14th Jun 2005 07:01
Warner Estate Holdings PLC14 June 2005 Warner Estate Holdings PLC GROWTH CONTINUES AS WARNER ESTATE REACHES £1 BILLION TARGET Warner Estate Holdings PLC ("Warner Estate"), the property investment companyhas today announced its preliminary results for the year ended 31 March 2005. Highlights • Property under management up 23% to £1,077m (2004: £877m)• NAV per share up 19% to 583p (2004: 488p)• Adjusted+ NAV per share up 19% to 592p (2004: 498p)• Triple NAV* per share up 16% to 551p (2004: 475p)• Pre-tax profits up 39% at £21.9m (2004: £15.7m)• Basic earnings per share up 45% at 35.97p (2004: 24.84p)• Adjusted+ earnings per share up 31% at 34.39p (2004: 26.31p)• Wholly owned investment property portfolio increased to £327m (2004: £317m)• 34th year of unbroken dividend growth• Dividend raised by 7% to 18.25p (2004: 17p)• Successful recommended cash offer for Ashtenne Holdings PLC * Adjusted for deferred tax and fair and fair value debt +Adjusted for the effects of tax arising from the adoption of FRS 19 Philip Warner, Executive Chairman of Warner Estate commented, " I am delighted with the progress made over the last twelve months, reflectedin the Group's excellent performance. We have achieved a number of strategicgoals, culminating in the recommended offer for Ashtenne Holdings PLC, made injoint venture with Anglo Irish Bank. The year saw the company reach its targetof more than £1 billion of property under management, a significant milestone,and we are able once again to increase the dividend, the thirty-fourthsuccessive annual increase. "The success of the offer for Ashtenne brings further funds and investorpartners and last week saw the creation of the Apia Regional Office Fund withMorley Fund Management, further reinforcing our reputation as a leading assetmanager. "We are in an excellent position to maintain growth in the scale of ouroperations. The future looks very promising and I am confident the company willmaintain its progress." - ends- Date: 14 June 2005 For further information contact:Warner Estate Holdings PLC City Profile GroupPhilip Warner, Chairman Simon CourtenayRichard Moore, Property Director Oliver WintersPeter Collins, Finance Director 020-7448-3244020-7907-5100Web: www.warnerestate.co.uk CHAIRMAN'S STATEMENT This has been a year of considerable achievement for Warner Estate, generating arise of 16% in triple net asset value and a total return (on shareholders'triple net asset funds) of 19.7%. The Group accomplished a number of strategicgoals, culminating in the recommended offer for Ashtenne Holdings PLC on 31stMarch, made in joint venture with Anglo Irish Bank. The success of this offerhas increased property assets under management from £1.1bn at the year end,another target attained, to £1.9bn and adds further funds and investor partners,objectives which I outlined last year. A significant milestone passed during theyear was the earning of our first performance fee for asset management,following the sale of Ellesmere Port Shopping Centre by the Agora Fund. Asreported at the half year, we have also reinforced our capacity for developmentthrough the acquisition of a 25% interest in Bride Hall Group. RESULTS OVERVIEW I described last year's results as excellent and I am delighted to report thatthis year's are even better. Net asset value increased by 19% (2004: 13%) from488p to 583p and triple net asset value, which adjusts for deferred tax and thefair value of debt, rose 16% (2004: 14%) from 475p to 551p, despite theGovernment's abrupt removal of Disadvantaged Area Stamp Duty relief, equivalentto 14.9p per share. The total return of 19.7%, being the increase in triple netasset value including the dividend, comfortably exceeded the IPD All Fund (March2005 Universe) return of 16.7%. This is the last year for which we shall treat the wholly owned properties as afund, benchmarked against the IPD All Fund return. In future their performancewill simply be a part of the benchmarking of the whole Group, allowing greaterfreedom in making decisions on individual properties. IPD results for theindividual funds will be found in the Property Review. Property assets under management in funds at the year end were valued at £742million and those wholly owned, including trading properties, at £335 million, atotal of £1,077 million (2004: £877 million). The annualised rent roll at 31March 2005, including that under management, was £72 million (2004: £62million). During the year, three investment properties were purchased for the wholly ownedportfolio at a cost of £31 million. After disposals, which realised a profit of£2.3 million, the valuation of the 72 wholly owned investment properties was£327 million at the year end (2004: 79 properties and £317 million). Fivetrading properties were sold, realising a profit of £1.7 million. Six investmentproperties were purchased by our funds for £205 million and two sold, realisinga profit of £5.4 million for the Group. Recurring revenue profits before tax, the measure of core maintainable incomewere £14.2 million (2004: £14.2 million), held back by decisions taken toenhance long term rather than short term earnings. Adjusted recurring earningsper share fell slightly to 21.36p (2004: 22.93p), reflecting the benefit to lastyear's figures of the release of a tax provision. Pre-tax profits were £21.9million (2004: £15.7 million), the most significantitem being the Group's £5.1m profit share on the disposal of Ellesmere Port, andadjusted earnings per share 34.39p (2004: 26.31p). Revenue profits before tax,which exclude the effect of fixed asset disposals, were £14.2 million (2004:£14.1 million) and adjusted revenue earnings per share 21.39p (2004: 24.54p).Basic earnings per share were 35.97p (2004: 24.84p). Adjusted gearing (pre FRS 19) has fallen from 69% to 51% at the year end. If theelement of non-recourse debt is excluded, the figure is 33% (2004: 47%). Ourshare of the £323 million of debt in the joint ventures is also non-recourseexcept for approximately £7 million. It remains our policy that gearing shouldnot exceed 100%. Interest is covered 2.8 times (2004: 2.6 times) by recurringprofit before interest and tax. Debt reorganisation costs of £1.2m were incurredin the year, the effect of which will be to improve recurring profit in thefuture. A more detailed analysis of the period will be found in the Reviews that followfrom the Property Director, the Operations Director and the Finance Director. The Board recommends a 7.4% rise in dividends per share from 17.00p to 18.25p,well above the current rate of inflation and the Company's 34th successiveannual increase. The dividend is covered 1.17 times by recurring revenueearnings and 1.17 times by revenue earnings. If approved at the Annual GeneralMeeting, the final dividend per share of 9.50p will be paid on 16th September2005 to shareholders on the register at close of business on 19th August 2005. STRATEGY The current strategy continues to produce excellent results for shareholders.Building a fund management business is providing an additional income streamfrom fees, £3.9m this year, up from £1.4m in 2004, and the benefits ofsuccessful sector selection and of asset management are evident both fromrevaluation and from disposals, particularly Ellesmere Port. During the year, the Skipper Regional Office Fund was converted into a JerseyProperty Unit Trust (JPUT) and, subsequent to the year end, merged with a £63mJPUT owned by Morley Fund Management to create the £256m Apia Regional OfficeFund. As reported above, the acquisition of Ashtenne has brought further fundsunder management, the £690m Ashtenne Industrial Fund, invested in multi-letindustrial estates, and the £70m t3 partnership, invested in trade parks. Forillustrative purposes only, the effect of this acquisition, using Ashtenne'spublished December 2004 results, would have increased this year's managementfees from £3.9 million to £7.2 million. As at the year end, the Agora ShoppingCentre Fund was valued at £374m (2004: £293m) and the Radial DistributionWarehouse Fund at £172m (2004: £116m). Expansion of the quantum of propertyassets under management will continue and whether this is through growth inexisting funds or through establishment or acquisition of further funds will bedetermined by research and opportunity. Development remains an important part of our asset management process,particularly in the Agora Fund. The Group has a pipeline approaching 900,000 sqft, of which nearly two thirds has planning permission, and our connection withBride Hall Group will ensure we are able to maximise the potential of theproperties concerned. Furthermore, it is our mutual intention that thisconnection should be a source of further opportunities and to that end we haveagreed to buy a 190,000 sq ft shopping centre development in Folkestone whereBride Hall has obtained planning permission. The Government's most recent consultation paper on Real Estate InvestmentTrusts, (REITs), was encouraging, with its declared intention to introduce thesetax transparent vehicles for property investment in the 2006 Finance Bill. TheGovernment appears to have responded to advice on flexibility although we shallhave to await full details, in particular of conversion costs, beforedetermining their suitability for Warner Estate or its funds. BOARD APPOINTMENTS In July 2004, Julian Avery was appointed to the Board. Formerly chief executiveof Wellington Underwriting plc and prior to that a senior executive in theinvestment and international banking divisions of Lloyds Bank Group for 20years, he brings a wealth of corporate and City experience to your Board. InFebruary 2005, Michael Stevens, one of our associate directors, was appointed tothe Board and I look forward to his continuing contribution as OperationsDirector. PROSPECTS Demand for property from investors remains strong. It is difficult to forecasthow much further yields will continue to harden in the current year, althoughthe performance and attributes of property compare favourably with other assetclasses. Despite clear signs in the retail market of reduced consumerconfidence, born of the slowdown in the housing market and successive interestrate rises, there are grounds for optimism while employment remains high andinterest rates appear to have peaked. In any event, Warner Estate does not relyon yield shift to achieve progress. Our focus is on asset management and increating value in the properties which we own and manage. Purchasing assets withpotential and realising the value will continue to be challenging but we havethe resources, both human and financial, to meet that challenge. I thank ourstaff for their hard work in achieving these results and I am confident ofcontinuing progress. Philip WarnerChairman PROPERTY OVERVIEW The market for commercial property investment remained very strong throughoutthe year, with demand from institutions, private purchasers and overseasinvestors who see the benefit of commercial property's relatively high yieldscompared to other asset classes. Nearly £42bn of property investment activityoccurred in 2004, an increase of over 40% on the preceding 12 months. Areported £2.3bn of net institutional investment occurred over 2004, the highestlevel since the 1970's. Yields are reported to have fallen since September 2004from 6.08% to 5.74% in March 2005. Shopping centres and West End Offices havebeen popular throughout the year as have industrials, particularly secondarystock with asset management potential and in the second half of the yearpositive sentiment returned to the provincial office market. Following a year in which we broke through our major target of £1bn worth ofassets under management with some style, we are now closing in on the nextmilestone of £2bn. We set ourselves challenging targets in all sectors,recognising competition is fierce, and to the team's credit no area hasunder-performed. We have purchased product, both for the wholly owned coreportfolio and for the funds. Subsequent to the year end, the purchase ofAshtenne Holdings PLC, in joint venture with Anglo Irish Bank, and the mergingof our regional office JPUTs with that of Morley Fund Management to create theApia Regional Office Fund demonstrate our growing reputation as asset managers. 2004 will be viewed as a year of major change, in terms both of ownership and ofthe roles of the major players in the market. Great swathes of property havebeen passing from the control of business operators into the hands of privatecompanies. Scarcely a week has gone by without transactions taking place in thepub, cinema or retail sectors, with hundreds of units changing hands at a singlestroke. With yields hardening it is the margins available from economies ofscale which are driving transactions. This change has forced all companies to review their strategy more frequently.Fund size matters and to compete it is crucial to reach an economic massquickly. Some have already decided to sell now as it is impossible for them toreach the appropriate threshold ahead of the changes which will take place withthe advent of REITs in 2006. Others have taken a specialist stance, swappingone type of portfolio for another in order to reach the scale required. Jointventures between organisations have become common place to ensure each partnerobtains the benefits of economies of scale. We, as a company, have kept pace with these changes and risen to the challenges.A corporate purchase was high on our agenda and identifying a target which wouldaccelerate our progress was difficult but in Ashtenne all of the rightcomponents are in place. They are already asset managers for two funds with aproven team in place. The synergies their team brings to our company will fitour modus operandi easily. Our game plan for the Ashtenne Industrial Fund is togrow it substantially in as short a time as possible. Whilst looking for the right corporate opportunity, work on our own funds hasbeen coming to fruition. The creation of the Apia Regional Office Fund withMorley gives us the additional "big brother" we have been seeking. We join arecognised brand which should lead us along an already established route ofproven success. In agreement with Morley, the intention is to grow Apia to over£750m worth of assets by 2008. In our industry many of the major players from the past decades have retiredfrom the scene. All in all, from my observation, we have never witnessed quitesuch a year of change in the past two decades. Property was the darling among2004 investment categories. It will continue to be so in 2005 but for many ofus life will not be the same. PERSONNEL With all the activities coming together, now was the right time to make changesin the structure of the property team. Michael Stevens has been appointed tothe Board as Operations Director and his review of the property assets and theirperformance follows this report. His appointment created the opportunity forPaul Hodgson to be promoted to the position of Chief Asset Manager. Paul'sprimary task will be to push forward the Apia Regional Office Fund. James Ward,fresh from Henley Management School, is now working closely with Vinod Vaghela,one of our associate directors, on ensuring the Ashtenne integration runssmoothly. I welcome Mark Ovens in his position as Managing Director of thefunds acquired with Ashtenne, together with all the regional teams in Preston,Glasgow, Leeds, Newcastle, Birmingham and Cardiff, a very potent team. We havealso been joined by Suzie Walker from Prime Commercial who will be working onthe Agora Fund. As the photographs in last year's Report and Accounts revealed,this is a young team, full of ideas, being guided by a few older heads. Richard MooreProperty Director PROPERTY REVIEW INTRODUCTION The heart of our business model is the generating of better income and, withforecasters expecting much more modest yield compression for the future than wehave experienced over the last 18 months, we are well placed. We have shown wecan outperform against anticipated rental values through prudent capitalinvestment and working with our tenants. They expect us to provide a strongplatform, from which they can conduct their business, and performance for thenext few years will come from assets where active management initiatives areundertaken for the benefit of both landlord and tenant. Each of our funds has a clearly defined investment strategy where properties areonly added which complement existing stock. This puts them in a good positionshould the Government allow REITs and provides clarity of risks and likelyreturns for our investment partners. It also allows us to provide specialisedmanagement skills and property solutions for our tenants through knowledge oftheir respective industries. PERFORMANCE Valuations over the year on all properties under management, excluding tradingproperties, increased from £860m to £1.069bn, including a reduction to thevaluation of £16.8m from additional stamp duty costs when the Governmentreversed its earlier decision on Disadvantaged Area relief in March 2005. Ourstanding investments, those held throughout the twelve months (excludingtrading), increased overall by 9.5% from £739m to £809m, a £70m uplift over theyear. The trading portfolio reduced in value from £17.5m to £8.2m followingfive disposals during the year, in line with our strategy. The IPD Universe Index over the 12 months to March 2005 recorded total returnsfor all property at an average of 16.7%. Our preliminary IPD results for individual funds are as follow:- Performance (IRR) Sub-Sector Benchmark IPD UniverseAgora 18.5% 14.8% 16.7%Skipper 10.9% 14.2% 16.7%Radial 13.2% 14.7% 16.7%Bareway 17.8% 16.4% 16.7%Core 15.7% n/a 16.7%Overall 15.5% n/a 16.7% These returns strip out the effect of gearing. They do take account oftransactions during the year. The purchasing costs associated with growingRadial by £50m and Skipper by £70m during the year have held back performance;however we are prepared to accommodate this consequence of our growthprogrammes. ACTIVITY In the past year we have completed extensions and refurbishments at our Agorashopping centres at Sale and Ellesmere Port and driven Zone A rents for eachthrough the £50.00 barrier, having initially targeted £40.00 Zone A. At CavernWalks in Liverpool we added Dolce & Gabbana, Versace, Agent Provocateur, JimmyChoo Shoes and Arrogant Cat as high fashion brands to our refurbished scheme andincreased rents by around 20% above expectation. At Europa Trading Estate inErith, Kent we agreed an industrial rent review at £4.50 psf, some 76% aboveestimated rental value and for our Radial Fund increased the rent at Sainsbury'sdistribution facility at Yate, Avon to £1.2m, £100,000 over our projected rentalvalue. Purchasing new investments has been hard work and we bought three officeinvestments for the Skipper Fund in Birmingham and Manchester for a combined£70.5m and earlier in the year sold Holland House, Bournemouth after asatisfactory re-gearing with the First Secretary of State, for £12.7m (6%initial yield). For Agora, we bought The Grange Shopping Centre in Birkenhead for £86m andacquired The Pyramids car park for £2.1m complementing the adjacent PyramidsShopping Centre purchase last year. We also bought a £3m parade of shopsopposite the Market Hall in Bolton. In March we sold Port Arcades, EllesmerePort, in which Warner Estate has had an interest since the 1960s, for £48.25m,approximately £11.5m more than its valuation at the start of the year. We bought two investments at Cambuslang near Glasgow and DIRFT, Daventry for acombined £50m for our Radial Distribution Fund and in April 2005 completed thepurchase of Units A to F Townsend Farm Industrial Estate, Dunstable for theBareway Industrial Fund. In our Core Portfolio we bought an industrial investment at Whiston, Liverpool,retail units at Folkestone, adjacent to our shopping centre development withBride Hall, and purchased Hale Leys Shopping Centre, Aylesbury for £28.2m inSeptember 2004 to increase the retail proportion of the Core Portfolio. We alsosold 13 mainly office and industrial properties from the Core and Tradingportfolios for a combined £46m. In many instances we purchased off market. This has only been possible throughmeeting tight deadlines with organised, dedicated teams and with trustingpartners aligned with our objectives and cognisant of our goals. AGORA SHOPPING CENTRE FUND (a Joint Venture with Bank of Scotland) Value - £373.7m Initial Yield - 5.87% Shopping Centres No. Tenants Area Income Value 7 530 177,012 sq m £23.0m £373.7m (1,905,360 sq ft) The Agora Fund was launched in March 2003 and consists of 7 shopping centreswith a remit to focus on investing and improving shopping centres within a 50mile radius of Manchester City Centre. We acquire shopping centres whichcomplement the existing portfolio with strong asset management potential. The following properties are held in the fund:- Preston, Fishergate 33,445 sq m (360,000 sq ft) We have had a busy year at Preston, starting with the successful completion ofthe redesigned and enhanced main centre entrance from Fishergate, giving thescheme greater prominence onto Fishergate. This also saw the creation of anadditional unit at the entrance which has been let (post year end) to Starbucks- their first unit in Preston. Planning permission was obtained in September 2004 for a 189,000 sq ft extensionto the centre, along with an additional 250 car parking spaces. We are nowfinalising the major pre-lets and construction will start in autumn 2005. Thiswill satisfy retailer demand for Preston, where unit availability is low, andgive Fishergate the critical mass that it needs to cement its position in thecity. Bolton, Market Place & Market Hall 29,248 sq m (320,000 sq ft) Market Place is the prime retail location in Bolton. Over the past year RiverIsland have opened their new 8,600 sq ft unit on the lower mall, and we haveintroduced La Senza to the tenant line up. Planning consent has been obtained for a redesign of the Market Hall, theculmination of a year of consultation with both English Heritage and BoltonMetropolitan Borough Council. The scheme is scheduled to start in summer 2006and once finished will add 100,000 sq ft of retail and leisure space. Corporation Chambers, opposite Market Hall (a parade of 7 shops with officesover) was acquired in December 2004 for £3m. Middleton 25,300 sq m (272,300 sq ft) Following the March 2005 purchase of land adjacent to the centre for £1.1m,Phase I of our extension will commence in June this year. This first phase willprovide 44,000 sq ft of new retail space and three of the four new units arepre-let to Peacocks, Quality Save and Superpound. The fourth unit is underoffer to another regional multiple retailer. Planning consent for Phase 2,comprising 17,450 sq ft, was obtained on 27th April 2005. With some internalreconfiguration, around 25,000 sq ft can be developed starting on site in March2006, subject to pre-letting. Sale, The Square 21,390 sq m (230,240 sq ft) The year has seen marked progress for this refurbished scheme with 7 newlettings consolidating the Zone A tone throughout the scheme at £47.50 ITZA andcapturing the reversionary income. New lettings to the Post Office and ToyKingdom, post year end at over £50.00 ITZA, have further improved the Zone Atone. The 11,500 sq ft LSU2 is being split into 2 units to capture the strongerretail demand for 5 to 6,000 sq ft units. Liverpool, Cavern Walks 10,137 sq m (109,820 sq ft) After the introduction of Vivienne Westwood and the upsizing of Cricket to 5,800sq ft, letting momentum has gathered pace with 4 new retailers bringing theJimmy Choo, Versace, Dolce & Gabbana, Agent Provocateur and Arrogant Cat brandsto Liverpool. The reversionary Zone A tone has been firmly reinforced at £40.00per sq ft against £25.00 per sq ft ITZA being achieved prior to therefurbishment. Our remodelled Cavern Walks made the shortlist for theprestigious BCSC Gold Awards in December 2004. Birkenhead, The Pyramids 13,300 sq m (143,000 sq ft) In July 2004 we extended the ownership of The Pyramids with the acquisition ofthe adjacent 400 space multi-storey car park from Wirral Borough Council for£2.1m, which we have now fully integrated into the shopping centre. Greenwoodslong leasehold peppercorn interest has been simultaneously surrendered andre-let on a new commercial lease at £80.00 per sq ft ITZA, providing healthyrent review evidence. In September 2004 we took a surrender from Internacionale and simultaneouslycompleted a new letting to HMV at a record rent for the centre of £106.00 ZoneA. This letting together with the lettings to Faith and Greenwoods has driventhe Zone A forward, enhancing the reversionary rents. Consequently during theyear we achieved rent review settlements £90,000 pa above the estimated rentalvalues. Plans for the redevelopment of the existing food court area are moving ahead.Five new units are to be created for a variety of food retailers together with alarger and improved seating area. Birkenhead, The Grange 43,000 sq m (470,000 sq ft) The Grange is the most recent acquisition by the Agora Fund, purchased for £86min October 2004. First developed in 1975 and extended in 1997, it has 120retail units and a 490 space multi-storey car park; tenants include Marks &Spencer, Littlewoods, T J Hughes and Argos. The centre adjoins The Pyramids, already within our ownership, and we intend toamalgamate the two centres into a single asset consolidating Birkenhead'sposition as the dominant retail centre for the Wirral. We plan to add 150,000sq ft of retail space which will include a 90,000 sq ft department store.Existing units are to be combined and extended, creating better quality spaceand modernising the retail offer in Birkenhead. Ellesmere Port, The Port Arcades 27,615 sq m (297,248 sq ft) Having completed the £7m redevelopment of the Port Arcades and successfully letall the new units, achieving a record £54.00 Zone A, we sold the Shopping Centreto HSBC in March 2005 at £48.25m. Warner Estate had owned and/or managed thecentre since 1964, but with our plans for Birkenhead it was the right time tosell. Outlook We will time the delivery of our projects to complete over the next three years,with the extension to Middleton scheduled to open in 2006, Preston and Bolton in2007 and Birkenhead in 2008. Our capital expenditure programmes willre-invigorate the centres and provide the key to drive rental growth. Retailerswill demand the best locations to fulfil their expansion requirements,especially over the next 12 to 24 months and we are confident they will focus onsites where landlords have improved unit sizes, facilities and layout. Ourproactive approach will pay dividends, already evidenced at Ellesmere Port,Sale, and Cavern Walks, Liverpool which have seen superior rental growthfollowing our refurbishment programmes. SKIPPER REGIONAL OFFICE FUND (APIA) (a Joint Venture with the Royal Bank of Scotland) Value - £174.8m Initial Yield - 6.43% No. Tenants Area Income Value Offices 8 55 69,709 sq m £12.1m £174.8m (750,348sq ft) Since its launch in July 2003, the Skipper Regional Office Fund has grown invalue by 68%. In July, we purchased 120 Edmund Street, Birmingham and 81Fountain Street, Manchester. Norfolk House, Manchester was acquired in August,reinvesting the proceeds from the sale in April 2004 of Holland House,Bournemouth. We have progressed many asset management initiatives, includingcontrolled refurbishment projects in Leeds and Edinburgh. The Fund continues tofocus on owning investments in Central Business Districts of the principalregional office centres in the UK. This sub-sector has been identified ashaving a healthy income proportion of total returns, relatively low volatility,stable long term supply and demand characteristics and strong covenants. The following properties are held in the fund:- Glasgow, Bath Street 8,183 sq m (88,084 sq ft) This Grade A refurbished office is presently let to two principal tenants,Teletech and NAG Europe Limited (t/a Clydesdale Bank). There are leasere-gearing opportunities with both tenants and the potential to increase thefloor plates further from 14,500 sq ft to 20,000 sq ft, subject to planning,through developing across the site offering the potential to horizontallyrealign the tenants. Edinburgh, APEX 123 8,796 sq m (94,683 sq ft) This is a modern air conditioned office building in the Haymarket district ofEdinburgh, let to the Secretary of State, Abbey National, Scottish Enterpriseand Edinburgh Fund Management. The early surrender of 17,829 sq ft in November2004 from GE Capital has provided the opportunity to refurbish and upgradeindividual floors and the building entrance. There are potential leasere-gearing opportunities with all the tenants and the possibility of re-orderingtheir occupation laterally across large single open plan floors. Leeds, Yorkshire House 7,552 sq m (81,293 sq ft) The first phase of the refurbishment programme, within the tower block, isunderway which has coincided with principle tenant Lupton Fawcett's ownrefurbishment programme of their office space, as part of their consolidationwithin Yorkshire House. Once all works are completed, total revenues areprojected to increase by over 15%. Other opportunities include potential leasere-gearings with Lloyds TSB and Yorkshire Building Society. Norfolk House, Manchester 5,050 sq m (54,358 sq ft) This Grade A office building in Central Manchester offers a range ofopportunities to drive income forward; settling the Coutts & Co rent reviewahead of estimated rental value has provided good evidence for the Watson Wyatt,Zurich and Secretary of State for Health rent reviews currently beingnegotiated. Once complete these will lead to further lease re-gearingopportunities. 81 Fountain Street, Manchester 3,685 sq m (39,665 sq ft) This office building in the heart of the city is let in its entirety to BUPAuntil June 2013. BUPA are not in occupation and have sub-let to 5 tenants.There is potential to surrender their lease and complete an extensiverefurbishment of the whole property to create excellent air conditioned officeaccommodation for the existing subtenants on improved terms. Birmingham, 120 Edmund Street 12,926 sq m (139,133 sq ft) This is a centrally located multi-let office investment, where 73% of thebuilding is leased by HFC Bank (a subsidiary of HSBC) and the average unexpiredlease term is 8 years. We are undertaking a number of initiatives, includingthe letting of two vacant suites and considering lease re-gearing opportunitieswith all tenants. There is also potential to add additional floors to thebuilding, subject to planning, to create two new floorplates of 17,500 sq ft perfloor. Solihull, Sapphire Court 8,041 sq m (87,563 sq ft) This is one of the few Grade A refurbished office buildings within Solihullwhich offers a high level of car parking in a central location. 50% of theincome received is from Government departments with the other investment gradeoccupiers having leases to 2013. Having re-geared the Secretary of State forThe Environment's lease of 18,345 sq ft to expire in 2028, with a tenant'sbreak option in 2021, we can now begin our refurbishment programme for thecommon parts and there will be other lease re-gearing opportunities to increaserental levels. There is also potential to extend the building by a further25,000 sq ft, subject to occupier demand. Kingston, Lever & Surrey House 15,382 sq m (165,569 sq ft) In December we received planning consent for the development of "The Roundhouse"(formerly Cheltenham & Gloucester Building Society) into a restaurant and thisis due for completion in November 2005. Lease re-gearing discussions with LeverFaberge on Lever House have followed the rent review determination in January.All rent review and lease renewals have been completed on the retail units inSurrey House, whilst the second floor has seen a 97% improvement in theprofitability of the serviced offices and terms are agreed to re-let 16,000 sqft to Inside Track. Outlook The Lyons Report, which identifies around 20,000 government jobs moving fromLondon into the regions, will provide an additional boost for provincial officecentres. With this increase in tenant demand and little speculativedevelopment, occupiers will focus their requirements on efficient, wellspecified offices. Consequently we expect our Regional Offices Fund to performwell. Our pro-active approach with tenants will encourage opportunities formutual benefit. In June the Skipper Office Fund assets, plus Westgate, Bristolfrom our Core Portfolio, and four similar properties from Morley formed the new£256m Apia JPUT. RADIAL DISTRIBUTION FUND (a Joint Venture with Bank of Scotland) Value - £172.3m Initial Yield - 6.54% Distribution Warehouses No. Tenants Area Income Value 10 11 205,862 sq m £11.9m £172.3m (2,215,954 sq ft) The Radial Distribution Fund specifically targets investment in distributionproperties located close to major transport interchanges. The fund favoursmodern, purpose built stock, specified to institutionally acceptable standardswhere there is an opportunity to regear leases, and where site coverage is 40%or less. Net income is now approaching £12 million per annum, of which 45% issecure for more than 10 years. Tenants include Tesco, Antalis, Eddie Stobart,Focus DIY, NYK Logistics and Sainsbury. The following properties are held in the fund:- Glasgow, ACR Logistics Unit, Cambuslang Investment Park 11,508 sq m (123,871 sq ft) Cambuslang Investment Park is one of the best distribution locations in Scotlandlocated 8 miles south of central Glasgow and very close to Junctions 1 & 2 ofthe M74 motorway. The unit stands on a site of 3.25 hectares (8.02 acres) andhas a low site coverage of around 35%. The unit is let to ACR Logistics Ltd(formerly Hays Distribution), who use the site for a contract with B&Q (withbreak options) until October 2013. Manchester, Stakehill Industrial Estate 9,525 sq m (102,526 sq ft) Stakehill Industrial Estate is an established distribution locationapproximately 8 miles north east of Manchester, just south of junction 19 of theM62 and 2 miles from junction 20 of the M60 Manchester Orbital motorway. Theproperty has a site area of 2.94 hectares (7.25 acres) with site coverage of32%, offering plenty of room for expansion if required. Neighbouring occupiersinclude Booker, Christian Salvesen, Aldi, Cert Logistics and Tesco. TraffordPark's World Trade Centre is located approximately 12 miles south of Stakehilland Manchester airport is 15 Miles to the south. The property is let to Dunloptyres until 2020, with a tenant break option in 2010. Leicester, Antalis Unit, Interlink Business Park, Bardon 21,160 sq m (227,763 sq ft) Interlink Park is a distribution park development close to Junction 22 of the M1Motorway, which is steadily approaching maturity. The Antalis unit was purposebuilt for the tenant in 1997 and was subsequently extended in 2001. Sitecoverage on the 5.05 hectare (12.47 acre) site is still only 42% and there ispotential for expansion by a further 50,000 sq ft. Antalis, part of theFrench-owned Worms et Cie group, use the property as their national distributionhub for stationery, paper and printing supplies. The property is let oninstitutional terms until 2017 and there is a rent review in November this year. Tamworth, Relay Point 7,981 sq m (85,903 sq ft) Relay Point is a recently built manufacturing and distribution park, close tojunction 10 of the M42, at its intersection with the A5 trunk road inStaffordshire. The site is 2.28 hectares (5.63 acres), providing 35% sitecoverage. Neighbouring occupiers include Britvic, Safeway Distribution, AAHPharmaceuticals and Swish Products. The property is let to NYK Logistics until2018. Units A, B and C, DIRFT, Daventry, Northamptonshire 56,609 sq m (609,349 sq ft) 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. Radialacquired three units on DIRFT in September 2004, with the sites totalling 13.89hectares (34.32 acres). The individual units have low site coverage, rangingfrom 38% to 42%. Neighbouring occupiers include Excel Logistics, Wincanton,Tesco, Mothercare and Royal Mail. Units A and B are let to Eddie Stobart onseparate leases until March 2025 (with break options in 2015). Unit C is let toIngram Micro Holdings Limited until July 2010. The purchase was driven by theearly opportunity to achieve an improving income stream from the 2005 rentreviews. Coleshill, Highway Point (1&2), Collins & Aikman 13,066 sq m (140,646 sq ft) Highway Point at Coleshill, Warwickshire, is a purpose built distribution park 8miles north east of Birmingham, adjacent to the A446 trunk road. The site enjoysdirect access to 3 major motorways: the M6 (junction 4), M6 Toll (junction T1)and the M42 (junction 9). Hams Hall Rail Freight Terminal and BirminghamInternational Airport are also very close by. The site extends to 3.94 hectares(9.73 acres), giving very low site coverage of 33%. The lease formallyidentifies an area of expansion land, for which additional rent is paid. Theproperty is let to Collins & Aikman, guaranteed by its US parent, until 2027,with a tenant break option in 2017. Coleshill, Highway Point (3), Greenwoods Communications 11,170 sq m (120,238 sq ft) On the plot adjoining Collins & Aikman, there is a purpose built distributionfacility let to Greenwoods Communications. The site extends to 3.2 hectares (7.9acres) representing 35% site coverage, and there is expansion land for which thetenant pays additional rent. Greenwoods centralised their UK operations intothis site last year and it is now their national distribution hub and headoffice. It is let until 2022, with a tenant break option in 2017. Yate, Great Western Business Park 23,078 sq m (248,410 sq ft) Great Western Business Park lies between junctions 18 and 19 of the M4 motorway,7 miles north east of Bristol with access via the A432 and the M32. The unit ison a site of 5.8 hectares (14.36 acres), giving approximately 40% site coverage.The property is held by Sainsbury until 2019 and during the year the propertywas underlet to Morrisons for the remainder of the term, with a simultaneousrent review settlement £100,000 per annum above the passing rent. A substantialrefurbishment was undertaken for the undertenant as part of this transaction. Bristol, Western Approach Distribution Park, Severnside 22,679 sq m (244,133 sq ft) Western Approach Business Park is approximately 9 miles north west of Bristolvia the M5 (Junction 18A), the A403 trunk road and the M48 and 3 miles fromAvonmouth container port. Built in 1997, the property is let to Focus DIY astheir South and South West regional distribution hub, as well as handling allbulk orders of imported goods. The site extends to 5.7 hectares (14.08 acres),which gives a site coverage of 40%. There is sufficient expansion land toaccommodate a 30,000 sq ft extension. The property is let on institutional termsuntil 2022, with a tenant's break option in 2017. Weybridge, Brooklands Business Park 29,091 sq m (313,135 sq ft) The distribution facility was purpose built for Tesco in 1983 and subsequentlyextended in 1989. It supplies Tesco's southern Home Counties and south coaststores with non perishable goods. Situated on the west side of London, close tojunctions 10 (A3) and 12 (M3) of the M25, the site area is 5.91 hectares (14.58acres) with a site coverage of just under 50%. Brooklands is a multi-usecommercial estate where other occupiers include John Lewis/Waitrose and DaimlerChrysler. The retail element of Brooklands includes Marks & Spencer and TescoSuperstore. The December 2004 rent review was settled during the year, at a newrent of £2.555m pa. - this represents an increase of £125,000 pa. Outlook Occupiers are responding to the significant changes occurring in thedistribution markets, creating premium value for the limited supply of welllocated sites. "Just in Time" logistical requirements mean operators'contracts will be renewed only with the most efficient suppliers. In additionthe European Working Time Directive, which has reduced lorry drivers' workingweek by 25% to a maximum of 48 hours and introduced compulsory rest breaks every31/2 hours, will accelerate the demand for the best property. Our strategy ofbuying modern investments at major transport intersections puts the Radial Fundin a healthy position. Their low site coverage means opportunities to expandsites for tenants. Lease restructuring can happen simultaneously, giving moreand longer term income. BAREWAY INDUSTRIAL PORTFOLIO (a Joint Venture with Barclays) Value - £21.6 m Initial Yield - 7.03% Industrial Estates No. Tenants Area Income Value 3 32 (44 leases) 31,125sq m £1.6m £21.6m (334,911 sq ft) Bareway's remit is to invest in high yielding multi-let industrial estates inthe South and South East of England. We have seen improvement in income fromboth Norwich, which is now fully let, and Witney, where the restructuring ofleases has been carried out to positive effect. The following properties are held in the fund:- Norwich, Hellesdon Hall Industrial Estate 11,648 sq m (125,830 sq ft) Located just off the inner ring road, and within one and a half miles of NorwichAirport, this is a modern 28 unit industrial estate. Vacant space on the estatehas now been fully let during the year, increasing income by £54,818 per annum(10.5%). The evidence from these transactions has enabled the overall ERV to bedriven forward over the past 12 months from £4.58 psf to £4.70 psf. Harlow, Roydonbury Industrial Estate 9,455 sq m (101,773 sq ft) Roydonbury Industrial Estate comprises of 9 units in a self contained locationin the heart of the Pinnacles Industrial Area, on the east side of the town. Theestate extends to 2.25 hectares (5.55 acres), giving relatively low sitecoverage of 42%. The restructuring of the leases of units 1/2 and units 7/8(both for new 15 year terms) and unit 9 during the year have improved theincome. Witney, Witan Park 10,011 sq m, (107,758 sq ft) Witan Park comprises an estate of seven units built in the late 1970s and isprincipally let to Fabulous Bakin' Boys until 2010 (66,390 sq ft) and SwanLaundry (27,917 sq ft) until 2018, with tenant options to determine on 2011. Theestate is situated in Witney's principal industrial area, adjacent to the A40.During the past 12 months, rent has increased by £32,052 per annum. A further property has been added to the fund since the year end with thepurchase of Townsend Farm Industrial Estate in Dunstable for £5.8m. Outlook We are re-appraising strategy for the Bareway Fund following the year end as aconsequence of our investment in the Ashtenne Industrial Fund which has similarstock. CORE PORTFOLIO Value - £326.6m Initial Yield - 7.0% No. Tenants Area Income Value 72 247 287,507 sq m £23.7m £326.6m (3,094,810 sq ft) Our Core Portfolio provides a flexible and pro-active area of our activity. Itsremit is to be entrepreneurial by growing income through asset managementinitiatives. During the course of this year, through the sale of a collection of eight assetswith a bias towards offices, the transfer of Norfolk House, Manchester to theSkipper Fund and the purchase of Hale Leys Shopping Centre, Aylesbury, theoverall balance of the Portfolio has been improved significantly with a greaterweighting in retail. Cushman & Wakefield carried out a valuation of the Core Portfolio as at 31stMarch 2005 which, together with Directors valuation, produced a figure of£326.6m with an average lot size of £4.5m (March 2004 = £317.4m and £4.0m).The removal of Disadvantaged Area Stamp Duty relief in the March 2005 budgetresulted in a £2.5m adjustment downwards in the valuation of the 18 propertiesaffected. Retail Value - £92.5m Initial Yield - 6.2% Weighting 28% No. Tenants Area Income Value 18 55 41,572 sq m £5.9m £92.5m (447,494 sq ft) The most significant purchase in the Core Portfolio during the course of theyear was Hale Leys Shopping Centre, Aylesbury in September 2004 for£28.2million. Other purchases include two smaller retail investmentacquisitions in Sandgate Road, Folkestone in August for £2.6m. Retail assets have increased in value from £57.3m to £92.5m created by a capitalvalue improvement of £3.7m and an improved income of £1.8m on assets heldthroughout the year, and the additions. The notable changes included the re gearing of the Littlewoods lease inErdington which created a valuation uplift of £120,000. Ashford has continuedto provide strong Zone A growth from £57 per sq ft to £64.75 per sq ft andAylesbury, since acquisition, has improved in Zone A rents from £80 per sq ft to£81 per sq ft. During the course of the next 12 months we anticipate moreimprovement in Zone A rentals at Aylesbury with its identification as a SouthEast town capable of significant expansion. High Street, Rugby and Bridge House, Durham were sold for £3.9m an increase of£270,000 over valuation. Offices Value - £129.6m Initial Yield - 7.25% Weighting 40% No. Tenants Area Income Value 28 77 70,495 sq m £9.8m £129.6m (758,822 sq ft) We stated at the beginning of the Financial Year that our office weighting washigher than we would wish to maintain. From a 51% weighting in April 2004 wehave achieved a more favorable 40% exposure at Year End. This was achieved withthe sale of five office buildings in the Fortuna Portfolio and the transfer ofNorfolk House, Manchester into the Skipper Fund. The most notable performers have been the new lettings to The Secretary ofState, (30,945sq ft) in St John's House, Leicester and the completion (justprior to the sale) of the rent review at Springfield House, Horsham at £383,500per annum (an uplift from £372,500 per annum). Industrial Value - £104.5m Initial Yield - 7.3% Weighting 32% No Tenants Area Income Value 26 115 171,261 sq m £8.0m £104.5m (1,843,494 sq ft) We have achieved a strong series of results in letting vacant space andconcluding rent reviews. A 29% rental uplift was achieved at Abbey Road, Londonwith a new rent of £105,000 per annum. A surrender and re grant at Unit D,Swift Park, Rugby provided a new letting at £205,000 per annum, 4% above theprevious passing rent. Other locations where previously stated ERVs wereimproved upon were Tanners Drive, Milton Keynes and Millbrook Industrial Estate,Wythenshawe (18.5% above ERV). Outlook The Chairman has commented that in future our wholly owned Core assets will nolonger be benchmarked to IPD. We will continue to restructure the Portfoliowith investment decisions based on asset performance, unfettered by striving forinstitutional balance. The Core has been an excellent incubator for our Funds;this will continue, along with exploiting our development stock with Bride Hall,and opportunistic selections. TRADING PROPERTIES Value - £8.2m Initial Yield - 5.0% No Tenants Area Income Value 3 16 7,102 sq m £0.5m £8.2m (76,444 sq ft) We have continued our exit strategy from trading stock and completed on salespreviously reported as conditional at the start of the year. Disposals haveoccurred at Blackpool, Swindon, Falmouth, Malton and Addlestone. In total,these amount to £12.4m against the book cost of £10.4m. In November 2004 weexchanged on a conditional sale of Park House, Glasgow, subject to obtainingresidential planning consent. Of the remaining trading properties, Wellington House, Leicester goes fromstrength to strength following refurbishment of individual vacant suites and thecommon parts. Leicester City Council have agreed to take all the vacant space(32,100 sq ft) in the building and expressed interest in the additional suitescoming available this year. DEVELOPMENT 2004 saw another major objective achieved through our investment in Bride HallGroup. The credentials of Bride Hall speak for themselves and they have a trackrecord of achievement which is enviable. There are three strands of activitybeing pursued, each already beginning to show the fruits of success. Firstly there are the developments in which Bride Hall are already involved.These could be of interest to us as a funding partner and end user. BouveriePlace Shopping Centre, Folkestone falls into this category with its majortenants, ASDA, New Look, BHS, HMV and George. When completed, it will be addedto the Core Portfolio. Next are those properties which we own where a building has reached the end ofits economic life and we would normally have sold on the developmentopportunity. Through working jointly, Reading, Millennium Centre is under offerto Bellway Homes, subject to planning, and Scott House, Basingstoke is the nextin the pipeline. Finally, where we require development or project management assistance onproperties in a fund, we now have the added opportunity of working together onthe programme. The Agora Shopping Centre Fund is the first to benefit,particularly the properties at Preston and Middleton. Both management teams have worked hard to create the right environment toextract the full benefits from the synergies which can take place. It is stillearly days but the signs are encouraging. Michael StevensOperations Director FINANCE REVIEW This year is the last year in which the results will be published in accordancewith UK Accounting Standards; in future they will be presented in accordancewith International Financial Reporting Standards (IFRS) as will be the case forall fully listed groups. There will be no change in the underlying substance ofthe Group's financial performance though it will be reported differently and areconciliation will be provided. The Group's strategy remains that of growing recurring profitability throughactive property management and building a managed property funds business fromwhich the Group derives management fee income. To this end over the last yearthe funds have expanded with net purchases of £156m and capital expenditure of£16m. In addition the £172m Radial Distribution Fund has been refinanced and theSkipper Regional Office Fund converted into a Jersey Property Unit Trust (JPUT).Since the year end growth of the Funds has continued. Firstly, the SkipperJPUT has been merged with a £63m JPUT owned by Morley Fund Management to createthe £256m Apia Regional Office JPUT in which the Group has a 33% investment.Secondly, the acquisition of Ashtenne Holdings PLC by Industrial Funds Limited,a 50/50 joint venture with Anglo Irish Bank, has added two property funds, the£690m Ashtenne Industrial Fund where Morley are the fund managers and the £70mt3 trade centre fund where AXA are the fund managers. The net effect is thatwhilst the total property under management at 31 March was just under £1.1billion (2004: £0.9 billion) this has risen to £1.9 billion as a result of thesepost balance sheet events. The purpose of this review is to explain as concisely as possible the keyfactors that have affected the current year's results, together with how theabove two substantial post balance sheet events impact on the Group. RETURN ON CAPITAL The performance measure, which the Group utilises for itself and its management,is the total return made on shareholders' triple net asset funds. The returnequates to the total profit arising during the year together with netrevaluation surpluses and is summarised as follows: 2005 2004 £m £m Profit before tax 21.89 15.70Tax (pre FRS 19) (4.56) (1.75) 17.33 13.95 Gains taken through the reserves 38.85 24.91Deferred tax arising on unrealised (gains)/losses (9.56) (5.69)Change in the fair value of the cost of group debt 0.55 6.70 Total return for the year 47.17 39.87 Shareholders' triple net asset funds at start of year 239.7 209.1Return on shareholders' triple net asset funds 19.7% 19.1% Of which post tax profit 7.2% 6.6% net property revaluation 11.9% 9.2% net increase in value of investments 0.4% 0.1% change in fair value of debt 0.2% 3.2% It can be seen that the proportion of the return coming from post tax profitwas slightly higher than last year, the main reason for this being the disposalof Ellesmere Port by the Agora Fund which contributed £4.1m of our total posttax profit of £17.3m. The other reason for a lower overall percentage comingfrom revaluation gains was the ending of deprived area stamp duty relief whichreduced the overall revaluation uplift by £7.5m whilst last year it contributeda positive £5.9m. The cost of the fair value of debt, having variedsubstantially over the last two years has this year been fairly neutral, in partdue to the relatively stable yield curve over most of the year coupled with thedecision to repay certain long term debt lines at a cost of £1.2m in order tocreate a more cost effective financing structure for the future. It is worth noting that if the distortion caused by the change in the treatmentof stamp duty in respect of deprived areas is excluded from the return in 2004and the opening shareholders' funds for the current year's calculation then thecomparative performance figures are a return of 20.0% for the current yearcompared to only 17.1% for 2004. RESULTS The profit before tax is £21.9m (2004: £15.7m). This increase is entirely due tonon recurring profits and this is analysed in the table below. The mostsignificant items are the Group's £5.4m share of funds capital profit, of which£5.1m arose on the disposal of Ellesmere Port, capital and trading profits of£3.9m and £1.6m of non-recurring costs of which, £1.2m arose from thereorganisation of the Group's debt that is included in interest costs. 2005 2004 Change £m £m £m £m £mRecurring profit 14.2 14.2 - Non-recurring profit Non-recurring costs (1.6) (0.2) (1.4) Trading profit Property trading 12.4 15.5 Cost of sales (10.8) (15.4) Write down of trading stock - (0.2) 1.6 (0.1) 1.7 Capital profits Own 2.3 1.6 Share of funds 5.4 - 7.7 1.6 6.1 Funds - trading profits - 0.2 (0.2) Profit on ordinary activities before tax 21.9 15.7 6.2 Recurring profits were £14.2m (2004: £14.2m) maintained by the performance feeof £1.6m arising on the disposal of Ellesmere Port Shopping Centre by the AgoraFund. Progress has been restrained by the impact of the costs of a number ofactions that have been taken to enhance the Group's long term overallperformance. In particular higher yielding assets have been sold out of theGroup's property portfolio and have been replaced by lower yielding assets withgreater growth potential. Such transactions, because of stamp duty inparticular, cost around 7.5% of the value of the proceeds being transacted.Similarly the recent purchases of The Grange, Birkenhead by the Agora ShoppingCentre Fund and of three distribution centres at Daventry by the RadialDistribution Fund have been made at costs that result in initial short termrecurring losses but with significant medium/long term potential. The Group hasalso made an investment in Bride Hall which took place last September but forwhich no income has been booked, and refinanced the Radial Distribution Fundwhich reduced the profits receivable by the Group from that fund but ensures thefund has the capacity for expansion. A full analysis of recurring profit is shown below where it can be seen that theamount arising from the funds now exceeds that arising from the Group's ownproperty portfolio. This reflects the substantial expansion of property in thefunds and is a trend that will continue, reinforced by the two substantial postbalance sheet events referred to at the start of this report.Related Shares:
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