24th May 2005 07:03
Great Portland Estates PLC24 May 2005 PRELIMINARY RESULTS 24 May 2005 The Directors of Great Portland Estates plc announce the results of the Groupfor the year ended 31 March 2005. Highlights: * Net assets per share up 19% to 333p (2004: 280p) on an adjusted+, diluted basis * Earnings per share 14.3p (2004:15.1p) * Adjusted* earnings per share 11.3p (2004: 12.8p) * Dividend up 2.4% to 10.75p per share (2004: 10.5p) * Portfolio valuation up by 9.8% on a like-for-like basis to £804 million * Total property return 16.7% (2004: 6.1%) * Two joint ventures set up with Liverpool Victoria Friendly Society (one since 31 March 2005), containing £230 million of property assets * £135 million of disposals achieved at 9.4% above March 2004 values * £116 million of acquisitions and development expenditure in the year on balance sheet, and £134 million by joint venture * Void rate at 31 March 2005 2.6%; following completion of Met Building 6.4% * Met Building completed on time and on budget, and 43% let * Six new planning permissions gained; 680,000 sq ft near-term development programme * £101.5 million of cash returned to shareholders * High-coupon debt redeemed, lowering cost of debt to 6.3% (2004: 6.7%) * Net gearing 49% (52% including joint venture); interest cover 2.4 times +excluding deferred tax on capital allowances (see note 10)*excluding exceptional items, profits or losses on sales of investment properties and excluding deferred tax on capital allowances (see note 10) Toby Courtauld, Chief Executive, said: "The amount of space being leased by businesses in London today is broadly inline with the long-term average and we expect this to increase during the year.Vacancy rates are falling across the market due primarily to the lack of supplycoming on stream and we remain cautiously optimistic about the prospects forrental growth. "We have had a busy and productive year and Great Portland Estates is in goodshape; our development pipeline is growing and is geared to deliver qualityspace at good value, into an undersupplied West End market; our disposal andacquisition programmes are transforming the prospects of the Group's portfolioand producing healthy profits; our focused asset management continues tomaintain a virtually fully let portfolio; our restructured balance sheet ishelping to drive returns to shareholders, whilst preserving the financialflexibility we need to execute our development and acquisition programmes; andour teams are working well together to unearth further opportunities for valueenhancement. We face the future with confidence." Enquiries etc:Great Portland Estates plc 020 7580 3040 Toby Courtauld, Chief Executive John Whiteley, Finance Director Finsbury Group 020 7251 3801 Edward Orlebar CHAIRMAN'S STATEMENT Overview I am happy to report on another year of substantial activity, strong progressand one in which we have achieved most of our immediate strategic goals. TheGroup's portfolio is now 100% concentrated in central London, voids remain atunder 3%, the average cost of debt has been further reduced, gearing, followingthe return of cash last August, is at a more appropriate level for this point inthe cycle, asset enhancing acquisitions have been made and the developmentprogramme continues to expand. For the period under review total propertyreturns and total shareholder returns were 17% and 24% respectively. Results and Dividend Twelve months ago I said that the markets in which we operate had turned thecorner and, whilst around any corner there may be a speed bump or two, thecautious optimism we have been expressing for some time has proved to be wellfounded, particularly in our favoured area of the West End. Based on anunderlying positive valuation movement of 10% on the investment properties andaided by the return of cash, adjusted diluted net assets per share haveincreased by 19% to 333p; even though there was further yield compression, it istestimony to our timing that one-third of the uplift was attributable to MetBuilding and the most recent acquisitions. With adjusted earnings at 11.3p, yourdirectors are recommending a final dividend of 7.17p per share, making a totalfor the year of 10.75p, up 2.4%. Property Review The substantial activity to which I refer in my opening sentence will be dealtwith in detail in the Chief Executive's Review. We continued to take advantageof the strong appetite for investment property from private and institutionalinvestors and, including transactions since 31 March, we have completed over£150 million of sales, notably, Clarendon House, 17/18 New Bond Street, W1 for£50 million. On the same timescale, acquisitions, if the assets in our jointventures with Liverpool Victoria Friendly Society are grossed up, amounted to£295 million. The major purchases included Ellerman House, 12/20 CamomileStreet, EC3 (a key addition to our immediate holdings in the area), the subtleassembly of a large development site in Tooley Street, SE1, St. Lawrence House,26/30 Broadwick Street, W1, the retail element of the Mount Royal block inOxford Street, W1 and the Liberty Island site, Regent Street, W1. The creationwith Liverpool Victoria of the joint ventures, which purchased the latter two,has not only provided us with additional management income but could also be theforerunner of similar opportunities with other partners. Another important objective which has been achieved in the past year is theexpansion of the development programme. Practical completion on our firstscheme, Met Building, 22 Percy Street, W1, was effected this month and 43% isalready let at rental levels well above our original forecasts. Building workshave commenced at 190 Great Portland Street, W1, and on two Mayfair properties,whilst planning permissions have recently been granted on three significantsites north of Oxford Street. Several other projects are at an advanced design stage and we anticipate thatsome £185 million will be spent in the next few years on 680,000 sq ft. Thiselement, which currently comprises less than one-fifth of the Group by value, isset to increase to over one-third on completion and we also anticipate that itwill provide a substantial component of future growth in rental income. Finance In conjunction with the property initiatives, we have continued to manage thecapital structure of the Group. During the year, the balance sheet was, asanticipated, substantially restructured via the £101 million return of cash toshareholders, and the average cost of debt was further reduced to 6.3% throughthe unwinding of swaps and the redemptions of principally high-coupon debenturestock. Board John Whiteley and Tony Graham will be retiring from the Board on 31 July and atthe Annual General Meeting respectively. John has been Finance Director for tenyears and, in the last five in particular, has played a vital role in thecapital restructuring of the Group, whilst Tony has provided wisdom and soundproperty advice during his seven years on the Board. I thank them both for thesignificant part they have played in the evolution of the Company and wish themall the best for the future. Phillip Rose, whose skills and experience in theproperty industry are well known, became a non-executive director on 11 April. General This is the first year of operation for the new Combined Code on CorporateGovernance, and I am pleased to report that, apart from one or two de minimisadministrative exceptions, we complied with the Code throughout the year. Twelve months ago I raised two important issues which rested with theGovernment. In principle, they have decided that there should be no interventionin the current leasing system and, for the time being, they will not belegislating against "upward only" rent reviews. Market forces should be allowedto prevail and we believe that a sensible conclusion has been reached.Additionally, the precise regime for the establishment of a UK real estateinvestment trust ("REIT") has been further delayed, and we shall have to waitand look at the small print before we decide whether such a vehicle would bringmaterial benefits to your Company. This is the last time that shareholders will be able to read the accounts in a"traditional" form. From hereon, including the next interims, a Europeandirective requires companies to adopt International Financial ReportingStandards; this will involve a radical reshaping of the way in which the Group'sactivities are reported, even though the fundamentals of our business will nothave changed. I fear that, initially, cold towels will be the order of the daybut we will be providing a reconciliation statement in order to facilitate anunderstanding of the changes. Outlook In the last five years Great Portland Estates has undergone a radicaltransformation. Today, we are a focused central London property company, and theyoung management team under Toby Courtauld is brimming with enthusiasm and ideasto drive the business forward. I am confident that our pipeline of developments,coupled with the continued active management of the portfolio, will createfurther value and provide attractive returns for shareholders. CHIEF EXECUTIVE'S REVIEW The Chief Executive's Review is accompanied by graphics. To view these graphicsplease copy and paste the following link into a browser: http://www.rns-pdf.londonstockexchange.com/rns/6636m_-2005-5-24.pdf We have made good progress against all of our management objectives over thepast twelve months: net assets per share have grown strongly; the prospects forthe Group's portfolio have been strengthened through sales totalling £135million and acquisitions of £223 million, of which £134 million was acquired inour joint venture; our development programme has continued to expand with theaddition of new projects; our focused asset management is keeping voids wellbelow market levels; and the return of £101 million to shareholders combinedwith further rationalisation of our debenture portfolio have both lowered ourcost of debt and established a more appropriate level of balance sheet gearingfor this point in the property cycle. Following the sales of our remaining provincial properties, the portfolio is nowtotally concentrated in central London enabling us to devote all our specialistskills to creating value in one of the world's most dynamic and excitingproperty markets. London alone accounts for almost 20% of UK Gross DomesticProduct and has consistently outgrown the rest of the country over the last tenyears; this is a trend which looks set to continue. Before reviewing our activity over the past year, I would first like to set thescene by looking at current market conditions. Twelve months ago, we werecautiously optimistic about the prospects for commercial property in London; weremain so. Although the amount of space being leased by businesses in Londontoday is broadly in line with the long-term average, vacancy rates are nowfalling across the market, due primarily to the lack of new supply coming onstream. This is particularly the case in the West End where 77% of our portfoliois located. Here, we estimate that only 3.6 million sq ft will be delivered bythe development industry over the next 3 years. Even without an increase intake-up, we think vacancy rates are set to fall further during this year puttingupward pressure on rents as occupiers seeking new premises outnumber the supplyof new, quality office space. In fact, we expect the rate of take-up acrosscentral London to increase during the year, helping to reduce overall vacancyrates from 11% today to approximately 9% by this time next year (and 8% in theWest End, down from 9%). For the short term, at least, we maintain our more cautious stance on the Citymarket as, despite encouraging levels of tenant demand, there remains a surfeitof space to let. However, we expect the vacancy rate to fall during the yearfrom its current level of 13%, and with rental growth likely to return during2006, this is a market which we will be studying closely for acquisitionopportunities. In the central London investment markets, turnover levels have continued theirrecord breaking run, fuelled by the plentiful supply of relatively cheap moneyand the attractiveness of commercial property yields compared to other assetclasses. This yield gap helps explain the estimated £10 billion of transactionsover the past year. Competition for well let investments remains fierce,resulting in market capitalisation rates falling by as much as 100 basis pointsover the period. We have consistently taken the opportunity to dispose of assetswhere we feel pricing to be out of line with their real worth. Valuation For the year to 31 March 2005, our portfolio of properties held throughout theyear increased in value by £63.4 million or 9.8%, driven by three main factors.First, portfolio capitalisation rates fell with the equivalent yield reducing bysome 53 basis points; second, rental values increased throughout the portfolio;and third, significant progress was made within our development portfolio. Although the let portfolio remains marginally over-rented to the tune of 5.3%(down from 6.9% as at March 2004), rental values increased, on a like-for-likebasis, by 9.4% (or £4.4 million). Reflecting the points made above on the gentlerecovery in market leasing conditions, most of the increase was in the secondhalf (5.9% versus 3.5% in the first six months) and in the West End officeportfolio (up 12.8%), the latter dominated by a strong performance at MetBuilding, 22 Percy Street, W1 (formerly Metropolis House) of 18.7%. The four properties in the course of development increased in value by £14.9million or 15.8%, net of capital expenditure. Met Building showed the strongestgain at 29.8% whilst 190 Great Portland Street, W1, where work recently started,increased by 21.2% over the second six months. As at 31 March 2005, the 100% owned portfolio was valued at £804.4 million by CBRichard Ellis with a further £156.7 million held in our 50:50 joint venture withLiverpool Victoria, the Great Victoria Partnership, (valued by Atisreal). Duringthe year, we sold our remaining properties outside London and at the year end77% was in the West End with the remaining 23% in the City. A detailed breakdownof the sector splits and their individual performances can be found in thePortfolio Statistics. Management of Income and Voids A central theme of our property strategy is the constant focus on ways toimprove the income profile of our properties. The past year has been nodifferent with a total of 134 lease events executed by our Asset Managementgroup, all within the context of each property's detailed business plan. As we bring a number of properties forward for development, a key ambition ofthe team has been the delivery of vacant possession to allow work to begin.During the year, 21 surrenders were negotiated to meet this need and of the 31units where tenants vacated at lease expiry or on the exercise of a break clause(out of a possible 57), 21 were deliberately left vacant. Nevertheless, 30lettings allowed us to maintain the Group's void rate at 2.6%, showing no changefrom March or September last year and comparing well to the central London rateof approximately 11%. As developments are completed, the Group void rate willrise from these low levels: following practical completion at Met Building itrose to 6.4%. Development Update Turning to our development programme, as I have been reporting over the past twoyears, we have again made good progress in our ambition to upgrade materiallythe quality of our portfolio and its growth prospects through development andsignificant refurbishment. We have four schemes on site (representing a total of 250,000 sq ft) and afurther three major projects where planning permission has been granted. Theseseven projects plus schemes at Tooley Street, SE1 (planning application recentlysubmitted) and 60/62 Margaret Street, W1 (recently acquired with vacantpossession) represent our near-term programme. They will deliver almost 680,000sq ft of new, high quality office and retail space (an increase of almost300,000 sq ft, or 74%), cost a total of approximately £185 million to build(excluding the existing land value), should generate net new rents of almost £19million (up from £5.1 million today) and are expected to deliver an averageoverall profit on cost of some 20%. At Met Building, 22 Percy Street, W1 practical completion was achieved on 6 Maybringing to a close the successful reconstruction of this 112,000 sq ft officeand retail scheme both on time and on budget: the property is already 43% let byrental value. Improvements in the building's design during the constructionprocess, healthy increases in rental values and keener capitalisation yieldshave combined to produce an estimated surplus on cost for this project in excessof £22 million, or 50%. Our major refurbishment to deliver 100,000 sq ft of office and retail space at190 Great Portland Street, W1 commenced in January this year and we anticipatecompleting the project early in 2007. Planning permissions have recently been obtained for the redevelopment ofKnighton House, 56 Mortimer Street, W1, our Titchmor scheme at the junction ofMortimer Street and Wells Street, W1 and at 79/83 Great Portland Street, W1.These three schemes were the subject of a complicated series of linked planningdiscussions with Westminster City Council designed to address stringentrequirements on the provision of residential space, including affordablehousing, in all new developments in Westminster. Obtaining these valuableconsents whilst providing the Council with their requirements, is a testamentboth to the skill of our in-house development team and the benefits of a closeworking relationship between developer and planning authority. We expect tobegin demolition work at Knighton House during early 2006 with Titchmor and 79/83 Great Portland Street commencing shortly thereafter. Following a carefully planned site assembly, we recently completed the designprocess at Tooley Street, SE1 submitting a detailed planning application toSouthwark Borough Council in March. Our proposals for an office and retaildevelopment of 220,000 sq ft continue the regeneration of this area of Southwarkand include the refurbishment of three existing period buildings fronting a new180,000 sq ft courtyard office scheme directly opposite the new 3 million sq ftMore London development. Including Tooley Street, we expect to go on site at a further five locationsduring this financial year, four of which are in the West End, developing newlettable space of approximately 430,000 sq ft to add to the 250,000 sq ftcurrently under development. Looking further ahead, preliminary discussions are under way with adjoiningowners in relation to the redevelopment of one of our largest holdings at thecorner of Bishopsgate and Camomile Street, EC3. Following the acquisition ofEllerman House, 12/22 Camomile Street, completing our site assembly earlier inthe year, a full professional team is engaged in designing a scheme. Disposals and Acquisitions Two years ago, I commented that we would focus our attention on sourcing newopportunities for growth, having completed the bulk of our strategic salesprogramme. Since then, investment markets have often proved prohibitivelyexpensive and we have continued to capitalise on these conditions by satisfyinginvestors' exceptional demand through sales of properties where, in our view,further opportunities for value creation were limited. During the year we disposed of seven properties generating sales proceeds of£135.5 million, some £11.6 million or 9.4% ahead of their March 2004 valuations.At Clarendon House, 17/18 New Bond Street, W1, we sold our 125 year leaseholdinterest for £50 million (representing a yield of 4.5%) following a successfulasset management programme on the adjacent property, Bond Street House, thepositive effect of which we were able to capture in the Clarendon House price.The sale generated a profit of £6.5 million, or 14.9% over the March 2004 bookvalue. We also crystallised the value of our lease restructuring activity atBarnard's Inn, 86 Fetter Lane, EC4, through a sale to an institution for £37.6million along with 38 Finsbury Square, EC2, for £18.5 million (realising netuplifts on March 2004 values of £2.6 million or 7.4% and £1.9 million or 11.8%respectively). Following our disposals of interests in Maidenhead and Hounslow, our lastremaining properties outside London, all of our activities are now focusedentirely in the capital. Since the year end, we have sold 55 Drury Lane, WC2 to an institution for £16.75million. This 28,000 sq ft office building was built by the Company in 1992 andhad a weighted unexpired lease term of 6.4 years. The price paid reflects ayield to the purchaser of 5.4%, and a premium to its March 2004 book value of32%. Despite the competitive investment environment, we continue to unearthinteresting opportunities to buy. In my report at the Interim stage, I mentionedacquisitions in Broadwick Street, Soho, Tooley Street, SE1, Camomile Street, EC3and in January we acquired a 22,000 sq ft redevelopment opportunity at 60/62Margaret Street, W1 for £5.75 million, which sits directly behind our holdingsin Market Place, and which brings the total value of acquisitions on the balancesheet to March 2005 to £89 million. Also at the Interim stage I announced the creation of the Great VictoriaPartnership ("GVP"), seeded by four properties, two of which were new to theGroup, and which had acquired a leasehold interest in Mount Royal, 508/540Oxford Street, W1 for £80 million. In January, GVP acquired the Prudential'sintermediate interest in Mount Royal for £10.9 million, adding £1.9 million tothe property's rent roll. Since the year end a new joint venture with LiverpoolVictoria, the Great Victoria Partnership (No.2) ("GVP2"), has been created andhas acquired 208/222, Regent Street, W1 with the adjacent Lasenby House, W1 fora total of £66.5 million, bringing the total amount of acquisitions on balancesheet and in joint venture to £295 million since March 2004. Let to retailers Liberty and Gap and with Barclays and MWB Business Exchangeabove, 208/222 Regent Street represents a good example of the sort ofacquisition we favour. The property was held on a 46 year lease from the CrownEstate and offers a number of opportunities for improving the retailingconfiguration. Since the purchase, we have restructured our leasehold interest,buying a longer 125 year lease from the Crown at a lower ground rent for £6million. Including the headlease regear, GVP2's total purchase price was £72.5million compared to its valuation (carried out by Atisreal) of £78 millionimmediately following our asset management activity. We have subsequently soldLasenby House to Shaftesbury PLC, a neighbouring owner, for a small surplus. In total, the properties acquired during the year, including those in GVP,increased in value by £21.9 million or 9.4% after all costs. Outlook Occupational markets in central London continue to recover, albeit slowly. TheWest End remains our favoured location due to its healthier balance of supplyand demand when compared to the City. Within it, there are some encouragingsigns - occupiers looking for quality office space of a staple size (between5,000 and 10,000 sq ft) are hard pressed to find a variety of options,particularly at the value end of the rental spectrum. The development pipeline,although increasing, remains limited which will only serve to accentuate thismarket dynamic. Great Portland Estates is in good shape; our development pipeline is growing andis geared to deliver quality space, at good value, into an undersupplied WestEnd market; our disposal and acquisition programmes are transforming theprospects of the Group's portfolio and producing healthy profits; our focusedasset management continues to maintain a virtually fully let portfolio; ourrestructured balance sheet is helping to drive returns to shareholders, whilstpreserving the financial flexibility we need to execute our development andacquisition programmes; and our teams are working well together to unearthfurther opportunities for value enhancement. I look forward with confidence tobuilding on the real progress we have made this year. FINANCIAL REVIEW The Financial Review is accompanied by graphics. To view these graphics pleasecopy and paste the following link into a browser: http://www.rns-pdf.londonstockexchange.com/rns/6636m_2-2005-5-24.pdf The results for the year ended 31 March 2005 and the movement in net asset valueduring the period have been significantly affected by a number of factors: • the balance sheet has been reshaped, with £101.5 million of cash returned toshareholders in August 2004, the redemption of a high-coupon debenture and thetrimming of the two debentures which remain; • the sale of seven properties for an aggregate price of £135.5 million; • capital expenditure of £116.0 million, comprising £53.3 million of directproperty acquisitions, £38.9 million through a corporate acquisition and £23.8million of development expenditure; • the injection of £23.8 million of equity into a 50% joint venture whichacquired £133.6 million of central London properties; and • the tightening of property investment yields and the growth in rental valueswithin central London, which drove the uplift in the portfolio valuation. The effect of these events has been to reduce adjusted earnings per share to11.3p (2004: 12.8p) but to increase diluted adjusted net assets per share to333p (2004: 280p). Throughout this financial review, where references are madeto adjusted figures, their calculation can be found in note 10. The financial statements have been drawn up on the basis of the accountingpolicies applied for the year ended 31 March 2004, save for the introduction ofUITF 38 Accounting for ESOP Trusts, the effect of which has been to reduceshareholders' funds at 31 March 2005 and 2004 by £3.4 million or 2p per share,as explained in note 23 to the financial statements. Profit and Loss Account Group rental income fell by £12.0 million from £63.8 million in 2004 to £51.8million in 2005. This was largely because rental income in 2004 included anexceptional premium of £8.2 million received on a lease surrender, which added4.0p to earnings per share in 2004. Excluding this, rental income fell by £3.8million compared to last year primarily through property disposals exceeding theeffect of acquisitions. Administration expenses of £10.1 million (2004: £7.2 million) included £0.8million of exceptional costs associated with the return of cash to shareholders,whilst the remaining £2.1 million increase primarily comprised increased staffcosts resulting from expanding the team to accommodate our burgeoningdevelopment programme and from the introduction of a new performance-based staffbonus scheme. The sale of seven investment properties for £135.5 million generated a profit onsale of £10.1 million, or 8.1% over March 2004 values, after costs. Two of theseven properties were sold into a new joint venture, the Great VictoriaPartnership, in which the Group has a 50% interest, and, therefore, only half ofthe profit made on the disposal of those two properties was included within the£10.1 million shown on the face of the profit and loss account. The GreatVictoria Partnership began to trade in mid-January, and, therefore, our share ofits operating profit in 2005 of £0.5 million represented less than one quarter'strading. Interest receivable of £2.2 million (2004: £5.0 million) was less than that ofthe previous year because the bulk of the cash held on deposit last year wasreturned to shareholders in August. Interest payable of £25.0 million (2004:£19.4 million) included exceptional finance costs of £6.9 million (2004: £nil);these exceptional costs related to the redemption of debentures, primarily our£24 million 113/16% debenture 2009/14. As the development of Met Building, 22Percy Street, W1 approached its practical completion, and the strip-out began at190 Great Portland Street, W1, interest capitalised on developments in the yearrose to £2.0 million (2004: £0.5 million). The effective rate of tax shown on the face of the profit and loss account in2005 was 2.7% (2004: 13.8%); this was low because the chargeable gain onproperty disposals was fully covered by capital losses, and tax relief on theexceptional cost of redeeming the debenture exceeded 30% of the book loss; theuse of capital allowances on plant and machinery within our investment portfoliolowered the tax charge still further. It is these capital allowances whichreduced the effective rate of tax on the underlying business to 15.9% inarriving at adjusted earnings per share. A final dividend for the year ended 31 March 2005 of 7.17p per share will,subject to shareholder approval, be paid on 12 July 2005 to shareholders on theregister on 3 June, and will make a total dividend for the year of 10.75p pershare (2004: 10.5p), an increase on last year of 2.4%. Adjusted earnings of11.3p provided dividend cover of 1.05 times. Balance Sheet Diluted adjusted net assets per share rose from 280p to 333p at 31 March 2005,an increase of 18.9%. The main driver of the increase was the revaluation of theinvestment property portfolio which added 37p; the revaluation of the share inthe Great Victoria Partnership added 5p, retained earnings 4p and the effect ofthe return of cash to shareholders and associated share consolidation added 7p.The return of cash to shareholders of £101.5 million reduced share capital by£81.2 million, share premium by £11.8 million, and distributable reserves byonly £8.5 million; at 31 March 2005 the holding company had distributablereserves of £176.6 million. At 31 March 2005 the effect of marking debt tomarket would have been to reduce diluted adjusted NAV by 9p (2004: 6p) and, hadthe Group's investment properties been sold for their book value at the balancesheet date, the contingent liability to taxation on chargeable gains would havebeen approximately £38 million or 21p (2004: 8p) per share. Accordingly, dilutedadjusted triple net asset value was 303p, an increase of 13.9% over 266p a yearearlier. Since 31 March 2005, the Group has entered into a second joint venture, theGreat Victoria Partnership (No. 2), with an investment of £15.6 million, and hassold 55 Drury Lane, WC2 for £16.8 million or £1.0 million above its March 2005valuation. Financing Over the past five years the Group has actively managed its balance sheet,repaying high-coupon or inflexible debt and returning excess capital toshareholders. The return of cash to shareholders in August 2004 was effected toprovide a more efficient balance sheet gearing level, thereby helping to enhanceprospective shareholder returns without unduly impairing the Group's financialheadroom or investment capacity. The return of cash to shareholders wasstructured so as to give shareholders a choice between receiving their return ofcash in the form of a capital payment or in the form of dividend income. As part of the Court-approved scheme, the share capital was consolidated on thebasis of four new shares for every five previously held in order to allow adirect comparison between the share price before and after the return of cash toshareholders. At close of business on 30 July 2004, the first day of trading inthe new shares after the capital restructuring, the share price stood at 282p. The efficiency of the Group's financing was further enhanced in May 2004 withthe redemption of our £24 million 113/16% First Mortgage Debenture Stock 2009/14. This high-coupon debenture had a disproportionately high value of propertiescharged to it as security; its redemption released £72.5 million of propertiesfrom charge in addition to reducing the Group's cost of borrowing. Also duringthe year we took the opportunity to acquire £10.1 million of our listeddebentures in the market, thereby further reducing the proportion of ourinvestment property portfolio required to be charged as security. In May werefinanced our main bank facility, replacing a £175 million syndicated loanfacility with a five year, £150 million bank club with our three main banks. At31 March 2005, 81% of the Group's borrowings were at fixed rates of interest andthe weighted average debt maturity was 16 years. The weighted average cost ofour drawn facilities was 6.1%, and of our total financing, including commitmentfees on undrawn facilities, 6.3%. Ten years ago the Group's weighted averagecost of debt was 9.5%, all of it was at fixed rates and had a weighted averagematurity of 15 years. At 31 March 2005 net gearing (based on shareholders' fundsas adjusted for deferred tax on accelerated capital allowances) was 49%,interest cover was 2.4 times and the Group had cash and undrawn bank facilitiesof £212 million, which, if spent in full, would increase pro forma net gearingto 88%. Financial Instruments The Group raises finance through equity and borrowings, and places surplus cashon short-term deposit. The primary sources of borrowing are debenture loans,convertible loans and bank and other loans. The Group also enters into interestrate swaps, collars and caps, but solely as a way of managing the interest raterisks arising from some of the Group's sources of finance, primarily bank loans. The main risks arising from the Group's financial instruments are interest raterisk, liquidity risk and credit risk. The policies for managing these arereviewed by the Board, and have been in place throughout the year ended 31 March2005. • Interest rate risk Borrowings are made either at fixed rates of interest, or at floating rateswhich can be fixed simultaneously, and co-terminously, by means of interest rateswaps. The Group's policy has been to ensure that most of its borrowings were atfixed rates; at 31 March 2005, 81% of borrowings were at fixed rates. • Liquidity risk The Group operates a long-term business, and its policy is to finance itprincipally with equity and medium-term and long-term borrowings. Accordingly,at the year end 62% of the Group's borrowings were due to mature in over 15years. Short-term flexibility is achieved by cash balances and overdraftfacilities. • Credit risk At 31 March 2005, the Group had £31.2 million on short-term deposit withfinancial institutions. It is the Board's policy that deposit and derivativecontracts are placed only with counter-parties with a credit rating of F1 orhigher. International Financial Reporting Standards International Financial Reporting Standards ("IFRS") are mandatory for alllisted companies within the European Union for accounting periods beginning onor after 1 January 2005, and, therefore, we will prepare our consolidatedfinancial statements in accordance with IFRS for the first time next year. Thiswill not affect the performance or cash flows of the business, but willsignificantly change the way in which the performance of the business isreported. The key changes for Great Portland Estates can be split between thosewhich will increase net assets, those which will reduce them and those whichwill do neither. Net assets will be increased by the following: • proposed dividends will no longer be accrued; and • part of our convertible bond will be shown as equity instead of debt. Net assets will be reduced as follows: • contingent tax on chargeable gains will be brought onto the balance sheet as along-term liability; and • the net liabilities of the Group's pension scheme will be brought onto thegroup balance sheet. Other changes which will have no effect on net assets will be: • surpluses or deficits on the revaluation of investment properties will beshown through the face of income statement, which may materially affect earningsper share; • development properties will be disclosed in the balance sheet separately fromother investment properties; and • properties held under long leasehold interests will have their value increasedby the net present value of future ground rents payable, and a correspondinglong-term liability will be set up in the balance sheet. The preparatory work to convert our Group reporting from UK GAAP to IFRS as at31 March 2004 and 31 March 2005 and for the year ended 31 March 2005 is largelycomplete. In July 2005 we shall issue a press release explaining in full theeffect of changing those numbers from UK GAAP to IFRS with appropriatereconciliations and narrative. Portfolio Statistics Rental income At 31 March 2005 Five Year Reversionary Five Year Year Potential Total Rent Reversionary Rental Beyond Five Rental Roll Potential Values Years Values £m £m £m £m £m London North of Oxford Street Office 18.8 (0.4) 18.4 0.4 18.8 Retail 4.2 0.2 4.4 - 4.4 Rest of West End Office 7.7 0.1 7.8 (0.4) 7.4 Retail 4.2 0.3 4.5 - 4.5 Total West End 34.9 0.2 35.1 - 35.1 City Office 13.7 (1.0) 12.7 (2.4) 10.3 Retail 0.4 0.1 0.5 0.5 1.0 Total Let Portfolio 49.0 (0.7) 48.3 (1.9) 46.4 Voids 1.6 - 1.6 Premises under 9.7 - 9.7 refurbishment Total Portfolio 59.6 (1.9) 57.7 Joint Venture rental income Let Portfolio Office 3.3 (0.2) 3.1 0.2 3.3 Retail 5.7 0.5 6.2 0.9 7.1 Total Portfolio 9.0 0.3 9.3 1.1 10.4 GPE's share 4.5 0.1 4.6 0.6 5.2 Rent roll security, lease lengths and voids Rent Roll Weighted Voids Secure for Average % Five Years Lease % Length Years London North of Oxford Office 30.3 4.1 4.7 Street Retail 50.7 8.0 2.2 Rest of West End Office 51.1 6.2 - Retail 59.4 10.6 - Total West End 41.2 5.8 3.1 City Office 69.1 5.8 1.1 Retail 38.5 8.5 - Total Let Portfolio 49.0 5.8 2.6 Joint Venture 84.2 11.9 - Rental values and yields Initial True Average Average Yield Equivalent Rent ERV Yield £psf £psf % % London North of Oxford Office 29 31 5.5 6.2 Street Retail 24 24 6.3 6.2 Rest of West End Office 33 34 5.6 5.8 Retail 73 79 6.0 5.8 Total West End 32 32 5.7 6.1 City Office 34 25 6.0 7.3 Retail 11 24 4.9 6.9 Total Let Portfolio 32 31 5.8 6.4 Joint Venture 41 48 5.4 5.5 At 31 March 2005 Property Portfolio Investment Properties Properties Total Office Retail Total Property Approaching Under Property Portfolio Development Development Portfolio £m £m £m £m £m £m £m North of Oxford 298.8 56.6 65.5 420.9 356.5 64.4 420.9 Street Rest of West End 157.6 - 44.2 201.8 132.1 69.7 201.8 Total West End 456.4 56.6 109.7 622.7 488.6 134.1 622.7 City 157.6 24.1 - 181.7 172.8 8.9 181.7 Total 614.0 80.7 109.7 804.4 661.4 143.0 804.4 Office 527.3 67.4 66.7 661.4 Retail 86.7 13.3 43.0 143.0 Total 614.0 80.7 109.7 804.4 Joint Venture At 31 March 2005Portfolio Rest of West End 144.2 - - 144.2 34.2 110.0 144.2 City 12.5 - - 12.5 12.5 - 12.5 Total 156.7 - - 156.7 46.7 110.0 156.7 GPE's share 78.4 - - 78.4 23.4 55.0 78.4 Portfolio Performance 12 month Proportion of Valuation Total Valuation Portfolio Movement Return £m % % % London North of Oxford Street Office 261.6 32.5 10.7 17.5 Retail 37.2 4.6 (2.8) 4.4 Rest of West End Office 77.9 9.7 27.6 33.7 Retail 38.9 4.9 - 5.6 Total West End 415.6 51.7 10.9 17.6 City Office 123.3 15.3 5.9 13.6 Retail 8.9 1.1 (6.3) - Total City 132.2 16.4 5.0 12.5 Investment property portfolio 547.8 68.1 9.4 16.3 Properties approaching 49.6 6.2 2.5 9.0 development Properties under development 109.7 13.6 15.8 19.6 Total properties held throughout 707.1 87.9 9.8 16.2 the year Acquisitions 97.3 12.1 Total property portfolio 804.4 100.0 Analysis of Five Year Rental Values Lease Expiries £m % Rent roll, rent reviews Less than 5 years 51.0 & lease renewals 48.3 5 to 10 years 34.7 Under refurbishment 9.7 10 to 15 years 8.8 Voids 1.6 Over 15 years 5.5 59.6 100.0 Occupier % Media & Marketing 24.5 Retailers 21.1 Professional 20.7 Banking & Finance 14.3 Corporates 12.5 IT & Telecoms 3.8 Government 3.1 100.0 GROUP PROFIT AND LOSS ACCOUNT For the year ended 31 March 2005 Notes 2005 2004 £m £m Rent receivable 52.7 63.8 Less: share of joint venture's (0.9) - rent receivable Group rent receivable 2 51.8 63.8 Ground rents (1.1) (1.4) Net rental income 50.7 62.4 Property and refurbishment costs (2.5) (2.4) Administration expenses 3 (10.1) (7.2) Operating profit 38.1 52.8 Profit/(loss) on sale of 10.1 (2.8) investment properties Share of operating profit of 0.5 - joint ventures Profit on ordinary activities 48.7 50.0 before interest Interest receivable 5 2.2 5.0 Interest payable 6 (18.1) (19.4) Exceptional finance costs 7 (6.9) - Profit on ordinary activities 25.9 35.6 before taxation Tax on profit on ordinary 8 (0.7) (4.9) activities Profit on ordinary activities 25.2 30.7 after taxation Dividends 9 (17.3) (21.1) Retained profit for the year 7.9 9.6 Earnings per share - basic 10 14.3p 15.1p Earnings per share - diluted 10 14.3p 14.7p Earnings per share - adjusted 10 11.3p 12.8p A statement of the movement on reserves is given in note 22. GROUP BALANCE SHEETAt 31 March 2005 Notes 2005 2004 as restated £m £m Fixed assets Investment properties 11 797.9 740.2 Investment in joint venture: 12 Share of gross assets 80.0 - Share of gross liabilities (37.4) - 42.6 - 840.5 740.2 Current assets Debtors 13 14.8 36.5 Cash at bank and short-term deposits 31.9 138.8 46.7 175.3 (38.5) (67.3) Creditors: amounts falling due within one 14 (38.5) (67.3) year Net current assets 8.2 108.0 Total assets less current liabilities 848.7 848.2 Creditors: amounts falling due after more than one year Debenture loans 15 (184.3) (221.0) Convertible loans 16 (57.4) 57.2) Bank and other loans 17 (59.0) (4.4) Provisions for liabilities and charges 19 (4.7) (4.4) 543.3 561.2 Capital and reserves Called up share capital 20 20.3 101.5 Share premium account 21 13.0 24.8 Revaluation reserve 22 307.6 237.6 Other reserves 22 25.0 25.0 Profit and loss account 22 180.0 175.7 Investment in own shares 23 (2.6) (3.4) Equity shareholders' funds 543.3 561.2 The group balance sheet at 31 March 2004 has been restated for the adoption ofUITF 38 (see note 23).GROUP STATEMENT OF CASH FLOWS For the year ended 31 March 2005 2005 2004 £m £m Notes Net cash inflow from operating activities 25 36.1 49.3 Returns on investments and servicing of finance 26 (18.7) (18.0) Taxation 26 (0.2) 1.8 Net cash inflow from capital expenditure 26 64.2 4.0 Acquisitions and disposals 26 (44.0) - Equity dividends paid (19.9) (20.9) Net cash inflow before use of liquid 17.5 16.2 resources and financing Management of liquid resources 26 106.8 (36.3) Net cash (outflow)/inflow from financing 26 (124.4) 19.1 Decrease in cash (0.1) (1.0) GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 31 March 2005 2005 2004 £m £m Profit for the year 25.2 30.7 Unrealised surplus/(deficit) on revaluation 65.7 (13.5) of investment properties Unrealised surplus on revaluation of joint 9.2 - ventureRelated Shares:
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