28th Mar 2006 07:04
Development Securities PLC28 March 2006 DEVELOPMENT SECURITIES PLC - PRELIMINARY RESULTS Strong investment portfolio performance Development Securities PLC, the leading property development and investmentcompany, today announces profits before tax of £23.3 million and earnings of54.0 pence per share for the year ended 31st December 2005, compared to £18.8million and 54.3 pence per share for the previous year. Financial highlights 31 Dec 2005 31 Dec 2004 Restated under IFRS Profit before tax £23.3 million £18.8 million Earnings per share 54.0p 54.3p Shareholders' funds £191.5 million £173.2 million Net assets per share 521p 472p Dividend per share 6.37p 6.0p Net gearing* 16% 18% * Refer to glossary (note 6) Another strong performance from the property investment portfolio, together witha significant surplus arising from the disposal of the investment in Stead &Simpson led to a significant increase in profit before tax. Property Investment Portfolio • 2005 represented another successful year as the investment portfolio continued to deliver enhanced returns which have outperformed the market. • This was notwithstanding the continuing strong property investment market, which has made acquiring stock at realistic prices increasingly challenging. • Excellent level of returns generated: 24.7 per cent IPD Total Annual Portfolio Return*, beating the average market return of 19.1 per cent. • Second percentile rank for the investment portfolio over both three and five-year periods. Development Portfolio PaddingtonCentral • Approval by our funding partner is anticipated shortly for construction of the second phase which will incorporate a 250,000 sq. ft. office building and a new 206-room Accor hotel. • Practical completion of the £30.0 million 'Crossrail Deck' achieved this month, on programme and under budget. CityPark, Manchester • 290,000 sq. ft. mixed-use development site acquired for £3.0 million in October 2004. • Initial discussions are in hand with a number of hotel operators and a detailed planning application will be submitted once discussions are progressed satisfactorily. • At appropriate stage to approach funding market for speculative office component. Colindale, London NW • In June 2005, the freehold of this 100,000 sq. ft. retail scheme with 750 car park spaces was acquired for £26.4 million, yielding 6.5 per cent. • The 7.5-acre site has the capacity to accommodate a markedly more dense development of some 700,000 sq. ft. which is likely to incorporate a larger retail element as well as private and affordable housing. • The existing property was developed in the late 1980s and the planning application on which we are currently working for submission in May this year proposes a major mixed-use, urban regeneration solution. Huyton, Liverpool • Construction work at the 110,000 sq. ft. retail scheme commenced in 2005, with practical completion scheduled for August 2006. • 50% already pre-let. Luneside, Lancaster • In November 2005, appointed by the Local Authority as joint developers with CTP Limited of 18.5-acre brownfield site which will comprise 350 new homes, 90,000 sq. ft. of new offices, a hotel and some retail and hospitality outlets. • Preparatory work on site, following the compulsory purchase order process, is scheduled to commence in early 2007 with the development phased over three to four years. Broughton • Retail planning application for the extension to the retail park at Broughton, submitted jointly with British Land, is scheduled for presentation to the Local Authority Members in the second quarter of 2006. • The scheme includes a new 90,000 sq. ft. Marks & Spencer store, a 26,000 sq. ft. extension for Tesco, 56,000 sq. ft. of new retail space and additional car parking and road improvements. • The additional application, in respect of the 19 acres of developable land for residential use, will also be submitted to the Members in the second quarter of 2006. Heart of Slough • In January 2006, the Office of the Deputy Prime Minister gave, in principle, approval for English Partnerships' proposed gross infrastructure investment of over £17 million for the Heart of Slough regeneration scheme. • Outline planning application to be submitted in conjunction with English Partnerships, Slough Borough Council and Berkeley Homes in mid-2006. Roy Dantzic, Chairman, Development Securities PLC, commented, "I am pleased to report a very satisfactory year with a significant uplift inshareholders' funds at the year-end. "It remains our target to deliver completed schemes in the latter part of thisdecade and we are cautiously optimistic of a marked increase in our developmentactivity and expenditure, starting with the next phase at PaddingtonCentral inthe near term. "Whilst we have unutilised cash resources to finance increased business, we willcontinue to be patient and selective. "Our investment strategy in 2006 will continue to seek further superiorperformance through active management both of our existing portfolio and any newacquisitions which we are able to secure." For further enquiries:Michael Marx / Julian BarwickDevelopment Securities PLC 020 7828 4777 Alison HowardThe Communication Group plc 07970 719 060 www.developmentsecurities.com Chairman's statement 2005 I am pleased to report a very satisfactory year for your Company, resulting in asignificant uplift in shareholders' funds. Another strong performance from our property investment portfolio, together witha significant surplus arising from the disposal of our investment in Stead &Simpson, enables me to report a profit before tax for the year to 31st December2005 of £23.3 million and earnings per share of 54.0 pence per share, comparedto £18.8 million and 54.3 pence per share for the previous year, as restated toconform to the new IFRS requirements. Shareholders' funds increased for the tenth successive year, reaching £191.5million, equivalent to 521 pence per share. This compares to £173.2 million and472 pence per share 12 months earlier. In the light of this strong performance, the Board has recommended the paymentof a final Ordinary dividend for the year of 4.25 pence per share, payable on6th July 2006 to shareholders on the register on 9th June 2006. This brings thetotal Ordinary dividend for the year to 6.37 pence per share, an advance of 6.2per cent over the previous year. Strategy The occupier markets, with limited exceptions, have not exhibited vitality.However, our outlook remains cautiously optimistic since a number ofsubstantial, attractive development projects are currently presenting themselvesto us. We continue to avoid development activity that has the potential toundermine our financial stability. We wait to see the strength of any occupational recovery in the City of London,where, in the final analysis, sustained employment growth will be key to a firmrebound in this significant marketplace. We anticipate a strong supply sideresponse to the City market in this cycle when demand recovers, with theanticipated effect of moderating rental growth in the medium-term. There isincreasing evidence of firms based in the City relocating to new accommodationwithin the Square Mile but, to date, there has been little net absorption ofspace. Although we actively monitor and, from time to time, bid for developmentopportunities in Central London, over the last twelve months we have taken thestrategic decision to broaden our focus to include opportunities in Outer Londonand those provincial locations where appropriate returns can be achieved.Increasingly, these will involve complex, urban regeneration mixed-use schemes,where our skill base, often in partnership with others, is well established. Our own recently acquired development project in Huyton, near Liverpool, theacquisition of a retail scheme in Colindale, North West London and our selectionas developer at the Lancaster Luneside regeneration project are goodillustrations of the tactical widening of our geographic focus. In June 2005, in recognition of their achievement over the previous three years,Matthew Weiner and his team were awarded the Estates Gazette Property InvestmentAward for the highest average returns in the category of Balanced Pooled Fundsand Traditional Institutions. I am pleased to report, for a fifth successiveyear, the maintenance of the excellent level of returns generated, both inabsolute and relative terms. In 2005, your Company achieved a 24.7 per cent IPDTotal Portfolio Return which compares favourably to the average market return of19.1 per cent. In broad terms, 6 per cent was generated from rental incomearising from the properties themselves and the balance from both realised andunrealised surpluses over existing book values. We have capitalised on yield compression to realise significant gains fromproperties where medium-term prospects for rental growth were limited. Inrecycling these funds, we have concentrated on investment opportunities wheregrowth and added value can be generated. Stead & Simpson, the footwear retailer in which we held a 39 per cent equitystake, traded well in 2005, but with a reduced level of profitability from theexceptional performance achieved in the previous year, reflecting the generalslowdown in consumer demand. Nevertheless, in December 2005 we were pleased tohave satisfactorily exited from this investment, which was a non-core activityfor your Company and, at the same time, to have left Stead & Simpson in asignificantly stronger trading position than in 1995, when our involvement withthe business recommenced. The sale proceeds of our equity holding amounted to£13 million with a further £2 million received from the early repayment of ourremaining loan to Stead & Simpson. We wish the excellent management team of thatcompany well for the future; they deserve further success. Outlook With interest rates in the UK likely to remain at their present subdued levelfor some time, there would not appear to be a strong threat to the high valuesnow established in the property investment market. Indeed, perhaps remarkably tothose with memories stretching back to earlier decades, there is the prospect offurther yield compression in 2006 pushing benchmark values to even higherlevels. However, rather than wait for market momentum, our investment strategyin 2006 will continue to seek further superior performance through activemanagement both of our existing portfolio and any acquisitions which we are ableto secure. The outlook for our development activity reflects a broad approach to the UKproperty markets. Whilst we will actively seek involvement in schemes in CentralLondon, our concern regarding the high pricing of development sites, in suchcontradistinction to the strength of the occupational markets, especially in theCity of London, will undoubtedly mean that our net will continue to be cast morewidely both from a geographical and sector standpoint. We remain keen toundertake joint ventures with those parties able to demonstrate exceptionalexpertise in geographic areas and product sectors that complement our own. Wecan expect to derive clear benefits from the relationships that we enjoy withour existing joint venture partners, not least from an accelerated dealflow. It remains our target to deliver completed schemes in the latter part of thisdecade and I am cautiously optimistic of a marked increase in our developmentactivity and expenditure, starting with the next phase at PaddingtonCentral inthe near term. Whilst we have unutilised cash resources to finance increasedbusiness, we will remain patient and selective. Board composition Your Board has remained unchanged throughout 2005 and with its appropriate mixof expertise has worked well as a team. After nine years of dedicated service,Bill Grant is to step down as a Non-executive Director at the forthcoming AnnualGeneral Meeting. Over that period he has served as both Chairman of theRemuneration Committee and Senior Independent Director. We will miss him and Iwould like to thank him most warmly on your behalf for his commitment to yourCompany. Conclusion The ongoing strength of the property investment market in 2005, together withthe surplus of £5.8 million arising from the disposal of our stake in Stead &Simpson, enabled your Company to significantly improve its returns compared tothose achieved in 2004. We believe that the upward momentum of the investmentmarket will finally abate at some point in 2006 and this, coupled with arelatively low level of development profits anticipated in this year, will ofnecessity mean that overall returns may be reduced. The important task for us in2006 is to secure further schemes to expand our development pipeline for theyears ahead. Our focus on the medium-term outlook is as, if not more, important to thecontinued success of your Company than the short-term horizon of the next 12months. I am confident we have the management team and resources necessary tomeet these challenges. I am pleased to thank, on your behalf, all of the management and staff ofDevelopment Securities for their unstinting efforts, commitment andprofessionalism in supporting the strategic objectives that we have set. Roy Dantzic, Chairman28th March 2006 Review of operations At the beginning of 2003, few would have contemplated that there would be threeconsecutive years of increasing divergence between the strength of the propertyinvestment market and the relatively soft occupational market. Remarkably, 2005 ended the third straight year of value growth with anacceleration in market values for investment property. We believe that thesemarkets will soon return to their more traditional closely-aligned relationship.However, given the seemingly increasing amounts of cash flowing into theproperty markets, it is difficult to see such a correlation returning in thefirst half of 2006, as investors lower their return expectations still further. This divergence of the investment market from the occupational market creates anumber of challenges for a property business such as ours. In the first place,sourcing additional property investments for our own portfolio becomes ever morechallenging in a marketplace which appears to be increasingly indiscriminate asto the relationship between price and value. Hence, in recent years, ourinvestment acquisition appetite has moved cautiously up the risk curve in searchof sensible returns. The ability to create genuine value is a core skill thatour investment team, led by Matthew Weiner, has developed over the last fiveyears or so and is being refined further in the face of strong competitivechallenges in the marketplace. Economic and business environment After its above trend growth of 3.2 per cent in 2004, the potentially vulnerablehousing market and high level of personal debt were significant factors in thedeceleration of UK GDP growth to 1.7 per cent in 2005. The consensus forecastsfor 2006 suggest another below trend expansion of two per cent, with theprospect of reduced sterling strength and lower interest rates assisting amodest acceleration in growth thereafter. Given the current weakness in UKconsumer spending and the deceleration in Government expenditure, the market maynot have factored in enough of the downside risk. Unless a significant driverappears to aid the UK economy, we do not foresee any dramatic turnaround in thesluggish occupational markets in the near term, other than in a few exceptional,well-defined locations. Unsurprisingly, these weak occupational markets have ledsome market forecasters to downgrade their expectations of rental growth in2006. Current development programme For our development business, not withstanding that pricing levels for potentialdevelopment sites continue to discount significant future rental growth, therewere and indeed still are a number of profitable opportunities in Central Londonthat we are pursuing. In addition, our strategy to broaden the developmentbusiness beyond Central London continued during the year. 2005 was an importantyear in this respect, as some of our recent acquisitions illustrate. PaddingtonCentral There was considerable construction activity in 2005 at PaddingtonCentral aswork proceeded on the £30 million 'Crossrail Deck', with practical completionachieved this month, on programme and under budget. The Deck provides theessential horizontal separation between the next phases of PaddingtonCentral andthe planned Crossrail work area underneath. Further heavy infrastructureprojects in 2005 in the immediate vicinity included the reconstruction ofBishops Bridge Road from two to five lanes. The new bridge is scheduled forcompletion in May 2006 and will provide improved vehicular access to our site,directly opposite the planned new entrance to Paddington Station. In February 2006, we reached agreement with Accor, subject to planning, for theletting of a new 206-room hotel to be incorporated into the next phase of thePaddingtonCentral development. We anticipate that approval will be given shortlyby our funding partner for the construction of the entire second phase, whichwill also incorporate a 250,000 sq. ft. office building, designed by SheppardRobson, for which detailed planning permission has already been received.PaddingtonCentral has consolidated its status as a proven head office locationand we anticipate considerable occupier interest as the project proceeds to itsestimated practical completion in two years' time. Given the constraints in themarketplace of identifying suitable sites for the provision of modern officeaccommodation, we anticipate that PaddingtonCentral will consolidate itsposition as a major supplier of London's West End prime office market. The Royals Business Park Of all London's office markets, Docklands has been the slowest to recover.Building 1000 remains available to let and as previously reported we have noexpectation of further profits flowing from this building. The main Olympic sitelies four miles from the Royals Business Park and should have a beneficialeffect on prospects for our scheme, not only generating demand for newdevelopment to serve the Olympics but also engendering a substantial improvementin sentiment for the regeneration of East London as we approach 2012. CityPark, Manchester This 290,000 sq. ft. mixed-use development site was acquired for £3 million inOctober 2004. We have now worked up detailed development proposals for theproject, which already has outline planning consent for 177,000 sq. ft. ofoffice and 94,000 sq. ft. of hotel accommodation, together with associated carparking. Initial discussions are in hand with a number of hotel operators and adetailed planning application will be submitted once these discussions haveprogressed satisfactorily. We are now also at the appropriate stage to approachthe funding market in respect of the speculative office component. Luneside, Lancaster In November 2005, we were pleased to be appointed by the Local Authority asjoint developers with CTP Limited for the Luneside East site in Lancaster. The18.5-acre brownfield site is located on Lancaster's River Lune waterfront andwill comprise 350 new homes, 90,000 sq. ft. of new offices, a hotel and someretail and hospitality outlets. Preparatory work, following a compulsorypurchase order process, is scheduled to commence on site in early 2007 with thedevelopment phased over some three to four years. This particular urbanregeneration project will require us to resolve significant existing landcontamination issues. Heart of Slough In January 2006, the Office of the Deputy Prime Minister gave, in principle,approval for English Partnerships' proposed gross infrastructure investment ofover £17 million to enable the Heart of Slough regeneration scheme. Followingthis welcome news, we have, with English Partnerships and our other partners,Slough Borough Council and Berkeley Homes, started to prepare an outlineplanning application for the scheme, to be submitted by the middle of this year. A decision thereon is expected some six months later. Meanwhile, we will bedeveloping more detailed proposals for the commercial component, with a view tosubmitting this for approval once the outline permission has been granted. We continue to monitor the Slough office market and, whilst it remainsover-supplied, there are signs that the improvement in the wider Thames Valleymarket is beginning to be felt in Slough. It remains our intention to proceedwith development only when market conditions are suitable. Cambourne Business Park In July 2005, a 20,000 sq. ft. letting was secured with ip.access, a whollyowned subsidiary of TTP Communications PLC. Accordingly, only 50,000 sq. ft.remains to be let of our most recent phase and, given current levels ofinterest, we believe that this should be absorbed over the next year. At thatstage, together with our development partner, Wrenbridge Land Limited, we willbe in a position to embark on a further phase of this 750,000 sq. ft. businesspark. Located nine miles from Cambridge City Centre, Cambourne Business Park is anintegral part of the new Cambourne settlement, a 1,040-acre scheme of 3,300houses with town centre, hotel, retail and leisure facilities. The year also sawthe new South Cambridgeshire District Council Civic Centre, completed during2004, receive the British Council of Offices award for the Midlands and EastAnglia Corporate Workplace Building Category. This building, which achieved an'Excellent' BREEAM rating, is highly sustainable in many aspects of its design,with the form of the building inextricably linked to environmental performance. Huyton, Liverpool Construction work by our development partner CTP at the 110,000 sq. ft. retailscheme in Huyton commenced in 2005, with practical completion scheduled forAugust this year. Currently, we have achieved pre-letting on 50 per cent of theaccommodation with a further 15 per cent in serious negotiations. Given thatmarketing of the scheme has only recently commenced we are pleased with thisprogress. The securing of New Look for a 10,000 sq. ft. unit can only assist inthe market positioning of this neighbourhood shopping scheme. Retailers continueto take space in such new developments to improve efficiencies andprofitability. High Street price deflation has meant that the successfulretailer's business model is based on customer value. Expansion has tended to beinto cost effective but strong secondary locations in preference to expensiveprime pitches. Huyton is an example of this. On completion and when fully let,we anticipate that the scheme will generate an attractive uplift in value. Broughton We have been advised by the Officers at Flintshire County Council that theretail planning application for the extension to the retail park at Broughton,submitted jointly with British Land in June 2004, is scheduled for presentationto the Local Authority Members in the second quarter of 2006. The schemeincludes a new 90,000 sq. ft. Marks & Spencer store, a 26,000 sq. ft. extensionfor Tesco, 56,000 sq. ft. of new retail space and additional car parking androad improvements. The terms of our commercial arrangements with British Landwill be agreed following the grant of planning consent. Following the retail consent, we anticipate that the additional application, inrespect of the 19 or so acres of developable land for residential use, will alsobe submitted to the Members in the second quarter of 2006. Environmentalconsiderations connected with this development have required the acquisition of11 acres of land to be designated for use as a reservation sanctuary for theprotected greater crested newt. Section 106 obligations in respect of both applications will require negotiationwith the Local Authority and this may involve further and final negotiationswith both British Land and other local landowners. Colindale, London NW In June 2005, we completed the acquisition of the freehold of this 100,000 sq.ft. retail scheme together with 750 car park spaces for £26.4 million, yielding6.5 per cent. The 7.5-acre site has the capacity, once planning consent has beenobtained, to accommodate a markedly more dense development of some 700,000 sq.ft. which is likely to incorporate a larger retail element as well as privateand affordable housing. The existing property was developed in the late 1980sand the planning application on which we are currently working for submission inMay this year, proposes a major mixed-use urban regeneration solution. Theforward-letting of a majority of the retail component will be essential beforeredevelopment commences. Property investment portfolio The year under review saw the continuation of our evolution from dry,long-leased property to assets which offer a greater degree of risk and,therefore, opportunity to generate higher returns. As part of this process, wehave continued to refine our expertise to evaluate the risks associated withthese types of assets which are key to the capture of value improvement. Increasingly, we seek out opportunities to take on refurbishment and buildingextension risk involving the whole range of our skill base, illustrating thebenefits that can be derived from the close working relationship between ourinvestment and development teams. During the year, the investment team won a prestigious award for the highestreturn within its IPD benchmark category for the three years ended December2004. In 2005, we achieved a fifth successive year of out-performance,generating a return of 24.7 per cent, compared to the IPD index of 19.1 percent. This out-performance is further validation of our strategy and it is ourbelief that the investment portfolio now comprises assets capable of providingconsistent out performance over the medium-term. Of course, we need to ensurethat we have a clear pipeline of additional initiatives that will deliver valuewhether or not the investment market continues its current strength. Whilstsourcing these deals is the major current challenge, we have also established awide range of local contacts and strong joint venture relationships over thelast five years. The direction of the market remains difficult to call, with significant furthercapital growth beyond the levels seen in 2005 seeming less likely. At the sametime, occupational demand remains patchy, but with some selective areas seeingrental growth. The bulk of investment grade property is secondary in nature and it is here thatyields compressed most in 2005 as investors reduced their target rates ofreturn. The current risk premium for these assets may now reflect anunder-valuation of the risks that are inherent in the market. We believe that weshall see limited rental growth, particularly in the secondary office market andyield differentials will need to adjust to reflect the realities of theoccupational market compared to the current exuberance of the investment market. In the office market, the combination of lower public sector and financial andbusiness service sector jobs growth will restrict demand for space. In theretail sector, stable or lower house prices, higher unemployment and high levelsof consumer debt repayments will put a further dampener on retail spending and aceiling on rental growth. Strategy Concerns over the direction of the investment market make us even more committedto our three key investment principles of sector rotation, stock selection andproactive management. Of these, in the current market, it is clear that stockselection, rather than sector focus, is the most critical, with individualassets in each sector producing a wide range of returns. Hence, we continue tofully evaluate all aspects of every acquisition and be decisive in our disposalstrategy where we feel that the market is overpricing any potential upturn inrental values. Most importantly, in 2005 we remained focused on maximising valuefrom the assets we own. These themes have led to a further reduction in our office weighting and anincrease in our retail holdings. At first sight, this strategy might seem atodds with the current slowdown in consumer spending, but our assets are focusedon convenience shopping expenditure which, by virtue of its day-to-day nature,benefits from more inelastic consumer demand. The key component in thissub-sector is a food retail offer either within or adjoining our schemes. Thisis the sole area of the retail market that currently enjoys both volume andvalue growth and our focus remains on shopping centres which offer a combinationof secure income and asset management opportunities as opposed to thetraditional high street which is likely to face the brunt of any prolongeddownturn. The office sector, now at the low point of its cycle, will offer investmentopportunities, but we are cautious about the pace of any recovery in occupierdemand since current market prices are discounting future rental growth,seemingly giving little room for value upside. Investor sentiment towards theoffice sector is also cyclical, with the market now on an upward, positivecurve. We anticipate that occupational demand will not pick up materially aboveits long-term average, with most markets already holding adequate supply ofstock and potential product. That said, there are significantly varied marketconditions in different towns, emphasising the need for careful stock selection. Disposals Transaction activity during 2005 showed disposals significantly outweighingacquisitions. In total, nine properties were sold for £39.4 million, generatinga 16 per cent net surplus over book value, as we crystallised significantvaluation surpluses on certain assets where we felt the market had overpricedthe return potential. Most notable was the disposal of Vector Point, Redditch, for £7.9 million. Weacquired this 110,000 sq. ft. warehouse in early 2004 with vacant possession andin need of comprehensive refurbishment. Following completion of these works, wesecured the letting of the unit at above target rent and subsequently disposedof the asset. This entire process realised a net surplus of £1.6 million and areturn on equity of 21 per cent over the period of our ownership. Havingestablished a process for creating value through the refurbishment andre-letting of this asset class we intend to repeat the process. To this end, weacquired a 147,000 sq. ft. warehouse in Wigan for £6.1 million in March 2006.The unit, constructed in 1999 to a high standard, requires only minor cosmeticrefurbishment. Based on our central case assumptions, we are hoping to capturein excess of £1.0 million of added value and are confident of achieving are-letting in the near term. The other notable sale during the year was Milton House, Sheffield. In 1999,Development Securities took the decisive step of comprehensively refurbishingthe then vacant 80,000 sq. ft. office building on a speculative basis at a totalcost of £6.7 million. It is a further validation of our strategy for thisproperty that we completed the sale for in excess of £15.0 million, producing a£2.5 million gain in 2005. The final major disposal in the year was Unit P, Southampton InternationalBusiness Park. We acquired this asset in 2002, at a time when the tenant, Regus,presented a financially weak occupier covenant. Since that date, the businesshas improved and investor sentiment towards Regus and the building has beenenhanced. The property was sold in December for £5.7 million, a surplus overbook value of £1.0 million. Investment Activity In 2005, £10.0 million was invested via capital expenditure on the existingportfolio. At Austen House, Fleet, we received planning approval for the conversion of theupper parts to residential use and have commenced the redevelopment, whichincludes an extension to the rear of the property. A total of 14 flats are to bedeveloped. Early indications from the initial marketing campaign suggest that weshould achieve our target sales prices. Earlier, as part of the asset strategy,we disposed of the retail element of the property at auction. We planned thatFleet would be the first in a series of projects with our local partner and weare pleased to report that the joint venture has exchanged contracts to acquirea 10,000 sq. ft. office building in Putney for which we will submit a revisedand improved planning consent for residential redevelopment. Following our likely development success at Huyton, we have targeted furtheracquisitions of this nature where we accept letting risk, which we can price,whilst leaving the construction cost risk with our local development partner. A remarkable £4.3 million of value was created during 2005 at The FurlongCentre, Ringwood. The catalyst for this improvement was undoubtedly the openingof the extended Waitrose store, which is now trading above their expectationsand accordingly acts as a significantly improved footfall generator. On the backof this, we took back possession of several units, subsequently re-letting theseto retailers including Hobbs, Phase 8, AGA, Caffe Nero and Jaeger. The securingof these aspirational retailers was important in transforming the scheme into afashion offer. In the process, we have raised the Zone A rental tone in thescheme from £25 per sq. ft. on acquisition in 2003 to its current level of£52.50 per sq. ft. We have re-branded the Centre to reflect its revised statusand this has been well received within the catchment area. At all of our shopping centre assets, we are focusing on the potential forfurther phases of development to enhance their value. Accordingly, during 2005,we acquired adjoining land holdings representing an investment of £4.8 million.We are working in conjunction with the various Local Authorities to obtain thenecessary planning consents and aim to commence development at one of thecentres during 2006. We intend that any development phase will have asignificant pre-let component before construction works commence. This retaildevelopment strategy is an evolving area of our business where we tend to workin conjunction with smaller, local partners. We are currently actively pursuing three other significant retail acquisitionsand, to secure preferential positions, are seeking strategic holdings in two ofthese locations. We believe that there can be further rental growth withincertain food-anchored neighbourhood retail schemes where the focus is on thevalue sector of the marketplace. As our Ringwood centre has demonstrated, nichefashion retailers are likely to target the better quality of these neighbourhoodschemes and it is into this sub-sector of the market that we are focusing ouracquisition strategy. The key is to provide economically priced rents enablingoccupiers to trade profitably. We have achieved five consecutive years of strong performance from theinvestment portfolio. We plan, by leveraging shareholders' funds moreeffectively in partnership with other investors, to expand the quantum of assetsunder management. In December 2005, the first such transaction was secured; the£20.5 million Peacock Place Shopping Centre, Northampton, together with aUS-based financial partner. In this instance, we secured a highly leveragedposition where, if our central business case can be achieved, the Company shouldgenerate above average returns. Having secured the first such transaction andidentified a like-minded financial partner, we hope to build on thisrelationship to source larger assets, further enhancing shareholder returns. C J Barwick P J Willis M S Weiner28th March 2006 Property portfolio analysis Tenant profile 1 Government 1% 2 FTSE 100 1% 3 PLC/nationals 47% 4 Regional multiples 15% 5 Local traders 36% Lease profile 1 0-5 years 23% 2 5-10 years 29% 3 10-15 years 10% 4 15-20 years 8% 5 20 years + 30% Location profile 1 South East 40% 2 North 31% 3 London 29% Analysis by sector 1 Retail 81% 2 Industrial 11% 3 Office 8% As at 28th February 2006 Consolidated income statementFor the year ended 31st December 2005 2005 2004 restated £'000 £'000 Continuing operations: Revenue 25,468 23,736Direct costs (15,218) (14,148)________________________________________________________________________________ Gross profit 10,250 9,588 Operating costs (10,538) (8,450) Profit on disposal of investment properties 3,728 4,057 Net gain on revaluation of property portfolio 17,854 14,689________________________________________________________________________________ Operating profit 21,294 19,884 Share of results of associate 1,453 3,623 Income from other fixed asset investments 149 125 Profit on disposal of investments 5,759 -________________________________________________________________________________ Profit before interest and taxation 28,655 23,632 Finance income 2,262 2,570 Finance costs (7,667) (7,366)________________________________________________________________________________ Profit before taxation 23,250 18,836 Taxation (3,460) (347)________________________________________________________________________________ Profit after taxation attributable to equity shareholders of the parent 19,790 18,489________________________________________________________________________________ Basic earnings per share 54.0p 54.3p Diluted earnings per share 53.7p 54.2p Consolidated balance sheetAs at 31st December 2005 2005 2004 restated £'000 £'000 Non-current assets Property, plant and equipment - Operating properties 10,393 10,573 - Other property, plant and equipment 3,776 3,793 Investment properties 160,246 156,572 Investments 1,920 8,439________________________________________________________________________________ 176,335 179,377 Current assets Land, developments and trading properties 56,479 21,235 Trade and other receivables 10,419 18,029 Cash and cash equivalents 73,094 53,766________________________________________________________________________________ 139,992 93,030 Current liabilities Trade and other payables (22,594) (15,332) Current tax liabilities (154) (1,060) Deferred tax liabilities (340) -________________________________________________________________________________ Net current assets 116,904 76,638 Total assets less current liabilities 293,239 256,015 Non-current liabilities Borrowings (98,632) (82,829) Deferred tax liabilities (3,107) - Net assets 191,500 173,186________________________________________________________________________________ Equity: Share capital 18,361 18,334 Share premium account 87,635 87,417 Revaluation reserve 2,074 1,673 Other reserves 45,793 45,683 Retained earnings 37,637 20,079________________________________________________________________________________ Equity attributable to equity shareholders of the parent 191,500 173,186________________________________________________________________________________ Basic net assets per share 521p 472p Diluted net assets per share 518p 469p Approved and authorised for issue by the Board of Directors on 28th March 2006and signed on its behalf M H MarxDirector Consolidated statement of recognised income and expenseFor the year ended 31st December 2005 2005 2004 restated £'000 £'000 Profit on revaluation of operating properties 401 89 Profit for the year 19,790 18,489________________________________________________________________________________ Total recognised income and expense for the year 20,191 18,578________________________________________________________________________________ Impact of adoption of IAS 32 and IAS 39 at 1st January 2005 15________________________________________________________________________________ Consolidated cash flow statementFor the year ended 31st December 2005 2005 2004 restated £'000 £'000 Net cash from operating activities (32,261) (15,889)________________________________________________________________________________ Investing activities: Interest received 2,170 2,532 Dividends received from associated undertaking 149 - Proceeds from sale of shares in associated undertaking 13,396 - Proceeds from redemption of preference shares held in associated undertaking 1,500 - Proceeds on disposal of property, plant and equipment - 70 Proceeds on disposal of investment properties 30,078 26,272 Purchase of property, plant and equipment (876) (854) Purchase of investment properties (11,945) (50,689) Purchase of investments (1,165) (377)________________________________________________________________________________ Net cash from/(used in) investing activities 33,307 (23,046) Financing activities: Dividends paid (2,245) (1,579) Issue of new shares 245 28,644 Repayments of borrowings (5,169) (7,227) New bank loans raised 25,830 15,169 (Decrease)/increase in bank overdrafts (379) 1,355 Increase in pledged cash (5,622) (10,191)________________________________________________________________________________ Net cash from financing activities 12,660 26,171 Net increase/(decrease) in cash and cash equivalents 13,706 (12,764) Cash and cash equivalents at the beginning of the year 34,645 47,409________________________________________________________________________________ Cash and cash equivalents at the end of the year 48,351 34,645 Pledged cash held as security against borrowings 24,743 19,121________________________________________________________________________________Cash and cash equivalents as disclosed in the consolidated balance sheet 73,094 53,766________________________________________________________________________________ 1. BASIS OF PREPARATION Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company will publish full financial statements thatcomply with IFRSs. The financial information set out in the announcement does not constitute theGroup's statutory accounts for the years ended 31st December 2005 or 2004. The financial information for the year ended 31st December 2004 is derived fromstatutory accounts for that year which have been delivered to the Registrar ofCompanies , as subsequently restated to comply with International FinancialReporting Standards (IFRS). The auditors reported on those statutory accounts;their report was unqualified and did not contain a statement under s237(2) or(3) Companies Act 1985. The statutory accounts for the year ended 31st December2005 will be delivered to the Registrar of Companies following the Company'sAnnual General Meeting. The auditors have reported on those accounts; theirreport was unqualified and did not contain statements under s237(2) or (3)Companies Act 1985. 2. ACCOUNTING POLICIES a) Basis of accounting The preparation of financial statements in accordance with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results ultimately may differfrom those estimates. The key areas where such judgements are made are in thevaluation of the property portfolio and the recognition of development revenuesand profits. In making its judgement, management has considered the detailedcriteria set out in IAS 18 'Revenue'. Determining development revenues andprofits requires an estimate of development costs, construction progress andletting activity. Key judgements relating to property valuations includeestimates of future rental income and yields. All listed companies in the EU are required to present their consolidatedfinancial statements for accounting periods beginning on or after 1st January2005 in accordance with IFRS, as adopted by the EU. Therefore, the Group'sconsolidated financial statements for the year ending 31st December 2005 havebeen presented on this basis. Comparative figures have been restated inaccordance with IFRS, except in respect of financial instruments, which areaccounted for in accordance with UK GAAP. The financial statements have beenprepared on the basis of the IFRS accounting policies which were expected to beadopted in the year-end consolidated financial statements when the IFRS balancesheet was first presented in the Group's 2005 Interim Report. The Group's transition date for adoption of IFRS is 1st January 2004. IAS 32 andIAS 39, dealing with financial instruments have been adopted from 1st January2005. The key amendment to comply with IFRS in this respect would be theinclusion of the fair value of financial derivatives in the balance sheet at31st December 2004. The provisions of IFRS 2 'Share-Based Payments' have beenapplied in respect of grants of equity instruments after 7th November 2002. IFRS3 'Business Combinations' has been applied prospectively from 1st January 2004.These transition dates have been selected in accordance with IFRS 1 'First-timeAdoption of International Financial Reporting Standards'. Prior to the adoption of IFRS, the consolidated financial statements ofDevelopment Securities PLC had been prepared in accordance with UK GAAP. UK GAAPdiffers in certain respects from IFRS and certain accounting, valuation andconsolidation methods have been amended, when preparing the financialstatements, to comply with IFRS. b) Basis of consolidation i) The consolidated financial statements of the Group include the financial statements of Development Securities PLC ('the Company'), its subsidiaries and the Group's share of profits and losses and net assets of jointly controlled entities and associated undertakings. Where necessary, adjustments have been made to the financial statements of subsidiaries, associates and jointly controlled entities to bring the accounting policies used into line with those used by other members of the Group. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. ii) The results of subsidiaries acquired during the year are included from the effective date of acquisition. Business combinations are accounted for under the acquisition method. Any excess of the purchase price of the business combination over the fair value of the assets and liabilities acquired is recognised as goodwill. Any discount received is credited to the income statement in the period of acquisition. 3. SEGMENTAL ANALYSIS For management purposes, the Group is currently organised into three operatingdivisions: Investment - management of the Group's investment property portfolio, generating rental income and valuation surpluses from property management; Trading and development - managing the Group's development projects. Revenue is received from project management fees and development profits; and Operating - serviced office operations and retail activities. Revenue is principally received from short-term licence fee income. These divisions are the basis on which the Group reports its primary segmentalinformation. All operations occur and all assets are located in the UnitedKingdom, except assets of £1,727,000 (2004: £1,776,000). Accordingly nosecondary segmental information is shown. Year ended 31st December 2005 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Revenue 10,626 9,687 5,155 25,468 Direct costs (1,994) (8,446) (4,778) (15,218)________________________________________________________________________________ Gross profit 8,632 1,241 377 10,250 Unallocated operating costs (10,538) Profit on disposal of investment properties 3,728 - - 3,728 Net gain/(loss) on revaluation of property portfolio 18,028 - (174) 17,854________________________________________________________________________________ Operating profit 21,294 Share of results of associate 1,453 Income from other fixed asset investments 149 Profit on disposal of investments 5,759________________________________________________________________________________ Profit before interest and taxation 28,655 Finance income 2,262 Finance costs (7,667)________________________________________________________________________________ Profit before taxation 23,250 Taxation (3,460)________________________________________________________________________________ Profit after taxation attributable to equity shareholders of the parent 19,790________________________________________________________________________________ Assets and liabilities Segment assets 226,002 59,568 13,074 298,644 Unallocated assets 17,683________________________________________________________________________________ Total assets 316,327 Segment liabilities (88,715) (27,268) (2,439)(118,422) Unallocated liabilities (6,405)________________________________________________________________________________ Total liabilities (124,827) Other segment information Capital expenditure 11,845 - 6 11,851 Unallocated capital expenditure 870 Depreciation (461) (461) Unallocated depreciation (688)________________________________________________________________________________ Year ended 31st December 2005 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Revenue Rental income 10,585 111 - 10,696 Operating property income - - 5,155 5,155 Project management fees - 266 - 266 Trading property sales - 9,135 - 9,135 Development profits - 175 - 175 Other income 41 - - 41________________________________________________________________________________ 10,626 9,687 5,155 25,468 Income from investments 149 Financial income 2,262________________________________________________________________________________ 27,879________________________________________________________________________________ Year ended 31st December 2004 (restated) Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Revenue 9,259 9,370 5,107 23,736 Direct costs (1,702) (7,644) (4,802) (14,148)________________________________________________________________________________ Gross profit 7,557 1,726 305 9,588 Unallocated operating costs (8,450) Profit on disposal of investment properties 4,057 - - 4,057 Net gain on revaluation of property portfolio 14,079 - 610 14,689________________________________________________________________________________ Operating profit 19,884 Share of results of associate 3,623 Income from other fixed asset investments 125________________________________________________________________________________ Profit before interest and taxation 23,632 Finance income 2,570 Finance costs (7,366)________________________________________________________________________________ Profit before taxation 18,836 Taxation (347) Profit after taxation attributable to equity shareholders of the parent 18,489________________________________________________________________________________ Year ended 31st December 2004 (restated) Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Assets and liabilities Segment assets 208,301 29,441 12,619 250,361 Unallocated assets 22,046________________________________________________________________________________ Total assets 272,407 Segemnt liabilities (90,335) (4,166) (1,345) (95,846) Unallocated liabilities (3,375)________________________________________________________________________________ Total liabilities (99,221) Other segment information Capital expenditure 49,353 - 2,823 52,176 Unallocated capital expenditure 854 Depreciation (778) (778) Unallocated depreciation (196)________________________________________________________________________________ Year ended 31st December 2004 (restated) Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Revenue Rental income 9,170 159 - 9,329 Operating property income - - 5,107 5,107 Project management fees - 496 - 496 Trading property sales - 6,900 - 6,900 Development profits - 1,815 - 1,815 Other income 89 - - 89________________________________________________________________________________ 9,259 9,370 5,107 23,736 Income from investments 125 Financial income 2,570 ________________________________________________________________________________ 26,431________________________________________________________________________________ 4. FIXED RATE DEBT The notional fair value adjustment at 31st December 2005 in respect of theGroup's fixed rate debt, calculated on a replacement basis, taking into accountthe difference between fixed interest rates of the Group's borrowings and themarket value and prevailing interest rates of appropriate debt instruments, was£15,100,000 (2004: £14,200,000) equivalent to a decrease in net assets of 28.8pence per share after tax (2004: 27.1 pence per share). 5. NOTE TO THE CASH FLOW STATEMENT 2005 2004 restated £'000 £'000 Operating profit 21,294 19,884 Adjustments for: Gain on disposal of property, plant and equipment (3,728) (4,062) Increase in fair value of investment properties (17,854) (14,689) Share based payments 110 - Depreciation of property, plant and equipment 1,149 974________________________________________________________________________________ Operating cash flows before movements in working capital 971 2,107 Increase in developments and trading properties (35,244) (5,736) Decrease/(increase) in receivables 7,702 (4,446) Increase/(decrease) in payables 1,509 (1,201)________________________________________________________________________________ Cash generated by operations (25,062) (9,276) Capitalised interest charged to direct costs 181 71 Income taxes (paid)/received (906) 1,088 Interest paid (6,474) (7,772)________________________________________________________________________________ Net cash from operating activities (32,261) (15,889)________________________________________________________________________________ 6. GLOSSARY Total Portfolio Return: The total return from the investment property portfolio,comprising net rental income or expenditure and capital gains or losses fromdisposals and revaluation surpluses or deficits, divided by the average capitalemployed during the financial period, as defined and measured by InvestmentProperty Databank Limited, a company that produces independent benchmarks ofproperty returns. Gearing: Gearing, expressed as a percentage, is measured as net debt divided bytotal shareholders' funds. END This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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