10th Mar 2006 07:00
Embargoed: 10 March 2006, 07:00hrs CLS Holdings Plc PRELIMINARY FINANCIAL RESULTS FOR THE YEAR 31 DECEMBER 2005 Financial Highlights - Added value to shareholders 20.1 per cent based on increase in adjusted* NAV per share and distributions in the year (19.7 per cent based on statutory NAV) - Adjusted Net Asset Value (NAV) per share 606.9 pence, up 16.2 per cent (Statutory NAV per share 441.9 pence, up 14.4 per cent) - Profit before tax ‚£84.7 million, up 40.9 per cent, including ‚£67.2 million of fair value gains on property - Intended distribution by way of a tender offer buy-back of 1 in 42 shares at 600 pence being 14.3 pence per share making a total distribution to shareholders of 22.8 pence per share for the year, up 18.1 per cent - Property portfolio valued at ‚£1.1 billion, up 7.2 per cent - Net rental income ‚£69.3 million, up 2.5 per cent - Year end cash ‚£118.2 million up 105.9 per cent (December 2004: ‚£57.4 million) 2005 Results at a glance PROFITS AND LOSSES SHOWN IN THE INCOME STATEMENT ‚£m ‚£m 2005 2004 Profit on letting of investment properties 23.1 24.0 Profit on sale of investment properties 1.9 0.5 Deficit arising from transfer in part interest of JV+ (1.1) - Core property profit 23.9 24.5 Equity investment division losses (3.1) (1.6) Non-recurring legal costs in respect of JV+ (3.3) - Underlying profit* 17.5 22.9 Fair value gains on investment properties 67.2 37.2 Profit before taxation 84.7 60.1 Current tax (1.3) (0.6) Deferred tax (21.9) (16.1) Loss on discontinued operations (sale of cable companies)++ (6.2) (4.0) Profit for the year 55.3 39.4 EQUITY MOVEMENTS SHOWN IN THE BALANCE SHEET Foreign exchange translation loss (7.7) 0.5 Fair value loss on listed investments (10.4) 12.0 Tender offer buy-backs and market purchases (19.0) (15.8) Acquisition of minority interest 1.3 - Other 2.6 (2.9) Balance sheet reserve movements in the year (33.2) (6.2) Change in net assets during the year 21.9 33.2 Net assets at 1 January 2005 (restated under IFRS) 331.9 298.7 Net assets at 31 December 2005 353.8 331.9 + Two non-recurring items reduced underlying profit in 2005, these were atransfer of interest in our joint venture at New London Bridge House causing adeficit of ‚£1.1 million and non-recurring legal fees to defend our shareholdingat our other joint venture, London Bridge Tower. The underlying profit fromongoing operations was therefore ‚£21.9 million.++ In early January 2006 further costs relating to the disposal of WightCableNorth were incurred, amounting to ‚£2.1 million. We have been advised by ourauditors that the prescriptive nature of the IFRS Accounting Standards preventus from providing for these costs in 2005 and they have therefore been expensedin 2006. Key statistics and other financial information 31 Dec 31 Dec 2005 2004 INCOME STATEMENT Adjusted earnings per share on continuing 19.7 p 25.9 p Down % operations * ++ 23.9 Earnings per share 67.5 p 47.0 p Up 43.6 % Net rental income ‚£69.3 m ‚£67.6 m Up 2.5 % Operating profit (excluding fair value gains ‚£54.9 m ‚£58.6 m Down % on property) 6.3 Net interest payable ‚£36.3 m ‚£34.1 m Up 6.5 % Underlying profit (excluding fair value gains ‚£17.5 m ‚£22.9 m Down % on property) 23.6 Fair value gains on investment property ‚£67.2 m ‚£37.2 m Up 80.6 % Profit before taxation ‚£84.7 m ‚£60.1 m Up 40.9 % Profit for year ‚£55.3 m ‚£39.4 m Up 40.4 % BALANCE SHEET Adjusted NAV per share* 606.9 p 522.3 p Up 16.2 % Statutory NAV per share 441.9 p 386.2 p Up 14.4 % Distribution per share from tender offer 22.8 p 19.3 p Up 18.1 %buy-backs Property portfolio ‚£1,096.4m ‚£1,022.5m Up 7.2 % Net asset value ‚£353.8 m ‚£323.8 m Up 9.3 % Cash ‚£118.2 m ‚£57.4 m Up % 105.9 Adjusted gearing* 125.2 % 133.8 % Down % 8.6 Statutory gearing 171.9 % 181.0 % Down % 9.1 Adjusted solidity* 38.7 % 39.0 % Down % 0.3 Statutory Solidity (net assets as a ratio of 27.9 % 28.5 % Down %gross assets) 0.6 Shares in issue (000's) - excluding treasury 80,058 83,853 Down %shares 4.5 IAS 32 fair value adjustment after tax 34.6 p 27.8 p Up 24.5 % * IAS12 requires that a deferred tax provision be made in respect of thepotential gain that would arise if properties were to be sold at valuation andfor the potential clawback of UK capital allowances to the extent that theseamounts are not covered by available tax losses. The calculation of thisdeferred tax liability has been carried out on the basis that the revaluationgains on the properties will be realised through receipt of net rents for theproperties owned. As such the amount provided represents the maximum potentialtax liability. Your Board considers it unlikely that this theoretical liabilitywill ever crystallise because it takes no account of the way in which the Groupwould realise these gains. In particular the deferred tax provision takes noaccount of the way in which properties are expected to be sold, of theindexation allowance available when calculating a taxable capital gain in theUK or of elections available to ensure that deductions claimed previously forcapital allowances are not reversed. The Board has complied with pronouncementsfrom the APB and the UK Listing Authority in showing NAV and Earnings per shareincluding the IAS 12 provision with equal prominence as the adjusted figures.The effect of IAS 12 has been excluded from those statistics that are indicatedby an asterisk. At 31 December 2005 the IAS 12 deferred tax charge included inthe profit and loss account was ‚£21.9 million and the cumulative reduction tonet assets was ‚£132.1 million (31 December 2004: charge to tax of ‚£16.0 millionand reduction in net assets of ‚£114.1 million respectively). The accountingpolicies are as set out in the Group's IFRS Transition Report for the yearended 31 December 2004.++ In line with UK property industry practice adjusted earnings per share doesnot include gains on revaluations and deferred taxation. BUSINESS HIGHLIGHTSDuring 2005Successful completion of our major refurbishment of Frƒ¤saren 12 at Solna andthe occupation by ICA Maxi supermarket in May 2005 and ICA headquarter officesin August 2005, in all 24,000 sq m (259,400 sq ft).Substantial investment programme initiated in Germany with the purchase of twooffice properties in Hamburg. Frohbƒ¶sestrasse 12 was purchased for ‚£2.5 million(¢â€š¬3.6 million) with a 15 year lease, generating a return on equity of 22.8 percent. The second property, Jarrestrasse 8-10, was purchased for ‚£8.6 million (¢â€š¬12.5 million) generating a return on capital employed of 23.2 per cent.Three new lettings at Solna covering 6,056 sq m (65,078 sq ft).An additional property, Yrket 3, bought at Solna Business Park, Stockholm for ‚£5.1 million (SEK 70.0 million) giving a return on equity of 18.4 per cent afterfinancing.Two office properties purchased in France, at 23 rue Raspail, Ivry-sur-Seine,Paris for ‚£7.9 million (¢â€š¬11.6 million) giving a return on equity of 40.7 percent and at 3 Allƒ©e du 1er Mai, Croissy Beaubourg for ‚£3.4 million (¢â€š¬5.1million) giving a return on equity of 29.1 per cent.Four smaller French office properties and vacant space sold for total proceedsof ‚£6.4 million (¢â€š¬9.4 million).Extensive refurbishment at Great West House, Brentford substantially finished.Sale of Carlow House and New London House, Drury Lane for a total of ‚£32.2million, generating a profit on disposal of ‚£1.5 million. The properties wereoriginally purchased in 1995 for ‚£11.5 million and 1994 for ‚£10.5 million,respectively.Extension of leases to the Home Office at Spring Gardens. The entire estatenow let for a term of 20 years.Re-financing of properties across the portfolio raised additional funding of ‚£97.8 million.WightCable business assets sold and balancing tax allowances realised. 2006 Sale of Lƒ¶vgƒ¤rdet for ‚£39.9 million (SEK547 million) purchased in 2002 for ‚£29.4 million (SEK440 million).Exchanged on the purchase of Adlershof Tor, a 19,715 sq m (212,212 sq ft)retail and office building in Berlin and a new 19,466 sq m (209,532 sq ft) headoffice building in Munich.Sold Le 41 a 6,026 sq m (64,864 sq ft) property in Paris for ‚£15.3 million (¢â€š¬22.3 million). It had been vacated by IBM in January 2005 and was originallypurchased in 1998 for ‚£7.4 million (¢â€š¬11.7 million).WightCable North business assets sold. CHAIRMAN'S STATEMENT IntroductionI am pleased to report that the Company has grown from strength to strengthduring 2005. We discuss our financial results in detail in the Financial Review, however Isummarise below the key elements of our performance in the year.Adjusted net asset value (NAV) per share has increased from 522.3 pence by16.2 per cent to 606.9 pence, this having been achieved despite an adverseforeign exchange translation movement of 13.5 pence. The calculation ofadjusted NAV is based on the net assets of the Group excluding the provisionfor deferred tax, amounting to ‚£132.1 million, divided by the shares in issue(excluding treasury shares), being 80,057,687.This is the tenth year in succession that our NAV per share has increased,showing an average growth rate of 16.6 per cent compound per annum.Statutory NAV per share, which includes the full provision for deferred tax of‚£132.1 million as required by International Financial Reporting Standards(IFRS), increased from 386.2 pence by 14.4 per cent to 441.9 pence. Profit before taxation, which under IFRS now includes the increase in the fairvalue of our property assets, increased from ‚£60.1 million by 40.9 per cent to‚£84.7 million. The fair value increase in the property assets in the year was‚£67.2 million, an increase of 80.6 per cent on the uplift in the previous year.BUSINESS REVIEW 2005The business has continued to perform consistently well across each of ourdivisions although market conditions have varied across operating regions.UKInvestment yields have sharpened during 2005 with prime yields falling to below5 per cent in the London market, less than the cost of borrowing in the UK. The weight of money in the market is likely to continue to exert downwardpressure on investment yields. In late 2005 we took advantage of the strongmarket and sold Carlow House and New London House for ‚£32.2 million at a profitof ‚£1.5 million over and above the half year valuation. We continue to lookfor good quality assets with opportunities for growth although we will notsacrifice our underlying investment principles.The main priority in the UK is to actively manage our existing properties toensure maximum value is achieved. The letting market has continued to provechallenging, however despite space having become available at Vista OfficeCentre and Chancel House we have contained our UK vacancy rate at 5.3 per cent.In addition, a further 4,587 sq m (49,374 sq ft) is under refurbishment atGreat West House, representing 2.9 per cent of space in the UK portfolio.The significant feature in 2005 has been the agreement to extend all the leasesheld at Spring Gardens by the Home Office to a term of 20 years. Thisgovernment tenant now occupies the entire estate following our relocation toVictoria in order to accommodate their expansion requirements. The leaseextensions are conditional upon our completion of two further infillscomprising 2,503 sq m (26,945 sq ft) the construction of which is due tocomplete in March 2007. When completed the annual rent generated will be ‚£6.3million per annum.UK Joint VenturesWe are working closely together with our joint venture partners to securepre-lettings of office space at both London Bridge Tower (The Shard of Glass)and at New London Bridge House, for which a striking Renzo Piano design hasbeen submitted to the planning authorities. We are hoping to make significantletting progress in respect of both of these projects in the coming year.SwedenDuring 2005 we completed the refurbishment works at Solna Business Park to24,000 sq m (259,400 sq ft) of space at Frƒ¤saren 12, to enable ICA, the largestfood retailer in Scandinavia, to take occupation of their head office andsupermarket, in accordance with a demanding budget and programme.Additionally, we completed both the internal refurbishment works to Smeden andto its award winning 250 metre long uplit faƒ§ade, enclosed within a glassenvelope. The major challenge for us at Solna is to let the recently vacatedareas at Sliparen 2 representing 10,672 sq m (114,874 sq ft), 8.1 per cent ofspace at Solna, and to let the rest of the vacant space within the development,representing 20,324 sq m (218,772 sq ft).In early February 2006 we took advantage of the strong investment market inSweden and sold our portfolio of 1,280 apartments and 42,608 sq m (458,644 sqft) of commercial and retail space to a major local landlord specialising inlocal residential estates, for a price of ‚£39.9 million (SEK 547 million), inline with our year end valuation. These properties were purchased in January2002 for ‚£29.4 million (SEK440 million).Continental EuropeFrench property comprises the majority of the portfolio in Continental Europeand this division has made a substantial contribution to our underlying profitbefore tax, amounting to ‚£14.5 million (¢â€š¬21.2 million). In addition, theincrease in fair value of this portfolio during the year was ‚£33.2 million (¢â€š¬48.5 million).The French letting market was relatively healthy during 2005 with take-up ofspace in Paris of 2.2 million sq m (23.4 million sq ft), over 12 per cent up on2004, keeping pace with the supply of new space coming onto the market. Theoverall market vacancy rate in the Paris area was 5.8 per cent, slightly downon the previous year.Our vacancy rate at the year end was 6.4 per cent by area of the Frenchportfolio, which was largely due to the vacant 6,026 sq m (64,864 sq ft) Le 41building. This building was sold in January 2006 and the residual vacancy rateof the entire French portfolio is now just 3.0 per cent by area.Equity investmentsDuring the first half of the year we sold one of our unlisted investments,Sit-up TV producing a profit of ‚£1.6 million on the transaction.Following our decision to sell our cable businesses, we sold the assets ofWightCable Limited at the end of December 2005 and the sale of the assets ofWightCable North Limited was completed in mid January 2006. The cable companyresults are shown as discontinued operations and amounted to a loss of ‚£6.2million. As a result of the sale of these assets, the group has realised theresidual capital allowances which amounted to ‚£22.0 million.Our equity investment portfolio was valued at ‚£13.7 million at 31 December2005, representing 1.1 per cent of the Group's gross assets. We will closelymonitor those investments in our portfolio that have potential to perform wellbut conversely, we will not fund enterprises that continue to under-perform. OUTLINE STRATEGYThe continuing strategy of the Group will be to invest in modern, well-letproperties that generate good returns on capital employed in markets that weknow and understand.The strategic principles by which we operate are outlined below : * to invest in good quality, modern buildings that are generally located in strategically well placed secondary office locations just outside the central business district of major cities. * To operate in European markets that we know and understand. This has been the UK, Sweden and France and we will include Germany within our core investment regions in 2006. * To establish offices in each country in which we operate, employing local well qualified highly motivated professional staff. * The application of strict investment criteria to new property purchases, taking into account the yield, strength of tenant covenants, lease lengths, reliability and the projected return on equity and return on cash over five and ten years. * The gearing of our investments with initial loan to values generally at or above 75 per cent, borrowing from well respected banking institutions in the currency of the asset in order to limit foreign exchange exposure. * Investment with a view to adding long-term value to our property portfolio. We do this by providing good service and developing close relationships with our suppliers and tenants and where appropriate carry out major refurbishment works to properties, using our own in-house development teams. In this way we aim to establish long-term tenants. * The ability to act with speed to new opportunities, having access to strong cash reserves. We actively seek out new opportunities where we see good returns coupled with acceptable levels of risk. * The careful assessment of risk and where appropriate use of hedging instruments to protect ourselves from potential adverse consequences. THE FUTUREGermanyIn the summer of 2005 we took the decision to invest in Germany, a market wherewe can see good returns being achieved on selective purchases. The groundworkof careful research and the development of business relationships with localprofessional advisers enabled us to successfully commence the establishment ofa German portfolio by completing the purchase of two small properties at theend of the year. Since then we have contracted to purchase two further properties to the valueof ‚£45.1 million (¢â€š¬65.6 million) generating a return on equity of 20 per cent.Upon completion of these contracted purchases we will hold five properties inGermany to the value of ‚£57.7 million (¢â€š¬84.2 million).It is our intention to build up a high quality portfolio in Germany in excessof ¢â€š¬300 million in selected major cities. UKIn The UK we will work hard in 2006 to complete the refurbishment and lettingof Great West House and to continue to reduce other vacant space within theportfolio. We are also evaluating the potential development of a number ofother property assets we hold in order to add value to our investmentportfolio. As mentioned above, together with our joint venture partners, we are preparingto develop The Shard and New London Bridge House. These are significantprojects in their own right and we recognise it is absolutely critical toensure that we assemble the right blend of expertise and experience within thedevelopment team, together with the appropriate combination of financing andsecure anchor pre-lets to quality tenants before commencing construction. Itis our intention to limit the amount of equity contribution we are exposed toon these projects.SwedenOur major challenge is to capitalise on the brand image and concept of SolnaBusiness Park by letting all remaining space, optimise its value and to securethe future of the areas currently occupied by the university at Vƒ¤nerparken. Inthis respect we are working closely with the local authority at Vƒ¤nersborg.FranceIt is our intention to expand our portfolio along the lines of our existingmodel, seeking opportunities both within Paris and other selected major cities.OrganisationWe have now laid down a strong organisation headed by Per Sjƒ¶berg who took upthe post of Chief Executive Officer on 1 January 2006. We have experiencedteams on the ground in each of our core operating regions and we are fullyconfident that they will achieve the clear goals we have identified.Environmental and social issuesWe not only think that it is socially responsible to take environmental issuesseriously, we also think that in an age of rising energy costs it also makescommercial good sense. We are therefore purposely seeking out innovative greensolutions to the design of new and refurbished buildings we are contemplatingand have already been awarded the environmental "P mark" standard fordeveloping "green" energy efficient properties in the refurbishment of ourSolna complex.It has also been pleasing to see the complete transformation of the SolnaBusiness Park area of Stockholm from a run-down drab industrial area to avibrant modern environment with in excess of 10,000 visitors a day to itsoffices, supermarket, hotel, gym and other leisure facilities. It is ourintention to bring a similar transformation to the London Bridge quarter.PERFORMANCE FOR INVESTORSOver the last five years adjusted net assets per share has grown from 325.5pence per share to 606.9 pence per share, an increase of 86.5 per cent. Thetotal return to shareholders, which takes account of NAV growth anddistributions showed an average annual compound growth of 20.5 per cent.The total return to CLS investors in the year has been 22.7 per cent (Source:Thomson Data Stream).We now have substantial cash reserves and have demonstrated consistently strongperformance over the years. There is still a 10.1 per cent discount betweenNAV per share and share price, we therefore propose to recommend a tenderoffer buy-back of 1 in 42 shares at 600 pence per share. This, together withthe interim tender offer will result in a total distribution for the year of22.8 pence per share, an increase of 18.1 per cent over the previous year.My fellow directors and I would particularly like to thank our staff for theirdedication and hard work during the year, we would also like to thank ouradvisers for their professionalism and creativity and our shareholders for theencouragement and support that they have given to the Company.We have concluded a very successful year and look forward to an excitingfuture.Sten MortstedtExecutive Chairman10 March 2006 FINANCIAL REVIEWIntroduction There has been strong capital growth in our assets across allthree of our main European markets with the prospect of further uplifts invalues on the back of preparatory work laid down during 2005. Adjusted NAV of 606.9 pence per share (December 2004 : 522.3 pence), grew by16.2 per cent during 2005 (Statutory NAV of 441.9 pence per share grew by 14.4per cent over the same period). In the last five years the adjusted net assetvalue per share has grown by 13.2 per cent compound per annum, or a total of86.5 per cent (Statutory NAV has shown a similar growth throughout thatperiod). The organic growth in adjusted net asset value per share over theperiod (taking into account the effect of tender offer buy-backs but excludinggrowth attributable to the purchase of shares on the market for cancellation)has been 68.3 per cent (Statutory NAV has shown similar growth throughout thatperiod). If all share options were to be exercised, the dilutive effect wouldbe to reduce adjusted NAV per share by 2.7 pence (Statutory NAV by 1.4 pence).At the year end the post-tax IAS 32 disclosure, showing the effect of restatingfixed interest loans to fair value, amounted to a reduction of 34.6 pence pershare (December 2004 : 27.8 pence).Added value to shareholders was 20.1 per cent (December 2004: 20.8 per cent),as measured by the increase in adjusted NAV per share and distributions bytender offer buy-backs. Based on Statutory NAV the return was 19.7 per cent(December 2004: 18.6 per cent).During the year the Company distributed ‚£16.8 million (20.3 pence per share) toshareholders by way of tender offer buy-backs at an average price per share of495 pence (December 2004 : 18.1 pence per share distributed).Net assets grew by ‚£30.0 million to ‚£353.8 million in the year, which includeda ‚£7.7 million reduction relating to negative foreign exchange translationmovements in respect of the Group's Swedish and Continental European netassets. The Kronor and Euro both weakened against Sterling during the year. Foreign exchange movements are substantially hedged as each property is fundedby loans in local currency. Net asset growth is calculated after taking intoaccount the cost of tender offer buy-back distributions made during the year,which totalled ‚£16.8 million as mentioned above.Adjusted gearing at the year end decreased to 125.2 per cent (December 2004:133.8 per cent) (statutory gearing was 171.9 per cent - December 2004 : 181.0per cent). Tender offer buy-backs and market purchases during the year had theimpact of increasing gearing by 3.9 per cent and the negative effect of foreignexchange translation of overseas net assets during 2005 increased gearing by afurther 2.6 per cent.The Group held ‚£118.2 million cash as at 31 December 2005 (December 2004: ‚£57.4million), the movement in the year being: 2005 2004 ‚£M ‚£M Cash inflow from property activities 51.8 51.7 Increase in equity investments held in current assets (3.5) (6.5) Cash inflow from operations 48.3 45.2 Net interest and other finance costs (33.4) (31.6) Taxation (0.3) (0.5) Properties purchased and enhanced (67.3) (69.3) New loans 148.6 112.9 Properties sold 45.1 8.5 Loans repaid (57.8) (45.8) Tender offer payment to shareholders (16.8) (15.8) Market purchase of shares for cancellation (2.0) - Other (3.6) (3.5) Net cash inflow 60.8 0.1 Existing equity investments held amounted to ‚£13.7 million (December 2004 : ‚£10.5 million). The majority by value are listed investments, which are nowcarried at market value, and represent only 1.1 per cent of the gross assets ofthe Group.We believe that our unlisted investments have the potential for growth in valuein due course; we continue to be closely involved in their progress and addcommercial support where appropriate.The underlying elements of the growth in net assets are set out in the tablebelow. It is not expected that deferred taxation provided would become payablein full if the properties were sold. It is currently anticipated that theoverseas property assets would be sold within corporate entities. Continental Equity Group UK Sweden Europe Investments ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Opening net assets As reported under UK GAAP 426.4 184.6 110.1 118.0 13.7 Adoption of IFRS 31 Dec 04 IAS 12 deferred tax (107.4) (42.7) (28.9) (35.8) Other IFRS 4.8 2.3 2.5 as re-stated 31 December 2004 323.8 144.2 81.2 84.7 13.7 Adoption of IAS32 and 39 1 Jan 2005 Adoption of IAS 32 and 39 10.0 (2.0) 12.0 Deferred tax on IAS 32 and 39 (1.9) 1.0 (2.9) as re-stated 1 January 2005 331.9 143.2 81.2 84.7 22.8 Movement in 2005 Income from investment in property 73.4 34.4 17.6 21.4 Realised gains on investments 1.1 1.1 Deficit on part disposal JV (1.1) (1.1) Share of loss of Associates (1.2) (1.2) Operating expenses (18.4) (11.2) (3.3) (2.5) (1.4) Net interest payable (36.3) (19.8) (10.6) (4.3) (1.6) Underlying profit before tax 17.5 2.3 3.7 14.6 (3.1) Fair value gains on investment property 67.2 24.2 9.8 33.2 Taxation - current (1.3) (0.1) (1.2) Taxation - deferred (21.9) (4.4) (4.3) (13.2) Discontinued operations (6.2) (6.2) Increase in equity due to direct investment 55.3 22.0 9.2 33.4 (9.3) Other Equity movements Shares issues 0.1 0.1 Shares purchased and associated costs (19.0) (19.0) Foreign exchange and other movements (7.7) (5.5) (2.2) Change in fair value of listed investments net of tax (7.3) (7.3) Change in fair value of derivative instruments (0.8) (0.8) Purchase of minority interest 1.3 1.3 Transfer of equity 14.5 (9.2) (15.6) 10.3 Net assets at 31 December 2005 353.8 160.0 75.7 100.3 17.8 REVIEW OF THE INCOME STATEMENTFinancial Results by Location The results of the Group have been analysed bylocation and main business activity as set out below: Equity 2005 Continental investments Total UK Sweden Europe 2004 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Net rental 69.3 31.8 17.2 20.3 - 67.6income Other 3.3 1.1 0.4 0.7 1.1 4.2operating gains Operating (18.4) (11.2) (3.3) (2.5) (1.4) (13.6)expenses Operating profit before gains 54.2 21.7 14.3 18.5 (0.3) 58.2on investment properties Fair value gains on investment 67.2 24.2 9.8 33.2 - 37.2properties Deficit on (1.1) (1.1) disposal part share JV Gain from sale of investment 1.9 1.5 - 0.4 - 0.5properties Net finance (36.3) (19.9) (10.5) (4.3) (1.6) (34.1)expense Associates' (1.2) - - - (1.2) (1.7)operating loss Profit on continuing activities 84.7 26.4 13.6 47.8 (3.1) 60.1before tax Tax - (1.3) (0.1) - (1.2) - (0.6)ordinary Tax - (21.9) (4.5) (4.3) (13.1) - (16.1)deferred Loss on (6.2) - - - (6.2) (4.0)discontinued operations Retained 55.3 21.8 9.3 33.5 (9.3) 39.4profit Net rental income of ‚£69.3 million has increased by 2.5 per cent (December 2004: ‚£67.6 million) and reflected additional net income of ‚£0.8 million in Solna,Sweden from the ICA space completed in May 2005 and increased rentals in Franceof ‚£1.5 million due to indexation and lease restructuring. Swedish net rentalincome was reduced by increased net service charge expense of ‚£0.7 million asthe majority of the rents are fully inclusive. UK net rental income was stablewith an increase of ‚£0.1 million. Foreign exchange had a negligible effect onrental income.Other operating gains amounted to ‚£3.3 million (December 2004: ‚£4.2 million)and included ‚£1.6 million profit on the disposal of Sit-up TV, an investmentwithin our equity portfolio, and dilapidations and lease surrender income of ‚£0.9 million. Income of ‚£0.4 million was generated in Sweden from Solna SportsPark and the marina at Vanerparken, lease extensions on our residential unitsat Cliffords Inn generated ‚£0.2 million and the remainder was generated frominsurance commissions and management fees on development projects net ofprovisions against unlisted investments.Operating expensesOperating expenses as set out in the summary table above comprisedadministrative expenditure of ‚£14.9 million (December 2004: ‚£10.0 million) andnet property expenses of ‚£3.5 million (December 2004: ‚£3.6 million)Administrative expenditure of ‚£14.9 million increased by ‚£4.9 million(December 2004 : ‚£10.0 million). Of this total, ‚£13.6 million related to thecore property business, an increase of ‚£4.5 million over the comparative figurefor last year. This was mainly due to exceptional legal and professional feesexpensed amounting to ‚£3.3 million, incurred to successfully preserve our 33.3per cent shareholding in respect of a joint venture company holding LondonBridge Tower. Reasons for the remainder of the increase over the previous yearincluded costs of relocation and employment related expenditure particularly inrelation to developing new markets. Overheads for the Investment Division were‚£1.4 million.Net property expenses of ‚£3.5 million (December 2004 : ‚£3.6 million) includeddepreciation of ‚£0.3 million, letting fees of ‚£0.3 million, mainly in relationto vacant space within the French portfolio and void costs of ‚£0.7 million(mainly at Great West House, Brentford, undergoing refurbishment). Advertisingand marketing costs totalled ‚£0.4 million, bad debts amounted to ‚£0.9 million,mostly in relation to One Leicester Square, and repairs and maintenance costswere ‚£0.2 million for minor works in Paris and the UK. The remainder comprisedoperating costs of the gym at Solna of ‚£0.4 million and non-recoverable VAT.Net finance expense amounted to ‚£36.3 million (December 2004 : ‚£34.1 million)and showed an increase of ‚£2.2 million over net expenditure in 2004, reflectingre-financings within all three of the Group's markets, mitigated by lowerinterest rates on floating rate debt in the UK and Sweden.The comparative figures for 2004 do not include a fair value adjustment forcaps and other financial instruments as IAS 39 and 32 were only applied from 1January 2005. The overall interest charge for 2004 would have beenapproximately ‚£0.9 million lower had it been calculated on a similar basis.The Group's policy is to expense all interest payable to the profit and lossaccount, including interest incurred in the funding of refurbishment anddevelopment projects, which amounted to ‚£1.7 million in 2005 for Great WestHouse, Brentford and Frƒ¤saren 12 in Solna.Analysis of net finance expense 2005 2004 Difference ‚£m ‚£m ‚£m Interest receivable 1.4 1.7 (0.3) Foreign exchange - 0.1 (0.1) Interest receivable and similar income 1.4 1.8 (0.4) Interest payable and similar charges (37.7) (35.9) (1.8) Net finance expense (36.3) (34.1) (2.2) Interest payable and similar charges of ‚£37.7 million (December 2004: ‚£35.9million) included fair value movements on interest rate caps amounting to ‚£0.1million (December 2004: ‚£1.0 million, before the application of IAS 32 and 39)and amortisation of issue costs of loans totalled ‚£1.4 million (December 2004:‚£1.1 million).The average cost of borrowing for the Group at 31 December 2005, which includesan estimate of the fair value adjustment in respect of interest rate caps, isset out below: ContinentalDecember 2005 UK Sweden Europe Total Average interest rate on fixed rate debt 7.2% 5.6% 4.6% 6.1% Average interest rate on variable rate debt 6.1% 3.2% 3.5% 4.2% Overall weighted average interest rate 6.9% 4.5% 4.2% 5.4% December 2004 Average interest rate on fixed rate debt 7.3% 5.8% 4.6% 6.4% Average interest rate on variable rate debt 6.6% 3.9% 3.3% 4.6% Overall weighted average interest rate 7.1% 4.8% 4.0% 5.7% Taxation In 2005 the Group's current taxation charge has benefited from theutilisation of losses, significant capital allowances and amortisationdeductions. Outside the UK these factors will have less effect in the future ascorporation tax losses are used against expected profits and as allowances andamortisation deductions decrease in existing subsidiaries. In the UK thedisposal of the cable businesses has resulted in significant balancingallowances which will have increased losses available to offset future profits.Loss from discontinued operations The Group completed the disposal of thebusiness and the assets of WightCable in December 2005 and of WightCable Northin January 2006. The operating results of these two businesses have beenclassified under IFRS 5 as discontinued operations and the comparative figuresfor 2004 have been similarly re-stated. The results for 2005 include thewrite-down during the year of the assets of WightCable North of ‚£1.8 million,and the purchase of the remaining minority interest of ‚£1.3 million. In earlyJanuary 2006 further costs relating to the disposal of WightCable North wereincurred, amounting to ‚£2.1 million. We have been advised by our auditors thatthe prescriptive nature of the IFRS Accounting Standards prevent us fromproviding for these costs in 2005 and they have therefore been expensed in2006.REVIEW OF THE BALANCE SHEET Investment Properties‚§ The investment properties of the Group have increased to‚£1,096.4 million (December 2004: ‚£1,022.5 million). The analysis of the netincrease of ‚£73.9 million is shown below: Continental Europe Total UK Sweden France Germany ‚£m ‚£m ‚£m ‚£m ‚£m Opening assets 1,022.5 479.6 273.1 268.0 1.8 Purchases 31.0 3.0 5.1 11.3 11.6 Refurbishment 43.4 10.7 31.0 1.7 - Disposals (45.6) (38.3) (1.2) (6.1) - Revaluation 67.2 24.2 9.8 33.7 (0.5) Foreign exchange (27.0) - (19.7) (7.2) (0.1) Other 4.9 2.1 2.8 - - Closing assets 1,096.4 481.3 300.9 301.4 12.8 PurchasesTwo new properties were purchased in France at Rue Raspail and CroissyBeaubourg at a total cost of ‚£11.3 million (¢â€š¬16.7 million). An additionalproperty, Yrket 3, was purchased at Solna Business Park at a cost of ‚£5.1million (SEK 70.0 million) and we completed the purchase of two new propertiesin Hamburg, Germany at Frohbƒ¶sestrasse 12 for ‚£2.5 million and at Jarrestrasse8-10 for ‚£9.1 million including costs (¢â€š¬16.1 million). Three small residentialunits were purchased as part of our site at Vauxhall Cross, London for ‚£1.8million and two further residential flats were purchased at 'The View',Victoria, London for ‚£1.2 million.RefurbishmentExpenditure on refurbishments of ‚£43.4 million included ‚£30.3 million expendedat Solna, mainly on the construction of retail and office space for ICA, and ‚£6.5 million at Great West House, Brentford, undergoing major refurbishment anda new facade. DisposalsSeveral disposals were made during the year; Lord Byron, La Ferme, AvenueFontainebleau and Abbƒ© Hazard were sold in France during the year for a totalconsideration of ‚£6.4 million, yielding a total profit on disposal of ‚£0.4million, and in the UK Carlow House was sold for ‚£18.2 million, generating aprofit on sale of ‚£0.4 million, and New London House, Drury Lane sold for ‚£14.0million, generating a profit on disposal of ‚£1.1 million.Foreign exchangeForeign exchange translation losses on Swedish and French property holdingsamounted to ‚£27.0 million in the year. After taking into account the effect offoreign exchange translation on loans to finance these assets, the net effectwas a loss of ‚£10.8 million.Based on the valuations at 31 December 2005 and annualised contracted rentreceivable at that date of ‚£76.4 million (December 2004: ‚£74.6 million), theportfolio shows a yield of 6.3 per cent (December 2004 : 6.9 per cent).An analysis of the location of investment property assets and related loans isset out below: Total % UK* % Sweden** % Continental % Equity % Europe** Investments ‚£m ‚£m ‚£m ‚£m ‚£m Investment 1,096.4 100.0 481.3 43.9 300.9 27.4 314.2 28.7 0.0 0.0properties Loans (719.9) 100.0 (317.6) 44.2 (186.8) 25.9 (205.8) 28.6 (9.7) 1.3 Equity in 376.5 100.0 163.7 43.5 114.1 30.3 108.4 28.8 (9.7) (2.6)Property Assets Other 109.4 100.0 49.5 45.2 (7.3) (6.7) 40.1 36.7 27.1 24.8 Net 485.9 100.0 213.2 43.9 106.8 22.0 148.5 30.6 17.4 3.5Adjusted Equity Equity in 34.3% 34.0% 37.9% 34.5% - Property as a Percentage of Investment ‚£m ‚£m ‚£m ‚£m ‚£m Opening 437.2 192.9 110.1 120.5 13.7 Equity Increase 48.7 20.3 (3.3) 28.0 3.7 Closing 485.9 213.2 106.8 148.5 17.4 Equity ** The following exchange rates were used to translate assets and liabilitiesat the year end : SEK/GBP 13.702 : Euro/GBP 1.453* Net assets were reduced by payments for tender offer distributionstotalling ‚£16.8 million, and market purchases totalling ‚£2.0 million which areincluded within the results of the UK. Debt Structure Borrowings are raised by the Group to finance holdings ofinvestment properties. These are secured, in the main, on the individualproperties to which they relate. All borrowings are taken up in the localcurrencies from specialist property lending institutions.Financial instruments are held by the Group to manage interest and foreignexchange rate risk. Hedging instruments such as interest rate caps areacquired from prime banks. The Group has thereby hedged all of its interestrate exposure and a significant proportion of its foreign exchange rateexposure. Net Total UK Sweden Continental Equity Interest Europe Investments Bearing ‚£m % ‚£m % ‚£m % % % Debt ‚£m ‚£m Fixed (389.5) 54.1 (221.6) 69.8 (88.4) 47.3 (79.4) 38.6 (0.1) 1.0 Rate Loans Floating (330.4) 45.9 (96.0) 30.2 (98.4) 52.7 (126.4) 61.4 (9.6) 99.0 Rate Loans (719.9) 100.0 (317.6) 100.0 (186.8) 100.0 (205.8) 100.0 (9.7) 100.0 Bank and 118.2 55.1 10.3 43.7 9.1 cash Net (601.7) 100.0 (262.5) 43.7 (176.5) 29.3 (162.1) 26.9 (0.6) 0.1 Interest Bearing Debt 2004 (581.2) 100.0 (289.6) 49.8 (141.2) 24.3 (148.5) 25.6 (1.9) 0.3 Non interest bearing debt, represented by short-term creditors, amounted to ‚£45.4 million (December 2004: ‚£44.1 million) Interest rate caps Total UK Sweden Continental Europe % % % % 2005 Percentage of net floating rate loans capped 100.0 100.0 100.0 100.0 Average base interest rate at which loans are capped 5.2 5.8 4.9 5.0 Average tenure 2.8 2.4 2.7 3.1 years years years years 2004 Percentage of net floating rate loans capped 100.0 100.0 100.0 100.0 Average base interest rate at which loans are capped 5.3 6.6 4.9 4.8 Average tenure 3.1 2.7 3.4 3.4 years years years years During 2005 a number of re-financings in the Group portfolio took place, themajority of which were on a floating rate basis, hedged by five year interestrate caps. Since the year-end we have extended the tenure of our commerciallyeffective caps to an average of 3.8 years for Sterling and 5.1 years for Euro.New Printing House Square was financed in 1992 through a securitisation of itsrental income by way of a fully amortising bond. This bond has a currentoutstanding balance of ‚£38.0 million (December 2004: ‚£38.6 million) at aninterest rate of 10.8 per cent with a maturity date of 2025; and a zero couponbond, with a current outstanding balance of ‚£5.5 million (December 2004: ‚£5.0million), with matching interest rate and maturity date. This debt instrumenthas a significant adverse effect on the average interest rate and the IAS 32adjustment. The net borrowings of the Group at 31 December 2005 of ‚£601.7 million showed anincrease of ‚£20.5 million over 2004, reflecting our increasing investmentprogramme. We have refinanced our assets in the UK (‚£57.8 million), Sweden (‚£48.3 million) and within the French portfolio (‚£39.8 million), and new loansfor acquisitions in Germany of ‚£9.7 million. Foreign exchange translation gainson Swedish and French loans reduced the liability by ‚£16.2 million during theyear, and repayments totalled ‚£57.8 million.Under the requirements of IAS 32, which addresses disclosure in relation toderivatives and other financial instruments, if our loans were held at fairvalue, the Group's fixed rate debt at the year end would be in excess of bookvalue by ‚£39.5 million (December 2004 : ‚£33.3 million) which net of tax at 30per cent equates to ‚£27.8 million (December 2004 : ‚£23.3 million). The contracted future cash flows from the properties securing the loans arecurrently well in excess of all interest and ongoing loan repaymentobligations. Only ‚£25.3 million (3.5 per cent) of the Group's total bank debtof ‚£719.9 million is repayable within the next 12 months, with ‚£365.3 million(50.7 per cent) maturing after five years.Share Capital The share capital of the Company totalled ‚£21.4 million at 31December 2005, represented by 85,527,177 ordinary shares of 25 pence each,quoted on the main market of the London Stock Exchange. Of the shares in issue,5,469,490 are held as Treasury shares following the tender offer buy-backs andmarket purchases made during the year, and therefore are not included for thepurposes of the proposed tender offer buy-back or for calculating earnings andNAV per share.A capital distribution payment by way of tender offer buy-back was made both inMay and November of 2005 resulting in the purchase of 3.4 million shares andproviding a distribution of ‚£16.8 million to shareholders, together with costsof ‚£0.1 million. Market purchases during 2005 totalled 441,000 shares at an average price of 457pence per share.A total of 54.7 million shares have been purchased at a total cost of ‚£128.4million since the programme of buy-backs started in 1998. The average cost ofshares purchased for cancellation over this period was 235 pence per share.The weighted average number of shares in issue during the year was 82,316,545(Decemebr 2004 : 86,113,994).The average mid-market price of the shares traded in the market during the yearended 31 December 2005 was 452 pence with a high of 505 pence in December 2005and a low of 394 pence in January 2005.An analysis of share movements during the year is set out below: No of No of shares shares Million Million 2005 2004 Opening shares for NAV purposes 83.9 87.6 Tender offer buy-back (3.4) (4.1) Buy-backs in the market for cancellation (0.4) - Shares issued for the exercise of - 0.4options Closing shares for NAV purposes 80.1 83.9 Shares held in Treasury by the Company 5.4 1.6 Closing shares in issue 85.5 85.5 In total 21.9 million shares were traded in the market during 2005. An analysis of the ownership structure is set out below: Number of Percentage of shares shares Institutions 32,618,524 40.8% Private investors 1,476,084 1.8% The Mortstedt family directors 41,017,368 51.2% Other 4,945,711 6.2% 80,057,687 100.0% Shares held in Treasury by the 5,469,490 Company Total 85,527,177 Should the proposed tender offer buy-back be fully taken up, the number ofshares in issue would be reduced by 1,906,135 to78,151,552 (excluding sharesheld in treasury of 7,375,625).At 31 December 2005 there were 595,000 options in existence with an averageexercise price of 246.1 pence.Distribution As the current share price remains at a considerable discount tonet asset value, your Board is intending to propose a further tender offerbuy-back of shares in lieu of paying a cash dividend, on the basis of 1 in 42shares at a price of 600 pence per share. This will enhance net asset valueper share and is equivalent in cash terms to a final dividend per share of 14.3pence, yielding a total distribution in cash terms of 22.8 pence per share forthe year (2004: 19.3 pence).Corporate Structure The aim has been to continue to hold individual propertieswithin separate subsidiary companies, each with one loan on a non-recoursebasis. PROPERTY REVIEW Introduction Our continuing Group strategy is to focus upon low risk highreturn properties in our core locations of London, Sweden, France and nowGermany. We believe that our emphasis on actively managing the portfoliomaximises long term capital returns. The Group now owns 113 properties with atotal lettable area of 612,838 sq m (6,596,536 sq ft), of which 45 propertiesare in the UK, 24 in Sweden, 40 in France, 3 in Germany and 1 in Luxembourg. Wehave 610 commercial tenants and 1,292 residential tenants.An analysis of contracted rent, book value and yields is set out below: Contracted Net Book Yield Yield Rent rent Value on net when rent fully let ‚£000 % ‚£000 % ‚£000 % % % UK London City Fringes 212 0.3% 212 0.3% 2,850 0.3% 7.4% London Mid town 6,967 9.1% 6,967 10.0% 106,750 9.7% 6.5% London West End 3,318 4.3% 3,238 4.7% 59,226 5.4% 5.5% London West 4,977 6.5% 3,930 5.7% 74,656 6.8% 5.3% London South Bank 10,660 13.9% 10,619 15.2% 155,892 14.3% 6.8% London South Bank -JVs 2,046 2.7% 2,046 2.9% 34,361 3.1% 6.0% London South West 1,439 1.9% 1,288 1.9% 20,200 1.8% 6.4% London North West 1,678 2.2% 1,214 1.7% 25,500 2.3% 4.8% Outside London 245 0.3% 245 0.4% 1,825 0.2% 13.4% Total UK 31,542 41.2% 29,759 42.8% 481,260 43.9% 6.2% 6.5%* Sweden Sweden Gothenburg 5,888 7.7% 2,612 3.8% 39,777 3.6% 6.6% Sweden Stockholm 12,294 16.1% 11,120 16.0% 215,524 19.6% 5.2% Sweden Vanersborg 4,474 5.9% 3,808 5.4% 45,615 4.2% 8.3% Total Sweden 22,656 29.7% 17,540 25.2% 300,916 27.4% 5.8% 6.5%++ Continental Europe France Paris 16,642 21.7% 16,642 24.0% 246,786 22.6% 6.7% France Lyon 2,740 3.6% 2,740 3.9% 34,123 3.1% 8.0% France Lille 594 0.8% 594 0.9% 6,772 0.6% 8.8% France Antibes 431 0.6% 431 0.6% 4,618 0.4% 9.3% Total France 20,407 26.7% 20,407 29.4% 292,299 26.7% 7.0% 7.7% Luxembourg 808 1.1% 808 1.2% 9,085 0.8% 8.9% Total Luxembourg 808 1.1% 808 1.2% 9,085 0.8% 8.9% 8.9% Germany Hamburg 813 1.0% 813 1.2% 11,012 1.0% 7.4% Germany Dƒ¼sseldorf 213 0.3% 174 0.2% 1,789 0.2% 9.7% Total Germany 1,026 1.3% 987 1.4% 12,801 1.2% 7.7% 7.7% Total Continental Europe 22,241 29.1% 22,202 32.0% 314,185 28.7% 7.1% 7.7% Group Total 76,439 100.0% 69,501 100.0% 1,096,361 100.0% 6.3% 6.8% Conversion rates : SEK/GBP 13.702 Euro/GBP 1.453- Contracted rent is defined as gross annualised rent supported by a signedcontract.- Net rent is defined as contracted rent less net service charge costs.- Yields on net rents have been calculated by dividing the net rent by the bookvalue.* Yields on receivable rents and potential rents have been calculatedon the assumption that book values at 31 December 2005 will increase byrefurbishment expenditure of approximately ‚£12.0 million in respect ofprojects in the UK.++ Yields on receivable rents and potential rents have been calculated onthe assumption that book values at 31 December 2005 will increase byrefurbishment expenditure of approximately ‚£10.3 million in respect ofprojects in Solna, Sweden. Rent analysed by length of lease and locationThe table below shows rental income by category and the future potential incomeavailable from new lettings and refurbishments. Contracted Contracted Unlet Space Total Total Aggregate but not Space under Rental income at Refurb producing ERV or with planning consent Sq.m Sq. ft ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 % UK >10 yrs 71,997 774,970 15,398 1,158 16,556 48.8% UK 5-10 yrs 25,998 279,840 5,358 5,358 15.8% UK < 5 yrs 44,356 477,444 9,628 9,628 28.4% Development 6,248 67,253 1,108 1,108 3.3%Stock Vacant 8,394 90,352 1,243 1,243 3.7% Total UK 156,993 1,689,859 30,384 1,158 1,243 1,108 33,893 100.0% Sweden > 10 23,794 256,117 3,181 3,181 12.3%yrs Sweden 5-10 76,454 822,944 7,330 7,330 28.3%yrs Sweden < 5 159,304 1,714,735 12,145 12,145 46.8%yrs Refurbished 13,337 143,558 1,670 1,670 6.4%space Vacant 21,147 227,625 1,618 1,618 6.2% Total 294,036 3,164,979 22,656 - 1,618 1,670 25,944 100.0%Sweden France 5-10 58,221 626,686 8,085 8,085 36.1%yrs France < 5 78,341 843,256 12,322 12,322 55.0%yrs Refurbished 1,417 15,252 166 166 0.7%space Vacant 9,390 101,073 1,835 1,835 8.2% Total 147,369 1,586,267 20,407 - 1,835 166 22,408 100.0%France Luxembourg 3,698 39,805 808 808 100.0%< 5 yrs Total 3,698 39,805 808 - - - 808 100.0%Luxembourg Germany > 1,993 21,452 171 171 16.7%10 yrs Germany 932 10,032 115 115 11.2%5-10 yrs Germany < 5 7,817 84,142 740 740 72.1%yrs Total 10,742 115,626 1,026 - - - 1,026 100.0%Germany Group > 10 97,784 1,052,539 18,750 1,158 19,908 23.7%yrs Group 5-10 161,605 1,739,502 20,888 20,888 24.8%yrs Group < 5 293,516 3,159,382 35,643 35,643 42.4%yrs Refurbished 14,754 158,810 1,836 1,836 2.2%space Development 6,248 67,253 1,108 1,108 1.3%Stock Vacant 38,931 419,050 4,696 - 4,696 5.6% Group Total 612,838 6,596,536 75,281 1,158 4,696 2,944 84,079 100.0% We estimate that open market rents are approximately 5.2 per cent lower thancurrent contracted rents receivable, which represents a potential decrease of ‚£4.0 million. This excludes the additional rents we will receive as a result ofour refurbishment programme. An analysis of the net decrease is set out below: Contracted Estimated Rental Reversionary Rent Value Element ‚£ Million ‚£ Million % UK 31.5 30.3 (3.8) Sweden 22.7 20.0 (11.9) Continental 22.2 22.1 (0.5)Europe Total 76.4 72.4 (5.2) The total potential gross rental income (comprising contracted rentals, andestimated rental value of unlet space and refurbishment) of the portfolio is ‚£84.1 million p.a.UKPortfolio During the year, the value of the UK property portfolio increasedby 5.0 per cent or ‚£24.2million due to revaluation uplifts, and net ofdisposals was valued at ‚£481.3 million at 31 December 2005 inclusive of ourshare of joint ventures.The sales achieved were of Carlow House, Carlow Street, NW1 and New LondonHouse, Drury Lane, WC2. Carlow House was sold for ‚£18.2 million against apurchase price in 1995 of ‚£11.5 million. The building provides 4,454 sq m(47,941 sq ft) of offices together with the ground rents for 13 residentialapartments. The sale price represented a net yield of 7.2 per cent.New London House in Drury Lane provides 2,167 sq m (23,328 sq ft) of officestogether with 914 sq m (9,836 sq ft) of retail and leisure uses. The propertywas sold for ‚£14.0 million, representing a net yield of 6.4 per cent. CLSacquired the property in 1994 for ‚£10.5 million.Both properties were considered to offer limited prospects for future growthand the sales generated a profit of ‚£1.5 million against valuation. Net cashproceeds amounted to ‚£10. 9 million following repayment of the loans and fees.2005 continued to be a challenging year to find value through new acquisitionsand our purchases were limited to 3 residential properties on Wandsworth Road,SW8 for ‚£1.8 million.The principal development activity during the year has been at Great West Housein West London and at Spring Gardens, Vauxhall. At Great West House we areinvesting just over ‚£11 million on a major refurbishment of the externalelevations, entrance halls and landscaping. We remain on schedule to launch thebuilding in the spring of 2006.The refurbishment works at Chancel House, which include new air cooling,overhauled lifts a new reception and the vacant offices on the 5th floor, havebeen completed on schedule. The building has 1,392 sq m (14,986 sq ft) ofvacant offices to let for which we are quoting a rent of ‚£151 per sq m (‚£14.00per sq ft).Finally, the conversion of the top two floors of Ingram House, John AdamStreet, WC2 into 5 apartments was completed during the summer of 2005 andhaving taken the decision to retain these apartments, all have now been let.A strengthening tenant market throughout 2005 has enabled us to achieve anumber of important new lettings at Vista near Heathrow, CI Tower in NewMalden, Quayside Lodge in Fulham and at our Spring Gardens Estate in Vauxhall.Most noteworthy is the deal signed with our existing tenant, the Home Office atSpring Gardens.At Spring Gardens, significant progress was made towards completion of 855 sq m(9,203 sq ft) of new office accommodation being built between Unit 3 and Unit4. Completion is due in the first half of 2006 and these new offices have beenpre-let to the Home Office on a new 20 year lease without break at ‚£344.50 persq m (‚£32.00 per sq ft).The Spring Gardens Estate currently provides 15,923 sq m (171,392 sq ft) ofoffice space, all of which is let to the Home Office.In June and August 2005, two new planning consents were secured to build anadditional 2,503 sq m (26,945 sq ft) of office accommodation on the site.Construction starts in January 2006 and upon completion in December, these newoffices will be let to the Home Office on leases which expire in 2026 at anaverage rent of ‚£334 per sq m (‚£31.06 per sq ft).In addition, upon completion of these new offices, the Home Office will extenda number of existing leases such that the whole Estate will be let until 2026.The total income will initially rise from ‚£5,451,438 per annum to approximately‚£6,288,355 per annum.The amount of vacant space at the end of 2005 stood at 8,394 sq m (90,352 sqft) or 5 per cent of the total for the UK, excluding Great West House which isunder construction pending release in the spring of 2006.During 2005 we have been particularly active with our joint ventures at LondonBridge Tower ('The Shard') and New London Bridge House; two adjacentredevelopment opportunities next door to London Bridge Station.The planning application for a new Renzo Piano designed building on the site ofthe current New London Bridge House was formally lodged with Southwark Councilin January 2006 and provides for a new high quality office and retail buildingproviding approximately 39,950 sq m (430,000 sq ft).At London Bridge Tower, following the pre-letting of the hotel element toShangri La, good progress is being made in securing a pre-letting of asubstantial part of the offices and these efforts will continue throughout2006.The outlook for 2006 is positive. We hope to see continuing evidence of rentalgrowth across our UK portfolio and an overall reduction in our vacancy rate. Inthis regard we are focusing our efforts towards a successful marketing campaignat Great West House and subsequent lettings of the vacant offices. Our UK portfolio offers good potential for adding value by securing newplanning consents. We are starting to evaluate the potential of our holdings atHoskyns House, next to Vauxhall mainline and underground station and willcontinue to work with our joint venture partners towards a positive outcome tothe planning application at New London Bridge House. We may consider individualdisposals where premium prices can be obtained and we will continue to seek outnew opportunities where we can achieve enhanced returns or asset growth.Swedish Portfolio The Swedish economy has been backed by GDP growth of 2.5 percent and falling rates of unemployment. More importantly, current growthforecasts predict that the Swedish economy will out-perform most other WesternEuropean economies in the coming years.Yields have compressed by approximately 50 bps during 2005 to just under 5 percent for central Stockholm properties with long-term secure income streams.During the last two to three years, Stockholm in particular has suffered fromhigh vacancy rates of between 15 to 20 per cent and falling rents, althoughthese have now generally stabilised. Despite improving occupational demand itis expected to take some time before this makes a significant impact on currentrental levels. Most new leases being signed reflect the relocation ofoccupiers within the market and demand is strongest for modern, flexible wellequipped open plan offices.Solna Business ParkDuring 2005 the main focus of our activity concentrated on the substantialcompletion of works to Solna Business Park. These focused primarily oncompleting works to Frƒ¤saren 12 to enable the Scandinavian food retailer, ICA,to open their supermarket of 9,400 sq m (101,182 sq ft) sq m in May 2005 and totake occupation of their office headquarters of 14,700 sq m (158,230 sq ft) inAugust 2005. The works were completed within budget and we adhered to thetight build programme which enabled them to successfully take occupation inaccordance with their time schedules.In addition major works to the faƒ§ade of Smeden were completed, includingencasing the face of the 200 metre building in a glass envelope and theinstallation of an innovative lighting system. In April 2005 we made a strategic purchased of a further 6,273 sq m (67,524 sqft) property at Solna Business Park, Yrket 3, at a cost of ‚£5.1 million (SEK 70million). It is fully let.We have made significant progress in branding Solna Business Park as adesirable office location and as a result have signed or agreed to lease 27,354sq m of previously vacant space during 2005. We have work to do in order to further reduce vacant space as during the yearthe IT division of the Swedish Post Office vacated 11,792 sq m (126,931 sq ft)of office space at Sliparen 2 in order to consolidate within their otherproperties. The overall vacant space by area in Sweden at 31 December 2005 was 21,147 sq m(227,625 sq ft) or 7.2 per cent and space under refurbishment amounted to afurther 13,337 sq m (143,558 sq ft) or 4.5 per cent.Lƒ¶vgƒ¤rdetThe estate, comprising 1,280 apartments and 42,608 sq m (458,644 sq ft) ofcommercial and retail space was sold to Stena Fastigheter AB, a well respectedlocal landlord, for ‚£39.9 million (SEK 547 million) on 1 February 2006. Theproperties were purchased in January 2002 for ‚£29.4 million (SEK 440 million)and were sold at our year end value.Vƒ¤nerparkenThe development provides important public services accommodation to the town ofVƒ¤nersborg, including the provision of a hospital, university, offices publicswimming pool and a marina.Following the extension of the university lease to 2008 and further lettingsuccess in the year, the current vacancy rate is 2.2 per cent which is thelowest since it was purchased in 1998. We have commenced discussions with theCity with regard to how we can facilitate future requirements.Continental European PortfolioThe French real estate market saw significant activity in 2005; a total of ¢â€š¬15.7 billion was invested, a 30 per cent increase over 2004, and there has beendiversification of the investment market in terms of product and location. Inthe Paris area, 2,165,300 sq m (23,259,653 sq ft ) of office space was takenup, an improvement of 12 per cent compared with 2004, and average headlinerents remained stable during the year.Yields are now at historically low levels, driven by the presence of manyforeign investors and the weight of money. This trend is likely to continue in2006.During the year, news leases and lease renewals in our French portfolioaccounted for a total of 18,435 sq m (198,029 sq ft), representing 12.5 percent of the portfolio. These transactions, together with indexation of rents,generated additional income of ¢â€š¬1.3 million during the year, equating to anuplift of 5.0 per cent.Major letting successes in the year included extension of the lease to ourtenant BNP-Paribas Insurance over 8,077 sq m (86,763 sq ft) in our 9,849 sq m(105,798 sq ft) property in Rueil-Malmaison and completion of a 6/9 year newlease. In the Sigma property an additional letting of 1,193 sq m (12,815 sq ft)was made to Data Base Factory, together with completion of a 3/6/9 year lease.This represented 18 per cent of the building by area.The vacancy rate of our portfolio remained low at 6.2 per cent, very close tothe national average of 6.0 per cent. This decreased to 3.0 per cent at the endof January 2006 following the sale of the vacant 6,026 sq m (64,864 sq ft) Le41 property.The portfolio was enhanced in 2005 by the addition of two newly acquiredproperties located in the Paris suburbs at a total cost of ¢â€š¬16.7 million (‚£11.3 million) ; Rue Raspail in Ivry (¢â€š¬11.6 million, ‚£7.9 million) providing5,570 sq m (59,833 sq ft) of lettable areaand whose main tenant is Jet Tours, and Croissy Beaubourg (¢â€š¬5.1 million, ‚£3.4million) providing 3,199 sq m (34,364 sq ft) let to a single tenant,Polymerland (part of the G.E Group).Several buildings have undergone refurbishment and improvement during 2005, themost notable being the renovation of the Marcel Pourtout property (2,219 sq m,23,837 sq ft) which led to the re-letting of all the vacant areas (1,447 sq m,15,544 sq ft) to a secure tenant Bureau Veritas, on a 6/9 lease. This propertyis now fully let.Other buildings undergoing light refurbishment included Le Clemenceau, whichreceived a new reception area and two new lifts, and Front de Parc in Lyon, inwhich we replaced all of the air cooling units.A number of smaller properties in Paris and Lyon have been sold for a total of¢â€š¬9.4 million (‚£6.4 million), the largest being the Lord Byron building, soldfor ¢â€š¬4.4 million (‚£3.0 million).Finally, we commenced the conversion of our 1,613 sq m (17,327 sq ft) officeproperty Le Foch, in La Garenne Colombes into 16 residential flats. Theexisting office tenants occupying this building were all reallocated to vacantspace in two of our other properties in the same area. The general economic improvement registered in France in the third quarter of2005 is settling in and the economic indicators suggest that the growth rateshould increase from 1.6 per cent recorded in 2005 to 2.0 per cent in 2006. Consolidated Income Statement Year ended Year ended 31 December 31 December 2005 2004 ‚£000 ‚£000 Continuing operations: Rental and similar revenue 77,678 74,475 Service charge and similar revenue 7,361 6,900 Total rental revenue 85,039 81,375 Service charge expense and similar charges (15,777) (13,772) Net rental income 69,262 67,603 Other operating income 3,360 4,151 Administrative expenses (14,910) (9,984) Net property expenses (3,532) (3,631) Operating profit before gain / (losses) on investment properties 54,180 58,139 Net gains from fair value adjustment on investment properties 67,173 37,236 Loss on disposal of part share of joint venture (1,106) - Profit from sale of investment properties 1,855 464 Operating profit 122,102 95,839 Finance income 1,425 1,801 Finance costs (37,654) (35,866) Share of loss of associates - post tax (1,216) (1,701) Profit before tax 84,657 60,073 Taxation - current (1,304) (596) Taxation - deferred (21,856) (16,042) Tax charge on profit (23,160) (16,638) Profit for the year from continuing operations 61,497 43,435 Discontinued operations: Loss for the period from discontinued operations - post tax (6,192) (4,002) Profit for the year 55,305 39,433 Attributable to: Equity holders of the parent 55,537 40,511 Minority interest (232) (1,078) 55,305 39,433 Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share) - basic 67.5 47.0 - diluted 67.0 46.7 Earnings per share for profit from continuing operations attributable to the equity holders of the Company during the year (expressed in pence per share) - basic 75.0 51.6 - diluted 74.5 51.3 Consolidated balance sheet Year ended Year ended 31 December 31 December 2005 2004 ‚£000 ‚£000 ASSETS Non-current assets Investment properties 1,096,361 1,022,539 Property, plant and equipment 8,119 10,710 Intangible assets 3,698 3,357 Investments in associates 3,526 3,010 Available-for-sale financial assets 13,918 - Investments - 171 Derivative financial instruments 353 - Deferred income tax 14,025 13,813 Trade and other receivables 1,265 3,163 1,141,265 1,056,763 Current assets Trade and other receivables 8,395 11,696 Investments - 10,492 Derivative financial instruments 457 - Cash and cash equivalents 118,162 57,371 127,014 79,559 Total assets 1,268,279 1,136,322 LIABILITIES Non-current liabilities Trade and other payables - 1,279 Deferred income tax 146,109 127,951 Borrowings, including finance leases 694,591 620,467 Derivative financial instruments 982 - Provisions - 301 841,682 749,998 Current liabilities Trade and other payables 45,394 44,128 Current income tax 1,799 902 Derivative financial instruments 285 - Borrowings, including finance leases 25,339 17,488 72,817 62,518 Total liabilities 914,499 812,516 Net assets 353,780 323,806 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 21,382 21,374 Other reserves 116,042 122,070 Retained earnings 217,252 182,340 354,676 325,784 Minority interest (896) (1,978) Total equity 353,780 323,806 Consolidated statement of changes in equity Attributable to equity Minority Total holders of the Company Interest Share Other Retained capital reserves earnings ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Balance at 1 January 2004 21,911 120,610 157,624 (900) 299,245 Arising in the year:- Currency translation differences on - 485 (1) - 484foreign currency net investments Share issue / purchase of own - - (118) - (118)shares expense Purchase of own shares - - (15,676) - (15,676) Cancellation of shares (609) 609 - - - Employee share option scheme 72 366 - - 438 Profit for the year - - 40,511 (1,078) 39,433 Total increase / (decrease) in (537) 1,460 24,716 (1,078) 24,561equity for the year Balance at 31 December 2004 21,374 122,070 182,340 (1,978) 323,806 Adoption of IAS 32 and IAS 39 - 9,774 (1,652) - 8,122 Balance at 1 January 2005 as 21,374 131,844 180,688 (1,978) 331,928restated for IAS 32 and IAS 39 Arising in the year:- Fair value gains/(losses) - available for sale - (7,481) - - (7,481) - cash flow hedges - (799) - - (799) Currency translation differences on - (7,663) - - (7,663)foreign currency net investments Share issue / purchase of own - - (115) - (115)shares expense Purchase of own shares - - (18,858) - (18,858) Employee share option scheme 8 141 - - 149 Reduction in minority interest - - - 1,314 1,314 Profit for the year - - 55,537 (232) 55,305 Total increase / (decrease) in 8 (15,802) 36,564 1,082 21,852equity for the year Balance at 31 December 2005 21,382 116,042 217,252 (896) 353,780 Consolidated statement of cash flows Year ended Year ended 31 December 31 December 2005 2004 ‚£000 ‚£000 Cash flows from operating activities Cash generated from operations 51,790 52,082 Interest paid (34,857) (33,325) Income tax paid (285) (539) Net cash inflow from operating activities 16,648 18,218 Cash flows from investing activities Purchase of investment property (22,386) (38,249) Capital expenditure on investment property (44,934) (31,003) Proceeds from sale of investment property 45,056 8,486 Purchases of property, plant and equipment (1,853) (1,545) Proceeds from sale of property, plant and equipment 2,826 2,029 Purchase of available-for-sale financial assets (3,532) (6,529) Purchase of interests in joint venture/associate (798) (1,486) Purchase of subsidiary undertaking (1,529) - Interest received 1,472 1,715 Net cash outflow from investing activities (25,678) (66,582) Cash flows from financing activities Issue of shares 144 428 Purchase of own shares (18,974) (15,795) New loans 148,581 112,938 Issue costs of new loans (2,234) (2,018) Interest rate caps purchased 81 (1,234) Repayment of loans (57,777) (45,814) Net cash inflow from financing activities 69,821 48,505 Net increase in cash and cash equivalents 60,791 141 Cash and cash equivalents at beginning of year 57,371 57,230 Cash and cash equivalents at end of year 118,162 57,371 Directors, Officers and AdvisersDirectorsSten Mortstedt (Executive Chairman)Per Sjƒ¶berg (Chief Executive Officer)Dan Bƒ¤verstam (Chief Financial Officer)Steven Board FCCA (Chief Operating Officer)Thomas Thomson BA (Non-executive Vice Chairman)James Dean FRICS * + (Non-executive Director) Keith Harris PhD * + **(Non-executive Director)Thomas Lundqvist + (Non-executive Director)Bengt Mortstedt Juris Cand (Non-Executive Director)* = member of Remuneration Committee+= member of Audit Committee**= senior independent directorCompany SecretarySteven Board FCCA Registered Office26th Floor, Portland HouseBressenden PlaceLondonSW1E 5BGRegistered Number2714781Registered AuditorsPricewaterhouseCoopers LLPChartered Accountants1 Embankment PlaceLondon WC2N 6RHRegistrars and Transfer OfficeComputershare Services PlcP O Box 435Owen House8 Bankhead Crossway NorthEdinburgh EH11 4BRClearing BankRoyal Bank of Scotland Plc24 Grosvenor PlaceLondon SW1X 7HPFinancial AdvisersNCB Corporate Finance20 Hooper StreetLondonE1 8BUJoint Stockbrokers NCB Corporate Finance20 Hooper StreetLondonE1 8BUKBC Peel Hunt111 Old Broad StreetLondon EC2N 1PHCLS Holdings plc on line: www.clsholdings.come-mail:[email protected] further information:Sten Mortstedt, Executive ChairmanPer Sjƒ¶berg, Chief Executive OfficerSteven Board FCCA, Chief Operating Officer+44 (0)20 7582 7766Adam Reynolds/Ben SimonsHansard Communications+44 (0)20 7245 1100ENDCLS HOLDINGS PLCRelated Shares:
CLS Holdings