9th Feb 2005 07:00
Liberty International PLC09 February 2005 LIBERTY INTERNATIONAL PLC 2004 PRELIMINARY ANNOUNCEMENT 9 FEBRUARY 2005 CONTENTS This document contains: Highlights Summary of Investment Property Valuations Chairman's Statement and Review of Operations Financial review Preliminary results CHAIRMAN'S COMMENT ON PRELIMINARY RESULTS Donald Gordon, Chairman of Liberty International, commented: "2004 ranks as one of Liberty International's most active and successful yearssince its incorporation 25 years ago in 1980, with strong financial results andthe completion of a record number of important projects and transactions whichhave considerably enhanced the positive momentum of the business. We havedeveloped a powerful market position in the UK regional shopping centre industryand are determined to extend our excellent track record of growth. I am highly confident in Liberty International's exceptional long-term prospectsgiven the quality of its people, its ongoing leadership, its irreplaceablephysical assets and the exciting prospects and challenges of our chosen industryin which Liberty International is the prime player in the UK. It is alsoextremely gratifying that both the London and Johannesburg stock markets havereacted positively to the company's momentum by recording the highest overallyearly improvement of our share price since our incorporation in 1980." This announcement includes statements that are forward-looking in nature.Forward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements ofLiberty International PLC to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Any information contained in this announcement on the price at whichshares or other securities in Liberty International PLC have been bought or soldin the past, or on the yield on such shares or other securities, should not berelied upon as a guide to future performance. FURTHER INFORMATION Liberty International PLC is today making a presentation to property analysts inLondon. The full text of this presentation, which does not form part of thePreliminary Announcement, is available today on Liberty International PLC'swebsite at www.liberty-international.co.uk. ENQUIRIES: Liberty International PLC:David Fischel Chief Executive +44 (0)20 7960 1207Aidan Smith Finance Director +44 (0)20 7960 1210 Public relations:UK: Michael Sandler, +44 (0)20 7796 4133 Hudson SandlerSA: Matthew Gregorowski, +44 (0)20 7457 2020 College Hill Associates Nicholas Williams, +27 (0)11 447 3030 College Hill Associates DIVIDENDS The Directors of Liberty International PLC have proposed a final ordinarydividend per share of 14.1p (2003 - 13.25p) to bring the total ordinary dividend per share for the year to 26.5p (2003 - 25.0p). The following are the salient dates for the payment of the final dividend: 22 March 2005 Sterling/Rand exchange rate struck. 4 April 2005 Ordinary shares listed ex-dividend on the JSE Securities Exchange South Africa. 6 April 2005 Ordinary shares listed ex-dividend on the London Stock Exchange. 8 April 2005 Record date for final dividend in London and Johannesburg. 21 April 2005 Dividend payment day for shareholders (Note: Payment to ADR holders will be made on 2 May 2005). South African shareholders should note that, in accordance with the requirementsof STRATE, the last day to trade cum-dividend will be 1 April 2005. Nodematerialisation or rematerialisation of shares will be possible from 4 Aprilto 8 April inclusive. No transfers between the UK and South African registers may take place from 19March to 10 April inclusive. LIBERTY INTERNATIONAL PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 HIGHLIGHTS • FINANCIAL HIGHLIGHTS Increase 2004 2003Investment properties (including share ofjoint ventures) at market values 12.0% £5,341m £4,768m Shareholders' funds 13.5% £3,244m £2,859m ** Net debt (including share of joint ventures) 0.3% £1,923m £1,917m Net assets per share (diluted, adjusted*) 12.3% 1017p 906p Diluted number of shares (for NAV) 352.1m 351.8m Operating profit (including share of jointventures) 3.9% £245.2m £235.9m Profit before tax including exceptional items 43.9% £158.3m £110.0m Net exceptional profits £42.6m £5.8m Profit before tax and exceptionals 11.0% £115.7m £104.2m Earnings per share before exceptionals(adjusted*) 5.7% 29.02p 27.45p Earnings per share (unadjusted) 49.8% 39.32p 26.25p Dividends per ordinary share 6.0% 26.5p 25.0p Weighted average number of shares (for EPS) 317.0m 306.9m * Adjusted for deferred tax relating to capital allowances (see note 13 to preliminary results). Unless otherwise stated, references in the preliminary results to earnings per share are to earnings per share before exceptional items (adjusted); and to net assets per share are to net assets per share (diluted, adjusted).** Restated for the effect of change of accounting policy in respect of shares held by an Employee Share Ownership Plan Trust Notional acquisition costs including stamp duty deducted by the valuers inarriving at the market values of investment properties amount in aggregate to£170 million (2003 - £156 million), equivalent to 48p per Liberty Internationalshare (2003 - 44p). These notional costs assume assets are sold individually onthe open market and take no account of the structures through which the assetsare held. In the case of a going concern and listed company such as LibertyInternational, the purchase and sale of shares is the predominant mode ofexchange of value for shareholders rather than the sale of each underlyingindividual property. If these notional acquisition costs were added back,shareholders' funds would increase to £3,414 million (2003 - £3,015 million) andnet assets per share (diluted, adjusted) would increase from 1017p (2003 - 906p)to 1065p (2003 - 950p). • REVALUATION SURPLUS FOR THE YEAR ON COMPLETED INVESTMENT PROPERTIES Market Value Revaluation surplus 31 December Year ended 31 December 2004 2004 ----------------------- £m £mUK regional shopping centres 4,310 247 6.1%US regional shopping centresand other retail 195 18 10.3%Central London retail andoffices 355 30 9.1%Retail outside London 185 31 19.9%Business space outside London 170 15 9.7%US other commercial 47 2 5.4% ----------- ---------- --------Completed investmentproperties 5,262 343 7.0% ----------- ---------- -------- - Regional shopping centres amount to 82 per cent of aggregate investment properties and retail overall amounts to 92 per cent (2003 - 90 per cent) • ACQUISITIONS AND ADDITIONS - £221 million of investment property acquisitions: £m Eldon Square, Newcastle (interest increased from 30% to 45%) 45Potteries, Stoke-on-Trent (interest increased from 50% to 100%) 128Plaza Escuela and others, USA 48 ------- 221 ======= - Aggregate investment property additions, including development expenditure, amounted to £321 million in 2004. • DEVELOPMENT PROGRAMME - £30 million Lakeside, Thurrock, refurbishment and enhancement completed in July 2004 on time and to budget with beneficial impact on trading - £85 million MetroCentre, Gateshead, Red Mall extension opened fully let in October 2004, restoring MetroCentre as Europe's largest covered shopping centre at 1.8 million sq.ft. - 510,000 sq.ft. Chapelfield, Norwich, development scheduled for Autumn 2005 opening with lettings agreed or solicitors instructed for 82 per cent of anticipated income. Project cost to CSC excluding residential element estimated at £260 million (of which £219 million remains to be paid) - Aggregate development programme of £1.3 billion, of which £350 million is committed, divided between regional shopping centres (£1,150 million) and other retail and commercial (£150 million) - The programme includes major new regional shopping centre developments in Norwich, Cardiff and Oxford, together with Braehead (Phase 2) and substantial extensions to and additional investment in Eldon Square, Newcastle; The Harlequin, Watford, and other existing centres - Other retail and commercial development programme includes King's Reach, Southwark, and 190 Strand, London • DISPOSALS - £285 million disposals of non-core assets: Disposal Exceptional proceeds profits £m £m Investment in Great Portland Estates 148.4 26.8UK investment properties 71.0 11.5USA - Ghirardelli Square 23.5 5.5Other investments 41.7 2.2 ------- -------- 284.6 46.0 ======= ======== • FINANCIAL STRENGTH - Debt to assets ratio reduced from 39 per cent to 36 per cent with aggregate net borrowings virtually unchanged at £1.92 billion - Cash balances of £438 million and committed facilities of £675 million, representing over £1.1 billion of available financial resources • FINANCIAL RECORD - Total return (increase in net asset value plus dividends) of 15.2 per cent in 2004 - Compound total return over past decade of 15.9 per cent per annum - The annual dividend has increased by a multiple of almost 6 times over 20 years from 4.55p per share in 1984 to 26.5p per share in 2004, with an unbroken growth record each year for the past decade. NOTES FOR EDITORS - COMPANY BACKGROUND Liberty International is a major UK FTSE-100 listed property company, withshareholders' funds of £3.25 billion and property investments of over £5.3billion, of which regional shopping centres amount to over 80 per cent. The company is engaged in three principal activities: • Capital Shopping Centres ("CSC"), the leading company in the UK regional shopping centre industry, owning Lakeside, Thurrock; MetroCentre, Gateshead; Braehead, Renfrew, Glasgow; and six major in-town regional centres. CSC has a substantial development programme, involving both new centres, in Norwich, Cardiff and Oxford, and extensions to existing centres; • Capital & Counties, a successful retail and commercial property business, increasingly concentrated in Central London, the south-east of England and California, USA; and • Investment activities, where Liberty International looks to use the substantial capital resources at its disposal to access profitable real estate-related financial market opportunities. Liberty International aims to produce outstanding long-term returns forshareholders, through capital and income growth, with a relatively full dividenddistribution policy from recurring income. The group focusses on premier property assets, particularly shopping centres andother retail, which have high potential, scarcity value and require activemanagement and creativity. SUMMARY OF INVESTMENT PROPERTY VALUATIONS 31 December 2004 31 December 2003 ------------------- ----------------- True equivalent Market Revaluation Market True equivalent yield(1) Value surplus Value yield(1) --------------- ----------- ------------- % % £'m £'m % £'m % % Lakeside,Thurrock 5.37% (5.40%) 1,075.2 76.1 7.6% 990.5 5.58% (5.61%)MetroCentre,Gateshead 5.43% (5.74%) 875.0 17.8 2.1% 763.0 5.59% (5.90%)Braehead,Glasgow 5.68% (5.75%) 580.6 42.5 7.9% 533.5 6.01% (6.07%)Other M25 centres 5.57% (5.88%) 899.3 55.1 6.5% 842.0 5.78% (6.09%)Other centres 6.03% (6.26%) 774.9 49.8 6.9% 550.8 6.34% (6.62%)Other properties 6.95% (7.35%) 105.2 6.0 6.0% 98.7 7.39% (7.77%) ------ ------ ------UK regional shoppingcentres 5.62% (5.82%) 4,310.2 247.3 6.1% 3,778.5 5.83% (6.03%) US regional shoppingcentres andother retail 194.9 18.1 10.3% 164.8UK other commercialproperties:Central Londonretail andoffices 6.94% (7.23%) 354.8 29.7 9.1% 327.1 7.88% (8.33%)Retail outsideLondon 6.60% (6.84%) 184.4 30.6 19.9% 131.6 7.64% (7.90%)Business spaceoutside London 7.40% (7.79%) 169.9 15.0 9.7% 204.6 8.35% (8.85%)US othercommercialproperties 47.6 2.5 5.4% 36.4 ------ ------ ------ 5,261.8 343.2 7.0% 4,643.0 ------UK regional shoppingcentre developments 58.5 104.6Other developments 21.0 20.3 ------ ------ Total investmentproperties 5,341.3 4,767.9Held throughjoint ventures (2) (28.4) (142.7) ------ ------ Group investmentproperties 5,312.9 4,625.2 ------ ------ (1) Yield to a purchaser of the assets individually at Market Value after taking account of notional acquisition costs. The figure in brackets represents the yield earned by Liberty International on the asset at Market Value.(2) Includes £5.8 million regional shopping centres and £22.6 million other commercial properties (31 December 2003 £122.8 million and £19.9 million respectively). SUMMARY OF CAPITAL & COUNTIES COMPLETED INVESTMENT PROPERTY VALUATIONS --------------------- ------------ Year ended Year ended 31 December 2004 31 December 2003 --------------------- ------------ -------------- Number Net Market Revaluation Net Market of property Value surplus property Value properties income -------------- income £'m £'m £'m £'m £'m Central London 21 26.5 354.8 29.7 9.1% 24.6 327.1retail andofficesRetail 7 10.4 184.4 30.6 19.9% 8.5 131.6outside LondonBusiness space 15 13.1 169.9 15.0 9.7% 14.1 204.6outside ------ ------- ------- ------- ------- -------LondonTotal United Kingdominvestment 43 50.0 709.1 75.3 11.9% 47.2 663.3properties United 10 14.9 242.5 20.6 9.3% 15.8 201.2States (1) ------ ------- ------- ------- ------- ------- Totalcompleted 53 64.9 951.6 95.9 11.2% 63.0 864.5investment ------ ------- ------- ------- ------- -------properties (1) Includes £0.9 million net property income and £9.1 million Market Value (2003 - £1.6 million and £9.8 million respectively) in respect of properties owned through joint ventures. Properties by use: 31 December 2004 31 December 2003 ----------------- ---------------- Retail Offices Total Retail Offices Total £'m £'m £'m £'m £'m £'m Central London retailand offices 152.9 201.9 354.8 128.0 199.1 327.1Retail outside London 184.4 - 184.4 131.6 - 131.6Business space outsideLondon - 169.9 169.9 21.1 183.5 204.6 ------- ------- ------- ------ -------- ------ Total United Kingdominvestment properties 337.3 371.8 709.1 280.7 382.6 663.3 United States 194.9 47.6 242.5 164.8 36.4 201.2 ------- ------- ------- ------ -------- ------ Total completedinvestment properties 532.2 419.4 951.6 445.5 419.0 864.5 Developments 5.4 15.6 21.0 - 20.3 20.3 ------- ------- ------- ------ -------- ------ Total investmentproperties 537.6 435.0 972.6 445.5 439.3 884.8 Held through jointventures - (22.6) (22.6) - (19.9) (19.9) ------- ------- ------- ------ -------- ------ Group investmentproperties 537.6 412.4 950.0 445.5 419.4 864.9 ------- ------- ------- ------ -------- ------ CHAIRMAN'S STATEMENT AND REVIEW OF OPERATIONS INTRODUCTION 2004 ranks as one of Liberty International's most active and successful yearssince its incorporation 25 years ago in 1980, with strong financial results andthe completion of a record number of important projects and transactions whichhave considerably enhanced the positive momentum of the business. In terms of underlying revenue performance, we have reported a further year ofconsistent growth with an 11 per cent increase in profit before tax andexceptionals to £115.7 million and an improvement in adjusted earnings per shareof 6 per cent to 29p per share. In terms of business activity, we invested over £220 million in strategicacquisitions, particularly by way of increasing our percentage interests inEldon Square, Newcastle, and The Potteries, Stoke-on-Trent, two of our existingcentres, each with considerable expansion potential. We also completedsignificant development and upgrading projects at our two largest shoppingcentres, Lakeside, Thurrock, and MetroCentre, Gateshead. Overall, we madeconsiderable headway with our promising development programme, now amounting toaround £1.3 billion, focussed primarily on new and existing regional shoppingcentres. Furthermore, we took advantage of favourable property market conditions to raise£285 million from disposals of non-core assets, realising a substantial £46million aggregate surplus over book value. Overall profit for the year beforetax, including these surpluses as exceptional profits, amounted to £158.3million. Our financial position strengthened considerably, with the debt to assets rationow reduced to 36 per cent, a level giving ample scope for business expansion,while our debt structure was improved by several favourable refinancingtransactions. We ended the year with cash balances of £438 million and committedlong-term facilities of £675 million, representing over £1.1 billion ofavailable financial resources. Finally, we have reported an overall revaluation surplus on our completedinvestment properties of £343 million (7.0 per cent) increasing our adjusted netasset value by 12.3 per cent from 906p to 1017p per share, giving a total returnfor the year of 15.2 per cent. To the above adjusted net asset value per share of 1017p should be added afurther 48p per share, reversing the deduction made by the valuers of notionalpurchasers' costs of £170 million. This deduction is not in our view valid for agoing concern structure such as Liberty International, a listed propertycompany, where purchase and sale of shares is the predominant mode of exchangeof value for shareholders rather than sale of each underlying individualproperty incurring transfer costs. DIVIDENDS The directors are recommending a final ordinary dividend of 14.1p per sharepayable on 21 April 2005, bringing the full year's dividend to 26.5p per share,an increase of 6 per cent on 2004, continuing our unbroken track record over the last decade of annual dividend improvement. The Board of directors remains committed to a progressive and relatively full dividend policy which it believes represents a major attraction to long-term investors. Our annual dividend has increased by a multiple of almost 6 times over 20 years from4.55p per share in 1984 to 26.5p per share in 2004. STRATEGY We concentrate through Capital Shopping Centres ('CSC') on premier regionalshopping centres, where we have a unique market position in the UK with ninecompleted centres in total, six of which rank in the UK's top eighteen. We alsohave a further three centres at the development stage with a number of otherprojects under consideration. This business, which represented over 80 per centof investment properties at 31 December 2004, is complemented by the otherretail and commercial activities of Capital & Counties in the UK and USA, and,from time to time when suitable opportunities emerge, by related investmentactivities. Retail overall represented 92 per cent of investment properties at31 December 2004 compared with 90 per cent a year ago. Our regional shopping centre business continued to deliver the stable andconsistent investment performance which makes the asset class attractive tolong-term investors, while our non-shopping centre activities, with investmentand trading properties passing the £1 billion mark, had a particularlysuccessful year. Our chosen strategy has proven its merit over the last decade by delivering acompound total return in terms of increase in net asset value plus dividend ofaround 16 per cent per annum, with capital appreciation providing thesubstantial part of the overall return. Liberty International has a number of unique strengths: - prime regional shopping centres seldom change hands in transparent open market situations and it is our belief that the valuation approach, as described under Property Valuations below, has resulted in market valuations which, when compared with other retail asset classes, would imply an unduly conservative net asset value per share - an increasingly difficult UK planning environment increasing the scarcity value and investment attraction of our regional shopping centres - a portfolio value substantially above the market value of the constituent individual assets, given the virtual impossibility of assembling such irreplaceable assets individually on the open market - a balance between out-of-town centres (Lakeside, MetroCentre and Braehead) and city centre projects, all in major regional destinations - a wide geographic spread across the UK including major UK cities such as Glasgow, Newcastle and Nottingham as well as locations in London and the South East of England - an absolute commitment to quality which in our view underpins superior rental income growth prospects from long-term lease structures, typically with 10 or 15 year leases containing rent reviews every five years. The attractiveness of the assets to retailers and shoppers, enhanced by our active management approach and capital investment programme, ensures they are very defensive and resilient in more difficult market conditions - regional shopping centres with very limited fragmentation in ownership, enabling effective management control to be exercised. Following a number of transactions in recent years to acquire partners' interests, including two such transactions in 2004, we own 90 per cent or more of seven of our nine completed centres. Of our developments, Chapelfield, Norwich will be 100 per cent owned, while St Davids 2, Cardiff, and Westgate, Oxford, are 50:50 joint ventures, a pragmatic structure with which we are entirely familiar - assets of an individual size sufficient to access substantial scale advantages in debt markets. As evidenced by the Lakeside transaction in 2004 and the MetroCentre transaction in early 2005, we can obtain overall borrowing terms which are considerably superior to those available to owners of smaller commercial assets or assets with fragmented ownership - strong and extensive relationships with key retailers, aided by our extensive use of turnover-related leases which create a common interest in the success of our centres. These relationships give us access to development opportunities, enhance our understanding of the business and provide insights which enable us to better judge investment and development opportunities and effectively manage their risks - a business of a size where we can create economies of scale in procurement and greater expertise in centre management, leading to lower levels of service charge to our tenants and better service overall - a substantial development programme of £1.3 billion predominantly focussed on regional shopping centres which should bring meaningful benefits to shareholders as projects are completed. This programme largely concentrates on extensions of existing prime retail locations and therefore has an attractive risk profile and is of a size appropriate to maintain Liberty International's measured growth approach - a financial position which enables the company to pursue acquisition opportunities, particularly where these fit in with our strategic ambitions to strengthen our market leadership in the UK regional shopping centre industry - a successful but often under-recognised retail and commercial business in Capital & Counties, including a predominantly regional shopping centre and retail business in California, which is complementary to our UK shopping centre business and has produced excellent returns for shareholders - a level of intellectual capital, experience and management skills within the organisation which ensures that the business as a whole is worth more than the market value of its individual assets PROPERTY VALUATIONS Of the overall £343 million (7.0 per cent) property revaluation surplus, CSC'scompleted regional shopping centres contributed £247 million (6.1 per cent),increasing in market value to an aggregate £4.3 billion, while the completedinvestment properties of Capital & Counties appreciated this year by anexceptional £96 million (11.2 per cent) to £952 million. CSC's valuation increase was some two-thirds the result of a downward shift inequivalent yields applied by our valuers from 5.83 per cent to 5.62 per cent.Prime regional shopping centres such as ours now represent demonstrably bettervalue than other retail asset classes which surprisingly benefited from a morepronounced yield shift in 2004. The balance of one-third of CSC's valuationsurplus for the year, some £86 million, was attributable to an increase inrental values, mostly in the second half year. The table set out below, based on figures supplied by one of our valuers, CBRichard Ellis, illustrates representative yields for the different retail assetclasses at the beginning and end of 2004, showing the yield reductions in theyear and the illustrative capital appreciation in 2004 due to shift in yield: Nominal Equivalent yield Illustrative -------------------------- 31 December 31 December Yield reduction capital 2003 2004 in 2004 % appreciation in 2004 due to yield shift % %Prime HighStreet Shops 5.0 4.5 (0.5) 11.1%Prime RetailWarehouses 5.75 5.0 (0.75) 15.0%Prime ShoppingCentres 5.75 5.5 (0.25) 4.5%SecondaryShoppingCentres 7.0 6.25 (0.75) 12.0% (Source: CB Richard Ellis) Prime shopping centres, which in our view have superior rental income growthprospects, anomalously yield more than prime high street shops and retailwarehouses according to the above table as at the end of 2004. Secondaryshopping centres, which carry much greater risks and volatility, yield only 0.75per cent more than prime shopping centres at the end of 2004, a margin which hasnarrowed significantly in recent years. In fact, if Liberty International's shopping centres were valued in line withprime high street shops at a nominal equivalent yield of 4.5 per cent, our netasset value would increase by some £970 million (approximately 275p per LibertyInternational share). Capital & Counties' UK investment properties increased in value by £75 million(11.9 per cent overall) to £709 million. The retail properties outside Londonincreased by nearly 20 per cent, while Central London investments and BusinessSpace outside London both showed strong gains of over 9 per cent. Overall trueequivalent yield for Capital & Counties' UK properties fell from 7.97 per centat December 2003 to a still attractive 6.94 per cent at December 2004. The US investments of Capital & Counties performed similarly well with anoverall increase of £21 million to £243 million, amounting to 9.2 per cent forthe year or 11.5 per cent if assets purchased close to the year end areexcluded. As in 2003, the Serramonte shopping centre was an outstandingperformer, increasing in value by 14 per cent. NET ASSET VALUE PER SHARE As we have previously advised shareholders of Liberty International, they shouldappreciate that, because they are holding their investment indirectly throughshares in a listed property company, their shares would on disposal be acquiredby a purchaser who would only pay 0.5 per cent stamp duty plus brokerage on theshare transaction, rather than the full purchasers' costs of acquiring theassets individually in the property market (primarily 4 per cent stamp duty landtax where applicable and normal transfer costs including professional feesaveraging around a further 1.2 per cent). These notional purchasers' costs weresome £170 million in aggregate at 31 December 2004 and, if added back, wouldincrease the net asset value by that amount, equivalent to 48p per LibertyInternational share, and would increase overall net asset value per share to1065p. The market values reported at 31 December 2004, as was the case with thosereported at 31 December 2003, subtracted these notional purchasers' costs, inline with the RICS Appraisal and Valuation Standards which became mandatory from1 May 2003. These Standards need urgent review as, in our view, these notionalcosts should not be relevant or taken into account as Liberty International is agoing concern and has not earmarked its investment properties for disposal.Furthermore, the Standards give no recognition to the structures through whichthe assets are held which would substantially reduce the notional costs on agenuine disposal. FINANCIAL POSITION We have always regarded the maintenance of financial strength as a pre-requisitefor success in the property business and our financial ratios at 31 December2004 are exceptionally robust. We are favourably placed to pursue our substantial £1.3 billion developmentprogramme which represents an important source of future growth and brings theprospect of delivering superior performance for shareholders from the extrareturns which well-judged development should bring. Opportunistic acquisitions also represent an important source of added value andsustain the momentum of the business. Experience has demonstrated to us that astrong financial position with substantial liquidity often enables us to takeadvantage of investment opportunities on attractive terms as vendors prefer todeal with parties who have a track record of delivery and who can undertaketransactions swiftly without needing any financing condition. Notwithstanding the scale of our development programme, our financial positionis such that we do not feel constrained from pursuing other opportunities wherethese fit our strategy of measured expansion in our chosen property marketsectors. FINANCING TRANSACTIONS The attached Financial Review sets out in detail some of the major financingexercises which the group has undertaken recently, particularly the £650 millionrefinancing of Lakeside in 2004 and the £600 million refinancing of MetroCentrewhich has been launched and completed since the year end. The substantial expansion of the commercial mortgage-backed securities (CMBS)market in the UK is proving a major benefit to Liberty International. Given thesize and quality of our major assets, we can now access large sums of debtfinance on extremely favourable margins from bond markets by creatingasset-specific structures with debt instruments rated by external ratingagencies. We estimate that the Lakeside and MetroCentre refinancing transactionswill reduce our annual interest expense by some £6 million, confirming thedecision we took some years ago to focus primarily on asset-specificnon-recourse debt finance rather than corporate unsecured debt which now playsonly a small part in our debt structure. In essence, the increasing liquidity instructured debt markets and consequential spread compression has created anadditional source of value for owners of large and high quality assets such asLiberty International. CAPITAL SHOPPING CENTRES 2004 has proved to be another active year for Capital Shopping Centres ('CSC').We completed the refurbishment at Lakeside in July and the Red Mall extension ofMetroCentre opened for trading in October. Towards the end of the year, we tookadvantage of opportunities to increase our interest in Eldon Square, Newcastle,from 30 per cent to 45 per cent and in The Potteries, Stoke-on-Trent from 50 percent to a full 100 per cent ownership. During 2004, our major shopping centres have continued to demonstrate theirundoubted quality by the high levels of interest from retailers and support fromshoppers. Through our active approach to management, we constantly refine thetenant mix in our centres to maintain their appeal to shoppers by providing themost attractive retail offer in a vibrant environment. During the year we havemade 87 tenancy changes, producing additional annual rental income of some £3.3million. The success of our management approach is demonstrated by the very lowlevels of voids, 11 shop units out of an aggregate of 1443 shops at the yearend, an occupancy level of over 99 per cent. The like-for-like growth in rental income in our centres in 2004 was £4.1million, 2.3 per cent, in line with expectations in a year when a relativelysmall proportion of CSC's income benefited from rent reviews. However, incomeover the next few years is expected to benefit strongly from major rent reviewcycles. The first reviews since Braehead, Renfrew, Glasgow opened in 1999 arenow being settled and further cycles commence in 2005 at Lakeside, Thurrock and,for the first time since opening, at The Chimes, Uxbridge. In 2006, rent reviewswill focus on MetroCentre. The trading climate for retailing during the first half of 2004 was generallyfavourable. Rising interest rates and the correction in the UK housing marketinevitably had an effect on consumer spending which resulted in a lower increasein retail sales for the second six months. Our centres have maintained theirmarket position with both Lakeside and MetroCentre benefiting from the capitalinvestment referred to below while the more recently opened centres, Braeheadand The Chimes, Uxbridge, continued to trade strongly. Development activities in respect of completed shopping centres A major focus for management is to strengthen our existing prime regionalshopping centres by implementing refreshment, remodelling and expansion schemesto meet the ever-changing needs of retailers. At Lakeside, Thurrock, we completed the remodelling, refurbishment andmodernisation works on programme and on budget at the beginning of July 2004,with a highly favourable response from shoppers and retailers. Theseimprovements have encouraged many retailers to refit their shops, with anincrease in demand from retailers who do not have a presence in the centre andfrom existing retailers wishing to expand. As an example, an 18,600 sq.ft.extension to increase the size of the Next store to 63,000 sq.ft., has commencedand is due to be completed in time for the enlarged store to be trading beforeChristmas 2005. Importantly, this increase in retailer demand is being reflectedin higher levels of rental value being obtained on new lettings. Also, ThurrockCouncil have resolved to grant planning consent to remodel and extend thePavilion building to improve the catering in Lakeside by providing 42,000 sq.ft.of new restaurants, of which 72 per cent is under offer. We opened the major extension to MetroCentre, Gateshead, providing a newdepartment store for Debenhams, 28 new shop units, an 1100 space car park and anew bus station, on time, on budget and fully let at the beginning of October2004. The project restored MetroCentre's position as Europe's largest coveredshopping centre at 1.8 million sq.ft., adding significantly to the retail offeron both trading levels. The space has attracted an excellent selection ofretailers including Debenhams, Zara, Hennes, River Island, French Connection,New Look and the first Bershka store in the UK. Generally retailers arereporting sales in excess of their initial budgets. At Braehead, Renfrew, Glasgow, the Phase 2 development, comprising some 165acres of land, is now gathering pace. We sold 11 acres for residentialdevelopment in the first half year recording a substantial trading profit of £6million. In October, the 460,000 sq.ft. construction of the Xscape Leisurescheme, a joint venture with Capital & Regional Plc, which will include anindoor ski-slope, cinema, bowling, restaurants, cafes and speciality retail,commenced on site. We are continuing to pursue other sales of land for moreresidential and business space. At Eldon Square, Newcastle, planning consent has been granted for three separateprojects to expand and renovate the centre, in total amounting to 468,000 sq.ft.of retail space including a new 175,000 sq.ft. department store, creating netadditional retail space of 318,000 sq.ft. When all three projects have beenimplemented, Eldon Square will provide 1.25 million sq.ft. of space, ranking itamongst the UK's largest city-centre regional shopping centres. In Watford, we have completed a preliminary agreement with Watford BoroughCouncil with the intention that CSC will in due course develop a mixed-usescheme of up to 600,000 sq.ft. including the redevelopment of Charter Place, anolder style 1970's shopping centre owned by the Council which adjoins our majorregional shopping centre, The Harlequin, and other high street properties wealready own. The Council continues to work on a planning brief for the areawhich is expected to be completed during the first half of 2005. The proposalswhen implemented will substantially enhance Watford as a destination in theregional retail hierarchy. At The Victoria Centre, Nottingham, we have commenced construction of a 40,000sq.ft. remodelling project creating an additional 31,600 sq.ft. of prime retailspace from available indoor market space. Terms have been agreed to pre-let thewhole of the new space of 40,000 sq.ft. In addition, further opportunities arebeing explored to add additional retail space subject to planning consent. At The Glades, Bromley, where we recently purchased properties in the highstreet adjoining the main entrance to the shopping centre, plans to incorporatethese properties to provide some 38,000 sq.ft. of new retail space have beenfinalised and a planning application has been submitted. During 2004, we made two strategic acquisitions of sites adjoining ThePotteries, Stoke-on-Trent, which will provide an opportunity for a proposedmajor extension to meet unsatisfied retailer demand in this 561,000 sq.ft.regional centre, where we have now obtained full 100 per cent ownership. Progress on new projects The development of the 510,000 sq.ft. Chapelfield shopping centre, Norwich,where CSC will become the owner on completion, continues to be progressed byLend Lease Europe for completion in the Autumn of 2005. Anchored by House ofFraser, an excellent line up of retailers has been secured with Lend Leasereporting that they have let or instructed solicitors on 89 per cent of thespace, representing 82 per cent of anticipated income. CSC's estimated cost forthe centre, excluding the residential element, is around £260 million of which£219 million remains to be paid. In Cardiff, the St David's Partnership, our joint venture with Land SecuritiesGroup PLC, continues to progress the detailed design of the proposed 850,000sq.ft. retail-led mixed-use extension to the existing St David's shopping centrein the heart of the City. We have agreed terms with The John Lewis Partnershipto occupy a new department store in the extended scheme which will rank oncompletion as one of the largest UK regional shopping centres. Our joint venture with LaSalle Investment Management to expand and upgrade theWestgate shopping centre, Oxford continues to make progress. A master planningexercise has been finalised following an extensive period of consultation andthis has been well received by the public, third parties and both the City andCounty Councils. The next step is to finalise discussions with interestedparties on transport issues, which are being considered in the context of awider joint initiative to regenerate a larger area, encompassing the entirewestern part of the City of Oxford. Our proposals for Oxford also include adepartment store for The John Lewis Partnership. CAPITAL & COUNTIES 2004 has been a year of excellent performance for Capital & Counties, both inthe UK and the USA. Buoyant investment market conditions coupled with activeasset management have combined to deliver a very attractive total return oncapital employed within Capital & Counties and the revaluation surplus this yearof £96 million increased property assets including development and tradingproperties to over £1 billion. UK Tenant interest in our Central London office properties, primarily located inthe West End and Mid-Town, has markedly improved over the last 12 months andrental levels are showing signs of returning to a growth pattern. Theperformance of retail properties outside London, which rose in value by nearly20 per cent, was substantially helped by active management, particularly of ourretail parks. The valuers estimate the rental value of Capital & Counties'investment properties to be £6 million in excess of passing rents. We took advantage of the strong investment market conditions in 2004 to sellfour non-core office properties, in particular Imperial Place, Borehamwood,Hertfordshire, realising a total of £68 million, £11.5 million in excess of themarket values at 31 December 2003. Central London offices and retail(£355 million market value) Activity returned to the West End office letting market in 2004 with anoticeable improvement in demand and take-up. We have as a consequence beensuccessful in letting vacant space in Kensington High Street, Regent Street andPiccadilly. In our core West End and Mid-Town office properties, space availableto let currently represents 1.9 per cent by area of the total accommodation. Afurther 2.9 per cent is undergoing refurbishment. We continue the policy ofupgrading common areas to reflect the increasing expectations of occupiers andto maximise achievable rents. Retail space remains fully occupied. The scheme for the refurbishment and redevelopment of the Kings Reach complexwas finalised in 2004 and a planning application will be made in February 2005.If consented the new scheme will provide 350,000 sq.ft. of new offices (a 40 percent increase over the existing building) and 30,000 sq.ft. of new retail space.A start on site could be made in 2007 and a pre-letting campaign is likely tocommence during 2005. Retail outside London(£184 million market value) The retail investments have performed outstandingly well in 2004. The benefitsof our active approach were particularly evident at the retail warehouse parksat Stafford and Braintree where lease buy-backs have enabled strategic relettingto higher quality retailers together with evidence for increased rental value.Further opportunities continue to be realised to improve these assets in bothphysical and tenant-mix terms. At Swansea, an extension of part of our holding on the prime pitch of OxfordStreet was completed in order to provide larger retail units, all of which havebeen successfully let to a quality range of new tenants. We are now exploringother opportunities to increase the retail offer in Swansea's City Centre. At Ilford in Essex we continue to work with the London Borough of Redbridge andCountryside Properties in progressing the 400,000 sq.ft. town centreregeneration scheme. Business space outside London(£170 million market value, including Capital Enterprise Centres) As the group's retail focus has increased, offices outside London have becomeprogressively non-core and we were pleased to make the substantial disposalsreferred to above in 2004. Significant marketing effort at Capital Park, Cambridge during 2004 has resultedin the letting of all the remaining vacant office space. This 160,000 sq.ft.office park is now fully occupied and we are contemplating the development of afurther 40,000 sq.ft. on the remaining undeveloped land. Encouragingly, in thecase of our other recent development, Capital Court, Uxbridge, further lettingsof 10,000 sq.ft. have been achieved, with interest in the majority of the 14,000sq.ft. of offices remaining to be let. Four Capital Enterprise Centres' locations with a total of 175,000 sq.ft. ofbusiness space are now open and trading successfully with construction of thefifth, in Milton Keynes, expected to commence in the first quarter of 2005.Occupier demand at Chelmsford has been exceptionally strong and terms are agreedfor the purchase of additional land to extend the centre by 50 per cent to55,000 sq.ft. United States 2004 was also an excellent year for our US company, focussed on California. TheSerramonte Center, our flagship regional shopping centre in Daly City, SanFrancisco, continues to trade strongly, with tenants' turnover increased indollar terms by 7 per cent in 2004. For the first time, total property assets inthe US exceed $500 million. The sale of Ghirardelli Square in San Francisco raised $45 million in the firsthalf year and produced an exceptional profit of $10 million. The $95 millionrefinancing of the Serramonte Center (reducing the interest rate from 6.9 to 4.8per cent) raised $31 million of further funds. These transactions enabled thecompany to make acquisitions with a potentially attractive return profile. PlazaEscuela, a 154,000 sq.ft. open shopping centre in the affluent community ofWalnut Creek, Contra Costa County, and a 75,000 sq.ft. medical office complex atDanville were acquired for $72.5 million and $20 million respectively. Inaddition, a 42 acre retail development site has been acquired at a nearby EastBay location, Antioch. ECONOMIC AND FINANCIAL BACKGROUND AND THE UK PROPERTY MARKET 2004 was a year of relative stability in financial markets, with the exceptionof some commodity sectors such as oil where sizeable price rises generated someinflationary concerns. In equity markets, the FTSE-100 Index and the US Standard& Poors 500 Index rose by 7.5 per cent and 9 per cent respectively. While shortterm interest rates rose, with UK base rate increasing from 3.75 to 4.75 percent and the US Fed Funds rate increasing from 1.0 to 2.25 per cent (increasingin 2005 to 2.5 per cent), longer term fixed interest markets were littleaffected, with the yield on the UK 10 year gilt declining from 4.8 to 4.5 percent and the 10 year US treasury remaining virtually unchanged at 4.2 per cent.The US dollar declined against sterling from $1.78 to $1.92, reflectingfinancial market concerns about the size of the US trade and budget deficits. Although UK GDP growth in 2004 has been estimated at around 3 per cent, verymuch in line with its long run average of some forty years or more, theimmediate outlook for consumer spending looks more challenging than over thelast few years. We are reassured by the fact that prime regional shoppingcentres have historically demonstrated their resilience and stability whenmarket conditions are more difficult. 2004 was another strong year for property returns in the UK with the IPD UKMonthly Index, the widely recognised benchmark for UK property performance,showing a total return of 19 per cent for the year, substantially outperformingUK equities and gilts. Over the last decade, according to the same index, UKproperty has produced a compound total return of 11.2 per cent, compared withequities which have produced 8.1 per cent. Not surprisingly, the continued strong relative performance of property, itsyield advantage and lower volatility have attracted increasing investorinterest, resulting in valuation yields dropping sharply in 2004, as referred toabove under Property Valuations. The All Property equivalent yield reduced from7.65 per cent to 6.86 per cent, a substantial move for a single year and a majorfactor in the exceptional 2004 total return. Retail property continued to be thestrongest performer of the property asset classes measured by IPD producing atotal return of 21.6 per cent in 2004 compared with offices producing 13.9 percent. While direct property performed strongly in 2004, property shares performed evenbetter with a 41 per cent rise in the FTSE 350 Real Estate Index, slightlyexceeded by Liberty International as we recorded a 42 per cent increase with ourshare price rising from 683p to 971p. REAL ESTATE INVESTMENT TRUSTS ('REITS') The relentless migration by participants in the UK property industry to offshoretax jurisdictions and indirect vehicles, not least in the face of the penal andcounter-productive 4 per cent stamp duty levy on UK property transactions, isclearly concentrating the mind of the UK Treasury on the need for a UK onshoretax-transparent property vehicle in line with other developed economies.Following last year's Treasury consultation paper, which received anunprecedented level of submissions, the indications are that a further Treasurypronouncement is likely in Spring 2005 which could lead to legislation in timefor the 2006 tax year. REIT investors worldwide have generally shown a strong preference for specialistcompanies rather than generalists. Regional shopping centres have been one ofthe asset classes which they have particularly favoured, with major REITS in thesector in several territories now trading at a significant premium to underlyingnet asset value. Liberty International would represent an attractive REIT. Wetherefore hope that the next round of Treasury proposals does not look to imposeunnecessary regulations or tax barriers which would impede the successfulevolution of an onshore REIT sector in the UK. CHAIRMANSHIP, DIRECTORATE AND MANAGEMENT During 2004, following the two retirements at the Annual General Meetingreferred to in my statement last year, we were pleased to appoint asnon-executive directors Lesley James, CBE, former human resources director ofTesco who now holds a number of non-executive appointments, and Rob Rowley,former finance director of Reuters and currently, amongst other appointments,senior independent non-executive director of Prudential PLC. In 2005, we have made a further round of appointments. Kay Chaldecott andRichard Cable, respectively asset management director and development directorof Capital Shopping Centres with 20 and 17 years experience with the group, havebeen appointed as executive directors of Liberty International. As non-executive directors, we have appointed Sir Robert Finch, immediate pastLord Mayor of London and former head of the property department at leading Citylaw firm, Linklaters, and Ian Henderson, CBE, former chief executive of the UK'slargest property company, Land Securities Group PLC. We look forward to all of the above making a substantial and valuablecontribution to our affairs. My intention remains to retire as Chairman at the end of June 2005 when I reachmy 75th birthday but I look forward to continuing my association with thecompany, in which my family has a substantial 22 per cent shareholding, as theBoard has invited me to accept the appointment of President for Life on myretirement and to act in an advisory capacity. We anticipate announcing mysuccessor as Chairman in the second quarter of 2005, sufficiently far in advanceof my retirement to ensure an orderly handover. I would like to extend my thanks to the management team, my non-executive boardcolleagues and the entire staff of Liberty International for their exceptionalefforts and commitment in such an active year when so much has been achieved toenhance the company's long-term prospects. Furthermore, I would like to thankour shareholders, advisers, bankers and other consultants for their continuingsupport. PROSPECTS 24 June 2005 marks Liberty International's 25th anniversary and I am gratifiedto have been involved from the very formation of the company on my 50th birthdayin 1980. The company has advanced from small beginnings into a major UK FTSE-100 company,with our ranking now in the top 75 companies. Over this period, we havedeveloped a powerful market position in the UK regional shopping centre industryand have found that increasing size, far from representing a barrier, hasgenerated a steady flow of attractive new opportunities to maintain thecompany's momentum. We are determined to extend our track record of growth, by relentlesslypursuing, in our chosen property market sectors and within sound financialparameters, an expansion strategy which has three main elements: - to increase net property income and thereby profits through appropriate rent reviews, lettings and active management - to take advantage of market opportunities for acquisitions where these fit our overall strategy - to successfully pursue our development programme to ensure the long-term growth profile of the business While my impending retirement at the end of June on my 75th birthday means thisrepresents my last annual Chairman's Statement, I can however assureshareholders that I am highly confident in Liberty International's exceptionallong-term prospects given the quality of its people, its ongoing leadership, itsirreplaceable physical assets and the exciting prospects and challenges of ourchosen industry in which Liberty International is the prime player in the UK. Itis also extremely gratifying that both the London and Johannesburg stock marketshave reacted positively to the company's momentum by recording the highestoverall yearly improvement of our share price since our incorporation in 1980. Donald Gordon Chairman 9 February 2005 FINANCIAL REVIEW MEASUREMENT OF PERFORMANCE The key performance measure used by Liberty International is total return, beingthe growth in net assets per share plus the annual dividend. Growth in netassets per share is primarily driven by investment property revaluations, andthe dividend derives from the revenue results for the year. REVENUE RESULTS Profit on ordinary activities before taxation increased by 44 per cent to £158.3million from £110.0 million. Removing the effect of exceptional items, profit onordinary activities before tax and exceptional items increased by 11 per cent to£115.7 million from £104.2 million. Operating profit including joint ventures, a key measure of underlyingperformance, increased by over 3.9 per cent to £245.2 million from £235.9million. The growth in operating profit reflected both like-for-like rentalRelated Shares:
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