Final Results

Hammerson PLC 24 February 2003 Embargoed until 7.00 a.m. - Monday, 24 February 2003 Hammerson plc - Results for the year ended 31 December 2002 2002 2001 Change Restated(1) Net rental income £175.9m £159.9m +10.0% Profit before taxation £90.9m £69.1m +31.5% Exceptional items £5.3m (£8.2m) Adjusted profit before taxation(2) £85.6m £77.3m +10.7% Earnings per share 27.1p 27.1p - Adjusted earnings per share(2) 29.2p 24.3p +20.2% Adjusted net asset value per 752p 731p +2.9% share(3) Return on shareholders' equity 4.3% 8.3% Gearing 80% 65% Recommended final dividend of 10.99 pence (2001: 10.26 pence) making a total for the year of 15.8 pence, an increase of 6.5%. Note (1) Figures for 2001 have been restated following the adoption of Financial Reporting Standard 19, 'Deferred tax'. (2) Excluding deferred tax and exceptional items, comprising profits and losses on the sale of investment properties and, in 2001, the costs of redeeming convertible bonds. (3) Excluding deferred tax. Copies of the Chairman's Statement, preliminary results statement, profit & loss account, balance sheet and cash flow statement are attached. Operational Highlights • Increase in retail portfolio weighting from 57% to 65% • Underlying growth in rents of 9.4%. • Successful acquisition and integration of Grantchester Holdings PLC • Property transactions totalling nearly £1.4 billion. Ronald Spinney, Chairman, said: 'Market conditions in 2002 proved challenging. Against this background, Hammerson continued to focus on driving income from the existing portfolio, completing the current developments and recycling capital. Capital investment of over £850 million and property disposals of £520 million marked an active year for the group. During 2002, the group acquired interests in two major regional shopping centres and the entire share capital of Grantchester Holdings PLC. This latter acquisition provides Hammerson with a major presence in the retail warehouse sector and has been successfully integrated into our existing business. Hammerson has a high quality portfolio which will show growth in rental income from rent reviews, renewals and new leases over the next few years. We shall continue to recycle capital by appropriate disposals. At the same time, the group is well placed to add value by completing the current developments and exploiting other opportunities within the portfolio.' For further information: John Richards Tel: 020 7887 1000 Chief Executive Fax: 020 7887 1010 Simon Melliss Group Finance Director Christopher Smith Director of Corporate Affairs CHAIRMAN'S STATEMENT Introduction Market conditions in 2002 proved challenging. Against this background, Hammerson continued to focus on driving income from the existing portfolio, completing the current developments and recycling capital. Capital investment of over £850 million and property disposals of £520 million marked an active year for the group. During 2002, the group acquired interests in two major regional shopping centres and the entire share capital of Grantchester Holdings PLC. This latter acquisition provides Hammerson with a major presence in the retail warehouse sector and has been successfully integrated into our existing business. Good progress was made with the current office development projects both in central London and central Paris. Expenditure and commitments in respect of unlet office developments in London totalled £139 million at the year end and this should be seen in the context of a total portfolio of £3.9 billion. At Bullring, the major redevelopment by The Birmingham Alliance, which opens in September 2003, letting progress is very encouraging. Hammerson maintains its strategy of focusing on retail and office properties, principally in the UK and France, and managing capital to generate good shareholder returns. Financial Last year, I made reference to the potential for income growth from the existing portfolio. In 2002, Hammerson was successful in achieving rent reviews and lease renewals resulting in an underlying increase in rental income of 9.4%. This was the major factor in an increase in profit before exceptional items of 10.7% to £85.6 million in 2002. Reflecting a lower current tax charge, adjusted earnings per share rose by 20.2% to 29.2 pence. In the light of the more difficult conditions in property investment markets, there was an underlying decrease of 0.3% in the value of the group's properties during 2002. Whilst there were increases in values in the UK and French retail portfolios, there were decreases in Germany and in London and Paris offices. Adjusted net asset value per share rose by 21 pence or 2.9% to 752 pence, with retained earnings and currency exchange movements more than offsetting the decrease in property values. The return on equity was 4.3% in 2002, compared with 8.3% in 2001. Hammerson has access to substantial undrawn committed bank facilities and its balance sheet remains strong. During the year five million shares were purchased and cancelled at an average price of 501 pence and a total cost of £25 million. It remains the group's intention that capital that is not required in the business will be returned to shareholders through dividends or the purchase of the Company's own shares. The directors are recommending a final dividend of 10.99 pence, compared with 10.26 pence in 2001. This makes a total dividend for the year of 15.8 pence, an increase of 6.5%. Markets and Outlook Retail Property In the UK, comparison retail sales grew by 6.5% in 2002, slightly below the levels of the past few years. Whilst a pickup in GDP growth is forecast through 2003 and 2004, there are mixed signals coming from retailers over future performance. On the supply side, additions to UK retail floorspace are projected to be modest over the next few years. This, combined with the continuing concentration of retail spending in fewer locations and retailers' focus on profitability, will support occupational demand for large, dominant centres and for retail warehousing, the categories of retail property in which Hammerson invests. Rental growth in these locations is anticipated to be above the average for retail property as a whole. In France, retail sales grew by 2.3% in 2002, compared with 1.3% in 2001. Proposed tax cuts are forecast to support consumer spending this year. It is likely that retail locations which can deliver rising turnover or a competitive cost base will continue to show the highest rental growth. In both the UK and France, good demand for retail property investments, limited supply, the potential for modest rental growth, and continuing low interest rates, are expected to support shopping centre yields at their current levels. The German economy remains fragile and consumer confidence low. It seems probable that retail property rents and values will recover only when the economy and consumer and business confidence improve. Office Property At the time of the group's interim results last August, I said that central London office rental levels had declined by about 10% in the first six months of the year. The market continued to deteriorate in the second half of the year, with a further decline in rental levels of around 10-15%. The reductions were greatest in Docklands and the City, with a smaller decline in the West End. In contrast, investment demand for prime offices let to major occupiers on long leases remained robust. Over the next 12 months, a number of speculative developments are due to complete in central London. Availability is being further increased by occupiers returning good quality surplus space to the market, a reflection of the continued weakness in the financial services sector. Whilst there should be some recovery in the occupational market in 2003 and 2004, it is unlikely that this will be reflected in a recovery in rental levels. However, the investment market for prime well-let property should remain sound. In Paris, slowing economic growth led to a higher vacancy rate in central Paris for prime offices and a fall in rental levels of around 5% during 2002. Looking ahead, we anticipate some further softening in rents in 2003 with potential occupiers cautious about entering into new commitments. Nevertheless, the better medium term prospects for the Paris market and low interest rates suggest that investment yields will remain around current levels. Taxation In France, outline legislation has recently been passed which will allow property companies quoted in France to elect for exemption from tax on income from French property assets. Tax will be paid by shareholders in respect of dividends received. As the detailed regulations have yet to be published, it is too early to say how these changes will affect Hammerson, but the position is being closely monitored. Conclusion Hammerson has a high quality portfolio which will show growth in rental income from rent reviews, renewals and new leases over the next few years. We shall continue to recycle capital by appropriate disposals. At the same time, the group is well placed to add value by completing the current developments and exploiting other opportunities within the portfolio. Ronald Spinney 24 February 2003 FINANCIAL REVIEW Profit and Loss Account • Net rental income was £175.9 million in 2002 compared with £159.9 million in 2001. Within net rental income, £3.8 million related to turnover rent and there was £2.5 million of accrued rent receivable allocated to rent free periods. • An analysis of net rental income is shown below: 2002 2001 £m £m Properties owned throughout 2002 and 2001 152.2 139.1 Acquisitions 15.6 0.3 Developments 3.4 0.4 Properties sold 4.7 21.4 Exchange translation and other - (1.3) 175.9 159.9 • Administration expenses in 2002 included one-off rationalisation costs of £2.6 million following the acquisition of Grantchester Holdings PLC. Excluding this, costs rose by £3.4 million compared with 2001, primarily due to increased staff costs, which included additional pension expenses. The UK defined benefit pension scheme was closed to new employees with effect from 1 January 2003. • Management fees of £2.8 million were received in 2002 for asset and development management services provided to the group's joint ventures, an increase of £0.9 million on the fees for 2001. • The group's net financing costs were £66.0 million in 2002 compared with £67.6 million in 2001. The latter figure included £3.3 million relating to the redemption of the group's £110 million convertible bonds. Interest capitalised was £24.6 million in 2002, compared with £19.1 million in 2001, the increase reflecting capital expenditure on the development programme. The average cost of borrowing was 6.1% compared with 6.4% in 2001. Interest cover remained at 1.9 times. • Profit before tax was £90.9 million, including profits on the sale of investment properties of £5.3 million. In 2001, profit before tax was £69.1 million after charging exceptional items of £8.2 million. Adjusted profit before tax, excluding exceptional items, was £85.6 million, compared with £77.3 million in 2001, an increase of 10.7%. • The tax charge in 2002 was £13.6 million, of which £11.1 million was deferred tax. The current tax charge of £2.5 million compared with a charge of £7.9 million in 2001, and represented an effective tax rate of 2.8%. The low tax rate was principally due to tax reliefs available from previous years and offset against UK tax payable in 2002. • Earnings per share for 2002 were 27.1 pence. Adjusted earnings per share, after excluding profits on disposals and deferred tax, were 29.2 pence compared with 24.3 pence in 2001, an increase of 20.2%. • A final dividend of 10.99 pence per share is proposed which, together with the interim dividend of 4.81 pence per share, makes a total of 15.8 pence per share for the year. This represents an increase of 6.5% over the total dividend for 2001. Cash Flow • Cash flow from operating activities was £148 million, with the increase of £13 million compared to 2001 attributable to increased rental income. This increase was largely offset by additional interest on the financing of acquisitions and development expenditure. • The cash outflow on acquisitions and other capital expenditure was £668 million, whilst £520 million was realised from disposals. After paying dividends of £42 million there was a cash outflow in 2002 of £132 million. Balance Sheet • At 31 December 2002, Hammerson's portfolio was valued at £3,908 million, compared with £3,488 million at the end of 2001. The increase of £420 million reflected additional net investment of £361 million after disposals, a revaluation deficit of £19 million and a favourable exchange movement of £78 million. • The development portfolio was valued at £468 million, £9 million above cost. Developments are shown at a valuation that is discounted for the estimated costs to complete, including interest, and a profit margin that a potential purchaser might apply. The group does not intend to dispose of any of its developments prior to their completion, and management believes that additional surpluses will be achieved. • A total of five million shares were purchased and cancelled in 2002 at an average price of 501 pence and a total cost of £25 million, increasing net asset value per share by 4 pence. • The group's net assets at 31 December 2002 amounted to £2,040 million, after allowing for deferred tax of £35 million, little changed from the previous year. • Adjusted net asset value per share, after excluding deferred tax, increased by 21 pence or 2.9% to 752 pence at the year end. Of this increase, retained earnings contributed 16 pence, offsetting a reduction of 7 pence due to the portfolio revaluation, the impact of share purchases was 4 pence, and exchange and other movements contributed 8 pence. Borrowings • At the end of 2002, the group's borrowings were £1,883 million. In June 2002 Hammerson arranged a new £215 million five year committed borrowing facility with a syndicate of leading international banks. Undrawn committed facilities were £294 million. • The weighted average maturity of borrowings at 31 December 2002 was approximately eight years, with 34% maturing after ten years and 90% of debt was unsecured. Secured borrowings of £197 million were assumed on the purchase of Grantchester and, since the year end, £84 million of these have been repaid and cancelled. • Cash and deposits were £242 million, and net debt was therefore £1,642 million. Gearing at 31 December 2002 was 80% compared with 65% at the end of 2001. The group is advancing a number of property disposals which will have the effect of reducing the level of gearing. • The market value of borrowings at the year end was £2,002 million, some £118 million greater than the book value, equivalent to 30 pence per share after tax. During the year, the margin above gilts of Hammerson's long-dated sterling bonds remained broadly constant but long term gilt yields reduced by 40 basis points. Also, in continental Europe, medium term government bond yields reduced by 80 basis points. The combination of these had the effect of increasing the market value of debt by £54 million. Return on Shareholders' Equity • At 4.3%, Hammerson's return on invested capital was below the group's estimated weighted average cost of capital of 6.3% after taxation. The principal reason for this was the small decline in the value of the portfolio. Financial Reporting • FRS 19 'Deferred tax' has been adopted for the year to 31 December 2002, and consequently full provision has been made for the possible recovery of tax relief received on capital allowances, tax depreciation and capitalised interest. In practice, the group does not normally pay tax on these items when properties are sold, and accordingly it reports net assets per share and earnings per share adjusted to exclude deferred tax. PORTFOLIO REVIEW • At 31 December 2002, Hammerson's portfolio had a book value of £3,908 million, including developments of £468 million. • Reflecting the acquisitions of the retail warehouse portfolio and major shopping centre interests in the UK and France, the retail component of the portfolio increased from 57% at the beginning of the year to 65% at 31 December 2002. The distribution between the UK and continental Europe was unchanged at 66% and 34% respectively at year end. • Total capital additions were £852 million in 2002. Of this £148 million was invested in the development programme, £665 million was attributable to acquisitions, including the Grantchester and Railtrack portfolios, and £39 million was spent on the existing portfolio. • Hammerson now has a retail portfolio of 20 major shopping centres and 15 retail parks and warehouses, providing around one million square metres of retail space. The group's office portfolio consists of 19 prime office buildings located in central London and central Paris with a total area of over 250,000 m(2). • During 2002, the group renewed over 200 expiring leases and carried out over 90 rent reviews, leading to an underlying increase in rents of 9.4%. Portfolio Information for the year ended 31 December 2002 Net Underlying Average rental Properties valuation Total Reversionary/ unexpired income at change return (over-rented) lease valuation term £m £m % % % years Note (1) United Kingdom Retail: Shopping centres 65 1,310 5.3 12.1 7.7 13 Retail warehouses (2) 5 344 0.8 2.2 19.7 17 70 1,654 4.8 11.6 9.9 14 Office 54 908 (6.7) (0.7) (11.5) 12 Total United Kingdom 124 2,562 0.4 6.4 1.1 13 Continental Europe Retail: France 32 593 3.3 9.1 22.2 7 Germany 12 290 (7.8) (4.3) 13.7 6 44 883 (0.7) 4.4 19.4 6 Office: France 8 463 (3.7) 0.3 12.5 6 Total Continental Europe 52 1,346 (1.7) 3.0 18.2 6 Group Retail 114 2,537 2.8 8.5 13.6 11 Office 62 1,371 (5.7) (0.5) (7.3) 11 Total Group 176 3,908 (0.3) 5.3 6.3 11 Notes 1. The amount by which the estimated rental value, excluding that relating to vacant space, exceeds or falls short of the rents passing, post any rent free period, at 31 December 2002. 2. Underlying valuation change and total return since the date of acquisition. Valuation Movements • During 2002, there were contrasting performances from the retail and office portfolios. The retail portfolio showed an underlying increase in value of 2.8%, whilst there was an underlying decrease in the value of the office portfolio of 5.7%, giving rise to an overall decrease in the valuation of the portfolio of 0.3%. • The good performance in the UK and French retail portfolios reflected both rental growth and some inward movement in yields due to favourable investment markets. In addition, the retail warehouse portfolio increased in value from the date of acquisition by 0.8%. By contrast, in Germany, investor uncertainty in the face of subdued consumer markets gave rise to a decline of 7.8%. • The decline in the value of the group's office portfolio reflected the worsening environment in both London and Paris caused by caution on the part of occupiers and, in the case of central London, second hand space being returned to the market. • During 2002, Hammerson carried out a review of its valuation arrangements. From June last year, Cushman & Wakefield Healey & Baker took responsibility for all valuations in continental Europe. In the UK, Donaldsons now values the retail portfolio and DTZ Debenham Tie Leung the office portfolio. The latter also reviews the consistency of valuation methodology and assumptions across the entire portfolio. Total Return • The total return from the portfolio was 5.3% in 2002, compared with 8.9% in the previous year, the reduction reflecting the adverse valuation movement in the office portfolio. Income Quality • At 31 December 2002, the average unexpired lease term of the group's portfolio was 11 years. Within the retail portfolio, the average unexpired lease term for shopping centres was ten years and for retail warehouses 17 years. The average unexpired lease terms for the office portfolios in London and Paris were 12 and six years respectively. • At 31 December 2002, the passing rent from the group's portfolio amounted to £210 million. Leases subject to expiries and break options over the next three years currently have rent passing of £36 million, of which £17 million relates to retail properties. • The group's five largest retail tenants accounted for 6.5% of total passing rent and comprised: Hennes & Mauritz (2.2%); B&Q (1.1%); Next (1.1%); Dixons (1.1%) and Boots (1.0%). Given the spread of tenants in the retail portfolio, the overall risk to Hammerson of individual tenant default is low. • The group's five largest office tenants accounted for almost 19% of total passing rent and comprised: Deutsche Bank (7.0%); BAT (4.9%); Lazard (2.6%); Network Rail (2.5%); and Withers (1.7%). In addition, the group now has an exposure to Allen & Overy, the prospective tenant at Bishops Square, London, where Hammerson's share of the annual rent on completion of the development in 2005 will amount to £26 million. Rent Reviews • In 2002, UK rent reviews with a passing rent of £17 million were agreed, giving rise to an increase in annual rents of £9 million. In addition, it is estimated that reviews remaining to be settled from 2002 could increase rents by £2 million in 2003. • In the UK, leases subject to rent review in 2003-2005 have current rents passing of £65 million. Management estimates that on review rents receivable in respect of these leases would increase by £7 million to £72 million by 2005 if reviewed at current ERV's. This is not a forecast and takes no account of increases or decreases in rental values before the relevant review dates. 2003 2004 2005 2003-05 £m £m £m £m Rents passing from leases subject to review 10 22 33 65 Projected rent after review at current ERV 12 25 35 72 Potential rent increases 2 3 2 7 Lease Expiries and Breaks • During 2002, tenant leases with passing rents of £15 million expired. Most of the leases were renewed or the tenants replaced, and because the expiring leases were at rents below market levels, additional annual income of £6 million was secured. • Over the three years 2003-2005, leases with current rents passing of £36 million either expire or are subject to tenants' break clauses. Management estimates that, assuming renewals at current ERVs, additional annual rents from this element of the portfolio would total £4 million by 2005 as shown in the table below. This is not a forecast and takes no account of void periods, tenant incentives, or possible changes in rental values before the relevant lease expiry dates. 2003 2004 2005 2003-05 £m £m £m £m Rents passing from leases subject to expiries or 9 13 14 36 breaks Current ERV 11 15 14 40 Potential rent increases 2 2 - 4 Retail Portfolio • The group's retail portfolio had a book value of £2,537 million at 31 December 2002. The retail portfolio was 14% reversionary, with annual rents passing of £136 million, compared with an ERV of £160 million. The shopping centre portfolio was 13% reversionary and the retail warehouse portfolio was 20% reversionary. The retail vacancy rate at the end of the year was 3.1%. Investment Activity • Hammerson's retail portfolio comprises prime regional shopping centres that dominate their catchment areas, retail warehouses and city centre properties that could form part of future retail-led developments. • In March, the group set up a partnership with the fund manager Hermes to acquire The Shires shopping centre in Leicester. Hammerson's share of the partnership is 60%, and the cost to Hammerson of the acquisition was £110 million. Since acquisition, rent reviews have resulted in an increase of £1 million in passing rents. Good progress is being made with plans for a major extension and a planning application should be submitted in 2003. • In August, the group made its first retail park investment at Parc Fforestfach, near Swansea. The newly completed centre, which was purchased for £57 million, is 69% let and trading well. In September, Hammerson made a successful £192 million cash offer for Grantchester Holdings PLC, the publicly quoted retail warehouse company. The acquisition has given Hammerson critical mass in this fast growing sector. Increasingly, tenants in the group's shopping centres are seeking representation in retail warehouses and the acquisition broadens the services the group is able to provide to retailers. • In continental Europe, Hammerson acquired Parinor shopping centre, located in the northern suburbs of Paris, in March 2002 at a cost of £99 million and is implementing a strategy to improve the centre and benefit from its populous catchment area. • The value of retail property acquisitions amounted to £594 million during 2002, whilst proceeds from disposals were £298 million. In July, Freshney Place shopping centre in Grimsby was sold for £98 million. Immediately prior to the year end, and following the upgrading of the building, the group sold West Riding House, a mixed retail and office building in Leeds, for £57 million. In addition, two retail warehouse properties were sold for a total of £35 million. • In France, the sale of 54 boulevard Haussmann was completed in January for £108 million. Despite interest from potential investors, the group was unsuccessful in its attempt to reduce its investment in Germany. However, discussions continue with a number of potential purchasers. Asset Management • A major objective for the UK retail portfolio during 2002 was the successful management of rent reviews, particularly at Brent Cross and at The Shires, and the continuing programme to improve the retail mix at the regional shopping centres. Substantial progress was made in these areas. • In France, refurbishment and reconfiguration works at Italie 2, Paris and Place des Halles, Strasbourg were successfully completed. In Germany works at Markisches Zentrum, Berlin and Luisen Center, Darmstadt were also finished on schedule and both centres have seen a substantial increase in footfall. • Discussions are underway with local authorities and co-owners for a number of refurbishment and extension schemes at shopping centres including Les Trois Fontaines in Cergy-Pontoise, Espace Saint Quentin near Paris, Bercy 2 in Paris and Forum Steglitz in Berlin. • Non-rental income, in the form of car park income, commercial and mall-based revenue amounted to £8 million in 2002, an increase of 23% over the equivalent income in 2001. These activities provide potential for good future revenue growth. • Hammerson also benefits from the strength of its local and, in certain cases, national brands and is promoting these with the intention of increasing footfall and sales in its centres. The group makes extensive use of research, including customer surveys and sales data from its centres, to assess the appeal of its retail offer to customers and to develop strategies for further improvement. Developments • Continued good progress has been made at the new Bullring shopping centre in Birmingham with the opening planned for 4 September 2003. At 31 December 2002, the centre was approximately 70% let or in solicitors' hands. Rental levels achieved are in line with the group's original forecasts. • The refurbishment of the Liberty Centre, Romford, a complex project to transform the centre whilst still trading, will be completed by Easter 2003. The scheme is over 95% let. • The group's pipeline of future retail developments, which includes the redevelopment of the Broadmead area in Bristol by the Bristol Alliance; the New Retail Quarter in Sheffield; and an extension to The Shires in Leicester are all being progressed. The retail warehouse portfolio contains a number of development projects, including St Oswald's Park in Gloucester where the outcome of a public inquiry is awaited. • The acquisition of the property portfolio of the former Railtrack Developments also offers opportunities to lead or participate in further projects, notably the Cricklewood regeneration scheme, which should have consequential benefits for the group's investment in Brent Cross shopping centre in North London. At Brent Cross, both Barnet Council and the Greater London Authority have supported revised plans for a mixed redevelopment of a substantial area adjoining the centre. The decision of the Secretary of State is awaited. Office Portfolio • The group's office portfolio had a book value of £1,371 million at 31 December 2002, and annual rents passing of £74 million. The portfolio was 7% over-rented overall, compared with 26% reversionary at the 2001 year end. During 2002, major rent reviews were settled at 99 Bishopsgate and Euston Square in London. In August, a new lease at a substantially increased rent was agreed with BAT at Globe House in London. Under the terms of this agreement the lease has been extended to 22 years and the rent increased to £10.3 million per annum in exchange for a rent-free period of 21 months. • The office vacancy rate at the end of the year was 11.3%, compared with 6.7% at the end of 2001. The increase was due to a significant rise in vacancy at Harbour Exchange in London, reflecting difficulties in the Docklands markets. The vacancy also included unlet space at 148 rue de l'Universite in Paris, development of which was completed in November. Investment and Development Activity • Capital investment in 2002 amounted to more than £120 million, and comprised expenditure on office developments in London and Paris. The disposal of 280 Bishopsgate in April raised £218 million. • Good progress was made with the group's three current developments in central London during 2002, although the market has suffered from occupier uncertainty in the face of retrenchment in the financial sector. • A lease agreement was signed with Allen & Overy in respect of 65,000m(2) of proposed office space at Bishops Square just outside the City of London. Following planning approval for the development from the local authority, which was received in November 2002, demolition of existing buildings is underway. • In Paris, the year saw the successful completion of the two office development projects at 53 quai d'Orsay and 148 rue de l'Universite. The former has now been let to Latham & Watkins, who are currently fitting out the building. At 148 rue de l'Universite, discussions with a number of prospective tenants continue, with heads of terms agreed for almost 50% of the space. • The project to redevelop Neo, 14 boulevard Haussmann in Paris to create 26,800m(2) of high quality office space continues and is scheduled for completion in July 2003. • In December 2002, Hammerson exercised its option to participate in a joint venture with leading French insurance company AXA, to redevelop 9 place Vendome and 368/374 rue Saint Honore. The scheme will provide 22,000m(2) of offices and 5,000m(2) of retail space at this highly prestigious location in the centre of Paris. In the light of current market conditions, the project is unlikely to start before late 2003. Consolidated Profit and Loss Account for the year ended 31 December 2002 2002 2001 Restated* Unaudited Audited Notes £m £m Gross rental income, after rents payable 197.1 175.6 Other property outgoings (21.2) (15.7) Net rental income 1(a) 175.9 159.9 Management fees receivable 2.8 1.9 Cost of property activities (16.6) (11.4) Corporate expenses (10.5) (8.8) Administration expenses (24.3) (18.3) Operating profit 1(b) 151.6 141.6 Exceptional items: Profit/(Loss) on the sale of investment 5.3 (4.9) properties Profit on ordinary activities before interest 156.9 136.7 Exceptional cost of finance 2 - (3.3) Other cost of finance (net) 2 (66.0) (64.3) Profit on ordinary activities before tax 90.9 69.1 Current tax 3(a) (2.5) (7.9) Deferred tax 3(b) (11.1) 15.9 Tax on profit on ordinary activities (13.6) 8.0 Profit on ordinary activities after tax 77.3 77.1 Equity minority interests (1.7) (0.9) Profit for the financial year 75.6 76.2 Dividends 4 (43.6) (41.5) Retained profit for the financial year 16 32.0 34.7 Earnings per share 5 27.1p 27.1p Diluted earnings per share 5 27.1p 27.1p Adjusted earnings per share 5 29.2p 24.3p * Comparative figures have been restated following the adoption of FRS 19 (see note 21). Consolidated Balance Sheet as at 31 December 2002 2002 2001 Restated* Unaudited Audited Notes £m £m Fixed assets Land and buildings 6 3,907.6 3,487.5 Fixtures, fittings and equipment 1.2 1.0 Tangible assets 3,908.8 3,488.5 Investments 8 41.6 31.4 3,950.4 3,519.9 Current assets Properties held for resale 9 30.8 - Debtors - Due within one year 10 121.3 81.4 - Due after more than one year 10 12.8 20.8 Cash and short term deposits 11 242.2 218.4 407.1 320.6 Creditors falling due within one year Borrowings 12 (85.7) (24.2) Other 13 (316.6) (173.2) Net current assets 4.8 123.2 Total assets less current liabilities 3,955.2 3,643.1 Creditors falling due after more than one year Borrowings 12 (1,797.9) (1,528.7) Other 13 (39.6) (22.1) Provisions for liabilities and charges Deferred tax 3(b) (37.2) (14.0) Equity minority interests (40.1) (37.1) 2,040.4 2,041.2 Capital and reserves Called up share capital 15 69.0 70.0 Share premium account 16 592.3 588.6 Revaluation reserve 16 786.8 978.0 Capital redemption reserve 16 7.2 5.9 Other reserves 16 6.5 1.5 Profit and loss account 16 578.6 397.2 Equity shareholders' funds 2,040.4 2,041.2 Diluted net asset value per share 5 739p 728p Adjusted net asset value per share 5 752p 731p * Comparative figures have been restated following the adoption of FRS 19 (see note 21). Statement of Total Recognised Gains and Losses for the year ended 31 December 2002 2002 2001 Restated* Unaudited Audited £m £m Profit for the financial year 75.6 76.2 Unrealised (deficit)/surplus on revaluation of properties (19.1) 107.6 Unrealised surplus/(deficit) on revaluation of investments and minority interests 0.4 (1.1) Negative goodwill (note 16) 5.0 - Deferred tax on property disposals (note 3(b)) (13.9) (11.5) Exchange translation movements 15.9 (6.3) Total recognised gains and losses relating to the year 63.9 164.9 Prior year adjustment (note 21) (7.6) Total recognised gains and losses since last annual report 56.3 Note of Historical Cost Profits and Losses for the year ended 31 December 2002 2002 2001 Restated* Unaudited Audited £m £m Profit on ordinary activities before tax 90.9 69.1 Realisation of previous years' revaluation gains 185.0 62.7 Historical cost profit on ordinary activities before tax 275.9 131.8 Historical cost profit for the financial year after tax, equity minority interests 203.1 85.9 and dividends Reconciliation of Movements in Shareholders' Funds for the year ended 31 December 2002 2002 2001 Restated* Unaudited Audited £m £m Retained profit for the financial year 32.0 34.7 Other recognised gains and losses (11.7) 88.7 Purchase and cancellation of own shares (25.1) (70.5) Issue of shares 4.0 63.0 Net (decrease)/increase in shareholders' funds (0.8) 115.9 Equity shareholders' funds at 1 January (restated*) 2,041.2 1,925.3 Equity shareholders' funds at 31 December 2,040.4 2,041.2 * Comparative figures have been restated following the adoption of FRS 19 (see note 21). Consolidated Cash Flow Statement for the year ended 31 December 2002 2002 2001 Unaudited Audited Notes £m £m Net cash flow from operating activities 17 147.5 134.8 Returns on investment and servicing of finance 17 (89.7) (77.8) Tax paid (0.2) (2.9) Capital expenditure and investment 17 30.3 (72.9) Acquisitions and disposals 17 (178.2) - Equity dividends paid (42.0) (39.7) Cash outflow (132.3) (58.5) Decrease/(Increase) in short term deposits 19 103.4 (78.1) Net cash inflow from financing 18 53.6 126.5 Increase/(Decrease) in cash in the year 24.7 (10.1) Reconciliation of Net Cash Flow to Movement in Net Debt for the year ended 31 December 2002 2002 2001 Unaudited Audited Notes £m £m Increase/(Decrease) in cash in the year 24.7 (10.1) Net increase in debt (74.7) (133.9) (Decrease)/Increase in short term deposits (103.4) 78.1 Change in net debt resulting from cash flows (153.4) (65.9) Short term deposits acquired on acquisition of subsidiaries 102.1 - Debt acquired on acquisition of subsidiaries (197.5) - Exchange adjustment (58.1) 20.9 Movement in net debt in the year (306.9) (45.0) Net debt at 1 January (1,334.5) (1,289.5) Net debt at 31 December 19 (1,641.4) (1,334.5) Notes to the Accounts 1. (a) SEGMENTAL ANALYSIS Gross Other 2002 2001 rental Rents property Net rental Net rental income payable outgoings income income £m £m £m £m £m Rental income United Kingdom Retail: Shopping centres 77.1 (1.5) (10.6) 65.0 60.9 Retail warehouses 4.8 - (0.2) 4.6 - 81.9 (1.5) (10.8) 69.6 60.9 Office: City 34.9 (5.0) (0.5) 29.4 24.2 West End 16.9 (0.5) (0.3) 16.1 17.5 Docklands & other 11.6 (1.2) (1.6) 8.8 9.5 63.4 (6.7) (2.4) 54.3 51.2 Total United Kingdom 145.3 (8.2) (13.2) 123.9 112.1 Continental Europe Retail: France 35.6 - (2.9) 32.7 28.2 Germany 16.9 (0.3) (4.8) 11.8 10.7 52.5 (0.3) (7.7) 44.5 38.9 Office: France 7.8 - (0.3) 7.5 8.9 Total Continental Europe 60.3 (0.3) (8.0) 52.0 47.8 Group Retail 134.4 (1.8) (18.5) 114.1 99.8 Office 71.2 (6.7) (2.7) 61.8 60.1 Total 205.6 (8.5) (21.2) 175.9 159.9 Included in net rental income for 2002 is £2.5m (2001: £3.8m) in respect of accrued rent receivable allocated to rent free periods and a deduction of £0.9m (2001: £0.9m) in respect of amortisation of lease incentives. 2002 2001 Restated* Assets Net Net Net employed debt assets assets £m £m £m £m Net assets United Kingdom 2,390.0 (593.2) 1,796.8 1,787.2 Continental Europe 1,291.8 (1,048.2) 243.6 254.0 3,681.8 (1,641.4) 2,040.4 2,041.2 * Comparative figures have been restated following the adoption of FRS 19 (see note 21). (b) Included in operating profit are redundancy and related costs of £2.6m following the acquisition of Grantchester Holdings PLC. Notes to the Accounts 2. COST OF FINANCE (NET) 2002 2001 £m £m Interest payable on: Bank loans and overdrafts 19.3 25.2 Other loans 85.3 71.0 Interest payable and similar charges 104.6 96.2 Less: Interest payable capitalised (24.6) (19.1) Interest receivable (14.0) (12.8) Other cost of finance (net) 66.0 64.3 Exceptional cost of finance - 3.3 Cost of finance (net) 66.0 67.6 The exceptional cost of finance in 2001 represents the costs incurred in redeeming the Company's £110m 6.5% convertible bonds. 3. TAXATION (a) Current tax 2002 2001 Tax charge £m £m UK corporation tax on profits for the year 0.2 0.3 Additional UK corporation tax in respect of previous years - 7.4 Foreign tax 2.3 0.2 2.5 7.9 2002 2001 Tax reconciliation £m £m Profit on ordinary activities before tax 90.9 69.1 Profit multiplied by UK corporation tax rate of 30% 27.3 20.7 Effects of: Utilisation of UK tax losses (12.2) (2.7) Capital allowances for the year (7.3) (11.6) Tax relief for capitalised interest (7.2) (5.7) Additional UK corporation tax in respect of previous years - 7.4 Effects of foreign tax rates and foreign tax losses 0.6 (1.4) Other items 1.3 1.2 Current tax charge for the year 2.5 7.9 Factors that may affect future tax charges In 2002 the group utilised UK tax losses brought forward. It is anticipated that further brought forward losses will be utilised in 2003 and 2004. Notes to the Accounts 3. TAXATION (continued) (b) Deferred tax 2002 2001 £m £m Movement in year Opening provision 7.6 12.0 Charge/(Credit) in profit and loss account 11.1 (15.9) Charge on realisation of revaluation gains on property disposals 13.9 11.5 Corporate acquisitions and disposals 1.2 - Exchange differences 1.0 - Closing provision 34.8 7.6 2002 2001 £m £m Net deferred tax provision UK Capital allowances 27.3 24.1 Other timing differences 3.4 0.9 Tax losses (29.4) (31.4) Net UK deferred tax provision/(asset) 1.3 (6.4) France Tax depreciation 28.5 21.8 Other timing differences 5.8 8.1 Tax losses (0.8) (15.9) Net France deferred tax provision 33.5 14.0 Net deferred tax provision 34.8 7.6 Analysed as: Deferred tax asset (note 10) (2.4) (6.4) Deferred tax provision 37.2 14.0 34.8 7.6 The deferred tax provision will not crystallise to the extent that capital allowances are retained by the group on UK property disposals and French disposals are made by selling subsidiary companies. There is no deferred tax provision in respect of Germany due to surplus tax losses. Note 21 gives details of the impact of the adoption of FRS 19 on previously reported figures. The charge on the realisation of revaluation gains relates to disposals in France which used French tax losses. (c) Contingent tax Should the group's properties and investments be sold at book value a tax liability would arise. If the properties are sold individually and no capital allowances are retained by Hammerson the liability would be £198m (2001: £196m) in addition to the deferred tax provided in the balance sheet. If account is taken of the likelihood that certain properties would be sold through the sale of shares in subsidiaries, and it is assumed that capital allowances will be retained by the group on all other property sales, then the deferred tax provision would be written back and the tax liability would be £78m (2001: £49m). On a diluted net asset value per share basis these amounts are equivalent to 71 pence per share and 28 pence per share (2001: 70 pence per share and 17 pence per share) respectively. Notes to the Accounts 4. DIVIDENDS 2002 2001 £m £m Interim 4.81p (2001: 4.58p) per share 13.3 12.8 Final proposed 10.99p (2001: 10.26p) per share 30.3 28.7 43.6 41.5 The directors have declared a final dividend of 10.99p per share payable on 15 May 2003 to shareholders on the register at the close of business on 7 March 2003. 5 EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE The calculations for earnings per share, diluted earnings per share and adjusted earnings per share are shown in the table below: 2002 2001 Restated* Weighted Weighted average average number of number of Earnings shares Pence Earnings shares Pence £m million per share £m million per share Basic 75.6 278.8 27.1 76.2 281.4 27.1 Adjustments: Dilutive share - 0.3 - - 0.2 - options Diluted 75.6 279.1 27.1 76.2 281.6 27.1 Adjustments: Exceptional items (5.3) - (1.9) 8.2 - 2.9 Deferred tax (1) 11.1 - 4.0 (15.9) - (5.7) Adjusted 81.4 279.1 29.2 68.5 281.6 24.3 * Comparative figures have been restated following the adoption of FRS 19 (see note 21). The weighted average numbers of shares shown above exclude those shares held in the Hammerson Deferred Share Plan (note 8) which are treated as cancelled. The calculations for basic, diluted and adjusted net asset value per share are shown in the table below: Shareholders' Net asset value funds Shares per share £m million pence Basic 2,040.4 276.0 739 Company's own shares held in Deferred Share Plan - (0.7) n/a Unexercised share options 9.5 2.0 n/a Diluted 2,049.9 277.3 739 Deferred tax (1) 34.8 n/a n/a Adjusted 2,084.7 277.3 752 (1) Deferred tax has been excluded from the calculations of earnings per share and net asset value per share, as in practice deferred tax balances are not expected to crystallise. Notes to the Accounts 6 LAND AND BUILDINGS Valuation Cost 2002 2001 2002 2001 £m £m £m £m Investment properties Fully developed properties 3,439.5 3,117.4 2,655.7 2,165.9 Properties held for or in the course of development 468.1 370.1 459.0 337.7 3,907.6 3,487.5 3,114.7 2,503.6 All properties are stated at market value as at 31 December 2002, valued by professionally qualified external valuers, except for the RT Group Developments Limited properties acquired on 24 December 2002 for £30.2m which are included at cost. In the United Kingdom, office properties and the group's interests in the Birmingham Alliance properties were valued by DTZ Debenham Tie Leung, Chartered Surveyors, and all other retail properties were valued by Donaldsons, Chartered Surveyors. In France and Germany the group's properties were valued by Cushman & Wakefield Healey & Baker, Chartered Surveyors. The valuations have been prepared in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. At 31 December 2002 the total amount of interest included in development properties was £26.1m (2001: £12.5m) and is calculated based on the group's average cost of borrowings. Freeholds Long Short Total leaseholds leaseholds £m £m £m £m Movements in the year Balance at 1 January 2002 1,711.5 1,766.4 9.6 3,487.5 Exchange adjustment 77.9 - 0.2 78.1 Additions at cost 616.7 235.0 - 851.7 Disposals at valuation (290.5) (224.7) - (515.2) Capitalised interest 13.2 11.4 - 24.6 Revaluation (deficit)/surplus (42.5) 24.2 (0.8) (19.1) Balance at 31 December 2002 2,086.3 1,812.3 9.0 3,907.6 2002 2001 £m £m Capital commitments 356.3 271.9 7 JOINT INVESTMENTS AND DEVELOPMENTS As at 31 December 2002 certain property and corporate interests have been proportionally consolidated, and these are set out in the following table: Group share % Partner(s) Investments Brent Cross Shopping Centre 41.2 The Standard Life Assurance Company Cricklewood Development Ltd 50 Pillar Property PLC Essen Shopping Center BV 22 Algemeen Burgerlijk Pensioenfonds The Martineau Galleries Limited 33.33 Land Securities PLC, Pearl Assurance plc Partnership The Martineau Limited Partnership 33.33 Land Securities PLC, Pearl Assurance plc The Oracle Limited Partnership 50 Akaria Investments Limited Opera Capucines SCI 50 MAAF Assurances Shires Limited Partnership 60 Hermes West Quay Shopping Centre Limited 50 Barclays Bank plc Developments 9 place Vendome SCI 50 AXA The Bull Ring Limited Partnership 33.33 Land Securities PLC, Pearl Assurance plc The Grosvenor Street Limited Partnership 50 Grosvenor West End Properties The London Wall Limited Partnership 50 Kajima London Wall Limited The Moor House Limited Partnership 33.33 Greycoat Estates Limited, Pearl Assurance plc Union Square Developments Limited 50 Stannifer Group Holdings Limited Wensum Developments Limited 50 Gazeley Properties Limited Notes to the Accounts 7 JOINT INVESTMENTS AND DEVELOPMENTS (continued) The following summarised profit and loss account and balance sheet show the proportion of the group's results and net assets before partner funding which is derived from its joint investments and developments: Profit and loss account 2002 2001 £m £m Net rental income 37.3 29.4 Administration expenses (0.2) (0.2) Operating profit 37.1 29.2 Exceptional items: Profit on the sale of investment properties 0.3 - Cost of finance (net) (4.5) 0.4 Profit on ordinary activities before taxation 32.9 29.6 Balance sheet 2002 2001 Restated* £m £m Land and buildings at valuation 1,087.7 822.0 Fixed assets 1,087.7 822.0 Other current assets 38.2 14.2 Cash and short term deposits 15.8 10.8 54.0 25.0 Borrowings falling due within one year (1.6) (0.1) Creditors falling due within one year (38.2) (20.6) Net current assets 14.2 4.3 Total assets less current liabilities 1,101.9 826.3 Borrowings falling due after more than one year (11.3) (10.4) Creditors falling due after more than one year (7.2) (7.7) Provisions for liabilities and charges (0.6) - Net assets before partner funding 1,082.8 808.2 *Comparative figures have been restated following the adoption of FRS 19 (see note 21). The effect at 31 December 2002 is to decrease net assets before partner funding by £0.6m (2001: increase £0.4m). 8. INVESTMENTS 2002 2001 £m £m Value Retail Investors Limited Partnerships 23.6 20.9 Interests in Value Retail PLC and related companies 12.6 2.5 Ordinary shares of Hammerson plc (Deferred Share Plan) 2.2 2.5 Other investments 3.2 5.5 41.6 31.4 9 PROPERTIES HELD FOR RESALE At 31 December 2002 properties held for resale represent a portfolio of properties acquired with RT Group Developments Limited and associated companies. A contract to sell these properties has been exchanged with Ballymore Properties Limited and is expected to complete at the end of February 2003. Notes to the Accounts 10 DEBTORS 2002 2001 Restated* £m £m Due within one year Trade debtors 44.8 27.2 Other debtors 69.5 48.4 Corporation tax 0.8 0.8 Prepayments 6.2 5.0 121.3 81.4 Due after more than one year Other debtors 10.4 14.4 Deferred tax (note 3(b)) 2.4 6.4 12.8 20.8 * Comparative figures have been restated following the adoption of FRS 19 (see note 21). At 31 December 2002 other debtors due after more than one year included a loan of €16.0m (2001: €7.2m) advanced to Value Retail plc bearing interest based on EURIBOR and maturing on 11 October 2006. 11 CASH AND SHORT TERM DEPOSITS 2002 2001 £m £m Cash at bank 34.2 9.4 Short term deposits 208.0 209.0 242.2 218.4 Analysis by currency Sterling 232.4 211.4 Euro 9.8 7.0 242.2 218.4 At 31 December 2002 short term deposits mainly comprised deposits placed on money markets with rates linked to LIBOR for maturities of not more than 1 month, at an average interest rate of 4.1% (2001: 3.9%). Included within cash at bank is a secured deposit of £1.5m (2001: £Nil). An equivalent amount is included within other creditors falling due within one year. Notes to the Accounts 12. BORROWINGS 2002 2001 £m £m Unsecured £200 million 7.25% Sterling bonds due 2028 197.3 197.3 £250 million 6.875% Sterling bonds due 2020 246.5 246.4 £200 million 10.75% Sterling bonds due 2013 194.7 194.4 €500 million 6.25% Euro bonds due 2008 323.5 303.2 €300 million 5% Euro bonds due 2007 194.1 181.8 £78.3 million 7.875% Sterling bonds due 2003 78.0 85.5 Bank loans and overdrafts 465.6 315.3 1,699.7 1,523.9 Exchange difference on currency swaps (11.8) (15.4) 1,687.9 1,508.5 Secured Sterling variable rate mortgages due 2007 11.3 10.4 Sterling variable rate loans due between 2003 and 2007 169.6 - Euro mortgages due between 2003 and 2023 14.8 31.9 Euro loans due between 2011 and 2019 - 2.1 195.7 44.4 1,883.6 1,552.9 Security for secured borrowings as at 31 December 2002 is provided by charges on property. Since 31 December 2002, sterling secured loans totalling £84.3m have been repaid and cancelled. Maturity Bank loans Other 2002 2001 and overdrafts loans Total Total £m £m £m £m After 5 years - 978.4 978.4 1,155.8 From 2-5 years 369.5 195.0 564.5 293.2 From 1-2 years 255.4 (0.4) 255.0 79.7 Due after more than one year 624.9 1,173.0 1,797.9 1,528.7 Due within one year 16.8 68.9 85.7 24.2 641.7 1,241.9 1,883.6 1,552.9 Undrawn committed facilities 2002 2001 £m £m Expiring after more than two years 294.1 233.6 Interest rate and currency profile 31 December 2002 Fixed rate borrowings Floating rate Maturity borrowings Total % years £m £m £m Sterling 7.67 16 694.3 131.3 825.6 Euro 4.72 5 515.5 542.5 1,058.0 6.40 12 1,209.8 673.8 1,883.6 31 December 2001 Fixed rate borrowings Floating rate Maturity borrowings Total % years £m £m £m Sterling 8.93 16 407.6 254.9 662.5 Euro 4.65 3 391.0 499.4 890.4 6.83 10 798.6 754.3 1,552.9 Notes to the Accounts 13. CREDITORS - OTHER 2002 2001 £m £m Falling due within one year Trade creditors 50.4 39.2 Tax and social security 38.8 4.9 Other creditors 180.8 91.1 Accruals 16.3 9.3 Dividends payable 30.3 28.7 316.6 173.2 Falling due after more than one year Other creditors 39.6 22.1 Other creditors falling due within one year include £61.7m in respect of the acquisition of RT Group Developments Limited. This amount is due for payment on completion which is expected to be at the end of February 2003. 14 FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES 31 December 2002 31 December 2001 Book value Fair value Book value Fair value £m £m £m £m Overdrafts and short term borrowings (99.6) (101.6) (25.9) (25.9) Gross long term borrowings (1,809.0) (1,933.1) (1,560.1) (1,632.2) Unamortised borrowing costs 18.0 18.0 17.7 17.7 Interest rate swaps (4.8) 0.5 - (9.4) Currency swaps 11.8 14.2 15.4 18.5 Total borrowings (1,883.6) (2,002.0) (1,552.9) (1,631.3) The fair values of the group's long term borrowings have been estimated on the basis of quoted market prices. The fair values of the group's outstanding interest rate and currency swaps have been estimated by calculating the present value of future cash flows, using appropriate market discount rates. The adjustment on interest rate swaps at 31 December 2002 of £5.3m includes £1.5m (31 December 2001: £3.0m) relating to swaps maturing in less than one year. Details of the group's cash and short term deposits are set out in note 11. Their fair values and those of other long term debtors and creditors equate to their book values. Short term debtors and creditors have been excluded from these disclosures as permitted by Financial Reporting Standard 13 'Derivatives and other financial instruments: disclosures'. At 31 December 2002 the fair value of financial liabilities exceeded their book value by £118.4m (31 December 2001: £78.4m), equivalent to 43 pence per share (31 December 2001: 28 pence per share) on a diluted net asset value per share basis. On a post tax basis, the difference was equivalent to 30 pence per share (31 December 2001: 19 pence per share). Notes to the Accounts 15. SHARE CAPITAL Called up, allotted Authorised and fully paid 2002 2001 2002 2001 £m £m £m £m Ordinary shares of 25p each 94.8 94.8 69.0 70.0 Number Movements in issued share capital Number of shares in issue at 1 January 2002 279,960,781 Exercise of share options - Share option scheme 966,397 - Save As You Earn 23,876 Purchase and cancellation of own shares (5,000,000) Number of shares in issue at 31 December 2002 275,951,054 16. RESERVES Share Capital Profit premium Revaluation redemption Other and loss account reserve reserve reserves account Restated* £m £m £m £m £m Balance at 1 January 2002 588.6 978.0 5.9 1.5 397.2 Exchange adjustment - 12.5 - - 3.4 Premium on issue of shares 3.7 - - - - Purchase of own shares for cancellation - - 1.3 - (25.1) Deficit arising on revaluation of - (19.1) - - - properties Surplus arising on revaluation of - 0.4 - - - investments and minority interests Negative goodwill - - - 5.0 - Deferred tax on property disposals - - - - (13.9) Transfer to profit and loss account on - (185.0) - - 185.0 disposal Retained profit for the year - - - - 32.0 Balance at 31 December 2002 592.3 786.8 7.2 6.5 578.6 * Comparative figures have been restated following the adoption of FRS 19 (see note 21). The negative goodwill credited to other reserves is principally the discount received on the purchase of the company owning the Parinor shopping centre for the underlying contingent tax in that company. This accounting treatment does not comply with FRS 10 'Goodwill and intangible assets', which requires that negative goodwill be recognised in the balance sheet as a fixed asset. However, in accordance with a ruling made in February 2002 by the Financial Reporting Review Panel over a similar issue, the directors consider that the accounting treatment adopted is necessary in order for the financial statements to give a true and fair view of the state of affairs of the group. Notes to the Accounts 17. ANALYSIS OF CASH FLOWS 2002 2001 £m £m Reconciliation of operating profit to net cash inflow from operating activities Operating profit 151.6 141.6 Depreciation and amortisation 1.6 1.6 Increase in accrued rents receivable (2.5) (3.8) Increase in debtors (10.0) (9.1) Increase in creditors 6.8 4.5 147.5 134.8 Returns on investment and servicing of finance Interest received 14.1 13.3 Interest paid (103.4) (91.1) Dividends paid to minorities (0.4) - (89.7) (77.8) Capital expenditure and investment Purchase and development of property (484.3) (363.3) Purchase of investments (5.0) (22.6) Sale of property 519.6 313.0 30.3 (72.9) Acquisitions and disposals Purchase of subsidiary companies (195.8) - Cash acquired with subsidiary companies 17.6 - (178.2) - 18. ANALYSIS OF CASH FLOW FROM FINANCING 2002 2001 £m £m Issue of bonds - 348.5 Purchase of own bonds for cancellation (8.4) (48.2) Issue of shares 4.0 1.3 Purchase of own shares for cancellation (25.1) (70.5) Increase/(Decrease) in medium and long term borrowings 23.6 (119.6) Increase in short term borrowings 59.5 15.0 Net cash inflow from financing 53.6 126.5 19 ANALYSIS OF MOVEMENT IN NET DEBT Borrowings Borrowings Short Cash at due within due after term deposits bank one year one year Net debt £m £m £m £m £m Balance at 1 January 2002 209.0 9.4 (24.2) (1,528.7) (1,334.5) Purchase of subsidiary companies 102.1 17.6 (0.5) (197.0) (77.8) Cash flow (103.4) 7.1 (59.5) (15.2) (171.0) Exchange 0.3 0.1 (1.5) (57.0) (58.1) Balance at 31 December 2002 208.0 34.2 (85.7) (1,797.9) (1,641.4) Notes to the Accounts 20. CONTINGENT LIABILITIES There are contingent liabilities of £16.4m (2001: £2.5m) relating to guarantees given by the parent company in respect of certain group companies. 21. OTHER INFORMATION Deferred tax FRS 19 'Deferred tax' requires that companies provide for the tax on timing differences between financial statements and tax computations. For Hammerson, this principally relates to capital allowances in the UK and depreciation in France, after deducting tax losses. The impact of the adoption of FRS 19 on the current year and prior year figures is shown below: Balance Profit and loss account Earnings per share sheet Profit for Tax the year Basic Diluted Net assets £m £m pence pence £m Year ended 31 December 2002 Excluding FRS 19 (2.5) 86.7 30.1 30.1 2,075.2 Adjustment (11.1) (11.1) (3.0) (3.0) (34.8) As reported (13.6) 75.6 27.1 27.1 2,040.4 Year ended 31 December 2001 As previously reported (7.9) 60.3 21.4 21.4 2,048.8 Adjustment 15.9 15.9 5.7 5.7 (7.6) Restated 8.0 76.2 27.1 27.1 2,041.2 Further details on deferred tax are given in note 3(b). 22. FINANCIAL STATEMENTS The consolidated profit and loss account and balance sheet set out above are not statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2002 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The financial information for the year ended 31 December 2001 is derived from the statutory accounts for that year which have been reported on by the Company's auditors and delivered to the Registrar of Companies. The audit report on the 31 December 2001 financial statements was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of the Companies Act 1985. The unaudited financial information in this report has been prepared on the basis of the accounting policies set out in the full statutory accounts for the year ended 31 December 2001. 23. NOTICE OF MEETING The Annual General Meeting will be held at 10.30am on Thursday, 8 May 2003 at 100 Park Lane, London W1K 7AR. Portfolio Review Property Portfolio Information for the year ended 31 December 2002 Net Properties True Underlying Estimated Reversi- rental at equivalent valuation Total Vacancy Rents rental onary/ income valuation yield change return rate passing value (over- rented) £m £m % % % % £m £m % Notes (1) (2) (3) (4) United Kingdom Retail: Shopping centres 65.0 1,310.1 6.5 5.3 12.1 0.7 68.9 75.3 7.7 Retail warehouses (5) 4.6 344.0 6.7 0.8 2.2 2.3 14.7 19.0 19.7 69.6 1,654.1 6.5 4.8 11.6 1.3 83.6 94.3 9.9 Office: City 29.4 438.5 7.0 (6.9) (0.4) 0.6 29.4 22.1 (32.9) West End 16.1 306.6 7.3 (4.0) 1.2 1.4 23.5 21.4 (11.4) Docklands & other 8.8 163.1 9.2 (10.6) (5.9) 21.1 10.2 16.1 21.7 54.3 908.2 7.6 (6.7) (0.7) 9.9 63.1 59.6 (11.5) Total United Kingdom 123.9 2,562.3 6.9 0.4 6.4 6.7 146.7 153.9 1.1 Continental Europe Retail: France 32.7 593.0 6.9 3.3 9.1 2.7 35.7 44.9 22.2 Germany 11.8 289.6 7.3 (7.8) (4.3) 10.2 16.3 20.3 13.7 44.5 882.6 7.0 (0.7) 4.4 5.9 52.0 65.2 19.4 Office: France 7.5 462.7 6.6 (3.7) 0.3 18.8 11.1 13.5 12.5 Total Continental Europe 52.0 1,345.3 6.9 (1.7) 3.0 7.3 63.1 78.7 18.2 Group Retail 114.1 2,536.7 6.7 2.8 8.5 3.1 135.6 159.5 13.6 Office 61.8 1,370.9 7.3 (5.7) (0.5) 11.3 74.2 73.1 (7.3) Total Group 175.9 3,907.6 6.9 (0.3) 5.3 5.0 209.8 232.6 6.3 Notes (1) True equivalent yield is based on rents passing and estimated rental values at 31 December 2002. The calculation excludes properties in the course of development. (2) Rents passing at 31 December 2002 after deducting head and equity rents. (3) Estimated rental value at 31 December 2002 including vacant space and after deducting head and equity rents. (4) The amount by which the estimated rental value, excluding that relating to vacant space, exceeds or falls short of the rents passing, post any rent free period, at 31 December 2002. (5) Underlying valuation change and total return since the date of acquisition. Portfolio Review SECURITY OF INCOME/REVERSION as at 31 December 2002 LEASE EXPIRIES/BREAKS Rents passing that expire/break in ERV of leases that Average expire/break in unexpired lease term 2003 2004 2005 2003 2004 2005 years £m £m £m £m £m £m Notes (1) (1) (1) (2) (2) (2) United Kingdom Retail: Shopping centres 1.3 2.1 2.6 1.6 2.2 2.6 13 Retail 0.0 0.0 0.0 0.0 0.0 0.0 17 warehouses 1.3 2.1 2.6 1.6 2.2 2.6 14 Office: City 0.0 0.4 5.5 0.0 0.4 4.5 8 West End 2.6 2.9 1.8 2.4 3.1 1.6 16 Docklands & 0.3 1.5 0.6 0.3 2.1 0.8 14 other 2.9 4.8 7.9 2.7 5.6 6.9 12 Total United Kingdom 4.2 6.9 10.5 4.3 7.8 9.5 13 Continental Europe Retail: France 3.1 1.4 1.6 4.5 2.1 2.2 7 Germany 1.5 2.6 1.0 1.7 3.0 1.2 6 4.6 4.0 2.6 6.2 5.1 3.4 6 Office: France 0.7 2.1 0.5 0.7 2.3 0.8 6 Total Continental Europe 5.3 6.1 3.1 6.9 7.4 4.2 6 Group Retail 5.9 6.1 5.2 7.8 7.3 6.0 11 Office 3.6 6.9 8.4 3.4 7.9 7.7 11 Total Group 9.5 13.0 13.6 11.2 15.2 13.7 11 RENT REVIEWS Rents passing subject to review in Projected rent at current ERV of leases subject to review in Outstanding 2003 2004 2005 Outstanding 2003 2004 2005 £m £m £m £m £m £m £m £m Notes (3) (3) (3) (3) (4) (4) (4) (4) United Kingdom Retail: Shopping centres 5.0 2.7 10.2 14.5 5.9 2.8 11.7 16.0 Retail warehouses 1.8 2.6 1.6 4.6 2.6 3.0 2.0 4.8 6.8 5.3 11.8 19.1 8.5 5.8 13.7 20.8 Office: City 0.2 0.1 7.4 7.2 0.2 0.2 7.4 7.2 West End 0.1 4.2 0.0 2.9 0.2 4.8 0.0 2.9 Docklands & other 0.6 0.7 2.4 4.0 0.8 1.6 3.2 4.3 0.9 5.0 9.8 14.1 1.2 6.6 10.6 14.4 Total United Kingdom 7.7 10.3 21.6 33.2 9.7 12.4 24.3 35.2 The majority of rents in France and Germany are subject to annual indexation. Notes (1) These figures show the amount by which rental income, based on rents passing at 31 December 2002, could fall in the event that occupational leases due to expire are not renewed or replaced by new leases. For the UK it includes tenants' break options. For France and Germany, it is based on the earliest date of lease expiry. (2) The estimated rental value at 31 December 2002 for space that expires or breaks in each year, after deducting head and equity rents and ignoring the impact of rental growth and any rent free periods. (3) These figures show the rental income, after deducting head and equity rents, at 31 December, which is subject to review in each year. (4) These figures are the projected rents for space that is subject to review in each year and is based on the higher of the current rental income and the estimated rental value as at 31 December 2002, after deducting head and equity rents and ignoring the impact of changes in rental values before the review date. Current Developments Ownership Cost at Retail/ Estimated total Size Anticipated interest 31/12/02 Office development cost* m2 completion £m £m date Project Bullring, 33 % 124 Retail 176 110,000 Sep 2003 Birmingham One London Wall, 50% 25 Office 50 19,300 Jul 2003 London EC2 10 Grosvenor Street, 50% 10 Office 21 6,100 Dec 2003 London W1 Moorhouse, 33 % 32 Office 68 29,100 May 2004 London EC2 Neo, 14 boulevard Haussmann, Paris 100% 150 Office 185 26,800 Jul 2003 9eme * Hammerson share This information is provided by RNS The company news service from the London Stock Exchange

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