Final Results

24th May 2006 07:02

Great Portland Estates PLC24 May 2006 PRELIMINARY RESULTS24 May 2006 The Directors of Great Portland Estates plc announce the results of the Groupfor the year ended 31 March 2006. Highlights: •Adjusted net assets per share* up 29.7% to 437p •Valuation of wholly-owned properties up 24.7% on a like-for-like basis to £1,015 million •Total Property Return of 29.7%, 4.9% ahead of IPD Central London (24.8%) •Profit before taxation up 127.6% to £188.0m •Basic earnings per share up 133.3% to 91.7p •Adjusted earnings per share* of 10.2p (2005: 11.6p) •Return on capital employed 28.9% (2005:17.5%) •Dividends per share up 2.3% to 11.0p €575,000 sq ft near-term development programme •Met Building completed on time and on budget and 96% let, generating a £45.0 million surplus •All near-term development projects on site or starting imminently •Good progress on 1.2 million sq ft medium-term development programme Notes * EPRA adjustments on a diluted basis - see note 7 Toby Courtauld, Chief Executive, said: "2006 was a strong year for the Group. With London's economy expanding at both ahealthy and steady rate and occupational markets, particularly in the West End,positioned for a growth phase, the conditions are in place for further healthyreturns. Great Portland Estates is well set to take advantage of this set ofcircumstances: •we have a near-term development programme that is already producing significant returns; •we have a growing medium and longer-term development programme, augmented by recent acquisitions; •our focused asset management continues to maintain a virtually fully let portfolio as well as create real value through asset restructuring; •our finances are both low cost and flexible following our most recent round of restructuring; and •our teams are working well together to unearth further opportunities for value enhancement. We are, therefore, confident that we will continue to generate attractivereturns for our shareholders." Enquiries etc:Great Portland Estates plc 020 7647 3000Toby Courtauld, Chief ExecutiveTimon Drakesmith, Finance Director Finsbury Group 020 7251 3801James MurgatroydGordon Simpson The results presentation will be broadcast live at 9.30am today on www.gpe.co.uk. Also an interview with Toby Courtauld, the Chief Executive, is available in video,audio and text on http://www.gpe.co.uk and http://www.cantos.com CHAIRMAN'S STATEMENT Knighton House, for nearly 45 years the headquarters of your Company, iscurrently the subject of an extensive refurbishment and so, as I write mytwenty-first Statement, it is the first from our new offices in Cavendish Square- and, by coincidence, this is the first Annual Report prepared in accordancewith the new format and revised presentation required under InternationalFinancial Reporting Standards. In the context of this environment and the plethora of financial detail andcorporate governance information contained in the following pages, I ambeginning to feel that the traditional Chairman's Statement is becomingsomething of an anachronism and I shall, therefore, confine myself to a few verybrief introductory remarks. It has been a high octane year, fuelled by anincreasingly frothy investment market, and one in which our Chief Executive,Toby Courtauld, and his well regarded team have produced another strongperformance, based on our focus in central London and by applying our assetmanagement and development expertise to create added value in our chosen areas.Indeed, the development programme is now swinging into full gear at what appearsto be an advantageous moment in the property cycle. We have also been active onthe financial front where our recently appointed Finance Director, TimonDrakesmith, has implemented more financial restructuring, thereby furtherreducing the average cost of debt. At 31 March net assets per share, despite aone-off hit on the repurchasing of a Debenture, stood at 437 pence, a rise of29.7% and a total shareholder return of 53.9% was delivered for the year underreview. Looking ahead, we are giving detailed thought as to whether it is in theCompany's best interests to convert into a Real Estate Investment Trust, wherethe Chancellor's proposals in March were friendlier than the industry might haveanticipated. We have achieved exceptional returns recently and, whilst it isunlikely that we will be able to repeat them in the immediate future (although Iremember writing something similar in the late 80s only to be proved wrong!), Ibelieve that we should be able to provide a satisfactory performance in thecoming years. In conclusion, I would like to thank my fellow Board members andall associated with the Group for their support and hard work in helping toachieve these excellent results. Strategy and objectives 1. Develop 2. Recycle capital 3. Asset Manage---------------------------------------------------------------------------------------------------- • near-term programme Buy • execute individual property strategies • into undersupplied market • off low rents • create value through asset repositioning • bring forward medium-term projects • with angles to exploit • to grow medium-term development programme Sell • off historically high capital values • with limited further angles • where capturing rental growth will be difficult (poor floor plates, etc). Great Portland Estates has a clear and straightforward strategy; we aim todeliver superior returns to shareholders with a focus on applying our assetmanagement and development skills to properties with value angles to exploit incentral London. Throughout this report you will find examples of the team delivering on ourstrategic aims: • Developing - we completed the 112,000 sq ft Met Building, Percy Street, W1, during the year, the first major project in our near-term programme. The remaining nine schemes are well advanced and are scheduled to deliver 575,000 sq ft between now and 2008, with an end value estimated at £375 million, or 37% of the Group's current portfolio. We have expanded our future development pipeline through both working up schemes on existing assets and new acquisitions. Conservatively, our future prospects total some 1.6 million sq ft of new space, up from those assets' existing area of 0.8 million sq ft. • Recycling capital - we have sold £139.7 million of properties, at historically high capital values, where we have executed asset strategies and where we see less attractive prospects. We have bought £134.0 million of properties where the current rents are low and where we see future redevelopment or other value creating opportunities. • Asset manage - we have continued the successful execution of asset strategies across the portfolio including letting 189,800 sq ft of space, generating £5.7 million of new rent roll, some 4.3% ahead of March 2005 rental values. The result of this activity has been a strong increase in our NAV per share of 100 pence or 30% to 437 pence and a total shareholder return for the year of 53.9%. We use numerous benchmarks to define our operational objectives and to measurethe success of our strategy in creating long-term value for shareholders,including: • Portfolio Internal Rate of Return (IRR) - each of our properties has a business plan with an IRR projection which, when amalgamated, produce the Portfolio IRR. We aim to achieve this target; • Portfolio Capital Growth - we aim to generate capital growth, net of capital expenditure, in the portfolio greater than that of the IPD central London Capital Growth Index; • Return on Capital Employed (ROCE) - we measure the Group's ROCE against its weighted average cost of capital; • NAV per Share Growth - we aim to produce growth in adjusted NAV per share of greater than RPI plus 3% over a three year period; and • Total Shareholder Return (TSR) - we aim to produce a TSR ahead of both the median of our comparator peer group and relevant market indices. The remuneration of the Executive Directors and every member of staff is linkedto our performance against these measures. MARKET AND INVESTMENT ENVIRONMENT Market and Investment Environment is accompanied by graphics (see Appendix 1).Copy and paste the link below to view the graphics. http://www.rns-pdf.londonstockexchange.com/rns/4791d_-2006-5-24.pdf Our Market Vacancy rates in the 220 million sq ft central London office market have fallensignificantly over the year, heralding the return of real rental growth acrossthe capital. Although take-up in the 12 months to 31 March 2006, estimated at 12million sq ft, has been only slightly ahead of the long-term average, thewithdrawal from the market of tenants' surplus space and the reduced supply ofnewly developed office property over the last few years has combined to restrictthe amount of choice for businesses on the move. In the West End, where 80% of our portfolio by value (including our share ofjoint venture properties) is located, vacancy rates have fallen to 7%. Dueprimarily to planning restrictions, this market is limited in its ability torespond rapidly to changes in occupier sentiment. The development pipelineremains constrained and we estimate that no more than 4 million sq ft is due tobe delivered speculatively by the end of 2009, equivalent to 5% of total stock,much of it outside the traditional 'core' areas. Both active and potentialdemand continue to be weighted towards the business services and marketing andmedia sectors, traditionally users of larger uniform floor plates which remainthe most difficult to provide in the West End. Vacancy rates have also fallen sharply in the City and Southwark market,comprising 20% of our portfolio by value, to 10% today. Unlike the West End,however, the ability to increase supply in the City is relatively lesschallenging. With a less restrictive planning regime we expect developmentactivity to pick up markedly over the next few years, with an estimated 10million sq ft to be completed speculatively by the end of 2009. Furthermore, webelieve planning consents exist for around 12 million sq ft in these marketswith 3 million sq ft of consent having been granted in the first quarter of 2006alone. As a result, we are maintaining our more cautious medium-term outlook forthe City as compared to the West End. In the meantime, due to the sharp fall in vacancy rates and the inevitable delayuntil supply picks up, rental growth in the central London office market as awhole during 2006 looks set to be ahead of consensus forecasts. Turning to the retail markets, despite the generally challenging environment,the principal shopping thoroughfares are performing well, helped by theunprecedented interest from international retailers seeking representation instrong locations in London. We have significant exposure to the prime retailstreets of Oxford Street, Bond Street and Regent Street where demand remainshealthy for well configured retail stores. In the investment markets, central London remained high on investors' shoppinglists throughout the year. Volumes have again been at record levels with over£13 billion traded. Due to the positive outlook for rental levels we expectfierce competition for investment property to continue imposing further downwardpressure on equivalent yields, at least in the short-term. However, on the assumption that yields cannot fall forever (not least becausethe recent rise in swap rates has eliminated the positive gap between propertyyields and funding costs), out-performance will come from those buildings that,through management action, will be best able to benefit from rental growth. Ourportfolio, with 20% in the process of being upgraded and a growing medium-termpipeline, is ideally placed to thrive in this set of market circumstances. BUSINESS ACTIVITIES AND RESOURCES Business Activities and Resources is accompanied by graphics (see Appendix 2).Copy and paste the link below to view the graphics. http://www.rns-pdf.londonstockexchange.com/rns/4791d_-2006-5-24.pdf Valuation The valuation of the Group's properties as at 31 March 2006, includingacquisitions made during the year and our share of the gross assets in jointventures, was £1,128.3 million (up 23.3% on a like-for-like basis). Thevaluation of the portfolio held throughout the year, excluding joint ventures,was £923.5 million which, net of capital expenditure totalling £41.7 millionincreased in value by 24.7%, or £183.2 million, of which 17.6% was during thesecond half. Three main factors have come together to drive this strong performance: • Growth in rental values - first half growth of 3.9% accelerated during the second half to produce 12.9% for the year across the portfolio. Within this, the strongest performance came from rental growth within the properties currently under development at 21.9% as we improved the quality of the space on offer. The lowest growth in rental values (5.9%) came from those properties approaching development where we are shortly to invest capital in order to create the conditions necessary to attract future rental growth. In the City, rental values grew by 9.1%, almost all of which was in the second half as the falling vacancy rate in this market began to have an effect. In the West End, rents grew by 14.5% in our North of Oxford Street portfolio and by 11.7% in the Rest of the West End properties, again reflecting the improvements in occupational market balance. • Yield shift - equivalent yields compressed across the portfolio, falling by 100 basis points over the 12 months to March from 6.3% to 5.3% on a like-for-like basis. We estimate that roughly 60% of the portfolio capital value movement was attributed to yield compression, which in turn was the result of strong investment demand driving prices higher and the improvements we made to our assets rendering them more attractive to investors. In line with central London market trends, the rate of yield compression accelerated during the second half with 83 basis points of the total 100 basis points across the portfolio taking place during this period. • Development - the strongest valuation performance came from those properties currently under development, which increased in value by 39.8% over the 12 month period. This does not include the Met Building, Percy Street, W1, which was transferred to the investment portfolio during the second half and increased in value over the year by more than 70% net of capital expenditure. Development We continued to make encouraging progress across our development business overthe past 12 months. We began the year with a near-term programme totalling nineschemes delivering almost 700,000 sq ft, an increase of 78%, over their existingarea, of which seven were on site. Since then, we have completed the first of theseschemes at the 112,000 sq ft Met Building, 22 Percy Street, W1, obtained planningpermission for six projects and commenced construction work at two sites. By theautumn of this year, we will have started on site at the remaining four schemes inthe near-term programme. At Met Building, construction was completed on time in May 2005 and to budgetand the project is now 96% leased or under offer. We achieved rentsapproximately 38% ahead of our initial expectations, totalling an annualequivalent of £4.8 million and, combined with inward yield shift, the scheme hasproduced a truly exceptional surplus of £45.0 million or 96% on our total cost. During the year, work progressed at 21 Sackville Street, Bond Street House, BondStreet, 180 (formerly 190) Great Portland Street, Margaret Street (recentlyforward sold) and Knighton House, Mortimer Street, all in the West End. At 180Great Portland Street, we recently passed the halfway stage in the constructionprogramme and completion is scheduled at the end of 2006. During the summer, work is due to start at our two major new-build officeprojects at Tooley Street, SE1 and Titchmor on Mortimer Street, W1, as well asat the last two schemes in the near-term programme being 79/83 Great PortlandStreet and Dorville House, Foley Street, W1. We anticipate completing the workat Titchmor, the last of the near-term programme to finish, during the fourthquarter of 2008. With the near-term programme now well advanced, our attention has shiftedtowards growing our medium and longer-term development pipeline in order togenerate a consistent flow of future development rents and valuation gains.During the year we identified and progressed medium-term projects both fromwithin the portfolio and through acquisitions (for example at Blackfriars Road,SE1 and New City Court, St Thomas Street, SE1 both mentioned in more detailunder Investment Management below). Currently, our medium and longer-term programme incorporates some 15 differentprojects, totalling approximately 1.6 million sq ft of potential space (up fromtheir existing 0.8 million sq ft). By the nature of such a programme, someschemes will have a greater degree of certainty than others - for example weexpect to submit a planning application at Blackfriars Road later this year andanticipate a start on site early in 2009, whereas at Bishopsgate we may not beable to commence a redevelopment until existing leases expire in 2011. Investment management Despite the intense competition in the central London investment market, we havecontinued to unearth interesting opportunities for value creation. Since March2005, we have spent £134.0 million in eight separate transactions, buyingproperties on Regent Street, Foley Street, Kingly Street (subsequently sold) andOxford Street, all in W1; on Bishopsgate in EC2 and on Shand Street, BlackfriarsRoad and St Thomas Street, all in Southwark, SE1. With our near-term development programme having reached an appropriate scale, wehave turned our buying attention to populating our medium and longer-termpipeline. Three examples of such acquisitions are: • 184/190 Oxford Street, W1, where we augmented our holdings around Market Place, a popular retail and restaurant location, with the acquisition of Oxford House, a 25,900 sq ft retail and office property, for £23 million. The current rent roll of £1.3 million is off low rents per square foot and, through a combination of refurbishment and an improving retail offer in the immediate vicinity, we are optimistic about the prospects for rental growth. • 231 and 235/241 Blackfriars Road, mentioned at the interim stage, where we bought a 0.4 acre site for £11 million. The majority of the site is let until December 2008, providing the Group with a decent income return, and thereafter, the potential for a major office development of some 130,000 sq ft, up from the existing 29,400 sq ft. Design work is progressing well and we anticipate submitting a planning application during the next six months. • Most recently, we acquired the 98,500 sq ft New City Court on St Thomas Street, SE1, for £43.2 million. This modern office building generates a healthy running yield, off low average rents, and provides us with an interesting medium-term development opportunity in the improving area around London Bridge Station, a key central London rail terminus. We continued to take advantage of investors' voracious appetite for centralLondon real estate during the year, recycling capital out of properties where wehad either executed asset strategies and where they were no longer needed forplanning gain or where we felt the prospects for rental growth were limited.Group sales totalled £122.5 million for the year to 31 March 2006, generating apremium to the 31 March 2005 book value of £16.1 million or 15.1%. The aggregateinitial yield to the purchasers was 4.7%. In addition, we sold two assets from our joint venture with Liverpool Victoriafor a total of £34.4 million, of which our share was £17.2 million, 2% ahead oftheir book value. Lasenby House on Kingly Street, W1, was acquired as part ofthe Liberty acquisition during the first half and, being surplus torequirements, was sold on immediately to a neighbouring owner. Total sales including our share of joint ventures were £139.7 million for 2006. Two further sales have been completed since the year end at Gillingham Street,SW1 and New Cavendish Street, W1 at an aggregate price of £47.0 million, a 49.2%premium to the 31 March 2005 valuation and 2.5% to that of March 2006. Asset management We continue to work all assets hard, exploring opportunities to enhance bothincome and capital returns and some examples are described below. The past yearhas been particularly active with 191 lease events executed by our assetmanagement team. During the year we took lease surrenders of 46,000 sq ft, producing £1.3 millionin rent roll, in addition to the 205,000 sq ft vacated by tenants at leaseexpiry or break. Of the total of 251,000 sq ft vacated, 70,000 sq ft has beenrelet with the remainder in the process of being redeveloped or refurbished forletting into the recovering occupational markets. A total of 189,800 sq ft was let during the year at an aggregate rent roll of£5.7 million, an increase of 4.3% on the rental value of the space at 31 March2005. As a result, the void level within the investment portfolio, which nowincludes Met Building, W1, was 1.9% at 31 March 2006 compared to 2.6% at thebeginning of the year. Our investment portfolio became reversionary during the year for the first timesince 2002. At lease renewal and rent review, new rents were agreed at 6.2%ahead of their March 2005 rental value. In addition to successful letting activity at Met Building, W1 and 12/20Camomile Street, EC2, and the delivery of vacant possession at Knighton House,W1, the asset management team created value from regearing existing leases in anumber of locations. For example, at 14 Hanover Square, W1, in return for theremoval of a tenant break clause and marking the rent to market, we completed arolling refurbishment for the existing office tenant whilst maintaining incomethrough the process. Good progress has been made at our joint venture properties. At Mount Royal inOxford Street, W1, we took a surrender of one of the larger retail units duringthe year for a payment from the tenant of two years rent. Since the year end, wehave leased the unit to Mothercare at a rent ahead of the previous rental tonefor the block, thereby creating a rental value uplift which we expect to feedthrough to the valuation this coming financial year. At 208/222 Regent Street,W1, acquired during the year, we regeared the headlease with The Crown Estate,secured early possession from the principal retail tenant, Liberty, and are dueto start work on reconfiguring the retail store shortly. Early interest fromquality retailers is encouraging and we are in advanced negotiations to let thespace well ahead of schedule. FINANCIAL REVIEW The Financial Review is accompanied by graphics (see Appendix 3).Copy and paste the link below to view the graphics. http://www.rns-pdf.londonstockexchange.com/rns/4791d_-2006-5-24.pdf Financial reporting The Group's annual results have been prepared, for the first time, usingInternational Financial Reporting Standards (IFRS). The change of accountingbasis has no effect on the underlying business performance or strategy. This section describes the Group's strong financial performance during 2006. Valuation growth Adjusted net assets per share grew 29.7% from 31 March 2005 to 437 pence.Underlying growth in adjusted net assets per share was higher at 32.9%,excluding the 11 pence per share effect of the exceptional refinancingactivities described below. The main drivers of the 100 pence per share year on year increase in reportedadjusted net assets per share were: •substantial valuation rises of 21 pence per share from properties under development and 77 pence from the investment portfolio; •increases in valuation in the Liverpool Victoria joint ventures and profits on sale of non-core properties of a further 11 pence; •adjusted earnings for the period of 10 pence with the payment of dividends of 11 pence together reducing adjusted net assets per share by a net 1 pence; and •redemption of the majority of the 7.25% debenture issue along with related refinancing costs reduced adjusted net assets per share by 11 pence. These factors are illustrated in the chart in Appendix 3. In the second half of the financial year growth in adjusted net assets per shareaccelerated to 22.0% from 7.7% in the first half because of significantportfolio valuation increases and profitable property sales. Triple net asset value (NNNAV) grew by 19.7% to 365 pence per share at 31 March 2006, principallydue to the factors set out above. The biggest difference between NNNAV per share and adjusted net assets per sharewas the provision for deferred tax on revaluation gains of 42 pence per share at31 March 2006. This provision is considerably higher than the equivalent figureof 21 pence per share at 31 March 2005 reflecting significant revaluation gainsin the Group's portfolio. Shareholder return KPIs In addition to the traditional net assets per share measure, the Group usesvarious other key performance indicators (KPIs). Total shareholder return was 53.9% for the year to 31 March 2006, an increase of25.7 percentage points over 2005. The Group's total shareholder return for theyear also exceeded that of the FTSE 350 real estate sector index and the FTSE250 index. Return on shareholders' equity was 32.9% versus 22.5% in 2005. This significantimprovement was driven by the valuation improvements and asset sales. Prospective individual project returns and the Group's overall return on capitalemployed (ROCE) are benchmarked against the weighted average cost of capital(currently estimated at around 6.5%). During 2006 the Group's ROCE was 28.9%,significantly greater than the cost of capital and higher than the value of17.5% for 2005. Income statement and earnings per share Gross rental income for the year was £42.2 million, a fall of £7.7 million or15.4% compared to 2005. This reduction was caused by the impact of disposalsincluding 55 Drury Lane WC2, 90 Fetter Lane EC4, 50/52 Paul Street EC2 and 22/28Eastcastle Street W1 and early termination of leases to gain vacant possessionfor the Group's development schemes. However, the Group benefited from rentreviews, lease renewals and new lettings which added £4.7 million to rentalincome during the period. Major new lettings were secured at the Met Building, W1,and 12/20 Camomile Street, EC3. Overall the estimated rental value of the portfolio grew by nearly 13%illustrating a combination of positive market factors and improving attractionof individual buildings. Reported profit before tax of £188.0 million was 127.6% higher than last year.The Group benefited from greater revaluation gains and profit on sale of assetspartly off-set by higher finance costs including exceptional expenses from thedebt refinancing. Basic earnings per share for the year was 91.7 pence, up 133.3% on 2005. Adjusted earnings per share was 10.2 pence, a 12.1% reduction compared to lastyear, the key factors behind this fall are set out in the chart in appendix 3.The lower rental income described above had the biggest single negative impactof 4.5 pence per share, this was partly mitigated by income generated from theLiverpool Victoria joint ventures (GVPs) of 2.7 pence per share and a lowerunderlying tax charge of 0.8 pence per share. The underlying finance charge washigher than last year, due to the increase in net debt following the return ofcapital in 2004. Underlying administration costs increased due to increased headcount and higher performance related bonuses. The financial performance of the GVPs in their first full year of operation wasvery encouraging. Management fees of £1.3 million (2005: £0.1 million) werereceived and the Group's share of GVP's net profit was £3.5 million (2005 : £0.1 million). Financial effects of near-term development programme The Group's near-term development and refurbishment schemes will receive verysignificant investment over the next five years. In market conditions of rentalgrowth and stable to declining investment yields, these schemes are forecast togenerate attractive returns for shareholders. Around £153 million of projectcosts are planned for schemes such as 180 Great Portland Street, 56 MortimerStreet, Titchmor, all in W1 and Tooley Street, SE1 in the period to March 2010.During the year the Group spent £25.4 million on project costs on the near-termschemes. By 2010, the Group's near-term schemes are forecast to generate incrementalrental income of £19 million. This growth in rental income from the near-termschemes taken with potential rental increases from voids and reversions is theequivalent of 49% of the Group's current rent roll. The effect of the majorschemes on rental growth is shown in the chart in Appendix 3. The Group's development programme and the disposal of selected properties whereattractive prices are available from a buoyant market will continue to impactthe Group's adjusted earnings per share. A portion of near-term earnings isbeing invested to allow shareholders to benefit from the potential of a higherportfolio valuation in future years. Financial resources and dividend Cash generated from operations was £5.8 million, down on last year largely dueto the Group investing in the second GVP and in the near-term developmentschemes. Net debt increased to £325 million, up from £266 million at 31 March2005 partly due to the timing of the acquisition of New City Court on 31 March2006. Gearing fell to around 44% at 31 March 2006 from 48% at last year end andinterest cover remained comfortable at 2.0 times. In March 2006, the Group successfully executed a refinancing programme. TheGroup's bank facilities have more than doubled in value, the margin over LIBORhas reduced by a quarter and the maturity of the main facilities has extendeduntil at least 2011. The majority of the Group's 7.25% debenture 2027 issue wasrepurchased to create significant financing and flexibility benefits. The Group's existing bank facilities have been replaced with a new five year£300 million committed facility, which can be extended with the banks'agreement, after the first and second anniversaries to 2012 and 2013respectively. The facility has been provided at an interest cost of 52.5bp overLIBOR which is significantly below the two previous facilities. Great PortlandEstates has also signed a new £110 million one year committed facility which canbe extended for a further year at the Group's option without the need forfurther bank consent. We have purchased £62 million nominal or 66% of the Group's outstanding issue ofits 7.25% debenture stock 2027 at a total cost (before accrued interest) of £88million. £32 million nominal now remains outstanding, out of an original issuesize of £100 million. The cost of the redemption premium on the buy back of the debentures and thewrite off of the issue and other costs was the equivalent of £27 million or 11pence per share after tax (of which 10 pence per share relates to the debenturepremium). Since the beginning of 2006, swap rates have materially increased and there is arisk that UK interest rates will rise so the Group executed a combination ofinterest rate swaps and caps to mitigate against interest rate risk. The Group'sTreasury Policy includes a target to maintain floating rate interest exposure at20-40% of the expected total and to spread the maturity profile of itsfinancing. The Board has declared a final dividend of 7.33 pence making a total dividend of11 pence per share for the year, a rise of 2.3% compared to the same time lastyear. The final dividend will be paid on 11 July 2006. Taxation and possible REIT conversion No corporation tax is payable for the current year due to the tax relief gainedfrom the debenture buy back. The Group's underlying effective tax rate for 2006was around 8% but the Group's future tax paying position will be subject topotential conversion into a REIT. The UK government has announced a favourable REIT framework for UK listed realestate companies. The Board believes Great Portland Estates could convert to aREIT without restricting its development business and is reviewing how thischange could benefit investors. A definitive statement on conversion will bemade in the second half of 2006. Outlook 2006 was a strong year for the Group - our Total Property Return of 29.7% beat the IPD Central London return of 24.8% and the Total Shareholder Return was 53.9%, outperforming the FTSE 250 Index by a margin of 12.4 percentage points. With London's economy expanding at both a healthy and steady rate and occupational markets, particularly in the West End, positioned for a growth phase, the conditionsare in place for further healthy returns. Great Portland Estates is well set to take advantage of this set ofcircumstances: •we have a near-term development programme that is already producing significant returns; •we have a growing medium and longer-term development programme, augmented by recent acquisitions; •our focused asset management continues to maintain a virtually fully let portfolio as well as create real value through asset restructuring; •our finances are both low cost and flexible following our most recent round of restructuring; and •our teams are working well together to unearth further opportunities for value enhancement. We are, therefore, confident that we will continue to generate attractivereturns for our shareholders.Portfolio statistics Rental income At 31 March 2006------------------------------------------------------------------------------------- Five Reversionary Five year year potential Total Rent reversionary rental beyond five rental roll potential values years values £m £m £m £m £m------------------------------------------------------------------------------------- London North of Oxford Office 18.4 1.8 20.2 - 20.2 Street Retail 3.6 0.3 3.9 - 3.9 Rest of West End Office 6.9 0.6 7.5 (0.1) 7.4 Retail 5.4 0.4 5.8 - 5.8------------------------------------------------------------------------------------- Total West End 34.3 3.1 37.4 (0.1) 37.3 City and Office 12.1 0.1 12.2 (0.5) 11.7 Southwark Retail 0.3 - 0.3 0.6 0.9-------------------------------------------------------------------------------------Total let portfolio 46.7 3.2 49.9 - 49.9------------------------------------------------------------------------------ Voids 1.1Premises under refurbishment 12.5-------------------------------------------------------------------------------------Total portfolio 63.5------------------------------------------------------------------------------------- Joint venture rental income -----------------------------------------------------------------------------------Let portfolio Office 3.5 0.1 3.6 (0.1) 3.5 Retail 6.1 0.7 6.8 0.9 7.7-----------------------------------------------------------------------------------Total portfolio 9.6 0.8 10.4 0.8 11.2-----------------------------------------------------------------------------------GPE's share 4.8 0.4 5.2 0.4 5.6----------------------------------------------------------------------------------- Rent roll security, lease lengths and voids At 31 March 2006------------------------------------------------------------------------------------- Rent roll Weighted secure average for five lease years length Voids % years %-------------------------------------------------------------------------------------London North of Oxford Street Office 26.2 4.0 2.6 Retail 65.6 9.8 - Rest of West End Office 43.3 6.0 - Retail 73.3 11.6 - Total West End 41.6 6.2 1.6 City and Southwark Office 27.7 4.9 3.1 Retail 25.9 9.8 -Total let portfolio 37.9 5.9 1.9Joint venture 69.5 10.5 17.9------------------------------------------------------------------------------------- Rental values and yields At 31 March 2006---------------------------------------------------------------------------------- True Average Average Initial Equivalent rent ERV yield yield £psf £psf % %---------------------------------------------------------------------------------- London North of Oxford Office 30 35 3.9 5.3 Street Retail 25 26 4.6 5.3 Rest of West End Office 33 39 4.5 4.9 Retail 85 91 5.2 5.2 Total West End 33 37 4.2 5.2 City and Southwark Office 28 26 5.2 5.6 Retail 9 26 3.4 6.8Total let portfolio 31 34 4.5 5.3Joint venture 42 50 3.6 4.9---------------------------------------------------------------------------------- Analysis of total rental values Lease expiries £m %Rent roll, rent reviews and lease renewals 49.9 Less than 5 years 62Under refurbishment 12.5 5 to 10 years 27Voids 1.1 10 to 15 years 4 ---- 63.5 Over 15 years 7 ---- --- 100 --- Group Income StatementFor the year ended 31 March 2006 2006 2005* Notes £m £m---------------------------------------------------------------------------------Rental income 2 44.5 51.6Service charge income 5.0 5.8Service charge expenses (6.3) (6.7) (1.3) (0.9)Other property expenses (2.2) (1.6)---------------------------------------------------------------------------------Net rental and related income 41.0 49.1Profit on disposal of investment property 14.8 10.1Net valuation gain on property portfolio 8 171.3 48.4Share of profit on joint ventures 10 16.4 9.3Administration expenses 3 (10.6) (10.7)---------------------------------------------------------------------------------Operating profit before financing costs 232.9 106.2Finance income 4 0.8 2.2Finance costs 5 (18.2) (18.9)Premium on redemption of interest-bearing loans and borrowings (27.5) (6.9)---------------------------------------------------------------------------------Profit before tax 188.0 82.6Tax 6 (39.7) (14.0)---------------------------------------------------------------------------------Profit for the year 18 148.3 68.6---------------------------------------------------------------------------------Basic earnings per share 7 91.7p 39.3p---------------------------------------------------------------------------------Diluted earnings per share 7 84.1p 37.7p----------------------------------------------------------------------------------All results are derived from continuing operations.*Restated under IFRS (see note 23). Group Balance SheetAt 31 March 2006 2006 2005* Notes £m £m---------------------------------------------------------------------------------Non-current assetsInvestment property 8 965.1 720.2Property, plant and equipment 9 61.0 93.3Investment in joint ventures 10 72.4 42.6 1,098.5 856.1--------------------------------------------------------------------------------- Current assetsTrade and other receivables 11 4.5 5.3Cash and cash equivalents 10.3 31.9--------------------------------------------------------------------------------- 14.8 37.2---------------------------------------------------------------------------------Total assets 1,113.3 893.3--------------------------------------------------------------------------------- Current liabilitiesTrade and other payables 12 29.6 25.3Income tax payable 0.4 1.6Interest-bearing loans and borrowings 13 110.0 ---------------------------------------------------------------------------------- 140.0 26.9--------------------------------------------------------------------------------- Non-current liabilitiesInterest-bearing loans and borrowings 13 225.7 297.6Obligations under finance leases 14 8.5 9.1Deferred tax 15 83.7 41.6Pension liability 22 0.7 2.1--------------------------------------------------------------------------------- 318.6 350.4---------------------------------------------------------------------------------Total liabilities 458.6 377.3--------------------------------------------------------------------------------- Net assets 654.7 516.0--------------------------------------------------------------------------------- EquityShare capital 16 20.4 20.3Share premium account 17 15.1 13.0Equity reserve 18 9.2 9.6Capital redemption reserve 18 16.4 16.4Revaluation reserve 18 8.1 12.6Retained earnings 18 587.3 446.3Investment in own shares 19 (1.8) (2.2)----------------------------------------------------------------------------------Equity shareholders' funds 654.7 516.0----------------------------------------------------------------------------------*Restated under IFRS (see note 23). Group Statement of Cash FlowsFor the year ended 31 March 2006 2006 2005* Notes £m £m--------------------------------------------------------------------------------Operating activitiesNet operating profit before financing costs 232.9 106.2Adjustments for non-cash items 20 (202.5) (69.7)(Increase)/decrease in receivables (0.2) 0.1Increase in payables 3.2 0.3Purchase and development of property (131.4) (93.7)Purchase of fixed assets (1.8) -Sale of properties 121.2 119.8Purchase of interests in joint ventures (15.6) (5.9)--------------------------------------------------------------------------------Cash generated from operations 5.8 57.1Interest received 0.8 2.9Interest paid (21.1) (22.4)Tax paid in respect of prior years (1.5) (0.2)--------------------------------------------------------------------------------Cash flows from operating activities (16.0) 37.4-------------------------------------------------------------------------------- Financing activitiesCapital reduction - (101.5)Receipts from capital reduction of own shares - 0.8Redemption of loans (89.1) (44.2)Borrowings drawn 156.0 55.0Borrowings repaid (55.0) (25.0)Loan to joint venture - (9.5)Equity dividends paid (17.5) (19.9)--------------------------------------------------------------------------------Cash flows from financing activities (5.6) (144.3)--------------------------------------------------------------------------------Net decrease in cash and cash equivalents (21.6) (106.9)Cash and cash equivalents at 1 April 31.9 138.8--------------------------------------------------------------------------------Cash and cash equivalents at balance sheet date 10.3 31.9--------------------------------------------------------------------------------*Restated under IFRS (see note 23). Group Statement of Recognised Income and ExpenseFor the year ended 31 March 2006 2006 2005* £m £m--------------------------------------------------------------------------------Revaluation of development properties 7.0 17.2Deferred tax on development properties recognised (2.1) (6.0)directly in equityActuarial gains on defined benefit scheme net of deferred tax 0.8 1.4--------------------------------------------------------------------------------Net gain recognised directly in equity 5.7 12.6Profit for the year 148.3 68.6--------------------------------------------------------------------------------Total recognised income and expense for the year 154.0 81.2-------------------------------------------------------------------------------- Group Reconciliation of Other Movements in EquityFor the year ended 31 March 2006 2006 2005* £m £m--------------------------------------------------------------------------------Opening equity shareholders' funds:As previously reported 516.0 561.2Effect of adopting IFRS (see note 23) - (5.8)--------------------------------------------------------------------------------Opening equity shareholders' funds restated 516.0 555.4Total recognised income and expense for the year 154.0 81.2Capital reduction - (101.5)Conversion of convertible bond 2.1 -Receipt from capital reduction in own shares - 0.8Deferred tax on convertible bonds (0.3) (0.3)Employee long-term incentive plan 0.4 0.3Dividends (17.5) (19.9)--------------------------------------------------------------------------------Closing equity shareholders' funds 654.7 516.0--------------------------------------------------------------------------------*Restated under IFRS (see note 23). Notes forming part of the Group Financial Statements 1 Accounting Policies Basis of Preparation While the financial information included in this preliminary announcementhas been computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company expects to publish full financial statements,that comply with IFRS in June 2006. The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2006 or 2005, but is derived from those accounts. Statutory accounts for 2005 have been delivered to the Registrar of Companies and those for 2006 will be delivered following the company's annual general meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under s. 237.2 or (3) Companies Act 1985. The statutory financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) for the first time. The disclosuresrequired by IFRS 1 concerning the transition from UK GAAP to IFRSs are given innote 23. The statutory financial statements have also been prepared in accordance withIFRSs and interpretations adopted for use in the European Union and thereforecomply with Article 4 of the EU IAS Regulation. The statutory financial statements have been prepared on the historical cost basis, except for the revaluation of properties and pension liabilities. In the process of applying the Group's accounting policies, management isrequired to make judgements, estimates and assumptions that may affect thefinancial statements. Management believes that the judgments made in thepreparation of the financial statements are reasonable. However, actual outcomesmay differ from those anticipated. The principal accounting policies adopted areset out below. Basis of Consolidation The Group financial statements consolidate the financial statements of theCompany and all its subsidiary undertakings for the year ended 31 March 2006. Rent Receivable This comprises rental income and premiums on lease surrenders on investmentproperties for the year, exclusive of service charges receivable. Lease Incentives Lease incentives including rent-free periods and payments to tenants, areallocated to the income statement over the lease term. The value of resultingaccrued rental income is included within the respective property. Other Property Expenses Irrecoverable running costs directly attributable to specifc properties withinthe Group's portfolio are charged to the income statement as other propertyexpenses. Costs incurred in the improvement of the portfolio which, in theopinion of the directors, are not of a capital nature are written off to theincome statement as incurred. Administration Expenses Costs not directly attributable to individual properties are treated asadministration expenses. Share-based Payment The cost of granting share-based payments to employees and directors isrecognised within administration expenses in the income statement. The Group hasused the Stochastic model to value the grants which is dependent on factorsincluding the share price, expected volatility and vesting period and theresulting fair value is amortised through the income statement over the vestingperiod. The charge is reversed if it is likely that any non-market basedcriteria will not be met. Investment Properties Investment properties, including those under development, are professionallyvalued each year, on a Market Value basis, and any surpluses or defcits arisingare taken to the income statement. Disposals of properties are recognised wherecontracts have been unconditionally exchanged during the accounting period andthe significant risks and rewards of ownership of the property have beentransferred to the purchaser. Depreciation In accordance with IAS 40 "Investment Property", no depreciation is provided inrespect of freehold investment properties and leasehold investment propertieswith over 20 years to run. Depreciation is provided on plant and equipment, at rates calculated to writeoff the cost, less estimated residual value based on prices prevailing at thedate of acquisition of each asset evenly over its expected useful life, asfollows: Fixtures and fittings - over five yearsLeasehold improvements - over the term of the lease. Development Properties Development properties are carried in property, plant and equipment and areprofessionally valued each year, on a Market Value basis, and any surplusesarising are taken to the revaluation reserve with any deficits below cost takento the income statement. A development property is one purchased for thepurposes of development, redevelopment or substantial refurbishment withrelatively little, or short-term, income whether planning permission exists oris still to be granted. All directly attributable costs of bringing a propertyto a condition suitable for letting are capitalised into the cost of theproperty. Once development is concluded, the property is transferred toinvestment property. Any cumulative revaluation reserve in respect of thatproperty is transferred to retained earnings. Joint Ventures Joint ventures are accounted for under the equity method: the Group balancesheet contains the Group's share of the net assets of its joint ventures.Long-term loans owed to the Group by joint ventures are included withininvestments. The Group's share of joint ventures' profit is included in a singleline in the Group income statement. Deferred Taxation Deferred tax is provided in full on temporary differences between the tax baseof an asset or liability and its carrying amount in the balance sheet. The Grouprecognises deferred tax in respect of property revaluations on the basis thattheir book value is realised through the sale of individual properties givingrise to capital gains. Such capital gains are mitigated by the availability ofindexation and it has been assumed that capital allowances claimed by the Groupto date will be retained on sale. The directors consider this to be the mostappropriate basis for the calculation. Deferred tax assets are recognised whenit is probable that taxable profits will be available against which the deferredtax asset can be utilised. Pension Benefits The Group contributes to a defined benefit pension plan which is funded withassets held separately from those of the Group. The full value of the net assetsor liabilities of the pension fund is brought on to the balance sheet at eachbalance sheet date. Actuarial gains and losses are taken to the Statement ofRecognised Income and Expense, all other movements are taken to the incomestatement. Capitalisation of Interest Interest associated with direct expenditure on investment properties underdevelopment and development properties is capitalised. Direct expenditureincludes the purchase cost of a site or property for development properties, butdoes not include the original book cost of investment property underdevelopment. Interest is capitalised from the start of the development workuntil the date of practical completion. The rate used is the Group's pre-taxweighted average cost of borrowings or, if appropriate, the rate on specificassociated borrowings. Financial Instruments The Group's derivatives are measured at fair value in the balance sheet. To theextent that a derivative provides an effective cash flow hedge against theGroup's underlying exposure the movements in the fair value of the hedge aretaken to equity. To the extent that the derivative does not effectively hedge the underlyingexposure the movement in the fair value of the hedge is taken to the incomestatement. Convertible Bonds Convertible Bonds are partly carried as debt, based on the net present value offuture cash flows and prevailing interest rates at the time of issue, and thebalance carried as equity within an equity reserve. Over the term of the loan,the debt is increased to its nominal value by charges to the income statement. Head Leases The present value of future ground rents is added to the carrying value of aleasehold investment property and to long-term liabilities. On payment of aground rent virtually all of the cost is charged to the income statement,principally as interest payable, and the balance reduces the liability; an equalreduction to the asset's valuation is charged to the income statement. Tenant Leases Management have considered the potential transfer of risks and rewards ofownership in accordance with IAS 17 "Leases" for all properties leased totenants and in their judgement have determined that all such leases areoperating leases. Segmental Analysis The Group has only one reportable segment on the basis that all of its revenueis generated from investment properties located in central London; accordinglyno segmental analysis is presented. Construction Contracts Where the outcome of a construction contract can be estimated reliably, revenueand costs are recognised by reference to the stage of completion of the contractat the balance sheet date. This is normally measured as the proportion thatcontract costs incurred for work performed bear to the estimated total contractcosts. Variations in contract work, claims and incentive payments are includedto the extent that they have been agreed with the client. Where the outcome of a construction contract cannot be estimated reliably,contract revenue is recognised to the extent of contract costs incurred that itis probable will be recoverable. Contract costs are recognised as expenses inthe period in which they are incurred. When it is probable that total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately. 2006 20052 Rental Income £m £m-----------------------------------------------------------------------------------Gross rental income 42.2 49.9Amortisation of capitalised lease incentives 2.6 2.0Ground rents payable (0.3) (0.3)----------------------------------------------------------------------------------- 44.5 51.6----------------------------------------------------------------------------------- 2006 20053 Administration Expenses £m £m-----------------------------------------------------------------------------------Administration expensesEmployee costs 8.2 7.2Other 2.4 2.7Non-recurring itemsCost of capital reduction - 0.8----------------------------------------------------------------------------------- 10.6 10.7----------------------------------------------------------------------------------- Included within administration expenses are fees charged by the auditorscomprising audit fees of £0.1 million (2005: £0.1 million) and non-audit fees of£0.1 million (2005: £0.2 million) and depreciation of £0.1 million (£2005: £nil). Employee Information The average number of employees of the Group, including directors, was: 2006 2005 Number Number--------------------------------------------------------------------------------------Head office and administration 65 56 Included within administration expenses are staff costs, including those ofdirectors, comprising: 2006 2005 £m £m------------------------------------------------------------------------------------Wages and salaries 6.6 5.9Social security costs 0.8 0.7Other pension costs 1.0 0.7------------------------------------------------------------------------------------ 8.4 7.3Less: recovered through service charge (0.2) (0.1)------------------------------------------------------------------------------------- 8.2 7.2------------------------------------------------------------------------------------ The directors received fees of £323,000 (2005: £324,000) and other emoluments of£2,067,000 (2005: £1,824,000), pension contributions have been made fordirectors of £228,000 (2005: £173,000). 2006 20054 Finance Income £m £m-----------------------------------------------------------------------------------Interest on short-term deposits 0.5 1.9Other 0.3 0.3----------------------------------------------------------------------------------- 0.8 2.2----------------------------------------------------------------------------------- 2006 20055 Finance Costs £m £m-----------------------------------------------------------------------------------Interest on bank overdrafts and loans 3.1 4.4Interest on debentures 11.8 12.8Interest on convertible bonds 4.1 4.2Interest on loan notes 0.2 0.2Interest on obligations under finance leases 0.7 0.8Other interest 0.7 ------------------------------------------------------------------------------------Gross finance costs 20.6 22.4-----------------------------------------------------------------------------------Less: capitalised interest (2.4) (2.0)------------------------------------------------------------------------------------ 18.2 20.4Fair value gain on interest rate swaps - (1.5)----------------------------------------------------------------------------------- 18.2 18.9----------------------------------------------------------------------------------- 2006 20056 Tax £m £mCurrent taxUK corporation tax - -Tax under provided in previous years 0.3 ------------------------------------------------------------------------------------Total current tax 0.3 -Deferred tax 39.4 14.0-----------------------------------------------------------------------------------Tax charge for the year 39.7 14.0----------------------------------------------------------------------------------- The difference between the standard rate of tax and the effective rate of taxarises from the items set out below: 2006 2005 £m £m-----------------------------------------------------------------------------------Profit before tax 188.0 82.6-----------------------------------------------------------------------------------Tax on profit at standard rate of 30% 56.4 24.8Expenses not deductible for tax purposes 0.7 0.6Accelerated capital allowances 2.5 (3.5)Receipts taxable as chargeable gains covered by capital losses (0.9) (0.3)Sale of investment properties 1.5 (3.0)Previous years' corporation tax 0.3 -Pension liabilities - 0.3Property revaluations (20.4) (4.0)Accounting profits arising in the year not taxable (0.1) (0.8)Other (0.3) (0.1)------------------------------------------------------------------------------------Tax charge for the year 39.7 14.0------------------------------------------------------------------------------------ During the year, £2.4 million (2005: £6.6 million) of tax was charged directlyto equity. This charge related to deferred tax in respect of revaluations ofproperty, plant and equipment, and pension liabilities. 7 Earnings per Share and Net Assets per Share In January 2006 the European Real Estate Association (EPRA) issued guidance forthe calculation of net asset per share and earnings per share. Thesecalculations have been adopted by the Group and are set out below: Weighted average number of ordinary shares 2006 2005 Number Number of shares of shares----------------------------------------------------------------------------------------Issued ordinary share capital at 1 April 162,474,812 203,093,515Conversion of convertible bonds 256,245 -Effect of capital reduction - (27,264,609)Investment in own shares (1,115,628) (1,115,628)----------------------------------------------------------------------------------------Weighted average number of ordinary shares 161,615,429 174,713,278----------------------------------------------------------------------------------------Effect of conversion of convertible bond 18,453,432 16,197,967----------------------------------------------------------------------------------------Diluted weighted average number of ordinary shares 180,068,861 190,911,245---------------------------------------------------------------------------------------- Basic, diluted and adjusted earnings per share 2006 2006 2005 2005 Profit Earnings Profit Earnings after tax per share after tax per share £m pence £m pence-----------------------------------------------------------------------------------------Basic 148.3 91.7 68.6 39.3Effect of convertible bonds 3.3 (7.6) 3.3 (1.6)------------------------------------------------------------------------------------------Diluted 151.6 84.1 71.9 37.7-----------------------------------------------------------------------------------------Deferred tax on accelerated capital allowances 4.4 2.5 - -Non-recurring items 19.3 10.7 4.7 2.5Profit on sale of investment properties (7.4) (4.1) (10.1) (5.3)Net valuation gain on property portfolio net (139.4) (77.4) (38.0) (20.0)of deferred taxNet valuation gain on joint ventures net of deferred tax (10.0) (5.6) (6.4) (3.3)------------------------------------------------------------------------------------------Adjusted 18.5 10.2 22.1 11.6----------------------------------------------------------------------------------------- Non-recurring items in the year to 31 March 2006 comprise a £27.5 million (2005:£7.7 million) premium on the redemption of interest bearing loans andborrowings, less tax relief of £8.2 million (2005: £3 million). The comparativeEPS numbers have been restated from the interim report published in November2005 to deduct the Group's investment in own shares from the weighted averagenumber of shares and for the tax treatment of the convertible bond as the IFRStax treatment has been clarified. Net assets per share 2006 2006 2006 2005 2005 2005 Net Number Net assets Net Number Net assets assets of shares per share assets of shares per share £m million pence £m million pence-------------------------------------------------------------------------------------------------------Basic 654.7 163.2 401.0 516.0 162.5 317.0Convertible bonds 53.4 18.0 (10.0) 54.3 18.7 (3.0)--------------------------------------------------------------------------------------------------------Diluted 708.1 181.2 391.0 570.3 181.2 314.0Fair value of financial (46.5) (26.0) (17.1) (9.0)--------------------------------------------------------------------------------------------------------liabilities net of taxDiluted triple net assets per 661.6 365.0 553.2 305.0shareFair value of financial liablities 46.5 26.0 17.1 9.0net of taxDeferred tax on capital allowances 7.7 4.0 3.3 2.0Deferred tax on revaluation gains 75.2 42.0 38.3 21.0-------------------------------------------------------------------------------------------------------Adjusted net assets per share 791.0 437.0 611.9 337.0------------------------------------------------------------------------------------------------------- 8 Investment Property Investment Property Freehold Leasehold Total £m £m £m---------------------------------------------------------------------------------------------Book value at 1 April 2004 467.0 256.0 723.0Cost capitalised 5.4 4.0 9.4Acquisitions 65.1 - 65.1Disposals (40.3) (87.3) (127.6)Transfer to investment property under development (14.7) (35.9) (50.6)Net valuation gain on investment property 34.9 12.1 47.0---------------------------------------------------------------------------------------------Book value at 31 March 2005 517.4 148.9 666.3---------------------------------------------------------------------------------------------Costs capitalised 20.1 0.9 21.0Acquisitions 83.8 - 83.8Purchase of freehold 17.2 (17.8) (0.6)Disposals (88.9) (9.8) (98.7)Transfer from development property 52.7 - 52.7Transfer to investment property under development (19.4) - (19.4)Net valuation gain on investment property 115.0 24.6 139.6---------------------------------------------------------------------------------------------Book value at 31 March 2006 697.9 146.8 844.7--------------------------------------------------------------------------------------------- Investment property under development Freehold Leasehold Total £m £m £m-----------------------------------------------------------------------------------------Book value at 1 April 2004 - - -Costs capitalised 0.4 - 0.4Transfer from investment property 14.7 35.9 50.6Net valuation gain on investment property 0.4 2.5 2.9-----------------------------------------------------------------------------------------Book value at 31 March 2005 15.5 38.4 53.9-----------------------------------------------------------------------------------------Costs capitalised 14.5 1.5 16.0Interest capitalised 0.3 - 0.3Transfer from investment property 19.4 - 19.4Net valuation gain on investment property 22.9 7.9 30.8-----------------------------------------------------------------------------------------Book value at 31 March 2006 72.6 47.8 120.4-----------------------------------------------------------------------------------------Total investment property 770.5 194.6 965.1----------------------------------------------------------------------------------------- Net valuation gain on investment property 170.4Add: net valuation gain reversing previous deficits below cost taken to income statement (note 9) 0.9-----------------------------------------------------------------------------------------Net valuation gain on property portfolio 171.3------------------------------------------------------------------------------------------ The investment and development properties (note 9) were valued on the basis ofMarket Value by CB Richard Ellis as at 31 March 2006 in accordance with the RICSAppraisal and Valuation Standards of the Royal Institution of CharteredSurveyors. The book value of investment properties includes £8.5 million (2005:£9.1 million) in respect of the present value of future ground rents. At 31 March 2006, properties with carrying value of £452.2 million (2005: £365.5million) were secured under first mortgage debenture stock (see note 13).Subsequent to 31 March 2006 the Group has released properties from chargeleaving £220.4 million secured. 9 Property, Plant and Equipment Leasehold Fixtures Development improvements and fittings property Total £m £m £m £mCost or valuationAt 1 April 2004 - - 34.3 34.3Acquisitions - - 27.4 27.4Costs capitalised - - 13.9 13.9Interest capitalised - - 2.0 2.0Net valuation gain taken to equity - - 17.2 17.2Net valuation deficits taken to income statement - - (1.5) (1.5)----------------------------------------------------------------------------------------------At 31 March 2005 - - 93.3 93.3---------------------------------------------------------------------------------------------Acquisitions - - 7.5 7.5Costs capitalised 1.9 0.6 8.6 11.1Interest capitalised - - 1.7 1.7Disposals - - (7.7) (7.7)Transfers to investment property - - (52.7) (52.7)Net valuation gain taken to equity - - 7.0 7.0Net valuation gain reversing previous deficits below cost taken to income statement (note 8) - - 0.9 0.9---------------------------------------------------------------------------------------------At 31 March 2006 1.9 0.6 58.6 61.1---------------------------------------------------------------------------------------------DepreciationAt 1 April 2005 - - - -Charge for the year 0.1 - - 0.1---------------------------------------------------------------------------------------------At 31 March 2006 0.1 - - 0.1--------------------------------------------------------------------------------------------- Carrying amount at 31 March 2005 - - 93.3 93.3---------------------------------------------------------------------------------------------Carrying amount at 31 March 2006 1.8 0.6 58.6 61.0--------------------------------------------------------------------------------------------- The historical cost of development properties at 31 March 2006 was £46.9 million(2005: £76.0 million). The cumulative interest capitalised in developmentproperties was £2.2 million (2005: £2.5 million). 10 Investment in Joint Ventures The Group has the following investments in joint ventures: Equity Loans Total £m £m £m------------------------------------------------------------------------------------At 1 April 2005 33.1 9.5 42.6Acquisitions 15.6 - 15.6Share of profits of joint ventures 3.5 - 3.5Share of revaluation uplift of joint ventures 12.9 - 12.9Distributions (2.2) - (2.2)-------------------------------------------------------------------------------------At 31 March 2006 62.9 9.5 72.4------------------------------------------------------------------------------------ On 19 April 2005 Great Portland Estates plc and Liverpool Victoria FriendlySociety formed a second joint venture, called the Great Victoria Partnership(No. 2), to invest in central London real estate. The Group owns a 50% share inthe partnership through a wholly-owned subsidiary. On 19 April 2005 the Groupcontributed £15.6 million of partnership equity. The investments in joint ventures comprise the following: Country 2006 2005---------------------------------------------------------------------------------The Great Victoria Partnership United Kingdom 50% 50%The Great Victoria Partnership (No. 2) United Kingdom 50% ---------------------------------------------------------------------------------- Included in the financial statements are the following items that represent theGroup's share in the assets and liabilities, revenues and expenses for the GreatVictoria Partnerships. 2006 2005 £m £m-----------------------------------------------------------------------------------Non-current assets 113.1 78.4Current assets 15.6 1.6Current liabilities (12.4) (11.2)Non-current liabilities (53.4) (35.7)------------------------------------------------------------------------------------Net assets 62.9 33.1----------------------------------------------------------------------------------- Income including revaluation uplift 19.5 10.2Expenses (3.1) (0.9)------------------------------------------------------------------------------------Net profit 16.4 9.3----------------------------------------------------------------------------------- During the year the Group received a management fee of £1.3 million from thejoint ventures which has been recognised in administration expenses. 2006 200511 Trade and Other Receivables £m £m-----------------------------------------------------------------------------------Rent receivables 0.8 1.7Prepayments and accrued income 1.2 0.9Work in progress 0.3 -Other trade receivables 2.2 2.7----------------------------------------------------------------------------------- 4.5 5.3----------------------------------------------------------------------------------- 2006 200512 Trade and Other Payables £m £m-----------------------------------------------------------------------------------Trade payables 11.6 12.2Non-trade payables and accrued expenses 18.0 13.1----------------------------------------------------------------------------------- 29.6 25.3----------------------------------------------------------------------------------- 2006 200513 Interest-bearing Loans and Borrowings £m £m-----------------------------------------------------------------------------------Non-current liabilities£32.1 million 7 1/4% debenture stock 2027 31.4 92.4£92.9 million 55 5/8% debenture stock 2029 91.9 91.95 1/4% convertible bonds 2008 53.4 54.3Bank loan 46.0 55.0Unsecured loan notes 2007 3.0 4.0----------------------------------------------------------------------------------- 225.7 297.6----------------------------------------------------------------------------------- Current liabilitiesBank loans 110.0 ------------------------------------------------------------------------------------ 335.7 297.6----------------------------------------------------------------------------------- Certain of the freehold and leasehold properties are charged to secure the firstmortgage debenture stock (see note 8). At 31 March 2005, the nominal valueoutstanding of the 71/4% Debenture Stock 2027 was £94.5 million; during the yearended 31 March 2006, £62.4 million of the stock was redeemed. The bank loanwithin non-current liabilities is unsecured, attracts a floating rate of 0.525%above LIBOR and expires in 2011. The bank loan within current liabilities isunsecured, attracts a floating rate of 0.45% above LIBOR and expires in 2007. The unsecured loan notes, which together with an associated guarantee attract afloating rate of interest of 0.275% in aggregate above LIBOR, are redeemable atthe option of the noteholder until 2007, and by the Company in 2007. The bonds,which are unsecured, are convertible by the bondholder at a price of £3.10 pershare, and redeemable by the Company at par, at any time until 2008. The amountof the convertible bonds classified as an equity reserve of £9.2 million is netof attributable transaction costs of £0.2 million. All interest-bearing loansand borrowings are in sterling. At 31 March 2006 the Group had available £257 million (2005: £180 million) ofundrawn committed bank facilities. Maturity of financial liabilities The maturity profile of the financial liabilities of the Group at 31 March 2006was as follows: 2006 2005 £m £m-----------------------------------------------------------------------------------In one year or less, or on demand 110.0 -In more than one year but not more than two years 56.4 -In more than two years but not more than three years - 58.3In more than three years but not more than four years - -In more than four years but not more than five years 46.0 55.0In more than five years 123.3 184.3----------------------------------------------------------------------------------- 335.7 297.6----------------------------------------------------------------------------------- Fair value of financial liabilities 2006 2006 2005 2005 Book value Fair value Book value Fair value £m £m £m £m-------------------------------------------------------------------------------------------Current liabilities 110.0 110.0 - -Non-current liabilities 225.7 278.5 297.6 325.2------------------------------------------------------------------------------------------- 335.7 388.5 297.6 325.2------------------------------------------------------------------------------------------- The fair values of the Group's cash and short-term deposits are not materiallydifferent from those at which they are carried in the financial statements.Market values have been used to determine the fair value of listed long-termborrowings, and interest rate swaps have been valued by reference to marketrates of interest. The market values of all other items have been calculated bydiscounting the expected future cash flows at prevailing interest rates. 14 Finance Leases Finance lease obligations in respect of the Group's leasehold properties arepayable as follows: Minimum Minimum lease lease payments Interest Principal payments Interest Principal 2006 2006 2006 2005 2005 2005-------------------------------------------------------------------------------------------------Less than one year 0.6 (0.6) - 0.7 (0.7) -Between one andfive years 2.3 (2.3) - 2.7 (2.7) -More than five years 68.8 (60.3) 8.5 77.1 (68.0) 9.1------------------------------------------------------------------------------------------------- 71.7 (63.2) 8.5 80.5 (71.4) 9.1------------------------------------------------------------------------------------------------- 15 Deferred Tax Recognised 31 March 1 April Recognised directly in 2005 in income equity 2006 £m £m £m £m------------------------------------------------------------------------------------Deferred tax liabilitiesAccelerated capital allowances 3.3 4.4 - 7.7Capitalised interest 0.7 0.7 - 1.4Property revaluations 38.3 34.8 2.1 75.2Deferred tax assetsLong-term incentive plan (0.1) (0.3) - (0.4)Pension liabilities (0.6) 0.1 0.3 (0.2)-------------------------------------------------------------------------------------Net deferred tax provision 41.6 39.7 2.4 83.7------------------------------------------------------------------------------------ Included within the deferred tax liability on property revaluations of£75.2 million is £2.9 million (2005: £2.8 million) in respect of the Group'sdeferred tax liability on properties it holds in joint ventures. Deferredtaxation associated with development property revaluations in respect ofproperty, plant and equipment is reflected directly in reserves where theunderlying property revaluations are also recognised. The Group recognisesdeferred tax assets based on forecast taxable profits. 2006 2006 2005 200516 Share Capital Number £m Number £m------------------------------------------------------------------------------------Ordinary shares of 121/2 pence eachAuthorised 550,100,752 68.8 550,100,752 68.8------------------------------------------------------------------------------------Allotted, called up and fully paid 162,474,812 20.3 203,093,515 101.5Conversion of convertible bonds 707,094 0.1 - -Capital reduction - - (40,618,703) (81.2)-------------------------------------------------------------------------------------At 31 March 163,181,906 20.4 162,474,812 20.3------------------------------------------------------------------------------------ On 30 July 2004, as part of a Court-confirmed capital reduction, the ordinaryshares of the Company were consolidated on the basis of four new shares forevery five existing ones, and their nominal value was reduced from 50 pence to1212 pence per share. 2006 200517 Share Premium £m £m-----------------------------------------------------------------------------------At 1 April 13.0 24.8Conversion of convertible bonds 2.1 -Capital reduction - (11.8)------------------------------------------------------------------------------------At 31 March 15.1 13.0----------------------------------------------------------------------------------- Capital Equity redemption Revaluation Retained reserve reserve reserve earnings18 Reserves £m £m £m £m------------------------------------------------------------------------------------------------------At 1 April 2005 9.6 16.4 12.6 446.3Profit for the year - - - 148.3Actuarial gains on defined benefit scheme - - - 1.1Deferred tax on actuarial gains on defined benefit scheme - - - (0.3)Net valuation gain taken to equity - - 7.0 -Deferred tax on net valuation gain taken to equity - - (2.1) -Transfer on completion of development property - - (8.8) 8.8Realised on disposal of development property - - (0.6) 0.6Conversion of convertible bonds (0.1) - - -Deferred tax recognised on convertible bonds (0.3) - - -Dividends to shareholders - - - (17.5)-------------------------------------------------------------------------------------------------------At 31 March 2006 9.2 16.4 8.1 587.3------------------------------------------------------------------------------------------------------ 2006 200519 Investment in Own Shares £m £m-----------------------------------------------------------------------------------At 1 April 2.2 2.5Employee long-term incentive plan charge (0.4) (0.3)------------------------------------------------------------------------------------At 31 March 1.8 2.2----------------------------------------------------------------------------------- The investment in the Company's own shares is held at cost and comprises1,115,628 shares held by the Great Portland Estates P.L.C. LTIP Employee ShareTrust which will vest in certain senior employees of the Group if performanceconditions are met. 2006 200520 Adjustment for non-cash movements in the Cash Flow Statement £m £m------------------------------------------------------------------------------------Net valuation gain on property portfolio (171.3) (48.4)Profit on disposal of investment properties (14.8) (10.1)Employee long-term incentive plan charge 0.4 0.3Capitalisation of lease incentives (2.6) (2.2)Share of profit on joint ventures (14.2) (9.3)------------------------------------------------------------------------------------Adjustments for non-cash items (202.5) (69.7)------------------------------------------------------------------------------------ 21 Dividends The proposed final dividend of 7.33 pence per share (2005: 7.17 pence per share)was approved by the Board on 22 May 2006 and is payable on 11 July 2006 toshareholders on the register on 2 June 2006. The dividend is not recognised as aliability at 31 March 2006. This brings the interim and final dividends for theyear ended 31 March 2006 to 11 pence per share. The 2005 final dividend of £11.6million and the 2006 interim dividend of £5.9 million were paid in the periodand are included within the Group Reconciliation of Other Movements in Equity. 22 Employee Benefits The Group contributes to a defined benefit pension plan (the "Plan"), the assetsof which are held by trustees separately from the assets of the Group. The Planhas been closed to new entrants since April 2002. The most recent actuarialvaluation of the Plan was conducted at 1 April 2005 by a qualified independentactuary using the projected unit method. The Plan was valued using the followingmain assumptions: 2006 2005 % %-----------------------------------------------------------------------------------Discount rate 5.00 5.50Expected return on Plan assets 6.28 6.28Expected rate of salary increases 3.75 5.00Future pension increases 2.75 2.75----------------------------------------------------------------------------------- The amount recognised in the balance sheet in respect of the Plan is as follows: 2006 2005 £m £m-----------------------------------------------------------------------------------Present value of unfunded obligations 15.6 14.0Fair value of Plan assets (14.9) (11.9)------------------------------------------------------------------------------------Pension liability 0.7 2.1----------------------------------------------------------------------------------- Amounts recognised as administration expenses in the income statement are asfollows: 2006 2005 £m £m-----------------------------------------------------------------------------------Current service cost 0.2 0.3Interest on obligation 0.8 0.8Expected return on Plan assets (0.7) (0.7)Past service cost 0.1 ------------------------------------------------------------------------------------ 0.4 0.4----------------------------------------------------------------------------------- Actuarial gain recognised immediately in the statement of recognised income and expense 1.1 1.4 Changes in the present value of the pension obligation are as follows: 2006 2005 £m £m-----------------------------------------------------------------------------------Defined benefit obligation at 1 April 14.0 14.0Service cost 0.2 0.3Interest cost 0.8 0.8Past service cost 0.1 -Actuarial gain 0.9 (0.6)Benefits paid (0.4) (0.5)------------------------------------------------------------------------------------Defined benefit obligation at 31 March 15.6 14.0-----------------------------------------------------------------------------------Changes to the fair value of the Plan assets are as follows:Fair value of Plan assets at 1 April 11.9 10.7Expected return 0.7 0.7Actuarial gains 2.0 0.6Contributions 0.7 0.4Benefits paid (0.4) (0.5)------------------------------------------------------------------------------------Fair value of Plan assets at 31 March 14.9 11.9-----------------------------------------------------------------------------------Net liability 0.7 2.1----------------------------------------------------------------------------------- The fair value of the Plan assets at the balance sheet date is analysed asfollows: 2006 2005 £m £m-----------------------------------------------------------------------------------Equities 6.0 8.1Bonds 8.9 3.8----------------------------------------------------------------------------------- 14.9 11.9----------------------------------------------------------------------------------- The history of the Plan for the current and prior year is as follows: 2006 2005----------------------------------------------------------------------------------------Difference between expected and actual return on the scheme assetsassets:Amount £m 2.0 0.6Percentage of scheme assets 13% 5%Experience gains and losses on scheme liabilities:Amount £m 0.5 0.6Percentage of scheme assets 3% 4%Total gains and losses:Amount £m 1.1 1.4Percentage of scheme assets 7% 9%---------------------------------------------------------------------------------------- The Group expects to contribute approximately 20.4% of members' pensionablesalaries plus £0.4 million to the Plan in 2007. 23 Explanation of the transition to IFRS This is the first year that the Group has presented its financial statementsunder IFRS. The last financial statements presented under UK GAAP were for theyear ended 31 March 2005. As IFRS comparative figures must be prepared for theyear ended 31 March 2005, the date of transition to IFRS was 1 April 2004.Reconciliation of equity at 1 April 2004 and 31 March 2005 and profit for theyear ended 31 March 2005 reported under IFRS and UK GAAP were published in theGroup's Interim Accounts and are also available on the Group's website,www.gpe.co.uk. IFRS 1 "First-Time Adoption of International Financial Reporting Standards"requires an explanation of major adjustments to cash flows under IFRS. Whilstthe format of the cash flow statement is different from UK GAAP, there are nomaterial changes to Group cash flows. Reconciliation of equity reported under UK GAAP to equity under IFRS 2005 2004 Notes £m £m---------------------------------------------------------------------------------------------Equity shareholders' funds under UK GAAP 543.3 561.2IFRS adjustments:Obligations under finance leases a (9.1) (12.7)Leasehold property interests a 9.1 12.7Exclusion of dividend b 11.6 14.1Recognition of pension deficit c (3.8) (4.6)Deferred tax on property revaluations d (38.3) (19.1)Convertible bond e 3.2 4.2Fair value of interest rate swaps - (0.4)----------------------------------------------------------------------------------------------Net IFRS adjustments (27.3) (5.8)----------------------------------------------------------------------------------------------Equity shareholders' funds under IFRS 516.0 555.4--------------------------------------------------------------------------------------------- Reconciliation of profit reported under UK GAAP to profit under IFRS 2005 Notes £m------------------------------------------------------------------------------------Profit for the period under UK GAAP 25.2IFRS adjustments:Revaluation gains on investment properties g 48.4Revaluation gains on joint ventures g 9.3Deferred tax on property revaluations d (13.3)Employee long-term incentive plan charge i (0.2)Spreading of lease incentives h -Convertible bond e (0.7)Change in fair value of interest rate swaps f 0.3Movement in pension deficit c (0.4)-------------------------------------------------------------------------------------Net IFRS adjustments 43.4------------------------------------------------------------------------------------Profit for the year under IFRS 68.6------------------------------------------------------------------------------------ UK GAAP referred to in the above tables refers to UK GAAP in force at 31 March2005. a The present value of future ground rents is added to the carrying value of aleasehold investment property and long-term liabilities. On payment of a groundrent virtually all of the cost is charged to the income statement, principallyas interest payable, and the balance reduces the liability; an equal reductionto the asset's valuation is charged to the income statement. b A proposed dividend is not accrued, but is accounted for only when approved.Dividends are not shown on the face of the income statement. c The net liabilities of the pension fund and their associated deferred tax arebrought onto the Group balance sheet, and any movements therein are shown as acost or income in the income statement, save for actuarial gains or losses,which are taken directly to retained earnings. d Contingent capital gains tax on investment property, based on the tax whichmay arise on the sale of the property, is included on the balance sheet as adeferred tax provision, and any movement from year to year is charged to theincome statement within the tax charge. e A convertible bond is partly carried as debt, based on the net present valueof future cash flows and prevailing interest rates at the time of issue, and thebalance carried as equity within an equity reserve. Over the term on the loan,the liability is increased to the nominal value of the debt by charges to theincome statement. f The fair value of all derivatives is recorded in the balance sheet. Themovement in the fair value is taken to reserves if the hedge is effective, orotherwise to the income statement. g Revaluation surpluses or deficits of investment property and investmentproperty under development are taken to the income statement. Revaluation gainsand losses on development properties are taken to the revaluation reserve,unless the valuation falls below cost, in which case they are charged to theincome statement; any subsequent reversal of this loss will be credited to theincome statement. h Rent free periods are amortised over the lease term. The associated debtor isadded to the cost of investment property rather that being carried separately,but as it does not add to the value of the property, it reduces the valuationsurplus taken through the income statement. i Under IFRS the estimated fair value of share awards needs to be assessed atgrant and charged to the income statement with any associated deferred tax overthe performance period, as adjusted by changes in the number of shares expectedto vest at the end of the vesting period. Glossary Adjusted earnings per share Earnings per share adjusted to exclude non-recurring items, profits or losses onsales of investment properties and deferred tax on capital allowances andproperty revaluations on a diluted basis. Adjusted net assets per share NAV adjusted to exclude deferred tax on capital allowances and propertyrevaluations on a diluted basis. Diluted figures Reported amounts adjusted to include the effects of potential shares issuableunder the convertible bond. Earnings per share (EPS) Profit after tax divided by the weighted average number of ordinary shares inissue. Triple net asset value (NNNAV) NAV adjusted to include the fair value of the Group's financial liabilities on adiluted basis. EPRA adjustments Standard calculation methods for adjusted EPS and adjusted NAV as set out by theEuropean Public Real Estate Association (EPRA) in their January 2006 BestPractice and Policy Recommendations. Estimated rental value (ERV) The market rental value of lettable space as estimated by the Company's valuersat each balance sheet date. Net initial yield Annual net rents on investment properties as a percentage of the investmentproperty valuation. IPD The Investment Property Databank Limited (IPD) is a company that produces anindependent benchmark of property returns. Like-for-like portfolio Properties that have been held for the whole of the period of account. Market value The amount as estimated by the Company's valuers for which a property shouldexchange on the date of valuation between a willing buyer and a willing sellerin an arms-length transaction after proper marketing wherein the parties hadeach acted knowledgeably, prudently and without compulsion. In line with marketpractice values, are stared net of purchasers costs. Net assets per share or net asset value (NAV) Equity shareholders' funds dividend by the number of ordinary shares at thebalance sheet. Net gearing Total borrowings less short-term deposits and cash as a percentage of equityshareholders' funds. Portfolio internal rate of return (IRR) The rate of return that if applied as a discount rate and applied to theprojected cash flows from the portfolio would result in a net present value ofzero. REIT Real Estate Investment Trust. Rent roll The annual contracted rental income. Return on capital employed (ROCE) Return on capital employed is measured as profit before financing costs, plusrevaluation surplus on development property by the opening gross capital. Return on shareholders' equity The growth in the adjusted diluted net assets per share plus dividends per sharefor the period expressed as a percentage of the adjusted net assets per share at thebeginning of the period. Reversionary or under-rented The percentage by which ERV exceeds rents passing, together with the estimatedrental value of vacant space. Reversionary yield The anticipated yield, which the initial yield will rise to once the rentreaches the ERV. Total property return (TPR) Capital growth in the like-for-like portfolio plus net rental income derivesfrom holding these properties plus profit on sale of disposables expressed as apercentage return on the period's opening value. Total shareholder return (TSR) The growth in the ordinary share price as quoted on the London Stock Exchangeplus dividends per share received for the period expressed as a percentage ofthe share price at the beginning of the period. True equivalent yield The constant capitalisation rate which, if applied to all cash flows from aninvestment property, including current rent, reversions to current market rentand such items such as voids and expenditures, equates to the market value.Assumes rent is received quarterly in advance. Weighted average cost of capital (WACC) The weighted average pre-tax cost of the Group's debt and notional cost of the Group'sequity used as a benchmark to assess investment returns. Weighted average unexpired lease term (WAULT) The weighted average unexpired lease term expressed in years. Voids The element of a property which is unoccupied but available for letting, usuallyexpressed as the ERV of the void space divided by the existing rent roll plusthe ERV of the void space. This information is provided by RNS The company news service from the London Stock Exchange

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