11th Mar 2010 07:00
11 March 2010 CLS Holdings plc ("CLS", the "Company" or the "Group") Audited Financial Results for the year ended 31 December 2009
Financial highlights:
- Adjusted net assets per share: up 18.6% to 767.5 pence (2008: 647.2 pence)
- Adjusted earnings per share: up to 48.2 pence (2008: loss per share of 65.6
pence)
- Proposed tender offer buy-back: 1 in 42 shares at 525 pence, equivalent to
12.5 pence per share, and increasing pro forma adjusted net assets per share
to 771.7 pence
- Profit before tax: up to £18.5 million (2008: loss £142.1 million)
- Profit after tax: up to £17.4 million (2008: loss of £78.0 million)
- Core Profit: up to £23.7 million (2008: £2.8 million)
- Portfolio value: £813.0 million (2008: £798.8 million) - underlying
valuation movement up 7.5% in UK, down 5.6% in Europe, down 0.6% overall
- Aggregate cash, corporate bonds and other investments: £144.2 million
- Recurring interest cover: up at 2.1 times (2008: 1.1 times)
- Weighted average cost of debt: down to 4.0% (2008: 5.8%)
- Corporate bond portfolio: return on capital employed of 54.2%
- Distributions through tender offer buy-back: 77.8 pence per share (£48.0
million)
- Total Shareholder Return: for the year ended 31 December 2009 52.7%
- Occupancy rate: consistently high at 95.5% (2008: 95.7%)
- Proportion of rent roll let to Government tenants: 40% for the Group and 54%
in the UK
Commenting on the results, Sten Mortstedt, Executive Chairman, said:
"The property portfolio has performed well in difficult market conditions, reflecting the defensive benefits of well-let properties, and net assets per share are 18.6% higher than a year ago, a good result in the light of the adverse 36 pence impact of sterling strengthening during the period".
"The fundamentals of our business remain sound. We have the resources available to take advantage of opportunities as they arise and I am delighted to report that we face the challenges ahead from a position of strength and confidence."
For further information, please contact:
Sten Mortstedt, Executive Chairman, CLS Holdings plc +44 (0)20 7582 7766
Henry Klotz, Chief Executive Officer, CLS Holdings plc +44 (0)20 7582 7766
John Whiteley, Chief Financial Officer, CLS Holdings plc +44 (0)20 7582 7766
Jonathan Gray, Kinmont Advisory Limited +44 (0)20
7087 9100
Adam Reynolds, Hansard Communications +44 (0)20
7245 1100
The annual financial report can be found on www.clsholdings.com
CHAIRMAN'S STATEMENT 2009Investment Philosophy
CLS has an investment philosophy and a strategy to seek out and exploit imperfections in the market.
By this I mean that today's prices and values will always be different in the future and CLS, therefore, tries to predict price movements and then position itself to benefit from them.
In order to achieve higher returns and minimise the associated higher risks, diversification is key; CLS's main investment is in properties, but we have also invested in a portfolio of corporate bonds. Both asset classes cover a number of countries and currencies, and have exposure to different sectors. This diversification ensures that if some of the investments are unsuccessful the total return should still remain very good.
Imperfections Exploited
- In 2006, we anticipated significant falls in property valuesacross Europe and embarked on a strategy to dispose of a number of properties.By the end of 2008 we had raised through sales almost £750 million, repaidassociated debts, returned £72 million to investors and retained £150 millionfor subsequent investment. Consequently, whilst the UK listed property sectorwas repairing its collective balance sheet with right issues of over £6billion, CLS was returning cash to shareholders.
- During the most critical period of the financial crisis we became uncomfortable with the outlook for the banking industry. In order to gain absolute protection for a large part of our liquid assets, we reduced our exposure to bank deposits and invested in government bonds.
- At the end of 2008, when we were convinced that the bankingsystem would survive, we placed large cash deposits of 12 months' duration atinterest rates of 6.15% (sterling) and 4.9% (euro), expecting rates to fall.Within four to five months interest rates were virtually zero.- Also in the autumn of 2008 we began to invest for the long termin a portfolio of liquid corporate bonds as we believed the prevailing marketprices to be too low. In 2009 the bond portfolio provided a total return of£18.0 million, adding 37 pence per share to net asset value, and at 31December 2009 the portfolio of £70.0 million was yielding over 8.1%. Theincrease in value of the bonds has not been included in profit before tax dueto the long-term characteristics of this new investment.- We broke several interest rate swaps in July 2009 as we were ofthe opinion that the yield curve was too steep and, therefore, the swaps wereundervalued, which proved to be correct. In addition, we sought to increasethe extent to which our interest rate risk was mitigated by caps rather thanswaps, thereby allowing us to take advantage of the prevailing low interestrate environment whilst restricting our exposure to interest rate rises. At 31December 2009, our weighted average cost of borrowing was 4.0% and 50% of ourdebt was at floating rates.We believe CLS has served investors well; in the ten years since2000, our total shareholder return has been 297%. Over the same period, usingtender buy-backs and market purchases of shares, we have returned in aggregate£266 million to shareholders; in January 2000 CLS's market capitalisation was£159 million. We believe that for the past ten years, CLS has been one of thethree best performing property companies listed on the London Stock Exchange.
The Portfolio
In 2009, the property portfolio which we retained has performedwell in difficult market conditions, a reflection of the strength of our rentroll and our team's active management. 40% of the Group's rental income isderived from governmental or quasi-governmental tenants, our weighted averagelease length is 8.5 years, and our vacancy rate remains low at 4.5% by rentalvalue. Further, our traditional focus on debt collection has consistently seencollection rates exceed 90% within a few days of the due date during the year.The portfolio's valuation at 31 December 2009 reflected thedefensive benefits of well-let properties. In the UK, our portfolio began torise in value in the first half of the year, and over the twelve months showeda gain of 7.5%. In recent years the French market has been less volatile thanthe UK, rising neither as quickly nor as far, and falling more slowly. In 2009our French portfolio declined in value by 6.2% in local currency and theGerman portfolio by 5.7%.
Financials
Net assets per share at 31 December 2009, adjusted to exclude deferred tax, were 767.5 pence, 18.6% higher than a year earlier, and 4.8% above the pro forma equivalent of 732.0 pence, after the effect of the large tender offer in January 2009. This is a good result in the light of the adverse 36.0 pence impact of sterling strengthening during the period.
Property Investment
In the prevailing economic climate, we have been rigorous inassessing investment opportunities in 2009, restricting our acquisitions tothe £29.2 million 7 Rue Eug¨ne et Armand Peugeot, Rueil-Malmaison, to the westof Paris, a transaction which was completed at the end of December. Our onlydisposal in the year was 2 Deanery Street, London W1 for £2.2 million.
The UK market is now characterised by a far greater demand for property investment than supply and banking conditions remain relatively unfavourable. We see greater value and better conditions in both France and Germany and we will seek to take advantage of opportunities in these markets in the short to medium term.
Cash ManagementDuring a year of uncertain property and financial markets,effective cash management has been key. With poor returns available from bankdeposits, the Board sought to manage the Group's cash resources by exploitingopportunities which arose in the corporate bond market as explained above. Thecorporate bond portfolio is a part of the Company's long-term investmentstrategy.A further initiative successfully executed in 2009 was theavoidance of potential breaches of covenants of bank loans with an aggregatevalue of £176.4 million, by repaying or placing on deposit new cash of £14.3million. The fact that this was achieved at a time of significant bankingturmoil is testament to the good relationships we enjoy with our principallenders.
With the reduction in the appetite of banks to lend, it is encouraging that very little of our borrowing matures over the next two years.
Efficiency
We successfully implemented a cost-cutting programme before the financial crisis began. In May 2008 we moved to cheaper premises in one of our own buildings and slimmed down the organisation, successfully reducing our administration costs from £16.1 million in 2008 to £12.2 million in 2009.
We believe that environmentally safe and energy-efficient buildingsare both commercially beneficial and socially desirable. For this reason weincorporate environmentally effective features in our developments and convertor modify as many properties as possible. This provides an advantage inletting the buildings, creating benefits to tenants, who enjoy higher qualitybuildings, lower running costs and a healthier environment, and it providescost savings for the Group and added investment value. At Solna Business Parkin Sweden we developed buildings with geothermal heating and cooling systems,which cut running costs significantly, and met high specifications for airquality, sound proofing and illumination. Both of our recent developments inGermany, at Landshut and Bochum, were designed to comply with the ENEVrequirements on energy saving, and at Landshut ground water is used in thecooling system for the office space. We intend to extend this programme ofenergy efficiency across the portfolio.
Distributions
Following the substantial returns of cash to shareholders in late2008 and early 2009, and with the share price at a discount of over 40% toadjusted net assets per share, we believe this is an appropriate time torestore our distribution policy. Accordingly, we propose to recommend a tenderoffer buy-back of 1 in 42 shares at 525 pence per share, and a general meetingto consider this will be convened for early April.
Appointments
In November we welcomed John Whiteley to the Board as Chief Financial Officer, and Thomas Lundqvist succeeded Tom Thomson as Vice Chairman. In addition, David Fuller was appointed Company Secretary. I would like to thank my Board colleagues and our staff for their fortitude during demanding times, and our shareholders, lenders, customers and suppliers for their continued support.
The Future
We operate in difficult markets, with banks seeking to reduce theirexposure to the real estate sector. Good property deals, such as our recentFrench acquisition, are scarce. The fundamentals of our business remain sound.We have resources available to take advantage of opportunities as they ariseand I am delighted to report that we face the challenges ahead from a positionof strength and confidence.Sten MortstedtExecutive Chairman11 March 2010BUSINESS REVIEW 2009The Group's business is divided into two operating divisions:investment properties and other investments. The investment property divisionis sub-divided for management purposes between the United Kingdom, France,Germany and Sweden. Other investments comprise investments in corporate bonds,in property groups Catena AB and Bulgarian Land Development plc, and inwebsite media company Wyatt Media Group AB and other small corporateinvestments. At 31 December 2009, the investment property portfolio was valuedat £813.0 million, and the other investments had a book value of £114.8million.
Investment Property
Overview At 31 December 2009, the investment property portfolio wasvalued at £813.0 million, a fall in the year of 4.3%, of which 3.7% was due tothe strength of sterling against assets held in euros and Swedish kronor. Inlocal currency, the UK portfolio rose in value by 7.5%, France fell by 6.2%,Germany by 5.7% and Sweden by 2.0%. The property investment markets did notprovide many opportunities to invest at value in the year, but towards the endof December we acquired Fr¨res Peugeot in Paris for £29.2 million. Disposalsin the year were restricted to 2 Deanery Street, London for £2.2 million. At31 December 2009, the weighted average lease length across the Group was 8.5years.United Kingdom At 31 December 2009, the UK accounted for 42.7% ofthe investment portfolio at a value of £346.8 million, 7.5% higher than twelvemonths earlier on a like-for-like basis. By contrast, Investment PropertyDatabank recorded a fall in office values across the UK of 5.9% in the year.Our valuation gain reflected a fall in yields for long-term, secure incomecaused by an excess of demand from investors over the available supply. The UKportfolio has a strong tenant profile with over 50% by rental value let togovernment tenants, and longevity of income with a weighted average lease termof over 10 years.During the year, 2 Deanery Street, a Grade II listed buildingextending to 197 sq m of office accommodation, was sold with vacant possessionfor £2.2 million, generating a profit of £0.3 million over its 2008 valuationand representing the final disposal of properties considered to offer limitedfuture prospects for growth. At 31 December 2009, the UK portfolio comprised26 properties with an aggregate lettable area of 116,700 sq m.We saw few opportunities for acquisitions offering good long-termvalue, with pricing generally reflecting excessive demand from overseas buyersand institutions. Nevertheless, we remain vigilant for opportunisticacquisitions. As a long-term holder of properties we have continued to carryout renovation and improvement works to a number of buildings in the UKportfolio, comprising £1.3 million in aggregate in the year, and includingworks at Chancel House and the installation of a new substation andrefurbishment works at Cambridge House. At Westminster Tower, the electricalsupply to each of the floors was replaced whilst the building remained fullyoccupied. At Great West House, a further floor was refurbished for the lettingto Medical Professional Personnel.
Within the context of an economy in recession, the UK vacancy rate remained low at 4.5% by rental income compared to 4.4% in December 2008.
Despite the difficult market conditions, lettings were achieved atGreat West House to Medical Professional Personnel and National AviationCompany of India, for 473 sq m and 299 sq m respectively, and an existingtenant at Great West House, Global Refund, acquired further space. AtQuayside, 147 sq m was let to Knowledge to Action and at Ingram House 178 sq mwas contracted with Ash Associates Communications. Further lettings wereachieved at Spring Gardens Court, 16 Tinworth Street, 2/10 Tinworth Street and107 Wandsworth Road.
Significant rental increases were achieved on the rent reviews at CI Tower: the annual rent from Hays Specialist Recruitment rose by 15%, and rent from Lafarge Cement UK increased by the same degree. Further rent reviews were settled at Spring Gardens, Westminster Tower and Cambridge House.
Through our close relationships with tenants we have again achieved excellent levels of debt recovery with no tenant company failures to report across the UK portfolio during the year. On average we received 94% of rent and service charge within 14 days of the due dates.
In the medium term, we plan to capitalise on the improvement of theVauxhall area, following the recent substantial residential development of StGeorge's Wharf, the relocation of the New Covent Garden Market, and theannouncement of the new location of the United States embassy which is to openin 2016. We are pursuing development options on two sites in Vauxhall whichare important projects in an improving area offering strong potential foradding value to substantial sites.France At the end of 2009, the French portfolio was valued at£222.8 million, or 27.4% of the total CLS portfolio, and had fallen by 6.2% inthe year in local currency on a like-for-like basis. This compares favourablyto a 2009 average fall of 16% in the French market.Throughout 2009 we were prepared to wait for the right deal. Havingappraised many opportunities in the year, on 29 December we acquired 7 rueEug¨ne et Armand Peugeot in Rueil-Malmaison for £29.2 million. This was a7,350 sq m multi-let office building to the west of Paris yielding 8.3% andproviding a return on equity of 16.1%. There were no disposals from the Frenchportfolio in the year, which at the year end comprised 25 properties of 85,800sq m with 180 tenants. Most tenancies were of the traditional French 3:6:9year duration, and the weighted average lease length at 31 December 2009 was5.9 years.The French portfolio suffered no major tenancy changes in the year,but 7,200 sq m of space was relet and 8,700 sq m renewed, resulting in a yearend vacancy rate of 4.2% by rental value. Among the deals closed in the yearwere two lettings to existing tenants in Lyon: 3,909 sq m let to Deloitte inPark Avenue; and 1,050 sq m to Deloitte's parent, Inuem, at Front de Parc. InParis, at Le Quatuor, Montrouge, P´le Emploi took 999 sq m, and in 96 RueNationale, Lille, Medef signed a lease renewal and extension on 936 sq m.Renewals and lease extensions were also completed in Paris with MicroApplication on 1,315 sq m in 20/22 Rue des Petits H´tels, with Citadines on1,264 sq m in 120 Rue Jean Jaur¨s, with Camfil on 1,228 sq m in Le Debussy,and with Cesap on 606 sq m in new nine year leases.
£2.3 million was incurred in 2009 maintaining the fabric of the portfolio, in particular in Paris at Le Debussy, la Garenne-Colombes with the renovation of common parts and the replacement of the heating and cooling system at the building. Other renovation work took place in Lyon at Rh´ne Alpes, and in Paris at Le Quatuor, Montrouge, 95/97 Bis Rue de Bellevue, Boulogne, and 120 Rue Jean-Jaures, Levallois Perret, and in Luxembourg.
The total French investment market turnover in 2009 was €8 billion,down from €12.5 billion in 2008 and €27 billion in 2007, and the lettingmarket was 25% down on 2008 at 1.8 million sq m. We expect the French propertymarket to recover slowly in 2010 in line with the French economy, but withwell-located assets performing the better.Germany The German portfolio, 23.6% of the total portfolio, wasvalued at £192.1 million at 31 December 2009, a fall of 5.7% in local currencyon a like-for-like basis, caused by a marginal increase in yield of typically0.125 to 0.25%. There were no purchases or sales in the year.During 2009 capital expenditure in Germany comprised £17.7 millionin total. The second and third phases of the Landshut development, of 7,032 sqm in aggregate, were completed on time and on budget. The entire scheme waspre-let to E.ON Bayern AG for 15 years with no breaks, and added €957,000 perannum to the rent roll. In addition, the 23,800 sq m redevelopment of theRathaus Center in Bochum was completed and handed over to the City in December2009 under a 30 year pre-letting to the local municipality at €2,285,000 perannum.At 31 December 2009, the German portfolio comprised 16 propertieswith 140,400 sq m of lettable space. During the year tenants vacated 9,611 sqm, and lettings were achieved on 5,021 sq m, resulting in an increase in ourvoid rate to 5.8% by rental value, well below the national rate. Notableamongst the lettings, at Frohb¶sestrasse 12 in Hamburg, laboratory equipmentmanufacturer Scope Life Sciences leased 1,595 sq m, and also in Hamburg threetenants took 1,100 sq m in aggregate at Jarrestrasse 8/10. At 31 December 2009the portfolio housed 80 tenants on a weighted average lease term of 9.3 years.Germany's GDP fell by 5.1% in 2009, the largest decrease in 50years; an increase of 1.5% is expected in 2010. It is within this context thatactivity in the German commercial investment property market fell to €10.3billion in 2009, down from €19.6 billion in 2008 and €75.0 billion in 2007.The market was dominated by open-ended funds looking for safe coreinvestments, in which there was a small fall in yields which is expected tocontinue in 2010. We were prepared not to enter the investment market in 2009except for the right opportunity, and we will continue to be circumspect in2010.The office letting market was depressed in 2009, with an overallfall in activity of 28% against the previous year, which in some cities suchas Munich and D¼sseldorf reached around 40%. Letting activity is unlikely toincrease in 2010, but there remains very limited development activity to bringfurther supply to the market. The national average vacancy rate increased from8.9% in 2008 to 9.9% in 2009, and is expected to increase in 2010. Our voidrate of only 5.8% is a creditable result in the prevailing economic climate.Sweden Our Swedish portfolio comprises adjacent buildings locatedin V¤nersborg, near Gothenburg, which we treat collectively as one asset of45,500 sq m called V¤nerparken. At 31 December 2009 it was valued at £51.3million, reflecting a fall of 2.0% on a like-for-like basis, and representing6.3% of the Group portfolio.Since mid-2008, the local university has vacated approximately12,500 sq m and has been replaced as a tenant by the local municipality. TheCity of V¤nersborg has leased the entire space for 20 years, with 10 yearsterm certain. Should the local authority exercise its break in 2019 it wouldbe subject to a break cost of one year's rent. We now have a secure incomestream of 97% of our total Swedish income from governmental tenants untilmid-2015, and subject to annual indexation.
With the new letting to the City of V¤nersborg, the vacancy rate at V¤nerparken has fallen to 1.9% by rental value.
Investment market activity in Sweden was not immune from global sentiment, and fell in 2009 by 75% against the year before.
Other Investments
Other investments at 31 December 2009 comprised investments in corporate bonds, in property groups Catena AB and Bulgarian Land Development Plc, and in website media company Wyatt Media Group AB and other small corporate investments, and represented a book value of £114.8 million in aggregate.
The corporate bond portfolio was acquired as part of the Group's long-term investment strategy in parallel with the ownership of long-term investment properties and had a value of £70.0 million at the year end against an historical cost of £58.4 million. The valuation uplift, together with interest income from the portfolio and gains on disposals, produced a total return on capital employed in the year of 54.2%.
Catena AB is a Swedish listed property investment company with aScandinavian property portfolio valued at approximately one-quarter the sizeof that of CLS. During the year, the Group increased its interest in theissued share capital of Catena marginally to 29.8%, taking the aggregate costto £28.6 million.
Bulgarian Land Development Plc is an AIM-listed developer of predominantly residential buildings in Bulgaria. CLS owns 47.7% of the company, acquired at a cost of £13.4 million.
Results for the Year
Changes in presentation In the year ended 31 December 2009, a number of International Financial Reporting Standards have been applied for the first time, as explained in Note 2 to the financial statements, although none has materially affected the results for the year. In applying IFRS8 -Operating Segments this year for the first time we are also required under the newly issued IAS 1 (revised) Presentation of financial statements, to provide three balance sheets instead of the usual two and several pages ofaccompanying notes, even though in applying IFRS8 the balance sheets areunaffected. Also under IAS 1 (revised) this year a Statement of ComprehensiveIncome is presented for the first time, comprising the traditional IncomeStatement and other reserve movements.Headlines Profit after tax attributable to the owners of theCompany of £17.5 million (2008: loss of £78.1 million) generated basicearnings per share of 36.4 pence (2008: loss per share of 120.6 pence). Afterexcluding the effect of deferred tax and the movement on the revaluation ofinvestment properties, adjusted earnings per share were 48.2 pence (2008: lossper share of 65.6 pence). Gross property assets at 31 December 2009 rose to£813.0 million (2008: £798.8 million), net assets per share were 643.3 pence(2008: 548.4 pence) and adjusted net assets per share, which exclude deferredtax, were 18.6% higher than the previous year at 767.5 pence (2008: 647.2pence).Approximately 40% of the Group's business is conducted in thereporting currency of sterling, and 8% is in Swedish kronor, the exchange ratefor which remained largely unchanged against sterling between 2008 and 2009.However, half of the Group's business is conducted in euros, the average rateof which strengthened by around 10% against sterling in 2009 compared to theprevious year, adding to the profits reported in the Statement ofComprehensive Income. Towards the end of 2008 the euro strengthenedsignificantly, reaching almost parity at the year end, but by 31 December 2009sterling had strengthened by 7.8%, reducing the relative value of euro-basednet assets. So, perversely, when compared to the previous year the Statementof Comprehensive Income benefited from the euro's strength in 2009, but theBalance Sheet at 31 December 2009 suffered from its weakness.Exchange rates to the £ EUR SEKAt 31 December 2007 1.3571 12.78962008 average rate 1.2575 12.0861At 31 December 2008 1.0461 11.44742009 average rate 1.1233 11.9290At 31 December 2009 1.1275 11.5689Statement of Comprehensive Income Rental: income for 2009 was £60.6million, 3.9% lower than in 2008. Rents in the UK were £25.0 million, 41% ofthe total Group, and £1.2 million lower than 2008, virtually entirely due todisposals made in 2008. At £4.9 million, rents in Sweden were in line withlast year. In Germany and France, a full year of loss of rent from disposalsmade in 2008 reduced rental income by £6.4 million in 2009, whilst rents fromcompleted developments and termination payments on expiries added £2.1million. Underlying rental income from the remaining portfolios in Germany andFrance rose by 1.0% in local currency but translated to a 13.1% rise due tothe strength of the euro.Following the rationalisation of the property portfolio, weembarked upon a process to address the cost base of the Group, slimming downthe organisation and reducing administration costs from £19.0 million in 2007(excluding £8.7 million relating to the investment in London Bridge Quarterwhich was sold at the end of that year), to £16.1 million in 2008, and £12.2million in 2009.The net deficit on revaluation of investment properties at 31December 2009 was £6.7 million (2008: deficit of £103.3 million). The upliftin the UK of £24.1 million reflected a 7.5% underlying gain. In Germany andFrance, the underlying deficit in local currency of around 6% was doubled bythe relative strength of sterling at the year end, causing a deficit of £13.5million and £15.9 million, respectively. The deficit on revaluation ofinvestment properties is excluded in arriving at adjusted earnings per share.
The impairment of intangible fixed assets and goodwill of £22.0 million significantly reduced adjusted earnings per share in 2008. There was no such impairment in 2009.
Net finance costs in 2009 were £25.5 million (2008: £43.0 million).Within this number, interest payable of £28.5 million (2008: £42.6 million)was lower than the previous year due to the reduction in loans whichaccompanied the disposals in 2008, and also due to the decision to reduceexposure to fixed rate interest rate swaps in favour of interest rate capcontracts, which enabled the Group to benefit from the prevailing low interestrate environment. The fall in interest income to £6.4 million (2008: £8.7million) was largely due to cash balances being reduced by the £48.0 milliondistributed through the tender offer buy-back in January 2009. Foreignexchange variances created a loss of £9.7 million (2008: gain of £11.9million), and the effect of marking derivatives to market at the year endproduced a net gain of £6.3 million (2008: loss of £21.0 million).Within the Other Investments division, in addition to the return of54.2% from corporate bonds, Wyatt Media Group contributed £0.1 million (2008:loss of £2.8 million) to operating profit on turnover of £3.6 million (2008:£3.6 million), and the Group's share of Catena AB's profit after tax was £3.0million. Bulgarian Land Development plc contributed a loss after tax of £3.3million, which was partially offset by negative goodwill of £2.8 millionoccasioned when the Group bought a further 11.9% of the shares in BLD at aprice below that company's net asset value.Once again this year the current tax charge was significantly belowthe weighted average rate of the countries in which we do business. Our Frenchoperation was the only part of the Group which paid tax. Elsewhere in theGroup, through judicious planning, tax losses absorbed taxable profits made inthe year. Future profits will erode such tax losses and, thereby, the Group'sability to mitigate future tax liabilities. The tax charge also contains adeferred tax credit of £1.0 million (2008: tax credit of £67.7 million), whichtypically largely contains an adjustment required under IFRS for the potentialtax occasioned by valuation movements on investment properties. In practicethis tax is unlikely to be paid, so deferred tax is excluded from thecalculations of adjusted earnings per share and adjusted net asset value.
Adjusted net asset value: Adjusted net assets fell by 7.7% to £368.6 million (2008: £399.6 million), but adjusted net assets per share rose because the number of shares in issue was reduced by 2 in 9, or 22%, through the tender offer buy-back.
At 31 December 2009, adjusted net assets per share, which excludedeferred tax, were 767.5 pence (2008: 647.2 pence), a rise of 18.6%. On 7January 2009, a tender offer of 2 in 9 shares in issue took place at 350 penceper share, which had the effect of increasing adjusted net assets per share to732.0 pence. Profit after tax added a further 34.3 pence, and fair valuemovements contributed 28.2 pence. Against this, exchange rate variancesreduced adjusted net assets per share by 27.0 pence.
Cash flow, net debt and gearing: At 31 December 2009, the Group's cash balances of £70.3 million were £125.0 million lower than twelve months previously, mainly due to the distribution of £48.0 million by way of the tender offer buy-back in January, property acquisitions and other capital expenditure of £52.0 million, and the net investment in corporate bonds of £45.9 million.
During the year gross debt reduced from £601.7 million to £592.8million. £19.2 million was raised to finance the acquisition of Fr¨res Peugeotin Paris, £21.1 million to finance developments in Germany, and £29.4 millionfor sundry working capital requirements. £57.4 million was repaid during thenormal course of business, and the effect of translating euro-denominatedloans into sterling at an exchange rate 7.8% different from twelve monthsearlier reduced the sterling value of overseas loans by £21.1 million.
Adjusted net gearing, which excludes the effect of deferred tax, was 101.7% at 31 December 2008, but rose to a pro forma 129.2% with the tender offer buy-back on 7 January. At 31 December 2009 it was 141.7%, and the weighted average loan-to-value on borrowings against properties was 66.9%. Adjusted solidity was 36.4% (2008: 37.6%).
During the year a number of fixed interest rate swap contracts were cancelled in favour of interest rate caps to take advantage of the prevailing low interest rate environment. This had the effect of reducing the weighted average cost of debt to 4.0% (2008: 5.8%), and increasing the proportion of floating rate loans to 50% of total borrowings (2008: 42.5%). In 2009 recurring interest cover rose to a comfortable 2.1 times (2008: 1.1 times).
Financing strategy: The Group's strategy is to hold its investmentspredominantly in single-purpose vehicles financed primarily by non-recoursebank debt in the currency used to purchase the asset. In this way credit andliquidity risk can most easily be managed, around 75% of the Group's exposureto foreign currency is naturally hedged, and the most efficient use can bemade of the Group's assets. Bank debt ordinarily attracts covenants onloan-to-value and on interest and debt service cover. Following thesignificant fall in property values at 31 December 2008, actual and potentialcovenant breaches on loans with a value of £176.4 million were resolvedthrough the part-repayment of loans or the placing of cash on deposit usingless than £15 million in aggregate. None of the Group's debt was in breach ofcovenants at 31 December 2009; potential breaches could be rectified on thepart-repayment of £1.9 million of principal.
To the extent that Group borrowings are not at fixed rates, the Group's exposure to interest rate risk is mitigated by the use of financial derivatives, particularly interest rate swaps and caps.
Share capital: At 1 January 2009, there were 66,745,471 shares in issue, of which 5,000,000 were held as Treasury shares. On 7 January, under the tender offer buy-back, 13,721,215 shares were cancelled in exchange for £48.0 million distributed to shareholders. There were no other changes to share capital in the year, and at 31 December 2009 48,024,256 shares were listed on the London Stock Exchange, and 5,000,000 shares remained in Treasury.
The Directors intend to put to a general meeting of the Company in April 2010 a proposal to issue a tender offer to buy back 1 in 42 shares at 525 pence per share. If approved by shareholders this could lead to the purchase and cancellation of 1,143,434 shares, a distribution to shareholders of £6.0 million, and 46,880,822 shares remaining, excluding Treasury shares.
Total Returns to Shareholders
In addition to the distribution associated with the tender offer buy-back in January 2009, shareholders benefited from a rise in the share price in the year from 305 pence on 31 December 2008 to 498.75 pence on 31 December 2009. Accordingly, the total shareholder return in 2009 was 52.7%.
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties which couldhave a material impact on the Group's performance and could cause the resultsto differ materially from expected or historical results. The management andmitigation of these risks are the responsibility of the Board.Risk MitigationProperty investment risks Senior management has
Underperformance of investment detailed knowledge of core portfolio impacting on
markets and experience gained through many market
financial performance due to: cycles. This experience is
supplemented by external
- Cyclical downturn in property advisors and financial
market models used in capital allocation decision-making.- Inappropriate buy/sell/hold decisions
- Changes in supply of space and/or The Group's property
tenant demand affecting rents portfolio is diversified
and vacancies across four countries. The weighted-average unexpired lease term is 8.5 years and the Group's largest tenant concentration is with the Government sector (40.1 per cent).- Poor asset management Property teams proactively manage tenants to ensure changing needs are met, and review the current status of all properties weekly. Written reports are submitted bi-weekly to senior management on, inter alia, vacancies, lease expiry profiles and progress on rent reviews.Other investment risks In assessing potentialUnderperformance of corporate bond investments, the Groupportfolio Treasury department undertakes research on the bond and its issuer, seeks third-party advice, and receives legal advice on the terms of the bond, where appropriate. The Group Treasury department receives updates on bond price movements and third party market analysis on a daily basis and reports on corporate bonds to the Board on a bi-weekly basis.Funding risks The Group has a dedicatedUnavailability of financing at Treasury department andacceptable prices relationships are maintained with approximately 20 banks, thus reducing credit and liquidity risk. The exposure on re-financing debt is mitigated by the lack of concentration in maturities.
Adverse interest rate movements The Group's exposure to
changes in prevailing market rates is largely hedged on existing debt through interest rate swaps and caps, or by borrowing at fixed rates.Breach of borrowing covenants Financial covenants are monitored by the Group Treasury department and regularly reported to the Board.Foreign currency exposure Property investments are partially funded in matching currency. The difference between the value of the property and the amount of the financing is generally unhedged and monitored on an ongoing basis.Taxation risks The Group monitorsThe risk that there will be legislative proposals andincreases in tax rates or changes consults external advisorsto the basis of taxation. to understand and mitigate the effects of any such change.Going concern See note 1 to the groupThe risk that given the economic financial statements.uncertainties the Group will nothave adequate working capital toremain a going concern for the next12 monthsPROPERTY PORTFOLIOAt 31 December 2009, the Group owned 68 properties containing 389tenants in a total lettable area of 388,381 sq m. Contracted rent across theGroup was £64.0 million; net rent, which is contracted rent less net servicecharge costs, was running at £61.9 million from properties with a book valueof £813.0 million, representing a net initial yield of 7.6%. Should the vacantspace at 31 December 2009 have been let at its estimated rental value (ERV) of£3.1 million per annum, the yield would have been 7.9%.The ERV of the entire portfolio was £61.3 million, of which £58.2million related to the let portfolio which, therefore, was 9.1% over-rented.However, around half of the over-rented element was in the UK, where theweighted average lease length was over 10 years and £1.9 million of theover-rented element in the UK was let to the Government for 16 yearsunexpired. 67% of the Group's rent roll extended beyond five years and 27% hadover 10 years unexpired. The weighted average lease length across the Groupwas 8.5 years. 40% of the rent roll was let to government tenants, and afurther 26% to major corporations. Contracted Net Yield True rent Net rent Book value initial when equivalent £m £m £m yield fully let yieldUK 24.8 24.0 346.8 6.7% 7.3% 6.5%France 18.8 18.6 222.8 8.0% 8.7% 7.7%Germany 14.6 14.4 192.1 7.2% 7.8% 7.2%Sweden 5.8 4.9 51.3 10.5% 9.5% 8.0% 64.0 61.9 813.0 7.6% 7.9% Total ERV of Vacant contracted total Weighted Vacant @ ERV plus vacant portfolio Over-rented average % £m £m £m £m lease lengthUK 4.5% 1.3 26.1 23.3 2.8 10.4 yearsFrance 4.2% 0.8 19.6 18.0 1.6 5.9 yearsGermany 5.8% 0.9 15.5 15.1 0.4 9.3 yearsSweden 1.9% 0.1 5.9 4.9 1.0 6.4 years 4.5% 3.1 67.1 61.3 5.8 8.5 years
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RELATION TO THE ANNUAL REPORT
The Responsibility Statement has been prepared in connection with the Company's full Annual Report for the year ended 31 December 2009. Certain parts of the Annual Report are not included within this announcement.
We confirm to the best of our knowledge that:
- the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation as a whole; and
- the Business Review includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
This statement of responsibilities was approved by the Board on 10March 2010.By order of the BoardDavid Fuller BA FCISCompany Secretary11 March 2010GROUP STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 31 December 2009 2009 2008 Notes £m £mContinuing operationsGroup revenue 4 76.3 81.6Costs 4 (30.3) (37.4) 46.0 44.2Net movements on revaluation ofinvestment properties 10 (6.7) (103.3)Profit on sale of investmentproperties 0.3 7.0Profit on sale of corporate bonds 1.9 -Impairment of intangible fixedassets and goodwill 12 - (22.0)Loss on disposal of subsidiaries 30 - (16.2)Operating profit/(loss) 41.5 (90.3)Net finance costs 7 (25.5) (43.0)Other non-recurring costs 5 - (1.3)Share of profit/(loss) ofassociatesafter tax 14 2.5 (7.5)Profit/(loss) before tax 18.5 (142.1)Taxation 8 (1.1) 64.1Profit/(loss) for the year 5 17.4 (78.0)Other comprehensive incomeForeign exchange differences (9.5) 36.2Fair value gains/(losses) oncorporatebonds and other investments 15 13.5 (3.4)Deferred tax on fair value gains oncorporate bonds 20 (3.2) -Share of other comprehensiveincome of associates 14 0.4 4.3Total comprehensive income/(loss) for the year 18.6 (40.9)Profit/(loss) attributable to:Owners of the Company 17.5 (78.1)Minority interests (0.1) 0.1Profit/(loss) for the year 17.4 (78.0)Total comprehensive income/(loss) attributable to:Owners of the Company 18.7 (41.0)Minority interests (0.1) 0.1Total comprehensive income/(loss) for the year 18.6 (40.9)Earnings/(loss) per share fromcontinuing operations attributableto the owners of the Companyduring the year (expressed inpence per share)Basic 9 36.4 (120.6)Diluted 9 36.4 (120.6)
Notes 1 to 32 are an integral part of these group financial statements.
GROUP BALANCE SHEETAt 31 December 2009 2009 2008 2007 Notes £m £m £mNon-current assetsInvestmentproperties 10 813.0 798.8 1,175.3Property, plantand equipment 11 2.5 2.8 1.8Intangible assets 12 1.1 1.1 19.5Investments inassociates 14 40.9 39.3 42.3Other investments 15 73.9 14.3 8.4Derivativefinancialinstruments 16 0.1 0.4 1.3Deferred tax 20 12.7 12.4 2.9 944.2 869.1 1,251.5Current assetsTrade and otherreceivables 17 10.4 10.6 9.1Derivativefinancialinstruments 16 - - 1.3Cash and cashequivalents 18 70.3 195.3 122.0 80.7 205.9 132.4 Total assets 1,024.9 1,075.0 1,383.9Non-currentliabilitiesDeferred tax 20 (72.3) (73.4) (117.4)Borrowings,including financeleases 21 (479.3) (529.1) (695.7) (551.6) (602.5) (813.1)CurrentliabilitiesTrade and otherpayables 19 (30.1) (32.8) (59.7)Current tax (5.0) (5.9) (2.7)Derivativefinancialinstruments 16 (15.7) (22.6) (2.3)Borrowings,including financeleases 21 (113.5) (72.6) (103.0) (164.3) (133.9) (167.7) Total liabilities (715.9) (736.4 ) (980.8) Net assets 309.0 338.6 403.1EQUITYCapital andreservesattributable tothe owners ofthe CompanyShare capital 23 13.3 16.7 18.7Share premiumaccount 25 70.5 70.5 69.8Other reserves 26 105.0 100.4 61.3Retained earnings 121.5 152.2 254.4 310.3 339.8 404.2Minority interest (1.3) (1.2) (1.1)Total equity 309.0 338.6 403.1
Notes 1 to 32 are an integral part of these group financial statements.
GROUP STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2009 Attributable to the owners of the Company Share Share Other Retained Minority capital premium reserves earnings Total Interest Total Notes £m £m £m £m £m £m £mAt 1 January 2009 16.7 70.5 100.4 152.2 339.8 (1.2) 338.6 Arising in 2009:Totalcomprehensiveincome/(loss)for the year - - 1.2 17.5 18.7 (0.1) 18.6Purchase ofown shares 23 (3.4) - 3.4 (48.0) (48.0) - (48.0)Expensesthereof - - - (0.2) (0.2) - (0.2)Total changes arising in 2009 (3.4) - 4.6 (30.7) (29.5) (0.1) (29.6)At 31 December 2009 13.3 70.5 105.0 121.5 310.3 (1.3) 309.0 Attributable to the owners of the Company Share Share Other Retained Minority capital premium reserves earnings Total Interest Total Notes £m £m £m £m £m £m £mAt 1 January 2008 18.7 69.8 61.3 254.4 404.2 (1.1) 403.1Arising in2008:Totalcomprehensiveincome/(loss)for the year - - 37.1 (78.1) (41.0) 0.1 (40.9)Purchase ofownshares 23 (1.5) - 1.5 (23.9) (23.9) - (23.9)Expensesthereof - - - (0.2) (0.2) - (0.2)Employee shareoption scheme 25 - 0.7 - - 0.7 - 0.7Cancellation oftreasury shares (0.5) - 0.5 - - - -Change inminorityinterest - - - - - (0.2) (0.2)Total changesarising in 2008 (2.0) 0.7 39.1 (102.2) (64.4) (0.1) (64.5)At 31December2008 16.7 70.5 100.4 152.2 339.8 (1.2) 338.6
Notes 1 to 32 are an integral part of these group financial statements.
GROUP STATEMENT OF CASH FLOWSfor the year ended 31 December 2009 2009 2008 Notes £m £mCash flows from operating activitiesCash generated from operations 27 45.7 49.9Interest received 4.8 8.7Interest paid (30.1) (41.4)Income tax paid (3.0) (0.4)Net cash inflow from operatingactivities 17.4 16.8 Cash flows from investing activitiesPurchase of investment property (29.2) -Capital expenditure on investmentproperty (22.8) (18.9)Proceeds from sale of investmentproperty 2.2 127.5Purchase of corporate bonds (70.8) (10.6)Purchase of subsidiary undertakings - (2.7)Proceeds from sale of corporate bonds 24.9 -Proceeds from sale of equityinvestments 0.7 0.3Purchase of interests in associate (1.8) (0.9)Dividend received from associateundertaking 1.5 1.5(Costs)/proceeds on foreign currencytransactions (4.2) 2.3Amounts expended in relation tocorporate disposals in prior periods (1.0) (3.0)Purchases of property, plant andequipment (0.1) (0.2)Proceeds on disposal of joint venturenet of cash sold 30 - 28.1Proceeds on disposal of subsidiaryundertakings net of cash sold 30 - 49.2Proceeds from sale of property,plant and equipment - 0.4Net cash (outflow)/inflow frominvesting activities (100.6) 173.0 Cash flows from financing activitiesPurchase of own shares (48.2) (24.1)New loans 69.7 21.3Issue costs of new loans (0.3) (2.3)Repayment of loans (57.4) (122.9)Purchase of financial instruments (0.1) -Issue of shares - 0.7Non-recurring restructuring costs - (1.3)Net cash outflow from financingactivities (36.3) (128.6) Net (decrease)/increase in cashand cash equivalents (119.5) 61.2Foreign exchange (loss)/gain (5.5) 12.1Cash and cash equivalents at thebeginning of the year 195.3 122.0Cash and cash equivalents at theend of the year 18 70.3 195.3
Notes 1 to 32 are an integral part of these group financial statements.
NOTES TO THE GROUP FINANCIAL STATEMENTS
31 December 2009
1 General Information
CLS Holdings plc and its subsidiaries is an investment property group which is principally involved in the investment, management and development of commercial properties, and in other investments. The Group's principal operations are carried out in the United Kingdom, France, Germany and Sweden.
The Company is registered in the UK, registration number 2714781, of registered address: 86 Bondway, London, SW8 1SF. The Company is listed on the London Stock Exchange.
The financial information contained in this announcement has been prepared onthe basis of the accounting policies set out in the statutory accounts for theyear ended 31 December 2009. Whilst the financial information included in thisannouncement has been computed in accordance with International FinancialReporting Standards (IFRS), as adopted by the European Union, thisannouncement does not itself contain sufficient information to comply withIFRS. The financial information does not constitute the Company's statutoryaccounts for the years ended 31 December 2009 or 2008, but is derived fromthose accounts. Those accounts give a true and fair view of the assets,liabilities, financial position and profit and loss of the Company and theundertakings included in the consolidation taken as a whole. Statutoryaccounts for 2008 have been delivered to the Registrar of Companies and thosefor 2009 will be delivered following the Company's annual general meeting. Theauditors' reports on both the 2008 and 2009 accounts were unqualified; did notdraw attention to any matters by way of emphasis; and did not containstatements under s498(2) or (3) Companies Act 2006 or preceding legislation.
Going concern
The current economic conditions have created a number of uncertainties as setout above. The Group's business activities, together with the factors likelyto affect its future development and performance are set out in the BusinessReview. The financial position of the Group, its liquidity position andborrowing facilities are described in the Business Review and in notes 21 and22 of the financial statements.The Directors regularly stress-test the business model to ensure that theGroup has adequate working capital and have reviewed the current and projectedfinancial positions of the Group, taking into account the repayment profile ofthe Group's loan portfolio, and making reasonable assumptions about futuretrading performance. The Directors have a reasonable expectation that theCompany and the Group have adequate resources to continue in operationalexistence for the foreseeable future and, therefore, they continue to adoptthe going concern basis in preparing the annual report and accounts.
2 Significant accounting policies
The principal accounting policies applied in the preparation of these group financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
The financial statements have been prepared on a going concern basis as explained above and have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union, International Financial Reporting Interpretations Committee ("IFRIC") interpretations, and the provisions of the Companies Act 2006 applicable to companies reporting under IFRS.
New standards and interpretations
In the current year, the Group has adopted standards and guidance for the first time, the following three of which have had a material effect on the results for the year, or their presentation:
- Amendments to IAS 1 - Presentation of Financial Statements
- Amendments to IFRS 7 - Improving Disclosures about Financial Instruments
- IFRS 8 - Operating Segments
In accordance with IFRS 8, the reporting of the Group's operating divisionshas been restated to reflect the way in which senior management monitors theGroup. Under IAS 1, a change of comparatives, such as that occasioned by IFRS8, requires a second comparative balance sheet to be disclosed. In addition, aGroup Statement of Comprehensive Income has been produced for the first time.IFRS 7 introduced additional disclosures on financial instruments.
Also in the current year, the Group has adopted the following standards and guidance for the first time, none of which has had a material effect on the results for the year:
- Amendments to IAS 20 - Accounting for Government Grants and Disclosure of
Government Assistance
- Amendments to IAS 32 and IAS 1 - Puttable Financial Instruments and
Obligations Arising on Liquidation
- Amendments to IAS 38 - Intangible assets
- Amendments to IAS 39 and IFRS 7 - Reclassification of Financial Assets
- Amendments to IAS 39 and IFRS 7 - Reclassification of Financial Assets -
Effective Date and Transition
- Amendments to IAS 40 - Investment Property
- Amendments to IFRS 1 and IAS 27 - Cost of an Investment in a Subsidiary,
Jointly Controlled Entity or Associate
- Amendments to IFRS 2 - Vesting Conditions and Cancellations
- Amendments to IFRIC 9 and IAS 39 - Embedded Derivatives
- IFRIC 12 - Service Concession Arrangements
- IFRIC 13 - Customer Loyalty Programmes
- IFRIC 15 - Agreements for the Construction of Real Estate
- IFRIC 16 - Hedges of a Net Investment in a Foreign Operation
At the date of authorisation of these financial statements, the followingStandards and Interpretations, which have not been applied in these financialstatements, were in issue but not yet effective. In some cases these standardsand guidance have not been endorsed by the European Union:
- IAS 24 (revised) - Related Party Disclosures; effective for accounting
periods starting on or after 1 January 2011
- Amendments to IAS 27 - Consolidated and Separate Financial Statements;
effective for accounting periods starting on or after 1 July 2009
- Amendment to IAS 32 (October 2009) - Classification of Rights Issues;
effective for accounting periods starting on or after 1 February 2010
- Amendments to IAS 39 - Eligible Hedged Items; effective for accounting
periods starting on or after 1 July 2009
- FRS 1 (revised) - First-time Adoption of International Financial Reporting
Standards; effective for accounting periods starting on or after 1 July 2009
- Amendments to IFRS 1 - Additional Exemptions for First-time Adopters;
effective for accounting periods starting on or after 1 January 2010
- Amendment to IFRS 1 - Limited Exemption from Comparative IFRS 7 Disclosures
for First-time Adopters; effective for accounting periods starting on or after
1 July 2010
- Amendments to IFRS 2 - Group Cash-settled Share-based Payment Transactions;
effective for accounting periods starting on or after 1 January 2010
- IFRS 9 - Financial Instruments; effective for accounting periods starting on
or after 1 January 2013
- IFRS 3 (revised) - Business Combinations; effective for accounting periods
starting on or after 1 July 2009
- Amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement;
effective for accounting periods starting on or after 1 January 2011
- IFRIC 17 - Distributions of Non-cash Assets to Owners; effective for
accounting periods starting on or after 1 July 2009
- IFRIC 18 - Transfers of Assets from Customers; effective for transfers on or
after 1 July 2009
- IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments;
effective for accounting periods starting on or after 1 July 2010
These pronouncements, when applied, will either result in changes to presentation and disclosure, or are not expected to have a material impact on the financial statements.
2.2 Business Combinations(i) Subsidiary undertakingsSubsidiary undertakings are those entities controlled by the Group. Control isassumed when the Group has the power to govern the financial and operatingpolicies of an entity or business to benefit from its activities. Subsidiariesare fully consolidated from the date on which control is transferred to theGroup until the date control ceases. All intra-group transactions, balances,income and expenses are eliminated on consolidation.
(ii) Joint ventures
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. The group financial statements include the Group's proportionate share of income, expenses, assets, liabilities and cash flows of joint ventures.
(iii) Associates
Associates are those entities over which the Group has significant influencebut which are not subsidiary undertakings or joint ventures. The results andassets and liabilities of associates are incorporated in these financialstatements using the equity method of accounting. Investments in associatesare carried in the Balance Sheet at cost as adjusted by post-acquisitionchanges in the Group's share of the net assets of the associate, less anyimpairment in the value of individual investments. When the Group's share oflosses in an associate equals or exceeds its interest in the associate theGroup does not recognise further losses, unless it has incurred obligations ormade payments on behalf of the associate. Unrealised gains on transactionsbetween the Group and its associates are eliminated to the extent of theGroup's interest in the associates. Unrealised losses are also eliminatedunless the transaction provides evidence of an impairment of the assettransferred.
(iv) Goodwill
Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of identifiable assetsand liabilities of a subsidiary, joint venture or associate at the date ofacquisition. It is initially recognised as an asset at cost and issubsequently measured at cost less any accumulated impairment losses. Goodwillwhich is recognised as an asset is reviewed for impairment at least annually.
2.3 Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated into sterling using theexchange rate prevailing at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies at the balance sheet date aretranslated into sterling at the exchange rate ruling at that date, anddifferences arising on translation are recognised in profit before tax, unlessthey relate to qualifying cash flow hedges or qualifying net investmenthedges.Changes in the fair value of monetary securities classified asavailable-for-sale and denominated in foreign currencies are recognised inprofit before tax where the translation difference results from changes in theamortised cost of the security, and are recognised in equity where it resultsfrom other changes in the carrying amount of the security.
(ii) Consolidation of foreign entities
The results and financial position of all the Group entities that have a functional currency different from sterling are translated into sterling as follows:
(a) assets and liabilities are translated at the closing rate at the date of the balance sheet;
(b) income and expenses for each income statement are translated at theaverage exchange rates (unless this average is not a reasonable approximationof the cumulative effect of the rates prevailing on the transaction dates, inwhich case income and expenses are translated at the dates of thetransactions); and
(c) all resulting exchange differences are recognised directly in equity in the cumulative translation reserve.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to the cumulative translation reserve. When a foreign operation is sold, such exchange differences are recognised as part of the gain or loss on sale in profit before tax.
2.4 Investment properties
Investment properties are those properties held for long-term rental yields orfor capital appreciation or both. Land held under an operating lease isclassified and accounted for as an investment property when the definition ofinvestment property is met and the operating lease is accounted for as if itwere a finance lease. Investment properties are measured initially at cost,including related transaction costs.After initial recognition at cost, investment properties are carried at fairvalue, based on market value as determined by professional external valuers atthe balance sheet date. Investment properties being redeveloped for continuinguse as investment properties, or for which the market has become less active,continue to be classified as investment properties and measured at fair value.Changes in fair values are recognised in profit before tax. If an investmentproperty becomes owner-occupied, it is reclassified as property, plant andequipment, and its fair value at the date of reclassification becomes its costfor accounting purposes. Subsequently the owner-occupied property isdepreciated over its useful economic life and revalued at the balance sheetdate.
2.5 Property, plant and equipment
Property, plant and equipment is stated at historical cost less accumulated depreciation and any recognised impairment loss.
Land is not depreciated. Depreciation on property, plant and equipment is calculated using the straight-line method to allocate cost less estimated residual values over the estimated useful lives, as follows:
Plant and equipment 4 - 5 years
Freehold property 6 years
The gain or loss arising on the disposal or retirement of an asset isdetermined as the difference between the sale proceeds and the carrying amountof the asset and is recognised in profit before tax. Freehold property isdepreciated until December 2014 after which it is anticipated that it will
beredeveloped.2.6 Intangible assetsIntangible assets acquired separately are capitalised at cost, and in respectof business combinations are capitalised at fair value at the date ofacquisition. Intangible assets are amortised over their estimated useful liveson a straight line basis as follows:
Trade names 11 years
Customer relationships 10 - 11 years
Technology 4 years
Capitalised development and other costs not amortised
2.7 Financial instruments
(i) Derivative financial instruments
The Group uses derivative financial instruments, including swaps and interestrate caps, to help manage its interest rate and foreign exchange rate risk.Derivative financial instruments are recorded, and subsequently revalued, atfair value. Revaluation gains and losses are recognised in profit before tax,except for derivatives which qualify as effective cash flow hedges, the gainsand losses relating to which are recognised directly in equity.
(ii) Available-for-sale investments
Available-for-sale investments are initially measured at cost, and are subsequently revalued to fair value. Revaluation gains and losses are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary assets. On disposal, the cumulative gain or loss previously recognised in equity is recycled through profit before tax.
(iii) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, demand deposits and other short-term highly liquid investments which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
(iv) Trade and other receivables and payables
Trade and other receivables are recognised initially at fair value. An impairment provision is created where there is objective evidence that the Group will not be able to collect the receivable in full. Trade and other payables are stated at cost, which equates to fair value.
(v) Borrowings
Borrowings are recognised initially at fair value less attributabletransaction costs. Subsequently, borrowings are stated at amortised cost withany difference between the amount initially recognised and the redemptionvalue being recognised in profit before tax over the period of the borrowings,using the effective interest rate method.
2.8 Revenue
(i) Rental income
Rental revenue from operating leases is recognised on a straight-line basis over the lease term. When the Group provides incentives to its customers, the cost of incentives are recognised over the lease term, on a straight-line basis, as a reduction of rental revenue.
(ii) Service charge income
Service and management charge revenue is recognised on a gross basis in the accounting period in which the services are rendered. Where the Group is acting as an agent, the commission rather than gross revenue is recorded as revenue.
(iii) Other property-related income
Revenue from the sale of goods and services is booked when the revenue can becalculated reliably, and the risks and benefits have been transferred to thebuyer. Revenues are booked net of deductions for VAT and discounts.
2.9 Profit on sale of investment properties
Profits on sale of investment properties are recognised when the risks and rewards of ownership have been transferred to the buyer, typically on unconditional exchange of contracts or when legal title passes.
2.10 Income tax
Current tax is based on taxable profit for the year and is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided using the balance sheet liability method on temporarydifferences between the carrying value of assets and liabilities for financialreporting purposes and the values used for tax purposes. Temporary differencesare not provided for when they arise from initial recognition of goodwill orfrom the initial recognition of assets and liabilities in a transaction thatdoes not affect accounting or taxable profit.The amount of deferred tax provided is based on the expected manner ofrealisation or settlement of the carrying amount of assets and liabilities,and is calculated using rates that are expected to apply in the period whenthe liability is settled or the asset is realised, in the tax jurisdiction inwhich the temporary differences arise. Deferred tax is charged or credited inarriving at profit after tax, except when it relates to items recogniseddirectly in equity, in which case the deferred tax is also recognised inequity.Deferred tax assets are recognised only to the extent that it is probable thatfuture taxable profits will be available against which the assets can be used.The deferred tax assets and liabilities are only offset if they relate toincome taxes levied by the same taxation authority, there is a legallyenforceable right of set-off and the Group intends to settle its current taxassets and liabilities on a net basis.
2.11 Leases
Leases are classified as finance leases whenever the terms of the leasetransfer substantially all the risks and benefits of ownership to the lessee.All other leases are classified as operating leases. Certain operating leasesfor land that is classified and accounted for as investment property pursuantto IAS 40 - Investment Properties are accounted for as if they were financeleases.
(i) A Group company is the lessee
(a) Rentals payable under operating leases are charged to the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the term of the lease.
(b) Assets held under finance leases are recognised as assets at the leasecommencement date at the lower of the fair value of the leased asset and thepresent value of the minimum lease payments. The corresponding liability tothe lessor is included in the Balance Sheet as a finance lease obligation.Each lease payment is allocated between finance charges and reduction of thelease obligation so as to achieve a constant rate of interest on the remainingbalance of the liability. Finance charges are charged directly against income.
(ii) A Group company is the lessor
(a) Rental income from operating leases is recognised on a straight-line basisover the term of the lease. Initial direct costs incurred in negotiating andarranging an operating lease are added to the carrying amount of the leasedasset and recognised on a straight-line basis over the lease term.(b) Amounts due from lessees under finance leases are recorded as receivablesat the amount of the Group's net investment in the leases. Finance leaseincome is allocated to accounting periods so as to reflect a constant periodicreturn on the Group's net investment outstanding in respect of the leases.
2.12 Employee benefits
Pension obligations
The Group operates various defined contribution plans. The Group payscontributions to publicly or privately administered pension insurance plans ona mandatory, contractual or voluntary basis. The Group has no further paymentobligations once the contributions have been paid. A contribution isrecognised as an employee benefit expense when it is due. A prepaidcontribution is recognised as an asset to the extent that a cash refund or areduction in future payments is available.3 Critical accounting judgements and key sources of estimation uncertaintyIn the application of the Group's accounting policies, which are described innote 2, the Directors are required to make judgements, estimates andassumptions about the carrying amounts of assets and liabilities that are notreadily apparent from other sources. The estimates and associated assumptionsare based on historical experience and other factors that are considered to berelevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Changes to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the critical estimates and judgements that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
(i) Fair value of investment properties
The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable fair value estimates. In making its judgement, the Group considers information from a variety of sources including:
(a) current prices in an active market for properties of a different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences;
(b) recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and
(c) discounted cash flow projections based on reliable estimates of futurecash flows, derived from the terms of any existing lease and other contracts,and (where possible) from external evidence such as current market rents forsimilar properties in the same location and condition, and using discountrates that reflect current market assessments of the uncertainty in the amountand timing of the cash flows.
(ii) Income Taxes
The Group is subject to income taxes in different jurisdictions and estimationis required to determine the worldwide provision for income taxes. There aresome transactions and calculations for which the ultimate tax determination isuncertain. Where the final tax outcome of these matters is different from theamounts that were initially recorded, such differences will impact the incometax and deferred tax provisions in the period in which determination is made.
(iii) Impairment of goodwill and other intangible assets
When assessing possible impairment of goodwill and other intangible assets theGroup is required to make an assessment of recoverable amounts. Recoverableamount is calculated as the higher of fair value less costs to sell and valuein use. In making these assessments, assumptions are required to be made basedupon information available at the time.
(iv) Deferred tax
The method of calculation of deferred tax in relation to UK properties assumes that indexation allowance will be available as it is assumed that the Group will recover the carrying amount of its investment properties through use followed by an eventual sale.
4 Segment information
The Group has two operating divisions - Investment Property and OtherInvestments. Other Investments comprise corporate bonds, shares in Catena AB,Bulgarian Land Development Plc and Wyatt Media Group AB, and other smallcorporate investments. The Group manages the Investment Property division on ageographical basis due to its size and geographical diversity. Consequently,the Group's principal operating segments are:
Investment Property - United Kingdom
FranceGermanySwedenOther Investments
There are no transactions between the operating segments.
The Group's results for the year ended 31 December 2009 by operating segmentwere as follows: Investment property United Other Kingdom France Germany Sweden Investments Total £m £m £m £m £m £mRental income 25.0 15.9 14.8 4.9 - 60.6Service chargeincome 4.7 4.2 1.7 0.3 - 10.9Other property-related income 0.4 0.3 0.3 - - 1.0Income fromnon-propertyactivities - - - - 3.8 3.8Group revenue 30.1 20.4 16.8 5.2 3.8 76.3 Service chargesand similarexpenses (6.3) (4.5) (2.8) (1.2) - (14.8)Administrationexpenses (2.6) (1.5) (1.1) (0.5) (3.7) (9.4)Other expenses (1.0) (0.7) (1.2) (0.2) (0.2) (3.3)Costs (9.9) (6.7) (5.1) (1.9) (3.9) (27.5)Group revenueless costs 20.2 13.7 11.7 3.3 (0.1) 48.8 Net movementson revaluationof investmentproperties 24.1 (15.9) (13.5) (1.4) - (6.7)Profit on saleofinvestmentproperties 0.3 - - - - 0.3Profit on saleofcorporate bonds - - - - 1.9 1.9Segmentoperatingprofit/(loss) 44.6 (2.2) (1.8) 1.9 1.8 44.3 Net financecosts (6.1) (7.0) (7.4) (1.6) (3.4) (25.5)Share of profitofassociatesaftertax - - - - 2.5 2.5Segmentprofit/(loss)before tax 38.5 (9.2) (9.2) 0.3 0.9 21.3Taxation (4.0) 1.6 0.2 0.6 0.5 (1.1)Segmentprofit/(loss)after tax 34.5 (7.6) (9.0) 0.9 1.4 20.2 Centraladministrationcosts (2.8)Profit for theyear 17.4On the adoption of IFRS 8 - Operating Segments in 2009, certain items in 2008and 2007 have been reclassified. Previously, other investments were shownwithin their respective geographical segment, central administration costs andnon-recurring costs were included within the UK segment and the deferred taxcharge was not allocated by segment. In 2008, results from associates (loss of£7.5 million) were shown within the Sweden segment and are now shown withinthe Other Investments segment. Available-for-sale investments of £11.0 millionwere shown in the assets of the UK segment and investments in associates of£39.3 million were shown in the Sweden segment; both are now shown withinother investments.
The Group's results for the year ended 31 December 2008 by operating segment, restated as explained above and in note 2, were as follows:
Investment property United Other Kingdom France Germany Sweden Investments Total £m £m £m £m £m £mRental income 26.2 19.6 12.3 5.0 - 63.1Service chargeincome 5.4 3.4 2.2 0.3 - 11.3Other property-related income 0.9 1.1 - 1.3 - 3.3Income fromnon-propertyactivities - - - - 3.9 3.9Group revenue 32.5 24.1 14.5 6.6 3.9 81.6Service chargesand similarexpenses (5.7) (3.7) (2.3) (1.4) - (13.1)Administrationexpenses (1.6) (2.0) (1.8) (1.3) (6.5) (13.2)Other expenses (1.6) (0.8) (1.2) - (4.6) (8.2)Costs (8.9) (6.5) (5.3) (2.7) (11.1) (34.5)Group revenueless costs 23.6 17.6 9.2 3.9 (7.2) 47.1 Net movementson revaluationof investmentproperties (59.4) (17.8) (19.9) (6.2) - (103.3)Profit/(loss)onsale ofinvestmentproperties 6.6 (0.2) 0.6 - - 7.0Impairment ofintangiblefixedassets andgoodwill - - - - (22.0) (22.0)Loss ondisposal ofsubsidiaries - (15.9) - (0.3) - (16.2)Segmentoperating loss (29.2) (16.3) (10.1) (2.6) (29.2) (87.4) Net financecosts (25.7) (9.0) (8.8) (1.4) 1.9 (43.0)Share of lossofassociatesaftertax - - - - (7.5) (7.5)Segment lossbefore tax (54.9) (25.3) (18.9) (4.0) (34.8) (137.9)Taxation 25.5 34.4 1.6 2.1 0.5 64.1Segment(loss)/profitafter tax (29.4) 9.1 (17.3) (1.9) (34.3) (73.8) Centraladministrationcosts (2.9)Non-recurringcosts (1.3)Loss for theyear (78.0)
Other segment information:
Capital Assets Liabilities expenditure 2008 2007 2008 2007 2008 2007 2009 restated restated 2009 restated restated 2009 restated restated £m £m £m £m £m £m £m £m £mInvestmentPropertyUnited Kingdom 370.2 428.9 625.5 282.0 311.5 482.3 1.3 2.7 20.8France 246.1 307.5 376.5 187.6 193.5 295.2 31.4 1.2 5.5Germany 200.0 210.1 177.5 158.8 152.4 123.0 17.8 11.1 26.2Sweden 58.6 70.1 71.5 30.7 52.8 44.6 2.2 2.4 0.5Other investments 150.0 58.4 132.9 56.8 26.2 35.7 - - - 1,024.9 1,075.0 1,383.9 715.9 736.4 980.8 52.7 17.4 53.0
Included within the assets of other investments are investments in associates of £40.9 million (2008: £39.3 million; 2007: £42.3 million).
5 Profit/(loss) for the year
Profit/(loss) for the year has been arrived at after charging:
2009 2008 £m £mAuditors' remunerationFees payable to the Company's auditors forthe audit of the parent Company and groupaccounts 0.2 0.1Fees payable to the Company's auditors forother services to the GroupThe audit of the Company's subsidiariespursuant to legislation 0.1 0.1Corporate finance services* - 0.2Depreciation and amortisation 0.5 1.4Loss on disposal of property, plant andequipment - 0.2Permanent diminution in value ofavailable-for-sale equity investments - 3.0Employee benefits expense (note 6) 6.7 7.9Professional fees and other non-recurringcosts of investigating a potentialrestructuringof the Group* - 1.3* In 2008 fees payable to the Company's auditors for corporate financeservices of £0.2 million are also included within non-recurring costs of £1.3million.6 Employee benefits expense 2009 2008 £m £mWages and salaries 5.3 5.5Social security costs 0.8 1.2Pension costs - defined contributionplans 0.2 0.4Other employee-related expenses 0.4 0.8 6.7 7.9
The Directors are considered to be key management of the Group.
No amounts were charged to the Statement of Comprehensive Income in relation to share-based payments (2008: £nil).
The monthly average number of employees of the Group in continuing operations, including Executive Directors, was as follows:
2009 2008 Other Other Property operations Total Property operations Total number number number number number numberMale 20 20 40 22 39 61Female 29 8 37 30 15 45 49 28 77 52 54 1067 Net Finance costs 2009 2008 £m £mInterest expenseBank loans 22.7 33.3Debenture loans 4.7 4.7Other interest 0.3 0.9Amortisation of issue costs of loans 0.8 3.7Foreign exchange variances 9.7 (11.9)Movement in fair value of derivativefinancial instrumentsInterest rate swaps: transactions notqualifying as hedges (6.7) 19.9Interest rate caps, collars and floors:transactions not qualifying as hedges 0.4 1.1Interest income (6.4) (8.7) 25.5 43.08 Taxation 2009 2008 £m £m Current tax 2.1 3.6Deferred tax (note 20) (1.0) (67.7) 1.1 (64.1)
A deferred tax charge of £3.2 million (2008: £nil) was recognised directly in equity (note 20).
The charge for the year differs from the theoretical amount which would ariseusing the weighted average tax rate applicable to profits of Group companiesas follows: 2009 2008 £m £mProfit/(loss) before tax 18.5 (142.1) Tax calculated at domestic tax ratesapplicable to profits in the respectivecountries 4.9 (40.8)
Expenses not deductible for tax purposes 0.5 10.3 Tax effect of unrecognised losses in associates and joint ventures
(0.7) 2.0Previously unrecognised tax lossesand other deferred tax adjustments (3.6) (3.0)
Different taxation treatment of disposals (0.1) (32.2) Deferred tax assets not recognised
2.9 0.4
Adjustment in respect of prior periods (2.8) (0.8) Tax expense/(credit) for the year
1.1 (64.1)
The weighted average applicable tax rate of 26.3 per cent (2008: 28.7 per cent) was derived by applying to their relevant profits and losses the rates in the jurisdictions in which the Group operated.
9 Earnings per share
Management has chosen to disclose adjusted earnings per share from continuing operations in order to provide an indication of the Group's underlying business performance. Adjusted earnings per share excludes the effect of revaluations of investment properties and deferred tax.
2009 2008 £m £mProfit/(loss) for the year attributableto the owners of the Company 17.5 (78.1) Deferred tax (1.0) (67.7)Net movement on revaluation ofinvestment properties 6.7 103.3Adjusted profit/(loss) for the yearattributable to the owners of theCompany 23.2 (42.5) 2009 2008 number numberWeighted average number ofordinary shares 48,249,810 64,783,048 2009 2008 pence penceBasic and diluted earnings/(loss) pershare from continuing operations 36.4 (120.6)Adjusted earnings/(loss) per sharefrom continuing operations 48.2 (65.6)In 2009 there were no instruments in issue which could have changed theweighted average number of shares. In 2008 there were share options in issuefor part of the year, the effect of which had they been issued from the startof the year would have been accretive to earnings per share. Had these beenissued from the start of 2008, the weighted average number of shares that yearwould have increased by 110,877 shares.10 Investment properties 2009 2008 2007 £m £m £mAt 1 January 798.8 1,175.3 1,143.4Acquisitions 29.2 - 29.0Capital expenditure 23.4 17.2 23.2Transfer to property, plantand equipment (note 11) - (2.3) -Disposals - property sales (1.9) (120.5) -Disposals - corporate sales(note 30) - (285.3) -Net movements onrevaluation of investmentproperties (6.7) (103.3) (68.1)Rent-free period debtoradjustments 1.5 (1.0) 0.8Exchange rate variances (31.3) 118.7 47.0At 31 December 813.0 798.8 1,175.3
The investment properties (and the owner-occupied property detailed in note11) were revalued at 31 December 2009 to their fair value. Valuations werebased on current prices in an active market for all properties. The propertyvaluations were carried out by external, professionally qualified valuers asfollows:
UK 2009: Lambert Smith Hampton
UK 2007 and 2008: Allsop & Co.
France: DTZ Debenham Tie Leung
Germany: DTZ Debenham Tie Leung
Sweden: CB Richard Ellis
Investment properties included leasehold buildings of which the carrying amount was £18.1 million (2008: £20.8 million; 2007: £113.3 million).
Where the Group leases out its investment property under operating leases the duration is typically 3 years or more. No contingent rents have been recognised in the current or comparative years.
Substantially all investment properties (and the owner-occupied property detailed in note 11) are secured against debt.
In the latter half of 2008 the economic climate and lower transactionalvolumes in the real estate markets in which the Group was active meant thatthe valuers had to refer to greater use of professional judgement in arrivingat the year end valuations at 31 December 2008. The Directors are satisfiedthat market conditions, while still remaining challenging, had returned to amore normal level of transactional activity by 31 December 2009. The Directorsare satisfied that the external valuations supplied are appropriate to adoptfor the 2009 financial statements without adjustment.
11 Property, plant and equipment
2009 2008 2007 £m £m £mCost or valuationAt 1 January 6.6 6.7 6.5Transfer from investmentproperty (note 10) - 2.3 -Additions 0.1 0.2 0.8Disposals - (2.6) (0.6)Revaluationincrease/(decrease) 0.1 (0.3) -Exchange rate variances - 0.3 -At 31 December 6.8 6.6 6.7Accumulated depreciationand impairmentAt 1 January (3.8) (4.9) (4.5)Depreciation charge (0.5) (0.9) (1.0)Disposals - 2.2 0.6Exchange rate variances - (0.2) -At 31 December (4.3) (3.8) (4.9)Net book valueAt 31 December 2.5 2.8 1.8Owner-occupied property was revalued at 31 December 2009 based on the externalvaluation performed by Lambert Smith Hampton (in prior years Allsop & Co.)
asdetailed in note 10.12 Intangible assets Other Goodwill intangibles Total £m £m £mCostAt 1 January 2009 and at31 December 2009 18.6 7.2 25.8AmortisationAt 1 January 2009 and at31 December 2009 (17.5) (7.2) (24.7) Net book valueAt 31 December 2009 1.1 - 1.1 Other Goodwill intangibles Total £m £m £mCostAt 1 January 2008 15.2 6.5 21.7Additions 3.6 0.2 3.8Disposals (1.6) - (1.6)Exchange rate variations 1.4 0.5 1.9At 31 December 2008 18.6 7.2 25.8AmortisationAt 1 January 2008 - (2.2) (2.2)Amortisation - (0.5) (0.5)Impairment (17.5) (4.5) (22.0)At 31 December 2008 (17.5) (7.2) (24.7) Net book valueAt 31 December 2008 1.1 - 1.1 Other Goodwill intangibles Total £m £m £mCostAt 1 January 2007 12.9 6.3 19.2Additions 1.8 - 1.8Exchange rate variations 0.5 0.2 0.7At 31 December 2007 15.2 6.5 21.7AmortisationAt 1 January 2007 - (0.4) (0.4)Amortisation - (1.8) (1.8)At 31 December 2007 - (2.2) (2.2) Net book valueAt 31 December 2007 15.2 4.3 19.5Goodwill
Goodwill comprised £0.8 million (2008: £0.8 million; 2007: £2.4 million) onthe acquisition of a French property portfolio in 2004 and £0.3 million (2008:£0.3 million; 2007: £0.3 million) on a German property acquisition in 2005.All other goodwill and intangible assets related to Wyatt Media Group AB andwere fully written down in 2008.In October 2007, the Group purchased a call option for the remaining 60%shareholding in Bilddagboken AB for £1.2 million. The option was exercised on22 January 2008 for £2.2 million. When exercised, goodwill of £3.3 million wasrecognised.
In February and April 2008, the Group acquired a further 25.1% of the share capital of Internetami AB (Tyda) taking the Group's total shareholding to 82.3%. On acquisition, goodwill of £0.2 million was recognised.
In October 2008, the Group acquired the remaining 47% of the share capital of Xtraworks AB. On acquisition, goodwill of £0.1 million was recognised.
Other intangibles
Other intangibles (relating to trade names, technology, customer relationships, capitalised development and other costs) relate to Wyatt Media Group AB and were fully written down during 2008 as described above.
2009 Impairment review
Goodwill was reviewed for impairment at 31 December 2009 using the key assumptions set out below. No impairment was required.
Key assumptions:
Unamortised goodwill at 31 December 2009 related to contingent deferred tax arising on acquisitions of corporate entities for which an equal deferred tax liability was recognised in the Balance Sheet.
2008 impairment review
The impairment losses recognised in the Statement of Comprehensive Income in2008 in respect of goodwill and intangible assets related exclusively to WyattMedia Group AB. During the year ended 31 December 2008, the goodwill andintangible assets in respect of the Group's online media operations wereimpaired by £17.5 million and £4.5 million, respectively. This was due tomarket competition, primarily in the social networking environment, andincreased obsolescence of existing coding and software causing a significantpre-tax risk adjustment. At 31 December 2008 the net book value of goodwilland intangible assets relating to Wyatt Media Group AB was £nil.
Key assumptions:
The key assumptions used in reviewing for impairment at 31 December 2008 the goodwill and intangibles of Wyatt Media Group AB were as follows:
- Budgeted earnings before interest, tax, depreciation and amortisation(EBITDA) - budgeted EBITDA was based on an "income per user" measure derivedfrom existing income streams and new product launches. Projected user volumesusing web services were derived from past experience of the business.
- Long-term growth rates - growth rates of between 2-3 per cent were used which approximated to the nominal GDP rates in the countries in which the business operated.
- Pre-tax adjusted discount rate - the discount rate was derived from arisk-free rate adjusted to reflect specific risk premiums in relation to thesystemic risk of 33 per cent and a risk adjustment (`beta') applied to reflectthe risk of the operating entity.
13 Joint ventures
At 31 December 2009 the Group had a one-third interest (2008: one-third; 2007:one-third ) in the issued ordinary share capital of Fielden House InvestmentsLimited, a company incorporated in England and Wales.
The principal activity of Fielden House Investments Limited is investment in, and management and development of, commercial property.
The following amounts represent the Group's share of the assets andliabilities, and income and expenditure of Fielden House Investments Limitedwhich are included in the Balance Sheet and Statement of Comprehensive Incomeof the Group: 2009 2008 2007 £m £m £mAssetsNon-current assets 1.8 2.3 2.9Current assets 0.2 - 0.1 2.0 2.3 3.0LiabilitiesNon-current liabilities (2.5) (2.5) (2.5)Current liabilities (0.2) - (0.1) (2.7) (2.5) (2.6)Net (liabilities)/assets (0.7) (0.2) 0.4 Income 0.2 0.2 0.2Expenses (0.2) (0.8) (0.2)Loss after income tax - (0.6) -In 2007 the Group had interests in two other joint ventures, Teighmore Limitedand New London Bridge House Limited, of which the Group also owned one-thirdof the issued ordinary share capital. New London Teighmore Bridge House Total 2007 £m £m £mAssetsNon-current assets 80.4 29.8 110.2Current assets 2.2 0.3 2.5 82.6 30.1 112.7LiabilitiesCurrent liabilities (69.1) (13.6) (82.7)Net assets 13.5 16.5 30.0 Income 0.7 1.1 1.8Expenses (6.0) (1.4) (7.4)Loss after income tax (5.3) (0.3) (5.6)The Group's interests in New London Bridge House Limited and Teighmore Limitedwere disposed of during 2008 as described in note 30. There were no contingentliabilities on sale.14 Investments in associates Net assets Goodwill Total £m £m £mAt 1 January 2009 34.6 4.7 39.3Additions 1.7 0.1 1.8Share of profit ofassociates after tax†2.5 - 2.5Other equity movements* 0.4 - 0.4Dividends received (1.5) - (1.5)Exchange rate differences (1.6) - (1.6)At 31 December 2009 36.1 4.8 40.9 Net assets Goodwill Total £m £m £mAt 1 January 2008 31.9 10.4 42.3Additions 0.8 0.1 0.9Reclassification 1.3 (1.3) -Share of loss of associatesafter tax†(2.2) (5.3) (7.5)Other equity movements* 4.3 - 4.3Dividends received (1.5) - (1.5)Exchange rate differences - 0.8 0.8At 31 December 2008 34.6 4.7 39.3 Net assets Goodwill Total £m £m £mAt 1 January 2007 - - -Transfer from otherinvestments 4.2 - 4.2Additions 24.8 10.4 35.2Share of profit ofassociatesafter tax†0.5 - 0.5Other equity movements* 0.3 - 0.3Exchange rate differences 2.1 - 2.1At 31 December 2007 31.9 10.4 42.3†Consists of share of associates' loss of £0.3 million (2008: loss of £4.3million; 2007: profit of £0.5 million) and the realisation of £2.8 million(2008: £2.1 million; 2007: £nil) of negative goodwill on acquisition. Thewrite down of goodwill of £5.3 million in 2008 is explained in note 14.
* Primarily foreign exchange movements of the associate undertakings.
£1.3 million was reclassified to net assets from goodwill in 2008 to reflect arevision to the original acquisition calculation in 2007, which had been basedon preliminary results and was updated in 2008 to reflect published data.
During 2008 Bulgarian Land Development Plc restated its 2007 accounts. The share of loss in 2008 disclosed above includes £0.5 million relating to 2007, and other equity movements in 2008 include a further £0.5 million also relating to 2007.
The Group's interests in its principal associates were as follows:
Interest held
Profit / in ordinary
Country of Assets Liabilities Revenues (loss) share capitalAt 31 December incorporation2009 £m £m £m £m %Catena AB Sweden 66.4 (43.8) 5.1 3.0 29.8Bulgarian Land
Development Plc Isle of Man 27.4 (13.9) 2.1
(3.3) 47.7Flavour of theMonth AB Sweden - - - - 40.0 93.8 (57.7) 7.2 (0.3) Interest held Profit / in ordinary Country of Assets Liabilities Revenues (loss) share capitalAt 31 December incorporation2008 £m £m £m £m %Catena AB Sweden 61.4 (40.9) 4.6 (3.2) 29.1Bulgarian Land
Development Plc Isle of Man 23.8 (9.7) 2.3
(1.1) 35.8Flavour of theMonth AB Sweden - - - - 40.0 85.2 (50.6) 6.9 (4.3) Interest held Profit / in ordinary Country of Assets Liabilities Revenues (loss) share capitalAt 31 December incorporation2007 £m £m £m £m %Catena AB Sweden 57.8 (34.9) 0.7 0.6 29.1Bulgarian Land
Development Plc Isle of Man 17.2 (8.2) -
(0.1) 28.7 75.0 (43.1) 0.7 0.5Catena AB
In May 2007 the Group acquired a 27.6 per cent stake in Catena AB, a listedSwedish property company, increasing this to 29.1 per cent on 3 July 2007, foran aggregate sum of £28.0 million. A further 0.7 per cent was acquired during2009 at a cost of £0.6 million. Henry Klotz, Chief Executive Officer of theCompany, was appointed Chairman of Catena in 2007.
The quoted market value of the Group's investment in the shares of Catena AB at year end was £26.1 million (2008: £17.6 million; 2007: £28.0 million).
Bulgarian Land Development Plc
During 2006, the Group acquired 4,250,000 shares (10.6 per cent) of BulgarianLand Development Plc (BLD), a company listed on the Alternative InvestmentMarket of the London Stock Exchange, at a cost of £4.2 million. BLD developsresidential and commercial properties in Bulgaria.
In 2007 a further 7,211,787 shares were acquired by the Group at a cost of £7.2 million taking the total shareholding to 28.7 per cent.
In 2008 a further 2,859,500 shares were acquired by the Group at a cost of £0.8 million to take the total shareholding to 35.8 per cent. This created negative goodwill of £2.1 million which was included in the Group's profit before tax in 2008.
In 2009 the Group increased its holding by 4,763,491 shares at a cost of £1.2million, taking the total shareholding to 47.7 per cent. This created negativegoodwill of £2.8 million which was included in the Group's profit before taxin 2009.
The market value of the Group's investment in the shares of BLD at the year end was £3.8 million (2008: £4.6 million; 2007: £9.1 million).
Flavour of the Month AB
In 2008 the Group acquired a 40 per cent interest in a blog resourcing website provider, Flavour of the Month AB, for £0.1 million.
Impairment
2009
In assessing the carrying value of Catena AB, the Group considered that thebalance sheet of Catena AB at 31 December 2009 was stated at fair value exceptfor certain deferred tax liabilities. It was management's assessment that therealisation of Catena's property assets would occur through corporatedisposals and therefore latent deferred tax liabilities were unlikely tocrystallise. As the Group's share of the net assets of Catena AB, excludingdeferred tax liabilities, exceeded the carrying value of the Group's interestthere was no further impairment of the Group's interest in Catena AB at 31December 2009.BLD is carried in the Balance Sheet at a value equal to the Group's share ofits net assets. BLD's net assets were reviewed and found not to be impaired at31 December 2009. Accordingly there was no further provision against thecarrying value of the Group's interest in BLD at 31 December 2009.
2008
Given the economic instability in late 2008 and the likelihood of a slowdownin global growth, the Group considered that this represented a potentialindication of impairment in relation to its associate investments.Consequently, the Group tested the recoverability of its associate investmentsby comparing the carrying amount of the associate investment at the balancesheet date to its recoverable amount. This resulted in a write down of £5.3million of goodwill.In assessing the carrying value of Catena AB, the Group considered that thebalance sheet of Catena AB at 31 December 2008 was stated at fair value exceptfor certain deferred tax liabilities. It was management's assessment that therealisation of Catena's property assets would occur through corporatedisposals and therefore latent deferred tax liabilities were unlikely tocrystallise. Taking this into account the write down in relation to Catena was£3.9 million in 2008, representing the excess of carrying value over fairvalue.In assessing the carrying value of BLD there was significant uncertainty overthe timing and level of future cash flows which crystallised a write down ofgoodwill of £1.4 million in 2008. A review of BLD's underlying assets wasundertaken and found not to be impaired at 31 December 2008. On this basis theDirectors considered the Group's share of net assets approximated torecoverable value.15 Other investments 2009 2008 2007 £m £m £mAvailable-for-salefinancialinvestments carried atfairvalueListed corporate bonds UK 17.1 1.2 - Eurozone 40.0 8.3 - Other 12.9 1.2 -Listed equity securities UK 0.6 0.3 1.7 Sweden 2.5 2.3 5.0 Other 0.1 0.1 -Unlisted investments UK - 0.1 - Sweden 0.6 0.6 -Government securities UK 0.1 0.2 0.1 73.9 14.3 6.8Investments designatedasat fair value throughtheprofit or lossListed equity securities UK - - 0.8 Other - - 0.3Unlisted investments Sweden - - 0.5 - - 1.6 73.9 14.3 8.4
When investments are managed and their performance is evaluated on a fair value basis they are designated upon initial recognition as "at fair value through the profit or loss". All other equity investments are designated as "available-for-sale".
The movement of other investments is analysed below:
2009 2008 2007 £m £m £mAt 1 January 14.3 8.4 16.2Additions 70.7 10.6 7.2Disposals (23.4) (0.3) (13.5)Fair value movementsrecognised in reserves onavailable-for-sale assets 13.5 (3.4) 1.7Fair value movementsrecognised in profit beforetax on available-for-saleassets - (3.0) (0.3)Transfers to investments inassociates - - (4.2)Exchange rate variations (1.2) 2.0 1.3At 31 December 73.9 14.3 8.4
The table below gives an analysis of the valuation methods used to measure thefair value of the other investments, grouped into Levels 1 to 3 based on thedegree to which the fair value is observable. 2009 2008 2007 £m £m £mLevel 1 - quoted unadjustedmarket prices 3.3 2.9 7.9Level 2 - valuation fromobservable market data†70.0 10.7 -Level 3 - other valuationmethods* 0.6 0.7 0.5 73.9 14.3 8.4
†Includes £5.1 million (2008: £4.9 million; 2007: £nil) of corporate bonds priced directly from market makers in those bonds.
* Unlisted equity shares valued using multiples from comparable listed organisations.
16 Derivative financial instruments
2009 2009 2008 2008 2007 2007 Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £mNon-currentInterestrate swaps - - - - 0.1 -Interestrate capsand floors 0.1 - 0.4 - 1.2 - 0.1 - 0.4 - 1.3 -CurrentInterestrate swaps - (15.7) - (22.4) - (2.3)Forwardforeignexchangecontracts - - - (0.2) - -Call optiononsubsidiaryundertaking - - - - 1.3 - - (15.7) - (22.6) 1.3 (2.3) 0.1 (15.7) 0.4 (22.6) 2.6 (2.3)
The valuation methods used to measure the fair value of all derivative financial instruments were grouped into Level 2, being derived from inputs which were either observable as prices or derived from prices.
There were no derivative financial instruments accounted for as hedging instruments.
Interest rate swaps
The aggregate notional principal of the outstanding interest rate swapcontracts at 31 December 2009 was £136.7 million (2008: £296.8 million; 2007:£195.7 million). The average period to maturity of the interest rate swaps was3.9 years (2008: 2.1 years; 2007: 3.8 years).The main interest rate swap matures payable during 2026. During the period tomaturity there is a single date in 2012 on which the swap can be cancelled bythe counterparty and settled at fair value. The fair value of this swap at 31December 2009 was a liability of £9.9 million (2008: £15.0 million; 2007: £0.8million).
Forward foreign exchange contracts
The Group uses forward foreign exchange contracts from time to time to add certainty to, and to minimise the impact of foreign exchange movements on, committed cash flows. At 31 December 2009 the Group had £5.4 million of outstanding net foreign exchange contracts (2008: £23.4 million; 2007: £35.0 million).
17 Trade and other receivables
2009 2008 2007 £m £m £mCurrentTrade receivables 2.8 3.7 2.9Prepayments 0.8 0.7 1.3Accrued income 2.2 0.3 0.4Other debtors 4.6 5.9 4.5 10.4 10.6 9.1
There is no concentration of credit risk with respect to trade receivables asthe Group has a large number of tenants spread across the countries in whichit operates.
There were no material trade and other receivables classified as past due but not impaired. No trade and other receivables are interest-bearing.
18 Cash and cash equivalents
2009 2008 2007 £m £m £mCash at bank and in hand 47.0 64.9 42.7Short-term bank deposits 23.3 130.4 79.3 70.3 195.3 122.0
At 31 December 2009, Group cash at bank and in hand included £13.8 million (2008: £11.0 million; 2007: £21.4 million) of cash deposits which were restricted by a third-party charge.
Cash and short-term deposits are invested at floating rates of interest based on relevant national LIBID and base rates or equivalents in the UK, France, Germany and Sweden.
The cash and cash equivalents currency profile is as follows:
Cash at bank Short-term and in hand deposits Total At 31 December 2009 £m £m £mSterling 18.5 22.0 40.5Euro 24.5 1.3 25.8Swedish Krona 4.0 - 4.0 47.0 23.3 70.3 Cash at bank Short-term and in hand deposits Total At 31 December 2008 £m £m £mSterling 12.4 75.0 87.4Euro 50.3 49.7 100.0Swedish Krona 2.2 5.7 7.9 64.9 130.4 195.3 Cash at bank Short-term and in hand deposits Total At 31 December 2007 £m £m £mSterling 20.6 64.7 85.3Euro 18.5 4.5 23.0Swedish Krona 3.6 10.1 13.7 42.7 79.3 122.0
19 Trade and other payables
2009 2008 2007 £m £m £mCurrentTrade payables 1.9 2.5 5.8Social security and othertaxes 1.8 1.1 2.1Other payables 5.4 4.7 6.1Accruals 12.1 16.6 36.9Deferred income 8.9 7.9 8.8 30.1 32.8 59.720 Deferred tax 2009 2008 2007 £m £m £mDeferred tax assets:- after more than 12 months (12.7) (12.4) (2.9)Deferred tax liabilities:- after more than 12 months 72.3 73.4 117.4 59.6 61.0 114.5
The movement in deferred tax is as follows:
2009 2008 2007 £m £m £mAt 1 January 61.0 114.5 150.3Credited to the tax chargeinthe Statement ofComprehensive Income (1.0) (33.1) (42.3)Released on disposal ofsubsidiaries (note 30) - (34.6) -Charged to equity 3.2 - 0.3Exchange rate variances (3.6) 14.2 6.2At 31 December 59.6 61.0 114.5
The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, was as follows:
Tax losses Other Total Deferred tax assets £m £m £mAt 1 January 2009 (5.4) (7.0) (12.4)(Credited)/charged to thetax charge in the Statementof Comprehensive Income (1.7) 1.4 (0.3)At 31 December 2009 (7.1) (5.6) (12.7) Tax losses Other Total £m £m £mAt 1 January 2008 (1.8) (1.1) (2.9)Credited to the tax charge inthe Statement ofComprehensive Income (3.6) (5.9) (9.5)At 31 December 2008 (5.4) (7.0) (12.4) Tax losses Other Total £m £m £mAt 1 January 2007 (3.6) (1.0) (4.6)Charged/(credited) to the taxcharge in the Statement ofComprehensive Income 1.8 (0.4) 1.4Charged to equity - 0.3 0.3At 31 December 2007 (1.8) (1.1) (2.9) Fair value Adjustments to UK capital investment allowances properties Other TotalDeferred taxliabilities £m £m £m £mAt 1 January 2009 12.2 60.5 0.7 73.4Credited to thetax charge in theStatement ofComprehensiveIncome (0.1) (0.4) (0.2) (0.7)Charged to equity - - 3.2 3.2Exchange ratevariances - (3.6) - (3.6)At 31 December2009 12.1 56.5 3.7 72.3 Fair value adjustments to UK capital investment allowances properties Other Total £m £m £m £mAt 1 January 2008 15.8 101.5 0.1 117.4(Credited)/chargedto the tax chargeinthe Statement ofComprehensiveIncome (3.6) (20.1) 0.1 (23.6)Released ondisposal ofsubsidiaries(note 30) - (34.6) - (34.6)Exchange ratevariances - 13.7 0.5 14.2At 31 December2008 12.2 60.5 0.7 73.4 Fair value adjustments to UK capital investment allowances properties Other Total £m £m £m £mAt 1 January2007 15.9 138.8 0.2 154.9Credited to thetax charge intheStatement ofComprehensiveIncome (0.1) (43.5) (0.1) (43.7)Exchange ratevariances - 6.2 - 6.2At 31 December2007 15.8 101.5 0.1 117.4
Deferred tax assets are recognised in respect of tax losses carried forward tothe extent that the realisation of the related tax benefit through futuretaxable profits is probable. At 31 December 2009 the Group did not recognisedeferred tax assets of £7.8 million (2008: £6.0 million; 2007: £7.4 million)in respect of losses amounting to £40.6 million (2008: £29.4 million; 2007:£21.2 million) which can be carried forward against future taxable income orgains. The majority of deferred tax assets recognised within the "other"category relate to deferred tax on swaps with a negative book value. Lossesrecognised as deferred tax assets can be carried forward without restriction.
21 Borrowings, including finance leases
Total Current Non-current borrowings At 31 December 2009 £m £m £mBank loans 112.5 434.1 546.6Debenture loans 1.0 34.1 35.1Zero coupon note - 8.8 8.8Other loans - 2.3 2.3 113.5 479.3 592.8 Total Current Non-current borrowings At 31 December 2008 £m £m £mBank loans 71.7 483.8 555.5Debenture loans 0.9 35.1 36.0Zero coupon note - 7.9 7.9Other loans - 2.3 2.3 72.6 529.1 601.7 Total Current Non-current borrowings At 31 December 2007 £m £m £mBank loans 102.0 648.8 750.8Debenture loans 0.8 36.0 36.8Zero coupon note - 7.1 7.1Other loans - 2.5 2.5Finance lease liabilities 0.2 1.3 1.5 103.0 695.7 798.7
Arrangement fees of £2.9 million (2008: £3.6 million; 2007: £5.0 million) have been offset in arriving at the balances in the above tables.
Bank loans
Interest on bank loans is charged at fixed rates ranging between 3.9 per centand 11.2 per cent, including margin (2008: 3.9 per cent and 11.2 per cent;2007: 4.5 per cent and 11.2 per cent) and at floating rates of typicallyLIBOR, EURIBOR or STIBOR, plus a margin. Fixed rate margins range between 0.8per cent and 1.8 per cent (2008: 0.8 per cent and 1.8 per cent; 2007: 0.7 percent and 2.5 per cent) and floating rate margins range between 0.8 per centand 3.0 per cent (2008: 0.8 per cent and 2.0 per cent; 2007: 0.8 per cent and2.5 per cent). All bank loans are secured by legal charges over the respectiveproperties, and in most cases a floating charge over the remainder of theassets held in the company which owns the property. In addition, the sharecapital of some of the subsidiaries within the Group has been charged.
Debenture loans
The debenture loans represent amortising bonds which are repayable in equalquarterly instalments of £1.2 million (2008: £1.2 million; 2007: £1.2 million)with final repayment due in January 2025. Each instalment is apportionedbetween principal and interest on a reducing balance basis. Interest ischarged at a fixed rate of 10.8 per cent, including margin. The debentures aresecured by a legal charge over a property and securitisation of its rentalincome.
Zero coupon note
The zero coupon note accrues interest at 11.2 per cent, including margin. It is unsecured and is redeemable as a balloon repayment of principal and interest of £43.7 million in aggregate in February 2025.
Other loans
Interest on other loans is at a fixed rate of 6.5 per cent and a variable rateranging between 2.0 per cent and 4.0 per cent (2008: 2.0 per cent and 4.0 percent; 2007: 2.0 per cent and 4.0 per cent), comprising LIBOR plus a margin.The loans are secured by legal charges over the share capital of the borrowingsubsidiaries.Loan covenants
There were no covenant breaches at 31 December 2009. Loans totalling £26.8 million at 31 December 2008 had covenant breaches which were rectified in 2009.
The maturity profile of the carrying amount of the Group's borrowings, including finance leases, at 31 December was as follows:
Debenture Zero coupon Bank loans loans note Other loans Total At 31 December 2009 £m £m £m £m £mWithin one year or on demand 113.1 1.0 - - 114.1More than one but not more thantwo years 27.3 1.1 - 2.3 30.7More than two but not more thanfive years 200.7 4.0 - - 204.7More than five years 208.4 29.0 8.8 - 246.2 549.5 35.1 8.8 2.3 595.7Unamortised issue costs (2.9) - - - (2.9)Borrowings, including financeleases 546.6 35.1 8.8 2.3 592.8Less amount due for settlementwithin 12 months (112.5) (1.0) - - (113.5)Amounts due for settlement after12 months 434.1 34.1 8.8 2.3 479.3 Debenture Zero coupon Bank loans loans note Other loans Total At 31 December 2008 £m £m £m £m £mWithin one year or on demand 72.4 0.9 - - 73.3More than one but not more thantwo years 60.2 1.0 - - 61.2More than two but not more thanfive years 194.7 3.6 - 2.3 200.6More than five years 231.8 30.5 7.9 - 270.2 559.1 36.0 7.9 2.3 605.3Unamortised issue costs (3.6) - - - (3.6)
Borrowings, including finance leases 555.5 36.0 7.9 2.3 601.7Less amount due for settlementwithin 12 months (71.7) (0.9) - - (72.6)Amounts due for settlement after12 months 483.8 35.1 7.9 2.3 529.1 Debenture Zero coupon Bank loans loans note Other loans Total At 31 December 2007 £m £m £m £m £mWithin one year or on demand 103.0 0.8 - 0.2 104.0More than one but not more thantwo years 53.2 0.9 - 1.2 55.3More than two but not more thanfive years 295.9 3.2 - 2.5 301.6More than five years 303.7 31.9 7.1 0.1 342.8 755.8 36.8 7.1 4.0 803.7Unamortised issue costs (5.0) - - - (5.0)
Borrowings, including finance leases 750.8 36.8 7.1 4.0 798.7Less amount due for settlementwithin 12 months (102.0) (0.8) - (0.2) (103.0)Amounts due for settlement after12 months 648.8 36.0 7.1
3.8 695.7
The interest rate risk profile of the Group's fixed rate borrowings was asfollows: At 31 At 31 At 31 December December December 2009 2008 2007 Weighted Weighted Weighted Weighted Weighted Weighted average average average average average average fixed rate period for fixed rate period for fixed rate period for of financial which rate is of financial which rate is of financial which rate is liabilities fixed liabilities fixed liabilities fixed % Years % Years % YearsSterling 6.5 6.6 6.8 5.7 6.7 6.4Euro 4.3 3.1 5.1 3.4 4.9 0.8Swedish Krona - - - - 5.4 3.3The interest rate risk profile of the Group's floating rate borrowings was asfollows: At 31 At 31 At 31 December December December 2009 2008 2007 Average Average Average capped capped capped % of net % of net % of net interest Average interest Average interest Average floating floating floating rate rate tenure rate rate tenure rate rate tenure loans capped % Years loans capped % Years
loans capped % YearsSterling 100 3.9 0.7 100 3.8 1.7 100 5.5 2.0Euro 100 4.7 1.6 100 4.7 2.3 100 4.7 3.3SwedishKrona - n/a n/a - n/a n/a 100 4.5 0.8
The carrying amounts of the Group's borrowings are denominated in the following currencies:
Floating Fixed rate rate financial financial liabilities liabilities Total At 31 December 2009 £m £m £mSterling 154.2 115.4 269.6Euro 123.8 165.1 288.9Swedish Krona - 34.3 34.3 278.0 314.8 592.8 Fixed rate Floating rate financial financial liabilities liabilities Total At 31 December 2008 £m £m £mSterling 230.5 37.0 267.5Euro 115.8 161.8 277.6Swedish Krona - 56.6 56.6 346.3 255.4 601.7 Fixed rate Floating rate financial financial liabilities liabilities Total At 31 December 2007 £m £m £mSterling 328.5 79.9 408.4Euro 152.0 177.7 329.7Swedish Krona 20.7 39.9 60.6 501.2 297.5 798.7
The carrying amounts and fair values of the Group's borrowings, including finance leases are as follows:
Carrying Fair amounts values 2009 2008 2007 2009 2008 2007 £m £m £m £m £m £mCurrentborrowings,includingfinanceleases 113.5 72.6 103.0 113.5 72.6 103.0Non-currentborrowings,includingfinanceleases 479.3 529.1 695.7 503.4 563.2 716.5 592.8 601.7 798.7 616.9 635.8 819.5
Arrangement fees of £2.9 million (2008: £3.6 million; 2007: £5.0 million) have been offset in arriving at the balances in the above table.
The fair value of non-current borrowings represents the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties, discounted at the prevailing market rate, and excludes accrued interest.
The Group has the following undrawn committed facilities available at31 December: 2009 2008 2007 £m £m £mFloating rate:- expiring within one year 0.6 - -- expiring after one year 0.9 23.5 - 1.5 23.5 -22 Financial instruments
22.1 Categories of financial instruments
Financial assets of the Group comprise:
- Interest rate swaps and caps
- Foreign currency swaps and forward contracts
- Available-for-sale investments
- Investments in associates- Trade and other receivables- Cash and cash equivalents
Financial liabilities of the Group comprise:
- Interest rate swaps and caps
- Foreign currency swaps and forward contracts
- Bank loans- Debenture loans- Other loans- Finance lease liabilities- Trade and other payables- Provisions- Current tax liabilities
The fair values of financial assets and liabilities are determined as follows:
(a) Interest rate swaps and caps are measured at the present value of future cash flows based on applicable yield curves derived from quoted interest rates.
(b) Foreign currency swaps and forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts.
(c) The fair value of non-derivative financial assets and liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. Financial assets in this category include available-for-sale instruments such as listed corporate bonds and equity investments.
(d) In more illiquid conditions, non-derivative financial assets are valued using multiple quotes obtained from market makers. Where the spread of prices is tightly clustered the consensus price is deemed to be fair value. Where prices become more dispersed or there is a lack of available quoted data, further procedures are undertaken such as evidence from the last non-forced trade.
(e) The fair value of other non-derivative financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis, using prices from observable current market transactions and dealer quotes for similar instruments.
Except for investments in associates, bank loans, debenture loans, other loans and finance lease liabilities, the carrying amounts of financial assets and liabilities recorded at amortised cost approximate to their fair value.
22.2 Capital risk management
The Group manages its capital to ensure that entities within the Group will beable to continue as going concerns while maximising the return to stakeholdersthrough the optimisation of debt and equity balances. The capital structure ofthe Group consists of debt, cash and cash equivalents and equity attributableto the owners of the parent, comprising issued capital, reserves and retainedearnings. Management perform "stress tests" of the Group's business model toensure that the Group's objectives can be met. The objectives have been met inthe year.The Directors review the capital structure on a quarterly basis to ensure thatkey strategic goals are being achieved. As part of this review they considerthe cost of capital and the risks associated with each class of capital.
The gearing ratio at the year end was as follows:
2009 2008 2007 £m £m £mDebt 595.7 605.3 803.7Cash and cashequivalents (70.3) (195.3) (122.0)Net debt 525.4 410.0 681.7Equity 309.5 338.6 403.1Net debt to equityratio 170% 121% 169%Debt is defined as long and short-term borrowings excluding unamortised issuecosts as detailed in note 21. Equity includes all capital and reserves of theGroup attributable to the owners of the Company.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements except tothe extent that debt covenants may require group companies to maintain ratiossuch as debt to equity (or similar) below certain levels.
22.3 Risk management objectives
The Group's activities expose it to a variety of financial risks, which can be grouped as:
- market risk;- credit risk; and- liquidity risk.
The Group's overall risk management approach seeks to minimise potential adverse effects on the Group's financial performance whilst maintaining flexibility.
Risk management is carried out by the Group Treasury department in closeco-operation with the Group's operating units and with guidance from the Boardof Directors. The Board regularly assesses and reviews the financial risks
andexposures of the Group.(a) Market riskThe Group's activities expose it primarily to the financial risks of changesin interest rates and foreign currency exchange rates, and to a lesser extentother price risk. The Group enters into a variety of derivative financialinstruments to manage its exposure to interest rate and foreign currency riskand also uses natural hedging strategies such as matching the duration,interest payments and currency of assets and liabilities.
(i) Interest rate risk
The Group's most significant interest rate risk arises from its long-term variable rate borrowings. Interest rate risk is regularly monitored by the Group Treasury department and by the Board on both a country and a Group basis. The Board's policy is to minimise variable interest rate exposure whilst maintaining the flexibility to borrow at the best rates and with consideration to potential penalties on termination of fixed rate loans. To manage its exposure the Group uses interest rate swaps, interest rate caps and natural hedging from cash held on deposit.
In assessing risk, a range of scenarios is taken into consideration such asrefinancing, renewal of existing positions and alternative financing andhedging. Under these scenarios, the Group calculates the impact on theStatement of Comprehensive Income for a defined movement in the underlyinginterest rate. The impact of a reasonably likely movement in interest rates isset out below: 2009 2008 Statement of Statement of Comprehensive Comprehensive Income Income Scenario £m £mCash +100 basis points(2008: +50 basispoints) 0.9 1.4Variable borrowings(including caps) +100basis points(2008: +50 basispoints) (2.7) (0.5)Cash -100 basis points(2008: -50 basis points) (0.9) (1.4)Variable borrowings(including caps) -50basis points(2008: -50 basis points) 1.3 1.2(ii) Foreign exchange riskThe Group does not have any regular transactional foreign exchange exposure.However, it has operations in Europe which transact business denominated ineuros and, to a lesser extent, in Swedish kronor. Consequently, there iscurrency exposure caused by translating the local trading performance and netassets into sterling for each financial period and balance sheet,respectively.The Group's principal foreign currency exposures are in respect of the euroand the Swedish krona. If the value of sterling were to increase in strengthby 1% against the value of the euro, the Group's net assets would decrease by£1.4 million and the Group's profit by £0.1 million. If the value of sterlingwere to decrease in strength by 1% against the value of the euro, the Group'snet assets would increase by £1.4 million and the Group's profit by £0.1million. If the value of sterling were to increase in strength by 1% againstthe value of the Swedish krona the Group's net assets would decrease by £0.4million and the Group's profit by £0.1 million. If the value of sterling wereto decrease in strength by 1% against the value of the Swedish krona theGroup's net assets would increase by £0.3 million and the Group's profit by£0.1 million.The policy of the Group is to match the currency of investments with therelated borrowing, which largely eliminates foreign exchange risk on propertyinvestments. A portion of the remaining operations, equating to the net assetsof the foreign property operations, is not hedged. Where foreign exchange riskarises from future commercial transactions, the Group will hedge the futurecommitted commercial transaction using foreign exchange swaps or forwardforeign exchange contracts.
(iii) Other price risk
The Group is exposed to corporate bond price risk and, to a lesser extent, to equity securities price risk, because of investments held by the Group and classified in the Balance Sheet as available-for-sale.
In order to manage the risk in relation to the holdings of corporate bonds andequity securities the Group holds a diversified portfolio. Diversification ofthe portfolio is managed in accordance with the limits set up by the Group.
The table below shows the effect on profit before tax and on equity which would result from an increase or decrease of 10% in the market value of corporate bonds and equity securities, which is an amount management believes to be reasonable in the current market:
2009 2009 2008 2008Scenario: Profit Directly Profit DirectlyShift of before tax in equity before tax in equity10% invaluations £m £m £m £m10% fallin value 0.1 (7.4) - (1.4)10%increasein value (0.1) 7.4 - 1.4(b) Credit riskCredit risk refers to the risk that a counterparty will default on itscontractual obligations resulting in financial loss to the Group. Credit riskarises from the ability of tenants to meet outstanding receivables and futurelease commitments, and from financial institutions with which the Group placescash and cash equivalents, and enters into derivative financial instruments.The maximum exposure to credit risk is partly represented by the carryingamounts of the financial assets which are carried in the Balance Sheet,including derivatives with positive fair values.For credit exposure other than to tenants, the Directors believe thatcounterparty risk is minimised to the fullest extent possible as the Group haspolicies which limit the amount of credit exposure to any individual financialinstitution.The Group has policies in place to ensure that rental contracts are made withtenants with an appropriate credit history. Credit risk to tenants is assessedby a process of internal and external credit scoring, and is reduced byobtaining bank guarantees from the tenant or its parent, and receipted rentaldeposits. The overall credit risk in relation to tenants is monitored on anongoing basis. Moreover, a significant proportion of the Group portfolio islet to Government tenants which can be considered financially secure.At 31 December 2009 the Group held £73.9 million (2008: £14.3 million; 2007:£8.4 million) of available-for-sale and other financial assets. Management ofthe Group considers the credit risk associated with individual transactionsand monitors the risk on a continuing basis. Information is gathered fromexternal credit rating agencies (Standard & Poor's) and other market sourcesto allow management to react to any perceived change in the underlying creditrisk of the instruments in which the Group invests. This allows the Group tominimise its credit exposure to such items and at the same time to maximisereturns for shareholders.
The table below shows the external Standard & Poor's credit banding on the available-for-sale and other investments held by the Group:
S&P Credit rating at 2009 2008 2007balance sheet date £m £m £mInvestment grade 42.0 7.2 0.1Non-investment grade 23.8 - -Not rated 8.1 7.1 8.3Total 73.9 14.3 8.4(c) Liquidity risk
Liquidity risk management requires maintaining sufficient cash, other liquid assets and the availability of funding to meet short, medium and long-term requirements. The Group maintains adequate levels of liquid assets to fund operations and to allow the Group to react quickly to potential opportunities.
Management monitors rolling forecasts of the Group's liquidity on the basis of expected cash flow so that future requirements can be managed effectively.
The majority of the Group's debt is arranged on an asset-specific, non-recourse basis. This allows the Group a higher degree of flexibility in dealing with potential covenant defaults than if the debt was arranged under a Group-wide borrowing facility.
Loan covenant compliance is closely monitored by the Group Treasurydepartment. Potential covenant breaches can ordinarily be avoided by placingadditional security or a cash deposit with the lender, or by partial repaymentbefore an event of default takes place. Potential loan-to-value covenantbreaches at 31 December 2009 could be remedied by partial repayments of theloans of £1.9 million in aggregate.The table below analyses the Group's contractual undiscounted cash flowspayable under financial liabilities and derivative assets and liabilities atthe balance sheet date, into relevant maturity groupings based on the periodremaining to the contractual maturity date. Amounts due within one year areequivalent to the carrying values in the balance sheet as the impact ofdiscounting is not significant. Less than 1 to 2 to Over 1 year 2 years 5 years 5 yearsAt 31 December2009 £m £m £m £mNon-derivativefinancialliabilities:Borrowings,includingfinance leases 114.1 30.7 204.7 246.2Interestpayments onborrowings(i) 23.5 24.2 56.2 72.6Trade andother payables 30.1 - - -Forwardforeignexchangecontracts:Cash flowhedges- Outflow 5.4 - - -- Inflow (5.4) - - - Less than 1 1 to 2 to Over year 2 years 5 years 5 yearsAt 31 December2008 £m £m £m £mNon-derivativefinancialliabilities:Borrowings,includingfinance leases 73.3 61.2 200.6 270.2Interestpayments onborrowings(i) 20.1 14.8 36.7 60.8Trade andother payables 32.8 - - -Forwardforeignexchangecontracts:Cash flowhedges- Outflow (130.1) - - -- Inflow 129.9 - - -At 31 December Less than 1 1 to 2 to Over 2007 year 2 years 5 years 5 years £m £m £m £mNon-derivativefinancialliabilities:Borrowings,includingfinance leases 104.0 55.3 301.6 342.8Interestpayments onborrowings(i) 42.2 40.2 92.7 117.2Trade andother payables 59.7 - - -Forwardforeignexchangecontracts:Cash flowhedges- Outflow (35.0) - - -- Inflow 35.1 - - -
(i) Interest payments on borrowings are calculated without taking into account future events. Floating rate interest is estimated using a future interest rate curve as at 31 December.
23 Share capital Number Ordinary Total Ordinary shares in Treasury ordinary shares in
Treasury Total ordinary
circulation shares shares circulation shares shares thousands thousands thousands £m £m £m
At 1 January 2009 61,745,471 5,000,000 66,745,471 15.4 1.3 16.7Cancelled followingtender offer (13,721,215) - (13,721,215) (3.4)
- (3.4)At 31 December 2009 48,024,256 5,000,000 53,024,256 12.0 1.3 13.3 Number Ordinary Total Ordinary shares in Treasury ordinary shares in
Treasury Total ordinary
circulation shares shares circulation shares shares thousands thousands thousands £m £m £m
At 1 January 2008 67,740,457 7,109,279 74,849,736 16.9
1.8 18.7Employee shareoptionscheme:- shares issued 325,000 (325,000) - 0.1 (0.1) -Cancellation ofTreasury Shares -(2,114,209) (2,114,209) - (0.5) (0.5)Purchase of ownshares:- pursuant to market
purchase (329,930) 329,930 - (0.1) 0.1 -Cancelled followingmarket purchases (3,414,412) - (3,414,412) (0.9) - (0.9)Cancelled followingtender offer (2,575,644) - (2,575,644) (0.6) - (0.6)At 31 December 2008 61,745,471 5,000,000 66,745,471 15.4
1.3 16.7 Number Ordinary Total Ordinary shares in Treasury ordinary shares in
Treasury Total ordinary
circulation shares shares circulation shares shares thousands thousands thousands £m £m £m
At 1 January 2007 72,604,668 7,477,168 80,081,836 18.1
1.9 20.0Cancellation ofTreasury Shares - (750,000) (750,000) - (0.2) (0.2)Purchase of ownshares:- pursuant to market
purchase (382,111) 382,111 - (0.1) 0.1 -Cancelled followingmarket purchases (1,163,140) - (1,163,140) (0.3) - (0.3)Cancelled followingtender offer (3,318,960) - (3,318,960) (0.8) - (0.8)At 31 December 2007 67,740,457 7,109,279 74,849,736 16.9
1.8 18.724 Tender offer buy-backs
A tender offer by way of a Circular dated 1 December 2008 for the purchase of 2 in 9 shares at 350 pence per share was completed in January 2009. It returned £48,024,253 to shareholders, equivalent to 77.8 pence per share.
A further tender offer will be put to shareholders in April 2010 for thepurchase of 1 in 42 shares at a price of 525 pence per share which, ifapproved, will return £6.0 million to shareholders, equivalent to 12.5 penceper share.25 Share premium account 2009 2008 2007 £m £m £mAt 1 January 70.5 69.8 69.7Employee share option scheme- shares issued - 0.7 0.1At 31 December 70.5 70.5 69.826 Other reserves Capital Cumulative redemption translation Fair value Other reserve reserve reserve reserves Total £m £m £m £m £mAt 1 January 2009 17.0 59.8 (4.5) 28.1 100.4Purchase of ownshares:- cancellationpursuant totender offer 3.4 - - - 3.4Exchange ratevariances - (9.5) - - (9.5)Share of exchangerate variances ofassociates - 0.4 - - 0.4Available-for-salefinancial assets:- net fair valuegains in the year - - 13.5 - 13.5- deferred taxthereon - - (3.2) - (3.2)At 31 December2009 20.4 50.7 5.8 28.1 105.0 Capital Cumulative redemption translation Fair value Other reserve reserve reserve reserves Total £m £m £m £m £mAt 1 January 2008 15.0 19.3 (1.1) 28.1 61.3Purchase of ownshares:- cancellationpursuant totender offer 0.6 - - - 0.6- cancellationpursuant tomarket purchase 0.9 - - - 0.9- cancellation oftreasury shares 0.5 - - - 0.5Exchange ratevariances - 36.2 - - 36.2Share of exchangerate variances ofassociates - 4.3 - - 4.3Available-for-salefinancial assets:- net fair valuelosses in the year - - (3.4) - (3.4)At 31 December2008 17.0 59.8 (4.5) 28.1 100.4 Capital Cumulative Cash flow Fair redemption translation hedge value Other reserve reserve reserve reserve reserves Total £m £m £m £m £m £mAt 1 January 2007 13.7 2.4 1.2 (2.8) 28.1 42.6Purchase of ownshares:- cancellationpursuant totender offer 0.8 - - - - 0.8- cancellationpursuant tomarketpurchase 0.3 - - - - 0.3- cancellationof treasuryshares 0.2 - - - - 0.2Exchange ratevariances - 16.9 - - - 16.9Available-for-salefinancial assets:- net fairvalue gainsin the year - - - 1.7 - 1.7Cash flow hedges:- fair valuelosses in theyear - - (0.1) - - (0.1)- transfers - - (0.8) - - (0.8)- deferredtax - - (0.3) - - (0.3)At 31 December2007 15.0 19.3 - (1.1) 28.1 61.3
The amount classified as other reserves was created prior to listing in 1995 on a Group reconstruction and is considered to be non-distributable.
27 Cash generated from operations
2009 2008 £m £mOperating profit/(loss) 41.5 (90.3)Adjustments for:Net movements on revaluation of investmentproperties 6.7 103.3Depreciation and amortisation 0.5 1.4
Profit on disposal of investment properties (0.3) (7.0) Loss on disposal of subsidiaries
- 16.2(Profit)/loss on equity investments (2.1) 3.0Impairment of goodwill - 22.0Changes in working capital:Increase in debtors (0.7) (11.3)Increase in creditors 0.1 12.6Cash generated from operations 45.7 49.9
28 Contingencies
At 31 December 2009 CLS Holdings plc had guaranteed certain liabilities ofgroup companies. These were primarily in relation to Group borrowings andcovered interest and amortisation payments. No cross guarantees had been givenby the Group in relation to the principal amounts of these borrowings. Certainwarranties given in the course of corporate sales during 2008 either had beenprovided for or were too remote to be considered contingent.
29 Commitments
The Group leases office space under non-cancellable operating lease agreements. The future aggregate minimum lease payments under these non-cancellable operating leases are as follows:
2009 2008 2007Operating lease commitments -where the Group is the lessee £m £m £mWithin one year 0.1 - 0.6More than one but not more thanfive years 0.1 0.3 1.1More than five years 0.3 0.3 - 0.5 0.6 1.7
At the balance sheet date the Group had contracted with tenants for the following minimum lease payments:
2009 2008 2007Operating lease commitments -where the Group is lessor £m £m £mWithin one year 57.9 55.3 63.0More than one but not morethan five years 196.1 174.1 196.0More than five years 182.1 203.2 226.8 436.1 432.6 485.8
Operating leases where the Group is the lessor are typically negotiated on a tenant-by-tenant basis and include break clauses and indexation provisions.
Other commitments
At 31 December 2009 the Group had no other commitments (2008: £30 million ofcontracted capital expenditure in relation to developments in Germany; 2007:£nil). There were no authorised financial commitments which were yet to becontracted with third parties (2008: none; 2007: none).
30 Business acquisitions and disposals
Business disposals - prior years
French property portfolio disposals
On 15 May 2008, the Group disposed of its interests in 29 subsidiaries, 9 inthe Netherlands and 20 in France, owning 14 properties in France. Collectivelythese were referred to as the LFPI Portfolio. On 30 July 2008, the Groupcompleted on the disposal of two subsidiary undertakings owning two propertiesin France, known as the Belin sale. Results of the entities disposed of werepreviously reported in the French operating segment. LFPI Portfolio Belin May-08 Dec-07 Jul-08 Dec-07 £m £m £m £mNet assetsdisposed of:Investmentproperties 105.4 97.7 69.7 66.6Property,plant &equipment - - - 26.1Trade andotherreceivables 18.3 15.6 25.4 -Cash andcashequivalents 2.6 0.5 4.4 -Deferred tax (17.4) - (17.2) -Trade andotherpayables (4.2) (3.1) (2.1) (1.0)Borrowings,includingfinanceleases (64.0) (59.7) (45.3) (42.2) 40.7 51.0 34.9 49.5 Gain ondisposal 11.2 7.5Costs ofdisposal 6.2 0.3Totalconsideration 58.1 42.7 Satisfied by:Cash 38.4 17.8Subordinationofintercompanydebt 17.3 24.9Deferredconsideration 2.4 - 58.1 42.7 The gain ondisposal isdisclosed intheStatement ofComprehensiveIncome asfollows:Loss ondisposal ofsubsidiaries (6.2) (9.7)Release ofdeferred tax 17.4 17.2 11.2 7.5 Net cash inflowarising ondisposal:Cashconsideration 38.4 17.8Cash and cashequivalentsdisposed of (2.6) (4.4) 35.8 13.4Included in costs for the LFPI Portfolio disposal are rent guaranteeprovisions of £1.5 million, the write-off of £1.7 million of goodwill on theoriginal acquisition of the LFPI Portfolio, £1.8 million for a contribution tothe capital of the disposed subsidiaries and £1.3 million of professional andadvisory costs incurred. Deferred consideration of £2.7 million (classifiedwithin other debtors) remains on escrow to cover the rent guarantee provisionsas mentioned above and other contingencies (the likelihood of crystallisationof these other contingencies is considered remote and therefore they have notbeen provided for).
The costs in relation to the Belin sale related to professional fees.
London Bridge Quarter
On 9 January 2008 the Group disposed of its one-third interest in the LondonBridge Quarter joint venture (Teighmore Limited and New London Bridge HouseLimited). The joint venture was previously reported within the UK operatingsegment. London Bridge Quarter Jan-08 Dec-07 £m £m Net assets disposed of:Investment properties 110.2 110.2Trade and other receivables 0.6 0.6Cash and cash equivalents 1.9 1.9Trade and other payables (16.5) (16.5)
Borrowings, including finance leases (66.2) (66.2)
30.0 30.0 Gain on disposal -Costs of disposal (see below) -Total consideration 30.0 Satisfied by:Cash 30.0 Net cash inflow arising on disposal:Cash consideration 30.0
Cash and cash equivalents disposed of (1.9)
28.1All of the costs in relation to the disposal of LBQ, comprising £4.9 millionin aggregate, were incurred and expensed in 2007. At 31 December 2007 theinvestment in LBQ was written down to its recoverable amount, so there was nogain or loss on disposal recognised in 2008.
At 31 December 2007 the joint venture borrowing facility was in breach of its loan to value covenant. All obligations potentially arising from the breach were discharged on sale.
Solna and L¶vg¤rdet
On 31 January 2006, the Group disposed of its interests in L¶vg¤rdet BusinessAB, L¶vg¤rdet Residential AB and L¶vg¤rdet Capital Partners AB, the holdingcompanies of properties at L¶vg¤rdet, Gothenburg, Sweden. In addition, on 21August 2006, the Group disposed of its interest in Solna Business Holdings ABand Sliparen Ett AB, the holding companies of the properties at Solna BusinessPark, Stockholm, Sweden. The combined loss on these disposals in 2006 was £1.8million and in 2007 was £2.0 million which was recognised in profit before taxin the relevant years. During the year ended 31 December 2009 there were nofurther costs incurred relating to commitments made on the disposal of SolnaBusiness Park (2008: £0.3 million). In 2009, cash payments of £0.9 million(2008: £3.0 million) were made in relation to deferred consideration agreed onsale.Summary of business disposals 2009 2008 £m £mLoss on disposal of subsidiariesLFPI Portfolio - 6.2Belin - 9.7Solna and L¶vg¤rdet (sold in 2006) - 0.3 - 16.2
31 Related party transactions
A Group company, F¶rvaltnings AB Klio, rents office space from a company ownedby Sten Mortstedt, Executive Chairman of CLS Holdings plc. The total payablein the year was £34,000 (2008: £33,000; 2007: £29,000). A company owned bySten Mortstedt purchased accountancy services from F¶rvaltnings AB Klio duringthe year amounting to £8,000 (2008: £8,000; 2007: £7,000). In relation tothese transactions £3,000 was payable at the balance sheet date (2008:£53,000; 2007: £37,000).
32 Principal subsidiaries
The group financial statements include the financial statements of CLS Holdings plc and all of its subsidiaries, the principal ones of which are listed below.
The Directors consider that to give full particulars of all subsidiaryundertakings would lead to a statement of excessive length. The followinginformation relates to those wholly-owned subsidiary companies whose resultsor financial position, in the opinion of the Directors, principally affectedthose of the Group.Adlershofer S rl* Grossglockner S rl* New Printing House Square Limited
Coventry House Limited Ingrove Limited Spring Gardens Limited
Fr¨res Peugeot SCI†Kapellen S rl* V¤nerparken Property
Investment KB**
Great West House Limited Naropere S rl* Vauxhall Cross Limited
* Incorporated in Luxembourg†Incorporated in France** Incorporated in SwedenThe principal activity of each of these subsidiaries is property investment,apart from Coventry House Limited whose principal activity is to act as aninvestment company. All of the above subsidiary undertakings are incorporatedin the United Kingdom unless stated above. To comply with the Companies Act2006, a full list of subsidiaries will be filed with the Company's next annualreturn.GLOSSARY OF TERMSADJUSTED NET ASSETS
Net assets excluding deferred tax assets and deferred tax liabilities
ADJUSTED TOTAL ASSETS
Total assets excluding deferred tax assets
CONTRACTED RENT
Annual contracted rental income
CORE PROFIT
Profit before tax and before net movements on revaluation of investmentproperties, profit on sale of investment properties subsidiaries and corporatebonds, impairment of intangible assets and goodwill, non-recurring costs andforeign exchange variances.EARNINGS PER SHARE
Profit after tax divided by the weighted average number of ordinary shares in issue in the period
ADJUSTED EARNINGS PER SHARE
Profit after tax, but excluding deferred tax and net gains or losses from fair value adjustments on investment properties, divided by the weighted average number of ordinary shares in issue in the period
ESTIMATED RENTAL VALUE (ERV)
The market rental value of lettable space as estimated by the Group's valuers
LOAN TO VALUE (LTV)
Borrowings expressed as a percentage of the market value of the property portfolio
NET ASSETS PER SHARE or NET ASSET VALUE (NAV)
Equity shareholders' funds divided by the number of ordinary shares in circulation at the balance sheet date
ADJUSTED NET ASSETS PER SHARE or ADJUSTED NET ASSET VALUE
Adjusted net assets divided by the number of ordinary shares in circulation at the balance sheet date
NET DEBT
Total borrowings less cash and short-term deposits
NET GEARING
Net debt expressed as a percentage of net assets
ADJUSTED NET GEARING
Net debt expressed as a percentage of adjusted net assets
NET INITIAL YIELD
Annual net rents on investment properties expressed as a percentage of the investment property valuation
NET RENT
Contracted rent less net service charge costs occupancy rate
Contracted rent expressed as a percentage of the aggregate of contracted rent and the ERV of vacant space
OVER-RENTED
The amount by which ERV falls short of the aggregate of passing rent and the ERV of vacant space
PASSING RENT
Contracted rent after any rent-free periods have expired
RECURRING INTEREST COVER
The aggregate of group revenue less costs plus share of results of associates, divided by net finance costs
RENT ROLLContracted rent
RETURN ON SHAREHOLDERS' EQUITY
The movement in the adjusted net assets in the period plus distributions as a percentage of the adjusted net assets at the beginning of the period
SOLIDITY
Equity shareholders' funds expressed as a percentage of total assets
ADJUSTED SOLIDITY
Adjusted net assets expressed as a percentage of adjusted total assets
TOTAL SHAREHOLDER RETURN
For a given number of shares, the aggregate of the proceeds from tender offer buy-backs and the change in market value of the shares during the year adjusted for cancellations occasioned by such buy-backs, as a percentage of the market value of the shares at the beginning of the year
vendorRelated Shares:
CLS Holdings