8th Apr 2008 07:01
Development Securities PLC08 April 2008 8th April 2008 DEVELOPMENT SECURITIES PLC - UNAUDITED PRELIMINARY RESULTS Well poised for the cyclical downturn Development Securities PLC, the leading property development and investmentcompany, today announces a pre-tax profit of £0.2 million for the year ended31st December 2007. The £2.0 million share buyback programme largely accountedfor the decrease in shareholder funds of £2.5 million to £228.9 million,equivalent to 564 pence per share. This compares to £231.4 million and 568 penceper share 12 months earlier. In a year that has seen the property industry encounter significant challenges,Development Securities reports 3.7% IPD Total Portfolio Return* from itsinvestment portfolio, compared to the All Market Return of a negative 3.4%. Thebalance sheet was strengthened during the year by the issuance of €47 million,20-year Unsecured and Subordinated Floating Rate Loan Notes, which were fullyexchanged into a £33 million fixed-rate debt obligation of equivalent term. David Jenkins, Chairman of Development Securities PLC, commented: "In the context of the then current market conditions, these are acceptableresults. As we mentioned in our 2006 Annual Report, the relative performance ofthe property sector participants will not be evident until the end of thecurrent property cycle. I am pleased to report that the Board anticipated someof the dangers in the market some four years ago when it implemented a strategyof diversification that took our traditional focus away from Central Londontowards provincial UK cities and suburban London. We will continue to focus onurban development opportunities, and are watchful that the next few years maybegin to provide appropriate market conditions for us to return to CentralLondon. "Another year of excellent returns from our property investment portfoliocompared to the market performance, validated our medium-term strategy in onlyacquiring investment properties that contained defensive qualities. Our focus onthe retail sector is underpinned by the robust sub-asset class of neighbourhoodconvenience retailing, typically led by a food store anchor, which offers bothresilient pedestrian footfall and not insignificant redevelopment opportunities. "The Company's ability to source the substantial additional funding inchallenging market conditions highlights its stature in the capital markets. Wecontinue to pursue our risk-averse policy of maintaining modest levels of netgearing and seeking, wherever possible, to engage long-term institutionalpartners for our substantial development projects." Financial highlights unaudited for the year ended 31st December 2007 31st Dec 2007 31st Dec 2006Profit before tax £0.2 million £22.8 millionEarnings per share 0.0p 63.4pNet assets £228.9 million £231.4 millionNet assets per share 564p 568pDividend per share 7.2p 6.75pGearing * 31% 6% * refer note 6 Property and other highlights PaddingtonCentral • completion of 250,000 sq ft office building, with 30% pre-let, togetherwith development partners Morley Fund Management and Union Investment RealEstate. • construction commenced on the next phase, a 230,000 sq ft office buildingapproved by development partners Morley Fund Management and Quinlan Private forcompletion in 2010. Southampton • commenced fully forward funded construction of 150,000 sq ft headquartersbuilding for Carnival PLC scheduled for completion in 2009. St Brides London EC4 • commenced fully forward funded 55,000 sq ft office development scheduledfor completion in 2010. City Park, Manchester • commenced construction of 147,000 sq ft office scheme, forward sold toprivate investor for part owner occupation. Issued €47 million, 20-year Unsecured and Subordinated Loan Notes, with theproceeds fully exchanged through an interest and currency swap into a £33million fixed-rate debt obligation of equivalent term. Enquiries: Michael Marx 020 7828 4777Development Securities PLCwww.developmentsecurities.com Mallika Basu 020 7630 1411The Communication Group PLC Chairman's statement I am pleased to report a profit before tax of £0.2 million for your Company in ayear which has seen the property sector encounter significant challenges. The £2.0 million share buyback programme largely accounted for the decrease inshareholder funds of £2.5 million to £228.9 million, equivalent to 564 pence pershare. This compares to £231.4 million and 568 pence per share 12 monthsearlier. For the first time in many years, the contribution from our development andinvestment activities was insufficient to generate a significant surplus overour operating and financing costs. Accordingly, I report a near break-evenposition for the year and neutral earnings per share, compared to a profit aftertax of £23.6 million and earnings per share of 63.4 pence for the previous year. However, the Board has recommended the payment of a final Ordinary dividend forthe year of 4.8 pence per share payable on 3rd July 2008 to shareholders on theregister on 6th June 2008. This brings the Ordinary total dividend coupon for the year to 7.2 pence pershare, an advance of 6.7 per cent over the previous year. Our balance sheet was strengthened during the year by the issuance of €47million, 20-year Unsecured and Subordinated Floating Rate Loan Notes inSeptember. The proceeds were fully exchanged through an interest and currencyswap into a £33 million fixed rate debt obligation of equivalent term. Followingon from the £23.1 million Ordinary share placing in November 2006, the abilityof your Company to source additional funding in the challenging marketconditions that were prevalent in the second half of 2007, reflects itsimproving stature in the capital markets. Strategy Our strategy of diversification, which we implemented some four years ago, tookour business away from the Central London markets towards the main provincial UKcities and suburban London. This policy remained unchanged in 2007, since we continued to believe thatconditions in the prime City of London and West End markets offered insufficientreturns for risk, which was not the case in our alternative markets of choice.That caution, with the advantage of hindsight, may well have been correct, andwe are now watchful that the next few years may begin to provide appropriatemarket conditions for your Company to reappraise the risks and returns availablein the Central London market. We will continue to seek out large scale, multi-phase urban developmentprojects. We believe that the scale and complexity of such regeneration projectsafford us a certain competitive advantage, as well as strengthening our pipelineof activity in the medium term. Such activity, which includes our work atPaddingtonCentral and the Royals Business Park in London, Curzon Park inBirmingham and The Heart of Slough project, now exceeds three million sq. ft. offuture development. With our track record and expertise in both stand alone and mixed-use projects,we remain focused on all main sectors, with the possible exception of theindustrial market. This is also unlikely to change in the foreseeable future. I am pleased to report another year of superior level returns from our propertyinvestment portfolio compared to the overall market. We achieved a 3.7 per centIPD Total Portfolio Return* in 2007, compared to the IPD UK Annual PropertyIndex of a negative 3.4 per cent. 2007 was the year in which our medium-termstrategy of acquiring only such investment properties that contain innatedefensive qualities was tested and found to be resilient. As I reported inSeptember, we have been significantly overweight in the retail sector but, asour shareholders will be aware, our sub-sector of choice is neighbourhoodconvenience retailing, typically anchored by a significant food store. Not onlydoes this sub-asset class offer a resilient pedestrian footfall, but theunenclosed nature of these assets frequently offers significant redevelopmentopportunities, as retailers focus on locations which can provide convenience andincreased customer trip journeys. In recent years, and in this respect 2007 was no different, our allocation ofresources into the investment property portfolio fell below target levels as weremained unable to identify additional investments that offered the returns thatwe felt appropriate. That caution also appears to have been justified. 2007 saw us commence development-led joint venture relationships with both CTPLimited, a Manchester-based property development company specialising inprojects in the North of the UK, and Fiducia Group Limited which primarilydevelops the retail component of new residential neighbourhoods. In January ofthis year, we were pleased to form a joint venture with Blue (SustainableLiving) Limited to pursue sustainable residential and mixed-use developmentopportunities. Outlook The difficulties in certain parts of the financial markets that became apparentin the second half of 2007, and which have continued since, had their mostsignificant external impact on the property market. It is perhaps too early topredict accurately the full ramifications of this liquidity squeeze, but wesense that valuations of property assets may shortly be approaching levels whichmore accurately reflect risk. However, the impact that the projected economic slowdown in the UK will have onthe strength of occupier demand for office accommodation has not yet beenrevealed. Since our activities are primarily involved in the delivery of suchnew accommodation, it is here that we must be at our most vigilant. We will continue to focus on urban development opportunities, possibly nowembracing Central London for the first time in several years, deepenrelationships with our regional joint venture development partners and possiblyseek new ones that complement our now expanded portfolio of activity. We plan to continue our risk-averse policy of maintaining relatively modest netdebt and gearing* and seek, wherever possible, to engage long-term institutionalpartners for our substantial development projects. * refer note 6 Conclusion There is no doubt that the property market has been impacted by the turmoil inthe financial sector. Given the importance to the property market of a confidentand healthy banking community, it is likely to be some time before adequate bankliquidity is available again to finance the demand that we feel lies latent inthe property business. Consequently, value growth will be inhibited untilstability returns to the financial services sector. Creation of real value has, in our view, always originated from developmentactivity that delivers a real impact on the physical environment in which welive and work. This activity is our core area of expertise from which we willseek to benefit in the years ahead. Such activity relies on a confident occupiermarket, and we are hopeful that the forecast slowdown in the UK economy will notbe of such proportions that occupier prospects are seriously damaged. However,favourable prospects for the occupier markets will recede the longer the currentdifficulties in the financial sector remain unresolved. Our development activity will continue in 2008 in a number of importantlocations such as Paddington, Southampton and Manchester, and we anticipatesecuring profitability in the current year from these, amongst other projects,as well as moving closer to commencing development activity in Slough, theRoyals Business Park and Hammersmith in West London. I believe that our reputation as a developer with both the expertise and theappetite to unlock large-scale development value will continue to be to ouradvantage in a world where more equity capital may be available, in directcontrast to the more restrained liquidity available from bank finance. Ourability to intermediate between development opportunities on the one hand andequity capital on the other, will prove increasingly relevant. I am confident that we have the management team and resources necessary to meetthese challenges. As previously reported, Paul Willis stood down as a member of our Board forfamily reasons in March 2007 and Roy Dantzic, our former Chairman, retired inMay 2007 after four years of exemplary service. For myself, I was very pleasedto have been appointed to your Board in February 2007. I am pleased to thank, on your behalf, all of the management and staff ofDevelopment Securities for their considerable efforts, commitment andprofessionalism in what has been a challenging year. David JenkinsChairman8th April 2008 Review of operations 2007 was the year that the chickens came home to roost in the financial servicessector, as the most significant liquidity squeeze in recent memory impacted thecapital markets. Other than this sector, property was the worst hit asset classas values tumbled across the board in recognition that reduced liquidity andappetite for property lending in the banking community would have potentiallyserious consequences in our sector, as investor appetite diminished at theprospect of financing property with more equity and less bank debt. This rapidre-pricing of risk, which occurred towards the end of the year, was anticipatedsome six months earlier by the real estate equity sector. As a consequence of this credit crunch, UK annual GDP growth is estimated toslow significantly from an above trend 3.0 per cent in 2007 to a below trendfigure of less than 2.0 per cent in both 2008 and 2009, prompting the Bank ofEngland's Monetary Policy Committee to reduce interest rates. Whilst there maybe some upward pressure on inflation from currency weakness and rising commodityprices, wage increases in the UK have remained moderate, and it is anticipatedthat the UK consumer will cut spending growth to 2.0 per cent in 2008 in theface of residential property market concerns and higher household debt levels.The unknown factor is the extent to which the knock on effects of the bankingliquidity crisis will eventually effect the rest of the UK economy, sinceconfidence levels could easily be shaken by events yet to unfold and none of usshould be complacent in that regard. A more distant threat, but a threatnevertheless, is the unbalanced nature of the global economy, with reliance oneconomic growth in Asia assuming ever increasing proportions. At some stage,this imbalance will need to be addressed. Clearly, a property asset price bubble had formed in recent years and thenecessary market correction was made. Nowhere was this more keenly witnessedthan in the Central London office market where double-digit positive returnswere posted in the nine months to September only to be turned around intonegative territory three months later. Our three pronged risk-averse strategy,maintained through recent years, continued primarily to seek out property forour investment portfolio which is able to provide a mixture of defensive, stableincome and positive asset management opportunities to create value. We arepleased to report that this strategy has been validated as the downturn invalues impacted the market in the final quarter of 2007. Against the backdrop ofmarket declines of more than 10.0 per cent, the capital value of our portfoliodeclined by only 1.0 per cent, generating a Total Portfolio Return* as measuredby IPD of 3.7 per cent as compared to the IPD UK Annual Property Index for 2007of negative 3.4 per cent. Once again, we have achieved an upper quartileperformance ranking. Secondly, we continued with our policy of reducing ourequity exposure to large-scale, speculative development by seeking institutionalpartners more appropriate to long-term substantial real estate exposures andthirdly, we maintained a modest level of net gearing*. Our main concern currently is the health of the UK occupational market since, aswe have always maintained, long-term property performance is driven by rentalgrowth. If the impact of the credit crisis is limited to the banking andfinancial services sector, the occupational markets, with the exception of theCity of London office market, could remain stable and lead us to believe thatcurrent pricing levels are fair valued. The risk, however, remains on thedownside and we would not be surprised to see further capital value fallsthrough 2008 and possibly 2009. We anticipate that rental growth at best will beweak this year and at worst slightly negative, as the consumer-led slowdowngathers pace, with businesses likely to delay expansion plans and reduceemployment levels. *refer note 6 West Quay, Southampton The site acquisition and development of the new headquarters building forCarnival PLC at West Quay III, Southampton was forward funded with Lime PropertyFund Limited Partnership in 2007. Carnival PLC entered into an agreement tolease for a term of 20 years on completion of the development. The scheme is presently under construction, within budget and within timetable.The project commenced the regeneration of this city centre brown field site.Practical completion of this £75 million building is scheduled for the firstquarter of 2009. Negotiations in respect of a second phase of similar size on an adjoining siteare still in hand with Southampton City Council. PaddingtonCentral Our landmark urban regeneration project, PaddingtonCentral, has benefited fromhitherto buoyant occupier demand and the consequent low office vacancy levels inthe West End office market. Construction continued throughout 2007 on thecurrent phase, a 250,000 sq. ft. office building at One Kingdom Street and a206-room Accor hotel, funded by our development partners Morley Fund Managementand Union Investment Real Estate. Practical completion of the office componentwas achieved on schedule in February 2008. In the autumn of 2007, we secured apre-letting of 73,000 sq. ft. to Misys plc, representing approximately 30 percent of the available space. With West End vacancy rates at their lowestend-of-year level since 2000, we anticipate leasing the remainder of theaccommodation during 2008. The hotel is scheduled to be completed this autumn. In January 2008, we were pleased to announce that Morley Fund Management andQuinlan Private had formed a joint venture partnership to fund Two KingdomStreet, the next phase of development at PaddingtonCentral. This £275 millionbuilding will provide 230,000 sq. ft. of prime office accommodation and 22,000sq. ft. of high-end studio space. Construction of this building designed by KohnPedersen Fox has already commenced, with practical completion anticipated bymid-2010. CityPark, Manchester This mixed-use site benefits from a planning consent for a 250-room hotel and a147,000 sq. ft. office building. The hotel element of the site was sold in June2007. In October 2007, the office component was forward sold to a privateinvestor for part owner occupation, whereupon development activitycommenced on site with practical completion scheduled for mid-2009.Construction, currently on schedule and within budget, is financed on our ownbalance sheet against the bank-guaranteed sale contract with the privateinvestor. Accordingly, we believe that a satisfactory financial outcome will beachieved. Colindale, London NW9 In June 2007, we obtained planning permission for our mixed-use scheme at 399Edgware Road, London NW9, comprising 300,000 sq. ft. gross retail space and340,000 sq. ft. of private and affordable housing, together with a new 420 pupilprimary school. In November 2007, we completed the sale of the property to aprivate investor for £68 million, with the consideration comprising both cashand loan notes payable on or before 30th June 2008. Notwithstanding that thefuture payments due under the loan notes are secured by way of a first charge onthis property in favour of Development Securities, it nevertheless feltappropriate to exclude the revenue and resultant profit from our 2007 results,since approximately 75.0 per cent of the original consideration falls due forredemption in 2008. Accordingly, we anticipate that the disposal will bereflected in our 2008 financial statements. At the outset, like all its othermajor regeneration schemes, the Company planned to implement the new consentedscheme, possibly in conjunction with a residential developer. However, on thisoccasion, the Company acted upon an early opportunity to realise the value inthe site and reinvest the equity thus released into the Company's expandingdevelopment programme. Curzon Park, Birmingham Just over a year ago, in equal partnership with Grainger PLC, we acquired this10-acre site for £33.5 million. With a gross development value of over £350million, this scheme will provide some 800,000 sq. ft. of office and 400,000 sq.ft. of residential accommodation, together with a 180-bed hotel and 30,000 sq.ft. of retail space. Clearly, a project of this scale will be delivered on aphased basis, which we anticipate will stretch over 10 to 15 years. Your Companyis managing the planning process and the construction of the requiredinfrastructure as well as the commercial phases, with Grainger plc projectmanaging the residential component. The outline planning application was lodgedin July 2007 with consent anticipated in the next few months. Acquisition of thesite was funded by a mix of bank finance and equity from ourselves and our jointventure partner. Hammersmith Grove, London W6 In September 2007, we exchanged contracts with London Underground Limited forthe acquisition of a 1.5-acre site in Hammersmith town centre, immediatelyadjacent to the Hammersmith and City Line underground station. The acquisitionwill be undertaken through a Jersey property unit trust with funding from TheRoyal London Mutual Insurance Society Limited, The National Bank of Dubai andourselves. This town centre regeneration scheme, designed by HamiltonsArchitects, includes 325,000 sq. ft. of offices, a 20,000 sq. ft. cinema to bepre-leased to the Everyman Group and 15,000 sq. ft. of high-quality restaurantsand retail accommodation, alongside a significant new area of public open space. Commencement of construction will await the completion of appropriatedevelopment bank finance. We intend to deliver West End quality accommodation tooccupiers seeking a prestige location in the west of London. Cambourne Business Park We have already completed three phases at our 750,000 sq. ft. scheme locatednine miles from Cambridge. The business park is an integral part of the newCambourne Settlement, a 1,040-acre scheme of 3,300 houses with town centre,hotel, retail and leisure facilities. It is unfortunate that discussions with aninstitutional partner for the forward-funding of the next 50,000 sq. ft. phasewere interrupted by the property market uncertainties in the final quarter of2007. All funding solutions will be considered once appropriate marketconditions return. Broughton, Flintshire Progress has been unavoidably protracted on both the retail and residential landholdings. With regard to our 19-acre residential site, the Planning Inspector has nowstudied our proposals during the final stages of his review of the emergingUnitary Development Plan (UDP). Whilst not wishing to pre-judge his finalreport, which is anticipated by the end of 2008, it is pleasing that the LocalAuthority itself previously ratified the status of this land as allocated forresidential use in the emerging UDP. Our outline planning application isprepared and ready for immediate submission once the Inspector's report has beenpublished. Once planning consent has been granted, consideration will be givenas to how the increased value can be best realised. Planning consent in respect of the 171,000 sq. ft. extension to the existingBroughton Retail Park was achieved in March 2007. It is quite possible that thesoftening of market conditions in out-of-town retail parks will slow down theimplementation of this consent by ourselves and our potential joint venturepartner, British Land PLC. We have already acquired the land necessary toconstruct the road interchange that will provide enhanced access to the expandedretail facilities and also the 10 acres of land required to construct areservation for the existing, protected local populations of greater crestednewts. Hartfield Road,Wimbledon, London SW19 Following the refusal of our first application in April 2007, a revisedapplication was submitted for a simplified and marginally smaller project of35,000 sq. ft. retail and 83,000 sq. ft. private apartments including affordableunits. We believe that this second application will be considered within thenext few months. If successful, construction is likely to start in January 2009. Luneside, Lancaster Land remediation on this 17.5-acre urban regeneration project is anticipated tocommence later this year. Detailed planning consent for the first phase ofcommercial development has been obtained comprising 90,000 sq. ft. of commercialspace together with a hotel. Outline planning consent exists for 350 residentialunits for which we are now selecting our preferred development partner. The Royals Business Park In August 2007, agreement was reached for the disposal by Standard LifeInvestments of the long leasehold interest in Building 1000, the 252,000 sq. ft.office facility at the first development phase on the 50-acre development siteat The Royals Business Park, opposite London City Airport. With the acquisitionby Newham Borough Council of this building for their own occupation, discussionsare presently in hand with the relevant authorities to consider the introductionof other uses to the next phase of this site in order to create a truly mixed-use and sustainable environment. St Bride Street, London EC4 In June 2007, we received planning consent for the redevelopment of 10 St BrideStreet, on the western side of the City of London. This 55,000 sq. ft. officeand leisure project is forward-funded with the Luxembourg-based fund, SireoImmobilien Fonds. Construction work has now commenced behind the partiallyretained facade of the pre-existing building. Practical completion is scheduledfor the first quarter of 2010. Heart of Slough This mixed-use regeneration project, in partnership with Berkeley Homes, SloughBorough Council and English Partnerships includes 350,000 sq. ft. officeaccommodation, retail units, 50,000 sq. ft. library and 1,400 residential units.Progress was made in 2007, with discussions having commenced for the vacantpossession of the bus station and with Slough Borough Council leading the designand procurement process, while master plan development continues. We anticipatesubmitting our revised planning application for the scheme in the latter half of2008. Kirkby Shopping Centre, Liverpool In April 2007, we acquired this town centre retail asset for £65 million. Theasset offered precisely the regeneration potential that fits within our corearea of retail expertise. In November, we undertook our initial public consultation exercise to establishthe important community benefits that Kirkby residents wanted to see as part ofour significant regeneration proposals. We are presently in discussion withTesco plc regarding their recent planning application for a large retail-leddevelopment incorporating a new football stadium. If we are unable to reach amutually compatible resolution, we plan to submit our own revised master planand planning application later this year. Our proposals, which will includesignificant additional retail accommodation, a new civic quarter for the towncentre and a complete upgrade of the public realm, have been strengthened by ourrecent signing of an Exclusivity Agreement with ASDA Group Limited under whichthey will anchor the redevelopment. In the short term, we are implementing basic asset management initiatives tostrengthen the income stream and are encouraged by the level of occupierinterest. Furlong Shopping Centre, Ringwood The performance of our 83,000 sq. ft. neighbourhood shopping centre in Ringwoodexcelled once again in 2007, returning £2.9 million (11.3 per cent) of capitalgrowth driven by some 30.0 per cent rental growth, an outstanding result giventhat the asset suffered a predictable yield correction. During the year, activemanagement added yet another brand name to the already diverse ladies fashionoffer. Ringwood is now a significant fashion destination near the South Coast,with tenant demand increasingly comprising higher value fashion retailers, andwe aim to consolidate the rental tone in 2008, targeting £85 zone A rents. Thisaugurs well for phase II of the scheme, for which we anticipate planning consentin 2008. This phase will comprise an additional 20,000 sq. ft. of retailaccommodation, including some restaurants, to improve visitor dwell times atRingwood. Kingsland Shopping Centre, Thatcham Whilst 2007 saw us obtain outline planning consent for an extension to theexisting 50,000 sq. ft. retail centre, we plan to seek a revision to thisconsent based on a more efficient and deliverable scheme to comprise anadditional 56,000 sq. ft. of retail accommodation that we believe will providethe catalyst to further improve rental levels. All the necessary land assemblyfor this second phase has been completed and we expect to commence works on sitelater this year. Swanley Shopping Centre, Swanley Whilst slower than we ideally would have liked, key planning milestones wereachieved in 2007 which should allow us to submit an application towards the endof this year for a comprehensive redevelopment of the Swanley Shopping Centre.We are presently negotiating vacant possession of the scheme on a phased basisin order to allow continuity of trade for key retailers. Stonecross Park, Wigan In February 2008 we entered into a contract for the disposal of this vacant159,000 sq. ft. warehouse and distribution facility in Wigan which we acquiredand refurbished in 2006. Part of our portfolio management philosophy is alwaysto accept an element of vacant risk in order to create value upon a subsequentletting or disposal to an occupier. Expected sale proceeds of £8.0 million willrealise a surplus above book value of £0.8 million. Bank Hey Street, Blackpool A strategic decision was taken in the second half of 2007 to close thePricebusters indoor market operation which had been trading under increasingpressure at this location as the declining footfall in Blackpool town centrecontinued. The improvements to pitch, largely initiated by the currentredevelopment and expansion of the nearby Hounds Hill Shopping Centre, hasenabled us to implement an upgraded retail offer. In 2007, we completed aletting to Sportsworld International Limited on the first and second floors andhave exchanged contracts with fashion retailers Peacocksfor approximately half of the ground floor retail accommodation. We arecurrently close to agreement with a large UK high street pub group for theremaining ground floor and basement space. Conversion works are well in hand topermit the retailers to be trading by the summer. Closure costs of thePricebusters operation and the impact of disruption to its trading by conversionworks to the building, resulted in a £1.1 million one-off cost in 2007. Heritage Park, Winchester In 2007, we completed the land assembly and obtained detailed planning consentfor a 51,000 sq. ft. mixed-use scheme anchored by a food store, in respect ofwhich we have recently signed an Agreement for Lease with Waitrose.Additionally, we not only have strong interest in the five retail units thatadjoin the anchor store, but have agreed a pre-letting of the upper parts to thelocal Primary Healthcare Trust. Construction is scheduled to commence in mid-2008, with the objective of an opening of the scheme in spring 2009. Given thatmost of the development exposure has been de-risked, we are currentlynegotiating to forward-fund this project, thus allowing our equity to berecycled. Other portfolio properties The rental tone at Bexleyheath was improved during 2007 by securing Halifax plcas an occupier, thus helping to generate capital growth on this asset in spiteof softening yields. We aim to obtain planning consent this year for thedevelopment of a 90-key budget hotel together with residential apartments, thusunlocking the air space over the 1960's car park which should also help securean improved income stream to the car park itself. Occupancy levels at our 91,000 sq. ft. office building in Warrington have alwaysbeen managed on a 'flexible term' basis, with occupancy levels rising through2007 to its present optimum level of 92.0 per cent which we hope, together withother initiatives, will permit us to consider further raising of the rental toneof this asset. With the disposal of our Wigan property, Great West Trading Estate, Brentford isour sole remaining exposure to the industrial sector and, given the recentcorrection in values and possible concerns over downward pressure in theoccupier markets, we plan to reassess our strategy for this 163,000 sq. ft.warehouse and distribution centre. In November 2007, we completed theacquisition of a 10-acre site in Mountnessing, Brentwood, benefiting from anoutline planning consent for a 110,000 sq. ft. leisure-led mixed-use schemelocated close to the M25 motorway. In March this year, we received a favourableplanning consent for a 130-room mid-market hotel, a health and fitness club andadditional restaurant space. Development projects in partnership Significant progress has been made in our joint venture relationships which havegrown to afford us an increasing diversification within our developmentbusiness, providing access to sectors and parts of the country which lie beyondour core skills. In 2007, we formed a five-year joint venture with Fiducia Group Limited, aleading developer of neighbourhood shopping schemes. Our objective in so doingis to provide sustainable community retail centres at the heart of suburbanresidential developments. To date, the business has acquired five sites acrossthe country, with good progress being made on all projects. We are pleased tosee that a sound pipeline of opportunities looks likely to provide furthersignificant transactions in the current year. More recently, we have signed a five-year joint venture with Blue (SustainableLiving) Limited to pursue sustainable residential and mixed-use developmentopportunities throughout the UK. Its purpose is to promote, define and develophigh-quality, authentically sustainable places and communities. The firstproject is underway, incorporating a sustainable mixed-use neighbourhood schemecomprising in excess of 500 homes in the South East. The project, in line withthe objectives of the joint venture, aims to establish new standards forauthentic, sustainable development, and we anticipate a planning applicationwill be submitted by the end of 2008. Since we plan to develop more sustainablemixed-use and residential projects, the partnership with Blue (SustainableLiving) Limited dovetails effectively with more than one of our strategicobjectives. Our partnership with Centros Miller at Crawley and Wells continued on schedule.Earlier this year, we obtained planning consent for a 312-unit residentialscheme in Crawley town centre and, following strong interest from residentialdevelopers, this site is now being marketed for sale. At Priory Road in Wells,we continue to progress our retail scheme master plan with the Local Authority.Occupier demand remains firm and we anticipate a planning application being madelater this year, with a start on site in 2009. In 2007, we acquired a 25.0 percent equity interest in CTP Securities Limited, a Manchester-based propertydevelopment business operating mainly within the north of the UK. We have alsoagreed to provide a significant working capital facility to part fund furtherexpansion. CTP has a well established brand in its core regions, employingsimilar development risk management techniques as we do. It will operateseparately and will continue to build out its existing development programme of£600 million and continue to actively source and negotiate new developmentopportunities. This relationship is part of our overall strategic objective tosource large-scale, regional regeneration projects. Towards the end of 2007, we acquired a 47.0 per cent interest in the WessexProperty Fund and currently have £3 million of equity and loans investedtherein. This fund is focused on the south west of England, specialising indevelopment and investment property. There are currently six properties withinthe fund and a pipeline of potential transactions indicates further expansion.We believe there is potential to grow the fund by expanding the equity base withboth institutional and local participants. Key performance indicators Since the business of property investment and development, especially that ofDevelopment Securities, which has a considerable emphasis on developmentactivity, can only properly be judged over a long period, probably a completecycle, annual performance indicators are of less relevance in the running of ourbusiness. Whilst Total Shareholder Return* is a good guide to relativeperformance, the importance of that measure needs to be moderated by both therisk profile which we are prepared to accept and the precise stage that has beenreached in any property market cycle. Our average Total Shareholder Return sinceJanuary 2000, the date on which we would regard the present cycle to havecommenced, is 17.0 per cent per annum. This compares to 17.1 per cent assimilarly derived from the Real Estate sector index. One of the contributors toour comparative underperformance to date is the lower level of gearing* withwhich Development Securities has operated over the current cycle. It istherefore perhaps not unexpected that the consequent reduction in exposure tovolatility risk should lead to a lower required and actual level of return. Thatsaid, we are of the view that the current stages of the cycle should generatesuperior returns from development activity, over those less active investmentportfolios. We also measure our overall investment portfolio performance against anappropriate IPD Index* in order to assess relative performance of this assetclass. In 2007, the total return generated from our investment portfolio was 3.7per cent, compared to the IPD UK Annual Property Index of negative 3.4 per cent.Over the last five years, our total return has been 17.1 per cent, as comparedto 12.2 per cent of the IPD Index. * refer note 6 Debt and equity structure Our gearing* continues to be modest, at 31.2 per cent at 31st December 2007, butis elevated compared to the unusually low 6.2 per cent at the end of theprevious year. Our gross debt totalled £144.6 million whilst we held £73.1million of cash deposits. £45.3 million of these deposits were pledged ascollateral. Following on from our issue of 3.7 million Ordinary shares whichraised gross proceeds of £23.1 million at the end of 2006, we raised €47.0million through the issue of 20-year Unsecured Subordinated Floating Rate LoanNotes, redeemable anytime after five years at no additional cost. The proceedswere fully exchanged through a 20-year currency and interest rate swap into a£33.0 million fixed-rate debt obligation. Property portfolio analysis Tenant profile1 Government 2%2 FTSE 100 1%3 PLC/nationals 50%4 Regional multiples 7%5 Local traders 40% Lease profile1 0-5 years 26%2 5-10 years 29%3 10-15 years 20%4 15-20 years 11%5 20 years + 14% Location profile1 South East 40%2 North 48%3 London 11%4 South West 1% Analysis by sector1 Retail 79%2 Industrial 12%3 Office 8%4 Residential 1% Income generating properties as at 29th February 2008 * refer note 6 Financial review Consolidated income statement Profits Profits before tax decreased to £0.2 million (2006: £22.8 million) primarily dueto lower revaluation surpluses and higher net finance costs compared to 2006. Rental income Net rental income for the year fell to £6.9 million (2006: £7.4 million),reflecting the sale of let investment properties and their replacement withvacant or partially let properties with refurbishment and development prospects.During the year, £6.0 million of investment properties, yielding £0.4 million ofrental income per annum, were sold. Rental costs increased from £1.6 million to £2.5 million, reflecting a £0.5million onerous lease provision and additional property related costs. Trading and development profits Trading and development profits remained constant at £7.8 million (2006: £7.9million) arising from the sale and development of the hotel and office land siteat CityPark, Manchester, and development profit at West Quay III, Southampton.The development programme also produced project management fees from the officeschemes at PaddingtonCentral and Southampton. Operating expenses Operating expenses increased to £11.4 million (2006: £10.3 million) principallyas the result of increased bonus payments and legal and professional costs. Gain on sale and revaluation of investment properties During the year to 31st December 2007 the Group sold investment properties withbook values of £6.0 million (2006: £45.2 million) on which it broke even (2006:£0.1 million loss). The properties sold included a retail warehouse in Formbyand a number of small residential units. The revaluation surplus for the yearwas £5.1 million (2006: £21.8 million). Finance costs and finance income Increases in interest rates on higher levels of debt during most of the year ledto an increase in interest costs. This was partially offset by the increase ininterest earned, resulting in net finance costs of £6.5 million (2006: £4.4million). Subsequent to the year end, a fixed rate loan facility of £34.5 million wasrepaid, incurring an early repayment fee of £5.9 million, or £4.1 million aftertax. The facility was replaced with a £38.0 million floating rate loan. Taxation The corporation tax charge and deferred tax movements for 2007 are more than thestandard 30.0 per cent due to permanent differences and tax adjustments inrespect of prior years. The deferred tax charge for the year reflects a provision for tax onrevaluations and on other temporary differences between the carrying amount ofassets and liabilities in the financial statements and their corresponding taxbases in accordance with IFRS. Dividends The Board will recommend to shareholders at the Annual General Meeting on 21stMay 2008 a final dividend of 4.8 pence per share (2006: 4.5 pence) to be paid on3rd July 2008 to shareholders on the register on 6th June 2008. This finaldividend, amounting to £1.9 million (2006: £1.8 million) has not been includedas a liability at 31st December 2007, in accordance with IFRS. During 2007, 400,000 shares were purchased for £2.0 million at 499.7 pence pershare and 254,000 shares issued under options for £0.9 million. Earnings per share Earnings per share in the year to 31st December 2007 were nil pence (2006: 63.4pence per share) and on a diluted basis were nil pence per share (2006: 63.0pence per share). Consolidated balance sheet Investment portfolio During the year investment properties with a book value of £6.0 million weresold and partly replaced by £1.4 million of new properties. In addition, £4.0million of capital expenditure was spent on refurbishing various office,industrial and retail buildings. At 31st December 2007, there was a revaluationsurplus of £5.1 million (2006: £21.8 million) on the investment portfolio. Net asset values The performance of the Group in the year to 31st December 2007 has marginallyreduced equity shareholders' funds on which the net asset value per share iscalculated, by £2.5 million to £228.9 million, leading to a 0.7 per centdecrease in net assets per share to 564 pence (2006: 568 pence), principally asa consequence of £2.0 million share buy-back programme. Borrowings and financial risk The Group's purchases of development sites have increased debt and, at 31stDecember 2007, net debt had increased from £14.4 million to £71.5 million. Together with a decrease in net assets of £2.5 million and higher net debt, theGroup's net gearing* increased from 6.2 per cent to 31.2 per cent. The Group seeks to manage financial risk by ensuring that there is sufficientfinancial liquidity to meet foreseeable needs and by investing cash prudentlyand profitably. At the year end, Development Securities PLC had £55.5 million ofundrawn bank facilities of which £7.5 million is collaterised (2006: £42.8million and £5.4 million respectively) and cash of £73.1 million (£27.8 millionexcluding pledged collateral cash balances) (2006: £88.5 million and £81.6million excluding pledged cash). The Group partly manages its interest rate exposure through the use of fixedrate debt and debenture instruments. * refer note 6 Consolidated income statement For the year ended 31st December 2007 2007 2006 £'000 £'000 Continuing operations: Revenue 60,358 48,727Direct costs (45,937) (32,776)Gross profit 14,421 15,951Operating costs (11,396) (10,257)Gain/(loss) on disposal of investment properties 9 (97)Gain on revaluation of investment property portfolio 5,099 21,821Deficit on revaluation of operating properties (780) (475)Net foreign currency differences 262 -Operating profit 7,615 26,943 Other income 416 -Share of post tax profits of joint ventures 57 151Share of post tax losses of associates (826) -(Loss)/income from financial assets (63) 63Impairment provision of financial assets (500) -Profit before interest and taxation 6,699 27,157 Finance income 3,809 2,954Finance costs (10,264) (7,321) Profit before taxation 244 22,790 Taxation (205) 769Profit after taxation attributable to equity shareholders of the parent 39 23,559 Basic earnings per share 0.0p 63.4pDiluted earnings per share 0.0p 63.0p Dividends 2007 2006 £'000 £'000 Dividends declared and paid during the year 2,825 2,390 Consolidated balance sheet As at 31st December 2007 2007 2006 £'000 £'000Non-current assetsProperty, plant and equipment- Operating properties 2,360 8,090- Other plant and equipment 2,372 3,618Investment properties 154,811 139,461Financial assets 16,540 5,881Investments in associates 842 673Investments in joint ventures 8,379 20,464Trade and other receivables 653 1,468Deferred tax assets 4,997 6,215 190,954 185,870 Investment property - held for sale - 5,299Investment in joint venture - held for sale 654 - Current assetsInventory - developments and trading properties 155,544 74,663Financial assets 12,734 -Trade and other receivables 16,597 10,014Cash and short-term deposits 73,135 88,536 258,010 173,213 Total assets 449,618 364,382 Current liabilitiesTrade and other payables (62,925) (16,747)Financial liabilities (853) (15,515) (63,778) (32,262) Non-current liabilitiesFinancial liabilities (143,796) (87,419)Deferred tax liabilities (11,697) (12,233)Provisions (1,431) (1,055) (156,924) (100,707) Total liabilities (220,702) (132,969) Net assets 228,916 231,413 Capital and reservesShare capital 20,283 20,356Share premium 109,801 108,850Revaluation reserve 1,081 853Other reserves 47,596 45,793Retained earnings 50,155 55,561 Total equity 228,916 231,413 Basic net assets per share 564p 568pDiluted net assets per share 563p 565p Consolidated statement of recognised income and expenseFor the year ended 31st December 2007 2007 2006 £'000 £'000Gains on revaluation of operating properties 228 518Loss on valuation of cross-currency interest rate swap (114) -Gains on valuation of available-for-sale financial assets 1,827 -Deferred tax charge (498) (992) Net income /(expense) recognised directly in equity 1,443 (474)Profit for the year 39 23,559Total recognised income and expense for the year attributable to equity 1,482 23,085shareholders of the parent Consolidated cash flow statementFor the year ended 31st December 2007 2007 2006 £'000 £'000Net cash flow from operating activities (refer note 5) (46,342) (17,977)Investing activities:Interest received 3,812 3,057Proceeds on disposal of plant and equipment 728 33Proceeds on disposal of investment properties 5,989 45,076Purchase of plant and equipment (825) (1,547)Purchase of investment properties (4,812) (6,928)Purchase of investments (1,614) (20,190)Investment in financial assets (22,034) (5,000)Cash inflow from joint ventures 12,075 - Net cash flow from investing activities (6,681) 14,501 Financing activities:Dividends paid (2,825) (2,390)Issue of new shares 865 23,210Purchase of own shares (2,019) -Repayments of borrowings (42,699) (18,729)New bank loans raised 89,567 11,973 Net cash flow from financing activities 42,889 14,064Net (decrease) / increase in cash and cash equivalents (10,134) 10,588 Cash and cash equivalents at the beginning of the year 82,607 72,019 Cash and cash equivalents at the end of the year 72,473 82,607 Cash and cash equivalents comprise:Cash at bank and in hand 27,791 81,588Pledged cash held as security against financial liabilities 45,344 6,948Cash and short-term deposits 73,135 88,536Bank overdrafts (662) (5,929) Cash and cash equivalents 72,473 82,607 NOTES TO THE UNAUDITED PRELIMINARY RESULTS 1. BASIS OF PREPARATION Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company will publish full financial statements thatcomply with IFRSs. The financial information set out in the announcement does not constitute theGroup's statutory accounts for the years ended 31st December 2007 or 2006. The financial information for the year ended 31st December 2006 is derived fromstatutory accounts for that year which have been delivered to the Registrar ofCompanies. The auditors reported on those statutory accounts; their report wasunqualified and did not contain a statement under s237(2) or (3) Companies Act1985. The statutory accounts for the year ended 31st December 2007 will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting. The audit report on the full financial statements has yet to be signed. 2. ACCOUNTING POLICIES a) Basis of accounting The Group's financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union asthey apply to the financial statements of the Group for the year ended 31stDecember 2007 and applied in accordance with the Companies Act 1985. b) Basis of consolidation i) The consolidated financial statements of the Group include the financialstatements of Development Securities PLC ('the Company'), its subsidiaries andthe Group's share of profits and losses and net assets of jointly controlledentities and associated undertakings. Where necessary, adjustments have been made to the financial statements ofsubsidiaries, associates and jointly controlled entities to bring the accountingpolicies used and accounting periods into line with those used by the Group. Intra-group balances and any unrealised gains and losses arising fromintra-group transactions are eliminated in preparing the consolidated financialstatements. ii) The results of subsidiaries acquired during the year are included from theeffective date of acquisition being the date on which the Group obtains control.Business combinations are accounted for under the acquisition method. Any excessof the purchase price of the business combination over the fair value of theassets and liabilities acquired is recognised as goodwill. Any discount receivedis credited to the income statement in the period of acquisition. 3. SEGMENTAL ANALYSIS For management purposes, the Group is currently organised into three operatingdivisions: Investment - management of the Group's investment property portfolio, generating rental income and valuation surpluses from property management;Trading and development - managing the Group's development projects. Revenue is received from project management fees, development profits and the disposal of inventory; andOperating - serviced office operations and retail activities. Revenue is principally received from short-term licence fee income. These divisions are the basis on which the Group reports its primary segmentalinformation. All operations occur and all assets are located in the UnitedKingdom, except assets of £808,000 (2006: £1,394,000), which are located inFrance and The Netherlands. Accordingly no secondary segmental information isshown. All revenue arises from continuing operations. Year ended 31st December 2007 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Segment revenue 9,404 46,240 4,714 60,358Direct costs (2,543) (37,241) (5,051) (44,835)Business closure costs - - (1,102) (1,102) Segment result 6,861 8,999 (1,439) 14,421Unallocated operating costs (11,396)Gain on disposal of investment 9 - - 9propertiesGain/(loss) on revaluation of 5,099 - (780) 4,319property portfolioNet foreign currency difference 262Operating profit 7,615 Other income - 416 - 416Share of post-tax profits of - 57 - 57joint venturesShare of post-tax losses of (800) (26) - (826)associatesLoss from financial assets (63) - - (63)Impairment provision of (500)financial assets Profit before interest and taxation 6,699Finance income 3,809Finance costs (10,264) Profit before taxation 244Taxation (205) Profit after taxation attributable to equity shareholders of the parent 39 Year ended 31st December 2007 Trading and Investment development Operating Total £'000 £'000 £'000 £'000 Assets and liabilitiesSegment assets 179,713 241,149 6,519 427,381Unallocated assets 22,237 Total assets 449,618 Segment liabilities (101,946) (101,879) (1,779) (205,604)Unallocated liabilities (15,098) Total liabilities (220,702) Year ended 31st December 2007 Trading and Investment development Operating Total £'000 £'000 £'000 £'000Other segment informationCapital expenditure 5,474 - 738 6,212Unallocated capital expenditure 87Depreciation - - 921 921Unallocated depreciation 142 RevenueRental income 8,460 21 - 8,481Operating property income - - 4,714 4,714Project management fees - 1,223 - 1,223Trading property sales - 5,166 - 5,166Construction contract revenue - 23,349 - 23,349Development proceeds - 16,481 - 16,481Other income 944 - - 944 9,404 46,240 4,714 60,358 4. FIXED RATE DEBT The notional fair value adjustment at 31st December 2007 in respect of theGroup's fixed rate debt, calculated on a replacement basis, taking into accountthe difference between fixed interest rates of the Group's borrowings and themarket value and prevailing interest rates of appropriate debt instruments, was£11,598,000 (2006: £11,900,000) equivalent to a decrease in net assets of 20.0pence per share after tax (2006: 20.5 pence per share). 5. NOTE TO THE CASH FLOW STATEMENT 2007 2006 £'000 £'000 Operating profit 7,615 26,943Adjustments for:(Gain)/loss on disposal of investment properties (9) 97Net gain on revaluation of property portfolio (4,319) (21,346)Share based payments 428 142Depreciation of property, plant and equipment 1,063 1,128 Operating cash flows before movements in working capital 4,778 6,964Decrease / (increase) in developments 2,924 (3,587)Increase in trading properties (83,805) (14,975)Increase in receivables (5,418) (182)Increase in payables 45,272 1,727Increase / (decrease) in provisions 376 (474) Cash outflow from operations (35,873) (10,527)Capitalised interest charged to direct costs 20 1,145Income taxes paid (21) (473)Interest paid (10,468) (8,122) Net cash outflow from operating activities (46,342) (17,977) 6. GLOSSARY Operating profit: stated after profit on disposal of investment properties andthe revaluation of the property portfolio and before the results of associates,jointly controlled entities, finance income and costs. IPD Index and Total Portfolio Return: total return from the investment propertyportfolio, comprising net rental income or expenditure and capital gains orlosses from disposals and revaluation surpluses or deficits, divided by theaverage capital employed during the financial period, as defined and measured byInvestment Property Databank Limited, a company that produces independentbenchmarks of property returns. Total Shareholder Return: movement in share price over the year plus dividendspaid as a percentage of the opening share price. Gearing: expressed as a percentage, is measured as net debt divided by totalshareholders' funds. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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