27th Mar 2007 07:04
Development Securities PLC27 March 2007 DEVELOPMENT SECURITIES PLC - UNAUDITED PRELIMINARY RESULTS Increased contribution from development activities and strong investmentportfolio performance Development Securities PLC, the leading property development and investmentcompany, today announces profits after tax of £23.6 million and earnings of 63.4pence per share for the year ended 31st December 2006, compared to £20.1 millionand 54.8 pence per share for the previous year. Financial highlights 31st Dec 2006 31st Dec 2005 (restated)* Profit after tax £23.6 million £20.1 million Earnings per share 63.4p 54.8p Shareholders' funds £231.4 million £187.5 million Net assets per share 568p 510p Dividend per share 6.75p 6.37p Gearing# 6% 17% There has been an increased contribution from our development activities,coupled with a sixth year of strong performance from the property investmentportfolio. The increased strength of the balance sheet reflects the £23.1 million Ordinaryshare placing in November 2006, when 3.7 million shares were issued at a priceof 625 pence per share. The proceeds of the placing were principally utilised toacquire a 10-acre development site in Birmingham. Property development portfolio PaddingtonCentral • Phase II is under construction, which includes a 250,000 sq. ft. office building and a 206-room Accor hotel scheduled for practical completion in 2008 • Phase III, a 366,000 sq. ft. prime office building known as Two Kingdom Street, has already been granted detailed planning consent CityPark, Manchester • The part of the site on which the hotel will be developed has been sold to a reputable hotel operator • The forward funding arrangements for the sale and development of the office component are close to finalisation Colindale, London NW • In November 2006, proposals to redevelop Oriental City, at 399 Edgware Road, London NW9, received a unanimous resolution from the London Borough of Brent to grant planning consent for a new mixed-use scheme • The scheme includes 300,000 sq. ft. gross retail space, 340,000 sq. ft. of private and affordable housing and associated retail • The development will also include a new 80,000 sq. ft. primary school for 420 pupils, the first primary school to be built in Brent in the last 50 years Huyton, Liverpool • Disposal of the retail scheme near Liverpool to a private investor for £24 million, reflecting an initial yield of 5.5 per cent and generating a net surplus of £5.8 million * refer note 2 # refer note 6 Curzon Park, Birmingham • 10-acre site acquired for £33.5 million in November 2006 in equal partnership with Grainger PLC • The proposed 1.4 million sq. ft. mixed-use project, with a gross development value of over £350 million, will comprise approximately 800,000 sq. ft. of office and 400,000 sq. ft. of residential accommodation, together with a 180-bed hotel and 30,000 sq. ft. of retail space West Quay III, Southampton • An agreement to lease with Carnival PLC was signed to develop their new 150,000 sq. ft. UK headquarters building • Acquisition of the site and development of this building will be forward funded with Lime Property Fund LP, with practical completion anticipated in 2009 • Negotiations continue regarding the acquisition and development of the second phase Hammersmith Grove, London • Selected as preferred development partner by Transport for London for a 350,000 sq. ft building to include offices, retail and a cinema Property Investment Portfolio • 2006 represented the sixth consecutive year of strong performance in the property investment portfolio • Excellent level of returns generated: 18.5 per cent IPD Total Annual Portfolio Return#, which compares favourably to the average market return of 18.1 per cent Roy Dantzic, Chairman, Development Securities PLC, commented, "I am pleased to report another very satisfactory year for your Company,resulting in a significant uplift in shareholder funds. "We believe our resources will be more efficiently employed by continuing tofocus on urban development opportunities in suburban London and the main UKprovincial cities. We are also keen to expand our regional joint venturerelationships with complementary partners. "Owing to the structure and timing of our development activity, its fullfinancial impact may not be evident until 2008. We will endeavour to extendfurther our pipeline of projects in the medium term. Our financial resourcesremain available to support any new opportunities that we consider will providethe returns we seek. "After four years as Chairman, I shall be succeeded by David Jenkins, who joinedthe Board in February 2007. David retired three years ago as a senior auditpartner of Deloitte where he specialised in the property sector for most of hiscareer and I wish him every success in the role." # refer note 6 For further enquiries: Michael Marx / Julian Barwick 020 7828 4777 Development Securities PLC Mallika Basu 020 7630 3852 The Communication Group plc 07939 521708 www.developmentsecurities.com Chairman's statement I am pleased to report another very satisfactory year for your Company,resulting in a significant uplift in shareholder funds. An increased contribution from our development activities, coupled with a strongperformance from our property investment portfolio enables me to report a profitafter tax of £23.6 million and earnings of 63.4 pence per share, compared to£20.1 million and 54.8 pence per share for the previous year. Shareholder funds increased for the eleventh successive year, reaching £231.4million, equivalent to 568 pence per share. This compares to £187.5 million and510 pence per share 12 months earlier. In light of this strong performance, the Board has recommended the payment of afinal Ordinary dividend for the year of 4.50 pence per share, payable on 6thJuly 2007 to shareholders on the register on 8th June 2007. This brings thetotal Ordinary dividend coupon for the year to 6.75 pence per share, an advanceof six per cent over the previous year. The increased strength of our balance sheet of course reflects the £23.1 millionOrdinary share placing in November 2006, when 3.7 million shares were issued ata price of 625 pence per share. As shareholders will be aware, the proceeds ofthe placing were principally utilised to acquire a 10-acre development site inBirmingham, thus allowing your Company to conserve its cash resources for otherpotential property acquisitions. We were pleased with the strength of supportdemonstrated by both existing and new shareholders for this successful placing. Strategy Shareholders will be aware that the strategic focus of our developmentactivities over the last two years has been suburban London and the mainprovincial UK cities, rather than Central London. The City of London propertymarket remains innately volatile, due to the dominance of its financial servicessector and, together with the West End market, is always likely to become one ofthe most competitive in any development cycle upturn. For some time now, we havebelieved that a more attractive risk/return ratio would be available elsewhere.Indeed, 2006 was a year of considerable progress in pursuit of our chosenstrategy, with project 'wins' in Birmingham, Hammersmith, Southampton andsignificant advances at recently acquired sites in North London, Huyton andManchester. We continue to search out developments we believe will give us a competitiveadvantage, due to the scale and complexity of urban regeneration, for which yourCompany has considerable proven expertise. It is likely that large-scale,multi-phase projects, such as Curzon Park in Birmingham, will be delivered overmore than one economic cycle. This will offer good visibility to our futureactivity and, we hope, potential profitability over the medium term. Ourdevelopment portfolio now comprises a number of similar projects, further underpinning what we believe to be a sustainable business model. The growing size and strength of our balance sheet, recently augmented by the£23.1 million share placing, supports our adjusted business model, whereby wenow consider it appropriate to secure direct ownership of land for development.Our recent £33.5 million acquisition of Curzon Park, in equal partnership withGrainger PLC, is a case in point. We also plan to take an equity interest inBeadon Road, Hammersmith. Acquiring land is relatively straightforward and cannow be achieved within the constraints of our enlarged capital structure.However, the subsequent development is much more capital intensive. Therefore,we will continue to seek leading financial institutions as equity partners,either in an individual phase or possibly through the entire project, thusmaintaining our risk-averse approach. For a sixth successive year, I am pleased to report an excellent level ofreturns from our property investment portfolio, generated by Matthew Weiner andhis team. In 2006, your Company achieved an 18.5 per cent IPD Total PortfolioReturn (refer note 6), which compares favourably to the average market return of18.1 per cent. In broad terms, six per cent came from the rental income of theproperties themselves and the balance from realised and unrealised surplusesover existing book values. During the year, we realised gains from properties where we felt medium-termrental growth prospects were limited. However, reinvestment of these proceedsproved more challenging than ever due to the seemingly relentless weight ofmoney seeking similar assets. As a result, allocation of our resources into theinvestment property portfolio fell below target levels. Income returns in thecash market now approach those available in the direct real estate market. Inorder to justify the risk inherent in property ownership, it is important thatasset value grows through significant property-related initiatives. We havenever believed market momentum to be the sole justification for propertyinvestment. Outlook Whilst we long ago gave up predicting an end to the current investment marketboom, we find it difficult to believe that the total investment returns ofrecent years will be sustainable in 2007. However, we will continue to seeksuperior performance through active management both of our existing portfolioand of acquisitions. At such points in the property cycle superior returns may be more readilyobtained in the development arena. This is increasingly understood by ourtraditional institutional development and joint venture partners, banks and bythose with adequate financial and professional resources to compete alongsideus. The strength of the current development cycle will benefit from continuingemployment growth, a benign economic outlook and declining office vacancy rates.Prospects for the medium term encourage us to further expand our projectportfolio, which presently has a completed investment value in excess of £1billion. In this regard, your Company will pursue two tactical options. First, we believeour resources will be more efficiently employed by continuing to focus on urbandevelopment opportunities in suburban London and the main UK provincial cities,where our brand strength and reputation continue to grow. Second, we remain keento expand our regional joint venture relationships with those whose expertisebest complements our own. In some instances, our partners will be of equalfinancial strength; in others we may take the financial lead while theappropriate regional specialist heads the development project. We look forwardto establishing more such relationships in the near and medium term. Board composition As previously reported, Bill Grant retired from the Board in May 2006. Earlierthis month, Paul Willis stood down as a member of our Board for family reasons.We wish him well for the future. After four years as your Chairman, I shall notbe seeking re-election at this year's Annual General Meeting. I shall besucceeded by David Jenkins, who joined the Board in February. David retiredthree years ago as a senior audit partner of Deloitte & Touche LLP where hespecialised in the property sector for most of his career. I have no doubt thathe will make a significant contribution to the Company's further progress. Conclusion The strength of the property investment market and the returns now emerging fromour development portfolio resulted in our 2006 financial performance exceedingeven that of 2005. We do not yet discern any credible or significant threats tothe property sector as an asset class, unless values are driven still higher in2007, which would make us more apprehensive. Global growth may slow marginallyin 2007, but this might be of benefit, allowing interest rates generally to fallslightly as any perceived inflationary threats recede. Given the structure and timing of our development activity, we may well have towait until 2008 for the next meaningful contribution to our financial results.We will endeavour to extend our pipeline of projects in the medium term. Ourfinancial resources remain available to support any new opportunities that weconsider will provide the returns we seek. It remains for me to thank all of our Directors, management and staff for theirvalued contributions to our performance to date. Their professionalism andreputations have been an undoubted important feature of our success so far. Longmay it continue. I am certain we have the executive and management teams to meet the challengesthat lie ahead. Roy Dantzic Chairman 27th March 2007 Review of operations 2006 represented the fourth consecutive year of divergence between the propertyinvestment market and the occupational market. Sustained and strong investment demand was reflected in 2006 with capital valuesrising almost as much as they had in 2005. Investors were seemingly willing to accept the further compression in yieldsthat this represented. Whilst it remains to be seen whether these investmentratings are sustainable in the medium to long term, it is comforting to observethat the fundamentals underpinning the real UK economy remain supportive ofproperty values. In particular, office rents are now growing at their fastestrate for five years, albeit that this positive trend owes much to theconsiderable improvement witnessed in the Central London market. Employmentgrowth is expected to remain fairly constant over the next few years, supportedby an economy which might be expected to return to trend growth in 2008 and2009, after a possible slight deceleration in 2007. Interest rates in 2006, bothin the UK and the US, have trended upwards largely in response to inflationaryindications and have probably all but peaked. Even so, the rise in propertyvalues continued uninterrupted in 2006 and may well be sustainable in the mediumterm if investors feel confident regarding economic fundamentals and theprospects for rental growth. Through this period of rising property investment prices, we have maintained ourstrategy of realising surpluses where we felt we were no longer able to extractadditional value rather than expecting market momentum to generate furthergains. Conversely, it has been a much more difficult market in which to sourcenew investment product. Competition in the market place in 2006 was even lessdiscerning in the relationship between quality and value. Accordingly, during2006, the investment markets became less attractive to us in general terms thanthe development arena. Current development programme 2006 has seen considerable activity in our development programme with successesachieved on a number of existing projects and some further deals which eitherextend, or have a significant possibility of extending, our pipeline of futurework. We are encouraged that institutional investment support is increasinglyavailable to fund development projects, since it is precisely this class oflong-term, patient capital that is the best underpinning for market stabilityand growth. A concern with any development activity must be that developers andinstitutions engender such a significant oversupply of product that the currentupswing ends prematurely. Whilst we are always mindful of such events, webelieve there is some way to go to the end of this development cycle, especiallyif UK and global economic growth continues. The Central London markets are,unsurprisingly, currently demonstrating the largest increases with strong rentaland asset value growth in both the City and West End markets. It remains to beseen whether demand here can be sustained and to what degree the supply sideresponse may act as a brake on rental growth. The lead times involved inlarge-scale, urban development are considerable and there is little margin forerror especially if site acquisitions are made at values which reflect currentshort-term investor demand rather more than those predicated on economicfundamentals. PaddingtonCentral Few projects can better illustrate the cyclical nature of the property marketsin Central London than our large-scale, urban regeneration scheme adjacent toLondon's West End, which has turned a derelict former railway yard into adynamic living and working environment, supported by retail and leisureamenities. The substantial first phase commenced in 2000 and was fully-let oncompletion, some two years later, with your Company's share of profit easilysurpassing the anticipated level due to strength in both the letting andinvestment markets. A further period of four years was to follow until theproperty markets were strong enough to support construction of the second phase,beginning in April 2006. The intervening years have not been entirelyunproductive, as both the completion of the £30 million 'Crossrail Deck' and thereopening of the newly widened six-lane, 175-metre long Paddington Bridge onBishops Bridge Road provided vital new infrastructure to underpin future phases. The current phase under construction, a 250,000 sq. ft. office building at OneKingdom Street and a 206-room Accor hotel, is scheduled for practical completionin 2008 and is funded by our development partners Morley Fund Management andDIFA Deutsche Immobilien Fonds AG. Phase three, a 366,000 sq. ft. prime officebuilding known as Two Kingdom Street, has already been granted detailed planningconsent and represents a substantial pre-let opportunity in a market whereoccupiers for large space face limited choice from existing buildings. CityPark, Manchester This mixed-use site was acquired towards the end of 2004 for £3 million. Whilstoutline planning existed for a 94,000 sq. ft. hotel and a 177,000 sq. ft. officebuilding, variation in mix and quantum of space was sought and achieved in 2006.That part of the site on which the hotel will be developed has been sold to areputable hotel operator. We are close to finalising the forward-fundingarrangements for the sale and development of the office component. Colindale, London NW In November 2006, we were pleased to note that our proposals to redevelopOriental City, at 399 Edgware Road, London NW9, received a unanimous resolutionfrom the London Borough of Brent to grant planning consent for a new mixed-usescheme to include 300,000 sq. ft. gross retail space and 340,000 sq. ft. ofprivate and affordable housing, along with associated retail and residential carparking. It is particularly beneficial that the development will also include anew 80,000 sq. ft. primary school for 420 pupils, the first primary school to bebuilt in Brent in the last 50 years. Marketing of the available accommodation toretail and residential third parties has begun and we are cautiously optimisticthat our original value expectations will be met. This 7.5-acre property,currently comprising 100,000 sq. ft. of retail accommodation with 750 car parkspaces was acquired in June 2005. Cavendish Walk Shopping Centre, Huyton 2006 ended with a more than satisfactory outcome with the completion of this new110,000 sq. ft. retail scheme in Huyton, near Liverpool. Acquired by yourCompany in January 2005, and constructed by our joint development partner, CTPLimited, this scheme achieved practical completion in December 2006. This wasimmediately followed by the disposal of Cavendish Walk to a private investor for£24.0 million reflecting an initial yield of 5.5 per cent and generating a netsurplus of £5.8 million. On our acquisition of the site, Wilkinsons PLC was thesole pre-let anchor tenant, with the majority of the space letting up duringconstruction and against the background of a weakening retail market, mostly towell known High Street names. We believe that retailers prefer such thriving andcost-effective locations over expensive prime pitches, and will continue to seekout similar opportunities in the future. This project is a good illustration ofthe synergy between our development and investment skills. As momentum in theinvestment market slows, such a combination of our skill base will prove key tofurther successful projects. Curzon Park, Birmingham In November 2006, in equal partnership with Grainger PLC, we acquired the10-acre Curzon Park site for £33.5 million. The proposed 1.4 million sq. ft.mixed-use project, with a gross development value of over £350 million, willcomprise approximately 800,000 sq. ft. of office and 400,000 sq. ft. ofresidential accommodation, together with a 180-bed hotel and 30,000 sq. ft. ofretail space. The development strategy includes the securing of planningconsent, delivery of £12 million of infrastructure works and a phaseddevelopment of the site over a period of approximately 11 years. It is intendedthat your Company will project manage the planning process and construction ofthe infrastructure and commercial phases, with Grainger PLC project managing theresidential component. The Royals Business Park In June 2006, our funding partner, Standard Life Investments, secured the firstletting of some 10,000 sq. ft. at Building 1000, the 252,000 sq. ft. new Grade Aoffice accommodation completed speculatively in 2004. Whilst Standard Life havea number of other live enquiries, the level of demand for offices in thislocation has clearly not met initial expectations, and we are in discussion withthe London Development Agency with a view to introducing other users to the sitein order to create a truly mixed-use and sustainable environment. We continue tobe cautiously optimistic that discussions with parties interested in some of theremaining accommodation will be successful. Luneside, Lancaster In mid-2006, a compulsory purchase order was confirmed in respect of this17.5-acre urban regeneration project. A land remediation strategy and detailedplanning application are being devised, with a view to starting on site in 2007.The development will comprise 350 new homes, 90,000 sq. ft. of new offices and ahotel. Cambourne Business Park In July 2006, we leased further space on phase two of this 750,000 sq. ft.development, leaving only 30,000 sq. ft available to let. Located nine milesfrom Cambridge, this business park is an integral part of the new Cambournesettlement, a 1,040-acre scheme of 3,300 houses with town centre, hotel, retailand leisure facilities. Discussions are presently in hand with the institutionalmarket to forward-fund the next 50,000 sq. ft. phase. Hammersmith Grove, London W6 In October 2006, following a detailed selection process, Development Securitieswas selected by Transport for London as its preferred development partner forthe 1.5-acre Hammersmith Car Park Site immediately adjacent to HammersmithUnderground Station. Consultation with the relevant planning authority isunderway, with the anticipation that construction on site can commence by theend of 2007, in order to deliver the completed 350,000 sq. ft. building toinclude offices, retail, and a cinema by the end of 2009. West Quay III, Southampton Significant milestones have been achieved at the West Quay Road site in thecentre of Southampton. Firstly, last autumn, we signed an Agreement to Leasewith Carnival PLC to develop their new 150,000 sq. ft. UK headquarters buildingand then, early in 2007, we secured detailed planning consent for this project,the first of what we hope will be a two phase mixed-use scheme adjacent to theexisting West Quay Shopping Centre. Finally, in March 2007, we exchangedcontracts with Lime Property Fund LP to fund the site and development of thebuilding. Practical completion of the first phase is estimated for 2009. If ourcurrent negotiations are successful, the second phase of this urban regenerationproject is expected to provide a further 50,000 sq. ft. of office, 75,000 sq.ft. of residential or hotel use and 5,000 sq. ft. of retail accommodationtogether with a 20,000 sq. ft. casino. Broughton In the first half of 2006, Flintshire County Council approved the resolution togrant planning consent for both the 170,800 sq. ft. extension to the existingBroughton Retail Park and the related highway link from the A55. Whilstrealisation of any profit potential from this phase will ultimately await theconclusion of discussions with British Land PLC, we did move ahead in November2006 by acquiring not only the land necessary to construct the interchange thatwill provide enhanced access to the expanded retail facilities, but also the 10acres of land required to construct a reservation for the existing, protectedlocal population of greater crested newts. In October 2006, Flintshire County Council ratified in their emerging UnitaryDevelopment Plan (UDP) the status of our 19-acre site as allocated forresidential purposes. The number of units that the Council considered could beaccommodated on the land was increased by 35 to 260 dwellings, in line with ourearlier planning application. At the same meeting in October, the LocalAuthority confirmed within the emerging UDP, that a further two acres of ourland has been designated for non-retail commercial use. The emerging UDP isexpected to be ratified within the next 15 months. Heart of Slough During 2006, English Partnerships gained approval for a £17 million grossinfrastructure investment to enable the Heart of Slough regeneration scheme. Weare now preparing the outline masterplan alongside our joint venture partners,Berkeley Homes, Slough Borough Council and English Partnerships, with a view tocommencing development in 2008, with completion of the first phase anticipatedtwo years later. In September, we acquired Compair House, a key strategic sitethat will permit the permanent relocation of the existing town centre busstation, thus releasing the existing facility for redevelopment to provideapproximately 300,000 sq. ft. of commercial space adjacent to the town'stransport hub. We are encouraged by the continued gradual reduction in theoffice vacancy rate in Slough and expect still further strengthening of thelocal occupational market in the medium term. Princes Road, Wells In early 2006, in joint venture with respected town centre developer CentrosMiller, Development Securities acquired three strategic sites at the edge ofWells town centre. The sites form part of a wider area identified by MendipDistrict Council for a comprehensive, retail-led, mixed-use development inexcess of 100,000 sq. ft. The joint venture has recently signed a Lock OutAgreement with the Local Authority which is the significant first step in thepreparation of a masterplan for the wider project. We are also working with theadjoining occupier, Tesco PLC, to incorporate an enlarged food store into themaster plan, to the benefit of all parties. Telford Place, Crawley Towards the end of 2006, we entered into a further joint venture with CentrosMiller under which Development Securities has now acquired two parcels of landadjacent to the town centre in Crawley. Working with English Partnerships, thejoint venture will promote the sites for a 200,000 sq. ft. residential-led,mixed-use development. A planning application has been submitted and we arehopeful to have secured all the required consents by the end of 2007. This transaction strengthens our relationship with Centros Miller and is afurther advance into an increasingly favoured area in which value is added viathe planning process. This is a complex aspect of the development process, butone where we feel our core skills and risk-focused strategy will allowsignificant returns to shareholders. Hartfield Road, Wimbledon In February 2006, in a joint venture with Foinavon Limited, conditionalcontracts were exchanged to acquire the 1.25-acre development site at HartfieldRoad. We expect our planning application for a 159,000 sq. ft. scheme tocomprise 63,000 sq. ft. of residential accommodation, a 30,000 sq. ft. hotel and66,000 sq. ft. of retail space together with car parking for 220 vehicles to beconsidered in the next few weeks. Practical completion is targeted for 2009. Frimley and Marlow In November 2006, Development Securities and Equitable Life Assurance Societyentered into an Agreement to Lease the entire 180,000 sq. ft. office campus toSiemens Holdings PLC for a 20-year term. Simultaneously, we sold our equitystake in this scheme and our residual equity stake at Globeside, Marlow toEquitable Life, generating a combined surplus of £2.9 million over book values. Staines In the first half of 2006, we reached agreement with the adjoining land owner tojointly promote for planning our combined land holdings in this significantdevelopment site which could accommodate a 250,000 sq. ft. office building. Aplanning application has been submitted and is awaiting determination. Investment portfolio 2006 marked another strong year in the property investment market with totalreturns reaching 18.5 per cent. This is the third consecutive year where returnshave reached these exceptional levels and against a backdrop of solid, if notspectacular, economic growth, the future would appear to be set fair. Once again, financial performance was driven primarily by falling investmentyields as the weight of money targeting the real estate sector remained strong.Yield compression has been a global phenomenon, reflecting the glut of savingsin Asia and energy-producing countries. This further compression continued inthe face of rising interest rates, such that the IPD Initial Yield (refer note6), of 4.6 per cent finished the year 70 basis points below the five-yearfinance swap rate, making the leveraged investor a reticent participant. Riskaversion may return if perceptions change regarding UK monetary policy. We are beginning to see the early signs of this particular reverse yield gapimpacting on secondary property values, which comprise the bulk of investmentstock, as the market becomes more selective where rental growth prospects looklimited and where yield compression is no longer seen to be the apparentindiscriminate driver of enhanced returns. Yield differentials will eventuallyadjust to reflect the realities of the occupational market as compared to thecurrent exuberance of the investment market. We have sought to close out ourexposure in this sector of the market since values of these assets maydeteriorate rapidly, depending on the cost and availability of money. It isworth reflecting that whilst markets can take a long time to rise, they canreverse at a more alarming rate. The value of prime property, by virtue of location, covenant or asset managementopportunities, will remain stable. There remains a wall of money chasing afinite property supply. We have increasingly focused our portfolio towardsassets with one or all of these characteristics. As the capital markets plateau, the focus will once again turn to theincome-related element of returns which involves the demand and supply balancein occupational markets. Encouragingly, 2006 saw rental growth contributing toreturns, with offices doing notably well relative to retail and industrialproperty. We feel that the Company's exposure to the office market is best achievedthrough its development business where we can, through new build andrefurbishment projects, provide high quality accommodation which will haveenhanced letting and performance prospects. We are uncertain as to whether therecovery in this sector will spread to Grade B and C quality buildings whichform the bulk of investment grade stock. Despite a softening retail sector, we remain focused within our investmentportfolio on the convenience shopping market, where consumer expenditure, by itsnature, is more stable. The key component of the strategy is a food retail offereither within or adjoining the scheme. Since this is the one area of the retailmarket enjoying both volume and value growth, our focus remains on shoppingcentres which offer a combination of secure income and significant assetmanagement opportunities compared to the traditional High Street, which we feelis more threatened. We have sold all of our remaining unit shop exposure duringthe course of 2006 except those assets with short-term value potential. These various themes make the investment market difficult to predict. Wetherefore remain even more committed to our three key investment principles ofsector rotation, stock selection and proactive management. Of these, we remainconvinced that stock selection is the key to performance. In addition, we remainfocused on releasing value from the assets we own. In general, 2006 could be characterised as a year in which we reduced exposureto vulnerable assets, replenished our pipeline of opportunities and above allmaximized value through our management activities. In total during 2006, wedisposed of £45 million of property in eight transactions which included thePrincess of Wales Centre, Dewsbury. The key to achieving future out-performance will be the intensive assetmanagement of each holding and we believe, perhaps justified by our long-termout-performance of the investment market, that we possess the requisite skillsto achieve this. A remarkable £4.0 million of value was created over the year at The FurlongCentre, Ringwood where 2006 saw the continuation of our active strategy to takeback units and re-let to aspirational retailers, thereby driving rental valuesfurther. Rental levels have broken through the £60 per sq. ft. Zone A level andwe are hopeful of achieving in excess of £70 per sq. ft. Zone A with our nextletting. In addition, the turnover provisions that we secured in some leases,based on our confidence in the trading potential of the Centre, are starting togenerate additional income and should increase the rental levels to an effective£100 per sq. ft. So successful have we been in recent years, that we now havefew units remaining with which to implement this strategy. Consequently, we havesecured adjoining land for further phases of development at The Furlong Centre.The additional critical mass thus created will improve dwell times within thescheme and further improve the rental tone. This process of further landassembly is almost complete and we are hopeful of securing planning consent andcommencing on site during 2007. We continue a similar process at Thatcham where, during 2006, we also acquiredadjoining land. Here again we hope to make a planning application shortly andare close to securing those final land acquisitions required for implementation.We have been encouraged by the lettings achieved in 2006, which have seen rentsimprove by 11 per cent, and believe there is latent demand for the new space tobe created. At Swanley Shopping Centre, we intend to submit a planning application shortlyfor the comprehensive redevelopment of the entire scheme. Not only is a positivedialogue underway with the Local Authority and local interest groups, butpre-letting interest is encouraging us to maintain the initiative. This retail development strategy coupled with a defensive investment strategy isan evolving area of our business in which we prefer to work in conjunction withsmaller, specialist partners who assist in facilitating these opportunities. Wehave long recognised the need to ensure that we have a clear pipeline ofopportunities that will deliver value whether or not the investment marketcontinues its current strength. Sourcing these deals is the current challengeand we are pleased with our progress to date. During the course of 2006, we acquired interests worth £4.3 million in two otherschemes. In one, we are in advanced negotiations to pre-let a food store, with afavourable planning decision anticipated by mid-2007. The other project shouldprovide medium-term pipeline product and, when considered alongside our projectsat Ringwood, Thatcham and Swanley, is ample confirmation of an enviable streamof such projects. Other asset management initiatives completed during 2006 included therestructuring of retail leases at Bexleyheath which contributed to the 23 percent increase in the property's value. At our retail warehouse in Formby, weagreed with the tenant a surrender and re-grant of the occupational lease, whichallowed us to agree a sale just before the year-end in a difficult market, thusremoving a problematic covenant exposure from our balance sheet. Completion ofthis transaction occurred in February 2007. Significant progress has been achieved at Peacock Place, Northampton, our jointventure shopping centre project with Capmark, acquired in December 2005. Therefurbishment of the internal areas commenced in January 2007 and we are nowstarting to reposition and re-market the Centre to access latent demand withinthe town. Discussions are also ongoing with the major Centre occupiers toenlarge their holdings, thereby strengthening and re-anchoring the scheme. We have completed the refurbishment of our vacant warehouse in Wigan, acquiredearly in 2006. Demand in the logistics market has been patchy, but we arebeginning to see a resurgence in demand in the 100,000 sq. ft. size range asdistributors look to acquire sub-regional facilities. In addition, there aretentative signs of demand from manufacturers seeking to upgrade facilities. Weare optimistic that an occupier for the unit will be secured during 2007. Key performance indicators Since the business of property investment and development, especially that ofDevelopment Securities, which has a considerable emphasis on developmentactivity, can only properly be judged over a long period, probably a completecycle, annual performance indicators are of less relevance in running ourbusiness. That said, Total Shareholder Return (refer note 6) is a good guide torelative performance, but the importance of that measure needs to be moderatedby both the risk profile which we are prepared to accept and the precise stagethat has been reached in any cycle. Our compound Total Shareholder Return since January 2000, the date on which wewould regard the present cycle to have commenced, is 18 per cent per annum. Thiscompares to 21 per cent as similarly derived from the Real Estate sector index.One of the contributors to our comparative under-performance to date is thelower level of gearing (refer note 6) with which Development Securities hasoperated over the current cycle. It is therefore perhaps not unexpected that theconsequent reduction in exposure to volatility risk should lead to a loweractual and required level of returns. That said, we are of the view that thenext stages of the current cycle should generate superior returns fromdevelopment activity, rather than investment portfolios. We also measure our overall investment portfolio performance against anappropriate IPD Index (refer note 6) in order to assess relative performance ofthis asset class. In 2006, the total return (refer note 6) generated from ourinvestment portfolio was 18.5 per cent, as compared to the IPD Index of 18.1 percent. Over the last five years, our total return has been 19.0 per cent, ascompared to 15.1 per cent of the IPD Index. Debt and equity structure Our gearing continues to be low, at 6.2 per cent at 31st December 2006, comparedto 16.9 per cent at the end of the previous year. Our gross debt totalled £102.9million whilst we held £88.5 million of cash deposits. £6.9 million of thosedeposits were pledged as collateral to certain of our lenders. In November 2006,we issued 3.7 million Ordinary shares by way of a placing, raising grossproceeds of £23.1 million. These proceeds were principally used to fund theacquisition of the Curzon Park site in Birmingham. We continue to earmark asignificant proportion of our cash balances to identified projects on which weare presently engaged and would expect our gearing levels to increase during2007 if we are successful in securing all of the projects for which we are nowin negotiation. Property portfolio analysis Tenant profile1 Government 2% 2 FTSE 100 1% 3 PLC/nationals 56% 4 Regional multiples 6% 5 Local traders 35% Lease profile1 0-5 years 43% 2 5-10 years 23% 3 10-15 years 13% 4 15-20 years 10% 5 20 years + 11% Location profile1 South East 54% 2 North 20% 3 London 25% 4 South West 1% Analysis by sector1 Retail 70% 2 Industrial 15% 3 Office 15% As at 28th February 2007 Consolidated income statement For the year ended 31st December 2006 2006 2005 restated* £'000 £'000 Continuing operations: Revenue 48,727 25,468 Direct costs (32,776) (15,218) ---------------------------- ---------- -------- Gross profit 15,951 10,250 Operating costs (10,257) (10,538) (Loss)/profit on disposal of investment properties (97) 3,728 Gain on revaluation of property portfolio 21,821 18,028 Deficit on revaluation of operating properties (475) (174) ---------------------------------- ---------- -------- Operating profit 26,943 21,294 Share of results of associates and joint ventures 151 1,453 Income from financial assets 63 149 Profit on disposal of investments - 5,759 ---------------------------------- ---------- -------- Profit before interest and taxation 27,157 28,655 Finance income 2,954 2,262 Finance costs (7,321) (7,667) ---------------------------------- ---------- -------- Profit before taxation 22,790 23,250 Taxation 769 (3,160) ---------------------------------- ---------- -------- Profit after taxation attributable to equity shareholders of the parent 23,559 20,090 ---------------------------------- ---------- -------- Basic earnings per share 63.4p 54.8p Diluted earnings per share 63.0p 54.5p ---------------------------------- ---------- -------- 2006 2005 £'000 £'000 Dividends declared and paid during the year 2,390 2,245 ---------------------------------- ---------- -------- * refer note 2 (c) Consolidated balance sheetAs at 31st December 2006 2006 2005 restated* £'000 £'000 Non-current assets Property, plant and equipment - Operating properties 8,090 9,000 - Other property, plant and equipment 3,618 3,776 Investment properties 139,461 159,568 Financial assets 5,881 755 Investments in joint ventures 20,464 - Investments in associates 673 1,165 Trade and other receivables 1,468 1,420 Deferred tax assets 5,619 4,387 ---------------------------- ------- ------- 185,274 180,071 Investment property - held for sale 5,299 - Current assets Inventory - developments and trading properties 74,663 56,479 Trade and other receivables 10,014 9,677 Cash and short-term deposits 88,536 73,094 ---------------------------------- ------- -------- 173,213 139,250 ---------------------------------- ------- -------- Total assets 363,786 319,321 --------------------------------- -------- -------- Current liabilities Trade and other payables (16,747) (15,014) Financial liabilities (15,515) (6,204) --------------------------------- -------- -------- (32,262) (21,218) Non-current liabilities Financial liabilities (87,419) (98,632) Deferred tax liabilities (11,637) (10,434) Provisions (1,055) (1,529) --------------------------------- -------- -------- (100,111) (110,595) --------------------------------- -------- -------- Total liabilities (132,373) (131,813) --------------------------------- -------- -------- Net assets 231,413 187,508 --------------------------------- -------- -------- Equity Share capital 20,356 18,361 Share premium 108,850 87,635 Revaluation reserve 853 335 Other reserves 45,793 45,793 Retained earnings 55,561 35,384 --------------------------------- -------- -------- Equity attributable to equity shareholders of the 231,413 187,508 parent --------------------------------- -------- -------- Basic net assets per share 568p 510p Diluted net assets per share 565p 507p * refer note 2 (c) Consolidated statement of recognised income and expense For the year ended 31st December 2006 2006 2005 restated* £'000 £'000 Gains on revaluation of operating properties 518 321 Deferred tax (992) - --------------------------------- -------- -------- Net (loss)/ income recognised directly in equity (474) 321 Profit for the period 23,559 20,090 --------------------------------- -------- -------- Total recognised income for the year attributable 23,085 20,411 to equity shareholders of the parent --------------------------------- -------- -------- Impact of adoption of IAS 32 and IAS 39 at 1st - 15 January 2005 --------------------------------- -------- -------- Consolidated cash flow statement For the year ended 31st December 2006 2006 2005 restated* £'000 £'000 Net cash flow from operating activities (refer note (17,977) (32,261) 5) --------------------------------- -------- -------- Investing activities: Interest received 3,057 2,170 Dividends received from associated undertaking - 149 Proceeds from sale of shares in associated - 13,396 undertaking Proceeds from redemption of preference shares held - 1,500 in associated undertaking Proceeds on disposal of property, plant and 33 - equipment Proceeds on disposal of investment properties 45,076 30,078 Purchase of property, plant and equipment (1,547) (876) Investment in participating loan (5,000) - Purchase of investment properties (6,928) (11,945) Purchase of investments (20,190) (1,165) --------------------------------- -------- -------- Net cash from investing activities 14,501 33,307 Financing activities: Dividends paid (2,390) (2,245) Issue of new shares 23,210 245 Repayments of borrowings (18,729) (5,169) New bank loans raised 11,973 25,830 Increase/(decrease) in bank overdrafts 4,854 (379) --------------------------------- -------- -------- Net cash from financing activities 18,918 18,282 Net increase in short-term deposits 15,442 19,328 Cash and short-term deposits at the beginning of 73,094 53,766 the year -------- -------- --------------------------------- Cash and short-term deposits at the end of the year 88,536 73,094 --------------------------------- -------- -------- Cash and cash equivalents comprise: Cash and short-term deposits at the end of the year 81,588 48,351 Pledged cash held as security against financial 6,948 24,743 liabilities --------------------------------- -------- -------- Cash and short-term deposits 88,536 73,094 Bank overdrafts (5,929) (1,075) --------------------------------- -------- -------- Cash and cash equivalents 82,607 72,019 --------------------------------- -------- -------- * refer note 2 (c) NOTES TO THE UNAUDITIED PRELIMINARY RESULTS 1. BASIS OF PREPARATION Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company will publish full financial statements thatcomply with IFRSs. The financial information set out in the announcement does not constitute theGroup's statutory accounts for the years ended 31st December 2006 or 2005. The financial information for the year ended 31st December 2005 is derived fromstatutory accounts for that year which have been delivered to the Registrar ofCompanies. The auditors reported on those statutory accounts; their report wasunqualified and did not contain a statement under s237(2) or (3) Companies Act1985. The statutory accounts for the year ended 31st December 2006 will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting. 2. ACCOUNTING POLICIES a) Basis of accounting The Group's financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union asthey apply to the financial statements of the Group for the year ended 31stDecember 2006 and applied in accordance with the Companies Act 1985. b) Basis of consolidation i) The consolidated financial statements of the Group include the financialstatements of Development Securities PLC ('the Company'), its subsidiaries andthe Group's share of profits and losses and net assets of jointly controlledentities and associated undertakings. Where necessary, adjustments have been made to the financial statements ofsubsidiaries, associates and jointly controlled entities to bring the accountingpolicies used into line with those used by other members of the Group. Intra-group balances and any unrealised gains and losses arising fromintra-group transactions are eliminated in preparing the consolidated financialstatements. ii) The results of subsidiaries acquired during the year are included from theeffective date of acquisition. Business combinations are accounted for under theacquisition method. Any excess of the purchase price of the business combinationover the fair value of the assets and liabilities acquired is recognised asgoodwill. Any discount received is credited to the income statement in theperiod of acquisition. c) Prior Year Restatement The Directors have made the following revisions to the prior year financialstatements in respect of the following items: Operating properties Comparative figures for the year ended 31st December 2005 have been restated tomore accurately adopt IFRS requirements in respect of certain leaseholdproperties. The financial effect at 1st January 2005 is a reduction in the netasset value of Operating properties of £1,348,000, a reduction in Revaluationreserve of £1,673,000 and a revaluation surplus of £347,000. For the year ended31st December 2005, the depreciation charge in respect of Operating propertieswas reduced by £58,000 and the Revaluation gain reduced by £104,000. Deferred tax The Directors have corrected an error in the computation of deferred tax inrespect of the revaluation gain of an Operating property. Accordingly, at 31stDecember 2005, deferred tax liabilities have been restated and increased by£2,900,000, with a corresponding reduction in Retained reserves. The impact onthe deferred tax charge for the year ended 31st December 2005 was a decrease of£300,000. 3. SEGMENTAL ANALYSIS For management purposes, the Group is currently organised into three operatingdivisions: Investment - management of the Group's investment property portfolio, generating rental income and valuation surpluses from property management; Trading and - managing the Group's development projects. Revenue isdevelopment received from project management fees and development profits; and Operating - serviced office operations and retail activities. Revenue is principally received from short-term licence fee income. These divisions are the basis on which the Group reports its primary segmentalinformation. All operations occur and all assets are located in the UnitedKingdom, except assets of £1,394,000 (2005: £1,727,000), which are located inFrance and The Netherlands. Accordingly no secondary segmental information isshown. All revenue arises from continuing operations. Year ended 31st December 2006 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Segment revenue 8,995 34,675 5,057 48,727 Direct costs (1,601) (26,195) (4,980) (32,776) ----------------- ---------- ---------- ---------- ---------- Segment result 7,394 8,480 77 15,951 Unallocated operating costs (10,257) Loss on disposal of (97) - - (97) investment properties Net gain/(loss) on 21,821 - (475) 21,346 revaluation of property portfolio ----------------- ---------- ---------- ---------- ---------- Operating profit 26,943 Share of results of 151 associates and joint ventures Income from financial 63 assets ----------------- ---------- ---------- ---------- ---------- Profit before interest and 27,157 taxation Finance income 2,954 Finance costs (7,321) ----------------- ---------- ---------- ---------- ---------- Profit before taxation 22,790 Taxation 769 ----------------- ---------- ---------- ---------- ---------- Profit after taxation 23,559 attributable to equity shareholders of the parent ----------------- ---------- ---------- ---------- ---------- Assets and liabilities Segment 205,723 100,006 13,911 319,640 assets Unallocated assets 44,146 ----------------- ---------- ---------- ---------- ---------- Total assets 363,786 Segment liabilities (83,771) (31,104) (2,593) (117,468) Unallocated liabilities (14,905) ----------------- ---------- ---------- ---------- ---------- Total liabilities (132,373) ----------------- ---------- ---------- ---------- ---------- 3. SEGMENTAL ANALYSIS (continued) Year ended 31st December 2006 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Other segment information Capital expenditure 7,047 - 1,305 8,352 Unallocated capital 242 expenditure Depreciation 982 982 Unallocated depreciation 146 ----------------- ---------- ---------- ---------- ---------- Revenue Rental income 8,700 124 - 8,824 Operating property income - - 5,057 5,057 Project management fees - 587 - 587 Trading property sales - 25,800 - 25,800 Development profits - 8,164 - 8,164 Other income 295 - - 295 ----------------- ---------- ---------- ---------- ---------- 8,995 34,675 5,057 48,727 4. FIXED RATE DEBT The notional fair value adjustment at 31st December 2006 in respect of theGroup's fixed rate debt, calculated on a replacement basis, taking into accountthe difference between fixed interest rates of the Group's borrowings and themarket value and prevailing interest rates of appropriate debt instruments, was£11,900,000 (2005: £15,100,000) equivalent to a decrease in net assets of 20.5pence per share after tax (2005: 28.8 pence per share). 5. NOTE TO THE CASH FLOW STATEMENT 2006 2005 restated* £'000 £'000 Operating profit 26,943 21,294 Adjustments for: Loss/(gain) on disposal of property, plant and 97 (3,728) equipment Net gain on revaluation of investment and operating (21,346) (17,854) properties Share based payments 142 110 Depreciation of property, plant and equipment 1,128 1,149 --------------------------------- ------- -------- Operating cash flows before movements in working 6,964 971 capital Increase in developments (3,587) (996) Increase in trading properties (14,975) (34,248) (Increase)/decrease in receivables (182) 7,702 Increase in payables 1,253 1,509 --------------------------------- ------- -------- Cash generated by operations (10,527) (25,062) Capitalised interest charged to direct costs 1,145 181 Income taxes paid received (473) (906) Interest paid (8,122) (6,474) --------------------------------- ------- -------- Net cash from operating activities (17,977) (32,261) --------------------------------- ------- -------- * refer note 2 (c) 6. GLOSSARY Operating profit: stated after profit on disposal of investment properties andthe revaluation of the property portfolio and before the results of associates,jointly controlled entities, finance income and costs. IPD Index and Total Portfolio Return: total return from the investment propertyportfolio, comprising net rental income or expenditure and capital gains orlosses from disposals and revaluation surpluses or deficits, divided by theaverage capital employed during the financial period, as defined and measured byInvestment Property Databank Limited, a company that produces independentbenchmarks of property returns. IPD Initial Yield: annualised current passing rent expressed as a percentage ofthe property valuation. Total Shareholder Return: dividends plus annual growth in net assets. Gearing: expressed as a percentage, is measured as net debt divided by totalshareholders' funds. 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