Final Results
17 March 2009
DERWENT LONDON PLC ('Derwent' / 'Group')
Annual results announcement for the year ended 31st December 2008
DERWENT REPORTS GOOD OPERATIONAL PROGRESS WITH
SUCCESSFUL LEASING PROGRAMME AND BALANCE SHEET STRENGTH
Derwent London announces continued progress across all areas of its activity during the year to 31st December 2008, recording particular success in its leasing programme and securing of key planning consents.
Highlights
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Group's portfolio was valued at £2.1 billion (31st December 2007: £2.7 billion), a decline of 22.2%. The Group's central London properties (94% of the portfolio) reduced in value by 22.5%, compared to a decrease in the IPD Central London Offices Capital Growth Index of 27%.
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Adjusted net asset value per share attributable to equity holders of 1,226p (31st December 2007: 1,801p), a decrease of 32%.
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Total dividend up 8.9% to 24.5p (2007: 22.5p).
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Gross property income rose £7.3 million year on year to £119.0 million (2007: £111.7 million), driven by new lettings and rent reviews.
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Recurring profit before tax of £23.3 million, after two major charges to the group income statement without which the profit would have been £39.9 million (31st December 2007: £37.6 million).
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Three bank facilities totalling £253 million renewed during the last twelve months. No further debt maturities until December 2011.
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Successful lettings of 45,300 m2 during the year, generating an annual income of £16.3 million with a further 9,700 m2 let or under offer since the year end.
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Vacancy level at 3.8% of rental value (2007: 4.5%) and 4.0% of total floor space, compared to a central London rate of 5.3%.
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Continuation of active disposals programme of non-core assets realised £73 million, recording a small net profit. Further disposals of £34.5 million made in 2009.
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Development programme restricted to three schemes and de-risked through the pre-letting of nearly 60% of the space.
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Three important planning consents obtained for development when the market recovers; North Wharf Road, 40 Chancery Lane and City Road Estate, totalling up to 37,900 m2.
Robert Rayne, Chairman, commented:
'In a year which has proved to be extremely demanding for both the UK economy and the property sector, we have retained our focus on matters within our control, namely asset and financial management. This, together with our extensive expertise of London's villages, has enabled us to make good operational progress.
'This approach, combined with the strength of our financial position, gives us confidence that we will emerge from this challenging period in a position to take advantage of opportunities that arise as the market recovers.'
John Burns, Chief executive, added:
'The economic outlook for the next few years is extremely challenging, with an inevitable impact on occupier demand and liquidity in the investment market.
'We expect that our main operating area, the West End, will prove more resilient than the City due to its greater tenant diversification and limited existing and future supply. In addition, the characteristics of our portfolio, such as its low average rent, a modest vacancy rate and broad tenant base, should provide a degree of defence for the future. Our income stream is strong, with an average unexpired lease length of 8.3 years, and our competitively priced, high quality product, aimed at the middle rental range, is well placed to attract the limited number of tenants in the market.'
A presentation to analysts and investors will take place at 09.30am on 17 March 2009. The presentation will also be available to international analysts and investors through a live conference call and webcast.
The webcast and copy of the presentation will be available on the company website: www.derwentlondon.com.
Conference call dial-in details:
Dial in: +44 (0) 1452 569 103
Conference ID: 88673722
For further information, please contact:
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Derwent London |
Financial Dynamics |
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John Burns, Chief Executive |
Stephanie Highett/ Dido Laurimore/ Olivia Goodall |
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Tel: 020 7659 3000 |
Tel: 020 7831 3113 |
Chairman's statement
Last year proved to be extremely demanding for both the UK economy and the property sector, with ongoing turmoil in the financial markets creating an unprecedented lack of liquidity and pushing the wider economy into recession.
In the property industry, this has been evidenced by the largest ever annual fall in the IPD Central London Offices Index, with no part of the market being unaffected. However, we have retained our focus on matters within our control, namely asset and financial management, and this has enabled us to make good progress with a number of operational objectives. We entered 2008 with relatively modest balance sheet gearing and some £370 million of unutilised, committed bank facilities. This position of financial strength was maintained throughout the year and is one result of management applying its proven strategy through a number of economic and property cycles. This strategy is to acquire income producing office buildings, predominantly located in London's West End and surrounding villages, that offer the potential for regeneration, and to improve these, over time, through refurbishment or redevelopment. Capital is then recycled through the disposal of mature assets.
Results
At the year end the adjusted net asset value per share attributable to equity shareholders was 1,226p, a decrease of 32% from 1,801p at 31st December 2007. Of this decline, 78% occurred in the second half of the year.
The investment portfolio was valued at £2.1 billion at 31st December 2008, a reduction from the previous year end of £597 million before lease incentive adjustments of £5.0 million. Properties held throughout the year fell in value by 22.1% compared to a gain of 4.3% in 2007. Central London properties, which account for 94% of the portfolio, showed a decrease of 22.5% for the year, with a decline in the second half of 17.8%. The portfolio's annual property return of minus 18.9% compares favourably to the IPD Central London Office Index which showed a negative return for the year of 23.5%.
During the year, the portfolio's initial yield, based on the annualised contracted rental income, increased from 4.4% to 6.0% whilst the true equivalent yield increased from 5.7% to 7.1%. The estimated rental values that underlie the 2008 year end valuation showed a decrease of 3.4% over the year, clearly illustrating the relative resilience of our middle market rental values. The principal cause of the decline in the portfolio valuation was the upward movement in investment yields, although the group's yield profile confirms that the portfolio has maintained a reversionary element.
The group's recurring profit before tax was £23.3 million, after two major charges to the group income statement. Without these, the profit would have been £39.9 million compared to £37.6 million for the prior year. One of these items was reported at the interim stage and is the £8.3 million reverse premium paid to the tenant at 1-3 Grosvenor Place, for the surrender of its lease. The other is an £8.3 million foreign exchange translation movement included in finance costs; this is a non-cash item arising on the consolidation of a dormant overseas subsidiary inherited with LMS, the scale of which has been caused by the rapid deterioration of sterling against the dollar. It has little impact on net assets as there is a similar amount credited direct to reserves. Notwithstanding a tax credit, diluted recurring earnings per share were 22.73p compared with 34.99p in 2007.
Dividend
The directors are recommending a final dividend of 16.35p per share of which, as a REIT, 10.0p per share will be paid as a property income distribution (PID). This, together with the interim dividend of 8.15p per share, makes a total for the year of 24.5p, an increase of 8.9% on the 22.5p per share paid in respect of 2007. The total dividend paid as a PID for the year will be 15.0p per share. The final dividend will be paid on 19th June 2009, to those shareholders on the register on 22nd May 2009. Going forward, the board is committed to at least maintaining the current level of dividend, with a view to returning to a progressive dividend policy when the markets improve.
Market review and activity update
The consequences of the weakening economy have been felt across the central London occupier market and deteriorating tenant activity has filtered through into increased vacancy rates, below average take-up, rental declines and greater leasing incentives. Against this backdrop, the group has performed well, delivering strong lettings, renewals and reviews and reducing the amount of vacant space.
As a group, we concentrate our ownerships in the West End and surrounding villages where there is a more diverse tenant base and lower exposure to the financial sector than in the City and Docklands. Together with limited existing and future supply, this has, to date, seen the West End weather the downturn better and should provide a degree of resilience in the future.
During the year, the main objective of our asset management team was to capture the reversionary potential of the portfolio through lettings, rent reviews and lease renewals. By the end of the year, these had added £16.2 million to gross property income.
The group's letting achievements demonstrate that the middle market rents in our central London locations remain attractive to tenants, albeit they are not immune to the overall downward pressure. Lettings of 45,300m² of space were made during the year which will ultimately generate rents of £16.3 million per annum. The principal letting was the 13,000m² pre-let to Cancer Research UK at Angel Building, Islington. It is notable that in a weakening economy, over 75% of these lettings were made in the second half with 29% in the final quarter.
We were also successful in retaining tenants within our portfolio through the quality of our space and management's close relationship with them. In the period, approximately 10% of the portfolio's rent roll was subject to break options or lease expiries. Of this income, 81% was retained or re-let. This performance was achieved through intense management of a portfolio with a low average passing rent of £266 per m² (£25 per sq ft). This is a parameter that has always been a cornerstone of our business. It provides protection in a down market and upside opportunity for when the market recovers. Following this activity, space available to let at the year end was 3.8% of rental value (last year 4.5%) and 4.0% of the group's total floor space of 520,400m². This compares to CB Richard Ellis's published rate for central London of 5.3%.
To date, we have experienced negligible tenant default. Throughout the year, we collected, on average, 97% of the rents within 14 days of the quarter day, with the December quarter only marginally lower at 96%.
As part of our portfolio management, the disposal of non-core properties realised a total of £72.6 million, £1.2 million above the December 2007 book value.
Expenditure on strategic acquisitions totalled £32 million in the year, predominantly to facilitate future schemes in Fitzrovia. In addition, capital expenditure of £73 million was incurred, principally on our schemes at Angel Building, Arup II, Fitzrovia and Horseferry House, Victoria. The latter two schemes were completed during the year.
In the current climate, we have restricted our development exposure to three main projects; Angel Building, Gresse Street and Arup III. This programme has been substantially de-risked as, overall, we have pre-let nearly 60% of the space. Capital expenditure to complete these projects is £70 million in 2009 and £25 million in 2010. Where we have delayed schemes, the properties remain income producing and the group retains control over the timing of future development.
Three important planning permissions for future schemes were obtained during the year which, if developed, would add 37,900m² of additional space to the portfolio.
Finance
Despite the lack of liquidity in the financial markets, three bank facilities, totalling £253 million, have been renewed in the last twelve months, including a £125 million loan that was due for repayment in November 2009. This shows the benefit of the long term relationships that have been established with the group's banks. There are no further debt maturities until December 2011.
Prospects
We believe the economy will contract throughout 2009 and possibly into 2010 and the lack of financial liquidity will remain a major issue. We are cognisant of the challenges this presents and expect there to be continued downward pressure on rental levels and capital values with little improvement in the investment market. In response to these unparalleled market conditions, we will continue to focus on financial and asset management and to use our extensive experience of the London villages to maximise revenue.
This approach, combined with our financial strength, gives us confidence that we will emerge from this challenging period in a position to take advantage of opportunities that arise as the market recovers.
R. A. Rayne
17th March 2009
Business review
Introduction
Derwent London is a real estate investment trust that owns and manages a £2.1 billion commercial property portfolio. Its marketplace is central London and, in particular, the West End where 74% of the group's assets are located. Our business model is well established. Firstly, we acquire income producing office buildings that offer the potential for regeneration. Secondly, these properties are improved over a number of years through refurbishment or redevelopment. Thirdly, capital is recycled with the disposal of the more mature assets. The group is led by an experienced management team that has steered the business through a number of economic cycles.
A particular focus for the group, in operating a 520,400m2 portfolio with nearly 1,000 tenancies, is to adopt a creative asset management approach. Our strong property expertise and close tenant relationships are fundamental in maximising income and minimising voids - a priority in the current environment. In addition, by applying innovative office design solutions to our projects, we have gained a strong reputation for delivering first class, award-winning space that is both attractive and, yet importantly, competitively priced. It is through the application of this strategy that we seek to generate above average total returns to shareholders. Whilst our total property return was -18.9% in 2008, this was an outperformance against the IPD Central London Office Index of -23.5%.
Our market
After sixteen years of economic prosperity, the UK economy deteriorated rapidly in 2008, ending the year in a recession that looks set to be deep and prolonged. Although the current economic crisis originated in the financial market, its problems have spread to the wider economy with all sectors now feeling the pain of the economic slowdown. Accordingly, business confidence is low, unemployment is rising and the financial markets remain extremely fragile. London, which plays an important role in the UK economy by generating over 19% of the national GDP, felt the early impact of the downturn due to its dependence on the financial sector. In particular, this was evident in the City of London and Docklands due to their reliance on national and international financial organisations. Approximately 58% of the capital's office space is located in these areas.
The consequences of the weakening economy were felt across the central London occupier market and, by the year end, the deteriorating tenant activity had filtered through into increased vacancy rates, below average take-up, rental declines and greater leasing incentives. According to surveyors CB Richard Ellis (CBRE), the central London office vacancy rate increased from 3.0% to 5.3% during the year. By sub-area, the West End's vacancy rate increased from 2.3% to 5.1% whilst the City's increased from 3.5% to 7.1%.
As a group, we concentrate our ownerships in the West End where there is a lower exposure to the financial sector compared to the City and Docklands. To date, the West End has weathered the downturn better due to its broader tenant base and more limited office supply. This was reflected in our strong letting activity, which totalled 45,300m2 in 2008, with a further 9,700m² either let or under offer since the year end - an excellent achievement in the current market.
In the investment market, the lack of financial liquidity and the deteriorating economy have led to increased pressure on occupiers, a weakening of rents and a slowdown in activity. After peaking in mid-2007, capital values across the UK, irrespective of the sector, have seen substantial declines, falling in the region of 35% to December 2008. By turnover, central London office investment transactions in 2008 were down 58% from 2007, at £7.4 billion. Whilst the dramatic reductions in the base rate since October have provided a stimulus to the market by making property yields more attractive, until funding availability in the lending market returns, investment activity will remain limited.
Outlook
The economic outlook for the next few years is extremely challenging, with GDP estimated to decline in the region of 3.0% in 2009 and 1.0% in 2010. Consequently, in both our market and across the UK, occupier demand will weaken, leading to increased vacancy rates, whilst the investment market will remain constrained. Surveyors Jones Lang LaSalle forecast that by the end of 2010, vacancy rates will have risen to around 8% in the West End and 14% in the City. In these operating conditions, the group will continue to liaise closely with its tenants to keep voids to a minimum whilst maximising cashflow. In respect of our developments, we are completing our current projects and have reduced our development risk by pre-letting 57% of the proposed floorspace. New projects are on hold until the market improves. These future projects involve buildings from within our portfolio that are currently income producing, and we will manage them for cashflow retention whilst retaining their long-term development flexibility.
We expect that our main operating area, the West End, will prove more resilient than the City due to its greater tenant diversification and limited existing and future supply. In addition, the characteristics of our portfolio such as its low average rent (£266 per m2), a modest vacancy rate (3.8%) and broad tenant range, should provide a degree of defence for the future. Our income stream is strong, with an average unexpired lease length of 8.3 years, and our competitively priced, high quality product, aimed at the middle rental market (£400-£600 per m2), is well placed to attract the limited number of tenants in the market.
Property review
Valuation commentary
We entered the year under review with the property investment market experiencing difficult and deteriorating conditions as the financial crisis, which started in mid-2007, deepened and spilled over into the general economy. The outcome was a downward economic spiral that put the UK firmly in recession by the end of 2008.
One of the consequences was a virtual cessation of debt availability in the second half of 2008, a key source of finance for the commercial property market. With this restriction, and the weakening outlook for tenant demand, it was inevitable that investment turnover would drop. As a result, valuation yields increased and property values declined.
It was against these severe economic conditions that our investment portfolio was valued at £2.1 billion at the end of December 2008. This produced a valuation deficit for the year of £597.1 million, before lease incentive adjustments of £5.0 million. The valuation of properties held throughout the year, excluding development properties, was £1,976 million and showed a £543.6 million valuation deficit. The development properties, which principally comprise the Angel Building, Arup Phase III and 16-19 Gresse Street, were valued at £107 million, a decrease of £46.9 million over the year. Whilst 57% of these schemes, by floor area, are pre-let, the valuation decrease was a result of the general uncertainty over the rental levels achievable and the likely timeframe for letting the remaining space. The balance of the portfolio, at £25 million, comprises the acquisitions made during the year. These decreased by £6.6 million, as a result of the acquisition costs being written off and the increase in valuation yields. However, these properties will facilitate long-term development opportunities being adjacent or near to existing holdings. The portfolio's underlying valuation movement during the year was a decrease of 22.1% against a 4.3% increase in the previous year. This continued the group's outperformance of the IPD Central London Offices Capital Growth Index of -27.0% (2008) and -3.1% (2007).
Our focus is the West End, where 74% of the portfolio is located. Here, values declined by 22.1% and, not surprisingly, none of our operating villages were immune as valuation yields moved out and rental values declined. We have no holdings in the City core but prefer to concentrate on the City border locations, such as Holborn and Clerkenwell, due to their more diverse tenant base. These properties represent 20% of the portfolio and decreased in value by 23.9% during the year. The balance of the portfolio at 6% is situated in provincial locations, principally Scotland, and these decreased in value by 15.6%.
The portfolio's estimated rental values increased by 1.3% in the first half of the year before decreasing by 4.6% in the second half. The annualised figure was a decline of 3.4%. Our low average and middle market rental values proved much more resilient than the prime rental areas of the West End which saw double digit rental falls over the year.
Whilst rental and capital values declined, our letting and portfolio management activities added income to the portfolio. This combination increased the portfolio's initial yield, based upon the annualised contracted rent and after rent free periods, to 6.0% at 31st December 2008, compared to 4.4% a year before. Upon letting our available space, the yield will rise to 6.3% and ultimately to 7.6% upon full reversion. The portfolio's true equivalent yield was 7.1% at the year end, an increase from 5.7% at the start of the year and 6.1% at 30th June 2008.
The group's total property return for 2008 was -18.9%, driven by the downward valuation movements. However, this outperformed the comparator benchmark, the IPD Central London Office Index, which recorded a -23.5% return.
Lettings
In what was a challenging letting market, with tenants becoming increasingly cost and commitment conscious, we adopted a pragmatic letting policy in both pricing and lease terms. This strategy delivered 82 leasing transactions during the year, totalling 45,300m2, including a number of scheme pre-lettings. The combined rental income from these lettings was £16.3 million per annum, of which £9.3 million was from space that was not income producing at the start of the year. The difference was principally at the Angel Building, as we still receive £4.2 million per annum from BT. Our letting activity was almost double the £8.3 million in 2007. More importantly, 29% of our lettings by floorspace were in the final quarter of 2008, demonstrating the demand in these markets for our particular brand of high quality, good value space.
A significant proportion of the transactions during the year were pre-lets, substantially reducing our development risk, whilst a number were short-term lettings to accommodate our future development aspirations - North Wharf Road, City Road Estate and Wedge House. Overall, lettings were 6.6% below the valuer's estimated rental values at December 2007. However, after excluding short-term development lettings that were carried out at reduced rents to retain lease flexibility, the rental values were 2.3% above valuer's estimates.
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Angel Building, Islington - Early in 2008, we undertook a pre-letting strategy at this major 24,400m2 project. The outcome was one of the largest central London lettings of the year as 13,000m2, over half of the building, was let to Cancer Research UK on a 20-year term with a 24 month rent free period and a break option at year 15. The rent is £5.6 million per annum with the main space achieving £441 per m2. The building is due for completion in summer 2010.
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Qube, Fitzrovia - In 2008, a total of 4,100m2 of office and retail space was let at an annual rental income of £2.3 million. The office lettings were to architects HOK International who took 2,500m2 at a rent of £1.3 per million annum (£603 per m2 on the prime space) and to Geronimo Communications, part of the Tribal Group, who leased 1,100m2 at £0.7 million per annum (£624 per m2). Retail lettings were to Space NK and Tossed. By floorspace, 59% of the Qube was let at the year end. A further 37% is now either let or under offer.
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Gordon House, Victoria - This building has undergone a phased refurbishment with 1,500m2 completed in 2008, including the addition of a new penthouse office floor. The entire space was pre-let to The Benefit Express at an annual rental income of £0.9 million (£619 per m2), which set a new rental level in the building.
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151 Rosebery Avenue, Clerkenwell - Whilst under refurbishment, we pre-let five of the six office floors (1,800m2) to Momentum Activating Demand at £0.7 million per annum, which equates to £431 per m2.
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Tea Building, Shoreditch - Following the granting of planning permission to transform a redundant element of this building into a 25 bedroom boutique hotel, we pre-let the space to Soho House at an annual rent of £0.3 million. This mixed-use building has already become a local landmark and this letting will further strengthen its status in the area.
With this activity, and our pro-active asset management, the group's immediately available space reduced from 4.5% to 3.8% during the year. This remains substantially lower than our KPI's upper limit of 10%. By floor area, the group's year end vacancy rate was 4.0%, below CBRE's published rate for central London of 5.3%. However, with the completion of our Gresse Street development later this year, and the Angel Building in 2010, we expect the amount of available space in the portfolio to rise over this period. As an indication, when complete, these two projects could potentially increase the rate to 8.2% by rental value or 7.0% by floor area. To manage the exposure from the completion of our current projects, we have initiated pre-marketing campaigns and are in discussions with a number of potential occupiers.
Portfolio management
Key characteristics of the Derwent London portfolio are low average rents, a diverse tenant mix and an average unexpired lease length of 8.3 years. At the year end, the average rent of our central London portfolio was £275 per m2, with the West End at £281 per m2 and the City borders at £261 per m2. These are important defensive attributes in the current economic climate.
To illustrate our diverse profile of tenants' business sectors, at the year end 40% of the portfolio's contracted rental income was from professional and business services, 22% from media and 16% from retail and leisure. The financial sector accounted for 7% of income with another 7% from government and public administration. By rental income, our ten principal tenants were Arup, the Government, Burberry, Saatchi & Saatchi, BT, Thomson Reuters, Pinsent Masons, MWB Business Exchange, BBC and Jupiter Investment. These occupiers represented 35% of the portfolio's income at the year end. In total, we have 49 tenants paying in excess of £0.5 million per annum of which 23 are paying over £1.0 million. As part of our letting process, we critically assess the covenant strength of all potential new tenants and regularly monitor the financial health of the existing tenant base.
The focus for our asset management team in 2008 was to capture the reversionary potential of the portfolio through rent reviews and lease renewals. Their extensive local knowledge and experience, combined with a strong working tenant relationship, have enabled us to maintain a high occupancy rate and generate additional income. For example, of the 96 tenant break options during the year, 88% of tenants by rental income did not exercise their option and, of the balance, 48% of the space has already been re-let.
Of the 103 lease expiries during the year, 43 renewals were completed on 13,100 m2 of space achieving a rental income of £4.0 million per annum. These renewals were 26% above the previous rent and were in line with the valuers' estimated rental values at the beginning of the year. Of the remainder, 25 renewals are in the process of being concluded and 35 tenants vacated. Of the vacated space, 34% has since been re-let. In addition, 94 rent reviews were settled, producing an 18% increase over the previous rent and adding £4.0 million to the group's contracted rent roll. These were also in line with the valuers' estimated rental values at December 2007.
Examples of notable asset management activity included:
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1-3 Grosvenor Place, Belgravia - As part of our long-term strategy for the redevelopment of this building, together with our adjacent 4-5 Grosvenor Place, we negotiated the surrender of Hanson's lease. The tenant occupied 6,900m2 of offices at a low rent of £202 per m2 and, whilst the group paid £8.0 million plus costs for the surrender, our income was enhanced by £1.2 million per annum from the under-tenants who occupied 75% of the building. Of the remaining space, we subsequently let 700m2 at £0.4 million per annum and the balance is under offer.
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80 Charlotte Street, Fitzrovia - We concluded a major, March 2008 rent review with Saatchi & Saatchi, involving 15,100m2 of office floorspace. The rent was highly reversionary and we achieved a 45% uplift to £4.6 million per annum.
An important aspect of the business is managing our income collection and this is monitored closely to assess the health of our tenants. This is one of the group's KPIs, whereby at least 95% of rent should be collected within 14 days of the quarter day. Despite the deteriorating economic conditions, there has been little change in our collection profile. In 2008, an average of 97% of rent was received within 14 days of the quarter day. The number of tenants defaulting continued to be de minimis.
At the year end, the group's annualised net contracted rental income was £126.4 million. The valuers' estimated rental value of the portfolio was £167.8 million, indicating a £41.4 million reversion, equivalent to a 33% uplift. This has reduced from 47% in 2007 as a result of lettings and lease management activities, which have increased the rental income and crystallised reversions, and due to rental values declining over the year.
Of the potential reversion, £6.4 million was from immediately available space of which the majority comprised Qube (£2.5 million), Strathkelvin Retail Park (£1.0 million) and Portobello Dock (£0.8 million). There was a further £16.4 million from our refurbishments and developments, such as 16-19 Gresse Street and the Angel Building. The balance of the reversion (£18.6 million) was from future rent reviews and lease renewals. With rental values likely to decline during 2009, this reversion will decrease. However, £3.1 million is secured through contracted fixed increases under existing leases.
Over the next two years, 14% of the group's contracted rental income is subject to lease expiries, rising to 21% when tenant lease breaks are included. Within these figures, 3% is attributable to the BT income at the Angel Building which is receivable until March 2010 and which will be replaced by rent from the Cancer Research letting.
Disposals and acquisitions
Following our timely and substantial sales programme in 2007, which generated £343.5 million, disposals in 2008 were more modest at £72.6 million, after costs. They continued our policy of disposing of non-core assets, principally smaller properties or those in provincial locations. Overall, these were concluded at a profit of £1.2 million. With a rental income of £3.2 million per annum they reflected an exit yield of 4.4%.
The principal disposals were retail assets in Southampton and Bournemouth for £18.6 million and £10.3 million respectively, and the £12.3 million sale of the vacant residential element of Portobello Dock.
Purchases during the year were limited to £31.9 million, after costs, with an income of £1.5 million per annum. With the downward pressure on values, we tailored our purchases to those that were of strategic importance to the portfolio such as those adjacent to or nearby existing ownerships. For example, in Fitzrovia, where 23% of our assets are held, we acquired 53-65 Whitfield Street for £14.1 million after costs. At Gresse Street, Noho, we completed a lease re-gear and property exchange that expanded our ownership in the area and enabled us to improve the immediate surrounds of this current development.
For the year ahead, unless there is an easing in the credit markets, our disposal programme is likely to be restricted. However, the Astoria on Charing Cross Road, and 17 Oxford Street were compulsory purchased in January 2009 as part of the Crossrail project. We remain involved with the future redevelopment through a buy-back option of this site. We have received interim proceeds of £14.4 million from the sale, with the final payment subject to formal valuation which is underway. On the acquisitions side, the continued pressure on capital values may create interesting buying opportunities for the group although our approach will be cautious.
Development
During the year, capital expenditure totalled £73.0 million compared to £61.0 million in 2007. Completion of Arup Phase II and Horseferry House, both of which are fully let, and Portobello Dock accounted for £26.1 million of this.
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Arup Phase II, Fitzrovia - In the heart of our Fitzrovia holdings is this new 5,300m2 development, an important addition which has improved the location. It was completed in April 2008 and handed over to the tenant, Arup. They entered into a 25-year lease with no breaks at a rent of £2.4 million per annum which equates to £453 per m2.
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Horseferry House, Victoria - The comprehensive 15,200m2 office refurbishment and remodelling of this 1930s building was completed in May 2008. Burberry pre-let the property as their global headquarters, signing a 25-year lease with a break option at year 15. The annual rent of £5.3 million per annum equates to £411 per m2 on the prime space.
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Portobello Dock, Ladbroke Grove - This mixed use 6,400m2 canal-side project was completed in May 2008. The residential element of the scheme was pre-sold at the beginning of 2008 and several of the office suites have been let. Marketing continues for the remainder of the space although lettings have been slower than anticipated.
Of the remainder, £23.7 million was invested in our current projects and further details are set out below. The balance of the capital expenditure, £23.2 million, was for smaller refurbishment projects such as those at Gordon House and 151 Rosebery Avenue.
Development pipeline
Whilst the commencement of new projects is on hold, our strategy is to retain future flexibility at these buildings through our leasing structure, as many offer the opportunity for regeneration and substantial floor area increases. Meanwhile, we will continue to evaluate our appraisal studies as the planning process is complex and can take a number of years.
To enable us to plan our development timings, thereby managing our exposure and risk, our development pipeline is categorised into three specific stages.
1 Current projects: Schemes that are committed and construction is underway
In 2008, we continued work at our Gresse Street development and commenced construction at the Angel Building and Arup Phase III, providing a total floorspace of 36,700m2. Of this, 20,900m2 is pre-let at an income of £9.2 million per annum. Approximately £99 million of capital is required for their completion. This commitment is spread out over the next three years with £70 million anticipated in 2009, £25 million in 2010 and the balance in 2011.
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Angel Building, Islington - After receiving planning permission in February 2008 for a comprehensive refurbishment and extension, construction work commenced in June. The project increases the building's floor area by 62% to 24,400m2. Cancer Research UK has pre-let 13,000m2 at £5.6 million per annum. During the development period, the non-occupying tenant, BT, will continue to pay a rent of £4.2 million per annum. This commitment is until March 2010, thereby mitigating substantial holding costs, and ties in with the scheduled completion in summer 2010.
-
Arup Phase III, Fitzrovia - The 7,900m2 new build development adjoins Phase II and is due for completion at the end of this year. The building will provide first class accommodation and, with its enterprising design, we are targeting a BREEAM Excellent rating. Like Phase II, it is pre-let to Arup on a 25-year lease with no breaks. The tenant currently pays an annual rent of £1.2 million for Phase III whilst construction is underway and this will rise to £3.6 million at completion.
-
16-19 Gresse Street, Noho - A mixed-use scheme, located just off Oxford Street. We are developing a 4,400m2 office building, and converting a nearby building to residential accommodation. These are due for completion this autumn. This project is a good example of our regeneration work. We have taken a neglected, yet central area, and are transforming it into a stylish and lively destination with attractive public space.
2 Planning consents: Schemes where planning permission has been granted but the project is not committed
During the year, four important planning consents were obtained: North Wharf Road; the Angel Building; 40 Chancery Lane; and City Road Estate. These are in addition to our existing consents at Wedge House, The Turnmill and Leonard Street. With the commencement of the Angel Building project, and its movement from this category into current projects, schemes with planning permission at the year end totalled 80,400m2, equating to a 154% floorspace uplift. This potential increase will provide an important source of value creation in a more favourable market. The existing buildings are valued at £86.3 million and produce an annual rental income of £4.2 million. They are 86% occupied and have a low average passing rent of £175 per m2. These are key features of our development pipeline, whereby the existing properties provide a valuable source of rental income for the group.
3 Appraisal studies: Project studies where planning and viability assessments are underway
Whilst clearly not at the forefront of our current strategy, it is important that we selectively advance our key appraisal studies. We are limiting our capital expenditure to initial architect studies and planning negotiations. However, this expenditure is flexible and can be easily adjusted depending on market conditions. The existing buildings remain income producing whilst studies progress. Ultimately, these could be some of our most significant developments over the next decade. Of current importance is our Charing Cross Road ownerships. These form part of a new Crossrail and underground transport interchange and we are working on a masterplan with Crossrail for this major regeneration project. A planning application is likely to be submitted later this year.
Finance review
While the group's results are prepared in compliance with International Financial Reporting Standards, as adopted by the European Union (IFRS), and the accounting policies set out in the notes to the accounts, the investment community traditionally makes a number of adjustments to the key IFRS figures. The board also uses these adjusted figures because it believes they give a more meaningful reflection of the group's performance. Consequently, they are referred to in this review.
Results commentary
Net assets per share
The adjusted net asset value per share attributable to equity shareholders was 1,226p at 31st December 2008, compared with 1,801p at the previous year end. The reduction of nearly 32% is principally due to the fall in value of the investment portfolio. As shown in the group income statement, this amounted to £602.1 million with a further deficit of £1.3 million reported in the joint ventures' results. The extent of the fall in value can be attributed to the effect of the financial crisis on fully valued real estate, and the subsequent impact of a deteriorating global economy. A fuller explanation of the valuation movements has been provided earlier in the business review. At 31st December 2008, adjusted net assets, excluding minority interests, were £1,235.8 million compared with £1,813.8 million at the 2007 year end. A reconciliation of the adjusted net assets to the balance sheet total is provided in the notes to the accounts.
Loss before taxation
The group income statement for the year ended 31st December 2008 shows a loss before tax of £606.5 million which compares with a loss in 2007 of £99.8 million. While the 2007 loss can be attributed to the write-off of goodwill of £353.3 million associated with the acquisition of London Merchant Securities (LMS), the 2008 loss, as noted above, can be predominantly attributed to the group valuation deficit of £602.1 million. In 2007, the group reported a net valuation surplus for the year of £90.3 million, although the downward trend had been established in that year with a deficit of £152.9 million being recorded in the second half. In 2008, the loss before tax was exacerbated by an adverse movement in the year end fair value of the group's interest rate hedging derivatives of £28.1 million. This was caused by the rapid fall of interest rates in the last quarter of the year as the Bank of England sought to stimulate the economy. This took interest rates well below the 10-year average rate and below the rates at which the group was hedged. Further information on the use of derivatives as a protection from the risk of interest rate movements can be found later in this review.
While the loss of £606.5 million is the headline figure, the board monitors the recurring profit before tax. For the current year, this was a profit of £23.3 million against the 2007 comparable figure of £38.0 million. The reduction in profit of £14.7 million can be broadly explained by two large items charged against income. The first of these is the £8.3 million reverse surrender premium reported at the interim stage. This was paid to a tenant to gain control of a building which forms part of an important site that has future development potential. It was an opportunity to protect the prospective value of this particular site, and it is not anticipated that a payment on such a scale will be repeated over the medium term. The second item, which is included in finance costs, is the foreign exchange loss that arises from the translation into sterling of the dollar denominated, inter-company loan of the now dormant, LMS Inc. This amounted to £8.3 million and compares with a profit of £0.4 million in 2007. It is a non-cash item and has little effect on the net asset value because a similar amount, arising from the translation of equity, is credited directly to reserves. Both of these currency adjustments arose due to the sharp deterioration in the value of sterling against the dollar towards the end of 2008. The dormant company will be wound up as soon as various technical, mainly tax related, matters are resolved. Until this time, and as long as the sterling exchange rate fluctuates significantly against the dollar, these foreign exchange profits or losses will continue to feature in the group income statement. If both these charges against income were to be added back, the resultant recurring profit would be £39.9 million, an increase on 2007.
Nonetheless, the results from the underlying business are encouraging. Gross property income rose £7.3 million year on year to reach £119.0 million in 2008. The main drivers of this growth were lettings which added £12.3 million to 2007's total, and rent reviews which likewise provided £3.9 million. The group announced several lettings during 2008, details of which have been included in this review. The other year-on-year reconciliation items are: the absence of a surrender premium received in 2007 (£4.2 million); an increase in rent foregone at vacant space (£5.2 million); and a net increase in rent from acquisitions, including the extra month from LMS properties, and disposals (£0.5 million). Although property expenditure rose £4.7 million to £14.6 million, £2.1 million of this was the increase in fees associated with the letting, lease renewal and rent review activity, the benefits of which will flow through in future years. The only other major increase in property expenditure over 2007, which amounted to £2.3 million, related to costs associated with the vacant space, including that which is or has been subject to refurbishment or redevelopment. In an actively managed portfolio, the group will always have an element of void space. Not surprisingly in the current environment, the group's trading stock declined in value by £2.0 million. Further falls in value can be expected in line with that of the main investment portfolio.
Following the restructuring after the LMS acquisition, administrative costs have fallen £1.2 million from £19.5 million in 2007 to £18.3 million, with savings across all the major expense categories. At the time of the LMS acquisition at the beginning of 2007, the overheads of the combined group were approximately £20.2 million. Even if no allowance is made for two years' worth of inflation, overheads in 2008 were about £1.9 million lower than that, which reflects the synergies achieved after the integration was completed in the latter half of 2007. All the figures referred to here exclude the valuation adjustment to cash-settled share options over which the board has no direct control. This was a surplus of £1.6 million in both 2007 and 2008.
Net finance costs of £47.2 million, excluding the foreign exchange loss referred to earlier, were only £0.5 million above the equivalent figure for 2007. Although interest rates are currently at historically low levels, the main corporate borrowing rate, three month LIBOR, was considerably above these rates for the first nine months of the year. In spite of increased debt levels referred to later, the group's fixed and hedged debt, together with extensive use of the group's non-LIBOR facilities which attracted lower interest rates, provided considerable protection from the high rates. However, the group does not receive the full benefit of the recent fall in rates due to its fixed and hedged interest rate position.
There remains just two more items on which to comment in respect of profits. Following valuation of the Telstar development, which was managed on behalf of the Prudential, and the agreement of all the development costs, the group is able to report a further profit of £0.5 million in 2008. This makes a total profit of £14.1 million from the development management contract and the full amount of this was received during 2008. The second item is the profit on disposals. Immediately after the LMS acquisition and before property values softened, the board instituted a sales programme which led to in excess of £350 million of disposals and a realised profit of £130.8 million. In last year's more challenging times, disposals totalled £73 million with only a small net profit being achieved but, with values falling sharply during the year, this should be seen as a creditable achievement. Finally, the absence of all the adjustments associated with the LMS acquisition has simplified the 2008 group income statement.
Taxation
Derwent London converted to a REIT in 2007, the effect of which is that much of its income is exempt from taxation. However, there are always likely to be items outside the REIT ring fence on which tax will be payable. In 2008, the tax charge amounted to £1.4 million. Utilisation of tax losses within the LMS group, and over-provisions in prior years, generated a tax credit of £7.1 million which, with a write back of deferred tax due to the revaluation deficit, lead to a net tax credit for 2008 of £9.3 million.
Recurring earnings per share
As with profit before taxation, the most useful measure is to calculate this on a 'recurring' basis. A reconciliation of the various earnings per share figures can again be found in the notes to the accounts. Despite the tax credit, recurring earnings per share mirrored the recurring profits trend and were 22.83p for 2008 compared with 35.14p for the previous year.
Cash flow and debt
The net cash outflow from operating and investing activities was £60.2 million, which rose to £83.7 million after payment of dividends to shareholders and minority interests. This compares with an inflow in 2007 of £116.9 million which arose due to the aforementioned high level of property and investment disposals that year. In 2008, the group capital expenditure was £72.9 million, a small increase on last year's £68.3 million, while acquisitions of investment properties fell by £108.8 million to £31.9 million. This reflects both the lack of suitable opportunities coming on to the market and our caution in the current economic climate. Likewise, property disposals declined from £343.3 million to £72.6 million so that there was a net investment in the portfolio in 2008 of £32 million. A major one-off payment in the year was the entire REIT conversion charge of £53.6 million, which accounted for 64% of the total cash outflow referred to above.
Due to the cash outflow, the balance sheet net debt rose to £865.4 million at 31st December 2008 from £782.8 million at the same date in 2007. With falling asset values and increased debt, balance sheet gearing increased from 42.5% at the 2007 year end to 71.2% at 31st December 2008. Property gearing - effectively a group loan to value ratio - was 39.7% at December 2008 compared with 28.2% in 2007.
The last of the three important gearing figures, the interest cover (profit and loss gearing), was 1.88 in 2008 against 1.81 for 2007, slightly above the KPI benchmark figure of 1.80. However, this ratio has been redefined for 2009 onwards in order to remove the increasing number of valuation and other adjustments that had to be made to calculate the ratio as originally intended. The new definition is designed to show, on a group basis, a ratio similar to that which is included in many of the group's security specific bank covenants. The redefined figure for 2008 is 2.47 against a recalculated rate for 2007 of 2.24.
Financing
Last year proved to be an extraordinary period in the financial markets. A number of banks ceased business or had to be rescued by national governments around the world. The impact of this for borrowers is the paucity of new bank facilities as, globally, banks seek to reduce their lending to restore capital ratios, and reduce exposure to sectors including real estate. Successive interest rate cuts have done little to alleviate this position. This lack of liquidity in the financial markets is a major concern, and a key risk for corporates generally. The company, as expected, has benefited from the long-term relationships it has established with its banks, and in the last 12 months has been able to renew all of its maturing facilities. This includes the £125 million facility that was due for repayment in November 2009, the replacement facility for which was approved by the bank's credit committee in March 2009. Once the documentation is signed, the group will have no further debt maturities until December 2011. The three facilities that have been renewed total £253 million but the price of renewal has been higher margins and shorter terms than those of the maturing loans. Renewal of these loans demonstrates the banks' support for the group and its covenant position. All the financial covenants are security specific, except for those of one small unsecured loan, and therefore do not include corporate ratios such as balance sheet gearing. Based on the December 2008 valuation, the debt facilities are secured for amounts in excess of current drawings to the point that the group is able to draw all but £2 million of its unutilised facilities without charging further security. In addition, unsecured properties have a value in excess of £400 million at that date. The group needs a minimum security value of £1.58 billion to fully draw its £1.135 billion of committed facilities. This compares with the year end portfolio value of £2.1 billion. There is a further security cushion in that the current estimate of the group's cash requirements through to December 2010 shows that only £900 million of the committed facilities at December 2008 are required to fund the group over this period.
While the group's current financial position is sound, the board will continue to closely monitor its future debt requirements, portfolio values, debt covenants and the availability of finance during this period of economic turbulence. Interest covenant management is not an issue with interest rates at current levels, and the interest cover of 2.47 demonstrates the group's ability to pay its interest. A diverse tenant base, and the ability to hedge at low rates, helps to protect this position.
Liability risk management
Although base rate currently stands at 0.5%, it began 2008 at 5.50% with the three month LIBOR, which is most commonly used by companies as a basis for borrowing money, higher than that. It was a feature of 2008 that, as banks became increasingly concerned about each other's financial stability, the LIBOR showed a considerably higher divergence from base rate than has historically been the case. While the gap has narrowed in the last quarter, the volatility of interest rates in 2008 shows why this is one of the main financial risks to which the group is exposed. Therefore, in addition to the fixed rate debt, interest rate derivatives will continue to be used to protect the group against such movements despite the fair value adjustments that appear in the group income statement. Board policy provides flexibility in the amount of interest rate hedging that can be undertaken, as the total of fixed debt and that fixed using derivative instruments can fluctuate between 40% and 75% of the total nominal value of debt, excluding leasehold liabilities. At present 70% of such debt is covered, and the spot weighted cost of debt is 4.5%.
As indicated above, derivatives are fair valued at each reporting date and the movement in value over the period is reported in the group income statement. As a result of the steep decrease in interest rates in the final quarter, the charge for 2008 was £28.1 million, compared with £5.1 million for 2007. Under IFRS, changes in fair value of the £175 million secured bond are not required to be reported in this statement. The fair value adjustment for the bond at 31st December 2008 was a gain of £18.7 million (equivalent to 18.6p per share) compared with a loss of £15.0 million, equivalent to -14.9p per share, at December 2007. Upon acquisition of LMS, the bond had to be fair valued in accordance with IFRS 3, and the resultant amount included in the opening fair value balance sheet. This valuation is being amortised over the life of the bond and the residual amount remaining in the balance sheet at 31st December 2008 was £20.9 million (21p per share) compared with £21.6 million (21p per share) at the end of the prior year.
Directors' responsibilities
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets of the company, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and directors' remuneration report which comply with the requirements of the Companies Act 1985.
The directors are responsible for preparing the annual report and the financial statements in accordance with the Companies Act 1985. The directors are also required to prepare financial statements for the group in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRSs) and Article 4 of the IAS Regulation. The directors have chosen to prepare financial statements for the company in accordance with IFRSs.
Group financial statements
International Accounting Standard 1 requires that financial statements present fairly for each financial year the group's and company's financial position, financial performance and cash flows. This required the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the directors to:
-
consistently select and apply appropriate accounting policies;
-
present information, including accounting polices, in a manner that provides relevant, reliable, comparable and understandable information; and
-
provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.
The directors confirm to the best of their knowledge:
-
they have complied with the above requirements in preparing the financial statements which give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
-
the business review includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as whole, together with a description of the principal rules and uncertainties that they face.
Financial statements are published on the group's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the group's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.
On behalf of the Board
J.D. Burns, Chief executive officer C.J. Odom, Finance director
17th March 2009
GROUP INCOME STATEMENT
|
|
Note |
2008 £m |
|
2007 £m |
|
|
|
|
|
|
|
Gross property income |
4 |
119.0 |
|
111.7 |
|
Development income |
4 |
0.5 |
|
2.0 |
|
Other income |
4 |
0.9 |
|
- |
|
|
|
|
|
|
|
Property outgoings |
5 |
(14.6) |
|
(9.9) |
|
Reverse surrender premium |
5 |
(8.3) |
|
- |
|
Write-down of trading property |
5 |
(2.0) |
|
- |
|
|
|
_______ |
|
_______ |
|
Net property income |
|
95.5 |
|
103.8 |
|
|
|
|
|
|
|
Administrative expenses |
|
(18.3) |
|
(19.5) |
|
Movement in valuation of cash-settled share options |
|
1.6 |
|
1.6 |
|
Goodwill impairment |
25 |
- |
|
(353.3) |
|
Revaluation (deficit)/surplus |
|
(602.1) |
|
90.3 |
|
Profit on disposal of properties and investments |
6 |
1.2 |
|
130.8 |
|
|
|
_______ |
|
_______ |
|
Loss from operations |
|
(522.1) |
|
(46.3) |
|
|
|
|
|
|
|
Finance income |
7 |
1.7 |
|
2.8 |
|
Exceptional finance income |
7 |
- |
|
1.5 |
|
Finance costs |
7 |
(57.2) |
|
(49.1) |
|
Exceptional finance costs |
7 |
- |
|
(3.3) |
|
Movement in fair value of derivative financial instruments |
|
(28.1) |
|
(5.1) |
|
Share of results of joint ventures |
8 |
(0.8) |
|
(0.3) |
|
|
|
_______ |
|
_______ |
|
Loss before tax |
|
(606.5) |
|
(99.8) |
|
|
|
|
|
|
|
Tax credit |
9 |
9.3 |
|
200.7 |
|
|
|
_______ |
|
_______ |
|
(Loss)/profit for the year |
|
(597.2) |
|
100.9 |
|
|
|
_______ |
|
_______ |
|
Attributable to: |
|
|
|
|
|
Equity shareholders |
17 |
(586.4) |
|
97.0 |
|
Minority interests |
17 |
(10.8) |
|
3.9 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
(Loss)/earnings per share |
10 |
(581.99) |
|
100.55p |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Diluted (loss)/earnings per share |
10 |
(581.99) |
|
100.11p |
|
|
|
_______ |
|
_______ |
Group balance sheet
|
|
Note |
2008 £m |
|
2007 £m |
|
Non-current assets |
|
|
|
|
|
Investment property |
11 |
2,068.1 |
|
2,654.6 |
|
Property, plant and equipment |
12 |
1.2 |
|
1.4 |
|
Investments |
|
7.6 |
|
5.1 |
|
Pension scheme surplus |
|
1.0 |
|
2.8 |
|
Derivatives |
15 |
- |
|
1.2 |
|
Other receivables |
|
29.0 |
|
23.3 |
|
|
|
_______ |
|
_______ |
|
|
|
2,106.9 |
|
2,688.4 |
|
|
|
_______ |
|
_______ |
|
Current assets |
|
|
|
|
|
Trading property |
13 |
7.5 |
|
9.4 |
|
Trade and other receivables |
|
38.7 |
|
61.0 |
|
Cash and cash equivalents |
|
10.5 |
|
10.3 |
|
|
|
_______ |
|
_______ |
|
|
|
56.7 |
|
80.7 |
|
|
|
|
|
|
|
Non-current assets held for sale |
14 |
17.5 |
|
3.4 |
|
|
|
_______ |
|
_______ |
|
|
|
74.2 |
|
84.1 |
|
|
|
_______ |
|
_______ |
|
|
|
_______ |
|
_______ |
|
Total assets |
|
2,181.1 |
|
2,772.5 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Bank overdraft and loans |
15 |
(106.6) |
|
(120.6) |
|
Trade and other payables |
|
(47.6) |
|
(48.0) |
|
Corporation tax liability |
|
(7.1) |
|
(75.4) |
|
Provisions |
|
(0.2) |
|
(0.5) |
|
|
|
_______ |
|
_______ |
|
|
|
(161.5) |
|
(244.5) |
|
|
|
_______ |
|
_______ |
|
Non-current liabilities |
|
|
|
|
|
Borrowings |
15 |
(769.3) |
|
(672.5) |
|
Derivatives |
15 |
(26.9) |
|
- |
|
Provisions |
|
(1.2) |
|
(2.8) |
|
Deferred tax liability |
16 |
(7.2) |
|
(10.8) |
|
|
|
_______ |
|
_______ |
|
|
|
(804.6) |
|
(686.1) |
|
|
|
_______ |
|
_______ |
|
|
|
_______ |
|
_______ |
|
Total liabilities |
|
(966.1) |
|
(930.6) |
|
|
|
_______ |
|
_______ |
|
|
|
_______ |
|
_______ |
|
Total net assets |
|
1,215.0 |
|
1,841.9 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Equity |
17 |
|
|
|
|
Share capital |
|
5.0 |
|
5.0 |
|
Share premium |
|
156.2 |
|
157.0 |
|
Other reserves |
|
923.4 |
|
914.0 |
|
Retained earnings |
|
95.0 |
|
706.0 |
|
|
|
_______ |
|
_______ |
|
Equity shareholders' funds |
|
1,179.6 |
|
1,782.0 |
|
Minority interests |
|
35.4 |
|
59.9 |
|
|
|
_______ |
|
_______ |
|
Total equity |
|
1,215.0 |
|
1,841.9 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Adjusted net asset value per share attributable to equity shareholders |
19 |
1,226p |
|
1,801p |
|
|
|
_______ |
|
_______ |
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
|
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
|
(Loss)/profit for the year |
|
(597.2) |
|
100.9 |
|
Actuarial (loss)/gain on defined benefits pension scheme |
|
(2.1) |
|
1.3 |
|
Foreign currency translation |
|
8.2 |
|
(0.6) |
|
|
|
_______ |
|
_______ |
|
Total recognised income and expense relating to the year |
|
(591.1) |
|
101.6 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Equity shareholders |
|
(580.3) |
|
97.7 |
|
Minority interests |
|
(10.8) |
|
3.9 |
|
|
|
_______ |
|
_______ |
CHANGE IN SHAREHOLDERS' EQUITY
|
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
|
Total recognised income and expense relating to the year |
|
(580.3) |
|
97.7 |
|
Dividends paid |
|
(23.3) |
|
(13.2) |
|
Issue of shares |
|
- |
|
2.4 |
|
Premium on issue of shares |
|
- |
|
911.4 |
|
Share-based payments transferred to reserves |
|
1.2 |
|
0.3 |
|
|
|
_______ |
|
_______ |
|
|
|
(602.4) |
|
998.6 |
|
|
|
|
|
|
|
Equity attributable to equity holders of the parent company at 1st January |
|
1,782.0 |
|
783.4 |
|
|
|
_______ |
|
_______ |
|
Equity attributable to equity holders of the parent company at 31st December |
|
1,179.6 |
|
1,782.0 |
|
|
|
_______ |
|
_______ |
Group cash flow statement
|
|
|
2008 £m |
|
2007 Restated £m |
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
Cash received from tenants |
|
109.6 |
|
111.9 |
|
Development income received |
|
14.1 |
|
- |
|
Direct property expenses |
|
(22.8) |
|
(10.1) |
|
Cash paid to and on behalf of employees |
|
(10.3) |
|
(10.2) |
|
Other administrative expenses |
|
(5.9) |
|
(8.8) |
|
Interest received |
|
2.9 |
|
2.5 |
|
Interest paid |
|
(48.5) |
|
(53.4) |
|
Exceptional financing costs |
23 |
- |
|
(3.3) |
|
Tax expense paid in respect of operating activities |
|
(0.8) |
|
(0.2) |
|
|
|
_______ |
|
_______ |
|
Net cash from operating activities |
|
38.3 |
|
28.4 |
|
|
|
_______ |
|
_______ |
|
Investing activities |
|
|
|
|
|
Acquisition of investment properties |
|
(31.9) |
|
(140.7) |
|
Capital expenditure on investment properties |
|
(72.9) |
|
(65.1) |
|
Disposal of investment properties |
|
72.6 |
|
233.2 |
|
Capital expenditure on assets under construction |
|
- |
|
(3.2) |
|
Disposal of assets under construction |
|
- |
|
110.1 |
|
Purchase of property, plant and equipment |
|
(0.2) |
|
(0.2) |
|
Disposal of property, plant and equipment |
|
0.2 |
|
0.3 |
|
Disposal of investments |
|
- |
|
9.1 |
|
Distributions received from joint ventures |
|
- |
|
5.7 |
|
Payments in relation to joint ventures |
|
- |
|
(0.3) |
|
Purchase of minority interest |
|
(0.4) |
|
- |
|
Advances to minority interest holder |
|
(4.2) |
|
(14.3) |
|
Acquisition of subsidiaries (net of cash acquired) |
25 |
- |
|
(5.9) |
|
Payment of subsidiary's pre-acquisition expenses |
|
- |
|
(16.0) |
|
REIT conversion charge |
|
(53.6) |
|
- |
|
Tax expense paid in respect of investing activities |
|
(8.1) |
|
(11.0) |
|
|
|
_______ |
|
_______ |
|
Net cash (used in)/from investing activities |
|
(98.5) |
|
101.7 |
|
|
|
_______ |
|
_______ |
|
Financing activities |
|
|
|
|
|
Net movement in revolving bank loans |
|
86.2 |
|
(91.8) |
|
Repayment of non-revolving bank loans |
|
(28.0) |
|
(20.0) |
|
Drawdown of non-revolving bank loans |
|
56.8 |
|
28.5 |
|
Repayment of loan notes |
|
(28.8) |
|
(0.5) |
|
Redemption of debenture |
|
- |
|
(26.6) |
|
Net proceeds of share issues |
|
- |
|
0.1 |
|
Dividends paid to minority interest holder |
|
(1.0) |
|
- |
|
Dividends paid |
18 |
(22.5) |
|
(13.2) |
|
|
|
_______ |
|
_______ |
|
Net cash from/(used in) financing activities |
|
62.7 |
|
(123.5) |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents in the year |
|
2.5 |
|
6.6 |
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the year |
|
4.4 |
|
(2.2) |
|
|
|
_______ |
|
_______ |
|
Cash and cash equivalents at the end of the year |
|
6.9 |
|
4.4 |
|
|
|
_______ |
|
_______ |
Details of the restatement of the 2007 cashflow are given in note 23.
NOTES TO THE FINANCIAL STATEMENTS
|
1 |
Basis of preparation |
The results for the year ended 31st December 2008 include those for the holding company and all of its subsidiaries, together with the group's share of the results of its joint ventures. The results are prepared on the basis of the accounting policies set out in the 2007 annual report and financial statements with the addition of the two policies below.
Foreign currency translation
On consolidation, the assets and liabilities of foreign entities are translated into sterling at the rate of exchange ruling at the balance sheet date and their income statement and cash flows are translated at the average rate for the period. Exchange differences arising from the retranslation of long-term monetary items forming part of the group's net investment in foreign entities are recognised in the foreign exchange reserve on consolidation.
Transactions entered into by group entities in currencies other than the entity's functional currency are recorded at the exchange rate prevailing at the transaction dates. Foreign exchange gains and losses resulting from settlement of these transactions and from retranslation of monetary assets and liabilities denominated in foreign currencies are recognised in the group income statement.
Other income
Other income consists of commissions and fees arising from the management of the group's properties and is recognised in the group income statement in accordance with the delivery of services.
|
2 |
Significant judgments, key assumptions and estimates |
Some of the significant accounting policies require management to make difficult, subjective or complex judgments or estimates. The following is a summary of those policies which management consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements. These are the same policies identified at the previous year end and a full discussion of these policies will be included in the 2008 financial statements.
- Trading properties
- Trade receivables
- Exceptional items
- Investment property valuation
- Outstanding rent reviews
- Compliance with the real estate investment trust (REIT) taxation regime.
|
3 |
Segmental reporting |
During the year, the group had only one (2007: one) business activity, that being property investment, refurbishment and redevelopment. It operates only in the United Kingdom and the directors consider that all properties carry a similar risk profile.
|
4 |
Income |
Gross property income includes surrender premiums received from tenants during 2008 of £0.2 million (2007: £5.7 million). The balance of £118.8 million (2007: £106.0 million) is derived solely from rental income from the group's properties. Of these amounts, £4.2 million (2007: £3.9 million) was derived from a lease to BT of the Angel Building, EC1, where in March 2007 the group entered into an arrangement with BT to restructure the lease arrangements such that the group could obtain possession of the building whilst maintaining rental income from BT until March 2010 (albeit that if the group disposed of this property, the right to that rental income would pass to the purchaser). The group has included the income from this building within gross property income as, although similar to a lease surrender arrangement, the group's entitlement to this rental income is linked to its continued ownership of the property, rather than being an unconditional amount receivable (whether as an upfront payment or through a series of instalments).
Development income of £0.5 million (2007: £2.0 million) is the proportion of the total profit share earned by the group from the project management of the construction and letting of a property on behalf of a third party.
Other income of £0.9 million (2007: £nil) relates to fees and commissions earned in relation to the management of the group's properties and is recognised in the group income statement in accordance with the delivery of services
|
5 |
Property outgoings |
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
|
|
Other property outgoings |
13.9 |
|
9.5 |
|
|
Ground rents |
0.7 |
|
0.4 |
|
|
|
|
_______ |
|
_______ |
|
|
14.6 |
|
9.9 |
|
|
|
|
|
|
|
|
Reverse surrender premium |
8.3 |
|
- |
|
|
Write down of trading property |
2.0 |
|
- |
|
|
|
_______ |
|
_______ |
|
|
Total |
24.9 |
|
9.9 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
6 |
Profit on disposal of properties and investments |
|
|
2008 £m |
|
2007 £m |
|
Investment property |
|
|
|
|
Disposal proceeds |
72.6 |
|
233.6 |
|
Carrying value |
(71.4) |
|
(157.4) |
|
|
_______ |
|
_______ |
|
|
1.2 |
|
76.2 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Assets under construction |
|
|
|
|
Disposal proceeds |
- |
|
109.9 |
|
Carrying value |
- |
|
(56.3) |
|
|
_______ |
|
_______ |
|
|
- |
|
53.6 |
|
|
_______ |
|
_______ |
|
Investments |
|
|
|
|
Disposal proceeds |
- |
|
9.1 |
|
Carrying value |
- |
|
(8.1) |
|
|
_______ |
|
_______ |
|
|
- |
|
1.0 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Total |
|
|
|
|
Disposal proceeds |
72.6 |
|
352.6 |
|
Carrying value |
(71.4) |
|
(221.8) |
|
|
_______ |
|
_______ |
|
|
1.2 |
|
130.8 |
|
|
_______ |
|
_______ |
|
|
|
|
|
The profit of £1.2 million (2007: £130.8 million) includes a loss on disposal of £0.2 million (2007: profit of £112.6 million) which relates to properties and investments acquired as part of the acquisition of London Merchant Securities plc (see note 25).
|
7 |
Finance income and costs |
|
|
2008 £m |
|
2007 £m |
|
Finance income |
|
|
|
|
Interest on development funding |
0.1 |
|
1.1 |
|
Return on pension plan assets |
0.8 |
|
0.6 |
|
Foreign exchange gain |
- |
|
0.4 |
|
Bank interest received |
- |
|
0.1 |
|
Other |
0.8 |
|
0.6 |
|
|
_______ |
|
_______ |
|
|
1.7 |
|
2.8 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Exceptional finance income |
|
|
|
|
Profit on redemption of debentures |
- |
|
1.5 |
|
|
_______ |
|
_______ |
|
Total finance income |
1.7 |
|
4.3 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Finance costs |
|
|
|
|
Bank loans and overdraft wholly repayable within five years |
35.3 |
|
27.0 |
|
Bank loans not wholly repayable within five years |
0.8 |
|
9.4 |
|
Loan notes |
0.9 |
|
1.5 |
|
Secured bond |
10.8 |
|
9.9 |
|
Mortgages |
- |
|
0.1 |
|
Finance leases |
0.6 |
|
0.6 |
|
Pension interest costs |
0.5 |
|
0.5 |
|
Foreign exchange loss |
8.3 |
|
- |
|
Other |
- |
|
0.1 |
|
|
_______ |
|
_______ |
|
|
57.2 |
|
49.1 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Exceptional finance costs |
|
|
|
|
Cost of unused acquisition facility |
- |
|
3.3 |
|
|
_______ |
|
_______ |
|
Total finance costs |
57.2 |
|
52.4 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|||
The exceptional profit of £1.5 million in 2007 arose following the payment of a £6.6 million premium on the redemption of a debenture. The debenture was fair valued at £8.1 million on the acquisition of London Merchant Securities plc. The year to 31st December 2007 also contained exceptional finance costs of £3.3 million which was the cost of acquisition finance.
|
8 |
Share of results of joint ventures |
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
Loss from sale of investment property |
- |
|
(0.7) |
|
Revaluation deficit |
(1.3) |
|
- |
|
Other profit from operations after tax |
0.5 |
|
0.4 |
|
|
_______ |
|
_______ |
|
|
(0.8) |
|
(0.3) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
9 |
Tax credit |
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
Corporation tax (credit)/expense |
|
|
|
|
UK corporation tax and income tax on profits for the year |
1.4 |
|
33.5 |
|
REIT conversion charge |
- |
|
53.6 |
|
Adjustment for (over)/under provision in prior years |
(7.1) |
|
0.3 |
|
|
_______ |
|
_______ |
|
|
(5.7) |
|
87.4 |
|
|
_______ |
|
_______ |
|
Deferred tax credit |
|
|
|
|
Origination and reversal of temporary differences |
(3.6) |
|
(287.4) |
|
Changes in tax rates |
- |
|
(0.7) |
|
|
_______ |
|
_______ |
|
|
(3.6) |
|
(288.1) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
_______ |
|
_______ |
|
|
(9.3) |
|
(200.7) |
|
|
_______ |
|
_______ |
|
|
|
|
|
Of the £7.1 million over provision (2007: £0.3 million under provision) in prior years, £3.4 million (2007: £nil) relates to losses not recognised in prior years due to the uncertainty over their availability.
The tax for 2008 is higher (2007: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
Loss before tax |
(606.5) |
|
(99.8) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Expected tax credit based on the standard rate of corporation tax in the UK of 28.5% (2007: 30%) |
(172.9) |
|
(29.9) |
|
Difference between tax and accounting profit on disposals |
0.6 |
|
(9.4) |
|
Goodwill impairment |
- |
|
106.0 |
|
REIT conversion charge |
- |
|
53.6 |
|
Revaluation deficit/(gain) attributable to REIT properties |
171.6 |
|
(24.1) |
|
Deferred tax released as a result of REIT conversion |
- |
|
(288.7) |
|
Other differences |
(1.5) |
|
(8.5) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Tax credit on current year's loss |
(2.2) |
|
(201.0) |
|
Adjustments in respect of prior years' tax |
(7.1) |
|
0.3 |
|
|
_______ |
|
_______ |
|
|
(9.3) |
|
(200.7) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
|
|
|
10 |
(Loss)/earnings per share |
|
|
(Loss)/ profit for the year £m |
Weighted average number of shares '000 |
Earnings per share p |
|
|
|
|
|
|
Year ended 31st December 2008 |
(586.4) |
100,758 |
(581.99) |
|
Adjustment for dilutive share-based payments |
- |
- |
- |
|
|
_______ |
_______ |
_______ |
|
Diluted |
(586.4) |
100,758 |
(581.99) |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
The diluted loss per share for the year to 31st December 2008 has been restricted to a loss of 581.99p per share, as the loss per share cannot be reduced by dilution in accordance with IAS33, Earnings per Share. At 31st December 2008, there were 435,000 share options and contingently issuable shares which could potentially dilute earnings in the future.
|
Year ended 31st December 2007 |
97.0 |
96,473 |
100.55 |
|
Adjustment for dilutive share-based payments |
- |
418 |
(0.44) |
|
|
_______ |
_______ |
_______ |
|
Diluted |
97.0 |
96,891 |
100.11 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
Year ended 31st December 2008 |
(586.4) |
100,758 |
(581.99) |
|
Adjustment for: |
|
|
|
|
Disposal of properties |
(6.2) |
- |
(6.15) |
|
Group revaluation deficit |
597.9 |
- |
593.40 |
|
Joint venture revaluation deficit |
1.3 |
- |
1.29 |
|
Fair value movement in derivative financial instruments |
28.1 |
- |
27.89 |
|
Development income |
(0.5) |
- |
(0.50) |
|
Minority interests in respect of the above |
(11.2) |
- |
(11.11) |
|
|
_______ |
_______ |
_______ |
|
Recurring |
23.0 |
100,758 |
22.83 |
|
|
|
|
|
|
Adjustment for dilutive share-based payments |
- |
435 |
(0.10) |
|
|
_______ |
_______ |
_______ |
|
Diluted recurring |
23.0 |
101,193 |
22.73 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
Year ended 31st December 2007 |
97.0 |
96,473 |
100.55 |
|
Adjustment for: |
|
|
|
|
Disposal of properties and investments |
(98.2) |
- |
(101.79) |
|
Disposal of joint venture property |
0.7 |
- |
0.72 |
|
Group revaluation surplus |
(89.0) |
- |
(92.26) |
|
Fair value movement in derivative financial instruments |
5.1 |
- |
5.28 |
|
Deferred tax released as a result of REIT conversion |
(288.7) |
- |
(299.25) |
|
REIT conversion charge |
53.6 |
- |
55.56 |
|
Goodwill impairment |
353.3 |
- |
366.22 |
|
Development income |
(1.4) |
- |
(1.45) |
|
Exceptional finance income and costs |
(1.2) |
- |
(1.24) |
|
Minority interests in respect of the above |
2.7 |
- |
2.80 |
|
|
_______ |
_______ |
_______ |
|
Recurring |
33.9 |
96,473 |
35.14 |
|
|
|
|
|
|
Adjustment for dilutive share-based payments |
- |
418 |
(0.15) |
|
|
_______ |
_______ |
_______ |
|
Diluted recurring |
33.9 |
96,891 |
34.99 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
The recurring earnings per share excludes the after tax effect of fair value adjustments to the carrying value of assets and liabilities, the profit or loss after tax arising from the disposal of properties and investments, the development income, and any exceptional costs and income in order to show the underlying trend. In addition, the conversion charge and the release of deferred tax related to the transfer to REIT status, and the impairment of goodwill resulting from the acquisition of London Merchant Securities plc have also been excluded.
|
11 |
Investment property |
|
|
Freehold £m |
Leasehold £m |
Total £m |
|
Carrying value |
|
|
|
|
At 1st January 2008 |
2,224.1 |
430.5 |
2,654.6 |
|
Transfer |
(15.0) |
15.0 |
- |
|
Additions |
88.9 |
16.0 |
104.9 |
|
Disposals |
(59.8) |
(11.6) |
(71.4) |
|
Revaluation |
(515.7) |
(86.4) |
(602.1) |
|
Movement in grossing up of headlease liabilities |
- |
(0.4) |
(0.4) |
|
|
_______ |
_______ |
_______ |
|
At 31st December 2008 |
1,722.5 |
363.1 |
2,085.6 |
|
|
_______ |
_______ |
_______ |
|
Disclosed in |
|
|
|
|
Investment property |
1,705.0 |
363.1 |
2,068.1 |
|
Non-current assets held for sale |
17.5 |
- |
17.5 |
|
|
_______ |
_______ |
_______ |
|
|
1,722.5 |
363.1 |
2,085.6 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
At 1st January 2007 |
1,025.2 |
248.8 |
1,274.0 |
|
Arising on acquisition of subsidiary |
1,104.6 |
141.0 |
1,245.6 |
|
Additions |
177.6 |
24.9 |
202.5 |
|
Disposals |
(151.2) |
(6.2) |
(157.4) |
|
Revaluation |
67.9 |
22.4 |
90.3 |
|
Movement in grossing up of headlease liabilities |
- |
(0.4) |
(0.4) |
|
|
_______ |
_______ |
_______ |
|
At 31st December 2007 |
2,224.1 |
430.5 |
2,654.6 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
Adjustments from fair value to carrying value |
|
|
|
|
At 31st December 2008 |
|
|
|
|
Fair value |
1,752.1 |
355.9 |
2,108.0 |
|
Adjustment for rents recognised in advance |
(29.6) |
(1.4) |
(31.0) |
|
Adjustment for grossing up of headlease liabilities |
- |
8.6 |
8.6 |
|
|
_______ |
_______ |
_______ |
|
Carrying value |
1,722.5 |
363.1 |
2,085.6 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
At 31st December 2007 |
|
|
|
|
Fair value |
2,249.0 |
422.7 |
2,671.7 |
|
Adjustment for rents recognised in advance |
(24.9) |
(1.2) |
(26.1) |
|
Adjustment for grossing up of headlease liabilities |
- |
9.0 |
9.0 |
|
|
_______ |
_______ |
_______ |
|
Carrying value |
2,224.1 |
430.5 |
2,654.6 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
The investment properties were revalued at 31st December 2008 by external valuers, on the basis of market value as defined by the Appraisal and Valuation Standards published by The Royal Institution of Chartered Surveyors. CB Richard Ellis Limited valued properties to a value of £2,079.6 million (2007: £2,647.9 million); other valuers £28.4 million (2007: £23.8 million).
Additional information regarding the basis of valuation is included in the risk management and internal control section.
At 31st December 2008, the historical cost of investment property owned by the group was £2,054.5 million (2007: £1,990.7 million).
|
12 |
Property, plant and equipment |
|
|
Assets under construction £m |
Plant and equipment £m |
Total £m |
|
Net book value |
|
|
|
|
At 1 January 2007 |
- |
0.3 |
0.3 |
|
Arising on acquisition of subsidiary |
53.1 |
1.6 |
54.7 |
|
Additions |
3.3 |
0.2 |
3.5 |
|
Disposals |
(56.4) |
(0.5) |
(56.9) |
|
Depreciation |
- |
(0.2) |
(0.2) |
|
|
_______ |
_______ |
_______ |
|
At 31st December 2007 |
- |
1.4 |
1.4 |
|
|
|
|
|
|
Additions |
- |
0.2 |
0.2 |
|
Disposals |
- |
(0.2) |
(0.2) |
|
Depreciation |
- |
(0.2) |
(0.2) |
|
|
_______ |
_______ |
_______ |
|
At 31st December 2008 |
- |
1.2 |
1.2 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
Net book value at 31st December 2008 |
|
|
|
|
Cost or valuation |
- |
3.0 |
3.0 |
|
Accumulated depreciation |
- |
(1.8) |
(1.8) |
|
|
_______ |
_______ |
_______ |
|
|
- |
1.2 |
1.2 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
Net book value at 31st December 2007 |
- |
3.1 |
3.1 |
|
Cost or valuation |
- |
(1.7) |
(1.7) |
|
Accumulated depreciation |
_______ |
_______ |
_______ |
|
|
- |
1.4 |
1.4 |
|
|
|
|
|
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
13 |
Trading property |
At 31st December 2008, trading properties were written down by £2.0 million (2007: £nil) to their net realisable value.
|
14 |
Non-current assets held for sale |
|
|
|
2008 £m |
|
2007 £m |
||
|
|
|
|
|
|
||
|
Investment properties (note 11) |
|
17.5 |
|
- |
||
|
Investments |
|
- |
|
3.4 |
||
|
|
|
_______ |
|
_______ |
||
|
|
|
17.5 |
|
3.4 |
||
|
|
|
_______ |
|
_______ |
||
|
|
|
|
|
|
||
Compulsory purchase orders issued under the Crossrail Act 2008 were received for two of the group's freehold investment properties on 19th December 2008 and on 16th January 2009 title for these properties passed to the acquiring authority, The Secretary of State for Transport. Therefore, in accordance with IFRS 5, Non-current assets held for sale, these properties have been recognised as non-current assets held for sale at 31st December 2008.
At 31st December 2007, the directors considered that the disposal of the group's holding in their joint venture, Euro Mall Sterboholy in the first half of 2008 was highly probable and, therefore, was not accounted for by the equity method, in accordance with IFRS 5, Non-current assets held for sale. This sale did not proceed and at 31st December 2008, there is no expectation of a sale in the next 12 months and, therefore, the asset has been transferred back to investments. The classification of the asset has no impact on its value or its results for the year.
|
15 |
Borrowings and derivatives |
|
|
2008 £m |
|
2007 £m |
|
|
Non-current assets |
|
|
|
|
|
Derivative financial instruments |
- |
|
(1.2) |
|
|
|
_______ |
|
_______ |
|
|
Current liabilities |
|
|
|
|
|
Bank loans |
103.0 |
|
113.4 |
|
|
Unsecured loans |
- |
|
1.3 |
|
|
Overdraft |
3.6 |
|
5.9 |
|
|
|
_______ |
|
_______ |
|
|
|
106.6 |
|
120.6 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
6.5% Secured Bonds 2026 |
194.3 |
|
194.9 |
|
|
Loan notes |
3.2 |
|
32.0 |
|
|
Bank loans |
534.0 |
|
434.0 |
|
|
Mortgages |
- |
|
2.2 |
|
|
Unsecured loans |
29.2 |
|
0.4 |
|
|
Leasehold liabilities |
8.6 |
|
9.0 |
|
|
|
_______ |
|
_______ |
|
|
|
769.3 |
|
672.5 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
Derivative financial instruments |
26.9 |
|
- |
|
|
|
_______ |
|
_______ |
|
|
Total liabilities |
902.8 |
|
793.1 |
|
|
|
_______ |
|
_______ |
|
|
Net borrowings and derivatives |
902.8 |
|
791.9 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Derivative financial instruments are measured at fair value, being the estimated amount the group would pay or receive to terminate the interest rate derivative agreements at the balance sheet date.
|
16 |
Deferred tax liability |
|
|
Revaluation surplus £m |
Capital allowances £m |
Other £m |
Total £m |
|
|
|
|
|
|
|
At 1st January 2008 |
13.1 |
- |
(2.3) |
10.8 |
|
Provided during the year in the group income statement |
- |
- |
0.6 |
0.6 |
|
Released during the year in the group income statement |
(4.2) |
- |
- |
(4.2) |
|
|
_______ |
_______ |
_______ |
_______ |
|
At 31st December 2008 |
8.9 |
- |
(1.7) |
7.2 |
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
|
At 1st January 2007 |
150.2 |
16.3 |
0.7 |
167.2 |
|
Arising on acquisition of subsidiary |
135.9 |
7.8 |
(11.3) |
132.4 |
|
Transfer to investment in joint ventures |
(0.7) |
- |
- |
(0.7) |
|
Provided during the year in the group income statement |
1.3 |
- |
- |
1.3 |
|
Released during the year in the group income statement |
|
|
|
|
|
Change in tax rates |
(0.9) |
- |
0.2 |
(0.7) |
|
|
_______ |
_______ |
_______ |
_______ |
|
At 31st December 2007 |
13.1 |
- |
(2.3) |
10.8 |
|
|
_______ |
_______ |
_______ |
_______ |
Due to the group's conversion to REIT status on 1st July 2007, deferred tax is only provided on the revaluation surplus of properties outside of the REIT regime. Deferred tax on the revaluation surplus is calculated on the basis of the chargeable gains that would crystallise on the sale of the investment property portfolio as at each balance sheet date. The calculation takes account of available indexation on the historic cost of the properties and any available capital losses. Due to the uncertainty over their availability, £11.9 million (2007: £15.6 million) of tax losses have not been recognised as a deferred tax asset.
|
17 |
Equity |
|
|
Share capital £m |
Share premium £m |
Other reserves £m |
Retained earnings £m |
Minority interest £m |
|
|
|
|
|
|
|
|
At 1st January 2008 |
5.0 |
157.0 |
914.0 |
706.0 |
59.9 |
|
Share-based payments expense transferred to reserves |
- |
- |
1.2 |
- |
- |
|
Actuarial pension losses |
- |
- |
- |
(2.1) |
- |
|
Foreign exchange translation differences |
- |
- |
8.2 |
- |
- |
|
Loss for the year |
- |
- |
- |
(586.4) |
(10.8) |
|
Purchase of minority interest |
- |
- |
- |
- |
(0.4) |
|
Transfer between reserves in respect of performance share plan |
- |
(0.8) |
- |
0.8 |
- |
|
Dividends paid |
- |
- |
- |
(23.3) |
(13.3) |
|
|
_______ |
_______ |
_______ |
________ |
_______ |
|
At 31st December 2008 |
5.0 |
156.2 |
923.4 |
95.0 |
35.4 |
|
|
_______ |
_______ |
_______ |
________ |
_______ |
|
|
|
|
|
|
|
|
At 1st January 2007 |
2.6 |
156.1 |
3.8 |
620.9 |
- |
|
Issue of shares |
2.4 |
- |
- |
- |
- |
|
Premium on issue of shares |
- |
0.9 |
910.5 |
- |
- |
|
Arising on acquisition of subsidiary |
- |
- |
- |
- |
56.0 |
|
Share-based payments expense transferred to reserves |
- |
- |
0.3 |
- |
- |
|
Actuarial pension gain |
- |
- |
- |
1.3 |
- |
|
Foreign exchange translation differences |
- |
- |
(0.6) |
- |
- |
|
Profit for the year |
- |
- |
- |
97.0 |
3.9 |
|
Dividends paid |
- |
- |
- |
(13.2) |
- |
|
|
_______ |
_______ |
_______ |
________ |
_______ |
|
At 31st December 2007 |
5.0 |
157.0 |
914.0 |
706.0 |
59.9 |
|
|
_______ |
_______ |
_______ |
________ |
_______ |
Included within other reserves at 31st December 2008 is a foreign exchange reserve of £7.6 million (2007: £0.6 million deficit).
|
18 |
Dividend |
|
|
2008 £m |
|
2007 £m |
|
|
|
|
|
|
Final dividend of 15p (2007: second interim dividend 10.525p) per ordinary share declared during the year relating to the previous year's results |
15.1 |
|
5.7 |
|
|
|
|
|
|
Interim dividend of 8.15p (2007: 7.5p) per ordinary share declared during the year |
8.2 |
|
7.5 |
|
|
_______ |
|
_______ |
|
|
23.3 |
|
13.2 |
|
|
_______ |
|
_______ |
|
|
|
|
|
Of the dividend of £23.3 million (2007: £13.2 million), £22.5 million (2007: £13.2 million) was paid during the year and the remainder of £0.8 million (2007: £nil), which relates to withholding tax, was paid after the balance sheet date.
The directors are proposing the payment of a final dividend in respect of the current year's results of 16.35p (2007: 15p) per ordinary share which would total £16.4 million (2007: £15.1 million). This dividend has not been accrued at the balance sheet date.
|
19 |
Net asset value per share |
|
|
Net Assets £m |
Deferred tax on revaluation surplus £m |
Fair value of derivative financial instruments £m |
Fair value adjustment to secured bond £m |
Adjusted net assets £m |
|
At 31st December 2008 |
|
|
|
|
|
|
Net assets |
1,215.0 |
8.9 |
26.9 |
20.9 |
1,271.7 |
|
Minority interests |
(35.4) |
(0.5) |
- |
- |
(35.9) |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
Attributable to equity shareholders |
1,179.6 |
8.4 |
26.9 |
20.9 |
1,235.8 |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
Net asset value per share attributable to equity shareholders (p) |
1,170 |
8 |
27 |
21 |
1,226 |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
At 31st December 2007 |
|
|
|
|
|
|
Net assets |
1,841.9 |
13.1 |
(1.2) |
21.6 |
1,875.4 |
|
Minority interests |
(59.9) |
(1.7) |
- |
- |
(61.6) |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
Attributable to equity shareholders |
1,782.0 |
11.4 |
(1.2) |
21.6 |
1,813.8 |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
Net asset value per share attributable to equity shareholders (p) |
1,770 |
11 |
(1) |
21 |
1,801 |
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
The number of shares at 31st December 2008 was 100,807,146 (2007: 100,703,194)
The total net assets of the group and those attributable to equity shareholders are shown in the table above. Adjustments are made for the deferred tax on the revaluation surplus, and the post tax fair value of derivative financial instruments and the adjustment to the secured bond are excluded, on the basis that these amounts are not relevant when considering the group as an ongoing business.
|
20 |
Recurring profit before tax |
|
|
2008
£m
|
|
2007
£m
|
|
|
|
|
|
|
Loss before tax
|
(606.5)
|
|
(99.8)
|
|
Adjustment for:
|
|
|
|
|
Disposal of properties and investments
|
(1.2)
|
|
(130.8)
|
|
Group revaluation deficit/(surplus)
|
602.1
|
|
(90.3)
|
|
Joint venture revaluation deficit
|
1.3
|
|
0.7
|
|
Fair value movement in derivative financial instruments
|
28.1
|
|
5.1
|
|
Development income
|
(0.5)
|
|
(2.0)
|
|
Goodwill impairment
|
-
|
|
353.3
|
|
Net exceptional finance income and costs
|
-
|
|
1.8
|
|
|
_______
|
|
_______
|
|
Recurring profit before tax
|
23.3
|
|
38.0
|
|
|
_______
|
|
_______
|
|
|
|
|
|
|
21 |
Total return |
|
|
2008 % |
|
2007 % |
|
|
|
|
|
|
Total return |
(30.6) |
|
2.8 |
|
|
_______ |
|
_______ |
|
|
|
|
|
Total return is the movement in adjusted net asset value per share as derived in note 19 plus the dividend per share paid during the year expressed as a percentage of the adjusted net asset value per share at the beginning of the year.
|
22 |
Gearing |
Balance sheet gearing at 31st December 2008 is 71.2% (2007: 42.5%). This is defined as net debt divided by net assets.
Profit and loss gearing is 1.88 (2007: 1.81). This is defined as recurring net property income less administrative costs divided by net interest payable, having reversed the ground rent payable on leasehold investment properties to interest payable of £0.7 million (2007: £0.7 million).
However, the definition of this measure is being changed for 2009 onwards in order to align it more closely to the group's most commonly used interest cover covenant. The future definition will be recurring gross property income less ground rent divided by net interest payable on borrowings less interest receivable. Profit and loss gearing under this revised measure for 2008 is 2.47 (2007: 2.24).
|
23 |
Cash flow |
The cash flow for the year to 31st December 2007 contained exceptional finance costs of £16.0 million which relates to costs incurred by London Merchant Securities plc prior to the acquisition and accrued at 31st January 2007 in the fair value balance sheet shown in note 25.
The year to 31st December 2007 also contained an exceptional finance cost of £3.3 million which was the cost of acquisition finance (see note 7).
The previously reported acquisition of subsidiaries (net of cash acquired) figure for the year ended 31st December 2007 of £38.4 million for the group and £52.2 million for the company, has been restated to exclude the loan notes of £32.5 million issued on the acquisition of London Merchant Securities plc as this was not a cash transaction. In addition, the previously reported movement in the bank loans figure of £83.3 million for the group and £36.5 million for the company has been split between the net movement in revolving bank loans, and the drawdown and repayment of non-revolving bank loans, in accordance with IAS7, Statement of Cash Flows. Neither of these changes affect the overall net cash flow for 2007.
|
24 |
Post balance sheet events |
Since 31st December 2008, the group has completed the disposal of two freehold properties as described in note 14. Due to the nature of the transactions, the final value of the properties has not yet been agreed and therefore the profit or loss on disposal has not yet been determined. In addition, the group disposed of one freehold property for £17.0 million, before costs, generating a profit of £0.5 million.
|
25 |
Acquisition of subsidiaries |
The whole of the issued share capital of London Merchant Securities plc, (LMS), a property investment company, was acquired on 1st February 2007 for a total cost of £965.6 million.
Cost of acquisition:
|
|
|
|
£m |
|
|
|
|
|
|
Equity |
|
|
912.9 |
|
Loan notes |
|
|
32.5 |
|
Cash |
|
|
12.2 |
|
Directly attributable acquisition costs |
|
|
8.0 |
|
|
|
|
_______ |
|
|
|
|
965.6 |
|
|
|
|
_______ |
The equity consideration was satisfied by Derwent London plc issuing 46,910,232 ordinary shares at a price of £19.46 on 1st February 2007. This was the closing market price of the company's 5p ordinary shares on 31st January 2007. This issue price consists of the nominal value of the ordinary shares of £0.05 and a share premium of £19.41.
Directly attributable acquisition costs are those charged by the company's advisers in performing due diligence activities and producing the acquisition documents.
The net assets acquired at 1st February 2007 were:
|
|
Book value of assets acquired £m |
|
Fair value of assets acquired £m |
|
Non-current assets |
|
|
|
|
Investment property |
1,245.6 |
|
1,245.6 |
|
Property, plant and equipment |
53.9 |
|
54.7 |
|
Investments |
18.0 |
|
17.5 |
|
Pension scheme surplus |
1.4 |
|
1.4 |
|
Deferred tax asset |
12.0 |
|
12.0 |
|
Derivatives |
6.1 |
|
6.1 |
|
Other receivables |
6.2 |
|
6.2 |
|
|
_______ |
|
_______ |
|
|
1,343.2 |
|
1,343.5 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Current assets |
|
|
|
|
Trading property |
1.3 |
|
9.4 |
|
Trade and other receivables |
9.4 |
|
8.8 |
|
Cash and cash equivalents |
13.9 |
|
13.9 |
|
|
_______ |
|
_______ |
|
|
24.6 |
|
32.1 |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Total assets |
1,367.8 |
|
1,375.6 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Bank loans |
(4.6) |
|
(4.6) |
|
Trade and other payables |
(39.8) |
|
(40.9) |
|
|
_______ |
|
_______ |
|
|
(44.4) |
|
(45.5) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Borrowings |
(480.4) |
|
(510.6) |
|
Deferred tax liability |
(148.8) |
|
(144.4) |
|
Other |
(6.8) |
|
(6.8) |
|
|
_______ |
|
_______ |
|
|
(636.0) |
|
(661.8) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Total liabilities |
(680.4) |
|
(707.3) |
|
|
_______ |
|
_______ |
|
|
|
|
|
|
Net assets acquired |
687.4 |
|
668.3 |
|
|
|
|
|
|
Minority interests |
(56.0) |
|
(56.0) |
|
|
_______ |
|
_______ |
|
Attributable to equity holders of the parent company |
631.4 |
|
612.3 |
|
|
_______ |
|
|
|
Goodwill on acquisition |
|
|
353.3 |
|
|
|
|
_______ |
|
Cost of acquisition |
|
|
965.6 |
|
|
|
|
_______ |
During 2008, there has been much attention paid to the issues concerning the origin of goodwill in financial statements and the processes by which it is subsequently impairment tested. In order to provide the shareholders with better information on these issues in connection with the goodwill arising upon the acquisition of LMS, the wording of this note has been enhanced.
Adjustments from book value to fair value include those arising from the fair value adjustments to property, plant and equipment, trading property and debt. Adjustments arising from the application of Derwent London's accounting policies were made to the book value figures.
The acquisition, which gave rise to goodwill of £353.3m, was of a group which owned a portfolio of properties which complemented Derwent London's existing operations and expanded its reach into other key areas of London. The property portfolio held by LMS was in certain respects diverse, both in geographical location and type of property (residential, retail and office), but many of the properties fitted well with the niche market in which Derwent London operated. However, the commercial strategy of LMS was different from that of Derwent London in that, whilst LMS sought mainly to extract value through maintaining cashflows from existing lease agreements, Derwent London seeks actively to maximise the value that can be derived from a property portfolio.
Therefore, the purchase of LMS presented the group with an almost unique opportunity to acquire a range of properties of a size and nature that it believed would generate significant additional value through application of its active management and redevelopment approach. This would be achieved through Derwent London's strategy of applying its design-led philosophy, including transforming and revitalising properties to provide highly desirable and modern office environments, as well as by innovative design solutions to deliver new developments and refurbishment schemes.
The acquisition structure involved a purchase consideration which was settled primarily through the issue of equity shares. A key aspect of the acquisition was that the terms of the share for share exchange with the LMS shareholders were such that the dilution of the existing shareholders in the group did not exceed an acceptable threshold. In view of this focus, the group's desire to acquire the LMS portfolio, and the fact that the acquisition did not complete until 1st February 2007 (having been announced on 14th November 2006), both the amount of consideration paid for LMS and the fair values of the net assets acquired were not determined until the completion date.
The acquisition of LMS was completed at a time when, unusually in historical terms, the group's share price was above its net asset value. The directors believe that this had been influenced by the introduction of the REIT regime on 1st January 2007 which, in conjunction with substantial and sustained increases in property values and the terms of the acquisition referred to above, resulted in the acquisition cost being significantly in excess of the net asset value of LMS.
A review was carried out in order to determine whether it would be appropriate for any separable intangible assets to be recognised in accordance with IFRS 3. No such intangible assets were identified with any material value and, in consequence, the entire excess amount of consideration above the net assets acquired of £353.3m was allocated to goodwill.
Impairment
After the acquisition of LMS, a review for impairment was carried out in accordance with IAS 36 Impairment of Assets on both value in use and fair value less cost to sell bases. The acquired business was subsumed within Derwent London's existing operations, as the group has only one operating segment and, in consequence, the goodwill was allocated to the entire business (both existing and acquired). The group's cash generating units comprise each individual property, and it is not possible to allocate goodwill at this level.
This review indicated that an impairment in the carrying value of goodwill of £353.3m was appropriate, and this amount was charged to the group income statement in 2007.
Individual properties
For each of the group's individual properties, fair value less cost to sell was determined by CB Richard Ellis Limited in accordance with the Appraisal and Valuation Standards as published by the Royal Institution of Chartered Surveyors. The carrying value of goodwill was not considered as part of this test as it was not possible to allocate goodwill at individual property level.
In addition, the value in use of each property was determined by reference to forecasts. The main assumptions were a forecast period of 10 years, as the group believes this longer period is appropriate to properly assess the value in use of the properties; no yield shift; rent reverts to estimated rental value ('ERV') on review; no movement in ERV over the period; no tenants exercise their break clause and all renew their leases; properties are sold at the end of the 10 year period at their current value and estimated renewal and review fees were included. In addition, no enhancements to the properties were included that arose from future capital expenditure. Properties identified for disposal or development that had been acquired as part of the LMS portfolio was assumed to be sold at their current value at the start of the projection period. Projections were discounted at 8.66% being the directors' best assessment of the post REIT weighted average cost of capital for the group.
These tests indicated that the carrying value of the properties was not impaired on an individual property basis.
Goodwill
As goodwill was not allocated to each of the cash generating units (the individual properties), IAS 36 requires a second 'top down' impairment test to be carried out at the lowest level at which goodwill can be allocated. As noted above, this was to the group's entire business.
The directors note that as at the date of completion of the acquisition of LMS, the carrying amount of goodwill could be regarded as being supported on the basis of fair value less cost to sell, as the group's share price was substantially in excess of net asset value. The directors consider that the share price quoted on the London Stock Exchange can be used as being indicative of the fair value of the group.
However, at 30th June 2007, the balance sheet date of the group's interim report, the share price had decreased such that the market capitalisation of the group was below its net asset value (after deducting the full amount of capitalised goodwill).
The impairment tests carried out at an individual property (cash generating unit) level indicated that the carrying values of the properties were not impaired on an individual basis. However, because the fair value of the group no longer supported the capitalised goodwill, the full amount of £353.3m was considered to be impaired and this amount was charged to the group income statement.
Details of the movement in goodwill and related impairments are set out below:
|
|
£m |
|
Cost |
|
|
At 1st January 2007 |
- |
|
Arising on acquisition of LMS |
353.3 |
|
At 31st December 2007 |
353.3 |
|
|
|
|
At 1st January 2008 and 31st December 2008 |
353.3 |
|
|
|
|
Impairment |
|
|
At 1st January 2007 |
- |
|
Arising in year |
353.3 |
|
At 31st December 2007 |
353.3 |
|
|
|
|
At 1st January 2008 and 31st December 2008 |
353.3 |
|
|
|
|
Net book value |
|
|
At 31st December 2007 |
- |
|
At 31st December 2008 |
- |
If the date for this acquisition had been 1st January 2007, then the gross property income in 2007 would have increased by £4.6 million. As the fair value adjustments and adjustments arising from the application of Derwent London's accounting policies made above have not been made to the results of London Merchant Securities plc for 31st December 2006 it is impractical to assess the impact on the profit for the year arising from a 1st January 2007 acquisition date. The profit for the year ended 31st December 2007 of £100.9 million, which is after recognising the £353.3 million of goodwill impairment, included post acquisition profits of £203.0 million for London Merchant Securities.
A number of investment properties and assets under construction, included within property, plant and equipment, were disposed of as they were not consistent with the group's objectives and a disposal programme was implemented. Details and explanation of the profits arising on these disposals is set out in note 6.
|
26 |
|
The financial information set out above does not constitute the company's statutory accounts for the years ended 31st December 2008 or 2007, but is derived from those accounts. Statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered following the company's annual general meeting which will be held on 27th May 2009. The auditors have reported on those accounts; their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports, and did not contain statements under the Companies Act 1985, s237(2) or (3). The annual report and accounts will be posted to shareholders on 21st April 2009, and will also be available on the company's website, www.derwentlondon.com, from that date.
Risk management and internal control
Strategic risks
-
That the group's strategy is not achieved due to adverse economic influences and/or movements in the central London property investment or occupational market.
The group carries out an annual strategic review covering the next five years and prepares regular rolling forecasts for the next two years. As part of both exercises, the effect that changing various main assumptions has on the key ratios is considered and the board can vary the group's short term objectives so as to best realise its long term strategic goals. The group's policy of maintaining income from properties until a development starts gives the board flexibility in this regard.
Property risks
-
In their report to the directors, the independent valuers, CBRE, whilst not qualifying their opinion of value, have noted that the current volatility in the global financial system has created a significant degree of turbulence in commercial real estate markets across the world. Furthermore, the lack of liquidity in the capital markets means that it may be very difficult to achieve a sale of property assets in the short term.
-
That the cost of the group's development schemes is increased due to delays in the planning process.
When preparing appraisals for the group's proposed developments, potential delays on the scheme's critical path are identified and the effect quantified. If material, alternative solutions are evaluated. The group uses advisers who are fully aware of the current planning requirements specific to the scheme's location so as to reduce the risk of unforeseen delays.
-
That a contractor or major sub-contractor becomes insolvent causing a project to be delayed or otherwise adversely affected.
Generally the group selects contractors from a pool that are well known to it, and financial information of these companies is regularly reviewed. If the insolvency of a major sub-contractor is seen to present a material risk to the critical path of a project, specific strategies are implemented to mitigate the effect.
-
That a major tenant becomes insolvent causing a significant loss of rental income.
The group's credit committee reviews the financial status of all prospective tenants and decides on the level of security to be obtained, by way of rent on deposit, bank guarantees etc. for those tenants that are approved. The group's asset managers are proactive in collecting amounts due from tenants and maintain regular contact with tenants which enables them to identify early signs of distress. In the current economic environment the group is investigating the option of insuring the rent of a limited number of key tenants.
Financial risks
-
That the group is unable to raise finance from its preferred sources.
The group's five year strategic review and rolling forecasts enables any financing requirement to be identified at an early stage. This enables sources of finance to be identified and evaluated and, to a degree, the finance to be raised as and when market conditions are favourable.
-
That the group breaches one of its financing covenants.
All the group's secured borrowings contain financial covenants based only on specific security not corporate ratios such as balance sheet gearing. Treasury control schedules are updated each week whilst the group's rolling forecast enables any potential problems to be identified at an early stage and corrective action to be taken.
-
That the group's debt facilities become unavailable or are not renewed.
The group develops long term relationships with a small number of banks and, where possible, arranges facilities that provide an excess over the requirement identified in the rolling forecast.
This information is provided by RNS
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