15th Feb 2006 07:01
Liberty International PLC15 February 2006 LIBERTY INTERNATIONAL PLC PRELIMINARY REPORT FOR THE YEAR ENDED 31 DECEMBER 2005 Attached is the full Preliminary Report for the year ended 31 December 2005: HighlightsSummary of Investment and Development PropertiesChairman's StatementOperating and Financial ReviewPreliminary Results ENQUIRIES:Liberty International PLC:Sir Robert Finch Chairman +44 (0)20 7960 1273David Fischel Chief Executive +44 (0)20 7960 1207Aidan Smith Finance Director +44 (0)20 7960 1210Public relations:UK: Michael Sandler, Hudson Sandler +44 (0)20 7796 4133SA: Matthew Gregorowski, +44 (0)20 7457 2020 College Hill Associates Nicholas Williams, +27 (0)11 447 3030 College Hill Associates BACKGROUND ON LIBERTY INTERNATIONALLiberty International PLC is the UK's third largest listed property company anda constituent of the FTSE-100 Index of the UK's leading listed companies.Liberty International owns Capital Shopping Centres ("CSC"), the premier UKregional shopping centre business, and Capital & Counties, a retail andcommercial property investment and development company concentrating on CentralLondon, non-shopping centre retail in the UK and California, USA. This announcement includes statements that are forward-looking in nature.Forward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements ofLiberty International PLC to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Any information contained in this announcement on the price at whichshares or other securities in Liberty International PLC have been bought or soldin the past, or on the yield on such shares or other securities, should not berelied upon as a guide to future performance. LIBERTY INTERNATIONAL PLC PRELIMINARY REPORT FOR THE YEAR ENDED 31 DECEMBER 2005 - HIGHLIGHTS Sir Robert Finch, Chairman of Liberty International, commented: "The impressive 2005 results, my first as Chairman, show that the companycontinues to deliver strong growth in earnings and net assets per share,possesses a very talented management team and has consolidated yet further itsposition as the UK's leading regional shopping centre business. Our totalproperty assets have now passed £7 billion and our £1.2 billion developmentprogramme should provide added impetus to the consistent growth of thisoutstanding business which, in terms of increase in net assets per share anddividend, has produced a 19 per cent total return in 2005 and a compound annualreturn of over 15 per cent for the last decade." 15 February 2006 A presentation to analysts and investors will take place at 9.30 a.m. on 15February. The presentation will also be available to international analysts andinvestors through a live audio call. The presentation will be available afterwards on the group's websitewww.liberty-international.co.uk. HIGHLIGHTS (Continued)------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2005 2004 Restated#------------------------------------------------------------------------------- Net rental income + 17% £300.1m £256.3m Profit before tax, valuation andexceptionals* + 13% £120.9m £107.0m Profit before tax + 16% £526.9m £455.1m Revaluation gains on investmentproperties + 58% £565m £357m Total properties + 31% £7,070m £5,409m Net assets (diluted, adjusted**) + 16% £4,180m £3,607m Basic earningsper share + 10% 114.8p 104.8p Earnings per share (adjusted***) + 10% 29.8p 27.1p Dividend per ordinary share + 6.6% 28.25p 26.5p Net assets pershare(diluted, adjusted**) + 16% 1188p 1025p------------------------------------------------------------------------------- # Restated for the effect of adopting International Financial Reporting Standards ('IFRS') (see note 1 to Preliminary Results) * See Analysis of profit before tax in Financial Review ** Adjusted for deferred tax in respect of revaluation surpluses and capital allowances, fair value movements on interest rate hedges, net of tax, and valuation surpluses on trading properties (see Financial Review), in accordance with UK property industry practice *** Adjusted for valuation and exceptional items and their tax effect (see note 14 to Preliminary Results), in accordance with UK property industry practice Unless otherwise stated, references to net assets per share are to net assets per share (diluted, adjusted) and references to earnings per share are to adjusted earnings per share. Notional acquisition costs including stamp duty deducted by the valuers inarriving at the market values of investment properties on the balance sheet dateamount in aggregate to £318 million (2004 - £170 million), equivalent to 90p perLiberty International share (2004 - 48p). These notional costs assume each assetis sold individually on the open market at that date and take no account of thestructures through which the assets are held within the Liberty Internationalgroup. In the case of Liberty International, the purchase and sale of shares is thepredominant mode of exchange of ownership and value for shareholders, not thesale of each underlying individual property. If these notional acquisition costswere added back, net assets (diluted, adjusted) would amount to £4,498 million(2004 - £3,777 million) and net assets per share (diluted, adjusted) wouldamount to 1278p (2004 - 1073p) compared with the reported figure of 1188p (2004- 1025p). • A year of major expansion with total properties increased by 31 per cent to £7.1 billion including £5.8 billion of UK regional shopping centres • £1.1 billion of acquisitions and development expenditure including 3 major regional shopping centres - Manchester Arndale (joint ownership of 95 per cent) - The Mall, Cribbs Causeway, Bristol (joint ownership of 66 per cent) - Chapelfield, Norwich (100 per cent ownership, opened September 2005) • Future development programme of £1.2 billion - St David's 2, Cardiff - Westgate, Oxford - extensions to and upgrades of existing shopping centres - other retail and commercial assets of Capital & Counties • 98.5 per cent occupancy (UK regional shopping centres) • 7.7 per cent like-for-like net rental income growth • Record revaluation gain of £565 million (2004 - £357 million) • Strong financial position with debt to assets ratio of 40 per cent • 19 per cent total return for the year (increase in adjusted net asset value plus dividends) DIVIDENDS The Directors of Liberty International PLC have proposed a final ordinarydividend per share of 15.25p (2004 - 14.1p) to bring the total ordinary dividendper share for the year to 28.25p (2004 - 26.5p). The following are the salient dates for the payment of the final dividend: Monday, 3 April 2006 Sterling/Rand exchange rate struck. Thursday, 13 April Ordinary shares listed ex-dividend on the JSE,2006 Johannesburg. Wednesday, 19 April Ordinary shares listed ex-dividend on the London Stock2006 Exchange. Friday, 21 April Record date for final dividend in London and2006 Johannesburg. Tuesday, 9 May 2006 Dividend payment day for shareholders (Note: Payment to ADR holders will be made on 23 May 2006). South African shareholders should note that, in accordance with the requirementsof STRATE, the last day to trade cum-dividend will be 12 April 2006 and that nodematerialisation or rematerialisation of shares will be possible from 13 Aprilto 21 April 2006 inclusive. No transfers between the UK and South African registers may take place from 1April to 23 April 2006 inclusive. SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTIES Market Value Revaluation surplus Net rental income ------------------- ---------------------------- ---------------------- 2004 2005 Increase Increase 2004 2005 Increase £m £m £m ex. DAR (1) £m £mUK RegionalShopping CentresLakeside 1,075.2 1,165.3 85.2 7.9% 12.4%Braehead 580.6 675.1 95.1 16.4% 21.3%Other M25 899.3 989.1 88.3 9.8% 9.8%Other 360.5 410.6 43.3 11.8% 11.8%Centres --------- ------- ------ ------ ------Like-for-likeincome (2) 2,915.6 3,240.1 311.9 10.7% 13.2% 129.4 140.5 8.5% ------ ------ MetroCentre 875.0 936.0 52.6 6.0% 6.0%Other 414.4 494.8 15.0 3.1% 6.9%Centres ------- ------- ------Like-for-likecapital (3) 4,205.0 4,670.9 379.5 8.8% 11.0% 180.8 206.0 14.0% Acquisitions - 1,013.9 80.7 8.6% 10.5% - 23.5Redevelopments(4) 105.2 125.5 6.7 5.7% 6.0% 6.6 6.1Developments 47.2 24.2 (15.7) - - ------- ------- ------ ------ ------ Total UK RegionalShoppingCentres 4,357.4 5,834.5 451.4 8.4% 10.4% 187.4 235.6 25.8% ------- ------- ------ ------ ------ Other UKPropertiesLike-for-likeincome (2) 487.2 566.6 77.4 15.8% 16.4% 29.4 30.9 5.2%Like-for-likecapital (3) 7.7 8.9 1.2 15.2% 15.2% 0.4 0.6 ------- ------- ------ ------ ------ 494.9 575.5 78.6 15.8% 16.3% 29.8 31.5 5.8%Acquisitions 20.5 42.5 2.1 5.3% 5.3% - 0.7Redevelopments(4) 153.7 153.4 (8.5) (5.5)% (2.7)% 14.5 10.3Disposals 40.3 - - 5.7 1.0 ------- ------- ------ ------ ------ Total Other UKProperties 709.4 771.4 72.2 10.3% 11.7% 50.0 43.5 (13.0)% ------- ------- ------ ------ ------ US Properties*Like-for-likeincome (2) 187.3 241.4 28.1 13.2% 13.4 14.0 5.2%Like-for-likecapital (3) 55.2 64.3 1.6 2.6% 1.2 3.9 ------- ------- ------ ------ ------ 242.5 305.7 29.7 10.8% 14.6 17.9 23.0%Acquisitions - 24.7 0.1 0.5% - 0.1Developments 0.4 - (0.5) - -Disposals - - - 0.3 - ------- ------- ------ ------ ------ Total USProperties 242.9 330.4 29.3 9.7% 14.9 18.0 19.0% ------- ------- ------ ------ ------ TotalInvestmentProperties(5) 5,309.7 6,936.3 552.9 8.7% 10.5% 252.3 297.1 17.8% ======= ======= ====== Trading Properties 4.0 3.0 ------ ------Net Rental Income 256.3 300.1 17.1% ====== ====== (1) Disadvantaged Area Relief (DAR) from Stamp Duty Land Tax was withdrawn in March 2005. Percentage valuation increases after adjusting for the effect of DAR on opening values are shown where applicable. (2) Like-for-like income - Properties which have been owned throughout both periods without significant capital expenditure in either period, so both income and capital values can be compared on a like-for-like basis. (3) Like-for-like capital - Properties which have been owned throughout the current period but not the whole of the prior period, without significant capital expenditure in the current period, so capital values but not income can be compared on a like-for-like basis. (4) Redevelopments - Properties which have previously been held as completed investment properties which may have been owned throughout the period but which are undergoing, or have been earmarked for, substantial redevelopment such that capital values or income may have been affected. (5) Reconciliations of Total Investment Properties and Revaluation Surplus shown above to the amounts shown on the Balance Sheet and in the Income Statement are included in notes 7 and 3 respectively to the Preliminary Results. * Percentage increases for the US have been adjusted for the effect of exchangerates. Property Analysis by Use and Type Revaluation Market Value surplus ---------------- 2004 2005 % of total Increase £m £m properties ex DARRegional Shopping Centres & OtherRetailUK Regional Shopping Centres 4,357.4 5,834.5 84.1% 10.4%UK Other retail 337.3 355.4 5.1% 13.3%US Regional Shopping Centres 104.2 131.6 1.9% 10.9%US Other retail 90.8 138.3 2.0% 8.4% ----------------- -------Total Regional Shopping Centres &Other Retail 4,889.7 6,459.8 93.1% 10.5% ----------------- ------- OfficeUK Business space 372.1 416.0 6.0% 10.4%US Business space 47.9 60.5 0.9% 10.2% ----------------- -------Total Office 420.0 476.5 6.9% 10.4% ----------------- ------- Total Investment Properties 5,309.7 6,936.3 100% 10.5% ================= ======= Analysis of Other UK and US Properties by Location and Type Market Foreign Market Value exchange Value Revaluation surplus ------------------- 2004 2005 2005 2005 Increase £m £m £m £m ex DAROther UK PropertiesCentral London 354.8 400.3 33.5 10.3%Business space outside London 170.2 197.2 23.0 13.7%Retail outside London 184.4 173.9 15.7 12.8% ------ ------- -------Total Other UK Properties 709.4 771.4 72.2 11.7% ------- ------- ------- US PropertiesUS Retail 195.0 23.1 269.9 23.7 9.6%US Business space 47.9 5.7 60.5 5.6 10.2% ----------------------------- -----Total US Properties 242.9 28.8 330.4 29.3 9.7% ----------------------------- ----- Further definitions: AcquisitionsProperties acquired during the current period. DevelopmentsProperties under development and land which have not previously been held ascompleted investment properties. Changes in the fair value of developments aredealt with in reserves rather than in the Income Statement. DisposalsProperties which have been sold during the period. Net rental income for 2004also includes income from properties sold in 2004. UK Investment Property Valuation Data Market Passing Net rental Value rent income ERV 2005 True equivalent 2005 2005 2005 yield £m 2004 2005 £m £m £mUK Regional ShoppingCentresLakeside 1,165.3 5.37% 5.06%MetroCentre 936.0 5.43% 5.16%Braehead 675.1 5.68% 5.25%Other M25 989.1 5.57% 5.29%Other Centres 905.4 6.03% 5.56% -------Like-for-like capital 4,670.9 5.59% 5.25% 202.4 206.0 249.6Acquisitions andRedevelopments 1,139.4 5.58% 33.8 29.6 67.9Developments 24.2 ------- ----------------------------Total UK RegionalShopping Centres 5,834.5 5.31% 236.2 235.6 317.5 ------- ---------------------------- Other UK PropertiesCentral London 288.7 6.30% 5.57%Business space outsideLondon 147.7 6.78% 6.23%Retail outside London 139.1 6.66% 5.68% -------Like-for-like capital 575.5 6.51% 5.77% 32.5 31.5 34.3Acquisitions andRedevelopments 195.9 5.76% 10.3 12.0 18.2 ------- ----------------------------Total Other UK 771.4 5.76% 42.8 43.5 52.5properties ------- ---------------------------- Definitions: True equivalent yieldEffective annual yield to a purchaser of rent receivable quarterly in advancefrom the assets individually at Market Value after taking account of notionalacquisition costs. Passing rentThe group's share of contracted annual rents receivable at the balance sheetdate. This takes no account of accounting adjustments made in respect of rentfree periods or tenant incentives, the reclassification of certain leasepayments as finance charges or any irrecoverable costs and expenses, and doesnot include excess turnover rent, additional rent in respect of unsettled rentreviews or sundry income such as from car parks etc. As such passing rent cannotbe directly compared with net rental income shown in the Income Statement. Net rental incomeThe group's share of net rents receivable in 2005 as shown in the IncomeStatement. ERV (Estimated Rental Value)The external valuers' estimates of the group's share of the current annualmarket rent of all lettable space. Turnover rentRent partly or wholly linked to tenants' annual sales normally comprising aminimum or base rent plus excess turnover rent. CHAIRMAN'S STATEMENT Introduction It is with great pleasure that I present the 2005 annual results, my first asChairman. They are an outstanding set of results and show that the companycontinues to deliver strong growth in earnings and net assets per share,possesses a very talented management team and has consolidated yet further itsposition as the UK's leading regional shopping centre business. The legacy bequeathed by Sir Donald Gordon on his retirement from the Board inthe 25th year of Liberty International was substantial and I am indebted to himfor his friendship and assistance in making the transition such a seamlessexercise. The strong continuing links with his family both on the Board and inSouth Africa are also hugely welcomed by me. I much look forward to thechallenges ahead and to building on the strong platform left us by Sir Donald. 2005 was another busy and highly successful year with over £1 billion ofinvestment expenditure and, after a record revaluation gain of £565 million,an increase in the aggregate value of our property assets of over 30 per cent to£7.1 billion. The high level of activity continues into 2006 with plans for ournew projects in Cardiff and Oxford progressing well and our energetic programmeof renewal and remodelling of existing assets continuing unabated. Our overall£1.2 billion development programme should provide added impetus to theconsistent growth of our business. Results for the year ended 31 December 2005 The 2005 results are the first full year results we have produced in accordancewith International Financial Reporting Standards ("IFRS") and are fullydescribed in the attached Operating and Financial Review. While the format maybe unfamiliar, the changes in presentation have no impact on the cash flows ofthe business or its present strategic direction. Our underlying revenue profit showed a 13 per cent increase from £107 million to£121 million, after extracting from the Income Statement revaluations ofinvestment properties, the change in fair value of derivative financialinstruments and exceptional items. Solid growth in like-for-like rental incomeand the realisation of some healthy trading profits in the second half yeardrove this outcome. Adjusted net asset value per share increased from 1025p to 1188p, a total returnfor the year, taking dividends into account, of 19 per cent. The unexpectedwithdrawal in the first half of the year of disadvantaged area relief from stampduty land tax reduced the total return by some 3.5 per cent. Net asset value per share would have been further increased by 90p at 31December 2005 to 1278p if purchasers' costs, primarily stamp duty land tax, hadnot been deducted from the valuations as required by the RICS Appraisal andValuation Standards. This deduction may seem inappropriate, for we have nopresent intention of selling these assets. Furthermore, since the assets werevalued individually, no recognition was given to the premium which could havebeen added had the portfolio of shopping centre assets been valued as a whole.The prime quality of the assets we have assembled in the UK and their strategiclocations, given the planning constraints under which the country operates,could not easily be emulated. Looking back over the last decade, our compound annual return of 15.4 per centin terms of increase in net assets per share plus dividends has represented anexceptional outcome for shareholders. Looking forward, our focus on activemanagement to generate like-for-like rental income growth, alertness to theacquisition of prime assets and our active development programme to upgrade thequality of our asset base bode well. Dividends The directors are recommending a final ordinary dividend of 15.25p per sharepayable on 9 May 2006, bringing the full year's dividend to 28.25p per share, anincrease of 6.6 per cent on 2004, continuing our unbroken track record over thelast decade of annual dividend improvement. The directors remain committed to aprogressive and relatively full dividend policy which they believe represents amajor attraction for long-term investors. Valuations The recent strength of the UK property market, with 2005 another buoyant yearfor property valuations, has been caused by a number of factors - considerableinternational and institutional demand for product, the substantial drop in longterm interest rates, the comparative safety of UK investment when set againstthe rigours and risks of finding investment in developing countries and the hugepent-up demand particularly from the oil rich nations of the Middle East.Although this competition for product leads us necessarily to maintain acautious stance towards new acquisitions and development opportunities,nevertheless we remain excited by the prospects for our outstanding business. Our overall revaluation gain was a record of £565 million even after thequite unexpected withdrawal of disadvantaged area relief from stamp duty. Theunderlying surplus represents a valuation increase of 10.5 per cent. Regional shopping centres owned for more than twelve months contributed asurplus of £380 million (11.0 per cent). A downwards shift in the equivalentyield applied by the external valuers from 5.59 per cent to 5.25 per centprovided some two-thirds of this uplift with the balance of one-third comingfrom underlying increases in rental value. Particularly strong performers wereBraehead, Renfrew, Glasgow (opened September 1999) and The Chimes, Uxbridge(opened March 2001), reflecting respectively the achievement and expectation ofuplifts in rental income from the first round of rent reviews since opening. The £1.0 billion regional shopping centre additions in the year also performedstrongly, contributing a surplus of 10.5 per cent before costs. Our acquisitionof 50 per cent of Prudential PLC's interests in the Manchester Arndale and theMall at Cribbs Causeway, Bristol, and associated properties at an aggregatepurchase price of £653 million, has proved an excellent transaction both infinancial terms and in strengthening our overall position in the UK regionalshopping centre industry. In September, we opened our newest centre,Chapelfield, Norwich, where we have taken full freehold ownership for an overallconsideration of £263 million. The centre contributed a first time valuationsurplus of £34 million. Our UK regional shopping centre interests, at £5.8 billion by market value,amount to 84 per cent of our total investment properties. One of the investmentattractions of regional shopping centres is their stability, with historicalevidence indicating a lower level of volatility and obsolescence than otherproperty asset classes. Of course, in a rapidly rising market, the converse isthat other asset classes, temporarily at least, can perform more strongly. The table set out below, provided by one of our valuers, CB Richard Ellis, givesillustrative representative yields for the different retail asset classes overthe last three year ends: Nominal Equivalent yield ----------------------------------------------- 31 December 31 December 31 December 2003 2004 2005 % % %Prime High Street Shops 5.00 4.50 4.00Prime Retail Warehouses 5.75 5.00 4.25Prime Shopping Centres 5.75 5.50 5.25Secondary Shopping Centres 7.00 6.25 5.85 (Source: CB Richard Ellis) Over the last two years, prime high street shops and retail warehouses, mostlydriven by the greater accessibility of the product to investors, have moved to asubstantial premium rating to prime shopping centres, where evidence from markettransactions is much less readily available; the gap between prime and secondaryshopping centres has also significantly narrowed. By way of illustration, at 31December 2005, a rental income stream of £4 million would have been valued(ignoring costs) at £100 million for high street shops, £94 million for a retailpark but only £76 million for a prime shopping centre. We commented last yearthat prime regional shopping centres represented demonstrably good value againstthe other retail classes; this year, that conclusion is even more inescapable. In fact, if Liberty International's £5.8 billion of prime shopping centres werevalued in line with prime high street shops at a nominal equivalent yield of4.00 per cent, our net asset value would increase by some £1.7 billion(approximately 485p per Liberty International share). The business of Capital & Counties, concentrating on London's West End,non-shopping centre retail and California, USA, with retail propertyrepresenting 57 per cent of its assets, has once again delivered a strong totalreturn on group capital employed. The Capital & Counties approach of combining,within carefully defined sectors, active management, investment, development andtrading provides the group with greater strategic flexibility and a valuablecomplement to the group's shopping centre activities. The overall retail and commercial portfolio of Capital & Counties increased to£1.1 billion after a £102 million (11.1 per cent) revaluation surplus; excludingimpending redevelopments which had a market value of £153 million at 31 December2005, the surplus on UK properties amounted to an impressive 16 per cent. The retail industry 2005 saw the UK economy sluggish with a below trend growth rate of 1.7 per cent.Retail sales were particularly affected by a range of factors such as weaknessin the UK housing market, and the impact on disposable incomes from higherprices for fuel and utilities; and higher council and other taxes. The totalvalue of retail sales was estimated by the Office for National Statistics (ONS)at £249 billion, up 1 per cent on 2004. This compares with growth of 4.6 percent in 2004 and, according to ONS, is the lowest annual increase since theSecond World War. The ONS year-on-year figure for non-food retail sales has been disappointing atnegative 0.6 per cent compared with 2004. However, although subdued, the runningrate of sales growth has improved after a stronger December 2005. In this environment, retailers have faced many challenges - from pricedeflation; the growing range of non-food products sold by the supermarkets; theever more demanding consumer; and from the growth of e-tailing. This lastcategory is of particular interest as established 'bricks and mortar' retailerswho have successfully embraced e-tailing have in many cases discovered avirtuous circle where the e-tail business produces positive benefits for theirin-store business. We have seen several retail casualties during 2005 but in our centres theseunits were absorbed, in the main by expanding UK fashion retailers and newentrants to the UK retail market in all use categories. We have also seen thedisappearance of some familiar high street names such as Allders, Littlewoodsand Allsports but the market absorbed the majority of these units, mainlythrough acquisitions by Primark, New Look and J D Sports. The winning retailer formats this year have been those with trusted brands, astrong complementary on-line presence and those who have focused on their corecustomers. CSC has been delighted to work closely with such retailers to fulfiltheir space requirements. Retailer demand The undoubted success of CSC's centres and their pre-eminent position withintheir localities, together with our close working relationships with retailers,has continued to generate sustained levels of demand for all sizes of wellconfigured space. We have continued to take advantage of opportunities torefresh the tenant mix of our centres and respond to retailers' ever-changingspace requirements. Our prime regional centres can never remain in a static condition. They mustcontinually evolve to meet consumer needs and retailer demands. Remodelling ofspace, upgrading facilities, modernising leisure areas and providing betterrestaurant facilities constantly demand our attention, while changes in tenantmix provide new attractions for our customers. This active approach isparticularly important in the tough trading environment which became evident in2005. Overall, our occupancy level at CSC continues to be high at 98.5 percent. Property industry issues 2005 saw for the first time the Government's detailed proposals for the creationof a UK Real Estate Investment Trust (UK-REIT), a tax transparent vehicle forholding real estate. Liberty International believes that a thriving propertyindustry is essential for a successful modern economy - and the UK propertyindustry should have a vehicle to compete with the REIT models now wellestablished in the US, Continental Europe and the Far East. Some of the details of the Government's proposals clearly require furtheramendment such as the proposed 10 per cent shareholding limit and anexceptionally restrictive interest cover test, while the details of theconversion process, particularly its tax implications, are still uncertain. Ihope that the Treasury proposals can be further refined to produce a productwhich, while not disadvantageous for the Treasury, will encourage investmentinto property. However, a less welcome Government proposal is the so-called Planning GainSupplement - another form of taxation which in my view runs counter to theGovernment's own objectives for the release and development of land,particularly for the residential sector, will create a valuation nightmare andignores the reality that a planning permission, the purported value of whichwill be the basis of the proposed tax charge, is just one step amongst manytowards the creation of a new development; this would particularly be the casefor the sort of large and complex development with a long time scale to whichCSC commits. The Government needs to think again, particularly since simplerproposals are available to provide the infrastructure that communities require. Corporate social responsibility The forthcoming Annual Report details the progress we have made over severalyears in our commitment towards Corporate Social Responsibility. We havereformed our internal structures, introduced line responsibility forimplementing policy and introduced procedures for measuring and curbingemissions and waste. We have encouraged our shopping centres to work at a locallevel with the communities which create our customer base, particularly focusingon youth, education and crime issues. At all times, we strive to achieve theappropriate balance between the best interests of shareholders, employees andour local communities. Directorate changes & management 2005 has seen considerable change at Board level and within the underlyingmanagement structure of CSC. First of all, of course, the chairmanship has changed but we shall continue tobenefit from Sir Donald Gordon's huge knowledge and commitment to LibertyInternational through his appointment both as President for Life and as aconsultant to the group. Secondly, John Abel retired as Managing Director of CSC and we have welcomed KayChaldecott into that role. Kay has spent her working life to date at CSC. She ishugely experienced in the retail sector and will bring much energy to her newrole. John Abel's vast knowledge of CSC and the retail industry gained throughsome 30 years at 40 Broadway will fortunately continue to be available to us ashe has agreed to remain on the group Board as a non-executive and as a member ofour Board-appointed Capital Projects Committee, which reviews major capitalexpenditure decisions. At this year's Annual General Meeting, David Bramson is intending to step downas one of our independent non-executive directors but his wise counsel willremain available to us at the level of the Capital Projects Committee and he hasagreed to take on the role of chairman of the trustees of the group's pensionfund. We have made two further appointments to the CSC Board - namely Caroline Kirbyand Martin Ellis. Caroline has taken on Kay Chaldecott's former role and willtake responsibility for the investment management of the CSC portfolio. MartinEllis will be director responsible for construction both of new projects andwithin existing centres. We are confident both have the necessary expertise tofulfil their senior positions. We greatly appreciate the tireless work and assistance given to the group overthe course of many years by John Abel and David Bramson and I look forward toworking with those newly appointed. I feel immensely privileged to have been so warmly welcomed into the group andto be able to witness at first hand the dedication and effort demonstrated byour employees at all levels. Prospects Regional shopping centres as an asset class remain extremely resilient to retailmarket conditions. CSC's investment criteria of quality and large scale willbecome increasingly important as successful shopping destinations continue topolarise. Our considerable programme of activities to extend, remodel, refresh andreconfigure space at our existing centres, together with opportunities each yearto grow the contracted income through rent reviews, will continue to improve theoverall business for shareholders, with added benefits from the prospectivedevelopment of our major new projects, in prime and enviable locations. Both thesize of programme of development activity and the timing of completions giveconsiderable momentum for growth. Against a retail environment of increasedcompetition, our quality assets should prove robust. Capital & Counties provides a valuable complementary activity to the shoppingcentre business and is engaged on a range of substantial and promisinginitiatives to continue to provide excellent returns on capital employed. With this unrivalled portfolio of highly attractive assets, and a young, ableand ambitious management team, we remain confident of Liberty International'sfuture prospects. Sir Robert FinchChairman15 February 2006 OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 31 DECEMBER 2005 OPERATING REVIEW INTRODUCTION In 2005, Liberty International has successfully extended its consistentfinancial track record, reporting both strong growth in adjusted net asset valueper share and steady adjusted earnings per share progression. We completed a number of major and important transactions in the year, mostnotable of which were • the £653 million acquisition of interests in two of the UK's leading regional shopping centres, Manchester Arndale and Cribbs Causeway, Bristol, and associated properties • the opening in September of the new and virtually fully let 530,000 sq.ft. regional shopping centre, Chapelfield, Norwich, where we assumed ownership soon after opening for an overall consideration of £263 million • increasing our interest in Eldon Square, Newcastle, from 45 per cent to 60 per cent at a cost of £53 million contemporaneously with the grant of a new 250 year lease and entering into an agreement with Newcastle City Council for the expansion and redevelopment of this top-ranking centre, which has traded very successfully since opening in 1976 • progressing our substantial development programme, particularly the Northern Extension at Manchester Arndale; Eldon Square, Newcastle; Cardiff and Oxford; and in the case of Capital & Counties, significant projects at King's Reach on London's South Bank; the Strand, London WC2; and the Headrow, Leeds • raising £1.2 billion of long term finance through the commercial mortgage-backed securities ("CMBS") market and raising additional permanent equity through early conversion of £129 million of the £240 million convertible bond 2010 Overall, the year was one of major expansion. Total property assets increased byover 30 per cent from £5.4 billion to £7.1 billion with over £1 billion ofadditions and further strong upward property revaluations. Our robust financialposition has readily absorbed this expansion with the year end debt to assetsratio at 40 per cent, a level which gives plenty of flexibility to continue ouractive development programme. The substantial drop in longer dated UK interest rates in 2005 provided afavourable background for the UK property market. The 10 year gilt yield reducedfrom 4.5 per cent to 4.1 per cent in the year while the 30 year gilt finishedthe year yielding just below 4 per cent. In this interest rate environment, property continued to prove an attractiveinvestment to yield-seeking investors. The total return from UK property for theyear, as measured by the IPD monthly all-property index, amounted to 18.8 percent, comparable to the 18.9 per cent return in 2004, with most of the capitalgrowth of some 12 per cent explained by a substantial yield shift. Theall-property equivalent yield according to IPD reduced from 6.8 per cent at theend of 2004 to a record low of 6.0 per cent at the end of 2005; compared with8.8 per cent a decade ago, when long gilt yields were considerably higher at 7.7per cent. Our objective is to continue to deliver exceptional long-term returns toshareholders through focus on three principal components; active management togenerate like-for-like rental income growth and thereby increase underlyingprofits; acquisitions of prime assets where these enhance our strategicposition; and an active development programme, continually upgrading the overallquality of our assets. All three of these elements contributed to the positiveoutcome of 2005. CAPITAL SHOPPING CENTRES ('CSC') Key information on Capital Shopping Centres' UK regional shopping centres • market value of £5.8 billion • 35 per cent increase in 2005 in space under ownership from 8.3 million sq.ft. to 11.1 million sq.ft. • 12 completed centres including 9 of the UK's top 25 • an estimated 210 million customer visits per annum with half the UK's population within a 45 minute drive time of our centres • 98.5 per cent occupancy by rental value (1791 units out of 1828) • 106 tenancy changes in the year increasing annual rental income by £3.8 million • like-for-like net rental income growth in 2005 of 8.5 per cent • net rental income from Braehead, Renfrew, Glasgow, increased 28 per cent in 2005 after the first round of rent reviews since the centre opened in September 1999 • rental income growth prospects in the next two years underpinned by five yearly rent reviews on 17 per cent of CSC rental income in 2005 and 19 per cent in 2006 • £1 billion development programme on new projects and existing assets Acquisitions in the year 2005 has been a year of tremendous growth for CSC, increasing our scale fromnine completed regional shopping centres to twelve. CSC now owns nine of theUK's top 25 shopping centres with a good geographical spread across the UK. Halfthe UK's population lives within 45 minutes drive time of one of our centres -an excellent platform for future growth of market share nationally. The acquisition of 50 per cent of Prudential PLC's interests in ManchesterArndale and The Mall, Cribbs Causeway, Bristol and associated properties hasprovided CSC with two additional powerful centres. Manchester Arndale, oncompletion of the current Northern Extension development will be one of the UK'slargest city centre retail destinations at 1.4 million sq.ft. and CribbsCauseway is one of only eight out-of-town super-regional centres in the UK; fourof which are now within CSC's ownership. Phase One of the Manchester ArndaleNorthern Extension opened, on programme, in October, the main event being theopening of Next's first 150,000 sq.ft. store. Also in October we assumed 100 percent ownership of Chapelfield, Norwich, for a total consideration of £263million, excluding the residential element, following the centre's successfulopening in September. These three new investments at Manchester Arndale, Cribbs Causeway and Norwichall meet CSC's criteria of large scale regional shopping centres with goodaccess, car parking and excellent tenant mix, adding 2.8 million sq.ft. ofregional shopping space. Overall space under CSC's ownership increased in theyear by 35 per cent from 8.3 million sq.ft. to 11.1 million sq.ft. Since the end of 1993, when CSC was formed as a stand-alone business, we haveincreased the group's prime UK regional shopping centre interests ten-fold from£576 million to £5.8 billion, in the process carving out market leadership inthis attractive market sector. Regional shopping centre industry background Regional shopping centres of the quality and scale of those owned by CSC broadlymaintained their market position but the competition for customers and retailspending in the UK retail property market remains intense. As the boundariesbecome increasingly blurred between comparison and convenience shopping, ourcentres compete not just with other shopping centres but also with other retailformats, particularly superstores and retail parks; we also compete with othernon-retail attractions for our share of overall customer expenditure. Activeproperty management and superior customer service aiming to deliver a pleasantshopper experience have increasingly become fundamental to the success of ourcentres. We have continued to generate sustained levels of demand for all sizes of wellconfigured space and taken advantage of opportunities to refresh the tenant mixof our centres and respond to retailers' ever-changing space requirements. Department stores continue to progress discussions for new space andnegotiations with major space users have been dominated by the fashion retailerswho have requirements for our future projects. As our centres continually evolve to meet consumer needs and open for longerhours, we have seen an increase in demand for standard units by quality caterersand restaurants adding a vibrancy to the malls late into the evening. Theseoccupiers are responding to both the extended dwell time of consumers and theincreasing proportion of shopping trips made during the week after workinghours. The pipeline of proposed shopping centre development in the UK between 2006 andthe end of the decade is considerable, with more town centre retail space nowunder construction than at any time in the past ten years. However, little ofthis additional space is directly competing with CSC centres and prime centressuch as ours in strong towns or cities continue to improve as retaildestinations. Benefits from our active management approach The many opportunities we have implemented to refresh the tenant mix at ourcentres have continually created something new to attract consumers. During theyear, we have made 106 tenancy changes, excluding development lettings,producing additional annual rental income of £3.8 million. Occupancy has continued to run at high levels, amounting to 98.5 per cent byrental value, representing 1791 units out of 1828 in aggregate. The like-for-like growth in net rental income from our centres in 2005 was £11.1million, 8.5 per cent, reflecting the benefits of refreshing the tenant mix andthe well planned and executed rent reviews and lease renewals, particularly atBraehead, Renfrew. Future like-for-like increases in rental income are expectedin 2006 from the 2005 rent review cycles at Lakeside and Uxbridge where thefirst reviews are now being settled. 2006 also sees significant rent reviews inrespect of 19 per cent of CSC's rental income, in particular at MetroCentre,Gateshead, and The Harlequin, Watford. Customer service Consumers have become more selective demanding 'added value'; convenience and abroad range of shops have become priorities in the choice of shoppingdestination. Our focus on improvements to customer service and amenities isrelentless, aiming to provide the consumer with a hassle-free shopping trip,offering something special and different. Through our close working relationships with retailers, we can plan ahead toprovide their store size requirements to enable them to meet consumer demand forchoice. We continue to invest in customer service - creating clean, safe andbright environments to welcome each member of the public. Our partnership approach extends beyond retailers and consumers to the widercatchment areas in which we invest, working closely with local authorities andconsumer organisations to incorporate their requirements. These relationshipsare important in ensuring our centres provide full benefit to their communities,including for example in certain locations educational support through thesponsorship of retail management and apprenticeship schemes. Embracing localauthorities' wider vision for their towns and cities assists in providing moreattractive destinations, differentiating them from competing locations. Our CSC Enterprises' business, building on the powerful marketing opportunity ofan estimated 210 million customer visits each year to our centres, made ameaningful contribution to revenue in 2005 of £6 million. Development activities in respect of completed shopping centres In order to anticipate and respond to both retailer and consumer requirements,management constantly focus on selecting and implementing opportunities tofurther improve CSC's centres; 2005 saw much activity. At Lakeside, Thurrock, we have continued to enhance the customer offer. Theprovision of a roof box has provided Next with a 63,000 sq.ft. store now tradingon three levels, while taking back the former Allders store has afforded theopportunity to provide Primark, previously not represented at Lakeside, with a60,000 sq.ft. store, soon to be extended to 90,000 sq.ft. Full planning consent has now been granted for the final phase of Lakeside'srefurbishment, the remodelling of the Pavilion building, which will provide ninenew restaurants, overlooking Alexandra Lake together with additional retail andleisure uses. All the restaurant space is under offer and construction is due tocommence in the Spring for completion in Summer 2007. Our rolling programme of refurbishment at MetroCentre, Gateshead, has continuedsuccessfully, providing new flooring and improved vertical circulation throughthe majority of the malls, due to complete in Autumn 2006. At Braehead, Renfrew, Glasgow the phase two development which involves 165 acresof land adjacent to the shopping centre made substantial progress in 2005. Majorinfrastructure works, including new roads, a riverside walkway and a public parkwere completed. Construction of the 460,000 sq.ft. Xscape leisure scheme, ajoint venture with Capital & Regional plc, is progressing well for opening inSpring 2006. The scheme includes an indoor ski slope, a multi-screen cinema,bowling and an excellent line-up of restaurants, cafes and speciality retailers.71 per cent of the projected annual income is now committed with a further 20per cent under negotiation. We sold 4.3 acres for showroom and offices in thesecond half of the year, recording a trading profit of £1.2 million. Inaddition, conditional contracts have been exchanged to sell a further 40 acresof residential land and 2 acres of commercial land for an hotel. Construction ofRiverside, Braehead, a 35,000 sq.ft. office scheme providing small units forsale or rent, will commence in Summer 2006. At Eldon Square, Newcastle, enabling works have been completed for constructionto commence this Spring on the new bus station and 48,000 sq.ft. of retail spacein the north of Eldon Square ('ES North'), due to complete in 2008. Constructionwork for the second phase, providing bigger units on Blackettbridge andrestaurants overlooking Old Eldon Square ('ES West'), has commenced on site,with the new occupiers expected to open for Christmas trade in 2006. 64 per centof the 22,000 sq.ft. of new space in ES West is currently under offer. Goodprogress continues to be made on the third and largest development, to the southof the centre ('ES South'), providing 410,000 sq.ft. of retail space including anew department store. Subject to site assembly, works are due to commence onsite in Autumn 2006 and retailer interest is very encouraging. Eldon Square,currently comprising 961,000 sq.ft., will provide 1.3 million sq.ft. of citycentre retail space on completion of the three phases. At The Glades, Bromley, our project to provide an additional 38,000 sq.ft. ofretail space through the re-configuration and integration of recent High Streetacquisitions, is programmed to commence on site in Spring 2006. The first phasewill also provide new and improved customer facilities for the centre. 60 percent of the new space is under offer. In Watford, we continue to make good progress on our mixed use plans for theCharter Place site adjacent to The Harlequin, where the planning brief has beenfinalised and an initial public consultation programme completed. At the Victoria Centre, Nottingham, the 40,000 sq.ft. remodelling projectconverting the lower level of the former market to prime retail space iscomplete and fully let. The new retailers - Top Shop, Monsoon and Republic -opened ahead of the Christmas trading period. Following our acquisition in March 2005 of 50 per cent of the Prudential'sinterest in properties at Manchester Arndale and Cribbs Causeway, initialperformance has been very encouraging with scope for additional initiatives toadd further value to these premium assets. In partnership with the Prudential,we will commence works to refurbish and modernise the retail park at CribbsCauseway in March 2006 with completion programmed for the Autumn prior topre-Christmas trading. At Manchester Arndale, where Prudential is responsible for delivery of theNorthern Extension, works for phases 2 and 3 are on programme which will enableopenings in April and October 2006 respectively. This will complete the 550,000sq.ft. extension increasing the whole centre to 1.4 million sq.ft. in total.Some 80 per cent of the new space is currently committed, reflecting strongretailer demand for this prime location in the city. Progress on New Projects Significant progress has been made in Cardiff, where the St David's Partnership,our joint venture with Land Securities Group PLC, has secured detailed planningconsent for a 967,000 sq.ft. retail-led mixed-use extension to the existing StDavid's Centre. A Conditional Development Agreement has been exchanged with Cardiff CountyCouncil and the Compulsory Purchase Order has been published. Enabling works areunderway and a construction start is anticipated in Winter 2006 for completionin Autumn 2009. An agreement for lease has been exchanged with the John LewisPartnership for a 260,000 sq.ft. department store and discussions are underwaywith other major space users. In Oxford, the Westgate Partnership, our joint venture partnership with La SalleInvestment Management, continues to make progress with agreement now reachedwith both Oxford City and County Councils on a transport solution for ourproposed scheme and the wider West End regeneration area of which Westgate is avital ingredient. The detailed design of the proposed retail-led mixed-useextension to the Westgate Centre is now underway. A further round of publicconsultation on the emerging designs has proved very positive and a detailedplanning application for 750,000 sq.ft. of retail anchored by a department storefor the John Lewis Partnership, together with 124 residential units, is expectedto be submitted in Spring 2006. CAPITAL & COUNTIES Key information on Capital & Counties • complementary to regional shopping centre business • Central London and non-shopping centre retail • a window to the US market with regional shopping centres and other retail in California • mixed-use development skills • over 6 million sq.ft. of retail and business space • investment properties at 31 December 2005 £1.1 billion; 30 per cent in USA • £102 million revaluation surplus in 2005 (11.1 per cent) • by value, 57 per cent retail, 43 per cent business space • like-for-like net rental income growth in 2005 of 5.2 per cent • 2005 trading profits of £10.4 million • £200 million development programme with 1.6 million sq.ft. of development and refurbishment under way or planned UK 2005 has been dominated by preparation for a number of major refurbishment andredevelopment projects. We have also taken advantage of strong investmentmarkets to make a number of disposals from both the investment and tradingportfolios. Where we have perceived opportunity to add value, we have beenprepared to make purchases, but without pursuing an aggressive policy in currentmarket conditions. Central London£400 million market value We have seen West End office rental growth of up to 18 per cent over the year inSt James's and Piccadilly where we have significant holdings. A rollingprogramme of upgrading continued within the multi-let West End and Mid Townoffice buildings with work planned in 2006 for 23,000 sq.ft. of space. Retailrental values have been stable or showed some marginal growth. At the year end, offices available to let within our Central London propertiesexcluding redevelopments or refurbishments planned or underway amounted to 2 percent of total floorspace. Purchasing investments in a very competitive marketplace within the West Endmarket has become increasingly difficult. Yields have continued to fall over theyear as investors became convinced of the likelihood of strong office rentalgrowth. We did however acquire Kendal House, a 10,150 sq.ft. office and retailbuilding strategically located at the junction of Regent Street and ConduitStreet, for £8 million. Significant progress has been made with the refurbishment and redevelopmentprogramme outside the core West End. At Hammersmith, regeneration and re-imagingis underway of the 110,000 sq.ft. office building currently known asCommonwealth House and to be rebranded as the Metro Building. Completion of ashow suite is expected in May 2006. At Wapping, E1 architects are drawing upcreative plans for contemporary loft-style workspace within the 170,000 sq.ft.riverside Metropolitan Wharf. A planning application will be made in February2006. As reported at the half year, the London Borough of Southwark has resolved togrant consent for partial redevelopment and extension of the King's Reachcomplex. The scheme envisages complete reorganisation of the office, retail andpublic realm elements and gross floorspace will increase by nearly half toalmost 400,000 sq.ft. We have also gained consent from Westminster City Councilfor the major redevelopment with our partner, Prudential, of 190 Strand, WC2.This outstanding design by architects Kohn Pederson Fox will provide 200,000sq.ft. of office and retail floorspace together with 44 apartments. Vacantpossession of King's Reach and 190 Strand is anticipated within two years. Business space outside London £197 million market value In the M25 West area, office market conditions are improving in Uxbridge whereour property, Capital Court, is now fully let at rents of up to £24 per sq.ft.Slough and Heathrow markets continue to experience oversupply, though we havelet over 4,000 sq.ft. at Capital Place, Hillingdon for around £20 per sq.ft. At Capital Park, Cambridge, an additional 39,000 sq.ft. office phase has startedand is due for completion in the second half of 2006. As reported at the halfyear, we continue to plan for the substantial upgrading of 54 Hagley Road,Birmingham. Planning consent has now been received for a major 'statement'entrance to the building and we are currently seeking consent for enlargement ofthe car park. We also completed refurbishment of 36,000 sq.ft. offices at PortSolent, Hampshire, following negotiation of a prelet of the entire building. Retail outside London £174 million market value Asset management activities at the Braintree and Stafford retail parks havecontinued. We added to our retail warehouse investments by the acquisition ofthe 38,000 sq.ft. Riverside Retail Park in Canterbury for £10.7 million. Let toStaples, Pets at Home and Land of Leather, this park benefits from being part ofa major cluster of retail warehousing at the A2/A28 Junction, half a mile southwest of the city centre. A retail warehouse was also acquired in Rotherham; letto B&Q but with an open A1 retail consent and expansion potential. No other retail acquisitions were made and we took advantage of investmentmarket conditions to sell the long leasehold interest in the 110,000 sq.ft.Swansea Market retail scheme for £42.6 million, above book value. As in Central London, current and prospective projects continue to dominate.Planning consent was received in December 2005 for a major conversion andextension of the mainly vacant former Allders store on the Headrow, Leeds. Theconsented scheme includes 120,000 sq.ft. of prime retail and 150,000 sq.ft. ofnew offices. An alternative and equally financially attractive scheme is alsobeing prepared which would enable us to proceed without gaining possession ofcurrently occupied offices. In addition to this, we have started to look at the potential for unutilisedspace over retailing areas at the Lewis' Liverpool and Primark Manchesterdepartment stores. A total of 300,000 sq.ft. could be brought into use. AtManchester, a scheme is being drawn up to provide about 100,000 sq.ft. ofloft-style workspaces whilst at Liverpool various possibilities are underconsideration including residential and hotel use. Trading£54 million market value (UK) We continue to maintain a UK trading portfolio and the principal sale in 2005was of an 8 acre site at Junction 15 of the M40, following the receipt of aresidential planning consent, creating a trading profit of £6.4 million. 5.5acres of potential commercial development land have been retained. US 2005 has been a very active year for Capital & Counties USA Inc. At Mission Village, Fairfield, planning consent was obtained for a majorsuperstore in place of the remaining unoccupied retail units on this 18 acresite, and a sale to WalMart was concluded. We also sold a parcel of land incentral Pasadena adjacent to our residential and retail development. Together,these sales created substantial trading profits of £4.5 million ($8.1 million). The proceeds of the sales were recycled into the purchase for $42 million of a127,000 sq.ft. retail and office building at Sutter Street, downtown SanFrancisco. The Senator office building in Sacramento was refinanced with a new$38 million loan at 5.3 per cent, effectively repaying our original equity inthe purchase. In Pasadena, two of the proposed five phases of the 'Trio' apartmentdevelopments have been completed together with the pool, gym and amenity areas.We have also leased further vacant space at the adjoining Sanwa office building,bringing it to 96 per cent occupancy. At Serramonte Shopping Centre, improvements and enhancements continuedthroughout the year. The development of areas adjacent to the North entrance tothe scheme was completed and the new 'gateway' dining facility - the 'ElephantBar' - was opened. We continue to work on upgrading tenant mix and completed animportant amendment to an anchor store lease, thus opening the way to furtherdevelopment of the site. At the Willows Shopping Centre, Concord we secured planning approval for theredevelopment of 6,800 sq.ft. of awkwardly arranged vacant space. The resulting10,800 sq.ft. unit has been preleased to Pier One. In 2005, the US company has once again demonstrated the success of itsconsistent focus on - capital recycling through strategic sales and opportunistic purchases - value adding activities - timely use of leverage - trading and development In the US, the focus on retail will continue but will not preclude considerationof other opportunities in 2006. FINANCIAL REVIEW ACCOUNTING ISSUES International Financial Reporting Standards ("IFRS") became mandatory for alllisted companies within the European Union from 1 January 2005 and thePreliminary Report for 2005 has been prepared in compliance with IFRS. Thecomparative figures for 2004 have been restated accordingly and the notes to thePreliminary Results contain summary reconciliations to the previously reportedfigures. A more extensive commentary and explanation of the changes broughtabout by the transition to IFRS is contained in a separate document published on26 July 2005 which is available in the Report and Accounts section on thecompany's website (www.liberty-international.co.uk). INCOME STATEMENT Analysis of profit before tax------------------------------- Increase Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Underlying profit before tax 8.4% 109.3 100.8Property trading profits 11.6 6.2 --------- --------- Profit before tax, valuation andexceptional items 13.0% 120.9 107.0 Gains on revaluation and sale ofinvestment properties 565.5 357.3Movement in fair value of derivativefinancial instruments (145.8) (41.4)Exceptional items (13.7) 32.2 --------- --------- Profit before tax 526.9 455.1 --------- --------- Underlying profit before tax increased by 8.4 per cent to £109.3 million from£100.8 million reflecting rent reviews and interest savings, offset in part bythe impact of active management and acquisitions all of which are discussed inmore detail below. Trading profits of £11.6 million were almost twice the level achieved in 2004.Overall profit before tax, valuation and exceptional items therefore increasedby 13.0 per cent from £107.0 million to £120.9 million. In addition to exceptional items, material items which need to be disclosed byvirtue of their size or incidence, profit before tax, under IFRS, includes otheritems which are unpredictable by their nature, such as revaluation gains oninvestment properties and the movement in fair value of derivative financialinstruments. These items can have a significant impact on the presentation andinterpretation of the revenue results. In order to compare one period withanother, the results have been analysed above to show the effect of these items. Under IFRS, the revaluation movements on investment properties, other than onfirst time developments, are presented in the Income Statement rather than inthe revaluation reserve. Commentary on this movement is dealt with below underthe section, investment properties. Also, under IFRS, the fair value ofderivative financial instruments is now included in the balance sheet and themovement in fair value of derivative financial instruments is included in theIncome Statement. This change creates considerable volatility in the IncomeStatement and has particular significance for Liberty International because ofour chosen method of financing which employs a small proportion of fixed ratefinance but uses derivative financial instruments to fix interest rates on themore flexible floating rate funding which forms the greater proportion of ourdebt. This gives the group the desired certainty over future cash flows combined witha debt structure which enables early repayment without necessarily incurring thesignificant penalties that can be associated with the early repayment of fixedrate debt. For example, the separation of the fixed and floating elements inthis way enabled us to benefit from reduced margins, through the earlyrefinancing of non-recourse facilities secured on our major shopping centres, ina way which would not have been possible had the original financing been on afixed rate basis. We have not adopted the hedge accounting treatment for interest rate derivativeswith the result that these derivative financial instruments are accounted for atfair value with movements in fair value shown in the Income Statement. Thisdiffers from the treatment of fixed rate debt where fair value has no impact onthe Balance Sheet or the Income Statement even though the cash flows from bothtypes of financing should be broadly similar. Over the period to 31 December 2005, interest rates in general fell and inparticular the ten-year sterling interest rate swap, which represents a suitablebenchmark for the group's fixed rate obligations, decreased from 4.86 per centto 4.45 per cent. As a result the fair value of the group's derivative financialinstruments, which are outlined in more detail below under Maturity and InterestRate Profile of Debt, declined by £145.8 million and this movement has beenreported in the Income Statement. The fair value of financial instruments is extremely sensitive to movements ininterest rates. An increase of around 0.80 per cent in swap rates would besufficient to eliminate the £281 million negative fair value shown in thebalance sheet at 31 December 2005 while such a rise in interest rates would havea minimal impact on the group's financing cash flows. Exceptional items in the period to 31 December 2005 primarily comprised thecosts associated with the early conversion of £129 million convertible bondsinto 16 million ordinary shares plus the unamortised costs of the originalMetroCentre and Braehead bank facilities which were written off when thesefacilities were repaid earlier in the period. Further commentary on the impactof the financings is included below under the section net interest payable. Profit before tax increased to £526.9 million from £455.1 million, largely as aresult of the substantial increase in the revaluation gain on investmentproperties. Net rental income increased to £300.1 million from £256.3 million. The increasehas two components, like-for-like growth and acquisitions net of disposals.Overall the like-for-like growth, calculated in respect of 58 per cent ofproperties by value, amounted to £13.2 million (7.7 per cent). UK regional shopping centres provided like-for-like growth of £11.1 million (8.5per cent) primarily from the favourable rent reviews at Braehead. A further£14.1 million increase in net rental income came from centres where there hadbeen substantial capital expenditure in 2004, notably the addition of the RedMall at MetroCentre and the increased interest in The Potteries, Stoke-on-Trent.Acquisitions in 2005 accounted for a further £23.5 million of the totalincrease. Other UK properties contributed 5.2 per cent like-for-like growth. However, theeffect of property sales and management decisions to forgo short-term revenuefor medium and longer-term refurbishment or redevelopment opportunities led toan overall reduction in net rental income of £6.5 million. The US properties also showed like-for-like growth of 5.2 per cent with capitalexpenditure in the previous period, net of disposals, resulting in an overall19.0 per cent increase in net rental income. Other income decreased marginally to £14.2 million from £15.1 million reflectinga near doubling of property trading profits to £11.6 million but a reduced levelof investment income as a result of the disposal of the interest in GreatPortland Estates and other investments during 2004. Interest payable increased to £171.7 million from £147.5 million. Together witha reduction in interest receivable from £10.3 million to £7.5 million, thisreflects the increase in net debt during the period less the benefit from thesavings resulting from the refinancings referred to below. The increase ininterest payable reflects expenditure on property acquisitions both in thelatter part of 2004 and more significantly in 2005 the acquisition fromPrudential of interests in Manchester Arndale and The Mall at Cribbs Causewayand, more recently, the completion of Chapelfield, Norwich and an increasedinterest in Eldon Square, Newcastle. In the second half of 2004 and the first half of 2005, Liberty Internationalundertook three major non-recourse refinancings, effectively replacing securedbank loans with commercial mortgage backed securities, gaining the advantage ofcapital markets pricing while retaining the flexibility of a bank loan. Thecombined savings from the £650 million seven-year Lakeside facility in August2004 and the £532 million ten-year facility secured on MetroCentre in February2005 amounted to around £6 million per annum. The third major financing, in May 2005, involved Braehead and The Harlequin,Watford raising on a ten-year basis a combined £640 million excluding the highercoupon bonds retained by Liberty International. The net proceeds of thisfinancing, after repaying other facilities, amounted to £468 million andprovided the bulk of the resources for the £653 million purchases fromPrudential, with the balance of the purchase price satisfied from cashresources. The rate achieved on the Braehead and Harlequin financing of 5.30 percent before costs, but including hedging arrangements, is marginally above theinitial running yield of around 5 per cent on the properties acquired. The movement in net debt and available facilities is commented upon furtherunder the Financial Management heading. The underlying tax charge, before valuation and exceptional items and beforedeferred tax on capital allowances amounted to 21.3 per cent (2004 - 19.8 percent). The low tax charge was primarily attributable to the benefit of capitalallowances and tax relief for capitalised interest, both of which shouldcontinue to be of benefit in 2006 as a result of the active developmentprogramme. Provision for tax on valuation and exceptional items and deferred tax in respectof capital allowances increased the group's reported tax charge to 30.5 per cent(2004 - 27.0 per cent). Basic earnings per share increased to 114.8p from 104.8p. Earnings per share(adjusted) increased by 10 per cent to 29.8p from 27.1p. The final dividend per share increased to 15.25p per share making a totaldividend for the period of 28.25p, an increase of 6.6 per cent in line with ourpolicy of distributing substantially all of the group's underlying net income.Under IFRS no provision is made for dividends declared after the balance sheetdate. BALANCE SHEET Net assets per share---------------------- As at As at 31 December 31 December 2005 2004 Restated £m £m Basic net asset value 2,933.1 2,534.2Effect of dilution:On conversion of bonds 105.4 220.9On exercise of options 17.9 27.7 -------- -------- Diluted net asset value 3,056.4 2,782.8Adjustments:Fair value of derivative financialinstruments (net of tax) 194.4 92.6Deferred tax on revaluation surpluses 817.4 653.8Deferred tax on capital allowances 95.7 76.2Unrecognised surplus on tradingproperties (net of tax) 16.4 2.0 -------- -------- Diluted adjusted net asset value 4,180.3 3,607.4 -------- -------- Basic net assets per share (pence) fromIFRS balance sheet 875p 799p -------- --------Net assets per share (diluted, adjusted)(pence) 1188p 1025p -------- -------- Basic shares in issue used for calculation 335.4m 317.3mDiluted shares used for calculation 352.0m 352.1m Net assets per share (diluted, adjusted) is arrived at after adding back the IAS12 provision for deferred tax on property revaluation surpluses and theadjustment in respect of fair value of derivative financial instruments. Two further potential adjustments are often made in order to arrive at the UKindustry measure referred to as triple net assets per share. First is theadjustment for the fair value of all financial instruments, not justderivatives. The fair value adjustment for non-derivative financial instruments(note 11) amounts to 27p per share after tax (31 December 2004 - 23p) and theadjustment for derivative financial instruments equates to 55p per share aftertax (31 December 2004 - 26p). This number is of course extremely sensitive tointerest rates and, as referred to above, would be eliminated by a rise ofaround 0.80 per cent in the ten-year interest rate swap. The second potential adjustment is the provision for deferred tax which,calculated on a disposal basis (note 6) rather than the basis reported underIFRS, would amount to £642 million (31 December 2004 - £505 million) or 182p pershare (31 December 2004 - 143p). However, this amount is undiscounted and takesno account of the savings that may be available depending on how sales arestructured. The sum of the above potential adjustments is 264p at 31 December 2005 (31December 2004 - 192p). Investment properties increased to £6,938 million from £5,298 million atDecember 2004. Additions amounted to £1,102 million, comprising primarily theacquisition of Manchester Arndale, The Mall at Cribbs Causeway and Chapelfield,Norwich together with expenditure on development and refurbishment activityacross the portfolio. The movements during the period are summarised in thetable below. Analysis of movement in investment properties----------------------------------------------- £mInvestment properties at 31 December 2004 5,298Additions 1,102Disposals (40)Foreign exchange and other movements 30Valuation surplus on investment properties 563Valuation deficit on new developments (15) ------Investment properties at 31 December 2005 6,938 ------ The net valuation surplus arising in the period to 31 December 2005 amounted to£547.2 million, of which a £562.9 million surplus was dealt with in the IncomeStatement together with the £2.6 million gain on sales and the £15.7 milliondeficit on valuation of developments was dealt with in the revaluation reserve.Under IFRS, investment properties under development or redevelopment arerevalued to fair value. Net assets increased to £2,933 million from £2,534 million. Net assets (diluted,adjusted) increased to £4,180 million from £3,607 million and net assets pershare (diluted, adjusted) increased to 1188p from 1025p, mostly as a result ofthe valuation surpluses arising during the period and the underlying profit forthe period. Investment properties are valued after deducting notional acquisition costsincluding stamp duty amounting in aggregate to £318 million (31 December 2004 -£170 million), equivalent to 90p per Liberty International share (31 December2004 - 48p). These notional costs assume each asset is sold individually on theopen market at that date and take no account of the structures through which theassets are held within the Liberty International group. In the case of Liberty International, the purchase and sale of shares is thepredominant mode of exchange of ownership and value for shareholders, not thesale of each underlying individual property. If these notional acquisition costswere added back, net assets (diluted, adjusted) would amount to £4,498 million(2004 - £3,777 million) and net assets per share (diluted, adjusted) wouldamount to 1278p (2004 - 1073p) compared with the reported figure of 1188p (2004- 1025p). FINANCIAL MANAGEMENT Movement in Net Debt and Bank Facilities Cash balances reduced by £368 million from £439 million at 31 December 2004 to£71 million at 31 December 2005 while gross borrowings increased by £604 millionto £2,984 million. The increase in gross borrowings is largely explained by the£640 million net proceeds of the new Braehead and Harlequin facilities. Theresulting movement in net debt during the period is broadly explained by thetable below. Analysis of movement in net debt---------------------------------- Net debt £mOpening net debt (note 10) 1,941Additions to investment properties 1,102Disposals of investment properties (43)Conversion of bonds (116)Other 29 -------Closing net debt (note 10) 2,913 ------- At 31 December 2005 the group had committed undrawn medium-term bank facilitiesof £405 million which in part provide standby cover for short-term loans of £152million. Available facilities have been increased by a further £90 million sincethe year end. On 8 December 2005 Liberty International announced an offer of £60 per £1,000 toholders of 3.95% Convertible Bonds who exercised their option to convert intothe ordinary shares of Liberty International at the rate of 125 shares per£1,000 of bonds. Acceptances were received in respect of £128.7 million of bondsresulting in the issue of 16.1 million ordinary shares and a reduction in netdebt of £108 million (after costs and expenses of £8.4 million). The earlyconversion brought an improvement in the group's financial ratios, reduced therisk associated with the potential early repayment of the bonds in 2007, albeitthat in current circumstances this possibility seems remote, and the premiumpaid represented only a small proportion of the premium received from theoriginal issue. The additional permanent share capital and reduced debt providean improved capital structure from which to pursue the development programme. Financial Ratios The group's main internal constraints are that, at currently prevailing propertyyields and interest rates, interest cover, measured before valuation andexceptional items and adjusting for the amortisation of convertible debt, shouldbe maintained at a level in excess of 1.6 times and debt to assets at less than50 per cent. On these measures, interest cover reduced to around 1.7 times (2004- 1.8 times) and the ratio of net debt to assets increased to 40 per cent from36 per cent, in each case within the group's internal constraints. Maturity and Interest Rate Profile of Debt The group's policy is to eliminate substantially all exposure to short andmedium-term interest rate fluctuations in order to reduce the variability ofcash flows. During the period short-term interest rates in the UK reduced from4.75 per cent to 4.50 per cent. However, the market in longer-term sterlingswaps reflected expectations for interest rates to fall further and the ten-yearsterling interest rate swap declined by over 0.40 per cent to 4.45 per cent overthe same period. The table below summarises the interest rate swaps in place at 15 February 2006compared with 31 December 2005 and 31 December 2004. The level of fixed rateprotection was increased during 2005 and in early 2006, across all maturitiesincluding extending protection beyond the current maturity of existing floatingrate facilities. The larger part of the increase resulted from the hedging undertaken to cover the debt incurred for the £653 million acquisition of shopping centre interests from Prudential, with further hedging undertaken in respect of the committed element of the development programme. The average swap rate across all periods was reduced. Interest rate swap summary---------------------------- Notional principal Average rate -------------------------------------- -------------------------------------- 5 February 31 December 31 December 15 February 31 December 31 December 2006 2005 2004 2006 2005 2004 £m £m £mOutstandingafter:1 year 2,462 2,462 1,744 5.36% 5.36% 5.64%5 years 2,909 3,125 2,111 5.22% 5.29% 5.68%10 years 1,950 1,780 1,235 4.76% 4.97% 5.22%15 years 1,475 1,175 900 4.65% 4.86% 5.00%20 years ormore 1,475 1,175 900 4.65% 4.86% 5.00% Over the next ten years substantially all interest payments, including those inrespect of debt which is expected to arise as a result of committed capitalexpenditure, are at fixed rates. However, as the potential developments becomemore probable capital commitments, the level of hedging will be addressed inline with the group's interest rate hedging policy. The weighted average maturity of debt is 8 years, the weighted average leasematurity 9 years and the weighted average interest cost of group debt at 31December 2005 was 6.1 per cent (5.8 per cent excluding the £230 million ofCapital and Counties' First Mortgage Debenture Stocks 2021 and 2027 which wereissued in a different interest rate environment in the late 1980s and early1990s). 15 February 2006 CONSOLIDATED INCOME STATEMENT (Unaudited)For the year ended 31 December 2005 Year ended Year ended 31 December 31 December 2005 2004 Restated* Notes £m £m Revenue 2 434.3 392.7 --------------------------- Rental income 417.1 367.5Rental expenses (117.0) (111.2) --------------------------- Net rental income 300.1 256.3 Other income 14.2 15.1Gain on revaluation and sale of investmentproperties 3 565.5 357.3 --------------------------- 2 879.8 628.7 Administration expenses (29.2) (27.2) ---------------------------- Operating profit before exceptional items 850.6 601.5 Exceptional profit on disposal of fixedasset investments 4 - 35.6 ---------------------------- Operating profit 850.6 637.1 Interest payable 5 (171.7) (147.5)Interest receivable 7.5 10.3Exceptional finance costs 5 (13.7) (3.4)Change in fair value of derivative financialinstruments (145.8) (41.4) ---------------------------- Net finance costs (323.7) (182.0) ---------------------------- Profit before tax 526.9 455.1 Current tax on ordinary items 6 (25.5) (24.4)Deferred tax on ordinary items 6 (139.8) (96.4)Tax on exceptional items 4.7 (2.2) ---------------------------- Taxation charge (160.6) (123.0) ---------------------------- Profit for the period attributable to equityshareholders 366.3 332.1 ---------------------------- Basic earnings per share 14 114.8p 104.8pDiluted earnings per share 14 107.4p 98.3p ---------------------------- * Restated for the effect of adopting IFRS (see note 1) Adjusted earnings per share are shown in note 14 CONSOLIDATED BALANCE SHEET (Unaudited)As at 31 December 2005 As at As at 31 December 31 December 2005 2004* Restated Notes £m £m Non-current assetsInvestment property 7 6,913.6 5,250.4Development property 7 24.2 47.2 ---------------------------- 6,937.8 5,297.6Plant and equipment 0.6 1.3Trade and other receivables 9 65.7 59.3 ---------------------------- 7,004.1 5,358.2Current assetsTrading properties 8 132.6 111.9Trade and other receivables 9 78.7 80.5Investments 3.0 -Cash and cash equivalents 70.8 438.8 ---------------------------- 285.1 631.2 ---------------------------- Total assets 7,289.2 5,989.4 ---------------------------- Current liabilitiesTrade and other payables (212.4) (190.3)Tax liabilities (10.0) (23.8)Borrowings, including finance leases 10 (173.5) (13.2)Derivative financial instruments (21.6) (12.9) ---------------------------- (417.5) (240.2)Non-current liabilitiesBorrowings, including finance leases 10 (2,810.2) (2,366.3)Derivative financial instruments (259.5) (121.8)Deferred tax provision 6, 12 (856.2) (708.9)Other provisions 12 (6.8) (17.2)Other payables (5.9) (0.8) ---------------------------- (3,938.6) (3,215.0) ---------------------------- Total liabilities (4,356.1) (3,455.2) ---------------------------- Net assets 2,933.1 2,534.2 ---------------------------- EquityCalled up share capital and reserves 15 2,933.1 2,534.2 ----------------------------* Restated for the effect of adopting IFRS (see note 1) CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE (Unaudited)For the year ended 31 December 2005 Year ended Year ended 31 December 31 December 2005 2004* Restated £m £m Profit for the period 366.3 332.1Net exchange translation differences and other (0.1) (2.9)Actuarial losses on defined benefit pension schemes (2.6) (0.4)Deficit on revaluation of development properties (15.7) -Tax on items taken directly to equity 5.5 0.1Transfers to income statement on disposal of investments - (6.6)Tax on items transferred from equity - 1.1 -----------------------Total recognised income and expense for the period 353.4 323.4 ----------------------- * Restated for the effect of adopting IFRS (see note 1) A summary of changes in group equity is shown in note 15 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Year ended Year ended 31 December 31 December 2005 2004* Restated £m £m Cash flows from operating activitiesOperating profit before exceptional items 850.6 601.5Adjustments for non-cash items:Unrealised net revaluation gains on investment properties(562.9) (340.3)Profit on sale of investment properties (2.6) (17.0)Depreciation and amortisation 0.8 0.5Amortisation of lease inducements and other direct costs (4.6) 4.3 -------------------------- Cash flows from operations before changes inworking capital 281.3 249.0Change in trade and other receivables (24.2) (8.6)Change in trading properties (18.1) (30.1)Change in current asset investments (3.0) -Change in trade and other payables 17.1 15.9 -------------------------- Cash generated from operations 253.1 226.2Interest paid (168.2) (140.8)Interest received 9.7 10.3Tax paid (24.5) (18.3) -------------------------- Cash flows from operating activities 70.1 77.4 -------------------------- Cash flows from investing activitiesPurchase and development of property (1,081.5) (145.2)Sale of property 43.7 93.3Purchase of investments and other fixed assets - (0.8)Sale of investments - 190.1Purchase of interests in joint ventures andsubsidiary companies - (51.3)Increase in long term loans receivable, beforeamortisation - (0.7) -------------------------- Cash flows from investing activities (1,037.8) 85.4 -------------------------- Cash flows from financing activitiesIssue and repurchase of shares 10.1 1.9Borrowings drawn 1,944.8 644.8Borrowings repaid (1,268.9) (490.4)Equity dividends paid (86.3) (81.1) -------------------------- Cash flows from financing activities 599.7 75.2 -------------------------- Net (decrease)/increase in cash and cashequivalents (368.0) 238.0Cash and cash equivalents at 1 January 438.8 200.8 -------------------------- Cash and cash equivalents at closing 70.8 438.8 -------------------------- * Restated for the effect of adopting IFRS (see note 1) NOTES TO THE ACCOUNTS (Unaudited) 1. Basis of preparation The Preliminary Report is unaudited and does not constitute statutory accountswithin the meaning of s240 of the Companies Act 1985. The statutory accounts for2004, which were prepared under UK GAAP, have been delivered to the Register ofCompanies. The auditors' opinion on these accounts was unqualified and did notcontain a statement made under s237 (2) or s237(3) of the Companies Act 1985. The financial information has been prepared in accordance with the accountingpolicies set out in the document entitled "Adoption of IFRS - Restatement of2004 Income Statements and Balance Sheet" (the "release") dated 26 July 2005which is available on the company's website (www.liberty-international.co.uk).The Group has applied these policies for the year ended 31 December 2005 in thefinancial statements in accordance with International Financial ReportingStandards, as adopted by the European Union ("IFRS") for the first time and withthose parts of the Companies Act 1985 applicable to companies reporting underIFRS. It has been prepared under the historical cost convention as modified bythe revaluation of properties, available for sale investments and financialassets and liabilities held for trading. Change of accounting policies Prior to the adoption of IFRS the financial statements of Liberty Internationalhad been prepared in accordance with United Kingdom accounting standards (UKGAAP). UK GAAP differs in certain respects from IFRS and certain accounting,valuation and consolidation methods have been amended, when preparing thesefinancial statements, to comply with IFRS. The comparative figures in respect of2004 have been restated to reflect these amendments. Reconciliation anddescription of the effect of the transition from UK GAAP to IFRS on the group'sreported financial position, financial performance and cash flows is set out innote 16. 2. Segmental analysis Year ended 31 December 2005 ----------------------------------------------- UK Other Other Group Shopping Commercial Activities Total Centres Properties £m £m £m £m ----------------------------------------------- Revenue 328.7 103.4 2.2 434.3 ----------------------------------------------- Rental income 327.2 89.9 - 417.1 Rental expense (91.6) (25.4) - (117.0) -----------------------------------------------Net rental income 235.6 64.5 - 300.1 Property trading profits 1.2 10.4 - 11.6Other income - 0.4 2.2 2.6Gain on revaluation and sale ofinvestment properties 459.4 106.1 - 565.5 ----------------------------------------------- Segment result 696.2 181.4 2.2 879.8 ----------------------------------------------- Year ended 31 December 2004 (restated) ---------------------------------------------------- UK Shopping Other Other Group Centres Commercial Activities Total Property £m £m £m £mRevenue 289.5 93.4 9.8 392.7 --------------------------------------------------- Rental income 274.3 93.2 - 367.5 Rental expense (86.9) (24.3) - (111.2) --------------------------------------------------- Net rental income 187.4 68.9 - 256.3Property trading profits 6.0 0.2 - 6.2Other income - - 8.9 8.9Gain on revaluation and sale of investment properties 244.3 113.0 - 357.3 --------------------------------------------------- Segment result 437.7 182.1 8.9 628.7 --------------------------------------------------- The segmental result is shown before administrative expenses and exceptionalprofit/losses. 3. Gain on revaluation and sale of investment properties A reconciliation of the investment and development property revaluation surplusto the gain on revaluation of investment properties in the income statement is set out below: Year ended Year ended 31 December 31 December 2004 2005 Restated £m £m Investment and development property revaluationsurplus per external valuers 552.9 337.7Less valuation movement in respect of head leasepayments (0.4) (0.4)Less valuation movement in respect of lease incentives (5.3) 3.0 --------------------------Total gain on revaluation of investment anddevelopment properties 547.2 340.3Gain on sale of investment property 2.6 17.0Development property revaluation recognised inequity rather than the Income Statement 15.7 - --------------------------Income statement gain on revaluation and sale ofinvestment properties 565.5 357.3 -------------------------- 4. Exceptional profit on disposal of fixed asset investments Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Profit on disposal of fixed asset investments - 35.6 -------------------------- - 35.6 -------------------------- 5. Finance costs Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Gross interest payable 180.3 151.9Interest capitalised on investment propertiesunder development (8.6) (4.4) -----------------------------Interest payable 171.7 147.5 -----------------------------Exceptional finance costs 13.7 3.4 ----------------------------- Exceptional finance costs include costs of £8.4m (2004 - £nil) incurred in earlyconversion of £128.7m of the £240m Liberty International 3.95% convertible bondsin issue as well as £4.5m (2004 - £3.3m) of unamortised issue costs written offon redemption of loans. 6. Taxation (a) Current tax Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Current UK corporation tax at 30% (2004 - 30%) onprofits 24.0 27.6Prior year items - UK corporation tax (0.9) (6.2) ---------------------------- 23.1 21.4Overseas taxation 2.4 3.0 ----------------------------Current tax on ordinary items 25.5 24.4 ---------------------------- Deferred tax:On investment property 183.3 112.5On derivative financial instruments (43.7) (12.9)On other temporary differences 0.2 (3.2) ----------------------------Deferred tax on ordinary items 139.8 96.4 ---------------------------- Tax charge on ordinary items 165.3 120.8 Tax on exceptional itemsCurrent tax (15.3) 0.4Deferred tax 10.6 1.8 ---------------------------- (4.7) 2.2 ----------------------------Total tax charge 160.6 123.0 ---------------------------- (b) Deferred tax Under IAS 12, provision is made for the deferred tax liability associated withthe revaluation of investment properties. The group does not provide fordeferred tax on investment properties by reference to the tax that would be dueon the sale of the investment properties as the group has no current intentionto dispose of these properties. Instead the group treats the value of theinvestment properties as being recovered through use, and so provides fordeferred tax on the revaluation of investment properties by applying thecorporation tax rate of 30% to the revaluation surplus without indexationallowance. The deferred tax provision on the revaluation of investment propertiescalculated under IAS 12 is £817.4m at 31 December 2005 (31 December 2004:£653.8m). This IAS 12 calculation does not reflect the expected amount of taxthat would actually be payable if the assets were sold. On a disposal basis, theestimated liability is £642.5m at 31 December 2005 (31 December 2004: £505.0m). If upon sale of the properties the group retained all the capital allowances,which is within the control of the group, the deferred tax provision in respectof capital allowances of £95.7m would also be released, and further capitalallowances of £19.1m would be available to reduce the amount of tax payable onsale. Under IFRS, where gains such as revaluation of development properties and otherassets, and actuarial movements on pension funds are dealt with in reserves, thedeferred tax is also dealt with in reserves. Movements in the provision for deferred tax: As at As at 31 December Recognised in Recognised in 31 December 2004 income equity 2005 Restated ---------------------------------------------------------- £m £m £m £m ---------------------------------------------------------- Deferred tax onrevaluation of investmentproperties 653.8 168.3 (4.7) 817.4Capital allowances 76.2 17.2 2.3 95.7Derivative financialinstruments (39.7) (43.7) - (83.4)Other temporarydifferences 18.6 8.7 (0.8) 26.5 ----------------------------------------------------------Net deferred taxprovision 708.9 150.5 (3.2) 856.2 ---------------------------------------------------------- 7. Investment and development property Other UK shopping commercial centres properties Total £m £m £mInvestment property:At 31 December 2004 (as previously stated) 4,310.2 942.5 5,252.7Effect of adopting IFRS (8.4) 6.1 (2.3) ---------------------------------- At 31 December 2004 (restated) 4,301.8 948.6 5,250.4Additions 1,008.1 59.6 1,067.7Disposals - (40.4) (40.4)Reclassifications - developments 41.7 - 41.7Reclassifications - trading properties 2.5 - 2.5Foreign exchange fluctuations - 28.8 28.8Surplus on valuation 460.7 102.2 562.9 ---------------------------------- At 31 December 2005 5,814.8 1,098.8 6,913.6 ---------------------------------- Development property:At 31 December 2004 (as previously stated) 52.7 7.5 60.2Effect of adopting IFRS (5.5) (7.5) (13.0) ---------------------------------- At 31 December 2004 (restated) 47.2 - 47.2Additions 34.4 - 34.4Reclassification - investment property (41.7) - (41.7)(Deficit)/surplus on valuation (15.7) - (15.7) ---------------------------------- At 31 December 2005 24.2 - 24.2 ---------------------------------- Total investment and development properties:At 31 December 2005 5,839.0 1,098.8 6,937.8 ----------------------------------At 31 December 2004 (restated) 4,349.0 948.6 5,297.6 ---------------------------------- The group's interests in investment and development properties, including thoseheld through joint ventures, were valued as at 31 December 2005 by externalvaluers in accordance with the RICS Appraisal and Valuation Standards, on thebasis of market value. Market value represents the figure that would appear in ahypothetical contract of sale between a willing buyer and a willing seller. Regional shopping centres in the UK were valued by either DTZ Debenham ThorpeTie Leung, Chartered Surveyors or CB Richard Ellis. Other commercial propertiesin the UK were valued by either Knight Frank LLP or CB Richard Ellis. In theUnited States, properties were valued by Cushman and Wakefield California Inc. A reconciliation of investment and development property valuations to thebalance sheet carrying value of property is shown below: Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Investment and development property at marketvalue as determined by external valuers 6,936.3 5,309.7Add minimum payment under head leases separatelyincluded as a creditor in the balance sheet 53.9 31.9Less accrued incentives separately included as adebtor in the balance sheet (52.4) (44.0) --------------------------Balance sheet carrying value of investment anddevelopment property 6,937.8 5,297.6 -------------------------- 8. Trading properties The estimated replacement cost of trading properties based on market valueamounted to £156.0m (31 December 2004 - £113.9m). 9. Trade and other receivables As at As at 31 December 31 December 2005 2004 Restated £m £mAmounts falling due within one year:Rents receivable 20.8 15.0Other debtors 21.5 34.3Derivative financial instruments 0.9 2.4Prepayments and accrued income 35.5 28.8 ---------------------------- 78.7 80.5 ----------------------------Amounts falling due after more than one year:Other debtors 13.7 11.5Prepayments and accrued income 52.0 47.8 ---------------------------- 65.7 59.3 ---------------------------- 10. Borrowings, including finance leases As at As at 31 December 31 December 2005 2004 Restated £m £mAmounts falling due within one year: Bank loans and overdrafts 151.6 9.2Commercial Mortgage Backed Securities ("CMBS") 15.0 -Finance lease obligations 6.9 4.0 -----------------------------Total amounts falling due within one year 173.5 13.2 ----------------------------- Amounts falling due after more than one year: Secured borrowings - non recourseCMBS Notes 2015 1,141.9 -CMBS Notes 2011 547.5 548.7Bank loan 2015 - 526.5Bank loans 2014 384.9 386.0Bank loan 2007 40.0 40.0 ----------------------------- 2,114.3 1,501.2Other secured borrowingsDebentures 2021 and 2027 230.0 230.0Bank loan due 2016 - 172.5Bank loan due 2013 98.4 -Other loans 147.0 117.4 ----------------------------- 2,589.7 2,021.1Unsecured borrowingsCSC bonds 2013 26.5 31.7CSC bonds 2009 41.0 64.1 ----------------------------- 2,657.2 2,116.9 £111.3m (2004- £240m) 3.95% convertible bonds due2010 105.4 220.9 ----------------------------- 2,762.6 2,337.8 Finance lease obligations 47.6 28.5 -----------------------------Amounts falling due after more than one year 2,810.2 2,366.3 ----------------------------- Total borrowings, including finance leases 2,983.7 2,379.5Cash and cash equivalents (70.8) (438.8) ----------------------------- Net borrowings 2,912.9 1,940.7 ----------------------------- 11. Fair value of financial instruments As at 31 December As at 31 December 2005 2004 Balance Balance sheet sheet Fair value Fair value value value Restated Restated £m £m £m £mDebentures and other fixed rate loansSterlingC&C 9.875% debenture 2027 150.0 233.1 150.0 217.0C&C 11.25% debenture 2021 80.0 126.9 80.0 119.9CSC 6.875% unsecured bonds 2013 26.5 28.0 31.7 33.0CSC 5.75% unsecured bonds 2009 41.0 41.0 64.1 63.8 US DollarsFixed rate loans 156.7 162.4 119.1 124.7 ------------------------------------------- 454.2 591.4 444.9 558.4Bank loans and loan notes -LIBOR linked 2,369.6 2,369.6 1,681.2 1,681.2Finance lease obligations 54.5 54.5 32.5 32.5Derivative instruments 281.1 281.1 132.3 132.3 ------------------------------------------- 3,159.4 3,296.6 2,290.9 2,404.4 -------------------------------------------Convertible debt 105.4 141.0 220.9 293.0 ------------------------------------------- The fair value adjustment in respect of financial instruments, after credit fortax relief, would amount to 27p per share diluted (31 December 2004 - 23p). All other financial assets and liabilities included in the balance sheet arestated at fair values. 12. Provisions for liabilities and charges Deferred taxation Other Total £m £m £m At 31 December 2004 (as previously stated) 79.3 16.6 95.9Effect of adopting IFRS 629.6 0.6 630.2 --------------------------------- At 31 December 2004 (restated) 708.9 17.2 726.1Net charge for the period 150.5 1.2 151.7Other movements (3.2) (11.6) (14.8) ---------------------------------At 31 December 2005 856.2 6.8 863.0 --------------------------------- 13. Capital commitments At 31 December 2005, the group was contractually committed to £69.9 million(2004 - £329.2 million) of future expenditure for the purchase, construction,development and enhancement of investment property. 14. Per share details (a) Number of shares used in the calculation of earnings per share Year Year ended ended 31 31 December December 2005 2004 millions millions Weighted average shares (basic) 319.0 317.0Effect of dilution 31.5 31.9 ------------------------Weighted average shares (diluted) 350.5 348.9 ------------------------ (b) Earnings used in the calculation of earnings per share Year Year ended ended 31 December 31 December 2004 2005 Restated £m £m Earnings used for calculation of basic earnings per 366.3 332.1shareEffect of dilution 10.2 10.8 ------------------------Earnings used for calculation of diluted earnings 376.5 342.9per share ------------------------Basic earnings per share (pence) 114.8p 104.8p ------------------------Diluted earnings per share (pence) 107.4p 98.3p ------------------------ Earnings used for calculation of basic earnings per 366.3 332.1shareAdd back/(less) exceptional items, net of tax 9.0 (30.0)Less gain on revaluation and sale of investment (565.5) (357.3)propertiesAdd back fair value movement on derivative financialinstruments 145.8 41.4Add back deferred tax in respect of investment 183.3 112.5propertiesLess deferred tax in respect of derivative financialinstruments (43.7) (12.9) ------------------------Earnings used for calculation of adjusted earnings 95.2 85.8per share ------------------------ Adjusted earnings per share (pence) 29.8p 27.1p ------------------------ Earnings used for calculation of adjusted earnings 95.2 85.8per shareEffect of dilution 10.2 10.8 ------------------------ Earnings used for calculation of adjusted, dilutedearnings per share 105.4 96.6 ------------------------Adjusted, diluted earnings per share (pence) 30.1p 27.7p ------------------------(c) Other share information Nominal value(i) Convertible bonds in issue3.95% convertible bonds 2010 £m Conversion Callable from price At 31 December 2004 240.0 800p 14 October 2008 Converted in year (128.7) -----------At 31 December 2005 111.3 ----------- On 8 December 2005 Liberty International PLC announced that it would offer £60per £1,000 of bonds to holders of outstanding £240m 3.95 per cent convertiblebonds due 2010 to convert into ordinary shares. Conversion notices were accepted by the company in respect of £128.7m of bonds,representing 53.6 per cent of the £240m of bonds outstanding on 16 December2005. The company paid a sum of £7.7m which, together with costs of £0.7mresulted in an exceptional finance charge of £8.4m. The bonds converted into 16.1 million new ordinary shares of the company on thebasis of 125 shares for £1,000 of bonds, increasing the company's issuedordinary share capital by 5 per cent from 321.7 million to 337.8 millionordinary shares. The outstanding convertible bonds may be redeemed at par on 30 September 2007 atthe option of the bondholders. Number(ii) Ordinary share capital millions At 31 December 2005 337.8 ----------- Of which, held by ESOP trust and treated as cancelled 2.4 ----------- (iii) Dividends paid Year Year ended Ended 31 December 31 December 2005 2004 Restated £m £m Ordinary shares:Prior period final dividend paid of 14.1p (2004- 13.25p) 44.7 41.8Interim dividend paid of 13.0p per share (2004- 12.4p) 41.6 39.3 ------------------------- 86.3 81.1 -------------------------Proposed dividend of 15.25p (2004 - 14.1p) pershare (not provided for) 51.1 44.7 ------------------------- 15. Summary of changes in group equity Year ended Year ended 31 December 31 December 2005 2004 Restated £m £m Opening equity shareholders' funds - restated 2,534.2 2,288.9Bond conversions 121.7 0.1Issue of shares 11.2 4.1Cancellation of shares (1.1) (1.2) ------------------------- 2,666.0 2,291.9Total recognised income and expense for the period 353.4 323.4 ------------------------- 3,019.4 2,615.3Dividends paid (86.3) (81.1) -------------------------Closing equity shareholders' funds 2,933.1 2,534.2 ------------------------- 16 Adoption of International Financial Reporting Standards As stated in note 1, this is the group's first preliminary report prepared inaccordance with IFRS. The accounting policies set out in the release dated 26July 2005 have been applied in preparing the financial information for theperiods ended 31 December 2005, 31 December 2004 and in the preparation of anopening IFRS balance sheet at 1 January 2004 (the group's date of IFRStransition). In preparing the opening IFRS balance sheet, the group has adjusted amountsreported previously in financial statements prepared in accordance with UK GAAP.An explanation of how the transition from UK GAAP to IFRS has affected thegroup's financial performance, financial position and cash flows is set out inthe following tables and accompanying notes. A full line-by-line reconciliationof the financial position as at 31 December 2004 and the financial performancefor the year then ended is set out in the release dated 26 July 2005. (a) Reconciliation of net profit: Year ended 31 December 2004 Notes £mPreviously reported - UK GAAP:Net profit on ordinary activities 115.7Exceptional items 42.6 --------- Net profit before tax 158.3Taxation charge - recurring (32.3)Taxation charge - on exceptional items (1.4) --------- Net profit after tax 124.6 --------- Adjustments to net profit before tax:Revaluation gains on investment properties previouslydealt with in reserves 1 336.7Movement in fair value of derivative financial instruments 2 (41.4)"Recycling" of prior year valuation gains of fixed assetinvestments into profit on disposal 3 6.6Additional amortisation upon reallocation to equity ofportion of the convertible debt liability 4 (4.3)Longer amortisation period for rent free periods and otherlease incentives 5 (0.4)Defined benefit pension scheme net liability and otheremployee benefits 6 (0.4) --------- 296.8 ---------Restated - IFRS:Net profit on ordinary activities 422.9Exceptional items 32.2 ---------Net profit before tax 455.1Taxation charge - recurring 8 (120.8)Taxation charge - on exceptional items (2.2) ---------Net profit after tax 7 332.1 --------- 1. Under IFRS, gains and losses arising on revaluation of investment properties are recorded as operating income in the Income Statement. For the year ended 31 December 2004, this includes gains previously reported in the revaluation reserve of £337.6m on the group's investment properties and £5.6m on the group's share of investment properties of joint ventures, net of £5.5m revaluation losses on development properties which were not revalued under UK GAAP and £1.0m lower gain arising from reclassification of rent free periods (see 5 below). In addition, gains or losses realised on investment properties disposed of during the period are accounted for as revaluation gains, rather than exceptional items as under UK GAAP. The effect of this for the year ended 31 December 2004 is a reclassification from exceptional items to revaluation gains of £17.0m. Other reclassifications which offset within net profit in respect of finance-leased assets and letting costs are also included within revaluation gains on investment properties (see note 7a and 7c below).2. Under IFRS, derivative financial instruments are carried in the balance sheet at fair value with gains or losses arising on revaluation dealt with in the Income Statement unless they are eligible to be accounted for as hedges. This does not affect the underlying cash flows.3. Under IFRS, exceptional gains or losses on disposal of fixed asset investments are calculated by reference to their historic cost. Any previous revaluation surpluses are "recycled" into the profit on disposal, with a corresponding adjustment to the revaluation reserve.4. Under IFRS, convertible debt is required to be allocated between debt and equity (see 12 below). The debt element is initially less than the nominal value of the bond and must therefore be amortised up to full nominal value over the term of the instrument, resulting in an additional tax-deductible finance charge.5. Under IFRS, investment property lease rent free periods, stepped rents and other incentives are amortised over the full lease term rather than the period to first open market rent review (see 13 below). To the extent that any unamortized incentives have been taken into account in the property valuation, for example rent free periods recognised as income ahead of invoicing, the property valuation must be adjusted to avoid double counting (see below).6. Under IFRS, the group is required to account for the net liability or asset in respect of defined benefit pension schemes. Whilst the actuarial gains and losses in respect of the scheme are dealt with in the statement of recognised income and expense, the difference between the notional interest cost on scheme liabilities and the expected return on the scheme assets is included in the group's net interest cost. In respect of the year ended 31 December 2004, this amounts to a credit of £0.2m. Further, IFRS requires the group to account for the cost of share-based payments at their fair value rather than intrinsic value. This increases administration expenses for the year ended 31 December 2004 by £0.5m.7. Other adjustments have been necessary to the group's reported financial performance which offset within net profit. a. Investment properties held leasehold are treated as finance-leased assets, with the minimum element of future head rent payments treated as if it relates to a loan which is financing an increased interest in the property (see 17a below). The fixed head rental payment is largely treated as a finance cost instead of a property expense. For the year ended 31 December 2004, this decreases rental expenses by £4.0m, increases net interest cost by £3.6m and decreases fair value gains on investment property by £0.4m. b. Under UK GAAP the group was required to show its share of the operating profit of joint ventures as a separate line on the profit and loss account. Under IFRS joint ventures are proportionally consolidated, with the group's share of individual gains and losses of the joint venture included on the relevant line of the Income Statement. For the year ended 31 December 2004 this increases rental income by £8.0m and removes the line item "share of operating profit of joint ventures". c. Under IFRS, letting costs of developments and investment properties are capitalised over the lease term whereas under UK GAAP the former were capitalised and the latter were written off as incurred. For the year ended 31 December 2004, this increases fair value gains on investment property and rental expenses, each by £4.0m.8. The principal changes in the tax charge for the year ended 31 December 2004 are as follows: UK GAAP Adjustments IFRS £m £m £m ----------------------------------Profit on ordinary activities before taxation 158.3 296.8 455.1 ---------------------------------- Current United Kingdom corporation tax at 30% 47.5 89.0 136.5Effects of:Capital allowances not reversing on sale (2.2) - (2.2)Disposals of properties and subsidiaries (10.5) 1.9 (8.6)Prior year items (2.5) 0.1 (2.4)Expenses disallowed, net of capitalisedinterest 1.9 (1.6) 0.3Untaxed dividends (1.2) - (1.2)Overseas taxation, including joint ventures 0.7 (0.1) 0.6 ----------------------------------Tax charge for the year 33.7 89.3 123.0 ---------------------------------- (b) Reconciliation of equity: 31 December 1 January 2004 2004 Notes £m £m Previously reported - UK GAAP 3,244.0 2,859.4Deferred tax on revaluation of investmentproperties 9 (653.8) (549.9)Fair value of derivative financial 10 (132.3) (89.5)instrumentsExclusion of provision for proposed dividend 11 44.7 41.8Reallocation to equity of a portion of theconvertible debt liability 12 14.5 18.9Longer amortisation period for leaseincentives - long term debtor 13 50.6 50.3Longer amortisation period for leaseincentives - adjust property valuation 13 (44.0) (42.3)Fair value of development properties 14 (11.4) (5.8)Defined benefit pension scheme net liabilityand other employee benefits 15 (2.0) (1.3)Owner-occupied property held under finance lease 16 (0.3) (0.4)Tax effect of the above 24.2 7.7--------------------------------------------------------------------------------Restated - IFRS 17 2,534.2 2,288.9-------------------------------------------------------------------------------- Notes: 9. Under IAS 12, provision is made for the deferred tax liability associated with the revaluation of investment properties, whereas UK GAAP requires that the potential liability on the sale of the properties be disclosed as contingent tax but not provided in the balance sheet. This liability will not be incurred while the group continues to hold its property assets.10. Under IFRS, derivative financial instruments are carried in the balance sheet at fair value. This does not affect the underlying cash flows. The total fair value recognised as a liability at 31 December 2004 is £132.3m (1 January 2004 £89.5m), which is partially offset by a deferred tax asset of £39.7m (£26.9m).11. Under IFRS, proposed dividends are not recognised as liabilities at the balance sheet date. Accordingly, compared with UK GAAP, equity shareholders' funds have increased, and current liabilities have decreased.12. Under IFRS, convertible debt is required to be allocated between debt and equity. The debt element is initially less than the nominal value of the bond and must therefore be amortised up to full nominal value over the term of the instrument, resulting in an additional tax-deductible finance charge. The equity element is not remeasured during the term of the instrument. The effect of this is to reduce borrowings by £14.5m and to reduce the tax liability by £1.5m at 31 December 2004 (1 January 2004 £18.9m and £0.2m).13. Under IFRS, investment property lease rent free periods, stepped rents and other incentives are amortised over the full lease term rather than the period to first open market rent review. To the extent that any unamortized incentives have been taken into account in the property valuation, for example rent free periods recognised as income ahead of invoicing, the property valuation must be adjusted to avoid double counting. The effect of this at 31 December 2004 is to reduce the value of investment property by £44.0m, increase debtors due in more than one year by £47.8m, increase debtors due within one year by £2.8m and increase the provision for deferred tax by £1.4m (1 January 2004 £42.3m, £47.9m, £2.4m and £2.0m)14. Under IFRS, investment properties under redevelopment remain classified as investment properties subject to revaluation through the Income Statement in accordance with IAS 40. The effect of this at 31 December 2004 is to reduce development properties by £11.4m and reduce the deferred tax liability by £3.4m (1 January 2004 £5.8m and £1.7m). Properties acquired with the intention of development are classified as properties in the course of development and are accounted for at fair value in accordance with IAS 16. Valuation changes for the latter properties are recognised in equity rather than the Income Statement15. Under IFRS, the group is required to account for the net liability or asset in respect of defined benefit pension schemes and any corresponding deferred tax asset or liability. At 31 December 2004, the adjustment to the net scheme liability was £1.2m with a deferred tax asset of £0.4m (1 January 2004 £1.0m and £0.3m). Further, IFRS requires the group to account for the cost of share-based payments at their fair value rather than intrinsic value. This increases accruals by £0.8m at 31 December 2004, partially offset by a tax credit of £0.2m (1 January 2004 £0.3m and £0.1m) 16. Under IFRS, the leased property occupied by the group is classified as a finance-leased asset and as such it increases fixed assets by £0.3m, net of cumulative depreciation. The minimum lease payments are included as a creditor of £0.6m.17. Other adjustments have been necessary to the group's reported financial position which offset within net assets and therefore do not affect equity: a. Investment properties held leasehold are still valued at the fair value of the group's interest, but under IFRS the minimum element of future head rent payments is treated as if it relates to a loan which is financing an increased interest in the property. The capitalised value of the minimum payment is reflected by grossing up the carrying value of the property with an equal and opposite amount included as a creditor. The fixed head rental payment is largely treated as a finance cost instead of a property expense. At 31 December 2004, this increased investment property and creditors by £31.9m, with £4.0m of the creditor falling due within one year (1 January 2004 £32.3m and £4.0m). b. Under UK GAAP the group was required to show its share of the gross assets and gross liabilities of joint ventures separately on the balance sheet. Under IFRS joint ventures are proportionally consolidated, with the group's share of individual assets and liabilities of the joint venture included on the relevant line of the balance sheet. At 31 December 2004 this increases investment property by £14.9m, trading properties by £13.5m, cash by £0.4m, creditors due within one year by £1.2m and borrowings by £7.3m, removing the £20.3m group's share of net assets of joint ventures (1 January 2004 investment property £132.6m, trading property £10.6m, working capital £0.2m and borrowings £69.3m). c. Under IFRS, letting costs are capitalised and amortised over the lease term (see 7c above). The effect of this is to increase investment property cost and correspondingly reduce revaluation by £11.4m. (c) Cash flows Under IFRS, the consolidated cash flow statement reconciles the movements incash and cash equivalents, whereas in the last audited UK GAAP financialstatements it reconciled the movements in cash only. Other than this, there areno material differences in the restated consolidated cash flow statement fromthat previously published. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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