Final Results

19th Jun 2007 07:02

Warner Estate Holdings PLC19 June 2007 Part 1 of 2 Warner Estate Holdings PLC A YEAR OF CONTINUED MOMENTUM AND REIT CONVERSION Warner Estate Holdings PLC ("Warner Estate" or "Group"), the property investmentand management company has today announced its preliminary results for the year ended 31 March 2007. Financial Highlights • Total return 18.2% (2006: 31.2%)(i) - £63.9million (2006: £85.0million) • Adjusted net asset value per share, after REIT conversion charge, 800p (2006: 721p)(ii) • Net asset value per share, after REIT conversion charge, up 17% to 774p(iii) • Recurring earnings per share 30.5p (2006: 22.9p)(iv) • Earnings per share 129.3p (2006: 140.2p) • 36th successive year of dividend growth • Average dividend growth over the last five years of 7.6% per annum • Dividend raised by 7.7% to 21p (2006: 19.5p) Business Highlights • Property owned and under management up 29% to £3.2billion • Commercial rent roll owned and under management up 16% to £175million per annum • Elected to convert to a REIT and converted on 1 April 2007 • Successful acquisition and integration of JS Real Estate Plc (i) See table for explanation (ii) Adjusted for deferred tax on fair value gains and other items (iii) The NAV includes deferred tax on assets not within the REIT election and is before the proposed final dividend (iv) Adjusted for net gains on investment properties and other items Philip Warner, Chairman of Warner Estate commented "This has been a successful year for the Group, maintaining the momentum of thelast few years. Adjusted net asset value has risen to 800p and the dividend hasbeen increased for the 36th consecutive year. Immedately after the year end, on1 April, the Group converted to a REIT. Expansion of our property fund management business has continued and we nowmanage over £3.2billion of property assets, including our wholly ownedportfolio. Adding value through development is an important part of our assetmanagement process and we have a significant pipeline of more than one millionsquare feet. We completed the corporate acquisition of JS Real Estate Plc, adding £130millionto our wholly owned portfolio and improving our London and South East weighting. A new joint venture was formed and bought two office buildings in the City ofLondon for £98million. We have since made further purchases of offices inGreater London. The outlook for the Group remains promising. We have the team to deliverfurther growth and I am confident that it will be delivered." Date: 19 June 2007 For further information contact: Warner Estate Holdings PLC City ProfilePhilip Warner, Chairman Simon CourtenayPeter Collins, Finance Director Tel: 020-7448-3244Michael Stevens, Property DirectorTel: 020-7907-5100Web: www.warnerestate.co.uk Chairman's Statement This has been a year of continuing success and of further significant change,which together maintain the momentum steadily built up over the last few years.Net asset value rose by 17% and the total adjusted return was 18%, figures whichevidence a first class performance. Following shareholder approval in March,the Group became a Real Estate Investment Trust (REIT) on 1 April 2007,immediately following the year end, a change which is not expected to impingeupon our profitable strategy of co-investment and fund management. Byconverting, the Group will no longer pay tax on REIT qualifying profits andgains, thereby removing from those profits the element of double taxationsuffered by many shareholders. The imminence of conversion inspired our agreedbid and subsequent takeover of JS Real Estate Plc (JSRE), adding £130million toour wholly owned portfolio and improving our London and South East weighting.Property under management, including that wholly owned, rose from £2.5billionlast March to £3.2billion at the year end and that managed throughout the yearincreased in value by 9%. Results Overview Conversion to a REIT has brought the net asset value calculation underInternational Financial Reporting Standards (IFRS) much closer to the keyperformance measure of triple net asset value used in prior years, due to theelimination of most of our deferred tax provisions. Consequently, we shall, forthis year and in future, use the IFRS calculation which should reduce the scopefor confusion. Net asset value per share rose by 17%, from 660p to 774p and adjusted net assetvalue increased to 800p. However, as I pointed out last year, these figurestake little account of the contribution made by the fund management business. Inparticular, Ashtenne Asset Management made a profit before tax and head officerecharges of £3.7million, without a performance fee, Apia Asset Management onthe same basis made £2.6million, including a £1.8million performance fee, andoperating margins improved for both. The Group's accounts show goodwill of only£11million in respect of Ashtenne and nothing in respect of Apia when clearlytheir real worth is substantially more. Properties under management, excluding those wholly owned, have risen in valuefrom £2.14billion to £2.76billion at the year end and those wholly owned from£0.34billion to £0.46billion, boosted by the acquisition of JSRE. The number ofemployees has increased from 187 to 202 and, following the Ashtenne IndustrialFund's successful bid for the management of a £140million portfolio with theNorth West Development Agency, the number of regional offices has been increasedto seven (2006: six). Recurring pre-tax profits were up 14% to £18.1million (2006: £15.9million),mainly as result of increased performance fees following the renegotiation ofasset management agreements. Pre-tax profits have fallen from £91million to£68million. A significant proportion of this reduction was due to lower fairvalue gain on investment properties (including our share of joint ventures) of£29million (2006: £56million). Realised profits on the disposal of propertiesand investments were also down from £18million to £4million. However, the changein the fair value of debt made a substantial contribution of £10million (2006:loss of £2million), due to rises in interest rates. A direct result of REIT conversion, including movement associated with jointventures, was a net positive impact, post tax, of £20million from conversioncharges of £14million being more than offset by deferred taxation releases of£34million. The Group took the opportunity to repay high coupon debt at a costof £9million but with significant benefits in the form of lower future interestpayments. Recurring earnings per share were 30.5p (2006: 22.9p) and earnings per share,which include the fair value gains, were 129.3p (2006: 140.2p). Equity shareholders' funds rose from £351million to £433million and adjustedequity shareholders' funds increased by £64million to £447million. Afterdeducting for the £21.4million of equity raised in January 2007 to help fund thepurchase of JSRE, this represents an increase of 11% after dividends. As notedabove, these figures include only £11million in respect of our fund managementbusiness. Adjusted gearing increased to 66% (2006: 48%) and currently stands at 75%following the recently announced London office purchases, still comfortablybelow the Group's internal policy ceiling of 100%. The Group's share of debtwithin the funds and joint ventures was £412million (2006: £348million), all ofwhich is non-recourse. Interest was covered 1.8 times (2006: 1.9 times) byrecurring profit before interest and tax. A more detailed analysis of the year will be found in the Reviews from theProperty Director and the Finance Director that follow this statement. The Board recommends a 7.7% rise in dividends per share from 19.5p to 21p, theCompany's 36th successive annual increase. Over the last five years the dividendhas been raised by 7.6% per annum compound, well above the rate of inflation.The dividend is covered 1.45 times by recurring earnings and, if approved at theAnnual General Meeting, the final dividend per share of 11p will be paid on 21September 2007 to shareholders on the register at close of business on 24 August2007. REIT conversion will support the Board's policy of paying a progressiveand above inflation increase in dividend. This Company has always sought todistribute income as a reasonable part of its total return to shareholders andthe REIT requirement to pay out at least 90% of REIT profits will reinforce thatpolicy. Strategy The conversion to REIT status has not changed the Group's strategy of building aco-investing fund management business which complements its property investmentbusiness. REIT rules require at least 75% of assets and profits to be REITqualifying and although our profits from fund management are not REIT qualifyingwe have both the capacity and the ambition for significant expansion. Theacquisition of JSRE in the wholly owned portfolio has benefited the REITequation providing a further reason for our maintenance of a wholly ownedinvestment portfolio on balance sheet. The wholly owned portfolio will continueto be a flexible investor with a view to using that freedom to pursue profitableopportunities in any sector and to provide the seed corn for new funds. During the year both the multi-investor funds which we manage, the AshtenneIndustrial Fund (AIF) and the Apia Regional Office Fund (Apia), have beatentheir benchmarks, providing their investors with improving returns and the Groupwith an improving and profitable income stream, both as investor and as assetmanager. Both have continued to expand, AIF from £986million to £1.3billion andApia from £417million to £501million, and we expect further growth to bringincreased profits both to investors and to the Group. Our shopping centre joint ventures with Bank of Scotland, Agora Max and Agora,have also risen in value but made no purchases during the year although itremains our intention for them to do so as and when we see value opportunity.However we do see value in the one million sq.ft. development programme for theexisting shopping centre assets, including those in our wholly owned portfolio. Capital expenditure is expected to be in excess of £300million, from which weanticipate realising profit over the next four years. It is an objective of ourdevelopment team not only to manage but also to extend the development pipeline. Our distribution warehouse joint venture with Bank of Scotland, Radial, has beensuccessful in growing during the year from £180million to £304million. Theobjectives for this fund, in addition to continuing expansion, are to bring innew investors and to venture further across Europe. It remains our intention to continue to build our fund management businessthrough both the existing funds, where the Group has asset management contracts,and the formation or acquisition of additional funds as dictated by research andopportunity. During the year we began purchasing offices in Greater London and afurther joint venture was formed, this time with Barclays Capital, to acquiretwo office buildings in the City of London for £96million. We would like toincrease our investment in this sector and have since the year end made moreGreater London office purchases. A fund may follow. Shareholders As referred to above, £21.5million was raised during March through the placingof additional stock with a group of institutional shareholders. This transactioncontinues the trend started last year of broadening the Group's shareholderbase. Prospects The outlook for the Group remains promising. Although, in the property marketas a whole, yield compression has all but ended and there are signs of yieldsmoving out on secondary property, the entire thrust of the Group's strategy hasbeen and is to take active steps to improve property under management andthereby to maintain and increase value. Even if interest rates rise further, asexpected, they remain at historically low levels and the underlying economicoutlook is benign. Strong demand for property persists but if higher interestrates remove some buyers from the market, opportunities for us to purchaseimprove, the more so should property yields move out. Property share prices mayhave fallen in recent months but, as these results illustrate, the value of theGroup continues to rise. That value, derived from active management, dependsupon the efforts of our staff. I thank them on behalf of shareholders and Iremain confident they will ensure a further increase in value in the forthcomingyear. Philip WarnerChairman Property Review Total property assets under management grew by 29% in the period to £3.22billionand it is easy to forget how far we have come from just two years ago when wereported £1.1billion under management. We now run seven business unitsoperating across the office, industrial and retail sectors with the importantaddition this year of investment in Greater London offices through a jointventure with Barclays Capital. Each business is run by a specialist teamfocusing exclusively on its particular area. We achieve leverage of ourresources, both people and infrastructure, and there is clear focus to theirdelivery with the potential to achieve greater scale. We remain committed to co-investment in and the management of property in eachof the principal commercial sectors, offices, industrial and retail, and intheir respective submarkets where we can add most value. Our pan-sectorcommitment provides broad risk management and we adjust weightings in apre-cyclical fashion. We have continued to re-weight our investment away fromretail and in favour of offices, most notably through the £98million Londonoffices joint venture. With disposals of secondary shopping centres over recentyears coupled with our ongoing refurbishment and extension of existing centresthe investment quality of our retail businesses increasingly leans towardsprime. We are excited by the prospect of the next cycle in the market. Returns will bedriven by aggressive active management and surpluses from well manageddevelopment activity. These have been core values of our business model forsome years and continue to be at the heart of our process. Overview We have three areas of activity: • Fund Management and Joint Ventures• Wholly Owned• Development Fund Management and Joint Ventures The Apia Regional Office Fund and the Ashtenne Industrial Fund (AIF) aremulti-investor vehicles which we co-manage with Morley Fund Management (MFM). Weconcentrate on property asset management and MFM's responsibilities are investorrelations and fund administration. We have joint ventures with HBoS on our twoshopping centre businesses, Agora and Agora Max, and on the Radial Distributionbusiness; and with Barclays Capital on Greater London Offices. The chosenownership format suits the relative maturity and size of each fund. Our regional office network gives us proximity to the industrial estates whichwe manage, ensuring very close contact with our customers - a philosophy whichdistinguishes AIF from its competitors, increases the likelihood of rentretention and represents a key feature of our active management discipline. Wholly Owned Our wholly owned portfolio has increased its geographical bias towards the SouthEast, primarily through the purchase in March of JS Real Estate Plc (JSRE),which increased our weighting in London and the South East to 80%. Itsprincipal asset is an unbroken block of 27 shops in St Johns Wood High Street,London, NW8, with residential over, which provides significant opportunity forasset management performance off existing rents of £100 to £130 Zone A. Acomprehensive five year plan is being worked up for this asset. Development For more than three years we have been building a development pipeline acrossall areas of our business and since John Peacock's arrival last year asDivisional Director responsible for development we have built up a six strongteam, in addition to our 25% interest in Bride Hall. We now manage a pipelineof 1.4million sq.ft. and 240 acres of development land, of which approximatelyhalf is on site and a further 330,000 sq.ft. has planning consent. Whilstdelivery is being controlled evenly over each of the next four years, this yearwe have initiated 188,500 sq.ft. in new retail schemes, completed 55,972 sq.ft.at our shopping centres in Birkenhead, Preston and Middleton; and started orcompleted four new industrial schemes through AIF, totalling 315,000 sq.ft. Our developments are typically 60-70% pre-let before we start construction, andbuilding contracts are awarded on a fixed price or maximum price basis. Market Comment There is still considerable appetite for UK and particularly Central Londoninvestments. Any dwindling domestic demand is being replaced in at least equalmeasure by overseas purchasers attracted by the UK's investment transparency andliquidity, sound legal infrastructure, expected transport improvements needed toservice the 2012 Olympics and the relatively efficient corporate tradingenvironment. £55billion of investment transactions were reported in the 2006calendar year, against the £57billion record set in 2005. There are good signs of rental growth across all three main sectors and the mostprevalent are in offices, particularly Central London and the major regionalcentres. However, rental growth has to be initiated by matching occupiers'increasingly sophisticated demands with an efficient and cost effective propertyproposition. New supply across all sectors is relatively low and thisconstraint, alongside the continuing conversion of commercial property toalternative uses such as residential and hotels, bolsters confidence for themedium term. During the year to 31 March 2007, the market experienced a strong first half,with our values appreciating by 5.4% and a continued hardening of yields; in thesecond half that yield compression began to flatten out and our capital growthwas 2.6%. These compare against the IPD Universe of 6.3% and 3.6%. Goingforward, in the short to medium term we expect returns to be dominated by incomerather than capital growth, with any superior-to-benchmark returns coming fromasset management and development-led successes. A feature of our portfolio is a net initial yield of 5.14%, some 61bps lowerthan at the start of the year and still a healthy premium to the IPD Universe(Monthly Index March 2007) net initial yield of 4.58 % Our standing investments, those owned and managed throughout the year, grew by9.02%, an uplift of £215million. Our un-geared property total return across all businesses of 14.5% and gearedtotal return of 22.6% compares against the IPD All Fund Universe Index for the12 months to March 2007 of 15.8%. March 2007 Capital Value Net Rental Income ERV Initial Yield Change in Capital Value £million £million £million % % AIF 1,271.9 70.7 93.6 5.25 29.0Apia 501.1 28.0 32.5 5.21 20.7Agora Max 327.6 16.7 23.1 4.81 5.03Agora 256.1 12.1 15.2 4.60 8.2Radial 303.7 18.3 18.4 5.70 68.7GLOF 98.9 4.9 5.7 4.73 -Wholly Owned 461.3 24.5 28.4 5.02 29.9 Total 3,220.6 175.2 216.9 5.14 29.5 Business Review The Ashtenne Industrial Fund, our largest individual business, grew by£286million (29%) to £1.27billion. AIF won the competitive tender to buy a 50%interest in, and co-manage, a £140million portfolio with the North WestDevelopment Agency, since re-branded as Space NorthWest. A new office wasestablished in Liverpool to serve this business. The Fund produced a 29.2%total return during its financial year to 31 December 2006, against itsbenchmark of 17.7%. The Apia Regional Office Fund has now reached over £0.5billion, nearly twice thesize at launch in June 2005 and on track for its target of £750million by theend of 2008. Growth was 20% over the last 12 months. Notable additions includedSt Magnus House, Aberdeen and New Castle House, Nottingham for a combined£48million. The Fund outperformed its benchmark of 18.1% with total returns of31.5% for the 12 months to 31 December 2006. Robert Game joined as ManagingDirector of the Apia Asset Management business in October 2006 to concentrate onthis Fund. The thrust of activity in both our shopping centre businesses, Agora Max andAgora, has been realising asset management potential and progressing ourdevelopment opportunities. Phase I of Middleton completed in June 2006, fullylet and 28% ahead of anticipated rental value and we are now working up plansfor Phase 2. The 100,000 sq.ft. development of the Victorian Market Hall,within our Market Place shopping centre in Bolton, started in January, alreadyover 70% pre-let, and also ahead of estimated rental value. Phase I atBirkenhead, a six unit scheme, completed in July 2006 and we secured a planningpermission for the 30,000 sq.ft. Phase 2 in June 2006. 14 of the 18 unitsvacant at acquisition of The Pallasades, Birmingham have been let or are insolicitors' hands, at or ahead of ERV. Phases 1 and 2 at Fishergate, Prestonboth completed in 2006, creating a fresh and vibrant entrance to the main Mall. Our Radial Distribution joint venture grew by nearly 70% from £180million to£304million, with new acquisitions at some of the country's leading logisticparks - Hams Hall, Birmingham; DIRFT, Daventry; Magna Park, Leicestershire;Brackmills, Northampton and the Marks and Spencer regional facility at RadialPoint, Stoke. A European dimension remains a target for this business. A highlight of our year has been our acquisition of office investments inGreater London, in particular the establishment of a £98million joint venturewith Barclays Capital which purchased Central House, Camperdown Street, and 55Old Broad Street, both in the City of London. These followed an earlier WhollyOwned purchase of 24/26 Minories, EC3 for £11million and post year end, furtheracquisitions have been made at 16 Upper Woburn Place, WC1 and 2 America Square,EC3, demonstrating the use of the Wholly Owned as a platform for launching newJVs and funds. Challenges We expect to grow the scale of our funds under management and continue to widenthe investor base in each. Where appropriate we will continue the gravitationof our joint ventures into fully fledged funds, and our Radial Distributionbusiness is ripe for conversion and growth into Europe. Now that AIF has reached the £1bn threshold of assets under management, whichhas been achieved with record returns to investors in that business, this shouldbe the next target for all our funds and JV's. Scale at this level bringsmarket presence, higher chance of tenant retention and repeat business, andgreater buying power for services and funding. We also have to continue to convert the significant value potential inherent inour businesses. Our aggregate estimated rental value is £217million pa, some24% ahead of rent received. We have recently bought good quality, vacant andpart vacant property, particularly in offices and warehouses/industrial and inareas of low supply over the last 12 months - some with developers guarantees -as a platform for generating above market returns. Our overall void rate is10.8% (Ashtenne Industrial Fund carries a target void rate of 10-14% to ensurewe have opportunities for tenants to move within our estates as their needsdictate); excluding AIF, our void rate is 6.3%, which we target to reduce tobelow 5%. The adjusted void rate of 6.3% (i.e. excluding AIF) computes to anannual rental potential of £7.8m. We expect to deliver 400,000 sq ft of development completions next year which isa valuable source of new income and expected surpluses from development profit,and initiate a further 300,000 sq ft, to maintain the momentum built up fromthis activity. Key Statistics Total under management Wholly owned* 31 March 2007 31 March2006 31 March 2007 31 March 2006 Capital Value £3,220.6million £2,487.1million £461.3million £344.3millionAnnualised rent roll £175.2million £151.5million £24.5million £20.7millionInitial Yield 5.14% 5.8% 5.13% 5.7%Average Unexpired Lease 7.16 years 4.25 years 6.42 years 12.2 yearsTermVoid Rate 10.8% 9.5% 8.6% 4.0%Number of Properties 562 499 84 75Average Lot Size £5.73million £4.99million £5.49million £4.59million *Investment properties and properties under the course of development, where thecapital value is before the accounting adjustment for ground lease interest forleasehold properties of £1.5m (2006: £1.1m). Wholly Owned Number of Capital Annual Properties Value Rent Roll ERV Weighting £million £million £million %RetailRetail Warehouses 7 29.9 1.9 1.9Shopping Centres 2 84.6 4.4 5.2High Street 14 89.1 4.3 5.0 Retail sub total 23 203.6 10.6 12.1 45 Office sub total 35 159.5 9.9 11.5 35 Distribution 2 14.1 1.0 1.0Industrial 19 47.9 2.6 3.3 Distribution & Industrial sub total 21 62.0 3.6 4.3 14 Residential 1 10.7 0.4 0.4 2Land 2 1.7 - 0.1 -Development (shopping centres) 1 19.7 - - 4Total Wholly Owned 83 457.2 24.5 28.4 100 Overseas Property 1 4.1 - - Total Wholly Owned plus Overseas property 84 461.3 24.5 28.4 Under Management Net Initial No. of Capital Annualised Yield Properties Value Rent Roll ERV £million £million £million %Aggregate of all propertiesAshtenne Industrial* 434 1,271.9 70.7 93.6 5.25Apia Regional Offices 22 501.1 28.0 32.5 5.21Agora Max Shopping Centres** 2 327.6 16.7 23.1 4.81Agora Shopping Centres** 4 256.1 12.1 15.2 4.60Radial Distribution** 14 303.7 18.3 18.4 5.70Greater London Offices** 2 98.9 4.9 5.7 4.73Wholly Owned** 84 461.3 24.5 28.4 5.13 Total under management 562 3,220.6 175.2 216.9 5.14 *Includes 100% of the Space Northwest JV portfolio **Capital value is before accounting adjustments for ground lease interest forleasehold properties, and certain properties treated as finance lease assets. THE ASHTENNE INDUSTRIAL FUND (AIF) VALUE - £1.27BILLION (KING STURGE/DTZ) RENTAL INCOME - £70.7MILLION PA Ashtenne Industrial Fund grew from £986million to £1.27billion during the yearand saw further expansion of the regional office network and delivered recordabove-benchmark returns to investors. AIF transacted over £250million of property, selling approximately £73million ofchallenging, non-core assets and acquiring £196million of asset managementopportunities; the high note being the acquisition of a fifty percent interestin a £140million joint venture with the North West Development Agency, nowbranded as Space Northwest. This acquisition prompted the opening of a newAshtenne office in Liverpool and the Leeds office moved into new, high qualitypremises adjacent to the M1. The network is well positioned to intensivelymanage its assets in the coming year. The Fund continued to show out-performance against its benchmark and for theyear to 31 December 2006 produced a 29.21% return against a benchmark of 17.70%. Equity was raised at a premium from both existing and new investors during2006 demonstrating the appetite from the market for exposure to AIF and thesecondary industrial sector. As at March 2007 the Fund had a gross asset value of £1.272billion comprising434 assets totalling 21.25million sq ft (1.97million sq m). After strong yield compression in the sector over the last 18 months, abovebenchmark returns in future will derive from aggressively managed stock. Ourregional network is uniquely placed to cater for occupiers' immediate needs andmaintain high customer satisfaction and property standards. A two tier marketis emerging between estates which are well managed and those where a poor levelof ongoing management and investment will lead to obsolescence. Space Northwest After a nine month tender and due diligence process in December 2006, TheAshtenne Industrial Fund secured the transfer of 40 industrial and officeproperties owned by the North West Development Agency into a new £140millionjoint venture. The property portfolio comprises well specified, multi-let industrial andbusiness assets located throughout the Merseyside and Cumbria region, offeringsubstantial value enhancement and reversionary potential with an initial voidrate of c40%. The largest industrial asset is a highly prominent industrial area immediatelyadjacent to Liverpool's John Lennon Airport extending to some 360,000 sq ft ofaccommodation and providing a diverse range of unit sizes. The former Marconiheadquarters complex in Wavertree, Liverpool is also included on a 29 acre sitecomprising a range of industrial and office accommodation with significantrefurbishment and development opportunities. Chippenham, Langley Park Langley Park is a 50 acre industrial estate, of which approximately 17 acres,adjacent to Chippenham mainline railway station, has been allocated within theNorth Wiltshire Local Plan for mixed use redevelopment. An intricate planning strategy has been implemented to achieve an optimum mix ofalternative use development at the earliest opportunity, whilst also ensuringthat the investment value of the remaining industrial asset is sustained postdevelopment. In March 2007 a revised outline planning application was submitted for thedevelopment of 192 houses as well as a detailed application for a large scaleretail store for ASDA. Ashtenne Regional Offices The regional office network is central to the continued out-performance of AIF.The structure provides direct representation in areas where there is an existingconcentration of assets. This network of offices differentiates us from ourcompetitors and provides significant benefits for the day to day management ofthe assets within AIF, enabling direct contact with occupiers in order tomaximize income and reduce the vacancy rates for the portfolio as a whole. APIA REGIONAL OFFICE FUND VALUE £501MILLION (DTZ) RENTAL INCOME £28.0MILLION PA Jointly established in June 2005 by Warner Estate and Morley Fund Management,the Apia Regional Office Fund is one of a few specialists investing exclusivelyin city centre offices outside Central London. In its first full financial yearto 31 December 2006, the Fund delivered a total return in excess of 30%,significant relative outperformance and a top quartile placing in the HSBC/AREFPooled Property Fund Index for specialist vehicles. This track record and the scale and diversification that a £501million UK wideportfolio of 22 properties offers has contributed to attracting £24 million newinvestor equity. The regional office markets have performed strongly over the last 12 months.Office demand in key regional cities has improved, bolstered by growth in thefinancial and professional service sector. The rental growth achieved across theUK has fuelled demand for investment product and lead to a further hardening ofyields. Prospects for the office sector as a whole appear positive on the back of theimproved letting activity, full vacancy rates and healthy levels of activedemand. Aberdeen, St Magnus House Size - 80,180 sq.ft. (7,448 sq.m.) A six storey office building with 104 car spaces in a prime city centre locationoverlooking Aberdeen harbour and purchased by Apia in March 2007. Originallyconstructed in 1984, the building has recently undergone re-cladding andsubstantial upgrading to provide Grade A office accommodation. Fully let onvarious lease terms to four tenants including The Scottish Ministers and CNRInternational (UK) Ltd. Aberdeen, New Telecom House Size - 84,764 sq.ft. (7,874 sq.m.) An eleven storey 1970's office investment close to Aberdeen railway station with47 car parking spaces. The building is let to British Telecommunications. Edinburgh, Apex 123, Haymarket Terrace Size - 94, 522 sq.ft. (8,781 sq.m.) A four storey modern air conditioned building located close to HaymarketStation, one mile west of the city centre with 135 car spaces. Tenants includeScottish Enterprise, Secretary of State for the Environment, Edinburgh FundManagers and Abbey National Bank PLC. Following the 2006 refurbishment of17,836 sq.ft. (1,657 sq.m.), 2,500 sq.ft. (232 sq.m.) has been let to Mapeley. Glasgow, 225 Bath Street Size - 87,578 sq.ft. (8,136 sq.m.) A seven storey office building built in 1978 and substantially refurbished in1997. Located in Glasgow's CBD (central business district) with 33 surface carspaces, let to two principal tenants, National Australia Group and FaberMaunsell. Faber Maunsell took a pre-let of one of the floors formerly occupiedby Teletech. Refurbishment of the remaining three floors is nearing completionand one is currently under offer. Glasgow, Lomond House Size - 64,331 sq.ft. (5,976 sq.m.) An eleven storey 1990's office investment within Glasgow's CBD with 23 basementcar parking spaces. The building is let to seven tenants including The ScottishMinisters, Intel and Deloitte & Touche. Newcastle, St Ann's Wharf Size - 57,897 sq.ft. (5,378 sq.m.) A five storey 1990's multi-let Grade A office investment on Newcastle's Quaysidewith 197 car parking spaces. Principally let to Dickinson Dees Solicitors. Newcastle, Hampshire Court Size - 118,246 sq.ft. (10,985 sq.m.) A fully let campus comprising of three office buildings (387 car spaces) locatedon Newcastle Business Park, approximately 1.5 miles from the city centre. Oneof the buildings is let in its entirety to SoS for the Environment. Theremaining buildings are let to tenants including Lombard North Central, WSP,Fujitsu and Norwich Union. Leeds, Yorkshire House, Greek Street Size - 72,938 sq.ft. (6,776 sq.m.) A seven storey office building with ground floor retail and restaurant unitswith 45 basement car parking spaces in Leeds' CBD. The offices are let toLupton Fawcett and AIG and the retail units let to Lloyds TSB, Target PIL andRegents Inn. A refurbishment programme is being discussed with the principaltenant, Lupton Fawcett, to upgrade their accommodation and re-gear their leases. Preston, Preston Office Centre Size - 144,417 sq.ft. (13,417 sq.m.) A ten storey 1970's office investment within Preston city centre with 97 carparking spaces. Let principally to Trillium (Prime) Property and occupied byGovernment departments. Manchester, Norfolk House Size - 54,614 sq.ft. (5,073 sq.m.) A five storey modern (1996 built) air conditioned office building withinManchester's prime office core with 47 car parking spaces. Occupiers includeHalliwells LLP, Secretary of State for Health, Zurich Insurance, Watson WyattLLP and more recently Lloyds TSB. The common parts have recently undergoneupgrading and refurbishment. Manchester, 81 Fountain Street Size - 39,900 sq.ft. (3,707 sq.m.) A nine storey office building constructed in 1987 and located in Manchester'soffice core with 19 car parking spaces. The building is let in its entirety toBUPA. Manchester, Sunlight House Size - 197,289 sq.ft. (18,329 sq.m.) A fifteen storey 1930's landmark office investment within Manchester's CBD with212 car parking spaces. Let to SoS for the Environment, SoS for Transport,Building Design Partnership, Capita and others. The rolling refurbishment andupgrading of the building's common parts and vacant suites is underway. Nottingham, New Castle House Size - 71,630 sq.ft. (6,654 sq.m.) An imposing four storey art deco building constructed by Viyella in 1929. Thebuilding occupies a prominent position, a short distance west of the railwaystation and city centre. The property was comprehensively redeveloped andextended to the rear in 1989 and now provides large floors of mainly open planaccommodation with 164 parking spaces. 53% of the current income is derivedfrom the Gala Coral Group Ltd and 46% from UPS Ltd. Nottingham, York House Size 79,020 sq.ft. (7,341 sq.m.) An eight storey 1960's office investment within Nottingham City Centre with 73car parking spaces. Let principally to Nottingham Trent University until 2008. Birmingham, 120 Edmund Street Size - 138,200 sq.ft. (12,839 sq.m.) A nine storey Grade A office building in Birmingham's prime office district with104 basement car parking spaces. The building is let to tenants including HSBCBank and Donaldsons. A vacant part floor of 6,992 sq.ft. (650 sq.m.) is beingmarketed. Solihull, Sapphire Court Size - 87,563 sq.ft. (8,134 sq.m) A four storey multi-let office building with extensive car parking located closeto Solihull Railway Station. Constructed during the early 1970's andrefurbished in 1986, 48% of the income is received from the Environment Agencywith the remainder from investment grade companies or subsidiaries. Milton Keynes, Ashton / Norfolk House Size - 131,143 sq.ft. (12,183 sq.m.) A four storey, two building 1970's multi-let office investment within MiltonKeynes CBD. The buildings are let to tenants including Deloitte & Touche, AbbeyNational and Barclays Bank. 33,850 sq ft (3,144 sq.m.) of office accommodationhas recently undergone upgrading and refurbishment to include air conditioning.Of this amount, 15,261 sq.ft. (1,471 sq.m.) has been pre-let. Cardiff, Oakleigh House Size - 41,038 sq.ft. (3,813 sq.m.) A four storey 1990's single let office investment within Cardiff's CBD with 23car parking spaces. The building is let to Cunningham Lindsey. Bristol, Westgate Size - 90,924 sq.ft. (8,446 sq.m.) A six storey landmark Grade A building in Bristol city centre, comprehensivelyrefurbished in 1992 with 63 basement car parking spaces. Royal & Sun Allianceoccupy the entire building. Wimbledon, St George's East Size - 54,877 sq.ft. (5,098 sq.m.) A six storey 1980's mixed use office and retail investment within Wimbledon towncentre with 35 car parking spaces. The office building is let and occupied byMYSIS and the retail units are let to Lloyds TSB, Starbucks and Dixons. MISYShave announced their intention to vacate their offices, 42,422 sq.ft. (3,941sq.m.), on lease expiry in 2008, creating an excellent opportunity for the Fundto refurbish, upgrade, and capitalise on improved rental values. Kingston, Surrey & Lever House Size - 154,717 sq.ft. (14,373 sq.m.) A prominent island site at the southern tip of Kingston town centre, with twoprincipal office buildings (Surrey House and Lever House) providing officeaccommodation, ancillary retail units at ground floor level, a nightclub and asix storey car park. Tenants include Lever Faberge, HMV, Multiyork and NCP. Brighton, Sussex House Size - 36,996 sq.ft. (3,437 sq.m.) A six storey 1980's office investment within Brighton town centre with sixbasement car parking spaces. The building is let to Lloyds TSB. AGORA MAX SHOPPING CENTRES VALUE £328MILLION (DTZ) RENT ROLL £16.7MILLION PA The Agora Max Shopping Centre joint venture, which is a Jersey Property UnitTrust, is a 50/50 joint venture with Bank of Scotland, launched in October 2005.The joint venture invests in shopping centres between £100million and£200million in value, with active asset management and medium term developmentpotential. Birkenhead, The Grange & Pyramids Shopping Centre Size - 613,000 sq.ft. (56,949 sq.m.) Providing 160 retail units and 1,225 car spaces the scheme comprises the majorretail element of Birkenhead town centre, the dominant retail centre for theWirral. Phase 1 of our development programme was completed in July with thereconfiguration of the food court area into six new food units, a newsagent anda juice bar. Planning consent has been obtained for Phase II, a 30,000 sq.ft.(2,787 sq.m.) redevelopment of St John's Pavement. Pre-letting discussions areunderway with a major fashion retailer and the scheme could be initiated inautumn 2007. A new 1,400 sq.ft. (130 sq.m) sustainable cafe is planned for StWerburgh's Square, for which a planning application was submitted in March 2007,with work due to commence in summer 2007. Birmingham, Pallasades Shopping Centre Size - 290,000 sq. ft. (26,915 sq.m.) Pallasades Shopping Centre is situated in a prime location above Birmingham NewStreet Station. Part of the centre is to be redeveloped under Network Rail andBirmingham City Council's Gateway Project which involves the modernisation ofthe station's environment and connections with the City. Pallasades is anchored by a number of major national retailers including Argos,Peacocks, HMV and Woolworths and served by a 1,000 space multi-storey car park.Since acquiring the Pallasades in November 2005 14 new tenants have been securedand this has started the process of improving the tenant mix and rental valueswithin the Centre. AGORA SHOPPING CENTRES VALUE £256MILLION (DTZ) RENT ROLL £12.1MILLION PA The Agora joint venture was launched in March 2003 and currently owns fourshopping centres totalling 1.12million sq.ft. (103,500 sq.m.). It is owned 50/50with Bank of Scotland and invests in shopping centres in the heart of thenorth-west with potential for improvement through pro-active asset managementand refurbishment/extension projects. Preston Fishergate Shopping Centre Size - 360,000 sq.ft. (33,445 sq.m.) Fishergate Shopping Centre occupies a prime location next to Preston railwaystation. It covers an eleven acre city centre site and is anchored byDebenhams. Extension works to the entrance to the centre have beensuccessfully completed during the year with lettings to Lush, Starbucks and HSamuel. This combined with the opening of the new flagship Primark store withinthe scheme has generated a significant rise in pedestrian flow at the centreadding to the potential for rental growth. Pre-letting discussions with tenantsfor the phased 190,000 sq.ft.(17,625 sq.m.) extension for which permission wasinitially granted in 2004, continue. Bolton, Market Place Shopping Centre And Market Hall Size - 333,123 sq.ft. (30,948 sq.m.) Market Place is the prime retail location in Bolton. Work has commenced on theredesign and extension of the attached listed Victorian Market Hall, scheduledto complete in September 2008, creating 100,000 sq. ft. (9,290 sq. m.) of newretail space, 70% pre-let to tenants including Zara, H&M, Office, Joy andStarbucks. Liverpool, Cavern Walks Shopping Centre Size - 30,580 sq.ft. (2,842 sq.m.) of Retail And 79,240 sq.ft. (7,362 sq.m.) ofOffices Cavern Walks continues to attract high fashion retailers into the heart ofLiverpool's city centre. Cricket, a leading retailer in this market, hasexpanded their presence in the centre this year with an additional store. Withinvestment in the retail environment planned, we expect to improve further thetenant mix and dwell time. Refurbishment of the 7th floor of Cavern Court (theoffice building above) has been successfully completed and, as a result, a leaseto Tweeds renewed. Manchester, Middleton Shopping Centre Size - 317,300 sq.ft. (29,500 sq.m.) The scheme has seen marked progress this year, starting with the successfulcompletion in June of the 45,000 sq. ft. (4,181 sq.m.) Phase 1 extension fullylet to Peacocks, Bon Marche, Streetwise Sports, Cool Trader and Quality Save.Works to improve the vertical circulation including the introduction of a newmall cafe let to BB's Coffee and Muffins were completed in the autumn, followedby the opening of the newly extended 32,000 sq.ft. (2,973 sq.m.) Wilkinsonsstore. Plans are now being prepared for the second phase of development togetherwith the refurbishment of the car park. RADIAL DISTRIBUTION VALUE £304MILLION (DTZ) RENT ROLL £18.3MILLION PA Radial Distribution was established in 2003 as a 50/50 joint venture with Bankof Scotland, responding to the significant changes occurring in the distributionand logistics markets. Radial focuses specifically on distribution warehouses,typically 200,000 to 500,000 sq.ft., and located at major motorwayintersections, ports, airports or rail freight terminals. The Fund now ownssixteen purpose built distribution centres, at ten of the UK's most popularlogistics locations. The joint venture's strategy reflects the prevailing trends in the occupationalmarket for distribution warehouses, which show increasing preference for largerproperties. The Fund is currently building 54,000 sq.ft (5,016 sq.m.) ofadditional warehouse and office space at Interlink Park in Leicestershire, inreturn for an extended lease commitment from the existing tenant. In addition to its management activities, Radial grew substantially this yearthrough new acquisitions. Five new acquisitions were made, totalling £95million. One small disposal was also made, reflecting the Fund's focus on largerand more modern properties. Overall, space under management has increased duringthe year by 1.21 million sq ft (112,400 sq.m.) to 3.31 million sq ft (307,500sq.m.) - an increase of 57%. Glasgow, Cambuslang Investment Park Size - 123,871 sq.ft (11,508 sq.m.) Cambuslang Investment Park is situated 8 miles south of Glasgow and very closeto Junctions 1 & 2 of the M74. The unit stands on a site of 3.25 hectares (8.02acres) and has low site coverage of around 35%. The unit is let to Kuehne &Nagel Logistics Limited, who use the site for a contract with B&Q. Stoke On Trent, Radial Point Size - 183,750 sq. ft. (17,071 sq.m.) Radial Point is situated at the junction of the A500 and A50 on the outskirts ofStoke, just off junction 15 of the M6. Major occupiers in the area includeMichelin, Sainsbury's, Screwfix Direct, HW Plastics and Waterford Wedgwood. Thebuilding is let to Marks & Spencer from August 2006 for a term of ten years,with breaks in the third and fifth years. Lutterworth, Magna Park Size - 195,758 sq.ft. (18,185.9 sq.m.) Located within the Golden Triangle in Lutterworth, Leicestershire, Magna Parkwas Britain's first dedicated distribution park, acclaimed within the industryfor setting new standards in concept and design. Covering 500 acres, Magna Parkprovides close to 7.7 million sq ft of B8 distribution floor space. Unit 5220 islet to Unipart Logistics Ltd for a term of ten years, from December 2004. Leicester, Interlink Park, Bardon Size - 227,763 sq.ft. (21,160 sq.m.) Interlink Park is close to Junction 22 of the M1. The Antalis unit was builtfor the tenant in 1997 and was subsequently extended in 2001. The 5.05 hectare(12.47 acre) site is still capable of further expansion by 54,000 sq ft (5,017sq.m.). Radial is presently on site building this extension for the tenant andcompletion is expected in October 2007. Tamworth, Relay Point Size - 85,903 sq.ft. (7,981 sq.m.) Relay Point is a recently built manufacturing and distribution park, adjacent toJunction 10 of the M42 at its intersection with the A5 trunk road inStaffordshire. The site is 2.28 hectares (5.62 acres), providing 35% sitecoverage. Neighbouring logistics occupiers include Britvic, Morrisons, DHL andHeadlam Flooring. The property is let to NYK Logistics until 2018. Coleshill, Birmingham, Highway Point Total Space Held On Park - 260,884 sq.ft. (24,236 sq.m.) Highway Point is a purpose built distribution scheme between Junction 9 (M42)and Junction 4 of the M6. Both units are let until 2027, to GreenwoodsCommunications and Lucas Aerospace respectively. Each has expansion land, withpotential for an additional 40,000 sq ft (3,716 sq.m.). Birmingham, Hams Hall Distribution Park Size - 218,872 sq.ft. (20,333 sq.m.) Hams Hall Distribution Park covers an area of approximately 430 acres (174hectares) and has its own international rail freight terminal, located 1 mile(1.6 km) from Junction 9 of the M42; Birmingham International Airport is eightmiles to the south. Unit Alpha One is let to Accident Exchange until 2021 witha tenant break option in 2016. Daventry, Units A, B, C And E1, DIRFT Logistics Park Total space held on park - 834,349 sq.ft. (7,752 sq.m.) DIRFT (Daventry International Rail Freight Terminal) is one of the premierdistribution locations in the UK. The park is located at Junction 18 of the M1,where it intersects with the A5 trunk road and the West Coast Mainline (whichcan be accessed directly from the park's dedicated rail port). Other occupierson DIRFT include Tesco, Royal Mail, DHL Logistics, Malcolm Group and Nissin UK.Units A and B are both let to Eddie Stobart Ltd until 2025, with subleases toDHL and Tesco (both have break options in 2015). Unit C is let to Ingram Micrountil 2010. Unit E1 (222,752 sq.ft, or 20,694 sq.m), which was newly purchasedin January 2007, is subject to an 18 month rental guarantee which expires inJuly 2008 and the unit is presently being marketed. Northampton, Brackmills Industrial Estate Total space held on park 610,061 sq.ft. (56,675 sq.m.) Brackmills is a dedicated distribution park, with dual carriageway access toJunction 15 of the M1. Occupiers on the park include John Lewis, Stanley Tools,Black & Decker, Office Depot and GE Lighting. Radial owns two buildings on thepark; the first is a 126,974 sq.ft. unit (11,795 sq.m.)let to PanasonicLogistics until April 2009, while the much larger of the two units (483,650 sq.ft, or 44,933 sq. m.) is let to Howdens Kitchens Properties Ltd until March2022. Weybridge, Brooklands Business Park Size - 313,135 sq.ft. (29,091 sq.m.) Brooklands Business Park is close to Junctions 10 and 11 of the M25 and to theA3 artery into London. Occupiers include Waitrose, Daimler/Mercedes Benz, Marks& Spencer and Sony. The unit is let to Tesco until 2014 and is one of very fewlarge format retail distribution hubs located inside the Western section of theM25. Bristol, Western Approach Distribution Park Size - 244,115 sq.ft. (22,679 sq.m.) Western Approach Distribution Park is one of the South West's premier logisticslocations, lying close to Junction 22 of the M4 and junction 18 of the M5. Theunit is let to Focus DIY until March 2022 and is capable of expansion by afurther 30,000 sq ft (2,787 sq.m.) for which planning permission was granted inApril 2006. GREATER LONDON OFFICES VALUE £99MILLION RENT ROLL £4.9MILLION PA In September 2006 we launched our new Greater London Offices joint venture withBarclays Capital, following the purchase of £96million of offices at 55 OldBroad Street, London, EC2 and Central House, Camperdown Street, London, E1, bothin well established City of London locations. 55 Old Broad Street Size: 98,047 sq.ft. (5,316 sq.m.) An 11 storey office building which has 75,497 sq. ft. of offices and 22,550 sq.ft. of retail occupying a prime corner location with Old Broad Street and LondonWall in the heart of the City. The building is multi-let and by taking backselected floors and refurbishing the accommodation we are generating strongrental growth. Central House, Camperdown Street Size: 57,225 sq.ft. (5316 sq.m.) A 7 storey office building let to one of the worlds largest shipping companies,Maersk. The building is located to the South of the Aldgate Gyratory which isscheduled to see transport and public realm improvements. WHOLLY OWNED INVESTMENTS VALUE £461MILLION RENT ROLL £24.5MILLION PA The Wholly Owned Portfolio comprises 84 properties across all the major propertysectors. It is a diverse portfolio, increasingly focused toward the south east. It is a flexible and pro-active area of the Group's activities and also anincubator platform for new funds. The portfolio acquired the property assets of JS Real Estate PLC, an AIM listedproperty company with £130 million of property largely based in the south east,increasing the weighting of the portfolio in the South East from 72% to 80%. St Johns Wood High Street, London Retail size - 24,852 sq.ft. (2,310 sq.m.) This asset is the largest of those acquired from JS Real Estate. It comprises27 ground floor retail units on the west of the street which are let to a rangeof retailers, predominantly fashion outlets. An active management programmewill be initiated to re-brand and revitalize the retail offer in this affluentcatchment area. Above the retail parade are 65 residential flats that are let on a range oftenancy types. Southend-On-Sea, The Royals Shopping Centre Size - 284,649 sq.ft. (26,454 sq.m.) Acquired in November 2005, this modern shopping centre is anchored by a 122,000sq. ft. Debenhams department store, 32,000 sq. ft. TK Maxx unit which iscurrently being extended to 38,000 sq. ft. as part of our Phase I initiative and25,500 sq. ft. Boots unit. Phase II proposals to create another large retailunit are being progressed. Aylesbury, Hale Leys Shopping Centre Size - 89,662 sq.ft. (8,333 sq.m.) This is a modern town centre shopping centre originally constructed in 1983.Over the year through aggressive management the Zone A headline rent has risenfrom £80.00 Zone A to £93.00 Zone A. The scheme provides 30 units which aresubstantially let to major national retailers including Boots, Next and RiverIsland. The Group has entered into a Collaboration Agreement with AylesburyVale District Council to progress the development of a further 265,000 sq. ft.of retailing adjacent to Hale Leys designed around a new 80,000 sq. ft.department store and 50,000 sq. ft. food store. Folkestone, Bouverie Place Shopping Centre Size - 200,000 sq.ft. (18,581 sq.m.) A new shopping centre development funded by WEH and being developed by BrideHall, which includes pre-lettings of 83,000 sq.ft. to Asda, 21,000 sq. ft. toBhS, 19,000 sq. ft. to Next plus George, HMV, New Look, Peacocks and Starbucks.The scheme is programmed for completion in September 2007. Leicester, St John's House Size - 24,586 sq.ft. (2,281 sq.m.) A nine-storey multi-let office investment in Leicester's City Centre. Thebuilding is principally let to the Secretary of State for Health and otheroccupiers include NatWest Bank and RBS Plc. London, Minories Size - 25,169 sq.ft. (3,750 sq.m.) A six-storey building in the City of London purchased in May 2006. The upperfloor offices are let to Groupama UK Services Limited and the ground floorretail unit is let to Barclays Bank PLC. DEVELOPMENT Our development activity is growing both within the funds and in our WhollyOwned portfolio. We have increased the size of our in-house development teamand all projects are carefully managed to control risks associated with theircompletion. A summary of our development activity is as follows: Scheme Business Size (sq Comments Estimate Estimate Capital Unit ft) Start Date PC Investment OutlayAIF - Development Land AIF 190 acres Various schemes under consideration and / or underway, including :- 70,000 sq ft started at Q1 2007 Q3 2007 Thameside, Manchester 85,500 sq ft started at Q3 2006 Q1 2007 Quedgeley, Glos. Phase 2 80,000 sq ft, manufacturing Q4 2007 Q3 2008 facility at Quedgeley, Glos. Phase 3 93,000 sq ft Optima Park, Q1 2007 Q3 2007 Dartford Phase 2. Planning granted November 2006 38,000 sq ft, Autobase, Tipton, Q2 2007 Q4 2007 West MidlandsAIF - Chippenham AIF 50 acre Revised planning application Q3 2008 Q3 2010 existing submitted March 2007 for c £32million industrial potential retail and residential site uses. Birkenhead - The Grange Agora Maxand Pyramids ShoppingCentre Phase 2 - New retail unit Phase 2 - Proposed new retail unit at Q4 2007 Q3 2008 30,000 sq entrance to shopping centre. ft Planning granted June 2006. Phase 3 - Cafe in Phase 3 - Planning application April 2007. Q3 2007 Q1 2008Werbergh Square 3,000 sq ft Phase 4 - Mall anchor Phase 4 - Re-development of Milton Q2 2008 Q2 2010scheme 50,000 sq Pavement and introduction of new ft anchor. Birmingham - Pallasades Agora MaxShopping Centre Ladywood House 90,000 sq Office refurbishment. Q1 2008 Q2 2009 ft c £61millionNetwork Rail T.B.A. Discussions ongoing with Network - - Rail and local authority over plans for a new station and retail area above. Middleton - Middleton AgoraShopping CentrePhase 2 17,500 sq Plaza units being designed. Q4 2007 Q1 2008 ft Planning permission received June 2006.Bolton - Market Place Agora 100,000 sq Over 70% pre-let. Started on Q1 2007 Q4 2008 ft site January 2007.Preston - Fishergate Agora 190,000 sq Revised planning permission Q2 2006 Q2 2010Shopping Centre ft granted January 2007. Pre-letting negotiations ongoing. 4 phases. 2 c completed. £120million Leicester - Antalis Radial 54,000 sq Started on site March 2007. Q2 2007 Q4 2007. c £5millionExtension ft Folkestone - Bouverie Wholly 200,000 sq Forward funding, works on site. Q2 2005 Q3 2007Place Shopping Centre Owned ft 80% pre-let.Southend - The Royals Wholly 38,000 sq Extension in negotiation. Q4 2006 Q3 2007Shopping Centre - Phase 1 Owned ft (incl. existing)Aylesbury - Hale Leys Wholly 265,000 sq Collaboration Agreement signed Q1 2008 Q4 2010Shopping Centre - Phase 2 Owned ft with local authority March 2006. c Planning application to be £134million submitted July 2007. TOTALS 1.4m sq ft + 240 acres £352million* Key projects include: Bolton, Market Hall (Agora) Size - 100,000 sq.ft. (9,290 sq.m.) extension A new retail insertion within this Victorian Grade II Listed Market Hall. Newtenants secured to date include anchor units for Zara and Hennes with over 70%of the new floor space pre-let. Building works commenced in January 2007 withcompletion anticipated in Autumn 2008. The new tenants will add to theattraction of Bolton as a shopping destination and should benefit the adjacentexisting Market Place. Preston, Fishergate Shopping Centre (Agora) Size - 190,000 sq.ft. (17,651 sq.m.) extension A revised planning approval was granted in January 2007. Discussions onpre-lettings are continuing alongside the promotion of a Compulsory PurchaseOrder to secure vacant possession of the extension area (Phase 3). The schemewill add critical mass and car parking to the existing centre and is expected togenerate an uplift in the value of the existing centre. The first 2 phases completed in 2006 with lettings of new units for Lush, HSamuel and Starbucks, around the new 40,000 sq.ft. Primark Store. Aylesbury, Hale Leys Shopping Centre Phase Two (Wholly Owned) Size 280,000 sq.ft. (8,176 sq.m.) extension Negotiation of a Development Agreement with Aylesbury Vale District Council isprogressing following our appointment as chosen developer by AVDC in 2006.Discussions with a department store and supermarket anchors are underway and aplanning application will be submitted in the summer of 2007. The extensionwill help Aylesbury to capitalise more fully on its affluent catchmentpopulation connecting with our existing ownership of Hale Leys Shopping Centre. Folkestone, Bouverie Place Shopping Centre (Wholly Owned) Size - 200,000 sq.ft. (18,580 sq.m.) new development We are funding Bride Hall's development of Bouverie Place and will own the asseton completion in Autumn 2007. The scheme is anchored by a 83,000 sq ft (7,711sq m) Asda supermarket and is 80% pre-let by area. Final lettings in thedevelopment should establish reversionary rental value. Bouverie Place willcontinue the on-going regeneration of Folkestone. Birmingham, Pallasades Shopping Centre/New Street Station 'Gateway' (Agora Max)Development Network Rail, Birmingham City Council and Advantage West Midlands are promotingsignificant works to New Street Station and the Pallasades Shopping Centreabove. We are in active discussions with the consortium with a view to securinga beneficial joint venture relationship. Planning consent is expected to begranted for the consortium's scheme which has announced that works are plannedto start in 2008. There is additional potential to refurbish and upgrade Ladywood House, a 95,000sq.ft. office building over the station, for the existing occupier Secretary ofState for the Environment. Leicester, Bardon Antalis Unit (Radial) Size - 54,000 sq.ft. (5,017 sq.m.) extension The Radial Distribution Fund has agreed to extend the existing building by54,000 sq ft, to accommodate the tenant's continued expansion which, oncecompleted will consolidate Antalis' occupation into a 279,000 sq.ft. nationalfacility. The project, which incorporates 9,500 sq ft of 2-storey officeaccommodation, will complete in late October 2007 and incorporates asimultaneous lease re-gear/extension. Michael StevensProperty Director Finance Review This is another year in which there has been significant change in the financialenvironment in which the Group operates. Last year we reported for the firsttime under International Financial Reporting Standards (IFRS) which resulted inthe Report and Accounts almost doubling in size. This year we have prepared theGroup for conversion to a Real Estate Investment Trust (REIT) and converted on 1April 2007. The election, prior to the year end, to convert has meant that the2% conversion charge and the release of deferred tax no longer required areaccounted for in this year's results. We have also acquired JS Real Estate Plc(JSRE), a transaction which was completed on 14 March 2007. The net effect of the REIT election has been to increase the post-tax profits ofthe Group by £11.3million to £69.4million of which £19.8million relates to thenet deferred taxation released on conversion to a REIT and £8.5million to thenet reorganisation costs arising from REIT conversion. The full impact of therestructuring that has taken place and the implications for the Group of being aREIT are detailed under Significant Events. In addition to the post-taxprofits, which contributed £69.4million of the £83.9million increase in equityshareholders' funds to £432.7million, the other main contributors were the£21.4million of additional equity raised in January 2007 to help fund theacquisition of JSRE, the deduction of £10.7million of dividends paid in the yearand £2million in other equity movements. Significant Events 1. Conversion to a REIT In March 2007 our shareholders approved our conversion to a REIT with effectfrom 1 April 2007. In order to convert, the Group confirmed that it met theREIT tests as at conversion and undertook detailed modelling to satisfy itselfthat it was likely to do so in the future. By converting to a REIT, members ofthe Warner Estate Group will no longer pay UK direct tax on the profits andgains from their qualifying property rental businesses in the UK and elsewhere,provided that they meet certain conditions. Non-qualifying profits and gains ofthe Warner Estate Group will continue to be subject to corporation tax asbefore. The benefit the Group obtains, as long as it complies with the rules and, inparticular, continues to meet the rule that 75% of profits and assets derivefrom the property rental business, is that it is no longer liable for tax on anycurrent or future capital gains on its investment properties nor will it pay taxon its profits from its property rental business as defined under the REITlegislation; with the result being that, in future, shareholders will not sufferfrom profits being, in effect, taxed twice. The current year's accounts reflect a conversion charge at 2% of the Group'squalifying assets totalling £13.5million, of which £2.6million relates to theacquisition of JSRE. This £2.6million has been treated as part of the cost ofacquisition and the balance of £10.9million has been included within the taxcharge for the year. This 2% charge applies to the value of the Group'sinvestment properties and our share of the value of the properties held by theApia and AIF JPUTs in which the Group has 28.07% and 6.52% investmentsrespectively. In addition, where we have elected our joint ventures into theREIT regime, their results also include a conversion charge. Our share of thecharge in respect of Agora Shopping Centres Limited (Agora) and RadialDistribution Limited (Radial), both of which were REIT elected, is £2.8millionand, as a result, we have been able to release £22.3million of deferred taxrelating to contingent tax on capital gains as a tax credit. Similarly, thejoint ventures' results contain a release of £11.2million. In addition, theresults this year contain a significant number of costs and profits which havearisen specifically as a result of preparing the Group for conversion so thatthe Group can ensure that it obtains the maximum benefit from being a REIT andcan operate without being in danger of not complying with the REIT rules. The full effect of the decision to convert to a REIT in terms of the conversioncharge and the deferred tax released together with the costs and profitsconnected with the decision are summarised in the table below. £million £million REIT conversion charge (10.9)Deferred taxation released 22.3 Impact on taxation charge in income statement 11.4 Share of conversion charge payable by joint ventures (2.8)Share of joint ventures' deferred taxation released 11.2 Impact on share of joint ventures' post tax profits in income 8.4statement Net deferred taxation released on conversion to a REIT 19.8 Net cost of reorganisation of Group debt (8.7) Advisory fees on conversion to a REIT (1.4)Liquidation fees (0.2) Net cost of reorganisation of Group structure (1.6) Performance fees receivable from joint ventures crystallised 6.7Share of performance fees payable by joint ventures (3.4) Net effect of joint venture agreements review 3.3 Profits on appropriation of trading properties 0.3Taxation payable on appropriation of trading properties (1.8) Net effect of appropriation of trading properties (1.5) Net reorganisation costs on conversion to a REIT (8.5) Net impact on the profit for the year 11.3 1. Reorganisation of Group Debt The Groups debt has been reorganised so as to improve flexibility and cost, aswell as providing the Group with better interest cover as detailed in the debtsection of this review. 2. Corporate Structure As part of the process of preparing for REIT conversion, the Group implemented astrategy to create a simplified corporate structure which resulted in thirtyseven subsidiaries and twenty four joint venture companies being made dormantand liquidated or prepared for liquidation. This process proved morecomplicated than anticipated due to the REIT legislation on joint venturegroups, which was scheduled to be in place before December 2006, still not beingfinalised. As a result, in order to ensure that the Group was not exposed tounknown legislation, the Agora and Radial joint venture groups had to beconverted into single entity joint ventures at a cost to the Group of£0.1million. 3. Financial Reporting System An upgraded software system has been put in place together with a new payrollsystem to ensure that the Group can accurately report its REITable andnon-REITable profits and support this analysis. The majority of these costs of£0.2million were written off in 2006. 4. Joint Venture Agreements Prior to conversion, all the joint venture agreements, most of which had beenput in place some years earlier, were reviewed. As a result of this review anumber of the agreements were renegotiated to ensure that, in future,performance fees from joint ventures, which are non-REITable profits, arereceived annually rather than every five years or on the disposal of an asset.The aim is that, as far as possible, non-REITable profits are not affected inany one year by large one-off performance fees earned over a number of years.Under the renegotiated agreements £6.7million of performance fees from thesejoint ventures have been agreed as payable to the Group at 31 March 2007increasing this year's profit by a net £3.3million. However, no furtherperformance fees will be due under these agreements for Agora or Radial whichrun to April 2008 and December 2009 respectively. In the case of the Agora MaxJPUT all future performance fees will accrue on an annual basis. The managementfees receivable from Agora and Radial have also been agreed at 1.5% of rentalincome collected against a previous level of 5% in return for a 40bps reductionin the interest margin payable by Agora and Radial on their debt, the net effectof which is neutral in terms of the profit the Group receives. Also, as part ofthe renegotiation, it has been agreed that whilst the respective joint ventureswill pay the conversion charge of £2.8million detailed above, the Group, as theREIT, will receive 100% of the benefit of conversion. 5. Trading Properties The Group's trading properties, including those under development, have beentransferred at market values to Investment Properties and re-valued as at 31March 2007. This has led to an increase in profit on trading activities of£0.3million, an increase in tax payable of £1.8million and a 2% conversioncharge of £0.6million payable on these assets, the benefit to the Group beingthat future capital appreciation and rental income will not be taxed. 6. Investments in Funds Another result of the Group making the REIT election is to bring its holdings inthe Apia and AIF unit trusts within the REIT at an entry charge of £4.3million.The benefit of this election is that the income received from these units willnot be taxable although any future disposal of the units may be subject to tax.The treatment of the income and the assets under the rules for REIT compliancediffer between Apia and AIF as the Group's holding in Apia is greater than 20%of the units in the Fund. In Apia's case all our share of the income and assetsof this Fund count toward the REIT tests, whereas for AIF, where we hold only6.52% of the Fund, whilst the income is tax free and 90% of this income has tobe distributed, it is classified as not being qualifying income for the purposeof the 75% balance of business test under the REIT rules. 2. Acquisition of JS Real Estate PLC (JSRE) On the 26 January 2007 the Group made a recommended cash bid with a loan notealternative of 700p a share for JSRE valuing that business at approximately£114million plus costs. The purchase was to be funded by way of a placing at850p a share, of 2,517,647 new shares in the Group which raised £21.4million anda new bank borrowing facility of £90million. However, at practical completion on14 March 2007, £19.9million of the consideration was paid for by way of the loannote alternative rather than bank borrowing. The acquisition enabled the Group to purchase a South East based propertyportfolio worth £129.8million which, together with debt and other netliabilities, including the 2% REIT conversion charge of £2.6million, had a fairvalue on acquisition of £116.6million for an overall purchase price after costsof £116.7million. The difference of £0.1million has been recorded in theGroup's accounts as goodwill. If the purchase had been a straight propertypurchase then the costs paid, over and above the acquisition value, wouldtypically have been of the order of 5% to 5.75% of the acquisition value. The profit arising in the Group's accounts from this acquisition to 31 March2007 is £0.2million. Return on Capital The return on capital uses a slightly different base from that used in previousyears as the introduction of IFRS accounting, which records unrealised fairvalue movements through the income statement coupled with the Group's decision,prior to 31 March 2007, to convert to a REIT from 1 April 2007, means that theincome statement and shareholders' funds reports reflect very similar results tothe Group's previously calculated adjusted return and shareholders' triple netasset funds. Therefore, it now makes sense to use the results amended only forany remaining deferred tax and fair value movements, whilst accepting the needto take account of one off items such as the goodwill adjustment incorporated inlast year's calculation. This year however, because of REIT conversion, thereare still a number of adjustments required as shown in the table below. Return: 2007 2006 £million £million Profit for the year 69.4 74.4 Deferred tax arising on fair value gains during the year 7.5 9.2Change in fair value of fixed rate debt, net of tax 5.8 0.9 Add back REIT conversion charges 13.7 -Add back one-off costs arising from REIT conversion 8.5 -Release of deferred tax on fair value gains due to REIT (33.5) -conversionAdd back goodwill reduction on Ashtenne asset management - 17.7businessDeferred tax arising from unrealised gains (7.5) (17.2) Adjusted total return for the year 63.9 85.0 Equity shareholders' funds at start of year 350.6 272.1 Return on equity shareholders' funds 19.8% 27.3%Adjusted return on equity shareholders' funds 18.2% 31.2% The return on equity shareholders' funds was 19.8% (2006: 27.3%) and theadjusted shareholders' return, which includes the elimination of REITconversion, was 18.2% this year. The main reason for this reduced return isthat fair value gains in the Group's wholly owned portfolio and joint venturesare some £28million lower than in 2006 when the Group had also made realisedgains of £17.7million on assets sold out of the Ashtenne acquisition. Anothersignificant element of the return this year has been the reduction in the fairvalue of debt. This is due to the rise in interest rates in the second half ofthe year which impacted on the value of fixed rate debt and on hedginginstruments taken out on debt. In particular, this benefited hedges in thejoint ventures, where there are circa £357million of interest rate swaps andcaps at rates of 4.6% or below and a further £245million at between 4.6% and 5%. Results for the year ended 31 March 2007 The table below illustrates the constituent parts of the results for the yearwhich are analysed in full at the end of this review. As can be seen, recurringprofits are £18.1million (2006: £15.9million). Income Statement 31 March 2007 31 March 2006 £million £million Recurring profit before taxation 18.1 15.9Non-recurring (losses) / profits (6.5) 12.2Net fair value gains 52.7 71.0Taxation 5.1 (24.6)Profit for the year 69.4 74.5 The key features of this year's results are the impact of REIT conversion ontax, as detailed in the tax section of this review, and the profits and costsarising from preparing for conversion. Recurring profits include a net£3.3million of performance fees as a result of the renegotiation of the jointventure asset management agreements. Non-recurring losses of £6.5million (2006: £12.2million profit) include an £8.7million cost of reorganising the Group'sdebt and a £1.6million cost of reorganising the Group's structure. The othersignificant components were a reduction of £18.3million in net gains from fairvalue adjustments (revaluation increases in assets) at £52.7million and thecontribution of a full year's results from the asset management businesses forthe AIF and Apia Funds. The following summarises the key aspects of theseresults. Recurring Profit 31 March 2007 31 March 2006 £million £million Property investment and other income 23.1 28.6Net contribution from joint ventures 4.4 (1)5.5Net income from fund asset management activities 4.4 2.2Head office costs (1.6) (2)(8.0)Net interest payable (12.2) (12.4) 18.1 15.9 Of which performance fees: Funds 1.8 1.3 Joint ventures(3) 3.3 1.0 5.1 2.3 (1) This includes £0.8m of profits from the AIF fund management business whilst it was owned through Industrial Funds Limited as a 50% joint venture. (2) Head office costs were not reallocated across the different businesses in 2006. (3) This represents the performance fee receivable less our share of the performance fee payable by the joint ventures. A straight comparison between the returns from each of the above activities isdifficult because Head Office costs were not reallocated across the variousactivities in 2006. However, a best estimate would apportion £3million of thecosts against property investment, £1.3million against fund asset management and£1.6million against the joint ventures. Taking this into account the profitfrom property investment and other income fell by £2.5million as rental incomefell by some £2.7million despite the portfolio increasing by a net £106million,including £170million of acquisitions, to £462million. This apparent anomaly isdue to the fact that £130million of the purchases were acquired via JSRE inmid-March 2007 whilst the majority of the £70million of disposals occurred muchearlier in the year. The rent roll as at 31 March 2007 was £24.5million (March2006 £21.2million). In addition, property costs increased by £1.1million, dueto increased costs on rent renewals and new lettings, a significant element ofthis being surrender premiums paid on lease terminations, together with a risein void costs. Other income is up £1.1million to £6.2million including£6million received from the Group's investments in the AIF and Apia fundscompared to £3.8million in 2006 when the Group had only held these investmentsfor part of the year. Using an annualised comparison for 2006, the incomereceived from these investments showed a year on year growth of 12%. Thedecline in income from other sources is mainly due to the disposal of theGroup's investment in East Surrey Holdings Plc in 2006. The results of the joint ventures include our share of recurring profits,performance fees and asset management fees. Within this, the Group's share ofthe joint ventures' loss was £2.8million which arose due to £6.7million ofperformance fees being charged by the Group to the Agora Max and Agora jointventures without which the Group's share of the joint ventures would have been aprofit of £0.5million. This is a direct result of the renegotiation of themanagement agreements with the Agora Max, Agora and Radial joint venturesreported in the section on conversion to a REIT above. The net effect of thisis that the Group's recurring profit is £3.3million higher this year. The other major change is the increased contribution from the fund managementbusiness. Non-recurring (Losses) / Profit 31 March 2007 31 March 2006 £million £million Profit on sale of investment properties and investments (Group and 3.1 10.9joint ventures)Profit on sale of trading properties (Group and joint ventures) 1.1 7.0Costs relating to conversion to a REIT (Group and joint ventures) (10.3) -(1)Other net non-recurring costs (Group and joint ventures) (0.4) (5.7) (6.5) 12.2 (1) This includes £8.7million of debt reorganisation costs. This year's results contained a significant number of one-off costs that relatedirectly to the preparation for REIT conversion with other one-off costs beingnegligible. In addition, the Group disposed of the majority of its listedinvestments for a profit of £1million in the year. Net Fair Value Gains 31 March 2007 31 March 2006 £million £million Net gain from fair value adjustments on investment properties (Group 28.9 56.0and joint ventures)Net gain from fair value adjustments on investments in funds (Groupand joint ventures)AIF 6.0 4.7Apia 10.9 11.1 16.9 15.8 Net (loss)/gain from fair value adjustments on other investments (2.8) 1.2Change in fair value of derivative financial instruments (Group and 9.7 (2.0)joint ventures) 52.7 71.0 There are three significant changes this year, firstly the reduction in the fairvalue gains arising in the year which was £28.9million compared with £56millionlast year, secondly the reduction in the value of the investment in Bride Hallby £3million to £12million, which is included in other investments and finallythe positive benefit arising from the change in the value of the Group's hedginginstruments arising from the increase in UK interest rates. Taxation This year, due to the decision to convert to a REIT, the explanation of theGroup's taxation is not straight forward. The REIT charge of £10.9million payable by the Group and £2.8million payable bythe Joint Ventures has enabled the release of deferred tax provisions held onproperties of £22.3milllion and £11.2million respectively. The Group has alsohad to pay a £2.6million REIT charge on the acquisition of JS Real Estate, butthis has been treated as an acquisition cost and offset against goodwill. TheJS Real Estate REIT charge has enabled approximately £19million of potentialcapital gains to be extinguished. Included in the £10.9million Group REIT charge is a £4.3million conversion feeon our holdings in the AIF and Apia funds. This charge enables distributionsreceived from these two funds to be treated as REIT income and therefore exemptfrom corporation tax. However, the asset value of these holdings are treated asnon- REIT under the REIT assets test and so remain liable for capital gains taxwhich is the main reason for the continuance of a deferred tax liability. The table below shows the taxation charge and effect of the above: 31 March 2007 31 March 2006 £million £million Current taxation (Group and joint ventures) (4.6) (15.7)Deferred taxation movement during the year(1) (10.1) (8.9)REIT conversion charge (Group and joint ventures) (13.7) -Release of deferred taxation due to REIT conversion 33.5 - 5.1 (24.6) Of which Group (see reconciliation below) 1.7 (16.5) Joint Ventures 3.4 (8.1) (1) This relates to deferred taxation remaining on our balance sheet onthe fair value gains on the investment in funds and listed investments, as wellas our share of fair value gains in Agora Max and Greater London Offices, whichhave not been elected for REIT status. In addition there is deferred taxationon the fair value adjustments on derivatives and on the cost of share basedpayments. The current year tax charge has also been reduced due to loan breakage costs onthe redemption of the 2015 Debenture Stock and also as a result of theresolution of the prior year's tax charge. The table below shows the tax reconciliation for the last two years: RECONCILIATION OF TAX CHARGE 2007 2006 £million £million Profit on ordinary activities before taxation 67.8 91.0 Tax @ 30% 20.3 27.3Share of joint venture and associate post tax profits (8.1) (6.6)Net tax on assets sold during the year (1.5) (0.4)Net capital allowances on asset disposal (1.9) (4.3)Share scheme timing differences (0.3) 0.7Disallowable expenses 0.8 0.3Other - (0.2)REIT election - elimination of deferred tax balances (18.3) -REIT conversion charge 10.9 -Tax on properties appropriated to investment properties 1.8 -Net tax movement on fair value gains of assets (2.5) 0.6Over provision in respect of prior years (2.9) (0.9)Total tax (credit) / charge in the accounts (1.7) 16.5Of which: Current tax 5.2 12.8 Deferred tax (17.8) 3.7 REIT conversion charge 10.9 - Fund Management This business now manages £1.8billion (2006: £1.4billion) of assets and hasseven regional offices which employ 121 people (2006: 102 people) of which 31(2006: 20) are service charge recoverable. The two funds have four andfourteen years respectively to run. 2007 2006Personnel of which of which service service chargeable chargeable Total Total Ashtenne Industrial Fund (AIF) 90 31 67 20Apia Regional Office Fund 4 - 5 -Finance 27 - 30 - Total 121 31 102 20 Fund management income statement Annualised 31 March 2007 31 March 2006 £million £million Asset management and other fees 11.3 8.0 Costs (6.8) (5.2)Head Office recharges (1.9) (1.9) 2.6 0.9 Performance fees 1.8 1.3 4.4 2.2 AIF Asset Management Income statement 2007 2006 Unaudited Pro Forma Results Actual 12 included in Months (a) Financial 01/04/2005 Statements To 31/03/2006 £'000 £'000 Asset management fees 5,477 4,440Letting and other fees 4,063 2,296 Total fees 9,540 6,736Costs (5,837) (4,565)Head Office charges (1,628) (1,600) Profit before performance 2,075 571feesPerformance fees - 1,324 Recurring profit 2,075 1,895Notional tax charge @ 30% (622) (569) 1,453 1,326 Group investment in AIFDistributions from fund 2,838 3,058Value of units at 31 March 44,828 38,5722007% share of fund 6.52% 7.09%Yield on holding 6.33% 7.93% (a) This business was only owned for ten months last year and for seven of those only through IFL a 50% joint venture. Annualised comparative numbers have been used as this business was only ownedfor 10 months last year and for seven of those as a joint venture. A bestestimate of the Head Office recharge has been used for the 2006 results. On this basis, total fees earned by this business increased by 42% year-on-yearwith the profit before performance fees and the Head Office recharge being some71% higher at £3.7million as a result of operating margins rising to 39% from32%. However, despite the Fund managed by this business returning a record27.7% return in the year, no performance fees were earned. Negotiations are inhand to review the formulae for the performance fee assessment and to extend thelife of the Fund which currently has four years to run. This business is carried in the Group's accounts with a goodwill of only£11million due to the surpluses made on the disposal of assets purchased as partof the acquisition being accounted for as a reduction in goodwill. This yearthis business made a profit of £2.1million before tax which on a notional taxcharge of 30% equates to a P/E of 7. Apia Asset Management Income statement 2007 2006 Unaudited Pro Forma Results included Annualised in the Financial results for Statements 12 months (based on 10 months Accounts) £'000 £'000 Asset management fees 1,830 1,241Costs (927) (640)Head Office recharges (312) (300) Profit before performance fees 591 301Performance fees 1,776 - Recurring profit 2,367 301Notional tax charge @ 30% (710) (90) 1,657 211 Group investment in ApiaDistributions from fund 3,130 2,263Value of units at 31 March 2007 74,817 64,374% share of fund 28.07% 28.78%Yield on holding 4.18% 3.52% In order to understand the full impact of this business this year thecomparatives are annualised numbers as the Fund was only formed in early June2005. Also a best estimate of an annualised recharge of Head Office costs hasbeen used for the 2006 results. In the year to March 2007 the business earned £1.83million in management fees,an increase of 47% on a year-on-year basis with an operating margin, before HeadOffice recharges, of 49% compared with 48% last year. The profit before tax was£2.4million, which included £1.8million of performance fees. There were noperformance fees in the year ended 31 March 2006 as the Fund had beenestablished for less than a year. The Group's accounts and therefore the NAV do not include any value for the ApiaFund Management business which was set up some eighteen months ago. This isbecause the business was established in-house rather than purchased from a thirdparty. Management Fees The table below briefly summarises the main terms on which the Group receivedits management fee income from each of the funds. Management Management Property Year Fee % Fee % Valuation Rent RollName End Property Rent Other Fees Performance Fees 31 March 2007 31 March 2007 AIF 31/12 0.5% N/A Lettings, Based on outperforming the IPD £1,271.9million £70.7million (a) rent all industrial index on a 3-year reviews, rolling basis disposals, additions etc Apia 31/12 0.4%(b) N/A N/A Based on outperforming the IPD £501.1million £28.0million (a) regional office index (excluding business parks) on a 3-year rolling basis (a): The performance fees in these Funds are receivable in the second half of the Group's financial year to 31 March as the fees are calculated on the results of the Funds for the year to 31 December. (b): The Apia management fee reduces to 0.35% on the property assets managed between £0.5billion and £1.0billion and to 0.3% on the property assets managed over £1.0billion. Joint Ventures This business now manages £1billion (2006: £0.73billion) of assets employing 30people (2006: 28) of which 16 are service charge recoverable. There are fourjoint ventures which have between one and fourteen years to run. Ahead of itselection for REIT status, discussions took place on the life of the AgoraShopping Centre joint venture, which has one year to run, and it was agreed inprinciple that this joint venture would be extended. 2007 2006Personnel of which of which service service charge charge Total recoverable Total recoverable Agora Max Shopping Centre Fund 8 6 9 6Agora Shopping Centre Joint Venture 17 10 16 10Radial Distribution Joint Venture 2 - 1 -Greater London Offices Joint Venture 1Finance 2 - 2 - Total 30 16 28 16 These joint ventures earned the Group net fees of £94.7million (2006:£42.5million) including performance fees of a net £3.3million (2006;£1.0million). The terms on which the Group currently earns fees and will earn infuture are detailed below The other main change in the year was the formation of the Greater LondonOffices joint venture. This joint venture was established with Barclays Capitalin September 2006 and purchased two central London properties for £96.5million. Management Fees The table below summarises the main terms on which the Group received itsmanagement fee income from each of the joint ventures in the year to 31 March.The joint venture agreements in respect of Agora Max, Agora and Radial have beenrenegotiated and the new terms are detailed in the notes below. Management Management Property Valuation Year Fee % Fee % Rent RollName End Property Rent Other Fees Performance Fees 31 March 2007 31 March 2007 Agora Max 31/03 N/A 5% N/A Based on exceeding an IRR of 20% £327.6million £16.7million over the life of the funds or on disposal. This has been renegotiated with effect from 31 March 2007(a)Agora(b) 31/03 N/A 5% Based on exceeding an IRR of 20% £256.1million £12.1million over the life of the funds or on disposal Radial(c) 31/03 N/A 5% N/A Profit share at end of joint £303.7million £18.3million ventureGreater 31/03 N/A Fixed N/A N/A £98.9million £4.9millionLondon £65kpaOffices(d) (a) A fee of £3.7million was agreed as the performance fee receivable as at 31 March 2007. In future, the performance fee will be charged annually, subject to clawback, based on exceeding a 20% IRR. (b) A fee of £3.0million was agreed as the performance fee receivable as at 31 March 2007. The current joint venture agreement ends in early March 2008 and no further performance fees will arise in the period remaining.(c) The profit share agreement has been cancelled as part of the renegotiation of the asset management agreement.(d) The fees receivable under the management agreement have yet to be concluded pending the finalisation of the REIT legislation in respect to joint ventures. Earnings per Share Earnings per share were 129.3p (2006: 140.2p) and recurring earnings per sharewere 30.5p (2006: 22.9p). Earnings per share include the fair value gains onproperties and investments of 121.1p (2006: 103.8p) and one-off losses of 22.3p(2006: 13.5p profits) which are excluded from recurring earnings. Cashflow March 2007 March 2006 £million £million £million £millionCash generated from operations 6 25Net interest (19) (8)Tax (11 (11)Cash flows from operating activities (24) 6Acquisitions (128) (160)Disposals 59 152Dividends received 8 9Cash flows from investing activities (61) 1Issue of shares 21 14Net repayment of bank loans (68) (92)Dividends (11) (10)Other cash flows - 1Cash flows from financing activities (58) (87)Net cash (outflow) / inflow (143) (80) Balance Sheet As at 31 March 2007, shareholders' funds were £432.7million (2006:£350.6million), an increase of 17% excluding the impact of the additional equityof £21.4million which was raised through a placing in January 2007. Theunderlying elements of the growth in equity shareholders' funds is analysed in the table below. Pence per £million share Equity shareholders' funds at 31 March 2006 350.6 660.3Change in number of shares in issue (33.3) 627.0Movement in the year to 31 March 2007Profit before fair value gains 11.6 20.7Net fair value gains 52.7 94.3Taxation - current (4.6) (8.2)Taxation - deferred 23.4 41.8REIT conversion costs (13.7) (24.5) Profit for the year 69.4 124.1 Other equity movementsShares issued 21.4 38.3Dividends paid (10.7) (19.2)Investment in own shares 0.2 0.4Share based payments reserve 1.8 3.2 Equity shareholders' funds at 31 March 2007 432.7 773.8 As shown in the table below, the equity shareholders' funds have been adjustedfor the remaining deferred tax on fair value gains on the Group's investment inApia and AIF along with our share of the fair value gains in Agora Max andGreater London Offices which have not been elected for REIT status. The Groupdoes not anticipate this deferred tax to materialise. In addition, we haveadjusted for the fair value on fixed rate debt which is not included on thebalance sheet along with the final proposed dividend which is also excluded. As stated earlier in this report, as part of the conversion to a REIT, weelected for our trading and development properties to be treated as investmentproperties which resulted in a taxation charge. However, in the case of ourdevelopment at Folkestone, under the current accounting rules, the property mustbe held at cost until the development reaches practical completion and, althoughthe income statement includes a current taxation charge of £0.3million, a REITconversion charge of £0.4million, which reduces net assets by £0.7million, wehave not been able to include the fair value gain in the accounts as at 31 March2007. We have therefore shown the effect on net asset value of this fair valuegain of £1.2million at 31 March 2007 in the table below. These adjustments result in an adjusted net asset value per share of 800.2p.This would have increased to 845.8p per share if the costs of conversion to aREIT had been eliminated. 31 March 2007 31 March 2006 £million Pence per £million Pence per share shareEquity shareholders' funds 432.7 773.8 350.6 660.3 Add back deferred tax on fair value gains (including 19.0 34.0 42.9 80.8JVs)Add / (less) fair value adjustments on fixed rate 0.7 1.3 (5.1) (9.6)debt, net of taxLess proposed dividend (6.2) (11.0) (5.3) (10.0)Add fair value gain on Folkestone 1.2 2.1 - -Adjusted equity shareholders' funds 447.4 800.2 383.1 721.5 Add back REIT conversion charge 13.7 24.5 - -Add back one-off costs arising from REIT conversion 11.8 21.1 - - Adjusted equity shareholders' funds pre REIT 472.9 845.8 383.1 721.5conversion costs Bride Hall In previous years we were required to equity account for this investment as anassociate but we have now renegotiated our equity holding to ensure we are notable to exert significant influence and we have therefore reclassified ourinvestment as "investments in listed and unlisted shares" (See notes 18 and 19to the Financial Statements). As explained in the Net Fair Value Gains sectionabove, the value of this investment has reduced by £3m to £12m during the year. Leasehold Liability Portfolio The balance sheet includes £5million (£12million at acquisition) in respect ofliabilities acquired with the portfolio of properties purchased in December 2005from the Co-operative Insurance Society. Since purchase, this liability hasbeen reduced by £7million which represents the net payments of liabilities toMarch 2007. At the start of this process, there were 105 separate leaseholdliabilities which had been reduced to 34 by 31 March 2007. The Group hasreassessed the value of these liabilities at March 2007 using a model that hasbeen used since the purchase of this portfolio of liabilities to assess itsvalue and remains of the opinion that the value at which the liability wasacquired, less subsequent payments, remains unchanged and no profit or loss hasbeen recorded. Contingent Assets As advised above in the section on Conversion to a REIT, the joint ventureagreements have been renegotiated and the potential £6million of performancefees which were previously reported in the accounts to March 2006 as contingentassets arising over the next two to three years have now been crystallised. Borrowings Debt Total net borrowings for the Group at the year end, including £19.9million ofloan notes issued to acquire JSRE, were £296.6million (2006: £185.6million) andare summarised in the table below. Since the year end, net debt has increasedby £39million to fund the acquisition of two properties for the wholly ownedproperty portfolio, increasing net debt to £336million and raising net gearingon adjusted equity shareholders' funds at the year end from 66% (2006: 48%) to75% currently. On balance Share of joint Share of sheet ventures funds Total £million £million £million £million Net short-term debt 11.4 59.4 (5.1) 65.7Long term debt 285.2 262.4 95.8 643.4 Total net debt at 31 March 2007 296.6 321.8 90.7 709.1 Of which:Total net recourse debt 271.0 - - 271.0Long-term non-recourse debt 25.6 321.8 90.7 438.1 Gearing (on adjusted shareholders' funds) 66% 158%Recourse gearing 61% 61% Total net debt at 31 March 2006 185.6 260.2 87.8 533.6Gearing (on adjusted shareholders' funds) 48% 138%Recourse gearing 35% 35% The Group's average cost of debt at the year end was 6.18% (2006: 6.07%).Whilst the margin at which the Group borrows has reduced and high interest fixedrate debt cancelled the effect of the £90million 3.5% callable swap beingcancelled in the year and underlying interest rates rising has resulted in thissmall increase. During the year the Group carried out a substantial reorganisation of itsborrowing facilities so as to provide it with more flexible and cheaper sourcesof funds. Specifically, the Group redeemed two term loans totalling £44millionat a cost of £0.9million of which £0.2million was in respect of the break costsand the balance a write off of a fair value adjustment. One loan was with Bankof Scotland, which had a blended rate of interest of 5.5% plus a margin of 1%and the other was with The Royal Bank of Scotland, which had interest set atLIBOR plus a margin of 1%. Both these loans were replaced by increasing therevolving credit facility with The Royal Bank of Scotland from £100million to£135million and the margin was reset to 60bps from the previous margin of 80bps. The Group also extended its Barclays three year revolving facility from£60million to £90million at the same margin as previously of 60bps. Finally, inMarch of this year, the £10million 11.655% debenture and the £12.5million 9.635%debenture held with the Prudential were repaid at a break cost of £7.8millionand replaced by a new £60million three year revolving credit facility with Bankof Scotland at a margin of 60bps. The interest cost of £2.37million p.a. on thedebentures has been reduced by approximately £0.7million p.a. after takingaccount of the additional interest payable on the break cost of £7.8million. Ofthe total costs of £8.7million in respect of these loans the fair value in thenotes to the accounts at 31 March 2006 was £7.3million of which £8.3millionrelated to this debt. The overall effect of these changes, after taking intoaccount the associated break costs and facility fees, is to reduce the Group'sinterest costs on an ongoing basis by approximately £1.5million p.a. at currentborrowing levels. These savings on the margins the Group pays over and abovethe headline rate of interest on the Group's debt will be reduced by the impactof interest rate rises where every 25bps rise in LIBOR increases the Group'sinterest rate burden by approximately £0.5million p.a. until the 6.25%£150million cap is reached when the impact falls to approximately £0.2millionp.a. In addition to the above, the Group funded the acquisition of JSRE by way of ashare placing that raised £21million and a new £90million dedicated facilitywith The Royal Bank of Scotland at a margin of 60bps. This facility iscurrently only drawn to £77million as shareholders in JSRE elected to take£20million of consideration in the form of redeemable loan notes rather thancash. The overall effect of this transaction on the Group's loan to value andincome cover ratios at the year end is set out below: Pre - JS RE Post - Acquisition Acquisition Acquisition £million £million £million Net Debt 203.5 93.1 296.6Property 331.6 129.8 461.4Loan to Value % 61.4% 71.7% 64.3% Rental Income 22.2 6.8 29.0Interest Payable 10.5 5.4 15.9Income Cover 2.11 1.26 1.82 Since the year end, £4.1million of debt in JSRE, which had a blended rate of7.33%, has been redeemed using surplus cash from within JSRE. The dedicated financing line of £25million with Anglo Irish Bank PLC to fund thedevelopment of a new shopping centre at Folkestone has been extended to£27.75million to the end of November 2007. At 31 March 2007, £16.3million ofthis facility had been drawn down. The Group had un-utilised facilities at 31 March 2007 of £64million (2006:£44million), which are sufficient to meet our working capital requirements. In the joint ventures, Agora Shopping Centres and Radial Distribution Fund wereincluded as part of the REIT election and the margins on their debt were reducedby 40bps. The Agora Shopping Centre joint venture is financed as to 57% by debtand 43% equity and rental income covers interest 1.4 times. It has a dedicatedfunding line of £35million in place to facilitate the development of the BoltonShopping Centre. In Radial, a second facility was put in place during the yearfor £120million which will allow property to be acquired up to a value of£150million. This facility has already been utilised by more than 60%,acquiring property of £95million. At 31 March 2007, the Radial joint venturehad a loan to value ratio of 73% and rental income covered interest 1.4 times.The Agora Max joint venture is funded 71% by debt and 29% equity and rentalincome covers interest 1.2 times. The Agora Max joint venture is partiallyfunded by debt as well as equity from the partners. This has been excluded fromthe Group debt information. The Greater London Office joint venture wasestablished during the year. It had debt of £72.2million as at 31 March 2007and is financed 73% by debt and 27% equity and rental income covers interest1.26 times. At 31 March 2007, the Group held investments in the Apia Regional Office Fundand the Ashtenne Industrial Fund amounting to 28.1% and 6.5% respectively. Asat that date, Apia had debt of £237million with property under management ofmore than £500million and AIF had debt of £445million with property undermanagement of more than £1.1billion. Both Funds have loan-to-value ratios ofless than 50% and have 2.2 and 2.4 times rental income to interest coverrespectively. Hedging The interest rate exposure on the Group's debt is managed to ensure that thereis a balance between flexibility and certainty. In terms of the Group debt, theGroup put in place £200million of new hedging against Group debt during the yearcomprising a £150million 5-year cap at 6.25%, put in place at a cost of £881k,to replace the £100million cap at 7.25% which matures in June 2007 and two£25million 25-year cancellable swaps, one of which is effective from 31 March2007 at a rate of 4.34% and callable by the bank every two years thereafter, theother is effective from 31 March 2008 at a rate of 4.16% with the first call at31 December 2009 and then every two years thereafter. The cancellable swapshave a blended rate of 4.25% and have been staggered so that there are differentcall dates. The Group intends to put further swaps in place at the appropriatetime to build up 80% to 90% of cover on the floating rate debt. The intentionis that these swaps will have different maturity and call dates, therebyensuring that if any one of the swaps is called there will still be more than75% of cover on the floating rate debt. At the start of the year, we had four fixed rate loans, totalling £93million.As advised above, three of these with a face value of £66.5million were redeemedduring the year. As a result at the year end there was only £39.7million offixed rated debt together with swaps of £46million and a cap of £100millionproviding coverage of 57% of the floating rate debt. When combined, the totalamount of hedging and fixed rate debt comprises 63% of the total Group debt.During the year, a 10 year cancellable swap effective from 31 March 2006,whereby the interest charge was fixed at 3.5% for the first six months to 30September 2006 and thereafter at 4.19% for the remaining 91/2 years, was calledby the Bank on 31 December 2006. Group Share of JointNet Debt as at 31 March 2007 on Balance Sheet Ventures £million £million Fixed rate debt 39.7 -Floating rate debt 256.9 321.8 296.6 321.8Percentage of floating rate loans at 31 March 2007 Covered by swaps 18% 70% Covered by caps 39% 23% 57% 93%Percentage of floating rate loans at 31 March 2006 Covered by swaps 91% 75% Covered by caps 9% 25% 100% 100% In respect of the Group's share of £643.0million of net debt in the jointventures, approximately one quarter is fixed at 4.1% by two swaps, £95million isfixed by a swap at 4.96%, £109.5million is fixed by a swap at 4.5775% andanother £72million is fixed by two callable swaps at 4.49%. There are twoenhanced collars, the first for £124million is capped at 5.0% and the second for£27million is capped at 5.5%, leaving approximately £40million uncovered. Thefavourable rates obtained for the hedges in the joint ventures means that thefair value adjustments for the hedging in the joint ventures equates to£2.3million in Agora, £2.4million in Radial, £1.9million in the Greater LondonOffices joint venture and £13.1million in Agora Max. Both of the Funds, Apia and AIF, were more than 80% covered through acombination of swaps and caps as at 31 March 2007. Post Balance Sheet Events There have been no material post balance sheet events that require adjustment.A list of the material, though non-adjusting events and transactions, are notedin the Significant Events post 31 March 2007 section following this report. Business Risks The Group regularly reviews business risks with the aim of ensuring that the keycontrollable risks faced by the Group are kept to a minimum and a comprehensiverisk matrix is utilised. Risks that are outside our control, particularlylegislative, the Group, and industry in general, can do little to mitigate. This year the Group has continued to expand with another corporate acquisition,the establishment of a Greater London Office joint venture and, through theAshtenne Industrial Fund, a joint venture with the North West Development Agencyand converted to a REIT on 1 April 2007. As part of this process the Group hasappointed a senior executive as a REIT Compliance Officer, commenced recruitmentfor a Health & Safety executive, carried out a comprehensive update of itsaccounting, property and payroll software for REIT compliance purposes,reorganised the Group's debt and simplified the Group's corporate structure. Inaddition the Group's internal financial reporting has been modified to ensurethat compliance with the REIT rules is monitored on a regular basis. The Group's internal auditors, Grant Thornton, have carried out a number ofinvestigations during the year under the direction of the Audit Committee and athree year rolling programme has been established based upon the Group's riskmatrix which was updated in April 2007. The reports prepared to date haveidentified some issues on which the Group has taken action but none of whichwere of a material nature. There are a number of areas where the Group faces key business risks which, withthe exception of the need to comply with the REIT rules, remain those previouslyoutlined namely:- The asset management business where there is a need to perform to certain agreedstandards if contracts are to be retained. Equally, above average fund businessperformance secures for the Group potentially significant performance fees aswell as the opportunity to further expand this profitable business. The key financial risks arising in the business are liquidity, interest rate andmarket price risks. Liquidity risk is managed by ensuring that there is alwayssufficient headroom available to meet the working capital requirements of thebusiness. The interest rate and market price risk is managed by the use offinancial instruments such as swaps and caps to reduce the exposure to interestrate and market price fluctuations. This provides certainty over the amount ofinterest payable both in the short-term and in the long-term, given the currentlevel of borrowings. The Group has had to become much more proactive as a result of the continuingrapid expansion of the business. The broad nature of this expansion has ensuredthat the Group's spread of property activities should provide protection fromshort term changes in individual property sectors. Even so, the Group iscurrently looking at the new property derivatives market to ascertain whetherfurther protection from adverse movement in individual property sectors can beput in place. Furthermore, should there be a very significant increase inproperty yields, something the Group does not currently anticipate, thefinancial strength of the Group, the lack of any pressure on borrowing covenantsand the financial hedging that the Group undertakes should ensure that the Groupcan cope with such an eventuality. On the legislative front, as highlighted in previous year's accounts, thereporting pressures continue to mount with the passing of the 2006 Companies Actand the implementation in February 2007 of the Transparency Directive. Aparticular example of the cost of this ever changing and increasing burden beingthe fact that in the case of the JSRE acquisition the original offer included anelement of shares which a year ago would not have required a prospectus. Thischanged last summer and as a result the Group had to place the shares for cashto institutional investors as the cost of a prospectus was prohibitive. Profit Analysis - Year to 31 March Joint Property2007 Ventures Investment Head (our 50% & Other Office Asset share) Income Costs(i) Management Sub Total Total Under Management Wholly OwnedAsset value £'000 £'000 £'000 £'000 £'000 £'000 100% of Properties Managed / Owned 1,773,000 986,300 2,759,300 461,300 - 3,220,600 IncomeRental and similar income - 28,275 28,275 25,776 - 54,051Asset management fees receivable 11,370 2,569 13,939 - - 13,939Asset management fees payable - (1,229) (1,229) - - (1,229)Performance fees receivable 1,776 6,708 8,484 - - 8,484Performance fees payable - (3,354) (3,354) - - (3,354)Expenses (8,704) (10,511) (19,215) (8,877) (1,581) (29,673) Recurring operating profit 4,442 22,458 26,900 16,899 (1,581) 42,218Investment income - - - 6,199 - 6,199Interest receivable/(payable)(ii) - (18,059) (18,059) - (12,249) (30,308) Recurring profit 4,442 4,399 8,841 23,098 (13,830) 18,109 Net gain from fair value adjustments - 17,707 17,707 11,198 - 28,905on investment propertiesNet gain from fair value adjustments - - - 14,124 14,124on investmentsChange in fair value of derivative - 8,713 8,713 - 1,011 9,724financial instrumentsProfit on sale of investment - 374 374 1,751 - 2,125propertiesProfit on sale of investments - - - 987 987Profit on sale of trading properties - - - 1,055 - 1,055Non-recurring income / (expenses) - (235) (235) 396 (10,865) (10,704) Profits before tax including joint 4,442 30,958 35,400 52,609 (23,684) 64,325ventures and associatesTaxation including joint ventures - 483 483 - - 483and associates - currentTaxation including joint ventures - 5,727 5,727 - - 5,727and associates - deferredREIT conversion charge - (2,796) (2,796) - - (2,796)Minority interests - 15 15 - - 15 Profit before income tax 4,442 34,387 38,829 52,609 (23,684) 67,754 Percentage of recurring operating 10.4% 53.2% 63.6% 40.0% (3.6)% 100.0%profit Being:Share of joint ventures' post tax 27,157profitsAsset management fees receivable 2,569Performance fees receivable 6,708Asset management expenses (3,513)Interest receivable 1,466 34,387 Note: (i) The Head Office expenses have been reapportioned across each of the business activities using the model that was prepared for the REIT conversion. In terms of salary costs, these are specific recharges but other costs are an apportionment based upon the salary cost recharge. (ii) The interest costs within the Group have not been reapportioned to reflect the cost of the Group's equity investments in the funds and joint ventures. Profit Analysis - Year to 31 March Joint Property2006 Ventures Investment Head Asset (our 50% & Other Office Management share) Sub Total Income Costs (i) Total Under Management Wholly OwnedAsset value £'000 £'000 £'000 £'000 £'000 £'000 100% of Properties Managed / Owned 1,403,000 729,000 2,132,000 355,000 - 2,487,000 IncomeRental and similar income - 22,168 22,168 24,003 - 46,171Asset management fees receivable 3,064 6,188 9,252 - - 9,252Asset management fees payable - (3,005) (3,005) - - (3,005)Performance fees receivable 1,324 1,947 3,271 - - 3,271Performance fees payable - (973) (973) - - (973)Expenses (2,193) (5,295) (7,488) - (8,003) (15,491) Recurring operating profit 2,195 21,030 23,225 24,003 (8,003) 39,225Investment income - 491 491 4,610 - 5,101Interest receivable/(payable)(ii) - (15,981) (15,981) - (12,461) (28,442) Recurring profit 2,195 5,540 7,735 28,613 (20,464) 15,884 Net gain from fair value adjustments - 28,915 28,915 27,101 - 56,016on investment propertiesNet gain from fair value adjustments - 1,063 1,063 16,050 - 17,113on investmentsChange in fair value of derivative - (2,016) (2,016) - (72) (2,088)financial instrumentsProfit on sale of investment - 4,700 4,700 3,102 - 7,802propertiesProfit on sale of investments - 77 77 3,024 - 3,101Profit on sale of trading properties - 420 420 6,583 - 7,003Non-recurring expenses (578) (2,229) (2,807) - (2,948) (5,755) Profits before tax including joint 1,617 36,470 38,087 84,473 (23,484) 99,076ventures and associatesTaxation - current - (2,772) (2,772) - (110) (2,882)Taxation - deferred - (5,238) (5,238) - - (5,238) Profit before income tax 1,617 28,460 30,077 84,473 (23,594) 90,956 Percentage of recurring operating 5.6% 53.6% 59.2% 40.8% 100.0%profit Being:Share of joint ventures' post tax 21,291profitsAsset management fees receivable 3,001Performance fees receivable 1,947Asset management expenses (1,319)Interest receivable 3,540 28,460 Note: (i) The Head Office costs have not been recharged across the different businesses as the analysis was not available in 2006. (ii) The interest costs within the Group have not been reapportioned to reflect the cost of the Group's equity investments in the funds and joint ventures. Peter CollinsFinance Director Significant events during the year ended 31 March 2007 Date Detail Category April 2006 Purchase of Alpha 1 at Hams Hall National Distribution Park, Joint venture Birmingham by Radial Distribution joint venture for £17.62million May 2006 Purchase of 24-26 Minories, London EC3 for £10.85million Group Investment Property September 2006 Sale of industrial portfolio to Ashtenne Industrial Fund for £41.85 Group Investment million Property September 2006 Establishment of the Greater London Office Fund, a joint venture with Joint venture Barclays Capital, and the purchase of 55 Old Broad Street, London EC2 and Central House, Camperdown Street, London E1 for £96.5 million September 2006 Purchase of Howdens Joinery Distribution Warehouse, Brackmills Joint venture Industrial Estate, Northampton by Radial Distribution joint venture for £41.7 million September 2006 Purchase of Marks & Spencer Distribution Unit, Radial Point, Stoke on Joint venture Trent by Radial Distribution joint venture for £14.3 million October 2006 Purchase of Unit 1E, DIRFT, Daventry by Radial Distribution joint Joint venture venture for £17.95 million October 2006 Repayment of £25.5million term loan with Bank of Scotland Group October 2006 Company joins the FTSE 250 for the first time Group December 2006 Launch of Norwebb PP, a public private partnership between Ashtenne Funds Industrial Fund and Northwest Regional Development Agency for a portfolio of commercial properties situated across the North West region December 2006 Purchase of Unipart unit, Magna Park, Lutterworth by Radial Joint venture Distribution joint venture for £18.25 million January 2007 Significant pre-lets announced for Agora's £40 million addition at Joint venture Market Place Shopping Centre, Bolton January 2007 Purchase of New Castle House, Nottingham by Apia Regional Office Fund Funds for £15.3 million January 2007 4.7% placing of shares in Warner Estate Holdings PLC to part finance Group the acquisition of JS Real Estate Plc February 2007 Announcement of 54,000 sq ft extension of the Antalis unit at Joint Venture Interlink Park, Leicestershire, owned by Radial Distribution February 2007 Strategic purchase of the Miltons Pub long leasehold interest Joint Venture adjacent to Pyramids and Grange Shopping Centre, Birkenhead by Agora Max joint venture for £300,000 March 2007 Offer to acquire JS Real Estate Plc is declared unconditional Group March 2007 Two First Mortgage Debenture Stocks with Prudential redeemed and Group replaced by £60 million revolving credit facility with Halifax Bank of Scotland SIGNIFICANT EVENTS POST 31 MARCH 2007 Date Detail Category April 2007 Company converts to a Real Estate Investment Trust (REIT) Group April 2007 Purchase of St Magnus House, Aberdeen by Apia Regional Office Funds Fund for £23.7 million May 2007 Purchase of 2 America Square, London EC3 for £25.1 million and Group Investment 16 Upper Woburn Place, London WC1 for £21.75million Property CONSOLIDATED INCOME STATEMENT For the year ended 31 March 2007 Notes 2007 2006 £'000 £'000 Revenue 53,424 67,478Rental and similar income 21,604 24,003Turnover from property trading activities 5,225 31,167Cost of sales of property trading activities (4,170) (24,584)Service charge and similar income 4,172 2,972Service charge expense and similar charges (4,703) (3,591)Net rental and trading income 2 22,128 29,967Turnover from asset management activities 22,423 9,336Asset management expenses (12,215) (3,512)Net income from asset management activities 2 10,208 5,824Administrative expenses (3,757) (2,390)Property management expenses (3,778) (7,517)Operating profit before net gains on investments 2 24,801 25,884Net gain from fair value adjustments on 11,198 27,101investment propertiesNet gain from fair value adjustment on 14,124 16,050investmentsProfit on sale of investment properties 5 1,751 3,102Profit on sale of investments 6 987 3,024Operating profit 52,861 75,161Finance income 7 8,185 8,306Finance expense 8 (21,460) (14,445)Change in fair value of derivative financial 1,011 (72)instrumentsShare of associates' post tax profits 19 - 715Share of joint ventures' post tax profits 16 27,157 21,291Profit before income tax 67,754 90,956Taxation - current 9 (5,182) (12,842)Taxation - deferred 9 17,787 (3,659)REIT conversion charge (10,917) -Profit for the year 69,442 74,455Attributable to:Equity holders 69,425 74,432Minority interests 17 23 p pEarnings per share 12 129.26 140.17Fully diluted earnings per share 12 127.69 138.79 BALANCE SHEETS Group Company Notes 2007 2006 2007 2006 £'000 £'000 £'000 £'000ASSETSNon-current assetsGoodwill 13 11,279 11,205 - -Investment properties 14 437,832 333,198 - -Properties under the course of development 14 19,658 12,261 - -Plant and equipment 15 539 465 - -Investments in joint ventures 16 151,568 103,372 - -Investments in funds 17 120,622 104,081 - -Investments in listed and unlisted shares 18 13,260 5,115 261,974 113,476Investments in associates 19 24 15,518 - 15,009Net investment in finance leases 21 5,283 - - -Deferred income tax assets 25 1,343 552 1,095 -Derivative financial assets 24 810 - - -Trade and other receivables 20 33 363 - - 762,251 586,130 263,069 128,485Current assetsInventories 14 - 10,939 - -Net investment in finance leases 21 9 - - -Trade and other receivables 20 29,754 23,096 351,802 249,103Current income tax assets 384 - 1,576 6,632Cash and cash equivalents 34,333 98,358 - - 64,480 132,393 353,378 255,735Total assets 826,731 718,523 616,447 384,220LIABILITIESNon-current liabilitiesBorrowings, including finance leases 22 (286,725) (283,625) (119,614) (75,915)Trade and other payables 27 (14,238) - - -Derivative financial liabilities 24 (451) (1,361) - -Deferred income tax liabilities 25 (11,814) (29,563) - -Retirement benefit obligations 3 (378) (481) - -Other provisions 26 (5,334) (12,503) - (503) (318,940) (327,533) (119,614) (76,418)Current liabilitiesBorrowings, including finance leases 22 (25,803) (1,893) - -Trade and other payables 27 (46,754) (29,569) (277,629) (104,157)Current income tax liabilities - (5,608) - - (72,557) (37,070) (277,629) (104,157)Total liabilities (391,497) (364,603) (397,243) (180,575)Net assets 435,234 353,920 219,204 203,645EQUITYCapital and reserves attributable to the Company'sequity holdersShare capital 28 2,805 2,675 2,805 2,675Reserves 29 430,661 348,837 217,139 201,896Investment in own shares 30 (740) (926) (740) (926)Equity shareholders' funds 432,726 350,586 219,204 203,645Minority interest 37 2,508 3,334 - -Total equity 435,234 353,920 219,204 203,645 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 March 2007 Group Company Notes 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Profit for the year 69,425 74,432 2,835 8,438Actuarial profits / (losses) on retirement 3 22 (219) - -benefit obligations recognised directly inequityDeferred tax arising on retirement benefit 3 (31) 43 - -obligationsTotal recognised income and expense for the year 69,416 74,256 2,835 8,438attributable to equity shareholders CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2007 Group Company Notes 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Opening equity shareholders' funds 350,586 272,103 203,645 190,980Shares issued 28 130 127 130 127Share premium on shares issued 29 21,311 13,493 21,311 13,493Acquisition of investment in own shares 30 (386) (139) (386) (139)Disposal of investment in own shares 30 572 880 572 880Cost of share based payments 1,004 - 1,004 -Deferred tax arising on share based payments 784 - 784 - 374,001 286,464 227,060 205,341Total recognised income and expense for the year 69,416 74,256 2,835 8,438Dividend paid in year 11 (10,691) (10,134) (10,691) (10,134) Closing equity shareholders' funds 432,726 350,586 219,204 203,645 CASH FLOW STATEMENTSFor the year ended 31 March 2007 Group Company Notes 2007 2006 2007 2006 £'000 £'000 £'000 £'000Cash flows from operating activitiesCash generated from operations 32 6,105 24,703 (35,904) (22,416)Interest paid (21,601) (13,209) (6,560) (3,077)Interest received 2,330 5,285 151 119UK Corporation tax paid (11,249) (10,604) (7,293) (2,452) Net cash inflow / (outflow) from operating activities (24,415) 6,175 (49,606) (27,826) Cash flows from investing activitiesPurchase of investment properties and related capital (15,336) (59,787) - -expenditureSale of investment properties 51,812 95,063 - -Purchase of plant and equipment (225) (154) - -Purchase of investments in listed shares (209) - - -Sale of investments in listed shares 5,242 14,411 - -Purchase of investments in funds - (66,910) - -Sale of investments in funds 500 1,000 - -Purchase of investments in unlisted shares (5,000) - (5,000) -Purchase of investments in associates - (5,000) - (5,000)Net cash acquired from purchase of shares in subsidiary 38 (82,984) 22,600 - -companyPurchase of shares in joint ventures (11,062) (16,676) - -Loans to joint ventures (13,299) (47,544) - -Loans repaid by joint ventures 1,883 37,559 - -Loans repaid by associates - 4,651 - -Payment received for leasehold liabilities - 13,750 - -Dividends received from listed investments 123 422 - -Dividends received from unlisted investments 87 - 87 -Dividends received from funds 6,340 1,566 - -Dividends received from joint ventures 1,274 1,000 - -Dividends received from associates 373 5,058 - 995 Net cash inflow / (outflow) from investing activities (60,481) 1,009 (4,913) (4,005) Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 21,441 13,620 21,441 13,620Purchase of own shares for AESOP scheme (386) (139) (386) (139)Disposal of own shares for share option scheme 456 807 456 807Dividends paid (10,691) (10,134) (10,691) (10,134)Purchase of derivative financial instruments (882) - - -Net proceeds from issue of new bank loan 3,549 37,915 - -Repayment of bank loans (71,200) (72,232) - -Repayment of other loans (384) (57,346) - - Net cash (outflow) / inflow from financing activities (58,097) (87,509) 10,820 4,154 Net decrease in cash and cash equivalents* (142,993) (80,325) (43,699) (27,677)Cash and cash equivalents at beginning of year (77,672) 2,653 (75,915) (48,238) Cash and cash equivalents at end of year (220,665) (77,672) (119,614) (75,915) * Includes overdraft facility balances shown in borrowings This information is provided by RNS The company news service from the London Stock Exchange More to Follow

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