14th Feb 2007 07:01
Liberty International PLC14 February 2007 14 February 2007 LIBERTY INTERNATIONAL PLC PRELIMINARY REPORT FOR THE YEAR ENDED 31 DECEMBER 2006 Attached is the full Preliminary Report for the year ended 31 December 2006: Highlights Summary of Investment and Development Properties Chairman's Statement Development Projects of the Liberty International Group Financial ReviewGlossary Preliminary Results Enquiries: Liberty International PLC:Sir Robert Finch Chairman +44 (0)20 7960 1273 David Fischel Chief Executive +44 (0)20 7960 1207 Aidan Smith Finance Director +44 (0)20 7960 1210 Public relations:UK: Michael Sandler, Hudson Sandler +44 (0)20 7796 4133 SA: Matthew Gregorowski, +44 (0)20 7457 2020 College Hill Associates Nicholas Williams, +27 (0)11 447 3030 College Hill Associates Background on Liberty International Liberty International PLC is the UK's third largest listed property company anda constituent of the FTSE-100 Index of the UK's leading listed companies.Liberty International owns Capital Shopping Centres ("CSC"), the premier UKregional shopping centre business, and Capital & Counties, a retail andcommercial property investment and development company concentrating on CentralLondon, non-shopping centre retail in the UK and California, USA. This announcement includes statements that are forward-looking in nature.Forward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements ofLiberty International PLC to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Any information contained in this announcement on the price atwhich shares or other securities in Liberty International PLC have been boughtor sold in the past, or on the yield on such shares or other securities, shouldnot be relied upon as a guide to future performance. LIBERTY INTERNATIONAL PLC PRELIMINARY REPORT FOR THE YEAR ENDED 31 DECEMBER 2006 - HIGHLIGHTS Sir Robert Finch, Chairman of Liberty International, commented: "2006 was a landmark year in the 26 year history of Liberty International withconversion at the year end into a UK Real Estate Investment Trust (REIT). REITstatus brings many advantages including tax transparency for shareholders,significantly increased flexibility for asset management and an internationallyrecognised property holding vehicle. We are delighted to have acquired the iconic seven acre Covent Garden Estate; anestate which not only will provide an excellent showcase to demonstrate ourskills in the retail sector but also the opportunity to create a world classmixed-use destination in the heart of London. We have also acquired a 50 percent interest in the St David's shopping centre in Cardiff. Our development pipeline amounts to some £1 billion including three top qualityregional shopping centre projects in Cardiff, Newcastle and Oxford, with the keyanchor tenants already in place. We have maintained virtually full occupancy of 98.6 per cent at our establishedcentres in 2006, while we made good progress with letting the developments whichopened in the year, the Northern Extension of Manchester Arndale and Xscape,Braehead. Our adjusted net asset value per share increased to 1327p per share, on theproperty industry standard measure, after absorbing the REIT conversion chargeof £154 million (41p per share) and equivalent to 1425p if adjusted for notionalacquisition costs deducted from market values. Our total properties amount to£8.2 billion, the debt to assets ratio has reduced to 36 per cent, diluted netassets have passed the £5 billion mark and we have ended the year with over £830million of cash and committed bank facilities. We very much look forward to the broader range of opportunities which our newREIT status should bring; we face the future with confidence and withcommitment." 14 February 2007 A presentation to analysts and investors will take place at 9.30 a.m. on 14February.The presentation will also be available to international analysts and investorsthrough a live audio call. The presentation will be available on the group's websitewww.liberty-international.co.uk. HIGHLIGHTS (Continued) ------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2006 2005 ------------------------------------------------------------------------------- Net rental income +13% £341m £300m Profit before tax, valuationand exceptional items +28% £155m £121m Profit before tax +71% £903m £527m Profit for the periodattributable to equity shareholders +327% £1,564m £366m Gain on revaluation and sale ofinvestment properties £587m £565m Total properties +16% £8,232m £7,070m Net debt +5% £3,063m £2,913m Net assets (diluted, adjusted*) +20% £5,002m £4,180m Basic earnings per share +303% 462.1p 114.8p Earnings per share (adjusted*) +14% 33.9p 29.8p Dividend per ordinary share +10% 31.0p 28.25p Basic net assets per share +49% 1308p 875p Net assets per share (diluted, adjusted*)** +12% 1327p 1188p Total return* 18% 19%-------------------------------------------------------------------------------- * See Glossary for definitions ** Net assets per share (diluted, adjusted) would increase by 98p per share at 31 December 2006 (31 December 2005 - 90p) to 1425p (31 December 2005 - 1278p) if adjusted for notional acquisition costs (see Financial Review). HIGHLIGHTS (Continued) KEY FEATURES OF 2006 PRELIMINARY RESULTS • Like-for-like gains on revaluation of investment properties: ------------------------------------------------------------------------------- Year ended Six months 31 December ended 2006 30 June 2006 ------------------------------------------------------------------------------- - UK regional shopping centres + 7.9% + 2.7% - UK non-shopping centre properties +13.9% + 8.9% - USA + 5.8% + 4.8%-------------------------------------------------------------------------------- • Revaluation gain on UK regional shopping centres: - 66 per cent from yield shift - 34 per cent from underlying rental growth • 98.6 per cent occupancy in established UK regional shopping centres, 97.7 per cent overall including recently completed developments (31 December 2005 - 98.5 per cent) • 8.5 per cent like-for-like net rental income growth in UK regional shopping centres, 3.5 per cent for UK non-shopping centre properties • £740 million property additions including: - Covent Garden Estate £421 million - St David's, Cardiff (50 per cent) £180 million including St David's 2 development • £127 million disposals of investment properties at £23 million over 31 December 2005 market values • Substantial progress with £1 billion development programme, of which £650 million is underway or with planning approval including: - St David's 2, Cardiff - Eldon Square, Newcastle - Westgate, Oxford • Strong financial position with debt to assets ratio reduced to 36 per cent (2005 - 40 per cent) benefitting from the placing of 25 million shares in November 2006 raising £335 million HIGHLIGHTS (Continued) DIVIDENDS The Directors of Liberty International PLC have proposed a final ordinarydividend per share of 17.25p (2005 - 15.25p) to bring the total ordinarydividend per share for the year to 31.0p (2005 - 28.25p). The following are the salient dates for the payment of the final dividend: Tuesday, 24 April 2007 Sterling/Rand exchange rate struck. Monday, 7 May 2007 Ordinary shares listed ex-dividend on the JSE, Johannesburg. Wednesday, 9 May 2007 Ordinary shares listed ex-dividend on the London Stock Exchange. Friday, 11 May 2007 Record date for final dividend in London and Johannesburg. Wednesday, 30 May 2007 Dividend payment day for shareholders (Note: Payment to ADR holders will be made on 13 June 2007). South African shareholders should note that in accordance with the requirementsof STRATE the last day to trade cum-dividend will be Friday 4 May 2007 andthat no dematerialisation or rematerialisation of shares will be possible fromMonday 7 May to Friday 11 May 2007 inclusive. No transfers between the UK andSouth African registers may take place from Tuesday 24 April to Sunday 13 May2007 inclusive. SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTIES------------------------------------------------------------------------------------------------------- Fair value Revaluation surplus Net rental income --------------------------- --------------------- ----------------------------- 2005 2006 2005 2006 £m £m £m Increase £m £m Increase-------------------------------------------------------------------------------------------------------UK regional shopping centres Lakeside,Thurrock 1,155.9 1,289.0 126.0 10.8%MetroCentre,Gateshead 930.0 1,019.2 80.8 8.6%Braehead, Glasgow 677.2 742.0 65.1 9.6%The Harlequin,Watford 493.2 521.7 28.7 5.8%VictoriaCentre,Nottingham 407.8 438.3 30.1 7.4%The Potteries,Stoke-on-Trent 281.8 306.3 24.4 8.7%The Glades,Bromley 266.6 281.4 11.4 4.2%The Chimes,Uxbridge 242.3 271.8 30.8 12.8% ------- ------- ------- ---------------- Like-for-likeincome 4,454.8 4,869.7 397.3 8.9% 197.4 214.2 8.5% Arndale,Manchester 436.0 439.6 (0.5) (0.1)%Chapelfield,Norwich 307.3 345.3 25.6 8.0%CribbsCauseway,Bristol 289.1 314.5 23.8 8.2%Eldon Square,Newcastle uponTyne 214.7 240.4 10.5 4.7% ------- ------- ------- -----------------Like-for-likecapital 5,701.9 6,209.5 456.7 7.9% 229.7 266.0 15.8% Acquisitions andcompletions - 108.3 2.9 2.7% - 0.4Redevelopments anddevelopments 137.1 225.0 6.5 3.0% 5.9 5.6 ------- ------- ------- ----------------Total UK regionalshopping centres 5,839.0 6,542.8 466.1 7.7% 235.6 272.0 15.4% ------- ------- ------- ---------------- UK non-shoppingcentre propertiesLike-for-likeincome 528.8 609.8 76.7 14.4% 29.0 30.0 3.5%Like-for-likecapital 52.8 57.4 4.6 8.6% 1.4 2.7 ------- ------- ------- ------- ------- 581.6 667.2 81.3 13.9% 30.4 32.7 Acquisitions - 500.2 (20.5) (3.9)% 1.7 8.3Redevelopments 85.6 123.3 13.6 12.5% 4.4 4.4Disposals 103.0 - - - 9.1 2.6 ------- ------- ------- ----------------Total UKnon-shoppingcentre properties 770.2 1,290.7 74.4 6.1% 45.6 48.0 5.3% ------- ------- ------- ----------------US propertiesLike-for-likeincome 303.9 283.8 15.3 5.3% 17.8 18.3 4.4%Like-for-likecapital 24.7 25.4 3.0 12.3% 0.2 1.4 ------- ------- ------- ---------------- 328.6 309.2 18.3 5.8% 18.0 19.7Acquisitions - 44.4 (0.3) (0.7)% 0.9 0.9 ------- ------- ------- ----------------Total USproperties 328.6 353.6 18.0 4.9% 18.9 20.6 ------- ------- ------- ----------------Total investmentproperties 6,937.8 8,187.1 558.5 7.3% 300.1 340.6 13.5% ------- ------- ------- SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTIES (Continued) Property analysis by use and type-------------------------------------------------------------------------------- Fair Value Revaluation surplus ------------------- -------------------- 2005 2006 % of total Increase £m £m properties -------------------------------------------------------------------------------- Regional shopping centres andother retailUK regional shopping centres 5,839.0 6,542.8 80.0% 7.7%UK other retail 351.2 765.1 9.3% 3.3%US regional shopping centres 130.8 121.6 1.5% 4.8%US other retail 138.0 132.2 1.6% 7.5% ------------------ -------Total regional shoppingcentres and other retail 6,459.0 7,561.7 92.4% 7.2% ------------------ -------OfficeUK business space 419.0 525.6 6.4% 10.5%US business space 59.8 65.8 0.8% 2.9% ------------------ -------Total office 478.8 591.4 7.2% 9.7% ------------------ -------ResidentialUS residential - 34.0 0.4% ------------------ -------Total residential - 34.0 0.4% ------------------ ------- ------------------ -------Total investment properties 6,937.8 8,187.1 100% 7.3% ------------------ ------- Analysis of UK non-shopping centre and US properties by location and type ------------------------------------------------------------------------------- Revaluation surplus Net rental income ------------------- ----------------- 2005 2006 2006 2005 2006 £m £m £m Increase £m £m-------------------------------------------------------------------------------- UK non-shopping centre properties Covent Garden 47.8 489.3 (10.2) (2.0)% 2.6 9.6Central London 358.5 397.3 51.5 14.9% 23.6 20.0Business spaceoutside London 193.4 212.0 19.7 10.3% 11.1 10.7Retail outsideLondon 170.5 192.1 13.4 7.5% 8.3 7.7 ---------------------------- ---------------Total UK non-shoppingcentre properties 770.2 1,290.7 74.4 6.1% 45.6 48.0 ---------------------------- --------------- US propertiesUS retail 268.7 253.8 15.9 6.2% 13.9 15.9US businessspace 59.9 99.8 2.1 1.9% 5.0 4.7 ---------------------------- -------------- Total US properties 328.6 353.6 18.0 4.9% 18.9 20.6 ---------------------------- -------------- 1,098.8 1,644.3 92.4 6.0% 64.5 68.6 ----------------------------- -------------- SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTIES (Continued) UK investment property valuation data-------------------------------------------------------------------------------- Fair Value Nominal equivalent yield Passing Net ERV ----------------------- rent rental income 2006 2005 2006 2006 2006 2006 £m £m £m £m -------------------------------------------------------------------------------UK regional shopping centres Lakeside, Thurrock 1,289.0 4.91% 4.65%MetroCentre, Gateshead 1,019.2 5.00% 4.75%Braehead, Glasgow 742.0 5.10% 4.81%The Harlequin, Watford 521.7 5.00% 4.75%Arndale, Manchester 439.6 5.36% 4.96%Victoria Centre, 438.3 5.30% 4.95%NottinghamChapelfield, Norwich 345.3 5.50% 5.00%Cribbs Causeway, Bristol 314.5 5.06% 4.74%The Potteries,Stoke-on-Trent 306.3 5.40% 5.00%The Glades, Bromley 281.4 5.21% 4.95%The Chimes, Uxbridge 271.8 5.30% 5.00%Eldon Square, Newcastleupon Tyne 240.4 5.50% 5.20% ------- Like-for-like capital 6,209.5 5.13% 4.83% 258.7 266.0 316.1Other 333.3 9.3 6.0 12.8 ------- -------------------------Total UK regional shoppingcentres 6,542.8 5.15% 4.76% 268.0 272.0 328.9 ------- ------------------------- UK non-shopping centrepropertiesCentral London 354.4 5.36% 4.86%Business space outsideLondon 151.7 6.54% 6.03%Retail outside London 161.1 5.49% 5.13% ------- Like-for-like capital 667.2 5.68% 5.20% 36.4 32.7 38.9Other 623.5 6.83% 5.02% 26.2 15.3 41.0 ------- ------------------------- Total UK non-shoppingcentre 1,290.7 5.95% 5.11% 62.6 48.0 79.9properties ------- ------------------------- CHAIRMAN'S STATEMENT 2006 was a landmark year in the 26 year history of Liberty International withits conversion at the year end into a UK Real Estate Investment Trust (REIT).Furthermore, we concluded in the year the acquisition of the seven acre CoventGarden Estate and a 50 per cent interest in the St David's shopping centre inCardiff. The group also completed a number of major development projects andseveral important financings. We recorded a further strong performance in thegrowth of our underlying earnings per share and a very satisfactory increase innet asset value. Our development pipeline amounts to some £1 billion includingthree top quality regional shopping centre projects, with the key anchor tenantsalready in place. Our share price rose by 42 per cent from 981p to 1396p at theyear end, driven by a strong property market and the anticipation of thebenefits of REIT status. We face the future with confidence and with commitment. Conversion to a REIT The very rapid progress towards the launch of REITs was helped by a constructivedialogue between the property industry and the UK Treasury. In December 2006,our shareholders approved our conversion to a REIT with effect from 1 January2007. REIT status brings us many advantages including tax transparency forshareholders, a significantly increased flexibility for our asset managementwhich can be conducted without the complication of tax on future capital gainsand an internationally recognised property holding vehicle which should attractadditional investors. By committing to the applicable conversion charge at2 per cent of investment properties of £154 million (41p per share), we havebeen able to remove from the balance sheet and permanently extinguish aprovision for deferred tax including contingent tax on valuation gains,amounting to £1,037 million (275p per share) at 31 December 2006; thissubstantially enhanced our reported capital base. Liberty International is the third largest UK REIT and currently ranks in thetop twenty largest REITs globally. We very much look forward to the broader rangeof opportunities which our new status should bring. Acquisition of the Covent Garden Estate In August 2006, we took advantage of a very special and unusual opportunity andacquired for £421 million a seven acre site in Covent Garden including thehistoric market buildings at its centre. This important purchase provides astrategic holding in the heart of the West End of London and ownership of awell-recognised venue which attracts some 50 million customers a year. A numberof smaller add-on investments have since been made. We look forward to workingwith the local communities and the planning authorities in creating a worldclass retail and mixed-use destination at the core of our business. The projectwill provide the group with an excellent showcase with which to demonstrate ouractive management skills and the benefits of our extensive retailerrelationships, while delivering substantial benefits to shareholders. Results for the year ended 31 December 2006. Our underlying revenue results for the year continued to be robust with a strong8.5 per cent like-for-like increase in UK shopping centre net rental income anda 14 per cent increase in adjusted earnings per share. The gains on revaluation and sales of investment properties amounted to £587million, as described under Property Valuations below, while profits on tradingproperties amounted to £33 million. We also recorded a valuation surplus of £164 million on derivative financialinstruments which are used to fix the interest rate on our long term debt.Somewhat paradoxically, we are required under the International FinancialReporting Standards which we now adopt to mark-to-market these instrumentsnotwithstanding their purpose being to reduce the volatility of our cash flows.The surplus reflects the rise in long-term interest rates in the year, with theten year interest rate swap, a reasonable proxy for our hedging strategy, risingin the period from 4.45 per cent to 5.11 per cent. Over and above these pre-tax items, we recorded substantial exceptional taxsurpluses as a result of REIT status and the debenture restructuring which weconcluded during the year, the details of which are contained in the FinancialReview. During 2006, we substantially enhanced our financial position. We increased ourequity base with a share placing of 25 million shares in November 2006 raising£335 million, concluded a major and complex restructuring of our long-dateddebenture stock and were active in raising further long-term fixed-rate debt. Our total properties amount to £8.2 billion, the debt to assets ratio hasreduced to 36 per cent, diluted net assets have passed the £5 billion mark and we have ended the year with over £830 million of cash and committed bank facilities. Our net asset value per share increased in 2006 from 1188p to 1327p per share.Adjusting for the one-off 2 per cent conversion charge cost of 41p per share,this represented a total return for the year including dividends of 18 per cent.Indeed, over the last decade, Liberty International has delivered a compoundtotal return of over 15 per cent per annum, a very consistent and satisfactoryresult for the company and its shareholders. As we have regularly pointed out to shareholders and analysts, investmentproperties are required to be valued after deducting notional acquisition costs,including stamp duty land tax at 4 per cent in the UK, amounting in aggregate to£370 million, equivalent to 98p per Liberty International share, over 7 per centof Liberty International's adjusted net asset value as the impact is magnifiedby the company's gearing. The valuation process assumes each asset is soldindividually on the open market at the balance sheet date. This point is especially relevant now shareholders have full tax transparencywith Liberty International's REIT status. As stamp duty on share transfers onlyamounts to 0.5 per cent, an incoming shareholder in Liberty International caneffectively invest in the assets at a substantially lower acquisition cost thanis assumed by the valuers in the direct property valuations. Property valuations The headline story in the 2006 UK investment market was very much that of theoffice, as office markets especially in Central London experienced a strongcyclical recovery after a long period of underperformance. One of the characteristics of our UK regional shopping centres is stabilitywhile delivering real returns consistently over the long term with lowvolatility; in this changed property environment, our shopping centre marketvaluations did not keep pace with the overall UK market in 2006. The valuationsincreased by 7.9 per cent on a like-for-like basis, but encouragingly one-thirdof the uplift, in respect of centres where income could be measured on alike-for-like basis, came from improvement in underlying rental values. Ourshopping centre valuations did benefit, although not to the same extent asoffice valuations, from a further downward shift in yields, with an average 30basis points reduction across our UK regional shopping centres, to an averagenominal equivalent yield of 4.83 per cent. We continue to believe that our UK regional centres, which represent 80 per cent of our overall assets, have a relatively very undemanding investment rating. For example, at 31 December 2006, representative valuation yields for other relevant prime asset classes as reported by one of our valuers, CB Richard Ellis, were 4.0 per cent for high street shops, 3.85 per cent for retail parks, 4.25 per cent for City of London offices and 3.75 per cent for West End of London offices. These yields in each case represent a substantial premium to the CB Richard Ellis figure of 4.75 per cent for UK regional shopping centres, a very stable asset class which has not participated to the same extent in the strong downward movement in property yields in the last few years. Furthermore, no account is taken in the valuation process of any additionalvalue were our UK regional shopping centre portfolio to be considered as awhole. Lakeside, our flagship centre, provided a particularly strong 10.8 per centuplift following the completion of the 2005 rent review cycle. Otherwiseperformance was consistent across our shopping centres with the exception ofManchester Arndale where a flat result was recorded. This reflected theextensive tenant reorganisation which has been taking place during the year aswe aim to optimise the tenant mix across the whole centre now the 550,000 sq.ft.Northern Extension is open. This process is progressing well and we continue tobelieve the prospects are outstanding for this excellent city centre project,where the general rental level is below that of other comparable city centrelocations. Our UK non-shopping centre properties produced a creditable 13.9 per cent uplifton a like-for-like basis while our United States' properties recorded a 5.8 percent increase. These results compare with the capital growth for the year from UK property, asmeasured by the IPD monthly all-property index, of 12.4 per cent (offices 17.5 per cent and retail 10.5 per cent), a substantial part of which was the result of further downward yield shift. UK regional shopping centres Major events of the year included the pooling of our interests in December withour joint venture partner in Cardiff, Land Securities Group PLC, conferringownership of a 50 per cent interest in the existing St David's Centre and the StDavid's 2 development. Construction of this large scale project extending anexisting prime location has now commenced and, when complete, the enlargedcentre at around 1.4 million sq.ft. should rank in the UK's top ten regionalcentres. In addition, in partnership with the Prudential, we successfully opened thefinal phases of the Northern Extension of Manchester Arndale increasing thecentre's size to 1.4 million sq.ft. currently the largest city centre shoppingcentre in the UK. The 550,000 sq.ft. extension has significantly improvedcustomer circulation, attracted new retail formats to the city and the overallcentre is around 90 per cent let by rental value. At Braehead, Renfrew, Glasgow, which has our major shopping centre at its heart,we further strengthened the overall destination by the opening in April of the460,000 sq.ft. Xscape leisure attraction. More generally and encouragingly, after a rather torrid 2005, conditions in theUK retail market for non-food retail sales showed steady improvement from thesecond quarter of 2006, recording a 2.2 per cent increase in value for the yearas a whole as measured by national ONS statistics after a fall of 0.6 per centin 2005. In fact, Christmas 2006 appears to have produced the best tradingresult for three years. Our management team must be congratulated on maintaining virtually fulloccupancy of 98.6 per cent at our established centres in 2006. We made good progress with letting the developments which opened in the year, the Northern Extension of Manchester Arndale and Xscape, Braehead. The UK retail landscape remains extremely competitive with regional shoppingcentres fighting for their share of retail spend against other retail sectorsincluding superstores, retail parks, other shopping centres and e-commerce.While reliable statistics on the latter are hard to find, the emerging patternin the UK is one of a virtuous circle where successful on-line operationsbolster a successful physical retailing presence and vice versa. Our shopping centres are maintaining their position in this environment. Ourstrategy is based on active tenant mix management aimed at providing the mostcompelling comparison shopping offer. We aim to have the UK's leading retailerstrading out of flagship stores in our centres and to meet shoppers' aspirationsfor an enjoyable and satisfying experience, in a safe, secure and qualityenvironment. Retailer changes are fundamental in providing a fresh impression to the shopperon a regular basis and in 2006 we implemented 124 tenancy changes at our established centres, 7 per cent of total retail units. 10 retailers chose a Capital Shopping Centres' centre for their first store opening in a UK shopping centre and in addition we achieved 17 lettings to UK retailers entirely new to our centres. Family dining is becoming integral to our business as the trend of extendedshopping hours continues and the quality of the offer is a key differentiatorfor customers. We were delighted to achieve 32 casual dining lettings in 2006and 19 lettings to coffee, juice bar and other similar operators. The process of change and improvement is constant and part of the fascination ofthe regional shopping centre, a format which has over the years proved itsadaptability and flexibility and maintained its core position in modernlifestyles and in the economy. Development programme In each of the last three years, we have opened a major shopping centre project;the New Red Mall at MetroCentre in 2004; Chapelfield, Norwich in 2005 and theManchester Arndale Northern Extension in 2006. We have maintained a measured approach to development risk and continue to havean active development programme which represents an important component of ourlong term growth profile. The programme currently comprises £650 million ofprojects either underway or with planning approval and aggregates to £1 billionincluding potential projects where we are already actively engaged onpreliminary work but as yet without planning permission. The programme includes extremely high quality regional shopping centredevelopments such as Cardiff, Oxford and Eldon Square, Newcastle where the riskprofile is very attractive as we are extending what are already establishedprime regional locations and have commitments from leading anchor retailers. Weare making good progress with other initial lettings on these projects whichcomplete in 2009 and, in the case of Oxford, 2011. We also have a number of attractive remodelling projects within our existingshopping centres such as the Lakeside Boardwalk restaurant project, whichcontinually add value and respond to the changing requirements of both retailerand shopper. On the non-shopping centre side, notable projects are Broadgate, Leeds, amixed-use redevelopment of the former Allders store, and the officeredevelopment of 190 Strand, London WC2. A full list of development projects is included in these Preliminary Results. UK non-shopping centres Capital & Counties, the group's UK non-shopping centre and internationalbusiness, performed well in 2006 and offers the Group a strong platform forfuture growth with £1,644 million of investment properties at 31 December 2006. Following the acquisition of Covent Garden, the company has been reorganisedunder new leadership to create focussed vehicles with the intention of achievingsuperior performance arranged around core, value-add and opportunisticinvestment returns. Capco Covent Garden will focus on growing its already significant investmentinto a major focussed district player utilising the retail skills of the groupto exploit fully the potential of Covent Garden as a core group investment. Capco London holds our non-Covent Garden properties in London and throughpartnership and acquisition intends to become a specialist value-add developerand investor in the capital. Capco Urban will participate in composite mixed-use developments nationally,working closely with the development arm of CSC to create a long termcompetency, fully capturing the component values of projects within this growingsector of the UK property market. Capco Opportunities will target higher return investments actively recyclingcapital and co-operating where appropriate with third party investors toproperly exploit opportunities in all property categories. International Capco USA is an established value-add developer of mixed-use properties with anemphasis on retail investment and performed strongly in 2006 recording a totalreturn of 23 per cent with total assets now amounting to some $720 million. Mostnotable in 2006 was the successful completion and letting of the Trio apartmentdevelopment in Pasadena, providing a £17 million profit on completion which hasbeen shown as a trading profit. The Serramonte Shopping Centre, our largestasset, continues to provide a number of active management and remodellingopportunities which we are pursuing. Capital & Counties USA is converting to aUS REIT, as the company has reached the stage in its development where US REITstatus is considered beneficial. Capco International has been formed to support broader group initiatives in theinternational marketplace. We announced in 2006 and since the year end havesubscribed for a 25 per cent interest in an Indian shopping centre development company, Prozone, a 75 per cent subsidiary of the fast-growing Indian retailer, Provogue. Board and management In 2006, John Saggers, Managing Director of Capital & Counties, retired after 33years of service and we thank him for his professionalism, commitment andcontribution to the group. In September, we were delighted to welcome in hisplace Ian Hawksworth, previously with Hongkong Land, who has joined the Board ofLiberty International. The activities for which Ian is responsible include asubstantial £1.6 billion of investment properties and we have great confidencein his ability to make a significant impact in this important segment of ouroverall business. We have a tremendous platform for value-adding andopportunity-driven activities, both in the UK and internationally, potentiallydelivering higher returns to complement the very stable UK regional shoppingcentre business. Also, David Bramson retired as a non-executive director and we thank him for hisservices to the Board. We appointed in his place Neil Sachdev, formerly propertydirector of Tesco PLC and from March 2007 the commercial director of J Sainsburyplc, who brings valuable and relevant experience to our affairs. Once again my thanks go to my Board colleagues for their active support during2006. Along with the non-executive directors, I would like to thank the group'sexecutive directors for shouldering such a substantial workload in 2006 giventhe enormous activity in the year; also to thank the staff at 40 Broadway, atour shopping centres and in the USA for their tremendous commitment and effort.In the course of a year, we host a considerable number of visits to our shoppingcentres and it is noticeable how many unprompted comments we receive fromvisitors praising the professionalism, enthusiasm and cheerfulness at all levelsof our organisation - one of the group's tremendous strengths. Corporate social responsibility I am pleased to record that for many years Liberty International has had astrong commitment to Corporate Social Responsibility, producing our first fullannual report on the subject in 2002. We have a strong community programme at our shopping centres, focussing onyouth, education and the prevention of crime and anti-social behaviour, withsome excellent local initiatives. Once again, in 2006 we have devotedsubstantial time and financial support to this important area to the benefit ofall parties involved. Our development programme has always been focussed on brownfield land andBraehead in Renfrew, Glasgow, formerly derelict industrial land, is a wonderfulexample of mixed-use urban regeneration. Overall we estimate that our shoppingcentres have generated employment directly at the centres for some 50,000people, leaving aside the indirect employment opportunities they have created. In our development activities, we continue to apply the highest constructionstandards; and, in management, we have made further major strides in energyefficiency and the reductionof waste. Our city centre development proposal in Oxford, where after a lengthy processthe Council has resolved to grant planning approval, is a good example of ourfocus on designing and implementing practical responses to policy requirementsand the needs of our retailers and local circumstances. We have worked with awide range and number of stakeholders in Oxford to deliver a sustainabilitypackage which we consider is unrivalled in developments of this type. Thelocation is a brownfield site in a city centre area in need of regeneration. Weare proposing a genuine mix of uses with a significant residential element ofsome 127 units. We have woven new development into a sensitive location;pedestrian and cycle access is at the forefront of the design befitting a Cityalready heavily reliant on these modes of transport. Our constructive dialogue with the City and County Councils and the busoperators has led to a huge proposed investment in public transportinfrastructure. This will include a major reorganisation of bus access into andout of the city centre and a very significant contribution towards investment inother public transport initiatives including park and ride. In addition, the replacement car parking and the new arcade will both benaturally ventilated. We will introduce green sedum roofs, solar thermals, andrainwater harvesting. The department store for John Lewis and the residentialuses will be served by centralised carbon-neutral biomass boilers fuelled bywaste timber and wood from forestry thinning. The design of the buildings willalso include the installation of pipework to enable connection to a localcombined heat and power plant currently being researched by Oxford City Council. Over 2000 jobs are expected to be created when the new retail offer opens,increasing the number employed in the centre to around 3,300. In addition, therewill be around 2,000 employment opportunities during construction. Dividends We are recommending a final dividend of 17.25p payable on 30 May 2007, bringingthe full year's dividend to 31.0p per share, an increase of 10 per cent on 2005.This dividend will be an ordinary dividend with no property income distribution('PID') element. Dividends for 2007 will contain both a PID element, subject towithholding tax for certain shareholders, and a non-PID element. We expect the dividend for 2007 to include an extra increase out of the netsavings from conversion to a REIT. The directors remain committed to a progressive and relatively full dividendpolicy, distributing substantially all of the group's recurring income. Quarterly reporting In recognition of our new status as a REIT and in order to address theever-increasing requirements of investors for more regular and up-to-dateinformation, we intend to move to quarterly reporting with effect from the firstquarter of 2007, including external independent property valuations. Prospects Shareholders can be reassured that our sound financial position and theunderlying strengths of our business mean we are well placed to continue toprosper and to respond to challenges which lie ahead. The retail industry is a core economic sector. We are the clear market leader inthe ownership, development and management of prime UK regional shopping centres,owning 8 of the UK's top 21 centres and overall attracting some 225 millioncustomer visits per annum to our centres; we also now own the iconic CoventGarden complex with its market and surrounding assets generating some 50 millionannual customer visits. Liberty International has three attributes which should prove to have anenduring attraction to REIT investors - a business of exceptional quality, ahigh degree of specialisation and the benefits of scale. I believe that ourexcellent management team will take the business forward for the benefit ofshareholders and extend its long track record of success with confidence andwith commitment. Sir Robert FinchChairman14 February 2007 DEVELOPMENT PROJECTS OF THE LIBERTY INTERNATIONAL GROUP New developments of Capital Shopping Centres St David's, Cardiff In Cardiff, the St David's Partnership, our joint venture with Land SecuritiesGroup PLC for a substantial extension to the existing St David's Centre, isprogressing well. The retail provision of an additional 967,500 sq ft will beanchored by a John Lewis department store and an extended Debenhams and providearound 125 shops and restaurants. In addition, over 300 new apartments will becreated, together with a state of the art civic library of around 55,000 sq ft. Enabling works, including a temporary library, have been completed and thecentre scheduled to open in autumn 2009. On completion, the new St David'sCentre will provide around 1.4 million sq ft of space, ranking it amongst the UK's largest city centre regional shopping centres. Westgate Centre, Oxford Significant progress has been made in Oxford, where the Westgate Partnership,our joint venture with LaSalle Investment Management, where the Council hasresolved to grant planning consent for the refurbishment and extension of theexisting centre to around 750,000 sq.ft. In addition to a John Lewis departmentstore and around 90 shops, there will be 127 city centre homes, 50 per cent ofwhich will be designated as affordable housing. It is anticipated that a public inquiry into the Compulsory Purchase Order willtake place in late summer, allowing a start on site in spring 2008 and ananticipated completion in autumn 2011. Development Activities in Respect of Completed CSC Shopping Centres Manchester Arndale The final phase of the 550,000 sq.ft. Northern Extension opened, on programme,in September 2006, extending the centre to 1.4 million sq.ft., currently thelargest city centre shopping centre in the UK, with over 90 per cent of the newspace either exchanged or in solicitors' hands and the overall centre around 90per cent let by rental value. The centre now enjoys a continuous pedestriancirculation, a new market operated by Manchester City Council and boasts manynew retailers to Manchester. Eldon Square, Newcastle Two of the proposed schemes to improve and extend the centre to a total of 1.3million sq.ft. commenced on site during 2006. Eldon Square West, providing 2 newrestaurants overlooking Old Eldon Square and 22,000 sq.ft. of additional retailspace opened for trade in November. 80 per cent of the space is committedincluding the restaurants, let to Wagamama and Strada. The first phase of the second scheme, Eldon Square North, providing a new busstation for the City opens in March with the new retail mall, providing anadditional 48,000 sq.ft. of retail space, due to open in Spring 2008. Initialletting interest is encouraging. The third and largest scheme, Eldon Square South, providing a total of 410,000sq.ft. of retail space including a new 175,000 sq.ft. department store forDebenhams, is due to commence on site, subject to vacant possession, this year.Over 50 per cent of the space is either exchanged or in solicitors' hands andthe scheme is due to open in Autumn 2009. Lakeside, Thurrock The remodelling of the Pavilion to provide 11 new restaurants and 4 additionalretail units overlooking Alexandra Lake continues on budget and programme. 91per cent of the restaurant space is committed and all units are due to open thisSummer. The adjacent cinema is also being refurbished to provide 9 screens withstadium seating. Braehead, Renfrew, Glasgow During 2006, the phase two development involving around 165 acres of landadjacent to the shopping centre continued to progress well. Xscape, our joint venture with Capital & Regional, opened in April broadeningBraehead's retail and leisure offer to include activities such as bowling, wallclimbing, and indoor skiing/snow boarding together with specialist retail,restaurants and cafes. A further 40 acres of residential land has been sold toBest Homes, a joint venture between Bett Homes and Strathclyde Homes who willdevelop around 850 new homes and apartments. A new 80 bedroom hotel for ChoiceHotels is under construction and a Scottish headquarters for Spanish ceramicscompany, Porcelanosa, will complete in the spring. Conditional contracts have been exchanged to sell a further three sites for anadditional hotel, retirement homes and a headquarters building for a Scottishplant hire company, GAP. In addition, Renfrew Riverside a 35,000 sq ft officedevelopment is underway and is scheduled to complete in the summer. We have 56 acres of remaining land for further enhancement of the regenerationproject. The Glades, Bromley The first phase of the project to remodel the entrance mall and adjacentproperties, provide a new 30,000 sq.ft. store for H&M and further deeper retailunits to meet modern retailer requirements, was completed in November. Phase twois now underway and trading of the new space is anticipated to commence earlynext year. The Harlequin, Watford Good progress continues to be made at Watford for plans to redevelop theadjacent Charter Place site with our partners, Watford Borough Council. Following publication of the planning brief, architects have been appointed andinitial designs have been drawn up for a retail-led mixed-use scheme including anew department store, cinema, leisure and catering facilities. The Potteries, Stoke-on-Trent At The Potteries Shopping Centre, Stoke-on-Trent, planning consent has beenreceived to remodel and extend the existing food court to provide 15,700 sq.ft.of new retail space to enhance the tenant mix. Construction is due to commencein March to facilitate retailers opening for Christmas trade this year. Chapelfield, Norwich The phased completions of the fit out of the residential element of Chapelfieldhave continued to be delivered with 42 units now completed. Of the 117apartments, 28 have been sold to Wherry Housing for affordable housing, 38 arein the process of being sold privately, with the remaining 51 to be released inphases. MetroCentre, Gateshead During the year, our ongoing refurbishment works through the malls havecontinued together with improvement to customer circulation. The final phasewill commence alongside plans to upgrade the leisure facilities. UK non-shopping centre development activities 190 Strand, London WC2 Significant progress was made during 2006 with detailed design developmentcontinuing on our joint venture scheme with Prudential. This office, retail andresidential project anticipates the creation of some 200,000 sq ft of newcommercial office and retail floor space plus 44 residential apartments. Metropolitan Wharf, Wapping Riverside, London E1 The refurbishment and conversion of this 110,000 sq ft riverside warehouse forthe creative industries has commenced on site. Completion of the constructionwork is expected laterin 2007. Metro Building, Hammersmith, London W6 The renovation and refurbishment of the 110,000 sq ft office building inHammersmith was completed during the year. Capital Park, Cambridge The fourth phase of this major office park in Cambridge, 40,000 sq.ft. of GradeA offices, was completed during 2006 and the marketing is well underway. Broad Gate, Leeds During 2006, demolition and preliminary works were completed at our major mixeduse scheme at Broad Gate in the centre of Leeds. The main construction work hascommenced and the scheme will see the introduction of 120,000 sq ft of retail, complemented by 150,000 sq ft of office floor space and some residentialon the upper levels. Good progress is being made with marketing and a majorretail pre-letting has been secured. Construction is on course for completion inlate 2008. Hagley Road, Birmingham The major refurbishment and upgrading of the 140,000 sq ft office in Birminghamis underway. Allowing for phased handover, the expected completion is early2008. New Fetter Lane, London EC4 Initial proposals for a major office redevelopment on New Fetter Lane are beingdrawn up to create a significant prime office development. Architects areinstructed and preliminary designs are being drawn up. Stockwell Street, Greenwich Significant progress in preparing a planning application was made during theyear. This mixed use project in the centre of Greenwich comprises 131residential apartments and 30,000 sq ft of retail. Public planning exhibitionswere organised and further community engagement will take place once theplanning application is submitted. Capco USA Trio Apartments, Pasadena, California During 2006 the construction was completed on this mixed use project consistingof 304 luxury residential units and 14,500 sq.ft. retail space. The scheme isover 95 per cent let with strong tenant demand. Serramonte Shopping Centre, Daly City Construction was completed of the new casual dining wing which is 100 per centlet and planning approvals for the renovation of the west wing food court havebeen received. The Willows Shopping Centre, Concord 2006 saw the completion of the Pier 1 building as well as the new courtyard andlandscaping. We leased 7,000 sq.ft. of space and the shopping centre is now 97per cent let. FINANCIAL REVIEW INCOME STATEMENT Analysis of profit before tax-------------------------------------------------------------------------------- Increase Year ended Year ended 31 December 31 December 2006 2005 £m £m--------------------------------------------------------------------------------Underlying profit before tax 12% 122.3 109.3Property trading profits 32.8 11.6 --------- ----------- Profit before tax, valuation andexceptional items 28% 155.1 120.9 Gain on revaluation and sale ofinvestment properties 586.5 565.5Movement in fair value of derivativefinancial instruments 163.5 (145.8) Exceptional finance costs (2.0) (13.7) --------- -----------Profit before tax 903.1 526.9 ----------- ----------- Underlying profit before tax increased by 12 per cent to £122.3 million from£109.3 million reflecting rent reviews and interest savings, offset in part bythe impact of active management and disposals. Trading profits of £32.8 million showed a significant increase over the levelachieved in 2005. A substantial amount of these profits arose on the transfer oftrading stock to investment property including £17.7 million which was achievedin the year on the completion of the Trio apartment project in the US. Theseelements of the trading profit have been excluded in the calculation of adjustedearnings per share. Overall profit before tax, valuation and exceptional itemsincreased by over 28 per cent from £120.9 million to £155.1 million. Profit before tax increased from £526.9 million to £903.1 million. Revaluation movements on investment properties and the movement in fair value ofderivative financial instruments are presented in the Income Statement.Inclusion of these items can create considerable volatility in the IncomeStatement. Commentary on the revaluation of investment properties is included in theChairman's Statement. Over the period to 31 December 2006, interest rates in general increased fromthe historic lows in the early part of the year. In particular the ten-yearsterling interest rate swap, which represents a suitable benchmark for thegroup's fixed rate obligations, increased from 4.45 per cent to 5.11 per cent. As a result the negative fair value of the group's derivative financial instruments improved by £163.5 million to £112.5 million and this movement has been reported in the Income Statement. This upward movement in interest rates has continued since the year end with the 10 year swap rate rising to around 5.35 per cent reducing the negative fair value of interest rate swaps by approximately a further £70 million to around £40 million at 13 February 2007. The fair value of financial instruments is extremely sensitive to movements ininterest rates. An increase of around 0.15 per cent in swap rates would besufficient to eliminate the remaining £40 million negative fair value while sucha rise in interest rates would have a minimal impact on the group's financingcash flows. Net rental income increased from £300.1 million to £340.6 million. The increasehas two components; like-for-like growth; and acquisitions and completions, netof disposals. UK regional shopping centres provided like-for-like growth of £16.8 million (8.5per cent) primarily from the favourable rent reviews at Lakeside, MetroCentre,Uxbridge and Watford. A further £20.1 million increase in net rental income camefrom the impact of acquisitions made in 2005, where income had only beenreceived for part of the comparative period. UK non-shopping centre properties contributed 3.5 per cent like-for-like growth.Taking into account the impact of property acquisitions, sales and the effect ofmedium and longer-term refurbishment or redevelopment activity, net rentalincome increased by £2.4 million. US properties showed like-for-like growth of 4.4 per cent. Interest payable increased from £171.7 million to £190.0 million and interestreceivable reduced from £7.5 million to £3.9 million. The increase in netinterest payable of £21.9 million reflects expenditure on the completion ofChapelfield, Norwich during 2005 and property acquisitions including theacquisition of Covent Garden Market in 2006. The interest charge benefited from savings generated by the three majornon-recourse refinancings undertaken in the first half of 2005 and from theconversion of £129 million of 3.95% convertible bonds into 16 million ordinaryshares at the end of that year. In April 2006 the £208 million loan secured on The Glades, Bromley and TheChimes, Uxbridge was replaced with separate ten-year loans amounting to £332million. This increase in the level of debt was achieved while at the same timesecuring a saving in margin. In May 2006, we completed a £212 million ten-yearloan secured on Chapelfield, Norwich and in October a £252 million loan securedon the newly-acquired Covent Garden Market and surrounding properties. While net debt was reduced by the £335 million raised through a placing of 25million ordinary shares, this happened late in the year and had little impact onnet interest payable. The underlying tax charge, before valuation and exceptional items amounted to7.7 per cent (2005 - 21.3 per cent). The low tax charge was primarily due to thebenefit from capital allowances and tax relief for capitalised interest togetherwith the resolution of prior year items during the period. The conversion to REIT status at the end of the year resulted in the reversal ofthe provision for tax on valuation items and deferred tax in respect of capitalallowances previously included in the group's balance sheet. This was offset inpart by the provision for the payment of a £154 million entry charge. Thegroup's reported tax charge also included an exceptional credit of £32.2 millionin respect of the debenture reorganisation completed during the period, referredto below. Current tax for the period reduced from £10.2 million payable in 2005to £0.8 million receivable in 2006. Basic earnings per share increased from 114.8p to 462.1p. Earnings per share(adjusted) increased by 13.7 per cent from 29.8p to 33.9p. The proposed final dividend of 17.25p per share results in an annual dividendper share of 31p, an increase of 9.7 per cent. NET ASSETSNet assets per share-------------------------------------------------------------------------------- As at As at 31 December 31 December 2006 2005 £m £m--------------------------------------------------------------------------------Basic net asset value 4,732.4 2,933.1Effect of dilution:On conversion of bonds 108.7 105.4On exercise of options 12.3 17.9 --------------- -------------- Diluted net asset value 4,853.4 3,056.4Adjustments:Fair value of derivative financialinstruments 112.5 280.2Unrecognised surplus on trading properties 4.7 23.4Tax on the above (32.1) (92.8)Deferred tax on revaluation surpluses 32.1 817.4Deferred tax on capital allowances 31.8 95.7 --------------- ------------Net assets (diluted, adjusted) 5,002.4 4,180.3 ----------------- ------------ Basic net assets per share from IFRSbalance sheet 1308p 875p ---------------- --------Net assets per share (diluted,adjusted) 1327p 1188p ----------------- -------- Basic shares in issue used forcalculation 361.7m 335.4mDiluted shares used for calculation 377.1m 352.0m Net assets per share (diluted, adjusted) is arrived at after adding back theremaining IAS 12 provision for deferred tax on property revaluation surplusesand the adjustment in respect of the fair value of derivative financialinstruments. The actual potential tax liability which could arise if theproperties were disposed of at their balance sheet values would be £49.1million(2005 - £642.5 million), the residual potential tax liability mainly relating toproperties in the US. This liability could be offset by the release of deferredtax provisions in respect of capital allowances of £31.8 million and furthercapital allowances of £24.4 million which may be available to reduce the taxpayable on a sale. Investment properties increased from £6,938 million to £8,187 million atDecember 2006. The movements during the period are summarised in the tablebelow: Analysis of movement in investment properties-------------------------------------------------------------------------------- £m--------------------------------------------------------------------------------Investment properties at 31 December 2005 6,938Acquisitions 641Additions 98Transfers from trading properties 109Disposals (carrying value) (117)Foreign exchange and other movements (40)Valuation surplus on investment properties 558 --------Investment properties at 30 June 2006 8,187 -------- Investment properties are valued after deducting notional acquisition costsincluding stamp duty amounting in aggregate to £370 million (31 December 2005 -£318 million), equivalent to 98p per Liberty International share (31 December2005 - 90p). In the case of a REIT the purchase and sale of shares is the predominant mode ofexchange of ownership and value for shareholders, not the sale of eachunderlying individual property. The transaction costs associated with transfersof shares are considerably lower. If these notional acquisition costs were addedback, net assets (diluted, adjusted) would amount to £5,372 million (2005 - £4,498 million) and net assets per share (diluted, adjusted) would amount to 1425p (2005 - 1278p) compared with the reported figure of 1327p(2005 - 1188p). FINANCIAL MANAGEMENT Movement in Net Debt and Bank Facilities Cash balances increased by £251 million from £71 million at 31 December 2005 to£322 million at 31 December 2006 while gross borrowings increased by £401million to £3,385 million. The movement in net debt during the period is broadlyexplained by the table below: Analysis of movement in net debt-------------------------------------------------------------------------------- Net debt £m -------------------------------------------------------------------------------Opening net debt 2,913Additions to investment properties 654Disposals of investment properties (127)Share placing (335)Other (42) ---------Closing net debt 3,063 --------- At 31 December 2006 the group had committed undrawn medium-term bank facilitiesof £510 million. In October 2006 the group completed the re-organisation of its long-termdebentures issuing a new £355 million 5.562% debenture and redeeming theexisting Capital and Counties' £80 million 11.25% 2021 and £150 million 9.875% 2027 stocks. The new stock amortises to a final redemption amount of £231.4 million, a structure designed to closely match the aggregate cash flows of the original stocks. Also it is secured on substantially the same assets as the original stocks. The principal benefits to the group are improved substitution and withdrawal provisions combined with the efficiency of a single,larger more liquid instrument and a reduction in the annual finance charge of around £0.8 million. Although the redemption gave rise to an exceptional charge of around £130 million for Capital and Counties, the IFRS accounting treatment effectively eliminates the underlying transactions from the group accounts. The exceptional item has been reversed and deducted from the £355 million nominal value of the new bond to arrive at an adjusted balance sheet carrying value of £225.8 million. This adjustment is then amortised through the income statement resulting in an annual finance charge of around £23 million compared to £23.8 million for the previous debentures. The benefit of the £32.2 million exceptional tax credit resulting from the re-organisation has remained in the Income Statement. Financial Ratios The group's main internal constraints are that, at currently prevailing propertyyields and interest rates, interest cover, measured before valuation andexceptional items and adjusting for the amortisation of convertible debt, shouldbe maintained at a level in excess of 1.6 times and debt to assets at less than50 per cent. On these measures, interest cover for the period ended 31 December2006 remained at around 1.7 times and the ratio of net debt to assets reducedfrom 40 per cent at 31 December 2005 to 36 per cent at 31 December 2006, in eachcase within the group's internal constraints. Maturity and Interest Rate Profile of Debt The group's policy is to eliminate substantially all exposure to short andmedium-term interest rate fluctuations in order to reduce the variability of cash flows. During the period short-term interest rates in the UK increased from 4.50 per cent to 5.00 per cent with a further increase to 5.25 per cent since the year end. The market in longer-term sterling swaps reflected expectations for interest rates to rise and the ten-year sterling interest rate swap has increased since 31 December 2005 by over 0.90 per cent to 5.35 per cent at 13 February 2007. The table below summarises the interest rate swaps currently in place comparedwith 31 December 2005. Over the period the level of fixed rate protection wasincreased, both in relation to the additional debt incurred in the period andextending protection beyond the current maturity of existing floating ratefacilities. Interest rate swap summary ------------------------------------------------------------------------------- Notional principal Average rate ---------------------------- ---------------------------- 13 February 31 December 13 February 31 December 2007 2005 2007 2005 £m £m ------------------------------------------------------------------------------- In payment after:1 year 3,055 2,462 5.31% 5.36%5 years 3,153 3,125 5.16% 5.29%10 years 2,275* 1,780 4.69% 4.97%15 years 1,950* 1,175 4.57% 4.86%20 years 1,950* 1,175 4.57% 4.86%25 years 1,475* 900 4.38% 4.81% * increased by £200 million since 31 December 2006. Over the next ten years substantially all interest payments, including those inrespect of debt which is expected to arise as a result of committed capital expenditure, are at fixed rates which are below those currently prevailing in the market.Furthermore the rates which have been achieved through these swaps asthe base level for future borrowings are at reducing average interest rates andappear attractive in the context of long-term historic rates in the UK. The weighted average maturity of debt is 8 years, the weighted average leasematurity 8.5 years and the weighted average interest cost of group debt at 31 December 2006 was 5.8 per cent (31 December 2005 - 6.1 per cent.). 14 February 2007 GLOSSARY Earnings per share (adjusted): Earnings per share adjusted for valuation andexceptional items and their tax effect, in accordance with UK property industrypractice (for calculation, see note 14). ERV (Estimated Rental Value): The external valuers' estimates of the group'sshare of the current annual market rent of all lettable space. Like-for-like income: The category of investment properties which have been ownedthroughout both periods without significant capital expenditure in eitherperiod, so both income and capital can be compared on a like-for-like basis. Like-for-like capital: The category of investment properties which includeslike-for-like income properties, plus those which have been owned throughout thecurrent period but not the whole of the prior period, without significantcapital expenditure in the current period, so capital values but not income canbe compared on a like-for-like basis. Net assets (diluted, adjusted): Net assets adjusted for deferred tax in respectof revaluation surpluses and capital allowances, fair value movements oninterest rate hedges, and valuation surpluses on trading properties, net of tax, in accordance with UK property industry practice (for calculation, see Financial Review). Net rental income: The group's share of net rents receivable as shown in theIncome Statement. Nominal equivalent yield: Effective annual yield to a purchaser from the assetsindividually at market value after taking account of notional acquisition costsbut assuming rent is receivable annually in arrears rather than reflecting theactual rental cash flows. Passing rent: The group's share of contracted annual rents receivable at thebalance sheet date. This takes no account of accounting adjustments made inrespect of rent free periods or tenant incentives, the reclassification ofcertain lease payments as finance charges or any irrecoverable costs andexpenses, and does not include excess turnover rent, additional rent in respectof unsettled rent reviews or sundry income such as from car parks etc. Total return: Percentage increase in net assets per share (diluted, adjusted) after adding back dividends and, in 2006, the one-off REIT conversion charge. CONSOLIDATED INCOME STATEMENT (Unaudited)for the year ended 31 December 2006 -------------------------------------------------------------------------------- Notes 2006 2005 £m £m--------------------------------------------------------------------------------Revenue 2 562.8 434.3 ------- -------Rental income 493.1 417.1Rental expenses (152.5) (117.0) ------- -------Net rental income 2 340.6 300.1 Other income 34.8 14.2Gain on revaluation and sale of investment anddevelopment property 3 586.5 565.5 ------- ------- 961.9 879.8Administration expenses (34.2) (29.2) ------- ------- Operating profit 927.7 850.6 ------- -------Interest payable 4 (190.0) (171.7) Interest receivable 3.9 7.5Exceptional finance costs 4 (2.0) (13.7)Change in fair value of derivative financialinstruments 163.5 (145.8) ------- ------- Net finance costs (24.6) (323.7) ------- ------- Profit before tax 903.1 526.9 ------- ------- Current tax 5 0.8 (10.2) Deferred tax 814.5 (150.4)REIT entry charge (154.3) - ------- ------- Taxation 5 661.0 (160.6) ------- -------Profit for the period attributable to equityshareholders 1,564.1 366.3 Ordinary dividends - paid and proposed 108.7 92.7 - pence per share 31.0p 28.25p ------- -------Basic earnings per share 14 462.1p 114.8p ------- -------Diluted earnings per share 14 444.0p 107.4p ------- ------- Adjusted earnings per share are shown in note 14. CONSOLIDATED BALANCE SHEET (Unaudited)as at 31 December 2006 -------------------------------------------------------------------------------- Notes 2006 2005 £m £m--------------------------------------------------------------------------------Non-current assetsInvestment and development property 7 8,187.1 6,937.8Plant and equipment 0.9 0.6Trade and other receivables 9 81.4 65.7 ------- ------- 8,269.4 7,004.1 ------- -------Current assetsTrading properties 8 45.2 132.6Trade and other receivables 9 113.8 78.7Investments - 3.0Cash and cash equivalents 321.8 70.8 ------- ------- 480.8 285.1 ------- ------- Total assets 8,750.2 7,289.2 ------- ------- Current liabilitiesTrade and other payables (319.5) (212.4)Tax liabilities (2.1) (10.0)Borrowings, including finance leases 10 (43.5) (173.5)Derivative financial instruments (4.6) (21.6) ------- ------- (369.7) (417.5) ------- -------Non-current liabilitiesBorrowings, including finance leases 10 (3,341.3) (2,810.2)Derivative financial instruments (128.9) (259.5)Deferred tax provision 5 (40.8) (856.2)Other provisions 12 (4.9) (6.8)Other payables (132.2) (5.9) ------- ------- (3,648.1) (3,938.6) ------- -------Total liabilities (4,017.8) (4,356.1) ------- -------Net assets 4,732.4 2,933.1 ------- -------EquityCalled up share capital and reserves 15 4,732.4 2,933.1 ------- ------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE (Unaudited) -------------------------------------------------------------------------------- 2006 2005 £m £m--------------------------------------------------------------------------------Profit for the period 1,564.1 366.3 Actuarial gains/(losses) on defined benefit pension schemes 0.7 (2.6)Deficit on revaluation of development properties - (15.7)Tax on items taken directly to equity (4.9) 5.5Net exchange translation differences and other movements (4.6) (0.1) ------- ------- (8.8) (12.9) ------- -------Total recognised income and expense for the period 1,555.3 353.4 ------- ------- A summary of changes in group equity is shown in note 15. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -------------------------------------------------------------------------------- 2006 2005 £m £m-------------------------------------------------------------------------------- Cash flows from operating activitiesOperating profit 927.7 850.6Adjustments for non-cash items:Unrealised net revaluation gains on investmentproperties (558.5) (562.9)Unrealised gains on transfer of trading properties (33.1) -Profit on sale of investment properties (28.0) (2.6)Depreciation and amortisation 0.2 0.8Amortisation of lease incentives and other direct costs 10.3 (4.6) ------- ------- Cash flows from operations before changes 318.6 281.3in working capitalChange in trade and other receivables (10.9) (24.2)Change in trading properties 9.7 (18.1)Change in current asset investments 3.0 (3.0)Change in trade and other payables (0.5) 17.1 ------- ------- Cash generated from operations 319.9 253.1Interest paid (198.6) (168.2)Interest received 2.9 9.7Tax paid (6.6) (24.5) ------- ------- Cash flows from operating activities 117.6 70.1 ------- ------- Cash flows from investing activitiesPurchase and development of property (653.9) (1,081.5)Sale of property 127.3 43.7 ------- ------- Cash flows from investing activities (526.6) (1,037.8) ------- ------- Cash flows from financing activitiesIssue and repurchase of shares 341.4 10.1Borrowings drawn 902.0 1,944.8Borrowings repaid (486.0) (1,268.9)Equity dividends paid (97.4) (86.3) ------- ------- Cash flows from financing activities 660.0 599.7 ------- ------- Net increase/(decrease) in cash and cash equivalents 251.0 (368.0)Cash and cash equivalents at 1 January 70.8 438.8 ------- ------- Cash and cash equivalents at 31 December 321.8 70.8 ------- ------- NOTES TO THE ACCOUNTS (unaudited) 1 Basis of preparation The Preliminary Report is unaudited and does not constitute statutory accountswithin the meaning of s240 of the Companies Act 1985. The statutory accounts forthe year ended 2005 have been delivered to the Register of Companies. Theauditors' opinion on these accounts was unqualified and did not contain astatement made under s237 (2) or s237(3) of the Companies Act 1985. Theaccounting policies set out on pages 34 and 35 of the 2005 Annual Report havebeen consistently applied in the preparation of this financial information. The financial information has been prepared in accordance with InternationalFinancial Reporting Standards, as adopted by the European Union ("IFRS"), IFRICinterpretations and with those parts of the Companies Act, 1985 applicable tocompanies reporting under IFRS. It has been prepared under the historical costconvention as modified by the revaluation of properties, available for saleinvestments, financial assets and liabilities held for trading. 2 Segmental analysis ------------------------------------------------------------------------------- 2006 ----------------------------------------------- UK Other Other Group shopping commercial activities Total centres properties £m £m £m £m ------------------------------------------------------------------------------- Revenue 421.1 139.2 2.5 562.8 -------------------------------------------Rental income 387.9 105.2 - 493.1Rental expense (115.9) (36.6) - (152.5) -------------------------------------------Net rental income 272.0 68.6 - 340.6Property tradingprofits/(losses) (0.8) 32.6 1.0 32.8Other income - 0.5 1.5 2.0Gain on revaluation and sale of investment and development property 470.7 115.8 - 586.5 -------------------------------------------Segment result 741.9 217.5 2.5 961.9 ------------------------------------------- ------------------------------------------------------------------------------- 2005 -------------------------------------------- UK Other Other Group shopping commercial activities Total centres properties £m £m £m £m ------------------------------------------------------------------------------Revenue 328.7 103.4 2.2 434.3 --------------------------------------------Rental income 327.2 89.9 - 417.1Rental expense (91.6) (25.4) - (117.0) --------------------------------------------Net rental income 235.6 64.5 - 300.1Property trading profits 1.2 10.4 - 11.6Other income - 0.4 2.2 2.6Gain on revaluation and sale of investment anddevelopment property 459.4 106.1 - 565.5 --------------------------------------------Segment result 696.2 181.4 2.2 879.8 -------------------------------------------- 3 Gain on revaluation and sale of investment and development property ------------------------------------------------------------------------------- 2006 2005 £m £m ------------------------------------------------------------------------------- Revaluation surplus on investment and development property 558.5 547.2Exclude development property deficit recognised in reserves - 15.7 ------- ------- Income statement gain on revaluation of investment anddevelopment property 558.5 562.9Income statement gain on sale of investment property 28.0 2.6 ------- ------- Income statement gain on revaluation and sale of investmentand development property 586.5 565.5 ------- ------- 4 Finance costs-------------------------------------------------------------------------------- 2006 2005 £m £m ------------------------------------------------------------------------------- Gross interest payable - recurring 198.6 180.3Interest capitalised on developments (8.6) (8.6) ------- -------Interest payable 190.0 171.7 ------- ------- Cost of early conversion of Liberty International 3.95%convertible bonds - 8.4Issue costs written off on redemption of loans 2.0 4.5Repurchase of CSC unsecured bonds - 0.8 ------- -------Exceptional finance costs 2.0 13.7 ------- ------- 5 Taxation -------------------------------------------------------------------------------- REIT Entry Current Deferred charge 2006 £m £m £m £m-------------------------------------------------------------------------------- Tax on non-exceptional items (including£4.6m current tax in respect of tradingproperty reclassifications) 29.6 (17.6) - 12.0 Tax on exceptional items andproperty disposals 1.8 - - 1.8Other exceptional tax (32.2) - 154.3 122.1 Valuation items:Investment property - (848.1) - (848.1)Derivative financialinstruments - 51.2 - 51.2 ------- ------- ------- ------- (0.8) (814.5) 154.3 (661.0) ------- ------- ------- ------- Taxation charge for the financial year-------------------------------------------------------------------------------- 2006 2005 £m £m-------------------------------------------------------------------------------- Current UK corporation tax at 30% (2005 - 30%) on profits 27.6 24.0Prior year items - UK corporation tax 0.2 (0.9) ------- ------- 27.8 23.1Overseas taxation 1.8 2.4 ------- ------- Current tax on profits excluding exceptional items andproperty disposals 29.6 25.5 ------- ------- Deferred tax:On investment and development property (848.1) 183.3On derivative financial instruments 51.2 (43.7)On other temporary differences (17.6) 0.2 ------- -------Deferred tax on profits excluding exceptional items andproperty disposals (814.5) 139.8 ------- -------Tax charge on profits excluding exceptional items andproperty disposals (784.9) 165.3 ------- ------- REIT entry charge 154.3 - ------- -------Exceptional current tax credit (32.2) -Tax on exceptional items and property disposals:- current tax 1.8 (15.3)- deferred tax - 10.6 ------- -------Exceptional tax and tax charge on exceptional items andproperty disposals (30.4) (4.7) ------- -------Total tax (credit)/ charge (661.0) 160.6 ------- ------- 5 Taxation continued Under IAS 12 (Income Taxes), provision is made for the deferred tax liabilityassociated with the revaluation of investment properties at the corporate taxrate expected to apply to the group at the time of use. For those propertiesqualifying as REIT properties the relevant tax rate will be 0 per cent (2005 -30 per cent), for other UK properties the relevant tax rate will remain 30 percent and for overseas properties the relevant tax rate will be the prevailingcorporate tax rate in that country. This change in the relevant tax rate on thegroup becoming a REIT resulted in the elimination of £834.2m of the 31 December2005 deferred tax liability. Of this, £838.9m was credited to the incomestatement and £4.7m was debited to reserves. Had the group not become a REIT,the deferred tax liability at 31 December 2006 would have been £1,078.0m, and sothe impact on deferred tax of the group becoming a REIT is a £1,041.9m liabilitybeing released to the income statement and a £4.7m asset being released toreserves. The deferred tax provision on the revaluation of investment propertiescalculated under IAS 12 is £32.1m at 31 December 2006 (2005 - £817.4m). This IAS12 calculation does not reflect the expected amount of tax that would be payableif the assets were sold. The group estimates that calculated on a disposal basisthe liability is £49.1m at 31 December 2006 (2005 - £642.5m). If upon sale thegroup retained all the capital allowances, which is within the control of thegroup, the deferred tax provision in respect of capital allowances of £31.8m mayalso be released, and further capital allowances of £24.4m may be available toreduce the amount of tax payable on sale. Where gains such as revaluation of development properties and other assets andactuarial movements on pension funds are dealt with in reserves, any deferredtax is also dealt with in reserves. Movements in the provision for deferred tax ------------------------------------------------------------------------------- As at Recognised Recognised As at 31 December in income in equity 31 December 2005 2006 £m £m £m £m -------------------------------------------------------------------------------Revaluation of investmentand development properties 817.4 (787.2) 1.9 32.1Capital allowances 95.7 (60.9) (3.0) 31.8Derivative financialinstruments (83.4) 51.2 - (32.2)Other temporarydifferences 26.5 (17.6) 0.2 9.1 ------- ------- ------- -------Net deferred tax provision 856.2 (814.5) (0.9) 40.8 ------- ------- ------- ------- 6 Dividends-------------------------------------------------------------------------------- 2006 2005 £m £m-------------------------------------------------------------------------------- Ordinary sharesPrior period final dividend paid of 15.25p per share (2005 -14.1p) 51.1 44.7Interim dividend paid of 13.75p per share (2005 - 13.0p) 46.3 41.6 ------- -------Dividends paid 97.4 86.3 ------- -------Proposed dividend of 17.25p per share (2005 - 15.25p) 62.4 51.1 ------- ------- 7 Investment and development property-------------------------------------------------------------------------------- UK Other shopping commercial centres properties Total £m £m £m-------------------------------------------------------------------------------- At 31 December 2005 5,839.0 1,098.8 6,937.8Additions 251.9 487.3 739.2Disposals (14.2) (102.7) (116.9)Transfers from trading properties - 108.7 108.7Foreign exchange fluctuations - (40.2) (40.2)Surplus on valuation dealt with in theincome statement 466.1 92.4 558.5 ------- ------- -------At 31 December 2006 6,542.8 1,644.3 8,187.1 ------- ------- ------- The group's interests in investment and development properties were valued as at31 December 2006 by independent external valuers in accordance with theAppraisal and Valuation Manual of RICS, on the basis of market value. Marketvalue represents the figure that would appear in a hypothetical contract of salebetween a willing buyer and a willing seller and is estimated without regards tocosts of sale or purchase. 8 Trading properties The estimated replacement cost of trading properties based on market valueamounted to £49.9 million (31 December 2005 - £156.0 million). 9 Trade and other receivables-------------------------------------------------------------------------------- 2006 2005 £m £m--------------------------------------------------------------------------------Amounts falling due within one year:Rents receivable 26.1 20.8Derivative financial instruments 7.0 0.9Other receivables 42.3 21.5Prepayments and accrued income 38.4 35.5 ------- ------- 113.8 78.7 ------- ------- Amounts falling due after more than one year:Other receivables 12.2 13.7Derivative financial instruments 14.0 -Prepayments and accrued income 55.2 52.0 ------- ------- 81.4 65.7 ------- ------- 10 Borrowings, including finance leases-------------------------------------------------------------------------------- 2006 2005 £m £m--------------------------------------------------------------------------------Amounts falling due within one year:Secured borrowingsBank loans and overdrafts 12.9 151.6Commercial mortgage backed securities ("CMBS") notes 24.2 15.0Finance lease obligations 6.4 6.9 ------- -------Amounts falling due within one year 43.5 173.5 ------- ------- Amounts falling due after more than one year:Secured borrowings - non recourseCMBS notes 2015 1,124.1 1,141.9CMBS notes 2011 639.7 547.5Bank loans 2016 512.9 -Bank loan 2014 175.6 384.9Bank loans 2013 251.0 98.4Bank loan 2007 - 40.0 ------- ------- 2,703.3 2,212.7Other secured borrowingsDebentures 2027 (2005 - 2021 and 2027) 225.8 230.0Other loans 189.5 147.0 ------- ------- 3,118.6 2,589.7Unsecured borrowingsCSC bonds 2013 26.5 26.5CSC bonds 2009 41.3 41.0 ------- ------- 3,186.4 2,657.2£111.3 million (2005 -- £111.3 million) 3.95% convertiblebonds due 2010 108.7 105.4Finance lease obligations 46.2 47.6 ------- -------Amounts falling due after more than one year 3,341.3 2,810.2 ------- -------Total borrowings, including finance leases 3,384.8 2,983.7Cash and cash equivalents (321.8) (70.8) ------- -------Net borrowings 3,063.0 2,912.9 ------- ------- 11 Fair values of financial instruments-------------------------------------------------------------------------------- As at 31 December 2006 As at 31 December 2005 ----------------------- ---------------------- Balance Fair Balance Fair sheet value value sheet value value £m £m £m £m ------------------------------------------------------------------------------ Debentures and other fixed rate loansSterlingC&C 5.562% debenture 2027 225.8 348.8 - -C&C 9.875% debenture 2027 - - 150.0 233.1C&C 11.25% debenture 2021 - - 80.0 126.9CSC 6.875% unsecured bonds 2013 26.5 25.4 26.5 28.0CSC 5.75% unsecured bonds 2009 41.3 42.0 41.0 41.0US dollarsFixed rate loans 164.0 169.1 156.7 162.4 ---------------- ------------------- 457.6 585.3 454.2 591.4 ---------------- -------------------Convertible bonds - fixed rate 108.7 195.4 105.4 141.0 ---------------- ------------------ The adjustment in respect of the above, after credit for tax relief, to thediluted net assets per share (which does not require adjustment for the fairvalue of convertible bonds) would amount to 24p per share (2005 - 27p). All other financial assets and liabilities included in the balance sheet arestated at fair values. Derivative financial instruments-------------------------------------------------------------------------------- 2006 2005 £m £m--------------------------------------------------------------------------------Non current assets (note 9) 14.0 -Current assets (note 9) 7.0 0.9Current liabilities (4.6) (21.6)Non-current liabilities (128.9) (259.5) ------- ------- (112.5) (280.2) ------- ------- Of the movement in the balance sheet value of derivative financial instrumentsduring the year of £167.7 million, £4.2 million has been charged to finance costs. 12 Other provisions for liabilities and charges-------------------------------------------------------------------------------- £m -------------------------------------------------------------------------------At 31 December 2005 6.8Net charge for the year 0.3Other movements (2.2) -------At 31 December 2006 4.9 ------- 13 Capital commitments At 31 December 2006, the group was contractually committed to £127.0 million(2005 - £69.9 million) of future expenditure for the purchase, construction,development and enhancement of investment property. 14 Per share details (a) Earnings per share-------------------------------------------------------------------------------- 2006 2005 millions millions--------------------------------------------------------------------------------Weighted average ordinary shares in issue forcalculation of basic earnings per share 338.5 319.0Weighted average ordinary shares to be issued onconversion of bonds and under employee incentivearrangements 15.0 31.5 ------- -------Weighted average ordinary shares in issue forcalculation of diluted earnings per share 353.5 350.5 ------- ------- -------------------------------------------------------------------------------- 2006 2005 £m £m--------------------------------------------------------------------------------Earnings used for calculation of basic earnings per share 1,564.1 366.3Reduction in interest charge from conversion of bonds, netof tax 5.3 10.2 ------- -------Earnings used for calculation of diluted earnings per share 1,569.4 376.5 ------- -------Basic earnings per share (pence) 462.1p 114.8p ------- -------Diluted earnings per share (pence) 444.0p 107.4p ------- ------- Earnings used for calculation of basic earnings per share 1,564.1 366.3Add back exceptional finance costs 2.0 13.7Add back REIT entry charge 154.3 -Add back other exceptional tax (30.4) (4.7)Less gain on revaluation and sale of investment anddevelopment properties (586.5) (565.5)(Less)/add back fair value movement on derivative financialinstruments (163.5) 145.8(Less)/add back deferred tax in respect of investment anddevelopment properties (787.2) 166.1Add back/(less) deferred tax in respect of derivativefinancial instruments 51.2 (43.7)Less deferred tax on capital allowances (60.9) 17.2Less gain on transfer of trading property to investmentproperty, net of tax (28.5) - ------- -------Earnings used for calculation of adjusted earnings per 114.6 95.2share ------- -------Adjusted earnings per share (pence) 33.9p 29.8p ------- ------- Earnings used for calculation of adjusted earnings per share 114.6 95.2 Reduction in interest charge from conversion of bonds, netof tax 5.3 10.2 ------- -------Earnings used for calculation of adjusted, diluted earningsper share 119.9 105.4 ------- -------Adjusted, diluted earnings per share (pence) 33.9p 30.1p ------- ------- (b) Ordinary share capital-------------------------------------------------------------------------------- 2006 2005 Number Number millions millions--------------------------------------------------------------------------------At 31 December 362.8 337.8 ------- -------Of which, held by ESOP trust and treated as cancelled 1.1 2.4 ------- ------- (c) Convertible debt 3.95 per cent convertible bonds due 2010 At 31 December 2006 and 31 December 2005 3.95 per cent convertible bonds with anominal value of £111.3 million were in issue. The holders of the 3.95 per cent bonds have the option to convert their bondsinto ordinary shares at any time on or up to 23 September 2010 at 800p perordinary share. The 3.95 per cent bonds may be redeemed at par at the company'soption after 14 October 2008. 15 Summary of changes in equity-------------------------------------------------------------------------------- 2006 2005 £m £m-------------------------------------------------------------------------------- Opening equity shareholders' funds 2,933.1 2,534.2Bond conversions - 121.7Issue of shares 342.4 11.2Cancellation of shares (1.0) (1.1) ------- ------- 3,274.5 2,666.0Total recognised income and expense for the period 1,555.3 353.4 ------- ------- 4,829.8 3,019.4Dividends paid (97.4) (86.3) ------- -------Closing equity shareholders' funds 4,732.4 2,933.1 ------- ------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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