Annual Report ’06 Annual Report ’06 Financial Statements Business Analysis 18 Performance overview 99 Financial statements and business 139 Introduction 20 Chairman’s statement analysis contents 140 Investment property business – 100 Five year summary Combined portfolio 24 Operating and financial review 101 Income statement 142 Investment property business – 37 Understanding our numbers 101 Statement of recognised income Retail under IFRS and expense 146 Investment property business – 38 Financial review 102 Balance sheets London Portfolio 44 Investment property business 103 Cash flow statements 150 Investment property business – 48 Retail 104 Notes to the financial statements Combined portfolio analysis 58 London Portfolio 153 Property Outsourcing – 68 Property Outsourcing – 137 Directors’ report Land Securities Trillium Land Securities Trillium 76 Urban Community Development 158 Investor information 159 Glossary 78 Board of directors 160 Index 80 Corporate responsibility Ibc Contact details 85 Corporate governance 89 Risk management 90 Remuneration report 97 Directors’ responsibilities 98 Independent auditors’ report “Everyone knows what a bicycle looks like. “So draw one, from memory. We’ll even give you a head start... “Hard isn’t it? Don’t worry if you got it wrong – 80% of people do. “To draw a bicycle correctly, you have to look at one, to understand how it works. “As you can see, the pedals don’t drive both wheels. “In Autumn last year we sent six hundred children from 14 towns across Britain into their local surroundings to draw... “Working with professional illustrators, they learned to look at their worlds, to understand their environments, and how they could be a creative part of them. “It’s a process we understand. We are a creative part of those environments too. “Take the Bullring in Birmingham. Where others saw a roundabout, we saw an opportunity. And with our partners we created a new retail heart for Birmingham, moving the city to the number two spot in the retail hierarchy rankings. “Sometimes it’s about identifying basic human needs. “At lunchtime, St Paul’s, London is one of the most densely populated areas of Britain...but there are no shops (unless you live on sandwiches). It’s amazing what gets overlooked. “So, we are going to develop One New Change into the largest office and retail site the City of London has ever seen. “And because we don’t want to miss out on the view of St Paul’s Cathedral, we’ve cut our development in half to ensure those inside can experience the breathtaking views. “Would you like a gherkin with that? “Remaining the number one property company in the UK means thinking creatively, spotting new opportunities and keeping an open mind. Recent developments like Cardinal Place, Whitefriars Canterbury and the project for Norwich Union are testament to our expertise in making property work.” 17 Annual Report ’06 18 Performance overview 20 Chairman’s statement 24 Operating and financial review 37 Understanding our numbers under IFRS 38 Financial review 44 Investment property business 48 Retail 58 London Portfolio 68 Property Outsourcing – Land Securities Trillium 76 Urban Community Development 78 Board of directors 80 Corporate responsibility 85 Corporate governance 89 Risk management 90 Remuneration report 97 Directors’ responsibilities 98 Independent auditors’ report Financial Statements Land Securities Annual Report 2006 18 Performance overview Pre-tax profit up 80.4% Revenue profit up 8.2% Total dividend up 8.0% £2,359.2m £391.3m 46.70p Includes revaluation surplus as well as Our measure of the underlying pre-tax profit Final proposed dividend of 28.55p together with exceptional items including profit of £293.0m the paid interim dividend of 18.15p. Over two on sale of Telereal joint venture years the dividend has increased by 25% reflecting confidence in the business Net assets per share up 23.5% Adjusted diluted net assets per share up 28.5% Combined portfolio valuation surplus 15.3% 1597p 1912p £12.9bn Net assets with full provision for deferred tax on Impressive portfolio valuation surplus combined Strong contribution from development activities revaluation surpluses with exceptional profit from sale of Telereal as well as rental growth and continued yield shift joint venture Net assets per share (p) Dividends per share (p) UK GAAP 02 1151 1157 02 34.00 03 1188 1219 03 35.50 04 1294 1331 04 37.10 05 1419 1460 05 43.25 Basic Adjusted diluted IFRS 05 1293 1488 06 1597 1912 06 46.70 Basic Adjusted diluted xxx Land Securities Annual Report 2006 19 Performance overview continued Welcome. We’ve had an excellent year and we hope that you enjoy reading the 2006 Annual Report to discover more about our achievements. Our accounts explained Revenue profit: Profit before tax, excluding the adjustment to interest payable resulting To help you understand our accounts we profits on the sale of fixed asset and trading from the amortisation of the bond exchange detail here some of the key terms we use and properties, profits on long-term development de-recognition, the one-off pension credit and conventions we have adopted, with an contracts, revaluation surpluses, mark-to- any exceptional items explanation of their meaning: market adjustments on interest rate swaps and similar instruments used for hedging purposes, Financial highlights Adjusted diluted earnings per share: These are based on revenue profits plus profits on 31/03/06 31/03/05 % change trading properties and long-term development Gross property income (including joint ventures) contracts after tax Retail £371.8m £298.1m +24.7% London Portfolio £514.0m £358.1m +43.5% Other investment portfolio £88.8m £165.2m -46.2% Adjusted diluted net assets per share: This Property outsourcing £1,013.6m £1,054.8m -3.9% is often used to evaluate the performance of Total £1,988.2m £1,876.2m +6.0% a property company and is calculated by Operating profit £2,443.4m £1,404.8m +73.9% dividing equity shareholders’ funds, adjusted Pre-tax profit £2,359.2m £1,307.5m +80.4% primarily for deferred tax arising on revaluation Revenue profit £391.3m £361.8m +8.2% surpluses and capital allowances and the bond Earnings per share 357.95p 227.32p +57.5% exchange de-recognition, by the number of Adjusted diluted earnings per share 70.47p 66.87p +5.4% shares in issue Dividends per share 46.70p 43.25p +8.0% Diluted net assets per share 1590p 1289p +23.4% Adjusted diluted net assets per share 1912p 1488p +28.5% Combined portfolio: The combined portfolio, Combined portfolio valuation £12,892.9m £9,365.8m +37.7% see page 150, is our wholly-owned investment Net borrowings £3,685.9m £2,438.1m +51.2% portfolio combined with our share of the value Equity shareholders’ funds £7,493.9m £6,050.3m +23.9% of properties held in joint ventures. Unless Gearing (net) 49.2% 40.3% stated these are the pro-forma numbers we use when discussing the investment property business Retail: This business unit includes shopping London Portfolio: This business unit includes Other investment portfolio: This comprises centres, retail warehouses, shops outside all London offices and London retail, but all other investment properties not included London, shops held through the Metro excludes those assets held in the Metro in Retail or London Portfolio Shopping Fund LP, regional offices and Shopping Fund LP sundry other regional properties Land Securities Annual Report 2006 20 Chairman’s Statement “We’ve delivered a total business return of 32.4%, demonstrating a strong performance from all areas of the business.” Peter Birch Chairman The outstanding performance of Land Securities over the past 12 months can be summed up by the 28.5% growth in adjusted diluted net assets per share, driven largely by the 15.3% valuation surplus on our investment portfolio and the £293.0m profit on the sale of Telereal. Growth in net assets is one of the leading financial measures against which we are benchmarked and I am delighted with this result in a year which was exceptional for both Land Securities and the property industry. Under International Financial Reporting Standards (‘IFRS’) our pre-tax profit was £2,359.2m and now includes revaluation surpluses as well as exceptional items, providing a simple measure of the value we have created for shareholders. Revenue profit, our measure of underlying pre-tax income, was up 8.2% to £391.3m and we are recommending a final dividend of 28.55p per share. Over the year we have delivered a total business return of 32.4%. Benchmarking We have reported against key benchmarks for three years now, allowing you to evaluate our performance against our major competitors and the underlying commercial property market. Once again this year the Group outperformed all its key benchmarks and, given the important role benchmarks play, I hope you will not mind if I expand a little on these here. Total shareholder return Total shareholder returns Total shareholder return is the most widely recognised way to compare returns from one publicly % return quoted company against another.As a constituent of the FTSE100 we compare our performance % return for six for year to years to against both this and the FTSE Real Estate Index, over the 12 month period under review and 31/03/06 31/03/06 since 1 April 2000 when we embarked upon the reinvigoration of the business.This year we Land Securities 54.3 224.4 produced a total shareholder return of 54.3% compared to 25.5% for the FTSE100 and 48.6% for FTSE100 25.5 9.8 FTSE Real Estate Index.The returns over the six years since 1 April 2000 are even more impressive FTSE Real Estate 48.6 210.9 recording 224.4% for Land Securities compared to 9.8% for the FTSE100 and 210.9% for FTSE Source: Datastream Real Estate.