Group Finance Director
The Group’s profit before tax was £1.227bn, up 14.8% from last year. There were two main drivers behind this:
First, our combined investment portfolio, which is now worth just over £10.5bn, increased in value by £908.8m, up 9.7%. This has contributed to an increase in adjusted diluted NAV per share to 826 pence, up 19.5%.
The second driver was revenue profit, that’s our measure of underlying profits, which grew by 9.1% to £274.7m, helped by a £28.2m reduction in our interest costs.
Adjusted diluted earnings per share were up 6.5% to 36.31 pence per share, and this growth in earnings has allowed us to propose a recommended 2.9% increase in the final dividend to 7.2 pence per share. This means our total dividend for the year was up slightly at 28.2 pence per share. And all of this is consistent with our previous comments that dividend growth would resume as earnings growth returned.
This year we have also reduced the cost of our debt and increased its flexibility. Our weighted average cost of debt is 4.9%, our gearing, which we measure by loan to value was down to 39% and we have £1.8bn of cash and undrawn facilities which covers our capital commitments many times over. In simple terms, on the liability side of the balance sheet we have the debt structure and the capacity to enable us to deliver on the strategy for all our assets including our development programme.
“This year we have delivered a strong set of results. We are well placed with the financial capacity to enable us to deliver on the strategy for all our assets, including our development programme.”
Overview and headline results
This year saw the continuation of positive dynamics in our market. We remained alert to ripples in capital values, but these did not materialise as low interest rates helped support strong demand for good quality investment properties in both London and Retail. Over the year, the value of our combined investment property portfolio (including joint ventures) increased by £908.8m, helping us deliver a profit before tax for the year ended 31 March 2011 of £1,227.3m, compared to £1,069.3m for the previous year.
Revenue profit, our measure of underlying profit before tax, increased by 9.1% from £251.8m to £274.7m, with a reduction in net interest costs being the main reason. Adjusted diluted earnings per share was 36.31p (2010: 34.08p), up 6.5% on the comparable period.
Key actions in the year included the completion of a number of substantial acquisitions and disposals, the continuation of development activity in London and the restarting of development in Retail. Our early start on development was made possible by the Group’s financing structure. At a time when many property businesses are finding it difficult, if not impossible, to secure speculative development finance, we continue to be able to use our facilities in this way or for any other activity. We expect our significant funding lines and the flexibility in how we deploy these resources to be a growing source of competitive advantage as more development and acquisition opportunities appear through the cycle. And our development programme is already producing strong results, rising in value by 19.4% over the year compared to 8.4% for our like-for-like properties.
Adjusted diluted net assets per share was up by 19.5% over the year, increasing from 691p at March 2010 to 826p. The 135p increase in adjusted diluted net assets per share together with the 28p dividend paid in the year represents a 23.6% total return from the business.
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.
Table 17 shows the composition of our revenue profit including the contributions from London and Retail. Revenue profit increased by £22.9m from £251.8m last year to £274.7m. This was mainly due to net interest costs, which were £28.2m lower than last year, partially offset by a £10.8m (1.9%) reduction in net rental income. The reduction in interest costs was the result of a lower average debt balance following the sales we made last year together with a lower average cost of debt as a result of cancelled interest rate swaps and the buyback of some of our bonds.
Table 17 – Revenue profit
|Gross rental income*||308.0||302.6||610.6||312.9||312.3||625.2||(14.6)|
|Net service charge expense||(2.3)||(3.7)||(6.0)||(3.5)||(4.4)||(7.9)||1.9|
|Direct property expenditure (net)||(30.2)||(17.7)||(47.9)||(30.2)||(19.6)||(49.8)||1.9|
|Net rental income||275.5||281.2||556.7||279.2||288.3||567.5||(10.8)|
|Segment profit before interest||248.1||263.6||511.7||254.3||267.5||521.8||(10.1)|
|Unallocated expenses (net)||(30.9)||(35.7)||4.8|
|Net interest – Group||(173.7)||(201.7)||28.0|
|Net interest – joint ventures||(32.4)||(32.6)||0.2|
- *Includes finance lease interest, net of ground rents payable.
The lower net rental income was mainly due to the sale of investment properties, which led to a £34.6m reduction (see Table 19). In addition, net rental income from properties in our development pipeline declined by £10.4m as properties were vacated to enable development to occur. It was net rental income from our other two property categories, like-for-like (up £14.1m) and completed developments (up £9.6m), where we saw the main benefit of the improving economy and its impact on our customers. Time horizons moved from dealing with immediate issues to planning for the medium term and, for many of our occupiers, cash flow concerns eased. As a result, we let space, reducing our voids and service charge shortfalls; rent review settlements were higher than forecast; and balances were recovered against which we held provisions. This is a normal feature of this phase of the recovery cycle. While much of this benefit will carry through into next year, around £10m is not expected to recur.
Earnings per share
Basic earnings per share were 162.33p, compared to 144.04p last year, the improvement being predominantly due to the valuation surplus on the investment property portfolio and profits on investment property disposals (together 129.2p per share compared to 111.0p 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. Adjusted diluted earnings per share increased by 6.5% from 34.08p last year to 36.31p per share this year. This was mainly due to the increase in revenue profit partly offset by the impact of additional shares issued under the scrip dividend scheme.
We are recommending a final dividend payment of 7.2p per share. Taken together with the three quarterly dividends of 7.0p, our full year dividend will be 28.2p per share (2010: 28.0p) or £216.5m (2010: £212.2m).
Shareholders continue to have the opportunity to participate in the scrip dividend scheme introduced last year 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 1 April 2010, 30 July 2010, 25 October 2010 and 10 January 2011 was 41%, 19%, 35% and 37% respectively. This resulted in the issue of 11,195,141 new shares at between 584p and 650p per share and total cash savings of £70.8m.
All of the cash dividends paid and payable in respect of the financial year ended 31 March 2011 comprise Property Income Distributions (PID) from REIT qualifying activities. The calculation price for the scrip dividend alternative in respect of the final dividend, which will not be a PID, will be announced on 29 June 2011, and the latest date for election will be 7 July 2011.
It is often assumed that we continue to offer the scrip dividend to retain cash within the business. This is not the case. PIDs are subject to 20% withholding tax for certain classes of shareholders. None of our scrip dividends to date have been PIDs and therefore they have not been subject to 20% withholding tax. As a result, the scrip dividend alternative allows shareholders to select the type of distribution they prefer, taking account of their tax status and investment strategy.
Table 18 summarises the main differences between net assets and our adjusted measure of net assets together with the key movements over the year.
Table 18 – Net assets
31 March 2011
31 March 2010
|Net assets at the beginning of the year||5,689.9||4,823.5|
|Valuation surplus on investment properties||908.8||863.8|
|Impairment release/(charge) on trading properties||0.7||(13.5)|
|Profits/(losses) on investment property disposals||79.3||(24.5)|
|Profit after tax attributable to owners of the Parent||1,241.6||1,088.9|
|Other reserve movements||22.8||(4.6)|
|Net assets at the end of the year||6,811.5||5,689.9|
|Mark-to-market on interest-rate swaps||22.7||37.3|
|Debt adjusted to nominal value||(467.5)||(486.0)|
|Adjusted net assets at the end of the year||6,366.7||5,241.2|
- To the extent tax is payable, all items are shown post-tax.
At 31 March 2011, our net assets per share were 885p, an increase of 135p compared to 31 March 2010. The increase in our net assets was primarily driven by the increase in value of our investment property portfolio and profits on disposal of investment properties.
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 2011, adjusted diluted net assets per share were 826p per share, an increase of 135p or 19.5% from 31 March 2010.
Table 19 – Net rental income analysis
|Year ended 31 March|
|Retail Portfolio||London Portfolio||Combined portfolio variance|
|Like-for-like investment properties||226.3||212.8||231.5||230.9||14.1||3.2|
|Acquisitions since 1 April 2009||10.3||(0.2)||0.1||0.1||10.5|
|Sales since 1 April 2009||7.8||35.6||6.5||13.3||(34.6)|
|Non-property related income||3.3||3.7||3.0||2.6||–|
|Net rental income||275.5||279.2||281.2||288.3||(10.8)||(1.9)|
A summary of the cash flow for the year is set out in Table 20 below.
Table 20 – Cash flow and net debt
31 March 2011
31 March 2010
|Operating cash inflow after interest and tax||153.5||179.3|
|Proceeds from the disposal of Trillium||–||25.0|
|Loans repaid by/(advanced to) third parties||16.2||(33.3)|
|Divestment of a joint venture (Bullring)||0.3||209.8|
|Fair value of interest-rate swaps||(1.9)||7.0|
|Increase in net debt||(50.2)||660.2|
|Net debt at the beginning of the year||(3,263.4)||(3,923.6)|
|Net debt at the end of the year||(3,313.6)||(3,263.4)|
The main cash flow items are typically operating cash flows, the dividends we paid and the capital transactions we undertook. This year, operating cash flow after interest and tax was lower than last year due to a protective tax payment of £60.7m we made to HMRC while dividends paid in cash were also lower due to the scrip dividend.
Having been net sellers of investment property last year, our aim this year was for property disposals broadly to match the capital we invested on acquisitions and capital expenditure.
Disposals in the year, including Park House, W1 and Stratford shopping centre, generated receipts of £535.0m. We spent £597.4m on assets; acquisitions cost £371.3m with the largest being Overgate, Dundee and the O2 Centre, Finchley Road, NW3; and, capital expenditure totalled £226.1m, principally on our developments at One New Change, EC4 and Trinity Leeds.
The net receipt of £4.5m from our joint ventures comprises a number of transactions. We invested £81.7m in joint venture acquisitions, including our 50% share in the Westgate Centre, Oxford, and provided loans of £17.3m for development capital expenditure. These payments were offset by loan repayments and distributions totalling £103.5m as a result of asset sales and third party borrowings within our joint ventures. The largest disposals occurred in the Metro Shopping Fund which sold the N1 shopping centre, Islington and Notting Hill Gate.
Net debt and gearing
As a result of the cash flows described above, our IFRS net debt increased by £50.2m to £3,313.6m, while the reduction in borrowings in our joint ventures led to our IFRS net debt (including joint ventures) falling by £11.2m to £3,741.1m (£3,752.3m at 31 March 2010). 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 £15.1m at £4,185.9m (31 March 2010: £4,201.0m).
Table 21 below sets out various measures of our gearing.
Table 21 – Gearing
|31 March 2011
|31 March 2010
|Adjusted gearing* – including notional share
of joint venture debt
|Group LTV – as above plus notional share of joint venture debt||39.0||43.5|
|Security Group LTV||40.1||45.5|
- *Book value of balance sheet debt increased to recognise nominal value of debt on refinancing in 2004 divided by adjusted net asset value.
All of our gearing measures have declined compared with last year as a result of 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.
Our interest cover, excluding our share of joint ventures, has increased from 1.92 times in 2010 to 2.22 times in 2011. 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 2011 was 1.92 times. There is further information on our approach to gearing in ‘Our principal risks and how we manage them’.
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 of our net debt at below its nominal value, we view our capital structure on a basis which adjusts for this.
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 2011 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 borrowing 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.
We continually review our financing structure to ensure that our borrowings have an appropriate balance of duration, headroom to meet capital commitments and flexibility to be drawn down and repaid in line with changing business requirements. During the year, we arranged a new four year bilateral facility of £100m, renegotiated pricing on our existing bilateral facilities and bought back £253.8m of bonds due in 2013 and £267.4m of bonds due in 2015. We began the financial year with no borrowings under our syndicated bank or bilateral facilities and, as a result, we bought back the bonds through a tender offer using funding from our bank facilities to increase the flexibility of our borrowings.
The buyback of the bonds also resulted in a reduction in the cash and committed but undrawn facilities available to the Group and joint ventures. At 31 March 2011 we had available funds of £1,870.3m compared to £2,447.0m at 31 March 2010. However, this still represents a comfortable headroom over the outstanding capital expenditure on our committed developments of £464.0m at 31 March 2011.
The weighted average duration of the Group’s debt (including joint ventures) is 11.4 years with a weighted average cost of debt of 4.9%. During the coming financial year, we are likely to begin discussions around the refinancing of our £1.5bn syndicated loan facility which matures in 2013 and various joint venture facilities which mature in the next two years.
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 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 2011, Group debt (including joint ventures) was 92.1% fixed (2010: 98.2%). 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 2011 (£427.9m notional amount including our share of joint ventures).
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 £16.8m (2010: £21.0m) which were created in prior periods and are no longer required as the relevant uncertainties have now been cleared. In addition, a protective payment of £60.7m was made to HMRC in respect of an outstanding issue from a period prior to REIT conversion, for which full provision was made at the time. The Group holds further provisions of £25.8m for interest on overdue tax in relation to this matter, which will become payable if it is not settled in our favour. The provision will be released, and the tax paid recovered, if the Group’s claim is successful.
- Martin Greenslade
- Finance Director