Final Results
Derwent Valley Holdings PLC
21 March 2006
21 March 2006
DERWENT VALLEY HOLDINGS PLC ("Derwent Valley" / "Group" )
Preliminary results for the year ended 31st December 2005
Derwent Valley, a specialist investor and redeveloper of Central London property
announces its results for the year to 31st December 2005.
• Adjusted net asset value+ per share rose 24.3% to 1,335p (31st
December 2004: 1,074p; 30th June 2005: 1,176p)
• Total dividend up 9.2% to 13.65p (2004: 12.50p)
• Total return for the year of 25.5% (2004: 17.2%)
• Revaluation gain of £124 million brought the value of the Group's
portfolio to over £1 billion for the first time
• Property disposals realised £98 million and produced a profit of £9.6
million
• Net property income of £46.6 million (2004: £48.0 million)
• Adjusted profit before tax* of £16.7 million (2004: £18.3 million)
• Strong lettings progress during the year with 19,100 sq m of space let
at an annualised rent of £4.5 million
John Ivey, Chairman, commented:
"Continued demand for the group's distinctive, design-led product resulted in
another highly successful year of letting space. However, such success does not
mean that the tank is empty. We are fortunate that 50% of the space in our
240,000 sq m portfolio still retains opportunities for refurbishment or
redevelopment. We remain confident that this, and the scope to increase rents
from a low base, will enable us to make further strong progress."
+ Excludes the deferred tax on the revaluation surplus and capital
allowances as well as the post tax fair value of derivative financial
instruments.
* Excludes the revaluation movement on investment properties and financial
instruments and the profit on disposal of investment properties
For further information, please contact:
Derwent Valley Financial Dynamics
John Burns, Managing Director Stephanie Highett/Dido Laurimore
Tel: 020 7659 3000 Tel: 020 7831 3113
CHAIRMAN'S STATEMENT
Results
A revaluation gain of £124 million brought the value of the group's portfolio to
over £1 billion for the first time and took the adjusted net asset value per
share up to 1,335p, a rise of 24.3%. Properties held for the full year
increased in value by 14.8% compared to 8.3% last year as investment demand
strengthened and exerted continued downward pressure on yields.
Advantage was taken of the strong investment market with property disposals of
£98 million, net of costs, which realised a profit of £9.6 million against their
value at 31st December 2004. As a result of these sales and planned vacancies
as schemes moved into the development stage, net property income decreased by
£1.4 million to £46.6 million. Adjusted profit before tax was also lower at
£16.7 million, compared to £18.3 million in 2004.
Dividend
The directors are recommending a final dividend of 9.725p per share. Together
with the 3.925p per share paid in November, this amounts to 13.65p for the whole
year and represents an uplift of 9.2% on last year. Shareholders on the register
on 12th May 2006 will be eligible for the dividend that will be paid on 5th June
2006.
Review of the year
Within the global real estate sector, Central London offices continued to be one
of the most sought after investment classes for investors. Although yield shift
remained prominent, rental growth improved during the year and it has been
encouraging to see further upward momentum since the year end.
Continued demand for the group's distinctive, design-led product resulted in
another highly successful year of letting space. During 2005, 19,100 sq m was
let at an annualised rent of £4.5 million. The portfolio now contains only 9,500
sq m of space that is available for immediate occupation. However, such success
does not mean that the tank is empty; we have a pipeline of future schemes, some
of which are already under construction and others which are progressing through
the planning process.
Capital expenditure throughout the year totalled £26.5 million, the majority of
which was committed to the Johnson Building. With practical completion recently
achieved, we are talking to a number of potential tenants. Capital expenditure
of £39 million is planned for this year, the principal schemes being at Gresse
Street, W1, Portobello Dock, W10, and Horseferry Road, SW1. This last property,
a 13,900 sq m office building in Victoria, was acquired during the year for
£32.4 million. Architectural studies have already been completed and a
comprehensive refurbishment is planned to commence later this year at a cost of
approximately £17 million. Telstar House, W2 is our first externally funded
transaction. Here, we are now acting as development managers for Prudential in
constructing a new, 9,750 sq m, office building. A right to share in the
scheme's profit has been retained.
The board has a strategy of recycling resources and therefore looks to sell
properties where its rental aspirations have been reached. As a consequence, the
average rents within our portfolio remain low at £250 per sq m. From this
level, we can generate rental growth through refurbishment and asset management.
Whilst residential development is unlikely to become a mainstream activity for
the group, it is inevitable that, with today's rigid planning regulations which
enforce mixed use development, we will have a level of involvement. Our
initial scheme provided 14 apartments at the rear of the Johnson Building where
we applied our design brand to create light and spacious living accommodation.
This approach has paid off with 12 of the units sold and the other two under
offer. Further residential schemes may be undertaken, particularly in the
Islington portfolio, where designating some properties for residential
development is likely to provide the key to unlock the potential at other sites.
Real Estate Investment Trusts (REITs)
The proposed introduction of REITs is eagerly awaited. However, some of the
rules ascribed to date by the Treasury are generally perceived as disappointing
in their present form, and are unlikely to be widely attractive to the quoted
property sector. Many interested parties have lobbied the Treasury to stress
that the proposed model is too restrictive and needs amending. We await the
outcome of this and also details of a final crucial component, the conversion
charge, which will be levied on companies that convert to REIT status. The
imminent budget statement should enable us to have a much clearer view as to the
benefits for the group.
The board
Ivan Yeatman, who has been a non-executive director for 10 years, will be
standing down at the conclusion of the annual general meeting in May. Ivan has
made an excellent and wide ranging contribution to the development and
management of the business. We will greatly miss his common sense approach and
would like to take this opportunity to thank him for his valuable input and
advice. We are pleased to welcome Stuart Corbyn who will join the board after
the AGM. Stuart is chief executive of the Cadogan Estate, one of the principal
private estates in London, and a former President of the British Property
Federation. Like Ivan, he has a wealth of experience across the whole property
spectrum and I am sure he will make a valuable contribution.
Simon Silver has been awarded an Honorary Fellowship of the Royal Institute of
British Architects in recognition of his contribution to architecture and
design. Simon has been the catalyst in evolving the group's innovative approach
to creating exciting buildings and we congratulate him on this achievement.
Prospects
With investment demand continuing to be strong, and yields currently showing
more signs of contraction than expansion, new acquisitions where value can be
added, are likely to remain scarce. We are fortunate that, through our
discerning acquisition and stringent sales policies, 50% of the space in our
240,000 sq m portfolio still retains opportunities for management to use its
full complement of skills to enhance value. We remain confident that this
feature of our portfolio, and the scope to increase rents from a low base, will
enable us to make further strong progress.
J C Ivey 21st March 2006
OPERATING REVIEW
Strategy and performance
Derwent Valley is a commercial property company committed to the ownership of a
Central London office portfolio. It operates in a market place that employs
over 4 million people, 15% of the UK total, and which accounts for about 18% of
the country's GDP. London is one of the most dynamic cities in the world - a
place for business. Its economic outlook, which is principally service sector
driven, is positive with favourable employment trends predicted.
Our strategy, which includes risk management at both property and corporate
level, is to produce high total returns from a combination of income and capital
growth. To achieve this, we create interesting working environments through the
following framework of objectives:
1. Ownership of a portfolio with significant opportunities for
value enhancement through refurbishment or redevelopment.
2. Active lease management to improve rental income.
3. To maintain a pipeline of projects that can be delivered
according to market conditions.
4. Deliver and let projects on time and on cost.
5. Apply and promote contemporary architecture and
forward-thinking techniques through the Derwent Valley design brand.
6. Recycle capital for reinvestment when potential is
maximised.
Set against these objectives, 2005 was an excellent year. We achieved a total
property return of 20.1%, progressed planning applications and project
opportunities and made selective acquisitions and disposals.
Valuation commentary
At 31st December 2005, the investment portfolio was valued at just over £1.0
billion. The valuation surplus for the year was £126.1 million, before
deducting the lease incentive adjustment of £2.0 million. The strong investment
market experienced further yield compression and this contributed £72.0 million
of the surplus, with an additional £44.6 million coming from lease activity and
improving rental values. The revaluation of development properties, previously
not recognised under UKGAAP, added £8.7 million and the £0.8 million balance
came from acquisitions. The underlying valuation increase was 14.8%, compared
to 8.3% last year.
West End properties, which represent 74% of the portfolio, increased in value by
14.6% with all the component villages performing well. The Soho/Covent Garden
holdings, 20% of the portfolio, produced a 15.9% uplift. Here, a number of
prime properties, including the Covent Garden Estate, Tower House, Davidson
Building and Charing Cross Road, all benefited from strong yield compression and
rental value improvement. The Noho properties, which comprise 17% of the
portfolio, saw an uplift of 11.9%, which was driven by pre-lettings of our
Holden House project. The Belgravia, Victoria and Paddington properties
increased by 15.9%, 13.4% and 7.6% respectively. In Mayfair, the value of our
sole property, 25 Savile Row, increased 37.9% following tenure improvement.
The remaining 26% of the group's holdings are in the City borders, in areas such
as Holborn, Clerkenwell and Shoreditch. Here, the valuation uplift was 15.2% as
the benefits of recent refurbishments and strong letting activity at Oliver's
Yard and the Tea Building materialised.
Portfolio management
The portfolio comprises over 240,000 sq m of floor space, approaching 500
tenancies, and has an average lease length of 8.0 years. During the year, there
were 29 rent reviews settled at an overall uplift of 17%, and 34 lease renewals/
regears on 5,900 sq m of space. In conjunction with this, we have a strategy
for each property focused on scheme progression aligned with income management
to maximise returns. As an example, last year we retained close to 90% of the
income that was subject to lease breaks, without compromising future scheme
opportunities.
The company is a partner in New London Architecture, and held exhibitions and
presentations during the year to promote London and our projects. The space we
create ranges from studio offices (Tea Building and Morelands) to large scale
developments (Johnson Building). In each instance, we strive to produce
innovative space for the London environment at competitive terms. The emphasis
is on contemporary design, offering uncluttered accommodation that can be
occupied efficiently. Our attention to detail and hands-on style is respected
amongst our professional teams. This focused culture has been at the forefront
of the evolution of a Derwent Valley brand of accommodation, which has been
advanced by employing emerging architectural practices to promote fresh
occupational ideas. A strict environmental policy has been adopted which
exerts control over materials and construction methods. Tied in with this, we
seek to minimise building running costs which improves the appeal and the
efficiency of the space.
Our efforts translate directly into letting activity. Last year, 19,100 sq m of
space was let in 75 units at a rental of £4.5 million per annum. This was a
similar level to the previous year and took our five-year letting total to over
87,000 sq m in 300 transactions. Last year included the pre-letting of 2,300 sq
m at Holden House, Noho at rents of £410 per sq m compared to the original
appraisal levels of £350 per sq m. This latest phase completed the
transformation of the property. At the Tea Building, there were 27 lettings,
totalling 8,460 sq m, including 2,700 sq m taken by Soho House, the
international private members club. The entire project has been successful in
establishing a vibrant complex on the edge of the City of London, specialising
in media and creative businesses. In addition, rents have improved
significantly from £108 per sq m to £156 per sq m over the last two years.
Overall, our letting activity reduced the level of space available at the year
end to 9,500 sq m, down from 16,900 sq m the previous year. This represents a
vacancy level of 2.7% of the portfolio's rental value, compared to 5.9% at the
last year end.
The investment portfolio's annualised contracted rental income, net of ground
rent, was £49.3 million at the year end, with a potential rental value of £66.6
million. This £17.3 million reversion is derived from £9.6 million of vacant
accommodation and £7.7 million of rent review and lease reversions. The
portfolio yield profile on this income stream is initially 4.9% rising to 6.5%
at the full estimated rental value.
During the year, competition for space intensified and rents moved forward. The
portfolio's underlying rental value increase was 5.4% compared to 2.8% last
year. This reflects our strategy of retaining those properties in locations
with rental growth potential. The average passing rental level for the
portfolio was low at £250 per sq m, with £281 per sq m for the West End
properties. We believe these levels offer a good platform for further growth.
Vacant space, either under refurbishment or identified for refurbishment at the
year end, was 28,600 sq m. This included the 15,900 sq m Johnson Building,
Hatton Garden, where practical completion has recently been achieved. At the
4,600 sq m Portobello Dock, Ladbroke Grove, vacant possession has been obtained
and this project is expected to commence in summer 2006. A number of smaller
refurbishment projects are proposed which include 1,500 sq m at St Cross Street,
adjacent to the Johnson Building, and 1,200 sq m at 35 Kentish Town Road,
Camden.
Refurbishment and redevelopment
The outlook is optimistic for the Central London office sector with increasing
enquiries, improving take-up levels, and limited development completions over
the next few years. We intend taking advantage of these conditions by
completing schemes and implementing the next generation of projects. Delivery
of this pipeline is important to the group's future performance and we have
identified over 50% of the portfolio floor area for eventual refurbishment or
redevelopment.
Last year, capital expenditure was £26.5 million and a further £9.3 million is
committed to complete current schemes. Expenditure was incurred at over half of
our properties, which illustrates our strategy of continued portfolio
improvement. The principal project was the 15,900 sq m Johnson Building, Hatton
Garden. This £36 million development, of which £18 million was spent in the
year, is a combination of new and refurbished offices around an impressive
central atrium. Letting interest is already encouraging. As a planning
requirement, 14 residential units were included in the scheme and 12 have now
been sold. Elsewhere, capital expenditure included £2.7 million on the final
phase at Holden House and £1.4 million at the Tea Building.
At Telstar House, we departed from our normal practice of financing schemes from
our own resources and entered into a funding agreement. Following receipt of
planning permission for a 9,750 sq m development, we sold the site to
Prudential, yet retained the role of development manager and a profit
participation. Completion is anticipated in autumn 2007, which will make this
Paddington's next new office building. We also acquired from Prudential the
freehold of 25 Savile Row, Mayfair for £5.0 million plus costs.
On the planning front, a number of important permissions have been obtained and
these will form the basis for this year's schemes. At 16-19 Gresse Street,
after lengthy negotiations, permission for a 4,500 sq m office development was
granted. This project will replace the 2,900 sq m existing building, achieving
a substantial floor area increase. We propose locating the residential part of
the scheme, again a planning requirement, off-site at the adjacent 7-8 Rathbone
Place, thereby making the office permission more valuable. At Portobello Dock,
planning permission has been obtained to extend this 4,600 sq m property and
create a mixed use development. This canal side project will provide 4,700 sq m
of offices and 1,700 sq m of residential.
At Rosebery Avenue, Clerkenwell we have combined four properties and obtained
permission for their refurbishment and the addition of a new penthouse office
floor. This 3,100 sq m project illustrates our philosophy of buying early into
improving locations.
Other forthcoming projects are progressing. As described in more detail below,
at the recently acquired 13,900 sq m Horseferry House, Victoria, design details
are being finalised for a comprehensive refurbishment. At Leonard Street, on
the City borders, we are in detailed discussions with the planners for a mainly
residential scheme of 47 units. Subject to satisfactory planning and
possession, a start this year is anticipated at both of these projects.
For the longer term, our largest project is the redevelopment of 55-65 North
Wharf Road, Paddington. Here, the planning progress is slow but we anticipate
finalising the scope of the development later this year. The existing 7,800 sq
m low-rise building occupies a prime under-utilised site, and we have recently
completed an occupational lease re-structure, which enables us to take
possession for redevelopment from 2009. Other on-going studies, where there is
the potential to substantially increase the floor area, include Wedge House,
Southbank, 40-43 Chancery Lane, Holborn and Riverwalk House, Victoria. This
evaluation process lays the foundation for future projects.
Acquisitions and disposals
The strong appetite for stock led to Central London investment transactions
reaching a record high in 2005, which inevitably made it difficult to source
acquisitions. However, we made two classic Derwent Valley style purchases.
Both acquisitions are in improving locations, off low capital values, and offer
significant refurbishment potential. Firstly, Horseferry House, Victoria was
acquired in July for £32.4 million plus costs. This 13,900 sq m office building
occupies a large island site and is ideal for the Derwent Valley refurbishment
treatment, which will change the building's identity, with new entrances and the
introduction of ground floor retail. The property is leased short-term to a
Government department at £2.0 million per annum and vacant possession is
anticipated later this year. We are finalising our refurbishment proposals and
studies indicate that, by relocating the core into the existing lightwells, the
floor area can be increased by up to 10%. Secondly, on the City borders,
following exchange of contracts last year, we have recently completed the
acquisition of 186-188 City Road. The 3,600 sq m building is likely to be
refurbished to improve the rental potential.
In total, there were 13 disposals in 2005 which realised £97.8 million and
produced a surplus of £9.6 million after costs. The largest sale was Berkshire
House, Holborn, which had been subject to a rolling refurbishment and letting
programme. In addition, 19-29 Woburn Place, Bloomsbury was sold, having been
acquired in 2004 as part of the Chelsfield portfolio. The College, an
educational building where we had recently completed a comprehensive
refurbishment, was acquired by an owner-occupier. We continued to work through
the Islington portfolio. After another seven disposals in 2005, which raised
£8.6 million, 19 properties are left with interesting opportunities to exploit.
This activity continues our strategy of disposing of those investment properties
where we perceive limited growth, and takes sales over the last five years to in
excess of £370 million.
FINANCIAL REVIEW
Basis of accounting
These are the first results reported by the group in full compliance with
International Financial Reporting Standards (IFRS), adoption of which became
compulsory for companies listed on a regulated market with effect from 1st
January 2005. However, the changed format of these accounts and the new
definitions for key figures, such as profits and net assets, should be no
surprise. The 2005 interim results, published last September, were prepared on
this basis and, at that time, a full explanation of the differences between the
IFRS figures and those prepared under the previous accounting rules (UKGAAP) was
made available. As a foretaste of these accounts, the 2004 Report and Accounts
also showed the 2004 results on both an IFRS and UKGAAP basis.
Results commentary
Profit before tax
As in previous years, profit before tax has been adjusted to show a figure which
better reflects the underlying business trend. This adjusted profit of £16.7
million was lower than the IFRS restated figure for 2004 of £18.3 million. The
key influences on the adjusted profit are discussed below.
Year on year, gross property income (GPI) fell from a restated £52.1 million to
£49.5 million. As in prior years, the level of this important figure is,
firstly, the result of a balance between growth from lettings and rent reviews,
and income forgone from properties under refurbishment or redevelopment. In a
market that is currently favourable, and is expected to be so for the immediate
future, the board has pressed on with a number of value adding schemes, for
which planning consent had been achieved. Consequently, income was £3.2 million
lower in 2005 compared with 2004. This reduction was exceeded marginally by
income from lettings and rent reviews, at £3.2 million and £0.3 million
respectively. A second balance that affects GPI is that between acquisitions
and disposals of properties. It is not surprising that, in a year in which
property values have risen strongly, income from properties sold of £5.2 million
exceeded that acquired of £2.8 million.
The net reduction in GPI, including other minor factors, was £2.6 million.
However, lower property expenditure meant that, at the net property income
level, the decline was only £1.4 million to £46.6 million, compared with the
restated £48.0 million of 2004. This was a result of lettings achieved in 2004
and 2005 which, in addition to generating GPI, also had the effect of reducing
the group's void costs. These fell £0.6 million year on year. Additionally,
due to the timing of scheme completions in 2005, there was less vacant space to
let and transaction costs, mainly legal and letting fees, were consequently
reduced by £0.2 million.
Administrative expenses rose £1.7 million, entirely due to increased employment
costs. While all categories of these costs rose, the two largest increases,
both of £0.7 million, related to incentive schemes run by the group. The
long-term incentive plan, which has an in-built three-year cycle, was only
introduced two years ago. Therefore, 2005 bore the cost of two years' worth of
share allocations compared with one year in 2004. A further rise in the charge
for this scheme will occur in 2006, after which the annual cost should
stabilise. Additionally, the strong rise in the company's share price during
the year has required further national insurance provisions to be made in
respect of share-based remuneration.
The group also operates a benchmarked bonus scheme for staff and directors, the
level of awards from which can only be determined after the group has announced
its results. This led to an over accrual in 2003 which lowered the 2004 charge
by £0.2 million and an under accrual of £0.2 million in 2004 which has been
charged in 2005 while the 2005 provision has been increased.
Finally, net finance costs were down £1.6 million due mainly to borrowings
repaid by disposal proceeds.
The net effect of these movements accounts for the £1.6 million reduction in
adjusted profit before tax. To arrive at the profit before tax of £150.4
million, reported in the group income statement, two other figures need to be
considered. The largest item in the income statement is the £124.1 million
surplus on revaluation of the group's properties. This is £77.7 million up on
last year and a discussion of this can be found in the operating review. Under
UKGAAP, this figure would have been shown as a reserve movement. It is not a
realised profit and is not taken into account when setting the dividend. The
second item is the profit on disposal of investment properties. This was £9.6
million in 2005, compared with £24.9 million in 2004, which included the
insurance receipt of £18.5 million in respect of a fire damaged building. The
scale of the above figures, together with the movement in the fair value of
interest rate derivatives, which in these accounts was not a factor year on
year, shows how volatile profit before tax may be under IFRS and why the group
continues to report an adjusted profit before tax to best reflect underlying
trends.
Tax expense
Full details of the £33.7 million tax expense can be found in the tax note. The
largest item is the £29.1 million deferred tax charge. The cash flow shows that
the actual tax paid in the year was only £4.2 million.
Dividend
The dividend is now reported on a paid and not payable basis as previously under
UKGAAP. It is also no longer shown in the group income statement as a
distribution of the year's earnings but as a deduction from reserves.
Net assets
Net assets rose £110.7 million to £606.2 million at 31st December 2005, mainly
due to the surplus arising from the year end property revaluation noted above.
As with UKGAAP, an adjusted net asset value per share is reported. This figure
rose to 1,335p per share in 2005, an increase of 24.3% from last year's restated
1,074p.
Total return
The growth in net asset value is reflected in the total return for the year of
25.5% (2004: 17.2%).
Cash flow
The group had a cash inflow for the year, after the payment of dividends, of
£34.5 million, compared with an outflow in 2004 of £17.9 million. In a year
when value adding acquisitions were difficult to secure, and demand for property
from all sectors of the market was high, advantage was taken of the latter, such
that proceeds from the disposal of investment properties (£97.8 million)
exceeded acquisitions (£40.3 million) and capital expenditure (£26.7 million) by
£30.8 million. In 2004, the reverse was true in that disposals only part
financed investment outflows. Cash generated from the underlying business
before tax was £14.7 million. After payment of tax and distributions to
shareholders, this was reduced to £3.7 million, an insignificant amount when set
against capital expenditure demands. This demonstrates the importance of
maintaining committed bank facilities.
Financing
Sources of finance
In addition to its share capital, the group is financed by a series of
bi-lateral, medium term, revolving credit facilities from a number of banks with
whom the group has long-term relationships. Outside of its existing lenders,
close relationships are maintained with a second tier of banks to satisfy future
debt requirements. Sources of finance, which would provide an alternative to
bank debt, are also reviewed and considered. While the group expects to borrow
competitively in line with its credit standing, the margin is only one
negotiable element in a financing arrangement and other items, such as covenants
and flexibility, are equally important. The group continues to borrow on a
secured basis with only loan to value and interest to rent covenants. There are
no corporate covenants given to support its borrowing.
During the year, the bank facility that was due to expire in April 2006 was
renegotiated on improved terms. Amongst other matters which were reviewed, the
term of the loan was extended for seven years, such that the loan now matures in
2013. There is now no loan due for renegotiation until late 2008. At the year
end, total group bank facilities were £430 million, of which £264 million had
been drawn down. Therefore, the group has sufficient facilities to fund its
next two year's capital expenditure, estimated to be about £70 million, while
allowing it to move quickly when prospective acquisitions are identified. The
group also has a £35 million listed debenture which is due for repayment in
2019.
Debt and gearing
With a cash inflow of £34.5 million, net debt fell year on year from £341.5
million to £303.9 million. In addition to the debenture and bank loans, these
figures include the leasehold liabilities that are treated as debt under IFRS.
In terms of managing the group's debt liabilities, these are irrelevant and
considered a property matter as they are derived from ground rent payable.
The decrease in debt levels and the growth in property values had reduced
balance sheet gearing to 50% from 69% at the December 2004 year end. However,
profit and loss gearing for the year was effectively unchanged from 2004 at
1.84. This demonstrates why it is the more important figure for the board to
manage when it is reviewing the group's risk profile, particularly in respect of
the ongoing refurbishment and redevelopment programme and the average lease
length profile.
Liability risk management
The group uses derivatives to protect itself from adverse interest rate
movements. Board policy is that sufficient hedging should be entered into such
that the total of fixed rate debt, and that fixed using derivative instruments,
is within a range of 40% to 75% of total debt. The actual percentage is
dependent on the perceived risk to the group. At the year end, 67% of debt was
covered, which gave a weighted average cost of debt of 6.4%.
Under IFRS, the difference between the year end valuations of the interest rate
derivatives is included in the group income statement as part of the interest
charge and the valuation itself shown in the balance sheet. Although the
interim results showed a charge of £1.4 million in respect of this, the
valuation had fallen back to its 31st December 2004 figure of £3.1 million by
the 2005 year end. At both December 2004 and 2005 this is equivalent to 4p per
share after tax. The fair value of the debenture continues to be shown in a
note to the financial statements as the company is carrying it at amortised cost
in accordance with its accounting policies, and has no obligation or present
intention to redeem the debenture other than at normal maturity. The fair value
adjustment figure for the debenture was a negative £14.1 million compared with a
negative £11.7 million at the 2004 year end. This is equivalent to 18p per
share after tax (2004: 15p per share).
Outlook
In considering the current financial year (2006), the movement in net property
income will continue to be a balance between the letting of completed schemes
and voids caused by the group's refurbishment and redevelopment programme. The
group's major expense is employment costs. Salaries will rise as the group
needs to attract and retain the best staff to grow its business, while incentive
payments are dependent on the group's relative performance against its peers and
various indices. Any change in interest rates will have only a modest impact on
profits due to the group's hedging policy. In terms of net asset growth,
although rental levels are moving upwards, the factor which will determine the
year's outturn is likely to be the direction which property yields take during
the year.
As stated at the beginning, these are the first full set of financial statements
to be prepared under IFRS. Accounts already published under this basis have
been found useful by some, but they have not been met with universal acclaim.
Certainly, most commentators in the real estate sector are adjusting both
profits and net assets to provide something they find more useful and,
consequently, these financial statements show these figures for those who wish
to use them. This may indicate that, despite all the work that went in to
producing IFRS, the right answer may not have been found yet.
However, it is early days with IFRS. It will take time before users of the
financial statements become familiar with the new format and definitions,
although the length and complexity will deter some. Further immediate changes
to the standards, or technicians reading into them unintended consequences,
should be avoided. Compliance with IFRS has been costly and time consuming for
companies and a period of reflection would be beneficial, not least because any
more changes to definitions of key figures would strain credibility as to which
are the correct or "true and fair" ones.
Group INCOME STATEMENT
Note 2005 2004
Restated
£m £m
Gross property income 49.5 52.1
Property outgoings 2 (2.9) (4.1)
_______ _______
Net property income 46.6 48.0
Administrative expenses (8.8) (7.1)
Revaluation surplus 124.1 46.4
Profit on disposal of investment properties 3 9.6 24.9
_______ _______
Profit from operations 171.5 112.2
Finance income 0.4 0.3
Finance costs 4 (21.5) (23.0)
Share of results of joint ventures 5 - 1.6
_______ _______
150.4 91.1
Tax expense 6 (33.7) (18.5)
_______ _______
Profit for the year 116.7 72.6
_______ _______
All amounts are attributable to the equity holders of
the parent company.
Basic earnings per share 7 218.63p 136.64p
_______ _______
Diluted earnings per share 7 216.81p 135.76p
_______ _______
Group balance sheet
Note 2005 2004
Restated
£m £m
Non-current assets
Investment property 8 1,015.6 915.6
Property, plant and equipment 9 0.4 0.6
Investment in joint ventures 1.8 1.8
Other receivables 13.3 11.0
_______ _______
1,031.1 929.0
_______ _______
Current assets
Trade and other receivables 12.3 12.9
Cash and cash equivalents 14.7 4.5
_______ _______
27.0 17.4
_______ _______
Total assets 1,058.1 946.4
Current liabilities
Bank overdraft (2.0) (1.3)
Trade and other payables (20.7) (22.9)
Corporation tax liability (3.0) (2.6)
Provisions (0.1) (0.1)
_______ _______
(25.8) (26.9)
_______ _______
Non-current liabilities
Bank loans (262.0) (288.0)
10 1/8% First Mortgage Debenture Stock 2019 (34.5) (34.5)
Leasehold liability (20.1) (22.2)
Derivative financial instruments (3.1) -
Provisions (1.2) (0.9)
Deferred tax liability 10 (105.2) (78.4)
_______ _______
(426.1) (424.0)
_______ _______
Total liabilities (451.9) (450.9)
_______ _______
Total net assets 606.2 495.5
_______ _______
Equity - attributable to equity holders of the parent
company. 11
Share capital 2.6 2.6
Share premium 155.1 154.1
Other reserves 2.3 0.3
Retained earnings 446.2 338.5
_______ _______
Total equity 606.2 495.5
_______ _______
Adjusted net asset value per share 13 1,335p 1,074p
_______ _______
Net asset value per share 13 1,134p 930p
_______ _______
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
2005 2004
Restated
£m £m
Profit for the year 116.7 72.6
Recognition of financial instruments at 1st January 2005
at fair value under IFRS1 transitional rule (2.2) -
______ _____
Total recognised income and expense relating to the year 114.5 72.6
______ _____
2005 2004
Restated
£m £m
Change in shareholders' equity
Total recognised income and expense relating to the year 114.5 72.6
Equity dividends paid (6.8) (6.2)
Share-based payment transferred to reserves 0.6 0.3
Deferred tax asset in respect of share-based payments 1.4 -
Premium on issue of shares 1.0 0.5
_______ _______
110.7 67.2
Equity at 1st January 495.5 428.3
_______ _______
Equity at 31st December 602.2 495.5
_______ _______
All amounts are attributable to the equity holders of the
parent company.
Group cash flow statement
2005 2004
Restated
£m £m
Operating activities
Cash received from tenants 46.3 47.1
Direct property expenses (3.0) (6.3)
Cash paid to and on behalf of employees (4.5) (3.7)
Other administrative expenses (2.8) (3.5)
Interest received 0.4 0.2
Interest paid (21.7) (20.9)
Tax paid in respect of operating activities (1.0) (0.6)
_______ _______
Net cash from operating activities 13.7 12.3
_______ _______
Investing activities
Acquisition of investment properties (40.3) (88.7)
Capital expenditure on investment properties (26.7) (26.1)
Disposal of investment properties 97.8 76.9
Capital insurance receipt - 18.7
Purchase of property, plant and equipment - (0.1)
Tax paid in respect of investing activities (3.2) (4.7)
_______ _______
Net cash from/(used in) investing activities 27.6 (24.0)
_______ _______
Financing activities
Movement in bank loans (26.0) 18.1
Net proceeds of share issues 1.0 0.5
Dividends paid (6.8) (6.2)
_______ _______
Net cash (used in)/from financing activities (31.8) 12.4
_______ _______
Increase in cash and cash equivalents in the year 9.5 0.7
Cash and cash equivalents at the beginning of the 3.2 2.5
year
_______ _______
Cash and cash equivalents at the end of the year 12.7 3.2
_______ _______
Notes
1. Basis of preparation
The results for the year ended 31st December 2005 include those for the holding
company and all of its subsidiary undertakings together with the group's share
of the results of its joint ventures.
These financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board as adopted by the European Union and with those parts
of the Companies Act 1985 applicable to companies preparing their accounts under
IFRS. This is the first time the group has prepared its financial statements in
accordance with IFRS, having previously prepared its financial statements in
accordance with UKGAAP.
A detailed reconciliation of the 2004 financial position and performance
of the group, together with the accounting policies that have been applied and
the exemptions taken under IFRS1, First-Time Adoption of International Financial
Reporting Standards, is included in "Derwent Valley Holdings plc - Conversion
from UKGAAP to International Financial Reporting Standards", which is published
on the company's website, www.derwentvalley.co.uk. Copies can also be obtained
from the Company Secretary, Derwent Valley Holdings plc, 25 Savile Row, London,
W1S 2ER. The accounting policies and reconciliations will be included in the
2005 Report and Accounts.
2. Property outgoings
2005 2004
Restated
£m £m
Ground rents 0.2 0.3
Other property outgoings 2.7 3.8
_______ _______
2.9 4.1
_______ _______
3. Profit on disposal of investment properties
2005 2004
Restated
£m £m
Disposal proceeds 97.8 78.9
Carrying value (90.1) (72.5)
Leasehold liabilities 1.9 -
_______ _______
9.6 6.4
Insurance receipt from fire damaged building - 18.5
_______ _______
9.6 24.9
_______ _______
4. Finance costs
2005 2004
Restated
£m £m
Finance costs
Bank loans and overdraft wholly repayable within five years 8.4 14.6
Bank loans not wholly repayable within five years 8.2 3.6
Debenture stock 3.6 3.6
Finance leases 1.3 1.2
_______ _______
21.5 23.0
_______ _______
5. Share of results of joint ventures
2005 2004
Restated
£m £m
Profit from operations before revaluation surplus - 0.1
Revaluation surplus - 1.5
_______ _______
- 1.6
_______ _______
6. Tax expense
2005 2004
Restated
£m £m
Corporation tax expense
UK corporation tax and income tax on profits for the year 4.0 6.3
Adjustment for under/(over) provision in prior years 0.6 (1.1)
_______ _______
4.6 5.2
_______ _______
Deferred tax expense
Origination and reversal of temporary differences 30.9 12.4
Adjustment for (over)/under provision in prior years (1.8) 0.9
_______ _______
29.1 13.3
_______ _______
_______ _______
33.7 18.5
_______ _______
The tax for both 2005 and 2004 is lower than the standard rate of corporation
tax in the UK. The differences are explained below:
2005 2004
Restated
£m £m
Profit before tax 150.4 91.1
_______ _______
Expected tax expense based on the standard rate of corporation tax
in the UK of 30% (2004 - 30%) 45.1 27.3
Indexation relief on investment properties (8.0) (10.4)
Difference between tax and accounting profit on disposals (1.4) 2.2
Other differences (0.8) (0.4)
_______ _______
Tax expense on current year's profit 34.9 18.7
Adjustments in respect of prior years' tax (1.2) (0.2)
_______ _______
33.7 18.5
_______ _______
Tax charged directly to reserves
Deferred tax on fair value of derivative financial instruments (0.9) -
Deferred tax on share-based payments (1.4) -
_______ _______
(2.3) -
_______ _______
7. Earnings per share
Weighted
average
Profit for number of Earnings
the year shares per share
£m '000 p
Year ended 31st December 2005
Basic 116.7 53,378 218.63
Adjustment for dilutive share-based payments - 447 (1.82)
_______ _______ _______
Diluted 116.7 53,825 216.81
_______ _______ _______
Year ended 31st December 2004
Basic 72.6 53,195 136.64
Adjustment for dilutive share-based payments - 346 (0.88)
_______ _______ _______
Diluted 72.6 53,541 135.76
_______ _______ _______
Year ended 31st December 2005
Basic 116.7 53,378 218.63
Adjustment for deferred tax on capital allowances (0.8) - (1.50)
Adjustment for disposal of investment properties (7.0) - (13.11)
Adjustment for group revaluation surplus (94.9) - (177.79)
_______ _______ _______
Adjusted 14.0 53,378 26.23
_______ _______ _______
Year ended 31st December 2004
Basic 72.6 53,195 136.64
Adjustment for deferred tax on capital allowances 2.2 - 4.13
Adjustment for disposal of investment properties (20.7) - (38.89)
Adjustment for group revaluation surplus (36.7) - (69.15)
Adjustment for share of joint venture's revaluation (1.5) - (2.82)
surplus
_______ _______ _______
Adjusted 15.9 53,195 29.91
_______ _______ _______
The adjusted earnings per share excludes the after tax effect of fair value
adjustments to the carrying value of assets and liabilities, together with the
profit or loss after tax arising from the disposal of investment properties.
The adjusted earnings per share figure also excludes the deferred tax charge
provided in respect of capital allowances claimed, on the basis that it is
unlikely that a liability will ever crystallise. These adjustments are widely
made by analysts and investors.
8. Investment property
Freehold Leasehold Total
£m £m £m
Carrying value
At 1st January 2005 595.4 320.2 915.6
Transfer 23.2 (23.2) -
Additions 64.6 1.4 66.0
Disposals (55.4) (34.7) (90.1)
Revaluation 96.4 27.7 124.1
_______ _______ _______
At 31st December 2005 724.2 291.4 1,015.6
_______ _______ _______
At 1st January 2005
Fair value 606.4 299.8 906.2
Adjustment for rents recognised in advance (11.0) (1.8) (12.8)
Adjustment for grossing up of headlease liabilities - 22.2 22.2
_______ _______ _______
Carrying value 595.4 320.2 915.6
_______ _______ _______
At 31st December 2005
Fair value 737.5 272.3 1,009.8
Adjustment for rents recognised in advance (13.3) (1.0) (14.3)
Adjustment for grossing up of headlease liabilities - 20.1 20.1
_______ _______ _______
Carrying value 724.2 291.4 1,015.6
_______ _______ _______
Investment property in the course of development with a carrying value of £75.0
million (2004 - £50.3 million) is included in the carrying value of freehold
property above.
The freehold land and buildings and leasehold property were revalued at 31st
December 2005 by either CB Richard Ellis Limited or Keith Cardale Groves
(Commercial) Limited, as external valuers, on the basis of market value as
defined by the Appraisal and Valuation Manual published by the Royal Institution
of Chartered Surveyors.
At 31st December 2005, the historical cost of the freehold land and buildings
and leasehold property owned by the group was £635.6 million (2004 - £652.3
million).
9. Property, plant and equipment
2005 2004
Restated
£m £m
Net book value
At 1st January 0.6 0.6
Additions - 0.1
Disposals (0.1) -
Depreciation (0.1) (0.1)
_______ _______
At 31st December 0.4 0.6
_______ _______
At 31st December
Cost 1.3 1.4
Accumulated depreciation (0.9) (0.8)
_______ _______
Net book value 0.4 0.6
_______ _______
10. Deferred tax liability
Revaluation Capital
surplus allowances Other Total
£m £m £m £m
At 1st January 2005 62.4 14.4 1.6 78.4
Adjustment to reserves in respect of
deferred tax on fair value of derivative financial
instruments at 31st December 2004 - - (0.9) (0.9)
Adjustment to reserves in respect of
deferred tax on share-based payments - - (1.4) (1.4)
Provided during the year 29.2 (0.8) 0.7 29.1
_______ _______ _______ _______
At 31st December 2005 91.6 13.6 - 105.2
_______ _______ _______ _______
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 31st December 2005. The calculation takes account of indexation
on the historic cost of the properties and any available capital losses to the
extent that these are deductible.
11. Equity
Share Share Other Retained
capital premium reserves earnings
£m £m £m £m
At 1st January 2005 2.6 154.1 0.3 338.5
Fair value of derivative financial
instruments at 31st December 2004 - - - (3.1)
Deferred tax asset in respect of the fair
value of derivative financial instruments
at 31st December 2004 - - - 0.9
Premium on issue of shares - 1.0 - -
Share-based payments expense transferred
to reserves - - 0.6 -
Deferred tax asset in respect of share-based
payments - - 1.4 -
Profit for the year - - - 116.7
Dividend - - - (6.8)
_______ _______ _______ _______
At 31st December 2005 2.6 155.1 2.3 446.2
_______ _______ _______ _______
12. Dividend
2005 2004
Restated
£m £m
Final dividend of 8.90p (2004 - 8.10p) per ordinary share proposed and
paid during the year relating to the previous year's results 4.8 4.3
Interim dividend of 3.925p (2004 - 3.60p) per ordinary share
paid during the year 2.0 1.9
_______ _______
6.8 6.2
_______ _______
The directors are proposing a final dividend of 9.725p (2004 - 8.90p) per share
totalling £5.2 million. This dividend has not been accrued at the balance sheet
date.
13. Net asset value per share
Net asset
Net Number of value per
assets shares share
£m '000 p
At 31st December 2005
Basic 606.2 53,472 1,134
Adjustment for deferred tax on capital allowances 13.6 - 26
Adjustment for deferred tax on revaluation surplus 91.6 - 171
Adjustment for post tax fair value of derivative
financial instruments 2.2 - 4
_______ _______ _______
Adjusted 713.6 53,472 1,335
_______ _______ _______
At 31st December 2004
Basic 495.5 53,268 930
Adjustment for deferred tax on capital allowances 14.4 - 27
Adjustment for deferred tax on revaluation surplus 62.4 - 117
_______ _______ _______
Adjusted 572.3 53,268 1,074
_______ _______ _______
In order to provide a figure used by analysts and investors, adjusted
net assets exclude the deferred tax provided in respect of capital allowances
claimed on the basis that it is unlikely that this liability will ever
crystallise. The deferred tax on the revaluation surplus and the post tax fair
value of derivative financial instruments are also excluded, on the basis that
these amounts are not relevant when considering the group as an ongoing
business.
14. Total return
2005 2004
Restated
% %
Total return 25.5 17.2
_______ _______
Total return is the movement in adjusted net asset value per share 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.
15. Gearing
Balance sheet gearing for 2005 is 50.1% (2004 - 68.9%). This is defined as net
debt divided by net assets.
Profit and loss gearing for 2005 is 1.84 (2004 - 1.85). This is defined as net
property income less administrative expenses divided by net interest payable
having reversed the reallocation of ground rent payable on leasehold properties
to interest payable of £1.3 million (2004 - £1.2 million).
16. Post balance sheet event
On 27th February 2006, the group completed the purchase of an investment
property for £6.8 million excluding costs.
17. The announcement set out above does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985, for the year ended
31st December 2005. The auditors have reported on the statutory accounts for
the said year and have accompanied them with an unqualified report. The
accounts have yet to be delivered to the Registrar of Companies. The annual
report and accounts will be posted to shareholders on 20th April 2006, and will
also be available on the company's website, www.derwentvalley.co.uk, from that
date. The annual general meeting of the company will be held on 23rd May 2006.
This information is provided by RNS
The company news service from the London Stock Exchange D
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