13th Jun 2007 07:02
Quintain Estates & Development PLC13 June 2007 13 June 2007 QUINTAIN ESTATES AND DEVELOPMENT PLC ("QUINTAIN"/"COMPANY"/"GROUP") PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2007 QUINTAIN REPORTS AN OUTSTANDING YEAR WITH 29.9% TOTAL RETURN Financial Highlights • EPRA Net Asset Value (NAV) up 28.1% to 784p (2006: 612p) • NAV per share up 25.5% to 660p (2006: 526p) o NAV (diluted) up 26.9% to 655p (2006: 516p) • Substantial capital value uplifts for Wembley and Greenwich Peninsula holdings o Wembley up 25.4% to £524m o Greenwich up 43.8% to £225m • Total return* of 27.5%, or 29.9% on an EPRA basis • Profit before tax down 20.5% to £51.6m (2006: £65.0m) o Reflects lower valuation surpluses on investment properties held directly and in joint ventures • Adjusted profit+ up 25.8% to £20.0m (2006: £15.9m) o Significantly increased contribution from Quintain Fund Management • Gearing of 36% at the year end o Provides the Group with substantial financial headroom • Final dividend increased 1p to 8.25p o Total dividend for the year 11.75p (2006: 10.50p) Operational Highlights • Wembley o First residential building under construction - All private units sold at higher than anticipated values o Planning consents obtained for two further residential buildings o Heads of terms agreed for student accommodation block with iQ fund o Planning application made for 402 room hotel and 656 room student accommodation block • Greenwich o New 50:50 joint venture holding company established o First land sale with reserved matters consent granted o College relocation to Greenwich agreed • Fund Management o Funds under management increased from £470m to £711m o iQ student accommodation joint venture formed with The Wellcome Trust o Quantum Fund signed development agreement for SPark science park at Emersons Green, Bristol • Property Disposals and Acquisitions o £138.7m of proceeds from property disposals o £92.4m of investment properties acquired * as measured by the increase in net assets per share adding back the dividendpaid + as defined in the Operating and Financial Review John Plender, Chairman of Quintain, commented: "In my first statement as chairman of Quintain, I am delighted to be able toreport another outstanding year in which strong progress has been made acrossour business. The most striking feature of the results is the substantialcapital uplift, driven largely by our large scale urban regeneration schemes atWembley and Greenwich. "Quintain's diversified business model, with its balance of mixed-use urbanregeneration, investment property and fund management, has innate defensivemerits, while retaining a continuing impetus to embrace a variety ofopportunities for rapid growth. We believe that the Group is well positioned tooutperform in the years ahead, in terms of our core measure of total return,regardless of market environment. That belief underpins our considerableenthusiasm as we look to the future." For further information, please contact: Quintain Estates and Development PLC Rebecca Worthington 020 7495 8968 Financial Dynamics Stephanie Highett/Dido Laurimore 020 7831 3113 FINANCIAL HIGHLIGHTS 31 March 31 March Change 2007 2006 % BALANCE SHEET Net asset value per share (pence) 660 526 + 25.5 Diluted net asset value per 655 516 + 26.9share (pence) EPRA net asset value per 784 612 + 28.1share (pence) Total return (%) 27.5 21.0 - EPRA total return (%) 29.9 25.2 - DIVIDENDS Total dividend per share (pence) 11.75 10.50 + 11.9 Final dividend per share (pence) 8.25 7.25 + 13.8 INCOME STATEMENT i. Continuing operations Operating profit 5.1 4.1 + 23.7 Profit before tax (£m) 51.6 65.0 - 20.5 Earnings per share (pence)Basic 35.0 46.1 - 24.1Diluted 34.3 45.2 - 24.1 ii. Total operations Operating profit 5.0 - - Profit before tax (£m) 51.6 60.9 -15.3 Earnings per share (pence)Basic 34.9 43.9 - 20.5Diluted 34.3 43.0 - 20.2 Chairman's Statement In my first statement as chairman of Quintain, I am delighted to be able toreport another outstanding year in which strong progress has been made acrossour business. The most striking feature of the results is the substantialcapital uplift, driven largely by our big urban regeneration schemes at Wembleyand Greenwich. The valuation at Wembley this year has produced a 25.4% increaseto £524.0m, while Greenwich has seen a 43.8 % increase to £225.0m, with bothpercentage increases measured after capital expenditure in the year. Much ofthis enhancement in value stems from the buoyancy of the London residentialmarket, which has been reflected in the very successful outcome of recent salesof residential units at Wembley. These are discussed in greater detail in theOperating and Financial Review. It is gratifying that Quintain's innovative, large-scale schemes, designed tocreate sustainable communities, are delivering value on such a scale forshareholders as well as other stakeholders. It is also pleasing that thissuccess, together with the impressive contribution of the rest of the business,has been mirrored in an outstanding share price performance relative to themarket and the property sector. Over the past five years Quintain has delivereda total shareholder return, based on the increase in share price adding back thedividend paid, of 354.4%, compared with a return of 50.4% for the FTSE 350 Indexand 187.7% for the FTSE Real Estate Index. Over 10 years the Company is rankednumber two in the March universe of funds covered by the Investment PropertyDatabank ("IPD"), the industry benchmark. That is a tribute to the dynamism ofQuintain's entrepreneurial management team and to the robustness of its businessmodel. During the year the business achieved a total return, as measured by theincrease in net assets per share adding back the dividend paid of 27.5% or 22.7%net of Retail Price Index inflation. The total return on the measure recommendedby the European Public Real Estate Association (EPRA) and defined in theOperating and Financial Review was 29.9%. Both measures are far above ourinternal target of 10% total return net of RPI inflation, a target set at thetime of the Company's flotation in 1996. It has been exceeded in every yearsince. We have also, once again, significantly outperformed the property market asmeasured by IPD. Our total ungeared return, as defined in the Operating andFinancial Review, for the year to 31 March 2007 was 26.6%, compared with IPD'sMarch Universe of 15.8%. During the year the net asset value per share rose by 25.5% from 526p to 660pand on a diluted basis by 26.9% from 516p to 655p. On an EPRA basis adjusteddiluted net asset value per share rose by 28.1% to 784p per share. As mentionedearlier, the main driver of the uplift was the surplus on property revaluation.A more detailed commentary on the valuations, together with a full review of ouroperations, follows in the Operating and Financial Review. Profit before tax fell 20.5% from £65.0m to £51.6m, while earnings per sharefrom continuing operations fell 24.1% on a diluted basis from 45.2p to 34.3p. Asinvestment property revaluation movements are required to be included in theIncome Statement, the pre-tax profit figure has inevitably become more volatileand the decline here reflects lower valuation surpluses on investment propertiesheld directly and in joint ventures. However the adjusted profit as defined inthe Operating and Financial Review showed a 25.8% increase from £15.9m to£20.0m, with Quintain's fund management business making a significantlyincreased contribution. Borrowings net of cash have increased from £245m to £303m, while gearing remainsat 36%, the same level as last year. Dividend As a result of the year's strong performance, the Board is recommending anincrease in the final dividend of 1p to 8.25p giving a total dividend for theyear of 11.75p (2006: 10.50p), representing an increase of 11.9%. The finaldividend will be paid on 7 September 2007 to shareholders on the register as at27 July 2007. The Company's intention is to maintain a progressive dividend andthis policy will continue, subject to cash requirements. Corporate Governance Quintain takes its corporate governance responsibilities very seriously and iscompliant with the Combined Code except in relation to bonus arrangements, whereunder exceptional circumstances there is no upper limit in the aggregate forshare awards. The Board's explanation for this will be given in the CorporateGovernance Report in the Annual Report and Accounts. Quintain also goes beyondthe requirements of the Combined Code in a number of areas, most notably inputting the report of the Audit Committee to the vote at the Annual GeneralMeeting. In addition, both the Chairman of the Audit Committee and theRemuneration Committee are appointed annually by shareholders. People Impressive as the financial numbers are, they say nothing about one ofQuintain's distinctive competitive advantages, which is its human capital. Themanagement team has demonstrated a capacity for constant innovation, putting theCompany at the forefront in creating sustainable communities, exploringundervalued niche areas of the property market and making pioneering financialmoves such as our profitable venture into the property derivatives market. Thishabit of constant self-renewal and innovation has been facilitated by a flatmanagement structure, together with an intense internal competition for capitalbetween the different parts of the business; likewise by the encouragement,within a prudent control framework, of risk-taking where this will deliverappropriate returns for shareholders. Despite the increasing size of thebusiness, Quintain's entrepreneurial culture, strong work ethic and emphasis onrisk management is very much alive and well, as the past year's performanceindicates. I would like to thank all the staff for their impressive contributionand commitment to the Company during the year. I should also like to pay tribute to my predecessor Nigel Ellis, who steppeddown from the chairman's role on 31 March. Since he joined the Board in 1995,Nigel's leadership, wise counsel and long experience in property have been aninvaluable resource for a company experiencing very rapid growth and growingrisk exposure. Everyone at Quintain owes him a great debt. Nigel will remain asa non-executive director until the Company's annual general meeting on 4September 2007. In the course of the year Tom Cross Brown resigned from the Board. I would liketo offer warm thanks for his contribution to Quintain. Outlook Since the start of the year conditions in the commercial property market havebecome less buoyant. However, Quintain's diversified business model, with its balance of mixed-useurban regeneration, investment property and fund management, has innatedefensive merits in such circumstances, while retaining a continuing impetus toembrace a variety of opportunities for rapid growth. Our gearing remains low. Webelieve that the Group is well positioned to outperform in the years ahead, interms of our core measure of total return, regardless of market environment.That belief underpins our considerable enthusiasm as we look to the future. John Plender Chairman 13 June 2007 Operating and Financial Review The past year has been one of substantial progress for Quintain. We have movedfrom the planning to the delivery phase in two of our major regenerationprojects, at Wembley and at Greenwich. We have added a new fund, iQ, to our FundManagement division and we have continued to realise value from our InvestmentPortfolio. The progress of our three divisions is detailed later in this review. Our significant progress this year, however, marks only the start of a process.With the inherent potential of our asset base, an exceptional skill set and astrategy which is designed to produce superior returns, we anticipate furthersubstantial progress in the period ahead. Strategy and Objectives Quintain's strategy is to focus on the financial characteristics of propertiesto identify assets and special situations where we can use our skills to createvalue. We seek out opportunities and price anomalies in three areas: - large scale urban regeneration - specialist fund management - the UK secondary property investment market across all sectors. By following this strategy and managing the risk return matrix, we have producedconsistently high shareholder returns combined with low volatility. This isdemonstrated by our position in the Investment Property Databank (IPD) Indexover 10 years of first percentile performance and over three and five years ofthird and second percentile performance respectively. Our objective, as well asoutperforming the IPD Index, is to deliver a minimum total return of 10% real.We have achieved this every year since the Company's flotation in 1996 and on anannualised basis, total return as measured on a 10-year UK GAAP basis is of theorder of 22%. We believe our strategy, which is designed to maximise returnsover the medium to long term, should endure successfully in both bull and bearmarkets. Transforming Strategy into Action Our current structure - Special Projects, Fund Management and the InvestmentPortfolio - reflects the way in which we believe we can best realise and deliverour objectives. Unusually for a property company, we are not wedded to theconcept of the long term retention and development of assets. We simply believethat, at this point in time, our current structure and asset base will producethe best possible risk adjusted returns for our shareholders. Our combination ofspecialised fund management, urban regeneration and the procurement ofnon-rental revenue streams through estate management ('running towns and citiesas businesses') is conducive to higher returns and lower volatility. Special Projects In the case of our large scale urban regeneration projects, the Company'sintention is to be a long term owner of major estates, thus enabling us todirectly influence important policy issues, since the local community isconfident of our enduring commitment. By doing this we are also able to financeand procure long term income streams from sources such as telecommunications,power and branding. While we intend to retain the freehold or long leasehold ofthese sites, capital will be recycled through the sale of leasehold interests,as well as by bringing in joint venture partners. During the course of 2006 we moved from the planning stage to the delivery stagein both of our largest projects - the regeneration schemes at Wembley andGreenwich. This development phase inevitably means we will need to commit morecapital to these projects, both from our own and third party resources. Fund Management Fund Management operates in areas with high barriers to entry and plays severalroles in our business. It produces high rates of return. It also creates revenuestreams, which, along with those from the Investment Portfolio, supportunderlying earnings. It also reduces our risk profile through the utilisation ofthird party balance sheets. In Quintain Fund Management ("QFM"), we are rapidlybuilding critical mass, including the formation this year of the iQ studentaccommodation joint venture with The Wellcome Trust. In addition, QFM has animportant synergy with Special Projects. This is being exploited throughagreements such as that for student accommodation at Wembley. This synergy willenable us to forward-fund certain elements of our regeneration schemes and willallow us to recycle equity, whilst keeping a carried interest and increasing ourfunds under management. In order to fulfil our ambitions in fund management, weare prepared to consider portfolio acquisitions and corporate deals. Investment Portfolio Our Investment Portfolio is key to our strategy of making good returns throughstock picking. The Investment Portfolio comprises secondary property, which webelieve has upside potential. Tactically, over time the size of our investmentportfolio will expand or contract, depending on our assessment of prevailingmarket trends and available opportunities. During the last few years, we havebeen a net seller of commercial properties, reflecting our view of marketconditions and wish to take profits. Over time, additional revenue streams deriving from our fund management andurban regeneration businesses will make us less dependent on rental and otherincome streams from our investment property portfolio and reduce still furtherour exposure to a downturn in the investment property market. The Market and Prospects Quintain is well positioned to create shareholder value in most marketconditions. The long run bull market in commercial property, which was driven primarily byyield compression, is slowing. As anticipated last year, a changed outlook forinterest rates has been a major factor in a market correction, particularly inthe secondary investment market. Outstanding debt in the property market standsat a record high and the highly leveraged borrower is potentially vulnerable. Areverse yield gap has reappeared, with the 10 year gilt rate currently standingat 5.25%, compared with the All Property initial yield of 4.6%. In many sectorsand locations there is also little prospect of significant rental growth, inreal terms. With no foreseeable positive indicators, yields seem set to rise insome sectors and at best drift sideways in others. The outlook for total property returns over the next few years is therefore amajor issue for most market participants, with the majority of forecastsindicating single figure total returns in the short to medium term. Not all elements of the commercial market are negative, however, with a notableexception being the market for offices in the City and West End. Institutionaland overseas demand remains strong and banks appear better positioned to managebad debt risk. The London residential market also remains robust. Quintain's strategy will enable us to take advantage of these market conditions.In our view, our large scale urban regeneration schemes are conservativelyvalued, with delivery programmes that can be amended to suit market conditions.The housing shortfall and favourable demographics in London provide positiveindicators for our regeneration projects at Wembley and Greenwich. One of our core skills is that we are good opportunistic stock pickers and a "shake out" in the secondary market should enable us to compete even moreefficiently, mainly through the activities of our Investment Portfolio division. Our Fund Management division also has defensive qualities. Demography andsocial policy favour significant growth opportunities for our Quercus(healthcare) and iQ (student accommodation) funds. Both offer sustainable realrates of return through the linkage of rents to the Retail Price Index. The Chairman of the Board Nigel Ellis, who has served as a non-executive director of Quintain since 1995and as Chairman since 1996, stepped down from his role as Chair on 31 March thisyear. He will continue to serve as a non-executive director until our AGM inSeptember. Although our new Chairman, John Plender, has already paid tribute toNigel, I would like to add my own, personal, tribute to him. Nigel'scontribution to the development of Quintain has been immense. He has acted as along-term friend, confidant and mentor and a great deal of Quintain's successtoday is, I believe, due to his wise counsel. John Plender has been a non-executive director of Quintain since 2002 and hisextensive experience of investment and corporate governance issues has alreadyproved invaluable. I anticipate that his well-structured views and his wisdomwill stand us in good stead in the years ahead. Our People It is only through harnessing the skills and the vision of our employees that wecan achieve our objectives and realise our strategy. In terms of people numbers,we are still a relatively small organisation. Our progress is in great measuredue to this dedicated and talented band of people. We strive to attract andretain individuals of the highest calibre and have designed developmentprogrammes and employment packages to ensure their continued enthusiasm andpride in the organisation for which we all work. My thanks to them all. Operating Review: Special Projects Our Special Projects division focuses on capital growth, in particular derivingupside from planning gain and development. The largest component is the urbanregeneration programme, which is typified by the schemes at Wembley andGreenwich. Special Projects - Main Project Valuations Valuations as at 31 March 2007 £m Wembley Complex including Palace of Industry 524Greenwich Peninsula 195Emersons Green, Bristol 29Docklands Depot, Silvertown 18Other special projects 24Total direct property 790 Investment in joint venturesGreenwich, investment in MDL 31Other joint ventures 12 43 Our Development Programme is shown in the table below: Development Programme Project Sector Share Area GDV £m Planning Timing (1)Wembley Mixed use 100% 6.17m sq 2,300 Outline Now-2017Complex ftGreenwich Mixed use 50% 13.2m sq 5,000 Outline Now-2023Peninsula (2) ftBristol and Bath Science 50% 829,000 203 Outline 2008-2018Science Park (2) Park sq ftCity Park Gate Mixed use 50% 1.0m sq ft 200 Resolution 2008-2018Birmingham (2) to grantMiddlehaven, Mixed use 50% 1.0m sq ft 187 Outline 2007-Phase 1 (2) 2014Arrow Valley Distribution 100% 140,000 13 Detailed 2007-Redditch sq ft consent 2008Emersons Mixed use 65 2,650 units - Submitted 2008Green acres of 275 Residential + 40 onwardsBristol acre site acres employment 50,000 sq ft retailNew England Residential 25% 122,00 33 Detailed 2007-Quarter sq ft consent 2009BrightonDorset House, Student 100% 82,000 sq Being 2008-Oxford accommodation ft prepared 2010Palace of Industry Mixed use 100% 13 acres - Zoned for 2010Wembley mixed use onwardsDocklands Depot Mixed use 66.7% 12.6 acres - 2012Silvertown onwardsGallion's Park Residential 25% 3 acres - 2008- 2010 (1) GDV is gross development value. This is only shown where planning has been received. (2) These properties are subject to a development agreement. Performance This has been a year of substantial progress for Special Projects. Highlightshave included the start of construction for, and sale 'off-plan' of, allprivately-owned apartments in our first residential development at Wembley andthe opening of the refurbished Arena and Arena Square (now known as "The Squareof Fame"). We have announced the acquisition of the Stadium Retail Park, havereceived planning consent for the blocks known as W03 and W04 and anticipatesigning heads of terms for a retail joint venture within the next few weeks. At Greenwich Peninsula, we achieved the sale of the first land plot toresidential developers Bellway Homes and have recently announced the receipt ofreserved matters planning consent for this site. In May 2007 we announced therestructuring of our agreement with Lend Lease, as a result of which Quintainnow has a 50% share of the new joint venture. A chief executive with a stronghouse building background has also been appointed for the 3,000 residential unitPeninsula Quays development. BioRegional Quintain has also had a year of notable progress, with the signingof a development agreement for a 40 acre site at Middlehaven in November 2006,followed by the submission in May this year of detailed plans for the first twobuildings. In February 2007, BioRegional Quintain was named as the developer ofa zero carbon exemplar scheme in London, in partnership with Crest Nicholsonwhile, also in partnership with Crest Nicholson, planning permission was grantedin early 2007 for a sustainable community in Brighton. Wembley Construction began in the early part of the year on our first residentialdevelopment, W01. W01 is a mixed use development with residential accommodationlocated on the first floor and above.. All of the 145 private apartments weresold 'off-plan'. In addition to the private apartments, W01 will include 86shared ownership and 55 socially rented apartments. A joint venture was signedwith the Genesis and Family Housing Associations during 2006 in relation to thisblock. Following our successful receipt of reserved matters consent for the blocksknown as W03 and W04, we made an application to Brent Council for an 'enhanced'scheme in March 2007 which included a further 67 apartments for W03, bringingthe total to 403. Significantly, in terms of realisable values, the existingplanning permission has established the principle that the units in W03 are tobe entirely privately-owned. Early indications are highly positive for our second development, W04 or 'TheQuadrant', marketing for which began in May 2007. All those apartments whichhave been released for sale were sold 'off-plan'. These latest sales achieved anaverage price per square foot of £527 and a top price per square foot of £630,in a block where 70% of the apartments are affordable. We intend to be on sitefor W04 in late 2007. A reserved matters application has been made for a 402 room 4-star Hilton Hoteland adjoining 656 unit student accommodation block. The student accommodationelement of the scheme will be forward-funded by our iQ fund, illustrating thesynergistic benefits of our business model. During the course of 2006, demolition work began to clear the western side ofthe Wembley site, including the demolition of the 157,000 sq ft Elvin Houseoffice block and the Conference Centre and Exhibition Halls. It is anticipatedthat this demolition work will be complete by autumn 2007. Masterplanning has begun for the Palace of Arts and Industry site and it isanticipated that a planning application will be made for 2.2m sq ft of mixed usespace in early 2008. We further consolidated our landholding at Wembley with the acquisition of the2.7 acre Stadium Retail Park for £21.7m. This is a strategic site which adjoinsour existing site and fronts Olympic Way. The acquisition brings with it 37,000sq ft of open A1 planning consent and will allow us to optimise the development,advertising and branding value of the access to Wembley Stadium from WembleyPark Station. Wembley Arena, which opened to the public in April 2006 following a £36mrefurbishment, is operated by Live Nation under a 15 year agreement. The Arenais performing well and has recently won two major entertainment industry awards,the Pollstar Award for Best Venue and the ILMC 'First Venue to Come In to YourHead' Award. With over 170 performances and attendance numbers of approximately1.4m, the Arena has had an excellent first year of operation following therefurbishment. The Wembley Plaza Hotel, which was acquired in August 2006 for£11.0m, has been trading ahead of expectations. An ongoing refurbishmentprogramme and the charging of premium rates for Arena nights have resulted in anincrease in chargeable room rates. The Square of Fame is building critical mass as a tourist site, with 10 plaquesshowing the hands of iconic entertainers already in place and more planned. Wehave also recently implemented a public arts policy. Through an agreement withthe Cass Foundation, we will feature the works of major British sculptors in theSquare on a rotating basis. Sustainability is a key element of our delivery strategy at Wembley and duringthe course of the year it was, for example, agreed that we should install theEnvac waste disposal system at the site. This system cuts down on road transportof waste, improves hygiene and reduces odours. Opportunities to capitalise on income streams from running the Wembley site as abusiness are progressing. Media advertising for the day of the Cup Final alonerealised over £75,000 and it is anticipated that the development of the site andthe installation of media cubes will substantially increase opportunities forsponsorship and advertising as well as community messaging. We anticipate thesigning of an agreement with a retail partner and the signing of heads of termswith a telecommunications partner. Negotiations are also well advanced for anagreement with commercial partners on infrastructure and media content. Wembley Gross Development Value ("GDV") and construction detail by plot Building GDV Construction Cost Construction Construction £m £m Start EndE01 169 97 Sep 09 Sep 12W01 67 52 Aug 06 Sep 08W03 176 97 Mar 08 Mar 11W04 79 60 Nov 07 Mar 10W05 203 152 Feb 08 Sep 10W06 84 49 Oct 08 Sep 10W07 118 72 Jul 08 Sep10W08 118 74 Feb 09 Sep 11Other Retail & Parking 136 79 May 08 Aug 10 Notes: GDV's and Costs are as at 31 March 2007 and ignore cost and valueinflation Construction costs include professional fees but exclude finance costs Greenwich Peninsula In partnership with Lend Lease and working in agreement with EnglishPartnerships, we are regenerating a 194 acre site at Greenwich Peninsula. It wasannounced in September 2006 that Bellway Homes, one of the UK's top fivehousebuilders, has been selected as the first residential developer to buildapartments at Greenwich Peninsula. Bellway will deliver a high quality urbanblock of 229 riverside apartments on the southern part of the site. A reservedmatters application has been consented and it is anticipated that work willstart on the development in late 2007, with the apartments ready for occupationin 2009. In keeping with our strong sustainability agenda at Greenwich, all of the homeswill have, at the very least, an EcoHomes 'Excellent' rating. Opportunities forrenewable energy initiatives are also being investigated. Peninsula Square, which provides access to the O2 entertainment venue and whichwill form a focal point for the new business district at Greenwich, has beencompleted and will open to the public in summer 2007. In May 2007, a revised structure was announced for the joint development atGreenwich Peninsula with Lend Lease. A new 50:50 joint venture holding company,Greenwich Peninsula Regeneration Limited (GPRL), has been established whichdirectly owns Peninsula Quays Limited, the vehicle that will carry out theproposed development of 3,000 homes on a 22 acre site in the north west of thePeninsula. We believe this site, which overlooks Canary Wharf, will achievepremium residential prices per square foot and so offers the greatest upside fordevelopment. A chief executive has been appointed for Peninsula Quays and thefirst plot at Peninsula Quays is currently being designed. We anticipate asubmission for reserved matters consent will be made in respect of the firstblock in September with a target of being on site by early 2008. The revised structure for the joint development is part of an acceleration ofour delivery of the emerging new community at Greenwich Peninsula and will allowQuintain and Lend Lease to carry out joint management of the ongoingdevelopment. Also in May 2007, it was announced that Ravensbourne College for Design andCommunications will relocate to Greenwich Peninsula. A planning application hasbeen submitted and it is anticipated that the relocation will be complete by2010. At the southern end of the site we are currently in negotiations with a group ofhousing associations to form a joint venture to develop a block with a highaffordable housing content. It is anticipated that submission of the planningapplication for this block will take place in September. Under the First Time Buyers Initiative, we have received an allocation fromEnglish Partnerships. Subject to final legal agreement, design work will beginshortly on this plot. Greenwich GDV and construction detail by plot Plot Land Owner GDV Construction Construction ConstructionReference £m Cost Start End £mM0116 EP 29 21 Jul 08 Dec 09M0114 EP 58 34 Jul 08 Dec 09N0602 QED 180 107 Jul 08 Mar 11N0203 EP 113 73 Jan 08 Jun 10N0206 EP 98 61 Oct 08 Jun 10N0607 QED 122 87 Jun 09 Jun 12N0204 EP 146 96 Jan 08 Mar 09N0205 EP 68 49 Apr 09 Mar 11N0603 QED & EP 162 101 Oct 10 Sep 13N0502 EP 40 19 Feb 11 Mar 13 Notes: GDVs and costs are as at 31 March 2007 and ignore cost and valueinflation Construction costs include professional fees but exclude finance costs EP = English Partnerships QED = Quintain Estates and Development PLC City Park Gate, Birmingham Development of this 5.1 acre site, which is immediately to the east of MoorStreet Station, is currently being undertaken in partnership with CountrysideProperties plc. Following submission of a reserved matters application in late2006, resolution to grant was received from Birmingham City Council in May 2007and it has now been confirmed that this application will not be 'called in'.Designs are now being advanced for a mixed use scheme which will include 825residential units (575,000 sq ft), 230,000 sq ft of office space and 70,000 sqft of retail space. This revised plan will, we believe, improve density, massand costings and will enhance returns. BioRegional Quintain Our 50:50 joint venture with BioRegional Properties Limited continues to makegood progress. A development agreement was signed in November 2006 for a 40acre, £200 million development at Middlehaven, Middlesbrough. It is anticipatedthat on completion this will be the largest zero carbon development in the UK.Treasury grant funding is in place for this scheme and detailed plans weresubmitted in May 2007 for the first two buildings on the site, which comprise150 residential units and 14,000 sq ft of commercial space. Heads of Terms havealso been signed with Hilton Hotels for a 150 bed Garden Inn hotel and theopening, in 2008, of Middlesbrough College will bring animation to this site atan early stage of its development. In partnership with Crest Nicholson, BioRegional Quintain was named as thedeveloper of 'One Gallions' in February 2007. One Gallions is an exemplar zerocarbon residential scheme at Gallion's Park, Beckton, London. Working alongsidehousing association partner Southern Housing Group, the scheme will deliver awide range of affordable homes. One Gallions was awarded the accolade ofResidential Project of the Year at the British Housing Awards for 2007. In early 2007 planning permission was granted to joint developers CrestNicholson and BioRegional Quintain for a sustainable community in Brighton.Designed to be the most environmentally advanced development in the UK,construction of the 172 apartments and 24,000 sq ft of commercial space isexpected to begin in August 2007, with the first properties going on sale inlate 2007. BioRegional Quintain Gross Development Value and Construction Detail by Site GDV Construction Costs Construction Construction Start EndBrighton £33.8m £21.7m Aug 07 Aug 09 Middlehaven £21.8m £17.8m Nov 07 May 09Phase 1 Gallion's Park £52.5m £34.4m May 08 May 10 Note: Brighton and Gallion's Park are 50:50 joint ventures betweenBioRegional Quintain and Crest Nicholson Quintain City Partnerships Limited In February 2007, Quintain announced the formation of a 50:50 joint venture withLace Market Properties Limited, a Nottingham based developer. Known as QuintainCity Partnerships Limited, the joint venture has been created to undertakemainly residential property development schemes, in areas where Lace Market haslocal expertise or knowledge. Emersons Green, Bristol Key principles of cost sharing between adjoining landholders have been broadlyagreed, and a revised masterplan was submitted in July 2006 for a mixed usedevelopment of 2,650 dwellings, employment, retail and supporting facilities. Itis expected that this will be considered by the local authority in late 2007.Quintain owns 65 acres of the 275 acre site. Silvertown Following expiry of the Carlsberg Tetley lease on this 12 acre site, which isowned in joint venture with the London Development Agency, proposals are nowbeing drawn up for this site. In order to maximise income whilst these plans arebeing progressed, we have made a medium term letting of 98,000 sq ft. Synergy with Fund Management Special Projects has an important synergy with our fund management businesswhich is being exploited, for example, in relation to the student accommodationat our Wembley site. This will enable us to forward-fund these elements of ourregeneration schemes and allow us to recycle equity, whilst keeping a carriedinterest and increasing our funds under management. In addition, Special Projects' local knowledge and contacts have afforded usefulsynergies with the selection, for example, of Quantum (our 50:50 specialistscience park partnership with Morley Fund Management) by the South West ofEngland Regional Development Agency as the preferred development and fundingpartner to create a new science and technology park at Emersons Green. Thescience park site adjoins Quintain's own landholding at Emersons Green. Operating Review: Quintain Fund Management Quintain Fund Management: Funds under Management 2004 2005 2006 2007 £m £m £m £mPosition as at 245 296 470 71131 March Quintain Fund Management plays several roles within the business. It createsrevenue streams, which, alongside rental income from our investment portfolio,provide some of the income necessary to run the business. In its own right itdelivers high rates of return and also provides us with the opportunity toretain a long term strategic interest in some of the assets we develop inSpecial Projects by selling them down into our funds. We are unlikely to achieveour ambitions in fund management through organic growth alone and we thereforereview opportunities for portfolio acquisitions and corporate deals on anongoing basis. Performance This has been a year of substantial growth for Fund Management. Funds undermanagement have grown from £470m to £711m and our pipeline is strong, with, forexample, £137m of student accommodation contracted for delivery over the comingthree years and heads of terms agreed for a further £227m. Rental income andfees generated through our fund management activities grew 41% to £17.6m (2006:£12.5m) and we recognised a total revaluation uplift of £27.9m. In December 2006we signed the first development agreement for Quantum, our science park fund,and in March 2007, we announced the introduction of The Wellcome Trust as apartner in iQ, our student accommodation fund. Quercus Quercus, our healthcare fund, which is partnered with Morley Fund Management,grew funds under management by 37% to £648.1m (2006: £470.3m) and delivered afund level return for the 12 months of 26.2% (2006: 49.7%). During the course of the year Quercus continued to expand its asset base, withacquisitions totalling £100.3m at an average net initial yield of 7.25%. Majoracquisitions included the purchase in October 2006 of seven care homes for theelderly in the north east of England for a purchase price of £47.3m. In earlyMarch 2007, five elderly care homes in the West Midlands and Doncaster areaswere acquired for £15.6m. Following the year end, five elderly care homes andtwo units specialising in the care of clients with learning disabilities andchallenging behaviour have been acquired in the West Midlands and Kent for£20.0m along with four elderly care homes in the Stockport area for £11.5m. The healthcare market remains robust for operators and, with rising interestrates, the merits of sale and leaseback are more evident. Accordingly, we expectto be able to continue to build the fund in line with our business plan over thecoming year. Investment yields in healthcare remain firm and we expect thiscombination of firm yields and RPI linked income to continue to deliverinvestment outperformance over the coming year. At the year end the fund comprised a total of 221 properties let to 36 tenantsoperating nursing and residential care homes for the elderly, learningdisability and specialist care facilities and private hospitals. At the year end, Quintain held a 28% interest in the fund. Asset management feesreceived during the year were £3.0m net, including performance fees. iQ In March 2007 we announced we had entered into a 50:50 joint venture with TheWellcome Trust to establish the iQ Property Partnership Fund. iQ has beencreated to acquire, fund and develop student accommodation which will beretained and managed on a long term basis. Quintain and Wellcome have eachcommitted up to £100.0m of equity to the joint venture, which includes assetsalready contributed by Quintain. iQ's minimum duration is five years and it hasan initial target size of £600.0m. The first two iQ schemes, in Sheffield and Nottingham, are complete, with bothproperties delivered on time and well received by their occupants and theuniversities. Further schemes, in Birmingham, Salford, Kingston, Bristol,Preston, Edinburgh and Sheffield are under construction. Birmingham and Salfordare expected to be completed in late summer 2007 and the others are expected tobe completed in the late summers of 2008 and 2009. These, together with thecompleted schemes, will have a combined value of more than £200m. Terms havebeen agreed for a further £227m of schemes for delivery over the next threeyears. In particular, heads of terms have been agreed between Quintain and iQfor the sale and forward funding of 656 rooms of student accommodation atWembley for £56.1m. The transaction is subject to final planning consent withthe scheme expected to open in September 2010. All of iQ's current schemes involve the forward funding of development partners,but in future iQ will also consider the acquisition of sites for its own directdevelopment. The student accommodation market continues to offer opportunity for investment.Applications to UK universities for 2007 have risen 5.0% despite higher tuitionfees and another 50,000 student places are being made available via increasedfunding. Deal flow is strong and the market is competitive, but we believe ourcombination of specialist operational and investment skills gives us a marketadvantage. A strong pipeline of further opportunities has been identified. Quantum Quantum, a 50:50 joint venture with Morley Fund Management, is a specialistscience park fund. In December 2006, Quantum signed a development agreement withthe South West of England Regional Development Agency to create a new scienceand technology park, SPark, at Emerson's Green, Bristol. Quantum will fund andprocure primary infrastructure and associated servicing for the first 55 acrephase of SPark. This will include building a 35,000 sq ft innovation centrewhich will act as the hub building on the park and an initial 'grow on' centrewhich will provide additional space for companies as they expand. Furtherdevelopment will be market led over the ten year duration of the agreement, withQuantum retaining and managing a critical mass of accommodation on the park on along term basis. When fully built out, the first phase is estimated to have agross development value of approximately £200m. Quantum's initial investment isestimated to be £26m. Subject to the clearance of reserved matters, it isanticipated that work will begin on site in early 2008. We are activelypursuing several other opportunities in the science park sector. Operating Review: Investment Portfolio Our Investment Portfolio predominantly comprises secondary commercial assets,situated throughout the UK, which require active management. The portfolio iscurrently split as follows: 69% offices, 17% industrial, 10% retail and 4%other. The income flow generated by the Investment Portfolio is used to supportthe Company's other activities. Performance During the year we continued to be a net seller of property, with marketconditions making it difficult to find value. In line with our strategy ofexiting areas where we do not see significant further asset value upside orpotential market contraction, we have sold a number of properties. Significantsales included the Whitehall Industrial Estate, Colchester and Chateau Rouge,Lille. The total value of sales within this portfolio during the year was£38.3m at a net initial yield of 5.4%. Conditional sales made since 1 April 2007total £6.5m and reduce the net initial yield to 4.9% on all disposals to date. Acquisitions within this division during the year totalled £24.1m at an overallnet initial yield of 8.3%. Principal acquisitions included Hudson House, Yorkfor £12.0m.. Voids across the Investment Portfolio totalled £4.8m, withsignificant additional post year end lettings or sales reducing the voids to£4m. Over £2m of leasing or void sales have been completed throughout the year.Planned refurbishments completed include the Royal Exchange, Manchester and StPeter's House and Belgrave House, Sheffield. Peter Doyle was appointed to head Quintain's Investment Portfolio in September2006. Other Activities Our commitment to sustainable development includes supporting the development ofproducts that are more environmentally friendly than traditional alternatives.Serrastone is a company, based in France, which owns the exploitation licencefor a technology to produce low carbon, non-toxic blocks with the potential torecycle rubble from demolished buildings and quarry waste. An investment of£2.9m relating to Serrastone SA is included in our balance sheet. The £15.0m property derivative contract, which was a swap between the IPD AllProperty Index and LIBOR plus a margin, expired on 31 December 2006. The profitfor the year was £1.2m and the profit for the 16 month period of the contractwas £2.8m. Whilst we have taken out no further positions, as liquidity increases we see the derivatives market for both commercial and residential property asoffering opportunities to hedge exposure or, in the case of options, underwritepositions. Outlook During the year we have made substantial progress in turning some of ourpotential into solid realisable value, for example through the progress madewith our residential developments at Wembley and the formation, with ourpartners Wellcome, of the iQ fund. Some of this activity is reflected in theincreased independent valuations. Despite increases in interest rates, we areconfident the upward trend in our activity levels will accelerate throughout thecurrent financial year, creating further substantial shareholder value. Adrian Wyatt Chief Executive 13 June 2007 Financial Review Headline Results The basic net asset value per share at 31 March 2007 was 660p, an uplift of25.5% from 526p in the prior year. On a diluted basis, the net asset value pershare rose 26.9% from 516p to 655p. Adjusted diluted net asset value per share,the measure recommended by The European Public Real Estate Association (EPRA),rose by 28.1% to 784p per share (2006: 612p). 31 March 2007 31 March 2006 % increaseNAV per 660p 526p 25.5%share basicNAV per 655p 516p 26.9%share dilutedNAV per 784p 612p 28.1%shareEPRA(1)Dividend 11.75p 10.5p 11.9%per shareTotal return 27.5% 21.0%per share(2)Total return 29.9% 25.2%per shareEPRA(3) (1)The EPRA NAV per share excludes the fair value adjustments for debt andrelated derivatives and deferred taxation on revaluations and is calculated on afully diluted basis as set out in the table below. (2)The total return is calculated by the increase in net assets per theconsolidated balance sheet adding back the dividend paid. (3)This uses the net assets per EPRA as shown in the table below. The table below reconciles net assets as shown in the consolidated accounts tothe definition of net assets set out by EPRA. 31 March 31 March 2007 2006 £m £mBalance sheet net assets 846.1 676.7Deferred tax arising on revaluation movements,capital allowances and derivativesGroup 151.0 108.0Joint ventures 14.1 5.7Associates 0.4 0.6Fair value adjustment on interest rate swapsGroup 4.4 12.9Joint ventures (0.6) 0.2 1,015.4 804.1Dilutive effect of options 9.6 9.8Dilutive effect of convertible - 2.9EPRA net assets 1,025.0 816.8 Operating Performance Adjusted profit for the year was £20.0m (2006: £15.9m). The table below showsthe reconciliation from IFRS profit before tax to adjusted profit. 31 March 31 March 2007 2006 £m £mIFRS profit before tax 51.6 65.0Revaluation movements Gain on revaluation of investment properties (12.2) (23.9) Deficit on revaluation of investment properties 0.9 1.8 Deficit on revaluation of development properties 0.2 1.8 Reversal of deficit on revaluation of development properties (1.2) (3.6) Gain on revaluation of properties held in joint ventures (27.9) (29.4) Deficit (gain) on revaluation of properties held in associates 0.6 (0.4) Tax charge on profits in joint ventures 9.7 1.6Tax (credit) charge on (loss) profit in associates (0.2) - Change in fair value of derivative financial instruments (1.5) 3.0Adjusted profit 20.0 15.9 As explained within the Chief Executive's Review our investment portfolio isstrategic.. However under current market conditions, tactically we have been netsellers. This net selling has reduced rental income by £4.2m. Voids have furtherreduced it by £1.8m. An additional contribution of £5.6m has arisen from theArena being included in rental income following the 15 year agreement with LiveNation. Overall rental income from directly owned properties fell by 0.7% to£29.7m. Rental income arising from our equity ownership within funds that wemanage has increased by 36.5% to £10.7m, reflecting our strategic ambition ofgrowing funds under management. 31 March 2007 31 March 2006 £m £m Directly Within Total Directly Within Total owned joint owned joint properties ventures properties venturesGross 29.7 10.7 40.4 29.9 7.8 37.7rentalincomeContracted 21.0 13.4 34.4 23.7 9.7 33.4annualisedrentERV* 27.4 13.7 41.1 35.4 10.1 45.5 *ERV is the estimated rental value During the year the level of voids has fallen by £1.6m to £6.4m. As aproportion of ERV, voids have remained at 23.4%. Of these only a small amountremains intentional (£0.6m) and mainly relate to sites at the GreenwichPeninsula which are being vacated for redevelopment. Those properties whereshort term lettings are being sought pre-development or where furtherrefurbishment is being considered have been included within unintended voids andmake up approximately 45% of the total. A table of voids is set out below: £mRoyal Exchange, Manchester 1.0The Synergy Building, Sheffield 1.0Docklands Depot, Silvertown, EC3 0.9Greenwich Peninsula, SE10 0.6The Forum, Exeter 0.5First National House, Harrow 0.5Smallbrook, Queensway, Birmingham 0.4Kansas Building, Liverpool 0.3Other 1.2Total 6.4 The average unexpired lease term across the portfolio was 16 years (2006: 14years). The increase is due to the larger weighting of nursing home properties,in turn reflecting our increased equity in the Quercus fund. These propertiesare typically on 35 year leases. The table below sets out the lease expiries by contracted annualised rentincluding our share of joint ventures across the Group: £mLess than 1 year 5.51 to 2 years 3.72 to 5 years 4.65 to 15 years 3.2Greater than 15 years 17.4Total 34.4 Quintain aims to create a diverse tenant base in order to manage risk. Ourtenant covenant strength has been measured by IPD using Experian and shows 65.6%of our rent roll is delivered from negligible, low and low/medium riskcovenants. Live Nation is by far the largest tenant, comprising 10.9% ofcontracted annualised rent. The risk of this exposure is reduced by the factthat receipts equating to approximately two thirds of the rent are received inQuintain controlled bank accounts before being passed on and also by the strongunderlying business. The next largest tenant is an exposure of 3.0% and the top10 tenants represent 29.7% of contracted annualised rent. This year saw operating income from hotels for the first time with theacquisition of the Plaza Hotel at Wembley in August 2006. Turnover for the sevenmonths was £3.4m with a gross profit of £1.4m. This acquisition is strategic toour land holding at Wembley as we intend to replace the hotel in time with a 402bed 4 star Hilton hotel, for which we have a development agreement, and use theexisting land for residential development. Net fees from fund management increased by 58% to £3.0m (2006: £1.8m). Thesearose mainly from Quercus and reflect increasing funds under management andperformance fees of £0.6m (2006: £0.5m). We adopt a prudent policy in relationto performance fees and do not recognise them until we have a high degree ofcertainty that they cannot be clawed back. Net revenue from other income rose by 32.2% to £3.7m. This includes income fromthe property derivative contract which has now expired of £1.2m (2006: £1.6m),surrender premiums of £1.5m (2006: £1.2m) and management fees and commissions of£0.8m (2006: £0.6m). Within surrender premiums we received a premium of £1.7m inrelation to Smallbrook, Queensway of which £0.5m was provided for againstrefurbishment costs. Administrative expenses in relation to continuing operations were £25.8m (2006:£22.7m). For discontinued operations they were £0.6m (2006: £3.2m) being costsin relation to the Conference Centre and Exhibition Halls at Wembley which havenow been demolished. With the closure of these businesses, staff costs fell by£0.8m to £18.4m, more than offsetting the overhead associated with running thePlaza Hotel. In the running of the Plaza, 111 staff are currently employed, ofwhom 97 work in an operational capacity and so their costs are charged to costof sales within gross profit. Further information is given in note 4 to theaccounts. Administrative expenses include £0.3m of audit fees paid to KPMG and£0.08m for other services, the latter reflecting our policy of following bestpractice in corporate governance which recommends that non-audit fees should notbe in excess of audit fees. Sale of Non-Current Assets The profit over valuation on the disposal of properties not held as currentassets was £18.6m (2006: £14.2m), with a profit on historic cost of £48.8m. Sales proceeds Profit over valuation £m £mRamada Hotel, Manchester 25.0 2.336-41 Gracechurch Street, EC3 24.8 3.4Chateau Rouge, Lille 13.4 0.8Tricare Nursing Homes 9.6 1.7Acute Psychiatric Unit, Dartford 9.5 0.2Pond Street, Sheffield 9.0 0.5Other 25.3 3.0Sale of subsidiaries: iQ Trust - 50% of units 14.5 3.8 W01 - 50% land sale 7.6 2.9Total 138.7 18.6 Revaluation Surpluses and Deficits The net revaluation surplus arising from directly held investment properties was£11.3m (2006: £22.1m). This reducing figure reflects our position as net sellersin this area of the market as well as market conditions where yield compressionslowed and in some cases plateaued towards the end of the period. Therevaluation surplus on joint venture investments is incorporated within theshare of profit from joint ventures. Development property surpluses are creditedto equity except where deficits arise below cost in which case the charge andany write back are included within the Income Statement. In the current year thenet surplus reflected in the Income Statement was £1.1m (2006: £1.8m). Surplusesof £179.3m on development properties were reflected in equity. Finance Expenses Net finance expenses have fallen by 34.0% to £6.9m. Excluding the change in fairvalue of interest rate swaps,which under IAS39 are classified as ineffective,finance expenses have increased by 12.3% to £8.4m reflecting the higher level ofdrawn debt. Of the interest capitalised in the year £5.8m relates to the Wembleydevelopment, £1.8m to Greenwich and £0.8m to student accommodation sites wheredevelopment contracts were entered into. 31 March 2007 31 March 2006 £m £mInterest payable 21.4 16.9Interest capitalised (9.2) (7.8)Interest receivable (3.8) (1.6)Change in fair value of ineffective (1.5) 3.0interest rate swapsTotal net interest payable 6.9 10.5 Profit from Joint Ventures The profit from joint ventures in the year was £23.0m (2006: £32.9m). Thisexcludes net fees receivable of £3.0m for management, transactions andperformance which are shown within gross profit. The table below analyses thecomponents of profit. The increased rental income reflects a larger Quercusportfolio. Next year's numbers will reflect a full year contribution from the iQfund. The tax charge was £9.7m (2006: £1.6m). The prior year was significantlybelow the standard rate due to a one off tax credit. £19.6m of the profit before tax came from our 28% ownership of Quercus. £4.3marose from our 50% share of the iQ fund. The majority of other joint venturesrelate to development opportunities that are in their early stages and so theIncome Statement mainly includes administration expenses. A detailed breakdownof profit by joint venture is set out in note 12i to the accounts. 31 March 2007 31 March 2006 £m £mRent receivable 10.7 7.8Trading profit - 1.3Administration expenses (2.3) (1.5)Revaluation surplus 27.9 29.4Net finance costs (3.6) (2.5)Profit before tax 32.7 34.5Taxation (9.7) (1.6)Profit after tax 23.0 32.9 Taxation and Tax Status Since the introduction of REITS in the UK from 1 January 2007, Quintain has notand does not intend to convert wholesale into a REIT as it is not consistentwith our strategy. For value creation we require the flexibility to develop outelements of our large scale urban regeneration schemes and also to reinvestincome from investment properties into funding other elements of the business.In not converting to a REIT we believe that the returns we make on a post taxbasis, without the confines of the existing rules, will be higher. The effective corporation tax rate for the year in relation to income was 20.0%(2006: 16.0%). The tax rate was below the standard rate of 30% because of theavailability of capital allowances, indexation relief and brought forward taxlosses. Over time we expect to move closer to the standard rate of tax as lossesare used up and because of changes in legislation relating to capitalallowances. Balance Sheet At 31 March 2007, the investment portfolio was valued at £288.9m including a netrevaluation surplus of £11.3m. The development portfolio surplus was £180.4mgiving a valuation of £769.3m. A table analysing activity is included within theoperating review. Wembley Of the development surplus, £106.0m related to Wembley, giving a year end valueof £524.0m, and was driven by the change in base price of residentialaccommodation, substantiated by the recent sales of W01 and W04 and byreflecting market expectations of sales price growth. Whilst the valuation is aview of what the market may pay at any point in time, it is backed up by adiscounted cashflow model. This model is based on many assumptions and the tablebelow is included to afford the reader a better understanding of the dynamicsrelating to some of these assumptions. The range set out does not necessarilyindicate the Company's view of what assumptions should be used. Valuation £m Discount Rate 10% 9% 8% 7%Increase in growth rate 0% 524 565 610 659 1% 567 611 659 713 3% 662 713 769 831 5% 771 831 897 970 Real growth rates currently shown in the model are 1.5% for the first two years,followed by a one off 9% uplift as the regeneration effect takes place and thena negative 1% for the remainder of the scheme, reflecting construction costinflation being ahead of sales price inflation. Savills, who have produced theyear end valuation, have used a discount rate of 10%. The Company believes thereis the opportunity for considerable upside to this valuation, given our view ofmarket conditions. Our internal model reflects average starting prices for residential units at£480 to £590 per square foot. Initial evidence on the lower quality blocks showsthat we are already ahead of these figures. If the starting price was £100 persquare foot higher the matrix set out above would then look as follows: Valuation £m Discount Rate 10% 9% 8% 7%Increase in growth rate 0% 633 679 728 785 1% 681 730 784 844 3% 784 841 904 973 5% 903 969 1,042 1,123 Greenwich Our holdings at Greenwich contributed £69.8m to the revaluation surplus giving ayear end value of £225m. Progress on the site has given greater visibility tothe variables, particularly in relation to residential prices and growth, whichhave led to an increase in the valuation. Real rates of growth currently shownin the model are 1.5% to 2012, followed by a one off 9% uplift in 2013 as theregeneration effect takes place and then a negative 1% for the remainder of thescheme. Savills have used a discount rate of 12%. As for Wembley varying thediscount rate and growth rate gives the following sensitivities. Valuation £m Discount Rate 12% 11% 10% 9%Increase in growth rate 0% 225 245 267 291 1% 268 292 317 345 3% 364 395 430 467 5% 475 516 561 610 Our internal model has an average starting residential price of £515 per squarefoot with a range of £400 to £628 per square foot. If the starting price was£100 per square foot higher the matrix set out above would then look as follows: Valuation £m Discount Rate 12% 11% 10% 9%Increase in growth rate 0% 334 361 391 423 1% 83 415 449 486 3% 494 535 579 627 5% 627 678 734 797 The table below sets out capital commitments including our share of anycommitments within joint ventures. The £51.5m commitment to the iQ fund is ourshare of forward funding agreements in relation to development pipelines. 31 March 2007 £mWembley - directly owned 12.2Wembley - W01 19.8Claybrook Drive, Redditch 2.1iQ student accommodation fund 51.5Quercus 6.8Quantum science park fund 1.9Meridian Delta Limited 1.1Other 1.7 97.1 During the year, The Quintain Group Employee Benefit Trust purchased 500,000shares at an average price of £5.90 per share to cover allocations under theExecutive Directors' Performance Share Plan. Quintain also bought 500,000 ofshares held in treasury for an average price of £6.07 of which 232,360 werereleased to satisfy commitments under the Deferred Bonus Plan. Joint Ventures At 31 March 2007, Quintain had net investment in joint ventures totalling£170.1m. A breakdown of this is included in the table below and more detail isavailable in note 12i to the accounts. Joint venture Share of equity Net investment £mQuercus 28% 112.6Meridian Delta 49% 31.1iQ 50% 14.7Quintessential Homes 50% 5.6Quintain Birmingham 50% 1.9Bioregional Quintain 50% 1.5Other joint ventures N/A 2.7 170.1 Financing Strategy and Capital Structure Our financial strategy in the medium term is to manage a level of debt thatbalances the risks to the business with the higher returns on equity achievedthrough gearing. The gearing levels will vary depending on the profile ofoperational risks and the capital that is currently committed or expected to becommitted in the future. Despite increasing our net debt by 23.4% to £302.8m,excluding unamortised finance costs, this was offset by increases in net assetvalue, resulting in our gearing being unchanged at 36%. This is below our longrun expected level due to significant anticipated expenditure. The financing structure we adopt needs to be flexible and cost effective. Wehave achieved this through funding at the corporate level, which allows us thescope to efficiently fund areas of the portfolio which otherwise may be morechallenging, such as infrastructure works at Wembley and Greenwich. It alsoprovides us with liquidity and operational flexibility, enabling us to movequickly when bidding for deals. In May 2007, we agreed a one year extension to our £475m corporate loan toreinstate its five year maturity. During the year we also made some amendmentsto the terms in order to reflect the requirements of the business over theperiod of the loan. We removed the covenant that required the loan to be 100%covered by investment properties and reduced the gearing level to 110% of netassets excluding equity in separately financed joint ventures. This wasimportant as we enter the delivery phase of our major urban regenerationprojects at a time when tactically our holding in investment properties isdecreasing. We now have complete flexibility as to how we invest the debt but,given the higher risk profile associated with development, we reduced ourgearing limit as described above. Another major covenant is an interest cover requirement of 1.25 times earningsbefore interest and tax, plus surplus or deficits over cost on the disposal ofproperties. This again reflects the reality of our business which will includerecycling capital, and whilst this element of profit is accounted for throughreserves, it represents crystallisation of a cash surplus and so should berecognised. In addition to this there is an upper limit of net worth that can beinvested in separately financed joint ventures of 50%. As well as the £475m facility we have a £20m bilateral facility that provides uswith flexibility on a day-to-day basis. This has the same terms and covenants asthe main facility. The weighted average rate of interest of the Group's debt at the year end was6.6% (2006: 6.6%). In measuring the cost effectiveness criteria, whilst thisrate is slightly ahead of the market, we believe this is a price worth payingfor the flexibility we now have in our financing structure, particularly giventhe nature of our assets. 31 March 2007 31 March 2006Net borrowings £302.8m £245.3mGearing 36% 36%Gearing including share of joint ventures' debt 45% 43%Weighted average debt maturity 5 years 5 years% of net debt hedged 55% 70%Interest cover 1.6 1.2Interest cover - banking covenants 3.4 2.7Undrawn committed facilities £164m £254m Interest cover is defined as profit before tax, net finance expenses andrevaluation surpluses divided by net interest payable. Interest cover for the year ended 31 March 2007 was 1.6 times (2006: 1.2 times).After adding back realised revaluation reserves to calculate the bankingcovenant definition, interest cover was 3.4 times (2006: 2.7 times). Hedging As at 31 March 2007, Quintain's interest rate risk was 55% hedged with swaps(2006: 70%). The fair value deficit on interest rate hedging instruments was£4.4m (2006: £12.9m). Of the movement during the year, £1.5m was credited to theIncome Statement, being the element relating to the ineffective swaps and £7.0mdirectly to equity. As part of our continuing review of funding, after the year end we altered ourhedging strategy to better manage the financial risks to the business. Wecancelled all our swaps and replaced them with £225m of caps at 6.5%. As themajority of our income is no longer fixed on long term leases, but is due toarise through realising development surpluses, we have removed the fixing of ourinterest cost and instead capped our cost, so limiting the cost implicationsfrom a rise in rates but allowing us to take full advantage of falls in interestrates. As at close of business on 11 June 2007, 72.9% of our outstanding debtwas capped. Cashflow Net cashflow from operating activities was an outflow of £11.5m, compared withan inflow of £0.2m for the prior year. The major differences arose because of anet decrease in trade and other payables of £7.5m and the decrease in trade andother receivables being £6.0m lower. The cash outflow from investing activities was £57.9m. Purchases and capitalexpenditure on properties of £133.1m offset the proceeds received in the periodfrom sales of investments of £117.6m and sales of shares in subsidiaries of£20.5m. Investment in joint ventures net of distributions was £11.5m andacquisition of other investments totalled a net £47.1m. Key Performance Indicators We measure our performance both financially and in terms of the service weprovide to our stakeholders. In keeping with our business strategy, which is to leverage the strength of ourBalance Sheet and the other assets under our control to produce superiorreturns, we have one key financial performance indicator only - which is totalreturn. We measure and monitor total return at both an individual asset leveland at a corporate level. We also recognise the impact of our activities on our stakeholders. On aconsistent basis we monitor our health and safety record and the satisfaction ofour employees. Business Risks In addition to those general economic, security and regulatory risks which arefaced by a wide range of companies and which are part of the general commercialenvironment, we consider there are a number of specific risks which are faced byour Company. In delivering high long run returns to shareholders, theidentification and monitoring of risk is crucial. A detailed risk register isupdated regularly and all those with responsibility for managing areas of riskare required to report on those on a quarterly basis. Our internal auditfunction reviews the risk register for completeness and accuracy. In addition tothis the risk register is considered by the Audit Committee. The Risk Committeedebates key risks and mitigation on a regular basis. Those risks which arejudged to be critical to the business, as shown by the risk scores attributed bya combination of likelihood and impact, are set out below: Development Risk Development exposure, such as that undertaken at Wembley and Greenwich, offersthe prospect of good returns but brings with it certain risks, both marketrelated and internally controlled, such as time and cost overruns. The latterare managed by a strong in-house project management team and within that,relationships with contractors are crucial. Funding structure plays an important part in risk transference and ourstrategies include bringing in joint venture partners and forward funding. People Succession planning in a relatively small business with a few key individualscan give rise to instability. During the year, the chairmanship of Quintain washanded over from Nigel Ellis to John Plender in an orderly fashion, according toa previously announced timetable. The support of senior executives ensured thiswas a successful transition. The loss of key personal represents a risk to the business. Our ongoingrecruitment programme seeks to mitigate this by bringing in highly skilledemployees. This is considered important given the relatively small size of theexisting Quintain team and the large number of projects. Vital employees areencouraged to remain by long term incentive and remuneration packages. The culture of the business and its role in the motivation of employees is alsoconsidered critical. Annual employee surveys are carried out to give themanagement a formal understanding of this position. However given the nature andcurrent size of the business, issues are generally known about and addressed ona timely basis. Financial Resources and Information The amount of financial resource required to deliver our urban regenerationprojects could be significant, depending on exit routes, since the two largestprojects have a combined gross development value in excess of £7bn. We are,effectively, under no obligation to develop out these sites ourselves but, inseeking to capture potentially significant upside value, our strategy is togenerally assume a proportion of the development. This will have a consequentimpact on financial resources. In anticipation of this, and of the growth in ourFund Management business, the Group's gearing levels are low. Further capitalcan be applied either through recycling of assets elsewhere or additional formsof financing. Approval for projects and monitoring of commitments take place at Board leveland also in weekly meetings of the Executive Directors, where financialinformation is provided to understand the implications of these decisions. It iscritical that this information is accurate and complete, as such, and given thecomplicated nature of our large scale developments, we have significant in-housemodelling and forecasting capabilities. Production of the Greenwich and Wembleymodels was outsourced to accountancy firm Deloitte. All models and forecasts arereviewed by our internal audit function, which is provided by Grant Thornton. Grant Thornton is also working with us on a detailed budgeting and authorisationprocess to ensure that we have the highest quality management information andthe accountability appropriate to a rapidly growing business. Management Resources Quintain's philosophy, of being entrepreneurial and 'fleet of foot', isconducive to operating with a small, close knit team. Our head count isrelatively small when compared with the ambitions of the business. We thereforeendeavour to manage a successful outsourcing model where possible. Wherespecialist skills or local knowledge are required we form strategic jointventures, for example with BioRegional on sustainable development and with LaceMarket on development opportunities around their Nottingham base. Reputation Relationships in our business are critical, not least with local and centralgovernment, business partners and financing institutions. There is a high levelof awareness of this at Board level where our policies of achieving bestpractice in our Corporate and Social Responsibility are formed. Given our commitments to development, Health and Safety is crucial and the teamwhich has day-to-day responsibility for this has the appropriate expertise,funding and Board access. On issues of sustainability Quintain is taking a lead in driving progress withinthe industry. Quintain's financial and other resource commitment to this, andreputational risk, is regularly reviewed by the Board. Market Risk Quintain has significant exposure to the residential market as our schemes atGreenwich and Wembley include planning consent for approximately 14,500residential units, of which 61% are private. The London housing market has seensignificant price inflation over the last 12 months with forecasts of continuedhigh single digit growth. The anticipated population growth in London leads usto believe that demand should remain reasonably resilient. As a landowner anddeveloper, we have the ability to control the nature and timing of the variousphases of our developments. The commercial property market has experienced very significant yieldcompression over the last few years. In most sectors and locations yields havestabilised and could increase, which would lead to a fall in property values.Quintain has the opportunity to add value in these market conditions by itsactive management of the investment portfolio, crystallising value in its urbanregeneration projects with planning gains, development profits and placecreation and building up of a fund management business. Very material falls inproperty values market-wide would put considerable strain on the Balance Sheetin the short term. This is mitigated by Quintain's current low levels ofgearing. Such movements would also represent a buying opportunity, since currentpricing means there are very few interesting investment acquisitionopportunities in the market. Rebecca Worthington Finance Director 13 June 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Quadrise