Half-yearly results 2015

Forward-looking statements

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Half-yearly results for the six months ended 30 September 2015

10 November 2015

"Land Securities continues to deliver the right space at the right time, and it's paying off. Our Retail Portfolio is performing well and leasing levels in our London developments remain strong," said Chief Executive Robert Noel.

"In Retail, our portfolio is focused around our core themes of dominance, experience and convenience. Since the start of the financial year, we have sold selectively, recycling capital into the redevelopment of Westgate, Oxford, and other development opportunities. Operationally we are strong, with retailer sales and footfall up in our shopping centres and voids down.

"In London, we continue to benefit from our well-timed development programme delivering schemes into today's supply constrained market. So far this financial year, a further 500,000 sq ft has been let or is in solicitors' hands. We're focused on completing and letting up the remainder of our committed projects while progressing a future pipeline.

"Our strategy is working and we are well positioned for the future. We have better assets, with higher quality income, and our balance sheet is stronger than ever. We are delivering for our customers, our communities and our shareholders and look forward to the second half of the year with confidence."

Results summary

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements included within the half-yearly results.

2.    The % change for the valuation surplus represents the increase in value of the Combined Portfolio over the six month period, adjusted for net investment.

3.    Our key valuation measure.

Activity

·      £17.2m of development lettings

·      £17.0m of investment lettings

·      Acquisitions, development and refurbishment expenditure (including trading properties) of £317.3m

·      Disposals (including trading properties) of £406.5m

·      Supported 85 disadvantaged people into sustainable jobs in the communities where we operate through our Community Employment Programme

Results

·      Ungeared total property return 5.9%, underperforming the IPD Quarterly Universe at 6.8%

·      Total business return (dividends and adjusted diluted NAV growth) of 7.0%

·      Combined Portfolio valued at £14.6bn, with a valuation surplus of 3.8%

·      Valuation surplus of properties in the development programme of 6.8%

·      Revenue profit £184.2m, up 8.4%

·      Voids in the like-for-like portfolio remain low at 2.8% (31 March 2015: 3.2%)

Financials

·      Group LTV ratio at 26.5%, based on adjusted net debt of £4.0bn

·      Weighted average maturity of debt at 8.3 years

·      Weighted average cost of debt at 4.6%

·      Cash and available facilities of £1.4bn

·      First half dividend of 16.3p, up 3.2%

Development

·      1.4m sq ft being delivered in London over the next 12 months

·      0.8m sq ft Westgate, Oxford, due to open in October 2017

·      1.4m sq ft of retail development and extension opportunities including Ealing Filmworks, Selly Oak, Birmingham, Buchanan Galleries, Glasgow, and White Rose, Leeds

·      1.2m sq ft future London pipeline including 21 Moorfields, EC2, Nova East, SW1, 1 Sherwood Street, W1 and Portland House, SW1

Recognition

·      Winner of the Business in the Community Work Inclusion Award

·      Maintained EPRA gold status for sustainability reporting and membership of FTSE4Good and the Dow Jones Sustainability Index

·      Achieved ISO 50001 certification for energy management

·      Re-certification of ISO 14001 for environmental management

All measures above are presented on a proportionate basis, as explained in the notes to the financial statements included within the half-yearly results

Chief Executive's statement

We have continued to execute our strategy, achieving good progress on lettings in London, enhancing our Retail Portfolio and strengthening the balance sheet.

Once again, we funded high levels of activity by recycling capital rather than increasing debt. This approach is providing us with better assets, higher quality income and lower financial gearing as we move through the cycle. Over the six months, we invested £317.3m in acquisitions, development and refurbishment and completed disposals of £406.5m.

Our actions during the half-year enabled us to build on last year's exceptionally strong performance. We increased revenue profit by 8.4% compared to the same period last year. Adjusted diluted NAV per share was up 74p at 1,367p - an increase of 5.7%. The second quarterly dividend is 8.15p, making the first half dividend 16.3p - up 3.2% on the comparative period. Total business return for the six months was 7.0%.

In Retail, we have continued to shape the portfolio to suit changing customer expectations, pursuing our strategic themes of dominance, experience and convenience. In the first half we started construction of our development at Westgate, Oxford. This 800,000 sq ft shopping centre, being built in joint venture with The Crown Estate, will open in October 2017. We made progress on potential developments at Ealing Filmworks and Selly Oak, Birmingham. We completed £43.6m of disposals in the period and, since 1 October, we have exchanged contracts to sell a further £273.6m of non-core assets.

In London, we have continued to deliver exceptional work environments into a supply-constrained market. At the beginning of the financial year, we had 1.1m sq ft of space to let in our development schemes. 500,000 sq ft of that space is now let or in solicitors' hands and the remainder is well matched to customer demand. We made one acquisition, purchasing the 50% interest we did not already own at 6-17 Tottenham Court Road, W1, and £362.9m of disposals including Times Square, EC4. We also exchanged contracts to sell Haymarket House, SW1, for £155.2m and this sale will complete in the second half. We continue to progress a pipeline of future development opportunities in the capital.

Operationally, it is a busy time for the business, with over 3,000 people working on our construction sites. I am pleased to report that our highly acclaimed Community Employment Programme has so far enabled 668 of London's most disadvantaged people to train for a trade on and around our sites, and subsequently enter the construction industry. In July, this was recognised with the 2015 Business in the Community award for 'Work Inclusion'. We are now replicating the programme at Westgate, Oxford.

In the second half, we expect rental value growth to remain positive for our assets. We continue to track and assess new development opportunities --both inside and outside our current portfolios but, as we have previously indicated, we will not commit to further developments without substantial pre-lets. We are likely to be net disinvestors in the second half of the year as a result of some £565m of disposals we have agreed but not yet completed. For these reasons, both operational gearing as measured by the amount of speculative space we have to let, and financial gearing as measured by loan-to-value, are likely to be lower in March 2016.  

Robert Noel

Chief Executive

Financial review

Overview and headline results

Over the six months ended 30 September 2015, we delivered a profit before tax of £707.9m, compared with £1,031.1m for the same period last year, primarily due to a reduction in the valuation surplus from £880.2m to £519.3m (including our proportionate share of subsidiaries and joint ventures). Basic earnings per share were 89.7p compared with 130.6p. Underlying earnings were up; revenue profit was £184.2m compared with £170.0m in the comparative period and adjusted diluted earnings per share increased to 23.2p from 21.4p.

Our Combined Portfolio increased in value from £14.0bn at 31 March 2015 to £14.6bn principally as a result of our valuation surplus of £519.3m. Net assets per share increased by 5.4% to 1,416p at 30 September 2015. Adjusted diluted net assets per share were up by 5.7% over the six months, increasing from 1,293p to 1,367p. This 74p increase in adjusted diluted net assets per share together with the dividends paid in the period represents a 7.0% total business return.

Presentation of financial information

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.

Revenue profit

Revenue profit is our measure of underlying pre-tax profit, which is used internally to assess the Group's income performance. It excludes all items of a capital nature, such as valuation movements and profits and losses on the disposal of investment properties, as well as one-off items. A full definition of revenue profit is given in the glossary. The main components of revenue profit are presented on a proportionate basis in the table below and a more detailed reconciliation of revenue profit to our IFRS profit before tax is included in note 3 to the financial statements.

Table 1 shows the composition of our revenue profit including the contributions from London and Retail.

Table 1: Revenue profit

1.    Includes finance lease interest, after rents payable.

Revenue profit increased by £14.2m from £170.0m in the comparative period to £184.2m in the six months ended 30 September 2015. The 8.4% increase was mainly due to lower net interest expense and higher net rental income. Our net interest expense has decreased by £11.9m to £81.2m, largely due to the repayment of joint venture debt in the prior year and utilisation of cheaper Group facilities. The increase in net rental income is primarily due to the impact of acquisitions made in the prior year, including Bluewater, Kent, together with development completions largely offset by the loss of income from properties sold last year. Approximately £4.5m of the net rental income in the period is from non-recurring items, including surrender receipts. 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, collectively, they represent the net indirect expenses of the Group including joint ventures. In total, net indirect expenses were £39.4m compared with £39.3m in the comparative period.

Change of valuer

In line with best practice, we conducted a tender exercise earlier this year, as a result of which we appointed CBRE to replace Knight Frank as our principal valuer. CBRE performed the valuation at 30 September 2015.

Valuation surplus and disposal profits

The movement in the values of our investment properties and any profits or losses on disposals are key components of our pre-tax profit. Over the period, the valuation surplus on our Combined Portfolio was £519.3m, or 3.8%. We made a profit on the disposal of investment properties of £9.8m (on a proportionate basis), down from £38.2m in the same period last year. A breakdown of the valuation surplus by category is shown in table 2 below.

Table 2: Valuation analysis

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

Over the six months to 30 September 2015, we have seen values rise in almost every category of our Combined Portfolio. Overall, values were up by 3.8%, with the like-for-like portfolio up by 3.0% largely due to rental value growth.

There is a slight difference in approach between CBRE and Knight Frank on how they look at the rental value and equivalent yield components of a valuation. The changes in rental values and equivalent yields over the period reflect both this difference in approach and market movements. As a result, there are some rental value and equivalent yield movements in the period which look counter-intuitive.

Our shopping centres increased in value by 2.6% predominantly due to rental value growth. The value of our retail warehouse and food store portfolio was broadly unchanged with a small reduction in rental values offset by yield movements. Leisure and hotels reported a 2.8% valuation surplus as a result of rental value growth and yield reduction.

London offices saw values rise by 3.0% with rental values up by 6.6% and yields moving outwards by 10 basis points. These movements are impacted by the change in approach between valuers (see above). This has led to a higher reported growth in rental values than we were expecting, coupled with a modest outward yield movement when market yields have generally tightened slightly.

Outside the like-for-like portfolio, completed developments increased in value by 10.7% due to a 19 basis points reduction in yields and rental values up by 6.7%. Within acquisitions, the value of the additional 50% interest in Thomas More Square, EC3, was up strongly on the back of rental growth and letting success. The development programme valuation surplus was up 6.8% due to continued construction and pre-letting progress on our major schemes.

Earnings per share

Basic earnings per share were 89.7p, compared with 130.6p for the same period last year, primarily due to the lower valuation surplus.

Similar to the adjustments we make to profit before tax, which remove capital and one-off items to give revenue profit, we also report adjusted earnings per share figures. Adjusted diluted earnings per share increased by 8.4% from 21.4p in the comparative period to 23.2p per share as a result of the increase in revenue profit.

Dividend

We will be paying a second quarterly dividend of 8.15p per share on 7 January 2016 to shareholders registered at the close of business on 4 December 2015, all of which will be paid as an ordinary dividend. Taken together with the first quarterly dividend of 8.15p (100% Property Income Distribution) paid on 9 October 2015, our first half dividend will be 16.3p per share (six months ended 30 September 2014: 15.8p), or £128.8m (six months ended 30 September 2014: £124.8m).

Net assets

At 30 September 2015, our net assets per share were 1,416p, an increase of 73p or 5.4% from 31 March 2015. 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 increase our debt to its nominal value. At 30 September 2015, adjusted diluted net assets per share were 1,367p per share, an increase of 74p or 5.7% from 31 March 2015.

Table 3 summarises the differences between net assets and our adjusted measure of net assets together with the key movements in the period.

Table 3: Net assets

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

Net debt and gearing

Over the period, our net debt decreased by £165.7m to £3,634.8m. The main elements behind this decrease are set out in our statement of cash flows.

Operating cash inflow after interest and tax was £155.5m, higher than the £109.8m received in the same period last year largely due to higher receipts from trading property sales. Capital expenditure was £123.6m, largely relating to our wholly owned developments in Victoria, and we contributed a net £27.7m to our joint ventures, principally Nova, Victoria, SW1 and Westgate, Oxford. We spent £94.8m on investment property acquisitions, including 6-17 Tottenham Court Road, W1. Offsetting these investments in our portfolio were sales proceeds of £344.3m, primarily from Times Square, EC4, and we paid cash dividends of £124.2m in the period to 30 September 2015.

Adjusted net debt, which is presented on a proportionate basis and includes the nominal value of our debt but excludes the mark-to-market on our swaps, was down £163.4m to £4,008.3m (31 March 2015: £4,171.7m). A reconciliation between net debt and adjusted net debt is given in note 14 to the financial statements.

Table 4 below sets out various measures of our gearing.

Table 4: Gearing

1.    Adjusted net debt divided by adjusted net asset value.

All of our gearing measures have decreased since 31 March 2015 as there has been an increase in the value of our assets coupled with a decrease 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. This LTV measure decreased from 28.5% at 31 March 2015 to 26.5% at 30 September 2015. This is consistent with our strategy at this stage in the property cycle of allowing gearing to decline as property values rise.

Our Security Group LTV decreased to 28.6% (31 March 2015: 31.5%) largely as a result of the disposal of a number of secured assets and capital growth in the secured asset pool.

Financing

The total capital of the Group consists of shareholders' equity and adjusted net debt. 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 full nominal value. We view our capital structure as if the debt were carried at its full redemption amount. For further details see notes 14 and 15 to the financial statements.

During the period, we increased our syndicated revolving credit facility by £125.0m to £1,380.0m. This takes our total revolving credit facilities to £2,365.0m. The pricing of our facilities which fall due in more than one year ranges from LIBOR +75 basis points to LIBOR +120 basis points.  Borrowings under our commercial paper programme typically have a maturity of less than three months, carry an interest rate of approximately LIBOR +25 basis points and are unsecured. Overall the amounts drawn under the bilateral facilities, syndicated bank debt and commercial paper in issue totalled £797.8m, a £153.3m decrease since 31 March 2015, primarily due to property disposals exceeding capital investment.

The Group's debt (on a proportionate basis) has a weighted average maturity of 8.3 years, a weighted average cost of 4.6% and 91.8% is at fixed interest rates. At 30 September 2015, we had £1.4bn of cash and available facilities. This gives the business considerable flexibility to deploy capital quickly should an acquisition opportunity arise.

Taxation

As a consequence of the Group's REIT status, income and capital gains from our qualifying property rental business are exempt from UK corporation tax. There was a tax credit of £0.2m in the period, relating to deferred tax arising on the acquisition of Bluewater, Kent (six months ended 30 September 2014: £0.1m credit).

Martin Greenslade

Chief Financial Officer