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Rating Action:

MOODY'S LOWERS LAND SECURITIES' DEBT RATINGS TO A3 FROM A2; OUTLOOK STABLE

04 Sep 2003
MOODY'S LOWERS LAND SECURITIES' DEBT RATINGS TO A3 FROM A2; OUTLOOK STABLE

Approximately GBP1.8 Billion of Long-term Debt Affected

London, 04 September 2003 -- Moody's Investors Service lowered to A3 from A2 the long-term senior unsecured debt ratings of Land Securities PLC (Land Securities). The Prime-2 short-term rating was affirmed. The outlook is stable. The ratings lowered are:

Land Securities PLC -- long-term senior unsecured debt ratings to A3, from A2

Moody's said that the downgrade reflects the subdued outlook for Land Securities' earnings growth in a challenging market environment. Uncertain conditions, particularly in the London office markets, are likely to constrain rental income levels both at existing properties and at completing developments. More modest new business activity at Land Securities Trillium is also factored into the rating. The rating action also takes into account the rise in debt associated with the group's more active development and investment strategy, and its heightened financial risk. The outlook is therefore for Land Securities' debt protection metrics to remain at levels more consistent with an A3 rating in the medium-term.

More positively, the A3 rating takes account of the asset backing implied by the size and quality of Land Securities' investment portfolio, as well as the spread of asset categories which helps offset the valuation pressures experienced by the office portfolio. It also reflects the predictability and security of its core income stream, and management's commitment to specific financial risk parameters. This rating action concludes the review initiated in May 2003. Moody's commented that the rating is solidly positioned at that level.

The stable outlook anticipates moderate growth in debt, reflecting a slower rate of capital spend and divestment of ex-growth assets, as well as progress on letting developments.

Moody's said that Land Securities is almost three years into a five year strategy designed to enhance growth and returns by broadening its activities beyond asset accumulation alone. The group has made good progress at investing in its sizeable development programme and in its total property outsourcing business, partly by recycling capital from portfolio management. Over time, these activities should contribute significantly to group profits, well over 90% of which in 2002/3 were generated from rental income from the investment portfolio.

In the meantime, however, growth in operating profitability is likely to be modest reflecting, broadly, the delay in offsetting rental income foregone on divested properties and non-renewed leases with rents on completed developments and income from total property outsourcing. Moody's said that market conditions remain difficult in London's office markets, where Land Securities generates roughly 46% of its rent roll. An over-supply of London office space and weak occupational demand is being reflected in declining rents and negative valuation movements in the market overall.

The A3 rating is based primarily on Land's GBP7.8 billion property investment portfolio, which is well diversified, consisting mainly of London offices and shops, regional shopping centres, retail warehouses and some industrial holdings in the south-east of the UK. The portfolio, which over the last couple of years has been reshaped to consist of fewer, higher average value, properties, generates a solid and well-diversified rental income stream. The longer-term revenue security implied by a mean weighted average unexpired lease term of just over eleven years for the portfolio as a whole, and the group's high quality tenant profile, also underpin the A3 rating. Moody's added, however, that it considers these defensive characteristics to be offset to an extent by rises in voids, and the shorter residual lease tenor and over-renting on certain segments of its office assets. Increased development risk, reflected in the substantial investment in speculative development ahead of pre-letting, also raises the business risk profile.

Moody's said that the A3 rating anticipates that growth in borrowing over the next couple of years should be moderate from the GBP2.6 billion carried at March 2003. This reflects management's active commitment to containing borrowing both through asset sales, and deferring planned investment and development expenditures, in accordance with its targeted financial risk parameters which are modest by industry standards. The 10% coupon payable on GBP800 million of debentures inflates Land Securities' interest expense which, taken with the modest outlook for profitability, will likely be reflected in coverage ratios at the lower end of its targeted range. Moody's added that it would continue to monitor Land's financial risk profile and cautioned that although investment demand has on the whole remained firmer than occupational demand, achieving planned asset divestments in current soft market conditions could present a challenge.

Headquartered in London, England, Land Securities PLC is one of Europe's leading property investors and developers, with a GBP7.8 billion portfolio of investment properties at March 2003.

Paris
Eric de Bodard
Managing Director
European Corporates
Moody's France S.A.
JOURNALISTS: 33 1 53 43 93 78 SUBSCRIBERS: 44 20 7772 5454

London
Niel Bisset
Senior Vice President
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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