20th Mar 2007 07:02
Derwent London PLC20 March 2007 20 March 2007 DERWENT LONDON PLC ("Derwent" / "Group") Preliminary results for the year ended 31st December 2006 DERWENT LONDON ANNOUNCES EXCELLENT RESULTS, A TARGET DATE FOR REIT CONVERSION AND STRONG PROGRESS WITH THE LMS INTEGRATION Derwent London, Derwent Valley Holdings plc's new name following its merger withLondon Merchant Securities plc ("'LMS") in February 2007, announces its resultsfor the year ended 31st December 2006. Highlights • Adjusted net asset value per share rose 33% to 1,770p (31st December2005: 1,335p). Properties held for the year gained in value by 21.6% (2005:14.8%). • Revaluation surplus of £223 million brought the value of the Group'sportfolio to over £1.3 billion (2005: £1.0 billion); the portfolio of the mergedgroup now totals £2.5 billion. • Adjusted profit before tax of £16.4 million (2005: £16.7 million).IFRS profit before tax rose 61% to £242.8 million (2005: £150.4 million). • Exceptional lettings progress with over 40,000 sq m of space let,primarily at The Johnson Building, Hatton Garden and, following the year-end,Horseferry Road, Victoria. • Total dividend up 8% to 14.75p (2005: 13.65p). • Acquisitions of £58.3 million. Disposals realised £31.2 million,producing a profit of £2.9 million. • Total return for the year of 33.6% (2005: 25.5%). • REIT conversion confirmed with a target date of 1st July 2007. • Merger to deliver benefits from increased scale and managementresource, allowing the Group to undertake larger acquisitions and refurbishmentand development schemes. • 315,000 sq m pipeline of development or refurbishment projects withan estimated completed development value of £2.7 billion. Financial Highlights Year to Year to Change 31.12.06 31.12.05 %Adjusted net asset value per share (p) 1,770 1,335 33Gross property income (£m) 51.3 49.5 4Adjusted profit before tax (£m) 16.4 16.7 (2)IFRS profit before tax (£m) 242.8 150.4 61Adjusted earnings per share (p) 24.83 26.23 (5)Dividend per share (p) 14.75 13.65 8Total return (%) 33.6 25.5 - Robert Rayne, Chairman, commented: "This has been a transformational year and I am delighted to be reportingexcellent results for Derwent London. The Group is now the sixth largest UKlisted property company, with a market capitalisation in excess of £2 billion.I am also pleased to confirm that the Group is planning to elect for REITstatus. The targeted conversion date is 1st July 2007. "With yield compression unlikely to contribute significantly to performance, itis encouraging that rental growth in central London, where the portfolio'saverage rent is only £255 per sq m, looks firmly set to continue. For DerwentLondon shareholders, the future offers the exciting prospects of REIT status, aportfolio packed with opportunities and a specific focus on central London. Ilook forward to reporting to you later in the year on the Group's progress." For further information, please contact: Derwent London Financial DynamicsJohn Burns, Chief Executive Stephanie Highett/Dido LaurimoreTel: 020 7659 3000 Tel: 020 7831 3113 DERWENT LONDON PLC PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31st DECEMBER 2006 CHAIRMAN'S STATEMENT After a transformational year, Derwent London, Derwent Valley Holdings' new namefollowing its merger with London Merchant Securities (LMS), reports excellentresults for the year ended 31st December 2006. The merger created one of London's leading West End office specialists with amarket capitalisation in excess of £2 billion making it the sixth largest UKlisted property company. The benefits and the prospects for the enlarged groupare dealt with below. Results overview The merger was completed on 1st February 2007 and, accordingly, these results donot include those of LMS. The adjusted net asset value increased by 33% to £950million, equivalent to 1,770p per share compared with 1,335p last year. Theproperty portfolio was valued at £1.3 billion, producing a surplus of £223million on the previous year. Properties held for the full year gained in valueby 21.6% compared to 14.8% in 2005. At £16.4 million, adjusted profit before tax was marginally lower than the £16.7million achieved last year. Profits were held back as a consequence of thegroup's strategy of foregoing income and taking possession of properties whereopportunities for value enhancing development schemes were evident. During the year, £58.3 million was expended on acquisitions including £24.8million on the Astoria, Charing Cross Road and 17 Oxford Street. At £18.7million, capital expenditure on projects was lower than anticipated due tounexpected delays caused by the increasingly protracted planning environmentwithin which the group operates. Disposal proceeds totalled £31.2 million andgave a profit of £2.9 million. Dividends The terms of the merger with LMS necessitated a change to the timing of thepayment of the 2006 final dividend. Shareholders of Derwent Valley Holdingsreceived a second interim dividend of 10.525p per share on 23rd February 2007,in lieu of the final dividend normally paid in June. This, together with thefirst interim dividend of 4.225p paid on 6th November 2006, gave a total paymentfor the year of 14.75p, an increase of 8% on the previous year. The company'snext dividend payment will be the interim dividend for the year to 31st December2007, which is expected to be paid in November 2007. Market review Rental growth fulfilled expectations, especially in the West End, as tenantdemand flourished and the supply of vacant space receded. Yield compression wasalso still evident as demand from the investment market showed no sign offaltering. The year was an exceptionally productive one for the group in terms of lettingactivity, the high points being the successes at its three largest projects. Inthe first half of the year, Telstar, Paddington, where the group is acting asdevelopment manager for Prudential, was prelet to Rio Tinto. The JohnsonBuilding, Hatton Garden, is now fully let and Horseferry House, Victoria wasprelet to Burberry as its new global headquarters, at a very early stage of itsrefurbishment. These three transactions, which combined have a floor area of39,000 sq m, demonstrate the high level of demand for the group's product. ForDerwent London, continuing this success involves three principal factors thatthe board believe give a competitive advantage. First, create interesting anddesign-led space that stands apart. Second, be enterprising and prepared toinvest in those London villages that have the essential characteristicsnecessary for future improvement. Third, target schemes predominantly at themiddle market, where rents are in the range of £375-£650 per sq m. Applyingthese principles to the merged portfolio, which comprises over 440,000 sq m ofspace in central London and has a project pipeline of 315,000 sq m, shoulddeliver further net asset growth. Merger The merger effectively doubled the size of the company. This, together with theadditional depth in management resource, will allow the group to make largeracquisitions and increase the scale of its future redevelopment andrefurbishment schemes in central London. Integration of the two businesses is proceeding smoothly with a phased transferof personnel to Savile Row due to be completed by early April. The annual costsavings, to be achieved through synergy, are estimated at £4.5 million by 2008.The net savings in 2007 are expected to be half this figure. The combination of the two companies' portfolios presented a unique opportunityto create a new major ownership within the central London commercial propertymarket, with £2.2 billion of property located in this key sector. WhilstDerwent Valley Holdings focussed its efforts solely within this area, LMShistorically held some of its assets outside London. It is the board's intentionthat the new group will become wholly concentrated on central London and,therefore, assets outside this core area, with a value of £0.3 billion, will bedisposed of in a timely and efficient way. The proceeds of these sales willeither be recycled into the extensive pipeline of projects or reinvested in newproperties. The enlarged group has a significantly enhanced presence in two major Londonhubs - the West End and the City borders - which are currently two of the mostdynamic locations for property investment. The total portfolio value is £2.5billion, of which £1.7 billion is in the West End, and £0.5 billion in the Cityborders. Traditionally, Derwent Valley Holdings pursued a policy of owningassets with a relatively short lease profile, which provided futurerefurbishment and development opportunities. In contrast, LMS concentrated onletting buildings on longer leases and at some of the larger buildings, theseleases are approaching the end of their terms. This will present excitingopportunities to apply Derwent's design-led philosophy and active assetmanagement approach to regenerate the properties and enhance value. The board In addition to my appointment as chairman, the merger has brought other changesto the board. I am delighted that John Ivey, the company's former chairman, hasagreed to become deputy chairman. John has made a substantial contribution tothe development of the group and I look forward to benefiting from his knowledgeand experience. John Burns, Derwent Valley Holdings' managing director, becamechief executive officer of the enlarged group and Simon Silver became head ofdevelopment. Nick Friedlos joined the board in an executive capacity and Junede Moller and Donald Newell, former non-executive directors at LMS, continue inthat capacity for the enlarged group. REITS The group is planning to elect for REIT status and shareholders will shortlyreceive a circular convening an EGM to approve the changes to the company'sarticles of association needed to achieve this. The targeted conversion date is1st July 2007. Upon conversion, the group will be required to pay a one-off charge calculatedat 2% of the group's gross assets. Based on the proforma value of theinvestment portfolio, the conversion charge would be £46 million. The board has reviewed its dividend policy in light of the merger and thepending conversion to REIT status. Historically, the group's strategy has beento maximise total returns and this will continue post the merger and REITconversion. The board has concluded that Derwent London will pay dividends broadly equal tothe aggregate of the current dividend distributions of the two companies plus asignificant proportion of the tax saving on recurring profit arising from REITconversion. Since conversion will take place part way through 2007, the dividendfor this year will be adjusted accordingly. Going forward, the board plans to continue the group's existing progressivedividend policy, in line with adjusted earnings growth. The board consider that the benefits to the group of converting to a REIT are: • A globally recognised structure for investors to gainexposure to the group's assets • No tax on property rental income or chargeable gains ondisposals • Elimination of latent capital gains tax liability on theinvestment property portfolio - a proforma amount of £293 million. Prospects With yield compression unlikely to contribute significantly to performance, itis encouraging that rental growth in central London, where the portfolio'saverage rent is only £255 per sq m, looks firmly set to continue. For DerwentLondon shareholders, the future offers the exciting prospects of REIT status, aportfolio packed with opportunities and a specific focus on central London. Ilook forward to reporting to you later in the year on the group's progress. R.A. Rayne20th March 2007 OPERATING REVIEW Strategy and performance Derwent London is a leading commercial property company with a specific focus oncentral London offices. Our specialist operating areas are the established andprospering 'villages' of the West End and the City borders. The prospects forour market place remain exciting, with London's economic growth leading thecountry, a trend that is set to continue. In addition, the occupational marketis favouring property owners. There is strong demand for offices at a timewhich coincides with a shortage of available quality space that is beingexacerbated by planning bureaucracy. The outcome is an upward movement onrents, particularly in our targeted middle market. With rents between £375-£650per sq m, this still offers tenants good economic value. Following the recent merger, the group now has ownership of a £2.5 billionportfolio. Nearly 90% by value is located in our core operating area of centralLondon and provides in excess of 440,000 sq m of accommodation. The West End,which encompasses Victoria, Belgravia, Fitzrovia, Noho, Baker Street,Paddington, Soho and Covent Garden, is the focal area with 69% by value. Last year, a number of key objectives were set out. These, together with theprogress that has been made towards achieving them during 2006, are reviewedbelow. 1. Ownership of a portfolio with significant opportunities forvalue enhancement through refurbishment or redevelopment. Our strategy is to assemble and retain a core portfolio that has thecharacteristic of existing low rents and that offers an important refurbishmentand development pipeline. In this regard, asset management activity andacquisitions undertaken during the year have significantly enhanced theportfolio's potential. This includes the swap transaction with The Crown Estateand the acquisition of further properties to add to our existing holdings inCharing Cross Road. In addition, the merger has created a unique opportunity tobring under one ownership similar "style" properties to which our provenmanagement skills will be applied to extract further value. 2. Active lease management to improve rental income. We endeavour to maximise rental income both through the letting of our completedprojects and by ensuring that occupancy and income is preserved in buildingsearmarked for redevelopment. As an example, at North Wharf Road, Paddington,2,700 sq m was quickly re-let, following a lease surrender. The new lettingsincorporate a number of lease breaks, which give us control over the timing ofwhat is a major redevelopment opportunity. 3. Maintain a pipeline of projects that can be deliveredaccording to market conditions. Our development team continually instigate and evaluate planning studies toensure an appropriate supply of schemes. Following the merger, the projects onwhich we are currently on site total over 59,000 sq m, of which 38,000 sq m ispre-let. The total project pipeline is over 315,000 sq m and this places us ina strong position for future value creation. 4. Deliver, and let projects on time and on cost. Our largest project to date, the 13,900 sq m Johnson Building, was completed ontime and on budget and is now fully let. Capital expenditure on variousprojects during the year totalled £18.7 million, with a further £193 millionplanned for the enlarged group over the next two years. 5. Apply and promote contemporary architecture andforward-thinking techniques through the Derwent London design brand. Through our selection of architects, under the direction of Simon Silver, wecontinue to work with emerging talent from progressive practices in order topromote the Derwent London style and brand. This design philosophy deliversinteresting buildings that people want to work in, thereby improving theopportunity for letting success and value enhancement. We actively support New London Architecture, which promotes quality in urbandesign through exhibitions on forthcoming projects in London. As part of this,in 2006, we were principal sponsors for "The Office", an event exploringinnovation and change in workplace design. 6. Recycle capital for reinvestment when potential ismaximised. Although disposals were at a slower pace than in previous years, due to theapproaching REIT regime, we continue to divest 'mature' assets in strong marketconditions to free up capital to invest in situations that are capable ofgenerating better returns. During the year, the portfolio benefited from thework that had previously been undertaken to position our assets to benefit fromrental improvement and yield compression. The results translated into a property return of 26.7% for the year, compared to20.1% in 2005. Looking forward, we are encouraged by the strong levels ofletting activity seen so far this year in the central London office market.With vacancy rates forecast to remain at low levels over the next few years,these conditions look set to continue to deliver rental growth. Valuation commentary The year under review saw unprecedented demand for central London property.This was driven by an incessant availability of money, a strong occupationalmarket and a limited supply of office space. Against this background, theinvestment portfolio was valued at £1.3 billion at 31st December 2006. The valuation surplus achieved during the year was £224.3 million, before thelease incentive adjustment of £1.0 million. Underlying performance contributed£198.0 million with £94.4 million from rental growth and asset management and£103.6 million from yield compression. The revaluation of developmentproperties added £21.1 million, driven principally by the early pre-letting ofHorseferry House. The balancing surplus of £5.2 million came through strongperformance from acquisitions. The underlying valuation uplift was 21.6% compared to 14.8% last year. The WestEnd properties, which represented 74% of the portfolio by value, achieved anincrease of 20.9%. With their characteristic low levels of rent, at £314 per sqm, they were well positioned to capitalise on the strong improvement in rents,and consequently capital values. In particular, Victoria, which has one of thelowest vacancy rates of the central London villages, enjoyed a valuationincrease of 25.7%. Noho properties were up 20.4% and Soho/Covent Gardenachieved 18.0%. Properties in the City borders and Holborn made up theremaining 26% of the portfolio and here the valuation increase was 23.6%. Animportant contribution to this was the valuation surplus of £28.9 million at TheJohnson Building, which was completed and virtually fully let before the end ofthe year. Portfolio management Our strategy of increasing the momentum of the project programme over the lasttwo years has produced excellent results, with letting activity at recordlevels. During the year, lettings totalled over 40,000 sq m, excluding Telstar,and achieved an annualised income of over £12.6 million per annum. The keylettings were at The Johnson Building and Horseferry House, which together willultimately produce over £10 million per annum of rental income. In addition, weremained active at a number of our multi-let buildings, such as Morelands andthe Tea Building on the City borders. Both of these are now at full occupancy,which demonstrates the strength of the letting market. With the strong demand for space in our core locations, we have seen a hardeningof rents and a reduction in incentives offered. Our innovative design-ledproduct is proving attractive and is encouraging tenants to look outside themore 'traditional' areas for space. We have attracted tenants from a diverserange of sectors such as advertising agencies to Holborn, a fashion house toVictoria and an international mining company to Paddington. We have also been active in managing income at properties where there arepotential schemes, viewing these in tandem with our planning studies.Accordingly, we have undertaken a number of "light touch" refurbishments andeffected lettings that will produce valuable, short-term income as we progressour longer-term development aspirations. At the year end, vacant space in the portfolio available for occupation was only10,200 sq m, which represented a low void rate of 3.0% of the portfolio rentalvalue and 4.2% of the floor area. This included the recently completed schemesat 186 City Road (3,600 sq m) and St Cross Street, EC1 (1,750 sq m), the latterof which is now let. Other vacant space, which is either under refurbishment or identified for futureprojects, stood at 17,400 sq m and included the proposed new office building atGresse Street and our mixed-use scheme at Portobello Dock. Total vacant spaceat the year end was 27,600 sq m, down from 38,100 sq m at the prior year. Thereduction from last year's level was also due to the successful re-letting ofspace which became vacant during the year. In addition to lettings, the rent reviews that were completed during the yearshowed an average increase of 11% in annual income. We are committed to workingclosely with our tenants and, where possible, retaining them within theportfolio when their leases come to an end. As a result, we were able tosuccessfully undertake 35 renewals last year. We believe that the ability towork with our tenants to fulfil their evolving requirements has beensubstantially enhanced through our merger and the consequent increase in thesize and reach of our portfolio. The activity during the year increased the annualised rental income, net ofground rent, to £54.1 million at the year end. After the inclusion of thepre-let income from Horseferry House, this rises to £59.4 million per annum. Inaddition, there is significant reversion of £7.4 million from letting vacant andscheme space, and £12.0 million from further rent reviews and lease reversions. Acquisitions and disposals Within the current extremely competitive investment market, and alongsideseveral new acquisitions, we continue to create value with our existing assets.A property swap was completed with The Crown Estate, in which we acquired thefreeholds of Riverwalk House, Victoria and Argosy House, Noho. Thissubstantially improved the value of our interest at both of these properties,and, more importantly, unlocked significant future refurbishment andredevelopment potential. It is this type of forward-planning and flexiblestrategy that will ensure a strong ongoing pipeline of schemes for the future. In June, in what is identified as a strategic, long-term site assembly, weacquired the Astoria, Charing Cross Road, and a nearby property in Oxford Streetfor £24.8 million. These buildings adjoin our existing holdings in CharingCross Road and are all part of the designated West End Special Policy RetailArea and a Crossrail interchange. Since acquisition, important progress hasbeen made with the signing of an Oversite Development Agreement with Crossrail.As part of this agreement, we will now co-ordinate and promote the planningprocess for the potential redevelopment. In return, we have an option toreacquire the site following Crossrail transportation works. Whilst this is along-term proposal, the investments are fully income producing and the locationoffers good interim growth potential. During the year, we disposed of assets for a total of £31.2 million. As part ofthe swap transaction with The Crown Estate, Morley House, which had undergone arolling refurbishment following acquisition in 2001, was sold for £17.5 million.Other disposals were our residential development, known as Sweeps in HattonGarden, and four Islington properties. The combined portfolio In a proforma balance sheet based on Derwent Valley Holdings' results to 31stDecember 2006 and LMS's completion accounts at 31st January 2007, the investmentportfolio is valued at £2.5 billion. Properties in central London, which is the group's principal operating area,account for £2.2 billion of the value and provide 440,000 sq m of predominantlyoffice space. They are let at a low average rental of £255 per sq m and have anaverage unexpired term of 10.2 years. The balance of the investment portfolio is located in the provinces with a focuson retail assets. Overall the total annual income, net of ground rents, is £113.4 million, with apotential rental value of £153.4 million. This significant reversion is derivedfrom £17.2 million of vacant accommodation and £22.8 million of rent reviews andlease renewal reversions. Looking at the vacancy rate, approximately a third isfrom The Qube development, which is nearing completion. Actual space availablefor letting is low at under 2% of the portfolio's rental value. Refurbishment and redevelopment It is into a favourable and strengthening market place that we have beenprogressively delivering space. Our schemes share the strong Derwent Londoncharacteristics of contemporary design, uncluttered and flexible spaces and anuncompromising attention to detail. The Johnson Building in Hatton Garden, completed in the first half, provides13,900 sq m of attractive office accommodation, around an impressive centralatrium. This development has fulfilled our aspirations of delivering somethingspecial into an improving location. The appeal and success of this building hasbeen confirmed with lettings to major names such as Grey Advertising, FaberMaunsell and Thomson Scientific. Looking forward, a number of major projects are under construction. Telstar,Paddington, the 9,900 sq m building, where we are development managers on behalfof the Prudential, was pre-let during the year to mining group Rio Tinto for anannual rent of £4.95 million per annum. This rental set a new benchmark for thearea. With the core, frame and floor slabs complete, the facade is nowprogressing quickly, creating an exciting building. Practical Completion isscheduled for summer 2007. The prominence of the location and the design willensure this will be a local landmark. Following the grant of planning consent for an increase in floor area andsubstantial alterations, enabling works have commenced at Horseferry House,Victoria. This has revealed the building's expansive potential, which will betransformed into some exceptional open spaces. The refreshingly, modern designapproach to this imposing 1930's building attracted an early pre-let inDecember, with Burberry leasing the entire 15,200 sq m building for £5.3 millionper annum. Upon completion, which is scheduled for spring 2008, this willbecome their new global head office. In Noho, a 4,400 sq m project is planned at Gresse Street. Here, we intend toimprove the area and, thereby, the value of our adjacent holdings, through thedelivery of an eye-catching Derwent London scheme. Thoughtfully presentedpublic realm, and a mix of uses, will turn this under-appreciated location intoa vibrant new destination for occupiers. Elsewhere, other smaller projects will allow the group to take advantage of thecurrent strong occupational environment. A canal-side, mixed-use scheme of6,400 sq m at Portobello Dock, Ladbroke Grove is underway. A varied range ofcommercial and residential units will be delivered to the market from autumn2007. In addition, we have recently completed the refurbishment of 186 CityRoad, EC1. This handsome building offers 3,600 sq m of high quality, flexibleoffice space in a convenient location on competitive terms. In order to ensure the ongoing delivery of similar value-creating schemes, wehave secured and are progressing a significant pipeline of projects across ourLondon villages. These range from those currently at the planning stage toothers that may be several years from commencement but are undergoing rigorousfeasibility studies. Of the former, we have recently agreed the final planningobligations for our proposed 47 residential units and 2,000 sq m of commercialspace at Leonard Street on the City borders. Another project where we obtainedplanning consent in the latter part of 2006 is Wedge House, Southbank. Whenvacant possession is obtained in mid 2008, we intend to replace this tired,3,600 sq m, 1960's office building with an exciting design, providing 8,200 sq mof new accommodation. A number of important, future projects, which are at the planning stage, arebeing advanced. In the summer, we made an application for a new office buildingof 9,900 sq m in Chancery Lane, Holborn, and we will be shortly submitting arevised application for our North Wharf Road development in Paddington. Thelatter will include a 23,000 sq m office building with a cutting-edge design,which will be accompanied by a separate residential building of nearly 100units. This highly complex regeneration project is in a pivotal location and weare currently in detailed discussions with the planning authorities as to themix of land uses for the scheme. For the mid- to longer-term, a number of major holdings have been identifiedwith scope for large-scale redevelopments. Following the swap with The CrownEstate, we improved our tenure by acquiring the freehold at Riverwalk House inVictoria. This building occupies a substantially under-utilised site in a primelocation overlooking the Thames. At lease expiry in 2011, this will provide anattractive redevelopment scheme in the order of 18,600 sq m, which couldincorporate exceptionally high quality residential accommodation. At CharingCross Road, we continue to explore the long-term possibilities for ourinterests. This is an extensive project, incorporating numerous sites andstakeholders, as well as significant involvement with London Underground andCrossrail. The opportunity to participate in a regenerative project of thisscale is eagerly anticipated. Initial studies indicate the potential for over28,000 sq m of space. Additionally, in association with our freeholder, TheGrosvenor Estate, we have initiated preliminary architectural studies of 1-5Grosvenor Place at Hyde Park Corner. The combination of this landmark locationand the potential for the site presents an exceptional opportunity in the WestEnd. The existing buildings total 15,000 sq m and there is potential to doublethis following redevelopment. The merger has added substantial current and future schemes to the pipeline.Initial focus is on Fitzrovia, where 21% of the merged portfolio is held andwhere the group has commenced a long-term programme of projects which willregenerate its holdings and re-establish the area as a core West End officelocation. The most immediate project is The Qube, which will be delivered to the market insummer 2007. This 10,000 sq m office building, one of the few large-scale newbuildings available in the West End this year, is attracting early interest. Weare also on site at the adjacent 13,200 sq m Arup Phase II and III development.A further, important holding in the area, with long-term potential, is the18,600 sq m of properties, centred on Charlotte Street, let to Saatchi &Saatchi. Another potential major scheme is the Angel Centre, Islington, a prominentlylocated 15,000 sq m office building. This is an improving area and studies havebeen instigated for a substantial refurbishment and creation of additionalspace, along the lines of The Johnson Building scheme. The overall pipeline for the merged group is 315,000 sq m, with an estimatedcompleted development value of £2.7 billion. J.D. Burns20th March 2007 FINANCIAL REVIEW The group's results are prepared in compliance with International FinancialReporting Standards (IFRS) and the accounting polices as set out in the notes tothe accounts. This is the second year that the accounts have been produced onthis basis, which is now more widely understood. Some of the standards workbetter than others for property investment companies, evidenced by the number ofadjustments the investing community makes to the key IFRS figures. It is theadjusted figures that the board uses in monitoring performance and these areincluded in the discussion below. 2006 results commentary The 2006 results are those for a period ended prior to the merger with LondonMerchant Securities plc (LMS). The headline numbers are: 2006 2005Net property income (£m) 58.0 46.6Adjusted profit before taxation (£m) 16.4 16.7Profit before taxation (£m) 242.8 150.4Adjusted net asset value per share (p) 1,770 1,335 Net property income Net property income includes rent received from the tenants of the group'sinvestment properties, less the associated property outgoings, and developmentincome. These are reviewed in turn. Gross property income (GPI) (rentsreceived) rose 3.6% year on year to £51.3 million. This increase of £1.8million is the net result of a number of key decisions taken in respect of thebusiness. As noted last year, the board, taking account of the currentenvironment in which the group operates, has been pressing on with therefurbishment and redevelopment programme. In 2006, lettings added £3.6 millionto GPI and the letting of completed schemes was the main component of this. Thebiggest impact from lettings came from The Johnson Building and St Cross Street(£0.9 million), Tea Building (£0.7 million) and Holden House (£0.6 million).However, this continuous drive to create value in the portfolio, as described inthe property review, has also had a negative effect on GPI due to buildingsbeing emptied to enable schemes to commence. The main losses of income havebeen at Horseferry House (£0.9 million), Kensal House/Portobello Dock (£0.7million) and North Wharf Road (£0.5 million), although the latter was offset bya £1.0 million premium paid by a departing tenant. GPI also rose due to rentreviews, which added £1.2 million, largely derived from the February 2006 reviewat Henry Wood House, and from the acquisition of Horseferry House in 2005 andthe Astoria in 2006. Finally, disposals, made in 2005 and 2006 reduced GPI by£2.4 million. Development income is a new item in 2006. This relates to the group's share ofthe profit estimated to have been earned from managing the Telstar redevelopmenton behalf of Prudential. While the development has been prelet, the group willnot receive payment for the profit until after practical completion later thisyear, when the final profit share will be calculated. The profit earned during2006 has been estimated at £11.6 million. The final component of net property income is the property outgoings. Theserose from £2.9 million in 2005 to £4.9 million. Substantial movements inproperty expenses are usually related to the commencement and completion ofschemes, and 2006 was no exception. Void costs rose by £1.0 million of which£0.6 million related to costs at The Johnson Building post completion and priorto letting. In tandem with the letting activity, letting fees increased £0.3million to £0.9 million. The net result of the above is that, in spite of the level of developmentactivity, gross property income less property outgoings at £46.4 million almostmatched last year's figure of £46.6 million, while net property income rose intotal by 24% to £58.0 million with the inclusion of the development income. Profit before taxation The adjusted profit before taxation which takes no credit for the developmentincome, nor the exceptional finance costs, was £16.4 million. This compareswith the £16.7 million reported in 2005. The lower profit derives from anincrease in administrative costs of £1.3 million to £10.1 million. Employmentcosts are the group's major overhead and these rose £0.9 million in 2006 to £7.0million. Profits benefited from a £1.1 million fall in interest costs, notablydue to finance lease costs which were £0.4 million lower both because of thesale of leasehold properties and the buying in of freehold interests. Profit before tax for the year was £242.8 million compared with £150.4 millionin 2005. The largest item in the group income statement is the revaluationsurplus of £223.3 million, which showed an increase of £99.2 million on lastyear's figure. A further £3.5 million of valuation surplus is included in thejoint venture results. An explanation of the factors behind these surpluses canbe found in the operating review. Other items that reconcile the adjustedprofit to IFRS profit before taxation include property disposal profits of £2.9million and the fair valuation of derivatives, which this year gave rise to aprofit of £3.2 million. Profit on disposals was down £6.7 million, year onyear, on proceeds reduced from £97.8 million to £31.2 million in the run up tothe conversion to REIT status. The final item, the exceptional finance cost of £18.1 million, was the cost ofredeeming the company's 101/8% First Mortgage Debenture Stock 2019 in November.This is discussed further under "Financing". Tax expense Full details of the tax expense of £60.6 million can be found in the tax note.The largest item is the deferred tax expense which represents tax that may bepayable in the future. A consequence of the debenture redemption is that thegroup actually paid little tax during the year. Dividend For technical reasons connected with the company's merger with LMS in 2007, theboard will not be proposing the payment of a final dividend. In its place, asecond interim dividend was paid on 23rd February 2007, which was equivalent tothe expected final dividend. The two interim dividends totalled 14.75p per shareand compare with the combined interim and final for 2005 of 13.65p per share, anincrease of 8%. This is well ahead of the inflation rate for the year. Net assets Net assets rose £177.2 million to £783.4 million at 31st December 2006,following the annual valuation of the group's investment properties to a totalof £1.3 billion. This resulted in an adjusted net asset value per share of1,770p, compared with 1,335p at the 2005 year end and 1,540p reported at theinterim stage. These are increases of 32.6% and 14.9% respectively. Theadjustments made to arrive at this figure are shown in the notes to theaccounts. Cash flow The group's underlying operational business generated a cash inflow of £13.3million before deducting the cost of redeeming the debenture of £17.6 million.This compares with £13.7 million in the prior year. For reasons noted earlier,disposal proceeds were reduced in 2006 while the amount spent on propertyacquisitions increased slightly. Consequently, the net investment in businessassets was nearly £48 million. This included capital expenditure, which waslower both compared with last year and budget. However, this was only due totiming variances and schemes such as Kensal Dock and Horseferry House are nowwell underway. In total, the group saw a cash outflow in 2006 of £59.4 millioncompared with an inflow in 2005 of £34.5 million. Financing Sources of finance Other than its share capital, the group continued to be predominantly financedin 2006 by a series of bilateral, medium-term, revolving credit facilities froma limited number of banks with whom the group has had long-term relationships.The effect is akin to the group creating its own syndicated loan. While closerelationships are maintained with additional banks to satisfy future debtrequirements, other sources of finance, which would provide an alternative tobank debt, are also reviewed and considered. The group continues to borrow on asecured basis with only loan to value and interest to rent covenants. However,following the merger with LMS, discussed later, a review of the group'sfinancing arrangements will be undertaken which may lead to a change in thisstrategy. At 31st December 2006, bank facilities totalled £430 million of which £87million was undrawn. An additional £105 million of facilities was agreedduring January 2007, not only to provide sufficient funds to cover the next twoyears' capital expenditure but also allow future acquisitions. None of the bankfacilities mature in 2007, the next termination date being in late 2008. During the year, the company redeemed its £35 million listed debenture, whichhad been due for repayment in 2019. The 101/8% coupon on this was out of linewith current interest rates and the debenture only accounted for a small amountof the group's total debt. The premium paid for this, together with the costsof redemption, totalled £17.6 million. A further £0.5 million of original issuecosts, not previously written-off in accordance with IFRS, were expensed to givea total charge to the group income statement of £18.1 million. This amount canbe offset against taxable profits. Debt and gearing Although the cash outflow was £59.4 million, net debt only rose to £349.8million from £303.9 million at the 2005 year end due to a reduction in leaseholdliabilities which fell £13.5 million for the reasons noted earlier. Despite increased borrowings, the relative growth in asset values caused gearingto fall to 44.7%, compared with 50.1% last year and 47.1% reported at the halfyear. However, in terms of the group's risk profile, the more important ratiois the profit and loss gearing. For the second year running, despite areduction in balance sheet gearing, this has remained virtually unchanged at1.85, compared with 2005 at 1.84. Liability risk management Adverse movements in interest rates are one of the main risks to which the groupis exposed. Therefore, derivatives are used to protect the group against this.Board policy is that sufficient hedging should be entered into such that thetotal of any fixed rate debt, and that fixed using derivative instruments, iswithin a range of 40% to 75% of total debt, excluding leasehold liabilities.The actual percentage is dependent on the perceived risk to the group. At theyear end, 43% of debt was covered and the weighted average cost of debt was 6.0% At each reporting date, the derivatives are fair valued and the increase ordecrease since the last valuation is reported in the group income statement.For 2006, the movement amounted to a profit of £3.2 million. Risk management and outlook While the group cannot be immune from factors affecting the property orfinancial markets, the board believes that, through regular consideration ofthese issues, it achieves an appropriate risk/reward profile for the group.Identifying, monitoring and controlling risks so that they are appropriate tothe business are amongst the key tasks of a board of directors. The annualreview of the five year property strategies, the rolling financial forecastswhich turn these into a detailed management reporting tool and the annual riskanalysis are some of the means by which the board achieves this. Other exampleshave been mentioned in this review, for example, the company's bankingrelationships and hedging policy. Amongst the key risks faced by the group, are those set out below, together withtheir effect on the business. Risk Effect Property related : increase in valuation yields Fall in asset values; rise in gearing. : no/negative rental growth Fall in asset values; no income growth. : tenant default Fall in income; reduced cash inflow. : development cost overrun Reduced development surplus. Finance related : rise in interest rates Reduced profit; increased cash outflow. : lack of available finance Inability to refinance debt. Corporate, social, environmental, including health and Adverse reputation risk; potential safety fines. Looking at the profit before taxation's constituent parts for 2007, the netproperty income will continue to be determined by the balance between theletting of completed schemes and voids caused by the refurbishment andredevelopment programme. Employment costs are the group's biggest overhead, andsalaries continue to rise in a competitive, buoyant economy. The level of fixedand hedged debt will provide a large amount of insulation against currentlyrising interest rates. In terms of net asset growth, yield compression may havefound its level, perhaps a reflection of globally rising interest rates, butrental growth is being achieved to drive on asset values if yields remain attheir existing levels. Merger The company's merger with LMS completed on 1st February 2007. The merger wasfinanced by the issue of 46,910,232 of the company's ordinary shares, £32.5million of loan notes and a payment of £12.2 million in cash. The proformaconsolidated balance sheet shows that the new group has an investment propertyportfolio valued at £2.5 billion, net assets of £1.4 billion, net debt of £898million at fair value and gearing of 64%. For the purposes of the proformabalance sheet, the acquired goodwill of £291 million has been assumed to beimpaired and consequently written-off. In addition to Derwent London's debtdiscussed earlier, LMS brings to the debt portfolio a £175 million 6.5% securedbond due 2026 and a £375 million combined term and revolving credit facilityrepayable in 2013. The new group's current cost of debt is approximately 6.15%,and 62% of debt is either fixed or hedged. GROUP INCOME STATEMENT Note 2006 2005 £m £m Gross property income 51.3 49.5Development income 2 11.6 -Property outgoings 3 (4.9) (2.9) _______ _______Net property income 58.0 46.6Administrative expenses (10.1) (8.8)Revaluation surplus 223.3 124.1Profit on disposal of investment properties 4 2.9 9.6 _______ _______Profit from operations 274.1 171.5Finance income 5 0.4 0.4Finance costs 5 (20.4) (21.5)Exceptional finance costs 5 (18.1) -Movement in fair value of derivatives 3.2 -Share of results of joint ventures 6 3.6 - _______ _______ 242.8 150.4Tax expense 7 (60.6) (33.7) _______ _______Profit for the year 182.2 116.7 _______ _______ All amounts are attributable to the equity holders ofthe parent company. Earnings per share 8 340.13p 218.63p _______ _______ Diluted earnings per share 8 337.21p 216.81p _______ _______ GROUP BALANCE SHEET Note 2006 2005 £m £mNon-current assetsInvestment property 9 1,274.0 1,015.6Property, plant and equipment 10 0.3 0.4Investments 5.4 1.8Derivative financial instruments 0.1 -Other receivables 13.7 13.3 _______ _______ 1,293.5 1,031.1 _______ _______Current assetsTrade and other receivables 39.4 12.3Corporation tax asset 1.4 -Cash and cash equivalents - 14.7 _______ _______ 40.8 27.0 _______ _______ Total assets 1,334.3 1,058.1 Current liabilitiesBank overdraft (2.2) (2.0)Trade and other payables (32.5) (20.7)Corporation tax liability - (3.0)Provisions (0.1) (0.1) _______ _______ (34.8) (25.8) _______ _______Non-current liabilitiesBank loans (341.0) (262.0)10 1/8% First Mortgage Debenture Stock 2019 - (34.5)Leasehold liabilities (6.6) (20.1)Derivative financial instruments - (3.1)Provisions (1.3) (1.2)Deferred tax liability 11 (167.2) (105.2) _______ _______ (516.1) (426.1) _______ _______ Total liabilities (550.9) (451.9) _______ _______Total net assets 783.4 606.2 _______ _______ Equity attributable to equity holders of the parentcompany Share capital 2.6 2.6Share premium 156.1 155.1Other reserves 3.8 2.3Retained earnings 620.9 446.2 _______ _______Total equity 12 783.4 606.2 _______ _______ Adjusted net asset value per share 14 1,770p 1,335p _______ _______ Net asset value per share 14 1,460p 1,134p _______ _______ GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE 2006 2005 £m £m Profit for the year 182.2 116.7Recognition of financial instruments at 1st January 2005at fair value under IFRS1 transitional rule - (2.2)Deferred tax in respect of share-based payments 0.6 1.4 ______ ______Total recognised income and expense relating to the year 182.8 115.9 ______ ______ CHANGE IN SHAREHOLDERS' EQUITY 2006 2005 £m £m Total recognised income and expense relating to the year 182.8 115.9Dividends paid (7.5) (6.8)Share-based payments transferred to reserves 0.9 0.6Premium on issue of shares 1.0 1.0 _______ _______ 177.2 110.7 Equity at 1st January 606.2 495.5 _______ _______Equity at 31st December 783.4 606.2 _______ _______ All amounts are attributable to the equity holders of the parent company. GROUP CASH FLOW STATEMENT 2006 2005 £m £m Operating activitiesCash received from tenants 48.7 46.3Direct property expenses (5.5) (3.0)Cash paid to and on behalf of employees (4.5) (4.5)Other administrative expenses (3.9) (2.8)Interest received 0.4 0.4Interest paid (21.9) (21.7)Exceptional financing costs (17.6) -Tax paid in respect of operating activities (1.3) (1.0) _______ _______Net cash (used in)/from operating activities (5.6) 13.7 _______ _______Investing activitiesAcquisition of investment properties (48.9) (40.3)Capital expenditure on investment properties (18.9) (26.7)Disposal of investment properties 31.2 97.8Acquisition of subsidiary (6.2) -Merger transaction costs (0.4) -Purchase of property, plant and equipment (0.2) -Tax paid in respect of investing activities (2.9) (3.2) _______ _______Net cash (used in)/from investing activities (46.3) 27.6 _______ _______Financing activitiesMovement in bank loans 78.5 (26.0)Redemption of debenture (35.0) -Net proceeds of share issues 1.0 1.0Dividends paid (7.5) (6.8) _______ _______Net cash from/(used in) financing activities 37.0 (31.8) _______ _______ (Decrease)/increase in cash and cash equivalents in (14.9) 9.5the year Cash and cash equivalents at the beginning of the 12.7 3.2year _______ _______ Cash and cash equivalents at the end of the year (2.2) 12.7 _______ _______ NOTES 1. Basis of preparation The results for the year ended 31st December 2006 include those for the holdingcompany and all of its subsidiaries, together with the group's share of theresults of its joint ventures. These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) issued by the International AccountingStandards Board as adopted by the European Union and with those parts of theCompanies Act 1985 applicable to companies preparing their accounts under IFRS. 2. Development income The amount of £11.6 million (2005 - £nil) is the proportion of the total profitshare estimated to have been earned by the group from the construction andletting of a property on behalf of a third party. 3. Property outgoings 2006 2005 £m £m Ground rents 0.4 0.2Other property outgoings 4.5 2.7 _______ _______ 4.9 2.9 _______ _______ 4. Profit on disposal of investment properties 2006 2005 £m £m Disposal proceeds 31.2 97.8Carrying value (30.7) (90.1)Leasehold liabilities 2.4 1.9 _______ _______ 2.9 9.6 _______ _______ 5. Finance income and costs 2006 2005 £m £mFinance incomeBank interest received 0.4 0.4 _______ _______Finance costsBank loans and overdraft wholly repayable within five years 12.7 8.4Bank loans not wholly repayable within five years 3.7 8.2Debenture stock 3.1 3.6Finance leases 0.9 1.3 _______ _______ 20.4 21.5 Exceptional finance costs 18.1 - _______ _______Total finance costs 38.5 21.5 _______ _______ The exceptional finance costs arose from the redemption of the 10 1/8% FirstMortgage Debenture Stock 2019. 6. Share of results of joint ventures 2006 2005 £m £m Profit from operations before revaluation surplus 0.1 -Revaluation surplus 3.5 - _______ _______ 3.6 - _______ _______ 7. Tax expense 2006 2005 £m £m Corporation tax expenseUK corporation tax and income tax on profits for the year 0.7 4.0Adjustment for (over)/under provision in prior years (1.0) 0.6 _______ _______ (0.3) 4.6 _______ _______Deferred tax expenseOrigination and reversal of temporary differences 60.6 30.9Adjustment for under/(over) provision in prior years 0.3 (1.8) _______ _______ 60.9 29.1 _______ _______ _______ _______ 60.6 33.7 _______ _______ The tax for both 2006 and 2005 is lower than the standard rate of corporationtax in the UK. The differences are explained below: 2006 2005 £m £m Profit before tax 242.8 150.4 _______ _______ Expected tax expense based on the standard rate of corporation taxin the UK of 30% (2005 - 30%) 72.8 45.1Indexation relief on investment properties (11.1) (8.0)Difference between tax and accounting profit on disposals 0.2 (1.4)Other differences (0.6) (0.8) _______ _______Tax expense on current year's profit 61.3 34.9Adjustments in respect of prior years' tax (0.7) (1.2) _______ _______ 60.6 33.7 _______ _______ Tax credited directly to reservesDeferred tax on fair value of derivative financial instruments - (0.9)Deferred tax on share-based payments (0.6) (1.4) _______ _______ (0.6) (2.3) _______ _______ 8. Earnings per share Weighted average Profit for number of Earnings the year shares per share £m '000 p Year ended 31st December 2006 182.2 53,567 340.13Adjustment for dilutive share-based payments - 464 (2.92) _______ _______ _______Diluted 182.2 54,031 337.21 _______ _______ _______ Year ended 31st December 2005 116.7 53,378 218.63Adjustment for dilutive share-based payments - 447 (1.82) _______ _______ _______Diluted 116.7 53,825 216.81 _______ _______ _______ Year ended 31st December 2006 182.2 53,567 340.13Adjustment for deferred tax on capital allowances 2.7 - 5.04Adjustment for disposal of investment properties (1.7) - (3.17)Adjustment for group revaluation surplus (167.0) - (311.76)Adjustment for share of joint ventures' revaluation (2.9) - (5.41)surplus _______ _______ _______Adjusted 13.3 53,567 24.83 _______ _______ _______ Year ended 31st December 2005 116.7 53,378 218.63Adjustment for deferred tax on capital allowances (0.8) - (1.50)Adjustment for disposal of investment properties (7.0) - (13.11)Adjustment for group revaluation surplus (94.9) - (177.79) _______ _______ _______Adjusted 14.0 53,378 26.23 _______ _______ _______ The adjusted earnings per share excludes the after tax effect of fair valueadjustments to the carrying value of assets and liabilities, together with theprofit or loss after tax arising from the disposal of investment properties.The adjusted earnings per share figure also excludes the deferred tax chargeprovided in respect of capital allowances claimed, on the basis that it isunlikely that a liability will ever crystallise. These adjustments are widelymade by equity analysts and investors. 9. Investment property Freehold Leasehold Total £m £m £mCarrying valueAt 1st January 2006 724.2 291.4 1,015.6Transfer 38.5 (38.5) -Additions 76.1 0.9 77.0Disposals (10.3) (20.4) (30.7)Revaluation 196.7 26.6 223.3Movement in grossing up of headlease liabilities - (11.2) (11.2) _______ _______ _______At 31st December 2006 1,025.2 248.8 1,274.0 _______ _______ _______ At 31st December 2006Fair value 1,039.7 243.0 1,282.7Adjustment for rents recognised in advance (14.5) (0.8) (15.3)Adjustment for grossing up of headlease liabilities - 6.6 6.6 _______ _______ _______Carrying value 1,025.2 248.8 1,274.0 _______ _______ _______ At 1st January 2006Fair value 737.5 272.3 1,009.8Adjustment for rents recognised in advance (13.3) (1.0) (14.3)Adjustment for grossing up of headlease liabilities - 20.1 20.1 _______ _______ _______Carrying value 724.2 291.4 1,015.6 _______ _______ _______ Investment property in the course of development with a carrying value of £91.8million (2005 - £75.0 million) is included in the carrying value of freeholdproperty above. The freehold land and buildings and leasehold property were revalued at 31stDecember 2006 by either CB Richard Ellis Limited or Keith Cardale Groves(Commercial) Limited, as external valuers, on the basis of market value asdefined by the Appraisal and Valuation Manual published by the Royal Institutionof Chartered Surveyors. At 31st December 2006, the historical cost of investment property owned by thegroup was £688.9 million (2005 - £635.6 million). 10. Property, plant and equipment 2006 2005 £m £mNet book valueAt 1st January 0.4 0.6Additions 0.2 -Disposals (0.2) (0.1)Depreciation (0.1) (0.1) _______ _______At 31st December 0.3 0.4 _______ _______At 31st DecemberCost 1.2 1.3Accumulated depreciation (0.9) (0.9) _______ _______Net book value 0.3 0.4 _______ _______ 11. Deferred tax liability Revaluation Capital surplus allowances Other Total £m £m £m £m At 1st January 2006 91.6 13.6 - 105.2Adjustment to reserves in respect ofdeferred tax on share-based payments - - (0.6) (0.6)Provided during the year in income statement 56.9 2.7 1.3 60.9Acquired on acquisition of subsidiary 1.7 - - 1.7 _______ _______ _______ _______At 31st December 2006 150.2 16.3 0.7 167.2 _______ _______ _______ _______ Deferred tax on the revaluation surplus is calculated on the basis of thechargeable gains that would crystallise on the sale of the investment propertyportfolio as at 31st December 2006. The calculation takes account of indexationon the historic cost of the properties and any available capital losses to theextent that these are deductible. 12. Equity Share Share Other Retained capital premium reserves earnings £m £m £m £m At 1st January 2006 2.6 155.1 2.3 446.2Premium on issue of shares - 1.0 - -Share-based payments expense transferredto reserves - - 0.9 -Deferred tax in respect of share-basedpayments - - 0.6 -Profit for the year - - - 182.2Dividends paid - - - (7.5) _______ _______ _______ _______At 31st December 2006 2.6 156.1 3.8 620.9 _______ _______ _______ _______ 13. Dividend 2006 2005 £m £m Final dividend of 9.725p (2005 - 8.90p) per ordinary share proposedand paid during the year relating to the previous year's results 5.2 4.8Interim dividend of 4.225p (2005 - 3.925p) per ordinary share paidduring the year 2.3 2.0 _______ _______ 7.5 6.8 _______ _______ A second interim dividend in respect of the current year's results of 10.525p(2005 final - 9.725p) per ordinary share, which totalled £5.6 million (2005final - £5.2 million), was paid on 23rd February 2007. This dividend has notbeen accrued at the balance sheet date. 14. Net asset value per share Net asset Net Number of value per assets shares share £m '000 p At 31st December 2006 783.4 53,656 1,460Adjustment for deferred tax on capital allowances 16.3 - 30Adjustment for deferred tax on revaluation surplus 150.2 - 280Adjustment for post tax fair value of derivativefinancial instruments (0.1) - - _______ _______ _______Adjusted 949.8 53,656 1,770 _______ _______ _______ At 31st December 2005 606.2 53,472 1,134Adjustment for deferred tax on capital allowances 13.6 - 26Adjustment for deferred tax on revaluation surplus 91.6 - 171Adjustment for post tax fair value of derivativefinancial instruments 2.2 - 4 _______ _______ _______Adjusted 713.6 53,472 1,335 _______ _______ _______ In order to provide a figure used by equity analysts and investors, adjusted netassets exclude the deferred tax provided in respect of capital allowancesclaimed on the basis that it is unlikely that this liability will evercrystallise. The deferred tax on the revaluation surplus and the post tax fairvalue of derivative financial instruments are also excluded on the basis thatthese amounts are not relevant when considering the group as an ongoingbusiness. 15. Total return 2006 2005 % % Total return 33.6 25.5 _______ _______ Total return is the movement in adjusted net asset value per share plus thedividend per share paid during the year expressed as a percentage of theadjusted net asset value per share at the beginning of the year. 16. Gearing Balance sheet gearing at 31st December 2006 is 44.7% (2005 - 50.1%). This isdefined as net debt divided by net assets. Profit and loss gearing for 2006 is 1.85 (2005 - 1.84). This is defined asrecurring net property income less administrative expenses divided by netinterest payable having reversed the reallocation of ground rent payable onleasehold properties to interest payable of £0.9 million (2005 - £1.3 million). 17. Post balance sheet event The following acquisition took place after the balance sheet date and before theapproval of these financial statements: Name of business acquired Principal activity Date of acquisition Proportion of Cost of shares acquired acquisition % £m London Merchant Securities plc Property investment 1st February 2007 100 965.6 17. Post balance sheet event (continued) Cost of acquisition: £m Equity 912.9Loan notes 32.5Cash 12.2Directly attributable acquisition costs 8.0 _______ 965.6 _______ The cost of equity was satisfied by Derwent London plc issuing 46,910,232ordinary shares at a price of £19.46 on 1st February 2007. This issue priceconsists of the nominal value of the ordinary shares of £0.05 and a sharepremium of £19.41. Directly attributable acquisition costs are those charged by the company'sadvisers in performing due diligence activities and producing the acquisitiondocuments. Subject to completion of the verification exercise, net assets acquired at 1stFebruary 2007 were: Book value of Fair value of assets acquired assets acquired £m £mNon-current assetsInvestment property 1,239.6 1,245.6Property, plant and equipment 6.8 1.6Investments 19.3 19.3Derivative financial instruments 6.1 6.1Deferred tax asset 15.2 15.2Pension scheme surplus 1.4 1.4 _______ _______ 1,288.4 1,289.2 _______ _______ Current assetsTrading property 48.3 62.5Trade and other receivables 17.3 17.3Cash and cash equivalents 13.9 13.9 _______ _______ 79.5 93.7 _______ _______ Total assets 1,367.9 1,382.9 Current liabilitiesBank loans (4.6) (4.6)Trade and other payables (38.5) (39.3) _______ _______ (43.1) (43.9) _______ _______ Non-current liabilitiesFinancial liabilities (482.2) (512.4)Deferred tax liability (150.7) (145.4)Other (4.6) (6.8) _______ _______ (637.5) (664.6) _______ _______ Total liabilities (680.6) (708.5) _______ _______Net assets acquired 687.3 674.4 _______Goodwill on acquisition 291.2 _______Cost of acquisition 965.6 _______ 17. Post balance sheet event (continued) Adjustments from book value to fair value include those arising from theapplication of Derwent London's accounting policies, and fair value adjustmentsto property, plant and equipment, trading property and debt. An impairment test is being carried out on the goodwill arising on theacquisition. A detailed review of the existence of intangible assets other thangoodwill has already been concluded, and none were found to have any materialvalue. The properties acquired on the acquisition of LMS complement the existingportfolio of properties held by the group. It is anticipated that, in future,the group will be capable of deriving significantly enhanced cashflows from theacquired portfolio due to future lease management, refurbishment andredevelopment, which are proposed to be made to the acquired property portfolio.While the amount that the group has paid for LMS is justified by theseanticipated enhancements and benefits that will be brought to the group, IAS 36Impairment of Assets does not permit such enhancements to be included in thecashflows used in estimating value in use for the purposes of impairmenttesting, and instead requires the cashflows to be based on the assets in theircurrent condition. In addition, the benefits arising from the acquired portfolio are specific tothe group and, consequently, the fair value less costs to sell of the acquiredbusiness is unlikely to support the carrying amount of the goodwill associatedwith the acquisition. Therefore, it is anticipated that an impairment charge will be recorded in 2007,which will be approximately equal to the carrying amount of goodwill that hasarisen on the post balance sheet acquisition. 18. The financial information set out above does not constitute thecompany's statutory accounts for the years ended 31st December 2006 or 2005, butis derived from those accounts. Statutory accounts for 2005 have been deliveredto the Registrar of Companies and those for 2006 will be delivered following thecompany's annual general meeting which will be held on 23rd May 2007. Theauditors have reported on those accounts; their reports were unqualified and didnot contain statements under the Companies Act 1985, s237(2) or (3). The annualreport and accounts will be posted to shareholders on 20th April 2007, and willalso be available on the company's website, www.derwentlondon.com, from thatdate. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Derwent London