Chief Executive's statement


Robert Noel
Chief Executive

"Land Securities has continued to build on a clear plan, playing to its strengths in the London and Retail markets. We have actively managed the risk on our developments, improved the resilience of our portfolio and our balance sheet is in rude health. We are well placed to protect and create value through a range of market conditions."

This is my first statement to you as Chief Executive. Building on last year's strong results, your company made good progress as tougher market conditions emerged during the year. We continued to execute our clear plan first articulated in 2009. We pressed ahead with development, continuing to reduce risk while creating value through pre-lettings, sales and joint ventures. We repositioned assets through refurbishments and we restructured leases. We remained disciplined on debt, using the proceeds of sales to fund development and other capital expenditure. Our balance sheet is strong and our position has been enhanced by our £1.1bn five-year revolving credit facility arranged in December 2011. This should prove to be a valuable source of competitive advantage to exploit opportunities within and outside our portfolio.

Revenue profit is up 9.0% with adjusted diluted earnings per share up 8.5% on the back of higher net rental income and lower interest costs. Adjusted diluted NAV per share is up 4.5% to 863p. Our Total Business Return was 7.9% and Total Shareholder Return was 0.7%. Our Total Shareholder Return compares to a return of 4.0% for the FTSE 100 and -3.2% for the FTSE 350 Real Estate Index.

Investment portfolio performance relative to IPD Ungeared total return (12 months ended 31 March 2012)

Investment Port Relativeto IPD

We delivered an ungeared total property return of 7.7%, compared to 6.3% for the IPD Quarterly Universe. This comprises an income yield of 5.0%, surplus of net proceeds from sales of 4.3% and a valuation surplus on the combined portfolio of 2.0%. The total property return of our London Portfolio was 9.2%, which underperformed its IPD sector benchmark by 2.5%. Our Retail Portfolio total property return was 5.8%, which outperformed its IPD sector benchmark by 2.4%.

We took advantage of the liquid investment market to sell income producing assets, on average at 4.3% above the March 2011 valuations. While we are actively seeking to acquire new assets, we remain of the view that patience will be required to find the right opportunities at the right price. In addition the development pipeline will dilute earnings in the near term, although it is set to deliver earnings growth in the medium term. With these impacts in mind and our aim to deliver a progressive dividend, we are recommending a fourth quarter payment of 7.4p, taking the total dividend for the year to 29.0p, up 2.8%.

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Uncertain market

The retail sector is undergoing a period of unprecedented change. Certain retailers, locations and assets have the potential to thrive. Others continue to lose ground. Changing consumer needs, tastes and behaviours are determining the winners and losers. Dominant centres in the right locations remain popular and a good mix of retail and leisure continues to attract visitors. In contrast, many locations have empty space which may never be re-occupied by retailers. Internet sales are winning market share. While this is hitting some retailers hard, we saw opportunities in the year to help others integrate the online world into physical stores. We also developed smart initiatives with online businesses such as Amazon and Ocado.

The effects of the structural shift in retail have been heightened by uncertainty in the economy. The year saw weaker demand from consumers and downward pressure on rents. Rent reviews, historically one of our engines of growth, are currently stuck in neutral. Low confidence limited development activity and property owners have had to look to active asset management to generate value. This plays to our strengths. Our portfolio is structured to meet the changing requirements of those retailers best able to compete in these conditions. For example, since 2010 we have created 47,700m2 of new space for Primark, the John Lewis Partnership and Sainsbury's.

In London, uncertainty in the eurozone weighed heavily on business confidence, leading to lower demand than expected for office space. However, particularly low levels of development, coupled with the high number of lease expiries due from 2013 and evolving occupier needs mean the market will see supply-constrained conditions. Due to subdued business confidence, these conditions are taking longer to appear than first thought, but once here they should continue for longer. We expect value creation to come from active asset management and well-timed, well-located mixed use development, particularly in the West End where the majority of our development pipeline is focused.

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A plan for every asset

Our primary purpose is to grow value for shareholders, not simply collect rent. Asset management must balance income and capital growth. We plan the future of each asset carefully and look for ways to add value through the cycle. For example, this year we refurbished assets and restructured leases at a number of properties - such as 40 Strand, WC2 and Southwark Bridge Road, SE1 - to ensure they did not fall empty in a slow market.

No asset is sacred. If we believe money invested in an asset is likely to work harder elsewhere, we will sell the property and re-allocate the capital. We demonstrated this with our disposals of Park House, W1, last year and 110 Cannon Street, EC4, Arundel Great Court, WC2, Eland House, SW1, St John's Centre, Liverpool and Corby town centre this year.

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Well-timed development pipeline

Our development schemes are creating the right spaces in the right locations to meet the needs of successful businesses. Trinity Leeds is set to transform the city centre. At 185-221 Buchanan Street in Glasgow we are creating contemporary retail space on one of Britain's busiest shopping streets. 20 Fenchurch Street, EC3, right in the heart of the insurance district, will be the first of the new tower developments in the City to complete. Wellington House, SW1, will complete this summer with all 59 apartments already pre-sold. These schemes underline our view that as well as risk there is opportunity in the current environment.

Land Securities' developments

Landecurities Developments

We will continue to manage our pipeline carefully. In Retail we secure significant levels of pre-lettings before we start construction. In London we have good optionality. For example, at 1 & 2 New Ludgate, EC4 (formerly 30 Old Bailey and 60 Ludgate Hill), demolition work has completed and we can time delivery to suit market conditions or pre-let demand.

We are managing our risk at two major projects in the capital through joint venture partnerships. Last year it was 20 Fenchurch Street, EC3. This year we formed a 50:50 joint venture with Canada Pension Plan Investment Board to own and develop Victoria Circle, SW1. This 84,670m2 scheme is a key part of our plans to transform Victoria into the thriving central London area it should be.

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A strong, quick-thinking team

Just as every asset has a plan, so every team and individual within the Company has a clear set of priorities. Building on the work of my predecessor Francis Salway, we will continually look for ways to create shareholder value by being better at making and managing space for customers. We will encourage a culture where outperformance is expected and where we are judged on the value we create. We should not be afraid to make mistakes, but learn from them when they occur. Take Brand Empire; this was an innovative way to address a difficult leasing market at the time. It didn't work as we hoped, so we acted quickly to close it down and we will apply the lessons learnt.

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Corporate responsibility

Corporate responsibility plays a vital role in how we create and protect value. We can only gain a licence to operate from Local Authorities if people trust us to make a positive difference. This is common sense. We want local communities to be pleased that Land Securities is operating in their area. We want to be recognised by Local Authorities as the best property partner to work with in terms of economic contribution, social benefits and the environment.

Commercial property accounts for around 18% of the UK's carbon dioxide emissions. We are well aware of the need for action and were the first in our sector to have an in-house energy team, and the first to have a dedicated environment team. We have targets to reduce our own carbon emissions and are keen to help our occupiers do the same. We are not interested in competitive corporate responsibility. Measurement and targets are helpful, but we are looking to find pragmatic solutions to real issues, not simply to tick boxes in a report. We are engaged with Government to look for consistency in policy so that real progress can be made.

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Looking ahead

Francis stated that recovery in UK commercial property would involve ripples, not straight-line growth. We continue to hold this view. Our plan for value creation was never dependent on employment growth, so we are not overly exposed to the present environment. Conditions may deteriorate over the next 12 months. They may pick up. Either way, we are well placed to respond. We have a strong balance sheet with plenty of firepower, giving us the ability to make acquisitions and press ahead with oven-ready developments at the appropriate time.

We believe the structural shift in retail will continue, with the strongest retailers finding more opportunities for expansion and weaker traders falling further behind. The same is true for locations and property assets. In addition, growth in leisure and internet sales - together with the rapid emergence of mobile technology being employed by consumers - will further separate the winners and losers in this sector. We will continue to refine our portfolio to ensure it meets the changing needs of successful retailers.

Despite the current lull in financial services, London remains the stand-out vibrant global centre that constantly reinvents itself. Sectors such as high-end fashion, business services, insurance and technology are particularly active. New businesses from overseas continue to arrive. Corporates require efficient, contemporary buildings that reflect their values and handle the demands brought by higher occupational densities than ever before. Much of the existing stock will not meet their requirements or their expectations. We are well placed to respond.

Robert _noel

Robert Noel
Chief Executive

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