7th Jun 2005 07:02
Quintain Estates & Development PLC07 June 2005 7 June 2005 QUINTAIN ESTATES AND DEVELOPMENT PLC ("Quintain" / "Company" / "Group") PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2005 Highlights • Net asset value per share increased by 22% to 495p (2004: 405p); diluted net asset value per share also rose by 22% to 486p (2004: 399p) • Group turnover rose 30% to £78.4m (2004: £60.5m) • Profit before tax decreased by 2% to £15.8m (2004: £16m) • Earnings per share of 10.3p (2004: 12.4p) • Total return of 24.6%, or 21.4% net of RPI inflation, substantially ahead of internal target of 10% real and total return of 18.9% in 2004 • Total dividend increased by 9% to 9.5p per share (2004: 8.75p) • Sale of investment properties at an average exit yield of 6.1% generated proceeds of £294m and realised profits on cost of £82m; £86m of properties purchased at an initial yield of 8.1% • Significant progress made in the Company's key Special Projects: - Construction has commenced at Wembley, having achieved an unconditional planning consent during the year for Phase 1 comprising 5.3m sq ft of mixed-use development; a joint venture agreement has been signed for the first residential plot; and the site has expanded with 740,000 sq ft of further planning consent at the southern end - Following the deal at Greenwich Peninsula going unconditional, we have achieved a detailed planning consent for Millennium Square; negotiations with residential developers are at an advanced stage; and first land sales are envisaged in Spring 2006 • £48m of properties acquired by Quercus Healthcare Property Partnership taking funds under management to £289m • Syndication in July of a new corporate loan, raising £475m, combined with the current low level of gearing and circa £330m of undrawn facilities, ensures Quintain is in a strong financial position to acquire new assets, increase its fund management operations and fund its Special Project activities. Nigel Ellis, Chairman of Quintain, commented: "The work undertaken in the year to 31 March 2005 has positioned Quintain wellto sustain its successful track record. We have realised profits from the saleof properties in the core investment portfolio, achieved excellent returns fromour fund management activities and made substantial progress with our majorprojects. We have also significantly enhanced the Group's financial fire-powerthrough the raising of new debt and a substantial reduction in our gearing. "We look forward to continuing to develop the Group's business and to whatshould be another exciting year." For further information, please contact: Quintain Estates and DevelopmentRebecca WorthingtonTel: +44 (0)20 7495 8968 Financial DynamicsStephanie Highett/Dido LaurimoreTel: +44 (0)20 7831 3113 FINANCIAL HIGHLIGHTS FOR THE YEAR TO 31 MARCH 2005 Profit and Loss Account 31 March 31 March Change 2005 2004 % Group turnover (£m) 78.4 60.5 30 Profit before tax (£m) 15.8 16.0 (2) Underlying profit before tax (£m) 10.6 10.1 5 Basic earnings per share (pence) 10.3 12.4 (17) Diluted earnings per share (pence) 10.2 12.3 (17) Total dividend per share (pence) 9.5 8.75 9 Final dividend per share (pence) 6.75 6.0 12.5 Balance Sheet 31 March 31 March Change 2005 2004 % Net asset value per share (pence) 495 405 22 Diluted net asset value per share(pence) 486 399 22 'Triple net' net asset value per share(pence) 439 364 21 Total return (%) 24.6 18.9 Gearing (%) 27 56 Chairman's Statement I am pleased to report that Quintain has had yet another successful year inwhich further progress was made. As a result of this year's strong performance,the board is recommending an increase of 9%, or 0.75p in the dividend, giving atotal dividend for the year of 9.5p (2004: 8.75p). During the year, we achieved a total return of 24.6%, or 21.4% net of inflation.This is well ahead of our internal target of a 10% total return net of RPIinflation, a target which we have exceeded every year since flotation in 1996. We have also significantly outperformed the property market, as measured by theInvestment Property Databank ("IPD"), the industry benchmark. Our totalungeared return for the year to 31 March 2005 was 22%, compared with IPD's MarchUniverse of 17%. This performance places us in the top decile for the year andbuilds on an already strong historic track record. Over a twelve year period,Quintain is the top performing fund in IPD March Universe and we have securedfirst percentile rankings over five and ten years. During the year, the net asset value per share rose by 22% from 405p to 495p,and on a diluted basis by 22% to 486p from 399p. As in past years, the maindriver of this uplift was the surplus on property revaluation. The mostsignificant contributions arose from our investment in Wembley, the MeridianDelta project in Greenwich and York House, Wembley. Details of all theseprojects and a full review of our operations follow in the Operating andFinancial Review. Profit before tax fell by 2% from £16m to £15.8m and earnings decreased by 17%to 10p per share, primarily due to the sales in the core investment portfolio,and an effective tax rate of 15% compared with last year's nil charge. However,due to accounting policy, these results do not reflect the £76m of realisedprofit on cost arising from the sale of investment properties, which is onlyshown as a transfer to revenue reserves. Of these sales, the disposal of MountRoyal, Oxford Street made the largest individual profit contribution of £36m. Improving trading sales more than offset the 20% increase in administrationexpenses giving rise to a 5% increase in underlying earnings before the profiton investment property sales and write off of loan costs on refinancing. Thecontribution from the ongoing recruitment programme within the major specialprojects' management team is clearly reflected in the Group's total return. As indicated in previous reports to shareholders, the Company's earnings willinevitably vary over time, particularly in light of the major special projects.The value of these projects is shown as a capital value uplift on the Group'sbalance sheet. Under International Financial Reporting Standards, the uplift oninvestment properties will go through the income statement, but the treatment ofdevelopments will be unchanged. Borrowings have been reduced from £292m to £172m, with gearing reduced from 56%to 27%. This is a far lower figure than our normal target, and is due to ourdecision to recycle the profits from our sales programme to support ourdevelopment projects, particularly Wembley. As reported last year, we have alsoorganised a major new loan for the same reasons, as well as to increaseoperational flexibility. Further details are given in the Operating andFinancial Review. Share Price During the year, the share price continued to perform well. At 555p at close ofbusiness on 3 June 2005, the shares, over 12 months, have outperformed the FTSEAll Share Index by 19% and the FTSE Real Estate Index by 4%. Dividend As a result of the year's strong performance, the board is recommending anincrease of 9%, or 0.75p, giving a total dividend for the year of 9.5p. It isintended that the final dividend of 6.75p per share will be paid on 8 September2005 to shareholders on the register as at 5 August 2005. The Company'sintention is to maintain a progressive dividend and this policy will continuesubject to cash requirements. Corporate Governance We continue to improve our corporate governance and confirm that we havecomplied with the Combined Code during the period under review. A detailedreview is contained in the Corporate Governance section within the AnnualReport. People Since the year-end, we were pleased to announce the appointment of Tom CrossBrown as a non-executive director. Tom brings with him considerable experienceof investment banking and fund management which will help to further strengthenthe Group. The only other management change is that James Hamilton Stubber hasnow taken responsibility for the generation of new business, passing hisadministration responsibility to Rebecca Worthington. In the current somewhatheated property market, we acknowledge the need to focus additional resources onthe creation of new business streams. I would also like to take this opportunity to thank the entire Quintain team fortheir contribution to the Group's ongoing success. Outlook The work undertaken in the year to 31 March 2005 has positioned Quintain well tosustain its successful track record. We have realised profits from the sale ofproperties in the core investment portfolio, achieved excellent returns from ourfund management activities and made substantial progress with our majorprojects. We have also significantly enhanced the Group's financial fire-powerthrough the raising of new debt and a substantial reduction in our gearing. We look forward to continuing to develop the Group's business and to what shouldbe another exciting year. Nigel Ellis Chairman 7 June 2005 Operating and Financial Review During the year to 31 March 2005, Quintain successfully positioned itself tocreate significant ongoing value for the Group and its shareholders, whilstdelivering another excellent set of results. Objectives and Strategy Quintain's two core objectives are to deliver upper quartile performancerelative to the IPD benchmark and to make a real total return, measured by theincrease in net asset value per share adding back the dividend, of at least 10%. Since formation, our fundamental strategy has remained unchanged. We apply arigorous stock-picking approach, focusing on the financial characteristics ofproperties or landholdings, to identify assets and special situations where wecan use our skills and experience to create value. Our approach to the ownership of assets in our core investment portfolio demandsthat we sell assets that no longer offer opportunities to add significant value.This resulted in our selling investment properties with a book value of £281m. Over the last twelve months our strategy in relation to the urban regenerationactivities within Special Projects has continued to evolve. In our view, inorder to maximise our long-run returns to shareholders, the guiding principlefor the regeneration projects should be to invest in long-term communityinfrastructure, whilst at the same time achieving our commercial objectives ofcreating new locations and estate management businesses. We believe that our projects at Greenwich Peninsula and Wembley alone have thepotential to transform the value of the Company. While the nature and scale ofthese urban regeneration projects will inevitably have an impact on the absolutelevel of the Group's profits during their roll-out, the Group will continue tofollow a cautious approach to their financing, focused always on the ongoingcreation and enhancement of value for our shareholders. Options already beingexplored include joint venture partnerships; the exploitation of non-rentalcommercial opportunities, such as advertising, naming rights, branding,telecommunications and power; as well as more traditional routes such asinstitutional forward-funding. To ensure the successful delivery of our strategy, we have continued to investin people, recruiting a number of specialists during the year whose skills willgreatly benefit the Group's ability to capture and create value. The market and the competitive environment Property as an asset class has outperformed equities and gilts over 1, 3, 5 and10 years. This has attracted growing numbers of private investors and led tothe re-weighting of institutional portfolios. The banks remain enthusiastic tolend to investors and developers and so yield compression remains in place -albeit at a declining rate -with a proliferation of new funds being formed,ensuring ongoing appetite for assets. Positive features for the propertyinvestment market include regulatory changes to SIPPS and the prospectiveintroduction of REITs. At Wembley and Greenwich, our planning consents include provision forapproximately 14,500 residential units, of which 60% are private. Currently,prices in London are closer to their historic norm than almost anywhere else inthe country and it is our belief that, with a growing population, demand inLondon should remain reasonably resilient. As a landowner and potentialdeveloper, we have the ability to control the nature and timing of phasing.Within the 40% affordable housing allocation, much of which is discounted forsale, demand substantially outstrips supply. Our current view in the market is that the performance of commercial propertywill plateau, yielding total returns of 6%-8% real, a respectable figure inhistoric terms. Against this background, Quintain's continued outperformance will primarily besecured through crystallising the value inherent in our special projects,accessing new business and the continuing evolution of our fund managementbusiness. Business Review The market conditions prevailing during the year have prompted active trading inthe portfolio. Proceeds of £294m were generated by investment properties thatwere sold at an average exit yield of 6.1%, whilst £86m of properties werepurchased at an initial yield of 8.1%. The table below demonstrates activityduring the year. £m Investment property at 31 March 2004 798Purchases 86Capital Expenditure 25Sales (281)Valuation uplift 113Capitalised interest 4Other (2) Investment property at 31 March 2005 743 The Quintain business model has been designed to capture the growth inherent inour existing and future asset base. For example, investment product createdthrough our regeneration projects could be held within the main portfolio or, ifof a specialist nature, in fund management (Q3P). • The main portfolio currently comprises secondary investment property with potential to create capital value uplift while delivering a strong flow of rent. This cashflow supports the activities of the Group's other divisions • Special Projects comprise large complicated landholdings offering significant value upside from planning gain and development • Our fund management and structured finance division accesses third party funds, skill and opportunity and will de-risk our business through its activities in health, education and public sector housing. The segmental analysis showing performance by division is in note 3 to theaccounts. A summary table below schedules the investment properties by division. Directly held Indirect Total properties properties £m £m £m Main portfolio 284 - 284Special Projects 436 14 450Q3P 23 50 73Investment portfolio 743 64 807 Main Portfolio The year was characterised by the sale of several low yielding properties and aretrenchment from the retail sector. This was opportunistic, influenced by ourconcerns over consumer spending and rental values. The major sales includedMount Royal, Oxford Street and the shopping centres in Stockton and Scunthorpe,giving a profit over valuation of £1m and a profit over cost of £57m. The buoyant market conditions made buying more difficult but we managed toacquire £86m of high yielding properties offering opportunities to enhancevalue, whilst simultaneously 'spring cleaning' the portfolio through the saleof a number of smaller management intensive properties. Notable transactionsincluded the purchase of Sapphire House in Telford for £12.9m, which is subletto the Government and has potential to benefit from the government relocationinitiative outlined in the Lyons Report, and St Peter's and Belgrave House inSheffield, acquired for £7m, which we intend to refurbish on lease expiry. We have continued our programme throughout the portfolio of refurbishing officeaccommodation when it becomes vacant. Schemes completed during the year includeSmallbrook Queensway, Birmingham (13,000 sq ft), Imperial Court, Leamington Spa(18,700 sq ft) and The Forum, Exeter (21,000 sq ft). We have commenced a major refurbishment of our speciality shopping centre atRoyal Exchange, Manchester. This follows our recent grant of planning consentand agreement with the freeholders for a reconfigured unit scheme within theGrade II listed landmark property. The table below sets out current and proposedrefurbishments. Property Scheme Floor area sq Cost £m Timing ft Royal Exchange, Manchester Retail 41,600 3.5 2005-2006St Peter & Belgrave Office 69,000 2.3 2005-2006SheffieldSmallbrook Queensway Office 13,700 0.3 OngoingBirmingham 2005-2008Total 124,300 6.1 Special Projects The main Special Projects are listed below. Valuation as at 31 March 2005 £m Wembley complex 215Greenwich 110Emersons Green, Bristol 22York House, Wembley 22Ramada Hotel, Manchester 16Other special projects 51Total Direct Investment property 436Greenwich, equity in MDL joint venture 14 As mentioned, we hope to play a long-term role in the communities we aredeveloping, enabling us to create long-term value from the transformation ofthese areas. At Greenwich, following the unconditional completion of the deal with EnglishPartnerships, Meridian Delta Ltd, our joint venture company with Lend Lease, hascommenced infrastructure works. Negotiations with residential developers are atan advanced stage and we envisage the first land sales in Spring 2006. At Wembley, following an expedited consent, we are on site on a scheme of 6m sqft. Construction has commenced on the 42 acre first phase of the Wembley site, inparticular on the transformation of Wembley Arena and the adjoining Square. Atthe southern end a new bridge linking the site to the High Street is being builtby the London Development Agency ("LDA") and by underwriting the acquisition ofland we have secured an additional consent for 0.74m sq ft. We have signed a joint venture agreement with two housing associations for thefirst residential development, comprising 285 apartments, 50% of which aredesignated affordable housing. The detailed planning application will besubmitted shortly with the intention of being on site by Spring 2006. The 13acre Palace of Industries site is the subject of a joint venture with CaesarsEntertainment Inc. for a regional casino. We remain fully committed to theproject notwithstanding the continuing political debate. At Silvertown, across the river from Greenwich, the 13 acre site including theCarlsberg Tetley Distribution Depot is owned jointly by Quintain and the LDA.Discussions are ongoing with adjoining and nearby landowners with the aim ofproducing a masterplan for the Thameside West area. Development of the site iscurrently restricted by safeguarded wharves and a reservation for the thirdriver crossing. A strategy is being developed to remove or manage theseconstraints. Phase 1 of the mixed-use development at Merton Abbey Mills, in joint venturewith Countryside Properties Plc, comprising 124 apartments and 104,000 sq ft ofretail and leisure space, has been successfully completed and sold. Work hascommenced on Phase 2 which comprises 164 apartments, 50 of which are alreadyreserved or exchanged. At Emersons Green near Bristol, the Local Plan Inspector has reported favourablyon the major mixed-use allocation of the 275 acre site of which Quintain owns 65acres. This decision has, in turn, been endorsed by the Local Authority. Adecision on the associated planning application, made by ourselves inpartnership with JJ Gallager and Heron Land, is likely to be made by the end ofthe year. Regarding Croydon, our Valley Trade Park has now been sold for a profit overvaluation of £0.7m, representing a profit on valuation of 24%. At Valley Point,10 of the 14 units have been sold for £4.1m, resulting in a profit of £0.9m. Our ownership of sites for development is shown in the table below: Project Sector Share Area GDV* Planning Timing £m Wembley Mixed- 100% 6.17m sq ft 2,000 Outline Now - 2015Complex useGreenwich Mixed- 49% 13.2m sq ft 5,000 Outline Now - 2023Peninsula useArrow Valley Distribution 100% 240k sq ft 18 Part detailed, 2006 - 2010Redditch part outlineMerton Abbey Residential 50% 164 units resi 46 Detailed Now - 2006MillsEmersons Mixed-use 65 acres 1800 units resi + - Submitted 2006 - 2008Green, Bristol of 275 20 hectares acre site employmentArundel Gate Mixed-use 100% 200k - 300k sq ft - Being prepared 2007 - 2010SheffieldDeansgate, Mixed-use 100% 180k - Being prepared 2006 - 2008Manchester * GDV is Gross Development Value. This is only shown where planning has beenreceived. Quintain will only take on a proportion of the development, generally in jointventure, and this will be combined with land sales. Typically our equitycontribution will be in the form of land. Fund Management (Q3P) The major contributor in the year was the Quercus Healthcare PropertyPartnership which we agreed to expand in June 2004. We have purchased £48.0m ofproperties for the fund, taking funds under management to £289m, of which ourshare is currently 26.5%. The fund achieved a total return of 23.1% in its yearto December 2004, including a distribution yield of 9.7%, but excluding feespaid to Quintain of £1.4m. New equity is being raised, following recentinvestments by the Norfolk and Essex County Council Pension Funds. In additionto the existing portfolio of 168 properties providing care for the elderly,long-term ill and those with learning disabilities, the fund will shortlycommence development of an assisted living village. Last summer, the decision was made to dissolve Quart, our licensed premisesfund, to take advantage of a strong market. The liquidation is now complete,generating £0.7m of profit in the year for Quintain along with a performance feeof £0.4m. We continue to examine opportunities to build funds in other specialist sectorsincluding Science Parks, Student Accommodation and Affordable Housing. Outlook We see the outlook for property as being reasonably benign, but remain cautiousof the more over-heated sectors. We will continue to seek opportunities where webelieve we can create value. We have significantly enhanced our financial fire-power through the syndicationin July 2004 of a new £475m corporate loan. With gearing at 27% this gives £330mof undrawn facilities. We are confident we have the skills and experience to face the challenges thatlie ahead and we are well placed to continue our track record of outperformanceagainst the prospect of a performance plateau in the market generally. Financial Review Operating performance Gross rental income for the year fell by 14% to £36.2m (2004: £42.0m). This wasa result of sales of £294m which were only partially offset by acquisitions of£86m. Lost income from sales of £11.8m included £2.6m of back rent on NeathousePlace. Rent from purchases coming on line added £7.5m. Rents passing at 31 March2005 totalled £27.5m, with an estimated rental value (ERV) of £32.2m. Voids have increased to 5.7% (2004: 5.1%) following the refurbishment ofImperial Court, Leamington Spa and The Forum, Exeter where these properties arenow available for letting giving a combined ERV of £0.5m. Quintain also holds a number of development properties where leases havepurposely been taken back from tenants. As at 31 March 2005, planned voids inrelation to these were in line with last year at 6.6% of ERV (2004: 6.6%). Thelargest of these was £0.6m, or 1.8% of ERV at Royal Exchange, Manchester. The average unexpired lease terms across the portfolio is 13 years (2004: 15years). This has decreased due to the sale of properties with longer leases,including Mount Royal, Oxford Street and Castlegate, Stockton with average leaselengths of 16 years and 25 years respectively. This was reflected in the initialyields on disposal of 4.4% and 6.2%. Armageddon, which is when rent equalsinterest assuming no tenants renew and all breaks are exercised, is 2017. Quintain's strategy is to have a diverse tenant base in order to manage risk.Our tenant covenant strength has been measured by Investment Property Databank(IPD) (using Dun and Bradstreet) and shows 66% of our rent roll is derived fromnegligible, low and low/medium risk covenants. Our largest exposure to acovenant is 5.5% and the largest 10 tenants in terms of our exposure make up29.9% of the rent roll, of which 15.1% are negligible risk and 12.3% are lowrisk. Profit from the sale of trading properties was £3.8m (2004: £0.3m) on saleproceeds of £25.9m. Historically trading profits have varied. This year'sresults included £2.6m of profit from Phase I at Merton Abbey Mills and £0.9mfrom the disposal of 10 of the 14 units at Valley Point in Croydon. Income from leisure operations includes the contribution from Wembleybusinesses, which delivered £6.2m for the year (2004: £6.6m). The slight fallcame from the closure of the arena in the last quarter whilst underrefurbishment. Next year's contribution will be significantly lower as the arenawill not reopen until the end of the financial year to 31 March 2006. Other income fell from £3.6m to £2.2m, with surrender premiums significantlylower at £1.4m (2004: £2.3m). This income varies over time depending onopportunities acquired or existing within the portfolio. Administration expenses increased by 19.9% to £19.1m (2004: £16.0m). £3.0m ofthis related to additional staff costs, arising mainly from recruitment andperformance related bonuses. Whilst total staff costs are charged to the profitand loss account the uplift in value they have created is reflected in thebalance sheet, particularly so with those working on development projects. Wehave an active recruitment programme ensuring that we have the skill base todeliver future performance. Administration expenses include £0.3m of audit fees paid to KPMG and £0.07m fornon-audit work. The latter has fallen substantially following the recruitment ofin-house tax specialists and the appointment of Deloitte as tax advisors, inline with corporate governance best practice of separating audit and non-auditwork. Further information is given in note 4b to the accounts. Operating profit from joint ventures increased by £1.0m to £4.6m, reflecting thegrowth and income performance of the Quercus fund. The profit over valuation on the disposal of investment properties was £6.3m(2004: £5.9m). Proceeds, including the sale of joint ventures and associates,were £305.4m, with a profit on book cost of £81.9m. Net interest payable is analysed below. Of the interest capitalised, £2.3mrelated to the Wembley complex and £1.7m to Greenwich. 31 March 2005 31 March 2004 £m £m Interest payable 19.2 20.2Amortisation of finance costs - current facility 0.5 0.6Finance costs written off against old facility 1.9 -Profit on termination of swap arrangements (0.7) -Interest capitalised (5.2) (3.2)Interest receivable (1.5) (0.8)Joint venture and associate interest 1.7 1.4Total net interest payable 15.9 18.2 An additional £2m of interest was incurred in relation to developmentproperties. After deducting this interest payable fell by £3m, which was in linewith the fall in rental income before back rents. Taxation Quintain had an effective tax charge of 15% for the year (2004: 0%), arisingfrom a combination of factors. The tax charge in relation to the sale ofinvestment properties amounted to £17.7m, against which the Group was able touse £13.3m of prior year losses, with £4.0m being allocated against the releasefrom the revaluation reserve in the year. The tax charge benefited from a net£2.3m release of capital allowance credits arising on the disposal of investmentproperties. A full reconciliation of the current tax charge is shown in note 6to the accounts. The Group's policy has always been to seek to retain the benefit of capitalallowances on the disposal of properties and this, together with brought forwardlosses, should keep the effective tax rate, in the medium term, below thestandard 30%. This is subject to changes in tax legislation. Because the timingof sales has a material impact on taxation, it is difficult to give preciseestimates of future rates at this time. Assuming all properties are sold at the revalued amounts, the Company has anestimated potential capital gains liability of £57.2m (2004: £40.1m). Thisequates to 42.8p per share. The increase in the year arises from revaluationsurpluses. Balance Sheet At 31 March 2005, the investment portfolio was valued at £742.9m (2004:£797.7m). A table analysing activity is included within the business review. Ofthe £113.5m revaluation surplus, £75.2m related to the Wembley complexreflecting the achievements during the year. In particular we gained aresolution to grant planning for 5.3m sq ft of mixed use development on Phase 1,followed by agreement of the S106 and notification from both the GovernmentOffice for London and the Mayor of London that they would not exercise theirstatutory powers. On expiry of the judicial review period in December 2004, theconsent was unconditional and construction of initial infrastructure works hasnow commenced. Also during the year we agreed to indemnify the LDA for thepurchase of an 8 acre site in return for its development rights, with anexisting consent for 0.74m sq ft of mixed-use development. Other tangible fixed assets include £8.8m paid during the year for a longleasehold building at 16 Grosvenor Street, W1. We intend to use the building forour own occupation and sub-let the remaining leases at our existing premises.This move will give us more space to accommodate the increasing number ofemployees. If we had held the property for investment purposes the revaluationuplift in relation to it would have been £2.8m. Capital commitments at the year-end totalled £102.1m, of which £68.4m related tothe Wembley complex. This included: £26.0m to complete the refurbishment ofWembley Arena; £20.1m on Phase I infrastructure works together with delivery ofArena Square; £9.0m for the indemnity on the LDA acquisition; and £11.6m tocover our share of construction costs on the first residential development. AtGreenwich commitments included £4m for deferred land payments and £8.7m as ourshare of Meridian Delta Limited costs mainly relating to infrastructure. We haveallocated £9m of capital for further equity purchases within the Quercus jointventure. During the year the Quintain Group Employee Benefit Trust purchased 300,000shares at an average price of 508p to cover allocations under the ExecutiveDirectors' Performance Share Plan. Quintain also purchased 425,000 shares at anaverage price of 525p for cancellation. Joint ventures At 31 March 2005, Quintain had net investment in joint ventures totalling£62.0m, of which our 26.5% share in Quercus, the healthcare fund, represented£48.1m. Whilst our holding on the Greenwich Peninsula is included withininvestment properties, Meridian Delta Limited, the company charged withoverseeing the redevelopment of the peninsula, owned 49% by Quintain and 51% byLend Lease, is treated as a joint venture. Our current investment in this jointventure is £13.9m. A further analysis is shown in note 11a to the accounts. Net Assets The basic net asset value per share at 31 March 2005 was 495p, an uplift of22.2% from the 405p for the prior year. On a diluted basis, the net asset valueper share rose 21.8% from 399p to 486p. The triple net asset value was up 20.6%at 439p after taking into account 4.5p for marking to market of debt and 42.8pfor unprovided capital gains. Financing strategy and capital structure Our financial strategy is to maintain a level of debt that balances the risks tothe business with the higher returns on equity achieved by lower cost funding.This translates into a long run gearing target of 100%. We have currentlypositioned the company well below this at 27% geared (2004: 56%) partly toensure substantial financial resources for the next phase of delivery of themajor urban regeneration projects and partly reflecting current marketconditions. During the year, we raised a £475m corporate loan underwritten by Bank ofScotland, Barclays, HSBC and Lloyds as well as a £20m liquidity facility fromBank of Scotland. The £475m facility was for five years with possible one yearextensions at the end of the first and second year. We have exercised the firstof these and removed the term element, so the facility is now fully revolving.The margin is 0.95% with a 0.375% commitment fee. The main financial covenantsare a maximum gearing of 130% of net assets excluding joint ventures, with thepossibility of extending it to 150% with the banks' permission and an increasein the margin to 1.35%. Interest cover must be 1.25 times covered by earningsbefore interest and tax, plus surpluses or deficits over cost on the disposal ofproperties. A maximum of 30% of net worth can be invested in separately financedjoint ventures. This facility will increase liquidity and operational flexibility by enabling usto move quickly when bidding for investment opportunities and will allow us tofund more of the urban regeneration projects on our own balance sheet, socapturing greater value. As at 31 March 2005, Quintain was 92% hedged with swaps (2004: 76%). Companypolicy is to be between two thirds and fully hedged as, given the nature of itsincome, it seeks to match the revenue profile with certainty in relation tofinance costs. Where there is less certainty of revenue, for example in the caseof properties under development, we will hedge using a combination of swaps andcaps. The weighted average rate of interest of the Company's debt at the year-end was7.1% (2004: 6.1%). The increase from the prior year is the impact of fees on£330m of undrawn but committed facilities spread over a low level of drawn debt.These resources are essential for our special projects and are already beingused to fund initial infrastructure works at Wembley. The cost should be viewedin relation to the potential value that can be added by the flexibility to fundthese projects. Financing Statistics 31 March 2005 31 March 2004 Net debt £172.4m £292.2mGearing 27% 56%Gearing including share of joint ventures' debt 32% 60%Weighted average debt maturity 5 years 5 years% of debt hedged 92% 76%Interest cover 1.5 1.6Undrawn committed facilities £330.0m £124.5m The fair value deficit on fixed debt and interest rate hedging instruments was£8.7m (2004: £8.4m), equivalent to a reduction in the Company's net assets pershare of 6.5p or 4.7p after deducting tax. Interest cover for the year endedMarch was 1.5 times (2004: 1.6 times). After adding back realised revaluationreserves to calculate the banking covenant definition, interest cover was 4.6times (2004: 2.0 times). Cashflow Net cashflows from operating activities at £22.3m are significantly ahead oflast year's £6.7m. The largest factor in this was the increase in tradingproperties in the prior year and related to investments made in Merton AbbeyMills, our joint arrangement with Countryside Properties Plc. The salesprogramme less investments released a £147.0m net cash surplus. Financingcreating cash outflows of £155.6m, driven by the net repayment of loans, with acash decrease in the year of £6.7m (2004: £0.6m). Pensions Quintain operates a defined contribution scheme and has no liabilities arisingunder FRS17 Retirement Benefits. International Financial Reporting Standards As from 1 April 2005, Quintain's accounts will be prepared under InternationalFinancial Reporting Standards (IFRS). The accounts for the year ended 31 March2005 have been restated under IFRS and a reconciliation to UK GAAP provided.These numbers are unaudited. Under IFRS Investment properties are shown at fair value as was the case with UKGAAP, however the revaluation surplus is taken directly to the income statement,so increasing profit by £20.3m in relation to directly owned properties and£6.6m for our share of joint ventures and associates. Offsetting this is adeferred tax credit of £7.0m and charge of £4.1m respectively. This gives anearnings per share of 32.2p compared with 10.3p under UK GAAP. Within the balance sheet, investment and development properties are separatelyidentified and for development properties the revaluation surplus continues tobe posted to the revaluation reserve. This is offset by a deferred tax provisionof £75.4m relating to the unrealised capital gains. Under IFRS all jointventures must either be proportionally consolidated or equity accounted. We havedecided to adopt equity accounting and so entries for the proportionallyconsolidated joint arrangement at Merton Abbey Mills have been reversed out andincorporated within joint ventures. Under IFRS, leasehold property interests held as investment property at fairvalue are accounted for as finance leases. The liability under these leases isrecognised as the present value of minimum lease payments at the date ofinception or acquisition of the lease. The finance charge of £1.1m isincorporated within the net finance expenses. In the balance sheet investmentproperties are grossed up by £1.4m and development properties by £10.1m with theliability disclosed separately. The diluted NAV per share of 436p under IFRS and compares with a triple net NAVof 439p based on UK GAAP. Key risks and uncertainties In delivering high long-run returns to shareholders the identification andmonitoring of risk is crucial. In addition to the detailed internal controls setout in the Audit Committee Report, the Board has appointed a risk committee to,at a high level, identify and assess risks to the business. In considering themajor risks to the business, some relate to economic and political uncertaintieswhilst others are specific to Quintain. • In terms of planning consents Quintain has significant exposure to the residential market. Details of issues relating to this are set out in the section analysing the market. • The make-up of the portfolio has changed, with special projects being the largest constituent. These assets are capable of delivering significant value but often have little or no income attaching to them in the short term so having a negative impact on the profit and loss account. This can be mitigated by land sales and bringing in third party equity. This is also offset by growing income streams from Q3P. • In the current market there are few opportunities to find value in income producing assets. • Changes in legislation can impact the business, particularly in planning and taxation. Also at Wembley, in building a leisure destination, our preference for a casino is subject to changes in gaming legislation. This is not materially reflected in the current valuation but if successful will generate significant value in creating a sustainable development. • Loss of key personnel represents a risk to the business. Our ongoing recruitment programme seeks to mitigate this by bringing in highly skilled employees. Key personnel are encouraged to remain by long-term incentive and remuneration packages. Corporate Social Responsibility ("CSR") We endeavour to take our social responsibilities seriously and a full CSR reportis included in the Annual Report and Accounts. Areas of focus for the Groupinclude its commitment to environmental and social issues, its health and safetyrecord and the motivation and retention of its employees. The Group recognisesthe potential impact of its activities on the wider community. The Group views its staff as one of its most important resources since a highlymotivated employee base is essential to its continued success. The Group'spolicy is to recruit both directors and staff of the highest quality and toremunerate them accordingly. The aim is to produce competitive remuneration inrelation to other major property companies. A significant proportion ofremuneration is performance related. Further details are shown in the Report ofthe Remuneration Committee contained in the Report and Accounts. The Group considers staff retention to be one of its key performance indicators.Staff turnover during the year for head office was 9.9% with an average lengthof service of three years. The comparatively short average length of servicefor head office staff reflects the relative youth of the Company and the recentexpansion in staff numbers. For our Wembley operation, turnover during the yearwas 20.1% with an average length of service of eight years. As previously explained, it is the Company's policy to recruit staff of thehighest calibre and motivate them appropriately. Since the year end, theGroup's head office carried out a staff survey which showed that every memberof staff who responded rated the Company's culture either as "positive" or "extremely positive". A small number of action points were identified and arebeing dealt with. The Group's commitment to sustainability and social issues is illustrated by itswork at our two major urban regeneration sites at Wembley and Greenwich. Herewe are working to meet the needs of future tenants, communities, and local andcentral government by creating sustainable mixed-use projects. Further detailsof how we are developing these sustainable communities are given in the CSRreport. As far as environmental issues are concerned, the Group is very aware of theimportance of maintaining the environment and encourages continuousenvironmental awareness. In general terms, we aim to minimise risk of causingharm through careful consideration of construction techniques, the specificationand use of sustainable materials and the reduction of waste. Once again,further information evidencing our commitment to good environmental practice isshown in the CSR report. The Group is committed to the highest standards of performance in the provisionof a safe and healthy environment for its employees, tenants, contractors andvisitors and considers its performance in this field to be a key performanceindicator. Further details of the Group's health and safety policy andobjectives are shown in the CSR Report. During the year under review there were eight minor accidents across the Group'spremises which resulted in insurers being notified and no RIDDOR reportableincidents. Most of the minor accidents occurred in the Group's CastlegateShopping Centre which was sold during the year. The Group monitors the positionconstantly. Key Performance Indicators (KPIs) The Group's KPIs are outlined in various sections of this review and compriseboth specific financial and stakeholder related measures. Whilst there are many financial measures which the Group monitors on a regularbasis, details of which are set out elsewhere in this Review, our core financialobjectives are, as previously stated: I to deliver upper quartile performance relative to the IPD benchmark; and II to make a real total return of at least 10% each year. Since listing in 1996, the Group has achieved both objectives every year As a listed property company, it is also appropriate to measure our performancein ways other than financial, thus recognising the impact of our activities onour stakeholders. As such, the Group has, during the year, identified twofurther key measures being:- I our health and safety record; and II staff motivation and retention. We will, in future, report on our performance in these areas on a comparativebasis. This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOWRelated Shares:
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