Financial review

 

Martin Greenslade
Chief Financial Officer

Overview and headline results

"Our balance sheet is in very good shape; we have low gearing, good dividend cover and plenty of financial flexibility on how and when we exploit market opportunities."

During the first half of the year, we saw continued investor demand for well-let investment properties and values in our portfolio rose. In the second half of the year, overall valuation movements of our properties were flat as demand for prime assets remained strong but renewed concerns over the UK and eurozone economies weighed on the retail sector. Over the full year, valuation increases of £190.9m (including joint ventures) helped us deliver a profit before tax for the year ended 31 March 2012 of £515.7m, compared to £1,227.3m for the previous year. Basic earnings per share were 67.5p compared to 162.3p for the year ended 31 March 2011.

Revenue profit increased by 9.0% from £274.7m in the prior year to £299.4m. Adjusted diluted earnings per share were 38.5p (2011: 35.5p), up 8.5% on the comparable period. We have made a minor change to our calculation of adjusted earnings and adjusted earnings per share. Further details are given in the earnings per share section.

We finish the year with a stronger balance sheet than at the start. We have sold well, including some secondary retail assets and a non-income producing development site in London's mid-town. And we have refinanced our revolving credit facilities, giving us the financial flexibility to invest in our portfolio through acquisitions and developments as suitable opportunities arise.

As a result of our disposals, the combined portfolio decreased in value from £10.56bn to £10.33bn, despite a valuation surplus of £190.9m. Net assets per share increased by 36p from 885p at 31 March 2011 to 921p at 31 March 2012. Adjusted diluted net assets per share were up by 4.5% over the year, increasing from 826p at 31 March 2011 to 863p. The 37p increase in adjusted diluted net assets per share together with the 28.6p dividend paid in the year represents a 7.9% total return from the business.

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Revenue profit

Revenue profit is our measure of the underlying pre-tax profit of the Group, which we use internally to assess our income performance. It includes the pre-tax results of our joint ventures but excludes capital and other one-off items. A reconciliation of revenue profit to our IFRS profit before tax is given in note 4 to the financial statements.

The table below shows the composition of our revenue profit including the contributions from London and Retail.

Revenue profit increased by £24.7m from £274.7m last year to £299.4m. The 9.0% increase was mainly due to a reduction in net interest costs, which were £18.7m lower than the prior year, together with an increase in net rental income of £16.0m, partly offset by a rise in indirect costs. Lower net interest costs are primarily due to the buyback of medium-term notes in June and December 2010, using cheaper revolving credit facilities. In common with last year, revenue profit benefited from non-recurring items totalling some £10m, of which the largest items were surrender premium receipts of £6.0m and the release of £5.8m of dilapidation provisions, partly offset by costs of £2.7m associated with the closure of Brand Empire. Further information on the net rental income performance of the London and Retail portfolios is given in the respective business reviews.

The indirect costs of London and Retail and net unallocated expenses need to be considered together as, in total, they represent the net indirect expenses of the Group including joint ventures. The £10.0m increase in these costs is largely due to some £5m of non-recurring provision releases last year and the Brand Empire closure costs this year.

Looking ahead to next year, we do not expect revenue profit to be as high as this year. The level of non-recurring income is likely to reduce, we have sold investment properties ahead of finding attractive buying opportunities and income on certain pre-development sites will cease. This year, we received £37.0m of net rental income on properties we have now sold and, at Kingsgate House, SW1, a pre-development site where the building is currently being demolished, we received £8.5m of income during the year with no income expected in 2012/13. The reduction in income from disposals will only be partly offset by lower interest costs as our marginal cost of debt at below 2% is very low.

Revenue profit

  31 March 2012 31 March 2011 
 Retail
Portfolio
£m
London
Portfolio
£m
Total
£m
Retail
Portfolio
£m
London
Portfolio
£m
Total
£m
Change
£m
Gross rental income* 312.9 293.2 606.1 308.0 302.6 610.6 (4.5)
Net service charge expense (2.8) (2.5) (5.3) (2.3) (3.7) (6.0) 0.7
Direct property expenditure (net) (26.4) (1.7) (28.1) (30.2) (17.7) (47.9) 19.8
Net rental income 283.7 289.0 572.7 275.5 281.2 556.7 16.0
Indirect costs (28.1) (17.7) (45.8) (27.4) (17.6) (45.0) (0.8)
Segment profit before interest 255.6 271.3 526.9 248.1 263.6 511.7 15.2
Unallocated expenses (net)     (40.1)     (30.9) (9.2)
Net interest - Group     (155.5)     (173.7) 18.2
Net interest - joint ventures     (31.9)     (32.4) 0.5
Revenue profit     299.4     274.7 24.7

* Includes finance lease interest, net of ground rents payable.

 
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Valuation surplus

A key component of our pre-tax profit is the movement in the values of our investment properties and any profits or losses on disposals. Over the course of the year, the valuation increase on our investment portfolio was £190.9m, up 2.0% and our profit on disposals was £46.4m, down from £79.3m last year. A breakdown of the valuation surplus by category is shown in the table below.

The like-for-like portfolio saw a 1.8% increase in value over the 12 months to March 2012 driven by a 1.2% increase in rental values, with yields little changed overall. In general, properties with exposure to London performed best with rental values rising. Central London offices and shops delivered a valuation surplus of 4.3% and 4.1% respectively, driven by the combined effect of increasing rental values, due to robust occupier demand, and a slight compression in yields as investors continued to be attracted to well-let properties in the capital. Our hotel portfolio was the main contributor to the valuation surplus of 4.6% within 'Other', with the London hotels showing the greatest uplift.

In Retail, shopping centre valuations were flat in the first half of the financial year, but falling rental values and increasing yields in the second half led to a 3.2% valuation deficit over the year. In contrast, retail warehouse and food store values were up 1.1% as rental values grew by 1.7%, partly offset by a small outwards movement in yields.

Outside the like-for-like portfolio, both our completed developments and our development programme generated valuation surpluses while proposed developments fell in value as income all but ceased in advance of redevelopment.

Valuation analysis

 Market value
31 March
2012
£m
Valuation
surplus
%
Rental value
change*
%
Net initial
yield
%
Equivalent
yield
%
Movement in
equivalent
yield
bps
Shopping centres and shops 2,018.0 (3.2) (1.8) 6.1 6.4 16
Central London shops 775.1 4.1 3.7 4.0 5.5 (26)
Retail warehouses and food stores 1,117.1 1.1 1.7 5.0 5.6 8
London offices 3,483.9 4.3 2.2 5.2 5.6 (13)
Other (incl. rest of UK) 725.4 4.6 4.5 6.5 6.7 2
Total like-for-like portfolio 8,119.5 1.8 1.2 5.4 5.9 (4)
Proposed developments 212.6 (12.8) n/a 0.8 n/a n/a
Completed developments 427.4 3.3 (3.1) 4.1 5.5 (7)
Acquisitions 383.0 (4.8) 0.2 4.9 5.6 (15)
Development programme 1,188.1 8.2 n/a 1.6 5.4 (3)
Total investment portfolio 10,330.6 2.0 1.0 4.8 5.8 (8)

* Rental value change excludes units materially altered during the year and Queen Anne's Gate, SW1.

 
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Earnings per share

Basic earnings per share were 67.5p, compared to 162.3p last year, the reduction being predominantly due to the lower valuation surplus on the investment property portfolio and lower profits on investment property disposals (together 30.6p per share compared to 129.2p per share last year).

In a similar way that we adjust profit before tax to remove capital and one-off items to give revenue profit, we also report an adjusted earnings per share figure. As outlined at the half year, our calculation of adjusted earnings and adjusted earnings per share has been changed in the year to exclude the profit on disposal of trading properties and profit on long-term development contracts. The new approach brings the treatment of profits from the sale of trading properties into line with our treatment of investment property disposals. The impact of the change in calculation is to reduce adjusted diluted earnings per share from 39.3p to 38.5p in the current year (2011: reduction from 36.3p to 35.5p). We have amended prior year numbers so that all years are presented on a consistent basis.

Adjusted diluted earnings per share increased by 8.5% from 35.5p last year to 38.5p per share this year. This was mainly due to the increase in revenue profit, slightly offset by the impact of additional shares issued under the scrip dividend scheme.

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Total dividend

We are recommending a final dividend payment of 7.4p per share. Taken together with the three quarterly dividends of 7.2p, our full year dividend will be 29.0p per share (2011: 28.2p) or £225.8m (2011: £216.7m).

Shareholders continue to have the opportunity to participate in our scrip dividend scheme and receive their dividend in the form of Land Securities shares (a scrip dividend alternative) as opposed to cash. The take-up for the dividends paid on 26 April 2011, 28 July 2011, 24 October 2011 and 9 January 2012 was 36.4%, 40.6%, 23.9% and 18.7% respectively. This resulted in the issue of 9.2m new shares at between 654p and 833p per share and £66.6m of cash being retained in the business.

All of the cash dividends paid and payable in respect of the financial year ended 31 March 2012 comprise Property Income Distributions (PID) from REIT qualifying activities. In contrast to the cash dividends, none of the scrip dividends paid to date have been PIDs and therefore they have not been subject to the 20% withholding tax requirement which applies to PIDs for certain classes of shareholders. The latest date for election for the non-PID scrip dividend alternative in respect of the final dividend will be 25 June 2012 and the calculation price will be announced on 3 July 2012.

The purpose of the scrip dividend alternative is to enable shareholders to select the distribution they prefer. While the scrip dividend alternative results in cash being retained in the business, it also results in new shares being issued. If the new shares are issued at a time when the share price is below our adjusted net asset value per share, there will be a small dilution to existing shareholders from this discount. Rather than suspend the scrip dividend alternative when the discount is material, in such circumstances the Company intends to buy back an equivalent number of shares to those issued in connection with the scrip dividend, thereby retaining choice for shareholders but minimising any dilution associated with issuing shares.

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Net assets

At 31 March 2012, our net assets per share were 921p, an increase of 36p or 4.1% from 31 March 2011. The increase in our net assets was primarily driven by the increase in value of our investment properties, profits on disposal of investment properties and our adjusted earnings, partly offset by the dividends we paid.

In common with other property companies, we calculate an adjusted measure of net assets which we believe better reflects the underlying net assets attributable to shareholders. Our adjusted net assets are lower than our reported net assets primarily due to an adjustment to include our debt at its nominal value. At 31 March 2012, adjusted diluted net assets per share were 863p per share, an increase of 37p or 4.5% from 31 March 2011.

The table below summarises the main differences between net assets and our adjusted measure of net assets together with the key movements over the year.

Net assets attributable to owners of the Parent

  Year ended
31 March 2012
Year ended
31 March 2011
  £m£m
Net assets at the beginning of the year   6,811.5 5,689.9
Adjusted earnings   298.3 271.4
Valuation surplus on investment properties   190.9 908.8
Profit on disposal of investment properties   46.4 79.3
Profit on disposal of trading properties   5.2 1.2
Debt restructuring   - (22.0)
Other   (17.9) 2.9
Profit after tax attributable to owners of the Parent   522.9 1,241.6
Dividends   (154.8) (142.8)
Purchase of own shares   (18.5) (0.2)
Other reserve movements   (5.7) 23.0
Net assets at the end of the year   7,155.4 6,811.5
Fair value of interest-rate swaps   20.8 22.7
Debt adjusted to nominal value   (450.9) (467.5)
Adjusted net assets at the end of the year   6,725.3 6,366.7

To the extent tax is payable, all items are shown post-tax.

 
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Net pension deficit

The Group operates a defined benefit pension scheme which is closed to new members. At 31 March 2012, the scheme was in a net deficit position of £2.4m compared to a surplus of £8.7m at 31 March 2011. The change is primarily due to a £22.9m increase in the value of the scheme's liabilities, due to a reduction in corporate bond yields lowering the discount rate from 5.7% to 4.8%. Further information regarding the defined benefit pension scheme, including the assumptions adopted and the related sensitivities can be found in note 31 to the financial statements.

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Cash flow

A summary of the Group's cash flow for the year is set out in the table below.

The main cash flow items are typically operating cash flows, the dividends we pay and the capital transactions we undertake. Operating cash inflows after interest and tax were £254.1m for the year ended 31 March 2012, compared with £153.5m in the prior year, the increase being driven by lower net interest paid in the year and the absence of the tax payments made in the prior year.

Like last year, our initial aim this year was for the cash received from property disposals in the Group and joint ventures broadly to match the amount we invested on acquisitions and capital expenditure. But this was not a strict target; we have a strong balance sheet and financial flexibility which enables us to take advantage of opportunities as they arise. During the year, we identified very few attractively priced investment opportunities as investor demand for better quality assets remained good. Instead, we were able to sell some secondary assets into that demand as well as a non-income producing development site. At a Group level, these capital transactions resulted in a net cash inflow of £99.4m, or £86.6m if we include joint ventures. In addition, we are due to receive cash of £481.7m in the next financial year in respect of disposals which have already been recognised in these results.

Disposals completed in the year included the sale of Corby town centre, Eland House, SW1 and 110 Cannon Street, EC4, generating receipts of £513.7m. We spent £383.8m on assets: investment property acquisitions cost £76.8m and capital expenditure totalled £307.0m, principally on our developments at Trinity, Leeds, 123 Victoria Street, SW1 and 62 Buckingham Gate, SW1. Our largest investment property acquisition was the Kingsmead Centre, Bath which cost £20.0m. We also spent £30.5m on acquiring a 12% interest in the X-Leisure Fund from a number of institutional investors.

The net payment of £45.5m to our joint ventures is largely a result of development funding for Victoria Circle, SW1 and 20 Fenchurch Street, EC3.

Cash flow and net debt

 Year ended
31 March 2012
Year ended
31 March 2011
 £m£m
Operating cash inflow after interest and tax 254.1 153.5
Dividends paid (153.1) (143.0)
Non-current assets:    
    Acquisitions (107.3) (371.3)
    Disposals 513.7 535.0
    Capital expenditure (307.0) (226.1)
  99.4 (62.4)
Loans repaid by third parties 22.8 16.2
Joint ventures (45.5) 4.8
Fair value movement of interest-rate swaps (4.5) (1.9)
Purchase of own shares (18.5) (0.2)
Other movements (24.3) (17.2)
Decrease (increase) in net debt 130.4 (50.2)
Net debt at the beginning of the year (3,313.6) (3,263.4)
Net debt at the end of the year (3,183.2) (3,313.6)
 
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Net debt and gearing

As a result of the cash flows described above, our IFRS net debt decreased by £130.4m to £3,183.2m, while the reduction in borrowings in our joint ventures led to our IFRS net debt (including joint ventures) falling by £189.8m to £3,551.3m (£3,741.1m at 31 March 2011). Adjusted net debt, which includes our joint ventures and the nominal value of our debt but excludes the mark-to-market on our swaps, was down £204.5m at £3,981.4m (31 March 2011: £4,185.9m).

The table below sets out various measures of our gearing.

All of our gearing measures have declined compared with last year as a result of the positive cash flows described above together with the increase in the value of our assets. This is in line with our strategy at this stage in the property cycle of allowing gearing to decline as property values rise. The measure most widely used in our industry is loan-to-value (LTV). We focus most on Group LTV including our notional share of joint venture debt, despite the fact that lenders to our joint ventures have no recourse to the Group for repayment.

Group LTV (including joint ventures) declined from 39.0% at March 2011 to 38.0% at March 2012. In the LTV calculation, the value of our assets already reflects the sale of certain properties for which we have yet to receive proceeds. Had those proceeds been received at 31 March 2012, the Group LTV ratio (including joint ventures) would have been 33.4%.

Our interest cover, excluding our share of joint ventures, has increased from 2.2 times in 2011 to 2.5 times in 2012. Under the rules of the REIT regime, we need to maintain an interest cover in the exempt business of at least 1.25 times to avoid paying tax. As calculated under the REIT regulations, our interest cover of the exempt business for the year to 31 March 2012 was 2.2 times. There is further information on our approach to gearing in the section in Our principal risks and how we manage them.

Gearing

 31 March 201231 March 2011
  % %
Adjusted gearing* – including notional share of joint venture debt 59.2 65.7
Group LTV 40.4 40.5
Group LTV – including share of joint ventures 38.0 39.0
Security Group LTV 37.6 40.1

* Book value of balance sheet debt increased to recognise nominal value of debt on refinancing in 2004 divided by adjusted net asset value.

 
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Financing structure and strategy

The total capital of the Group consists of shareholders' equity, non-controlling interests and net debt. Since IFRS requires us to state a large part our net debt at below its nominal value, we view our capital structure on a basis which adjusts for this. The table below outlines our main sources of capital. Further details are given in notes 28 and 29 to the financial statements.

Financing structure

 Group
£m
Joint ventures
£m
2012
Combined
£m
Group
£m
Joint ventures
£m
2011
Combined
£m
Bond debt 3,363.5 - 3,363.5 3,395.4 - 3,395.4
Bank borrowings 300.0 393.4 693.4 428.0 438.0 866.0
Amounts payable under finance leases 23.3 4.5 27.8 28.4 4.6 33.0
Less: cash and restricted deposits (59.2) (44.1) (103.3) (72.7) (35.8) (108.5)
Adjusted net debt 3,627.6 353.8 3,981.4 3,779.1 406.8 4,185.9
Non-controlling interests 0.2 - 0.2 0.8 - 0.8
Adjusted equity attributable to owners of the Parent 6,711.0 14.3 6,725.3 6,346.0 20.7 6,366.7
Total adjusted equity 6,711.2 14.3 6,725.5 6,346.8 20.7 6,367.5
Total capital 10,338.8 368.1 10,706.9 10,125.9 427.5 10,553.4
 

In general, we follow a secured debt strategy as we believe that this gives the Group and joint ventures better access to borrowings and at lower cost. Other than our finance leases, all our borrowings at 31 March 2012 were secured.

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 addition, the Group holds a number of assets outside the Security Group structure (in the Non-Restricted Group). These assets are typically our joint venture interests or other properties on which we have raised separate, asset-specific finance. By having both the Security Group and the Non-Restricted Group, and considerable freedom to move assets between the two, we are able to raise the most appropriate finance for each specific asset or joint venture.

Importantly, we can use borrowings raised against the Security Group to fund expenditure on both acquisitions and developments. At a time when finance to fund capital expenditure on speculative developments is largely unavailable or prohibitively expensive, this gives the Group a considerable advantage in being able to develop early in the cycle.

During the year, we signed a new £1,085m five year revolving credit facility at a headline margin of 120 basis points over LIBOR. This replaced the existing £1,500m revolving credit facility and £400m of bilateral arrangements. In addition to the new £1,085m facility, Land Securities has retained £300m of existing bilateral arrangements which are due to expire in November 2014. Under the previous revolving credit facility, no drawings were possible where the Security Group LTV exceeded 65% or would exceed 65% as a result of the drawing. The new facility provides a mechanism whereby it is possible to utilise facilities up to a Security Group LTV of 80% subject to certain conditions, most notably the advanced notification of such intention while the Security Group LTV is below 65%.

The weighted average duration of the Group's debt (including joint ventures) is 10.9 years with a weighted average cost of debt of 5.0%.

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Hedging

We use derivative products to manage our interest-rate exposure, and have a hedging policy which generally requires at least 80% of our existing debt plus increases in debt associated with net committed capital expenditure to be at fixed interest rates for the coming five years. Specific interest-rate hedges are also used within our joint ventures to fix the interest exposure on limited-recourse debt. At 31 March 2012, Group debt (including joint ventures) was 94.8% fixed (2011: 92.1%). As all of our bond debt is issued at fixed rates, we only have a small amount of outstanding interest-rate swaps at 31 March 2012 (£618.9m notional amount including our share of joint ventures).

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Taxation

As a consequence of the Group's conversion to REIT status, income and capital gains from our qualifying property rental business are now exempt from UK corporation tax. No tax charge arose in respect of the current year but we released provisions of £8.0m (2011: £16.8m) which were created in prior periods and are no longer required as the relevant uncertainties have now been cleared. The Group holds further provisions of £21.6m for interest on overdue tax in relation to a matter in dispute with HMRC, which will become payable if it is not settled in our favour. The provision will be released, and the tax paid to date of £60.7m recovered, if the Group's claim is successful.

MGreenslade

Martin Greenslade
Chief Financial Officer

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