Final Results - Year Ended 31 Dec 1999, Part 2
Slough Estates PLC
22 March 2000
Part 2
EXTRACTS FROM THE CHIEF EXECUTIVE'S REVIEW
During 1999 the Group made significant progress in realising the
benefits from its strategy of concentrating its development and
redevelopment activities in prime business centres in the UK,
continental Europe and North America, a strategy which will continue to
be followed into the new century. The strategy is centred on the
premise that development activity in superior locations, which will
show long term resilience to property cycles due to scarcity of land,
economic diversity, business preference and favourable population
demographics, will produce higher new income cashflows than investment
in the acquisition of standing buildings. This strategy inevitably
takes time to flow through into earnings but the results for 1999 show
the benefits coming through with core income growth of 24 per cent for
the year and 16 per cent per annum growth since 1995.
Over the same period the Group has built 750,000 sq.m. of new space
through the redevelopment of many of its older but well located
properties and at new locations acquired for medium to long term
investment. Many development opportunities remain to be realised. In
the UK, the creation of the 155,000 sq.m. Farnborough Business Park is
by far the largest opportunity for the next decade, supported by over
twenty other locations where we have either land to be developed or
where regeneration of older properties is likely.
In Europe, the Pegasus Park office development in Brussels is on a
scale to match Farnborough, with a further 143,000 sq.m. to be
developed. In Paris, the 98,000 sq.m. development at Marly la Ville
will be the next step in the Group's logistics strategy for France. In
North America the Torrey Pines Science Center on which a further 53,000
sq.m. of laboratory and office space can be built will be the focus in
San Diego, whilst in South San Francisco a new site capable of
supporting 47,000 sq.m. of space for bioscience and information
technology users has been secured. In Vancouver a further 43,000 sq.m.
of office space in Willingdon Park can be built.
These, together with many other opportunities on land controlled by the
Group could cost approximately £875 million to build. Development will
progress according to the strength of occupier demand at the time of
commitment decision though some developments may be phased over periods
of up to ten years.
During the year 334,000 sq.m. of construction was completed, of which
90 per cent has now been leased or sold. A further 188,000 sq.m. was
under construction at the year end, of which 76 per cent is pre-let or
sold and it is likely that construction will start on a further 335,000
sq.m. in the course of 2000. Land acquisition and construction costs
during 1999 amounted to £220 million and approximately £300 million is
likely to be spent in 2000 followed by roughly £250 million in 2001,
subject to continuing favourable market conditions and, in many
instances, timely receipt of planning permissions. For the present,
the prospects for occupier demand for our locations are promising.
Occupancy is a key indicator of the health of property markets. The
Group has continued to perform strongly, with world wide occupancy of
93.5 per cent and UK occupancy of 93.7 per cent at the end of 1999.
Occupancy percentage by area
1999 1998
UK 93.7 93.5
Canada 90.9 98.3
USA 96.4 98.1
Europe 95.7 94.5
--------- --------
Total 93.5 94.8
--------- --------
Had it not been for an unusually high number of practical completions
of new construction in the last few months of the year, occupancy would
have been shown as 94.7 per cent in the UK, 97.9 per cent in Canada and
95.3 per cent world wide.
UK PROPERTY
1999 was a record year for our UK leasing team, with 112,000 sq.m. of
first time leasing of new buildings, 56,000 sq.m. of re-letting of
older space and 33,000 sq.m. of leases renewed to existing tenants
which in aggregate represents over 10 per cent of all built space. The
changing nature of business in the Thames Valley continues with an ever
increasing proportion of leasing being to knowledge based businesses.
The pace of change is such that now over 22 per cent of our UK non
retail rent roll is from new generation businesses; e-commerce,
computers, communications and health sciences. This percentage can be
expected to grow.
The acquisition of Bilton plc at the end of 1998 brought with it
607,000 sq.m. of industrial and business space earning a rent roll of
£25 million from 399 tenancies and a staffing of over sixty people.
Following a thorough review of its properties, thirty of the fifty four
properties have been sold, as have its sporting assets and housing
land. Proceeds from these disposals amounted to £131 million compared
with an acquired book value of £120 million. The locations retained
have a rent roll of £16.6 million from 360,000 sq.m. of space. The
integration of Bilton operations into Slough was completed by the end
of March 1999, with six employees retained. The continuing portfolio
is essentially composed of South East industrial properties with strong
income growth potential or brownfield redevelopment options. Subject
to receipt of planning consents it is expected that some 57,000 sq.m.
of new development will have been commenced prior to the end of year
2000, including 11,000 sq.m. currently on site.
Following the rationalisation of the Bilton portfolio the UK portfolio
including jointly owned properties comprises 1,928,000 sq.m. producing
a rent roll of £167 million from 1555 tenancies. The current market
rental value of these tenancies is approximately £185 million and the
rental value of the vacancy is approximately £10 million.
The focus of the Group's UK development activity continues to be
business space in the South East and the Thames Valley in particular.
The transformation of the Slough Trading Estate to a business park fit
for the twenty first century has continued. Of its 694,000 sq.m., 24
per cent has been rebuilt in the 1990's, representing 39 per cent by
value. Opportunities for further redevelopment of industrial buildings
have been reducing, largely as a result of the scale of redevelopment
already completed. Only 18,700 sq.m. were completed or started during
1999. However, two sites for office development on the prime Bath Road
frontage are available for development. The larger site has received
detailed consent for 15,900 sq.m. in three buildings; the first of
4,656 sq.m. has started construction and a pre-let of 2,971 sq.m. has
been agreed on the second phase. The other site has outline consent
for 8,825 sq.m. and is being marketed for pre-letting.
At Centennial Park, Elstree, a second phase of 10,861 sq.m. of
industrial space was completed and a first office development of 5,905
sq.m. has commenced. Two sites acquired in 1998 are making rapid
progress. At Emersons Green near Bristol a first phase of 15,860 sq.m.
is completed and leasing well, and at the Nursling Estate, Southampton,
a first phase of 10,575 sq.m. is being built.
The purchase of the old Royal Aircraft Establishment factory site at
Farnborough was completed in March 1999 for £57 million and the
planning process is underway. The Inspectors report on the draft local
plan was supportive of the redevelopment of the site as a business park
of up to 155,000 sq.m. of office and R&D space, plus limited ancillary
uses. An outline planning application has been submitted and is
scheduled to be considered by the council in the spring of 2000. It is
hoped that the infrastructure works will start on site by September and
possibly a first phase of building construction may be started by the
year end. The Group is committed to making the Farnborough Business
Park the best business location in the M3 corridor. The size of the
development will allow a range of buildings from small to very large,
giving the flexibility which new high technology businesses require to
meet their expansion plans.
Finally, the 56,300 sq.m. Buchanan Galleries shopping centre in Glasgow
opened on 31st March 1999, on time and within budget. Developed
jointly with Henderson Investors, the Galleries have reconfigured the
retail focus of central Glasgow. Built on brown land adjacent to rail,
bus and underground interchanges, all those involved with bringing this
complex development to completion are to be congratulated. In
financial terms, the development has been far more successful than
envisaged when the commitment was taken to start building in 1995. The
Group's 50 per cent share of the centre has been valued at £130
million. Of the total development gain of £55 million, £28 million had
been recognised during the development phase and £27 million in the
1999 valuation.
OVERSEAS
The Group's commitment to investing in prime business centres in North
America and Europe is being rewarded by growing contributions to Group
profits. Overseas' contribution to property profits before interest
increased by 44 per cent to £36.7 million in 1999. The Group's
overseas property investments now constitute 18.8 per cent of its total
portfolio by value, being 14.1 per cent in North America and 4.7 per
cent in Europe.
Canada
The Canadian economy has been performing strongly, benefiting from the
continued prosperity south of the border. In the property sector take
up of space has been good and rental levels have been firm.
In suburban west Toronto the substantial development programme of new
industrial buildings has continued. The 1999 completions totalled
58,314 sq.m. of which 88 per cent has now been leased. A further
59,500 sq.m. is planned for 2000 subject to further leasing progress on
the 1999 programmes. At Willingdon Park, Burnaby, Vancouver, two
office buildings completed in early 1999 have been leased, the largest
being pre-let to Newbridge Networks. A 50 per cent interest in these
buildings has been sold to Hospitals of Ontario Pension Fund, with whom
there is a joint ownership agreement covering the whole park. A
further building of 20,810 sq.m. will be started this spring. The
office market in suburban Vancouver is almost fully absorbed and
speculative development to meet the demands of the 'West Coast'
technology revolution is appropriate. Also in Vancouver works have
commenced at the new Mayfair Park, Coquitlam site which has a
development capacity of 37,000 sq.m. The first two units of industrial
space totalling 11,200 sq.m. will commence construction shortly.
USA
The US economy has been particularly strong, with low inflation and
interest rates, high employment and economic growth. In the locations
in which the Group operates, occupier demand has been very favourable
and the development programme has been particularly successful,
catering for the spectacular growth in computer, internet and bio-
science businesses.
In the San Francisco Bay area the Point Eden estate is now fully built
out following the construction and leasing of two buildings totalling
11,070 sq.m. At Pleasanton the final site is being built out
speculatively with a 7,060 sq.m. flex building. In South San Francisco
the Group has two estates, Gateway and Pointe Grand. The pre-let to
Tularik of a 7,547 sq.m. laboratory has been completed and a bio-
science user Fibrogen has exercised an option for 3,716 sq.m. on the
remaining site at Gateway. The nearby Pointe Grand will also soon be
built out, with 9,383 sq.m. under construction and a further 11,148
sq.m. to start in 2000, all on a pre-let basis to Exelixis and Sugen.
To provide for further development, the Group has recently acquired a
site in South San Francisco capable of supporting over 45,000 sq.m. of
bio-science and office space.
At the Torrey Pines Science Center, San Diego, two buildings were
completed in the year, the first of 4,924 sq.m. having been sold to the
Scripps Institute and the second of 7,664 sq.m. is being leased to
Sequenom. Following these two developments the estate has a capacity
for a further 53,000 sq.m. Agreement has recently been reached with
Agouron, a wholly owned subsidiary of Warner-Lambert to build a 30,750
sq.m. research campus alongside a 9,662 sq.m. building which they
already occupy at the Center. The agreement provides for a phased
programme over four years but it is likely that two buildings will
commence construction in 2000. The agreement provides for leases of up
to 17 years with rental returns related to capped construction costs.
Overall the project should cost £50 million, excluding land.
The development of the Group's 34 hectares of land at Elgin, Illinois,
commenced in 1999 with the first 3,948 sq.m. industrial unit leased on
completion. A further 6,131 sq.m. is under construction and further
phases are planned to commence soon.
The Group's Quail West Country Club at Naples, Florida, met its house
lot and membership sales targets for the year.
Continental Europe
Despite the disappointing start to the single currency in 1999 and
questions remaining as to its long term beneficial impact on Europe,
the economies of Belgium, France and Germany all showed signs of
improvement in 1999. Low inflation and low interest rates are likely
to continue well into the future and high unemployment relative to the
UK and North America leaves room for significant further growth. Under
these conditions the property market should continue to be firm,
particularly in the prime business centres of Brussels, Paris and the
North Rhine/Ruhr, where the Group has focused its operations.
Belgium
Pegasus Park, close to the entrance of Brussels airport, made great
progress during 1999. Cisco Systems have occupied their second
building of 7,574 sq.m. and agreed a pre-let on a third building of
8,900 sq.m. with an option on a fourth. A speculative office of 7,895
sq.m. was virtually fully let on completion. A further pre-let of
5,521 sq.m. is under construction for Regus.
The location has proved to be extremely popular which has prompted the
Group to take a 50 per cent interest in an adjacent development site
known as Pegasus Park II, on which up to 27,000 sq.m. can be built in
four buildings. The developments on this site will be sold to the
Perifund SICAFI launched early in 1999 in association with KBC, a
leading Belgian bank. The first of the four buildings of 7,787 sq.m.,
which has started construction, has been pre-leased to Deloitte &
Touche who have been granted an option on a second building.
The development at Pegasus Park will form the core of the Group's
strategy for Belgium over the near term, though opportunities will be
taken where possible to continue with industrial and distribution
developments close to the Brussels Ring Road. A recent land
acquisition at Rumst, on the autoroute north of Brussels towards
Antwerp, will be developed with 81,000 sq.m. of modern logistics
warehousing.
France
The Group's development strategy for Paris continues to be the
provision of big box warehouses on or close to the new Francilienne
Ring Road. The Cergy Pontoise unit of 25,795 sq.m. was leased and
retained for the long term, as was the earlier 25,850 sq.m. warehouse
on the same site. During 1999 the Group acquired a 25 hectare
brownfield site at Marly la Ville, just north of Charles de Gaulle
airport. A 10,652 sq.m. warehouse leased to Printemps and Inchcape
will be retained, allowing a further 97,720 sq.m. of warehousing to be
developed. The first units already under construction of 36,250 sq.m.
and 23,290 sq.m. have been pre-leased to Geodis and Stockalliance
respectively. The last two units totalling 38,180 sq.m. are likely to
commence construction within twelve months.
During 1998 an office redevelopment site was acquired at Rue Vineuse
near the Trocadero in Paris. Reconstruction started in September to
provide 4,385 sq.m. of modern office space. Since the year end it has
been pre-sold at a price which will show a trading profit of
approximately £4 million.
Germany
The Group's German operation has continued to concentrate on the
development of small industrial estates in the Dusseldorf area for
leasing and subsequent sale to institutional investors. During the
year the first phase of a site at Willich Munchheide of 7,198 sq.m. was
completed and fully leased and a second phase of 2,448 sq.m. commenced.
At Neuss the first two developments totalling 11,500 sq.m. were sold to
Pricoa, a third development of 6,605 sq.m. was completed and leased and
a further site acquired to accommodate a 6,700 sq.m. development. The
Duisburg development of 8,733 sq.m. was completed and is 73 per cent
leased and three further sites have been acquired for early development
at Monchengladbach, Kapellen and at Hamburg Glinde.
NON PROPERTY ACTIVITIES
Slough Heat & Power
Slough Heat & Power has been an integral part of the Trading Estate for
over 80 years and provides a secure supply of electricity, steam and
water to estate occupiers. Excess electricity is exported to the Grid.
Volume sales of electricity to the Trading Estate grew by 1.2 per cent
during the year, however volumes exported declined by 17 per cent as a
result of plant outages to upgrade two generators. In addition to the
market pressures on export pricing, a valuable five year Non-Fossil
Fuel Obligation contract expired at the end of 1998 causing a year on
year net revenue reduction of over £4 million, the main reason for the
company's operating loss of £3.7 million for the year. The plant
upgrades actioned in 1999 increased generating capacity from 90MW gross
to 100 MW and should contribute to a better result next year. Further
initiatives are being progressed to secure satisfactory financial
returns in future years.
The electricity supply industry is undergoing significant structural
change and further regulatory reorganisation is expected in 2000. The
impact that these changes will have on small producers is difficult to
predict.
Management Buy Out Investments
For over 15 years the Group has participated in management buyout
financing funds managed by Candover Investments plc in the UK and
Charterhouse Group International Inc in the USA. Through these funds
the Group has investments in over forty businesses ranging from
internet web hosting companies to film studios and engineering software
designers to regional newspapers. The year end book value of the
Group's investment in these funds was £31.6 million compared with the
fund managers' valuation thereof of £49.0 million. Uncalled
commitments to Candover and Charterhouse Funds amount to £21.6 million.
Equity Interests in Californian Tenants
The Group's property developments in San Francisco and San Diego
attract many knowledge led start up companies, particularly in the
field of bio-science but also in computer and communications
activities. As part of pre-letting agreements, Slough has been granted
equity warrants over a total of 1.4 million shares in 15 different
companies. Of these warrants 125,000 have been exercised, producing a
profit of $2.0 million, 790,000 warrants are in respect of companies
yet to seek an exchange listing, and 490,000 are warrants on listed
stock. The ultimate value of these warrants, carried in the books at
nil value, is impossible to determine but is likely to be rewarding.
Tipperary
Tipperary is an independent energy company headquartered in Denver,
Colorado and quoted on the American Stock Exchange. Its subsidiary,
Tipperary Oil & Gas (Australia) Pty Ltd, owns a 55.75per cent interest
in the 1.1 million acre Comet Ridge Coalbed Methane Project and a
370,000 acre Authority to Prospect (ATP) in Queensland, Australia.
Comet Ridge began producing gas revenues in 1998 and is still in the
early development stage. The company is in the process of divesting
its US oil and gas producing assets to concentrate on the development
of its Comet Ridge interests which show great potential for the future.
The Group has held an equity interest in Tipperary since 1986. To
assist Tipperary in the funding of its Australian operation, Slough has
subscribed to additional Tipperary stock bringing the Group's ownership
up to 53.1 per cent. The book value of this equity is £11.6 million.
The Group will continue to hold Tipperary stock until the full value of
Comet Ridge is realisable.
EXTRACTS FROM THE FINANCIAL REVIEW
Results
The success of the group's continuing strategy of concentrating
investment in prime business centres in the UK and overseas was
reflected in the 24 per cent growth to £103.7 million in core or
maintainable earnings in 1999. This follows a 24 per cent increase the
previous year. Core earnings comprise property investment, property
joint ventures and utilities income, less administration and net
interest costs.
As a consequence, pre-tax profit rose from £101.1 million to £128.0
million, including the adverse impact of exchange rates of £1.0
million. After excluding the results of investment property sales,
profit before tax for the year increased by 12.2 per cent to £115.8
million.
Property investment income of £182.6 million in 1999 was £41.2 million
or 29.1 per cent higher than that of 1998, despite a reduction of £4.3
million in net rental income due to property sales during the last two
years. The Bilton portfolio accounted for £19.6 million of this
increase. Rental income from the development programme continues to
flow through. Recent property developments added £19.2 million of new
year on year income in 1999, on top of 1998's £8.9 million. On a like
for like basis, after adjusting for the effect of acquisitions, new
developments and property sales, the underlying increase in rental
income was £7.1 million. Property joint ventures contributed an
additional £9.6 million, up £3.8 million on 1998, due mainly to the
opening of the Buchanan Galleries shopping centre in Glasgow in March
1999.
Looking ahead, the main variables affecting rental income apart from
acquisitions are property sales, new developments and the level of
rental rates. Rental income in the current year will suffer by some
£7.5 million from the effect of the high level of property sales during
1999. The development programme will continue to significantly benefit
core earnings as additional year on year rental income of £23.6 million
has already been secured on recent completions or properties currently
under development.
There has been further rental growth during 1999. The UK portfolio
excluding joint ventures was 9.8 per cent reversionary at the end of
1999. This equates to £14.4 million of potential future rental income
as leases are reviewed or properties re-let. The 9.8 per cent reversion
is lower than the figure of 11.4 per cent disclosed last year as the
latter excluded the Bilton properties and some of the 1998 reversionary
income has flowed through during 1999.
64 per cent of the current UK rent roll is secured on leases with at
least ten years unexpired, or 49 per cent if all earlier break clauses
are treated as expiries. Overseas, the customary length of lease is
for shorter periods but any resultant reduced level of income security
is compensated by the greater mobility of businesses. With over 1,550
tenants in the UK and just under 2,200 worldwide, the Group is not
dependent on any one customer for its principal revenues.
Net interest costs increased by £20.5 million to £72.3 million. Group
net interest payable (before capitalisation of interest) was up £18.6
million from £75.7 million to £94.3 million. The effects of newly
completed developments and the Bilton acquisition were to increase
interest costs by £13.7 million and £10.3 million respectively, whereas
1998/1999 property sales lowered them by £4.9 million. Interest
capitalised amounted to £22.0 million (1998 £23.9 million). About 48
per cent of capitalised interest related to developments that were
either pre-sold or covered by agreed lettings. Gross interest cover
(before capitalising interest) rose from 2.0 times in 1998 to 2.1
times in 1999.
The Group's non-core activities, involving property trading, other
income and share of non-property associates, had another good year,
despite profit falling by £7.3 million to £12.1 million.
Profits from property trading (£6.1 million) remained at the same high
level as in 1998. A number of projects in the UK, Belgium, France,
Germany and the USA contributed. There are sufficient projects in the
pipeline to suggest another reasonable level of trading profits in
2000.
Returns of £6.0 million from other income and share of non-property
associates were £7.3 million down on last year. Contributions of £5.6
million were generated from the Candover and CHUSA investments, against
£11.0 million in 1998. With an investment of £31.6 million remaining
in their funds, and additional commitments of £21.6 million to these
ventures' 1997 funds, further profits can be expected in the future,
although the timing and quantum thereof are difficult to predict.
Sales of investment properties and associates realised a surplus of
£12.2 million over book value in 1999, compared to a deficit of £2.1
million in 1998. The principal contributors were the Bilton industrial
property and office portfolio sales.
The Group's effective tax rate of 11.4 per cent was lower than 1998's
19.6 per cent. The 1999 tax charge has benefited from the measures
that were taken during 1998 to alleviate the Group's surplus advance
corporation tax position. The effective tax rate is expected to revert
to circa 20 per cent in 2000.
Adjusted earnings of 21.7 pence per share, which excludes the effect of
the sale of investment properties, were 20.6 per cent higher than in
1998.
Cash Flow
The net cash inflow from operations of £171.2 million was £11.6 million
lower than in 1998. The shortfall was more than accounted for by the
significant sale of the Hammersmith office development as a trading
property in 1998. Excluding the abnormal effect of this sale,
operating cash inflow was £34.2 million higher than last year. After
paying all interest, dividends and tax, there was a free cash inflow of
£19.4 million. Spend on the investment property development programme
of £181.0 million was almost entirely offset by investment property
sales proceeds of £166.8 million and the net inflow from associates and
joint ventures of £4.8 million. Overall the result was a net cash
inflow of £6.7 million for the year.
Balance Sheet
Shareholders' funds increased by £312.5 million to £2,106.9 million
during the year, due largely to the £259.2 million surplus on the
revaluation of the Group's properties and investments and retained
profit of £54.6 million. Diluted net assets per share consequently
increased by 16.8 per cent to 452 pence per share. The total return of
86.5 pence per share to ordinary shareholders represents a 21.5 per
cent increase over 1998's basic net assets of 402 pence per share.
Year end net borrowings amounted to £1,089.9 million, a marginal fall
of £3.0 million during the year. Gearing (the ratio of net borrowings
to shareholders' funds) fell from 61 per cent in 1998 to 52 per cent in
1999 mainly due to the revaluation surplus. Exchange rates had a £3.4
million adverse effect on net borrowings.
The Bilton acquisition was substantially refinanced in February 1999
through a sixteen year £150 million unsecured 6.25 per cent Eurobond
issue. Since the year end, another unsecured Eurobond issue raised
£225 million for 24 years at a coupon of 6.75 per cent. These proceeds
are being used to help finance the ongoing development programme.
Property investment is a long term business. The Group's policy is to
finance it primarily with equity and medium and long term borrowings.
The weighted average maturity of borrowings at the year end was 9.6
years. £125.9 million of debt is due for repayment or rollover in
2000/2001. £719 million or 63 per cent of the Group's gross debt of
£1,149.4 million has a maturity date beyond the year 2004.
At the year end the Group had £59.5 million of cash balances on deposit
and £404.7 million of undrawn committed bank facilities. This
availability, together with the aforementioned £225 million Eurobond
proceeds are more than adequate to cover the Group's development plans
over the next two to three years. Spend on the development programme
is expected to amount to some £300 million in 2000 and about £250
million in 2001. This will obviously depend on progress made in
planning and, in some instances, pre-leasing.
At the year end 73 per cent of the debt portfolio was at fixed rate and
a further 7 per cent hedged with interest rate caps and/or collars. The
weighted average cost of fixed rate debt was 8.6 per cent which falls
to 7.7 per cent when variable debt is included.
Net assets exposed to exchange rate fluctuations amounted to £242.1
million. A 10 per cent movement in the value of sterling against all
currencies affects net assets per share by 1 per cent although
experience shows that sterling rarely moves in the same direction
against all currencies.
A number of the Group's historic fundings are at fixed interest rates
which are high compared with current rates, but which reflect market
conditions at the time they were completed. FRS13 requires the
disclosure of the 'fair value' of these loans and derivatives. The
fair value at 31 December 1999 of the Group's borrowings was some
£107.4 million higher than book value before tax or £75.2 million after
tax. It is important to realise that the Group is under no obligation
to repay these loans at anything other than their nominal value at the
original maturity dates.
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