Final Results

22nd Mar 2006 07:02

Slough Estates PLC22 March 2006 SLOUGH ESTATES PLC FINANCIAL RESULTS FOR THE YEAR TO 31 DECEMBER 2005 STRONG PERFORMANCE FIRMLY FOCUSED ON FLEXIBLE BUSINESS SPACE Financial Highlights for Slough Estates Plc ("SEI") Diluted adjusted NAV per share 680.4p (558.4p) UP 21.8%Profit before tax £582.3m (£388.0m) UP 50%Adjusted profit before tax £120.4m (£120.1m) -- including exceptional surrender premiums £156.8m (£127.6m) UP 23%Basic EPS 91.7p (68.5p) UP 34%Diluted adjusted EPS 24.3p (24.4p) -Total dividend 17.5p (16.0p) UP 9.4%Adjusted gearing 62% (51%) UP 11%- Loan to value ratio 42% (34%) UP 8%Equity shareholders' funds £2,440m (£2,165m) UP 18%Total property portfolio - including share of joint ventures £5,137.8m (£3,987.5m) UP 29% Diluted adjusted net asset value per shareNAV per share adjusted to add back deferred tax associated with investmentproperties and to reflect the dilution caused by preference shares and sharesheld in the ESOP trust. Adjusted profit before taxProfit before tax excluding exceptional gains and losses, property revaluationssurpluses and the gains and losses on derivative instruments. lease surrenderpremiums which are exceptional by virtue of their size are excluded fromadjusted profit before tax. Diluted adjusted earnings per shareEarnings per share based on adjusted profit before tax, and reflecting thedilutive effects of preference shares and shares held by the ESOP trustproperties. Adjusted GearingNet debt as a percentage of shareholders' funds adjusted to add back deferredtax associated with investment properties and treating preference shares asequity. Highlights • Flexible business space focus now firmly in place, representing 94% of portfolio • Managing our assets for value + Bought and sold £895m of assets in 2005 o Floor space increased by 34% o Land area doubled in Continental Europe o £136m profit on disposals • Strong growth in NAV (up 21.8%) including + Benefit of continuing yield compression + Valuation gains from development programme + Valuation uplift from 2005 acquisitions • Further significant value creation potential in 2.5 million sq m development pipeline • Record level of lettings - 364,000 sq m in 2005 + 100,000 sq m post year end letting successes in Continental Europe • Significant progress on target voids - key target wins + UK vacancy* down from 12.1% to 10.9% + Underlying** UK vacancy down from 9.8% to 8.1% • Like for like rental income from investment portfolio broadly unchanged on prior year + Reflecting generally flat market conditions and loss of income from disposals + Lettings and rent reviews delivered £14.5m new rental income + £52m reversionary potential (excluding over-rented) * Treating rental guarantees as vacant - as analysed at the interims 2005** Excluding acquisitions and completed developments (< 18 months old) Ian Coull, Chief Executive, said: "Slough Estates International ("SEI") has delivered a strong set of results,making good progress on a number of key objectives. Our flexible business space focus is now firmly in place, representing 94% ofour portfolio. In markets showing little if any rental growth we have been veryactively managing our assets for value, delivering a 22% uplift in NAV. We havegrown our floor space by 34% to over 4m sq m under management and we arebuilding on our position as the European leader in this specialised area offlexible business space. In 2005 SEI bought and sold £895m of assets. Over a twoyear period, SEI has been involved in approximately £1.8bn worth oftransactions. In 2005 we made major acquisitions in North America, the UK and inparticular in Continental Europe where by the end of the year we had doubled thesize of our portfolio. By the end of 2005 our development pipeline had grown to2.5 million sq m with an expected aggregate expenditure of some £2.6bn and weare well placed to realise its value potential. The 22% increase in NAV per share was driven not only by market yieldcompression but also by direct management input from the record level oflettings, from a valuation uplift in our development projects and from an upliftin the value of the assets acquired during the year. Heywood and Woodside alonedelivered year end valuation gains of almost 8% since the acquisition of theholding entities in mid-year. Similarly, the US acquisitions delivered almost10% of uplift since acquisition. Total returns on our UK industrial propertiesat 18.4% were identical to the IPD industrial index. In 2005 we made goodprogress against our key target voids - such as the prime site taken by ResearchIn Motion (BlackBerry(R)) on the Slough Trading Estate. We report a profit before tax, excluding valuation gains and exceptionals of£120.4 million, unchanged on last year - reflecting the generally flat rentaltrends in 2005 and the disposals we made at the end of 2004. We delivered arecord level of lettings of over 364,000 square metres and, although this was tosome extent offset by space returned, in many cases space was brought back inorder to create fresh redevelopment opportunities. The UK achieved significantprogress with voids down from 12.1% to 10.9%. A key differentiator for SEI is our major development programme and much of thevacancy we record therefore represents an opportunity to enhance value.Similarly, acquisitions of portfolios with voids will naturally increase ourvacancy levels but, actually, represent a significant opportunity for us.Stripping out recent major acquisitions and completed development sites theunderlying SEI vacancy is down from 9.8% to 8.1%. We have been actively managing our assets for value - locking in gains by makingdisposals (£136m profit against book value in 2005) and reinvesting where thereare greater opportunities. Our profit performance was achieved despite the lossof significant income from those assets sold as part of the recycling programme. Strength in both NAV and profit resulted in total returns for the year of 24.8%.Our strong financial performance, coupled with confidence in the futureperformance of the business, has led the Board to recommend a final dividend of11p per share, making the total dividend for the year 17.5p per share, anincrease of 9.4% on 2004. Outlook2006 has got off to a good start. We have achieved 100,000 sq m of new lettingsin Continental Europe and we have seen an early increase in the level of UKleasing activity leading to a further reduction in vacancy rates by the end ofFebruary. Whilst there has been some limited evidence that rental levels areedging up, we do not expect to see significant growth in market rentals in 2006.There is further evidence of yield compression in the early part of 2006 but theindications are that this is not likely to be as sustained as we experienced in2005. The recent dynamic pace of change continues. Our focused business model and ourcore areas of expertise leave us well positioned to generate strong levels ofreturns for investors. We are in good shape." For further information please contact:Slough Estates plc The Maitland ConsultancyMichael Waring Colin BrowneTel: 07775 788628 Tel: 0207 379 5151 1) REVIEW OF THE YEAR ENDED 31 DECEMBER 2005 The Portfolio The group's investment and development portfolio is summarised in the tablebelow: Gross Valuation Total Reversionary/ Rental at 31 Property (Over-rented) Income December Valuation Return Initial (including 2005* 2005 Surplus (ungeared) Yield** vacant space) £m £m £m % % % ------- -------- -------- --------- ------- ----------UKSlough 73.4 1,313.1 145.8 19.5 5.3 14.1S London & SEngland 14.4 403.9 29.1 12.8 3.5 35.8N London & EEngland 21.5 472.0 33.4 14.4 4.9 27.5Midlands 16.3 374.2 25.5 16.1 5.5 22.7Heathrow & WLondon 29.6 552.0 54.2 17.7 4.9 15.5TV & W 28.4 442.8 33.4 15.7 5.9 10.5England ------- -------- -------- --------- ------- ---------- Total 183.6 3,558.0 321.4 17.0 5.1 18.0Industrial 142.6 2,541.7 246.9 18.4 5.4 22.2Office 30.4 489.0 48.5 17.9 6.5 2.1Retail 10.6 216.9 28.4 21.2 4.8 12.3Land - 310.4 (2.4) - - - ------- -------- -------- --------- ------- ---------- Total 183.6 3,558.0 321.4 17.0 5.1 18.0ContinentalEuropeIndustrial 12.6 200.4 5.7 11.7 6.5 9.6Office 8.2 132.4 2.0 9.1 6.7 16.9Retail 1.1 15.0 2.3 28.7 7.8Land/WIP - 33.6 (1.4) (4.4) - - ------- -------- -------- --------- ------- ---------- Total 21.9 381.4 8.6 9.8 6.0 11.9NorthAmericaOffice / R&D 60.8 712.2 86.5 27.7 8.0 (5.2)Land / WIP - 224.8 41.0 28.6 - - ------- -------- -------- --------- ------- ---------- Total 60.8 937.0 127.5 28.0 6.1 (5.2)Group Total*** 266.3 4,876.4 457.5 19.1 5.3 12.9 * Represents gross rental income receivable for the year, excluding exceptionallease surrenders and calculated under IFRS.** Passing rent at 31 December 2005 as a percentage of property valuation,including vacant space and land.*** Excludes joint ventures Good valuation surpluses were achieved in all regions, countries and assetclasses. Particularly strong performances were delivered in the Slough TradingEstate and in North America - the latter building on several successive years ofstrong performance and the Slough Trading Estate benefiting from an improvedproduct offer and a marketing re-launch. Total returns of 18.4% on our UK industrial properties were in line with the IPDindustrial index. Overview - UK The portfolio in the UK is at the heart of our business and although we areexpanding our Continental European business, we expect the UK to remain thefinancial driver for the Group for the foreseeable future. The UK businessperformance has been flat for a few years and so we took the decision at thebeginning of 2005 to significantly change the way we operated in the UK. Wechanged our management structure from a traditional functional reporting modeland created six new, market-facing geographic regions, each headed by a RegionalDirector. This change has created a clear ownership of the value creation withineach region and has ensured that business decisions are now taken on the basisof this overall value creation rather than on a narrower, functional basis. Thenew regional teams were created at the beginning of April and we believe thatthe excellent financial performance in the second half of the year was duesubstantially to the cultural change which has followed this restructuring. Weexpect to see more benefits emerging this year and beyond. The Slough Trading Estate is one of Europe's the best known business facilitiesand is, we believe, the biggest single trading estate in private ownership inEurope. Over the last two years, we have recognised that the traditionalindustrial businesses which have been at the heart of the Slough Trading Estateare no longer in such profusion in the UK and we recognised that if the Estatewas to continue in its premier position in Europe then it needed some radicalre-thinking. Accordingly, in October we re-launched the Trading Estate with anew branding, underpinned by an improved service offering and have launched amaster-planning exercise designed to ensure that the Estate continues to developby attracting contemporary business users in the future and we expect to seethese positive changes directly reflected in the value of the Estate in theyears ahead. Major acquisitions in the UK notably included the holding entities owningHeywood and Woodside industrial parks. The UK also achieved a record 224,000 sqm of lettings in 2005. The 50/50 joint venture HelioSlough was created in 2004 to provide us withaccess to the UK logistics market where we were under-represented. In its firstfull year of operating, it has succeeded in making a profit before tax of £0.6m(SEI's share), which is ahead of plan. We have been very successful in acquiring a number of new opportunities and theprospects for HelioSlough for 2006, and beyond, are very encouraging. The highlevel of post year end activity has resulted in a £42m of pre-funding agreementbeing secured for HelioSlough's 70,000 sq m speculative distribution facility atNimbus Park, near Doncaster. Overview - Continental Europe At the Interims in 2004, we announced that we planned to significantly expandour operations in Continental Europe. We have had development and investmentprogrammes in Belgium, France and Germany for over 40 years and we have built upan enviable reputation in those markets. We are now building on this marketposition, both within those countries by expanding out of the core areas inwhich we have operated previously and also by moving into new countries. We believe that there is an appetite with both investors and occupiers for apan-European business space provider. We are already building up strongrelationships with a number of international businesses who want support indeveloping across international boundaries and we believe that there are manymulti-national organisations who want to enter into partnership arrangements todeliver their space requirements. During the year we made two significant corporate acquisitions which are helpingus to deliver our vision. In July we acquired 60% of Mainland BV which is aNetherlands based development company, specialising in the light industrial andsuburban office market around Amsterdam's Schiphol airport. The acquisition notonly brought substantial development opportunities for around 100,000 sq m ofnew business accommodation but, also, an established and well respected team ofprofessionals whom we have now embraced into the Slough 'family'. Ourrelationship with Jelle Kuiper who owned the business and retains the other 40%of the company is very strong and we could exercise our option to acquire thebalance of 40% at an appropriate time as the business develops. In December we acquired the Central European development arm of a Dutchengineering company, Grontmij, and as a result have secured developmentopportunities in a number of new countries in Central Europe. We are nowrepresented in Poland, the Czech Republic and Hungary and we also have optionsfor development sites in northern Italy and Hungary. As well as the 80 hectaresthat we have acquired, we have been joined by an excellent team of professionalswho all know the markets in which they operate and who have been swiftlyintegrated into the Group. We are optimistic about achieving good performance inthese new territories - as evidenced already in 2006 by the pre-let to a majorUS company of a 43,000 sq m distribution and manufacturing facility. Meanwhile our organic programme has also accelerated and we have acquired someoutstanding new opportunities around Paris, at Schiphol airport and a largeportfolio of logistics and office facilities from KarstadtQuelle in Germany. Thelatter provides a powerful combination of a significant revenue stream and majordevelopment opportunity - a combination which we believe few of the otherpotential bidders were in a position to unlock. Overview - North America Over the last ten years we have developed a real expertise in the health sciencemarket in California and we are undoubtedly the leading developer in the sector.In October 2005 we organised a trip for investors and analysts to see our U.S.operation. The purpose was to highlight the excellent quality of our localportfolio, the development pipeline, our people and also of our customers. Thefeedback we received clearly indicated that this was a very worthwhile trip andthat this business is now much better understood. Health science is now a mature industry and as a result of consolidation overthe last few years we find ourselves with some of the biggest corporations inthe world as our customers. In 2005 construction started on the first phase of the 72,836 sq m $329m campuswe are developing for Genentech - currently on target for completion during2006. We will continue to exploit the outstanding pipeline of development sites thatwe have in the Bay Area of San Francisco and in San Diego. In 2005 two major newsites were acquired for £168m at Shoreline and Seaport in the Bay Area. We have been selling all of the activities in the U.S. outside our Californianhealth science core and we have been successful in hitting markets at the righttime. During the year we sold the leisure and residential complex in Florida,known as Quail West, and we also sold our holding in the Tipperary Oil and GasCompany. Both of these disposals produced substantial profits over book value. Strength of Rental Income Profile SEI has an excellent spread of customers including many blue chip clients butwith no major exposure to any one customer and a particularly resilient leaseexpiry and break profile. The weighted average lease expiry including breaks is11.4 years, 10.1 years including breaks (note the basis of calculation here isthe weighted average calculated by value of annual contracted rent per year andincludes pre-let developments and pre-contracted rents). The number of tenants occupying property throughout the group increased by 5.7%to 1,639, with the top 10 representing 21% of income and the top 20 representing28% of income. 91% of income is secured for 5 years, 57% for 10 years. If allbreaks were exercised these percentages would only drop to 81% and 49% for 5 and10 years, respectively. In terms of UK occupational markets the tenant profile is diversified with thelargest industry sectors represented being Telecommunications Media & Technology(25%), Engineering & Machinery (16%), Food Producers, Beverages & HouseholdGoods (12%) and Retailers (11%) - no other single sector represented more than10%. Information on current rent passing, upcoming rent reviews, expiries and breakscan be found in the Financial Review. Lettings Analysis Area Rent * pa 000's Sq M £m ----------- -----------UK:Vacant let first time 25.6 4.2New construction 2005 16.4 1.8Existing vacant 146.9 9.0Licenses 35.2 0.8 ----------- -----------Total UK 224.2 15.8 ----------- -----------Continental Europe ** 107.4 9.7 ----------- -----------North America 32.8 3.1 ----------- -----------Total SEI 364.4 28.6 * Annual passing rent in first full year excluding rent free periods** Includes sale and leaseback transactions with KarstadtQuelle and Alstom Vacancy Analysis Occupancy rates - Headline (basis** as per interims 2005 20042005) % % ----------- ------------UK 89.1 87.9Continental Europe 87.7 87.9(Continental Europe - excluding trading properties 92.9 94.2 ----------- ------------USA 80.5 86.2 ----------- ------------ Total 87.8 87.7 ----------- ------------Analysis of UK Occupancy rates ----------- ------------Recent acquisitions (Heywood, Woodside, Land 85.0 77.5Securities) ----------- ------------Completed development sites (less than 18 months) 54.3 43.6 ----------- ------------Underlying* UK Portfolio Occupancy rates 91.9 90.2 ----------- ------------ * Excluding recent acquisitions and completed development sites (less than 18months)** Treating former Land Securities properties as vacant Record levels of lettings in the UK improved overall occupancy levels from 87.9%to 89.1% with the Slough Trading Estate and The Thames Valley & West of Englandregions showing the best progress. An important driver of SEI's performance is its development programme -consequently much of its vacancy level actually represents an opportunity. Themajority of the vacancy increase in the US relates to the acquisitions ofShoreline and Seaport. Similarly, if the UK vacancy position is adjusted toexclude recent major acquisitions and completed development sites, theunderlying UK vacancy figure for 2005 becomes 8.1% compared to 9.8% for 2004.8.1% is a reasonable level at this stage of the cycle to allow for themanagement of both the demand for new space and for the flexibility to relocatetenants as required. In 2006 the Continental European businesses have achieved major lettingsuccesses in a series of post balance sheet transactions - including SEI'slargest ever letting in Continental Europe with a 43,000 sq m transaction in thenewly acquired business in Poland. Acquisitions & Disposals In 2005 SEI made £597m of acquisitions and £187m of property disposals(including Quail West) - plus a further £111m from the sale of non-coreTipperary which generated a profit of £100m against book value. These includedimportant strategic moves with the £279m acquisition of holding entities owningWoodside and Heywood in Dunstable and Manchester - two of the largest industrialparks in the UK, the £168m acquisition of major bio-tech sites for SEI's strongspecialist operations in California and the acquisition of a large portfolio ofboth investment and development properties from retailer KarstadtQuelle inGermany (£58m in 2005 - parts of the deal completed after the year end). Withthe acquisition of the holding entities owning Woodside and Heywood SEI now ownsfive of the largest industrial estates in the UK. The major 2005 acquisitionshave delivered significant year end valuation uplifts against acquisitionprices. In addition to these strategic moves SEI continued with its active assetrecycling programme across the board - crystallising value on sites where thecompany's ability to add further value was outweighed by opportunities elsewherein the portfolio or by new acquisition opportunities. This programme resulted insignificant disposals at Elstree (£49m), Heston (£10m) and two sites atPleasanton, California (£29m and £8m) and acquisitions in Feltham (£11m), Alstom- near Paris (£17m), and Carlsbad - in California (£20m). Just before the end of 2005 we concluded a further strategic move in ContinentalEurope, with SEI's first expansion into Central Europe via the €19.1macquisition of the engineering company Grontmij's landbank in Poland, the CzechRepublic and Hungary - all providing excellent development potential atstrategic locations well placed for logistics projects. In early 2006 SEI alsocompleted the remaining elements of the KarstadtQuelle deal announced but notconcluded in 2005. Post year end activity in the UK also demonstrates our increasingly flexibleapproach with the announcement of a proposed sale of land at FarnboroughBusiness Park to the De Vere Group for the development of a hotel - designed toenhance the comprehensive offer and the overall attractiveness of the 125 acrepark to its occupiers. Development Programme An important driver of SEI's performance is the development programme. Wecompleted 143,000 sq m of projects during 2005, of which 45% has been let and at31 December we had 123,000 sq m under construction of which 71% has been let. The total "pipeline" of 2.5 million sq m of current and potential developments,with a built-out cost in the order of £2.6bn represents a major opportunity togenerate superior returns for investors. The overall development pipeline as at 31 December 2005 is summarised in thefollowing table. Space to Land Current Future Estimated ERV Be built Book Total 000's sq Area Value Spend Spend m hectares £m £m £m £m -------- -------- -------- -------- --------- ----------InvestmentPropertiesWork In 125 18 227 122 350 33ProgressFuture 1,080 224 490 1,149 1,638 143Developments -------- -------- -------- -------- --------- ---------- Total 1,205 242 717 1,271 1,988 176 DevelopmentTrading Profit £mPropertiesWork in 0 0 0 0 0 0ProgressFuture 1,336 274 117 534 651 86Developments -------- -------- -------- -------- --------- ---------- Total 1,336 274 117 534 651 86 -------- -------- -------- -------- --------- ----------Group total 2,541 516 834 1,805 2,639 -------- -------- -------- -------- --------- ---------- Note: Space to be built and land area includes joint ventures on a 100% basis.All financial figures are estimates and subject to change. These amounts includethe Group's developments plus its share of joint ventures' projects. Estimatedtotal spend comprises current value plus all future expenditure includingcapitalised interest. Future developments include development of bare land andredevelopment of existing buildings - some of which are currently incomeproducing. In the UK over the course of 2005 we saw a good level of take up for our coreproduct of flexible business space. The year was a letting record in terms ofnumbers, volume, floor space and rental income secured. After a low level ofactivity in previous years, occupiers are now starting to reassess their futurespace requirements and are becoming more confident about updating their propertyportfolios. There is a particular interest in occupying new and modern premises,which reflect an appropriate image to both customers and employees. As a resultwe have committed to increasing our continuing our programme of speculativedevelopment in the UK. Our success in pre-letting ranges from the 47,000 sq m complex under developmentfor Thales at Crawley (by floor space our largest UK letting ever), to the smallpremises built for Bradford Builders Merchants at Weston-super-Mare. The majority of letting transactions in 2005 (63 per cent) and in previous yearswere in respect of buildings provided in anticipation of future requirements,that is, on a speculative basis. While we are targeting increasing proportionsof pre-let accommodation we recognise that going forward it will continue to beadvantageous to provide a range of new flexible business accommodation designedto suit the most diverse range of potential customers. In Continental Europe we significantly increased our land bank over the courseof 2005 and by the end of the year held 206 ha across the 7 European countries.This land bank provides a significant development pipeline in the targetsuburban markets across Europe. Notably we have high profile developments ineach of our core markets at Pegasus Park next to Brussels International Airport,the 17 ha De Hoek scheme next to Schiphol airport, Amsterdam, the "Porte deFrance" suburban office scheme next to the Stade de France in St Denis, theAlzenau logistics park in Germany, Tulipan Park next to Prague Airport in theCzech Republic and at Strykow in Poland. These international projects aresupported by a tier of schemes targeted at their respective domestic marketswhich complement the existing investment portfolio; such as the "Carre desAviateurs" scheme and the Alstom project both to the north of Paris and theZellik and Zaventem projects in the periphery of Brussels, Belgium. Over the course of the year our German operations have expanded from providing aconcentration of business park developments in the Dusseldorf and Frankfurtsuburban markets to, through our acquisition of the KarstadtQuelle AG industrialportfolio, holding assets and potential schemes in most of the large businesscentres across the country. We believe that the time was right to make this movein Germany - given the improving market conditions and the excellentopportunites we had secured. In Central Europe, our development pipeline inPoland is provided by three projects; the largest of which is a 61 ha logistics/business park adjacent to the new motorway at Strykow in central Poland. In theCzech Republic we have a 16 ha scheme next to Prague Airport and there is a 9 hascheme in Budapest, Hungary. In North America in December 2004 we completed a master lease with Genentech todevelop a $329 million, eight-building 72,836 sq m campus on our Britannia EastGrand site in South San Francisco, California. In 2005 construction started onthe four-building, 41,806 sq m, Phase I component which is on target forcompletion during 2006. The Phase II component, consisting of four buildingstotaling 31,030 sq m, will commence construction during 2006. We also completed, in mid 2005, Phase I of our unique, modular lab facility inSouth San Francisco. This pioneering 6,039 sq m life sciences facility,featuring flexible 464 and 929 sq m square laboratory units, was the product oftwo years planning and design and is targeted at small biotech companiesrequiring small laboratories on flexible lease terms. We developed the modularlab concept in order to cater for smaller life sciences companies requiringsophisticated laboratory facilities for relatively short periods of time. Webelieve this investment will also provide access to life sciences companies atthe smaller end of the scale, to develop relationships and to captureopportunities for future expansion. A Phase II project of 5,760 sq m, adjacentto the initial facility and featuring four 1,393 sq m units, commencedconstruction during the year and is scheduled for completion in mid 2006. In October 2005, Amgen exercised an option to commence construction of a furtherbuilding at Britannia Oyster Point, South San Francisco. The 8,640 sq m office/laboratory facility is now under construction and is scheduled for completionand occupancy in January 2007. We are encouraged by the level of enquiries for life sciences facilities in theBay Area and San Diego County and are confident that additional development andacquisition transactions will take place during 2006 and beyond. REITS SEI has been carefully studying developments with regard to the possibleintroduction of real estate investment trusts in the UK and has played a leadingrole in the industry-wide consultation undertaken by the UK Government. We aregenerally supportive and positive about recent developments in this area butmany important details are still to be resolved and we do not yet know keyaspects of the structures which the government will implement. These areasinclude the interest cover test, the ten per cent shareholding limit, thetreatment of overseas subsidiaries and the conversion charge. We await futuredevelopments with interest. Property Markets & Outlook - By Geography In the UK to the end of February 2006 we have let 29,000 sq m of space - givingan additional £2.2m of income leading to a further reduction in vacancy levels.The level of take up of the core product - evidenced by the number oftransactions and the level of rent secured - has encouraged us to plan for anincrease in development starts in 2006; we are currently planning to commence568,000 sq m of construction, 8 per cent of which is already pre-let. Weanticipate that in 2006 more companies will review their property needs and ourplan is to be in a position to satisfy those requirements and to deliver astandard of service that will encourage even greater customer loyalty. In Continental Europe we believe that the investment market will become morecompetitive. Our rare position as both an investor and developer can give us asignificant competitive advantage when sellers want to sell both types of assetsto one purchaser - as evidenced in the acquisition of the KarstadtQuelleportfolio in Germany. In 2006 we aim to bring together the individual countryoperations under a single, enhanced European presence and to fully integrate ourrecent corporate acquisitions into the existing network - increasingly we areleveraging and growing customer relationships on a pan-European basis. In the US we aim to build on the substantial value creation of the last threeyears through the further pursuit of both new and existing developmentopportunities in the same specialised market in the Bay Area and in San DiegoCounty. Building on a productive and rewarding year in 2005, more initiativesare in the pipeline and will generate attractive development and investmentopportunities during 2006 and beyond. We aim to further reduce our core vacancythrough leasing and development of pre-leased product. 2) SUPPLEMENTARY INFORMATION ON DEVELOPMENT - Individual Projects COMPLETED CONSTRUCTION 2005 Location Type sq m sq m Let or SoldEdinburgh Avenue, Slough Industrial 2,394Camberley Business Centre Industrial 2,484 2,484Radlett Road, Radlett Industrial 9,676 2,384Stone Close, West Drayton Car Showroom 2,926 2,926Stockley Close, West Drayton Industrial 876 876Buckingham Avenue, Slough Industrial 2,440 511Buckingham Avenue, Slough Industrial 4,706Gazelle Road, Weston Super Mare Industrial 1,757 1,757Pulborough Way, Hounslow Industrial 2,527Motor Park, Portsmouth Car Showroom 3,074 3,074Railway Triangle, Portsmouth Industrial 1,934Handley Page Way, Radlett Industrial 6,968 6,968HelioSlough, various Logistics 11,148 11,148 ----------- ---------- ------------UK TOTAL 52,910 32,128 ----------- ---------- ------------ BelgiumPegasus building 5 extension Offices 6,694 688 FranceLe Blanc Mesnil Industrial 10,147 3,709 GermanyKapellen Logistics 12,186 CentreKrefeld Business Park 7,596 3,507Neuss IV Logistics 21,170 18,327 CentreDormagen 6,327 6,327Neuss V Business Park 5,804 392 USABritannia Modular Labs I (Allerton),South San Francisco Biotech / 6,029 OfficePoway A&B Biotech / 14,492 Office ----------- ---------- ------------OVERSEAS TOTAL 90,445 32,950 ----------- ---------- ------------GROUP TOTAL 143,355 65,078 ----------- ---------- ------------% Let or Sold 45.4% UNDER CONSTRUCTION AT 31 DECEMBER 2005 Location Type Sq m Sq m Let or SoldUKAjax Avenue, Slough Office 5,914 5,914Fowler Avenue, Farnborough Office 3,796Fowler Avenue, Farnborough Office 3,233O'Gorman Avenue, Farnborough Office 4,544Riverside Way, Uxbridge Office 1,978Riverside Way, Uxbridge Industrial 2,899Riverside Way, Uxbridge Industrial 2,093Stockley Close, West Drayton Industrial 5,100Bilton Court, Luton Industrial 6,266 ----------- ---------- ------------UK TOTAL 35,823 5,914 ----------- ---------- ------------ USAEast Grand, South San Francisco R&D 72,836 72,836East Grand, South San Francisco R&D 5,739Oyster Point, South San Francisco R&D 8,658 8,658 ----------- ---------- ------------OVERSEAS TOTAL 87,233 81,494 ----------- ---------- ------------GROUP TOTAL 123,056 87,408 ----------- ---------- ------------ % Let or Sold 71% ANTICIPATED DEVELOPMENT - in 2006 Location Type Sq mUKWhitby Road, Slough Industrial 2,590Farnham Road, Slough Retail 5,824Buckingham Avenue, Slough Industrial 7,000Farnham Road, Slough Leisure 3,351Ajax Avenue Industrial 5,685Bedford Avenue Industrial 1,430Oxford Avenue Industrial 3,964Bath Road Office 11,000Voyager Park, Portsmouth Industrial 16,063Lovelace Road, Bracknell Industrial 1,488Heywood Industrial 6,747Argyle Street, Birmingham Industrial 20,900Stanhope Road, Camberley Industrial 10,046Crawley Office 42,310Faggs Road, Feltham Industrial 8,900Javelin Park, Haresfield Industrial 9,058Aglient Site, Winnersh Office 1,858Frogmore Business Centre, W Thurrock Industrial 4,294HS. Nimbus Thorne. Doncaster Industrial 69,677HS. Chorley Industrial 27,871 ----------- ----------UK TOTAL 260,056----------------------- ----------- ---------- BelgiumRumst Logistics 43,000Sirius Hotel 21,000Zellik Industrial 10,100Kortenberg Industrial 6,500Pegasus Office 5,250 ----------- ----------Belgium Total 85,850 ----------FranceSaint Denis Offices 26,500Le Blanc Mesnil Industrial 5,000 ----------- ----------France Total 31,500 ----------GermanyKapellen, Phase II Industrial 7,860Monchengladbach Industrial 22,731Frankfurt Industrial 12,780Braunschweig Industrial 15,316Damstadt Industrial 12,000Essen Industrial 12,000Berlin Industrial 8,000 ----------- ----------Germany Total 90,687 ----------Central EuropePoland Industrial 46,000Czech Republic Industrial 20,000Hungary Industrial 12,000 ----------- ----------Central Europe Total 78,000 ----------- ---------- USAPoway R&D 17,837Torrey Pines Science Park 5, San Diego R&D 4,181 ----------- ----------USA Total 22,018 ----------- ----------OVERSEAS TOTAL 308,055 ----------- ----------GROUP TOTAL 568,111 3) FINANCIAL REVIEW International Financial Reporting Standards The Group adopted International Financial Reporting Standards ("IFRS") witheffect from 1 January 2005 and summary financial statements for 2004 presentedunder IFRS were issued on 13 July 2005, complete with reconciliations to, andexplanations of the differences from, the previously published figures preparedin accordance with UK GAAP. These documents are available on the Group'swebsite, www.sloughestates.com. Income Statement Adjusted profit before taxThe published IFRS Income Statement includes the revaluation surplus oninvestment properties and a number of exceptional gains and losses. Thedirectors consider it helpful for shareholders to show an additionalpresentation of the income statement which separately highlights such items.Accordingly, the adjusted profit before tax shown below has been arrived at byfollowing the EPRA Best Practices Policy Recommendations (January 2006) and bymaking other adjustments to exclude exceptional gains and losses not related tothe Group's underlying property activities, as follows. 2005 2004 £m £mNet rental income from investment properties 221.2 225.0Net income from trading properties 9.7 6.8Net loss from utilities and gas (0.9) (7.4)Other investment income 5.5 6.1Administration expenses (20.7) (14.7)Share of joint ventures' profits before tax & valuationgains 6.2 12.7 --------- ----------Operating income 221.0 228.5Net finance costs (100.6) (108.4) --------- ----------Adjusted profit before tax 120.4 120.1 Revaluation gains on investment properties (includingjoint ventures) 419.6 182.1Exceptional lease surrender premiums 36.4 7.5Profit on sale of non-current assets 20.3 64.7Profit on sale of gas interests 99.7 4.4Profit on sale of Quail West 16.1 -Cost of bond refinancing (126.0) -Net losses on derivatives (1.0)Tax in joint ventures & associate (3.2) (4.0)Notional finance charge in respect of preference shares - 13.2 --------- ----------Reported profit before tax per Income Statement 582.3 388.0 --------- ---------- Adjusted profits before tax for the year were unchanged at £120.4m (2004:£120.1m). This mainly reflects a reduction in net rental income following thesale of the Pfizer campus in the USA at the end of 2004 and a lower contributionfrom joint ventures following the sale of retail assets, also in 2004.Offsetting these factors was a significant turnaround in the performance ofSlough Heat & Power (utilities) and a reduction in finance costs, following thebond refinancing earlier in 2005. Net rental incomeReflecting the 2004 disposals referred to above, total net rental income for theyear, including rents from trading properties and the Group's share of jointventures' rental income, but excluding exceptional surrender premiums, reducedby 5.0% from £244.4m to £232.5m, comprised as follows. Year ended 31 December 2005 2004 £m £m Rental income from investment properties 289.1 259.1Less exceptional surrender premiums (36.4) (7.5) -------- -------- 252.7 251.6Property operating costs less recharges to tenants andother property income (31.5) (26.6) -------- --------Net rental income from investment properties 221.2 225.0Net rental income from trading properties 2.7 3.1Share of net rental income of joint ventures 8.6 16.3 -------- --------Total net rental income 232.5 244.4 -------- -------- Total surrender premiums of £42.7m (2004: £11.7m) were unusually high in 2005 asa result of £36.4m ($68.4m) received from Pfizer in January 2005 to buy-out ofits obligations in respect of the Sugen campus in South San Francisco; all ofthe space surrendered by Pfizer was subsequently re-let and is now fullyoccupied. In the year ended 31 December 2004 a premium of £7.5 million wasreceived from Cubist in connection with 252 Bath Road, Slough; this space hasalso since been fully re-let. Due to their magnitude, the Pfizer and Cubistpremiums have been excluded from adjusted profit before tax. The directorsbelieve this treatment, which differs from that adopted for the 2005 InterimResults, provides a clearer picture of the underlying performance of thebusiness. The increase in property operating costs was mainly attributable to the nonrecovery of property outgoings on vacant buildings, property taxes and costsassociated with properties acquired in the year. The movement in underlying net rental income is analysed in the table below. £m Net rental income - 2004 244.4Pfizer sale & Pfizer/Sugen space surrendered (14.3)Other space returned (9.2)Other disposals (Group £18.5m, JV's £7.8m) (26.3)Acquisitions 28.9New lettings, rent reviews & other 14.5Increase in property operating expenses, net of recoveries (4.9)Other including rent averaging (0.6) --------Net rental income - 2005 232.5 -------- The current passing rent of the Group's investment properties at 31 December2005, including the Group's share of joint ventures and trading properties, was£275m and the profile of future rents passing allowing for contracted rents onpre-let developments and the loss of rents from lease expiries and potentialbreaks is as follows. Contracted rents at 31 2005 2006 2007 2008 2009 2010December £m £m £m £m £m £m Ignoring break clauses 275 270 267 272 261 252Assuming all breaks exercised 275 261 253 250 237 222 The profile of rent reviews, expiries, potential breaks and contracted rentsfrom pre-let developments yet to be completed and other recent lettings wherethe customer has yet to take up occupation is as follows. 2006 2007 2008 £m £m £mCurrent rent passing subject to:- Rent reviews 22 27 42- Lease expiries 10 9 8- Potential breaks 9 4 9 Contracted additional rent (cumulative) 5 11 24 In addition to the above, the Group has significant potential to grow its rentalincome through letting existing vacant space and through building out thedevelopment pipeline. The total potential rental income which could be generatedfrom the development pipeline (including the amounts shown above in respect ofpre-lettings already agreed) amounts to approximately £176m in respect ofinvestment property developments although, it may take several years before thepotential developments could be fully built and let. In some cases whereredevelopments of existing properties are planned, there would be a loss ofexisting income in order to generate the redevelopment opportunity. The reversionary potential of the investment portfolio at 31 December 2005 wasas follows: Reversion to ERV On Occupied On vacant Properties properties £m £mUK - Industrial 8.3 22.3- Offices (5.0) 6.8- Retail 0.9 0.4USA (13.0) 10.0Europe (0.5) 3.3 (9.3) 42.8 Property Trading Net income from property trading activities increased by £2.9m to £9.7m (2004:£6.8m), reflecting the net rental income shown above plus profits from the saleof trading properties of £7.0m (2004:£3.7m) which included £4.5m relating to thesale of the Group's Avenue Kleber development in Paris. Also included within property trading activities in the Income Statement is anamount of £16.1m representing the gain on disposal of the Group's interest inthe Quail West leisure development in Naples, Florida. This was sold in April2005 and, for presentational purposes, the gain has been excluded from adjustedprofit before tax. Utilities and Gas Following several difficult years at Slough Heat & Power, the business showed asignificant improvement in performance in 2005, turning an operating loss of£4.1m in 2004 into an operating profit of £1.2m in 2005. This was a result ofthe management changes introduced at the end of 2004, the subsequentimplementation of plant operating improvements and stronger market conditionsfor energy trading and for the trading of carbon emission credits and renewableenergy certificates. The net loss from gas activities amounted to £2.1m (2004: £3.3m) and representsthe Group's share of the operating losses of Tipperary Corporation up to July2005, when the Group disposed of its interests in that company. The Group'sinterests in Tipperary Corporation were sold for £110.5m ($197.6m) giving riseto a net profit on sale of £99.7m. Other income Other income represents the Group's share of realisations from available forsale investments, principally comprising holdings in venture capital funds andwarrants received from certain tenants in the USA. At 31 December 2005, theGroup had available for sale investments recorded at fair value amounting to£54.7m, with a remaining commitment to invest further funds of £10.5m. Administration expenses Administration expenses included a number of one-off costs associated with theimplementation of IFRS, pensions advice and additional staff and related costsassociated with the refocusing and growth of the Group's activities. Net income from joint ventures The Group's share of net income from joint ventures reduced from £12.7m in 2004to £6.2m in 2005. This is attributable to the sale of retail assets to LandSecurities at the end of 2004 since a number of the Group's former retail assetswere held in joint ventures. Net finance costs Adjusted net finance costs for the year, excluding the exceptional cost of thebond refinancing and gains and losses on derivatives, are comprised as follows: Year ended 31 December 2005 2004 £m £m Interest on overdrafts & loans 116.9 115.7Interest on convertible preference shares (1) 13.2 13.2Interest receivable (9.9) (6.7)Other net (income)/expense (0.5) 2.2 -------- -------Net finance costs before capitalisation 119.7 124.4Less amounts capitalised in respect of developmentactivities (19.1) (16.0) -------- -------Adjusted net finance costs before 'mark to market'adjustment of derivatives and costs of bond refinancing 100.6 108.4 -------- ------- (1) In accordance with IAS 32 & 39, with effect from 1 January 2005, the Group'sconvertible redeemable preference shares are classified as borrowings andpreference dividends are replaced by a financing charge recorded within financecosts. In order to aid comparability between the two years, a notional financecharge of £13.2m has been included in the comparative amounts shown above for2004. Interest costs before capitalisation benefited in, the second half of the yearby approximately £5m as a result of the bond refinancing undertaken in June. Ona like for like basis, therefore, net interest costs showed a slight increasebetween 2004 and 2005, reflecting higher net debt levels associated with theacquisitions undertaken in the year. Exceptional items and valuation gains and losses Under IFRS, revaluation gains on investment properties are included within theIncome Statement and the equivalent items in respect of our joint venturecompanies are included within the group's share of results of such entities. As recommended by EPRA, such valuation gains have been excluded from adjustedprofits before tax. Similarly, the £22.2m (2004: £64.7m) gain on the sale of investment propertiesis excluded from adjusted earnings, as is the gain arising on the disposal ofthe group's interests in Tipperary Corporation and the surplus on the disposal of the group's residential leisure development at Quail West, Florida. Whilstthe latter property was classified as a trading activity, it was not part ofthe core business and, accordingly, the profit on disposal of that asset is excluded from our underlying performance measures. Details of the exceptional cost of the bond refinancing and the net losses onderivatives are provided below in the section entitled "Financing". Taxation The tax charge for the year can be analysed as follows: Year ended 31 December 2005 2004 £m % £m % Underlying tax charge on adjusted profit before tax 16.9 14 20.2 17Tax relating to exceptional items and valuationgains/losses 180.5 39 76.0 28Less amounts included above in respect of jointventures (3.2) 19 (4.0) 14 ------- -------Total Group tax charge 194.2 33 92.2 24 ------- ------- The underlying tax charge for the year as a percentage of adjusted profit beforetax was 14% (2004: 17%) primarily due to the release of an over-provision inrelation to previous years' taxation. Looking ahead for the next two years, weexpect the underlying current tax rate to remain less than 15% of adjustedprofit before tax as the Group benefits from utilising UK tax losses. The tax charge on exceptional items and valuation gain/losses includes a taxcharge of £34.0m arising on the sale of Tipperary, £14.9m on the exceptionallease surrender premium (2004: £nil) and deferred tax of £130.5m (2004: £58.2m)on the revaluation gains on investment properties. Earnings per share and dividends Basic earnings per share for the year were 91.7p, an increase of 34% over 2004(68.5p). Diluted adjusted earnings per share were unchanged at 24.3p (2004:24.4p). Diluted adjusted earnings per share is based upon adjusted profit beforetax, excluding all exceptional items and valuation gains and losses, and takesinto account the dilutive effects of the convertible preferred shares and sharesheld by the ESOP trust. The directors have proposed a final dividend of 11 pence per share, taking thetotal dividend for the year to 17.5 pence per share, an increase of 9.4% overthe total dividend for 2004. Under IFRS no provision is made for dividendsdeclared after the balance sheet date. Property Portfolio The Group's total property portfolio at 31 December 2005 amounted to £5,137.8m,as follows: 31 December 2005 2004 £m £mInvestment properties- completed properties 4,304.7 3,413.1- under development 135.4 39.6Development properties 436.3 276.8 -------- --------Sub-total: investment and development properties 4,876.4 3,729.5Trading Properties- completed properties 61.4 88.7- properties under development 62.2 36.6Share of properties held within joint ventures- investment properties 113.5 115.0- trading properties 24.3 17.6 -------- --------Total property portfolio, including share of jointventures 5,137.8 3,987.4 -------- -------- All of the Group's properties except trading properties were independentlyvalued at 31 December 2005. Trading properties are recorded at the lower of costand net realiseable value. The value of property portfolio increased by £1,150.4m (29%) during 2005. Thisincrease was comprised of: £mAdditions 757.8Disposals (156.8)Valuation surpluses- included in Income Statement 409.1- included in SORIE* 48.4- joint ventures 10.5Currency translation differences 68.7Other changes 12.7 -------- 1,150.4 --------*Statement of Recognised Income and Expense Net Assets Per Share Under IFRS, the Group is required to provide for deferred tax on investmentproperties and the capital gains tax on revaluation surpluses. In arriving atadjusted net assets and adjusted net assets per share, the Board believes it isappropriate to add back such contingent tax liabilities since the nature of theGroup's investment portfolio means the tax is not expected to crystallise.Accordingly, diluted adjusted net assets per share is calculated as follows. 31 December 2005 2004 £m £mEquity attributable to ordinary shareholders 2,447.3 2,034.3Less shares held by ESOP (6.9) (5.2) -------- -------- 2,440.4 2,029.1Add back:Deferred tax on revaluation surpluses 412.1 256.6Deferred tax on capital allowances 237.1 200.7Dilution adjustment in respect of preference shares 107.7 136.0 -------- --------Diluted adjusted net assets 3,197.3 2,622.4 -------- --------Shares in issue (diluted) millions 469.9 469.6 -------- --------Net assets per share (diluted, adjusted) 680.4p 558.4p -------- -------- At the year end diluted adjusted net assets per share were 680.4p, an increaseof 22% over the previous year end. The increase is analysed in the followingtable. Pence per £m share Adjusted diluted equity attributable toshareholders 31 December 2004 2,622.4 558.4Adjusted profit after tax 103.5 22.0Exceptional items, net of tax 28.8 6.1Property valuation gains (including joint ventures) 468.0 99.6Increase in value of available for sale investments 6.5 1.4Actuarial loss on pension scheme, net of tax (7.8) (1.7)Currency translation differences 37.2 7.9Ordinary dividends paid (69.0) (14.7)Other items 7.7 1.4Adjusted diluted equity attributable to -------- --------shareholders 31 December 2005 3,197.3 680.4 -------- -------- NNNAV The Group's 'triple net asset' ("NNNAV") per share, calculated using theprinciples recommended by EPRA, is set out in the table below. It should benoted that capital allowance elections at the point of sale of a property oftenmean that deferred tax liabilities relating to capital allowances do not, inpractice, reverse. PerAt 31 December 2005 £m share (p) Diluted adjusted NAV 3,197.3 680.4'Mark to market' adjustment of debt, net of tax (106.0) (22.6)Deferred tax on investment properties- in respect of capital allowances (237.1) (50.5)- in respect of revaluation surpluses (412.1) (87.7)- less unrecognised indexation allowances 93.6 19.9 -------- --------'Triple NAV' (NNNAV) 2,348.5 539.6 -------- -------- Cash Flow A summary of the cash flow for the year is as follows: Year ended 31 December£millions 2005 2004 £m £mCash flow from operations 237.3 202.4Finance costs (net) (116.3) (108.3)Tax paid (net) (91.8) (15.3)Additional pension scheme contributions (16.2) - -------- --------Free cash flow 13.0 78.8Capital expenditure (738.9) (102.7)Property sales (including joint ventures) 147.0 238.0Sale of Tipperary 110.5 -Cash cost of bond exchange (40.8) -Ordinary dividends (69.0) (64.1)Other items 0.8 6.6 -------- --------Net funds flow (577.4) 156.6Investments in term deposits 185.6 (184.5)Net increase in borrowings 340.0 88.2 -------- --------Net cash (outflow)/inflow (51.8) 60.3Opening cash and cash equivalents 218.1 158.6Exchange rate changes 0.6 (0.8) -------- --------Closing cash and cash equivalents 166.9 218.1 -------- -------- Commentary on cash flows Cash flow from operations increased by 17% to £237.3m (2004: £202.4m) mainly asa result of the exceptional surrender premium received in the first half.Finance costs paid, net of interest income and dividends from joint ventures,increased from £108.3m to £116.3m due to higher levels of average debt caused bythe capital expenditure programme, mitigated partly by savings from the bondexchange. Tax paid of £91.8m was much higher than in 2004 (£15.3m) mainly as aresult of taxes paid relating to the 2004 sale of the Pfizer campus and other UStaxes. During the year, the Company agreed to make a one-off UK pensioncontribution of £15m and to accelerate the elimination of the remaining UKpension scheme deficit through increased monthly contributions, resulting inadditional contributions of £16.2m in the year over and above the regularcharge. Capital expenditure of £738.9m included property acquisitions of £587.6m, theacquisitions of Mainland BV (£1.8m) and Grontmij (£7.5m) and developmentexpenditure of £142.0m. Property sales, including joint ventures, generatedproceeds of £147.1m and the sale of Tipperary gave rise to net receipts of£110.5m. After the cash cost of the bond refinancing and the payment ofdividends, there was a net 'funds outflow' of £577.4m (2004 : inflow of£156.6m). Allowing for movements in borrowings and investments in term deposits,the net cash outflow for the year was £51.3m (2004: inflow of £60.3m). Potential future capital expenditure on the Group's development programme as at31 December 2005 was as follows: 2006 2007 Thereafter £m £m £mProjects in progress or already approved 225 110 55Potential future projects, not yet authorised 185 270 960 ------- ------- --------- Total 410 380 1,015 ------- ------- --------- Financing At 31 December 2005, the Group's borrowings totalled £2,264.9 million including£107.7million representing the deemed debt component of the 8.25p convertibleredeemable preference shares 2006 - 2011 which were reclassified as debt underIFRS on 1st January 2005. Cash balances totalled £172.6 million resulting inreported net debt of £2,092.3 million (2004: £1,325.3m). The weighted averagematurity of the debt portfolio was 11.8 years. Unsecured borrowings represent 96% of gross debt at the year end. Secured debttotalled £86.6 million being certain historical mortgage debt domiciled in theGroup's overseas operations. £1,783.6m of debt is domiciled in the UK, isunsecured and is issued by the Parent Company without any supporting up-streamguarantees. £394.7 million of debt is unsecured and is issued by subsidiarycompanies located overseas. Reported financial gearing was 86% (2004: 54%) or 62% (2004: 51%) after addingback deferred tax of £649.2 million and treating the convertible redeemablepreference shares as equity. The loan to value ratio (net debt divided byproperty assets) at 31 December 2005 was 42%. Interest cover based upon adjusted profit before interest and tax and adjustednet finance costs was 2.2 times (2004: 2.1 times), or 2.0 times (2004: 2.0times) based upon recurring income allowing for the inclusion of capitalisedinterest. The market value of borrowings at the end of December 2005 was £151.4 millionhigher than the book value, equivalent, after tax relief, to a reduction in netasset value of 23 pence per share or 3.4%. Funds availability at year end 2005 totalled £706.9 million, comprised of £172.6million of cash deposits and £534.3 million of undrawn bank facilities. Only £25million of this total is uncommitted overdraft lines with the balance of undrawnfacilities being fully committed and with £471 million remaining available to2010/11. In June the Company completed a debt exchange transaction whereby £322 millionof bonds at a weighted average interest rate of circa 11% were exchanged into£200 million of 5.50% 2018 bonds and £100 million of 5.75% 2035 bonds with thebalance being redeemed from new bank line drawings. The cost of the exchange was£126 million which has been expensed through the Income Statement but is treatedas an exceptional loss above. Going forward this transaction will save the groupapproximately £10 million per annum in interest charges. Also in June the Group's £415 million committed revolving credit facility wasextended through to 2011 at a reduced margin. In September the similar €150million committed revolving credit facility was extended through to 2010 at areduced margin. In November a new $550 million committed revolving creditfacility was signed with a new syndicate of banks. This remains available to2010 but with extension options to 2012. Finally in December a £100 million tapof the 5.75% 2035 bond was closed along with a new £250 million 5.625% 2020bond. Hedging Policies The Group has set policies on interest rate and foreign currency translationexposures, liquidity and funding. These policies state that at least 85%(increased from 70% effective January 2006) of the Group's debt portfolio shouldattract a fixed or capped rate of interest and that at least 75% of foreigncurrency assets (excluding unrealised valuation gains) should be matched withliabilities of the same currency. Interest rate exposure As at 31 December 2005 87% (2004 81%) of the debt portfolio attracted a fixed orcapped rate of interest at a weighted average rate of 6.19% (2004 7.09%) much ofthis debt is in the form of fixed rate debt issues raised through SterlingEurobonds and US dollar private placements. Such fixed rate debt issues are heldin the balance sheet at amortised cost. Interest rate swaps, caps, collars andforward rate agreements are also used to convert variable rate bank debt tofixed rate. The 13% of debt remaining at a variable rate of interest brought theoverall weighted average cost of debt down to 5.81% (2004 6.41%). The Group has decided not to elect to hedge account its interest ratederivatives portfolio. Therefore movements in the fair value are taken to theIncome Statement but, in accordance with EPRA recommendations, these gains andlosses are eliminated from adjusted profit before tax and adjusted eps. Foreign currency translation exposure Due to the nature of the Group's business it has no cross border tradingtransactions and therefore, foreign exchange transaction exposure is negligible.However, it does have operations located overseas which transact business in thedomestic currency of where the business is located - mostly in US dollars andEuros. The Group's main currency exposure therefore is the translation riskassociated with converting net currency assets back into sterling in the Groupconsolidated accounts at each balance sheet date. As mentioned above the policyis that at least 75% of currency denominated assets (excluding unrealisedvaluation surpluses) are matched with liabilities of the same currency. At yearend 2005 £260.7m (excluding unrealised valuation surpluses) or 19.6% of currencydenominated net assets were exposed to exchange movements. This increases to£460.9 million or 34% when unrealised valuation surpluses are included. A 10%movement in the value of sterling against all currencies in which the groupoperates would therefore change net assets by £46 million and net assets pershare by 10 pence or 1.4%. However it should be noted that, historically,sterling has rarely moved in the same direction against the US dollar and Euro. Financial Ratios and Credit Rating The Group follows an unsecured funding model which relies upon maintaining astrong investment grade credit rating. The Board believes it is appropriate toadapt gearing levels according to its assessment of prevailing property marketconditions and the stage in the economic cycle. Accordingly, whilst currentGroup policy is to maintain an adjusted long term financial gearing level below80% (net debt to adjusted equity) and interest cover in excess of 1.8(recurring, adjusted profit before tax divided by net interest beforecapitalisation) the Group retains flexibility to temporarily exceed thesethresholds should particular circumstances warrant it. The Group is currentlyrated A- (long term) F2 (short term) with a stable outlook, by the credit ratingagency FITCH. Liquidity and funding The policy on liquidity risk is that at any given time forecasts shoulddemonstrate that there is headroom of at least £200 million against immediatelyavailable cash and/or committed bank facilities for 2 years projected forward.As property investment is a long term business the Group aims to raise fundingon a long term basis through a mix of equity, long term debt issues andcommitted medium term revolving credit facilities as well as recycling capitalgenerated from property sales. Typically developments are funded through cashresources or drawing down committed bank lines whilst the investment portfoliois funded through unsecured long term debt issues of similar weighted averagelife to that of the unexpired remaining term of the lease portfolio. Notes: Slough Estates plc (Also known as Slough Estates International or "SEI" -Slough Estates plc is listed on the London Stock Exchange - stock code: SLOU.L)www.sloughestates.com SEI is a leading provider of flexible business space inbusiness parks in Western Europe and North America, with over 1600 customersoccupying over 4m square metres of business space. SEI's fundamental focus isindustrial property and based on this core activity, 94% of its portfolio is nowin flexible business space. Slough Estates' properties are in strategiclocations in close proximity to major business centres - where there is longterm demand for business accommodation. By geography its business space islocated in the UK (62%), Continental Europe (28%) and North America (10%).Details as at 31 December 2005. SLOUGH ESTATES plc2005 Preliminary results Group income statement For the year ended 31 December 2005 2005 2004 Note £m £m Revenue 4 405.2 342.7 ------ ------ Gross rental income from investment properties 301.8 270.8 Interest received on finance lease assets 0.9 0.9 Property operating expenses (45.1) (39.2) ------ ------Net rental income 257.6 232.5 ------ ------ Proceeds on sale of trading properties 57.3 31.4 Carrying value of trading properties sold (34.2) (27.7) Trading property rental income 3.3 4.2 Property outgoings relating to trading properties (0.6) (1.1) ------ ------Net income from trading properties 25.8 6.8 ------ ------ Income from sale of utilities and gas 41.9 35.4 Cost of sales (42.8) (42.8) Gain from sale of gas interests 99.7 4.4 ------ ------Net income/(loss) from utilities and gas 98.8 (3.0) ------ ------ Other investment income 5 5.5 6.1 Administration expenses 6 (20.7) (14.7) Gain on disposal of property assets 14.4 56.4 Gain on disposal of joint ventures 7.8 8.3 Net valuation gains 7 409.1 166.7 ------ ------Operating income 798.3 459.1 Finance costs 8 (124.9) (101.9) Exceptional cost of refinancing 8 (126.0) - ------ ------ (250.9) (101.9) ------ ------ Finance income 9 21.4 6.7 Share of profit from joint ventures and associate aftertax 10 13.5 24.1 ------ ------Profit before tax 582.3 388.0 Taxation- current 11 (44.4) (49.4)- deferred 11 (149.8) (42.8) ------ ------ (194.2) (92.2) ------ ------ Profit after tax from continuing operations 388.1 295.8 Preference dividends 12 - (11.2) ------ ------Profit for the period 388.1 284.6 ------ ------ Attributable to equity shareholders 23 385.1 285.8 Attributable to minority interests 3.0 (1.2) ------ ------ 388.1 284.6 ------ ------ Basic earnings per ordinary share 13 91.7p 68.5p Diluted earnings per ordinary share 13 85.0p 63.4p SLOUGH ESTATES plc2005 Preliminary resultsGroup statement of recognised income and expenses (SORIE) For the year ended 31 December 2005 2005 2004 £m £m ---- ---- Revaluation gains on properties in the course of development 48.4 24.1 Exchange differences arising on translation of overseasoperations 25.4 (13.5) Actuarial losses on defined benefit pension schemes (4.0) (10.6) Increase in value of available-for-sale investments 10.8 - Tax on items taken directly to equity (25.4) (3.3) ------ ------Net gain/(loss) recognised directly in equity 55.2 (3.3) Transferred to income statement on sale of available-for-saleinvestments (1.1) - Profit for the period 388.1 284.6 ------ ------Total recognised income and expenses for the period 442.2 281.3 Adoption of IAS 39 (103.9) - ------ ------Total recognised income and expenses for the period afterrestatement 338.3 281.3 ------ ------ Attributable to - equity shareholders 334.8 283.6 - minority interests 3.5 (2.3) ------ ------ 338.3 281.3 ------ ------ SLOUGH ESTATES plc2005 Preliminary results Group balance sheet As at 31 December 2005 2005 2004 Note £m £m ------ ---- ---- Non-current assets Goodwill 14 0.7 -Investment properties 15 4,440.1 3,452.7 Development and owner occupied properties 16 436.3 276.8 Plant and equipment 17 45.0 118.0 Finance lease receivables 10.9 10.9 Available-for-sale investments 54.7 38.4 Investments in joint ventures and associate 18 100.1 84.1 Deferred tax asset - 0.2 ------ ------Total non-current assets 5,087.8 3,981.1 ------ ------ Current assets Inventories 1.6 1.9 Trading properties 123.6 125.3 Finance lease receivables 0.1 0.1 Tax recoverable 8.1 1.0 Trade and other receivables 162.8 114.0 Cash and cash equivalents 172.6 397.4 ------ ------Total current assets 468.8 639.7 ------ ------ Total assets 5,556.6 4,620.8 ------ ------ Non-current liabilities Borrowings 19 2,250.2 1,683.5 Obligations under finance leases 0.5 0.5 Deferred tax provision 22 635.9 448.4 Provisions for liabilities and charges 21 29.6 59.8 Other payables 7.1 15.8 ------ ------Total non-current liabilities 2,923.3 2,208.0 ------ ------ Current liabilities Borrowings 19 14.7 39.2 Tax liabilities 7.2 47.4 Trade and other payables 162.4 141.7 ------ ------Total current liabilities 184.3 228.3 ------ ------ Total liabilities 3,107.6 2,436.3 ------ ------ Net assets 2,449.0 2,184.5 ------ ------ Equity Share capital 137.5 138.8 Share premium account 256.8 339.1 Own shares held (6.9) (5.2) Other reserves 1,471.6 1,127.2 Retained earnings 581.4 565.2 ------ ------Total shareholders' equity 23 2,440.4 2,165.1 Minority interests 8.6 19.4 ------ ------Total equity 2,449.0 2,184.5 ------ ------ Net assets per ordinary share basic 13 579p 486p diluted 13 542p 461p Approved by the Board on 21 March 2006 SLOUGH ESTATES plc2005 Preliminary results Group cash flow statement For the year ended 31 December 2005 2005 2004 Note £m £m ------ ---- ---- Cash inflow generated from operations 25 237.3 202.4 Interest received on deposits 10.3 7.4 Dividends received from joint ventures and associate 2.8 8.4Dividends received from available-for-sale investments 1.5 3.1Interest paid (including penalty on bond repayment) (156.7) (115.0)Dividend paid to preference shareholders (10.8) (11.3)Minority dividends paid (4.2) (0.9)Tax paid (91.8) (15.3)Funding pension scheme deficit (16.2) - ------ ------Net cash (outflow)/inflow from operating activities (27.8) 78.8 ------ ------ Cash flows from investing activitiesPurchase of subsidiary undertakings (9.3) -Purchase and development of investment properties (587.4) (68.1) Sales of investment properties 118.6 237.1Amount received from property swap 0.8 3.4Legal costs paid in relation to property swap (0.6) (2.2)Purchase and development of property, plant and (142.4) (35.8)equipmentSales of property, plant and equipment 7.6 0.9Purchase of available-for-sale investments (11.9) (16.2)Proceeds from disposal of available-for-sale 16.4 20.5investmentsProceeds from disposal of gas interests 110.5 -Repayment of loans by purchaser of gas interests 12.3 -Proceeds from reduction in holding of a subsidiary - 3.3Investment and loans to joint ventures and associate (16.5) (3.8)Proceeds from the disposal of an investment in jointventure 20.8 -Investment in term deposits 185.6 (184.5)Acquisition of minority interests - (4.0)Contribution from minorities - 4.6 ------ ------Net cash used in investing activities (295.5) (44.8) ------ ------ Cash flows from financing activitiesDividend paid to ordinary shareholders (69.0) (64.1)Net increase in borrowings 340.0 88.2 Proceeds from the issue of ordinary shares 1.5 3.0Purchase of own shares (1.0) (0.8) ------ ------Net cash from financing activities 271.5 26.3 ------ ------ Net (decrease)/increase in cash and cash equivalents (51.8) 60.3Cash and cash equivalents at the beginning of the year 218.1 158.6Effect of foreign exchange rate changes 0.6 (0.8) ------ ------Cash and cash equivalents at the end of the year 166.9 218.1 ------ ------ Cash and cash equivalents per balance sheet 172.6 397.4Less restricted deposits - (176.0) ------ ------ 172.6 221.4Bank overdrafts (5.7) (3.3) ------ ------Cash and cash equivalents per cash flow 166.9 218.1 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 1. Basis of preparation The Preliminary Report is unaudited and does not constitute statutory accountswithin the meaning of s240 of the Companies Act 1985. The statutory accounts for2004, which were prepared under United Kingdom Generally Accepted AccountingPrinciples (UK GAAP), have been delivered to the Registrar of Companies. Theauditors' opinion on these accounts was unqualified and did not contain astatement made under s237(2) or s237(3) of the Companies Act 1985. The financial information has been prepared in accordance with the accountingpolicies set out in the press release document entitled "Slough Estates plc andSubsidiaries (Slough) Adoption of International Financial Reporting Standards(IFRS) 2004 Income statement and balance sheet" dated 13 July 2005 which isavailable on the company's website (www.sloughestates.com). The Group hasadopted these policies for the year ended 31 December 2005 in the financialstatements in accordance with International Financial Reporting Standards(IFRS), as adopted by the European Union for the first time and with those partsof the Companies Act 1985 applicable to companies reporting under IFRS. Thefinancial statements have been prepared under the historical cost convention asmodified for the revaluation of properties, available-for-sale investments andfinancial assets and liabilities held for trading. Change of accounting policies Prior to the adoption of IFRS the financial statements of Slough Estates plc hadbeen prepared in accordance with UK GAAP. UK GAAP differs in several respectsfrom IFRS and certain accounting, valuation and consolidation methods andpolicies have been amended, when preparing these preliminary results, to complywith IFRS. The comparative figures in respect of 2004 have been restated toreflect these amendments. Reconciliations and description of the effect of thetransition from UK GAAP to IFRS on the reported movement in equity for 2004 areset out in note 26. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 2. Segmental analysis For management purposes the Group's primary reporting format is the geographiclocation of its properties as set out below. The secondary reporting format isby business sector. Geographical UK Europe USA * Groupsegments 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £m Segmentrevenue 222.8 211.7 55.3 50.9 127.1 80.1 405.2 342.7 ------ ------ ------ ------ ------ ------ ------ ------ Gross rentalincome frominvestmentProperties 182.7 177.5 21.9 21.6 97.2 71.7 301.8 270.8Interestreceived onfinance leaseassets 0.9 0.9 - - - - 0.9 0.9Propertyoperatingexpenses (28.9) (25.1) (1.8) (1.3) (14.4) (12.8) (45.1) (39.2) ------ ------ ------ ------ ------ ------ ------ ------Net rentalincome 154.7 153.3 20.1 20.3 82.8 58.9 257.6 232.5 ------ ------ ------ ------ ------ ------ ------ ------Proceeds onsale oftradingproperties 1.1 2.6 30.1 25.1 26.1 3.7 57.3 31.4Carrying valueof tradingpropertiessold (0.5) (2.4) (23.7) (21.9) (10.0) (3.4) (34.2) (27.7)Tradingpropertyrental income - - 3.3 4.2 - - 3.3 4.2Propertyoutgoingsrelating totradingproperties - - (0.6) (1.1) - - (0.6) (1.1) ------ ------ ------ ------ ------ ------ ------ ------Net incomefrom tradingproperties 0.6 0.2 9.1 6.3 16.1 0.3 25.8 6.8 ------ ------ ------ ------ ------ ------ ------ ------Income fromsale ofutilities andgas 38.1 0.7 - - 3.8 4.7 41.9 35.4Cost of (36.9) (34.8) - - (5.9) (8.0) (42.8) (42.8)salesGain from saleof gasinterests - - - - 99.7 4.4 99.7 4.4 ------ ------ ------ ------ ------ ------ ------ ------Netincome/(loss)from utilitiesand gas 1.2 (4.1) - - 97.6 1.1 98.8 (3.0) ------ ------ ------ ------ ------ ------ ------ ------Otherinvestmentincome 4.0 3.1 - - 1.5 3.0 5.5 6.1Administrationexpenses (15.0) (11.0) (2.7) (1.1) (3.0) (2.6) (20.7) (14.7)(Loss)/gain ondisposal ofpropertyassets (2.8) (1.6) - - 17.2 58.0 14.4 56.4Gain ondisposal ofjoint ventures - 8.3 - - 7.8 - 7.8 8.3Net valuationgains 314.9 128.3 8.1 7.0 86.1 31.4 409.1 166.7 ------ ------ ------ ------ ------ ------ ------ ------Operatingincome 457.6 276.5 34.6 32.5 306.1 150.1 798.3 459.1 Finance (99.2) (69.4) (6.6) (6.9) (19.1) (25.6) (124.9) (101.9)costsExceptionalcost ofrefinancing (126.0) - - - - - (126.0) -Finance income 18.1 5.7 0.4 0.3 2.9 0.7 21.4 6.7Share ofprofit/(loss)from jointventures andassociateafter tax 8.3 18.4 (0.2) (0.1) 5.4 5.8 13.5 24.1 ------ ------ ------ ------ ------ ------ ------ ------Profit beforetax 258.8 231.2 28.2 25.8 295.3 131.0 582.3 388.0Taxation (80.5) (33.8) (10.3) (7.8) (103.4) (50.6) (194.2) (92.2) ------ ------ ------ ------ ------ ------ ------ ------Net profitafter tax 178.3 197.4 17.9 18.0 191.9 80.4 388.1 295.8 ------ ------ ------ ------ ------ ------ ------ ------ Segment assets 3,788.5 3,093.8 532.8 427.8 1,062.7 701.8 5,384.0 4,223.4Segmentliabilities (559.9) (484.1) (85.1) (74.0) (197.7) (155.5) (842.7) (713.6) ------ ------ ------ ------ ------ ------ ------ ------Net segmentassets 3,228.6 2,609.7 447.7 353.8 865.0 546.3 4,541.3 3,509.8Net externalborrowings (1,629.2) (1,025.4) (203.3) (180.0) (259.8) (119.9) (2,092.3) (1,325.3)Netinter-segmentborrowings 123.0 142.2 (56.1) - (66.9) (142.2) - - ------- ------- ------ ------ ------ ------ ------- -------Net assets 1,722.4 1,726.5 188.3 173.8 538.3 284.2 2,449.0 2,184.5 ------- ------- ------ ------ ------ ------ ------- -------Depreciationby segment 3.9 3.4 0.1 0.1 1.1 1.2 5.1 4.7Capitalexpenditure inthe period 406.9 385.2 136.9 22.7 258.1 65.0 801.9 472.9 ------- ------- ------ ------ ------ ------ ------- -------*includes the results of Canada and gas interests in Australia SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 3. Segmental analysis Business Property Trading Othersegments investment property Utilities activities Group 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £m £m £m Rental 288.2 258.2 3.3 4.2 - - - - 291.5 262.4income Recharges totenants 13.6 12.6 - - - - - - 13.6 12.6 Sales - - 57.3 31.4 38.1 30.7 3.8 4.7 99.2 66.8 Interestreceived onfinance leaseassets 0.9 0.9 - - - - - - 0.9 0.9 ------ ------ ----- ----- ------ ----- ------ ------ ------- ------ Total 302.7 271.7 60.6 35.6 38.1 30.7 3.8 4.7 405.2 342.7revenue Depreciation (0.7) (0.7) - - (2.4) (2.1) (1.1) (1.1) (4.2) (3.9) Propertyoutgoings (44.4) (38.5) (0.6) (1.1) - - - - (45.0) (39.6) Cost of - - (34.2) (27.7) (34.5) (32.7) (4.8) (6.9) (73.5) (67.3)sales Gain on saleof gasinterests - - - - - - 99.7 4.4 99.7 4.4 ------ ------ ----- ----- ------ ----- ------ ------ ------- ----- Segment netincome 257.6 232.5 25.8 6.8 1.2 (4.1) 97.6 1.1 382.2 236.3 Share ofprofits/(loss)from jointventures andassociateafter tax 13.0 24.9 0.5 (0.8) - - - - 13.5 24.1 Otheractivities - - - - - - 5.5 6.1 5.5 6.1 Unallocatedadministrationexpenses - - - - - - (20.7) (14.7) (20.7) (14.7) Profit ondisposal ofpropertyassets 14.4 56.4 - - - - - - 14.4 56.4 Profit ondisposal ofjoint ventures 7.8 8.3 - - - - - - 7.8 8.3 Net valuationgains 409.1 166.7 - - - - - - 409.1 166.7 Finance - - - - - - (124.9) (101.9) (124.9) (101.9)costs Exceptionalcost onrefinancing - - - - - - (126.0) - (126.0) - Finance income - - - - - - 21.4 6.7 21.4 6.7 ------ ------ ----- ----- ------ ----- ------ ------ ------- -----Profit/(loss)before tax 701.9 488.8 26.3 6.0 1.2 (4.1) (147.1) (102.7) 582.3 388.0 ------ ------ -- ----- ----- ------ -----Taxation (194.2) (92.2) (194.2) (92.2) ------ ------ ------- -------Net profitafter tax (341.3) (194.9) 388.1 295.8 ------ ------ ------- ------- Segment assets 5,060.3 3,876.5 185.2 163.0 52.8 51.2 85.7 132.7 5,384.0 4,223.4 Segmentliabilities (757.8) (562.6) (10.2) (15.2) (11.4) (11.3) (63.3) (124.5) (842.7) (713.6) ------ ------ ----- ----- ------ ----- ------ ------ ------- -------Net segmentassets 4,302.5 3,313.9 175.0 147.8 41.4 39.9 22.4 8.2 4,541.3 3,509.8 Net borrowings - - - - - - (2,092.3) (1,325.3) (2,092.3) (1,325.3) ------ ------ ----- ----- ------ ----- ------ ------ ------- -------Net assets 4,302.5 3,313.9 175.0 147.8 41.4 39.9 (2,069.9) (1,317.1) 2,449.0 2,184.5 ------ ------ ----- ----- ------ ----- ------ ------ ------- -------Capitalexpenditure inthe period 714.0 426.6 76.0 31.0 3.4 1.2 8.5 14.1 801.9 472.9 ------ ------ ----- ----- ------ ----- ------ ------ ------- ------- There are no significant inter-segment trading activities SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 4.Revenue 2005 2004 £m £m ---- ---- Rental income from investment properties 245.5 246.5Interest received on finance lease assets 0.9 0.9Service charge income 13.6 12.6Surrender premiums 42.7 11.7 ------ ------Total property investment income 302.7 271.7Proceeds on sale of trading properties 57.3 31.4Trading property rental income 3.3 4.2Sale of electricity, water and steam 38.1 30.7Sale of gas 3.8 4.7 ------ ------Total revenue 405.2 342.7 ------ ------ 5. Other investment income 2005 2004 £m £m ---- ---- Net profit on available-for-sale investments 2.9 5.7Transfer of fair value surplus realised on the sale ofavailable-for-sale investments 1.1 -Dividends from available-for-sale investments 1.5 0.2Other - 0.2 ------ ------ 5.5 6.1 ------ ------ 6. Administration expenses 2005 2004 £m £m ---- ---- Directors' remuneration 2.7 2.5Depreciation 0.9 0.8Auditors' remuneration 0.9 0.7Auditors' remuneration - IFRS transition work 0.2 -Paid to company's auditors for non-audit work 0.9 0.7Other administration costs 15.1 10.0 ------ ------ 20.7 14.7 ------ ------ 7. Net valuation gains The total valuation gains and losses for the period are shown in the financialstatements as follows: 2005 2004 £m £m ---- ---- Income statement 409.1 166.7Statement of recognised income and expenses 48.4 24.1 ------ ------Total valuation gains reported 457.5 190.8 ------ ------ and arise on the following properties:Investment properties 423.3 175.8Development and owner occupied properties 34.2 15.0 ------ ------ 457.5 190.8 ------ ------ The valuation gains and losses of joint ventures and associate amounting to£10.5m (2004 £15.4m) are included within their results shown on the face of theincome statement and are excluded from the above figures. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 8. Finance costs 2005 2004 £m £m ---- ---- Interest on overdrafts and loans 116.9 115.7Interest on convertible redeemable preference shares 13.2 -Unwinding of discount on the pensions liability less return onassets 0.5 0.9Unwinding of discount on other provisions 0.2 0.5 ------ ------Total borrowing costs 130.8 117.1Less amount charged to: the development of trading properties (0.7) (0.8): the development of investment and development properties (17.9) (14.0): the development of other assets (0.5) (1.2) ------ ------Net borrowing costs 111.7 101.1Fair value losses on interest rate swaps and other derivatives 0.2 -Swaption close out cost 2.3 -Borrowing close out cost relating to property disposals 1.9 0.7Exchange differences 8.8 0.1 ------ ------Total finance costs before exceptional expense 124.9 101.9Exceptional cost of refinancing (see explanation below) 126.0 - ------ ------Total finance costs 250.9 101.9 ------ ------ On 10 May 2005 the Group announced a debt exchange programme whereby holders ofcertain bonds were offered the chance to exchange the bonds at market value plusan incentive into new longer dated current coupon bonds. The cost of the exchange reflecting the mark-to-market fair value of the oldbonds plus the £4.9 million incentive fee results in a one-off tax deductiblefinance charge of £126.0 million. However, future cash interest charges shouldbe reduced by circa £10.0 million per annum. 9. Finance income 2005 2004 £m £m ---- ---- Interest received on bank deposits 9.9 6.7Fair value gains on interest rate swaps and otherderivatives 1.5 -Unwinding of discount on amounts receivable 1.4 -Exchange differences 8.6 - ------ ------ 21.4 6.7 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 10. Share of profits from joint ventures and associate Property Trading Total investment property 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m ---- ---- ---- ---- --- ---- ---- Revenue 9.5 18.7 7.6 1.6 17.1 20.3 ------ ------ ------ ------ ------ ------ Net rental income 8.3 15.9 0.3 0.4 8.6 16.3 Profit/(loss) onsale of tradingproperties - - 0.8 (0.9) 0.8 (0.9) Finance cost (2.6) (2.4) (0.6) (0.3) (3.2) (2.7) ------ ------ ------ ------ ------ ------ 5.7 13.5 0.5 (0.8) 6.2 12.7 Valuation surplus 10.5 15.4 - - 10.5 15.4 ------ ------ ------ ------ ------ ------Profit/(loss)before tax 16.2 28.9 0.5 (0.8) 16.7 28.1 Current tax (0.9) (1.0) - (0.1) (0.9) (1.1) Deferred tax (2.2) (2.9) (0.1) - (2.3) (2.9) ------ ------ ------ ------ ------ ------Group share ofprofit/(loss)after tax 13.1 25.0 0.4 (0.9) 13.5 24.1 ------ ------ ------ ------ ------ ------ 11. Taxation 2005 2004 £m £m ---- ----Current taxProvision for taxation based on profits for the year United KingdomCorporation tax charged at 30 per cent (2004 30 per cent) - 14.1Over provision in earlier years (4.6) (2.8) ------- --------- (4.6) 11.3OverseasCurrent tax charge 15.4 3.1(Over) / under provision in earlier years (2.3) 0.6Tax charge on sale of Tiperrary 34.0 -Tax charge on sale of investment properties 1.9 34.4 ------- ---------Total current tax 44.4 49.4 ------- ---------Deferred taxOrigination and reversal of timing differences 19.1 30.1Charged / (released) in respect of property disposals in theperiod 11.5 (51.6)On valuation surplus 130.5 58.2 ------- ---------Total deferred tax in respect of investment properties 161.1 36.7Released in respect of Quail West 10.6 -Other deferred tax (21.9) 6.1 ------- ---------Total deferred tax 149.8 42.8 ------- ---------Total tax on profit on ordinary activities 194.2 92.2 ------- --------- Factors affecting the tax charge for the period:The tax charge for the year is higher (2004 lower) than the standard rate ofcorporation tax in the UK. The differences are explained below: 2005 2004 £m £m ---- ---- Profit on ordinary activities before tax 582.3 388.0 Profit on ordinary activities multiplied by the standard rate ofcorporationtax in the UK of 30 per cent (2004 30 per cent) 174.7 116.4 Effects of :Capital allowances released due to property sales - (25.6)Permanent timing differences 4.7 2.3Profit on joint ventures already taxed (4.1) (7.2)Higher tax rates on overseas earnings 23.6 8.5Prior year adjustments (4.7) (2.2) ------ ------ 194.2 92.2 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 11. Taxation (continued) In addition to the amount charged to the income statement, deferred tax of£25.4million (2004 £3.3 million) has been recognised directly in equity. Thisincludes deferred tax relating to the revaluation of the Group's land andbuildings other than investment property amounting to £18.4 million (2004 £5.8million). 12. Dividends 2005 2004 £m £m ---- ---- Ordinary dividends paidFinal dividend for the year ended 31 December 2003 @ 9.2 penceper share - 38.4 Interim dividend for the year ended 31 December 2004 @ 6.15pence per share - 25.7 Final dividend for the year ended 31 December 2004 @ 9.85 penceper share 41.6 - Interim dividend for the year ended 31 December 2005 @ 6.50pence per share 27.4 - ------ ------ 69.0 64.1 ------ ------ In respect of the current year the directors propose that a dividend of 11 penceper ordinary share will be paid to shareholders on 16 May 2006. This dividend issubject to approval by the shareholders at the Annual General Meeting (AGM). Asrequired by IFRS this final dividend is not recognised in the financialstatements until paid. The preference dividend paid during 2005 of £10.8 million is included withinfinance costs. The preference dividend paid during 2004 of £11.2 million isincluded in the comparative figures in the income statement as an appropriationof profit. SLOUGH ESTATES plc 2005 Preliminary resultsNotes to the group financial statements 13. Earnings and net assets per ordinary share 2005 2004Earnings per shareThe weighted average number of shares usedfor the calculation of the earnings pershare is as follows: Weighted average number of shares in issue Shares m 421.8 418.6 Less the weighted average number of sharesheld by the ESOP Shares m (1.7) (1.4) ------ ------Basic weighted average number of shares a Shares m 420.1 417.2 Dilution adjustments: Preference shares Shares m 47.1 50.4 Share options and save-as-you-earn schemes Shares m 1.5 1.3 ------ ------Diluted weighted average number of shares b Shares m 468.7 468.9 ------ ------ Earnings used for the calculation ofearnings per share is as follows: Attributable profit c £m 385.1 285.8 Interest on preference shares £m 13.2 11.2 ------ ------ d £m 398.3 297.0Revaluation surpluses including jointventures £m (419.2) (182.1)and associate net of minority Add back exceptional loss on refinancing £m 126.0 - Profits and losses on sale of investmentproperties £m (20.3) (64.7)and joint ventures net of borrowing closeout costs Add back profit on the sale of Quail West £m (16.1) - Add back fair value of derivatives £m 1.0 - Add back exceptional surrender premiums £m (36.4) (7.5) Add back profit on sale of gas interests £m (99.7) (4.4) Tax on above exceptional items £m 28.6 10.1 Deferred tax relating to investmentproperties £m 151.9 65.9including valuation surpluses ------ ------ Diluted adjusted earnings e £m 114.1 114.3 ------ ------Basic adjusted earnings f £m 100.9 103.1 ------ ------ Earnings per ordinary share :Basic c/a pence 91.7 68.5Basic - adjusted f/a pence 24.0 24.7Diluted d/b pence 85.0 63.4Diluted - adjusted e/b pence 24.3 24.4 Net assets per ordinary shareThe number of shares used for the calculationof net assets per ordinary share is asfollows: Number of shares in issue Shares m 423.0 419.3 Less shares held by the ESOP Shares m (1.7) (1.4) ------ ------ Basic number of shares h Shares m 421.3 417.9 Dilution adjustments: Preference shares Shares m 47.1 50.4 Share options and save-as-you-earn schemes Shares m 1.5 1.3 ------ ------Diluted number of shares l Shares m 469.9 469.6 ------ ------ Equity used for the calculation of netassets per ordinary share is as follows:Total equity attributable to ordinaryshareholders £m 2,447.3 2,034.3Less shares held by the ESOP £m (6.9) (5.2) ------ ------Restated equity j £m 2,440.4 2,029.1Adjustment to exclude deferred tax oninvestment £m 649.2 457.3properties and latent CGT on revaluationsurpluses ------ ------Adjusted equity attributable to ordinaryshareholders k £m 3,089.6 2,486.4 Dilution adjustment for preference shares £m 107.7 136.0 ------ ------Adjusted diluted equity attributable toordinary shareholders m £m 3,197.3 2,622.4 ------ ------ Diluted equity attributable to ordinaryshareholders n £m 2,548.1 2,165.1 ------ ------Net assets per ordinary share Basic j/h pence 579 486Basic excluding deferred tax on investmentproperties k/h pence 733 595Diluted n/l pence 542 461Diluted excluding deferred tax oninvestment m/l pence 680 558properties SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 14. Goodwill Group 2005 2004 £m £m ---- ---- Balance 1 January - -Additions arising on acquisitions in the period 0.7 - ------ ------At 31 December 0.7 - ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 15. Investment properties Investment properties consist of completed land and buildings and properties inthe course of redevelopment. They exclude trading properties, propertiesoccupied by group companies, land held for development and developments in thecourse of construction. UK Europe USA Total £m £m £m £m ---- ----- ---- ---- At 1 January 2004 2,449.9 259.0 534.0 3,242.9Exchange movement - 1.9 (32.0) (30.1)Acquisitions 334.9 - - 334.9Additions 37.7 (0.7) 7.2 44.2Disposals (185.0) - (169.3) (354.3)Transfer from development properties - - 39.3 39.3Revaluation surplus during period 139.3 4.6 31.9 175.8 -------- -------- -------- -------- At 1 January 2005 2,776.8 264.8 411.1 3,452.7Exchange movement - (8.5) 62.2 53.7Acquisitions 280.0 67.3 168.1 515.4Additions 47.5 (1.8) 18.1 63.8Disposals (74.9) - (40.2) (115.1)Transfer from development properties 15.6 3.1 15.6 34.3Transfer from trading property - 12.0 - 12.0Revaluation surplus during period 326.8 9.9 86.6 423.3 -------- -------- -------- --------At 31 December 2005 3,371.8 346.8 721.5 4,440.1 -------- -------- -------- -------- Completed properties 3,245.7 346.8 712.2 4,304.7Properties for or under redevelopment 126.1 - 9.3 135.4 -------- -------- -------- --------At 31 December 2005 3,371.8 346.8 721.5 4,440.1 -------- -------- -------- -------- 2005 2004 £m £m ---- ---- Properties held at valuation - cost 2,710.5 2,146.4- valuation surplus 1,729.6 1,306.3 -------- --------Valuation 4,440.1 3,452.7 -------- -------- The above assets include long term leaseholds valued at £105 million (2004 £110million). All other properties are freehold. Investment properties have been included at market value after having deductedan amount of £50.6 million (2004 £45.0 million) in respect of lease incentivesand letting fees included in trade and other receivables. The Group's properties were externally valued as at 31 December 2005 by CBRichard Ellis, DTZ Debenham Tie Leung or Colliers CRE in the United Kingdom, inthe USA by Walden-Marling Inc., in Belgium by De Crombrugghe & Partners s.a. andin France by CB Richard Ellis. The valuation basis is fair value, conforms tointernational valuation standards and was arrived at by reference to marketevidence of the transaction prices for similar properties. All the valuerslisted above are qualified valuers who hold a recognised and relevantprofessional qualification and have recent experience in the relevant locationand category of the properties being valued. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 16. Development and owner occupied properties UK Europe USA Total £m £m £m £m ---- ---- ---- ----Cost or valuationAt 1 January 2004 149.5 25.2 83.9 258.6Exchange - 0.4 (7.0) (6.6)Additions 7.1 4.0 41.0 52.1Disposals (1.0) - (0.8) (1.8)Revaluation (deficit)/surplus duringperiod (14.9) 2.1 27.8 15.0Transfer to investment property - - (39.3) (39.3) ------ ------ ------ ------At 1 January 2005 140.7 31.7 105.6 278.0Exchange - (1.1) 17.7 16.6Additions 71.6 6.6 70.9 149.1Disposals (3.1) - (4.1) (7.2)Transfer to investment property (15.6) (3.1) (15.6) (34.3)Transfer from trading property - 1.6 - 1.6Revaluation (deficit)/surplus duringperiod (5.4) (1.4) 41.0 34.2 ------ ------ ------ ------At 31 December 2005 188.2 34.3 215.5 438.0 ------ ------ ------ ------ Depreciation and impairmentAt 1 January 2004 1.0 - - 1.0Additions 0.2 - - 0.2 ------ ------ ------ ------At 1 January 2005 1.2 - - 1.2Additions 0.5 - - 0.5 ------ ------ ------ ------At 31 December 2005 1.7 - - 1.7 ------ ------ ------ ------ Net book valueAt 31 December 2005 186.5 34.3 215.5 436.3 ------ ------ ------ ------ At 31 December 2004 139.5 31.7 105.6 276.8 ------ ------ ------ ------ Land for and under development and owner occupied buildings are valued on thesame basis as investment properties.The valuers are detailed on the previous page within note 15 SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 17. Plant and equipment Other plant Fixtures Gas Utilities and assets plant fittings Total £m £m £m £m ---- ---- ---- ----CostAt 1 January 2004 80.9 30.8 10.4 122.1Exchange (5.1) - - (5.1)Additions - 14.5 0.5 15.0Disposals - - (0.2) (0.2) ------- ------- ------ ------At 1 January 2005 75.8 45.3 10.7 131.8Exchange 4.1 - - 4.1Additions 7.1 3.3 2.1 12.5Disposals (87.0) - (0.1) (87.1) ------- ------- ------ ------At 31 December 2005 - 48.6 12.7 61.3 ------- ------- ------ ------ Depreciation and impairmentAt 1 January 2004 - 3.1 7.0 10.1Additions 1.1 2.1 0.9 4.1Disposals - - (0.4) (0.4) ------- ------ ------ ------At 1 January 2005 1.1 5.2 7.5 13.8Additions 1.0 2.4 1.2 4.6Disposals (2.1) - - (2.1) ------- ------ ------ ------At 31 December 2005 - 7.6 8.7 16.3 ------- ------ ------ ------ Net book value at 31 December2005 - 41.0 4.0 45.0 ------- ------ ------ ------ Net book value at 31 December2004 74.7 40.1 3.2 118.0 ------- ------ ------ ------ 18. Investments in joint ventures and associate 2005 2004 £m £m ---- ---- Cost or valuation at 1 January 84.1 203.3Exchange movement 2.2 (1.8)Additions 15.7 7.3Disposal (12.6) (140.4)Dividends received (2.8) (8.4)Valuation surplus 10.5 15.4Deferred taxation on valuation surplus (2.3) (2.9)Share of profits net of current taxation 5.3 11.6 ------ ------Cost or valuation at 31 December 100.1 84.1 ------ ------ Analysed as follows:Cost 40.7 29.2Valuation surplus net of deferred tax 51.2 44.1Share of retained profits 8.2 10.8 ------ ------ 100.1 84.1 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 19. Borrowings 2005 2004 £m £m ---- ----Borrowings falling due after one yearPayable in more than five years:Secured:11.25% first mortgage debenture 2019 - 40.0Currency first mortgages on overseas properties:US dollars 6.85% to 7.51% 2008 to 2017 30.4 40.4•uro mortgages 5.14% to 6.36% 2014 to 2016 42.3 45.6Australian dollar project finance loan 2014 - 45.4Unsecured:7.125% bonds 2010 - 124.411.625% bonds 2012 - 100.06.25% bonds 2015 148.0 148.310% bonds 2017 - 98.75.5% bonds 2018 197.8 -5.625% bonds 2020 246.6 -7% bonds 2022 148.7 148.86.75% bonds 2024 220.6 221.05.75% bonds 2035 197.9 -8.09% US dollar Notes 2015 5.8 5.28.0% US dollar Notes 2012 25.3 22.67.94% US dollar Notes 2010 - 47.69.27% Canadian dollar Notes 2010 - 10.96.57% US dollar Notes 2011 58.0 52.06.97% US dollar Notes 2016 58.0 52.06.417% Euro Notes 2011 34.2 35.5Long term loan 2010 - 18.48.25% Convertible redeemable preference shares 107.7 -Bank loans scheduled for renewal in over five years 156.3 - ------ ------ 1,677.6 1,256.8Exchange difference on currency swaps - (2.6)Less instalments due in less than five years (21.1) (51.7) ------ ------ 1,656.5 1,202.5 ------ ------ Payable by instalments in more than five years 51.6 98.1Payable on final maturity date 1,604.9 1,104.4 ------ ------ 1,656.5 1,202.5 ------ ------ Wholly repayable between three and five years:Secured:US dollars 6.9% 2007 first mortgage - 4.1•uro mortgage 2009 2.5 -Unsecured:7.58% US dollar Notes 2007 - 10.47.84% US dollar Notes 2008 8.7 7.87.94% US dollar Notes 2010 53.1 -9.27% Canadian dollar Notes 2010 12.5 -10% Bonds 2007 - 50.012.375% loan stock 2009 - 31.97.125% bonds 2010 124.3 -Bank loans and overdrafts scheduled for renewal betweenthree and five years 331.5 327.9 ------ ------ 532.6 432.1Instalments due on longer dated borrowings 13.3 42.0Less instalments due in less than three years (1.4) (0.4) ------ ------ 544.5 473.7 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 19. Borrowings (continued) 2005 2004Repayable between one and two years: £m £m ---- ----Secured:US dollars 6.9% 2007 first mortgage 4.3 -Polish mortgage 3.5 -Unsecured:7.58% US dollar Notes 2007 11.6 -Bank loans and overdrafts scheduled for renewal inone to two years 25.5 2.1 ------ ------ 44.9 2.1Instalments due on longer dated borrowings 4.5 5.2Less instalments due within one year (0.2) - ------ ------ 49.2 7.3 ------ ------ Total repayable in more than one year 2,250.2 1,683.5 ------ ------ Borrowings falling due within one yearSecured:European mortgages 3.6 -Unsecured:Bank loans and overdrafts 5.9 34.3Preference shares held by subsidiary 0.3 - ------ ------ 9.8 34.3Instalments due on longer dated borrowings 4.9 4.9 ------ ------Total repayable within one year 14.7 39.2 ------ ------ Maturity profile of group debtIn one year or less 14.7 39.2In more than one year but less than two 49.2 7.3In more than two years but less than five 544.5 473.7In more than five years but less than ten 567.1 466.6In more than ten years 1,089.4 735.9 ------ ------Total Group debt 2,264.9 1,722.7 ------ ------ Split between secured and unsecured borrowingsSecured (on land, buildings and other assets) 86.6 175.5Unsecured 2,178.3 1,547.2 ------ ------ 2,264.9 1,722.7 ------ ------ Maturity profile of undrawn borrowing facilitiesIn one year or less 44.8 47.3In more than one year but less than two 18.5 -In more than two years 471.0 275.9 ------ ------Total available undrawn facilities 534.3 323.2 ------ ------ Rates at which interest is charged on borrowings dueafter more than one year 2005 2005 2004 2004 before after before after swaps swaps swaps swaps £m £m £m £m ---- ---- ---- ----Up to 5% 4.3 75.0 - 78.15% to 7.5% 1,496.9 1,659.4 862.6 881.1Over 7.5% 124.8 124.8 429.9 429.9 ------ ------ ------ ------ 1,626.0 1,859.2 1,292.5 1,389.1 8.25p convertible redeemablepreference shares 107.7 107.7 - -Variable rate 516.5 283.3 391.0 294.4 ------ ------ ------ ------ 2,250.2 2,250.2 1,683.5 1,683.5 ------ ------ ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 20. Financial instruments and fair values Book Fair Book Fair value value value value 2005 2005 2004 2004 £m £m £m £m ---- ---- ---- ---- Fair value of borrowingsSecured bonds - - 40.0 63.0Secured bank loans 86.6 92.9 138.0 144.7Unsecured bond issues 1,283.9 1,400.1 923.1 1,080.4Unsecured loans 267.2 296.1 243.9 278.0Bank loans & overdrafts 519.2 519.2 380.3 380.3Guildhall preference shares 0.3 0.3 - -Convertible redeemable preferenceshares 107.7 107.7 - - ------- ------- ------ -------Fair value of debt 2,264.9 2,416.3 1,725.3 1,946.4 ------- ------- ------ ------- Interest rate swaps 1.4 1.4 - 1.7Cross currency swaps (4.2) (4.2) (2.6) (3.3)FRAs (0.2) (0.2) - -Caps & collars 0.2 0.2 - 0.5Options - - - 3.8 ------- ------- ------- -------Fair value of derivatives (2.8) (2.8) (2.6) 2.7 ------- ------- ------- ------- Fair value of debt and derivatives(pre-tax) 2,262.1 2,413.5 1,722.7 1,949.1Tax relief due on earlyredemption/termination @ 30% (45.4) (67.9) ------- ------- ------- -------Fair value of debt and derivatives(post tax) 2,262.1 2,368.1 1,722.7 1,881.2 ------- ------- ------- ------- After tax mark-to-market adjustment 106.0 158.5 Included in the above analysis are £18.6 million (2004 £12.9 million) ofunamortised borrowing costs. 21. Provisions for liabilities and charges Pension scheme Quail Other deficit West liabilities Total £m £m £m £m ---- ---- ---- ---- Balance at 1 January 2005 41.5 18.0 0.3 59.8Exchange movement 0.1 1.0 - 1.1Charged/(credited) to income statement 2.9 (19.0) - (16.1)Charged to SORIE 4.0 - - 4.0Paid (19.1) - (0.1) (19.2) -------- ----- ------ -------Balance at 31 December 2005 29.4 - 0.2 29.6 ------- ------ ------- ------- The other liabilities relate principally to provisions for onerous leases onrented properties and represent the estimated liability of future costs forlease rentals and dilapidation costs less the expected receipts from sub-lettingthese properties which are surplus to business requirements. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 22. Deferred tax assets and liabilities Balance Balance 1 January Recognised Recognised 31 December 2005 Exchange in income in Equity 2005 £m £m £m £m £m ---- ---- ---- ---- ----Movement indeferred taxValuationsurpluses on 256.6 6.6 130.5 18.4 412.1propertiesCapital 127.6 5.8 37.0 - 170.4allowancesOthers 73.1 - (6.4) - 66.7 -------- -------- --------- --------- ---------Total relating toinvestment 457.3 12.4 161.1 18.4 649.2propertiesCapitalallowances on 2.6 - 3.7 - 6.3plant andequipmentPension deficit (11.9) - - 3.8 (8.1)Deferred tax (13.1) (0.8) (10.9) - (24.8)assetsOthers 13.5 0.7 (4.1) 3.2 13.3 -------- -------- --------- --------- ---------Total deferred 448.4 12.3 149.8 25.4 635.9tax -------- -------- --------- --------- --------- Balance Balance 1 January Recognised Recognised 31 December 2004 Exchange in income in Equity 2004 £m £m £m £m £m ---- ---- ---- ---- ----Movement indeferred taxValuationsurpluses on 221.7 (2.5) 31.6 5.8 256.6propertiesCapital 129.7 (2.5) 0.4 - 127.6allowancesOthers 78.2 (0.3) (5.6) 0.8 73.1 -------- -------- --------- --------- ---------Total relating toinvestment 429.6 (5.3) 26.4 6.6 457.3propertiesCapitalallowances on 0.1 - 2.5 - 2.6plant andequipmentPension deficit (8.6) - - (3.3) (11.9)Deferred tax (24.5) - 11.4 - (13.1)assetsOthers 10.7 0.3 2.5 - 13.5 -------- -------- --------- --------- ---------Total deferred 407.3 (5.0) 42.8 3.3 448.4tax -------- -------- --------- --------- --------- At the balance sheet date, the Group has unused revenue tax losses of £75.4million (2004 £16.8 million) available for offset against future profits. Adeferred tax asset has been recognised in respect of all of these losses as itis expected that future profits will be available. The Group also has capital tax losses of £45.3 million (2004 £48.3 million)which can only be utilised against future profits from the sale of investmentproperties. In accordance with IAS 12 these losses give rise to a deferred taxasset which is offset against the deferred tax liability. At the balance sheet date, the aggregate amount of temporary differencesassociated with undistributed profits of subsidiaries and joint ventures forwhich deferred tax liabilities have not been recognised was £nil (2004 £nil ).No liability has been recognised because the Group is in a position to controlthe distribution of these profits and this is unlikely in the foreseeablefuture. A contingent tax asset of £93.6 million (2004 £90.7 million) relating to unusedindexation allowances has not been recognised in the financial statements due torestrictions in IFRS. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 23. Statement of changes in equity Retained Other Pref Balance Balance Restated profit items Reserve share 31 1 January for for in Shares Div'd trans- conve- December 2005 IAS 39 Exch Period SORIE* issued Other paid fers rsion 2005 £m £m £m £m £m £m £m £m £m £m £m Revaluationreservenet ofdeferred tax 1,090.8 - 9.3 - 29.6 - - - 289.9 - 1,419.6 Share basedpaymentsreserve 0.3 - - - - - 2.6 - - - 2.9 Fair value reserve-available-for-saleinvestments - 4.1 0.7 - 6.5 - - - (1.1) - 10.2 Unrealisedsurplusreserve 47.4 - - - - - - - - - 47.4 Translationreservenet ofdeferred tax (11.3) 2.0 (0.2) - (0.1) - - - 1.1 - (8.5) ------------------------------------------------------------------------------------------------------ Total otherreserves 1,127.2 6.1 9.8 - 36.0 - 2.6 - 289.9 - 1,471.6 Revenuereserve 565.2 (18.7) 15.3 385.1 (7.8) - - (69.0) (289.9) 1.2 581.4 Ordinary sharecapital 104.8 - - - - 0.1 - - - 0.8 105.7 Preferenceshares 34.0 - - - - - - - - (2.2) 31.8 Share premium 339.1 (91.0) - - - 1.4 - - - 7.3 256.8 Own sharesheld (5.2) - - - - - (1.7) - - - (6.9) ----------------------------------------------------------------------------------------------------- Total equityattributable toequityshareholders 2,165.1 (103.6) 25.1 385.1 28.2 1.5 0.9 (69.0) - 7.1 2,440.4 Minorityinterests 19.4 (0.3) 0.8 3.0 - - (9.9) (4.4) - - 8.6 ----------------------------------------------------------------------------------------------------- Total equity 2,184.5 (103.9) 25.9 388.1 28.2 1.5 (9.0) (73.4) - 7.1 2,449.0 ------------------------------------------------------------------------------------------------------- *SORIE is the term used for the Statement of Recognised Income and Expenses. SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 24. Commitments Contractual obligations to purchase, construct, develop,repair, maintain or enhance: 2005 2004 £m £m ------ ------ Property- United Kingdom 120.9 36.6- Overseas 188.1 147.5Available-for-sale investments 10.5 17.3Utilities plant 0.6 0.6Other plant and equipment 0.1 - ------ ------Total capital commitments 320.2 202.0 ------ ------ Group's share of capital commitments of joint venturesand associate 15.8 2.7 ------ ------ 25. Reconciliation of cash generated from operations 2005 2004 £m £m ---- ---- Net operating income 798.3 459.1Less gain from sale of oil and gas interests separatelydisclosed (99.7) - Adjustments for:Depreciation of property, plant and equipment 5.1 4.7Profit on sale of properties (14.0) (56.4)Profit on disposal of property, plant and equipment (0.4) -Profit on disposal of joint venture (7.8) (8.3)Revaluation surplus on investment properties (409.1) (166.7)Other income re-allocated (5.5) (11.0)Other provisions (17.8) (1.9) ------ ------ 249.1 219.5Changes in working capital:Decrease in trading properties 14.3 6.9Decrease/(increase) in inventories 0.3 (0.3)Increase in debtors (21.6) (33.6)(Decrease)/increase in creditors (4.8) 9.9 ------ ------Net cash inflow generated from operations 237.3 202.4 ------ ------ SLOUGH ESTATES plc2005 Preliminary resultsNotes to the group financial statements 26. Reconciliation of opening shareholders' equity as previouslyreported under UK GAAP to IFRS Year to Year to 31 31 December December 2004 2003 Note £m £m -------- ------- Shareholders' equity previously reported under UK 2,446.2 2,176.1GAAPEffects of adopting IFRSProposed dividends 1 41.3 38.4Business combinations 2 7.4 -Operating lease incentives 3 (9.4) (4.7)Joint ventures and associate 4 (8.2) (6.1)Finance leases as lessor 5 (10.7) (8.5)Deferred tax 6 (260.3) (225.0)Pension scheme deficit 7 (41.0) (29.5)Fair value of share based payments 8 1.3 0.8Other (1.5) 0.9 -------- --------Shareholders' equity restated under IFRS 2,165.1 1,942.4 -------- -------- Notes1. IAS 10 - Ordinary dividend excluded from the income statement. Recognised onthe balance sheet when approved. 2. IFRS 3 - The acquisition of Ravenseft has been treated as a propertyacquisition. Goodwill and deferred tax on acquisition have been eliminated.Opted to apply this standard with effect from 1 January 2004. 3. SIC 15 - Lease incentives amortised over period of lease or to the firstbreak whichever is the shorter. 4. IAS 28 & 31 - Equity account for the results of joint ventures andassociate's profits, including its share of valuation surpluses and deficits,interest and taxation as a one line entry in profit before tax. The reduction inshareholders' funds arises principally from deferred taxation provided onrevaluation surpluses. 5. IAS 17 - Finance leases included on the balance sheet as a debtor. Norevaluation. Previously accounted for as investment property. 6. IAS 12 - Mainly deferred tax on investment property valuation surpluses, withmovements in the income statement. Previously disclosed in the notes. 7. IAS 19 - Recognise in full the cumulative deficits at the transition date 1January 2004 - corridor approach not adopted. 8. IFRS 2 - Share option plans fair valued at the date of grant and costs takento the income statement over the vesting period. Transitional exemption used. 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