Half-year Report 2016

Chief Executive's statement

Land Securities is well-positioned following the actions taken over the last few years. We have transformed our Retail Portfolio and predominantly completed and let a large scale development programme in London whilst keeping debt on a tight rein.

Since we reported in May, the UK has voted to leave the European Union and a new government has set out its intended, though legally challenged, timeframe for triggering Article 50 of the Lisbon Treaty. We have seen early indications of revised policy priorities that may affect our market, including public spending, housing and infrastructure. Uncertainty hangs over many issues and businesses find themselves in uncharted territory.

These conditions are having a tangible effect on the commercial property market. Occupational demand for office space in London is hesitant and the vacancy rate has continued to rise. We will watch closely how this uncertainty affects development decisions and construction starts. In retail, we expect consumer spending to be affected by growth in prices exceeding that of pay, which will put increased pressure on retailers. This will continue to widen the gap in performance between dominant destinations like ours and the rest.

Uncertainty has also affected real estate pricing. Across most market sectors, values have weakened. Our external valuer has marked down our assets by 1.8% since 31 March 2016. In both London and Retail, we have experienced smaller falls than seen elsewhere in our market sectors due to the actions we took to position the business for change. Our adjusted diluted net assets per share were also down 1.8%.

In contrast, despite being significant net sellers in the second half of last year, our revenue profit is up 4.5%, as we have reduced our interest costs and continue to benefit from our developments. The second quarterly dividend is 8.95p, making the first half dividend 17.9p, up 9.8% on the comparative period.

Our high-quality portfolio, historically low levels of speculative development and conservative financial gearing put us in a resilient position as we move through near-term uncertainty. With 51% of our portfolio acquired or developed over the last six years, we have achieved this resilience thanks to the efforts of our people across the business.

Our drive to lead on sustainability continues. Smart, long-term thinking is central to our purpose of providing the right space for our customers and our communities - helping businesses to succeed, the economy to grow and people to thrive. For me, it's quite simple: we can only prosper as a business when we anticipate and meet the changing needs and expectations of our customers, communities, employees and partners.

Social trends and technological innovation are reshaping how we live, work, shop and play. That's why we have transformed our Retail Portfolio to ensure we provide places that communities value and visitors want to experience. And it's why we are constantly innovating to ensure our offices are both technically resilient machines - in terms of power and performance - and inspiring working environments that attract and retain talent.

Looking ahead, we expect both our market sectors to see a general weakening of net effective rental values as a result of current uncertainty, but our high quality, well-let portfolio should mean we are relatively insulated. Also, uncertainty usually presents opportunities and we are ready to act.

Robert Noel

Chief Executive

Financial review

Overview

Table 1: Highlights

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements.

In my previous Financial Review, I explained how the quality and resilience of our property portfolio had been enhanced this decade through recycling capital into developments and acquisitions. We further strengthened our balance sheet in the second half of the last financial year with significant disposals. Those actions now look well-timed given the unexpected outcome of the EU referendum.

Over the six months ended 30 September 2016, we incurred a loss of £95.0m compared with a profit of £707.9m for the same period last year, primarily due to a valuation deficit of £259.6m (including our proportionate share of subsidiaries and joint ventures). This compares with a valuation surplus in the prior period of £519.3m. While our assets are not immune from the uncertainty affecting the commercial property market, the 1.8% decline in their values has not been as large as falls in the wider market as measured by IPD, who provide our commercial property benchmark.

The decline in asset values is behind both the loss per share of 12.1p, compared with earnings per share of 89.7p in the prior period, and the reductions in basic and adjusted diluted net assets per share from 1,482p and 1,434p respectively at 31 March 2016 to 1,449p and 1,408p respectively at 30 September 2016. In contrast, revenue profit and adjusted diluted earnings per share were up over the comparative period. Revenue profit was up from £184.2m to £192.5m and adjusted diluted earnings per share were up 1.1p at 24.3p.

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 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 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 that this presentation better explains to stakeholders the Group's activities and performance.

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.

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. We believe revenue profit better represents the results of the Group's operational performance to stakeholders. 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 on a proportionate basis in the table below and a reconciliation of revenue profit to our IFRS profit before tax is included in table 4.

Table 2: Revenue profit

1.    Includes finance lease interest, after rents payable.

Revenue profit increased by £8.3m from £184.2m in the comparative period to £192.5m in the six months ended 30 September 2016. Following asset disposals we made last year, net rental income declined. However, this was more than offset by lower costs and lower net interest expense as explained further below.

Net rental income

Table 3: Net rental income

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements.

Net rental income decreased by £6.7m from the comparable period as rental income growth in our like-for-like portfolio and new lettings at our developments were more than offset by the impact of properties sold since 1 April 2015. Significant disposals included Thomas More Square, E1, Holborn Gate, WC1 and Times Square, EC4 in London and three retail parks in Gateshead, Dundee and Derby. Our developments generated £14.7m of additional income following completion of The Zig Zag Building, SW1 and 20 Eastbourne Terrace, W2, alongside further lettings at 1 & 2 New Ludgate, EC4 and 62 Buckingham Gate, SW1. Like-for-like net rental income growth of £5.0m was due to new lettings, 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.

Net indirect expenses

The indirect costs of the London and Retail portfolios 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 £36.6m compared with £39.4m in the same period last year. The £2.8m reduction is largely the result of lower staff costs due to decreased headcount and reduced share based payment costs.

Net interest expense

Our net interest expense has decreased by £12.2m to £69.0m, partly due to interest savings following the redemption of the £400m A8 bond in March 2016 and the purchase of £45.1m of bonds in June 2016, but also due to net debt being on average £841.8m lower than over the same period last year as a result of asset disposals.

Profit before tax

Table 4: Reconciliation of revenue profit to profit before tax

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements.

Loss before tax for the period was £95.0m, down £802.9m on the same period last year principally due to the valuation deficit in the six months to 30 September 2016 compared to a surplus over the same period last year. In addition to our revenue profit, the net change in values of our investment properties, the movement in impairment of trading properties, any profits or losses on the disposal of assets and any exceptional items are key components of our profit before tax.

Valuation

The valuation deficit of our Combined Portfolio was £259.6m (six months ended 30 September 2015: surplus of £519.3m), representing a net decrease in values over the period of 1.8%. A breakdown of valuation movements by category is shown in table 5.

Table 5: 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 2016, values fell in most categories of our Combined Portfolio. Overall, values were down by 1.8%, with the like-for-like portfolio down by 2.4% largely due to outward yield movements.

Within the like-for-like portfolio, our shopping centres fell in value by 2.2% as rental value growth was insufficient to offset an 11 basis points increase in equivalent yields. The value of our retail parks was down 4.2% predominantly due to a 22 basis points outwards movement in yields. Leisure and hotels reported a small increase in values as rental values moved up slightly, while London offices saw values fall by 3.6% as yields moved out by 15 basis points and rental values were broadly unchanged.

Outside the like-for-like portfolio, the development programme saw values increase by 2.3% largely due to Nova, SW1 where the valuer recognised the reduced construction risk as the project nears completion. In contrast, completed developments fell in value by 1.7% as yields increased by 7 basis points.

Movement in impairment of trading properties

The movement in impairment of trading properties of £9.6m 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 period.

Profits on disposals

Profits on disposals relate to the sale of investment properties, trading properties and joint ventures. We made a total profit on disposal (on a proportionate basis) of £10.9m, compared with £9.6m in the same period last year. Disposals included the sale of our 50% interest in 26-32 Oxford Street, W1 and Ealing Filmworks.

Exceptional items

During the period, there were two items of an exceptional nature which are not included in revenue profit but are part of our pre-tax profits. At 31 March 2016, we provided for the onerous lease on our head office, which arose following our commitment to move to Cardinal Place, SW1. In the period, we agreed to assign the lease on our current head office at a lower net cost than originally estimated and have therefore released the balance of the provision of £2.4m. We have also incurred £0.7m of relocation costs.

In June and July, we purchased bonds with a nominal value of £45.8m at a premium of £10.2m. The redemption premium and £6.4m of the bond exchange de-recognition adjustment associated with the redeemed bonds have been charged to the income statement as an interest cost. Further details are given in the financing section below.

Earnings per share

Basic loss per share was 12.1p compared with earnings per share of 89.7p for the same period last year, primarily due to the valuation deficit in the six months to 30 September 2016 compared to a surplus over the same period last year.

Similar to the adjustments we make to profit before tax, which remove capital and exceptional items to give revenue profit, we also report adjusted earnings per share figures. Adjusted diluted earnings per share increased by 4.7% from 23.2p in the comparative period to 24.3p per share as a result of the increase in revenue profit.

Dividend

We will be paying a second quarterly dividend of 8.95p per share on 6 January 2017 to shareholders registered at the close of business on 2 December 2016. This will be paid wholly as an ordinary dividend. Taken together with the first quarterly dividend of 8.95p per share paid wholly as a Property Income Distribution on 7 October 2016, our first half dividend will be 17.9p per share (six months ended 30 September 2015: 16.3p), representing a total payment of £141.4m (six months ended 30 September 2015: £128.8m). This 9.8% increase in the half-year dividend is a reflection of last year's increase in the total dividend which was driven by a significant rise in the final dividend. Therefore, it should not be viewed as a forecast of how this year's total dividend might change.

Net assets

At 30 September 2016, our net assets per share were 1,449p, a decrease of 33p or 2.2% from 31 March 2016.

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 2016, adjusted diluted net assets per share were 1,408p per share, a decrease of 26p or 1.8% from 31 March 2016.

Table 6 summarises the key components of the decrease in our adjusted net assets over the period.

Table 6: Net assets

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements.

Net debt and gearing

Over the period, our net debt increased by £83.7m to £2,944.2m. The main elements behind this increase are set out in our statement of cash flows.

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 up £73.8m to £3,312.5m (31 March 2016: £3,238.7m). For a reconciliation of net debt to adjusted net debt, see note 14 to the financial statements.

Table 7: Adjusted net debt

1.    Including our proportionate share of subsidiaries and joint ventures, as explained in the notes to the financial statements.

Table 7 sets out the main movements behind the increase in our adjusted net debt. Net operating cash inflow was £156.8m, largely offset by dividend payments of £135.8m. There were few acquisitions in the period with the largest being the acquisition of the long leasehold of the cinema at Bluewater, Kent. Disposals in the period included the sale of our 50% interest in 26-32 Oxford Street, W1. Capital expenditure was £146.5m, largely relating to our development programme.

Table 8 below sets out various measures of our gearing.

Table 8: Gearing

1.    Adjusted net debt divided by adjusted net assets.

Most of our gearing measures have increased marginally since 31 March 2016 due to the decrease in the value of our assets and a 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 from 22.0% at 31 March 2016 to 22.6% at 30 September 2016.

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 detail, see notes 14 and 15 to the financial statements.

At 30 September 2016, our committed revolving facilities totalled £1,950.0m (31 March 2016: £1,865.0m). The £85.0m increase in committed facilities is the result of a £435.0m syndicated debt facility being issued on 14 June 2016, offset by the cancellation of £350.0m of bilateral facilities on the same date. The pricing of our facilities which fall due in more than one year is LIBOR +75 basis points. Borrowings under our commercial paper programme typically have a maturity of less than three months, carry an interest rate of approximately LIBOR +28 basis points and are unsecured. Overall, the amounts drawn under the syndicated bank debt and commercial paper programme totalled £541.2m, a £108.7m increase since 31 March 2016.

During the period, we purchased £45.8m of our medium term notes (MTNs). On 2 June, we purchased £2.0m of the 4.875% MTN due to mature in 2025, £19.6m of the 5.391% MTN due to mature in 2026 and £23.5m of the 5.391% MTN due to mature in 2027. A premium to par of £10.2m was payable, which reflects future interest coupon savings of £20.1m. Two further small purchases totalling £0.7m were also made in the period. Taking into account the interest rate of the facilities used for the redemption, we estimate the Group's net cash interest saving will be £1.5m in the current financial year and £10.4m over the subsequent years to expected maturity.

The Group's debt (on a proportionate basis) has a weighted average maturity of 9.0 years, a weighted average cost of 4.7% and 91.0% is at fixed interest rates. At 30 September 2016, we had £1.5bn 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 charge of £0.8m in the period (six months ended 30 September 2015: £0.2m credit), which comprised a current period charge of £1.0m (2015: nil) and a £0.2m credit (2015: £0.2m credit) in respect of the movement in deferred tax liabilities.

Martin Greenslade

Chief Financial Officer