Headline results

The Group’s loss before tax was £4.6m, compared to a loss of £1,621.2m for the six months ended 30 September 2008.  Revenue profit, our measure of underlying profit before tax, reduced by 15.4% from £151.8m to £128.4m, mainly as a result of lower rental income due to the sale of properties.

Basic earnings per share was 1.58p compared to a loss per share of 314.39p last year, restated for the Rights Issue and the reclassification of Trillium to discontinued operations. Adjusted diluted earnings per share was 16.89p (2008: 29.51p), down 42.8% on the comparable period.

Six months
ended
30.09.09
Six months
ended
30.09.09
change
%
£(1,621.2)m Loss before tax(1) £(4.6)m n/a
£(1,757.7)m Valuation deficit(1)(4) £(117.8)m -1.4
£151.8m Revenue profit(1) £128.4m -15.4
29.51p Adjusted diluted earnings per share(1) 16.89p -42.8
593p(2) Adjusted diluted NAV per share 565p -4.7
29.80p Dividend per share (3) 14.00p -53.0
  1. Continuing activities
  2. As at 31 March 2009
  3. Declared dividends, restated for impact of the Rights Issue
  4. Including share of joint ventures

The combined investment portfolio (including joint ventures) decreased in value from £9,407.0m to £8,700.8m on the back of sales of £765.5m and a valuation deficit of £117.8m or 1.4%. Net assets per share decreased by 17p from 639p at the end of March 2009 to 622p in September 2009, with adjusted diluted net assets per share decreasing by 4.7% over the same period from 593p to 565p.

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Valuation deficit

The main reason behind the reduction in the Group’s loss before tax to £4.6m (six months ended 30 September 2008: loss of £1,621.2m) was a significantly lower valuation deficit on the investment portfolio.  The valuation deficit of £117.8m represented a 1.4% reduction in market values over the six months, compared with a 12.5% reduction for the comparable period last year.

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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 performance. It includes the pre-tax results of our joint ventures but excludes capital and other one-off items.

Table 5 shows the composition of our revenue profit including the contributions from London and Retail.

Table 5: Revenue profit


Retail Portfolio
£m
London Portfolio
£m
30 September 2009
£m
Retail Portfolio
£m
London Portfolio
£m
30 September 2009
£m
Gross rental income1 170.6 165.7 336.3 183.2 177.7 360.9
Direct property related income 4.6 10.9 15.5 4.5 12.0 16.5
Rents payable (7.0) (3.7) (10.7) (6.1) (2.3) (8.4)
Rental income 168.2 172.9 341.1 181.6 187.4 369.0
Net service charge expense (2.7) (3.0) (5.7) (3.2) (0.5) (3.7)
Direct property expenditure (16.5) (24.3) (40.8) (16.8) (20.5) (37.3)
Indirect costs (18.7) (17.7) (36.4) (20.4) (20.2) (40.6)
Underlying segment operating profit 130.3 127.9 258.2 141.2 146.2 287.4
Unallocated expenses (6.1) (8.0)
Net interest – Group (107.7) (116.2)
Net interest – joint ventures (16.0) (11.4)
Revenue profit
128.4 151.8
  1. Includes finance lease interest.

Revenue profit declined to £128.4m for the six months to 30 September 2009 compared to £151.8m for the prior period, mainly due to a £24.6m reduction in gross rental income. Sales of investment properties accounted for £26.3m of this decline in income, partly offset by increased income of £14.1m from developments. Gross rental income was also affected by the failure of a number of retailers in late 2008 and early 2009, which led to a decline in income on our like-for-like investment portfolio of £14.3m.

Net service charge expense and direct property expenditure increased by £2.0m and £3.5m respectively, driven by increased levels of voids compared with the same period last year. These increases were partly offset by lower indirect costs because of reduced headcount and lower professional fees.

Net interest was £3.9m lower than last year, reflecting lower interest rates, partly offset by a reduction in capitalised interest, following the completion of our schemes in Bristol and Livingston.

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Earnings per share

Basic earnings per share was 1.58p compared to a loss per share from continuing operations of 314.39p in the prior period.  The improvement was predominantly due to the significantly lower valuation deficit on the investment property portfolio together with an income tax credit of £17.8m this period, compared to a £2.7m credit in the first six months last year.

In the same 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.  Adjusted diluted earnings per share from continuing operations reduced from 29.51p per share for the six months ended 30 September 2008 to 16.89p per share for the current period.  This reduction was attributable to lower revenue profit for the reasons described above as well as an increase in the average number of issued shares following our Rights Issue in March 2009.

During the period under review, the Rights Issue proceeds of £756m were held as cash while we waited for property markets to stabilise.  As a result of very low prevailing interest rates, on average 0.8%, the interest received on the Rights Issue proceeds was low, leading to a dilution in earnings per share.

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Total dividend

We will be paying a second quarterly dividend of 7.0p per share on 15 January 2010 to shareholders on the Register at 11 December 2009. Taken together with the first quarterly dividend of 7.0p, paid on 23 October 2009, this makes a first half dividend of 14.0p per share (2008: 29.8p). This is in line with guidance given at the time of our Rights Issue and in our 2009 Annual Report.  For our second interim dividend of 7.0p, it is our intention to offer shareholders the opportunity to receive this in the form of Land Securities shares as opposed to cash (a scrip dividend alternative).  Further information relating to the scrip dividend will be sent to shareholders shortly.  If the scrip dividend alternative is approved by shareholders, we will suspend the current Dividend Re-investment Plan (DRIP).

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Net assets

At 30 September 2009, net assets per share were 622p, a decrease of 17p or 2.7% compared with the year ended 31 March 2009. This reduction was primarily due to the valuation deficit.

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 our debt.  Under IFRS we do not show our debt at its nominal value, although we believe it would be more appropriate to do so, and we therefore adjust our net assets accordingly.  At 30 September 2009, adjusted diluted net assets per share were 565p per share, a decrease of 28p or 4.7% from 31 March 2009.

This decline was greater than the reduction in our net assets over the period due to the termination of interest-rate swaps.  Adjusted net assets ignores the fair value movement on interest-rate swaps, only recognising the impact of realised gains or losses on these instruments.  As explained in more detail below, during the period we terminated a number of interest-rate swaps, resulting in a cash payment of £74.5m.  This realised loss is reflected in the reduction in adjusted net assets during the period.

Table 6 summarises the main differences between net assets and our adjusted measure together with the key movements over the period.

Table 6: Net assets attributable to owners of the Parent

Six months
ended 30
September
2009
£m
Year ended
31 March
2009
£m
Net assets at the beginning of the period 4,823.5 9,582.9
Adjusted earnings 127.6 325.0
Valuation deficits on investment properties (117.8) (4,743.7)
Impairment of development land and infrastructure (12.2) (104.3)
Losses on disposals of investment properties (10.3) (127.9)
Other 24.6 (119.5)
Profit/(loss) after tax attributable to owners of the Parent 11.9 (4,770.4)
Loss on discontinued operations - (420.9)
Dividends paid (129.8) (302.4)
Rights Issue - 755.7
Other reserve movements (3.2) (21.4)
Net assets at the end of the period 4,702.4 4,823.5
Mark-to-market on interest-rate swaps 60.9 150.2
Debt adjusted to nominal value (493.4) (499.8)
Adjusted net assets at the end of the period 4,269.9 4,473.9

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Net pension deficit

The Group operates a defined benefit pension scheme which is closed to new members.  At 30 September 2009 the scheme was in a net deficit position of £7.5m compared to a net surplus of £3.0m at 31 March 2009.  Although the scheme’s assets performed strongly over the period, a significant reduction in corporate bond yields reduced the discount rate from 7.0% to 5.5%, which in turn increased the scheme’s liabilities and resulted in the £10.5m change in the position since the beginning of the financial year.

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Cash flow, net debt and gearing

Our net debt at 30 September 2009 was £3,428.6m, £495.0m lower than the position at 31 March 2009. This reduction was primarily due to proceeds received from the disposal of investment properties (£511.6m) and the sale of our joint venture interest in the Bullring, Birmingham (£209.8m).  Capital expenditure during the period totalled £112.1m, of which £45.3m was spent on our development at One New Change, London EC4.  We also invested a net £38.1m in our joint ventures, consisting mainly of capital expenditure of £66.6m on our major developments in Cardiff and Bristol, offset by drawings of £30.5m on a new stand-alone facility within our Cardiff joint venture.

Our interest cover, excluding our share of joint ventures, is virtually unchanged from 1.89 times for the year ended 31 March 2009 to 1.88 times for the six months ended 30 September 2009. 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 six months ended 30 September 2009 was 1.82 times.

Table 7: Cash flow and net debt

Six months
ended 30
September
2009
£m
Year ended
31 March
2009
£m
Operating cash inflow after interest and tax 83.4 367.2
Dividends paid (129.8) (302.4)
Non-current assets:
Acquisitions (34.2) (86.1)
Disposals 511.6 823.0
Divestment of joint ventures 209.8 -
Capital expenditure (112.1) (429.8)
575.1 307.1
Trillium disposal:
Gross proceeds - 444.0
Net debt divested - 48.6
- 492.6
Loans advanced to third parties - (50.0)
Receipts from the disposal group (part of Trillium’s PPP activities) - 113.5
Joint ventures and associates (38.1) (117.0)
Proceeds from the Rights Issue - 755.7
Fair value movement on interest-rate swaps 10.9 (105.6)
Other movements (6.5) (0.2)
Decrease in net debt 495.0 1,460.9
Net debt at the beginning of the period (3,923.6) (5,384.5)
Net debt at the end of the period (3,428.6) (3,923.6)

The reduction in net debt has contributed to the fall in gearing from 81.4% at 31 March 2009 to 72.9% at 30 September 2009. Details of the Group’s gearing are set out in Table 8, which also shows the impact of joint venture debt, although the lenders to our joint ventures have no recourse to the Group for repayment.

Adjusted gearing, which recognises the nominal value of our debt, reduced from 96.4% at 31 March 2009 to 91.3% at 30 September 2009. Adjusted gearing including our share of joint ventures also reduced, declining from 105.9% to 102.0% over the same period. In common with other property companies, we also show our Group LTV ratio.

Table 8: Gearing

September
2009
%
31 March
2009
%
Gearing 72.9 81.4
Adjusted gearing* 91.3 96.4
Adjusted gearing* – as above plus notional share of joint venture debt 102.0 105.9
Security Group LTV 54.9 76.7
Group LTV – including notional share of joint venture debt 50.8 52.0

* 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 and capital

Our financing strategy and the structure of our main funding vehicle, the Security Group, are described in detail on page 22 of our 2009 Annual Report.  As a result of our decision in January 2009 to draw down £1.1bn of available credit facilities, the Security Group entered a more restrictive operating environment (Tier 3) following formal submission of our valuation report as at 31 March 2009.  The priority for the period under review was to focus on cash flows, extending existing facilities and raising new finance.  In this regard, we have had considerable success.

We raised £360.3m of long-term debt against a government lease on Queen Anne’s Gate, London SW1 and secured £290.0m of five year joint venture finance for the St David’s Centre, Cardiff.  Since the end of September 2009, we have extended £650.0m of bank bilateral facilities which were anticipated to be repaid in 2010 to the financial year ending March 2015.  We are also well advanced in discussions with other banks about entering into new agreements.

As a result of these achievements and the cash raised from investment property sales, we have repaid £1.8bn of bank facilities and the Security Group has returned to a normal operating environment.  In addition, our debt structure has had its AA credit rating reaffirmed allowing us to raise finance at a competitive rate.

Expecetd debt maturities (nominal)

expected-debt_maturities.gif

The Group still had £637.9m of cash investments (including restricted cash of £119.0m) at the end of September, £360.0m of which has subsequently been used to repay outstanding short-term bank debt.

The weighted average life of the Group’s debt is 11.9 years (31 March 2009: 9.7 years) with a weighted average cost of debt of 5.0% at 30 September 2009, although this has subsequently risen to around 5.3% following the further repayment of £360.0m of short-term borrowings in November 2009.

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Hedging

We use derivative products to manage our interest-rate exposure, and have a hedging policy which requires at least 80% of our existing debt plus our net committed capital expenditure to be at fixed interest rates for the coming five years. Specific hedges are also used in geared developments or joint ventures to fix the interest exposure on limited-recourse debt.

At 31 March 2009 the Group was slightly over-hedged at 107% principally due to the Rights Issue proceeds which were received in late March 2009.  During the period, this over-hedging increased as a result of our investment property sales and funding initiatives.  Corrective action to eliminate the over-hedged position was taken during September 2009 when £2.2bn of interest-rate swaps were closed out resulting in a £74.5m cash payment.  As a result, Group debt is now 97.8% fixed.

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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.  The tax credit for the period of £17.8m (2008: £2.7m credit) comprises a prior year corporation tax credit of £20.0m following resolution of a number of prior year issues, and a net deferred tax charge of £2.2m, including the write off of deferred tax assets no longer considered recoverable.  The tax credit for the period has not been recognised as part of our adjusted earnings as it is non-recurring and relates to the period before we became a REIT.

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Principal risks and uncertainties

The principal risks facing the Group for the remaining months of the financial year are broadly consistent with those outlined on pages 30 to 32 of the 2009 Annual Report. The risks include property investment risks (falling property values, illiquidity of assets and tenant failure) and financial risks (including liquidity risk due to unavailability of credit facilities).

While these risks remain relevant for the rest of this financial year and beyond, our new and extended bank facilities, as well as our return to a normal operating environment under our Security Group debt structure, have helped to mitigate liquidity risk.  The financial and property risks, which are closely tied to property values and property market liquidity, have also reduced since 31 March 2009 as the overall trend in property values since 31 March 2009 has stabilised.

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