agendas and discussions to the extent that they were not already part of our normal business. Shareholder engagement remains a high priority for me and the management team. We appreciate the impact which a company like Landsec can have on a wider group of stakeholders. This is reinforced by our vision to be the best in the eyes of our customers, communities, employees and partners, but it goes beyond that. The expectations being placed on companies, and the ways in which they are being judged, are changing rapidly. The Board debates these issues when considering specific investments and more broadly when looking at future opportunities and the role that Landsec can play in a wider sense. You will see in other parts of this Annual Report examples of how this is put into practice throughout the business. In our separate Sustainability Report you will see how we are building the business for the future so that we leave a strong legacy for those following us. As part of our contribution to the wider issues of governance currently under consideration, we responded to the Government’s Corporate Governance Green Paper and await the outcome of that review and other governance initiatives. Health, safety and security The health, safety and security of our customers, employees, contractors and visitors remains a top priority for us. We work closely with our partners and maintain a safety record that is well ahead of industry benchmarks. Our leadership position over the last year on mental health in the construction industry saw us recognised with the visit in December to our Nova site in Victoria by the Minister of State for Disabled People, Health and Work. Reflecting the ever-changing threats, we remain vigilant on matters of both physical and cyber security. Board changes and effectiveness I am delighted to welcome Nicholas Cadbury to our Board. Nicholas joined on 1 January and brings a wealth of commercial experience that will inform our Board discussions. As I said in my letter to you last year, Kevin O’Byrne will be retiring from the Board later this year and, when he does, Nicholas will take over as Chairman of the Audit Committee having had the benefit of Kevin’s oversight of this year’s results. I would like to convey my special thanks to Kevin for his nine years on the Board and his leadership of the Audit Committee. We conducted an internal evaluation of our Board’s effectiveness during the year. The process followed and outcome of this review and its results are set out on page 66. Looking ahead At Landsec, we are fortunate to have a Board and Senior Management who are very experienced and exceptionally well qualified. We are engaged with providing shareholders with attractive returns whilst giving customers a top-class property experience. All our employees work hard and share our enthusiasm for the business and I thank them for their commitment. Dame Alison Carnwath Chairman G o v e r n a n c e Nicholas Cadbury joins Landsec I was delighted to be appointed to Landsec’s Board and have been impressed by the deep knowledge throughout the Company. My induction programme has enabled me to understand the business quickly, to get to know my fellow Directors, Senior Management and key advisers right from the outset and to get a good understanding of the opportunities ahead.” Nicholas Cadbury Non-executive Director Landsec Annual Report 2017 57 58Landsec Annual Report 2017Board of DirectorsExecutive Directors1. Robert NoelChief ExecutiveRobert was appointed to the Board in January 2010 as Managing Director, London Portfolio, and became Chief Executive in April 2012. Career A chartered surveyor and graduate of the University of Reading, Robert was Property Director at Great Portland Estates plc between August 2002 and September 2009. Prior to that, he was a director of the property services group, Nelson Bakewell. He is a former director of the New West End Company and former Chairman of the Westminster Property Association. Robert is a director of the European Public Real Estate Association (EPRA). On 5 July 2016, he was appointed a Director of the British Property Federation. He is also a trustee of the Natural History Museum. Skills, competencies and experience Robert has over 30 years’ experience in a number of sectors within the property market, and extensive knowledge of the London commercial property market in particular. He has substantial executive leadership and listed company experience. Committees Chairman of the Group’s Executive, Asset and Liability, Health, Safety & Security, Investment and Sustainability Committees. He attends the Audit, Remuneration and Nomination Committees at the invitation of the Committee Chairmen. 2. Martin GreensladeChief Financial OfficerMartin joined the Board as Chief Financial Officer in September 2005.Career A chartered accountant, having trained with Coopers & Lybrand, Martin was previously Group Finance Director of Alvis plc. He has also worked in corporate finance serving as a member of the executive committee of Nordea’s investment banking division and Managing Director of its UK business. Martin is a trustee of International Justice Mission UK. Skills, competencies and experience Martin brings extensive and wide-ranging financial experience to the Group from the property, engineering and financial sectors in the UK and overseas. He also has extensive financial expertise, particularly in relation to corporate finance and investment arrangements, and significant listed company experience at board level. His oversight responsibilities cover the Group’s finance, tax, treasury, risk management and internal audit, insurance and information technology teams. Committees A member of the Group’s Executive, Asset and Liability and Investment Committees. He attends Audit Committee meetings at the invitation of the Committee Chairman.Non-executive Directors 3. Dame Alison Carnwath Chairman of the Board 5. Kevin O’Byrne Non-executive Director* 7. Stacey Rauch Non-executive Director* 9. Cressida Hogg CBE Non-executive Director* Dame Alison was appointed to the Board as a Non-executive Director in September 2004 and became Chairman in November 2008. Career Dame Alison worked in investment banking and corporate finance for 20 years before pursuing a portfolio career. During her banking career, she became the first female director of J. Henry Schroder Wagg & Co. Dame Alison was also a Senior Partner at Phoenix Securities and a Managing Director at Donaldson, Lufkin & Jenrette. She has served as a non-executive director of Friends Provident plc, Gallaher Group plc, Glas Cymru Cyfyngedig (Welsh Water), Barclays plc and Man Group plc. Dame Alison is currently a non- executive director of Zurich Insurance Group Limited, Paccar Inc (a Fortune 500 company) and CICAP Limited, and a senior advisor to Evercore Partners. She is also a member of the UK Panel on Takeovers and Mergers and a supervisory board member and audit committee chair of the Frankfurt listed chemicals company, BASF SE. Dame Alison was appointed a Dame in 2014 for her services to business. Skills, competencies and experience Dame Alison has very significant board level experience gained across a range of industries and countries. This enables her to create the optimal Board environment and get the best out of her fellow Directors both during and outside meetings. She has expertise in alternative asset management, banking and global manufacturing. Committees Chairman of the Nomination Committee and a member of the Remuneration Committee. Kevin was appointed to the Board as a Non-executive Director in April 2008 and held the position of Senior Independent Director from April 2012 to 21 July 2016. Career Kevin is a chartered accountant who trained with Arthur Andersen. He was appointed Chief Financial Officer of J Sainsbury PLC on 9 January 2017, joining them from Poundland Group PLC where he had been Chief Executive Officer from 1 July 2016 until 31 December 2016. Formerly, he was Group Finance Director of Kingfisher plc from 2008 to 2012 following which he became CEO of its B&Q and Koçtas businesses in China, Turkey, Germany and the UK, until he left that business in May 2015. His previous roles include Group Finance Director of Dixons Retail plc and European Finance Director of The Quaker Oats Company. Skills, competencies and experience Kevin has extensive understanding of retail trends, operations and insights gained during a number of senior financial and general management positions at large listed retailers. He is a long-standing Non-executive Director and Chairman of the Audit Committee who is able to use his experience gained across a property cycle to bring additional challenge to management. Committees Chairman of the Audit Committee and a member of the Nomination Committee. Stacey joined the Board as a Non- executive Director in January 2012. Cressida joined the Board as a Non- executive Director in January 2014. Career Stacey is a Director Emeritus of McKinsey & Company where she served clients in the US and internationally for 24 years. Whilst there, she co-founded the New Jersey office and was the first woman to be appointed as an industry practice leader. She was a leader in the firm’s Retail and Consumer Goods Practices, served as the head of the North American Retail and Apparel Practice and acted as the Global Retail Practice Convener. She retired from McKinsey & Company in September 2010 and has since then pursued a portfolio career. Stacey has served as Chairman of the Board of Fiesta Restaurant Group Inc (a NASDAQ listed company) since February 2017 and as a non-executive director since 2012. Former positions include non-executive director of CEB Inc (a NYSE listed member-based advisory company), ANN Inc (a NYSE listed woman’s specialty apparel retailer) and Tops Holding Corporation. Skills, competencies and experience Stacey brings deep analytical thought to the Board, with considerable expertise of retail trends and insights gained at a leading international management consultancy. She has significant board level experience gained through non- executive positions held in retail and other industries. Committees A member of the Audit Committee and, from 1 April 2017, a member of the Nomination Committee. Career Cressida spent almost 20 years with 3i Group plc having joined them in 1995 from JP Morgan. She co-founded 3i’s infrastructure business in 2005, becoming Managing Partner in 2009, and led the team which acted as Investment Adviser to 3i Infrastructure plc, a FTSE 250 investment company. She advised on all of 3i Infrastructure’s transactions from its flotation in 2007 through to her leaving in 2014. Cressida was previously a member of the advisory board for Infrastructure UK, the HM Treasury unit that works on the UK’s long-term infrastructure priorities. She is currently Managing Director, Head of Infrastructure, of the Canada Pension Plan Investment Board and a non-executive director of Anglian Water Group Limited and of Associated British Ports Holdings Ltd. Cressida received a CBE in 2014 for services to infrastructure investment and policy. Skills, competencies and experience Cressida has a deep understanding of large, long-term infrastructure projects and businesses. She has considerable experience of investment returns, general management and leadership. Committees A member of the Remuneration Committee. G o v e r n a n c e 4. Edward Bonham Carter Senior Independent Director* 6. Chris Bartram Non-executive Director* 8. Simon Palley Non-executive Director* 10. Nicholas Cadbury Non-executive Director* Edward joined the Board as a Non- executive Director in January 2014. He was appointed Senior Independent Director on 21 July 2016. Career Edward became Vice Chairman of Jupiter Fund Management plc in March 2014, having been Chief Executive Officer of the company since June 2007. During his time as CEO, Edward steered the company through a management buy-out from its previous owners, Commerzbank, in 2007 and oversaw the firm’s listing on the London Stock Exchange in 2010. Edward joined Jupiter in 1994 as a UK fund manager and held the position of Chief Investment Officer from 1999 to 2000. He started his career at Schroders in 1982 as an investment analyst before moving to Electra Investment Trust in 1986 where he was a fund manager. Edward is a Board member of The Investor Forum, a trustee of the Esmeé Fairbairn Foundation and a trustee of the Orchestra of the Age of Enlightenment Trust. Skills, competencies and experience Edward has significant experience of general management as a former CEO of a private equity backed and a large listed company. Having been a fund manager for many years, he also has an excellent understanding of stock markets and investor expectations. Committees A member of the Remuneration Committee and, from 29 September 2016, a member of the Nomination Committee. Chris was appointed to the Board as a Non-executive Director in August 2009. Simon was appointed to the Board as a Non-executive Director in August 2010. Nicholas joined the Board as a Non- executive Director on 1 January 2017. Career Chris is a chartered surveyor. He was Chairman and Partner of Orchard Street Investment Management LLP, a leading commercial property investment manager focused on the UK market, until 31 March 2015, and continued to act as an adviser to that firm until 31 March 2017. He was a Board Counsellor of The Crown Estate until 31 December 2015, having previously served as a Board Member. Former positions include Managing Director of Haslemere NV, Chairman of Jones Lang Wootton Fund Management, President of the British Property Federation and Chairman of the Bank of England Property Forum. Chris is currently a Wilkins Fellow of Downing College, University of Cambridge, and an advisory board member to certain overseas entities within the Brack Capital Real Estate Group. Skills, competencies and experience Chris is a scion of the property industry, with decades of property investment, fund management and capital allocation experience gained across a range of businesses and disciplines within the real estate sector. He has significant experience of general management as a former Chief Executive and Chairman of significant businesses. Committees A member of the Audit and Nomination Committees. Career A senior figure within the private equity industry, Simon has had a successful and broad ranging career in investment banking, consulting and private equity. He started his career at Chase Manhattan before moving to Bain & Company. He left there in 1988 to join Bankers Trust as a Vice President and moved to BC Partners, a private equity firm, in 1990 where he worked for 17 years, rising to the position of Managing Partner. Simon then became Chairman of the private equity firm Centerbridge Partners Europe, a post he held until 2013. He is now a non-executive director of UK Government Investments, a Senior Adviser to TowerBrook Capital Partners and an adviser to the private equity arm of GIC. He is an MBA graduate of The Wharton School, Pennsylvania. Simon is a trustee of the University of Pennsylvania and The Tate Foundation. Skills, competencies and experience Simon has extensive understanding of portfolio management, financial metrics and the impact of interest rates on capital markets. He has expertise in private equity and capital markets and considerable experience managing highly talented professionals. Committees Chairman of the Remuneration Committee and a member of the Nomination Committee. Career Nicholas is Group Finance Director of Whitbread PLC, a position he has held since November 2012. Before that, he held the position of Chief Financial Officer of Premier Farnell PLC, which he joined in 2011, and prior to that he worked at Dixons Retail PLC in a variety of management roles, including as Chief Financial Officer from 2008 to 2011. Nicholas originally qualified as an accountant with Price Waterhouse. Skills, competencies and experience Nicholas brings wide-ranging and international financial and general management experience to the Group gained from working in consumer facing businesses, particularly in the retail, leisure and hospitality sectors. He also has extensive commercial and operational knowledge and skills in relation to strategy and IT development. Committees A member of the Audit Committee. He will become Chairman of that Committee, in succession to Kevin O’Byrne, at a date to be confirmed in 2017. * Independent (as per the UK Corporate Governance Code). Landsec Annual Report 2017 59 Executive Committee 1. Robert Noel Chief Executive Full biography on page 58 2. Martin Greenslade Chief Financial Officer Full biography on page 58 3. Colette O’Shea Managing Director, London Portfolio Colette joined Landsec in 2003 and was Head of Development, London Portfolio, before being appointed its Managing Director in April 2014. Career Colette has over 20 years’ property experience in London, operating in investment, asset management and development. Prior to joining Landsec, she was Head of Estates at the Mercers’ Company where she led the property team whilst also gaining extensive office, retail and residential experience. Responsibilities In her current role, Colette has responsibility for Landsec’s £8.3bn London Portfolio comprising some 6.5 million sq ft of London offices, leisure, retail and residential property both in development and asset management. She has led the London business through its 2010 three million sq ft speculative development programme in the City and West End, including the transformation of Victoria. Colette was appointed as a Business Board Member of the Mayor of London’s London Local Enterprise Partnership for London (LEAP) in 2016. Committees A member of the Group’s Executive, Asset and Liability and Investment Committees. Chairman of the London Executive Committee. 60 Landsec Annual Report 2017 4. Scott Parsons Managing Director, Retail Portfolio 5. Diana Breeze Group Human Resources Director Scott re-joined Landsec in 2010 and was Head of Property, London Portfolio, before being appointed as Managing Director, Retail Portfolio, in April 2014. Career Scott’s career to date includes three years as Managing Partner of Brookfield Asset Management, where he led their European business, more than ten years at GE Capital Real Estate (including as Head of Business Development), and three years as Business Development Director at Landsec in his first position with the Company. Responsibilities In his current role, Scott has responsibility for Landsec’s £6.1bn Retail Portfolio of shopping centres, retail parks and leisure properties throughout the UK comprising some 16.7 million sq ft of accommodation. Previously, as Head of Property for Landsec’s London Portfolio, he led the investment, asset and property management teams for the Group’s office and retail space in central London. Scott was previously a member of the Strategic Board of the New West End Company and was previously Vice President of the City Property Association. He was appointed a Property Committee member of the RNLI in April 2016. Committees A member of the Group’s Executive, Asset and Liability and Investment Committees. Chairman of the Retail Executive Committee. Diana joined Landsec in June 2013 as Group Human Resources Director. Career Diana has over 20 years’ HR and organisational consulting experience, and she has previously held a number of senior HR roles at J Sainsbury plc, where she led many people focused change initiatives. Prior to that, she was a senior manager in the Human Capital practice of Accenture. Responsibilities In her current role, Diana has end-to-end responsibility for the articulation and delivery of a clear people strategy for Landsec, including talent, reward, organisational design and engagement. Since joining the Company, Diana has focused upon the key areas of talent and leadership, and has implemented a number of initiatives to evolve the culture of the business. Diana is a member of the International Advisory Board for Executive Education at the Saïd Business School, University of Oxford. She also advises the Board of Trustees, and is a member of the Personnel and Nominations Committees of the UK Green Building Council. Committees A member of the Group’s Executive and Sustainability Committees. Attends Investment Committee meetings and both the Remuneration and Nomination Committee meetings at the invitation of the Committee Chairmen. 6. Miles Webber Director of Corporate Affairs and Sustainability Miles joined Landsec in May 2015 as Director of Corporate Affairs and Sustainability. Career Before joining Landsec, Miles was Head of External Affairs, UK & Ireland, for General Electric, having previously held other senior external affairs and relations positions with them since he joined in 2005. Prior to that, he spent six years with Merrill Lynch, his first two years as Vice President, Corporate Communications, followed by four years as Director of Public Affairs, EMEA. Responsibilities Miles’ broad responsibilities cover sustainability, public relations (both financial and business-to- business), internal communications, public affairs, investor relations and corporate marketing (including brand and reputational management). Miles is a board director of the Foreign Policy Centre and the Westminster Forum. Committees A member of the Group’s Executive and Sustainability Committees. Attends Investment Committee meetings. 7. Tim Ashby Group General Counsel and Company Secretary Tim joined Landsec in September 2015 as Group General Counsel and Company Secretary. Career Tim is a solicitor and has more than 20 years of significant legal, compliance and commercial experience gained across a number of different sectors and businesses both in the UK and overseas. He joined Landsec after five years as Group General Counsel and Company Secretary of Mothercare plc. Before that, he worked at Yum Brands (KFC, Pizza Hut and Taco Bell) as Region Counsel for Europe and Africa, and as a Senior International Counsel at PepsiCo working in various businesses in the UK, Eastern Europe and Africa. Tim started his career in private practice at Dentons, where he specialised in commercial law. Responsibilities Tim leads the Legal, Company Secretarial and Real Estate Information Management teams and is responsible for legal, compliance and governance activity across the Group. He provides advice and support to the Board and its Committees and holds the Group’s relationships with its external law firms, and investor and shareholder bodies. Committees A member of the Group’s Executive Committee. Attends all Board and Audit, Nomination and Remuneration Committee meetings in his capacity as Company Secretary. He also attends meetings of the Investment Committee and the Asset and Liability Committee. Leadership The role of the Board and its committees d r a o B s e e t t i m m o c d r a o B s e e t t i m m o c t n e m e g a n a M Board Collectively responsible for the long-term success of the Group. With due regard to the views of shareholders and other stakeholders (including its customers, communities, employees and partners), it provides leadership and direction to the business as a whole. This includes establishing the culture, values and ethics of the organisation; setting strategy and overseeing its implementation ensuring only acceptable risks are taken; and responsibility for corporate governance and the overall financial performance of the Group. More details on pages 62-63. Audit Committee Reviews and is responsible for oversight of the Group’s financial and narrative reporting processes and the integrity of the financial statements. It scrutinises the work of the external auditor and valuer and any significant judgements made by management. It regularly reviews the risk management framework, including the systems of risk management and internal control, and the work of internal audit. Remuneration Committee Reviews and recommends to the Board the executive remuneration policy and determines the remuneration packages of the Executive Directors and other members of the Executive Committee. It also has oversight of the Group’s remuneration policy for all employees. Nomination Committee Reviews the structure, size and composition of the Board and its Committees and makes recommendations to the Board accordingly. It has oversight responsibility for succession planning of the Board and Senior Management and leads the process for new Board appointments. It monitors developments in corporate governance and advises the Board accordingly. More details on pages 68-74. More details on pages 76-91. More details on pages 64-67. G o v e r n a n c e Executive Committee An advisory committee that operates under the direction and authority of the Chief Executive and which comprises senior management from across the business (see page opposite). It sets the Vision for the Group and determines the strategy and culture of the Group in support of the Vision. It assists the Chief Executive and the Chief Financial Officer in preparing and agreeing strategy, operating plans, budgets, policies and procedures, and managing the operational and financial performance of the Group. It also addresses other key business and corporate related matters, including competitive forces, risk and reputation management, branding, resource allocation, succession planning, organisational development and employee remuneration. Chief Executive Responsible for leadership of the Group and articulation of the Group’s Vision, together with developing and implementing strategy, managing the overall performance of the business and ensuring an effective and motivated leadership team is in place. He can approve transactions with a value between £10m and £20m. More details below. Asset and Liability Committee Responsible for considering the impact of proposed sales, purchases, developments and debt funding arrangements on the Group’s balance sheet and internal control metrics over the short and medium term. It also considers the likely impact of macro-economic developments on the business. From 1 April 2017, this Committee will be subsumed into the Investment Committee. Investment Committee Responsible for considering and approving significant investment transactions, including the acquisition, disposal and development of assets with a value of between £20m and £150m. It also reviews and recommends higher value transactions to the Board. It is responsible for implementing the annual funding strategy approved by the Board. London and Retail Executive Committees Responsible for the financial, operational and governance performance of the London and Retail business portfolios. Each Committee can also approve transactions up to a value of £10m. Sustainability Committee Responsible for developing and implementing the Group’s sustainability strategy, linked to and integrated with the Group’s overall corporate strategy. In doing so, it also considers environmental, social, economic and energy issues affecting the business. Health, Safety and Security Committee Responsible for overseeing the Group’s health and safety policy and operations, security governance, policy and procedures at all Group properties, performance against targets and progress towards goals. Matters reserved to the Board and delegated authorities In order to retain control of key decisions and ensure there is a clear division of responsibilities at the head of the Company between the running of the Board and the running of the Company’s business, the Board has identified certain ‘reserved matters’ that only it can approve. Other matters, responsibilities and authorities have been delegated to its Committees and certain Management Committees, as above. The matters reserved to the Board and the terms of reference for each of its Committees, which are reviewed on an annual basis, can be found on the Company’s website at www.landsec.com. Any matters outside of these fall within the Chief Executive’s responsibility and authority. He reports on the activities of all Management Committees through his (and the Chief Financial Officer’s) regular reports to the Board. The Board and each Committee receive sufficient, reliable and timely information in advance of meetings and are provided with or given access to all necessary resources and expertise to enable them to fulfil their responsibilities and undertake their duties in an effective manner. Landsec Annual Report 2017 61 Board composition and roles Table 28 The Board currently comprises a Non-executive Chairman (who was independent on appointment), two Executive Directors and seven Independent Non-executive Directors. They are advised and supported by the Group General Counsel and Company Secretary. Their key responsibilities are as set out in the table below: Chairman Dame Alison Carnwath Chief Executive Robert Noel Chief Financial Officer Martin Greenslade Responsible for leading the Board, its effectiveness and governance and for monitoring and measuring progress against strategy and the performance of the Chief Executive. Ensures Board members are aware of and understand the views and objectives of major shareholders and other key stakeholders. Maintains a culture of openness and debate and helps set the tone from the top in terms of the purpose, vision and values for the whole organisation. Responsible for developing the Group’s strategic direction for consideration and approval by the Board, implementing the agreed strategy, running the business day-to-day and leading the executive team. Maintains a close working relationship with the Chairman. Supports the Chief Executive in developing and implementing strategy, and in relation to the financial and operational performance of the Group. Independent Non-executive Directors Edward Bonham Carter, Kevin O’Byrne, Chris Bartram, Simon Palley, Stacey Rauch, Cressida Hogg CBE and Nicholas Cadbury. Responsible for bringing an external perspective, sound judgement and objectivity to the Board’s deliberations and decision-making. Support and constructively challenge the Executive Directors using their broad range of experience and expertise. Monitor the delivery of the agreed strategy within the risk management framework set by the Board. Senior Independent Director Edward Bonham Carter Group General Counsel and Company Secretary Tim Ashby Acts as a sounding board for the Chairman and a trusted intermediary for other Directors. Available to discuss with shareholders any concerns that cannot be resolved through the normal channels of communication with the Chairman or the Executive Directors. Leads the other independent Non-executive Directors in the performance evaluation of the Chairman. Provides advice and assistance to the Board, the Chairman and other Directors, particularly in relation to corporate governance practices, induction training and development. Ensures that Board procedures are complied with, applicable rules are followed and good information flow exists to the Board and its Committees. The appointment and removal of the Company Secretary is a matter for the Board as a whole. Board meetings and attendance Table 29 AGM 1 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sept 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 31 Mar 17 Director Dame Alison Carnwath Robert Noel Martin Greenslade Kevin O’Byrne Chris Bartram Simon Palley Stacey Rauch Cressida Hogg CBE Edward Bonham Carter Nicholas Cadbury Tim Ashby * Martin Greenslade attended an executive management course in Stanford, California in June and July 2016. ** Nicholas Cadbury joined the Board and the Audit Committee on 1 January 2017. *** WEF 29 September 2016. 62 Landsec Annual Report 2017 Audit Committee Nomination Committee Remuneration Committee 3/3 3/3 4/4 4/4 4/4 1/1** 3/3 3/3 3/3 1/1*** 3/3 3/3 3/3 Board 8/8 8/8 6/8* 7/8 8/8 8/8 8/8 8/8 8/8 2/2** 8/8 Governance63Landsec Annual Report 2017Board activity Table 30The diagram below shows the key areas of Board activity during the year. 1. Strategy, property and funding —Reviewed the Group’s strategy, in particular an in-depth review of both the London and Retail businesses —Debated the changing status of the property cycle, including the Company’s position, risk profile and preparations for any business impact —Considered Brexit and other political risks —Reviewed the Group’s performance versus budget and targets, external benchmarks and by reference to its peers —Reviewed performance versus Board approval for key schemes and assets acquired, completed or developed —Considered portfolio liquidity analysis and development exposure —Considered and approved acquisitions and disposals of properties with a value in excess of £150m —Considered and approved the Group’s Going Concern and Viability Statements, dividend policy, debt funding arrangement and gearing levels —Considered and approved the bond funding strategy, including the bond tender and new issuance.2. Governance, stakeholders and shareholders —Discussed the outcome of the Board evaluation and effectiveness review, and agreed improvement opportunities —Considered the Group’s 2020 sustainability strategy, including progress versus annual targets and improvements planned —Reviewed regular health, safety and security updates —Reviewed developments in corporate governance and received key legal and regulatory updates —Reviewed the investor relations strategy and considered in depth the independent report carried out which followed a consultation with our institutional investors; regularly reviewed feedback from institutional shareholders, roadshows and other engagement activities —Reviewed the new Landsec brand proposition —Received regular meeting reports from the Chairman of the Audit, Remuneration and Nomination Committees —Reviewed and approved no change to the annual fees for Non-executive Directors —Considered the Market Abuse Regulations and approved an updated Securities Dealing Code —Approved the Group’s Slavery and Human Trafficking statement for publication on its website —Considered and agreed to continue with Defined Benefit Pension scheme —Agreed the closure of the American Depositary Receipt programme.3. Internal control and risk management —Reviewed the Group’s risk register and the effectiveness of the systems of internal control and risk management —Reviewed the risk framework and reporting structure —Debated significant and emerging risks, including cyber security, terrorism, the loss of key people, uncertainty arising from the Brexit process and other political risks. 4. Leadership and people —Discussed the composition of the Board and its Committees, including succession planning —Agreed appointment of Edward Bonham Carter as new Senior Independent Director —Considered and approved appointment of new Non-executive Director and Audit Committee Chairman —Reviewed the development of people and potential talent in the Group, including succession planning for Senior Leaders.5. Financial performance —Considered the financial performance of the business and approved the annual budget, key performance targets and five year plan —Reviewed the half-yearly and annual results and presentations to analysts and approved the Annual Report —Considered the half-yearly and full year valuation of the Group’s portfolio by the external valuer —Reviewed the Group’s tax structure and insurance programme. Five key areas of Board activity during the yearGovernance, stakeholders and shareholdersInternal control and risk managementLeadership and peopleFinancial performanceStrategy, property and funding64Landsec Annual Report 2017Letter from the Chairman of the Nomination CommitteeDear Shareholder,I am pleased to present the Nomination Committee report which summarises our work over the past year.GovernanceI can report that we complied in full with the principles of the 2014 UK Corporate Governance Code throughout the year. You will find more detail regarding our compliance, governance and effectiveness elsewhere in this report. Board and Committee changesLast year, I explained that Kevin O’Byrne, who joined our Board as a Non-executive Director in April 2008, would be standing down as Senior Independent Director in July 2016, and would retire from the Board in 2017. We started the external search to find Kevin’s successor in early 2016, appointing Spencer Stuart (an independent search consultancy appointed following a tender process) to assist with the recruitment. I am delighted to say that Edward Bonham Carter became the Company’s Senior Independent Director in July 2016, and that the search for a new Non-executive Director was successful with Nicholas Cadbury joining our Board on 1 January 2017. Nicholas will succeed Kevin O’Byrne as Chairman of the Audit Committee later this year. We will issue an announcement in due course to confirm the date of Kevin’s retirement.Nicholas is CFO at Whitbread PLC and therefore has all the technical skills required to become Chairman of the Audit Committee. However, it was important to the Committee that any new Director could bring complementary non-financial skills and experience, and Nicholas’ role at a consumer-facing business like Whitbread – and previously at companies such as Dixons – will be a true asset to our Board discussions. On behalf of the Committee, I extend my warm welcome to Nicholas as a member of the Board.Also, Stacey Rauch joined the Nomination Committee on 1 April 2017 to broaden her perspective of and contribution to the Company.Board composition and successionWe believe that the current composition of the Board and its Committees remains appropriate for the time being but this is kept under regular review. The Committee supports the ongoing development of Directors. It agreed the scope of a comprehensive induction programme for Nicholas Cadbury that started when he joined the Board and was pleased to support the ongoing professional development of Martin Greenslade who attended a six-week world-class Executive Program at Stanford University, USA, last summer. Board succession is a very live topic at Committee meetings. In particular, we discuss executive talent and leadership in the wider property industry. Our goal is to retain and recruit the best at Board and senior leadership levels. As a matter of prudence, we monitor a range of candidates who may be suitable replacements for existing Directors. We believe that Non-executive Directors should generally stay for nine years, with the appointment of new Directors providing an opportunity to add diverse perspectives and skills. However, it is important to ensure that the experience gained through one property cycle is available for the next, and that we have a mixture of real estate, financial, retail and general expertise to hand. As such, the Committee may determine occasionally that it is in the Company’s best interests for a Non-executive Director with particular skills to stay beyond the nine year term identified in the UK Corporate Governance Code at which point some investors or governance bodies may begin to question their independence. Should this occur, we will explain the decision and the rationale to shareholders.Finally, the Committee supports the Board in its work to secure the long-term health of the Company, and its strategy for success in a fast-changing world. This can only be achieved with the right people in the organisation, and the Committee has considered the likely business needs of the Company and its management capability – and succession plans – at executive and senior management level. We also recognise and support the extensive leadership development work that is being undertaken with all management levels within the Group.Dame Alison Carnwath (Chairman)Chris Bartram*Simon Palley*Stacey Rauch*Edward Bonham Carter**Independent Non-executive DirectorHighlights —Successful and thorough appointment process to find Nicholas Cadbury —Increased focus on changes to the governance landscape affecting the Company —Thorough assessment of succession plans.Key responsibilities —Reviews the structure, size and composition of the Board and its Committees and makes recommendations to the Board accordingly —Oversight responsibility for succession planning of the Board and Senior Management and leads the process for new Board appointments —Monitors developments in corporate governance and advises the Board accordingly. Committee membersGovernance65Landsec Annual Report 2017Independence and re-election to the BoardThe independence, effectiveness and commitment of each of the Non-executive Directors has been reviewed by the Committee which satisfied itself on the contributions and time commitment of all the Non-executive Directors during the year. On behalf of the Committee, I conducted a specific review in relation to Simon Palley as he has been in office for more than six years. The Committee was confident that Simon, and each of the other Non-executive Directors, remains independent and will be in a position to discharge their duties and responsibilities in the coming year. With the exception of Nicholas Cadbury whose appointment is being ratified for the first time, all the Directors will stand for re-election at the Annual General Meeting with the support of the Board. Committee effectivenessI am pleased to report that the recent Board performance evaluation concluded that the Nomination Committee operated very well. The Committee has decided to increase the number of meetings held during the year from two to four. Partly this is in response to the ongoing internal and external succession planning work, but also it is a response to the expected increase in the number and scope of governance changes. You will find more information on these topics and the other work of the Committee, and more details of the Board evaluation process and its outcomes, on the following pages.Dame Alison Carnwath Chairman, Nomination CommitteeDame Alison Carnwath ChairmanEffectiveness Board evaluation 2016/17 Following the external evaluation of the Board and its Committees last year, this year’s review of the Board’s effectiveness was conducted internally and was led by the Chairman with the support of the Company Secretary. In accordance with the Board evaluation cycle, the evaluation this year focused on any issues raised in last year’s externally facilitated review and any new issues arising from this year’s process. The first part of the evaluation required each Director to complete anonymously an online survey and questionnaire that focused on matters such as the Board’s performance, the performance of each of its Committees, the nature and content of Board meetings and the relationship between the Non-executive and Executive Directors. The survey included open questions that encouraged Directors to provide comments or enabled them to raise any concerns. The output of this survey was collated and provided to each Director. The Chairman then met separately with each Director and used the output of the survey and questionnaire, together with a tailored set of questions, to conduct a detailed interview. These meetings were helpful in that they allowed the Chairman to explore in more detail some of the themes arising from the questionnaire and to obtain supplementary comments and observations. Mr Bonham Carter, as the Senior Independent Director, separately evaluated the performance of the Chairman having first collated points of view and questions from the other Directors and then discussing the outcome with her. A final report and recommendations was prepared based on the collective comments from all the Directors and this was discussed by the Board. Separate reports were prepared for each of the Audit, Remuneration and Nomination Committees based on the feedback received, and in each case the conclusions were discussed by those Committees at their meetings in March 2017. Conclusions from this year’s review The conclusion from this year’s evaluation was that the Board and its Committees continue to operate to a high standard, and work well and effectively. The results overall ranged from positive to very positive, and there were no specific concerns raised by any of the Directors to the Chairman or anonymously through the online survey. Areas that were assessed as being particularly strong included the culture and relationships in the Boardroom, the Board’s collective judgement and overall performance, Board information and the involvement of Directors in succession planning. As with every high performing board, the Directors continue to look for areas of improvement. The Board will devote more time to engage in “blue sky” strategy discussion 66 Landsec Annual Report 2017 Board, Committee and Directors’ performance evaluation cycle Year 1 Independent, externally facilitated review Year 2 Review focused on Year 1 issues raised and any new issues arising Year 3 Progress reviewed generally coupled with focused questionnaire and/or interviews with the Chairman Board evaluation 2016/17 Effectiveness review of the Board and Committee workings conducted externally Conclusions from this year’s review and areas identified for improvement Progress review against targets set for 2016/17 Areas of focus for 2017/18 Areas of focus for 2017/18 — Strategy – Board meetings to allocate sufficient time to both medium and longer- term strategic discussion — Innovation – appreciate the impact of rapid technological development on us and our customers — Risk – further develop the approach to risk, especially in the context of the wider economic and political framework in which we will be operating — Culture and people – provide oversight and support to management as Landsec introduces its new brand framework. to supplement its existing programme (and to identify the enablers that will facilitate the execution of the strategy). The Board will ensure that its meeting agendas are forward looking in terms of the cycle and the business opportunities, and retain oversight over execution of the five year plan. Also, the Board will ensure that, at a time when the risk profile faced by businesses is changing rapidly, its assessment of risk remains dynamic (being revisited and adjusted as facts or scenarios change). Finally, regarding succession planning, the overall level of skills and expertise will remain a matter of priority, with particular importance attached to maintaining real estate expertise at Board level. The Chairman will continue to lead the process of building on current strengths of the Board and innovating further to build on the points outlined above, with support from the Chief Executive and Company Secretary. Progress against targets set for 2016/17 In addition to considering the results of this year’s externally facilitated evaluation, the Directors reviewed progress against the targets identified last year as set out in the table below: Objective Performance Board meetings to increase the amount of time allocated to risks and challenges that could impact the business, particularly at a time of increasing market uncertainty Time to be allocated to site visits, supported by ongoing professional development, in order to increase their level of business awareness and engagement Review the way the Board tracks progress on previously approved major projects and initiatives, using experience gained from past investment decisions This is being achieved, helped by the time allocated in meetings to assess some of the unexpected events during the year, and will continue this year. Examples include external advisers addressing the Board in June and July 2016 (shortly before, and immediately following, the EU referendum); further analysis of political and economic risk at the December Board meeting; and a Strategy Day agenda that was largely devoted to risks and challenges affecting (or which may affect) the business. Site visits were arranged for Directors and Directors have attended results presentations and investor days. We held an in-depth review of each of the London and Retail operating businesses, assessing past decisions, current performance and future strategy. Board environment and access to appropriate information The Board environment and its culture of transparency and openness was again rated favourably in this year’s effectiveness review. In addition to the Board meetings, and the private sessions scheduled at each Board meeting held by the Chairman and the Non-executive Directors, there are other opportunities arranged during the year when Directors meet and at which relevant items can be discussed in detail. The Board and its Committees receive papers in a timely fashion and Directors have access to information, support and advice from the Company Secretary and members of his team throughout the year. Induction A comprehensive induction programme exists for any newly appointed Directors and was used when Mr Cadbury joined the Board during the year. The priorities of the induction were to provide Nicholas Cadbury with an understanding of the Group’s history, culture, business, strategy and financial position. This included early meetings with the Chairman and the Executive Directors, together with other Non-executive Directors and Senior Management. There were also meetings with external advisers to the Audit Committee, of which Mr Cadbury will become Chairman later in 2017. Professional development, support and training for Directors The Board held several specific knowledge development sessions during the year, on such matters as Brexit and other political and economic risk factors that may affect the business or the wider property market in the UK. Directors continued to receive regular reports facilitating greater awareness and understanding of the Group’s business and the legal, regulatory and industry-specific environment in which it operates. This is complemented by visits to properties owned, managed or being developed by the Group which enable a deeper insight into the operations of the business and provide Directors with the opportunity to meet with senior and local management teams. Board strategy The Board considers strategy throughout the year, encompassing topics such as funding and capital allocation, competition and emerging sectors. Additionally, the Board held its regular two-day strategy meeting in February that enabled it to explore and debate in detail a wide range of items such as: — the rapidly developing technology that may affect the business and its customers — possible longer-term threats and challenges to the commercial property market — geopolitical and macro-economic trends. Diversity policy The Board embraces diversity in its broadest sense, believing that a wide range of experience, background, perspective, skills and knowledge combine to contribute towards a high performing, effective Board, which is better able to support and direct the Company. Landsec continues to make good progress in terms of greater diversity. The addition of Mr Cadbury to the Board has meant that the percentage of women on the Board has reduced to 30% (from 33% last year). However, this will reverse later in 2017 when Kevin O’Byrne retires and we will again be meeting the voluntary targets set by the Hampton-Alexander review for women on the Board of FTSE 350 companies. Further, we are pleased to report that 36% of Senior Management in Landsec (comprising the Executive Committee and Senior Leaders) are women, again in line with this voluntary target identified in the Hampton-Alexander review. Our mentoring programme, introduced last year specifically to assist women at all levels to reach their full potential within the Company, continues to operate well. Diversity is more than just gender based, and the Board will continue to focus in the coming year on this important issue in its wider context. Landsec has set specific objectives to be achieved by 2020, including improvements in the engagement scores of its Black, Asian and Minority Ethnic and LGBT employees, and these objectives are supported by the Board. Conflicts of interest The Board operates a policy to identify and, where appropriate, manage any potential conflicts of interest that Directors may have. The Nomination Committee monitors the situation and determines the actions necessary to address potential conflicts of interest as detailed in the table below. Potential conflicts of interest Table 31 G o v e r n a n c e Director Dame Alison Carnwath Potential conflict situation Nomination Committee decision and mitigating actions taken A non-executive director of Zurich Insurance Company Limited with whom the Group places certain of its insurance policies and pension investments. Since the Group’s insurance programme and policy matters are handled by the Executive Directors outside of the Board (and in consultation with its own independent insurance brokers), the Committee concluded that in practice conflicts of interest involving Dame Alison Carnwath and Zurich Insurance were unlikely to occur. Chris Bartram An adviser to Orchard Street Investment Management (OSIM) until 31 March 2017 which is, in some areas of operation, a competitor of the Group. The Committee did not see any potential conflict of interest situations arising from Mr. Bartram’s advisory role at OSIM. Kevin O’Byrne Cressida Hogg CBE Edward Bonham Carter Nicholas Cadbury Chief Executive of Poundland Group PLC and Chief Financial Officer of J Sainsbury PLC, both of which lease a number of retail properties from the Company around the country. As operational matters, such as retail leasing, are unlikely to be considered at Board level, the Committee concluded that in practice conflicts of interest involving Mr O’Byrne and his employers were unlikely to occur. Mr O’Byrne resigned his position at Poundland on 30 December 2016 and took up his position at J Sainsbury on 9 January 2017. Managing Director, Head of Infrastructure, of the Canada Pension Plan Investment Board (CPPIB) which is the Group’s joint venture partner at a major development. In her role, Ms Hogg will not have any involvement with the development in question as this is managed by a different business unit within CPPIB. As an additional precaution, the Group will not share any sensitive information on that development with her and she has agreed not to participate in any Board discussion that relates to it. Vice Chairman of Jupiter Fund Management plc, a fund manager which evaluates investments that may or may not include those of the Group. Jupiter is also a customer of the Group. Mr Bonham Carter’s position is such that he is unlikely to be involved in the selection of particular investments and has agreed not to participate in any investment decisions which may involve the Group’s securities. Since operational matters, such as office leasing, are unlikely to be considered at Board level, the Committee concluded that in practice conflicts of interest involving Mr Bonham Carter and his employer were unlikely to occur. Group Finance Director of Whitbread PLC which, through its Costa Coffee operations, leases a number of retail properties from the Company around the country. Since operational matters, such as retail leasing, are unlikely to be considered at Board level, the Committee concluded that in practice conflicts of interest involving Mr Cadbury and his employer were unlikely to occur. Nicholas Cadbury was appointed a Non-executive Director of the Board on 1 January 2017. Landsec Annual Report 2017 67 68Landsec Annual Report 2017Letter from the Chairman of the Audit CommitteeDear Shareholder,I am pleased to report on the key activities and focus of the Audit Committee during the year. This will be my last report to you as Chairman of the Committee as I intend to step down later this year after nine years on the Board. Nicholas Cadbury, who joined the Board in January, will take over as the Chairman of the Committee.The Committee monitors the integrity of the Group’s reporting process and financial management. It ensures that risks are carefully identified and assessed, and that sound systems of risk management and internal control are in place. It scrutinises the full and half-yearly financial statements before proposing them to the Board for approval, and reviews in detail the work of the external auditor and valuer and any significant financial judgement made by management. The Committee reviews the risk management framework and reports to the Board on matters of existing and emerging risk affecting the Group. The Committee receives detailed reports from management, supplemented by other conversations and meetings as appropriate during the year.Acquisitions and disposalsThe Company made a number of property acquisitions and disposals during the year as it continued to execute its strategy. The Committee ensured that the accounting treatment of all transactions was scrutinised and appropriate. Changing risk landscapeThe risk landscape has evolved during the year. We reviewed changes at a macro-economic and political level and a range of other risks affecting the business including cyber security and rapid technological change. Also, we considered other factors such as the market cycle, the Brexit negotiation process, and property and consumer trends that are relevant to our business planning in the medium to long term.The Group’s Executive Committee regularly reviews the risk register and this is used by the Committee as the basis of its risk assessment. During the year, we refreshed the risk reporting matrix within the business to provide more scope for emerging threats to be identified before they are considered as potential risks affecting the business. We have also revised the way that risks are reported to the Board with more regular updates through the Chief Financial Officer’s Board report.Internal auditThe Company maintains its own risk management and internal audit function. The Committee again reviewed the scope, skills and competencies of this function, and the level of resource available to it. We decided that the knowledge, skills and resources of our internal audit team, and their understanding of the business, were appropriate. However, there are occasions when we require and benefit from the expertise that can be offered by specialist external advice and, accordingly, the Committee considered when such advice was appropriate. We believe that the combination of internal and external advisers provides us with the best insight into areas of risk and appropriate controls, and allows us to provide assurance to the Board that the system of internal processes is robust.External valuations and valuerCBRE was appointed in 2015 to act as the Group’s valuer following a tender process. We are pleased with the level of support provided by CBRE, the rigorous process that they apply to their work and their broad industry expertise and knowledge.External auditorErnst & Young LLP (EY) was appointed as the Company’s auditor in 2013. This year’s internal review of their effectiveness and performance concluded that they continue to operate at a high standard. We have agreed a new fee basis for EY’s services for this year and through to 2018/19, details of which are contained on page 71 in the Accountability section. Based on the Committee’s recommendation, the Board is proposing that EY be reappointed to office at this year’s AGM.AQRTDuring the year, an Audit Quality Review Team (AQRT) from the FRC undertook an inspection of EY’s audit of the Group’s financial statements for the year ended 31 March 2016. As part of that process I spoke with the AQRT to share my (and the Audit Committee’s) perspectives on the quality of EY’s audit and its delivery on commitments made by the audit firm as part of the audit tender process. On completion of the review, the Audit Committee received and considered the AQRT’s final report on its inspection and discussed it with Eamonn McGrath, the audit partner at EY. The report does not give the Committee any concerns over the quality, objectivity or independence of the audit.Fair, balanced and understandableThe Committee assessed and recommended to the Board that, taken as a whole, the Company’s 2017 Annual Report is fair, balanced and understandable.Viability StatementThe Viability Statement, together with the rationale behind the chosen five year time horizon, is set out on page 54. The Committee considered whether there should be any change to the period chosen for the Statement, particularly in the context of any implications resulting from the UK’s decision to leave the EU, but was of the opinion that five years remained appropriate.UK Corporate Governance Code/FRC Guidance on Audit CommitteesThe Committee considered its compliance with the 2014 UK Corporate Governance Code and the FRC Guidance on Audit Committees. We believe that we have addressed both the spirit and the requirements of both; this conclusion is supported by our external auditor.Kevin O’Byrne (Chairman)*Stacey Rauch*Chris Bartram*Nicholas Cadbury**Independent Non-executive DirectorHighlights —Reviewed changing risk factors and reporting matrix —Assessment of skills and competencies of internal audit —Quality and appropriateness of property valuation process.Key responsibilities —Monitors the integrity of the Group’s reporting process and financial management —Ensures that risks are carefully identified and assessed, and that sound systems of risk management and internal control are in place —Scrutinises the full and half-yearly financial statements —Reviews in detail the work of the external auditor and valuer and any significant financial judgement made by management —Reviews the risk management framework.Committee membersGovernance69Landsec Annual Report 2017Committee effectivenessDuring the year, the Board carried out an internally facilitated evaluation of its performance and that of its Committees. This evaluation confirmed that the Committee continued to operate at a high standard, with clear priorities, well-defined responsibilities and clarity around its workplan.The year aheadI have referred already to the rapidly changing environment in which the Company operates, with important political and economic changes to follow from the decision to leave the EU. The increasing pace of technological change is both a threat and opportunity that we assess on a regular basis. The Committee will continue to work with management, and provide clear reports to the Board, to ensure that it addresses these issues in a way that is consistent with the Company’s culture and values. I would like to thank the other members of the Committee, together with management and EY, for their support during the year.Audit Committee – new ChairmanAs I mentioned earlier, this is my last year as Chairman of the Audit Committee. I have thoroughly enjoyed my time at Landsec, and would like to thank the Chairman, my fellow Directors and the Company’s management, external advisers and shareholders for the support that I have received throughout my tenure.A rigorous process was followed by the Nomination Committee in appointing my successor, Nicholas Cadbury. Nicholas will be replacing me later this year as Chairman of this Committee. As the CFO of Whitbread PLC, a highly-regarded customer-facing company in the FTSE 100 with an extensive property portfolio, Nicholas has the knowledge and technical skills (and recent and relevant financial experience) to lead this Committee. Nicholas will have the benefit of having been a member of the Audit Committee through the year-end process and, supported by his induction programme, I am confident this continuity will ensure a smooth transition. I hope that you find this review, and the report that follows, a helpful explanation of the work of the Committee during the year.Kevin O’ByrneChairman, Audit CommitteeKevin O’ByrneChairman, Audit Committee70Landsec Annual Report 2017AccountabilityStructure and operations The Audit Committee’s structure and operations, including its delegated responsibilities and authority, are governed by terms of reference which are reviewed annually and approved by the Board. To maintain effective communication between all relevant parties, and in support of its activities, the Chief Executive, Chief Financial Officer, Director of Risk Management and Internal Audit, the partner and representatives of the Company’s external auditor, Ernst & Young LLP (EY), and other members of the senior finance team regularly attend Committee meetings. The Company Chairman and all Non-executive Directors are invited to attend meetings when the Group’s external valuer, CBRE, makes property valuation presentations. The Committee has private sessions with the internal and external audit teams. In addition, the Committee Chairman has private and informal sessions with the audit teams and the valuer to ensure that open lines of communication exist in case they wish to raise any concerns outside of formal meetings. Nicholas Cadbury has participated in these meeting following his appointment as a Director in January 2017.The Committee members collectively have a broad range of financial, commercial and property sector expertise that enables them to provide oversight of both financial and risk matters, and to advise the Board accordingly. Kevin O’Byrne and Nicholas Cadbury are the members determined by the Board as having recent and relevant financial experience for the purposes of satisfying the UK Corporate Governance Code. The Committee works to a structured programme of activities and meetings to coincide with key events around the Company’s financial calendar. Following each meeting, the Committee Chairman reports on the main discussion points and findings to the Board.External auditor EY, as the external auditor, is engaged to conduct a statutory audit and express an opinion on the Company’s and the Group’s financial statements. Their audit includes a review and test of the systems of internal control which produce the information contained in the financial statements, and a review by EY of the asset valuation process and methodology using its own chartered surveyors (more details below), in each case to the extent necessary to express an audit opinion. —quarterly reports on investigated internal control issues significant to the Group —quarterly reports on the Group’s risk register, including significant and emerging risks —compliance by management concerning the operation of the business for which they are responsible —the adequacy and effectiveness of the Group’s internal control and risk management systems. Internal audit —the scope of the internal audit plan and resourcing requirements —the independence, appropriateness and effectiveness of internal audit.External property valuation —the quality and appropriateness of the half-yearly and full year external valuation of the Group’s property portfolio, together with an assessment of the methodology applied —the independence and effectiveness of the external valuer. Other —the Committee’s terms of reference and performance effectiveness —compliance with the Code and the Group’s regulatory and legislative environment. Significant financial matters During the year, the Committee considered the appropriateness of significant financial matters made in connection with the financial statements as set out on pages 72 and 74.Audit Committee activityThe key areas of Committee activity during the year included the planning, monitoring, reviewing and approving of the following:Financial reporting —the quality, appropriateness and integrity of the half-yearly and full year financial statements —the information, underlying assumptions and stress test analysis presented in support of Going Concern and the Viability Statement —the consistency and appropriateness of the financial control and reporting environment —the dividend policy and the payment of dividends, with due regard to the Company’s REIT status —the fair, balanced and understandable assessment of the Annual Report (and any other financial statements such as the half-yearly statement). External audit —the scope of the external audit plan —the independence and objectivity of EY —the quality and effectiveness of EY’s audit services —the level of fees paid to EY in accordance with the policy for the provision of non-audit services —EY’s reappointment to office as external auditor. Risk management and internal control —the scope of the internal control and risk management programme —the results of internal audit reviews and the progress made against agreed management actions Effectiveness of the external audit Following the issue of the Company’s Annual Report, the Director of Risk Management and Internal Audit conducts a performance evaluation and effectiveness review of the external audit. This is conducted against structured guidelines in consultation with the Executive Directors and members of the senior finance team and with due regard to the latest Audit Quality Inspection Report on EY issued by the Financial Reporting Council (FRC). This year’s review will again include an audit quality assessment based on the new Practice Aid guidelines also issued by the FRC. The Committee Chairman meets privately with the audit engagement partner before the Committee considers the results of the review. Objectivity and independence The Committee is responsible for monitoring and reviewing the objectivity and independence of the external auditor. In undertaking its annual assessment, the Committee has reviewed: — the confirmation from EY that they maintain appropriate internal safeguards in line with applicable professional standards — the mitigation actions taken by the Company in seeking to safeguard EY’s independent status, including the operation of policies designed to regulate the amount of non- audit services provided by EY and the employment of former EY employees — the tenure of the audit engagement partner (not being greater than five years) During the year, an Audit Quality Review — the internal performance and effectiveness Team (AQRT) from the FRC undertook an inspection of EY’s audit of the Group’s financial statements for the year ended 31 March 2016. The report did not give the Committee any concerns over the quality, objectivity or independence of the audit. EY successfully completed their audit for the financial year. The Committee’s preliminary view is that, in line with the conclusions from last year’s performance review, EY had again performed their audit services effectively, efficiently and to a high standard. Areas identified for development will be shared with them for inclusion in their audit and service delivery plans going forward. Audit plan In respect of the audit for the financial year under review, EY presented their proposed audit plan (prepared in consultation with senior management and the Director of Risk Management and Internal Audit) to the Committee for consideration and approval. The objective was to ensure that their work remained aligned to the Group’s structure and strategy. The audit plan was again risk and materiality focused, challenge based and designed to provide valuable insights beyond the audit. review of EY referred to above — the outcome of the independent AQRT review referred to above. Taking the above review into account, the Committee concluded that EY remained objective and independent in their role as external auditor. Audit tendering EY were first appointed to the office of auditor, following a competitive tender process, in respect of the 2013/14 financial year. Having undertaken such a process, the Company has complied with The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Processes and Audit Committee Responsibilities) Order 2014 (Article 7.1), published by the CMA on 26 September 2014. Under current regulations, the Company will be required to retender the audit by no later than the 2023/24 financial year. However, the Committee proposes to review the situation at the same time as the current audit engagement partner, Eamonn McGrath, is due to rotate. Mr McGrath has held the role of the Company’s audit engagement partner for four years and will relinquish this position during the 2018/19 financial year and following completion of the 2017/18 financial statements. There are no contractual restrictions in relation to the Company’s choice of external auditor. On the recommendation of the Audit Committee, the Board is proposing a resolution at this year’s Annual General Meeting that EY be reappointed to office for a further year. Audit fee The Committee reviewed the level of fees payable to EY for audit services as the terms agreed for the original engagement had expired. It was agreed that the audit fees payable to EY for the audit and half year review for 2016/17 would be £800,000 (up from £793,000 in 2015/16), with an increase of £25,000 in each of the two following financial years subject to business and audit requirements remaining consistent year on year. Non-audit services To help safeguard EY’s objectivity and independence, the Company operates a non-audit services policy which sets out the circumstances and financial limits within which they may be permitted to provide certain non-audit services (such as assurance work) on which they will not be required to provide an audit opinion. The Committee monitors compliance with the policy including the prior approvals required for non-audit services which are as follows: G o v e r n a n c e Table 32 Aggregate during the year £ <100,000 Per assignment £ 0 – 25,000 25,000 – 100,000 100,000 – 290,000 >100,000 >290,000 CFO Audit Committee Chairman Committee Details of the fees charged by EY during the year can be found in note 8 to the financial statements. Total fees for non-audit services, including the half year review and other assurance related services, amounted to £248,000. This sum represented 42% of the total Group audit fees, and 34% of the total audit fees payable by the Group to EY during the year (including the audit of its joint ventures). No non-audit fees were approved or paid on a contingent basis. Landsec Annual Report 2017 71 External valuations and valuers The valuation of the Group’s property portfolio, including properties held within the development programme and in joint ventures, is undertaken by independent external valuers. The Group provides input, such as source data, and support to the valuation process. CBRE have been the Company’s principal valuer since September 2015. The valuation helps to determine a significant part of the Group’s net asset value, reported performance and Senior Management remuneration. Accordingly, the scrutiny of each valuation, and the valuer’s independence, objectivity and effectiveness, represents such an important part of the Committee’s work. Valuations for the full and half year were presented to the Committee by CBRE. These were reviewed and challenged by management and the Committee, with reference to CBRE’s approach, methodology, valuation basis and underlying property and market assumptions. Other Non-executive Directors attended the final presentation. The Committee Chairman and Nicholas Cadbury also met separately with CBRE. Additionally, CBRE met with EY and exchanged information independently of management. EY has experienced chartered surveyors on its team who consider the valuer’s qualifications and assess and challenge the valuation approach, assumptions and judgements made by them. Their audit procedures are targeted at addressing the risks in respect of the valuations and the potential for any undue management influence in arriving at them. This year, EY identified 36 properties (comprising 69% of the portfolio by valuation) for substantive review by its valuation experts primarily on the basis of their value, type, risk profile and location. EY performed site visits for a sample of assets and completed analytical reviews over the input data for the valuations, comparing this to market data. The Committee reviewed their findings. An internal evaluation of CBRE’s performance and effectiveness will be conducted after the year-end results are finalised (and annually thereafter) with the results reported on the following year. A fixed-fee arrangement (subject to adjustment for acquisitions and disposals) is in place with CBRE for the valuation of the Group’s properties and, given the importance of their work, we have disclosed the fees paid to them in note 9 to the financial statements. The total valuation fees paid by the Company to CBRE during the year represented less than 5% of their total fee income for the year. Significant financial matters The Committee reviewed two significant financial matters in connection with the financial statements, namely the valuation of the Group’s property portfolio and revenue recognition. Further details are set out in table 33 on page 74. These items were considered to be significant taking into account the level of materiality and the degree of judgement exercised by management and, in respect of the valuation, the external valuer. The Committee discussed these with both parties, as well as EY. In addition, the Committee considered, took action and made onward recommendations to the Board, as appropriate, in respect of other key matters including the Viability Statement, the Going Concern basis on which the financial statements are prepared, accounting for property acquisitions and disposals, bond buy- back and new issue, maintenance of the Group’s REIT status and other specific areas of individual property and audit focus. The Committee was satisfied that all issues had been fully and adequately addressed, that the judgements made were reasonable and appropriate and had been reviewed and debated with the external auditor who concurred with the approach taken by management. Risk management framework The Board is responsible for determining both the nature and extent of the Group’s risk management framework and the risk appetite that is acceptable in seeking to achieve its strategic objectives. The framework and the ongoing process in place for identifying, evaluating and managing the principal risks faced by the Group are described on pages 42-45. These are regularly reviewed by the Board. Primary responsibility for operation of the Company’s internal control and risk management systems, which extend to include financial, operational and compliance controls (and accord with the FRC’s 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’), has been delegated to management. These systems have been designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business goals and can provide only reasonable, not absolute, assurance against material misstatement or loss. During the year, the Committee commissioned an external report to be carried out on the Company’s risk management framework and the approach to risk. No major weaknesses were identified but a number of recommendations were suggested and considered by the Committee. These will be implemented in the coming year. Internal control The key elements of the Group’s internal control are as follows: — an established organisation structure with clear lines of responsibility, approval levels and delegated authorities — a disciplined management and committee structure which facilitates regular performance review and decision-making — a comprehensive strategic review and annual planning process — a robust budgeting, forecasting and financial reporting process — various policies, procedures and guidelines underpinning the development, asset management, financing and main operations of the business, together with professional services support including legal, human resources, information services, tax, company secretarial and health, safety and security — a compliance certification process from management conducted in relation to the half-yearly and full year results, and business activities generally — a quarterly self-certification by management confirming that key internal controls within their area of responsibility have been operating effectively — a risk management and internal audit function whose work spans the whole Group — a focused post-acquisition review and integration programme to ensure the Group’s governance, procedures, standards and control environment are implemented effectively and on time — a financial and property information management system. 72 Landsec Annual Report 2017 Risk management Under the overall supervision of the Committee, there are several sub-committees and work groups that oversee and manage day-to- day risk within the business. The Group has a Director of Risk Management and Internal Audit (with a direct reporting line to the Audit Committee Chairman) who provides regular oversight of risk matters, evaluates emerging risks that may affect the business and monitors compliance to ensure that any mitigating actions are properly managed and completed. The Committee, in consultation with management, agrees the annual work plan (including any assistance that may be required from external specialists) of the risk management and internal audit function to ensure alignment with the needs of the business and compliance with its governance charter. Additionally, the Committee receives and discusses on a quarterly basis: — the Group’s risk register, including significant and emerging risks, and how exposures have changed during the period — summary reports and progress against agreed actions from internal audit on their review of the effectiveness of various elements of the internal control system maintained by the Group. Effectiveness The Board has undertaken a robust assessment of the principal risks faced by the Group, including those that could threaten the business model, future performance, solvency or liquidity. Assisted by the Committee, the Board also reviewed the effectiveness of the systems of internal control and risk management in place throughout the year and up to the date of this report. This took into account the valuable assurance work undertaken by the risk management and internal audit function (which is supplemented by external specialist resource as necessary) and the relevant process, controls and testing work undertaken by EY as part of their half-yearly review and full year audit. No weaknesses or control failures significant to the Group were identified. Where areas for improvement were identified, new procedures have been introduced to strengthen the controls and will themselves be subject to regular review as part of the ongoing assurance process. Fair, balanced and understandable The Committee applied this year the same due diligence approach adopted in previous years in order to assess one of the key Code requirements in respect of the Annual Report. This included the establishment of an editorial team who were responsible for preparing, compiling and verifying the content and, through regular review meetings with the Executive Directors, ensuring that consistent reporting and appropriate links existed between key messages and sections of the Annual Report. A specific paper was presented to the Committee (and the Board) to assist in its challenge and testing of a fair, balanced and understandable assessment. Taking the above into account, together with the views expressed by EY, the Committee recommended, and in turn the Board confirmed, that the 2017 Annual Report, taken as a whole, is fair, balanced and understandable and provides the necessary information for shareholders to assess the Company’s position, performance, business model and strategy. Whistleblowing policy The Committee reviews the Group’s arrangements, incorporated within a specific policy, which allow employees to report concerns about suspected impropriety or wrongdoing (whether financial or otherwise) within the Group on a confidential basis, and anonymously if preferred. These include an independent third- party reporting facility comprising a telephone hotline and an online process. Any matters reported are investigated by the Company Secretary and escalated to the Committee, as appropriate. During the year, there were no whistleblowing incidents reported. The Company runs a whistleblowing awareness campaign every year and the arrangements also form part of the induction programme for new employees. The policy and facilities have been extended to cover key suppliers and the requirements of the new legislation covering slavery and human trafficking reporting. Bribery and corruption policy The Board has a zero tolerance policy for bribery and corruption of any sort. The Company, in operating the policy, gives regular training to staff on the procedures, highlighting areas of vulnerability. New employees are required to complete an online training module when they join. Our principal suppliers are required to have similar policies and practices in place within their own businesses. G o v e r n a n c e Landsec Annual Report 2017 73 How the Committee addressed the matters The Audit Committee adopts a formal approach by which the valuation process, methodology, assumptions and outcomes are reviewed and robustly challenged. This includes separate review and scrutiny by management, the Committee Chairman and the Committee itself. The Group uses CBRE, a leading firm in the UK property market, as its principal valuer. It also includes EY as the external auditor which is assisted by its own specialist team of chartered surveyors who are familiar with the valuation approach and the UK property market. EY met with CBRE separately from management and their remit extends to investigating and confirming that no undue influence has been exerted by management in relation to the external valuer arriving at its valuations. CBRE submits its valuation report to the Committee as part of the half-yearly and full year results process. They were asked to attend and present their report to the Board and to highlight any significant judgements made or disagreements which existed between themselves and management. There were none. The Committee and EY considered the main areas of judgement exercised by management in accounting for matters related to revenue recognition, including timing and treatment of rents, incentives, surrender premia and other property related revenue. EY reviewed and tested individual transactions on a sample basis to ensure there was a contractual relationship and consistency of accounting treatment between last year and this year. It performed data analytics over the whole population of leases in the Group’s portfolio, analysing data held in the Group’s document and property management system. Significant financial matters considered Valuation of the Group’s property portfolio (including properties held within the development programme and in joint arrangements) The valuation of the Group’s property portfolio is a major determinant of the Group’s performance and drives an element of the variable remuneration for senior management. Although the portfolio valuation is conducted externally by an independent valuer, the nature of the valuation estimates is inherently subjective and requires the making of significant judgements and assumptions by management and the valuer. Significant assumptions and judgements made by the valuer in determining valuations may include the appropriate yield (based on recent market evidence), changes to market rents (ERVs), what will occur at the end of each lease, the level of non-recoverable costs and alternative uses. Development valuations also include assumptions around costs to complete the development, the level of letting at completion, incentives, lease terms and the length of time space remains void. Revenue recognition Certain transactions require management to make judgements as to whether and to what extent they should be recognised as revenue in the year. Market expectations and revenue profit based targets may place pressure on management to distort revenue recognition. This may result in overstatement or deferral of revenues to assist in meeting current or future targets or expectations. The above description of the significant financial matters should be read in conjunction with the Independent Auditor’s Report on pages 97-102 and the significant accounting policies disclosed in the notes to the financial statements. Further details on significant accounting judgements and key estimations of uncertainty can be found in note 2 to the financial statements on page 108. Table 33 The valuer proposed changes to the values of our properties and developments during the year, which were discussed by the Committee in detail and accepted. Based on the degree of oversight and challenge applied to the valuation process, the Committee concluded that the valuations had each been conducted appropriately, independently and in accordance with the valuer’s professional standards. In its assessment, the Committee, in consultation with EY, considered all relevant facts, challenged the recoverability of occupier incentives, the options that management had in terms of accounting treatment and the appropriateness of the judgements made by management. These matters had themselves been the subject of prior discussion between EY and management. The Committee, having consulted with EY, concurred with the judgements made by management and were satisfied that the revenue reported for the year had been appropriately recognised. 74 Landsec Annual Report 2017 Investor relations Approach to investor relations The Board is committed to maintaining an open dialogue with shareholders and recognises the importance of that relationship in the governance process. The Chairman, supported by the Executive Directors, has overall responsibility for ensuring effective communication with shareholders. The Company has a comprehensive investor relations programme (designed for institutional investors, private shareholders and debt investors) which aims to help existing and potential investors understand the Group’s business, strategy and performance. Shareholder feedback is provided to the Board to ensure that they understand the objectives and views of major investors. The Company approaches its debt investor relations on a partnership basis, ensuring that any feedback is considered and the Company takes into account best practice guidance from the Investment Association. During the year, the programme of investor events included: Institutional shareholders’ programme Meetings with principal shareholders — The Executive Directors had meetings with shareholders representing more than half the register by value during the year — The Chairman maintained contact with principal shareholders and undertook her usual biennial investor roadshows in the UK and the Netherlands — The geographic spread of the programme covered Europe, North America, South Africa and the Far East — The Senior Independent Director, and other Non-executive Directors, were available to meet with shareholders — Institutional shareholders were invited to attend the Company’s full year and half- yearly results presentations. Investor conference — The investor conference is held annually and focuses on the Retail and London portfolios in alternate years. This year, the conference was held in Victoria, SW1, and focused on the London Portfolio with senior management presenting updates on all aspects of its business. The day included tours of five of our buildings in Victoria including a visit to Nova. The conference also provided an opportunity for attendees to meet the management teams in the business — The presentations and an audio recording of the conference were made available on the corporate website to enable non-attendees to access the information provided. Investor tours and presentations — In addition to our annual investor conference, we hosted various presentations and tours of some of our major assets in the Retail and London portfolios. These tours were conducted at Bluewater, Kent, Trinity Leeds, White Rose, Leeds, Westgate Oxford, key properties in Victoria, SW1, and 20 Fenchurch Street, EC3 — We conducted 12 sales team meetings during the year which provided the Executive Directors with the opportunity to present our strategy and performance directly to the sales teams of the major investment banks. Industry conferences — Industry conferences provide Executive Directors with a chance to meet a large number of investors on a formal and informal basis. Conferences attended this year included the UBS Global Property, JP Morgan and Bank of America Merrill Lynch conferences in London, the Bank of America Merrill Lynch conference in New York, the Kempen conferences in Amsterdam and New York and the Citi Conference in Miami. Other initiatives — The Chairman and Chief Executive held a dinner for the senior heads of equities from UK institutions. Private shareholders’ programme Private shareholders are encouraged to give feedback to and communicate with the Directors through the Company Secretary. During the year they were also able to meet Directors at the United Kingdom Shareholders’ Association meeting and at the Annual General Meeting. Debt investors’ programme Credit side institutional investors and analysts — Our treasury team held non-deal specific meetings with credit side institutional investors and analysts after the half year and full year results — In addition, the team met with around 40 accounts as part of the deal roadshow for the bond tender and new issue exercise in January/February of this year. Banks — Regular dialogue is maintained with our key relationship banks, including at least bi- annual meetings with our treasury team and in-house dinners hosted by the Executive and Non-executive Directors — Our treasury team also actively engaged with potential lenders. Credit rating agencies — During the year, business and financial updates were provided by our treasury team and senior management to Standard & Poor’s, Fitch Ratings and Moody’s — Further information on our debt investors can be found at: www.landsec.com/investors. G o v e r n a n c e Annual General Meeting (AGM) The 2016 AGM provided all shareholders with an opportunity to question the Board and the Chairmen of each Board Committee on matters put to the meeting, including the Annual Report. Shareholders who attended the AGM received a strategic progress update from the Chairman and a presentation from the Chief Executive on the business activities and performance of the Group over the preceding year. The results of voting at general meetings are published on the Company’s website: www.landsec.com/investors. Independent feedback on investor relations During the year, the Board commissioned Rivel, an independent adviser, to conduct an investor audit of investor perceptions of the Company, its management, strategy, governance and the investor relations programme. An investor relations audit usually takes place every two years. Rivel interviewed over 50 investors based in the UK, Europe and North America to obtain their views on management and business performance. The results were presented to the Board with suggestions and improvements being taken forward by management. The perception study found that investors have a very high degree of confidence in management and there was broad support for the Company’s strategy. The investor relations department also received feedback from analysts and investors during the year through the Group’s corporate advisers. The Company Secretary also received feedback on governance matters directly from investors and shareholder bodies. The information was shared with the Board to help members develop their understanding of shareholders’ needs and expectations. Other disclosures Other disclosures required by paragraph 7.2.6 of the Disclosure and Transparency Rules and the Companies Act 2006 are set out in the Directors’ Report on pages 92-94. The Governance report was approved by the Board on 17 May 2017. On behalf of the Board Tim Ashby Group General Counsel and Company Secretary Landsec Annual Report 2017 75 76Landsec Annual Report 2017Directors’ Remuneration Report – Chairman’s Annual StatementDear Shareholder,I am pleased to introduce the Directors’ Remuneration Report for the year.The political and economic uncertainty to which I alluded last year has certainly accelerated in some unexpected ways, beginning with the UK’s decision to leave the European Union. Although the UK economy has continued to perform well overall, the property industry has been impacted by wavering consumer and business confidence. We believe our decision to complete speculative development earlier than others remains the right one. The priorities over the past year have been to lengthen lease terms in London offices, and to lease up our development programme, including Westgate Oxford, due to open in October. Behind the scenes, we have also been active in ensuring that the business is in the best possible position – financially, culturally, reputationally and capability-wise – to take advantage of new opportunities to deliver shareholder value.As I have highlighted previously, the remuneration outcomes for the executives at Landsec are largely driven by outperformance versus our peers and do not always reflect our absolute performance. For Total Property Return, our performance is compared to IPD, a widely-used industry benchmark over both a one year and three year period, for the calculation of bonus and LTIP outturns respectively. Over one year, we estimate that we will have slightly underperformed the benchmark which now encompasses all March-valued properties within IPD. Over a three year period, where we are still measured against a sector weighted index of the IPD Quarterly Universe, I am pleased to say we have outperformed the benchmark. To have achieved this while putting the business on such a strong financial footing is a very good performance. In terms of Total Shareholder Return, we are measured over a three year period and were disappointed not to outperform our peer group. Simon Palley (Chairman)*Dame Alison CarnwathEdward Bonham Carter*Cressida Hogg CBE**Independent Non-executive DirectorHighlights —Reviewed and approved the remuneration outcomes for 2016/17 for Executive Directors and the Executive Committee —Gathered insight on the sentiment of shareholders and other key stakeholders as context for planning the review of the remuneration policy in 2018 —Oversaw the approach to the reporting of gender pay.Key responsibilities —Reviews and recommends to the Board the executive remuneration policy —Determines the remuneration packages of the Executive Directors and other members of the Executive Committee —Oversight of the Group’s remuneration policy for all employees.Committee membersSimon Palley Chairman, Remuneration CommitteeOur relative share price has been impacted by a number of factors including sentiment towards our market sectors, particularly London, and no exposure to continental Europe at a time of sterling devaluation. Following positive feedback from shareholders, we have chosen to lay out the report in a very similar way to last year. The full details of the Remuneration Policy, approved by shareholders in 2015, are contained in the back section of the Annual Report, on pages 175 to 179. For ease of reference, a summary of the proposed implementation of the policy for 2017/18 is included within the Directors’ Remuneration Report on page 90. We have included the key information, including an “at a glance” summary of the outturns for the year, immediately following my statement. More detail on remuneration outcomes for the year The annual bonus for the year was slightly above target for Executive Directors, but below last year’s outturn. The performance can be summarised as follows: — As I mentioned above, our measure of Total Property Return now uses a broader and unweighted IPD benchmark of all March- valued properties. The benchmark was not available at the time of writing, but we expect to slightly underperform, resulting in no payment from this element of the bonus. — The revenue profit performance was again very strong, significantly above our threshold set in 2015. This reflects increased rents from our successful development programme and lower interest costs, more than outweighing rent lost through disposals last year. There has also been strong ongoing discipline around the management of costs. This element of the plan paid out in full. — Performance against the specific business objectives was more mixed. Retail had a strong performance, with high demand for space at Westgate Oxford, and the successful pre-letting of the extension to White Rose, Leeds as particular highlights. In London, where the impact of current political and economic uncertainty on demand has been more keenly felt, the ambitious development letting targets have been challenging to meet. Other corporate objectives have focused on evolving the culture through the office move and pressing ahead with our ambitious sustainability agenda, and these have largely been met. When this performance was combined with the strong performance against their individual objectives, the total bonus pay-out was 88.1% of salary for Robert Noel (58.7% of maximum) and 86.1% for Martin Greenslade (57.4% of maximum), both lower than last year. Turning to the Long-Term Incentive Plan, which is for performance over the three years to 31 March 2017, the outturn is as follows: — Our Total Property Return of 12.7% per annum over the three years outperformed that of our benchmark, the sector-weighted IPD Quarterly Universe, which was 11.5% per annum. As a result, this element vests in full. — However, our Total Shareholder Return over the same period was 9.2%, versus 16.2% for the comparator group. This element of the LTIP, therefore, does not vest. Therefore, in total, 50% of the 2014 awards will vest. Looking forward Later this year we will be consulting with shareholder representatives on our Remuneration Policy, in preparation for the binding vote at next year’s AGM. Executive pay is an area that is attracting a great deal of focus from many quarters, including government. As ever, we are very keen to work within the spirit of stakeholder sentiment, while ensuring that any proposals continue to drive the right behaviours from our executives, who remain completely focused on the delivery of our stated goal – “To outperform our peer group in terms of total shareholder return through the property cycles”. I look forward to discussions with some of you in the coming year. Simon Palley Chairman, Remuneration Committee G o v e r n a n c e Landsec Annual Report 2017 77 Remuneration at a glance Fixed pay Robert Noel (£000) 2017 2016 769 754 Chart 34 Martin Greenslade (£000) Chart 35 192 21 189 23 982 2017 966 2016 500 491 125 19 644 123 20 634 0 100 200 300 400 500 600 700 800 900 1,000 0 100 200 300 400 500 600 700 800 900 1,000 Base pay Pension Benefits Base pay Pension Benefits Annual bonus outturns Robert Noel 2017 Individual – max 20% Individual – actual 17% Total (£000) 677* Chart 36 Martin Greenslade 2017 TPR – max 39% TPR – actual 0% Total Property Return Revenue Profit KPIs Individual * Estimated Individual – max 20% Individual – actual 15% TPR – max 39% TPR – actual 0% Chart 37 Total Property Return Revenue Profit KPIs Individual * Estimated Total (£000) 431* KPIs – max 52% KPIs – actual 32% Rev Profit – max 39% Rev Profit – actual 39% KPIs – max 52% KPIs – actual 32% Rev Profit – max 39% Rev Profit – actual 39% Robert Noel 2016 Individual – max 20% Individual – actual 17% Chart 38 Martin Greenslade 2016 TPR – max 39% TPR – actual 13.5% Total Property Return Revenue Profit KPIs Individual Individual – max 20% Individual – actual 17% TPR – max 39% TPR – actual 13.5% Chart 39 Total Property Return Revenue Profit KPIs Individual Total (£000) 760 Total (£000) 494 KPIs – max 52% KPIs – actual 31% Rev Profit – max 39% Rev Profit – actual 39% KPIs – max 52% KPIs – actual 31% Rev Profit – max 39% Rev Profit – actual 39% 78 Landsec Annual Report 2017 Long Term Incentive Plan outturns Robert Noel 2017 Total Shareholder Return – max 50% Total Shareholder Return – actual 0% Chart 40 Martin Greenslade 2017 Total Property Return – max 50% Total Property Return – actual 50% Total Shareholder Return – max 50% Total Shareholder Return – actual 0% Total Shareholder Return Total Property Return * Estimated Total (£000) 1,062* Total (£000) 719* Robert Noel 2016 Total Shareholder Return – max 50% Total Shareholder Return – actual 0% Chart 42 Martin Greenslade 2016 Total Property Return – max 50% Total Property Return – actual 13% Total Shareholder Return – max 50% Total Shareholder Return – actual 0% Total Shareholder Return Total Property Return Total (£000) 285 Total (£000) 193 Chart 41 Total Property Return – max 50% Total Property Return – actual 50% Total Shareholder Return Total Property Return * Estimated G o v e r n a n c e Chart 43 Total Property Return – max 50% Total Property Return – actual 13% Total Shareholder Return Total Property Return Summary of Remuneration outturns versus target and actual Robert Noel (£000) Chart 44 Martin Greenslade (£000) Chart 45 £4,260 £2,622 £2,721 £5,000 £4,000 £3,000 £2,000 £1,000 0 £982 £5,000 £4,000 £3,000 £2,000 £1,000 0 £2,831 £1,738 £1,794 £644 Fixed pay On-target Maximum Actual1 Fixed pay On-target Maximum Actual1 Base salary (28.4%) Pension (7.1%) Benefits (0.8%) Annual bonus (24.5%) Long-term incentives (39.2%) Base salary (27.9%) Pension (6.9%) Benefits (1.1%) Annual bonus (24.1%) Long-term incentives (40%) 1. Percentages are of the actual. 1. Percentages are of the actual. Landsec Annual Report 2017 79 Annual Report on Remuneration — Reviewing and determining the outturns against the performance conditions, and subsequent vesting outcome, of awards granted under the Long-Term Incentive Plan (LTIP) and Matching Share Plan (MSP) in 2013 — Determining the annual level of LTIP and/or MSP grants to Executive Directors, Executive Committee members and senior management — Monitoring Directors’ compliance with the Company’s share ownership guidelines — Monitoring developments in stakeholder sentiment on executive pay and corporate governance more generally, including participating in consultation exercises where appropriate. Unless otherwise stated, narrative and tables are unaudited. The Annual Report on Remuneration describes how the Directors’ Remuneration Policy (“The Policy”), approved by shareholders at the Annual General Meeting in July 2015, has been applied in the financial year ended 31 March 2017, and how it will be applied in the financial year commenced 1 April 2017. During the course of 2016/17, the Remuneration Committee was engaged in a number of key matters, including: — Determining salary increases for the Executive Directors and Executive Committee members, together with the overall level of salary increases for employees across the Group — Setting and subsequently reviewing the outcomes for corporate, business unit and personal targets under the annual bonus scheme for Executive Directors and Executive Committee members Dates of appointment for Directors Table 46 Name Executive Directors Robert Noel Martin Greenslade Non-executive Directors Dame Alison Carnwath Kevin O’Byrne Chris Bartram Simon Palley Stacey Rauch Edward Bonham Carter Cressida Hogg Nicholas Cadbury Date of appointment Date of contract 1 January 2010 23 January 2012 1 September 2005 9 May 2013 1 September 2004 1 April 2008 1 August 2009 1 August 2010 1 January 2012 1 January 2014 1 January 2014 13 May 2015 13 May 2015 13 May 2015 13 May 2015 13 May 2015 13 May 2015 13 May 2015 1 January 2017 1 January 2017 1. Remuneration outcomes for Directors during the year In this section, we explain the pay outcomes for Directors in relation to the financial year ended 31 March 2017. Table 47 shows the payments we expect to make and then tables 49 and 50 give more detail on how we have measured the performance outcomes with respect to the annual bonus and LTIP in the context of value created for shareholders. 1.1 Directors’ emoluments (Audited) The basis of disclosure in the table below is on an ‘accruals’ basis. This means that the annual bonus column includes the amount that will be paid in June 2017 in connection with performance achieved in the financial year ended 31 March 2017. It should be noted that the annual bonus figure has been estimated for the purposes of the table, as final data on the Company’s Total Property Return versus the peer group using the benchmark (i.e. all March-valued properties) will not be available until after the date of this report’s publication. The estimate has been derived from the most up- to-date performance information available, and any payment made will be based on the final performance data when received and verified. The values shown for the 2014 LTIP awards vesting for the three year performance period ended 31 March 2017 are based on estimated achievements against the performance measures and calculated using the average share price for the quarter then ended. The actual share price is not known at the time of writing as the awards do not formally vest until July 2017. Single total figure of remuneration for each Director (£000) (Audited) Table 47 Basic salary1 Benefits2 Pension allowance3 Annual bonus paid in cash Annual bonus deferred into shares4 Total emoluments Long-term incentives vested5 Total 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 Executive Directors Robert Noel Martin Greenslade 769 500 754 491 21 19 23 20 192 125 189 123 384 250 377 245 293 181 383 1,659 1,726 1,062 285 2,721 2,011 249 1,075 1,128 719 193 1,794 1,321 1. Basic salary is stated as a per annum figure based on current annual salary at the end of 2016/17. Actual salaries paid in the year were £766,156 (Robert Noel) and £498,724 (Martin Greenslade). 2. Benefits consist of a car allowance, private medical insurance, income protection and life assurance premiums. 3. The pension allowance shown is a cash emolument of 25% of base salary. 4. The annual bonus for 2015/16 was estimated in last year’s report and therefore the amounts for the bonus deferred into shares have been adjusted to reflect actual values. The impact of the adjustment was a reduction of £3,527 for Robert Noel and a reduction of £2,296 for Martin Greenslade. 5. The long-term incentives for 2016/17 have been calculated using a share price of £10.35 (which is the three-month average to 31 March 2017). The long-term incentives vesting in 2015/16 were estimated in last year’s report, so have been adjusted to reflect actual values. The impact of the adjustment was a reduction of £31,076 for Robert Noel and a reduction of £21,021 for Martin Greenslade. 80 Landsec Annual Report 2017 Single total figure of remuneration for each Director (£000) (Audited) Table 48 Fees Benefits Pension allowance Annual bonus paid in cash Annual bonus deferred into shares Total emoluments Long-term incentives vested Total 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 Non-executive Directors Dame Alison Carnwath 375 350 Kevin O’Byrne Chris Bartram Simon Palley Stacey Rauch Edward Bonham Carter Cressida Hogg Nicholas Cadbury 92.8 70 85 70 76.8 70 17.4 95 67.5 80 67.5 67.5 67.5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 375 350 92.8 70 85 70 76.8 70 95 67.5 80 67.5 67.5 67.5 – 17.4 – – – – – – – – – – – – – – – – – 375 350 92.8 70 85 70 76.8 70 17.4 95 67.5 80 67.5 67.5 67.5 – 1.2 Annual bonus outturn In the year under review, each Executive Director had the potential to receive a maximum annual bonus of up to 150% of base salary. Of this, 130% was dependent on meeting Group targets and 20% dependent on meeting personal targets. All targets were set at the beginning of the year. The following table confirms the targets and their respective outcomes. The on-target bonus expectation is 75% of salary. G o v e r n a n c e Annual bonus outturn Target Total Property Return – The Group’s ungeared Total Property Return (TPR) relative to an IPD benchmark comprising all March-valued properties (excluding Landsec). Total benchmark value c. £170bn. Percentage of base salary (maximum) Assessment 39.0 — The Group’s Total Property Return1 for the year was 3.9%, an under- performance of 0.7% versus the estimated IPD benchmark — Therefore, none of this element is likely to pay out. Table 49 Percentage of base salary awarded 0.0 Share in long-term real growth in Group revenue profit. 39.0 — Revenue profit for the year (£382m) significantly exceeded the threshold 39.0 level set in 2015 — This element therefore paid out in full. Key business targets Development lettings – specific targets were set for both the London and Retail portfolios, with a focus on the London developments and Westgate Oxford (opening in 2017) and the extension of White Rose, Leeds. Net effective, rather than headline, rents were used as the key measure of performance. Residential sales – specific targets were set for the Victoria residential developments. Project budgets – specific aggregate and individual budget targets were set for projects in both London and Retail (Nova, New Street Square, 20 Eastbourne Terrace and White Rose). Customers – recognising the importance of creating a truly customer-focused culture, specific targets were set around the rollout of internal and external customer excellence programmes. An improvement to (already high) customer satisfaction scores was also sought. People – ensuring that the office move to Victoria was maximised as an opportunity to embed the purpose, vision and values and create a step change in a more collaborative and innovative culture, to be measured through movement in “before” and “after” employee surveys versus a recognised external benchmark. 18.2 — The outturn is calculated on the basis of a threshold of £23.4m, and a 12.1 maximum of £34.0m — Both the Retail lettings targets, at Oxford and Leeds, were exceeded, while London lettings achieved threshold levels. £28m was achieved in total. — This element of the bonus therefore paid out at 66.4% of the maximum. 4.2 — The outturn is calculated on the basis of a threshold of £65m. 0.0 Achievement is calculated on a straight-line basis from threshold to the maximum of £102m — The Group secured relevant sales of £51m, which was below threshold — This element of the bonus therefore was not paid. 6.2 — Although three out of four of the named developments were completed 0.0 to target budgets, one (Nova) was not — This element of the bonus therefore was not paid. 7.8 — The proposed rollout of the internal customer excellence programme was delayed to coincide with the launch of the new Landsec brand in June — However, a programme of external customer engagement activities has been delivered, and customer satisfaction scores in London and Retail were maintained — This element of the bonus therefore paid out at 66.6% of the maximum. 5.2 — The relevant survey scores improved by 35% — This element of the bonus therefore paid out in full. 5.2 5.2 1. The outturn is adjusted to take account of the performance of trading properties and the capital and income extracted from Queen Anne’s Gate, SW1, through a bond issue in 2009. Landsec Annual Report 2017 81 Annual bonus outturn continued Target Sustainability – clear progress in delivery of the agenda, via the rollout of internal training programmes, and the commencement of measurable energy reduction initiatives in the most energy-intensive sites. Percentage of base salary (maximum) Assessment 5.2 — In order to achieve maximum payout, three levels of sustainability training, including a core mandatory module completed by at least 95% of employees, needed to be delivered. In addition, quantifiable energy reduction initiatives should be identified for implementation in two thirds of our most energy-intensive sites — The target on training was achieved in full, and energy reduction initiatives were identified in 88% of energy-intensive sites — This element of the bonus therefore paid out in full. Percentage of base salary awarded 5.2 Community Employment Programme – a target was set to secure permanent employment for 170 (target) and 188 (maximum) candidates on the Community Employment Programme. 5.2 — Employment was secured for 186 candidates on the programme across 4.4 the Group — This element of the bonus therefore paid out at 85% of maximum. Executive Directors’ personal targets Each Executive Director received a number of personal targets, which included: — Creating and embedding a new public affairs agenda — Creating and activating a new corporate brand — Ensuring that Landsec’s culture is further developed through a successful office move — Positive feedback from the annual shareholder survey — Continued focus on talent, development and succession — Review of the funding strategy in preparation for increased investment activity. Total 130.0 Total Group elements 20.0 Each Executive Director was scored against objectively measurable targets set at the beginning of the year. The outturn was as follows: — Robert Noel — Martin Greenslade 150.0 Robert Noel Martin Greenslade 71.1 17.0 15.0 88.1 86.1 1.3 Long-Term Incentive Plan and Matching Share Plan outturns The table below summarises how we have assessed our LTIP performance achievement over the three years to 31 March 2017. Awards granted in 2014 under the LTIP for this period are subject to performance conditions that measure and compare the Group’s relative performance against its peers in terms of Total Property Return (TPR) and Total Shareholder Return (TSR), with each measure representing 50% of the total award. Please see table 61 for more detail on how vesting levels are determined. The performance calculation for awards granted in 2014 and vesting in 2017 are illustrated below: Long-Term Incentive Plan and Matching Share Plan outturns Target Ungeared Total Property Return Total Shareholder Return Percentage of base salary (maximum 75 + 75 (maximum shares pledged) 75 + 75 (maximum shares pledged) Assessment The Group’s Total Property Return1 over the three year period was 12.7% per annum compared with the performance of the sector-weighted IPD Quarterly Universe of 11.5% per annum. Therefore, this element vests in full. The Group’s Total Shareholder Return over the three year period was 9.2% versus that of the comparator group at 16.2%. As this return was below the benchmark, this element of the total award does not vest. 0.0 1. The outturn is adjusted to take account of the performance of trading properties and the capital and income extracted from Queen Anne’s Gate, SW1, through a bond issued in 2009. In total, therefore, 50% of the awards made in 2014 will vest in July 2017. For awards granted in 2015, the Group’s performance over the two years to 31 March 2017 would, if sustained over the three year period to 31 March 2018, result in 0% of the LTIP share awards vesting. For awards granted in 2016, performance over the one year period to 31 March 2017 would, if sustained over the second and third years of the period to 31 March 2019, result in 22.4% of the LTIP share awards vesting. 82 Landsec Annual Report 2017 Table 50 Outturn Percentage of maximum 50.0 Total Shareholder Return – comparator groups Name Assura PLC Big Yellow Group PLC Capital & Counties Properties PLC CLS Holdings PLC Daejan Holdings PLC Derwent London PLC F&C Commercial Property Trust Ltd Grainger PLC Great Portland Estates PLC Hammerson PLC Hansteen Holdings PLC Intu Properties PLC Kennedy Wilson Europe PLC Londonmetric Property PLC NewRiver REIT PLC Redefine International REIT PLC Safestore Holdings PLC Segro PLC Shaftesbury PLC St Modwen Properties PLC The British Land Company PLC Tritax Big Box REIT PLC UK Commercial Property Trust UNITE Group PLC Workspace Group PLC 1. As proposed to apply for awards to be made this year under the LTIP. 1.4 Individual outcomes by Executive Director versus Target and Maximum Robert Noel (£000) Chief Executive Chart 52 £4,260 Element of pay Base salary £2,622 £2,721 Pension £5,000 £4,000 £3,000 £2,000 £1,000 0 £982 Benefits Annual bonus1 — Company Performance element — Individual element Long-term incentives2 Total 2014 2015 2016 20171 Table 51 Year of award G o v e r n a n c e Maximum potential (£000) Percentage of maximum achieved (%) 769 192 21 999 154 2,125 4,260 n/a n/a n/a 54.7 85.0 50.0 Table 53 Outturn (£000) 769 192 21 546 131 1,062 2,721 Fixed pay On-target Maximum Actual1 Base salary (28.4%) Pension (7.1%) Benefits (0.8%) Annual bonus (24.5%) Long-term incentives (39.2%) Martin Greenslade (£000) Chief Financial Officer Chart 54 £5,000 £4,000 £3,000 £2,000 £1,000 0 £644 £2,831 £1,738 £1,794 Fixed pay On-target Maximum Actual1 Base salary (27.9%) Pension (6.9%) Benefits (1.1%) Annual bonus (24.1%) Long-term incentives (40%) 1. Percentages are of the actual. 1. £292,939 of the annual bonus will be deferred into shares for one year. 2. Value of shares vesting in 2017 calculated on basis of the £10.35 average share price for the three month period to 31 March 2017. Element of pay Base salary Pension Benefits Annual bonus1 — Company Performance element — Individual element Long-term incentives2 Total (Unaudited) Table 55 Maximum potential (£000) Percentage of maximum achieved (%) 500 125 19 650 100 1,437 2,831 n/a n/a n/a 54.7 75.0 50.0 Outturn (£000) 500 125 19 356 75 719 1,794 1. £180,680 of the annual bonus will be deferred into shares for one year. 2. Value of shares vesting in 2017 calculated on basis of the £10.35 average share price for the three month period to 31 March 2017. Landsec Annual Report 2017 83 2. Directors’ interests (Audited) 2.1 Total shareholding Details of the Directors’ interests, including those of their immediate families and connected persons, in the issued share capital of the Company at the beginning and end of the year are set out in the table below. It also shows the value of each Director’s interest compared to the required holding value under the Company’s share ownership guidelines. Directors’ shares Name Robert Noel2 Martin Greenslade3 Dame Alison Carnwath4 Kevin O’Byrne4 Chris Bartram4 Simon Palley4 Stacey Rauch4 Edward Bonham Carter4 Cressida Hogg4 Nicholas Cadbury4 Salary/Fee (£) 766,156 498,724 375,000 92,807 70,000 85,000 70,000 76,756 70,000 70,000 Required holding value (£) 1,915,390 997,448 375,000 92,807 70,000 85,000 70,000 76,756 70,000 70,000 Holding (ordinary shares) 1 April 2016 260,508 386,223 147,005 11,552 14,478 17,061 8,000 10,000 10,000 – (Audited)Table 56 Holding (ordinary shares) 31 March 2017 Deferred bonus shares under holding period 61,939 40,927 293,849 386,233 151,338 11,552 14,478 17,061 8,000 10,000 10,000 1,900 Value of holding (£)1 3,111,861 4,090,207 1,602,669 122,336 153,322 180,676 84,720 105,900 105,900 20,121 1. Using the closing share price of £10.59 on 31 March 2017. 2. Requirement for the Chief Executive to own shares with a value of 2.5x base salary within five years of appointment. 3. Requirement for other Executive Directors to own shares with a value of 2.0x base salary within five years of appointment. 4. Requirement for Non-executive Directors to own shares with a value of 1.0x their annual fee within three years of appointment. 2.2 Outstanding share awards held by Executive Directors (Audited) The table below shows the LTIP share awards granted and the LTIP and MSP awards vested during the year to the Executive Directors, together with the outstanding and unvested LTIP and MSP share awards at the year end. From 2015, MSP awards for Executive Directors have been discontinued. Outstanding LTIP and MSP share awards and those which vested during the year (Audited)Table 57 Robert Noel LTIP shares Matching shares Martin Greenslade LTIP shares Matching shares Performance period to 31 March Award date 2016 08/07/2013 2017 01/07/2014 2018 10/08/2015 2019 27/06/2016 2016 08/07/2013 2017 01/07/2014 2016 08/07/2013 2017 01/07/2014 2018 10/08/2015 2019 27/06/2016 2016 08/07/2013 2017 01/07/2014 Market price at award date (p) 921 1,039 1,335 1,005 921 1,039 921 1,039 1,335 1,005 921 1,039 Shares awarded 112,964 102,638 170,240 229,453 112,964 102,638 76,416 69,431 110,816 149,361 76,416 69,431 Shares vested 14,798 Market price at date of vesting (p) Vesting date 962 08/07/2016 01/07/2017 10/08/2018 27/06/2019 14,798 962 08/07/2016 01/07/2017 10,010 962 08/07/2016 01/07/2017 10/08/2018 27/06/2019 10,010 962 08/07/2016 01/07/2017 84 Landsec Annual Report 2017 2.3 Directors’ options over ordinary shares (Audited) The options over shares set out below for Martin Greenslade relate to the Company’s Savings Related Share Option Scheme. The Scheme is open to all qualifying employees (including Executive Directors) and under HMRC rules does not include performance conditions. Exercised/(lapsed) during year Number of options granted in year to 31 March 2017 Exercise price per share (p) Number exercised – – – – – – Market price at exercise (£) – – Number of options at 1 April 1,060 878 1,938 Exercise price per share (p) 848.5 1,024.0 Number of options at 31 March 2017 Exercisable dates 1,060 08/2017 – 02/2018 878 08/2018 – 02/2019 1,938 (Audited)Table 58 Martin Greenslade 3. Application of Policy for 2016/17 3.1 Executive Directors’ base salaries Having conducted a detailed benchmarking exercise of both the Chief Executive Officer and Chief Financial Officer roles in 2015, the Committee concluded that no formal exercise was necessary this year, in line with emerging best practice. It has therefore awarded both Executive Directors a base salary increase of 2%. This is in line with the average increase received by employees across the Group, excluding promotions and exceptional increases. G o v e r n a n c e Accordingly, the following salary increases will take effect from 1 June 2017: Executive Directors Robert Noel Martin Greenslade Table 59 Current (£000) From 1 June 2017 (£000) 769 500 784 510 % increase 2.0 2.0 Average % increase over five years (including 2017/18) 3.1 2.2 3.2 Non-executive Directors’ fees The fees for Non-executive Directors were reviewed In December 2015 following a market benchmarking exercise, and took effect from 1 April 2016. They have remained unchanged for 2016/17. When Nicholas Cadbury was appointed to the Board on 1 January 2017, he received the published base fee of £70,000 per annum. Non-executive Director’s fees Chairman Non-executive Director Audit Committee Chairman Remuneration Committee Chairman Senior Independent Director Table 60 (£000) 375.0 70.0 20.0 15.0 10.0 Landsec Annual Report 2017 85 3.3 Performance targets for the coming year Table 61 Metric Link to strategy and value for shareholders Performance measure Performance range — Rewards our outperformance of the returns generated by our listed company peers — Encourages efficient use of capital through good sector allocation and appropriate gearing — Based on a market capitalisation of £8.4bn, a 3% per annum outperformance over three years would generate approximately £0.8bn of value for shareholders over and above that which would have been received had we performed in line with our comparator group of property companies within the FTSE 350 Real Estate Index. — Rewards sustained outperformance by our portfolio compared with the industry’s commercial property benchmark — Incentivises increasing capital values and rental income — Capital value growth is reflected in an increased net asset value, which is the measure with the strongest correlation to share price — On the basis of a portfolio with a value of £14.4bn, 1% per annum outperformance over three years generates approximately £0.4bn of value over and above that which would have been received had the portfolio performed in line with the benchmark. — Rewards annual outperformance by our portfolio compared with the industry’s commercial property benchmark — Incentivises increasing capital values — Capital value growth is reflected in an increased net asset value, which is the measure with the strongest correlation to share price — On the basis of a portfolio with a value of £14.4bn, 2% outperformance would generate approximately £0.3bn of return over and above the returns of commercial property within our sectors. — Encourages above inflation growth in income profits, year-on-year, on the basis of a new three year plan set in 2015 — Adjustment for significant net investment/disinvestment gives a like-for-like view of performance — Encourages sustainable dividend growth and cover over the medium term. — Threshold: Matching the performance of the index — Target: Outperformance of the index by 1.3% per annum — Maximum: 3% or more per annum outperformance of the index for maximum vesting. — Threshold: Matching the performance of the benchmark — Target: Outperformance of the benchmark by 0.4% per annum — Maximum: Outperformance of the benchmark by 1% or more per annum. Measured over a period of three financial years: — The Group’s total shareholder return (TSR) relative to an index based on a comparator group comprising all of the property companies within the FTSE 350 Real Estate Index weighted by market capitalisation (excludes Landsec) — 10% of the overall award vests for matching the index, and 50% of the overall award for outperforming it by 3% per annum. Vesting is on a straight-line basis between the two. Measured over a period of three financial years: — The Group’s ungeared Total Property Return (TPR) relative to an IPD benchmark comprising all March- valued properties. Total benchmark value c. £170bn (excluding Landsec) — 10% of the overall award vests for matching the benchmark and 50% of the overall award vesting where we outperform the benchmark by 1% per annum. Vesting is on a straight-line basis between the two. — The Group’s ungeared Total Property — Threshold: Matching the Return (TPR) relative to an IPD benchmark comprising all March- valued properties. Total benchmark value c. £170bn (excluding Landsec) matching the benchmark and 26% of the overall award for outperforming the benchmark by 2%. Payment is on a straight-line basis between the two. performance of the benchmark — Target: Outperformance of the benchmark by 0.7% for the year — Maximum: Outperformance of the benchmark by 2% for the year for the maximum award. — Once the Group has met a — Will be confirmed in 2018 report. threshold level on revenue profit, a portion (5%) of the excess is contributed to the bonus pool for the Group. This will be capped at 26% of the overall award. and rental income — 6% of the overall award for Long-Term Incentive Plan (LTIP) — Total Shareholder Return (50.0% of overall award). — Ungeared Total Property Return (50.0% of overall award). Annual bonus — Ungeared Total Property Return (26.0% of award, or 39.0% of salary). — Absolute growth in revenue profit (26.0% of award, or 39.0% of salary). 86 Landsec Annual Report 2017 3.3 Performance targets for the coming year continued Metric Link to strategy and value for shareholders Performance measure Performance range Annual bonus – specific business targets — Completion and letting of Westgate Oxford (6.9% of award, or 10.4% of salary). — A high profile new opening and key driver of income and revenue profit in the future — Completion of leasing of the London Development Programme (6.9% of award, or 10.4% of salary). — Replacement and leasing of the Piccadilly Lights screens (3.5% of award, or 5.2% of salary). — Customer-centricity — (5.3% of award, or 7.8% of salary). — Proves the value of the development and drives capital growth. — Key driver of income, revenue profit and capital growth. — Specific threshold and stretch targets have been set for the Oxford development (leasing and project completion on time and on budget). — Specific leasing targets have been set for individual assets in London, with the broad objective of fully letting the new developments. — Will be confirmed in 2018 report. — Will be confirmed in 2018 report. — Ensures that momentum is — Specific threshold, target and — Will be confirmed in 2018 report. maintained behind the delivery of a key iconic project. outperformance objectives have been set aiming at replacing and fully letting all screens. — Ensures that the needs of customers, both current and future, are at the heart of our culture, ways of working and decision-making. — Completion of major internal programme to fully embed customer-centric behaviours — Internal activation of the — Significant improvement in both internal and consumer satisfaction scores is required for maximum payout. G o v e r n a n c e new brand — Measurement of the impact of the programme by an independent third party — Consumer satisfaction scores. — Diversity – achieving real progress on our stated 2020 targets (3.5% of award, or 5.2% of salary). — Allows us to attract and retain the diverse talent (in terms of gender, ethnicity and background) necessary to fully anticipate the changing needs of our customers. — Measurable progress, by the end of March 2018, towards our stated 2020 targets around gender balance, ethnicity and data transparency. — For maximum, two out of four targets achieved by 2018, with measurable progress towards the other two. — Innovation – extending our business capability and embedding the innovation value (2.7% of award, or 3.9% of salary). — Ensures that we remain sufficiently — Evidence will be sought to — Tangible examples of innovation future-facing in our strategic focus, ensuring the long-term sustainability of the business. demonstrate clear outputs from the innovation capability. will be required and will be stated in 2018 report. — Community Employment — A key way in which Landsec can — A target has been set around — Threshold: A further 156 candidates Programme (3.5% of award, or 5.2% of salary). deliver on its commitment to the communities in which it operates, and create a sustainable future by building a skilled workforce. securing permanent employment for an increased number of candidates by extending the programme beyond its current focus on Construction. into employment — Target: A further 174 candidates into employment — Maximum: A further 194 candidates into employment. — Environment – driving energy management initiatives across the portfolio (2.7% of award or 3.9% of salary). — Key to our long-term sustainability and reputation as a responsible business. — Individual targets for Executive — Ensures that each Executive Directors (13.0% of award, or 20.0% of salary). Director focuses on his individual contribution in the broadest sense, aligned with, but not limited to, specific business targets — Encourages a focus on personal development. — Clear targets have been set — Threshold: Commence around the implementation of energy reduction initiatives in a high proportion of our highest consuming sites. implementation in 40% of identified sites — Target: Commence implementation in 60% of identified sites — Maximum: Commence implementation in 80% of identified sites and identify further opportunities. — A mix of short-term individual goals set at the beginning of the year. — Will be confirmed in 2018 report. Landsec Annual Report 2017 87 4. Comparison of Chief Executive pay to Total Shareholder Return The following graph illustrates the performance of the Company measured by Total Shareholder Return (share price growth plus dividends paid) against a ‘broad equity market index’ over a period of eight years. As the Company is a constituent of the FTSE 350 Real Estate Index, this is considered to be the most appropriate benchmark for the purposes of the graph. An additional line to illustrate the Company’s performance compared with the FTSE 100 Index over the previous eight years is also included. Adjacent to this chart is a table showing how the ‘single figure’ of total remuneration for the Chief Executive has moved over the same period. It should be noted that Robert Noel became Chief Executive in March 2012. Total Shareholder Return (Unaudited) Chart 62 359.9 324.7 325.2 323.9 304.0 303.0 250.3 214.2 203.0 285.0 264.4 201.5 224.1 188.9 207.5 162.5 156.7 150.4 183.6 161.6 176.4 188.2 170.3 163.6 ) d e s a b e r ( ) £ ( e u a V l 400 350 300 250 200 150 100 50 0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Land Securities Group PLC FTSE 100 FTSE 350 Real Estate This graph shows the value to March 2017 of £100 invested in Land Securities Group PLC on 31 March 2009, compared with the value of £100 invested in the FTSE 100 and FTSE 350 Real Estate Indices on the same date. Source: Datastream (Thomson Reuters). Chief Executive remuneration over eight years Table 63 Year 2017 2016 2015 2014 2013 2012 2011 2010 Chief Executive Robert Noel Robert Noel Robert Noel Robert Noel Robert Noel Francis Salway Francis Salway Francis Salway Single figure of total remuneration (£000) Annual bonus award against maximum opportunity1 (%) Long-term incentive vesting against amount awarded (%) 2,721 2,014 4,776 2,274 2,678 2,769 1,798 1,694 58.8 67.5 94.5 71.0 86.0 24.0 39.0 34.0 50.0 13.1 84.7 62.5 76.1 85.9 27.5 50.0 1. Under the policy covering the years 2010–2012 shown in the table, bonus arrangements for Executive Directors comprised three elements: an annual bonus with a maximum potential of 100% of basic salary, a discretionary bonus with a maximum potential of 50% of basic salary and an additional bonus with a maximum potential of 200% of salary. The first two elements were subject to an overall aggregate cap of 130% of basic salary, with the overall amount of the three elements capped at 300% of basic salary. 2012: 73.4% of the maximum opportunity was awarded under annual bonus with no awards made under the discretionary bonus or additional bonus. 2011: 94.5% of the maximum opportunity was awarded under the annual bonus, discretionary bonus of 60% of the maximum opportunity with no awards made under the additional bonus. 2010: 77% of the maximum opportunity was awarded under the annual bonus, discretionary bonus of 50% of the maximum opportunity with no awards made under the additional bonus. 88 Landsec Annual Report 2017 5. The context of pay in Landsec 5.1 Pay across the Group a. Senior Management During the year under review, bonuses (including discretionary bonuses) for our 16 most senior employees (excluding the Executive Directors) ranged from 37.6% to 74.5% of salary (2016: 40.1% to 114.2%). The average bonus was 55.6% of salary (2016: 67.0%). The LTIP and MSP awards made to Senior Management vested on the same basis as the awards made to Executive Directors. b. All other employees The average pay increase for all employees, including the Executive Directors, was 2.0%. Including salary adjustments and promotions for employees below the Board, this rose to 2.4%. The ratio of the salary of the Chief Executive to the average salary across the Group (excluding Directors) was 13:1 (£768,668:£58,683). % change Chief Executive Average employee Salary % +2.0 +2.4 Benefits No change No change 5.2 The relative importance of spend on pay The chart below shows the total spend on pay for all Landsec employees, compared with our returns to shareholders in the form of dividends: Metric Spend on pay1 Dividend paid2 1. Including base salaries for all employees, bonus and share-based payments. 2. See note 11 to the financial statements. March 2017 (£m) March 2016 (£m) 50 289 55 255 G o v e r n a n c e Table 64 Bonus % (10.9) (5.7) Table 65 % change (9.1) 13.3 6. Dilution Awards granted under the Company’s long-term incentive arrangements, which cover those made under the LTIP, MSP, Deferred Share Bonus Plan and the Executive Share Option Plan are satisfied through the funding of an Employee Benefit Trust (administered by an external trustee) which acquires existing Land Securities Group PLC shares in the market. The Employee Benefit Trust held 792,556 shares at 31 March 2017. The exercise of share options under the Savings Related Share Option Scheme, which is open to all employees who have completed more than one month’s service with the Group, can be satisfied by the allotment of newly issued shares. At 31 March 2017, the total number of shares which could be allotted under this Scheme was 354,783 shares, which represents significantly less than 1% of the issued share capital of the Company. 7. Remuneration Committee meetings The Committee met four times over the course of the year, and all of the members attended all meetings. Simon Palley chaired the Committee, and the other members during the year were Dame Alison Carnwath, Edward Bonham Carter and Cressida Hogg. The Committee meetings were also attended by the Chief Executive, the Group Human Resources Director, and the Group General Counsel and Company Secretary who acted as the Committee’s Secretary. Over the course of the year, the Committee received advice on remuneration and ancillary legal matters from Aon Hewitt. It has also made use of various published surveys to help determine appropriate remuneration levels and relied on information and advice provided by the Group General Counsel and Company Secretary and the Group Human Resources Director. Aon Hewitt has voluntarily signed up to the Remuneration Consultants Group Code of Conduct. The Committee is satisfied that the advice it receives is independent and objective. Aside from some support in benchmarking roles below the Board for pay review purposes, Aon Hewitt has no other connection with the Group. For the financial year under review, it received fees of £76,290 in connection with its work for the Committee. 8. Results of the voting on the Directors’ Remuneration Report at the AGM in 2016 The votes cast on the resolutions seeking approval in respect of the Directors’ Remuneration Report at the Company’s 2016 AGM were as follows: Resolution To approve the Annual Report on Remuneration for the year ended 31 March 2017 1. A vote withheld is not a vote at law. Table 66 % of votes For 99.37 % of votes Against Number of votes withheld¹ 0.63 133,717 The Directors’ Remuneration Report was approved by the Board on 17 May 2017 and signed on its behalf by: Simon Palley Chairman of Remuneration Committee Landsec Annual Report 2017 89 Summary of Directors’ Remuneration Policy 1. Approach to Policy As stated in last year’s report, some revisions were made to the Company’s long-term incentive arrangements in 2015. The Directors’ Remuneration Policy (Policy) for Executive and Non-executive Directors was then put to a binding shareholder vote at the Annual General Meeting (AGM) on 23 July 2015, and received a 98.8% vote in favour. It therefore took formal effect from that date, replacing the previous policy approved by shareholders at the 2014 2. Application of the Policy in 2017/18 AGM, and intended to remain in place for three years. The Policy set out in the Additional Information section of this Report therefore remains in force until 2018, when any proposed revisions will be discussed with shareholders, and their views sought, well in advance of the AGM. A summary statement on the planned application of the Policy in 2017 is shown in table 67 below. The Remuneration Committee’s primary objective when setting the Policy is to provide competitive pay arrangements which promote the long-term success of the Company. To achieve this, the Committee takes account of the responsibilities, experience, performance and contribution of the individual, as well as levels of remuneration for individuals in comparable roles elsewhere. The Committee also takes into account the views expressed by shareholders and institutional investors’ best practice expectations, and monitors developments in remuneration trends. The Policy places significant emphasis on the need to achieve stretching and rigorously applied performance targets, with a significant proportion of remuneration weighted towards performance- linked variable pay. The Committee operates within the Policy at all times. It also operates the various incentive plans and schemes according to their respective rules and consistent with normal market practice, the UK Corporate Governance Code and, as applicable, the Listing Rules. Within the Policy, the Committee will retain the discretion to look at performance “in the round”, including withholding or deferring payments in certain circumstances where the outcomes for Directors are clearly misaligned with the outcomes for shareholders. Any specific circumstances which necessitate the use of discretion will always be explained clearly in the following year’s Annual Report on Remuneration. No such discretion was exercised by the Committee during the year under review. The table on pages 175-179 provides more detail on the discretion reserved to the Committee for each element of the remuneration package. Policy element Base salary Details on p175 Benefits Details on p175 Pension Details on p175 Annual bonus Details on p176 Long-Term Incentive Plan awards (and Matching Share Plan awards for 2017 vesting) Details on p177 Savings Related Share Option Scheme Details on p177 Share Ownership Guidelines Details on p177 Executive Director Recruitment and Termination Provisions Details on p179 Service Agreements and Letters of Appointment Details on p179 Non-executive Directors’ fees Details on p178 90 Landsec Annual Report 2017 Application in 2017/18 Table 67 The increase in current salaries for the Executive Directors will be 2%, in line with the increase to overall employee pay across the Group in 2017. Therefore, the new annual gross salaries will be £784,041 for Robert Noel and £510,367 for Martin Greenslade. These will be effective from 1 June 2017. No changes to the current benefit arrangements (which mainly covers annual holiday entitlement, car allowance, life assurance, private medical cover and income protection insurance) are proposed during the year. The 25% of base salary (gross) payment to each Executive Director by way of annual pension contribution will continue. The maximum bonus potential for the Executive Directors will remain at 150% of salary. No changes are proposed to the weighting of the elements of the plan which remain at: — 26% based on the Company’s Total Property Return performance versus that of the market — 26% based on the Company’s Revenue Profit performance — 35% based on delivery of specific business objectives for the year — 13% based on the delivery of individual targets. The value of this year’s Long-Term Incentive Plan (LTIP) award to the Executive Directors will not exceed the current individual limit of 300% of salary. Outstanding LTIP and Matching Share Plan awards granted in 2014 will vest later in 2017 subject to the performance conditions set at the time and the plan rules under which they were granted. In September 2016, in common with many other companies and primarily to give the participants greater flexibility over the timing of exercise, the Committee approved the granting of LTIP awards, from 2017 onwards, as nil-cost share options with a seven year exercise period. It also agreed that outstanding awards should also vest as nil-cost options, and that dividends could be accrued on vested options where they are subject to a two year holding period, but not thereafter. The Executive Directors, and all other eligible employees, will be entitled to participate in the Company’s Savings Related Share Option Scheme (which is operated in line with current UK HMRC guidelines). The existing share ownership levels (i.e. 250% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer) will continue to apply. External recruitment and termination activity during the year is currently not envisaged; however should this occur, the Policy will apply as stated. If new Service Agreements, or variations to existing ones, are required over the course of the year, the Policy will apply as stated. Any new Non-executive Director joining the Board will be contracted under a Letter of Appointment as per the Policy. As the fees for Non-executive Directors were reviewed in late 2015, no further revisions will take place over the course of the year. The annual fee for Dame Alison Carnwath as Chairman remains at £375,000 and the annual base fee for all other Non-executive Directors remains at £70,000. These have been in effect since 1 April 2016. Additional fees also apply for Committee chairmen, and these remain unchanged. 3. Fixed and variable pay reward scenarios Total opportunity at maximum and target levels The charts that follow illustrate the remuneration opportunity provided to each Executive Director at different levels of performance for the coming year. Fixed and variable pay reward scenarios (£000) Chart 68 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 £4,529 £2,765 £2,952 £1,001 £1,805 £657 G o v e r n a n c e Fixed pay On-target Maximum Fixed pay On-target Maximum Chief Executive Chief Financial Officer Fixed pay Annual bonus Long-term incentives Fixed pay 22%; Annual bonus 26%; Long-term incentives 52% (Percentages are of the maximum). Maximum value does not include share price movement between the date of grant and any vesting of long-term incentives. In developing the above scenarios, the following assumptions have been made: Fixed and variable pay reward scenarios Fixed pay — Consists of the latest base salary, benefits and pension allowances — Pension allowance calculated at 25% of new base salary Robert Noel, Chief Executive Martin Greenslade, Chief Financial Officer On-target award Based on what a Director would receive if performance was in line with expectations: — Annual bonus pays out at 50% of the maximum — LTIP is assumed to vest at 50% of the total award. Maximum award — Annual bonus pays out in full — LTIP vests in full. Table 69 Base (£000) 784 510 Benefits (£000) 21 19 Pension (£000) 196 128 Total fixed (£000) 1,001 657 4. Payment schedule The following table illustrates in which financial years the various payments in the charts are actually made/released to Executive Directors. For illustration purposes only, the table assumes that the annual bonus payment is equivalent to at least 100% of salary. Payment schedule Table 70 Financial year Base year Base year +1 Base year +2 Base year +3 Base year +5 — Element of remuneration received. — Base salary — Benefits — Pension. — The annual bonus targets are measured and the first portion of the annual bonus (i.e. up to 50% of salary) is paid in cash — The remainder is deferred into nil-cost options. — The first deferred portion of the annual bonus (i.e. between 50% and 100% of salary) vests. — The final portion of the annual bonus (i.e. awards in excess of 100% of salary) vests — Holding period on LTIP awards ends. — LTIP awards vest but remain subject to a two year holding period. Annual bonus (cash and deferred shares) and vested and unvested LTIP awards are subject to withholding and recovery provisions. Landsec Annual Report 2017 91 Directors’ Report The Directors present their report and audited accounts for the year ended 31 March 2017. Additional disclosures Other information that is relevant to this report, and which is also incorporated by reference, including information required in accordance with the UK Companies Act 2006 and Listing Rule 9.8.4R, can be located as follows: Likely future developments in the business Employee engagement Going Concern and Viability Statement Governance Capitalised interest Financial instruments Table 71 Pages 16-17 Page 40 Page 54 Pages 55-94 Page 116 Page 138 Credit, market and liquidity risks Pages 139-142 Related party transactions Greenhouse gas emissions Page 153 Page 166 Company status Land Securities Group PLC is a public limited liability company incorporated under the laws of England and Wales. It has a premium listing on the London Stock Exchange main market for listed securities (LON:LAND) and is a constituent member of the FTSE 100 Index. The Company is a Real Estate Investment Trust (REIT). It is expected that the Company, which has no branches, will continue to operate as the holding company of the Group. Disclaimer The purpose of this Annual Report is to provide information to the members of the Company and it has been prepared for, and only for, the members of the Company as a body, and no other persons. The Company, its Directors and employees, agents and advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. A cautionary statement in respect of forward-looking statements contained in this Annual Report appears on the inside back cover of this document. Results and dividends The results for the year are set out in the financial statements on pages 103-154. The Company has paid three quarterly interim dividends to shareholders for the year under review, each of 8.95p per ordinary share. These comprised two payments (totalling 17.90p) as a Property Income Distribution (PID) and one payment (8.95p) as a normal dividend (i.e. non-PID). The Board has recommended a final dividend for the year of 11.7p per ordinary share, payable wholly as a PID (net of withholding tax, where appropriate), making a total dividend for the year of 38.55p per share, representing an increase of 10.1% compared with the prior year. Subject to shareholders’ approval, the final dividend will be paid on 27 July 2017 to shareholders on the register at the close of business on 23 June 2017. The Board has also declared a first quarterly dividend in respect of the 2017/18 financial year of 9.85p per ordinary share, payable wholly as a PID (net of withholding tax, where appropriate), to be paid on 6 October 2017 to shareholders on the register at the close of business on 8 September 2017. A Dividend Reinvestment Plan (DRIP) election is currently available in respect of all dividends paid by the Company. Events since the balance sheet date Since 31 March 2017, the Group has redeemed the £273m Queen Anne’s Gate bond in its entirety at a premium of £63m. The redemption was financed through existing Group facilities. On 13 April 2017, the Group’s joint arrangement, the Metro Shopping Fund Limited Partnership (Metro), completed the sale of ShopStop (Clapham Junction) LLP to DV4 (a fund owned by Delancey Real Estate Asset Management Limited (Delancey)). On the same date, Delancey sold its stake in Metro to Invesco Real Estate European Fund. The partnership was subsequently renamed The Southside Limited Partnership and the £85m third-party debt in the fund was repaid in full. On 15 May 2017, the Group acquired three retail outlet centres from Britel Fund Trustees Limited (as trustee of the BT Pension Scheme). The three assets, Freeport, Braintree, Clarks Village, Street and Junction 32, were acquired for a total consideration of £333m. Directors The names and biographical details of the current Directors (all of whom held office throughout the year except for Nicholas Cadbury – see below), and the Board Committees of which they are members, are set out on pages 58 and 59. Kevin O’Byrne ceased to act as the Company’s Senior Independent Director following the Company’s Annual General Meeting (AGM) on 21 July 2016. Edward Bonham Carter was appointed to that position as his immediate successor. Nicholas Cadbury was appointed an independent Non-executive Director of the Board on 1 January 2017 and joined the Audit Committee with effect from that same date. He will become Chairman of the Audit Committee in succession to Kevin O’Byrne who is expected to step down from the Board at some point during 2017. The Service Agreements of the Executive Directors and the Letters of Appointment of the Non-executive Directors are available for inspection at the Company’s registered office. Brief details of these are also included in the Directors’ Remuneration Report on pages 76-91. Appointment and removal of Directors The appointment and replacement of Directors is governed by the Company’s Articles of Association (Articles), the UK Corporate Governance Code (Code), the Companies Act 2006 (Act) and related legislation. The Board may appoint a Director either to fill a casual vacancy or as an addition to the Board so long as the total number of Directors does not exceed the limit prescribed in the Articles. An appointed Director must retire and seek election to office at the next AGM of the Company. In addition to any power of removal conferred by the Act, the Company may by ordinary resolution remove any Director before the expiry of their period of office and may, subject to the Articles, by ordinary resolution appoint another person who is willing to act as a Director in their place. In line with the Code and the Board’s policy, all Directors are required to stand for re-election at each AGM. Directors’ powers The Board manages the business of the Company under the powers set out in the Articles. These powers include the Directors’ ability to issue or buy back shares. Shareholders’ authority to empower the Directors to make market purchases of up to 10% of its own ordinary shares is sought at the AGM each year (see below). The Articles can only be amended, or new Articles adopted, by a resolution passed by shareholders in general meeting by at least three quarters of the votes cast. Directors’ interests Save as disclosed in the Directors’ Remuneration Report, none of the Directors, nor any person connected with them, has any interest in the share or loan capital of the Company or any of its subsidiaries. At no time during the year ended 31 March 2017 did any Director hold a material interest, directly or indirectly, in any contract of significance with the Company or any subsidiary undertaking other than the Executive Directors in relation to their Service Agreements. 92 Landsec Annual Report 2017 Directors’ indemnities and insurance The Company has agreed to indemnify each Director against any liability incurred in relation to acts or omissions arising in the ordinary course of their duties. The indemnity applies only to the extent permitted by law. A copy of the deed of indemnity is available for inspection at the Company’s registered office and will be available at the 2017 AGM. The Company has in place appropriate Directors & Officers Liability insurance cover in respect of potential legal action against its Directors. Share capital The Company has a single class of share capital which is divided into ordinary shares of nominal value 10p each all ranking pari passu. No other securities have been issued by the Company. At 31 March 2017, there were 801,244,628 ordinary shares in issue and fully paid. Further details relating to share capital, including movements during the year, are set out in note 34 to the financial statements. At the Company’s AGM held on 21 July 2016, shareholders authorised the Company to make market purchases of ordinary shares representing up to 10% of its issued share capital at that time and to allot shares within certain limits approved by shareholders. These authorities will expire at the 2017 AGM (see below) and a renewal of that authority will be sought. ACS HR Solutions Share Plan Services (Guernsey) Limited is a shareholder who acts as the trustee (Trustee) of the Company’s offshore discretionary Employee Benefit Trust (EBT). It is used to purchase Land Securities Group PLC ordinary shares in the market from time to time for the benefit of employees, including for satisfying outstanding awards under the Company’s various employee share plans. The EBT purchased a total of 500,000 shares in the market during the year for an aggregate consideration of £4.92m (including all dealing costs) and released 851,336 shares to satisfy vested share plan awards. At 31 March 2017, the EBT held 792,556 Land Securities Group PLC shares in trust. A dividend waiver is in place from the Trustee in respect of all dividends payable by the Company on shares which it holds in trust. Further details regarding the EBT, and of shares issued pursuant to the Company’s various employee share plans during the year, are set out in note 35 to the financial statements. Save as disclosed above, the Company did not purchase any of its own shares during the year under review and no treasury shares were cancelled. Accordingly, the 10,495,131 ordinary shares held in Treasury at 31 March 2017 remained unchanged from those held at the beginning of the year. Substantial shareholders As at 31 March 2017, the Company had been notified under the Disclosure and Transparency Rules (DTR 5) of the following holdings of voting rights in its issued share capital: Shareholders holding 3% or more of the Company’s Issued Share Capital Table 72 Shareholder name BlackRock, Inc. Norges Bank Investment Management State Street Global Advisors Ltd Legal & General Investment Management Ltd The Vanguard Group, Inc. Number of ordinary shares Percentage of total voting rights attaching to issued share capital1 70,396,617 50,911,003 34,475,813 26,891,758 26,387,704 8.91 6.44 4.37 3.40 3.33 1. The total number of voting rights attaching to the issued share capital of the Company on 31 March 2017 is 790,749,497. The Company received no further DTR notifications, by way of change to the above information or otherwise, during the period from 1 April to 17 May 2017, being the period from the year end through to the date on which this report has been signed. Information provided to the Company under the DTR is publicly available to view via the regulatory information service on the Company’s website. Shareholder voting rights and restrictions on transfer of shares All the issued and outstanding ordinary shares of the Company have equal voting rights with one vote per share. There are no special control rights attaching to them save that the control rights of ordinary shares held in the EBT can be directed by the Company to satisfy the vesting of outstanding awards under its various employee share plans. In relation to the EBT, the Trustee has agreed not to vote any shares held in the EBT at any general meeting. If any offer is made to all shareholders to acquire their shares in the Company the Trustee will not be obliged to accept or reject the offer in respect of any shares which are at the time subject to subsisting awards, but will have regard to the interests of the award holders and will have power to consult them to obtain their views on the offer. Subject to the above, the Trustee may take such action with respect to the offer as it thinks fit. The Company is not aware of any agreements or control rights between existing shareholders that may result in restrictions on the transfer of securities or on voting rights. The rights, including full details relating to voting of shareholders and any restrictions on transfer relating to the Company’s ordinary shares, are set out in the Articles and in the explanatory notes that accompany the Notice of the 2017 AGM. These documents are available on the Company’s website at: www.landsec.com. G o v e r n a n c e Landsec Annual Report 2017 93 Change of control There are a number of agreements that take effect, alter or terminate upon a change of control of the Company following a takeover. None of these are considered significant. The Company’s share plans contain provisions that take effect in such an event but do not entitle participants to a greater interest in the shares of the Company than created by the initial grant or award under the relevant plan. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment or otherwise that occurs specifically because of a takeover. Human rights and equal opportunities The Company operates a Human Rights Policy which aims to recognise and safeguard the human rights of all citizens in the business areas in which we operate. We support the principles set out within both the UN Universal Declaration of Human Rights (UDHR) and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work. Our Policy is built on these foundations including, without limitation, the principles of equal opportunities, collective bargaining, freedom of association and protection from forced or child labour. The Policy has been extended to take account of the new Modern Slavery Act that came into force in October 2015 and requires the Company to report annually on its workforce and supply chain, specifically to confirm that workers are not enslaved or trafficked. The Company’s first slavery and human trafficking statement, relating to the financial year ended 31 March 2016, was approved by the Board on 29 September 2016 and posted on the Company’s website on 30 September 2016. Landsec is an equal opportunities employer and our range of employment policies and guidelines reflects legal and employment requirements in the UK and safeguards the interests of employees, potential employees and other workers. We do not condone unfair treatment of any kind and offer equal opportunities in all aspects of employment and advancement regardless of race, nationality, gender, age, marital status, sexual orientation, disability, religious or political beliefs. The Company recognises that it has clear obligations towards all its employees and the community at large to ensure that people with disabilities are afforded equal opportunities to enter employment and progress. The Company has therefore established procedures designed to provide fair consideration and selection of disabled applicants and to satisfy their training and career development needs. If an employee becomes disabled, wherever possible Landsec takes steps to accommodate the disability by making adjustments to their existing employment arrangements, or by redeployment and providing appropriate retraining to enable continued employment in the Group. Further information regarding the Company’s practical safeguarding of human rights and promotion of equal opportunities is included as part of the Social review in the Strategic Report on page 38. Political donations No political donations were made in the year (2015/16: nil). Auditor and disclosure of information to the auditor So far as the Directors are aware, there is no relevant audit information that has not been brought to the attention of the Company’s auditor. Each Director has taken all reasonable steps to make himself or herself aware of any relevant audit information and to establish that such information was provided to the auditor. A resolution to confirm the reappointment of Ernst & Young LLP as auditor of the Company will be proposed at the 2017 AGM. The confirmation has been recommended to the Board by the Audit Committee and EY has indicated its willingness to remain in office. 2017 Annual General Meeting This year’s AGM will be held at the earlier time of 10.00 am on Thursday, 13 July 2017, at 80 Victoria Street, London SW1E 5JL. A separate circular, comprising a letter from the Chairman, Notice of Meeting and explanatory notes in respect of the resolutions proposed, accompanies this Annual Report. The Directors’ Report was approved by the Board on 17 May 2017. By Order of the Board Tim Ashby Group General Counsel and Company Secretary Land Securities Group PLC Company number 436904 94 Landsec Annual Report 2017 Financial statements Contents Statement of Directors’ Responsibilities Independent Auditor’s Report Income statement Statement of comprehensive income 96 97 103 103 104 Balance sheets 105 106 Statement of cash flows 107 Notes to the financial statements Statement of changes in equity G o v e r n a n c e Landsec Annual Report 2017 95 Statement of Directors’ Responsibilities The Annual Report 2017 contains the following statements regarding responsibility for the financial statements and business reviews included therein. The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit and loss of the Group and the Company for that period. In preparing these financial statements the Directors are required to: — select suitable accounting policies in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently; — make judgements and accounting estimates that are reasonable and prudent; — present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; — state that the Group and Company has complied with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; — provide additional disclosures when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s and Company’s financial position and performance; and — prepare the Group’s and Company’s financial statements on a going concern basis, unless it is inappropriate to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company, and to enable them to ensure that the Annual Report complies with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Directors’ responsibility statement under the Disclosure and Transparency Rules Each of the Directors, whose names and functions are listed below, confirm that to the best of their knowledge: — the Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and — the Company financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position, performance and cash flows of the Company; and — the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties faced by the Group and Company. Directors’ statement under the UK Corporate Governance Code Each of the Directors confirm that to the best of their knowledge the Annual Report taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s and Company’s position, performance, business model and strategy. A copy of the financial statements of the Group is placed on the Company’s website. The Directors are responsible for the maintenance and integrity of statutory and audited information on the Company’s website at www.landsec.com. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors of Land Securities Group PLC as at the date of this Annual Report are as set out below: — Dame Alison Carnwath, Chairman* — Robert Noel, Chief Executive — Martin Greenslade, Chief Financial Officer — Edward Bonham Carter, Senior Independent Director* — Kevin O’Byrne* — Chris Bartram* — Simon Palley* — Stacey Rauch* — Cressida Hogg CBE* — Nicholas Cadbury* * Non-executive Directors The Statement of Directors’ Responsibilities was approved by the Board of Directors on 17 May 2017 and is signed on its behalf by: Robert Noel Chief Executive Martin Greenslade Chief Financial Officer 96 Landsec Annual Report 2017 Independent Auditor’s Report To the members of Land Securities Group PLC Our opinion on the financial statements In our opinion: — Land Securities Group PLC’s Group financial statements and Parent company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 March 2017 and of the Group’s profit for the year then ended; — The Group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union; — The Parent company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and — The financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group financial statements, Article 4 of the IAS Regulation. What we have audited Land Securities Group PLC’s financial statements comprise: Group Parent company Consolidated balance sheet as at 31 March 2017 Balance sheet as at 31 March 2017 Consolidated income statement for the year then ended Consolidated statement of comprehensive income for the year then ended Consolidated statement of changes in equity for the year then ended Statement of changes in equity for the year then ended Consolidated statement of cash flows for the year then ended Statement of cash flows for the year then ended Related notes 1 to 39 to the financial statements Related notes 1 to 39 to the financial statements Overview of our audit approach Risks of material misstatement — The valuation of investment property (including properties within the development programme and investment properties held in joint ventures) — Revenue recognition, including the timing of revenue recognition, the treatment of rents, incentives and recognition of trading property proceeds. Audit scope — The Group solely operates in the United Kingdom and operates through two segments, London and Retail, both of which were subject to the same audit scope. This included the Group audit team performing direct audit procedures on joint venture balances included within the Group financial statements. Materiality — Overall Group materiality of £61m which represents 0.5% of the carrying value of investment properties line item in the Group balance sheet at 31 March 2017 — Specific materiality of £21m which represents 5% of adjusted profit before tax is applied to account balances not related to investment properties (either wholly owned or held within joint ventures). F i n a n c i a l S t a t e m e n t s The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union and as regards the Parent company financial statements as applied in accordance with the provisions of the Companies Act 2006. Landsec Annual Report 2017 97 Independent Auditor’s Report continued Our assessment of risk of material misstatement We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas. Key observations communicated to the Audit Committee We have audited the inputs, assumptions and methodology used by the external valuer. We conclude that the methodology applied is reasonable and that the external valuations are an appropriate assessment of the market value of investment properties at 31 March 2017. Our Chartered Surveyors concluded that the sample of valuations they reviewed were within a reasonable range. We conclude that management provided an appropriate level of review and challenge over the valuations but did not identify evidence of undue management influence. Risk Our response to the risk The valuation of the investment property portfolio, including properties within the development programme and investment properties held in joint ventures 2017: £12,144m in investment properties and £1,763m (the Group’s share) in investment properties held in joint ventures (2016: £12,358m in investment properties and £1,630m in investment properties held in joint ventures) Refer to the Accountability section of the Annual Report (pages 70-74); Accounting policies (page 119-120); Note 14 of the Financial Statements (pages 121-123) and Note 16 of the Financial Statements (pages 124-129) The valuation of investment property (including properties within the development programme and investment properties held in joint ventures) requires significant judgement and estimates by management and the external valuer. Any input inaccuracies or unreasonable bases used in these judgements (such as in respect of estimated rental value and yield profile applied) could result in a material misstatement of the income statement and balance sheet. There is also a risk that management may influence the significant judgements and estimates in respect of property valuations in order to achieve property valuation and other performance targets to meet market expectations or bonus targets. Our audit procedures around the valuation of investment property included: We evaluated the Group’s controls over data used in the valuation of the investment property portfolio and management’s review of the valuations. We evaluated the competence of the external valuer which included consideration of their qualifications and expertise. We met with the Group’s external valuer to discuss their valuation approach and the judgements they made in assessing the property valuation such as estimated rental value, yield profile and other assumptions that impact the value. For a sample of properties, we performed testing over source documentation provided by the Group to the external valuer. This included agreeing a sample of this documentation back to underlying lease data and vouching costs incurred to date in respect of development properties. We also assessed the reasonableness of the costs to complete information in respect of properties in the course of development by comparing the total forecast costs to contractual arrangements and approved budgets. We included Chartered Surveyors on our audit team who reviewed and challenged the valuation approach and assumptions for a sample of properties which comprised 69% of the market value of investment properties (including investment properties held in joint ventures). Our Chartered Surveyors compared the equivalent yields applied to each property to an expected range of yields taking into account market data and asset specific considerations. They also considered whether the other assumptions applied by the external valuer, such as the estimated rental values, voids, tenant incentives and development costs to complete were supported by available data such as recent lettings and occupancy levels. Together with our Chartered Surveyors, we met with the external valuer to discuss the findings from our audit work described above and to seek further explanations as required. We also discussed the impact of current market conditions, including Brexit, on the property valuations. We conducted analytical procedures by comparing assumptions and the value of each property in the portfolio on a year-on-year basis, by reference to our understanding of the UK real estate market, external market data and asset specific considerations to evaluate the appropriateness of the valuations adopted by the Group. We investigated further the valuations of some properties which included further discussions with management and, where appropriate, obtaining evidence to support the movement in values and involvement of our Chartered Surveyors. We attended meetings between management and the external valuer to assess for evidence of undue management influence and we obtained a confirmation from the external valuer that they had not been subject to undue influence from management. We utilised our analytical procedures and work of the Chartered Surveyors described above in order to assess for evidence of undue management influence. We performed site visits accompanied by our Chartered Surveyors for a sample of properties in the development programme, which enabled us to assess the stage of completion of, and gain specific insights into, these developments. We met with development directors and project managers for major properties in the development programme and assessed project costs, progress of development and leasing status and considered the reasonableness of the forecast costs to complete included in the valuations as well as identified contingencies, exposures and remaining risks. We corroborated the information provided by the development directors and the project managers through valuation review, site visits and cost analysis. We also reviewed development feasibilities and monthly development reporting against budget. Scope of our procedures We performed full scope audit procedures over valuation of the whole of investment property, including properties within the development programme and investment properties held in joint ventures. 98 Landsec Annual Report 2017 Key observations communicated to the Audit Committee We audited the timing of revenue recognition, treatment of rents and incentives and recognition of trading property proceeds and assessed the risk of management override. Based upon the audit procedures performed, we concluded that revenue has been recognised on an appropriate basis in the year. Risk Our response to the risk Revenue recognition, including the timing of revenue recognition, the treatment of rents, incentives and recognition of trading property proceeds 2017: £587m rental income and £62m trading property sales proceeds (2016: £603m rental income and £195m trading property sales proceeds) Refer to the Accountability section of the Annual Report (pages 70-74); Accounting policies (page 113); and Note 6 of the Financial Statements (page 113) Market expectations and revenue profit based targets may place pressure on management to distort revenue recognition. This may result in overstatement or deferral of revenues to assist in meeting current or future targets or expectations. Our audit procedures over revenue recognition included: We carried out testing relating to controls over revenue recognition and the treatment of rents which have been designed by the Group to prevent and detect fraud and errors in revenue recognition. This included testing the controls governing approvals and changes to lease terms and the upload of this information to the Group’s property information management system. We also performed controls testing on the billings process. We selected a sample of new or amended lease agreements in the year and agreed the data input into PIMS, the property management information system, including lease incentive clauses. We performed detailed testing for a sample of revenue transactions by agreeing them back to lease agreements. This included focusing upon incentives included within lease agreements and we critically assessed whether the appropriate accounting treatment had been followed. Detailed analytical procedures were performed on the recognition of revenue, including rents, incentives and other property related revenue to assess whether revenue had been recognised in the appropriate accounting period. We agreed a sample of lease agreements to the schedules used to calculate straight-lining of revenue in accordance with SIC 15 Operating Leases – Incentives and corroborated the arithmetical accuracy of these schedules and the resulting amounts in revenue for straight-lining of tenant lease incentives. We challenged the assessment of recoverability of ‘tenant lease incentives’ receivable balance by evaluating the financial viability of the major tenants with related lease incentive debtors. We assessed whether the revenue recognition policies adopted complied with IFRS as adopted by the European Union. We performed audit procedures specifically designed to address the risk of management override of controls including journal entry testing, which included particular focus on journal entries which impact revenue. We tested a sample of trading property proceeds recognised during the year through agreement to contracts and cash to bank in order to verify that revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Scope of our procedures The whole Group was subject to full scope audit procedures over revenue. Compared to the prior year, there have been no changes to our assessment of the risks of material misstatement. The scope of our audit Tailoring the scope The Group solely operates in the United Kingdom and operates through two segments, London and Retail, both of which were subject to the same audit scope. The Group audit team performed all the work necessary to issue the Group and Parent company audit opinion, including undertaking all of the audit work on the risks of material misstatement identified above. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 99 Independent Auditor’s Report continued The table below sets out the materiality, performance materiality and threshold for reporting audit differences applied on our audit: Overall Account balances not related to investment properties (either wholly owned or held within joint ventures) Basis 0.5% of carrying value of investment properties Profit before tax, excluding the impact of the net deficit on revaluation of investment properties either wholly owned or held within joint ventures and the impact of the redemption of medium term notes (Adjusted PBT) Materiality £61m (2016: £62m) £21m (2016: £21m) Performance materiality Audit differences £46m (2016: £46m) £16m (2016: £16m) £3m (2016: £3m) £1m (2016: £1m) When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material for the financial statements as a whole. We determined that the carrying value of investment property would be the most appropriate basis for determining overall materiality given that the Group’s investment property balance accounts for around 82% of the Group’s total assets (2016: 82%) and the fact that key users of the Group’s financial statements are primarily focused on the valuation of the investment property portfolio. This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures. We have determined that for other account balances not related to investment properties (either wholly owned or held within joint ventures) a misstatement of less than materiality for the financial statements as a whole could influence the economic decisions of users. We have determined that materiality for these areas should be based upon profit before tax of £112m, excluding the impact of the net deficit on revaluation of investment properties either wholly owned or held within joint ventures of £146m and the impact of the redemption of medium term notes of £170m (‘Adjusted PBT’) as overall materiality is applied to the net deficit on revaluation. We believe that it is appropriate to use a profit based measure as profit is also a focus of users of the financial statements. This year the calculation of Adjusted PBT excludes the impact of the redemption of medium term notes, given this is expected to be a non-recurring item. During the course of our audit, we reassessed initial materiality and, as the actual carrying value of investment properties was in line with that which we had used as the initial basis for determining overall materiality, our final materiality was consistent with the materiality we calculated initially. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement is that overall performance materiality and specific performance materiality (i.e. our tolerance for misstatement in an individual account or balance) for the Group should be 75% (2016: 75%) of the respective materiality. We have set performance materiality at this percentage due to our past experience of the audit that indicates a lower risk of misstatements, both corrected and uncorrected. Our objective in adopting this approach is to confirm that total detected and undetected audit differences do not exceed our materiality for the financial statements as a whole. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to the Committee all uncorrected audit differences in excess of £3m (2016: £3m), as well as audit differences in excess of £1m (2016: £1m) that relate to our specific testing of the other account balances not related to investment properties which are set at 5% of their respective planning materiality. We also agreed to report differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 100 Landsec Annual Report 2017 Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 96, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (ISAs). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: — The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and — Based on the work undertaken in the course of the audit: — The information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; — The Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception ISAs (UK and Ireland) reporting We are required to report to you if, in our opinion, financial and non-financial information in the annual report is: — Materially inconsistent with the information in the audited financial statements; or — Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or — Otherwise misleading. In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the Directors’ statement that they consider the annual report and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s performance, business model and strategy; and whether the annual report appropriately addresses those matters that we communicated to the Audit Committee that we consider should have been disclosed. We have no exceptions to report. Companies Act 2006 reporting In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have identified no material misstatements in the Strategic Report or the Directors’ Report. We have no exceptions to report. We are required to report to you if, in our opinion: — Adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or — The Parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or — Certain disclosures of Directors’ remuneration specified by law are not made; or — We have not received all the information and explanations we require for our audit. Listing Rules review requirements We are required to review: — The Directors’ statement in relation to going concern and longer-term viability, set out on We have no exceptions to report. page 54; and — The part of the Corporate Governance Statement relating to the company’s compliance with the ten provisions of the UK Corporate Governance Code specified for our review. F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 101 Independent Auditor’s Report continued Statement on the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity We have nothing material to add or to draw attention to. ISAs (UK and Ireland) reporting We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: — The Directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; — The disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; — The Directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and — The Directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Eamonn McGrath (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 17 May 2017 Notes: 1. The maintenance and integrity of the Land Securities Group PLC web site is the responsibility of the Directors; the work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 102 Landsec Annual Report 2017 Income statement for the year ended 31 March 2017 Revenue Costs Profit on disposal of investment properties Loss on disposal of investment in joint venture Profit on disposal of other investment Net (deficit)/surplus on revaluation of investment properties Operating profit Share of post-tax profit from joint ventures Finance income Finance expense Profit before tax Taxation Profit attributable to owners of the parent Earnings per share attributable to owners of the parent: Basic earnings per share Diluted earnings per share Revenue profit £m Capital and other items £m 721 (242) 479 – – – – 479 21 37 (155) 382 – 382 66 (24) 42 19 (2) 13 (186) (114) 48 – (204) (270) 1 (269) Notes 6 7 14 16 10 10 12 5 5 2017 Total £m 787 (266) 521 19 (2) 13 (186) 365 69 37 (359) 112 1 113 14.3p 14.3p Statement of comprehensive income for the year ended 31 March 2017 Profit attributable to owners of the parent Items that will not be subsequently reclassified to the income statement: Net re-measurement (loss)/gain on defined benefit pension scheme Deferred tax credit/(charge) on re-measurement above Other comprehensive (loss)/income attributable to owners of the parent Revenue profit £m Capital and other items £m 744 (259) 485 – – – – 485 20 35 (178) 362 – 362 Notes 32 198 (151) 47 75 – – 739 861 179 – (66) 974 2 976 2017 Total £m 113 (12) 2 (10) 2016 Total £m 942 (410) 532 75 – – 739 1,346 199 35 (244) 1,336 2 1,338 169.4p 168.8p 2016 Total £m 1,338 18 (3) 15 F i n a n c i a l S t a t e m e n t s Total comprehensive income attributable to owners of the parent 103 1,353 Landsec Annual Report 2017 103 Balance sheets at 31 March 2017 Non-current assets Investment properties Intangible assets Net investment in finance leases Investments in joint ventures Investments in subsidiary undertakings Trade and other receivables Other non-current assets Total non-current assets Current assets Trading properties Trade and other receivables Monies held in restricted accounts and deposits Cash and cash equivalents Total current assets Total assets Current liabilities Borrowings Trade and other payables Other current liabilities Total current liabilities Non-current liabilities Borrowings Trade and other payables Other non-current liabilities Redemption liability Total non-current liabilities Total liabilities Net assets Equity Capital and reserves attributable to owners of the parent Ordinary shares Share premium Capital redemption reserve Own shares Share-based payments Merger reserve Retained earnings Total equity 14 19 18 16 28 26 29 15 26 22 23 21 27 30 21 27 31 34 Notes 2017 £m Group 2016 £m 12,144 12,358 36 165 1,734 – 123 51 38 183 1,668 – 86 44 Company 2016 £m – – – – 2017 £m – – – – 6,205 6,200 – – – – 14,253 14,377 6,205 6,200 122 418 21 30 591 124 445 19 25 613 – 17 4 – 21 – 17 4 – 21 14,844 14,990 6,226 6,221 (404) (302) (7) (713) (19) (289) (19) (327) – – (1,394) (1,037) – – (1,394) (1,037) (2,545) (2,854) (25) (9) (36) (28) (47) (35) (2,615) (2,964) – – – – – – – – – – (3,328) (3,291) (1,394) (1,037) 11,516 11,699 4,832 5,184 80 791 31 (9) 8 – 80 790 31 (14) 11 – 10,615 11,516 10,801 11,699 80 791 31 – 8 374 3,548 4,832 80 790 31 – 11 374 3,898 5,184 The loss for the year of the Company was £68m (2016: profit of £331m). The financial statements on pages 103 to 154 were approved by the Board of Directors on 17 May 2017 and were signed on its behalf by: R M Noel Directors M F Greenslade 104 Landsec Annual Report 2017 Statement of changes in equity for the year ended 31 March 2017 At 1 April 2015 Total comprehensive income for the financial year Transactions with owners: Share-based payments Dividends paid to owners of the parent Acquisition of own shares Total transactions with owners of the parent Attributable to owners of the parent Group Ordinary shares £m Share premium £m Capital redemption reserve £m Own shares £m Share- based payments £m Retained earnings £m Total equity £m 80 789 31 (12) 9 9,709 10,606 – – – – – – 1 – – 1 – – – – – – 16 – (18) (2) – 2 – – 2 1,353 1,353 (6) (255) – (261) 13 (255) (18) (260) At 31 March 2016 80 790 31 (14) 11 10,801 11,699 Total comprehensive income for the financial year Transactions with owners: Share-based payments Dividends paid to owners of the parent Acquisition of own shares Total transactions with owners of the parent – – – – – – 1 – – 1 – – – – – At 31 March 2017 80 791 31 – – 103 103 11 – (6) 5 (9) (3) – – – (289) – (3) (289) 9 (289) (6) (286) 8 10,615 11,516 At 1 April 2015 Profit for the year ended 31 March 2016 Share-based payments Dividends paid to owners of the parent At 31 March 2016 Loss for the year ended 31 March 2017 Share-based payments Dividends paid to owners of the parent At 31 March 2017 1. Available for distribution. Ordinary shares £m Share premium £m 80 789 – – – 80 – – – 80 – 1 – 790 – 1 – 791 Capital redemption reserve £m Share- based payments £m 31 – – – 31 – – – 31 9 – 2 – 11 – (3) – 8 Merger reserve £m Retained earnings1 £m 374 3,816 – – – 331 6 (255) 374 3,898 – – – (68) 7 (289) 374 3,548 F i n a n c i a l S t a t e m e n t s Company Total equity £m 5,099 331 9 (255) 5,184 (68) 5 (289) 4,832 Landsec Annual Report 2017 105 Notes 2017 £m Group 2016 £m Company 2016 £m 2017 £m 13 16 16 16 16 21 21 21 21 11 23 464 15 (152) (12) 69 2 386 (46) (16) (80) 245 13 (67) (45) 54 44 (19) 83 356 (391) 698 (690) (137) (4) (289) (7) (464) 5 25 30 451 21 (197) (32) 190 (1) 432 (118) (103) (100) 1,221 – (62) (106) 14 63 40 849 249 (806) – (400) (26) – (262) (26) (1,271) 10 15 25 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Statement of cash flows for the year ended 31 March 2017 Cash flows from operating activities Net cash generated from operations Interest received Interest paid Capital expenditure on trading properties Disposal of trading properties Other operating cash flows Net cash inflow from operating activities Cash flows from investing activities Investment property development expenditure Acquisition of investment properties Other investment property related expenditure Disposal of investment properties Disposal of other investment Cash contributed to joint ventures Net loan advances to joint ventures Loan repayments by joint ventures Distributions from joint ventures Other investing cash flows Net cash inflow from investing activities Cash flows from financing activities Proceeds from new borrowings (net of finance fees) Repayment of borrowings Issue of medium term notes (net of finance fees) Redemption of medium term notes Premium payable on redemption of medium term notes Refinancing of derivative financial instruments Dividends paid to owners of the parent Other financing cash flows Net cash outflow from financing activities Increase in cash and cash equivalents for the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 106 Landsec Annual Report 2017 Notes to the financial statements for the year ended 31 March 2017 Section 1 – General This section contains a description of the Group’s significant accounting policies that relate to the financial statements as a whole. A description of accounting policies specific to individual areas (e.g. investment properties) is included within the relevant note to the financial statements. This section also includes a summary of new European Union (EU) endorsed accounting standards, amendments and interpretations that have not yet been adopted, and their expected impact on the reported results of the Group. 1. Basis of preparation and consolidation Basis of preparation These financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards as adopted by the EU (IFRS), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared in Pounds Sterling (rounded to the nearest one million), which is the presentation currency of the Group (Land Securities Group PLC and all its subsidiary undertakings), and under the historical cost convention as modified by the revaluation of investment property, available-for-sale investments, derivative financial instruments and pension assets. During the year, the Group has reviewed the presentation of the financial statements and has made some changes with the intention of simplifying the way in which the Group’s results are presented. One of the main changes is from reporting to the nearest hundred thousand pounds, to reporting to the nearest million pounds. Additionally, certain insignificant line items that were previously presented separately in the financial statements have been aggregated. Where line items have been aggregated in the primary statements, explanatory notes providing a breakdown of the aggregated balances are included in the notes to the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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. Further details on the Group’s significant accounting judgements and estimates are included in note 2. Land Securities Group PLC (the Company) has not presented its own statement of comprehensive income (and separate income statement), as permitted by Section 408 of Companies Act 2006. 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. The capital redemption reserve represents the nominal value of cancelled shares. Basis of consolidation The consolidated financial statements for the year ended 31 March 2017 incorporate the financial statements of the Company and all its subsidiary undertakings. Subsidiary undertakings are those entities controlled by the Company. Control exists where an entity is exposed to variable returns and has the ability to affect those returns through its power over the investee. F i n a n c i a l S t a t e m e n t s The results of subsidiaries and joint ventures acquired or disposed of during the year are included from the effective date of acquisition or to the effective date of disposal. Accounting policies of subsidiaries and joint ventures which differ from Group accounting policies are adjusted on consolidation. Where instruments in a subsidiary held by third parties are redeemable at the option of the holder, these interests are classified as a financial liability, called the redemption liability. The liability is carried at fair value; the value is reassessed at the balance sheet date and movements are recognised in the income statement. Joint arrangements are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint arrangements are accounted for as either a joint venture or a joint operation. A joint arrangement is accounted for as a joint venture when the Group, along with the other parties that have joint control of the arrangement, have rights to the net assets of the arrangement. Interests in joint ventures are equity accounted. The equity method requires the Group’s share of the joint venture’s post-tax profit or loss for the year 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. A joint arrangement is accounted for as a joint operation when the Group, along with the parties that have joint control of the arrangement, have rights to the assets and obligations for the liabilities relating to the arrangement. Joint operations are accounted for by including the Group’s share of the assets, liabilities, income and expenses on a line-by-line basis. 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. Landsec Annual Report 2017 107 Notes to the financial statements for the year ended 31 March 2017 continued 2. Significant accounting judgements and estimates The preparation of financial statements in conformity with IFRS requires management to exercise judgement in applying the Group‘s accounting policies. The areas where the Group considers the judgements to be most significant involve assumptions or estimates in respect of future events, where actual results may differ from these estimates. These areas are as follows: — Valuation of investment and trading properties (page 120) — Accounting for property acquisitions and disposals (page 120) — Compliance with the Real Estate Investment Trust (REIT) taxation regime and the recognition of deferred tax assets and liabilities (page 117) 3. Amendments to IFRS The accounting policies used in these financial statements are consistent with those applied in the last annual financial statements, as amended where relevant to reflect the adoption of new standards, amendments and interpretations which became effective in the year. These amendments have not had an impact on the financial statements. A number of new standards and amendments to standards have been issued but are not yet effective for the Group. The most significant of these, and their potential impact on the Group’s accounting, are set out below: — IFRS 15 Revenue from Contracts with Customers (effective from 1 April 2018) – the standard will be applicable to service charge income, other property related income, trading property sales proceeds and proceeds from the sale of investment properties, but not rental income arising from the Group’s leases with tenants. Based on the transactions impacting the current financial year and future known transactions, the Group does not expect the adoption of IFRS 15 to have a material impact on the Group’s reported results. However, we will continue to assess new transactions as they arise to the date of adoption. — IFRS 9 Financial Instruments (effective from 1 April 2018) – the standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. The Group is in the process of assessing the impact of IFRS 9, but adoption of the new standard may impact the measurement and presentation of the Group’s financial liabilities. — IFRS 16 Leases (effective from 1 April 2019) – the adoption of this standard is not expected to significantly impact the recognition of rental income earned under the Group’s leases with tenants. The Group holds a small number of operating leases as a lessee which are affected by this standard, however, these are not material to the financial statements. 108 Landsec Annual Report 2017 Section 2 – Performance This section focuses on the performance of the Group for the year, including segmental information, earnings per share and net assets per share, together with further details on specific components of the income statement and dividends paid. Our property portfolio is a combination of properties that are wholly owned by the Group, part owned through joint arrangements and properties owned by the Group but where a third party holds a non-controlling interest. Internally, management review the results of the Group on a basis that adjusts for these different forms of ownership to present a proportionate share. The Combined Portfolio, with assets totalling £14.4bn, is an example of this approach, reflecting the economic interest we have in our properties regardless of our ownership structure. We consider this presentation provides a better explanation to stakeholders of the activities and performance of the Group, as it aggregates the results of all of the Group’s property interests which under IFRS are required to be presented across a number of line items in the statutory financial statements. The same principle is applied to many of the other measures we discuss and accordingly, a number of our financial measures include the results of our joint ventures and subsidiaries on a proportionate basis. Measures that are described as being presented on a proportionate basis include the Group’s share of joint ventures on a line-by-line basis, and are adjusted to exclude the non-owned elements of our subsidiaries. This is in contrast to the Group’s statutory financial statements, where the Group’s interest in joint ventures is presented as one line on the income statement and balance sheet, and all subsidiaries are consolidated at 100% with any non-owned element being adjusted as a non-controlling interest or redemption liability, as appropriate. Our joint operations are presented on a proportionate basis in all financial measures. Our income statement has two key components: the income we generate from leasing our investment properties net of associated costs (including interest expense), which we refer to as revenue profit, and items not directly related to the underlying rental business, principally valuation changes, profits or losses on the disposal of properties and exceptional items, which we refer to as capital and other items. Our income statement is presented in a columnar format, split into those items that relate to revenue profit and capital and other items. The Total column represents the Group’s results presented in accordance with IFRS; the other columns provide additional information. We believe revenue profit better represents the results of the Group’s operational performance to stakeholders as it focuses on the rental income performance of the business and excludes capital and other items which can vary significantly from year to year. A full definition of revenue profit is given in the glossary. The components of revenue profit are presented on a proportionate basis in note 4. 4. Segmental information The Group’s operations are organised into two operating segments, being the London Portfolio and the Retail Portfolio. The London Portfolio includes all our London offices and central London shops and the Retail Portfolio includes all our shopping centres and shops (excluding central London shops), hotels and leisure assets and retail park properties. All of the Group’s operations are in the UK. Management has determined the Group’s operating segments based on the information reviewed by senior management to make strategic decisions. During the year, the chief operating decision maker was the Executive Committee (ExecCom), which comprised the Executive Directors, the managing directors of the Retail and London portfolios, the Group General Counsel and Company Secretary, the Group HR Director and the Corporate Affairs and Sustainability Director. The information presented to ExecCom includes reports from all functions of the business as well as strategy, financial planning, succession planning, organisational development and Group-wide policies. F i n a n c i a l S t a t e m e n t s The Group’s primary measure of underlying profit before tax is revenue profit. However, segment profit is the lowest level to which the profit arising from the ongoing operations of the Group is analysed between the two segments. The Group manages its financing structure, with the exception of joint ventures, on a pooled basis and, as such, debt facilities and finance expenses (other than those relating to joint ventures) are not specific to a particular segment. Unallocated income and expenses (Group services) are items incurred centrally which are neither directly attributable nor can be reasonably allocated to individual segments. All items in the segmental information note are presented on a proportionate basis. A reconciliation from the Group income statement to the information presented in the segmental information note is included in table 78. Landsec Annual Report 2017 109 Notes to the financial statements for the year ended 31 March 2017 continued 4. Segmental information continued Revenue profit Rental income Finance lease interest Gross rental income (before rents payable) Rents payable1 Gross rental income (after rents payable) Service charge income Service charge expense Net service charge expense Other property related income Direct property expenditure Net rental income Indirect property expenditure Depreciation Segment profit before finance expense Joint venture finance expense Segment profit Group services – other income – expense Finance income Finance expense Revenue profit Retail £m London £m 342 1 343 (8) 335 56 (60) (4) 20 (36) 315 (21) (1) 293 (4) 289 296 9 305 (3) 302 45 (46) (1) 14 (30) 285 (16) (1) 268 (17) 251 Retail £m 363 1 364 (9) 355 56 (58) (2) 21 (45) 329 (25) – 304 (4) 300 London £m 287 9 296 (3) 293 46 (47) (1) 17 (34) 275 (18) (1) 256 (17) 239 2017 Total £m 638 10 648 (11) 637 101 (106) (5) 34 (66) 600 (37) (2) 561 (21) 540 2 (42) 37 (155) 382 1. Included within rents payable is finance lease interest payable of £1m (2016: £1m) and £1m (2016: £nil), for the Retail and London portfolios, respectively. Reconciliation of revenue profit to profit before tax Revenue profit Capital and other items Valuation and profits on disposals Profit on disposal of investment properties Loss on disposal of investment in joint venture Profit on disposal of other investment Net (deficit)/surplus on revaluation of investment properties Movement in impairment of trading properties Profit on disposal of trading properties Net finance expense Fair value movement on interest-rate swaps Amortisation of bond-exchange de-recognition adjustment Other Exceptional items Head office relocation Premium payable on redemption of medium term notes Other Profit before tax 110 Landsec Annual Report 2017 2017 Total £m 382 20 (2) 13 (147) 12 36 (68) (8) (24) (2) (34) 1 (170) (169) 1 112 2016 Total £m 650 10 660 (12) 648 102 (105) (3) 38 (79) 604 (43) (1) 560 (21) 539 4 (38) 35 (178) 362 2016 Total £m 362 79 – – 907 16 41 1,043 (11) (23) (5) (39) (6) (27) (33) 3 1,336 5. Performance measures Three of the Group’s key financial performance measures are adjusted diluted earnings per share, adjusted diluted net assets per share and total business return. In the tables below we present earnings per share and net assets per share calculated in accordance with IFRS, together with our own adjusted measures and certain measures required by EPRA. We also present the calculation of total business return. Adjusted earnings, which is a tax adjusted measure of revenue profit, is the basis for the calculation of adjusted earnings per share. We believe adjusted earnings and adjusted earnings per share better represent the results of the Group’s operational performance to stakeholders as they focus on the rental income performance of the business and exclude capital and other items which can vary significantly from year to year. Adjusted net assets excludes the fair value of interest-rate swaps used for hedging purposes and the bond exchange de-recognition adjustment. We believe this better reflects the underlying net assets attributable to shareholders as it more accurately reflects the future cash flows associated with our debt instruments. Total business return is calculated as the cash dividends paid in the year plus the change in adjusted diluted net assets per share, divided by the opening adjusted diluted net assets per share. We consider this to be a useful measure for shareholders as it gives an indication of the total return on investment over the year. EPRA measures for both earnings per share and net assets per share have been included to assist comparison between European property companies. Earnings per share Profit attributable to owners of the parent Taxation Valuation and profits on disposal Net finance expense1 Exceptional items2 Other Profit used in per share calculation Basic earnings per share Diluted earnings per share Profit for the financial year £m 113 – – – – – 113 IFRS 14.3p 14.3p 2017 EPRA earnings £m Adjusted earnings £m 113 (1) 68 10 170 (1) 359 113 (1) 68 34 169 (1) 382 Profit for the financial year £m 1,338 EPRA earnings £m 1,338 2016 Adjusted earnings £m 1,338 (2) (2) (1,043) (1,043) – – – – – 16 27 (3) 1,338 333 EPRA Adjusted IFRS EPRA Adjusted 45.4p 45.4p 48.4p 48.3p 169.4p 168.8p 42.2p 42.0p 45.9p 45.7p 39 33 (3) 362 F i n a n c i a l S t a t e m e n t s 1. The difference in the adjustment for EPRA earnings and adjusted earnings relates to the amortisation of the bond exchange de-recognition adjustment, which is included in EPRA earnings, but excluded from adjusted earnings. 2. The difference in the adjustment for EPRA earnings and adjusted earnings relates to the head office relocation costs, which are included in EPRA earnings, but excluded from adjusted earnings. Net assets per share Net assets attributable to owners of the parent 11,516 11,516 11,516 11,699 2017 Net assets £m EPRA net assets1 £m Adjusted net assets £m Net assets £m Fair value of interest-rate swaps – Group – Joint ventures Bond exchange de-recognition adjustment Deferred tax liability arising on business combination Goodwill on deferred tax liability Net assets used in per share calculation Net assets per share Diluted net assets per share 1. For EPRA triple net assets, see table 81. EPRA net assets1 £m 11,699 32 2 – 5 (5) 2016 Adjusted net assets £m 11,699 32 2 (368) 5 (5) – – – – – 2 2 – 4 (4) 2 2 (314) 4 (4) – – – – – 11,516 11,520 11,206 11,699 11,733 11,365 IFRS 1,458p 1,456p EPRA n/a 1,456p Adjusted 1,418p 1,417p IFRS 1,482p 1,476p EPRA n/a 1,481p Adjusted 1,439p 1,434p Landsec Annual Report 2017 111 Notes to the financial statements for the year ended 31 March 2017 continued 5. Performance measures continued Number of shares Ordinary shares Treasury shares Own shares Number of shares – basic Dilutive effect of share options Number of shares – diluted Total business return (Decrease)/increase in adjusted diluted net assets per share Dividend paid per share in the year (note 11) Total return (a) Adjusted diluted net assets per share at the beginning of the year (b) Total business return (a/b) Weighted average million 2017 31 March million Weighted average million 2016 31 March million 801 (10) (1) 790 1 791 801 (10) (1) 790 1 791 801 (10) (1) 790 3 793 2017 pence (17) 37 20 1,434 1.4% 801 (10) (1) 790 3 793 2016 pence 141 32 173 1,293 13.4% 112 Landsec Annual Report 2017 6. Revenue Accounting policy The Group recognises revenue on an accruals basis, when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Group. Rental income, including fixed rental uplifts, is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives being offered to occupiers to enter into a lease, such as an initial rent-free period or a cash contribution to fit-out or similar costs, are an integral part of the net consideration for the use of the property and are therefore recognised on the same straight-line basis. Contingent rents, being 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. Service charge income and management fees are recorded as income in the period in which they are earned. When property is let under a finance lease, the Group recognises a receivable 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. 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 and is recognised within revenue. Proceeds received on the sale of trading properties are recognised when the significant risks and rewards of ownership transfer to the buyer. This generally occurs on unconditional exchange or on completion, particularly if completion is expected to occur significantly after exchange or if the Group has significant outstanding obligations between exchange and completion. All revenue is classified within the ‘Revenue profit’ column of the income statement, with the exception of proceeds on the sale of trading properties which is presented in the ‘Capital and other items’ column. Also included in the ‘Capital and other items’ column is the non-owned element of the Group’s subsidiaries which is excluded from revenue profit. Rental income (excluding adjustment for lease incentives) Adjustment for lease incentives Rental income Service charge income Other property related income Trading property sales proceeds Finance lease interest Other income Revenue per the income statement Revenue profit £m Capital and other items £m 541 44 585 92 32 – 10 2 721 2 – 2 2 – 62 – – 66 2017 Total £m 543 44 587 94 32 62 10 2 787 Revenue profit £m Capital and other items £m 571 29 600 94 36 – 10 4 744 3 – 3 – – 195 – – 198 The following table reconciles revenue per the income statement to the individual components of revenue presented in note 4. Rental income Service charge income Other property related income Trading property sales proceeds Finance lease interest Other income Revenue in the segmental information note Adjustment for non-wholly owned subsidiaries1 £m Joint ventures £m 53 9 2 72 – – (2) (2) – – – – 136 (4) Group £m 587 94 32 62 10 2 787 2017 Total £m 638 101 34 134 10 2 919 Adjustment for non-wholly owned subsidiaries1 £m (3) Joint ventures £m 50 8 2 – – – – – – – – 60 (3) Group £m 603 94 36 195 10 4 942 1. This represents the interest in X-Leisure which we do not own, but which is consolidated in the Group numbers. F i n a n c i a l S t a t e m e n t s Group 2016 Total £m 574 29 603 94 36 195 10 4 942 Group 2016 Total £m 650 102 38 195 10 4 999 Landsec Annual Report 2017 113 Notes to the financial statements for the year ended 31 March 2017 continued 7. Costs Accounting policy The carrying amounts of the Group’s non-financial assets, other than investment properties, 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. An impairment loss is recognised in the income statement whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell 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. All costs are classified within the ‘Revenue profit’ column of the income statement, with the exception of the cost of sale of trading properties, amortisation of intangible assets and head office relocation costs which are presented in the ‘Capital and other items’ column. Also included in the ‘Capital and other items’ column is the non-owned element of the Group’s subsidiaries which is excluded from revenue profit. Rents payable Service charge expense Direct property expenditure Indirect property expenditure Cost of trading property disposals Movement in impairment of trading properties1 Head office relocation2 Amortisation of intangible assets Impairment of goodwill Costs per the income statement Revenue profit £m Capital and other items £m 10 95 58 79 – – – – – 242 – 1 – – 33 (12) (1) 2 1 24 2017 Total £m 10 96 58 79 33 (12) (1) 2 1 266 Revenue profit £m Capital and other items £m 11 96 72 80 – – – – – 259 – – – – 154 (11) 6 1 1 151 Group 2016 Total £m 11 96 72 80 154 (11) 6 1 1 410 1. The movement in impairment of trading properties in the years ended 31 March 2017 and 2016 relates to the reversal of previous impairment charges related to residential land, where the valuer’s assessment of net realisable value increased over the year. 2. The net credit of £1m in respect of the head office relocation comprises the £2m release of an onerous lease provision following the assignment of the lease on the Group’s previous head office at lower net cost than originally anticipated, together with relocation costs of £1m. The cost of £6m in the prior year reflects the creation of the provision in respect of the onerous lease and relocation costs committed to at that time. The following table reconciles costs per the income statement to the individual components of costs presented in note 4. Group £m Joint ventures £m Adjustment for non-wholly owned subsidiaries1 £m 10 96 58 79 33 (12) (1) 2 1 266 1 11 8 2 65 – – – – 87 – (1) – – – – – – – (1) 2017 Total £m 11 106 66 81 98 (12) (1) 2 1 352 Group £m Joint ventures £m Adjustment for non-wholly owned subsidiaries1 £m 11 96 72 80 154 (11) 6 1 1 410 1 9 7 2 – (5) – – – 14 – – – – – – – – – – Group 2016 Total £m 12 105 79 82 154 (16) 6 1 1 424 Rents payable Service charge expense Direct property expenditure Indirect property expenditure Trading property disposals Movement in impairment of trading properties Head office relocation Amortisation of intangible asset Impairment of goodwill Costs in the segmental information note 1. This represents the interest in X-Leisure which we do not own, but which is consolidated in the Group numbers. The Group’s costs include employee costs for the year of £60m (2016: £64m), of which £7m (2016: £7m) is within service charge expense and £53m (2016: £57m) is within indirect property expenditure, of which £22m relates to Group services (2016: £19m). 114 Landsec Annual Report 2017 Employee costs Salaries and wages Employer payroll taxes Other pension costs (note 32) Share-based payments (note 33) The average monthly number of employees during the year was: Indirect property or contract and administration Direct property or contract services: Full-time Part-time 2017 £m 45 6 4 5 60 Group 2016 £m 47 6 3 8 64 2017 Number Group 2016 Number 421 153 9 583 459 142 8 609 With the exception of the Executive Directors, the Company Secretary and two employees of the Defined Benefit Pension Scheme, who are employed by Land Securities Group PLC, all employees are employed by subsidiaries of the Group. During the year, no Executive Directors had retirement benefits accruing under either the defined contribution pension scheme or the defined benefit scheme (2016: nil). Information on Directors’ emoluments, share options and interests in the Company’s shares is given in the Directors’ Remuneration Report on pages 76 to 91. Details of the employee costs associated with the Group’s key management personnel are included in note 37. 8. Auditor remuneration Services provided by the Group’s auditor Audit fees: Audit of parent company and consolidated financial statements Audit of subsidiary undertakings Audit of joint ventures Non-audit fees: Audit related assurance services Other assurance services F i n a n c i a l S t a t e m e n t s 2017 £m 0.4 0.3 0. 1 0.8 0. 1 0. 1 1.0 Group 2016 £m 0.4 0.3 0.1 0.8 0.2 – 1.0 It is the Group’s policy to employ the Group’s auditor on assignments additional to their statutory duties where their expertise and experience with the Group are important. Where appropriate the Group seeks tenders for services. If fees are expected to be greater than £25,000 they are pre-approved by the Audit Committee. Landsec Annual Report 2017 115 Notes to the financial statements for the year ended 31 March 2017 continued 9. External valuer’s remuneration Services provided by the Group’s external valuer Year end and half year valuations – Group – Joint ventures Other consultancy and agency services 2017 £m 0.7 0.2 3.2 4.1 Group 2016 £m 0.7 0.1 3.9 4.7 CBRE Limited (CBRE) is the Group’s valuer. CBRE undertakes other consultancy and agency work on behalf of the Group. CBRE has confirmed to us that the total fees paid by the Group represented less than 5% of its total revenues in the current year. 10. Net finance expense Finance income Other interest receivable Interest receivable from joint ventures Finance expense Bond and debenture debt Bank and other short-term borrowings Fair value movement on interest-rate swaps Amortisation of bond exchange de-recognition adjustment Redemption of medium term notes Revaluation of redemption liabilities Other interest payable Interest capitalised in relation to properties under development Net finance expense Joint venture net finance expense Net finance expense included in revenue profit Revenue profit £m Capital and other items £m Revenue profit £m Capital and other items £m 2017 Total £m 2 35 37 (144) (15) (8) (24) (170) (3) - – – – – – (8) (24) (170) (3) 1 2 35 37 (144) (15) – – – – (1) (160) 5 (204) (364) – 5 (155) (204) (359) (204) (322) (118) (21) (139) 1 34 35 (169) (20) – – – – – (189) 11 (178) (143) (21) (164) Group 2016 Total £m 1 34 35 (169) (20) (11) (23) (27) (5) – (255) 11 (244) – – – – – (11) (23) (27) (5) – (66) – (66) (66) (209) During the year, the Group purchased medium term notes (MTNs) with a nominal value of £690m (2016: £400m) for a premium of £137m (2016: £26m). The redemption premium and £30m (2016: £nil) of the bond exchange de-recognition adjustment associated with the purchased bonds have been expensed to the income statement in the year, as an exceptional item, along with £1m (2016: £nil) of bank tender fees and the £2m (2016: £1m) write-off of unamortised issue costs. Further details are given in note 21. Finance lease interest payable of £2m (2016: £1m) is included within rents payable as detailed in note 4. 116 Landsec Annual Report 2017 11. Dividends Accounting policy Interim dividend distributions to shareholders are recognised in the financial statements when paid. Final dividend distributions are recognised as a liability in the period in which they are approved by shareholders. Ordinary dividends paid For the year ended 31 March 2015: Third interim Final For the year ended 31 March 2016: First interim Second interim Third interim Final For the year ended 31 March 2017: First interim Second interim Gross dividends Dividends in statement of changes in equity Timing difference on payment of withholding tax Dividends in the statement of cash flows Payment date 10 April 2015 24 July 2015 9 October 2015 7 January 2016 8 April 2016 28 July 2016 7 October 2016 6 January 2017 Pence per share Non-PID PID 7.9 8.15 8.15 – 8.15 10.55 8.95 – – – – 8.15 – – – 8.95 Total 7.9 8.15 8.15 8.15 8.15 10.55 8.95 8.95 Group and Company 2017 £m 2016 £m 63 64 64 64 255 255 7 262 64 83 71 71 289 289 – 289 A third quarterly interim dividend of 8.95p per ordinary share, or £71m in total (2016: 8.15p or £64m in total), was paid on 7 April 2017 as a Property Income Distribution (PID). The Board has recommended a final dividend for the year ended 31 March 2017 of 11.7p per ordinary share (2016: 10.55p) to be paid as a PID. This final dividend will result in a further estimated distribution of £92m (2016: £83m). Subject to shareholders’ approval at the Annual General Meeting, the final dividend will be paid on 27 July 2017 to shareholders registered at the close of business on 23 June 2017. The total dividend paid and recommended in respect of the year ended 31 March 2017 is therefore 38.55p per ordinary share (2016: 35.0p). A Dividend Reinvestment Plan (DRIP) has been available in respect of all dividends paid during the year. 12. Income tax Accounting policy 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. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the asset is realised or the liability is settled. No provision is made for temporary differences (i) arising on the initial recognition of assets or liabilities, other than on a business combination, 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. Significant accounting judgements and estimates The Group is a Real Estate Investment Trust (REIT). As a result, the Group does not pay UK corporation tax on its profits and gains from the qualifying rental business in the UK. Non-qualifying profits and gains of the Group continue to be subject to corporation tax as normal. In order to maintain group REIT status, certain ongoing criteria must be met. The main criteria are as follows: — at the start of each accounting period, the assets of the tax exempt business must be at least 75% of the total value of the Group’s assets; — at least 75% of the Group’s total profits must arise from the tax exempt business; and — at least 90% of the notional taxable profit of the property rental business must be distributed. Landsec Annual Report 2017 117 F i n a n c i a l S t a t e m e n t s Notes to the financial statements for the year ended 31 March 2017 continued 12. Income tax continued The Directors intend that the Group should continue as a REIT for the foreseeable future, with the result that deferred tax is no longer recognised on temporary differences relating to the property rental business. Deferred tax assets and liabilities require management judgement in determining the amounts, if any, to be recognised. In particular, judgement is required when assessing the extent to which deferred tax assets should be recognised, taking into account the expected timing and level of future taxable income. Deferred tax assets are only recognised when management believe they will be recovered against future taxable profits. The income tax credit in the income statement comprises the movement in deferred tax on intangible assets of £1m (2016: £1m credit) and adjustments in respect of prior financial years of £nil (2016: £1m credit). The tax for the year is lower than the standard rate of corporation tax in the UK of 20% (2016: 20%). The differences are explained in the table below. Profit before tax Profit before tax multiplied by the rate of corporation tax in the UK of 20% (2016: 20%) Exempt property rental profits and revaluations in the year 2017 £m 112 (22) 45 23 Group 2016 £m 1,336 (267) 261 (6) Effects of: Interest rate fair value movements and other unrecognised temporary differences (31) (4) Adjustment in respect of prior years Non-allowable expenses and non-taxable items Utilisation of brought forward losses Total income tax credit in the income statement The Group’s deferred tax liability is analysed as follows: Arising on business combination Arising on pension surplus (note 32) Total deferred tax – 6 3 1 2017 £m 4 3 7 Deferred tax is calculated at the rate substantially enacted at the balance sheet date 17% (2016: 18%) which comes into effect from 1 April 2020. There are unrecognised deferred tax assets on the following items due to the high degree of uncertainty as to their future utilisation by non-REIT qualifying activities. Revenue losses Capital losses Other unrecognised temporary differences Total unrecognised deferred tax 2017 £m 2 589 140 731 2 4 6 2 Group 2016 £m 5 5 10 Group 2016 £m 13 643 – 656 The other unrecognised temporary differences relate to the premium paid on the redemption of the Group’s medium term notes. For further details see note 21. 118 Landsec Annual Report 2017 13. Net cash generated from operations Reconciliation of operating profit/(loss) to net cash generated from operations Operating profit/(loss) Adjustments for: Net deficit/(surplus) on revaluation of investment properties Movement in impairment of trading properties Profit on disposal of trading properties Profit on disposal of investment properties Profit on disposal of other investment Loss on disposal of investment in joint venture Share-based payment charge Other Changes in working capital: Increase in receivables (Decrease)/increase in payables and provisions Net cash generated from operations Section 3 – Properties 2017 £m 365 186 (12) (29) (19) (13) 2 5 8 Group 2016 £m 1,346 (739) (11) (41) (75) – – 8 6 Company 2016 £m (22) 2017 £m (30) – – – – – – – – – – – – – – – – 493 494 (30) (22) (17) (12) 464 (33) (10) 451 – 30 – – 22 – This section focuses on the property assets which form the core of the Group’s business. It includes details of investment properties, investments in joint ventures and trading properties. Our property portfolio is a combination of properties that are wholly owned by the Group, part owned through joint arrangements and properties owned by the Group but where a third party holds a non-controlling interest. In the Group’s IFRS balance sheet, wholly owned properties are presented as either ‘Investment properties’ or ‘Trading properties’. The Group applies equity accounting to its investments in joint ventures, which requires the Group’s share of properties held by joint ventures to be presented within ‘Investments in joint ventures’. Internally, management review the results of the Group on a basis that adjusts for these forms of ownership to present a proportionate share. The Combined Portfolio, with assets totalling £14.4bn, is an example of this proportionate share, reflecting the economic interest we have in our properties regardless of our ownership structure. We consider this presentation to better explain to stakeholders the activities and performance of the Group, as it aggregates the results of all of the Group’s property interests which under IFRS are required to be presented across a number of line items in the statutory financial statements. The Group’s investment properties are carried at fair value and trading properties are carried at the lower of cost and net realisable value. Both of these values are determined by the Group’s external valuers. The combined value of the Group’s total investment property portfolio (including the Group’s share of investment properties held through joint ventures) is shown as a reconciliation in note 14. Accounting policy Investment properties Investment properties are properties, either owned or leased by the Group, that are held either to earn rental income or for capital appreciation, or both. Investment properties are measured initially at cost including related transaction costs, and subsequently at fair value. Fair value is based on market value, as determined by a professional independent valuer at each reporting date. 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 surplus or deficit. Investment properties are presented on the balance sheet within non-current assets. Some of the Group’s investment properties are owned through long-leasehold arrangements, as opposed to the Group owning the freehold. Where the Group is a lessee and the lease transfers substantially all the risks and rewards of ownership of the asset to the Group, the lease is accounted for as a finance lease. Finance leases are capitalised within investment properties at the commencement of the lease at the lower of the fair value of the property and the present value of the minimum lease payments, and a corresponding liability is recorded within borrowings. Each lease payment is allocated between repayment of the liability and a finance charge to achieve a constant rate on the outstanding liability. The investment properties held under finance leases are subsequently carried at their fair value. Landsec Annual Report 2017 119 F i n a n c i a l S t a t e m e n t s Notes to the financial statements for the year ended 31 March 2017 continued Trading properties Trading properties are those properties held for sale, or those being developed with a view to sell. Trading properties are recorded at the lower of cost and net realisable value. The net realisable value of a trading property is determined by a professional independent valuer at each reporting date. If the net realisable value of a trading property is lower than its carrying value, an impairment loss is recorded in the income statement. If, in subsequent periods, the net realisable value of a trading property that was previously impaired increases above its carrying value, the impairment is reversed to align the carrying value of the property with the net realisable value. Trading properties are presented on the balance sheet within current assets. Acquisition of properties Properties are treated as acquired when the Group assumes the significant risks and returns of ownership. Capital expenditure and capitalisation of borrowing costs Capital expenditure on properties consists of costs of a capital nature, including costs associated with developments and refurbishments. Where a property is being developed or undergoing major refurbishment, interest costs associated with direct expenditure on the property are capitalised. The interest capitalised is calculated using the Group’s weighted average cost of borrowings. Interest is capitalised as from the commencement of the development work until the date of practical completion. Certain internal staff and associated costs directly attributable to the management of major schemes during the construction phase are also capitalised. Transfers between investment properties and trading properties When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be held as an investment property. When the Group begins to redevelop an existing investment property with a view to sell, 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 the income statement. The re-measured amount becomes the deemed cost at which the property is then carried in trading properties. Disposal of properties Properties are treated as disposed when the significant risks and rewards of ownership are transferred to the buyer. Typically, this will either occur on unconditional exchange or on completion. Where completion is expected to occur significantly after exchange, or where the Group continues to have significant outstanding obligations after exchange, the risks and rewards will not usually transfer to the buyer until completion. The profit on disposal is determined as the difference between the sales proceeds and the carrying amount of the asset at the beginning of the accounting period plus capital expenditure to the date of disposal. The profit on disposal of investment properties is presented separately on the face of the income statement. Proceeds received on the sale of trading properties are recognised within Revenue, and the carrying value at the date of disposal is recognised within Costs. Significant accounting judgements and estimates Valuation of the Group’s properties The valuation of the Group’s property portfolio is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental revenues from that particular property. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of volatility or low transaction flow in the property market. The investment property valuation contains a number of assumptions upon which the Group’s valuer has based its valuation of the Group’s properties as at 31 March 2017. The assumptions on which the property valuation reports have been based include, but are not limited to, matters such as the tenure and tenancy details for the properties, ground conditions at the properties, the structural condition of the properties, prevailing market yields and comparable market transactions. These assumptions are market standard and accord with the Royal Institution of Chartered Surveyors (RICS) Valuation – Professional Standards UK 2014 (revised April 2015). The estimation of the net realisable value of the Group’s trading properties, in particular the development land and infrastructure programmes, is inherently subjective due to a number of factors, including their complexity, unusually large size, the substantial expenditure required and long timescales to completion. In addition, as a result of these timescales to completion, the plans associated with these programmes could be subject to significant variation. As a result, and similar to the valuation of investment properties, the net realisable values of the Group’s trading properties are subject to a degree of uncertainty and are determined on the basis of assumptions which may not prove to be accurate. If the assumptions upon which the external valuer has based its valuations prove to be inaccurate, this may have an impact on the value of the Group’s investment and trading properties, which could in turn have an effect on the Group’s financial position and results. Acquisition and disposal of properties Property transactions can be complex in nature and material to the financial statements. To determine when an acquisition or disposal should be recognised, management consider whether the Group holds the risks and rewards of ownership, and the point at which this is obtained or relinquished. Consideration is given to the terms of the acquisition or disposal contracts and any conditions that must be satisfied before the contract is fulfilled. In the case of an acquisition, management must also consider whether the transaction represents an asset acquisition or business combination. 120 Landsec Annual Report 2017 14. Investment properties Net book value at the beginning of the year Acquisitions Capital expenditure: Investment portfolio Developments Capitalised interest Disposals Net movement in finance leases Net (deficit)/surplus on revaluation of investment properties Net book value at 31 March 2017 £m 12,358 14 80 46 5 (205) 32 (186) Group 2016 £m 12,158 157 91 104 9 (900) – 739 12,144 12,358 The market value of the Group’s investment properties, as determined by the Group’s external valuer, differs from the net book value presented in the balance sheet due to the Group presenting lease incentives, tenant finance leases and head leases separately. The following table reconciles the net book value of the investment properties to the market value. Group 2016 Combined Portfolio £m Adjustment for proportionate share2 £m (34) 13,954 – – – 311 (14) 220 14,471 F i n a n c i a l S t a t e m e n t s Net book value Plus: tenant lease incentives Less: head leases capitalised Plus: properties treated as finance leases Group (excl. joint ventures) £m 12,144 311 (31) 238 Adjustment for proportionate share2 £m (34) (1) – – Joint ventures1 £m 1,763 57 (8) – 2017 Combined Portfolio £m 13,873 367 (39) 238 Group (excl. joint ventures) £m 12,358 268 (14) 220 Joint ventures1 £m 1,630 43 – – Market value 12,662 1,812 (35) 14,439 12,832 1,673 (34) Net (deficit)/surplus on revaluation of investment properties (186) 40 (1) (147) 739 171 (3) 907 1. Refer to note 16 for a breakdown of this amount by entity. 2. This represents the interest in X-Leisure which we do not own, but which is consolidated in the Group numbers. The net book value of leasehold properties where head leases have been capitalised is £1,169m (2016: £968m). Investment properties include capitalised interest of £206m (2016: £201m). The average rate of interest capitalisation for the year is 4.7% (2016: 5.0%). The historical cost of investment properties is £6,713m (2016: £6,720m). Valuation process The fair value of investment properties at 31 March 2017 was determined by the Group’s independent valuer, CBRE. The valuations are in accordance with RICS standards and were arrived at by reference to market evidence of transactions for similar properties. The valuations performed by the independent valuer are reviewed internally by senior management and relevant people within the London and Retail business units. This process includes discussions of the assumptions used by the independent valuer, as well as a review of the resulting valuations. Discussions of the valuation process and results are held between senior management, the Audit Committee and the independent valuer on a half-yearly basis. The valuer’s opinion of fair value was primarily derived using comparable recent market transactions on arm’s length terms and using appropriate valuation techniques. The fair value of investment properties is determined using the income capitalisation approach. Under this approach, forecast net cash flows, based upon current market derived estimated rental values (market rents) together with estimated costs, are discounted at market derived capitalisation rates to produce the valuer’s opinion of fair value. The average discount rate, which, if applied to all cash flows would produce the fair value, is described as the equivalent yield. Properties in the development programme are typically valued using a residual valuation method. Under this methodology, the valuer assesses the completed development value using income and yield assumptions. Deductions are then made for estimated costs to complete, including finance and developer’s profit, to arrive at the valuation. As the development approaches completion, the valuer may consider the income capitalisation approach to be more appropriate. Landsec Annual Report 2017 121 Notes to the financial statements for the year ended 31 March 2017 continued 14. Investment properties continued The Group considers all of its investment properties to fall within ‘Level 3’, as defined by IFRS 13 and as explained in note 25(iii). Accordingly, there have been no transfers of properties within the fair value hierarchy in the financial year. Costs include future estimated costs associated with refurbishment or development (excluding finance costs), together with an estimate of cash incentives to be paid to tenants. The table below summarises the key unobservable inputs used in the valuation of the Group’s wholly owned investment properties at 31 March 2017: Market value Estimated rental value £ per sq ft Equivalent yield % 2017 Costs £ per sq ft £m Low Average High Low Average High Low Average High Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other1 3,134 855 1,361 20 Total Retail Portfolio (excluding developments) 5,370 London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other1 2,423 1,291 1,336 323 5,373 1,364 41 Total London Portfolio (excluding developments) 6,778 Developments: income capitalisation method Development programme 514 514 Market value at 31 March 2017 – Group 12,662 4 11 5 n/a 4 19 56 31 27 19 14 n/a 14 45 45 34 21 16 n/a 27 62 63 57 35 59 79 n/a 63 73 73 51 28 31 n/a 51 72 66 64 50 72 130 n/a 130 76 76 4.1% 3.5% 3.8% n/a 3.5% 2.9% 4.1% 4.3% 4.7% 2.9% 2.9% n/a 2.9% 4.8% 5.6% 5.3% n/a 7.7% 10.0% 8.6% – – – n/a n/a 5.0% 10.0% 4.6% 4.6% 4.5% 5.0% 4.6% 3.9% n/a 5.0% 5.8% 4.6% 5.5% 5.8% 5.8% n/a 4.4% 5.8% 5 2 2 n/a 4 1 31 1 – 8 - – – – – – - - n/a n/a – – – 6 – – 14 16 28 n/a 28 24 462 2 – 462 1 n/a 1 – – 4.1% 4.1% 4.2% 4.2% 4.5% 4.5% 1. The ‘Other’ category contains a range of low value properties of a diverse nature. As a result it is not meaningful to present assumptions used in valuing these properties. The sensitivities illustrate the impact of changes in key unobservable inputs (in isolation) on the fair value of the Group’s properties: Sensitivities Impact on valuations of 5% change in estimated rental value Impact on valuations of 25 bps change in equivalent yield 2017 Impact on valuations of 5% change in costs Increase £m Decrease £m Decrease £m Increase £m Decrease £m Increase £m 229 264 16 (216) (256) (16) 288 428 33 (263) (381) (30) 2 19 – (2) (20) (17) Market value £m 5,370 6,778 514 12,662 Total Retail Portfolio (excluding developments) Total London Portfolio (excluding developments) Developments: income capitalisation method Market value at 31 March 2017 – Group 122 Landsec Annual Report 2017 The table below summarises the key unobservable inputs used in the valuation of the Group’s wholly owned investment properties at 31 March 2016: Market value Estimated rental value £ per sq ft Equivalent yield % 2016 Costs £ per sq ft £m Low Average High Low Average High Low Average High Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other1 3,133 887 1,520 20 Total Retail Portfolio (excluding developments) 5,560 London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other1 2,506 797 1,053 320 4,676 1,258 45 Total London Portfolio (excluding developments) 5,979 Developments: income capitalisation method Development programme 1,293 1,293 Market value at 31 March 2016 – Group 12,832 4 11 4 n/a 4 16 47 31 27 16 23 n/a 14 17 17 33 21 16 n/a 26 49 59 56 35 51 72 n/a 55 67 67 49 28 33 n/a 49 68 63 61 49 68 140 n/a 140 79 79 4.0% 3.5% 3.8% n/a 3.5% 2.9% 4.3% 4.3% 4.8% 2.9% 2.9% n/a 2.9% 4.0% 4.0% 4.7% 5.4% 5.2% n/a 7.7% 10.0% 8.1% n/a 4.9% 10.0% 3.7% 4.5% 4.4% 4.9% 4.1% 4.1% n/a 4.0% 4.1% 4.1% 5.0% 5.2% 4.4% 5.5% 5.5% 5.1% n/a 5.7% 4.4% 4.4% – – – n/a – – – – – – – n/a – – – 9 2 1 n/a 6 18 10 2 – 12 2 n/a 10 37 37 35 30 20 n/a 35 134 21 3 8 134 7 n/a 134 162 162 1. The ‘Other’ category contains a range of low value properties of a diverse nature. As a result it is not meaningful to present assumptions used in valuing these properties. Sensitivities Total Retail Portfolio (excluding developments) Total London Portfolio (excluding developments) Developments: income capitalisation method Market value at 31 March 2016 – Group Impact on valuations of 5% change in estimated rental value Impact on valuations of 25 bps change in equivalent yield 2016 Impact on valuations of 5% change in costs Increase £m Decrease £m Decrease £m Increase £m Decrease £m Increase £m 240 242 41 (236) (241) (41) 292 397 95 (287) (349) (81) 6 21 2 (7) (21) (2) Market value £m 5,560 5,979 1,293 12,832 F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 123 Notes to the financial statements for the year ended 31 March 2017 continued 15. Trading properties At 1 April 2015 Capital expenditure Capitalised interest Disposals Movement in impairment At 31 March 2016 Capital expenditure Disposals Movement in impairment At 31 March 2017 Development land and infrastructure £m Residential £m 85 10 – (19) 12 88 17 (9) 12 108 137 17 2 (119) (1) 36 2 (24) – 14 Total £m 222 27 2 (138) 11 124 19 (33) 12 122 The cumulative impairment provision at 31 March 2017 in respect of Development land and infrastructure was £67m (31 March 2016: £79m); and in respect of Residential was £1m (31 March 2016: £1m). 16. Joint arrangements Accounting policy Joint arrangements are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint arrangements are accounted for as either a joint venture or a joint operation. The treatment as either a joint venture or a joint operation will depend on whether the Group has rights to the net assets, or a direct interest in the assets and liabilities of the arrangement. A joint arrangement is accounted for as a joint venture when the Group, along with the other parties that have joint control of the arrangement, has rights to the net assets of the arrangement. Interests in joint ventures are accounted for using the equity method of accounting. The equity method requires the Group’s share of the joint venture’s post-tax profit or loss for the year 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. A joint arrangement is accounted for as a joint operation when the Group, along with the parties that have joint control of the arrangement, have rights to the assets and obligations for the liabilities relating to the arrangement. The Group’s share of jointly controlled assets, related liabilities, income and expenses are combined with the equivalent items in the financial statements on a line-by-line basis. 124 Landsec Annual Report 2017 The Group’s joint arrangements are described below: Joint ventures Held at 31 March 2017 20 Fenchurch Street Limited Partnership Nova, Victoria2 Metro Shopping Fund Limited Partnership3 St. David’s Limited Partnership Westgate Oxford Alliance Limited Partnership The Oriana Limited Partnership4 Harvest5, 6 The Ebbsfleet Limited Partnership6 Millshaw Property Co. Limited6, 7 West India Quay Unit Trust6, 8 Joint operation Bluewater, Kent Percentage owned & voting rights Business segment Year end date1 Joint venture partner 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% London London Retail Retail Retail London Retail London Retail Retail 31 March 31 March 31 March Canary Wharf Group plc Canada Pension Plan Investment Board Delancey Real Estate Partners Limited 31 December Intu Properties plc 31 March 31 March 31 March 31 March 31 March 31 March The Crown Estate Commissioners Frogmore Real Estate Partners Limited Partnership J Sainsbury plc Ebbsfleet Property Limited Evans Property Group Limited Schroder Exempt Property Unit Trust Ownership interest 30% Business segment Retail Joint operation partners M&G Real Estate and GIC Lend Lease Retail Partnership Hermes and Aberdeen Asset Management The following joint arrangement was sold in the year ended 31 March 2017: Joint venture Countryside Land Securities (Springhead) Limited Ownership interest 50% Business segment London Joint venture partner Countryside Properties PLC 1. The year-end date shown is the accounting reference date of the joint venture. In all cases the Group’s accounting is performed using financial information for the Group’s own reporting period and reporting date. 2. Nova, Victoria includes the Victoria Circle Limited Partnership, Nova Residential Limited Partnership and Victoria Circle Developer Limited. 3. On 13 April 2017, Metro Shopping Fund Limited Partnership (Metro) completed the sale of one of its assets to DV4 (a fund owned by Delancey Real Estate Asset Management Limited (Delancey)). On the same date Delancey sold its stake in Metro to Invesco Real Estate European Fund. The partnership was subsequently renamed The Southside Limited Partnership. 4. On 23 September 2016, The Oriana Limited Partnership disposed of its interest in 26-32 Oxford Street, W1. 5. Harvest includes Harvest 2 Limited Partnership, Harvest Development Management Limited, Harvest 2 Selly Oak Limited, Harvest 2 GP Limited and Harvest GP Limited. 6. Included within Other in subsequent tables. 7. At 31 March 2017, the Millshaw Property Co. Limited was in the process of being liquidated. 8. West India Quay Unit Trust is held in the X-Leisure Unit Trust (X-Leisure) in which the Group holds a 95% share. All of the Group’s joint arrangements have their principal place of business in the United Kingdom. All of the Group’s joint arrangements own and operate investment property with the exception of The Ebbsfleet Limited Partnership which holds development land as trading properties, and Millshaw Property Co. Limited which disposed of its only property interest in the prior year. The Westgate Oxford Alliance Limited Partnership, Nova, Victoria and The Oriana Limited Partnership are also engaged in the development of investment and trading properties. The activities of all the Group’s joint arrangements are therefore strategically important to the business activities of the Group. All joint ventures are registered in England and Wales with the exception of the Metro Shopping Fund Limited Partnership and West India Quay Unit Trust which are registered in Jersey. F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 125 Notes to the financial statements for the year ended 31 March 2017 continued 16. Joint arrangements continued Joint ventures Group 2017 Total Group share £m 136 52 44 42 (39) 18 (21) 21 40 1 7 69 – 69 – 69 – 69 Other Group share £m 5 2 1 1 – – – 1 – – – 1 – 1 – 1 – 1 50 43 41 (39) 18 (21) 20 40 1 7 68 – 68 – 68 – 68 20 Fenchurch Street Limited Partnership 100% £m Metro Nova, Victoria 100% £m Shopping Fund Limited Partnership 100% £m St. David’s Limited Partnership 100% £m Westgate Oxford Alliance Partnership 100% £m The Oriana Limited Partnership 100% £m Individually material JVs (Group share) 50% £m 131 Comprehensive income statement Revenue1 Gross rental income (after rents payable) Net rental income Segment profit before finance expense Finance expense Capitalised interest Net finance expense 48 39 37 36 (22) – (22) 147 7 2 1 (36) 25 (11) Revenue profit 14 (10) Capital and other items Net surplus/(deficit) on revaluation of investment properties Profit on disposal of investment properties Profit on disposal of trading properties Profit/(loss) before tax Taxation Post-tax profit/(loss) Other comprehensive income Total comprehensive income 43 – – 57 – 57 – 57 41 – 14 45 – 45 – 45 21 17 15 15 (8) – (8) 7 – 2 – 9 – 9 – 9 43 35 29 27 – – – 3 3 2 2 (11) 10 (1) 27 1 (22) – – 5 – 5 – 5 19 – – 20 – 20 – 20 – – – – – – – – (1) – – (1) – (1) – (1) Group share of total comprehensive income 50% 28 50% 23 50% 5 50% 3 50% 10 50% (1) 1. Revenue includes gross rental income (before rents payable), service charge income, other property related income and trading properties disposal proceeds. 126 Landsec Annual Report 2017 20 Fenchurch Street Limited Partnership 100% £m Metro Shopping Fund Limited Partnership 100% £m Nova, Victoria 100% £m St. David’s Limited Partnership 100% £m Westgate Oxford Alliance Partnership 100% £m The Oriana Limited Partnership 100% £m Individually material JVs (Group share) 100% £m Other Group share £m Joint ventures Comprehensive income statement Revenue1 Gross rental income (after rents payable) Net rental income/(expense) Segment profit/(loss) before finance expense Finance expense Capitalised interest Net finance expense Revenue profit Capital and other items Net surplus on revaluation of investment properties Movement in impairment of trading properties Profit on disposal of investment properties Profit before tax Taxation Post-tax profit Other comprehensive income Total comprehensive income 45 36 35 33 (33) – (33) – 86 – 1 87 – 87 – 87 – – (1) (1) (29) 28 (1) (2) 87 – – 85 – 85 – 85 19 15 15 14 (7) – (7) 7 56 – – 63 (1) 62 – 62 45 37 30 29 – – – 29 73 – – 102 – 102 – 102 3 3 1 1 (6) 6 – 1 19 – – 20 – 20 – 20 1 1 1 1 – – – 1 19 – 4 24 – 24 – 24 Group 2016 Total Group share £m 60 49 43 41 (38) 17 (21) 20 171 5 4 200 (1) 199 – 199 199 F i n a n c i a l S t a t e m e n t s 57 46 41 39 (38) 17 (21) 18 170 – 3 191 (1) 190 – 190 190 3 3 2 2 – – – 2 1 5 1 9 – 9 – 9 9 Group share of total comprehensive income 50% 44 50% 42 50% 31 50% 51 50% 10 50% 12 1. Revenue includes gross rental income (before rents payable), service charge income, other property related income, trading properties disposal proceeds and income from long-term development contracts. Landsec Annual Report 2017 127 Notes to the financial statements for the year ended 31 March 2017 continued 16. Joint arrangements continued Joint ventures Balance sheet Investment properties1 Non-current assets Cash and cash equivalents Other current assets Current assets Total assets Trade and other payables and provisions Current liabilities Non-current liabilities Non-current liabilities Total liabilities Net assets Market value of investment properties1 Net (debt)/cash Balance sheet Investment properties1 Non-current assets Cash and cash equivalents Other current assets Current assets Total assets 20 Fenchurch Street Limited Partnership 100% £m Metro Shopping Fund Limited Partnership 100% £m St. David’s Limited Partnership 100% £m Westgate Oxford Alliance Partnership 100% £m Nova, Victoria 100% £m The Oriana Limited Partnership 100% £m 1,046 1,046 16 93 109 1,155 (100) (100) – – 809 809 43 195 238 376 376 6 7 13 1,047 389 (173) (173) – – (39) (39) (142) (142) (181) 708 708 4 21 25 733 (12) (12) (16) (16) (28) 412 412 10 15 25 437 (32) (32) – – (32) Individually material JVs (Group share) 50% £m 1,722 1,722 46 180 226 93 93 13 28 41 134 1,948 (2) (2) (17) (17) (19) (179) (179) (88) (88) (267) (100) (173) 1,055 1,135 16 1,008 1,008 12 71 83 1,091 874 815 43 680 680 12 259 271 951 208 705 405 115 1,681 379 (166) 707 (12) 411 10 93 13 1,770 (48) 378 378 7 6 13 391 (11) (11) (174) (174) (185) 206 381 (167) 716 716 7 21 28 744 (13) (13) – – (13) 731 732 7 248 248 9 1 10 258 (6) (6) – – (6) 252 247 9 159 159 26 34 60 219 (29) (29) – – (29) 190 159 26 1,594 1,594 37 196 233 1,827 (145) (145) (87) (87) (232) 1,595 1,637 (50) Group 2017 Total Group share £m 1,763 1,763 49 194 243 2,006 (184) (184) (88) (88) (272) 1,734 1,812 (46) 2016 1,630 1,630 43 236 279 1,909 (154) (154) (87) (87) (241) 1,668 1,673 (44) Other Group share £m 41 41 3 14 17 58 (5) (5) – – (5) 53 42 2 36 36 6 40 46 82 (9) (9) – – (9) 73 36 6 Trade and other payables and provisions Current liabilities Non-current financial liabilities Non-current liabilities Total liabilities Net assets Market value of investment properties1 Net (debt)/cash (109) (109) (122) (122) – – – – (109) (122) 982 1,075 12 829 680 12 1. The difference between the book value and the market value is the amount recognised in respect of lease incentives, head leases capitalised and properties treated as finance leases, where applicable. 128 Landsec Annual Report 2017 Joint ventures Net investment At 1 April 2015 Total comprehensive income Cash contributed Loan advances Loan repayments Property and other distributions Cash distributions At 31 March 2016 Total comprehensive income Cash contributed Loan advances Loan repayments Other distributions Cash distributions Disposal of investment At 31 March 2017 20 Fenchurch Street Limited Partnership 50% £m Metro Shopping Fund Limited Partnership 50% £m St. David’s Limited Partnership 50% £m Westgate Oxford Alliance Partnership 50% £m Nova, Victoria 50% £m The Oriana Limited Partnership 50% £m 446 44 – 1 – – – 491 28 – 8 – – – – 272 42 – 100 – – – 414 23 – 37 (37) – – – 86 31 – 1 – – (15) 103 5 – – (1) – (3) – 329 51 – – (14) – – 366 3 – – (16) – – – 54 10 62 – – – – 126 10 67 – – – – – 527 437 104 353 203 146 12 – – – (56) (7) 95 (1) – – – – (37) – 57 Individually material JVs (Group share) 50% £m 1,333 190 62 102 (14) (56) (22) 1,595 68 67 45 (54) – (40) – 1,681 17. Capital commitments Contracted capital commitments at the end of the year in respect of: Investment properties Trading properties Joint ventures (our share) Total capital commitments Group Total Group share £m 1,434 199 62 106 (14) (56) (63) 1,668 69 67 45 (54) (12) (44) (5) 1,734 Group 2016 £m 102 2 104 152 256 F i n a n c i a l S t a t e m e n t s Other Group share £m 101 9 – 4 – – (41) 73 1 – – – (12) (4) (5) 53 2017 £m 48 3 51 79 130 Landsec Annual Report 2017 129 Notes to the financial statements for the year ended 31 March 2017 continued 18. Net investment in finance leases Accounting policy Where the Group’s leases transfer the significant risks and rewards of owning the asset to the tenant, the lease is accounted for as a finance lease. At the outset of the lease the fair value of the asset is de-recognised from investment property and recognised as a finance lease receivable. Lease income is recognised over the period of the lease, reflecting a constant rate of return. The difference between the gross receivable and the present value of the receivable is recognised as finance income within Revenue over the lease term. Non-current Finance leases – gross receivables Unearned finance income Unguaranteed residual value Current Finance leases – gross receivables Unearned finance income Net investment in finance leases Gross receivables from finance leases due: Not later than one year Later than one year but not more than five years More than five years Unearned finance income Unguaranteed residual value Net investment in finance leases 2017 £m 274 (143) 34 165 12 (9) 3 168 12 49 225 286 Group 2016 £m 333 (184) 34 183 12 (10) 2 185 12 52 281 345 (152) (194) 34 168 34 185 The Group has leased out a number of investment properties under finance leases, which range from 30 to 99 years in duration from the inception of the lease. The fair value of the Group’s finance lease receivables, using a discount rate of 4.2% (2016: 4.9%), is £218m (2016: £226m). 130 Landsec Annual Report 2017 19. Intangible assets Accounting policy Intangible assets comprise goodwill and other intangible assets arising on business combinations and software used internally within the business. Intangible assets arising on business combinations are initially recognised at fair value. Goodwill is not amortised, but is tested at least annually for impairment. Other intangible assets arising on business combinations are amortised to the income statement over their expected useful lives. Software assets are stated at cost less accumulated amortisation and are amortised on a straight-line basis over their estimated useful economic lives, normally five years. At 1 April 2015 Transfer from other property, plant and equipment Capital expenditure Amortisation Impairment of goodwill on unwind of deferred tax liability At 31 March 2016 Capital expenditure Amortisation Impairment of goodwill on unwind of deferred tax liability At 31 March 2017 Goodwill £m Software £m Other intangible asset £m Group Total intangible assets £m 6 – – – (1) 5 – – (1) 4 – 5 2 (2) – 5 2 (1) – 6 29 – – (1) – 28 – (2) – 26 35 5 2 (3) (1) 38 2 (3) (1) 36 The other intangible asset relates to the Group’s acquisition of its interest in Bluewater, Kent in 2014 and represents the estimated fair value of the management rights for the centre. The fair value at the date of acquisition was £30m and the asset is being amortised over a period of 20 years. On recognition of the intangible asset, the Group recognised a deferred tax liability of £6m, and corresponding goodwill of the same amount. The deferred tax liability is being released to the income statement as the intangible asset is amortised, and the corresponding element of the goodwill is being tested for impairment. F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 131 Notes to the financial statements for the year ended 31 March 2017 continued Section 4 – Capital structure and financing This section focuses on the Group’s financing structure, including borrowings and financial risk management. The total capital of the Group consists of shareholders’ equity and net debt. The Group’s strategy is to maintain an appropriate net debt to total equity ratio (gearing) and loan-to-value ratio (LTV) to ensure that asset level performance is translated into enhanced returns for shareholders whilst maintaining an appropriate risk reward balance to accommodate changing financial and operating market cycles. The table in note 20 details a number of the Group’s key metrics in relation to managing its capital structure. A key element of the Group’s capital structure is that the majority of our borrowings are secured against a large pool of our assets (the Security Group). This enables us to raise long-term debt in the bond market, as well as shorter-term flexible bank facilities, both at competitive rates. In general, we follow a secured debt strategy as we believe this gives the Group better access to borrowings at a lower cost. In addition, the Group holds a number of assets outside the Security Group structure (in the Non-restricted Group). These assets include a number of joint venture interests, our interests in X-Leisure and other properties where we have asset specific finance. By having both the Security Group and the Non-restricted Group, and considerable flexibility to move assets between the two, we are able to raise the most appropriate finance for each specific asset or joint venture. Under IFRS, a large part of our net debt is carried at below its final redemption amount and is increased over its life to its nominal value. We view our capital structure as if the debt were carried at its full redemption amount (see note 21 for an explanation of the bond exchange de-recognition adjustment). 132 Landsec Annual Report 2017 20. Capital structure Property portfolio Market value of investment properties Trading properties Total property portfolio (a) Net debt Borrowings Monies held in restricted accounts and deposits Cash and cash equivalents Fair value of interest-rate swaps Fair value of foreign exchange swaps Net debt (b) Less: Fair value of interest-rate swaps Reverse bond exchange de-recognition (note 21) Adjusted net debt (c) Adjusted total equity Total equity (d) Fair value of interest-rate swaps Reverse bond exchange de-recognition (note 21) Adjusted total equity (e) Gearing (b/d) Adjusted gearing (c/e) Group LTV (c/a) Security Group LTV Weighted average cost of debt Group £m 12,662 122 12,784 2,949 (21) (30) 2 5 2,905 (2) 314 3,217 11,516 2 (314) 11,204 25.2% 28.7% 25.2% 28.3% 4.2% 2017 Adjustment for non-wholly owned subsidiaries1 £m Combined £m Group £m (35) 14,439 – 248 12,832 124 (35) 14,687 12,956 Joint ventures £m 1,812 126 1,938 Group 2016 Combined £m Adjustment for non-wholly owned subsidiaries1 £m (34) – (34) 14,471 280 14,751 Joint ventures £m 1,673 156 1,829 93 – (49) 2 – 46 (2) – 44 – 2 – 2 85 – (43) 2 – 44 (2) – 42 – 2 – 2 – – – – – – – – – – – – – 3,042 2,873 (21) (79) 4 5 2,951 (4) 314 3,261 (19) (25) 32 – 2,861 (32) 368 3,197 11,516 11,699 4 (314) 32 (368) 11,206 11,363 25.6% 29.1% 22.2% 4.2% 24.5% 28.1% 24.7% 23.4% 4.9% – – – – – – – – – – – – – 2,958 (19) (68) 34 – 2,905 (34) 368 3,239 11,699 34 (368) 11,365 24.8% 28.5% 22.0% 4.9% F i n a n c i a l S t a t e m e n t s 1. This represents the interest in X-Leisure which we do not own, but which is consolidated in the Group numbers. Landsec Annual Report 2017 133 Notes to the financial statements for the year ended 31 March 2017 continued 21. Borrowings Accounting policy 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 the 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, 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. Secured/ unsecured Fixed/ floating Effective interest rate % Nominal/ notional value £m Fair value £m Book value £m Nominal/ notional value £m Fair value £m Book value £m 31 March 2017 Group 31 March 2016 Current borrowings Sterling 5.253% QAG Bond Commercial paper Sterling Euro Swiss Franc US Dollar Total current borrowings Non-current borrowings Sterling A3 5.425% MTN due 2022 A10 4.875% MTN due 2025 A12 1.974% MTN due 2026 A4 5.391% MTN due 2026 A5 5.391% MTN due 2027 A6 5.376% MTN due 2029 A13 2.399% MTN due 2031 A7 5.396% MTN due 2032 A11 5.125% MTN due 2036 Secured Fixed 5.3 18 22 18 Unsecured Floating LIBOR + margin Unsecured Floating LIBOR + margin Unsecured Floating LIBOR + margin Unsecured Floating LIBOR + margin Secured Secured Secured Secured Secured Secured Secured Secured Secured Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed 5.5 5.0 2.0 5.4 5.4 5.4 2.4 5.4 5.1 3 261 28 94 404 46 28 400 27 585 318 300 321 500 3 261 28 94 408 53 34 411 33 749 420 314 441 689 3 261 28 94 404 46 28 399 27 583 317 299 320 499 (314) 17 2 – – – 19 255 300 – 211 608 318 – 323 500 20 2 – – – 22 291 351 – 254 749 398 – 410 624 Bond exchange de-recognition adjustment 5.253% QAG Bond Syndicated bank debt Secured Fixed 5.3 Secured Floating LIBOR + margin Amounts payable under finance leases Unsecured Fixed 5.7 255 55 31 310 55 42 255 55 31 272 430 14 327 430 18 2,525 3,144 2,204 2,515 3,077 Total non-current borrowings 2,866 3,551 2,545 3,231 3,852 2,854 Total borrowings 3,270 3,959 2,949 3,250 3,874 2,873 134 Landsec Annual Report 2017 17 2 – – – 19 255 298 – 210 606 317 – 321 499 (368) 2,138 272 430 14 Reconciliation of the movement in borrowings At the beginning of the year Proceeds from new borrowings Repayment of borrowings Redemption of medium term notes Issue of medium term notes (net of finance fees) Amortisation of bond exchange de-recognition adjustment Bond exchange de-recognition adjustment on redemption of medium term notes Foreign exchange movement on non-GBP borrowings Other At 31 March 2017 £m 2,873 361 (391) (690) 698 24 30 23 21 Group 2016 £m 3,784 249 (806) (400) – 23 – 23 – 2,949 2,873 Medium term notes (MTNs) The MTNs are secured on the fixed and floating pool of assets of the Security Group. Debt investors benefit from security over a pool of investment properties, development properties and the Group’s investment in Westgate Oxford Alliance Limited Partnership, Nova, Victoria, the St. David’s Limited Partnership and 20 Fenchurch Street Limited Partnership, in total valued at £12.9bn at 31 March 2017 (31 March 2016: £12.6bn). The secured debt structure has a tiered operating covenant regime which gives the Group substantial flexibility when the loan-to-value and interest cover in the Security Group are less than 65% and more than 1.45 times respectively. If these limits are exceeded, the operating environment becomes more restrictive with provisions to encourage a reduction in gearing. The interest rate is fixed until the expected maturity, being two years before the legal maturity date for each MTN, whereupon the interest rate for the last two years may either become LIBOR plus an increased margin (relative to that at the time of issue), or subject to a fixed coupon uplift, depending on the terms and conditions of the specific notes. The effective interest rate is based on the coupon paid and includes the amortisation of issue costs. The MTNs are listed on the Irish Stock Exchange and their fair values are based on their respective market prices. On 8 February 2017, the Group purchased £635m of MTNs for a premium of £124m. The Group purchased £206m of its A3 MTN due in 2022, £265m of its A10 MTN due in 2025 and £164m of its A4 MTN due in 2026. On the same date, the Group issued a £400m 1.974% MTN due in 2026 and a £300m 2.399% MTN due in 2031. Costs associated with the issues of the new MTNs of £2m have been capitalised within non-current borrowings. Earlier in the year, the Group also purchased a further £55m of MTNs for a premium of £13m. The Group purchased £3m of its A3 MTN due in 2022, £7m of its A10 MTN due in 2025, £20m of its A4 MTN due in 2026, £23m of its A5 MTN due in 2027 and £2m of its A7 MTN due in 2032. The table below summarises the aggregate purchases, together with the premiums paid. F i n a n c i a l S t a t e m e n t s MTN purchases A8 4.875% MTN due 2019 A3 5.425% MTN due 2022 A10 4.875% MTN due 2025 A4 5.391% MTN due 2026 A5 5.391% MTN due 2027 A7 5.396% MTN due 2032 Syndicated and bilateral bank debt Syndicated debt Bilateral debt 31 March 2017 31 March 2016 Purchases £m Premium £m Purchases £m Premium £m Group – 209 272 184 23 2 690 2017 £m 55 – 55 – 29 57 44 6 1 137 400 26 – – – – – – – – – – 400 26 Drawn 2016 £m 430 – 430 2017 £m 1,760 125 1,885 Group Undrawn 2016 £m 950 485 1,435 Landsec Annual Report 2017 135 Maturity as at 31 March 2017 2021-22 2021 2017 £m 1,815 125 1,940 Authorised 2016 £m 1,380 485 1,865 Notes to the financial statements for the year ended 31 March 2017 continued 21. Borrowings continued At 31 March 2017, our committed revolving facilities totalled £1,940m (31 March 2016: £1,865m). The £75m increase in committed facilities is the result of a £435m syndicated debt facility being arranged on 14 June 2016, and a £125m bilateral debt facility being arranged on 31 January 2017, offset by the cancellation of £350m of bilateral facilities on 14 June 2016 and the cancellation of a £135m bilateral facility on 24 November 2016. All syndicated and bilateral facilities are committed and secured on the assets of the Security Group. In the year ended 31 March 2017, the amounts drawn under the Group’s bilateral facilities and syndicated bank debt decreased by £375m. The terms of the Security Group funding arrangements require undrawn facilities to be reserved where syndicated and bilateral facilities mature within one year, or where commercial paper has been issued. Accordingly, the Group’s available undrawn facilities at 31 March 2017 were £1,499m (31 March 2016: £1,433m), compared with undrawn facilities of £1,885m (31 March 2016: £1,435m). Queen Anne’s Gate Bond On 29 July 2009, the Group issued a £360m bond secured on the rental cash flows from the commercial lease with the UK Government over Queen Anne’s Gate (QAG). The QAG Bond is a fully amortising bond with a final maturity in February 2027 and a fixed interest rate of 5.253% per annum. At 31 March 2017, the bond had an amortised book value of £273m (31 March 2016: £289m). Since 31 March 2017, the Group has redeemed the QAG bond in its entirety, for a premium to nominal value of £63m. Fair values The fair values of any floating rate financial liabilities are assumed to be equal to their nominal value, but adjusted for the effect of exit fees payable on redemption. The fair values of the MTNs and the QAG Bond fall within Level 1, the syndicated, bilateral facilities, commercial paper, interest-rate swaps and foreign exchange swaps fall within Level 2, and the amounts payable under finance leases fall within Level 3, as defined by IFRS 13. The fair value of the amounts payable under finance leases is determined using a discount rate of 4.2% (31 March 2016: 4.9%). Bond exchange de-recognition On 3 November 2004, a debt refinancing was completed resulting in the Group exchanging all of its outstanding bond and debenture debt for new MTNs with higher nominal values. The new MTNs did not meet the IAS 39 conditions to be considered substantially different from the debt that they replaced. Consequently, the book value of the new debt is reduced to the book value of the original debt by the ‘bond exchange de-recognition’ adjustment which is then amortised to zero over the life of the new MTNs. The amortisation is included in finance expense in the income statement. 136 Landsec Annual Report 2017 22. Monies held in restricted accounts and deposits Accounting policy Monies held in restricted accounts and deposits represent cash held by the Group in accounts with conditions that restrict the use of these monies by the Group and, as such, does not meet the definition of cash and cash equivalents. Holding cash in restricted accounts does not prevent the Group from optimising returns by putting these monies on short-term deposit. Cash at bank and in hand Short-term deposits 2017 £m 12 9 21 Group 2016 £m 11 8 19 Company 2016 £m 4 – 4 2017 £m 4 – 4 The credit quality of monies held in restricted accounts and deposits can be assessed by reference to external credit ratings of the counterparty where the account or deposit is placed. F i n a n c i a l S t a t e m e n t s Counterparties with external credit ratings A BBB+ 23. Cash and cash equivalents Accounting policy 2017 £m 13 8 21 Group 2016 £m 11 8 19 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. Cash at bank and in hand Short-term deposits 2017 £m 21 9 30 Group 2016 £m 24 1 25 Company 2016 £m – – – 2017 £m – – – Short-term deposits The credit quality of cash and cash equivalents can be assessed by reference to external credit ratings of the counterparty where the account or deposit is placed. Counterparties with external credit ratings A BBB+ 2017 £m 29 1 30 Group 2016 £m 24 1 25 Landsec Annual Report 2017 137 Notes to the financial statements for the year ended 31 March 2017 continued 24. Derivative financial instruments Accounting policy The Group uses interest-rate and foreign exchange swaps to manage its market risk. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes. All derivatives are recognised on the balance sheet at fair value. The fair value of interest-rate and foreign exchange swaps is based on counterparty or market quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market rates for similar instruments at the measurement date. The gain or loss on derivatives are recognised immediately in the income statement, within net finance expense. The fair values of the financial instruments have been determined by reference to relevant market prices, where available. The fair values of the Group’s outstanding interest-rate swaps have been estimated by calculating the present value of future cash flows, using appropriate market discount rates. These valuation techniques fall within Level 2, as defined by IFRS 13. Fair value of derivative financial instruments 2017 £m 5 2 7 2017 £m 400 389 789 Group 2016 £m 1 31 32 Group 2016 £m 580 – 580 Current liabilities Non-current liabilities Notional amount Interest-rate swaps Foreign exchange swaps 138 Landsec Annual Report 2017 25. Financial risk management Introduction A review of the Group’s objectives, policies and processes for managing risk is set out in “Managing risk” and “Our principal risks and uncertainties” (pages 42 to 45). This note provides further detail on financial risk management and includes quantitative information on specific financial risks. The Group is exposed to a variety of financial risks: market risks (principally interest-rate risk), credit risk and liquidity risk. The Group’s overall risk management strategy seeks to minimise the potential adverse effects of these on the Group’s financial performance and includes the use of derivative financial instruments to hedge certain risk exposures. Financial risk management is carried out by the Group’s treasury function under policies approved by the Board of Directors. The following table summarises the Group’s financial assets and liabilities into the categories required by IFRS 7, ‘Financial Instruments: Disclosures’: Loans and receivables Cash and cash equivalents Other investments Financial liabilities at amortised cost Financial liabilities at fair value through profit and loss Financial risk factors 2017 £m 672 30 13 Group 2016 £m 684 25 14 (3,118) (3,047) (43) (67) (2,446) (2,391) (i) Credit risk The Group’s principal financial assets are cash and cash equivalents, trade and other receivables, finance lease receivables and amounts due from joint ventures. Further details concerning the credit risk of counterparties is provided in the note that specifically relates to each type of asset. Bank and financial institutions One of the principal credit risks of the Group arises from financial derivative instruments and deposits with banks and financial institutions. In line with the policy approved by the Board of Directors, where the Group manages the deposit only independently rated banks and financial institutions with a minimum rating of A- are accepted. For UK banks and financial institutions with which the Group has a committed lending relationship, the minimum rating is lowered to BBB+. The Group’s treasury function currently performs a weekly review of the credit ratings of all financial institution counterparties. Furthermore, the treasury function ensures that funds deposited with a single financial institution remain within the Group’s policy limits. F i n a n c i a l S t a t e m e n t s Trade receivables Trade receivables are presented in the balance sheet net of allowances for doubtful receivables. 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 balance is low relative to the scale of the balance sheet and, owing to the long-term nature and diversity of the Group’s tenancy arrangements, the credit risk of trade receivables is considered to be low. Furthermore, a credit report is obtained from an independent rating agency prior to the inception of a lease with a new counterparty. This report is used to determine the size of the deposit that is required from the tenant at inception. In general these deposits represent between three and six months’ rent. Finance lease receivables This balance relates to amounts receivable from tenants in respect of tenant finance leases. This is not considered a significant credit risk as the tenants are generally of good financial standing. Landsec Annual Report 2017 139 Notes to the financial statements for the year ended 31 March 2017 continued 25. Financial risk management continued (ii) Liquidity risk The Group actively maintains a mixture of notes with final maturities between 2022 and 2036, commercial paper and medium-term committed bank facilities that are designed to ensure that the Group has sufficient available funds for its operations and its committed capital expenditure programme. Management monitors the Group’s available funds as follows: Cash and cash equivalents Available facilities Cash and available undrawn facilities As a proportion of drawn debt 2017 £m 30 1,499 1,529 47.2% Group 2016 £m 25 1,433 1,458 45.0% The Group’s core financing structure is in the Security Group, although the Non-restricted Group may also secure independent funding. Security Group The Group’s principal financing arrangements utilise the credit support of a ring-fenced group of assets (the Security Group) that comprises the majority of the Group’s investment property portfolio and certain investments in joint ventures. These arrangements operate in ‘tiers’ determined by LTV and interest cover ratio (ICR). This structure is most flexible at lower tiers (with a lower LTV and a higher ICR) and allows property acquisitions, disposals and developments to occur with relative freedom. In higher tiers, the requirements become more prescriptive. No financial covenant default is triggered until the applicable LTV exceeds 100% or the ICR is less than 1.0x. As at 31 March 2017, the reported LTV for the Security Group was 28.3% (2016: 23.4%), meaning that the Group was operating in Tier 1 and benefited from maximum operational flexibility. Management monitors the key covenants attached to the Security Group on a monthly basis, including LTV, ICR, sector and regional concentration and disposals. Non-restricted Group The Non-restricted Group obtains funding when required from a combination of inter-company loans from the Security Group, equity and external bank debt. Bespoke credit facilities are established with banks when required for the Non-restricted Group projects and joint ventures, usually on a limited- recourse basis. The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the expected maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m 531 145 537 2 1 11 34 80 6 39 – 2 2 – – – – – – 704 149 5 1 – – – – – 36 579 Group 2017 Total £m 4,587 214 2 11 34 80 6 39 36 Over 5 years £m 3,374 205 (2) – – – – – – 3,577 5,009 Borrowings (excluding finance lease liabilities) Finance lease liabilities Derivative financial instruments Trade payables Capital accruals Accruals Amounts owed to joint ventures Other payables Redemption liabilities 140 Landsec Annual Report 2017 Borrowings (excluding finance lease liabilities) Finance lease liabilities Derivative financial instruments Trade payables Capital accruals Accruals Amounts owed to joint ventures Other payables Non-current trade and other payables Redemption liabilities Less than 1 year £m 171 1 1 6 32 79 3 25 – – 318 Between 1 and 2 years £m 170 Between 2 and 5 years £m 1,186 1 4 – – – – – 28 – 203 3 20 – – – – – – 35 1,244 Group 2016 Total £m 4,815 84 35 6 32 79 3 25 28 35 Over 5 years £m 3,288 79 10 – – – – – – – 3,377 5,142 (iii) Market risk The Group is exposed to market risk through interest rates, availability of credit and foreign exchange movements. Interest rates The Group uses derivative products to manage its interest rate exposure, and has a hedging policy that generally requires at least 80% of its existing debt plus increases in debt associated with net committed capital expenditure to be at fixed interest rates for the coming five years. 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. Specific interest-rate hedges are also used within our joint ventures to fix the interest rate exposure on limited-recourse debt. Where specific hedges are used in geared joint ventures to fix the interest exposure on limited-recourse debt, these may qualify for hedge accounting. At 31 March 2017, the Group (including joint ventures) had pay-fixed interest-rate swaps in place with a nominal value of £0.5bn (2016: £0.7bn), and its net debt was 88.9% fixed (2016: 94.9%). Based on the Group’s debt balances at 31 March 2017, a 1% increase in interest rates would increase the annual net finance expense in the income statement and reduce equity by £2m (2016: £2m). The sensitivity has been calculated by applying the interest rate change to the variable rate borrowings, net of interest-rate swaps and cash and cash equivalents. Foreign exchange Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the Group’s functional currency. As it is solely UK based, the Group does not frequently enter into any foreign currency transactions other than in connection with its financing activities. Where significant committed expenditure in foreign currencies is identified, it is the Group’s policy to hedge 100% of that exposure by entering into forward purchases of foreign currency to fix the Sterling value. At 31 March 2017, the Group had issued €307m, $118m and CHF35m of commercial paper, fully hedged through foreign exchange swaps. At 31 March 2016, the Group had no foreign currency exchange exposure. A 10% weakening or strengthening of Sterling would therefore have £nil (2016: £nil) impact on the Group’s income statement and equity. The Group’s foreign exchange risk is therefore low. Financial maturity analysis The interest rate profile of the Group’s undiscounted borrowings, after taking into account the effect of the interest-rate swaps, are set out below: F i n a n c i a l S t a t e m e n t s Sterling Euro US Dollar Swiss Franc Fixed rate £m 2,829 – – – 2,829 Floating rate £m 58 261 94 28 441 2017 Total £m 2,887 261 94 28 Fixed rate £m 2,997 – – – Floating rate £m 253 – – – Group 2016 Total £m 3,250 – – – 3,270 2,997 253 3,250 Landsec Annual Report 2017 141 Notes to the financial statements for the year ended 31 March 2017 continued 25. Financial risk management continued The expected maturity profiles of the Group’s borrowings are as follows: One year or less, or on demand More than one year but not more than two years More than two years but not more than five years More than five years Borrowings Effect of hedging Borrowings net of interest-rate swaps Fixed rate £m 18 20 117 2,674 2,829 – 2,829 Floating rate £m 386 – 55 – 441 – 441 2017 Total £m 404 20 172 2,674 3,270 – 3,270 Fixed rate £m 16 18 320 2,463 2,817 180 2,997 Floating rate £m 3 – 430 – 433 (180) 253 The expected maturity profiles of the Group’s derivative instruments are as follows (based on notional values): One year or less, or on demand More than five years1 1. Interest-rate swaps more than five years have a term commencing from October 2017. Foreign exchange swaps £m 389 – 389 2017 Interest- rate swaps £m – 400 400 Foreign exchange swaps £m – – – Group 2016 Total £m 19 18 750 2,463 3,250 – 3,250 Group 2016 Interest- rate swaps £m 180 400 580 Valuation hierarchy Interest-rate swaps, foreign exchange swaps, the redemption liability and other investments are the only financial instruments which are carried at fair value. For financial instruments other than borrowings disclosed in note 21, the carrying value in the balance sheet approximates their fair values. The table below shows the aggregate assets and liabilities carried at fair value by valuation method: Assets Liabilities Level 1 £m Level 2 £m – – – (7) Level 3 £m 13 (36) 2017 Total £m 13 (43) Level 1 £m – – Level 2 £m – (32) Level 3 £m 14 (35) Group 2016 Total £m 14 (67) Note: Level 1: valued using unadjusted quoted prices in active markets for identical financial instruments. Level 2: valued using techniques based on information that can be obtained from observable market data. Level 3: valued using techniques incorporating information other than observable market data. The fair value of the Group’s finance lease obligations, using a discount rate of 4.2% (2016: 4.9%), is £42m (2016: £18m). The fair value of the redemption liability is determined as the present value of the amount the Group would be required to pay to settle the liability (an exit price). The fair value is calculated by reference to the net assets of the underlying subsidiary. The valuation is not based on observable market data and therefore the redemption liability is considered to fall within Level 3 of the fair value hierarchy. The fair value of the other investments is calculated by reference to the net assets of the underlying entity. The valuation is not based on observable market data and therefore the other investments are considered to fall within Level 3 of the fair value hierarchy. 142 Landsec Annual Report 2017 Section 5 – Working capital This section focuses on our working capital balances, including trade and other receivables, trade and other payables, and provisions. 26. Trade and other receivables Accounting policy Trade and other receivables are recognised initially at fair value, subsequently at amortised cost and, where relevant, adjusted for the time value of money. A provision 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. If collection is expected in more than one year, the balance is presented within non-current assets. Net trade receivables Property sales receivables Tenant lease incentives (note 14) Prepayments and accrued income Amounts due from joint ventures Other receivables Total current trade and other receivables Non-current amounts due from joint ventures Non-current property sales receivables Total trade and other receivables 2017 £m 53 18 311 25 2 9 418 107 16 541 Group 2016 £m 69 70 268 25 7 6 445 86 – 531 Company 2016 £m 2017 £m – – – – – 17 17 – – 17 – – – – – 17 17 – – 17 The accounting for lease incentives is set out in note 6. The value of the tenant lease incentive, included in current trade and other receivables, is spread over the non-cancellable life of the lease. Ageing of trade receivables As at 31 March 2017 Not impaired Impaired Gross trade receivables As at 31 March 2016 Not impaired Impaired Gross trade receivables Not past due £m Up to 30 days past due £m Up to 6 months past due £m Up to 12 months past due £m More than 12 months past due £m 17 – 17 29 – 29 30 – 30 32 – 32 3 1 4 4 2 6 1 1 2 2 4 6 2 9 11 2 10 12 Group Total £m 53 11 64 69 16 85 The majority of the Group’s trade receivables are considered past due as they relate to rents receivable from tenants which are payable in advance. None of the Group’s other receivables are past due (2016: £nil). F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 143 Notes to the financial statements for the year ended 31 March 2017 continued 26. Trade and other receivables continued Movement in allowances for doubtful accounts At the beginning of the year Increase to provision Decrease to provision Utilised in the year At 31 March Movement in tenant lease incentives At the beginning of the year Revenue recognised Capital incentives granted Provision for doubtful receivables Disposal of properties At 31 March 27. Trade and other payables Trade payables Capital accruals Other payables Accruals Deferred income Amounts owed to joint ventures Trading property deposits Loans from Group undertakings Total current trade and other payables Non-current amounts owed to joint ventures Non-current other payables Non-current trading property deposits Total trade and other payables Group 2016 £m 15 10 (5) (4) 16 Group 2016 £m 251 29 7 (2) (17) 268 Company 2016 £m – – – 6 – – – 2017 £m 16 6 (5) (6) 11 2017 £m 268 44 1 – (2) 311 2017 £m – – – 14 – – – 1,380 1,394 1,031 1,037 – – – – – – 1,394 1,037 2017 £m 11 34 39 80 132 6 – – 302 – – 25 327 Group 2016 £m 6 32 25 79 126 3 18 – 289 12 16 – 317 Capital accruals 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 year end. Deferred income principally relates to rents received in advance. 144 Landsec Annual Report 2017 Section 6 – Other required disclosures This section gives further disclosure in respect of other areas of the financial statements, together with mandatory disclosures required in accordance with IFRS. 28. Investments in subsidiary undertakings Accounting policy Investments in subsidiary undertakings are stated at cost in the Company’s balance sheet, less any provision for impairment in value. In accordance with ‘IFRS 2 – Share Based Payments’ the equity settled share-based payment charge for the employees of the Company’s subsidiaries is treated as an increase in the cost of investment in the subsidiaries, with a corresponding increase in the Company’s equity. At the beginning of the year Capital contributions relating to share-based payments (note 33) At 31 March A full list of subsidiary undertakings at 31 March 2017 is included on page 180. 29. Other non-current assets Other property, plant and equipment Other investments Pension surplus (note 32) Total other non-current assets 30. Other current liabilities Provisions Derivative financial instruments Total other current liabilities 2017 £m 6,200 5 6,205 Company 2016 £m 6,192 8 6,200 2017 £m 24 13 14 51 2017 £m 2 5 7 F i n a n c i a l S t a t e m e n t s Group 2016 £m 5 14 25 44 Group 2016 £m 18 1 19 Landsec Annual Report 2017 145 Notes to the financial statements for the year ended 31 March 2017 continued 31. Other non-current liabilities Provisions Derivative financial instruments Deferred tax liability Total other non-current liabilities 32. Net pension surplus Accounting policy 2017 £m – 2 7 9 Group 2016 £m 6 31 10 47 Contributions to defined contribution schemes are charged to the income statement as incurred. The pension obligations arising under the Group’s defined benefit pension scheme are measured at discounted present value. The scheme assets are measured at fair value, except annuities, which are valued to match the liability or benefit value. The operating and financing costs of the scheme are recognised separately in the income statement. Service costs are spread using the projected unit credit method. Net financing costs are recognised in the period in which they arise, calculated with reference to the discount rate, and are included in finance income or expense on a net basis. Re-measurement gains and losses arising from either experience differing from previous actuarial assumptions, or changes to those assumptions, are recognised immediately in other comprehensive income. Defined contribution schemes The charge to operating profit for the year in respect of the defined contribution scheme was £3m (2016: £2m). Defined benefit scheme The Pension & Assurance Scheme of the Land Securities Group of Companies (the Scheme) is a registered defined benefit final salary scheme subject to the UK regulatory framework for pensions, including the Scheme Specific Funding requirements. The Scheme is operated under trust and as such, the Trustees of the Scheme are responsible for operating the Scheme and they have a statutory responsibility to act in accordance with the Scheme’s Trust Deed and Rules, in the best interest of the beneficiaries of the Scheme, and UK legislation (including trust law). The Trustees and the Group have the joint power to set the contributions that are paid to the Scheme. In setting contributions to the Scheme, the Trustees and the Group are guided by the advice of a qualified independent actuary on the basis of triennial valuations using the projected unit credit method. As the Scheme is closed to new members, the current service cost is expected to increase as a percentage of salary of the Scheme members, under the projected unit credit method, as members approach retirement. A full actuarial valuation of the Scheme was undertaken on 30 June 2015 by the independent actuaries, Hymans Robertson LLP. This valuation was updated to 31 March 2017 using, where required, assumptions prescribed by IAS 19, ‘Employee Benefits’. The next full actuarial valuation will be performed as at 30 June 2018. As a result of the 30 June 2015 valuation, the employer contribution rate increased from 1 April 2016 to 43.1% (from 36.1%) of pensionable salary to cover the costs of accruing benefits. It was agreed that no further deficit contributions were required from the Group. Employee contributions are paid by salary sacrifice, and therefore appear as Group contributions. In the year ended 31 March 2017, employee contributions were 8.0% (2016: 8.0%) of monthly pensionable salary. The Group expects to make total employee and employer contributions of around £1m (2016: £1m) to the Scheme in the year to 31 March 2018. All death-in-service and incapacity benefits arising during employment are wholly insured. No post-retirement benefits other than pensions are made available to employees of the Group. 146 Landsec Annual Report 2017 Analysis of the amounts charged to the income statement Analysis of the amount charged to operating profit Current service cost Charge to operating profit Analysis of amount credited to net finance expense Interest income on plan assets Interest expense on defined benefit scheme liabilities Net credit to finance income Analysis of the amounts recognised in other comprehensive income Analysis of gains and losses Net re-measurement gains/(losses) on scheme assets Net re-measurement (losses)/gains on scheme liabilities Net re-measurement (loss)/gain Cumulative net re-measurement loss recognised in other comprehensive income The net surplus recognised in respect of the defined benefit scheme can be analysed as follows: Equities Bonds – Government Bonds – Corporate Insurance contracts Cash and cash equivalents Fair value of scheme assets Fair value of scheme liabilities Net pension surplus 2017 £m 1 1 (8) 7 (1) 2017 £m 29 (41) (12) (39) 2016 % 18 49 26 6 1 100 Group 2016 £m 1 1 (7) 7 – Group 2016 £m (12) 30 18 (27) Group 2016 £m 38 106 56 13 2 215 (190) 25 F i n a n c i a l S t a t e m e n t s 2017 % 20 24 7 49 – 100 2017 £m 49 59 17 120 1 246 (232) 14 During the year, the Scheme sold some corporate bonds and gilts to purchase a buy-in policy with Just Retirement for £111m. This insurance contract is valued as an asset using the same IAS 19 assumptions. Insurance contracts are annuities which are unquoted assets. All other Scheme assets have quoted prices in active markets. The Scheme assets do not include any directly owned financial instruments issued by the Group. Indirectly owned financial instruments had a fair value of £0.1m (2016: £0.1m). The defined benefit scheme liabilities are split 11% (2016: 12%) in respect of active scheme participants, 25% (2016: 27%) in respect of deferred scheme participants, and 64% (2016: 61%) in respect of retirees. The weighted average duration of the defined benefit scheme liabilities at 31 March 2017 is 17.3 years (2016: 16.7 years). Landsec Annual Report 2017 147 Notes to the financial statements for the year ended 31 March 2017 continued 32. Net pension surplus continued The assumptions agreed with the Trustees of the Scheme for the triennial valuation at 30 June 2015 have been restated to the assumptions described by IAS 19, ‘Employee Benefits’. The major assumptions used in the valuation were (in nominal terms): Rate of increase in pensionable salaries Rate of increase in pensions with no cap Rate of increase in pensions with 5% cap Discount rate Inflation – Retail Price Index – Consumer Price Index 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 2017 % 3.40 3.40 3.30 2.55 3.40 2.60 2017 Years 30.8 31.2 33.8 33.7 Group 2016 % 3.15 3.15 3.05 3.50 3.15 2.35 Group 2016 Years 29.6 31.0 33.2 33.5 The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below. These were calculated using approximate methods taking into account the duration of the Scheme liabilities. Assumption Discount rate Rate of mortality Rate of inflation Change in assumption Impact on scheme liabilities Increase/decrease by 0.5% Decrease/increase by £21m Increase by 1 year Increase by £9m Increase/decrease by 0.5% Increase/decrease by £18m As the above table demonstrates, changes in assumptions can have a significant impact on the Scheme liabilities. The assumptions agreed with the Trustees of the Scheme for the triennial valuation and subsequent interim updates differ from those prescribed by IAS 19, ‘Employee Benefits’. Using the assumptions agreed with the Trustees would result in a balance sheet deficit for the Scheme of £8m at 31 March 2017, as opposed to a surplus of £14m. In order to reduce risk within the Scheme, 48% (2016: 7%) of the Scheme assets are invested in annuities that match the liabilities of some pensioners. The assets that the Scheme holds are designed to match a significant proportion of the Scheme liabilities and the Scheme has hedged over 72% (2016: 75%) of the inflation and interest rate risks (when measured on a gilts flat discount rate) to which it is exposed. The Company did not operate any defined contribution schemes or defined benefit schemes during the financial year ended 31 March 2017 or in the previous financial year. 148 Landsec Annual Report 2017 33. Share-based payments Accounting policy The cost of granting shares, options over shares and other share-based remuneration to employees and Executive Directors is recognised through the income statement. All awards are equity settled and therefore the fair value is measured at the grant date. Where the awards have non-market related performance criteria, the Group uses the Black-Scholes option valuation model to establish the relevant fair values. Where the awards have Total Shareholder Return (TSR) market related performance criteria, the Group has used the Monte Carlo simulation valuation model to establish the relevant fair values. The resulting values are amortised through the income statement over the vesting period of the awards. For awards with non-market related criteria, the charge is reversed if it appears probable that the performance or service criteria will not be met. The following table analyses the total cost recognised in the income statement for the year between each plan, together with number of options outstanding. Long-Term Incentive Plan Deferred bonus share plan Share award plan Executive share option scheme 2017 Charge £m Number (millions) Charge £m 2016 Number (millions) 2 1 1 1 5 2 – – 2 4 4 1 2 1 8 3 – – 2 5 A summary of the main features of each type of plan is given below. The plans have been split into two categories: Executive plans and other plans. For further details on the Executive plans, see the Directors’ Remuneration Report on pages 76 to 91. Executive plans: Long-Term Incentive Plan (LTIP) The LTIP is open to Executive Directors and Senior Management, with awards made at the discretion of the Remuneration Committee. In addition, other than for Executive Directors, an award of ‘matching shares’ can be made where the individual acquires shares in Land Securities Group PLC and pledges to hold them for a period of three years. Awards of LTIP shares and matching shares are subject to the same performance criteria and normally vest after three years. Awards may be satisfied by the issue of new shares, the transfer of treasury shares, other shares or nil cost options. The awards will be issued at nil consideration, subject to performance and vesting conditions being met. The weighted average share price at the date of vesting during the year was 1,006p (2016: 1,262p). The estimated fair value of awards granted during the year under the scheme was £4m (2016: £4m). Deferred bonus share plan The Executive Directors’ and Managing Directors’ annual bonus is structured in two distinct parts made up of an initial payment and deferred shares. The shares are deferred for one or two years and are not subject to additional performance criteria. Awards are satisfied by the transfer of existing shares held by the Employee Benefit Trust (EBT) at nil consideration, or by nil cost options. The weighted average share price at the date of vesting during the year was 887p (2016: 1,227p). The estimated fair value of awards granted during the year under the scheme was £0.8m (2016: £1.5m). F i n a n c i a l S t a t e m e n t s Other plans: Executive share option scheme (ESOS) The 2005 ESOS is open to managers not eligible to participate in the LTIP. Awards are discretionary and are granted over ordinary shares of the Company at the middle market price on the three dealing days immediately preceding the date of grant. Awards normally vest after three years and are not subject to performance conditions. Awards are satisfied by the transfer of shares from the EBT and lapse 10 years after the date of grant. The weighted average share price at the date of exercise for awards exercised during the year was 1,053p (2016: 1,249p). The estimated fair value of awards granted during the year under the scheme was £0.3m (2016: £0.3m). Savings related share option plan Under the savings related share option plan, Executive Directors and other eligible employees are invited to make regular monthly contributions into a Sharesave plan operated by Equiniti. On completion of the three or five year contract period, ordinary shares in the Company may be purchased at a price based upon the market price at date of invitation less 20% discount. The weighted average share price at the date of exercise for awards exercised during the year was 1,046p (2016: 1,238p). The estimated fair value of awards granted during the year under the scheme was £0.2m (2016: £0.3m). Landsec Annual Report 2017 149 Notes to the financial statements for the year ended 31 March 2017 continued 33. Share-based payments continued The aggregate number of awards outstanding, and the weighted average exercise price, are shown below: At the beginning of the year Granted Exercised Lapsed At 31 March Exercisable at the end of the year Weighted average remaining contractual life 1. Executive plans are granted at nil consideration. Executive plans1 Number of awards Number of awards 2017 Number (millions) 2016 Number (millions) 2017 Number (millions) 2016 Number (millions) 3 1 (1) (1) 2 – 3 1 (1) – 3 – 2 1 (1) – 2 1 2 – – – 2 1 Years 1 Years 1 Years 6 Years 6 Other plans Weighted average exercise price 2017 Pence 983 993 805 – 1,068 929 2016 Pence 860 1,229 911 900 983 913 The number of share awards outstanding for the Group by range of exercise prices is shown below: Outstanding at 31 March 2017 Outstanding at 31 March 2016 Weighted average remaining contractual life Weighted average exercise price Years Pence Number of awards Number (millions) Weighted average remaining contractual life Years Number of awards Number (millions) 2 – – 1 1 – – 1 2 5 4 7 8 – – 536 761 761 1,058 1,328 1,563 3 – – 1 1 – – 1 3 5 5 6 9 1 Weighted average exercise price Pence – 535 775 886 1,044 1,328 – Exercise price – range Pence Nil2 400 – 599 600 – 799 800 – 999 1,000 – 1,199 1,200 – 1,399 1,400 – 1,565 2. Executive plans are granted at nil consideration. 150 Landsec Annual Report 2017 Fair value inputs for awards with non-market performance conditions Fair values are calculated using the Black-Scholes option pricing model for awards with non-market performance conditions. Inputs into this model for the grants under each plan in the financial year are as follows: Year ended 31 March Share price at grant date Exercise price Expected volatility Expected life Risk-free rate Long-Term Incentive Plan Deferred bonus share plan 2005 ESOS 2017 2016 2017 1,005p 1,325p 1,005p n/a 18% n/a 16% 3 years 3 years n/a 18% 1 to 2 years 2016 1,245p n/a 16% 1 to 2 years 2017 1,005p 1,005p 18% 2016 1,328p 1,328p 16% 3 years 3 years Savings related share option plan 2017 1,191p 953p 18% 3 to 5 years 2016 1,280p 1,024p 16% 3 to 5 years 0.21% 1.02% 0.15% to 0.21% 0.52% to 0.67% 0.21% 1.02% 0.35% to 0.57% 1.07% to 1.58% Expected dividend yield 3.48% 2.40% nil nil 3.48% 2.40% 2.94% 2.49% Expected volatility is determined by calculating the historic volatility of the Group’s share price over the previous ten years. The expected life used in the model has been determined based upon management’s best estimate for the effects of non-transferability, vesting/exercise restrictions and behavioural considerations. Risk-free rate is the yield at the date of the grant of an award on a gilt-edged stock with a redemption date equal to the anticipated vesting of that award. Fair value inputs for awards with market performance conditions Fair values are calculated using the Monte Carlo simulation option pricing model for awards with market performance conditions. Awards made under the 2005 LTIP which were granted after 31 March 2009 include a TSR condition, which is a market-based condition. The inputs into this model for the scheme are as follows: Share price at date of grant Exercise price Expected volatility – Group Expected volatility – index of comparator companies Correlation – Group vs. index Year ended 31 March 2017 Long-Term Incentive Plan 1,005p 2016 1,325p 2017 n/a 2016 n/a 2017 20% 2016 20% 2017 20% 2016 20% 2017 85% 2016 85% F i n a n c i a l S t a t e m e n t s Landsec Annual Report 2017 151 Notes to the financial statements for the year ended 31 March 2017 continued 34. Ordinary share capital Accounting policy Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. The consideration paid by any Group entity to acquire the Company’s equity share capital, including any directly attributable incremental costs, is deducted from equity until the shares are cancelled, reissued or disposed. Where own shares are sold or reissued, the net consideration received is included in equity. Shares acquired by the Employee Benefit Trust (EBT) are presented on the Group balance sheet as ‘own shares’. Purchases of treasury shares are deducted from retained earnings. Ordinary shares of 10p each At the beginning of the year Issued on the exercise of options At 31 March Group and Company Allotted and fully paid 2017 £m 80 2016 £m 80 Group and Company Number of shares 2016 801,032,763 131,734 801,164,497 2017 801,164,497 80,131 801,244,628 The number of options over ordinary shares from Executive Schemes that were outstanding at 31 March 2017 was 2,281,006 (2016: 2,580,225). If all the options were exercised at that date then 2,281,006 (2016: 2,580,225) shares would be required to be transferred from the EBT. The number of options over ordinary shares from Other plans that were outstanding at 31 March 2017 was 1,859,031 (2016: 2,071,452). If all the options were exercised at that date then 354,783 new ordinary shares (2016: 406,021) would be issued and 1,504,248 shares would be required to be transferred from the EBT (2016: 1,665,431). Shareholders at the Annual General Meeting have previously authorised the acquisition of shares by the Company representing up to 10% of its share capital, to be held as treasury shares. During the year ended 31 March 2017, no ordinary shares (2016: nil) were acquired to be held as treasury shares. At 31 March 2017 the Group held 10,495,131 ordinary shares (2016: 10,495,131) with a market value of £111m (2016: £116m) in treasury. 35. Own shares At the beginning of the year Acquisition of ordinary shares Transfer of shares to employees on exercise of share options At 31 March 2017 £m 14 6 (11) 9 Group 2016 £m 11 19 (16) 14 Own shares consist of shares in Land Securities Group PLC held by the EBT in respect of the Group’s commitment to a number of its employee share option schemes (note 33). The number of shares held by the EBT at 31 March 2017 was 792,556 (2016: 1,143,892). The market value of these shares at 31 March 2017 was £8m (2016: £13m). 152 Landsec Annual Report 2017 36. Contingencies The Group has contingent liabilities in respect of legal claims, guarantees, and warranties arising in the ordinary course of business. It is not anticipated that any material liabilities will arise from the contingent liabilities. 37. Related party transactions Subsidiaries During the year, the Company entered into transactions, in the normal course of business, with other related parties as follows: Transactions with subsidiary undertakings: Recharge of costs Dividend received Interest paid Company 2016 £m (272) 400 (63) 2017 £m (294) – (55) Joint arrangements As disclosed in note 16, the Group has investments in a number of joint arrangements. Details of transactions and balances between the Group and its joint arrangements are disclosed as follows: 20 Fenchurch Street Limited Partnership Nova, Victoria Metro Shopping Fund Limited Partnership St. David’s Limited Partnership Westgate Oxford Alliance Limited Partnership The Oriana Limited Partnership Harvest The Ebbsfleet Limited Partnership Millshaw Property Co. Limited West India Quay Unit Trust Year ended and as at 31 March 2017 Year ended and as at 31 March 2016 Income/ (expense) £m Net investments into joint ventures £m Amounts owed by joint ventures £m Amounts owed to joint ventures £m Income/ (expense) £m Net investments into joint ventures £m Amounts owed by joint ventures £m Amounts owed to joint ventures £m Group 12 19 – 1 9 – – – – – 41 8 – (4) (16) 67 (37) (2) (1) (12) (1) 2 43 56 – – 10 – – – – – 109 (1) (3) – – – – – – – (2) (6) 17 18 – 1 7 – 1 – – – 44 1 100 (14) (14) 62 (63) (32) – (3) (2) 35 46 40 1 – 5 – – – – 1 93 – – – (1) – – – – (12) (2) (15) F i n a n c i a l S t a t e m e n t s Remuneration of key management personnel The remuneration of the Directors and Managing 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 Directors’ Remuneration Report on pages 76 to 91. Short-term employee benefits Share-based payments 2017 £m 5 3 8 2016 £m 6 3 9 Landsec Annual Report 2017 153 Notes to the financial statements for the year ended 31 March 2017 continued 38. Operating lease arrangements Accounting policy The Group earns rental income by leasing its properties to tenants under non-cancellable operating leases. 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. 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 years More than five years The total of contingent rents recognised as income during the year was £45m (2016: £43m). 39. Events after the reporting period 2017 £m 496 1,962 3,444 5,902 2016 £m 464 1,913 3,874 6,251 On 13 April 2017, the Group’s joint arrangement, The Metro Shopping Fund Limited Partnership (Metro), completed the sale of ShopStop, Clapham Junction to DV4 (a fund owned by Delancey Real Estate Asset Management Limited (Delancey)). On the same date Delancey sold its stake in Metro to Invesco Real Estate European Fund. The partnership was subsequently renamed The Southside Limited Partnership and the £85m third-party debt in the fund was repaid in full. Since 31 March 2017, the Group has redeemed the £273m Queen Anne’s Gate bond in its entirety at a premium of £63m. The redemption was financed through existing Group facilities. On 15 May 2017, the Group acquired three retail outlet centres from Britel Fund Trustees Limited (as trustee of the BT Pension Scheme). The three assets, Freeport, Braintree, Clarks Village, Street and Junction 32, Castleford, were acquired for a total consideration of £333m. 154 Landsec Annual Report 2017 Additional information Contents Further analysis of our business and practical information for shareholders. 156 Business analysis – Group 160 Business analysis – London 161 Business analysis – Retail 162 Sustainability reporting 168 Combined Portfolio analysis 170 Lease lengths 171 Development pipeline and trading property development schemes 172 Alternative performance measures 172 Five year summary 174 Acquisitions, disposals and capital expenditure 175 Remuneration policy 180 Subsidiaries, joint ventures and associates 183 Shareholder information 186 Key contacts and advisers 187 Glossary IBC Cautionary statement Business Analysis – Group Combined Portfolio performance relative to IPD Total property returns – year ended 31 March 2017 Retail – Shopping centres – Retail parks Central London shops Central London offices Total 1. IPD Quarterly Universe 2. IPD Retail Warehouses Quarterly Universe 3. Includes leisure, hotel portfolio and other Combined Portfolio value by location at 31 March 2017 Central, inner and outer London South East and East Midlands Wales and South West North, North West, Yorkshire and Humberside Scotland and Northern Ireland Total % figures calculated by reference to the Combined Portfolio value of £14.4bn. Total shareholder returns1 Land Securities Group PLC FTSE 100 FTSE 350 Real Estate Index Landsec % 3.6 1.3 9.8 2.0 3.73 Shopping centres and shops % 14.6 10.4 – 2.5 7.1 2.7 37.3 Retail parks % 0.2 3.5 0.6 0.5 0.9 0.3 6.0 Hotels, leisure, residential & other % 3.4 0.9 0.4 4.5 0.5 0.2 9.9 Offices % 46.7 – – – 0.1 – 46.8 Table 73 IPD1 % 1.1 1.32 8.6 2.6 4.6 Table 74 Total % 64.9 14.8 1.0 7.5 8.6 3.2 100.0 Table 75 Period to 31 March 2017 5 years £ 172.2 151.0 175.2 3 years £ 109.2 124.3 112.2 1 year £ 101.9 124.4 101.1 1. Historical TSR performance for a hypothetical investment of £100 – source: Thomson Reuters. Voids and units in administration – like-for-like (%) Chart 76 Analysis of performance relative to IPD (%) Chart 77 20 18 16 14 12 10 8 6 4 2 0 18.6 (0.6) (0.3) (0.1) – 0.1 (0.9) (2.1) 4.9 3.6 3.9 2.3 2.9 4.6 2.4 0.7 0.5 0.0 0.0 s e c ffi o n o d n o L s e r t n e c i g n p p o h S s p o h s d n a s p o h s l a r t n e C n o d n o L l i a t e R s k r a p e r u s i e L s l e t o h d n a l l A y t r e p o r p 0.0 0.1 s e c ffi o n o d n o L 0.5 0.7 0.5 0.0 0.0 0.0 0.1 0.5 0.2 0.3 s e r t n e c i g n p p o h S s p o h s d n a s p o h s l a r t n e C n o d n o L l i a t e R s k r a p e r u s i e L s l e t o h d n a l l A y t r e p o r p h t w o r g l a t i p a C n r u t e r e m o c n i e v i t a e R l l s t n e m p o e v e d f o n o i t u b i r t n o C s e s a h c r u p f o n o i t u b i r t n o C s l a s o p s i d f o n o i t u b i r t n o C l a t o T e r u t c u r t s f o t c a p m I 31 March 2017 31 March 2016 Voids In administration Attribution analysis, ungeared total return, 12 months to 31 March 2017, relative to IPD Quarterly Universe. Source: IPD. 156 Landsec Annual Report 2017 Reconciliation of segmental information note to statutory reporting The table below reconciles the Group’s income statement to the segmental information note (note 4 to the financial statements). The Group’s income statement is prepared using the equity accounting method for joint ventures and includes 100% of the results of the Group’s non-wholly owned subsidiaries. In contrast, the segmental information note is prepared on a proportionately consolidated basis and excludes the non-wholly owned share of the Group’s subsidiaries. This is consistent with the financial information reviewed by management. Rental income Finance lease interest Gross rental income (before rents payable) Rents payable Gross rental income (after rents payable) Service charge income Service charge expense Net service charge expense Other property related income Direct property expenditure Net rental income Indirect property expenditure Other income Profit on disposal of investment properties Loss on disposal of investment in joint venture Profit on disposal of other investment Net (deficit)/surplus on revaluation of investment properties Movement in impairment of trading properties Profit on disposal of trading properties Head office relocation Other Operating profit Finance income Finance expense Share of post-tax profit from joint ventures Profit before tax Taxation Profit attributable to owners of the parent Group income statement £m Joint ventures1 £m Proportionate share of earnings2 £m 587 10 597 (10) 587 94 (96) (2) 32 (58) 559 (79) 2 482 19 (2) 13 (186) 12 29 1 (3) 365 37 (359) 69 112 1 113 53 – 53 (1) 52 9 (11) (2) 2 (8) 44 (2) – 42 1 – – 40 – 7 – – 90 – (21) (69) – – – (2) – (2) – (2) (2) 1 (1) – – (3) – – (3) – – – (1) – – – 4 – – – – – – – Table 78 Year ended 31 March 2017 Revenue profit £m Capital and other items £m 638 10 648 (11) 637 101 (106) (5) 34 (66) 600 (81) 2 521 – – – – – – – – 521 37 (176) – 382 – 382 – – – – – – – – – – – – – – 20 (2) 13 (147) 12 36 1 1 (66) – (204) – (270) 1 (269) Total £m 638 10 648 (11) 637 101 (106) (5) 34 (66) 600 (81) 2 521 20 (2) 13 (147) 12 36 1 1 455 37 (380) – 112 1 113 1. Reallocation of the share of post-tax profit from joint ventures reported in the Group income statement to the individual line items reported in the segmental information note. 2. Removal of the non-wholly owned share of results of the Group’s subsidiaries. The non-wholly owned subsidiaries are consolidated at 100% in the Group’s income statement, but only the Group’s share is included in revenue profit reported in the segmental information note. REIT balance of business To retain the Group’s REIT status it must meet conditions from the REIT legislation. At least 75% of the Group’s assets and 75% of the Group’s income must relate to qualifying activities. The results of these tests at the balance sheet date are below: REIT balance of business Table 79 A d d i t i o n a l i n f o r m a t i o n Profit before tax (£m)1 Balance of business – 75% profits test Adjusted total assets (£m)1 Balance of business – 75% assets test 1. Calculated according to REIT rules. For the year ended 31 March 2017 For the year ended 31 March 2016 Tax-exempt business Residual business Adjusted results Tax-exempt business 185 78.7% 14,088 93.4% 50 21.3% 991 6.6% 235 15,079 310 85.6% 14,256 93.8% Residual business 52 14.4% 939 6.2% Adjusted results 362 15,195 Landsec Annual Report 2017 157 Business Analysis – Group continued Cost analysis Gross rental income (before rents payable) Gross rental income (after rents payable) Net service charge expense Net direct property expenditure Net rental income Indirect costs Segment profit before finance expense Net unallocated expenses Net finance expense – Group Net finance expense – joint ventures Revenue profit £m 648 637 (5) (32) 600 (39) 561 (40) (118) (21) 382 Direct property costs £37m Indirect expenses £79m Total £116m Total cost ratio1 17.9% Year ended 31 March 2017 Table 80 Year ended 31 March 2016 Total £m Cost ratio %1 Total £m Cost ratio %1 1.2 0.3 2.0 1.9 2.5 10.0 17.9 18.1 8 2 13 12 16 65 116 (1) 115 (12) 1.2 1.4 2.3 1.8 3.0 9.0 18.7 19.9 8 9 15 12 20 59 123 6 129 (15) 103 16.2 114 17.5 Managed operations Tenant default Void related costs Other direct property costs Development expenditure Asset management, administration and compliance Total (incl. direct vacancy costs) Head office relocation EPRA costs (incl. direct vacancy costs) Less: Direct vacancy costs EPRA (excl. direct vacancy costs) 1. Percentages represent costs divided by gross rental income including finance leases, before rents payable. This is with the exception of EPRA measures which represent costs divided by gross rental income including finance leases, after rents payable. EPRA performance measures Adjusted earnings Recurring earnings from core operational activity1 Adjusted earnings per share Adjusted earnings per weighted number of ordinary shares1 Definition for EPRA measure Adjusted diluted earnings per share Adjusted diluted earnings per weighted number of ordinary shares1 Adjusted net assets Net assets adjusted to exclude fair value movements on interest-rate swaps2 Adjusted diluted net assets per share Adjusted diluted net assets per share2 Triple net assets Adjusted net assets amended to include the fair value of financial instruments and debt Diluted triple net assets per share Diluted triple net assets per share Net initial yield (NIY) Topped-up NIY Voids/vacancy rate Cost ratio Annualised rental income less non-recoverable costs as a % of market value plus assumed purchasers’ costs3 NIY adjusted for rent free periods3 ERV of vacant space as a % of ERV of Combined Portfolio excluding the development programme4 Total costs as a percentage of gross rental income (including direct vacancy costs)5 Total costs as a percentage of gross rental income (excluding direct vacancy costs)5 Table 81 31 March 2017 EPRA measure £359m 45.4p 45.4p Landsec measure £382m 48.4p 48.3p £11,206m £11,520m 1,417p 1,456p Notes 5 5 5 5 5 n/a n/a £10,502m 1,328p 3.6% 4.2% 4.2% 4.4% 4.6% 4.0% 17.9% 18.1% n/a 16.2% 1. EPRA adjusted earnings and EPRA adjusted earnings per share include the amortisation of bond exchange de-recognition of £24m and the net head office relocation credit of £1m. 2. EPRA adjusted net assets and adjusted diluted net assets per share include the bond exchange de-recognition adjustment of £314m. 3. Our NIY and Topped-up NIY relate to the Combined Portfolio, excluding properties in the development programme that have not yet reached practical completion, and are calculated by our external valuer. EPRA NIY and EPRA Topped-up NIY calculations are consistent with ours, but exclude all developments. 4. Our measure reflects voids in our like-for-like portfolio only. The EPRA measure reflects voids in the Combined Portfolio excluding only the development programme. 5. The EPRA cost ratio is calculated based on gross rental income after rents payable, whereas our measure is based on gross rental income before rents payable. We do not calculate a cost ratio excluding direct vacancy costs as we do not consider this to be helpful. 158 Landsec Annual Report 2017 Top 12 occupiers at 31 March 2017 Table 82 % of Group rent1 Annual net rent breakdown by occupier business sector (%) Chart 84 Deloitte Accor Central Government Mizuho Bank Boots Sainsbury’s Taylor Wessing H&M K&L Gates M&S Cineworld Telecity Group 1. On a proportionate basis. PID Table Profit before tax per accounts Adjustment to exclude Valuation and profits on disposals Interest income Amortisation of bond exchange de-recognition adjustment Redemption of medium term notes Fair value movement on interest rate-swaps Revaluation of redemption liabilities Impairment of goodwill Amortisation of intangible asset Tax adjustments Capital allowances Capitalised interest Cumulative tax adjustments and removal of net residual tax result Estimated tax exempt income for year PID thereon (90%) PID dividends paid in the year Financial services Services Retail trade Public administration Manufacturing Transport, communications Wholesale trade Other 16.3 26.7 33.3 6.1 2.8 2.6 2.6 9.6 Floor space (million sq ft) Chart 85 London Portfolio Retail Portfolio Total 6.5 16.7 23.2 5.2 5.1 5.1 1.7 1.5 1.3 1.2 1.2 1.2 1.1 1.1 1.1 26.8 Table 83 Year ended 31 March 2017 £m Year ended 31 March 2016 £m 112 1,336 % portfolio by value and number of property holdings at 31 March 2017 68 (37) 24 170 8 3 1 2 (1,043) £m (35) 0 – 9.99 10 – 24.99 25 – 49.99 50 – 99.99 100 – 149.99 150 – 199.99 200+ Total 23 26 11 5 1 2 351 326 Table 86 Value % Number of Properties 0.5 2.8 3.8 11.4 8.4 8.5 64.6 100.0 21 24 15 24 10 7 19 120 (56) (20) 2 277 250 218 (53) (26) (13) 234 211 191 Committed development – estimated future spend (£m) Chart 87 100 95 90 80 70 60 50 40 30 20 10 0 A d d i t i o n a l i n f o r m a t i o n 5 2019 2020 2021+ 2018 Trading properties Development programme Estimated future spend includes the cost of residential space but excludes interest. Landsec Annual Report 2017 159 The table provides a reconciliation of the Company’s profit before tax to its estimated tax exempt income, 90% of which the Company is required to distribute as a PID to comply with REIT regulations. The Company has 12 months after the year end to make the minimum distribution. Accordingly, PID dividends paid in the year may relate to the distribution requirements of previous periods. Business Analysis – London London Portfolio valuation (%) Chart 88 London Portfolio floor space (sq ft) Chart 90 £8.3bn West End Mid-town City Inner London Central London shops Other 39 16 22 4 18 1 West End offices City offices Mid-town offices Inner London offices Central London shops Other Total 2.3 1.7 1.2 0.5 0.7 0.1 6.5 6.5m sq ft West End Our £3.2bn West End office portfolio is dominated by our Victoria assets which include Cardinal Place, SW1, Queen Anne’s Gate, SW1, 62 Buckingham Gate, SW1, and developments including The Zig Zag Building, SW1 and Nova, Victoria, SW1. Mid-town Positioned between the City and West End, our cluster of buildings at New Street Square, EC4, represent our major assets and developments in Mid-town. City Our £1.9bn City office portfolio includes assets such as One New Change, EC4 and the now completed schemes at 20 Fenchurch Street, EC3 and 1 & 2 New Ludgate, EC4. Inner London Includes our assets at Docklands, E14 and Southwark, SE1. Central London shops This segment comprises the retail space in our London Portfolio assets. The largest elements are Piccadilly Lights, W1 and the retail space at One New Change, EC4, and Cardinal Place, SW1. Voids and units in administration – like-for-like London Portfolio (%) Chart 89 19.1 Top 10 office customers Deloitte Central Government (including Queen Anne’s Gate, SW1) Mizuho Bank Taylor Wessing K&L Gates Telecity Group Deutsche Bank Bain & Co Schlumberger Oilfield UK Wellington Management Office other Total Table 91 % of Group rent 5.2 5.1 1.7 1.2 1.2 1.1 1.1 0.8 0.7 0.7 18.8 20.0 38.8 London like-for-like — rental and capital value trends % year ended 31 March 2017 Table 92 West End City Mid-town Inner London Central London shops Total London like-for-like portfolio Rental value change1 % Valuation change % 2.5 8.1 (1.0) 0.6 4.7 3.0 (4.3) (3.1) (5.1) (7.8) 6.9 (1.8) 3.6 3.6 2.4 4.9 4.6 3.9 3.0 7.1 1. Rental value change excludes units materially altered during the year and Queen Anne’s Gate, SW1. Mar 16 Mar 17 Sep 16 London offices Mar 17 Mar 16 Sep 16 Central London shops Mar 17 Mar 16 Sep 16 London Portfolio 20 18 16 14 12 10 8 6 4 2 0 In administration Voids 160 Landsec Annual Report 2017 Business Analysis – Retail Retail Portfolio valuation (%) Chart 93 Retail Portfolio floor space (sq ft) Chart 95 £6.1bn Shopping centres and shops Retail parks Leisure and hotels Other 63.0 14.1 22.6 0.3 Shopping centres Retail parks Leisure and hotels Other Total 8.2 2.7 5.6 0.2 16.7 16.7m sq ft Top 10 retail customers Table 96 % of Group rent Shopping centres and shops Comprises our portfolio of 13 shopping centres in major retail locations across the UK including Bluewater, Kent, Trinity Leeds, Gunwharf Quays, Portsmouth and Buchanan Galleries in Glasgow. Retail parks Our 13 retail parks are typically located away from town centres and offer a range of retail and leisure with parking providing convenient shopping. Assets include Westwood Cross Thanet, Lakeside Retail Park and Bexhill Retail Park. Leisure and hotels We own five stand-alone leisure assets and a 95% share of the X-Leisure Fund which comprises 15 schemes of prime leisure and entertainment space. We also own 25 Accor Group hotels in the UK. Three hotels were sold after 31 March 2017. The remaining 22 are leased to Accor for 75 years with a break clause in 2031 and 12 yearly thereafter. Boots Sainsbury’s H&M Cineworld Next Arcadia Group M&S Vue Tesco Currys & PC World Voids and units in administration – like-for-like Retail Portfolio (%) Retail other (excluding Accor) Chart 94 Total 1.5 1.3 1.2 1.1 1.1 1.0 0.9 0.8 0.8 0.6 10.3 37.5 47.8 5 4 3 2 1 0 4.5 4.4 3.6 Retail like-for-like — rental and capital value trends % year ended 31 March 2017 Table 97 3.2 3.0 Shopping centres and shops 2.5 Retail parks Leisure and hotels Total Retail like-for-like portfolio Rental value change1 % Valuation change % 1.6 0.6 0.2 1.1 (1.3) (4.2) 2.3 (0.9) 1.0 0.8 0.6 1. Rental value change excludes units materially altered during the year. Mar 16 Mar 17 Sep 16 Shopping centres and shops In administration Voids 0.2 Sep Mar Mar 16 16 17 Retail parks Mar 16 Sep 16 Leisure and hotels Mar 17 Sep Mar 16 16 Retail Portfolio Mar 17 A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 161 Sustainability reporting We see sustainability as a business advantage and are seeking to embed sustainable practices into everything we do. We have a vision to lead the UK listed real estate sector and demonstrate best practice. This section includes a summary of our performance against our corporate commitments and our key disclosures. For more information please visit www.landsec.com/sustainability Creating jobs and opportunities Commitment Diversity: Make measurable improvements to the profile – in terms of gender, ethnicity and disability – of our employee mix. Performance With 36% of our management being female, we already exceed the recent Hampton-Alexander recommendations for females at our Executive Committee and senior leader level (combined percentage of 33%) and female representation has increased by 1% overall. We’ve also seen an increase of 3% in employees identified as black, asian or mixed ethnicity. Commitment Employment: Help a total of 1,200 disadvantaged people to secure jobs by 2020. Ethnicity (%) Chart 99 White Other Mixed Black Not Stated Asian 80 6 5 5 2 2 Commitment Health, safety and security: Maintain an exceptional standard of health, safety and security in all the working environments we control. Performance This year we continued sharing best practice through our ‘One Best Way’ guidelines and our Health and Safety pledge, which new starters and external customers signed up to. We also maintained our OHSAS 18001 certification, the benchmark for health and safety management systems. Performance Since 2011 we have secured employment for 962 people from disadvantaged backgrounds. In 2016/17, 183 jobs have been secured (134 in London and 49 in Retail). Cumulative total number of jobs secured Table 98 1,200 1,000 800 600 400 200 0 26 2011 Jobs Target 962 779 583 426 206 105 2012 2013 2014 2015 2016 2017 Commitment Fairness: Ensure the working environments we control are fair and ensure that everyone who is working on our behalf – within an environment we control – is paid at least the Foundation Living Wage by 2020. Performance Landsec received accreditation from the Living Wage Foundation in March 2017. We have a milestone programme now in place so that we can meet our 2020 commitment. 162 Landsec Annual Report 2017 Efficient use of natural resources Commitment Renewables: Continue to procure 100% renewable electricity across our portfolio and achieve 3 MW of renewable electricity capacity by 2030. Performance Our contract with SmartestEnergy has been in place since 1 April 2016; all electricity is from 100% renewable sources. We have agreed our new gas contract with Corona Energy which has taken effect from 1 April 2017. We are now procuring 15% of our total volume as green gas derived from 100% waste streams. We have set a new metric to achieve 3 MW of renewable electricity capacity by 2030. Our current capacity is 0.6 MW, following the completion of our installations at Trinity Leeds and White Rose this will rise to 1.4 MW. Commitment Waste: Send zero waste to landfill with at least 75% recycled across all our operational and construction activities by 2020. Performance In 2016/17 we diverted 99.9% of waste from landfill and recycled 70.8%. This is an improvement from the year before which was 99.3% and 70.3%. Our London Portfolio continues to divert 100% from landfill with 77% of waste recycled. In our Retail Portfolio, we are diverting 99.9% from landfill and recycling 68.4%. In construction activities for 2016/17, a total of 7,571 tonnes of construction waste was generated. Over 98% was recycled, with less than 2% being sent to landfill. Landsec carbon emissions intensity pathway Table 101 2 m / e 2 O C g K 90 80 70 60 50 40 30 20 10 0 2015 2020 2025 2030 2035 2040 2045 2050 Landsec Pathway – target Sector Pathway Landsec Pathway – actual Landsec Pathway – projected The above figure indicates our performance against the required decarbonisation pathways of our portfolio and the wider sector. We are currently outperforming our target pathway and are on track for our 2030 commitment. Commitment Energy: Reduce energy intensity (kWh/m2) by 40% by 2030 compared to a 2013/14 baseline, for property under our management for at least two years. Performance We have reduced portfolio energy intensity by 13% compared to our 2013/14 baseline. This has been achieved by savings realised from our active energy management programme. Landsec monthly portfolio recycling rates 2014-16 Table 100 Landsec energy intensity Table 102 90% 80% 70% 60% 50% 40% 30% 247 213 300 250 200 2 m / h W K 150 100 50 0 129 112 77 64 62 Mar 14 Sept 14 Mar 15 Sept 15 Mar 16 Sept 16 London Retail Landsec Commitment Commitment Carbon: Reduce carbon intensity (kgCO2/m2) by 40% by 2030 compared to a 2013/14 baseline, for property under our management for at least two years. Performance We have reduced portfolio carbon intensity by 18.5% compared to our 2013/14 baseline. This has been achieved via reductions in energy consumption and assisted by favourable changes in the UK’s energy generation mix. 2013/14 Baseline 2016/17 2013/14 Baseline 2016/17 2013/14 Baseline 2016/17 London Retail Landsec 2030 target The above chart shows the energy intensity improvements we have made in our London and Retail portfolios and Landsec as whole. Office buildings in London naturally have a much higher energy intensity than Retail assets and we have reduced London Portfolio intensity by 14% since 2013/14. Our Retail Portfolio intensity has reduced by 3%. Overall we have reduced Combined Portfolio intensity by 13% and are on track to meet our 2030 commitment. Landsec Annual Report 2017 163 A d d i t i o n a l i n f o r m a t i o n Sustainability reporting continued Sustainable design and innovation Commitment Resilience: Assess and mitigate site-specific climate change adaptation risks that are material across our portfolio. Performance This is a new commitment for 2017 and work is in progress to assess our climate risks and determine opportunities for mitigation. This work will be undertaken in collaboration with our Group Research and Insurance teams. Commitment Embodied carbon: Carry out embodied carbon analysis to inform the selection and procurement of building materials to reduce environmental impacts. Achieve at least a 15% reduction in embodied carbon. Performance Our Westgate Oxford development set an ultra-low carbon target requiring the reduction of embodied carbon by 25,777 tonnes. We’re delighted to report that we’ve met this target, avoiding over 30,000 tonnes of embodied carbon emissions. This equates to an 18% saving, exceeding our corporate commitment. These are the emissions that would have been created if we’d used the initial design, which we’ve avoided through design development. This means the building has avoided as many emissions as it will generate over the next 30 years. Commitment Biodiversity: Maximise the biodiversity potential of all our development and operational sites and achieve a 25% biodiversity net gain across our five sites currently offering the greatest potential, by 2030. Performance We are focussing our work on the five sites that offer the greatest biodiversity potential. These are: Bluewater, Kent; Gunwharf Quays, Portsmouth; St David’s, Cardiff; The Galleria, Hatfield and White Rose, Leeds. We have identified opportunities to enhance biodiversity at each of these sites and expect to begin implementation next year. The table below lists the five sites and rating classifications Sites Bluewater, Kent Gunwharf Quays, Portsmouth St David’s, Cardiff The Galleria, Hatfield White Rose, Leeds Table 103 Current rating Targeted rating A B C C B+ A+ B+ B+ B+ A Commitment Wellbeing: Ensure our buildings are designed and managed to maximise wellbeing and productivity. Progress We have conducted a trial of WELL certification on the fit out of our new headquarters at 80-100 Victoria Street, SW1 to learn more about the process. The design incorporated many wellbeing features, and was recognised by staff in the Leesman® Workplace Survey, which ranked Landsec in the top 3% of companies surveyed. This performance will enable us to help our customers deliver WELL projects for their employees in the future. 164 Landsec Annual Report 2017 Benchmarking and awards Taking part in rigorous external benchmarking of our performance helps us to track and assess our progress. It also provides stakeholders with confidence that we’re turning our commitments and targets into action. And it underlines our ambition to be a sustainability leader in our industry. This year we received high scores from our key benchmarking schemes: Benchmarking scores Activity Carbon Disclosure Project (CDP) Global Real Estate Sustainability Benchmark (GRESB) Dow Jones Sustainability Index (DJSI) FTSE4Good EPRA REEB Table 104 Performance 2016: A- (Leadership) 2015: disclosure 99/score B 2014: disclosure 96/ score A- 2013: disclosure 88/score B 2012: disclosure 92/score B 2016: score 77% 2015: score 77% 2014: score 78% 2013: score 67% 2012: score 68% 2016: score 76/percentile ranking 92 2015: score 72/percentile ranking 89 2014: score 70/percentile ranking 87 2013: score 72/percentile ranking 87 2012: score 70/percentile ranking 85 We continue to retain our established position in the FTSE4Good Index Received a Gold Award at EPRA Sustainability Awards 2016 for Sustainability Reporting Offices — 2016: 13th out of 22 in performance league table — 2015: 22nd out of 23 in performance league table Retail — 2016: 4th out of 13 in performance league table — 2015: 10th out of 13 in performance league table Community investment data Value of resources given Over £2m equivalent of time, promotion and cash investment. 2,6781 hours spent by employees volunteering National Charity Partnership Over £360,000 raised for partner Mencap in our three-year partnership 1. This year we launched a new community investment activity tool. We anticipate that with continued employee engagement on how to use the new tool we will see increased investment statistics for the 2017/18 financial year. Awards and membership Award name Better Society Awards 2016 Award category Winner: National Commitment to the Community Award City of London Building of the Year Awards 2016 Winner: Building of the Year Award, 1&2 New Ludgate, EC4 Table 105 Date May 2016 July 2016 RICS Awards 2016 Winner: Best Commercial Building, 1&2 New Ludgate, EC4 October 2016 Leading European Architects Forum (LEAF) Awards 2016 EMA Energy Management Awards 2016 Winner: Developer and Development Project of the Year, 1&2 New Ludgate, EC4 Winner: EMA Most Inspiring Energy Reduction Project 2016 – NG Bailey in Collaboration with Landsec October 2016 November 2016 World Architectural Festival Winner: World’s Best Office, The Zig Zag Building, SW1 November 2016 The City of London Clean City Awards Scheme 2017 BREEAM Awards 2017 National Recycling Awards 2017 National CSR Awards 2017 Better Society Awards 2017 Business Charity Awards 2017 BITC Responsible Business Awards 2017 Winner: — New Street Square, EC4, Premier Award for Facilities Management and Chairman’s Cup — 20 Fenchurch Street, EC3, Platinum Award Winner: BREEAM Offices Refurbishment & Fit-Out award Shortlisted: Team of the Year Award Shortlisted: Clean and Green Award Shortlisted: Partnership with a National Charity Shortlisted: Charity partnership – property & construction Shortlisted: Environmental Leadership Award Reaccreditation: Work Inclusion Award January 2017 March 2017 March 2017 March 2017 March 2017 March 2017 April 2017 A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 165 Sustainability reporting continued Green building certifications Our BREEAM rated space Landsec – Scope 1 and 2 emissions 2015-17 Table 108 Table 106 Feb 16 Feb 17 Scope 1 and 2 mandatory reporting Location-based emission factors Market-based emission factors Total common and tenanted space (m²) 2,681,066 3,021,432 Total space with BREEAM rating (m²) 583,919 996,585 Emissions 2015 2016 2017 2016 2017 Scope 1 tCO2e 13,711 13,648 16,477 Scope 1 13,648 16,477 tCO2e Percentage of total which is BREEAM rated 22% 33% Scope 2 tCO2e 64,114 55,688 47,066 Scope 2 34,259 3,862 BREEAM rating Outstanding Excellent Very Good Good/Pass Table 107 % of our total space 0.2% 17.7% 7.2% 7.9% Area m2 4,864 534,490 218,959 238,272 Scope 1 and 2 tCO2e Intensity Scope 1 and 2 tCO2e/m2 77,825 69,336 63,543 Scope 1 47,907 20,338 tCO2e and 2 tCO2e 0.041 0.038 0.038 Scope 1 0.026 0.012 and 2 tCO2e/m2 The tables above outline the percentage of our portfolio rated by BREEAM and the breakdown of these ratings. BREEAM is a well-established assessment method and ratings system for buildings and continues to be a valuable indicator of quality and sustainability. It looks at a building’s performance and rates it on a scale which includes Pass, Good, Very Good, Excellent or Outstanding. CO2e Conversion Factors – Location-based1 Table 109 Electricity Natural gas 2015/16 2016/17 % Change 0.57492 0.51680 0.20928 0.20899 -10.1% -0.1% 1. Combined conversion factor including well-to-tank and transmission and distribution factors. Greenhouse gas reporting We report our full greenhouse gas (GHG) emissions annually in accordance to the World Resources Institute’s Greenhouse Gas Protocol. Landsec is also committed to EPRA Best Practice Recommendations for Sustainability reporting, for which we have won a Gold award for three years running. We believe that such reporting improves transparency and performance. We report our data using an operational control approach to define our organisational boundary. A detailed description of our reporting methodology and data, including our EPRA figures, can be found at www.landsec.com/sustainability GHG emissions are broken down into three scopes, Scope 1,2 and 3. Scope 1 emissions are direct emissions from activities controlled by us that release emissions into the atmosphere, whereas Scope 2 emissions are indirect emissions associated with our consumption of purchased energy. Scope 2 emissions are reported using both the ‘location-based’ and ‘market-based’ accounting methods. Location-based emissions are reported using UK Government Greenhouse gas reporting – Conversion factors 2016. Market-based emissions are reported using the conversion factor associated with each individual electricity supply as per the supplier’s guidance. Scope 1 emissions are currently reported using only the location-based method. Scope 3 emissions are those that are a consequence of our actions, but which occur at sources we do not own or control and which are not classed as Scope 2 emissions. The GHG Protocol identifies 15 categories of which eight are directly relevant for Landsec. The table below outlines the location-based emission factors used for the 2016/17 year and how they compare to the previous year. Landsec – Scope 1 and 2 emissions 2015-17 Table 110 90,000 80,000 64,114 70,000 60,000 e 2 O C t 50,000 40,000 30,000 20,000 10,000 55,688 47,006 34,259 13,711 13,648 16,477 13,648 3,862 16,447 2015 2016 2017 2016 2017 Location-based emission factors Market-based emission factors Scope 1 tCO2e Scope 2 tCO2e Total GHG emissions using location-based emission factors have dropped by 8% since the previous year. This has been driven by a reduction in electricity consumption and the drop in national emission factors due to a cleaner energy mix. In terms of market-based emissions we have seen a significant reduction of 58%. This has been due to our move to 100% renewable electricity via our contract with SmartestEnergy. This is the first year where we have fully reported our Scope 3 emissions having worked with the Carbon Trust to establish an accurate and repeatable methodology. We believe it was important to do so to fully understand and disclose the total emissions associated with our business. The table below provides a breakdown of our entire emission inventory including Scope 3. 166 Landsec Annual Report 2017 Landsec – Scope 1, 2 and 3 emissions 2016/17 GHG Scope Scope 1 Scope 2 Scope 3 Category Scope 1 Scope 2 1. Purchased goods and services (PG&S) 2. Capital goods 3. Fuel- and energy-related activities 4. Upstream transportation and distribution 5. Waste generated in operations 6. Business travel 7. Employee commuting 8. Upstream leased assets 9. Downstream transportation and distribution 10. Processing of sold products 11. Use of sold products 12. End-of-life treatment of sold products 13. Downstream leased assets 14. Franchises 15. Investments The GHG Protocol splits Scope 3 emissions into 15 categories. We assessed each one individually and decided which ones were applicable to our business. For the categories that are applicable we have obvious hot spots which are highlighted below: Landsec – Scope 3 GHG emissions 2016/17 (%) Table 112 Capital goods 45.82% Downstream leased assets 41.76% Purchased goods and services (PG&S) 9.96% Fuel- and energy-related activities 2.26% Others 0.20% The two largest contributing categories are Capital goods and Downstream leased assets, making up 80% of our entire emissions. Capital goods include the emissions associated with the manufacture and transport of materials used within our construction activity and Downstream leased assets are those associated with our customers within our assets. We are working to reduce our impacts in these categories by working closer with our supply chain partners and customers on reduction strategies. Table 111 Emissions (tCO2e) % of total emissions 16,477 47,066 61,647 283,570 13,982 Grouped under PG&S 703 360 182 n/a n/a n/a n/a n/a 258,428 n/a n/a 2% 7% 9% 42% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 38% 0% 0% A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 167 Combined Portfolio analysis Like-for-like segmental analysis Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Like-for-like portfolio10 Proposed developments3 Development programme11 Completed developments3 Acquisitions12 Sales13 Combined Portfolio Properties treated as finance leases Combined Portfolio Total portfolio analysis Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Combined Portfolio Properties treated as finance leases Combined Portfolio Represented by: Investment portfolio Share of joint ventures Combined Portfolio 168 Landsec Annual Report 2017 Market value1 Valuation movement2 Rental income3 Annualised rental income4 Annualised net rent5 Table 113 Net estimated rental value6 31 March 2017 £m 31 March 2016 £m Surplus/ (deficit) £m Surplus/ (deficit) % 31 March 2017 £m 31 March 2016 £m 31 March 2017 £m 31 March 2017 £m 31 March 2016 £m 31 March 2017 £m 31 March 2016 £m 3,663 855 1,361 20 5,899 2,020 797 1,013 323 4,153 1,267 41 5,461 11,360 6 1,138 1,841 94 – 14,439 3,677 886 1,323 20 5,906 2,084 797 1,053 320 4,254 1,181 45 5,480 11,386 4 1,013 1,771 90 207 14,471 (47) (37) 30 - (54) (1.3%) (4.2%) 2.3% (2.0%) (0.9%) (87) (25) (50) (13) (175) 82 (4) (97) (151) (4.3%) (3.1%) (5.1%) (7.8%) (4.4%) 6.9% (7.8%) (1.8%) (1.4%) (3) (33.2%) 1.3% 14 (0.4%) (7) 0.4% – – – (1.0%) (147) 14,439 14,471 (147) (1.0%) 194 52 82 2 330 89 29 40 14 172 45 2 219 549 – 21 63 4 11 648 (10) 638 195 52 84 2 333 88 28 39 13 168 44 2 214 547 – 8 47 2 56 660 (10) 650 184 52 81 1 318 91 29 40 14 174 34 1 209 527 – 25 70 4 – 626 179 51 79 2 311 89 32 43 15 179 34 1 214 525 – 1 40 4 – 570 180 50 78 2 310 84 32 42 9 167 45 1 213 523 – – 16 4 13 556 195 51 82 2 330 98 40 49 17 204 58 1 263 593 – 60 86 4 – 743 190 51 81 2 324 96 37 49 17 199 55 1 255 579 – 63 85 3 12 742 Market value1 Valuation movement2 Rental income3 Annualised rental income4 Annualised net rent5 Net estimated rental value6 31 March 2017 £m 31 March 2016 £m Surplus/ (deficit) £m Surplus/ (deficit) % 31 March 2017 £m 31 March 2016 £m 31 March 2017 £m 31 March 2017 £m 31 March 2016 £m 31 March 2017 £m 31 March 2016 £m 3,860 861 1,384 20 6,125 3,247 1,853 1,336 323 6,759 1,514 41 8,314 14,439 3,790 890 1,542 20 6,242 3,262 1,814 1,325 320 6,721 1,462 46 8,229 14,471 (37) (40) 30 - (47) (103) (14) (48) (13) (178) 82 (4) (100) (147) (0.9%) (4.5%) 2.2% (1.9%) (0.8%) (3.2%) (0.8%) (3.7%) (7.8%) (2.8%) 5.7% (7.9%) (1.3%) (1.0%) 14,439 14,471 (147) (1.0%) 12,628 1,811 14,439 12,800 1,671 14,471 (187) 40 (147) (1.5%) 2.3% (1.0%) 195 52 94 2 343 123 66 48 14 251 52 2 305 648 (10) 638 585 53 638 196 68 98 2 364 109 65 41 28 243 51 2 296 660 (10) 650 600 50 650 185 52 82 1 320 127 67 55 14 263 42 1 306 626 571 55 626 179 51 80 2 312 107 53 42 15 217 40 1 258 570 523 47 570 180 50 91 2 323 97 36 41 9 183 49 1 233 556 527 29 556 210 51 83 2 346 156 88 67 17 328 68 1 397 743 650 93 743 205 51 93 2 351 156 83 67 17 323 67 1 391 742 650 92 742 Total portfolio analysis continued Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Combined Portfolio Represented by: Investment portfolio Share of joint ventures Combined Portfolio Gross estimated rental value7 Net initial yield8 31 March 31 March 31 March 31 March 2017 £m 219 52 83 2 356 156 89 68 17 330 69 1 400 756 661 95 756 2016 £m 213 52 93 2 360 156 84 69 17 326 68 1 395 755 661 94 755 2017 % 4.1% 5.4% 5.2% 3.8% 4.5% 3.0% 2.7% 3.0% 4.2% 3.0% 2.4% 0.9% 2.9% 3.6% 2016 % 4.2% 5.1% 5.3% 6.3% 4.6% 2.8% 1.7% 3.0% 2.6% 2.5% 3.1% 1.1% 2.6% 3.5% 3.7% 2.4% 3.6% 3.7% 1.7% 3.5% Like-for-like segmental analysis continued Table 114 Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Like-for-like portfolio10 Proposed developments3 Development programme11 Completed developments3 Acquisitions12 Sales13 Combined Portfolio Total portfolio analysis Total portfolio analysis continued Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Combined Portfolio Represented by: Investment portfolio Share of joint ventures Combined Portfolio Market value1 Valuation movement2 Rental income3 Annualised net rent5 Annualised rental income4 Net estimated rental value6 31 March 31 March 2017 £m 2016 £m Surplus/ (deficit) £m Surplus/ (deficit) % 31 March 31 March 31 March 31 March 31 March 31 March 31 March 2017 £m 2016 £m 2017 £m 2017 £m 2016 £m 2017 £m 195 196 185 179 180 210 (37) (40) 30 - (0.9%) (4.5%) 2.2% (1.9%) 52 94 2 68 98 2 6,125 6,242 (47) (0.8%) 343 364 320 312 323 346 (103) (3.2%) 123 109 127 107 3,860 861 1,384 20 3,247 1,853 1,336 323 6,759 1,514 41 3,790 890 1,542 20 3,262 1,814 1,325 320 6,721 1,462 46 8,314 8,229 14,439 14,471 (14) (48) (13) (0.8%) (3.7%) (7.8%) (178) (2.8%) 82 5.7% (4) (7.9%) (100) (147) (1.3%) (1.0%) 12,628 12,800 (187) (1.5%) 1,811 1,671 40 2.3% 14,439 14,471 (147) (1.0%) 52 82 1 67 55 14 263 42 1 306 626 571 55 626 51 80 2 53 42 15 217 40 1 258 570 523 47 570 50 91 2 97 36 41 9 183 49 1 233 556 527 29 556 51 83 2 156 88 67 17 328 68 1 397 743 650 93 743 66 48 14 251 52 2 305 648 (10) 638 585 53 638 65 41 28 243 51 2 296 660 (10) 650 600 50 650 2016 £m 205 51 93 2 351 156 83 67 17 323 67 1 391 742 650 92 742 Properties treated as finance leases Combined Portfolio 14,439 14,471 (147) (1.0%) Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Combined Portfolio Represented by: Investment portfolio Share of joint ventures Combined Portfolio Gross estimated rental value7 Net initial yield8 Equivalent yield9 Voids (by ERV)3 31 March 2017 £m 31 March 2016 £m 31 March 2017 % 31 March 2016 % 31 March 2017 % 31 March 2016 % 31 March 2017 % 31 March 2016 % 203 52 82 2 339 98 41 50 17 206 58 1 265 604 – 61 87 4 – 756 197 52 81 2 332 96 38 51 17 202 56 1 259 591 – 64 85 3 12 755 4.3% 5.5% 5.2% 3.8% 4.7% 4.0% 3.8% 4.0% 4.2% 4.0% 2.5% 0.9% 3.6% 4.2% – 0.1% 2.0% 3.7% – 3.6% 4.4% 5.1% 5.3% 6.3% 4.7% 3.8% 3.7% 3.8% 2.6% 3.7% 3.5% 1.0% 3.6% 4.2% – – 0.8% 3.6% 5.5% 3.5% 4.8% 5.6% 5.4% 8.3% 5.0% 4.6% 4.8% 4.5% 5.0% 4.7% 4.1% 1.3% 4.5% 4.8% n/a 4.2% 4.2% 3.8% n/a 4.7% 4.7% 5.4% 5.5% 8.2% 5.0% 4.5% 4.5% 4.4% 4.9% 4.5% 4.0% 1.5% 4.4% 4.7% n/a 4.0% 4.1% n/a n/a n/a 3.9% – 0.7% 33.3% 2.8% 7.6% – – – 3.6% 18.6% 33.3% 7.0% 4.6% n/a n/a n/a n/a n/a n/a 2.9% – 0.5% 21.7% 2.0% 4.7% – 0.4% – 2.3% 4.9% 16.7% 2.9% 2.4% n/a n/a n/a n/a n/a n/a Gross estimated rental value7 Net initial yield8 31 March 2017 £m 31 March 2016 £m 31 March 2017 % 31 March 2016 % 219 52 83 2 356 156 89 68 17 330 69 1 400 756 661 95 756 213 52 93 2 360 156 84 69 17 326 68 1 395 755 661 94 755 4.1% 5.4% 5.2% 3.8% 4.5% 3.0% 2.7% 3.0% 4.2% 3.0% 2.4% 0.9% 2.9% 3.6% 4.2% 5.1% 5.3% 6.3% 4.6% 2.8% 1.7% 3.0% 2.6% 2.5% 3.1% 1.1% 2.6% 3.5% 3.7% 2.4% 3.6% 3.7% 1.7% 3.5% Notes: 1. The market value figures are determined by the Group’s external valuer. 2. The valuation movement is stated after adjusting for the effect of SIC15 under IFRS. 3. Refer to glossary for definition. 4. Annualised rental income is annual ‘rental income’ (as defined in the glossary) at the balance sheet date, except that car park and commercialisation income are included on a net basis (after deduction for operational outgoings). Annualised rental income includes temporary lettings. 5. Annualised net rent is annual cash rent, after the deduction of ground rents, as at the balance sheet date. It is calculated with the same methodology as annualised rental income but is stated net of ground rent and before SIC15 adjustments. 6. Net estimated rental value is gross estimated rental value, as defined in the glossary, after deducting expected ground rents. 7. Gross estimated rental value (ERV) – refer to glossary for definition. The figure for proposed developments relates to the existing buildings and not the schemes proposed. 8. Net initial yield – refer to glossary for definition. This calculation includes all properties including those sites with no income. 9. Equivalent yield – refer to glossary for definition. Proposed developments are excluded from the calculation of equivalent yield on the Combined Portfolio. 10. The like-for-like portfolio – refer to glossary for definition. Capital expenditure on refurbishments, acquisitions of head leases and similar capital expenditure has been allocated to the like-for-like portfolio in preparing this table. 11. The development programme – refer to glossary for definition. Net initial yield figures are only calculated for properties in the development programme that have reached practical completion. 12. Includes all properties acquired since 1 April 2015. 13. Includes all properties sold since 1 April 2015. A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 169 Lease lengths Lease lengths Retail Portfolio Shopping centres and shops Retail parks Leisure and hotels Other Total Retail Portfolio London Portfolio West End City Mid-town Inner London Total London offices Central London shops Other Total London Portfolio Combined Portfolio Table 115 Weighted average unexpired lease term at 31 March 2017 Like-for-like portfolio Mean1 Years Like-for-like portfolio, completed developments and acquisitions Mean1 Years 6.5 7.6 12.4 1.9 8.2 8.0 6.1 9.5 15.8 8.6 6.8 6.7 8.3 8.2 6.5 7.6 12.5 1.9 8.2 8.0 10.9 12.2 15.8 10.3 7.2 6.7 9.9 9.1 Table 116 Valuation (deficit)/ surplus for the year ended 31 March 20172 £m – – (9) (9) 10 – 4 14 – (3) – (3) 1. Mean is the rent weighted average of the unexpired lease term across all leases (excluding short-term leases). Term is defined as the earlier of tenant break or expiry. Development pipeline Development pipeline financial summary Cumulative movements on the development programme to 31 March 2017 Total scheme details1 Market value at start of scheme £m Capital expendi- ture incurred to date £m Capitalised interest to date £m Valuation surplus/ (deficit) to date2 £m Disposals, SIC15 rent and other adjust- ments £m Market value at 31 March 2017 £m Estimated total capital expenditure3 £m Estimated total capitalised interest £m Estimated total develop- ment cost4 £m Net income/ ERV5 £m – – 137 137 30 – 212 242 – – 283 283 115 – 385 500 – – 16 16 8 – 44 52 – – 405 405 32 – 401 433 – – 4 4 (2) – (87) (89) – – 845 845 183 – 955 1,138 Movement on proposed developments for the year ended 31 March 2017 – 4 – 4 – 2 – 2 – – – – – (3) – (3) – 3 – 3 – 6 – 6 – – 277 277 171 – 272 443 – 44 – 44 – – 15 15 10 – 44 54 – 1 – 1 – – 416 416 211 – 528 739 – 51 – 51 – – 40 40 14 – 46 60 – 3 – 3 Developments let and transferred or sold Shopping centres and shops Retail parks London Portfolio Developments after practical completion, approved or in progress Shopping centres and shops Retail parks London Portfolio Proposed developments Shopping centres and shops Retail parks London Portfolio 1. Total scheme details exclude properties sold in the year. 2. Includes profit realised on the disposal of investment properties and any surplus or deficit on investment properties transferred to trading. 3. For proposed development properties, the estimated total capital expenditure represents the outstanding costs required to complete the scheme as at 31 March 2017. 4. Includes the property at its market value 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 2017 is included in the estimated total cost. Estimated costs for proposed schemes could still be subject to material change prior to final approval. 5. Net headline annual rent on let units plus net ERV at 31 March 2017 on unlet units. 170 Landsec Annual Report 2017 Development pipeline and trading property development schemes at 31 March 2017 Development pipeline Property Developments after practical completion The Zig Zag Building, SW11 20 Eastbourne Terrace, W2 Developments approved or in progress Nova, Victoria, SW1 Oriana, W1 – Phase II Westgate Oxford Proposed developments Selly Oak, Birmingham Developments let and transferred or sold 1 New Street Square, EC4 1 & 2 New Ludgate, EC4 Oriana, W1 – Phase II2 Description of use Ownership interest % Size sq ft Letting status % Market value £m Net income/ ERV £m Actual/ estimated completion date Total development costs to date £m Table 117 Forecast total development cost £m Office Retail Office Office Retail Retail Retail 100 100 50 50 50 192,700 38,700 92,800 481,400 79,200 30,700 793,000 Retail Residential 50 200,000 89,000 Office Office Retail Retail 100 100 50 274,800 355,300 26,700 41,800 89 89 90 42 93 100 68 n/a n/a 100 100 100 100 382 130 396 47 183 n/a n/a n/a3 n/a3 n/a3 17 Nov 2015 6 May 2016 21 2 14 n/a n/a Apr 2017 Jul 2017 Oct 2017 2019 2019 16 24 Oct 2016 Apr 2015 n/a n/a 182 67 259 19 148 n/a n/a 168 248 n/a 182 67 259 20 211 n/a n/a 168 248 n/a 1. Includes retail within Kings Gate, SW1. 2. This represents the disposal of 28-32 Oxford Street, W1. 3. Once properties are transferred from the development pipeline, we do not report on their individual value. Where the property is not 100% owned, floor areas and letting status shown above represent the full scheme whereas all other figures represent our proportionate share. Letting % is measured by ERV and shows letting status at 31 March 2017. Trading property development schemes are excluded from the development pipeline. Total development cost Refer to glossary for definition. Of the properties in the development pipeline at 31 March 2017, the only properties on which interest was capitalised on the land cost were Westgate Oxford and Nova, Victoria, SW1. Net income/ERV Net income/ERV represents headline annual rent on let units plus ERV at 31 March 2017 on unlet units, both after rents payable. Trading property development schemes Property Kings Gate, SW1 Nova, Victoria, SW1 Oriana, W1 – Phase II Westgate Oxford Ownership interest % Size sq ft Number of units Sales exchanged by unit % Actual/ estimated completion date Total development costs to date £m Table 118 Forecast total development cost £m 100 50 50 50 108,600 166,800 20,200 36,700 100 170 18 59 95 87 22 – Oct 2015 Apr 2017 Jul 2017 Jul 2017 163 146 14 7 163 146 15 10 Description of use Residential Residential Residential Residential A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 171 Alternative performance measures The Group has applied the European Securities and Markets Authority (ESMA) ‘Guidelines on Alternative Performance Measures’ in these annual results. In the context of these results, an alternative performance measure (APM) is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS. The table below summarises the APMs included in these annual results, where the definitions and reconciliations of these measures can be found, as well where further discussion is included. The definitions of all APMs are included in the Glossary and further discussion of these measures can be found in the financial review. Nearest IFRS measure Reconciliation Table 119 Revenue profit Adjusted earnings Adjusted earnings per share Adjusted diluted earnings per share Adjusted net assets Adjusted net assets per share Adjusted diluted net assets per share Total business return Combined Portfolio Valuation surplus/deficit Adjusted net debt Group LTV Five year summary Income statement Revenue Costs Profit/(loss) on disposal of investment properties (Loss)/profit on disposal of investments in joint ventures Profit on disposal of other investment Net (deficit)/surplus on revaluation of investment properties Operating profit Net finance expense Net gain on business combination Share of post-tax profit from joint ventures Profit before tax Taxation Profit for the financial year Net (deficit)/surplus on revaluation of investment properties: Group1 Joint ventures1 Total1 Revenue profit 1. Includes our non-wholly owned subsidiaries on a proportionate basis. 172 Landsec Annual Report 2017 Profit attributable to owners of the parent Profit before tax Basic earnings per share Diluted earnings per share Net assets attributable to owners of the parent Net assets attributable to owners of the parent Net assets attributable to owners of the parent n/a Investment properties Net surplus/deficit on revaluation of investment properties Borrowings n/a 2017 £m 787 (266) 521 19 (2) 13 (186) 365 (322) – 69 112 1 113 (187) 40 (147) 382 2016 £m 942 2015 £m 770 2014 £m 717 (410) (334) (249) 532 75 – – 739 1,346 (209) – 199 1,336 2 1,338 736 171 907 362 436 107 3 – 1,771 2,317 (228) 2 326 2,417 – 2,417 1,768 269 2,037 329 468 16 2 – 607 1,093 (185) 5 196 1,109 8 1,117 609 155 764 320 Note 4 Note 5 Note 5 Note 5 Note 5 Note 5 Note 5 Note 5 Note 14 Note 14 Note 20 Note 20 Table 120 2013 £m 737 (284) 453 (3) – 1 197 648 (175) 1 59 533 – 533 197 21 218 291 Five year summary Balance sheet Investment properties Intangible assets Net investment in finance leases Loan investments Investment in joint ventures Trade and other receivables Other non-current assets Total non-current assets Trading properties and long-term development contracts Trade and other receivables Monies held in restricted accounts and deposits Cash and cash equivalents Total current assets Non-current assets held for sale Borrowings Trade and other payables Other current liabilities Total current liabilities Borrowings Trade and other payables Other non-current liabilities Redemption liability Total non-current liabilities Net assets Net debt Market value of the Combined Portfolio Adjusted net debt Results per share Total dividend payable in respect of the financial year 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 2017 £m 2016 £m 2015 £m 12,144 12,358 12,158 36 165 – 38 183 – 35 185 50 Table 121 2013 £m 9,652 – 188 50 2014 £m 9,848 – 187 50 1,734 1,668 1,434 1,443 1,301 123 51 86 44 53 29 35 14 11 14 14,253 14,377 13,944 11,577 11,216 122 418 21 30 591 124 445 19 25 613 – – (404) (302) (7) (713) (19) (289) (19) (327) 222 404 10 14 650 283 (191) (367) (10) (568) 193 366 15 21 595 152 345 31 42 570 – – (513) (320) (12) (845) (436) (364) (37) (837) (2,545) (2,854) (3,593) (2,849) (3,315) (25) (9) (36) (28) (47) (35) (30) (45) (35) (23) (4) (33) (18) (11) (118) (2,615) (2,964) (3,703) (2,909) (3,462) 11,516 (2,905) 11,699 (2,861) 10,606 (3,801) 8,418 7,487 (3,331) (3,699) 14,439 14,471 (3,261) (3,239) 14,031 (4,172) 11,859 11,446 (3,948) (4,290) 38.55p 14.3p 14.3p 48.4p 48.3p 1,458p 1,456p 1,418p 1,417p 35.0p 169.4p 168.8p 45.9p 45.7p 1,482p 1,476p 1,439p 1,434p 31.85p 306.1p 304.7p 41.7p 41.5p 1,343p 1,337p 1,299p 1,293p 30.7p 142.3p 141.8p 40.7p 40.5p 1,069p 1,065p 1,017p 1,013p A d d i t i o n a l i n f o r m a t i o n 29.8p 68.4p 68.1p 37.0p 36.8p 959p 955p 907p 903p Landsec Annual Report 2017 173 Acquisitions, disposals and capital expenditure Investment properties Net book value at the beginning of the year 12,358 1,630 (34) 13,954 13,529 Year ended 31 March 2017 Table 122 Year ended 31 March 2016 Group (excl. joint ventures) £m Adjustment for proportionate share £m Joint ventures £m Combined Portfolio £m Combined Portfolio £m Acquisitions Capital expenditure Capitalised interest Disposals Net movement in finance leases Transfer to trading properties Net (deficit)/surplus on revaluation of investment properties Net book value at the end of the year 14 126 5 (205) 32 – (186) 12,144 1 114 13 (39) 9 (5) 40 1,763 – – – – 1 – (1) (34) – – – – – – – – – – – Profit on disposal of investment properties 19 1 124 19 – (33) – 12 122 29 (2) 13 157 27 5 (68) 5 – 126 7 – – Trading properties Net book value at the beginning of the year Capital expenditure Capitalised interest Disposals Transfer from investment properties Movement in impairment Net book value at the end of the year Profit on disposal of trading properties Investment in joint ventures Loss on disposal of investment in joint venture Other investments Profit on disposal of other investment Acquisitions, development and refurbishment expenditure Acquisitions of investment property Capital expenditure – investment property Development capital expenditure – investment properties Capital expenditure – trading properties Development capital expenditure – trading property Acquisitions, development and refurbishment expenditure Disposals Net book value – investment property disposals Net book value – trading property disposals Profit on disposal – investment property Profit on disposal – trading property Loss on disposal – investment in joint venture Profit on disposal – other investment Disposal of asset held for sale Other Total disposal proceeds 174 Landsec Annual Report 2017 15 240 18 123 312 23 (244) (940) 42 (5) (147) 13,873 – – 907 13,954 20 79 281 46 5 (101) 5 12 248 337 61 6 (140) – 16 280 36 41 (2) 13 £m 15 81 159 19 27 301 £m 244 101 20 36 (2) 13 – 1 413 – – £m 123 160 152 51 10 496 £m 940 140 79 41 – – 283 10 1,493 Remuneration policy 1. Executive Directors Purpose and link to strategy Operation Opportunity Discretion Table 123 Base salary — To aid the recruitment, — Reviewed annually, with effect from retention and motivation of high performing executives 1 June, and reflects: — Increases throughout the rest of — To reflect the value of the business their experience, skills and knowledge, and importance to the business. — Market benchmarking exercise undertaken periodically to ensure salaries are set at around the median of the market competitive level for people in comparable roles with similar levels of experience, performance and contribution — Changes in the scope of a Director’s role may also require a further adjustment to salary. Benefits — To provide protection and — Directors receive a combination of: market competitive benefits to aid recruitment and retention of high performing executives. — Car allowance — Private medical insurance — Life assurance — Ill health income protection — Holiday and sick pay — Professional advice in connection with their directorship — Travel, subsistence and accommodation as necessary — Occasional gifts, for example appropriate long service or leaving gifts. — The Committee has the discretion to determine the precise amount of base salary within the Policy, including approving the salary for a newly-appointed Director. It will also determine whether there are specific reasons to award salary increases greater than those for the wider workforce. — For 2017/18, the annual base salaries of the Executive Directors are £784,041 (Chief Executive), and £510,367 (Chief Financial Officer), representing a 2% increase — The maximum annual salary increase will not normally exceed the average increase across the rest of the workforce (2017/18: 2%). Higher increases will be exceptional, and made in specific circumstances, including: — Increase in responsibilities or scope of the role — To apply salary progression for a newly appointed Director — Where the Director’s salary has fallen below the market positioning. — The value of benefits may vary from year to year depending on the cost to the Company. — The Policy will always apply as stated, unless there are specific individual circumstances why it should not. Pension — To help recruit and retain — Participation into a defined contribution — Directors receive a pension — The Policy will apply as stated. high performing executives pension scheme or cash equivalent. — To reward continued contribution to the business by enabling Executive Directors to build retirement benefits. contribution or cash allowance of 25% of salary. A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 175 Remuneration policy continued Purpose and link to strategy Operation Opportunity Discretion Annual bonus — To incentivise the delivery of stretching, near-term business targets and personal performance objectives — To reward near-term outperformance relative to industry benchmarks — Specific measures and targets, for example successful planning applications and asset management initiatives, will provide future opportunity for the business and will increase the value of our properties in the short term — Other KPIs, such as development lettings targets, are likely to have a significant impact on capital growth and long-term revenue profit performance — The ability to recognise performance through variable remuneration enables the Group to control its cost base flexibly and react to events and market circumstances — Deferral of a portion of annual bonuses into shares encourages a longer- term focus aligned to shareholders’ interests and discourages excessive risk taking. — All measures and targets are reviewed and set by the Board at the beginning of the year and payments are determined by the Committee after the year end, based on performance against the targets set — Specific measures and targets will be set each year, but will always include a measure of Total Property Return versus that of the market — Other measures and targets will reflect the most critical business performance indicators for the year ahead, and will be both specific and measurable. Revenue Profit performance will always feature as a key measure — The achievement of on-target performance should result in a payment of 50% of the maximum opportunity (i.e. 75% of salary) — A small proportion (no more than 20% of base salary) of a Director’s bonus is based on the Committee’s assessment of the achievement of pre-set personal performance objectives — The structure of the plan incentivises outperformance by ensuring that the threshold targets are stretching — Bonuses up to 50% of salary are paid in cash — Any amounts in excess of 50% of salary are deferred into shares for one year — Any amounts in excess of 100% of salary are deferred into shares for two years — Deferred shares are potentially forfeitable if the executive leaves prior to the share release date — Bonus payments are not pensionable — Withholding and recovery provisions (malus and clawback) apply where any overpayment was made as a result of a material misstatement of the Company’s results or a performance condition, or where there has been fraud or gross misconduct, whether or not this caused the overpayment. — Minimum bonus payable is — The Committee has the discretion 0% of salary — Maximum bonus potential is 150% of salary. to set targets and measures each year — The outturns for the Group element of the bonus plan are calculated formulaically and therefore the Committee has no discretion to adjust these, unless it feels it is necessary to adjust them down — The Committee does have the discretion to award appropriate bonus payments under the individual element (maximum 20% of base salary) to reflect the performance and contribution of an individual Director — Within the Policy, the Committee will retain flexibility including: — When to make awards and payments — How to determine the size of an award, a payment, or when and how much of an award should be payable — Who receives an award or payment — Whether a departing Director should receive a bonus and whether and what proportion of awards should be paid at the time of leaving or at a subsequent date — Whether a departing Director should be treated as a “good leaver” in respect of deferred bonus shares — How to deal with a change of control or any other corporate event which may require adjustments to awards — To determine that no bonus or a reduced bonus is payable where the performance of the business has been poor, notwithstanding the achievement of objectives. 176 Landsec Annual Report 2017 Purpose and link to strategy Operation Opportunity Discretion Long-Term Incentive Plan (LTIP) — Incentivises value creation — The Committee may make an annual award — Normal and current award over the long-term in excess of that created by general market increases — Rewards execution of our strategy and the long- term outperformance of our competitors — Aligns the long-term interests of Directors and shareholders of shares under the LTIP limit – 300% of salary. — Vesting is determined on the basis of the Group’s achievements against stretching performance targets over a fixed three year financial period and continued employment. There is no re-testing — The Committee reviews the measures, their relative weightings and targets prior to each award — Promotes retention. — The measures selected are relative and directly aligned to the interests of shareholders. 50% of an award is weighted to a measure of Total Property Return versus the industry benchmark over a three year period and 50% to Total Shareholder Return versus our listed comparator group over a three year period — For each measure, no awards vest for performance below that of the benchmark. Only a proportion (20%) will vest for matching the performance of the benchmark and significant outperformance is required for the maximum award to vest — Awards will be satisfied by either newly issued shares or shares purchased in the market and any use of newly issued shares will be subject to the dilution limits contained in the scheme rules or approved by shareholders — Executive Directors are required to hold vested shares for a further two years (including post- employment) following the three year vesting period expiry — Withholding and recovery provisions (malus and clawback) apply where any overpayment was made as a result of a material misstatement of the Company’s results or a performance condition or where there has been fraud or gross misconduct, whether or not this caused the overpayment. — The outturns of the LTIP are calculated formulaically and therefore the Committee has no discretion to adjust these, unless it determines they should be adjusted down — Within the Policy, the Committee will retain flexibility including: — When to make awards and payments — How to determine the size of an award, a payment, or when and how much of an award should vest — Who receives an award or payment — Whether a departing Director is treated as a “good leaver” for the purposes of the LTIP and whether and what proportion of awards vest at the time of leaving or at a subsequent vesting date — How to deal with a change of control or any other corporate event which may require adjustments to awards. Savings Related Share Option Scheme (SAYE Scheme) — To encourage all employees — All employees, including Executive Directors, — The maximum participation to make a long-term investment in the Company’s shares, through a savings- related arrangement. are entitled to participate in the SAYE Scheme operated by the Company in line with UK HMRC guidelines currently prevailing. levels may vary in line with HMRC limits. For 2017/18, participants may save up to £500 per month for either three or five years, using their accumulated savings at the end of the period to purchase shares at a 20% discount to the market price at the date of grant. Share ownership guidelines — To provide close alignment between the longer-term interests of Directors and shareholders in terms of the Company’s growth and performance. — Executive Directors are expected to build up and maintain shareholdings with a value set at a percentage of base salary: — Chief Executive – 250% of salary — Other Executive Directors – 200% of salary These levels are normally required to be achieved within five years of appointment in order to qualify for future long-term incentive awards. Deferred or unvested share awards not subject to performance conditions may count towards the ownership levels on a net of tax basis. — The Policy will apply as stated. — Within the Policy, the Committee will retain the flexibility to determine whether a departing Executive Director should be treated as a “good leaver”. — In exceptional circumstances, the Committee may extend the period by which share ownership levels are required to be achieved by up to two years. A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 177 Remuneration policy continued 2. Non-executive Directors Purpose and link to strategy Operation Opportunity Table 124 Base fee — To aid the recruitment, retention and motivation of high performing Non-executive Directors — To reflect the time commitment given by Non-executive Directors to the business. Additional fees — To reflect the additional time commitment required from Non-executive Directors in chairing various Board sub-committees or becoming the Board’s Senior Independent Director. Other incentives and benefits — The Chairman is paid a single fee for all Board duties and the other Non-executive Directors receive a basic Board fee, with supplementary fees payable for additional responsibilities — Reviewed (but not necessarily changed) annually by the Board, having regard to independent advice and published surveys — The Chairman’s fee is also reviewed by the Board rather than the Remuneration Committee. — The current fees for Non-executive Directors are shown in the Annual Report on Remuneration in section 3.2 — Non-executive Director fees are typically reviewed annually but increased every two to three years — Any increases reflect relevant benchmark data for Non-executive Directors in companies of a similar size and complexity, and the time commitment required. — Reviewed (but not necessarily changed) annually by the Board, having regard to independent advice and published surveys. — The opportunity depends on which, if any, additional roles are assumed by an individual Director over the course of their tenure — Any increases reflect relevant benchmark data for Non-executive Directors in companies of a similar size and complexity, and the time commitment required. — Non-executive Directors do not receive any n/a other remuneration or benefits beyond the fees noted above. Expenses in relation to Company business will be reimbursed — If deemed necessary, and in the performance of their duties, Non-executive Directors may take independent professional advice at the Company’s expense. Share ownership — To provide close alignment between the longer-term interests of Directors and shareholders in terms of the Company’s growth and performance. — The current share ownership guidelines require Non-executive Directors to own shares with a value of 100% of annual fees within three years of appointment. 178 Landsec Annual Report 2017 3. Directors’ Service Agreements and Letters of Appointment 3.1 Service Agreements – Executive Directors The Executive Directors have Service Agreements with the Company which normally continue until the Director’s agreed retirement date or such other date as the parties agree. In line with Group policy, the Executive Directors’ employment can be terminated at any time by either party on giving 12 months’ prior written notice. The Company allows Executive Directors to hold external non-executive directorships, subject to the prior approval of the Board, and to retain fees from these roles. 3.2 Termination Provisions – Executive Directors An Executive Director’s Service Agreement may be terminated without notice and without further payment or compensation, except for sums earned up to the date of termination, on the occurrence of certain events such as gross misconduct. The circumstances of the termination (taking into account the individual’s performance) and an individual’s opportunity to mitigate losses are taken into account by the Committee when determining amounts payable on termination, including pay in lieu of notice. The Group’s normal approach is to stop or reduce compensatory payments to former Executive Directors when they receive remuneration from other employment during the compensation period. The Company does not make any arrangements that guarantee pensions with limited or no abatement on severance or early retirement. There are no special provisions for Executive Directors with regard to compensation in the event of loss of office. Any share-based entitlements granted under the Company’s share plans will be determined on the basis of the relevant plan rules. The default position is that any outstanding unvested awards automatically lapse on cessation of employment. However, under the rules of the LTIP, in certain prescribed circumstances, such as redundancy, disability, retirement or other circumstances at the discretion of the Committee (taking into account the individual’s performance and the reasons for their departure), “good leaver” status can be applied. For example, if an executive’s role has effectively been made redundant, and there are no significant performance issues, the Committee is likely to look favourably on the granting of some “good leaver” provisions. However, if an executive has resigned for a similar role in a competitor organisation then such provisions are extremely unlikely to apply. Where “good leaver” provisions in respect of share awards are deemed to be appropriate, a participant’s awards should vest on a time pro-rata basis and subject to the satisfaction of the relevant performance criteria with the balance of the awards lapsing. The Committee retains discretion to decide not to pro-rate if it is inappropriate to do so in particular circumstances. For the avoidance of doubt, if the termination of employment is not for one of the specified reasons, and the Committee does not exercise its discretion to allow an award to vest, all outstanding awards automatically lapse. 3.3 Remuneration of newly appointed Executive Directors The remuneration package for a new externally appointed Executive Director would be set in accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment. At present, the Policy on base salary will apply, but the Committee has the flexibility to set the salary of a new hire at a discount to the market level initially, with a series of planned increases implemented over the following few years (subject to performance in the role) to bring the salary to the desired positioning. Only in very exceptional circumstances will the salary of a newly appointed Director exceed the market median benchmark for the role. The annual bonus would operate in accordance with the terms of the approved policy, albeit with the opportunity pro-rated for the period of employment in the first year. Depending on the timing and responsibilities of the appointment, it may be necessary to set different performance measures and targets initially. The LTIP would also operate in accordance with the Policy. The maximum level of variable pay that may be offered to a new Executive Director is therefore at an aggregate maximum of 450% of salary. This limit does not include the value of any buy-out arrangements deemed appropriate (see below). In addition to the elements of the remuneration package covered by the Policy, the Committee may “buy out” certain existing remuneration of an incoming Executive Director through the offer of either additional cash and/or share-based elements (on a one-time basis or ongoing) when it considers these to be in the best interests of the Company. Any such payments would be based solely on remuneration lost when leaving the former employer and would take into account the existing delivery mechanism (i.e. cash, shares, options), time horizons and performance conditions. In the case of an internally appointed Executive Director, any variable pay element awarded in respect of the prior role would be paid out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations existing prior to appointment would continue, provided that they are put to shareholders for approval at the earliest opportunity. For external and internal appointments, the Committee may agree that the Company will meet certain relocation expenses, on a one time basis, as appropriate. Where a Director is recruited from overseas, flexibility is retained to provide benefits that take account of market practice in their country of residence. The Company may offer a cash amount on recruitment, payment of which may be staggered over a period of up to two years, to reflect the value of benefits a new recruit may have received from a former employer. Shareholders will be informed of the remuneration package and all additional payments to newly appointed Executive Directors at the time of their appointment. 3.4 Chairman and Non-executive Directors’ Letters of Appointment The Chairman and the Non-executive Directors do not have Service Agreements with the Company. Instead, each of them has a Letter of Appointment which sets out the terms of their appointment, including the three months’ prior written notice on which their appointment can be terminated by either party at any time. The dates of the current Letters of Appointment are shown in the Annual Report on Remuneration and these, together with the Executive Directors’ Service Agreements, are available for inspection at the Company’s registered office. On appointment, the fee arrangements for a new Non-executive Director would be set in accordance with the approved remuneration policy in force at that time. A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 179 Subsidiaries, joint ventures and associates As at 31 March 2017, the Company had a 100% interest, direct or indirect, in the ordinary share capital of the following subsidiaries, all of which are registered in the UK at 100 Victoria Street, London, SW1E 5JL. Name Name 59-60 Grosvenor Street (No. 1) Limited Land Securities Management Limited 59-60 Grosvenor Street (No. 2) Limited Land Securities Management Services Limited Alan House (Nottingham) (No. 1) Limited Land Securities MPPS Trustee Company Limited Alan House (Nottingham) (No. 2) Limited Land Securities Partnerships Limited Albany Park (Frimley) (No. 1) Limited Land Securities PLC Arundel Great Court Development Management Limited Blueco Limited Bluewater Ground Lease Limited Bluewater Outer Area Limited Brand Empire SPV 4 Limited Cedric (New Fetter Lane) (No. 1) Limited Cedric (New Fetter Lane) (No. 2) Limited City & Central Shops Limited City Centre Properties Limited Clock Tower (Canterbury) (No. 1) Limited Clock Tower (Canterbury) (No. 2) Limited Crossways 2000 Limited Crossways 3065 Limited Crossways 7055 Limited Dashwood House Limited DVD Box Limited Ebbsfleet Valley Estate Company Limited Ebbsfleet Valley Property Services Limited Eron Investments Limited GEP16 Limited Gunwharf Quays Limited Knollys House (No.1) Limited Knollys House Limited L & P Estates Limited Land Securities (BH) Limited Land Securities Portfolio Management Limited Land Securities Properties Limited Land Securities Property Holdings Limited Land Securities Reserve A Limited Land Securities Reserve B Limited Land Securities SPV’S Limited Land Securities Trading Limited Land Securities Trinity Limited LC25 Limited LS (Bracknell) Limited LS (Bridgewater Management) Limited LS (Finchley Road) Limited LS (Jaguar) GP Investments Limited LS (Milford Haven) Limited LS (Victoria) Nominee No.1 Limited LS (Victoria) Nominee No.2 Limited LS (Winchester) Limited LS (Workington) Nominee 1 Limited LS (Workington) Nominee 2 Limited LS 1 New Street Square Developer Limited LS 1 New Street Square Limited LS 1 Sherwood Street Limited LS 120 Cheapside Limited LS 130 Wood ST Limited LS 20 Fenchurch Street (GP) Investments Limited Land Securities (Finance) Limited LS 20 Fenchurch Street Limited Land Securities (Hotels) Limited Land Securities (Insurance Services) Limited Land Securities (Media Services) BH Limited Land Securities (Media Services) PQ Limited LS 21 Moorfields Development Management Limited LS 21 Moorfields Limited LS Aldersgate Limited Land Securities Buchanan Street Developments Limited LS Arundel Nominee Limited LS Arundel Nominee No. 1 Limited Land Securities Business Services Limited LS Ashdown Limited Land Securities Capital Markets PLC LS Banbridge Limited Land Securities Consulting Limited LS Banbridge Management Limited Land Securities Corporate Services Limited LS Banbridge Phase Two Limited Land Securities Development Limited LS Bankside Development Limited Land Securities Ebbsfleet (No.2) Limited LS Bankside Limited Land Securities Ebbsfleet (No.3) Limited LS Bexhill Limited Land Securities Ebbsfleet Limited Land Securities Intermediate Limited LS Birmingham Limited LS Bon Accord Limited Land Securities Investment Trust Limited LS Buchanan (GP) Investments Limited Land Securities Lakeside Limited LS Buchanan Limited 180 Landsec Annual Report 2017 Name Name Name LS Canterbury Limited LS Cardiff (GP) Investments Limited LS Cardiff (Holdings) Limited LS Cardiff Limited LS Cardinal Limited LS Maidstone Limited LS Mark Lane Limited LS Millshaw Limited LS Mirage Limited LS Moorgate Limited LSIT (Management) Limited Metro Nominees (Notting Hill No.1) Limited Metro Nominees (Notting Hill No.2) Limited Metro Nominees (Victoria Place) Limited Micadant (2001) Limited LS Centre Properties Limited LS New Street Square Investments Limited O2 Retail & Leisure UK Partnership No.1 LLP LS Chattenden Marketing Limited LS Nominees Holdings Limited Oriana LP Limited LS Chesterfield Limited LS City & West End Limited LS City Gate House Limited LS Clayton Square Limited LS Occupier Limited LS ONC Holdings Limited Oxford Castle Apartments Limited QAM (2026) Limited LS One New Change Developments Limited QAM (GP) Limited LS One New Change Limited LS Company Secretaries Limited LS Oxygen Limited LS Cornerhouse Limited LS Director Limited LS Eastbourne Terrace Limited LS Eastern Quarry Limited LS Easton Park Investments Limited LS Empress State Limited LS Fenchurch Development Management Limited LS Galleria Limited LS Park House Development Management Limited LS Poole Retail Limited LS Portfolio Investments Limited LS Portland House Developer Limited LS Property Finance Company Limited LS Property Solutions Limited LS Red Lion Court Limited LS Retail Warehouses Limited LS Greenwich Investments Limited LS Roebuck House (LP) Limited LS Greenwich Limited LS Greyhound Limited LS Gunwharf Limited LS Rose Lane Limited LS Selborne House Limited LS Soho Square Limited LS Harbour Exchange Option Limited LS Taplow Limited LS Harrogate (Leasehold) Limited LS Harrogate Limited LS Taplow No.2 Limited LS Thanet Limited LS Harrow Properties Limited LS Times Square GP Limited LS Harvest (GP) Investments Limited LS Times Square Limited LS Harvest 2 Limited LS Harvest Limited LS Hill House Limited LS Holborn Gate Limited LS Howard Centre Welwyn Limited LS Hungate Limited LS Juliet Limited LS Kings Gate Residential Limited LS Kings Gate Residential No.2 Limited LS Kingsmead Limited LS Leisure Limited LS Lewisham Limited LS London Holdings One Limited LS London Holdings Three Limited LS Ludgate (No.1) Limited LS Ludgate (No.2) Limited LS Ludgate (No.3) Limited LS Ludgate Development Limited LS TMS Nominee 1 Limited LS TMS Nominee 2 Limited LS Tottenham Court Road Limited LS Victoria Circle Development Management Limited LS Victoria Circle GP Investments Limited LS Victoria Circle LP1 Limited LS Victoria Circle LP2 Limited LS Victoria Properties Limited LS Voyager Limited LS Wellington Limited LS Westminster Limited LS Westminster No.2 Limited LS White Rose Limited LS Whitefriars Limited LS Wilton Plaza Limited LS Wood Lane Limited LS Zig Zag Limited QAM (Holdings) Limited QAM (LP) Limited QAM Funding Limited Partnership QAM Nominee No 1 Limited QAM Nominee No 2 Limited QAM Property Trustee No 1 Limited QAM Property Trustee No 2 Limited Ravenseft Industrial Estates Limited Ravenseft Properties Limited Ravenside Investments Limited Retail Property Holdings Trust Limited Roebuck House (GP) Limited Roebuck House (Nominee) Limited Rosefarm Leisure Limited Sevington Properties Limited Shirec Limited Southside General Partner Limited Stag Place (GP) Limited Stag Place (LP) Limited Stag Place Limited Partnership The City of London Real Property Company Limited The Imperial Hotel Hull Limited The Westminster Trust Limited Tops Estates Limited Tops Shop Centres Limited Tops Shop Estates Limited Trinity Quarter Developments Limited Wallace City Limited Watchmaker Finance Limited Whitecliff Developments Limited Willett Developments Limited Wood Lane Nominee No. 1 Limited Wood Lane Nominee No. 2 Limited X-Leisure (Brighton Cinema) Limited X-Leisure (Brighton Cinema II) Limited X-Leisure (Edinburgh) Limited X-Leisure Limited A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 181 Subsidiaries, joint ventures and associates continued As at 31 March 2017, the Company had an interest (as shown), direct or indirect, in the ordinary share capital of the following subsidiaries, joint ventures and associates, each of which is registered in the country indicated. The registered address of all the entities is 100 Victoria Street, London, SW1E 5JL, except where indicated by a footnote. Name 20 Fenchurch Street (GP) Limited 20 Fenchurch Street Developer Limited 20 Fenchurch Street Limited Partnership 20 Fenchurch Street Nominee No.1 Limited 20 Fenchurch Street Nominee No.2 Limited Castleford (UK) Limited Ebbsfleet Investment (GP) Limited Ebbsfleet Nominee No.1 Limited Five Fields Limited Greenhithe Holding Limited Greenhithe Investments Limited Harbour Exchange Management Company Limited Harvest 2 GP Limited Harvest 2 Limited Partnership Harvest 2 Selly Oak Limited Harvest Development Management Limited Harvest GP Limited Harvest Nominee No. 1 Limited Harvest Nominee No. 2 Limited Kent Retail Investments Limited Land Securities Insurance Limited Leisure II (North Finchley Two) Limited Leisure II (North Finchley) Limited Leisure II (O2 LP) Shareholder Limited Leisure II (O2 Manager) Shareholder Limited Leisure II (West India Quay LP) Shareholder Limited Leisure II (West India Quay Two) Limited Leisure II (West India Quay) Limited Leisure Parks I Limited Leisure Parks II Limited LS (Eureka Two) Limited LS (Eureka) Limited LS (Fountain Park Two) Limited LS (Fountain Park) Limited LS (Parrswood Two) Limited LS (Parrswood) Limited LS (Riverside Two) Limited LS (Riverside) Limited LS Fort Limited Metro Nominees (Clapham) Limited Metro Nominees (Wandsworth) (No.1) Limited Metro Nominees (Wandsworth) (No.2) Limited Metro Shopping Fund GP Limited Metro Shopping Fund LP Metro Shopping Fund Management Limited NOVA Residential (GP) Limited NOVA Residential Intermediate Limited NOVA Residential Limited Partnership O2 (General Partner) Limited Oriana (Hanway St) Limited Oriana GP Limited Oriana Nominee No.1 Limited Oriana Nominee No.2 Limited Oriana Residential Nominee No.1 Limited Oriana Residential Nominee No.2 Limited 182 Landsec Annual Report 2017 Group share % Country of registration Name Group share % Country of registration UK UK UK UK UK UK UK UK UK Jersey1 Jersey1 UK UK UK UK UK UK UK UK Jersey2 Guernsey3 Jersey2 Jersey2 UK UK UK Jersey2 Jersey2 UK UK UK UK UK UK UK UK UK UK 50.00% 50.00% 50.00% 50.00% 50.00% 95.04% 50.00% 50.00% 50.00% 100.00% 100.00% 25.70% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 100.00% 100.00% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% 95.04% Limited by guarantee UK UK 50.00% UK 50.00% UK 50.00% Jersey4 50.00% Jersey4 50.00% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 95.04% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 50.00% Oriana Residential Nominee No.3 Limited Oriana Residential Nominee No.4 Limited Queens Links Unit Trust St David’s (Cardiff Residential) Limited St David’s (General Partner) Limited St David’s Dewi Sant Merchant’s Association Limited Limited by 50.00% 50.00% 95.04% 50.00% 50.00% UK UK Jersey4 UK UK St. David’s (No.1) Limited St. David’s (No.2) Limited St. David’s Unit Trust The Ebbsfleet Limited Partnership The Oriana Limited Partnership The St. David’s Limited Partnership The X-Leisure (General Partner) Limited The X-Leisure Limited Partnership The X-Leisure Unit Trust Victoria Circle Business Manager Limited Victoria Circle Developer Limited Victoria Circle GP Limited Victoria Circle Limited Partnership Victoria Circle Nominee 1 Limited Victoria Circle Nominee 2 Limited West India Quay Limited West India Quay Management Company Limited West India Quay Unit Trust Westgate Oxford Alliance GP Limited Westgate Oxford Alliance Limited Partnership Westgate Oxford Alliance Nominee No.1 Limited Westgate Oxford Alliance Nominee No.2 Limited X-Leisure (Bentley Bridge) Limited X-Leisure (Boldon) Limited X-Leisure (Brighton I) Limited X-Leisure (Brighton II) Limited X-Leisure (Cambridge I) Limited X-Leisure (Cambridge II) Limited X-Leisure (Leeds I) Limited X-Leisure (Leeds II) Limited X-Leisure (Maidstone II) Limited X-Leisure (Maidstone) Limited X-Leisure (Poole) Limited X-Leisure Management Limited Xscape Castleford Limited Xscape Castleford Limited Liability Partnership Xscape Castleford No.2 Limited Xscape Castleford Partnership Xscape Castleford Property Unit Trust Xscape Milton Keynes (Jersey) No.2 Limited Xscape Milton Keynes Limited Xscape Milton Keynes Limited Liability Partnership Xscape Milton Keynes Partnership Xscape Milton Keynes Property Unit Trust guarantee UK UK 50.00% UK 50.00% Jersey5 100.00% UK 50.00% UK 50.00% UK 50.00% UK 95.04% UK 95.04% Jersey2 95.04% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 47.52% UK 29.93% Jersey2 47.52% UK 50.00% UK 50.00% UK 50.00% UK 50.00% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% UK 95.04% Jersey2 95.04% UK 95.04% Jersey2 95.04% UK 95.04% Jersey2 95.04% Jersey2 95.04% Jersey2 95.04% UK 95.04% UK 95.04% Jersey2 95.04% 1. 44 Esplanade, St Helier, Jersey, JE4 9WG 2. 13 Castle Street, St Helier, Jersey, JE4 5UT 3. PO Box 155, Mill Court, La Charroterie, St Peter Port, Guernsey, GY1 4ET 4. 13-14 Esplanade, St Helier, Jersey, JE1 1EE 5. 47 Esplanade, St Helier, Jersey, JE1 0BD Shareholder information Financial calendar 2016/17 Final dividend1 Ex-dividend date Record date Last day for DRIP elections/receipt of DRIP application Payment date Annual General Meeting2 2017/18 First quarterly interim dividend3 Record date Payment date 2017/18 Half-yearly results announcement 2017/18 Second quarterly interim dividend4 Record date Payment date 2017/18 Third quarterly interim dividend4 Record date Payment date 2017/18 Financial year end 2017/18 Annual results announcement4 Table 125 2017 22 June 23 June 6 July 27 July 13 July 8 September 6 October 14 November 1 December 2018 5 January 9 March 6 April 31 March 15 May 1. The Board has recommended a final dividend of 11.7p per ordinary share, payable wholly as a Property Income Distribution, subject to shareholders’ approval at the forthcoming Annual General Meeting. 2. The Annual General Meeting will be held at 10.00 am on Thursday, 13 July 2017 at 80 Victoria Street, London SW1E 5JL. A separate circular, comprising a letter from the Chairman, Notice of Meeting and explanatory notes in respect of the resolutions proposed, accompanies this Annual Report. Copies of this document can also be found on the Company’s website at: www.landsec.com/investors 3. The Board has declared a first quarterly dividend of 9.85p pence per ordinary share payable wholly as a Property Income Distribution. 4. Provisional. Share register analysis as at 31 March 2017 Holding range: 1–1,000 1,001–5,000 5,001–10,000 10,001–50,000 50,001–100,000 100,001–500,000 500,001–highest1 Total Share register analysis as at 31 March 2017 Held by: Private shareholders Nominee and institutional investors1 Total 1. Including 10,495,131 shares held in Treasury by the Company. Number of holders 9,004 3,175 389 420 136 224 184 % 66.5 23.4 2.9 3.1 1.0 1.7 1.4 Number of ordinary shares 3,496,457 6,519,740 2,749,364 10,227,100 9,898,684 51,641,904 716,711,379 13,532 100.0 801,244,628 Number of holders 10,475 3,057 13,532 % 77.4 22.6 Number of ordinary shares 13,025,459 788,219,169 100.0 801,244,628 Table 126 % 0.4 0.8 0.3 1.3 1.2 6.5 89.5 100.0 Table 127 % 1.6 98.4 100.0 A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 183 Shareholder information continued Ordinary shares The Company’s ordinary shares, each of nominal value 10p each, are traded on the main market for listed securities on the London Stock Exchange (LON:LAND). The Company’s American Depositary Receipt Programme was terminated on 1 September 2016. Company website: www.landsec.com The Company’s Annual Report, results announcements and presentations are available to view and download from its website. Information can also be found there about the latest Land Securities share price and dividend information, news about the Company, its properties and operations, and how to obtain further information. Registrar: Equiniti For assistance with queries about administration of shareholdings, such as lost share certificates, change of address or personal details, amalgamation of accounts and dividend payments, please contact the Company’s Registrar: Equiniti Group PLC Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 21281 International dialing: +44 (0) 121 415 70491 www.shareview.co.uk An online share management service is available which enables shareholders to access details of their Land Securities Group PLC shareholdings electronically. This is available at www.landsec.com/ investors or www.shareview.co.uk e-Communication We encourage shareholders to consider receiving their communications from the Company electronically as this will enable you to receive it more quickly and securely. It also allows Landsec to communicate in a more environmentally friendly and cost-effective manner. To register for this service, you should go to www.landsec.com/ investors or www.shareview.co.uk UK Real Estate Investment Trust (REIT) taxation and status on payment of dividends As a UK REIT, Landsec does not pay corporation tax on rental profit and chargeable gains relating to property rental business. However, it is required to distribute at least 90% of its qualifying income as Property Income Distributions (PIDs). A REIT may in addition pay ordinary dividends and this will be treated in the same way as dividends from non-REIT companies. UK shareholders will be taxed on PIDs received at their full marginal tax rates and on ordinary dividends received in line with the dividend tax regime introduced by the Government on 6 April 2016 – for more information see www.gov.uk/tax-on-dividends. For most shareholders, PIDs will be paid after deducting withholding tax at the basic rate. However, certain categories of shareholder may be able to receive PIDs gross (i.e. without deduction of withholding tax). These categories are principally UK companies, charities, local authorities, UK pension schemes and managers of ISAs, PEPs and Child Trust Funds. Further information on UK REITs and the forms required to be completed to apply for PIDs to be paid gross are available on the Company’s website or from the Registrar. 184 Landsec Annual Report 2017 Payment of dividends to UK resident shareholders Shareholders whose dividends are currently sent to their registered address may wish to consider having their dividends paid directly into their personal bank or building society account. This has a number of advantages, including the crediting of cleared funds on the actual dividend payment date. If you would like your future dividends paid in this way, you should contact the Registrar or complete a mandate instruction available from www.landsec.com/ investors and return it to the Registrar. Under this arrangement, dividend confirmations are still sent to your registered address. Payment of dividends to non-UK resident shareholders Instead of waiting for a sterling cheque to arrive by post, shareholders can request that their dividends be paid directly to a personal bank account overseas. This is a service which the Registrar can arrange in over 30 different countries worldwide, and in local currencies, and it normally costs less than paying in a sterling cheque. For more information, you should contact the Registrar on +44 (0)121 415 7049 or download an application form online at www.shareview.co.uk. Alternatively, you can contact the Registrar at the address given above. Dividend Reinvestment Plan (DRIP) The DRIP gives shareholders the opportunity to use cash dividends to increase their shareholding in Land Securities Group PLC. It is a convenient and cost-effective facility provided by Equiniti Financial Services Limited. Under the DRIP, cash dividends are used to buy shares in the market as soon as possible after the dividend payment, with any residual cash being carried forward to the next dividend payment. Details of the DRIP, including terms and conditions and participation election forms, are available at www.landsec.com/investors. They are also available from: Dividend Reinvestment Plans Equiniti Group PLC Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 22681 International dialling: +44 (0) 121 415 71731 Share dealing facilities Equiniti provides both existing and prospective UK shareholders with an easy to access and simple-to-use share dealing facility for buying and selling shares in Land Securities Group PLC by telephone, online or post. The telephone and online dealing service allows shareholders to trade ‘real-time’ at a known price that will be given to them at the time they give their instruction. For telephone dealing, call 0345 603 7037 between 8.00am and 4.30pm, Monday to Friday (excluding public holidays in England and Wales). Calls are charged at the standard geographic rate and will vary by provider. Calls outside the UK will be charged at the applicable international rate. For online dealing, log on to www.shareview.co.uk/ dealing. For postal dealing, call 0371 384 22481 for full details and a dealing instruction form. Existing shareholders will need to provide the account/ shareholder reference number shown on their share certificate. Other brokers, banks and building societies also offer similar share dealing facilities. ShareGift Shareholders with only a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to the charity through ShareGift, a registered charity (No. 1052686) which specialises in using such holdings for charitable benefit. A ShareGift donation form can be obtained from the Registrar and further information about ShareGift is available at www.sharegift.org.uk or by writing to: ShareGift The Orr Mackintosh Foundation Limited 17 Carlton House Terrace London SW1Y 5AH Telephone: +44 (0)20 7930 3737 Corporate Individual Savings Account (ISA) The Company has in place a Corporate ISA which is managed by: Equiniti Financial Services Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 22441 Capital Gains Tax For the purpose of Capital Gains Tax, the price of a Land Securities share at 31 March 1982, adjusted for the capitalisation issue in November 1983 and the Scheme of Arrangement in September 2002, was 203p. On the assumption that the 5 for 8 Rights Issue in March 2009 was taken up in full, the adjusted price for Capital Gains Tax purposes would be 229p per share. 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 Telephone: +44 (0)333 000 0182 email: uarenquiries@uk.experian.com www.uar.co.uk Unsolicited mail The Company is obliged by law to make its share register available on request to other organisations and this may result in shareholders receiving unsolicited mail. To limit the receipt of unsolicited mail, shareholders may register with the Mailing Preference Service, an independent organisation whose services are free, by visiting www.mpsonline.org.uk. Shareholder security Over the past few months, some of our shareholders have received unsolicited telephone calls or correspondence concerning investment matters from organisations or persons claiming or implying that they have some connection with the Company. These are typically from purported ‘brokers’ who offer to buy shares at a price often far in excess of their market value. These operations are commonly known as ‘boiler rooms’. Shareholders are advised to be very wary of any offers of unsolicited advice, discounted shares, premium prices for shares they own or free reports into the Company. If you receive any such unsolicited calls, correspondence or investment advice: — ensure you get the correct name of the person and firm; — check that the firm is on the Financial Conduct Authority (FCA) Register to ensure they are authorised at www.register.fsa.org.uk; — use the details on the FCA Register to contact the firm; — call the FCA Consumer Helpline (0800 111 6768) if there are no contact details in the Register or you are told they are out of date; and — if you feel uncomfortable with the call or the calls persist, simply hang up. Additionally, feel free to report and/or discuss any shareholder security matters with the Company. To do this, please call +44 (0)20 7413 9000 and ask to be put through to a member of the Company Secretarial department. 1. Lines are open 8.30am to 5.30pm (UK time), Monday to Friday, excluding public holidays. Calls are charged at the standard geographic rate and will vary by provider. Calls from outside the UK will be charged at the applicable international rate. A d d i t i o n a l i n f o r m a t i o n Landsec Annual Report 2017 185 Key contacts and advisers Registered office and principal UK address Land Securities Group PLC 100 Victoria Street, London SW1E 5JL Registered in England and Wales No. 4369054 Company Secretary Tim Ashby Group General Counsel and Company Secretary Investor relations Edward Thacker Head of Investor Relations Telephone: +44 (0)20 7413 9000 Email: investor.relations@landsec.com www.landsec.com Registrar Equiniti Group PLC Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 2128 Textel: 0371 384 2255 International dialing: +44 (0) 121 415 7049 www.shareview.co.uk Auditor Ernst & Young LLP 1 More London Place London SE1 2AF Telephone: +44 (0)20 7951 2000 www.ey.com External advisers Valuer: CBRE Financial adviser: Citigroup Solicitors: Slaughter and May Joint brokers: JP Morgan Cazenove and UBS 186 Landsec Annual Report 2017 Glossary Adjusted earnings per share (Adjusted EPS) Earnings per share based on revenue profit after related tax. Adjusted net assets per share Net assets per share adjusted to remove the effect of the de-recognition of the 2004 bond exchange and cumulative fair value movements on interest-rate swaps and similar instruments. Adjusted net debt Net debt excluding cumulative fair value movements on interest-rate swaps, the adjustment arising from the de- recognition of the bond exchange and amounts payable under finance leases. It generally includes the net debt of subsidiaries and joint ventures on a proportionate basis. Book value The amount at which assets and liabilities are reported in the financial statements. BREEAM Building Research Establishment’s Environmental Assessment Method. Combined Portfolio The Combined Portfolio comprises the investment properties of the Group’s subsidiaries, on a proportionately consolidated basis when not wholly owned, together with our share of investment properties held in our joint ventures. Completed developments Completed developments consist of those properties previously included in the development programme, which have been transferred from the development programme since 1 April 2015. Development pipeline The development programme together with proposed developments. Development programme The development programme consists of committed developments (Board approved projects with the building contract let), authorised developments (Board approved), projects under construction and developments which have reached practical completion within the last two years but are not yet 95% let. Diluted figures Reported results adjusted to include the effects of potentially dilutive shares issuable under employee share schemes. Dividend Reinvestment Plan (DRIP) The DRIP provides shareholders with the opportunity to use cash dividends received to purchase additional ordinary shares in the Company immediately after the relevant dividend payment date. Full details appear on the Company’s website. Earnings per share Profit after taxation attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the year. EPRA European Public Real Estate Association. EPRA net initial yield EPRA net initial yield is defined within EPRA’s Best Practice Recommendations as the annualised rental income based on the cash rents passing at the balance sheet date, less non- recoverable property operating expenses, divided by the gross market value of the property. It is consistent with the net initial yield calculated by the Group’s external valuer. Equivalent yield Calculated by the Group’s external valuer, equivalent yield is 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 non-recoverable expenditure but ignoring future changes in capital value. The calculation assumes rent is received annually in arrears. ERV – Gross estimated rental value The estimated market rental value of lettable space as determined biannually by the Group’s external valuer. For investment properties in the development programme, which have not yet reached practical completion, the ERV represents management’s view of market rents. Fair value movement An accounting adjustment to change the book value of an asset or liability to its market value (see also mark-to-market adjustment). Finance lease A lease that transfers substantially all the risks and rewards of ownership from the lessor to the lessee. Gearing Total borrowings, including bank overdrafts, less short-term deposits, corporate bonds and cash, at book value, plus cumulative fair value movements on financial derivatives as a percentage of total equity. For adjusted gearing, see note 20. Gross market value Market value plus assumed usual purchaser’s costs at the reporting date. Head lease A lease under which the Group holds an investment property. Interest Cover Ratio (ICR) A calculation of a company’s ability to meet its interest payments on outstanding debt. It is calculated using revenue profit before interest, divided by net interest (excluding the mark-to-market movement on interest-rate swaps, foreign exchange swaps, bond exchange de-recognition, capitalised interest and interest on the pension scheme assets and liabilities). The calculation excludes joint ventures. IPD Refers to the MSCI IPD Direct Property indexes which measure the property level investment returns in the UK. Interest-rate swap A financial instrument where two parties agree to exchange an interest rate obligation for a predetermined amount of time. These are generally used by the Group to convert floating-rate debt or investments to fixed rates. Investment portfolio The investment portfolio comprises the investment properties of the Group’s subsidiaries, on a proportionately consolidated basis where not wholly owned. Joint venture An arrangement in which the Group holds an interest and which is jointly controlled by the Group and one or more partners under a contractual arrangement. Decisions on the activities of the joint venture that significantly affect the joint venture’s returns, including decisions on financial and operating policies and the performance and financial position of the operation, require the unanimous consent of the partners sharing control. Lease incentives Any incentive offered to occupiers to enter into a lease. Typically, the incentive will be an initial rent-free period, or a cash contribution to fit-out or similar costs. For accounting purposes the value of the incentive is spread over the non-cancellable life of the lease. LIBOR The London Interbank Offered Rate, the interest rate charged by one bank to another for lending money, often used as a reference rate in bank facilities. Like-for-like portfolio The like-for-like portfolio includes all properties which have been in the portfolio since 1 April 2015, but excluding those which are acquired, sold or included in the development pipeline at any time since that date. Loan-to-value (LTV) Group LTV is the ratio of adjusted net debt, including subsidiaries and joint ventures, to the sum of the market value of investment properties and the book value of trading properties of the Group, its subsidiaries and joint ventures, all on a proportionate basis, expressed as a percentage. For the Security Group, LTV is the ratio of net debt lent to the Security Group divided by the value of secured assets. Market value Market value is determined by the Group’s external valuer, in accordance with the RICS Valuation Standards, as an opinion of the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing. Mark-to-market adjustment An accounting adjustment to change the book value of an asset or liability to its market value (see also fair value movement). Net assets per share Equity attributable to owners of the parent divided by the number of ordinary shares in issue at the year end. Net assets per share is also commonly known as net asset value per share (NAV per share). Net initial yield Net initial yield is a calculation by the Group’s external valuer of the yield that would be received by a purchaser, based on the Estimated Net Rental Income expressed as a percentage of the acquisition cost, being the market value plus assumed usual purchasers’ costs at the reporting date. The calculation is in line with EPRA guidance. Estimated Net Rental Income is determined by the valuer and is based on the passing cash rent less ground rent at the balance sheet date, estimated non- recoverable outgoings and void costs including service charges, insurance costs and void rates. Net rental income Net rental income is the net operational income arising from properties, on an accruals basis, including rental income, finance lease interest, rents payable, service charge income and expense, other property related income, direct property expenditure and bad debts. Net rental income is presented on a proportionate basis. Over-rented Space where the passing rent is above the ERV. Passing cash rent The estimated annual rent receivable as at the reporting date which includes estimates of turnover rent and estimates of rent to be agreed in respect of outstanding rent review or lease renewal negotiations. Passing cash rent may be more or less than the ERV (see over-rented, reversionary and ERV). Passing cash rent excludes annual rent receivable from units in administration save to the extent that rents are expected to be received. Void units and units that are in a rent-free period at the reporting date are deemed to have no passing cash rent. Although temporary lets of less than 12 months are treated as void, income from temporary lets is included in passing cash rents. Planning permission There are two common types of planning permission: full planning permission and outline planning permission. A full planning permission results in a decision on the detailed proposals on how the site can be developed. The grant of a full planning permission will, subject to satisfaction of any conditions, mean no further engagement with the local planning authority will be required to build the consented development. An outline planning permission approves general principles of how a site can be developed. Outline planning permission is granted subject to conditions known as ‘reserved matters’. Consent must be sought and achieved for discharge of all reserved matters within a specified time- limit, normally three years from the date outline planning permission was granted, before building can begin. In both the case of full and outline planning permission, the local planning authority will ‘resolve to grant permission’. At this stage, the planning permission is granted subject to agreement of legal documents, in particular the s106 agreement. On execution of the s106 agreement, the planning permission will be issued. Work can begin on satisfaction of any ‘pre-commencement’ planning conditions. Pre-let A lease signed with an occupier prior to completion of a development. Pre-development properties Pre-development properties are those properties within the like-for-like portfolio which are being managed to align vacant possession within a three year horizon with a view to redevelopment. Property Income Distribution (PID) A PID is a distribution by a REIT to its shareholders paid out of qualifying profits. A REIT is required to distribute at least 90% of its qualifying profits as a PID to its shareholders. Proposed developments Proposed developments are properties which have not yet received final Board approval or are still subject to main planning conditions being satisfied, but which are more likely to proceed than not. Qualifying activities/ Qualifying assets The ownership (activity) of property (assets) which is held to earn rental income and qualifies for tax-exempt treatment (income and capital gains) under UK REIT legislation. Real Estate Investment Trust (REIT) A REIT must be a publicly quoted company with at least three- quarters of its profits and assets derived from a qualifying property rental business. Income and capital gains from the property rental business are exempt from tax but the REIT is required to distribute at least 90% of those profits to shareholders. Corporation tax is payable on non-qualifying activities in the normal way. Landsec Annual Report 2017 187 A d d i t i o n a l i n f o r m a t i o n Glossary continued Rental value change Increase or decrease in the current rental value, as determined by the Group’s external valuer, over the reporting period on a like-for-like basis. Rental income Rental income is as reported in the income statement, on an accruals basis, and adjusted for the spreading of lease incentives over the term certain of the lease in accordance with SIC 15. It is stated gross, prior to the deduction of ground rents and without deduction for operational outgoings on car park and commercialisation activities. Return on average capital employed Group profit before net finance expense, plus joint venture profit before net finance expense, divided by the average capital employed (defined as shareholders’ funds plus adjusted net debt). Return on average equity Group profit before tax plus joint venture tax divided by the average equity shareholders’ funds. Revenue profit Profit before tax, excluding profits on the sale of non-current assets and trading properties, profits on long-term development contracts, valuation movements, fair value movements on interest-rate swaps and similar instruments used for hedging purposes, the adjustment to finance expense resulting from the amortisation of the bond exchange de-recognition adjustment, debt restructuring charges, and any other items of an exceptional nature. 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 (or fall) once the rent reaches the ERV. Scrip dividend A scrip dividend is when shareholders are offered the opportunity to receive dividends in the form of shares instead of cash. Security Group Security Group is the principal funding vehicle for the Group and properties held in the Security Group are mortgaged for the benefit of lenders. It has the flexibility to raise a variety of different forms of finance. Temporary lettings Lettings for a period of one year or less. These are included within voids. Topped-up net initial yield Topped-up net initial yield is a calculation by the Group’s external valuer. It is calculated by making an adjustment to net initial yield in respect of the annualised cash rent foregone through unexpired rent-free periods and other lease incentives. The calculation is consistent with EPRA guidance. Total business return Dividend paid per share in the year plus the change in adjusted diluted net assets per share, divided by adjusted diluted net assets per share at the beginning of the year. Total cost ratio Total cost ratio represents all costs included within revenue profit, other than rents payable and financing costs, expressed as a percentage of gross rental income before rents payable. Total development cost (TDC) Total development cost refers to the book value of the site at the commencement of the project, 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, together with capitalised interest, being the Group’s borrowing costs associated with direct expenditure on the property under development. Interest is also capitalised on the purchase cost of land or property where it is acquired specifically for redevelopment. The TDC for trading property development schemes excludes any estimated tax on disposal. Total property return Valuation movement, profit/loss on property sales and net rental income in respect of investment properties expressed as a percentage of opening book value, together with the time weighted value for capital expenditure incurred during the current period, on the combined property portfolio. Total Shareholder Return (TSR) The growth in value of a shareholding over a specified period, assuming that dividends are reinvested to purchase additional units of the stock. Trading properties Properties held for trading purposes and shown as current assets in the balance sheet. Turnover rent Rental income which is related to an occupier’s turnover. Valuation surplus/deficit The valuation surplus/deficit represents the increase or decrease in the market value of the Combined Portfolio, adjusted for net investment. The market value of the Combined Portfolio is determined by the Group’s external valuer. Voids Voids are expressed as a percentage of ERV and represent all unlet space, including voids where refurbishment work is being carried out and voids in respect of pre-development properties. Temporary lettings for a period of one year or less are also treated as voids. Weighted average cost of capital (WACC) Weighted average cost of debt and notional cost of equity, used as a benchmark to assess investment returns. Weighted average unexpired lease term The weighted average of the unexpired term of all leases other than short-term lettings such as car parks and advertising hoardings, temporary lettings of less than one year, residential leases and long ground leases. 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. 188 Landsec Annual Report 2017 Cautionary statement This Annual Report and Landsec’s website may contain certain ‘forward-looking statements’ with respect to Land Securities Group PLC (“Company”) and the Group’s financial condition, results of its operations and business, and certain plans, strategy, objectives, goals and expectations with respect to these items and the economies and markets in which the Group operates. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’, ‘may’, ‘should’, ‘will’, ‘would’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘targets’, ‘goal’ or ‘estimates’ or, in each case, their negative or other variations or comparable terminology. Forward-looking statements are not guarantees of future performance. By their very nature, forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Group’s ability to control or estimate precisely. There are a number of such factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the political conditions, economies and markets in which the Group operates (including the outcome of the negotiations to leave the EU); changes in the legal, regulatory and competition frameworks in which the Group operates; changes in the markets from which the Group raises finance; the impact of legal or other proceedings against or which affect the Group; changes in accounting practices and interpretation of accounting standards under IFRS, and changes in interest and exchange rates. Any forward-looking statements made in this Annual Report or Landsec’s website, or made subsequently, which are attributable to the Company or any other member of the Group, or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above. Each forward-looking statement speaks only as of the date it is made. Except as required by its legal or statutory obligations, the Company does not intend to update any forward-looking statements. Nothing in this Annual Report or Landsec’s website should be construed as a profit forecast or an invitation to deal in the securities of the Company. Land Securities Group PLC Copyright and trade mark notices. All rights reserved. © Copyright 2017 Land Securities Group PLC Landsec, Land Securities, the Cornerstone logo, the “L” Logo and ‘Everything is experience’ are trade marks of the Land Securities Group of companies. Landsec is the trading name of Land Securities Group PLC. All other trade marks and registered trade marks are the property of their respective owners. Produced by Brightsource Limited, a Cello Signal company. Printed by CPI Colour. Cover and text printed on Munken Design Kristall Smooth which is produced from FSC and PEFC certified wood pulps and manufactured at a paper mill which has ISO 14001, EU Ecolabel and EMAS certification for environmental standards. Independently certified on behalf of the Forest Stewardship Council (FSC®). Design: mslgroup.co.uk Words: Tim Rich and Landsec Photography: Philippa Langley Luke Hayes David Hares Joseph Fox Land Securities Group PLC 100 Victoria Street London SW1E 5JL +44 (0)20 7413 9000 www.landsec.com www.landsec.com 

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