28th Feb 2005 07:01
Hammerson PLC28 February 2005 Hammerson plc - Results for the year ended 31 December 2004 2004 2003 Change Net rental income £188.4m £189.5m -0.6% Profit before tax £127.2m £67.1m +89.6% Exceptional profits/(losses)(1) £40.3m £(18.8)m Adjusted profit before tax(1) £86.9m £85.9m +1.2% Basic earnings per share 42.1p 18.3p +130.1% Adjusted earnings per share(2) 30.0p 29.8p +0.7% Total dividend for the year 17.92p 16.83p +6.5% Adjusted net asset value per share(3) 936p 803p +16.6% Return on shareholders' equity(4) 22.1% 9.3% Gearing 68% 73% Recommended final dividend of 12.47 pence (2003: 11.71 pence) making a total forthe year of 17.92 pence, an increase of 6.5%. Notes: (1) Exceptional profits of £40.3 million in 2004 related primarily to the sale of properties and these have been excluded from adjusted profit before tax. (2) Excluding exceptional profits, deferred tax and the one-off tax charge for entry into the Societes d'Investissements Immobiliers Cotees ('SIIC') regime in France. (3) Excluding deferred tax. (4) Excluding deferred tax and the one-off tax charge for entry into the SIIC regime. (5) The 2004 results have been prepared under existing UK accounting rules. The group will be restating the 2004 results under IFRS before the announcement of its 2005 interim results. Copies of the Chairman's statement, preliminary results statement, profit & lossaccount, balance sheet, statement of total recognised gains and losses, cashflow statement and notes are attached. The terms in the commentary that followsare defined in the glossary at the end of this document. Highlights • Adjusted net asset value per share increased by 16.6% to 936 pence,principally as a result of an underlying increase in property valuations of 8.8%overall. • Return on shareholders' equity in 2004 was 22.1%, reflecting thestrong valuation performance. • Net rental income increased by 5.4% on a like-for-like basis. Propertydisposals reduced rental income by £26 million compared with 2003. • During the year, the group invested over £540 million, including £203million in acquiring a further 50% interest in WestQuay shopping centre,Southampton. • The group sold eight properties for £399 million, more than 10% abovetheir book value at 31 December 2003. • Hammerson elected for tax exempt status for its Frenchbusiness, following its listing in March on Euronext Paris. • John Nelson will become Chairman on 1 October 2005, on theretirement of Ronald Spinney. Ronald Spinney, Chairman, said: " In this, my last annual statement to shareholders, I am very pleased to reporton an excellent set of results for Hammerson in 2004. Adjusted net asset valueper share increased by 16.6% to 936 pence and the group achieved a return onequity of 22.1%. The policy of progressive growth in dividends has beenmaintained with a proposed increase of 6.5% this year. The current strong property investment markets have made it more difficult toacquire income-producing assets that meet the group's target financial returns,but Hammerson is benefiting from its development programme, which provides asource of high quality new properties. During 2004, the group invested a totalof £544 million in the development programme, in improvements to existingproperties, in increasing its interests in joint ventures, and in securingfuture development opportunities. The group's retail portfolio offers good potential for growth, notwithstandingsome uncertainties over growth in consumer expenditure in the short term.Encouragingly, demand for office accommodation, both in central London andParis, has improved in the last few months, and this should enable Hammerson toachieve further lettings in its office portfolio and increase rental income. I am delighted that John Nelson will succeed me as Chairman on my retirement atthe end of September. He has broad commercial experience and I believe he willmake a valuable contribution in his role as Chairman. I have every confidence in Hammerson's future success." For further information:John Richards, Chief Executive Tel: 020 7887 1000Simon Melliss, Group Finance Director Tel: 020 7887 1000Christopher Smith, Director of Corporate Affairs Tel: 020 7887 1019 Fax: 020 7887 1010 [email protected] Presentation Hammerson is making a presentation to investors and analysts at 9.30 a.m. todayat the offices of Dresdner Kleinwort Wasserstein, 20 Fenchurch Street, LondonEC3. A conference call facility is available for those unable to attend thepresentation by dialling + 44 (0) 20 8322 2055. A copy of the slide presentationwill be posted simultaneously on the Company's website (www.hammerson.co.uk). Calendar Ex dividend date 13 April 2005Record date 15 April 2005Dividend payable 12 May 2005Interim results August 2005 CHAIRMAN'S STATEMENT Overview In this, my last annual statement to shareholders, I am very pleased to reporton an excellent set of results for Hammerson in 2004. The group achieved areturn on equity of 22.1%, with adjusted net asset value per share increasing by16.6% to 936 pence. Hammerson has consistently achieved year on year growth in both net asset valueper share and adjusted earnings per share. We have concentrated on markets weknow well in the UK and France and benefit from operating both in the office andretail markets. In 2004, Hammerson continued its policy of recycling capital from matureinvestment properties into assets with better growth potential. The group tookadvantage of the strong investment markets to sell eight properties and realiseda total of £399 million, leading to exceptional profits of £40.3 million. These strong property investment markets have made it more difficult to acquireincome-producing assets that meet the group's target financial returns, butHammerson is benefiting from its development programme, which provides a sourceof high quality new properties. During 2004, the group invested a total of £544million in the development programme, in improvements to existing properties, inincreasing its interests in joint ventures, and in securing future developmentopportunities. The group's portfolio showed an underlying valuation increase of 8.8%,reflecting strong demand from investors for property in the UK and France. Therewas continuing good demand from retailers for space in Hammerson's shoppingcentres and retail parks. Conditions in the office occupational market were morechallenging. Despite this, the group made considerable progress in letting spaceat three office schemes in London and Paris. The directors are recommending a final dividend of 12.47 pence, compared with11.71 pence in 2003. This makes a total dividend for the year of 17.92 pence, anincrease of 6.5%. Financial Net rental income for the year to 31 December 2004 was £188.4 million, comparedwith £189.5 million in 2003. On a like-for-like basis, net rental incomeincreased by 5.4%, following rent reviews, lease renewals and, in France,indexation. Profit before tax increased by £60.1 million to £127.2 million. In 2004,exceptional profits of £40.3 million arose on property disposals, whilst in 2003disposals gave rise to exceptional losses of £18.8 million. Excludingexceptional items, adjusted profit before tax increased by 1.2% to £86.9 millionand adjusted earnings per share by 0.7% to 30.0 pence. In March 2004, Hammerson plc obtained a secondary listing for its shares onEuronext Paris, the French Stock Exchange, enabling the group to elect into thenew Societes d'Investissements Immobiliers Cotees ("SIIC") tax regime. Underthis, the group's income and capital gains in its French subsidiaries are nowtax exempt. However, intercompany dividends receivable in the UK from France aretaxable. Full provision has been made for the £71 million SIIC regime entry charge,payable in four annual instalments, the first of which was made in December2004. This provision was partly offset by the write back of deferred tax of £45million, giving rise to a net tax charge of £26 million. In addition, thecontingent tax liability in respect of Hammerson's French business was largelyeliminated, with a reduction of £120 million to £3 million at the end of 2004. Adjusted net asset value per share increased by 133 pence, or 16.6%, to 936pence. The return on equity was 22.1% in 2004, compared with 9.3% in 2003. During 2004, Hammerson issued £300 million 6% unsecured bonds maturing in 2026and signed a £230 million five year revolving credit facility, furtherstrengthening the group's financing structure. The average maturity of thegroup's debt has now increased to nearly 11 years. Hammerson's liquidity is strong with cash, short term deposits and unutilisedcommitted bank facilities of £529 million at 31 December 2004. Gearing at 31December 2004 was 68% compared with 73% at the end of 2003. A placing of nearly 20% of Hammerson's existing equity with a wide variety ofinvestment institutions was successfully carried out by the group's brokers inJanuary 2004, which I believe has improved liquidity in the Company's shares. Markets and Outlook Retail Property In the UK, economic growth in recent years has been supported by strong activityin the housing market and increased consumer spending. However, towards the endof 2004, the housing market showed signs of a downturn, particularly in Londonand the South East, affecting consumer confidence and retail sales growth. The medium term outlook for the retail property sector remains attractive.Although retailing is competitive in the UK, with supermarkets growing theirmarket share and margins under pressure, supply of new space is limited by tightplanning restrictions. It is anticipated that dominant shopping centres andretail parks, which provide good tenant risk diversification and have lowvacancy rates, will continue to win market share and show increases in rentalvalues. In France, consumer spending and retail sales improved in 2004, although theoverall retail environment remains competitive. Given the Government's policy ofreducing taxation, the growth in retail sales is expected to continue into 2005.Rental values for shopping centres increased slightly in 2004 and further modestgrowth is anticipated in 2005. Both in the UK and France, investor sentiment towards retail property remainedstrong, leading to a further increase in values. With few investors wishing todispose of assets, particularly prime shopping centres, and an increased numberof potential investors, investment yields could reduce further in 2005,particularly in France. In Germany, the domestic economy remained weak during 2004, with retail salescontinuing to fall. Whilst a gradual recovery in the economy is expected overthe medium term, the outlook for the property investment market remainsuncertain. Office Property In London, occupational demand for prime offices showed some improvement during2004, reducing the overall market vacancy rate from 14% to 12%. However, therewas a marked increase in demand towards the end of 2004 and, with a limitedsupply of new London office space coming to the market during 2005 and 2006,this should lead to higher rental levels. It is expected that 2005 will seeshorter rent free periods being granted to tenants, followed by an increase inheadline rents in 2006. In central Paris, occupational demand improved in 2004, particularly in thelatter part of the year. Despite this, the vacancy rate remained little changedat around 6%. Incentives required by occupiers increased, reducing effectiverents by around 10%. Looking ahead, continued economic growth and improvedbusiness confidence should lead to further demand from occupiers. This, coupledwith few new development completions, should result in a recovery in rentallevels in 2006. Investment demand for well-let offices both in central Londonand Paris remained buoyant throughout 2004, leading to a further reduction inyields. UK Tax At the beginning of 2004, the UK Treasury issued a consultation paper, "Promoting More Flexible Investment In Property", to consider the introduction oftax transparent vehicles for property ownership in this country. The Government,in its pre-Budget Statement in November 2004, announced that, whilst there willbe no legislation in this area in 2005, it will issue a further consultationpaper in Spring 2005. Hammerson is already seeing the benefits of a tax transparent regime in Franceand is supportive of the Government's efforts to introduce a tax transparentvehicle in the UK. The Board I shall be standing down as Chairman on 30 September 2005. I consider it a greatprivilege to have served first as Chief Executive of Hammerson and since 1999 asChairman. I would like to place on record my appreciation for the advice andencouragement I have received from my colleagues during the 12 years I havespent with Hammerson. I am delighted that John Nelson has agreed to succeed me as Chairman. He joinedthe Board in May 2004. John is a Chartered Accountant and a former seniorinvestment banker with broad commercial experience. He is Deputy Chairman ofKingfisher plc and a non-executive director of BT Group plc. I am confident thathe will make a valuable contribution as Chairman of Hammerson. In 2004, we also welcomed John Hirst to the Board and he has assumed the role ofChairman of the Audit Committee. He is Group Chief Executive of Premier Farnellplc. The Board has also announced today that Graham Pimlott will be standing downfrom the Board on 31 December 2005. Graham joined the Board as a non-executivedirector in 1993 and was appointed Deputy Chairman in 2000. I would like tothank him for his major contribution to Hammerson over many years. Summary Hammerson showed a further strong performance in 2004. The policy of progressivegrowth in dividends has been maintained with a proposed increase of 6.5% thisyear. The group's retail portfolio offers good potential for growth, notwithstandingsome uncertainties over growth in consumer expenditure in the short term.Encouragingly, demand for office accommodation, both in central London andParis, has improved in the last few months, and this should enable Hammerson toachieve further lettings in its office portfolio and increase rental income. Five developments, with an anticipated total cost of £470 million, will becompleted this year and next. These have an estimated total annual rent roll of£40 million, of which £33 million has been secured. Seven further schemes areexpected to start during 2005 and 2006. I have every confidence in Hammerson's future success. Ronald Spinney Chairman 28 February 2005 FINANCIAL REVIEW The financial information contained in this review is extracted or calculatedfrom the attached profit and loss account, balance sheet, cashflow statement,notes and glossary of terms. Profit and Loss Account • Net rental income was £188.4 million in 2004 comparedwith £189.5 million in 2003. An increase in rents from properties ownedthroughout the year, from completed developments and from acquisitions was morethan offset by a reduction in rents in respect of property disposals. Net rental income reconciliation 2004 2003 £m £mProperties owned throughout 2004 and 2003 153.3 145.4Acquisitions 7.3 0.8Developments 15.7 5.0Properties sold 11.5 37.9Exchange translation and other 0.6 0.4Net rental income 188.4 189.5 • Net rental income in 2004 included £4.3 million inrespect of turnover rent and £2.4 million in respect of accrued rent receivable,which has been allocated to rent free periods. • Administration expenses in 2004 rose by £1.9 million to£26.7 million, which included a one-off charge of £0.8 million in respect of theclosure of the group's Berlin office. Increases in staff costs and professionalfees relating to tax restructuring in France were offset to some extent byincreased management fees receivable from joint venture partners. • The group's net financing costs were £74.8 million in2004 compared with £78.7 million in 2003. Following the completion of severaldevelopments, less interest was capitalised during 2004. However, this was morethan offset by a higher level of interest receivable, reflecting cash receivedfrom property disposals. The average cost of borrowing was 6.3%, compared with6.0% in 2003. Interest cover was 2.0 times, compared with 1.8 times in 2003. • Profit before tax was £127.2 million, after includingexceptional profits of £40.3 million on the sale of properties. These profitsarose principally on the sale of office properties and a retail park in the UK.Adjusted profit before tax, excluding exceptional items, was £86.9 million, anincrease of 1.2% over 2003. • The tax charge in 2004 was £8.7 million, reflecting acurrent tax charge of £49.0 million largely offset by a deferred tax credit of£40.3 million. The election into the SIIC regime accounted for £43.6 million ofthe current tax charge and £45.0 million of the deferred tax credit, being theexit tax payable and the release of deferred tax respectively. Excluding theeffects of the SIIC regime, the low tax rate arose principally due to low tax onforeign earnings, UK capital allowances and relief for interest capitalised. • Adjusted earnings per share, after excluding profits onproperty disposals, deferred tax and the SIIC exit charge, were 30.0 pence,compared with 29.8 pence in 2003, an increase of 0.7%. • A final dividend of 12.47 pence per share is proposedwhich, together with the interim dividend of 5.45 pence per share, makes a totalof 17.92 pence per share for the year. This represents an increase of 6.5% overthe total dividend for 2003. Cash Flow • Cash flow from operating activities was £164 million,compared with £174 million in 2003. The decrease was principally due to thetiming of working capital receipts and payments. • The cash outflow in respect of acquisitions and othercapital expenditure of £544 million was £106 million less than capital additionsof £650 million. The difference was due to: £mBorrowings assumed on acquisition 32Negative goodwill on acquisitions 28Payments deferred until 2005 34Interest capitalised 21Working capital and other movements (9)Total 106 • Property disposals realised £399 million and, afterpaying tax, interest and dividends, there was a cash outflow, before financing,of £129 million during the year. Balance Sheet • At 31 December 2004, Hammerson's property portfolio wasvalued at £4,608 million, compared with £3,956 million at the end of 2003. Theincrease arose from capital additions of £650 million, a revaluation surplus of£344 million and exchange translation gains of £6 million, partly offset by thedisposal of properties with a book value of £348 million. • Adjusted net asset value per share increased by 133pence, or 16.6%, to 936 pence at the year end. The portfolio revaluationaccounted for 124 pence of the increase, with the balance principally reflectingretained profits and the negative goodwill arising on the acquisitions of theadditional interests in WestQuay shopping centre and the Moorhouse officescheme. Provision was made in the year for the tax cost of entering the SIICregime in France, which reduced net assets per share by 25 pence. Borrowings • In February 2004, Hammerson issued £300 million 6%unsecured bonds maturing in 2026. In addition, the group signed a new £230million five year revolving credit facility in June 2004, refinancing a £250million facility that expired at that time. • At 31 December 2004, Hammerson's borrowings totalled£1,800 million and it had undrawn committed facilities of £475 million. Theweighted average maturity of borrowings at 31 December 2004 was approximately 11years. • Unsecured borrowing represented 96% of total debt at 31December 2004, compared with 99% at the end of 2003. Secured borrowings of £65million principally comprised the group's share of the facility relating toMoorhouse. • Net debt amounted to £1,746 million at 31 December 2004after taking into account cash and deposits of £54 million. Gearing was 68%compared with 73% at the end of 2003, whilst the loan to value ratio was 38%. • The market value of borrowings and interest rate swaps atthe year end was £1,974 million, some £175 million greater than the book value,equivalent, after tax relief, to 44 pence per share. Return on Shareholders' Equity • Hammerson's return on shareholders' equity for the yearended 31 December 2004 was 22.1%, excluding deferred tax and the effects ofentry into the SIIC regime. This compares with the group's estimated cost ofequity of 7.8%. Over the last three years the group has achieved an averagereturn on shareholders' equity of 11.9%. Tax • In March 2004, Hammerson plc obtained a secondary listingfor its shares on Euronext Paris, the French Stock Exchange, enabling the groupto elect into the new Societes d'Investissements Immobiliers Cotees ("SIIC") taxregime. The group's income and capital gains in the French subsidiaries are nowtax exempt, although intercompany dividends receivable in the UK are taxable. • Full provision has been made for the £71 million SIICregime entry charge, payable in four annual instalments, the first of which wasmade in December 2004. This provision was partly offset by the write back ofdeferred tax of £45 million, giving rise to a net charge of £26 million. Inaddition, the contingent tax liability in respect of Hammerson's French businesswas largely eliminated, with a reduction of £120 million to £3 million at theend of 2004. International Financial Reporting Standards ('IFRS') • With effect from 1 January 2005, all companies quoted inthe European Union are required to adopt IFRS. Hammerson will report its interimand final results for 2005 under the new accounting regime. • The main changes to Hammerson's financial statements willbe the recognition of property revaluation surpluses and deficits in the incomestatement, rather than the statement of recognised gains and losses, and theinclusion in the balance sheet of contingent tax that may arise on the disposalof all properties in the portfolio. In addition, the movements in the fair valueof interest rate derivatives will be recognised in the income statement andlease incentives capitalised and amortised through the income statement over thelease term, rather than the period to the first rent review. • Hammerson is maintaining a dialogue with other property companies toensure that the standards are applied as consistently as possible across thesector. Hammerson will present its 2004 results restated under IFRS in April2005. The presentation will be available on the Company's website. PORTFOLIO REVIEW Portfolio InformationFor the year ended 31 December 2004 Net Properties Underlying Average rental at valuation Total Reversionary/ unexpired income valuation change return (Over-rented) lease term £m £m % % % (1) YearsUnited KingdomRetail: Shopping centres 71 1,784 10.3 17.4 10.6 12 Retail parks 21 503 21.3 29.3 10.6 16 92 2,287 12.5 20.0 10.6 13Office: City 18 640 7.0 15.7 (22.0) 7 West End 5 89 13.2 17.6 - 7 Docklands & Other 10 165 6.5 13.2 (18.3) 7 33 894 7.5 15.9 (17.9) 7 Total United Kingdom 125 3,181 11.1 18.9 3.0 11 FranceRetail 41 751 10.6 17.2 18.3 6Office 15 515 5.8 9.7 5.9 7 Total France 56 1,266 8.6 14.1 13.7 6 GermanyRetail 7 161 (21.8) (18.7) 4.4 5Total Continental Europe 63 1,427 4.0 9.1 12.5 6 GroupRetail 140 3,199 9.7 16.3 12.3 10Office 48 1,409 6.8 13.3 (8.2) 7 Total Group 188 4,608 8.8 15.4 6.2 9 Notes: (1) The amount by which the estimated rental value exceeds or falls short of the rents passing after any rent free periods, together with the estimated rental value of vacant space. Portfolio Allocation • Hammerson owns and manages a portfolio of 15 majorshopping centres and 11 retail parks, providing over 1,100,000 m(2) of retailspace. The group's office portfolio consists of 10 prime office buildings,located in central London and central Paris, with a total area of over 200,000 m(2). • Hammerson's property portfolio was valued at £4.6 billionat 31 December 2004, compared with £3.9 billion at the end of 2003. During theyear, capital expenditure totalled £650 million, principally on propertyacquisitions and the development programme, whilst valuation increases amountedto £344 million. Property disposals reduced the value of the portfolio by £348million. • During 2004, the UK component of the portfolio increasedby three percentage points to 69%, whilst there was a reduction in Germany from5% to 3%. The retail component of the portfolio increased by one percentagepoint to 69%. • In June, Hammerson exchanged contracts to acquire thefreehold interest in the former London Stock Exchange buildings in the City for£68 million. An initial payment of £34 million was made on completion in July2004 and the balance is due in December 2005. • The group increased its interest in WestQuay shoppingcentre to 100% with the acquisition for £203 million in December 2004 ofBarclays Bank PLC's 50% interest in the scheme. The 76,300 m(2) shoppingcentre, which is anchored by John Lewis and Marks & Spencer, produces rentalincome of approximately £22 million per annum, with the first rent reviews duethis year. • Hammerson also increased its interest in The Moor HouseLimited Partnership, which owns the Moorhouse office building in the City ofLondon, to 66.7% following the acquisition of a further one-third interest forapproximately £51 million. The 30,100 m(2) landmark building was completed inNovember 2004 at a total development cost to Hammerson of approximately £123million. • Brent Cross Shopping Park, a joint venture with StandardLife Investments, was also completed during 2004. Hammerson's interest in the8,500 m(2) retail park is 40.6% and its share of the total commitment to theproject, including the initial consideration, was £30 million. • The group took advantage of the strong investment marketduring 2004 by disposing of eight properties and raised total proceeds of £399million. The disposal proceeds were in aggregate some £40 million above theirvaluations at 31 December 2003 and £66 million above their cost. • In Germany, the sale of Hammerson's 22% interest in CityCenter shopping centre, Essen, was completed for £20 million early in 2004.Following the reduction in the size of its business in Germany, Hammerson closedits Berlin office in February 2004 and outsourced the property management of itsthree remaining retail properties. • Hammerson has exchanged contracts to sell its property inSittingbourne, Kent, for £34 million, with completion due in March 2005. Thegroup acquired the property in February 2003 for £17 million. Terms have alsobeen agreed for Hammerson to undertake the development management role for theproposed redevelopment of the site as a mixed-use town centre scheme to beanchored by a major food superstore. Valuation Movements • During 2004 the retail and office portfolios showedunderlying increases in value of 9.7% and 6.8% respectively. This resulted in anoverall valuation increase of the group's portfolio of 8.8%. • The underlying valuation increase in the UK was 11.1%.The strong investment market reduced yields generally and around 40% of theincrease in value of Hammerson's UK portfolio can be attributed to this factor.A further one-quarter of the uplift arose from increased rental values, whilstthe balance reflected property specific factors and management initiatives. • In France, the underlying valuation increase was 8.6%.Approximately 40% of the growth in value was due to lower yields and reflectedfavourable investment market conditions. The balance reflected higher rentalvalues at the shopping centres and progress in letting recent officedevelopments. • In Germany, the weak consumer markets caused rentalvalues to decline and this was the main reason for the reduction in values. Total Return • The total return from the portfolio was 15.4% in 2004,compared with 8.7% in 2003. The increase was attributable to the valuationperformance of the UK and French portfolios. The retail park portfolio in the UKshowed a particularly strong performance with a total return of 29.3%. Income Quality • Hammerson's portfolio generates a high quality secureincome stream. At 31 December 2004, the passing rent from the portfolio amountedto £220 million and the average unexpired lease term was nine years. Within theretail portfolio, the average unexpired lease term for shopping centres was nineyears and for retail parks 16 years. The average unexpired lease terms for theoffice portfolios in London and Paris were both seven years. • The group's five largest retail tenants, which accountedfor 8.8% of total passing rent, were: H&M Hennes (2.4%); B&Q / Comet (1.9%);Pinault Printemps Redoute (1.9%); Arcadia (1.4%); and Next (1.2%). Given thespread of tenants in the retail portfolio, the overall risk to Hammerson ofindividual tenant default is considered low. • The group's three largest office tenants, which accountedfor 11.9% of total passing rent, were: Deutsche Bank (6.7%); La Societe duFigaro (4.0%); and HM Government (1.2%). • The office development at Bishops Square, London has beenpre-let to Allen & Overy. Hammerson's share of the annual rent, which isexpected to commence in April 2007, will amount to £26 million. • During 2004, the group renewed nearly 200 expiring leasesand carried out over 50 rent reviews, which, together with rent reviews andrenewals in the previous year, contributed to an underlying increase in incomeof 5.4%. Rent Reviews • In 2004, UK rent reviews were agreed in respect of leaseswith passing rents of £6 million, giving rise to an increase in annual rents of£2 million, whilst reviews remaining to be settled from 2004 could increaserents by a further £2 million. • The first rent reviews at The Oracle, Reading, occurredin 2004. To date, 45% of the reviews have been agreed, at levels nearly 30% inexcess of previous passing rents. In 2005, the first rent reviews at WestQuay,Southampton, will take place. The ERV of leases subject to review at WestQuaywas approximately 28% higher than rents passing at the end of 2004. • At 31 December 2004, the shopping centre portfolio was12.5% reversionary and the retail parks portfolio 10.6% reversionary. The officeportfolio was over-rented by 8.2%, with the over-renting accounted for by justtwo office buildings in London, 99 Bishopsgate and Exchange Tower. Hammerson'sportfolio was 6.2% reversionary overall. • In the UK, leases subject to rent reviews in the years2005 to 2007 have current rents passing of £73 million. Management estimatesthat, on review, rents receivable in respect of these leases would increase by£6 million to £79 million by 2007 if reviewed at current rental values. This isnot a forecast and takes no account of increases or decreases in rental valuesbefore the relevant review dates. Outstanding 2005 2006 2007 2005-07 £m £m £m £m £mRents passing from leases subject to review 14 31 30 12 73Projected rent after review at current ERV 16 34 31 14 79Potential rent increases 2 3 1 2 6 • Shopping centre leases in France are indexed annuallyaccording to a construction cost index. For 2004, indexation increased rents atHammerson's shopping centres in France by £1.0 million. The level of indexationfor 2005 is 5.4%, which applies from 1 January 2005. Lease Expiries and Breaks • During 2004, leases with passing rents of £10.4 millionexpired. Most of the leases were renewed or the tenants replaced and, becausethe expiring leases were at rents below market levels, additional annual incomeof £1.4 million was secured. • Over the three years 2005 to 2007, leases with currentrents passing of £30 million are subject either to expiry or tenants' breakclauses. Management estimates that, assuming renewals at current rental values,additional annual rents from this element of the portfolio would total £3million by 2007 as shown in the table below. This is not a forecast and takes noaccount of void periods, tenant incentives, or possible changes in rental valuesbefore the relevant lease expiry dates. 2005 2006 2007 2005-07 £m £m £m £mRents passing from leases subject to expiries or breaks 18 6 6 30Current ERV 19 6 8 33Potential rent increases 1 - 2 3 Vacancy • At the end of 2004 the overall vacancy rate within thegroup's portfolio stood at 9.4%. The vacancy rate in the retail portfolio at 31December 2004 was 4.7%, with the vacancies principally reflecting units or spaceheld empty pending refurbishments or reconfigurations. The vacancy rate in theoffice portfolio was 28.3% and related principally to four office buildings incentral London, one of which, Moorhouse, was a development completed in November2004. • Good progress has been made in letting the three officedevelopment schemes completed towards the end of 2003. In London, 10 GrosvenorStreet and One London Wall are now approximately 33% and 51% let respectively.In Paris, Neo, 14 boulevard Haussmann, the 26,700 m(2) office building, is nowfully let. This followed a major letting of 20,500 m(2) to La Societe du Figaro,the leading French newspaper, in November 2004, and a further letting to thesame company since the year end. New Contracted Income • Reflecting the leasing activity referred to above andleases which have already been signed or agreed in respect of currentdevelopments, the group has secured a substantial and rising income stream asshown in the table below. New contracted income 2005 2006 2007 2008 £m £m £m £mRetail parks 3.3 7.1 8.1 8.1Bishops Square, London E1 - - 18.4 25.8UK completed offices - 0.9 2.4 2.8Neo, 14 boulevard Haussmann, Paris 1.6 1.7 3.9 10.69 place Vendome, Paris - 0.2 0.6 0.6Total - cash flow 4.9 9.9 33.4 47.9 - UITF28 basis 13.6 24.7 40.4 40.4 Notes: (1) The figures include Hammerson's share of income in respect of joint ventures. (2) Income is included according to when rent payments commence, with the total allocation to rent free periods, as required by UITF28, also shown. Developments • Hammerson continues to follow a strategy of undertakingselective developments in the retail and office sectors. Developments enable thegroup to create assets showing attractive income returns and at a costsubstantially below the price of acquiring completed and income producing assetson the open market. • Hammerson's developments were valued at £533 million at31 December 2004, £96 million above cost, and represented 12% of the totalportfolio. Developments are shown at a valuation that is discounted for theestimated costs to complete them, including interest, and a profit margin that apotential purchaser might apply. The group does not intend to dispose of any ofits developments prior to their completion, which should give rise to additionalsurpluses as buildings are completed and let. • At 31 December 2004 five projects were underconstruction, the cumulative cost of which was £319 million, compared with avaluation of £415 million. Further costs of £151 million will be incurred inorder to complete the projects. Current projects Ownership Size Cost at Estimated total Amount let Anticipated interest 31/12/04 development or under completion m(2) £m cost £m offer by date areaRetail parks Cyfarthfa, Merthyr Tydfil 100% 23,600 29* 35* 85% Jan 2005St Oswald's, Gloucester 100% 20,500 25* 44* 83% Jun 2005Offices Bishops Square, London E1 75% 75,000 184* 280* 95% Jun 200519 Hanover Square, London 100% 2,700 16* 21* 0% Aug 2005W19 place Vendome, Paris 1er 50% 27,700 65* 90* 5% Jul 2006 *Hammerson's share of cost shown for joint ventures • The 23,600 m(2) Cyfarthfa Retail Park at Merthyr Tydfilhas now been completed and the property is 85% let. • Construction is underway at St. Oswald's Retail Park inGloucester. The first phase of the development is expected to be completed inJune 2005 at a total cost of £44 million and leases in respect of 83% of theforecast rental income have been agreed. • The construction of Bishops Square, London, isprogressing well with completion due in June 2005. The 71,200 m(2) of offices isleased to Allen & Overy. Marketing of the 3,800 m(2) of retail space is nowunderway and there is an encouraging level of interest from retailers andrestaurant operators. • At 9 place Vendome, Paris, work started in January 2004on a scheme to create 22,200 m(2) of offices and 5,500 m(2) of retail space in a50:50 joint venture with AXA. Hammerson's share of the total cost of the projectis £90 million and completion is scheduled for July 2006. Two of the eightretail units have now been let, representing 29% of the anticipated retailrental income. Future Development Programme • Hammerson has several excellent future development opportunities onwhich good progress was made during 2004. The group is using its expertise toadvance these projects although the timing of these schemes will be dependentupon site assembly, planning and letting markets. Seven projects are currentlyexpected to start in 2005 and 2006 with a total development cost of £740 millionand a potential rent roll when fully let of around £60 million. Projects Scheme outline Indicative Planning status total development cost £m*Retail schemes Broadmead, Bristol 93,000 m(2) retail and leisure 215* Planning consent secured.(50%) element of 140,000 m(2) scheme. Shires West, Leicester (60%) Extension of 60,000 m(2) and 200* Planning consent secured. refurbishment to existing centre. The Avenue Retail Park, 4,500 m(2) extension and 10* Planning consent secured.Cardiff reconfiguration. Westwood & East Kent 7,500 m(2) extension. 15* Planning consent secured.Retail Parks, Thanet Offices 125 Old Broad Street, 32,000 m(2) tower building. 160* Revised planning applicationLondon EC2 submitted. 60 Threadneedle Street, 20,000 m(2) of offices 105* Revised planning applicationLondon EC2 2,000 m(2) of retail. to be submitted in 2005. Opera Capucines, Paris 2e 5,800 m(2) of offices 35* Planning application(50%) 4,600 m(2) of retail. submitted. *Hammerson's share of costs shown for joint ventures • Good progress has been made by the Bristol Alliance onits planned redevelopment of Broadmead in the centre of Bristol. In June,Hammerson and Land Securities agreed to acquire Morley Fund Management's onethird share of the Bristol Alliance and Hammerson now has a 50% interest in thescheme. Planning consents are in place for the 140,000 m(2) mixed-usedevelopment, which incorporates 93,000 m(2) of retail and leisure space. Houseof Fraser has agreed terms to occupy the 16,250 m(2) four-storey departmentstore. A leasing campaign is underway and site assembly is progressing with aview to construction starting later this year. It is anticipated that the newscheme will open in Autumn 2008. • In Leicester, Hammerson and Hermes received planningconsent in 2004 for a major expansion and refurbishment of the existing Shiresshopping centre, which will increase its overall size to 109,000 m(2). ShiresWest will include 50,000 m(2) of retail space, 6,000 m(2) of restaurant andleisure facilities and some 120 residential units, served by 2,000 car parkingspaces. John Lewis Partnership has agreed terms for a 20,000 m(2) departmentstore, which will anchor the new scheme. It is anticipated that construction ofShires West will begin early in 2006 with completion in Autumn 2008. Hammersonhas a 60% interest in the scheme. • In January 2004, Hammerson received planning consent fora 7,500 m(2) expansion of its retail park in Thanet, Kent. Site assembly has nowbeen completed and construction should begin shortly. The group also hasplanning consent for a 4,500 m(2) extension to its existing 10,500 m(2) TheAvenue Retail Park in Cardiff. • Following the acquisition of the former London StockExchange buildings in June 2004, the group intends to undertake a phasedredevelopment. The first phase, for which a revised planning application wassubmitted in December 2004, involves a comprehensive refurbishment of the towerbuilding, 125 Old Broad Street, to provide 32,000 m(2) of high quality officeaccommodation. The second phase, 60 Threadneedle Street, involves the demolitionof the former Stock Exchange market building, and the construction of a newoffice building of approximately 22,000 m(2). • In the centre of Paris, Hammerson is proposing amixed-use redevelopment at Opera Capucines, in a 50:50 joint venture with MAAF.A planning application was submitted at the end of 2004 to create 5,800 m(2) ofoffices and 4,600 m(2) of retail accommodation and a start on site isanticipated in early 2006. Terms have been agreed with Esprit to take 2,500 m(2)of the retail space for a new flagship store. • In addition to the above schemes, Hammerson has severalother significant development opportunities. The group is working with localauthorities and landowners in several other major towns and cities, includingAberdeen, Barnet, Birmingham, Kingston-upon-Thames, Leeds, Peterborough andSheffield, to advance potential retail-led development schemes or expansions toexisting centres. A number of further retail parks are also planned. Inaddition, the group has several potential future London office schemes arisingfrom its acquisition of part of the Railtrack portfolio in 2002, includingdevelopments at Bishopsgate Goodsyard and Shoreditch. • In France, the group continues to advance plans forextentions and refurbishments over the next few years at a number of itsexisting retail assets, including Bercy 2 and Italie 2 in Paris, Les 3 Fontainesin Cergy Pontoise, Espace Saint Quentin in Saint Quentin-en-Yvelines and Parinorin Aulnay sous Bois. CONSOLIDATED PROFIT AND LOSS ACCOUNTfor the year ended 31 December 2004 Notes 2004 2003 Unaudited Audited £m £m Gross rental income, after rents payable 1 212.3 215.3Other property outgoings 1 (23.9) (25.8)Net rental income 188.4 189.5 Loss on disposal of properties held for resale - (0.1)Management fees receivable 4.0 3.3Cost of property activities (16.3) (15.8)Corporate expenses (14.4) (12.3)Administration expenses (26.7) (24.8)Operating profit 161.7 164.6 Exceptional items: Profit/(Loss) on the sale of investment 40.3 (18.8)propertiesProfit on ordinary activities before interest 202.0 145.8 Cost of finance (net) 2 (74.8) (78.7)Profit on ordinary activities before tax 127.2 67.1 Current tax 3(a) (49.0) (1.7)Deferred tax 3(a) 40.3 (13.1)Tax charge on profit on ordinary activities (8.7) (14.8)Profit on ordinary activities after tax 118.5 52.3 Equity minority interests (2.2) (2.0)Profit for the financial year 116.3 50.3 Dividends 4 (49.6) (46.4) Retained profit for the financial year 15 66.7 3.9 Basic earnings per share 5 42.1p 18.3pDiluted earnings per share 5 42.0p 18.2pAdjusted earnings per share 5 30.0p 29.8p All results derive from continuing operations. CONSOLIDATED BALANCE SHEETas at 31 December 2004 2004 2003 Unaudited Audited Notes £m £m Fixed assetsLand and buildings 6 4,607.8 3,955.5Fixtures, fittings and equipment 1.1 1.3Tangible assets 4,608.9 3,956.8Investments 8 46.4 40.7 4,655.3 3,997.5Current assetsDebtors - Due within one year 9 86.1 109.7 - Due after more than one year 9 23.3 32.8Cash and short term deposits 10 53.7 187.0 163.1 329.5Creditors falling due within one yearBorrowings 11 (0.7) (249.0)Other 12 (307.2) (253.8)Net current liabilities (144.8) (173.3) Total assets less current liabilities 4,510.5 3,824.2 Creditors falling due after more than one year Borrowings 11 (1,798.8) (1,523.2) Other 12 (72.1) (36.0) Provisions for liabilities and charges Deferred tax 3(d) (17.3) (58.7) Equity minority interests (41.6) (38.1) 2,580.7 2,168.2 Capital and reservesCalled up share capital 14 69.3 69.1Share premium account 15 597.8 594.1Revaluation reserve 15 1,086.8 764.7Capital redemption reserve 15 7.2 7.2Other reserves 15 35.9 8.4Profit and loss account 15 785.6 726.9Investment in own shares 16 (1.9) (2.2)Equity shareholders' funds 2,580.7 2,168.2 Diluted net asset value per share 5 930p 784p Adjusted net asset value per share 5 936p 803p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESfor the year ended 31 December 2004 2004 2003 Unaudited Audited Note £m £m Profit for the financial year 116.3 50.3Unrealised surplus on revaluation of properties 344.4 110.8Unrealised surplus on revaluation of investments and minority 2.9 0.5interestsUnrealised surplus on acquisition of minority interest - 1.5Negative goodwill 15 27.5 -Current tax on property disposals relating to prior year revaluations (4.7) (0.3)Deferred tax on property disposals relating to prior year - (4.7)revaluationsFrench exit tax payable on election for SIIC status relating to prioryear revaluations (27.2) - Exchange translation movements (1.3) 16.4Total recognised gains and losses for the year 457.9 174.5 NOTE OF HISTORICAL COST PROFITS AND LOSSESfor the year ended 31 December 2004 2004 2003 Unaudited Audited £m £m Profit on ordinary activities before tax 127.2 67.1Realisation of previous years' revaluation gains 25.8 145.2Historical cost profit on ordinary activities before tax 153.0 212.3Historical cost profit for the financial year after tax, equity minorityinterests and dividends 60.6 144.1Related Shares:
Hammerson